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Colgate-Palmolive (NYSE:CL)

Q3 2012 Earnings Call

October 25, 2012 11:00 am ET

Executives

Bina H. Thompson - Former Vice President of Investor Relations

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

Analysts

William Schmitz - Deutsche Bank AG, Research Division

Nik Modi - UBS Investment Bank, Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Sarah Miller

Wendy Nicholson - Citigroup Inc, Research Division

Caroline S. Levy - Credit Agricole Securities (NYSE:USA) Inc., Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

Javier Escalante - Consumer Edge Research, LLC

Jason Gere - RBC Capital Markets, LLC, Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Constance Marie Maneaty - BMO Capital Markets U.S.

Joe Lachky - Wells Fargo Securities, LLC, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

John A. Faucher - JP Morgan Chase & Co, Research Division

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Ian J. Gordon - S&P Equity Research

Operator

Good day, and welcome to today's Colgate-Palmolive Company's Third Quarter 2012 Earnings Conference Call. Today's call is being recorded and is being simulcast live at www.colgate.com. [Operator Instructions]

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 H. Thompson

Thanks, Brian. Let me add my welcome to our third quarter earnings release conference call. With me this morning are Ian Cook, Chairman, President 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. 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 Statement on Forward-looking Statements.

This conference call will also include a discussion of non-GAAP financial measures, which differ from our results prepared in accordance with GAAP. We will discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures. We will also discuss gross profit, gross profit margin, operating profit, net income and earnings per share, excluding the impact of the one-time items described in the press release. A full reconciliation with the corresponding GAAP measures is included in the press release and is posted on the Investor Relations section of our website at www.colgatepalmolive.com.

So we're very pleased with the continued strong momentum in our business in the third quarter. Good organic sales growth coupled with an excellent increase in gross margin have allowed us to increase investments behind our business as well as to grow our bottom line. Market shares are strong around the world. On a year-to-date basis we're up in toothpaste, manual toothbrushes, mouthwash, bar soaps, body wash, deodorants and fabric conditioner. Our pipeline of new products is as full as it has ever been, which bodes well for continued share gains.

Our balance sheet is solid, and cash generation is strong. We continue to successfully implement the strategies with which you are all familiar, engaging to build our brands, innovation for growth, effectiveness and efficiency and leading to win. And we believe our tight focus on a limited number of categories continues to be the right approach for Colgate. This has allowed us to deliver consistent results.

Now while our strategies have not changed, the external environment is increasingly changing and at a fast pace. To help ensure continued strong results, today we announced a 4-year global growth and efficiency program. And this is truly a global program affecting all areas of the business, which is expected to help us deliver sustained profitable growth over the long-term.

We believe that these changes will help ensure the long-term success of our business in today's fast changing global marketplace. We've chosen to undertake them at a time when the business is strong to leverage our growth momentum so we continue to deliver on both our near and long-term targets, while increasing investment to strengthen our market-leading positions and commercial capabilities on the ground.

As a reminder, our key areas of focus are not new to us but rather a continuation of what we've done successfully in the past. The global growth and efficiency program represents a truly global effort to expand upon successful initiatives previously implemented in select regions, focusing on the areas of commercial hubs, shared services and global supply chain and facilities optimization.

Reflecting on 2012, when we initially gave constant dollar guidance, we were experiencing and projecting extremely volatile foreign exchange markets. That has proven to be the case throughout 2012 in all regions of the world. By managing the business on a constant currency basis, we ensured that commercial funds stayed invested in the local businesses. So as we look ahead, we see the exchange market as being somewhat less volatile and more in line with historic patterns. So while our global budget process is still in the initial stages, as Ian said in the press release, we expect to return to double-digit earnings per share growth on a dollar basis in 2013 in the 10% to 11% range. Our target for organic sales growth for 2013 remains 6% to 7%, and we expect to see increases both in gross profit and advertising.

So let me now briefly share some third quarter highlights in the division, starting with North America. We're particularly pleased with our North American results. Despite a deceleration in category growth throughout the year, we achieved positive volume and pricing in the third quarter. The volume growth was also notable as compared to the strong year-ago quarter, in which we launched Colgate Optic White toothpaste. As referenced in the press release, our oral care shares are strong. The launch of Colgate Optic White enamel toothpaste in the U.S. has helped to increase the share of the Colgate Optic White franchise with a share of over 6% in the most recent period. And we told you last quarter about the launch of Colgate Optic White mouthwash, which complements the toothpaste and toothbrush and offers a full whitening regimen. The launch is doing well, and the mouthwash has over 2% share.

Increased investment behind our Colgate Total franchise, along with a very successful Seeing is Believing marketing campaign, also contributed to our success. And we have some very exciting new products along with some new marketing campaign slated for the first quarter, which you will hear about at a later date.

