Good morning. Welcome to today’s Colgate-Palmolive 2022 Fourth Quarter and Year End Earnings Conference Call. This call is being recorded and is being simulcast live at www.colgatepalmolive.com. Now for opening remarks, I’d like to turn this call over to Chief Investor Relations Officer and Senior Vice President, M&A, John Faucher.

Thanks, Allison. Good morning. And welcome to our 2022 fourth quarter and full year earnings release conference call. This is John Faucher. Today’s conference call will include forward-looking statements. Actual results could differ materially from these statements. Please refer to the earnings press release and related prepared materials, and our most recent filings with the SEC, including our 2021 annual report on Form 10-K and subsequent SEC filings, all available on Colgate’s website, for a discussion of the factors that could cause actual results to differ materially from these statements. This conference call will also include a discussion of non-GAAP financial measures, including those identified in tables eight and nine of the earnings press release. A full reconciliation to the corresponding GAAP financial measures is included in the earnings press release and is available on Colgate’s website. Joining me on the call this morning are Noel Wallace, Chairman, President and Chief Executive Officer; and Stan Sutula, Chief Financial Officer. Noel will provide you with his thoughts on our Q4 results and our 2023 outlook. We will then open it up for Q&A. Noel?

Thanks, John, and thank you all for joining us this morning and I wish all of you a very Happy New Year. So I mostly wanted to focus on the year ahead today, as I think we are well positioned to deliver strong results in 2023, even as we plan for a difficult macroeconomic environment and continued uncertainty. That said, as we mentioned in the prepared remarks, we are pleased with the progress we made in 2022. We delivered organic sales growth in all four of our categories, including double-digit organic sales growth in Pet Nutrition and high single-digit organic growth in Oral Care. 2022 was our fourth straight year of delivering organic sales growth either in line or ahead of our 3% to 5% long-term target range and we delivered within or ahead of that range in every quarter over that time period, 16 consecutive quarters in all. And is the continuing strengthening of our strategy that has allowed us to grow consistently through different operating environments, as each year has presented its own challenges and its opportunities. But if we stay focused on driving the core, leveraging our capabilities across our portfolio, innovating in faster growth adjacencies and tapping into faster growth channels and markets, we will continue to grow. And in 2023, as we continue to execute on our strategy, we expect to accelerate earnings growth and generate incremental cash flow to drive shareholder value. Why are we well positioned for this year despite all of the uncertainty in the world today? It starts with our portfolio. We operate in four highly focused categories. Growing categories that consumers use every day and where they look to trusted brands to help themselves and their pets lead healthier lives. The focus on healthier lives means these consumers are motivated by science-driven innovation with professional endorsement, which is an area of particular strength for us. And the importance of trust in our categories helps keep private label penetration relatively low and allows for premiumization behind differentiated benefits. And within these categories, we have strong market shares. With most of our revenues coming from brands that have a number one or number two market shares on a global basis. The second reason is our focus on building, sharing and scaling capabilities to drive growth. I will continue to talk about our digital transformation as it impacts everything we do. This year we benefited from continued efficiencies in our digital media spending through data-driven modeling. Our efforts on innovation need to deliver over the long-term, not just the launch year, and we have shifted our resources to deliver more breakthrough and transformational innovation. In our prepared commentary, we talked about the share gains we are seeing in the whitening segment of the toothpaste category. It’s a long-term strategy of launching Optic White Renewal and then Optic White Pro Series in the U.S. or our new MPS whitening technology where we are launching around the world, which leverages our superior R&D capabilities to drive long-term share growth. And on top of that, we continue to launch at-home whitening and professional whitening products to enhance our credibility and expand our presence in the premium segment. And our focus on building revenue growth management capabilities, particularly through increased use of data and analytics is driving our pricing growth in ways beyond just list price increases. And the third reason is our strong balance sheet. Our combined financial resources provide us the flexibility to reinvest in our portfolio or pursue value-enhancing acquisitions like our pet food acquisitions, which enables us to drive faster growth. The final reason we are well positioned is the efforts we have put into offsetting the extraordinary cost increases we have seen over the past several years. We have driven consistent pricing and we look to take additional pricing in the first half of this year. Our Funding the Growth program delivered another strong year in 2022 and we expect even higher levels of savings in 2023. We announced our global productivity initiative one year ago and we began to see the benefits in our numbers in the second half of 2022. We expect even greater savings in 2023 to help fund investment and drive operating margin expansion. So we believe we are well prepared for 2023, but there’s still a lot of uncertainty in the world. The macroeconomic environment outlook remains volatile, which can impact consumer spending. China remains a question mark as the country emerges from COVID lockdowns. While raw materials and foreign exchange remain headwinds, they look less onerous now. But as we learned last year, that can change quickly. So we head into 2023 with topline momentum and a proven strategy, with the right brands, the right capabilities and the right efficiency drivers to deliver topline growth and improve our bottomline performance. And with that, I will turn it over to the questions.

Thank you. [Operator Instructions] And our first question today will come from Dara Mohsenian from Morgan Stanley. Please go ahead.

Hey, guys. I just wanted to touch on the organic sales growth guidance for next year coming off a strong Q4 result and the strong pricing we are seeing. I am assuming more than all of that perhaps is driven by pricing and volumes will be down slightly, A, maybe is that correct, and then B, it just be helpful to get a bit of commentary on each of those areas. What are you seeing from a competitive standpoint on the pricing front, and then B, as you think about volume and the demand elasticity you are seeing from a consumer standpoint to pricing, any changes sequentially at all and how are you feeling about that front heading into 2023 here? Thanks.

