Procter & Gamble Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 19, 2022

Key Takeaways

  • Q1 organic sales rose 7% with pricing contributing 9 ppt and mix +1 ppt, while volume fell 3 ppt (mainly Russia); all 10 categories grew and global aggregate market share was held with 26 of the top 50 category-country combos holding or growing share.
  • Core EPS grew 1% as a 550 bps headwind to gross margins from higher commodities, materials, freight and FX was offset by 580 bps from pricing and productivity, though currency-neutral core margin declined 130 bps.
  • Full-year guidance was reaffirmed for 3–5% organic sales growth, core EPS growth in line to +4%, ~90% free cash flow productivity and $15–17 billion of cash return to shareholders.
  • The company now expects ~\$3.9 billion of after-tax headwinds in FY23 (including \$2.4 billion from commodities, \$0.2 billion from freight and \$1.3 billion from FX) to be partly offset by further pricing, productivity and ongoing investments.
  • P&G will double down on integrated strategies—Supply Chain 3.0, Digital Acumen, Environmental Sustainability and Employee Value—to fund innovation, offset costs and sustain balanced top- and bottom-line growth.
AI Generated. May Contain Errors.
Earnings Conference Call
Procter & Gamble Q1 2023
00:00 / 00:00

There are 17 speakers on the call.

Operator

Good morning, and welcome to Procter and 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 ks, 10 Q and 8 ks 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 and 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.

Operator

Procter and 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.

Speaker 1

Good morning, everyone. Joining me on the call today are John Moller, Chairman of the Board, President and Chief Executive Officer and John Chevalier, Senior Vice President, Investor Relations. We are going to keep our prepared remarks brief and then turn straight to your questions. Execution of our integrated strategies continued to yield good results in the July to September quarter and provides a solid start to the fiscal year. We're growing organic sales in all 10 categories, holding global aggregate market share, accelerating productivity savings and improving supplies efficiency.

Speaker 1

Together, this progress enables us to maintain guidance ranges for organic sales growth, core EPS growth, free cash flow productivity And cash return to shareowners. Despite continued high commodity and transportation costs, inflation in the upstream supply chain and in our own operations, Accelerating headwinds from foreign exchange, geopolitical issues, COVID disruptions impacting consumer confidence And historically high inflation impacting consumer budgets. Moving to the Q1 numbers. Organic sales grew 7%, Pricing added 9 points to sales growth and mix was up 1 point. Volume declined 3 points primarily due to lower shipments in Russia.

Speaker 1

Growth was broad based across business units with each of our 10 product categories growing organic sales. Personal Healthcare grew high teens. Feminine Care was up double digits. Fabric Care and Home Care were up high single digits. Baby Care, Grooming, Hair Care and Skin and Personal Care were each up mid singles.

Speaker 1

Family Care and Oral Care Focus markets grew 4% for the quarter with the U. S. Up 5%. Greater China organic sales were down 4% versus the prior year, modest sequential improvement in a market still affected by COVID lockdowns And weak consumer confidence. Longer term, we expect China to return to strong underlying growth rates.

Speaker 1

Enterprise markets were up 16% With each of the 3 regions up 13% or more. Global aggregate market share was in line with prior year With 26 of our top 50 category country combinations holding or growing share. In the U. S, all outlet value share was in line with prior year With 6 of 10 categories holding or growing shares. On the bottom line, core earnings per share were 1 point Core margin decreased 160 basis points and currency neutral core margin was down 130 basis Higher commodity, materials and freight cost impacts combined with a 550 basis point hit to gross margins.

Speaker 1

Mix was 120 point headwinds, productivity savings and pricing provided 580 basis SG and A costs as a percentage of sales were lower by 90 basis points as sales leverage Operating margin increased 10 basis points. Productivity improvements were a 230 basis point held to the quarter. Adjusted free cash flow productivity was 86%. We returned nearly $6,300,000,000 of cash to share owners, Approximately $2,300,000,000 in dividends $4,000,000,000 in share repurchase. In summary, considering the backdrop of a very challenging cost environment, good results across top line, bottom line and cash to start the fiscal year.

Speaker 1

Our team continues to operate with excellence, Executing the integrating strategies that have enabled strong results over the past 4 years, which are the foundation for balanced growth and value creation. A portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. So priority across the 5 vectors of product, package, brand communication, retail execution and value. Productivity improvement in all areas of our operation to fund investments in superiority, offset cost and currency challenges, expand margins and deliver Going forward, there are 4 areas we are driving to improve the execution of integrated strategies: Supply Chain 3.0, Digital Acumen, Environmental Sustainability and Employee Value Equation. These are not new or separate strategies.

