Colgate-Palmolive Company (NYSE:CL) Morgan Stanley Global Consumer & Retail Conference December 5, 2023 11:45 AM ET
Company Participants
Stan Sutula – CFO
Panos Tsourapas – Group President, Europe and Developing Markets
Conference Call Participants
Dara Mohsenian – Analyst
Dara Mohsenian
Thanks, everyone, for joining us. I’m Dara Mohsenian, Morgan Stanley’s Household Products and Beverage Analyst. I’m going to start just with quick disclosures. Please see the Morgan Stanley website for research disclosures.
And with that, I’m very pleased to welcome Colgate here today. With us are Panos Tsourapas. I think I pronounced your name right this time. All right. Good, who’s the Group President of Europe and Developed Markets, and Stan Sutula, who is the CFO.
And John and Hope are in the crowd here somewhere. So thanks very much for being here today. We appreciate it, guys.
Stan Sutula
Pleasure.
Question-and-Answer Session
Q – Dara Mohsenian
So maybe we could just start on the Q3 call and in general, in recent quarters, you guys have spent some time talking about sort of consistent compounded top line but also bottom line performance. Why don’t we start on the top line? Obviously, strong performance here in the last couple of years, but that’s come during an environment when we’ve had outsized industry pricing. So — just as you think about the business, maybe starting from a top line standpoint, how sustainable is the strength that you’re seeing? How do you think about category growth versus Colgate market share as we look out over the next couple of years here?
Stan Sutula
So why don’t I start, and Panos can give some color on his markets in particular. So, we’ve executed 19 consecutive quarters of growth within our 3% to 5% or above our 3% to 5% long-term range. And certainly, pricing has helped. But over, through that time, we’ve made material investments into our business model through advertising, innovation, go-to-market, digital, analytics, and that has helped deliver that growth into the market. On the bottom line, you’ve seen in particular in 2023, that, that performance has been improving. We’ve been growing profit, expanding margin, so we are looking to drive that compounding effect of top line and bottom line growth. Importantly, as part of that, we’ve also been growing cash flow, and we’ve had a very strong performance in cash flow this year. So overall, I think the health of the P&L has gotten better. So investing in a business, bringing innovation, bringing capacity. And that has gone through and helped us deliver improving results each quarter, and I think leaves us well positioned for going forward.
Panos Tsourapas
Yeah. And the only thing that I would add is that the strategy we outlined recently around innovation, adjacencies, new channels and investing in advertising and in capabilities to improve our brand health it is working, particularly the brand health metrics across the world is — are improving. This is reflected to our positive market share trajectory lately, and this is reflected to our top line momentum. And as long as these fundamentals are in place and they continue to work that we believe they will do. We could see us being the same trajectory in the quarters and years to come.
Dara Mohsenian
Okay. Great. And let’s dive down into that a bit more. Obviously, from a corporate standpoint, we’ve seen market share improvement over the last couple of years. We’ve seen that even more so in your markets, specifically under your leadership, Panos. So you mentioned some of the key buckets. Which do you think have been the most important drivers of that improvement. And as you think about sustainability in each of those buckets going forward, what gives you confidence, particularly if the industry pricing umbrella comes down a little bit in terms of contribution versus the levels we’ve seen recently?
Panos Tsourapas
Yeah. I would say pricing was a factor the last couple of years, but I would argue that everybody took pricing in the market and the improvements we see across the board are relative. So I’m not sure that I would attribute them fully in pricing. I think there are other elements. It’s innovation. It is advertising. It is all our brand building activities across the world. As I said before, we sell brands. So the brand health metrics, it’s probably the most important indicator about the long-term prospect of the business. And when you see them, they saw an improvement actually in most parts of the world. And this is the result of our increased advertising spending and through our investment in data and analytics through the improvement of the efficiency of this investment. So if you take these factors into consideration together with our consistent and superior executional ability around the world, we could be optimistic that we would continue in the same trajectory. And I would use an example around Europe. In Europe, we grow significantly our toothpaste market share if we take our core category. Actually, we are the only company that grows materially market share. We have two portfolios. We have the Colgate brand, and we have the elmex and meridol brands and we grow both our franchises. We grow Colgate through whitening. We grow elmex through premium therapeutic, mostly in the drug and pharmacy channel. So we have the ability to deploy complementary brand strategies and to drive market share and disproportionate growth, and we have many examples like that around the world.
