Ian M. Cook - Chairman, Chief Executive Officer and President
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
Colgate-Palmolive Co. (CL) 2013 Consumer Analyst Group of New York Conference February 22, 2013 8:15 AM ET
Okay, we're ready to get started now. Colgate-Palmolive has an enviable position in oral care and a strong presence in personal care, too. Its emerging market footprint is broad, and it has a good track record in cutting costs to fund growth. Colgate recently announced a new restructuring program that, I think, will provide additional savings. Colgate has a healthy new product pipeline in 2013, which I'm sure we'll hear about -- more about today.
Please join me in welcoming back, Ian Cook, Chairman, President and Chief Executive Officer. Ian, thanks for being with us.
Ian M. Cook
Thanks, Sally. Good morning, everyone. Good morning. It's always delightful to be down in these balmy climes in February, and let me start with an advertisement, which is the new IR app we have. For those of you on Apple equipment, you can go to the App Store and for the Androids in the room, you can go to Google Play, and that's the end of the presentation.
So turning to my prepared remarks. What we'd like to talk about this morning is why we believe we are well positioned for 2013 and beyond. And the topics I will discuss are the global balance that we have and the tight focus on the categories that we do business in; the effective strategic initiatives that we've been deploying consistently for the last 8 years; and the capabilities that we have had for a long time and new capabilities that we're building into the company; as Sally mentioned, a proactive restructuring program running over the 4 years; the leadership that drives the performance of the company; and the fact that we believe we have momentum in the marketplace.
So to our global balance. We have our products in over 220 countries around the world. And in many of those countries, as you know, we entered early, now in our 76th year in Brazil, for example. We have under half of our business in the so-called developed markets of the world. And we have over 50% in the emerging and developing markets, good balance given the current growth rates we are seeing across those geographies. And as you well know, we have been focused for a long time on 4 business groups: our flagship oral care business; then the personal care and home care, it's about the same representation of the company's sales around 20%; and the Hill's Pet Nutrition business. And with that balance of geography and focus on categories, we believe we have delivered consistent financial results over an extended period of time.
If you look here at the top line growth of the company and bring your eyes down to the lower line, the organic growth, you can see that between 2002 and '07, on a compounded basis, we were growing about 6%. If you move your eye up to the volume, you can see that, that was predominantly volume-driven growth. When we then went through the subprime years, the organic growth stayed elevated, but it was principally driven by pricing; then through 2010 and '11, driven by volume; and then last year, we believe a healthy balance between volume and pricing, a balance that we expect to continue in 2013, although with a little bit more volume. And for 2013, we continue to believe our growth will be between 6% and 7% organic top line growth even after the affect of Venezuela.
So from a net sales point of view, closed last year just north of $17 billion. Gross margin up 70 basis points last year, still not at the peak we had in 2010, but building back. And again with the transaction impacts on Venezuela this year, we now expect our gross margin expansion to be in the 30 to 70 basis point range. Operating profit, compounding over the 21-year period at over 9%. Operating cash flow, which we meaningfully stepped up in 2008, we have held at about that $3 billion level, predictably. And when you distill it all together in terms of the after-tax delivery return on capital, you can see that we continue to outpace our peer group and the S&P 500.
And from a shareowner point of view, if you take the total return, the appreciation in the stock and the dividend, you can see over the long term, 20 years, we have outpaced the S&P and our peer group; the same for 15 years; the same for 10 years; the same for 5 years, which, as you know, included the subprime period. In 2010 -- '12, I'm sorry, we were basically neck-and-neck with the S&P, but outpaced our peer group. And as of year-to-date this year, ahead of the S&P, behind our peer group where a couple of companies are rebounding, or as we like to frame it, a buying opportunity.
So consistent results and consistent return to shareowners, including dividends where our dividends have increased over the last 50 consecutive years, and we will make the determination for 2013 at our March board meeting.
And that driven, we believe, by the building of brands around the world. This is our worldwide toothpaste share, now nearly 1 in 2 is to Colgate. This is manual toothbrushes where we continue to widen the gap with our nearest competitor. And this mouthwash x the United States where we have refocused on building this business to our advantage, and we believe we are making very good progress.
