Colgate-Palmolive Company (CL) Earnings Call Transcript & Summary

Okay. We are back. So up next, we're going to hear from Colgate. Joining me on this virtual stage is Mr. John Faucher, Chief Investor Relations Officer at Colgate, a job he's held since exiting along an industrious career at JPMorgan in 2016. And with John is Pat Verduin, Chief Technology Officer. Pat has been with the company since 2007. Both have seen ups and downs with the company such as organic sales slowdown, the business suffered in 2017 and '18. So the re-acceleration to 7% organic sales growth last year, it's fastest growth since 2008, and momentum has sustained this year despite the owner's comparisons. So with that backdrop, please join me in welcoming John and Pat to the stage to tell us what's driven the recent success and where to next? John, Pat, welcome. Thank you for coming.

Thanks, Jason.

Thanks, Jason.

You bet. Thank you. Let's jump right into it. Innovation has undoubtedly been one of the most meaningful drivers of the recent success, at least from the outside looking in, and correct me if you disagree with that. And given, Pat, that we're fortunate enough to have you with us today, I'd love to start there. So I don't know if you recall this, but you and I actually met for the first time about a decade ago in New Jersey, where I learned for the first time what a nurdle is. I also learned all about pro-arginine technology. My sense is a lot has changed regarding your approach to innovation since then. Can you walk us through like then and now, what's changed? How has it evolved?

Yes. Well, it's great seeing you again, and thanks for having me. And you're right, a lot has changed since you visited in 2012. I mean we've had to rethink our entire approach to innovation and really rethink the role of innovation and our growth ambitions and what type of innovations are needed for growth. Back in the day, growth was driven by market accessibility. You delivered trustworthy product in as many markets as you could and you were good to go. And I think the concept of trust still really holds true. It's still a really important factor in terms of gaining loyalty for our brands. But growth is driven by people's emotions, by offering unique solutions for pain points and delivering wonderful user experiences. And we've always focused -- kept our focus on keeping our categories vibrant and new. And that was fine, but it really, over time, didn't deliver the growth of the market. So now what we're really focused on is new user experiences, sustainable -- improving our sustainability profile, making sure that we have better designs, making better functionality, all that stuff. And it all has to fit to the brand's overall purpose. So we used to, when I met you, probably 90 -- 80%, 90% of our portfolio of innovation was near-end. It was really closed-end innovation. And we have had to swing that to much more of a 50-50 blend from that near-end innovation to stuff that really moves the category adjacencies really impacts our product benefits, and we've got to do it fast. The agility and speed that we are delivering innovation is unlike I've ever experienced before, and we've had to really rethink a lot of our processes. So very exciting time to be in our industry.

And if -- Jason, if I can just add something to that. It's really tied into our strategic plan. And so this has been -- this is not something where paths off on our own and trying to change everything. I mean she does a great job leading the rest of the organization, but this is fundamental to the strategy that we've laid out, and it's going to be factored into all of our goals, compensation, all these other factors because the understanding that this innovation works, she's doing really is the lifeblood to hitting that -- hitting our strategic targets.

For sure, for sure. How does it vary, Pat, either market to market or business to business, right? You've got Oral Care business, a Personal Care business, a pet food business, is it similar across all of those? Or do you have to take different approaches?

I think the execution and the projects are different, but the approach is the same. It's faster it's more innovative, it's more expansive in terms of adjacencies to the category. So if you look at a product like CO., we just launched in the Ulta Beauty stores, CO. by Colgate, that's not just a toothpaste in a box, it's a line of products, which really puts oral care squarely into the beauty segment. People take care of their skin. We want them to have that same kind of thought when they take care of their teeth. So beautiful products, beautiful design, beautiful user experience. And you compare that to a brand like Hill's, right, which is much more nutritionally focused. It's a dry kibble, that type of stuff. And if you look at Hill's, what they're doing to expand their marketing is they're looking at emerging conditions. They're looking at different types of pets in terms of dogs that used to be, we all had labs in the past, right? Now most people, lots and lots people have small dogs, and their nutrition needs are different. So that's the kind of market expansion we look at in Hill's. And the same thing for skincare, which is a category I love innovating for. You look at a brand like Protex, which, for those that don't know is sold in a lot of developing countries. It's antibacterial soap, kind of harsh. We've really transformed that brand into a skin -- much more skin, sensitive skin type of product. Really comforting, it's made with flaxseed oil now that gives you the antibacterial properties in much less chemical way. So we're trying to look at our brands and say, what's the purpose of that brand and our strategy and our portfolio, how do consumers view it and kind of expand their mind and to help them to think of that brand in a much more -- much broader way.

