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Colgate-Palmolive Co. (NYSE:CL)

Q3 2008 Earnings Call

October 30, 2008 11:00 am ET

Executives

Bina Thompson - VP of Investor Relations

Ian Cook - President and CEO

Analysts

Nik Modi - UBS

Bill Schmitz - Deutsche Bank

Ali Dibadj - Sanford Bernstein

Wendy Nicholson - Citi Investment Research

Alice Longley - Buckingham Research

Chris Ferrara - Merrill Lynch

Bill Chappell - SunTrust Robinson

Lauren Lieberman - Barclays

Connie Maneaty - BMO Capital Markets

Alec Patterson - RCM

John Faucher - JPMorgan

Jason Gere - Wachovia

Operator

Welcome to today's Colgate-Palmolive Company third quarter 2008 conference call. Today's call is being recorded and will be simulcast live at www.colgate.com. Just reminder there will be a slight delay before the question-and-answer session begins due to the web simulcast.

Now, at this time, I would like to turn the conference over to the Vice President of Investor Relations, Bina Thompson. Please go ahead.

Bina Thompson

Thank you, Dwayne, good morning, everybody, and welcome to our third quarter 2008 earnings release conference call. With me this morning are Ian Cook, President and CEO; Steve Patrick, CFO; Dennis Hickey, Corporate Controller; and Ed Filusch, Treasurer. We will discuss our results and expectation, excluding charges relating to the 2004 restructuring program and certain other items in the first nine months of 2007. In addition, we will also discuss organic sales growth, which is sales excluding the impact of foreign exchange, acquisitions and divestitures.

A full reconciliation of these measures with their corresponding GAAP measures is included in the press release and the company's financial statements, and is posted on the Investor Relations page of our website at www.colgate.com. So we will be glad to answer any questions you may have, including or excluding these items, as you wish.

We are very pleased to report a solid quarter, especially given the current uncertain external environment. Market shares are healthy around the world; business continues to be robust in the high growth markets, such as Latin America and Asia, which is helped to offset some of the slower growing economies in Western Europe and North America.

Organic sales were strong across most divisions, up 9.5% worldwide. This is the best organic quarterly sales growth in over 10 years. As you know, we have taken meaningful price increases in the third quarter, to offset the unprecedented increases in commodity costs we have seen throughout the year. This, as you would expect, has resulted in some temporary slowdowns in volume as consumers have worked down their pantries.

Our experience is that this type of slowdown generally last for a quarter or so. Accordingly, we expect volume to be up somewhat more in the fourth quarter than in the third, particularly at Hill's where the biggest pricing was taken. Overall organic sales are expected to grow at current levels for the balance of this year, and into 2009.

So while commodity cost pressure remain significant in the quarter, and should abate only slightly in the fourth quarter, we are encouraged that the recent decline in oil and other commodity prices is sustained, should provide a meaningful benefit starting in the first quarter of 2009.

As we said in the press release, this should fully offset the anticipated negatives from foreign exchange. In addition, we continue to achieve good savings from our ongoing fund in the growth programs as well as our restructuring and business building programs.

Importantly, this should allow us to continue to support our business with strong levels of advertising, while increasing profits as well. All of these bode well for delivering continued strong results. Our balance sheet and cash generation are strong. We have continued to issue commercial paper at attractive rates and have had no difficulties in this regard.

Our pension plans are well-funded and our overall liquidity position is very sound. Again, this is most encouraging in the current macroeconomic environment. So let's turn to the divisions. Volume in North America grew slightly. We have witnessed some pantry destocking on the part of the consumer, particularly as our price increase in toothpaste was realized on the shelf. However, we are still seeing dollar growth in all our categories. In addition, private-label levels for most of our categories still remain low at mid single-digit or less.

Our market shares are level or up in 10 and 12 of our categories. As you read in the press release, our toothpaste and toothbrush shares are doing well, fueled by new product activity as well as our continuous investment in multiple media, TV, print and online.

On the new product front, we are very excited about Colgate Max Fresh with Mouthwash Beads which stick to customers in the third quarter. This along with the launch of the Colgate Max Fresh toothbrush provides consumers with a regiment approach to fresh breath. Fabric conditioner, our Suavitel brand achieved (inaudible) and in the market overall, 35.4 and 13% respectively.

We told you last quarter about our launch of Palmolive Pure & Clear dish detergent that along with our new Eco Plus automatic dish detergent and Murphy's oil soap provides a cost category Eco platform which we are supporting with an integrated PR program, shopper marketing activities and joint displays in stores. We will be shipping some very exciting new products in the first quarter of 2009, in toothpaste, toothbrushes, liquid hand soap, body wash and deodorants.

