Procter & Gamble Company (PG) — Q4 2022 Earnings Call Transcript

Good morning, everyone. Joining me on the call today are Jon Moeller, Chairman of the Board, President and Chief Executive Officer; and John Chevalier, Senior Vice President, Investor Relations. I'll start with an overview of results for fiscal year '22 and the fourth quarter. Jon will add perspective on our strategic focus areas. We'll close with guidance for fiscal '23 and then take your questions. Fiscal 2022 was another very strong year. Execution of our integrated strategies continues to yield strong sales, earnings and cash results in an incredibly difficult operating environment. We delivered broad-based strong top line growth across categories and regions, earnings growth in the face of significant cost headwinds, and continued strong return of cash to P&G shareholders. Organic sales for the fiscal grew 7%, up 13% on a two-year stack, and up 19% on a three-year stack. Growth was broad-based across business units with all 10 of our product categories growing organic sales. Personal Health Care grew 20%. Fabric Care and Feminine Care grew double digits; Baby Care, up high single digits; Oral Care and Grooming, up mid-single digits; Hair Care, Home Care, Skin and Personal Care, and Family Care each grew low singles; Focus Markets were up 5% for the year; and Enterprise Markets, 10%. We delivered strong results in our largest and most profitable market, the United States, with organic sales growing 8%, up 16% on a two-year stack. E-commerce sales increased 11%, now representing 14% of company total. Our integrated strategies continue to drive strong market growth, and in turn, share growth for P&G. All channel market value in the U.S. categories in which we compete grew approximately 6% in fiscal '22. P&G value share continued to grow, up 90 basis points for the year. Global aggregate market share increased 50 basis points. 36 of our top 50 category country combinations held or grew share for the year. Importantly, this share growth is broad-based. Nine of ten product categories grew share globally over the past year. Core earnings per share grew 3% for the year despite a 22 percentage point headwind to earnings from commodities, freight, and foreign exchange. Our initial outlook predicted $1.8 billion after tax of headwinds. We ended up at $3.2 billion. So despite an incremental $1.4 billion of earnings pressure versus our initial plan, we delivered core EPS growth within our initial guidance range for the year. On a currency-neutral basis, core EPS was up 5%. Adjusted free cash flow productivity was 93%. We increased our dividend by 5% and returned nearly $19 billion of value to shareholders, $8.8 billion in dividends and $10 billion in share repurchases. Moving to the April-June quarter, organic sales grew 7%. Pricing contributed 8 points to organic sales growth as additional price increases reached the market. Mix was flat and volume declined 1 point, which is due to reduced operations in Russia. Volume for the balance of the business excluding Russia was up 1 point. These strong company results are grounded in broad-based category and geographic strength. Nine of the ten product categories grew organic sales in the quarter. Personal Health Care grew mid-teens; Fem Care was up low teens; Fabric Care grew double digits; Oral Care, up high singles; Baby Care and Family Care, up mid-single digits; Hair Care, Home Care, and Grooming, each grew low singles. Five of seven regions grew organic sales with Focus Markets up 3% and Enterprise Markets up 18% for the quarter. Organic sales in the U.S. grew 6%, up 24% on a three-year stack. European Focus Markets were up 3%. Excluding Russia, European Focus Markets were up 7%. Greater China organic sales were down 11%, mainly due to COVID-driven lockdowns in major regions of the market. Since lockdowns have eased, we've seen sequential market recovery but somewhat slower than expected when we gave guidance last quarter. In Enterprise Markets, each of the three regions grew organic sales 14% or more. Global aggregate market share increased 50 basis points. 29 of our top 50 category country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.21, up 7% versus the prior year. On a currency-neutral basis, core EPS increased 12%. Core operating margin decreased 30 basis points as gross margin pressure was largely offset by sales leverage and productivity improvements in SG&A. Currency-neutral operating margin increased 20 basis points. Free cash flow productivity was 99%. We returned $3.5 billion of cash to shareholders this quarter, nearly $2.3 billion in dividends and nearly $1.3 billion in share repurchases. In summary, we met or exceeded each of our going-in target ranges for the year: organic sales growth, core EPS growth, free cash flow productivity, and cash return to shareholders, strong performance in very difficult operating conditions. Now I'll pass it over to Jon.

