Colgate-Palmolive Company (CL) Q1 2006 Earnings Report, Transcript and Summary

Good day, and welcome to today's Colgate-Palmolive Company First Quarter 2006 Earnings Conference Call. Today's call is being recorded and is being simulcast live at www.colgate.com. Just a reminder, there will be a slight delay before the question-and-answer session begins due to the web simulcast. At this time for opening remarks and introduction, I would like to turn the conference over to Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead.

Thanks Sara. Good morning, everybody, and welcome to our First Quarter 2006 Earnings Conference Call. With me this morning are Reuben Mark, Chairman and CEO; Ian Cook, President and Chief Operating Officer; Javier Teruel, Vice Chairman; Steve Patrick, CFO; Dennis Hickey, Corporate Controller; and Ed Filusch, Treasurer. Our remarks this morning will refer to our first quarter results and ongoing expectations excluding restructuring charges, 46.8 million after-tax in the first quarter and incremental charges related to stock compensation due to the implementation this quarter of FASB 123(R), 12.1 million after-tax in the first quarter. These items are included in the as reported numbers contained in this morning's press release and accompanying financial statements. The reported GAAP results with reconciliation to the results excluding these items are included in the press release and posted on the Investor Relations page of our website at https://www.colgate.com/. We're delighted to report what we think is a very strong quarter, one which set first quarter records on virtually every line of the P&L, sales, gross profit margins, advertising levels, operating profits and earnings per share. Unit volume was strong across all our operating units and particularly impressive on a worldwide basis when compared with the really excellent volume quarter a year ago. This healthy sales growth coupled with a strong gross margin increase and a tight control on fixed expenses has allowed us to continue to invest behind our brands globally while still delivering double-digit operating profit and EPS growth. First, overall P&L. As I said, volume was excellent, up 7% excluding divestitures, pricing added a 1.5%. I think you all know that we've undertaken a worldwide initiative to improve the efficiency of trade spending, which should result in more positive pricing. We're still of course in the early stages, that we're excited with the…

Sarah, this is Reuben Mark. Don't push it if there are no questions.

Yes. Good morning everyone. Reuben, I don't think you're going to be that lucky. There's probably going to be a lot of questions. I was wondering, as we look at the Latin American margin performance, it obviously drove a ton of the profit growth. Can you talk a little bit about sort of how we should look at this over the balance of the year in terms of investment levels in different regions? Should we expect Latin America with the continued strength there to maybe fund additional investment in the other markets over the course of the year? Assuming that's what happened this year when you look at these sort of the outsize margin expansion in that region?

Well, Latin America from our formal estimates, from a top line point of view, is expected to grow well throughout the year. So, somewhere between 7% and 8% volume growth and it should be quite substantial for the rest of the year as well. Whether there will be as much pricing who knows, but their operating profit is expected -- it was up very substantially during this quarter. It is expected to be up double-digit each quarter for the year and for the year as a whole. And from an advertising point of view gross profit is also expected to be up substantially all year. And advertising -- again advertising will be up both as a percentage of sales and absolutely in Latin America. So yes, it will be helping other divisions to a certain extent, but in itself it is very healthy with a very good percentage of operating profit sales and at the same time an increasing advertising sales. So one would expect the volume will continue quite strong.

So it sounds like you took more of a portfolio view of the Latin American business this quarter in terms of saying, look, this gives us the opportunity to fund some more stuff in other regions, is that fair?

We generally do that. We operate the business on a global basis as you know, John, in order to ensure that everybody gets the spending they need. And the fact that we had the -- what actually was 170 points of -- basis points of price and 110 basis points of gross profit, they allow us to do that even more than we normally would.

Okay. Thanks.

Good. Thanks John.

Next we'll hear from Javier Escalante with Morgan Stanley.

Hi good morning everyone. First, the quick question on gross margin, if you can give us the components in the quarter and how you see them trending for the balance of the year in terms of pricing, restructuring, savings and funding the growth? And then I have a quick follow-up question.

Sure. Javier as we would normally do, as you frequently ask, the breakdown of the 110 basis points that we recorded was pricing gave us 0.7, that's basically the translation of the 1.5 or 1.7 positive into gross profit terms. The various savings programs are normal funding of growth. The restructuring and everything else that's going on gave us a 1.1, 110 basis points. The material prices, which everybody of course has negatives on, was negative 1.5. And all other changes, which are mixed, in the divestment and various other things gave another 0.8 positive. So if you add those all up, that comes out as a one-one.

And if you could help us, give us kind of how you see them trending for the balance of the year, that would be helpful.

Sure. We had stated earlier that we had raised -- Javier our expectations from 50 to 100 to 125. We do expect it to come in at that range this year. We expect each quarter to come in at that range each year, although that's always a dangerous thing to say. But nonetheless, we expect that. And as the -- I believe Bina mentioned that where oil price averages out for the year will influence some extent where we end up in that range. But we, I guess, the only way I can summarize it, we are looking quite good on gross profit.

But if oil stays, let's say, at this very high level, do you think that with the savings and the current price level that you guys have, you could weather a double cost environment or do you believe that you would consider taking more pricing, let's say in the bigger categories like toothpaste or dishwashing?