Yeah. Thanks, Dara. Good morning. So, again, let’s recap quickly, obviously, the strong topline growth or organic growth that we have seen across the business. We are very pleased, obviously, with finishing the year with strong momentum. Obviously, the pricing that we put into the P&L, particularly if you look on a two-year stack basis up to 15.5%, so sequentially up as we moved out of the quarter. So we have continued to take a lot of pricing and we will continue to see the benefits of that as we move into 2023. Volume continues to be a challenge across the world, as you have heard, I think, throughout the earnings season, categories have pulled back and that’s expected given the magnitude of pricing that we have seen go into all geographies around the world. Our sense is will see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we have seen particularly in the back half of this year, but that will begin to improve in the second half of the year. . I think the other aspect on the organic guidance is really a question mark on the economic vibrance of the various markets around the world. We have seen Europe obviously under significant pressure with double-digit inflation. Categories have been soft. Elasticity is a little bit higher in Europe than the rest of the world. Obviously, China is a big question mark. Infection rates remain high. Yeah, a lot of euphoria about China reopening, but as you have seen in the fourth quarter, volumes have been very soft in China for the categories in which we compete, and we see that continuing, quite frankly, in the first quarter, that will improve as we move through the back half of the year to be sure. But that will bring, I think, a question mark to everyone in terms of uncertainty on where China goes and the impact that has. Pricing will need to continue to go through the categories in the first half of this year. As we announced in the prepared remarks, we will be taking more pricing and there’s a real question mark, given the magnitude of the pricing that we have seen in the back half of 2022 and the pricing implementation in 2023, the impact that we will have on the consumer. So far, if I give an overarching comment to elasticities, they have been very much in line with where we have expected. So, overall, we think we feel good about the organic range. We feel very confident that we are within that range and if things continue to stay where they are and we continue to see the share growth that we are seeing across the world and the response to our innovation, hopefully we could be at the top end of that range or better.

Our next question today will come from Andrea Teixeira from JPMorgan. Please go ahead.

Thank you and Happy New Year to you too. So I have a broader question on volumes. On the minus 4% globally, which compares, I guess, favorably to some of your competitors that reported so far. What was the impact of retail destocking, if any, in Filorga. I mean I appreciate you put it in the prepared remarks, obviously impacted more Europe. So I was wondering if you can kind of breach that gap. And also a good segue from your last comments, Noel, on Europe, you have said obviously more pressured. What are the -- and I understand that it was mostly Personal Care and hand soap. Is there anything you can add to that in terms of like the exit rate and also the exit rate for China? Thank you.

Sure. Thanks, Andrea. Good morning. So let me talk a little bit about volume performance around the world and more sequentially as we went through the quarter. Volume improved in the fourth quarter versus third quarter and that volume improvement came despite obviously an incremental point of advertising, excuse me, of pricing, which you saw at 12.5%. So, overall, we are pretty pleased. Some of the drawbacks on volume, as we discussed in the prepared remarks, obviously, skin health had a challenging quarter from inventory reductions, particularly in the online world. We saw those inventory reductions, particularly here in the North America business, and obviously, a significant inventory and volume softness in China due to COVID on the Filorga business. So that really pulled down quite a bit of the volume. You obviously have the Russia impact, which we would quantify to roughly around 30 basis points. Elasticity, as I mentioned early on, were very much in line and consistent around the world, slightly higher elasticities in Europe, but that should be expected and consistent with history, but very much in line with where we expected. A little bit more inventory reduction in India than we expected, particularly in the rural as the rural business has not come back nearly as quickly as we anticipated in the fourth quarter. We expect that, though, to come back in 2023. So, overall, that was very much driven by some inventory reductions we saw on skin, a little bit in the drug classic [ph] trade in the U.S. Likewise, the softness that we saw -- a continued softness we saw in the China skincare business. But, overall, volumes improved versus the third quarter and to a certain extent, more or less where we expected. We did not expect a further deceleration of inventory pullback in the U.S. on the skin business. So in terms of exit rates for Europe, if I characterize Europe in general, a strong share growth across the Board and mid-to-high single-digit organic sales growth in Oral Care and in Home Care, which as you rightfully pointed out, was offset by the weakness in Personal Care, which was principally Filorga, China. But, overall, shares are strong in Europe. We seem to be getting our pricing through. Negotiations continue to go quite well. However, categories have been rather soft in Europe given the amount of pricing that, that market has experienced and the sheer inflation that the European economies are incurring today. So, overall, I feel pretty good about Europe. The good news is the shares are strong and we are getting the pricing through and we feel we are set up for a good year in 2023.

Our next question will come from Kaumil Gajrawala from Credit Suisse. Please go ahead.

Hi. Good morning. On your commentary on shares…

Good morning, Kaumil.

Hi. On your commentary on share, you seem quite pleased with share trends. Can you maybe just dig into that a little bit volume versus value, are your shares -- do your shares look -- are you equally as happy with your share in volume terms as opposed to in value?

Sure. I just characterized Europe, where we felt very good about where we ended up, particularly in Oral Care. North America, as you have seen the data, we are up or flat in eight to 12 categories. Importantly, good -- very strong Oral Care growth both in the year and in the quarter, so pretty good there. Latin America shares in general are flat and we feel good about where we are from a Latin America standpoint, given the sheer amount of pricing that we have taken. I think that’s a representative of some of the strong innovation that we put into the market in the back half. Asia, I will characterize it as quite strong, particularly the e-commerce business, a little softness in the brick-and-mortar business. But, overall, e-commerce continues to perform very, very well and Africa, Middle East, strong as well. So, overall, we feel very good about the momentum we have had on market shares in value terms. Volume pretty much consistent with that, a little softer, particularly in Europe on the volume side in terms of our volume shares, and that’s, I think, response to just the sheer amount of pricing that we have taken in that market. And as I mentioned earlier, obviously, a little softness in the Asian markets on volume, a lot of value going through those markets in general in the categories has been quite soft, but our volume shares in Asia seem to be holding up okay.

The next question is from Chris Carey of Wells Fargo Securities. Please go ahead.

Hi. Good morning.

Good morning.

Noel, if I just take your comments around some incremental pricing, I think, you said, productivity is expected to accelerate, if I look at raw material outlook of several hundred million of inflation and Red Collar, the gross margin negative impact should be easing sequentially. I am coming up with potentially significant gross margin expansion and I realize reality is often so much different than what we can see in the models. But I wonder if you can just maybe help frame that a bit more for me, because it does imply maybe you are leaving some room for investment. But, again, perhaps, I am missing something in this -- in the development of the key drivers here and I wonder if you could just help clarify that a bit more for me? Thanks.