So I wasn't aware of this CO. The nice thing about doing this virtually is I have a computer next to me, so I may really quickly Google and pull the stuff up, like what is you talking about. Okay, here it is. Really interesting. I mean it's taking you into some new spaces. It does seem somewhat consistent. If I'm going to look at your innovation broadly, particularly in Oral Care, there seems to have been a very concerted effort to premiumize the portfolio, more aggressively than I think in the past, and this certainly ladders to it. I mean looking at $129 rechargeable device at home kit. Like that's -- those are real price points I don't think Colgate participated in the past. Is that a fair observation that you're looking to premiumize the portfolio around the world? And is the consumer -- how welcoming is the consumer proving to be with us so far?

So I can take it and then John can augment. I mean we're absolutely looking at premium reservation but from the standpoint of offering the consumer a premium experience. So if you look at the products on CO. and any time we offer a consumer a premium experience for a premium price, you've got to deliver. And you have got to deliver the good. So if you say that product is going to whiten, it better whiten at those price points. If you say that product is going to relieve sensitivity, it better do it and better do it fast. So we are really careful about marrying our premiumization, not just to how the product looks and isn't it pretty, but does it work, and is it worth paying for? And that's really -- we're a trusted brand. We've been -- we're in more households than any other brand. We're in 60% of the households around the globe. We're sold in 200 countries. We've been around for over 200 years. You cannot be disloyal to your consumers. You cannot lose that trust. And for me, I think that's about them paying a fair price for the value you're delivering. And I think that's really an important kind of mantra we keep.

Jason, what I would add to that is, revenue growth management, right, is an overall sort of encompassing strategy that we've really gotten so much better at over the last couple of years. And we've got 7 different levers that we pull with that, but innovation is a key one, right? And it's one where we were lagging versus our peers. If you look at the premiumization that happened in markets like China, with Yunnan Baiyao and Saki and some other local brands, they push the envelope of what consumers were willing to pay. And it took us a while to respond, but it's made us more aggressive. And again, to Pat's point, if you have the brand and you have the technology that can live up to those price points, you're going to end up winning longer term. So we have launched a GBP 20, and that's a price point, not a weight, whitening toothpaste in the U.K., okay? I mean that -- again, people would look at that and say, well, that's not something Colgate -- I would associate with Colgate. But if we have the best technology and we compare it with great marketing, we can convince consumers that our products are worth spending that extra money on because they truly deliver. And we have to do that in order to offset a lot of these costs that are obviously a big focus of concern for everybody right now.

Sure, sure. And we'll come to cost, we'll come to cost because inflation is -- there's 2 things that have come out of every call today so far: one, the buzzword of RGM, revenue growth manager, I hear at every single one; and inflation. But let's hold that for later. You talked about some of the -- you alluded to some of the troubles you were facing in emerging markets a couple of years ago when you highlighted some of the competitors that caught you a bit flat footed. I think it was similar in Russia and similar in India, as it was in China, different competitors, but similar dynamics. Where are we today? I mean it looks like emerging markets have come back with advantage. Your performance last quarter was phenomenal. What's driven that acceleration? Is it durable? Or is that just easy comps?