So let's turn to Latin America. Very good market share progress drove our strong results in Latin America. Year-to-date, market shares are up in toothpaste, manual toothbrushes, mouthwash, bar soaps, fabric conditioners, dishwashing liquid and liquid cleaners. As referenced in the press release, we reached another record share in toothpaste at 79.3%, up 120 basis points from a year ago. Now this increase was achieved in spite of competitive launches in a number of countries. Colgate Luminous White toothpaste, which was launched a year ago in Mexico and Brazil, is now selling across the division and accounts for almost 4 points of our overall toothpaste share.

Our leading toothbrush share is at 42.5% year-to-date, up almost 2 full points from the year-ago period. And as in other developing markets, we have product offerings at all price points, and both our premium-priced and mid-tier brushes are contributing to the share gain. In mouthwash, our market share is up 4 points to 37% on a year-to-date basis, and we've achieved leadership in Argentina, Venezuela, Central America, Paraguay and Uruguay. In bar soaps, we've consolidated our leadership position up over 2 points to 32%. Protex is the leading brand, and the launch of Protex's Vitamin E as well as a strong hand washing campaign has contributed to its success. Palmolive is the #2 brand across the region, also benefiting from innovation.

Turning then to Europe. As you know, the macroeconomic situation in Europe is quite challenging. Category growth is slowing, and consumer confidence levels are low. But despite that, our oral care shares are solid. In toothpaste, our year-to-date market share is even with the year-ago period, and our shares are up in manual toothbrushes and mouthwash. So even in this tough environment, we've successfully launched new products. We found that the consumer is willing to pay a premium for a clear benefit such as whitening or gum health. Across the region in September, we relaunched our Colgate Max White One Whitening toothpaste along with an accompanying toothbrush and mouthwash to provide a full whitening regimen. The distinctive red packaging, the same as for Optic White here in the U.S., really does stand out on shelves. Persuasive in-store presence is a critical component of an integrated marketing campaign, particularly in a more developed market, and early results for this bundle are very encouraging.

Now we're also very excited about our launch into a completely new category, electrically chargeable toothbrushes. Our lead market is the U.K. The product was introduced in early October at the British Dental Trade Association Conference, the largest U.K. trade event with over 10,000 delegates attending, and the reactions were very positive. As you know, professional recommendations play a very important role in this category. And in addition, we introduced the product at Booths, the first-ever platinum launch for Colgate. 50% of the category sales are through this one retailer. Advertising is now on air, and although we don't have scanner data until next month, the initial reception has been excellent.

Greater Asia/Africa. As in other divisions, successful new product launches have helped increase market shares. Across Asia, our toothpaste share is up 40 basis points on a year-to-date basis. In India, both premium and mid-tier offerings have driven our share up 250 basis points to over 53% of the market. The share gains are across the country in both urban and rural markets. And in China, our share continues to grow. We're up 140 basis points to 33.7%. We continue to grow our mouthwash business across the region. Year-to-date, our market share is up almost 3 full points to 19.3% with increases in almost every country. Both Colgate Plax Fresh Tea and Colgate Plax Fruity Fresh have contributed to the share gains, along with the Colgate Sensitive Pro-Relief mouthwash to accompany our Colgate Sensitive Pro-Relief toothpaste in the developed markets of Hong Kong and Singapore.

And Hill's. While Hill's volume declined in the quarter, positive pricing allowed for another quarter of organic sales growth. A number of initiatives faced through [ph] the end of 2012 and the first quarter of 2013 should benefit the business. On the Science Diet side of the business, we'll be relaunching the Science Diet line at the beginning of December. The new Science Diet Dry Offerings will contain natural ingredients with meat or high-quality protein as the first ingredient, and no chicken byproduct or artificial colors or flavors. New packaging design will make it easier for the pet owner to find the right product. In fact, our studies show it reduces the time it takes by about 30%. There will be 3 new shopping categories that should reduce shelf clutter: Life Style, Life Stage and Life Care. Ideal Balance, which provides natural ingredients in perfect balance and contains no corn, continues building momentum with third quarter 2012 volume in the U.S. up 19% over the second quarter of 2012. A very exciting new Prescription Diet product is Prescription Diet metabolic. And this is the first weight management food with proven and real-world results. 88% of dogs and cats lost weight in 2 months at home, and it's also clinically proven to avoid weight regain following a weightless -- loss program. It comes in Dry, Wet and Treats for dogs as well as cats. This product will start shipping in the first quarter of next year starting with the North American market and Japan.

So in summary, we're pleased with the continued momentum in our business and look forward to a strong finish for the year. And as you heard, Colgate people around the world are winning on the ground, delivering strong results and increased market shares. And our new global growth and efficiency programs for sustained growth announced today should help us to continue to deliver strong results in 2013 and beyond. That's the end of my prepared remarks.

Brian, now, if we can open it up for questions, that would be terrific.

Question-and-Answer Session

Operator

[Operator Instructions] And we'll go first to Bill Schmitz with Deutsche Bank.

