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

All right. Good afternoon, everyone. Welcome to the UBS Global Consumer Retail Conference here in New York City. My name is Peter Grom, I'm the UBS Consumer staples analyst here out of the U.S. And we are very excited to have joining us this afternoon. John Faucher, Executive Vice President, Head of M&A and Chief Investor Relations Officer from Colgate-Palmolive. So over the last few years, Colgate has implemented several strategic initiatives that have improved financial delivery with organic revenue growth in line or above the company's long-term algorithm for 24 straight quarters. Despite what's been a very volatile, I guess, dynamic environment, if you will. So just in terms of format for this afternoon, I have a ton of questions that I plan to run through with John. But if you have any questions that you want to ask me to ask on your behalf, I think you guys have instructions on how to -- and put them that will pop up here on this nice little iPad for me. So I would be more than happy to ask any questions on your behalf. Before we start, I am required to read a legal disclaimer. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company on which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. So with that, -- why don't we get started, John, thanks so much for coming.

Thanks for having me Peter.

So look, it's been well documented. And I think the performance and financial delivery more or less speaks for itself. And look, I think you probably could spend the whole 45 minutes talking about this. But I think it will be, what, 9 years at Colgate this spring. So maybe just to set the stage, I think it would be most helpful to get a sense from your perspective, what have been the most important changes during that time frame that really have allowed or put Colgate on this better path?

Sure. So I think the key thing is over the last 6 or 7 years because it really sort of led into when Noel Wallace became CEO back in 2019, we really had to think about growth differently. And growth was incredibly hard to come by back in sort of the 2010s, and our approach to growth really wasn't working. We were overly reliant on emerging markets pricing. And so we needed to go back and say, how are we, Colgate, going to go in and drive growth in our categories, which is the best way to drive growth. Not think about, okay, the categories are growing x, and we'll take a little bit of market share, but more how do we drive the growth ourselves. And so we talked about what we call the growth mindset from that standpoint. And that was really about understanding how our business was structured and how we needed to go to consumers differently to drive that growth. And so we talked about core, right, driving innovation in the core. So pretty much every consumer products company, particularly the mega cap ones like Colgate-Palmolive, we have big brands, which are the foundation of the company. But they can become -- and so as we looked at this, what we basically said was, okay, we need to solidify those core businesses, drive innovation, drive higher pricing. And so we've done that. The second piece was what we call faster growth adjacencies. And so we leaned into segments of our categories where we knew we were under-indexed from a market share standpoint, but where we could drive additional growth. And so you think about whitening, for example, in toothpaste or you think about some of the conditions for prescription diet, maybe it's a derm condition in prescription diet for Hill's, where we can drive incremental market share. And then the third piece on this was faster growth channels and markets. And at that point, we were under-indexed in channels like e-commerce, club, discounters. And so we've made a specific effort to improve our market share in those channels. And that also led to some geographic expansion on some of our brands. For example, taking a brand like Elmex which was a high-end European therapeutic brand, bringing it to Brazil in pharmacies or reinventing Colgate as an e-commerce brand in China. So what really happened was we were able to think about growth differently, be much more proactive in terms of how we were driving growth. And what that has done has allowed us to bring volume back into the business. The premiumization strategy, along with our focus on revenue growth management has allowed us to deliver pricing as well. And then what's been great is we've been able to do this across all of our divisions and all of our categories because if you aren't focusing on the entire business, you're really not going to be able to deliver that growth. And then the next step is we had to rebuild the P&L in order to deliver financial bottom line results to go along with the top line. That took a little while longer because of the issues we had to deal with in terms of the raw material inflation in '22 and '23. But you can see how we've bounced -- gotten past that and been able to drive nice top and bottom line growth for the last several years.

Okay. That's super helpful. And maybe one of the things you kind of kicked off with was on innovation, right? And I would just love to understand how the company has shifted their thinking around it. You kind of touched on just focusing on the core. And I know you and I've had this discussion a lot in the past around what's actually real innovation versus just maybe a flavor extension or a line extension, right? So maybe just through that some, how has the company really evolved from maybe where it was in the 2010s to where it is today in terms of how you think about innovation, how you bring that innovation to market?

