ColgatePalmolive at RBC Capital Markets Consumer & Retail Conference – Final
Corporate Participants
* Jason Gere RBC Capital Markets – Analyst * Franck Moison Colgate-Palmolive Company – COO, Emerging Markets
JASON GERE, ANALYST, RBC CAPITAL MARKETS: Okay. Thank you very much. We’re actually very pleased to have Colgate-Palmolive wrap up the Consumer Conference. By our calculation, over 50% of Colgate’s sales and profit are driven in the emerging markets and clearly a critical element of the sustainable growth story here at Colgate.
With us today we’re pleased to have Franck Moison, the COO of the Emerging Markets, to talk with us on the fundamentals in the region. Mr. Moison will provide an overview or a presentation and then we’ll jump into some questions and we encourage the audience participation in this fireside chat.
FRANCK MOISON, COO, EMERGING MARKETS, COLGATE-PALMOLIVE COMPANY: Thank you very much. And I’d like to introduce Bina Thompson, who is our Vice President, Investor Relations. Please ask all the tough questions to Bina. By way of introduction, you can understand from my accent I’m not a native New Yorker, but please don’t ask me questions about the euro because we know which way it’s going. So I’m in charge of Emerging Markets since a few weeks and previously I was in charge of global marketing, R&D, and the supply chain and therefore my presentation today will be focusing on innovation, innovation leading to leadership. I’d be very happy after that presentation to answer all questions on Emerging Markets, of course.
So innovation, this is one of the priority at Colgate because beyond innovation as you can understand, we’re talking about driving growth, both short term and long term. The agenda I’d like to cover with you this afternoon is a short presentation on who we are, the way we innovate in terms of strategy organization, and then see what are the results of this innovation strategy and resources in terms of commercial results and then financial results.
Who we are? As you know, we are a very global company and we’ve been global for many decades. We have power brands around the world. Everyone knows Colgate, but Ajax for example is a market leader in cleaning products in Europe and strong in Latin America. In personal care, we have brands such as Palmolive, Melon, Softsoap, Protex, very strong in emerging markets. In cleaners, fabric softener, we have brands such as Suavitel and around the world, we have the Hill’s brand in terms of pet food.
Now those global brands, as you can see, were only a small part of our portfolio in the 1980s and this has been a journey and today, they represent more than 84% of our sales, which are lowest of course to leverage our commercial approach across the world. Speaking of being global, this was a claim we were making a few seconds ago, we were very proud last year when we discovered that through a survey done in 25 countries around the world that Colgate is the most used brand in the world every day and as you can see, we came up number one ahead of every other great brand, that was a good surprise for us.
Last year we were at $15.3 billion in sales; North America representing 23% of our sales, the rest of the world 77%, again showing that we are indeed a very global company. If you look at the sales by geography at the end of this first quarter; Europe/South Pacific was 22%, Greater Asia/Africa 19%, Latin America a big piece 26%, North America 20%, and the Hill’s pet food division 13%.
Another way to look at the business is sales by category. You see that Oral Care as the lion’s share in our portfolio, Personal Care at 21%, Home Care still very important with 22%, and Hill’s we just saw that 13%. What this chart also tells us is that we are extremely focused. We compete in only four categories. Some of our formidable competitors have to deal with up to 25 categories. So, the point I want to make here there is a benefit about a strategy that is extremely focused in terms of putting your resources and reaching a depth of knowledge in each category.
We are very global indeed, we are reaching consumers in 223 countries and we are doing that following, what we believe with a lack of modesty, of course we believe it’s the winning strategy. You may know that we are following strategic initiatives that want us to focus even more every day on the consumer, the profession which is a very important part for us in Oral Care and in pet food business and focus on our customers. Colgate has developed over the years a competitive edge, I believe, along the lines of effectiveness and efficiency in everything with programs such as [fund the growth] that allow us year after year after year to generate huge amount of fund from every line of the P&L.
The third part of our strategy is developing innovation, which I will talk a bit more about, and very importantly for us developing a leadership around the world to manage a global company. So let me talk a little bit about innovation and start with a strategy because everything has to start with a strategy. For years, actually for decades, we had the great luck of starting in emerging markets long time ago; be it in Latin America, be it in India, in Southeast Asia, Africa. So what we learned there is that in order to be successful we needed to compete at every price point and that knowledge has been very useful for us in 2008 and 2009 when we had to deal with the crisis.
