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

Great. Thanks, everyone, for joining us. I'm Wendy Nicholson from Citi. It's my pleasure to have John Faucher from Colgate here. So thank you very much, John, for joining us. And I thought we could start bigger picture. We're going to get to the issues about commodity and pricing and logistics and all of that. But let's start bigger picture.

I wasn't expecting any commodity questions, I have to say.

Or pricing elasticity. We'll look at there. We'll get there. But I'm kind of more interested to start anyway -- taking a step back and thinking about Noel. He's been in place now, obviously, a long time Colgate guy, but I think 3 years now. And just going back to some of his sort of initial strategies, kind of how he's making his impact felt on the organization. And the topic I wanted to start first with was kind of revenue growth management and premiumization, which is something we hear a lot the RGM side throughout CPG. But for Colgate in particular, where the portfolio has historically actually been more -- not value priced, but more moderately priced, can you just walk through kind of where we are, how much conviction there is now 3 years into the strategy that that's the right strategy? And I know, obviously, we're in a funny time given the commodity environment. Just conceptually, RGM, how important is that and give yourself a grade in terms of the progress the company has made.

Sure. So I think that the key factor is how -- I think we took a look when -- as Noel was ascending to the role and as he took over in 2019, I think the real question was how do we need to act differently to grow, right? So if I go back, it's interesting, I was having a discussion with an investor earlier today, and we're talking about the 2008, 2009 raw material/pricing cycle, right? And how the categories grew and how we grew as a company back then was different, right? You had more consistent emerging markets GDP growth. You had more population growth. You had retail square footage growth. You had emerging markets -- underlying emerging markets inflation on a consistent basis. So as I look back then, your categories were growing 3% to 5%. And the way that companies like Colgate grew 4% to 7%, which was our long-term organic sales target back at that point, was you would execute well and you would gain share in a growing category, right? And I think as you look at now, and it's going to be interesting to see what happens with emerging markets inflation going forward, but let's look at the last sort of 4, 5 years. I think what you're seeing more is a focus from Colgate, and not just us, but other companies, that we really need to be the drivers of that growth, right? So big brands drive big categories. And how can we, as Colgate, not just execute to gain market share in a growing category, but really accelerate that category growth to get to the 3% to 5% long-term organic sales growth target we have now. And so, I think, as you look at it and Noel articulated this at CAGNY back at 2019, it was core innovation, which really is about getting pricing in the core, right? So that kind of goes back to your revenue growth management piece. It's about premium adjacencies. So segments of our categories that are higher priced that are growing faster, whitening being probably the best example. And then you have new channels and markets, right? So those – and faster-growth channels and markets. So those were the 3 priority areas that we talked about. But even then, if you think about e-commerce, which is an opportunity, if you think about pharmacies, which is an opportunity, those tend to be higher-priced channels, right? So if you think about revenue growth management, and we were working on revenue growth management even before that happened, it's really sort of embedded in those strategies in that you have to think about, well, how are we going to get these price points up, okay? Now I will also say there was somewhat of a defensive attitude towards this in that our categories have been premiumizing, but we had not been participating in that, right? So if you look at our value share over that time period, the performance lagged our volume share. And that was because whether it was local competitors like Yunnan Baiyao or some of our multinational competitors, we weren't getting the same level of premiumization. And what we realized is this was despite the fact that we had a situation where we were delivering the best science in the category from that standpoint. And so as we looked at it, we needed to build capabilities to take advantage of our science. And I think that's what you've seen. So revenue growth management, I think we're still early innings. But what I think you'll see is continue to build that capabilities. And I think it's going to continue to deliver price mix for us going forward.

Got it. Let's break it down, just this topic of revenue growth management kind of maybe region by region. I know you called out Latin America specifically. And again, I'm trying to make it bigger picture as opposed to just what's happening today. But I guess Latin America, where your shares are so big, I'm thinking Oral Care specifically, that seems to me that it would give you greater license to be maybe more aggressive on the pricing. I think you've been doing that. Do you see any trade-offs or any risks or do you see any down trading? Do you see other brands maybe saying, "Hey, there's an opportunity to take share because Colgate is being so aggressive on the pricing side?" So let's just talk about Latin America and RGM for a sec.

