Chief Financial Officer at Procter & Gamble
Good morning, everyone. Joining me on the call today are Jon Moeller, President and Chief Executive Officer; and John Chevalier, Senior Vice President, Investor Relations. We will keep prepared remarks brief and then turn straight to your questions.
This was another strong quarter, strong top line growth across categories and regions, sequential earnings growth progress in the face of significant and still increasing cost headwinds.
Starting with a few highlights on the March quarter. Organic sales grew 10%. Volume contributed 3 points of sales growth. Pricing added 5 points as additional price increases began to reach the market. Mix added 2 points to sales growth for the quarter. These strong company results are grounded in broad-based category and geographic strength.
Each of the 10 product categories grew organic sales in the quarter. Personal Health Care grew more than 30%. Fabric Care was up low teens. Baby Care and Feminine Care grew double digits. Oral Care and Grooming up high singles. Home Care and Family Care up mid-single digits. Hair Care and Skin and Personal Care each grew low singles.
Focus markets grew 9%, and enterprise markets were up 12%. In focus markets, U.S. organic sales were up 11% on 7% growth in the base period. On a two-year stack basis, U.S. organic sales up 18%. Focus markets in Europe were up 10% and Asia Pacific, up 8%. Greater China organic sales were down mid-single digits versus a comp period that was up 22%. Market conditions continued to soften in the March quarter due to COVID-driven lockdowns.
In enterprise markets, Europe grew 18%; Latin America, up 16%; and Asia, Middle East, Africa grew 8%. Broad-based growth across geographies with six of seven regions growing organic sales high singles or better.
Global aggregate market share increased 50 basis points. 36 of our top 50 category country combinations held or grew share for the quarter. Our superiority strategy continues to drive strong market growth and in turn, share growth for P&G. All channel market value in the U.S. categories in which we compete grew nearly 9% this quarter. P&G value share continued to grow, up 1 point versus same quarter last year. Importantly, this share growth is broad-based. Nine out of 10 product categories grew share over the past three-, six- and 12-month period in the U.S. and globally.
Consumers continue to prefer P&G brands, recognizing the superior performance and value. On the bottom line, core earnings per share were $1.33, up 6% versus the prior year. On a currency-neutral basis, core EPS increased 10%. Within the EPS results, we estimate Ukraine, Russia was a negative impact of about $0.01 per share.
Core gross margin decreased 400 basis points, and currency-neutral core gross margin was down 380 basis points. Higher commodity and freight cost impacts combined were a 490 basis point hit to gross margins. Mix was 130 basis point headwind, mainly from product form and pack size mix impact. Pricing and productivity savings of 260 basis points partially offset the gross margin headwinds.
SG&A as a percentage of sales decreased 380 basis points due to strong top line leverage. Advertising investments remained strong as we continue to communicate the superiority and value of P&G offerings across price tiers.
Core operating margin decreased 10 basis points. Currency-neutral operating margin increased 20 basis points. Productivity improvements were 170 basis points help to this quarter. Free cash flow productivity was 74% as receivables and inventories increased due to strong sales results. We returned $3.4 billion of cash to shareowners, approximately $2.2 billion in dividends and $1.2 billion in share repurchase. Last week, we announced a 5% increase in our dividend, reinforcing our commitment to return cash to share owners, many of whom rely on the steady, reliable income earned with their P&G investment. This is the 66th consecutive annual dividend increase and 132nd consecutive year P&G has paid a dividend.
So three quarters into the fiscal, organic sales up nearly 7% on broad-based growth across categories and geographies, solid global value share growth, sequentially improving EPS growth, strong cash productivity and an increased income commitment to owners of P&G shares.
Moving on to strategy. Our team continues to operate with excellence and stay focused on the strategies that enabled us to create strong momentum prior to the COVID crisis and to make our business even stronger since the crisis began. We continue to step forward into the challenges and to double-down on our efforts to delight consumers. The strategic choices we've made are the foundation for balanced top and bottom line 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. In these performance-driven categories, we've raised the bar on all aspects of superiority: product, package, brand communication, retail execution and value.
Superior offerings delivered with superior execution drive market growth. This drives value creation for our retail partners and build market share for P&G brands.
Noticeable superiority is perhaps the most important inflationary environment we are now facing -- is most important in the inflationary environment we are potentially facing. A great example is the formula innovation we've launched on Tide and Ariel laundry detergents to enable superior cleaning performance in cold water washing. We're strengthening the communication of the cost benefits to consumers and the environmental benefits for the planet on the package and in our advertising.
For consumers, the savings from switching from hot to cold washing can nearly offset the cost of Tide or Ariel liquid detergent in each load. The superior cold water performance is a strong competitive advantage, enables immediate energy cost savings for our consumers and avoids the cost of rewashing, which may be necessary with less effective detergents.
In addition, washing with cold water improves sustainability by reducing the energy required to heat water in the process and by improving garment lifespans.
Superior innovation delivering multiple benefits and improved value for consumers even while we price to offset a portion of the cost increases we are absorbing. We've made investments to strengthen the health and competitiveness of our brands across innovation, supply chain and brand equity. And we'll continue to invest to extend our margin of advantage and quality of execution, improving solutions for consumers around the world.
Building on the strength of our brands, we are thoughtfully executing tailored price increases. We closed a couple of price increases with innovation to improve consumer value along the way. The strategic need for investments to continue to strengthen the superiority of our brands, the short-term need to manage through this challenging cost environment and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity.
We are committed to driving cost savings and cash productivity in all facets of our business. No area of cost is left untouched. Each business is driving productivity within their P&L and balance sheet to support balanced top and bottom line growth and strong cash generation.