Thanks, Andre. P&G employees have delivered great results over the past four years in a very challenging macro environment against very capable competition. In those four years, P&G people have added more than $13 billion in annual sales and roughly $5 billion in after-tax profit, executing our integrated strategies with excellence. I want to publicly thank our colleagues in product supply and R&D, who have enabled this progress with formulation, sourcing, manufacturing, and logistics agility and extraordinary commitment to serve consumers, customers, and each other through walk-downs, inbound supply shortages, outbound truck shortages, port blockages, natural disasters, and geopolitical tensions. What P&G's people have accomplished together is truly extraordinary. Still, we're very clear-eyed about the trials ahead. The list of challenges we face heading into our new fiscal year is longer than any I can recall. The progress we've made and our collective commitment to our strategies give me confidence we can manage through these challenges. We've never been better positioned. A portfolio that's focused on daily-use categories where performance drives brand choice; superiority across product, package, brand communication, in-store execution, and value; leveraging that superiority to grow markets and our share in them; creating business versus taking business; powerful with our retail partners as we work to jointly create value. We've developed a productivity muscle that helps address some of the challenges we face. We remain fully committed to cost and cash productivity in all facets of our business, up and down the income statement and across the balance sheet in each business and corporately. Productivity improvement is a necessity to drive balanced top and bottom line growth and strong cash generation. Success in our highly competitive industry and in this dynamic and challenging environment 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 for the future. In the current environment, that agility and constructive disruption mindset are even more important. Our organization structure is yielding what we intended: a more empowered, agile, and accountable organization with little overlap or redundancy, flowing to new demands, seamlessly supporting each other. This improved agility and accountability have been important enablers of our strong results in the dynamic environment we faced. Going forward, there are four areas in which we need to be even more deliberate and intentional to strengthen the execution of the strategy. The first is supply, improved capacity, agility, cost efficiency, and resilience for a new reality and a new age. The capability investments we made prior to COVID to improve our manufacturing and distribution networks have helped us to manage through the last few years with relatively few prolonged issues. We're already making the next round of investments needed to ensure we have multiple qualified suppliers for key inputs, sufficient manufacturing capacity to satisfy growing demand, and flexibility to meet the changing needs of all types of retailers. The second area is environmental sustainability, integrated into our product packaging and supply chain innovation work, irresistibly superior offerings that are sustainable. New cardboard packaging on Gillette razors is an improvement for the environment and a noticeably superior experience for consumers at the first and second moments of truth. New fully recyclable paper packaging on our premium Always cotton protection pads recently launched in Germany. Laundry detergent formulations that deliver superior cleaning in cold water, reducing energy usage, saving money, and extending garment lifespans for consumers. Third, increasing our digital acumen to drive consumer and customer preference, reduce cost, and enable rapid and efficient decision-making. Increased digitization on manufacturing lines, more use of AI, more use of blockchain are not ends in to themselves. There are tools we can use to delight consumers and customers at the most reasonable cost possible. Fourth, our employee value equation for all gender identities, races, ethnicities, sexual orientations, ages, and abilities for all roles to ensure we continue to attract, retain, and develop the best talent. By definition, this must include equality. To deliver a superior employee value equation, there must be something in it for everyone. These are not new or separate strategies. They are necessary elements in continuing to build superiority and reducing cost to enable investment in value creation and strengthening our organization. They are part of the constructive disruption we must continue to lead. The operational costs and currency challenges we faced over the last two years will continue in fiscal '23. We began the new fiscal year with consumers facing inflation levels not seen in the last 40 years. We know one of the most pressing questions out there is how we plan to deal with the severe cost and currency impacts we're facing: $6.5 billion after tax in just two years, nearly an $8 billion hit to operating profit. I'll repeat what I said on our April 2020 earnings call: the best response to uncertainties and challenges we face is to double down on the integrated set of strategies that are delivering very strong results. It won't be easy. There will be bumps along the road, but we have the portfolio, superiority, productivity, and in my not-so-humble opinion, the best organization in the world. We have everything we need. So again, I think we are very well positioned. We're committed to keep investing to strengthen the superiority of our brands across innovation, supply chains, and brand equity to deliver superior value for consumers in every price tier in which we compete. Alongside our productivity work, we'll continue to offset a portion of the cost impacts with price increases. Whenever possible, we'll close a couple of those price increases with innovation. Those moves will be tailored to the market, category, and brand. As consumers face increased pressure on nearly every aspect of their household budgets, we invest to deliver truly superior value in combination of price and product performance to earn their loyalty every day. So far, elasticities in most categories where we've taken price increases have been better than our historical experience. Our strategic choices on portfolio, superiority, productivity, constructive disruption, and organization are not independent strategies. They reinforce and build on each other, and the four focus areas that I mentioned strengthen the execution of that strategy. When all of this is executed well, we grow markets, which in turn grow share, sales, and profit. These integrated strategies are a pathway to delivering balanced growth. We've been talking about the importance of balance for a long time in the context of needing both top line and bottom line growth to deliver value for shareholders. We're in a world that needs more from us now. We need to expand that concept to serve and delight consumers, customers, employees, society, and our shareholders. And I firmly believe that if we fail to do any of those, we will fail to do all of them. Our consumers increasingly rely on us to deliver superior solutions that are sustainable. Our world requires that we do our part in this regard. This challenge is also a wonderful opportunity to extend our margin of superiority, further grow our categories, and create more value, all while positively impacting the environment and society. 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. With that, I'll hand it back to Andre to outline our guidance for fiscal 2023.