Yes. I mean so we've given a couple of different examples of this, particularly I think at CAGNY, if you take a look at we highlighted. And then also, I think, at our annual meeting, we highlighted some of the opportunities that we've taken with revenue growth management in Brazil in particular, because that's been one of our best markets. Look, what you have to do is the category leader, so we have over 70% market share in Brazil, we are making decisions what's the best long-term strategy for our business, right? So we have basically 2 big businesses in Brazil. So we have Sorriso, which is our price brand. It's about 15% of the market. And then we have Colgate, which is sort of medium to higher end, which is about 56% of the market, okay? And then separately, we made a big push in pharmacies with elmex and PerioGard. And so what we're doing is we're balancing those 3 separate businesses and saying, how do we focus on growth, right? So what's happened is we have seen some competitors keep price points very low, the very low end of the category, right? So tubes that cost BRL 1, BRL 2, what have you. And so we say, okay, do we -- so that is taking some promotional volume away from Sorriso, okay? How do we respond to that? Well, you know what, we want to keep the profitability of Sorriso healthy. So we may give a little bit of volume share away there. At the same time, what we're doing is we are changing our price pack architecture, particularly in terms of promotional price points, pack sizes, right, maybe we're going for a 2-pack instead of 1 larger tube, something like that. So we have lost a little bit of volume share in Sorriso. We have gained most of that back in Colgate, which is driving premiumization, okay? So less wedded specifically to the market share data points month by month because we've got more to lose, right, if we promote 2 by 2. Now at the same time, what we're doing is we're saying, look, we have this opportunity in pharmacy. Pharmacies did not want Colgate as much in there, right, because it's not a differentiated brand. So we come out with elmex. We bring elmex over from Europe. And I remember having a discussion with one of your competitors, and it's like, well, what should I put in my Brazil model for elmex. It's like, nothing, right? We started off in pharmacies in Rio and Sao Paulo, and we're building it up over time. And it's toothbrushes, mouth rinse, toothpaste. And it's growing. It's growing very rapidly. It's nicely profitable, but we're investing back into the business. And so that is a revenue growth management opportunity that will pay out for years to come as we look to build it. So I think the other key thing to building good revenue growth management capabilities is you have to take a multiyear cycle approach, right? So as we roll this out, the primary focus was 3 years, right? So what are your 3-year plans on revenue growth management? And again, going back to how I started the answer with the core innovation piece, like that's the key piece, right? So core is going to be 60% to 70% of your business. You have to lay out your core innovation because that takes time to put in place. Here's my core innovation for this year. Here's the core innovation for next year and the following year. That gives you a base to start with, and then you innovate in adjacencies and other channels to augment that going forward.

But fair to say, and one thing about Colgate that I think has really distinguished you guys historically is you have really good finger on the pulse of what's happening in your local markets, particularly Brazil, and that's just been a historical strong suit of the company, I think. But particularly now, we're looking at Brazil specifically, potentially a more difficult economic environment for some time to come. So fair to say that while the company is kind of focuses on revenue growth management and premiumization, there's flexibility built into the model so that if you need to remain focused and sensitive to the local environment and if there's increased price sensitivity, at the end of the day, you don't want to sacrifice a lot of market share just for the goal of premiumizing the portfolio.

Correct. It's always going to be a balance. And the balance will shift from month-to-month, quarter-to-quarter, what have you. And emerging markets are -- as I have discussions with investors, it's -- understand emerging markets are, by definition, more volatile. So nothing is going to move in a straight line. I hate to say -- I hate to give this example because sometimes it comes across as heads I win, tails you lose. But when you have an 88, 89 index versus the category, which is what we have on a global basis, right? Brazil is a little different because of our market shares. But obviously, we have a big base business, the Colgate business, what have you. One of the reasons why you take pricing first is that gives you the flexibility to say, okay, this -- we're seeing trade down. How do we deal with that? Do we take some of that pricing and promote it back? Do we focus a little bit more on Sorriso, okay? Do we focus within our Colgate business? Do we focus a little bit more on Triple Action and a little less on Colgate Total? Because the consumer is not a monolith, right? And this kind of goes back to the trade up, right? There's always going to be consumers who are going to trade up even in difficult economic times, and you have to make sure that you have the price points that really run the gamut across the portfolio. And historically, we've been really well represented at that low end, right? So that's the strength. So that goes back to the heads I win thing, which is, well, we have the low end, we under-index. You need to make sure you're doing both. So trade down is good for us from a market share standpoint. But what we need to make sure is that we're still premiumizing with those consumers who still will have the reais, the rupees, what have you, to premiumize. And that's where I think we're slightly differently positioned now versus 5 years ago.

Fair enough. Fair enough. And all of that makes great sense, particularly in a market like Brazil where per capita consumption is so high. In fact, I think per capita consumption in Brazil in toothpaste is higher than it is in the U.S. But what about in markets like a China or an India, where per capita consumption is still very low? How do you balance the opportunity to really help grow the category and maybe that means selling a tooth powder or a low-priced product just to get people to come into the category?

