Q4 2022 Colgate-Palmolive Co Earnings Call

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Speaker 8: Good morning. Welcome to today's Colgate Palmolive 2022 fourth quarter in year-end earnings conference call.

Speaker 9: This call is being recorded and is being simulcast live at www.colgatepalmolive.com.

Speaker 10: Now for opening remarks, I'd like to turn this call over to Chief Investor Relations Officer and Senior Vice President M&A John Fauche.

Speaker 11: Thanks, Allison. Good morning and welcome to our 2022 fourth quarter and full year earnings release conference call. This is John Fauche. Today's conference call will include forward looking statements.

Speaker 12: Actual results could differ materially from these states.

Speaker 13: Please refer to the earnings press release and related prepared materials and our most recent filings with the SEC, including our 2021 Annual Report on Form 10-K and subsequent SEC filings, all available on Colgate's website, for discussion of the factors that could cause actual results to differ materially from these statements.

Speaker 14: 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.

Speaker 15: A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate's website.

Speaker 16: Joining me on the call this morning are Noah Wallace, Chairman, President, and Chief Executive Officer and Stan Zatula, Chief Financial Officer.

Speaker 17: Noel will provide you with his thoughts on our Q4 results and our 2023 outlook. We will then open it up for Q&A.

Speaker 18: No.

Speaker 19: Thanks, John , and thank you all for joining us this morning, and I wish all of you a very Happy New Year.

Speaker 20: So I mostly wanted to focus on the year ahead today as I think we are well positioned to deliver strong results in 2023, even as we plan for a difficult macroeconomic environment and continued uncertainty.

Speaker 21: That said, as we mentioned in the prepared remarks, we're pleased with the progress we made in 2022. We delivered organic sales growth in all four of our categories, including double-digit organic sales growth in pet nutrition and high single-digit organic growth in oral care.

Speaker 22: 22 was our fourth straight year of delivering organic sales growth either in line or ahead of our 3-5% long-term target range.

Speaker 23: And we delivered within or ahead of that range in every quarter over that time period, 16 consecutive quarters in all.

Speaker 24: and it's the continuing strengthening of our strategy that has allowed us to grow consistently through different operating environments.

Speaker 25: as each year has presented its own challenges and its opportunities.

Speaker 26: But if we stay focused on driving the core...

Speaker 27: leveraging our capabilities across our portfolio, innovating in faster growth adjacencies, and tapping into faster growth channels and markets, we will continue to grow.

Speaker 28: And in 2023, as we continue to execute on our strategy, we expect to accelerate earnings growth and generate incremental cash flow to drive shareholder value.

Speaker 29: Why are we well positioned for this year despite all the uncertainty in the world today?

Speaker 30: It starts with our portfolio. We operate in four highly focused categories.

Speaker 31: growing categories that consumers use every day, and where they look to trusted brands to help themselves and their pets lead healthier lives.

Speaker 32: The focus on healthier lives means these consumers are motivated by science-driven innovation with professional endorsement, which is an area of particular strength for us.

And the importance of trust in our categories helps keep private label penetration relatively low and allows for premiumization behind differentiated benefits.

And within these categories we have strong market shares with most of our revenues coming from brands that have a number one or number two market shares on a global basis.

The second reason is our focus on building, sharing, and scaling capabilities to drive growth.

I will continue to talk about our digital transformation as it impacts everything we do.

This year we benefited from continued efficiencies in our digital media spending through data-driven modeling.

Our efforts on innovation need to deliver over the long term, not just the launch year. We have shifted our resources to deliver more breakthrough and transformational innovation.

In our prepared commentary, we talked about the share gains we're seeing in the whitening segment of the toothpaste category. It's a long-term strategy of launching optic white renewal and then optic white pro series in the U.S. or a new MPS whitening technology where we're launching around the world, which leverages our superior R&D capabilities to drive

long-term share growth. And on top of that, we continue to launch at-home whitening and professional whitening products to enhance our credibility and expand our presence in the premium segment.

And our focus on building revenue growth management capabilities, particularly through increased use of data and analytics, is driving our pricing growth in ways beyond just list price increases.

And the third reason is our strong balance sheet.

Our combined financial resources provide us the flexibility to reinvest in our portfolio or pursue value-enhancing acquisitions like our pet food acquisitions which enables us to drive faster growth.

The final reason we are well positioned is the efforts we have put into offsetting the extraordinary cost increases we have seen over the past several years.

We have driven consistent pricing and we look to take additional pricing in the first half of this year.

Our Funding to Growth program delivered another strong year in 2022, and we expect even higher levels of savings in 2023.

We announced our Global Productivity Initiative one year ago, and we began to see the benefits in our numbers in the second half of 2022.

We expect even greater savings in 2023 to help fund investment and drive operating margin expansion.

So we believe we are well prepared for 2023, but there's still a lot of uncertainty in the world.

the macroeconomic environment outlook remains volatile, which can impact consumer spending.

China remains at question mark as the country emerges from COVID lockdowns.