Yes. So I would go back to the point I made previously about driving category growth, right? And if you think about driving category growth, you're not doing that with a line extension. Okay? What's driving category growth is sort of reinventing your brand, coming up with new usages, coming up with premiumized products, et cetera. So as we look at what's going on with our -- when we look at what's going on with our business, we had to say, okay, we're not going to do line extensions anymore. We're going to do what we call breakthrough and transformational innovation, a real step change that can drive premiumization, drive additional usage as well as driving market share. And so that's the thought process that went behind this new innovation strategy. Now in order to get there, it's much more complicated, okay? You need to take a much longer-term view of how innovation needs to be incubated, how it needs to be rolled out, how it needs to be funded longer term, and you need to create new incentives within the organization to get that done. So we brought in a number of people from the outside, including a new Head of R&D to drive new thinking on innovation. We created new compensation policies where we went in and we were able to figure out, okay, how do we measure the incrementality of this innovation and then we put that into our comp targets for our operators. So we all get paid on the incrementality of innovation, both the size as well as how truly incremental it is to the franchise. And so we've really been able to rethink how we do this -- and -- but it comes with saying, okay, we can't just think about the easy things. We have to think longer term and how do we truly transform our brands and our categories.

No, that makes a lot of sense. And I guess one of the other things that's pretty noticeable from a P&L perspective has just been the step-up in advertising. I think it's 300 basis points since 2018, something like that.

Yes, it's up 440 basis points since 2016.

2016. All right. And it's supposed to be up on the dollar and percentage of [indiscernible] is there room to move higher? Are we at the right levels? And then I guess just kind of thinking about rebuilding the P&L and financial flexibility, if there is a scenario where you would need to find some flex, I mean, is this an area that you could kind of leverage down the road?

Sure. So let me first clarify. So our guidance for 2025 as of our Q4 conference call was that advertising would be flat to up slightly on both a dollar basis and as a percent of sales. So close, but I just want to clarify that. Look, the advertising is really a strategy, but the advertising has to pay off from that standpoint. So it's not just about a number. Now we know it's an important indicator of our investment in the business, and we know that a higher advertising to sales ratio, if we spend that money well, will provide confidence to the investment community that we can drive volume growth, that we can drive brand health, that we can drive household penetration. Because at the end of the day, that's what the advertising needs to do. It needs to drive the business. It's not just about spending more money, it's about spending that money effectively. So that's what we're really focused on. So as we look at this now, what we would say is we believe we're seeing the impact of that advertising pay off, okay? So if you look at our volume performance in 2024, we delivered very robust volume growth, probably better volume growth versus our peer -- than our peers did on an organic sales growth standpoint. [indiscernible]. Okay so -- we delivered better volume growth than many of our peers delivered organic sales growth, which we think is an outcome of our focus on: A, trying to drive household penetration, but B, the increase in marketing investment. We've also gotten smarter in terms of how we measure that investment. Noel talked about this at CAGNY, a lot of tools that we have created, that we've worked with our IT team to develop where we can measure the ROI of our incremental spending, right? So again, it's not just the absolute number, it's what you're doing with that spending. And so as we look out going forward, our preference would be to continue to increase that advertising to sales ratio. But we know we need to do that in the context of delivering consistent compounded earnings per share growth. So to your point, there may be some years where it's up. We'd like -- we prefer that. There may be some years where it's down. But we feel more comfortable in this current environment saying, okay, if it was down in 2025, it would be down off of 13.5% advertising to sales where we finished 2024 as opposed to 13% or 12%. We focused, again, as you mentioned, building that flexibility into the P&L. Now what's important, though, is that flexibility needs to be across every single line item of the P&L. Right? So we don't want advertising to be sort of the first choice that gets cut because, again, that will negatively impact our ability to drive brand health and household penetration. So the focus is on driving dollar sales, right? That's the best way to drive margin expansion longer term, productivity on the gross margin line, leverage on our overheads. You drive cash, which drives down interest and shares outstanding, try to get the tax rate down. So that's 6 levers before we get to advertising, but we can use that flexibility if we need it.

Okay. That makes sense. So maybe just shifting gears to kind of the world we're in today. I would just maybe love some perspective over -- on what's happened in the last 12 months. A lot of moving pieces across various categories, regions, et cetera. So what have been the biggest surprises in your perspective? And I guess maybe where have things been better than you would have anticipated? And maybe where have things been worse?

