Procter & Gamble Company (The)

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. 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. I'll start with an overview of second quarter results. John will add perspective on our results and strategy, and we'll close with guidance for fiscal 25 and then take your questions. Second quarter results were largely in line with our going-in expectations despite a high degree of volatility within the quarter. Ultimately, acceleration in organic sales growth, EPS growth, strong cash return to share owners. Organic sales for the quarter grew 3%. Volume contributed two points to organic sales growth. Mix added one point, and pricing was roughly in line with prior year. The top-line results were better than anticipated in early December. Our team was able to fully overcome the two-week outage of our global transportation management system provider, and support strong late December customer orders ahead of early January merchandising events. Growth was broad-based across categories, with 9 of 10 product categories growing organic sales for the quarter. Family care was up double digits. Home care and skin and personal care were up mid-singles. Personal health care, hair care, oral care, feminine care, fabric care, and grooming grew low single digits. Baby care was down low singles. Organic sales in focus markets grew 4 percent, and enterprise markets were in line with prior year. Organic sales in North America grew 4 percent, driven by four points of volume growth. Over the last six quarters, North America has grown organic sales 7 percent, 5, 3, 4, 4, and now again 4 percent, on volume growth of 3 to 4 percent each quarter. The region delivered broad-based market share growth this quarter with 8 of 10 categories holding or growing volume share, and 8 of 10 categories holding or growing value share. Europe-focused markets' organic sales were up 4%, driven by 4 points of volume growth. Over the last six quarters, Europe-focused markets have grown organic sales on average 6%, on volume growth of 3%. Latin America and European enterprise markets each grew low single digits, and the Asia, Middle East, and Africa region declined low singles. Greater China organic sales declined 3%. While down versus prior year, this is a solid step forward in our second largest market from a 15% decline last quarter. Notably, SK2 in Greater China grew 5%, with strong growth during the 11-11 key consumption period and modest growth in travel retail. Underlying market conditions remain soft, and we are trending back toward growth in Greater China. Global aggregate value share was in line with prior year, with 28 of our top 50 category country combinations holding or growing share for the quarter. On the bottom line, core earnings per share were $1.88, up 2% versus prior year. On a currency neutral basis, core EPS increased 3%. The quarter included roughly $0.02 per share of incremental costs to manage through the transportation services disruption, almost entirely in cost of goods sold. Core growth margin was down 30 basis points and core operating margin declined 80 basis points. Currency neutral core operating margin decreased 50 basis points. The quarter included strong productivity improvement of 260 basis points. Adjusted free cash flow productivity was 84%. We returned over $4.9 billion of cash to shareholders this quarter, $2.4 billion in dividends, and $2.5 billion in share repurchases. To summarize results, accelerating organic sales growth, solid core EPS growth and cash return to share owners, keeping us on track to deliver within our fiscal year guidance ranges. Overall good performance in what continues to be a challenging economic and geopolitical environment. Over to John.

Thanks, Andre. Our team continues to execute our strategy with excellence, enabling strong results over the past six plus years. Pre-COVID, during COVID, through historic inflationary and pricing cycle, and through geopolitical tensions. They've now delivered 26 consecutive quarters of 2% or better organic sales growth, averaging 5.5% organic sales growth over those 6.5 years. We've now delivered 8.5 fiscal years of 2% or better core earnings per share growth, averaging nearly 8% over that period. This is the type of long-term, sorry, turning my page here, balanced top and bottom line growth we strive to deliver. Solid, consistent growth over time. As we expected heading into the fiscal year, first half results were below the guidance ranges we set for the full year. And while recent consumer trends and FX rates make the balance of the year more challenging, we continue to expect stronger results in the second half. Andre will discuss this more in the guidance update. We remain committed to the integrated strategy that has enabled our strong results and that is the foundation for balanced growth and value creation. We highlighted many of the reasons we're confident in the strategy at our investor day in November. If you weren't able to attend, I encourage you to listen to the replay on our IR website. To recap, we remain very disciplined in our portfolio choices. including some moves over the past year to strengthen our ability to generate US dollar-based returns. We're doubling down on superiority across all five vectors. No single vector of superiority can carry the day itself. It's all five together. The innovation plans to create and extend superiority across the business are very strong, and we continue to leverage recent innovations by driving more trial and household penetration. A few examples. Charmin Smooth Tear, with its patented scalloped edge, the biggest innovation in toilet paper in 100 years, continues to drive Charmin volume and value share growth in the US. We were first to launch the whole body deodorant sprays, now across the Old Spice, Secret, and Native brands. And we continue to drive trial in the growing segment, in this growing segment of the category. P&G U.S. deodorant volume and value share are each up nearly a point over the last year. Dawn Power Wash continues to drive market share up more than a point in the U.S. market after nearly three years in the market. Swiffer Power Mop has become the largest innovation in Swiffer's history, contributing to 40% growth of the brand portfolio and driving a remarkable 35% growth in the category. We've launched our most advanced power toothbrush, Oral-B IO10, early last year. We followed up with IO2, the first IO designed to help consumers trade up from a manual toothbrush to a power brush. Early results in the U.S. are very encouraging, and we're expanding IO2 across major markets over the next several months. We just launched our best ever whitening toothpaste, Crest 3D White Deep Staining Remover. The new formula works in just one day to dissolve the bonds that lock stains to your teeth and better prevent stains from occurring. The early trial period for deep stain remover is off to a great start. We're expanding Xevo, our insect killing sprays, mosquito and tick repellents, and insect traps with worry-free ingredients inspired by plants' natural defenses against bugs. We're building distribution and trial and receiving very strong consumer ratings and reviews. Tide OxyBoost Power Pods have just launched online with a great response from retailers and customers. OxyBoost includes two times the OxyPower to provide Tide's most powerful clean. OxyBoost Power Pods will be available in stores soon, and we'll be following up quickly with additional innovations in laundry detergents and fabric enhancers. Finally, Tide Evo, our new laundry detergent developed on our breakthrough functional fibers platform, continues to exceed expectations in our Colorado test market, surpassing our year one performance goals in just the first 12 weeks after launch. We're progressing through the last phase of supply chain readiness, and we'll be assessing our expansion plans in the coming months. There are many more examples we could share considering the next six months of innovations across Tide, Gain, Downey, Febreze, Dawn, Cascade, Mr. Clean, Pampers, Loves, Tampax, Always, Always Discreet, Bounty, Old Spice, Crest, Gillette, and Venus brands. And that's just in the U.S. I hope you can see this is one reason we're confident in our prospects going forward. We're improving productivity in all areas of our operations to fuel investments in superiority, mitigate cost and currency headwinds, and drive margin expansion. We've extended our visibility to productivity improvement with each business unit building three-year cost savings master plans, mirroring what we've done for years in our innovation program. We're driving constructive disruption of ourselves and our industry, a willingness to change, adapt, and create new trends, technologies, and capabilities that will shape the future of our industry and extend our competitive advantage. We've designed to continue to refine and strengthen P&G's organization structure so that it enables P&G people to be fully empowered, agile, and accountable, focused on business outcomes to deliver the greatest value creation. We call this an integrated strategy for a reason. Each part of the strategy needs to be delivered. It's not a menu to pick and choose from. Each element is incredibly important. The real advantage comes from being able to do all of these things at the same time. The strategy is inherently dynamic. It adapts to the changing needs of consumers, customers, and society. It demands that we not sit still. We continue to believe our best path forward is to double down on this integrated strategy, operating with a focus on driving market growth, creating business, versus taking business to deliver balanced top and bottom line growth and value creation. With that, I'll hand it back to Andre to discuss guidance. Thank you, John.