Yes. So I'll talk a little bit about the markets broadly, and then, Pat, do you want to maybe talk about how we do some local innovation because I think that's probably the best way to address it. So innovation, obviously, is a key thing, right? So if I think about China -- so we're in better shape in all 3 markets. Our India company reported yesterday, and they reported very strong results. Russia is a little bit more complicated from that standpoint. I think we're probably a little bit farther behind, but still delivering growth in Russia. As I look at these markets, what happened is you did have more innovation coming from local players, different types of innovation, whether it's herbal or whitening, let's say, in China at premium price points, whether it's ayurvedic in India, natural ingredients in Russia. Like all of this happens at different cadences in different ways in different markets. And so if we have a one-size-fits-all innovation strategy, we can't respond sort of market-by-market to deliver against that. But what we have been able to do because we have an operating model that is so focused on on-the-ground management, right? So our India team is laser-focused on turning around India, and they've laid out a pricing strategy, a go-to-market strategy and innovation strategy that has allowed us to get back to strong momentum in India. If you look at what we've done in China, very difficult situation because the market premiumized so rapidly that our brand, and particularly the Colgate brand in China was left at an index versus the category, that basically made it difficult to price and very difficult to innovate directly off of that price point when you're selling at like a 60, 70 index. So what we did in China was we basically said, okay, let's focus on e-commerce. It's the most developed oral care e-commerce market in the world, and we came out with -- we're still selling Colgate at RMB 8, both in brick-and-mortar and online, but we've now come out with RMB 40 to RMB 50 priced innovation that is truly differentiated. We've remade our portfolio in e-commerce, and then the next step is leveraging that back into brick-and-mortar. And so those are the steps we've taken. So I feel like we've made very good progress in China, very good progress in India. Russia, the category has been a little less dynamic in terms of the shifts, but we've been focusing on driving better distribution, and we're getting better innovation into the market there, and we've delivered better growth. So that's kind of where we stand overall in those markets. Pat, anything you would add about sort of the local versus global innovation?

No. It's always exciting to do the local innovation because you learn a lot about cultures. I mean there's just no substituting for the people we have on the ground. And so we have locals developing on products. So we have innovation teams, not just this commercial marketing teams, but we also have R&D teams, we have packaging people. We have designers on the ground in those markets, which really -- and they're local people, obviously. So they know the culture, they know the mores. They know the language, particularly in China where that's so difficult. And there's just no substitute to those insights. And so China is interesting because people do their homework when they buy products. And you think about toothpaste and it's how mundane, yes. They spend an enormous amount of time deciding what toothpaste to buy. And they really do their homework. So if we say it's going to whiten or it's going to suit their gums, it better do it. And then on top of that, they're really discriminating when it comes to design and the messages and the look and the user experience. So you can't scrimp on thinking through products in China. They like devices. So that opens up a world of opportunities in terms of -- we launched a handheld water flosser in China. It opens up a world of opportunities when you marry a device that gives you targeted delivery to a chemistry, a formula. All of a sudden, there are opportunities to really deliver breakthrough performance really open up. Russia is a little different. They are more, I think of them as Missouri. They're kind of like a show-me state. You have to really prove your worth. They want to make sure everything is safe, they're much more cautious. So you can't like push them too far. You've got to go with them in terms of what they're willing to accept in local ingredients, stuff they're familiar with when you innovate for Russia.

Interesting. So it sounds like, if I'm hearing you right, like this has been a lot of effort, a lot of work to get this innovation gear -- the innovation gear is turning the pipelines full. You guys sound pretty confident in your -- in the momentum you built there and the ability to let momentum to sustain.

I mean, look, I think we're making progress, right? Emerging markets have not been a straight line over the last 10 years. I mean Asia has been, from a market standpoint, probably a little bit more of a straight line. Latin America has obviously not been a straight line. But we've had our issues in Asia, but I think when you focus on making strategic choices in changing how you do things. And the innovation in India, whether it's the chakki or the new diabetics product, these are real changes to how we go to market. Now when you do innovation like this, you have to be patient, right? I mean it may not work right away. You have to be iterative. You may say, okay, you launch it, doesn't hit your targets for 6 months. You don't pull back on it, you say, okay, what do we need to do differently? And a lot more of this stuff will not work, right? I mean the models are probably more accurate on what is this Colgate total line extension going to do versus what is this entirely new line going to do? So some are going to work, some aren't going to work. But if you put the process in place, that should keep the momentum going.

