Procter & Gamble Company (The)

Good morning and welcome to Procter & Gamble's quarter-end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its investor relations website www.pginvestor.com a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chief Financial Officer,

Good morning, everyone. Joining me on the call today are Kerry Cohen and Jon Chevalier, our Senior Vice Presidents of Investor Relations. I'll start with an overview of results for the first quarter of fiscal 27 and discuss the progress we are making against our near-term priorities and longer-term transformation efforts. I close with guidance for fiscal 27, and then we will take your questions. We are pleased with the continued acceleration in top line results in our first quarter of fiscal year 27. Bottom line results reflect the strength of the top line progress and productivity to offset the higher costs from raw materials, energy, and increasing freight costs, primarily in North America. We expect these headwinds to increase in the next few quarters. Taken together, we remain on track to deliver within our guidance ranges for the fiscal year. Before I share the detailed results, you may have noticed in the press release beginning this fiscal year, we will report sales growth to one decimal place at both the company and the sector level. And with that, organic sales increased 4.0% versus the prior year. We see sequential progress from our targeted interventions at the category and country level. By delivering superiority, we are winning with consumers and driving improved consumption semester over semester into this first quarter. Volume increased 2.4 points, pricing was up 0.4 points, and mix was up over a point for the quarter. A solid balance across top-line drivers and with a majority of growth driven by volume. We delivered broad-based growth across the business with each of our 10 product categories growing organic sales. Fabric care, home care, baby care, hair care, skin and personal care, and grooming Thank you very much. We now have over 70% of our top US customers holding or growing share, up from less than 10% in the first half of fiscal 26 and 50% in the second half of last fiscal year. Europe region was up 4% with all key markets growing, that by high single digit growth in the UK. Greater China organic sales grew 8%, continued strong growth in what remains a challenging consumer environment. Pampers and SK2 led the growth, with SK2 up 12% and Pampers up close to 50%, benefiting from near-term competitive dynamics. Enterprise markets in aggregate grew 5% for the quarter. Note the makeup of enterprise markets has changed this fiscal year, now made up of Latin America, Asia-Pacific enterprise, and our newly combined IMETA or India, Middle East, Turkey and Africa region. This change emphasizes the growth opportunity across emerging markets and creates a one Europe region structure to simplify the Europe operating framework. Latin America organic sales grew 4% led by Mexico up double digits and Brazil up low single digits. Organic sales in the IMETA region grew 8% APAC Enterprise was up 2%, still impacted by our portfolio restructuring impacts. Global aggregate market share is flat versus prior year across all time periods. 29 of our top 50 category country combinations held or grew share fiscal year to date, up from 25 in the second half of last fiscal year, also a reflection of the progress being made across the portfolio. On the bottom line, core earnings per share were $2, up one point versus prior year. On a currency-neutral basis, core EPS was in line versus prior year. Core growth margin was down 150 basis points, and core operating margin was down 80 basis points versus prior year. Strong productivity improvement of 250 basis points was offset by commodity and freight costs in addition to demand creation investments. Currency Neutral Cooperating Margin was down 90 basis points. Pre-cash flow productivity was 93%. We returned $3.9 billion of cash to share owners in this quarter, $2.6 billion in dividends, and $1.3 billion in share repurchase. In summary, this was a strong start to the year. Positive sales and share trends across markets Consistent with the semester to semester progress we expected behind the interventions being executed across categories, countries, and customers. As we move forward, the fundamental elements of our strategy remain unchanged. We are in the right categories to deliver against our growth goals. These categories are our core competency. We know how to grow these categories and win with superior innovation, better execution, and clear communication. We know how to create value in these categories and we have a proven track record to fund growth via productivity. We have an organization focused on delighting consumers and winning with our retail partners. What we are changing is nearly every part of our execution framework to identify superiority gaps even faster and respond quickly to changes needed to product, package, communication, retail execution or value to ignite user growth of our brand. The adjustments we have made are starting to take hold. Let me share a few examples. US Pantene Abundant and Strong started with a deep insight and consumer connection. More than 50% of women will experience noticeable hair loss in their lifetime. In the United States alone, female pattern hair loss affects approximately 30 million individuals. Pantene's Abundant and Strong technology grew from research linking scalp oxidative stress to poor scalp conditions and hair quality. This led to the development of Pantene's abundant and strong collection with a provitamin complex proprietary formulation. Consumers are delighted with improvements in hair strength and less shedding with delightful fragrance and a tingling sensorial experience in the shower. Pantene is delivering mid-single-digit sales growth in the U.S. and is growing share. Pampers Prestige has been a significant growth driver of our China baby care business with mid-teen growth consistently over the past eight quarters. So we took the same consumer insight and brought the very best diaper available to the U.S. with the Amore launch in the second half of last fiscal year. Amore is our most advanced and premium diaper combining proprietary skin health technologies and premium materials for superior protection and cashmere-like skin