CL - Colgate-Palmolive Company (CL) Presents at CAGNY 2023 Conference (Transcript)

Colgate-Palmolive Company (CL)

CAGNY 2023 Conference Call

February 24, 2023 08:00 AM ET

Company Participants

Noel Wallace - Chairman and CEO

Yves Briantais - VP, Marketing

Conference Call Participants

Kevin Grundy - Jefferies

Presentation

Unidentified Company Representative

Joining us from Colgate are Chairman and CEO, Noel Wallace; as well as VP of Marketing from Colgate's Asia Pacific region, Yves Briantais. It was four years ago on this stage that Noel began articulating Colgate's strategy for reaccelerating organic growth through a combination of increased brand support, premiumization and innovation, increased digital and e-commerce capabilities as well as increased white space penetration across oral care, home care, personal care as well as health. And as I'm sure Noel will discuss further, the results since have been impressive on that front, from 1% organic growth in 2017, '18 to an average of nearly 6% over the past 4 years.

To tell us more about Colgate's journey, let me turn it over to Noel.

Noel Wallace

Thank you, Steve. [ph]

[Presentation]

Noel Wallace

Well, thanks, Steve, [ph] and good morning, everyone. I appreciate you getting up so early on a Friday after a long week. And I'm sure I'm not the first to say how great it is to be back in person with you. As a reminder, our safe harbor statement. I assume you've seen a couple of these this week. But let me announce our guest star today, which is Yves Briantais. Yves has been the key architecture of some of our transformational strategies across Asia and particularly in China, which we're going to unpack a bit relative to some of the great things that are going on in that market and the success that we're seeing behind that strategy.

Quickly on highlights for 2022. Challenging year, to be sure. Net sales were up 3% behind 4% headwinds in foreign exchange, organic strong at 7%. And importantly, that organic was broad-based across all 4 of our categories and all of our geographies around the world, both emerging and developed. Importantly, we took bold actions as we saw costs coming quickly after the first quarter inflation that came through the P&L. That allowed us to continue to build our brands throughout the year and sustain our advertising investment. And importantly, we saw the fruits of all of our innovation and digital transformation transfer into stronger market shares for both our toothpaste and our toothbrush business.

As I said on the Q4 call, net sales for 2023 is expected to be up 2% to 5%. The assumption is low single-digit foreign exchange headwinds there. Organic growth at the top end of our range of 3% to 5%, a return to gross margin in the year, which is going to allow us to continue to fuel investment in building our brands and, as you'll see, a really strong pipeline of innovation going into 2023 and, importantly, return to volume growth into the P&L.

We have guided to a base business EPS growth of low to mid-single digits. And importantly, as we work on the middle of the P&L generating more cash profits, lowering our working capital, we'll see cash flow increase and our ability to continue to invest behind the business and drive shareholder return.

So 5 key messages for you today. Right strategy. I want to get into more details on the strategy that we talked about back in 2019 and how we continue to strengthen that strategy; importantly, talk about the capabilities that we feel are going to future-fit the organization, and we talked about, quite frankly, for a couple of years and how we're strengthening those in terms of our execution; spend more time on the middle of the income statement in terms of productivity, how we're getting leverage through the P&L and driving margin expansion; reaccelerating cash to invest behind the business and drive shareholder value; and finish off with our sustainability strategy in terms of how we're looking to create a more healthier, sustainable future.

So let me get into the strategy in a bit more detail in terms of how that's driving growth for our business. Here's what Steve mentioned. Back in 2019, I was on this stage, and we talked about how we were going to reaccelerate growth with a growth mindset across the company. We had 3 key tenets to that strategy: Driving the core innovation, which is a big part of our portfolio today; pursuing higher growth-adjacent categories and segments; and importantly, looking at the new emerging segments, particularly e-commerce and some of the club store environments to ensure that we have the right portfolio to capitalize on that growth opportunity.

The second piece was ensuring that we were thinking about where the organization needed to go and some of the issues that got us into some of the slower growth that we are experiencing. It started with innovation that we needed to get back to the heart and soul of what's made Colgate so strong across the world, and that's our science-led innovation. The digital transformation was going to be a completely new way of working across the organization. We knew we needed to find more analytical ways to drive pricing and work with our retailers to grow categories and, importantly, start to think about what the supply chain of the future was going to look like.

