Colgate-Palmolive Company (CL) — Q1 2023 Earnings Call Transcript

Thanks, Allison. Good morning, and welcome to our 2023 first quarter 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 2022 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 Table 6 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 some thoughts on our Q1 results and our 2023 outlook. We will then open it up for Q&A. Noel?

Thanks, John, and good morning, everyone. As you can tell from our press release and the earnings materials, we had a strong start to 2023, and the momentum on our business gives us confidence to raise our net and organic sales growth guidance and to raise the lower end of our base business earnings per share growth guidance for the year. We did this because, with the quarter of the year gone, we see less risk from some of the macroeconomic and geopolitical issues that we were concerned about earlier in the year. That said, there is still notable uncertainty surrounding the balance of the year, particularly in the second half. Since the commentary focuses on the results, I want to focus my remarks on three of our priorities that Colgate people are focused on. Priority one is driving organic sales growth as we face tougher comparisons. We will utilize our enterprise-wide capabilities in innovation and revenue growth management, along with a firm commitment to marketing spending to return to a balanced algorithm of pricing and volume growth. The pricing we have taken over the past two years helps provide us with the flexibility to fund increased brand investment to support our pricing, build brand health, and drive volume and household penetration. We know that the competitive environment is going to be difficult, but we have a brand portfolio that is built for times like these, and we look forward to driving growth and market share performance now. Priority two is delivering our productivity to fund brand investment while we're also delivering on our earnings targets. We had a strong start to the year for both Funding the Growth and our 2022 global productivity initiative and we are laser-focused on delivering against or exceeding our goals for the year. We still foresee year-over-year headwinds to earnings per share growth from raw and packaging materials, foreign exchange and below-the-line items, so driving productivity in the middle of our P&L is vital. And finally, we are focused on improving our cash flow performance. Again, we had a strong start to the year with both operating cash flow and free cash flow up and we know there is still opportunity for further improvement. We will utilize this cash flow to fund growth in capital expenditures to return cash to shareholders through dividends and to drive earnings leverage through paying down debt and repurchasing shares. So I'm pleased with how we started the year, but I'm also well aware of the challenges and uncertainty ahead for us. Colgate-Palmolive, however, has the brands, the capabilities, and the people to deliver in this environment. So with that, I'll take your questions.

Hey, guys, good morning. So clearly, strong top line results in Q1, but we're also obviously in a period of outsized pricing. And the question is sort of where do we land as the pricing trails off? So just A, can you discuss your confidence that volume will recover going forward as pricing drops off? I know it's a bit of an unanswerable question at this point, but how do you think about that dynamic ahead of time and manage your business to drive sustained volume growth? And B, can you talk about your market share performance in Q1 in some of your key regions and product categories and if the strategies are working in terms of driving improved market share trends?

Yes. Thanks, Dara. Let me come back again to the strategy that we've been deploying over the last couple of years and continue to execute against the initiatives that we've talked about, particularly at CAGNY, and that's driving the core and adjacencies and channels. And you see the progress we're making against all three of those, obviously delivering sequential volume growth in the quarter. So we had five of the six divisions sequentially up in the first quarter. North America was down, but if you pull the Fabuloso recall out of the North America business, North America would have been up sequentially as well. All of this plays back to our belief that the strategy clearly is working to deliver improved volume despite the fact that we continue to take significant pricing across all of our geographies and categories. So quite frankly, we're very pleased with the progress we're seeing, and we expect sequential volume improvement as we move through the year. Now that is contemplated on a consumer environment that remains as is. We shall see where the consumer goes relative to the level of inflation being absorbed in the marketplace, but we feel strongly that we've got the right portfolio of brands across price points, the right innovation, the right channel strategies, particularly where consumers are shopping today to continue to drive growth. Importantly, as we saw in the quarter, our Oral Care business was up double-digit, and that's both positive pricing and positive volume in toothpaste, and we saw good share growth in the first quarter on toothpaste in North America. We saw very strong share growth across Europe. Flat shares in Latin America, and good share growth in Asia. So overall, we feel good about where we are from a consumption standpoint and the strategies that we're executing and expect sequential volume improvement as we move through the back half of the year. And as you said, pricing will get more challenging as we lap the back half. And certainly, in the second quarter, which was a strong quarter for us, where we had strong pricing and volume, we'll expect a little bit of pullback from there. But overall, we feel good about the momentum behind the business right now.