Innovation has to be incremental, very easy to say in this room, but in reality quite difficult to do because if you track new product, you often see a very high degree of cannibalization. So what can we do to make sure that our innovation brings additional sales, additional margin. Another difficulty when you deal with innovation is how long will the new products stay around in the marketplace, and recent study shows that the life cycle of new product is getting shorter and shorter. So what can we do in the development process to make sure that we come up with innovation that will stay in the marketplace for a long time.
Then when we are competing on a global basis, what can we do so that our innovation travels fast around the world, or at least in different parts of the world, and we see this as being a very integral part of our strategy. So in order to innovate everywhere, I will talk about the way we’re getting organized, both internally and externally, the way we get closer to the consumer, leveraging communication, developing a unique bridge between us and the profession and making that a competitive edge and then importantly, the fact that we need to balance innovation between new products, which is the exciting part and the existing business, because let’s not forget that in the consumer goods industry, the bigger size of your business is the existing business, and new products will be a few percentage points. So if you don’t do a good job at maintaining your base business vital, you may be in trouble.
So in terms of organization, we a few years ago set up a specific organization at Colgate, and I think we are one of the rare ones to have a long-term innovation group. Typically, this is something you see with R&D, but we have put some marketing talent working at long-term innovation trying to anticipate what will be the trend in five years from now, and then from that anticipation, brief R&D, brief the supply chain to develop new products.
For example, in Oral Care, actually we are — we have done some studies and we are looking at trend in dentistry up to 2020. So you see things that, for example around implantology about tooth erosion, things that allow us to get prepared now. Then we have mid-term category innovation center based around the world and those markets there are in charge of developing innovation that will come in a marketplace between one to three years. And then of course, to complement the marketing talent, R&D has a competitive edge and we’re trying to be — have both internal talent, as well as external innovation and have fundamental research that we call early research.
So the point is — with this chart is we are looking at being connected with the consumer around the world. There is no real consumer in Park Avenue, at least I didn’t see many, so we have our innovation group as you can see around the world and the other message is a good balance between developed markets in emerging markets. As you can see, we are well covering Asia with a group in India, China, Hong Kong, we are covering well Europe, as well as the US and Latin America.
Now, we have a strong R&D, and again we don’t have to focus on 25 categories, but only on four, and there is lot of benefit with that extreme focus. Again, because the consumer needs are not exactly the same around the world, we have — our R&D resources with a heavy focus in New Jersey, in Piscataway, but we are also ready to understand the specific need of consumer in Latin America, in Europe and in Asia. And again this is not new for us, we’ve been there for decades.
As a result, Colgate R&D is recognized as one of the best-in-class in terms of science. And if you are a leader in Oral Care, that is a necessity. We publish more than 250 clinicals every year, and that is very important in terms of having credibility with the profession, academia in dentistry and in pet food.
So on top of our own PhDs, we have set up a system to scalp the marketplace to find external innovation. And we have groups in our R&D that are specialized in external innovation, and then we have also a group looking at fundamental research. Just to give you an example, we have some joint programs with the top academic organizations, for example, I would just quote one. The Forsyth Institute in Boston linked to Harvard Dental School is the best you can find in the world in terms of dentistry. But those people are working a fundamental science program again that are coming in five to ten years.
Getting close to the consumer with cutting-edge communication is a big nightmare for the marketers today because the media scene is getting more and more fragmented, the investment we put in media is huge so how can we make sure we optimize it. So we have one main advertising partner, the WPP Group out of London, they are the biggest and I believe that they are also the best and we are developing more and more, an approach that we call integrated marketing communication that allow us to track the consumer the whole day wherever the consumers are. And you will see that we are moving beyond TV and using innovative media planning.
So you would not be surprised if I tell you that more and more we are using all the social media programs, but not only in the US, you’d be amazed at what we are doing in Asia, for example, in India or in China. So let me give you an example of a new product that we launched in the US. The product is called Wisp, it’s a portable toothbrush with an integrated bead of mouth rinse and it’s a premium product targeting the young population between 18 and 25. Now this population is not at home, they don’t look at TV much, and the challenge is how to catch them and what we came out is that you really have to find them online a lot. You have to use search marketing, you have to use in-store, and of course a bit of TV. So I will show you just one commercial, you may have seen this already.
So don’t forget Wisp before you kiss. So this is an example of a real innovation, premium price, great margin, and every dollar is incremental. The challenge is will it be sustainable and I will show you some data. So the result so far and this is a US market up to the month of April, you see that we got a 6% share of the manual toothbrush market and that contributed to really increase our total toothbrush market share and that allow us to close the gap with the market leader in the US.
