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Colgate-Palmolive Company (CL)

Q3 2006 Earnings Call

October 25, 2006 11:00 am ET

Executives

Bina Thompson - VP, IR

Ian Cook - President, COO

Reuben Mark - Chairman, CEO

Analysts

Amy Chasen - Goldman Sachs

Laura Lieberman - Lehman Brothers

Bill Pecoriello - Morgan Stanley

Wendy Nicholson - Citigroup

Nik Modi - UBS

Bill Chappell - Suntrust Robinson Humphrey

Christopher Ferrara - Merrill Lynch

John Faucher - JP Morgan

Linda Bolton Weiser - Oppenheimer

Sandy Beebee - HSBC

Bill Schmitz - Deutsche Bank

Joe Altobello - CIBC World Markets

Alice Longley - Buckingham Research

Alec Patterson - RCM

Connie Maneaty - Prudential

Justin Hott - Bear Stearns

Jason Gere - A.G. Edwards

Presentation

Operator

Good day and welcome to today's Colgate-Palmolive Company third quarter 2006 earnings conference call. Today's call is being recorded and is being simulcast live at www.colgate.com. Just as a reminder, there may be a slight delay before the question-and-answer 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

Thanks, Gwen. Good morning. Welcome to our third quarter earnings release conference call. With me this morning are Reuben Mark, Chairman and CEO; Ian Cook, President and COO; Javier Teruel, Vice Chairman; Steve Patrick, CFO; and Ed Filusch, Treasurer.

First, we will discuss our results for the third quarter this morning, excluding $58.5 million of after-tax charges related to the 2004 restructuring program and an $18.9 million non-cash after-tax charge, or approximately $0.04 per share in incremental stock compensation charges due to the adoption of SFAS 123 R. 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 including these items are included in the press release and posted on the Investor Relations page of our website at www.colgate.com. Comments about expectations will also exclude comparable charges. During the Q&A, we will answer any questions including or excluding these items, as you may wish.

We are obviously pleased with our results for the third quarter of 2006. Clearly, the momentum that we had seen in the first half of this year has continued. Evidence of that can be seen in our strong sales growth, as well as strong unit volume growth in all divisions, excellent gross profit growth of 140 basis points ahead of our targeted range, good media increases in every division, strong operating profit growth and continued double-digit earnings per share growth. And of course, this is also reflected in increasing market shares in many countries.

Our restructuring and business building program is proceeding well. We feel that our excellent gross margin performance, as well as continued containment of our worldwide overhead expenses, is clearly indicative of the increasing success of this program.

Savings from restructuring contributed a healthy 60 basis points to our gross margin increase, while our ongoing funding to growth programs delivered additional substantial savings as well. Both these initiatives more than offset the continued negative impact from our raw material cost increases.

Our restructuring plan remains on target with savings in this year expected to be in the $0.10 to $0.11 per share range, indicated earlier in the year. It is possible that they will come in slightly higher. We're confident our gross profit should increase at least within the target range of 75 to 125 basis points, both in the fourth quarter and for next year as well.

Our worldwide effort to be more efficient in our trade spending, Colgate business planning continues to roll out around the world. We finished our initial deep dive which has provided good learnings for us and are about to go live in six countries with a further rollout over the next two years. And importantly, we are beginning to see some of the benefits. Our worldwide pricing was up $0.015 with pricing up in almost every division.

Pricing was negative only in our North American division, which was entirely due to a very successful defense plan for our toothpaste business in light of a recent competitive launch and you'll hear how that defense plan has been progressing.

As noted in the press release, advertising increased worldwide, both absolutely and as a percent of sales. Support behind our core brands increased in every operating division and it's particularly gratifying that our operating profit increased 15% despite this business building spending and in the face of the most difficult year-over-year comparisons so far this year.

So let's look at the divisions. North America. Our business momentum in North America continues to be excellent. New products have contributed to growth across categories with record market shares in toothbrushes and fabric conditioners. Our overall consumer takeaway as measured by Nielsen reached a record high as well, up almost 8.7% over the year-ago quarter.

As noted in the press release, we achieved record market shares in the quarter in toothbrushes and fabric conditioners. As you know, our fabric conditioner business is sold mainly in Hispanic markets but our 33% market share in Hispanic markets translates to a full national share of over 11%.

Let's spend just a moment on our U.S. toothpaste business which has been receiving a great deal of press attention recently. Our U.S. toothpaste consumption, that is consumer takeaway, in the quarter was up a very strong 9.3%. Our all-outlet overall toothpaste share, as measured by Nielsen, is up year-over-year with total toothpaste achieving 15.2%. As for current consumption, we are seeing strong figures for Colgate toothpaste in the U.S. as October progresses.

As we noted in the press release, pricing was slightly off in the U.S., and this is basically all due to our defense plan related to the recent launch of Crest Pro Health. That defense plan does appear to be working.

So looking ahead, with a strong pipeline of new products, along with the existing momentum in the business, we are encouraged about the prospects for North America going forward. North American volume in the fourth quarter is expected to be up mid single-digits or better. Operating profit is expected to be again up modestly as we continue our business-building support. Our early budget thoughts for North America in 2007 are another good volume year with a more substantial increase in operating profit.

Turning to Europe/South Pacific. Volumes for the Europe/South Pacific region increased a solid 4% with growth coming from Western and Eastern Europe, and the South Pacific. Importantly, pricing was even with last year's best performance in 19 quarters.

Two new oral care products in the region which were launched in Western Europe in the middle of the year continue to gain share, Colgate Time Control and Colgate Sensitive Multiprotection toothpaste.

In Eastern Europe, the launch of Colgate Max Fresh has met with good success and in the South Pacific a very successful oral health month in August, a good example of how we continue to partner with the profession, helped to increase our market leading share to 67% on a year-to-date basis with the most recent four week share over 68%.

In the Personal Care category, the recently launched Palmolive Olive is now the best selling variant in our line of shower gels and liquid soaps and has contributed to share growth in Italy, the U.K., Scandinavia, Spain, Portugal and Greece. In the third quarter, we launched two new products, Palmolive Body Yogurt and Palmolive Splish Splash Splosh. Palmolive Body Yogurt is another entry in our shower gel and bath soap line positioned for consumers interested in health and nutrition benefits for their skin. Splish Splash Splosh is a children's liquid hand soap in fun, character-shaped bottles and an instant foam formula. So looking ahead, we expect volume in Europe to increase at third quarter levels in the fourth quarter and operating profit should be up double digits, up absolutely on a percent of sales.

Turning to Latin America. This division continues to post excellent results with volume increases in every one of our 18 subsidiaries in the region. In Mexico, our toothpaste share is at 82.3%, the highest market penetration in two years. Across the division, our strategy of providing consumers with more premium-priced products, such as Colgate Max Fresh and Colgate Total, is paying off, driving increased sales and profits.

We told you in previous quarters that we would be launching our Colgate 360-degree toothbrush across Latin America. This product has met with consistent success around the world and this region is no exception. We were able to increase toothpaste shares by 4.5 points in Mexico, over 3 points in Colombia, and thereby achieving region-wide market leadership in the most recent two-month period. And we're also gaining share in soaps, liquid soaps, deodorants and dishwashing liquids, a clear indication that as we get closer to the customer and the consumer, we can launch relevant new products with effective marketing and promotional support.

So looking ahead, most of the economies across Latin America are growing, and we're optimistic that our strong business results will continue through the remainder of this year and into next. Volume in the fourth quarter is expected to increase mid to high single-digits, with operating profit increasing double-digits, up absolutely and as a percent of sales.

