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Colgate-Palmolive Co. (NYSE:CL)

Q1 2014 Results Earnings Conference Call

April 25, 2014 11:00 AM ET

Executives

Bina Thompson - Senior Vice President, Investor Relations,

Ian Cook - Chairman, President and CEO

Dennis Hickey - Chief Financial Officer

Victoria Dolan - Corporate Controller

Elaine Paik - Treasurer

Analysts

Dara Mohsenian - Morgan Stanley

Steve Powers - UBS

Wendy Nicholson - Citi

Caroline Levy - CLSA

Chris Ferrara - Wells Fargo

John Faucher - J.P. Morgan

Olivia Tong - Bank of America Merril Lynch

Ali Dibadj - Bernstein

Bill Schmitz - Deutsche Bank

Bill Chappell - SunTrust

Michael Steib - Credit Suisse

Javier Escalante - Consumer Edge Research

Alec Patterson - AGI

Jason English - Goldman Sachs

Operator

Please standby. Good day, everyone. And welcome to today's Colgate-Palmolive Company First Quarter 2014 Earnings Conference Call. Today's call is being recorded and is being simulcast live at www.colgatepalmolive.com. Just as a reminder, there may be a slight delay before the question-and-answer session begins due to the web simulcast.

And at this time, for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead, ma’am.

Bina Thompson

Thank you, Nancy, and good morning. And welcome to our first quarter 2014 earnings conference call. With me this morning are Ian Cook, President, Chairman and CEO; Dennis Hickey, CFO; Victoria Dolan, Corporate Controller; and Elaine Paik, Treasurer.

This conference call will include forward-looking statements and these statements are made on the basis of our views and assumptions as of this time and are not guarantees of future performance.

Actual events or results may differ materially from these statements. So for information about certain factors that could cause such differences, investors should consult our most recent annual report on Form 10-K, filed with the Securities and Exchange Commission and available on our website, including the information set forth under the captions Risk Factors and Cautionary Statements on forward-looking statements.

And this conference call will also include a discussion of non-GAAP financial measures, which differ from our results compared in accordance with GAAP. We will discuss organic sales growth, which is net sales growth excluding foreign exchange, acquisitions and divestitures.

And we will also discuss gross profit, gross profit margin, SG&A as a percent of net sales, operating profit, operating profit margin, net income and earnings per share on a diluted basis, excluding the impact of certain items described in the press release.

And a full reconciliation with the corresponding GAAP measures is included in the press release and is posted in the For Investors section of our website at www.colgatepalmolive.com.

We are delighted with our results for the first quarter. As we exited 2013, we said we were excited about continuing our momentum and that has indeed happened. Our organic sales growth was at the high end of our target range of 5% to 7%, on top of strong growth of 6% in the prior year and with a good balance between volume and price. In fact, our pricing increase of 1.5% was against the highest level of pricing performance of any quarter last year and we expect this good performance to continue.

In light of precipitous declines of currencies versus the dollar during the quarter, we are pleased that our gross profit margin was even with last year’s level. While we had forecasted an improvement year-over-year, lack of growth was primarily due to the transaction costs associated with the aforementioned currency headwinds.

However, our Funding the Growth Program is as robust as it has ever been and as you know, an integral part of our company culture. So as we are able to take pricing as we go through the year to offset the sudden currency moves, we expect to see our gross margin improve each quarter.

We are particularly pleased about the savings being generated from our Global Growth and Efficiency Program. As we told you when we announced the program in the fourth quarter of 2012, we felt it would serve us well as we entered turbulent times and indeed it has.

We also said that the bulk of the savings would be reflected in overhead expenses and in the first quarter we delivered a 30 basis point reduction in overhead spending, which allowed us to increase our advertising as a percent of net sales to support what continues to be a very robust pipeline of innovation around the world. Our balance sheet is solid with strong cash generation, as well as excellent working capital control. So, a good start to the year, which bodes well for the remainder of 2014.

So let’s turn to the divisions starting with North America. We are particularly pleased with the solid organic sales growth in North America. This growth of 3.5% was against 5.5% in the year ago quarter, which was the strongest quarter for 2013.

A full array of new products across categories contributed to the results and as referenced in the press release, we grew our market shares in manual toothbrushes, mouthwash, dish liquids, liquid cleaners and fabric conditioners.

Colgate Optic White toothpaste is continuing to grow share from 2013 behind new products, strong marketing campaigns and more impactful claims. In February, we began to ship an uberpremium priced toothpaste line, expanding on our original Optic White whitening toothpaste.

Optic White Platinum Whiten & Protect, a new product in the line, adds stain prevention technology to the whitening power of the original Optic White formula to help maintain whiter teeth.