And when you turn to our other businesses. You can see here that for 2012, we either held or grew market share across our other principal businesses. So a consistency of performance, a consistency of shareowner return, and we believe, built in a high-quality way by continuing to build our brands around the world.
The strategic initiatives that have been driving that performance are really 4: building engagement with our consumers to build our brands; a real high focus on innovating to drive that growth, something that the company has been focused on for the longest time; this idea of effectiveness and efficiency in everything that we do, which has led to the restructuring program announced last year; and the idea of the leadership team around the world that makes that happen country-by-country, year-upon-year.
So we believe we have enduring capabilities and that we are building new capabilities in the company for the future. First, that we are strengthening our innovation pipeline around the world from a capability point of view. And we do that in a fairly predictable, but nonetheless, a disciplined way. It starts with consumer understanding, and we have talked many times about the number of innovation centers we have around the world to make sure that we capture insight from the emerging parts of the world as well as the developed parts of the world and are not simply exporting developed country innovation that is reducing costs for the emerging markets. It includes new products, new claims with demonstrations and new packaging. We believe we have a healthy blend of internal technology and external technology that we have access to. We are structured to focus on innovation for the short term. And for us, the short term is 3 years where we have rooted innovation for each of those years, country-by-country, category-by-category. And for the long term, which we view is 5 years and out, where you are making bets on technology or changes in consumer behavior, health condition, surfaces in the home, and disease conditions and so on and so forth. And internally, we have a very disciplined, collaborative innovation process that includes many forums where we can focus on those innovations that we think might be particularly big for the company so that we can allocate resource early and speed the expansion of those innovations around the world.
So let's take a snapshot of what is in the market and rolling out around our world in 2013. I think you know Optic White well, the success here in the U.S. and now being moved around the world. We were in something like 75 countries by the end of last year and we will be in approaching 90 countries as we go through the first half of this year. We then have an additional product to the Optic White line, Dual Action, which whitens and shines more than 3 shades, and the results begin within 1 week and that will come to the marketplace on top of the original variant in the first half of this year.
In China, we have a 360 Pro Gum Health product, which gives relief from gum problems in just 3 weeks, which is an important condition in China and very credible and relevant to the Chinese consumer.
We have a unique Slim Soft manual toothbrush which started in Asia and is now moving around the world. And in Asia now, a companion product with charcoal bristles, believe it or not, which have antibacterial properties in Asia and are far more appealing to the consumer than it may look on the slide.
We have a Total Advanced Floss Tip, which gives greater cleaning and deeper reach.
We have a line of products going to market in Europe, Total Pro-Interdental, which continuously fights plaque even between the teeth for a healthier mouth.
We have talked before about our entry into the rechargeable toothbrush category with Colgate ProClinical, started in the U.K. and is moving out to selected geographies in 2013. Intelligent technology, terrific design, superior clean and I love the red on the box.
In the mouth rinse category, we have a relaunch of the entire line with the benefit of killing germs up to 99% and provides 12-hour protection without alcohol, which is increasingly an important aspect to formulation in mouthwash to dental professionals. We developed in Asia and are moving around the world Colgate Plax Tea Fresh, a unique flavor that started in China, but we are now finding -- it's about 1/3 of our share in China in mouthwash, but we're finding it has appeal to consumers way beyond China.
Hill's, a business that we have not seen perform as well as we would have liked. I have said before and I'm sure I will get a question again today, that the principal reason is we have not competed effectively in the natural segment here in the U.S. This is a focus line that goes directly after that. It is not Science Diet Ideal Balance. It's Ideal Balance from Hill's with packaging that is in the frame of the natural brands in the segment, the ingredients that are competitive with naturals products. And the trade reception to this, which is principally PETCO and PetSmart here in the U.S. because we have limited distribution, as you know, has been extremely strong and this product is being shelved in the natural segment of those stores. So we know the product is well received by both the owner and the pet. We have to remember we have 2 audiences in this business. It has been well received by the trade, and we know our consumer engagement works and the formula works and that will be fully in distribution by April, which is why we have said we expect our Hill's business this year to return to volume growth around the middle of this year.