Well, as you would expect we're being as aggressive as competitive conditions and cost rationales allow us around the world. Therefore you see the good price numbers. In some markets competitively, it's not very possible. Europe being -- Western Europe being one. But the net result of it all, Javier, is that we had projected double-digit earnings and our expectation is we will in fact be there for the year, wherever -- that's a rash claim, but wherever oil settles, because if it goes out of sight, our expectation is that we will be able to raise prices. And beyond that as you know we are less dependent on oil than many.

And quickly on China, I know, I mean, the weakness in the quarter in terms of the timing, did the slowdown take place late in the quarter, because we met your China team in March, and at that point they hadn't seen any weakness. And if more strategically you help us understand whether the factors driving the slowdown, is it the price increases that you took early in the quarter. How do you see the category evolving in China?

Well I'm -- actually, March was a good month in China and the quarter finished well. China was -- Greater China was flat, even with last year's volume, which went up 18% as you know. Our market share -- again as you know we have a very narrow focus in China. Our latest shares are about 35, which is up from the 31 or 32 in December in toothbrush -- in toothpaste. And -- let me see where the -- I guess I don't have it - the toothbrush share is also good. Our expectations for what it's worth moving forward is in the China region, the entire region, we would expect volume to be up in the second quarter, the third quarter, and the fourth quarter, and up as a result, about mid singles for the full year.

So basically, what's kind of like a glitch in the quarter, because of the holiday, the New Year, the Chinese New Year. Do you think that was a factor for the flat volume in the quarter?

Yeah. I'm not sure the volume was very different, last year being such a strong first quarter. For example our second quarter expectations and we're starting off that way are somewhat high -- quite a bit higher and we beyond it. I think you're trying to find a difficulty, Javier, where I'm not sure it exactly exists.

No, no. I mean, it's just basically the thing is -- as you know we visited China in March. It's not a difficulty. It's just that basically, back then we were told that there was no weakness and basically the timing of the Chinese New Year hadn't been a factor or there was so - because your competitor had brought that up earlier in a mid quarter release, so basically it just was a little bit inconsistent with what we had heard about –

Javier given what we had heard about what other people brought up, we are quite pleased with the finish.

It was a very good quarter.

I mean finished in China specifically. And as you know from your own experience that in the Asia portion of the world, it's the timing of the monsoon that a sales manager will tell you affect sales. And in Latin America, it's Carnival and then it's Chinese New Year in the Orient and so on. There's always, but my question always is, well, gee, didn't we have Chinese New Year last year and didn't we have that when we made up the budget. But -- so we were actually quite pleased with the finish in Asia in general and China. As you know the rest of Asia was extremely good, India ended up with volume over 11%. The Pacific Rim was strong as well. So I think what you learned there really came to pass. I'm not sure that you could characterize that as –

Absolutely it was an excellent quarter and even further you have to say, is elections. Okay.

Okay. Bye, bye. Yes right. Absolutely. Mexico elections as well.

Exactly. Bye, bye.

We’ll take our next question comes from Amy Chasen with Goldman Sachs.

Hi. I'm just curious about the volume upside sort of across the board in all of the regions. Would you attribute that to just more efficiency from your ROI program or is there something else generally going on that allowed you to accelerate that volume so nicely?

Well, Amy, Seamus McBride who you know and I think a number of people know who is -- runs our US Company and also is in charge of this worldwide ROI and promotion program is in the room, and he would be delighted if I said, it was due to that. But I think it's little early days to say, I think that we came out of last year with quite strong more -- volume momentum worldwide. We were able to build our advertising spending as you know, and we are getting more efficient at the various spending mechanisms, and it's continuing. It really reflects real consumption as I'm not sure was mentioned in the press release or in Bina's comments, I guess it was in Bina’s comments that the US for example had an increase of 11% in consumption and through Nielsen and very substantially outside of Nielsen. So that's a -- the shipments are reflecting the takeaway in the market share.

Okay. Great. And it sounds like -- you mentioned working capital, and there seemed to be a focus in your prepared comments on that. That was greater than it's been in recent calls. Is this, I know it's something you've always focused on at the company, but is this sort of a renewed focus on this, and do you see a new opportunity to bring DSOs down more than you had anticipated?

There's always a focus on it. As you know we run reasonably tight on the balance sheet side. We did reach as I recall 1.5% in total working capital, which is lower than we had last year and lower than we've had historically. That's a combination of a pretty good drop in receivables and basically a maintenance on a percentage of sales basis or on a days outstanding -- days supplies of inventory. But yes, we have a constant focus on that, and a lot of the restructuring benefits that Javier - our Javier -- has been leading will affect the supply chain and will ultimately affect our percentage of sales as inventory. Actually it is progressing quite well.

Okay. Great. Last question is just that pricing number, how much of that was list price versus the reduction of inefficient trade spend?

Okay. Actually that's not easy to define but I mean -- and also my folder on it, is not that easy to find. But I do have a folder on it. Let me dig it up. As I recall, it was about a ratio of 40% from gross to net and 60% from price increases. And I'm looking at the piece of paper and it's about -- yes, two-thirds from price increases and one-third from gross to net.

Great. Thank you.

Good. Thanks.

Now, we'll hear from April Scee with Banc of America Securities.