So the challenge is will people repeat, will it become a habit, and we are very encouraged because you see this information here that says that the repeat is increasing period after period reaching 14%, which is a very good benchmark in our industry. The trial is only at 6% of the population, so we still have room to grow. So just one example of innovation.
Now I’m going to talk a little bit about the relation we have with the profession and if there is one reason for which you should have Colgate share forever, this is it. We have a specific relationship with the profession around the world. So whenever we develop a new product, we get early input from dentist and I would say not only the average dentist, but we get early input from key opinion leaders in academia. We have invested a lot in the detailing force and today we have the biggest detailing force in dentistry around the world. Of course as you would expect, we have strong presence in convention and we have very solid clinicals behind every product we introduce. So we communicate a lot to the profession around the world, sharing, training clinicals and so on and so forth.
We have partnership with people like the Mayo Clinic, the American Dental Association and so on and so forth. Around the world, once a year we dedicate one month together with the local dental association to sponsor activities, for example, such as free checkup for consumers. We leverage this, we do a lot of in-store activities, we do advertising together with the dental profession.
So as a result, you can see that the toothpaste most recommended by dentists, we’ve been going from 28% in 2004 to 43% last year. And why is this worth a lot of money? Because once your dentist tells you (inaudible) please use this toothpaste, you are most likely going to listen to him or her. And so that protects us from competitive inroads and the nearest competitor is at 15%.
Now this is a chart that is worth for us a lot of money. This is the top-20 subsidiary in the world and in 17 case, it’s a Colgate brand that is recommended by dentists. Colgate you know, Elmex and Meridol is a brand we bought from GABA in Europe in 2004 and you see that there are three countries where we are not yet number one; Lacalut is a German brand in Russia, Laser is a local brand in Spain, in Thailand it’s Sensodyne, but not for long. So we still have some progress to make, yes, but this is very strong. So a point I want to make here now as we show you example again, if you want to grow your total sales, your total market share, you have to make sure that you allocate resources behind new products such as Wisp, but you already — you also have to take care of your existing business. So let me show you an example of new product innovation, something we are very proud of is Colgate Sensitive Pro-Relief, addressing the condition of hypersensitivity of the dentine, which typically in every country around the world, between 20% and 40% — 20% of the people suffer from that.
And the current technology will help you, but with the current technology it will take about two weeks to cure you. So imagine if you have a headache, you take a pill and it’s going to work in two weeks, you would not be very happy. With this technology that we acquired from the outside, by the way, it was developed by Professor Kleinberg here in New York, he worked on it 30 years, so it’s not a fast process. With this technology, we can cure the problem in one minute. So it looks like another tube of toothpaste, but in reality the science behind it is revolutionary.
So we worked a lot with key opinion leaders before launching it. We launched it in dental office and then in mass except unfortunately in the US because we have to go through an FDA approval process that takes a few years. So very interesting for us in terms of potential because this is the one segment in Oral Care where we are not yet market leader, Sensodyne from GSK is. So for us it is a gap that we need to fill and we will fill.
So the technology is — the ingredient is called (inaudible), I’m not going to bore with you that except believe me it works. We launched it just a few months ago and before the launch we had in the sensitivity, we had a 3% share of this with existing Colgate Sensitive toothpaste and what you can see is that in a few months, we have already doubled our share and thanks to the launch of Pro-Relief, and you can see that has been totally incremental.
Now I will give some examples around the world. In Greece, for example, that Pro-Relief took a 5.8% share, we have been multiplying our share in Sensitive segment by four. Going to the UK, for example, we have a 2.5% share, we went from 47% to 50.2%. Mexico in hypermarket where we just launched in February, we already got a 4% share and again we have tripled our share in the sensitivity segment. I forgot to say this is super premium with the margin that is absolutely fabulous.
Brazil, we speak a lot of Brazil recently, it’s a great place to be. So we launched in November, in the drug channel we have a 6% share, again we have almost tripled our share in that segment. So the point I want to make is different geography, same success. Let’s go to Singapore, we went from a 4% share to a 7% share in the Sensitive segment and grew our total share. Then let’s go to Taiwan, same story. So we are very encouraged by this. Innovation now in another segment, which is a Freshness segment, totally different approach, Max Fresh, again the proposition is freshness targeting the younger population, and this is a product with bead in a transparent tube giving you a very impactful freshness.
Toothbrush, that’s one of my favorite innovations, actually back to external partner, we work with people in Austria, they design the Porsche, the car you drive, those people help us design our toothbrush. And the engineers that work on it came up with — by association with a concept of the suspension in the car, they brought suspension in the head of the brush, and we tested that and the consumer said, wow! So this is Colgate 360 ActiFlex premium.
