Colgate-Palmolive Company
Q2 2012 Earnings Call Transcript

Published: 26 Jul 2012

[Operator:]

Good day, and welcome to today's Colgate-Palmolive Company's Second Quarter 2012 Earnings Conference Call. Today's call is being recorded and is being simulcast live at www.colgatepalmolive.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:]

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. We will discuss organic sales growth, excluding foreign exchange, acquisitions and divestitures. We will also discuss gross profit, operating profit, net income and earnings per share, excluding the impact of the onetime 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 We're very pleased with our second quarter results, particularly in light of an increasingly unpredictable global economy. Of particular note is our organic sales growth, which was positive in every division and up double-digit in the emerging markets, accelerating from the first quarter's strong pace. The total company organic sales growth of 8% reflected a good balance between volume of 4.5% and price of 3.5%. Our market shares are strong around the world, and our categories are growing. Even in the developed markets, we see category growth, albeit modest. And we believe we have the right strategies and plans in place for 2012 and beyond. As you know, 1 of our 4 strategic initiatives is innovation for growth, and that focus has been one of the key drivers of our top line momentum. You'll hear more about recent launches as well as new products to come when we go through the divisions. Gross margin increased 50 basis points and continues to be higher than the fourth quarter of last year. The increase was somewhat less than previously anticipated due primarily to higher foreign exchange transaction costs from a rapidly strengthening dollar during the quarter. However, we expect gross margin to increase sequentially in the third and fourth quarter, and to be up within our targeted range of 75 to 125 basis points for the full year. Our increase in margin and control of overheads has allowed us to increase advertising, both absolutely and as a percent of sales, as we told you we would. And with EPS as expected, overall a healthy income statement. Earnings per share increased 6% and was up strong double-digit on a currency-neutral basis. Our balance sheet remains strong, both inventory and receivable days declined year-over-year and our free cash flow before dividends increased 8%. So then let's turn to the divisions. First, starting with North America. Our business in North America remains solid. Our categories are still growing, and we are growing even faster. Both for the quarter and on a year-to-date basis, our all-outlet market shares are up in toothpaste, manual toothbrushes, liquid hand soaps, bar soaps, body wash, all-purpose cleaners and fabric conditioner. Our strong advertising support behind a broad array of new products has helped drive these results. We're very pleased with the continued strong performance of Colgate Optic White toothpaste and are very excited about the launch this quarter of Colgate Optic White mouthwash to complete the existing regimen of toothpaste and toothbrush. This mouthwash, our first entry into the U.S. market, effectively whitens teeth and freshens breath. The alcohol-free formula helps prevent -- protect against future stains and reaches hard-to-brush areas. It kills bad breath germs, while being enamel-safe. Reception by the trade has been excellent. In addition to the mouthwash, we're also launching Colgate Optic White enamel white toothpaste, which fortifies enamel through mineralization for strong teeth while providing a whitening benefit. This bundle addresses a large segment of whitening users and nonusers who fear long-term enamel damage. Enamel variance grew 22% in 2011 and now represent almost 6% of the toothpaste market. In personal care, in both liquid hand soap and body wash, we are expanding our fragrant footprint with Softsoap Pampered Hands Coconut Lime Foaming Hand Soap and Softsoap Citrus Splash & Berry Fusion body wash. The body washes are created with real fruit extracts and best-in-class, wake-me-up fragrances, along with strong, invigorating graphics to help differentiate the products on the shelf. In the dish liquid category, we're launching Palmolive Fresh Infusions. This new line addresses the mass market consumers' desire for affordable luxuries. The line has premium looking packaging combined with naturally inspired fragrances

[Operator:]

[Operator Instructions] And we'll go first to Nik Modi with UBS.

[Nik Modi:]

Just, Ian, would love your thoughts -- I mean, the top line was phenomenal. I'm sure share gains have to do with a lot of that. Can you kind of parse out what's going on in the category, just sequentially? And obviously, a lot of talk about consumer slowdown globally, et cetera, et cetera, just curious what some of the category consumer dynamics were and how much you think the share gains really contributed to the top line effort this quarter?

