Procter & Gamble Company (PG) — Q1 2022 Earnings Call Transcript

Thank you, operator. Good morning, everyone. Joining me on the call today are Jon Moeller, currently Vice Chair and incoming President and Chief Executive Officer as of November 1st; and John Chevalier, Senior Vice President, Investor Relations. We're going to keep our prepared remarks brief and then turn straight to your questions. The July to September quarter provides a good start to the fiscal year, putting us on track to deliver our guidance for organic sales growth, core EPS growth, free cash flow productivity, and cash return to shareholders. We experienced the full impact of rising commodity and transportation costs this quarter, but healthy top line growth and strong cost savings kept EPS growth nearly in line with prior year. Earnings growth should improve sequentially through the balance of the fiscal year as price increases go into effect and productivity programs ramp up. So moving to first quarter results, organic sales grew 4%, volume contributed 2 points of sales growth, pricing, and mix each added 1 point. Growth was broad-based across business units with nine out of 10 product categories growing organic sales. Personal Healthcare, up double digits; Fabric Care grew high singles; Baby Care, Feminine Care and Grooming, up mid singles; Home Care, Oral Care, Hair Care, and Skin and Personal Care organic sales each up low single digits. Family Care declined mid singles, comping very strong growth in the base period. Organic sales were up 4% in the U.S., despite 16% growth in the base period. On a two-year stack basis, U.S. organic sales are up 20%. Greater China organic sales were in line with prior year due to strong growth in the base period comp and due to intra-quarter softness in beauty market growth. On a two-year stack basis, organic China organic sales are up 12% in line to slightly ahead of underlying market growth. Focused markets grew 4% for the quarter and enterprise markets were up 5%. E-commerce sales grew 16% versus prior year. Global aggregate market share increased 50 basis points, with 36 of our top 50 category country combinations holding or growing share for the quarter. Our superiority strategy continues to drive strong market growth and in-term share growth for P&G. All channel market value sales in the U.S. categories in which we compete grew mid-single digits this quarter and P&G value share continued to grow to over 34%. We are up more than 1.5 points versus first quarter last year. Importantly, the share growth is broad-based; 9 of 10 product categories grew share over the past three months, with the 10th improving to flat versus year-ago over the past month. Consumers are continuing to prefer P&G brands. On the bottom line, core earnings per share were $1.61, down 1% versus the prior year. On a currency neutral basis, core EPS declined 3%, mainly due to gross margin pressure from higher input costs, which we highlighted in our initial outlook for the year. Core gross margin decreased 370 basis points, and currency-neutral core gross margin was down 390 basis points. Higher commodity and freight cost impacts combined were a 400 basis point hit to gross margins. Mix was an 80 basis points headwind, primarily due to geographic impacts. Productivity, savings, pricing, and foreign exchange provided a partial offset to the gross margin headwinds. Within SG&A, marketing expense as a percentage of sales was in line with prior year levels for the quarter, increasing more than 5% in absolute dollars consistent with all-in sales growth. Core operating margin decreased 260 basis points, currency neutral core operating margin declined 270 basis points. Productivity improvements were a 180 basis points help to the quarter. Adjusted free cash flow productivity was 92%. We returned nearly $5 billion of cash to shareholders, $2.2 billion in dividends and approximately $2.8 billion in share repurchase. In summary, in the context of a very challenging cost environment, good results across top line, bottom line, and cash to start the fiscal year. Our team continues to operate with excellence and stay focused on the near-term priorities and long-term 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 these challenges and to double down our efforts to delight consumers. As we continue to manage through this crisis, we remain focused on the three priorities that have been guiding our near-term actions and choices. First, is ensuring the health and safety of our P&G colleagues around the world. Second, maximizing the availability of our products to help people and their families with their cleaning, health, and hygiene needs. Third priority, supporting the communities, relief agencies, and people who are on the frontlines of this global pandemic. The strategic choices we've made are the foundation for balanced top and bottom line growth and value creation. A portfolio of daily used 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. In our categories, this drives value creation for our retail partners and builds market share for P&G brands. We've made investments to strengthen the health and competitiveness of our brands, and we'll continue to invest to extend our margin of advantage and quality of execution, improving solutions for consumers around the world. The strategic need for investment 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 extension, underscore the importance of ongoing productivity. We're 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 the mindset of constructive disruption, a willingness to change, adapt and to create new trends of technology that will shape the industry for 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. These strategic choices on