And alongside the Ideal Balance, for now the Science Diet range, we have completely reformulated the line without sacrificing any clinical benefit, which is the heritage of Science Diet to have 100% natural ingredients, no byproducts and a winning, in fact, a better flavor profile. And we have done that for the cat business and we have done that for the dog business. And on top of that, we have some exciting new technology in our prescription diet business that I have mentioned before, which is metabolic, which produces weight loss in a real word condition, which simply says, you can eat as much as you like and reduce weight. And by the way, this doesn't taste too bad if you'd like to try it.
The -- must be too early in the morning, I guess. The Protex for Men, this is a body wash business that we have now taken into the male segment and are moving around the world. A light antibacterial protection product under the Protex mark in Brazil that will move around Latin America; a relaunched antibacterial liquid hand soap line that keeps hands healthy and germ-free; a relaunch of our body wash business in Europe, new packaging, new formulation, new advertising; new lines and sublines to our underarm business. This happens to be an example from the emerging parts of this world with our Lady Speed Stick business, 5 benefits in 1 product; a complete line of deodorants under our Sanex name starting in Europe, fights odor-causing bacteria while respecting the skin's natural bacteria; Sanex Zero% for kids, an extension to our body wash line, also in Europe.
Turning to our dish business. Several initiatives here in the U.S. and in Europe: a product that washes away the odor-causing residue from sponges, for those people that use sponges to clean their dish; an upgraded soft-on-hands variant; and a boutique line extension range; an upgrade of the Sensorial line with new packaging and new fragrances.
On our fabric softener business, a complete overhaul of our fabric softener line in Latin America with improved fragrances and extremely striking packaging, which is already building market share in Mexico, having just gone to the marketplace.
And on our Ajax cleaning business in Europe, a new subline that purifies your home with an oxygen-rich active formula. And even a new wipes line, which is biodegradable fiber and cleans and eliminates nearly 100% of bacteria.
So we believe a rich -- a continuing rich flow of innovation. We said on our call that it would be about 7% to 8% of our sales in 2013. And it is clearly an important part of what drives our conviction in a 6% to 7% organic top line growth.
Coming back to our oral care business. We remain committed to building relationships, credibility and recommendation with the dental professional. We invest across all of these areas: increasing the number of people we have to cover professional and academic offices; training material that is accredited for dental professionals around the world; and, of course, the literature that demonstrates the clinical efficacy of our products against the various different disease conditions; and the sampling that goes to consumers with the credibility and conviction of professional endorsement around the world. And rather like our market share, you can see that nearly 1 in 2 professionals recommends a Colgate product around the world in the toothpaste segment; that we are nearly at leadership levels on toothbrush, having been building consistently over the years; and interestingly, and we hope our worldwide market share goes here, doing the same on mouthwash -- I guess the wish is the 32% share, mouthwash with dental professionals.
And in many ways, our business is about doing the fundamentals well. And we have renewed our focus. I guess, one of the enduring capabilities we have built entering many of these emerging markets early is focusing on strengthening our already strong and deep distribution in those markets.
Let me give you an example with India that Bina was just visiting the other month, so some background in terms of the scale of what we believe the opportunity to be. You can see over 2/3 of the population of India is living in the rural areas. The toothpaste category penetration, I think somewhat obviously, is lower in those rural areas than it is in the more middle class-driven urban areas of the country. And of course, consistent with that lack of penetration, the consumption is lower still compared to the urban areas. But it's changing. The rural areas are seeing higher disposable income. They do have access to increased media coverage and they have increasing aspirations behind the confidence that they have exhibited year-upon-year that tomorrow will, for them, be better than today. And the store profiles are changing as well. There is still a large number of the small mom-and-pops with a limited assortment, but store types are improving to larger general stores, which carry greater endorsement.
Now we have been focusing, and we'll continue to focus, on expanding our distribution in those rural areas, and we have been changing the way we go to market. We are directly reaching the mom-and-pop stores through Colgate Van Distribution. And that means that not only do you get the availability of the product, but I will show in a video in a moment, you get the visibility of the product at the store level and we know empirically that increases the rate of sale. We are going to be doubling our coverage in the rural areas in India over the next 3 years, reaching new stores, increasing assortment and improving visibility when we already have extraordinarily high reach in India.
