Procter & Gamble Company (The)

Good morning and welcome to Procter & Gamble's quarter-end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its investor relations website www.pginvestor.com a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chairman of the Board, President and Chief Executive Officer, David Taylor.

Good morning, everyone, and thank you for joining us. Last evening, we announced that I will retire as CEO on November 1st, and John Moeller was elected as the incoming CEO. I will remain as Executive Chair of the Board. We also announced that Shailesh Jujurikar has been elected Chief Operating Officer effective October 1st, 2021, transitioning behind John Moeller. These moves have been thoughtfully planned and provide P&G with highly capable and experienced leadership going forward. I truly have full confidence and strongly support these changes. John, you know well, he has a distinguished track record throughout his 33-year career with P&G, including more than 12 years as CFO. More recently, John added responsibility as vice chairman and then chief operating officer with P&L responsibility and ownership for our enterprise markets. In my nearly six years as CEO, I've had the benefit of partnering with John and an outstanding global leadership team to integrate a comprehensive set of strategies to guide our choices and priorities. Now to go back, in 2012, John led the initial work to make productivity an integral part of P&G's business. Our team doubled down on this strategy when we announced our second five-year, $10 billion cost savings program in 2017. Today, productivity is built into our operating model and is an ongoing part of our strategy in every part of our business. We worked together for several years to focus the company's portfolio on faster growing, more profitable daily use categories where products solve problems and performance drives consumer brand choice. The team largely completed this work with the divestiture of several fashion-driven beauty categories in 2016. This strategy continues to guide our disciplined approach to managing our category and brand portfolio. At the Cagney Conference in 2016, we first discussed the test we were doing on a new approach to our organization design. We refined and formalized the plans and announced the new focus market and enterprise market design at our November 2018 analyst day. Our objective was to create a more engaged, agile, and accountable organization, which is exactly what we've done. In April 2017, we first discussed our work to set a much higher bar for measuring the success of our innovation and execution across products, packaging, brand communication, retail execution, and value. If there were any doubts about the importance of consistently delivering irresistible superiority, our results over the last few years should have put those to bed. And finally, in 2018, we first talked about the need to lead constructive disruption in our highly dynamic and competitive industry. We continue to drive disruption in innovation, brand building, digitization, supply chain transformation, and with our citizenship and ESG efforts. Over several years through many challenges, our organization responded brilliantly as we integrated each element of the strategy, building momentum that is evident in our results in the past three fiscal years. The team fully embraced the idea that we must be willing to change anything and everything needed to win. The only things we will not change are purpose, values, and principles, and our commitment to winning. This has been especially evident during the continuing COVID crisis, where the organization has demonstrated tremendous agility to meet the needs of consumers while ensuring the safety of our employees and supporting communities around the world to deal with the impacts of this crisis. Through all of it, delivering results that should delight owners and do it in a way that makes us proud to be P&Gers. Put simply, our strategies are working, our team is outstanding, and I could not be more confident in the next generation of leadership that will take the reins of P&G later this year. Now I'll turn it over to Andre Schulten, Chief Financial Officer, to lead us through the fiscal year 2021 fourth quarter and year-end earnings announcement. Andre.

Thank you, David. Good morning, everyone. Joining David and me on the call today are John Moeller, Vice Chairman, Chief Operating Officer, and John Chevalier, Senior Vice President, Investor Relations. I'll start with an overview of company results for fiscal 21 and fourth quarter. David will add perspective on our immediate priorities and strategic focus areas. We'll close with guidance for fiscal 22 and then take your questions. Fiscal 2021 was another very strong year. Our focus on superiority and strong investment in the business funded with strong productivity improvements and cost savings drove market growth and, in turn, strong sales, share, earnings, and cash results, leading to balanced growth and value creation. Organic sales for the fiscal year grew more than 6%, up more than 12% on a two-year stack. Growth was broad-based across business units, with each of our 10 product categories growing or holding organic sales. Home care up high teens, oral care up double-digits, Skin and personal care up high single digits. Grooming, fabric care, feminine care, hair care, and personal health care organic sales each up mid-single digits. Family care grew low singles. Baby care was in line with prior year. We delivered strong results in our two largest and most profitable markets, annualizing strong base periods. Organic sales were up 8% in the U.S. and 12% in Greater China for the fiscal year. Focus markets grew 7% for the year. Enterprise markets were up 5% despite significant market growth impacts from the pandemic. E-commerce sales were up 35% for the year at over $10 billion in sales, representing 14% of company total. Global aggregate market share increased 50 basis points. 33 of our top 50 category country combinations held or grew share for the fiscal year. All outlet value share in the US improved through the year, growing from 33% over the past 12 months to 33.5% for the past six months to 34% over the past quarter, one of the highest absolute value shares in the last 20 years. Consumers are increasingly choosing P&G brands. We translated this strong top line growth into strong earnings and cash results. Core earnings per share grew 11% for the year, Currency-neutral core EPS was also up 11%. Within this, core growth margin expanded 20 basis points up 60 basis points, excluding currency impacts. Core operating margin grew 80 basis points up 130 points, excluding currency impacts. Productivity improvements helped operating margin by 250 basis points, enabling strong reinvestment in marketing programs, Advertising was at 10.8% of sales, an increase of more than 40 basis points. Adjusted free cash flow productivity was 107%. We increased our dividend by 10% and returned $19 billion of value to share owners, $8 billion in dividends, and $11 billion in share repurchase. Moving on to the April-June quarter, organic sales grew 4%. Volume, pricing, and mix each contributed more than one point to top-line growth. Growth rates by market reflected the volatility in shipments in the base period. Organic sales were down 1% in the US. However, this is still 18% growth on a two-year stack. Recall that in the April-June quarter last year, organic sales were up 19% in the US, 13 points above track channel sales as we worked to restock depleted trade inventories. Organic sales in Greater China were up 5%, also comping a strong base period. On a two-year stack, Greater China up 19%. Focus markets were up 2%. Enterprise markets were up 14% in the quarter. Strong market share trends with aggregate global value share up 70 basis points. All-out share in the U.S. increased 260 basis points for the quarter to 34.1%. On the bottom line, core earnings per share were $1.13, down 3% versus prior year, down 4% on a currency-neutral basis, mainly due to gross margin pressure from higher input costs, as we had anticipated. Core gross margin decreased 260 basis points, currency-neutral core gross margin also down 260 points. This includes 220 basis points impact from higher commodity and trade costs, nearly $400 million in just this quarter. We also saw a sharp headwind from mix of 210 basis points, mainly geographic mix impacts. Recall that in our fourth quarter last year, the US and China accounted for more than 100% of organic sales growth. In this year's fourth quarter, enterprise markets lead the growth. Cooperating margin decreased 230 basis points. Currency neutral cooperating margin declined 210 basis points. Productivity improvements were a 320 basis point help to the quarter. Adjusted fee cash flow on the quarter was 117%. In summary, we exceeded each of our going-in targets for the year, organic sales growth, core EPS growth, fee cash flow productivity, and cash return to shareholders. Our team has operated with excellent discipline in a challenging and volatile environment. And with that, I'll pass it back to David.

