Procter & Gamble Q1 2027 Earnings Call Transcript

Procter & Gamble (NYSE:PG) reported first-quarter financial results on Thursday. The transcript from the company’s first-quarter earnings call has been provided below.

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Summary

Procter & Gamble reported a solid start to fiscal year ’27, with a 4.0% increase in organic sales and a 2.4% rise in volume, driven by growth across all product categories and regions, notably in Greater China with 8% growth.

Despite challenges from rising raw material, energy, and freight costs, the company maintained its guidance for fiscal ’27, expecting 1% to 3% sales growth and core EPS growth of 0% to 3%.

Strategic initiatives include maintaining a focus on category and geographical growth, with specific product innovations like Pantene’s Abundant and Strong collection and the Amore diaper launch, while adapting to external market dynamics to become the CPG company of the future.

Management emphasized the resilience of the consumer and the company’s ability to drive category growth through innovation and strategic adjustments, despite acknowledging potential volatility due to economic and geopolitical factors.

The company returned $3.9 billion to shareholders through dividends and share repurchases in the quarter and is on track to return $15 billion in fiscal ’27.

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 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 & 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 & 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 (Chief Financial Officer)

Good morning everyone. Joining me on the call today are Kerry Cohn and John Chevalier, our Senior Vice Presidents of Investor Relations. I’ll start with an overview of results for the first quarter of fiscal ’27 and discuss the progress we are making against our near term priorities and longer term transformation efforts. I close with guidance for fiscal ’27 and then we will take your questions. We are pleased with the continued acceleration in top line results in our first quarter of fiscal year ’27. Bottom line results reflect the strength of the top line progress and productivity to offset the higher costs from raw materials, energy and increasing freight costs, primarily in North America. We expect these headwinds to increase in the next few quarters. Taken together, we remain on track to deliver within our guidance ranges for the fiscal year.

Before I share the detailed results you may have noticed in the press release, beginning this fiscal year we will report sales growth to one decimal place at both the company and the sector level and with that organic sales increased 4.0% versus the prior year. We see sequential progress from our targeted interventions at the category and country level. By delivering superiority we are winning with consumers and driving improved consumption semester over semester. Into this first quarter volume increased 2.4 points, pricing was up 0.4 points and mix was up over a point for the quarter. A solid balance across top line drivers and with a majority of growth driven by volume. We delivered broad-based growth across the business with each of our 10 product categories growing. Organic sales, Fabric Care, Home Care, Baby Care, Hair Care, Skin and Personal Care and Grooming grew mid-singles.

Family Care, Feminine Care, Oral Care and Personal Health Care each grew low single digits. Growth was also broad based geographically with each of our six regions growing organic sales. Focus markets were up 4%. Organic sales in North America grew 3% and the U.S. market also was up 3%. In North America, volume was up 3 points, driven by continued improvement in consumption across categories. We now have over 70% of our top U.S. customers holding or growing share, up from less than 10% in the first half of fiscal ’26 and 50% in the second half of last fiscal year.

Europe region was up 4% with all key markets growing, led by high single digit growth in the UK. Greater China organic sales grew 8%, continued strong growth in what remains a challenging consumer environment. Pampers and SK-II led the growth with SK-II up 12% and Pampers up close to 50%, benefiting from near term competitive dynamics. Enterprise markets in aggregate grew 5% for the quarter. Note the makeup of enterprise markets has changed this fiscal year, now made up of Latin America, Asia Pacific Enterprise and our newly combined IMETA, or India, Middle East, Turkey and Africa, region.