Thank you, Jon. As we've said in each guidance outlook for the past two years, we will undoubtedly experience more volatility in the fiscal year ahead. This rings true again as we enter fiscal 2023. The combined year-on-year profit headwinds from foreign exchange rates, freight costs, materials, fuel, energy, and wage inflation are an even greater challenge in fiscal '23 than they were in fiscal '22. Based on current spot prices and supply contracts, we estimate commodities, raw materials, and packaging material costs to be a $2.1 billion after-tax headwind in fiscal 2023. Freight costs are expected to be higher in fiscal '23 compared to the average cost paid in fiscal '22 by roughly $300 million after tax. Foreign exchange rates have moved sharply against us even since our presentation at the Deutsche Bank Conference in June. We now expect foreign exchange to be a $900 million after-tax headwind in fiscal '23. Combined headwinds from these items are now estimated at $3.3 billion after tax, roughly equal to the challenge we faced in fiscal '22, a 23 percentage point headwind to EPS growth or roughly $1.33 per share as we start the year. As Jon said in his review of our strategies, we're working to mitigate the impact of these cost headwinds through a combination of innovation to create and extend the superiority of our brands, productivity in all aspects of our work, and pricing. With this context, I'll move to the key guidance metrics. We expect global market value growth in our categories to moderate back towards a range of around 3% to 4% with strong price contribution offset by modest decreases in unit volume. With the strength of our brands and our commitment to keep investing in the business, we continue to expect to grow at or above underlying market levels, building aggregate market share globally. This leads to guidance for organic sales growth in the range of 3% to 5% for fiscal '23. On the bottom line, we expect EPS growth in the range of in line to plus 4% versus fiscal '22 EPS of $5.81. This guidance equates to a range of $5.81 to $6.05 per share, $5.93 or up 2% at the center of the range. Considering a 6-point headwind from foreign exchange, this outlook translates to 6% to 10% EPS growth on a constant currency basis. There are many possible scenarios that could cause us to be outside of this range to either side, high or low. While it's relatively easy to envision many possible scenarios, steeper inflation, deep recession, further geopolitical disruption or commodity cost reversion easing inflation, peaceful conflict resolution, it's very difficult to assign probability to any single scenario. As a result, we set the range we feel is most probable based on market conditions as we see them today. We expect adjusted free cash flow productivity of 90% for the year. This includes a step-up in capital spending as we begin to add capacity in several categories. We expect to pay more than $9 billion in dividends and to repurchase $6 billion to $8 billion of common stock. Combined, a plan to return $15 billion to $17 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, or store closures are not anticipated within this guidance range. Now I'll hand it back to Jon for his closing thoughts.

The macroeconomic and market-level consumer challenges we're facing are not unique to P&G, and we won't be immune to the impacts. We've attempted to be realistic about these impacts in our guidance and transparent in our commentary. As we've said before, we believe this is a rough patch to grow through, not a reason to reduce investment in the long-term health of the business. We're doubling down on the strategy that has been working well and delivering strong results. We'll continue to step forward 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.

