Q3 2022 Procter & Gamble Co Earnings Call
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Okay.
Good morning, and welcome to Procter <unk> Gamble's quarter end conference call. Today's event is being recorded for replay.
This discussion will include a number of forward looking statements.
If you will refer to P&g's. Most recent 10-K 10-Q and 8-K reports you will see a discussion of factors that could cause the company's actual results to differ materially from these projections.
As required by regulation G. Procter <unk> gamble needs to make you aware that during the discussion the company will make a number of references to non-GAAP and other financial measures.
Procter <unk> Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its investor Relations website, Www Dot PG investor Dot Com, a full reconciliation of non-GAAP financial measures.
Now I will turn the call over to <unk>, Chief Financial Officer Andre Scholten.
Good morning, everyone.
Joining me on the call today are John Walden, President and Chief Executive Officer, and John <unk>, Senior Vice President Investor Relations.
We will keep prepared remarks brief and then turn straight to your questions.
This was another strong quarter strong top line growth across categories and regions sequential earnings growth progress in the face of significant and still increasing cost headwinds.
Starting with a few highlights on the March quarter.
Organic sales grew 10%.
Volume contributed three points of sales growth pricing added five points as additional price increases begin to reach the market.
<unk> added two points to sales growth for the quarter.
These strong company results are granted and broad based category and Geographics.
Each of the 10 product categories grew organic sales in the quarter.
Personal healthcare grew more than 30%.
Fabric care was up low teens.
Baby care and feminine care grew double digits.
All rukia and grooming up high singles.
Homecare and family care up mid single digits.
Yes, yes, and skin and personal care each grew low singles.
Focus markets grew 9% and enterprise markets were up 12%.
In focused markets U S organic sales were up 11% on 7% growth in the base period on a two year stack basis U S organic sales up 18%.
Focused markets in Europe were up 10% and Asia Pacific up 8%.
Greater China organic sales were down mid single digits versus the comp period was up 22%.
Market conditions continued to soften in the March quarter.
Due to Covid driven lockdowns.
And enterprise markets Europe grew 18% Latin America up 16%.
In Asia Middle East Africa grew 8%.
Broad based growth across geographies with six of seven regions growing organic sales high single a or better.
Global aggregate market share increased 60 basis points.
<unk> 36 of our top 50 category country combinations held or grew share for the quarter.
Our superiority strategy continues to drive strong market growth and in turn share growth for P&G.
All channel market value in the U S categories in which we compete grew nearly 9% this quarter.
Angie value share continued to grow up one point versus the same quarter last year.
Importantly, this share growth is broad based nine of 10 product categories grew share over the past three six and 12 months periods in the U S and globally.
Consumers continue to prefer P&G brands, recognizing the superior performance and value.
On the bottom line core earnings per share were $1 33.
Up 6% versus the prior year.
On a currency neutral basis core EPS increased 10%.
Within the EPS results, we estimate Ukraine, Russia was a negative impact of about a penny per share.
Core growth margin decreased 400 basis points and currency neutral core gross margin was down 380 basis points.
Higher commodity and freight cost impact combined were 490 basis point hit to gross margins.
<unk> was 130 basis point headwind.
Mainly salt product form and pack size mix impacts.
Pricing and productivity savings of 260 basis points, partially offset the gross margin headwinds.
Okay.
SG&A as a percentage of sales decreased 380 basis points due to strong topline leverage advertising investments remained strong as we continue to communicate the superiority and value of PNG offerings across price tiers.
Core operating margin decreased 10 basis points currency neutral operating margin increased 20 basis points.
Productivity improvements were 170 basis point help to this quarter.
Free cash flow productivity was 74% as receivables and inventories increased due to strong sales results.
We returned $3 $4 billion of cash to share owners, approximately $2 2 billion in dividends and $1 2 billion in share repurchases.
Last week, we announced a 5% increase in our dividend reinforcing our commitment to return cash to share owners.
Of whom rely on the steady reliable income at <unk>.
<unk> investment.
This is the 66th consecutive annual dividend increase and the 100.
<unk> second consecutive year P&G has paid a dividend.
So three quarters into the fiscal <unk> organic sales up nearly 7%.
Broad based growth across categories and geographies.
Solid global value share growth sequentially, improving EPS growth strong cash productivity and an increased income commitments to owners of P&G shares.
Moving on to strategy.
Our team continues to operate with excellence and stay focused on the strategies that enabled us to create strong momentum prior to the COVID-19 crisis and to make our business even stronger since the crisis began.
We continue to step forward into the challenges and to double down on our efforts to delight consumers.
The strategic choices. We've made are the foundation for balanced top and bottom line growth and value creation.
A portfolio of daily use products, many providing cleaning health and hygiene benefits in categories, where performance plays significant role in brand choice.
And these performance driven categories, we've raised the bar on all aspect of superiority.
Package brand communication retail execution and value.
Superior offerings delivered with superior execution drive market growth.
This drives value creation for our retail partners and build market share for P&G brands.
Most of those apparel is perhaps the most important inflationary environment.
Most of it is most important in the inflationary environment.
Potentially facing.
A great example is the formula of innovation, we've launched on tight area laundry detergent to enable superior cleaning performance in cold water Washington.
The strengthening of the communication of the cost benefits to consumers and the environmental benefits for the planet on the package and in our advertising.
Well consumers savings from switching from hot to Cold, Washington, Conneely, offset the cost of tight oil area liquid detergent and each vote.
Superior Coldwater performance is a strong competitive advantage enables immediate energy cost savings for our consumers and avoids the cost of re bushing, which may be necessary with less effective detergents.
