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 is John Chevalier, Senior Vice President, Investor Relations. Execution of our integrated strategy drove solid sales and market share results and another quarter of strong earnings and cash results. The strong results we've delivered in the first three quarters of fiscal 24 enable us to raise our outlook for core earnings per share and keep us on track to deliver within our fiscal year guidance ranges for organic sales growth, cash productivity, and cash return to shareholders. Specifically on the numbers, organic sales grew 3%. Volume was in line with prior year, showing sequential progress. Pricing contributed three points to sales growth as we continue to annualize price increases taken last fiscal year. Mix was neutral to organic sales growth, And growth across categories continues to be broad-based, with 8 of 10 product categories holding or growing organic sales in this quarter. Grooming organic sales grew double digits. Home care and hair care up high singles. Oral care grew mid-single digits. Fabric care, family care, feminine care, and personal health care were up low singles. Skin and personal care and baby care organic sales were lower versus prior years. Growth was also broad-based across geographies. North America, Europe, and Asia-Pacific focus markets and Latin America and Europe enterprise markets are each growing organic sales. Global aggregate value share was up versus prior year, with 29 of our top 50 category country combinations holding or growing share. Focus markets grew organic sales 2% for the quarter, and enterprise markets grew 4%. Organic sales in North America grew 3%, with three points of volume growth. Over the last four quarters, volume growth in North America has been plus 2%, plus 3%, plus 4%, and now plus 3%. These results include over a point of impact from retail inventory reductions, primarily in personal health care. Consumer demand for P&G brands remains very strong in the U.S., with all outlet consumption value growth of 5%, All outlet value share was up 10 basis points versus prior year. U.S. volume share was up 40 basis points, reflecting continued strong volume growth ahead of the underlying market. The gap between consumer offtake of 5% compared to our U.S. sales growth of 3% reflects the aforementioned trade inventory reductions in the quarter. Europe-focused markets were up 7% with 4 points of volume growth. Value share in Europe-focused markets was up 100 basis points over the past three months. Latin America organic sales were up 17%. Argentina is a significant contributor to this result, given the pricing taken to offset the more than 400% devaluation of the Argentine peso since the start of the year. Mexico and Brazil are annualizing high base periods with organic sales growth in the 20s and 30s, and we expect will normalize back to pre-COVID levels in the mid to high single digits. As we noted last quarter, there are some specific issues affecting other markets. Those challenges continue to impact results in the quarter. Greater China organic sales were down 10% versus prior year. Progress versus the December quarter, but still impacted by weak underlying market conditions. and headwinds for SK2 and other Japanese brands in the market. SK2 sales in Greater China were down around 30% for the quarter. We have seen some month-to-month improvement in overall Greater China sales trends, though we expect it will be another quarter or two until we return to growth. Volume trends in some of the European enterprise and Asia Pacific Middle East Africa countries such as Egypt, Saudi Arabia, Turkey, Indonesia and Malaysia have remained soft since the start of the heightened tensions in the Middle East. Also, shipments in Russia continue to decline, double digits given our reduced footprint and curtailed investments with consumers and retailers. Combined, the headwinds from Greater China and Asia-Middle East Africa markets were a 150 basis point impact on total company sales for the quarter. We expect these headwinds to moderate or annualize over the coming periods. Moving to the bottom line, core earnings per share were $1.52, up 11% versus prior year. On a currency neutral basis, core EPS increased 18%. Core growth margin increased 310 basis points, and operating margin increased 90 basis points. Strong productivity improvement of 320 basis points enabled continued strong investment in superior products, packaging, and consumer communication to drive market growth. Currency neutral cooperating margin increased 220 basis points. Adjusted free cash flow productivity was 87%. We returned $3.3 billion of cash to share owners, approximately $2.3 billion in dividends, and $1 billion in share repurchase. Over three quarters, more than $10 billion returned to share owners in dividends and repurchases. Last week, we announced a 7% increase in our dividend, again reinforcing our commitment to return cash to share owners. This is the 68th consecutive annual dividend increase, and the 134th consecutive year P&G has paid a dividend. In summary, against what continues to be a challenging and volatile