While raw materials and foreign exchange remain headwinds, they look less onerous now. But as we learned last year, that can change quickly.

So we head into 2023 with top line momentum and a proven strategy with the right brands,

the right capabilities, and the right efficiency drivers to deliver top-line growth and improve our bottom-line performance.

And with that, I'll turn it over to the questions.

Thank you.

We will now begin the question and answer session. To ask a question, you may press star and then one on your touch tone phone.

To withdraw your question, please press star, then 2.

Please limit yourself to one question.

If you have further questions, you may re-enter the question queue.

Once again, if you would like to ask a question, please press star, then 1.

And our first question today will come from Dara Mocinian from Morgan Stanley . Please go ahead. Selecta Beateston Internet's

Hey guys, I just wanted to touch on the organic sales growth guidance for next year, coming off a strong Q4 result and the strong pricing we're seeing. I'm assuming more than all of that perhaps is driven by pricing and volumes will be down slightly.

A, maybe is that correct? And then B, it'd just be helpful to get a bit of commentary on each of those areas. What are you seeing from a competitive standpoint on the pricing front? And then B, as you think about volume and the demand elasticity you're seeing from a consumer standpoint to pricing.

any changes sequentially at all, and how are you feeling about that front heading into 2023 here?

Thanks, Derek. Good morning. Again, let's recap quickly. Obviously, the strong top line growth or organic growth that we've seen across the business, we're very pleased obviously with finishing the year with strong momentum. Obviously, the pricing that we put into the P&L, particularly if you look on a two-year stack basis up to below, would have been a regular basis.

throughout the earnings season. Categories have pulled back, and that's expected given the magnitude of pricing that we've seen go into all geographies around the world. Our senses will see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we've seen particularly in the back half of this year.

but that will begin to improve in the second half of the year. I think the other aspect on the organic guidance is really a question mark on the economic vibrance of the various markets around the world. We've seen Europe obviously under significant pressure with double digit inflation. Categories have been soft. Elasticity is a little bit higher in Europe than the rest of the world.

Quite frankly, in the first quarter, that will improve as we move through the back half of the year, to be sure. But that will bring, I think, a question mark to everyone in terms of uncertainty on where China goes and the impact that has. We'll need to continue to go through the categories in the first half of this year.

As we announced in the prepared remarks, we will be taking more pricing. And there's a real question mark given the magnitude of the pricing that we've seen in the back half of 2022 and the pricing implementation in 2023, the impact that will have on the consumer. So far, if I give an overarching comment to elasticities, they've been very much in line with what we've expected.

So overall, we think we feel good about the organic range. We feel very confident that we're within that range, and if things continue to stay where they are, and we continue to see the share growth that we're seeing across the world and the response to innovation, hopefully we can be at the top end of that range or better.

Our next question today will come from Andrea Teixeira with JP Morgan. Please go ahead. I know we got to know all of our speakers today, so hopefully this is important

Thank you and happy new year to you too. So I have a broader question on volumes. On the minus 4% globally which compares I guess favorably to some of your competitors that we reported so far, what was the impact of retail, this talking if any, in Filorga?

obviously more pressured. What are the, and I understand it was mostly personal care and hand soap, is there anything you can add to that in terms of like the exit rate and also the exit rate for China? Iurd

Sure, thanks Andrea. Good morning. So let me talk a little bit about volume performance around the world and more sequentially as we went through the quarter volume improved in the 4th quarter versus 3rd quarter. And that volume improvement came despite obviously an incremental point of advertising, excuse me, of pricing, which you saw at 12 and a half percent. So.

Overall, we're pretty pleased. Some of the drawbacks on volume, as we discussed in the prepared remarks, obviously, skin health had a challenging quarter from inventory reductions, particularly in the online world. We saw those inventory reductions, particularly here in the North America business, and obviously, a significant inventory.

volume softness in China due to COVID on the Filorga business. So that really pulled down quite a bit of the volume. You obviously have the Russia impact, which we would quantify to roughly around 30 basis points. Elasticities, as I mentioned early on, were very much in line and consistent around the world. Slightly higher elasticity.

in the fourth quarter. We expect that though to come back in 2023. So overall it was very much driven by some inventory reductions we saw on skin, a little bit in the drug classic trade in the U.S. Likewise the softness that we saw, a continued softness we saw in the China skincare business.

But overall, volumes improved versus the third quarter and to a certain extent, more or less where we expected. We did not expect the further deceleration of inventory pullback in the U.S. on the skin of business.

So in terms of exit rates for Europe , you know, if I characterize Europe in general, strong share growth across the board and mid to high single digit organic sales growth in oral care and in home care, which is, as you rightfully pointed out, was offset by the weakness in personal care.

which was principally Fallorga, China. But overall, shares are strong in Europe . We seem to be getting our pricing through. Negotiations continue to go quite well. However, categories have been rather soft in Europe , given the amount of pricing that that market has experienced and the sheer inflation.

that the European economies are incurring today. So overall, I feel pretty good about Europe . The good news is the shares are strong, and we're getting the pricing through, and we feel we're shut up for a good year in 2023.

