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

All right. So thanks, everybody. Welcome back. For our next session, I am thrilled to welcome back to the conference the Colgate-Palmolive Company. With us today are Chairman, President and Chief Executive Officer, Noel Wallace. And also, I'm sure many of you have seen around the conference, Chief Investor Relations Officer and Executive Vice President of Mergers and Acquisitions, John Faucher. For today's session, I'm going to basically have a chat with Noel. We're going to run through as much as we can in the next 38 minutes or so. And again, thanks for joining us.

Pleasure to be here.

Okay. So 5 years ago, you implemented a growth strategy at Colgate when you became CEO. I think there was some -- from the market's perspective, there were some ups and downs and some -- it took some time for the investors to kind of buy into that strategy. I think they do now. I think it's pretty widely viewed as a success. What do you think, looking back, were the critical building blocks? And how confident are you from where you stand today that we can continue that momentum?

Yes. I think one of the key aspects of the turnaround for us was really getting the growth mindset back in the company, and that's been a historical differentiator for us. And it was really about how do we build sustainable compounding growth year after year. And that required us to make a lot of changes to the strategy in terms of what we thought were the growth enablers and the things that we could really compete and grow against, and what were the capabilities that we need to build as an organization. There were three aspects to the strategy that were fundamental was how do we get the core business growing again. We have really strong core businesses, household penetration around the world in terms of our big franchises. We need to expand into adjacencies with the strength of our equities. And a big piece was channels and thinking about what was the right portfolio strategy for our channel expansion around the world. Everyone was focused on market shares, obviously, but we oriented the organization around brand penetration. That's ultimately the most important metric, in my view, for a CPG company is are you getting your brands into more households? You can fluctuate market shares quarter-to-quarter based on promotional cadence, et cetera, but the health of a business is determined by the brand penetration. So getting the company to think about that differently was very important to us. Inherent to that was, okay, we've got these incredible brands, how do we invest behind the growth catalyst for the company. We picked categories and country combinations that were going to be much more oriented towards growth. We put the investment behind those and we saw a return on that investment. We built capabilities that were both short-term oriented and long-term oriented. We restructured the company around organizational design, which was very important to unlock the opportunities that we saw in growth for the company. And ultimately, we've seen that play out. Now we've had a lot of volatility over the last 5 years, but I think we stuck true to the strategy from the center. COVID, we didn't change the strategy. Hyperinflation in our categories, we didn't change the strategy. We continue to reinvest behind things that we believe will drive long-term sustainable growth.

Great. And the results, I would say, the last several quarters have been very consistent profit and EPS growth. Arguably, some of that's due to the diminishing volatility, but we're still going through plenty of volatility. So what would you say has been the keys to that inflection?

I think the strength of the brands. Obviously, we've seen brand penetration growing across the investment choices that we've made. We've made deliberate choices in growth categories, whether it's Oral Care, Pet Nutrition, our skin health business as well. That investment is driving that brand penetration. But the capabilities that we put in place, the digital transformation, the tech platforms that we brought in the company to work more efficiently, optimizing our supply chain, particularly in Pet Nutrition where we didn't have the capacity, buying capacity rather than building capacity. We made important choices that we believe are setting us up for sustained profit growth moving forward. We obviously have very strong brands, and a lot of that advertising investment that we put behind the brands allowed us to take pricing, particularly in emerging markets. Our emerging market footprint is very, very strong. We took that pricing early, and we've seen volume come back very quickly in those categories as we expected. And that's been -- that's translated into obviously more monetization through the P&L. The third aspect, I would say that is really important is we set ourselves up to drive more flexibility in the middle of our P&L. We needed to have a flexibility in order to make the choices that we needed to have, whether it was increased investment, growing gross margins, improving operating margin percent in dollars and all of that seems to have come together quite nicely. And then the third would be, obviously, strengthening our balance sheet, continuing to pay down debt and driving cash generation, which has allowed us to be much more flexible in how we deploy our cash around the world.

Yes. Great. And you mentioned improved volumes. That's lots of eyes on volumetric trajectory, better than peer volume growth coming out of the first quarter. Question number one, do you think you can deliver on consistent and improved volume growth from here? And number two, do you handicap any risk for more price investment sort of broadly, there's a lot of concern around the health of the consumer and how that plays out competitively?