Can you talk about the consumer health in your key emerging markets? What are you seeing in terms of response to recent price increases? And then, as you mentioned, the second half, obviously, a lot of uncertainty. Maybe can you compare and contrast how do you see the consumer environment evolving in emerging markets compared to your more developed markets like the U.S. and Europe?

Yes. Emerging was strong. You saw double-digit organic growth in the quarter. Sequentially, again, volumes performed better than they did in the first quarter. If you look at the pricing that we've taken in emerging markets over the last three quarters, quite frankly, we're pretty pleased with the fact that the volume sequentially continues to improve. That being said, we've got strong innovation in emerging markets and you've seen the level of advertising that we're putting back into the business. That gives us confidence that we're able to sustain that advertising as we move into the back half of the year, and we intend to continue to do everything we can to increase that advertising support in the back half, particularly in emerging markets in order to support the innovation we have, drive pricing into the market and continue to accelerate volume growth in the category. Overall, emerging has been pretty good. We were really pleased with the progress in both Latin America, Africa and Asia, particularly in China, with strong growth in all three of those regions, especially in the key markets of Mexico, Brazil, China, and South Africa. So good progress across emerging markets and shares holding up, a little more elasticity as you would expect given the level of pricing taken in emerging markets. But overall, we feel pretty good about where we stand in that regard. As it relates to the second half, time will tell. As I mentioned upfront, we'll see the compounding impact of pricing across many categories as we move into the back half, and I expect a better balance between pricing and volume as we move through the back half, but we shall see. The good news is we've got strong innovation and the pricing in the P&L, which is really important to get the flexibility that we need to drive the business in the back half of the year. And we feel we've got a good channel strategy to ensure, as I mentioned upfront, that we're capturing the omnichannel impact of how consumers are shopping today.

Thank you, operator, and good morning, everyone. I appreciate the insights on inflation in the prepared remarks. Stan, is the $300 million to $400 million headwind we discussed on the last call still a reasonable estimate? I'm trying to understand the dollar impact from the 770 basis point headwind mentioned earlier; this morning's figures seem to align closely with that range. I recognize there are multiple factors beyond inflation affecting that line. Can you provide any context regarding the inflation component within that estimate or how we should approach that part of the bridge as we progress through the rest of the year?

Yes, thanks, Peter. As we assess the inflation levels, we still observe that the commodities are in the $300 million to $400 million range. However, there is a significant underlying issue, particularly in the agriculture sector affecting Hill's, where prices remain high with little relief expected throughout the year. This is why our range has not decreased more. Other categories, such as toothpaste, Home Care, Oral Care, and Personal Care, have shown more moderation, which is reflected in our guidance for the year, and they remain fairly balanced. We are essentially locked in for Q2 and have already secured pricing for Q3 with slightly less certainty for Q4. I see this range persisting as we approach the year's end. On a year-on-year basis, we are comparing against last year's substantial price increases. The pricing adjustments we have made have helped to moderate our situation. We've had a strong start to our Funding the Growth initiative this year, which is also aiding in this mitigation. This gives us confidence that we will be able to increase margins throughout the year, even while we anticipate that commodities will remain in this range due to ongoing inflation.

Good morning, everyone, and congratulations on a strong result. Noel, I have a question for you regarding reinvestment. Clearly, you have achieved impressive results and are seeing the top line payback that you expected, with gross profit coming through. Since you joined, you have focused on increasing advertising levels, and it shows. The percentage of advertising and marketing relative to sales is high, even compared to historical norms, which is positive. How are you approaching reinvestment levels if gross profit exceeds expectations? Additionally, while top line payback and profit growth drive your decisions rather than just the percentage of sales, are you comfortable with your current position? At 12% of sales, this figure is notably high compared to historical standards, which dropped to 9% in 2015 and 2016. How should we interpret this as gross margin starts to improve?

Sure. Thanks, Kevin. Yes, we're really pleased with the level of advertising we're getting in the P&L, and that is obviously driven by the circular nature of how we're driving the business; more advertising is driving the top line, and we're able to get more leverage to the P&L to continue to support that. We feel as we move out that getting the pricing in the P&L was critically important to sustaining and increasing our levels of advertising. We've obviously moved more money into digital. We're seeing great ROIs on digital and our programmatic and the personalized content that we're delivering in the market. We're seeing growth in market shares relative to where we're spending the money, particularly around the Hill's business and our Oral Care and Skin Health businesses. So we're really pleased with the fact that the advertising levels continue to deliver against the expectations that we have. And we balance that off with obviously a broad portfolio of offerings that we think are attracting and building the brands that we speak. We have high household penetration with many of the brands around the world; our ability to drive reach and continue to sustain that reach is very, very important to the growth that we're seeing in the business. As we look forward, we would anticipate to continue to spend behind those businesses. We still have some businesses, in my view, that need more support, particularly in parts of Europe and some of the categories in the U.S., and we would expect to continue to fund those as we get more gross margin accretion through the back half of the year because we're seeing the results. Ultimately, the brand equity, which is testament to the brand support and how we're getting what we want out of it, continues to show a strengthening of our brands, and that bodes well for continuity and sustainability of the growth moving forward, and that's how we're kind of running that flywheel right now: continue to invest, drive leverage in the middle of the P&L, accelerate the top line and ultimately deliver better margins, better earnings per share for our shareholders.