Our next question will come from Camille Godrowalla from Credit Suisse. Please go ahead..

Hi, good morning.

Hi. On your commentary on share, you seem quite pleased with share trends. Can you maybe just dig into that a little bit, volume versus value? Are your shares, do your shares look, are you equally as happy with your share in volume terms as opposed to in value?

Sure. I just characterized Europe where we felt very good about where we ended up particularly in oral care.

North America, as you've seen the data, we're upper flat in eight to 12 categories. Importantly, very strong oral care growth, both in the year and in the quarter, so pretty good there. Latin America shares in general are flat, and we feel good about where we are from a Latin America state.

the brick and mortar business, but overall e-commerce continues to perform very, very well in Africa, Middle East strong as well. Overall, we feel very good about the momentum we've had on market shares in value terms. Volume pretty much consistent with that. A little softer. We've learned a lot about how options work.

particularly in Europe on the volume side, in terms of our volume shares, and that's, I think, response to just the sheer amount of pricing that we've taken in that market. And as I mentioned earlier, you know, obviously a little softness in the Asia markets on volume, a lot of value going through those markets, but in general in the categories.

has been quite soft, but our volume shares in Asia seem to be holding up okay.

The next question is from Chris Carey of Wells Fargo Securities. Please go ahead..

Hi, good morning.

Good morning.

Noel, if I just take your comments around some incremental pricing.

I think he said productivity is expected to accelerate.

If I look at raw material outlook of several hundred million of inflation and red collar, the gross margin negative impact should be easing sequentially.

I'm coming up with potentially significant gross margin expansion and I realize reality is often so much different than what we can see in the models. But I wonder if you can just maybe help frame that a bit more for me.

because it does imply maybe you're leaving some room for investment, but again, perhaps I'm missing something in the development of the key drivers here, and I wonder if you could just help clarify that a bit more for me. Thanks.

Yeah, let me take the kind of strategically how we position the P&L, particularly around growth and investment. And then I'll let Stan take you through some of the constructs on how we built the P&L.

internally gross margin and operating margin. As you rightfully said, we're really pleased with the operating margin improvement that we're seeing moving through the P&L and that will continue allowing us to fund more advertisers. So as the prepared marks indicated, we intend to continue to invest behind the business and we've seen great response to the strategy that we've executed over the last couple years. Obviously the core Jason.

more capacity coming online and that is obviously started to happen in the fourth quarter and we expect that to obviously continue as we move into 2023 so we will continue to accelerate our investments in the Hills business in order to reap the benefits of the incremental capacity that we have.

good momentum on oral care and strong innovation and a lot of pricing that we've taken across a broad section of categories and we want to ensure that we have the investment there to generate, get the pricing seated in the marketplace and continue to drive consumption growth for our retailers. So overall...

It will be another year of good investment, of good share growth expected, and obviously good top line growth coming through the P&L. Let me turn it over to Stan to kind of take you through how we bridged some of the aspects around gross margin and operating margin.

Sure, thanks Noel. And on gross profit margin, you started to see some progress here in North America, Latin America, and Africa Eurasia, you saw improvements in the operating margin in the fourth quarter. As we look at gross profit, Noel highlighted the pricing, that significant flow through will help in 2022.

The productivity will be a tailwind here. And while material and raw and pack in particular will still be a headwind that moderates coming off of 2022. So, as you look at gross profit margin expansion, that's going to be a benefit. But keep in mind as you work down, we are going to have investments in advertising. We expect to increase that on a dollars and percent of sales.

But also keep in mind as you go down the income statement that interest expense is going to be up year to year. That's driven predominantly by increase in rates and also by slightly increased debt levels as we carry red collar in for the full year. And also taxes, so taxes around the world in particular in recessionary environments.

to mid-single digit EPS growth.

Our next question today will come from Peter Grom of UBS. Please go ahead.

Thanks operator and good morning everyone. So I wanted to ask on ungrossed margin as well which you know you know for the quarter was a you know a bit of a surprise. So in your prepared remarks you mentioned a number of key drivers as to why it came in below your expectations but can you maybe unpack where the biggest variance was whether it be sales mix you know commodities versus

You know some of these startup costs and manufacturing variances and then just maybe following up on Chris's question When when we think about the path forward you mentioned Several hundred million dollars of inflation from all materials and packaging is there any way to kind of frame that is that? 300 to 400 million is it is it something higher? I just think it's kind of important to understand kind of the

the gross margin bridge as we think about next year. Thanks. Sure, as you saw in the fourth quarter, obviously a continued difficult environment in terms of raw material inflation, another 900 basis points on top of what we had in the third quarter in terms of a headwind on gross profit.

A good percentage of that continues to be ag prices, which obviously have continued to move south on us. And in fact, if you look at the first half versus second half, Peter, ag prices were up 25%. So obviously that continued to impact the hills business.

