Everyone, good afternoon. Welcome to the UBS Global Consumer Retail Conference here in New York City. My name is Peter Grom. I am the U.S. Beverages and Household Products analyst here at UBS, and we are very excited to have joining us today for our afternoon keynote slot from Colgate-Palmolive, Stanley Sutula, Chief Financial Officer, and John Hazlin, President of Hill's Pet Nutrition. You know, over the past few years, Colgate has implemented several strategic initiatives that have resulted in stronger organic revenue growth and improved financial delivery. One of the key drivers of that improved performance has been the sustained strong growth from the company's Hill's division. In terms of format for today, I have about 45 minutes that I have here with both Stan and John. I have a number of questions that we will run through.
Before we start, I am required to read a legal disclaimer. As a research analyst, I'm required to provide certain disclosures relating to the nature of my own relationship and that of UBS with any company of which I express a view on this call today. These disclosures are available at www.ubs.com/disclosures. Alternatively, please reach out to me, and I can provide them to you after the call. So with that, why don't we get started? So, John, I would like to start with you. You've been the President of Hill's since 2022 after being the President of Africa and Eurasia. And I want to spend some time talking about the path forward for the business.
But in many ways, it feels like the foundation for the improved algorithm for Colgate really started with Hill's, focusing on science-led innovation, reinvested back into the business, and that's really, you know, led to strong results, four straight years of double-digit organic sales growth. But maybe to start, I think it would be helpful to understand the Hill's business prior to the turnaround and ultimately what got the division or what the company got right, I guess, if you would say, to kind of get become a more consistent growth driver for the total company.
Yeah, great. Thanks, Peter. So, good afternoon, everybody. Hill's is a very strong business with a strong business platform to begin with, and it mirrors after what we think about when we think about Colgate-Palmolive. It all starts with our science-driven nutrition. That science-driven nutrition delivers optimal health outcomes for pets. That science-driven nutrition attracts the veterinary endorsement, so that professional endorsement model that we also see on the Colgate oral care and the skin health sides. And then importantly, our selective distribution model that we apply with Hill's. We sell in vet channel. We sell in pet specialty. But one of the changes to your question was e-commerce. So historically speaking, e-commerce was not a channel we were in, and it wasn't a big channel.
As that channel has evolved and the pet category and Hill's with it has evolved even faster, it's been a significant contributor to growth. We remain focused on that selective distribution. That core business model is what we've been working on since Hill's was created back in 1948 with the first therapeutic nutrition diet. We invented the category. What we've done in addition to the core model is start to amplify it. Prior to 2019, we were not a mass media market advertiser. We did do a lot of professional promotional activities, conferences, talking to vets, doing some level of digital. We started to invest in media, and that media investment has tracked ahead of the overall Colgate-Palmolive business. What it's allowed us to do is take a low-awareness brand and start to build household penetration. We also continue to innovate.
That's part of the Colgate model as well. So we are a regular innovator bringing in new-to-the-world diets into therapeutic nutrition. That, both of those things are further amplified by taking data and analytics and digital. We've taken our data analytics, fed it back into the media, shown that we can create more effective media, meaning bringing more households into the brand, and doing it at an ever-increasing return on investment. We also take the data, apply it back into the innovation space. So for example, a diet that we launched in 2021, Derm Complete, was clinically proven through the use of wearables technology. We were able to show by a tracker device on the collar that we could show lower itching and scratching. So that again, data play going back in driving the innovation.
Yeah. And anything you would add? I mean, in many ways, similar to John, a lot of the turnaround at Colgate was, you know, underway before you joined. But I would love to get your perspective on how the total company was really able to replicate this model.
I think it's a good question. And John articulated the Hill's journey, I think, really well. But if you go back and look at kind of pre-COVID, 2019, 2018, we weren't growing. And we changed the business model fundamentally to invest back into the business and get back to investing behind the brands through advertising, bringing innovation to market. And that started to manifest itself through better organic growth. We improved the middle of the P&L, by delivering better margin and delivering bottom line in cash. And I think I'll give Noel and the entire management team a lot of credit. When some challenging times came, in particular through the big commodities, it would have been easier to cut advertising.