Yes. Implicit in our guidance has been improved volume growth. But I was talking with some investors earlier today on how we are very focused at Colgate on building balanced price and volume. We can't just have everything shift back to volume because the price moves through the P&L gives us the gross margin expansion, allows us to continue to operate -- excuse me, invest behind the business through increased advertising support. The good news is we've seen volume come back quite nicely in our categories and in our brands. Our volume shares are up pretty systematically around the world. That, again, I think, underscores the strategy of increased investment. Good innovation is helping to shore up the strength of our brands and we're seeing that play through. The environment around the world around promotions, which, I guess, inherent to that question probably is that it's been very constructive. North America has been the real discussion point. We've seen promotions stay pretty much consistent with where they were historically. Our -- remind the audience, our brands are nondiscretionary. People will continue to brush their teeth. And so you're not going to see huge drop off in volumes because of the pricing we've taken. We've seen promotional pantries come down -- promotional levels in the pantry come down, but people are still, by and large, brushing their teeth at similar levels to historical. So we see volume being constructive. We see the promotional environment being constructive, and we'll watch that very carefully. We're looking at the elasticities that seem to be in line with what we historically expected. Western Europe is a great example. I've been working with that business this week, and volumes have come back really nicely in Western Europe despite a lot of pricing that was taken in those categories.

Great. The other push you made beyond sort of pure pricing has been a push towards premiumization. Inherent in the growth mindset strategy was a push towards premiumization. When investors think about the path towards premiumization, how does that show up in the P&L, number one? And then how do you view the today's balance between value and more premium offerings in the portfolio? Is it where it needs to be? Or is there more work to be done?

So if I go back to the core strategy, core adjacency channels, we needed to do a lot more work on relaunching our big core businesses around the world. We've been too fixated on line extensions. Those weren't driving incremental value, incremental price or incremental volume for the categories. Getting the core businesses relaunched, bringing science back into those core businesses allowed us to relaunch them and take pricing. So if you take our toothpaste portfolio globally worldwide, we compete today at around 92 index to the category. We would like to be at 100. So there's still head space to continue to move that. But to do that, we need to take our big core businesses, which are the main part of the market, we need to take those up in price. Second, we need to have a strategy that says, how do we go after the need stages that are growing, the therapeutic need stage. And the big change in the company's strategy was say, we're no longer going to operate by looking at the business locally. We're going to develop a 5-year strategy, which is finishing off right now. We're now in the midst of putting our 2030 strategy together that says these are the need states that we want to grow, and we're going to develop the R&D innovation and the go-to-market strategy to build those need states over the next 5 years, which we've done through 2025 and now we're going through 2030. Those are all premium need states. And so those allow us to take that index from 92 hopefully over time to continue to inch that up. The second big part of the strategy change was saying despite Colgate being the highest penetrated brand in the world, we have other vehicles at our disposal to grow the premium therapeutic side of the business. And if you take closer to home here in Europe, we own the elmex and meridol brands. Those are significant premium therapeutic brands and those are our fastest-growing brands in Europe. Elmex is up 200 basis points in market share since 2020. That reflects a change in strategy to say we're going to focus not only on the Colgate side, but on the premium therapeutic side and split the money much more balanced between the two equities. Historically, it was just Colgate. And taking those brands and rolling them out to certain markets around the world where the channel strategy is conducive.

Okay. And presumably, as we look forward in that 2030 strategy, that process continues.

Yes.

Okay. Let's sort of go a little bit around the world -- around the world of Colgate from a segment perspective. And we'll start across the emerging markets because geographically speaking, that has clearly been the strongest source of organic sales growth. And it led, in terms of where you saw that strategy take root, from my perspective anyway, you saw it first in emerging markets and then developed market, seconds. What do you see that's driving the strength? And how would you differentiate across key geographies as you think about the path forward?

Yes. If I focus specifically on emerging markets, I mean, we compete in advantaged positions in emerging markets. We have really strong market shares, extremely high brand loyalty to our brands and we have a go-to-market structure in terms of our distribution base that's very, very competitive in the markets. The increased investment strategy that we put behind the company has built the strength of those brands. Moving into adjacencies, given the strong equities that we have, have allowed us to premiumize and drive more incremental volume to the categories. But I come back to the core of the strategy, which is what are the need states that we believe we need to continue to drive in those markets to premiumize the market? So if we have a 80% share in Mexico in toothpaste, how do we then drive more trade up in that market with a balanced strategy to drive more per capita consumption and more household penetration. And I think that discipline behind that strategy is allowing us to develop more sustained growth rather than episodic growth in those markets. And the strength of the brands is obviously something that our emerging markets are very characteristic to have.