On top of that is we integrated the three red collar facilities and began transitioning some of the high capacity volumes of business that we had in our own plants. We obviously incurred some startup costs and some variances moving through the P&L that obviously impacted margin in the quarter as well.

And then I'd also characterize, as I mentioned, that obviously the inventory reductions we saw on skin health and the drag from China on the skin health business likewise had a mixed impact in the quarter. With that, let me turn it over to Stan to see if he has any more information in terms of how you want to characterize how we're thinking about raw materials for next year.

The raw materials continue as Noel highlighted to be a headwind for us and your range is probably in the right ballpark here as you think about that on your basis. But I would emphasize it has been volatile. So things have moved up and down pretty significantly here and in particular the agriculture and how that applies to hills.

Those have not moderated it up in the second half as Noel talked about a 25%. And as we look ahead, we think that will continue to be the primary headwind in raw and pack. The other volatile one is natural gas. Now, fortunately, that's been a benefit here in terms of moderating in the late second half and fourth quarter.

But we expect that could be volatile as well heading into particularly the back half of 23. So a combination of those 2 primarily we think are the drivers as you look at raw impact going into the year. Now we've laid out our pricing actions and our funding the growth savings that we look to drive combined with.

Our next question today is from Kevin Grundy of Jefferies. Please go ahead.

Great, thanks. Good morning, everyone. A question for Noel and then perhaps John . You may want to jump in on this as well. With respect to the impairment charge on the scheme care assets, just more broadly how this may be informing the view around capital deployment. We can all appreciate the non-cash charge. Not usually surprising. You guys have been pretty open about some of the challenges in the business. We also realize...

is M&A, and then maybe perhaps just from an M&A perspective, an update on any books broadly that you may be seeing, and whether private market values have started to come in a bit given higher rates and what we see in the public markets. So thanks for all that.

Sure. Good morning, Kevin. I think you characterized that well. So let me just recap quickly a couple aspects of skin health and I'll turn it over to Stan and John for the second part of your question. You know, the impairment was obviously based on three issues. The biggest change is our outlook on growth in China. You've seen, I think, external numbers.

And given the prolonged impact of COVID in China, particularly as it impacts travel retail, which were a significant portion of our businesses, we obviously then decided to rebase the outlook in years going forward and particularly 2023 in a much more conservative position to ensure.

with Chinese travel and as Chinese travel opens up potentially in the back half, we will see an improvement but we we assumed in the impairment that that will continue to be but a headwind for us as we move through at least the first six months of the year slightly improving as we move through the back half of the year.

And then as you well can understand, the significant rise in interest rates has lowered the value in our discounted cash flow. But let me step back for a moment. Again, we continue to be very confident in our strategy around skin health. Obviously, the short-term impacts that we've had related to China, we believe ultimately will get behind us, but we've obviously...

of encouragement. Our US business continues to be very very strong despite the inventory pullback that we saw in the fourth quarter. If I take our online business specifically, our share growth was up 300 basis points online in the back half of last year and on the year, which is terrific. Obviously we incurred that share growth despite obviously inventory getting reduced.

We do expect some of those inventories to come back slightly, but we're obviously assuming a considerable amount of conservatism there, because we can't be sure that particularly the online retailers will take inventory up as quickly as they took it down. Our business overall continues to grow very, very nicely, particularly in the professional channel, which is the course...

But we think we positioned the brand so obviously as China comes back we'll be in a position to reap the benefits of that.

The only thing I'd add on Florida is if you go back and look at the timing of when we purchased it late 2019, it's built off of very strong growth in China at the time and very strong growth in the travel retail. And then obviously the pandemic hit. Nobody had insight to that. The underlying brand is really strong. There's going to be new innovation. We've got the advertising to support it.

You know, we're a big believer in return on invested capital, and that generates the highest incremental returns. And so if you look at the investment we're making at Hills and capacity, if you look at the investment we're making on some of our sustainability projects, you know, red collar honestly is a little bit of both, right? It's M&A, but it also is an investment in internal growth because we think that to be excellent.

You know, Hills is one of the best growth engines we have. So I don't think there's any change in our capital allocation strategy. Invest internally, we'd like to pay a healthy dividend and the board helps us develop the dividend strategy longer term. You know, then we'll look at projects when the valuations are appropriate.

And we'll see what happens with valuations in the market right now. I think the market's still somewhat in flux from that standpoint. And the CAPA allocation, I think, as we look at that, we returned $2.9 billion to shareholders. We had $900 million of net share buyback. We've paid dividends since 1895 and 60 consecutive years of increasing it. So our CAPA allocation strategy hasn't changed. We think

from Olivia Tong of Raymond James. Please go ahead.

Great, thanks, good morning. My focus is around all care, because you've obviously made great improvements here, particularly on pricing and cheering on the portfolio. So could you give us a sense of how your game plan's pivoting as the macros essentially get a bit more choppy and elasticities get a little bit more elastic?