In addition, Washington, with cobalt improved sustainability by reducing the energy required to each quarter in the process.
And by improving government lifestyles.
Superior innovation, delivering multiple benefits and improve value for consumers, even while we've priced to offset a portion of the cost increases we are absorbing.
We've made investments to strengthen the health and competitiveness of our brands across innovation supply chain and brand equity.
And we will continue to invest to extend our margin of advantage and quality of execution.
Proving solutions for consumers around the world.
Building on the strength of our brands, we are thoughtfully executing tailored price increases.
We closed couple of price increases with innovation to improve consumer value along the way.
The strategic need for investments to continue to strengthen the superiority of our brands. The short term to manage through this challenging cost environment.
The ongoing need to drive balanced top and bottom line growth, including margin expansion underscore the importance of ongoing productivity.
We are committed to driving cost savings and cash productivity in all facets of our business no area of cost is left untouched each business is driving productivity within the P&L and balance sheet to support balanced top and bottom line growth and strong cash generation.
Success in our heightened competitive industry requires agility that comes with the mindset of constructive disruption willingness to change adapt and create new trends and technologies that will shape our industry in the future.
In the current environment that agility and constructive disruption mindset.
Even more important.
Our organization structure to more empowered agile and accountable organization with little overlap or redundancy.
Flowing to new demands seamlessly supporting each other to deliver against the priorities around the world.
Going forward there are four areas in which we need to be even more deliberate and intentional to strengthen the execution of our strategies.
Leveraging environmental sustainability as an additional dry bulk superior performing products and packaging innovations.
Increasing our digital acumen to drive consumer and customer preference.
<unk> cost and to enable rapid and efficient decision making.
Next level supply chain capabilities to enable flexibility agility resilience and a new level of productivity adapting to a new reality.
And our employee value equation for all agenda identities races, ethnicity, sexual orientation of ages and abilities for all roles to ensure we continue to attract.
We came in to develop the best talent.
These are not new or separate strategies, they unnecessary elements and continuing to build a priority and reducing costs to enable investment and value creation and strengthening our organization.
They are part of the constructive disruption we must continue to meet.
These strategic choices on portfolio superiority productivity constructive disruption and organization structure and culture.
Independent of the strategies, they reinforce and build on each other.
When executed well they grow markets, which in turn growth share sales and profit.
These strategies, while delivering strong results before the pandemic and have served us well during these volatile times.
Confident they remain the right strategic framework as we move forward.
Moving on to guidance.
We set each quarter that we will undoubtedly experienced more volatility as we move through this fiscal year.
We've seen another step in cost pressures and foreign exchange rates have moved further against them.
Transportation that labor markets remain tight aveda.
The variability of materials remained stretched in some categories and market inflationary cost pressures are broad based and continued to increase with little sign of near term relief.
And have resulted in consumer price increases across CPG categories and beyond.
A recent spike in virus cases in China entry, resulting lockdowns are affecting consumption and have caused temporary work stoppages in our operations and those of our suppliers.
These cost and operational challenges are not unique to PNG and we won't be immune to the impacts.
However, we think the strategies we've chosen the investments we've made and the focus on execution excellence have positioned us well to manage through these challenges overtime.
Based on the current spot prices, we now estimate a $2 5 billion after tax commodity cost headwind in fiscal 'twenty two.
Since our last update we've seen continued cost increases in nearly every type of material, we use and in diesel and natural gas.
Great costs continue to increase we now expect freight and transportation costs to be a $400 million after tax headwind in fiscal 'twenty two.
Foreign exchange rates has also moved further against US since our last guidance. We now expect FX to be a $300 million after tax headwind to earnings for the fiscal year.
We are offsetting a portion of these cost pressures with price increases and with productivity savings.
Start of the fiscal year, we've taken price increases in each of our 10 product categories in the U S.
You may recall it was one year ago, when we announced price increases and the feminine care and baby care categories.
Over the last year input costs have continued to increase substantially and as a result, the feminine care business has announced an additional price increase in the U S, which will be effective in mid July .
Also as a result of these increased cost headwinds, we've recently announced price increases on certain items in the U S. Homecare category. It would it be effective at the end of June .
And in the U S <unk> business that would be effective mid July .
Okay.
As always each category and each market is continually assessing the cost impacts they face.
And the potential need for pricing.
It's fair our decisions to price the degree and timing of those moves will be very specific to the category the brand and sometimes to the individual SKU.
This is not a one size fits all approach also just as we've done over the past year, we'll look to close a couple of price increases with new innovation.
It offers our consumers more value continue to drive category growth and maintain our competitive advantage.
As we said before we believe this is a temporary bottom line rough patch to grow through another reason to reduce investment in the business, we're sticking with our strategy.
That has been working well before and during the Covid crisis.
Moving to key guidance metrics.
We now expect organic sales growth in the range of 6% to 7% for the fiscal year.
Two point increase versus our prior guidance of 4% to 5%.
Pricing was sequentially stronger contributor to top line growth in the third quarter and will continue to be a driver again in the fourth quarter as we get the full effect of increases taken over the past few months.
We are closely monitoring consumption trends or signs of changes.
So far elasticities have been in line or better than our expectations.
Demand for our best performing premium priced offerings remained strong as to our market share trends.
On the bottom line, we are maintaining the core earnings per share growth range of 3% to 6%, but given cost challenges. We're facing we now expect to be at the low end of the range at 3%.
Within this guidance, we expect an additional <unk> <unk> per share of negative impacts in the fourth quarter from higher costs and limited operations in Ukraine and Russia.