So with half of the fiscal year complete, our guidance ranges for fiscal 25 are unchanged and remain consistent with our long-term algorithm. We've highlighted we continue to expect the environment around us to remain volatile and challenging from input costs currencies to consumer, competitor, retailer, and geopolitical dynamics. On the top line, we are maintaining our organic sales growth guidance in the range of 3 to 5%. We continue to expect the markets in which we compete to deliver local currency sales growth in the range of 3 to 4% for the year, and our objective remains to grow organic sales modestly ahead of the underlying growth of these markets. On the bottom line, our core EPS guidance range for fiscal 25 remains at growth of 5 to 7% versus fiscal 24 core EPS of 659. This guidance equates to a range of 691 to 705 per share. Our outlook for commodity costs remains consistent with our most recent guidance, expecting a commodity cost headwind of approximately $200 million after tax, which equates to a headwind of $0.08 per share for fiscal 25. Since last earnings for an exchange rates have moved sharply against us, we are now expecting a headwind of approximately $300 million after tax, which equates to a headwind of $0.12 per share for fiscal 25. We continue to expect lower non-operating income benefits this fiscal year and a somewhat higher tax rate versus the prior year. Combined, these additional Headwinds amount to $0.10 to $0.12 to core EPS on top of the commodities and FX headwinds I mentioned. With projected softer market growth and stronger foreign exchange headwinds, we currently have good visibility towards the lower end of the top and bottom line guidance ranges. However, we will continue to push all levers in our control to offset these headwinds that are largely not in our control. We expect adjusted free cash flow productivity of 90% for the year, and we have plans to pay around $10 billion in dividends and to repurchase $6 to $7 billion in common stock, combined returning $16 to $17 billion of cash to share owners for the 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 disruptions, major supply chain disruptions or store closures are not anticipated within the guidance ranges. Now I'll hand it over to John for closing thoughts.

We're very pleased with the results P&G people have delivered in a very challenging and volatile environment. A good first half of the year and a stronger outlook for the second half. We remain focused on excellent execution of our integrated dynamic market constructive strategy aimed at delivering balanced top and bottom line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retailers. 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. Your first question comes from the line of Dara Masinian of Morgan Stanley. Please go ahead.

Hey, good morning, guys. I just wanted to drill down a bit more short-term into organic sales growth for the back half of the year, given some of the volatility over the last year. You've talked historically about the OSG split between the robust 85% in country mix versus a lagging 15% for the last few quarters. Can you just give us a bit of update on the performance in fiscal Q2 in each of those buckets? Do you think you're on track for continued improvement in the 15% in the back half of the year as you look versus Q2, and also just sustainability of growth in that 85% that's stronger, presumably driven by the U.S. and Europe?

Thanks. Morning, Dara. Thanks for the question. I'll take a crack at it, and John, you'll jump in. So if you look at quarter two, and I apply the same logic that we've been using to explain the divergence of the majority of the business versus some of the tougher markets, 85% of the business, so comprising of the US, Europe, Latin America, the Latin America and Europe enterprise markets, that 85% continues to grow at around 4%. What has improved is the 15%, so the performance of the balance of the markets, mainly the Asia-Middle East Africa markets, but the significant improvement in Greater China. So China was down 15% organic sales in quarter one and was down, as we mentioned in the prepared remarks, only 3% in quarter two. So we see encouraging momentum towards recovery and hopefully more neutral picture as we go into half two. That's exactly what we're expecting as we go into the second half of the year. We expect the U.S. to continue to grow at the pace that we've seen in quarter two and quarter one. We expect some increased momentum across Europe and Latin America, specifically as comps ease versus the base period. And with that, if we are combining hopefully a little bit stronger growth in North America, easier comps in Europe, LA, and Asia, Middle East, Africa, and if China continues to move towards a more neutral contribution to sales growth, that would actually allow us to be at the midpoint of organic sales growth guidance, maybe a little bit higher. Yeah. Conversely, if we saw weakening across some of the core markets of North America and Europe, or we saw China returning to more negative territory, that would move us to the lower end or slightly below the current organic sales growth guidance. Our base case, Dara, to summarize, continued strong performance around 4% in the 85% of the business, continued recovery on the 15%.