So looking ahead, volume in North America is expected to be up low single-digit in the fourth quarter, and for the full year 2009. Organic sales are anticipated to grow mid single digit for the same periods. Operating profits is expected to be up modestly in the fourth quarter, and up mid to high single-digit for the full-year 2009.

Europe. The macroeconomic situation in Western Europe remains challenging for us as well as for other consumer products companies. Despite this, our market shares are doing well, especially in the higher margin categories, such as Oral and Personal Care. We see some indication that our business in Germany is improving, our toothpaste share is up almost one full point on a year-to-date basis, subsequent to a complete re-launch of our base business, which included price increases.

Similarly, in dish washing liquid, we re-launched our Palmolive brand with a more premium price position and our share is up 80 basis points year-to-date to 15.8%. In bath and shower gels, our share is up nicely with good momentum in the most recent period.

In the UK, we reached a record toothpaste share of over 50% in September and in Australia, our toothpaste share is now 70%. We told you last quarter that we had launched Magic Moments, a fabric conditioner in France, Greece and Belgium, and as it has done in Mexico, this new product has met with good success in these European countries as well as with increased market shares in all countries.

Looking ahead, volume in Europe is expected to grow very modestly for the fourth quarter and for 2009 with organic sales growing low to mid-single digits for the same periods. Operating profit is expected to be down in the fourth quarter, primarily due to negative exchange. For full year 2009, operating profit is expected to be up, low to mid-single digits.

Turning then to Latin America. Markets in this region continued to be quite strong and we are still seeing good category growth. In fact, in Mexico and Brazil, we are seeing growth rates accelerating from 2007 levels in certain categories. Our market shares have increased in toothpaste, tooth brushes, mouthwash, bar soap, liquid soap and hand dish across the region.

Our toothpaste business is healthy across the region. Colgate Total is continuing to gain share behind strong support and focus with the profession and constant innovation. The new sub brand, Colgate Total Pro Clean achieved a 2% share in the latest readings, adding incremental share to the Colgate Total franchise. In addition to this strong performance in toothpaste, in Mexico, referenced in the press release, other countries enjoyed good share gains as well.

In Brazil, our toothpaste share is up almost two points, reaching nearly 70% of the market. Venezuela reached the prestigious 90 club with a share of 90.4% in the most recent periods. In Colombia, our year-to-date share is up almost 4 points. In addition to good regional share gains in toothpaste and toothbrushes, we have had very good success in mouthwash with our year-to-date share up over five points closing the gap with our nearest competitor by a full 10 points from three years ago.

Our market shares have increased in virtually every country, driven by strong innovation supported by full media and in store activities. Our regional bar soap share increased over a point year-to-date to 27%, climbing to a leadership position from almost an 8 point gap three years. In the most recent period, our share rose further to 27.3%.

Both the Palmolive and Protex brands contributed to this success. As you know, Protex is a brand with an antibacterial positioning that we sell throughout the emerging markets. Protex had outstanding results in many countries in the region and in Brazil achieved a record 10 share in the latest readings.

So looking ahead, volume in Latin America is expected to increase at third quarter levels or slightly higher for the fourth quarter and for full year 2009 as well. Organic sales should be up mid teens for the same period. Operating profit is expected to be up high single digit and as a percent to sales in the fourth quarter and is expected to be up double digits in 2009.

Greater Asia and Africa; this division delivered another strong quarter as markets throughout the region continued to show solid growth despite economic difficulties in other parts of the world. The toothpaste markets in China, India and Russia are all growing at double-digit rates. Our toothpaste shares are up across the region as referenced in the press release. In India, our share is even with the prior year on a year-to-date basis and has upped in the most recent period.

A new Colgate Max Fresh advertisement accompanied by an integrated marketing communications plan is helping to drive the positive recent Max Fresh shares. We also continue our equity enhancing consumer engagement activities along with Oral Health Month for the overall Colgate equity.

In Russia, our Colgate toothpaste share is up 50 basis points on a year-to-date basis to 33.8 and is at a record 34% in the most recent period. In addition, the launch of our GABA products in the pharmacy channel which we mentioned last quarter is going well. That has been supported by promotional and market research activities. Our toothpaste shares are doing well also. In India, our year-to-date share is up 290 basis points over the prior year, approaching 40%. Much of this gain comes from our lower-priced Colgate Super Flexible Toothbrush which is aimed at the large lower-income population in both the rural and urban markets.