Turning then to Greater Asia/Africa. Our business in Greater Asia/Africa continues to be very strong. In Russia, we reached another record toothpaste market share in the most recent period, and are up year-to-date over last year by 5.6 points. Our Russian toothbrush share is at a record as well, over 40%, up almost 4 points from a year ago on a year-to-date basis. And our recently launched Colgate 360 degree toothbrush had a share of almost 4% in its first reading. Share increases as well in Russia in liquid soap and deodorant helped that subsidiary continue to achieve strong double-digit growth in both sales and profits.

In India, our double-digit volume growth was aided by a good toothpaste share increase of almost a full point on a year-to-date basis. Our market share is now 48% of the total market. Our Indian toothbrush share is at a record, up almost 4 full points on a year-to-date basis. This was as a result of continuous expansion in all segments of the market from value to premium, accompanied by excellent on-the-ground execution of in-store and professional activities.

As mentioned in the press release, we saw modest sales growth in Greater China, maintaining our market leadership in toothpaste of over 30% of the market while our nearest competitor has lost almost 2 full share points on a year-to-date basis. A new super strong Colgate brand contributed to our strong results in the low end segment while the continued success of Max Fresh has boosted the higher-priced segment.

So we expect the good momentum in Greater Asia/Africa to continue with volume expected to be at least at third quarter levels in the fourth quarter. Fourth quarter operating profit should be flat or modestly up as compared to a very strong quarter in 2005.

Finally, Hill's. Hill's continues to post solid volume growth. Strong growth domestically was fueled by substantial increases in advertising and particularly media, and as a result, we saw strong consumption growth in the large format retailers.

Our international volume was strong as well, and we're delighted that we continue to make inroads in the higher growth markets such as Russia, Taiwan, Australia, and Brazil. In Russia, we've continued to expand our footprint and increase distribution, while consumers now have more disposable income to spend on their pets. So Hill's outlook for the fourth quarter is for good mid single-digit volume growth. Operating profit should be up high single-digits.

Now, before turning to Ian to sum up, I would like to mention to you reports that we have posted on our website regarding the American Jobs Creation Act. We prepared and posted this report at the suggestion of the Amalgamated Bank Longview Collective Investment Fund through a Colgate shareholder.

Briefly, Colgate repatriated approximately $780 million of incremental foreign earnings in 2005 under the Act. Colgate has used these funds to strengthen the growth of the Company's U.S. business. The additional cash made available from repatriated funds related to the Act has helped finance investments in the U.S. in advertising and marketing, research and development, capital investments, debt repayment and funding of pension plans, which have contributed to sales and market share growth and strengthened the Company's competitiveness and efficiency in the U.S.

In this way, the Company accomplished the purpose of the Act for the benefit of shareholders, consumers and employees, and a copy of the complete report can be found on our website at www.colgate.com on our Investor Relations web page under Financial Information, Report on American Jobs Creation Act.

So now Ian will make a few summary remarks.

Ian Cook

Thank you, Bina. We are extremely pleased with our results for the third quarter and are confident that this good and increasing momentum will continue as we exit 2006. These good results are largely the results of the strategies which we have in place to succeed in what we call winning on the ground. These strategies have us refocusing on the basics of our core business, and allow us to get better and better at the fundamentals.

Specifically, we are becoming even more expert in connecting to the consumer, the customer, and the profession; becoming ever more effective and efficient, lowering costs of everything we do; intensifying our focus on innovation worldwide, both in products and all our disciplines and processes; and finally, renewing our efforts to maximize the strength of our next generation of leaders.

As you have seen from today's results, this is all happening. Around the Colgate world, all employees are well aligned with our strategies, and as many of you who have visited a Colgate subsidiary can testify, this results in a positive culture with a real can-do attitude.

Our restructuring, business-building and Colgate business planning trade spending programs are well underway and delivering results. Our market shares and volume growth are healthy worldwide and providing additional leverage to the P&L. So we continue to expect double-digit EPS growth looking out into 2007 and beyond.

This concludes our prepared remarks. Let me turn the call back to Bina to take your questions.

Bina Thompson

Yes, Gwen. We're available for Q&A now. You can open up the call.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions)We'll go first to Amy Chasen with Goldman Sachs.

Amy Chasen - Goldman Sachs

First of all, Bina, you mentioned that U.S. consumer takeaway in toothpaste of 9.5%. Two questions on that. Is that all outlet or is that just Nielsen? Secondly, why such a disconnect between that and what you reported? Was there any inventory destocking in the quarter?

Reuben Mark

I'll answer it. It is all outlet and the takeaway is extraordinary and in some of the really big accounts it was even higher than that. A large part of this is reflected in market share. Actually, the inventory in that particular segment of the business came down a bit so that the consumption was higher than the ship-in, and I have an analysis here if you want to go through it in detail, but basically there were a couple points of difference between consumption and shipping in.

Amy Chasen - Goldman Sachs

Is that something that you think ultimately will reverse or is that more along the lines of Wal-Mart's plans to reduce inventory, it's sort of a permanent fixture?

Reuben Mark

We are looking good in the U.S. and worldwide, good fourth quarter toothpaste volume. We're running actually worldwide a bit ahead of par. But, so it's going to be tough to tease out, but I think you should see these good volume trends continue.

Amy Chasen - Goldman Sachs

Okay. But potentially staying a little bit less than takeaway?

Reuben Mark

By definition, that's got to end sometime, as you know, Amy. But probably it will be so in the fourth quarter but less so.

Amy Chasen - Goldman Sachs

Okay. Great. Can you also just run through more specifically the gross margin drivers like you normally do and specifically I'm interested in whether you saw any benefit in gross margin from the reduction in trade spending?

Reuben Mark

Okay. In the gross margin comparing to last year, as you know, it went up 140 basis points. About a year ago, Amy, you recall that we raised our target from 50 to 100, from 75 to 125. We're pleased that we did that and we expect to do better. The restructuring gave us 60 basis points. Pricing gave us 80 basis points. Material prices were down 170, and basically the savings were up eight-tenths to one-tenths, which when you add those all together, come out to the 1.4.

Amy Chasen - Goldman Sachs

I'm sorry, the savings you're referring to, what?

Reuben Mark

The combined savings, which is ex-structuring, which is funding the growth, a small indefinable, but a small amount of the business planning, which everybody's shaking their heads no, but I insist there's some in there, because it really hasn't started yet; but basically all the various savings programs that we have worldwide.

Amy Chasen - Goldman Sachs

I'm sorry, but Reuben, I apologize. Restructuring, I thought you said was 60 basis points.

Reuben Mark

That's correct.

Amy Chasen - Goldman Sachs

Then you went into pricing of 80, materials down 170, and then you said combined savings of 0.8. Does that include the 60?

Reuben Mark

I probably misspoke. That is the net of all of those figures. That's the net of all of those figures. Then there's a minor adjustment for mixed divestments, et cetera, and that's the difference between the 55.1 last year and the 56.5 with a 0.8 in pricing. I miscalled the thin edge savings from pricing. So it's 0.8, 0.8 minus 0.2. 0.8 in pricing, 0.8 plus in total of funding the growth, material prices and restructuring, and a negative 2 from miscellaneous divestments and so on and so forth. You got that now?

Amy Chasen - Goldman Sachs

No, I'm thoroughly confused but I think I'm just going to follow up with Bina afterwards because I'm afraid that it might take too long to get me unconfused.

Reuben Mark

Not, but it was my fault. Instead of the price line, I read the net savings line. So overall pricing contributed 80. We started with 55.1 last year, third quarter. We add 80 basis points from pricing. We add 60 basis points from restructuring, 190 basis points for funding the growth, negative 170 from material prices, which parenthetically give you 0.80, 80 basis points positive from net savings.