In addition, we relaunched Optic White Dual Action as Optic White Platinum White & Radiant, which contains extra polishing brighteners to add shine. An impactful media, print and shopper campaign to support the Optic White Platinum launch emphasizes whiter teeth in just one day by using the entire Optic White regimen including the Colgate Optic White Toothbrush + Built-In Whitening Pen.

Along with these new toothpastes we introduced Colgate Optic White mouthwash with Whiteseal technology. The new formula combines stain prevention with the whitening power of Colgate’s original Optic White Mouthwash, along with a significantly enhanced taste profile.

The launch of Colgate Optic White Toothbrush + Built-In Whitening Pen, which we told you about last quarter, has been very well received. In March, it achieved an 8.1 share and has been driving almost the entire manual toothbrush category growth year-to-date and as you would expect, we have continued strong commercial support planned for the remainder of the year.

Regimen approach has served us well with our Colgate Total franchise. Colgate Total mouthwash launched in May of last year behind record retail support has been driving overall category growth.

Trial and repeat levels are outpacing other competitive launches, contributing to an overall mouthwash share of over 6% on a year-to-date basis, up from the year ago period. And we have also reinvigorated the graphics on our Colgate Total toothpaste line and have increased our professional marketing efforts with dental office sampling and detailing aids, as well as advertising in dental and scientific journals.

As I said, our market share in dish liquid was up in the quarter. Driving this in part was the launch of Palmolive Dish + Sink which helps eliminate odors to freshen the air around the sink as you do dishes. A strong marketing campaign only began in April but we saw excellent results right after our launch.

As you know, our business in the Hispanic market is very strong and a number of years ago, we launched Suavitel Fabric Conditioner, the leading brand in Mexico, in the U.S. In first quarter this year we launched a new variant, Suavitel Fast Dry, with a breakthrough patent-pending formula that softens clothes and contains moisture wicking polymers that allow fabric to quickly shed water so that clothes dry 30% faster.

This has contributed to an all-time high national fabric conditioner share of 17.5% in March, with over 1% coming just from this new product. More new product activity is expected for the third quarter of this year which you will hear about soon.

Turning now to Europe/South Pacific. We are very pleased with the organic sales growth of 1.5% in this region, strongest growth in five quarters. Innovation played a key role in the results and from a macroeconomic standpoint, we are cautiously optimistic.

While Southern Europe still remains a challenge, it appears that Northern Europe is showing modest signs of recovery, now market shares increased in many Oral Care categories, up in toothpaste, battery toothbrushes and electric toothbrushes.

We are very pleased with the launch of Colgate Maximum Cavity Protection plus Sugar Acid Neutralizer, biggest innovation against cavities since the introduction of fluoride more than 50 years ago and we are off to a good start, after only six weeks in market in Denmark, we have achieved a 3.8 share, after two weeks in Norway a 3.2 share and after two weeks in Portugal a full point. In Australia, our latest four-week share is 5.4%. We will continue to rollout this product across the region.

We told you last quarter about the launch of Colgate Max White One Optic toothpaste. This quarter we have re-launched our Colgate Max White One mouthwash with an advanced stain prevention system to seal out the stains and seal in the natural whiteness and as you would expect, this is being supported by a full integrated marketing campaign in synergy with the toothpaste.

Also launching this quarter is Colgate Slim Soft Charcoal toothbrush, first developed in Asia, which has 17 times slimmer tip bristles with charcoal for better cleaning between the teeth and along the gum line.

An interesting opportunity for us in the personal care category is the entry into the kids’ body wash category, where we currently have no offering. This subcategory is growing around 8%, outpacing the overall category growth of 2%.

And bundle to be launched in the second quarter, uses playful graphics to appeal to children and a mild natural formula with a Pediatrician Approved claim to appeal to their parents.

A seasonal launch expected to provide additional distribution is Palmolive Sensacao do Brazil. This line of shower gels seizes on Europeans passion for football and the resulting interest in Brazilian culture heightened around this summers World Cup, combination of unique fragrances, natural ingredients and attractive graphics should deliver heightened impact in store.

Our Home Care business in Europe is strong, leading brands such as Ajax and Soupline. Under the Ajax brand we are launching Ajax all Uage Gel, one cleaner to clean your entire house. The formula has a concentrated efficacy and the bottle has a versatile press and dosage cap.

Turning to Latin America, momentum continues across the region with another quarter of double-digit organic growth, consistent flow of innovation allowed us to maintain our strong leading shares in tooth paste and toothbrushes.

And our mouthwash market share was up half a point year-to-date behind successful launches such as Plax Tea Fresh and Plax 2 in 1 market shares increased as well in fabric conditioner, hand dish and liquid cleaners.

In Brazil, our year-to-date toothpaste share remained over 71%. As you know, this was one of the lead countries for our launch of Colgate Maximum Cavity Protection with Neutrazucar toothpaste.

