Procter & Gamble Company (PG) — Q4 2025 Earnings Call Transcript

Jon Moeller here. I'm going to start the call and then I will hand it over to Andre. Good morning. Obviously, Andre is joining me here, as is John Chevalier, Senior Vice President of Investor Relations. Last evening, we announced that, after 38 years of service, I will transition into the role of Executive Chairman of the Board beginning January 1, 2026, and that the Board of Directors has elected Shailesh Jejurikar as the incoming President and Chief Executive Officer. This move has been thoughtfully planned and provides P&G with highly capable and experienced leadership going forward. Shailesh has a distinguished track record throughout his 36-year P&G career and has been an integral part of P&G's leadership team for the past 12 years. He's delivered substantial contributions across multiple businesses in both Focus and Enterprise Markets, including regional and global leadership of our Fabric & Home Care categories. Most recently, Shailesh served as Chief Operating Officer with P&L ownership for our Enterprise Markets business, along with the management responsibilities for our product supply, market operations, global business services and IT organizations. Over the last 17 years as CFO, COO, and CEO, I've had the benefit of working closely with Shailesh and our outstanding global leadership team to develop an integrated comprehensive set of strategies to guide our choices and priorities. Those strategies continue to serve us well. Shailesh has been a partner in advocating for a focus on balanced top and bottom line growth and the need for P&G brands to lead the growth of our markets. Growing markets versus simply taking business to build market share. These fundamentals guide our decision-making as we execute our integrated growth strategy and drive value creation for shareholders. For my part, it's been a tremendous honor to serve as P&G's Chairman, President, and Chief Executive Officer. As I've walked the halls of P&G buildings around the world for the last 38 years, I'm constantly reminded of the privilege it is to work alongside such committed colleagues and friends. P&G has afforded me the chance to serve consumers and communities around the world. It's been a true joy and a tremendous learning experience. Our strategy is working. Our bench is strong. As we cross the calendar year, it's a good time to transition to the next generation to lead the P&G team through its next chapter of top and bottom line growth, and of course, value creation. With that, I'll now turn the call over to another esteemed colleague, Andre Schulten, to lead us through fiscal year 2025 fourth quarter and the year-end results.

Thank you, Jon, and congratulations to you and to Shailesh. And I'm very happy you will be in the current position for the next 6 months and Executive Chairman thereafter. So with that, I'll start with an overview of results for fiscal '25 and then the fourth quarter. Jon will add perspective on strategic focus areas and capabilities. And we will close with guidance for fiscal '26, and then take your questions. Execution of our integrated strategy enabled the company to grow organic sales and core EPS and to return cash to shareholders in line with our target range in a challenging fiscal '25 despite volatile macroeconomic, geopolitical, and consumer dynamics resulting in market-level headwinds that were not anticipated at the start of the fiscal year. Organic sales for the year grew 2%. Volume growth contributed 1 point and price/mix added 1 point. Growth continues to be broad-based across categories and regions. Nine of 10 product categories grew organic sales for the year. Family Care and Personal Health Care each grew in singles. Fabric Care, Home Care, Feminine Care, Hair Care, Grooming, Oral Care, and Skin and Personal Care were up low single digits. Baby Care was down low singles. Focus Markets grew organic sales 2% for the year with North America up 2% and Europe Focus Markets up 3%. Greater China organic sales were down 5% versus the prior year, but improved sequentially throughout the fiscal year, growing 2% in the most recent quarter. Enterprise Markets were up 2%, led by Latin America with 4% organic sales growth. E-commerce sales increased 12%, now representing 19% of total company. 30 of our top 50 category/country combinations held or grew share for the year. Seven of 10 product categories held or grew share globally. In aggregate, global value and volume share were both in line with the prior year. All channel market value in the U.S. categories in which we compete grew around 3.5% in fiscal '25. P&G consumption growth was roughly in line with category value and volume levels for the year. Our earnings per share were $6.83, up 4% for the year. Core gross margin declined 40 basis points and core operating margin increased 50 basis points. Nearly $2.7 billion of productivity improvement across cost of goods sold and SG&A enabled an increase in investment in superior products, packages, and brand communication to drive market growth. On a currency-neutral basis, core EPS was up 4% and core operating margin increased 50 basis points. Adjusted free cash flow productivity was 87%. We increased our dividend by 5% and returned $16 billion of value to shareholders, nearly $10 billion in dividends and $6.5 billion in share repurchase, consistent with our guidance at the start of the fiscal year.

Thanks, Andre. I'll start with a few thoughts on results before discussing the strategy. We're pleased with the performance P&G people delivered last fiscal year in the face of a very dynamic, difficult, and volatile environment, growing sales and profit and returning high levels of cash to shareholders despite heightened consumer anxiety with tariffs, inflation, interest rates, political and social divisiveness, and immigration and employment status uncertainty, all resulting in lower category growth and unpredictable geopolitical environment and against highly capable competitors. While not all results are at the levels we aspired to deliver at the beginning of the year, growth in this environment is worth acknowledging. To be clear, there's more work to do to continue improving the areas in our control, which will be needed to offset the headwinds that are largely not in our control. The restructuring program we announced last month is one important step towards strengthening the execution of our integrated strategy. I'll talk more about this later.