There's a minor negative of 0.2 from mix and divestments and so on and so forth, and that brings you to the 56.5 or the 140 basis points more. If I explained it that way from the beginning, it would have been less confusing. My apologies.

Amy Chasen - Goldman Sachs

Okay. Great. You said that everybody was shaking their head when they said that there was no benefit from the trade promotion but I remember in the last one or two quarters that there actually have been some benefits from that plan. So I guess I'm surprised to hear that if anything, those didn't accelerate and that, in fact, there was no benefit from that or very little benefit.

Reuben Mark

There is certainly benefit, and again, there's some contention. For example, as you know, promotion spending was up in the U.S. in the defense plan that was put into effect. I think there are certain parties who believe strongly that it would have been substantially more. Or put another way, there were savings that we were able to reinvest in the U.S. from the business planning.

It's very difficult to tease that out. The net result is, is our gross margin went up in the United States by a modest amount, as I recall 10 or 20 basis points, even with that heavier defensive spending.

In Latin America, my guess is in Mexico and elsewhere, that we did receive some benefit. If, later on, Amy, I'm sure somebody else will ask a question on business planning. I'll talk a little bit about it more fully then or I can do it now. But to give somebody else a shot, let's do that and if nobody asks, I'll come back to it.

Amy Chasen - Goldman Sachs

Fine, fair enough. Thank you.

Reuben Mark

Thanks, Amy.

Operator

We'll take our next question from Laura Lieberman with Lehman Brothers.

Laura Lieberman - Lehman Brothers

Thanks. Good morning. On the investment spending and marketing, advertising, media and so on, I'm guessing that it had to have been up very significantly to have this kind of upside to gross margin and then operating margins come out where they did. So can you maybe give some specificity around just how much spending was up in the quarter?

Reuben Mark

How much advertising spending?

Laura Lieberman - Lehman Brothers

Yes. Advertising, media, all that good stuff.

Reuben Mark

Okay. Well, on an overall basis, the advertising in the P&L, which is, of course, media and certain minor elements of promotion, was up 11.8%, which increases the percentage to sales by about 0.5 point. So yes, it was up more than sales. Spending was up in every division, probably more from an overall commercial investment point of view in the United States, than elsewhere.

However, as I say, the, interestingly that in the U.S., which if you net out the divestment, volume grew about 5%, with that extra spending and without the profit of the detergents, EBIT was still up, which we were quite pleased with.

Laura Lieberman - Lehman Brothers

So if I look outside of the U.S. knowing there was the defensive spending and so on, and think about other divisions where you really ramped up advertising spending maybe a bit more than you have in the past, which divisions are those? Because I'm looking at Latin America as an example, and thinking back to a couple quarters ago when everybody was beating you up for the margin thing down in Latin America, and you kept saying we're reinvesting, and if you look at the results today, it's pretty clear that that paid off over time. So what are the divisions I should be looking at that way today?

Reuben Mark

Well, I think you could, to a certain extent, look at the world, but taking a look at Latin America and I'll do the same thing for Asia, if you want. Gross margin in Latin America, between the first quarter of last year when it was about just under 51%, right now it's over 54%, and we would expect next year to be that or slightly higher. So that what we're able to do is spend additional money, but at the same time get price increases which are totally offsetting of local inflation and, therefore, the overall profitability increases.

Laura Lieberman - Lehman Brothers

Okay. It would be great if you can do the same thing on Asia.

Reuben Mark

I can do the same analysis in Asia/Africa, which basically says from a gross profit point of view, we went from the first quarter of last year and the first quarter was not unusually low, but 48.5 gross profit in Asia/Africa, to a third quarter actual of 51 -- am I supposed to give these out?

Bina Thompson

No.

Laura Lieberman - Lehman Brothers

I didn't think so.

Reuben Mark

Okay, I'm sorry. But anyway, I just looked up and there was a grim expression on Bina's face. Sorry, I shouldn't have been doing that, Lauren. But basically what's happening is that the margin, has temporarily leveled in the United States because of this defensive program, elsewhere is going up at a rate that allows us to increase spending and increase operating profitability.

Laura Lieberman - Lehman Brothers

Okay, great. Thank you.

Reuben Mark

Thanks, Laura.

Operator

We'll take our next question from Bill Pecoriello with Morgan Stanley.

Bill Pecoriello - Morgan Stanley

Good morning. First question was on China. Many of the CPG companies have been talking about a slowdown recently, especially in Shanghai. Are you seeing that, and is it concentrated around Shanghai? Is it anything to do with large format retail?

Reuben Mark

I can only tell you overall that our Greater China sales are up, as you saw, I think it was in the major markets, about 4% and volume is up about 1%. I can't tell you whether that was slower than it was the last couple of years to be sure, but I can't tell you whether it's concentrated. It's not isolated. It's not isolated.

Bill Pecoriello - Morgan Stanley

Okay, great. Next question on North America. Should we expect the same type level of defensive spending in Q4 as we saw in Q3, and any news on the oral care front, you refer in your release to the pipeline? Should we see anything into Q4 on the North America pipeline there?

Reuben Mark

Okay. In North America, I'll translate your question, Bill, into operating profit. We do expect spending to be strong in the fourth quarter in the U.S. We expect volume to be good and we expect operating profit to be up modestly.

So basically continuing as before, I guess you see the effects in your mark-to-market shares you see about what effect that is having versus us and versus competition. I'm sure you noticed, Bina said that our market shares in the United States, both on a year-to-date basis and in the third quarter, were actually up versus last year, not down, and that certainly is extremely encouraging.

Bill Pecoriello - Morgan Stanley

Okay. And just the last one, when you had mentioned the funding the growth, the 190 basis points was a nice acceleration over prior quarter. Was anything particular driving that?

Reuben Mark

Well, again, as I guess Ian said and Bina referred to it, the two gentlemen sitting with us in the meeting here, Ian and Javier, have for the last couple of years been first initiating and then implementing this strategy which really does focus on efficiency and effectiveness in everything we do, and we're seeing increasing momentum in the generation of savings and new alternatives.

We, I think we talked about the restructuring very quickly, but for example, in a review of restructuring just a little while ago, we see that the charge for the restructuring is going to be right in the middle of the range that looks like that we had originally given you guys, but the savings are going to be top it. So that seems to be repeated increasingly in the various programs that we have built up over the years and the new ones as well.

Bill Pecoriello - Morgan Stanley

Great, thank you.

Reuben Mark

Okay. Thanks.

Operator

We'll go next to Wendy Nicholson with Citigroup.

Wendy Nicholson - Citigroup

Hi, good morning. My question relates to the operating margin in the North American business over the long run. Because that's the only region, I think, that we've seen kind of steady margin compression over the last four years. And I wonder if either just the competitive environment has changed so much that that's going to be a permanently lower margin business, or whether your restructuring savings are going to kick in more next year?

And Bina, I wasn't clear from your guidance whether '07 was going to see more profit growth than sales growth or just more profit growth than '06? So in other words, are margins going up in '07 or not?

Reuben Mark

In what part of the world?

Wendy Nicholson - Citigroup

All in North America.

Reuben Mark

Okay, let's talk about it. Our operating profit, if you take out the restructuring and so on, last year was 20%, we're allowed to give this? Yes. And this year will be a little higher than that, at least 50 basis points, maybe more, as a percentage of sales.

Wendy Nicholson - Citigroup

I'm just looking at the U.S., the North American business.