Example of innovation in UAP or deodorant, launched around the world with the Mennen brand, Stainguard that would prevent staining of T-shirts. In Europe and in Asia, Palmolive Nutrafruit in Personal Care, just launched in Europe, very strong uplift, in the US, very good success with innovation on the Irish Spring brand. In Europe, I mentioned earlier that Ajax is a market leader in cleaners, but as everywhere else in the world, there is a strong expectation for cleaning products to be safer to the environment. So we came up with this line of products from dishwashing liquid to cleaner product, fabric softener with a concept of (inaudible), again very strong test market results, and we’re launching as we speak in Europe.
So the point I wanted to make here is innovation across the board, some are totally breakthrough, some are more innovation on the existing businesses. Critical to succeed in the US, in developed market, but also very importantly in emerging markets, the ability to develop products at every price point, and when I mean every price point, I mean up to the fresh air of toothpaste at one rupee in India to convince people in the rural area to try the toothpaste, to drop their neem stick, because 20% of the population brush their teeth with charcoal on neem stick, which is free. So trying to upgrade them to toothpaste is a challenge. And we know how to do that and make money with it. So example of innovation in different price points, underarm, for example, most recent innovation, you can see that we went from index 100 to 160.
Toothbrush, we have a fabulous facility in China, state-of-the-art that produce 1.5 billion toothbrushes per year and the benefit of that is — because it is state-of-the-art, because it is in China, we can produce at very low cost. Nobody else can do that. And as a result, we are competing from very low price like $0.25 up to $6 plus. So see the range of pricing is very wide and allows us to really compete well everywhere. The challenge (inaudible), but can you make money with a brush at $0.25, and the answer is yes, because it’s easy to be low priced, the difficulty is to be low priced and have a good margin. Innovation in toothpaste recently again covering entry price, for example, this is herbal toothpaste with mineral salt probably from Asia, and then premium innovation, Max Fresh with Bead and super premium Colgate Sensitive Enamel Protect.
In Home Care, we are strong in Home Care in LATAM and in Europe, entry price point for example for dish cleaning products in paste form, premium product with fabric softener Magic Moments, and super premium with Ajax Professional in Europe or in South Pacific. Very important as well to have a leading-edge supply chain and the one element I’d like to talk about within supply chain is simplification because again if you do a good job there, it is going to have a lot of benefit in terms of generating funds, improving your working capital and inventory. So in the US last year, we reduced SKUs by 10% and improved our sales 6%. In Europe, I spoke a lot about Ajax; to serve one Europe we had 84 different types of bottles, we moved to 25. You can imagine the benefit for the supply chain, you can imagine the saving coming with such a program.
On a worldwide basis, last year we reduced the number of formula by 23%, number of SKUs by 22%. So it’s not something very sexy; people don’t really like to work on those things, but it’s generating a lot of hard cash saving. Now, we also try to simplify and be more sustainable because I think this is something that will stay and as we relaunch product, we are developing packing using less plastic and it’s a good transition because I’d to speak a little bit about sustainability, we usually don’t communicate a lot about this, but it is important.
Our strategy is around our three Ps, people, performance, and planet. And in planet it’s about production, products, packaging. We have been reducing the energy per ton produced in the [packages] by 21%, very important water usage. In particular in emerging markets, we’ve been reducing by 41% and CO2 emission by 22%. So we can do that and still be a low-cost producer.
So this is — very quickly a few information about our innovation strategy example. What are the results? As you know, we are market leader in toothpaste worldwide. We are number one in toothbrush, in liquid hand soap, in household cleaner, and dishwashing liquid, and pet food and that is where we compete. For example, Korea and Japan are not included there. And we are number two in fabric conditioner, liquid body cleansing, bath soap, and mouthwash outside the US. So the point I want to make here, we are not competing in many markets, but whenever we compete we tend to have a strong position. We speak a lot about toothpaste recently, a lot of people are telling us, yes, you have some friends coming in Mexico and Brazil and whatnot. Well, the good news is we are growing our market share year after year and even this year, we continued to grow.
While we have three competitors on a global basis, as you can see, they are trading waters. I mean one of them is going down fast from 17% to 8.8% and the other guys are coming up and down, but we continue to grow. And to be more precise, according to Nielsen, 69 countries, we are number one in 55, Lever is number one in eight, typically in Asia and then Asia, Italy, France and Finland. GSK is market leader in five and Proctor & Gamble is market leader in one and tied for number one position in another one. So if you ask me are you worried about increased competition, my answer is we look at them seriously, but we’re not too worried.