But we stayed the course to the long-term model, and that has delivered a much more robust business model and delivered the great results for last year and I think our strong guidance for 2024. And that has given us more flexibility. And you hear us use this term more often now within a broader model. And we think about capital allocation. We're able to invest long-term to develop the brands and our go-to-market strategy. And I think Hill's is a great example. You know, we've invested in capacity. We've invested in R&D, in advertising. And all of that has come across as a very strong business with great opportunity in front of us.
That's really helpful. John, one of the things I found on the Colgate website that was interesting was in your bio. And I'm going to read it. It says, "Your drive to accelerate sales and profits while simplifying the business has been a core theme of your career." So for a business like Hill's that's seen tremendous growth and has really become the growth engine for the company, how do you really plan to accelerate sales and profits? Is there something that needs to be done differently, or is it really just kind of a continuation of the strategy you just outlined?
Yeah, it's really a continuation of the strategy. The core strategy has been in place. This core strategy is working. But having said that, where are the growth opportunities? There are a lot of growth opportunities out there. I mentioned that we have low awareness among pet parents, high awareness among vets, low awareness among pet parents. The advertising is helping us drive awareness, which is helping us drive penetration. We have growth opportunities in spaces that we're under-indexed in. So, for example, in the cat wet space, this is an area where we have opportunity to grow. The opening of our new factory in Tonganoxie, Kansas, is going to enable us to drive more variety of diets, more opportunity to feed cats wet products.
There's a number of different growth drivers that we see out there that can help us so that we keep the core strategy in place and add these growth opportunities on top.
Okay. That's really helpful. You know, maybe just, you know, thinking about the path forward, I would love to get your perspective on category growth, you know, near-term but also longer-term. Obviously, we saw some outsized growth rates for the pet industry, you know, during the pandemic. And more recently, you've seen category growth moderate or slow, which you both have outlined on, or Stan, you've outlined on kind of recent earnings calls. What's really driving the slowdown, in your view? And have you seen any sort of improvement in trends lately? And I guess, has this changed your perspective at all in terms of how you think about growth for broader pet food or actually premium pet food longer-term?
Right. So, I think everybody's seen the dynamics, COVID, a little bit of an acceleration, and then the consequent inflation that came, post-COVID. We've seen volumes soften in the U.S., globally. I think all markets are experiencing the same thing. The cost inflation in the pet category grew at a higher and faster pace than it did in our other businesses across the Colgate network. And you saw that in then price inflation out to consumers. So, clearly, that's had a softening impact on pet buying behavior. There has been also a difference in adoption rates. So a lot of COVID adoptions, a lot of pets going back into shelters these days, that's softened a little bit. The vets also have been under pretty extreme pressure. So there's a shortage of vets in the industry.
The more the greater focus of people on the health of their pets going to the vet means that there isn't a lot of time for vets to operate. So that's where some of the softness has come. But if you think about the longer-term dynamic, the humanization of pets, that's happening here and everywhere. Premiumization of pet food is happening. You can see the premium brands are growing despite the inflationary challenges. Health and wellness, a continued focus for people. As they're treating their pets more like part members of their family, they're looking to impact lifespan and health span and other things like that. We also see parts of the market that are growing at different rates. So there are more small dogs and cats growing; they're growing faster as a percent of the population than large dogs.
Small dogs and cats have different feeding preferences, often more towards wet. So that gives us an opportunity to grow there. They also tend to live longer. And if you think about the way our brand is structured, we can hit pets at every part of their life stage. We got puppies and kittens, young adults, mature adults. If your pet goes ill, falls sick, we've got the therapeutic nutrition that can impact them there. So lots of opportunities, we think, for the category as a whole to continue its longer-term growth trajectory.
I'd actually pick up on that because I think as we look, I mean, obviously, there's some short-term tactical items going on. But long-term, we like this category, and we think Hill's will contribute above the overall category rate to the business, which is why you've allocated that capital. And as a result, you know, John and Hill's business have gained share, and it's been a really strong performance. And if I look at the broader portfolio, you know, we grew in every category and every geography last year.
