Colgate-Palmolive Company 2010 Annual Report

Ian Cook, Chairman, President and CEO, answers questions often asked by our shareholders regarding our business results, key strategic initiatives and the Company's prospects for future growth.*

Q. Please comment on the Company's 2010 global business results.

A. We are pleased to have achieved another year of double-digit earnings per share growth in 2010, despite difficult economic conditions and aggressive competitive activity around the world. Global sales rose 1.5% to an all-time record level, and global unit volume grew 3.0%. Advertising spending behind the Company's brands increased 8%, contributing to widespread market share gains in all of our core categories with our global leadership in toothpaste and manual toothbrushes increasing to all-time highs in 2010.

Operating profit, net income and diluted earnings per share all increased versus last year's record levels. Gross profit margin increased 30 basis points to a record 59.1%, driven primarily by the benefits of our many cost-saving programs around the world, which enabled us to offset higher material costs and increased promotional investments.

We maintained our strong balance sheet and cash flow with working capital held at a very low 0.3% to sales, and cash from operations declined only 2% when compared with last year's uniquely strong record level.

Q. Colgate has a long history of strong operating cash flow. What are your priorities for uses of cash?

A. At Colgate we maintain as sharp a focus on generating cash as we do on achieving our profit goals. That has been the case for a very long time, allowing us to make uninterrupted dividend payments to our shareholders every year since 1895, with dividend payments increasing each year for the past 48 years. And that trend is continuing. In February 2011, we announced a 9% increase in the quarterly dividend rate, effective in the second quarter of 2011, on top of the 20% increase that took effect in 2010.

Another priority is maintaining flexibility for acquisitions. As in the past, we will continue to view acquisitions as a strategic endeavor and follow a strictly disciplined approach when it comes to valuation.

Absent an acquisition, we have returned cash to shareholders by repurchasing Colgate shares. A year ago, we authorized the buy back of an additional 40 million shares. By the end of 2010, we had bought back 23 million shares under this program and that pace should continue in 2011.

Q. Colgate's long-time presence in emerging markets has been a distinct competitive advantage. What is Colgate's strategy to drive further growth in these markets?

A. Emerging markets, which now represent half of our global sales, have been a very important part of our growth for a long time, and we think our history there positions us well to accelerate that growth going forward. We have been in Latin America for over 75 years and in Greater Asia for over 50 years. By being there early, Colgate has built brand loyalty and, of course, leading market positions. This is particularly true with toothpaste and the entire oral care category. Our deep understanding of local tastes and habits across categories, combined with our proven disciplined global execution, we believe, gives us a significant competitive edge.

Additionally, as part of our global strategy, we have developed strong relationships with dental professionals. This strategy has contributed greatly to increasing professional recommendations for our brands. In Brazil, 77% of professionals are now recommending Colgate ahead of any other brand, in India 81% and in China 85%.

We are also committed to building consumption in emerging markets by educating consumers in these areas of the world about better oral hygiene and skin cleansing habits because we know that once people adopt those behaviors they stay with them for a lifetime. Indeed, our "Bright Smiles, Bright Futures" oral health education program has now reached over half a billion children in 80 countries since the program began twenty years ago.

Q. Amid today's heightened competitive environment, what is Colgate doing to better connect with consumers?

A. When we think about driving our growth with consumers, we focus on targeting our commercial investment to both build brands with our traditional marketing programs and build trial for the new products that we are bringing to the marketplace.

Over the last few years, we've found that engaging with consumers must include very powerful and effective in-store shopper marketing activities to complement our advertising in traditional media outlets. Importantly, our integrated marketing campaigns are making much greater use of digital tools, such as the Internet and social media, and even mobile applications. In some countries, as much as 15% of our media spending is on digital initiatives. As for in-store activity, one example is using a demonstrator to explain how Colgate Sensitive Pro-Relief toothpaste provides instant and lasting relief from pain caused by tooth sensitivity, while distributing product samples for consumers to try for themselves.

As a result of these types of activities, Colgate's long-term global market shares have strengthened despite periods of heightened competitive activity. As we enter 2011, we are planning for even greater levels of advertising investment, both in and out of the store, behind our base business and a robust pipeline of new products, which should continue to strengthen our worldwide market share positions.

Q. Please comment on the Company's innovation strategy.

A. Colgate's growth is sparked by the innovative products we bring to market in our key product categories, and we continue to be very focused on making sure we have innovation at all price points. This strategy offers consumers a choice of products from entry level to super premium and allows them the opportunity to trade up as disposable income levels rise.

