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, Andre Scholten.

Good morning, everyone. 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. Execution of our integrated strategies drove strong results in the January to March quarter. Organic sales grew across all ten categories and in six out of seven regions. Global aggregate market share is holding steady. Productivity savings are accelerating and enabling sustained investment in the superiority of our brands. In-market execution across all five vectors of superiority is strong and consistent. Product, package, communication, go-to market, and value. Superior offerings continue to pay benefits for our consumers and retail partners, and in turn, for P&G shareholders. Progress against our plan enables us to increase guidance for organic sales growth and cash return to share owners, and to maintain guidance for core EPS growth and free cash flow productivity. Moving to third quarter numbers, organic sales grew more than 7%. Pricing added 10 points to sales growth, and MIX was a modest positive contributor for the quarter. Volume declined three points, including a one-point headwind from portfolio reduction in Russia. Growth was broad-based across business units with each of our 10 product categories growing organic sales. Feminine care was up low teens. Personal health care, home care, and hair care each grew double digits. Grooming, oral care, and fabric care grew high single digits. Baby care was up mid-singles. And family care and skin and personal care grew low singles. Growth was also broad-based across geographies. with six of seven regions growing organic sales. Focus markets grew 5% for the quarter. Organic sales in the US were up 6%, including modest unit volume growth. Europe focus markets were up 8%. Greater China organic sales were up 2% versus prior year as the market begins to recover from COVID lockdowns and as consumer confidence improves. We continue to expect further recovery as consumer mobility increases over the coming quarters. Longer term, we expect China to return to mid-singles underlying market growth rates for our portfolio of categories. Enterprise markets were up 15%, with Latin America up nearly 30%, and Europe enterprise markets up low teens. This is the fourth consecutive quarter in which all five sectors grew organic sales double digits in enterprise markets. Global aggregate value share was in line with prior year, with 30 of our top 50 category country combinations holding or growing share. Excluding Russia, global value share was up 20 basis points. In the US, all outlet value share was up 40 basis points versus prior year, with 8 of 10 categories holding or growing share in the quarter. US volume share is up 90 basis points versus the prior year, driven by two points of absolute volume consumption growth in a market that is still down modestly versus prior year. Strong U.S. share growth in personal care has been led by innovation on the native brand in deodorants, as well as successful extension into body wash. Cascade Platinum Plus has driven strong share growth in auto dish washing, and Dawn Share continues to be up more than a point with ongoing leverage from the power wash and easy squeeze innovations. VIX continues to be a growth leader in personal health care, and we've delivered strong share growth in the Metamucil and Pepto-Bismol brands. In Europe, the new four-chamber aerial platinum pots are driving strong consumer demand in fabric care. Fairy Power Spray is growing the dish category and building market share in home care. The new Gillette Labs exfoliating razor, male and female intimate grooming innovations, and cardboard packaging upgrades are driving strong growth in grooming. Moving to the bottom line, core earnings per share were $1.37, up 3% versus prior year. On a currency-neutral basis, core EPS increased 13%. Good progress as we faced $0.31 per share of cost and foreign exchange headwinds in the quarter. Core operating margin increased 40 basis points, as 150 basis points of gross margin expansion were partially offset by SG&A investments and inflation impacts. Currency-neutral cooperating margin increased 160 basis points. Productivity improvements were a 290 basis point help to the quarter. Adjusted free cash flow productivity was at 92%. We returned $3.6 billion of cash to share owners, approximately $2.2 billion in dividends, and $1.4 billion in share repurchase. Last week, we announced a 3% increase in our dividend, again reinforcing our commitment to return cash to shareholders. This is the 67th consecutive annual dividend increase, and the 133rd consecutive year P&G has paid a dividend. In summary, against what is still a challenging cost and operating environment, continued good results across top line, bottom line, and cash for the third quarter. 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 vectors of product, package, brand, communication, retail execution, and value. We are again raising the bar on our superiority standards to reflect the dynamic nature of this strategy. Productivity improvements in all areas of operations to fund investment 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 Finally an organization that is increasingly more empowered agile and accountable with little overlap or redundancy Flowing to new demands seamlessly supporting each other to deliver against our priorities around the world. I 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 equation. 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. 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 a commitment to deliver irresistibly superior propositions to consumers and retail partners. Now moving to guidance. As we work toward the end of the fiscal year, we are cautiously optimistic. We remain confident in our strategies and the organization's ability to execute them with excellence. We continue to expect more volatility in the macro and consumer environment and expect sustained pressure in costs and foreign exchange as we move forward. On the whole, our consumer markets remain relatively resilient with US and China volume trends improving, but with inflation pressures in Europe weighing more heavily on consumption. We continue to think the strategies we've chosen, the investments we've made, and the focus on execution and excellence have positioned us well to manage through this volatility over time. Raw and packaging material costs, inclusive of commodities and supply inflation, have largely stabilized over the last few months, but still remain a significant headwind versus last fiscal year. Based on current spot prices and latest contracts, we now estimate a $2.2 billion after-tax headwind in fiscal 23. Foreign exchange is also a significant year-on-year headwind, and rates since last quarter have moved modestly against us. Based on current exchange rates, we now forecast a $1.3 billion after-tax impact to the fiscal year. Freight costs have moderated throughout the year, and we now expect them to be roughly in line with prior year. Combined headwinds from these items are now estimated at approximately $3.5 billion after tax, or $1.40 per share, a 24 percentage point headwind to EPS growth for the year. In addition to these impacts, we are also facing higher inflation in wages and benefits and higher year-on-year net interest expense. 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 noted in the outset, our strong results over the first three quarters have enabled 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 4% to 5% to approximately 6% for the fiscal year. This will put fiscal 23 in line with 6% top line growth we've averaged over the last four years, which were 5, 6, 6, and 7 from fiscal 19 through 22, respectively. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of inline to plus 4% versus prior year. Significant headwinds from input costs and foreign exchange keep our current expectations toward 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 value creating opportunities are available. We continue to forecast adjusted free cash flow productivity of 90%. We now expect to pay nearly $9 billion in dividends and to repurchase $7.4 to $8 billion in common stock. Combine the plan to return $16 to $17 billion of cash to share owners this fiscal year. This outlook is based on current market growth estimates, commodity prices, and foreign exchange rates. Significant additional currency weakness commodity cost increases, geopolitical disruption, major production stoppages, or store closures are not anticipated within this guidance range. To conclude, we continue to face highly volatile consumer and macro dynamics. We also continue to see high year-over-year input costs, inflation in the upstream supply chain, and in our own operations. Headwinds from foreign exchange, geopolitical issues, and historically high inflation impacting consumer budgets. 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 our business. We're doubling down on the strategy that has been working well and is delivering strong results. We'll continue to step forward. We remain fully invested in our business. We remain 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'll be happy to take your questions.

If you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, please press star followed by two. The first question comes from Lauren Lieberman of Barclays. Please go ahead.