Shipments started in October of last year and our 2014 share year-to-date is 2.2% with the most recent lead at 3%. Our leading Brazilian toothbrush share reached a record 33.1% on a year-to-date basis, fueled by good performance in our premium end of the business.

Our Brazilian bar soap business achieved a record market leading share of 26.5% on a year-to-date basis, new products in both the Palmolive and Protex lines have helped achieve this result.

In Mexico, we saw a standout performance in our underarm protection business with our year-to-date share increasing 30 basis points to 19.6%, the highest in almost a decade. We told you about the launch of Men’s Speed Stick Stress Defense deodorant last quarter and we have more innovation slated for the second quarter.

In fact, new product activity is planned for the second quarter across categories throughout Latin America. Building on the insight that many consumers think about toothpaste as taking care of their teeth and not the rest of the mouth, we have launched a new integrated marketing campaign to support Colgate Total which explains its benefit of protecting all areas of the mouth to give 100% confidence.

In the whitening category, we are launching Colgate Luminous White Advanced toothpaste with the benefit of three shades whiter teeth with the same whitening ingredient dentists use. And, of course, we will continue the launch of Colgate Maximum Cavity Protection plus Sugar Acid Neutralizer toothpaste across the region.

In Personal Care, we are launching Protex Omega 3 bar soaps, liquid soaps and shower gels. Its formula, with moisturizers, helps keep your family’s skin healthier while eliminating 99.9% of bacteria. As well, we will be introducing Lady Speed Stick Aclarado Perfecto plus Vitamin E deodorant. Its formula, with vitamin E and mother of pearl extract, helps show your natural skin tone while blocking sweat.

And, in the Home Care category, we have taken an idea from a Palmolive launch in the U.S. market. In Latin America, using the Axion equity for hand dishwashing liquid, we launched Axion Good Bye Odors. Residues from dishes and sponges can cause bad odors and this new product eliminates the bacteria that may cause these odors.

Turning now to Asia. Organic sales growth in Asia continues to be robust, increasing 7.5% in the quarter. New products supported by an increase in advertising have driven the top line growth and market share gains. Across the region, we increased our market shares in manual toothbrushes, mouthwash and shampoo.

In India, our toothpaste market share is up 60 basis points to 53.8% on a year-to-date basis, even in the face of heightened competition. Our toothbrush shares there are up as well, up 140 basis points to 44.5% year-to-date. Strong communication and trade plans have helped drive these results.

In China, we remain the market leader in toothpaste by a wide margin at over 34% year-to-date. Our Chinese toothbrush shares increased as well, up 70 basis points to over 26% year-to-date.

Malaysia was our lead market in Asia for the launch of Colgate Maximum Cavity Protection plus Sugar Acid Neutralizer toothpaste. That new product, introduced in February of this year, as well as other premium bundles, helped lift our toothpaste share 60 basis points to 73.4% on a year-to-date basis.

In the second quarter, we will be rolling out into new markets some of the innovation that has already helped drive growth elsewhere in the region, Colgate Total Charcoal Deep Clean toothpaste, Colgate 360 Charcoal toothbrush and Colgate Slim Soft Dual Action toothbrush.

Africa/Eurasia. Organic sales growth continues to be robust in this region. As mentioned in the press release, some of the strength came from Russia even in the face of all the turmoil in that country. Our innovation in this region continues to drive growth as elsewhere.

In the toothpaste category, innovation in Russia has helped us to maintain our market leading share of over 32% year-to-date. Colgate Altai Herbs toothpaste was launched there recently. Altai is a region of Russia known for its herbal remedies. As a companion product, we also launched Colgate Altai Herbs mouthwash, which has driven our year-to-date mouthwash market share up almost 2 full points to 27.6%.

Our shower gel market share across this region is up over a point and a half year-to-date. In Russia and Turkey where we launched Palmolive Gourmet Spa, our year-to-date market shares are up 2 and 3.6 points, respectively, to 23.1% and 39.1%. You may recall this line of shower gels is highly experiential with chocolate, vanilla and strawberry fragrances.

In South Africa, Palmolive Thermal Spa Skin Renewal shower gel has contributed to a 3 point share increase to 27.1% on a year-to-date basis. Our innovation continues in the second quarter. In toothpaste, we will be launching Colgate Optic White Instant with optical brighteners for a whiter smile and instantly visible whiter teeth.

I mentioned earlier the launch of Colgate Altai Herbs toothpaste and mouthwash in Russia where the Altai region is well known for its herbal ingredients. Capitalizing on the success of this launch we will be launching Palmolive Altai Herbs bar soap, liquid hand soap and shower gel. This mini line of body cleansing is inspired by Altai authentic recipes and its formulas contain natural extracts of herbs to revive body and spirit.

Also in Russia, in the underarm category we will be launching Lady Speed Stick Altai Herbs Freshness, an antiperspirant in sprays, sticks and roll-ons that give your skin a superior feeling of natural purity and long-lasting freshness to keep you confident and attractive.

