Procter & Gamble Company (PG) — Q3 2022 Earnings Call Transcript

Good morning, everyone. Joining me on the call today are Jon Moeller, President and Chief Executive Officer; and John Chevalier, Senior Vice President, Investor Relations. We will keep prepared remarks brief and then turn straight to your questions. This was another strong quarter, strong top line growth across categories and regions, sequential earnings growth progress in the face of significant and still increasing cost headwinds. Starting with a few highlights on the March quarter. Organic sales grew 10%. Volume contributed 3 points of sales growth. Pricing added 5 points as additional price increases began to reach the market. Mix added 2 points to sales growth for the quarter. These strong company results are grounded in broad-based category and geographic strength. Each of the 10 product categories grew organic sales in the quarter. Personal Health Care grew more than 30%. Fabric Care was up low-teens. Baby Care and Feminine Care grew double digits. Oral Care and Grooming up high singles. Home Care and Family Care up mid-single digits. Hair Care and Skin and Personal Care each grew low singles. Focus markets grew 9%, and enterprise markets were up 12%. In focus markets, US organic sales were up 11% on 7% growth in the base period. On a two-year stack basis, US organic sales up 18%. Focus markets in Europe were up 10% and Asia Pacific, up 8%. Greater China organic sales were down mid-single digits versus a comp period that was up 22%. Market conditions continued to soften in the March quarter due to COVID-driven lockdowns. In enterprise markets, Europe grew 18%; Latin America, up 16%; and Asia Middle East Africa grew 8%. Broad-based growth across geographies with six of seven regions growing organic sales high singles or better. Global aggregate market share increased 50 basis points. 36 of our top 50 category country combinations held or grew share for the quarter. Our superiority strategy continues to drive strong market growth and in turn, share growth for P&G. All channel market value in the US categories in which we compete grew nearly 9% this quarter. P&G value share continued to grow, up 1 point versus the same quarter last year. Importantly, this share growth is broad-based. Nine out of 10 product categories grew share over the past three, six and 12-month period in the US and globally. Consumers continue to prefer P&G brands, recognizing the superior performance and value. On the bottom line, core earnings per share were $1.33, up 6% versus the prior year. On a currency neutral basis, core EPS increased 10%. Within the EPS results, we estimate Ukraine, Russia had a negative impact of about $0.01 per share. Core gross margin decreased 400 basis points, and currency neutral core gross margin was down 380 basis points. Higher commodity and freight cost impacts combined were a 490 basis point hit to gross margins. Mix was a 130 basis point headwind, mainly from product form and pack size mix impact. Pricing and productivity savings of 260 basis points partially offset the gross margin headwinds. SG&A as a percentage of sales decreased 380 basis points due to strong top line leverage. Advertising investments remain strong as we continue to communicate the superiority and value of P&G offerings across price tiers. Core operating margin decreased 10 basis points. Currency neutral operating margin increased 20 basis points. Productivity improvements were 170 basis points aided to the quarter. Free cash flow productivity was 74% as receivables and inventories increased due to strong sales results. We returned $3.4 billion of cash to shareholders, approximately $2.2 billion in dividends and $1.2 billion in share repurchase. Last week, we announced a 5% increase in our dividend, reinforcing our commitment to return cash to shareholders, many of whom rely on the steady, reliable income earned with their P&G investment. This is the 66th consecutive annual dividend increase and the 132nd consecutive year P&G has paid a dividend. So three quarters into the fiscal year, organic sales are up nearly 7% on broad-based growth across categories and geographies, solid global value share growth, sequentially improving EPS growth, strong cash productivity, and an increased income commitment to owners of P&G shares. Moving on to strategy. Our team continues to operate with excellence and stay focused on the strategies that enabled us to create strong momentum prior to the COVID crisis and to make our business even stronger since the crisis began. We continue to step forward into the challenges and to double down on our efforts to delight consumers. The strategic choices we've made are the foundation for balanced top and bottom-line growth and value creation; a portfolio of daily use products, many providing cleaning, health, and hygiene benefits in categories where performance plays a significant role in brand choice. In these performance-driven categories, we've raised the bar on all aspects of superiority: product, package, brand communication, retail execution, and value. Superior offerings delivered with superior execution drive market growth. This drives value creation for our retail partners and build market share for P&G brands. Noticeable superiority is perhaps the most important in the inflationary environment we are potentially facing. A great example is the formula innovation we've launched on Tide and Ariel laundry detergents to enable superior cleaning performance in cold water washing. We're strengthening the communication of the cost benefits to consumers and the environmental benefits for the planet on the package and in our advertising. For consumers, the savings from switching from hot to cold washing can nearly offset the cost of Tide or Ariel liquid detergent in each load. The superior cold water performance is a strong competitive advantage, enables immediate energy cost savings for our consumers and avoids the cost of rewashing, which may be necessary with less effective detergents. In addition, washing with cold water improves sustainability by reducing the energy required to heat water in the process and by improving garment lifespans. Superior innovation delivering multiple benefits and improved value for consumers, even while we price to offset a portion of the cost increases we are absorbing. We've made investments to strengthen the health and competitiveness of our brands across innovation, supply chain, and brand equity. And we'll continue to invest to extend our margin of advantage and quality of execution, improving solutions for consumers around the world. Building on the strength of our brands, we are thoughtfully executing tailored price increases. We closed a couple of price increases with innovation to improve consumer value along the way. The strategic need for investments to continue to strengthen the superiority of our brands, the short-term need to manage through this challenging cost environment, and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity. We are committed to driving cost savings and cash productivity in all facets of our business. No area of cost is left untouched. Each business is driving productivity within their P&L and balance sheet to support balanced top and bottom line growth and strong cash generation. Success in our highly competitive industry requires agility that comes with a mindset of constructive disruption, a willingness to change, adapt, and create new trends and technologies that will shape our industry in the future. In the current environment, that agility and