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

Good afternoon, everyone, and welcome to the UBS Global Consumer and Retail Conference here in New York City. My name is Peter Grom. I'm the U.S. beverages and household products analyst here at UBS. And we're very excited to have joining us for our afternoon keynote slot from Colgate-Palmolive, Stan Sutula, Chief Financial Officer; and Jesper Nordengaard, President of North America. So over the past few years, Colgate has implemented several strategic initiatives that have resulted in stronger organic revenue growth and improved share performance across many of these categories. And one of those key drivers of the improved algorithm was Hill's or the turnaround of Hill's Pet Nutrition, which a division that Jesper led prior to becoming President of North America last year. So in terms of format for today, I have a series of questions that I kind of plan to run through regarding Hill's, North America and kind of other key topics for about 30, 35 minutes or so. And then we'll kind of leave the last 10 minutes for open Q&A. I think you all have received instructions on how to submit questions via the app, and we'll show them up here. If you want, if it's easier, just you can raise your hand and I'll repeat the question so everyone that's listening on the line can hear the question, and I'll be happy to ask on your behalf. But before we get started, I am required to read a legal disclaimer. So as a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS, of which any company 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, Jesper, Stan, thank you so much for joining us today. We really appreciate it.

Great to be here.

Thanks for having us.

Of course. So Jesper, I kind of want to start with you, and obviously, want to spend a lot of time talking about North America. But I think it will be helpful to set the stage, if you will, and just talk about your time at Hill's. Maybe help us and the listening audience understand the turnaround at Hill's. Where you saw the greatest opportunity and I guess, as you move into this North America role, do you see any similarities?

Yes. Thank you for the question. It's great to be here. So I spent 9 exciting years at Hill's out in the Midwest, based in Kansas. And you can tell from my accent, I'm not a native Kansan. I actually grew up with the Colgate business in Europe, working across the European geography in mainly marketing roles. So almost 10 years ago, I was asked to go to Topeka and basically be the head of marketing for Hill's, which I did for 4 years. I then ran the U.S. company, and then I became the President of the division. And it was quite an interesting journey and a couple of key milestones, I would say. First, the purpose and the brand strategy. That was the first thing we got right. And now looking back, it seems very intuitive. But at the time, it was not that intuitive what we did when we really focused the business back on science. That's truly the superpower of Hill's is the business model, which is anchored in the profession. And then it's the products that are deeply ingrained in science. So that was the first thing we did. We connected that to the purpose. You've probably seen a lot of our initiatives around shelters. That's true around the world. And that really resonated with our people, our own employees, but it also resonated with people out there leaning into pet. And then, of course, we looked at our go-to-market model, and it had to evolve. So we kept it very anchored in pet specialty but we expanded into digital commerce, which again, looking back, looks very intuitive. At the time, it was more controversial because we doubled down on partnering with [indiscernible], Amazon, [indiscernible] and others around the world. And that led to basically a digital-first mindset that we deployed way ahead of the industry, and that we benefit from on the Colgate side now because I think Hill's became a little bit of a [ PetRageous ] of what we're building on the Colgate side. And then, of course, we had to start really building the brand. So we deployed revenue growth management resources way before it was a thing to really fuel the P&L, to be able to advertise. And that was really when it took off, when we started to get more people, more eyeballs on the brand and get more people excited about it. The benefit of the Hill's business is also that we command a high loyalty. When you use the product, you actually see a benefit. So we see when we recruit people, they tend to stay on the brand. So of course, all of that was then packaged into what you know today as Hill's, which is a very unique icon in the pet industry. A lot of these lessons, I take with me back to the Colgate side, right? So I learned a lot about leadership, also, by the way, having to lead through a pandemic and other things being in 85 countries. But the importance of building your brands, whatever we do in managing the here and now, we've got to kind of have that outlook of what are we trying to achieve. Yes, you look at the short term but you also look at the long term in terms of your progress in household penetration that you continue to build a P&L that allows for investments so that you fuel the top line where you deliver the profit. And then that's also the courage to do things differently when it comes to your go-to-market, when it comes to driving a digital-first mindset, when it comes to, in today's world, not even thinking e-comm or brick-and-mortar, I think it's more about thinking omni. I like to think about when you really reflect on what we do, it is about making it as easy as possible to shop our products no matter what modality you're in, and the tools available to us today allows us to do that. So it's been an interesting journey and I'm very excited about being back on the Colgate side.

