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. Joining me on the call today is John Chevalier, Senior Vice President, Investor Relations. I will start with an overview of results for the first quarter of fiscal 26 and spend a few minutes on strategy and innovation and will close with guidance for fiscal 26 and then take your questions. First quarter results reflect strong execution of our integrated strategy in a difficult geopolitical, competitive, and consumer environment. This marks 40 consecutive quarters of organic sales growth and keeps us on track for the 10th consecutive fiscal year of core EPS growth. Organic sales rounded up to 2%. Volume was in line with prior year. Pricing and mix were each up 1%. Growth continues to be broad-based across categories and regions. with eight of 10 product categories growing or holding organic sales. Skin and personal care led the growth up high single digits. Hair care, grooming, personal health care, home care, and baby care each grew low singles. Oral care and feminine care were in line with prior year, and fabric care and family care were each down low single digits. Six of seven regions held or grew organic sales. Focus markets were up more than 1%. Organic sales in North America were up 1%. Consumption in our categories decelerated throughout the quarter, with unit volumes essentially flat for both markets and P&G brands. Price mix added a point of growth. The pricing for innovation and supply chain costs that was announced on June 15th went into effect on September 15th. This caused some trade inventory volatility in the quarter, but shipments were largely in line with offtake for the full quarter. European focus markets organic sales were equal to prior year, with strong growth in France and Spain, offset by a softer period in Germany and Italy. Greater China organic sales grew 5%, another quarter of sequential improvement and positive momentum. Six of seven categories grew organic sales in quarter one, with Pampers and SK2 each growing double digits. This progress is the result of interventions made across the digital commerce and distributor business, along with strong innovation and execution of the integrated strategy. Enterprise markets grew more than 1% for the quarter. Latin America organic sales were up 7%, with strong growth across Mexico, Brazil, and the balance of smaller markets in the region. Organic sales in the European enterprise region were in line with prior year, and the Asia Pacific Middle East Africa enterprise region was down low singles. Global aggregate market share was down 30 basis points, 24 of our top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.99, up 3% versus prior year. On a currency neutral basis, core EPS also increased 3%. Core growth margin was down 50 basis points and core operating margin was equal to prior year. Strong productivity improvements of 230 basis points with healthy reinvestment in innovation and demand creation. Currency neutral core operating margin was up 40 basis points. Adjusted free cash flow productivity was 102%, a very strong Q1 result. We returned $3.8 billion of cash to share owners this quarter, $2.55 billion in dividends, and $1.25 billion in share repurchases. In summary, a solid quarter to start the year in what continues to be a challenging environment, including heightened competitive activity in the US and in Europe. Moving on to strategy, given the market and competitive challenges we face, now is the time for increased investment in and flawless execution of our integrated growth strategy with the consumer firmly at the center of everything we do. We will drive superiority in every part of our portfolio across all value tiers where we play, all retail channels and all consumer segments we serve to grow categories, provide value to consumers and customers, and create value for shareholders. We will strengthen the integration of all vectors of superiority, starting with a very strong innovation program this year, building stronger core brand propositions and growing bigger adjacencies and forms to enhance consumer delight, core and more. In U.S. fabric care, we recently started shipments of Tide's biggest upgrade to liquid detergent in 20 years. Tide's boosted formula combines its ultimate grease and stain fighting technology with an advanced perfume innovation resulting in laundry that's cleaner, wider, brighter, and fresher. This significant innovation on liquid detergent strengthens the core of the Tide franchise as we continue plans for expansion of Tide Evo, our new laundry detergent developed on our breakthrough functional fibers platform. Evo has started its first stage of national expansion with an online launch of Tide Evo free and gentle. Evo offers superior cleaning performance in a recyclable package, no plastic bottles or water. In test market stores, Evo sales have been highly incremental to category growth, and retailer demand has been well above initial expectations. We're in the process of adding manufacturing capacity to prepare for an eventual national launch. We have a strong bundle of innovation launching across the US baby care business this fall, including improvements on Pampers Easy Ups, Swaddles, Cruisers, and the first phase of restage to our mid-tier Pampers Baby Dry line. Each are important upgrades to drive consumer trial and delight, especially considering the ramp up in competitive promotional activity in the category. In Greater China, premium body wash innovation on both the Safeguard and Olay brands drove 9% personal care growth in the quarter. Safeguard Detox Body Wash is designed to provide superior deep pore cleansing and skin transformation. The recent restage across all elements of superiority has accelerated market conversion from bars to liquids and from basic products to premium offerings. Olay Premium Body Wash, launched in July, contains Olay facial skin essence and the first ever sparkling liquid to provide visible skin benefits and an unforgettable showering experience. Since launch, the new premium line has grown over 30% in offline channels and 80% online, driving category growth and Olay share growth. In Latin America, personal health care grew organic sales plus 15% in quarter one, driven by improved execution of the integrated superiority strategy. A combination of strong product and packaging innovation on the VIX brand, compelling consumer communication, strong retail execution, and superior consumer value drove both growth across markets and the region. Brazil led the growth up nearly 30%, along with growth in Mexico, Peru, Colombia, and smaller distributor markets. Our innovation program is designed to strengthen the core brand propositions combined with full media and in-store support across the portfolio, where we add new elements to our brands like we are doing with Tide Evo, we ensure the more is sufficient in size to warrant full brand communication and go-to-market support. Superiority integrated across all five vectors. We will continue to accelerate productivity in all areas of our operation, including the recently announced restructuring work to fuel investment