[Ian M. Cook:]

Thanks for the question, Nik. As Bina closed in her summary remarks, we do believe that it is the full strategic initiatives that we have, the innovation that flows from them and the quality of our integrated marketing programs that is driving the top line growth of the company. Obviously, it is a blend between market share and category growth. You probably recall that about 53% of our business mix today is in the emerging markets. And as we have said before, the pace of growth in our categories in those markets is high-single digits, and we continue to see that pace of growth sustained through the second quarter. As we commented on the last call, obviously, category growth in Europe is extremely modest, very-low-single digits, in some cases flat. But as we've also said before, that's not a new phenomenon. That's built into our plans, and we're actually quite pleased with the volume and organic and sequentially improving pricing in Europe and the share gains behind it. And here in the U.S., as Bina said, we have outpaced the also modest, low-single-digit category growth in the United States continuing to build the market share, as Bina commented, and it is a combination of all of those factors that is driving the organic growth of the company. And it is that which gives us the confidence to say that we stand by our objective of 6% to 7% organic growth rate for the full year of 2012.

[Operator:]

We'll go next to Dara Mohsenian with Morgan Stanley.

[Dara W. Mohsenian:]

So, Ian, I guess following up on that question, I was looking for a bit more granularity in Latin America, specifically, where you saw a very strong top line acceleration despite slightly more difficult comparisons. So can you give us a rundown on -- specifically in Latin America, what drove the acceleration down there and your thoughts on the balance of the year and the sustainability of that?

[Ian M. Cook:]

Yes. It's -- again, we were very pleased. I remember there were some questioning when we talked about the first quarter on Latin America, whether we could continue at the pace, particularly given the tough comparisons second quarter on. Again, as I think Bina commented, it is largely to do with our innovation stream and the consumers' reaction to that and to the marketing that is bringing those products to the consumer, whether it's Optic White; whether it's Sensitive Pro-Relief, where we now lead in half of the Latin countries; whether it's that continued share progress on toothbrushes, with leadership in Mexico, the next objective. And consistent with our 6% to 7% organic growth for the total company for the year, as we have said before, we see double-digit organic growth for Latin America this year as well.

[Operator:]

And we'll go next to Caroline Levy with CLSA. Caroline S. Levy - Credit Agricole Securities (USA) Inc., Research Division A couple of questions. The first is, are you seeing any increased discounting in North America or elsewhere where a competitor have lost share and has sort of committed to getting it back, have you seen that happen? And can you give us a little more detail on Venezuela, Brazil, Mexico, just any macro or micro trends that you could highlight there?

[Ian M. Cook:]

By all means. Again, as we said on the last call, we have seen, I would say, a slight moderation of competitive activity around the world. But competitors who have lost market share, we continue to see that level being intense. We have seen, in some categories around the world, media investment reduced from some of those principal competitors. And perhaps in a drive for short-term volume in selective markets, a step-up in promotional activity. Latin America, for example, in some countries, promotional levels as they have been running 3x our level, but we still see our market shares growing because the consumer is looking for value, and it's value through innovation that builds market share. And so I can't say that worldwide, the discounting is lessening overall. I would say there is a trend to that. And I would also say, from our side, we are benefiting from integrated marketing programs that are actually happening in retail environments, particularly in the developed world. And those programs are brand-building programs, even though they are expensed between growth and net sales in trade spending. Turning to Latin America, obviously, we're extremely pleased with our continued progress. In Brazil, we see our market share pushing through 72% on toothpaste. We see the competitor flat in that 5% to 6% range, again, driven by innovation. In Mexico, our year-to-date share is around 83%, competitors holding in between 11% and 12%. There has, specifically in Mexico, been a step-up in promotional activity. We've seen competitors -- or a specific competitor promoting at 80% level year-to-date, in some months at a 90% level, and yet, we are still building market share. And in Venezuela, obviously, we executed the pricing changes that were mandated by the government. We continue to make about 85% of the volume we sell. We have rationalized and simplified our offerings down to key SKUs, and our market shares are doing very well. I think as I said the last time, we have about a 96%, 97% share on toothpaste, which is quite pleasing. And that really, for us, for the year so far and for the year to go, is what our focus is. Our focus is on getting done what we have agreed to get done in 2012, which is to bring the innovation that the consumer values, to put the appropriate investment behind that innovation and to generate the funding from our productivity programs. And I would say, so far, that is working globally, and specific to your question in Latin America as well.

[Operator:]

We'll go next to Christopher Ferrara with Merrill Lynch.