So there you see it. Since 2019, 16 quarters, the team has been able to deliver at or above our long-term guidance of 3% to 5%, and a lot of volatility in those 4 years that I thought I'd talk about for just a second. First of all, it was after a couple of very lean years of growth we needed to put a new growth strategy in place to reaccelerate growth, and we saw that back in 2019. Clearly, in 2020, that strategy continued to strengthen, but we did see the benefit of some of our COVID-driven categories that we compete in. In 2021, we then had obviously some difficult comparisons. We continued to execute against that strategy despite some of the supply chain disruptions that we were incurring and, in 2022, continued to build that momentum as we went through the year, taking courageous pricing early on in the year and seeing that momentum build as we went through the back half of 2022.

The point I'm trying to make is the durability of the strategy is there, independent of how we were tested in different market environments over the last 4 years, and we continue to see that momentum build. And importantly, as we've guided in 2023, we see that continuing to be at the high end of our target range.

Why is that? Growth across all 4 of our categories. We added $2 billion in net sales to the top line of the company since 2018, every category contributing and, importantly, every geography contributing to that despite significant foreign exchange headwinds. So if I leave you with anything as we're confident in the strategy. We feel we're executing good top line momentum across the organization, and we feel good about where that's going.

Why is that? We have a very focused portfolio in terms of how we think about the categories in which we compete. They're attractive core categories, high gross margin and high cash characteristics to them as well, and they're all growing here in North America and around the world. You know our 4 categories well: Oral Health, pet health, Personal Care and Home Care. And all of them, obviously categories where brands play a very, very important role in consumer selection.

And brands that are very strong around the world. We're #1 or #2 in almost all of the categories in which we compete. Some of these categories have very strong geographical strengths but, nonetheless, a very, very strong, and consumers really, really trust and engage with the categories and the brands that we offer.

Importantly, these are categories in a tough economic environment that we're in, that consumers use every single day. And I'll talk a little bit about that, like the Colgate brand, which is in 60% of the world's households, the highest penetrating brand in the world of any consumer products company.

And our products, not just Oral Care used every day, but you can see the shaded categories here, which is the bulk of the categories in which we compete. Minimum 75% of our categories have daily usage compared to some of the other HPC categories that we see in the middle of the store. Sunscreen, obviously, a growing category for us where you're getting recommended, as you know, to use a sunscreen every single day.

Importantly, the brand choice is very, very important in the categories in where we compete. Trust is important, and people spend significant amounts of money and learning to ensure that they're buying the right products. As a result, you see low private label penetration in the categories in which we compete. And in fact, in many of our categories, private label is actually declining, and you see that in comparison to other HPC categories where that penetration number is much, much higher.

We do that by ensuring that we're obviously building quality brands that consumers can interact with but, importantly, ensuring that we have innovation across multiple price points in a category. Here's an example in Brazil, where our Sorriso brand is the opening price point at 100 and our elmex brand all the way up at 200 index to our entry-level brand.

Importantly, it's building trust. And you've heard us talk quite a lot about the importance of the profession across many of our categories. And building that endorsement level, building that science-based rigor with the profession is something that really sets us apart from many of our competitors.

We continue to find ways in New York now to engage the profession and really create a flywheel effect across all of the different brands and segments that we compete in. So we have an organization in New York that's simply looking at best practices in how we engage dermatologists, aestheticians, vets and vets techs, dentists, hygienists and making sure that all of that learning is consolidated and scaled across the entire enterprise. And you see some of the work that we're doing in dental conferences around the world, again, to continue to promote our science-based products and make sure that we continue to partner with the profession on bringing them the best products they can offer to their patients and pets.

So we're not stopping there. We're taking the digital transformation into the professional area as well. We're taking a lot more of our targeting in terms of the digital work that we're doing to ensure that we're creating personalized connections with the profession. We're making sure that we're not only talking to key opinion leaders but, likewise, to digital influencers, which is an emerging area of opportunity for us and making sure we're thinking about the future in terms of how we make sure we partner with schools and their curriculums to ensure that the proper knowledge around nutrition and oral health is clearly present. So that's a little bit about the strategy.

The second piece, what we're trying to instill as we started in 2019 was making sure that we had capabilities that were going to change the way we work as a company. And we wanted to ensure that we were leveraging those across the entire enterprise. It started with getting back to the basics of where we came from, which was phenomenal formulas that were based on a lot of clinical rigor and science to drive premiumization in the category.