Yeah. I just have a few questions about North America. The first is now that the detergent business has been divested, shouldn't the operating margin be going up and what is your margin opportunity there? And then, on pricing, it looks like this was the easiest pricing comp in North America for the year. What should we be expecting on pricing going forward? And then finally, for Wal-Mart and the de-stocking issues that folks have been talking about, was there something that you saw there that you were just able to offset maybe better than some of your peers during the quarter? Thanks.

Well, April, you have to obviously decide about better than the peers. There was a de-stocking affect from not just from Wal-Mart but from other big trade elements. If you as I said earlier, the US volume was up 8%. If you add back in, though, specific Wal-Mart percent that gave a 0.5% to 1%, about a 0.5% on top of it, but if you add the de-stocking and I can give you the actual trade inventories which are down a substantial amount. If you add those back, it really gets the volume up to about 11%, which is interestingly equivalent to the consumption figure that we have separately. But let's talk pricing in the US. The current projections are that we should have a positive pricing number for the full year, and the second quarter should be modestly up and increasingly after that. There have been a couple of price increases, which are nothing more than you know about. But that will take effect and a lot of this other promotional stuff will start to bite I'm sorry, I'm looking at the operating profit but the number was pressed pricing at the same analysis. Hang on one sec. Yeah, okay. Good. Yeah. So if we look at it was flat this quarter as we said, it's going to be up about 0.5% for the year, and that should start in the second quarter as I said a moment ago. But the comments I was making were really on the figures on operating profit. Operating profit should be up for the year in all of North America. Hang on one sec -- (off-mike comments) sorry one sec. Operating profit will be up in each of the next three quarters and with increasing velocity as we go through. For the year in North America operating profit should be up, based on our current projections, mid-to-high single digits.

Okay. Thank you.

Thanks April.

Now, we'll hear from Wendy Nicholson with Citigroup.

Hi. If you could just clarify a couple of things, I'm not sure I understand, frankly, on why pricing in the US wouldn't have been up in the first quarter. If you raised prices on something late in the year and we saw that benefit in the fourth quarter, why doesn't that translate through? Does that just mean there was more promotion in the first quarter?

I think there's two things, Wendy. Number one is we had a major push in the first quarter to build our business in club stores, very specifically with toothbrushes and toothpaste. But and as a result of that, since the mix that goes into club stores is almost by definition lower price on average per unit, that affected it number one. And number two, there was a major push in the promotional push by our toothpaste competitor in the fourth quarter, and as we habitually do we met it. All that being said, again, on a worldwide basis, it was up, and our US pricing is expected to be up as I just said in my conversation with April.

Okay. Got that. Okay, thanks. Now, two more questions. Hill's, you talked about double-digit profit increases for the balance of the year.

Wendy let me answer quick, is do I interpret frankly, to be a positive or a negative word?

You have to wait to read my note.

Okay, good.

Okay. Just to be clear. Hill's, you talked about profits being up in the balance of the year. And I wondered whether that was a function of an outlook for easing raw material prices. It sounds like that's hugely important category for you, and I assume advertising spending still going to be up.

It is. As you know, Hill's operating profit was up in the fourth quarter, and the expectation, it will be up throughout the year. That's combined first of all it's combined with a increasing gross profit in every on a percentage basis, and absolutely in each quarter. And advertising through the year will be up double digit and essentially that every quarter.

Okay. Perfect. And then, my last question –

Hill's business is actually quite good as I think, Bina mentioned, 5.5% volume increase is the best in several years.

Yes. Looked awesome. My last question is on Latin America just following up on this on the terrific strength there. Or --when a bunch of us were down in Brazil in December, the General Manager told us pretty clearly that the subsidiary and I think throughout Latin America had taken a huge initiative to, kind of, build consumption partly with the expectation that Procter was going to get more aggressive pulling the Crest and Oral B brands together. And that some of the volume growth that your business had seen in Latin America, specifically in 2005, was a result of that, sort of, heavier offensive investment spending. And I guess not only in Latin America were it seems like the volume growth is great, but have you seen or begun to see in any of your major subsidiaries more of an offensive approach from P&G as it relates to bringing those brands together?

I can't say, as I'm looking at the people who would know in more detail than I. I have not heard of that but let me give you let me -- since we were down in Brazil, last year the -- we ended up with a double-digit volume increase in the fourth quarter and for the year as a whole. And the first quarter started off with a 13% volume increase in Brazil, which is not all toothpaste but largely toothpaste and personal care. And so that looks quite good. And as I say, Latin America as a whole, ended up with a 5% volume growth in the fourth quarter and a 7% volume growth in the first quarter. So if anything, it would appear to be accelerating rather than decelerating. And our projections on going for the next couple of quarters are also well into our 4% to 7% volume ranges.

Got it. Sounds great. Thanks, Reuben.

Thanks Wendy.

Next we'll move to Bill Chappell with SunTrust.

Good morning. Just two separate questions. First, on the advertising spend, do you expect that to continue to be up kind of double-digits for the remaining quarters this year or was that tied to new product launches? And then second, kind of separately on the restructuring charges, can you maybe give us a little color on what those were for this quarter and kind of where you see the improvements from them?

