John Faucher - IR Ian Cook - Chairman, CEO and President

Dara Mohsenian - Morgan Stanley Jason English - Goldman Sachs Group Andrea Teixeira - JPMorgan Chase & Co. Caroline Levy - Macquarie Research Sunil Modi - RBC Capital Markets Bonnie Herzog - Wells Fargo Securities Jason Gere - KeyBanc Capital Markets Inc. Kevin Grundy - Jefferies LLC Ali Dibadj - Sanford C. Bernstein & Co. Wendy Nicholson - Citigroup Olivia Tong - Bank of America Merrill Lynch Stephen Powers - Deutsche Bank AG Jonathan Feeney - Consumer Edge Research William Chappell - SunTrust Robinson Humphrey Lauren Lieberman - Barclays PLC Mark Astrachan - Stifel, Nicolaus & Company

Good day, and welcome to today's Colgate-Palmolive Company's Fourth Quarter 2017 Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I would like to turn the call over to the Senior Vice President of Investor Relations, John Faucher. Please go ahead, John.

Thanks, Lisa. Good morning, and welcome to our fourth quarter earnings release conference call. This is John Faucher, Senior Vice President for Investor Relations. Joining me this morning are, Ian Cook, Chairman, President and CEO; Dennis Hickey, CFO; Henning Jakobsen, Vice President and Corporate Controller; and Elaine Paik, Vice President and Treasurer. Today's conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and our more recent filings with the SEC, including our 2016 Annual Report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in Tables 8 and 9 of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website.

Thanks, John. Good morning, everybody. Belated Happy New Year. As has been our custom for a little while now, I'd like to provide some introductory thoughts, and I intend them to be framed on the fourth quarter results and our thinking for 2018. You will recall on the last call and, indeed, the one before that, we talked about 4 areas of business focus for the company, increased advertising spending behind more impactful creative innovation across the business but especially naturals in toothpaste, which I will come back to; working with all retail partners, especially e-commerce; and then, finally, aggressively maximizing productivity up and down the income statement. And those remain our 4 areas of our business focus. But to talk more specifically about the fourth quarter and 2018, let me start by saying that while our organic sales performance in the quarter improved sequentially versus the third, the rate of improvement was modestly less than we expected and comes despite what we see as sequential improvement in growth rates for our categories and importantly, improved market share performance as we work our way through the quarter. That's, of course, particularly true for our Oral Care business where we made significant incremental advertising investments across the second half of last year. So let me focus specifically on 4 things, which, hopefully, will give you some clarity on the progress we believe we're making. First, category growth. As we discussed on the third quarter call, we continue to see improvement in category growth across many parts of the year -- the world. If we look at the U.S., growth in the categories in which we compete improved from being down slightly in the first half to 1% in the third quarter and 1.6% in the fourth quarter. In Asia Pacific, we saw a second half acceleration in toothpaste category growth in key markets like China, the Philippines, Southeast Asia and Australasia. And in Europe, we are seeing initial signs that our categories are strengthening with the improvement in growth driven by Oral Care. And very interestingly, this morning, the scanner data for the last 4 weeks in Europe just issued, which show our sales, on a consumption basis, up around 7.5% and our toothpaste market share, up a full point. So all signs we see of an improvement in category growth. Secondly, on top of that category growth, we continue to focus on growing our market share. This is one of the key reasons for our increased advertising over 2017 and, as we said in the release, continuing into 2018. And we do believe we are seeing initial signs of this paying off as our market share performance is improving in many of the key markets where we have ramped up the advertising. We're seeing it in Europe. And during the fourth quarter, we gained market share year-over-year in 6 categories. Through the third quarter, we were not gaining share in any categories. And it is broad-based. It is beyond simply a reinstatement in one retailer in the western parts of Europe. In Brazil, we posted a 73% market share in the fourth quarter. In fact, in December, our market share was 73.7%, which is basically tied for the highest share we've -- we ever had in that country. And we gained market share year-over-year. I would also say that our market share in Mexico is back up to 83%. And we continue to spend behind new launches as well, including the Colgate Naturals offerings. In Russia, which, under the name Ancient Secrets, has a very unique and differentiated advertising campaign. We're seeing very strong performance. We have seen nationally the market share build to over 2 percentage points with distribution building. It is adding to the overall share in Russia, which we have seen grow for the last 3 periods. And indeed, in some of the retail outlets, where you build faster distribution, we have seen market shares north of 3% and approaching 4% with penetration, thereby, trial building very, very nicely. We've seen our Naturals offerings in China just under 1 share point. We've seen them in India approaching 1 share point; and in the Morgan trade, approaching 2 share points. So we believe these businesses are off to a good start from a concept point of view, supported the point I was starting with, with compelling advertising and seeing that in our market shares. So we're seeing improvements in the category growth rates and market shares, which, of course, is leading to increase consumption, which you see in the scanner data, particularly here in North America. And we think that increase in consumption is going to support, and I'll come back to organic sales for 2018, but is going to support our ambitions for organic growth in 2018. And suffice it to say, that is, of course, our #1 priority. Another area for us in 2018 is acting with greater speed and agility. You may recall, when we began our journey on the Global Growth and Efficiency Program, we said that one of the underlying objectives was speed and agility. And we have made quite a few changes over the last several years, which is opening up opportunity in that area. And clearly, the way the world is moving, whether it's e-commerce, digital in general or the local brands, we are committed to