Okay. So despite that broad strength, there's been a lot of more ups and down performance and arguably disappointing performance for a lot of companies in China. How specifically is Colgate now positioned versus competition in China? And how do you see the path forward in that market?

We're very cautious on China. It's not a significant part of our business. We're going to be very thoughtful on our investment strategy in China moving forward. As you know, back 3 or 4 years ago, I talked about really zero based in our entire Colgate strategy in China. We reoriented the business towards the premium, more profitable side of the business, which was online and e-commerce. China has the highest penetration of online users in the world. It's about 35% of the toothpaste category, where it's about 4% to 5% everywhere else. So it's very developed, but the cost of doing business is quite high there. But we reoriented our portfolio from the value side of the business to the premium side of the business and focused it online. And that has completely shifted the entire profitability and economics of our P&L in China. So we're in a very good place, and we're growing that business quite well. The second part of our business in China is our Hawley & Hazel joint venture. That business competes very much in the rural and B, C and D cities. That part of the country is going through a lot of change relative to consumption. We've taken some pricing that we had to really adjust. We're now thinking on the same strategy we have on Colgate, not necessarily the online piece, but how to adjust the go-to-market strategy in China on the Hawley & Hazel business to really develop the foothold of where we think the market is going to evolve to. So cautious on China. The Hawley & Hazel business will improve as we go through the back half of this year and the Colgate business continues to perform quite well.

Well, well positioned, and that's -- China is -- we'll come back to this in a second, but China has been -- despite the challenges there, you've put a lot of investment into technology. You mentioned e-commerce and advertising, so we'll come back to that in a second. First, kind of pivoting to the developed markets. North America has been on a much better trajectory certainly versus where we were a year ago. But it's still not growing as fast as maybe it could be or as fast as the rest of the company. So what are you seeing there both from your business and for the market backdrop? And I guess, most importantly, for investors, I think is how confident are you that you once we start to lap better performance as we get to the tail end of this year and into next year that the momentum can continue?

It's -- North America is projecting in line with our expectations. Clearly, it's not growing at the same pace as the rest of the world, but the characteristics of the North American market are quite unique. You have a couple of very local big competitors. And that is the dominant part of their business, and they will invest very aggressively in those markets. So we need to be thoughtful and selective not to get ahead of ourselves and to build a business to your point, that's sustainable and durable over time. We are putting more investment in the brands in North America, which was missing over the last couple of years. So that investment strategy is playing out in brand health and increased brand penetration. So we feel good about the trajectory. We've got a couple of categories where we need to really dial up the innovation. We have one category where we took too much pricing. We need to adjust that. But overall, we feel good about where that market is going, but we're going to be prudent and thoughtful in terms of how we invest there. The great thing about Colgate is we've got this incredible diversity of geographies that we compete in, and we're not wholly reliant on just one. And we will flex as we see the appropriate opportunities. And we think we've got a good investment structure in place for North America moving forward.

Good. Here in Europe, performance has been well above, I think, external expectations. Consumption trends remain positive. You mentioned earlier, some of the initiatives you've taken. What do you think beyond what you have already mentioned, sort of the key drivers are? How sustainable is it? And just generally speaking, what you're seeing about consumer health across Europe?

Yes. We've learned a lot over the last couple of years, and we've taken a lot of pricing in this market, which is historically not the norm for Europe. I think that's a function of really being much more sophisticated on revenue growth management. We now have proprietary technology tools that we use and deploy across Europe to really understand how to get promotional pricing right, how to adjust that in a much more effective way for the retailer and for us. That has certainly played out. I was in the Western Europe -- with the Western Europe team this week, and they continue to see great results from that revenue growth management strategy. The biggest difference in Europe has really been a more balanced investment posture across the region. We put more advertising into Europe and building the businesses where we think we have a real right to win. And as I mentioned earlier, the big change in Europe has been the elmex and meridol brands, putting a lot more investment in the high-end therapeutic where the premiumization has been very important. That's been the fastest-growing part of the market historically. We now -- our elmex business is up 200 basis points in market share since 2020, and continues to deliver record market share growth in household penetration. So that strategy clearly is paying out. But it's not just investment. It's a lot more innovation. We're relaunching our brands to provide more value to the consumer. We've personalized our messaging and our digital transformation that we had underway, we think is being deployed very effectively across Europe. So it's a balanced approach. And the other aspect is we're supporting more brands now in Europe. Historically, we're very toothpaste focused. We're now supporting a strong Sanex brand. We're supporting the strong Soupline brand across Europe, and we're seeing nice growth come from that as well.