portfolio, superiority, productivity, constructive disruption, and organization 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 crisis and have served us well during the volatile times. We're confident they remain the right strategy framework as we move through and beyond the crisis. Moving onto guidance. We will undoubtedly experience more volatility as we move through this fiscal year. As we saw this quarter, growth results going forward will be heavily influenced by base period effects, along with the realities of currency and cost pressures and continued effects of the global pandemic. Supply chains are under pressure from tight labor markets, tight transportation markets, and overall capacity constraints. Inflationary pressures are broad-based and sustained. Foreign exchange rates add more volatility to this mix. We have also experienced some short-term disruptions in materials availability in several regions around the world. Our purchasing R&D and logistics experts have done a great job managing these challenges. These costs and operational challenges are not unique to P&G, and we won't be immune to the impacts. However, we think the strategies we've chosen, the investments we've made, and the focus on executional excellence have positioned us well to manage through this volatility over time. Input costs have continued to rise since we gave our initial outlook for the year in late July. Based on current spot prices, we now estimate a $2.1 billion after-tax commodity cost headwind in fiscal 2022. Freight costs have also continued to increase. We now expect freight and transportation costs to be an incremental $200 million after-tax headwind in fiscal '22. We will offset a portion of this higher cost with price increases and with productivity savings. As discussed last quarter and in the more recent investor conferences, we've announced price increases in the U.S. on portions of our Baby Care, Feminine Care, Adult Incontinence, Family Care, Home Care, and Fabric Care businesses. In the last few weeks, we've also announced to retailers in the U.S. that we will increase prices on segments of our Grooming, Skin Care, and Oral Care businesses. The degree of timing of these moves are very specific to the category, brand, and sometimes the product form within a brand. This is not a one-size-fits-all approach. We're also taking pricing in many markets outside the U.S. to offset commodity, freight, and foreign exchange impact. As always, we will look to close a couple of price increases with new product innovations, adding value for consumers along the way. As we've 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. I will go First Quarter results confirm our guidance ranges for the Fiscal year across all key metrics. We continue to expect organic sales growth in the range of 2% to 4%. Our solid start to the Fiscal year increases our confidence in the upper half of this range. We expect pricing to be a larger contributor to sales growth in coming quarters as more of our price increases become effective in the market. As this pricing reaches store shelves, we'll be closely monitoring consumption trends. While it's still early in the pricing cycle, we haven't seen notable changes in consumer behavior. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of 3% to 6%, despite the increased cost challenges we're facing. Foreign exchange is now expected to be neutral to after-tax earnings compared to the modest tailwind we estimated at the start of the year. Considering FX was a modest help to first quarter earnings, we're projecting it to be a headwind for the balance of the year. In total, our revised outlook for the impact of materials, freight, and foreign exchange is now a $2.3 billion after-tax headwind for Fiscal '22 earnings, or roughly $0.90 per share, a 16% point headwind to core EPS growth. This is $500 million after-tax of incremental cost pressure versus our initial outlook for the year. Despite these cost challenges, we are committed to maintaining strong investment in our brands. So while we are not changing our core EPS guidance range, please take note of these dynamics as you update your outlook for the year. We will face the most significant cost impacts in the first half of the Fiscal year as pricing goes into effect, as savings programs ramp up, and as we begin to annualize the initial spike in input costs, earnings growth should be sequentially stronger in the third and fourth quarters of the year. We are targeting adjusted free cash flow productivity of 90%. We expect to pay over $8 billion in dividends and to repurchase $7 billion to $9 billion of common stock. Together, we plan to return $15 billion to $17 billion of cash to shareholders this fiscal. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant currency weakness, commodity cost increases, additional geopolitical disruptions, major production stoppages, or store closures are not anticipated within the guidance ranges. To conclude, our business exhibited strong momentum well before the COVID crisis. We've further strengthened our position during the crisis, and we believe P&G is well-positioned to grow beyond the crisis. We will manage through the near-term cost pressures and continued market-level volatility with the strategy we've outlined many times, and against the immediate priorities of ensuring employee health and safety, maximizing availability of our products, and helping society overcome the COVID challenges that still exist in many parts of the world. We will continue to step forward toward our opportunities, and we remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments, mitigate input cost challenges, and maintain balanced top and bottom-line growth. With that, we'll be happy to take your questions.