This change emphasizes the growth opportunity across emerging markets and creates a one Europe region structure to simplify the Europe operating framework. Latin America organic sales grew 4% led by Mexico up double digits and Brazil up low single digits. Organic sales in the IMETA region grew 8%. APAC Enterprise was up 2%, still impacted by our portfolio restructuring impacts. Global aggregate market share is flat versus prior year across all time periods. 29 of our top 50 category-country combinations held or grew share fiscal year to date, up from 25 in the second half of last fiscal year, also a reflection of the progress being made across the portfolio. On the bottom line, core earnings per share were $2, up 1 point versus prior year on a currency-neutral basis. Core EPS was in line versus prior year. Core gross margin was down 150 basis points and core operating margin was down 80 basis points versus prior year.

Strong productivity improvement of 250 basis points was offset by commodity and freight costs in addition to demand creation investments. Currency-neutral core operating margin was down 90 basis points. Free cash flow productivity was 93%. We returned $3.9 billion of cash to shareholders in this quarter, $2.6 billion in dividends and $1.3 billion in share repurchase. In summary, this was a strong start to the year. Positive sales and share trends across markets consistent with the semester-to-semester progress we expected behind the interventions being executed across categories, countries and customers. As we move forward, the fundamental elements of our strategy remain unchanged. We are in the right categories to deliver against our growth goals. These categories are our core competency. We know how to grow these categories and win with superior innovation, better execution and clear communication.

We know how to create value in these categories and we have a proven track record to fund growth via productivity. We have an organization focused on delighting consumers and winning with our retail partners. What we are changing is nearly every part of our execution framework to identify superiority gaps even faster and respond quickly to changes needed to product, package, communication, retail execution or value to ignite user growth of our brands. The adjustments we have made are starting to take hold. Let me share a few examples. U.S. Pantene Abundant and Strong started with a deep insight and consumer connection. More than 50% of women will experience noticeable hair loss in their lifetime in the United States alone.

Female pattern hair loss affects approximately 30 million individuals. Pantene’s Abundant and Strong technology grew from research linking scalp oxidative stress to poorer scalp conditions and hair quality. This led to the development of Pantene’s Abundant and Strong collection with a Pro-Vitamin complex proprietary formulation. Consumers are delighted with improvements in hair strength and less shedding. With delightful fragrance and a tingling sensorial experience in the shower, Pantene is delivering mid single digit sales growth in the U.S. and is growing share.

Prestige has been a significant growth driver of our China Baby Care business with mid-teen growth consistently over the past eight quarters. We took the same consumer insight and brought the very best diaper available to the U.S. with the Amore launch in the second half of last fiscal year. Amore is our most advanced and premium diaper, combining proprietary skin health technologies and premium materials for superior protection and cashmere-like skin comfort.

Built on an engaging social-first brand building model and inspired by insights that fewer babies in each household means parents spend more per baby, Amore has been one of the most successful launches across multiple retailers, contributing to Pampers share growth and projected to exceed $100 million in sales in year one. In the Gulf cluster, UAE, Oman, Qatar, Kuwait and Bahrain, the percentage of sales growing household penetration increased fourfold from 15% in fiscal ’25 to over 60% in fiscal ’26. Despite the market volatility, Fairy Dish delivered double digit growth in fiscal ’26 into the first quarter of fiscal ’27. After the team transformed how consumers engaged with Fairy, they created a consumer-led, user-generated content campaign that brought to life the toughest dishwashing moments consumers face, generating a record-breaking engagement at 20 times our branded content benchmark.

As a result, Fairy reclaimed its position as the market’s leading equity brand and grew the category by four points and P&G share by two points. The other examples we’ve discussed recently also continue to deliver strong results including U.S. Tide Boosted, Mexico Fabric Enhancers, Brazil Hair Care and U.S. Personal Care. While we continue to execute our plans in the near term to return to sustainable growth, we’re also making progress on a long-term reinvention of Procter & Gamble capabilities to become what we call the CPG company of the future. We are adapting our capabilities, systems and organization structure to take advantage of significant growth opportunities we see across our markets and overcome the external landscape changes impacting our industry.