Dara Mohsenian
Okay. And given we’re in this period of pricing versus volume volatility, just how do you think about a volume recovery in your geographies going forward as pricing starts to moderate? Are there any leading indicators so far in terms of individual geographies or product categories you could point to? What gives you confidence in a volume recovery? And maybe you can cover your areas and Stan, you can sort of weigh in from a corporate perspective or maybe some of the other areas of the business?
Panos Tsourapas
Yeah. I would say, first of all, in general, considering the amount of pricing that was put in place by us and the industry in general because of the cost. I think it’s not unreasonable to see some volume contraction. It’s the basic law of price or volume elasticity to price. But when you dissect the business around the world, you see that a pattern that has been deployed in the past is — it’s happening now. Originally, you see prices up, volume down, then the market is stabilizing and volume is coming back. You see our Latin American volumes in the last two quarters, they are improving. You see our Africa/Eurasia volumes are improving. I would say our Asian volumes, apart from China with the issues we have with the pricing we do with our H&H business are also sequentially improving. So you see around the world, a clear indication that volume is coming back to the business. And logically, should — this trend should continue.
Stan Sutula
Yeah, I’d add that, that pricing supports both brand equity, bringing innovation to market in addition to simply helping us to offset the dramatic increase in cost. And in our other businesses, like North America, we have volume declines, that rate of decline has been improving. And I suspect, as you look at the scanner data, which we all do look at, you’ve seen that share performance in recent times start to improve. In Hill’s, we grew volume in the third quarter. That category is under some softening, which we talked about on our call. But long term, we like our positioning in that market. So we continue to bring innovation to these categories and the health of the overall income statement and P&L has improved. So we continue to invest in the business through advertising to help support that innovation and the pricing that we have taken. And by improving the overall health of the P&L, we think that positions us well exiting the year and entering next year.
Dara Mohsenian
Right. Okay. And maybe let’s delve into that a bit more. I started out by talking about the balance between top line and bottom line. Can you talk a little bit about sort of evolving back to that consistent bottom line performance. We’ve obviously seen the last couple of quarters that start to emerge, but we haven’t had consistent performance over time. So we now sort of back to that? How should we think about it conceptually when you bring everything together in terms of top line and some of the other factors you mentioned from a margin perspective?
Stan Sutula
So let’s start at the high level. So if you take a look at the pricing that we did take over the last couple of years along with the industry, we made a conscious decision during the pandemic, and that was to continue to invest in the business. and support that business through advertising. That has led to us being able to grow that top line consistently, not just through pricing but through all of our GM. And then through them, what you’ve seen us in recent times has been improving that margin. And while the margin in most categories is still not back to pre-pandemic. That improvement in margin has fueled the investment in advertising. We’ve been investing in innovation, which continues to support our brands around the world. We’ve expanded at capacity both in our Hill’s area. We also opened up a plant in Nigeria through a joint venture a couple of years ago. As we look to go deliver value, we see that strength in the P&L. We’ve been managing our overheads effectively, and that combination has now led to improving bottom line. And so we’ve seen that improvement over the last several quarters, and we’ve seen that improvement in cash flow. So our objective is to compound that performance, top line and bottom line, and we’ve been doing that this year. And we’re looking forward to continuing that. And in the future, we think we’ve set the right foundation. Noel talked about an inflection point on the performance of what we were delivering and we think that we’re well positioned here as we exit the year.
