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 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 bottom-line performance. And with that, I will turn it over to the questions.

Thank you. 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 would 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 we 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 on 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. I have a broader question about volumes. The global decline of 4% seems to compare favorably to some competitors that have reported so far. What was the impact of retail destocking, if any, on Filorga? I appreciate that you mentioned it in the prepared remarks, noting it affected Europe more significantly. Can you elaborate on that? Additionally, regarding your comments about Europe being under pressure, I understand it was mainly in Personal Care and hand soap. Can you provide more details about the exit rate in that region and also for China? Thank you.

Sure. Thanks, Andrea. Good morning. I would like to discuss volume performance globally and sequentially through the quarter. Volume increased in the fourth quarter compared to the third quarter, and this improvement occurred even with a rise in pricing, which was at 12.5%. Overall, we are quite satisfied with this outcome. However, some challenges impacted volume, particularly in skin health, due to inventory reductions, especially online. We noticed these reductions mainly in North America and experienced notable inventory and volume declines in China because of COVID's effect on the Filorga business. This significantly affected our overall volume. The situation in Russia had an estimated negative impact of about 30 basis points. As for elasticity, it has remained consistent globally, with slightly higher elasticities in Europe, which aligns with historical trends. We did see a bit more inventory reduction in India than we were anticipating, especially in rural areas, as the rural market has not rebounded as quickly as we thought it would in the fourth quarter. We expect that recovery to happen in 2023. The volume changes were largely influenced by inventory reductions in skin care and some softness in the U.S. drug trade, as well as ongoing challenges in the China skincare market. Overall, volumes improved compared to the third quarter, aligning with our expectations, although we did not foresee further deceleration in inventory reduction for the U.S. skin care sector. Turning to Europe, I would characterize the performance as strong share growth overall and mid-to-high single-digit organic sales growth in Oral Care and Home Care. However, as you mentioned, this was counterbalanced by weaknesses in Personal Care, primarily due to Filorga in China. But overall, our shares are solid in Europe. We are successfully implementing our pricing strategies, and negotiations are progressing well. Nonetheless, categories in Europe have remained somewhat weak due to significant pricing pressure and inflation affecting the economies there. Overall, I feel optimistic about Europe. The encouraging news is that our shares remain strong, we are managing to pass through prices, and we are positioned well for a successful 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. Regarding your comments on share trends, you seem quite satisfied. Could you elaborate on the performance of your shares in terms of volume compared to value? Are you as pleased with the volume share as you are with the value share?

Sure. I characterized Europe positively, especially in Oral Care. In North America, we are either up or flat in eight to twelve categories, with particularly strong growth in Oral Care both for the year and the quarter. In Latin America, shares are generally flat, but we are satisfied with our position there, considering the pricing we've implemented. This reflects the successful innovations we launched in the latter half. Asia is showing strong performance, mainly in e-commerce, although there is some softness in the brick-and-mortar segment. Overall, e-commerce continues to excel, and there is also strength in Africa and the Middle East. We are pleased with the momentum we've gained in market shares in value terms. Volume trends are mostly consistent, though there is a bit of softness in Europe regarding our volume shares, likely due to the pricing we've applied in that market. As mentioned earlier, there is some volume softness in Asian markets, but we are seeing significant value flow through those categories, and our volume shares in Asia appear to be holding steady.

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

Hi. Good morning.

Good morning.

Noel, regarding your comments on incremental pricing, you mentioned that productivity is expected to improve. Considering the outlook for raw material costs, which are expected to inflate by several hundred million, and the negative impact on gross margins from Red Collar should ease sequentially. This leads me to anticipate a potential for significant gross margin expansion. However, I recognize that reality can differ from what the models predict. Could you help clarify this for me? It suggests that there might be some room for investment, but I may not fully understand the development of the key drivers. Thank you.

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 advertising. 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. In the fourth quarter, we faced a challenging environment with ongoing raw material inflation, adding another 900 basis points to the gross profit headwinds we experienced in the third quarter. A significant portion of this was due to agricultural prices, which have continued to decline. In fact, comparing the first half to the second half, agricultural prices increased by 25%, significantly affecting Hill's business. Additionally, as we integrated the three Red Collar facilities and began transitioning some of our high-capacity volume business, we incurred startup costs and encountered variances that impacted margins this quarter. Moreover, the inventory reductions in skin health and the challenges from the skin health business in China also had varying effects during the quarter. Now, I'll pass it over to Stan for further insights on our outlook regarding 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, 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 packaging. 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 skincare 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, 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, inwest 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, we returned $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 about Oral Care, as you've made significant improvements, especially in pricing and the portfolio. Could you share how your strategy is adjusting as market conditions may become more volatile and consumer behavior shifts? While high single-digit growth in Oral Care is impressive, what is your perspective on the consumer landscape in the U.S. and other developed markets, and how does this impact your views on potential trade-up versus trade-down in 2023? Thank you.

