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Executives

Bina Thompson - Vice President of Investor Relations

Ian M. Cook - Chairman, President and Chief Executive Officer

Analysts

Bill Pecoriello - Consumer Edge Research

Ali Dibadj - Sanford C. Bernstein & Company

Bill Chappell - Suntrust Robinson Humphrey

Andrew Sawyer - Goldman Sachs

Wendy Nicholson - Citi

Chris Ferrara - Bank of America-Merrill Lynch

Alice Longley - Buckingham Research

William Schmitz - Deutsche Bank

John Faucher - J.P. Morgan

Linda Weiser - Caris & Company

Lauren Lieberman - Barclays Capital

Alec Patterson - RCM

Connie Maneaty - BMO Capital Markets

Jason Gere - RBC Capital Markets

Colgate-Palmolive Co. (CL) Q1 2009 Earnings Call April 30, 2009 11:00 AM ET

Operator

Good day, and welcome to today's Colgate-Palmolive Company First Quarter 2009 Earnings Conference Calls. Today's call is being recorded and is being simulcast live at www.colgate.com. Just a reminder, there maybe a slight delay before the Q&A session begins due to the web simulcast.

At this time, for opening remarks, I would like to turn the call over to the Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead.

Bina Thompson

Thank you, Tania, and good morning everybody. And welcome to our first quarter 2009 earnings release conference call. With me this morning are Ian Cook, Chairman and CEO; Steve Patrick, CFO; Dennis Hickey, Corporate Controller; and Ed Filusch, Treasurer.

This conference call will include forward-looking statements. These statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance. Actual events or results may differ materially from those statements. For information about certain factors that could cause such differences, investors should consult our annual report on 10-K filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Cautionary Statements on forward-looking statements.

We will discuss organic sales growth, which is sales excluding the impact of foreign exchange, acquisition and divestitures. And we will also discuss our results and expectations, excluding charges relating to the 2004 restructuring program which was completed last year. 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. We'll be glad to answer any questions you may have including or excluding these items, as you wish.

We're very pleased to have begun this year continuing the momentum with which we exited 2008, particularly in the current global environment. Organic sales growth again increased high single-digits and as expected foreign currency was a significant headwind.

As we told you, we would, we took price increases in overseas markets to offset transaction losses which resulted in less volume growth than previously anticipated. This volume decline was more notable in our health business to cover ongoing commodity cost factors. There is, of course, a delicate balance between volume and price. As you will hear when we review the decisions, we volume in all divisions to rebound somewhat as we go through the year.

Gross margin increased 20 basis points, which was very encouraging. As we told you last quarter and as we mentioned in the press release, we expect to increases to build as we go through the year. While we have come to the end of our full year restructuring in business building programs, our ongoing funding in the growth programs continued to deliver meaningful savings throughout the P&L.

Our advertising was down on a dollar and percentage sales basis due to a number of factors. Overall, media rates have declined in many markets, and in certain instances competitor's spending has been reduced. This has allowed us to remain competitive in our spending as witnessed by solid market shares around the world.

In additions, in certain key markets, we have shifted away from media to more in-store activities were appropriate. As the consumer is more cautious to value in this current environment, in-store activity communicating our value proposition is even more important than ever.

You may recall that in the fourth quarter, our overhead expenses were down as a percent of sales, an indication of our ongoing focus on becoming more efficient. As you know, in the first quarter due to market conditions, our pension costs increased as did those of our competition. Excluding the increased pension costs, our overhead expenses were down 50 basis points in the prior year. And of course, diluted EPS increased 8% inline with expectation.

Importantly, in these very challenging macro economic times, we are staying even closer to consumers to understand how they are reacting to a changing environment. In addition, we are conducting more in-home visits, learning some online communities and conducting consumer surveys. And we found that while shopping behaviors may be changing, buying smaller sizes more frequently for example, trading down by consumers does not had a significant impact on our business.

Likewise, private label its still not a significant factor in most of our categories. In fact, excluding Europe, where private labels has always had more of a presence, private label is under 5% in every category but mouthwash and liquid soap.

Worldwide private label market share in two space, including Europe, is about 1.5%, down 10 basis points from the year ago period. As you know, we have portfolio of value-added products with altering at every price points, which allows us to remain competitive in both developed and high growth markets. The new product innovations which has fueled our growth and market shares this quarter follow that portfolio strategy. Our balance sheet and liquidity are solid, and as you read in our press release, cash from operations was up as strong 21%.

So let's look then in specifically at the divisions. North America had a solid quarter, with volume up 2% and organic growth up 5%. New product activity contributed to the good results along with growth in our base business, supported by both advertising and in-store activity.

As referenced in the press release, our market shares are very healthy, with increases in the majority of our categories. Importantly, overall our categories are growing and consumption has been increasing with particularly strong performance in March. The two new products we told you about last quarter, Colgate Wisp and Softsoap are meeting with good early success.

As you may recall, Wisp is a disposable mini-toothbrush with a breath freshening bead to make cleaning teeth on the go convenient and refreshing.

Distribution has drove very quickly. The first shipment in March generated almost one full toothbrush market share point, with the share in the last week of the month reaching over 3% and the first week of April over 7%.