moving more rapidly. And this is not just true around innovation; it's about how we go about doing everything in the company. I mentioned briefly on the third quarter call this Colgate Dare to Love toothpaste cocreated with one of our e-commerce partners in China. And I just came back from China, actually, and we created the product in a very short period of time, around 5 months. It was our largest and fastest-selling multipack on the 11/11 Singles' Day in China and the single biggest growth driver in our portfolio for this online retailer. Now interestingly, it has additional benefits. It brings us to a younger female millennial user with a higher wealth program. So the combination of our advertising and the offering itself sees us broaden our reach in terms of consumers. We've also brought greater speed and agility to how we go about our digital marketing efforts. I've mentioned before our consumer engagement centers, which are truly always on as we listen to what's happening in real time online, quickly engaging with consumers. And our increased digital media investment and focus on faster, easier ways to test and improve the creative has led to significant improvements in return on investments over the year. And this has helped us increase our e-commerce market share leadership in toothpaste in the U.S. for both the fourth quarter and the full year. I would say, editorially, is that our e-commerce business, in general, was up just under 60% for the full year. And finally, although it may seem a minor area to you, packaging development for us is an enormous part of what goes behind bringing our products to the marketplace. And we have completely reengineered our packaging process to get our products from design brief to the shelf in about 1/2 of the time and about 1/3 lower cost across our packaging systems all around the world. So the third area of operating focus is speed and agility. And obviously, the last area I'd like to come back to is productivity. We have a strong history of margin expansion, and we expect that to continue going forward. Our margins have been under pressure across our industry over the past year or so, and we know we need to push productivity aggressively. Now our productivity efforts start with funding-the-growth, and we have seen and did see in the fourth quarter increased logistics costs given fuel and availability, and indeed, raw material costs stayed at about the third quarter level but due to hurricanes and the price of oil resins and given pulp packaging going up beyond our initial estimations for the fourth quarter. So through our funding-the-growth program, we are working to reduce these costs through many digital platforms interestingly to see us real time looking at what our logistics providers are paying for fuel, allowing us to economize, and at the same time, using new technologies, like Uber Freight, where we are a founding participant, to improve service and manage volatility. And I'll come back to funding-the-growth when we go through the margin roll forward. And as we talked about on our last call, we remain resolutely focused on maximizing our Global Growth and Efficiency Program to streamline our cost structure. The key, of course, is to focus on where we think we're going to be in the future and organize for that, so that we can meet those changes head on. For example, we, in the last 4 months, have just redesigned our supply chain organization to become organized by region while keeping the central capability, which allows us, again, to respond more speedily to local market needs while still leveraging at global scale and capability. The productivity is not just about cutting costs. We also think it's about simplification, which is a very big area of focus for the company. And for example, while we are launching new products like the Naturals I just mentioned, we're also focused on reducing the complexity of our business by eliminating less productive SKUs. This allows us to be more efficient and effective in bringing these products to the marketplace. Now if we look at our SKUs on a global basis, we see them down about 7% on a global basis and our range of reduction is from 12% at the high end and, in case of one division, a modest increase. But overall, a 7% reduction in SKUs globally at the time we're bringing innovation to the marketplace, which allows you to put the more productive SKUs on the shelf and, therefore, get more productive consumption and sales velocity from them. And as we go through that, we see an average improvement in offtake productivity approaching 7%. So those are the key takeaways I'd like to leave you with as we reflect on 2017 and more importantly, look at what we need to do to further accelerate profitable growth in 2018. Now before I turn it back to John who has stayed for all of this, I wanted to discuss our longer-term outlook for top line growth, which many of you have asked me about at conferences and on past conference calls. Now before this year, we have consistently delivered against our 4% to 7% long-term organic revenue growth target, although as we have seen more towards the lower end since the financial crisis. You may recall that, that range was determined when global growth for our categories was around 4% to 5% per year on a fairly consistent basis. Of course, if you look at our categories over the last 12 to 18 months, they've been growing at roughly a 2% rate, slightly up, as I commented earlier, in the fourth quarter. But the 2% we've been operating in was developed markets moving closer to 0 with developing markets coming down from a high single digits to the mid-single digits. Now while we believe these growth rates are beginning to improve, we think it's appropriate to plan with an assumption that category growth rate will be below those heavy historical levels even if it's greater than what we've seen in the most recent past. So as we look forward, starting with 2018, we think it more probable that our categories will grow in a 2% to 4% range. And on top of this growth, we believe that we will return to consistent market share growth behind the strength of our brands, our increased investment, our ability to innovate and in our market execution. And we believe, from a consumption point of view, we're already seeing signs of that. So this combination of category growth and market share growth should put us in the range of 3% to 5% top line organic growth rate, and that's the stance we are taking for 2018 and beyond. Now obviously, we will be doing our level-best to help bring our categories back to the higher growth rates. But for now, we think that prudence is warranted. And clearly, if the growth rates accelerate, that's a good problem to have. Mr. Faucher?

