John Faucher - Colgate-Palmolive Co. Ian M. Cook - Colgate-Palmolive Co..

Wendy C. Nicholson - Citigroup Global Markets, Inc. Jason English - Goldman Sachs & Co. LLC Andrea F. Teixeira - JPMorgan Securities LLC Bonnie L. Herzog - Wells Fargo Securities LLC Jason M. Gere - KeyBanc Capital Markets, Inc. Kevin Grundy - Jefferies LLC Ali Dibadj - Sanford C. Bernstein & Co. LLC Dara W. Mohsenian - Morgan Stanley & Co.

LLC Nik Modi - RBC Capital Markets LLC Caroline Levy - Macquarie Capital (USA), Inc. William B. Chappell - SunTrust Robinson Humphrey, Inc. Mark Stiefel Astrachan - Stifel, Nicolaus & Co., Inc. Lauren Rae Lieberman - Barclays Capital, Inc. Armani Khoddami - Consumer Edge Research LLC.

Good day and welcome to today's Colgate-Palmolive Company Third Quarter 2017 Earnings Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I'd like to turn the call over to the Senior Vice President of Investor Relations, John Faucher. Please go ahead, John..

Thanks, David. Good morning, and welcome to our third quarter earnings release conference call. This is John Faucher, Senior Vice President for Investor Relations.

Joining me this morning are Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Henning Jakobsen, Vice President and Corporate Controller; and Elaine Paik, Vice President and Treasurer. 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 2016 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..

that we would increase our advertising spend behind more impactful, creative, and would be consistent in the way we deployed that spend; that we would continue to focus on innovation across our full portfolio of businesses, which you'll hear more from John in a little while, but with a special focus on Naturals in toothpaste as a way of countering some of the local brands in Asian and Eurasian markets; third, that we would continue to work with all of our retail partners to seek growth of category and our brands with a special focus on the high-growth e-commerce businesses, whether they be pure play or brick and click; and finally, and very importantly to us that we would aggressively work to maximize productivity up and down our income statement.

I guess in summary that our focus was going to be on brand-building and productivity. So let me start with the advertising.

We said we would increase our advertising and we would deploy it consistently across the year, and that would see an acceleration in the second half of 2017 given the comparisons to the second half of 2016, and indeed I think you've seen that in the press release that our advertising was increased quite substantially, and a growing percentage of that working media is going behind digital, between 20% and 25% globally, but of course there is a range in that, and in the case of Hill's for example, 100% of our consumer engagement spending is digital.

We said that our advertising creative was beating testing norms and demonstrating that we have a broad array of work that is proven to create awareness and is motivating and persuasive against our brands.

And we also said, and this has been the case, that our advertising would not just be focused behind innovation, but rather we would focus behind our brand equities, our core businesses, and these brand purpose models that we have been deploying, which give people something to buy into, not just something to buy, especially millennials.

And all of that very much focused on the here and now, but we also reference the fact that we would continue to invest to build per capita consumption given the enormous opportunity that represents over the longer term in the emerging markets. So we have indeed invested and deployed our advertising the way we said we would.

We think we're getting the beginnings of a return on that, and our advertising is focused not just on the near term, but with the consumption building on the long term as well.

The second was innovation, and as I say, you'll hear from John about the broad array of innovation that is affecting our business in the second half, but I'd like to talk specifically on the Naturals innovation we have on our toothpaste business, as I said, combating the local brands, particularly in Asia and Eurasia.

As we mentioned before, given that we have our innovation centers on the ground located in our divisions, this has allowed us to tailor our Naturals offerings against each of our major markets, so the interpretation of them has been different in, for example, India and China.

The products have been launched, and they are proceeding on plan and building distribution in China and in India. And a third interpretation of Naturals was actually launched a little bit earlier in Russia where it was launched in July, and we actually have some very early share information from Russia.

This is Nielsen so-called Scantrack data which focuses on the modern trade or about 60% of the overall Russian market, and the data shows that the Ancient Secrets interpretation of Naturals in Russia has built from July to a 2.7 share business, of which about a point and change of that has been incremental, actually more than that – the total share has gone up 4 points since July from 32% to 36.1% in that Scantrack data.

So early days, our first share read, but an encouraging start with the Ancient Secrets in Russia and obviously considerable investment yet to come behind that innovation.

We will have launched an interpretation of Naturals across all of our principal Asian markets by the end of the year, and in Eurasia, we will be fully launched across all of Central Asia by the beginning of the first quarter. So some good progress.

You'll hear a little bit more about Naturals in Europe, but something early indications would suggest will be positive for us.

The third, working with retail partners to drive profitable growth in all channels in which we compete, with a particular focus on e-commerce, whether it's pet specialty in the United States, cash-and-carry in Brazil, discounters in Europe, or mom-and-pops in India, or e-commerce everywhere, we're working with customers to grow our categories and our brands.

To do that, we continue to invest in on-the-ground capability to manage with a separate income statement on e-commerce business and drive that e-commerce business, and we're using different approaches to capture the full potential of e-commerce.

One example I would give of our different approach is a recent launch of Colgate Dare to Love toothpaste in China – yes, Colgate Dare to Love toothpaste in China, launched around, when else, Love Teeth Day, which we, of course, will sponsor forever. It's a national oral health awareness campaign held annually in China in September.

The product was developed as a collaboration between our local Colgate China e-commerce team and one of our Chinese e-commerce partners.