constructive disruption mindset are even more important. Our organization structure yields a more empowered, agile, and accountable organization with little overlap or redundancy, flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world. Going forward, there are four areas in which we need to be even more deliberate and intentional to strengthen the execution of our strategies. Leveraging environmental sustainability as an additional driver of superior performing products and packaging innovations, increasing our digital acumen to drive consumer and customer preference, reduce costs, and enable rapid and efficient decision-making, next-level supply chain capabilities to enable flexibility, agility, resilience, and a new level of productivity adapted to a new reality. And our employee value equation for all gender identities, races, ethnicity, sexual orientations, ages, and abilities for all roles to ensure we continue to attract, retain, and to develop the best talent. These are not new or separate strategies. They are necessary elements in continuing to build superiority in reducing cost to enable investment and value creation and strengthening our organization. They are part of the constructive disruption we must continue to lead. These strategic choices on portfolio, superiority, productivity, constructive disruption, and organizational structure and culture are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales, and profit. These strategies were delivering strong results before the pandemic and have served us well during these volatile times. We're confident they remain the right strategic framework as we move forward. Moving on to guidance. We said each quarter that we will undoubtedly experience more volatility as we move through the fiscal year. We've seen another step in cost pressures, and foreign exchange rates have moved further against us. Transportation and labor markets remain tight. Availability of materials remains stretched in some categories and markets. Inflationary cost pressures are broad-based and continue to increase with little sign of near-term relief and have resulted in consumer price increases across CPG categories and beyond. The recent spike in virus cases in China and resulting lockdowns are affecting consumption and have caused temporary work stoppages in our operations and those of our suppliers. These costs and operational challenges are not unique to P&G, and we won't be immune to their impact. However, we think the strategies we've chosen, the investments we've made, and the focus on execution excellence have positioned us well to manage through these challenges over time. Based on the current spot prices, we now estimate a $2.5 million after-tax commodity cost headwind in fiscal '22. Since our last update, we've seen continued cost increases in nearly every type of material we use, in diesel, and in natural gas. Freight costs have continued to increase. We now expect freight and transportation costs to be a $400 million after-tax headwind in fiscal '22. Foreign exchange rate has also moved further against us, since our last guidance. We now expect FX to be a $300 million after-tax headwind to earnings for the fiscal year. We are offsetting a portion of these cost pressures with price increases and with productivity savings. In the start of the fiscal year, we've taken price increases in each of our 10 product categories in the US. You may recall, it was one year ago, when we announced price increases in the Feminine Care and Baby Care categories. Over the last year, input costs have continued to increase substantially. And as a result, the Feminine Care business has announced an additional price increase in the US, which will be effective in mid-July. Also, as a result of these increased cost headwinds, we recently announced price increases on certain items in the US Home Care category that will be effective at the end of June, and in the US Oral Care business that will be effective mid-July. As always, each category in each market is continually assessing the cost impacts they face and the potential need for pricing. If there are decisions to price, the degree and timing of those moves will be very specific to the category, the brand, and sometimes to the individual SKU. This is not a one-size-fits-all approach. Also, just as we've done over the past year, we'll look to close a couple of price increases with new innovation that offers our consumers more value, continue to drive category growth, and maintain our competitive superiority advantage. As we said before, we believe this is a temporary bottom line rough patch to grow through, not a reason to reduce investment in the business. We're sticking with the strategy that has been working well before and during the COVID crisis. Moving to key guidance metrics. We now expect organic sales growth in the range of 6% to 7% for the fiscal year, a two-point increase versus our prior guidance of 4% to 5%. Pricing was a sequentially stronger contributor to top line growth in the third quarter and will continue to be a driver again in the fourth quarter as we get the full effect of increases taken over the past few months. We are closely monitoring consumption trends for signs of changes. So far, elasticities have been in line or better than our expectations. Demand for our best-performing, premium-priced offerings remain strong as do our market share trends. On the bottom line, we're maintaining the core earnings per share growth range of 3% to 6%. But given the cost challenges we're facing, we now expect to be at the low end of the range at 3%. Within this guidance, we expect an additional $0.04 per share of negative impact in the fourth quarter from higher costs and limited operations in Ukraine and Russia. The impact from commodities, freight, and foreign exchange has increased significantly since the start of the fiscal year. Our initial guidance in July assumed $1.8 billion after tax or about $0.70 a share. This increased to $2.3 billion in our October outlook, $2.8 billion in January, and now $3.2 billion after-tax headwind to fiscal 2022 earnings. On an EPS basis, the headwinds are now approximately $1.26 a share or a 22% headwind to core EPS. So in the face of an incremental $0.56 per share of negative cost impact since the start of the year, we've held our going-in EPS range, and we've maintained strong investment superiority with new product innovation and fully funded advertising programs. Of note, the majority of the recent $400 million increase in cost and foreign exchange headwinds will impact us in the fourth quarter. We continue to expect adjusted free cash flow productivity of 95% for the year. We continue to expect to pay $8 billion in dividends and now expect to repurchase approximately $10 billion of common stock, combined a plan to return $18 billion of cash to shareholders this fiscal year. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruptions, major supply chain disruptions and store closures are not anticipated within these guidance ranges. To conclude, our business continues to exhibit strong momentum. And we believe P&G is well positioned to grow through and beyond the immediate issues we are facing. We will manage through the near-term cost pressures and market volatility with the strategy we've outlined many times. We'll continue to step forward toward our opportunities and remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments, mitigate input cost challenges, and to maintain balanced top and bottom line growth. With that, we'll be happy to take your questions.