Advertising began in April along with other awareness in child building activities, both in and out of the store. We have an online contest launching on May 1 called the 'The Face of Wisp' in which Wisp fans will post their photos to an online site for national voting for the face that best represent this fresh and appealing innovation. Of course, to repeat pressures will be the ultimate indicator of ongoing product success, and we will be monitoring that closely.

Softsoap Spa (ph) has been steadily building distribution and is doing particularly well in the food and drug channel. The integrated marketing campaigns for this launch will include both national TV and print advertising, with the message focused on 'affordable styles for everything.'

March sales was already at 2.4%, driving an increase in overall liquid hand soap share from 39.9% to 40.2%. And this is particularly encouraging as liquid hand soaps is more susceptible to private label. More new product activity for the balance of the year is planned in this category, providing more value-added innovation to the consumer.

So looking ahead, volume in North America for the second quarter is expected to grow modestly and should be up mid-single digits for the full year. Organic sales are expected to increase mid-single digit for the second quarter and full year. And operating profit should increase double-digit for the second quarter and full year, up absolutely and as a percent of sales.

Turning then to Latin America, organic sales in this region continued to grow to strong double-digits. As elsewhere in the world, there is a delicate balance between pricing and volume. Importantly, our categories are still showing solid growth and market shares are very healthy.

Regional market shares are up in toothpaste, toothbrushes, mouthwash, soaps, liquid cleaners, and dish washing liquids.

As you would expect the stir over effect of a weak economy is present in countries closer to the US. In Brazil, for instance, Brazil remains quite solid in terms of the macro economic situation with double-digit growth in a number of categories.

Our regional toothpaste share year-over-year is up 1.5 points to 78.1%. Nine countries in the region now have market shares greater than 80%. And importantly, premium price offering such as Colgate Total continues to grow as the consumer continues to purchase products which can deliver added value.

In toothbrushes, we've increased our leadership position as referenced in the press release; our share in Mexico is up five points year-over-year.

Our mouthwash business also continues to grow very nicely. Our year-to-date regional share is up over four points, and in Brazil, our biggest mouthwash market, we achieved leadership in a November-December timeframe and have further extended that leadership in 2009; to beat our nearest competitor by over four points and are approaching a 40% share of the market. In Mexico, our mouthwash share is up over three points on year-to-date basis.

Looking ahead, volume in Latin Americ a for the second quarter is expected to grow modestly, and should be up mid single-digits for the full year. Organic sales are expected to increase mid double-digits for the second quarter and full year. And operating profit should increase high single-digits for the second quarter and full year, up absolutely and as a percentage of sales.

Turning then to Europe/South Pacific. Challenging macro economic conditions persist in Western Europe, with negative GDP and a consumer confident index at record low levels.

In addition, countries in both Western and Eastern Europe have experienced considerable weakening of their currencies, adding further pressure to our dollar P&L. We have been able to offset some of the currency headwinds with increased pricing; the third consecutive quarter of price increases in the region.

As referenced in the press release, market shares are stable. And we have continued to launch new products for the full pipeline for the remainder of the year. One encouraging sign is a strengthening in our German business, one of the largest subsidiaries in the regions.

Our toothpaste market share is up 50 basis points year-over-year to 37.2%, with the most recent leading at 38.2%. Our dishwashing liquid share there is up almost a full point, 17.4% with the most recent leading at 20.3%. And in private softeners, our share is up almost 4.5 points, with good momentum in the recent period.

Our GABA business is also doing well, both in the established countries and the newer expansion countries in Eastern Europe. Both toothpaste and toothbrush shares are up with particularly good performance in Germany and in Italy, which is a newer market where we have recently entered the mass retail channels.

Looking ahead, volume in Europe and South Pacific for the second quarter is expected to grow modestly, and it should be up modestly for the full year. Organic sales are expected to increase modestly for the second quarter and full year.

Operating profit is expected to be down double-digits for the second quarter, and to be down mid single-digits for the full year, but is expected to be up as a percent of sales for both the second quarter and the full year.

Turning to greater Asia/Africa. As in Latin America, this fast growing region also continued to enjoy double-digit organic growth. Our categories continued to grow many at a double-digit rate. While shopping behaviors may have changed, we see no reduction in consumption and so far no trading down.

In some markets, the consumers are opting to buy bigger sizes of the same product and others the consumer is buying smaller sizes more frequently.

Our toothpaste share increased in virtually all markets on a region wide basis, reaching 39.7%, up 50 basis points from the year ago period. In India, where our share reached 50%, we have seen growth both from the premium and lower priced segments of the business, supported with new advertising and other consumer engagement program. As you would imagine, growth on the premium side has been in urban markets.

Our deep distribution in rural markets has allowed us to grow our business in the value segment as we bring new users into the franchise. In both Thailand and the Philippines, where our toothpaste shares are up over 50%, Colgate Total has contributed to that growth.

In Russia, we've seen an increase in both our Colgate and Elmex toothpaste shares. As you may recall, Elmex is the GABA brand which we introduced into Russia last fall and is doing very well. Our Russian toothbrush business is strong as well with shares up 270 basis points year-over year to 51.2%.

Looking ahead, volume in greater Asia/Africa for the second quarter is expected to grow mid to high single-digit, and should be up mid single-digit for the full year.