Okay. On the advertising, we -- when you said new products, obviously, we have new products around the world in 200 countries, but the expectation is that, for the year, advertising will be up double-digit. It was up double-digit this quarter. Bina used the figure 11%. It's expected to be more or less in that range in each of the next three quarters. So that's for the first question. Second question, restructuring projects, I can read you a whole bunch of them. In the charges in this quarter were for Dental Cream consolidation in North America. You may recall we told you that we were going to close our factory in Jeffersonville, Indiana. That has been announced and that is underway. And we are going to be building a new factory in Morristown, Tennessee. So that was 14 million. Similarly, we closed our facility in Kansas City, and are consolidating our soap -- have already consolidated our soap at an outside contractor. That's 11 million. And Dental Cream Europe toothpaste in Europe about 10 million, and then some miscellaneous smaller things.

Got it. I guess the broader question is, on the restructuring program, are we on schedule, ahead of schedule?

Yeah, we are on schedule, Bill. We are where we had said we were going to be in the January conference call. The overall savings over the entire period of time are -- as other charges are within the original guidance when we announced it in 2004. And it is now accelerating, and the savings will accelerate throughout this year.

Okay. And then, just one final, I assume your double-digit EPS growth guidance assumes a certain level of portfolio, I mean, has that been updated or can you maybe quantify what the swing factor is on that?

Of course, we have as you would expect, we have quantified it. As I, I think I mentioned, but perhaps not, is that every $2 in the cost of oil costs us $0.01 a share. Our job is, and we have here to fore done it, is to offset that. And this morning oil was 72.55 or whatever it was a barrel. But in answer to an earlier question I said that, number one, I think our savings programs are running somewhat better than we had anticipated. We have a whole potentially incremental source in Janice's project. And the history is that when those prices are passed along, normally in most countries they can be further passed along to the consumer. But we shall see. We are very confident, as I say, of delivering a double-digit earnings this year.

Okay. Thank you.

Thank you, Bill.

Next we'll hear from Christopher Ferrara with Merrill Lynch.

Hi. I was wondering if you could talk about Europe -- I guess, specifically your ability and by the way, given the comp was easier -- your volume growth was strong, yet pricing was downwards and margin was up. So I guess how were you able to drive margin percentage up in that type of environment? I mean was there a sort of disproportionate restructuring saving there?

There were not disproportionate savings. The -- a specific answer to that -- and this is probably more specific than you want to be -- our volume was terrific in the UK, I mean, extraordinary. And the UK has the highest because it's personal care and oral care company has the highest margin in Europe. So that even though it came down with pricing slightly, the increased UK mix part helped the margin. Nobody told me that. I'm just supposing that. I'm looking at the financial people. Okay. So to a certain extent, part of that is mix. Secondly, we have good volume and good margin growth in Eastern Europe. Third, that surprisingly good volume in what some people call old Europe. And together, that added up to a slight negative in pricing, an obvious negative with foreign exchange offset by good volume and good mix.

Got it. And then just –

If you're interested, Chris, in terms of projections, we expect the margin in Europe -- hang on second - to be -- the second quarter of last year was a bit lower, so one would expect that the margin growth would be even a little higher. The gross profit growth will be a little higher next quarter than previous -- than the first quarter. And as a result, our expectations are that EBIT will be up slightly in dollars, obviously, substantially in local currency.

Got it. That's great. And just also on Asia and Africa. I noticed that the margins stayed flat on a reported basis, but ex-divestitures based on what you guys have said, margin would have gone. So I guess why would that have been if you're divesting a lower margin business?

Track me through it again. If we're divesting a low margin business, I think the comment was not on margin, it was on operating profit. So let me explain Chris, that on the detergents even though the gross margin is say 35, and the operating profit is only 12 versus the company's 21 or so, you are still making a bunch of operating profit that when you sell it you give away, and by no means does the interest on the money that you've received come anywhere near short term equaling that. So the job is -- and you wouldn't divest it unless you thought you could overcome it -- that in a couple of quarters you will have overcome that and that you will have the positive growth. But for the first quarter when it's divested, we divested it as I recall literally at the end of the year. This is a -- so that there's -- you tell me I can't remember the number -- $10 million of operating profit or so that we simply have to make up over time, and will.

Right. I was just talking more in terms of, I guess, ex-divestitures your EBIT would have grown faster than your sales. I mean like ex divestitures your margin percentage would have gotten better –

Yes. The net through operating margin percentage, yes the in fact by divesting the detergents, the operating -- the gross profit went up, but short term, the operating profit went down. It did, however go up as a percentage of sales, which is what you want. If I'm not being clear either ask it again, or let's talk separately.

Yes. That we can, I can -- we can handle that offline. I don't want to take up too much time. Thank you though.

Thank, Chris.

Now we'll hear from Lauren Lieberman with Lehman Brothers.

Great. Thank you. Good morning. Can you give me the split of cost savings, how much was from restructuring benefits and how much was from just the ongoing funding growth programs?

I don't think we're going, we break those out actually, but together, Lauren, I believe I said it was 1.1. And about two-thirds of it is from our funding the growth and the third is most around the third is from restructuring.

Okay. Great. And then, I guess I'm still not really clear on why you're expecting to see acceleration in operating profit growth through the year for North America and for Hill's.

Okay.

And sort of what changes as we move to the year, is that more of restructuring savings is it more pricing if volume growth is going to pretty much, strong and consistent in Q1?

