Procter & Gamble Company (PG) — Q2 2023 Earnings Call Transcript

Good morning. 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. We're going to keep our prepared remarks brief and then turn straight to your questions. Execution of our integrated strategies continued to yield good results in the October to December quarter, growing organic sales in nine of 10 categories, holding global aggregate market share, continuing productivity savings, improving supply efficiency, and sustaining investment and superiority of our brands across all five vectors: product, package, communication, go-to-market, and value continue to pay benefits for our consumers and retail partners and in turn for P&G shareholders. Progress against our plan fiscal year-to-date enables us to increase the guidance range for organic sales growth and maintain ranges for core EPS growth, free cash flow productivity, and cash return to shareholders. Moving to the second quarter numbers. Organic sales grew 5%, pricing added 10 points to sales growth, and mix was up 1 point. Volume declined by 6 points driven by a combination of market contraction, trade inventory reductions, and portfolio reduction in Russia. Growth was broad-based across business units with each of our 10 product categories growing or holding organic sales. Personal Health Care grew high teens, Feminine Care, Fabric Care, and Home Care were up high single digits. Hair Care was up mid-single digits. Baby Care, Family Care, Oral Care, and Skin and Personal Care were each up low single digits. Grooming was in line with prior year. Focus markets grew 3% for the quarter, with the U.S. up 6%. Greater China organic sales were down 7% versus prior year, as the market continued to be impacted by COVID lockdowns and weaker consumer confidence. We continue to expect a slow recovery as consumer mobility increases over the coming quarters. Long term, we expect China to return to strong underlying growth rates. Enterprise markets were up 14%, with each of the three regions up 10% or more. Global aggregate market share was in line with prior year with 27 of our top 50 category country combinations holding or growing share. In the U.S., all outlet value share was in line with prior year with seven of 10 categories holding or growing share. U.S. volume share is up 0.5 points versus the prior year quarter, delivering sequential improvement from quarter one. Recent innovations like Downy Rinse and Refresh in fabric enhancers and Dawn Powerwash in hand dishwashing are extending superiority advantages and driving value and volume share growth. Innovation also serves as a catalyst for pricing across our other brands and forms in their category segments. On the bottom line, core earnings per share were $1.59, down 4% versus prior year. On a currency-neutral basis, core EPS increased 5%. Core operating margin decreased 170 basis points, primarily due to gross margin pressure from commodities and foreign exchange. Currency-neutral core operating margin decreased 70 basis points. Productivity improvements were 110 basis points helping the quarter. Adjusted free cash flow productivity was 72%, primarily due to a temporary reduction in payables. We returned $4.2 billion of cash to shareholders, approximately $2.2 billion in dividends and $2 billion in share repurchase. In summary, considering the backdrop of a very challenging cost and operating environment, we achieved continued solid results across the top line, bottom line, and cash for the first half of the fiscal year. Moving on to strategy. Our team continues to operate with excellence, executing the integrated strategies that have enabled strong results over the past four years, and that are the foundation for balanced growth and value creation. A portfolio of daily use products, many providing cleaning, health, and hygiene benefits in categories where performance plays a significant role in brand choice. Ongoing commitment to and investment in irresistible superiority across the five vectors of product, package, brand communication, retail execution, and value. As discussed during our Investor Day in November, we are renewing our superiority standards to reflect the dynamic nature of this strategy. Productivity improvement in all areas of our operations to fund investments in superiority offsets cost and currency challenges, expands margins, and delivers strong cash generation. An approach of constructive disruption, a willingness to change, adapt, and create new trends and technologies that will shape our industry for the future, especially important in this volatile environment. Finally, an organization that is increasingly more empowered, agile, and accountable with little overlap or redundancy, flowing to new demands, seamlessly reporting to each other to deliver against our priorities around the world. Going forward, there are four areas we are driving to improve the execution of the integrated strategies: Supply Chain 3.0, digital acumen, environmental sustainability, and employee value creation. These are not new or separate strategies. They are necessary elements in continuing to build superiority, reduce costs to enable investment and value creation, and to further strengthen our organization. We expanded on each of these at our Investor Day in November. If you weren't able to attend or listen in remotely, I encourage you to review the materials on our IR events website. Our strategic choices on portfolio, superiority, productivity, constructive disruption, and organization are interdependent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales, and profit. We continue to believe that the best path forward to deliver sustainable top and bottom line growth is to double down on these integrated strategies, starting with a commitment to deliver irresistible superior propositions to consumers and retail partners. Now moving to guidance. We continue to expect more volatility in costs, currencies, and consumer dynamics as we move through the second half of the fiscal year. However, we think the strategies we've chosen, the investments we've made, and the focus on executional excellence have positioned us well to manage through this volatility over time. Raw and pack material costs inclusive of commodities and supplier inflation are still a significant headwind versus last fiscal year, though we have seen some modest sequential improvement. Based on current spot prices and latest contracts, we now estimate a $2.3 billion after-tax headwind in fiscal '23. Foreign exchange is also a significant year-on-year headwind. But like raw and pack materials, we've seen modest directional improvement. Based on current exchange rates, we now forecast a $1.2 billion after-tax impact for the fiscal year. Freight costs remain higher versus prior year, and we continue to expect a $200 million after-tax headwind in fiscal '23. Combined headwinds from these items are now estimated at approximately $3.7 billion after tax, $1.50 per share, a 26 percentage point headwind to EPS growth for the year. For perspective, recall that we began the year expecting approximately $1.33 of cost and FX headwinds. So despite some modest relief since last quarter, our current outlook is still $0.17 worse than our incoming position. We are offsetting a portion of these cost headwinds with price increases and productivity savings. We are continuing to invest in irresistible superiority, and we are investing to improve our supply capacity, resilience, and flexibility. As we've said before, we believe this is a bottom line rough patch to grow through with continued investment in the business and underlying strategies. As I noted at the outset, our solid first half results enable us to raise our organic sales outlook and confirm our guidance ranges on EPS and cash. We are increasing our guidance for organic sales growth from a range of 3% to 5% to a range of 4% to 5%. Within this company-wide range, there are many puts and takes. As I mentioned, we expect to see some modest improvement in China, but European markets have softened as high inflation affects consumer spending. The U.S. remains relatively strong to date, and most enterprise markets remain resilient. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of in line to plus 4% versus prior year. The significant headwinds from input costs and foreign exchange keep our current expectations towards the lower end of this range. This guidance also reflects our intent to remain fully invested to drive our superiority strategy and increase investments as opportunities are available. We continue to forecast adjusted free cash flow productivity of 90%. We expect to pay around $9 billion of dividends and to repurchase $6 billion to $8 billion of common stock, combined we 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 production stoppages, or store closures are not anticipated within these guidance ranges. To conclude, we continue to face high year-over-year commodity and transportation cost inflation in the upstream supply chain and in our own operations, headwinds from foreign exchange, geopolitical issues, COVID disruptions impacting consumer confidence, and historically high inflation impacting consumer budgets. These macroeconomic and market-level consumer challenges we're facing are not unique to P&G, and we won't be immune to the impact. We attempt 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 is delivering strong results. We continue to step forward towards our opportunities, and we remain fully invested in our business. We are committed to driving productivity, improvements to fund growth investments, mitigate input cost challenges and to deliver balanced top and bottom line growth. With that, we're happy to take your questions.