Organic sales are expected to increase double-digits for the second quarter and a full year, and operating profit should increase double-digit for the second quarter and the full year, up absolutely and as a percent of sales.

And finally Hill. While organic sales at Hill increased nicely, volume declined. This was due in part to buying in the fourth quarter in anticipation of our significant first quarter price increases.

Commodity prices at Hill's are still up year-over year. However, our strong pricing along with ongoing savings programs allowed us to increase both our growth and operating margins.

In the U.S. our buy and sell business continues to be resilient, and we are seeing more category growth in the specialty market where we compete as compared to the grocery in that market.

In February, we launched Culinary Creations, which is gravy based canned fruits for cats; the fastest growing segment in the wet category. Early results show great promise. And in addition, we continued to communicate our value messaging in terms of daily cost of fee with affected in-store activities.

Also in the U.S. in the prescription diet business, our most recent share was up almost two points year-over-year to almost 70%. We launched a Get-a-better life' weight loss challenge in veterinary clinics in January, and the program has received great feedback from our veterinary community.

Additionally, we expanded the urinary health symposium which targets educational and case management communications to processing better areas in key cities.

Feedbacks from attending veterinarians has been so positive that additional symposium are being added in the schedule.

Looking forward, sales volume is expected to be down modestly for the second quarter and full year. Organic sales are expected to be up double-digits to the second quarter and full year. And operating profit is expected to grow double-digits for the second quarter and full year, up absolutely and as a percent of sales.

So in summary, we are pleased with how we started off the year. Our organic sales continued to be strong and our market shares are healthy around the world. So, while we are mindful at difficult economies in many countries, we think we have the right strategies in place, coupled with a fixed financial discipline to continue to deliver solid result as we go through the year.

And now, I'd like to turn it over for questions, Tania, if you want to open it up please?

Question-and-Answer Session

Operator

Absolutely. (Operator Instructions). We're going to Bill Pecoriello with Consumer Edge Research.

Bill Pecoriello - Consumer Edge Research

Good morning. Ian, my question is, if you could help us understand your organic sales growth remains quite robust and you're gaining market share in just about every country. All your market share gains accelerating, what are you seeing with the underlying categories, if you look at oral care versus personal care, pet household, is your pace of growth, the gap widening in terms of how faster are growing new categories?

Ian Cook

Well, it depends Bill. That's a very brood ranging question. I think if you sort of break it down into component element, first of all, we continued to see a growth in that categories around the world. Indeed, if you take the Hill's business, with it, limited distribution channels, the channels that we distribute to also continued to grow by which I mean, the PETCO is Petsmart, the neighborhood pet and the vet.

So yes, we're continuing to see growth very much along the lines that I talked about, with the fourth quarter call, with Europe being the weakest, North America stronger and then of course, the emerging market has stronger sales. We continued to see private label contained at the levels that I have talked about before.

We have categories, no categories immune to private label, ours certainly seemed to be resistant. And we are not seeing a growth in private label. And we continued to see a trade-off to premium offerings in our categories, even in the emerging market. So, all of that continues to move as it has done in the past as we strived to put the right value equation in front of the consumer which as I had said before, is not necessarily priced. And so, we are seeing growth in certain countries in market shares. We're certainly holding our market shares elsewhere as we take as you say, fairly significant pricing which on depends the strong organic growth.

Bill Pecoriello - Consumer Edge Research

And then just one follow-up on, is de-stocking impacting any of your categories in a notable way in the quarter?

Ian Cook

Although, it's an interesting question again Bill, when we think about inventory I guess we think about it three ways: Number one is the consumer's pantry, because everything starts with the consumer. And there I think as I have said before, we do in, particularly in the developed markets, but we do to see consumer work down of their pantry inventory before they come back to a category. So that's certainly a factor.

Trade de-stocking I must say not to any significant degree, there is no question that all retailers are focused on becoming more efficient and reducing their inventory to get better turns and we partner with them to do that. The only relationships where we have choicefully made move, would be with distributors in some parts of the world, where if we have a liquidity concern, we have changed our go-to-market channels of distribution. And, therefore, if you will already created our own de-stocking by transferring the business elsewhere.

And finally, I guess inventory plays into assortment and shelf space with retailers, which also is always under review. And in the main with the reset this year, we have either held position or increased position of the shelf. So the headline answer would be no.

Bill Pecoriello - Consumer Edge Research

Thank you very much.

Operator

Thank you. Let's move onto our next question coming from Ali Dibadj with Bernstein.

Ali Dibadj - Sanford C. Bernstein & Company

Hey guys, wondering whether you could talk a little bit about your philosophy around the elasticity, because it does look like broadly your assesses are getting worse and worse going forward, want to see, how you thought about that and particularly, drilling down perhaps as an example in to Hill's, as if you look at where you had suggested was going to be the Hill's numbers for this quarter, your kind of missed on every single one of those metrics, even with selling, because you even going forward, your assuming volume's going to be negative. So what were you surprised by there, what should we watch out for? And then I have a follow-up on that one?

Ian Cook

Yeah, well Ali, let me talk about pricing in general. What we watch is the consumer obviously. And as I had said, they do work down their pantry, but our market shares continue to either hold or increase and the trading up, we see with consumers continues. As you look at the balance of this year, new pricing that will be taken obviously eases and we have a risk portfolio of innovation which brings value to consumers to come.