Yeah. And I want to build on that. I mean, you know, because the other key building block of the growth is obviously the category growth rate, but kind of the market share opportunity. And Noel touched on this a little bit on the 4Q call, just the market share opportunity and the low penetration, and really about improving reach, awareness, conversion. And despite all this strong growth you've seen, you know, four years of double-digit organic sales, dollar share is still relatively low. And I think that surprises a lot of people. So like, I guess, as a percentage of a category, you know, how big can Hill's be? Where are the biggest opportunities? And what are the biggest challenges to kind of driving that market share improvement over time?
Yeah. So as I referenced before, we have relatively low brand awareness among general population households. There's a great opportunity to spend the investment money to build that awareness. What we've seen is as we've invested, we've become ever more effective at attracting households, growing market share. We've become ever more effective at the return on investment. I think what you heard, Noel and Diana talk about at CAGNY was an example of how we're using data in clean rooms. And that's a great way where we're taking our media dollars. We're partnering with our pet specialty partners on a win-win solution. You want they want more people in their stores. We want more brand penetration and market share.
We're able to target people who are, let's say, not shoppers in pet specialty, not shoppers of Hill's, and bring them into the retail environment and bring them into our brand. There's other areas of market share which we think are important. We mentioned small dogs and cats, areas that we are that will grow as a part of the population and where we're relatively under-indexed. In small dogs, we invested a couple of years ago in a special wing of our pet nutrition center where we, by the way, have almost 1,000 dogs and cats who we study for their lifetime. We now have 80 small dogs in the colony. So we can study the specific nutritional needs of small dogs. Anatomy kind of seems obvious. They're smaller. But what are the consequences for health?
They have the same number of teeth, but they have smaller head sizes. So they're going to have more oral care problems. There's other digestive problems that they might have. They also have a different rate of metabolism. So we're going to understand new nutritional solutions and set new nutritional standards for how you should feed a small dog. We think there's going to be market share there. Same on cat. Cat is an area that we are generally stronger on the dry side but have opportunity on the wet side. As we've made the investments in capacity, we're going to have more opportunity to expand our feeding forms. So if you think we usually use the shorthand of wet, but you've got loaf, mousse, pâté, stew. There's lots of different ways to feed. There's lots of different preferences. There's cans. There's pouches.
So we think lots of ways to continue to grow market share. And that's mostly what we're kind of alluding to is the U.S. We've got the whole international side of things where there's significant market share opportunity as well.
And as we look out strategically, when we like this opportunity, we like this space, which is why you've allocated capital to it. And that took the form of a new facility, production facility, two acquisitions, automation capital, innovation capital, because we see long-term that Hill's as well as oral care will be the two primary drivers of the overall business.
That makes sense. So building on that international, we talk a lot about the U.S. So maybe we could spend some time just helping us understand the international opportunity. Maybe just how big is international for Hill's today? Where do you see that going over time? And kind of what are the biggest opportunities, whether it be a market perspective, and kind of what are the biggest challenges to growing that over time as well?
Right. So, Hill's U.S. is more than 50% of the business. It's by far our strongest market. We have good presence in many markets, but we have the same fundamental dynamics, low brand awareness, low brand penetration. We do quite well among the veterinary community in most markets. If you're in a vet clinic, vets are going to know the Hill's name. But there's still market share opportunity in those spaces. There are places that we were not able to build as strongly because we frankly didn't have the capacity to serve some of those markets. So we've seen some competitive growth there. We think that's market share that's ready for us to take. We're still the leader in science.
All of the science that we do, the publications, the clinicals, the patents, all of that is helping us to bring really strong innovation. We have, as I said, we invented the category effectively. We've got examples. If you think about, and this is to answer your global question, around the world, pet weight and pet obesity are an issue. There, it doesn't matter where you go. More than 50% of cats and dogs are overweight. Our Metabolic product was the first product to use nutrigenomics, gene expression, to help affect the metabolism so that we can show proven weight loss by feeding our product. And those pets that use that product, after they've used it, they can keep using it, and they're going to maintain their body weight because we've basically changed their metabolism.
That kind of a diet, that kind of a blockbuster diet, that can be applied everywhere. There's many more opportunities. Internationally, we also have significant distribution opportunities. So these are places where we haven't built out the full breadth of the distribution opportunity. So that's there as well. We're also like we are investing in media and awareness; we are taking the media investment up globally as well so that we can continue to build against that model.