Okay, number one, Hill's took a price increase, I believe in January in the US and elsewhere. And despite that they had 5.5% volume. Their volume is expected to be more or less at that level throughout the year, perhaps if it goes well even a tad higher. So volume are good, the effect of that price increase will be reflected in sales and margin and operating profit as we go through the year. Also the gross profit, which was up in this quarter nicely, will be up at least -- the plan is to be up even more nicely for the year. So the -- and advertising is as I mentioned earlier is up, but a good volume trend with a very high margin category and mix moving in the right direction should give us -- our operating profit for the year is to touch or go slightly over double digits, and historically they have come in pretty close to what they estimate.

Okay. And then how about North America, that was just Hill’s?

Yes. I'm sorry.

Thank you.

North America, there it is primarily a pricing difference that, it is expected, and I have the man who is in charge of the division -- that starting in the second quarter, pricing will be more positive who is nodding, but indicating that that's not a slam-dunk, as they say, I'm just reading his nod.

And if that going to be driven by the gross to net savings or buy list prices with the change?

Both from the point of view, that -- that we haven’t yet lapped the last year's price increases and the gross net is indeed taking strong form.

Okay. Then also, if I could ask about Listerine from the Pfizer businesses. Can you give us an update on timing? Because I think your level of potential interest has been made clear, but what kind of timing have you put a bid in and when do you expect some resolution on that?

Okay, all the attorneys and quasi-attorneys around them are shaking their head, no. But it is in process. And I guess Pfizer or Pfizer's investment banking people will tell you. There is an orderly process. And we are at stage X, and a stage Y will be coming up. So if that is perfectly clear, I discharge my obligations.

Okay. All right. Thank you.

Thanks Lauren.

Next we'll hear from Linda Bolton Weiser with Oppenheimer & Co.

Thank you. I just wanted to clarify on the -- Reuben, when you were speaking about the European performance, I was under the impression that Eastern Europe was moved out of that segment into Greater Asia/Africa. And then Australia was moved into that segment. So wouldn't that have actually dampened the growth of that segment relative to how it was reported previously? And if so, maybe you could give a little more color on the rest of Europe other than the UK, because it still seems like very, very strong growth.

Well, you have to distinguish, if you could, Linda, between Central Europe and Eastern Europe holdings. So basically, Russia was moved to Asia because that is a developing country in the same sense that we perceive other companies -- countries are developing. If I'm correct, the other Central European countries remain in Europe. So that -- if you want me to, I will give you the volume for all those countries -- hang on one sec. In the record "new division," Poland was up double-digits, Romania, these are the -- we're talking about the -- Poland, Romania was up strongly, Nordic Group over 10%. UK, Ireland actually as I say earlier, very strong, virtually 20%. And then, if we look at the part of the Eastern Europe, which is Russia and basically Turkey, Russia was up very substantially, over 20%, and Turkey was up about 10%.

Okay. That's helpful.

Good. Okay.

Can I also ask something about cash flow? It seemed like the negative swing on operating cash flow in the quarter was due to accounts payable and other accruals. Is there anything unusual in the timing there, will that comparison improve later in the year?

Well, I think and as -- I have an analysis this year, I think Linda that the swing was virtually completely due to the tax. The estimated tax, if you add that back in, and I can give you the specifics, if you add that back in that gives us 10% or 11% increase in that figure. Yes. Let me make sure I give that to you accurately. And reasonably enough, it's in a folder labeled cash flow. The operating -- I can give these out, can't I?

Sure.

Okay. The operating cash flow overall was 382.5 million. The tax payment was -- last year was 66 million, this year it's 160 million. So basically, 100 million difference and if you take that out, that's 10.6 increase in cash flow.

Okay.

Okay.

And then one more. Is option expense still expected to be $0.10 per share for the full year?

Yes, we've been saying -- I think I said originally $0.09 to $0.10. As you know, it came in slightly less than -- we are not getting hit very hard by this. The way it should lay out is that it was $0.02 in this quarter. Probably it will be $0.02 or maybe slightly less in the second quarter. The third quarter is when we give our new option so that's $0.04. And in the -- and the fourth quarter, it will probably be $0.01. So that's the way it lays out through the year.

Okay, thank you very much.

Thanks Linda.

Now, we'll hear from Alice Longley with Buckingham Research.

Hi. Good morning. I've got two questions. One, within Europe one of your major competitors had said that in Germany, there is a shift going on at the consumer level somewhat from the hard discounters to the soft discounters and the soft discounters are more weighted to brands, unless the private label set should be good for you and the other companies selling major brands. Are you seeing that?

We're seeing a little of it, and also, we're seeing even the hard discounters starting to take a individual best-selling brands. It's just the tip of the iceberg but maybe very exciting.

Okay. And then my other question relates to Hill's. There was some concern about the pet market overall in the second half of last year in the specialty channel and supposedly, there was some improvement in the market here in the first quarter. Are you seeing -- what is the dog food market doing overall in the first quarter in the specialty channels? Was your performance all gaining share or was the market growing?

We grew somewhat faster than the market, but it is the specialty channel overall had grew just under 3% in volume and about 5% in sales fourth quarter '05 versus this quarter. An interesting phenomenon is that we're seeing a bit of resurgence in the pet retail, i.e., not the superstores but the pet retail as I'm sure you've heard that elsewhere, as it moves back just a trifle.

I'm sorry. The 3% increase in volume and 5% in sales, that was the first quarter?

It's fourth quarter '05 -- I'm sorry, yes, it's first versus year-to-date. That's correct with year-to-date. And….

