Colgate-Palmolive Q4 2022 Earnings Call Transcript

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Provided by Quartr
January 27, 2023

Key Takeaways

  • Colgate delivered organic sales growth in all four categories in 2022, marking its 16th consecutive quarter of organic growth with double-digit gains in pet nutrition and high single-digit growth in oral care.
  • The company expects to accelerate earnings growth and generate incremental cash flow in 2023, leveraging its focused portfolio, digital transformation efforts, and cost-saving programs like Funding the Growth and its global productivity initiative.
  • Raw material and packaging inflation remain a headwind with several hundred million dollars of additional cost projected for 2023, though pricing actions and savings initiatives are expected to partially offset this pressure.
  • Volume declined about 4% in Q4 due to inventory destocking in online skin-health channels and COVID lockdowns in China, despite improving sequentially from Q3 and ongoing share gains in key markets.
  • Integration of three Red Collar pet-food plants continued in Q4, incurring start-up costs, but is set to boost capacity and drive further savings and margin improvement in the second half of 2023.
AI Generated. May Contain Errors.
Earnings Conference Call
Colgate-Palmolive Q4 2022
00:00 / 00:00

There are 16 speakers on the call.

Operator

Good morning. Welcome to today's Colgate Palmolive 2022 4th 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 and A, John Fauci.

Speaker 1

Thanks, Alison. Good morning, and welcome to our 2022 Q4 and full year earnings release conference call. This is John Foshee. Today's conference call will include forward looking statements. Actual results could differ materially from these statements.

Speaker 1

Please refer to the earnings press release and related prepared materials and our most recent filings with the SEC, including our 2020 Annual Report on Form 10 ks 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 89 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 Sotula, Chief Financial Officer. Noel will provide you with his thoughts on our Q4 results and our 2023 outlook.

Speaker 1

We will then open it up for Q and A. Noel?

Speaker 2

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 That said, as we mentioned in the prepared remarks, we're 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 4th straight year of delivering organic sales growth either in line We're 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 it's the continuing strengthening of our strategy that has allowed us to grow Systemally through different operating environments as each year has presented its own challenges and its opportunities.

Speaker 2

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 4 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.

Speaker 2

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 1 or number 2 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.

Speaker 2

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're seeing in the whitening segment of the toothpaste category. It's a long term strategy of launching OPTIC White Renewal and then OPTIC White Pro Series in the U. S. Or our new MPS whitening technology where we're launching around the world, which leverages our superior R and D capabilities to drive long term share growth.

Speaker 2

And on top of that, we continue to launch at home 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 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.

Speaker 2

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 1 year ago And we began to see the benefits in our numbers in the second half of twenty twenty two. We expect even greater savings in 20 3 to help fund investment and drive operating margin expansion. So we believe we are well prepared for 2020 But there's still a lot of uncertainty in the world.

Speaker 2

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 top line momentum and a proven strategy With the right brands, the right capabilities and the right efficiency drivers to deliver top line growth and improve our bottom line performance.

Speaker 2

And with that, I'll turn it over to questions.

Operator

Thank you. We will now begin the question and answer session. Please limit yourself to one question. If you have further questions, you may reenter the question And our first question today will come from Dara Mohsenian from Morgan Stanley. Please go ahead.

Speaker 3

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're seeing. I'm assuming more than all of that perhaps is driven by pricing and volumes will be down slightly. A, maybe is that correct? And then, B, it just be helpful to get a bit of commentary on each of those areas.

Speaker 3

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're seeing from a consumer standpoint to pricing, any changes sequentially at all? And how are you feeling about that front heading into 2023 here?

Speaker 2

Yes. Thanks, Dara. Good morning. So again, let's recap quickly. Obviously, the strong top line growth or organic growth that we've seen across the business, We're very pleased obviously with finishing the year with strong momentum.

Speaker 2

Obviously, the pricing that we put into the P and L, Particularly if you look on a 2 year stack basis up to 15.5 percent, so sequentially up as we moved out of the quarter. So we continue 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've heard, I think throughout the Earnings season, categories have pulled back and that's expected given the magnitude of pricing that we've seen go into all geographies around the world. Our sense is we'll see continued pricing in the first half of this year, which we think will have a drag on volumes for the categories that we've seen particularly in the back half of 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.

Speaker 2

We've 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 Big question mark, infection rates remain high. Yes, a lot of euphoria about China reopening, but as you've seen in the Q4, Volumes have been very soft in China for the categories in which we compete and we see that continuing quite frankly in the Q1.

Speaker 2

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. There's a real question mark given the magnitude of the pricing that we've seen in the back half of twenty twenty two and the pricing Implementation in 2023, the impact that will have on the consumer. So far, if I give an overarching comment They've been very much in line with where we've expected.