Sure. Good morning, Olivia. As I mentioned earlier, Oral Care had a very strong year, with high single-digit growth both overall and in the last quarter. We achieved high single-digit growth in Oral Care for three out of the last four quarters, and toothbrushes saw double-digit growth in three of those quarters. Some of this can be attributed to easier comparisons as we overcame supply chain challenges from the previous year. However, the key point is that we experienced market share growth in both toothpaste and toothbrushes. Regarding pricing elasticity, it circles back to our strategy that we've discussed for a couple of years, which emphasizes flexibility within our portfolio. We continue to innovate across all price ranges, covering a broad spectrum, and we are increasingly focusing on the super premium segment, as demonstrated by our success in the whitening products. Overall, our portfolio is well positioned for the current market. We've dedicated significant efforts to ensure that every price point in our range offers value-added benefits, and we have adapted our portfolio in various ways over the last few years, resulting in improved performance. For instance, Elmex has thrived by being carefully introduced in the pharmacy channel globally, allowing us to capture additional market share. Additionally, we have a major core relaunch planned for our India business next year, and we've already revitalized our core business in several key markets, which has facilitated the introduction of premium innovations to the franchise. We feel confident about our standing in Oral Care. Elasticity aligns with our expectations and is driven by the flexibility of our portfolio and the innovations we are implementing in the market.

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.

Could you provide some more context on what you are observing in China right now? It's interesting that you believe the recovery will occur in the latter half of the year. Other companies have projected that improvements might begin around March to April, and we are already tracking the metro activity in China and noticing some significant enhancements. I'm curious about your thoughts on this, considering how crucial that business is for the margin side given the skincare mix.

Sure. As I mentioned, we had strong performance in China for the Colgate business. Our Holly & Hazel business is doing well with growth in the mid-single digits, and our Colgate business is seeing increases in the mid-to-high single digits. Overall, we feel very positive about the transformation we have implemented over the past couple of years in our China business. Our brick-and-mortar sales are somewhat soft, but I attribute that to limited mobility across the country. As mobility improves, we should benefit from this as we continue to grow our distribution in that market. However, there remains a high level of uncertainty. The upcoming Chinese New Year is something everyone is watching closely due to its potential impact. While there is a lot of optimism, infection rates remain very high, and circumstances can change quickly. When I spoke about the latter half of the year, I was referring not only to internal mobility within the country, which I expect to improve more rapidly, but also to increased international travel that would positively affect the Filorga business. Nevertheless, we are encouraged by our market share growth. Our e-commerce business saw a nearly 300 basis point increase this year, reflecting our successful strategy and the positive innovations we have introduced. If the markets improve, we will likely see the benefits flow through our financials sooner than we had initially expected. That said, I remain cautious about China at this moment, but we are very optimistic about the medium- to long-term growth opportunities there.

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

Hey. Good morning, folks.

Hey, Jason.

Mr. Faucher mentioned the strong growth contribution from Hill’s, and it's clear that the topline has seen significant increases in recent years. However, it is surprising to see penny profit actually declining this year. Could you elaborate on the factors contributing to this, particularly in relation to agricultural inflation? Additionally, it seems like the agricultural sector is one of the easier areas to hedge. I assume you have managed to hedge, which would provide you with good visibility, especially if part of the contribution is tied to agriculture. What has limited your ability to pass those costs through? Thank you.