Yeah. Let me take the kind of strategically how we position the P&L particularly around growth and investment and then I will let Stan take you through some of the constructs on how we built internally gross margin and operating margins. As you rightly said, we are really pleased with the operating margin improvement that we are seeing moving through the P&L and that will continue allowing us to fund more advertisers. So as the prepared remarks indicated, we intend to continue to invest behind the business and we have seen great response to the strategy that we have executed over the last couple of years. Obviously, the core adjacencies and channels behind increased investment is driving very strong organic growth in the category and up 5% dollar in the quarter despite significant foreign exchange headwinds. We talked obviously through the back half of this year, the need to continue to invest in Hill’s business once we had more capacity coming online, and that has obviously started to happen in the fourth quarter, and we expect that to obviously continue as we move into 2023. So we will continue to accelerate our investments in the Hill’s business in order to reap the benefits of the incremental capacity that we have. Good momentum on Oral Care and strong innovation and a lot of pricing that we have taken across a broad section of categories and we want to ensure that we have the investment there to generate to get the pricing seated in the marketplace and continue to drive consumption growth for our retailers. So, overall, it will be another year of good investment, a good share growth we expected, and obviously, good topline growth coming through the P&L. Let me turn it over to Stan to kind of take you through how we bridged some of the aspects around gross margin and operating margin.

Sure. Thanks, Noel. And on gross profit margin, you started to see some progress, right? North America, Latin America and Africa, Eurasia, you saw improvements in the operating margin in the fourth quarter. As we look at gross profit, Noel, highlighted the pricing, that significant flow-through will help in 2022. The productivity will be a tailwind here and while material and Ranpak in particular will still be a headwind that moderates coming off of 2022. So, as you look at gross profit margin expansion, that’s going to be a benefit. But keep in mind, as you work down, we are going to have investments in advertising. We expect to increase that on a dollars and percent of sales. But also keep in mind, as you go down the income statement that interest expense is going to be up year-to-year. That’s driven predominantly by increase in rates and also by slightly increased debt levels as we carry Red Collar in for the full year. And also taxes, so taxes around the world, in particular in recessionary environments, potentially being out there, we expect our tax position will be slightly higher on a year-on-year basis. So, while the operating margin or EBIT margin we expect will be up nicely, that will be partially offset by interest and taxes, delivering low-to-mid single-digit EPS growth.

Our next question today will come from Peter Grom of UBS. Please go ahead.

Thanks, Operator, and good morning, everyone. So I wanted to ask on the gross margin as well, which for the quarter was a bit of a surprise. So in your prepared remarks, you mentioned a number of key drivers as to why it came in below your expectations. But can you maybe unpack where the biggest variance was, whether it be sales mix, commodities versus some of these startup costs and manufacturing variances? And then just maybe following up on Chris’ question, when we think about the path-forward, you mentioned several hundred million dollars of inflation for raw materials and packaging. Is there any way to kind of frame that, is that $300 million to $400 million, is it something higher? I just think it’s kind of important to understand kind of the gross margin bridge as we think about next year? Thanks.

Sure. As you saw in the fourth quarter, obviously, a continued difficult environment in terms of raw material inflation, another 900 basis points on top of what we had in the third quarter in terms of a headwind on gross profit. A good percentage of that continues to be ag prices, which obviously, have continued to move south on us. And in fact, if you look at the first half versus second half, Peter, ag prices were up 25%. So, obviously, that continued to impact the Hill’s business. On top of that, as we integrated the three Red Collar facilities and began transitioning some of the high capacity volume business that we had in our own plants. We obviously incurred some startup costs and some variances moving through the P&L that obviously impacted margin in the quarter as well. And then I’d also characterize, as I mentioned, that obviously, the inventory reductions we saw in skin health and the drag from China on the skin health business likewise had a mix impact in the quarter. With that, let me turn it over to Stan to see if he has any more information in terms of how he wants -- we want to characterize how we are thinking about raw materials for next year.

Yeah. The raw materials continue, as Noel highlighted, to be a headwind for us and your range is probably in the right ballpark here as you think about that on a year-on-year basis. But I would emphasize, it has been volatile. So things have moved up and down pretty significantly here, and in particular, the agriculture and how that applies to Hill’s, those have not moderated, up in the second half, as Noel talked about at 25%, and as we look ahead, we think that will continue to be the primary headwind in raw and pack. The other volatile one is natural gas. Now fortunately, that’s been a benefit here in terms of moderating in the late second half and fourth quarter. But we expect that could be volatile as well heading into particularly the back half of 2023. So a combination of those two primarily we think are the drivers as you look at raw impact going into the year. Now we have laid out our pricing actions and are funding the growth savings that we look to drive, combined with our productivity. And I will just mention Red Collar will moderate, but it’s still going to be an impact on a full year basis and it’s important to realize that. So that will moderate through the year on a full year basis, it will still be an impact on overall gross margin.

Our next question today is from Kevin Grundy of Jefferies. Please go ahead.

Hey. Thanks. Good morning, everyone. Question for Noel and then perhaps, John, you may want to jump in on this as well. Just with respect to the impairment charge on the skin care assets and just more broadly, how this may be informing the view around capital deployment. So we can all appreciate the noncash charge. Not hugely surprising, you guys have been pretty open about some of the challenges in the business also realized higher rates when you perform the impairment test so all that kind of makes sense. But I guess just given this dynamic, it sort of back to the question, does it give you any pause in terms of how you stress the assets that you may be looking at, broadly does it increase your bias towards internal investment and returning cash to shareholders versus M&A? And then maybe perhaps just from an M&A perspective, an update on any books broadly that you may be seeing and whether private market values have started to come in a bit given higher rates and what we see in the public markets? So thanks for all that.