Speaker 1

They are necessary elements in continuing to build superiority, reduce cost to enable investment and value creation and to further strengthen our organization. John touched on each of these in our July earnings call, and they will be a central part of our discussion at Investor Day Independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales We continue to believe that the best path forward to deliver sustainable top and bottom line growth is to double down on these integrated strategies, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. Now moving on to guidance.

Speaker 1

We fully expect more volatility in costs, currencies and consumer dynamics as we move through the fiscal year. However, we think the strategies we've chosen, the investments we've made and the focus on execution and excellence have positioned us well to manage through this volatility Over time. Raw and packaging material costs, inclusive of commodities and supplier inflation, have remained high Since we gave our initial outlook for the year in late July, based on current spot prices at latest contracts, we now estimate a $2,400,000,000 after tax headwind in We've made a modest downward adjustment in our outlook and now expect a $200,000,000 after tax headwind from freight and transportation costs in fiscal 2023. Foreign exchange has continued its strong move against us as the U. S.

Speaker 1

Dollar has strengthened significantly Against essentially all major currencies around the world. Based on current exchange rates, we forecast a $1,300,000,000 after impact, an incremental hit of $400,000,000 versus our initial outlook for the year. Combined, Headwinds from these items are now estimated at approximately $3,900,000,000 after tax or $1.57 a share, A 27 percentage point headwind to EPS growth for the year. We will offset a portion of these cost headwinds with price increases and productivity We will continue to invest in irresistible superiority, which is even more important as we compete in some markets with local For non U. S.-based competitors that don't see the same foreign exchange rate impact.

Speaker 1

As we said before, We believe this is a rough patch to grow through, not a reason to reduce investment in the business. As I noted at the outset, our good first quarter results enable us to Our guidance ranges for the fiscal year across all key metrics. We continue to expect organic sales growth in the range of 3% to 5%. On the bottom line, we are maintaining our outlook of core earnings per share growth in a range of in line to plus 4% versus prior year. However, the steep increase in foreign exchange impact pushes our current expectations towards the lower end of the range.

Speaker 1

We continue to forecast adjusted free cash flow productivity of 90%. We expect to pay around $9,000,000,000 in dividends to repurchase $6,000,000,000 to $8,000,000,000 in common stock. Combined, a plan to return $15,000,000,000 to $17,000,000,000 of cash to share owners this fiscal year. The outlook is based on current market growth rate estimates, commodity prices and foreign exchange rates, significant additional currency weakness, Commodity cost increases, geopolitical disruption, major production stoppages or store closures are not To conclude, the macroeconomic and market level consumer challenges we're facing are not unique P and G, and we won't immune to the impact. We've attempted to be realistic about these impacts in our guidance and transparent in our commentary.

Speaker 1

As we said before, we believe this is a rough patch to grow through, not a reason to reduce investment in the long term health of the business. We're doubling down on the strategy that has been working well and delivering strong results. We'll continue to step forward towards the 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 With that, we'll be happy to take your questions.

Speaker 2

Thank And your first question comes from the line of Steve Powers with Deutsche Bank.

Speaker 3

Yes. Hey, good morning. Thanks for the question. Andre, I kind of wanted to pick up where you left off about Your P and G's commitment to remaining fully invested, even in this environment. I think the one of The biggest questions and points of pushback that I've received around P&G in recent months is just this idea that given all the headwinds that you've talked about and quantified today And given the accelerated push on productivity that you've emphasized coming into the year and again underscored today, That there isn't enough left over to keep those investments going, investments that have Ben, I think, is pretty critical in investors' eyes to enabling the growth that we've experienced over recent years.

Speaker 3

So maybe you could just step back and reassure Investors, give some perspective on how much room there is to invest even as you Push for productivity and work to offset these headwinds and kind of counter the idea that you're going too far and curtailing

Speaker 1

Yes. Good morning, Steve. Let me maybe start with productivity to reassure you On the ability to deliver significant productivity and then I'll turn it into the discussion on investments. We have increased our productivity numbers for the year back to pre COVID levels. So we have good visibility to a significant step up versus what we were able to do during COVID where we had to Limit our productivity efforts to some degree to benefit innovation and shipping cases.