Hill’s. We are very pleased with the continued solid results in our Hill’s business, both domestically and overseas. An important driver here in the U.S., as you know, has been the launch of Hill’s Ideal Balance, and that continues to meet with success. Consumption at the super stores is strong and growing up 50% year to date over the prior year and has been helped by a wide array of innovation in the naturals category.

In February, we launched 11 new dry variants, nine wet and three treats in both dog and cat. For dogs, Ideal Balance Slim and Healthy and Ideal Balance Active, for cats, Ideal Balance Indoors, Ideal Balance Hairball and Ideal Balance Slim and Healthy. To support this innovation, this quarter we will continue with not only media but in-store support in the superstores with impactful pallet displays as well as coupons offered by brand ambassadors and nutritional consultants.

Our Hill’s Science Diet business is strong as well. An interesting new marketing campaign is being implemented as we speak at PetSmart, Paws for Health. Based on the shopper insight that pet parents know they don’t take their pets to the vet as often as they should but it is important to them to do what they can to ensure the pet has a longer healthier life. In-store consultants educate pet parents about the importance of preventative care for their pet and drive awareness and provide trial sizes of Hill’s Science Diet products in the LifeCare product grouping.

Our Hill’s Prescription Diet business is also doing well. We have told you about our Hill’s Prescription Diet Metabolic for weight control. That has been met with terrific acceptance. Our Hill’s Prescription Diet business is also doing well. We have told you about our Hill’s Prescription Diet Metabolic for weight control.

We will continue the momentum on the business with in-clinic activities, testimonial campaigns to drive vet endorsement and sampling and new client starter kits As you know, the science behind our weight control is uniquely innovative.

As mentioned above, we have leveraged it with our Ideal Balance line and have launched weight control products in the Science Diet line as well. And our robust new product program will continue throughout the year. We will be launching Hill’s Ideal Balance throughout Europe where the naturals category is just beginning.

Another exciting innovation we referenced in our press release is Hill’s Prescription Diet Stews, a breakthrough in wet food technology. The proprietary processing technique and natural ingredients produce a therapeutic food for dogs and cats with delicious appearance, and superior efficacy.

So in summary, we are very pleased with the way 2014 has started out. The momentum we saw as we exited 2013 has continued in all regions of the world. Our new product pipeline is full across all categories and our ongoing savings programs as well as our Global Growth and Efficiency Program are providing funds to support that robust innovation.

And as we implement our Global Growth and Efficiency Program, our people are becoming even more focused on winning on the ground each and every day. We look forward to sharing our progress with you as we go forward throughout the year.

And now, Nancy, I would like to turn the call over to you to start the Q&A session.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) We’ll go first to Dara Mohsenian with Morgan Stanley.

Dara Mohsenian - Morgan Stanley

Good morning.

Ian Cook

Hey, Dara.

Dara Mohsenian - Morgan Stanley

So, first, just a clarification, Bina mentioned you expected gross margin improvement each quarter this year. Are you still expecting 75 to 125 basis points for the full year and then, the real question is your toothpaste and toothbrush market share momentum looks like it’s slow this quarter. The toothpaste year-over-year share change was the worst we’ve seen recently. So, I was just hoping for more detail on what’s driving that performance, particularly which geographies and your view on if the share losses will continue going forward or if that’s more temporary factors in Q1?

Ian Cook

Okay, Dara. Let me -- before I get to the gross margin, let me put the gross margin position in sort of a broader context and underscore a couple of the points that Bina has already made. First, we are very pleased with the first quarter’s topline performance and we would reaffirm our target range of organic growth for the year at between 5% and 7%. We think that is going to be a very strong range, particularly as our categories remain range bound in Europe, growing at between 1% and 2% and similarly so in North America. And in our emerging markets, we see category growth rates slowing slightly from 6% to 8% range previously to now 5% to 7%.

And the things we think will continue to drive that organic rate of growth are in innovation and of course the advertising, which was up absolutely and as a percent of sales this quarter and we expect it to be up absolutely and as a percentage to sales for the year. Now very importantly, of course, Dara, as you correctly point out, is the gross margin and what our expectations are for gross margin during the year. We are still comfortable with the gross margin expansion of between 75 and 125 basis points.

But obviously given recent foreign exchange volatility, which we have to react to and our, we would say that our margin expansion will be at the lower end of that range more in a 70 to 100 basis points band. Our funding of the growth program remains strong and I think some were little bit questioning our ability to take pricing in Latin America in the fourth quarter. And I think you see in the first quarter what is the usual sequence in these events, which is there is a lead lag between the foreign exchange impact, particularly when it is, as precipitates as we saw in this first quarter and you will see pricing continue across the balance of the year.

And all of that led us to reiterate our EPS guidance of 4% to 5% on a dollar basis for this year or double digit currency neutral. And I’m reading some of the earlier notes this morning.