Thanks, Ian. After providing some general commentary on the quarter, I will briefly go into some detail on divisional performance. I will then provide some further detail on our outlook for 2018 before opening up for your questions. As Ian said, we showed progress in the fourth quarter on our efforts to reaccelerate top line growth. We showed sequential improvement in net sales growth in key markets, like the U.S., Western Europe and India. Furthermore, our takeaway trends, as shown in syndicated data, improved at a greater rate with sequential improvement in market share in key markets. We exit 2017 with Q4 representing our highest growth quarter of the year in net sales, organic sales and volume. Net sales are up 4.5% in the quarter versus Q4 2016 with 3% volume growth, minus 1% pricing and a 2.5% foreign exchange benefit. Organic sales growth was 2% in the fourth quarter, continuing the sequential improvement we saw on the third quarter. On a GAAP basis, our gross profit margin was down 60 basis points year-over-year. Excluding the impact of our Global Growth and Efficiency Program, it was down 40 basis points year-over-year. We delivered strong funding-the-growth savings in the quarter, which mostly offset higher raw material costs, while pricing was a negative impact to gross margin. On a GAAP basis, our operating profit margin was down 200 basis points year-over-year in Q4. Excluding the impact of our Global Growth and Efficiency Program in both periods and the 2016 litigation matter, our operating profit margin was down 190 basis points driven primarily by an increase in advertising investment. On a dollar basis, advertising investment was up 24% year-over-year in Q4. As Ian mentioned in the press release, we intend to continue to spend behind our brands in 2018 with a focus on our base business, new products and consumption building activities. On a GAAP basis, diluted earnings per share of $0.37 was down 46% year-over-year in Q4. Excluding the impact of our Global Growth and Efficiency Program in both periods, U.S. tax reform and the 2016 litigation matter, diluted earnings per share was flat year-over-year at $0.75. For 2017, we returned more than $2.9 billion to shareholders through share repurchases and dividends. Now moving to the divisions. We'll start off with North America. In Q4, we saw a sequential improvement versus the third quarter in volume, net sales and organic sales growth in North America. Net sales were up 1% in the quarter with organic sales up 1% driven volume growth of 4.5% and pricing of minus 3.5%, while foreign exchange was even with the year ago period. We continue to see significant pricing pressure in the liquid hand soap and hand dish categories. Category growth rates in the U.S. continue to improve sequentially with every category, except power toothbrush, posting faster growth in the second half of '17 versus the first half of '17. In Oral Care, we widened our market share leadership in toothpaste and toothbrushes in the U.S. In toothpaste, after seeing declines year-over-year in the first half of the year, our market share increased year-over-year in the fourth quarter driven by our premium brands, including Colgate Optic White and Tom's of Maine. Now we'll look at Latin America. Latin America delivered 4% net sales growth in the quarter driven by a combination of 4% volume growth and 1.5% foreign exchange, while pricing was minus 1.5%. Organic sales for the division grew 2.5%. Net sales growth in Latin America was driven by Mexico and Brazil. In Mexico, our volume declines were more than offset by positive pricing. We gained toothpaste market share versus Q4 2016 behind our Kids line and Triple Action Xtra Freshness. Our double-digit net sales growth in Brazil was driven by strong volume performance. And as Ian mentioned, our toothpaste shares in Brazil are improving behind increased advertising support, effective merchandising and new products. Brazil also benefited from the launch of Colgate Total mouth rinse, which has added two points to our mouth rinse market share since its Q3 launch. In 2018, Brazil should benefit from several new Oral Care product launches in the high-growth pharmacy channel, along with a robust Personal Care pipeline. Moving to Europe, Europe continues to show strong sequential improvement in Q4 with net sales growth of 13%. Organic sales grew 4%, our best organic sales performance in Europe since first quarter 2010, driven by 6% volume growth with negative 2% pricing. Foreign exchange is favorable by 9% in the quarter. While our price business benefited from lapping against easy comparisons, the volume growth in Europe continued to be broad-based. We saw particular strength in Southern and Western Europe, Poland and the Nordic countries. Europe saw a significant step-up in advertising spending in the quarter versus the prior year, and we believe this is paying off in sequential improvement in market shares as well as in organic sales growth. In Germany, our largest market in Europe, we have gained a full point of market share year-to-date in toothpaste with our year-over-year share gains accelerating in the fourth quarter driven by strength in the elmex and meridol brands. Last quarter, we mentioned the success of our launch of Colgate Natural Extracts line in Europe, and sales for Colgate Natural Extracts continued to come in ahead of our expectations. The Naturals category is relatively underdeveloped in toothpaste in Europe, and we are looking to launch Colgate Naturals in more markets in 2018 to drive incremental growth. Sanex continued to deliver solid growth behind the 0% line, while our French fabric softener business, Soupline, which is the market leader in that country, continued its strong growth through premium innovation. Next is Asia Pacific. Net sales in Asia Pacific were up 6% in the quarter with organic sales up 2.5%. Net sales growth was driven by a combination of pricing and volume growth, while foreign exchange added 3.5%. Our net sales growth was driven primarily by India and Greater China. Our volume in India was up double digits as we lap demonetization in the year ago period. India also benefited from positive pricing, and we continue to see benefits from our launches in the Naturals space with Colgate Cibaca Vedshakti and Colgate Swarna Vedshakti driving incremental sales. In Greater China, negative volume was offset by positive pricing, and we continue to benefit from growth in e-commerce where we have market share leadership. The Africa/Eurasia division reported net sales growth of 2% in Q4 as positive foreign exchange offset a slight decline in volume, while pricing was even with the year ago period. We saw volume growth in our Sub-Saharan Africa business as we lap last year's distributor changes. We also delivered solid volume growth in Russia driven by the continued benefit from our Q3 launch of Colgate Ancient Secrets toothpaste, as Ian mentioned. As we called out on our Q3 conference call, the volume weakness this quarter was primarily driven by economic softness in the Middle East. And we'll finish up with Hill's. Hill's delivered 2.5% net sales growth in the fourth quarter driven by a combination of positive pricing and foreign exchange, while volume was even with the year ago period. Organic sales grew 0.5%. We continue to see strong growth in e-commerce in developed markets. In particular, we are seeing strong share gains on e-commerce in the United States with Prescription Diet. We are also seeing rapid growth in several of our emerging markets, particularly Russia and Latin America. In the United States, both volume and pricing were up slightly. We have seen modest improvement in consumption trends in the pet specialty channel, but the dynamics in this channel remained difficult. I am also pleased to announce that earlier this month, we closed 2 premium skincare transactions, PCa Skin and EltaMD. Both companies are delivering significant top line growth in the professional skincare channel and in e-commerce. Now we'll turn to our outlook for 2018. As stated in our press release, we expect net sales growth to increase mid-single digits in 2018. We expect organic sales to be up low to mid-single digits with improvement in our growth rate versus the second half of 2017. We are encouraged by our volume growth over the second half of 2017, and we plan for a combination of pricing and volume growth for 2018. On a GAAP basis, we expect gross margin to be up 75 to 125 basis points in 2018. Excluding the impact of our Global Growth and Efficiency Program, we expect our gross margin to be up 50 to 75 basis points as a combination of pricing and productivity from our funding-the-growth initiatives should more than offset higher raw material costs. We expect another year of increased advertising spending in 2018, both on an absolute basis and as a percentage of net sales. We still see significant opportunity to spend behind our core brands, support new product launches and drive consumption in emerging markets. Now moving over to the impact of recent U.S. tax reform. On both a GAAP basis and excluding the impacts from our Global Growth and Efficiency Program, we expect our tax rate to be in the range of 26% to 27% in 2018. We expect GAAP earnings per share to be up double digits for the year. Excluding charges related to the Global Growth and Efficiency Program and the onetime charge resulting from U.S. tax reform, we expect earnings per share growth to be around 10%. And with that, we'll open it up for questions.