It is a pink toothpaste, very like our Max Fresh toothpaste, which has breath strips inside, except this toothpaste, of course, has heart-shaped breath strips inside, packaged in a clear tube, so consumers can see the product. It went from an idea to the marketplace in five months.

And since then, it has been the top-selling item within the Colgate flagship store on this e-tailer site. And we have seen, since the launch, a significant acceleration in purchasing growth with that approach. So one example, but it shows that we are thinking about e-commerce holistically, not just as another distribution channel.

And, in fact, our worldwide e-commerce business third quarter year-to-date is maintaining the same rapid pace of expansion that we saw in the second quarter, so focus and progress there. And finally, productivity, we, as you know, put a lot of focus on funding-the-growth, our productivity program. We've made a lot of very good gains this year.

And rather than wait for the question, let me just do the third quarter margin roll-forward right now around that funding-the-growth comment. The prior year gross profit was 60.4%. We got negative 10 basis points from price in this quarter.

Our funding-the-growth delivered 220 basis points favorable, maintaining our usual curve across the year, where funding-the-growth builds in the second half, but we saw a headwind of negative material price of 210 basis points, and that was with no impact from transaction.

And that traces largely to fats and oils and resins, which have moved differently and negatively to where we were at the end of the second quarter, fats and oils being a volatile marketplace, and the resins affected by the weather event in Texas. And we expect both to continue for the balance of the year.

So when you net those off, our gross profit margin was flat year-on-year. And then secondly, we had talked about our extreme focus on structural cost as we came into this last year of our Global Growth and Efficiency Program with two incremental projects included in our second quarter earnings report.

And as you've seen from our announcement this morning, building on the successful implementation of our program to-date, we see real opportunity to expand our Global Growth and Efficiency Program, with the same focus on commercial hubs extending Colgate business services and streamlining our global functions, and optimizing our facilities and global supply chain, a way to continue the investment in advertising and support growth for the balance of 2017, and, more importantly, in the pace (13:24) of the Global Growth and Efficiency Program for 2018 and beyond.

So we said those were our areas of focus, a quick report back on the fact that they are and will continue to be, and let me hand the call now back to John..

Thanks, Ian. I will start off with some general commentary on the quarter, followed by further detail on divisional performance. I will then finish with some color on our outlook for the fourth quarter of 2017 before opening it up for questions.

As a reminder, Ian mentioned at a conference back in September that we will discuss our 2018 outlook on our fourth quarter earnings call in January. This will give us more color on the trajectory of category growth. As Ian said in the press release, the third quarter showed improvement versus the first half of the year.

Net sales were up 3% in the quarter versus Q3 2016, with 1.5% volume growth, flat pricing and a 1.5% foreign exchange benefit. Organic sales growth was 1.5% in the third quarter, a sequential improvement versus the first half of the year.

Importantly, in the third quarter, we showed sequential improvement in volume versus the second quarter in every one of our divisions. We are also encouraged that on balance, foreign exchange turned favorable in the quarter, as we experienced a top line benefit from foreign exchange for the first time since the third quarter of 2011.

Although we do believe that underlying trends are slowly improving and that the consumer outlook is modestly better, the marketplace and our categories remain volatile. In the third quarter, category growth rates improved slightly in several important geographies, including the U.S., Europe, Brazil, and parts of Asia.

On a GAAP basis, our gross profit margin was down 10 basis points year-over-year and was flat year-over-year excluding the impact of our Global Growth and Efficiency Program. We delivered strong funding-the-growth savings in the quarter, as Ian mentioned, which offset higher raw material costs. There was no benefit from pricing in the quarter.

On a GAAP basis, our operating profit margin was down 440 basis points year-over-year in Q3.

Excluding the impact of our Global Growth and Efficiency Program, a gain on sale of land in Mexico, and a previously disclosed litigation matter, our operating profit margin was down 160 basis points, driven primarily by a 140 basis point increase in advertising investment.

We have discussed all year that we'd be investing in advertising at a more consistent rate throughout the year, and that the year-over-year comparisons would be particularly notable in the second half of the year. Our advertising investment was up approximately 20% year-over-year in the quarter and was up year-over-year in every division.

We are expecting an even bigger year-over-year increase in advertising in the fourth quarter. On a GAAP basis, diluted earnings per share of $0.68 was down 13% year-over-year.

Excluding the impact of our Global Growth and Efficiency Program, the previously mentioned one-time items, and benefits from previously disclosed tax matters, diluted earnings per share was flat year-over-year at $0.73. We have returned more than $2.1 billion to shareholders year-to-date through Q3 through share repurchase and dividends.

This is an 8% increase versus the first three quarters of 2016. Now moving to the divisions. We'll start off with North America. In Q3, we saw sequential improvement versus the second quarter in volume, net sales and organic sales growth in North America.

Net sales were down 0.5% in the quarter, with organic sales minus 1%, driven by volume growth of 3% and slightly favorable foreign exchange. Category growth rates in the U.S. improved sequentially versus the first half when our categories were negative.

The slight improvement in category growth was fairly broad based, with a majority of our categories now in positive territory year-to-date. In Oral Care, we maintained our market share leadership in toothpaste and toothbrushes in the U.S.

The premium priced whitening segment continues to be an area of strength for us, as we've gained share year-to-date behind the Colgate Optic White and Tom's of Maine Luminous White franchises. Our sales and channels not covered by syndicated data providers improved this quarter, driven by strength in club and e-commerce.

We continue to see gains in e-commerce as we look to optimize our digital marketing and promotional strategies to drive market share. In our Home Care business, we saw strong growth in our household cleaning portfolio.

