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Colgate-Palmolive Company (CL)

Q2 2006 Earnings Conference Call

July 25, 2006 11:00 am ET

Executives

Bina Thompson - VP IR

Ian Cook - President and COO

Reuben Mark - Chairman and CEO

Analysts

Wendy Nicholson - Citigroup Investment Research

Amy Chasen – Goldman Sachs

Bill Chappell – SunTrust Robinson Humphrey

Bill Piccariello – Morgan Stanley

Christopher Ferrara - Merrill Lynch

Alice Longley – Buckingham Research

Bill Schmitz - Deutsche Bank

Linda Bolton Weiser – Oppenheimer

Joe Altobello – CIBC World Markets

Constance Maneaty – Prudential Equity Group

John Faucher – J.P. Morgan

Ryan Bennett – Lehman Brothers

Alec Patterson - RCM

Jason Gere - A.G. Edwards & Sons

Ursula Moran - Bear Stearns

Presentation

Operator

Good day and welcome to today’s Colgate-Palmolive Company second quarter 2006 earnings conference call. Today’s call is being recorded and being simulcast live at www.colgate.com. Just as a reminder, there may be a slight delay before the question-and-answer begins due to the web simulcast. At this time for opening remarks and introductions, I would like to turn the conference over to the Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead.

Bina Thompson

Thanks, Sarah. Good morning everybody, and welcome to our second quarter earnings conference call. With me this morning are Reuben Mark, Chairman and CEO, Ian Cook, President and COO, Javier Teruel, Vice Chairman, Steve Patrick, CFO, Dennis Hickey, Corporate Controller and Ed Filusch, Treasurer.

Our remarks this morning on the second quarter will refer to our results excluding $115.9 million of after-tax charges related to the 2004 restructuring program and an $8.3 million non cash after tax charge, or less than $0.02 per share, in incremental stock compensation expenses due to the adoption of FAS 123R. These items were included in the reported numbers contained in this morning’s press release and accompanying financial statements.

The reported GAAP results with reconciliation to the results excluding these items are included in the press release and posted on the Investor Relations page of our web site at www.colgate.com.

Comments about expectations will also exclude comparable charges.

And we’re very pleased with the strong quarter which was detailed in this morning’s press release. I’ll spend just a few moments on some highlights overall and then review the divisions but before we turn it over to Q&A, Ian Cook would like to make a few remarks concerning our outlook going forward.

Good volume growth across all divisions was supported by strong increases in advertising. Advertising was up absolutely and as a percent of sales in North America, Latin America, Greater Asia/Africa and Hill’s.

Our gross margin increase of 100 basis was the result of our continued funding the growth program, as well as the incremental benefits now being realized by our restructuring and the start of returns from our promotional efficiency business building program.

As Reuben mentioned in the press release, we were able to increase advertising and profitability in the face of significant raw material cost pressure.

Our restructuring program remains on track and we are beginning to see a ramp up in the savings associated with it, as we’d indicated to you previously. Overall charges from the program remain in the range of $550 to $650 million after tax, while the expected overall long-term savings remain in the range of $250 to $300 million after tax.

As you can imagine, we’re pleased with the double-digit operating profit and EPS increases and, as Reuben said in the press release, we expect double-digit profit for the remainder of this year and also for next year.

While we continue with our share repurchase program, our average diluted share count did not decline year over year in the second quarter as much as it usually does. Our diluted share count actually increased slightly from the first quarter. As you know Colgate’s share price has performed well recently, which resulted in a higher diluted share count.

So let’s turn to the divisions:

North America.

We’re very encouraged by the continued strong momentum in North America, and specifically in the U.S. Volume growth excluding divestitures continued to be very strong and is broadly based across categories, with particularly good growth in our high-margin businesses such as toothbrushes and toothpaste.

Our all-outlet actual share of the toothpaste category, as measured by ACNielsen for year-to-date is at 37.3%, up 20 basis points versus the prior year. In manual toothbrushes, our share continues to build and reached another quarterly record of 23.6%, up 70 basis points from a year ago.

More new products are being launched as we speak to help maintain this good growth. In toothpaste, we’re launching a new variant in the Luminous line, Mint Twist. And from Max Fresh, a new, exciting Kiss Me Mint flavor. A new entry in the dish liquid category, Palmolive Oxy Foam, will be shipping in August. This is a foaming dish liquid which removes tough grease on contact. And in the fabric condition category, where we continue to grow share with a national share now over 11%, we are launching Suavitel Ultra, with a positioning of three times the power for clothes, soft as a mother’s love.

One of the initial phases of our worldwide effort to increase the efficiency of our consumer and trade spending, under the name of Colgate Business Planning, was to roll out a return on investment tool kit to all subsidiaries. Much of the work on this initial ROI application was done here in the U.S. The results are just beginning to bear fruit, the start of what we see as a very productive long-term business process. Regular meetings to analyze promotion spending have been implemented across all our multifunctional selling teams in the U.S. We’re now sharing best practices to the Colgate world through our intranet and have also begun to incorporate our ROI analytics in our forward planning. Our 2007 budgeting will be based solidly on our best practice in the promotional ROI area. All this has established a solid foundation and momentum for our full transition to CBP here in the U.S., driven by our SAP software, by the end of this year.

Our acquisition of Tom’s of Maine is proceeding well. The Health and Specialty trade channel continues to grow double-digits and Tom’s, as the clear oral care market leader in that segment, is benefiting from that. While the transaction only just closed on May 1, we are already leveraging our strategic partnership in terms of sharing marketing and sales expertise and beginning to leverage distribution expansion capabilities in the traditional food, drugs and [inaudible].

So looking ahead, volume in North America should continue strong for the balance of the year. Operating profits should be up in both the third and fourth quarters, and for the full year.

Europe/South Pacific.

Macroeconomic conditions in Western Europe continue to be difficult. While there is a very modest growth in [GEP], consumer confidence in our biggest subsidiaries in France, Germany and Italy still remains very low. Despite these macro problems, our volume in Western Europe excluding divestitures was up modestly and as you’d expect, grew strongly in Central Europe.

As in other parts of the world, new products in Western Europe play an important role in growing our business. We’ve already told you about Colgate Time Control and Sensitive Multi Protection, which continue to drive volume and margin. Colgate’s 360 Degree toothbrush is another premium-priced product which has resulted in share increases in virtually every subsidiary where it has been launched. In the home care category, our expanded line of Ajax Professional, which has added a double-power spray in addition to a degreaser spray, has allowed us to maintain share leadership.

Importantly, our restructuring activities, many of which are centered across Europe, are beginning to bear fruit and to deliver the savings necessary to support our business with increased advertising.

In Australia, our toothpaste share is up almost 3 full points on a year to date basis, at 57.6, with the most recent reading at 68.9. Manual toothbrushes continue to reinforce their strong market-leading position, with a 21.8 gap to the nearest competitor. At 42.8%, our share is up almost 4 points versus the prior year due to better shelf positioning in certain retailers, as well as the continued success of Colgate 360-Degree toothbrush.

Looking ahead, volume in Europe is expected to be up again in the low to mid single digits in both the third and fourth quarters. Operating profit growth should accelerate somewhat in the first half of the year.