Speaker 2

So overall, we think we feel good about the organic range. We feel very confident that we're within that range. And if things continue to stay where they are and we continue to see the share growth that we're seeing across the world and the response

Operator

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

Speaker 4

Thank you and happy New Year to you too. So I have A broader question on volumes. On the minus 4% globally, which compares, I guess, favorably to some of your competitors that reported so far. What was the impact of retail destocking, if any, in Filorga? I mean, I appreciate you In the prepared remarks, obviously impacted more Europe.

Speaker 4

So I was wondering if you can kind of bridge that gap. And also good segue from your last comments, Noel, on Europe. You have said Obviously more pressured. What are the and I understand it was mostly Personal Care and Handstoap. Is there anything you can add That in terms of like the exit rate and also the exit rate for China.

Speaker 4

Thank you.

Speaker 2

Sure. Thanks, Andrea. Good morning. So let me talk a little bit about volume around the world and more sequentially as we went through the quarter. Volume improved in the Q4 versus Q3 And that volume improvement came despite obviously an incremental point of advertising excuse me of pricing which you saw at 12.5%.

Speaker 2

So Overall, we're pretty pleased. Some of the drawbacks on volume as we discussed in the prepared remarks, obviously skin health Had a challenging quarter from inventory reductions, particularly in the online world. We saw those inventory reductions, particularly here In the North America business and obviously a significant inventory and volume softness in China due to COVID on the Filorga business. So that really pulled down Quite a bit of the volume. You obviously have the Russia impact, which we would quantify to roughly around 30 basis points.

Speaker 2

Elasticities, as I mentioned early on, were very much in line and consistent around the world. Slightly higher elasticities in Europe, But that's to be expected and consistent with history, but very much in line with where we expected. A little bit more inventory reduction in India than we expected, Particularly in the rule is the rule business has not come back nearly as quickly as we anticipated in the Q4. We expect that though to come back in 2023. So overall, that was very much driven by some inventory reductions we saw on skin, a little bit in the drug classic Trade in the U.

Speaker 2

S, likewise, the softness that we saw a continued softness we saw in the China skincare business. But overall, volumes improved versus the 3rd quarter and to a certain extent, more or less where we expected. We did not expect Further deceleration of inventory pullback in the U. S. On the Skin business.

Speaker 2

So in terms of exit rates for Europe, If I characterize Europe in general, strong share growth across the board and mid to high single digit organic sales growth In oral care and in home care, which is as you rightfully pointed out was offset by the weakness in personal care, which was principally Filorga China. But overall, shares are strong in Europe. We seem to be getting our pricing through. Negotiations continue to go quite well. However, categories have been rather soft in Europe given the amount of pricing that that market has experienced and the sheer inflation That the European economies are incurring today.

Speaker 2

So overall, I feel pretty good about Europe. The good news is the shares are strong And we're getting the pricing through and we feel we're set up for a good year in 2023.

Operator

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

Speaker 5

Hi, good morning.

Speaker 6

Hi, Michael.

Speaker 5

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

Speaker 2

Sure. I just characterized Europe where we felt very good about where we ended up North America, as you've seen the data, we're upper flat in 8 to 12 categories. Importantly, good very strong oral care growth both in the year and in the quarter. So pretty good there. Latin America Our shares in general are flat and we feel good about where we are from a Latin America standpoint given the sheer amount of pricing That we've taken, I think that's representative some of the strong innovation that we put into the market in the back half.

Speaker 2

Asia, I'll characterize it as quite strong, particularly the e commerce business, a little softness in the brick and mortar business, but overall e commerce Continues to perform very, very well. In Africa, Middle East strong as well. So overall, we feel very good about the momentum We've had on market shares in value terms. Volume pretty much consistent with that. A little softer particularly in Europe on the volume side In terms of our volume shares and that's I think response to just the sheer amount of pricing that we've taken in that market.

Speaker 2

And as I mentioned earlier, obviously, A little softness in the Asia markets on volume, a lot of value going through those markets, but in general in the categories Has been quite soft, but our volume shares in Asia seem to be holding up okay.

Operator

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

Speaker 7

Hi, good morning. Good morning. Noel, if I just take your comments around Some incremental pricing. I think you said productivity is expected to accelerate. If I look at raw material Outlook of several 100,000,000 of inflation and red color, the gross margin negative impact should be easing sequentially.

Speaker 7

I'm coming up with potentially significant gross margin expansion and I realize reality is often so much different than What we can see in the models, but I wonder if you can just maybe help frame that a bit more for me Because it does imply maybe you're leaving some room for investment, but again, perhaps I'm missing something in this In the development of the key drivers here, and I wonder if you could just help clarify that

Speaker 6

a bit more for me. Thanks.