Let me just walk through that reiteration. I think most of you will remember that in our release at the end of January, when we announced our fourth quarter results, we expressed growth of EPS in line with the consensus of external analysts’ estimates at that time and then in February, February 18th to be price, we made our disclosure and announcement on Venezuela and indicated from that proposition that the Venezuela impact would be between $0.11 and $0.14 to EPS on the year with the first quarter at $0.03 to $0.04.

And then of course today, we disclosed that the first quarter was $0.03 and we expect the rate going forward to be at the same $0.03 per quarter, $0.12 on the year, consistent with the prior range and at that 4% to 5% a dollar and double-digit currency neutral rate.

To come to market share, a couple of comments on toothpaste. First of all, the shares that we talk about are dollar weighted, that’s the way we collect the data and aggregate it. And in Venezuela, we have an extremely elevated market share. We are still trying to find the three Venezuelans that don’t brush with our toothpaste. So given the currency moves in Venezuela, about a third of the share decline that you highlighted, the 1.3 points is simply mathematical to do without dollar weighting.

The other two geographies of an operating nature are the U.S. and Mexico as we have said before, and we said that our innovation and some adjustments to our marketing program to meet the competitive promotional activity we saw in both of those markets would be taken and they have been taken. And I think in the U.S., some of you had already commented on the more recent consumption and share data that the toothpaste progress for Colgate is good. We continue to see that in the near-term weekly data and we expect that to continue going forward. Same actions have been taken in Mexico and we expect to saying forward progress to strengthen our share in the 80 range. And in addition, in Mexico, we have just this month introduced the superior anti-cavity toothpaste, which has been highlighted has done very well, everywhere we had launched it.

Toothbrushes are affected by the same Venezuela calculation. Indeed, the modest 30 basis points decline you highlighted there is entirely driven by the Venezuela mathematical calculation. All of our divisions are either flat to up in market share with the exception of Africa, Eurasia where we are responding to in South Africa and Russia, specifically local market activity which we fully expect to be reversed over time. So no, we do not expect or plan for those share positions to continue as you laid them out.

Operator

(Operator Instructions) We’ll go next to Steve Powers with UBS.

Steve Powers - UBS

Hi, Ian. Thanks.

Ian Cook

Hi, Steve.

Steve Powers - UBS

I guess it was another solid quarter as you say of organic growth, 6.5%, overall and especially, 10%, in the emerging markets. How do you think about that relative to some of the outsized inflation that we are seeing in certain markets, especially in Latin America? If you agree with that characterization, especially in Argentina, Venezuela for example, how do you estimate that is adding to your organic growth, or conversely do you believe it’s really not that additive given the degree of volume and mix trade-offs in those same markets? Thanks.

Ian Cook

Yes. I would say if you look at the underpinning volume in Latin America for example, we view that as very healthy. When you talk about outsized inflation in Venezuela, remember that is true from a macro point of view, but bylaw in Venezuela, we are extremely restricted on availability to take pricing across most of our business. So I think we are very pleased with the progress. We view it to be real substantive and we see it continuing.

Operator

We’ll move to the next question with Wendy Nicholson with Citi.

Wendy Nicholson - Citi

Hi, good morning. I don’t want to be a dead horse on this pricing in Latin America thing, but that’s my question too. And the question is, historically when there has been currency question in Latin America, the pricing you could able to take on an annual basis I get that there is a [lie] (ph), but on an annual basis it’s pretty much close to a 1 offset. And my question is, if you look at the 6% pricing you got in the first quarter versus the 16% currency headwind, how much of that is Venezuela, how much of that is just timing? I mean, if we are going to see, let’s call it in mid-teems currency headwind in Latin America, can you take anywhere close to that pricing ex-Venezuela because I think everybody is just nervous that maybe the competitive dynamic is preventive you from taking as much pricing? If you can answer that, that would be great.

Ian Cook

Okay. Well, the answer is no, it’s not driven by competitors. As I said, when we posted just over 2% pricing in the fourth quarter, I think that question was raised that you now limited in terms of your ability to take pricing. And the answer is no, we are not. And I think the first quarter demonstrated that in quite a healthy way remembering we are not able in the first quarter given the move of some of the exchanges to take the pricing as quickly as the exchange takes the cost up for transaction reasons.

And in Venezuela, you frankly have to take Venezuela out of the equation because for the majority of that business, we are unable bylaw to take pricing. But we have demonstrated in the past and I think with Venezuela to one side, as far as the rest of Latin America is concerned, we have demonstrated an ability to price, to offset the foreign exchange. Indeed, in the more recent term, the Brazilian exchange is turn a we bit positive, but our plan would be as it has been in the past to be able to offset the transaction impact to foreign exchange with the pricing and funding the growth.