Dara Mohsenian
Okay. Let’s talk about one year within that future, 2024. Just as you think out, understanding some of the volatility in terms of the industry environment, what are some of the puts and takes we should be thinking about for 2024 as we think about your business from a corporate perspective?
Stan Sutula
So just to be clear, we’re not doing guidance here for 2024. But if we kind of step back and look at a macro point of view, we hit on one of the items earlier that I think is going to be important. The pricing level that we’ve seen kind of generically at a macro level over the last two years, that won’t continue at the same level. There still will be pricing in select areas driven by FX and some commodity moves and market positioning, but this is going to become more balanced. And I think as we’ve honed our GM and our P&L has left us well positioned to capitalize on that heading into 2024. So we’ll see a better balance, I think, between price and volume across the categories. And if you look geographically around our performance, we look around, inflation has been moderating in many areas. The consumer buying health has had ebbs and flows in different groups. But we feel, overall, pretty well positioned with the innovation that we have in the market, our positioning, our advertising to support the business and our overall management of our overheads. So we feel well positioned heading in, and there will be headwinds and tailwinds. We wake up every day with some new challenge but that’s why we manage a big portfolio.
Dara Mohsenian
Okay. Great. And Panos, obviously, very strong emerging markets performance in the last couple of years, and that’s really sustained in the last few quarters during a period where North America has been a bit more turbulent for you guys. And now from an industry perspective, we’re seeing North America start to slow. So, a, can you touch on your performance in emerging markets? How sustainable growth is going forward, particularly as the pricing umbrella comes down a bit? And, Stan, just given you guys are fairly unique in terms of having double the footprint in emerging markets that you do in North America, or triple US scanner data, which I know you like to hear, maybe just sort of juxtapose those two regions versus each other and how you think about that going forward over the next couple of years?
Panos Tsourapas
Yeah, let me start. I think our emerging market performance, as you said, has been very strong. Last quarter, I think we grew 10%, and we had low single-digits volume growth. So we are delivering, we believe, high-quality growth in these regions has been driven indeed by pricing, but also as you see volume is coming back, has been driven also by strong brand fundamentals, and healthy market shares. And this is something that I believe should give us confidence that we can continue in the same trajectory in the near term at-least. If you see around the world, if I see Latin America, our business is doing extremely well. It’s our largest operation in terms of sales and profits. We do extremely well in Mexico, in Brazil, in Colombia, which are the three big countries and also in the smaller countries. Our market shares are very, very strong, and we have a unique executional ability, as we know. When I look at Asia, apart, as I commented earlier, apart from China, H&H business, the rest of the business is doing well. Our Indian business is doing very well. And this trend should continue. Africa/Eurasia significantly disrupted by geopolitics and foreign exchange crisis, but our performance is very strong, both in pricing, in volume and in market share, where we’ll grow if I take a region like Africa/Eurasia, if I’m not mistaken, we are growing market share in every single market in the region. I think in the last period in one, we are flat. And I’m giving you these examples to illustrate the point that this is not a growth driven by temporary pricing. It’s a growth driven by focus behind the brands, advertising investment, innovation and consistent and superior executional ability. And with the brand strength we have in these parts of the world, when you put all these components together, I think, should make us at least cautiously optimistic that we will continue in this trajectory in the near term, at least.
Stan Sutula
I’d pick up on that as we look at the emerging markets have had a really good run here and again, very strong income statement. If you look at North America, and we saw that the volumes were impacted here earlier in the year, that’s been improving as we go through the year. But I would encourage you to take a look at their P&L because they’ve been improving margins, improving bottom line, that’s allowed them to invest back into advertising to support the brands. And we’re wrapping around on some difficult promo comparisons from the prior year. And we’re going to be intelligent. We’re going to do profitable promotions here as we go through. We want to build this the right way for a long term sustainable, and we’re making progress in the North American market. If I look at Hill’s, Hill’s has had some great performance. We love the category. Long term, we think it has great opportunity for us. We love our positioning within the category being science-based at the high-end premium part of that market. Those margins are also improving sequentially, and we expect to see continued improvement in that business. From a margin point of view. We’re also investing heavily in advertising in Hill because we see enormous opportunity, both in the US but also internationally. We’re well positioned to capitalize on that despite the current softness a bit in the category demand. So we feel overall that we’ve made the right investments, we’ve improved our business model which I think heading into next year allows us to be confident that we should be able to continue this compounding.
