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 Chief Financial Officer, Good morning.

Joining me on the call today are John Moeller, Chairman of the Board, President and Chief Executive Officer, and John Chevalier, Senior Vice President, Investor Relations. We're going to keep our prepared remarks brief and then turn straight to your questions. Execution of our integrated strategies continued to yield good results in the October to December quarter. growing organic sales in nine of 10 categories, holding global aggregate market share, continued productivity savings, improving supply sufficiency, sustained investment in superiority of our brands across all five vectors, product, package, communication, go-to-market, and value, continue to pay benefits for our consumers and retail partners, and in turn for P&G shareholders. Progress against our plan Fiscal year-to-date enables us to increase the guidance range for organic sales growth and maintain ranges for core EPS growth, free cash flow productivity, and cash return to share owners. Moving to the second quarter numbers. Organic sales grew 5%, pricing added 10 points to sales growth, and mix was up 1 point. Volume declined 6 points, driven by a combination of market contraction, trade inventory reduction, and portfolio reduction in Russia. Growth was broad-based across business units with each of our 10 product categories growing or holding organic sales. Personal health care grew high teens. Feminine care, fabric care, and home care were up high single digits. Hair care was up mid-single digits. Baby care, family care, oral care, and skin and personal care were each up low single digits. Grooming was in line with prior years. Focus markets grew 3% for the quarter, with the U.S. up 6%. Greater China organic sales were down 7% versus prior year, as the market continued to be impacted by COVID lockdowns and weaker consumer confidence. We continue to expect a slow recovery as consumer mobility increases over the coming quarters. Long-term, we expect China to return to strong underlying growth rates. Enterprise markets were up 14% with each of the three regions up 10% or more. Global aggregate market share was in line with prior year with 27 of our top 50 category country combinations holding or growing share. In the U.S., all outlet value share was in line with prior year with 7 of 10 categories holding or growing share. U.S. volume share is up half a point versus the prior year quarter, delivering sequential improvement from quarter one. Recent innovations like Downy Rinse and Refresh in fabric enhancers and Dawn Power Wash in hand dishwashing are extending superiority advantages and driving value and volume share growth. Innovation also serves as a catalyst for pricing across our other brands and forms in their category segments. On the bottom line, core earnings per share were $1.59, down 4% versus prior year. On a currency-neutral basis, core EPS increased 5%. Core operating margin decreased 170 basis points, primarily due to gross margin pressure from commodities and foreign exchange. Currency-neutral core operating margin decreased 70 basis points. Productivity improvements were 110 basis points held to the quarter. Adjusted free cash flow productivity was 72%, primarily due to a temporary reduction in payables. We returned $4.2 billion of cash to share owners, approximately $2.2 billion in dividends, and $2 billion in share repurchase. In summary, considering the backdrop of a very challenging cost and operating environment, continued solid results across the top line, bottom line, and cash for the first half of the fiscal year. Moving on to strategy, our team continues to operate with excellence, executing the integrated strategies that have enabled strong results over the past four years, and that are the foundation for balanced growth and 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. Ongoing commitment to and investment in irresistible superiority across the five factors of product, package, brand communication, retail execution, and value. As discussed during our investor day in November, we are renewing our superiority standards to reflect the dynamic nature of this strategy. Productivity improvement in all areas of our operations to fund investments in superiority, offset cost and currency challenges, expand margins, and deliver strong cash generation. An approach of constructive disruption, a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future, especially important in this volatile environment. Finally, an organization that is increasingly more empowered, agile, and accountable, with little overlap or redundancy, flowing to new demands, seamlessly reporting each other to deliver against our priorities around the world. Going forward, there are four areas we are driving to improve the execution of the integrated strategies, supply chain 3.0, digital acumen, environmental sustainability, and employee value equations. These are not new or separate strategies. They are necessary elements in continuing to build superiority, reduce costs to enable investment and value creation, and to further strengthen our organization. We expanded on each of these at our Investor Day in November. If you weren't able to attend or listen in remotely, I encourage you to review the materials on our IR events website. Our strategic choices on portfolio, superiority, productivity, constructive disruption, and organization are interdependent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grows share, sales, and profit. We continue to believe that the best path forward to deliver sustainable top and bottom line growth is to double down on these integrated strategies, starting with commitment to deliver irresistible superior propositions to consumers and retail partners. Now moving to guidance. We continue to expect more volatility in costs, currencies, and consumer dynamics as we move through the second half of the fiscal year. However, we think the strategies we've chosen, the investments we've made, and the focus on execution excellence have positioned us well to manage through this volatility over time. Raw and packed material costs, inclusive of commodities and supplier inflation, are still a significant headwind versus last fiscal year, though we have seen some modest sequential improvement. Based on current spot prices and latest contracts, we now estimate a $2.3 billion after-tax headwind in fiscal 23. Foreign exchange is also a significant year-on-year headwind, but like raw and packed materials, we've seen modest directional improvement. Based on current exchange rates, we now forecast a $1.2 billion after-tax impact for the fiscal year. Trade costs remain higher versus prior year, and we continue to expect a $200 million after-tax headwind in fiscal 23. Combined, headwinds from these items are now estimated at approximately $3.7 billion after-tax, $1.50 per share, a 26 percentage point headwind to EPS growth for the year. For perspective, recall that we began the year expecting approximately $1.33 of cost in FX headwinds, so despite some modest relief since last quarter, our current outlook is still 17 cents worse than our in-going position. We are offsetting a portion of these cost headwinds with price increases and productivity savings. We are continuing to invest in irresistible superiority, and we are investing to improve our supply capacity, resilience, and flexibility. As we said before, we believe this is a bottom line rough patch to grow through with continued investment in the business and underlying strategies. As I noted at the outset, our solid first half results enable us to raise our organic sales outlook and confirm our guidance ranges on EPS and cash. We are increasing our guidance for organic sales growth from a range of 3% to 5% to a range of 4% to 5%. Within this company, wide range. There are many puts and takes. As I mentioned, we expect to see some modest improvement in China, but European markets have softened as high inflation affects consumer spending. The U.S. remains relatively strong to date, and most enterprise markets remain resilient. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of in-line to plus 4% versus prior year. The significant headwinds from input costs and foreign exchange keep our current expectations towards the lower end of this range. This guidance also reflects our intent to remain fully invested to drive our superiority strategy and increase investments as opportunities are available. We continue to forecast adjusted free cash flow productivity of 90%. We expect to pay around $9 billion of dividends and to repurchase $6 to $8 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 additional currency weakness, commodity cost increases, geopolitical disruptions, major production stoppages, or store closures are not anticipated within these guidance ranges. To conclude, we continue to face high year-over-year commodity and transportation costs, inflation in the upstream supply chain and in our own operations, headwinds from foreign exchange, geopolitical issues, COVID disruptions impacting consumer confidence, and historically high inflation impacting consumer budgets. These macroeconomic and market-level consumer challenges we're facing are not unique to P&G, and we won't be immune to the impacts. We attempt to be realistic about these impacts in our guidance and transparent in our commentary. As we said before, we believe this is a rough patch to grow through, not a reason to reduce investment in the long-term health of the business. We're doubling down on the strategy that has been working well and is delivering strong results. We continue to step forward towards our opportunities, and we remain fully invested in our business. We are committed to driving productivity, improvements to fund growth investments, mitigate input cost challenges, and to deliver balanced top and bottom line growth. With that, we're happy to take your questions.