I have a couple of clarification questions regarding the guidance. The first one is to confirm my understanding. If I examine the implied increase in the tax rate alongside the share repurchases, they seem to balance each other out. It appears that the underlying guidance suggests that profit growth will match revenue growth. I just want to ensure I'm interpreting that correctly.

Yes. Our core EPS guidance, as I said, in the range of flat to plus 4% with a tax rate slightly higher than what we've seen in the previous fiscal year. This is driven by geographic mix changes, and it's also driven by reduced benefit from stock option redemption. From an operating profit standpoint, you're in the right ballpark. And I would leave it at that.

You both have mentioned several times the importance of maintaining ongoing cost and cash productivity. Reflecting on fiscal '22, it's evident that expense productivity fell short of expectations, particularly external ones. As we look ahead to fiscal '23, which could be crucial for the growth in operating profit you discussed, how confident are you about your ability to enhance productivity in the upcoming year? That's my main question. Additionally, could you address how the mix has significantly influenced margins for some time now and what your base case is for the impact of mix on your margin outlook in '23?

Good morning, Steve. On productivity, you're right, it has to be a significant contributor to how we offset the inflationary cost impacts and enable reinvestment in the business in combination with pricing and innovation, as we said before. In fiscal '22, maybe let's go by area. From a cost of goods productivity standpoint, we've talked about us prioritizing production of cases to ship them and innovation as we were capacity-constrained. That has limited our ability to get cost savings qualified and through the P&L. That is changing in this current fiscal year. As the capacity situation eases, as we add more capacity and catch up with demand, we are able to get more cost savings qualified, catch up on some of the cost savings we delayed in fiscal '22. So we are expecting growth savings in the COGS area to get back to pre-COVID levels in this fiscal year. We are very confident in our teams. They have an unlimited number of creative ideas to drive further productivity. That still obviously is needed to offset inflation, which is equally strong in the fiscal year. From a media standpoint, we have delivered significant productivity over the past years, but we have reinvested all of that productivity in incremental media spend ahead of sales leverage, ahead of the productivity numbers even that we generated. And that productivity continues to strengthen. We have developed strong capability to target better both on TV as well as in digital. Our ability to improve the effectiveness of reach and quality of reach is allowing us to drive cost per effective reach down both in digital and in TV. We've shifted more and more spend into digital. Now more than 50% of our advertising is in digital. And with that, we are rolling out these capabilities to more and more businesses and more and more regions. That allows us to increase productivity on media spend in the current fiscal year to the point where we believe we will use some of that productivity not to reinvest fully but to actually flow through and help offset inflation. And some of that you saw in Q4 combined with other effects. General sales leverage and productivity on SG&A driven by sales leverage is well intact. You saw it flow through in Q4. That was 180 basis points helped to operating margin, and that should continue. So in summary, I feel good about our productivity muscle. It continues to strengthen, and it will be needed to help offset some of the inflationary pressures we see. On product mix, we continue to see the same effect that we've seen in previous quarters, which is a negative impact to gross margin, roughly 130 basis points on the quarter, positive impact when you think about our portfolio. What we see is that consumers that come into the P&G portfolio and we had big success in driving trial over the past two years. Those consumers, if they try P&G products, they tend to trade up. And that trade-up comes with increased unit sales. It comes with increased penny profit, but the gross margin is slightly dilutive. The example we use generally is Tide pods, about a 50% premium in unit sales versus liquid detergent per load, significantly higher unit profit, but from a gross margin percentage standpoint, slightly lower. So that same effect continues, and we expect that trade-up, hopefully, to continue in this fiscal.

I just wanted to discuss your level of visibility on the 3% to 5% organic sales growth guidance for fiscal '23. Obviously, there's a lot that builds into that, but I was curious for your perspective in a couple of areas. First, just the competitive environment. What are you seeing in your categories with a strong 8% pricing this quarter? Are competitors generally matching pricing in your categories? And then, B, you're only assuming modest P&G market share gains for fiscal '23 with the 3% to 5% corporate organic sales growth and 3% to 4% category growth. So can you discuss what's driving the moderation in P&G market share gains and how potential pickup in private label share might play into that and the fiscal Q4 results?

