Colgate-Palmolive Company Earnings Call Nuggets: Comps Outlook and Operating Margin Sustainability

Colgate-Palmolive Company (NYSE:CL) recently reported its second quarter earnings and discussed the following topics in its earnings conference call.

Comps Outlook

Joe Lachky – Wells Fargo: Just first off on your guidance, the EPS outlook that you mentioned in the press release. Just wanted to verify, that was solely due to foreign exchange in Venezuela. And then secondarily, along the guidance lines just wanted to verify your outlook on organic growth, you mentioned 6% to 7%, you’re at 5.5% year-to-date, I guess you got little bit easier comps in the second half but wanted to hear your outlook on that. And then, also if you could talk about your 30 to 70 basis points of gross margin improvement that you’re expecting?

Ian M. Cook – Chairman, President and CEO: So, to come to the points on guidance, you’re absolutely correct. Indeed we’ve already seen some notes where folks have picked that up, it is entirely due to Venezuela, which is unchanged from what we told you earlier in the year and the additional 1% reduction in the range is due to the foreign exchange volatility and the strengthening of the dollar we saw in the last four to six weeks of the quarter and is predicated against the current spot rates. The growth part of your question, I think merits a little bit of perspective. As you might suppose we are pleased that with the fact that as a company we have this quarter between 53% and 54%, of our worldwide sales in the higher growth emerging markets. But we also believe that the decisions we took some 30 years ago to focus on the categories in which we do business continue to be a positive factor in the sense that we’re marketing products that are everyday used products for people brushing their teeth, cleaning their bodies, looking after their homes and indeed caring for their pets. So, we think the category choice is durable. Now when you look around the world, as we have said on many previous calls, we continue to see the U.S. categories grow low single digits. We continue to see Europe grow extremely low single digits. Indeed some of the categories are flat and some are modestly negative, not new news and something that we have been factoring into our planning for some time. When you turn to the emerging markets, notwithstanding the macro news that we have been reading about, our data so far shows that those categories continue to maintain high single-digit growth rates, which is very pleasing, and of course, we’re focused very, very closely on seeing whether any of that macro commentary turns into a category pressure for our businesses, but that being said, even with that, we are reaffirming our 6% to 7% organic growth rate for the year. As Bina said earlier, our new product pipeline already executed in the market and the ones that Bina mentioned for the balance of the year is extremely strong. Secondly, we are encouraged by our market share progress around the world, which obviously gives you incremental growth beyond the category growth. Third, our Hill’s business, which we had expectation to turn positive in the second half of the year, has indeed done so with a faster start than we were expecting, and we get that benefit for the balance of the year. And finally, as many of you have already noted, our comparisons in the second half from an organic top line point of view are somewhat easier than they were in the first half of the year. And then finally, on gross profit, let me take this opportunity to run through the second quarter gross profit roll-forward. So if you start with 57.9%, which was the second quarter gross profit in the prior year, pricing gave us 40 basis points. Funding-the-growth, following our usual pattern where second quarter funding-the-growth steps up from the first, was 210 basis points, actually better than what we delivered in 2012. Material prices were a headwind of 180 basis points, and the combination of that and the pricing gives us the 70-basis-point growth that we saw in the second quarter. And yes, we are very much staying with our gross profit guidance of 30 to 70 basis points and, of course, extremely pleased with the year-to-date progress at the higher end of that range. And there’s one other thing I should add relative to the gross margin and also relative to the earnings guidance, because of the currency volatility, and that is our plans for the balance of the year. Of course have us offsetting the transaction impact of foreign exchange in order to continue with that gross margin progress. That’s the end of the answer.

Operating Margin Sustainability

William Schmitz – Deutsche Bank: It was a monster operating margin quarter in North America. So, can you just kind of dig a little deeper on what drove that and maybe sort of how sustainable that almost 30% operating margin is here in the home market?

Ian M. Cook – Chairman, President and CEO: Well, we were indeed very, very pleased with, I assume monster means good.

William Schmitz – Deutsche Bank: Yeah.

Ian M. Cook – Chairman, President and CEO: We were very pleased with the progress in the U.S., but obviously it traces back as you will already have seen to the gross margin which expanded extremely healthily. And as we said in the release that gross margin obviously used to fund the advertising investment and indeed funds a little bit of stepped up debt for promotional activity which most of you have seen as we came towards the end of the quarter which comes nicely back to the top line and then good control of non-variables in the geography. So, certainly our expectation in our U.S. business is to sustain the growth in our gross margin. Whether it will be as strong as the first half of the year which indeed was extraordinarily strong. We will have to see, but our plans in a relatively benign commodity cost environment with our traditional strong funding the growth program as we look forward sees us with continued strong gross margin progress.

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