In Russia, we continue to strengthen our leadership position, up 320 basis points on a year-to-date basis, reaching 50% of the toothbrush market in the most recent period. Other countries showing good toothbrush share gains are Malaysia, the Philippines, Thailand and Turkey. Market shares are steady in our priority category of shower liquids with particular focus on the Eurasian countries. In Russia, for example, our shower gel share is at its highest level ever, up 220 basis points year-over-year, to over 30% with further gains in the latest readings.

So looking forward, volume in Greater Asia/Africa is expected to increase high-single digit s in the fourth quarter 2008 and then for full year 2009 as well. Organic sales should increase double digit for the same periods. Operating profit is expected to increase double digit, up absolutely and as a percent to sales for the fourth quarter and full-year 2009.

Finally, Hill; while Hill's overall sales growth was strong, volume itself was negative primarily impacted by the timing of price increases. This year we took selling price increases effective July 1st which drew volume out of Q3 and into Q2 as our customers made forward purchases in advance of the announced SBIs.

However, in 2007, we took price increases effective October 1, drawing volume out of Q4 and into Q3. The net effect was an unusually high volume in the third quarter of last year and an unusually low volume in the third quarter of this year. Volume in the fourth quarter is expected to increase low-single digits.

As we and other pet food manufacturers have taken quite significant price increases to offset the steep rise in commodity costs, we have instituted a new program in the US and Europe to clearly communicate the value proposition of Hill's Science Diet to pet owners.

The program called, 'Feeding is believing' focuses on the power of precise nutrition and the actual low cost per day of the product. The integrated marketing plan reaches the consumer through pet magazines, online advertising, consumer brochures and coupons as a variety of point-of-purchase materials, including shelf talkers, shelf laminates, counter mats and sidewalk signs.

Results so far have been very encouraging. As you know, one of our very successful prescription diet products is Prescription Diet JD which treats arthritis and joint problems in dogs. Based on consumer insight that showed about 50% of dog owners believe their dog has mobility problems and yet were unaware of any food solution, Hill's Europe offered a trial program which would give consumers firsthand experience on how Prescription Diet JD could help improve their dog's mobility.

The 21-day challenge provides consumers approximately one month of Prescription Diet JD at no charge. Vets are provided with the trial bags as well as consumer information to help them discuss mobility problems and explain how Prescription Diet JD could benefit their client's dog. As soon as the consumer enters the trial program, they receive e-mails every week during the trial period to reinforce the importance of compliance during the trial period.

As a result of the program, year-to-date market share for Prescription Diet JD is up 10 points and volume has increased by 48.5%. So following successful European results, Hill's US has also launched the program expanding to 3500 additional vets in September.

Looking ahead, volume in the fourth quarter and for full year 2009 is expected to increase low single-digit. Organic sales should increase double-digit for the same periods. Operating profit is expected to be up mid single-digit for the fourth quarter, and full year 2009.

So in summary, we are pleased with our results for the third quarter, particularly in these challenging and uncertain times. We feel strongly that our strategic focus and geographic diversity positions us well for future growth. Our four strategic initiatives with which you are all familiar, getting closer to the consumer, the profession and our customer, efficiency and effectiveness in everything we do, innovation everywhere, and most importantly, leadership at all levels of the organization, provide a clear direction for our 36,000 employees around the world. We have a strong senior team and a deep and broad bench of future leaders, who will work together to continue to deliver solid results.

So, Dwayne, that is the end of my prepared remarks and I would like to open it up now for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question will come from Nik Modi with UBS

Nik Modi - UBS

Good morning, everyone.

Ian Cook

Good morning, Nik

Nik Modi - UBS

My question is on the pricing, given the magnitude of some of the price increases. How are you protecting your market share in your key markets? Are your competitors are following? Can you just give us some prospective around that? Thank you.

Ian Cook

Well, let me make a few comments, Nik. First of all, relative to competitive pricing moves, yes, these commodity cost impacts are affecting all manufacturers in the categories in which we do business, and we are seeing competitors take pricing at similar levels to us across the board. Obviously, there can be a little bit of a lead-lag, 30 days, 60 days, 90 days, in terms of the pricing getting to the shelf, competitor-to-competitor versus ourselves, but we are seeing everybody take price to similar levels and we are seeing that pricing move to the shelf.