While we are still seeing weakness in our hand dish line, category trends improved sequentially in the third quarter versus the second as did our sales trends. As we said on the Q2 call, the business is not yet where it needs to be, but we do believe we are making progress. Now, we'll look at Latin America.

Latin America delivered 6.5% net sales growth in the quarter, driven by a combination of solid pricing and volume growth. Foreign exchange was favorable by 1% in the quarter. Our 3% volume growth was the highest for the division since Q2 of 2014.

Latin America also delivered strong gross profit growth, which allowed us to significantly increase our advertising investment year-over-year in the division. The volume growth was broad based across the division, with most of our hubs showing growth.

Mexico volume was down slightly, but we continued to see strong market share growth in toothpaste, plus 180 basis points year-over-year to more than 82%. Our Colgate Mexico team did an excellent job dealing with the impact of the devastating earthquakes there in Q3.

Our Puerto Rico and Caribbean teams right now are focused on helping communities rebuild after Hurricane Maria, and our thoughts are with them as they continue to deal with the aftermath. While the impact of Hurricane Maria on Q3 divisional results was modest, we expect it will have a more notable impact on our Q4 results in Latin America.

We are encouraged by the continued improvement in our Brazilian business in the quarter. While the market remains volatile, we grew volume behind new product launches, effective in-store activity and increased advertising. Going forward, our Latin American business will continue to benefit from several recent product launches.

In Mexico, we launched Colgate Triple Action Xtra Freshness toothpaste to enhance our base toothpaste business. In Brazil, we saw strong starts from several new products launched in Q3, including Total Mouthwash and Protex Pro Hidrata bar soap and body wash. Moving to Europe, Europe net sales were up 5.5% in the quarter.

Organic sales grew 1%, driven by 3% volume growth, with negative pricing in the quarter. Foreign exchange was favorable by 4.5% in the quarter. The volume growth was broad based across the division with growth across all of our hubs.

We were particularly pleased by the return to volume and net sales growth in France, and we're still working on rebuilding our toothpaste market shares there. Oral Care was the key driver of volume growth in the European division in the quarter with strength across all three brands – Colgate, elmex and meridol.

We are very pleased with the results of our Colgate Naturals launch in several markets in Europe during the quarter. Naturals is achieving market shares ahead of our initial expectations with high repeat rates and is proving more incremental than initially expected. We plan to continue expanding this line into new geographies going forward.

We also expect our Personal Care business to benefit from two new variants of our highly successful Palmolive Gourmet line, and our Sanex Zero% line continues to drive market share gains across multiple Personal Care categories, especially body wash and antiperspirant deodorant. Next, Asia Pacific.

Net sales in Asia Pacific were up slightly in the quarter, plus 0.5%, while organic sales were flat. Both volume and pricing were flat in the quarter. Foreign exchange was slightly favorable in Q3. We were very encouraged by a return to volume growth in Greater China after volume declines in the first half of the year.

The growth was driven by our e-commerce business, while brick-and-mortar sales trends improved sequentially from the second quarter to the third. The volume growth in Greater China was offset by weakness in Australia and India.

Volume in India during Q3 continued to be impacted by the implementation of the Goods and Services Tax at the beginning of the quarter.

As our Indian company discussed in their fiscal second quarter press release, they have seen a gradual recovery in the key wholesale channel with trends improving sequentially over the course of the quarter and they expect continued improvement in the coming quarters.

India should also benefit from significant increases in advertising investment and the recent launch of Colgate Swarna Vedshakti toothpaste, the high-end entry in the growing Naturals segment that Ian referred to earlier.

The Africa/Eurasia division reported net sales growth of 0.5% in Q3 as favorable pricing and foreign exchange offset a decline in volume. The volume weakness continues to be driven primarily by the impact of distributor changes in our sub-Saharan African business.

As other companies have highlighted for their businesses, we have also seen a slowdown in our Middle East business due to a difficult economic environment.

We posted volume growth in Russia in the quarter, driven by adjustment of promotional price points, in-store activity, and the launch of our Colgate Ancient Secrets toothpaste line in the Naturals segment.

As we look at the fourth quarter, while our sub-Saharan African business will benefit from lapping the distributor changes in the year ago period, we do expect continued headwinds from our Middle East business. Africa/Eurasia continues to be a major beneficiary of our increase in advertising investment.

Along with a strong support for our new product launches, we have also raised our investment behind initiatives to drive toothpaste per capita consumption. And we'll finish up with Hill's. Hill's delivered 2% net sales growth in the third quarter, with 1% volume growth, flat pricing and a 1% benefit from foreign exchange.

The volume growth was driven by the U.S. business including strong growth in e-commerce. Our international business saw net sales and volume growth in every region except for Japan. We've seen sequential improvement in our pet specialty performance in the United States, driven by improved promotional activity.

Over the next few quarters, we should see a further benefit from shelf resets in pet superstores. We continue to be enthusiastic about the performance of our Science Diet Youthful Vitality product. This product helps fight the effects of aging in older cats and dogs, 7 years and older.

We're supporting the launch with digital advertising and a meaningful campaign to help get older cats and dogs adopted. Specifically, Science Diet Youthful Vitality is working with Animal Planet on the web series, Mission Adoptable, which tells heartwarming stories about older cats and dogs. Now, we'll turn to our outlook for 2017.

As stated in our press release, we continue to expect both net sales and organic sales to increase at a low-single-digit rate for the year.

Given our gross margin results in the third quarter, we now expect our gross margin expansion will be in the range of 20 to 50 basis points this year versus our previous outlook of the lower end of our 75 to 125 basis points range.