[Operator Instructions]. We'll go first to Dara Mohsenian of Morgan Stanley.

So first, I just wanted to get a little clarification of your prepared remarks. I mean, you mentioned market share improved sequentially throughout the quarter. But I'm assuming overall market share result was less than you originally expected, particularly in emerging markets, given you mentioned the organic sales growth was weaker than you expected. So is that the right way to interpret your comments? Or were you trying to say that there's a lot of destocking going on at retail or at the consumer level? I just wanted a bit of clarification there. And hopefully, that doesn't count as a real question because the real question is more around organic sales and the slowdown we saw in emerging markets sequentially on a year-over-year basis or even more so on a two-year basis. It just seems pretty striking in the face of much higher advertising, the greater innovation you mentioned, the execution tweaks, et cetera, so it feels like something has changed here. So can you help me sort of understand the markets, you're trends in emerging markets, why we're not seeing more improvement, particularly given it looks like we're already seeing rebounding trends in developed markets? And then related to that, how does this sort of change the way you manage the emerging market business from here? Do you have to invest more on price, be more judicious with price increases, particularly given the Latin American pricing decline this quarter?

Well, thank you for the four questions, Dara. Where to start? I think I'll start with the bigger questions, which is the emerging markets and the market shares and growth. It's interesting, when you -- today, we're focused very much on price, if you take of the big picture view and go back over the last several years when transaction costs and commodity costs were forcing pricing, there was the reduction in the contribution of volume to the organic growth. And much concern expressed in terms of how to regain volume momentum and find that balance between pricing and volume. And in the emerging markets, that kind of effort never comes in a straight line, particularly when you have pockets of competitive activity maybe with competitors who also are in the developed world looking to challenge growth more aggressively in the emerging markets. So in terms of our business in those emerging markets, that's really the challenge. The challenge is the price versus the volume. John mentioned Brazil. And we have opportunities to fine tune our strategy in the emerging markets on price. We also have the opportunity in the emerging markets to react, too, particularly in Asia, the local brands where that innovation is at a significant premium to the average pricing in the market, which, obviously, drives the value of the market and then your performance from a share point of view. And we have a very broad portfolio because we service all consumers in those markets, the ones coming into the category, which John has talked many times, about our ability to get penetration and consumption up for the long haul and then trading them up the curve. So I think the second way we're thinking about the emerging markets beyond balancing price and volume is building that penetration and usage. I don't think it changes the way we think about the emerging markets at all, and that's why we are focused on those two things. What you do get in the emerging markets is, as you saw from John's comments about Saudi on the third quarter call and what we've seen in the fourth quarter, you get bumps along the way. They are not as predictable. Indeed, I'm not sure any of the world is as predictable as we might want it to be. And so these things aren't going to move in a straight line and regrettably, perhaps not as quickly as certainly you might want. So that would be my answer on the emerging markets. In terms of share performance in the fourth quarter, actually, we feel quite good about the share performance in the fourth quarter. Obviously, you have the difficulty in the developed world of the measured and the nonmeasured channels. We do quite well in the nonmeasured channels as well. I think the key thing in the developed world is the underlying category growth rates, and that's why we are encouraged, perhaps aided a bit, by our innovation and the investments we're putting behind category stimulation that we're starting to see that come back. If that continues to trend the way we have seen it coming out of the fourth quarter, I think that's going to be an important part of driving potential in the developed world.

We'll go next to Jason Gere of KeyBanc Capital Markets.

I guess, Ian, I was just wondering if you could talk maybe about overall company price deflation. I think this is the first time in maybe 6 years that we actually saw prices in negative. And I know from time to time, the U.S. and Europe have been a little bit more of an investment market. But usually, you've had the offsets in other markets. So as you think about that low to mid-single-digit growth, what's your outlook on total price as a contributor? And how do you balance that right now when you are seeing the rising, I guess, raw material prices? Do you take comfort that more of your portfolio is Personal Care versus household? Or I think you might be impacting a little bit more. So I was just wondering if you could provide a little bit of color around price and the impact on sales as well as margins.

Thanks. Let me use this opportunity to comment margin by doing the gross profit roll forward, and then I will come back to price as we think about it for 2018. So if we take the gross margin roll forward, the gross margin in the fourth quarter 2016 was 60.8%. Pricing in the fourth quarter of this year was a negative of 40 basis points. Interestingly, funding-the-growth and a very, very modest contribution from restructuring, together, offset a negative 2.6 points of material prices, the ones that I talked about earlier, basically, resins and cardboards packaging, and that led to the 40 basis points reduction year-on-year, although still north of 60% at 60.4%. The comment I want to make of this and then come back to pricing is we were very pleased with our funding-the-growth delivery in the fourth quarter. You know well, some tracking us over the years, that our funding-the-growth savings filled across of the year. But 260 basis points, 2.6 points in the fourth quarter is meaningfully higher than we tend to generate in historical years. Any point being that we have doubled down on driving funding-the-growth projects. And we think in that area of focus, we're quite well positioned for 2018. Now come back to pricing itself. Obviously, the biggest pressure on pricing, as you saw, was North America and, as it customarily is, Europe. The North America, we talked about some categories being under pressure from a promotional activity point of view, very specifically liquid hand soap and dish. And we said we were going to have to meet that activity in the third, and it continued into the fourth quarter. And we have seen a share response quarter-on-quarter positive for both businesses. And couponing was a factor for us in the fourth quarter as well as we edge pricing up in toothpaste. We think that the raw material underlying pressures will inform the marketplace in general about a need to ameliorate promotional intensity to be able to absorb those costs. And we certainly believe that in the emerging markets, we have the pricing power that we have always demonstrated to be able to offset those costs with pure price. And that is something we know how to do and we have done in the past. So it comes back to John's point about our growth in 2018 being a balance between volume and pricing. And we think we are positioned to be able to accomplish that developing markets we have done before, and on the other side, the funding-the-growth initiatives we have are deep and rich, and we leave 2017 with very good momentum in that space. And I would say, just to repeat, we are looking for our gross margin to increase by 50 to 75 basis points in 2018 in the face of the environment we're in.