Obviously, high single digit growth in oral care is fantastic, but what's your view on the state of the consumer in the US and developed markets as a whole, and how does that influence your view on potential trade up versus trade down in 2023? Thank you. Sure. Good morning, Olivia. Again, as I mentioned earlier, oral care is a very important part of the world.

That was some easier comps as we were lapping some of the supply chain challenges that we had last year. But the important aspect there is shared growth up on the year for both oral toothpaste and toothbrushes.

specifically around elasticity. And I think it comes back to the strategy that we've talked about for a couple of years now, which is the flexibility in our portfolio. We continue to innovate across all price points and we cover a wide gamut of price points from opening to now, obviously pushing a lot more of the super premium segment, which you saw some of the examples.

benefits to every price point within our portfolio and we're flexing our portfolio in different ways over the last couple of years and we're seeing that certainly translate into improved performance. Elmex would be a great example. Taking Elmex very selectively in the pharmacy channel around the world has allowed us to grow incremental share in those businesses.

The other aspect I'd say is our core relaunches. We'll have a significant core relaunch coming on the India business next year. We've relaunched our core business in some of our bigger markets around the world. And that has helped some of the premium innovations come on incrementally to the franchise moving forward. So we feel pretty good about where we are with oral care. Lasticity is exactly what we're looking for.

ahead.

Thank you. Good morning everyone. No, I was hoping maybe you could provide a little bit more context on what you're seeing on the ground in China right now. It's interesting you mentioned you think the recovery will happen in the back half. So I think there's been projections by other companies and just by looking at some of the mobility data that things might

Sure, you know, as I mentioned, we had strong performance in China on the Colgate side of the business. Our Holley and Hazel business up nicely mid-single digits, our Colgate business up nicely mid to high single digits. Overall, we feel very good about the transformation that we put in place over the last couple years.

in that marketplace, but it continues to be highly, highly uncertain. Obviously, the Chinese New Year, everyone's waiting very carefully to see the impacts of that. There's a lot of euphoria, but infection rates are still very, very high, and things could change very, very quickly there. The comment I made about the back half is not only mobility within the country,

up almost 300 basis points on the year this year and that is again a reflection of the strategy and some of the good innovation we brought into the market. If the markets improve, we shall certainly see the benefits moving through our P&L earlier than we anticipated, but I would be quite cautious on China at this point, but over the medium and long term, we are very...

the healthy growth contribution from Hills. And obviously the top line lift is really last few years. It's surprising though to see Penny Profit actually contracting this year. Can you unpack the drivers and I imagine within that you're gonna come back to some of the ag inflation. So I guess.

Yeah, thanks Jason. As you said, coming off of some of the challenging capacity issues that we had in the third quarter, we feel like we've certainly turned the corner on that business. Again, a double digit growth in the quarter. That's 27% growth on a two year stack basis. And we've delivered double digit growth on the hills business 10 of 12 quarters.

I'll let Stan talk in a moment to our hedging strategy, which is very minimal around ag prices so we don't do a lot of hedging there. But overall, it's taking pricing, it's making sure that we continue to move through the transition aspects of integrating three plants and moving capacity from our existing plants into those plants so there's startup costs associated with those plants.

have by investing in capacity and allowing us to do the things that we do so well in the marketplace. So we feel good about where the business is. Obviously, the AG prices will be where they are and we're taking pricing as you've seen both in the fourth quarter and plan to take more pricing in the first half of this year.

But again, if ag prices come back, things will get better, but we at this point don't expect any short-term benefits from ag coming back.

Yes, thanks Jason and Noel. So what I'd add on to that is we don't have a large hedging program against Ag and that's a philosophy for us. So we look, we do partial hedges there in Ag. We don't do that in most other categories, but just while we've highlighted Ag, there are other areas here.

like chicken livers, other specialty products that come in as part of the diets that make us more complex, as well as all the amino acids and everything else. Those have all had inflation as well. So while agriculture products have had the most significant, we've also had those. And things like the avian flu do have a ripple effect into that.

But as you would expect there are startup costs that go along with that. As we bring Togonoxy online that's our new wet plant in Kansas in the second half of the year. We're very excited about that plant. It has great automation. It's going to be I think a great addition to the portfolio. But that has startup costs in 23 in particular in the first half.

we're investing the advertising behind that to drive that capability and to drive that demand. We think that serves us well for the long term. So we expect margin improvement heading into 23 and Hills. We're excited about that market opportunity and what it represents to the company. We also think it fits really well in our overall portfolio with a science-based approach.

Europe had 11% head within foreign exchange and that obviously moved through the Colgate side of the business as well. Now you've seen the significant pricing that we're taking but obviously the transactional impact as well as a translational impact to that foreign exchange moved through in the fourth quarter and certainly dampered a little bit of the penny profit that we would have expected.

Our next question will come from Steve Powers of Deutsche Bank. Please go ahead.

Okay, thank you.

Picking up a little bit on what you were just talking about in terms of startup costs, but also the manufacturing variances and the negative mix that Noel you alluded to earlier with respect to the fourth quarter. I guess a couple of questions related to that. One is, I assume that's lumped into the raw materials, the 920 basis point. Roses to Catch

and carrying over and phasing at least into the, I presume the first half of 23. And then just to clarify and round it out is, are those?