William Schmitz - Deutsche Bank AG, Research Division

Hey, did you say how much of the restructuring program is going to be reinvested versus how much you think will flow down to the bottom line?

Ian M. Cook

No, we didn’t, Bill. And at this stage -- first, let me take a step back on the whole program because this has been the output of well over a year's study. As I think you have seen from the release and Bina's comments, we've taken a view here that is strategic for the long term, while benefiting starting in 2013 to build the kind of structure and skills we think we will need to compete effectively in this fast-changing world over the next 5 to 10 years. And important to say that we're really expanding structures and capabilities that we know very well how to handle; hubbing that we have been doing in various parts of the world for over 15 years. Our shared service center pioneered in Europe at about 5 years. And of course, in terms of manufacturing and sourcing, we started the year -- the millennium with something like 85 factories and have worked that down over time. And I think as you saw with the 2004, 2008 program, we have the focus and ability to get these programs executed without impacting the continued flow of the business. Now as to how we will use the funds generated by the program, if you take the near-end view, what we're really saying in 2013 is that we intend to continue the pace of organic top line growth in a world that has more slowness to it than not at the 6% to 7% range and expect to return to double-digit EPS on a dollar basis. How we allocate the second half benefits we'll get next year will depend by geography and by program, and that will be the same view we will use in the out years. But if you look at 2013, the commitment is really to the double-digit earnings per share growth on a dollar basis while maintaining that 6% to 7% organic top line growth.

Operator

Our next question comes from Nik Modi with UBS.

Nik Modi - UBS Investment Bank, Research Division

Can you just give us any perspective – Bina addressed the kind of Western European environment being sluggish, but can you talk about the other market, especially Latin America, kind of what you're seeing from a market growth standpoint? And then just a quick follow-up question on minor housekeeping. Venezuela, do you believe you can still deliver the dollar kind of 10%-plus even if we get a deval in Venezuela next year?

Ian M. Cook

So let me take them in the order you asked them, Nik. If you look at our world and by our world, I mean our categories by geography, as we have said before, in Europe we see low-single digit category growth, very low, in the 1% to 2% range, closer to 1% than 2%; and in some cases, negative. In North America, we see category growth rates in that 1% to 2% range. And in the emerging markets, we continue to see category growth rates at high-single digits, that would be the 8% to -- the 8% to 9% growth rates. And we continue to see that right through the latest periods of data available to us. And having just come back from Vietnam, Laos, Cambodia and Myanmar, I would say in these high growth geographies, consumer optimism is still high. So you see it in the numbers, and you feel it on the ground when you're interacting with consumers. Venezuela, obviously, there is a lot of speculation about Venezuela. Clearly, there would be 2 components to any devaluation were it to occur. One would be the one-time impact on that monetary assets, which would be a one-time event as it was before. And then to answer the heart of your question, it's really going to come down to the ability to take pricing in the country or not, and I think it would be highly speculative to say what that position might be at the time. Hopefully, the governmental view in terms of making product available to consumers would be to allow pricing to facilitate bringing raw materials. And remember, we make 85% of what we sell in the country, providing employment with bringing raw materials into the country. If we see a devaluation with no ability to take pricing, that is going to be painful for everybody operating in the country and would weigh on our ability to deliver the double-digit dollar EPS growth.

Operator

And our next question comes from Dara Mohsenian with Morgan Stanley.

Dara W. Mohsenian - Morgan Stanley, Research Division

Ian, on -- the Hill's business top line performance continued to be disappointing and that seems in contrast to some of the hope you would have that the new products would reinvigorate the business and help with the market share issues in the Naturals segment. So I just want to get an update there. And also, can you give us some detail in the Ideal Balance launch in terms of its incrementality and repeat rates and some perspective on potential growth for the division in 2013?

Ian M. Cook

Yes. The -- it's a tale of 2 cities. Ideal Balance is doing well, as Bina said. Trial rates are high and repeat rates are high, and we know we're bringing in about half of the new users from other Naturals products, but it's not big enough to shift the entire business. So as we have said before, the second half what we need to do and will do at the end of this year, as Bina said, is to reformulate and repackage from a design point of view our base Science Diet line to contain ingredients that natural users want and shout out those ingredients on our package. And so while we expect to continue to see organic growth this year, I think as we have said before, we expect to return to positive volume growth in 2013 behind the continued growth of Ideal Balance and more importantly, from an overall business point of view, that upgrade of the entire Science Diet line.

Operator

And next, we'll go to Bill Chappell with SunTrust.

Sarah Miller

This is Sarah Miller filling in for Bill this morning. My question is on -- it seems like there's kind of been cost initiatives and some smaller restructuring programs over time, but this program seems like it's kind of a little bit different, and I'm just wondering if there was a certain genesis behind the program, what could have brought it to light now and just the drivers behind that.