Operator

We’ll move to the next question from Caroline Levy with CLSA.

Caroline Levy - CLSA

Actually again I am sorry to get you around this issue. I'm looking at Asia and Eurasia where the currency impact substantially has been, certainly we were the expecting and I guess there was deterioration towards the end of the quarter. Do you expect to be able to get pricing in those markets as you move through the year?

Ian Cook

The answer is yes, the answer is yes. We will be able to take the pricing in those markets. One has to say exactly as you said Caroline that the precipitous make sure of the currency moves in some of those geographies. I come back to everyone’s estimation of the year, I'm not sure I saw anybody planning on the Crimea and the impact of Crimea on the Russian Ruble.

So some of those moves were really quite precipitous but we have the capability to take pricing. We had done so in some geographies already and we have plans and indeed are right now taking pricing in some of those markets to address the headwind of transaction. So we continue to have pricing capability. There is just a natural lead lag in terms of how quickly you can practically respond particularly when the foreign exchange has moved so quickly.

And I think in the world that we are in, our ability to plan for gross margin expansion are between 75 and 100 basis points a test to that capability.

Operator

We'll take the next question from Chris Ferrara with Wells Fargo.

Chris Ferrara - Wells Fargo

Hi, thanks.

Ian Cook

Hi Chris.

Chris Ferrara - Wells Fargo

Hi Ian. I guess I wanted to ask you about the slowdown you just cited in developing in emerging market and a point I guess is not a huge deal considering what we've seen elsewhere. But can you talk a little bit about, is that isolated to any specific geographies and what do you think is driving that specifically besides maybe the obvious sort of macro situation and maybe just that. And then also why do you think you can gain more share than you have been and sustain the top-line growth rate in the face of the slower market relative to say what your thought couple of quarters ago?

Ian Cook

Yes, I guess Chris. We're talking about fine differences here. We wanted to indicate that indeed we have seen a little bit of a slowdown. Other comments I have read from others suggest sharper than we have seen certainly in our businesses. I think it traces to the macros finally. In these cases, there is nothing untoward that we have seen so far in terms of consumer behavior. And I think our 5 to 7 range fits very nicely even with that slowdown. So I don't think it puts any more pressure on our desire, need or ability to build market share.

Operator

And we’ll move next to John Faucher with J.P. Morgan.

John Faucher - J.P. Morgan

Thank you. In looking at your sort of how reported top-line growth will track over the course of the year and given the seasonality of the business, it's a little tough given the first quarter performance to get to the low end of the range from a gross margin standpoint. So can you walk us through sort of sequentially how we should think about just progressing through the year and sort of what the big changes are from Q1 to the balance of the year. Are there just efficacy from the additional pricing, what have you? Thanks.

Ian Cook

Okay. I can’t resist John. I thought you were one that was questioning whether we could deliver the gross margin expansion. Well, I think -- let me say so you can come back to me at the end. Let me start with the traditional roll forward just that we have that as a starting point and then I will try and answer your question from there. Obviously, it's flat, so the star point was the same 58.6 as it is this year.

We picked up half a point from pricing. We picked up 1.4 from our funding the growth and a little bit of restructuring, material prices was a headwind of 2, a large part of that as we have already discussed was transaction. There was a modest 10 bps from other leading us to the 58.6.

So I would say the three main buckets of progress for the year quite obviously are pricing where we expect to get more pricing and therefore more contribution to the gross profit, funding the growth along with a little bit from restructuring and you know that our funding the growth tends to build over the year. And that would be the second major aspect of building our gross margin. And by talking about 75 to 100, all I was trying to do was to frame coming off the high-end of the range, we are not suggesting a 75 increase in gross margin.

Operator

We'll take the next question from Olivia Tong with Bank of America Merril Lynch.

Olivia Tong - Bank of America Merril Lynch

Thank you, I appreciate it. One quick question on housekeeping. Is it fair to assume the net interest expense will be similar to Q1, the Q1 rate going forward or whether any anomalies caught this quarter? And then on Hill's, I noticed that the margin was up for the first time in the last five quarters. And in the press release, you did state a number of puts and takes but one of them was lower ad spends. So was is just a function of comping against how you spend in a year ago as she prepped for the new line or if there shift in timing of spending or do you think there are just not a need to spend as much behind pet as you did before. And if that’s the case, the change -- does the changing of hands for IMs, change your thought process in any way on that? Thank you.

Ian Cook

Changing, of course, I guess who I am. But on your housekeeping question on net interest, the net interest expense we think we'll go up on the year. We'll probably be in the 35 to 40 range for the year largely due to changes in our capital structure as we have taken on some longer term debt at very attractive rates, planning ahead to world where rates are likely to increase. So yes but plan fully as part of readjusting our capital structure.