Speaker 2

Yes. Let me take the kind of strategically how we position the P and L particularly around growth and investment and then I'll let Stan take you through Some of the constructs on how we built internally gross margin and operating margin, as you rightfully said, we're really pleased with the operating margin Improvement that we're seeing moving through the P and L and that will continue allowing us to fund more advertisers. So as the prepared remarks Indicated, we intend to continue to invest behind the business and we've seen great response to the strategy that we've executed over the last Obviously, the core adjacencies and channels behind increased investment is driving very strong organic growth in the category and up 5% dollars in the quarter Despite significant foreign exchange headwinds, we talked obviously out through the back half of this year the need to continue to invest in those business Once we had more capacity coming online and that is obviously started to happen in the Q4 and we expect that to obviously continue as we move into '23, 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.

Speaker 2

Good momentum on oral care and strong innovation and a lot of pricing that we've taken across a broad section of categories and we want to We have the investment there to generate the get the pricing ceded in the marketplace and continue to drive consumption growth For our retailers. So overall, it will be another year of good investment, good share growth expected and obviously good top line growth Coming through the P and 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.

Speaker 6

Sure. Thanks, Noel. And on gross profit margin, you started to see some progress here. North America, Latin America And Africa, Eurasia, you saw improvements in the operating margin in the 4th quarter. As we look at gross profit, Noel highlighted Pricing, that significant flow through will help in 2022.

Speaker 6

The productivity will be a tailwind here. And while material and Ron Pack 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.

Speaker 6

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.

Operator

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

Speaker 8

Thanks, operator, and good morning, everyone. So I wanted to ask on gross margin as well, which For the quarter, it 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's question, when we think about the path forward, you mentioned several $100,000,000 of For raw materials and packaging, is there any way to kind of frame that?

Speaker 8

Is that $300,000,000 to $400,000,000 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.

Speaker 2

Sure. As you saw in the Q4, obviously, a continued difficult environment in terms of raw material inflation, another 900 basis points on top of what we had in the Q3 in terms of a headwind on gross profit. A good percentage of that continues to be ag prices, which obviously have continued to move south on us. And in fact, if you look at the first half versus second half, Peter, ag prices were up 25%. So obviously that continued To impact the Hills business.

Speaker 2

On top of that, as we integrated the 3 red collar facilities and began transitioning Some of the high capacity volumes business that we had in our own plants, we obviously incurred some start up costs and some variances moving through the P and L That obviously impacted margin in the quarter as well. And then I'd also characterize as I mentioned that obviously the inventory reductions we saw on Skin Health And the drag from China on the Skin Health business likewise had a mix impact in the quarter. With that, let me turn it over Stan, this is he if he has any more information in terms of how he wants you want to characterize how we're thinking about raw materials for next year?

Speaker 6

Yes. The raw materials continue as Noel highlighted to be a headwind for us and your range is probably in the right ballpark here as think about that on a year on year basis. But I would emphasize it has been volatile. So things have moved up and down pretty significantly here. And in particular, the agriculture and how that applies to Hill's, those have not moderated.

Speaker 6

It's 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 PAC. 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 twenty twenty three.

Speaker 6

So a combination of those 2 Primarily, we think are the drivers as you look at raw impact going into the year. Now, we've laid out our pricing actions and are funding the gross savings that we look to drive combined with our productivity. And I'll just mention your 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 Well, it moderates through the year.

Speaker 6

On a full year basis, it will still be an impact on overall gross margin.

Operator

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

Speaker 9

Great. Thanks. Good morning, everyone. A question for Noel and then perhaps John, you may want to jump in on this as well. Just With respect to the impairment charge on the Skin Care assets and just more broadly, how this may be informing the view around capital deployment, I think we can all appreciate the non cash charge, not usually surprising.

Speaker 9

You guys have been pretty open about some of the challenges in the business, also realized higher rates When you performed the impairment test, so all that kind of makes sense. But I guess just given this dynamic, it sort of begs the question, does it give you any pause in terms of how you stress that asset that you may be looking at? Broadly, does it increase your bias towards internal investment Turning cash to shareholders versus M and A. And then maybe perhaps just from an M and A perspective, an update on any books broadly that you may be seeing whether private market values to start to come in a bit given higher rates and what we see in the public markets. So thanks for all that.

Speaker 2

Sure. Good morning, Kevin. Yes, I think you characterized that well. So let me just recap quickly a couple of aspects of Skin Health and I'll turn it over to Stan and John for the second part of your question. The impairment was obviously based on 3 issues.

Speaker 2

The biggest change is our outlook On growth in China, you've seen, I think, external numbers that the beauty segment has taken a significant hit in the last 3 to 6 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 business is, we obviously then decided To rebase the outlook in years going forward and particularly 2023 in a much more conservative position to ensure 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.