The last couple of weeks, we've introduced Colgate Total Plaque Pro Release. This is a terrific new product. It's amino acid and arginine combination, a unique formula that we've been working on for quite some time. Plaque is clearly understood as the key oral health issue in the market. Consumers know that it creates cavities, obviously, and a leading indicator to gingivitis as well. We now have a formula that dissolves and lifts away gum-harming plaque, which is terrific.

Our meridol business in Europe is our premium therapeutic line on the gum positioning. We haven't relaunched this brand in over 5 years. We have a significant new formulation coming to the market as we speak.

You've heard us talk a lot about whitening over the last couple of years. That was a strategic thrust for us. We now are going to continue to raise the bar in the whitening segment with the first 5% hydrogen peroxide toothpaste. What you see there, it's continuing to drive incremental share for our whitening business here in the U.S.

And let me show you a spot on that, which just rolled in last week.

[Presentation]

Noel Wallace

So feel free to drink all the coffee you want this morning. You can use that product afterwards.

Quite a few markets around the world, peroxide is regulated. Our scientists have developed what we internally call MPS, which is an active oxygen formula, which we're using and launching in different parts of the world now. That will be our best whitening product outside the U.S. You can see here an example in Malaysia, where that's continuing to drive great incremental share.

And overall, the consolidation of all of our whitening efforts, you can see the great success we've had in that segment over the last 4 years, where we've added 400 basis points of market share to our business.

Importantly, now we've worked hard on the everyday daily use products. We're going to now continue to take our peroxide knowledge and the science that we've learned over the last 6 or 7 years in that area to the at-home market with new whitening kits. This is a unique product that takes significant uniqueness of a wavelength technology in lighting, combines that with peroxide to increase the efficacy of our product. So terrific stuff there at a very premium price.

Sustainability, an important part of our growth strategy. You see the RecyClean brush. This is our first 100% recycled plastic-handled toothbrush with plant-based bristles. So obviously, an area where consumers are looking very closely at the products they interact with, and this is clearly an opportunity for incremental growth for us.

Talked a lot about science, and there's no better place to represent what we're doing with science than in our Hill's business. So let me show you a spot that kind of sets up the next couple of charts.

[Presentation]

Noel Wallace

Finishing the rollout of Derm Complete. This is a very unique formulation that is a breakthrough opportunity to provide environmental sensitivity benefits to pets at home, both on the food and the environmental side, which is where it's quite unique. Obviously, the premium price is the Prescription Diet line.

And in the last 2 weeks, at the Western Vet Conference out in Las Vegas, we introduced this new product called ONC. This is called ONC internally, or it's an oncology product. 12 million pets in the U.S. suffer from cancer. That's a growing area in the market, unfortunately. And when pets have cancer, unfortunately, they often stop eating. And now we've got a high-caloric nutritional formula to get dogs to eat.

But better than I explain it, let me turn it over to our Head of Technology who's going to take you through a very personal story and kind of how this product was born and the great results that we've seen from it.

[Presentation]

Noel Wallace

So great stuff that product rolling out in the U.S. as we speak. Okay. Moving on to skin health. We obviously have the #1 brand recommended by dermatologists with Elta sunscreen. We competed in the cream segment exclusively. And what we've done over the last couple of years is really found ways to formulate the uniqueness of our formulas into both sticks and the rapidly growing spray segment. Those are rolling out as we speak.

And importantly, the innovation that we're putting into the market, it's nice to see us being recognized -- that Women's Wear Daily recognized the Elta brand as the breakthrough brand of the year, again, I think, a testament to some of the great innovation that we're pushing into the market in that space.

So we'll talk a lot about PCA. PCA, the origins of that brand were with aestheticians and aestheticians in the skin peel area specifically, a lot of knowledge on how to do effective skin peels and the training required with aestheticians to make that happen. We're taking that knowledge now into the mass segment with a new exfoliating product that we're introducing in the market now.

And then finishing off with Filorga, a new advanced eye treatment that targets 5 areas of the eye and has visible results in 7 days, a terrific product that we're rolling out across Europe as we speak and later into Asia.