Reuben Mark

I know. I want to put that, Wendy, in to context of how the U.S.., how North America does relative to the world. So forgive me. North America, last year, was 21.7 so that is somewhat higher. This year, yes, you're right, it is down but it's down, our expectations are that it will be 21.3, 21.4, 21.2, in that range, so that it's only modestly below what it was last year and this is in a situation where there's a heavy defensive plan, which one would guess will not be repeated next year.

We do expect next year for the operating profit in North America to be, no pun intended, north of where it is this year, absolutely and as a percentage of sales.

Wendy Nicholson - Citigroup

Okay. Just because I guess what I'm looking at, if I go back to '02, '03, which was your peak operating margin years, your U.S. business had an operating margin close to 300 basis points higher than it is now. Every other region has seen your margins go up. The U.S. has not. I'm just wondering, as I look out, this is more of a long-term question.

Just to clarify, the detergent divestiture, that was a lower operating margin business than your other businesses, I think, but despite that divestiture, your margins are still down. So I'm wondering over the next three to five years, do we get back to that 24% operating margin in the U.S. or are things just so competitive now that that that's a lower operating margin business permanently?

Reuben Mark

I think there are other factors at work. The operating profit on detergents was a full 600 to 800 I'm guessing, but at least 600 to 800 basis points below the overall division. But there was a couple things going on, especially in 2002, 2003 and that was the phenomenon of Simply White, which you may recall, seduced us a little and we ran after it with a margin, you tell me, of 80%.

So if you subtracted out that artificial bump, that I think you will see that operating profit percent, even with this heavy expenditure this year, has been headed north, if you take it out. At worst, flat. And we'll push those numbers for you, which was one of the reasons perhaps we chased that a bit because it was such high margin.

Wendy Nicholson - Citigroup

Fair enough. Okay, that's very helpful.

Reuben Mark

But we would expect, I can tell you that Ian is going to be disappointed and I'm going to be disappointed and Javier's going to be disappointed if we are not next year at least 100 basis points better in profitability in the U.S., North America, than this year.

Wendy Nicholson - Citigroup

Even if you have a big new product launch and you advertise like crazy?

Reuben Mark

Yes.

Wendy Nicholson - Citigroup

Okay. Sound good. Thanks.

Reuben Mark

Thanks, Wendy.

Operator

We'll go next to Nik Modi with UBS.

Nik Modi - UBS

Good morning, everyone. You seemed to have gained a lot of share, I'm just curious, where are you sourcing a lot of those share gains from, are these coming from the local smaller tertiary players or can you give us some color on that?

Reuben Mark

Well, Nik, let me tell you, it depends where you're asking that question. In the United States, we are up, take those toothpaste figures I gave to Wendy or Bill a few moments ago, that we're up but our main competition is also up and several of the other brands have fallen.

Nik Modi - UBS

Yes.

Reuben Mark

If you look at Mexico, Mexico's back up at an 82-plus share. That did come out of basically the only other brand down there, and they fell below double digits. I think it depends individually on the country, but our worldwide growth in oral care -- I don't think that was mentioned yet -- but it was I must say, quite impressive. This says that in the third quarter, oral care grew in sales 10%, and if you include GABA, 11.3, and that's extraordinary. For the full year or the nine months anyway, it's about the same, 10.8%.

So the source of it is, it depends on the competitive situation. There are 200 countries and it depends on the individual country. A considerable amount is coming from the fact that we've been able to invest considerably more with all these savings programs going on and market building activities, the professional activities that Bina and Ian mentioned, and dental recommendations are up and all the basic stuff that builds these businesses worldwide.

Nik Modi - UBS

Great. That's it for me. Thank you.

Reuben Mark

Thanks, Nik.

Operator

We'll go next to Bill Chappell with Suntrust Robinson Humphrey.

Bill Chappell - Suntrust Robinson Humphrey

Good morning. Quick follow-up on the U.S. toothpaste share. Can you just tell us how it trended during the quarter and also you might have broken this out, but what percentage was Tom's for the quarter?

Reuben Mark

Tom's is about a 1.5%, is it not? But the last market share that I recall, and we get them weekly, was 37.67.

Bill Chappell - Suntrust Robinson Humphrey

Okay, great.

Reuben Mark

Hang on a second. 37.9, somebody just handed me a piece of paper, which is pretty darn good.

Bill Chappell - Suntrust Robinson Humphrey

So it actually trended up during the quarter?

Reuben Mark

The last share was high, yes.

Bill Chappell - Suntrust Robinson Humphrey

Great. And then second, I think there was a comment by Ian maybe at a conference earlier in the quarter about the forecasted baked in maybe $74, $75 oil for next year. Is there any way to quantify what benefit you would have with oil in the 50s?

Reuben Mark

Yes. We had originally sent out our budget preparations on $75 oil, as we mentioned to you at the time. We obviously look at all the alternatives that would lead to a raw packaging material increase next year of between 2.5% and 3%. If it's at $65 a barrel, that brings us down to 1.4% and although we haven't run the numbers because if it's down at $55 or $60, it obviously would be lower as well. Every $2 a barrel represents $0.01 a share for us on a rough calculation.

Bill Chappell - Suntrust Robinson Humphrey

Okay, that's great. Thank you so much.

Reuben Mark

Okay. Thanks, Bill.

Operator

We'll go next to Christopher Ferrara with Merrill Lynch.

Christopher Ferrara - Merrill Lynch

Hi guys, just sort of longer term in nature. When I look at your gross margin walk that you guys do and you see restructuring giving you 60 basis points and probably getting better, funding the growth when you include the gross net improvement, looking very robust and growing and then you look at the one component, raw mats down 170, that probably doesn't stay there. So my question is, where do you find incremental spending programs to avoid the over-earning that you might have seen in the late 90s? Can you find $120 million of incremental investment projects or can you really see EPS get a lot more robust from here?

Reuben Mark

The question is, do we, instead of getting 13, 14, 15, 16% earnings, do we get 24% earnings? Probably not, simply because nothing ever goes precisely the way you plan it, and Number 2, there are not insatiable, but virtually insatiable ways to invest that money in the business that will generate a good return.

We're finding, as I believe a couple people observed already, that we are getting some wonderfully nice paybacks from these increase in back to basics. So are you saying are we going to suddenly grow 25%? Unlikely. That's not our history. We have a whole, quite sophisticated process of releasing funds and making sure the advertising is at the level it should be and so on. And it's not the kind of business that's designed to have windfalls and hopefully no pratfalls as well. So unlikely, but I got to say that the estimated range as I see it from all you guys for next year is from 9% to 15%, and since we've been talking about double-digit, I don't think it will be near the bottom of the range. I think we are expecting to see, we had said, I think in 2004, that 2005 would be a high single-digit. It turned out about 9.5%. We said this year would be double digit. It's turned out or going to turn out to be, we think, 13.5% or whatever that is, whatever the number is that you guys are estimating, and I think that trend will continue. That's about the same actually we did for many years previously.

Christopher Ferrara - Merrill Lynch

Great, that's really helpful. Just one other, I guess. Last quarter you guys had said your top ten accounts I guess were up about 16% and that clearly outpaces the rest of the business. Is there something longer term in nature? Are you seeing more of a channel shift to the big box retailers than are some of your competition, I guess on a global basis?

Reuben Mark

I couldn't tell you that, but I can tell you that that trend is continuing. The top ten accounts will of course was a U.S. calculation, Chris, but again, if you look at this quarter, the top ten accounts, their case volume was up by 10%. The rest of the country was up by a couple percent. So that's continuing.

My sense is that the market shares in some of the original big box stores whereby they lagged a little bit on our national market share, now are catching up.

Christopher Ferrara - Merrill Lynch

Please elaborate more.