How confident are you that you -- you and the industry overall can continue in sort of what I would argue sort of a new European algorithm where there is more constructive pricing and premiumization and brand investment as opposed to the old algorithm, which was just sort of minimal growth and more of a source of funds to fund growth elsewhere?

A tough question because I think, overall, you've got very strong buying groups here in Europe. But if you take a step back from all of that, the inflationary pricing that was going on in Europe, I think, created a much more constructive environment for both retailers and brands to grow categories profitably. And we're hoping that the retail environments notice that, that price inflation in our categories, unlike food categories perhaps, has been very resilient. Consumers have continued to buy our brands and will trade up when there's real value orientation associated with them. So our ability to relaunch and flex our supply chain to bring new innovation to the category and take pricing in that we think, has been constructive for the category and for ourselves and most importantly, for our retailers. So my hope is that, that will continue, and they've seen the light, in terms of -- that you can have some inflation in the categories that drives overall profitability for them. And for us, everyone's labor costs are going up, everyone's fixed costs are going up. If you're not driving some inflation in the categories, that continues to squeeze everyone down and no one ultimately wins from that. So I think there will be a more balanced but -- moving forward because everyone's recognized -- they're seeing benefits from that. So we'll see ultimately how that plays out.

Good. And last, but not least, is Hill's. A hot topic for a while across Colgate. A, how would you assess current momentum at Hill's? And then b, the backdrop of the broader pet category, which has been going through a bit of a kind of a post-COVID hangover, is that ending and getting better? Or are we still in the midst of it?

So we're very excited about the Hill's business. A couple of aspects of the business that are important for the audience to understand. One, we do most of our business in North America. We have low brand awareness and low brand penetration. So all of the strategy -- strategic choices we made on the business to really accelerate the advertising investment meant to, at the top of the funnel, really expand the awareness of the brand and drive more household penetration. And consistently quarter-to-quarter, we're seeing awareness increase, but more importantly, we're seeing brand penetration and market shares across all of our key channels increase. The category obviously went through a little bit of sluggishness post-COVID. Pet adoptions are way up. We hear, at least from some of our big retailers that we're starting to see a little bit more normalcy in where the category is. Cat adoptions are back up. Dog adoptions are flat. But overall, that's a good sign. We've seen a stabilization there. Ag prices have subsided. We obviously had to take a lot of pricing over the last year, which is more delayed than the rest of our products given some of the inflation that we saw in those categories. That pricing is sticking, and the investment and innovation strategy that we put in place. Now we compete in the part of the market that continues to be quite robust. I mean there's the science and premium end of the market, particularly in pet specialty, as you know, we do not distribute our products in mass has been quite robust, and that's been the driving force of store traffic in pet specialty and neighborhood pet stores is still nutrition. And so we feel very well positioned. And our brand is as strong as it's ever been. I mean we own the vet. That's a big part of who we are that -- and advocacy message that we get from the vet in terms of nutritional quality of our brands and the nutritional value that, that brings. We're very focused on bringing innovation to that segment and to the vet. The other three aspects is when we set the strategy in place 3 years ago, we made some bets on where we saw growth was going to come from. Small pets is the fastest-growing part of the pet population. That has a very, very different nutritional need than large dogs or large animals. And we've put a lot of R&D resources on understanding how to unlock that opportunity. We're starting to see some of those new products come to market as we speak. Vet has been the fastest-growing part of the category. We've now positioned ourselves with capacity to go after vet, which is a different approach and a different recipe that required. And the third is cat. We're under-indexed in cat. And as I mentioned earlier, that's a growing part. So there's still ample head space for us to continue on our strategy, and we believe grow. We're getting the pricing and that's helping drive gross margins. And the big change for us is really getting the supply chain addressed. And we were running way over capacity in terms demand of our product. As you know, we purchased, we think, very effectively new capacity. That has allowed us to now really optimize our network, drive a lot more efficiencies in our current facilities and spread the capacity across where we really need it and add capacity in vet, which we were -- which we didn't have before.