Thanks, Jason. As you mentioned, we have overcome some of the capacity challenges that affected us in the third quarter, and we believe we have turned a corner in that business. We achieved double-digit growth this quarter, with a 27% increase on a two-year stack basis, and we have consistently delivered double-digit growth in the Hill’s business for 10 to 12 quarters. With the capacity improvements we have made and the ongoing investments, we are positioned well for sustained profitable growth moving forward. Agricultural prices increased 25% half-to-half, and when compared to last year, it is significantly more. I’ll let Stan discuss our minimal hedging strategy concerning agricultural prices shortly. Overall, we are focused on pricing and successfully transitioning capacity by incorporating three new plants and reallocating resources from existing facilities. This involves startup costs, including the new web plant, which we expect to open in the second half of the year and will impact our P&L during its launch. All these efforts are aimed at enhancing our future investment capabilities, ensuring robust topline performance, and supporting our strong investment framework by boosting capacity, which allows us to excel in the marketplace. We are optimistic about our business outlook. Agricultural prices will fluctuate, and while we have already implemented price increases in the fourth quarter and plan to continue doing so in the first half of this year, we do not foresee any short-term benefits coming from agricultural prices rebounding at this time.

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 not only to Hill’s, 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 an 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.

Thank you. I want to follow up on the startup costs, manufacturing variances, and the negative mix that Noel mentioned regarding the fourth quarter. I have a couple of questions related to this. Firstly, I assume the 920-basis-point negative impact of raw materials is included in the raw materials category; I’m not sure where else it would be. If that’s true, can you quantify what the non-raw materials costs were in the quarter as a headwind? Secondly, how do we expect those impacts to carry over and phase into the first half of 2023? Additionally, are those impacts included in the several hundred million dollar outlook for raw and packaging materials inflation next year? I believe this is somewhat different from the narrowly defined raw and packaging materials. Those are my main questions. Could you also discuss how you are planning for Red Collar throughout the year and what that operationally entails? Are there notable cash or other costs affecting the P&L as you transition the private label product over to Hill’s? That would be helpful to understand. Thank you.

Sure. Steve, let me provide a strategic overview of how we are integrating Red Collar and our deliberate plans to ensure a successful integration into the Colgate-Palmolive Company. We have three significant plants that we are integrating. As we've discussed for nearly a year, all our existing Hill's facilities have been operating at full capacity, which is an inefficient way to manage our supply chain. We have been investing in increasing our capacity at these plants, including the Tonganoxie facility and the plant we acquired in Italy. Our goal is to integrate these into the system to ensure quality mechanisms are in place and that the production lines can handle the flexibility and complexity of our formulations. Additionally, we need to ensure that all aspects of our science-driven approach to our formulas are well understood by the cultures of the organizations we are bringing into the company. This process has been very methodical. Since we need the capacity, we are not rushing into this too quickly. We are carefully planning for long-term success as we develop strategies to incorporate that volume into the Colgate business over time. Now, I'll hand it over to Stan, who will explain our plans for Red Collar and discuss the ongoing startup costs related to it.

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.

Good morning, Rob. Thank you for your question about e-commerce. We've had a strong year in this area, with e-commerce now representing 14% of our sales. Throughout the year, we experienced robust growth, particularly in key markets globally, where we've also gained significant market share. The efforts we've invested in our digital transformation are clearly paying off across various sectors, including our skin care, U.S. Oral Care, and Hill’s businesses. We're effectively sharing our digital capabilities across the company, especially those developed in Hill’s, which have since been applied throughout the organization to enhance our e-commerce growth both in market share and revenue. In terms of inventory, we saw a reduction in PCA and Elta in the U.S. online segment, their primary retail channel, as they typically sell through professionals and major online retailers. These retailers significantly reduced their inventory levels in the fourth quarter, likely to manage their working capital, given the high price of these items. Fortunately, we didn’t experience much impact on our consumption, and our market shares actually improved. Additionally, we've started to see inventory levels gradually rebuild, especially in January of this year, although we may observe further reductions by the end of the quarter. This also applies to the Filorga brand in China, which faced considerable inventory cuts due to significant lockdowns in the fourth quarter and late in the third quarter. Regarding private label products, in the U.S. Oral Care sector, private label has about a 0.9 share, which remained fairly stable over the last quarter and year. In Europe, Oral Care private label shares are approximately 3.5%, also flat. We are, however, noticing some growth in private label products in Europe, especially within the Home Care segment, including cleaners and fabric softeners, where we've seen about a point of growth that aligns with our expectations. There hasn't been a significant turnaround in Oral Care share levels. As for the Hill’s brand, we haven’t observed any trade-down behavior so far. Looking back to 2007-2008, during the premiumization period, we didn’t see a decline in consumer interest in scientifically-supported pet nutrition. We believe that, due to our strong innovation and market investment, we can continue to navigate these conditions effectively.

So, thanks, Noel. Rob, let me just pick up 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.