Thanks, Andre. As I said at the outset, our team has done some outstanding work over the last 18 months to manage through the challenges of the COVID crisis and make our business even stronger in the process. In our April earnings call last year, we said we would step forward into the challenge of COVID, not back. We said we would double down to serve consumers, and that's exactly what our team has done. As we continue to manage the crisis, we'll remain focused on the three priorities that have been guiding our near-term actions and choices. First is ensuring the health and safety of our P&G colleagues around the world. Second, maximizing the availability of our products to help people and their families with their cleaning, health, and hygiene needs. And third priority, supporting the communities, relief agencies, and people who are on the front lines of this global pandemic. The strategic choices I outlined earlier are the foundation for balanced top and bottom line growth and long-term value creation, a portfolio of daily use products, many providing cleaning, health, and hygiene benefits in categories where performance plays a significant role in brand choice. In these performance-driven categories, we've raised the bar on all aspects of superiority, product, package, brand communication, retail execution, and value. Superior offerings delivered with superior execution drive market growth. I'd like to share just a few examples. First, in our oral care business, superior offerings are driving market growth across forms. Last summer, we launched Oral-B iO PowerBrush, which offers an irresistible consumer brushing experience. The value of this superior performance is evident to the consumers, even with the premium price. P&G's global value share in the brush segment is up more than 2.5 points over the past year, and the U.S. PowerBrush category is up nearly 14 points since the innovation launched, with iO contributing more than half of the category growth. We recently launched the next breakthrough in teeth whitening, Crest whitening emulsions create a micro-thin layer of concentrated peroxide droplets, enabling consumers to move beyond occasion-based whitening to a product that can be used up to four times per day with no rinsing or brushing needed. This innovation is a leading contributor to our more than 20% organic sales growth of our tooth whitening business in fiscal 21 and is driving two-thirds of U.S. whitening category growth. In personal health care, NyQuil and DayQuil Honey launched last summer, offering a great tasting formula while also delivering powerful relief. NyQuil Honey is the number one new item in the U.S. respiratory market, and our Vicks share is up 90 basis points over the past 12 months. Despite the soft market due to the very weak cold season, when consumers are shopping in the category, they're increasingly choosing Vicks. For some consumers, The environmental aspects of a product offering are taking on increased importance in their assessment of superiority. We are offering superior performing products or products that are more sustainable and educating consumers on the benefits of those products with superior brand communication. I'll switch to fabric care. Here, Tide and Ariel are innovating to extend their superior cleaning performance advantages while encouraging consumers to reduce their carbon footprint. Ariel's new campaign, Every Degree Makes a Difference, advocates lower washing temperatures. Up to 60% of laundry's carbon footprint comes from heating the water in the washing machine. Lowering the wash temperature is the single most important thing we can do to reduce the environmental impact of laundry. To achieve our goals, we continue to innovate to ensure superior fabric cleaning performance in cold water, and we utilize superior communication to educate the consumer on the benefits. This innovation has helped contribute to Global Fabric Care's 120 basis points of value share growth over the past 12 months. In our European shave care business, we're driving superiority across all five vectors and improving sustainability along the way. We're moving to a plastic-free packaging on eraser systems, simplifying our lineup, improving on-shelf fundamentals, and improving margin for our retail partners. This innovation contributed to mid-single-digit organic sales growth, in our European grooming business in fiscal 21 with market share up one point. Good business results and good for the environment. This packaging innovation will save the equivalent of 85 million water bottles per year when it's fully launched around the world. More important than one example is the common theme of superior innovation and execution that drives market growth. Leading category growth builds business for our retail partners and mathematically builds market share for P&G. We've made investments to strengthen the long-term health and competitiveness of our brands and will continue to invest to extend our margin of advantage and quality of execution, improving options for consumers around the world. The strategic need for investment to contribute to strengthen the long-term health and competitiveness of our brands, the short-term need to manage through the crisis, and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity. We're driving cost savings and cash productivity in all facets of our business. In cost of goods, we're delivering flexible formulations that can allow us to change between ingredients to lower cost or create supply chain flexibility while ensuring no impact on consumer preference for our brands. We're optimizing plastic bottle designs to reduce the amount of plastics we use while also lowering costs. We're improving the efficiency and effectiveness of our advertising investments bringing some media planning work in-house to achieve greater cost efficiency while also enabling us to place ads with greater precision based on more granular analytics to reduce waste and increase effectiveness. No area of cost is left untouched. We've given more authority and accountability to the business units to decide how to balance the need for more resources in some areas of the business with the opportunities for savings in other areas. They need to make the choices that are best for their business as they work to deliver balanced top and bottom line growth. Now success in our highly competitive industry also requires agility that comes with a mindset of constructive disruption. A willingness to change, adapt, and create new trends and technologies that will shape our industry for the future. In the current environment, that agility and constructive disruption mindset are even more important. Our organizational structure yields a more empowered, agile and accountable organization with little overlap or redundancy, flowing to meet new demands, seamlessly supporting each other to deliver against our priorities around the world. These strategic choices on portfolio superiority, productivity, and constructive disruption, and organizational structure and culture are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales, and profits. These strategies were delivering strong results before the crisis, have served us well during the crisis, and they will serve us well on the other end of this crisis. We're confident they remain the right strategic choices as we move through and beyond the pandemic. We delivered strong results in fiscal 21 in a very challenging environment. While we're pleased with these results and the overall strength of our business, the external environment continues to be volatile and difficult to predict. And our eyes are wide open to the many challenges we face. We compete in product categories against highly capable, multinational, and local competitors. Raw material and transport freight costs have risen sharply. Increased social unrest and economic distress in many parts of the world are putting pressure on local GDP growth. And the pandemic continues to create risk for consumers, retail partners, and supply chains. With these challenges, there are also opportunities as we emerge from the pandemic. the relevance of our categories in consumers' lives likely remains elevated. We will serve what will likely become a forever altered cleaning, health, and hygiene focus for consumers who use our products daily or multiple times each day. There may be a continued increased focus on home, more time at home, more meals at home, with related consumption impacts. The importance of noticeably superior performance potentially grows There is potential for increased preference for established reputable brands that solve newly framed problems better than alternatives, potentially less experimentation. Potential for lasting shift to e-commerce, both e-tailers and omnichannel. Our experience to date makes us believe we are generally well positioned in this environment. We're discovering lower cost ways of working with fewer resources. Today's necessity giving rise to the productivity inventions of tomorrow. New digital tools are being brought to the forefront, providing another productivity driver on the factory floor, in our labs, and in our office environment. Our business exhibited strong momentum well before the crisis. We've strengthened our position further during the crisis, and we believe P&G is well positioned to serve the heightened needs and new behaviors of consumers and our retail and distributor partners post-crisis. We have the right strategies. We have the right portfolio. We have the right organization structure. We have a team of 100,000 employees focused on executing to delight consumers, win with customers, and deliver balanced growth and value creation. With that, I'll hand it back to Andre to outline our guidance for fiscal 2022. Andre?