You're referring to Red Collar and that integration pretty seamless at this point?

It has been. I mean our case fill levels dropped down to 60%. We're back to 95%. Our capacity utilization was at 90%. We're back operating at a much more efficient level of 70%. It's down, but that's where we want to be. That allows us to stop lines and run productivity programs. It allows us to stop lines to test new products. So the efficiency of how we run our supply chain is set up now to kind of where we -- still some head space there. We still believe there's some optimization to happen as we move forward, but we're in a much better place than we were before.

Great. All right. Let me pivot to margins. You've returned the margin profile of the business -- gross margin profile of the business back into a very healthy place. It was 60% this past quarter. What have been the biggest contributors to that most recent leg of improvement? And how do you frame the outlook from here?

Well, obviously, we've gotten pricing back in the categories. We've been particularly aggressive in certain parts of the world to recover the inflationary aspects of that pricing, and that seems to be back. Really dialed up a lot more funding the growth initiatives that we have, and that's really addressing on productivity and the cost line, particularly on the Hill's business where we didn't have the time or the capacity to do that. We're now focused on getting a lot more productivity through the Hill's organization. And the last was productivity through the middle of the P&L, driving our overheads down, leveraging the increased volume and utilization we're getting through our plants. We're seeing to see that leverage go through the P&L. But listen, the most important aspect has been the sustained top line growth of the business, and that's focused on dollar sales growth moving through the P&L. And that's the best opportunity for us to drive leverage, and driving not only gross margin percent but gross margin dollars, operating margin percent and operating margin dollars. We're not -- listen, the margin has been the fulcrum of the P&L, but we're focused on driving more margin dollars through the P&L, which then allows us to drive the leverage that we need. And then the other piece I would say is our revenue growth management. As I mentioned upfront, we have to drive balanced volume and price. Everyone is fixated on volume, I get it, but we're in nondiscretionary category. Volumes aren't going to -- people aren't going to just stop using toothpaste. So we've got to get pricing through the P&L, and we've been very disciplined to ensure we continue to educate our teams and provide them the tools to find to do that.

You anticipated my next question on revenue growth management. So -- which is -- I mean, that's a theme -- I mean, every company to -- different words to describe it, but that capability is being built pretty consistently across the industry. How evolved is that capability at Colgate from your perspective relative to what you feel is optimal? And do you feel even if it's not optimal, it's a point of advantage at this point?

Yes. I think what's really important is that we've got this technology progress at the company. I mean we were one of the first big CPGs to go SAP worldwide. We're now going with S/4HANA, which will give us one instance of SAP. Why that's important is that allows us to really aggregate and consolidate our data architectures around the company and be more efficient on analyzing that and utilizing that. Likewise, with revenue growth management, we started this investment strategy 3.5 years ago, and really partnered to bring in technology that we can deploy and scale across the world to give our teams the ability to analyze things much more efficiently. So the days of waiting 6 weeks to see the sellout of a promotion and determine the ROI are gone. We need to be accurately looking at data all the time and making decisions based on how we're going to invest our gross to net in trade money in a much more efficient way. So France, which I was visiting this week, they're one of our lead markets for new technology with what we call RGM 2.0, which is really building algorithms that we can now facilitate a much more flexible way for our sales teams on the ground to drive more efficient allocation of their spending, and that's really exciting for the market. The big change again, for the company was we took IT out of a cost center, and we put IT into our growth group because we really wanted to make IT an enabler for change, an enabler for growth and it was a big part of our '25. We're going to make even more changes. We look at 2030 to make sure that AI -- excuse me, AI which I'm sure there's somebody with a question on that, that we start to integrate how we're going to use technology and ultimately, AI as part of our 2030 strategy.

Yes. And that -- you're really one step ahead here. So on that, you were -- you really leaned into that topic a couple of months ago at CAGNY in terms of what you're doing and how you're seeing it contribute to business transformation. What's the path forward on that, from here? How big of a priority is it for incremental investment? And to what degree do you see it evolving into a competitive advantage, especially a durable competitive advantage versus it just sort of transforming into the next new cost of business for the industry?