Brazil, we spoke a lot about Brazil. We continue to grow, thank you very much, actually we welcome competition, it’s a stimulus to do a little better and we continue to grow in Brazil. The key competitor is down significantly and the new entrant on total Brazil has a 0.6% share, in the test market of Fortaleza, 5.3% share.
Toothbrush, when it was managed by Gillette, the brand in blue was the market leader and when it was not managed anymore by Gillette, we decided to take the leadership. We wanted to buy the brand, but we could not so we’re taking market leadership as you can see and the gap is increasing every year.
Mouthwash, another interesting category. Clearly, we are not market leader, but we’re making great progress in terms of market share as you can see. Bath soap, we are not market leader again, but we are gaining share year after year. Fabric conditioner, again we are not — this is not a place for a market leader, but we are gaining share. And so it covers most of our categories and the message here is we tend to gain market share in most categories.
Now, let’s look at the financial results, something you will know very well. Our strategy is extremely simple. Gross margin has to go up, overheads down, advertising in new products, investment up and operating profit up; so extremely simple. In terms of walking the talk as you can see year after year, we are improving our gross margin and even last year, which was a relatively difficult year, we improved from 56.7% to 58.8%. Currently we are 59.2% and our ambition is to reach 60% by year-end.
Operating profit, on average we have grown 11% and no matter what happens in the marketplace, no matter what happens in the environment, we have the ability to deliver consistently. Earnings per share comparison last year, this chart tells the story. In terms of top-line growth and that’s something we are very proud of because maybe this is not understood well enough. If you look at the past years, since 2006 we have grown 8%, 8%, 9.5%, 6.5%, and this first quarter 6%. So in terms of organic growth if you look at our industry, I think there is only one other company that has delivered growth so consistently.
The other good news is, as you can see in the past years, growth came from every division and of course as you would expect, emerging market growing much faster with Latin America at plus 14.5% this first quarter and Asia at plus 8%. And business is very healthy.
In terms of generating cash, our business model seems to work. The cash flow from operation has been on average growing by 10.5% and last year we grew by 42%. After-tax return on capital, again this is an interesting [factor of] comparison S&P, peer group, and ourselves. So value creation, if you look at over 20 years, again the importance of being consistent and reliable; we have been doing well. Actually in terms of total return, for $1 invested in Colgate versus the S&P and versus our peers, we are doing well.
So to conclude, we have a clear and simple innovation strategy. In the past years, we have put dedicated effort against long-term and short-term innovation. We have been for years innovating across categories and across different price points, which is very critical. We have a fully integrated creative communication and very important for us given the field we are competing in, in particular in Oral Care and in vet product, we have a very strong endorsement from the profession as you have seen. So that results in market share gain in most categories for us and consistent outstanding financial results.
So, thank you very much. That was a short presentation of Colgate and now Jason, I leave it to you.
Questions and Answers
JASON GERE: Thanks, Franck, and I guess I’ll lead up the question and if you do have any questions, raise your hand. We have someone here with a microphone, but I guess starting off. Have some water. Talk about the global economies. Obviously we’ve seen a slowdown over the last year, so can you just talk about per capita consumption, changes in disposable income that you’ve seen in some of your key emerging markets right now, and then just thinking about longer term, is the opportunity really to delve deeper into some of the markets or is it really about still more of the trade up and the trade up with innovation going forward?
FRANCK MOISON: Okay, I will then focus on the emerging markets.
FRANCK MOISON: What we see and I was — we’re just in the process of what we call, I call it media review, so what we see is Asia doing very well, not only India and China where both the GDP, but income of the consumer going up is very healthy, but we see also Southeast Asia in good shape, which is a radical improvement versus last year.
So Asia is a very good story. Russia, while it was difficult last year, it’s coming back as you would be expecting with the price of oil coming back, Russia is coming back, a bit slower so far than Asia. Latin America, when you go to Brazil you can’t be — you have to be impressed by the vitality of the consumption there. Mexico, Argentina, actually all Latin America is quite good.
You will not see the same growth in Latin America than in Asia because in our field, their consumption perhaps for consumer is really quite high. For example Brazil, the Brazilian consumer brush their teeth three times a day and their consumption is already very close to what we see in the US.