Reuben Mark

No, after leaving the building last night, I ran into the gentleman who runs our Wal-Mart business in the United States and he waxed quite enthusiastically about what was going on. Interestingly, his take on the takeaway, on the consumption out of Wal-Mart, was even higher than the overall figures we had talked about before.

Christopher Ferrara - Merrill Lynch

Got it. Thanks a lot. I appreciate it.

Reuben Mark

Thanks, Chris.

Operator

We'll go next to John Faucher with JP Morgan.

John Faucher - JP Morgan

Yes, thank you very much. Following up on Laura's comment about Latin America and looking at the huge margin expansion there, but your commentary says that the advertising expense was up a ton as well. Can you maybe give us an idea about share of voice in Latin America? Because it seems like you probably have to be raising that pretty dramatically given the dollar spending levels. So it seems like that's going up, despite the fact that you're seeing this huge margin expansion.

Reuben Mark

I think you have to look at it by category. Because we are, if you take Mexico, we're the leaders in many categories. We have, as you previously noted, these enormous market share. In toothpaste, my recollection is the figure used was 77% or 78% for the entire division. So in most places, our share of voice is about where you would want it. When we spend money in toothpaste, it's devoted more now to getting the dental recommendations even higher, developing the market so that more people consume more toothpaste and so on. Because you don't want to go too high.

On the other hand, categories that are in development like body wash and like fabric softeners and so on, it can stand more money so it's a productive use of the money. But answer is yes, spending is up, and yet at the same time, operating profit, gross profit and operating profit is up as a percent.

John Faucher - JP Morgan

Okay, so you would say that on the toothpaste side at least, probably your media spending, your media share voice is probably static, let's say, but it's the dental professional piece that's really causing the greater acceleration there, is that a fair comment?

Reuben Mark

I couldn't; there are 34 countries or whatever there are in Latin America, so I would have difficulty generalizing, but where we are not wanting for media money, let me put it that way. If anything media is indeed up substantially in Latin America, media as a portion of advertising. Last year, media was up over 20%. This year it's going to be up throughout all of Latin America, essentially the same and will probably be up although somewhat less next year.

I guess what we are seeing is the overall business is benefiting so much, not just the toothpaste, but is benefiting so much from that, that it appears to be a very good payback.

John Faucher - JP Morgan

Okay. Thank you.

Reuben Mark

Good. Thanks, John.

Operator

We'll go next to Linda Bolton Weiser with Oppenheimer.

Linda Bolton Weiser - Oppenheimer

Thank you. I just wanted to ask you first about the inventory increase. I think it was up about 12% year-over-year. Is that just related to the situation in the channel with the inventory reductions there or is there something else going on?

Secondly, I wanted to ask you about innovation. I think when you announced the restructuring plan, you had specific points whereby you would be changing some of the innovation processes and improving upon that. We still haven't seen, in my view, any new products that really offer the consumer something that doesn't exist already on the market. So are you foreseeing there to be some new products of that type coming up in '07 or can you comment on that, please?

Reuben Mark

Okay, Linda. The fact that the trade inventory has been altered, has changed a bit, has gone down actually, really wouldn't affect our inventories. Our inventories are up not so much to the comments we made in the last several quarters, is that we are closing, as you know, a number of factories around the world in conjunction with our 2004 restructuring. We are building in eastern Europe and the United States and various places, greenfield sites.

As that transition takes place, we obviously are having extra inventory to make sure that we don't go out of stock. In this country, for example, as you know, this year, two of our big historic plants, one in Kansas City and one in Jeffersonville, Indiana, are being closed and the production is being transitioned elsewhere and so that incorporated a bit of inventory build. And it's largely, if not completely, attributable to that.

The other aspect is that I think, Linda, we've been able to build our organic growth up to, again the numbers say 9.5% sales growth and 8% volume growth on an apples-to-apples basis, that says that we are doing a pretty good job of launching new products and so on, I think. There is a full new product pipeline. I'm not sure that I know precisely what you mean about an innovative new product, we have right now Max Fresh on a worldwide basis, and in this country, is doing better than the famous competitive entry, and we are doing, I think, and these guys sitting in front of me are doing it, a very good job on new products.

I had looked for having done this for a considerable time, I try to find something that I would be upset about or concerned about in this performance. It was difficult to do, but I guess you could name that as that we have not launched a new product that is the Penicillin of the age.

Linda Bolton Weiser - Oppenheimer

Okay. Can I ask --

Reuben Mark

Linda, that was not a satisfactory answer. Would you explore that a little? Tell me what you'd like to know. We have a full new products program. We are gaining market share in the key categories, and I think Ian and Javier can talk a bit about the innovation programs.

Ian Cook

This is Ian. My comment would be a little bit to what Reuben was saying. We seek to bring innovations that fit with people's behavior and satisfy a need that they build into their everyday use because that's what builds market share over time. We have substantially increased our focus on investment on trying to increase our probability of finding those ideas, increasing the number of people that we have in our ten innovation centers around the word, establishing two new long-term innovation centers, one in oral care and one on Hill's Pet Nutrition here in New York; fostering external partnerships with innovation agencies and research institutes like the Forsythe Institute that we have announced before, and even establishing what we call a big hits process that sees Javier and I managing the development of the 10 or 12 major initiatives that we think have over $100 million in sales potential globally.

So we're doing all of that, but the distillation of it is in the steady building of our market shares as we bring products that fit consumer needs and fit into their behaviors, and that's what we're focused on. So it's the fundamentals and the fundamentals done better.

Linda Bolton Weiser - Oppenheimer

Okay. Well, does it have to do with how you view return on invested capital for groundbreaking innovation versus more incremental changes to the products?

Reuben Mark

No.

Linda Bolton Weiser - Oppenheimer

Okay.

Reuben Mark

I mean, it really doesn't. It really doesn't.

Linda Bolton Weiser - Oppenheimer

Okay.

Reuben Mark

Thanks.

Linda Bolton Weiser - Oppenheimer

Okay, thanks.

Operator

We'll go next to Sandy Beebee with HSBC.

Sandy Beebee - HSBC

Good morning, or I guess this is still good morning. Basically I had just one or two quick follow-ups. The performance in Latin America in 2006 has just been so incredible, and I want to get a sense of what your outlook is for the sustainability of a strong volume performance in 2007?

I guess what I'm thinking about this, you guys have such strong market shares that I can't imagine that the volume of oral care in Latin America is growing by 12%, for instance. So can we get a better sense of maybe which categories this performance is coming from?

I had one other question just on typically when you have a pretty big launch against you and you're mounting a pretty big defense, how long does it take before you feel pretty comfortable that the aggressive spending is enough to cement the shares that you have? So at what stage can we start to see in 2007 the North American profit growth start to accelerate?

Reuben Mark

I think you can expect, Sandy, that next year, although our budget's not complete yet, our budget is going to, I think, say in the United States that profitability next year will grow somewhat faster than sales, and they're budgeting a pretty good sales year. As I said a little earlier in response to a different question, that that should give us at least 100 basis points, maybe more, up to about at least 22% profitability, operating profitability in the U.S.

Going back to your first point. Actually, interestingly enough, the oral care growth in Latin America was indeed more than 12%. Toothpaste was up 17% and toothbrushes were up very substantially as well for the nine months, again, those figures are about the same. Oral care is up in sales in the Latin America substantially, and while we don't have a budget yet, I will bet you that we will be looking at a very substantial budget for next year.

Sandy Beebee - HSBC

Okay, great. Then just on a follow-up.

Reuben Mark

Excuse me. An interesting bit of analysis that was done which was looking at price and what that showed was that in Latin America and Asia, which are the, of course the developing parts of the world, that in this quarter, for example, there was inflation of 4%. Coincidently, or not so coincidentally, when you add it all up, our prices went up 4%. Essentially, the same thing happened, different numbers obviously, in Asia. So part of the sales growth has to do with price increases down there, but the volume underlying it is very strong as well.