Great. Thanks so much and good morning. Andre, curious this quarter's revenue numbers surely show that there isn't really much that's happening in the way of trade down, and you just commented on elasticity. But I just was curious kind of what, if anything, P&G is doing to prepare for what feels like an inevitability for consumers becoming more sensitive to the pricing that is prevalent not just in your products, but across everything that they need to buy. So anything that you guys are doing proactively to help mitigate or think ahead to when trade down or substitution may become more of a factor? Thanks.

Good morning, Lauren. As you mentioned, we continue to see favorable price elasticities compared to historical data, which is about 20% to 30% better than what we expected. That's encouraging. However, we remain vigilant regarding any shifts in consumer behavior. We are preparing in multiple ways. First, we've strategically shifted our focus from discretionary categories to daily essentials that emphasize health and hygiene, where brand performance influences consumer choice. This strategy allows us to consistently invest in product superiority despite rising costs. Consumers are recognizing this by opting for our products, as reflected in our market share. Moreover, we are developing clear value claims around our product superiority that we incorporate into our advertising. For instance, we have highlighted the benefits of our Ariel and Tide cold water washes, as well as innovations like the ADW, which demonstrates that using a dishwasher is more efficient than washing dishes under running water. Additionally, the new easy squeeze design on Dawn helps consumers get every last drop without compromising performance. We’ve structured our pricing to offer various options across our brands, ensuring consumers can trade within our portfolio if they feel financially constrained. For diapers, for example, we have multiple tiers priced from $0.20 to $0.40 each. This pricing structure exists across all categories, allowing consumers to select options that fit their budgets. Lastly, we have built distribution channels throughout all market segments, including those that budget-conscious consumers may prefer, such as hard discounters in Europe and the dollar channel in the U.S. This comprehensive distribution strategy positions us well to serve consumers where they choose to shop. Overall, we are better prepared than ever to meet the needs of consumers who may be tightening their budgets, although we have not yet seen significant changes in behavior.

Good morning everyone, and I appreciate you taking my question. I'm curious about the strategy for stabilizing gross margins specifically. In reviewing the quarter, it appears that pricing and productivity offset about half of the inflation when excluding the mix effect from gross margins. As we plan for the future, what strategies should we focus on to stabilize gross margins? Will there be significant additional pricing adjustments? I know you've mentioned this previously in your prepared comments, as well as an increase in productivity. I'm looking to gain clarity on what the key strategies will be in the upcoming quarters regarding gross margins.