Sounds like I need to try some of this product for myself.
You do.
Before shifting to profitability here, and I don't want you to outline. I don't expect you to sit here and outline long-term targets for Hill's specifically unless you really want to. That would be great. But, you know, Hill's has delivered organic growth consistently above the company's 3%-5% long-term algorithm for some time. Is that sustainable? And how would you frame the ability of Hill's to kind of consistently deliver growth, you know, in line with this, like, high single-digit, low double-digit growth you've seen over the past four years?
Right. So we do expect Hill's to grow ahead of the algorithm that Stan and Noel talk about on the other calls. And the reason why is we think that there is still significant headroom in penetration. If you think about the US, we're a single-digit penetration brand. We can't measure it everywhere because the data doesn't exist. But, you know, just take the size of Hill's versus the size of the category, you know that there's penetration opportunity that exists out there. Take the, if you think about our business, there's really two parts to it. There's the therapeutic nutrition, and there's the wellness nutrition. The therapeutic nutrition category, we believe, is underdeveloped versus what it could be. We estimate that 80% of pets could be using therapeutic nutrition of one form or another, and maybe 5% are.
This is a significant growth opportunity that we think we can untap by continuing to deliver our science out to the vets and by also using our media to educate pet parents that the category exists and can positively impact the outcomes of their pets' lifespan and health span. So we see lots of runway in category. We see lots of runway, again, in market share, some of the underdeveloped areas that we talked about, whether that's the small dogs or the cats or the wet products. And we're not even in some of the bigger pet markets, today.
Yeah. OK. So maybe shifting gears to margins a little bit. Obviously, the past couple of years have been challenging for the broader CPG space, for the total company. But for Hill's, sometimes it's a bit surprising just given how much growth the segment has seen, that it's the one segment that's seen the most margin compression relative to pre-pandemic. And I know a key component of that has been the raw material inflation for that business. But can we maybe unpack the big drivers of that?
Sure. So if you go back, as I mentioned earlier, before 2019, we were not spending significant media money against this business. We took the choice to do that, and it's really paid out in terms of top-line growth. We have invested in Hill's ahead of the overall Colgate-Palmolive advertising investment posture. And that's because you've seen the growth that's come about because of that. That obviously impacts the margins. But we think it's been the right investment choice. We think top-line is the way to go. We think, as we said, I mean, we can be much bigger as a part of the category, and we think the category can be much bigger if we continue to spend that way. Yes, raw material costs also accelerated, again, faster than the Colgate-Palmolive average. That has been a challenge to deal with.
But we've been taking pricing and using RGM and using all the mix at our disposal to help start to recover the margin. You're starting to see that turn the corner. And also the Red Collar acquisition, as we announced. We when I took over two years ago, we were not able to service the business properly. We had low service levels. We were putting quotas on places. We weren't able to develop some of our international markets because we couldn't give them the product. That acquisition has been really important. But yes, the way we managed it had a margin compaction impact. But over time, as we roll that off, we're going to see margin accretion come back in.
OK. And I guess, you know, when you put it all together, I mean, there's been, you know, in your filings, you put the kind of the gross margin versus the SG&A. I mean, a lot of this has really come from the gross margin. What is the path from here? And I guess putting it all together, can we really get back to, you know, operating margins back in the high 20% range for Hill's? Or do you feel like there's something structurally different? Maybe it's that level of advertising you were just referring to that makes that goal really not attainable?
Yeah. I think, you know, as we said, we've structurally changed the way we're operating the business.
Yeah.
So the focus is top-line. You know, if we can grow Hill's faster than the overall Colgate-Palmolive algorithm, that's a win. We're going to keep investing in this business. We think the investment is actually paying off in that area. When you think about, you know, some of the other cost things aside from raw materials, if you're running a factory network, a supply chain network, at effectively overcapacity, it's not the most efficient way to run that model, right? So we're seeing, as we're able to offload some of the volume from the existing plants to the new acquired and built plants, that's going to help us be able to manage the conversion costs and some of the other cost elements that we see.
OK.