Hill's is timing. Bina talked about some of the innovation on the Hill's business and the spending, we'll readjust. First quarter was strong last year because the timing of the innovation was earlier. So now we're very committed to our Hill's innovation flow which is very strong and frankly doing very well in market.

Operator

We'll move next to Ali Dibadj with Bernstein.

Ali Dibadj - Bernstein

Hi guys. So just a quick clarification and then a core question. The clarification is want to give you the opportunity of selling Venezuela to the side. And just if you could tell us what volume and organic growth would have been in Latin America ex-Venezuela? And then the other question, so you say the EPS growth of 4% to 5%. In fact, I think the same has since February at least for the year. Is it still above consensus? And I know you guys and the background of your team does a really good job of taking of our models and looking at it. And I'm trying to understand if you guys have a perspective on where you think consensus is too high, is it just currencies or are there other things that you would like to be pointed to?

Ian Cook

Yeah, well thanks for the opportunity to separate LatAm growth from Venezuela. But I shall politely decline that. We don't break it out in that way. I would say that we think, if you think about where Venezuela was three, four years ago as you well know it is substantially smaller portion of our corporation than it was then. And the Latin American growth, we think is very, very strong overall.

In terms of the second point Ali. Yes, you're right the 4% to 5% as we try to reemphasize at the beginning of the call has been where we have been. And there is nothing in that reiteration of guidance for the year that reflects anything other than foreign exchange and I would clarify and say that is the foreign exchange that analyst reacted to in January of the year with the Venezuela change which by the way I think makes our Venezuelan reporting more conservative than some who has stayed at the 630 rate.

And the -- it remains double-digits in terms of the EPS growth in local currency terms and in fact for the year looking forward after Venezuela, we see the currency impact for the year at around 5% which was pretty much where we had it before hand. So there is no incremental currency it nearly reflects actions taken through February of this year. So it is entirely currency related. There is nothing else.

Operator

The next question comes from Bill Schmitz with Deutsche Bank.

Bill Schmitz - Deutsche Bank

Hey, good morning.

Ian Cook

Hey, how are you?

Bill Schmitz - Deutsche Bank

I'm good. So the cash balance is massive, right. It's also like two equity done historically. Are you guys -- what’s the plan about the cash because certainly you don't need your working capitals getting better. There is super cash generated, I know you talked about, rates going up and locking some fixed rate debt. But is there a use for all that cash.

And then second part of the question is well that in the same part of same question but the second question, is there a plan or way to get Venezuela profitable again. I know I lost money this quarter but is there anything you could do either structurally or strategically to get that turn positive again. Thanks.

Ian Cook

Yes. The cash balance entirely timing, entirely timing. It’s related to when we took the debt. It will be washed out as we go through the year debt and cash will get back in balance. Net debt will end up in the same place. So nothing strategic, nearly timing.

With Venezuela, it is as you say modestly, it was very modest, negative for Venezuela in the first quarter. And obviously, we are in very constructive dialog with the government of this time about the need for relaxation of the pricing laws and for some pricing in order to make business in Venezuela profitable again. And we are hopeful that those discussions will lead to a productive outcome and that outcome of course, which has been our usual model and the rest of Latin America allows one to offset the gross margin pressure and see that translate through on the bottom line.

So those are the issues. You know, of course, that the first quarter was hit particularly by the historical one-time hit and that will come out across the balance of the year anyway. So we’ll be in a better position than we were in the first quarter but the step change would be driven by pricing.

Operator

The next question comes from Bill Chappell with SunTrust.

Bill Chappell - SunTrust

Good morning, thanks.

Ian Cook

Hey.

Bill Chappell - SunTrust

How are you? The question on or the comment on the sugar. I always get the name wrong but the cavity protection toothpaste that you are rolling out. The comment that you’re moving more throughout Europe and maybe the Australia, are there plan to meet from the near term to go to U.K., Germany, France, some of the bigger countries, it may in next quarter to. And is it contributing to the overall European growth at this point or is it still really too small?

Ian Cook

To answer the last part of the -- actually you don’t have to get the name right Bill, you just have to buy it.

Bill Chappell - SunTrust

I get you.

Ian Cook

Yeah.

Bill Chappell - SunTrust

That sort of trouble.

Ian Cook

In terms o Europe it is too early. We can say that in countries like Brazil, Turkey, Australia as Bina said that it is added to share nicely. We are expanding in Mexico as we’ve said. You will see continued expansion across Europe and some of the other emerging markets, you could expect to cross the balance of the year. So we’ll be moving quite broadly with this product, the reaction seems so far quite positive.

Operator

We’ll take the next question from Michael Steib with Credit Suisse.

Michael Steib - Credit Suisse

Good morning. My question relates to raw material cost. I noticed that in most regions there were essentially a headwind to margins in the quarter, except in Europe where there were tailwind. I wonder is that all due to currencies or there other differences for example in the portfolio compensation as well. And then related to that, do you expect a similar headwind from raw material cost for the remainder of the year?