Speaker 2

And as Chinese travel opens up potentially in the back half, we will see an improvement. But we assumed And the impairment that that will continue to be a headwind for us as we move through at least the 1st 6 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.

Speaker 2

Obviously, The short term impacts that we've had related to China, we believe ultimately will get behind us, but we've 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've seen some early signs Certainly in the early part of the year, particularly across our European business, Amphi Lorga, to give us quite a bit of encouragement. Our U. S.

Speaker 2

Business continues to be very, very strong Despite the inventory pullback that we saw in the Q4, if I take our online business specifically, our share growth was up 300 basis points online in the back half of last year and on the year, which is terrific. Obviously, we incurred that share growth Despite obviously inventories getting reduced, we do expect some of those inventories to come back slightly, but we're obviously assuming a Consider 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 course part of our PCA and Elta business. And we have a good innovation plan coming on stream for 2023. So overall, still feel very good about the strategy behind Skin Health, Need China to turn and you've heard a lot of discussions about the uncertainty in China, but we think we position the brand.

Speaker 2

So obviously, As China comes back, we'll be in a position to reap the benefits of that. The only thing

Speaker 6

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've got the advertising to support it, to bring it to market. We Still confident in the long term success of this brand.

Speaker 6

So that's what I'd add on Filorga.

Speaker 1

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

Speaker 1

I think the market still

Speaker 6

In the capital allocation, I think as we look at that, we returned $2,900,000,000 to shareholders. We had $900,000,000 of net share buyback. We've paid dividends since 18 95 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 and 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.

Operator

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

Speaker 10

Great. Thanks. Good morning. My question is around Oral Care because you've obviously made great improvements particularly on pricing and hearing on the portfolio. So could you give us a sense of how your game plan is pivoting as the macros potentially get a bit Choppy and elasticities get a little bit more elastic.

Speaker 10

Obviously, high single digit growth in oral care Fantastic. But what's your view on the state of the consumer in the U. S. And developed markets as a whole? And how does that influence your view Potential trade up versus trade down in 2023?

Speaker 10

Thank you.

Speaker 2

Sure. Good morning, Olivia. Again, as I mentioned earlier, oral care had a really, really strong year, high single digit growth across the year and the quarter And we were high single digit in oral care on 3 of the last four quarters and toothbrushes specifically up double digit 3 of the last Some of that was some easier comps as we were lapping some of the supply chain challenges that we had last year. But the important aspect there is share growth up on the year For both oral toothpaste and toothbrushes. Specifically around elasticity, I think it comes back to the strategy that we've talked about For a couple of years now, which is the flexibility in our portfolio.

Speaker 2

We continue to innovate across all price points and we cover a wide gamut of price From opening to now, obviously, pushing a lot more of the super premium segment, which you saw some of the examples of the success we're having in the whitening segment in that regard. So overall, our categories, our portfolio is well positioned for this environment. We spend a lot of time as we work through the operations around the world portfolio in different ways over the last couple of years and we're seeing that certainly translate into improved performance. Elmex would be a great example, Taking Elmex very selectively in the pharmacy channel around the world has allowed us to grow incremental share in those businesses. The other aspect I'd say is our core relaunches.

Speaker 2

We'll have a significant core relaunch coming on the India business next year. We've relaunched our core business Some of our bigger markets around the world and that has helped some of the premium innovations come on incrementally to the franchise Moving forward. So we feel pretty good about where we are with oral care. Elasticity is exactly where we expected and I think driven by combination of the flexibility we have in our portfolio in addition to the innovation that we're bringing to the marketplace.

Operator

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

Speaker 10

Thank you. Good morning, everyone. Noah, I was hoping maybe you could provide some little bit more context on what you're seeing on the ground China right now, it's interesting you mentioned you think the recovery will happen in the back half. So I think there has been projections by other Companies and just by looking at some of the mobility data that things might start improving around March, April, and we're already starting to see kind of retract The metro activity in China and starting to see some real improvements there. So just curious on your thoughts there given how important that business is for the on the margin

Speaker 2

Sure. As I mentioned, we had strong performance in China on the Colgate side of the business. Our Holly and Hazel business up nicely mid single digits, our Colgate business up nicely mid to high single digits. So overall, We feel very good about the transformation that we put in place over the last couple of years across our China business. Our brick and mortar business is a little soft, but as I mentioned, That's, I think, characteristic with the lack of mobility around the country and as mobility improves, as you say, and if it improves earlier, by all means, we should benefit from that as we continue to expand our distribution in that marketplace, but it continues to be highly, highly uncertain.