This one is an interesting one. 37% of the population in Brazil have tattoos. That continues to grow. We saw a unique opportunity with Protex, which is the #1 antibacterial soap used in Brazil to actually formulate it to skin protect the colors that you have from a tattoo. So we have 78 million people now that will hopefully be looking to use this new Protex tattoo products. So if you need some of this, talk to John afterwards. He'll get you some.

Big fabric softener business south of the border, particularly in Latin America. Odors that caused from humidity are a big issue. Good insight into that. We needed longer-lasting fragrance to make that happen. We've got a new product rolling into the market. Let me show you a spot on that now.

[Presentation]

Noel Wallace

Good insight there. Okay. Quickly on digital and data, a really big opportunity for us to have the company think very differently. And as a result, we brought in a significant amount of talent from the outside and then a lot of work to train our own people.

So 3 key areas on our digital and data strategy I thought I'd talk about a little bit. First is how we're upskilling people; then mastering the digital shelf, which is really the first point of entry; and then making sure that everything we do is analyzed in ways to drive more efficiency and productivity.

You've heard me talk about some of the work that we've done to really transform the organization to think differently. In 2021, we trained 16,000 people around the company in e-commerce and digital marketing, making sure that everyone really understood how important this was for us to drive. And this -- last year, we rolled that training into data literacy with 14,000 people. The important part is we're creating real scalability in the organization with how people really think and engage in a digital world that's very important.

Some examples of seeing all that effort transpire into the marketplace, this is how we think about the digital shelf, the 4 key metrics that we analyze ourselves on a daily basis: availability, placement, content, ratings and reviews. And you can see in the top 10 global markets, we're showing sequential improvements on all of those each quarter against all of our metrics, which, again, has translated into strong market shares.

On the data side, we're really looking to improve our targeting. This is such an unlock for the company when we think about how we use data analytics to improve not only how we use programmatic media and our digital media but, likewise, how we think about it in revenue growth management, which I'll talk to you in just a moment. But you can see some of the great ideas that we're using data for to not only retain loyal buyers as an example but to win back lapsed users, and everything now should be able to be analyzed in the digital world.

Moving on to media efficiencies. You can see the points here, but we're really trying to optimize now how we think about media and where we use media around the world and what type of mediums we have. In 2022, we cover about 60% of the world -- of our working media. So we continue to push that and hopefully get to 100% here soon.

But the most important metric is what is that really doing for us as a company. And you can see the continuous progress and improvement that we made around driving ROI, whether it's our total media spend or even in TV and the fact that digital now has a 1.3 index on ROI to the rest of our media. So good learning there and the company really thinking about making sure every dollar we spend is returning something to the business.

Data, likewise, in revenue growth management. Particularly, in the high inflationary environment that we've seen over the last 12 months, we need to use the power of data to make smarter decisions across the market. Our analytics team has now provided proprietary tools to all of our commercial teams around the world to ensure that they're using data algorithms to make important business decisions around how we're taking pricing and driving category dollars.

You can see the success of some of the RGM efforts that we've had over the last 2 years. And this continues to build year in and year out for us and as a really important competitive advantage in the marketplace to think about how we take pricing in the most effective way and the success of that in 2022.

So last point on data is ultimately how we -- that translates into driving your e-commerce business. E-commerce is a data-driven business. Clearly, in terms of our success has been the fact that we truly understood that and found ways to drive that business successfully. You see in 2022, double-digit growth following double-digit growth in 2021. It's about 14% of our total sales now, and there's sales growth on toothpaste in 7 of the top 10 markets where we really have good measurements. We continued to grow share, and our online share importantly is higher than our brick-and-mortar share in our key markets around the world.

Okay. So let me turn it over to Yves, and he's going to take you through a really exciting discussion on how we're transforming our business in Asia but particularly on the success that we're having in China. Yves?

Yves Briantais

And first, why the picture? Good morning. This picture is not about the 2 elephants because there are no elephants in the room today. But it's about this guy with a smile. Usually, I'm not in love with my smile when I have a picture, but on that one, I look at the picture, and I was like, "My God, I was so happy."

And I thought it would be a good smile to start the presentation with because I'm here today to tell you a story that is quite a happy story, a story of why and how. Why, despite huge challenges last year, and you know them, APAC has been hit by COVID more than in a region. We had many lockdowns still like last year in China impacting the category growth. We had cost inflation. You know that, and we had some very strong foreign exchange headwinds.