Going forward, we’ll see accelerated growth in Asia, no question, we’ll see growth coming in Latin America, trading up will play a big role, and I forgot to mention Africa, which is improving as well. For a long time, we saw Africa, Middle East being relatively flat, we see now an acceleration of growth. So clearly the fact that we are betting in emerging markets is the right thing.
JASON GERE: Okay. And then maybe just talking about Latin America, which has been your growth engine for so many years, the organic sales, double digits, far exceeding GDP growth, so can you talk maybe a little bit about your view, can you sustain those types of growth, can you parcel out between the volume and price? Obviously, prices had a role in the past where devaluation especially with Venezuela right now, but also amidst some of the increased competitive pressures that we’ve been hearing from one of your larger competitors out there.
FRANCK MOISON: So Latin America — our strength in Latin America started with the fact that we have a very long history there. We’ve been there since 90 years, 100 years for some markets, so we are very entrenched in those countries and actually consumers believe when they hear Colgate, it is the local brand. In terms of continued growth, we have very strong portfolio, not only in Oral Care, but also Personal Care and Home Care. And as you may remember, we have innovation center based in Mexico and in Brazil. We have an R&D center in Mexico and in Brazil, so we are coming up with innovation for those countries.
We are right now accelerating the investment in Latin America significantly. And as far as competition is concerned, in our field of excellence, I have to say, I don’t quite understand why people are moving in into a battle that they have very little chance to win. You’ve seen that in Brazil, for example, after one year our competitor there in the test market have only a 5% share, and we have continued to grow. There are other competitors there in Brazil, you may have seen, going down very significantly. So there is — we welcome them, we respect them, because they are strong, but we are not worried.
JASON GERE: Now in terms of (inaudible) I mean is this merely just raise the cost of doing business in Latin America, but at the same point it sounds like you have a high degree of confidence that the organic sales can stay above the corporate level of to six to eight longer term.
FRANCK MOISON: Absolutely.
JASON GERE: And then just from a margin standpoint, how much more investments do you need in that region with advertising? I mean your margins are 30%. Can they continue to grow from there? Can you tie in the element of CBP funding the growth, some of the other kind of corporate initiatives? Is there still more room to go on the margin side in Latin America?
FRANCK MOISON: Okay. In terms of continued growth, I like to come back to one of the things. Of course we are spending more to defending in two key geographies, Mexico and Brazil, but we’re also spending more because not only for defense reason, but also because we are launching innovation such as Pro-Relief, which as you’ve seen is picking up very rapidly. In terms of ability to continue to grow and fund that growth, as you know in Colgate we have this fund the growth program that I think you know quite well that allow us to generate funds year after year to fund the advertising line. So our business model in Latin America in particular is ready to deal with those competitive challenges. We’ve seen every few years a competitor tries to come in, be it a local competitor or international, and usually after one or two years they give up.
JASON GERE: So do you think the actions right now are rational or irrational?
FRANCK MOISON: I would not comment on that, I think the consumer will decide.
JASON GERE: Okay. Just the last topic on Latin America. Can you just talk about pricing? How — look at the (inaudible) obviously in the US when pricing goes through, volumes fall off, but Latin America has held up pretty well. Can you just talk to the strength right there of the brand or the dynamics behind it? I mean I think one would look at your organic sales at 14%, 15% and say this just can’t sustain, but at the same point it just feels like you can continue to take pricing in these regions through innovation and the volumes really kind of hold there.
FRANCK MOISON: In terms of Latin America in general because of inflation pattern, the whole environment has been used to deal with price increase and certainly as a market leader with a 77% share of the market in Latin America, 80% plus in Mexico, 94% in Venezuela, and 70% plus in Brazil, we can lead price increase. The other factor that is different from that to the US or Europe, in Latin America you don’t have private label or very little. So if you would have private label, it probably would be more difficult to take price increase.
The trend is also less concentrated than in the US or in Europe, that also helps us to take reasonable price increase to protect our market. So that’s what I see in terms of pricing power. Now, of course you have to be reasonable and always understand the tradeoff between pricing and volume, but I think the best way to do it for us is to give more value to the consumer, again with innovation, trading up the consumer as you’ve seen for example toothbrush is a place where we’re doing very well. Underarm is another example of what we are doing, introducing products from index 100 to 160 and that’s the way you can also act in the marketplace.
JASON GERE: Okay. And suffice it to say, even with some of the fears out there in the market, stemming initially from the eurozone, you guys — Latin America really has been kind of the rock of all the regions out there in the last couple of years. So is this where you have your greatest confidence in terms of growth or you’d say that’s more Asia still?