[Christopher Ferrara:]

Ian, can you talk a little bit about what portion of your FX profit drag hits gross profit or COGS as opposed to SG&A? Because you're obviously maintaining that gross margin target. I'm just trying to understand the maintenance of that target. I mean, what does that suggest for the amount of FX transaction drag that you're actually absorbing, like how could -- how much of it would be coming in SG&A, basically?

[Ian M. Cook:]

Well, let me focus on the gross margin because I think that's at the heart of your question and how we are approaching that and how we're thinking about that. And let me start by giving you the normal run-through year-on-year that we provide. So in the second quarter of this year, we start with the gross profit margin of 2011 Q2, which was 57.4%. The pricing that we have taken, and I was reading that some people felt our pricing balance would come off, but we've kept that pricing in the 3%, 3.5% range. Pricing added 1.4 percentage points to gross margin. Our Funding-the-growth stepped up in the second quarter from the first, as it historically always has done, to 190 basis points positive, exactly the same as we delivered last year. Material prices were a negative 260 basis points and then we have some mixed divestment impact of negative 20 basis points, which gets you to the 50-basis point increase. Now if you look specifically at the transaction cost impact, our gross margin, had we not had that impact, would have been higher by some 50 to 60 basis points in this quarter. We obviously, as we have said in our release, know now that foreign exchange is going to be a headwind of 6% to 7% for the year. We have taken the pricing that we said we would. You will remember from the last call there was 63% of the pricing we had planned for this year that was rollover. As we closed the second quarter, some 97% of all of the pricing planned for the year has been taken and is either at market or moving to market. On the last call, we said that number would be around 80%. And obviously, we have accelerated some pricing because of the specific transaction impact, and we see, while transaction is still out there for the balance of the year, easier comps year-on-year. And secondly, the commodity costs, the underlying commodity costs are showing some favorability. So you've got favorability on the commodity costs, pricing well in place and transaction still as a negative headwind. But all of that said, we remain comfortable with the 75 to 125 basis points improvement that we have been speaking of and we plan to see a sequential improvement in gross margin over the balance of the year.

[Operator:]

Our next question comes from Bill Schmitz with Deutsche Bank.

[William Schmitz:]

Could you just talk about some of the trends, more specifically in the categories and also your volume in Mexico? Because some of the data out there says like the category slowed like 50 basis points. And then just kind of what the sales growth was in China, both volume and reported sales? And then maybe a follow-up, if I can.

[Ian M. Cook:]

Yes, we're not going to get into that level of country-by-country detail. I think it would be fair to say, and you have the data. And as I said in an earlier remark, obviously, we have seen a slowdown in the U.S. categories, the second quarter modestly slower than the first. And yes, there has been some spillover into Mexico, but not to the level that you were just referencing. What we feel good about is that our innovation and our integrated marketing programs are seeing us push our market shares up, and therefore, delivering the organic growth that we had planned to deliver. Now if you take a broader view of those emerging markets and you think about the Greater China, you think about Russia, you think about India and you think about Brazil, we have very healthy organic growth continuing in all of those parts of the world. And as I said earlier, the category growth rates in those geographies continue to grow high-single digits, and we see no change in that, notwithstanding the chatter around slowing macros for those geographies.

[William Schmitz:]

Great. And can I ask a follow-up just on the gross margin side of things? What is the transaction impact kind of factored into that bridge you give us every quarter?

[Ian M. Cook:]

It's in the material prices. So it's in that 260. Of that 260, 56 -- 50 to 60 was transaction.

[Operator:]

And our next question comes from Bill Chappell with SunTrust.

[William Schmitz:]

Could you just give a little more color on the mouthwash in the U.S. launch? Are you getting full distribution? Will that benefit in terms of pipeline sales this quarter? And then do you have any goals for U.S. market share to kind of be similar to what you have in other regions?

[Ian M. Cook:]

Yes, I guess, is the answer. We -- one of the underlying consumer benefits that we believe we have globally is this notion of regimen. We are, I think, the only company that operates in the 3 largest oral care segments under the same brand name exclusively. So you can combine a Colgate toothpaste with a Colgate toothbrush and a Colgate mouth rinse, a name that the consumer has enormous trust in, and a regimen that clearly we want to educate consumers and retailers want to educate consumers to use. So we have good ambition in terms of bringing those 3 categories together. I think when Bina spoke about the rollout of Optic around the world, she mentioned that in the new markets we are going with the regimen, so it is a toothpaste, a toothbrush and the mouth rinse. And in some parts of the world, retail shelves, and certainly, retail displays take full advantage of linking the 3 categories. So Optic, of course, is a single variant entry strategy, thus far, in the United States. But we have good ambition for it. And so far, the retailer reception, both from a distribution point of view and a support point of view, has been very positive, and we'll keep you updated as the end market results start to come.