This reduction in our outlook is due to a combination of higher raw material costs versus our second quarter expectations and less benefit from pricing. On a GAAP basis, we still expect our earnings per share for the year to be down mid-single digits. On a non-GAAP basis, we are maintaining our guidance for low-single-digit EPS growth.

On a GAAP basis, we expect Q4 earnings per share to be down low- to mid-single digits. Excluding charges from the Global Growth and Efficiency Program and other one-time items, we would expect Q4 earnings per share to be roughly flat year-over-year. And with that, we'll open it up for questions..

Thank you. And we'll take our first question from Wendy Nicholson with Citi Research..

Hi, good morning..

Good morning, Wendy..

Hi. My question has to do with kind of the longer term philosophical outlook for the business. Great to see a sequential improvement in some of your market shares and in the organic sales growth rate. But despite a significant step-up in your spending, that growth is still coming in well below where you think you can be long term.

And I know you don't want to give too much 2018 guidance, but maybe just directionally touch on, hey, as you look into the new year, is the message to your general managers in the markets, hey, spend, spend, spend, because we've got to get market shares up, or hey, we need to have more balanced growth and see more margin expansion than in fact we saw in the third quarter because I can't remember a quarter where we've seen so much operating margin contraction in a favorable foreign exchange environment.

Thanks..

Okay. That was one very long question, Wendy. So trying to react to it in pieces. The reason I went through the margin roll forward quarter on quarter is to highlight the point that notwithstanding, to exactly the point you made, there was no transaction headwind for the first time in a long time.

There was higher than expected underlying commodity pressure, as I mentioned, particularly in fats and oils, and particularly in resins. And as John said, we didn't get benefit from pricing in the third quarter.

Now, as you know, many in our space in this particular quarter saw their gross margins contract, perhaps facing a similar composition of business. So as we think about going forward – and this is not specific to guidance for 2018 – it's more how we think about running the business.

We think about growing our business in excess of the underlying rate of market growth in our categories, which traces back to population and expansion of the middle class, particularly in the emerging markets, which is why we invest the money we do in the per capita consumption building program.

So our view, and why we're encouraged by some of the country-specific pickup in category growth, is that we think about growing slightly faster than the rate of growth in our categories, thereby assuming that we make some progress on market share as well. But as you well know, it is not spend at all costs.

We are a balanced company, and part of our thinking is to look for expansion in gross margin, as we move forward in order that we can maintain the levels of advertising that we think are appropriate to build our brand equities and announce our innovation.

And in these volatile times, that's why we've been so focused in addition to gross margin on structural cost, a journey we began several years back, I think leading many of our peers at the time, because we felt that structurally with the hubs, with the Colgate Service Centers, and the technology that binds all of that together for us, the SAP that we have across our enterprise, we could secure a more efficient structure, which would give us speed and saving.

And as you see in our announcement, we now see continued expansion that we can take charge of over the next couple of years, which gives us a little bit of extra savings in a volatile environment.

But the focus is very much a balance between growth, gross margin, and cost structure to grow the top line in a reasonable fashion in terms of the environment we're in, and deliver a return..

Next, we will go to Jason English with Goldman Sachs..

Hey, good morning, folks. Thank you for allowing me to ask a question..

Good morning..

I wanted to pull out a couple of threads that Mr. Faucher talked about and see if we can go a little bit deeper.

First, lots of conversation on innovation, natural – predominantly premium it sounded like, a lot of premium mix innovation that you're pushing out, but at the same time he talked about a bit of a reset in terms of margins in part attributable to less pricing expectation despite higher costs.

And obviously, we saw this quarter some pricing pressure emerge in a couple of markets.

Can you expound on that, first, the dichotomy of premiumization driving growth, yet pricing under pressure? And then also maybe give us a little more meat on the bone of what do you think is driving some of the underlying pricing pressure, some of the factors that are contributing to it, and how many of those may be enduring as we think about the future.

And I'm not trying to tease out guidance for 2018. I'm just trying to think about the underlying health of the business..

Yeah, yeah, well, good questions. I'll have to dig into the Mr. Faucher remark. Look, from an innovation point of view, as we have said before and it ties to the Naturals comment, in a way, as we move with these Naturals innovations, we are pleased to compete in that space, because as you say, the innovation is premium.

And we have a bias whenever we innovate to see if we can't make that innovation premium, in other words, deliver a value to the consumer that they're happy to pay for and, at the same time, be accretive from a gross margin point of view.

But we always make the point – and I would make it now – that when we think of innovation, we think of innovation across our entire portfolio, and in all of the markets in which we do business, we operate across a full bandwidth of price points, and even packaging forms on occasion, sachets instead of tubes, to make sure that we can capture in the emerging markets, the emerging consumer and the rural consumer.

So, yes, a bias to premium where the consumer sees value, but we never forget the fact that we have a full portfolio and we're always innovating across that full portfolio even if we talk more to the premium end innovation. Now, when you turn to pricing, and you look at the third quarter, I guess you see a couple of factors.

One is Europe, and European pricing has been pressured for many, many years, given the market conditions in Europe.

And it is unlikely that that is going to change any time soon, which is why you may remember, when we did the Global Growth and Efficiency Program, we started with structure in Europe first because we had concluded as a matter of strategy that underlying category growth would be under the kind of pressure that we have seen and we expect we'll continue to see.

North America, which saw pricing decline this quarter, is a little bit of a different story. You have a couple of factors going on, I think.