FRANCK MOISON: I’m very excited by Latin America, of course, given the strength of our portfolio, but just coming back from Asia, I have to say that I’m equally excited about Asia. And in Asia we have even more progress to make in terms of market share gains.
JASON GERE: And just switching a little bit to Asia and the EMEA region, unfortunately you don’t have 70%, 80% market share there?
FRANCK MOISON: Not yet.
JASON GERE: But can you talk just about the fragmentation of those markets, it just seems here you could argue that there’s a little bit more fair playing with some of the bigger players, everybody is trying to get their share of the pie. Can you talk about maybe the local players out there and just in terms of the category growth that you could see market share opportunities, it seems that your comments about market share opportunities were probably stemming from the areas where obviously you’re not as deeply penetrated, but there’s still an opportunity?
FRANCK MOISON: Yes. When we start with China, as you would expect, in China, we have a 32.2% share of market and we are market leader, you will find also a fairly strong Procter & Gamble, and you will find also Unilever, but in China, you also have growing local brands, and none of them being very strong, but collectively they still represent at least a third of the market. They tend to be premium, not only low price as one may be expecting. So there is still room for us to grow there, and we are convinced that from 33% where we are today, there is room for growth.
In India, we have a 50% share and growing as well, but you have some strong local competitor, one is called Dabur, for example, and there is another key multinational, [they're losing steam], so again we believe that based on our experience in Latin America, we can take that 50% to 55% and maybe 60%. In Southeast Asia, our share — we are also market leader. We have room to grow, there are some local competitors actually in almost every market, so it’s an interesting dynamic. The rate of growth of the market, we believe, until 2015 at least is going to be at least 10% a year.
JASON GERE: Okay. Great. And then just from a margin standpoint, the Asia Pacific, EMEA, obviously, everybody would aspire to have those Latin American margins, but obviously that pie comes with having strong market shares as well. Is this where you see the greatest upside to margin? Going back to what I was asking on Latin America, factoring in CBP, funding the growth, SAP implementation, is this where you think that there is going to be a big driver of the margin expansion?
FRANCK MOISON: I think what we see with our business model in Asia, growing our toothpaste share, our toothbrush share significantly, and mouth rinse, those products carry great margin and we see that we can grow, improve the margin, as well as significantly increase the advertising. So the answer is yes. Now, how long will it take so that we’ll reach the Latin American level, it’s going to be a few years.
JASON GERE: And just maybe a bigger question, obviously Colgate is a very global company where unlike maybe some other consumer product companies, ideas generate out of North America and they go East or West. Can you just talk about that cross-fertilization of ideas from emerging markets to the US and to the Europe and just kind of leveraging that — your scale from that perspective?
FRANCK MOISON: Yes. It’s a very good question, and what we see for example in the field of Oral Care, is that therapeutic ideas can travel, because for example, a cavity is a cavity or hypersensitivity of the dentine is the same across the world. And as you saw the example, the launch of Pro-Relief is working in Europe, in Latin America and in Asia. But we also believe that we can do some reverse innovation.
We can develop some new products in Asia and take them probably in other markets, maybe other emerging markets, but maybe even Europe or the US, and we are working on that precisely now. It’s already happening in the field of toothbrush, some innovation that were developed in China has been going very successfully around the world actually. So the challenge is, can you do that? Take an example, you may know that in India, ayurvedic medicine and toothpaste are very successful. There is a few markets around the world where there is some potential for such toothpaste. Now, it’s not yet happening, but we are looking at this.
JASON GERE: And as you look at the Colgate portfolio, which categories do you think that you’re still under-penetrated, obviously Oral Care is in the over 200-plus markets you’re in, where do you still see the opportunity for growth and where are those expansion opportunities (inaudible) question?
FRANCK MOISON: I mean the Hill’s business is another very profitable business model that has room for expansion. For example, we are growing in Russia, but we are just at the beginning. Asia, you have enough of the middle class now with enough income to be interested by Hill’s. So we would look at a big market in Asia for example, so Hill’s is one. The other category where we have potential for expansion is Personal Care. Personal Care is a place where when we are active we tend to be a strong player and we are not yet in an important way in some key markets of Asia. So that’s something we are looking at.
JASON GERE: Okay. And then when you look at the portfolio relative to one of your larger competitors, actually you got a couple of large competitors, you’re in fewer categories. So stop me if you don’t like the question, but leveraging the infrastructure I mean what’s on your wish list, like what would you love to have in that portfolio, categories that you’re not in whether you could do it organically, inorganically? What do you think? Is there anything missing from the Colgate portfolio from an emerging market standpoint that you think could help continue the strong growth that you’re seeing in this business over the last few years?