[Operator:]

We'll go next to Alice Longley with Buckingham Research.

[Alice Beebe Longley:]

One little question and then a bigger on if emerging markets have 53% of sales, about how much of their -- of your profits are they at this point?

[Ian M. Cook:]

Slightly higher, not much.

[Alice Beebe Longley:]

Just slightly?

[Ian M. Cook:]

Slightly.

[Alice Beebe Longley:]

Okay. And I'm a little confused about your statement that there's a slight moderation in competitive activity around the world, but some with less share are hiking promotion. And really, what I'm trying to get at is, is the competitor who has 11% to 12% of the toothpaste market in Mexico, are -- is that the one that is hiking promotional activity internationally and in the U.S.?

[Ian M. Cook:]

The -- again, when you're asked a question about the world, it's very difficult to give a generic answer, given that we operate in over 90 countries. So I would say, as I said before, that overall, we are seeing a slight abatement, less promotional activity. In some specific markets, and Mexico was one, the promotional activity, which has always been high, as I think we have said consistently on calls, because there is no positioning difference, so if you don't have a marketing idea, price tends to be the approach. And that promotional activity, which had always been north of 50%, moved to 80%, even though we saw media reduced in many of those markets. On what the future will bring in that regard, we will deal with when it comes. And you can see our ability to grow and build market share and deliver a return in those geographies by focusing on innovation that provides value at a higher price, and thereby, brings margin and return. And that's where we're going to stay focused.

[Operator:]

And we'll go next to Javier Escalante with Consumer Edge Research.

[Javier Escalante:]

Ian, if I understood correctly, you mostly refer to price increases that you've already planned. But in the second quarter, you have these 2 big devaluations in Brazil and Mexico. So is the rebound that needs to happen in the second half in gross margin dependent upon price increases to offset the devaluations in Mexico and Brazil? Or this can be done basically on savings and lower commodity?

[Ian M. Cook:]

Thanks, Javier. The answer is it's a bit of everything. What I was trying to say with the pricing we have taken, we accelerated pricing into the second quarter because of exactly the kind of foreign exchange transaction pressure you mentioned. But you can never react to those things quickly enough to impact a quarter, therefore, our gross margin would've been higher without that additional transaction impact, which was not originally forecast. So when we look at the balance of the year, yes, there is continued benefit from the pricing actions we've taken. And I must say, we feel pretty good at being able to take pricing in the 3% to 3.5% range overall and keep the volume north of 4% and being consistent with the 6% to 7% organic target that we have talked about previously. It also requires us to deliver the same kind of sequential Funding-the-growth improvements that we have done historically and we clearly have programs and confidence in those programs behind it, and we benefit somewhat from a more favorable underlying commodity cost environment unrelated to the transaction. So it is the combination of all of those that has us reaffirm advancing gross margin within that 75 to 125 basis points range.

[Operator:]

And we'll take our next question from Joe Altobello with Oppenheimer & Co.

[Joseph Altobello:]

Just first question on Hill's. It seems like the volume is really -- haven't turned yet. In fact, this quarter seemed to get a little bit worse. Is that surprising to you or were you guys expecting the push into naturals, for example, to really be more of a second half impact? And then secondly, and I apologize if you gave this, but the overhead savings in the quarter?