Sure and good morning, Kevin. I think you characterized that well. So let me just recap quickly a couple aspects of skin health and I will turn it over to Stan and John for the second part of your question. The impairment was obviously based on three issues. The biggest change is our outlook on growth in China. You have seen, I think, external numbers that the Beauty segment has taken a significant hit in the last three months to six months, in fact, imports were down 20%. And given the prolonged impact of COVID in China, particularly as it impacts travel retail, which were a significant portion of our businesses, we obviously then decided to rebase the outlook in years going forward and particularly 2023 in a much more conservative position to ensure that we can deliver on the growth aspects moving forward. Secondly, the situation in China regarding tourism around the world, as you followed our business on Filorga, it really went with Chinese travel, and as Chinese travel opens up potentially in the back half, we will see an improvement. But we assumed in the impairment that, that will continue to be a headwind for us as we move through at least the first six months of the year, slightly improving as we move through the back half of the year. And then as you well can understand the significant rise in interest rates has lowered the value in our discounted cash flow. But let me step back for a moment. Again, we continue to be very confident in our strategy around skin health. Obviously, the short-term impacts that we have had related to China, we believe ultimately, we will get behind us, but we have obviously been conservative in our assumptions on Filorga. We went into 2022, assuming China would open up and it didn’t. But we feel good about where we are. We have seen some early signs, certainly in the early part of the year, particularly across our European business on Filorga to give us quite a bit of encouragement. Our U.S. business continues to be very, very strong, despite the inventory pullback that we saw in the fourth quarter. If I take our online business specifically, our share growth was up 300 basis points online in the back half of last year and on the year, which is terrific. Obviously, we incurred that share growth despite, obviously, inventories getting reduced. We do expect some of those inventories to come back slightly, but we are obviously assuming a considerable amount of conservatism there because we can’t be sure that particularly the online retailers will take inventory up as quickly as they took it down. Our business overall continues to grow very, very nicely, particularly in the professional channel, which is the core part of our PCA and Elta business, and we have a good innovation plan coming on stream for 2023. So, overall, we still feel very good about the strategy behind skin health. Need China to turn and you have heard a lot of discussions about the uncertainty in China, but we think we have positioned the brand. So, obviously, as China comes back, we will be in a position to reap the benefits of that.

The only thing I’d add on, Filorga, is if you go back and look at the timing of when we purchased it late 2019, it’s built off of very strong growth in China at the time and very strong growth in the travel retail, and then obviously, the pandemic hit, nobody had insight to that. The underlying brand is really strong. There’s going to be new innovation. We have got the advertising to support it to bring it to market. We are still confident in the long-term success of this brand. So that’s what I’d add on Filorga.

Kevin, the only thing I would say relative to M&A strategy and capital deployment is our preference is still to deploy capital internally to our projects, because we are a big believer in return on invested capital and that generates the highest incremental returns. And so if you look at the investment we are making at Hill’s and capacity, if you look at the investment we are making on some of our sustainability projects, Red Collar honestly is a little bit of both, right? It’s M&A, but it also is an investment in internal growth, because we think that Hill’s is one of the best growth engines we have. So I don’t think there’s any change in our capital allocation strategy, invest internally, we would like to pay a healthy dividend and the Board helps us develop the dividend strategy longer term. Then we will look at projects when the valuations are appropriate and we will see what happens with valuations in the market right now. I think the market is still somewhat influx from that standpoint.

And the capital allocation, I think, as we look at that return $2.9 billion to shareholders. We had $900 million of net share buyback. We have paid dividends since 1895 and 60 consecutive years of increasing it. So our capital allocation strategy hasn’t changed. We think it’s the right long-term strategy and we think our investment in M&A is appropriate when we don’t have a better internal investment to do or to fill opportunities for us to fill out our model.

Our next question today will come from Olivia Tong of Raymond James. Please go ahead.

Great. Thanks. Good morning.

Good morning, Olivia.

My question is around Oral Care, because you have obviously made great improvements here, particularly on pricing or hearing on the portfolio. So could you give us a sense of how your game plan is pivoting as macros potentially get a bit more choppy and elasticity get a little bit more elastic. Obviously, high single-digit growth in Oral Care is fantastic, but what’s your view on the state of the consumer in the U.S. and developed markets as a whole, and how that -- and how does that influence your view on potential trade-up versus trade-down in 2023? Thank you.

Sure. Good morning, Olivia. Again, as I mentioned earlier, Oral Care had a really, really strong year, high single-digit growth across the year and the quarter and we were high single-digit in Oral Care on three of the last four quarters and toothbrushes specifically up double-digit three of the last four quarters. Some of that was some easier comps as we were lapping some of the supply chain challenges that we had last year. But the important aspect there is share growth up on the year for both Oral -- toothpaste and toothbrushes. Specifically around elasticity, I think, it comes back to the strategy that we talked about for a couple of years now, which is the flexibility in our portfolio. We continue to innovate across all price points and we cover a wide gamut of price points, from opening to now, obviously pushing a lot more of the super premium segment, which you saw some of the examples of the success we are having in the whitening segment in that regard. So, overall, our categories -- our portfolio is well positioned for this environment. We spend a lot of time as we work through the operations around the world to ensure that we have value-added benefits to every price point within our portfolio and we are flexing our portfolio in different ways over the last couple of years and we are seeing that certainly translate into improved performance. Elmex would be a great example. Taking Elmex very selectively in the pharmy channel -- pharmacy channel around the world has allowed us to grow incremental share in those businesses. The other aspect I’d say is our core re-launches. We will have a significant core re-launch coming on the India business next year. We have re-launched our core business in some of our bigger markets around the world and that has helped some of the premium innovations come on incrementally to the franchise moving forward. So we feel pretty good about where we are with Oral Care. Elasticity is exactly where we expected and I think driven by a combination of the flexibility we have in our portfolio in addition to the innovation that we are bringing to the marketplace.

Our next question will come from Nik Modi of RBC Capital Markets. Please go ahead.

Thank you. Good morning, everyone. Noel, I was hoping…

Hi, Nik.

… maybe you could provide some -- a little bit more context on what you are seeing on the ground in China right now. It’s interesting you mentioned you think the recovery will happen in the back half, so I think there has been projections by other companies and just by looking at some of the mobility data that things might start improving around March to April and we are already starting to see kind of we track the metro activity in China and starting to see some real improvements there. So just curious on your thoughts there given how important that business is for the -- on the margin side given the skin care mix?