Latin America.

Business in Latin America is strong across the region. As you know, one of our key strategies associated with our worldwide business building program has been to increase advertising investment, professional detailing and in store activity to ensure continued strong volume growth. This has been very successfully implemented across the region, where we’ve increased all aspects of advertising meaningfully, up absolutely and as a percent of sales.

Increasingly, production of our products has been moved to our world-class factories in Brazil and Mexico. The commercial hubbing model implemented a number of years ago in Central America is now being replicated in the Andean region as well as in the Mercosur region, allowing for more effective, focused go to market initiatives.

In Mexico, volume increased with dollar sales growing even stronger, aided by selling price increases. Our toothpaste share is up year over year, with a particularly strong reading in the most recent period as well over 80%. This is a result of the focus on our premium products such as Colgate Total and Colgate Max Fresh, which drive profitability as well as share. In toothbrushes, our share reached near-record levels, almost 34% in the most recent period. New products in the personal care category will contribute to continued good growth as well. In the second quarter, we just introduced two new variants in our hand and body lotions, ActiFirm and Extra Dry, and in the haircare category we have just launched four variants of combing creams to compliment our shampoo and conditioner business, all completely incremental to this category.

Volume in Brazil increased very nicely on top of almost a 20% increase in the year-ago quarter. Market shares in that country are up in virtually every category, with strong increases in toothpaste and toothbrushes. Key to our toothpaste growth was the success of Colgate Total which, as elsewhere in the region, was supported with a strong marketing plan including national media, [inaudible], in store execution and professional activities for dentists. While the shower gel segment is quite new to this and other Latin American countries, it is fast growing and we’ve established clear leadership, achieving over 26% of the market in the most recent period.

Using the successful Brazilian model, we expect to grow this category in other countries through the balance of the year.

Other highlights around the region include record toothbrush shares in Ecuador, Peru, and the Dominican Republic of 61.9%, 66.9% and 72.9%, respectively, continued growth in toilet soap market share across the region and maintenance of our over 70% share of the fabric conditioner market in Columbia, Central America, Dominican Republic and Peru, where we pursue an aggressive per capita consumption growth program. This program includes sampling and consumer education on product usage and benefits, incentives for the indirect trade, educating the trade in order to increase category space on store shelves and portfolio promotional strategies to trade-up consumers into larger sizes.

Looking ahead, volume growth in Latin America should continue at current levels for the balance of the year. Operating profit is expected to grow strong double-digit in the second half.

Greater Asia/Africa.

Business results for this division were excellent, showing good momentum and volume both in the first quarter, up 9.5% versus the year-ago quarter excluding divestitures as compared with a 7% growth in the first quarter.

Of particular note is the [inaudible] of Greater Asia itself, up double-digit in volume on the same basis and as elsewhere, fuelled by good increases in advertising, both absolutely and as a percent of sales. As noted in the press release, sales in Greater China increased 4% and operating profit increased substantially faster. We’ve sustained our market leadership position in both toothpaste and toothbrushes, with particularly good results in the toothbrush category and a broadening of the market share gap between us and our nearest competitor in toothpaste. As we continue to expand our distribution throughout that vast country, we expect to capitalize on the fast-growing secondary cities through the balance of this year.

Across Greater Asia, our toothpaste market share grew 120 basis points, to almost 39%, with record toothpaste shares being posted in Russia and Turkey.

In Russia, our share is up more than 7 full points year over year as we consolidate our recently achieved leadership position. In toothbrushes, the launch of our very successful 360 Degree toothbrush has contributed to an increase across the region of 190 basis points for the Colgate equity. Every country reported share gains for the Colgate equity in the period.

In the personal care category, our new product program has helped increase volume as well. In the Philippines and Vietnam, the re-launch of our Palmolive Natural shampoo line has delivered strong in market results.

In Russia, we’ve launched Palmolive Aromatherapy Propolis shower gel, building on our learnings from our successful Propolis toothpaste and the importance the Russian consumer attaches to this ingredient.

In Thailand, we’ve begun our deep dive with Colgate Business Planning, our new initiative to increase the efficiency and return on consumer and trade spending. Here we’re able to focus more closely on indirect trade, which accounts for a much bigger piece of our business in some of our other pilot countries. We’re working with wholesalers and distributors to understand how we can increase throughput and expand even further our distribution.

Looking ahead, volume in Asia should grow mid to high single digit in the second half, with operating profits growing double-digit.

Hill’s.

Both new products and strength in the base business contributed to an excellent second quarter for Hill’s.

In the U.S., new testimonial advertising for the Science Diet line is now on air. In addition, we continue to support the business by increasing in store demonstration programs as well as veterinary staffing programs and sponsorship of veterinary conferences and symposiums. Consumption in the superstore channels is growing considerably faster than the market as a whole and in addition, the percentage of pet food shoppers buying at a specialty channel has reached an all-time high, which bodes well for continued strength in our business.

Business in the U.S. veterinary channel is also doing well, with continued success behind our fourth quarter launch of BD Diets. Our results from the second quarter behind this new line of diets which help dermatological problems exceeded our estimates by over 40%.

Our international business continued strong as well, with particularly good growth in some of our newer markets such as Russia. While we’re still in the early stages of building our distribution in that vast country, we’re already the No. 1 recommended pet food by Russian vets.

So looking ahead, volume growth in Hill’s should be at second quarter levels for the third and fourth quarter. Operating profit is expected to grow double-digit.

I’d like to now turn the call over to Ian Cook, our President and Chief Operating Officer, to sum up briefly and talk about our prospects going forward. Ian.

Ian Cook

Thanks, Bina. We are very pleased with the excellent results this quarter, and expect continued momentum during the second half of the year and into next year.

As I have visited many international Colgate subsidiaries this year, I have seen firsthand the business results which our focused strategy is delivering. This gives me further encouragement for our continued success.

Of particular note is the sustained, healthy expansion in gross profit despite continued raw material cost pressures. The restructuring program, our traditional funding the growth initiatives, specific pricing action and product mix have all contributed to the increases in the gross profit. The higher gross profit has funded increased advertising support behind new products and marketing programs which have driven continued broad-based organic volume growth.

Importantly, we are increasing not only the amount but also the efficiency and effectiveness of our advertising and of all our marketing activities, and we are encouraged that our worldwide effort to even further increase spending efficiency with Colgate Business Planning is making good progress. Because of all the interest expressed in Colgate Business Planning, or CBP, let me give you a brief update on this important initiative.

Remember, the objectives of the program are to set goals and plans for both our brands and accounts, to measure performance against those goals and plans, and to drive efficient commercial investment and therefore market share and margin growth.

Every subsidiary has appointed a Colgate Business Planning leader. Sixty countries have started using our CBP ROI tool kit and so far, over 1,000 managers in many different functions have gone through our workshop and online training.

What we call deep dives, intensive analytical reviews of promotional activity and selected customers, is nearing completion in the U.S., Mexico, Spain and Thailand. These will help verify the magnitude of savings and the incremental growth opportunities we can expect from CBP.