Sure. So I mean, I think if you look at the last 12 months in the context of the last 5 years, I mean, we were up in Boston exactly 5 years ago, and we were talking to us before trying to get on a plane to get out of Boston in March of 2020 was a little hairy from that standpoint. Things have changed a lot, right, in terms of looking at the impact from COVID on demand in 2020 and 2021, then significant inflation, then significant pricing to combat that inflation. So I think what we've learned as a company is how well we can operate in different operating environments, right? And again, a lot of this goes back to what we talked about in terms of flexibility. If you build that flexibility into your model, right? You can adjust and you can adapt when things change. And I think that's what we've learned more than anything else from that standpoint. And so I think we've built this model that can flex. And so I think that's what's been most exciting as we've gone through the past couple of years is to see how we can deal with that successfully. As we look at the operating environment now, I think we are well prepared, but it's going to be a tricky operating environment from that standpoint. And as we look at the last 6 to 9 months, we've talked a lot about a slowdown in category growth as we've seen less pricing. So if we look at the acceleration in category growth in '22 and '23, we saw significant pricing in our categories to combat inflation. And elasticities were generally favorable because for every 100 basis points of pricing, you were losing about 50 basis points of volume. That's generally held as we've seen pricing growth decelerate. And so that's led to an overall deceleration in category growth rates, which we talked about a lot last year. Now that has obviously been further impacted this year by the slow start to the categories in the U.S. that we've talked about. In Mexico, that slowdown that we've talked about over the past couple of quarters. And we're seeing that sort of filter through across the businesses right now. So as we look at the underlying trends, what's really changed, I think, is the slowdown in consumer demand that we've seen over the past couple of months. That was obviously the big topic of conversation at CAGNY as we're looking at a consumer that is a little bit more cautious, dealing with issues like perception of higher inflation, what's going on with layoffs, what's going on with the Hispanic consumer, et cetera. And then as it came up at CAGNY, sort of how that plays out into what's going on with retailer destocking, et cetera. So I think we're seeing that right now. That's having an impact on category growth. We're seeing that spread a little bit, I think, to some other countries in terms of looking at Mexico and Central America. Europe seems to be hanging in. So I think as we look at this, we have -- we expected a category deceleration. I think as you look at the first quarter, that's happening a little more rapidly than what we had anticipated. And we just need to see how that plays out over the next 6 to 9 months.

Okay. And then on the U.S., I mean, is that just the kind of choppiness or uneasiness, if you will. Is it broad-based? Or is it specific to certain channels or categories?

Yes. I think it's relatively broad-based. I think what we're seeing is a little bit of a reduction in traffic. I think we're seeing, again, some hesitancy in the consumer given all the news flow that's going out there. Look, I think the other piece of this is as we look at -- when we think about our businesses, we tend to look at spreadsheets and say, okay, is something up year-over-year or something down year-over-year. I think consumers still perceive prices to be high, right? And so I think as all this discussion about potential for increased inflation, I think it reminds consumers that prices are still higher than they remembered them being several years ago. So I think it's relatively broad-based across channels and categories. I think there obviously is an impact on Hispanic demand as we've seen lower traffic from Hispanic consumers. So I'd say, yes, it's pretty much across the business. there's not one particular thing where we'd say, okay, this is really what's driving the noise from that standpoint.

And then yes, on the inventory destocking discussion, obviously, a big topic at CAGNY. I know you guys stopped short of providing maybe a gap, but it sounds like you're seeing something similar as well. And I guess, would you -- I mean, a lot of your peers are kind of saying, look, this is a short-term dynamic. This is going to reverse, and we'll kind of -- we'll get those kind of sales back or shipments back. Do you see it playing out that way?

Sure. So on the second question, I mean, is that about the destocking? Or is that about the category?

Destocking, more just say, okay, there's a gap between what you see in the track data. We would expect that to revert because we're in daily use category or something like that.

So going back to what we talked -- what Noel talked about at CAGNY, -- so we said we felt that this was more of a category slowdown issue than a destocking issue. We think there is some destocking going on in various channels. Drug, we're seeing some destocking, I think. Obviously, there's some volatility going on in the drug channel right now. So I think both the consumption piece and whatever destocking impact we're seeing should come back over time. To your point, we sell daily use categories, right? So even if there is uncertainty, even if there is a reduction in traffic, people hopefully are not stopping brushing their teeth. They're feeding their pets, they're showering, they're using deodorant, again, very hopefully from that standpoint. So as we look at this, we think whatever consumption, we think consumption is continuing, shipments will catch back up eventually because there's nothing fundamental that we see changing in how the categories are operating.