No, that's great. Stan, would you have anything to add to how important is the kind of the success of North America to just the broader...

North America is a big part of our overall business, contributes both obviously, revenue growth but the profit generated in North America generates the cash that we need in the U.S. to do dividends and share buyback and the investment. So it's a critical part of what we do. I first met Jesper out in Kansas when I first joined a couple of years ago but a great partnership. And obviously, he brings a ton of passion and energy to this, which I think is infectious to the team.

Great. That's super helpful. So Jesper, kind of you've been in this role for kind of a little over a year now. But a lot of these strategic changes were implemented or around going prior to you moving over here. So if you were to rewind 12 months ago, how well positioned was Colgate in North America? And has really anything changed over the last year?

So I'll start by saying that we have very strong brands in North America, and we talk a lot about Colgate and Oral Care, right? But we also have very strong presence in both Home Care and Personal Care. And one of the first things we did was to just sharpen our strategy and be clear on our priorities on how to invest. We have done some things differently in terms of how we are structured. We created some new groups that are focused on how we execute, whether it is in revenue growth management or it's in the area of digital marketing, and that has helped our go-to-market tremendously. On Oral Care, we created a holistic Oral Care go-to-market that basically oversees the entire Oral Care portfolio, also our professional products in the dental channel, and that allows us to truly think people journey. You think something like whitening, that probably starts in your accounts many times, right? And it can take you [ chair-side ]. It can take you to traditional retail. It can take you online or DTC. Now we have a team that thinks holistically about this. So those are some of the changes we made. We really sharpened our focus. We recognized that we have to make some bold decisions to drive profitability so we can invest in the brand, which I think is crucial, especially in the environment we're in, that we continue to build brands. We need it, our retailers need it, and that's exactly what we've been deploying. I've been pleased with the results so far. There are, of course, still construction sites that we're working on, but I think we're making good progress.

Great. And then, I guess I'm guilty of this. I think there are some people in the room that are guilty of this. Spend a lot of time analyzing your North America scanner data. And unfortunately, even though it's not the biggest piece of your business, that it kind of drives the sentiment for your overall company. So -- but to that end, the share performance has been strong and consistently strong for some time, right? And I guess, can you maybe just talk about the drivers of the improved share performance we've seen over the last year? And how confident are you that this can continue?

Yes, and my team would say I'm also guilty of that. So I also look at the -- but I think it's very important that we don't just look at that. To your point, that the share report we get, the Nielsen universe covers a part of the market. We have a number of important channels to us that are not covered by that, right? So we look at those channels as well. We look at organic sales growth, net sales growth and our profitability as important indicators on whether we're on the right track or not. And I think it is so important in the environment we're in right now that we don't over-correct because we get scared by a short-term trend, right? So I'm always trying to balance that, to make sure that we make the right long-term solutions, while we, of course, also focus on the short term. If you go through our categories, I think we -- our focus on the basics, on the fundamentals of the business has really helped us drive share growth and P&L growth this past year. Our innovation helps drive incremental growth, and we have a great pipeline. I'm excited about what we're launching as we speak. So on that note, I do believe we are well positioned to continue to perform ahead of the market. We don't -- we haven't talked so much about that. But if you look at Oral Care, we also have the Tom's business and the Hello business. Hello has the real superpower when it comes to young families and Gen Z, so that's a business we're going to push really hard. And then you have Tom's that is the one B-Corp in the industry that is truly a place for that conscious consumer to go and engage. So you look at that spectrum and we have a real great portfolio to compete. Home Care and Personal Care, we have some really strong brands there, and it is an integral part of our strategy to push those businesses as well. In Personal Care, you have brands that have been around for a long time like Irish Spring. We are a leading brand in the liquid hand soap with Softsoap, and we have a lot of ideas on how we can continue to drive that. You go into Home Care. We have Fabuloso that is a very vibrant brand, and it's proving extremely resilient and the demand is really high as we kind of move on from the recall right now. And you have a Fabuloso -- sorry, Suavitel that's very well anchored in the Hispanic community. By the way, the Hispanic segment is the fastest-growing consumer segment in the country, and we have all these great offerings that will serve that market if you will. But this is probably a long-winded way of saying, I'm quite optimistic about our outlook. Are there going to be setbacks? Are we up against some great competitors? Absolutely. But I do feel that we have the right tools to win and we will deploy them all.