Speaker 2

Obviously, the Chinese New Year, everyone's waiting very carefully to see the impacts of that. There's a lot of euphoria, but infection rates are still very, very high And things could change very, very quickly there. The comment I made about the back half is not only mobility within the country, Which I think will probably as you say improve more quickly, but it's more external mobility in terms of more international travel, Which would benefit the Filorga business. But again, we feel good from the success that we're having from a market share growth. As I mentioned earlier, our Commerce business was up almost 300 basis points on the year this year and that is again a reflection of the strategy and some of the good innovation we brought into the market.

Speaker 2

If the markets improve, we shall certainly see the benefits moving through our P and L earlier than we anticipated. But I would be quite cautious On China at this point, but over the medium and long term, we are very optimistic about the growth opportunities there.

Operator

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

Speaker 11

Hey, good morning folks. Hey, Jason. So Mr. Floche talked about the Healthy growth contribution from bills. And obviously, the top line lift has been really in the last few years.

Speaker 11

It's surprising though to see penny profit Actually contracting this year. Can you unpack the drivers? And I imagine within that, you're going to come back to some of the ag So I guess I'll tag on to that. The Ag complex seems like it's one of the easiest ones to hedge out. I imagine Are hedged out and therefore have good visibility to it.

Speaker 11

Assuming that part of the contribution is related to ag, what's Impede your ability to price that through? Thank you.

Speaker 2

Yes. Thanks, Jason. As you said, we've Coming off of some of the challenging capacity issues that we had in the Q3, we feel like we've certainly turned the corner on that business. Again, a double digit growth in the quarter. That's 27% growth on a 2 year stack basis.

Speaker 2

And we've delivered double digit growth on the Hill's business 10 of 12 of quarters and we feel with the capacity improvements that we have and obviously the continued Increased investments that we feel we're in a very good position to deliver sustained profitable growth moving forward. Now as I mentioned, ag prices were just 25% half to half. Now you take that on the year versus last year, that's significantly more. I'll let Stan talk in a moment to Our hedging strategy, which is very minimal around ag prices, so we don't get a lot of hedge we don't do a lot of hedging there. But overall, it's Taking pricing, it's making sure that we continue to move through the transition aspects of incorporating 3 plants And moving capacity from our existing plants into those plants, so there's startup costs associated with that.

Speaker 2

Obviously, we're building a new wet plant, We should open up towards the back half of the year. We have the start up costs associated with that move running through the P and L. But all of it is around building investment Ability for the future for us and our ability to continue to sustain the strong top line and the strong investment structure that we have by investing in capacity And allowing us to do the things that we do so well in the marketplace. So we feel good about where the business is. Obviously, the ag prices We'll be where they are and we're taking pricing as you've seen both in the Q4 and plan to take more pricing in the first half of this year.

Speaker 2

But again, if ag prices come back, things will get better. But we at this point don't expect any short term benefits from ag coming back.

Speaker 6

Yes. 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.

Speaker 6

But just while we've highlighted ag, there are other areas here like chicken livers as 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 So as we look, we've also integrated now 4 plants through acquisitions, 1 from Nutriamo earlier in the year and then the 3 from Red Collar. So we took those over on September 30. That integration has gone well.

Speaker 6

But as you would expect, there are startup costs to go along with that. As we bring Togonoxy online, that's our new wet plant in Kansas in the second half of the year. We're very excited about that It has great automation. It's going to be I think a great addition to the portfolio, but that has start up costs in 2023 in particular in the first half As we hire staffing, get the staffing right heading into the prep for going live. So important here on Hill's, We see a great market opportunity, science based, our research center really supports that.

Speaker 6

We're 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 Hills. We're 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.

Speaker 2

Jason, I'd throw one other point, which I think is relevant To not only Hills, but to other aspects or other questions that have come up this morning. And that is the foreign exchange impact in Europe in the quarter. Obviously, the 2nd largest business outside the U. S. For Hills is Europe and Europe had 11% headwind in foreign And that obviously moved through the Colgate side of the business as well.

Speaker 2

Now you've seen the significant pricing that we're taking, but obviously the transactional impact well as the translational impact of that foreign exchange move through in the 4th quarter and certainly dampered a little bit of the penny profit that we would have expected.

Operator

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

Speaker 7

Hey, thank you. So picking up

Speaker 12

a little bit on what you were just talking about in terms of start up costs, But also the manufacturing variances and the negative mix that, no, you alluded to earlier with respect to the 4th quarter. I guess a couple of questions related to that. One is, I assume that's lumped into the raw materials, the 9 20 basis point Negative impact of raw materials, so I don't know where else it would go. So if that's the case, I guess, is there a way to quantify what those sort of To me non raw materials costs would have been or were in the quarter as a headwind, number 1. Number 2, How we think about those carrying over and phasing at least until the I presume the first half Of 23.