Okay. And then maybe sticking with some of the near-term discussion just on kind of the Oral Care strategy in the U.S. And look, I don't want to sit here and harp on scanner data, but some of the...

I've been listening to people harp on scanner data all day, Peter.

So that is not surprising. But look, when you look at the market share data, right, it seems like things have kind of turned negative in recent weeks. So maybe just talk about the Oral Care strategy from here, what needs to improve? And maybe as you think about what you've done over the last several years, what do you need to keep doing?

Sure. So if you go back -- so if you look at our results in 2024, what you would have seen was volume share performance ahead of value share performance. So we grew volume share and we lost value share. And what happened was at the beginning of 2024, we made 2 strategic decisions. One was we were going to deemphasize the drug class of trade because of some promotions there that we felt weren't driving overall value for the franchise, and we lost some market share there. The second piece was we made a decision to try to regain household penetration. So as we had taken more pricing in '22 and '23, what we had seen was the middle tier of our portfolio had lost some penetration. So we've traded up some consumers to Optic White and traded down some consumers to, let's say, anti-cavity, which is sort of our base business and triple action. And we had lost some household penetration in the mid-tier sort of in the core of the business. So we made an emphasis in 2024 to focus our promotional activities more on the mid-tier worked to the extent that we got that household penetration back up and we grew volume share, but it provided more negative mix than we had anticipated. which combined with some negative channel mix into club and mass, created negative pricing. And so we think that's really what drove the negative pricing in our portfolio and created that gap between volume share and value share. So as we look at how that should play out in 2025, as we begin to lap those negative pricing numbers, what we are expecting is that the reported pricing should improve sequentially and then year-over-year as we get into the back half of the year. We think what will also help us is the relaunch of Colgate Total, which is one of our flagship Oral Care brands. We started the launch in Latin America in the third quarter of last year. It's going very well. Noel talked about this at CAGNY. It's rolling out now in the U.S. So we pulled back a little bit on promotions as we're getting that rolled out. And what you will see is an increase in promotional activity on total, along with an increase in marketing spending on total as we go forward, and that should drive better volume as well as better mix performance. We're already seeing a very nice response. There's a toothbrush, Colgate Total toothbrush that was launched in the fall that is delivering solid growth, and we think that's going to show up again in the toothpaste and in the mouth rinse that we're launching as well.

Okay. Great. I mean maybe just rounding out North America, but just thinking about it more from a segment perspective, I was hoping to get some color on how to think about that price versus volume relationship. And I think Noel touched on this a lot at CAGNY about how you -- maybe you took too much price in certain categories. You took that came back down. Volume came back nicely. So I guess as you think about -- I would imagine you still have a quarter or so cycling that dynamic, I think. But I guess in the second quarter, when you think about North America as a segment, would you anticipate getting back to better balance where you have both price and positive volume mix?

Yes. I'm not sure I can predict that necessarily quarter-by-quarter given the movement that we're seeing in the businesses. But as we go through the year, that should be the case. We will lap, again, much easier pricing comparisons. So I think that will help. The pricing dynamic that you're talking about was really on the hand dish business, where because of raw materials, we had priced to recover margin, felt that we could afford to take that price back down in order to be more competitive at shelf, and we will lap that. Some of the channel mix stuff will continue, right, just simply the nature of which retailers are growing faster than others. And then we'll see in terms of getting total into the mix, et cetera, and that balance between premium and core. That will kind of how well the volume mix shifts between those segments, that will determine when we get back to positive pricing.

Okay. Maybe pivoting to Latin America and maybe specifically just on Oral Care within Latin America. It's a market that already has high per capita consumption. You have very high market shares, but you have still been able to perform incredibly well. So maybe how have you been able to do that? And I guess, as you think about the path forward, can you sustain that momentum?