We've spent a lot of time as a leadership team having this debate, and it's very easy to get caught up in the shiny objects on the outside around AI. And what we've really tried to focus the organization around is on business cases that we believe we can scale in 200 markets around the world. If it's a capability that we're going to put into one section of the organization, so be it, but the focus of resources and investment from the company has to be on ideas that we believe we can scale. And we went through an interrogation of all of the opportunities, we work with our outside partners to think about it, and I'll get to a very important part, which is how we're training the organization to think about it. But we've developed what we call the opportunity spaces that we think are going to have the most profound impact on the company in the next 5 years that we need to change. And there'll be areas like innovation, areas like content creation. We believe those will be significantly disrupted by AI, and particularly generative AI, and we've now started to see the organization in ways that we can get the test cases proven out and be ready to scale those because if we can't scale them, it's just talk and PR. But we have to put things into the company that we believe are going to drive real change in how we think about our business and how we change. The piece I mentioned earlier is educating the organization. We have put significant investment in place to educate our entire S&C organization around AI and how we teach them to become prompt, semi-prompting, how they utilize our internal platforms, coupled with external platforms to think about the art of the possible. Why we're doing that is we want people to really think about how it can drive their own internal productivity. There will be a lot of efficiency to be gained through smaller things, developing presentations, writing memos, translating contracts. All that can help us drive a little bit of efficiency. It's not going to distract us from the big opportunities where the company is focused on and where we are going to add the resources to scale, but it will be a way for each person to think about, "well, how can I do my job more effectively." By the end of the year, we'll have trained everyone in the company on what we think are the basic principles they need to understand AI and what are the guardrails and how we want to operate in an ethical manner in that space.

Okay. Very interesting. Going back to the gross margin improvement, it has allowed for a significant investment, not only in technology, but most notably from the outside in advertising. Just before you started your tenure advertising at the company was closer to 9% of sales. Today, it's up -- last quarter, it was 13% of sales. So clearly, a tremendous amount of reinvestment. In addition to just the magnitude of investment, how has the direction of that investment changed? And do you -- are you in the right spot now? Or is there more investment -- more room for high ROI investment to be had from here?

I guess I'll take your last comment, which is ROI. I mean, everything we do has an ROI mentality. And I used the term across our reviews with the team that ultimately as we move more and more to digital spending. Digital is about 60%, 65% of our total spending worldwide now. Some markets, it could be even higher. I see a day where every single dollar we spend on digital should be assessed from ROI immediately. We should know exactly what impact we [indiscernible] from that. We can track the user, we can track what they do. We can track ultimately where they go. And that's the world that I see us going to in terms of using our tech platforms around the company to really use technology as a way to really maximize how we're spending our money. And that is a mindset that we're trying to instill in the company. What is the right level? I mean the right level is, as long as you see continued share growth, penetration growth, you see new users coming into your categories or a user base that you weren't getting to because you can personalize your message more effectively, we will continue to fuel that engine. But that engine can only be fueled by having the flexibility in the middle of your P&L and having consistent top line growth. And as those two things are working quite well for us, our intention is to continue to spend behind the business because we're seeing a great return on that investment for the company.

Okay. You always get this question, or you get this question a lot, but this is -- it's almost from a different point of view in terms of M&A. I think for a long time, Colgate was being asked the question of M&A, almost to enhance its growth profile. But now I'm asking it from a position of strength. Like now that you're got this -- this engine running, the financial algorithm is in a good spot, the cash flows are in a good spot, do you -- does that -- do you see more opportunities to lean into portfolio optimization from an M&A perspective? Or is it steady state?

Yes. This is an active discussion we have with the Board, and I compliment the Board for being profound and challenging us. And I think a big change is when we put the 2020 strategy together for 2025, we were clear on where we wanted to compete and where we didn't want to compete and how we're going to build that. Likewise, as we look at the 2030 strategy that we're about to kick off or finalize in terms of communication to the organization, we'll be very clear on where we want to compete and where we don't want to compete. That being said, we will constantly challenge ourselves to make sure are we in competitively advantaged categories that we believe we could sustain and drive real value to. And if we're not, we will exit those. And are there categories that we believe are more important for us moving forward. But the 2030 strategy is built on organic growth. We are not depending on M&A to get to that 2030 strategy, and that's very, very important. Because what happens when you do that is that you go out and you make bad decisions in terms of generating growth. We're getting the organic growth in the company. We have the flywheel working for us effectively. We need to continue to fuel that, make the changes we need to make to continue to optimize that, and there will be changes coming, but we need to ensure that the categories that we're in, which we love, we will continue to drive those categories through organic means and don't need M&A to that. If the right acquisition came across, we would look at it. But we're going to be thoughtful with that, very thoughtful.