As David said, we will undoubtedly experience more volatility as we move through the crisis. Quarterly results will be heavily influenced by top-line volatility embedded in base period results. along with the realities of current year cost pressures and continued effects of the global pandemic. Input costs have risen sharply. Current spot prices for materials such as resins, chemicals and other ingredients are up anywhere from 30 to 200% versus April 2020. Most of the material cost increases occurred in this calendar year and will disproportionately affect the first half of fiscal 2022. Based on current spot prices, we estimate a $1.8 billion after-tax commodity cost headwind in fiscal 22. Freight costs have also increased substantially due to several factors affecting the supply of drivers and the demand for drivers and trucks, and diesel fuel prices are up 35% so far in the calendar. We currently expect freight and transportation costs to be an incremental $100 million after-tax headwind in fiscal 22. We will offset a portion of these higher costs with price increases, but there is a lag between the time when costs begin to rise and when pricing is implemented to provide an offset. As discussed last quarter, our baby care, feminine care, and adult incontinence businesses have announced increases in the US that will go into effect in mid-September. Earlier this year, we executed a significant product upgrade on our Japan liquid aerial detergent, coupled with a 35% price increase. In U.S. fabric care, we recently announced a list price increase on Tide Simply, Chia, and Era liquid detergents effective in September. In U.S. home care, we've announced double-digit price increases across all product forms of the Swiffer brand. These increases are effective mid-September. We have announced price increases in many central Eastern European markets to offset a portion of recent currency impacts. In Latin America, we've taken a cumulative high single-digit price increase across our business over the past 12 months. We are analyzing input costs and foreign exchange rate impacts in other categories and markets, and we are assessing the need for additional pricing moves. When opportunities allow, we will close couple price increases with new product innovations, adding value for consumers along the way. We believe this is a temporary bottom-line rough patch to grow through, not a reason to reduce investment in the business, and not a reason to redesign a strategy that has been working well before and during the COVID crisis. Our guidance ranges for fiscal 22 incorporate these dynamics. We expect organic sales growth in the range of 2% to 4%. The high end of this range assumes global markets continue growing at about 3% or so, and P&G continues to grow above market levels. The low end of this range assumes deceleration in global markets to 2% or lower with P&G growth at or above underlying markets. This range also reflects the strong organic sales growth more than 8% that we delivered in the first half of fiscal 21. Given this base period dynamic, we expect organic sales growth to be stronger in the back half of fiscal 22 versus the front half. On the bottom line, we expect core earnings per share growth in the range of 3% to 6%. This outlook includes headwinds of approximately $1.9 billion after tax from commodity costs and freight, as I mentioned earlier, with a modest offset of around $100 million after tax from foreign exchange rate benefits. The combined impact of materials, freight, and FX is approximately a $0.70 per share headwind to EPS or a 12% point headwind to EPS growth in fiscal 22. Considering the cost challenge is weighted heavily towards the front half of the year, earnings growth is expected to be much stronger in the back half of fiscal 22. We are targeting adjusted free cash flow productivity of 90% starting the year. We expect to pay over $8 billion in dividends and to repurchase between $7 and $9 billion of common stock. Combined, a plan to return $15 to $17 billion of cash to shareholders this fiscal year. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant currency weakness, commodity cost increases, additional geopolitical disruption, major production stoppages, or store closures are not anticipated within this guidance range. Now back to David for closing comments.