Transition to the full CBP process, supported by SAP software which fits into our global SAP system, is well underway, with Mexico and Canada starting their go live program in August. Six more countries, including the U.S., will start go live programs in October of this year and we expect to cover 80% of our worldwide business within the next 24 [inaudible].

With our results to date and the strategic initiatives in place, we are confident of delivering good volume growth for the balance of the year, with a simultaneous gross profit increase and with advertising up in absolute dollars and as a percent of sales. As Reuben noted, this should lead to double-digit EPS increase both this year and next. We look forward to sharing our progress as we go through the remainder of the year.

This concludes our prepared remarks so let me turn the call back to Erica and we can proceed to the Q&A section.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question is coming from Wendy Nicholson with Citigroup Investment Research.

One moment. And your line is open. Please go ahead.

Wendy Nicholson with Citigroup Investment Research

Hi. Can you hear me?

Bina Thompson

Yes.

Wendy Nicholson with Citigroup Investment Research

Okay. My first question has to do with China and the top line growing only 4%. I had expected the quarter to be much stronger because I thought it was an easy comp to last year with the [Tricalstan] issues so can you explain kind of what was happening there? Is it just that the category’s not growing? I heard you say your shares sound good, but 4% just came in a lot lower than I had thought.

Reuben Mark

Yeah. I actually thought, Wendy, that you’d be pleased considering there was considerable concern that our business in the previous quarter was flat to down. It was up. What’s happening in China is, as I think the notation in either press release or the write up that Bina just went through, is that the gap between us and our nearest competitor has lightened. There is plenty of price competition and some of the local brands are fighting back. Our business is healthy. I think the projection for the next two quarters are up more than that and we did a review awhile back both here and in China and it’s looking quite good. As you saw, Asia is up very significantly and it’s expected to continue to be up significantly for the rest of the year, going into next year.

Wendy Nicholson with Citigroup Investment Research

So to just clarify, can you – I mean, it sounds like, is there a price war going on? I mean, how bad is the pricing and can you give us a sense of what the category grew in the quarter.

Reuben Mark

I don’t know the category growth. Category growth was about, in dollars, about what we grew, in mid single digits. There is – I mean, it’s a very competitive situation. It has been and will continue to be. Our EBIT is up in China and will be up again in the next quarters and budgeted for next year.

Wendy Nicholson with Citigroup Investment Research

My second question just has to do with pricing generally. I think we’re getting into sort of the part of the year here where we’re anniversarying some of the big price increases you took last year. With raw materials where they are, can you talk about the pricing outlook for the overall company in the back half?

Reuben Mark

Yeah. We – hang on one sec. The price percentage, of course, as you know, Wendy, has been going up. I’m looking for my worldwide pricing folder and I’m not finding it so I’ll go from memory.

Okay. You recall that last year on total company it was negative in the first two quarters, started going positive in the third and was positive in the fourth. Was positive 170 basis points in the first quarter and again positive in the second quarter and we expect it to be positive for the third and fourth quarters as well for a year, nicely above 100 basis points.

Wendy Nicholson with Citigroup Investment Research

Okay, but still – I mean, it sounds like it’s going to be up less in the back half because my real question is, do you have incremental price increases that you plan to take, you know, from here on out.

Reuben Mark

Answer, yes. Again, we’re talking about 200 countries. The price trend is good and that will be assisted by increasing reductions in gross-to-net on a worldwide basis. You may have seen that our gross-to-net went down. It’s led by the United States and Latin America, which are the two areas that are most advanced on what Ian was telling you about, the Colgate Business Planning, the promotional efficiency aspect and so that it will be helped by actual price increases and a reduction in gross-to-net.

Wendy Nicholson with Citigroup Investment Research

Fair enough. Thanks very much. I appreciate it.

Reuben Mark

Wendy, it felt to us like a pretty good quarter. You have anything encouraging to say?

Wendy Nicholson with Citigroup Investment Research

You know, you came in exactly where I thought you would on the EPS line so I think that’s pretty darn good. I think that’s all I want to say.

Reuben Mark

Okay, good.

Wendy Nicholson with Citigroup Investment Research

Thanks.

Reuben Mark

Thanks.

Operator

And next we’ll hear from Amy Chasen with Goldman Sachs.

Amy, your line is open. Please pose your question.

Amy Chasen – Goldman Sachs

Can you hear me now?

Reuben Mark

Yes I can hear you, Amy.

Amy Chasen – Goldman Sachs

Okay, great. The volume trends were actually much better than I had expected. Can you tell us how they were relative to your own internal expectations and how much of that upside, if there was some relative to your expectations, was due to the more efficient promotional programs that you’ve talked about?

Reuben Mark

Amy, yes. Volume was very good; somewhat better in certain areas than we had expected. We had an aggressive budget, but nonetheless we exceeded that from a volume and sales point of view. I think it’s a little early to see much volume coming from this promotional efficiency plan. We saw some gross-to-net go down which was good, which pushed the gross-to-net worldwide down which was also good. But I think it’s a function of the strategy that Javier and Ian developed a couple of years ago and promulgated to the organization, which is basically spending increased money on classic marketing activities, increasing sampling levels around the world, increasing professional relations programs and improving the quality of in store work, market research and the actual commercial advertising that we do. It’s a classic back to basics kind of a strategy and it appears to be working quite well.

Amy Chasen – Goldman Sachs

Okay, great. Can you quantify for us within the gross margin increase how much was from, you know, all the things that you usually quantify, including this promotional program?

Reuben Mark

Yeah, the promotional program is a little tough. Let me give you the normal quantification, Amy, that I would give you and then let me talk about the promotional aspect. So that, if you look at the second quarter, and this is a comparison versus the previous year second quarter, the gross profit is [up] on pricing .7, restructuring – I might add that in the first quarter it was up .7 as well – restructuring .4, which is somewhat above what it was in the first quarter; our classic funding the growth savings, 1.3, which is, again, better; material pricing, negative 1.4, and that altogether adds to the 100 basis points improvement.

Amy Chasen – Goldman Sachs

Okay, and one last question. Just, well first of all, within that you didn’t talk about the promotional programs. Is that because it was zero or just because it’s too hard for you to break that out?

Reuben Mark

No, because I was just pausing and ready to go on.

Amy Chasen – Goldman Sachs

Sorry.

Reuben Mark

Actually, it’s going to be difficult to measure precisely that number because it gets mixed up with – some of it ends up driving volume up, some of it ends up driving price up, so that it’s going to be a little complex. The only thing I can say is we’re at the very early stages of that. As you know, Ian and Javier are very excited about that, as are people around the world. I am, too. To give you an idea, for the first time in a considerable period of time, the gross-to-net percentage went down worldwide. That was a result of, as I said earlier, the Latin America and the U.S. gross-to-net percentage going down and they are the countries that are involved. I think you will see that becoming more pronounced as we go forward in both of those divisions and then the rest of the world.

If you simply take, and this is an attempt to quantify it even though it’s – if you take the reduction in worldwide gross-to-net and basically multiply it times sales, and its under a percentage point, as X number of basis points, you come up with an amount which is equivalent to about $0.01 a share or so that, probably that contributed overall. I’ve got to say that that will continue to grow and as we said before, we would think that the ultimate savings are in the range of the restructuring which is, as you know, several hundred million dollars.