Yes. Thanks. Morning, Bryan. You're right. Over the past three quarters, you see pricing and productivity continue to increase a bigger portion of the commodity, foreign exchange and T&W gross margin impact. In quarter one, this covered 37%. In quarter two, we covered, I believe, 43%, and now we're at 53%. So you see a bigger portion being covered over time through those effects. We will continue to drive all three levers to recover the dollar impact of commodity cost increases, foreign exchange and T&W. Productivity will continue to play a significant role. We have a lot of runway left on productivity. And as the supply situation stabilizes here over time, we have more line time and more resources available to reinvest in cost of goods savings. And that will allow us to strengthen our productivity muscle here sequentially, hopefully, over the next few quarters. We will continue to drive innovation. We have prioritized innovation in our resource and line time allocation to ensure that we can continue to offer superior value to our consumers, which also enables us to take pricing and see these relatively benign elasticities at this point in time. So you continue to see us invest in innovation. With innovation, we will try to take pricing at a very granular level by market, by brand. A lot of the price increases that we have announced are yet to flow through. So you will see an incremental contribution to the top line and to gross margin recovery over the future. The other price increase is already announced, and we will have to carefully evaluate more opportunities to take pricing. It will take time to recover the full dollar impact. And as we said before, it's more important to us to support the business model, support innovation, support superiority, execute pricing in the right way and recover gross margin and cost impact over time versus rushing to do this faster. So, you should expect sequential progress. I won't give you a specific timeline. We will continue to use all three, productivity, innovation and pricing.

Good morning. I was hoping to get a bit more detail on China. How much of the decline in the quarter do you think was specifically related to lockdowns and maybe the comp versus last year? And can you give us a bit more granularity on some of the performance by product category there? And any thoughts on China going forward with the continued lockdowns in April, and how the business is positioned going forward? Thanks.

Yes. Thanks, Dara. Good morning. The lockdowns in China have had two main impacts on us. Firstly, on the supply side, our two plants in the Shanghai area and our contract manufacturer were shut down for an extended period. We had to implement our business continuity plans to mitigate the production impact as much as possible. Secondly, we are seeing a significant effect on consumer demand, with about 25% of consumers estimated by Wall Street to be impacted by the lockdowns. This has hindered their ability to access stores, including grocery stores and department stores, with even online shopping severely limited due to delivery challenges. The latest market size data in our categories over the past three months through March was flat in terms of value in China. Given the ongoing lockdowns and market challenges, we anticipate that April will be flat to negative. Regarding categories, Beauty is heavily affected in China. A significant portion of our Beauty business operates there. SK-II continues to face pressure due to market conditions and distribution issues in China, and that situation remains unchanged. However, considering historical performance, China has previously shown strong growth over the last three to four years, averaging high single to low double-digit growth rates. We believe that the market remains highly attractive for us, and we expect categories to return to mid-single to high single-digit growth. Our organization, supply chain, and R&D efforts in China are robust, so we are confident and will continue to invest to capture future growth.

Great. Thank you, very much. Just a point of clarification to start off. Can you tell us kind of what your pricing run rate was at the end of the quarter, given that the pricing was going in throughout the quarter and the year? I think you were at 5% on average, but just like to get a sense of what the run rate was. And then I'd like to dig in a little bit more on the state of the consumer. You mentioned that elasticities were 20% to 30% better than what history has shown. But the current conditions, we've never had these kind of current conditions before at least in anybody's recent memory. So I was wondering what your consumer panels are telling you about why the elasticities are better? Is it because of increased savings? Is it the low rates of unemployment? How much has maybe contributed to your superiority? Just trying to get a little bit better sense of your read on the consumer from your own internal research? Thank you.

Okay. Thanks, Robert. So in terms of pricing run rate for the quarter, on average, we have a five point contribution to top line. As we said, pricing will continue to increase as more of the price increases flow through. So I would say exiting the quarter, I would see about a 6% run rate to top line from pricing contribution. So you will see more of the pricing that has been announced, and that will flow through in April for the flow-through in quarter four. Pricing elasticities remain favorable. And within the portfolio that we offer to consumers, we broadly see a trade-up into higher price propositions that offer better value and better product performance. So – and that explains the mix effect that you see in gross margin, where we see higher unit sales items being chosen with higher penny profit, but slightly lower gross margin. So consumers are trading into single unit dose detergents instead of liquid detergent. Consumers are trading into body lotions instead of Baby Dry in diapers. So we see consumers trading up even within our portfolio into higher-performing product propositions. The relevancy of – or the relevance of product performance in our categories, we believe, is the reason why consumers are not trading down. We've had an extensive period of trial during the early COVID phases, where consumers have traded into P&G. They've experienced the superior performance of our propositions. They've seen the relative value that we provide. Even though the cash outlay might be higher, they see the higher efficacy of the product and the benefit that they gain from it. And we've seen repeat rates reaffirming that. We believe that a good portion of the resiliency of our demand is driven by the superiority of the product and packaging, clear communication of the benefits basis, clear communication of the value, good retail execution, and carefully crafted price increases that allow consumers to choose the cash outlay they feel ready to afford and to choose the brand and brand proposition that they are looking for. So I'll leave it at that.