I think North America manifests the change we -- the shift we made back in '18, '19, which was a change in the model, more advertising, more innovation. And that has resulted in 4 years of organic growth at or above our long-term range. So I think we're seeing that model play out. I think the discipline back to looking at that, staying the course, we all stare at that date, I'm guilty as well. So Jesper and I talk about it all the time. But these other channels are also important. And I think the output of better top line performance, consistent top line performance has been really a benefit to the company.

No, that's helpful. And I guess maybe this question for both of you as well, but maybe kind of you alluded to the strength in Oral Care and kind of what you have to do in kind of Home and Personal Care. But I would love to get some perspective on category performance. And I'm not necessarily trying to understand changes in demand as a result of COVID. But what I'm trying to understand is just kind of the composition of category growth and how you see it evolving, right? A lot of price over the past year or 2, less so on the volume side. So I'd just be curious, how do you kind of see that evolving as you look out to the back half of this year and into 2024? It just seems there's a lot of uncertainty as to when volume can really return to growth.

Yes, let me start. So we had to make some bold decision on pricing last year. And it's back to the need of having resources in the P&L to invest behind the brands. And I'm proud of the work that the team has done. And if you look back on '22, yes, we see some volume declines but they're not different from what we had anticipated. You look at the value shares. Generally speaking, it is pretty healthy. Yes, I will be clear, liquid hand biz is an area where we have some work to do. It's still 1/3 of the category so it's a big brand so there's a lot to build from. But obviously, we need to up our game when it comes to innovation and so forth. But when I look at the business holistically, I think we make the right calls and it gives us some room now to push -- to build brands and to push it forward. The latest trends, right, we're watching that very carefully because everything we do these days is about managing trade-offs, right? You could decide not to take pricing but you cripple the P&L so you can't build your brand and invest, or you take too much pricing and the bottom fall out of your categories. And you start losing households, right? So you've got to manage that very carefully and be ready to pivot. We're looking at our more discretionary categories right now and see what impact we are seeing. For example, fabric conditioner could be one that you could skip so we're watching that very carefully. We're watching our toothbrush business. But so far, we don't see trade-down, and we may see a little bit of change when it comes to the more discretionary categories in terms of purchase cycle. And then we have tools we can deploy in addressing that on a more ongoing basis, if it's needed, right? So I really think that it's going to be about taking the opportunities you have in taking pricing, work closely with our retailers, which we do and then really deploying revenue growth management. We have pricing in the P&L also in the first half. When we get to the second half, to be honest. It's a little bit more clear where the world is at, and we're going to look at that, and we're going to make sure that we continue to massage the profitability of as we invest in the business as well so we drive that top line.

Yes, look, I think if you think about the other categories, they are important but they also vary widely by our divisions. So North America is a little bit more balanced actually with how much Home Care and Personal Care drive the total. That's different around the world. So our approach shifts around the world as well. These categories are important. They're good margin. They throw off a lot of cash, which allow us to invest back in the business. Importantly, as you've seen through this last year or 2 years, they're also growing. And we try to strike that right balance between price and volume. We want the volume to keep the manufacturing efficiency going. That's important. But we want to make the right decisions around price because we think it's so important for the model of investing back in advertising, which brings back supporting the price but also helps us bring innovation to market. So a little different in North America, a little bit more balanced around the world. It shifts. And we look at this because inflation in different pockets around the world, it's really different. And so we watch carefully the buying patterns by consumers and where would we expect to see impacts as the world economy changes.

That makes a lot of sense. I mean, maybe kind of building on that, right? I mean, there's a lot of discussion around pricing. And when you take more price retailers are getting louder, consumers are actually going to finally begin to push back. I mean, can you just maybe talk about what you're seeing from a pricing environment perspective? If you want -- we could talk about North America, but maybe more broadly, I think it would be helpful. And then just kind of what are you seeing and hearing from your retail partners on that front?