Speaker 1

With line time being available, we have now full ability to qualify those cost savings on the line. We have built digital capabilities to increase the speed of reformulation to drive superiority at lower cost. We have increased our ability to qualify new Supply chains, if necessary, in order to reduce cost. We're improving the capability of our working teams and the plants to drive more efficient Operations there, and we are constantly looking at our end to end supply chain, including logistics to drive And we feel very good about our continued efforts to drive significant cost of goods productivity. We'll talk more about that as we discuss Supply Chain 3.0.

Speaker 1

But the runway is there, the capabilities are there, and we're seeing the visibility on the fiscal year results. Quality of reach and better targeting, while being able to flow productivity dollars to the bottom line To help offset some of the headwinds that we're seeing, we now have more than 50% of our Media spend in digital. We are increasing our first party data and our digital capabilities to Increased precision of reach, not only in the U. S. Or in Europe, but around the world, and that is allowing us to drive significant productivity While increasing reach, while increasing quality of reach and while more precisely targeting our consumers, Over the past 3 years, we have significantly increased spend in media by more than $1,200,000,000 On top of the productivity we have generated over those years and on top of sales leverage.

Speaker 1

So we're also starting, I would argue, from a very rich Support plan for our brands. In terms of reinvestment Of those savings and reinvestment capability within the P and L construct, we are not deprioritizing Innovation, we will not deprioritize innovation. Every innovation that we've delivered in the market has created value and And in the overall results, we see that our approach of driving superiority It's actually the strongest driver of our ability to limit volume impact of our pricing moves, enable us to continue to price And deliver value to the consumer. So in aggregate, I think the team has full confidence that we can balance, what we see, But it will require careful balance and doubling down on productivity to sustain innovation and investment in our

Speaker 4

Steve, this is John. I agree with everything that Andre said. Just one additional Short comment. If we find ourselves, which we don't currently, in a position where we have to choose

Speaker 2

And we'll take our next question from Lauren Lieberman with Barclays.

Speaker 5

Great. Thanks. Good morning, everyone. Thought it might be timely to get sort of an update on what you're seeing in terms of Consumer behavior in the U. S, you did comment on all outlet market share being flat in the U.

Speaker 5

S. As you know, it's hard for us to see that Via Nielsen, but also just the absolute sales growth that we see in tracked and untracked Data does look like there's category contraction that's going on. So I guess commentary on what you're seeing, maybe we could just hit on, say, Laundry and whatever, pick another category, it will, to talk a bit about

Speaker 1

Seeing global value share and value share in the U. S. Holding, which is a great signal to our strategies working of providing Value to consumers via innovation as we price. Price contribution of 9% on the quarter with volume being down 3%, but majority of that volume, so more than 2 points actually driven by Russia, also is a good indication that the strategy of Irresistible superiority works even in an inflationary environment where we need to take pricing. The U.

Speaker 1

S. Specifically, as you mentioned, Our all outlet share is flat. We've seen strong growth in the U. S. Of 5%.

Speaker 1

There is some volume reduction as you would expect

Speaker 6

And that

Speaker 1

is consumer behavior around pantry inventory reduction, stretching purchasing cycles To specifically talk to some of the categories you mentioned and maybe consumer behavior there, We talked about our Fabric Care situation in the last earnings call, where we were supply constrained On some of the portfolio in quarter 3 quarter 4 of last fiscal year, we had reduced media spending and have reduced merchandising support stretching into Quarter 1 of this fiscal year, and that certainly has resulted in some share pressure, which you would To full sufficiency, they have also reinstated media, they have reinstated merge support and strengthened merge support. And we're seeing our Fabric Care business coming back. Our volume share in the most recent read is actually up. We see continued strong growth on single unit dose, where the majority of the market growth is and we're driving that market growth. In terms of consumer sentiment, in general, we see part of the consumer base in fabric care, for example, trending up, as I mentioned, into sacrohuman dose.

Speaker 1

We see some growth also in our mid tier brands. As consumers are looking for value within our portfolio, they're trading into GAME portfolio and our strategy to provide different value tiers to consumers. We are also seeing consumers moving Two different price points. So a group of consumers is looking for value by trading into higher transaction sizes, to find lower cost per Use or lower cost per unit, and we see other consumers who are more cash conscious. And they are very focused on cash outlay.