We are leveraging the deepest and most extensive consumer understanding in the industry, driven by learning and data from millions of consumers. This understanding leads to insights and signals that drive faster and better innovations. Grounded in industry-leading research, development, modeling and testing capabilities, we have the strongest ability to authentically engage consumers. Building on our trusted and loved brands, we have widespread access to consumer path to purchase, we have strong retailer partnerships and our supply chain is a differentiator, where a resilient, agile supply chain is critical to respond to global volatility and cost pressures. We have the highest output productivity program in the industry. Winning with consumers is what matters and the companies that can best respond to the changing environment and leverage the fast-evolving technologies and capabilities to follow the consumer closely are the ones that will truly lead the industry.

We intend this to be Procter & Gamble. Moving to guidance, as you saw in our press release this morning, we are maintaining our fiscal ’27 guidance ranges across organic sales, core EPS and free cash flow productivity. We expect the environment around us to remain volatile and challenging from cost to currencies to consumer, competitor, retailer and geopolitical dynamics. Our all-in GAAP outlook now includes the phone business which closed in early October. We continue to expect sales growth of 1% to 3%.

We started the year above this range, but we expect growth to be volatile quarter to quarter due to base period dynamics. Also, we’ll be closely watching consumer demand as high fuel and energy costs persist into the fall and winter. As a reminder, our top line guidance includes roughly 30 to 50 basis points headwinds from product and market exits that are part of our restructuring work. Our bottom line guidance is for core EPS growth of 0% to 3% versus prior year and this equates to a range of $6.89 to $7.11 per share. This outlook includes a cost headwind of approximately $1.4 billion after tax driven by higher raw material, energy and transportation costs and other premiums resulting primarily from the conflict in the Middle East. This estimate assumes an effective Brent crude oil price of $100 a barrel. Due to the duration of high oil prices, we now expect materially higher cost headwinds in Q2 and the second half of fiscal ’27.

We expect a foreign exchange headwind of approximately $50 million after tax. We also expect approximately $300 million of higher net interest expense after tax, around $150 million higher due to the debt issuance related to recent M&A activity. These impacts start in the second quarter. Finally, we still forecast $150 million after tax of lower non-operating income. We now expect that our core effective tax rate will be in the range of 20% to 21%. Combined input costs and foreign exchange items below the operating line will be a roughly $1.9 billion after-tax headwind to earnings in fiscal ’27, or $0.79 per share, 11% of fiscal ’26 core EPS, versus the $0.56 per share, or 8% impact, shared in the July earnings call. We expect capital spending will be between 4.5% to 5.5% of sales. We are forecasting free cash flow productivity at 85% to 90% for the year.

We expect to pay over $10 billion in dividends and to repurchase approximately $5 billion of common stock combined. We plan to return $15 billion of cash to shareowners in fiscal ’27. The guidance range reflects the continued acceleration toward our long-term algorithm. It is a balanced outlook between top line and bottom line despite significant cost pressures and reflecting current market realities of consumer demand. We will maintain strong investment in the business balanced by a strong productivity program with an intent to improve results semester by semester and year by year. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates.

Significant additional currency weakness, commodity cost increases, geopolitical disruptions, tariffs, major supply chain disruptions, or store closures are not anticipated within the guidance range. In summary, challenging markets like the ones we compete in today are an opportunity for Procter & Gamble to lead. We have the brands, the capability, and most importantly the people required to win. We are confident in the short-term progress we are making behind deliberate plans to drive user growth of our brands and execution excellence across each category and country combination. It won’t be a straight line, especially quarter to quarter, and volatility will remain a near- to mid-term reality.

But we are building momentum with consumers and customers, and we are excited about the long-term opportunities ahead. With that, we’ll be happy to take your questions.

OPERATOR

If you have a question, please press star followed by one on your phone. If your question has been answered or you would like to withdraw your question, press star followed by two. Your first question comes from the line of Lauren Lieberman of Barclays. Please go ahead.