Thanks, Andre. Our business exhibited strong momentum well before the COVID crisis. We've strengthened our position further during the crisis, and we believe P&G is well positioned to grow through and beyond the crisis. We will manage what is likely to be a volatile near term, consistent with the strategy we've outlined many times and against the immediate priorities of ensuring employee health and safety, maximizing availability of our products to serve cleaning, health, and hygiene needs, and helping society overcome the COVID challenges that still exist in many parts of the world. We'll continue to step forward toward our opportunities, not back. We remain committed to our strategies and fully invested in our business. We remain committed to driving productivity improvements to fund investment and to maintain balanced top and bottom line growth over the long term. We're doing this in our interest, in society's interest, and in the interest of our long-term shareholders. Now we'd be happy to take your questions.

Ladies and gentlemen, if you have a question, please signal by pressing star followed by one on your phone. If your question has been answered or if you'd like to withdraw your question, press the star followed by two. Your first question comes from the line of Lauren Lieberman with Barclays.

Great. Thank you. Good morning, everyone. I wanted to talk a little bit about marketing, both in terms of the efficiencies you've been realizing over the last several years and sort of thought process on the amount of spending necessary kind of going forward. So I think, and also relevant to the succession plans announced last night. So you've delivered 2 billion in media spending efficiencies over five years, right? And then marketing reinvestment this quarter was way stronger than we had expected. I think it was up 170 basis points on top of a 270 basis point investment last year. So one, how much is really left to go for on that efficiency side of the equation? Two, as you think about incremental reinvestment, there's so much funding in the base from the past two years. How are you thinking about that for fiscal 22? And then finally, I've been asked a few times over email, just CFO becoming a CEO, should the marketers be worried? I'd love to hear everyone's perspective. Thank you. Okay.

Let me start with the last part first, and then Andre can hit some of the marketing spending numbers, but First, no, the marketer should not be worried. The marketer should feel wonderful in that we've got a senior leadership that is maintaining a high degree of consistency. And you all know John very, very well. He has supported these investments in media to the extent they grow the market and grow market share and are helping drive awareness and trial of superior products and brands. That's a good thing. It's about creating value, not reducing or increasing one element of cost. And John has been very engaged with me and the leadership team in these decisions. The other thing about our organization structure, we leave it to the sector CEOs and the enterprise leader to decide how much to invest in their businesses. This is not a decision we make at the headquarters. It's a decision made by each one of the business leaders, and we hold them accountable to create the top and bottom line growth and cash generation for their business. And I think the results the last three years speak for themselves. And so they actually should feel very good, as do I, that the leadership of the company and the organization structure is working very well. And one comment on the marketing spending efficiency, then Andre can add some additional comments. We have increased meaningfully the investment in marketing, but we have also increased the rate of meaningful innovation that grows the markets. And one of the key parts is you have to help consumers understand what the product is, how to use it, and then help drive awareness and trial. And these investments have done that. It's evidence, again, in the top-line growth. You recall very well, if you go back four or five years ago, our average growth was about 2%. We moved up the past four years. The past five years, we've averaged 4%. In the last three years, 6%. And we've got the strongest share growth we've seen in many years, which tells me the combination of the superiority strategy and the brilliant execution by our people is really working. And we'll continue to invest behind both brands that are winning and invest to make sure we get the trial. Andre, any comments on the specific numbers?

Look, I think we've increased our ad spending year over year in fiscal 21 versus 20 by $850 million. And as David said, superior communication is a core element of our superiority framework, and we've not reached the point of diminishing return on those investments. So we'll continue to invest. around that level in percent of sales. We also do believe that there is significant productivity improvement still within the media spend. When you think about shift into digital media, improved targeting capability with first-party audiences or third-party audiences, an ability to sharpen our focus even on TV audiences with our own data. So there continues to be a significant leverage in terms of direct media spend efficiencies that we can create to improve quantity of reach and quality of reach. In the indirect space, we're also striving to continue to improve production costs, agency structures, so you see us continue to work in that direction, mostly to reinvest in superiority and superior communication.

And your next question will come from the line of Steve Powers with Deutsche Bank.

Oh, great. Thanks, and good morning. And congrats to you both this morning, John and David. It feels like the business is, you know, being passed off with great momentum. So, again, congrats to you both. I guess my question, I think it's probably a question for Andre mostly. Andre, I think you said that China was up 5% in the quarter. I don't know if you provided a U.S. growth rate in the quarter, but if you have one, that would be great. And I'm thinking the question really is, as you said, both those businesses had very difficult comps in the year-ago quarter. Those difficult comparisons continue in the first half. In terms of the makeup of growth, first half, second half, geographically, is there anything to call out there? Do you feel like the U.S. can stay positive in the first half? Just anything to call out in terms of the context of growth via geography. Thank you.

Yeah, very good. So U.S. quarter four growth was minus 1%. If you look at a two-year stack basis, that's 18%. Last year's quarter four was 19% growth. And the strong growth in last year's quarter was mainly driven at about 13 points, I believe, by restocking retailer inventories after strong consumption. So in comparison, minus one on a 19% base. The US consumption, I think we believe at this point in time we'll return to normal levels. Most importantly, we see our shares at record levels in the U.S. Our brands are continuing to strive. We're gaining share across categories. Our retail partnerships are strong, and we have very strong innovation programs hitting in the U.S. So we remain confident, but I think you're rightfully cautious in terms of base period effects, especially in the first half. On the China side, we expect the market to continue to grow mid-singles. Our mantra is to grow ahead of that. And I would tell you the same thing I've told you for the US. We feel good about the strength of our brands. In China, we feel good about our go-to-market capabilities. And we'll continue to invest in innovation and supporting those innovations in the market. Same comment, considering base period is going to be prudent. for China and the entire focus markets environment.

And your next question comes to the line of Dara Moussinian with Morgan Stanley.

Hey, guys. So just taking a step back, now that we've got a full quarter in the books where you've cycled a period where COVID was unfortunately with us, and the leadership change going forward. I was just hoping you could review maybe some of the more enduring consumer changes that you see post-COVID, again, from a consumer perspective, and how you think P&G is positioned relative to those changes. And then, you know, regarding the CEO change down the road, any sort of tweaks in strategy here? or areas of just increased emphasis, either in that post-COVID environment or with the change in leadership. Thanks.