Success in our highly competitive industry requires agility that comes with a mindset of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry in the future.
In the current environment, that agility and constructive disruption mindset are even more important. Our organization structure yields a more empowered, agile and accountable organization with little overlap or redundancy, flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world.
Going forward, there are four areas in which we need to be even more deliberate and intentional to strengthen the execution of our strategies. Leveraging environmental sustainability as an additional driver of superior performing products and packaging innovations; increasing our digital acumen to drive consumer and customer preference; reduce costs and enable rapid and efficient decision-making; next-level supply chain capabilities to enable flexibility, agility, resilience and a new level of productivity adapted to a new reality; and our employee value equation for all gender identities, races, ethnicity, sexual orientations, ages and abilities for all roles to ensure we continue to attract, retain and to develop the best talent.
These are not new or separate strategies. They are necessary elements in continuing to build superiority in reducing cost to enable investment and value creation and strengthening our organization. They are part of the constructive disruption we must continue to lead.
These strategic choices on portfolio, superiority, productivity, constructive disruption and organizational structure and culture are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales and profit. These strategies were delivering strong results before the pandemic and have served us well during these volatile times. We're confident they remain the right strategic framework as we move forward.
Moving on to guidance. We said each quarter that we will undoubtedly experience more volatility as we move through the fiscal year. We've seen another step in cost pressures, and foreign exchange rates have moved further against us. Transportation and labor markets remain tight. Availability of materials remain stretched in some categories and markets. Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief and have resulted in consumer price increases across CPG categories and beyond.
The recent spike in virus cases in China and resulting lockdowns are affecting consumption and have caused temporary work stoppages in our operations and those of our suppliers. These costs and operational challenges are not unique to P&G, and we won't be immune to their impact. However, we think the strategies we've chosen, the investments we've made and the focus on execution excellence have positioned us well to manage through these challenges over time.
Based on the current spot prices, we now estimate a $2.5 million after-tax commodity cost headwind in fiscal '22. Since our last update, we've seen continued cost increases in nearly every type of material we use and in diesel and in natural gas. Freight costs have continued to increase. We now expect freight and transportation costs to be a $400 million after-tax headwind in fiscal '22.
Foreign exchange rate has also moved further against us since our last guidance. We now expect FX to be a $300 million after-tax headwind to earnings for the fiscal year. We are offsetting a portion of these cost pressures with price increases and with productivity savings.
Since the start of the fiscal year, we've taken price increases in each of our 10 product categories in the U.S. You may recall, it was one year ago when we announced price increases in the Feminine Care and Baby Care categories. Over the last year, input costs have continued to increase substantially. And as a result, the Feminine Care business has announced an additional price increase in the U.S., which will be effective in mid-July. Also as a result of these increased cost headwinds, we recently announced price increases on certain items in the U.S. Home Care category that will be effective at the end of June and in the U.S. Oral Care business that will be effective mid-July.
As always, each category in each market is continually assessing the cost impacts they face and the potential need for pricing. If there are decisions to price, the degree and timing of those moves will be very specific to the category, the brand and sometimes to the individual SKU. This is not a one-size-fits-all approach. Also, just as we've done over the past year, we'll look to close a couple of price increases with new innovation that offers our consumers more value, continue to drive category growth and maintain our competitive superiority advantage.
As we said before, we believe this is a temporary bottom line rough patch to grow through, not a reason to reduce investment in the business. We're sticking with the strategy that has been working well before and during the COVID crisis.
Moving to key guidance metrics. We now expect organic sales growth in the range of 6% to 7% for the fiscal year, a 2-point increase versus our prior guidance of 4% to 5%. Pricing was a sequentially stronger contributor to top line growth in the third quarter and will continue to be a driver again in the fourth quarter as we get the full effect of increases taken over the past few months. We are closely monitoring consumption trends for signs of changes. So far, elasticities have been in line or better than our expectations. Demand for our best-performing, premium-priced offerings remain strong as do our market share trends.
On the bottom line, we're maintaining the core earnings per share growth range of 3% to 6%. But given cost challenges we're facing, we now expect to be at the low end of the range at 3%.
Within this guidance, we expect an additional $0.04 per share of negative impact in the fourth quarter from higher costs and limited operations in Ukraine and Russia.
The impact from commodities, freight and foreign exchange has increased significantly since the start of the fiscal year. Our initial guidance in July assumed $1.8 billion after tax or about $0.70 a share. This increased to $2.3 billion in our October outlook, $2.8 billion in January, now a $3.2 billion after-tax headwind to fiscal '22 earnings. On an EPS basis, the headwinds are now approximately $1.26 a share or a 22% headwind to core EPS.
So in the face of an incremental $0.56 per share of negative cost impact since the start of the year, we've held our going-in EPS range, and we've maintained strong investment superiority with new product innovation and fully funded advertising programs. Of note, the majority of the recent $400 million increase in cost and foreign exchange headwinds will impact us in the fourth quarter, free cash flow productivity of 95% for the year.
We continue to expect to pay $8 billion in dividends and now expect to repurchase approximately $10 billion of common stock, combined a plan to return $18 billion of cash to share owners this fiscal 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, major supply chain disruptions and store closures are not anticipated within these guidance ranges.
To conclude, our business continues to exhibit strong momentum. And we believe P&G is well-positioned to grow through and beyond the immediate issues we are facing. We will manage through the near-term cost pressures and market volatility with the strategy we've outlined many times.
We'll continue to step forward toward our opportunities and remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments, mitigate input cost challenges and to maintain balanced top and bottom line growth.
With that, we'll be happy to take your questions.