I wanted to talk a little bit about gross margin. Clearly, Funding the Growth start of the year materially better than expected. I imagine it's a function of supply chains improving a bit, if you could expand on that a bit. And then usually, your savings contribution builds as the year progresses. So should we assume sort of a regular quarterly cadence from here? Or is there something one-time that happened this quarter to result in the strong Funding the Growth contribution?

Yes. Thanks, Olivia. This was very intentional. As we went through the back half of last year, we were deliberately looking to make sure that we have projects in place for the first half of this year in order to accelerate gross margin accretion given the inflationary pressures that we were seeing. In addition, I would say that we've done a lot of work on getting our facilities to run far more efficiently, whether that's the Hill's facilities where capacity utilization has come down, which has allowed us to put more funding to growth projects onto the line to determine their feasibility. We've had the teams very much focused on the opportunities that we see in the first half in order to ensure that we get that gross margin back in quickly to once again sustain the advertising and the increases we want to see in the back half of the year. So it was deliberate and strategic to make sure that we got more of that funding to growth up front. The teams have really done a wonderful job in that regard as you saw in the numbers, and we would certainly expect that focus to continue as we move through the balance of the year. Let me throw it over to Stan. He'll give you a little bit more color on what we're seeing, again, around commodities and some of the other projects that we have underway, particularly around our global productivity initiative.

Yes. Thanks, Noel. And just a quick comment on the FTG. Noel highlighted that we had a very strong start here. That SKU, I think, is going to be a little bit different than prior years. In prior years, you saw build through the year. This was very deliberate. Supply chain has moderated in terms of the volatility around that. In particular, the Hill's team has actually had time to work on some of these as we've had a little bit better improvement in capacity utilization. So the strong start we have to the year, I think you should think that this will be more equal as you go through the year versus growing through the year from a SKU point of view. This is important because as we look at the material cost, there's still going to be a headwind as we go through the year. So we need that to help offset that impact. And then we have our GPI program; we continue to get benefit from that. You saw a small charge in the quarter, but the team is driving productivity throughout the P&L, not just in the GP line, but also in the MBO line as we look for things to offset that material headwind.

Good morning. So Stan, I just wanted to confirm one comment about commodities. I think it was somewhat clear. But to Peter's question, just around the $300 million to $400 million range, is that what you're expecting for the full year from an inflation standpoint? And then just a little bit related on the North American operating margin that has been stepping up sequentially and then slowed a little bit this quarter. I would have thought maybe with the transportation and logistics relief and building productivity and a little bit of easing inflation, maybe that can keep going, but I know there was obviously some noise with the North America business this quarter with recall and otherwise. So is there any way to maybe just unpack that North America margin performance and where you see things going?

So why don't I start here? First, let's start with the commodities. As we said, still $300 million to $400 million range on that impact. I don't see that moving a lot in the short term. And keep in mind, our locking, right? So we're already into almost May, so Q2 is largely locked. As we go into the back half of the year, hopefully, we'll see a little bit of relief come through. But keep in mind, the closer we get, the more we lock in order to ensure we have supply. If we think about the North America margin and go through, so North America margins here still improved on a year-on-year basis. They also improved on a sequential basis. So as you look at the progress on what we're doing from the GP point of view, that's important. We do see some logistics benefits here. Logistics have come down versus the start of the year. But again, we start to lock in some of that activity. We've seen it mostly in the ocean side of logistics, which will certainly help the overall margin. And if you think about North America in total, clearly, the Fabuloso recall had an impact in the quarter. That's getting largely behind us, so we expect that we'll see improvement as we go through the year.