Yes. So let me start with the macro view and then yes, we could take it down to North America. So we've taken price through '22, including at the fourth quarter. We've taken price in '23, as we said. Look, we think that's important. Commodities are still up. While they've moderated from their highs, they're still a headwind for us into '23. And you saw that in our margin performance coming out of '22. Now we guided that we expect margin to improve into '23. So that pricing so far, the overall balance on a macro level has been roughly in line with our expectation on the impact on volumes. We tend to see, when we take price, a lag effect on volume, right? You see volume drop and it tends to get a little bit better as we go through. But when you've got double-digit inflation in Europe, you see it in Latin America, by country, it varies widely. That's what we're looking at by market because in some markets, the retailers have gotten more aggressive. But they're under the same pressures on a macro view that the rest of us are. Labor costs are way up, distribution costs are way up. The warehousing costs, the shipping costs are all escalated. So they need some level of this as well. But it's pretty dynamic. And when we look at that, we want to make sure we strike that right balance. Now the one thing that is a benefit to our portfolio, particularly in Oral Care, is that we play the value ladder so we have the very premium and we have a value option as well. One of the nice things about that, though, is our margins are not materially different in that value ladder. So if somebody were to trade down within our value ladder, that's still a benefit to the company. Obviously, we want to keep them as a customer of ours. So when I first got here and we started to see the recessionary and inflation, I looked at '08 and '09, what happened in some of these categories. The premium hung in there actually because people are looking for that affordable luxury that they can do. And then the value did quite well. The middle got squeezed a bit. And I think because we play across that, that's a benefit. And then in most of our categories, not all, private label isn't a big piece in Oral Care and Pet Care, et cetera. For what we offer, we're pretty competitive. You want to talk about North America?

No, I think it's going to be a lot of the same, but maybe just to give you a couple of examples from our world, right? The -- one of our strengths is that we command all these price points, right? And that's a big consumer segment out there that's already struggling in this economy. They buy a lot of our products and we actually have products that they can still afford. And I'm very -- it's very important to us that we continue to make that -- that we make that an option for them and we keep that segment attractive. And then to Stan's point, we've done a good job over the year to have people trade up in our portfolios. And affordable luxury, right? We have the at-home whitening options now that you can get. You may not be able to afford hundreds of dollar treatment but you can afford an at-home whitening treatment. We have all those tools. It's important to communicate, though, as we go through this and that we get people excited about going shopping in our categories, and we give them that escape and that affordable luxury. When we work with our retailers on pricing, we talk a lot about also the evolution of our portfolio. Innovation is what's going to help us get more pricing into the P&L. And of course, also us consistently investing in communications, also what's going to make the brands more resilient and avoid just trading down. The lower-income consumer is very important for them to buy brands. There's a sense of pride and a sense of security. When you don't have a lot of money in your pocket, you don't want to make a mistake with the money you spend when you go grocery shopping. We play that role as well, right?

No, that makes a lot of sense. And I guess maybe building on that, I mean, what are you seeing from a consumer standpoint at this point, right? I mean, are you seeing more trade down? Are you seeing that middle starting to squeeze more today than maybe you saw 3 months ago? Or has it kind of been relatively steady?

So far, it's been relatively steady, right? There's a lot of noise out there. Now we have the most recent noise that we'll see what that does. But our categories have held up really nicely. We launched a very premium toothpaste in value discount as well last year, right, which was between $7 and a $10 price point. That's done really well actually in value discount to the point we're just making on affordable luxury. But we're going to have to keep our finger on the pulse because it could be that we suddenly see rapid changes. And I'll say we're very ready for that with the portfolio we have and with the way we run our business. We haven't seen trade-down to private label at significant scale. The one thing that we -- that I'm keeping a close eye on is purchase cycles right now, right? That's one thing that we -- that could be an indicator of things are slowing, so we're watching that data very carefully.

Okay. And maybe just kind of sticking with the near-term performance just for a second here. I think -- and this isn't a Colgate-specific issue, but I think it's been a lot harder for investors and analysts to kind of get a sense or use Nielsen as a barometer from what's really going on. And part of that is just kind of the shift in channel dynamics in terms of club and e-commerce, and part of it is kind of more of this inventory destocking dynamic. And maybe just to start there, are we getting back to a point where the performance and the tracked data is more closely aligned with what you might see in North America?