Moving to fourth quarter results. Organic sales rounded up to 2%. Volume was in line with prior year. Pricing and mix were each up 1%. Growth continues to be broad-based across categories and regions as 9 of 10 product categories held or grew organic sales. Fabric Care, Home Care, Feminine Care, Family Care, Grooming, Oral Care, Personal Health Care, and Skin and Personal Care each grew low singles. Hair Care was in line with prior year. And Baby Care was down low singles. Six of 7 regions held or grew organic sales. Focus Markets were up 1%. Organic sales in North America were in line with prior year, while we continued to see solid consumption growth in North America of around 2%. Sell-in trail sell-out due to retailer inventory reductions. European Focus Markets organic sales were up 2%. Greater China organic sales grew 2%, another quarter of sequential improvement and positive momentum heading into fiscal '26. The 618 key consumption period was relatively strong, but we are closely watching economic and consumer confidence impacts resulting from higher U.S. tariffs on Chinese imports. Enterprise Markets grew 3% for the quarter. Latin America organic sales were up 6%, including double-digit growth in Mexico more than offsetting a modest sales decline in Brazil due to trade inventory reductions. Europe Enterprise and Asia Pacific, Middle East, Africa Enterprise regions each grew organic sales low singles. Global aggregate market share was down 20 basis points. 28 of our top 50 category/country combinations held or grew share for the quarter. On the bottom line, core earnings per share were $1.48, up 6% versus prior year. And on a currency-neutral basis, core EPS increased 5%. These results include a $0.03 impact from tariffs. Our gross margin was down 70 basis points and core operating margin increased 150 basis points. Very strong productivity improvement of 560 basis points with healthy reinvestment in innovation and demand creation. Currency-neutral core operating margin increased 170 basis points. Adjusted free cash flow productivity was 110%. And we returned $3.3 billion of cash to shareholders this quarter, $2.6 billion in dividends and $700 million in share repurchase. In summary, another year of sales and earnings growth and strong cash return to shareholders in a challenging economic and geopolitical environment. With that, I'll pass it back to Jon.

Thanks, Andre. We're very pleased with the results P&G people have delivered in a very challenging and volatile environment, growing sales, growing earnings, and returning strong levels of cash to shareholders. We continue to believe the best path to sustainable balanced growth is to double down on the strategy. Excellent execution of an integrated set of market constructive strategies delivered with a focus on balanced top and bottom line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. We're taking proactive steps to improve the execution of strategy and our ability to deliver our growth and value-creation objectives.

Picking up on last night's announcement, I guess I'd like to begin by extending my congratulations to Shailesh, assuming he's listening somewhere. And also say congratulations to you and the entire team, Jon, in what appears a well-thought-out transition. Two questions stemming from that, if I could. First, I know we'll hear a lot more from Shailesh starting in about 6 months, but maybe you could offer a bit more perspective, Jon, on what you see as Shailesh's unique attributes and why you feel he's the right person to succeed you while also elaborating on your goals as you think about the pivot to Executive Chairman. And then secondly, shifting back to the business, Shailesh spoke in early June about the importance of P&G working, as he put it, to create its own tailwinds as we enter fiscal '26 in order to reaccelerate category growth and P&G's own top line. You spoke to the innovation slate this year and overall priorities. But could you elaborate further on those tailwind creation efforts and when within the fiscal year you might expect them to accumulate into more tangible overall results?

Thanks, Steve. As it relates to Shailesh's strong suitability to lead the next phase of growth and value creation for the company, he has successfully led our largest businesses, specifically the Fabric & Home Care sector most recently. He's led businesses in both Enterprise Markets and Focus Markets. Most recently, as COO, he had P&L responsibility for each of the Enterprise Markets. As COO, he gained even deeper knowledge of some of our functional skill sets and capabilities. So he'll bring all of that to bear combined with 36 years of experience. I've worked closely with Shailesh, most closely in the last number of years as he was COO and I was CEO, but we've worked in other capacities together over the years. So he's going to be a very strong candidate to lead the next phase of growth and value creation, and I feel very, very good about that. It gives me a fair amount of peace and comfort as I move into my next chapter. In terms of creating our own tailwinds, the last thing we need to do is create any more headwinds. The restructuring program that both Andre and I referenced in our remarks is a very good example of that, building financial headroom to invest in innovation and commercialization. And that's the reason we're doing that is to continue to create our own tailwinds to accelerate growth in what is otherwise a very, very difficult environment. Focusing those efforts on the categories and brands and markets that matter is another example of creating our own tailwinds. We continue to create tremendous advantage with all the work that we're doing in supply, both to improve service to consumers and customers, reduce costs, creating more financial headroom. And then obviously, the appropriate levels of investment and expertise focused on the next round of innovation, the next round of commercialization. There are many exciting things coming, not just in the categories we currently compete in, but also, selectively, a few additional categories. So again, I move to my next assignment with a sense of excitement and anticipation for what the team will accomplish.

Great. And I'll just echo everything that Steve so eloquently said both to you, Jon, and to Shailesh. It was great to get the context of your expectations for market growth and also kind of the current rate. But one thing that's become true over the last couple of quarters is the outperformance of P&G versus its categories. That gap has narrowed and narrowed and narrowed. And that's with what I think has still been a very steady fleet of innovation, of consistent reinvestment. So notwithstanding all the words you just shared around consistency of strategy and confidence in the strategy, what do you think maybe needs to change, and maybe we can focus just on North America, to widen that gap back out where your innovation, your strategies are, in fact, growing the categories, and by virtue of that, growing your share? Because that math doesn't seem to be working more recently. So whether it's competitive environment, particular cohorts in the consumer landscape that have been more challenged, what your perspective would be on how that gap kind of widens back out to support P&G outperformance?