Yes. Maybe a couple of things. So as Stan said, obviously, operating profit was up nicely, which has been the big focus for our North America business. We were up roughly 300 basis points on operating profit in the first quarter. So we feel we're making the right step, taking the right decisions and making the right progress against the middle of the P&L, particularly around gross profit and controlling our overheads and managing logistics. So that was an important element, and we're making sure that progress has been reinvested in the business. So a couple of other highlights on North America. Obviously, ex-Fabuloso, volume would have been up on the quarter; great quarter for toothpaste. Toothpaste was up double-digit in the quarter for North America with growth, including volume growth on that business. Toothbrush is a little softer. You remember, we were lapping a resupply of our product last year and some out-of-stock from some of our competitors. So volumes were a bit down there. Personal Care was up high single digits. Home Care was soft, as we mentioned, due to the Fabuloso recall. But overall, really good progress. The other aspect to North America that I would call out is the significant progress we're making in non-measured channels. Again, this is part of our strategy of growing in faster-growth channels, where we saw significant growth in non-Nielsen channels, which was terrific for North America and has obviously helped to drive some of that top line growth. So overall, a good quarter for North America, very focused on the middle of the P&L moving forward, and we see opportunities, but the good news is we're seeing good progress on the top line, and that translates to the P&L.

Just one point of clarification on that. North America volume would have been up sequentially from Q4 to Q1 performance from Q4 to Q1, not up year-over-year ex-Fabuloso.

Yes, on the operating margin, it's up year-to-year versus fourth quarter. You see it's down about 100 basis points or so. And that's really driven by the Fabuloso impact, combined with the increased investment in advertising as we're bringing both innovation to market and supporting the pricing that we've taken in the market.

If I could just ask a quick clarification on the raw material, the ag stuff. Stan, can you just give us any more detail on exactly what ags are causing the pressure and what's driving that? And then my broader question is Noel on the whitening innovation and just the whitening strategy. I'm just curious if you've done any halo work on the impact it has on the core Oral Care franchising or toothpaste. Any perspective around that would be helpful.

Sure. Let me address that, and then Stan will provide more details about the Hill's commodities and specifically the agricultural prices. Our strategy regarding whitening is focused on brand building, particularly with the Optic White brand in North America. As we have introduced at-home whitening products at significant premium prices and as those products demonstrate their effectiveness, we have observed a positive impact on the entire Optic White range and the Colgate brand. To answer your question briefly, the halo effect is indeed benefiting the entire Optic franchise and enhancing the Colgate brand.

Yes. And Nik, on the commodities, it's kind of across the board with most of the ag. So corn, wheat, soybean, and the risk of the drought in the U.S. and the effect on crops, even though some other areas of the world are a little bit better, the risk of Ukraine all has been putting pressure on that. Don't forget as well that the protein side of this, things like chicken livers, et cetera, with some of the impacts that have been out there has all put pressure on Hill's. That remains the real driver of that $300 million to $400 million range.

Hey. Good morning, folks, and that's a great segue because I wanted to talk about Hill's, actually. Good quarter, obviously, enough for Hill's with the profitability and the margins. We've lost over 1,000 basis points in margin in the last few years. I was hoping you could unpack the components of it, and the cadence at which you can recover if you were to recover them. How much are we looking at from the mix effects of recent acquisitions? And what's the cadence of bringing your capacity on there and improving that? How much is related to the slack capacity, the underutilization of the assets that you're standing up, and maybe some of the stress in the supply chain as a result of past utilization? And then I think the third bucket, tell me if there's other buckets; I think the third bucket is the pricing at the cost. How large is that bucket of the roughly 1,000, and is it reasonable to think that could come back? And if so, when? Sorry for the multipart.

No. Thank you, Jason. So let me top line Hill's a bit, and then Stan can provide a little more of the specificity that you were looking for. But structurally and strategically, this business continues to perform very well, continued sequential improvement in volume and strong organic growth despite the difficult comps that we continue to come up against. Overall, pleased with the 14%. Again, that's 14% on 13% last year and pricing of 11.4% on 9% last year and obviously sequential improvements in volumes. A couple of things there. Stan will get into, obviously, the key drivers of the operating margin dilution, which would be the following: ag cost, the manufacturing integration of the three Red Collar facilities plus the Italian facility that we have as we move through the variances associated with that. Red Collar in the current quarter is a significant portion of that, the private label business. We've continued to obviously significantly increase our advertising support. We said we would do that as we built up more capacity. That is very strategic and deliberate, and we're seeing the results of that in the marketplace, particularly as we drive new innovation into the market, and we drive pricing in the market; the ability to sustain and elevate that moving forward is going to be largely driven by our ability to sustain the strong levels or even increase our advertising levels. As we look forward, strategically, margins will improve sequentially as we move through the back half of the year. Plant efficiencies will continue to deliver progress in that regard. We'll get the constraints out of our existing plants, which we're running at full throttle, that will allow us to be far more efficient in those plants and put more Funding the Growth into those plants as we look forward. Overall, strategically, the business is doing very, very well, and we feel all the steps we've taken to improve capacity ultimately delivering good, strong line growth. We need to focus on the middle of the P&L, as you rightfully say, and the progress is there to do that.