Lauren Lieberman (Analyst at Barclays)

Great. Thanks so much. Good morning. We had to go back a ways in our model to find the last time that Procter & Gamble posted volumes up more than 2% and organic at 4%. But when we found that time, which was back in I think ’22, optically, margins are up a lot more this time around. And I was just curious if you could talk about if that’s something specific to the quarter mix dynamics or if something has changed structurally so that you’re going to see much greater operating leverage at this level of volume growth.

Andre Schulten (Chief Financial Officer)

Good morning, Lauren. Thanks for the question. I think it’s a combination of quarter specifics and structurals. Let me start with the structurals. Maybe when we see growth around 4% and volume growth at or above 2%, we’ve always seen leverage. I think that leverage structurally is increasing. Number one, on the cost of goods side, the level of productivity we’re generating is increasing and the amount of automation and digitization is helping us.

As we talked for many times, as we execute supply chain 3.0, there’s operating leverage on the COGS side. The restructuring program, including the 15% headcount reduction in non-manufacturing headcount, is starting to impact the quarter this fiscal year. Recall we started the execution last fiscal year, first semester. So we’re starting to get impact flowing through the P&L, and that is helping our SG&A leverage. The third structural component, as we transform our brand-building efforts to include the revised consumer path to purchase and drive engagement at every one of those touch points, we remain fully invested in the business, but we find ways to make that spending work harder for us. So that’s driving top line growth at flat spending, and that is giving the third structural element of the leverage.

I think what is more specific to the quarter is the fact that we’ve only seen partial flow-through of the commodity impact in the first quarter. Again, the oil price and petrol complex keeps increasing. So we’ve outlooked at $100 a barrel, $1.4 billion of after-tax impact. That’s 8% for the year of earnings headwind. In quarter one, we only saw 5% headwind year over year. So that’s a little bit of a one-timer that will be correcting itself as we get towards the ongoing oil price impact through the P&L. And for sure, if oil stays at the levels that we saw this morning, north of 110, that will continue to be an increasing headwind for the year. The last point I’ll give you is we had the second part of the IPA tariff refund in quarter one of about $90 million. And so those are the two ones that are more specific to the quarter. I think most encouraging for us are the first three. We truly drive leverage because we’re improving the structural leverage within the P&L.

OPERATOR

Your next question will come from the line of Steve Powers of Deutsche Bank. Please go ahead.

Steve Powers (Analyst at Deutsche Bank)

Great. Good morning. Thank you very much, Andre. Obviously, a very strong start to the year. I wanted to ask around the sustainability of the momentum that we’ve seen start to emerge from two perspectives. One is just very tactically, in the short term, as we think about this first semester in the December quarter, were there any shipment timing, competitive factors, or other dynamics that may have materially flattered 1Q at the expense of 2Q in your mind?

Just want to get underneath that if I could. And then stepping back more generally, as you look at the underlying performance across your 10 categories, I think you said growth across all 10. Where do you feel sustainable momentum is maybe best established versus where you feel there is still more work to do within those categories? Thank you.

Andre Schulten (Chief Financial Officer)

Morning, Steve. In summary, what I tell you is Q1 was a great start. Every region growing, every category growing. And most encouragingly, if we look at the last few weeks, share is trending up consistently. So that gives me confidence. I’d still tell you we expect half one to be at about 3% organic sales growth. That’s what we want to deliver, that sequential acceleration semester by semester. You recall half one of last year, one; half two, two.

And we think the right estimate and the right approach for cadence here is 3% in the first half and then acceleration into the second half. As you know, there’s always a little bit of wobble between merch events on when they ship. That’s been a little bit of an effect that we saw in Europe, for example, and so there might be a point shifting from one quarter to the other. But I think the overarching headline that I want you to take away is 3% for half one and slight acceleration in half two, which means consistent value and volume share growth throughout the next quarters.