Speaker 1

So again, the other part of the strategy to provide pack sizes that stretch from below $10 for some channels and consumers to above $30 or $40 for others seems to be meeting consumers' needs. So broadly, we feel good about the position we're in. There are some dynamics in terms of supply Base period that will be with us for a period of time. We remain supply constrained on a few categories where we will see share pressure. Tampons, for example, the premium tier of our, Samcare Pets business and on some health some side of the health care business.

Speaker 1

But overall, we don't see any negative reaction and we feel reconfirmed in our strategy

Speaker 2

And next, we'll hear from Dara Mohsenian with Morgan Stanley.

Speaker 7

Hey, guys. So a strong organic sales growth result in the quarter at 7%, especially given the COVID drag in China and Russia impact, But you kept the full year work sales guidance. Is that just conservatism given it's early in the year and some of the external challenges? Are you feeling any more Confident around that full year range. And perhaps within that answer, given the pricing has been so strong, You can just touch on the volume demand elasticity you're seeing with that higher pricing.

Speaker 7

Any changes at all towards

Speaker 1

The guidance of 3% to 5% is really grounded in what we believe the market will be. We see some softening in the market, as we have communicated, about 3% to 4% value growth It's what we're expecting the market to be. We want to grow slightly ahead of that. As you say, the Q1 gives us a good level of confidence that we're within the right range, but we're also very early in the year, so we believe the confirming the range In terms of volume elasticity, in my earlier remarks, as I said, we feel very Volume which speaks to favorable elasticities, speaks to our, Sogoroity strategy working and providing consumers value With innovation even as we take pricing, as we always do, we assume that these elasticities return to historical levels

Speaker 2

And your next question comes from the line of Bryan Spillane With Bank of America.

Speaker 8

Thank you, operator. Good morning, everyone. I guess Two questions for me just related to kind of how we should be thinking about phasing in the back part of the year. One is just in terms of price increases from here going forward, are you are there more incremental price increases that We'll flow through the balance of the year or has most of the pricing that you need in terms of what's in your Plans been implemented. And I guess what I'm really driving at is, are we going to start to see would we expect to see more of a shift To volume contributing more to the organic sales growth as we move through the back half of the year and less of incremental pricing.

Speaker 1

Execution of the second pricing round for many of our brands. We took pricing on all our categories in the last fiscal year, Covering about 80% of sales. We're now in the 2nd round covering about 85% of sales, and that's We see flowing through in the Q1. Many of these price increases in the second round are being executed in September October. For the future, we will continue to observe where our cost headwinds go, where foreign exchange rate goes.

Speaker 1

It's a very dynamic environment. We will continue to carefully balance innovation, pricing and productivity.

Speaker 9

Okay. Thank you.

Speaker 2

And your next question comes from the line of Kamil Gajrawala with Credit Suisse.

Speaker 10

Hey, everybody. Good morning. Can you talk a bit more, maybe just give some more details on what's driving some of these cost increases, especially as we're starting to see a lot of commodity costs start to roll over? Doesn't feel like you're discussing it kind of impacting your P and L yet. So can you just give us some more details there?

Speaker 1

Yes. Good morning, Kamil. Look, the commodity cost increases are Broad based and different by commodity class. So for example, we continue to see pulp increase. There is some relief on The input side to offset some of the inflation that is also coming from our suppliers, we call we don't buy Propelldyn, we don't buy ethylene.

Speaker 1

We buy packaging materials. We buy super absorbers and materials that are secondary to that direct commodity impact and that inflation is included in our $2,400,000,000 commodity headwind. So relatively stable on the commodity side. On the freight side, transportation and warehousing, as mentioned in the opening comments, we See some easing, and we expect about $100,000,000 less in headwinds, so $200,000,000 after tax down from $300,000,000 You see that market getting more back to So that's been reflected. And then foreign exchange rate, obviously, is broadly across all currencies, as the U.

Speaker 1

S. Dollar strengthens really around Every currency in the world, and that's why we have the biggest increase versus our initial guidance range About $400,000,000 due to the ForEx effects that we've described.

Speaker 2

Your next question comes from the line of Rob Fine with Evercore.

Speaker 11

Okay. Thank you very much. First, a quick follow-up and then my main questions. Just so I'm clear, In terms of post COVID consumer behavior, I mean, obviously, we've got some tightening that's going on And consumers searching for value you mentioned, but do you see any changes in consumer behavior in terms of those categories That increased demand due to COVID in terms of home and personal care, are we going to Be at an elevated level there or is there kind of just go back to normal? And then my main question is, can you give us a sense of how your business Is progressing in China kind of sequentially through the quarter into October and what your plans are for 11.11?