[Ian M. Cook:]

Let me answer the second first. You'll see SG&A was up by 20 basis points and that was all advertising, so overheads were flat this quarter, which is a function of timing. On Hill's, frankly, we would've liked to have seen less negative on volume. We were pleased with the pricing and we're obviously pleased with the gross margin because that gives us an investment platform behind the innovation we have. But we have still not, as I said on the last call, made enough progress in penetrating the faster-growing natural segment. We're quite pleased with this Ideal Balance line that I had mentioned the last time. This idea of marrying the science of Hill's with the ingredients that the naturals user prefers. Distribution is building. It's about 88% now. Trial is building. Repeat is healthily north of 30%, which is an elevated level. And as Bina said, in terms of data we can track at retail, 55% of users of Ideal Balance are new to Hill's and coming for the natural segment. So that is already underway. As we also said on the last call, we really wouldn't see an improvement in the organic growth of Hill's until the second half of the year when we start to convert and relaunch our Science Diet business with ingredients that are more consumer-friendly to those naturals consumer. And that process is going to run a year to 18 months to fully complete, but we think, as we said, that it'll have an effect in the second half. I would comment that some 40% of the U.S. business, and that natural segment is a U.S. phenomenon, not a global phenomenon, but 40% of our U.S. business is the Prescription Diet, which is clinically proven to provide benefits to animals that have an ailment, as recommended by and sold by vets. And that business, where we have a 70% share, a 75% recommendation level, is showing healthy growth, both in the U.S. and international. So it really is about penetrating the natural segment. And we think that the plans we have in place, based on the testing we have to date, will complete that job and begin the second half of the year and run through 2013.

[Operator:]

We'll go next to Ian Gordon with S&P Capital IQ.

[Ian Gordon:]

First, I have a housekeeping. On the -- you gave the impact of FX to sales, but you didn't explicitly give it -- what it was to EPS, so I'm just wondering how much bigger it is on EPS? And then secondly, as I look ahead to the third quarter and on the SG&A line, last year, you were down about 70 basis points, both in advertising and non-advertising. So I'm just trying to get a sense of how much of that might reverse in the third quarter and how we should think about that for the year?

[Ian M. Cook:]

Yes. Well, let's start with the foreign exchange. You may remember, Ian, which is a great name, by the way, you may remember on the first quarter call, we talked about foreign exchange impacting the top line by about 3% and the bottom line by about 4%. As you saw in our release, we're saying that based on the spot of today, the bottom line impact for the year will be some 6% to 7%, but the sales impact will be more in the 4% to 5%, consistent with the ratios we talked about on the last call. And in fact, in this second quarter, the foreign exchange impact on the bottom line was negative 9%. And as to your second question, I would stay focused on advertising. In the area of advertising, you have seen year-to-date we are up. We expect to continue to be up, both on an absolute and a ratio basis for the balance of the year, and that was the approach or that is the approach we have taken coming into 2012 in order to drive the trial of the innovation program that we have. And on the overhead side, we continue to look for opportunities to find self-funding ways of becoming more efficient. And to the extent that we generate funding to be able to do more, we will tell you about that at the appropriate time.

[Operator:]

Our next question comes from Joe Lachky with Wells Fargo.

[Joe Lachky:]

I got a couple of questions on Sanex. I guess since it's been a year since you bought that business, sounds like you're pretty happy with it. But how does it perform compared with your expectations? And is there any, I guess, regrets, so to speak, getting into Europe with the timing of the macro issues? And you've also mentioned with Sanex a large amount of innovation, strong pipeline that they had when you made the purchase, and how do you plan to roll that out globally? And then finally, on the Sanex business, how has organic growth been trending?

[Ian M. Cook:]

Well, we don't give that category level or brand level information. I will say, if you look at organic growth for each of our categories, organic growth on Hill's second quarter to first is that 2%. Organic growth on our other categories, personal care, which Sanex is a piece of, home care and oral care, are up quarter-on-quarter, obviously, given the overall company performance. But in the strong mid-single-digits range for personal care and home care and double-digit for oral care. So our category performance, we think, is very strong. We have no buyer's remorse on Sanex. We continue to be thrilled, and we continue to believe in Europe. We think the Europeans or the Greeks would still brush their teeth in euros or drachma. And the Sanex business is increasing our market shares in the important body wash and underarm categories. The innovation stream we have in Europe in the countries that Sanex is in today is strong. It's an innovation stream. You may see us take to other geographies under the Sanex name. You may see us take it to other geographies under a Palmolive or a Softsoap or a Protex name that we have around the world. The integration is on track. The transfer of manufacturing, which will build margin, is on track. And obviously, we would reveal country expansion plans at the appropriate time, given the competitive nature of those plans. No buyer's remorse.

