Procter & Gamble (NYSE:PG) reported third-quarter financial results on Friday. The transcript from the company’s third-quarter earnings call has been provided below.
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Access the full call at https://events.q4inc.com/attendee/506630038
Summary
Procter & Gamble reported a solid acceleration in top-line results for Q3, with organic sales up more than 3% year-over-year, driven by a 2% volume increase and 1% pricing increase.
The company achieved broad-based growth across all product categories and regions, with notable sales growth in skin and personal care, and strong performance in North America and Greater China.
Core earnings per share (EPS) grew 3% to $1.59, though margins were pressured by incremental investments and energy cost impacts related to geopolitical conflicts.
Procter & Gamble announced a 3% increase in its dividend, marking the 70th consecutive annual increase, and returned $3.2 billion to shareholders this quarter.
The company is focusing on strategic initiatives such as innovation, consumer communication, and supply chain enhancements to drive future growth and mitigate cost headwinds.
Management expressed confidence in maintaining momentum despite geopolitical uncertainties and affirmed its commitment to its Integrated Growth Strategy.
Fiscal 26 guidance remains unchanged, with organic sales growth expected to be in the range of 0-4%, but results are likely to be at the lower end due to cost headwinds.
Management highlighted ongoing investments in innovation and productivity to support business growth and expressed optimism about long-term opportunities.
Full Transcript
OPERATOR
Good morning and welcome to Procter & 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 10K, 10Q and 8K 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 & Gamble needs to make you aware that during the discussion the Company will make a number of references to non GAAP and and other financial measures. Procter and Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its Investor Relations website www.pginvestor.com A full reconciliation of non GAAP financial measures. Now I will turn the call over to P&G’s Chief Financial Officer Andre Schulten.
Andre Schulten
Good morning everyone. Joining me on the call today are John Chevalier and Kerry Cohen, our Senior Vice Presidents of Investor Relations. I will start with an overview of results for the third quarter of fiscal ’26 and then discuss our progress on near term business interventions and longer term transformation efforts. I’ll close with guidance for fiscal ’26 and then we’ll take your questions. As we expected, we saw solid acceleration in top line results in our fiscal third quarter. Bottom line results reflect the strength of the top line progress with partial offsets from incremental investments in the business and energy cost impacts from the conflict in the Middle East. Taken together, we remain on track to deliver within our guidance ranges. For the fiscal year, organic sales increased more than 3% versus the prior year. Volume increased 2 points, pricing was up a point and mix was flat. For the quarter we delivered broad based growth across the business with each of our 10 product categories growing organic sales. Skin and personal care grew organic sales high single digits. Hair care, family care and home care grew mid singles personal health care, oral care, fabric care, baby care, feminine care and grooming each grew low single digits. Growth was also broad based geographically. While with each of our seven regions growing organic sales focus markets were up 3%. Organic sales in North America grew 4%. Volume was up 3 points driven by improved consumption and trade inventory dynamics. We saw a benefit from base period trade inventory destocking and a modest help from a current period trade inventory increase late in the quarter driven by Easter timing. Price mix added a point of growth. The Europe region was up 2% led by enterprise markets being up 6% and modest growth in focus markets led by the UK, Italy and Spain. Greater China organic sales grew 3% continued growth in what remains a challenging consumer environment. Campus and SK2 led the growth, each up double digits. Enterprise markets in aggregate grew 5% for the quarter. Latin America organic sales were up 5% with Mexico and Brazil each up high single digits. Organic sales in Asia Pacific, Middle East, Africa enterprise region was up 4%. Global aggregate market share improved to in line with prior year with positive Trends through the quarter. 26 of our 50 top 50 category country combinations held or group share for the quarter. On the bottom line, co earnings per share came in at $1.59 up 3% versus prior year. On the currency neutral basis, Core EPS was in line with prior year core growth margin was down 100 basis points and core operating margin was down 80 basis points versus prior year. Strong productivity improvement of 330 basis points was offset by healthy reinvestment in innovation and demand creation. Currency neutral core operating margin was down 70 basis points. Adjusted free cash flow productivity was 82% and we returned $3.2 billion of cash to share owners this quarter, $2.5 billion in dividends and over $600 million in share repurchases. Earlier this month we announced a 3% increase in our dividend, continuing our commitment to return cash to share owners and this marks the 70th consecutive annual dividend increase and the 136th consecutive year P&G has paid a dividend. In summary, this was a solid quarter of progress, positive sales and share trends and earnings growth in a difficult environment. Geopolitical dynamics have thrown new challenges in front of us, but we will continue to fully support the business to maintain the momentum that we are creating as we move forward. We remain committed to the Integrated Growth Strategy, a portfolio of daily use products in categories where performance matters. In these performance driven categories, we must deliver irresistibly superior products across the product itself, the package, the brand, communication, retail execution and value. We continue to drive productivity with multi year