We have a couple comments about the consumer changes that we think are endearing, and then certainly Andre or John can jump in with some comments as well. We do believe that the health cleaning and hygiene brands will continue to play an increased role. There's the statistics that I saw a while back that pre-pandemic, about 5% of people work from home. And then post-pandemic estimated 20. I don't know what the number will be, but certainly there's a significant number of people that will be in home more than they were pre-pandemic. That bodes well for us. I believe the strength of our brands and actually the shift toward trusted brands will likely last a good while. We've had meaningful increased household penetration on some of our brands as there was a stock up and then people got exposed to the superior performance. I think that will have a lingering positive impact. So you've got both more people at home, and I'll take the U.S. especially, more occasions at home. You've got a shift toward trusted brands, and the role that health, cleaning, and hygiene plays will anniversary some tough comps. But the health of the brands and the share of momentum, to me, gives me a lot of confidence going forward. The U.S. and Europe, which I'll call our biggest focus markets, are having some of the strongest share progress they've had. And every one of those categories in absolute share is higher than they were pre-pandemic, with the exception of family care that had a supply issue for the first part, just couldn't supply because of the increased demand, and they're growing share in the fourth quarter. So we've got good momentum. Consumers continue to vote for trusted, superior-performing brands, and I think those consumer habit changes will likely last.

What I'd say... maybe I think our portfolio positions as well. There were many categories that did not benefit from COVID tailwinds in our portfolio. When you think about adult incontinence, deodorants, shave care, some of the tooth whitening that we see coming back, personal healthcare had a very low cough cold season with everyone wearing masks and our professional business, certainly that serves hotels and restaurants did not do well. So as mobility increases, those businesses pick up. And we see that as a positive going forward, obviously. Geographically, many of the markets we operate in, specifically the enterprise markets, never did see a benefit in terms of consumption from COVID as consumers and retailers were impacted by the crisis. So hopefully, as these markets work through the pandemic, that will also provide a tailwind from a geographic standpoint.

And relative to the question on strategic changes as we go forward, we will always be responsive to consumers and customers whose needs will continue to evolve over time. I don't foresee that leading to any major change in the strategies that the team has been executing with excellence But again, we will continue to be very attentive to and responsive to consumer and customer needs.

Your next question will come from the line of Wendy Nicholson with Citi.

Hi. My first question actually, you know, David, sort of before you go. One of the categories that seems to sort of be, I don't want to say persistently weak, but kind of lagging in terms of sustained global market share improvements is baby care. And I know the last 12 months have been really funny. You've actually had some market share recovery because they were depressed last year given supply issues, but still just sort of in totality, baby care just looks to be you know, such a competitive marketplace. I think Kimberly sounded more aggressive and more optimistic about their market share positions. You've obviously got less of fragmentation in the category with more organic, all natural players sort of trying to gain traction. So can you kind of give us a state of the union on baby care in particular, where you think Proctor is, why you think it's been sort of a stubborn business for you in terms of being able to really make progress, especially in China? That would be great. Thank you.

Sure. Happy to. First, it has been a challenging category for several years, and as we were very open several years ago, it would take time because of the technical changes we needed to make to deliver product superiority. And we continue to make those changes, but I'm actually very encouraged by the progress they've made. Our focus markets grew top line and profits last year. All-in profits increased. Global baby care made progress. Our North America business especially was plus 3%. The highest it's been in six years. We're leading the category growth. We actually have strong share growth now in North America. Most recent period, it's up a point or more. Our superiority metric, which is really important, back several years ago was 25%, which is unacceptable. It's up to 60% rising, and we'll continue to be investing to, again, delight consumers. But with North America doing better, Europe returned to growth for the first time in six years. You're right, it's been challenging both the birth rate, but return to growth, expanded the margins. We addressed some of the challenges we had in our enterprise markets. John and his team did a great job there, working to make sure we had structurally profitable businesses and adjusting the business model and supply systems where need be. So you look across those, and then this shift toward fast-growth segments. Our wipes business was up 10%. Our pants business was up 12%. We doubled our bedwetter segment growth to 12% behind the successful Ninjamas launch. So there's a number of things going well. We still have much work to do, and we understand that. Baby care does take time, but this was the best year we've had in six years, and the trends are positive. We're now playing in fast-growing segments, and the product superiority is getting better each year. I've become more optimistic on baby care each year. I think the leader and their team are doing a really nice job recognizing that this is a mid to long-term game, and they're continuing to make the right investments.

My next question will come from Javier Escalante with Evercore ISI.

Hi, good morning, everyone, and congratulations to David and John from Robert and I. well deserved. My question has to do with your plan to offset the increases in raw material, the $1.9 billion hit. And if you could split the pricing versus savings, how much you're going to eat in terms of not taking pricing? How much is pricing? And if you could help us understand what is happening geographically. We have a good feel of the US. We do not about Western Europe in particular. And both two of your competitors Colgate and Unilever reported negative pricing in Western Europe, which is surprising. And I think that they were even talk about deflation. So if you can talk about pricing in general and what's leading this deflation is the consumer is the retailer is competitive dynamic. Thank you.

I'll give one quick comment and turn it to Andre. Oh yeah. We have many tools to deal with the commodity cost increase. And one thing that is very clear is that hits everybody that hits local brands, international brands equally in many ways, uh, more severely, if you don't have scaled supply systems and the buying power that a company like P and G does, where we work collaboratively with our suppliers. So we've got the tools that include innovation, which I think is as strong as I've seen it in years. We have certainly pricing, but we have a very active productivity program. So we've got the tools. If you get into specifics for Europe and others, I'm going to turn it to Andre to get into. But again, I think we're well positioned to deal with it, and we have our eyes wide open that it's going to be meaningful, and especially in some of the categories that have some of the increased amounts of raw materials that have been hit the most. Andre, you want to give any specific comments about Europe?