Dara Mohsenian
Okay. Great. And then just turning back to Latin America. Can you give us a little bit of a state of the union on the business here? Obviously, there was a period where you guys put some pretty aggressive pricing into place early on and that enabled you to fund a lot of the investment buying the business that you’ve talked about, and Stan just touched on promotion in general. Maybe give us a little bit of update on Latin America, what’s happening on the ground. Promotional levels. And also, obviously, Argentina is going to become a bigger topic of discussion here post the elections. I think companies will approach that market probably in different ways. But help us put a little bit of perspective on, a, your exposure to Argentina and b, the way you’ll manage that going forward.
Panos Tsourapas
Our Latin American business, as I said earlier, is doing extremely well. I think we are delivering, particularly the last quarters, double-digit growth with a good balance between pricing and volume. All our geographies are performing very well. Mexico, Brazil, Argentina, Central America. And we have strong financial and commercial results. We took pricing first, and we always do this in Latin America. The simple reason is that when you have a very large market position, you have no choice than to lead with pricing. There is no way to balance your numbers otherwise. And this to an extent and has happened before, create some sort of opportunity to smaller competitors that they delay their pricing for a few months to capitalize a bit on the volume. I think after some period, nearly everybody followed our pricing. So their market pricing has been more or less in terms of index is where it was before the pricing increases. So we have a normalization if we can call it that way.
In terms of promotional environment, obviously, in periods of high pricing, you see more intensity, I wouldn’t call it abnormal or exaggerated in our categories. There are a couple of competitors in specific categories that they are put some pressure on pricing. But this is not something that we haven’t lived before, and we haven’t been able to deal with it before. I think in Latin America, our innovation plans are extremely strong. Our commercialization plans, our advertising is working very well. And our execution is a best-in-class, and this is reflected in the results. For instance, our market share in toothpaste in Brazil is growing, despite the fact that some of our competitors are very aggressive in pricing. It’s a key indicator on the health of our model.
Now as regards to your question on Argentina, we are in Argentina for nearly 100 years, if I’m not mistaken. We have lived this crisis many times before. Now people get very excited. But some years ago, we had a more conservative government than the another government was there. So it’s another crisis that we are dealing. What is important for us is that our market share in Argentina, it is growing. We represent three-quarters of the market, and it’s growing quite steadily. We have a very experienced team on the ground. So we have the experience and the expertise to deal with this crisis, which allow me to say it’s no different than several crisis of the same magnitude that we have lived in the last year. So, is it a concern? Yes, it’s another crisis as Stan said that we have to deal with. But I think we are confident that we have the capability to manage, and as we say in Latin America, we emerged stronger after any crisis, focusing on the fundamentals and driving the fundamentals of our business.
Dara Mohsenian
Okay. And, two follow-ups. A, can you talk a little bit about volume share in Latin America and how that’s trended over time, particularly in Brazil and Mexico, two of your key markets. We’ve seen a share ramp-up in Latin America and globally in Oral Care, in particular, how does that — how is it trending from a volume standpoint given you took some pretty aggressive price early. And in Argentina, is it fair to say that there’s less — based on what you know at least today, there’s less structural change in your operations, and it’s more sort of executing differently post some of the changes. Is that the right way to think about it?