comfort. Built on an engaging social first brand building model and inspired by insights that fewer babies in each household means parents spend more per baby Amore has been one of the most successful launches across multiple retailers contributing to Pampa's share growth and projected to exceed $100 million in sales in year one In the Gulf cluster, UAE, Oman, Qatar, Kuwait and Bahrain The percentage of sales growing household penetration increased fourfold, from 15% in fiscal 25 to over 60% in fiscal 26, despite the market volatility. Ferry Dish delivered double-digit growth in fiscal 26 into the first quarter of fiscal 27 after the team transformed how consumers engaged with Ferry. They created a consumer-led, user-generated content campaign that brought to life the toughest dishwashing moments Consumers faced generating a record-breaking engagement at 20 times our branded content benchmark. As a result, Ferry reclaimed its position as the market's leading equity brand and grew the category by 4 points and P&G's share by 2 points. The other examples we've discussed recently also continue to deliver strong results, including U.S. Tide Boosted, EndEvil, Mexico Fabric Enhancers, Brazil Hair Care, and U.S. Personal Care. While we continue to execute our plans in the near term to return to sustainable growth, we're also making progress on a long-term reinvention of P&G capabilities to become what we call the CPG company of the future. We are adapting our capability systems and organization structure to take advantage of significant growth opportunities we see across our markets and overcome the external landscape changes impacting our industry. We are leveraging the deepest and most extensive consumer understanding in the industry, driven by learning and data from millions of consumers. This understanding leads to insights and signals that drive faster and better innovations, grounded in industry-leading research, development, modeling, and testing capabilities. We have the strongest ability to authentically engage consumers, building on our trusted and loved brands. We have widespread access to consumer paths to purchase. We have strong retailer partnerships and our supply chain is a differentiator where a resilient agile supply chain is critical to respond to global volatility and cost pressures. We have the highest output productivity program in the industry. Winning with consumers is what matters and the companies that can best respond to the changing environment and leverage the fast evolving technologies and capabilities to follow the consumer closely are the ones that will truly lead the industry. We intend this to be P&G. Moving to guidance, as you saw in our press release this morning, we are maintaining our fiscal 27 guidance ranges across organic sales, core EPS, and free cash flow productivity. We expect the environment around us to remain volatile and challenging, from cost to currencies to consumer, competitor, retailer, and geopolitical dynamics. Our all-in-gap outlook now includes the thorn business, which closed in early October. We continue to expect sales growth of 1 to 3%. We started the year above this range, but we expect growth to be volatile quarter to quarter due to base periods dynamics. Also, we'll be closely watching consumer demand as high fuel and energy costs persist into the fall and winter. As a reminder, our top line guidance includes roughly 30 to 50 basis points headwinds from product and market exits that are part of our restructuring work. Our bottom line guidance is for core EPS growth of 0-3% versus prior year and this equates to a range of $6.89 to $7.11 per share. This outlook includes a cost headwind of approximately $1.4 billion after tax, driven by higher raw material, energy and transportation costs, and other premiums resulting primarily from the conflict in the Middle East. This estimate assumes an effective Brent crude oil price of $100 a barrel. Due to the duration of higher oil prices, we now expect materially higher cost headwinds in Q2 and the second half of fiscal 27. We expect the foreign exchange headwind of approximately $50 million after tax. We also expect approximately $300 million of higher net interest expense after tax, around $150 million higher due to the debt issuance related to recent M&A activity. These impacts start in the second quarter. Finally, we still forecast $150 million after-tax of lower non-operating income. We now expect that our core effective tax rate will be in the range of 20 to 21%. Combined input costs for an exchange items below the operating line will be a roughly $1.9 billion after-tax headwind of earnings in fiscal 27 or 79 cents per share, 11% of fiscal 26 core EPS versus the 56 cents per share or 8% impact shared in July earnings call. We expect capital spending will be between 4.5 to 5.5% of sales. We are forecasting free cash flow productivity at 85% to 90% for the year. We expect to pay over $10 billion in dividends and to repurchase approximately $5 billion of common stock combined a plan to return $15 billion of cash to share owners in fiscal 27. The guidance range reflects the continued acceleration toward our long-term algorithm. It is a balanced outlook between top line and bottom line despite significant cost pressures and reflecting current market realities for consumer demand. We will maintain strong investment in the business balanced by a strong productivity program with an intent to improve results semester by semester and year by year. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruptions, tariffs, major supply chain disruptions, or store closures are not anticipated within the guide range. In summary, challenging markets Like the ones we compete in today are an opportunity for P&G to lead. We have the brands, the capability, and most importantly, the people required to win. We are confident in the short-term progress we are making behind deliberate plans to drive user growth of our brands and execution of excellence across each category and country combination. It won't be a straight line, especially quarter to quarter, and volatility will remain a near to mid-term reality but we are building momentum with consumers and customers and we are excited about the long-term opportunities ahead. 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 Lauren Lieberman of Barclays. Please go ahead.