So why, despite all those headwinds, we managed to accelerate the growth of our region last year? What happened? Look at that. In 2022, we managed to deliver the strongest growth for APAC in the past 9 years. And this has been largely driven by China, despite the fact I told you that to China was a challenge in terms of lockdown. And indeed, in China, we became the fastest-growing oral care brand in 2022.

So what is the how? How did we manage to do all of this? What was the key driver of this performance? Simply the fact that we started to transform our marketing organization. Noel talked to you about capabilities, and I'm going to show you right now what we did since 2019 to implement those capabilities on the ground and to drive the business growth that you've seen.

Two pillars: innovation -- disruptive, science-led innovation; and communication. We will talk about effectiveness and efficiencies. And you see that here, we do not put digital transformation. We will talk about it, but digital is now part of how we do communication, which is part of our life.

Innovation first, and let's start with the end, which is the result. In 2022, the weight of innovation in APAC was multiplied by almost 2, meaning that, today, innovation in our region represent 20%, 22% of our sales, which is a huge achievement, huge improvement done in 1 year.

So what did we do to get there? First, I would say we are obsessed with incrementality. We don't want innovation any longer that is not driving incrementality, not driving growth both for our share of market and for the category. So to drive incrementality, we decided that it was time to look forward and not backwards anymore. Look forward means that we need to understand what's going to happen in the category before it does happen. And we developed the idea of need states.

What is a need state? Three components: the why, the why is a deep human motivation that drives future behaviors in the category, things that are starting to emerge that we start to notice but that are not big yet that have not been tackled by anybody yet in the market. The what is how we translate those need states, those future behavior into benefits that consumers want on our categories. And the how is what do we do, how do we deliver on those benefits through our products. I'll show you 2 examples.

We started those need states. It's a concept we developed for China in 2019. So need state #1, admirable impression. What does it mean? It means that, in China, you have more and more people who are successful, who were born in Tier 3 cities and are moving to Tier 1, and they're happy, and they want to show it. They want to signal the fact that they are successful. And the benefit that they're looking for, whitening. Why? Because they want to go in the society with a smile that is reflecting their success.

There is another need state in China, which is issue with aging. You're successful, you're 35, you're at your peak, but you start noticing that your body is changing. And in China, you talk a lot about black triangles in your gum that you don't want to see happening because that's a signal of the fact that you're aging. So gum is a key benefit on this segment.

And we went after those need states with very innovative products with a strong science-led point of view and point of differentiation. One with Colgate Enzyme White, and the other one with Colgate Miracle Repair with Amino Acids. Doing so, when we are looking forward, what we do is that we are reinventing our segments because we are launching products that don't exist. We're attracting benefits that were not existing before in the category. We talk about Enzyme White. You will tell me whitening is not new. This product has an 800 index to the category. That was new.

Miracle Repair, we talk about it. So a product that is working against aging. And in the middle is your product that we launched in the rest of APAC because whitening in the rest of APAC is a new segment. So we are driving whitening proactively in the region.

And we do that with our segments, but we are opening new segments as well, new categories. And here you see at-home whitening, which is something that we sell now in the entire region, even in places where it did not exist and in places where you will not expect at-home whitening to be because both the categories, the segment of whitening is small and the income of people is quite limited. But now you go to Thailand, you go to Malaysia, you go to Philippines, and this category exists and is growing nicely for us.

The other thing we decided to change is that if you talk about premiumization, but the experience with our product doesn't change, there is an issue. So we started to borrow the codes of beauty and implement them in our category. I'll show you again an example from China, Miracle Repair. You can see that the tube is different from the usual tube that we have, with a beautiful cap, with a different printing, with codes visually that are different. This product has the highest repurchase rate ever in China, 3x bigger than the #2 product. So it is a success.

And if you combine innovation that disrupts, together with an experience that is superior, you manage to deliver premiumization. So here, I'll give you 4 examples, always the same. I told you, Enzyme White, close to 800 index to the category; Miracle Repair, 360; O2, 300 index in the rest of the market; and the at-home whitening that we discussed, 350 to the category.

And look at what's happening. This is China. It is our share of market on the left, and on the right, it's our RSP. We started with an RSP, which was 97 to the category, and we are now at 190 average. And the share, of course, is a beautiful story. We moved from 2.1 in 2018 to 7.3. And we just got the share for January. We are at 9. So the growth is that it is -- the momentum is on, and we keep growing.