Yes. So it's a great question. In India, a lot of the volume in the category still is in INR 10 tubes, which have gotten smaller over time, as that's part of revenue growth management as well, right? So -- you cover Frito-Lay, you know how that works, right? The price stays the same as the bag gets bigger, and then all of a sudden, the bag gets -- the price stays the same as the bag gets smaller, right? And then the bag gets bigger, and you start the whole process over again. So we have to manage entry-level price points to keep people in the category. I mean, look, this is a -- it's a public health product as well, right? I mean so you want people to join. So yes, we have -- we have sachets that we sell in certain markets for $0.05 that we can make a margin on, right? And some of that comes from the efficiency of having a global supply chain where we can make this stuff really cheap. And so we have a long history of not -- teaching people how to brush their teeth through Bright Smiles, Bright Futures, giving them toothbrushes and toothpaste, but then providing them with an entry-level price point. So again, in most markets -- I mean, again, in China and India, our products are really at those entry-level price points. The problem has been the premiumization. The key thing is in an inflationary environment, balancing the pricing that you're getting so you're not -- as it goes up by keeping those entry-level price points you're not hurting your margins dramatically. So that's where funding the growth will show up. That's where -- again, sort of looking at formulas, all these other factors, you make it so that is affordable yet still good margin for the company. But yes, you'll probably have to do a little bit more pricing than the rest of the portfolio so that you're keeping household penetration at similar levels.

Got it. Got it. And just thinking about those emerging markets kind of more broadly, but again, staying on Oral Care, I mean over the last decade, part of the story has been this increased level of local competition, whether it's Patanjali or Yunnan Baiyao or Splat or whatnot. Can you give us kind of a lay of the land from a competitive perspective? And again, I care less about sort of the most recent market share data. And just kind of high level, do you think Colgate is regaining its momentum in some of those markets? Or what's the dynamic with the local brands?

Yes. I think it goes back to, again, sort of the answer to your first question, right, which is as we think about how we grow differently, we become significantly more competitive with these local players, right? So an example I would give you in the U.S. is 5, 6 years ago, if you would have said people would be clamoring to pay $12 in Target for a stick of deodorant, right? You'd be like, well, no, that doesn't make sense. You can buy stuff for $5 that's just as good, if not better. But somebody has, for lack of better term, the audacity to say, okay, we're going to come out with this product in this category with this price point, okay? We're going to come out with this ayurvedic product or this natural product, what have you. And what you realize is, okay, none of this is monolithic. Every country is different, and you have to respond to these local competitors differently. So I think one of our first advantages in terms of dealing with this is the fact that, as you well know, we keep the management of the business in the markets. Some of the innovation is done at the hub level or the division level. So we need to make sure that we can respond to Russia for Russia, China for China, India for India, Brazil for Brazil, in order to make that work. Secondly, we need to get some of that audacity, right? We need to say, okay, we're going to launch this product, and we're going to try it. And most importantly, you've seen that, that concept can work, right? You've seen that ayurvedic toothpaste can work. So when we launched Vedshakti, understand, okay, if it's not working, it's not because the concept isn't working, it's because we need to make a change. And Vedshakti has worked, right? But you can iterate with the formula. You can say, okay, as what we've seen in India is Dabur is actually doing better than Patanjali. But why is Dabur doing better, okay? It's in the south, the flavor profile is different, what have you. And so we need to be agile, as the overused corporate speak, that people would talk about, but you need to be agile and iterative as you deal with these companies, right? It's not here's this year's Colgate Total line extension, go out and launch it. It's okay how are we tackling this opportunity. And what's great about that is as a marketer, right, that's what you want. You want the ability to look at the problem and go after it. And then for our R&D people doing what we call Horizon 2, Horizon 3, breakthrough and transformational innovation, it's a lot more exciting. Some people are going to love working on the next Colgate Total line extension, and we still have people doing that. But somebody else wants to figure out, okay, what's the future of toothpaste and how do we do that. So it helps energize the whole organization behind those opportunities. And that's why we're doing better in these local markets.

Fair enough. If we're heading into a more difficult currency environment, who knows, but potentially, I mean, we've gone from currency being a tailwind down to a headwind. How do you think about the company's plan to offset currency headwinds or local inflation with pricing? And the reason I ask is I feel like I don't know 10 years ago, 15 years ago, when you were still on my side, I mean, it was pretty much lockstep. If the real devalued 30%, Colgate would raise prices by 30%. But we've seen less of a correlation or less aggressive response, if you will, to currency movements. The question is, are you doing that to insulate market shares? And what's the strategy today with regard to currency?