The next question will come from Lauren Lieberman of Barclays. Please go ahead.

Thanks. Good morning. So, Andre, I think you were, you know, kind of running through, you know, projected performance for P&G's business, but I was hoping you could also comment on what you're seeing in terms of consumer behavior and dynamics. I think in December you guys had flagged a little bit of a softening in the consumer environment in the U.S. as a maybe it's something that sticks, maybe it doesn't. But we'd just love to get a read on that, and same in Europe, sort of the consumer dynamic, not just your own performance and market share trajectory. Thanks.

Yep. Hey, Lauren. Generally, I would describe the consumer in our categories, which are, again, non-discretionary and very focused on performance as stable. In Europe specifically, the market continues to grow at around 4% in focus markets and in double digits actually in enterprise markets. Our ability to continue to grow ahead of that I think is visible in the volume share numbers. We are growing volume share about 50 basis points in focus markets and 60 basis points in enterprise markets. Inflation is down in Europe to about 2% and we see a relatively stable environment which we expect to continue going into half two. And we are investing in strong innovation in half two to benefit from that stable consumer environment. In the US, the current quarter has been a bit more volatile in terms of phasing of consumption. We saw very strong consumption in October, driven by hurricanes and by port strikes. easing off a little bit in November and then coming back in December. So it was volatile. But when I step back, I would characterize the situation very similarly to the European consumer, stable in our categories. Market growth continues to be around 4%. Volume growth continues to be around 3%. And again, our job is to encourage consumption in our categories with strong innovation and communication, which we're doing. and continue to do across half two.

The only thing I would add to Andre's comments is in terms of reflecting on consumer behavior, we're also seeing continued flat to declining private label shares in both the United States and in Europe. So that again is relatively reassuring in terms of the stable consumer that Andre rightly referred to.

Next question will come from Steve Powers of Deutsche Bank. Please go ahead.

Thank you. Good morning. I guess, Andre, I'm a little surprised that your currency outlook as it relates to the impacts on the top line didn't move off the negative 1% call you had in place as of October, even as the after-tax profit impact stepped up by the $300 million. So maybe you could just talk about any key moving parts there and whether you've assumed further currency movements or if the full year now effectively assumes spot rates as we've seen in the last few weeks. And then relatedly, I guess I'd love a little bit more discussion of the productivity and pricing levers you have available to you as an offset to those dynamics and whether you see any limitations to implementing them over the balance of the year. I'm asking that in the context that historically 3Q, 4Q gross margins step down sequentially. So I think your guidance seems to have fairly strong operating leverage over the balance of the year in SG&A, but just wanted to see if you could clarify those moving parts. Thank you.

Morning, Steve. I think we are forecasting right now at spot rates, as we always do, both on the P&L side and the organic sales growth side. We're seeing high volatility in currencies, obviously, that are moving on a daily basis based on commentary. So we'll reserve our ability to update here. But for now, we're reflecting spot rates. The impact of foreign exchange rate will mostly hit in the second half. So we saw a lot of the commodity impact in the first half. and the corresponding impact of FX will be mostly in half, too. That is built into our guidance logic that we've communicated. Our ability to deal with foreign exchange, as with any headwind, is a combination of productivity, which we feel very good about for the year, across all productivity buckets, so we're confident in our $1.5 billion productivity guidance on cost of goods sold, and the $2 billion guidance overall, including SG&A, and pricing levers. Pricing is probably most pronounced in enterprise markets, where we see strong foreign exchange rate exposure, but it's going to be a combination of both. All of that is baked in in our guidance commentary, but again, we'll watch this closely because there's a lot of volatility in this, as you know.

Just on pricing, Steve, the, you know, Our business model, as hopefully was reflected again in my comments this morning, is heavily innovation-based. It's at the heart of everything we do. And that's the primary enabler of modest amounts of pricing as we move forward. If you look at our history, again, as a source of potential confidence, and our ability to continue to execute modest amounts of pricing, even as Andre said, in the focus markets. Pricing has been a neutral or positive contributor to our top line growth for 19 of the last 20 years and for 54 of the last 57 quarters. Andre mentioned we have very strong second half innovation programs across markets, and so that should enable us to continue to put some upward pressure on the top line. Again, modest, but we're in a pretty good position with all of that innovation.

The next question will come from Brian Spillane of Bank of America. Please go ahead.

Thank you, operator. Good morning, guys. So just a question or maybe two on China. One, just the 3% in the quarter, just how did Chinese New Year's impact that? So I guess is that kind of reflective of consumption or is there any timing shift, shipment versus consumption? And then maybe just more broadly, John, the market's changing and Does it create opportunities? You know, are you looking now to kind of use your position as a position of strength and expand in China while the market is soft? Just curious if the change in the marketplace at all has changed the way you're thinking about the market strategically.