Sure. So Latin America is our largest division. It's a great business. We have breadth across oral personal and home care. We have a generally small Hill's business, but obviously, that's reported through the Hill's division. And so we have tremendous opportunities for growth there. So there is a belief that per capita consumption in Latin America is too high to go up anymore, that our market shares are too high to go up anymore. And I don't think that's really the case. So per capita consumption in markets like Brazil, sort of Southern Latin America is very high. Per caps in Brazil are the highest in the world at about 1.7, 1.8x per person per day. So there's still room to go in terms of get people brushing their teeth twice a day. And some people already brush their teeth 3 times a day in Brazil. But in markets like Mexico and other parts of Northern Latin America, consumption is closer to 1 time per person per day. So there is a big opportunity to grow per capita consumption. And we have significant programs across Latin America to drive that consumption. We work very well with governments across the region. We work very well with schools across the region, with programs like Bright Smiles, Bright Future to drive that consumption growth. So there's a big opportunity. The second opportunity to drive growth and market share in Latin America is through premiumization. So -- as you can imagine, with market shares in Latin America that averaged 75%, a big piece of our business is base. right? So we have built the categories over the last 75, 100 years that we've been in Latin America. So we have built these categories. We have the big brands, entry-level brands like Triple Action, Colgate Anti-cavity, but we have great growth opportunities in whitening as well as in Colgate Total, which is a premium brand in Latin America. So as we look at it, we think we have great opportunities to drive further penetration of Oral Care, increase mix and price points in Oral Care as well. Now we've also got big personal care and home care businesses there, particularly in markets like Mexico with very strong market shares and usage in categories like household cleaners, hand dish, body wash, et cetera, remains relatively low. So there are significant usage opportunities that we have as well as market share in those categories. So the long-term outlook for Latin America, I think, remains very robust. Again, we operate differently in Latin America. We operate with such a long-term focus there, right? So if you think about it, a number of our competitors basically left Argentina over the last 12 to 18 months as the market became more difficult because of devaluations, we stayed. We doubled down. We've gained market share. We've continued to support that business, and we're going to emerge from this crisis stronger in Argentina. So that long-term viewpoint of Latin America really helps us drive that growth.

Great. And then maybe building on a couple of the points there. And I would imagine it's a question I've heard you get asked today, and it's a question I've been asked. So -- it's on the company's ability to kind of drive share gains in the current environment when you're kind of looking to potentially take pricing to offset FX at a time when maybe local competitors don't need to do so. And so look, I know this is a dynamic that's not new. The company has been impacted by this over time. So can you maybe just elaborate on how you manage through this type of environment and maybe why this time might be different?

Sure. So I think -- well, I mean, I don't think it's going to be different from that standpoint in terms of I think we're going to be able to manage through this the way we had before. And I think there's a couple of different reasons. First off, we have such great management on the ground. We have local leaders who have lived through this. I mean when we went through the Argentina devaluation at the end of 2023, the number of people in the company who had worked through an Argentina devaluation previously because there's been more than one, they were all over the company, right? So the CFO of Latin America at the time had done multiple Argentina de-vals. We had a number of general managers who'd run the business during devaluations. So the experience that we have is tremendous. We have significant scale advantages versus our competition, right? So we have 75% market share across the division -- the region in toothpaste. So we have market shares in the 40s in categories like fabric softener and hand dish as well that again, give us scale advantages, which really plays out in store, where we can basically use the strength of our brands to drive strong merchandising to keep ourselves in the consumers' eyes. Another advantage that we have now that maybe we wouldn't have had 5 or 6 years ago is the increase in advertising spending that you focused on before. We have significantly increased advertising spending in Latin America, which we think has only further strengthened our brand. So I think from a company operational standpoint, I think we're in very good shape. The other point I would add to this is when you talk about taking pricing for foreign exchange, remember that we're looking to take pricing for what we call the transactional impact of foreign exchange, right? So that is the impact of dollar-based raw materials in local currency. So for example, if we buy BRL 100 million worth of resin and the real devalue is 20% all of a sudden versus the dollar, all of a sudden, we have BRL 120 million versus of resin. So we're going to price just to cover that extra BRL 20 million. We don't price to cover the translational impact, okay? Now we've got a big Latin American business. So at a corporate level, we need to deal with the translational impact in order to deliver the dollar-based earnings per share growth that we're focused on, but we can do that by flexing different parts of our portfolio and by building up the flexibility in the P&L. But relative to local competition, I think we're in tremendous shape to deliver pricing to offset that transactional foreign exchange impact while continuing to gain market share. Our market share performance in Latin America in 2024 was excellent, and we think we have a strong momentum in 2025.

Awesome. Maybe building on that, but going around the world a little bit, just Europe. It's been very resilient. I think it's mid-single-digit organic sales growth in the last couple of years, positive volume mix last year. What's happened? Like it's historically not been a fast growth market or any growth market, right? So I mean, is it a function of categories being better? Is it a function of better execution? And look, I know that this might be a difficult thing to answer just given a lot of moving pieces, what's going on. But where do we kind of settle out if you were to look out over the next 12 to 18 months?