Yes. I think the strategy is consistent. I think part of it is it's just happening -- it's been happening sort of year after year after year, right? It's the persistence of those moves. So the strategy behind dealing with foreign exchange is you don't price for translation, okay? That's just not going to happen because translational is just us, right? U.S.-based multinational, we have the translational impact. What happens with transactional, right, so the movement in dollar-based commodities in local currencies, is we price for the move, absolute move in that currency, right? So if we have, making this number up, BRL 100 million worth of resin that we buy and the real devalues 20%, we now have BRL 120 million worth of resin because we buy resin in dollars. So we price for the BRL 20 million, okay? We don't price for the BRL 20 million at the gross margin level, in which case you would have to -- if you said, okay, we have a 50% gross margin, made-up number, you would have to price BRL 40 million to offset that at the gross margin. So that's the plan. As Bina would have talked about the playbook, that is the playbook that we had in place, and that's still the playbook in place. What complicates it right now is simply the fact that you're putting that on top of what is the underlying raw material inflation. So I would argue, and I've said this a lot, translational foreign exchange impacts are probably a slight disadvantage for us. Because to your point, that resin move as a percentage of our revenues -- we've got a bigger gross margin, so by not pricing to cover gross margin we have more that we need to cover with [ productivity. ] Now conversely, when you look at the impact from raw materials, right, so if I'm running a local business, right, raw materials are a much bigger percentage of my revenues, so -- and I'm running with a lower operating margin, right? So the hit to my operating profit from a percentage standpoint of these types of raw material moves is greater. And so I think that helps us. So I'm not quite answering your question because at the end of the day, if you're running the Brazil P&L in Brazil, right, you're like, okay, here's my raw material inflation number for next year, some of this is regular raw material, some of this is transactional. You can't split it back finally when you're talking order of magnitude. Again, I think the advantage we have this year is our competitors, their raw material inflation is just as bad, if not worse, and it is worse as a percentage of sales. So everyone is kind of under the same level of pressure. But yes, foreign exchange, we talked about this on the Q3 call -- we said it was going to be negative for Q4. It's something people need to keep an eye on.

Yes, yes. And so just getting to that question of inflation, and I guess, specifically, the elasticity that maybe you're seeing, and I know you commented on it a lot, but any update, any new ways to think about it, just even for the next couple of quarters, as we think about our numbers?

Nothing so far, right? I mean you take pricing, you're going to see an impact. I don't think there's any question about that. As I've discussed this with other companies, I think one of the things you think about is, okay, and one of the things that's different versus, again, let's say, the transactional pricing that we talked about is entire baskets are going to be moving up, right? So we all have elasticity models, and we can all predict here's what's going to happen. And I don't think we're seeing anything that's different than what our models would say, but our models aren't -- it kind of goes back to if you go back to long-term capital management, right? It's okay, if everything moves in the same direction, how accurate are the models. And so that's -- we're watching that. We're watching the consumer to see how the consumer is stressed. Chicken wings are up, whatever percentage they are, right? The entire basket is up. So we need to be there. And honestly, that's why you take the pricing early and then you can adapt, right? Because these are mostly structural moves in the raw materials, right? Oil is not going back to where it was during COVID. Tallow, palm oil, palm kernel, soybean oil, they've moved up structurally. Some of that is biodiesel, some of that is increased demand. So we need to price for those. You take the pricing when you need it, and then if you need to deal some of that back to balance market share, penetration, profitability, you've given yourselves the flexibility to do that.

And do you -- are you starting to see or would you anticipate any greater degree of elasticity? I mean, a lot of people use Colgate because their dentist told them to or their mother told them to. But do you expect to see any more elasticity within your portfolio? And I -- let's put Hill's aside for 1 min, let's come to Hill's next, but within the deodorant, detergent, fabric softener, oral care side, any of those particular categories are you more worried about, vis-a-vis elasticity?

In -- I mean, deodorant is a very small piece of our business for one, but I think you talk to anybody with a deodorant business, and they've been surprised how discretionary deodorants has become over the past 18 months. I'm sure a lot of spouses are surprised about how discretionary deodorant has become over the last...

Maybe it makes a difference if you're working at home.

Exactly. Which is -- which in some ways is actually worse from that standpoint. But I don't mind not wearing deodorant around my spouse as opposed to at the office. Not necessarily. I mean, look, I think, again, going back to this -- there's a difference between the high end and the low end, right? And so what's going to be -- we're not seeing anything sort of impacting the high end, right? So if you think about skin or if you think about Hill's or anything else, I'm not sure we're going to see a huge impact because premiumization continues to be the issue. I think we have to watch -- I mean, the beauty of our categories and particularly toothpaste is just the sheer range of price points, right? I mean you can buy the toothpaste in the U.S. anywhere from $0.50 up to $10, right? We have price points in the U.K. anywhere from GBP 0.50 up to GBP 20, okay? Now chances are you're going to buy that at GBP 10 because it's a high-low market. But we -- if you've got the gamut of those price points, you should be able to keep people in the category, particularly in developed markets, as we talked about with markets like India, et cetera, that can be a little bit more complicated, but we're going to keep an eye on it.