I'll provide some perspective on your accurate observations and our response to them. And then I'll ask Andre to do the same from his vantage point. In North America specifically, we have three things happening. One is the reduction in category growth rates. The second is, as Andre mentioned in his remarks, the relationship between sell-in and sell-out where we've seen inventory reductions in the part of our retail partners, that is exaggerated by the shift of shopping across the retail channels. The channels that are growing the quickest right now typically carry lower levels of on-hand inventory, whether that's Walmart, whether that's Amazon, whether that's club stores. The third, and probably most important, is that we do have categories where we've lost superiority. And we simply must regain that level of superiority that allows us to outgrow the market. That's why we're going through the restructuring program that we are. There are specific plans. As you can imagine, they're competitively sensitive and I'm not going to go into step-by-step elements. But you should assume that we clearly understand that we have work to do there.

No, I echo what you said, Jon. I think maybe to be specific and give you some confidence here, as Jon said, in some categories we have not been able to maintain the level of superiority that we know we need in order to grow the category and grow within the category. But we also know that when we do that, the business quickly reaccelerates and picks up. So if you take Baby Care, for example, while the premium end of the lineup has been growing consistently because we've innovated consistently on Swaddlers and Cruisers 360, et cetera, the lower end, the value tier had not delivered. When we put innovation on Luvs with Platinum Protection, the category part we accelerated, our share reaccelerated and our organic sales reaccelerated. We have the same opportunity on Olay on the core jars business. So we know we're not superior, we know we need to adjust, and we're on it.

And to that end, every time that I interact with our organization, I remind that our job in the face of uncertainty is to step forward, not backward. And we will do that. I think the restructuring is a reflection of our commitment to do that.

So Jon, congrats on a remarkable run at driving shareholder value and Shailesh on his greater responsibilities. Jon, can you discuss how the restructuring you recently announced will enable greater organizational capabilities looking forward, particularly just given the external technology advancements that we've seen and how those two points interplay with each other? And on the other piece of big news, with the CEO change, all the background on Shailesh's capabilities is very helpful. Just any insight or perspective on the timing of the CEO change, why is now or technically January the right time to move to new leadership?

Great. I'll begin with the latter part of your question. Typically, when I do that, you may need to repeat the first part. Regarding why now, it's actually January 1, and I highlight that because as of that date, I will have served this company for 38 years. My wife was also part of this company in a senior executive role until her retirement when I became CEO. Combined, we will have contributed nearly 70 years to this organization, which is almost three-quarters of a century. The results you've mentioned give me confidence in the strength and sustainability of our strategy. Since we clarified our strategy and started executing it seven years ago in 2018, this team has generated $17.5 billion in additional sales, placing us at the 84th percentile of the S&P 500. Simultaneously, we have produced $6 billion in additional profit, which ranks us at the 92nd percentile of the S&P 500. As you noted, this has led to significant market cap growth of $180 billion, surpassing almost all our competitors' value creation over their entire one- or two-century histories. So, seven years compared to one or two centuries matters. In addition, the team has established the 18th most valuable publicly traded company in the U.S. and the 21st most valuable globally. We are entering our next chapter from a strong position in both strategy and execution. Recently, as Andre mentioned, we shared this at the Deutsche Bank conference in Paris in June, enhancing our strategic execution, which reassures me about our ability to move forward. I also want to emphasize that we have a very strong team, including Shailesh. Considering all of this, I believe this is the right time for a transition as we conclude the fiscal year.

So I hope I could take the answer of the question about where the difficulty is coming from, and I hope I also have answered your second question about the timing more broadly.

In terms of the timing for when the benefits we are creating for ourselves will start to show results, there is a necessary planning and execution phase that must happen before we see the impact. This will develop as we progress through the fiscal year and into the next one. I realize I may have overlooked the important question about our organizational design and how that gives us confidence, along with the tailwinds it creates. Many of you may have heard me discuss this before, as it's a topic I am passionate about. The industry has traditionally operated in a very siloed and functionally segmented model for the last century. However, the world has evolved, and we see a significant opportunity to dismantle these silos. This will lead to improved decision-making, more efficient processes, and a better value proposition for employees. Each of these factors alone could significantly contribute to the tailwinds we've mentioned. Together, they hold great power and extend across the enterprise's activity system, indicating substantial potential. Therefore, I am very optimistic about this change.

All right. And congratulations from me too, to both Shailesh and Jon. And Jon, we're really all going to miss seeing you, especially at CAGNY, but of course, you're always welcome. But I just had a few questions on your FY '26 guidance, if I may. First, your ranges are quite a bit wider than they've been historically. Now I certainly recognize there's a fair amount of volatility and uncertainty. But is there any other reason maybe why you have less visibility on your business right now? And then also, your guidance does imply deleverage at the midpoint. So maybe help us understand the puts and takes of this. And then finally, how are you thinking about phasing in the year? Should we assume EPS growth will be back half weighted?