So that was growth in the market this year, in the first quarter of '06?

Yes.

Okay.

Also, there are -- the pet retail categories volume were -- and this is data from late last year, were a couple of points higher than that. The highest rates within the specialty channels. That's pet retail excluding form and fee.

Okay, thanks a lot.

Okay, thanks.

Our next question comes from Mary Ann Dzuback (phonetic), Private Investor. Q – Mary Ann: Hi Reuben, great quarter. I have a question in terms of the restructuring charges. Can you break and the cost savings probably more so but can you break out the cost savings by geography?

I don't have that here. Can you go onto some other questions, and I will see if somebody can get an approximation of that in interpolating other data? Q – Mary Ann: The only other question I have is my long-standing one, and that's the definition of double digits. Is that 11 or 99?

It's not 99. Q – Mary Ann: Okay.

It depends. I mean if you're talking about basis points of gross margin, it may be 99, if it’s EPS growth, I think you know the consensus and the range as well as we do, and we're happy with both the consensus and the range for the year. Q – Mary Ann: Thank you.

And if we could, we can get back with an approximation of that, if we could Mary Ann.

Yes, thank you.

Okay, thanks.

Next, we'll hear from Alec Patterson with RCM.

Yes. Good morning. First, I just wanted to clarify, Reuben, your comments about the overall US retail inventory adjustments you experienced in the first quarter. And I believe you said that overall your US business probably saw about 300 basis points of sales lost to inventory de-stocking. Is that about right?

We don't want to make a big deal about it. We had a great first quarter in the US. We grew 8%. The Wal-Mart part would -- made it 8.5 or 9 and to our best of our calculations, it would have been 11. So you're saying -- I'm saying yes. But we historically do not talk about -- which is why we didn't talk about it in Bina's report or the press release. We do not normally talk about de-stockings and -- and what happens when they stock up? I mean so -- The answer is yes. And that is reflected Alec in -- I always answer more -- I give you more of an answer than you're asking. But if you'd look up in the classic announcements that we give whenever it's asked, is the number of weeks in the first quarter last year based on Nielsen, it was 9.3 weeks in the first quarter last year, and it was 9.3 in the fourth quarter. In the first quarter this year, it's 8.5. So that's - while it's not apples to apples certainly, I mean it's not directly translatable to the Wal-Mart or the other, it's an indication that in fact did happen.

I mean that's a fairly significant de-stocking. Do you expect that this can continue through the year or conversely looking into next year, shipments should resume levels that match takeaway and thus there's obviously a nice little lift for you in the following year? But what is your outlook on how that's playing out?

Well, number one, the general de-stocking of US and obviously any place else in the world, it has been taking place over a period of time and is continuing. For example, if you take 2004, for the full year we had 9.4 weeks in the trade. We -- last year, we had 9.3 and this year, we're expecting 9.2 including the 8.5 in the first quarter. So we do have a bit of an expectation of a modest rebuild but that trend goes on over a long period of time. It is -- maybe it can affect somebody in one quarter, but basically you adjust to it as you go along, and it's not, I don't think, meaningful enough in anyone period of time to affect the results significantly.

Yes. Not trying to take anything away from the results, just trying to understand what's going on. But in terms of that kind of impact maybe it's -- it is small in the broad company but did that have any impact on the overall, I mean to -- great gross margins, but the amount of gross margin contribution from the savings side seemed to be a little bit light. So I was just wondering, was there any impact due to de-stocking on your gross margin?

In the United States?

In the US, and then obviously and partly implied.

But the savings worldwide were pretty good -- 110 basis point total savings is at the high-end of what we've historically done. And I think we may be able to continue to do that, but historically it's I think is pretty good. Domestically, the question - let me pose it to Seamus. Alec's question is that, did that the stocking affect in any way that we think the gross profit of - is that the question?

Yes.

The answer to that. Both Seamus and Ian are shaking their heads and I look to the financial gurus they're shaking their heads, so I don't think so.

Okay. That's fair enough. But, just funding the growth implied benefit two thirds of your 110 basis points, just pointed out that is quite a bit below the trend line that you guys have done over the past few years. And I guess I'm just trying to get a read, is there is something that is taking their contribution down, is the one time factor or it is just the nature of blending restructuring savings with funding the growth that this will be a smaller contribution?

I don't think so. I have to say Alec that at least from my perspective as I see the potential for savings, I'm talking about going back to when we had a 39% gross profit instead of a 56% gross profit, and the potential for savings, taking into account the restructuring, our normal savings programs, possible pricing and then this very important area of promotion, that I have never really felt as good about the overall savings programs as I do now. When I said a couple of times at various presentations that the fundamentals are good, since we run the company, all of us on a ratio basis, when I say the fundamentals, I mean the ability to generate gross margin to spend on advertising to drive market share and volume. So that's –

Okay. That's fair. Will you guys be issuing an 8-K or anything to give us reclassified sales and earnings for the new divisions?

I think it's been issued.

Okay.

I think it's been issued. Yes.

Okay. Thank you.

Okay. Great.

Thanks Alec.

Next we'll hear from Constance Maneaty with Prudential Equity Group.

Just a couple of quick questions. How many shares did you buy in the quarter? Did you finish the last authorization and have started on the new one? And what were the quarter end share?