And another aspect, if I could, Sandy, that especially in the developing areas of the word, Total, products like Total which are premium-priced and especially Total, are having a bigger part of the mix and much of our incremental advertising and so on is spent on that so that the margins are higher, the sales dollars per case are higher, and so on.

I mean, none of this is accidental, obviously. It's pretty much in line with Ian's response to Linda, is that we have a very big business in Colgate Total and our job is to make it even bigger because it's extremely profitable.

Sandy Beebee - HSBC

Great. That was really helpful. But just one follow-up on the North American question.

Reuben Mark

Sure.

Sandy Beebee - HSBC

What gives you comfort that as the promotional activity on your part starts to abate that you don't start to see the very good volume growth that you've had start to decelerate?

Reuben Mark

Well, simply because first of all, even with the promotional activity, Sandy, don't forget our gross profit is up slightly in the U.S. That's encouraging. And actually, our profitability this year, with all the spending, our operating profitability is only down as we talked a moment ago with Wendy, about 30 or 40 basis points.

So who knows? I have before me a graph that shows our market share in the United States and that has basically gone up over the period which is from the beginning of the year to now. We're seeing it go up. There is some promotional correlation but not a heck of a lot, and that you have to tell me how the threat, any threat that is there from competition is going to affect us.

So far we are quite pleased with the results of the plan and you have to talk to our competition to find out how pleased they are, but we are very pleased with how things are going.

Sandy Beebee - HSBC

Thank you very much.

Operator

We'll go next to Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Hi, good morning. I know Proctor talks about this a lot and I think you guys have concurred, what happened to this piece in oral care that everybody's talking about where they say like we have 70% of the share together and there's 30% out there that we can go after, that some of the sort of tertiary players have. So if you look at the percent of sales on promotion, it keeps going up. There's a 10 point delta between you and P&G.

And also the year-over-year price per volume which should be going up because of the mix keeps going down. So is there any sort of color on what's going on there?

Reuben Mark

Well, I didn't make that statement. I think perhaps someone else did.

Bill Schmitz - Deutsche Bank

I thought you've concurred though in the past.

Reuben Mark

Yes, but if somebody is trying to take away our breakfast, we are not going to permit that to happen. So we told you that we're not going to permit it to happen and we told you why we are not letting it happen and now it's not happened. So I think go out to the Midwest and talk to them and see what happens.

Bill Schmitz - Deutsche Bank

Okay. Then just a quick follow-up.

Reuben Mark

All that being said, Bill, and you know, there's no antitrust aspects to that, but let me say that again don't forget that despite all that, all the spending and everything else, the gross profit is up, absolutely and as a percentage of sales, and the EBIT, if you take out the detergent aspect, grew about 6% in the U.S. So my own sense is that's pretty good, and I think that we will see -- as you know, the new entry by Proctor and Gamble is priced substantially above Total.

Bill Schmitz - Deutsche Bank

Sure.

Reuben Mark

So that's a factor in the promotional aspect.

Bill Schmitz - Deutsche Bank

Got it. Then just to follow-up, it's halcyon days right now it seems for home care and personal care, and you guys don't spend a lot of time talking about those businesses which are pretty darn good in a lot of regions. Is that going to be a bigger focus going into 2007?

Reuben Mark

Well, the businesses are good and I think we're quite responsive to what you guys talk about and you've been talking about U.S. entry and the other businesses are growing quite well. The personal care business for the third quarter worldwide grew 7.5%. Home care business grew just under 10% for the nine months. Again, good mid single-digits at least in both and we do a lot of work on those behind the scenes and the results are quite good.

The one business, as you know, that was not a long-term healthy business for us was detergents, and while we're not totally out of them, we are largely out of them.

Bill Schmitz - Deutsche Bank

Okay, that's helpful. It just seems that oral care is 30% of sales but 90% of sentiment in conversation and I wonder why that is.

Reuben Mark

I think it's a good question. You ought to ask around.

Bill Schmitz - Deutsche Bank

Okay, I will. Thanks, Reuben.

Reuben Mark

Thanks.

Operator

We'll go next to Joe Altobello with CIBC World Markets.

Joe Altobello - CIBC World Markets

Thanks. First a quick question on Tom's of Maine, if I could. I think when you guys bought that business, you had talked about distribution opportunities.

Reuben Mark

I'm sorry, Joe, could you either lean into the phone or do some -- you're garbled a bit.

Joe Altobello - CIBC World Markets

Sure, can you hear me better?

Reuben Mark

A little bit, yes.

Joe Altobello - CIBC World Markets

On Tom's of Maine, the distribution opportunities, could you update us there on what you've seen so far?

Reuben Mark

Okay. In the results that just published on a worldwide basis, Tom's of Maine, while it's a very important strategy for us contributed I think 30 basis points to the overall 10% growth on an apples-to-apples basis. It's doing very well. The presentation we made to our board of directors when we wanted to enter into the partnership with Tom's of Maine, actually yesterday we had an opportunity to review those figures and we are doing better on both top and bottom line than was presented, and we're quite pleased with that. And there's been a significant interchange of ideas and people, and it's going very well.

Joe Altobello - CIBC World Markets

It's clearly a very small part of the business but it was leading to a broader question. Have you guys changed your thought process when it comes to acquisitions? I think in the past you've sort of done them when they become available; but is that going to be a more integral part of your growth going forward?

Reuben Mark

If the question is, Joe, are we going to chase acquisitions? The answer is no. This is yet another example of going back to, I guess it was Sandy's question, that we are able to generate very substantial organic growth with our own resources in our own categories that we know very well and we know how to make them profitable. So when something like a GABA or a Tom's of Maine or other products that can add to our worldwide presence in a category that we are familiar with and believe in and is part of our strategy, we will move on it.

But I think we are very content that we can generate very good volume, better than historical levels in our existing businesses. And Joe, with John, I was kidding back and forth, what the meaning of John's name was in French and your name means tall and handsome, right?

Joe Altobello - CIBC World Markets

Yes.

Reuben Mark

You should know that my nickname in Latin America is little, short and bald, so you should just know that.

Joe Altobello - CIBC World Markets

Good to know. Thanks a lot.

Reuben Mark

Okay.

Operator

We'll go next to Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research

Hi there. Could you break out your growth in Central and Eastern Europe in volume and profits?

Reuben Mark

Well, we don't normally do that. I can tell you that as an area, the results are strong. For example, taking Russia, which is now a substantial business of -- well, but she said east and central Europe -- oh, oh, okay. Good, I'm sorry.

Alice Longley - Buckingham Research

I didn't hear what Bina said, but I am interested in Russia.

Reuben Mark

Okay. We'll talk about Russia. Alice, Russia's doing well. It's up strong double-digit in both sales and earnings, and it's a couple hundred million business now and doing very well. The other countries there overall, volume is up essentially everywhere as I recall, and during quarter for what it's worth, we bought out minority partners in Poland and Romania. A small portion of those, 15% or thereabouts, was owned by local people and now we're sole owners.

Business is doing well but Western Europe did better than we expected. The only remaining soft spot is Germany, but France and the southern parts of Europe did better than we anticipated.

Alice Longley - Buckingham Research

If I took that whole European division, roughly what percentage of it would you classify as developing markets?

Reuben Mark

Well, as you know, Australia's in the European division, so it depends on your point of view about Australia. There are Australians in the company management, it was just a joke. My guess is I would say on a revenue basis, since Russia is no longer in there, that was a big chunk, it would be 20% or less as developing markets.