The impact from commodities freight and foreign exchange.
Has increased significantly since the start of the fiscal year, our initial guidance in July as $1 $8 million after tax or.
Or about <unk> 70 per share.
This increased to $2 3 billion in our October outlook $2 8 billion in January now with $3 $2 billion after tax headwind to fiscal 'twenty two earnings.
On an EPS basis, the headwinds on our approximately $1 26 a share.
We're at 22% headwind to core EPS.
So in the face of an incremental 56 per share of negative cost impacts since the start of the year.
We've held our growing an EPS range that we've maintained strong investments this approach with new product innovation and fully funded advertising programs.
Note. The majority of the recent $400 million increased cost and foreign exchange headwinds will impact us in the fourth quarter.
We continue to expect adjusted free cash flow productivity of 95% for the year.
We continue to expect to pay $8 billion in dividends and now expect to repurchase approximately $10 billion of common stock combined our plan to return an $18 billion of cash to shareholders. This fiscal year.
This outlook is based on current market growth rate estimates commodity prices and foreign exchange rates.
Additionally, currency weakness commodity cost increases geopolitical disruptions major supply chain disruptions and store closures are not anticipated within these guidance ranges.
To conclude our business continues to exhibit strong momentum and we believe P&G is well positioned to grow through and beyond the immediate issues we are facing.
We will manage through the near term cost pressures and market volatility with the strategy. We've outlined many times, we will continue to step forward toward our opportunities and to remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments.
To mitigate input cost challenges.
And to maintain balanced top and bottom line growth.
With that we'll be happy to take your questions.
Okay.
Ladies and gentlemen, if you have a question. Please press star followed by one on your phone.
<unk> has been answered or if you would like to withdraw your question Press star followed by two.
Your first question comes from the line of Lauren Lieberman with Barclays.
Great. Thanks, Scott so much and good morning.
Okay.
<unk> revenue numbers, certainly show that there isn't really much happening in the way of trade data and you just commented on.
And I just was curious kind of what if anything P&G is doing to prepare for what feels like an inevitability for consumers, becoming more sensitive to the pricing that is.
Prevalent not just in your products across everything that they need to buy.
So anything that you guys are doing proactively.
To help mitigate I think I had to run when trade down or substitution may become more of a factor.
Sure morning, Laura.
Yes so.
As you said in the data at this point, we continue to see favorable price elasticities relative to historic.
<unk> we've observed.
<unk>, a better by about 20% to 30% versus what historical data would have indicated.
That's good.
Looking forward.
We certainly have our eyes wide open and watch for any change in terms of consumer behavior.
<unk>.
And as you say, we prepare on multiple fronts.
I think the first.
Level of protection here as the portfolio, we've chosen to play.
We've moved out of.
Discretionary categories in kept into categories that are.
Daily use health and hygiene focused where performance truly drive spend choice.
That allows us to continue to invest in superiority, which.
Which we are doing consistently even though we see cost pressures, we continue to invest in super over to you in every category and every proposition.
That is probably the best protection and consumers are rewarding us with continued training and continuous trade up which you see in the share numbers to date.
The Super Ot also allows us to.
Thanks Nate.
Product superiority for example into value superiority more directly for the consumer So that's second intervention I would describe.
So we are more proactively so ending true product superiority into value claims that we've put on tech users.
Advertising. One example is the.
Ariel cold everyone tide Coldwater wash that I have mentioned in the prepared remarks.
There are other innovations.
Like the 80 W Ultimate dishwasher myth Buster.
Stating that even with eight dishes its more efficient to use the dishwasher and cleaning the dishes under.
Under running water.
The latest easy squeeze innovation on dawn that allows the consumer to use every last drop.
Without any compromise on performance. So those are examples that we're turning into value claims.
To have consumers understand more easily the value of that is coming.
By using P&G propositions.
We have intentionally built price letters.
In every brand and across brands to ensure that we have offerings for consumers.
They feel they have budget constraints, they can trade within the PNG brand offerings.
So on <unk>, we have multiple offerings starting with.
Pampers pure at about 40 diaper slot.
Wallace at 35 cents, a diaper baby dry at 30.
And last at 20.
These price, let us exist in all categories and also the consumer a choice within the P&G portfolio.
We are also.
Which is part of our pricing execution protecting key price points P value price points for each offering so consumers can choose different cash outlays as they shop based on the available cash at the moment.
Shopping.
The last element, we intentionally built distribution across all channels.
<unk> invested in all channels and that includes channels that consumers are more budget constraint would like rates, who like hard discounters in Europe like the dollar channel in the U S. For example.
So building distribution across those channels to be able to serve the consumer where they want to shop. It's the last element I would call out so all of those leave us in a better position than we've ever been to deal with the potential consumer that is more budget constraint to date, we're not seeing that come through.
And your next.
Comes from the line of Bryan Spillane with Bank of America.
Hey, good morning, everybody and thanks for taking the question.
So my question is about just the.
Yes.
Path to stabilizing gross margins in particular, and I guess, if we look at the quarter right the pricing and productivity covered about half of the inflation. So if you take the mix effect data gross margins and so I guess as we're modeling going forward.
What are the levers that are good at that.
We should look to to stabilize gross margins will there be a lot more incremental pricing I know you've talked a little bit about that in the prepared remarks, a step up in productivity.
Yes, I'm just trying to understand what the levers are going to be as we kind of look forward over the next couple of quarters on gross margins.
Yeah. Thanks, Good morning, Brian .