So just a couple of questions on the full year guidance. Obviously, you didn't change the earnings guidance despite FX and commodities each being a little less negative than you originally thought. Is that more sort of making up for some of the sequential moves that we saw in Q1? Is it more you assuming reinvestment in the back half? Or is there something else in the back half? Just help us understand the reasoning there. And basically, the same question on the top line. I don't want to get into a 10-part question, but there's a bunch of sort of back and forth here. You raised the low end of the full year org sales range, but Q2 decelerated a bit versus Q1, the back half in theory implies a deceleration and volumes were a little weaker in the quarter. So maybe just taking a step back, how do you feel about the business in terms of looking at retail takeaway in fiscal Q2 and thoughts on the back half of the year?

I'll give it a try. Regarding the total year forecast, with the first half results in, we are very much on track to meet our annual guidance. When considering our EPS for the remainder of the year, we base it on current commodity prices and foreign exchange rates, and we do not anticipate that every dollar from these factors will immediately benefit our bottom line because we aim to reinvest. We see significant opportunities to invest in quality across all five areas, and if those opportunities arise, we will pursue them in the short and midterm. As mentioned in our prepared remarks, we are still performing above our initial assumptions. We are currently $0.17 lower than our initial guidance, which leads us toward the lower end of our core EPS range. However, with additional support, we are more confident that we can meet that range, or potentially exceed it. On the top line, after reviewing the first half results, we are optimistic about achieving the higher end of our initial top line guidance, which is why we adjusted our organic sales growth forecast to 4% to 5%. It's important to note that the low volumes in the current quarter need further examination. The negative volume of 6% or 5.8% in this quarter includes factors not entirely linked to consumption. For example, we made a strategic decision to reduce our portfolio in Russia by 50% to focus on essentials. Additionally, temporary inventory reductions impacted our results in China, which faced significant challenges due to COVID lockdowns, particularly affecting offline market dynamics. We also observed some inventory decreases in power Oral Care and Appliances in Europe. Notably, in late December, we experienced strong consumption in the U.S., but retail orders have not fully aligned with that consumption. Excluding these factors, the actual decline related to consumption is about 3% for the quarter, consistent with our expectations based on previous performance and market pricing pressures. What encourages us to raise our top line guidance is that we are maintaining our volume and value shares globally. In the U.S., our largest market, we've seen an improvement in volume share, increasing by 50 basis points over the past three months and 80 basis points in the last month. All these insights enhance our confidence in adjusting our top line guidance while we maintain the flexibility to invest in quality to achieve more sustainable growth. Ultimately, our goal over the next few quarters will be to increase household penetration and stimulate overall volume growth in our category.