Ian M. Cook

But let's talk about the program. The other programs you’re talking about were really opportunistic actions taken to lower our structural cost at a time when we got a one-time gain from divesting a small business. This program, which is a global growth and efficiency program, is obviously more strategic in nature and, as I said earlier, is the result of over a year's study, thinking about how we should best organize ourselves, how we should best invest behind growing the business for the next 5 to 10 years. So it's genesis, to use your word, with a strategic genesis and the content is really taking around the world structures and capabilities that we have had in place in some geographies for a long period of time have validated, know they work and know how to get them done. So this is moving our global structure to a place that we think will make us sustainably competitive for the next 5-plus years. That was the genesis.

Operator

And we'll go next to Wendy Nicholson with Citi Investment Research.

Wendy Nicholson - Citigroup Inc, Research Division

My question is a follow-up on that. And if I look back over history, I thought you're -- kind of once was a day that Reuben really prided himself and a big point of what made Colgate so special was that programs like this were sort of considered part of doing business every day, and Colgate never used to take extraordinary charges and that was something that really distinguished the company. And I wonder if something has changed culturally because these are huge charges. And obviously, everybody cares about pro forma earnings and I get that. But still on a GAAP basis, your earnings will not have grown for an awfully long time given the magnitude of the charges. And so I guess number one -- maybe that's just a statement about how difficult the macro is. But number one, can you talk about that philosophy? Should we start to think of Colgate as a company that's going to take big charges every 5, 7 or 10 years, something like that? So it's a little bit of a different story. But second thing, when you talk about how difficult the external environment is, can you tell us is that 2/3 of the macro and the consumer and the economic environment and 1/3 of the competitive situation, or is it the opposite? I mean, what is making the macro more difficult so that you'd take such big charges now?

Ian M. Cook

Yes. Well first of all, Wendy, I take exception to the point that we have not done these things in the past. We have a record of having taken significant restructuring activities not every 3 to 5 years, but usually in an 8- to 10-year cycle. And again, as we tried to say earlier, I mean, your question searches for an underlying problem that forces the action to be taken now, and we don't view it that way. We view it that the world is certainly fast changing and volatile. We view it that we want to prepare ourselves to continue to deliver that sustained growth both on the top line and the bottom line over time. And we believe we have enough validation and the capacity to get this done in a compressed period of time to make us better able to compete in the world for the longer term. So that was the thinking behind it.

Operator

And our next question comes from Caroline Levy with CLSA.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

And I had to hop off for a second, so I hope we haven't addressed this already. But just looking at Latin America, certainly versus what I have expected, it was a little worse than I've been hoping for, particularly the top line, and appears -- there's been a market where you've been beating, I think, what everybody thought was possible on sales, both volume and pricing, and that seemed to slow. And I know you've pulled on great margin performance, but can you talk a little bit about the environment there and -- if there's anything that's changing, or is this slowdown relative to the very strong double-digit growth over the past 5 quarters? Is this a one-off?

Ian M. Cook

Well, the -- you got them.

Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division

I was looking at the organic growth rate.

Ian M. Cook

Yes, yes, as am I. The answer is, I guess, twofold. Number one, if you look at the year-on-year comparison, the first 2 quarters were up against lesser performance in 2011, and the third quarter comes up against mid-teen, double-digit growth rates in the back half of 2011. And we still think that in that context, 9% is good. You heard from Bina that the share performance is good. Clearly, Venezuela is a little bit of a drag as you would expect, but the other geographies are performing extremely well, and Venezuela is to plan. So I don't think there's anything untoward. We have fairly consistently said that we think high-single digit, low-double digit is the kind of level you should expect from that geography.

Operator

And we'll go next to Lauren Lieberman with Barclays.

Lauren R. Lieberman - Barclays Capital, Research Division

Just really quick. The path work that you've done on the shared service center in Europe and the hubbing of regions, I guess I was wondering if you could remind us how much of that in the past was funded through restructuring or one-time charges to get that in place, or if it was done just in the course of operations and over time?

Ian M. Cook

It varied. In the early days, we definitely ran it more through the income statement because we were moving quite slowly, giving ourselves the confidence that the hubs would give us what we thought they would give us, which is better capability to win on the ground at the same time with lower cost. Some we have run through prior restructurings. And in this case, now having it in geographies -- in most of our geographic regions, we're taking it in a charge because we think we can deploy it more quickly than the 15-plus years we have had hubbing in place.

Operator

And our next question comes from Javier Escalante with Consumer Edge Research.

Javier Escalante - Consumer Edge Research, LLC

Sorry for going back to the restructuring and the savings data. First, I would like to understand whether -- and it's the same question, when is the confirmation whether the saving programs are going to be on top of beyond Funding the Growth or you're replacing it? And in the case that it's not replacing it, that is on top and beyond Funding the Growth, if you step back, you have -- this would be your third layer of savings. You have first, Funding the Growth, which is about $600 million. And then you have supply and demand synchronization, which is another $100 million. And then you're going to have another $45 million in savings because of this restructuring in 2013. So that is about $745 million in savings. This is over 4 points of margin expansion. And the question has to do -- can the organization -- can manage so much pressure to generate and take so much cost out of the system? Is -- kind of, I guess it has to do with the reaction to the timing of the restructuring and how ambitious all these 3 savings programs on their own merit are?