Youre right over the past three quarters, you'll see pricing and productivity continued to increase the bigger portion of the commodities foreign exchange MTN W. Gross margin impact in.
In quarter, one this cover 37% and quarter to recover I believe 43% and now we're at 53% so you'll see a bigger portion being covered over time.
Those effects.
We will continue to drive all three levers.
To recover the dollar impact of commodity cost increase was foreign exchange.
MTN W.
Productivity will continue to play a significant role we have a lot of runway left on productivity and as the supply situation stabilizes here over time.
We have more line time and more resources available to reinvest in cost of goods savings and that will allow us to strengthen our productivity muscle sequentially.
Hopefully over the next few quarters.
We will continue to drive innovation.
We have prioritized innovation and our resources in line time and location to make sure that we can continue to offer superior value to our consumers, which also enables us to take pricing.
And see these relatively benign in two cities at this point in time, so you'll continue to see us invest in innovation with innovation, we will try to take pricing at a very granular level by market by brand.
A lot of the price increases that we have announced are yet to flow through so you will see an incremental contribution to the topline and two gross margin recovery over the future. The other price increases already announced and we will have to carefully evaluate.
More opportunities to take pricing it will take time.
To recover the full dollar impact.
And as we said before it's more important to us to support the business model support innovation support superiority execute pricing and the right way.
And recover gross margin and cost impact of overtime versus rushing.
To do this faster so you should expect sequential progress I won't give you a specific timeline.
We will continue to use all three productivity innovation and pricing.
Your next question will come from the line of Derma <unk> with Morgan Stanley .
Okay.
Hi, good morning.
I was hoping to get a bit more detail on China.
How much of the decline in the quarter do you think was specifically related to Lockdowns and maybe the comp versus last year.
Can you give us a bit more granularity on some of the performance.
By product category, there and any thoughts on China going forward with the continued lockdowns and in April and how the business is positioned going forward. Thanks.
Yes.
Yes, Thanks Dara good morning.
Look China.
The lockdowns have to impact in China for US one on the supply side, we have two plants in the Shanghai area and the contract manufacturer. Those obviously were shut down for an extended period of time. So we had to activate our business continuity plans to offset that.
As much of that production impact as we as we could.
And we're certainly seeing a significant impact in terms of consumer demand.
About <unk>.
75% I think was the wall Street estimates of consumers are somehow impacted by lockdown.
That is impacting our consumers' ability to reach our stores grocery stores department stores, even online shopping is significantly constrained due to the inability to deliver.
So we certainly see a significant impact from Lockdowns.
Latest read of market size in our categories over the past three months through March was flat.
In terms of value in China.
With the continued lockdown and the difficulties in the market, we would expect April to be.
Flat to negative.
In terms of.
Category detail.
T is.
Significantly exposed to China as you know a bigger part of beauty as a beauty business in China SK II continues to be under pressure due to the marketing channel effect in China. So that dynamic has not changed.
No.
Longer term story around China based on historical results, which have been extremely strong over the past three or four years as you know we've grown high singles low doubles in China.
Believes the market continues to be a very attractive market for us we expect categories to return to mid single high single growth.
We have a very strong organization very strong supply chain very strong R&D organization in China. So we remain confident and we will continue to invest to capture the growth in the future.
Yes.
Alright next question will come from the line of Rob <unk> with Evercore.
Great. Thank you very much.
A clarification.
To start off can you tell us kind of what your pricing run rate was at the end of the quarter given that the pricing was going in throughout the quarter and the year. I think you were 5% on average, but just like to get a sense of what the run rate was and then I'd like to dig in a little bit more on the state of that.
Consumer you mentioned that elasticities, where 20% to 30% better than what history has shown.
But you know the current conditions, we've never had these kind of current conditions before.
At least in and anybody's recent memories. So I was wondering what your consumer panels.
Are telling you about why the elasticities are better is it because of increased savings is at the low.
The rates of unemployment how.
How much is maybe contributed to your superiority just trying to get a little bit better sense of your read on the on the consumer from your your own internal research. Thank you.
Okay. Thanks Robert.
So in terms of pricing run rate for the quarter on average we have a five point contribution to topline.
As we've said pricing will continue to increase as more of the price increases flow through.
So I would say.
<unk> the quarter I would see about a 6% run rates.
Topline from profit contribution.
So you will see.
More of the pricing that has been announced and approved flow through in April apathy flow through in quarter four.
Pricing elasticities remain favorable.
And we.
Within the portfolio that we offer to consumers.
We broadly see a trade up into higher.
Hi.
Price propositions that offer better value and better product performance.
So and that explains the mix effect that you see in gross margin, where we see higher unit sales of items being chosen with higher penny profit, but slightly lower gross margin.
So consumers are trading into single unit dose detergents, instead of liquid detergent consumers are trading into smaller instead of maybe try and diapers. So we see consumers trading up even within our portfolio into higher performing product propositions.
The relevancy of the relevance of product performance in our categories. We believe is the reason why consumers are not trading down we've had an extensive period of trial during the early Colgate phases, where consumers have traded into P&G.
<unk>.
<unk> experienced a superior performance of our propositions.
<unk> seen the relative value that we provide even though the cash outlay might be higher they see the high efficacy of the product and the benefit that they gain from it and we see repeat rates are reaffirming that we believe that a good portion of the <unk>.
Resiliency of our demand is driven by the superiority of the product and packaging.
Clear communication of the benefits basis clear communication of the value.
Good retail execution and carefully crafted price increases that allow consumers to choose.
Choose the cash outlay.