Alice Longley - Buckingham Research

Okay. So we take that and add Russia. And then on a different topic, the 5.5% volume growth for North America, does that include Tom's?

Reuben Mark

Say that again, Alice. I'm sorry.

Alice Longley - Buckingham Research

Did your 5.5% volume growth in North America include Tom's? I know it excludes divestitures, but does it include Tom's?

Reuben Mark

Yes.

Alice Longley - Buckingham Research

Could you tell us what volume would have been and profits would have been in North America without Tom's?

Reuben Mark

Profits? Did you say profits?

Alice Longley - Buckingham Research

Volume and profits. I could back out volume myself, I guess.

Reuben Mark

Yes, it represents about a 1.5% of the 1.5 points of the growth, profits, we don't give that. But one would guess that it's -- well, apparently one shouldn't guess.

Alice Longley - Buckingham Research

When you said consumer takeaway was up 9.3%, is that including Tom's?

Reuben Mark

No.

Alice Longley - Buckingham Research

No? Okay, great. Thanks.

Reuben Mark

Thanks, Alice.

Operator

We'll go next to Alec Patterson with RCM.

Alec Patterson - RCM

Yes, I'll try to be quick here. Options expense was $0.04 in third quarter. What does fourth quarter looking like?

Reuben Mark

Well, for the year, Alec, we have $0.09 or $0.10. It adds up to be $0.08 so far -- $0.02, $0.02 and $0.04, so that means it's $0.01 or $0.02 for the fourth quarter. There's some rounding involved but it will be $0.01 or $0.02. The reason why, we perhaps explained this, but is that our options are granted every year on the same date, which is the board meeting in the third quarter, so the charge will always be bigger in the third quarter. And next year, you could expect the same pattern, obviously.

Alec Patterson - RCM

Okay. And the tax rate on fourth quarter?

Reuben Mark

Again, we're thinking 31% to 32%. It will probably be in that range.

Alec Patterson - RCM

The 170 basis points raw material impact on gross margins actually was a bit of an accelerated rate of impact and I presume that was predominantly because of oil prices. Were there any other factors?

Reuben Mark

Not really. Again, oil directly affects only a third of our raw materials and partially a second third and not at all a third third. But nonetheless, when it was as high as it was, it did affect somewhat. Because there are different lag times and different filtering times for it to get through. The only thing is that obviously we're substantially happier at oil at $59 than we were at oil at $70-plus.

Alec Patterson - RCM

So put another way, Reuben, it wasn't anything else that started to run up on you that kept the raw material impact elevated? It's just mostly oil?

Reuben Mark

No. No. And if you look at it for the whole year, the fact that we had budgeted, as I recall, just under 2% raw material cost increases in 2006, and it's coming in at 0.7 and 0.8, that's really good. We've been able to find either prices have been reduced or in most cases we've been able to get them down one way or the other.

Alec Patterson - RCM

All right. Say the full year raw material increase in cost is, I'm sorry, what?

Reuben Mark

Yes, is that we had budgeted 1.7%, this is Hill's and Colgate, 1.7%. Our current estimate, taking into account everything, is the actual is going to be up 0.8.

Alec Patterson - RCM

Okay. And just make sure I got the right idea here, the 1.7%, this is not 170 basis points impact to gross margins, it's the actual raw materials cost increase?

Reuben Mark

Let me give you some history, Alec, is that in 2004 versus 2003, our total Company raw impact materials were up 3.7%. In 2005 versus 2004, same thing, we're up 3.8%. We had budgeted 1.7% up for 2006, and it looks like it's coming in at 0.8%. Now, incorporated in that is all the effect of our savings programs and options and all the various things that go into it, but that's encouraging.

Alec Patterson - RCM

I guess I want to make sure that this 1.7%, I don't want to confuse it with the 170 basis point number you talk about in the gross margin breakdown?

Reuben Mark

That's right. It's a factor in it, but it's apples and oranges. It's a different kind of calculation. It's not a percentage of sales. It's an absolute, we spend X number of billions of dollars on raw impact materials this year, next year we spend X billion plus 1.7%.

Alec Patterson - RCM

Lastly, Europe in the total number which I know now includes Australia and New Zealand, seems to be doing better. You suggested such earlier. Is that just something that is a good/better consumer backdrop in these markets? Do you expect this to continue, i.e., this sort of accelerated run rate on volumes might sustain or was there something unusual related to product launches in the quarter?

Reuben Mark

We do expect a reasonably good progress for those developed area to continue into the fourth quarter, and we haven't seen the budget next year but I think you'll see a good fourth quarter in Europe/South Pacific and they have indeed started off, Joe, pretty well.

Alec Patterson - RCM

Thanks, Alec. Why don't we have, say, two more questions, if there are two more?

Operator

We'll go next to Connie Maneaty with Prudential.

Connie Maneaty - Prudential

Hi. Just a question on the restructuring. Are restructuring savings now exceeding the costs of your program? And if not, when in 2007 might you hit that tipping point?

Reuben Mark

Well, you'll recall originally that it was going to be a cost of $550 million to $650 million, and savings from $250 million to $300 million. So it would just be a quirk of timing. I mean, the rate of return is terrific, but it's not over 100%.

Connie Maneaty - Prudential

Right.

Reuben Mark

So there would never be a point, I don't believe, at which the savings would exceed the charge. Correct? Yes. So Connie, so to rephrase your question, then, the savings are accelerating.

Let me be, if you want me to be; I don't know how specific I can be, I guess I can be fairly specific, that the charge in the third quarter, as you know, was $58 million, $59 million. We expect that the charge will go up somewhat off that level in the fourth quarter, and that will bring the charge for this year slightly below $300 million. The savings in this quarter were just under $20 million and will be $20 million or more in the fourth quarter. This year the total savings were about $70 million or will be about $70 million, and next year they will be north of $100 million.

Connie Maneaty - Prudential

Okay. But that's very helpful. And since you let this cat out of the bag where you sort of said earnings would be up 13% or 14%, are you talking about the fourth quarter or the full year '06, and is that, on the way you look at it, excluding options and restructuring?

Reuben Mark

Yes.

Connie Maneaty - Prudential

What timeframe are you looking at?

Reuben Mark

Well, my recollection of what I said was that the range of expectations for next year was between 9% and 15%, with a consensus of about 13%, as I recall, 12% or 13%. And that what I was saying was since we are committed to and think we will be hitting double-digit earnings which we have committed to, the part of the range that's below 10% is clearly not valid, which may push it up a slight amount.

Connie Maneaty - Prudential

Okay. So your comment was really related to 2007 instead of 2006?

Reuben Mark

There's a very narrow range in 2006. It's not more than $0.01 or $0.02 from the high to the low, as I recall. I have it here. But it is $0.02, I think, and we're comfortable with the range and the consensus.

Connie Maneaty - Prudential

Great. Thank you very much.

Reuben Mark

Thanks, appreciate it. Can I just take a moment, for whoever is still on the call to talk a bit about this business, Amy's first question which I had said I would come to later, and a few words just because it's really a very interesting thing, and as we've said that this can provide as much benefit to the Company as the restructuring.

The Colgate business planning is designed to be somewhat unique to us, if not totally unique to us, but improves the effectiveness and efficiency in trade spending. That efficiency or effectiveness will show up as higher volume growth, better average selling price, which will lead in turn to gross profit margin.

We, as you know, took our volume expectations up last year from 4 to 7 to 5 to 8 and we took our margin expectations up from 50 to 100, which has been traditionally 75 to 125 basis points. This is a program which will absolutely help us get there. Fortunately, it's essentially incremental to many other things that we're doing.