Speaker 12

And then just to clarify and round it out is, are those impacts embedded in the several $700,000,000 raw and packaging materials inflation outlook for next year just because I think it's a little bit different than Ram, and Packaging Materials is sort of narrowly defined. That's really my those are my main questions. If you could also talk a little bit about How you're thinking about red collar phasing through the year and just operationally what that entails if there are costs Whether cash costs or costs that are notable going to the P and L as you do transition the private label Product over to Hill's, just that would be helpful to understand. Thank you.

Speaker 2

Sure, Steve. Let me take very top line kind of strategically how We're integrating Red Collar and the deliberate plans that we've taken to ensure successful integration into the Colgate Palmolive Company. First, it's 3 significant plants that we're obviously integrating. And as we've talked about it for the better part of a year, All of our existing facilities on Hill's have been running full out. And obviously, that is a very inefficient way To run your supply chain, now we have obviously been investing in improved capacity, obviously with the plants in addition to the Tonganoxi, In addition to the plant that we purchased in Italy, but again, integrating those into the system to ensure 1, Quality mechanisms are where they need to be, ensuring the lines are capable of the flexibility in the formulations and the sophistication of our formulations, making sure that obviously that the all aspects of the science driven approach that we've taken to our formulas It's well understood and by the culture of the organizations that we're integrating into the company.

Speaker 2

All of that has been very, very methodical. We're not going Given that we need the capacity, we're not going to rush ourselves into doing this too quickly. So we've been very careful to ensure long term success as we build The plan is to bring that volume into the Colgate business over time. So with that, let me turn it over to Stan. He'll take you through a little bit of how we Planned for Red Collar and how we're thinking about the ongoing start up costs associated with that.

Speaker 6

Yes. 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. 1, and of course, I should start, all of this is baked into our guidance. So as we plan this out, this is all incorporated within our guidance.

Speaker 6

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've incorporated that into our capital and we've 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're 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.

Speaker 6

The variances that we have in total, let me step back to there. The variances that we have in total go into gross profit. So 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 Tiguanoxi, that's again the new wet food plant that will come on online in the second half of 23.

Speaker 6

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 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'll wrap around from an impact here in Q4 of 2023.

Speaker 6

But as we go forward, you should think that the impact to margin is roughly in line with what we saw in 4th quarter. So it would be a benefit to the top line 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.

Operator

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

Speaker 13

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.

Speaker 13

One question that we're getting is What was the effect of private label on the organic numbers? So if you took private label out, was the volume growth actually down 100 basis points? So 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 in Pet given a tougher consumer environment and how you may be adapting to that And what your volume assumptions are for Pet in 2023?

Speaker 13

Thank you.

Speaker 2

Yes. Good morning, Rob. Thank you. Let me take the e commerce question first. Good year for e commerce as I mentioned.

Speaker 2

It's up to 14% of our sales. We continue to see strong growth Throughout the year and importantly in the most important markets around the world, we continue to see strong share growth. So overall, We feel a lot of the work that we put into our digital transformation has paid out quite nicely in the consumption that we're seeing Across the board, whether that's our skin business, whether that's our U. S. Oral care business or our Hills business, we are performing quite well.

Speaker 2

And we're sharing those capabilities Very nicely across the enterprise. And as I've talked to you before in the past, obviously, Hills was at the forefront of that. And a lot of the skill sets that we build in our Hills organization have certainly translated now across the enterprise and we're using those Benefits to grow our e commerce business both on a share basis and the top line basis. The inventory drawdown was on PCA and Elta in the U. S.

Speaker 2

In the online channel, which is their number one retail channel. As you know, they sell through the profession and they sell online Through the big online retailers. The big online retailers took significant inventory out of the system In the Q4. These are very high priced items as you're well aware. And they felt I guess managing their working capital that they were going Take those down in the Q4.

Speaker 2

The good news as I mentioned earlier, we didn't see a significant impact on our consumption. Our shares were actually up. And the more important news is that we started to see that inventory rebuild itself slowly, I would say, in the Q1 of this year, particularly January. Now that's not to say that the end of the quarter we may see more draw downs. But in any case, the good news is we start to see some improvements there.

Speaker 2

But it was on the PCA and Elta business In the U. S. And likewise on the Filorga business in China with the significant lockdowns that we saw Across China in the Q4 and coming out of the Q3, we saw significant inventory reductions in the online business there as well. Relative to private label, let me characterize, I guess, first oral care. So oral care private label in the U.

Speaker 2

S. Is about a 0.9 share and that share is roughly flat on the quarter In the Q4 and flat on the year. Oral Care Private Label Shares in Europe are around 3.5% And likewise, that share is flat. We are seeing a little bit of growth in private label businesses, particularly in Europe on some of the home care businesses. Obviously cleaners, dish and to a certain extent fabric softeners we've seen about a point of growth in the private label business there, But consistent with where we expected.