Number one is heightened competitive promotional activity, I would say, particularly in the Home Care businesses, which, in our case, would be softeners and hand dish, and also to a certain extent in the liquid soap businesses.

And we said on the last call that we were going to make some pricing adjustments in order to continue to make progress on our dish business, which had been impacted by that heightened promotional activity in the second quarter.

And so we have done that and we have put focus behind getting those price points right in the retail channels where that is important.

And, obviously, as the promotional pressure eases, we will clearly ease back on the pricing because we would much rather put the investment, as we continue to do, in the brand building areas of advertising and consumption building promotion.

I'm pleased to say that specific to the U.S., as we track this trend data on a weekly and monthly basis, we're beginning to see an easing of that promotional intensity on Home Care, which I think augurs well for the future.

And I would finally say that you have seen in the past in the emerging markets, our ability to take pricing in relation to transaction cost impact.

I think you can be assured that we would seriously consider doing the same for a direct commodity cost increase as well, so that type of pricing in those kind of markets, I think, you can expect in our future plans..

And we'll move to our next question from Andrea Teixeira from JPMorgan..

Hi, good morning. Thank you. My question is regarding in the cadence for the North American sales within the third quarter. And if you got more traction with advertisement spending and promotional spending as you progressed in the quarter.

So in other words, I was trying to find out if the organic sales lift that you're planning for was across the board or if there was any areas where you can see potentially some buildup, I mean, positive buildup, into the fourth quarter and in particularly with the – also with the destocking that you had in the last quarter of last year. Thank you..

Yeah, I think we obviously track trade inventory levels well. We did have some destocking as we came into this year. We did not see any destocking in the third quarter. I think, as John mentioned in his prepared remarks, we were actually quite pleased by the broad based, if modest but nonetheless increase in category growth rates in the United States.

As I said a little bit earlier in response to the pricing question, we have made our Home Care businesses necessarily more competitive in the appropriate retail channels, but if the category growth rates continue the pickup we have seen, that would clearly be favorable for the quarter, and of course, as you have seen, we have now seen sequential progress in North America from the first quarter this year.

So I would say nothing exceptional to call out in that regard. The inventory destocking would seem to be behind us, and we're building against the underlying growth in the categories going forward..

And next we'll go to Bonnie Herzog with Wells Fargo..

All right, thank you. Good morning..

Good morning, Bonnie..

Hi. I have a question on your Global Growth and Efficiency Program. While I think it's encouraging that you guys extended it, I guess I'm wondering if this decision implies in any way that you're expecting more fundamental pressures on your business in the future that might need to be offset by more aggressive cost cutting.

And then are there any projects that you've started already that might begin to benefit margins in Q4, especially since you're up against another tough gross margin compare? Thanks..

Yeah. I guess the answer on the Global Growth and Efficiency Program is more the fact that we have, since we began the program, been intently focused on efficiency and speed that we can generate through these commercial hubs through the Colgate Business Service Centers and further rationalizing our manufacturing and other facilities.

And the thread that ties all those together has been the SAP technology that we have had across our company for a long time. And the expansion you're seeing is more based on the further opportunity we see building on the success of what we have done thus far. So rather it's not in reaction to anything.

It's more building on the learning that we have developed over the last several years. Now, to turn that around from a pure business point of view, yes, we're looking for the savings. More importantly, we're looking for the speed and efficiency.

And in a volatile world, it does give you some downside protection, but we didn't go into this with that as the thought in our minds, it was more truly building on what we had learned as we have been deploying all of these initiatives over the last several years.

Every time you get into one of these things, you get more learning and it spawns more ideas and more things that you can go after. So I would say it was more proactive. It wasn't reactive to a gloomy future..

Next we'll go to Jason Gere with KeyBanc Capital Markets..

Okay, thanks. Good morning. I guess I wanted to talk about the portfolio a little bit. In a softer environment, we're seeing a lot of companies trying to fix the mix here either exiting businesses in different geographies that maybe don't strategically make sense or doing tuck-in acquisitions.

So with the changing environment, we hear you guys talk about the locals and just about some of the disruptors that are out there, and your prestigious balance sheet that's out there.

Can you talk maybe about the portfolio? Are there areas that maybe you can prune a little bit more and then maybe actually add some new categories to the mix here to kind of leverage what seems to be a leaner cost structure over the next few years?.

Yeah, good question, Jason. Very strategic.

If I take a step back on the portfolio, the full portfolio categories that we have today, as you well know, I think, we have a very sharp priority focus in terms of Oral Care, Pet, Personal, and Home Care in that order, because the underlying growth dynamics in the categories are favorable in that order, consumer loyalty and emotional engagement, therefore pricing, are favorable in that order, and therefore gross margin potential is favorable in that order.

And I bring you all the way back to the per capita consumption building programs and education programs we have on toothpaste. So within the portfolio we have today, we have a very clear focus, and obviously even within segments, we're looking to accentuate the premium end of those segments.

Disposals, we have done them from time to time, despite the fact that we prioritize our categories the way we do. It's like having four kids. You don't love the fourth any less than the first three, and that's the case with Home Care from our point of view.

We have tactically over the years – I think Latin America was the last example where we divested of our bleach business and put it with Clorox as the acquirer, probably a better home for a bleach business than Colgate. So are there small things like that that one might see? Maybe. Your idea of buying on the outside, again, is a good one.

It's one we always have in view. We think about it quite broadly, whether it be companies, whether it be brands, or even technology as we have demonstrated in the past. And we put quite a lot of study attention against that. We put our customary financial discipline against that. You're right, we do have the balance sheet flexibility.