When I look at our business, I have to look at a broader spectrum than just the tracked environments because there are on track environments that are so important to us. And our tools now allow us to not only track the performance but also track the incrementality because we don't just want to move air around the balloon, run a promotion over here and then we move all these shoppers out of retailer A to retailer B. So we can increasingly look at that incrementality. And I think it will still be a bit messy when it comes to reading that, which is why I think we need to look at the short term but also be clear on where we're headed longer term and kind of make sure we're on the right track and have the right KPIs in place to decide if we're on the right track or we need to correct. As I said upfront, one of my biggest concerns would be if we start overcorrecting at a time where I feel we are getting things right, we need to stay the course and there will be nuances. There will be opportunities we need to go after, and there will also be things that didn't go according to plan. And we need to have the nimbleness to basically address that if whatever we put in the budget doesn't come through.

That's helpful. Maybe just anything on the inventory destocking aspect?

Yes. So inventory, right? So we obviously saw some reductions last year. Noel talked about it in the fourth quarter earnings that we saw it come up in January. We haven't built any of that into our numbers because it's an area that everybody plays with right now. And it's been very clear that our retail partners have been looking at how low level can I operate because obviously, they tie up a lot of cash in inventory. So this is something we're working with them very closely on. We do have some concerns about availability here and there that we need to be able to address but our supply chain talks with their supply chain. And we're making sure that we are partnering with them on being available. I think we will continue to see fluctuations just because of the cost of capital and the headwinds that we're all faced with.

Okay. We've been pivoting on that, and I would say it's not dramatically different around the world, but this is part of around our guidance. We said insights into the first half are -- we kind of have a better path with all the moving pieces. The second half, that crystal ball is a little bit more foggy, right? It's a little bit more foggy and that has impacted our guidance as we came out this year. That said, the inventory destocking, I think the teams have managed it well, that we've been focused on getting our fill rates back up to historical levels and becoming the dependable supplier across our portfolio. I think that's helped a lot on the partnership with the retailers.

And I think that whole process actually allowed for a different type of partnership. Our supply chain people closely embedded with the supply chain people in the customer side, they'll solve problems that the commercial people may not have the depth to be able to solve. So I think that has been helpful.

Yes. And then just last quick -- and I don't want to get too near term, but the most recent update showed some pretty weak volume performance. And so I think it was -- a lot of it was related to a product recall. But just any thoughts on what drove the kind of volume weakness in the scanner data more recently.

Yes. No, I'm watching that as well, right? And part of it is all the pricing settling in the marketplace. And I think we need a few more readings before we can really draw the conclusion on that, so we're watching that very carefully. And then yes, we had a voluntary recall on Fabuloso, which is disruptive to a month when you do that. The good news is that we'll be resolving it, we're getting back on shelves, and there's a great demand for the product. So we believe that, that will be a speed bump more than anything. And we will be quick to get back operating where we need to be on that specific product. When I look at some of the other categories, yes, we're watching it carefully and see, did we take too much pricing? And then if that's the conclusion, we have opportunities to address some of that and so forth. But it's still early days, I'll say.

Okay. And then I guess maybe shifting to North America longer term. North America has historically not been a huge driver of growth, I think, on average, kind of growing 2%, a little bit below the long-term algorithm, but the performance has really improved over the last few years. And I guess what I'm trying to understand is like how would you frame the ability of North America to consistently grow within the company's 3% to 5% organic growth?

That has to be our ambition. When you look at North America, we should look at it as a growth market and also one of our more profitable markets. And we got to have to manage both. Spent a lot of time talking about that also internally, that we need to be able to walk and perform at the same time. But when you look at the market. Why am I saying this, right? But you look at the U.S. as a market and our strength was multicultural, for example. You take the Hispanics. That's the fastest-growing segment. I think it's 50% of the population growth in the U.S. is from the Hispanic segment. They're younger. And we tend to fare really well with them, just south of the border. Toothpaste is called Colgate. So we have some real superpowers here that we need to leverage. I talked about our portfolio that basically cover all key price points you can grow with our company as a family. And I'll talk about our innovation anchored in science that we really bring things out there that are new to the world. A toothpaste that is like a whitening treatment in a tube. We bring our at-home whitening solutions. You move into Home Care and Personal Care, where we bring out initiatives that just help you do a better job, easy at home. So I don't see why we wouldn't be able to operate at that level between 3% to 5% as the company's ambition. And that's the plans we are writing. For that to be true, we have to continue to optimize the P&L so we can advertise and we have to advertise consistently. And that's one of the things we're very focused on. We turn every stone to make sure we can protect the advertising investment so that we bring excitement to our brands and we build categories with our retail partners.