[Operator:]

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

[Lauren R. Lieberman:]

Just a follow-up on Hill's and then North America pricing. So on Hill's, just with rising input costs in the agricultural complex, is there any commentary on how much more pricing you think you might need through the year that may run the risk of derailing some of your plans for some volume improvement there, notwithstanding the innovation coming to market? And then North America, just it's a big swing on pricing sequentially, and we're just curious how much of that was -- was it list increases? Was it changes in some of your sort of retailer-specific pricing by SKU? Any kind of mix and particular changes you're making on how your pricing sizes? Because that was a surprise to me, that sort of big change in pricing sequentially in North America and then obviously giving up some volume despite this continued business of Optic White.

[Ian M. Cook:]

Yes, the answer on Hill's, Lauren, you may know we have talked about this before, this is one of the few Colgate businesses that we actually hedged in a very disciplined way. And particularly what one's reading about in corn and soya, that the -- whatever impact will be in 2012 is in our plans, either hedged or in our plans and will not, in any way, derail the programs we have in place on the Hill's business. And some of the formula changes that we're going through will change the profile, if you will, of ingredients in Hill's products going forward. So not a derailer in 2012. And North American pricing, yes, it's a little bit of a lot of things. Some list, but particularly promotional planning with our Colgate business planning tool, bringing some efficiency, and then, yes, focusing on particular pricing with retailers, which, of course, links to the promotional planning. The mix, as you know, we have a dollar-weighted volume, so mix is not a component of that. But it's a little bit of all of the above. And as we have said before, for the last, I think, it's 10 Nielsen periods, our dollar-weighted consumption in the U.S. has outpaced the category.

[Operator:]

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

[Constance Marie Maneaty:]

I have a question on -- in toothpaste, how the category is getting segmented by so many different applications between Optic White and Luminous and Sensitive and Enamel and Total, and I'm not sure how many other ones are. The question is, at what point do you think consumers get overwhelmed by the choices? And how are you reaching them without -- how are you reaching them so that each one of these segments is successful? And the final part of the question is, are you seeing an increase in per capita usage as the market becomes more segmented?

[Ian M. Cook:]

The answer on per cap is in the emerging markets, absolutely. But per cap is in the developed world, really, how many times a day do people brush their teeth because the penetration is quite robust. In terms of choice, the consumer wants choice. And if you don't give the consumer choice in today's world, they'll go somewhere else to get the choice. Now we talk about Enamel, but Enamel ends up being a benefit within Optic. They're buying a whitening benefit with a secondary benefit on the enamel. You'll find many, many toothpastes, including Total, that offer a primary benefit that is gingivitis protection, but have a variant that delivers a whitening secondary benefit, of which the consumer puts a value on. I think the thing that needs to be understood in all of this is when you are bringing the new innovations, you are winnowing the old, whether that's a flavor variant, whether that's a size, or whether that's a benefit that was at one time interesting to the consumer, think baking soda going back. So it's a living process, Connie. And the way you communicate to the consumers, I think Optic is a wonderful example, it starts with the package. And of course, it is then surrounded by the traditional advertising mediums that we use, and increasingly, today, what we are able to communicate at the retail level, and obviously, for our therapeutic offerings, the clinical evidence that a professional will be relaying to their patients. So the consumer is not changing their view, but they continue to want choice in this category. And I think some of the threads of that choice are pretty broad, whitening, gum health, anti-cavity and so on, and then you have secondary benefits within it. And I think an important point to make is oftentimes, that innovation can be seen as having value to consumers, even again, at a higher price point, which, of course, is accretive to margin and accretive to category value growth.

[Operator:]

And our next question comes from Ali Dibadj with Bernstein.

[Ali Dibadj:]

A couple of questions. One is just reflecting on -- many times the word transactional or transactional effect of currency was discussed this time, and also it really started last quarter as well. That's very different than, as far back as I can remember, discussing with you guys about currencies, where it was always kind of 1

[Ian M. Cook:]

The -- thanks for the long question, Ali. The -- taking them in turn, and some I won't answer, but taking them in turn, we have never said foreign exchange is 1

[Operator:]

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

[Linda Bolton-Weiser:]

I apologize if I missed your full explanation on North America, but you did have a big sequential increase in pricing and yet a big decline in the volume growth. You actually had volume decline in North America in the quarter. And so it looks like you took price and your volumes got hit. Am I mistaken or is there another explanation? And then is that just a temporary phenomenon as that kind of works through the system? Or maybe if you can give a fuller explanation of that region. And then secondly, I guess my question is a little philosophical on the EPS growth rate and the FX impact. I mean, really, you get price that goes along with currency devaluations, so I'm just kind of curious as to why you would exclude the translation, the FX impact from EPS growth and yet you would include the pricing that goes along with the currency devaluation? So maybe you could kind of comment on that. And I don't know if there's any way to quantify the pricing you're expecting in 2012 that would be kind of directly related to currency devaluation.