Thanks, Dara. Our revenue guidance is based on our expectations for the marketplace. We anticipate a slowdown in overall market value growth from the 5% we experienced over the past year to about 3% to 4%. We expect pricing to be the primary factor contributing to this market growth, with a slight decrease in volumes. This is a logical result of the widespread pricing trends we're observing, which we assume will show elasticity. We've observed some elasticity, which has been better than anticipated given historical levels, and this is incorporated into our market growth projections. We are confident in our ability to thrive in this environment. Our product categories are everyday essentials that consumers tend to stick with even amid high inflation levels. Our commitment to Irresistible Superiority, robust value claims, diverse portfolio across price points and channels positions us favorably in the market. Additionally, the strength of our innovation portfolio and our focus on increasing household penetration and trade-up within our offerings will enable us to drive market growth, which in turn supports our share growth. This is part of our strategy for assessing market size and relative share growth. Regarding private labels, we are seeing a resurgence in some categories, particularly in paper products in various regions. While we recognize the return of private labels, partly due to supply dynamics, we continue to gain market share in those areas. In the U.S., we've noticed a slight rise in private label in Family Care, but overall, we've managed to achieve share growth across all outlets. In Europe, private labels are gaining strength in some markets; however, we are seeing positive share trends in the UK, France, and Germany during the recent period. We are closely monitoring the situation, but we remain focused on our strategy, portfolio, superiority, and innovation, believing we are well positioned to meet consumer needs in the current environment.

I just want to add one thing to that. I agree with everything that Andre said, both due to base period dynamics across ourselves and our competitive set and, as you said, Dara, due to many dynamics that are impacting both top and bottom line as we move forward. There will likely be more volatility in the numbers. There will be some bumps along the road. And you'll have to be careful how much you read into any one-week or four-week period. We've got our eyes focused on a longer time period than that, and we'll be managing accordingly.

I have two questions. First, despite your recent comments on scanner data, I've noticed a shift in U.S. market share performance, which is slightly down. It seems that competitor supply might be rebounding. Can you provide some insights on the overall U.S. market share performance, given that it was previously number one? Second, regarding China, which I believe accounts for 9% to 10% of your sales and has seen an 11% decline, this seems significant. I understand you've mentioned challenges related to the COVID lockdowns in China, but it appears that your decline is sharper compared to what other companies are reporting. Can you elaborate on why your performance in China differs from other multinationals? Is this related to market share factors or specific operational issues? I would appreciate any insights you can share.

Let me just start in response to that question, Lauren, and then kick it over to Andre. We need to keep coming back to the strength of the top line. So in the U.S., for example, we grew 6% in the quarter, 8% over the course of the year. As you know, 7% total company, both on the year and the quarter. And that strength is broad-based. That's important. And we continue to protect top line growth as well as modest share growth going forward. I'll ask Andre to provide specific commentary on China.

Very good. Hey, Lauren, I'll start quickly with the U.S. share if that's alright. You're correct that in the past week and the past four weeks, we've experienced a decline of about 10 to 20 basis points. As Jon mentioned, there will be fluctuations along the way due to the highly volatile base period. However, when looking at absolute shares in the U.S., we have actually increased over the last 52 weeks, the last 13 weeks, and even the past week. To provide more context, the two segments that have seen a decline during this period are Fabric Care and Family Care. Regarding the performance of Fabric Care, it's noteworthy that it had a strong run in the U.S., increasing by 11% for the quarter and 12% for the year, with a rise in the low teens over the past two years. Unfortunately, we couldn't keep up with capacity, which became a significant issue in March. While we were in the process of installing new capacity, we faced supply constraints during the AMJ quarter, leading to a reduction in merchandising and media investments because we simply didn’t have enough products available. This issue was resolved in July, and we are now back to full supply as the new capacity has come online, allowing us to reinstate our merchandising and media efforts. In Family Care, the supply situation has also been very tight, and it is important to note that what you're observing mainly reflects base period effects rather than sequential share changes. All-outlet shares in the U.S. continue to rise, and we remain confident about our overall U.S. business. Regarding China, we have indeed been significantly affected by COVID lockdowns. Our analysis shows that the market contracted by double digits during the quarter periods we are reviewing, which is evident in our results. However, since consumer mobility has begun to recover and lockdowns are being eased, we are witnessing a resurgence of growth in our categories. Our shares are responding positively, and we are optimistic about returning to mid-single-digit growth in China in the coming quarters. The local team is excited and well-prepared, but we need to see consumer mobility fully return.