Our market share, our Indian market share, is about 53.5% and you can see here that our rural shares are already slightly higher than the national average. The same in toothbrushes. And now, let me show you a video about this Van Distribution Model.
Ian M. Cook
I mean, the interesting point there is that we really do believe that those fundamentals are vitally important. The key here is we distribute through distributors, but our presence in the store is governed by direct contact from a Colgate sales executive. And even in a country as complex as India, we're able to use technology to speed the process.
So if distribution is a fundamental, obviously our integrated marketing communications and how we engage with consumers are also vitally important. We have, for a while, been increasing our total commercial investment. I have said many times there seems to be a sentiment in life that advertising is better than trade spending. I contest that given the capabilities available to you today. But for 2013, we will see our advertising promotion, the below-the-line spending, increase absolutely and as a percent of sales. But we make no apology for the quality of consumer engagement we are, today, able to get at the retail level. We work hard to use the most effective media, and we define what we do as paid, owned and earned. Earned, you could think of as social. Owned are the things we control, including the in-store. And paid is the more traditional media vehicles.
And we have a, now, share of engagement tool, which has got less to do with simply share of spending and more to do with other variables that we build in to make sure that the combination of the spend, the vehicles chosen and the reach and frequency with the consumer is creating the right engagement quantitatively and qualitatively.
We're building our investment in digital media. This is a trial-and-learn type of investment. We have been stepping up our investment in this space over many, many years. And it varies between brands and it varies between the developed and the emerging markets.
And of course, simply said, we invest in what works. A kind of interesting example here in the U.S. is our Mennen Speed Stick business where we have created an advertising platform around this notion of "Don't Sweat It, Handle It." In other words, the confidence to handle even difficult situations, we are using social media very, very strongly to drive this message to a younger target group and we are creating advertising using crowd-sourcing techniques, which means that they may be a little bit more irreverent than the average kind of advertising you would see on Colgate toothpaste or some of our other 2 brands. And it works well whether it's on our men's Speed Stick business or our Lady Speed Stick business. Why don't we see a couple of those crowd-sourced ads.
Ian M. Cook
Again, I talked about the in-store. We continue to increase our activity at the in-store area. And it is becoming an increased area of our brand investment. We focus on superior execution and engagement in store, how our brands look. And we have a very sharp focus for each of the different retail environments in which our products are found. We use in many of the emerging markets large numbers of in-store demonstrators to convince consumers to try our new products, even using iPads to make the selling story at the retail level.
At the indirect trade, we tend to try and put the product right next to the owner because the owner in those small environments is the person that ultimately makes the transaction happen.
And in the pharmacy, we're even going so far as to have dental checkups in the pharmacy to create the linkage, brand linkage, with the consumer.
And we build brand equity through consistent messaging and engagement. And I guess the point here is regimen. In the Hill's business, this is now behind the products I showed you earlier, we are basically constructing a relationship with the consumer around the idea of "Own The Meal," which is to say having all of the different product types in the one location: the basic food, the treat, the wet and the dry because pet owners use all of those and we bring them together. And we use in the PETCO's and PetSmart's nutritional consultants who, again, for the interested pet owner, will educate around the Ideal Balance product and the relaunches of our Science Diet business.
Optic White, the same: the regimen idea with the toothbrush and the mouthwash and the toothpaste all in the one display unit. And we know that when we put these products together in any part of the world that it increases the overall rate of sale of all of the different segments.
So those, I think, are enduring capabilities that we have had as a company. But we are still finding ways, as with the India distribution example, of making our presence even more ubiquitous.
In terms of areas that we have been moving into over the last couple of years and will continue to build, analytics and pricing are 2. In the area of analytics, we believe that with the data available in business today, this will be an increasingly important area of competence. We believe it allows us to execute better on the ground to build our brands. It gives you the capability on the ground to make faster and smarter decisions. And if we continue to build it and get it right, we think, it will become a competitive advantage.