Now, let me tell you what's been going on. We have developed a global standard, this is during this year, for the Colgate business planning process. There are 100 people from 15 countries and six professional functions involved full-time on this worldwide and a heck of a lot more as an important part, but not full-time. We have developed a whole set of internal best practices and we've obviously looked around at external best practices.

We've partnered with SAP to develop a supporting system. We have a detailed change management program, as we do everything, to make it happen on a worldwide basis, on a timely basis. We have preparation workshops in direct trade and event planning and 60 countries have formally launched the program. We've done a return on investment training. I previously told you about the return on investment promotional tool kit that's worldwide available. We've trained, over 1,600 cross-functional individuals have been formally trained, so far more are targeted, educational workshops for all levels of global management, we have Colgate business planning intra, meaning only Colgate people can get on site, which is a place containing tools for learning communications.

Then I have a timetable here which lays out 2006, 2007, 2008, the worldwide expansion of the program. As those of you who follow Colgate for many years know, we tend to do things thoroughly. We might not have the next Penicillin for Linda, but nonetheless we do things like this very methodically and so far we have very great expectations.

You will see it, I think, in continued volume growth, continued availability of funds for advertising, and I think increased profitability. This I happened to come across. It was built by our head of the U.S. company, who reports to Javier on this project, and will keep pushing it, and I thought it was interesting to show you. Okay, next question, sorry.

Operator

We'll go next to Justin Hott - Bear Stearns.

Justin Hott - Bear Stearns

Thanks. You obviously prepared for the launch of Crest Pro Health in the U.S. How are you thinking about the possibility of a global launch of the product?

One other question on that, too. Can you talk a little bit about how the early results on these defensive measure compares to what you've seen historically?

Reuben Mark

Okay. You'll have to talk to Proctor and Gamble about what their plans are. So far, I don't know what their expectations are and you'll have to talk to them. What I do know is we obviously track very closely how that entry is doing week by week by week versus the comparable period of Total, when Total was launched here and in other countries.

When you look at the U.S. launch to compare the two, they're currently at about a third of where we were at the same time. All that being said, we would obviously meet them anywhere that they went. I'm not a great fan of the current administration, but I would repeat whatever it was that he said about when the original terrorist acts started, which is bring 'em on. But I won't say that.

I think we know how to counter competitive entries into the market. I'm sorry, with all the people that are rolling their eyes in the room here. We have done it a lot. It's no guarantee that we'll be successful, but this is our lifeblood. We have done historically very well. I think, in this particular case, our U.S. company has done a very good job and if necessary, we'll do it wherever it's needed.

There are no indications to my knowledge that we already outspend many times in most of the countries outside the United States, or in plenty of them, so that it wouldn't require as much of a scale-up anyplace else. Pardon the wisecracks, Justin.

Justin Hott - Bear Stearns

No, don't worry. Can I just throw in two real quick ones? Since we've been talking about oral care innovation, question on whether or not there are still some subcategories for oral care you'd still be interested in? In particular, I'm wondering about mouthwash now that Listerine has gone somewhere else. Just to wrap up, since this is the last conference call for '06, Reuben, maybe if you could give us any more comments on the 2007 transition? That would be great.

Reuben Mark

We have interest in the entire category and if other opportunities present themselves, we are certainly exploring them and other possibilities. We are already in Europe and other areas of the world a significant mouthwash participant, but clearly not to the extent of Listerine. I think that it has been published that my expectations and the board's expectations are for my retirement in the middle of next year as CEO, and that then I think the expectation is that for a year or two to be determined, I would continue as Chairman of the Board. That remains, has been on track for a number of years and remains on track.

Justin Hott - Bear Stearns

Okay, thank you.

Reuben Mark

Thank you. Appreciate it, Justin. Okay. Any more questions?

Operator

We do have more questions remaining. We'll go next to Jason Gere with A.G. Edwards.

Jason Gere - A.G. Edwards

Thank you. Just a question, I might have missed this earlier, when you were talking about going back to Latin America. Looking at the volume, I think the guidance for the fourth quarter was mid to high single-digits, and certainly had a strong third quarter, but when you look at the prior-year comparison, it's a little bit easier in the fourth quarter. I was wondering if there was anything I was missing why the guidance is a little bit more conservative?

Reuben Mark

I would hope we possibly could do better than that, but that's what the official estimates say and we wouldn't want to over-promise them. They are doing extremely well and who knows, but the outlook for Latin America is tough to imagine.

Jason Gere - A.G. Edwards

Okay. And then just the last question because I know this call has gone on for a long time.

Reuben Mark

But there's no reason for any degree of pessimism that I can see in Latin America. There's certainly nothing in those numbers. We are, if anything, those numbers which are the official numbers may be conceivably understated but as always, we don't want to commit to something that we can't make.

Jason Gere - A.G. Edwards

Okay, no, that's fair enough. Then next question, sticking to Latin America on the pricing. Last three quarters, the pricing has come down a little bit and maybe part of that is because of the year-over-year comparison. Can you just talk a little bit about the pricing environment in Latin America, also and maybe looking a little bit forward in terms of how the U.S. dollar strengthened versus the Latin American currencies over the last four or five months, and maybe what your outlook is in '07 on a pricing stance? Thank you.

Reuben Mark

Pricing, I think has been up in Latin America. You may have meant exchange, but pricing was up each quarter so far this year and was expected to be up between 4% and 5% for the year and next year would be expected to be up slightly again. That basically offsets the currency devaluation. On a currency basis, which is for Latin America as well, that has been, in this quarter, it was down about 1% and is expected to be about down about the same thing in the fourth quarter.

Jason Gere - A.G. Edwards

Yes, no, no. I meant just keeping the two topics separately, but on the pricing, I think the first quarter pricing was like 6.5, then it went to 5, then I think it was 4 this quarter. If you look at the year-over-year comparisons, obviously the comparisons got tougher, in the third quarter versus the first quarter, so I was just wondering your outlook, do you still see more of that 4% when you look out to '07? Or do you think that because the dollar is strengthening out there, that maybe pricing may end up starting to come down a little bit over time? That's kind of the direction of the question.

Reuben Mark

I wouldn't think so only because, Jason, we had in 2005, the year price increases were 3.9%. This year they're estimated to be about 4.5%. Next year, again, what you budget for price increases since some of it is opportunistic is not necessarily related, but I would guess will be about the same, the same ballpark.

Jason Gere - A.G. Edwards

Okay. Terrific. Thank you.

Reuben Mark

Okay, and just one further thing. For example, it ranged between 1.4% early last year to 5% in the third quarter, so it does bounce around quarter to quarter.

Jason Gere - A.G. Edwards

All right.

Reuben Mark

Thanks a lot.

Operator

We'll take our last question from Linda Bolton Weiser with Oppenheimer.

Linda Bolton Weiser - Oppenheimer

Just the other expense item that's in operating profit, it looked like it was $13 million, excluding charges. That's a little bit lower than it's been trending on a quarterly basis. Is there anything unusual in there affecting it?

Reuben Mark

Nothing unusual. Nothing at all.

Linda Bolton Weiser - Oppenheimer

So might that amount be roughly $13 million again in the fourth quarter of '06?

Reuben Mark

Order of magnitude, that's what we would expect.

Linda Bolton Weiser - Oppenheimer

Okay, thank you.

Reuben Mark

Okay, many thanks. Again, we're pleased to deal with you all and we are pleased with the results and I would expect that going forward we'll continue to see pretty darn good results. So thanks so much.

Operator

Thank you, everyone. That does conclude today's conference.

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Source: Colgate-Palmolive Q3 2006 Earnings Call Transcript
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