Yes. Let me elaborate on that. First, if you look at our investments in the business, comparing net sales to a couple of years ago, we have increased by over $200 million per quarter since the first quarter of 2021. This demonstrates that our investment in the brand is yielding positive results. Regarding margin, the impact of our private label is around 90 basis points on the total company, but it has a slightly over 400 basis points effect on Hill's. This margin effect is significant for Hill’s on a gross profit basis. Over time, the private label will gradually decrease, as we wind down that contract in the next couple of years and replace it with Hill's volume at Hill's margin. Additionally, the inflation in raw material costs has primarily affected Hill's, impacting their margins. However, it’s important to note that they have implemented significant price increases over the last several quarters, which is helping to offset this issue. The recent activation of the Red Collar facilities is assisting in managing utilization across all our manufacturing operations. This has enabled Hill's to significantly contribute to the funding of growth savings. I believe Hill's is currently well-positioned and we expect to see sequential margin improvement as the year progresses. We will manage this carefully to ensure we can continue supplying our clients, and we have already seen notable improvements in case fill rates since the first quarter.

I have a quick clarification for Stan. In the guidance, you mentioned that net interest expense might exceed your original plan. Can you provide some details or a specific figure on that? Is this related to the refinancing? I believe you refinanced some debt in March. Is it strictly connected to that, or does it also involve exposure to short-term financing variable rates? I also have a follow-up question.

Sure, Bryan. Thanks for your question. Firstly, regarding interest, we want to mention that although we noticed rates going up, it's not a significant amount. You should estimate around $20 million for the year. This isn't really linked to the debt issuance in the first quarter, which we were quite pleased with due to strong demand for that bond. The main factors influencing this number are our assumptions about the number of rate increases, especially in Europe. As we consider the ECB and the changes occurring there, it's slightly different from what we anticipated at the start of the year. As we know, this is subject to change and will depend on inflation and central bank decisions, but that's our current estimate. Thus, it represents a modest impact for the year.

Okay, great. I have a question for Noel. You mentioned potential risks in the second half. From the Q&A and the prepared remarks, it seems that much of the risk relates to consumer behavior rather than concerns about fluctuations in input costs or supply chains. Risk can be defined in many ways, so could you elaborate on the specific risks and how Colgate is positioned to manage that risk with greater agility compared to two years ago?

Bryan, thank you. So clearly, the consumer environment is the one that's the big unknown, I think, to everyone. That's been a consistent theme through the first-quarter print by most in terms of what's really going to happen in the back half and the compounding impact of pricing. I'll address the fact that historically, when we've seen significant inflation in our categories, we weathered those periods really, really well; a combination of great value-oriented innovation and the fact that the breadth of our portfolio at various price points affords us the opportunity to really push different segments at the appropriate time anywhere around the world. So we're pleased with that. We're also pleased with the fact that you tend to see in times like this, a squeeze in the middle of the category with premium growing and the value growing, and that's been our focus, quite frankly. Premium has been the key focus for us, and we're seeing great progress, particularly across our Toothpaste business in new channels and at the premium end of the market, and we obviously have a very strong base business that is well positioned based on some of the relaunches we have. Raw and packing materials, we shall see, we've seen a stabilization across at least the Colgate side. You've heard a lot about the ag prices that continue to elevate, but we've seen stabilization on those as we move. So we've got more predictability on that. Hence, the reason why we felt more confident to raise guidance across multiple dimensions there because we see a little bit more transparency to that. As Stan mentioned, we've got some contracts that will obviously come off. Now the unknown there is what our suppliers would do. They're facing rising wage inflation, and we'll have to deal with that as it comes, particularly in the second half of the year relative to how they decide to adjust pricing on some of the key commodities that we will ultimately be purchasing. The other aspect is China. We will see where China impacts not only the Asia business but the world, quite frankly. We expect obviously a slow progress in that market. I don't expect it to be vertical; I expect it to be progress from quarter-to-quarter. We have not seen the travel retail business come back yet, and that is an expectation that we will probably see in the second half of 2023, not in the first half, but we shall see. Now we'll get into Asia and China, I'm sure as the Q&A progresses, but we had obviously a very strong quarter there, and we think we're well positioned as that economy comes back to deliver on it. The last is foreign exchange. That clearly is always a risk. We, as you saw in the prepared remarks, had a low single-digit foreign exchange impact through the P&L; we'll see where that moves. The Latin American currencies have come back a little bit, as has the euro, but it's been very volatile, and we'll adjust to that going forward. But that has been a big driver in the past, as you know, but we think we're well positioned right now from the fact again, of getting strong pricing into the P&L, both in the fourth quarter and the first quarter.