Yes. Hey, guys. Good morning, everybody. Maybe we can start just on organic growth this quarter and how you view it relative to underlying consumption trends. Specifically, how much of the 4% you think might have been aided by any timing, whether shipment timing or any temporary surges in demand against the backdrop of COVID? I guess it feels to me like maybe U.S. benefited from some of those dynamics and maybe China on the other side of that, but I'd love your perspective and just whether we should be thinking about any adverse correction against the 4% in subsequent quarters. Thanks.

Yes. Thank you, Steve. I'll start by saying that overall consumption trends remain strong globally, particularly as you said in the U.S. Markets continue to grow within our categories of daily use, health and hygiene in the range of mid-singles. From a consumption standpoint, consumer behavior continues to elevate the importance of health, hygiene, and a clean home. More time at home certainly is also a factor. We continue to see elevated consumption on Bounty paper towels, for example, by 10%. Charmin bath tissue is still elevated, consuming about 5% with more time at home. So overall consumption trends remained strong and fuel most of the growth. We also have been able to grow share as we've outlined in our prepared remarks. Also, on a global basis, we're up 50 basis points over the past three months and 70 basis points over the past six months. So that's certainly contributing to a stronger position to benefit from that growth. In the U.S., we've reached record share of 34.4% of value share, up more than a point. Inventory effects, I would tell you, certainly play a role in some geographies. Mainly in China, we saw some inventory build in the base period, which the reverse is obviously happening in this period. But in the grand scheme of things, they don't really impact our consumption trends and our shipment trends in the quarter.

Great. Thanks. Good morning, everyone. Let's discuss gross margin, which faced significant challenges this quarter due to factors like commodities, freight, and broader supply chain issues. Could you start by providing insight into your hedge position for commodities and the visibility you have regarding guidance, which appears more concerning? Additionally, I would appreciate your thoughts on the supply chain difficulties and how long you anticipate these challenges will persist. Lastly, I'd like to understand your approach toward restoring gross margins as you aim to return to low 50% levels. Thank you.

Thank you, Kevin. Let me begin by discussing the current outlook for commodities. We are observing broad-based increases across various commodity classes. Our forecast relies on spot rates, and we expect these rates to remain steady. All of our productivity, pricing, and innovation initiatives are grounded in the assumption that the current spot rates, as indicated in our guidance, will persist. We do not specifically hedge commodities, so the position you see here reflects its impact on our profit and loss. We mitigate risks through natural hedging in foreign exchange rates, commodity baskets, and interest rates, which is the most effective and economical way for us to guard against volatility. Regarding supply chain dynamics, it is clear that global demand and supply have not yet achieved balance. We are still facing challenges in transportation and warehousing, along with driver shortages and rising diesel prices. As previously noted, the increases across our commodity classes—including chemicals, resins, packaging, and pulp—are consistent with current market conditions. Our best forecast remains the current spot rates, and we will continue to operate based on that. As we've stated previously, we will gradually recover these costs without compromising our investments in the business. We have strong productivity initiatives ramping up throughout the fiscal year, and we aim to enhance value through pricing and innovation, which should alleviate margin pressures over time. However, recovering costs will take time, and we will deliberately pace this recovery to protect our investments in our successful superiority strategy, which is effectively contributing to our top-line growth and overall balanced business model.

Hey guys. I'm looking for more details on pricing. Can you clarify what percentage of the portfolio will have pricing plans in place after the ones you mentioned earlier in a few categories? Can you provide some specifics on the magnitude of those prices? I understand you might not want to be too specific about future plans, but any insights on how you plan to implement pricing to counteract cost pressures would be helpful. Do you anticipate catching up with the dollar cost pressures you're experiencing year-over-year this fiscal year, possibly in Q3 or Q4? Is that an unrealistic expectation given the significant cost pressures? Lastly, regarding the pricing you've implemented so far, it seems there hasn't been much impact on demand. Could you elaborate on that and discuss the risks to market share as you adjust pricing and how you view those risks? Thanks.