What we have experienced is that you do see some slight pantry destocking by the consumer as they wait for the pricing to settle on the shelf and then they come back into the marketplace. That is the flow we have been seeing.

Nik Modi - UBS

Ian, just to follow up on that, correct me if I am wrong, but are you pricing to offset some of the currency devaluations in some of your key emerging market, and in that environment how does the competitive pricing look with your key competition?

Ian Cook

That is always been a factor for us in parts of the world where currency devalue impacts. So that is a normal course of business and that effect is felt by all people in those markets. So the answer is yes, in both cases, but relative to our pricing so far if year, we have offset through pricing the dollar impact of the raw materials. It is our savings and other initiatives that have allowed us to limit the pressure on our gross profit through this year.

Nik Modi - UBS

Thank you.

Ian Cook

Sure.

Operator

Our next question will come from Bill Schmitz with Deutsche Bank

Bill Schmitz - Deutsche Bank

Hi, good morning.

Ian Cook

Hi, Bill.

Bill Schmitz - Deutsche Bank

You have obviously been through this a number of times in emerging markets, but can you just talk about how the consumer environment differs from the commodity environment, stock market environment and the currency environment down there, and how it relates to emerging middle-class and people's consumption rates? I know it is a big question.

Ian Cook

Yes, that is an economics question, Bill. I think the answer would be it is always interesting to me as I travel the world into those parts of the world, how attuned consumers are to marketplace events relative to currency and how that will affect pricing in the marketplace. You know, we have very well-established processes in place, honed in Latin America in terms of how we respond to devalue in taking our prices up, how we have elevated list prices for many of our products, so that we do not get caught in price freezes, if that is where governments end up going. We find consumers very well in attuned to managing in those environments.

Bill Schmitz - Deutsche Bank

Okay. How about the emerging middle-class? Have you seen a slowdown in people entering that consumption class or not yet or you do not expect to see it?

Ian Cook

We certainly do not see it yet, Bill and we certainly do not see them stepping out of the trade-up strategy that we have been putting in place. So the Colgate Total of this world continue to do well in Brazil, our market share continues to do well in Brazil, so, no signs at this time.

Bill Schmitz - Deutsche Bank

Great. Thank you very much.

Ian Cook

Sure.

Operator

Our next question is from Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Sanford Bernstein

Hi. How are you?

Ian Cook

Hi, Ali.

Ali Dibadj - Sanford Bernstein

A question about SG&A, down 90 basis points, it looks like you probably were aggressive on overhead reduction. I know we talked about that earlier. Could you help us to segregate that 90 basis points, in terms of the overhead versus maybe not growing your advertising spend as quickly as your top-line is looks like? Just flush that out a little bit, if you would please.

Ian Cook

Sure. If we take the quarter, the SG&A for the third versus prior year, as you say, down 90 basis points, we see the majority of that coming from advertising, overhead was down about 20 of those, and the rest was advertising, which is a reflection of two things, Ali. What we have seen around the world is that if you break it into its geographic components, we are seeing traditional advertising spending weaken in Europe and the US, particularly if you take out the presidential spending.

I think that would be intuitive to many. We are seeing advertising spending, the traditional advertising spending continue to increase in the emerging markets of Asia and Latin America, although at a decelerating rate while still quite healthy. That is how our advertising spend has profiled, so that we remain competitive in those markets in our categories.

I think the second point that is important to make here, and Bina mentioned it in part with Hill's, there is no question and we have talked about this several times that we have increased our focus on in-store communication, which is the place where, depending on the category, 60% to 80% of final purchasing decisions are made, and in some cases, added a value message to that communication through these times. So spending, consistent with what we are seeing in the market and a shift in communication focus to retail with a value message added as Bina exampled.

Ali Dibadj - Sanford Bernstein

That is helpful. In my context, just as a follow up, if you zoom in a little bit on North America margins, looked down obviously year-on-year and I would assume that it was from some of the new product launches that you mentioned in the press release and certainly Bina kindly went through earlier on in the call.

Is that not the case, then? Or is there something going out in the margins in North America beyond increased advertising for the new products? So maybe it is just commodities? I just want to get an understanding of that one in particular, please.

Ian Cook

You captured it in your question, Ali. It is the commodities impact directly in the US marketplace.

Ali Dibadj - Sanford Bernstein

Okay. Thanks very much, Ian.

Ian Cook

Sure.

Operator

We will next go to Wendy Nicholson with at Citi investment research.

Wendy Nicholson - Citi Investment Research

Hi, good morning.

Ian Cook

Hi, Wendy.