Sure. As I mentioned, we had strong performance in China on the Colgate side of the business. Our Holly & Hazel business up nicely mid single digits, our Colgate business up nicely mid-to-high single digits. So, overall, we feel very good about the transformation that we put in place over the last couple of years across our China business. Our brick-and-mortar business is a little soft. But as I mentioned, that’s, I think, characteristic with the lack of mobility around the country and as mobility improves, as you say, and if it improves earlier, by all means, we should benefit from that as we continue to expand our distribution in that marketplace. But it continues to be highly, highly uncertain. Obviously, the Chinese New Year, everyone is waiting very carefully to see the impacts of that. There’s a lot of euphoria, but infection rates are still very, very high and things could change very, very quickly there. The comment I made about the back half is not only mobility within the country, which I think will probably, as you say, improve more quickly, but it’s more external mobility in terms of more international travel, which would benefit the Filorga business. But again, we feel good from the success that we are having from a market share growth. Our -- as I mentioned earlier, our e-commerce business was up almost 300 basis points on the year this year and that is again a reflection of the strategy and some of the good innovation we brought into the market. If the markets improve, we shall -- certainly see the benefits of moving through our P&L earlier than we anticipated. But I would be quite cautious on China at this point. But over the long -- medium- and long-term, we are very optimistic about the growth opportunities there.

Our next question will come from Jason English of Goldman Sachs. Please go ahead.

Hey. Good morning, folks.

Hey, Jason.

So Mr. Faucher talked about the healthy growth contribution from Hill’s, and obviously, the topline lift has been really last few years. It’s surprising, though, to see penny profit actually contracting this year. Can you unpack the drivers and I imagine within that, you are going to come back to some of the ag inflation. So, I guess, I will tag on to that. Ag -- the ag complex seems like it’s one of the easiest ones to hedge out. I imagine you are hedged out, and therefore, have good visibility to it, assuming that part of the contribution is related to ag? What’s impeded your ability to price that through? Thank you.

Yeah. Thanks, Jason. As you said, we have coming off of some of the challenging capacity issues that we had in the third quarter, we feel like we have certainly turned the corner on that business. Again, a double-digit growth in the quarter, that’s 27% growth on a two-year stack basis and we have delivered double-digit growth on the Hill’s business 10 to 12 quarters and we feel with the capacity improvements that we have and obviously the continued increased investments that we feel we are in a very good position to deliver sustained profitable growth moving forward. Now, as I mentioned, ag prices were just up 25% half-to-half. Now you take that on the year versus last year, that’s significantly more. I will let Stan talk in a moment to our hedging strategy, which is very minimal around ag prices. So we don’t get a lot of -- we don’t do a lot of hedging there. But, overall, it’s taking pricing. It’s making sure that we continue to move through the transition aspects of incorp -- integrating three plants and moving capacity from our existing plants into those plants. So there’s startup costs associated with that, obviously, we are building a new web plant, which should open up towards the back half of the year. We have the startup costs associated with that running through the P&L. But all of it is around building investment ability for the future for us and our ability to continue to sustain the strong topline and the strong investment structure that we have by investing in capacity and allowing us to do the things that we do so well in the marketplace. So we feel good about where the business is. Obviously, the ag prices will be where they are and we are taking pricing, as you have seen both in the fourth quarter and plan to take more pricing in the first half of this year. But, again, if ag prices come back, things will get better, but we at this point don’t expect any short-term benefits for ag coming back.

Yeah. Thanks, Jason and Noel. So what I’d add on to that is, we don’t have a large hedging program against ag and that’s a philosophy for us. So we look, we do partial hedges there in ag. We don’t do that in most other categories. But just while we have highlighted ag, there are other areas here like chicken livers, other specialty products that come in as part of the diets that make us more complex, as well as all the amino acids and everything else. Those have all had inflation as well. So while agriculture products have had the most significant, we have also had those and things like the AVM flu do have a ripple effect into the availability of those products. So as we look, we have also integrated now four plants through acquisitions, one from Nutriamo earlier in the year and then the three from Red Collar. So we took those over on September 30th. That integration has gone well. But as you would expect, there are startup costs that go along with that. As we bring Tonganoxie online, that’s our new wet plant in Kansas in the second half of the year. We are very excited about that plan. It has great automation. It’s going to be, I think, a great addition to the portfolio. But that has startup costs in 2023, in particular, in the first half as we hire staffing, get the staffing right heading into or going live. So important here on Hill’s, we see a great market opportunity, science-based, our research center really supports that. We are investing the advertising behind that to drive that capability and to drive that demand and we think that serves us well for the long-term. So we expect margin improvement heading into 2023 in Hill’s. We are excited about that market opportunity and what it represents to the company. We also think it fits really well in our overall portfolio with a science based approach.

Jason, I’d throw one other point, which I think is relevant to not only Hills, but to other aspects or other questions that have come up this morning. And that is the foreign exchange impact in Europe in the quarter, obviously, the second largest business outside the U.S. for Hill’s is Europe and Europe had 11% headwind in foreign exchange and that obviously moved through the Colgate side of the business as well. Now you have seen the significant pricing that we are taking, but obviously, the transactional impact as well as the translational impact of that foreign exchange moved through in the fourth quarter, and certainly, dampened a little bit of the penny profit that we would have expected.

Our next question will come from Steve Powers of Deutsche Bank. Please go ahead.

Hey. Thank you. So picking up a little bit on what you were just talking about in terms of startup costs, but also the manufacturing variances and the negative mix that Noel you alluded to earlier with respect to the fourth quarter. I guess, a couple of questions related to that. One is, I assume that’s lumped into the raw materials, the 920-basis-point negative impact of raw materials, I don’t know where else it would go. So if that’s the case, I guess, is there a way to quantify what those sort of to me, non-raw materials costs would have been or were in the quarter as a headwind, number one. Number two, how we think about those carrying over and phasing at least into the -- I presume the first half of 2023. And then just to clarify and round it out is, are those are those impacts embedded in the several hundred million dollar raw and packaging materials inflation outlook for next year, just because I think it’s a little bit different than raw and packaging materials as sort of narrowly defined. That’s really my -- those are my main questions. If you could also talk a little bit about how you are thinking about Red Collar phasing through the year, and just operationally, what that entails, if there are costs, whether cash costs or costs that are notable going to the P&L as you do transition the private label product over to Hill’s, just that would be helpful to understand? Thank you.