What I would say is similar to what David mentioned. I think productivity is going to be a core driver of the offsets that we will continue to focus on. The commodity pressures that we're seeing, as you have heard, are broad-based in the industry, and therefore the same pressures exist in the market around the world. In terms of pricing, we've mentioned that we've taken and announced pricing in Central and Eastern European markets. We've announced pricing in the US, which you referenced, and we've also have taken pricing cumulatively high single digits in Latin America over the past 12 months. We will continue to evaluate pricing opportunities around the world. And we are encouraged, I think, by our ability to execute pricing in the markets where we have announced. But I cannot comment on any additional pricing that we might or might not take. Again, that is within the discretion of the sector leaders and will come out as we see fit.

All right. Next question will be from the line of Kevin Grundy with Jefferies.

Great, thanks. Good morning, everyone, and congratulations to David and John. Broader portfolio question, just to kind of pull back a little bit, so really beyond fiscal 22, and it relates specifically around strategic priorities and where you see the greatest opportunities to accelerate profitable growth. So, John, understanding your comments that, you know, the strategy is indeed working, there's just going to be, you know, sort of a continuation and execution against that. And, David, you talked about what the company has done with respect to productivity, structure, culture, innovation. And I think there's sort of general recognition among the investment community. You look at the market share momentum and the results. It is a strategy that's clearly working. But that being said, as you look across your geographies, your categories, and your cost structure, I would like to get your perspective on the areas where you see the greatest opportunity to accelerate growth and maximize profitability. And, John, how you intend to prioritize those. Thank you.

Yeah, I'll give a comment, and then I'll turn it to John. First, there are many opportunities, but it starts right here in the U.S. It's our largest market. We declared several years ago the U.S. is a growth market. We don't have any markets that aren't growth markets. It's our job to create the innovation that drives the growth, and I think it's best illustrated by the U.S. We are averaging 1% to 2%, and we've moved to mid-singles, and certainly the last two years we've been in high singles. And it has driven by... the innovation and the communication, just the superiority strategy being brought to health executed in a very good way. We have had some bolt-on acquisitions that you're well aware of. There have been some categories that we've been open about. We added the Merck International business to our healthcare, and that's done very well, and you've seen the growth recently in our healthcare business. That remains an interesting segment. You've seen some bolt-on acquisitions in the beauty care business. Again, that remains an interesting business as well. And each of the sector leaders has the opportunity to evaluate whether they see bolt-on acquisitions or acquisitions that would be helpful. The core, though, is most important. Driving the core in the focus markets and then continuing to have smart growth and value creations in the enterprise markets is working. And I believe that's the right strategy. I'll turn it to John to offer any comments about how he's thinking about the future. But we've worked together on these and been very aligned. It starts with delivering the core and seeing market growth as a key responsibility of each category.

Kevin, I really like, and you've heard me talk about this before, each of the categories that we've decided to play in as we've focused and strengthened our portfolio. And I firmly believe that they all have opportunity to grow and to create value. And you're seeing that in the results that André described, for example, there's very broad progress that's occurring across those businesses. Similarly, from a geographic standpoint, what people would view as mature markets have significant growth potential that exists within them. You've seen the results in the US. If you look at category development Outside of the US on average is 20% of US levels. So there's significant opportunity across geographies to continue to develop these categories to grow markets and increase consumption. And you know, historically, while we probably felt that way for the focus markets, we were a little bit concerned about what kind of future the enterprise markets held for us. But the team there has made significant progress in the last couple of years in dramatically increasing the structural profitability of those businesses so they are investment grade and we can take advantage of the population and income growth that will occur in those markets and do so in a very profitable value, accretive way. We exited last year with one country in the well over 100 countries in the enterprise markets losing any money. So the majority are contributing positively to the company's top line and bottom line. So I don't want to in any way backhand the question, but I really do believe that we have opportunities for growth and value creation in each of our categories and broadly across the global geography, and then it becomes executing the strategy that we've all talked about a number of times, and that, as Andre mentioned, we will continue to double down on, stepping forward, not back.

The next question will be from the line of Mark Astrakhan with Stifel.

Thanks, and good morning, everybody. I wanted to ask about thoughts on sustainability of EBIT margin expansion that we've seen in recent years. I get the comments about the roughly three points or so, if my math is right, of input commodity cost headwinds for 22. So I guess, you know, broader picture, 21 sounds like you're saying that's a base. You think it can obviously expand over time in a normalized world. I guess, you know, maybe you could just talk a bit about how holistically you're thinking about that and then maybe drilling in a little bit as well. Looking at segments, most of the – where the strongest rate of expansion has come from household products, whether it's household care or a fabric or baby, et cetera. So how sustainable is that? What can you do there to further improve? And just, as I said, broadly, kind of how are you thinking about margins? Thank you.

So I think, as David explained and John explained, we're very pleased with the categories we're operating in. continued growth opportunity if you think about you know either growing the market via innovation with the examples that David mentioned earlier if you think about trading consumers up into premium propositions would have superior profitability in terms of penny profit for us if you for example liquid fabric enhancers Household penetration in the U.S. is only 37%, and only 52% of those households use the fabric enhancer with every load. So there's tons of runway. When you think about beads, those numbers are even lower. Those propositions are accretive to our portfolio, are accretive to our margin, and we'll continue to focus on those. And they provide a good source for future growth, both top and bottom line. Productivity is another key lever that still has enormous runway across the balance sheet and across the P&L. Our supply chain continues to have significant opportunity in terms of synchronization, but also every innovation that we bring basically creates a new cost S curve that we can then optimize from. We talked about media and advertising spend as a significant source of future profitability growth and productivity. And I would add go-to-market specifically in terms of go-to-market logistics, but also go-to-market spend as a source. So we feel confident in our ability to deliver even with cost headwinds, which is reflected in our guidance for next year. And we do believe there's enough levers in the portfolio from trade up to usage expansion to be able to continue to do so.