Speaker 11

Thank you.

Speaker 1

Good morning, Rob. Yes, post COVID behavior, what I would point to obviously is we see market contraction versus The pandemic phase in terms of antibacterial surface cleaning products, which is a small part of our total portfolio. Other than that, I wouldn't point to any major deviation from what we expected. Consumers still spend more time at home. I think generally the focus on our categories, which are cleaning, hygiene, health based continues to be environment.

Speaker 1

The other element that is positive is some of the volatility Might be disappearing. So when you think about categories like bath tissue or paper towels, where we had very volatile base periods With suppliers being in and out of supply over quarter 3 quarter 1 and quarter 2 of last fiscal year, That is stabilizing. So those are the post COVID dynamics. That obviously doesn't play for China to transition to your second part of the question. We continue to see the lockdowns in China, specifically with Hainan being locked down for the last 2 months to impact consumption significantly.

Speaker 1

Volumes in China are down 5% to 6% on the quarter. Policies. We don't going forward, we make no assumption on that changing. So we'll have to observe where We have a strong team on the ground waiting to get going once the market fully reopens. And as we said before, we expect China to be a long term growth driver and returning to mid single digit growth here in the near future.

Speaker 1

Operator, do we have the next question?

Speaker 12

And next from the line of Nik Modi with ABC Capital Markets.

Speaker 6

Thanks. Good morning, everyone. Andres, hoping you could provide some macro context and some of what's being embedded in guidance. I mean, there's so much going on across the world. You addressed China to some degree, but perhaps you could just give us a little bit more context as it relates to Europe, especially as we head into the winter, U.

Speaker 6

S, maybe some of the developing markets, just kind of how you're thinking about how the macro dynamics will play out over the next rest of the fiscal year? Thanks.

Speaker 1

Yes. Good morning, Nick. As you know, we generally In terms of commodity costs, in terms of energy costs, so that's what is built into our reconfirmed guidance range. When you look at the consumer side and the market side, obviously, we see high pressure on the European consumer With high inflation, and certainly as the energy costs will hit the consumer over the winter period, Depending on how much support from the European government is provided and when, we need to be extra careful In terms of ensuring that consumers have appropriate access to our portfolio, making sure that we Give the right value to them via superiority, strong innovation, the right price letter and the right value to your offerings. So we expect Europe to be tough from a consumer environment The same is true for the U.

Speaker 1

S. We continue to focus with our retail partners We have broad access across our portfolio for consumers so they can make the right choices. As we said before, Price ladder is increasingly important. Cash outlay choices are increasingly important, and that's what we'll continue to focus on. Enterprise markets are holding up well, and that's a key growth driver also in the quarter.

Speaker 1

You've All enterprise markets grow mid teens and even L. A. Growing at 23%. So we'll continue to drive

Speaker 12

The next question comes from Kevin Grundy with Jefferies.

Speaker 13

Great. Thanks. Good morning, everyone. Andre, just a follow-up on that last question. Maybe you could just put parameters around that, specifically around category growth rates.

Speaker 13

I think coming into the year, I think the guidance was underpinned on a 3% to 4% category growth rate. I think investors were a little bit surprised by the degree of slowdown at that point, just given the strength of the business performance in recent years. 1st quarter, I think, was better than the market expected, certainly from a demand elasticity perspective. Maybe just comment now, Again, building on Nick's question, is 3% to 4% still what's underpinning your outlook? And maybe you can share, for key regions, U.

Speaker 13

S. Enterprise markets, etcetera, What you observed for category growth rates in the Q1 as we think about the balance of the year? So thanks for that.

Speaker 1

Yes, Kevin, we expect a slowdown from the growth rate we've seen over the past years, which was 5% to a more modest 3% to 4%. As you would expect given the inflationary pressure. We don't have more detail by region at this point in time, and It's really not a constructive forecast exercise to try to bring this down into lower level of detail. So 3% to 4% still underlying our forecast.

Speaker 12

The next question comes from the line of Christopher Carey with Wells Fargo.

Speaker 9

Hi, good morning. So just two connected questions on Focus and Enterprise Markets. First, just On the U. S, you noted that growth was 5%, which is several points ahead of what we can see in the U. S.