But now you heard what Noel said. We are not a category, and we're not a brand only for the [indiscernible]. We are a brand for everybody. And not everybody can afford a toothpaste at 800 index to the category. So we developed what we call the hero-halo strategy, meaning we advertise our hero products that you saw to generate interest, to motivate people about the brand and the category. And what we do next is that we decline those products into a product that people can afford because they are at the lower price points but leveraging the same concept. So you move from hero in e-com to halo in e-com, where you have a range of product adjacencies that are building the same concept to halo in brick-and-mortar, where you have our products, same concept, but more affordable for people, and it works. And we did it for Miracle Repair, but we did it as well for Enzyme.

And I just wanted as well to show you that it's not only a story about China. We learned a lot with China. And now we are implementing and rolling out the same learning to the rest of the region. So here, I'll show you an example of Thailand, the impact that the launch of O2 superpremium product had on our share but as well on our pricing. So that's the first pillar, innovation.

Now the second pillar, communication. I told you, we have done the digital transformation. In 2 years' time, during COVID time, by the way, we hired 175 people in the region to help us on digital, all of them coming from the outside. And we managed to integrate them in the team despite the COVID challenges.

Doing so, we built some new in-house capabilities, search but as well content because you will see, I will show you a few examples, that the need for content is becoming huge. And we cannot afford any longer to develop content with an outside agency only. So we are now developing content in-house. And doing all of that, we are obsessed with this idea of e-commerce, where we want to win, and we are winning. As you can see, we drove triple-digit e-commerce net sales growth over the past 3 years in the region. And now we are one of the leaders of the retail environment.

So we transformed digitally, and now we need to take care of effectiveness. And we do that before we take care of efficiencies. Why? Because a very senior media person once told me, if you have a media plan that is ineffective and you make it even more efficient, then you make it even more ineffective. So it's critical that before you talk about efficiency, you start taking a look at your effectiveness, which means we need to have pieces of communication that people love and remember. We are screening the creative capabilities of our team with a very thorough training. We are really working on making sure you know our portfolio. We have lots of products. So we are now making sure that we have a very clear view on the strategy of communication to make it consistent and to have an execution which is super engaging with an incredible craft.

Attention, we need human attention in our advertising. So we need to be less generic than we used to be, and we need to have advertising that people remember because we are talking to them about attention that they can identify with.

And the result is that today, all our advertising is performing significantly above the norm. That's the only thing we want. We want to be above the norm, not at the norm. And we are starting to win beautiful awards in different award shows. And that's important because we know that awards are correlated to success in terms of net sales.

And on top, of course, we keep driving the effectiveness of our advertising through analytics. So I will show you 2 examples so that you understand visually what I'm talking about, 2 advertising: 1 which we call higher order, which is talking about the purpose of the brand and 1 which is talking about product. And you will see that the 2 of them work very well together and that we don't have 2 [indiscernible] anymore, that it's 1 brand that is being built.

[Presentation]

Yves Briantais

So this is our higher-order advertising. And now I'll show you product advertising.

[Presentation]

Yves Briantais

So very strong, amplified in all touch points. As you can see, this is content that we are creating for the company internally and doing very well, driving the share of market.

And of course, now that we have effective advertising, we need to work on the efficiencies, and that's what we've been doing relentlessly over the past few months, generating lots of millions of savings that we reinvest in the business. So we are using marketing mix modeling. We are using programmatic media buying. We have media best practices in place, and we are doing thorough auditing of our investments, covering 100% of our investments.

So we are not perfect yet, but we are getting there, but we are committed. It's just the beginning. The intent is to become the marketers of the year by 2026, and we are working very strongly towards it.

Noel Wallace

Thank you. He gets all the fun stuff to present, but the really great work that he and the team have done over in Asia.

Okay. So we've talked about innovation and the strategy. We've talked about the capabilities we're building. Let me focus now on the middle of the income statement and how we're driving more productivity through the P&L to ensure we fund the advertising and drive margin expansion.

You know about our global productivity initiative. We got ahead, so to speak, of the inflationary environment that we saw coming in 2022 with this program, which will continue to deliver savings this year and a little bit into next year.