Hey, Robert, this is Jon. I wanted to share a few more insights on this, noting that the situation is changing quickly and could shift at any moment. If you examine the details of our income statement, you can see evidence supporting Andre's remarks about consumer resilience. Additionally, private label shares, which can indicate trade-down behavior, have remained lower than last year in the U.S. for the last three, six, and twelve months, and the same trend is seen in Europe. As for market shares across different channels, as Andre mentioned earlier, we've been enhancing our distribution in areas where budget-conscious consumers tend to shop. Our share growth in those channels aligns with his observations and has been among the highest across retail banners. For instance, we've experienced significant growth in the dollar channel. We need to keep a close watch on this, as things may change quickly. However, as it stands today, the strategies we've implemented to focus on daily use categories, where performance informs brand choice, and to ensure we deliver on performance across various factors while being precise with pricing are holding up well.

Great. Thanks. Good morning, everyone. My question relates to category growth rates, understanding the volatility of the environment. And I guess I'm coming at this from the angle, I'm trying to unpack the strength of the 10% organic sales growth in the quarter and just the areas of favorability versus your plan. We've covered a lot of this. Demand elasticity, clearly better. Trade up remains favorable despite the environment. You continue to gain market share, which is great, up 50 basis points globally, though, I'm less certain that degree of market share gain would be very different than your plan. And then we haven't touched on this on the call. I'm not sure maybe there is some degree of inventory rebalancing with the trade because demand has outstripped supply in recent quarters. So where I'm going with this and understand the volatility of the environment, has there been any material change in your view for the categories as you look across your geographies and you look across the categories that you participate in? And we're thinking about our forecast going forward, any material change to category growth rates based on what you're currently seeing? So your comments there would be helpful. Thank you.

Morning, Kevin. Thank you. So category growth rates are holding up well. Fiscal year-to-date, global category growth in the categories we compete in is 5%. We expect that to continue at around 5%. Category growth in focus markets is 5%. Category growth in enterprise markets is 7%. So it's a strong 5% on a global level. It's fairly consistent. Enterprise markets have been growing past three, six and 12 at 7%. Focus markets have gone between 4% and 5% over the past three, six and 12 months. So if anything, in the most recent reading, we've seen strengthening of category growth. We're also pleased with the fact that we see P&G leading and disproportionately contributing to category growth in most of the markets we're competing in, via innovation and via leading innovation and thereby driving category growth and participating in that category growth via share growth. So overall, we feel good about the level of category growth. We're seeing slight acceleration across the periods P&G contributing via our strategy of driving market growth, via superiority investment and innovation. And that certainly is benefiting our growth and is in line with our growth model we want to drive because the only way to sustainably grow at these level's by driving market growth and then participating in that growth via shared growth.

Yes. Market growth is something that doesn't happen to us. We need to positively impact it ourselves, which is exactly what Andre just said. And that's what we're trying to do through our strategy. I would also say, Kevin, that if you look at the last quarter, there are several negatives within the quarter from a top line standpoint, several challenges that we've been working against. We've talked about China, our second-largest market, down mid singles. We've talked about the unfortunate situation in Russia and the Ukraine. One thing we haven't talked about, except indirectly, is that we're still racing to catch up with demand in our largest market, the U.S. But we're not fully supplying the market's demand. And all of those, hopefully, over time or some of them at least offer even additional upside as they reverse themselves.

Thank you. I have a follow-up question. Could you discuss where the supply constraints are the most significant and which areas are starting to see an increase in capacity, especially among private label brands? You mentioned pricing in categories like Feminine Care, Home Care, and Oral Care. Can you share some insights on your decision-making process regarding future price increases and which categories you are considering for those adjustments? Thank you.