And just getting to Hill's specifically, I mean that's an area where you really only do play at the high end. I would imagine there's more whatever loyalty because if you're buying the food for your pet because the vet told you to or there's a specific regimen and it's for liver disease or whatever it is. I would imagine there's less risk of trading down, but can you talk about Hill's specifically? I would imagine that's 1 area where you're seeing the most inflation frankly.

Yes. I mean if you take a look at -- I was reading a food -- a sell-side food inflation note this morning, and just the sheer order of magnitude of food inflation, right, whether it's proteins, what have you. So that's definitely having an impact. What I think we're seeing -- I get a lot of questions, well, COVID benefiting Hill's, all these other things. And there are a couple of trends that are benefiting Hill's. I don't think there's any question. But what we have done at Hill's over the last 4 or 5 years is really sort of -- we planted our flag and really leaned into what makes Hill's strong as a brand, and that has worked incredibly well. So -- I was the lead analyst on the Blue Buffalo IPO, right? So I saw the impact of organics and naturals on the category, and you saw the impact as an analyst covering Colgate on Hill's, right? So Hill's tried to do organic and naturals, but it wasn't true to the brand, right? If it says science in the name, it's tough to do organic and naturals. So what we did is we really doubled down on science and -- but on biology, right? So Hill's works with your pet's biology for better health outcomes, right? And right as we did that, the pendulum, I think with health to some extent, began to swing away from organics and naturals and back towards science. And that's great news for the vets, because the vets want to recommend science-based brands. But when everyone is looking at Google and looking at other websites, what have you, there's a sense of, "Okay, my dog needs to eat something. I'm doing an all-protein diet. My dog needs to do an all-protein diet." I think the pendulum has swung back, but Hill's was incredibly well-positioned there. I think the pendulum continues to swing towards e-commerce, where obviously, we took some steps back in 2016 and 2017 that hurt our business with some of our pet specialty retailers, but positioned us very well when the category continued to move into e-commerce. And those retailers moved more aggressively into e-commerce. So that left us well-positioned. And then finally, and this kind of gets back to the premiumization angle, we've seen a bit of a -- I don't want to be too dramatic, a hollowing out of the middle of the Nielsen-tracked channel pet food market in the U.S., right? So you're seeing the big premium competitor in grocery gain share, grocery and mass. But you're also seeing consumers move, whether it's in pet specialty stores or on their websites or on Amazon or on chewy, that same movement into premiumization, right? And for the high end, there's no reason why e-commerce can't be the mass -- the new mass of pets. And so given our digital focus, given those efforts we've made, we're well-positioned. So we'll see what happens. I mean consumers seemed -- it's the humanization of pets, it sort of continued with this premiumization. And again, Blue Buffalo saw this 10 years ago. I think we're well positioned. And we also have the situation that the U.S. is our best market with sort of low to mid-single-digit retail market share. So we have the ability to gain share even if category growth slows a little bit and there's less premiumization. Then outside the U.S., our market shares are even lower, the opportunity there could be even bigger longer term.

And remind me how much is Science Diet versus Prescription Diet? And is the Science Diet growing faster than Prescription Diet today?

So Science Diet -- I would say they're probably pretty even. And yes, Science Diet, the retail business is growing faster than the prescription business. And some of that's a factor of the market shares, right? So there's only a couple of companies that do prescription pet food on a large-scale basis, while there's obviously hundreds, if not thousands, of companies doing pet food. So yes, our market shares are much higher than 5% in the prescription pet food business.

Yes. And isn't Prescription a higher margin business for you than Science just because it's more specialized? So is there any meaningful thing we should think about in terms of the impact on that margin -- on the overall health margin to the extent Science Diet continues to grow as a piece of the mix?

Not in the context of the raw material inflation that we're dealing and bringing support, right? So could there be a little bit of negative gross margin mix shift within the Hill's P&L? Maybe. But given what we give you to map it out where from a modeling standpoint it's just net sales operating profit between the increased advertising, the raw material inflation, the operating leverage, I think that would be a little tough to suss out because Prescription Diet is growing, just not quite as fast as Science Diet, right?

Fair enough. Okay. you raised the concept of e-commerce and how that's been particularly important and successful and a growth driver for Hill's. The -- going back to where we originally started with Noel's strategies, 1 of them was to sort of strengthen the channels where maybe you weren't doing as well. And again, I'm thinking more on the core non-health side of the business. Can you talk about why your market shares have responded so well? Is it investment spending? Is there a pricing gap? You keep talking about market shares being better on nontracked channels than tracked channels. Why is that? And what do you need to do to fix the market shares in the track channels?