There's some real. I mean, as we are operating those plants at capacity, you also can't do any productivity actions. You can't take the plant down to put in automation. You can't, you know, change some of the way you operate because you literally can't afford to be down. So I think there's some opportunity there. If you kind of pull it back and look at what we've guided to for 2024, you know, Hill's will contribute to that, but it's part of our portfolio. So as we guide to, you know, kind of 3%-5% organic, expanding margin, delivering, you know, mid to high single-digit in the bottom line, and improved cash, you know, that Hill's will be a component of that but as part of the total portfolio.
OK. And then I guess while we have you, Stan, maybe we can talk about gross margin from a total company perspective. As you just alluded to, the guidance for this year in gross margin expansion obviously makes a lot of sense given what we saw exiting 2023. But I think one of the bigger challenges has, you know, from our perspective, what's the right way to think about gross margin progression from here, particularly as we've seen kind of sequential improvement for five straight quarters? Any thoughts on how we should be thinking about the moving pieces within the gross margin bridge as we look out to 2024? I would imagine sequential improvement may not be the easiest way to think through it. But just, you know, any thoughts on your end?
Yeah. So we guided to margin expansion. And as we look at the components for driving that, I think it'll be different than it was last year. So last year, price was a major driver across the markets that will have moderated to some degree. So we're going to see volume come into play. We're going to see productivity come into play. As we drive what we call funding the growth across our enterprise, that will be an important part. We said commodities have moderated, right? So it's particularly compared to a couple of years ago. Logistics costs are a challenge. So while they've moderated in general, the challenge in Red Sea has added lead times. And we've tried to plan so we can make sure we fulfill our clients.
So the components of how we deliver that margin are going to be different in nature than they were last year. So we expect margin expansion for the year. And we expect that, you know, Hill's will certainly play a role in that, as I've set John's budget for him that way. And, you know, we'll go through and drive the portfolio to drive that. RGM will be a bigger player there as price has moderated.
OK. And then maybe putting it all together, right, I mean, one of the key drivers of the sustained improvement for Colgate has been this focus on reinvestment. You know, at this stage, how are you thinking about balancing investment in marketing capabilities versus kind of allowing some of the benefits to flow to the bottom line?
It's. We like the form of the business model today. So it is more flexible. It's more broad-based. It allows and I think it's proven success as we're gaining share in our key markets and key categories. That business model has more balance to it. So on advertising, it's not just the top dollar advertising and percent of sales. It's how we're spending those dollars. I think we've gotten significantly better at managing that. And underneath the covers, both digital and analytics, that ROI continues to improve. And Diana talked about that a little bit at CAGNY on our ability to spend those dollars more wisely. So as always, the CFO always looks at, you know, where's that law of diminishing returns?
I think if you look at the business model and our guidance, we're bringing some of that to the bottom line but continuing to support the overall balance of the business. That's why last year, we grew in every category and every division. We look to drive that as the model for the long term.
OK. John, back to you. I guess I wanted to ask about the Red Collar acquisition. Maybe just to start, what was kind of the key? I mean, we touched on this a little bit in terms of, you know, capacity. But, you know, maybe just some thoughts on kind of the purchase decision there. And now that we're kind of more than a year into the deal, has the transition gone as smooth as anticipated? And it maybe probably be some helpful to throw in some views on your new facility in Kansas as well.
Yeah, sure. Good. Yeah. So I came in two years ago. We had service levels that were dismal. We couldn't service the business. You saw out-of-stocks on shelves. As I said, we were putting quotas on some of the international markets. We were limiting. We basically temporarily suspended production of certain key diets because we just didn't have the wherewithal to make them. As Stan said, that also impacts your ability to innovate. You know, you can't run EMOs or line trials if you're trying to flat out just to get product out the door. So it was really debilitating in terms of our ability to operate going into the future. So it was clear that we needed capacity. We have a choice.
You say, well, I can go and build something, or I can buy something. Construction costs at the time, if everybody dials back two years ago, very high, accelerating, inflationary. If you couldn't even if the costs weren't there, hard to get materials for building, hard to get labor. So you knew that a buy that a build situation was going to be costly, and it was going to take time. And we didn't really have the time. The buy scenario meant that you could go in. You could buy some facilities that had been very well managed. They were facilities that in the past had been owned by another branded manufacturer. They were operated by Red Collar, which was a very good co-manufacturer. In fact, most co-manufacturers find it difficult to make Hill's diets because we have a complex diet.