Panos Tsourapas
Taking the first question, our volume was impacted when we took the pricing, which is logical. It’s the flow of price elasticity. We see it hasn’t been impacted as dramatically as somebody would have expected. Imagine you take a price increase of 10%, 15%, 20%, you dropped volume 2%, 3%, 4%. I guess, many people would say they would take it at any time. So the elasticity hasn’t been so dramatic. And what we see is that we see a sequential improvement in the volume growth and in the volume of market share. The other element, which is important in Latin America, considering our market share positions is that we pursue a premiumization strategy. If you take our premium products like Total, we grow market share despite the economic conditions. If I take Brazil, elmex, which is an uber premium product, is growing very strongly. So we are focusing on growing this part of the portfolio. And part of our strategy is to not to compete so intensely in very low price points where the competition is particularly in toothpaste. So we make the choice to get a way of some very low price points. Some of our competitors sell promotional prices the same as they were four, five years ago. But we don’t want to go there. I think we have discussed it before. If you — in a big business like Latin America, if you want to improve volume, it’s not very difficult. You do a couple of promotions and you drive the volume. The key is to drive the business in a strategic sustainable faster. And this is what we are doing, and we are very pleased that we see this working both commercially and financially.
Now, Argentina, I don’t see why we need to do any structural change. We are happy with the performance of our business there. As I said, we have three-quarters of our — of the toothpaste business there, which is growing. We are manufacturing in the country, which is a strategic advantage for us. Obviously, you need to deal with the issues like US dollar availability, imports at the government. But as I said, our regulations that continuously changing. Our team is extremely experienced, have long tenure, have lived many crisis of this nature. That’s why I draw my optimism that we will get out of this crisis with higher market shares and overall, a stronger position.
Stan Sutula
Those represent challenges, right? In particular, cash. So how do you manage cash through that. And the team is very proactive on that, but that still is a challenge that every company will have to deal with operating, but our objective is to have a long view of this and that we will come out stronger.
Dara Mohsenian
Okay. And maybe we can turn to the pet business. You touched on it a bit from a margin perspective earlier. Let’s get the short term out of the way, and then we can talk about the longer term. First of all, clearly, there’s trade down going on in the pet industry. I think it’s a fact not an opinion. You guys mentioned on the Q3 call. We’ve seen other companies and retailers comment on it since then. Just as you think about trade down risk to your portfolio on the one hand, intuitively, it’s a higher-end portfolio and higher end channels. That would seem to indicate a greater level of risk. But obviously, you’re tied to health benefits of the consumer. That’s really the MO of the business and the driver behind the business. And you’ve also had a lot of internal momentum and execution improvements in that business over really a multiyear period now. So maybe just juxtapose that external trade down risk versus those internal dynamics and how you think about that for the pet business?
Stan Sutula
Yeah. So I’d start with — we still really like this category, and we’re — been in it for a very long time. We’ve invested heavily into all the capabilities of the business. So starting with we do real research. We have a research center. We’ve focused in on — we opened up a small pause component of that because smaller pets, smaller dogs and cats are becoming the fastest-growing part of that category. We have 200 vets on staff, which helps us — as we look at that, it is real science going to market. Our positioning in a market, we think we like our category where we are at the category. So science-based, prescription diet, which comes through a vet recommendation and science diet. These help pets live better lives. And it’s not just a naturals brand. They are high efficacy. They help cure conditions. They help address chronic conditions to help a pet live a better life. When you do that and your pet is living a better life in particular if they have a chronic condition, that’s hard to trade away from. And we have not gone down market, and we like our position where we are. We think that plays well for science diet and for prescription diet. And so there has been some trade in the category. We’re not immune from that in total, we’re going to stay with our position. We continue to bring innovation to that through our research. We are bringing out things like Oncacare which is for helping pets who have been through cancer or some other trauma recently recover. And that has been really well received into the marketplace. And then openly, while the category may be under some initial softness right now, our penetration leaves us plenty of opportunity to go out and gain share. And I think the team has done a really nice job being very focused. So pet specialty, we play a particularly big role in. And I think we want to maintain that discipline. And if I go back and look at what happened in the last financial crisis, there was a softening in volumes. It didn’t last particularly long and the premium side of this, our place where we’re playing did turn out pretty well coming out of that. So we’re going to stay disciplined, continue to invest into that business through advertising, through innovation, through capacity expansion. It’s a very strong management team that knows the category well and we look at the opportunity both within the US, but also internationally. And candidly, we like our position.