Are those impacts embedded in the several hundred million dollar raw and packaging materials inflation outlook for next year just because I think it's a little bit different than raw and packaging materials is sort of narrowly defined.

Those are my main questions. If you could also talk a little bit about how you're thinking about red collar phasing through the year and just operationally what that entails, if there are costs, whether cash costs or costs that are notable going to the P&L as you do transition the private label product over the hills, that would be helpful to understand.

about it for the better part of a year that all of our existing facilities on on hills have been running full out and obviously that is a very inefficient way to run your supply chain now we have obviously been investing in improved capacity obviously with the plants in addition to the Tonganoxie in addition to the plant that we purchased in Italy

But again, integrating those into the system to ensure, one, quality mechanisms are where they need to be. Ensuring the lines are capable of the flexibility in the formulations and the sophistication of our formulations. Making sure that obviously all aspects of the science driven approach that we've taken to our formulas.

is well understood and by the culture of the organizations that we're integrating into the company. All of that has been very, very methodical. We're not going, given that we need the capacity, we're not going to rush ourselves into doing this too quickly. So we've been very careful to ensure long-term success as we built the plans to bring that volume into the Colgate business over time.

So with that, let me turn it over to Stan. He'll take you through a little bit of how we planned for Red Collar and how we're thinking about the ongoing startup costs associated with that.

Yeah, so let's start with with red collar first. So as red collar comes in and we cut over production over time, and this will be over an elongated period of time, there are a few things that have to happen. One, and of course, I should start, all of this is baked into our guidance. So as we plan this out, this is all incorporated within our guidance.

So first, as we take the red collar facilities and migrate those over to produce Hills formulas, there is investment that has to go into that. We've incorporated that into our capital and we've incorporated any income statement impact into the numbers.

And that really centers around what Red Collar was producing was much simpler formulas for us and for others. And our diets, our formulas are much more complex, in particular in a prescription diet area, which is why I think they're such valuable to consumers.

The variances that we have in total, so let me step back to there. The variances that we have in total go into gross profit, so as they are going through, we expect that those will get better. We expect that those will get better as we get some relief on the overall manufacturing as those red collar facilities come fully on board and produce more of the HILDS formulas. That allows us to go in and do more efficiency planning within the existing facilities.

So as we think about tiganoxie, that's again the new wet food plant that will come on online in the second half of 23. In the beginning, we do have some startup costs there, and those startup costs again are around things like, you know, bubble staffing as we bring the staff on board and get them trained. And so we expect that that will contribute in the second half, but it becomes a head...

to margin is roughly in line with what we saw in fourth quarter. So it'd be a benefit to the top line and given it the the private label activity is at a much lower margin that will impact margin through the year, but at a slightly decreasing rate.

Our next question will come from Rob Odenstein of Evercore. Please go ahead.

Great, thank you very much. A couple of follow-up questions. One, you mentioned in the press release or the comments that there was an e-commerce inventory drawdown on skin health. Can you just clarify exactly what brands that was and why that would be happening?

And then I'd like to just kind of talk a little bit more about about Hills. One question that we're getting is, you know, what was the effect of private label on the organic numbers? So if you took private label out was the volume growth actually down 100 basis points. So clarification on that and then bigger picture if we could kind of scope out

and look at the whole pet food area in general. You guys are obviously premium and have been gaining share a long time. Can you talk about historically potential trade down impact given a tougher consumer environment.

and how you may be adapting to that and what your volume assumptions are for PET in 2023. Thank you.

Yeah, good morning, Rob. Thank you. Let me take the e-commerce question first. You know, a good year for e-commerce, as I mentioned, it's up to 14% of our sales. We continue to see strong growth throughout the year and importantly in the most important markets around the world, we continue to see strong share growth. So overall,

we feel a lot of the work that we put into our digital transformation has paid out quite nicely in the consumption that we're seeing across the board, whether that's our skin business, whether that's our US oral care business or our Hills business. We are performing quite well and we're sharing those capabilities very nicely across the enterprise. And as I've talked to you before in the past, obviously Hills was at the forefront of that.

And a lot of the skill sets that we've built in our Hills organization have certainly translated now across the enterprise and we're using those benefits to grow our e-commerce business both on a shared basis and a top-line basis. The inventory drawdown was on PCA and Elta in the US in the online channel.

which is their number one retail channel. As you know, they sell through the profession, and they sell online through the big online retailers. The big online retailers took significant inventory out of the system in the fourth quarter. These are very high priced items, as you're well aware.

And they felt, I guess, managing their working capital, that they were going to take those down in the fourth quarter. The good news, as I mentioned earlier, we didn't see a significant impact on our consumption. Our shares were actually up. And the more important news is that we started to see that inventory rebuild itself.