Ian made the point earlier, which I think is very important and Javier keeps stressing this when he’s pursuing this program around the world, which is that this is not just a savings program. It is genuinely to get more efficient savings so the same amount of money or less money will drive volume even more and I think you’re seeing that in Latin America, you’re seeing it – early stages – in the U.S. So when we say that the business is robust and its fundamentals are as good or better than they’ve ever been in my knowledge, a part of it is this program and, to a certain extent, I think you ain’t seen nothing yet.

Amy Chasen – Goldman Sachs

Wonderful. Thank you.

Operator

Next we’ll hear from Bill Chappell with SunTrust.

Reuben Mark

Hi, Bill.

Bill Chappell – SunTrust Robinson Humphrey

On the Tom’s of Maine acquisition, how much does that add in terms of U.S. market share on the oral category?

Reuben Mark

About 1.5 share points. In the quarter, we only had a partial quarter, it was under $10 million in sales.

Bill Chappell – SunTrust Robinson Humphrey

So the share was still year over year, even excluding that?

Reuben Mark

Yes, that’s right. Actually, their share was constant year to year and when you take the – our share was up, and we get weekly shares which we’re not actually allowed to put out, but we just got a fantastic weekly share. We’re working on daily shares.

Bill Chappell – SunTrust Robinson Humphrey

With that in mind, is there a timeline for expanding the distribution within the U.S. or outside the U.S.?

Reuben Mark

There’s a strategy group that’s participating up there right now, and that is in the process of being developed.

Bill Chappell – SunTrust Robinson Humphrey

Then also, just looking at the [kind of] the acquisitions out there, obviously took a pass on the Pfizer business. Did that preclude you from repurchasing shares and if not, I mean, are you looking to take the cash for more share repurchases or other acquisitions or kind of what’s your thought going forward?

Reuben Mark

With $16.6 billion we could have bought about 40% of our capitalization, but interestingly yes, two things were going on. We did lay out about $100 million for the Tom’s of Maine, number one. Number two, we were keeping our powder dry and being conservative, you know, on the one chance in who knows how many that we would have gone ahead with the Listerine portion of that business.

So as a result, our share repurchase in the quarter was lower than it has been and actually we’re going to, as soon as the quiet period ends, we’re going to about double our purchase back to slightly above the rate that we were going at, at about $1 billion a year rate.

Bill Chappell – SunTrust Robinson Humphrey

Great.

Reuben Mark

Also, just as an aside, I think Bina mentioned this, is that there’s an interesting calculation that, for the first time in a long time, in the quarter the shares went up rather than down from the previous quarter because number one, we didn’t buy back as much as we normally do but well beyond that, because of the fact that the stock has done pretty well. The diluted calculation which, of course, figures out the number of shares and the money, it’s a very complex thing, but as a result the diluted shares outstanding went up.

Bill Chappell – SunTrust Robinson Humphrey

Great. Just one last question and you might have commented on this - any thoughts on Crest Pro Health and their expansion plans over the next six months, how that’ll affect your oral care share?

Reuben Mark

Well, I guess I’m going to react the only way that I can react. We have, you know our strategy is narrow, that we’re in only a few categories and our job is to improve our world and country market leadership. There are constant attacks by various competitors around the world to try to change that balance and we historically, I think, without exception have met that challenge. I can’t remember a situation, and I’m looking around the room for the people who would know better than I, where we have, our market leadership has been damaged or lost appreciably in recent years and I would think that the U.S. is no different. You know, let’s – Bill, we’ll talk as we go along. I would say six months from now, or a year from now, we’ll see that we remain the strong market leader in this country.

Bill Chappell – SunTrust Robinson Humphrey

Great. Well, nice quarter.

Reuben Mark

Thanks.

Operator

Next we’ll hear from Bill [Piccariello] with Morgan Stanley.

Bill Piccariello – Morgan Stanley

Good morning, everyone. First question, just on the advertising spend, in the past quarters you’ve given us the absolute amount, the percentage it’s gone up?

Reuben Mark

Advertising went up 9% as I recall, and will go up for the year probably that much or more.

Bill Piccariello – Morgan Stanley

Okay, great. Then just –

Reuben Mark

Back in between 9 and 10, somebody was saying. Okay.

Bill Piccariello – Morgan Stanley

Could you also give us some more color on Russia? You’d given some details on China. Was it up double-digit? How did it compare to the first quarter growth?

Reuben Mark

It was up double-digit. Very strong. First quarter growth was excellent, in the 20s. Second quarter growth is excellent, in the 30s. I don’t think that progression will continue, but it’s expected up very well for the year. A strong third and fourth quarter is anticipated and the EBIT grew very substantially during the quarter in Russia, and is expected up very materially for the year. Business is good in Russia and continues, so - you should know that Russia was transferred, when we realigned the divisions awhile back, in the last few months, it ended up in [Greater] Asia. [Inaudible] It ended up in Greater Asia. So that it had been in Europe and basically what – that means that growth in Europe, had it been historically comparable, although we have adjusted the previous years, would have been a point or two higher because of Russia. But it’s, from a marketing and an administrative point of view, it’s right where it should be.

Bill Piccariello – Morgan Stanley

Okay, great, and then just following up on the components of the gross margin chain. As we look out the balance of the year, the charge in the quarter, the $116 million, was a little bit greater than we’ve seen the last couple of quarters, greater than we were expecting so should we see that savings contribution accelerate in the back half from the [inaudible]?

Reuben Mark

Bill, the reason for the greater amount was that, remember we told you that we had to have a number of, many, many smaller personnel programs and for a number of pretty valid reasons, they didn’t go ahead when they were planned but instead we put in a – and it was fully announced and everything else during the first quarter or earlier – a voluntary retirement program for a big quantity of domestic employees. So the charge came all at once rather than spread out over a period of time. It is – basically, the deadline has now passed. It’s come out very well, as I think Bina may have mentioned, and actually a bit better than we had expected. Those savings will start coming in in the fourth quarter and next year, which means that our savings for those periods should be a bit more than we had originally thought.

Bill Piccariello – Morgan Stanley

Great, and just one last one. On the U.S. pipeline, should we expect some more news balance of the year relative to what you’ve mentioned, a release? You have some new products you announced in Europe, like this Microsonic toothbrush and the Colgate Time Control. Should we expect those in the U.S. eventually?

Reuben Mark

Well, not necessarily those specifically but there is an aggressive new products program in the second half.

Bill Piccariello – Morgan Stanley

Okay, great. Thank you.

Reuben Mark

Thanks, Bill.

Operator

Our next question will come from Chris Ferrara with Merrill Lynch.

Christopher Ferrara - Merrill Lynch

Hey, I just want to ask about funding and growth. You know, it seems like after, it might have slowed a little bit last quarter. You came back pretty strongly and I’m trying to get a sense for, you know, what that outlook might be going forward as it’s, you know, a pretty big component of your gross margin savings. I mean, do you see continuing at this kind of rate?

Reuben Mark

Well, again, the breakdown, the precise breakdown is difficult to project but from a projection of gross margin – hang on one sec – we do expect the second half to be continuing at [inaudible] the same rate as the first half, maybe a bit better, but who knows?