Speaker 2

So nothing unusual and importantly we don't see obviously given the benign levels of shares we've seen in oral care, We haven't seen a significant turnaround there. On the Hill's trade down, we have not seen trade down thus far. If you go back to 'seven, 'eight, which spent a lot of time looking at the premiumization of the category during that period. We did not see consumers pulling back on Scientifically proven pet nutrition. And we feel that given the strength of our innovation and obviously the strength of the investment that we're putting in the market that we'll be able to continue to manage that quite well.

Speaker 6

So thanks. Rob, let me just pick up on the Hill's organic and private label and how we're 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 it in the net sales, but in organic it will only be inorganic when it wraps around For the year, which will be in the Q4.

Speaker 6

So when you see organic sales, that represents true year on year with no private label benefit in that number. Similar to volume, you'll see the volume in the press release at plus 10% and then organic volume at plus 0.5%. So volume expanded even outside Of private label, but 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.

Operator

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

Speaker 14

Yes, thanks and good morning everyone. I want to go back to gross margin kind of looking backwards and then trying to think about it going forward. So I guess I'm curious what happened to gross margin in 4Q. I mean, I hear all of what you talked about, some things unexpected. But if you go back and look at what you said at the last call, you were locked in at least that's what I thought you said on, I assume A bunch of these are raw materials ag pieces.

Speaker 14

So was just these manufacturing variances, start up costs, etcetera, just much greater? And I guess The question going forward then is, I hear you and a lot of the questions on this call is about improving gross margin expectations all these things that are potential tailwinds, but how much visibility do you have as you sit here today and what potentially is baked in that could go wrong? And then Kind of pushing it forward longer term, how do you think about or how does the company think about the necessity to grow Gross margins over time so that you can hit the earnings algorithm for the business given where the top line expectations are and just how That is and what line of sight you have to get back to a number, not that I'm expecting you to comment on you can get to 60% again, but if you can Talk directionally to that, that'd be helpful as well. Thanks.

Speaker 2

Thanks, Mark. Let me start with the end of your last question first And provide some thoughts and I'll have Stan walk through you a bit more of our assumptions once again. Listen, driving gross margin for our company has always been fundamental and it's always been the fulcrum of our P and L. And as we Laid out in the prepared comments, we expect gross profit to be up in 2023. I remind you that gross profit was down 160 basis points in the 4th quarter, if when you exclude the impact of red collar.

Speaker 2

Some of the Issues that we incurred in the Q4, obviously, we had a mix issue with the lower skin health business that we mentioned, A little bit of a mix issue on Hill's as well with more of the science diet business versus prescription diet. But we obviously had the elevated ag prices moving through there and the start up costs that as Stan mentioned earlier that moved through the gross profit line. But step back again, I mean we are very focused on getting pricing in the P and L and you've seen that sequentially improve from 3rd to 4th quarter. We expect that to benefit us next year. Now, there are a lot of assumptions on where commodities go.

Speaker 2

We've talked about a couple of $100,000,000 there. But remember where we were in the Q1 of this year. We had a lot of assumptions there and we got ahead of that very, very quickly in terms of where things move. Now if things move stay where they are improve, obviously, we don't think we'll be at the low end of our guidance, But we feel that's a prudent and flexible place to be given the uncertainty that we've seen and the movement that we've seen certainly over the last 6 to 9 months Commodity prices, not to mention foreign exchange. So, let me turn it over to Stan to give you a little bit more color once again on where we are from Some of our locks in our contracts.

Speaker 6

Yes. So on gross profit, we look at raw and pack. We do lock in a majority of our Commodities here at least for 90 days out for the next quarter. But there is still conversion costs. There's still the manufacturing variances that have to go through labor cost that goes into that, etcetera.

Speaker 6

So when we look at this and for 4th quarter, the 250 basis As reported, decline in margin, again, private label drove about 90 points of that, so you're at 160. And as we look at Prices here, again, it was 9.20 basis points relatively consistent with Q3. And our conversion cost and some of the variances that Talked about had an impact overall on margin versus our original expectations. 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 were on pack, improved pricing in our GM and then the productivity work that we've been doing Across the board, we'll have a benefit here to margin.

Speaker 6

So the margin expansion again fuels that investment into advertising. So we do believe That margin expansion is a core component, a foundation of our overall model. And so that expansion into next year will fuel that model, which will allow us Deliver low to mid single digit earnings growth.

Operator

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

Speaker 15

Great. Thanks. Good morning. I know you've covered a lot of ground, but I just was curious Knowing that 4Q gross margins came in below what you had anticipated, you've obviously detailed the reasons a couple of times. I was just curious, the bottom line still delivered, frankly.

Speaker 15

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 a shorter term sense? How you kind of make those decisions and how we should think about the reinvestment in 2023? Thanks.