Speaker 9

Scanner data. Are there any timing differences with inventory or non track performance that you would highlight there? And then just connected on the enterprise markets in general, can you just expand a bit on the acceleration we've seen in these markets? What's Driving that uptick in growth and maybe importantly, how you see relevant performance versus local competitors in these markets, Namely, if that growth is being driven by pricing and certainly some of the local competition has different inflation exposures versus That of P and G, so thanks on the U. S.

Speaker 9

And the overall enterprise markets.

Speaker 1

Yes. And to start with the U. S, We see strong growth in non covered markets. That's explaining the overall stronger growth. So just looking at the covered markets here It's maybe not reflecting the full reality that we've seen in the Q1.

Speaker 1

So broader growth in the U. S, higher than what we've seen in just the covered markets. On the enterprise market side, Same dynamic as in the rest of the world. We continue to see strong contribution from pricing, obviously, And the combination of us taking pricing, but driving innovation into priority at the same time allows us to drive strong organic sales

Speaker 12

Your next question comes from the line of Olivia Tong with Raymond James.

Speaker 14

Great. Thanks. Good morning. My question is twofold. First, just kind of if you could give a little bit more detail on what needs to happen To get China to get back to mid single digit growth beyond obviously COVID going away.

Speaker 14

But my broader question is around Competition, your ability to sustain the spending behind brands, given still very tough input costs and obviously the move in the U. S. Dollar, Just kind of curious if you've seen any difference from what competition is doing since at the very least international competition since They at the very least don't have the same FX dynamics that you have. Thanks.

Speaker 1

Yes. Good morning, Olivia. China, I think you've answered the question, so I will leave it there. We will continue to invest. I think our teams are Very well set up, but we need consumer mobility to return in order for China to return to mid single digit growth.

Speaker 1

So I'll leave it at that. In terms of competitive spending, I won't speculate. I think the fact is, Obviously, local competitors, as you mentioned, and non U. S. Dollar denominated competitors, multinational competitors have I don't see the same headwinds in terms of foreign exchange.

Speaker 1

Our strategy continues to double down on our own priority continue to double down on our own investment. And as John said, our commitment to continue to drive irresistible superiority is relentless. And that is going to be even more important in some of those market category combinations where we see local or non U. S. Dollar based competition play.

Speaker 12

We'll take our next question from Bill Chappell with Truist Securities.

Speaker 10

Thanks. Good morning. Just wanted to follow-up a little bit on Lauren's question a while back On trade down and you said certainly you're seeing some trade down within your categories, within your brands. And I guess, two questions. 1, are you surprised that there isn't more at this stage even within your brands with inflation and with Potential recession.

Speaker 10

And then 2, maybe could you talk about is there any differences in terms of trade down and what you're seeing in the U. S. Versus, say, Europe, Latin America, or is it all fairly similar? Thanks.

Speaker 1

Yes. Hey, Bill. Look, mainly the macro indication of trade down is twofold. Our value shares in aggregate are holding, as we said. And private label shares, Which is the other indicator for a trade down in the market are growing modestly, both in the U.

Speaker 1

S. And in Europe. When you look at the U. S, we see value share for private label increasing 30 basis points over the past 3 6 months. In Europe, we're looking at about Basis points of growth.

Speaker 1

Some of that is simply driven by supply dynamics. So we are in the U. S, for example, where we see Private labor growth in our categories would be in bath tissue or in paper towels, where private label in the base period was not supplying well, and we kind of picked up that supply over quarter 1 and quarter 2 of last fiscal year. Growth and us not being able to continue to hold our share position or even expand our share position. Overall, trade down within our portfolio is per design.

Speaker 1

That's why we have created different value tiers. That's why we have created different pack sizes. So some level of Consumer shifting is expected. We are very encouraged by many of our consumers actually continuing to look for the upper end of our portfolio. And I mentioned the Fabric Care example.

Speaker 1

Our biggest growth in the Fabric Care share is in the single unit dose segment The portfolio, some consumers who are more exposed from a cash outlay or value standpoint find a solution within our

Speaker 4

I think some of the I mean, the clearest explanation of all of this, if there is such a In a very complex world, is that value is found at the intersection Of price, product performance as Andre has said and usage experience. It's not just price. Price is an important component, but those other components are equally important. And as Andre has said several times during the call, We continue to invest heavily in performance and in the usage experience and We are hopeful that we can maintain a value proposition for most consumers. Some will out of necessity trade down.