And relative to your question about share performance, the location of manufacturing operations greatly affects the ability to supply the market. We were significantly impacted by the location of some shutdowns, particularly in Shanghai, where we have manufacturing centers and important contract manufacturer supply. This is one of the reasons for the fluctuations in the share comparison.

Two questions. I guess kind of coming back to some of the topics that have already been raised. First on market growth assumptions, the anticipated deceleration, is this coming from an anticipation that consumers are going to use less so as volume comes in, trade down so mix comes in? Or maybe we lap some pricing and bring some more promotions back so pricing comes in? Which of those three components do you expect to be the bigger driver of category to sell?

It's a combination of what you described. Pricing generally has a level of elasticity. Consumers tend not to leave the category, but they may adjust their dosing behaviors. They might pay closer attention to their inventories and reduce them over time, especially as they face inflation in the marketplace with the highest rates seen in 40 years. It would be naive to think that consumers are not considering their cash outlays and spending in our categories. While we have observed more favorable elasticities than historical averages so far, we assume that they will revert to those historical norms going forward. We hope this isn't the case, but we believe it will return to past levels. Another point to consider is the normalization of consumption patterns. After a period of significant growth in consumption over the last two years, some of that will likely return to more typical levels at the market level. Our focus is on our brands and categories driving household penetration opportunities, which remain significant even in the most developed markets and categories. That will be our priority.

My question is on potential implications from the fallout with Walmart and your bigger retailers more broadly feeling margin pressure. From a category perspective, it's sort of well understood the issues are more general merchandise and not consumer staples. But we have seen some ripple effects, right? They've announced freight fuel charges, which we have seen. So my question is really around any implications that you may be concerned about, whether more difficulty taking price, greater request for trade promotion. So any comments you have there in terms of what's going on with large retail customers would be helpful.

Yes, Kevin, I'll start, and then Jon might want to add here. We recognize that Walmart is experiencing challenges in general merchandise and apparel. However, our categories, particularly in health and personal care, are still performing well across all retailers in the U.S. Our goals align with those of retailers, as our mission is to deliver the best value to consumers in terms of price and product performance. We aim to attract customers to stores, increase shelf traffic, and promote the use of our products. Therefore, we continue to collaborate positively with Walmart and all retailers to achieve these objectives. Our strategy is based on the categories we operate in, which tend to remain strong even during tough times. Our focus is on excellence, innovation, driving category growth, and succeeding with our retail partners rather than solely prioritizing market share growth. All these efforts are beneficial in our view and for retailers. The ongoing conversations are generally constructive, with an emphasis on delivering the best value to consumers.

Was wondering if you could talk a little bit about your price increases in July, maybe give a sense of order of magnitude and breadth, early reception. And then assuming the sort of elasticities that you expect, how far can those increases go to offsetting the $3.2 billion or $3.3 billion of headwinds that you outlined earlier?

The increases we announced in June and July are being implemented broadly this quarter, specifically in July, August, and September, particularly in the latter half. They apply to most categories in the U.S., and we have also announced pricing adjustments globally in the same range, typically mid-single digits but with notable differences. Overall, I would say we're looking at mid to high single digits, customized by country, brand, and SKU to ensure we meet retailers' needs by providing the best value for shoppers in terms of price, product performance, and value tier. The feedback from retailers regarding these price increases has been as anticipated. Although no one is happy about the ongoing inflationary trends, the discussions remain constructive as we seek to balance the needs of both retailers and manufacturers in recovering inflationary costs that cannot be mitigated through productivity. While pricing is a component of our strategy to counter the recent inflation trends affecting commodities and transportation, the increases will not completely cover all the rising costs. It will require a collective approach, integrating pricing, innovation, and encouraging trade-up through new product development and productivity improvements. Nevertheless, we are optimistic about all aspects of this strategy. Our innovation portfolio is exceptionally strong, our productivity efforts are solid, and our pricing conversations continue to be positive.

I want to make an additional point regarding the competitive environment. We are observing price increases on private label brands and mid-tier offerings that in some instances exceed our own price increases. I mention this perspective in relation to our ability to maintain pricing and its potential impact on market share. As Andre noted, the environment is generally positive.

I'd like to talk more about the $1.33. It's a significant amount influenced by commodities and foreign exchange, especially in relation to forward purchasing agreements, hedges, and similar factors. I'm asking this for a clear reason: commodity costs have recently decreased. While the benefits may not be immediate, how should we consider the potential impact if this trend continues on the estimates you've provided so far?