We are ready to afford and to choose the brands and brand proposition that theyre looking for.
So I'll leave it at that.
Hey, Robert this is John .
A couple other piece.
Pieces of perspective on this and of course, it's a rapidly evolving situation and this could change tomorrow.
But if you look.
For data points to support Andreas comments on consumer resiliency, you, obviously see them within the internals of our income statement as you mentioned.
Also if you look at.
Private label shares as a proxy for trade.
Trade down.
They remain below year ago.
You asked for the past three six and 12 months.
They remain below year ago in Europe for the past.
Three six and 12 months.
And if you look at.
Market shares across channels.
Andre mentioned earlier that we're we've worked.
To improve our distribution in channels, where.
Consumers with.
More of a a budget challenge are inclined to shop.
Our share growth in those channels are entirely consistent with his points are some of our highest.
Share growth across retail banners.
So in the dollar channel for example.
Significant share growth.
Again, we'll have to monitor this very closely things can change tomorrow.
But as we sit here today.
Looks like.
The moves we've made to focus the portfolio.
And daily use categories, where performance drives brand choice and deliver.
The performance aspect across the vectors of superiority.
And be very.
Granular and our pricing executions as is holding up.
Alright next question will come from the line of Kevin Grundy with Jefferies.
Great. Thanks, good morning, everyone.
My question relates to category growth rates understanding the volatility of the environment and I guess I'm coming at this from the angle I'm trying to unpack the strength of the 10% organic sales growth in the quarter and just the areas of favorability versus your plan. We've covered a lot of this demand elasticity clearly better trade up remains favorable despite the environment.
You continue to gain market share, which is great up 50 basis points globally.
Less certain.
That degree of market share gain would be very different thing than your plan and then we haven't touched on this in the call I'm not sure. Maybe there is some degree of inventory rebalancing with the trade because demand has outstripped supply in recent quarters. So.
Where I'm going with this and understand the volatility of the environment has there been any material change in your view for the categories. As you look across your geographies and you look across.
The categories that you participate in and we're thinking about our forecast going forward any any material change to category growth rates based on what your current currently seeing your comments there would be helpful. Thank you.
Okay.
Kevin Thank you so.
Category growth rates are holding up well.
Well.
Fiscal year to date global category growth in the categories. We compete in is 5%.
We expect that to continue at around 5%.
Category growth in focused markets is 5% category growth in enterprise markets of 7%. So it's a strong fives on a global level.
It's fairly consistent enterprise markets had been growing past three six and 12% to 7% focus markets have gone between 4% and 5% over the past three six and 12 months.
So if anything in the most recent reading we've seen strengthening of category growth.
We're also pleased with the fact that we see P&G, leading disproportionately contributing to category growth.
In most of the markets we're competing in.
Beyond innovation.
We are leading innovation and thereby driving category growth.
And participating in that category growth via share growth.
Overall, we feel good about the level of category growth, we're seeing slight acceleration across the periods P&G contributing to be our strategy of driving market growth the two priority investment and innovation.
And that certainly is benefiting our growth and is in line with our growth model, we want to drive because it's the only way to sustainably grow at these levels by driving market growth and then participating in that growth to be up schedule.
Market growth is something that doesn't.
Happened to us we need to.
Positively impacted ourselves, which is exactly what Andre just said and Thats what were trying to do through our strategy.
I would also.
Hey, Kevin.
If you look at the last quarter.
There are several negatives within the quarter from a top line standpoint several challenges.
We've been working against we've talked about China.
Our second largest market.
Down mid signals.
We've talked about.
The unfortunate situation in Russia and Ukraine.
One thing we haven't talked about except indirectly is that.
We're still racing to catch up with demand in our largest market.
The U S.
But we're not fully supplying.
The market's demand.
And all of those hopefully over time or some of them at least.
Offer.
An additional upside as they are.
Reverse themselves.
Your next question comes from the line of Olivia Tong with Raymond James.
Great. Thank you.
A little bit of a follow up there could you just talk a little bit about where the supply constraints are most acute.
Where are you starting to see potentially.
Potentially some more capacity coming back across the category, particularly amongst private label players.
You mentioned pricing in Perm in care home care oral care can you talk about a little bit about your decision tree as you can see our future rounds of price increases and what not.
Categories, you could potentially how do you think about what categories you could potentially move on partner. Thank you.
Alright, good morning Olivia.
Supply constraints and maybe just to start at the global level supply constraints omni presence in every potential bucket that you can think through.
Being able to source raw and packing materials, it's still difficult insufficient quantities.
Getting raw and packing materials to the places we need to get them to continues to be costly.
And highly volatile.
Labor availability is.
It's certainly a stretch not for PNG directly but more for our supplier base.
And then getting finished product or to our retailers by being able to actually ship with <unk>.
Truck availability in the U S. For example, it's difficult so it's across all aspects of our supply chain.
We are making progress.
Our on shelf availability continues to be stable at around 90, 394%, even if we grow at these levels.
That we are happy to report we're growing in Q3.
And fiscal year to date.
We have more and more categories coming off managed supply in the U S. Over the next few months.
So we are carefully working with our retail partners to ensure that we do this in the right way to ensure the best service and best on shelf availability with our retail partners.
We're making progress.
The most investment in terms of <unk>.
Capacity will be in our.
North America and European markets to ensure that we have sufficient capacity to keep up with the increased demand. We've seen those investments will take hold over the next over the next two years.
But we expect to be in a better situation over the next call. It three to six months specifically in the U S. Moving out of managed a minute to supply.
There is no to your second part of the question on pricing.