My new word is pivot. And so we launched these products, and the more -- the further out you go, the more you have to read the market. So analytics become incredibly important. Because you need to read the market real-time when you're launching, you need to really understand what your -- what are your Amazon star ratings? Or what -- how are the consumers reacting? And then you need to pivot. You need to slightly adjust the packaging, the opening, maybe the formula, flavor is a little too harsh. And you adjust to get it right. And you almost do that real-time based on consumer feedback, and you have to pay attention. It's no more, I launch that product, I'm on to the next thing. You have to pay attention to what you launched and keep revisiting it until you get it right, particularly as you go further out in the adjacencies.

Yes. And is that data capability and that real-time feedback loop, the primary way you've been able to shorten your innovation cycle?

Absolutely. There's 2 things that we've done. One is that we do a lot more targeted testing upfront. We don't do 1 million tests upfront because we know they're not very predictive. The other thing is we've used analytics to really shorten our, what I call predictive formulation. So in other words, it shortens the formulation time because we can predict how to formulate and what's going to work and what's not. How much testing we need to do, how many clinical tests we need to run. And then when you launch, that's when analytics really help you shorten that optimization period. Because the data is available, you just have to use it, and you just have to pay attention.

Sure. That makes sense. But your supply chain, I doubt, was built for this. The idea of being able to iterate on the fly, it's like, no, no, you get a formula, you buy in bulk, you buy with homogenized intentions and you're well on those lines, right? Have you been able to evolve your supply chain to adapt to this without being burdened with so much inefficiency?

You want to take that? Or do you want me to take that, John?

Why don't you start, and then I'll finish up.

Right. It's a challenge. We were built for speed and make the same thing over and over again, every supply chain was. It was a strategic advantage. And so I think you have to be, I guess, the trend where it is ambidextrous. You still need those big lines. You still need speed and efficiency, but there's another set of the supply chain organization that needs to be small-scale trial-adaptive, test-and-run type of things, 10,000 units, get it on the market, see what happens. And so the supply chain has a really terrific strategy that they're working through in all the divisions to enable that to happen. And they've been really -- I have to say, they've been really agile. It sounds like an overused word as well, but contract manufacturers in-house, they have -- you don't know a lot of on our supply chain. They're like, okay, let me think about it and I will figure it out and get back to you. So they've been really partnered -- we've been partnered on this.

Yes. I mean I would add to that. I mean, Pat talked about their strategy. I mean one of the things you realize as you join a company like Colgate, it's an incredibly competitive company that historically has been focused on winning, right? And there were a couple of years there where we weren't winning the way we historically have been. So I think everyone was very open to making changes, and you say to what is a very competitive supply chain ranked among the best in the world, okay, how are you guys going to change so that we can deliver growth, mean if you put that as a challenge, I mean, it's the same challenge you put to Pat's organization, you put it to supply chain, to everybody. So, okay, what do we need to do differently, right? And so it's, okay, we're going to take these lines, and these lines are going to run -- are going to do smaller runs for new products, okay? And that frees up our bigger lines, okay, to create the efficiencies, and you have to strategically plan for this. And then what you have to do is when the marketers come in and they say, well, I want to run the financials for this new product on the fastest lines, okay? Finance needs to say, no, we're going to run the financials for this project on the lines we're going to use, and we'll figure out how to make the economics work over time because not everything can run on the fastest lines. So everyone has to hold hands and say, okay, here's how we're going to get back to delivering growth because that's where we all want to be, right? It's more fun to work for a business that's growing, that's taking market share, the stock price is going up. And so we've all kind of signed up to that strategy, and every function is figuring out what do we need to do differently.

For sure. Yes. It must be really fun to be working on Hill's these days then? I mean it has tremendous momentum, a kicking butt. A question for you, how much of it is just good luck, right place, right time? Because these DCM concerns clearly drove a lot of consumers to their vet. The vets got much more emboldened than they have historically in terms of recommending products, and they really only recommend 3 Hill's Science Diet, the Purina Pro and Royal Canin, all 3 of which are on fire right now. So one from the outside looking in, could say, you were in the right place, right time. Is that fair or not?

I mean I'm going to say no. I mean, the momentum was shifting on Hill's before DCM and COVID-related, pantry loading, what have you, and I think the momentum on Hill's will continue after we've seen those play out. I mean, Jason, part of that was the pendulum itself, right? So pendulum swung towards organic and naturals. By definition, it had to swing back. So yes, some of that was the headwinds that we had let's say, '14, '15, '16, 17, really turning into neutrals, potentially tailwinds from that standpoint. But the Science Diet relaunch, the significant increases in -- just saw your dog in the background there, hopefully your dog...