And if in these volatile times, an external candidate that was attractive, was feeling perhaps a little bit of pressure and looking for a different home, on the assumption the financials would work out, we would be a willing buyer, as we have been with Sanex and Tom's and GABA, all of which have done very well for us.

So the answer is, the right brand business saw technology, absolutely, at the right price..

And next we'll go to Kevin Grundy with Jefferies..

Thanks, good morning..

Good morning, Kevin..

I wanted to come back to the topic of advertising spending and what the appropriate level is longer term.

And my questions in the context, there's been a number of discussions on these calls in the past on striking the right balance between trade spending and advertising spending, and now it seems like you're leaning in a bit more again on ad spending following a couple of years where ad spending for the company in total as a percent of sales was sub-10%.

And John mentioned it'll be up again in the fourth quarter, but I guess that's not surprising given you're cycling at historically low ad spend as a percent of sales.

So the question is as we look at it within the next several years, not just 2018 because I know that you're not prepared to give guidance today, but are you still comfortable with ad spending a little north of 10% of sales or do you think that needs to move higher in the current environment? Thank you..

Yeah, I think one has to come back to the beginning premise, and that is the reason we made the statement we made coming into this year is that with the savage and indeed sometimes over the last couple of years foreign exchange moves were extremely savage, we had as a court of last resort reduced advertising to offset the sharp move in foreign exchange.

And we made the statement this year that that's not what we wanted to do. That doesn't change as a matter of commercial strategy at all, the fact that we work to have a balance between what we do at retail and what we do in the traditional advertising and promotion spending.

So as we go forward, when we build our advertising, we build it against a business plan. We build it by country. We build it by brand in country. And it rolls off at the corporate level. I would say the level of advertising that we have this year is a healthy level of advertising.

If you talk to a marketer, there is always the potential to spend more advertising. And I think we would be driven more by the good ROIs we're getting, the particular activity we have in any year, the adequacy of the advertising to be on air for a long period of time to make sure we're building awareness, and what the competitive context would be.

And of course, as we are moving forward in this world, you're seeing that continued shift from the traditional advertising into digital, which brings some of its own economies.

So the shorthand answer would be, the level of spending this year is, we think, appropriate but good for our business, and we'd be guided going forward by the things I mentioned a little bit earlier, but that does not in any way undervalue the power of what we do at retail, and we'll always be working to balance those two investments..

Next we'll go to Ali Dibadj with Bernstein..

Hey, guys. Sorry if I missed....

Hey Ali..

Hey, sorry if I missed the Q4 organic sales guidance if you gave any, but if you could, could you just talk about that? And then from a margin perspective, I guess I have two questions. And perhaps if it's appropriate, Dennis Hickey or John Faucher can jump in here, but for the productivity program extension, clearly it's good.

We like to see more cost savings. But at what point do kind of more or less regular one-time charges turn into recurring as opposed to one time? And I don't mean that as purely an accounting question, but a little bit more of a business question, as well, from that perspective.

And then we also noticed that the return on your charges, so in other words if I just divide the savings number you're contemplating by the charges, the extension is much higher than what you've been doing so far, so it's like 46% versus 30s-percent, i.e. much greater return on what you're extending here.

So it does actually feel like the nature – to one of the earlier questions, does it actually feel like the nature of the extension of the Global Growth and Efficiency is different than what has happened so far, so it feels much more aggressive, indeed perhaps reactionary. I don't know. You said it wasn't but it feels that way.

And certainly it would feel more head count focused given that type of return profile. But would love obviously your interpretation of that as well. Thanks..

Thanks, Ali. Well, let me start there, given where you left it. It was not reactionary at all, period. Everyone can have their view.

I think the important thing to say, as I tried to say earlier, it has been in part the learning process we have gone through in the areas we have been focusing on, and the opportunity one has with technology to simplify what you do and then simplify the organization needed to do it.

So the reason for the higher rate of return, as we have been building the Global Growth and Efficiency Program, we have built a lot of capability. This in a way is more of an SG&A focus against a built infrastructure, allowing us in many areas to delayer the management structure required to operate without any impact to quality.

So entirely planned for and planned for based on the learning we had had. On the technical aspect of the productivity program, we have obviously been through this in some detail as a company from a financial point of view, from a legal point of view, and with our auditors from an external point of view, as we always do with these kinds of programs.

And we are comforted and assured and believe that these are indeed one-time discrete activities in the same themes that we have been focused on before. And no, Ali, you didn't miss the fourth quarter top line guidance. We didn't give it..

Okay. And next we'll go to Dara Mohsenian with Morgan Stanley..

Hey, good morning..

Hey, Dara..

So I was hoping to get more of a review of category growth around the world besides some of the commentary that John made. First, in the U.S., you did mention a slight pickup sequentially in category growth, but we're still seeing pretty weak year-over-year trends in terms of category growth.

And that doesn't seem to fit with macro indicators that theoretically should be favorable for the consumer. So I'd love to get your view on what's driving the U.S. category weakness, and if you think it's more temporary or longer term and if this slight pickup you've seen continues going forward. And then second, a similar question in emerging markets.

There we're hearing about some initial signs of a pickup from a number of CPG companies and the macro indicators generally seem favorable, so are you seeing category growth recover in emerging markets in general and are you comfortable that that builds as we look out to Q4 and 2018? Thanks..