Sure. So I mean, it's a great question because Europe for 20 years was basically a low growth market with slightly positive volume growth and slightly negative pricing. And between COVID and then the raw material inflation, there's been a lot of volatility in Europe over the past couple of years. But what it has really awakened at Colgate is the belief that we can go out and execute our strategy, build our brands. It really all starts with brands from that standpoint. And we have gotten, I think, smarter about how we use our brands in Europe. So if you go back 10, 15 years ago, in Europe, we were more focused on being successful just with Colgate in Oral Care. What we've done over the last 5 years or so is we have flexed our entire portfolio in Oral Care, where we're using Elmex and Noel talked about this at CAGNY. Elmex is a tremendous therapeutic brand for sensitivity, for anti-cavity, and that has really paid off in terms of incremental innovation, incremental advertising, -- we've done a tremendous amount of work with the profession to rebuild Elmex's role with the profession. It's driving significant market share, and it's one of our highest margin products from that standpoint. So now we haven't just focused on Elmex. We've kept the focus on Colgate as well, but really focusing on premium whitening, right? So another one of those faster growth adjacent segments. And so by having multiple ways of growing, not just one, we've been able to tackle multiple opportunities within the category and therefore, get to peak market shares. And Noel shared those at CAGNY that we've moved up to 38% market share. The market share is up about 300 basis points in Europe over the past couple of years because we have delivered better innovation, focused on multiple brands and supported those businesses. Same things with Personal Care or same thing with Personal Care, where we focused on both Palmolive, which tends to be more at the core end of the portfolio as well as on Sanex, which tends to be more at the premium end. Strong core innovation, good growth and faster growth adjacencies, driving premiumization and pricing. And so I think that's the key focus from the brands, which has enabled us to really execute on Revenue Growth Management, RGM, much more effectively. right? So I think that list pricing in Europe will still be difficult to take going forward given the retail environment. But our ability to launch premium versions of our core businesses will allow us to drive positive mix, which we think will get Europe from a sort of low single-digit volume growth with negative pricing environment to a consistently low single-digit volume growth with slightly positive pricing environment going forward. So not the same growth we've seen over the past couple of years, but better than it was historically. But again, it really starts with the brands and then our ability to execute behind stronger brands.

Great. Maybe rounding out the top line discussion, but pivoting over to Hill's a little bit. I mean, I would love to just hear some perspective on the opportunity from here, both in the U.S. and internationally. Obviously, you can't fully control category growth rates, but this has been a key area of investment for the company. You spent a lot of time getting the supply chain network adjusted. You build the facilities, capabilities, acquired others. So can you just talk about how these investments are unlocking value for Hill's longer term?

Sure. So what -- again, so I'll start off with Hill's where I finished the last question, which is our Pet Nutrition business starts with the brand. And we continue to believe that the Hill's brand is the single best brand in pet nutrition, and we have really rediscovered and leaned into our focus with science and our relationship with vet recommendations, and that creates very sticky demand for this business, which has allowed us to continue to grow despite what is a somewhat weaker category that we've seen over the last 18 months. So as we think about Hill's, the real opportunity there is Colgate is the single most penetrated brand in the world, and it's in about 60% of the world's homes. Hill's is in about 6% -- has about 6% household penetration in its best market, which is the U.S. So there is a huge opportunity to grow household penetration, to grow market share on Hill's and capacity was a massive enabler for that, right? The business had grown so quickly in 2020 through 2022 that we didn't have the capacity to feed the demand. And so we went out and purchased dry pet food capacity through the Red Collar acquisition. We built a wet pet food facility that we opened up in fourth quarter of 2023, and that has given us more capacity to meet demand. The other thing it's done is it's not just the capacity to meet demand, it's the capacity to innovate, right? So we have been underpenetrated in certain segments within premium pet food, particularly cat, wet pet food, particularly wet cat and then also small paws, small dogs. And so this capacity has allowed us to innovate much more quickly, much more aggressively in some of these segments where we've been underpenetrated, which is allowing us to gain market share, right? So that's as evidenced by the fact that we are growing mid-single digits in a category that's roughly flat right now, mid-single digits, excluding the negative impact of private label, which is we think the way people should be looking at the business. And then finally, the last enabler of that is the brand investment, right? So I keep going back to this. It's about the brands and investing behind the brands and investing behind that innovation. So advertising to sales has increased dramatically at the total company. We mentioned that 440 basis points since 2016. The investment level at Hill's as a percent of sales has been even higher than that. It was below the company average in 2016. It's above the company average now. And yet and Hill's has grown sales dramatically over that time. So we've invested aggressively behind the business to build up brand awareness to build that penetration and really drive the awareness of that innovation that we have. So I feel like right now, even though the category is a little softer than we would like it to be, the structure of where the brand is and where the business is, is by far the best in the time since I've been at the company, if not for a longer period of time. And I think we're incredibly well positioned as the category reaccelerates, we start to see household formation pick up I think we will get that tailwind, pardon the pun of better category growth, allowing us to accelerate Hill's growth even further.