Okay. We did finish the old authorization, and we are working on a new one. During, on a year-to-date basis -- we -- in the first quarter, we purchased 3.7 million shares at a cost of 205 million. In the second quarter so far and understanding that we have a blackout period so we only had -- we're buying for a couple of weeks I guess, we bought 217 million -- is that right? -- 217,000 shares at a cost of $12 million. So that's -- going back into history Connie, in the first quarter we bought at a faster rate -- substantially faster, 50% faster than either the third or fourth quarter last year.

Okay. Also the acquisition of Tom's of Maine suggests maybe a different segment for you. How big do you think that business could be in, say, five years, and which categories are most attractive to you?

Well, we have some great expectations for Tom's of Maine. And as you know that's -- the Naturals category is growing enormously, rapidly a multiple of what the traditional categories are growing. And fortunately Tom's enjoys very big, I mean, very big market share in the whole foods and those type of outlets. We have great expectations not just for this country and other categories, but internationally as well. We have -- is this legally, can I say? -- we have received the Hart-Scott-Rodino clearance, and so one would expect during this quarter, we will close on that acquisition. But again, it's not as much an acquisition. We do own about 85% of it, but it's a partnership with, as you know, Tom is the founder -- Tom Chappell is the founder of the company and his wife, and they retain a meaningful portion and will be continuing to run the business.

Would you guess that within, say, five years the Naturals category for you could be several hundred millions of dollars -- does it have that kind of potential?

If you were to say that, I'm not sure I would argue with it. But I have no -- on the other hand we don't talk a lot much anymore.

Okay. Thanks.

Okay.

Now we'll hear from Bill Schmitz with Deutsche Bank.

Good morning, Reuben.

Hi, Bill. How are you doing?

I'm fine. How are you?

Good.

Can you just talk about Europe a little more, because it seems like a lot of the European domiciled names, they posted some pretty sizable both volume and sales growth. So if something changed our marketplace is then now having the benefit of currency and kind of reinvesting a lot of that back into the marketplace because some other comments about France accelerating and Germany doing a little better doesn't kind of jibe with what some of the US guys have said so far?

Which US guys?

Well, Kimberly-Clark specifically.

Okay. The only thing -- Europe -- Western Europe remains the most difficult market in which we compete, there is no question, from a competitive point of view, promotional point of view, from a trade point of view. But despite that we are encouraged as Bina said that there are some very nice market share gains, again, in our core categories. Both Colgate and GABA have grown meaningfully in market share in Europe. We've got good gross margins in Europe, and historically pretty darn good operating margins. I don't know that our situation is different than anybody else's you'll have to tell me that. But so far we're pleased. The fact that we've got 8% volume growth in Europe, understanding that you have Australia in there and Eastern Europe, but there was positive growth in Western Europe, which is not easy volume growth in Western Europe, which is not easy to come by.

Okay. I mean, has the competitive set changed now with the European guys investing back currency?

The European guys doing what?

Investing back their currency gains?

I don't know that -- I mean we have currency negatives, but it depends in what currency they report. I mean if they report in euros, then there's no real gain, because they are -- if they were investing in the United States, they have a gain because they can invest dollar. In euro is a euro is a euro. So if they maintain their rate as advertising sales percentage, they don't have that opportunity. But the net of all of that, Bill, is that we are gaining in the categories that we really care about. We also had an interesting resurgence, as I recall, in liquid cleaners with where we are the number one company in Europe. And that is encouraging, because that is the only basically the only high margin household category.

And, then just a quick philosophical question on through the inventory level of the trade. So with the nine weeks now I mean are auto stocks going to start to be a big problem for them? Do you think that's going to ultimately push back at some point? Or if something dramatically changed in the sort of supply infrastructure that kind of allows them to operate at these much leaner levels of inventory?

Yeah. They are smart people just like you guys are smart and we're smart and everybody else. And everybody has their business to worry about. They calculate how much they want to have in out of stocks and they adjust accordingly and they balance how much the savings are from the investment inventory plus versus perhaps an increase in out of stocks. But as I mentioned a moment ago, the fact that we've gone from 9.4 weeks to 9.3 weeks to 9.2 weeks over a three-year period, it's that’s you're planning visibly close to being so on an overall basis. And again, this is not -- it's not a random shopping, it's a thoughtful process aided especially by their increase in supply chain logistics and the companies themselves, the supplying company is becoming more sophisticated.

Great thank you.

Thank you, Bill.

Now, we'll move to Joe Altobello with CIBC World Markets.

Thanks. Good morning. Reuben, earlier you mentioned the overhead spending has been the sales has come down pretty aggressively. And it's easy to see the gross margin impact, but the overhead cost reduction is a little bit more varied. How much of that came from actual cost savings? And how much is from operating leverage from higher volumes?

Well, what I can tell you is I'll have to check. I'm looking for a folder on our overhead. I don't know if you have it. Okay. I'm getting a backup folder on it. Okay. The -- in overhead, you know, there are number of components, and we try to strip them out, so we can take a real look at it. Obviously, this year, a new component is the FAS 123R. But also, we strip out freight and warehouse, because that is fuel driven as you would expect, and that so and that we can control it only within a certain extent, so that the numbers we can control are what we call worldwide adjusted. And that went down from 17.2% to 16.7%. So that's encouraging. It was actually, basically flat with last year, even though there was a 7% solid sales increase.