In the first quarter, as we had to step up in the fourth quarter, we took meaningful pricing because of the transaction impact and our general philosophy is to take that pricing quickly to implement it as the shelf in parts of the world that are very accustomed to devaluation impacts on pricing. And then move on with our traditional marketing programs and recover accordingly.

So we're quite comfortable with that. Hill's is a slightly different situation this time. We told you about the pricing that we had already taken or announced at the first part of this year, which played into the volume shift last year and as we had said before, you tend to see a quarterly dip in both the Hill's consumption and the category consumption on the basis that most of the competitor's price at the same time. That did not happen this time. So the Hill's pricing in the first quarter, we elected to maintain and we now understand that competitive pricing has been announced that will take place late in the second quarter of this year.

So what is unusual about Hill's in this particular case is that the industry did not move within the same time period and, therefore, it's going to take a couple of quarters before the Hill's business comes back. And indeed, the second quarter is up against a record quarter for last year and we see the business positive on a volume basis in the second half of the year.

So a slightly longer lag, because of the decoupling of when our pricing was effective at shelf and when competitors price this time which is different than product.

Ali Dibadj - Sanford C. Bernstein & Company

That makes sense. And a follow-up in terms of benefit after you guess, I am taking pricing as margin expansion and focusing it on SG&A in particular, is that when you break that out a little bit? Certainly, like you with gross margins, right? In terms of the puts and takes, so obviously, negative 210 basis points on advertising.

You clearly added, you got a positive basis points from funding the growth, funding the growth, there are some volume de-leverage obviously, pension expense in there and currency. Can you give us just a sense of some of those drivers or maybe there's something I'm missing as well?

Ian Cook

Well, probably not, I guess. We've gone through those component elements that perhaps the only one I would comment on is the advertising to perhaps put that in an appropriate context. We are actually very happy with where our advertising is, both in this quarter, and where we expect it to be for the year. And there are several reasons for that. Some of them I talked about on the fourth quarter call, we are seeing the cost per unit of media coming down, we're seeing that between 5 and 25% depending on which country of the 80 we advertise in it is, we are seeing in some key markets comparative spending coming down meaningfully in some core categories and we have continued as Bina commented with our out shift to do more communication and connection with consumers at the retail level when value decisions are ultimately being made.

We had in fact set for ourselves a goal this year to gain 10% saving in terms of cost per advertising unit, we did slightly better than that in the first quarter and look to maintain that over the year, such that overall absolute dollar spending will be down on prior year.

We think that our impressions will be up. So we think we've entered the year prudently and our advertising increases over the balance of the year. But I guess that's the only ratio, I would add additional comment on.

Ali Dibadj - Sanford C. Bernstein & Company

Okay, thanks

Operator

Our next call comes from Bill Chappell, SunTrust.

Bill Chappell - Suntrust Robinson Humphrey

Good morning.

Bina Thompson

Hey, Bill.

Bill Chappell - Suntrust Robinson Humphrey

Just wanted to follow-up a little bit on Hill's pricing question, I imagine by now that the commodity cost for that business come down or should come down pretty dramatically, so why wouldn't you look to rollback some of the price increases you took last year or step up the couponing of promotional efforts on that business?

Ian Cook

The -- well pricing actually has come down in some, but in others has continued to go up. Indeed, in the aggregate, in terms of the key rule materials, they were up between 18 and 20% in the first quarter. So some of these agro materials we used, some of them quite specialized haven't actually yet started to come down.

Now, there's no question Bill, that over the balance of the year, pricing becomes less of the factor for the Hill's business because we do expect those prices to comedown in the, the second half and of course, we will continue with our marketing activities as we continue to manage this balance as flexibly and as agilely as we can.

So, we always start with the consumer in mind and in this case I guess its two consumers; the owner and the pet themselves, and very much structure our programs accordingly. So half on half, you're right. You will see that switch but the material prices haven't come down as quickly in this business as some others.

Bill Chappell - Suntrust Robinson Humphrey

And just a follow up question, I know this only happens once a decade or so but as we look at the market and you have a strong balance sheet and there seem to be some other distressed properties out there, do you look at acquisitions anymore aggressively or are you pretty comfortable with your portfolio as is?

Ian Cook

Well, I would say, certainly in terms of a notion of would we wish to expand categories, we are very comfortable with our portfolio the way it is. We are always very focused on the opportunity for the right acquisition. In our language, that starts with a category strategy and well path property could add to advancing our strategy like Thomas has and GABA has in recent years and to be sure, if an appropriate property became available at a handsome or advantageous price in this environment, we would be keen as we would have been in the past.

So, our approach hasn't really changed only time will tell whether opportunities present themselves.

Bill Chappell - Suntrust Robinson Humphrey

Great, thank you.

Ian Cook

Thank you.

Operator

Lets move on to Andrew Sawyer with Goldman Sachs.

Andrew Sawyer - Goldman Sachs

Hey guys, I'm wondering if you could address a little bit pricing dynamics in Latin America. I know you're pricing in front of the evaluation but from our perspective, it also seems like you're pricing it a bit ahead of CPI and how the consumers reacted to it. I know you talked positively about Colgate Total expanding, continuing to grow and gain share in Brazil. Can you talk about how the consumers' reacting and maybe, in a comparing contrast to differences between the Mexico and Brazil in the category like toothpaste?