Good morning, Kaumil. Yes. Breaking it down, of the $3.3 billion, $1.33 billion comes from commodities, $900 million from foreign exchange, and $300 million from transportation. On the commodity side, we've noticed some of our commodities have annualized declines, but most of our commodity basket continues to show week-over-week and month-over-month increases. Overall, our commodity exposure is currently stable to increasing. We are assuming stability within the commodity price environment based on current spot rates since we do not hedge our commodities. We're counting on our offsets within our total exposure across commodities, foreign exchange, and interest rates. Our expectation is based on current spot rates, and while we do see slight increases consistently, they are not at the levels we observed at the beginning of 2022. The foreign exchange rate presents the quickest growing headwind, which was quite significant in the fourth quarter. Interest rate differentials continue to widen compared to the U.S., so we expect that headwind to potentially increase. However, our forecast relies on the current spot rate, similar to our approach with commodities. Transportation costs are now rolling over compared to the average prices we paid in 2021 and 2022, showing some easing on rates. For instance, the load-to-driver ratio in the U.S. has dropped from a peak of 12 to a more normalized 4, and some spot rates are decreasing, although this has yet to affect contract rates. If that changes, it could bring a positive impact. In terms of ocean freight, the number of ships waiting to unload is decreasing, indicating a normalization. As a counterbalance, we do see energy and fuel prices, which might provide some relief, but so far, our observations of fuel costs suggest otherwise.

So you noted that trade promotion was expected to be about $300 million after tax. I think you're referring to promotional spending, which is not an item, I think, typically, you call out specifically. So it does seem like you're indicating a more intentional desire to pick up promotional spending in order to help the consumer weather some of these cost increases. Is that a fair characterization? And then obviously, your price increases across much of your portfolio ahead. But are there specific categories or geographies where you specifically intend to lean in or where you think the consumer or the retailers need the most help?

Good morning, Chris. On the promo side, I'm not sure we intended to mention any number. But let me describe where we are. But John Chevalier can certainly clarify afterwards, if that question remains open. Our promotion strategy remains the same. If you look at promotion levels, they are relatively stable. I take the U.S. as the market where we have the best visibility and you have the best visibility. We're running at about 27% of merch, so that's volume sold on deal, and depth combined. That compares to a pre-COVID level slightly above 30% to a COVID low at 16%. But that 27% has been relatively stable over the past few quarters. So there's no significant increase in what we're observing. We are not planning to increase significantly. But that, again, is a very tactical decision that is being made at the market level at the category level. But our intention to win is via innovation, via clarity of value offer, via our superiority, not via price promotion.

So my question is on RGM. I guess I'm not missing if you're prospectively or more reactively introducing new price points, perhaps taping simply pulling some of these levers to help the consumer or if you're seeing basically the retailers, your customers requesting more of that help or that's too early to say. And if you can walk through what has happened with Beauty in China on new exits of the quarter. I guess that's one area that you could potentially see improvement there. If you can help us kind of like bridge that gap?

Good morning, Andrea. On revenue growth management, that has been a priority for us, not only in the recent quarter but really over the past two to three years. So what we're benefiting from now was very intentional design of our revenue growth strategies over that period of time, including portfolio choices to have brand offerings available that cover different value tiers. When you think about diapers, for example, we have the premium-tier Pampers Pure at $0.38 per diaper, Swaddlers at about $0.35 a diaper, Baby Dry at $0.30 and Luvs at $0.20 a diaper. So that's one example. And this exists across really all brands. And we've been very intentional in building our presence in these different value tiers in the market, so we can serve consumers with different preferences between performance and price. We have also spent a lot of time and design effort in creating the right price points. And those price points are relevant on everyday price but also providing the right merch price points for different channels. So that's work that's been going on in every category. And then lastly, we've expanded our distribution across channels that consumers would go to in a more value-driven environment, think about hard discounters or dollar channels, to ensure that we have strong relationships with our retail partners there, strong distribution, and offerings. So that work, yes, is indeed very important, but it has been ongoing over a longer period of time. As we take pricing, we ensure that we protect that strategy very carefully. And that's why pricing is so differentiated between markets, brands, channels as we execute. On Beauty China, what I'll tell you is that we remain very confident that the Chinese market offers very attractive growth rates and very attractive value-creation opportunities for us. As mobility returns, as department stores reopen, and as we develop stronger capability in digital channels, as we refocus our business on the core brand equities, we see progress. The progress is still relatively slow because mobility is only just reopening. But we remain very confident that, that business offers a lot of opportunity, and we are well positioned with our brands to play.