Okay. And then in terms of the opportunity here obviously the 50 basis points is nice, but could this be a 200 basis point improvement over the next two or three years?

For what?

In terms of the overhead as a percentage of sales.

200 -- I don't know that I could guarantee or anybody could guarantee you 200 basis points drop. We have seen over many years a consistent drop each year. We are very sort of a tight company with no frills, but I don't know whether 200 basis points over a couple of years has come from. I don't my sense is that we would not do that. It will keep going down, but my sense is it would not do that. Q - Joe Altobello Okay. So the EBIT margins should generally track with the gross margin as well over the next few quarters?

Well again perhaps where the EBIT margin was up this time, if we have 60 basis points, I can't remember the number. And our expectation is that it will continue going up this year.

Okay. Great, thanks.

Okay

We'll hear from Daniel Chris with Federated Investors.

Thank you. My questions have been answered.

And move to Sandhya Beebee with HSBC.

Good morning. I had a question, once again on North American pricing. It sounded at the backend of last year like you were very positive about the way the trade promotion reductions were going and how the environment for pricing was in North America was progressing, and it seems now that you are a little bit more cautious with your expectations for 2006. Is there been something that has changed in the competitive environment that makes you feel a little bit -- that you are going to have to reinvest more of those trade promotion spending back into gaining volumes?

No. I don't really think so. The US is the second most difficult market after Europe and it is a competitive spending market. I did mention that a fourth quarter occurrence was a major promotional push by our primary competitor in toothpaste and we of course responded. But I think you will see Sandhya as the year goes on that we will have positive price and positive gross profit in North America.

And with some of the Latin American positive pricing due to some of your trade promotion reduction initiatives?

Yes.

And in which markets?

Well they're working on it throughout. My sense is that Mexico let me look that up, but I think Mexico was the most significant. Let me look that up. It would appear that Mexico is a big one Brazil was as well.

Thank you very much.

Thank you Sandhya.

We'll hear from Elena Mills of Atlantic Equities.

Thank you and good morning everybody. Just wanted to come back to Latin America if I could, and to delve a little bit deeper into the drivers of your operating profit progression there because you've obviously had some impact from the higher pricing, some volume leverage from the very strong growth that you've achieved there. And I imagine the currency also helped. But 29% I'm still interested to know what kinds of operational initiatives or overhead savings might really have contributed to that which was a very significant profit increase for the quarter. Could you provide a bit more color on the drivers there please?

You're talking about North America.

No Latin America?

Latin America? I'm sorry. I didn't quite understand. Okay. Well, the drivers were a very good volume quarter. It's happening simultaneously with a modest reduction in promotional spending and a price good price through out the division because, as you probably know from our past history, that our pricing in Latin America is designed to keep up with local inflation. So where there's local inflation, the prices in local currency go up because of it. And some interesting share initiative -- market share initiatives, big gains in key category of toothbrushes, big gains in toothpaste. If you look at the worldwide and Latin American growth in our core categories which we always look at, which is quite important, oral care was up 10% in volume. So, substantially higher two points higher than the company as a whole, and toothbrushes were up even higher than that, personal care about 5% and detergent is down, obviously, sharply. So that what is happening, and especially happening in Latin America, is our core categories are growing faster than the overall company. That affects mix, that affects operating profitability and so on.

So it's mainly a mix effect beyond the pricing. There's not really any significant initiatives that you have running on overhead cost reduction or any supply chain changes that would have impacted that number?

Well, we have a lot of specific programs to reduce overhead, and we have a lot of programs to increase gross profit, and we have a lot of programs to invest that money back in variety to the top line. So it is to a certain extent, and which is the reason I mentioned about the fundamentals, it's the whole there is I mean, you can't pick out one thing is that that we burned down three factories, and therefore, got the saving, but the whole process, which, in a global company as I think the process is important, is continuing and a bit better than we had expected.

Understood. So it sounds like that's a sustainable kind of trend for the balance of the year?

I would hope so.

Okay. And one follow-up question if I could on Western Europe. I was just wondering if, perhaps, you could provide a volume figure for Western Europe in isolation for oral care and for the company as a whole, excluding the other bits that you now include in the reporting segment?

I don't think I can give you for oral care. And I used to be able to give you these sheets used to have Western Europe and Eastern Europe, but the -- my recollection is the Eastern/Central portion, was up about 11 or 12 and Western Europe was up about 5. Let me read you, if you're interested, the individual countries.

Maybe if you could just provide UK, France, Germany, and maybe Italy?

Okay. Bina is saying no, but I'm going to do it.

Fair enough.

Hang on one second. Just one second, Western Europe was up 7% in volume, South Pacific was up 7% in volume and Central Europe was up 19% in volume.

And thanks very much. It's very helpful.

Which are pretty good numbers actually.

Absolutely. Thanks very much, Reuben.

Okay. Thanks. I appreciate it Elena. Okay. Why don't we have one more question or two more questions at most, okay?

And that will be a follow-up question from Lauren Lieberman.

Thanks. That's okay. I can follow-up with Bina later.

Okay. Thanks Lauren.

Okay. Thanks everybody. Terrific. I appreciate all of your attention and interests. See you. Bye-bye.

That does conclude today's conference call. We thank you for your participation and have a great day.