I can. Hey, Brian. So I think that the China results are not impacted by heavy phasing. Within the quarter, there was phasing in China on the timing of pre-shipments for 11.11, but that kind of evened out across the quarter. So the progress is really what we had anticipated. We're getting into easier comps, part of that. Part of that is SK2 is returning to growth in China at 5%, which is encouraging to see. And the last point I'll make is, On the core brands, we're making progress. We are innovating on hair care across Pantene, head and shoulders. We're innovating on fabric care. We're innovating on Olay, and that is driving progress. We are carefully investing in the fastest growing channel in Douyin to ensure that we create value there, but that allows us to now grow share in that channel. And the last element is, I think, the go-to-market interventions that we've made. We talked about in the last call where we improve our collaboration and synchronization with our core distributors is paying dividends. So all of that is moving in the right direction. I want to be clear, I don't think China is out of the woods. This will continue to be difficult. It will continue to be volatile. As reflected in my guidance commentary, that volatility can drive us to the midpoint or the lower end of the guidance. So we don't want to get ahead of ourselves, but it's good to see the trend going more positively.

And you make a very, very good point on taking advantage of significant change that's occurring in the marketplace, both with regard to consumer behavior and with regard to customer behavior and channels. And we intend to do exactly as you describe, which is to take advantage of those changes. There are a couple things that I just want to bring a little bit more focus to that are very, very important. One is, if you look at our distributor channels, largely feeding the wholesale markets and smaller grocery stores, they were being paid based on total P&G business. And we've changed that. So they're now being paid by category. So they have to deliver against each of the categories that we have products in, in order to be fully compensated. That might not seem like a big deal. That's a big deal. It changes behavior significantly. We've also moved, we've taken advantage of all the changes that are going on to move our China operations even closer to, for example, how we manage things in the US or focus Europe in terms of end-to-end, meaning that the categories own everything from the front end of innovation all the way through to the customer discussions. And that wasn't fully the case, say, two years ago, even a year ago. So those are big changes. The third big change is really reorienting the conversation that we're having internally and externally with our customers to one of market growth and demonstrating how we can be the biggest drivers, their strongest partners in driving that market growth, which is something that everyone wants badly. So that's another example of taking advantage of the current situation to become even stronger and more relevant to our customers. So thanks for asking that question. I think it's an excellent one and it's something we're very much focused on.

Your next question will come from Peter Grom of UBS. Please go ahead.

Thanks, Operator, and good morning, everyone. Hope you're doing well. I wanted to get just some perspective on the input cost environment. You know, I recognize you maintained your outlook for the $200 million after-tax headwind, but we've seen some volatility across some of your key raw materials over the past few months. So, Andre, can you maybe just give us or unpack what you're seeing or expecting across your key cost buckets? And then just kind of looking at the first half impact and the full year guidance, you kind of alluded to this, to Steve's question. Are you anticipating input cost deflation in the back half of the year when we think about our gross margin bridge? Thanks.

Good morning, Peter. Input cost for us, obviously, you can appreciate is a wide variety of different materials and commodities. What I'll tell you, which I think is most relevant for what you're after, is any variation that we see now versus what we already incurred in half one, which is the majority of the 200 million impact that we are talking about, will likely not hit the current year P&L. Because of variance holding and because of our contract structures, any major deviation in terms of oil prices outside of maybe transportation will impact half one of next fiscal year. Most of our materials and commodities will impact the first half of next fiscal year. So we feel relatively good about that end of the equation because it provides stability for the second half, where more of the volatility is, again, in foreign exchange rate. That doesn't mean we don't look at our input costs carefully because, as we said, we need to get ready to deal with it in the first half of next fiscal year, which then comes to John's point on appropriately developing pricing plans with innovation, productivity programs, et cetera. But the variability in the current year, we believe, is going to be limited.

Our next question will come from Andrea Teixeira of JP Morgan. Please go ahead.

Thank you, operator. Good morning, everyone. If we step back from the tone on the first quarter and then now the second quarter fiscal, in regards to the range of guidance for both organic and EPS growth, is it fair to say you're feeling a bit better about getting to the midpoint on the top line, but EPS more pressured given the increased headwinds and effects? I mean, I just want to understand how it changed. And then if so, if any changes, it seems like your productivity is coming in or even your operating leverage is coming in better than anticipated or better than feared, if you will. And related to that, just a clarification about the disruptions you called out in December. in one of your suppliers. I've been getting questions regarding if there is anything in terms of selling, sell out. I understand there wasn't anything material in the quarter, either like catching up to that or anything that we should be aware of into the fiscal third quarter. Thank you so much.

Morning, Andrea. So related to guidance, what I tell you is what I mentioned in the prepared remarks, right? At the moment, when you look at foreign exchange rate, you look at what we've delivered in the front half of the year, we would say we have good visibility and confidence to the lower end of the guidance range, both on organic sales growth and on core EPS. Yes. That doesn't mean that we don't have a shot at delivering the middle of the range. And as I said, if we continue to make good progress in China, if we continue to see some easing of the tensions in the Middle East and therefore business picks up, if Europe and North America continue to deliver, we have a good shot at the top line around the midpoint of the range and corresponding EPS. But at the moment, I would point you to the lower end. On transportation management system interruption, look, we wanted to give you guys visibility to what we were seeing. When we experienced the disruption, we saw a backlog of orders building up that would have been worth about 60 to 70 basis points of the quarter. And we had assumed at that point that we would get rid of half of that backlog through intense work by the team to operate a backup solution and get us back on the main operating system. The team did way better. They were able to not only work through the full backlog and get us back on the operating system faster, they were also able to then process strong orders in late December. There is no impact quarter over quarter driven by the transportation management system outage. So no unusual effect to consider there. Just great work by the team to get us through this without any impact on the quota.

Question will come from Robert Odenstein of Evercore ISI. Please go ahead.