Dara, this is Jon. I would just add a couple of pieces of perspective at a macro level. The world seems to want everything to be better as do I. That's really not reality though. There's an incredible amount of uncertainty that remains. None of us, I think, globally really understand what the recovery rate in China is going to be as an example. And nobody really understands what the new policies and practices are going to mean in terms of consumer confidence in that context. You have the war in Eastern Europe. You have the highest inflation rates in 40 years. You have continued volatility in both the currency markets and the commodity markets. And importantly, that currency exposure for us is not a simple dollar exposure. There's a lot of cross rates within that, which I realize makes it difficult to penetrate. But for example, the cross rate between the British pound and the euro has a significant impact on our bottom line. So all that put together, while I'm extremely happy with the progress the organization is making, I'm extremely confident that the strategy that we have is the right one that's going to continue to serve us well. It's just not an easy time to be taking up guidance to the top range of possibility.

You covered a lot in that answer. I'm going to change the topic a bit and discuss capacity investments. I believe one major factor affecting gross margin this quarter was these capacity investments. There are specific areas of focus, such as Fem Care and Oral. Can you elaborate on where you are increasing capacity, the extent to which you expect this to impact profitability in the upcoming quarters, and whether this will be a longer-term issue? This is also important as we consider future volume trends beyond the next couple of quarters.

Yes, Lauren. The short-term effect we are discussing is indeed related to Fem Care. We are experiencing strong growth at the high end of our portfolio and have seen significant growth over the past two years. We need to catch up with the overall capacity to demand ratio, particularly in our pads business, including the Radiant and Infinity lines. We are still not meeting full demand levels for tampons, but we are in the process of increasing our capacity in the latter half of the year. We are making investments across businesses to address the substantial growth in business size. I don't anticipate these investments to significantly impact our bottom line; in fact, the expected growth will offset the costs associated with increasing capacity. We have strong confidence in our growth potential, which is driving these capacity investments. For instance, in the U.S., last quarter marked our first quarter reaching $40 billion in sales, up from $30 billion just four years ago. Our growth rate remains positive, and our volume shares are outperforming the market with year-over-year positive trends. We need to maintain this momentum. Overall, things are looking very positive.

Yes. Just one quick clarification there. The $40 billion that Andre is referring to is an annualized run rate number. So it was $10 billion in the quarter, which translates to $40 billion, just so people don't get too carried away. Lauren, the point that you made and the point Andre made, there's a lot of upside here as we bring this capacity online. We indicated we're not meeting full demand in some of the protection segments. We have opportunity, as you said, across the board. So we're investing pretty significantly. I think as he said and you've said the bigger impact will be in our ability to accelerate the top line. It should not be a significant bottom line drag.

I just had one clarification and one question. The clarification, just I think in response to Dara's question, you cited a 3-point hit to the volume from basically Russia and shipping behind consumption. So if we add that back, organic sales would have been closer to an 8 versus a 5. I just want to make sure that that was the way we should be thinking about it?

That's correct.

Okay. And then as we look into the back half of the year, I guess, just if you could comment on two things. One is, has anything changed in terms of your view of the macro setup? So just as the operating environment the same, better, or worse than what you were expecting? And then also, just would we expect maybe to rebuild some of the inventory, the under shipment that occurred in the second quarter or the first half, would we get any of that back in the second half?

I would say the operating environment continues to be difficult, and we expect it to be difficult in the second half. While I think the U.S. is holding up very well. Enterprise markets are holding up very well. As John said earlier, recovery in China will be very hard to predict and probably not a straight line. We expect China to be difficult in the second half as it was in the first half. The European markets will continue to have to work through very high inflation numbers; I think we've seen a little bit of help via a warmer winter season that has helped energy prices. But Europe is not through, I think, inflationary pressures and consumers are still to see many of the consequences in terms of the energy builds as we are entering February and March. That doesn't change anything we do. I think the best way for us to get through all of this is to continue to invest in the business and to continue to execute with excellence, which the organization is doing and which is driving these good results. Our ability to carefully balance pricing and productivity to offset the inflationary pressures is critical. Within pricing, careful execution and combining pricing with innovation and sufficient investment to drive the superiority of our brands is critical. So that's why we want to preserve some level of flexibility to do those investments as we get through the second half.