Our funding the growth, you know it well, strong acceleration of the funding the growth in 2022, and we expect to see that level or higher in 2023. And importantly, looking at how we capitalize or how we use our capital in our facilities to drive accelerated productivity through automation, which will ultimately allow us to do the great things you just saw from Yves, and that's building brands and creating stronger brand health for a sustainable future for our business.

Our fourth is how we're accelerating free cash flow. Obviously, a big opportunity before us is we see to reduce our working capital and continue to accelerate our return of funding to shareholders.

Capital expenditures. Capacity building has been the key focus for us over the last 2 years, productivity and automation into our facilities as well and, obviously, using some of that money in our sustainability area that we'll talk to in just a moment.

Here's an aerial view of the new Tonganoxie plant that will open in the later part of 2023. This will be our most automated and sophisticated wet plant in the world.

Likewise, important to return our funds to shareholders, 128 years of dividend payments and 60 years of increases. And combined with our shareholder -- our share buyback is $28 billion of cash returned to shareholders over the last 10 years.

And on the M&A side, you saw the recent acquisitions that we made. We think a really intelligent and prudent way to use our balance sheet to increase capacity and do it at a much lower cost and building it from a greenfield, which is obviously going to help accelerate and sustain good growth at the Hill's business moving forward.

Last and finally, moving on to sustainability, a very important part of our strategy moving forward and the work that we're doing around social impact as well as our -- achieving our climate targets. Our Bright Smiles, Bright Futures continues to build a lot more focus, and we're learning on this. We're starting to digitize that program around the world as well to reach more children. Up to date, we've reached 1.6 billion and on our way to 2 billion, which is our ultimate target.

On the Hill's side, we've donated over $300 million in the last 10 years through our Food, Shelter & Love program. The important part here really is helping pets get adopted all over the world with over 13 million new pets finding new homes, which is wonderful.

We talked about recyclability, our proprietary technology, developing the first recyclable toothpaste tube in the world. We have shared that technology. We're about 40% through rolling that out across the entire world. And I have a spot here to show you how we're bringing that to life to encourage people to recycle their toothpaste tubes.

[Presentation]

Noel Wallace

Importantly, a good way to connect the brand to the purpose of our company, which is reimagining a healthier future for all people, which is great.

Likewise, our climate targets are an important part of how we set our sustainability targets longer term. We're very proud to be the first multinational company in our sector to have our net-zero targets approved by Science Based Target initiatives. This is the gold standard in improving and evaluating your climate targets. And so we feel we're in a very good position there.

And you heard me talk about TRUE Zero Waste, an area that has been a distinct advantage for us in the market. We now have 32 certifications in 19 countries across 5 continents, and that's higher than any other company in the world. So a terrific work in terms of how we continue to push our sustainability strategy.

Likewise, on the governance side and the transparency side, a lot of work that goes into getting these reports out there and making sure that consumers and shareholders understand where we are from a sustainability standpoint, hold us accountable and making sure that we communicate the great work that we're doing in that space.

So in summary, the strategy is working, continuing to accelerate the top line of the company to ensure long-term profitable growth. The top line continues to be a critical, critical focus for us, but we're now getting much more focused on the middle of the P&L to ensure that we get the gross margin recovered. So we continue to invest in building the brands and bringing great innovation to the market. That will allow us to grow earnings per share with more leverage through the P&L and, ultimately, utilizing our strong balance sheet to accelerate cash flow and ultimately drive investments into the business and return money to shareholders.

So with that, I'll turn it over to any questions.

Question-and-Answer Session

Q - Kevin Grundy

Kevin Grundy, Jefferies. So a question, just picking up on your last slide. One of the key points there was going to be gross margin improvement. So taking a longer-term view, understanding the expectation is to get some gross margin improvement this year, there had been a longer-term ambition to reach 65%. There's been a setback here for understandable reasons with cost headwinds and FX. Is 65% gross margin still a reasonable ambition? How large of a priority is that for you and for the organization? And do you feel like you have the right incentive structures in place throughout the organization to drive that behavior?

Noel Wallace

Yes. Thank you. As you know, over the years, the fulcrum of our P&L has always been gross margin, and the company is completely fixated on getting gross margin to grow back in 2023, and that's as we said earlier. The longer-term view is we will continue to grow gross margin. We eclipsed the 60% a couple of years ago. So we feel quite confident based particularly on the portfolio makeup we have now with skin health coming into the business and a lot of upside growth that we will continue to see the acceleration of that.