Good morning, Olivia. At a global level, supply constraints are widespread across all areas. Sourcing raw materials remains challenging, and transporting both raw and packed materials is costly and unstable. Labor availability is an issue, particularly for our suppliers rather than P&G directly. Delivering finished products to retailers is also complicated, especially with truck availability in the U.S. affecting shipping. Despite these challenges, we’re making progress, and our on-shelf availability remains stable at about 93% to 94% as we see growth in Q3 and year-to-date. Over the next two months, we expect more categories to move out of managed supply in the U.S., and we are collaborating closely with our retail partners to ensure we handle this effectively, aiming for optimal service and on-shelf availability. Most of our capital investment will focus on North America and Europe to enhance capacity in response to rising demand. We anticipate improvements in the next three to six months, particularly in the U.S. as we exit managed supply. Regarding pricing, there isn't a set formula across categories. We are monitoring consumer behavior and our competitive edge closely. We are also assessing cost pressures and challenges, especially in our paper products, Feminine Care, Baby Care, Family Care, and Fabric & Home Care categories, which are experiencing the greatest impact from rising commodity costs, transportation, and foreign exchange issues. It's crucial to balance innovation, pricing recovery, and productivity efforts, particularly in the categories most affected by cost pressures.

No, I think you've covered it. And Olivia, it's great to hear your voice again. Obviously, we can't provide any more specifics than Andre already has regarding where future price increases would occur, as that's not something we're allowed to disclose.

I guess not to beat a dead horse, but just to follow up on that point, as you think about the priority for the P&L, in those categories, I mean, I look at paper, I look at laundry or fabric. Those are categories where there is just to start with, maybe more competition, maybe less brand loyalty, maybe a little bit more private label just to start with, even though private label may not be gaining share yet. And so I'm wondering, if your priority is to offset commodity headwinds as much as you possibly can to preserve gross margin, or is it to preserve market share at this point? And then relatedly, you haven't really talked that much about currency and what you're doing in some of the bigger emerging markets, not even just emerging markets, but Japan, for example, where currency is a significant headwind. Are you adopting a different stance with regard to taking prices to offset currency headwinds? And are you seeing any differences in elasticity maybe in some of those emerging markets? Thanks so much.

Okay. In terms of priority, our priority remains a reasonable recovery time on the dollar impact of commodities, foreign exchange and T&W headwinds across all categories. We will do this in a way that provides value to the consumer, provides a superior proposition to the consumer by combining it with innovation. There is no timeline for us that forces us to recover gross margin over a certain period of time. We want to return to margin expansion, and we will. Our balanced growth model requires us to drive top line, bottom line but also reasonable margin expansion. So there is continued commitment to return to that point, but we will do it in a way that provides the right value to the consumer in every brand in every market at any given point in time, so we can serve consumers in the best way possible and maintain business momentum. To your second question on foreign exchange rate pricing, across markets, foreign exchange rate pricing is a reality we're dealing with every day, we've been dealing with for years. Nothing different to report in terms of elasticities, it's being executed in some markets, more pronounced. You've seen us taking significant price increases, for example, in Turkey, significant price increases in Argentina. So those are being executed. The organizations know very well how to do those, and they are baked in our forecast and guidance.

So just one other point, Wendy. You asked – the question that you asked is the question that we get asked by the organization every day, which is which of these matters most, essentially top line and continued share progression or bottom line and earnings recovery. And the answer always is both. It's Andre's balanced point. We need to do both or we get out of balance, and the wheels come off. So we need to continue, and we'll continue to invest in top line momentum as we recover the commodity costs through combination of pricing, productivity, et cetera. So that's – it's both.

Yeah. Thank you. Good morning, everyone. I wanted to ask a different slant to the premiumization and trade-down question, not necessarily on trade down, but just slowing momentum of premiumization because during the pandemic, you had a lot of low-income consumers with all that extra stimulus money engaging more in premium price tiers. So I was just curious on your observations on that. Kind of how do you think that's going to manifest in terms of that particular income strata and how they're behaving with food and gas inflation the way it is? Thank you.

Yeah. Good morning, Nik. Look, we're not seeing it. We've seen consumers trade into P&G brands and trade up within the P&G brand portfolio throughout the pandemic. Every quarter this fiscal year, we've seen consumers continue to trade up within the P&G brand portfolio into higher premium propositions across most categories. That's the mix effect you've seen on the gross margin and the positive mix effect on sales. So we continue to see consumers stay within the P&G portfolio and many consumers actually trading up within the P&G portfolio as they see the benefit of those higher premium propositions. As we've said before, we don't take that for granted. We don't assume that what we're seeing to date is necessarily an indication of what will happen in the future. We are very well aware that consumers might end up looking at budget constraints. Where we see, for example, private label losses reducing, we continue to see P&G growth. So even private label coming back so far is not impacting P&G's ability to grow within those markets or within those market category combinations. Our best defense to serve the consumer in a more budget constrained environment, other point we've talked through from the portfolio focus that we're operating to superiority to value plays, cash outlay choices, price ladder choices, distribution across our channels. So I come back to those elements that we control. That will serve us well, I believe, even for consumers that are more budget constrained and looking for choices.