Jon, this may be a little bit of a softball question, but I think we've run out of ways to ask about pricing in the consumer. But in your prepared remarks and then also I heard you on CNBC this morning say, 'P&G is the best organization in the world.' And I'm struck by that. In the 15 years I've known you, you've never been a cheerleader or someone to throw out superlatives. And coming on a quarter when technically, stock is down, and you've missed, just why you feel that way now? Is the kind of turnaround or the catching of breath complete? You seem to want to get that message out there. So just anything more color you could give would be interesting and helpful.

There's clearly a desire to recognize extraordinary effort and results on the part of our organization broadly defined. The challenges that have been overcome while maintaining or improving service to consumers, customer, and delivering both strong top and bottom line results, that's just not an accident. And we've been trying to become even more intentional about the importance of our organization, of our employee value proposition and delivering and sustaining superiority over time. So it's just, Bill, a reflection of that reality and my confidence in this organization to continue to step up and step forward into the challenges we face and continue to deliver strong progress from a business standpoint.

I'll be quick, but just two quick questions. First, are there more price actions planned versus what's already been announced? Is there anything being contemplated or everything that's been announced has been announced? And then secondly, just if you could give some color on your innovation pipeline and how it skews this year versus previous years potentially. Is there more premium versus more value and how you think about it in terms of contribution to price and mix?

Hey, Olivia. On pricing, my answer is going to be quick. What's announced is announced, and everything else we can't talk about. But it's going to be a combination of pricing, productivity, and innovation. That's as much as I can tell you. And we're always evaluating pricing and the necessity for pricing in every market every day. So that's an ongoing discussion. In terms of innovation, fundamentally, our innovation pipeline looks out five years, 10 years. The innovation pipeline continues to be strong. It continues to drive superiority across the full portfolio because that's the definition of superiority. It's not just the premium end, and that doesn't really change. So when we talk Irresistible Superiority, we mean Irresistible Superiority at every price point for every product, for every consumer that we choose to compete for versus the relevant competitive offering. And that drives the innovation strategy and the strength of the innovation. I see it only improving and being broad-based.

I have a question and just need a clarification or reminder. Can you provide insight into the leverage you gain from an SG&A perspective given the volumes we've experienced over the past couple of years, especially in light of the slight volume decline in the June quarter? Additionally, how do you view the ability to invest sustainably considering the current exchange rates, particularly with the strength of the dollar against other currencies? I'm interested in how this affects your overseas competitors who do not have to contend with the same translational impacts and how it influences your capacity to maintain investment levels if the dollar remains strong.

Thanks, Mark. Let me begin by discussing sales leverage in broader terms. We generally experience sales leverage when growth is around 3% to 4%. Growth exceeding 4% significantly contributes to SG&A leverage. If we achieve growth within our guidance range, we can expect a level of sales leverage consistent with our historical performance. On the cost of goods front, you're correct that volume is the critical factor for leverage. With flat volumes, as experienced in the fourth quarter, there is no leverage. This makes our productivity initiatives even more crucial, which is why we are focusing on accelerating improvements. We'll provide more details on this during our Investor Day, specifically regarding Supply Chain 3.0, to highlight the opportunities we still have for driving productivity. This also addresses your second question; foreign exchange rates pose a considerable challenge for us, unlike for some international competitors who may not experience the same impact. We recognize this issue and understand its implications. The key to overcoming these challenges is strong growth, which allows us to serve consumers better than our competitors and achieve top-line growth. This growth enables us to invest while simultaneously improving productivity, reinforcing our growth model and the importance of our overall strategy. However, I understand that foreign exchange rates remain one of the significant obstacles we need to navigate.

Great. Thanks for joining us this morning. Just one item to note before we sign off. We will be hosting an Investor Day here in Cincinnati on the afternoon and evening of Thursday, November 17. We'll be sending out another save-the-date reminder in the next week. But if you like more details, please get in touch with the IR team. Thanks and have a great day and weekend.