There's a, some of you have heard me talk about this before, but there's a chart that I share with our leadership team whenever we're together that highlights the importance of growth on both the top line and margin in delivering top third total shareholder return. We need to do both to dependably deliver top third shareholder return over reasonable periods of time. So that will continue to be the focus and the emphasis. Having said that. You know I'm. Margin as a as a metric. Has has many issues associated with it. The first being I can't put margin in a bank. I can't return margin to share owners. What matters most is what Andre referred to, which is. Penny profit and overall profit and profitability. And we've got to make sure that we keep our eyes firmly on that as we as we work to grow the top line.

Next question will come from the line of Andrea Teixeira with JP Morgan.

Good morning, and congrats to all of you, in particular David, and thanks for your leadership, and congrats to John and Shaleesh. I have a question on the beauty and follow-up on baby care. What are you expecting for fiscal 22 in terms of recovering skin care in Japan and China for both SK-II and OLE, and for baby David, your comments of improvement most recently. Are you putting, and a question now for John, more money behind innovation this fall? Because Pampers Pure was a good launch, but it seems that, you know, Core Pampers is still lagging. In a clarification on the $1.9 billion headwind for fiscal 22, are you betting that commodities and transportation costs will stabilize or decline? Or have you conservatively assumed that these cost pressures will linger at current levels, given understandably a wide EPS range that you gave?

Let me start with a couple of those here. There are quite a few questions there, so you have to help me if we don't answer each one of them. First, you mentioned our beauty businesses, specifically SK-II. I'm very pleased, if I just take SK-II as an example, you would have expected it to get hit very, very hard because of travel retail. virtually stopping in Asia, and it's certainly a huge channel. But the team pivoted amazingly well and was able to actually grow the business. Last year, the business was up double digits, up 13%. So SK2 is actually healthy and continues to grow nicely because the consumption that did not happen in tribal retail happened in the home market. And then there was the duty-free area in Hainan province that they did a really nice job making sure that the brand was both available and had the innovation and communication to win. So SK2 is healthy, and I expect, I don't know when travel retail will resume. You can take, you would guess, it looks like it's gonna be a while. But the good news is, at the strong growth that we're seeing already, we're not dependent on that. That'll be, could be a help if and when it opens up anytime soon. More broadly, the skin and personal care business had a strong year last year, as did the overall beauty business. So again, I feel very good about the business. How strong it grows next year will be dependent again on many of the factors that we've already mentioned. While there's meaningful cost headwinds, the innovation that both hair care, skin, and personal care has launched and will be launching, I feel very good about. So both businesses have strong years on the top and bottom line, and I feel good about those. Baby care, I made a number of comments earlier, so I'm not sure what else would be helpful. Yes, we are very committed to the category. The innovation coming will continue to come. We are on a multi-year innovation program. Certainly part of it has hit the market. You see that improvement in percent superiority from 25 to 60 percent. We'll continue to work to move that up significantly. And we also recognize that for many consumers in many markets, the premiumization is critically important in these high growth areas. And that allows us to offset some of the challenges that you're well aware of on the birth rate and still grow the category and grow share and create value. And baby care did create value this year. It's a very strong year, strong improvement. So all these businesses to me have meaningful upside and especially the beauty business has very good momentum and baby care is accelerating. So I feel good about both.

And Andrea, to answer your question on the commodity exposure and trade exposure, we are forecasting at spot, so we assume that spot prices will sustain throughout the year, so we don't expect an easing of these commodity pressures within the guidance that we've given.

Okay, next question will be from Chris Carey with Wells Fargo Securities.

Hi, good morning. just just two specific questions uh and you know i'll keep it brief um so just on grooming um you know volumes up for the first time in a while on a fiscal year pricing as well you know have we turned the corner in in the business um you know i'm also conscious you know there could be some cyclical recovery with return to office any perspective on just where you think the business sits Um, on this, uh, recovery curve, and if that's by, by geography. Or, um, you know, price here and any perspective would be helpful and then just just 1, quick follow up on on. I noticed that, you know, the press release talked about. In pricing, uh, premiumization, but not volume. Is it safe to assume it's been more driven by price of late and not volume. So any any clarification there would be helpful. Thanks so much.

Now it's actually very balanced volume and pricing, but let me take one and then we can give the specific numbers. First on grooming, grooming had a very strong year. They grew mid singles digits on the top and double digit on the bottom. Importantly, they grew share almost every segment across whether it was male shave, female shave, appliance, all of those making very good progress, which contributed to the strong growth. And as you rightfully said, as people return to working outside the home, I think that will benefit the category. And what the team has done, which I think is very strong and very important going for the future, we're no longer a wet shave business. We're truly a grooming business with growth in wet shave, dry shave, which we call appliances. We're also growing in many of the new areas like IPL, the intense pulse light area. All of those to me give me confidence. And it's in new segments as well. We have... innovation come on King Sea Gillette, which helps people with facial hair. So it's a broader portfolio, innovation across all those different forms and segments, and it's leading to mid-singles top and double-digit bottoms. So that's the strongest year we've had in many, many years in grooming. And the reason it's strong should continue because it's innovation-driven, consumer-driven.

And on SK2, what David said is certainly right. Growth is very strong, 13%, as David mentioned, for the fiscal year, but 35% for quarter four. The pricing taken was mid-singled, so by far there's a significant volume component to it. As the team shifted consumption into high non, which is a big part of the offset to travel retail reduction. So again, the growth on SK2 is both volume and price mix driven.

Your next question will be from the line of Peter Grom with UBS.

Hey, good morning, everyone. And David and John, I want to offer my congratulations as well. So I guess I just wanted to ask about the business momentum and growth from here. And I mean, the quarterly performance and what we can see in the data is very impressive. So congrats on that. And I know the health of the brand is very strong, but When you think about the magnitude of growth versus your peers, do you expect this level of outperformance to continue? You mentioned record share. How much more room do you have on the share side? Because a lot of your competitors are really implementing a similar playbook and attempting to innovate with superiority as well. So just like any comments on the relative outperformance from here would be really helpful. Thanks.