That makes a lot of sense. I guess, I want to shift to margins, which have been a key topic of discussion. And I guess maybe starting with North America, and then Stan, would love to get your perspective on the total company. But when I look in North America operating margins past 2 quarters have shown improvement. When you kind of take a step back, there's quite a bit of a long way between where you exited 2022 versus 2017 and 2018. How much of that margin contraction would you really argue was a result of the company kind of stepping up investment after maybe several years of "over-earning"? And then maybe bigger picture, what's kind of the long-term margin opportunity for North America? Is 30% still possible? Or with the investment levels where they are now, is that kind of a bit too ambitious?

So I don't think that '17 is the right benchmark, right? Because for the algorithm to work, we also -- we have to push the top line. We have to generate the growth. That's what gives life to the P&L. And then we have to do a really good job at managing the middle of the P&L through productivity and great innovation, smart pricing, revenue growth management, all those things, right? So we continue to create a model where we generate funds to advertise and we also generate funds to massage the margins up. We have some significant headwinds. The whole industry has, right? And I'm pleased with the progress we've seen in regaining some of that margin that we lost that allows us then to invest in the business. And then we will see what the future holds. We definitely have an ambition to continue to deliver that growth. And Stan holds me very accountable to that. But you're not going to get in to say what's the right number, right? I think we got to look at it holistically and there will be opportunities to make faster steps forward, and there will also be setbacks based on what the world throw at us. Logistic cost is one that's been really difficult these past years. We're seeing some easing but we need to see that in the P&Ls first. And there are certain parts of the cost that we incurred that are not going to go away, right? When you've got a salary increase, if you work in a warehouse or you drive a truck, you're not going to give that back. So we're going to have to find ways of offsetting that to all the things we talked about this past 40 minutes.

Yes. I think if you pull that margin through North America, first of all, you've seen Jesper has made great progress. Back half of the year, we've seen margin improvement. We guided that we'll see margin improvement going into '23 for the company. And we have confidence in our ability to execute that. But we're not satisfied where the margins are now. So just crystal clear, we -- that is not the new model. We expect that they'll improve going into '23 and beyond. It's integral. What you've heard about the model, you ask what's different about North America but it's symptomatically the entire company. If you go back to that time frame, low growth, not driving a lot, innovation, investment, advertising, improving our go-to-market that has yielded results. Four consecutive years of top line growth that within or above our 3% to 5% organic range. And now we want to take that because the model is expand margin, invest in advertising, invest in our brands, invest in innovation. And we think we're pretty well situated heading into '23 to execute that model.

I guess maybe -- that's really helpful, Stan. But I guess I think we -- I think -- I've got a lot of questions on kind of the 4Q gross margin, right? And I guess, can you maybe just walk us through kind of the delta between maybe where it landed versus kind of maybe your internal expectations? I'll start there and then I have a question on kind of the gross margin path moving forward.

So if we -- first of all, we weren't satisfied with our fourth quarter margins, right? They are below our expectations in total. The primary driver, because we had several divisions like Jesper said, improved margin. And that was our expectation and as a whole, that went reasonably well. Hill's was one that we struggled with a bit more. Now just as a reminder on Hill's, we love this business. We think it's a great business. It's making great progress. It's got great top line growth. Just to put in context what we saw happen in fourth quarter. So as we closed on our Red Collar, 3 new facilities in the U.S., that between September 30 and October 1, became part of Colgate Hill's. And as we look at that, we've now had to go integrate those. We're already operating at essentially 100% capacity on the existing plants. We're building a new plant, which will come online in the second half. So we're staffing up for that. We obviously go through all that. That put a lot of pressure on Hill's in the back half of the year, particularly in the fourth quarter. And we're still trying to get our fill rates back up to the levels we want them. So that margin was clearly impacted. The other part for Hill's, they felt the majority of the impact for commodities because the commodities they're using, things like proteins and ag, those have not come off their highs. Those have been the biggest headwinds for us as a company. So that had a big impact on margin. Now Red Collar, they do, [indiscernible] right, including us as we bought them. But that [indiscernible] is at a very low margin. Now it's part of our portfolio temporarily. We are not in a private label business long term. But when you think about that, that had a 90 basis point impact on our margins in fourth quarter. If you go through time, we're going to wind down that activity, replace it with Hill's. We're going to get a very natural mix benefit heading into the future. So we think that's a great acquisition, really ties in well. But the margin profile will improve. Part of this was in Hill's, a real example. We had one ingredient not show up, we lost entire production run, and you have no ability to make it up. We're remedying that with the additional capacity. So that's what gives us confidence that we're going to be able to see that margin improve. Sales will be a little slower as we're still migrating on the integration of these plants versus the rest of the business, but we do expect margin to be up sequentially off the fourth quarter.