Ian Cook

Thankfully, the consumer seems to be reacting the same way. As Bina said, our Mexico share year-on-year is up five points. Our Brazil share I think, we showed in the release, is just about at 70% and the consumer continues to buy our products, our categories and thankfully our brand. So, I'm not saying we continue to see the consumer staying with the category. And in Latin America for all those markets, new pricing is over the balance of the year, our innovation increases and as I have said earlier, in response to a question, our advertising increases over the balance of the year.

So, we think this quarter in all geographies but particularly Latin America was a prudent way to start the year and as Bina said, we have put in place many new techniques on top of all the techniques we use to get us very close to consumers on the weekly and monthly basis in their homes with them in stores, to watch exactly how they are shopping and how their behaviors may be changing and so far they continue to stay with us.

Andrew Sawyer - Goldman Sachs

Okay, thanks very much guys.

Operator

: And next up with Citi Investment Research we have Wendy Nicholson.

Wendy Nicholson - Citi

Hi, my question goes back to the advertising and the promotion trade-off that you are doing, and I just want to understand whether this is sort of a by product of some of the CBP stuff that you did and understanding the value of different types of promotion or how much of this is driven just by the macro environment right now?

In other words, philosophically do you think that the advertising level as a percentage of sales which I think the target had been 12% back when you had the last restructuring program, you are kind of creeping up to that, is that off the table, because of your analytics or just because of the market we're in right now?

Ian Cook

A very good question, Wendy. I think it's the combination of factors, if you take the store as real estate to connect with the consumer, you're absolutely spot-on. CBP has been educating us that this is a great place to connect and communicate with folks before they buy and that communication can be a lot deeper and richer than just pure price.

So, from our CBP commitment, we were already strategically shifting funds to the retail environment. There is a piece that is related to the environment we are in like the Hill's, feeling is the leading campaign where the value of a quality pet nutrition product is conveyed unlikely we would have done that in flatter environment and frankly on the ad spend side, you've got this enormous buyers' market opportunity to get great quality media at lower cost and remain extremely competitive in a marketplace with the same if not more impressions on the local currency basis, and it seems prudent as business people, that we would take the advantage of that while continuing to build that brand.

So, the store piece of it definitely has both components in it but if you get behind it, strategically we were moving that way more and of course that stand is capturing gross to net not in the traditional advertising.

Wendy Nicholson - Citi

And I don't know enough about media companies to know this, but how far out can you lock in those lower rates? I mean in a market like Brazil, can you lock in two years worth of advertising at lower rates or how does that work?

Ian Cook

Again it depends advertising, they say the native countries each one is a local negotiation some of them are still ongoing. So one doesn't want to talk too much. And again, the question of locking in, it's a bit like oil I guess. When would you have wanted to lock in and when not as some are finding out, but I would say you can lock in, you can buy scatter which is basically any forward buy on a weekly or monthly basis or you can negotiate out a year roughly depending on the market situation.

Wendy Nicholson - Citi

Okay, alright that's helpful. And if I can ask just one quick question on Hill's. Your understanding or your sense of the volume declines, these sound like more actual de-stocking issues or category issues, but your sense is not that consumers are making a deliberate choice to trade down to a cheaper type of dog food because I would worry in that category that if you trade down to dog-chow or whatever it is, it is hard to get a consumer to trade back up to buy in the product through the vet or what not. But it doesn't sound like that's happening or can you clarify that for me?

Ian Cook

I can clarify it Wendy, clearly the impact is choosing that the pantry, it will de-stocking before they go back to buy and we have seen category consumption slow after we take a price increase. But interestingly the channels through which we sell, which tend to carry the premium product, continue to grow frankly while math and grocery in that segment are declining.

So, people are not switching out if you will a pet nutrition product into a basic product at another channel. They are staying with that behavior to give their pet the benefit that they believe the pet deserves.

Wendy Nicholson - Citi

Terrific, thank you very much.

Operator

Moving on now to Chris Ferrara with Merrill Lynch.

Chris Ferrara - Bank of America-Merrill Lynch

Hey guys, just wanted to ask about OS this year and I guess, to the extent like in a place like Latin America that your elasticity doesn't seem to be one for one, I guess in other words you don't seem to lose a full point of volume over any longer period of time for every point in pricing that you take. When that pricing left, I guess you logically expect a similar dynamic that, I guess the definition of organic growth probably comes off otherwise pricing comes off, does that makes sense?

Ian Cook

I'm not sure, I fully understood the question Chris. I mean organic growth remains the same definition, but the ratio between price and volume would shift, yes.

Chris Ferrara - Bank of America-Merrill Lynch

Right, I guess what I am saying is, I guess the first question is, do you think you've lost of point of volume for every point of pricing you've taken in most of these markets?

Ian Cook

It's certainly is not that precise. So, no.

Chris Ferrara - Bank of America-Merrill Lynch

Right, then I guess the follow-on that would be as pricing eventually anniversaries and goes back down, you also wouldn't expect the full point of volume recovery for every point of pricing that ends up eroding off because of a lapping, is that also right?