I have two questions, similar to others. The first one is quite basic. Could you provide any insights on volume performance by category? I realize this isn't something you typically discuss, but as we consider the future and the transition to a more balanced revenue algorithm, I'm interested in your perspective on volume growth by segment. The second question is for you, Noel. In your prepared remarks, you mentioned that understanding the competitive environment would be challenging. I noticed we haven't heard this from many other companies and I'm curious if this comment was particularly significant or just a general observation about your competitive stance and confidence in your innovation pipeline and advertising support. I would like to hear more about the competitive environment.

Sure. Thanks, and good morning, Lauren. Let me take the second question first. The competitive environment will likely intensify, particularly as you see costs come down, and that will be a function of both local brands and private label getting more aggressive. The good news is our categories. If you take North America and private label, we've been benign; no progress in private label shares. With the exception of a little bit in liquid hand soap and a bit more acute of private label growth in Europe. As you saw price discrepancies or the gap between private label and global brands increase, we'll see how that translates in the back half as we expect them to have to take pricing in the first quarter as we did as well. So we think local brands and private label are likely to elevate in terms of their competitive nature in the back half. And as costs stay flat in the back half, which is what I think we're hearing from most, we expect the competitive environment to increase in that regard. Obviously, you'll see more promotional volumes probably come into the category, but it's been quite constructive so far. I will say that, but we need to anticipate that things could worsen based on where the costs are, and we're well prepared for that. On your first question, volumes. So category volumes, in general, were flat to slightly negative across most of the world, obviously, driven by the fact that there's so much pricing that's gone into both Oral Care, Personal Care, and Home Care. If you look at us specifically, we saw really strong growth on the Oral Care side, as I talked about, with double-digit growth across most markets in toothpaste and good volume progress in most markets on toothpaste. We're really pleased with what we're seeing there. Personal Care was up mid- to high single digits depending on the marketplace. Both from a pricing standpoint, a little bit more challenged on the volume side given the strong pricing we've taken there, particularly in categories like liquid hand soap and bar soap. Home Care, mid-single digits to low single digits in terms of growth depending on the marketplace. That one has experienced a little more elasticity, particularly around the cleaner side of the business where we've seen more price competitiveness in that side of the business and a little bit more trade down. But overall, again, sequentially up, and we're really pleased with that given the fact that we had a lot more pricing in this quarter than we had in the fourth quarter. So good progress overall. We'll have to watch the volumes carefully, and we're all over that.

I wanted to ask about EBIT margin in North America and Europe. If you take a look at where you are today versus where you were a few years ago, it seems like it's outside of Hill's, one of the biggest drop-offs relative to historical levels. I appreciate inflation, FX, et cetera, but it also seems like maybe those markets are a little bit more competitive than some of the others. Is it levels of spend potentially impacted that? And kind of how do you think about progression of margins? Is it realistic to think that you could eventually know sort of timeline around that to get back to those levels? Why or why not would be helpful.

Yes. Thanks, Mark. Yes, your answer is clearly around the spending. That's the answer. The spending is up quite notably in North America; that's very strategic. We see that as a growth market for us moving forward, not only on the top line but on the bottom line. We really wanted to reinvest behind the business in some of our brands, and we're clearly demonstrating that as we've gone through the last couple of quarters. Getting gross profit in the middle of the P&L sorted out in North America has clearly been a key focus, and we've had good gross profit progress in North America. We're getting better overhead leverage through the P&L. We are getting much better efficiency in our plants, and so we'll see that translating moving forward. But we will continue to invest behind that business moving forward to drive the top line. Europe, a little bit driven, obviously, by the foreign exchange environment to a certain extent and obviously, more increased inflation in Europe than we've seen in other markets around the world, particularly around the high gas prices and the fall-off effects of higher gas prices and some of the raw materials that we purchased into our European plants. Overall, there's been a little bit more pressure there. But again, we've taken strong pricing in the back half of 2022, and pleased that we were able to execute our pricing in first quarter 2023 towards the latter end of the quarter, and we'll see that benefit as we move forward. Overall, your observation is correct. We feel we've got a good handle on getting the gross margins and the operating profits up sequentially as we move through the back half of the year, and importantly, sustaining or increasing our advertising levels to continue to drive the top line.