I'll take a run at this, and Jon, please jump in here. On the top line, I think the reality that we're seeing is simply a lack of clarity on where the category growth is going to go. Our midpoint assumes that growth rates in the U.S. and in Europe stay about where we see them today, which is around 2%, maybe a little bit lower, in the most recent weekly data. China continuing on its path to growth. Not quite there. And Latin America and Enterprise Markets in general remaining at around 5%, 6% of category growth. So if that holds true, we think we can be at the midpoint or slightly higher. There is a scenario where the categories reaccelerate to historical growth rates. Europe and the U.S. return to 3% to 4%, China accelerates. Latin America reaccelerates beyond 6%. And that's the upper end of the range. The lower end of the range is the opposite. We see the deceleration that we've seen over the last few months continue in Europe and in the U.S. China not really gaining positive trajectory. And Enterprise Markets remain muted, specifically in the Asia, Middle East, Africa region. So that's just the reality we're looking at. And it's very hard to say where in that range we're going to be. So we find it prudent to give you transparency on where the range is on the top line. Then you move to the EPS line and it's, first of all, an outcome of where we think we're going to be on the top line. But then you have incremental volatility coming from tariff negotiations that are ongoing. And again, you saw from Deutsche Bank today we saw a $400 million increase in tariff exposure. With the EU trade deal over the weekend, we saw a $100 million decrease. So there's a lot of swing here from a tariff standpoint. You then have to assume what can you pass on in terms of pricing after we maximize productivity and how much of that pricing is going to be sticking in the market. And you have foreign exchange and commodity volatility that you always have. So you layer all of that on top, and you can see easily between the top line and those effects how the range is wider than we typically have. In any case, be assured, our objective is to firmly be at the upper end of the range and we work and do everything we can to be in the middle to upper range. But again, there's many factors on the macro side which we don't control, which we have to take into account.

Quarterly timing. It is going to be an upward trajectory on EPS, as you can appreciate. Some of the pricing recovery of the tariffs will come later in the year. The category acceleration is expected to happen later in the year, so it will be an upward trajectory from quarter 1 upwards. Right. And the savings as well are coming. Obviously, the restructuring savings are coming in the second half of the year.

Jon, Shailesh, congratulations to both of you. Jon, we will definitely miss you. I wanted to touch on the last point, Andre, and get your perspective as well as Jon's on category growth and the trend we've seen over the past few months compared to your expectations. I know the team has shown confidence in the category growth returning to historical averages, but the timing seems uncertain. Referring back to the last call, category growth was at 2.5%, and Andre, you mentioned it's now closer to 1.5%. Can you clarify what's driving the slowdown and whether this is aligned with your expectations? Additionally, regarding the guidance of flat to 3% growth, your insights in response to Bonnie's question were helpful. How realistic is it to anticipate further deceleration in category growth? Are you building in some cushion, or do you think this is a feasible scenario?

Look, the reason why we have a wide guidance range on the top line is exactly because it's very hard to predict where the category growth line is going to go. What we are observing is that the consumer, on both ends of the spectrum, the lower-income consumer and the higher-income consumer, they are reacting to the current volatility they are seeing and they are observing. And we see consumption trends consistently decelerating, not significantly, but we see a deceleration in the U.S. We see a deceleration in Europe. And those are the biggest regions that have an immediate impact on the global category growth numbers. The volatility the consumer is seeing, I think, is maybe not necessarily grounded in their current reality, but more on what to expect for the future. So consumers are a bit more careful in terms of consumption. They are using up pantry inventory and they are looking for value, either in smaller packs and promotions or in larger pack sizes in the club channel and online. That's the behavior we've outlined before, but it's not stopped. It continued. So the trajectory here could be that we've reached the low point and the consumer gains confidence, the labor market is stable, inflation doesn't pick up, and therefore, we see category growth returning to 3% to 4%, or not. And that's exactly the reason why we have a guidance range that is relatively wide. Our job in all of that, and that's why I come back to where Jon started, our job is to create our own tailwinds. Our job is to create category growth, create an incentive for the consumer to return to the category and find value in our propositions every day. And these categories, even though the consumer slows down for a period of time, they don't stop doing their laundry. They don't stop washing their hair. They don't stop using diapers. That's why we're exactly in these categories. So overall, I feel good about the portfolio. I feel very good about the innovation. But there is a level of baseline uncertainty that we reflect in the guidance range.

And just to build on that a little bit, and we've talked about this before, but to the extent that people are frustrated, and I would say understandably frustrated with the lack of certainty and the breadth of the range, trust me, because there's no one more frustrated with that than I. But as you look at the predictability and you think about things like what's the impact of immigration status and immigration policy on consumption over time? What's the impact of tariffs and related both pricing and potential supply chain shifts and portfolio shifts over time? If you look at a place, what's the impact of inflation? What's the impact of interest rates? We talked about the acceleration of growth in China, but that comes largely driven by the month of June, which is a heavy promotion period in China. I don't know how much of that went into inventory and how much was actually consumed. So there's just all those uncertainties that are out there, and as Andre rightfully said, we're just trying to give you the benefit of that aggregated perspective in terms of what outcomes might be. And our job is to wake up each morning, put both feet on the floor and power ahead to do the best that we can in creating the tailwinds that we've described and seeing that impact in the market, and that's what we're committed to do.