We are adjusting pricing globally, making decisions based on individual markets, categories, and sometimes specific products. Making broad statements is challenging, so I'll focus on the U.S. as a primary example, our largest market. We have announced price changes in nine out of ten categories. Many of these increases were implemented in September or are expected to take effect over the next 90 days. You have seen the announced price increases across Baby, Feminine Care, and Family Care, which are in the mid-single digits. The price increases for Grooming and Skin Care just came out and are expected to be in a similar mid-single digit range for most of our products. I can't comment on future price hikes, but we will adapt as costs and pricing abilities evolve. As mentioned in our prepared remarks, we expect the margin situation and core EPS performance to improve sequentially throughout the fiscal year. We will begin to annualize part of the commodity cost increase starting with Q3, and most of the pricing changes will positively impact our bottom line starting in Q3. Our productivity initiatives will also ramp up throughout the year. That said, it’s difficult to predict our sequential progress precisely. However, we are aiming for improvement. Importantly, we will not cut investment in the business; we continue to invest in marketing and strive for superior products to support our balanced growth strategy in the mid and long term. It’s still too early to assess price elasticity. For the price increases implemented in the U.S. around mid-September, we haven’t noticed any significant consumer reaction in terms of volume. This gives us confidence in our position, especially considering the strength of our portfolio. As we approach this pricing adjustment, around 75% of our portfolio is truly superior, likely increasing to about 80% once multi-piece pricing is fully implemented. This should enable us to maintain a strong consumer perception of value, even as we increase prices.

Let me build on Andre's comments with a couple of big picture thoughts. Given the inflationary cycle we are in, how do you want to be positioned? First, being in categories that are used daily and where performance drives brand choice is advantageous. During the pandemic, consumers have shifted their consumption toward trusted and high-performing brands, which is evident in the decline of private label market shares in the U.S. and Europe over the past three months. While this isn't a guarantee for the future, having a strong superiority profile, as Andre mentioned, along with a solid innovation and investment program, puts us in a good position. Second, dependability is key. Additionally, it's important to note that our business model inherently supports this pricing dynamic. Pricing has positively contributed to our top line for 44 out of 47 quarters and 16 of the last 17 years. Again, there's no guarantee for the future, but our business model fundamentally supports pricing in a way that adds value for consumers. Next, we want to minimize the need for pricing through productivity. We are in a better position regarding that than ever before. Our organization has done an exceptional job of reducing costs, and we will continue to do so. We aim to have products available at various price points to appeal to consumers for whom price is a significant part of their value equation. We are much better positioned now compared to the last cycle. While none of this guarantees future outcomes, it places us in a stronger position than we have been historically.

Thanks. Good morning. I wanted to talk a little bit about how scale may or may not be benefiting P&G at this time versus what you see from peers, in comparison around the world. So just thinking about access to raw materials, to packaging inputs, ability to get energy and power in some countries. But I was just curious if you could talk a little bit again about availability, access to can puts in energy and how you think P&G is managing through this or will manage through this versus what you see from some other companies out there. Thanks.

Yes. Thanks, Lauren. We are certainly not immune to the stress that is put on the supply chains globally. And we are very thankful to our supply chain teams who have done a tremendous job in developing business continuity plans and executing against those business continuity plans over the past 18 months, 24 months, as supply chains were stressed throughout the COVID pandemic. The strength of our supply chains is mainly driven by the flexibility that we can create within those supply chains. So strong supplier partnerships around the globe allow us to shift sourcing if we need to from one supplier to another either because of supply not being available or freight lanes not being available to get materials from point A to B. It also allows us to optimize costs to a degree. And we've been doing that over the past few months and we'll continue to do so. We have an ability to reformulate some of our products which we're doing actively without impacting the superiority of the product or any noticeable impact to the consumer. And that gives us flexibility to adjust again to material availability or cost. We also have an organization that looks around the corner, anticipates potential bottlenecks, and then chooses to build inventory. It's either on materials and intermediates or unfinished products to then be able to withdraw from those inventories on a global basis. So it doesn't mean that we build inventory in the same region where we consume, but we have the ability to do that on a global basis. So in that sense, the global footprint is an advantage to us. As I said, we're not immune to any impact here. But if history is any indication of the future, we feel relatively well-positioned because of the strength of our organization here. Of course, if there are any major disruptions to supply chains, we would be exposed just like everyone else. In terms of energy availability, we'll acknowledge that we've obviously been part of some of those curtailments that we've seen in China, for example. But they've not had a material effect on our supply chains. Again, when you think about our ability to potentially source from other regions for a period of time, most of our factories are able to run formula carts and run products for other regions, which gives us flexibility on our footprint to overcome short-term challenges.