I have a few follow-up questions. First, regarding the Fabuloso recall, could you clarify the impact it had in the quarter and whether we can expect a benefit from it in the second quarter? Second, on the logistics front, can you quantify the benefits you've seen or your expectations for the year? Lastly, building on Jason's question about Hill's margins, could you update us on the Tonganoxie plant's status and timeline for scaling it up? Is it a significant factor in the margin bridge, or is it more related to overall margins?

Great. Thanks, Stephen. Let me take the Fabuloso and the Hill's question, and I'll have Stan come back to you on logistics. So the Fabuloso impact was Q1. It was a material impact to the North America volume line. We're not going to quantify that, but it was quite significant to the volume performance in North America. That is behind us as we move through into the second quarter. So we'll see the benefits of the Fabuloso business coming back into the P&L as we move forward. Again, if you take the Fabuloso business out of the North America number, they were up sequentially versus the fourth quarter of 2022 in volume. So it was a very time-driven event in the first quarter. The good news is that's behind us. Tonganoxie is progressing; as you know, strategically, that's a very important plant for us given the strong demand we have on the wet side of the business at Hill's and our inability to supply the current demand for wet products all around the world. Getting that plant up and running will be strategic for the continued growth of that business. That will happen towards the tail end of the third quarter. We anticipate we'll have some start-up costs associated with that as we move through the transition of that facility. Overall, we should see that benefit us moving into 2024, particularly at the margin line as our wet business is margin-accretive to us and will certainly benefit the Hill's business longer term.

Yes. Let me discuss logistics. Logistics accounted for 9.5% of our sales. It has been a slight burden on our overheads, which have included it in our overheads and SG&A for several years. In the fourth quarter, we experienced the first year-on-year decline in percentage of sales in 12 quarters, and it declined again this quarter. We expect it to decrease for the year. I anticipate a slight reduction for the remainder of the year, but not significantly. We are currently at 9.5% and expect it to start around 9% as the year progresses. This will certainly be an improvement year-on-year, and as we look ahead to the rest of the year, it is reasonable to think that it will moderate and remain just above 9%.

Great. Two follow-ups. First one, a quick one. You mentioned that you were very strong in non-measured channels in North America. Was that more e-commerce or club stores? And can you give us some metrics around that? That would be helpful. And then my core question is really on the advertising spend pickup, 14%; it's a big number. You mentioned for the full year that you would be up absolutely and as a percent of sales, so can you give us a little bit more sense of where that money is going? Is it more innovation and longer-term focused or maybe more short-term? And then following into that, do you expect to see this elevated level going forward, either because you have very high return projects or you need to catch up, just trying to get a sense of what the income statement may look like longer term?

Sure, yes. Good morning, Rob. Let me take both those questions. First, on the non-measured channels. Again, this plays back to the strategy that we've been talking about for quite a few years now. Certainly, I highlighted again at CAGNY that we are very focused on growing channels that are particularly not measured by Nielsen, which are the faster growth channels, as you mentioned, e-commerce, club stores, discount stores, and value discount stores. Some of the big box stores that we're seeing emerge in Latin America. So overall, in some of the new platforms that we're seeing coming out of China, so this has been strategic and deliberate for us. If you take the North America number, we've seen significant growth in non-measured channels to the tune of 4x to 5x what we're getting in measured channels. So obviously, good growth there. The key is to sustain that growth. Our e-commerce business was up double-digit in the quarter and now roughly 14% of our total sales. Overall, we're seeing good share growth in those businesses. In fact, if you take some of the progress we're seeing in China, it's very much driven by the strong e-commerce shares that we had. I demonstrated that at CAGNY. Since then, we've continued to increase our e-commerce shares in China, and likewise in the brick-and-mortar business. Overall, we feel the strategy is working for us. Driven by the fact that we're supporting our businesses. We're using a wide spread of different mediums to grow brand awareness and brand penetration. Obviously, TV for a lot of reach and frequency given the scale and scope of our brands in many markets, but really fine-tuning behind our digital transformation; our ability to drive higher ROI spending in the digital space. Clearly, as we see more ROI coming, we see continued growth in penetration, in consumption, and in terms of ultimately delivering share growth and category growth for our retailers, we'll continue to elevate our spending. We're measuring it very quickly. This is not just for the sake of increasing spending. We want to be sure and absolutely deliberate in making sure that the spending is returning back to the brands, driving category growth. So there's not a specific number we're aimed at, Rob. We're looking to obviously continue to accelerate and sustain the top line and grow the health of our brands, and we're seeing good results from the strategy we've put in the marketplace.