I won't speculate too much in the relative outperformance. What I can say is the strength of just what you said, the brands are strong and the measures we use, which I think are really important. Our superiority metrics are relative to the best competitor in each brand in each country. So it pushes us to maintain and try to extend the advantage we have. Now we have full respect for our competitors, uh, and you're right. We have very strong growth in both, uh, North America, Europe, and Latin America. And in those markets, we'll see what happens next year. But this share growth has been now sustained in North America for three years and in Europe for three years. So the focus markets are performing very well. And as John mentioned, we have very strong progress in the enterprise markets. We are mid singles with double digit growth in a very, very difficult environment. So that gives me confidence we're at least well positioned. But the other thing is very real. You have to earn it every day. And so our teams understand that our competitors are refocusing and those that lost share will come back with their innovations and investments. Uh, and it's our job to go earn it, but it's very clear. That's what they're accountable to deliver. And based on the last three years, I've got confidence they'll continue.

And just a reminder, excuse me, um, how you gain share. how we gain share is very important in the answer to this question. And David's talked many times in our discussion this morning, as has Andre, about our intent to be a disproportionate driver of market growth. The math that falls out of that creates share growth, but the notion that we're taking business from competitors and it's only a matter of time, that's not how we look at things. OUR JOB IS TO BE CONSTANTLY EXPANDING THIS PIE, CONSTANTLY EXPANDING THE NUMBER OF HOUSEHOLDS THAT WE SERVE. AND IF WE DO THAT WELL, THERE'S NO REASON THAT GROWTH SHOULDN'T BE SUSTAINABLE.

ALL RIGHT. WE'LL NEXT GO TO BILL CHAPEL WITH TRUTH SECURITIES.

THANKS. GOOD MORNING. I'm not one who typically says congratulations on these types of calls, but I just want to take a step. David, the retirement couldn't be more deserved. Looking back six years ago in terms of where the company was and especially where investor sentiment was, it's remarkable where we are today. And John, knowing you for a decade plus and how integral you've been in the turnaround, I think most people would agree on the call Mr. P&G. so well deserved and I applaud the board and everyone for making these changes because I think it's just well done. So with that, moving on to the actual question, you know, kind of on trade promotion as we look back, you know, with the pandemic, trade promotion dropped off. It's not coming back kind of to full extent as you would expect as you're taking pricing and what have you. And I just kind of want to understand if, If you think this is kind of a permanent change, if we've kind of made a shift back to where marketing and innovation really take the lead in terms of investment dollars and trade promotion never really kind of goes back to where it was pre-pandemic levels, or if you do see it starting to creep back into pre-pandemic levels. Any thoughts there would be appreciated. Thank you.

I'll just offer a couple of thoughts. First, thank you for the kind words. The organization deserves a ton of credit and the total leadership team, but I appreciate your comments on me and very much agree in your comments on John. In terms of trade promotion, certainly it's in our best interest to bring to our retail partners programs that build their business and build their margin. I do believe, as you said, that that can best be done by innovation and market-growing plans, and there's roles they play with us in making things like the shelf, whether virtual or Fiscal shelf is arranged in a way that creates market growth and helps consumers find the brands that they're most apt to use. We've worked with retail partners around the world, and the ones we've partnered with best, success is they grow, the market grows, the margin grows, and that we help them do it, we get rewarded. So we will continue with that certainly objective. Certainly our eyes are wide open. I expect from a very low base we will see an increase in trade spending. Do I believe it'll go all the way back to what it was before? I think many retailers are very interested in finding smart ways, and they have the same pressures that we do with commodity costs. They need, as well as we, to find ways to create value. So I'm hopeful that we'll see some thoughtful change in promotion strategy that is more value creating for the market.

Yeah, and then to add a few numbers to David's statements, Quarter four in the US, we saw trade promotions volume sold on deal back to 27%, which was in line with quarter three, but it's still below pre-pandemic levels, which was around 33%. So we're certainly getting back to a more normalized level in quarter four.

All right. And your final question will come from the line of Jonathan Feeney with Consumer Edge.

Thanks very much, and let me add my congratulations, David Johns. Know him better. A quick one, and then a little bit more involved one, please. The quick one, does the point guidance you gave us on cost headwinds and Forex benefits, does that include hedging, current or anticipated? And then second, maybe a little more involved one, is we've had a lot of discussions with consumer staples leaders in the past really two weeks about The state of retailer inventory, and that's largely a U.S. question, but it seems all over the board. A lot of retailers are seeing better foot traffic. Certain retailers, certain channels have had unprecedented volume that's stuck around, and there's a little bit of a mentality of maybe taking on more inventory and shipping, maybe not matching up with measured takeaways. not only in the U.S., but other places. And I think it cuts both ways. So I know there's a lot to that question, but anything you could say about retailer inventories, where you think that is, and your big markets, your focus markets, where you stand and how that plays into your guidance for 22, your thoughts about that, how that plays in. I'd appreciate it. Thank you.

I'll let Andre comment on the hedging question in just a second. The way I think about the retailers approach to their business, I don't really think about it through an inventory lens so much as I think about it through a desire to maintain dependability of supply. And those manufacturers that can offer that assurance are often being rewarded with increased shelf space and increased focus on the part of our our retail partners. There's a small amount of inventory bill, but that's not really the focus. The focus is on how do we ensure supply and maintain the satisfaction of our shoppers? And and that's a very fertile place for us to play. With regard to hedging, Andre,

So yeah, the short answer is that $1.9 billion that we've communicated is the net impact to P&G.

Very good. Thank you very much. I think that concludes the call. We very much appreciate your engagement. P&G has got strong momentum. We've got a strong leadership, leadership team and organization. And we will continue to work aggressively to deliver strong results and value for our shareholders. Thank you all for your support and your comments today.

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect.

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