There are many mileage benefits in some of the higher-priced products that we need to proactively communicate, as Andre mentioned earlier. The assumption that something is higher priced means it costs more per job is not a valid assumption, and we need to help people understand that.

Hi. Good morning. I wanted to ask a question about the Personal Health Care business. Organic growth over 30%, certainly impressive. I appreciate there's a dynamic here where there's some recovery from like basically a non-existing cold, flu, but also conscious that this is one of those categories where you're particularly focused, and there's been some innovation. I wonder if you can just comment on how much of the strength in the business which is recovery versus things you're doing a bit more offensively that have a bit more legs long term? And just connected to that, fiscal Q4 implied organic sales guidance is for strength but deceleration on a two-year stack. And I wonder if you're baking in any normalization there or if there's other puts and takes that we should keep in mind? Thanks.

All right. Thanks, Chris. PHC had a fabulous quarter, as we point out. Part of that certainly is the stronger cold, cough and flu season. It's 57% stronger in our estimation than last year's season, which was abnormally low driven by the mask mandates and everything else going on, a slightly stronger season than average by about 4%. But importantly, North America Vicks, for example, was able to outpace that season growth, plus 123% growth versus the season, which drove about 1.9 share points over the period. So within respiratory, season recovery is certainly a big point, but mix growing ahead of the season recovery and building share. The growth is also broader than just respiratory. Digestive organic sales are up mid-teens, and fleet is up nearly 30%. So the breadth of the portfolio is performing even beyond just the season recovery. So we continue to be very pleased with the results of the PHC portfolio and certainly see significant future runway there. On quarter four, sales guidance, the only thing I would say is as we mentioned before, we do not assume the favorable price elasticities to hold. In our forecasting, we assume price elasticity is to return to normal levels that we've seen historically. That's the only thing I'll let you know. And the rest, I think, is fairly clear.

I'd like to follow up on a comment made earlier regarding sequential gross margin improvement. Are you suggesting that the gross margins we see today represent the lowest levels for the fourth quarter, and that we will begin to see improvements as we enter the next fiscal year?

General comment over time, Kaumil. We're not forecasting gross margin or gross margin guidance here, too many moving pieces. But over time, we remain committed to building gross margin as part of the balanced growth model.

Yes. Thanks and good morning everybody. I wanted to ask specifically a bit more about Beauty. So volumes negative. I guess I was curious, how much of it is category shift? It seems a bit away from Skin Care given pandemic effect there into some more discretionary categories. How much is market share challenges for SK-II around Asia and China specifically? And how do you think about how much of what I just said could be transitory versus needing more change from your standpoint to improve trends? Thank you.

Thank you, Mark. We are very confident in our Beauty portfolio. Over the past five years, this portfolio has shown impressive performance. We've seen sales growth exceeding $3 billion and profits surpassing $1 billion, leading to significant value creation for shareholders and 26 consecutive quarters of growth. The core portfolio has been performing exceptionally well. However, we are facing several temporary challenges, particularly with the dynamics in China impacting our Hair Care and Skin Care lines, as well as the travel retail shutdown during the COVID period affecting SK-II. The closures of department stores and disruptions in online sales have also presented challenges. Despite these temporary effects, we are continuing to expand our portfolio with several recent acquisitions that target the premium and super premium segments. We see this as a growth opportunity beyond our core offerings in specialty channels. Our strategy has been validated by past successes like First Aid Beauty, and we aim to enhance our portfolio in the premium and super premium segments while also strengthening our core business. We recognize the need to address the challenges in China, rebuild momentum for SK-II, and better serve premium consumers in the U.S. and internationally. Overall, we remain very confident in our focused core portfolio and our strategic acquisitions, positioning us for future growth in the Beauty category.

Hi good morning, everyone. So in the release, there were a few comments around lapping pandemic-related consumption. And I think you called out appliances and cleaning specifically. I just would be curious, when you look at performance in those categories, how does the recent performance compare versus your expectations? I guess what I'm trying to understand is, are you seeing a normalization that is in line with your expectations in some of those categories that saw significant growth over the past couple of years, or has demand held up better or been worse than you would have anticipated?