And just a little bit of color on the inventory piece, which has been accurately described a couple of times here. This is a fairly simple dynamic that's occurring. When there is supply volatility and uncertainty, it causes retailers to build higher inventory levels. When there's demand volatility, it does the same. So we've been through a period where inventories have been a little bit higher than normal in some of our retail channels. Supply assurance is increasing, demand volatility is decreasing. So those inventories are understandably being brought down. And so Bryan, I don't expect that there's a significant swing here quarter-to-quarter. I think this is the system normalizing itself.

Yes. I think Jon is exactly right. Our on-shelf availability is getting better. We're up now to 95% on-shelf availability, up from 93%. We make sequential progress. So as the supply chain is stabilizing, I wouldn't expect an immediate return of those days on hand. I think some of it will come back, but it will take a longer period of time.

I wanted to return to the topic of reinvestment for a moment. It was a significant topic last quarter, and I believe you convinced us then, as well as during your commentary at Investor Day, that you were quite fully invested based on productivity. As you consider the additional reinvestment implied in the new outlook, should we view that as elective and opportunistic for greater medium-term returns, or is it more necessary in the short term due to concerning trends in consumer competition? It would be helpful to understand how you frame that reinvestment. Additionally, you mentioned strength in the enterprise markets and your resilience. If there are specific areas of notable strength, I would appreciate it if you could highlight those, as well as any areas where you're more cautious.

I would describe our current media and brand support spending as adequate, and we are closely monitoring each business to ensure this is the case. Sufficiency means having enough reach and frequency, not just looking at the amount of money spent. Therefore, we believe our business is well-funded to continue growing our brands and enhancing their awareness and value. We reinvest when we see a positive return in the short term, which helps us strengthen our brands or specific innovations. In the last quarter, for instance, we increased our total advertising spend by $140 million, driven by the timing of innovations, merchandising support, and advertising aligned with retail support. We are committed to fully backing our brands and will continue to invest when opportunities arise for short-term returns.

And one other opportunity that we've talked about a little bit this morning, as additional supply comes online, there are often opportunities to increase support for the business to take advantage of that additional capacity. So we'll be looking for those, as Andre said, positive ROI opportunities to drive the business. You asked about enterprise markets. When you get down to a country level, of course, it's very variable. But 14% growth on the top line, all three regions growing at over 10%. So the strength is pretty broad there.

Yes. And if you look at L.A., 21% growth, for example, so that will be the top end of the growth and fairly consistent here. So enterprise markets continue to deliver very strong results. Last point maybe on the media investment. The synergies we're able to create are real and not insignificant. So if you look at Baby Care, for example, that business has grown 10% last year. They have completely shifted the way they run their media. They've increased reach by 20%, increased top-of-mind awareness by 26%. All of that while they saved 15% of their media spend. So the equation here really allows for sufficiency at lower cost.

Great. If memory serves me right, much of the pricing actions from last year will start to lap in the March quarter. So in your view, is the December quarter the one that has the biggest spread between price and volume? And could you talk about where your elasticity stands relative to your historical view? And how price and volume tracked at the end of the quarter versus the minus 6 versus plus 10 average for the quarter.

Hey, Olivia. Let me start with elasticities. The overall view has not changed. We continue to see more favorable elasticities than we would have expected on historical data pretty much everywhere, but Europe focused markets. And you can see with 10% pricing flowing through. And when you strip out the non-consumption-related volume effect, a 3% reduction in volume, that is a very benign elasticity that we're seeing in aggregate, and allows us to hold volume share and value share as the pricing flows through. So we feel good about, again, the strategy, doing what we wanted to do and the execution being very diligent in each of the markets. Europe is the one place where elasticities have returned to what we would have expected more on historical data, and that is driven by the increased pressure on the consumer. We're also seeing a little bit of price lag here. So private label, for example, is pricing slower in Europe, and that increases temporarily the price gap versus private label. Nothing we didn't plan on, but that explains part of the higher elasticities. In terms of peak pricing, you're right, many of the large price increases get lapped this fiscal year. But that doesn't mean that we're not putting more pricing in the market. So for example, we have a number of price increases that go into effect in February. So there's two components here. One where lapping price increases were executed last year, but we're also still passing through some of the cost pressures via incremental pricing around the world.