Great. Thank you very much. Just first a clarification on China, and apologies if I missed it, but I know that you're doing better, your brands are doing better, SK2 is doing better, but just wanted to get any commentary on the Chinese consumer, the health of the Chinese consumer as the quarter developed and then into January. So just a follow-up on that. And then my main question is on innovation this year. You sound more upbeat, positive on this, and excited. in terms of what you're bringing out in calendar 2025. Is there any way to quantify that versus prior years? Any way to think whether it's incremental shelf space or the expected impact of the business on the top and bottom line so that we can kind of try to model that? Thank you.

Thanks, Robert. From a Chinese consumer standpoint, as Andre intimated in some of his commentary, it's still a challenge. So that really hasn't changed significantly. There are signs, though, of some improvement. What am I talking about? So, for example, if we just look at the number of Chinese travelers to Korea and Japan, it's up pretty significantly quarter on quarter. We actually see that reflected in our SK2 business in those countries. So that would indicate, you know, more confidence and a willingness to spend. The growth of SK2 itself, and actually consumption growth in that business is a little bit ahead of even our shipment growth, is an indication of confidence. That's, as you know, a very premium price product. But the broad swath of society is not confident and is still struggling. And that's why Andre says, you know, we're not out of the woods. I agree with that statement. And that it will take some time still to get to, you know, dependable growth in China.

And the best data we have, Robert, to confirm what John was describing, past three months market in our categories in dollar terms is down 5%. Past 12 months was down 5%. So... Markle consumer environment pretty much stable but not positive.

Relative to innovation, I don't have a numerical ability to describe the strength of the innovation that's coming to market over the next six months vis-a-vis a year ago. But we are relatively, we have gained confidence in that program in part Because of what we're seeing in the marketplace and what we're seeing in terms of consumer response to, for example, the Tide Evo test market in Colorado. Again, we've delivered what we expected to deliver in the first year. We've delivered in 12 weeks. We're looking at the continued growth of some of our premium innovations in terms of household penetration and market share. I went through a litany of those examples earlier. And then, of course, there are some things that I'm not at liberty to talk about. But in general, your observation in terms of, as you describe, excitement or confidence in our innovation program is strong.

Our next question will come from Bonnie Herzog of Goldman Sachs. Please go ahead. Thank you. Good morning.

You know, I guess thinking about your guidance this year, you know, if your organic sales come in at the lower end, as you kind of touched on, if trends decelerate further, and thinking about gross margin tailwinds, you know, likely moderating this year, curious how much flexibility you have to deliver on your EPS guidance range and then In the context of that, do you see a potential that you might need to lower your reinvestment levels to deliver on your bottom line guidance? Any color on just how to think about your ability to continue to reinvest in your business? Thank you.

Hey, Bonnie, when we went through the years with really significant headwinds in terms of currency, commodities, and FX, And I'm talking there about a 50, 5-0% reduction in our profit over a two-year period because of those items. We increased our spending on innovation. We increased our spending on commercialization of that innovation. And we grew earnings modestly. So that's our mindset. And I just described a strong innovation pipeline. we will fully support that pipeline. And frankly, I don't think it will, but if that means that we come in a little bit lower, then that's what we need to accept, and we'll be very transparent and clear about that if that were to be the case. Currently, it's not, but we're going to continue to invest in both innovation and commercialization of that innovation.

Next question will come from Filipino Florney of Citi. Please go ahead.

Hi. Good morning, everyone. I wanted to ask a little more call on the enterprise market business. You talked about Europe enterprise market still growing solidly. Maybe can you give a little more call on Latin America? How's the consumer general health there in key countries like Brazil and Mexico? And then on the Middle East, you're starting to cycle easier comps. Is your expectation of a return to growth in the second half of 2025? Thank you.

Good morning, Filippo. LA, in aggregate, delivered 3% growth in this quarter on a base of 17%. So quite impressive base period and continued growth across the markets. If you look at the consumers, I would describe Mexico as more difficult right now, but we are making good progress. And I have great confidence in the half two plans that we are executing. And the same is true for Brazil. So my expectation would be an acceleration in Latin America, partially driven by the base becoming a little bit easier, but also given strong plans across those core markets. Europe, enterprise markets were up a point in the quarter on a base of 8% growth. Encouragingly, we are growing volume share in enterprise markets in Europe by 60 basis points. Market growth still very strong. So if we feel good about the market context, but also about our own ability to execute. I was just there with our CEO last week. The innovation plans are very strong. The go-to-market plans are very strong. The stores look phenomenal, and the opportunity is huge. And the profitability we have in both Latin America and in Europe enterprise markets allows us to remain fully invested in that innovation and the support thereof. AMA, Asia Middle East Africa, Look, the main driver here will be stabilization in the Middle East. We hope that that progress is sustaining and we can go from there, but I think it will remain a more difficult environment for us through the second half.

Your next question will come from Chris Carey of Wells Fargo Securities. Please go ahead.

Hi, everyone. Thank you for the question. I'd like to ask a few category specific questions. I'll count this as one single category question if you'll allow. In the family care business, the double digit growth you saw, would you attribute most of that to timing with, you know, some sort of reversal expected in the next quarter? in the oral care business. It's the second quarter consecutive of low single digit, which is a bit below trend than what we've seen over the prior one year period. And then, you know, just in the baby business, you did highlight that you'll be making some merchandising investments. You know, John spent some time on the resilience and longer-term history of pricing at P&G as a contributor to organic sales. Clearly, this is one of those categories that has been a bit more challenged over time, and you're leaning in a bit more on investments. Can you expand on that a bit more? What drives those sorts of decisions, and why now? So, just, you know, those three kind of category questions and, you know, any kind of timing dynamics, specifically with family care, that we should be thinking about going into next quarter. Thank you very much.