Speaker 2

Sure. Well, we didn't pull back on the advertising investment. Obviously, that was down 20 basis points on a percent of 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 The progress we've 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 the Hills business coming in a little bit lower than we expected as well as skin health, but we feel those are well under control.

Speaker 2

We have good visibility about where those two businesses are going. So we feel like we're in a pretty good position to continue to So we feel like we're in a pretty good position to continue to execute against our strategy, deliver against 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 and L, ensure we have the investment to support that.

Speaker 6

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're running the entire P and 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.

Speaker 6

We think that's just a prudent way to run the business and we'll continue to do that heading into 2023.

Speaker 2

Yes. As I mentioned earlier, Lauren, we're very pleased with that middle part of the P and L around how we managed overheads, Which given obviously the headwinds we've 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've talked about around digital transformation, improved capabilities around innovation, certainly as we restructured 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 top line growth for us.

Operator

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

Speaker 5

Thanks, operator. Good morning, everyone. So my question is just around cash flow. Free cash flow conversion, if I'm Doing the math right, with about 74 percent of net income this year, I think in absolute dollars free cash flow down about $900,000,000 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, I know you've talked about net interest expense being higher for this year, just if you can put a number on that and also on capital spending?

Speaker 5

Thank you.

Speaker 2

All right. Let me top line it, Brian. Good morning, by the way. And I'll let Stan take you through some of the puts and takes. But overall cash flow Cash was down due to lower cash income, right?

Speaker 2

Obviously, that was the higher that was some choices that we made, particularly around working capital investments. A little bit increase in inventories as we were dealing with some of the supply chain disruptions we saw from suppliers And our need to sustain the consumption growth that we had in the marketplace, particularly some of the stronger consumption growth. But obviously, inventory days came up as But we improved a bit of that in the Q4 versus where we were in the Q3. But clearly, it was driven by the lower cash profits, driven by Obviously, the sustained foreign exchange hit as well as the challenges that we saw moving through gross margin on the year. CapEx was the other one, a deliberate choice for us.

Speaker 2

Obviously, the growth that we've made the growth that we put into Hills and the investment and the Significant increase in capital expenditures there and some of the increases that John mentioned earlier around sustainability, which we think are extremely important to position us For where the markets are moving forward. And overall, I would say that we expect a very nice improvement in operating cash flow in 2023. Yes.

Speaker 6

Let me pick up there on the cash flows. As Noel said, we do expect improvement in 2023 and it's really going to be 2 fold. 1, Improvement in cash profits as we've guided to and second, the improvement in working capital. We see opportunities there. We have been conservative on our working capital here in 2022 and particularly around inventory.

Speaker 6

We wanted to make sure That we could restore fill rates across the board that we had enough inventory to supply and in particular towards the late in Q4 As China had impacts from COVID on manufacturing, we prudently brought in additional inventory to make sure we could Fill clients over the year end. So, on cash flow, we expect improvement both working capital and cash profits. On interest expense, you see in 4th quarter a material increase on a year on year basis. And again, really comes from 2 components. First, the impact that it has on floating rate debt, in particular CP, that's up significantly, as you know.

Speaker 6

And then second, we're carrying a slightly higher debt level, though quite comfortable within our range and our leverage metrics for heading into 2023. So as you think about that interest expense, it will be larger than the GAAP you saw in Q4 simply because you get a full year of carrying The red color of funding through the year. That said, we think we have highly competitive rates on our debt Going through, we have great access to the markets that fund our overall model. So on capital spending, as you saw from our We spent just under $700,000,000 I expect that could go up a little bit as we look at 2023 and that's really in a couple of areas. First, we're going to complete Taganoxi as that comes online in the second half and that we talked already about the red collar facilities.

Speaker 6

We have great plans for those as we're going to significantly increase our overall capacity for our Hills business, which operates in a terrific segment. And that investment obviously will have capital spending. In addition, we invest in sustainability type efforts like recyclable tube, we think are important. We'll continue to roll that out in a prudent manner that we continue to invest in our IT capabilities including our S4HANA Journey that we're well underway. So overall, we're comfortable with the position heading into 2023 and that will expand cash flow At a material level on a year on year basis.

Speaker 2

Yes. 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've seen over the last 3 years where we've recognized the challenges And generated real opportunities coming out of those and that certainly has driven the top line of the company. So with that, let me just finish off. I think that's the end The questions in 'twenty two was another year of strong progress for the business in terms of sales, market shares and productivity that move through the P and L, But more importantly, the capabilities that we're building across the organization.

Speaker 2

We're excited to see the leverage moving through the P and L and we'll see that continue in 2023 That will allow us to deliver the investment to sustain good top line growth and obviously very focused on delivering shareholder value moving forward. We'll see everyone I hope down in CAGNY in February where we can talk a little bit about more our plans in terms of how we're 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.

Operator

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

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