I just wanted to come back to Steve's question on investment priorities. If I take your fiscal year outlook, you're clearly implying better margins in the back half of the year. But if I just walk through a gross margin bridge of what perhaps makes sense, it does seem to imply you'll need to see leverage on the SG&A line in the back half of the year to drive margin expansion potentially notable SG&A leverage despite sales decelerating. So again, if you could just help me frame overall SG&A and whether you think you'll be ending the year with appropriate levels of spending? Or if you expect investments to maybe grow progressively over the next 12 to 18 months as, for example, your capacity continues to improve, as Jon just said.

I don't anticipate a significant change in SG&A spending. The current run rate aligns with our needs for adequate funding, and most of the margin increase will result from gross margin growth as we enhance productivity and pricing continues to improve. This will lead to an increase in gross margin over time. That will be the primary factor. We're not relying on substantial cuts in SG&A beyond what productivity can achieve, given our current funding levels. We are also carefully evaluating how we can reinvest while still operating within our desired range.

Good morning. Your commentary, I guess, just now on taking further pricing, it's obviously appropriate given we have a series of costs that are still coming through. But can you maybe just talk a little bit about the response from retailers and is that changing in any way? Not that long ago, it seemed across all of CPG, it was maybe easier to get some pricing through. And I'm just curious if that's changing in any way.

Yes, Kaumil. The environment continues to be constructive. We don't see much change in retailer conversations. It's focused on how do we best play the role that we need to play as a category leader in many of the markets by combining pricing with innovation, executing pricing in a way that consumers can appropriately choose from different price points, and different value tiers. And how that plays out at retail shelf, both virtual and physical shelves in the best possible way, so we can help them grow their categories and grow foot traffic, etc. Those are really the majority of the conversations I would characterize this quarter or next quarter as any different than the previous quarters, where really it's about how do we do this, when is the best time to execute. It's not should we or must we take pricing. I think everybody still understands that we are recovering costs after we recover as much as we can with productivity.

And as Andre said, the conversation, much more constructive for all concerned when we focus on improving consumer value holistically defined. And that's exactly what Andre was talking about in terms of the combination of innovation and pricing. And when that's the conversation, it takes on a very different nature than a more transactional discussion. Also don't forget, our retail partners are the owners of the private label brands that we compete against. They're facing many of the same dynamics in terms of their cost inputs that we are. So just to reconfirm what Andre said, it's been a generally constructive discussion. I don't see anything in my interactions with our retail partners that causes an inflection in that discussion in the near term.

Just first a quick follow-up and then my main question. So one, in terms of follow-up, is the volume headwind in this quarter from Russia and sort of the one-offs? Is that just a quarter issue? Or is that going to linger on the following quarters? And then my primary focus is the market share data that you gave us in terms of the U.S., I think, was very impressive, particularly given some of the lingering supply issues that are going to be resolved soon. So can we expect perhaps accelerating improvement in market share as the year goes if the supply comes on and maybe give us a little bit more sense of what the drivers were for the encouraging market share momentum in the U.S.?

Yes. Robert, on the volume side, I think the Russia effect will be with us for one more quarter before we annualize. And on the inventory side, as we said before, we believe this was a one-time adjustment. I wouldn't expect this to come back immediately. I wouldn't expect a significant further reduction in inventory. When we look at the U.S., for example, where we have good data in terms of retailer days on hand, we believe we are at pre-COVID levels, which is about the level that we've proven to operate reliably with our retail partners. So I would expect that to be a one-timer with potentially some help coming in the back over the next few quarters. The volume share dynamic in the U.S. is driven largely by Fabric Care coming back into supply. We have talked in the fourth quarter of last fiscal year and also in the first quarter of this fiscal year, that we had some supply constraints on our Fabric Care business that we had to address. We also reinstated merchandising support in the U.S. We've reinstated media support, and that is playing out in volume share accelerating on the Fabric Care business. The other dynamic is family care sequentially improving from a volume share standpoint where we have seen a very high base when private label was in less supply and didn't have merchandising in the July to December period of last calendar year. That is being annualized. So those two will continue, hopefully, to be a tailwind to our share position in the U.S. But as John said, it's hard to predict and look around the corner here, there are many variables that we don't control, but those two businesses explain the strength and hopefully should have more upside going forward.

I want to reframe the supply issue as a supply opportunity. Our supply team has excelled in their efforts. Over the past 15 quarters, our organic sales have increased significantly, by 80% to 90%, which is quite impressive. They have worked hard to keep up with this growth, and as we mentioned, there is further potential to fully meet and fulfill that demand.