All right. Good morning, Chris. Let me take them one by one. So family care, we saw very strong shipments and very strong consumption, most importantly. And as I mentioned, we had the port strike in October, and we had a hurricane in October. Both of those led to pantry loading from a consumer standpoint. So there was some pantry upstocking, clearly, in October. We also saw strong shipments in late December in anticipation of a January merge event. That's typical. We've had the same thing happen last year. But there is some increased pantry inventory. History would tell us that consumers tend to hold on to that pantry loading for quite a while. We've seen this during COVID, and we always expected it would come out. It never did. So hard to say what the going impact is for the year. I think we've appropriately protected for that in the guidance. But it's pantry inventory loading, and we expect the majority of that will sustain through the next quarter. Oral care, I would point you to two things. Number one, we're rolling out the full lineup of IO innovation, both IO10, so up the value chain, and IO2, down to lower price points. And as we do that, I think the full opportunity across the power over care business will become more accessible to us. Even in high penetration markets like in Europe, lowering the price point with IO2 will give us access to more consumers. We have a very strong marketing campaign building on the insight that power over care removes 100% of plug, while manual brushing only removes 50% of plug. That seems to resonate well with consumers. We also have the strongest paced innovation program, including heavy focus on whitening, where we had an opportunity to strengthen. So all of that gives me confidence that in the second half we'll see acceleration. Last point on baby. The reason why we want to make investments on baby, both in communication and potentially in promo, is due to innovation. We have talked for a while about the opportunity to continue to innovate across the entire lineup. We've seen the LUFS innovation now hit the market in September. We see sequential share growth on LUFS. So we want to give consumers the incentive and the opportunity to try those propositions while continuing to drive the premium end of the portfolios, swatters, and cruisers. So it's really about a combination of combining innovation with strong in-store visibility and incentive to try and strong communication to ensure consumers understand the benefits. All of those, the foundation to create growth in baby, which is one of the tougher categories to do so.

Next question will come from Olivia Tong of Raymond James. Please go ahead.

Great. Thanks. Good morning. Sorry, a two-parter here. First on China, you mentioned you expect continued normalization. So How much of this is category growth versus your market share improvements as you cycle less demanding comps? And I ask that because comps aren't particularly demanding in second half, of course, but they do get a little less easy than the minus 15 that you're comping this quarter. And then just if you could talk briefly about the level of investment necessary to achieve your broader goals, not specific to China, but more broadly, does it have to go higher or can you leverage many of the brand support investments that you talked about in answer to... a different question that you've already made. Thanks.

So, hey, Olivia, on China, what I tell you is it's a bit of both, right? We would expect some improvement as the market cycles tomorrow for giving comps, and we for sure would expect some improvement in our business. We talked about all the interventions we've made on innovation, on brand building, on go-to-market, including the distributor model that John elaborated on. So it's going to be a bit of both. Unfortunately, a bit of both means we have two hard to predict elements here. So we hope this is going to result in a more neutral organic sales growth contribution of China in the back half, but we also are fully aware that this could go either way. From an investment standpoint, my take on this would be you see us adjusting based on the opportunity. We have 30 basis points of incremental investment in the front half. That was more moderate than what you would have seen in the base period or even a couple of years before. And some of the experimentation that we talked about in how far can we push frequency and reach I think we concluded where it makes sense and where it doesn't make sense. So we're now more clear on where that playbook goes. And we're focusing mostly now on optimizing within that playbook and improving content quality as we go into the half to innovation. So we will continue to invest where it makes sense, albeit probably at a slower pace than what we've seen in the last years.

Yeah, I would just add a couple things in response to your question, Olivia. Just one nit for clarity. The minus 15 isn't what we're comping from an index standpoint. That's a sequential number, last quarter. So just for clarity on that. In terms of investments in commercialization and advertising and other forms of marketing, I agree with what Andre said. At the same time, he talked about optimizing within that context. We're making significant strides to be more profitable in the fastest growing channels in the country. So while we will be opportunistic in investing, I expect as well we'll be saving. For example, bringing the support of key opinion leaders in-house and utilizing some of our R&D resources for that activity. That saves a bunch of money. And our testing shows that it's as or more effective. So it's not as simple as the level of reach and frequency, which are important, But it's also the cost of delivering that which we're working to bring down.

The next question will come from Kevin Grundy of BNP Paribas. Please go ahead.

Great. Thanks. Good morning, everyone. I'd like to pivot to capital allocation. Two-part question. One, just updated thoughts on appropriateness of M&A as a potential avenue. to drive shareholder value and what looks like it's going to be a slower growth environment here. And then two, with respect to buyback, you know, consumer staples stocks, including proctors, have underperformed the market. Valuations are below historical averages versus the S&P 500. In that sort of context, has there been any school of thought internally to accelerate the pace of share repurchases as an avenue to drive shareholder value? So thanks for that.

Thanks, Kevin. I'll take the M&A question. Andre can add to it and then move to your share repurchase question. The answer is the same as it's been for some period of time here, which is that it starts with, in most of our categories, we wouldn't contemplate acquisition being part of the growth model in kind of any economic environment simply because Our market positions as typically the number one and sometimes both the number one and number two brands would preclude any acquisition of any size. There are two categories that we compete in that are attractive, that we like, that are much more fragmented in their current constitution. We've talked about those before. One is personal health care. Another is skin and other parts of specialty beauty. We're going to continue to be extraordinarily responsible in regards to pursuit of any potential acquisitions. We don't engage in hostile attempts So basically assets have to be available and then we have to be able to make sense of the purchase of that asset in a way that leaves us highly confident that we can create value. So that's kind of it from an M&A standpoint. Before I turn it over to Andre, just one comment on share repurchase. As Andre said in his prepared remarks, we're going to be returning between dividend and share repurchase $16 to $17 billion to shareholders this year. And as a general element of our capital allocation approach, I would expect significant cash return to shareholders to continue to play prominently. But with that, I'll turn it over to Andre.