Sure. Steve, let me take a very topline kind of strategically how we are integrating Red Collar and deliberate plans that we have take -- we have taken to ensure a successful integration into the Colgate-Palmolive Company. First, it’s three significant plants that we are obviously integrating. And as we have talked about for the better part of a year, all of our existing facilities on Hill’s have been running full out, and obviously, that is a very inefficient way to run your supply chain. Now we have obviously been investing in improved capacity, obviously, with the plants in addition to the Tonganoxie in addition to the plant that we purchased in Italy. But again, integrating those into the system to ensure one quality mechanisms are where they need to be, ensuring the lines are capable of the flexibility and the formulations and the sophistication of our formulations, making sure that, obviously, the all aspects of the science driven approach that we have taken to our formulas is well understood and by the culture of the organizations that we are integrating into the company. All of that has been very, very methodical. We are not going -- given that we need the capacity, we are not going to rush ourselves into doing this too quickly. So we have been very careful to ensure long-term success as we built the plans to bring that volume into the Colgate business over time. So, with that, let me turn it over to Stan. He will take you through a little bit of how we planned for Red Collar and how we are thinking about the ongoing startup costs associated with that.

Yeah. So let’s start with Red Collar first. So as Red Collar comes in and we cut over production over time and this will be over an elongated period of time. There are a few things that have to happen. One, and of course, I should start, all of this is baked into our guidance. So as we planned this out, this is all incorporated within our guidance. So first, as we take the Red Collar facilities and migrate those over to produce Hill’s formulas, there is investment that has to go into that. We have incorporated that into our capital and we have incorporated any income statement impact into the numbers. And that really centers around what Red Collar was producing was much simpler formulas for us and for others, and our diets, our formulas are much more complex, in particular, in the prescription diet area, which is why I think they are such valuable to consumers. So that involves additional mixing, additional ability and testing, quality testing as we go in, and that will require capital investment into those facilities, all planned all on track. The variances that we have in total, so let me step back to there, the variances that we have in total go into gross profit so that as they are going through, we expect that those will get better. We expect that those will get better as we get some relief on the overall manufacturing as those Red Collar facilities come fully on board and produce more of Hill’s formulas. That allows us to go in and do more efficiency planning within the existing facilities. So as we think about Tonganoxie, that’s, again, the new wet food plant that will come online in the second half of 2023. In the beginning, we do have some startup costs there and those startup costs, again, are around things like bubble staffing as we bring the staff on board and get them trained and so we expect that, that will contribute in the second half, but it becomes a headwind in the first half around Hill’s. So thinking about Red Collar, keep in mind that this was acquired and was in for the full quarter of Q4 of 2022. So we will wrap around from an impact here in Q4 of 2023. But as we go forward, you should think that the impact to margin is roughly in line with what we saw in fourth quarter. So it would be a benefit to the topline and given that the private label activity is at a much lower margin that will impact margin through the year but at a slightly decreasing rate.

Our next question will come from Rob Ottenstein of Evercore. Please go ahead.

Great. Thank you very much. A couple of follow-up questions. One, you mentioned in the press release or the comments that there was an e-commerce inventory drawdown on skin health. Can you just clarify exactly what brands that was and why that would be happening? And then I’d like to just kind of talk a little bit more about Hill’s. One question that we are getting is, what was the effect of private label on the organic number. So if you took private label out, was the volume growth actually down 100 basis points, so a clarification on that. And then bigger picture, if we could kind of scope out and look at the whole pet food area in general, you guys are obviously premium and have been gaining share a long time. Can you talk about historically potential trade-down impact given a tougher consumer environment and how you may be adapting to that and what your volume assumptions are for pet in 2023? Thank you.

Yeah. Good morning, Rob. Thank you. Let me take the e-commerce question first. A good year for e-commerce, as I mentioned, it’s up to 14% of our sales. We continue to see strong growth throughout the year, and importantly, in the most important markets around the world, we continue to see strong share growth. So, overall, we feel a lot of the work that we put into our digital transformation has paid out quite nicely in the consumption that we are seeing across the board, whether that’s our skin business, whether that’s our U.S. Oral Care business or our Hill’s business, we are performing quite well. And we are sharing those capabilities very nicely across the enterprise, and as I have talked to you before in the past, obviously, Hill’s was at the forefront of that and a lot of the skill sets that we built in our Hill’s organization have certainly translated now across the enterprise and we are using those benefits to grow our e-commerce business, both on a share basis and a topline basis. The inventory drawdown was on PCA and Elta in the U.S. in the online channel, which is their number one retail channel. As you know, they sell through the profession and they sell online through the big online retailers. The big online retailers took significant inventory out of the system in the fourth quarter. These are very high priced items, as you are well aware, and they felt, I guess, managing their working capital that they were going to take those down in the fourth quarter. The good news, as I mentioned earlier, we didn’t see a significant impact on our consumption. Our shares were actually up and the more important news is that we started to see that inventory rebuild itself slowly, I would say, in the first quarter of this year, particularly January. Now that’s not to say that at the end of the quarter, we may see more draw downs. But in any case, the good news is we start to see some improvements there. But it was on the PCA and Elta business in the U.S. And likewise, on the Filorga business in China with the significant lockdowns that we saw across China in the fourth quarter and coming out of the third quarter, we saw significant inventory reductions in the online business there as well. Relative to private label, let me characterize, I guess, first Oral Care. So Oral Care private label in the U.S. is about 0.9 share and that share is roughly flat on the quarter -- in the fourth quarter and flat on the year. Oral Care private label shares in Europe are around 3.5%, and likewise, that share is flat. We are seeing a little bit of growth in private label businesses, particularly in Europe on some of the Home Care businesses. Obviously, cleaners dish, and to a certain extent, fabric softener, as we have seen about 1 point of growth in the private label business there, but consistent with where we expected. So nothing unusual, and importantly, we don’t see, obviously, given the benign levels of shares we have seen in Oral Care, we haven’t seen a significant turnaround there. On the Hill’s trade-down, we have not seen trade-down thus far. If you go back to 2007, 2008, which we spent a lot of time looking at the premiumization of the category during that period. We did not see consumers pulling back on scientific -- scientifically proven Pet Nutrition. And we feel that given the strength of our innovation, and obviously, the strength of the investment that we are putting in the market, that we will be able to continue to manage that quite well.