I’m excited, quite frankly, about the progress we’re making across each of the categories. You look at Fabric and Home Care growing strongly, with North America now growing at 5% in Fabric Care. We’re growing across laundry, and we’re growing across fabric enhancers. And there’s tons of runway. Baby Care consistently growing at a global level, even if you exclude the China acceleration. We have very strong results in Baby. FemCare doing great. Adult incontinence improving.

Beauty Care at 5%—very strong and across all three segments within Beauty Care. So I could continue, but basically you’re getting the point: every category is showing great progress and momentum. I’ll tell you, we’re about 60% down the path of fixing each category–country combination. We’re running at 29 out of 50 top category–country combinations growing or holding share. We need to conquer the rest, and that’s the task ahead. I’ll tell you our Beauty team isn’t content with 5% of growth. There’s way more opportunity in that space that we need to capture. Family Care is not yet back to share growth. The interventions we are making across price point corrections in the club channel, the launch of Charmin and Bounty Essentials, all of those are pushing momentum in the right direction.

But we haven’t yet seen the share turn. Our Health Care business has been impacted by a slow cold–cough season over the last two years. We’ve now seen, in the most recent couple of weeks, an acceleration. If that holds, there’s more growth to be had there. Don’t get too excited. I come back to where I started: 3% in the front half, hopefully a bit of acceleration in the back half. Consistent share growth quarter over quarter.

OPERATOR

Your next question will come from the line of Dara Messinian of Morgan Stanley. Please go ahead.

Dara Messinian (Analyst at Morgan Stanley)

Hey, good morning. So, Andre, you’re expecting a pronounced level of commodity pressure this fiscal year at $1.4 billion, and up another $400 million versus last quarter. Unfortunately, that’s also looking more sustainable than we hoped originally after the run-up earlier this year. So just in light of how severe the commodity backdrop looks, how are you thinking about pricing as an offsetting lever to that cost pressure? And the context of the question is still seemingly difficult industry backdrop in theory, with a weak developed market consumer, promotional competitive environment, even some retailer pushback.

So just how do you weigh all those competing forces as you think about pricing in the remainder of the year and also the internal progress that you’re making from a top-line perspective that you just mentioned in response to Steve’s question. Thanks.

Andre Schulten (Chief Financial Officer)

Morning, Darrell. Yeah, I think that’s an important, important place to pause for a moment. Obviously $1.4 billion, 8% headwind, is significant. And again, if we see the most recent development, this might increase for the year. We will deal with this the same way we always do. And I do feel that the team is well equipped to handle even the higher level of cost pressure. But it will take three things. It will take record productivity levels, which we have identified.

The project list is complete and sufficient, and it’s being executed across every one of our businesses. So I feel very good about a sustained record level of productivity output that will help us overcome a good portion of this cost pressure while we maintain investment in the business. The second component is pricing with innovation. And honestly, I think the momentum we are starting to generate gives us confidence to price with innovation because we are getting the balance between pricing and product improvements, package improvements, claims, communication, and retail execution right. But it’s also a very fragile balance that we want to make sure we don’t compromise on. So we will price, and we will price with innovation, not jeopardizing the top line momentum.

The third component here is time. We will take the right amount of time to recover the dollar impact of the commodity hurt. And time will be largely driven by what we described in the second point—making sure we maintain the right balance of price, product, package, communication, and in-store execution. We have worked, the team has worked so hard over the last nine months, category by category, customer by customer, country by country, to improve this balance.

So I think we’re probably closer to this dynamic than we’ve been in a long time. I feel good about the plans that I see. The last point I’ll leave you with: at this level of commodity pressure—not a projection, just the fact—the industry generally is pricing up because there is no way to recover this level of commodity pressure without pricing. That’s a fact of the past; doesn’t have to hold true for the future. So I can just only give you my perspective on the three elements we’re going to work on.

OPERATOR

Your next question will come from the line of Robert Odenstein of Evercore ISI. Please go ahead.