Uh huh.
There is no formula based approach to pricing and any of these categories. So we're carefully watching.
Number one consumer behavior.
And the strength of our super royalty relative to the market.
We are looking at the cost pressures and cost headwinds that we are seeing and you will have noticed that.
Our paper categories in <unk>.
In baby care.
In summary, Q and in our fabric and home care categories, that's where we see the biggest impact from commodity cost increases of.
Transportation and warehouse, but also foreign exchange impacts.
So the impacts are bigger there is superiority.
And then it becomes a matter of do we have the right innovation available or do we feel that it is right at this point in time to recover via pricing versus leveraging productivity and the balance between those three elements as we've talked before so I wouldn't say, there's any formulaic.
Approach.
But certainly epic in homecare and the paper categories are most exposed to the cost pressures. So the combination of all three elements needs to play out more aggressively in those categories than maybe some others.
So on anything that you want to add.
No I think you've covered it.
Olivia first of all it's great to hear your voice again.
And obviously, we can't provide any more granularity than Andre already has in terms of where price future price increases would occur.
Not something thats legally permissible.
Your next question will come from the line of Wendy Nicholson with Citi.
I guess.
Not to beat a dead horse, but just to follow up on that point.
You think about the priority for the P&L.
In those categories I mean, I look at paper I look at laundry or fabric.
Those are categories, where there is just to start with maybe more competition, maybe less brand loyalty, maybe a little bit more private label just to start with even though private label may not be gaining share yet and so I'm wondering if your priority is to offset commodity headwinds as much as you want.
If I can to preserve gross margin or is it to preserve market share at this point and then Relatedly you haven't really talked that much about currency and what youre doing in some of the bigger emerging markets emerging markets like Japan for example, where currency is a significant headwind.
Are you adopting a different stance with regard to taking prices to offset currency headwinds and are you seeing any differences in elasticity, maybe it's in the best emerging markets. Thanks, so much.
Okay.
In terms of priority.
Our priority.
Remains a reasonable recovery time on the dollar impact of commodities foreign exchange.
And T W headwinds across all categories.
We will do this in a way that.
Provides value to the consumer provides a superior proposition to the consumer by combining it with innovation.
There is no.
There is no timeline for us that forces us to recover gross margin over a certain period of time, we want to return to margin expansion and we will.
Our balanced growth model that requires us.
To drive top line bottom line, but also a reasonable margin expansion. So there is continued commitment to return to that point, but we will do it in a way that provides the right value to the consumer in every brand in every market at any given point in time. So we can serve consumers in the best way possible.
And maintain business momentum.
To your second question on foreign exchange rate pricing.
Across markets Foreign exchange rate pricing is a reality with dealing with everyday we've been dealing with for years.
Nothing different to report in terms of elasticity.
It's being executed in some markets more pronounced you've seen us taking significant price increase for example in Turkey significant price increases in Argentina.
So those are being executed the organizations know very well how to do those.
And they are baked in our forecast and guidance.
So just one other point Wendy you asked the question that you asked is the question.
We get asked by the organization every day.
Which is which of these matters most.
Essentially topline and continued share progression or <unk>.
Bottom line earnings recovery.
And the answer always is both.
Andre is balanced point.
What we need.
To do both or we get.
Out of balance.
The wheels come off.
So we need to continue and will continue to invest in topline momentum.
As we.
Recover the commodity costs are a combination of pricing productivity et cetera.
So that's.
Both.
Alright. The next question comes from the line of Nik Modi with RBC capital markets.
Yes, Thank you and good morning, everyone I wanted to ask a different slant to the premium innovation and trade down question not necessarily on pay downs.
Slowing momentum opinion is nascent because during the pandemic and a lot of low income consumers with all that extra stimulus money engaging more in premium price tiers. So I was just curious on your observations on that and kind of how do you think thats going to manifest into.
And in that particular income strata and how they are behaving with food and gas inflation on the wages.
Yeah.
Yeah, Good morning, Nick.
Look we're not we're not we're not seeing it.
<unk> seen consumers trade ins with P&G brands and trade up within the PNG brand portfolio throughout the pandemic.
Every quarter this fiscal year, we've seen consumers continue to trade up within the PNG brand portfolio into.
Higher.
Premium propositions across most categories.
That's the mix effect you have seen on the gross margin and the positive mix effect on sales so.
So we continue to see consumers stay within the P&G portfolio and many consumers actually trading up within the P&G portfolio as they see the benefit of.
Those higher.
Premium propositions.
As we've said before we don't take that for granted we don't assume that what we're seeing to date is necessarily an indication of what will happen in the future. We are very well aware that consumers might end up looking at budget constraints.
Where we see for example, private label losses, reducing.
We continue to see P&G growth, so even private neighbor coming back so far is not impacting p&g's ability to grow.
Within those markets or within those market category combination.
Our best Defense too.
So if the consumer in a more budget from state environment other points, we've talked through.
From the portfolio focus that we are operating two superiority to value claims cash outlay choices price, let her choices distribution across all channels.
Come back to those elements that we control that will serve us well I believe even for consumers that are more budget constraints put choices.
There are a lot of.
Mileage benefits and some of the.
Higher priced products that we need to.
Proactively communicated as Andres mentioned earlier.
<unk>.
On the assumption that just because something is higher price. It cost me more per job is not a valid assumption.
And we have to help people understand.
I understand that.
Alright. Your next question will come from the line of Chris Terry with Wells Fargo Securities.
Hi, good morning.
Yes.
I wanted to ask a question about the personal health care business.