Dara Mohsenian
Okay. Great. And as you think about the longer-term drivers, you really mentioned a lot of them in your answer to that question. As you look out over the next few years, we are in a period here where growth for the business accelerated during COVID with higher adoptions. Obviously, those ads don’t go away. That continues. But in theory, maybe the incremental growth isn’t quite as strong going forward. So put that in perspective to us, the business really improved and you started to drive share gains even pre-COVID. But as you’re looking out over the next few years, is there sort of a natural moderation that you see? Or do you see a lot of significant opportunities still for share gains and to drive growth in that business?
Stan Sutula
Sure. The category is not going to continue at the growth rate it did through COVID. I mean those rates, that level of adoption, et cetera, combined with pricing, we expect that, that will moderate to some degree. However, when you look, while the population may, growth of the pets may slow slightly, our ability to go gain share in our presence, plenty of opportunity in the US. We’re talking mid-single-digit penetration. So there’s a lot of room here. And then internationally, some of the same trends we see developing in the US, we see developing in parts of Europe and elsewhere, the humanization of pets. And we think as people invest to take care of their pets to live a healthy, longer life, we fit really well into that sweet spot. So we’ve invested for that capability. We’ve invested for the capacity for that, and we think we’re positioned for that macro over the long term. So that pet adoption level clearly slowed. We do a Clear the Shelters program every year. It’s a little bit like Bright Smiles, Bright Future in oral care. How do you build overall demand in the category. And as we continue to grow the business and through that recommendation and the awareness of that and we continue the innovation. We think that positions us pretty well for a go forward.
Dara Mohsenian
Okay. And just one nuance on Q4. You guys went out of your way on the Q3 call to highlight that with the Red Collar acquisition from Q4 of last year, you’d rationalize some private label business. If you look at the contribution from that acquisition, it looks like it was 350 basis points lower in Q3 than Q4 of last year. Is that the right way to sort of think about a drag in Q4 year-over-year from the Red collar business and the strategic decision to give up some of that private label volume and generate incremental capacity that your business can grow into over time? Is that sort of the right way to think about it? And how do you think about that specifically in Q4?
Stan Sutula
So a quick recap for those who may not be familiar with that story. In October of last year, we closed on acquisition of Red Collar. They are three dry food facilities, production facilities. They were a co-manufacturer including for us. So through that period of time, we have exited those contracts backfilled with some Hill’s product. We still have a large client that will roll off over a longer period of time. So as you think about last year and look at our press release and the impact of what happened in Q4, and you compare that to the impact of Q3, that delta, what you’re highlighting, Dara, does give you a good indication of what you should expect as a headwind in Q4. And that known, we expected it. It’s better for us, and that’s one of the reasons why you’re seeing margin improve. If you think about taking over a business that was doing co-manufacturing at a very low margin, and you’re able to backfill it with Hill’s production at a much higher margin, you’re going to mix naturally to a healthier margin over time. Also, those — the integration of those facilities has gone extraordinarily well. Very happy with how that’s gone so far. So that is the right way to think about that heading into fourth quarter as planned, as expected.
Dara Mohsenian
Okay. Great. That’s very helpful. And then maybe we can touch on China. Clearly, macros have been worse than expected in general in recent quarters and months. Can you guys give us a little bit of an update on your business there, traditionally in more defensive categories, but there are some volume dynamics with distributors in general. So it’d be great to sort of hear your perspective on the business today. But also, are there any strategy changes, tweaks, the way you think about managing the business in this sort of new normal from an external standpoint?