Ian Cook

Yes, to the same assets, that's right. The honest answer is you simply can't be that precise from a modeling point of view. The operating reality will be, we think that as the pricing eases with innovation, the fact that we are taking our advertising up over the balance of the year, we will see volume rebound. That's the way I'd say it from an operating point of view.

Chris Ferrara - Bank of America-Merrill Lynch

That's great. That helps, thanks. Ian, can I just ask you to give that gross margin walk, I'm just wondering how commodities paced in the quarter?

Ian Cook

Sure, here it is, okay. So, Chris if we take the prior year gross profit which was 57.3 Right, Chris?

Chris Ferrara - Bank of America-Merrill Lynch

Yeah, yeah.

Ian Cook

Okay, just wanted to picturize and put you to safe side, the pricing was a positive 300 basis points, restructuring negligible 10 basis points as you would expect, funding the growth 80 basis points in line with the first quarter last year, material prices negative 350 basis points. Again about the same as the first quarter last year, down on the fourth quarter and just over half of that was foreign exchange related, all other changes negative 20 and then the current year gross profits the 575. So I think that tracks through it.

Chris Ferrara - Bank of America-Merrill Lynch

That's perfect. And does the FX portions, that's basically raw math piece. I am sure the commodities piece keeps going down, as you move on, but does FX, the portion the transaction part, does that get worst next quarter?

Ian Cook

We think it will be a slightly worse in the second quarter on a comparative basis and then start to ease off across the back half of the year.

Chris Ferrara - Bank of America-Merrill Lynch

Great, thanks a lot. I appreciate it.

Ian Cook

Sure.

Operator

(Operator Instructions). Now let's move on to Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

Hi, actually I have one housekeeping and then another. On just the corporate which is up, because of the pension cost, could you just give us a guidance for that for the year?

Ian Cook

Yeah. Hold on a SEC.

Alice Longley - Buckingham Research

And on that also, I'm assuming you're amortizing the increased pension funding needs, so that I shouldn't expect that need to go down in 2010. It will stay elevated for a while?

Ian Cook

Yes, that's right. The pension is about 10, $0.10 from the year between the U.S. and Hill's, evenly spread across the quarters obviously. So I think that answers the pension question.

Alice Longley - Buckingham Research

Yeah, I can back that out.

Ian Cook

Yeah.

Alice Longley - Buckingham Research

Okay and then my other question is drilling back down into Hill's where the volume was down. And I'm interested in the category, and you said from your data shows you the consumer still shifting to the specialty channels, can you tell us?

Ian Cook

I didn't say shifting, I said going, yeah.

Alice Longley - Buckingham Research

Well anyways, the consumer spending on dog food in specialty channels, can you give us the growth rate in volume and then the data that you have from mass channels, can you give us that too and tell us whether that includes Wal-Mart and Price Clubs and my point is that I'm wondering if your data shows better growth in specialty channels in part, because often your data for mass excludes Wal-Mart and Costco may be consumers are going to those channels more?

Ian Cook

But we don't measure on a regular basis, Wal-Mart and grocery because we don't distribute them. So the only data we look at is the Neilson, all outlet panel data and the Neilson track data, which as you say doesn't include Wal-Mart and some other retailers.

So I'm only reacting to publicly available data, on the other channels as we're with the pet nutrition channels as well. So I don't have that detail here with me Alice, but it is, we can let you have it subsequently. It's just publicly available data.

Alice Longley - Buckingham Research

I'm just wondering if the consumer maybe is shifting on from specialty channels to Wal-Mart and the Price Clubs and you just aren't seeing the data, but that could be going on.

Ian Cook

No. I mean that I can answer pretty categorically. The shopping consumer based on the data, we're saying is staying with the in our segment I hate (ph) and to add, not the general pet food product, I'm talking about a specialist pet food product is staying with those outlets because the volume and value is up.

Alice Longley - Buckingham Research

Okay and maybe Bina will call me later with that data. Thank you.

Operator

Our next question now comes from Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank

Hi, good morning

Ian Cook

Hey, Bill.

William Schmitz - Deutsche Bank

Hey, can you talk about the gross margin and percentage guidance for the year? Because I think, now you said it was going to be towards the high end of that 75 to 125 basis points and I think last time, you said it was going to be above than 125. So was that an unintentional change or is it just semantics in the press release?

Ian Cook

It was an intentional semantic change in the press release. There will be we said at least up to the 125 basis points, as I think, I commented on the last call, our current estimate indeed would show a north of that. In other words higher.

William Schmitz - Deutsche Bank

So you think its going to be higher now than last time?

Ian Cook

Higher than the 125.

William Schmitz - Deutsche Bank

Okay, got you. Alright. Even in the pantry, it sounds like it was towards the high end of the 125, so.

Ian Cook

As I said, at least and our current estimate shows it higher than a 125 basis points.

William Schmitz - Deutsche Bank

Okay great, and then one more question on China. I know it's a huge market for you. But it seems like a lot of the local players now and including the brand that you only brought are starting to really in trends to that market share, is there a plan that kind of attack that? It seems like your shares are also in toothpaste and toothbrushes are weighing a little bit there. So what's the dynamic point out and how do you kind of combat that?

Ian Cook

Sales actually are in China.

William Schmitz - Deutsche Bank

I'm not that bad Nielson did that or maybe both.