Yes. Is it pomapoo?

So the Science Diet relaunch was some of the best packaging work that this company has ever done. An e-commerce-focused strategy that really began to pay off in spades and sort of as we head into '18, '19. So there were big strategic choices that we made and I would also argue, even within anything related to DCM, the choice we made was not to compete in naturals per se, but to change the formulas. So it wasn't naturals from Hill's, it's Hill's with natural ingredients, which was a branding/product development decision that -- and Pat talked about brand purpose before, that fits with Hill's purpose. It's science, it's biology, but it's with natural ingredients. And then again, we made big decisions to support this business, right? So you can see our overall increase in advertising to sales over the past several years. Hill's has had the biggest increase in ad to sales of any division at the company. So we've made bets as well, and we're making further geographic bets in terms of looking at where we're putting that money where we think we have big market share opportunities. So yes, there are tailwinds. Don't disagree with that, but to get technical on it, you put up a 7 on a 21, I think chances are you're probably doing something pretty good from a business standpoint. Pat, anything you would add?

No. I mean as Hill's has this long-standing clinically driven nutritional principle and we know that dogs are not wolves. They're not little wolves wandering around. They're no wolves. So they eat grain, they eat beef, they eat meat, they eat protein. They get -- they want to vary diet just like you do. And when you eliminate 1 source of nutrition from a mammal, from you or from me or from a dog or a cat, like grain or fat, you throw off the metabolic balance and you put stress on the organs, whether that be your heart, your kidney or digestive systems. And that's our belief that it's about balanced diet. And our diets deliver that, first and foremost, and then we add on things from that balanced diet to address certain issues, whether it be kidney function, whether it be fur ball, reduction, whether it be gut health, whatever the case may be. But recall, our product, our Hill's diet is the sole source of nutrition for your dog. It's the only thing he's going to eat or she's going to eat. We have to make sure it goes by nutritional guidance and principles that keep that dog or that cat healthy, regardless of the state of health that dog or cat might be in. So it's really important to us that we stick by our principles. And I think it's -- eventually, the reality of that has come home and people and vets are starting to realize that.

Yes, yes. We could probably spend the next hour talking about Hill's. And I was -- I'd slotted here a question for you to take us through the R&D center, which is so impressive. I don't think investors appreciate. But for the sake of time, I'm going to pivot away from Hill's and go to a business that's probably a little bit less fun to be working out these days, and that's your core North America market. It's a shame. John, you and I have talked about this a lot. It's a big piece of your business, but it's not as huge as the percentage of mind share it captures for investors, given the abundance of data and, of course, the regional proximity of where we all live. So a lot of people are looking every month at fairly disappointing statistics or figures in terms of Nielsen data coming out of North America. What's happening in North America? What have been some of the headwinds? And what's the game plan to get this business on more from footing?

Yes. So I mean, North America, obviously, has been difficult. It's about 1/4 of our business from that standpoint. So it's important to us. And we think it was growing. We think it can grow longer term, having some short-term volatility here. I think there's a couple of things playing out. First off, obviously, COVID -- lapping the COVID demand in certain categories. Liquid hand soap, dish soap, what have you, that obviously hit sooner than we had anticipated and a little bit heavier than we had anticipated. So hopefully, that comes out -- sort of we come out of that a little bit sooner than expected as well. Oral Care has been a little more puzzling. We have seen some category weakness. I think we're beginning to see that pick back up. Still a little surprised by some of the weakness we saw in February, even if you take out the storms and things like that, which obviously had an impact. There have been some missteps, as we talked about on the first quarter call, we had some logistics changes in our footprint that created some availability issues, which impacted our ability to promote, right? And we've seen some aggressive promotions out there from a competition standpoint. There's no question. Some of our competitors are out there, and they're being aggressive. And to their credit, I'm not casting dispersions or anything like that. We need to -- we're getting things back up and running as quickly as possible. We feel good about where our service levels are trending now. And we think we have a great new product portfolio out there, whether it's Colgate Renewal, whether it's CO. by Colgate. Short-term volatility is a problem, but if you've got the right strategies, you'll get through it, and I'm convinced you're going to see North America be a solid growth market for us sooner rather than later. So Pat, anything you would add for the North America from an innovation standpoint?