All the work that we're doing at Hill's, Hill's will have a slower progression given some of the new plants that we're integrating and, obviously, the continued acceleration of ag prices in that regard. But you'll see sequential growth moving forward as we continue to execute our pricing and funding the growth areas in that business.

I don't want to say 65% is actually the target. We know we can continue to grow gross margin sequentially through this year and into next. And that clearly is our ambition. Now we don't know where costs will go over time. We never expected to see the unprecedented inflation that we saw in the P&L. The important takeaway, though, is you see the strength of our brands and our ability to take pricing in the categories and our ability to continue to bring innovation at the premium side of the business, which we think, ultimately, gives us a lot more confidence that we can continue to drive gross margin in the long run. But certainly, we want to get back into the 60s, and that's the ambition.

Lauren? [Ph]

Unidentified Analyst

I was curious if you could talk a little bit about chunks of the portfolio that didn't get attention today. So Home Care, some of the more, let's call it, rudimentary Personal Care categories and the degree to which those businesses are as ripe for innovation as what you've been able to do and continue to do in Oral Care and pet or if they are sort of sustainably slower growth, cash flow machines to help the business?

Noel Wallace

A little bit of all of that, [Lauren]. I mean they obviously generate a significant amount of cash. They're well incorporated into our manufacturing facilities around the world. I did show some. Obviously, the Protex brand is one of our largest brands in Latin America on the Personal Care side, both on the bar soap and the body wash side. You saw some great innovation coming to market. Suavitel, really strong business in Latin America and parts of Europe on the Soupline name.

So clearly, we are putting the innovation engine against those. And I think some of those businesses historically hadn't been giving some of the science-driven aspects that we needed to bring into that business. And Stephan, who is our new Head of R&D, clearly understands we see more opportunity there.

To get to your last part of your question, these businesses generate and spit off a substantial amount of cash for the business and absorb a lot of overheads for the company. And so we obviously balance them to make sure that we're driving profitable growth in those to make sure we're taking that investment to grow in our faster growth categories like Oral Care and skin health and Pet Nutrition.

Rob? [Ph]

Unidentified Analyst

Great. A question for Yves and a great presentation, amazing what you've done with the Colgate brand in China. Could you -- just kind of 2-part question. Could you, one, kind of put what you're doing with Colgate in the context of Greater China strategy, both in toothpaste and elsewhere? So like what's going on with elmex, meridol, Hawley & Hazel? So kind of the greater strategy there. And then just give us an update in terms of what you're seeing on the ground in China with Filorga and travel retail and the gradual opening up of China and what that means for your business.

Yves Briantais

Yes. So what I presented today about China is really the vision we have for the rest of our portfolio, which means that this idea of leveraging [RS] to premiumize RS like e-commerce. This idea of taking the category to another place, which is far beyond cleansing your teeth only. It's something we started with Colgate and that we're going to the rest of our portfolio, starting with H&H or even elmex. elmex, I didn't talk about it today, is a success in China. It's today the #1 toothpaste for kids. So it's working very well, delivering on the needs of the Chinese consumer. So it's a recipe that's was for Colgate but that we're applying across the portfolio of our brands, and that is delivering across. And again, if you realize what I said is that on top, it's working in the rest of the region. So it's really an inspiration for the rest of the region.

Regarding your second question, what's happened in China, it's very volatile. So we think Q1 will still be challenging in terms of categories because there will be some reminiscence of COVID. But we are -- the level of travel is back to the pre-COVID level, so which means that we are very hopeful that, sequentially, as of Q2, we're going to see some strong improvement. And if people are traveling, we mean that people are going to travel retail. And if people are going to travel retail, it means that the order will benefit from it. So mid of Q2, we think things will be back to normal in China and the second half of the year will be far better.

Noel Wallace

Yes. I'll speak quickly on the Filorga business. I mean the travel within -- in China certainly accelerated in the first quarter, and we see that in the second quarter. International travel has been somewhat passive still, and we expect that to recover in the back half of the year.

Unidentified Analyst

I think with that, we're out of time. So we'll take the remainder of questions next door in the breakout. Thanks.

Noel Wallace

Thanks, everyone.

Unidentified Analyst

Thanks to Colgate.

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Colgate-Palmolive Company (CL) Presents at CAGNY 2023 Conference (Transcript)