Ian Cook

Yeah, the -- but I've said before, it's up at 20 basis points, but it is looking. I think I've said before Bill, the challenge of winning share in China, it's very much about taking consumers away from the local brand, because if you take away the international players there, as you rightly say about half the market, it's still the local brands. And it's not that these brands are cheap, if they cover water front in terms of price point and positioning with some fairly unique flavors. So the simple way of answering the question is, we have an R&D capability in China, we have a flavor capability in China, we have a very rich innovation censor with consumer insight capability in China.

And as we look at our innovations flow, we are connecting and more closely than ever with Chinese tastes, and communication desires to engage more aggressively I would say with the local consumer to win their loyalty away from the local brands.

William Schmitz - Deutsche Bank

Okay, great. Thanks very much.

Operator

Moving on now to John Faucher with J.P. Morgan.

John Faucher - J.P. Morgan

Yes. Thank you very much. I realized given the volatility in 2009, it's difficult to ask about 2010, but as we look out and try to figure out where margins can go going forward, I guess there's some concern in terms of across the entire universe. How much of the raw material favorability we are going to capture in '09 and drop to the bottom line and same thing with the advertising spend. So realizing you are not going to comment on numbers or anything like that, can you talk with us philosophically about how much of the benefit in those two areas, raw materials, and advertising, you're going to store up and save for next year in case we start to see some of these factors moving in the opposite direction? Thanks.

Ian Cook

Yes John, as usual an extremely profound question but very-very difficult to answer even in the abstract given the volatility swirling around us. So, I don't think I'll even try frankly. If you don't mind. It's very difficult to predict. If you think the macro view on the advertising side some of the big players that are coming out of the marketplace, you have to ask yourself a question, will they be coming back in 2010, Because that obviously will set a framework for how the marketplace might look in some of the key geographies and we haven't even began to take a stand at materials for the coming year.

John Faucher - J.P. Morgan

Well, I guess maybe to sort of just make it a little bit less broad then, do you feel like you are leaving yourself enough cushion hen in terms of not dropping all of it to the bottom line, or do you feel you can given yourself from flexibility because you're obviously put enough good reported numbers, you are eating a pretty big piece of the translational currency impact, I think the market just wants to make sure that there is something else there in case now as we look out things begin to move in the opposite direction?

Ian Cook

Well I think in terms of the way we have approached it, we have been prudent in terms of our approach of the first quarter. We have taken the pricing necessary to begin to solidify the gross profit. We are taking advantage on the media side and we think there is more to come across the balance of the year and of course as we discussed briefly on the call, the last time the organizational and therefore overhead benefit of the changes we have been working towards over the last four years will continue to play out. On top of that, we have the Colgate Business Planning which we are continuing to use to find more efficiency in the spending.

So, I do think between all of those areas that we have, we are providing ourselves enough runway or agility to manage the company going forward.

John Faucher - J.P. Morgan

Okay, thank you.

Ian Cook

Okay.

Operator

And next from Caris we have Linda Bolton Weiser.

Linda Weiser - Caris & Company

Thank you, can you just kind of clarify because may be I kind of missed the concept here, of why you're confident that overall volume will be up in this second quarter, even though you're saying that the Hill's volume will rebound really balance of the second half. Is that just a new product you have planned or what gives you confidence?

Ian Cook

Well, it is the combination of things Linda, First and I haven't sort of talked about the strategy much so far this morning. I thought we continue to believe that the full pronged strategic initiatives we've been deploying over the last five years are still spot-on, which is this focus on the consumer, the profession and the customer innovation, efficiency and of course the Colgate leaders, about make it happen and in terms of what they are making happen as we move forward in the year.

Number one, our innovation stream gets stronger. Number two, new pricing eases over the balance of the year, so there is less new price entering the marketplace. And three; our advertising investment increases on a ratio basis as we go forward, lifting impressions in the local marketplace. So it is those three factors I guess, driven by the strategy that give us the planning confidence going forward.

Linda Weiser - Caris & Company

Okay. And then just let me ask because there's a lot of speculation about what's going on in Mexico? Is there any impact on your business because of the Swine flu situation there in Mexico?

Ian Cook

Not really. We obviously are watching it very, very closely. We are keeping our people out of harm's way and taking all the right hygiene actions but we haven't seen an impact on the business. Our facilities we've view as being strategically important in terms of people washing their bodies, et cetera. So we're keeping our facilities open but we're just keeping a very close on it.

Linda Weiser - Caris & Company

Has retail store traffic got impacted a lot?

Ian Cook

We've actually seen at least in the beginning a little bit of on an uptick if consumers bought a little bit more perhaps with some of the, I guess tomorrow will be a vacation day there, in terms of May Day, as the people have bought forward volume, but it's too early to start to make statements about what's going to happen at retail.

Linda Weiser - Caris & Company

Thank you

Operator

Next up from Barclays we have Lauren Lieberman

Lauren Lieberman - Barclays Capital

Thanks. Good morning

Ian Cook

Hi Lauren.

Lauren Lieberman - Barclays Capital

Hello, I just wanted to ask a bit about Western Europe. Because in the press release that was I think you said that volume in the UK was down but market shares were up and knowing how big a market that is, you want to either comment a little bit if it trends in retail, if there is new pricing that went in the quarter through the dynamic there and then France and Italy where seems that both shares and volumes are down, you look from an a competitors standpoint?