But Red Collar was one of the suppliers that we were using. So we felt comfortable that we were entering into a buy of facilities that were well positioned. Also, if you think about it just from a net present value perspective, the value that we paid to buy was much better than what we would have paid to build. And clearly, this was not only to solve the short-term challenge that we were facing at the time but to build for the future. So if we think that there's a long-term growth runway for the business, you want to make sure that you're building capacity for the next 10 years, not for the short term. Likewise, on the wet side, we had our original factory is the wet can factory in Topeka, Kansas.
It was the one factory that we owned to service wet products for the globe. So not only is that difficult from a capacity point of view, there's no place to build it out, but it was also difficult from risk management. You know, if one, we're based in Kansas. If one tornado comes through, that's not good, that wouldn't be good. So, we wound up acquiring a wet factory in northern Italy to help service the European, and some of the Asian markets. And we built the factory in Tonganoxie, Kansas, which is our state-of-the-art, most automated factory that we have in the Colgate network. And it's really, we think, going to create some great benefits over time.
Not only does it open up capacity, it opens up a variety of products that we can sell and process there. But it's also, because it's the most automated factory, we're going to learn a lot about how to ever improve our quality and safety metrics. We've got automated quality sampling. That takes cost out. That enables us to get, you know, better and more precise measurements. We've got automated AMRs moving product around the factory. So that helps with labor. It helps with safety. It helps with costs. So, you know, we think Tonganoxie is going to be a real boon and asset to the business.
Great. And then, you know, this is a question for both of you. You know, we're not all that far removed from, you know, there being some discussion in the market around whether Colgate was the best owner of Hill's, whether the value was being appropriately captured. Can you both give some perspective as to why Colgate is the best owner of Hill's?
Absolutely. I mean, Colgate, if you think about it from the strategy perspective, we operate the same core strategies: science-driven, professional endorsement. That's true in Hill's. It's true on the Colgate oral care side. It's also true on the skin health acquisitions that we do. If you think about those brands like EltaMD, PCA Skin, and Filorga, they all start with science. They go through the vet channel sorry, the professional channel. They get used, sold, and endorsed by those professionals. So we've got strategic synergy. We've also got the fact that we are able to invest in Hill's differently because of the Colgate enterprise structure than we would have been able to do independently. We wouldn't have been able to take on increases in advertising investment, new capacity build-outs, new capacity acquisitions if we didn't have the financial strength and balance sheet of Colgate-Palmolive. Maybe, Stan, you want to.
Yeah. No, look. I think it comes back to capital allocation. We think we're good stewards of the brand. You know, we've had the brand for a long time. Red Collar, when you brought that up, we didn't need another brand. We think we have the best brand. So we needed capacity, the ability for the corporation to run the portfolio and invest in that capability. So the two acquisitions, a new facility, increased advertising, a lot of skill back and forth, particularly around analytics and digital and data, that we can share, that that's a good use of capital. We think we're good stewards. And this brand continues to gain share, continues to outperform the market. We think it's an important part of the portfolio that does sync well together with profession-driven. And that's why we've invested the capital in it. And I think that's paying off.
I think it's been great great for us.
If I can add, and Stan sort of alluded to it, Colgate-Palmolive has owned Hill's since 1976. So it's not a recent addition. It's something that's been core to the strategy for a really long time. We've taken that business when we acquired it; it was a $50 million business. We surpassed $4 billion last year. So I think to your question about stewardship and is Colgate-Palmolive the right owner, you can see in the results that we are.
Yeah, absolutely.
Stan also talked about synergies and capabilities. I think it's really important. Hill's is very advanced in the digital space. We have been able to take people and capabilities from Hill's and move them into the Colgate side to help develop capabilities and skills over there. Likewise, we always talk about Colgate-Palmolive as being best in class in retail execution, winning on the ground around the world. Hill's, because of its origin in the vet channel, we're strong in pet retail, but we could be stronger around the world. And so we can bring people who have had decades of experience on the Colgate side, bring them into the Hill's side to help strengthen our retail execution fundamentals. So lots of back and forth that we think is really powerful.