Ian Cook

Well, let me react to both. I would say what we saw in the first quarter was indeed largely driven by foreign exchange, which is why we saw such a positive progress in Europe. I think training raw materials overall, we’re expecting for the year, raw and packing materials to increase by between 1% and 2% for the year. That’s raw and packing for the year. And as I have mentioned earlier, our ability to deliver the gross margin expansion that we are planning is going to be driven by pricing, which we have already to a certain extent and we’ll deliver going forward t5o offset that foreign exchange impact on raw and packing material.

Operator

We’ll look at next question. It comes from Javier Escalante with Consumer Edge Research.

Javier Escalante - Consumer Edge Research

Hello. Good morning, everyone. I had a couple of questions, one on the restructuring. It seems like it was a big chunk this first quarter about 40% of what you plan for the year. Does it mean that you are taking it faster pace and originally plan in order to navigate this issue of a currency. And the other question has to do with Hill’s. Certainly, very good performance, to what extent that has to do with the changes in planogram that (indiscernible) did or shall we continue seeing that at least for another quarter where we’re going to see a strong growth from Hill’s. Thank you.

Ian Cook

Thanks, Javier. No, there’s nothing particular about restructuring in terms of -- it's just timing, our full year, full program ranges remain the same, both at the cost and the benefit, and we don’t manhandle the restructuring to try and address foreign exchange issues. I think the point we made when we announced it was it would simply give us some agility and flexibility knowing that given the volatility of foreign exchanges, and therefore cost quarters might be a little bit lumpy.

Indeed, I’m here which you are correct have here in the US. We had some quite meaningful planograms resets, which have been positive, which underpin the increase that Bina talked about a little bit earlier. And we continue to feel good about seeing our Hill’s business go forward mid -single digits organic as we have spoken before. And the reason selling the planogram reset is good, but we’ll get to the planogram reset is the quality of the innovation and trial generation that you can create for that innovation. And as we have said before, we think we have a very rich innovation pipeline now, which is moving to the market.

Operator

And we’ll move to Alec Patterson with AGI.

Alec Patterson - AGI

Good morning.

Ian Cook

Hey, Alec.

Alec Patterson - AGI

Hi. So just quickly on the 75 and 100 basis points. I think I am crystallizing this into, it’s predominantly moved to lower end because of currency. In other words, the other component, pricing and you have been planning all along. Commodity costs that are basically dollar commodity base were on pack. And then anything from funding the growth productivity haven’t changed.

Ian Cook

Correct.

Operator

And we’ll take our final question from Jason English with Goldman Sachs.

Jason English - Goldman Sachs

Hey, good morning, folks.

Ian Cook

Hey, Jason.

Jason English - Goldman Sachs

Thank you for allowing the question. Two quick ones. First, a quick housekeeping question. Can you quantify how much the advanced customer shipments in Japan contribute to that growth this quarter? And then other question is back here to home North America, we’ve been seen solid growth both on the measure data as well as clearly into reporter results today. Well, we sliced and diced the measure data around 70% of gross been coming for mouthwash. Market share up year-on -year but running stagnant to kind of flat line sequentially at 6. Two months from now you’ll start rolling over that 7% share you got on the initial search, trial building. So how should we think about growth on a go forward? What are the initiatives that can maybe get mouthwash and other like higher or that can kick some of the categories into higher growth notes to drive more contribution for them?

Ian Cook

Thanks, Jason. On mouthwash as you know, I talked about the toothpaste change in momentum. Obviously the toothbrush business share up over 41 is terrific. That of courses is the second largest category in oral care. Mouthwash, we are pleased where we are. Two things will continue to grow our business in mouthwash. Number one, innovation and the variants that come with that innovation which we have seen, we will continue to see. The second is interesting in the U.S. is always packaging sizes in terms of retail environments. And consumer purchasing habits, you will see more of that as the year unfolds.

And most importantly, trial-generating devices, we know the repeat rate of the businesses is high. We know that it takes over two years to build your trial curve and we will continue to be putting money behind that. So we have a great product. We can add to the product and we’ll be focusing on building trial. In terms of Japan -- no, we don’t breakout at the country level.

Suffice to say on Japan, I think it was Ali on the last call was questioning the trajectory of that business. We’ve had some folk in Japan only a couple of weeks ago. We’re going through a thorough review of that business and there is confidence I would express that notwithstanding the pull forward, that we have our Japanese business now for Hills on a solid footing and a positive underlying trajectory and we will see that in the coming quarters.

Operator

And that does conclude today’s question-and-answer session. I’d like to turn the conference back to the speakers for any additional or closing remarks.

Ian Cook

Thanks, Nancy. Well, thanks all of you for your interest in the company and your questions. And thank you to the Colgate world for delivering the results that allow the questions.

Operator

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

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