Organic growth.
Over 30% certainly impressive.
I appreciate there's a dynamic here.
Were there some recovery from.
Basically a non existing cold flu.
But also.
Conscious that this is one of those categories, where where you are particularly focused and there's been some innovation.
I Wonder if you can just comment on how much of the strength of the business was just recovery versus things you are doing a bit more offensively that that have a bit more lags long term and just connected to that.
Fiscal Q4, and flat organic sales guidance is brute strength, but a deceleration on a two year stack.
Wondering if you're baking in any normalization there or if there's other puts and takes that we should keep in mind. Thanks.
Yeah.
Alright, Thanks, Chris.
<unk> had a fabulous quarter as you point out.
Part of that certainly is the stronger.
Cold cough flu season.
It's it's 57% stronger in our estimation that last year's season, which was abnormally low.
Driven by.
Driven by the mass mandates and everything else going on.
A slightly stronger seasons on average by about 4%.
But importantly, North America VIX for example.
Was stable to outpace that season growth.
Plus 123% growth versus the season, which drove about one nine share points over the period. So.
Within respiratory season recovery is certainly a big point, but mix growing ahead of the seasonal recovery in building share.
The growth was also broad adventurous respiratory.
Jessica organic sales are up mid teens and.
And sleep is up nearly 30% so the breadth of the portfolio is performing.
Even beyond just the seasonal recovery. So we continue to be very pleased with the results of the P. H C portfolio and certainly see significant future runway there.
On quarter four sales guidance.
The only thing I will say is as we mentioned before we do not assume the favorable price elasticities to hold.
In our forecasting we assume price elasticity is to return to normal levels that we've seen historically.
The only thing I'll, let you know the rest I think is fairly clear.
Yeah.
Okay.
The next question will come from the line of coming out of <unk> <unk> with credit Suisse.
Hi, I'd like to maybe just follow up on a comment from earlier on on sequential gross margin improvement was that a just a general comment on something that you expect over time or where you're kind of indicating that gross margins we see.
Today, our trough margins in <unk>.
<unk> <unk> and as we get into the beginning of.
The next fiscal year is when we'll start to see it.
General comment overtime, Colombia, we're not we're not forecasting gross margin will give gross margin guidance here.
Too many moving pieces, but over time, we remain committed to building gross margin as part of the model.
Got it thank you.
The next question comes from the line of Mark Astrachan with Stifel.
Yes, Thanks, and good morning, everybody I wanted to ask specifically a bit more about beauty. So volumes negative I guess I'm curious how much of it is category shifts it seems a bit away from skin care given.
Pandemic effect there into some more discretionary categories. How much is market share challenges for rescue two around Asia, and China, specifically and how do you think about how much of what I just said it could be transitory versus us.
Needing more change from your standpoint to improve trends. Thank you.
Yeah. Thanks Mark.
We're very confident in the beauty portfolio. If you look at the performance of this portfolio over the past five years, it's been just outstanding with the core portfolio has grown sales more than $3 billion over the past five years profits more than $1 billion.
<unk>.
Significant shareholder value creation, and 26 quarters of uninterrupted growth. So the core portfolio has been performing extremely well.
And as you say there are a number of headwinds that we see as as temporary China and the dynamics in China, certainly being one of those significant dynamics, which us.
Which is impacting the broader.
And skincare portfolio.
But also the broader impact on SK II as it comes to the travel retail shutdown during the Covid period.
And the impact of China on the SK to consumption.
Outlet stores being closed down and even some of the online business being hampered.
A number of temporary effects that we see.
We you have seen us announce a few portfolio additions acquisitions over the past months.
That are focused on.
The premium and Super premium segment in the category, we believe that's a growth opportunity beyond the core portfolio.
In specialty channels. So we've proven that strategy with our previous acquisitions like first aid beauty and so we want to build out the portfolio in the premium and Super premium segment. In addition to <unk>.
Strengthening the core so this certainly work to do to.
Address the opportunities in China.
On the core business.
Rebuild strength and momentum on SK II and further help our business to serve premium and Super premium consumer and specialty channels in the U S and outside the U S.
But we're very confident in the core focused portfolio.
You know some targeted at additions via acquisition.
We tucked in.
Which set us up well for future growth in the beauty category.
The next question comes from the line of Peter Grom with UBS.
Hey, good morning, everyone. So in the release there were a few comments around lapping pandemic related consumption and I think you called out appliances and cleaning specifically I just would be curious when you look at performance in those categories. How does the recent performance compare versus your expectations.
Guess, what I'm trying to understand is are you seeing a normalization that is in line with your expectations and some of those categories and saw significant growth over the past couple of years or has demand held up better or worse than you would have anticipated.
Yes.
Yes, I can start Peter and then maybe John wants to add a few points here, but.
Overall consumption is holding up as I mentioned market growth, 5%, a focused market, 7% and enterprise markets. That's certainly an indication that overall consumption in all categories is holding up well.
There are some natural.
Natural biological switch so when you think about for example, our grooming business.
The appliances business has.
Experienced significant growth during the pandemic as more and more jobs that went on in for loans and Barbershops moved in house so folks.
<unk> bought these appliances.
Experienced the fact that they can do the job themselves and they continue to do so but once that need a satisfied.
Clients with fees a decline versus the peak in terms of ink.
Incremental job growth and incremental overall growth.
At the same time, there is a natural hedge within the grooming portfolio, so blades and razors.
Well under pressure as more people work from home and stayed at home, which we opening that part of the category.
Resumed growth so there's a hedge component within grooming for example.
Within.