Okay. No, that's really helpful. I mean, we have -- I have a few more questions, but maybe just stop to see if there's any questions. I don't believe -- I've not gotten any in the room. But are there any questions before I run through the final 2? All right. So I guess maybe sticking with that last point. There's a lot of -- and this is a question I've asked in a lot of my fireside chats today is just kind of this -- how do you think about balance, right? And there's a lot of things that are still inflationary. There's still a lot of uncertainty, but there's also things that are moving favorably, right? And I would just be curious, how do you think about kind of that balance of reinvestment versus letting some of that favorability, should it continue, kind of flow to the bottom line, right? Because Colgate has kind of reinvested through the cycle, which might not be the case for other CPG companies. So just would be curious how you would frame the balance. And maybe both of you can answer this as it pertains to North America but also as it pertains to the total Colgate P&L.

Let me turn the macro and then we can bring it to North America. The balance is the key. So as we look into '23, while we do -- we gave our guidance of low to mid-single-digit EPS growth. As you know, there are 100 variables within that. But even within those variables, as we look kind of first half and second half, that second half, there's a lot of unknowns. There's a lot of volatility still in what we're looking at, and we plan for multiple scenarios and then tried to say, what's the right balance between those? We tried to leave ourselves some flexibility to deal with the unknown. Commodities, China is reopening. That could drive commodity prices back up. Inflation is still up. The ECB took 50 basis points today. That could put pressure on consumer demand. So we're trying to weave our way through that. The guidance that we gave of low to mid-single digit is the manifestation of that. So we still want to invest in the long-term health of the business because we think that's critically important. We've made conscious decisions. It's not a blanket across every matrix that we have, while we are still in the matrix. North America is one of those conscious decisions we're investing in because we think it's a really important market. And we think that Jesper is doing a great job to help deliver that. But we want that U.S.-based cash, right? That's an important part of our model, and we think there's market opportunity there. We think there's market opportunity in Hill's. We're investing very heavily in advertising. Obviously, you've seen the capacity investments that we're making in that market. So we made conscious decisions on resource allocation that we think not just helps deliver '23 but sets us up for a long-term success. All of this centers back to our 2025 strategy, and Noel talked a little bit about this at CAGNY. That's kind of become our North Star. It helps us with resource allocation. It keeps us focused on the long term. But the balance point is important, and that's what we guided to for this year, that we would deliver at the higher end of our 3% to 5% range organic and low to mid-single-digit EPS despite the fact we're going to have a major headwind on interest expense and ECB is not expected today. But that -- incorporating those headwinds, we still think we can overcome those with the balance of pricing and margin expansion. Maybe North America because it's a microcosm of the same, right? You run the same play within North America. You've had a little bit of success here in the back half of '22 kind of coming out of that, you got a little bit of momentum.

Yes, we did. And it is, as you say, Stan, right, that's -- we need to look at North America as a growth market and we need to deliver profitable growth. And that's ultimately the ambition we have, and that's what our strategies are designed to do. That's how we decide also for resource allocation. That's how we decide where we are more bold on pricing and where we think we can push volume more. That's the mindset we need to have. So that's the ambition for North America, to sit there and to generally grow ahead of the market, right? And we do think there's still a good outlook for this market. So that's what you have -- that's what we're focused on.

Great. Well, I think if there's no further questions in the room, I think that's a great spot to end. Jesper, Stan, thank you so much for joining us today. We wish you the best of luck moving forward, and we hope to do this again soon.

Thank you. Appreciate it.

Thanks for having us.

Thanks, guys.