Wendy Nicholson - Citi Investment Research

My question has to do with the pullback in raw material prices as we go into 2009. I know you reflected the outlook for gross margins to reflect that, but are you expecting, particularly on something likes the Hill's business where commodities are a particularly important part of the cost, to have to either roll back pricing or simply increase promotional levels? Have you begun to do that or see that in any of the big categories?

Ian Cook

To start with the last part of the question first, the answer is no. Working back from that, we are in the midst of our budgeting process right now. So, we have not fully finished. I think I have said before that if the commodities come back and indeed the visibility we have says that they are, then we will certainly not be in a position of needing to take new pricing at the levels we have seen this year, which if you go back three to four months were still part of our planning.

So, I think that comes off the table. The question then, Wendy, is what will be a compelling value communication at retail and how will you continue to keep the categories that are still growing in the United States, growing at healthy rates?

I think that will be a combination of promotion and other in store communication techniques.

Wendy Nicholson - Citi Investment Research

Your confidence in putting out the target for double-digit EPS growth in 2009, even though foreign exchange has moved as quickly as it has in so many of your big countries, I assume, comes from that expectation of being able to drop those gross margin savings to the bottom line?

Ian Cook

It is all a balance, Wendy. Obviously, as we think about foreign exchange for next year, we are thinking about it through the lens of what we have seen over the last week or so. Today we are thinking about oil in that $70 to $80 range for next year. But, yes, I think we feel we will capture the benefit and we will manage our promotional activity as we see fit across the year.

Wendy Nicholson - Citi Investment Research

Terrific. Thank you very much.

Ian Cook

Sure.

Operator

Our next question is from Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

Hi, my question is about pricing in Latin America. If you look at history where there have been big devaluations, the local currency pricing accelerates. That does not seem to be in your guidance because you have guided to organic sales up in the mid teens in the fourth quarter and for '09 and then you actually have a little acceleration in volume.

So could you comment on that?

Ian Cook

We talked about organic growth holding at about the same levels as we saw this quarter for the balance of this year and into next. As we look at pricing in Latin America, our current look at next year for all of the Colgate divisions has the Latin pricing higher than all of the other divisions.

So, I think we are reflecting it. We will finalize it when we complete our budget process.

Alice Longley - Buckingham Research

So your local currency, your organic sales growth in Latin America should be accelerating, right, to offset the worsening year-over-year currency hits?

Ian Cook

I think we have seen some of that in the pricing that is already in this year that will roll over and it will be again, a balance between volume and pricing in Latin America is probably not unlike this year's level, maybe a little bit ahead.

Alice Longley - Buckingham Research

Okay and then my other question is about the destocking in North America. Are you seeing it by consumers and retailers? Then also, does there come a point next year when that is done with and we face comparisons against quarters in '08 when that was happening. So, we get a little volume acceleration in North America?

Ian Cook

Well, I think that, Alice, relative to retailer destocking, as we have said many times before, that is an ongoing aspect of business, obviously, heightened during these times. Worked through in partnership and there is nothing we have yet seen that is a significant dislocation in that regard.

In the consumer case, what you see and we have seen it both with Hill's and in some of our other consumer categories, is consumers work down pantry inventory until the pricing stabilizes at shelf and then comes back into the category.

I think that is what we will going into next year.

Alice Longley - Buckingham Research

Thank you.

Operator

Our next question is from Chris Ferrara with Merrill Lynch.

Chris Ferrara - Merrill Lynch

Hi. Would you talk about what your actual currency assumptions are? Because obviously it looks like your top line impact for '09 can hit you by anywhere as much as 8% to 9% to 10%, and just trying to understand what the bottom line impact of that currency might be, given that you do not really hedge a lot of currency?

Ian Cook

We have got a spread looking at next year, Chris, of about 6% to 8% on currency. We are seeing volume in the 3% to 4% range as we said, the difference will be price.

Chris Ferrara - Merrill Lynch

Right, given your US company, your costs are probably more balanced or more exposed to the US dollar than your revenues are, maybe that is wrong, maybe you can clear that up. I would have expected the EPS or the earnings impact from currency to be at a greater percentage than the top line impact. Is that right?

Ian Cook

It is about the same, Chris. No, it is not right. It is about the same.

Chris Ferrara - Merrill Lynch

Okay. Thank you.

Operator

Our next question is from Bill Chappell, SunTrust Robinson.

Bill Chappell - SunTrust Robinson

Good morning.

Ian Cook

Hi, Bill.