Now, analytics is, frankly, as long as a piece of string. We kind of break it down into 2. There are what I call the fundamentals, which is basically market data, brand health, information, and the tracking of new products; trial, repeat, retention and so on and so forth. And then there are the more advanced analytics: marketing mix modeling; pricing capabilities that are available; shelf assortment; validations that are available, and then how one can aggregate and use customer rate of sale or point-of-sale information.
We have done many, many studies on our oral care business and have already identified and are executing now several different opportunities. I'll just take you through some case studies from Brazil as an example. And I'll go through it pretty quickly, but you can cast your eyes down.
Now these things always sound simple after the fact, but many retailers go to retail school and they have very distinct feelings about what works and what doesn't work even if it isn't necessarily justified by the numbers. So we found in Brazil that, in fact, a 2-month promotional cycle instead of the traditional 3-month cycle actually was 40% more responsive and efficient than longer-term events. So our promotional planning has been recast accordingly to the benefit of Colgate and also, frankly, the benefit of the retail. I told you before that bringing together brands across category, this idea of regimen, which in our case is under the same brand name, Colgate toothpaste, Colgate toothbrush, Colgate mouth rinse, creates greater uplift across the businesses. You can see on the third point that leading our displays with Colgate Total drives greater volume for the overall Colgate business. And even down to how we reach consumers with trial-building coupons, that a direct mail is actually more efficient than a target coupon and delivers a greater lift. So it's this kind of outcome that we get from the data and that is immediately built in to our business plans in these geographies.
I can't resist to show the Brazil market share. This is Nielsen data, which you can have ready access to. Our share up to 71.3%. Actually our latest market share in January was 71.6%. And this is the manual toothbrush share in Brazil also.
Now we have expanded our toothpaste learnings or our oral care learnings onto our other businesses with studies underway on them. And as I mentioned, in terms of building our competency, we have continued expansion built in for 2013.
And then the second area of competence that I believe we are building is this notion of pricing and making it more of a strategic endeavor, focusing on profitable growth while maintaining brand health. And we have many initiatives. I think as I announced at last year's Back-to-School, we have standard measurement tools. We have training that is rolling out the world. We have workshop capability that we are putting in place in the second quarter of this year and we are now piloting new analytical tools building on those fundamentals, which breaks that down to the customer and stock-keeping unit level, forecasting elasticities to see how far we can push the boundaries in a category, evaluating cross-elasticities between us and competitive brands, the stimulation that promotion provides also in the context of competitive brands and the combination between pricing and merchandising in key markets.
This is detailed stuff. And again, I come back to the discussion I had earlier on pricing. This would be our profile over time. And you can see the 2 subprime years, I think, stand out. And as I say, 2012 we feel was a good balance in generating that 6% organic growth between volume and pricing. And as I said for 2013, we expect that range to edge more towards volume this year, but still with a pricing component as we continue to build that capability.
Now as Sally mentioned, we announced last October a proactive Global Growth and Efficiency Program. It was because we feel we have enough experience in the things that I will repeat here to execute them now to the benefit of the company, to make the company sustainably stronger for the future at a time when the world is still a relatively volatile place.
We labeled it the Global Growth and Efficiency Program. As you know, it is a 4-year program running through 2016, which seeks to enhance the capabilities of the company by really doing 3 things: Number one, expanding our use of commercial hubs and that really is about a central mother subsidiary, if you will, and smaller satellite subsidiaries around that, that benefit from the increased capability that you can afford with that structure at the center and leave the smaller satellites focusing on building market share and recommendation on the ground, still owning the income statement and the balance sheet which is something we have stayed with for a long, long time. We have 15 years of experience doing this, starting with Central America. It's not new. We know how to do it. We know how it works.
Extending Colgate business-shared services. I will talk about the Warsaw center that we have and how we are expanding that to take away more of the routine work from the ground, again, to leave our people on the ground, like that India example, to focus on the distribution, focus on the consumer engagement and focus on building market share.