Is -- the Red Collar acquisition was not adding a new -- it was adding capability and capacity essentially. Do you see more -- and we talked about AI, we talked about -- is there a role for M&A to play and sort of capabilities building even if it's not portfolio reconstruction?

Absolutely. And the -- obviously, the net present value of that acquisition was far better than building it ourselves. And we brought it in more efficient manner, and we're going to get the benefits of that much sooner into the P&L versus greenfield sites. So I think it's opened our eyes to looking at ways to either bring whether it's manufacturing capacity, whether it's new technologies that we believe will enable more sustained growth for us and use our balance sheet. Our balance sheet is very, very strong, but we have no intention on levering up to do that. We believe we can do that through the improved cash flow. And I say that Stan has brought in a great discipline around this notion of cash -- growth margin cash and really getting the teams on the ground to understand how important cash generation is to give us the flexibility we need to go out and do those things, or to buy shares, or to increase the dividend. Those are really important aspects of our cash and there's a new mindset in the organization that puts that accountability back on the ground versus in the center.

Got it. You mentioned a focus on organic growth guidance. You -- your guidance this year of 5% to 7%. You've exceeded your long-term target this year. And I guess the question is, is 3% to 5% still the right long-term target?

I'll take a drink on that one. The 3% to 5% was built on categories growing at 2% to 4%. So we felt it was right in the sweet spot of where we said. We've obviously seen some inflationary aspects to the category. We'll see things normalize a bit. We'll see ultimately whether those pricing -- the pricing aspect of our sales growth unfolds. But 3% to 5% feels right long term. Clearly, we're overdelivering against that. I think that's exciting for the organization, and there's no targets to say 3% to 5% is the right number. We're very fixated on increasing that as much as we possibly can. Long term, we'll see where the categories kind of normalize in terms of growth. We've seen, obviously, as I mentioned, inflationary driving that up. But 3% to 5% feels right for us, and we feel that we can continue to deliver top-level TSR with that 3% to 5% algorithm because we believe we've got the leverage in the P&L to do that.

Great. You've used the word mindset a number of times in different contexts, growth mindset, cash mindset, et cetera, which implies cultural transformation to some extent over the last 5 years. How pervasive is that mindset shift today versus 5 years ago as you look across the organization? Or is there more work to do?

Glad we're talking about that, not [ scanner ] data, because obviously, I think that's far more important to us as a company. And you don't see it necessarily from the outside, but the culture of an organization unlocks everything. And we spent a lot of time to really instill this growth mindset on how important delivering sustained top line growth that we can compound year after year. And that's the discussion we have. The reorientation, the brand penetration is a great example of that. So we were having a discussion with France yesterday. Their brand penetration numbers are how many households do they want to increase or people do they want to increase? That's far different than saying, what's the share market you want to have in hypermarkets? Because organically, you have to understand who that consumer base is and that changes the whole mindset of the company to be fixated on tools that are going to drive that sustainably over time. It's getting the organization to understand that we're going to do things a little differently from an enterprise standpoint. That, that localization empowerment that I had, were going to drive change because it's going to be for the betterment of the company and more sustainable long term. That's a big cultural shift for the organization to go through. Very local P&Ls that we still want to have that empowerment on the ground, but we want that empowerment around execution and getting that effectively done across a global strategy that we think will take us to a better place. So there's been a lot of cultural change at the company. We brought in a lot of people from the outside, which was uncharacteristic for Colgate to build subject matter expertise. I think as we look at 2030, there will be a lot of organizational design that we believe we can unlock by doing things differently. And we will certainly look to continue to evolve the culture moving forward. But it's a wonderful culture company, 217 years old. So you're stuck with great things, but there's aspects that you want to change, too. And I give the leadership team and the organization great credit for living to our purpose of reimagining a healthier future for all people, and that includes our employees and what they see as the opportunity for the company moving forward, which is quite exciting.

Okay. I have a few more questions, but I also have no more time, and that's a good place to leave it. So thank you very much.

Great. Appreciate it.