visibility, to fund innovation and demand creation and to mitigate cost headwinds. Constructive disruption is key to staying ahead of and to creating emerging trends and opportunities in our fast changing industry. Finally, an organization that is fully engaged, enabled and excited to serve consumers and to win in the marketplace. Now P&G’s point of difference Our competitive advantage comes from outstanding integrated execution of these strategies across all activity systems in the company and from anticipating what capabilities are needed next. While the core strategy remains constant. On last quarter’s call and at the CAGNY conference, we outlined three major changes in the landscape around us. Media fragmentation and changing consumer media preferences preferences are affecting how consumers are collecting information about our categories, including platforms like social media, retail media and AI portals. The retail landscape is changing. More concentration, but also brand proliferation. Retailers are becoming media platforms and media platforms are becoming retailers. Third is Inflation across food, energy, health care and many other areas of spending has taken a toll on consumers and how they assess value. Recent geopolitical events have elevated this to a new level of concern. In short, the consumer path to purchase is changing every day and we expect an even more intense pace of change in the next three to five years. The interventions and investments we’re making in P&G capabilities to adapt to these changes are beginning to bear fruit. Strong innovation supported by sharper consumer communication and retail execution. A few examples Building on the success of Dawn Powerwash in the US Ferries Skip the Soak in the UK is a great example of deep consumer insight that’s driving innovation. Consumer research showed us that more than 70% of UK consumers soap dishes before washing. With this insight in mind, we created the Ferry Skip the soap idea which instantly and intuitively helps consumers understand what the product is and what it’s for. Integrated superiority across all vectors where the product name inspires the packaging in store. Execution and communication all supported by superior performance that delivers on the promise. Skip the Soak drove Fairy brand wholesale penetration to 61%, up 5 points in its first year. Mister Clean continues to innovate on its core proposition and solving more cleaning jobs with new additions to the portfolio core and more. The brand has launched new innovations on the Magic Eraser platform that improved the longevity with a denser foam and a wider micro scrubbing structure that now lasts two times longer. We restaged the packaging to use room and mass focused names that clearly signal where to use the eraser. At the same time, we launched Mister Clean Shower and Tub Scrubber to address consumers number one most hated cleaning chore Shower and tub Mistr. Clean Shower and Tub Scrubber delivers a quicker, easier and deeper clean with the power of the Magic Eraser, a sturdy grip handle built in squeegee and a pivoting head for hard to reach areas. The results Mister Clean is winning consumers and driving category growth, delivering 18 times its fair share of the bath cleaning category growth since launch. Germany Pantene identified an opportunity to improve brand and product superiority awareness by capitalizing on media landscape shifts. The increased investments in social media and influencer partnerships including top German beauty opinion leaders, hair experts and brand events including talk worthy local events like the Oktoberfest and Berlin Fashion Week. The impact earned influencer posts grew four times and total reach tripled despite a 20% reduction in media spend. Content value share in Germany is up 60 basis points versus a year ago and accelerating. The other examples we’ve discussed recently also continue to deliver strong results including Greater China baby Care, Mexico fabric enhancers, Brazil hair care and US Personal care. Finally, tight boosted liquid detergent in the US continues to deliver strong results. Initial weeks in the tight EVO launch are on track with our high expectations. While we work to improve our near term results, we’re also making progress on a longer term reinvention of PNG capabilities, the next phase of constructive disruption that will create and extend our competitive advantages in each element of our strategy. The way to break through consistently is to build the strongest brands in the industry. P&G has the unique strengths and capabilities to redefine brand building to deliver consumer relevant superiority. First, we are leveraging our large iconic brands with huge consumer bases and all the data we gather. We are now scaling the integrated data platforms and the technologies that will enhance our team’s ability to mine this data for insights that lead to new product innovations, brand ideas, performance claims and marketing campaigns across all relevant consumer platforms. Next, we are driving our unique set of innovation capabilities, substrate technology, thermoleic chemistry devices and biology to deliver breakthrough solutions in every part of the business. Third, we have tremendous supply chain capability. Supply chain 3.0 is driving a more complete system connection from purchase signal to our production planning and material ordering to ensure consumers find the product they want each time they shop. We know how to automate, digitize and autonomize our operations and more importantly, we have qualified a financial framework to generate strong returns on these investments. Our innovation and supply capabilities are key enablers to win in the volatile market we operate in today. Connecting R and D supply chain and procurement allows us to adjust, sourcing, optimize formulations and qualify alternative suppliers faster and more effectively than ever done before. It took years to build these underlying platforms and capabilities and we are now in full scaling mode across the company. The next step is to connect the dots to integrate the pieces. We will close the loop and we believe this will create a new S curve for growth and