And continuing to optimize our supply chain, and indeed, our facilities and customer service and logistics around the world. We expect the target savings to be in the range of $275 million to $325 million after-tax by the fourth year of the program with a rate of return north of 30% and an average payback of 3 to 4 years. And I think we have said that the benefit we expect to receive in 2013 is between $30 million and $40 million. So clearly, there is a ramp-up in the out years.
The key objectives, as I said, strengthen the on-the-ground capability; continuing to evolve global and regional organizations that we have been deploying for a long, long time; reducing structural and operational costs to increase growth, and ultimately, net margin; and to build on our current position of in-market strength to reinvest for sustaining that consistent growth and building of market share.
So to the 3 program components: expanding the commercial hubs, extending shared services and the optimizing of our global supply chain and facilities. To the commercial hubs, the benefits we have seen where we have done it, and therefore this is empirical evidence not strategic judgment, they move faster, and with better data and better capability, make better decisions. There is greater support for the business with strength and capabilities everywhere. You might have better consumer insight, trade marketing and financial capability in the center. You may have greater sales force firepower to build that distribution in the smaller subsidiaries on the ground. And of course, over time, it improves your cost structure. So again, the idea is to expand the reduction of the number of single country subsidiaries, strengthen the resources and streamline our commercial structure to reduce redundancies. And we will be implementing this in a phased way all the way through 2016. We have announced regional hubbing in Europe with Belgium and the Netherlands. And there will be future announcements that will come as this year and forward years unfold.
To the shared service center. Here, the principles are that these centers will provide multifunctional services. We're going to be as global as we can be, but as local as we think we need to be to be effective on the ground. We will have a network of shared service centers facilitated by our global SAP footprint. We're going to maximize what we can do at a center. And of course, we will adjust regionally to support local language and proximity requirements as needed. And again, this is something that we have analyzed and executed well in Warsaw for now 27 of our entire European operations. The benefits we have seen is that you standardize and simplify the support services. You can then increase the level of value-added support to the on-the-ground operations, and you allow the local subsidiaries to do what is most important while retaining the accountability for that financial outcomes on the ground. And it reduces costs. The European example is very telling. We established Warsaw. We brought 17 subsidiaries in. We started with simple transactional work, take payables as an example. And to our surprise, and I must say a little bit of embarrassment because we pride ourselves on being very disciplined, we lifted and shifted what we had in the 17 locations. And we found that the Germans do things a little bit differently than the French and the Brits do it differently to everybody else. And so, what we were able to do, having lifted and shifted and got the first order savings is we were then able to re-standardize that process to get even greater capability and greater cost savings.
We also found when we then aggregated all of those subsidiaries that we have something like 13,000 suppliers in Europe. I'm not sure we buy 13,000 things in Europe, so why we have 13,000 suppliers was again a surprise. We are now driving that down to between 5,000 and 6,000. And we discover that 15% of those suppliers only are on direct IT contact, which is to say no human hand dealing with the payables issue. As we reduce the number of suppliers to that 5,000 to 6,000 range, then it will become a condition of doing business. But all of those suppliers will be linked from a technology point of view so that you can have that system flowing without human intervention, which gets you another order of savings. So we have seen those practical benefits and we expect to see them again in the new centers that we open.
As I say, it is built on knowledge and the learning out of Warsaw. And while we will start with the transactional work, we can see that the scope of these shared services will expand to include additional capability, customer service and logistics, for example, and maybe even some of the more fundamental basic areas of analytics, which can be crunched. And at least in terms of first order analytics, done at the center and then refined and deployed at the local level. But we will step our way in to adding capabilities so as not to take any risk of disrupting the focus and the business on the ground.
We have just announced the opening of a Colgate business service center in Mumbai, India. So we now have one in Poland for Europe. We have one announced and beginning to take on the work in Mumbai. And therefore, I think you can imagine that there would be a third somewhere in the Americas to deal with that part of the world, not dissimilar to what we do on IT where we have a follow-the-sun principle, Mumbai, Europe and the United States in the case of IT. So underway, and you will see more progress in that area.