Anything that is health and hygiene related I think consumers continue to put more emphasis on on jobs to be done.
They spend more time at home. So we continue to see our categories to benefit from both effects paper towel consumption continues to be increased by more than 10%.
We'll see what Bath tissue ends up one supplier is unconstrained, but more time at home certainly.
Two more in home consumption.
This is away from home consumption.
The only part where we saw a little bit of a decline was anything that has to do with a household surface disinfection surface cleaning that's a relatively smaller part of our portfolio.
As consumers get more used to.
The right balance there, we saw a little bit of a decline, but overall all categories still.
Fitting from more time at home.
And and higher <unk>.
Focus on health and hygiene, and certainly beauty and personal care related categories benefiting.
Benefiting from reopening.
Your next question comes from the line of Andrea Teixeira with Jpmorgan.
Thank you I was hoping if you can please comment on the baby.
Can family care.
It seems that you've continued to regain share in the U S and also potentially in China. Despite the challenges there and similar to this question you had an impressive growth in the cold and flu brand franchises, but do you start to lap those comps.
So do you think the growth is it still sustainable with innovation you've made in other franchises and health care. Thank you.
Yep. Thanks Andrea.
So.
Yeah.
Baby care.
Sure is improving significantly in Europe , and North America.
Driven by.
Major innovation that was launched in the market.
Both in Europe and in North America.
We will continue to build on that share momentum, we will continue to drive Super OTV incremental innovation in <unk>.
<unk> in brand communication go to market execution.
We've also been able to.
And to some new parts and grow some new segments within the baby care category. When you think about Ninja Amas launches for example in North America.
That's a category that has been relatively quiet, it's us children between pipe itself.
With overnight funding issues.
A re entering that category with a creative and relevant proposition allowed us to grow the category.
Mid teens and at the same time build an 8% 89% share position.
Within the category.
We continue to build share in pads pants as a trade up category in Europe , and an opportunity in North America that allows us to grow our position as well. So brought innovation in terms of true product innovation, but also new jobs to be done and communications.
Fem care, we are seeing.
<unk> success in both adult and continent, but also in the most premium propositions in Fem care. The biggest growth for example in <unk>.
Pets in North America is driven by our Infinity, our most premium proposition, which is a unique proposition from P&G foam based pad.
Delivering superior comfort absorbency.
Again same formula significant significantly.
Innovating in relevant ways for the consumer investment in communication retail execution allows us to drive overall market growth and share growth.
On on Cold and flu I don't have much more to add Andrea This is what we said before.
We are growing ahead of the segment in terms of respiratory with strong innovation index.
And we are growing the balance of the portfolio.
In terms of absolute sales growth and share growth be asleep or digestive. So overall, we feel.
This significant runway left on all P. H C portfolio and it's playing out in the market.
And your final question will come from the line of Jonathan Feeney with consumer edge.
Thanks, very much I'll give you a lot of credit I mean, there hasn't been a lot of discussion about retailer pushback to pricing and maybe thats just because the results are good overall, but just looking at the U S market.
Why is it that your relationships with retailers seemed so good that elasticities are better it's really a consumer level discussion.
And do you expect that to continue if you can give me any color around why that particularly if it is it maybe just simply that theyre short product and theres more demand versus supply so you're kind of in the driver's seat what allowed this yeah pretty good.
Series of very good relationships to emerge and what.
How sustainable you think that proves if we need another round of significant pricing second half of the year. Thanks.
I'll start and I'm sure John has.
A few points to add here, but generally our discussions with retailers book better if your business comes from a position of strength.
Consumers are looking for Youll propositions velocity at shelf is strong.
You have innovation programs that are credible a tangible and meaningful for consumers you have install programs that are meaningful for retailers and consumers you have.
And the ability to communicate and support.
The advertising.
Both in digital as well as in mass advertising and all of those things hold true as we entered this commodity inflation cycle P&G came from a relatively strong position in terms of superiority, we continued to invest in innovation.
Products on shelf, we're doing well and that sets up a good discussion with retailers about future growth potential the need for pricing, which is very clear given the inflation cycle.
And the reality that it's broad based within multiple industries.
No guarantee that that will continue it would also it would always be as.
As we said before a very careful balance for us between productivity innovation and pricing.
Yeah. Our retail partners are also competitors in most cases with their their own label offerings.
And because of the increases that costs are so significant.
They need to be able to.
In most cases, obviously is entirely at our discretion, but they need to be generally able to raise pricing.
On their on their own brands.
And when that's true that becomes less of an issue not a non issue, but less of an issue.
For us.
And I think the biggest change that's occurred.
Over the.
For the last several years.
And our dialogue has been a more deliberate and over focus on our part.
On market growth.
And on being.
And our commitment to be a disproportionate contributor to market growth.
At the end of the day, a retail partner doesn't care, what our share is what they care about is what's there.
Their sales are in are they growing or not.
We need to be a source of that growth and when we do that dependably and reliably as Andre said it changes the nature of the conversation and that becomes the focus of the conversation as opposed to other things.
We are.
We have an opportunity and better serving our retail partners with supply as we've talked about several times and we're working to address that.
Important in terms of continuing.
To serve them effectively, but but that contribution to market growth.
<unk> independently.
Changes in the world.
Alright, I think that concludes the call. Thank you for spending time with us today.
John Chevalier and I will be available all day, if you have any other questions. So please feel free to call <unk>.
To find us have a wonderful rest of the day.
And ladies and gentlemen that concludes today's conference. Thank you for your participation you may now disconnect have a great day.
[music] them.