Thanks, operator, and good morning, everyone. I hope you're doing well. So I wanted to ask about the change in the commodity outlook, which for the first time in quite some time, the outlook has actually moved lower sequentially, understanding that there's a lot of moving pieces, but can you just help us understand what's driving that? Is it broad-based? Or are there particular inputs where you're starting to see inflation moderate more substantially?

Peter, it really varies from period to period and month to month. We've noticed that pulp has remained relatively steady, although it has dropped slightly on various grades. Propylene and polyethylene have also seen a small decrease. Overall, it’s quite broad and is changing frequently. Generally, as you may be aware, the supply situation is improving somewhat, which is positively impacting market dynamics related to commodities, transportation, and warehousing. However, there's no assurance that this trend will persist. The effect of China's reopening on the commodity market is a significant factor that is still unclear. We are monitoring this situation closely and continuing to make forecasts based on current spot prices. Additionally, we must consider that our suppliers are still dealing with rising input costs, labor costs, and energy costs. This presents two opposing dynamics: suppliers may want to pass costs onto us as contracts renew, while short-term input costs are easing. Both factors need to be considered when evaluating our ability to manage cost adjustments.

I have a clarification and a question. Andre, when you mentioned that the destocking should be over in the next quarter, does that also apply to China? And what are your thoughts on the rebound of consumption in China as you exit the port, especially with the reopening? Additionally, could you elaborate on how you are adjusting your portfolio in Europe in anticipation of a potential recession? As you mentioned, energy bills might be increasing now as we enter your third fiscal quarter.

Hey, Andrea. Yes, the China destocking, I think, will largely depend on the China reopening and that's very hard to predict. I think if consumer mobility returns to normal levels quickly, that will be a tailwind for every retailer with real estate on the ground. And that's really the major issue that off-line retail is facing. So if traffic returns to normal levels, that will be a big help, and obviously, no further destocking required. I'll leave it at that because I have no good way of knowing, nor does anybody else. We expect consumption in China to reaccelerate to mid-single digits; over what period is hard to predict. But in the midterm, that's where we see our China market, and it continues to be an important investment market for us. We have a very capable organization on the ground, and they are spending their days and nights to get ready for that. Fine-tune our innovation, ensure we have the best possible marketing programs, both digitally and with our retail partners on the ground. I think on the European portfolio, we have prepared, like everywhere else, our portfolio for a recession. And it comes back to the basic strategies on the categories we play in. We are in nondiscretionary categories to a large degree that people won't deselect easily. They continue to wash their laundry, they continue to wash their hair. So that's number one for recession-proofing our business model. Step number two is investment in irresistible superiority. When consumers see the benefits our brands can deliver, the value will be clear to them, and our ability to communicate that value clearly is critical, and that's why we continue to invest in both performance and communication. And then the last part is just accessibility of the portfolio, both in terms of brand tiering, so having premium brands but also value brands and price points across different channels, be that discounters or other retailers. So I think the portfolio-proofing has been done, and I think it's showing results in a very difficult environment that we think speak to the strength of the strategy.

We have discussed a lot so far. I want to clarify the 8% organic sales growth when we exclude the items mentioned by Andre, along with the comments in the press release about market contraction. In the release, you pointed out market contractions in categories like Hair Care, Grooming, Fabric Care, Baby Care, and Family Care within most of the portfolio. However, as Andre noted, the organic sales for the quarter were closer to 8%. If we consider the comparable figure, it actually shows an acceleration when looking at a two-year stacked basis. What I want to emphasize is that I know we’ve covered a lot on this call, but I want to ensure I'm clear on your perspective regarding category growth, elasticities, and consumer behavior as we exit the quarter. It appears to me that the quarter may have performed even better than what analysts had anticipated, especially excluding China, as you seem optimistic about demand dynamics and indicated that elasticity remains relatively stable. I just want to confirm that this is the message we want to convey to investors.

Yes. And I would characterize, obviously, the Russia element will be with us, and that's real. I think the market growth has been around 5% to 6% with a negative volume component and a very positive price component. I would expect that in the midterm to moderate to 3% to 4% overall growth and still have a negative volume component with offset by strong pricing that we continue to flow through the market. If you look at overall market size over the past three months, that has been the case, and that's where we expect it to be going forward. And that's pretty much in line with how we model the balance of the fiscal year. Our job here is to be ahead of that, and that's why we're investing; that we will continue to double down on the priority investments everywhere.