Ian Cook

Yeah, I'll say that we normally get into a country by country, I mean for Europe -- we have in the, if you take the Western Europe, Western European market now, we have seen some category contractions in France and in Italy, I don't think that is particularly new news. We have obviously taken pricing in Europe which may not be at the levels, it is in other geographies but nonetheless, is a factor in the European market, and in the UK the slowdown we are seeing there traces I think to the timing of promotional activity with a slow start to the year.

I think the more underlying condition is more on the Western European mainland.

Lauren Lieberman - Barclays Capital

Okay. And then was volume down significantly in Eastern Europe, how big I guess is the gap between Western and then Central and Eastern?

Ian Cook

The volume was down much less in Central and Eastern Europe than in Western Europe. And indeed if you take that whole sort of Eastern Europe, Russia and Middle East, aggregate group of countries, the volume was actually up.

Lauren Lieberman - Barclays Capital

Okay, great. Thank you so much.

Operator

Listeners (ph) are now taking the question from Alec Patterson.

Alec Patterson - RCM

Thanks, and for whatever reason the first quarter always seems to come up shy that did again this quarter. Could you speak to what you are expecting from the program this year and what its ongoing contribution could be?

Ian Cook

One second Alec. Yeah, we're, if you look going forward, you are right. We do always tend to face a little bit lighter at the beginning of the year. As we look going forward our current estimate would be a broadly in line with prior year full year, so the same kind of progression that we have seen in previous years.

Alec Patterson - RCM

Okay. That's helpful. And just to clarify and answer to the question before. You were talking about the advertising spend increasing through the rest of the year and I'm trying to understand that was that increasing from the way that which it came in Q1 or increasing year-over-year going forward. I'm sorry, just clarify that?

Ian Cook

Yes. Indeed Alec I shall. It was increasing from the first quarter rate of advertising across the balance of the year.

Alec Patterson - RCM

So you mean like as a percent of sales that would be higher, is that what your?

Ian Cook

Exactly so yes.

Alec Patterson - RCM

Okay, great. Thank you.

Ian Cook

You are welcome.

Operator

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

Connie Maneaty - BMO Capital Markets

Hi. I also have a question about Swine flu, but mostly, since we are worried and years ago about bird flu and SARS, have you changed the way you manage event risk and if the World Health Organization moved this up from Level 5 to Level 6 which some news reports say its going to do, does it change in any way the way you do business?

And then finally in Mexico apparently things are going to close for five days not for May Day, can you give us an estimate of how that would affect your business there?

Ian Cook

The well Connie, a good question on a very topical subject. First of all, we have a very well established risk management procedure as it relates to such health matters, of course very well developed at the time with of the Avian Flu in Asia. So yes we do have it. We have deployed it before and we stand ready to deploy it again at the most basic level, obviously the first thing one manages is the travel of the executives both in country and around the world. But we do have a very well established plan.

Secondly, now I'm very well aware that there's a close down in Mexico until May, the 5th, we have not closed down as I try to suggest on the earlier answer we're keeping our facilities open because the personal care product we provide, we were providing the everyday hygiene benefit that the World Health Organization and others are suggesting that consumers avail of. I think in terms of any retail impact on the business, we will all have to take stock of where the marketplace is after May the 5th.

Connie Maneaty - BMO Capital Markets

And just a follow up, do you make any hand sanitizer or disinfectants?

Ian Cook

We do not make disinfective, we make obviously body and hand cleaning products and regular washing of hands is of course one of the key practices.

Connie Maneaty - BMO Capital Markets

Okay, thanks.

Operator

: Ladies and gentlemen, we have time for one final question and that will come from Jason Gere with RBC Capital Markets.

Jason Gere - RBC Capital Markets

Hi, good morning or good afternoon. Just a quick one. I guess I was wondering if you could talk about your strategy of managing profitability versus volume growth in share in some of the non-oral care categories, specifically homecare when you're soon to be anniversaring some of these higher cost inflation that we saw last year. Thanks.

Ian Cook

Yeah, we have a very vibrant homecare business. It is of course more regional than our oral care business. As we look at it from a organic growth point of view, interestingly our homecare business is up about 7%, our personal care business, up about the same 7% and the oral care business, up north of 9%.

So where we have our homecare business, we apply the same strategies that we apply to our other strategic businesses. We bring innovation. We have indeed offset costs in these businesses but we continue to manage them for organic and market share growth. So we don't think about them differently from a strategic point of view.

Jason Gere - RBC Capital Markets

Okay. And actually can I just ask one more, as we're talking about Mexico and I know after May 5th is when we'll probably get more clarity, if there are impacts would you treat this -- I assume you would as a one time item in the second quarter or strip it out for us on the next conference call?

Ian Cook

Let's see where this goes yet Jason, it's -- I think it's too early to poll. Let's see where it goes.

Jason Gere - RBC Capital Markets

Okay. Thanks.

Ian Cook

Okay. Well, thanks everyone for calling in. Thank you to all of the Colgate people around the world who make all of this happen and look forward to catching up with you on the next call.

Operator

That does conclude today's call. Thank you for your participation.

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Source: Colgate-Palmolive Q1 2009 Earnings Call Transcript
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