We'll go next to Andrea Teixeira of JPMorgan.

So I'd like to drill on pricing and sharing return. Were you able to reinvest in pricing in Mexico and Central America? Or is that mostly concentrated in Brazil cash and carry? I asked in relation to your declining products in Mexico and Central America where volumes rebounded in Brazil and in June. So is that due to the new price instruction -- structure, sorry? Or is that related to destocking in some of your large clients in Mexico who happen to be also the U.S., your large U.S. clients, in many cases? So in other words, embedded in your top line guidance, are you expecting volumes to change slightly in Mexico, in Central America? And for you to recover a share, I'm assuming the household cleaning brands or the softener brands. So -- and how long do you expect the market share to improve in emerging markets?

Yes. I think, actually, we talk prices in some Latin American countries in the fourth. And in Brazil, there was a degree of price promotion, which, of course, led to a very good result for us. We have, as others have commented, seen destocking with retailers. You talked Mexico, specific to Mexico, and we think, when we look at our market shares with the combination of the advertising and the innovation, and the innovation is -- tends to be more at the premium end of things, that we will see growth, volume growth continuing and some price on top of that.

We'll go next to Caroline Levy of Macquarie.

Ian, you have talked a lot about funding-the-growth and the great success you have there. We saw another company announce a very, very deep restructuring, significant layoffs and plant closures and so on. Do you see opportunity to cut more aggressively go beyond funding-the-growth? Because it seems to me that the environment is such that getting gross margin improvement to the extent that you're looking for is going to be awfully challenging. So just any thoughts of other big activities going forward.

Yes. Well, Caroline, we fully endorse that notion. Indeed, we have been and continue with a very large restructuring program, which, when it's done by 2020, we'll see costs of about just under $1.3 billion to $1.4 billion and savings between $0.5 billion and $575 million. And that's a very profound reassessment of how we go about managing our business. It's all to do with the linked capability that SAP gives us and our ability to reorganize how we get work done and reducing the duplication of work done in various locations. So it's a very proper question. It's a very important question. But indeed, it is a journey that we are on and have been on for a while. So we think it's appropriate, and it's something we are pursuing diligently and aggressively.

We'll go next to Nik Modi of RBC Capital Markets.

Just one quick one. Ian, did you -- sorry, if I missed it, but did you comment on trade inventories and destocking? I'm just curious if you're seeing any and how long. If you are seeing it, how long it might last? The bigger-picture question is just, given what's going on in the environment and look, Colgate has been incredibly careful and, I think, responsible in terms of how you allocate capital and M&A, but it looks like the environment is really just tough for all CPG players. And I'm just curious, have you kind of thought about perhaps coming a little bit more overreaching in your M&A thoughts in terms of different categories and pillars of growth? Any thoughts on that would be helpful.

Yes. Always an appropriate question, Nik, and also an area of focus for us. We tend not to think about overreaching. We are quite broad in terms of thinking about where we might reach. I think, we think the recent additions of PCa and Elta skincare businesses are terrific acquisitions. These are very good technology, highly recommended skin health products with margins that are accretive, growth rates that are attractive and brands that use the recommendation model, of course, in their case, beauticians and dermatologists, to do what we have done so many years in Oral Care and Pet Nutrition. So your question is spot on. The challenge for us is what are the right assets. And I would say, when you think about use of our capital, clearly, when we think about the benefits of the tax legislation, our mind focuses on what we can do for growth, which is around capital investment that can drive growth organically and, of course, capital allocation that can acquire good businesses to further our category ambitions. And we think PCa and Elta are 2 such businesses.

We'll go next to Bonnie Herzog of Wells Fargo.

I had a question on your stepped-up advertising. I guess, I'm wondering if you believe you're successfully reaching your consumers and adapting enough to follow the changing consumer behaviors. So in the context of that, how do you guys evolve your approach? And have you leveraged in social media more and or -- maybe differently? And then curious if you considered implementing a subscription-based model for some of your businesses, especially in light of some of the relatively new entrants that are doing that. I guess, I'm just really trying to get at how you're better communicating with and attracting consumers as behaviors and the retail environment is changing so rapidly.

Yes, Bonnie, all good questions, all areas of great focus and great focus with speed on our side. We're going to spend around 30% of our advertising digitally, and of course, that varies depending on the geography and the penetration of digital. The Hill's business is 100% digital, for example. And interestingly, with that business, you talked about subscription, we lead in Oral Care online in the U.S. and the U.K. and in China. And the Hill's business is extremely well developed digitally here in the United States. And to your point, given the quality of brand and the trust, consumers having those diets and what they can bring to their pets, today, over 50% of Hill's e-commerce purchases is subscription in the United States to exactly, as your point, the power of brand translated through the way people want to shop that category increasingly today. In terms of reaching consumers and engaging with them, I mentioned a little bit earlier in some of my opening comments about these consumer engagement centers that we have in the U.S. and China, for example, which allows us to track 24/7 what the consumers are engaging in online and insert ourselves into that conversation with the brand, take Colgate, that is very iconically all about a smile, all about building a future, a brighter future for the people that use our brand. So we can communicate and has built capabilities to communicate in 3 seconds, 6 seconds or 30 seconds and make sure that the brand's message and brand recall gets through that very cluttered environment. So absolutely, we are leveraging social, and I think we are moving ourselves into the space with speed and agility to do that quickly when you see trends emerge and make sure you stay relevant to consumers. And the last idea I would repeat is this Dare to Love brand codeveloped with that e-commerce partner, very familiar with the consumers in that space who can be younger. And indeed, that Dare to Love toothpaste that I mentioned earlier that we launched online in China did precisely that, took the Colgate brand to a younger female purchaser, and we use digital to do that as well. So it's not just message; it's who we are reaching with that message. And if I may, although you didn't ask it, but Nik did and I didn't answer that part of his question, we have seen some retail destocking. I mentioned Mexico. It's fair to say that here in the U.S., year-on-year, some of the bigger retailers have seen a reduction of a weakened inventory compared to last year. So yes, we have continued to see that and deal with that as others are as well.