Speaker 4

And as Andres said, have offerings to meet them where they are as well. But I think again to cut through this, You have to think about the totality of the value proposition to make sense of what's happening.

Speaker 2

And your next question will come from the line of Mark Astrachan with Stifel.

Speaker 9

Thanks and good morning everyone. I guess I want to ask about market dynamics for lack of better terms. Yes. Maybe start with reconciling global share being in line in terms of what you said on the call with the 7% growth that you Reported organically and your 3% to 4% expectations for category growth, right? Obviously, that implies a bit of a deceleration.

Speaker 9

And then, specifically, what's happening in segments that you talked about where there's market contractions? I think you mentioned that in the press release, hair care, oral Fabric Care specifically anything sort of takeaways from there and your expectations and what's driving that going forward?

Speaker 1

Yes. Good morning, Mark. Look, the outlook for the year is still 3% to 4%. This won't be a straight line. The best visibility we have is on the total year at the global level.

Speaker 1

Trying to break this down into quarters or trying to break this down into geographies is not helpful in our mind. So we go quarter by quarter. The market growth dynamic by category are not fundamentally different from what we're observing. As I said, the only driver That is visible from a COVID to post COVID world is in the surface cleaning and hygiene space where we see slowdown in the A focus on health and hygiene, more time at home and more focus from consumers on our categories. Our main job here is to Drive category growth, and that's what we're really focused on, drive new jobs to be done, drive household penetration Where there is potential drive usage occasions via regimen use, and that's what we're focused on in our innovation And in our communication and in the market execution.

Speaker 4

And as you think about market and market growth, At some point, the whole market has priced. At some point, that annualizes, and it's less of a contributor to top Yes, volume will hopefully be a partial offset to that. But I think it's normal to expect Kind of a reversion to the mean as we get through the pricing cycle.

Speaker 2

Thank you. Next, we'll hear from Andrea Teixeira with JPMorgan.

Speaker 15

Good morning. And John, on your last point, I think just a follow-up on your comments on revenue growth management. I just want to confirm On the timing on this entry level products hitting the shelves, I know you've done some of it. And which categories you're Finding the need to offer value, I'm assuming to hold the volume share. I'm assuming family care, baby care, laundry care, I just want to clarify.

Speaker 15

And my main question is on what you're embedding in terms of additional pricing in Europe into the second half of fiscal Guidance for the back end of the year or the fiscal year at this point? Thank you.

Speaker 1

Yes. Hey, Andrea, let me take this. The value tier and price point portfolio that we were describing has been implemented over the past Years. So this is not something that we're doing ad hoc in reaction to market dynamics we are observing. This is something that has been part of the strategy for many years.

Speaker 1

So the introduction of SimplyTide or Tide simply the introduction of and strengthening of valves, for example, so That has been there for a number of years. Also, the strategy of having different opening price points from under $10 to higher transaction Our price execution is really tailored by SKU, by category, by brand, by market. So that's where we pay attention to ensure that As we price, we maintain the right structure on shelf, be that virtual or physical shelf. Again, I can't comment On additional pricing in the second half, as John indicated, you would, from a market perspective, expect that some pricing annualizes here during the next

Speaker 2

Your next Question comes from the line of Jason English with Goldman Sachs.

Speaker 1

Hey folks, thanks for slotting

Speaker 16

me in. I guess coming full circle to the top of the queue and on investment posture. I know that you raised media spend by $1,200,000,000 from fiscal 2019 to 22 as you mentioned earlier on the call. But you did start to get leverage on the last year. I think you're roughly 90 basis points of leverage.

Speaker 16

You mentioned more leverage today. So question 1 is, How do we think about the right investment posture when it comes to advertising and media? And then secondly, John mentioned that we're going to see price Subside as we anniversary, which obviously will. In some instances, we'll probably see it subside too because of promotional intensity. And it looks like promotions are building in laundry sequentially, And as you mentioned, private labels reengaged in tissue and that may require some promotional get back.

Speaker 16

So how do you balance Being competitive in market, matching promotional intensity where needed, but yet still getting the price realization you need to cover cost. Thank you.