value creation centered around our consumers. We are confident in the short term progress we’re making and we’re excited about the mid to long term as we leverage our strength and unique capabilities to set us apart from the industry. Moving on to Guidance as we saw in our press release this morning, we are maintaining our fiscal ’26 guidance ranges across organic sales, growth, core, EPS and adjusted free cash flow productivity. However, where we will land within those ranges has become more uncertain. Given the geopolitical dynamics in the Middle east, we continue to expect organic sales growth of in line to 4%. We’re seeing progress in most categories and regions as you can see in this quarter’s results. Underlying global market growth for our portfolio footprint is around 2% on a value basis with a positive trend over the last two months. However, it’s unclear how much higher gasoline and energy costs will impact near term consumer spending in our categories. Also, as I mentioned earlier, the trade inventory increase we saw in March was driven by Easter timing and likely some protection against potential price increases or supply chain disruptions resulting from the conflict in the Middle East. We expect this to result in fourth quarter organic sales somewhat lower than third quarter. As a reminder, our top line guidance includes a roughly 30 to 50 basis point headwind from product and market exits as part of our restructuring work. Our bottom line guidance is for core EPS growth in line to 4% versus prior year. This equates to a range of 683 to 709 per share. This guidance includes a foreign exchange tailwind of approximately $200 million after tax, unchanged from our prior outlook. We now expect a headwind of approximately $150 million after tax for the fiscal from a combination of commodity linked cost inflation, feedstock exposures and logistics disruptions resulting from the conflict in the Middle East. Almost all of these increased cost excuse me, will be in the fiscal fourth quarter. Our teams are doing a tremendous job to protect supply continuity and to minimize cost impacts. Much of this work, such as rapid product reformulation and supplier diversification is enabled by the advanced data, tools and capabilities we discussed earlier. With the timing of these cost impacts, there is little opportunity to create short term offsets within cost of goods sold. Likewise, we will protect our demand creation investments in the business to support our new innovation and maintain positive momentum. In fact, we’ve approved incremental investments in several businesses in the last month. Given all the above, we now expect full year EPS results to be toward the lower end of the guidance range. Our fiscal ’26 outlook continues to call for approximately $500 million before tax and higher costs from tariffs below the operating line. We continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20 to 21% for fiscal ’26 combined, a $250 million after tax headwind to earnings growth. We continue to forecast adjusted free cash flow productivity in the range of 85 to 90% for the year. This includes an increase in capital spending as we add capacity in several categories and as we incur the cash costs from the restructuring work. We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion of common stock combined, a plan to return roughly $15 billion of cash to shareholders at fiscal ’26. This outlook is based on current market growth rates, commodity prices and foreign exchange rates. Significant additional currency weakness, commodity or other cost increases further geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within the guidance range. We won’t provide guidance for fiscal 27 until our next call in July. However, we understand investor concern about potential cost and supply impacts from the Middle east conflicts. For perspective, the annual cost impact of Brent crude at around $100 per barrel is roughly $1.3 billion before tax or $1 billion after tax versus a pre conflict oil price in the mid-60s. Again, this goes beyond direct commodity cost to include other upstream and downstream cost impacts that would hit our pnl. Regarding supply impacts, we are hopeful the full flow of materials will resume in the coming weeks. We continue to work closely with our suppliers and contract manufacturers to identify potential short term risks. So far our business continuity plans continue to perform well and despite some force majeure declarations by our direct suppliers or by their upstream suppliers, no company will be immune to these effects. But this is an example of where our capabilities help us buffer the impacts on our business. Our business teams have been developing multiple contingency plans to mitigate potential cost and supply disruptions. Underpinning each of these options is a commitment to maintain support for our brands and superior value for our consumers. We remain willing to manage some short term pressure on the bottom line to come out of this period with stronger brands and business momentum on the other side. This has proven to be the right path in the past and we are confident that it is now. In summary, we continue to believe the best path to sustainable balanced growth is to double down on the strategy. Stronger integrated execution to delight consumers with superior products at superior value. Challenging markets like the ones we compete in today are an opportunity for P&G to step out from the pack and to lead. We have the brands, the tools, the capabilities and most importantly the people required to win. We’re confident in the short term progress we’re making. It won’t be a straight line, but we are moving in the right direction. We are building momentum and we are excited about the long term opportunities ahead and with that we are happy to Take your questions.
Steve Powers (Equity Analyst)
Thank you very much. Good morning everybody. Andre, you covered a lot of ground in your prepared remarks, but I guess as you as you look through the puts and takes and timing nuances in the third quarter, how do you assess underlying progress on organic …
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