That's a good one. I haven't thought of that one.

It's -- I hesitate every single time I say it.

Maybe just on the category and the near-term dynamics, what do you think is kind of driving more muted performance right now?

Yes. I think it's a combination of factors. I mean, look, we saw a tremendous number of pet adoptions during COVID, right? The number of sell-side and buy-side analysts who hit me up in 2020, 2021, asking for recommendations for what they should be feeding their dogs was dramatic. And so -- and most of them, I think, ended up buying Hill's. Hopefully, all of them should be buying Hill's from that standpoint. But that really drove -- it sort of front-loaded demand during COVID and really through 2022. Then what we saw was a lot of pricing, right? And again, inflation hit everybody. That probably led to people saying, look, I can't necessarily afford to go out and adopt a dog right now and bring a dog home because pet food has become a little bit more expensive. So I think that was a negative impact on growth. And then over the last 1.5 years or so, I think -- and I mentioned this a little bit, I think household formation has slowed, right? Higher interest rates mean fewer people are buying homes, potentially fewer people are starting families. And so that means the rate of pet adoption is a little bit lower. Encouragingly, we are seeing cat adoptions move up and people can adopt cats in apartments, what have you, dogs tend to need a little bit more room. We're hopeful that, that's sort of a harbinger of improved dog adoptions going forward so we can get the category back to historical growth rates.

Okay. Now maybe putting it all together, I mean, like do you see a path to the category getting back to growth? And I guess, look, a lot of uncertainty on the category, but a lot of brand momentum. How should investors be thinking about growth for Hill's if you look out over the next, call it, 6 to 12 months here?

I mean next 6 to 12 months, it's difficult to say whether -- I can't -- don't have a crystal ball to predict. I mean, medium to longer term, do I think household formation will pick back up and pet adoptions will pick back up? Yes. Is that 6 months, 12 months, 18 months, not really sure. I think the confidence that we have in our ability to gain share given all these factors that I talked about, the capacity that drives the innovation, the advertising investment, I feel confident that we'll be able to continue to gain share. And I do think eventually, we'll see the category come back to sort of that 3% to 5% long-term growth rate. There's nothing that makes me think that we're going to see people turn away from having pets longer term.

Okay. Maybe pivoting tariffs, big topic today. It's been a big topic for a few months now. But I know the company aims to have localized or regionalized manufacturing where possible. So I know this is a very fluid situation. I guess maybe give us some perspective on how this all may impact Colgate.

Sure. So to your point, we -- our supply chain tends to be more regional than global. We produce products that have liquid and transferring liquid over long distances is generally not efficient. So we have built -- historically, we have built our supply chain regionally and to drive efficiency. I think one of the interesting lessons that came out of COVID was we couldn't just focus on efficiency. We also had to focus on flexibility. So we have built more flexibility into our supply chain. And the best example of this is our one truly global category from a manufacturing standpoint is manual toothbrushes. And so during COVID, in the back half of 2021, when our capacity in China was kind of shut down, we realized, okay, in order to thrive in a more complicated supply chain world, we needed the ability to produce more products in more locations. So we have built more flexibility into our supply chain. This also plays into our strategy in terms of dealing with tariffs, right? So over the last couple of years, we have focused on building a little more flexibility, sometimes at the expense of cost, which gives us some ability to mitigate the impact of tariffs. Now we won't be able to fully mitigate that. As we've talked about, we do produce a meaningful amount of toothpaste for the U.S. and Mexico. We will work on mitigation strategies, whether that's inventory related, whether that's trying to shift some manufacturing in order to do that. And look, we have built a lot of manufacturing and acquired a lot of manufacturing in the U.S. over the past couple of years because of the potential for some of these things happening. But there still will be an impact both from the initial tariffs as well as in terms of what happens with any sort of retaliatory tariffs as we look at impact with Mexico or Canada, what have you. So there will be an impact. We're working on mitigation strategies, and we have -- when we have greater clarity on what those numbers will be, we'll get back to you with more specificity.