Speaker 1

Yes. On the media

Speaker 10

investment, I think

Speaker 1

we really need to shift focus. It is difficult TV into programmatic and into digital spend that is a lot more targeted, a lot more precise in terms of Delivering reach and quality of reach where we need it. So a spending reduction might not necessarily correlate With this investment, so we continue to, as John said, be committed to drive superiority of our brands. We will not step back from that, and that for us means higher reach, higher quality of reach, higher targeting capability, efficiency of investment. On the price and promotion side, Jason, we've seen Promotion levels come down during COVID, as you know, from above 30% pre COVID to, I think, 16% was the low during the COVID period.

Speaker 1

We now see in all categories promotion coming back up somewhere between 27% to 30%, which is to be expected. For us, the most important element is to use promotions in the right way. If we are able to drive regimen,

Speaker 4

for example,

Speaker 1

By co promoting, co merchandising, laundry detergent and fabric enhancers, where we have significant penetration opportunities in fabric enhancers, It grows the category, it drives incremental purchase and it drives repeat after trial if we do it right. Same is true in baby care. When we co promote wipes with diapers, it drives higher usage in a relatively more underdeveloped category, which is wipes. So in that sense, promotion can be a driver of growth, market growth and profit growth, and that's how we want to use it.

Speaker 4

Just to build on a point that Andre made, because the question keeps being raised, which I'll just give you the example of North America to hopefully give you confidence in our investment posture. We had a discussion with North American team a couple of weeks ago. Andre was there. I was there. Shailesh was there.

Speaker 4

And they had prepared perspective by category on dollar spend versus a year ago. And I walked into the room and said, this isn't helpful. What we need to understand is What are our reach objectives and are we sufficient in spending to achieve those reach objectives? What are our objectives in terms of Number of weeks on air achieving that reach and that's how we'll measure sufficiency. Now, I want to do that.

Speaker 4

We want to do that as cost effectively as possible. But that's Not, then there was a discussion, with the business leaders on what we could do to ensure that, that happened. So we're spending a fair amount of time on this. We're very committed to it. And it's I'm sure it's frustrating You don't have visibility to all of that.

Speaker 4

You just have visibility to the dollars, which I completely understand. As Andre also said, one other dynamic We're moving a lot of the marketing activity set in house. And so the cost for that in terms of, for example, purchasing media moves out of the advertising Hopefully that helps.

Speaker 2

And your final question comes from the line of Jonathan Feeney with Consumer Edge.

Speaker 10

Good morning. Thanks very much. 2 easy ones, I think. First,

Speaker 9

I want to understand the bridge between The global pricing impact is cited at 4 70 basis points and global pricing of 9%. I'm sure it's not easy I'm missing I just wanted to know how that knot works as we go forward. And secondly, you mentioned pantry inventories. I wonder, Is there any data you have specifically about monitoring that in a granular way on a global basis or at least maybe some anecdotes about how that's worked in the past when we've seen periods of Rising pricing and a little bit of elasticity. Thank you.

Speaker 1

On the pricing to gross margin reconciliation, I We have in home consumer data, specifically in the U. S. And many other markets that allows us to see their relative pantry inventory. So it's based on that observation in the market, but it's not illogical to assume that High inventories that were built during the COVID phase, for example, in bath tissue and in paper towels, slowly drawing down. I would tell you that we're still seeing somewhat higher levels than we've seen pre COVID, but none of this is material.

Speaker 1

It's more An element of consumer behavior we're observing. So it's nothing that would stand out in terms of the construct of the market growth or forecast.

Speaker 4

Hey, just one thing as we wrap this up, And I'll turn it back to Andre. If you step back from all of this, As I step back from all of this, I am just incredibly pleased with our team and what they've accomplished. 7% organic sales growth against the context of Russia, Ukraine, what's happened in China where the market is down mid singles, that is Truly fantastic work, communicating the value of our offerings, improving the value of our offerings as we take necessary Pricing, maintaining top line momentum of the business. Great work. The other piece that I think portends A strong future is the work, as Andre mentioned at the onset of the call, that's happening on productivity.

Speaker 4

Between commodities, FX and Warehousing and Transportation, we had a 32 point negative AT impact on the quarter. So that's the big picture in my view, and I couldn't be happier.

Speaker 1

Yes. Only point to add is and the combination of value shareholding globally and in the U. S. So we'll continue to double down as we said in our opening remarks. With that, I just want to remind you quickly that we'll be hosting an Investor Day Here in Cincinnati on the afternoon and evening of Thursday, November 17.

Speaker 1

You should have received the registration email in early September.

Speaker 2

Ladies and gentlemen, that concludes today's conference.

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