and superiority, mitigate cost and currency headwinds, and drive margin expansion. We have an objective for growth savings in cost of goods sold of up to $1.5 billion before tax, enabled by platform programs with global application across categories with supply chain 3.0. We have line of sight to savings for improved marketing productivity, more efficiency, greater effectiveness, avoiding excess frequency and reducing waste while increasing reach. We're taking targeted steps to reduce overhead as we digitize more of our operations. Visibility to more savings opportunities is increasing as the businesses continue to build their three-year rolling productivity master plans and as we accelerate productivity with our restructuring efforts. We will continue to actively manage our portfolio across markets and brands to strengthen our ability to generate U.S. dollar-based returns in daily use categories where performance drives brand choice. The portfolio choices we are making as part of the restructuring program include different go-to-market choices in some geographies, surgical exits of some categories, brands, and product forms in individual markets. We've announced several steps so far, redesigning our business model in Pakistan to an import model with local distributors, managing trade relationships, discontinuing laundry detergent bars in India and the Philippines, exiting several low-tier oral care products in some enterprise markets, focusing the Olay brand on the most productive European markets, and streamlining our Braun device portfolio in focus and enterprise markets. These steps are aimed at accelerating growth as we move further through the restructuring program. Also, these portfolio moves enable us to make related interventions in our supply chain, right-sizing, right-locating production to drive efficiencies, faster innovation, cost reduction, and even more reliable and resilient supply. As part of the two-year program, we are making additional organization, process, and technology changes to enable an even more agile, empowered, and accountable organization, making roles broader, teams smaller, and faster, and work more fulfilling and more efficient, actively reducing, eliminating, or automating internal work processes supporting teams with data and technology to increase capacity and capability to focus on integrated plans to deliver superior propositions to all consumers versus spending time internally. We expect to reduce up to 7,000 non-manufacturing roles or up to 15% of our current non-manufacturing workforce over this fiscal year and fiscal 27. We're making very good progress with organization designs to deliver this objective. While not easy, we firmly believe this will further empower our highly capable and agile organization that is ready to step forward to create value for all consumers, customers, and shareholders. We will continue our efforts to constructively disrupt ourselves, our industry, changing, adapting, creating new ideas, technologies, and capabilities that will extend our competitive advantage. These strategic choices across portfolio superiority, productivity, constructive disruption, and our organization will continue to reinforce and build on each other. We remain confident in our strategy and its importance, especially in challenging times, to drive market growth and to deliver balanced growth and value creation. A long-term focus on the strength of our brands and categories is the best way to position ourselves for stronger growth when the economic climate and consumer confidence improves This starts with a strong innovation plan and healthy investment to drive trial and user growth, the plan we are executing. As we said in the July earnings call, there are times when bigger steps are needed to bolster growth and value creation. The teams are on it. Moving on to guidance for fiscal 2026. As you saw in our press release this morning, we're maintaining all guidance ranges for the fiscal year. Organic sales growth of inline to plus 4%, Global market growth for our portfolio footprint is around 2% on a value basis at the center of our guidance range. As a reminder, this guidance includes 30 to 50 basis points headwind from product and market exits that are part of restructuring work. As you consider phasing of top-line growth, recall that Q2 last year benefited from two spikes in orders related to port strikes. the actual port strike that took place early October, and the concern of another strike in January. These dynamics will likely result in quarter two this year being the softest growth quarter for the year, with stronger growth in the back half. On the bottom line, core EPS growth in line to plus 4%, which equates to a range of 683 to 709 per share, or 696, up 2% in the center of the range. While we delivered strong EPS growth in quarter one, we expect modest earnings growth over the balance of the year as investments in innovation and competitiveness increase, particularly in the U.S. and in Europe. This outlook includes a commodity cost headwind of approximately $100 million after tax and a foreign exchange tailwind of approximately $300 million after tax. Our fiscal 26 outlook now includes approximately $500 million before tax in higher costs from tariffs While this is an improvement to the isolated tariff impact, keep in mind that there are other offsetting impacts, including related supply chain investments and adjustments to pricing plans also assumed in our guidance. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20 to 21% for fiscal 26. combined a $250 million after-tax headwind to earnings growth. We are forecasting adjusted free cash flow productivity in the range of 85% to 90% for the year. This includes an increase in capital spending as we add capacity in several categories and as we incur the cash costs from the restructuring work. We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion in common stock, combined a plan to return roughly $15 billion of cash to shareholders, in fiscal 26. This outlook is based on current market growth estimates, commodity prices, and foreign exchange rates, significant additional currency weakness, commodity or other cost increases, geopolitical disruptions, major supply chain disruptions, or store closures are not anticipated within the guidance ranges. So again, a solid start to the year, growing sales, and earnings and returning strong levels of cash to share owners as we look to strengthen investment and demand creation throughout the balance of the fiscal year. We continue to believe the best path to sustainable balanced growth is to double down on the strategy. Excellent execution of an integrated set of market constructive strategies delivered with a focus on balanced top and bottom line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. We are taking proactive steps to improve the execution of the strategy and our ability to deliver our growth and value creation objectives. 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, press star followed by two. Your first question comes from the line of Dara Messinian of Morgan Stanley. Please go ahead.