Yeah, yeah, obviously good questions, and one we're extremely focused on. So, yes, we were pleased, as John said, with the market-by-market upticks that we saw this quarter.

And as we said earlier, this is one of the things we want to track very, very carefully over the next couple of months in order that when we talk in January with you all, we talk in as informed way as we can about what we see in terms of our categories.

If you take a macro step back and look at our category growth rates around the world, what you still see is the emerging markets growing mid-single digits, between 4% and 6%, depending on the geography. And in the developed world, you basically are still seeing flat to modestly up in Europe and North America.

Again, those little green shoots we have seen, clearly we are looking to see them continue to build and strengthen. As I said before, we think this will adjust because we don't see in any of our data and some of the bespoke research we've done, we don't see any indication that consumer behavior in terms of brushing their teeth is changing in any way.

So a little bit of an improvement. The macros are still, from a category point of view, where we have been saying they were before. We'll be watching this very, very closely and be as informed as we can in January..

And next we'll go to Nik Modi with RBC Capital Markets..

Yeah. Thanks, good morning everyone. Ian, I think – there are a lot of debates going on in the market, but I think most of us can agree that Colgate is one of the best-in-class companies across any market, across any category, but obviously it's been a challenge the last year or two.

And I guess I ask that question in the vein of it looks like we could be in this period of time where just the cost of doing business is going up structurally.

And I wanted to get your comments on that and your thoughts because it seems like more local innovation to keep pace with the local consumer and local competition, changes in channel mix, which could be putting more pressure on the supply chain, technology, et cetera, et cetera.

So I just wanted to get your thoughts on that broadly, as you look at your business and the industry as a whole..

Yeah. Well, thanks, Nik. It's a time of great change. I guess that's the best way to say it. At the ground level, you have all of this country-by-country volatility, never mind weather patterns which seem to strike, with gay abandon and complete shock and surprise.

So on the one hand, you're dealing with a lot of pushes on the business that seem to come from nowhere and a general slowdown in categories, which we think is transitory and will change over time.

And then from the big picture point of view, you've got an enormous structural change in the way the consumer is engaging with brands and companies, and choosing to buy the products that those companies provide to those consumers, and I think that comes down to mastery of digital in its broadest sense, which is how you run the company with it, how you engage consumers with it, and indeed how you ultimately sell to consumers.

In and of themselves, if you organize yourselves right and you take full advantage of technology, it doesn't fundamentally change the cost of doing business. Indeed, in some areas, it can make you more agile and more efficient doing business.

But as you move along, you're going to get resistance for the change to e-commerce from other quarters and there's going to be that constant buffeting on cost, price, and/or otherwise.

And I think the role of CPG companies is to stay true to the consumers they serve, make sure their brands remain relevant and navigate how you engage with and sell to those consumers over time. So I see it as a challenge, but I don't see it as a God-given conclusion that costs of necessity must become a forever headwind.

How you do business will have to change over time, but that's a different thing..

Okay. Next we'll go to Caroline Levy with Macquarie..

Thanks so much for the question.

I'm just looking at market shares, and by their absence, it seems like you lost market share in the U.S., a lot of the Asia markets including China and India, Brazil, France, UK, and I'm just trying to, number one, am I right on that just because you didn't comment on them being up? And are you losing to local players? And is this something at some point you're willing to take a price rollback so that you can sort of stem that or are you only going to try the innovation and media route?.

You're right. In some markets, we have seen some share pressure. I'll kind of go through by market. The reasons are usually different, and the response is therefore different. Brazil, frankly, we've been very focused on growing that business from a pricing point of view to protect the margin and a volume point of view.

Our market share is still north of 72%. It is year-to-date a little bit weaker than the prior year, but frankly, we're damn pleased with the choices we have made and expect to build that market share going forward. Mexico, we're still north of 82% and it's going up, so there is a marketplace where we're making progress.

You come to France, France was a customer reason. We are now back in distribution with that customer and building both sales and share, and that of course affects the national share in the country, and, more importantly, given the size of France, it affects the European share. So, that is in the process of rebuilding.

In China, our year-to-date volume share is actually flat. Our year-to-date value share is down. The reason it's down is because we are not yet taking full advantage of the high growth in the category, which is at the premium end of the category, including one of the local brands.

And that is what the Naturals offering that I mentioned earlier is on plan and just building distribution, is seeking to offset. And it's a similar story in India, and again we now have building in distribution this Colgate Vedshakti, as John mentioned, which is our Naturals counter to two local brands.

So I've tried to answer by each of the geographies, but those would be the answers. The U.S. share is actually essentially flat, and we still lead in the United States. So there's no share issue there..

Okay. Next we'll go to Bill Chappell with SunTrust Robinson Humphrey..

Thanks. Good morning..

Hey, Bill..

Just a question on kind of the commodities buzz in the quarter and looking forward. I think you said it was in total a 200 basis point kind of headwind. Any way to kind of quantify how much of that was a surprise or extraordinary.

You talked about it lasting into fourth quarter, just in kind of how these things play back in terms of resin costs, do you expect that to drag far into 2018 or is fourth quarter kind of the end?.

Candidly, Bill, coming out of the second quarter, we thought fats and oils were on the way down for the balance of the year, and I think we guided for that at the time. And they have since reversed. The resins, perhaps not totally surprising, but seems to be lingering longer than we would have expected.

So certainly from a planning point of view, we're assuming a no change for the fourth quarter. And whilst we haven't got eyesight on data yet, I think a fair assumption would be that they may drift into 2018 a little bit..

Okay. And next we'll go to Mark Astrachan with Stifel..