So, thanks, Noel. Rob, let me just pick up on the on the Hill’s organic and private label and how we are showing that. If you look at the press release, you stated, you saw net sales were up 20%, organic sales were up 14%. There is no private label in the organic sales. So we include in the net sales, but in organic, it will only be inorganic when it wraps around for the year, which will be in the fourth quarter. So when you see organic sales that represents true year-on-year with no private label benefit in that number. Similar to volume, you will see the volume in a press release at plus 10% and then organic volume at plus 0.5%. So volume expanded even outside of private label, you get a feel for the size of private label in the as reported volume number. So, again, that will be that way Q1 through Q3, and then in Q4, it will wrap around, because it will be in both years and be in the organic numbers. .

Our next question will come from Mark Astrachan of Stifel. Please go ahead.

Yeah. Thanks, and good morning, everyone. I want to go back to gross margin kind of looking backwards and then trying to think about it going forward. So I guess I am curious what happened to gross margin in 4Q, I mean, I hear all of what you talked about some things unexpected. But if you go back and look at what you said at the last call, you were locked in at least that’s what I thought you said on, I assume a bunch of these raw materials, ag pieces. So was just the manufacturing variance of startup costs, et cetera, just much greater. And I guess the question going forward then is I hear you in modeling the question on this call is about, improving gross margin expectations and all these things that are potential tailwinds. But how much visibility do you have as you sit here today and what potentially is based in that could go wrong? And then kind of pushing it forward longer term, how do you think about -- how does the company think about the necessity to grow gross margins over so that you can hit the earnings algorithm for the business given where the topline expectations are and just how important that is and what line of sight you have to get back to a number, not that I am expecting you to comment on, you can get to 60% again, but if you can talk directionally to that that would be helpful as well? Thanks.

Thanks, Mark. Let me start with the end, the last question first and provide some thoughts and I will have Stan walk through you a bit more of our assumptions once again. Listen, driving gross margin for our company has always been fundamental and it’s always been the fulcrum of our P&L, and as we laid out in the prepared comments, we expect gross profit to be up in 2023. I remind you that the gross profit was down 160 basis points in the fourth quarter, if -- when you exclude the impact of Red Collar. Some of the issues that we incurred in the fourth quarter, obviously, we had a mix issue with the lower skin health business that we mentioned. A little bit of a mix issue on Hill’s as well with more of the Science Diet business versus prescription diet, but we obviously had the elevated ag prices moving through there and the startup costs that as Stan mentioned earlier, that moved through the gross profit line. But step back, again, I mean, we are very focused on getting pricing in the P&L and you have seen that sequentially improve from third to fourth quarter. We expect that to benefit us next year. Now there are a lot of assumptions on where commodities go. We talked about a couple of hundred million dollars there. But remember where we were in the first quarter of this year. We had a lot of assumptions there and we got ahead of that very, very quickly in terms of where things move. Now if things move -- stay where they are, improve, obviously, we don’t think we will be at the low end of our guidance. But we feel it’s a prudent and flexible place to be given the uncertainty that we have seen and the movement that we have seen, certainly, over the last six months to nine months in commodity prices not to mention foreign exchange. So let me turn it over to Stan to give you a little bit more color once again on where we are from some of our locks in our contracts.

Yeah. So on gross profit and we look at raw and pack, we do lock in a majority of our commodities here at least 90 days out for the next quarter. But there is still conversion costs, there’s still the manufacturing variances that we have to go through, labor cost that goes into that, et cetera. So when we look at this and for fourth quarter, the 250 basis point as reported decline in margin, again, private label drove about 90 points of that, so you are at 160 basis points. And as we look at prices here, again, it was 920 basis points, relatively consistent with Q3 and our conversion costs and some of the variances that we talked about had an impact overall on margin versus our original expectation. As we look going ahead, we are guiding for expansion of gross profit margin heading into 2023 and we think as we look at that, the components of that are going to be moderating commodities are on pack, improved pricing in RGM and then the productivity work that we have been doing across the Board will have a benefit here to margin. So the margin expansion again fuels that investment into advertising. So we do believe that margin expansion is a core component of foundation of our overall model and so that expansion into next year will fuel that model, which will allow us to deliver low-to-mid single-digit earnings growth.

Our next question today will come from Lauren Lieberman of Barclays. Please go ahead.

Hey. Thanks. Good morning. I know you have covered a lot of ground, but I just was curious, knowing that 4Q gross margins came in below what you had anticipated. You have obviously detailed the reasons a couple of times. I was just curious, the bottomline still delivered, frankly, so that means there were some choices made, perhaps, a little bit short term on lines within OpEx. So I was just curious kind of what are the areas that you may be pulled back on in the shorter term than how you kind of make those decisions and how we should think about the reinvestment in 2023? Thanks.

Sure. Well, we didn’t pull back on the advertising investment, obviously, that was down 20 basis on a percent to sales, but if you exclude Red Collar advertising was flat and on a local currency basis, Lauren, the advertising was up and that becomes fundamental to continue to build the momentum of the progress we have seen in 2022 to ensure that we deliver that continued momentum in 2023 and that was a very deliberate choice to sustain the investment moving through the quarter. Obviously, a little bit of softness in gross margin, as I mentioned, largely driven by mix of the Hill’s business coming in a little bit lower than we expected, as well as skin health, but we feel those are well under control. We have good visibility about where those two businesses are going. So we feel like we are in a pretty good position to continue to execute against our strategy, deliver gets the gross margin improvement in 2023. Obviously, the first half we have a bit more visibility, we don’t have that visibility in the second half, but we will continue to execute against what we see in front of us and that is our need to take more pricing, get it into the P&L and ensure we have the investment to support that.