Sure. So -- our relative market share is online versus offline. It's going to be very much market by market depending on the business model, right? So if you look at sort of pure-play markets, like the U.S., China, right, what we saw was smaller brands with distribution opportunities and big market share, sort of incumbent market shares in those channels, right? And the best example I can give you from our portfolio is Tom's, right? actually, you can find Tom's of Maine in every Walmart, okay? But you may not find Tom's of Maine strawberry, fluoride-free kid's toothpaste in every Walmart, right? So the opportunity is the initial adopters of e-commerce went to Amazon. Those were the types of brands they were finding. They were finding charcoal toothpaste. They were finding smaller brands like these local players that we talked about earlier. And those were particularly well-suited for pure-play markets. If you looked at Europe, for example, where you have more of a click-and-collect type of model, whether it's Tesco, Leclerc, what have you, what we saw was the brands that we're selling in the store were basically the brands that were available online. So you didn't have that disconnect of the smaller brands. So our market shares, let's say, in Europe, are basically in line, online versus offline. So -- and then you take a look at countries in emerging markets, let's say, aside from China and India, and what you would say is Latin America e-commerce is so nascent, what have you, that I feel good -- really good about our market shares there, but it's such a small piece of the business. So there was a structural situation really for all multinationals. And what happened was as multinationals began to go after this opportunity in e-commerce, in these pure-play environments, we learned the rules of the game, right? So these smaller companies understood search earlier. They understood having e-commerce first packaging earlier than we did. They understood which were the right words that you need to use to win in search, not just paying for search, but winning in search. Now what happens is they have that head start. And then companies adapt. We bring in -- we teach our people, we bring in new people who are experts on e-commerce, and they teach the rest of our people here's how we're going after search. At the end of the day, search is like advertising. It's a scale advantage, right? So if you take a look now, if you type in toothpaste on Amazon, and you take a look now at what's on the first page, it's going to be predominantly Colgate, Crest, Sensodyne, maybe some ARM & HAMMER when it used to be all sorts of charcoal and smaller brands. So we figured out how to use that ecosystem to our advantage. And then a great example I would give you is Hill's, right? So as part of the Hill's Science Diet relaunch, we redid the packaging, okay? And the packaging is one of the best things we've done at the company since I've been here. And that was despite the fact that certain members of senior management were like, "I'm not sure this is going to work." But it was designed e-commerce first, right? So when you put it on as an icon on Amazon, on chewy, what have you, it really pops, okay? Now it also works on shop. So you have to do both, right? So when you go through and change how you do your processes to keep digital, right? So it's not just e-com, it's digital first because that encompasses advertising, go-to-market, all these other factors. It really changes how you think and really lessens the competitive advantage in some of these smaller areas, which then allows you as a company to use your big competitive advantages in terms of supply chain, customization, scale, and advertising, et cetera, to win market share innovation, right? We can -- for a smaller company, you come up with 1 great new product that helps you gain market share. Well, then you got to do that again the next year. And that's tough. And so we've had to get better at that. But as we do that, that allows us to continue to gain share. And now we're gaining share in the vast majority of our e-commerce markets.

And at the end of the day, if the nontracked channels are growing faster and you're gaining share there, at the end of the day, that's going to be what drives your growth. So it's really probably more the investment community than anything else that cares about your tracked channel market share performance?

I mean, look, the investment community has told us they care about the tracked channel performance and we need to do better there. And look, that's the -- the answer is you want to be doing well everywhere, right? So the initial part of the strategy, as we talked about, was faster growth channels and markets may receive a big share of the support because in the U.S., for example, 80% of the category volume shows up in Nielsen, but that's only 50% of the growth. But we need to do better in both. And -- but understanding that at the end of the day, it's organic sales and net sales that's going to drive the P&L and the stock price. So you got to get the balance right between market share and growth.

For sure. And when you think about the role of innovation, I mean Hill's in particular, not just the packaging, which has been awesome, but the innovation has also been really strong. And it feels like there have been pockets of innovation across the portfolio. One area, one segment that just still seems to be elusive, and correct me if I'm wrong, for maybe out of date, but it still seems like the sensitive area in oral care or toothpaste is still a little bit of a challenge. At some point, you just say, "Hey, Glaxo, you can have it." Or is that still -- because I know historically, and I think it was at CAGNY a couple of years ago, Noel talked about how sensitive just from a demographic perspective and the aging consumer and that's an important segment. But what is the update in terms of Colgate's approach towards the sensitive segment?