Yeah, thanks for squeezing me in. I wanted to ask about....

Hey, Mark..

Hey, Ian.

I wanted to ask about how you think about what's the biggest contributing factor to sales growth and sort of relative share performance when you talk about local competition or Naturals, I know there can be a bit of overlapping there, or contrasting that with multinationals like GSK, who have been putting up high-single-digit-type growth on what is a very big brand.

So I guess how do you think about it in terms of what is contributing vis-à-vis what I just mentioned? And on the Naturals piece, how do you think about the Colgate brand and consumer acceptance of it with a natural positioning relative to what it's historically stood for?.

Yeah. Well, again, a lot of questions in there, Mark. But the GSK is clearly a competitor in the space, has been for a long time. Obviously a sensitivity-based brand. It's the one segment we don't lead in in the world, and although we have terrific technology, and that's a segment we are looking to build dentist-by-dentist, market-by-market.

But the trouble with Naturals is when you say Naturals, everybody thinks of something, but it may not be the same thing. So in the United States, you say Naturals, we might say Tom's. You translate Naturals in India, it's got more of an Ayurveda twist to it.

You transfer it in China, it's got different ingredients, and you take it to Russia and it's something different again. So, that's why we made the point, yes, this is general trend of Naturals which includes the local brands, but hasn't been created by some of these local brands. But it's different market-by-market.

So having innovation groups on the ground helping you build that offering to tailor it to those local tastes whether be they conceptual, be they flavor, be they color – some of the color of natural products is, shall we say, interesting – is a tricky thing and a complex thing, and a very specific thing.

As to Colgate, Colgate in its broadest definition is a worldwide family brand, and Colgate, take India, we have been there for 80 years, and Colgate is one of the most trusted brand names, indeed brands, in the country.

So Colgate's early entry into many of these emerging markets long before our American companion competitors means that the Colgate brand has been established in the culture.

So you start talking about combining a Naturals offering interpreted for people in the country, the Colgate brand is very familiar and trusted by people in the country, so there's no clash between concept and brand..

Next we'll go to Lauren Lieberman with Barclays..

Thank you. Good morning..

Hey, Lauren..

Two things. One was just on Hill's, so it's pretty rare to see no pricing in Hill's. And I had to go back to the price cuts in 2010, and then before that, I think it was 2004.

So just talk a little bit about what's gone on there? Is it anything in terms of promotional strategy or kind of gross (01:06:56) to net funding with your sort of more diversified distribution footprint for Hill's. That was one. And then second was also on pricing.

In North America, I was just curious, I know you mentioned some of the competitive promotional activity more in the Home Care and Personal Care with soaps.

But I was wondering if kind of the outsized growth you've had it looked like in e-commerce and in club, if that's also contributing to some of the pricing pressure that you saw this quarter and how we should think about that going forward. Thank you..

Yeah. The mix of the non-Nielsen channels in the United States tends to have slightly lower pricing than the other channels, so that is a contributory factor, Lauren. But the rest is predominant and true, and that is the Home Care and the liquid soap promotional activity, which we have met.

And as I mentioned, the latest information we're seeing shows it ebbing slightly. So, that's the answer on North America. E-commerce, no, that's not a factor.

For Hill's, Hill's had strong pricing last year, and as part of re-engaging with the specialty retailers, most one of the two, we have a lot of introductory activity going on in the quarter to reestablish the brand, be it couponing – targeted couponing and/or otherwise, and that as you know gets translated into price, so that was largely reestablishment in the U.S.

with the specialty retailers..

And next we'll go to Jonathan Feeney with Consumer Edge Research..

Hi, thank you very much..

Hey, Jonathan..

This is Armani Khoddami in for Jon..

Hi..

Just one quick question – yeah, how are you doing? So a quick question for you. Does the success of the Naturals line give you maybe some – or the ahead of planned performance there, does that give you some confidence around the ability to take price? I know we've talked a lot about price investments over this call.

But it seems like that product specifically has performed ahead of expectations. And then also whether it be the ability to price in emerging markets with Naturals, but also as we looked in the U.S., a key competitor of yours seems to have been taking prices up over the past 6 to 12 months.

And any comment around a thought about taking – the ability to take price even here in the U.S. as well. Thank you..

Yeah, well, Naturals, the Naturals offerings we have in the emerging markets are at meaningful price premiums. Indeed we had a learning in China where we had done an in-store test of the offering at, shall we say, a more market-level pricing.

And we found that we had underpriced, so as we have begun to take it nationally, we have significantly increased the pricing. So a general learning with Naturals is that part of the concept that generates the value that the consumer believes is real value to them is that they be at a higher price.

No brand espouses that strategy better than Tom's of Maine here in the United States, which has grown nicely every year basically since we acquired it and carries a meaningful price premium to the marketplace.

And in terms of pricing in general in toothpaste here in the United States, we have seen some progress on our pricing just over the last month or so, so we have been working to keep pace with pricing trends here in the United States. But your most important question, I think, was around the Naturals idea.

I think all of the learning we have to-date demonstrates that that offering justifies a premium price, and indeed the consumer seeks it. So, thanks for the question..

And those are all the questions we have today. I'll turn the call back over to our speakers for any additional comments or closing remarks..

Thanks, Dave. Well, thank you, everybody for being on the call and listening to what we have to say. Thanks to the Colgate folk for making it happen, and Happy Thanksgiving to everybody, and we look forward to talking again in the new year. Bye..

That does conclude today's conference. We thank you for your participation. You may now disconnect..