Robert Odenstein (Analyst at Evercore ISI)

And congratulations on the strong start. You know, from everything we’re seeing, you know, clearly a lot of the U.S. categories are improving, you’re regaining share. But as you note, it’s a very dynamic environment. So I was wondering if you could talk a little bit about what you’re seeing or expecting in terms of competitor reactions and then also how are you dealing with ongoing affordability issues in terms of, you know, dealing with competitors, as well as maintaining the market share momentum.

Thank you.

Andre Schulten (Chief Financial Officer)

Thanks for the question, Robert. I think the competitive environment has been fierce over the last few quarters and I think that has led us to make adjustments where we needed to make adjustments. We’ve talked about our baby care business where we needed to get value competitive with a new competitive reality. And I think we’ve done that. And I feel very good about being balanced. I think we got to a point where we reacted to be competitive on those hygiene factors, I would call them, and then add superiority in terms of product performance, communication, better retail execution to drive category growth and our growth within that.

So I still see the same formula playing out. Growth going forward is not about taking share. Growth going forward is about growing our categories. And I’m encouraged to see that in North America the category is now approaching 3% value growth in many places. Innovation that we’re launching with pricing is driving true category growth. You heard our examples in the prepared remarks on user growth. For example, in the Middle East, that topic of consistent user growth or penetration growth in our categories is relevant and being pushed around the world.

So I view the competitive dynamic as unchanged and yes, intense. I view our role within that as growing categories with innovation, better offerings for consumers, affordability within that is that careful balance that we were describing in every pricing decision. And I think also here we are executing what we have designed for. We have a portfolio of brands that spans across different value tiers. And we have a portfolio of pack sizes and executions within each brand that go from very affordable value offering to high pack size premium offerings, depending on the cohort, depending on the channel.

And I think we’re continuously getting sharper in the execution. My favorite example was the Charmin and Bounty Essentials execution. When we came out of COVID we deprioritized that part of the business simply because we didn’t have the capacity. And when we went into this period, we said we need to reignite user growth in that part of the value segment. Within family care, the team redesigned the proposition, adjusted the value, redesigned the packaging and the proposition is working extremely well, growing significant users.

At the same time, we’re innovating at the higher end with Charmin innovation on wider sheets, which is very intuitive and very consumer relevant. We’ll continue to do both and I think we’ve made the investment over the last nine months to get us into the right starting place. And now it’s pushing forward from here with the balanced portfolio execution and again, carefully watching value equation at each part of our portfolio.

OPERATOR

Your next question will come from the line of Bonnie Herzog of Goldman Sachs. Please go ahead.

Bonnie Herzog (Analyst at Goldman Sachs)

All right, thank you. Good morning everyone. I had a question on baby care. You know, it’s encouraging to see the sequential acceleration in growth this quarter and then, you know, you highlighted North America and China as key drivers. So I guess against the backdrop of increased promo intensity in the U.S. and then disruption at one of your key competitors in China, what has been your strategy in baby care and how sustainable do you think the recent improvements are?

Andre Schulten (Chief Financial Officer)

Thanks, Bonnie. Global baby care is up. Top line’s growing 5%, share’s growing 80 bps. Baby care in the U.S. is up 3% on sales, 7% on volume and up both in volume share and value share. We have not yet addressed many parts of the portfolio. We have just launched the mid-tier upgrade, which will not be the last to get to superiority. We have not yet fixed our wipes business and we have not yet launched the innovation that we want to launch on Swaddlers and some other parts of the premium portfolio.

We have fixed what I would call the hygiene factors, value versus growth competition. And we are building on the trend that we see as the future growth engine for this category, which is less babies mean more spending per baby. And that holds true in every part of the world. And it holds true in the U.S., it holds true in China. And when we launch truly superior propositions that feed into what the premium consumer is looking for — superior dryness, softness, premium materials, safety on the highest level, ingredient safety — we win. And that’s why Amora is going to a $100 million brand in a few quarters. And I think that would be the, that will be the success model for the future.

