Colgate-Palmolive Co (CL) Q1 2019 Earnings Call Transcript

Taking a look at the divisional results; North America delivered 3% net sales growth and 3.5% organic sales growth in the quarter, with 2% volume growth and 1.5% pricing growth. We saw strong sales growth in toothpaste in the quarter, driven by Colgate TotalSF, Colgate Optic White, Colgate Essentials and Tom's of Maine. Club and e-commerce delivered particularly strong toothpaste growth this quarter. The Colgate Total relaunch is proceeding in line with our expectations, as Total's market share is up year-over-year since the launch. In the U.S., we took pricing through a downsizing and this should lead to a shorter repurchase cycle, which should accelerate unit growth going forward, as consumers come back more quickly.

North America also benefited from the strong growth in the EltaMD and PCA Skincare businesses we acquired during Q1 of 2018. These brands are delivering very strong growth across a number of channels, including professional, B2C, and e-commerce.

Europe's net sales were down 7% in Q1, driven by negative foreign exchange. Organic sales were up 0.5% in the quarter, as volume growth of 1.5% was mostly offset by negative pricing of 1%. While categories in Europe remained sluggish, our market shares were up or flat in 7 to 10 categories. We delivered strong volume growth in Northern Europe with the UK and Scandinavia, both up on the back of the Colgate Total relaunch. We have reintroduced Colgate Total in Scandinavia and it is driving strong incremental market share gains in that region. We also launched Meridol Pure in several markets in Europe, in Q1, which brings our top therapeutic gum offering into the natural space, at a premium price.

In Personal Care, we continue to drive significant share gains behind the Sanex body wash business. In France, Sanex's body wash share is up more than 100 basis points year-to-date behind Sanex 0%, and the Sanex physiologic brand.

Latin America; we are pleased with our acceleration in organic sales growth in Latin America in Q1. Net sales declined 4.5% in the quarter, as 10.5% negative foreign exchange more than offset 2.5% volume growth, and 3.5% pricing growth in the quarter. Importantly, the growth was broad-based as we delivered organic sales growth in every hub. We are particularly pleased with the sequential improvement we saw in Brazil in the quarter versus Q4 2018, as we delivered both pricing and volume growth. Encouragingly, category trends in Brazil do seem to be better, although the market remains very promotional. Our recent innovations in oral care are paying off nicely, as we are seeing market share gains for our Colgate Natural extract toothpaste line, our Colgate guard franchise in pharmacies in Brazil, and the Colgate Slim Soft Advanced toothbrush.

Net sales in Asia-Pacific were down 8%, driven by negative foreign exchange of 5.5%, a 2.5% decline in volume, and flat pricing. Our results in China remain challenged by the difficult steps we are taking to reorient our portfolio and in Oral Care category that is rapidly premiumizing and shifting into e-commerce. As we indicated in January, we still expect trends to improve in the second half of the year. Encouragingly, we saw strong growth in both volume and pricing in India, with growth coming on both, the Colgate MaxFresh and Colgate Vedshakti franchises. In order to drive penetration of Vedshakti, we recently gave away 30 million samples at the Ardh Kumbh Mela festival in India.

Our Africa/Eurasia business showed solid underlying business momentum in Q1, despite the negative impact of foreign exchange. FX was a 13% drag on sales growth in the quarter, offsetting 7% pricing growth and flat volume. Our Eurasia hub delivered a strong mixture of pricing and volume growth in the quarter driven by Russia. Our North Africa, Middle East, Turkey hub also delivered volume growth in the quarter, despite significant pricing to offset foreign exchange. In order to help continue this momentum, we launched the full Meridol regimen; toothpaste, toothbrushes and mouth rinse in the pharmacy channel in Turkey in the first quarter. We also launched Palmolive Micellar Care shower gel in Russia this past quarter taking advantage of a big personal care trend.

And finally, Hills; our strong growth at Hills continued in Q1. Growth was led by the United States with particularly strong growth in e-commerce, pet specialty, and farm and feed. Internationally, our growth was very broad-based, we delivered both volume and pricing growth in Canada, Europe, Australia, Asia and Latin America. As we discussed at CAGNY, Q1 marked the beginning of our relaunch of our Science Diet brand with the new packaging on-shelf as we speak. Initial response has been positive as Science Diet market share trends continue to increase year-over-year in Q1. The relaunch will continue across the globe through the first half of 2020. We have also significantly exceeded our subscription targets for our Hill's to home service which allows pet parents to realize the benefits of home delivery, while maintaining contact with the veterinarian.

Moving on to full year guidance; we continue to expect net sales to be flat to up low-single digits. We continue to expect organic sales to be up to 2% to 4% based on current spot rates. For the full year we still expect gross margin to be up year-over-year on both, a GAAP basis and excluding charges related to our global growth and efficiency program. We expect the benefits of pricing and our productivity programs to offset an overall increase in raw material costs which includes the impact of transnational foreign exchange. We expect our advertising spending to be up notably, year-over-year on both, an absolute basis and as a percent of sales. We would expect advertising as a percent of sales for the full year to be fairly consistent with the Q1 level.

We continue to expect our full year 2019 tax rate to be between 25.5% and 26.5%, both on a GAAP basis and excluding charges related to our Global Growth and Efficiency Program in 2019 and 2018, and the charge related to U.S. tax reform and the benefit from a foreign tax matter in 2018. Based on current spot rates, we expect GAAP earnings per share to be down low-single digits for the year. Excluding the charges related to the Global Growth and Efficiency Program in 2019 and 2018, and the charge related to U.S. tax reform and the benefit from a foreign tax matter in 2018, based on current spot rates we expect earnings per share to decline mid-single digits for the year. We would note that the consensus EPS estimate is in the middle of that range.

And with that I will turn it over to Noel for his thoughts before the Q&A.

Noel Wallace -- President and Chief Executive Officer

Thanks, John and good morning everyone and thank you for joining us on the call today. I thought it appropriate to begin by framing three strategic areas of focus for our company that I believe will be critical to our ongoing success, and we certainly started to see transpire in the first quarter.

The first area of focus is how we're thinking about organic sales growth. No question that to deliver long-term revenue growth that's sustainable, we need to be more aggressive about going after growth, and we're going after growth differently. As you recall in the fourth quarter call and at CAGNY, I spoke about some of our growth mindset, specifically we're driving the Colgate brands like Total and Science Diet, remember these are big brands; big brands with a global penetration in many countries around the world, and we're bringing that to market through significant new innovation and superior product and formulations. We'd also bringing that alongside significant brand building along those businesses with real brand purpose that resonates with consumers in the different way.

Second, we're going after adjacent categories and product segments like naturals which is doing very well for us, therapeutics by expanding Elmex and Meridol to select markets, and importantly, expanding skincare and continuing to focus our investment on opening new doors and channels with that category. Third, we're expanding the availability of our products through distribution and new markets; being very thoughtful in that regard but we see opportunities in new channels, particularly in channels like e-commerce which is key to our continued growth moving forward. We were very pleased with the growth in e-commerce in the first quarter which was up 28% versus the year ago period. So, more to do and more to come and we're certainly focused on those areas.

Our second key area of focus is to simplify our processes and our structures around the world. We recognize that we need to change in order to respond to a rapidly changing marketplace in terms of our ease and how consumers are shopping. For example, we've revamping our innovation process to dramatically reduce the time to market. You heard my dear fellows (ph) speak about that at CAGNY and those changes are under way beginning in Latin America, and we'll begin to roll those out around the world as we move into the balance of the year.