Ian M. Cook

Okay, Javier. Well actually, now that you've given me the introduction to the Funding the Growth, why don't I just do the customary walk-through on the gross profit margin, which would save that question being asked relative now to the third quarter, obviously the prior-year gross profit was 56.8%. We picked up a 1.1 point benefit from pricing, a 2.2 benefit from Funding the Growth savings, again, in line with the curve of last year. Material prices were a negative 1.8 points, and then there was minor pickup of 0.3 from other, which is the walk-through to the 180 points improvement. Now coming back to your broader strategic question, I guess you have to break these things into 3 different component elements. Funding the Growth is a program we have had in place in this company for many, many years. And whilst it is comprehensive, it -- by which I mean it doesn't just touch gross margin, a large part of it is gross margin, and that program will continue because it is part of the culture of the company, because it is part of our year-on-year savings program. Synchronizing the supply and demand, again, is really squeezing waste out of a process, which is eliminating redundancy and doesn't bring pressure to the business. The new program, again, is not predominantly a margin benefit. It, when you look at it with hubs, with shared services, with reduced facilities, is going to hit more in the SGA area. And that's what we have been talking about for quite a while, which is -- with the slowing growth in the world in general, lowering structural cost is an important part of how to organize the company. Again, it will require a changed management. I think we have demonstrated with the prior programs we have conducted that we have the focus to do it. And the content of the program, the hubs, the shared service centers and the facility and manufacturing facility rationalization, these are all things we know how to do. We have validated them before, and we believe now is the right time to do it from a position of strength and readying us for the future and balancing what we believe we need to do to sustain top line and bottom line growth for that future.

Operator

And our next question comes from Jason Gere with RBC Capital Markets.

Jason Gere - RBC Capital Markets, LLC, Research Division

Most of the bigger picture questions have been asked. So I mean -- maybe you could just talk a little bit about the promotional environment. I think it was only a quarter ago that we heard one of your competitors, kind of talking about some of the, I guess, offensive spending that was out there for trial building, that there might be a little bit more defensive spending coming about. So just, I guess, really focusing on Western Europe and North America, how your outlook has changed maybe over the last 3 months? Anything there just coinciding with maybe some of the more tempered global market views on those regions.

Ian M. Cook

Yes. I must say thus far, nothing of -- nothing meaningful for me to say in terms of change. We continue to see promotional emphasis from folks. And in North America, we've just been pleased in our ability to continue to generate both price and volume in the third quarter. But no significant change in that environment.

Operator

And next, we'll go to Ali Dibadj with Bernstein.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

I first wanted to really praise the preemptive restructuring announcement. I think it's good you're doing it now and you're responding to the headwinds instead of waiting like the company used to do. However, I want to get a sense of what I think is kind of the positive returns on the restructurings are around 3 things. Like the first, the 30% return over several years is actually relatively low given your history. So 2004 restructuring, I think, was a 50% return, just quick, quick math. And it was even higher for previous ones. So it feels like you're just kind of squeezing the lemon too much, and are you? Secondly, is -- this is kind of what you need to do to grow double digits in 2013. So what should we infer about what your view is on the global marketplace going forward? Understanding that's changing, but what does that really mean? And then third -- and pardon me for this, I apologize. But if you put it altogether, as you think about your long-term growth, isn't Colgate just being a little bit stubborn? And by the way, maybe other competitors have done this, so you joined the crowd, but a little bit stubborn about double-digit EPS growth? How are you going to convince us that you're still a double-digit EPS growth company on a sustainable basis because you're doing a big restructuring to just get there? And to be fair, again, I'm not sure anybody in this sector is really double-digit EPS grower sustainably. So a lot in there, but a lot in my head in thinking about this.

Ian M. Cook

Well, as usual, Ali, thanks for the single question. I guess in the end, the double digit is going to come down to performance. And of course, you and others will track that as you track that. But to come back in sequence, number one, we do not think we're squeezing the lemon. In fact, the rates of return we got on prior restructurings were in that low- to mid-30% level, and this is entirely consistent with that kind of benchmark. We view it as again, to repeat, what we need to do to reorganize our company to compete effectively, perhaps compete stubbornly, over the medium to long term. We believe and have validated the structure of hubs where for smaller countries, you can bring big country capability, which arms the folks on the ground with the tools they need to continue to win by growing market share and volume on the ground. We believe in shared services centers because we have done it with our IT organization 10 years ago. We know it works. We did it 5 years ago in Europe and Poland. We know we get immediate savings. We then get second order savings as you simplify your process. And then, you get third order savings as you bring additional functions and capabilities through the shared service centers. And in the manufacturing and facility space, that is a continuation of a journey that we have been on for over 15 years, all of it facilitated by SAP and our growing capability to use SAP. So it is a strategic view about how we need to organize. So turning to 2013, that wasn't the way we viewed it. The way we have approached 2013 is to say that we expect to grow the top line of our company by 6% to 7% organic, which we think stands up to any comparison and at the same time, deliver double-digit dollar earnings per share growth in that 10% to 11% range. And we will deploy the savings we get from the program by geography, by activity, as we see necessary. And we think reaching this new organization structure as we get to 2016, 2017 will position us sustainably to deliver consistent top line growth and that double-digit bottom line growth, and the folks will see the measure of it then.