Christopher Ferrara - Merrill Lynch

Then, can I just – I’m sorry. Go ahead.

Reuben Mark

The components won’t be very different except that as I said earlier, that it’s probable that the amount that comes from gross-to-net reduction may accelerate and certainly will accelerate into next year.

Christopher Ferrara - Merrill Lynch

Got it and then, I guess along those lines, I mean, as you look at Latin American pricing obviously continued to be extremely strong and can you talk a little bit about what the breakdown might be on that pricing line, between list and improved gross-to-net, and then also a little color as to what, you know, how long you’re going to sustain that kind of a level of improvement?

Reuben Mark

Okay, well, the price increase - I guess that’s part of the stuff we send out, right -was 5%. We expect it up in the third quarter and the fourth quarter even though that laps strong quarters last year.

It’s being driven this – pricing is positive in all major countries and don’t forget, as you know, Chris, that for many years we’ve had a division policy to increase prices in line with local inflation wherever possible and the economies are doing well down there. There’s also, again, an early focus on the gross-to-net reduction and a lot of proactive SKU, VSKU analysis to identify specific opportunities. So it’s – we’re hitting on, if not all, certainly most cylinders in Latin America. The expectation is that we will have positive price for the next two quarters, and I would guess that we’ll be budgeting positive price for next year as well.

Christopher Ferrara - Merrill Lynch

Thanks, and then just one other one. In the trouble, in the more troublesome markets in Western Europe, you know, France, Germany and Italy, can you talk about where your market share is stacking out right now? How is it, you know, year over year? Obviously the economies are a little bit tough, but how are you doing relative to your competition there?

Reuben Mark

Basically, we’ve got some real success in increasing market share in liquid cleaners, which are the only, basically the only remnant of the home care business that we and we’re one of the leaders in Europe. The oral care shares are essentially flat to slightly up, [Gobba’s] increasing their shares and we have increased in a couple of countries. UK is up and a couple of others. Something that’s positive about Europe is that the negative price in Europe, which you’ve seen from us and everybody for a number of quarters is less than it has been. That is to say, last year was negative, price was negative 2%, a little over 2%. It was a negative 2% in the first quarter and this quarter it was negative less than 1%. So, again, it’s – the trend is good.

Also, from a volume point of view I think we’ll be disappointed, because of a lot of new product reasons and other reasons, if we don’t seem some better volumes although this was, there was nothing wrong with this volume, in the second half and in Europe, specifically.

Christopher Ferrara - Merrill Lynch

Right. Got it. Is the improvement in pricing at all related to the fact that your share, you didn’t gain share? I mean, obviously you cited a bunch of markets in Europe where you gained share and those three, you know, France, Germany and Italy, were not cited. I mean, did that have something to do with easing up on pricing and maybe more so than your peers were?

Reuben Mark

I don’t think so, Chris. Normally, we just – if a share is flat or slightly up, we don’t, I don’t think Bina mentions it. It’s just the ones that are, there’s a meaningful movement.

Christopher Ferrara - Merrill Lynch

All right. Thanks a lot.

Reuben Mark

Thanks, Chris.

Operator

Next we’ll hear from Alice Longley with Buckingham Research.

Alice Longley – Buckingham Research

Hi. Good morning. My first question is to ask about more specifics for North America. Going into the second half of the year, can you tell us what pricing might look like? It’s been flat recently. Will it be up or down in the second half? Also, you said operating profits would be up in the third and fourth quarters. Will they be up more or less than sales?

Reuben Mark

Yes. No, no, I mean – I assume that was a series of questions. The SBIs were basically flat so far and we shall see what happens, but they’re expected to be essentially flat for the rest of the year.

On the other hand, which they are flat we again are getting the benefit of the gross-to-net reduction which means that, on a percentage basis, the amount given the trade is somewhat lower. That was true in the second quarter and I think will be true going out, but we shall see.

At the same time, in response to an earlier question about one of the competitor’s launch, obviously by definition there is an aggressive plan that we have already planned on and budgeted and it is included in the estimates so that will reflect whatever happens on pricing, that certainly we will [anticipate.]

That being said, and that’s been built into the estimate, the EBIT chart in the U.S. – hang on one sec – is, we were up in the second quarter as you see. We expect to be up in the third quarter and expect to be up in the fourth quarter and up for the year, but as you would expect, what we’re doing is we’re making sure that the U.S. has sufficient money to meet any competitive challenges and that’s being funded elsewhere.

Alice Longley – Buckingham Research

That was really what I was trying to get at. So even net of maybe more couponing your pricing, you think, is going to be flattish and your EBIT is going to be up, but may be minimally in the second half? Is that fair?

Reuben Mark

It’ll be up modestly by design. We planned it that way and all our estimates and our comfort with the external estimates are built around a very stout and robust plan in the second half. Obviously we should get some real volume benefits out of that as well, but answer, yes. As you would expect, we tend to plan ahead and so there is a plan, an aggressive plan, in the U.S. company which has been funded within the estimate.

Alice Longley – Buckingham Research

Okay, my other question is on gross margin breakout. Don’t the comparisons get easier in the second half for raw material costs, so maybe that negative, like the negative 1.4 in the second quarter for materials might be reduced in the second half?

Reuben Mark

It might be, except that in the first half oil wasn’t $78. But let me give you that. The – hang on a sec. [Inaudible] was reading it upside down better than I’m reading it right side up.

Okay, so let me go through the raw materials for a moment. We had budgeted in the Colgate part of the business a 1.7% cost increase on [inaudible] packing materials and for the whole company it was a weighted average of about the same. The latest estimate is that we’re up 0.1%, 1.8% to 1.9%, for the estimate for the year and similarly for the overall company.

So that pushes our budget – we’re up somewhat and so one would expect that we’ll have the same sort of objective in terms of finding mechanisms or using the funds generated by the business to offset the costs. That’s all been factored in and our expectation is with the higher level of costs because, while oil has gone up some of our other costs have gone down and our overhead has gone down, we do expect to get positive gross profit in both the third and fourth quarter and to be budgeting it up next year.

Alice Longley – Buckingham Research

Is it fair to have gross margins up about 100 basis points in the second half, or do you think you can do more than that?

Reuben Mark

Well, we’ve set a goal, as you remember, Alice, between 75 and 125. We’ve been in there. That was an increase from our historic 50 to 100, and I think we’ll continue to be in there, hopefully at the upper end.

Alice Longley – Buckingham Research

Okay, thank you.

Reuben Mark

Thank you.

Operator

And next we’ll hear from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Hi. Good morning.

Reuben Mark

Hi, Bill.

Bill Schmitz - Deutsche Bank

Hey, is there any way you could break out volume and mix from the numbers? Because it looks like you’ve done an amazing job trading folks up to things like 360 Degree and Luminous and Total.

Reuben Mark

That is very tough to do, and all the financial wizards around the table are shaking their heads negatively. But the mix is good. There is – it’s good for the fact that we don’t have a bunch of the detergents that we used to have. At the same time it depends very much on how the mix comes [inaudible], and also by division and by country.