Panos Tsourapas
And it’s quite — first of all, macro-economically China is challenged. And today, I think the economy was downgraded. So — and the outlook doesn’t look great. The consumer goods markets are soft, are flattish to negative or slightly positive. So we haven’t seen the expected pre-COVID bump. Moreover, the cost of doing business has been increasing. It’s a very complicated market with a lot of new business models continuously emerging. We have a good business in China. Our Colgate business is doing well. Our H&H business overall is doing well. This year, we are challenged because we took major SPI. We were the only ones taking in our categories such an SPI. And we had some executional issues with our wholesale and distributor network that impacted negative volumes. We did the necessary adjustments. And as of September, the business is sequentially improving. So we believe that this is behind us. And our skin care business is challenged as everybody is challenged in skin care with the overall trajectory of the business in China. Net-net, China is one of the largest or the largest market in the world. So we have to compete there and we will compete there. We have good brands. And looking the way we can execute, I think we are confident that we can deliver growth in China. But looking the macro dynamics and the category growth rates probably will not play an outsized role in the future growth as it did play for many companies in the past decade. And to your point on the adjustments, we do this continuously. There are new platforms emerging in China, new business models. Until recently, everything goes about e-commerce. Now you see some brick-and-mortar type of offerings growing significantly like membership stores you see new platforms emerging and others fading. So it requires a continuous readjustment of the business model and the way you go to market to be successful. But we will compete. And I think we will have all the requirements to keep doing well and win in the market.
Dara Mohsenian
Okay. And Stan, I want to make sure we hit cash flow, your favorite subject, every CFO’s favorite subject. And you’ve had strong performance this year. So I guess, can that continue going forward? Are there opportunities from here as you look to future years? And how might that impact your capital allocation plans and look, there was a few year period during COVID when companies had just sort of sit back and focus on execution as opposed to portfolio reconfiguring, et cetera. So now that we’re past that phase, how might that play into capital allocation and the way you think about the business going forward strategically?
Stan Sutula
It’s — as we take a look at cash, we have an internal kind of mantra that we do on every kind of webcast [Technical Difficulty] growth, margin, cash and integrating cash as part of the core operations is no longer in the backup of presentations. It’s up there with the income statement. And when we went through COVID. We made the right choices for the time, back to your point. We increased safety stocks, logistics weren’t dependable, they weren’t reliable regardless of the cost. And through time, we’ve improved cash flow for two primary reasons. One, we improved cash profits operating the business. And two, we’ve improved net working capital, particularly inventory. This team, in particular, through the emerging markets, I think, does a very good job managing DSO. So from a cash overall ability, we’ve had significant improvement this year. As we look forward, for longer term, cash profits, I think, will continue to be there, and there’s still more room in net working capital. There’s still more room in net working capital. So we’ll gain that efficiency.
If I pull that back up to more macro strategic, one of the things we look at is a long-term model, and we want to know that long-term model because we want to know how much excess cash we’re going to generate through time, then look at our priorities, and they always remain investing back into the business on core innovation, advertising, capacity, efficiency, potentially M&A on both sides of that equation, are there things we want to add to our portfolio or are the things that maybe we’re not the best stewards of for the future. So we’ll get both sides of that. And then, of course, return to shareholders. Both dividend. We want to have a competitive dividend. We’ve increased our dividend for a long track record here reliably and share buyback, which we’ve been opportunistic on in terms of increasing it or decreasing it depending on market conditions and other opportunities.
So overall, we’re comfortable with our capital allocation. I don’t think it needs to change. It’s strategically relevant and strategic. It’s right online with our external comments. So as we step back, I think cash flow has had very nice improvement. We expect that, that will continue to have a good performance here going forward, and that really comes down to execution by the teams. They’ve done a great job.
Dara Mohsenian
Okay. Well, Stan, I’m very impressed. We’re exactly on time right now. So we’re going to end things there and head to lunch. But I really appreciate you guys being here.
Stan Sutula
Thanks very much.