The only thing I’d add, Lauren, on that one is, look, we took actions early in the year, particularly around the global productivity initiative that started to pay off in the back half of the year. So we saw some of that flow through here hit in the back half of the year. And we manage the overhead lines carefully and because we are running the entire P&L up and down and those overhead lines, we prioritize within that. We want to make sure we support advertising, digital, analytics and then we make trade-offs within that, as you would expect us to do go forward. We think that’s just a prudent way to run the business and we will continue to do that heading into 2023.

Yeah. As I mentioned earlier, Lauren, we are very pleased with that middle part of the P&L around how we managed overheads, which given, obviously, the headwinds we have seen below that around interest expense, as well as tax, it’s extremely important that we got ahead of that. We delivered an additional 50 basis points of overhead on top of the 150 basis points that we had in the previous year. So we feel that structures us well to invest in strategically the areas that we think are fundamental to driving long-term growth. Those are the capabilities that we have talked about around digital transformation, improved capabilities around innovation, certainly as we restructure that part of the organization and making sure that we have that operating leverage to sustain the advertising investment, which is clearly driving a good topline growth for us.

Our next question will come from Bryan Spillane of Bank of America. Please go ahead.

Hey. Thanks, Operator. Good morning, everyone. So my question is just around cash flow. Free cash flow conversion, if I am doing the math right was about 74% of net income this year. I think in absolute dollars, free cash flow down about $900 million. So maybe you can talk a little bit about, as we look forward, do we expect some of that free cash flow productivity to improve? And then maybe just related on, I know you have talked about net interest expense being higher for this year, just if you can put a number on that and also on capital spending? Thank you.

All right. Let me hit the topline, and Bryan, good morning, by the way, and I will let Stan take you through some of the puts and takes. But, overall, cash flow -- our cash was down due to lower cash income, right? Obviously, that was the higher -- that was some choices that we made, particularly around working capital investments, a little bit increase in inventories as we were dealing with some of the supply chain disruptions we saw from suppliers and our need to sustain the consumption growth that we had in the marketplace, particularly some of the stronger consumption growth, but obviously, inventory days came up as a consequence of that. But we improved a bit a bit of that in the fourth quarter versus where we were in the third quarter. But clearly, it was driven by the lower cash profits driven by, obviously, the sustained foreign exchange hit as well as the challenges that we saw moving through gross margin on the year. CapEx was the other one, a deliberate choice for us, obviously, the growth that we have made -- the growth that we put into Hill’s, and the investment and the significant increase in capital expenditures there and some of the increases that John mentioned earlier around sustainability, which we think are extremely important to position us for where the markets are moving forward. And overall, I would say that we expect a very nice improvement in operating cash flow in 2023.

Yeah. Let me pick up there on the cash flow. So, as Noel said, we do expect improvement in 2023 and it’s really going to be two-fold. One, the improvement in cash profits, as we have guided to, and second, the improvement in working capital. We see opportunities there. We have been conservative on our working capital here in 2022 and particularly around inventory. We wanted to make sure that we could restore fill rates across the board that we had enough inventory to supply. And in particular towards the late in the fourth quarter as China had impacts from COVID on manufacturing, we prudently brought in additional inventory to make sure we could fulfill clients over the year end. On -- so on cash flow, we expect improvement in both working capital and cash profits. On interest expense, you see in fourth quarter a material increase on a year-on-year basis, and again, really comes from two components. First, the impact that it has on floating rate debt, in particular, CP, that’s up significantly, as you know. And then second, we are carrying a slightly higher debt level, though, quite comfortable within our range and our leverage metrics for heading into 2023. So as you think about that interest expense, it will be larger than the gap you saw in fourth quarter, simply because you get a full year of carrying the Red Collar of funding through the year. That said, we think we have highly competitive rates on our debt going through. We have great access to the markets that fund our overall model. So, on capital spending, as you saw from our press release, we spent just under $700 million. I expect that could go up a little bit as we look at 2023 and that’s really in a couple of areas. First, we are going to complete Tonganoxie as that comes online in the second half. And that we talked already about the Red Collar facilities, we have great plans for those as we are going to significantly increase our overall capacity for our Hill’s business, which operates in a terrific segment and that investment obviously will have capital spending. In addition, we invest in sustainability type efforts like recyclable tube, which we think are important. We will continue to roll that out in a prudent manner and we continue to invest in IT capabilities, including our S/4HANA journey that we are well underway. So, overall, we are comfortable with the position heading into 2023 and that will expand cash flow at a material level on a year-on-year basis.

Yeah. The only thing I would add is strategically these investments are all around positioning us for long-term growth and success. A lot of discussion goes into the choices we make around our capital investments. And the supply chain, and certainly, the IT team are very focused on ensuring that the money is being put into areas that are going to give us improved capabilities moving forward and allow us to weather some of the storms that you have seen over the last three years where we have recognized the challenges and generated real opportunities coming out of those and that certainly has driven the topline of the company.

So, with that, let me just finish off. I think that’s the end of the questions. Again, 2022 was another year of strong progress for the business in terms of sales, market shares and productivity that moved through the P&L, but more importantly, the capabilities that we are building across the organization. We are excited to see the leverage moving through the P&L and we will see that continue in 2023 that will allow us to deliver the investment to sustain good topline growth, and obviously, very focused on delivering shareholder value moving forward. We will see everyone, I hope down in CAGNY in February, where we can talk a little bit about more of our plans in terms of how we are seeing 2023 unfold. But I’d be remiss not to thank all the Colgate people listening on the call for an extraordinary year in 2022, a lot of challenges, but we recognize the opportunities that we had in front of us and I wish all of you a happy and successful 2023. Thanks, everyone.

The conference has now concluded. We thank you for attending today’s call and you may now disconnect your lines.