But the answer is yes, there is a part of the strategy that I said that Javier and Ian put together is very clearly to increase our efforts to trade up and that is indeed happening.

Bill Schmitz - Deutsche Bank

Great, thanks and then, just on the acquisition front, I think you prudently didn’t get the Pfizer business, obviously. That was a big multiple. But is there other stuff on the docket, now? Should we expect further acquisitions in the future?

Reuben Mark

There is nothing currently being looked at. As you know, there’s not many things out there. All of our growth historically, or most of it, has come organically and will continue to. The volume projections that Ian and Bina gave you assume no acquisitions.

Bill Schmitz - Deutsche Bank

Okay, great, and then the last thing. Maybe I’m splitting hairs here but the detergent divestiture. Is that benefit in the funding and growth piece the 130 basis points you talked about?

Reuben Mark

No. It’s not in there.

Bill Schmitz - Deutsche Bank

Where is it? When you kind of do that gross margin bridge?

Reuben Mark

That would be, that would be in the mix. That would not be in the actual funding growth savings. Funding growth savings are a list of dozens if not hundreds of specific projects around the world in each subsidiary and at corporate that are measured [and clocked] and measured against the projected rate of return. So it’s not an amorphous thing. It’s a very project-oriented, highly-detailed, highly-followed mechanism.

Bill Schmitz - Deutsche Bank

Okay, and what would that detergent piece be in terms of gross margin expansion, the divestiture?

Reuben Mark

In a low to mid single digits, i.e., somewhere between 0 and 50 basis points. Does that –

Bill Schmitz - Deutsche Bank

Okay, great. Thanks very much.

Operator

Next we will hear from Linda Bolton Weiser with Oppenheimer.

Linda Bolton Weiser - Oppenheimer

Thank you. Can I just ask you about capital spending? I think I had projected it to be up in dollars for the year, and yet it was down for the quarter and first half. Can you just talk about that, and is there any additional spending related to the restructuring?

Reuben Mark

Well, it is going to be up for the year. Last year our regular program was $335 million and $390, I’m rounding, with restructuring.

This year, we had told you that the regular program was going up from $335 to $360 and the total program, including restructuring is up to between $530 and $540.

So on both bases they are indeed up, Linda.

Linda Bolton Weiser - Oppenheimer

So, why is it down in the first half?

Reuben Mark

Timing.

Linda Bolton Weiser - Oppenheimer

Timing?

Reuben Mark

These are projects that [you’re late in] and they’ve, the whole formality and everything else. What was it down first half? It really is. I’m looking at the budget here and what the update is, which was updated in our mid year estimates and it’s, those numbers are the numbers that we expect. So in both cases they will be up.

Linda Bolton Weiser - Oppenheimer

Okay, and I just wanted to ask about the inventory. I mean, it looked pretty good but it was up 8% year over year on a 6% sales increase. Is there anything going on there with inventory?

Reuben Mark

Well, inventory on a worldwide basis, again, I’m looking – may be looking at different numbers. I’m just, just because I don’t look at it on a percentage increase basis; we look at on a day’s – I guess that would, so you would subtract your 6% from your 8% and get a 2%, yeah. Because on a day’s outstanding basis it was, in the similar quarter last year, it was 66 [inaudible] 66 or 67 days, and now it’s about 67, 69 days. So there’s a two or three day difference. Answer is yes, that is. [Certainly], I don’t think anything is going on there. The specific explanation for is that we are, as part of the restructuring, closing factories and relocating factories in many parts of the world and a bit of inventory has been built to ensure that, I mean, for example, we’re moving, as you know, to a new site, base site in the United States, moving some of that production out of the country and that’s the primary reason. Secondary reason is, and we tracked it down pretty carefully, it’s promotional timing and new products timing and so on. As you heard, there was some [inaudible] product plans in the second half in Europe and that’s where some of it is.

I guess, Linda, my conclusion is we, as you can imagine, we’re very sensitive to the balance sheet and always making sure that the ratios are where they should be. That is not a concerning thing to us.

Linda Bolton Weiser - Oppenheimer

Okay, and just –

Reuben Mark

And let me – and as you know, on a percentage of sales basis, the working capital of which, of course, inventory is a major component, went down as a percentage to sales worldwide from over 42 or 43, as I recall, to 39.

Linda Bolton Weiser - Oppenheimer

Okay. Is there any effect from Wal Mart or any other retailers just reducing and pushing back a little bit on your inventory? Is there any of that going on?

Reuben Mark

Pushing back? We don’t really push back too hard on Wal Mart, but you’ll be interested to know that I have an analysis here which shows the top ten U.S. accounts and the top three accounts were all up over – which includes Wal Mart, Target and Sam’s – were all up at least double-digit and the top ten were up 16%. So the business in those accounts in the United States, the top ten accounts, is terrific.

Linda Bolton Weiser - Oppenheimer

Great. Very good, and can I just ask one last thing? In the Asia/Africa, I think you had said that almost all of the countries were up in toothpaste market share except for five countries. Just, which ones were those that were not up?

Reuben Mark

I didn’t say that.

Bina Thompson

Nine to 14.

Reuben Mark

Pardon me?

Bina Thompson

In the press release it said nine of 14.

Reuben Mark

Nine of 14. Can we get back with you, Linda? I’m not sure because there might be, I mean, it might be Fiji, it might be New Zealand. I don’t know, and China is not. Is also not up, right?

Bina Thompson

Yep.

Reuben Mark

China’s down. Okay. As we said earlier, Linda.

Linda Bolton Weiser - Oppenheimer

Okay, very good. Thank you.

Reuben Mark

Thank you.

Operator

Next we’ll hear from Joe Altobello with CIBC World Markets.

Joe Altobello – CIBC World Markets

Thanks. Good morning.

Reuben Mark

What does your name mean again?

Joe Altobello – CIBC World Markets

Tall and beautiful.

Reuben Mark

Okay.

Joe Altobello – CIBC World Markets

From what I understand. Anyway, it terms of the restructuring, I just want to go back to that for one second. You know, obviously you guys alluded to this a little bit earlier but it seems like that’s running pretty well ahead of where you had originally anticipated it would, given that your guidance was the high end of your gross margin expansion range despite the fact that oil is, I guess $10 above where you had budgeted and I think for every $2 in oil is about $0.01 off of your EPS. So, I was curious if there’s anything beyond the gross-to-net savings that is really, you know, basically trending above where you had planned [inaudible].

Reuben Mark

[Inaudible] Let me refine what you said. What you say is true, but – and it’s the entire savings package that goes into gross-to-net that goes into gross profit that is higher than anticipated. But the, as we discussed a couple of times in previous conference calls, the restructuring program was slightly behind, now is catching up rapidly, because of those human programs that we were unable to do as planned and did it on a voluntary basis instead. But those, any shortfall there, which is timing shortfall because it just simply comes in a somewhat latter quarter, has been more than made up by funding the growth and the other savings programs. I’m looking for the financial people – I think that’s quite accurate.