Operator

Next, we'll go to Connie Maneaty with BMO Capital Markets.

Constance Marie Maneaty - BMO Capital Markets U.S.

I just have a point of clarification. On your outlook for next year, 10% dollar EPS growth, what's the base we should be using? Is it the 2012 reported EPS, or is it the currency neutral? And then my real question is on the restructuring. You've said that you'll reduce the headcount by about 6%. Could you tell us what the timing of that is? And also, how many facilities will be changed or touched or closed during this process?

Ian M. Cook

To answer your first housekeeping question, Connie, it's the reported EPS. As to the second question, in terms of when the headcount reductions will take place, the answer is no. Those plans have not yet been finalized or communicated, and that would be premature. And in the case of the facilities, I think it would be fair to say that by the time we finish the program, we will have 10% fewer facilities approximately than the 54 we have today.

Operator

And our next question comes from Joe Lachky with Wells Fargo Securities.

Joe Lachky - Wells Fargo Securities, LLC, Research Division

I was just wanting to talk about your overall strategy, I guess in dealing kind of specifically with competition in emerging markets. And given your strong share in many of these markets, how do you specifically defend share of, like, say, rural areas or the high-frequency stores where you guys are prevalent in? And do you do anything differently, I guess, in your execution? I asked this within context of a major competitor in a major Latin American country, making a push into these rural areas.

Ian M. Cook

Yes. The most important point in all of this, Joe, is the consumer, and we should never forget that. And you'll find in many of these high-frequency stores, you can be there, but they're so small that you can't. You're not self-selecting the product. The shop owner is giving you the product that you ask for. And if you go to these stores, whether it's in India or in Latin America, Brazil, Mexico, the product they'll be asking for is Colgate. So that would be one. Number two, we would have the broadest assortment of toothpaste products available in those stores, and we have for many, many years had sizing and pricing that is particularly really tailored for those stores to acquaint to cash and pocket, cash outlay, what the consumer can afford. But the heart of it is loyalty versus presence. And the important thing in the high frequency down trade stores is the consumer loyalty that we have, which in many cases, despite the push, will not see new entrants distributed because the shopkeeper doesn't have any demand for the product.

Operator

And next, we'll go to Chris Ferrera with Bank of America.

Christopher Ferrara - BofA Merrill Lynch, Research Division

I just wanted to ask about SG&A for the quarter. So it was up, I guess, 60 basis points. It's a little bit of a different result than what we've seen over the last, I don't know, 6 or 7 quarters, so it's a little higher. Is there anything unusual going on in that line item in the quarter? And then on advertising, do you feel like we're at kind of a good rate of growth on the advertising line?

Ian M. Cook

Thanks, Chris. No. And the overhead is not really -- part of it is the non-cost of goods transaction impact rolling forward, and then it's the timing of some benefit expenses. So a timing issue, not a structural issue. And advertising, yes, we're quite happy with the advertising level we have. I've said for quite a time now, in some parts of the world, even though we don't focus on it, there are a lot of programs that are managed through the so-called gross to net, the trade spending dollar which leads to in-store activity which, in today's world, particularly in the developed parts of our world, is where engaging with the consumer is very, very important. But in the traditional A&P that you see, yes, we're quite happy with that level. Frankly, with the stream of innovation we have coming into next year and as we go through our budgeting cycle, we'll be looking to take that up.

Operator

And our next question comes from Alice Longley with Buckingham Research.

Alice Beebe Longley - The Buckingham Research Group Incorporated

Your organic sales growth was 5% and yet, you're still guiding to 6% to 7% for next year and holding to your longer-term targets there. Why were you below that this quarter, and why should we expect that to get better next year? And then also -- and should we see an improvement in the fourth quarter? And then, tied to this, I know you said that you're seeing your categories slow some, and you gave us what you think -- how fast you think your categories are growing in Europe, emerging regions and North America. Can you tell us how fast you think -- given the weighted average, how fast your categories are growing globally and how fast were you thinking the categories are growing? So in other words -- so we can see the magnitude of the slowdown that you're seeing.