Yes, I can start. Overall consumption is holding up. Market growth is 5% in focused markets and 7% in enterprise markets, indicating that consumption across all categories remains strong. There are logical shifts to consider. For instance, our Grooming business saw significant growth in appliances during the pandemic as many services traditionally performed in salons and barbershops moved to homes. People purchased these appliances and discovered that they could handle the tasks themselves, and they continue to do so. However, as that need was met, the demand for appliances declined from its peak. Simultaneously, there is a natural counterbalance in the Grooming portfolio. Blades and razors faced challenges as more individuals stayed home. With the reopening, this segment has started to grow again. For health and hygiene products, consumers are placing greater importance on tasks that need to be done while spending more time at home. Consequently, our categories are benefiting from these trends. Consumption of paper towels has increased by more than 10%. We'll see how bath tissue performs once supply constraints are lifted, but more time at home suggests higher consumption of in-home products. The only category we noticed a slight decline in is surface cleaning and disinfection, which is a smaller segment of our portfolio. As consumers find the right balance, there was some decline there. Overall, all categories continue to benefit from increased time spent at home and a heightened focus on health and hygiene, especially Beauty and Personal Care categories gaining from the reopening.

Thank you. I was hoping, if you can please comment on the Baby, Feminine Care and Family Care. Seems that you continue to regain share in the US and also potentially in China despite the challenges there. And similar to this question, you had an impressive growth in the cold and flu brand franchises. But you start to lap those comps there. So do you think the growth is still sustainable with the innovation you've made in other franchises in health care? Thank you.

Thank you, Andrea. We are seeing significant improvement in our Baby Care share in Europe and North America, driven by major innovations launched in these markets. We plan to continue building on this momentum by enhancing our offerings through incremental innovation, brand communication investments, and effective go-to-market strategies. We've also made strides into new areas within the Baby Care category. For instance, in North America, we've reentered a category that caters to children aged 5 to 12 dealing with nighttime bed-wetting issues, and this creative message helped us grow the category in the mid-teens while achieving an 8% to 9% share. Additionally, we're gaining share in the pants segment, which is a trade-up opportunity in Europe and a growth area in North America. Our approach includes broad innovation with real product advancements as well as addressing new consumer needs and enhancing communication. In Fem Care, we’re experiencing significant success in both adult incontinence and premium offerings. The major growth in Fem Care pads in North America is attributed to our Infinity brand, which stands out for its unique design providing superior comfort and absorbency. We are applying the same strategy of relevant innovation combined with strong communication and retail execution, leading to overall market and share growth. Regarding cold and flu, I don't have much new to add beyond what we've previously discussed. We are outpacing the segment in respiratory, thanks to strong innovation in Vicks, and we are also seeing growth across our other categories, including sleep and digestive health. Overall, we believe there is substantial growth potential remaining within our PHC portfolio, and this is evident in the market results.

So the announcement of this increase is certainly a strong signal to reaffirm our commitment to the brands that we represent here as a company. It represents confidence in our portfolio's ability to deliver on customer value, share growth, and all citizens being benefited from our strong performance as individuals. So our market share trajectory looks strong. Our commitment remains strong.

Thank you very much. I appreciate your insights. There hasn't been much conversation regarding retailer resistance to pricing, which could be due to overall good results. Focusing on the US market, what factors contribute to your positive relationships with retailers and better elasticities? This seems to be rooted in consumer dynamics. Do you anticipate this trend will persist? Can you provide any insight into why these strong relationships have developed? Could it be that retailers are experiencing product shortages, leading to higher demand? What do you believe allowed these positive relationships to form, and how sustainable do you think they will be if we face another round of significant pricing increases in the second half of the year? Thank you.

I'll start, and I'm sure Jon has a few points to add here. Generally, discussions with retailers are more effective when your business is strong. Consumers are interested in what you offer. Sales velocity at the shelf is robust. You have credible, tangible, and meaningful innovation programs for consumers. Your in-store programs are valuable for both retailers and consumers. You can effectively communicate and support your advertising in both digital and traditional media. All these factors were relevant as we entered this period of commodity inflation. P&G began from a relatively strong position in terms of superiority. We continue to invest in innovation. Our products on the shelf are performing well, which facilitates positive discussions with retailers about future growth potential and the need for pricing adjustments, which is evident due to the broad-based inflation affecting multiple industries. While there’s no guarantee this will persist, we must maintain a careful balance between productivity, innovation, and pricing.

Our retail partners often compete with us as they offer their own brands. Given the significant cost increases, they generally need the flexibility to raise prices on these brands. When they do this, it becomes a less pressing issue for us. Over the past few years, our discussions have shifted to a stronger emphasis on market growth, and we are committed to being a key contributor to that growth. Ultimately, our retail partners are more concerned about their own sales and growth rather than our market share. Our consistent ability to drive their growth changes the focus of our conversations. We also see an opportunity to better serve our retail partners by improving supply, which we are actively working on. This is crucial for maintaining effective relationships and our sustainable contribution to market growth.