Yes. So I mean we are still going after sensitivity as a segment. We have great products. Colgate Sensitive Pro-Relief is -- has the best technology. That's only available outside the U.S. Although arginine, which is in that formula, is also in Tom's, the Tom's product. So that's a very good product as well. So we need to tackle it in a different way, right? Again, one of the big changes over the last couple of years, and we alluded to this when I was discussing Brazil, is not every -- we don't just have a hammer, right? So we don't just have Colgate. So we have a hammer, we have a wrench, we have pliers, we have screwdrivers, what have you. We can use lots of different tools to deliver on this. So at some places, it's going to be elmex. Some places it's going to be Colgate. Maybe some places it could be Tom's or hello, right? And I'm just -- and that's not just sensitivity, that's sort of every issue we have. Meridol, for example, is a great gum offering that we can use to go after gums in a number of markets. But again, in some places, it's going to be Colgate. So I think we can use our existing brands and then we can use innovation to go after these target areas. So that's one answer to your question. So I think we will continue to work at that segment, what have you. The other thing I would say, though, is we are the category leader, right? We can also be more effective. And again, this kind of goes back to what I said before, at growing our segments, right? So we have the best science in whitening with our hydrogen peroxide formulas, right? We should be bigger in whitening, and whitening should be a bigger segment. We have to go into each market and figure out how to grow whitening because, for example, in Russia, the concept of whitening is that it needs to be safe, right? So in the U.S., you're like, okay, let's put as much hydrogen peroxide and -- not exactly how it works, but we'll put more hydrogen peroxide in the formula and people say, "Okay, I understand, if that works I like the higher hydrogen peroxide." In a market like Russia, there's more trepidation about that. But we have that local knowledge, we can innovate locally and drive our own segments. Freshness is one. At the end of the day, the #1 reason why people use toothpaste is for fresh breath, right? So freshness is a segment I'm always evangelizing internally about that we can grow our freshness business faster. So it's not just about attacking those competitive opportunities. It's also saying we need to be on the front foot and grow the segments where we know we have the opportunity and really the right to grow.

Got it. When you kind of pull it all together, when you think about sort of the margin, again, when I go back and I think about sort of what makes Colgate, Colgate. Historically, it was this religious maniacal focus on gross margin. But it's always been kind of on that virtuous flywheel of generating gross margin expansion to fund reinvestment and still be able to expand your operating margins. And I'm just kind of curious as you think about kind of where we are today. I mean gross margins, and again, it's so hard to separate just what's going on in the market today. But just kind of high level on gross margins, is there still a day out there where we get to a 65% gross margin? Or is that so far down the path, or hey, that's just not really as much as -- focus is more on the top line than it is on profit margins?

You have to deliver both longer term, right? The shape of the P&L for most consumer packaged goods companies is that in order to make your algorithm work, right, it's going to be -- the gross profit growth needs to be bigger than the revenue growth and the operating profit growth needs to be bigger than most likely at least the revenue growth, if not the gross profit growth. And then the earnings growth needs to be bigger than that, right? So that's the general shape of the P&L. I would say there is a difference, right, as you look at the willingness to grow in different areas. This kind of goes back to your question on Hill's, right, which is if we can grow Hill's gross profit dollars to invest back in the business, right, we should do that, right? So you shouldn't say, well, we're worried about driving Science Diet faster than Prescription Diet because the impact on gross margin. Okay, let's focus on driving organic sales growth, and then driving net sales growth, meaning we have to grow sales in dollars, which will help us drive gross profit growth in dollars to fund investment. Now again, over time, the gross margin has to grow, right? We've seen this again in consumer staples where relying on the SG&A, just the SG&A to offset gross margin deterioration, it creates tension in the P&L to put it mildly. And I think if you focus on gross profit dollars, driven by gross margin expansion, okay, as opposed to just gross margin expansion, that allows you to invest in a brand -- maybe of a brand, again, that has below corporate average gross margins. But if I can grow revenue 7% on that brand and get a little bit of gross margin expansion on that brand, maybe I'm growing gross profit 9%, which allows me to invest in toothpaste, what have you. So I think we're a little bit more holistic, for lack of a better term about that. But the target still has to be gross margin going up longer term. So we don't have that 65% target that we had in the past, and a year like 2021 shows why. But given the levers we have, whether it's the innovation, revenue growth management, a return to inflation in emerging markets, what have you, I think that makes us feel comfortable that the visibility on that long-term gross margin trajectory is still pretty positive. And again, we under-index in price in pet relative to peers. We definitely under-index in toothpaste, right, where it's sort of an 89, 90 on a global basis versus the category. That gives us -- and we have an incredibly efficient supply chain that gives us a lot of opportunity going forward.

And if you look at North America, specifically on the margin front, and again, it's just so kind of funny because, obviously -- the question I want to ask is has the erosion in your North America margins been worth it because you've accelerated your top line. But last year was so wonky because you had the COVID benefit, liquid soap and all of that, but again, if you can kind of just tease out the, hey, you made a specific investment in North America behind innovation and distribution and all of these things, and it's worked, I think, your market share is -- they've been spotty, but some of them are better. Has the trade-off been worth it? Because you've seen quite a bit of margin compression.