Bill Chappell - SunTrust Robinson

Just a follow up on the Hill's pricing and the volumes in current quarter. Do you have a sense or is there any way to gauge market share changes? Is there any worry about pricing consumers out of the category or out of your products with some of the recent price increases that you put through?

Ian Cook

Bill, the market shares have been okay and we have seen consistent with what we saw in the fourth quarter last year, the beginnings of a dollar comeback in terms of consumption at shelf. I think the additional step we have now taken, given all of the pricing that we and others in this segment have put into the marketplace, is the communication program at retail and direct-to-consumer that talks about the clinical nutrition of Hill's and the real value of that for consumer's pets on a relatively low day-to-day outlay basis. So that is the answer.

Bill Chappell - SunTrust Robinson

It sounds like the price gaps are not that different than they were before the price increases we put through?

Ian Cook

On a relative basis, although as a leader, we lead in pricing. As I said before, you sometimes get a little bit of a lead-lag before all competitors have fully moved their pricing as well, but ultimately, relative levels stay about the same.

Bill Chappell - SunTrust Robinson

Got it. Thanks.

Operator

Our next question then is from Lauren Lieberman with Barclays.

Lauren Lieberman - Barclays

Great, thanks. Good morning.

Ian Cook

Hi, Lauren.

Lauren Lieberman - Barclays

The first thing was on the value message advertising for Hill's. I was curious if you were doing anything similar with any of your other brands in any markets at this point?

Ian Cook

Sometimes at retail levels, but not in the same way, given the relative cash outlay.

Lauren Lieberman - Barclays

Okay. Then the more real question was about Europe. Just thought it was interesting, volume down in France, Italy, UK, and for GABA, if you could talk a little bit about category trends, is it more Personal Care, Home Care, or Oral Care, is it the category or just Colgate who is gaining share. At some point, one would think Europeans will start buying this stuff again and talk a little bit about the outlook there.

Ian Cook

Yes, sure. Well, let's do a little bit of a world roundup, but come back to Europe. As I said earlier, still seeing categories, now, this is specifically a profile of the categories in which we do business, not the overall market growing on a dollar basis in that 2.5% to 3.5% range, which is probably half a percentage down on a dollar basis year-on-year. This is the combined Western and Central or Eastern Europe, we are seeing categories continue to grow down a little bit on prior year, and it is more helpful to go into the breakdown.

From a Western European point of view, we are seeing in constant currency, we are seeing category growth rates across the businesses in which we do business. So, again it is prevailing 3% growth rate running at about 1.5%. Interesting, the profile is more favorable to Oral Care, which continues to run in a 2% to 3% range. Personal Care, which is in a 1.5% to 2% range, and Household Care more flat.

In Eastern Europe, we are continuing to see double-digit growth rates, again, favoring more Oral Care and Personal Care. So the consumer is staying with us, although at a more muted level, and I think going forward, they will continue to stay with us and hopefully we can stimulate the market enough to see that growth rate tick up a little bit.

Lauren Lieberman - Barclays

Okay. Then in the markets where you said your volume was down in the press release, Italy, UK, etcetera, who is it then that is gaining share?

Ian Cook

Well, the categories profile is pretty much like the countries profile. So, that was a broad average. So the categories are down more steeply in those markets.

Lauren Lieberman - Barclays

Okay. Would you expect category growth to resume? It looks like you are actually now getting some pricing. So one would think volume, I mean at some point has got to be more toothpaste being sold or household cleaning or…?

Ian Cook

Certainly that is what we will be working through in our budget cycle, how do we stimulate that return to the market, but the markets are still growing, but at a lesser rate.

Lauren Lieberman - Barclays

Okay, that is great. Thank you.

Ian Cook

Sure.

Operator

Our next question is from Connie Maneaty with BMO Capital Markets.

Connie Maneaty - BMO Capital Markets

Good morning.

Ian Cook

Hi.

Connie Maneaty - BMO Capital Markets

I was wondering if you could talk specifically about the fourth quarter, where you start to get the big currency impact, but not yet the benefit of the lower raw material costs. So how does the quarter shaping up from where you see it right now?

Ian Cook

Well, I think quite well. We talked about the organic growth continuing to be in the same range that we have seen in the third quarter, and you are right, Connie, you do not get the full benefit of the commodity given inventory etcetera, but we will see a little bit of improvement. Obviously we are very focused on our overhead area, as we go forward into the fourth quarter.