Agree with everything you said on M&A, John. It's nice not to have to do it. So we can do it if it makes sense. On the capital allocation, Kevin, nothing new here. We will continue to aggressively fund the growth in the business. We will continue to pay the dividend, likely increase the dividend. We will do M&A if we find a target that makes sense and is willing to play. And the rest goes to shareholders in share repurchase. That's really the simple logic that we apply. So it's an outcome rather than a target.

And there isn't a lot of, if you will, publicity about a special share repurchase program or, you know, a newly approved share repurchase program. And why is that? It's because we do it every year. And we do it at the highest levels we can. And as Andre said, we'll continue to pursue that approach.

Your next question will come from Mark Astrakhan of Stifel. Please go ahead.

Great. Thanks. Good morning, everybody. Two quick ones. Just remind us on the approach to offset FX pressures where we're pronounced in places like LATAM where the dollar has strengthened via pricing. And then just returning to FK2, it seems a little bit like the performance was a little bit better than anticipated at Investor Day where I think Alex had highlighted mainland China improvements would suggest obviously on China. a little bit weaker at the time, but your commentary would suggest otherwise. I guess, is part of the improvement that the Chinese consumer perception of the brand, the geopolitic angle, that improved? Is it category improvement? Is it both? Just any color there would be helpful. Thank you.

Hey, Mark. Good morning. Approach on foreign exchange is not different. So I just want to confirm we will In enterprise markets mainly, there's a relatively good market discipline to price for foreign exchange rate. We want to be part of that, and we will combine pricing with innovation wherever that's possible and reasonable. That approach has worked well in Europe enterprise markets, in LATAM and across AMA, and we'll continue to follow that playbook. On SK2, you're right. I think it's... It's actually good to see the brand strengthening with China consumer, number one. The whole dynamic of Japanese brand sentiment, I think, is easing. We, most importantly, I think, have made significant investments in brand building. As soon as we were able to get back into broad media coverage, we've done so with very strong amplification of the benefit and the efficacy of the product. which has worked well. We've upgraded our department store presence, both from a counter standpoint and from a personnel standpoint, to ensure that consumers can see us, find us at high-quality locations. And we've innovated. We've launched a super premium proposition called LXP, which is doing very well in the market and, again, is contributing to the brand equity that we want to build and reestablish. So all of that is contributing. And the last element I would tell you is consumption is actually stronger than organic sales. Specifically in travel retail, the sales number is still negative, but the consumption continues to return in line with John's earlier comments that we also see increased Chinese travel to different locations. So generally, I think more positive outlook on SK2. You're right than what we would have given at investor day.

Just to build a little bit on that, the SK2, you never know how you've got this cross-current of geopolitical sentiment and brand sentiment, as you rightly point out in your question. The geopolitical dynamic, one of the ways we track that in terms of how it affects consumer behavior is through social media references. And those are down significantly in terms of, so in other words, the number of positive comments is much higher than the number of negative comments, and that's continued to improve. So yes, as Andre confirmed, that is an improvement there, is part of what's going on. But the branding part that he also mentioned is an equally significant component, which he suggested. If you look at the premium skincare segment right now, SK-II is the fastest growing brand within that segment. Now, growth on SK-II is going to be strange to follow simply because of the base period dynamics. So the important thing to look at is what's happening to consumption trends quarter on quarter. And as Andre indicated, that's given us some confidence.

Our next question will come from Komeo Gajrawala of Jefferies. Please go ahead.

Hey, everyone. Good morning. I know to Chris's question, you answered for a few different categories. But if we can maybe dig in a little bit more on consumer health or health care, comp was a bit easier, slowed down a little bit. If just anything in there that we should be aware about, interesting to know. Thanks.

The trends there, you know, year to year, quarter to quarter, are most impacted by the cough cold season, which really hasn't existed significantly, at least through the month of December, which is the period of time that we're reporting results for currently. We continue to be very happy about the growth delivery and the growth prospects for the broader PHC business and have brands outside of the cough cold space that are growing very well. By the way, within the cough cold space, we continue to build a share. So that's kind of what's going on, and I don't want to wish for illness, but that's Less illness will have slower growth. More illness will have higher growth.

Our family is contributing heavily to that growth, by the way.

And I'm sitting right next to you.

That's not good. And our next question will come from Edward Lewis of Redburn Atlantic. Please go ahead.

Thanks, operator. Yeah, I just wanted to I guess look at the components of the focus on superiority plan, and particularly on the consumer value side. So look at this quarter. It's another quarter of it's flat pricing. But if I look back over, say, the last three years, on average, pricing is still up around 4%. And you're clearly getting positive volumes. So I wonder if you just talk to sort of what the consumer value side of the focus on superiority is telling you, and whether we should then, whether you should have confidence about possibly being able to take more pricing sort of in subsequent quarters or years with the evidence you're seeing from the data you're getting from the focus on security plan?

I think we will be taking more pricing as we move forward. As we bring more, as we bring innovation that produces a more efficacious product and a better experience to consumers, The data that you referenced do indicate to us that we have the ability with that combination to continue contributing to the top line through a modest amount of pricing.

The next question will come from Linda Bolton-Weiser of DA Davidson. Please go ahead.