Thank you, and good morning, everyone. I want to revisit gross margin, looking both at past results and future expectations. I'm interested in what happened to gross margin in the fourth quarter. I understand there were unexpected factors, but based on the last call, it seemed you were secured on many raw materials, particularly agricultural ones. Was the variance in manufacturing and startup costs significantly higher than anticipated? Moving forward, I recognize the focus on improving gross margin expectations and potential positive factors. However, how much visibility do you have at this moment regarding what could potentially go wrong? Additionally, looking at the long term, how does the company view the need to increase gross margins to achieve your earnings targets, considering the projected top-line growth? It's crucial to understand what your sights are on achieving a specific margin, and while I don't expect you to confirm reaching 60% again, any directional insights would be appreciated. Thank you.

Thank you, Mark. I'll address the last question first and share some insights, and then I’ll have Stan elaborate on our assumptions. Achieving strong gross margins has always been essential for our company and is a key aspect of our profit and loss statement. As we mentioned in our prepared remarks, we anticipate an increase in gross profit for 2023. It's important to note that gross profit declined by 160 basis points in the fourth quarter when excluding the effects of Red Collar. During the fourth quarter, we faced some challenges, including a mix shift with our lower skin health business and, to some extent, Hill’s, where we had more of the Science Diet product compared to the prescription diet. Additionally, elevated agricultural prices and startup costs, as Stan previously noted, impacted our gross profit line. Overall, we remain dedicated to improving pricing within our profit and loss statement, which has shown sequential improvement from the third to the fourth quarter. We expect this trend to continue next year. However, many factors, especially commodity prices, play a significant role in our projections, and we previously had strong assumptions in the first quarter of this year that shifted quickly as conditions changed. If commodity prices remain stable or improve, we don’t expect to end up at the lower end of our guidance. However, given the uncertainties and the fluctuations we've observed in commodity prices and foreign exchange over the past six to nine months, we believe it's wise and flexible to maintain our current position. I’ll now hand it over to Stan for further details regarding 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 the 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, 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.

Let me discuss the top line, and good morning, Bryan. I'll have Stan provide more details on some of the factors at play. Overall, cash flow was down due to lower cash income. This was influenced by some decisions we made, particularly regarding working capital investments, including a slight increase in inventories as we navigated supply chain disruptions and aimed to support consumption growth in the market. While we saw stronger consumption growth, inventory days increased as a result. However, we did see some improvement in the fourth quarter compared to the third quarter. The decline in cash profits was largely driven by sustained foreign exchange impacts and challenges with gross margin throughout the year. Capital expenditures were another conscious decision, particularly due to the growth investments in Hill’s and the substantial increase in capital spending, along with some of the sustainability initiatives John mentioned earlier, which we believe are crucial for positioning ourselves for future market trends. Overall, we expect a significant improvement in operating cash flow in 2023.

Let me discuss cash flow. As Noel mentioned, we anticipate improvements in 2023, driven by two key factors: better cash profits and enhanced working capital. We see opportunities in this area, having taken a conservative approach to working capital in 2022, especially regarding inventory. Our goal was to ensure we could restore fill rates across the board and had sufficient inventory to meet demand. Toward the end of the fourth quarter, the impacts of COVID on manufacturing in China led us to prudently increase our inventory to fulfill client needs year-end. Therefore, we expect improvements in both working capital and cash profits. In terms of interest expense, we noticed a significant year-on-year increase in the fourth quarter, primarily due to two components: the impact on floating rate debt, particularly commercial paper, that has risen considerably, and a slightly higher debt level, which remains comfortable within our range and leverage metrics as we head into 2023. Thus, the interest expense will be larger than the gap observed in the fourth quarter, largely due to carrying the Red Collar funding for a full year. That said, we believe we have competitive debt rates and strong access to the capital markets that support our overall model. Regarding capital spending, we reported nearly $700 million in expenditures, which may increase slightly in 2023 for several reasons. We plan to complete the Tonganoxie facility in the second half of the year and have significant plans for the Red Collar facilities to expand capacity for our Hill’s business, which operates in a promising segment. This investment will influence our capital spending. Additionally, we are focused on sustainability initiatives, such as recyclable tubes, which we consider vital and will implement in a thoughtful manner. We will also continue investing in IT capabilities, including our ongoing S/4HANA journey. Overall, we feel confident about our position as we enter 2023, expecting a substantial year-on-year increase in cash flow.

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.