Our advertising spending will be competitive with what we are seeing in the marketplace, but continuing to see a strengthening shift to the in-store, and keeping our consumer advertising competitive with what we are seeing in the markets in which we do business, but the focus is a little bit of benefit on gross profit and a continued sharp focus on overhead.

Connie Maneaty - BMO Capital Markets

So the mid-teen sales growth that you have seen on a year-to-date basis, does it slow to something low to mid single-digits in the fourth quarter? That is on a reported basis, not organic.

Ian Cook

On a reported basis, it will probably be in the 2% to 4% range.

Connie Maneaty - BMO Capital Markets

Okay. You would expect at this point to still see operating profit growth; right?

Ian Cook

Yes.

Connie Maneaty - BMO Capital Markets

Okay. Thank you very much.

Ian Cook

Sure.

Operator

Our next question is from Alec Patterson with RCM.

Ian Cook

Hey, Alec.

Alec Patterson - RCM

Yes, good morning. Firs t of all, the obligatory gross margin breakdown, I am sorry, did you give that already?

Ian Cook

No, we did not, I would be delighted to give it to you especially, Alec. The prior year gross profit, this is just the walk-through now. The prior-year gross profit at 57.3 for the quarter, material price is negative 5.5 points, benefit from pricing around 2.5% hedge points 2.5, and the balance then from restructuring and mix leading you to the 56.4, down the 90 basis points.

Alec Patterson - RCM

I am sorry; funding the growth is a part of that?

Ian Cook

I am terribly sorry, funding the growth is 170 basis points, 1.7 and then the balance is restructuring and mix.

Alec Patterson - RCM

Okay. Then, on the big chunk of the SG&A line is the shipping and handling. Is that going to be following more or less the price of oil, so to speak? Are there other factors at work here as we try and get a handle on that trend, on that line item?

Ian Cook

Yes, that probably is the one area obviously we are very sharply focused on, because as we all see at the palm that is an area that is translating through more quickly than other commodity prices. We have seen a bit of a pickup, the ratio to sales of that is 10 basis points down versus prior year at 7.7% to sales.

It is been coming down every quarter and we obviously will be hoping to continue that trend into the fourth and certainly into next year.

Alec Patterson - RCM

It is been coming down every quarter, meaning even though the diesel and energy markets have been up over the past several quarters?

Ian Cook

Yes, the dollars have been going up. It peaked at nearly 8% in the first quarter, down slightly in the second and then 7.7 in the third.

Alec Patterson - RCM

Okay, great. Thank you very much.

Ian Cook

Sure.

Operator

Our next question will be from John Faucher with JPMorgan.

John Faucher - JPMorgan

Thank you very much. Just a follow up on a couple of questions we have seen before. Given the focus on the raw material pieces and offset to currency, can you talk a little bit about how the rest of your commodities are trending.

Procter mentioned some commodities were still up dramatically year-over-year. Most of the companies seem to be saying that it is taking a little bit longer than at least I think Wall Street expected for the lower prices to flow through.

So can you give us just a little bit of commentary on both of those issues? Thanks.

Ian Cook

Yes, we are seeing obviously the impact in the third quarter was a little bit more than we were expecting. I think we have talked about that the third quarter would probably be the toughest quarter. I must say, as we look at the most recent pricing on our key raw materials, we are seeing it pretty generally across the board, down on quarter three levels, whether it is fats and oils, whether it is resins or of course the input to energy costs.

So what we are looking at is down from the third quarter. Now, what you say is right, John, obviously there is a lead lag between the spot and what we can negotiate at and when you will see that in the income statement. As we have been looking at it we think we are going to start seeing that benefit in the first quarter of next year, given the work through.

John Faucher - JPMorgan

Great. Thanks.

Ian Cook

Sure.

Operator

Our next question then is from Linda Bolton Weiser with Caris

Linda Bolton Weiser - Caris

Hi, thank you. Looking back at your earnings growth in the early part of the decade when there was some turmoil in Latin America, you actually had really strong earnings growth. It was like in the mid teens, I think. When you look at how you achieved that, there was a steady decline in your advertising and promo spending ratio over that period of time.

So, you managed to have earnings growth, but the decline in A&P spending, some would argue ended up in not a good situation five years later. So, can you just comment on that and your current thoughts about will a decline in A&P ratio contribute to the earnings growth in '09?

Ian Cook

Well, the way we are thinking about the earnings growth next year is obviously double-digit growth. We have not suggested mid teens growth. Secondly, our current look at 2009 shows an increase in advertising behind the business, both in absolute dollars and on a ratio basis.