And just one last point, I just want to reassure you, the strategy has not changed. We will push as hard as we can to generate category growth because we believe that's the only way to sustainably create value and regain share momentum. The easy answer would be to react to strong promotions we're seeing in the market with equal promotion response. That would protect share in the short term, but it would protect share of a contracting category. So you will not see us go there. You will see us continue to innovate, drive market growth. And you kind of heard the story in the beginning of the call. So that ties right into why we are where we are, independent of where we see the category going.

And to that end, every time that I interact with our organization, I remind that our job in the face of uncertainty is to step forward, not backward. And we will do that. I think the restructuring is a reflection of our commitment to do that.

Congrats to Jon and to Shailesh as well. Andre, I wanted to ask maybe one clarification and then one follow-up. I believe in response to Bonnie's question, you mentioned that maybe the $1 billion tariff headwind had moved down by about $100 million after this past weekend with Europe. So I just wanted to clarify that as a first piece. And then secondly, on the $600 million within the tariff bucket that you kind of said rest of the world. Just a bit broader, but as we continue to get kind of more trade announcements, just can you help us identify how much flexibility there maybe is in that? I don't know if Brazil isn't really at a 50% rate. Is there flex for that to move? Just other countries around the world that could impact that?

Thank you for the question, Peter. The recent tariff announcements have indeed reduced the figure from $1 billion to $900 million. However, we don't yet fully understand the specifics of that agreement, so we should approach it cautiously until we have more details. It is challenging for us to discern what is genuine and what isn't. We are reflecting this uncertainty in our pricing strategies, similar to how we approach commodities and foreign exchange. We are treating each announcement at face value from a tariff standpoint. I would advise against being overly optimistic that future trade agreements will create a significant advantage. Additionally, we need to consider how much of the pricing we are implementing will actually remain stable if there is a favorable shift in tariffs. I see these factors as balancing each other out. Therefore, we are conveying to our organization not to assume any benefits from reduced tariffs, as a decrease will likely not lead to sustained pricing in the market. I believe these elements will progress in tandem.

To provide additional perspective on the challenges we face and to encourage you not to spend excessive time on it, I will share a few examples of the current uncertainties. This is not a judgment or criticism; it simply reflects our reality. As Andre mentioned, we do not have detailed information about these agreements, making it difficult to analyze their potential impact on our business. Moreover, there is ongoing work related to 232 Investigations led by the Commerce Department, which has yet to be finalized. These investigations aim to evaluate the strategic risks associated with overreliance on imports of specific goods, including metals and wood pulp. There is also uncertainty surrounding exemptions from tariffs for materials compliant with USMCA, and we cannot predict if these exemptions will be upheld under new policies. Additionally, there is significant difficulty in understanding potential retaliatory tariffs, which involve other countries imposing tariffs on U.S. goods. For instance, Canada has placed a 25% tariff on imports from the U.S., which considerably affects us since most of our Canadian business sources products from the U.S. This illustrates the level of uncertainty we are currently navigating. While there are potential upsides, as Andre cautioned, we must be prepared to manage a wide range of outcomes. The most effective approach, in my opinion, is to focus on what we can control, which is precisely what we are doing with restructuring, spending portfolios, and innovation. I am not asking our innovation teams to slow down; in fact, I encourage the opposite.

I also wanted to extend my congratulations to Shailesh and Jon on your new roles. So for my question, I wanted to zoom in on the U.S. market, your largest market. Clearly, we've talked about some of the consumption slowdown. But from a reported standpoint, we've also seen the impact of the inventory destocking that you talked about. I'm just curious, why do you think we've seen this more pronounced deceleration over the last 2 quarters? Because some of the comments you made about the channels that are growing faster, having lower inventory, those have been going on for a while. But really, over the last 2 quarters, we've seen a much bigger negative impact from destocking. So maybe can you give us a sense of what is happening at the retailer level? Are there certain categories that are getting impacted? And do you think that negative impact in the U.S. will continue in the first half of '26 until you cycle some of this impact in Q3 of next year?

You're right, I think the channel shifting has been an effect that we've observed for a number of months. But it also is an effect that isn't stopping. So we continue to see strength in the online channel. We continue to see strength in Walmart and Costco, in club in general, in Amazon. And obviously, as that trend continues, those retailers are more inventory-efficient so that will continue to be a headwind until that trend changes. When and if that changes is a question I can't answer. The other point, I think, that is clear, retailers have to deal with tariff impacts as well as they allocate cash and inventory. And as tariff impacts become real and hit their cash availability, they have to make choices. We are fast-turning categories. The easiest way to make a choice and reallocate cash is in our categories. So if you need to free up cash for other general merchandise, you go to CPG because we have the fastest turn, so you free up the fastest amount of cash, which is the second driver. I think the third driver is if consumption slows, a retailer would react with reducing the inventory because you don't quite need as many turns as you would in a fast-growing consumer environment. So all of those effects coming together. None of them give us certainty on to what degree this inventory contraction will continue or if inventory actually would come back over the next few quarters. I can tell you what our assumption is. Our assumption is relatively stable inventory levels going forward. But we've not made any assumption on returning inventory levels. And it's not just the U.S. and Brazil, for example, we saw a 10-point inventory effect between consumption and organic sales growth. So these effects are visible not only in the U.S. but also in other parts of the world. And again, introduce a level of variability, which is reflected in our guidance range.