One other dynamic that feeds into this is the confidence of our suppliers in our business, both in terms of our business momentum. So if they need to make investments to increase their capacity and material availability, the momentum of our business factors directly into that decision. Second and related, the increments of capacity that we can offtake to generate economics at the supplier level that make investments viable. If we were just adding to demand on the margin, it would be a very different equation. So we become a very attractive customer for our suppliers because of both the size and importantly, the momentum of our business.

Thank you. Good morning, everyone. I wanted to follow up on the materials question; which materials are you facing the most challenges with in terms of sourcing? Additionally, Jon, congratulations on your appointment as CEO of Procter & Gamble. I would like to revisit your comments about continuing to invest, as that is a priority. However, what if the cost situation worsens? What if competitors don't act rationally with their pricing? It seems like they will, but there's a possibility they might not. As the CEO of Procter & Gamble, what trade-offs are you prepared to make? Is there a point at which you would consider reducing investments to protect margins in the future? Any insight on this would be very helpful.

Thank you, Nik. Regarding the materials issue, the increase in costs is widespread across all material categories, reflecting the current demand and supply dynamics, which can vary significantly from week to week. I wouldn't highlight any particular material as being more vulnerable than others; it truly encompasses the entire input range. The supply chain dynamics I've mentioned illustrate how we are managing these changes, which are really occurring on a period-by-period basis. When it comes to balancing overall costs with our strategic goals, I will begin and then Jon can share his insights. I want to emphasize that adhering to our strategy is essential, and we are fully committed to it. In the past, we have tried different approaches that did not yield positive results. Therefore, our focus on continuous investment in excellence, driving innovation, growing markets, and enhancing our market share while benefiting our retailers remains fundamental to our balanced growth model. This balanced growth, which includes increasing revenues alongside moderate margin growth to support our bottom line and cash flow, is the only viable path for the industry and for Procter & Gamble. We will pursue this strategy even if it means facing short-term and mid-term margin pressures. We will do everything we can to optimize our productivity within our financial framework. We still see considerable potential for enhancing productivity without compromising our business model. In terms of our marketing investments, we believe there is substantial room for improvement in reaching consumers more effectively and at a lower cost as our digital capabilities expand. We also have significant opportunities to refine our supply chain by utilizing the digital enhancements we have made over the past years, ensuring better demand synchronization from suppliers to retail partners. Additionally, we can improve our overhead structure by optimizing work processes and leveraging innovation and automation, allowing our employees to concentrate on more complex tasks. Jon, I’m sure you have some thoughts on this.

I might. Just a couple of pieces of perspective. First, this is a time to step forward, not back. Second, Andre, in his prepared remarks, articulated again the three priorities and the integrated set of strategies. Nowhere in there, at least to my ears, is pulling back on investment. The third and last piece of perspective I'd offer, the productivity muscle that we've built, as Andre was just describing the opportunities that remain there which are significant, will or should build margin over time. If we look at the last 12 years, our operating margin on an all-in basis has increased 320 basis points from 20.4% to 23.6% last year. On a constant currency basis, that's an increase of 1020 basis points. So the game here is to stay on course, continue to drive productivity to fuel investment and superiority in daily use categories where performance drives brand choice. We do all of that over time. As Andre said, that is the recipe for balanced growth, growing the top line and the bottom line. We were in an environment where there will be volatility across quarters. That's not our concern. We're concerned about the execution of the holistic strategy and the value that creates over time.

Hi, Jon. I wanted to follow up on the enterprise markets, which I know have been a focus for you recently. As these markets transition from losing money or breaking even to becoming more profitable, that could provide an additional boost to our margins. This improvement doesn't have to stem solely from productivity; it could also result from a better mix as some of the previously lower-margin regions become more profitable. Can you update us on the status of those enterprise markets? Have any shifted to contribute positively to margins, and what’s the outlook there? Also, Andre, you spoke quickly at the beginning, and I missed the growth figure for the enterprise markets. Could you please share that again? Thank you.