So that we are very pleased that there’s enough flexibility within the organization to, because of a very real administrative concern, we couldn’t move as we wanted to, we now have moved on the human front and we have been able to offset that and keep gross profit going anyway. So that the good part about that is, is that even though there was a modest shortfall to date, as that shortfall is filled in and actually has some additional savings, that will help us going forward. We’re quite pleased with it, Joe.

So yes, you’re right from an overall point of view, but the pieces of it are slightly different.

Joe Altobello – CIBC World Markets

Okay, so to date, is the plan better or worse than you expected? Because it sounded like you were a little bit inconsistent there, that’s all.

Reuben Mark

Okay. The plan to date has somewhat more spending because we spent it all, some of the people think, in a lump and the savings are a little behind to begin catching up fourth quarter and next year.

Joe Altobello – CIBC World Markets

Gotcha. Okay, and then –

Reuben Mark

Mark means short and bald. Everybody is frowning at me because it’s such an old – okay, go on.

Joe Altobello – CIBC World Markets

Secondly, in terms of 07 guidance, obviously this is the time of year last year when you talked about 06 and I was curious, you know, what the broad outlines are in terms of your expectations for volumes and pricing next year and where does visibility stand today on next year versus where it did a year ago, for example?

Reuben Mark

Well, we did say in the press release, which is scrutinized pretty carefully as you can imagine by legal and SEC experts and everything else and we did say that we expect a double-digit EPS after all the restructuring and all the stuff that – for next year. And we really do think that.

We have reason to think that the volume momentum that we have been seeing will continue. Certainly we will be - while the budgets, of course, have not been made yet - spending at substantial levels. One would expect to see, and this is barring anything, any major thing unforeseen, a growth in gross profit in our target range, an increase in EPS in the double-digit range as we said, and EBIT up at least in the high single double-digit range, probably double-digit.

We haven’t made up the budgets yet but I’ve got to say that, as I said before, Joe, that in the many years that I’ve been doing this, the business is as robust or, in my opinion, better, more robust, than it’s ever been and I think that’s a great credit to the strategy that Javier and Ian put together and have basically been in the process of implementing and we’re getting, I think, at all of the things we’re doing, better and better and one of the values of Colgate, it sounds like motherhood, but its continuous improvement and I think we’re going to continue to improve even further.

Joe Altobello – CIBC World Markets

Okay, thanks.

Reuben Mark

Sorry for the speech, but I really believe that.

Operator

Next we’ll hear from Constance Maneaty with Prudential.

Constance Maneaty – Prudential Equity Group

Good morning. Could you talk a little bit on the buyback? Did you say you would get back to $1 billion for the full year, or $1 billion annual rate?

Reuben Mark

Rate of. Rate of.

Constance Maneaty – Prudential Equity Group

A rate of. And when have you, I just didn’t catch what you said about how much you bought in the second quarter?

Reuben Mark

Yeah, I have that. We bought in the second quarter – we bought in the second quarter 2 million shares, average price of $59.74 and the first quarter we bought 3.7 million shares, average price of $55.31.

Constance Maneaty – Prudential Equity Group

Okay. You also mentioned in the earlier remarks something about a program in Central America that’s being expanded into the Mercosur and Andean regions. What program is that?

Ian Cook

It’s the regionalization program that we first did in Central America where we took six countries and essentially operated them as one unit. So we centralized support functions and strengthened our on-the-ground capability of selling and distribution and merchandising and we are applying the same to the Southern Cone part of Latin America and also the Mercosur part of Latin America. So it’s the same structure, now taken into South America.

Constance Maneaty – Prudential Equity Group

Is this part of the restructuring program?

Reuben Mark

Yes, it is.

Constance Maneaty – Prudential Equity Group

Okay, how far along are you in this and what might the impact of it be?

Reuben Mark

Again, it’s included in those big numbers of long-term savings. Javier reported to me a couple weeks ago that it looks like we have some additional opportunities within the same expenditure to get more savings which is why the reference in Bina’s write up about some possibility of increasing those savings, the 2008 plus savings, and that has indeed happened. I don’t think we break it out specifically and also, obviously, that is not yet in the process of being implemented but will be in the next six to nine months.

Constance Maneaty – Prudential Equity Group

Okay. Thank you very much.

Operator

Next we’ll hear from John Faucher with J.P. Morgan.

John Faucher – J.P. Morgan

Yes. Good morning, everybody, or good afternoon now. A quick sort of philosophical question on the marketing side. We continue to see the advertising grow faster than sales and I was wondering, can you give us an idea? You seem to have caught up. Is most of this advertising growing faster than sales? Do you think that is, sort of, normalizing? Getting back to where you need to be? How much of it is taking sort of opportunistic advertising and how much of it would you say is related to competitive pressure, if that question makes sense.

Reuben Mark

It makes sense. Let me, my sense is that we’re going to see that the 200 or 300 or 400 basis points of spending above sales levels will decline. I think that will start right in the second half and probably next year. Given the fact that our business is so robust, we’ll be able to afford very substantial advertising without [inaudible] necessarily being driven further.

So yes, it was a – there should be a normalizing process going on. Also, John, I think that a lot of elements of what’s being done now around the world, and this part of the strategy that I mentioned several times, is how we get more efficiency out of [inaudible] market research. I mean, classic stuff but some very interesting kinds of things and so that I think you’ll see that, without raising [inaudible] quite as strongly we’ll see good volume.

John Faucher – J.P. Morgan

Okay. Thank you.

Reuben Mark

Thank you. What does your last name mean, again? We’re going through that.

John Faucher – J.P. Morgan

It means to not have any money.

Operator

And next we’ll hear from Lauren Lieberman with Lehman Brothers.

Ryan Bennett – Lehman Brothers

Hi. This is actually Ryan Bennett, sitting in for Lauren today. Hello, everyone.

Reuben Mark

Hi, Ryan.

Ryan Bennett – Lehman Brothers

Just a quick question or two. When we take a look at Hill’s margins, it kind of contracted a little bit this quarter versus last year and I’m just wondering if that was a rise in the commodity costs for that particular division?

Reuben Mark

No, actually there is an increase in commodity costs, overall costs, raw [pack] materials for Hill’s of about 1.7 to 1.8, which is about the same as we had in the rest of the company.

But there are two things. First of all, you do know that margin an operating profit in Hill’s are well above the normal company. That is to say, it’s in the high 60s as compared to the mid 50s. So I don’t know if we give that out, but it’s a very, very good number.

What specifically is going on is there has been a packaging change basically from paper to plastic which at least short term cost a tad more and they’re getting it back in volume, but they will probably drive the cost down and secondly, the Japanese packaging became more expensive because we changed that as well. It’s really not a meaningful thing. The gross profit last year was 60 – well, [inaudible] what I want to say is – anyway, the gross profit for the year this year is expected to be up at least 40 or 50 basis points versus last year.

Ryan Bennett – Lehman Brothers

Okay. You mentioned that oral care sales were up 12%. Could you tell us if the volumes were up?

Reuben Mark

Volumes were up 8.5%, I believe. Right. Pardon me? 9%. Somebody holding up nine fingers and that means 9%. 9.5%.

Oral care altogether, this is volume growth 9.5% for the second quarter of which, that’s toothbrushes were up slightly more and toothpaste was up about that, slightly less, and other oral, which is floss and rinse, was up. The year to date is about the same.