We'll go next to Jason English of Goldman Sachs.

You may have just kind of answered it, Ian, but I was hoping we could just definitively sort of wrap up the line. I'm thinking a couple of questions. Your prepared remarks talked about end market acceleration, market share acceleration. They all sounded really a beat, but reported results are lagging. Is that simply a factor of kind of timing of when you're seeing the accelerations? Or are you referencing sort of leading indicators into the new year? Or is the way you saw on the fourth quarter in some of these transitory destocking issues, et cetera, prevented the full flow-through. And then second question, as we think into next year, your earnings algorithm, roughly 10%. It looks like you're getting kind of halfway there on just tax, and depending on your FX assumption, almost the rest of the way there on FX, despite organic sales growth and gross margin expansion. So is it fair to characterize next year as another year of outsized reinvestment back in the business?

Yes, Jason, I think the right way to think about our remarks related to the consumption in the fourth quarter is, indeed, leading into 2018. And we could go through factors about the sales versus the consumption. But the point, I think, is that we kept our advertising presence with better quality work behind growing relevant innovation. And we're beginning to see a marketplace response, not as quickly as people on the outside perhaps wanted. Indeed, a little bit shy of what we were looking for, which was not quite the same as the external. But from the consumption side of things, we're seeing a very definite measurable response, and we do think that bodes well in 2018 or for 2018. And as I have said at the end of the previous question, in certain parts of the world, destocking was a transitory piece of that. Relative to the earnings gross -- growth that we talked about for next year, in the release, we said low double digits earnings growth. John talked about around 10% on the call. And whenever I'm asked the question, what does low double digit mean? My answer is always 10%, but your characterization of it is not correct. The tax rate is not half of it and -- nor is foreign exchange the other half. I will say, as we think about the way we're talking about 2018, and to remind everybody, we talked about 3% to 5% organic on the top line, mid-single digits on a dollar sales basis. We talked about gross margin expansion of between 50 and 75 basis points. And we gave the tax range, legislation part, the new treatment to start compensation running through the income statement and said around 10% earnings per share growth. I will say that there is a modest part of the tax return being reinvested into the business quite deliberately, but we think the construct of that income statement and earnings flow is quite robust in the current environment.

We'll go next to Kevin Grundy of Jefferies.

I just wanted to build on Jason's question there with -- but -- with the guidance but as it pertains to advertising and marketing spending. So it would seem to imply that a healthy portion of the 50 to 75 basis points of gross margin improvement will be reinvested, so that advertising and marketing line starts to trend back closer to 10.5% to 11%. I think the high point for the company, if you look back a decade plus or so, it has been at 11%. So the question is really, is this sort of a reaction to the necessity to spend in the current environment? Or is this sort of a more permanent level of increase where it could be 11% or even north of that given a weak consumer, even including in emerging market? So any commentary there will be helpful.

Yes, Kevin. I mean, we think about advertising in a very disciplined way. It serves the purpose, and the purpose is to build our brands. And the purpose of building the brands, particularly in a lower-growth category environment and historically, is to make sure we develop and evolve and grow the market shares of those brands in country by country because that's where you grow them. So we don't think about it top-down as a ratio. We think about it bottom-up as an expense to support a portfolio of businesses and the innovation we are bringing behind those businesses. And for 2018, as John said, we have a plan, that's see the advertising up, absolutely, and on a ratio basis, and that's because we think the portfolio of brands, the quality of marketing technique and the innovation we have in 2018 will be responsive to that investment to drive the organic growth in that 3% to 5% range. So we think about it entirely in those terms. And will it go up in 2019? Again, we'll see what the plans are.

We'll go next to Ali Dibadj of Bernstein.

Look, I appreciate all the efforts, Ian, that you described at the outset, the good 4 focus areas. You got to do those things. And to be fair, I thought lots of questions from the release, like the tax rate guidance seems high, debates on ad spend, Hill's, maybe Naturals not seeming to get traction yet, we've been hearing it for a while. But I wanted to take a step back and maybe, most importantly, talk about potential or apparent lack of pricing or maybe a negative ship in brand power for you. And are we -- I guess, the core question is are we here because Colgate has been milking the business a little bit over the past several years and overearning? And to your comments, a few questions ago, your commodities are up, yet pricing is negative. Plus, you're investing significantly back into the brand, the ad spend. But not only your top line that challenges your market share still, right? So now it's two years, 140 basis points lower according to your own numbers, right, the track on track, according to your own numbers. And again, this quarter, for all mission, looks like you're not gaining in Brazil and Russia and India and U.K., and France and China at least, and a lot of that to local competitors. So I guess, I'm struggling for confidence, as you can tell by the question, I'm struggling for confidence that things are getting better quickly here. And I guess, the easier comps and FX should help, but I just don't see signs of Colgate doing better underlyingly. And going back to the question I start with, could this mean we're in a longer period of reinvestment necessary to shore up the Colgate brand, the formally impenetrable Colgate brand and pricing power? Does this mean that Colgate has been significantly overearning, and we're here for years of reinvestment as opposed to, hey, Q4 looks better, so 2018 is going to be good and rock the races again? Does that help? Does that make sense?