There's some really pragmatic things. If you're going to a new market, you can co-locate with a Colgate team. You've got all the infrastructure there. You have a banking establishment there. You can go to market much faster in those areas. You have buying power with media, buying power with different agencies. And I think that that's the good opportunity. We see the long-term opportunity, which is why we've invested all the capital into the business.
Maybe building on that, Stan? I mean, maybe just touch on, you know, capital allocation more broadly for Total Colgate. Can you just remind us of the company's priorities and how we should be thinking about uses of cash moving forward?
Yeah. I think we have a long history of disciplined capital allocation. We start with investing in the business. And that can manifest itself in capacity type of acquisitions and to automation, skill development, opening new markets. So investing in a business is always primary. Then we go and we look. We want to have a good return to shareholders, a competitive return to shareholders, and a combination of dividend and share buyback, a long history of that and paying dividends and over 60 years of increasing that dividend. We have a good share buyback program. And then, of course, we want to manage a strong balance sheet. So our leverage is well managed, below two turns on an S&P, measure. So a good debt profile over time. And we balance off that debt, versus, how we want to operate long term.
So that circle of capital allocation starts with investing in a business, strong balance sheet, and a good competitive return to shareholders. And I think we've been executing that pretty well.
OK. And then maybe rounding out the discussion on capital allocation, I would love to get your perspective on growth for pet, both from an organic perspective but also the inorganic opportunities. And I mean, are you kind of happy with the footprint that you have today? Stan, you kind of alluded to that you don't need another brand. You have the right brand. But are there other segments or channels within the pet industry that you are not in that you could see the business going to over time? And if so, can you actually capture that growth organically, or do you need to do M&A?
Yeah. So first of all, we do think that there are significant organic opportunities that remain, as we outlined earlier in the discussion. So, you know, the core focus is continuing to drive that penetration, that market share, and using the investment that way. That said, the market is a broad market. There are adjacencies out there. The way we would look at it is they have to fit the core criteria that I outlined before. They have to be science-driven. They have to be professionally endorsed. And they have to follow our selective distribution model, you know, because that's where Hill's is at the core. And as Stan said, we're not looking for a different brand. If we were looking for something, it would be something that could be accretive to the Hill's brand and help us compete more broadly in the category.
On that capital allocation, I think if you look, we've demonstrated that commitment to it. So whether it's M&A for capacity, expansion or investment in business through increased advertising and go-to-market, and if we found the right target, we certainly have the balance sheet and the ability to do that. So we feel we're pretty well positioned. But it all comes back to what John said, which is that long-term strategy. Anything we look at here and we do think there are opportunities to that are interesting in this broader space, the category moves. The technology moves. The science moves is why we invest so much here. And if that opportunity exists, then I think we have the ability to go after it.
OK. And then, John, maybe one last one on pet for you. And then, Stan, I maybe have a few out of left field for you.
Oh, left field good.
Maybe there's been a lot of discussion on capacity in the pet industry and what, you know, what that means for the category, what that means for Hill's specifically. Kind of what are your thoughts on this whole capacity debate? I mean, is this something you're concerned at all about as you look out over the next few years?
Yeah. I'm not Peter. And it's because of what we talked about before. We were so undercapacitized, that's the word that we, you know, we had to build out the network. So that was an important play. And we don't look at it as the short-term opportunity. Yes, we had to solve a problem. But because we think that the long-term growth profile of the business is so strong, we think that we're, you know, we built that out for the future. So, that's the first part. The second part is, historically speaking, this hasn't been a category that has gone crazy with promotions. It's been fairly disciplined. We think that will remain in place, especially in the part of the market that we operate.
If you think about therapeutic nutrition, if you bring your dog or cat to the vet and they're advising you to use a therapeutic nutrition, it's not about the discount that you're getting. And even on the retail side, we don't see the depth of promotional activity that we see in other categories that we compete in. In fact, you know, where we are spending our time and money with our retail partners is how can we attract new customers into their stores, and how can we attract new people to the Hill's brand using our targeted media or our co-op media activities.