No. i would agree. No. Our North American team is really strong. I mean that is -- it's such a talented team of people, and they're really good at driving innovation. They get where they need to go. I mean they figure it out. John mentioned the renewal line is doing well. We took a page out of the optic renewal launch that had done so well in terms of renewing your health and it gets back to this whole ageless society that we all want to be. The optical white pen has been a big success, particularly online and what can we do with that delivery mechanism and making sure that people have a great whitening experience. So I think the team is really committed to growing through innovation and through product adjacencies. I think they hit a bump on the road, and I think they're figuring out how to recover and we're seeing signs that they're doing it.

Jason, the other thing I would add is we've made some decisions surrounding capacity and other issues related to COVID in terms of where we were going to add capacity for the long term. What we thought that consumption of some of these categories was going to be 2019 versus 2020 versus 2021 and beyond. And that has left us in a little bit of a competitive disadvantage. But I think those decisions will play out longer term to our advantage in terms of not having chased after some of the extra volume.

Yes. That makes sense. I think it's probably also fair to say, and correct me if I'm wrong, that if we only isolate to the Nielsen or IRI data, we're probably looking at some of the weaker channels. And your business is probably on more firm footing if we had all-channel view. Is that fair?

That is fair. I mean, we've stated pretty unequivocally over the past couple of years that when we -- we're focused on returning to growth, right? What you do is you say, okay, it's particularly as your sort of marshaling resources, right? We've had a very tough couple of years in '17 and '18, where are you going to get the highest return, what have you? And some of the fastest-growth channels for us were nonmeasured channels. You've got club stores, you've got e-commerce, you've got parts of dollar. And we did have extra efforts there to drive growth. So you've seen very strong growth on Amazon. We picked up a ton of market share in e-commerce over the past couple of years. We've done really good work with whitening in Costco, et cetera. So I think as you put all that together, it's not 100% of what's going on. I mean the scanner data is probably 80%, 85% of the industry, but only 50% of the growth. So the key is sort of balancing that and then there are things that you can do that drive market share that may not drive growth or may not drive profitable growth and sort of making sure you've got that strategy in longer term, is important. But regardless of that, we need to do better. Longer term, we want to grow share in measured channels, and we think we should grow our share in measured channels. And I think we will grow share in measured channels. But we need to execute better to do that in the shorter to medium term.

Yes, yes, yes. And some of the onus of success has been e-com. And you mentioned finally catching up in China, too. And so my office companions have rejoined me here, not the least. It's -- from the outside looking in, it seems like you were a little late to the game on e-com, that you had a slower start than some of your peers, and correct me if you think I'm off base on that. But you're clearly gaining momentum and catching up quickly. What's been the key to success? What have you changed to really get the momentum going in the right direction?

Jason, was that about China specifically or about e-com globally?

It's incredibly point in China, I believe, but I think it also implies a bit to the U.S., too.

Yes. I think a lot of what drove the category, in the U.S., it's different than China, I think. So in the U.S., a lot of what drove the category initially on was availability, right? So every Walmart has Tom's of Maine, okay? But does every Walmart have Tom's of Maine, kids, strawberry flavored, fluoride-free toothpaste. No. So Tom's of Maine had a very high index of online share versus offline share because it had the breadth of distribution, but didn't necessarily have the depth of distribution, okay? So I think that's a key piece of it. And so what we've seen is a lot of the companies that had really high market share a couple of years ago, because of that distribution sort of disadvantage or advantage in e-commerce, they pushed e-commerce more aggressive early on, and we were a little later to that. What you have seen over the past couple of years is more focus on premium innovation, through e-com, focus on high price points, focus on paid search. And so what you have seen is the bigger brands have developed scale advantages in e-com. Like paid search at the end of the day is going to be a scale advantage. You've got higher brand awareness. You've got the dollars that are out there. You've got bigger budgets. You can make that work. And I think between the innovation we put in place, better digital advertising, more digital advertising, paid search, we've been able to catch up to where we're sort of knocking on online share and offline share being similar. China e-commerce, really it was the innovation piece on e-commerce that really did it. And brands, smaller brands, moving more aggressively, right? It's Yunnan Baiyao indexes, online versus offline, the way most of the other big brands do because you had sort of these native digital brands there. And so getting the innovation right and truly differentiate it. To Pat's point on, they're looking for entirely different products, new experiences, that was the key in terms of changing that innovation process. Now conversely, you go to Europe, where you've got more of an omnichannel, click-and-collect-type model, our market shares are very much in line with our offline shares because the innovation we're providing to tesco.com is the same innovation we're providing to Tesco, and it's just a different consumer model. So market-by-market, it depends. A lot of it's going to come down to making sure you get your ad budgets correct and getting that innovation 100% nailed down. Pat, anything you would add from that standpoint?