To clarify, I'm not implying any contrary views, but generally, having lower inventory across the system is beneficial. It contributes to more efficient operations throughout the entire supply chain, from our suppliers to our stock and on to retail inventory, all of which incurs costs. Thus, there is a positive aspect to this situation as well.

I wanted to ask about China specifically. Andre, I think you characterized it as another quarter of sequential improvement with 618 being relatively strong. Can you talk about just the durability of the trends that you're seeing? 618 is obviously more of an annual seasonal event. But really sort of underlying durability that you may or may not be seeing in the market. And I think there is this dynamic where P&G and your peers are still waiting to assess the impact of tariffs on the economy and what it means for the Chinese consumer in the months ahead. And as such, you're perhaps a bit more measured on carrying through this improvement that you've seen in the market into out quarters. And so can you just contextualize, again, the durability versus the onetime nature that we may have seen in the quarter. And just how we would see the medium term in the context of what will be an evolving consumer landscape in China.

Everything you said is accurate, but there are some things that are encouraging. I'll give you two of those. One is the trend continues to be more positive. That doesn't offer any definitive perspective on what the future is going to hold. But it's not like this thing is bouncing all around. It's generally improving. Second, the Chinese consumer continues to be very responsive to innovation. I gave you two examples in our prepared remarks where Pampers is growing at 20%; where SK-II is growing very, very strong double digits. So it comes back to our activity system and what we do to ensure that the best propositions are available at the best value to Chinese consumers as the most important and certain way to control our destiny, which we're very focused on. But I don't see anything personally that causes me concern of another shock in the system, so to speak, but I haven't foreseen those in the past.

I think you're right. I feel very encouraged about the situation in China right now. The market hasn't returned to growth yet, but its trajectory is positive. It’s more balanced across channels than we've experienced before. The variations during key consumption periods are less pronounced and better aligned with consumption patterns. These are all positive developments. Although the overall picture isn’t ideal yet, it is improving. The most encouraging aspect is the progress our team is making on the ground. Jasmine and her team have changed every element of the business model to adapt to the new reality. They have revamped the go-to-market model and completely overhauled the distributor lineup to ensure our products are presented in stores more effectively and consistently than ever before.

That is showing progress. We have adapted our media model. We've adapted our innovation model. We've adapted our customer value-creation model. All those things start to show progress, which I think I like to believe is part of the 2% growth we were able to generate. And in pockets, like Jon said, SK-II up 23%, now admittedly on a lower base, but also Baby Care consistently growing. We see pockets of real strength in China emerging. So that in aggregate makes me feel better than I felt about China in a long time.

I want to extend my congratulations to both of you. Jon, you have much to be proud of given your remarkable career. I wanted to discuss the consumer trade-down risk, particularly regarding Procter's premium price portfolio. The company has made significant strides in extending its pricing structures since the Global Financial Crisis, with Tide Simply in Fabric Care being one example. While private label share isn't accelerating, we are witnessing some trade-down behavior. In U.S. Fabric Care, your main competitor is focusing on value-priced offerings, and we are seeing an increase in their market share. This situation doesn't necessarily indicate a brand superiority issue; rather, it suggests a trend of commoditization in staples, where consumers are making decisions that are impacting category growth and, in some cases, Procter's market share performance. Can you share your thoughts on this assessment and its accuracy? Additionally, what are the broader implications as you address trade-down risk in your categories? I'd appreciate your insights.

Let me start with a few numbers and then I'll go into the more strategic part of that question. I think we see, I think, some level of pressure to drive trade down because of price promotional behavior. So private label, for example, volume share flat but value share down, both in Europe and in the U.S. That indicates more aggressive pricing from a retailer standpoint on retailer brands. That doesn't result in share growth, but it's certainly an attempt to drive volume and traffic into a lower-priced part of the portfolio. We also see significant promo levels in mid-tier laundry, which is driving some of the trade down. As I've indicated before, we don't think that's a winning strategy. It doesn't generally return value share growth. It might return volume share growth in the short term, but it certainly compresses the category. We also see some trade down in our portfolio. Jon mentioned this earlier from Tide into maybe a Tide Simply or a Gain. But that is part of our strategy, as you said, to serve the consumer across the price ladder and across the value tier that we choose to play in, and we need to innovate across all of those value tiers, be it Luvs in Baby Care or be it Gain and Tide Simply in laundry. I think the most important point to your question, are we concerned about commoditization? I don't think so. If you look at our categories, the consumer satisfaction in our categories is still remarkably low. Only 25% of consumers believe that they are happy with their laundry detergent performance in the wash. It doesn't come out clean enough, it doesn't come out smelling nice enough. 50% of diapers still fail and leak. Only 30% of women are happy with their protection during their period. So there's dissatisfaction and I firmly believe, and I think we all do, that the path of better innovation, better performance at an adequate value is an enormous opportunity to not only grow the category, but grow our share within the category.

I think a great example of that is the test market results we've talked about on Tide evo in Colorado, where the market is growing ahead of the balance of geography, where our share within that is growing. So there's true incrementality to the proposition at a 50% premium to the average cost per laundry load. So it's just another indication of the ability of delight from a product usage standpoint and performance against specific jobs to be done that drives the category.