More than ever before, our nine consumer innovation centers, which are located close to consumers in different parts of the world, are focused on developing insight-driven innovation. These centers are staffed with marketing and consumer insight professionals, who identify opportunities based on insights into consumer behavior, habits and desires, including local preferences. Such work led to the introduction in Europe of Palmolive Authentics liquid hand soap containing Mediterranean-inspired fragrances and ingredients.

Another important element of our innovation strategy is how we make use of external partnerships to complement our strong internal capability. We have many such partnerships with a broad array of suppliers, research institutions, universities and other industry sources.

Q. Colgate has often been cited as best in class with respect to generating cost savings in all areas of its business. Can the Company get even more efficient?

A. Indeed, we have made great strides in generating cost savings, but we still see many more opportunities ahead. Increasing our efficiency to fund growth has been ingrained in our culture for many, many years. One recent area of focus is on simplification of the product portfolio that we offer. Over the last three years, we have reduced the number of formulas that we use around the world by some 32% and the number of stock-keeping units, known as SKUs, by 23%. Another good example is our new European shared service center in Warsaw, Poland. The idea is to take away some of the non-operational activities from the people building our brands and consolidate that work into a regional or global center. We have streamlined and standardized accounting procedures and processes for all of our 27 European locations, and have leveraged SAP technology to deliver more accurate and more timely information back to the subsidiaries. Looking forward, we see further opportunities for standardization and are finding ways of broadening the scope of that center, which will serve as a model we can transfer to other geographies.

Q. Hill's performance was less robust in 2010 than in prior years. What are the prospects for this business going forward?

A. While the Hill's business indeed had a challenging year in 2010, we are encouraged that 2011 will bring a return to growth. Our plan to correct pricing and sizing in the market is complete, and a stream of innovative new products is being introduced at a rapid pace. The launch of Science Plan VetEssentials in Europe is driving market share gains and increasing veterinary recommendation levels. And, in the U.S., our recent launch of Science Diet Weight Loss System is being supported by a strong integrated marketing campaign, including television, digital media and promotional events, which is helping to build consumption weekly.

Looking longer term, opportunity also exists to continue expanding Hill's geographically. Our focused investments in high-growth markets should continue to drive strong sales growth in those regions well into the future.

Q. Please elaborate on how Colgate is strengthening leadership worldwide.

A. We have long believed that our Company's continuing success as a leading global consumer products company is closely linked to the personal leadership demonstrated by Colgate people at all levels within our organization. We support and encourage leadership in many ways, starting with making sure that we communicate our strategy throughout our entire organization. We provide information and tools to help our people carry out their responsibilities. For instance, our broad training curriculum includes courses on Colgate's global values of Caring, Continuous Improvement and Global Teamwork, as well as courses designed to enhance skills.

You can see examples of Colgate's leadership in action everywhere, far beyond delivering superior business results. In China, through donations and other support, Colgate has been instrumental in building 41 oral care clinics in cities impacted by earthquakes. These clinics will bring oral care services to over one million people in the Sichuan Province. Additionally, in Ethiopia, where the veterinarian to livestock ratio is the lowest in Africa, Hill's veterinarians are volunteering their time working with local veterinary students to improve veterinary resources in the region.

Q. What is the Company's outlook for 2011?

A. As we continue to face tough external challenges, we remain confident that we have the right strategies in place to build on our past successes, and are committed to executing those strategies with speed and agility. We are sharply focused on delivering value-added new products at all price points and are prepared to spend aggressively to support our global brands and fuel top-line growth worldwide.

Although we expect competitive and economic challenges to continue, we are confident that our market leading positions, particularly in emerging markets, experienced management team and strong financial condition position us well to achieve sustainable growth and another year of solid financial performance in 2011.

I'd like to take this opportunity to thank all Colgate people worldwide for their personal commitment to achieving our goals each year, with the highest ethical standards, and express appreciation for the support of our customers, suppliers, shareholders and directors.

Ian Cook
Chairman, President and Chief Executive Officer

* In the questions and answers provided and in the above video, the Company's results and outlook are discussed excluding the 2010 one-time charge related to the transition to hyperinflationary accounting in Venezuela and certain other items. A complete reconciliation between reported results (GAAP) and results excluding the Venezuela hyperinflationary charge and other items (Non-GAAP), including a description of such items, is available on Colgate's web site and on the Non-GAAP Reconciliation page of this report.