Great. Maybe putting that aside for a second, but kind of sticking with margins, maybe focusing specifically on gross margin, just a lot of progress there in recent years. And it seems like you really have unveiled some nice productivity through FTG. So maybe just can you talk about that and maybe how much more runway there is for productivity there?

Sure. So I think the key on driving gross margin. I mean I'm going to start the way I started the whole conversation with if you're driving sales growth, driving margin expansion becomes much more -- much easier from that standpoint. So the key thing is it starts with organic sales growth, which if you're growing -- we don't control currency, right? But we're focused also on growing our dollar-based businesses. You want to drive net sales growth, which drives margin expansion, right, which can drive dollar-based EPS growth, right, which is the target that we're focused on getting to so we can drive TSR for our shareholders. So again, it starts with growth. As far as getting gross margin expansion, I think we've gotten more holistic in terms of how we view this over time, which is, I think before, we would have focused more on just growing our higher gross margin businesses. Now what we're focused on is growing all of our businesses and trying to grow gross margin on all of our businesses. But we will continue to fund advertising, which we can then invest back in our highest gross margin businesses, right? So as we think about therapeutic brands like Elmex or Prescription Diet, the more we can invest behind those businesses to drive mix. Now as far as funding the growth goes, this is something that we spend a lot of time and effort on. We talk about it from a gross margin standpoint, but it really affects every line item of the P&L. I think we feel confident that our planning that is in place, the robust nature of this program, we have good visibility to continue to drive funding the growth. We will need to layer pricing in as well. I mentioned -- we talked about Latin America, right? We are seeing less pricing from Argentina now that we've lapped all of that. we've begun to lap the pricing in Latin America. We'll layer some of that additional pricing in as we go through the first quarter and the second quarter. So that will help pricing accelerate in Latin America from a lower base in Q1 as we go through the year, that will help on gross margin as well. So it's really a holistic view. You've got to drive the growth, you've got to drive the pricing and you drive the productivity. And I think that leaves us very comfortable that we've got good visibility on continuing to build up that gross margin even though we've hit very high levels in 2024.

Great. Maybe one last question, and we'll shut it down here. Maybe just going -- thinking about 2025. And then maybe I was surprised, maybe not others were, but I just felt like in the context of FX, I thought the low to mid-single-digit dollar U.S. EPS growth, I mean, that was relatively impressive. And I guess just as you think about the year ahead, and there's just a lot of moving pieces, a lot of uncertainty, right? But do you feel like there's the same degree of flexibility today in the P&L versus what we've seen in the last few years? And my guess would be, there's how many times we've said flexibility up here today that the answer would be yes. I'd just be curious how you think about 2025, maybe relative to what we've seen in the last couple of years here.

Sure. I mean it's a different kind of flexibility, right? I mean, again, we've been building up the flexibility by continuing to invest in advertising, continuing to invest ahead of the curve in areas like digital, data and analytics and AI, right? So we were focusing on that, knowing it's not like we woke up on January 1, 2025, and said we have negative currency and we have all these other factors, right? So we invested in 2024 ahead of the curve to give us flexibility in 2025. When we worked on the 2025 budget cycle all through the fall, we saw what was coming in 2025, at least part of what was coming in 2025. And so we went in with different types of budget assumptions, right? Now what's going on, what's going to happen with demand over the shorter term as we look at all this uncertainty in the U.S. and Mexico and Canada and some other markets, we'll see how that all plays out, right? That's obviously -- you're hearing that from retailers, you're hearing that from other companies. We're certainly not immune from that impact. But going in and saying, look, we want to deliver dollar-based EPS growth we know that's how the stock goes up, right? And again, we want to deliver TSR. So this was really about planning ahead and using 2023 and 2024 to build that flexibility so that we have the ability to really flex those levers throughout 2025.

Awesome. Well, why don't we leave it there. John, thank you so much for joining.

Thank you very much Peter.

We wish you nothing but the best of luck moving forward.

Thanks a lot. Appreciate it. Thanks, everyone.