Ian M. Cook

The -- thanks, Alice. The -- if you look at the 9 months, we guided to 6% to 7% organic for this year. I remember when we did, some said that was too aggressive. If you look at the 9 months, with the third quarter coming up against a tough comparison last year, our 9-months organic growth is running at about 6.5%. And I would tell you that we continue to guide for the full year to the 6% to 7% level. As regards to the category growth rates, I kind of went through them before, high-single digits in the emerging markets, which are about 53% of our business and low-single digits. I characterized Europe as 1% to 2%, nearer 1%; and the U.S. as the same 1% to 2%. But there's really been no change in those category growth rates, so that has what -- that is what has driven the business next year, and that is what we expect to continue to see next year. And what gives us the confidence is the continued flow-through of our innovation pipeline into 2013 and the effectiveness of many of the marketing programs that we have and, of course, the return to positive volume on the Hill's business.

Operator

Our next question comes from John Faucher with JPMorgan.

John A. Faucher - JP Morgan Chase & Co, Research Division

Sorry to belabor all of this. I guess -- as we look at this, I'm trying to figure out 1 of 2 questions here. The first would be is simply -- is this simply a cost of doing business going up this year right in terms of running harder to stick with the, let's say, the 6% to 7% growth because the cost of doing business has higher advertising or what have you? Or is this simply sort of a reflection that the old model of delivering operating leverage doesn't work anymore? Okay. Where it was categories grow x, you gain a little bit of share to grow y and then just sort of automatically deliver leverage. And I don't -- I agree with you if that's the case that it doesn't work anymore. So I guess where in the P&L are we seeing that breakdown? Is it just the higher raw material costs? Is it the inability to take as much pricing going forward? Or is it again something on the SG&A? So hopefully that question makes sense.

Ian M. Cook

I'm not sure. So let me try and answer it in the same spirit that it was given, John. I guess if you break the program down into 2 bits, the why are we doing it bit and the why are we doing it bit really strategically is more about how we think we should be best organized to manage our business for the medium to long-term. To repeat, we believe in the power of hubs and we validated it. We believe with the technology available to us today and the servicing ability of shared service centers, and so we are expanding it. And we have the ability to further reduce our facilities sourcing our global business. So for us, these are the right things to do. And the why now, the why now is we believe the company is in a strong position. And this is the ideal time to expand structures that we have had in place for a long period of time. I think it would be fair to say, when we talk about a fast-changing world, that we have seen a slowdown in category growth rates, particularly in the developed world. And if you take a jaundiced macro view, is there going to be spillover of that into the emerging markets. So we still expect that 6% to 7% organic growth. We still expect to grow market share, but you're doing it in a world where the rate of category growth, particularly in the developed parts of that world, have slowed. And therefore, as we have said for some time, we believe re-basing the structural cost is an important part of how we go about managing our business.

Operator

And next, we'll go to Linda Bolton-Weiser with Caris.

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

I was wondering if you could give a little more commentary on Hill's. It seems that for, I don't know, kind of a few years now, we've been hearing about sort of a sluggish growth and then changes or tweaks to some of the marketing strategies. And now we're hearing Science Diet relaunch and everything. But it's just -- it's hard to get a grasp of exactly what's going on. Is it something in the channel -- like, is the channel shifting from the specialty channel more toward regular retail channels, or are you losing market share? Like -- can you just give a little more color what's going on, please?

Ian M. Cook

Sure, Linda. First of all, we'll split out Hill's business into 2 parts. There is a Prescription Diet business. Those are diets that are specifically for pets with health issues that are prescribed by vets. We have a 70% recommendation level, a 70% market share and that business is fine. As we have been saying for a time, we have been unable, unsuccessful thus far in competing in what has become the fastest-growing, quite large segment in the category, which is the Naturals segment. We had offers there, a product called Nature's Best, but the consumer had a disconnect with this idea of Science Diet and a Natural's product and the trial and repeat rates were low and we withdrew the product. Our first step into that category was the product we have talked about, again, for a little while, which is Ideal Balance. And Ideal Balance is what it purports to be, which is it doesn't give up the heritage of Hill's Science, but it's just it's balanced with the ingredients that a natural -- a Naturals user would want. And that's working for us. It's working for us in terms of the trial we're getting, in terms of the business growth we're getting and in terms of the new users we're bringing from the Naturals segment. It's not big enough to turn the whole business. And in fact, I'm just hearing about the Science Diet relaunch now. We have been saying for a while that we were working to completely relaunch our Science Diet business at the end of this year, which across the line would therefore give the consumers the ingredients they would be looking for. And that, as it works its way through 2013, we think is going to complete the job and get the business back on to a positive volume track. So the proof of the pudding will be in 2013.

Operator

Our next question comes from Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C., Research Division

Sorry if this has been asked, I just jumped on recently. With respect to the efficiency program, the press release indicates clearly there are ample opportunities through the structural cost through it. But also, you called out the benefit that should enable you to help drive your market share position and support sustained sales growth. To what degree might you reinvest some of the benefits you've outlined here? And if so, where would those investments most likely be directed?