If I reflect just back on last fiscal year, enterprise markets grew top line by 5%, and bottom line grew ahead of the rest of the Company at 11%. We exited the year with only one of those 80-plus markets losing money, and that was Argentina, where we have a plan to address that over time this Fiscal year. So we're in a very good position in enterprise markets. If we look at the quarter we just completed, focused markets grew 4%, and enterprise markets grew 5%. Having said all of that, part of a responsible answer has to address the volatility that exists in these markets from a geopolitical standpoint and unfortunately from a health and COVID standpoint. So it's not a straight line in all likelihood from here to there, but we're much, much better positioned, and I'll give all the credit to the teams on the ground and these markets who are operating in very difficult, but as you rightly indicate, promising environments.

Thanks for the feedback on the speed, Wendy. I will adjust.

Good morning, everyone. I appreciate the opportunity to speak, and congratulations on a strong start to the year. I have a couple of questions. First, could you provide more details about the situation in China, especially regarding the beauty sector? I noticed in the press release there were mentions of mix and some deceleration in Skin Care, which I suspect is linked to China. Secondly, on a broader level, it will be interesting to see how this earnings season unfolds. However, I anticipate that when we reflect on it later, your pricing performance may have been among the weakest in the group, and you might be the only one not showing sequential improvement. My question is, why aren’t we seeing more progress? Is this part of a competitive strategy? If so, how much of your market share momentum can you attribute to what seems like a cautious approach to pricing? Should we be worried that once you catch up, this market share momentum might slow down?

Okay. There's a lot in there. So let me start with China. We continue to believe that China is a very attractive and important growth market for us. As we said, quarter 1 was flat in terms of organic sales growth, but on a two-year stack basis, we are up 12%, which is ahead of the market. We would have expected some quarter-to-quarter volatility due to base period dynamics and also some continued effects of COVID shutdowns on a regional level. Overall, we feel well-positioned with our portfolio within China and expect the market to return to mid-single-digit growth going forward. Again, we take some comfort in that retail sales coming up to above 4% again in the past quarter. On beauty specifically, we've seen all strongest results in healthcare in fiscal '21, '22 in China with strong top-line growth and strong bottom-line growth. SK-II sales were flat in China for the quarter, but again, on a 13% increase last fiscal year. We see travel retail coming up in SK-II, so that also needs to be considered as we think about the total market of SK-II consumption. Certainly a slowdown in the market in the first quarter, and specifically, as you point out, on Skin Care and in the beauty sector. Overall, we feel still confident in our ability to win in the market and in the market's ability to sustain that single-digit market growth. On the pricing side, the reason we are not seeing the pricing impact at this moment is due to a couple of factors. First, most of the pricing adjustments took effect in September, meaning we have had less than a month of pricing influence in the first quarter. We are also adjusting the base period where we had to decrease promotions in the market, as you may remember. We are now witnessing a return to promotion levels around 30% of volumes sold on deal, which is certainly affecting some of the pricing you would normally expect to see. We definitely anticipate that pricing will play a larger role in both our top-line and bottom-line moving forward as it becomes more apparent in the markets. As mentioned before, we are not lagging on pricing; rather, we are actively driving pricing by category, ideally aligned with innovation to ensure optimal value creation for consumers. We are implementing this strategy SKU by SKU and market-by-market, tailored to what is appropriate for each specific market situation, and this approach is influencing pricing. We expect pricing to positively contribute to our top-line and market share.

Great. Thank you very much. Based on some of the analysis that we've done, it looks like e-commerce in the U.S. continues to be very strong against pretty tough comps and that you guys are up well into double digits. Can you, number one, confirm that? Maybe give us a sense of what percentage of your business is e-commerce now, in the U.S. and globally? And then, going into it a little bit more. How do you see e-commerce driving your overall categories now? Is it driving premiumization? Are you continuing to gain or hold share in e-commerce? Just any thoughts and whether you're surprised that e-commerce has been so strong against such difficult comps. Thank you.