Slowly, I would say, in the first quarter of this year, particularly January . Now, that's not to say that at the end of the quarter we may see more drawdowns. But in any case, the good news is we start to see some improvements there. But it was on the PCA and ELTA business in the US, and likewise on the Filorga business.

China with the significant lockdowns that we saw across China in the fourth quarter and coming out of the third quarter we saw significant inventory reductions in the online business there as well.

Relative to private label, let me characterize, I guess, first oral care. So, oral care private label in the US is about a 0.9 share, and that share is roughly flat on the quarter, in the fourth quarter, and flat on the year.

Oral care private label shares in Europe are around 3.5%, and likewise that share is flat. We are seeing a little bit of growth in private label businesses, particularly in Europe on some of the home care businesses. Obviously cleaners, dish, and to a certain extent fabric softeners we've seen.

On the Hill's trade down, we have not seen trade down thus far. If you go back to 07-08, which we've spent a lot of time looking at the premiumization of the category during that period, we did not see consumers pulling back on scientifically proven pet nutrition. And we feel that given the strength...

the press release you stated you saw net sales were up 20%, organic sales were up 14%. There is no private label in the organic sales. So we include it in the net sales, but in organic it will only be in organic when it wraps around for the year, which will be in a fourth quarter. So when you see organic sales, that represents true year on year.

recorded volume number. So again, that will be that way Q1 through Q3, and then in Q4 it will wrap around because it will be in both ears and be in the organic numbers.

Our next question will come from Mark Astrakhan of CIFIL. Please go ahead. Thank you.

Thanks and good morning everyone. I want to go back to gross margin, kind of looking backwards and then trying to think about it going forward. I guess I'm curious what happened to gross margin in 4Q. I hear all of what you talked about, some things unexpected.

But if you go back and look at what you said at the last call, you were locked in, at least that's what I thought you said, on, I assume, a bunch of these raw materials, ag pieces. So was just the manufacturing variant, just startup costs, et cetera, just much greater. And I guess.

The question going forward then is, I hear you and a lot of lines of the question on this call is about improving gross margin expectations and all these things that are potential tailwinds, but how much visibility do you have as you sit here today and what potentially is baked in that could go wrong? And then kind of pushing it forward longer term.

How do you think about, how does the company think about the necessity to grow gross margins over time so that you can hit the earnings algorithm for the business, given where the top line expectations are and just how important that is and what line of sight you have to get back to a number? Not that I'm expecting you to comment on, you can get to 60% again, but if you can talk directionally to that, that'd be helpful.

been fundamental and it's always been the fulcrum of our P&L and as we laid out in the prepared comments we expect gross profit to be up in 2023. You know I remind you that the gross profit was down 160 basis points in the fourth quarter if when you exclude the impact of red collar. Some of the

issues that we incurred in the fourth quarter. Obviously we had a mixed issue with the lower skin health business that we mentioned. A little bit of a mixed issue on Hills as well with more of the science diet business versus prescription diet. But we obviously had the elevated ag prices moving through there and the startup costs that as Stan mentioned earlier that moved through the gross profit line.

But step back again, I mean we are very focused on getting pricing in the P&L, and you've seen that sequentially improve from third to fourth quarter. We expect that to benefit us next year. Now, there are a lot of assumptions on where commodities go. We talked about a couple hundred million dollars there.

But remember where we were in the first quarter of this year. We had a lot of assumptions there and we got ahead of that very, very quickly in terms of where things move. Now if things move, stay where they are, improve, obviously we don't think we'll be at the low end of our guidance. But we feel it's a prudent and flexible place to be given the uncertainty that we've seen and the movement that we've seen.

Certainly over the last six to nine months in commodity prices not to mention foreign exchange So let me turn it over to Stan give you a little bit more color once again on where we are from some of our locks in our contracts.

So on gross profit, we look at raw and pack, we do lock in a majority of our commodities here at least for 90 days out for the next quarter. But there is still conversion costs. There's still the manufacturing variances that we have to go through labor costs that goes into that, etc. So.

920 basis points relatively consistent with Q3. And our conversion cost and some of the variances that we talked about had an impact overall on margin versus our original expectations. As we look going ahead, we are guiding for expansion of gross profit margin heading into 23. And we think as we look at that, the components of that are going to be

moderating commodities, RONPAC, improved pricing, NRGM, and then the productivity work that we've been doing across the board will have a benefit here to margin. So the margin expansion again fuels that investment into advertising, so we do believe

that margin expansion is a core component of foundation of our overall model. And so that expansion into next year will fuel that model, which will allow us to deliver low to mid single digit earnings growth.

Our next question today will come from Lauren Lieberman of Barclays. Please go ahead.