[Ian M. Cook:]

Okay, Linda, let me do the foreign exchange response first. There are 2 separate things. We said when we set up this year that we would deliver double-digit EPS growth on a currency-neutral basis. That has all to do with translation, just translation. And we said, also, that we were going to deliver an increase in our gross margin between 75 and 125 basis points. To do that, you have to offset the transaction impact of buying raw materials, let's say, in Latin America, that are priced worldwide in dollars when the U.S. dollar strengthens. So in order to deliver the gross margin, to deliver the local profitability, you have to take the pricing to offset that cost impact. And that's the way we set up the year. So it is strictly translation, which has nothing to do with pricing. Now in North America, we -- you may recall, we started with Optic in the fourth quarter of last year. We did not have capacity for Optic when we got the overwhelming response positively from consumers in the U.S. We geared up capacity, and we came back and effectively relaunched that business in the first quarter of that year, up against, I would say, the most modest quarter's volume that we have seen in North America, first quarter of 2011. And we got the volume response we got, but we have, yes, certainly balanced pricing in North America. But I stress the point from an external point of view, we are seeing the consumption, the consumer purchases of our product outpacing the market rate of growth year-to-date, and in fact, for the last 10 periods. So from an organic point of view, we expect to see continued positive organic growth for the balance of the year, balancing the volume with the price and continuing to build with the innovation we have, including the Optic rinse talked about a little bit earlier.

[Operator:]

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

[Jason Gere:]

Just one question. So thinking about advertising, I know years ago you talked about, I think, 11% was the right way to think about it. Obviously, when gross margins start to contract closer to the trough, it was closer to 10, we started to see a little bit of a pickup this year. So I guess the way I'm thinking about the back half of the year, you're going to have a nice, big gross margin uptick. You guys have talked about advertising. But if we could think about maybe the next 2 years, should we think about the advertising spending still at that 11%? Is that a more fluid situation? So as more gross margin comes through, you'll reinvest a portion of it? Or will we expect to see more of the gross margin savings over the next couple of years really flow through to the bottom line? So I was wondering if you could just provide a little bit of color on that. That'd be great.

[Ian M. Cook:]

Yes, I -- if there was a number I wish I had never thrown out there, it was this 11%, which gets memorialized in tablets of stone. To start with where we are today, 8% organic growth, with advertising at the level we have in this quarter, is, we think, an effective return on our advertising investment. The advertising investment doesn't start with a ratio. We build it up from the plans on the ground. So I would venture to say that when you take our general financial strategic model, what we always intend to be focused on is increasing that gross margin, and that would certainly -- or that is our ambition and our goal next year, and you can imagine would be next year, to attempt to lower overhead on a ratio basis to sales in order to take some of that funding, as we call it, Funding-the-growth, to increase our advertising, assuming we have the breadth and depth of innovation that, we believe, today we have, and still deliver a healthy return on the bottom line. And that thinking has not changed. And if the innovation flow is good, I'm sure our ambition will be to continue to increase our advertising behind that innovation as we move forward in time.

[Operator:]

And our final question today comes from Jon Andersen with William Blair.

[Jon Andersen:]

Just one question on China, where GDP growth, and I guess, category growth for some is slowing, I know you're not in discretionary categories per se, but are you seeing any impact in your categories in terms of consumption, trade-down, et cetera?

[Ian M. Cook:]

No. Again, as I commented earlier, through the second quarter, we haven't seen a slowdown in our categories in these geographies in general. And specifically in China, still growing high-single digits. Our market share there over 33% year-to-date. I believe our principal competitor just hit below 20%, but who's looking? So thanks very much for your questions, helpful as always. And again, we look forward to keeping you posted on our progress as this volatile world continues over the balance of the year. And a special thank you to all of the Colgate people who get all this stuff done around the world. Thank you.

[Operator:]

And that does conclude today's presentation. We thank you, again, for your participation.