It makes sense. I don't agree, but it makes sense. I mean, the words do. The -- I disagree, Ali, because come back to pricing in this fourth quarter, we're seeing to take a quarter and then project the world. But based on the quarter, if I took us back many quarters, the critique was no volume growth or price. This is a problem for brands in general. And as we have worked our way through 2018, supported by advertising, we have built back underlying volume strength into the business. As others have said on earlier calls, in some parts of the world with category growth being slower, which is an industry phenomenon, not a Colgate phenomenon, some people in those categories have invested, shall we say, aggressively in the short term to deliver a piece of the pie. And in some categories, we have made that choice. It is fair to say that commodities in the fourth quarter were up a little bit beyond our expectations coming out of the third, and I think that has been true for others as well. But I come back to our underlying model, our market shares in Latin America are strong. Our share opportunity in China and India with Naturals, which only went into the marketplace in the third quarter of last year, the initial reaction as I tried to suggest that the Russia example has been very good and is building the Colgate market share. So I think we know how to innovate against competitors, whether they be multinational or local. And I think that the underlying commodity cost pressures will bring some sobering thinker -- thinking to others who compete in the category. We have, back to the criticism of a few years ago, the strength of brand to be able to take pricing in the developing markets, when we do that, there will be a corresponding yin and yang with volume while we establish the new pricing. But we know how to do that. And along with funding-the-growth, that will be part of how we will deliver that 50 to 75 point gross margin improvement, a fairly healthy gross margin, while we maintain a resolute focus on the Global Growth and Efficiency Program in the last couple of years of that program, so we can reduce structural costs as well and focus on building our brands. So we don't think the model is broken. We think we have the brands, the innovation, the quality of engagement materials to meaningfully drive the business in 2018 and going forward. And actually, we are very pleased to see the positive and continuing reaction in markets such as Europe and North America. Europe, a part of the world that has been flat for quite a long period of time. So we feel okay about the business model, and we feel okay about the future starting with 2018.

We'll go next to Wendy Nicholson of Citi Research.

My question actually goes back to the 2 skincare acquisitions you made. And I know, a, short answer would be, "Oh, they're so small. They don't move the needle. It doesn't matter." But I guess I'm struck sort of with the question of why bother? It's such a competitive category. It's such a crowded category. I feel like everybody and their uncle is buying these small dermatologist premium price skincare brands. And so just when I think of what is Colgate's kind of right to win in that category, I struggle with that. And I know there's an analogy, hey, we're going to be going to dermatologists the same way we go to veterinarians and to dentists. But at the same time, I mean, a lot of us has been to Topeka. We've been to New Jersey. We've seen your huge R&D facilities. And I've always thought of what makes Hill's and Colgate toothpaste special is how much technology and science you bring to the categories. And I just can't believe that you're going to be able to bring that from a real value added basis to the skincare category. So why bother? Is this a precursor to bigger M&A in that space? Or would you be better served even taking that relatively small dollar investment and putting it back into your core categories?

Yes. Well, thanks, Wendy. I mean, for the record, my uncle didn't buy any skincare businesses. These two we like for several reasons. They have, again, high recommendation levels. They have very good and proven technology, which is why they have the high recommendation levels. And a small as Tom's may have been and as small as some may have said a GABA was, we have learned a lot from those acquisitions in their respective spaces. So we think we get a technology -- we get technology learning and we think we can bring technology to those businesses. And the idea of, how would you call it, trickle-down science into a more mass skincare business is very attractive. And these are businesses that you can live wholesale to Australia and run the model with governing knowledge in those markets. So we think they are rich with opportunity, not just the businesses of themselves, but what we can gain from a technology point of view.

We'll go next to Olivia Tong of Bank of America.

I guess, if we take your word on Oral Care and the price pressure around some of your categories in pricing, maybe we can switch to the other 60% of your business. I mean, maybe Oral Care is okay, but what about the other categories, the home categories and the Personal Care areas in terms of your pricing power in those categories?

Well, we have pricing power in two ways in all categories. We have innovation, which is increasingly premium, which takes category and brand pricing up. And we have demonstrated that across categories, not just in Oral Care and even in tough markets like Europe with a fabric softener is we've seen a very strong end to the year with our supreme brand. And in the developing world, in general, we have brands that can carry price increases, I mean, straight price increases as opposed to reducing promotion and/or increasing mix. And we do that quite regularly. So on the Hill's business, that recommendation is a very powerful vehicle. And I think the testament to that for a product that is quite premium priced is the high level of subscription buying we see in the e-commerce channel, which is a fast-growing space for nutrition. So I mean, we always talk about the Colgate business and the toothpaste business, but we have brands that can earn their right across our portfolio in the world -- in the parts of the world that we have those businesses.

We'll go next to Stephen Powers of Deutsche Bank.

So building on some of what you said earlier, and you're absolutely right, in recent years, we were critical, many of us were, anyway, of the industry's potential overreliance on pricing to the detriment of volume. And now we're all harping on the opposite, the absence of pricing even the volumes are better. That's totally fair. But I guess, it's also about gross margin pressure. And I know you called out positive pricing gross margin targets in 2018. But the market, especially today, is obviously very concerned about the risk of an extended price more effectively brewing across HPC, just given the growth challenges that we've seen, the negative pricing and margin pressure, not only in your results, but in those with P&G and Kimberly-Clark early in the week. And I know you called out 50 to 75 basis points of gross margin expansion in '18. But I also think you were targeting like 150 basis points plus in '17 originally, and we finished essentially at 20. So I guess, the punch line is, what gives you the confidence that recent pricing intensity is really temporary versus more structural? And what's the risk that you see that you won't be able to fully offset -- or fully get the pricing you want in '18 such that margin aspirations may come under duress as heightened competition doesn't allow full pricing to flow through? And I guess, if I can just tuck on one more thing. Very specific to that, I wasn't sure how to interpret your comments earlier, should we extrapolate the negative pricing in Brazil that we saw in 4Q going forward as the cost of volume acceleration in 2018? Or was that really specific to the fourth quarter?