It's also how -- that's the right innovation at the right price point, and then it's really how you describe them. It's how you gain the attention of the consumer. So how is the product displayed? How is it described. When they get it, is it a great unboxing experience? Or do they get a mess on their hands. So packaging is a huge, huge component of innovation in e-com. Because you know, when you -- if you've ever ordered shampoo online, how difficult that can be to get to the consumer without it being all over the box, and we don't want that to happen. We let them -- Hill's, when they open that product, it needs to be a wow moment. And I think that's the way you gain loyalty. And so we're looking at innovations in a broader scale, not just the product, but the overall unboxing experience and the disposition of the packaging, everything from all angles because I think that's really what's driving it. Particularly in China, that on boxing experience has to be a wow moment or they will not come back. So you've got to really, really think about your package product interface and how that engages the consumer and then how that's displayed online for consumers.

Interesting. We could -- I feel like we could spend an hour just on this topic alone. In fact, for the audience, we've got a company called Profitero coming up next, where we will spend almost an hour on this topic, discussing. We're almost out of time, and we haven't talked about the topic du jour, and that's inflation. I mean I prefer talking about these longer-term things. But near term, it's real, right? There's a tremendous amount of cost pressure in the market right now, yet you're confident that you're still going to expand gross margins this year. Give us more context, more color around that. What gives you that confidence?

Yes. So our guidance was at the beginning of the year, in January when we guided after Q4 earnings was that gross margin would be up year-over-year. That is still our guidance, and we didn't put a range to it. And the reason why you don't put a range to it is because when you give your initial guidance, oil is at $55 and next thing you know, oil is at $70, and things move around. So there has obviously been additional cost inflation. Things have moved further and faster than we had expected. And so we need to adapt to them. And so the premium innovation is a key piece of this. We talked about revenue growth management. There's 7 different levers. We're going to have to get additional pricing in place. We're going to have to get additional productivity in place, which is an all-hands on deck-type of environment. Pat's team works with supply chain and on funding the growth projects to make sure -- for light-weighting plastic bottles or doing things like that, not going to be easy. I mean to be fair, we do have one advantage, which is the logistics, which is a big headwind year-over-year is in our SG&A line. But yes, the plan is to have gross margin be up and we think it's a combination of growing the right way and then really making sure that we're taking the pricing where we need to and sticking with them. And we're not going to be silly. We're not going to give up a ton of volume if people are not pricing, but the cost inflation is hitting everybody. And then Jason, that's kind of the point here, right, is everyone is dealing with the same headwinds, which is a little bit better than what we deal with sometimes when we have transactional foreign exchange, and we're getting hit worse than everybody else. So in an inflationary environment where everyone has to move, there can be some advantages of that.

Sure, sure. It can be some friction. But probably just a matter of time before everyone's aligned on that one.

Yes. I mean the timing will take place. We have a history of looking around and saying, okay, here's what's going on and responding and then sort of adapting on the fly, iterate pivoting, right? So you take some pricing. If you feel like you need to deal some of it back, there are times when we can do that.

Sure, sure. Okay. With that, it's a wrap. We're out of time. Thank you so much for your time. We really appreciate you guys making yourself available. Great discussion. I wish we could keep it going for another hour or 2.

That's great. Good seeing you, Jason.

Thanks, Jason. Appreciate it.