The supply chain area really had been more of a focus in our last restructuring, but we still think we can reduce the number of manufacturing facilities that we have around the world and get greater efficiency. That allows us to reconfigure our supply chain network, increasing our speed to market, and therefore and you have seen some of our European announcements already in the first quarter, it will consist of closing facilities and the manufacturing facilities that, that brings, and also very importantly, reconfiguring both our warehousing and our distributor network optimizations so that we can take advantage of that.
And again, as I mentioned, we have already announced several European facility rationalizations. As you can read there in the first bullet, exiting operations in Germany, Switzerland and Poland and consolidating, in our oral care global center in Poland -- Swidnica, Poland, as we had planned. And of course the other benefit you get with now a low 50s total number of sites around the world is the ability to deploy capital investment to get greater efficiency in a smaller footprint of sites around the world at a greater rate, therefore, getting a greater return. And everything that we do on this side of the business where again we have long experience, we expect to be completed by the end of 2015.
So we think that the timing for our Global Growth and Efficiency Program was right and appropriate. And we think it will help us keep winning on the ground as we go forward.
And then the last 2 soft item I guess that never gets much discussion in these kind of rooms, but we put a great premium on the quality of leadership that we have in the company, both on the ground and in our key operating jobs. Many of the people in this room have had an opportunity to meet with many of those people. We believe this is a strong group of executives and they will remain focused, and indeed, have been part of the building the strategic initiatives that we have and very much focused on executing on the ground.
And as we said before, Venezuela is Venezuela, and we believe that we do have momentum in our company, that we can continue to build well into the future and keep Colgate people's faces smiling, our product users' faces smiling, and hopefully, the investors in the company's faces smiling well into the future.
So those are my prepared remarks, and I would be delighted to take any questions you may have.
So Ian, I wanted to get more clarity on your 6% to 7% organic sales growth guidance for 2013. You still have a difficult consumer environment in developed markets. You have tougher comparisons with the strong innovation contribution last year. And if you look at the guidance on a 2-year average basis, it implies a level you haven't gotten to in a few years here. So what gives you the confidence that you can hit that 6% to 7% organic sales growth guidance?
Ian M. Cook
We can have a longer discussion, but I would say the Cliff Notes version is, number one, the innovation, which I tried to show you a snapshot of. It is every bit as robust as we had in 2013. There are some aspects to it you haven't yet seen, you will see as the year unfolds. We have good visibility on that. We believe we have a good process on that. And we believe that our predictability of repetition is good, at least that's our feeling internally given the time we have devoted to innovation. That's one. Second is the balance that we have around the world. There is still strong high single-digit category growth in the emerging markets. In the developed markets, the growth rates are what they are and have been for a time, but we understand that and that has been built into our forecast. And again, depending on the confidence of other people in the room, but the data will be the data. Hill's will turn from negative volume to positive volume in 2013 is our expectation. And what gives me the confidence there, and I can only assert it the way I can assert it, you will see the numbers as the year unfolds, is the quality of the innovation which we know is right from a consumer point of view. By consumer, I mean the owner and the animal. And the trade support that we are getting behind it, which we have not received from any of our prior efforts, which gives us the confidence in asserting what we assert. So in simple terms, those would be the 3 key aspects. Mr. Dibadj?
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
So the first question is on Hill's. You raise it -- I think, many of us at least expect the volumes should improve, but what are the implications on margins of these much higher cost ingredients that you're putting into the products? So if you can help us out on that. Not just for you but for the retailers, so we have heard historically, at least, in that category that retailers have very thin margins on pet food...
Ian M. Cook
Have, sorry, what?
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
Have very thin margins on your pet food products, specifically. So how does this change that going forward?
Ian M. Cook
I think the more important point to -- yes, there is an investment in formulation. I said that on the call. That is baked into the guidance that we gave, which, before Venezuela, was double-digit dollar EPS growth. After Venezuela, we told you the day after it happened what the impact would be. And Hill's is a part of that. From the retailer point of view, I can tell you that the support is very strong. I'm not going to talk about retailer margin. The Hill's product, I think, is the more important thing we now know to be competitive and that is getting us the retailer support. So there is no lack of conviction from the retailer to support that Hill's innovation, which is to say I think they, too, believe that these products will be successful in the marketplace. And you know well, the run-up in the naturals has been what the run-up has been. And that will not continue out in time. And to answer question 8 on your list, we may well have an interest in acquiring in the Hill's business as we would in oral care and as we would in personal care, but we don't believe to return to volume growth we need to do that. We believe that the plan we have will do that for us.