Yes, when we talk about pricing versus volume, again, I come back to the fact that finding the right balance is not a straight line. And we're always working to find the right balance. And we think we have that in our plan on a general basis in terms of this balance between volume and pricing. From a promotional point of view, we have seen some pockets, and we have felt the need to respond. I've mentioned the 2 U.S. categories specifically. But we think that the upward pressure on commodities, which wasn't at the level it is today in the third quarter, has definitely increased, will force people to reimagine how they engage with consumers beyond price in the developed world and in the emerging markets. As I've said before, we have the opportunity to price back to the balance that will see a diminution of volume until that new pricing is established, and then the volume comes back. So those tools, we believe, are there. When we think about gross profit beyond that, clearly, we have mixed opportunity within businesses back to the premium innovation. And as I said earlier, the PCa and Elta businesses may, indeed, be small, but the gross margins are attractive. So we see mix within businesses, and of course, we see mix between categories in terms of respective growth rate. We have that emerging market pricing power. We have promotional efficiency with the revenue growth management capability that we have underway. We have the funding-the-growth that I mentioned in the fourth quarter, fully -- 250 basis points of favorable in that quarter, fully offsetting the impact of materials in the fourth quarter. And all of that gives us confidence. And we start with guidance on gross margin for 2018, but it's 50 to 75 basis points because of the underlying commodity pressure, not 75 to 125 basis points in a more benign commodity environment. So we think we've been realistic, and we think we have the tools that will allow us to get there.

We'll go next to Jonathan Feeney of Consumer Edge.

Just one follow-up, Ian, to something you said earlier. Maybe you could illustrate what you're seeing in the marketplace that merits investment. You mentioned you've already seen some signs of the market -- of some of your markets responding to the increased investment that you're making, that you're planning to make in 2018. If you give -- but that maybe not to the extent that you really wanted in 4Q, at least not everywhere. Could you give some anecdotes as to maybe one place where the marketplace is really responding to the -- I'm talking specifically about advertising investment in a way that you like and maybe one place where it's not? And what that's -- how you reacted to that as a company?

Thanks, Jonathan. Well, markets are different around the world. Again, we were actually quite pleased with the overall consumption in the United States given the currently slow start we had to the year. We're very encouraged by the progress we have seen in Europe as that builds momentum in other developed market that is struggling. And if you get behind all of those things, it comes back to innovation. It comes back to brand building, and it comes back to good marketing, in general, working with the retail partners in the countries. Colgate alone is not going to change the market growth rate in a country or category. But we think we can bring stimulation to that and be a part of what is hopefully a rebuilding of category growth rates going forward. But all situations are so country-specific that actually, it wouldn't be helpful even to go through one country example versus another. The principles are effectively the same.

We'll go next to Bill Chapell of SunTrust.

Hey, just a follow-up on the long-term targets. I understand and I think most of it is expected, kind of the change. But just how the company looked at it in terms of is there a fundamental reason why you can't -- the categories can't get back to 4% growth or you can't get back to 6%, 7% growth? I mean, I understand it hasn't done that in a long time. But certainly, it seems like we're seeing it kind of a global improvement in economies. You still have a pretty untapped developing market in terms of the Oral Care category. So is there some ceiling that you were seeing? Or are you just more prudent, it hadn't grown that way in the past 5 years, there's no point in forecasting it for the next 5 years?

Bill, life is interesting. We were captivated for the last 5 years for being unrealistic about category growth rates supporting a 4% to 7% range. We believe deeply in the growth potential of these categories. That's why we invest a fair part of our advertising investment into emerging markets where middle classes will grow because of the underlying economic trends you mentioned to get people to brush their teeth because that will build consumption and that will build marketplace growth. Our mental view and the way we think about it is we want to grow faster than the categories in which we grow business. If we look at where we are today, I guess, I come back to your word, we say prudence dictates with underlying category growth rates maybe now in the 2.5% range if the fourth quarter maintains, that gives us confidence for the 3% to 5%. But we believe deeply in the fact that these categories will grow. And if you look at them on an aggregate basis, e-commerce is another area that we'll continue to grow exponentially. I said we were just shy of 60% growth this year. So it's developing people into the habit, and it's connecting with people in the digital world of the 21st century and all of the other channels in between. So we have belief. We think prudence is called for now. And you can rest assure, if we can be a party to bringing category growth rates back, there will be nobody happier than us to elevate that 3% to 5% range. But the principal we think about is growing faster than the underlying growth rate of the categories in which we do business.

We'll go next to Lauren Lieberman of Barclays.

That's okay. We can take it off-line.

All right, we'll move to our next question. We'll go to Mark Astrachan with Stifel.

Just curious, what are you budgeting for oil prices for 2018 just in the model? And then just more broadly, competitiveness has been more pronounced in certain categories, maybe like Home Care and some Personal Care categories more than like Oral Care. I guess, I'm just curious, and maybe even following up on some questions earlier, how you think about the rationale today for continuing to play in some of those places where there is just more competition than in places like Oral Care and Pet where consumers are less likely to jump around?

Yes. Yes, the oral in our budget on average is in below 60s. Obviously, front-weighted, the way most forecasts are externally. When you think about business strategy, you have to come back to this concept of balance. There is no question we prioritize our businesses for the reason you assert, which is the emotional connection that consumers have, the trust that consumers have with products that they put in their mouth or their kids' mouths and their pets' mouths, hopefully, not their own mouths in the case Hill's, is extremely strong and deep. And that builds brand loyalty. It gives you pricing power, which gives you margin power and usually, growth. Then comes Personal Care, not quite as emotionally bonding but close. And we're very interested to go on this journey in the professional stage where you are solving a specific skincare issues with recommendation. And then Home Care, which, yes, is more of a grab-and-go business. It's a scale business. Brands still do well in parts of the world that we have them. And so as I've often said, if you have 4 kids, you don't love the fourth one any less than the first 3. So we have, over the years, as you have seen, divested modestly. Bleach, we have divested in some countries in the world where we think that brand can be better developed by another owner than us. But we're very happy with the business in the markets that we have them. They do very well. The U.S. under pressure on dish for the conversion reasons we have mentioned, that is building back. But taken as a whole, we like the business, and we will continue to keep the business in our portfolio. And remember, we are only focused on those four businesses.

Sir, at this time, we have no further questions.

Thanks. Well, thanks, everybody, for joining us, and we look forward to talking with you again after we close the first quarter, so bye.

That does conclude our conference for today. We thank you for your participation. You may now disconnect.