I know we've covered a lot of ground, but I just was curious knowing that four Q-Gross margins came in below what you had anticipated. You've obviously detailed the reasons a couple times. I was just curious, the bottom line still delivered, frankly. So that means there were some choices made, perhaps a little bit short term, on lines within OPAC. So I was just curious.

advertising was flat and on a local currency basis, Lauren, the advertising was up and that becomes, you know, fundamental to continue to build the momentum of the progress we've seen in 2022 to ensure that we deliver that continued momentum in 2023 and that was a very deliberate choice to sustain.

visibility about where those two businesses are going. So we feel like we're in a pretty good position to continue to execute against our strategy, deliver against the gross margin improvement in 2023. Obviously, the first half, we have a bit more visibility. We don't have that visibility in the second half, but we will continue to execute against what we see in front of us. And that is our need to take more pricing, get it into the P&L, and ensure we have the investment to support that.

The only thing I'd add, Lauren, on that one is, look, we took actions early in the year, particularly around the global productivity initiative, that started to pay off in the back half of the year. So we saw some of that flow through here hit in the back half of the year. And we managed the overhead lines carefully, because we're running the entire P&L up and down.

And those overhead lines, we prioritize within that. We want to make sure we support advertising, digital, analytics, and then we make trade-offs within that as you would expect us to do go forward. We think that's just a prudent way to run the business, and we'll continue to do that heading into 23.

Yeah, as I mentioned earlier, Lauren, we're very pleased with that middle part of the P&L around how we manage overheads.

which given obviously the headwinds we've seen below that around interest expense as well as tax, it's extremely important that we got ahead of that. We delivered an additional 50 basis points of overhead on top of the 150 that we had in the previous year. So we feel that structures us well to invest in strategically the areas that we think are fundamental to driving long-term growth.

Those are the capabilities that we've talked about around digital transformation, improved capabilities around innovation, certainly as we restructure that part of the organization and making sure that we have that operating leverage to sustain the advertising investment, which is clearly driving a good top-line growth for us. Our next question will come from Brian Spillane.

hundred million dollars. So maybe you can talk a little bit about, as we look forward, do we expect some of that free cash flow productivity to improve?

Maybe just related, I know you've talked about net interest expense being higher for this year. Just if you can put a number on that and also on capital spending. Thank you. All right, let me top line it Brian . Good morning by the way, and I'll let Stan take you to some of the puts and takes, but overall cash flow cash. Cash was down due to lower cash income, right? Obviously that was the higher that was the.

that some choices that we made, particularly around working capital investments. A little bit increase in inventories as we were dealing with some of the supply chain disruptions we saw from suppliers and our need to sustain the consumption growth that we had in the marketplace, particularly some of the stronger consumption growth. But obviously inventory days came up as a consequence of that, but we improved a bit of that in the.

the growth that we put into hills and the investment and the significant increase in capital expenditures there and some of the increases that John mentioned earlier around sustainability, which we think are extremely important to position us for where the markets are moving forward and overall I would say that we expect a very nice improvement in operating cash flow in 2023. Great. Now let me pick up there on the cash flow. So as Noel said, we do expect improve...

fill rates across the board, that we had enough inventory to supply. And in particular towards the late in the fourth quarter, as China had impacts from COVID on manufacturing, we prudently brought in additional inventory to make sure we could fulfill clients over the year-end.

So, in cash flow, we expect improvement both working capital and cash profits. On interest expense, you see in fourth quarter a material increase on a year-on-year basis, and again, really comes from two components. First, the impact that it has on floating rate debt, in particular CP.

with the gap you saw in fourth quarter simply because you get a full year of carrying the red collar of funding through the year. That said, we think we have highly competitive rates on our debt going through. We have great access to the markets that fund our overall model.

So, on capital spending, as you saw from our press release, we spent just under 700 million. I expect that could go up a little bit as we look at 2023, and that's really in a couple of areas. First, we're going to complete Togonoxy as that comes online in the second half.

And that we talked already about the red collar facilities. We have great plans for those as we're going to significantly increase our overall capacity for our hills business, which operates in a terrific segment. And that investment obviously will have capital spending. In addition, we invest in sustainability type efforts, like recyclable tube, which we think are important. We'll continue to roll that out.

would add is you know, strategically these investments are all around positioning us for long term growth and success. A lot of discussion goes into the choices we make around our capital investments and the supply chain and certainly the IT team are very focused on ensuring

that the money is being put into areas that are going to give us improved capabilities moving forward and allow us to weather some of the storms that you've seen over the last three years where we've recognized the challenges and generated real opportunities coming out of those and that certainly has driven the top line of the company.

So with that, let me just finish off. I think that's the end of the questions. 22 was another year of strong progress for the business in terms of sales, market shares, and productivity that moved through the P&L, but more importantly, the capabilities that we're building across the organization. We're excited to see the leverage moving through the P&L. We'll see that continue in 2023.

that will allow us to deliver the investment to sustain good top line growth and obviously very focused on delivering shareholder value moving forward. We'll see everyone I hope down in Cagney in February where we can talk a little bit about more our plans in terms of how we're seeing 23 unfold.

But I'd be remiss not to thank all the Colgate people listening on the call for an extraordinary year in 2022. A lot of challenges, but we recognized the opportunities that we had in front of us. And I wish all of you a happy and successful 2023. Thanks everyone.

The conference has now concluded. We thank you for attending today's call. You may now disconnect your lines.