OK. That's really helpful. All right, Stan. So, Argentina, big topic this past earnings season. Can you maybe just provide an update in terms of what's happening there? And are there things we need to kind of contemplate as we think about the impacts, the P&L, versus what was outlined in January?
Yeah. Well, first of all, Peter, we're not going to give new guidance here, coming in. But look, we've been in Argentina coming up on 98 years. The company's 218 years old. Our management teams are very experienced at dealing with this. And this is sometimes where that personnel make a key difference. Because they have such a depth of experience and they've been through this before, they're very proactive on taking the actions. They don't wait. They have the experience. And they have the strength of the entire enterprise behind them to be able to go do that. So we look, you know, we operate in 200 countries and territories. So currency is not a new item for us. In fact, the last 10 years, currency has only been a tailwind, two, out of the last 10 years.
We're used to dealing with big devaluations across. You know, Nigeria had essentially 100% devaluation so far this year. So in Argentina, it's been what we said in our fourth quarter call. We've got an experienced management team. We've taken the appropriate level of pricing. We're balancing out our manufacturing in-country versus what we import. And we'll continue to take those actions. And as we look across the globe, you know, some currencies go in our favor and some go against us. And we take the appropriate actions in-country, through those experienced management teams to try to optimize our position. And you come back and you look, I think that's had some success. You know, 2023, we dealt with a lot of this as well. And we balanced out.
The only other thing I'd say about Argentina, even with 100% devaluation in December, you know, that impact does roll through the P&L. The balance sheet gets a little bit smaller. We're a growing, profitable business. It will grow back over time. We managed that in fourth quarter. If that were to happen again in the future, I'm confident we would manage that as well.
OK. And then last one before we have time, probably one more question, I guess. Just what you're seeing around the world, right? We can see some of the data here in the U.S. It seems like it's actually performing quite well. But what are you seeing kind of across the rest of the world just in terms of category growth, health of the consumer? Has there been any major shifts or worry pockets or spots of worry as you think about the last few weeks? And then just because it's been a topic of focus, I'd love to get your perspective on, you know, anything that's going on in China.
Yeah. It's been a really interesting time to be in this space. The health of the consumer is a question we get fairly often. But if you look across, I think what we saw kind of in fourth quarter, there have been major changes, right? Inflation's been moderating mostly across the globe. You saw the U.S. pop back up a little bit. And investors are feeling some investors, consumers are feeling some of this pressure on occasion in different markets. We play the value ladder, particularly in oral care. So we kind of play that value ladder up and down. But as I go kind of across the globe, I've been pretty happy with how things have held up. Probably one of the biggest benefits is commodities really kind of coming off their peaks. They've moderated. They're not reverting back to the pre-COVID mean.
Logistics, as we talked a little bit earlier, that's also moderated. That gives us a little bit more flexibility to deal with these in different markets. You know, as we look across, I think the fact we grew in every geographic division in every category last year kind of says, you know, look, we're pretty well positioned there. We have the money to invest in advertising, continue to bring innovation to market. And that's helped. Now, you mentioned China. China's been certainly an interesting market. We have a great Colgate business there. That business changed over time and has gone much more towards an e-commerce angle. And we're, in fact, we're the number one SKU in most of our categories in that marketplace. You know, one of our joint venture partners with Darlie took some pricing action in 2023. That's been more difficult.
And we've seen that improve as we went through 2023. And we said that we expect that will continue. The skin business in China has been more challenging. And it's not just us. I think that's more of a macro environment. But the China environment is challenging, right? They came back out and reiterated their growth trajectory. But there's a high youth unemployment. The real estate market's certainly been suffering. I think consumers, as you saw from the data, have been traveling. But we haven't seen that consumption pick back up, I think, even to what China was looking for. We've also been there a long time. So we're committed to the market. We feel balanced out in our supply chain and well positioned. And, you know, look, big global corporation, everything's going to go in the same direction. That's why you operate a portfolio.
All right. Well, we have about a minute left. So why don't we just leave it there? Stan, John, thank you so much for joining us today. And we hope you'll join us again next year.
Thank you, Peter.
Thank you. Thanks, Peter. Thanks, everybody.
Thank you. You chewed that one.