E-commerce continues to show strong performance globally, with a 16% increase in our e-commerce business, amounting to a 66% growth over the past two years. Currently, e-commerce constitutes about 14% of our total sales across all channels. In the U.S., our e-commerce business specifically grew by 11%. This growth is driven by several factors, including the impact of COVID, which has amplified our focus on strong brands. Our ability to appear prominently in search results and provide detailed e-content enhances our competitive edge compared to traditional shelf presentation. We also maintain strong partnerships to develop effective propositions that are suitable for both e-commerce and omni-channel environments. Ultimately, being a leading brand ensures we have more shelf space and product availability, allowing us to meet consumer demand effectively. We believe our strengths in e-commerce can be further leveraged through robust marketing and brand building to maintain this growth trajectory.

Hi, good morning. I have a follow-up on Andre's comments on the anniversary of the promotional normalization. If I understood it correctly, you had 60 basis points headwind in gross margin in what you call product and packaging investment and also 90 basis points investment in marketing on SG&A line. So correct me if I'm wrong, I think you were saying you'll continue to invest to keep your superiority, of course, you're going to lean in and it's the time to lean in. But perhaps how should we be thinking on your ability to flex once pricing is implemented? A nd I'm assuming most of your competitors will follow or actually had lab before even. So how we should be thinking or investments going forward? Thank you.

As you have observed this quarter, we are maintaining our commitment to growth through continued investment. Our marketing and advertising expenditures have increased by $130 million, and you can expect this trend to continue. As long as we generate a positive return on our additional spending, we will proceed with it. Additionally, there is still considerable potential to improve the efficiency of our marketing expenditures. By enhancing our digital reach and improving our targeting, we can both broaden our audience and enhance the quality of our reach, which can help balance the costs associated with our increased investment through greater efficiency. Regarding promotional dynamics, I mentioned that the market is returning to more standard levels. Prior to COVID-19, promotional activity was about 33%, and we are currently around 30%. We anticipate maintaining that level moving forward.

Thanks and good morning, everyone. I wanted to ask one follow-up and one other question. So just on China, I thought you'd mentioned in your prepared remarks that you'd seen some of the weakness intra-quarter, I guess implying that it's gotten better so perhaps you could just talk about that dynamic as you exited the quarter there in terms of your total business's schedule, however you want to think about it. And then on the marketing investment, it's interesting that you continue to have efficiencies there to offset the increase in investment. I guess the question is. how sustainable is that? And then are we to think that you take the efficiencies in invested all kind of backend marketing so that you remain fully funded or even increase off of current levels.

On the first part of the question regarding China Beauty, we did notice a decline in market size earlier in the quarter, but sequentially we are observing a recovery. As I mentioned previously, we anticipate a return to mid-single digit growth across categories, so there's not much more to add there. In terms of marketing efficiency, we expect to see a blend of both strategies. We will continue to enhance efficiency by increasing our media spending within our optimized targeting pool and raising the percentage of digital media globally as we refine our algorithms for targeted consumer messaging. There are still substantial opportunities available. You'll notice a mix of reinvestment in marketing programs and incorporating those productivity gains into the profit and loss statement to alleviate some cost pressures. This will vary from quarter to quarter based on the circumstances.

It may seem like an unusual dynamic, but the more efficient and effective our marketing spending becomes, the more appealing it is to invest in that area. As Andre mentioned, there are numerous opportunities to enhance this. In a way, efficiency leads to effectiveness, which in turn encourages spending. This all contributes to stimulating the market and advancing the business.

Hey, everybody. Good morning. I'd like to discuss the current state of the consumer market. Your business clearly has momentum, but it seems that consumers are in a notably strong position right now. Do you agree with this assessment, and if so, what factors do you believe are driving the strong demand? Additionally, given that your numbers are coming in better than expected, pricing hasn't yet played a larger role, and your comparisons are becoming easier, why haven't you adjusted your organic revenue guidance for the year? Your insights on this would be appreciated.