Yes, hi. You've talked quite a bit about beauty in China and certainly the SK-II improvement is contributing to that beauty improvement we saw in the quarter, but I was curious about the US side of it and whether what you're doing in Olay in the US, like focusing more on Regenerist as a core grower, if that's paying any benefits in terms of market share changes and And also just in beauty overall, it was a little curious why volume was actually down 1% for the whole segment for you, whereas volume had been sort of flat to up in the previous quarters. Thank you.

Hey, Linda. Good morning. Look, let me start with North America, and it's similar. Beauty is a story of pockets of real strength. and some pockets of opportunity. And that's true for North America and the globe. If you look at our antiperspirant and deodorant business in the U.S., it's growing 11%. And we're the number one whole body segment brand or have the number one position across our brands in that whole body segment. Personal care, North America is growing 16%. So again, real source of strength. Hair care, North America is up 3% on a base of 15%. So real strength. You point out skincare is an opportunity. Skincare is down in North America, double digits. And we are working to increase the innovation specifically on the jar business. The new innovation that we've launched, so Olay Melts and Super Serum, those are doing very well, but they are just not big enough yet to offset the decline in the core business of jars where we saw some distribution changes in the club channel. but also, I think, a shifting consumer benefit space that we need to address. Similarly, at the globe, same logic, strength on APDO, strength on personal care, strength on hair care, with an opportunity on skin care. And again, same dynamic there. The only point I'll call out in China, for example, the Olay brand has been historically focused on tone benefits The market is shifting more towards anti-aging or multi-benefit products. And so we've launched innovation there, which is going in that direction. So work to do on skincare, real strength across the other categories within beauty.

Relative to your question on volume, Linda, China beauty broadly has a higher presence in China than any of our other categories, and we're still not out of the woods, we'll use that expression again, on volume in China. So while sales were three, I believe volume was minus six. I feel comfortable that's going to continue to improve, but when you look at beauty volumes, you have to realize that China weighting, which in many periods has been a very positive thing, but now presents a challenge.

The next question will come from Robert Moscow of PD Cowan. Please go ahead. Robert, your line is live. You may be muted.

Sorry about that. Can you hear me now? We can hear you. Yeah, my apologies. I wanted to ask about pricing in a different way. This is the first quarter where pricing has been flat in many quarters. And is there any scenario you could imagine where pricing turns negative? Or is there just a line in the sand here where that just won't happen? And then secondly, on mix, mix is positive. And I want to know what's driving that. Is it geographic? Can we assume that if Europe and U.S. continue to outperform, will that be positive to your mix, or is there something within the categories that's driving it instead? Thanks.

I can start. John, jump in, please. So price is an outcome that consistently helps our organic sales growth number. I think John mentioned this. 54 out of 57 quarters positive contribution of price mix to our organic sales growth. And the timing of pricing outside of foreign exchange rate pricing or heavy commodity cycles, which has driven a lot of the pricing in the base periods, is mostly driven by our innovation cycle. Because we like and we tend to take pricing with innovation. And that just falls in different quarters. But generally that effect of modest pricing with inflation or foreign exchange rate in enterprise markets and pricing for innovation is driving that consistent contribution of pricing to our organic sales growth numbers and will continue to do so. What is driving mix here? I would focus less on geographic mix. I think what we're seeing is trade up within our categories. And you see that impacting the top line positively and impacting the growth margin line negatively. So as consumers trade up from liquid laundry detergent into unit dose or even within unit dose to the highest performing variants, they pay more per unit and we make more profit per unit, but mathematically the growth margin is lower. That's really the effect you see on the top line positive effect of MIX. on the growth margin line, the slightly negative effect of mix, which is exactly what we want. So healthy dynamics on both. We expect both of those, the pricing dynamic with innovation and the mix dynamic to continue.

And we're going to, you know, there is no straight line or red line on pricing. We're going to do what maximizes, we're going to make the choices that maximize value. and will be responsive to consumer needs in that context. But I don't think in all the time that I've been working on this business, I've ever thought about the question of would we have negative pricing. It's just not part of our thought process. We're focused on value creation. And as Andre said, pricing is kind of an outcome of that series of decisions.

Your final question today will come from the line of Corrine Wolfmeyer of Piper Sandler. Please go ahead.

Hey, good morning. Thanks for taking the question. I just want to touch a little bit on how you're feeling about or how your conversations with some of your retail partners have been going really across the globe. What are the confidence levels you're feeling with them? Are they still being cautious with inventory orders? Is that more normalized? And then how are you thinking about that heading into the back half of the fiscal year? Thanks.

So I just spent time with two of my counterparts who are CEOs of large European retailers. I had a top to top meeting with the largest customer outside of the US just yesterday. The entirety of those conversations is focused on market growth and how, as we pursue market growth, we can do that most efficiently. So working together, we call it one supply chain, to figure out how, and there's a lot of power in that because we used to optimize parts of our respective supply chains, but bringing that view all together has produced significant results both for ourselves and our retail partners. So right now, the conversation is very positive, generally, and focuses on the opportunities that we have in front of us. In the US, so that's kind of Europe. In the US, in the retail environment currently, you have some retailers who are doing extraordinarily well and some retailers and channels of trade that have more challenges. And you can imagine that the conversations are slightly different across that universe of customers. But in general, follows the same pattern that I just described for Europe.

All right. I think that concludes our call. Again, in summary, good quarter, good progress across multiple geographies, cautiously optimistic with a lot of moving pieces throughout the second half. Thanks for your time today. We're available for any follow-up questions, so please don't hesitate to reach out and have a great rest of the day. Thank you.

That concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.