Yes. So some of that margin compression -- I mean, there's some structural aspects that are industry-wide, right? So logistics, logistics has moved up dramatically. You can see that in our K, right? We don't report logistics on a quarterly basis. You can see that in our K, and I will say that the North America margin hit from logistics has been higher than the rest of the world, right? So that's been a piece. I would also argue that over the last 5 or 6 years since you saw that margin peak, North America has become a little bit more of a growth market within our categories, right? If you go back to -- and I talked about this a lot -- if you go back to the first half of 2017, I don't know if you remember, but all of a sudden, the categories all fell off. And it was, okay, is North America going to be like Europe. And since then, the market has been very robust. So I think the level of competition is higher, which has necessitated a little bit more investment from us as you talked about making those choices to get back in. And then we did see an impact last year from a margin standpoint in terms of the impact of liquid hand soap and dish in some of those categories. So what I would say is probably the margin in the past was not necessarily the right margin given the level of investment. But I would argue the margin now is not necessarily the right level of margin either. I think North America can and will be a growth and margin market for us going forward. And some of that will be some onetime things that happened this year. But I think structurally, we are in a situation where we can get margins up there over time with the right level of investment. So again, sustainable profitable growth, but North America should be a lead for us going forward, and we're putting plans in place to address that.

Got it. Really, my kind of, I think, last question is the potential -- is kind of related to margins, but more than anything, it's sort of category diversification, and it gets back to the skincare acquisitions, which I know we're off to a great start, and COVID kind of messed with the trajectory. But I guess a couple of questions. How are they doing now? How are they doing today? I know you're expanding into some new markets. How is that going? And we've seen a lot of other acquisitions, not just the most recent 2 by Procter, but it's just a crowded space, a lot of new brands in skincare. What's your appetite today for more acquisitions adding to that segment? Does Colgate become a bigger prestige skincare player over the next few years, kind of just update us there?

Sure. So I think our view on skin health, as we got into it, was we were looking for brands. And this was actually sort of an outflow of our previous strategic plan relative to Sanex, right, where we looked at the ability to take sort of skin health type positioning, which was differentiated from a brand standpoint, from a channel standpoint. And we saw it as an opportunity for growth within our Personal Care business. And so when you look at the assets we bought, whether it was Elta, which is strong with derms; PCA, which is strong with estheticians; or Filorga, which was strong in pharmacies, we thought about differentiated -- those differentiated channels and also health backgrounds. Filorga started off as a filler business. So it was a derm brand when it initially started. So I think we looked at that and said, okay, this is not sort of base mass skincare that we're going into, which, to your point, is an incredibly crowded field. We felt like we had some differentiated brands and channels. And that's still the case. And we would look at assets that could still fit that bill. To your point, the space is crowded, there's a lot of money chasing after few opportunities. I think COVID kind of put a little bit of a slowdown in terms of people getting deals done, and you've seen disruption in the channels in some of these markets, right? So the pharmacy channel in Europe has been disrupted by mobility lockdowns in markets like France and Italy. You've seen travel retail get negatively impacted. You've heard that from everybody in terms of Hainan. So that's had an impact. So I think there's still some dust settling in all of this. Our overall M&A strategy, and I recently took over responsibility for M&A at the company. And so that hasn't changed, right, which is we are going to be opportunistic where we see an opportunity, most likely to add growth, but also something where we're bringing something to the table. I think that's the key thing, right? So it's easy to get distracted by shiny growth object -- shiny objects. But we need to make sure is, okay, what is this bringing to help us and what are we bringing that's value-add to this asset. So I think we can afford to be patient. We don't have acquisitions built into our strategic plan. So if we see an opportunity at the right price, we'll go for it. I would also argue, and we talked about this very consistently, the best ROIC opportunities that we see are to invest back into our business, right? So our CapEx is going up this year, and that's predominantly to invest back in capacity, right? So our business is growing again, we can invest in capacity. We're also investing in sustainability, right? The plastic -- for the recyclable tube, we need to replace every single one of our tube-making machines, and we're the largest toothpaste tube maker in the world. So we see good opportunities to deliver growth by investing back into our business that's still going to be the #1 priority.

Well, it's so exciting that you've got that new responsibility. I can't -- I'm sure you'll be busy, and I can't wait to see what assets you find. But on that note, John, thank you so much for chatting with me, and this has been hugely informative. So thank you. Thank you so much. And if I don't see you before the holidays, happy holidays.

Thanks, Wendy. So great talking to you, and let's start to do this in person at some point.

Look forward to it. Bye.

Okay. Bye.