operating environment, strong overall results, enabling us to increase our earnings projections for the year and to maintain our guidance ranges for organic sales and cash generation, all while sustaining strong investment and superiority to both category consumption and to restore business growth in China and in the Middle East. Our teams continue to operate with excellence, executing the integrated strategy that has enabled strong results over the past five years, and that is 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 for each price tier where we compete. We are again raising the bar on our superiority standards to reflect the dynamic nature of this strategy. Productivity improvements 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. Finally, an organization that is empowered, agile and accountable. We continue to improve the execution of the integrated strategy with four focus areas. strong progress on supply chain 3.0, digital acumen, environmental sustainability, and a superior employee value equation. These four focus areas are not new or separate strategies. They simply strengthen our ability to execute the strategy. Our strategic choices on portfolio, superiority, productivity, constructive disruption, and organization 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 this integrated strategy, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners fueled by productivity. Moving on to guidance, as I mentioned, We expect the environment around us to continue to be volatile and challenging, from input costs to currencies to consumer, retailer, and geopolitical dynamics. However, our strong results year-to-date enable us to raise or maintain key guidance metrics for the year. We're maintaining our guidance range for organic sales goals of 4% to 5% for the fiscal year. We're squarely in the middle of this range fiscal year-to-date. This outlook assumes continued normalization in underlying market growth rates that we've seen over the past few quarters. Markets will be lapping the last waves of cost recovery pricing, and volumes slowly begin to recover. We also expect the market level changes we faced through quarter three to continue in Q4, though with some directional improvement. On the bottom line, enabled by 15 percent core EPS growth year to date, we are raising our outlook for fiscal 24 core earnings per share from a range of 8 to 9% to a range of 10 to 11%. This outlook includes continued strong investments in innovation and brand building to grow markets and extend the superiority of P&G offerings to consumers. We now estimate commodities will be a tailwind of around 900 million after tax in fiscal 24 based on current spot prices. This is a modest improvement versus the outlook we provided last quarter, though nearly all of this benefit has been booked in the first three quarters of the year. We now expect foreign exchange to be a headwind of approximately $600 million after tax for the fiscal year. The change versus prior guidance reflects volatility in Argentina exchange rates, including a period of currency appreciation in quarter three and a revised devaluation outlook for quarter four. We also reflect a reduction in Argentina FX exposure due to the divestiture of our Argentina fabric and home care business, which we completed in mid-March, and reduced assumptions for future volume and pricing given the current rate outlook and recent shipment trends. The net impact of these changes is a relatively modest help to the bottom line, which is reflected in our updated EPS outlook. We expect higher net interest expense of approximately $100 million after tax versus prior year. General inflation and higher wage and benefit costs are also earnings headwinds for the year. We expect adjusted free cash flow productivity of 90%, and we expect to pay more than $9 billion in dividends and to repurchase $5 to $6 billion in common stock. Combine the plan to return $14 to $15 billion of cash to share owners for the 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 disruption or major production stoppages are not anticipated within these guidance ranges. Finally, we'll be closely watching the more volatile regions we mentioned earlier, including the health of the China market, and we'll be keeping a close watch on competitive dynamics to ensure P&G brands remain a superior value for consumers and for retailers. The entire P&G organization remains focused on excellent execution of our integrated market constructive strategy, which has delivered strong results in a challenging operating and competitive environment. While we expect volatile consumer and macro dynamics to continue, we are confident the best path forward is to double down on this strategy, remain fully invested to drive irresistible superiority across every part of our portfolio, and stay focused on delivering balanced top and bottom line growth and value creation for our share owners. With that, we'll be happy to take your questions.

Thank you. 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. Your first question today comes from the line of Lauren Lieberman with Barclays. Please go ahead. Great.