Yes, it's a repeat, but it's worth repeating. It's a bit of a raindrop on the fray, Kevin. But I just want to highlight so that we don't get ahead of ourselves how uncertain, for example, China is. Andre said it several times, we don't have visibility. We have within our own operations, offices, innovation centers, and plants, our current estimate of the infection rate is up to 80%. And we're sitting here in the week before Chinese New Year when all the traveling occurs. At the same time, we have a government and a populist who desperately wants things to get better. It's just very hard to say, hey, we should assume that as we go forward, China comes back like a tire. Certainly, we all hope that's true. I hope for China, that's true. But just you really need to understand how uncertain things are.

I wanted to move from that raindrop question to a bit more funny question and just ask about whether the resilience of the U.S. consumer has surprised you all, sort of what's embedded in guidance from here? I know what you said, Andre, about the category, but that was, I think, on a global basis. So how do you generally think about U.S. trends from here? And within the portfolio, have there been any surprises relative to historical expectations, meaning things that have performed better than you would have expected? And kind of what are you watching from here from a portfolio standpoint, all within the context of the U.S. business?

Mark, I wouldn't expect the U.S. to fundamentally change. If you look back over the past six months, private label shares in the U.S. have been relatively steady. We've seen 20 basis points to 30 basis points of increase in private label share, which is a metric we're watching closely. But if you look at sequential share, absolute shares of private label, it continues to hover around 16% over the past three, six, and even 12 months. So there hasn't been a significant shift in consumer behavior in terms of trading down. I think the way that our pricing was executed with great support in innovation and great support in terms of marketing spend has helped. Our strategy isn't shifting. I don't see the market shifting significantly. All of that with a caveat that who knows what the next six months are going to bring. But if past behavior over the last six months, nine months is any indication, I think the consumer is relatively steady in the U.S., which gives us great confidence. It's our biggest market. We do well, expanding volume share, as I said, and hopefully have a bit more upside here as Family Care and Fabric Care continue to gain momentum.

And this continues to be a market, the U.S. market that is very responsive in a positive way to innovation that improves performance, both for the product and the package. And we have many examples, Dawn Powerwash as an example, introduced at a premium price. The brand has grown at 50% since that introduction and Dawn has driven 90% of category growth in that situation. Down Powerwash, again, a premium priced item that was introduced largely during difficult economic times as a standalone brand would be the third largest brand of the category. So I just used that as an example for the continued positive responsiveness of U.S. consumers to innovation, and we've got a lot of innovation coming.

Great. I wanted to come back, please, to the brand spend dynamic. And Andre, I think the example you gave to Baby Care is quite powerful. If you can increase so meaningfully while simultaneously cutting dollar spend. I guess that's probably driven by digital and better targeting there versus traditional media. My question is, do you think these benefits are sustainable or over the longer term, are we not likely to see some of these digital ROIs come back down as digital ad pricing goes up and some of your competitors start to catch up with your capabilities there?

I believe we are just at the beginning of our productivity curve, driven by two main factors. U.S. Baby Care has been one of the most aggressive areas, targeting a very narrow consumer base, specifically households with babies and those in the diapering age. By utilizing mass TV, which offers multiple ways to reach this target group of about 3% to 4% of the population, we found a clear opportunity to achieve synergies. However, we've also learned from other sectors that a wider approach can be effective. For instance, in Fabric Care, where everyone does laundry, the target audience is much broader. The Fabric Care team in the U.S. has switched to in-house media planning and buying, creating proprietary algorithms to optimize ad placement during TV programming. This approach has resulted in $65 million in savings over a year while increasing ad frequency. Both models are effective, though they are not yet fully implemented everywhere. While there are successes in the U.S., many categories are still in the process of developing their strategies to drive synergies. Additionally, there is a global market outside the U.S. that is still building on the capabilities we are establishing. We view this as an ongoing investment opportunity to enhance our capabilities and drive productivity for the foreseeable future.

Apologies for carrying on the inventories question. But Jon, you mentioned you were looking at a normalization. But in the Investor Day, you showed obviously a significant improvement in your supply chain efficiency. Do you think you're in the position over the next couple of years where U.S. retailers could operate at even lower inventories? And improving your relationship with them is working capital part of the conversation that you have with them in sort of helping form share of shelf. And then thank you for the color on the international business. Could you share with how fast your Indian business grew in the period because it looks like the India consumer there is recovering and whether you're seeing a sustained double-digit recovery there as well?

Thanks for the question. I do think that there's a significant opportunity for the entire supply system to operate at lower levels of inventory. And one of the enablers there in addition to supply dependability is increasingly looking at the supply chain across we historically looked at it as our supply chain and our customer supply chain as we're beginning to have conversations about this was one supply chain, would we do things differently? And the answer is almost yes. And the opportunities that are resident within that discussion are significant. So I do think we will continue to have that conversation and try to make progress in a way that benefits both ourselves and our retail partners and ultimately the consumer with higher on-shelf availability. And then go ahead, Andre, you want to talk about India?