Mine is on the medium-term outlook for the Pet Nutrition category. How should we think about the medium-term growth prospects as the tailwinds ease from increased pet ownership during COVID, et cetera? And I was also interested in your view on the competitive standpoint, like if you're making some investments on capacity. I think some of your peers are making significant investments. I think Nestle is doing quite a bit on manufacturing. Is there a risk that the supply-demand balance turns less favorable in the coming years and results in softening industry pricing power?

Thank you very much. Let me address the first part in a couple of ways. First, pet adoptions surged during COVID, and those pets will age, leading us to offer therapeutic and wellness products tailored for an older pet demographic. We are optimistic about this. You may remember that we've previously mentioned the low penetration and brand awareness associated with the Hill's franchise. Even if the market experiences slight softness, which we haven't definitively seen in volume but not in value, the ongoing trend of premiumization is still expanding the market. We believe we have the appropriate brand portfolio and investment strategy in place, which is why we are actively investing in advertising to enhance brand awareness and penetration from our current low levels. Additionally, we see untapped international opportunities due to existing capacity constraints. We will pursue these avenues moving forward. While I can't specifically address capacity issues or current market capacity, we are actively increasing our own capacity, and we consider this a significant advantage as we progress. This will help us achieve greater efficiency in our plants and as we ramp up the Tonganoxie and Italian facilities to align with our recipes, we see substantial growth opportunities in segments where we previously lacked competitive presence. Overall, this will benefit not only our business but also the entire category, thanks to the support we will continue to provide to our retailers.

Noel, Stan, I appreciate the sequential improvement in volumes that you called out worldwide. Are you still seeing a premiumization playing out, starting to see consumer downtrade into the entry-level price points in some parts of the world? I know mix is part of your volume numbers. So I was wondering if you can speak apples-to-apples into the volume increase that you're seeing sequentially. And then a clarification on Latin America and in European, including EMEA. I understood the share stabilized, especially in LatAm. But assuming it was mostly value share, given that obviously, you're the leader and you're leading in pricing. So how about the volume share in those regions? And how are you seeing that play out as you progress, especially as you over SKU in Personal Care, particularly hand soap and the other categories within that subcategory?

Yes. Thanks for the question. Clearly, as we've seen in prior challenging markets with a lot of inflation, you kind of have the tale of two cities, which is the premium segment continues to grow, and that's the area where we're under-indexed in. So clearly, that's fueling a lot of our advertising investment and our channel strategies, particularly in Oral Care and Skin Health business. We see that segment continuing to grow. The middle is getting squeezed a bit and the lower end with the point you made, a little bit more trade down into the lower end. Remember that some of our lower-end businesses, while the absolute margin dollars might be lower, the margin percent might be as good or better than some of our premium segments. Overall, we feel pretty good about the mix of our business, and that continues to be, in our view, a real advantage for our portfolio relative to the breadth of our portfolio. Relative to volume shares, particularly in the emerging markets, we have taken significant pricing in emerging markets. We clearly did that to ensure we get the flexibility in the P&L as quickly as we can to sustain the advertising numbers or increase them to drive the innovation and deliver the pricing, particularly for the premium side of the market. We've seen a little trade down, particularly more in the Home Care businesses. The cleaners segment, I would point out in the dish segment, a little bit of a trade down, particularly in Latin America. Personal Care is holding up okay; bar soap tends to be more price elastic than many of our categories. But we've seen a lot of constructive pricing from our competition, so there hasn't been a significant amount of trade down to private label as of yet, but we'll watch that very carefully. Home Care is a little bit more challenged, particularly around the Cleaner segment worldwide and Personal Care in the Bar Soap segment. Oral Care looks okay, as I mentioned, we were up by double digits in Toothpaste with both positive pricing and positive volume.

Yes. Thanks, everyone, for your interest in our company. Let me just extend a personal thanks to the 34,000 Colgate people who have worked tirelessly to deliver a stronger momentum in the first quarter, getting us off to a strong start for the year. We greatly appreciate their steadfast resolve and the innovation that they're bringing to the market and the strong execution. So I look forward to talking to everyone in the second quarter. Thank you.