And just to double down on and coming full circle, we always prepare a list of our upcoming innovation just to get ourselves confident as we go into these calls. And I am very confident that we have both the technology, the commercialization ideas, the innovation that allows us to capture that dissatisfaction that consumers still have in our categories and make incremental progress that allows us to regain both momentum on category growth, but also share.

Jon and Shailesh, congratulations from me as well. Just one clarification and one question. On the clarification, any perspective on which categories we experienced the destocking during the quarter? If you could just help give us some frame there. And then the question is just kind of piggybacking on Dara's question, if you can give us some kind of specific outcomes that you saw in the test markets that you have kind of deployed this new organizational design. Anything specific that you can provide us just so we can kind of understand what the broader implications could be for the entire company?

I'll start with your destocking question. It's broad-based. There's no specific category. And I think the only insight I'll give you, the faster the turn in the category, the faster the impact. But it's broad-based, so no differentiation across categories I would call out.

Each of the businesses varies across categories and markets, so I'm cautious about applying lessons from a test market universally. However, there are shared insights from our experiences. One key takeaway is that we can operate at much lower costs, an opportunity identified in all our pilots. We have yet to provide them with the IT tools that I mentioned, which will enhance this further. In every market and category we've encountered, this has proven to be true, prompting confidence from our leadership team as we navigated these discussions mainly in May, leading to our commitment to the restructuring opportunity we identified. Another shared insight is that there is excitement among people about the chance to have a broader impact and take on more comprehensive decision-making roles, rather than being just parts of costly processes in a factory setting. Naturally, there is some concern within the organization due to the changes we are pursuing, which brings uncertainty. However, if you consider these two factors alone—operating at significantly lower costs and improving decision-making speed and effectiveness—along with the increased value people see in their relationship with the company, you have compelling reasons to move forward, which is precisely what we are doing.

Congratulations, and thank you for all your help over the decades, Jon. And congratulations to Shailesh. A question on that, maybe a little bit following up on some earlier questions was often the timing of a change like this is just related to maybe a small or maybe a large pivot in what the world is going to look like over the coming 3 to 5 years. So curious whether it's data that you had mentioned, whether it's M&A, is there a bit of a philosophical pivot or shift in any way that would be related to the timing of this? And then the second question more related to sort of the business right now is the commentary on losing or not having the superiority position that you want in some categories. To what degree is that, in many ways, just related to the last 5 years have been complicated for a whole host of things? And did that maybe limit the ability to execute this playbook which has been in place for quite some time? Or is there something else that maybe led to the lagging within those categories for where you want to be?

One example of what has happened is that China developed a market supply system expecting significant growth. However, the opposite has occurred. That supply will not go unused, and we're seeing it impacting various markets worldwide, including the U.S. Credit goes to them for producing high-quality products at lower costs. Suddenly, we're facing a gap in superiority that we need to address. We are closely monitoring the situation and have strong innovation plans aimed at restoring that superiority across all price points. This is more indicative of external factors rather than an internal issue of excessive complexity. I don't view that as the main cause here. The good news is that we operate in a highly competitive industry with strong competitors who excel at their work. This competitive environment is beneficial, as it drives us to improve continuously. I don't see anything internally or externally hindering us from executing the strategy you mentioned.

Great. Congrats to Shailesh and Jon. Jon, thank you, and you'll be missed. We've talked a bunch about the challenged state of the consumer, and yet you're still seeing positive price, positive mix this quarter, this year. So three questions there. First, are you surprised that consumers are still mixing up and willing to accept price despite their current challenged state? Can you characterize your confidence and ability to price next year? Some color on where you see the most need because of the tariffs or increasing costs. And then just on the fiscal '26 outlook, your view on contribution from Focus versus Enterprise Markets.

I'm not surprised by the consumer trends you've highlighted. This was a key factor in our decision to focus our portfolio on daily use categories where performance influences brand choice, with performance being a major factor in value. Value, in a broader sense, encompasses much more than just price. I anticipated that these strategic shifts would bolster our resilience, and that largely seems to be the case. Additionally, if we examine price as a factor in our top line growth, historically, it has contributed positively to that growth over many years. In fact, nearly 19 out of the last 20 years, the combination of price and mix has positively impacted our results, and this trend is also evident on a quarterly basis. This aligns with our innovation-driven model in categories where performance adds value. Looking ahead to future pricing, based on our historical data, our commitment to innovation, and what Andre described regarding our innovation pipeline, I believe there is no reason to expect that historical trends won't continue.

Second part of your question, Enterprise Markets versus Focus Markets, at aggregate level, I expect both to perform similarly in terms of top line growth and bottom line growth in the year. Obviously, within the Enterprise Market bucket, there's a lot of variability between markets. Turkey has returned to 17% organic sales growth. India is still growing at 5%. Still significant challenges in the Middle East. But you allowed me to do it at an aggregate level, at an aggregate level, we should be fairly consistent between the two segments, Focus Markets and Enterprise Markets.

Congratulations to everyone from myself and Javier Escalante. Most of my questions have been answered, but I would like to explore the difference between value and affordability further. The emphasis on superiority makes perfect sense; you want to offer consumers more value, and that approach has proven effective. You've mentioned affordability, but I wonder if this consumer genuinely seeks and needs greater affordability, as there have been comments and behaviors suggesting this. The most important question is whether you believe it would be beneficial for your organization to focus more on providing superior offerings that are also affordable for consumers.