Yes, the India business continues to grow rapidly. We recorded a 12% increase in organic sales in Q1 and a 13% increase in Q2. India exemplifies the capabilities we've been discussing, showcasing effective implementation. The digital infrastructure our team has established in India is impressive and is helping us achieve significant growth in terms of both sales and media capabilities.

Congratulations on achieving that sales milestone and your progress in market share this quarter. I have a few questions combined into one. First, in which geographies are you implementing the majority of the incremental pricing? Second, as you're indicating more reinvestment in your company with the improvement in supply, what form do you anticipate this to take, such as product enhancements, advertising promotions, etc.? Lastly, I noticed you've made significantly more references to volume share instead of value share this quarter. Does this indicate a change in your priorities and focus?

Thanks, Jason. On the geographies, I would not see any disproportionate tilt towards one or the other. If you look at the cost structure, the implications, they are pretty similar across the different regions. Timing might shift. The category is, obviously, shifting.

Yes, there's one exception to that; I agree totally as it relates to pricing related to commodities. But there are some markets, of course, where currencies are devaluating massively.

Correct. In the enterprise market, we typically implement higher pricing aligned with overall market inflation. This will remain consistent. However, there are other markets, such as Japan and the G7, where pricing tends to be more challenging, leading to less pricing impact. This isn't different from what we've observed over the past few quarters. Our aim to reinvest spans all aspects of excellence, including product package innovation, communication, and go-to-market execution, all of which vary by region and category. We are emphasizing volume share because we view it as our responsibility and opportunity to enhance brand penetration. We have significant potential to increase consumption even in well-established categories. Therefore, we want our team to focus on boosting household penetration and creating consumption opportunities. A scenario where all market growth comes from pricing is not sustainable. Both pricing and volume share must return to a balanced state, which is why we discuss both aspects.

To clarify, I want to emphasize that I am not prioritizing volume share over value share. Volume share helps us achieve value share. It's important to understand that both metrics matter equally, and we are not shifting our focus from one to the other. Additionally, I wanted to address concerns about how our pricing strategy might affect volume, especially volume share. We aim to be open about what we're observing, which is currently very positive.

I have a complicated question that might seem simple. When you provided the initial commodity guidance for fiscal year '23, U.S.-based spot costs for freight and energy were down about 9% since then, and you've reduced your outlook for commodity inflation. My straightforward question is whether your current costs for this quarter are below their peak. Year-over-year, there was a 380 basis points cost push against gross margin compared to 510 basis points last quarter. Can you confirm if there has been a sequential decrease? Additionally, when can we expect costs to no longer be a headwind? Will that be in the June quarter, the September quarter, or is it uncertain? I recognize there are many factors to consider, including cross-currency exposure, which I cannot see in U.S.-based spots, but it does appear that your costs have decreased from their peak.

Well, on the second question, I don't know. It's just a very simple answer. On the first question, yes, we see sequential progress on the cost side. But as I mentioned earlier, it's important to understand the two opposing forces. We don't buy commodities. We buy pack material. We buy super absorbers. We buy films, etc. And our suppliers are still in the process of passing through their own inflation. So while their input costs via commodity helps is certainly easing, they also haven't fully caught up to their cost structure hits that they have experienced over the past few quarters. So we'll continue to work with them to find the right solution here. But when exactly that balance is going to occur, hard to predict.

Yes, and I’d like to add that it's not that the pace is slow. We have contracts that cover a specific timeframe, and often, prices are fixed during that period. When it comes time to renew a contract, we will continue to see this process unfold in the foreseeable future, but not indefinitely. This makes it challenging to view U.S. spot prices as a comprehensive indicator, as they do not provide a complete picture. Thank you for joining us today and for your patience as we go through everything. John, Andre, and the team will be available for the rest of the day to assist further. I'm very proud and grateful for our team's efforts to achieve 5% organic growth across all categories while maintaining and building our market share in the U.S. and increasing our sales guidance despite significant market slowdowns in China, the challenges in Eastern Europe, and the highest inflation rates in 40 years. The team has successfully executed our integrated strategy to keep up the momentum during these tough times, which is also evident in our bottom line performance. We noted the impact on the quarter from commodities, foreign exchange, and transportation. In the last fiscal year and our forecast for the current year, we've seen about 50% of profit affected by headwinds in those three areas. Despite this, the team managed to grow earnings per share last year and we expect modest growth in earnings per share this year. This highlights two key points: the quality of our team and the ongoing relevance of our strategy. That's my perspective, and I'm happy to discuss it further if you have any questions. Thank you for your time.