FRANCK MOISON: This is a question that we are really getting on a regular basis, but we have concluded that if we have one extra dollar most of the time we are better off, we get a better return in investing in our existing categories, in particular in emerging markets and grow further our toothpaste business in Asia, our toothbrush business in Asia, or as you have seen mouth rinse on a worldwide basis, we are making progress, but we only have a 19% share and Listerine is up there with — so we have plenty of room to grow in those very exciting markets. Now the next category where we’d like to evaluate is again I have said Hill’s and Personal Care. So not leaving the very focused strategy that we have had so far.
JASON GERE: Not enticed by beauty care or anything along those lines where you have Softsoap, which is in the body wash, but you could argue that a good logical extension will be something along those lines.
FRANCK MOISON: It’s not yet in the plans.
JASON GERE: Okay. Are there any questions from the audience?
UNIDENTIFIED AUDIENCE MEMBER: When I think about the Wisp toothbrush, obviously an extension to your product line that is not vertical, but when you go through the thought process of developing a brand-new toothbrush, how do you think about the economics, how long is the payback on this? What size of market do you need? Is this is the product that you can view as expanding multi-geographies or is it more of a US and then maybe just want to –?
FRANCK MOISON: Yes, thank you for asking the question because actually that product Wisp that we launched in the US has been such a good surprise. I mean the test market was positive, but we did better than the test market and it made money year one. So this is the dream new product. So based on that experience we are expanding this to another market, which is another important market for us is South Pacific, Australia where we also are very strong. And we’re doing it in a prudent fashion because again we want to make sure that it’s not going to be just a fad. We want to make sure it’s sustainable. You have to create that new habit, but again so far it’s very encouraging.
Now to answer your question, when we look at the new toothbrush and the technology in toothbrush right now is quite sophisticated, the investment in [most] is quite heavy. So indeed we go through — in terms of new product development, we go through the marketing side, testing the concept, working prototypes with external partner, as I mentioned, is Austrian company. We also work with a company in Milan, they are very good in design. So once the marketing side is developed, then we look at the financial side of course.
You may have seen that because we compete at all those price points with production based in Asia that is extremely competitive, it is easy for us to have good margin and the payback is very rapid. Why? Because we only advertise the premium part of the portfolio, and that is enough to drive a positive [value] effect on the whole category. So you have seen that in the past year we’ve gained lot of market shares. I would say that — this is why my answer to where do we want to invest further and my answer is more toothbrush and more mouthwash, because it’s a very profitable business [by now].
UNIDENTIFIED AUDIENCE MEMBER: How long can you protect or [incur] a patent to that, how long –
FRANCK MOISON: Yes, it is very patented, so the protection is therefore few years, and that very brush actually is not produced in China, but in Switzerland, which is in a very hi-tech firm, so we believe it will be difficult to imitate very quickly.
UNIDENTIFIED AUDIENCE MEMBER: Thanks. In a region like China, it was interesting that — I know you have top leading share there, but it is interesting, you mentioned most of the incumbents, which you are [rallying], are more premium-based products, that leads me to wonder whether the question is, is the bigger opportunity to trade up consumers and get more premium within China, or is it still just the breadth within China at the lower end still so great, that’s the bigger opportunity?
FRANCK MOISON: I think your question is correct, because as you now there is not one China, there is the coastal China with the key cities and then the A cities, and then we have the B and C cities and this rural area. So marketing in China is complex and costly, because you need to adapt your portfolio to those different realities. However, what we see as a mega trend in the past years is indeed with the rapid growth of income for the consumer, premium products are those winning. It was not the case just a few years ago.
This being said, you will have a go-to-market approach favoring the premium product, in the coastal area and B, C — A, B, C cities and you still — you will have a different portfolio to deal with the rural area. So that is why typically you will see the most successful consumer goods company in China, they will not have one national plan, they would tend to have different plans to face those things out, go to one big city and then move to the next one. China is really very complex. I don’t know if I answered your question.
UNIDENTIFIED AUDIENCE MEMBER: (Inaudible question – microphone inaccessible).
FRANCK MOISON: The bigger opportunity, again it’s around the premium products. But it’s not the exclusive opportunity, you asked me the bigger, that’s where the bigger is, but it would be a mistake to let go the medium and the lower value segment.
JASON GERE: Okay, I think this just ends the webcast. Thank you, Franck, for coming in here today and talking.
FRANCK MOISON: Thank you.
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