We will have to be attentive to what is happening in the various categories in which we do business around the world, but our thinking and planning assumption is that that will go up. So, our planning intention is to deliver good quality, double-digit earnings growth through times that we have managed through before with advertising spending up.

Linda Bolton Weiser - Caris

Okay. Thank you very much.

Ian Cook

Sure.

Operator

Our next question is from Jason Gere, Wachovia.

Jason Gere - Wachovia

Thank you, good morning. I was just wondering if you can give us an update on CBP, just in terms of the outlook for the savings in '09, where we stand in terms of the completion? Thank you.

Ian Cook

Sure. Going along very well, it continues to roll out around the world. We expect, as we leave this year to have about 70% of our global net sales covered by CBP. We have, again, a myriad of new examples, learning examples from new markets that we have gone into that we are transferring to benefit other markets and our go-to-market approaches and strategies.

We still have a savings goal in place for 2008 of $100 million pre-tax and are looking at delivering north of 150 in 2009. In the first quarter of 2009 will actually bring two important markets live. They are China and Brazil, along with Malaysia and some others.

China and Brazil will go live in the first quarter of next year. So, continued progress in terms of the shared learnings that can drive the business and a 150 goal for next year.

Jason Gere - Wachovia

Okay. Thank you.

Ian Cook

Sure.

Operator

We return to Ali Dibadj with Sanford Bernstein with for a follow-up.

Ali Dibadj - Sanford Bernstein

Thanks for taking the follow up. Two questions, one a more specific and one just a little bit cost strategic thinking about the overall business. Again on advertising spend, you mentioned that you expected to be going up or that is what you are thinking in terms of planning for '09.

Can you talk a little bit about ratio between in store or trade spend versus advertising spend? Do you see that shifting back and forth a little bit going forward? How are you imagining that?

Ian Cook

That is really something, Ali, I can not answer at this stage. We literally start our budget review processes here next year. I will know about a month from now.

Ali Dibadj - Sanford Bernstein

Do you expect a total of those two to go up? Can you even help answer that question? Or is that still yet to be determined?

Ian Cook

Well the way we are looking at the advertising for next year, we see total advertising going up. Some of the in store stuff is captured between gross and net and so it is not improbable that both could go up.

Ali Dibadj - Sanford Bernstein

You can not say right now growth to net expanding or contracting at this point.

Ian Cook

I cannot.

Ali Dibadj - Sanford Bernstein

Then my other question is, over the years and certainly more recently, there is still an idea among your distribution or among your manufacturing network of bigger scale, more localized plants, more consolidated big-scale plants to improve some of your scale leverage.

Does that change at all in a way you foresee or in this current environment right now, where currency is a little bit different? So, you have a little bit of a friction there? Or oil prices may not go down to where they used to be. How do you think about that going forward because it is really been one of the big drivers of your success or is that several years as a lot of that consolidation in getting more scale? Does it change at all going forward?

Ian Cook

I do not think so, Ali. We obviously revisit it and we will revisit it again during our budget cycle, but we did a lot of sensitivity planning before we made those decisions. While you say that in the broadest sense, the answer is yes, for oral care and personal care businesses.

Indeed there is efficiency and it has a lot of sensitivity around it to take advantage of these highly efficient, state-of-the-art, environmentally friendly facilities in providing our product worldwide, although it is a wild world. Worldwide, based on the likeness of the product.

For our home care businesses, we continue to have local facilities servicing regions of geography because obviously the shipping and transportation aspects of those kinds of homecare businesses demand that a supply chain network.

So, maybe our business profiles a little bit differently than some others, but that would force a reevaluation. In our case, we did a lot of sensitivity analysis around it and we are quite comfortable with that strategy going forward.

Ali Dibadj - Sanford Bernstein

Okay, thanks.

Operator

We do have a follow-up from Alec Patterson with RCM.

Alec Patterson - RCM

Yes and just to clarify on '09, the tax rate is expected to be roughly the same, around 33?

Ian Cook

Yes, Alec, indeed.

Alec Patterson - RCM

Okay, thanks.

Ian Cook

Yes.

Operator

With that, there are no further questions. I would like to turn the call to Ian Cook for our closing comment.

Ian Cook

Well thanks very much for being on the call and we look forward to catching up with you again January of next year. Thank you.

Operator

This does conclude today's conference call. Again, we would like to thank everyone for your participation and wish everyone a good day.

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Source: Colgate-Palmolive Co. Q3 2008 Earnings Call Transcript
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