Yeah. Okay. So I think the strength of consumption, our categories is really driven by the choice of categories that we operate in. We've chosen to be not in discretionary but in daily use essential categories for the consumer. Again, health, hygiene-focused and the clean home. The consumer continues to elevate the importance of these jobs coming out of COVID, as we've seen in COVID. And I think that continues to drive the importance of these categories and our ability to win in these categories because consumers return or turn to trusted brands because they know that they can deliver on the promise and the job to be done. We see that in our share results. And as Jon mentioned, we see it in the reverse share results of private label, for example, declining both in the U.S. and Europe over time. We also benefit, and the consumer spending shows it, from more time at home, which we believe is an ongoing phenomenon. More time at home means more meals at home, more dishwashing at home, more laundry at home. And again, those elements benefit our brands and our categories in terms of growth. We will continue to focus on superiority, as we said before, to ensure that we have the strongest solutions for our consumers at any price point, at any price ladder. But really, we benefit, I think, from overall more time at home and an elevated focus on all categories. On the organic price mix and guidance, you're right and we're expecting pricing to become a bigger part of the top-line construct, as we said, throughout the year. We are one quarter in. There's a lot of volatility in the market and so we believe that it's prudent to maintain the guidance range of 2% to 4% on the top-line. But as we said in our prepared remarks, Quarter 1 results give us confidence in the upper half of that guidance range.

I would like to add a point regarding consumer behavior in these categories. Daily use, where performance influences brand selection, often provides benefits in health, hygiene, or clean home aspects. For instance, one of our recent innovations in Oral Care, the premium-priced iO power brush, has allowed us to gain over 2 points of market share since its launch about a year ago. During this period, the market has grown by 14%, and we have contributed to over 50% of that growth. This demonstrates that consumers respond well to performance-based innovations. We can leverage this responsiveness to foster market growth in a positive manner, which, as Andre has frequently pointed out, benefits our retail partners and enhances market dynamics. There are numerous categories where performance-based innovations can enhance consumer satisfaction through effective solutions. Generally, consumers are receptive to performance in these categories, and consumption can expand.

Hi, good morning. Thanks so much. Just to confirm an answer to the prior question in a category-specific question. Just around the organic sales guidance for the year, you've made some statements just around material supply, supply chain constraints, how much of that is factored into how you're thinking about the full-year organic sales outlook? And then just from a category's perspective, Fabric Care has been a good story. Loans were particularly strong again on difficult comp. Just in general, what do you think is driving the share gains that you've seen in the category? We've heard about some material constraints for some of your competitors. Do you think that's a factor? Is it just more about innovation? Just in general, do you have some perspective on what you think is driving this particularly strong delivery on the Fabric Care side of the business? Thanks.

Thank you. Regarding our organic sales guidance, we expect the current supply chain pressures and our ability to manage them, as we have over the last 18 to 24 months, to continue to influence our forecasts. Any unexpected major disruptions will require us to reevaluate our position. However, we are confident in our capability to handle ongoing supply chain challenges, which is reflected in our organic sales expectations. The narrative behind Fabric Care truly brings our strategy to life. This category is one where performance influences brand choice, as daily use is critical for consumers and its effectiveness is easily noticed. The category has excelled at achieving superiority through innovative forms and meeting new consumer needs. For instance, single unit doses represent a very compelling offering that is intuitive for users. There has been a premiumization trend in the category, driving higher spending per wash with enhanced cleaning performance. Moreover, there is still considerable growth potential outside the U.S., with only 20% wholesale penetration of single unit doses in Germany and Canada, and just 11% in Japan. There remains a significant runway for advancement with this superior product form. Our Fabric Care team has also excelled in exploring rapidly growing new segments. For example, fabric enhancers saw a 14% growth this quarter. Our Bits brand is currently valued at a billion dollars and continues to grow robustly. However, its wholesale penetration in the U.S. is only 20%, with overall penetration around 30%. Thus, there is still substantial room for growth driven by superior innovations and products. We are committed to this direction, which is evident in our results.

Hey, good morning everyone. I would love to just get your view on what you're seeing in emerging markets around the world, particularly in Latin America. Have you seen any changes in terms of category growth or the health of the broader consumer in that region? And I know you previously discussed a prolonged recovery and a number of these markets. Is that still the right thinking as we look out to the balance of the year? Thanks.

Latin America continues to show strong growth, which is widespread. In the last quarter, Mexico grew by about 8%, and Brazil saw double-digit growth. However, there are challenges in the region, including health issues in many markets. Despite this, consumption remains robust, and our business performance in Latin America is very solid.

All right.

Thank you.

I think that concludes the call. Again, thank you for joining us. And again, if you have any questions, John Chevalier or I are available all day. So if you want to give us a call, please feel free to. And thanks again for joining us for our quarter one call. Have a great day.