Ryan Bennett – Lehman Brothers

Okay, and then in terms of the A&P spend, I know it’s been discussed quite a bit already but just understand there was a little bit of a deceleration in terms of a percentage to sales as opposed to the first quarter and we were thinking maybe it would be backend loaded this year in the face of new product launches and Crest Pro Health, but just understand

But just to understand, should we be expecting further deceleration?

Reuben Mark

Well, as I said, I think that you'll see a growth in advertising in the second half, but going back to I guess it was John's question, that the 8S growth will not be as much. 8S may grow slightly but it will be more or less on with sales growth.

Ryan Bennett – Lehman Brothers

Okay. That's it for me. Thank you, everyone.

Operator

Our next question comes from Alec Patterson - RCM.

Alec Patterson - RCM

Good morning. Just a couple of quick non-operating items and then another one. The interest rate expense line seemed to tick up a bit, and it looks like you turned over a fair amount of debt. Have we locked in some higher rates here?

Ian Cook

We are holding our floating and fixed rates within our policy guidelines, so most of the increase is just really due to rates going up significantly during the quarter around the world.

Reuben Mark

Which is last year.

Ian Cook

Last year. About 95 basis points.

Reuben Mark

The interest costs were about $11 million I recall, higher than last year, essentially all of which was rate change. That actually was down slightly.

Alec Patterson - RCM

Okay. Then, you had a slew of options exercised in the quarter, and it seemed to be well above the trend line. Is there some sort of event that caused that? Then looking into the rest of the year, should we expect that to then create sort of an empty bucket effect where we shouldn't see nearly as much?

Reuben Mark

Well, I think the only event was that the stock is over $60. People have historically, over time, exercised and held stock, owning stock and are doing it now. That also provides us with a couple of hundred million dollars of extra cash on the year. My guess is that it depends obviously what happens with the stock price, which we don't determine but you guys do. I would expect to see continual option exercises.

Alec Patterson - RCM

But in other words, Reuben, there wasn't sort of like a window of opportunity which created this stock-price opportunity to exercise?

Reuben Mark

No, I mean, there's nothing different than --

Alec Patterson - RCM

-- the rest of the year?

Reuben Mark

The rest of the year. There's a window period after each -- for 15 key people there's a window period after each earnings report, but most of the options exercises were during the quarter, not by the 15 key people.

Alec Patterson - RCM

Okay. Then just lastly, with oil, as you pointed out, in the mid -70s, potentially sustaining there, what are you guys doing in the area of raw material substitution on oil? I mean, there's been talk about maybe vegetable oils or some other sources for plastics and glycerin compounds and things like that maybe sourced from non-petrochemical-based areas. I was wondering if there was anything going on there.

Reuben Mark

Basically, we have an ongoing program of raw material substitution in some of our products, primarily agricultural-based between various kinds of natural oils. As you know, our oils component is not terribly high and we are also covered through the end of the third quarter. Our expectation is that if prices remain where they are, i.e. in the mid to high 70s, is that there will have to be another round next year of price increases in various locations, but I think that's to be expected.

Alec Patterson - RCM

So in other words, the oil prices are at a level which would have an impact on your pricing policy, but it's not at a level which will open up the door to substitutions for oil?

Reuben Mark

Well, the impact on our situation is more in transportation costs. I mean, it's an interesting and little paid attention to kind of thing. It's our freight costs are more dependent upon oil than any other single element of our costs and that that is not within our control, but yes, there are switchings to rail transport and ship transport and so on, so there's substitution in that sense.

Alec Patterson - RCM

So it's more of an impact on freight and distribution than it is on packaging is what you are saying?

Reuben Mark

Yes.

Alec Patterson - RCM

Okay, and that flows to the shipping and handling line?

Reuben Mark

Yes. It ends up affecting obviously gross profit.

Alec Patterson - RCM

Okay.

Reuben Mark

People are shaking their heads -- SG&A, I'm sorry.

Alec Patterson - RCM

SG&A, yes. Okay, great. Thank you.

Operator

Our next question comes from Jason Gere - A.G. Edwards.

Jason Gere - A.G. Edwards & Sons

Good morning, actually now good afternoon. Just a quick question; you talked about the products that you have and the geographic expansion, obviously the oral care you are in over 200 markets. I mean, can you talk about what you're most excited looking to or three years down the road, which of your product maybe has a lot more expansion opportunities?

Reuben Mark

Well, we have a list, as you know, Jason, of product categories in which we are quite strong or very strong, depending on the category, and that methodically we're going around the world with them. For example, liquid soap, where we are the world market leader and leader in this country with 40-plus share with soft soap, the leader in Europe and elsewhere; we are progressively going around the world. Latin America is enjoying a considerable success with that now, and Asia.

Similarly, we have a number of other categories we are doing the same thing. There's a major series of launches on different kinds of men's and ladies' Speed Stick, even though it's not a stick in some places, and there's a whole list of things. That's basically how the business development people in the Company plan out the grids for each division and each subsidiary.

Jason Gere - A.G. Edwards & Sons

Okay. I mean, because oral care is, you know, 40% of your sales and obviously you guys are the global leader in this category. I know you've been asked questions about acquisitions and I think the docket right now looks kind of empty, or I think that's how you said it. But just looking at the portfolio, you've gone out in detergents. I mean, would you use the next couple of years really to expand that portfolio into more of the higher-growth categories? I guess I'm just trying to look at more geographic expansion along the same lines.

Reuben Mark

Well, again, the organic growth is pretty good. I mean, we are getting dollar growth in the 8% to 9% range, which is what this quarter was in volume and the 6% to 7% range; that's pretty good. I think the expectations without acquisitions are that we will be able to perhaps not at the precise level but have very, very robust top line growth and that when opportunities present themselves, either locally or more broadly, we always examine.

However, as you say, there's nothing on the burners right now, nor do we expect there to be, but at the same time, we do expect this very strong volume to continue. For example I gave, a few moments ago, the numbers saying that we grew around 12% in sales in oral care during the quarter; we also grew 8% if you take our home care business, which is brands like Softsoap and so on, including detergents; that grew about 8%, so that's not too shabby, either.

Jason Gere - A.G. Edwards & Sons

That's terrific.

Reuben Mark

Can we have, say, one more question, if that's okay? If there's not too long a queue?

Operator

Our final question will come from Ursula Moran - Bear Stearns.

Ursula Moran - Bear Stearns

I will keep this very quick. It's a follow-up on Hill's. I thought that you said at the beginning that consumption in supermarkets was outpacing other channels. I just wanted some detail on that, if that in fact is true.

Reuben Mark

No, I think the comment was specialty channels rather than supermarkets.

Ursula Moran - Bear Stearns

Okay, sorry for the misunderstanding and thanks.

Reuben Mark

Okay, great. All right, I guess that brings us to the close. Thanks so much. We are pleased with what's going on. I hope you are and we look forward to continuing the good results into the next year or two. Thanks so much.

Operator

That does conclude today's conference. We thank you for your participation. Have a great day.

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Source: Colgate-Palmolive Q2 2006 Earnings Conference Call Transcript (CL)
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