Affordability is an important issue for us, and we address it in a few ways. First, we ensure that our product sizes align with what consumers can afford. In our current market environment, relying too heavily on larger pack sizes can become a challenge from an affordability perspective, so we are mindful of that. Secondly, beyond just the ability to spend, it’s essential to understand the value a consumer perceives to determine if something is considered affordable. This varies across different categories and brands. When we focus on advertising—whether it's through product packaging, in-store displays, or online communication—we emphasize both performance and value. While we aim to make our ads engaging, this should not overshadow our core message about performance and value, especially given the current entertainment landscape and other competing interests. Finally, we recognize the importance of creating more affordable options through innovation. We are actively exploring ways to develop more cost-efficient formulas while maintaining high performance, as well as identifying packaging and manufacturing opportunities that could lower costs. We're dedicated to pursuing these efforts.

Jon, we will miss you. Congratulations to you and Shailesh and your families. As you mentioned, this is a family business involving two families. The results over the years have been impressive. I have a question and two specific clarifications regarding the fiscal '26 guidance for both of you. Jon, starting with a broader perspective, you indicated that consumer health is an area where P&G was not performing to its potential. Has that changed? If not, will the growth primarily come from organic means or mergers and acquisitions? For the clarifications, in your fiscal '26 EPS guidance, are you including any tariff mitigation efforts in the $800 million headwind after taxes? If those efforts are not included, would that become an upside for the midpoint? Additionally, will the restructuring savings from the last two years be reflected in fiscal '26 or will they mainly impact fiscal '27?

So I'll let Andre handle those last two questions, Andrea, and then I'll come back to your question about Personal Health Care.

So Andrea, I think the short answer is the midpoint of headwinds and mitigation is included in the midpoint of the guidance range. And on the productivity savings, they will materialize beginning second half of fiscal year. But we're working through the program details, and as you can appreciate, execution will have to be diligently planned. So as we gain more visibility to the CPS by market, by legal entity, by project, we will give you more visibility to the timing of those savings. Rough cut, would say, building up towards the second half of the year.

And on your question on Personal Health Care, that continues to be a strong focus area for us. It's been a business that's performed extraordinarily well even in the context of a light cough/cold season in the most recent year. We have been clear that there is significant opportunity for organic growth within that portfolio. And the last several years, double-digit growth has been driven by organic innovation and geographic expansion. So that will continue. We also have been clear that there are a couple of categories that we currently compete in where we might be interested in acquisitions if they offer an opportunity to significantly improve the growth rate and margin structure through both revenue and cost synergies. That's what we did when we purchased the German Merck portfolio of OTC products. We're very happy with that acquisition. It's paid out extremely well. It's built capability, both from a supply standpoint and a commercial standpoint. So we'll continue analyzing opportunities that are presented to us. I expect that the future of Personal Health Care will be bright and it will be driven both organically and opportunistically through some level of acquisition.

Okay. We're going to finish strong here. Congrats, Jon. But I'm hoping to ask the same question everyone is asking a little more directly about the U.S. Are you going to be raising prices more this year in the U.S. than you did in fiscal '25? I would think it would be a necessity given the tariffs. And then secondly, there's a very wide range in your guidance for the top line. Is there also a wide range of scenarios on the pricing embedded in that? I would think that would be where there would be a high degree of uncertainty given the moving target on tariffs.

So the pricing on those SKUs that are impacted by tariffs, largely in combination with innovation, is mid-single digits in the U.S. and that's about 25% of our SKUs that are impacted. That is not vastly different from what we typically take with innovation, a couple of points higher to account for the tariff impact that we can't offset with productivity. If you average out the pricing across the entire portfolio, we're looking at about 2.5%, broadly in line with where inflation is trending, so also not too disruptive. And as I mentioned before, the variability on the pricing is part of the range on the top line. If the pricing is holding, if the pricing is supported by the tariffs actually being implemented, then that supports the upper end of the guidance range. If the pricing needs to be rescinded or spent back because the tariffs are coming in differently or for other reasons, that would lead to the lower end of the guidance range. So it's built in. I don't think it's the biggest variability in the top line. I think it's one factor. I think the underlying consumer strength is still the biggest unknown that we're dealing with here.

All right. I think that brings us to a close here. I want to just make a couple of comments reflecting on the conversations that we've just had. First, as Andre already said, but I just want to make sure it's registered, our ambition is to deliver at the midpoint to the high point of these guidance ranges. I believe, though I've always been guilty of this, that there are more opportunities than there are challenges. And that's both in the near term, but certainly in the long term. I tell our Board of Directors all the time, this company has never faced more challenges than it currently does. That's the bad news. The good news is we've never had more opportunities than we currently do. Getting ahead of ourselves in that regard in month 1 of 12, particularly given how things developed through last fiscal year, is probably not a prudent approach and probably doesn't serve you well. So that's kind of the summation of this overall discussion. We'll stay close and make sure that you're learning as we're learning, and we have many opportunities to do that as the year progresses. I have tremendously enjoyed, in most instances, my interactions with each of you and your constituents. You play a very important role in helping people make very important decisions in their lives. And you're a steward, in many cases, for the resources that they utilize to support their families. So I thank you. There's been a lot of thanks and congratulations extended my way, but I offer the same in return. And we all look forward to interacting with you, hopefully narrowing these ranges as we learn more and having a very good year in the process. Thanks a lot.