Ian M. Cook

Well, Jon, yes, the -- you know the areas we are focused on. We actually called out 4 areas of investment of those funds. And the first obviously was innovation and brand building. The second was enabling technology and analytics, and we have been talking for a little while about -- it is our belief that analytics is a new area of discriminating competence for companies like ours. The third would be continuing to explore and expand our use of digital engagement with customers, with consumers, with suppliers. And finally, continuing to strengthen our capability in the emerging markets to underscore the distribution, the in-store visibility that our products have in those parts of the world. So again, we'll be doing it on a case-by-case basis, by activity, by country as we work through this. But they are the 4 principal areas of potential reinvestment.

Operator

Our next question comes from Mark Astrachan with Stifel, Nicolaus.

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

So one follow-up or just a housekeeping question. From an input cost standpoint, anything you call out, particularly for next year, in terms of how you think it progresses and what your assumptions are for oil? And then, on the restructuring program and cost savings, broadly if you would think about it longer term, how does this compare, or how does this change your assumptions for gross margins as far as your long-term targets are concerned more specifically? And then obviously, if you could give us some color on the SG&A piece beyond what you've laid out, that'd be helpful. Otherwise, I understand that you probably won't.

Ian M. Cook

No. So let's answer that quickly, no, I won't. The -- but getting to your questions, frankly again, we're at the preliminary stages of our budget. But the preliminary look would be in the -- from a cost point of view would be in a 1% to 2% range. That's kind of consistent with what we have seen this year. So that would be the macro view and that would be with oil at an assumed 110, and it would also assume a bit of a headwind from corn, which obviously affects our Hill's business. From a gross margin point of view, we continue to hold the same, plus or minus 5-year goal of getting our gross margin into the mid-60s. So that continues to be the way we think about it. And of course, the 110, coming back to the oil, is obviously the brand, not the West Texas.

Operator

And next, we'll go to Ian Gordon with S&P Capital IQ.

Ian J. Gordon - S&P Equity Research

Just on housekeeping. So the FX impact on sales was a negative 6%. Was it the same on EPS? And then just can you dig into Europe a little bit? I think this was the first quarter in a while where organic volumes were down. So what's changed there? Was it the competitive environment? It doesn't look like it was a year-over-year comparison issue.

Ian M. Cook

The -- coming back, the -- as we've said several times before, the impact of foreign exchange on the top line -- I'm sorry, on the bottom line is greater than the impact on the top line. So we faced a headwind of around 8% on the bottom line relative to foreign exchange. And in terms of Europe, Europe has always been a difficult environment. The -- candidly, for the last half a dozen quarters, organic growth has run negative in Europe and so the third quarter is no different than that. Obviously when you look at Europe, there clearly is a difference between the North and the South where in the Iberia's, the Italy's and the Greece's, you are seeing lower category growth rates.

Operator

Next, we have a follow-up question from Ali Dibadj with Bernstein.

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

So Ian, we've obviously [indiscernible] disagreed a little bit about Hill's in the past. And then it sounds like the changes you're making are very much in the right direction, but they're bigger changes than at least what I thought you guys have thought about before and again, that's good. But I'm trying to figure out the costing of it. So look, corn meal costs a whole ton less than corn let alone than chicken or meat. You need to market this. You need to get perhaps different distribution, or at least get shelf space back and take your other things off of the marketplace with discounting, et cetera. So can you give us a sense of the costing of this, and what we should expect from a run rate on your margin in this business given that these are higher cost inputs?

Ian M. Cook

Well when you look at the business, you know that the gross margin of Hill's is quite attractive to us. You are correct that moving to these formulas does bring with them a cost. But again, I come back to the overall company and say that, that is baked into our thinking in 2013 and beyond. And again, we're looking at the top line of 6% to 7%, and we're looking at that bottom line EPS growth of 10% to 11%, and the impact on the Hill's gross margin is easily manageable in that framework.

Operator

And next, we'll go again to Connie Maneaty with BMO Capital Markets.

Constance Marie Maneaty - BMO Capital Markets U.S.

My question was answered.

Operator

We do have one follow-up question from Alice Longley with Buckingham Research.

Alice Beebe Longley - The Buckingham Research Group Incorporated

Two things. Is it possible -- this is a follow-up to the Hill's question. Is it possible that you'll change the pack size for Hill's and make them smaller as a way to address the higher cost and price this smaller pack size as the same as the bigger ones now?

Ian M. Cook

The straightforward answer, Alice, is no. The Hill's issue is not a pricing issue, it's a formulation issue in this particular case. So that's where we need to focus.

Operator

And as we have no further questions in queue, I'd like to turn the call back over to our speakers for any further or closing remarks.

Ian M. Cook

Okay. Well, thanks for all of you calling in. It's good to have the opportunity to talk about the business today and our plans for the future. And again, for all of those Colgate people listening on the call, thank you for your efforts. We obviously have a chapter ahead of us, and we'll get the job done. Thank you.

Operator

And that does conclude today's presentation. We thank you for your participation, and have a wonderful day.

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