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
I'm glad you're reading the questions. On Latin America, if we focus on a second.
Ian M. Cook
Say it again?
Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division
Latin America. So your Latin America margins have seen some pressure clearly over the past -- well, allowance is really the past quarter, even excluding Venezuela. So first, wanted to understand that a little bit. And then 2, a view we heard from a few people at this conference around Venezuela is that there is still another impact to come as soon as the government over the next couple of months gives you a sense of what exchange rate is actually going to be, how you actually can do business in terms of exchanging dollars and bolivars, there's another leg down. What's your view on that? So both kind of Latin America, broader; and then Venezuela, who knows?
Ian M. Cook
Yes. Again, we like our Latin American business, including Venezuela. We especially like our Latin American business, excluding Venezuela. And I think making predictions in Venezuela is interesting, but a waste of time. I'm not sure you could give a prediction that is valid. The view we take, and we have been in Latin America for a long period of time, and we didn't leave many geographies -- think Brazil, think Argentina in the bad old days. We didn't leave, people left because we learned how to operate in those businesses. And Venezuela will come back as a country. If you go back to the '50s, it was one of the more advanced geographies in Latin America. And the leadership may change, but the country eventually will come back. So from a big picture point of view, we're there for the long haul as we were in South Africa and as we will be in other geographies, and you don't change that view depending what slings and arrows the world throws at you. We will manage Venezuela the way we have managed Venezuela. We continue to build our market share in Venezuela. I think our toothpaste share is 97.6%. And when we get to 105%, we're absolutely going to stop building market share. And again, our Latin American performance outside Venezuela is absolutely fine and growing. We have pricing capability. We're growing market share. And again, all of that is baked into a 6% to 7% organic top line growth, even with the impact of Venezuela we see now. And what will happen in Venezuela in the future? We will see. Yes?
Thanks. Procter was talking yesterday about the ability to expand their oral care business without massively negatively impacting the profit pool. Can you talk about some thoughts on that in terms of where you see the overall industry profit pool going? And as part of that, can you talk about the sort of role of local brands or other competitors in terms of share donors to Procter as they try this again?
Ian M. Cook
Well, if you look at the data -- first of all, I read the transcript as well. I read questions and transcripts. And I thought that was an interesting remark yesterday. I remember laughingly making a similar remark some years back, so it's an interesting remark. We'll see what happens in life. Relative to local brands, you do see some important local brands, depending on where you go. Russia, there are a couple. China, there are more than a couple. And so they become potential sources of market share going forward. And one has to say if you take the long view, even though they still have quite strong positions in several markets, Unilever's share overall has been on a fairly continuous -- slow, but continuous decline. So we believe we can build share against any of those combinations, Procter, Unilever and the local brands.
Thanks, Ian. Can you talk about -- you talked about the incremental returns. You talked about expanding into the traditional trade in India. I guess, 2 things, one is what's the incremental return on those expansions into -- as you go more and more rural? And I guess, can you just revisit for a second what your advantage is relative to the peer group in a place like India? Obviously, the expectation is that you guys have a pretty big competitive advantage. But what does that look like today, and what's that incremental return?
Ian M. Cook
Well, I'm not going to tell you the incremental return, but we're doing it. What it looks like is what I showed you in the video. Getting distribution is one thing. Getting visibility is another thing altogether. A direct Colgate contact will get the visibility, and I won't quote you the numbers of incremental consumers we think we can reach, and so on and so forth, but all of that math has been done and we see it even though we have pretty ubiquitous distribution today in India. We have something like 64,000 distributors and wholesalers that build our distribution in India. Now we're adding the vans on top of it. And this has been part of a 75-year journey in India. So let me leave it at, it is a good thing.
I think we're just about out of time. Thanks, Ian, for a great presentation. And we'll move to the breakout room for additional questions.
Ian M. Cook
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