China has been doing this now for eight quarters. The mid-tier is effectively nonexistent in China anymore. And even when I take out the most recent competitive issue in China, the business would have consistently grown in high teens and low 20s. So I do believe that the model is very sustainable, that the strategy of being superior and trading consumers up as we are doing on tape diapers, is the same model we can apply on pants, the same model we can apply on wipes.

And I do think that is a solid growth path for the business. And I’m excited about the innovation that’s coming and I think that does exactly that.

OPERATOR

Your next question will come from Filippo Filorni of Citi. Please go ahead.

Filippo Filorni (Analyst at Citi)

Hi, good morning everyone. I wanted to ask about the U.S. business. Andre, you mentioned 70% of top U.S. customers holding or growing share — that’s a significant improvement as you called out versus last year. Where do you think it’s coming mainly from and how much more do you have to realize in the balance of the year? Within your guidance, what are you assuming in terms of improvement in share and then in terms of the gap relative to consumption?

Last year you had a lot of volatility — a lot of quarters where shipments were below consumption. This quarter, it seemed to have closed quite more. How should we think about that gap from an inventory, gross to net sales levels, as we think about the balance of the year? Thank you.

Andre Schulten (Chief Financial Officer)

Morning, Filippo. Thanks for the question. I think the answer to the first question is more we are where we said we would be. We wanted to be at the end of the year — we want to be north of 80%, end of the calendar year, that is. And I think the North American team is working towards that objective. The recipe doesn’t change. Where we don’t grow users, we very quickly go into diagnosis mode and we’re very quickly, in a combination of the customer, the customer team on the P&G side, the category team, develop an action plan and we fund that action plan when it cannot be funded within the category commitments, and that cycle time is only improving.

We’re having these conversations in a structural way every quarter, but we’re having them ad hoc almost every week. So I feel good about the urgency, I feel very good about the clarity of being consumer-led in those conversations. Because the secret here is not to try to buy more share. The secret here is to tailor the adjustments to superiority to the specific needs of that retailer’s shopper — be it price points, be it claims, be it part of the portfolio that we present at the retailer.

That will continue. Again, our objective that we stated before is 80% by the end of the calendar year. Inventory dynamics — you said it — the base period is going to be the source of volatility here. As you know, we had a significant inventory shift in quarter three in the U.S. that will impact this quarter three as well. But we’ll have to see how the flow of promotion events, how the flow of innovation evolves. I feel confident in the semester guidance that we just gave you. 3% organic sales in the front, a little bit more in the back half, quarter by quarter.

This might shift a little bit because of those dynamics, but I feel confident in three and three plus — front half, back half.

OPERATOR

Your next question will come from the line of Chris Carey of Wells Fargo Securities. Please go ahead.

Chris Carey (Analyst at Wells Fargo Securities)

Hi, thanks so much for the question, Andre. I just wanted to clarify that last statement, and then I have a follow-up. Just regarding the fiscal Q2 deceleration, despite the easier compare, we need to think about a roughly one point shift in Europe? And then it sounds like you’re just more broadly assessing strength of consumer as we get into the end of the calendar year, given the higher inflation backdrop. Is that really the premise of just embedding that deceleration for now into fiscal Q2?

And then just from a category perspective, I think this is the best fabric care top-line growth we’ve seen in a few years. Can you just give us a bit of context on category growth rates globally and perhaps some of the market share dynamics that are underway, most specifically in the U.S. and Europe, given some of the innovation and competitive activity you’ve seen in those regions? Thank you.

Andre Schulten (Chief Financial Officer)

Thanks, Chris. I think you answered your first part of the question. I think it’s exactly that. Look, gas prices are continuing to come up. Midterms and related outcomes in the Middle East are still a source of significant volatility going into quarter two, base period dynamics, inventory shifts. So you put it all together. We don’t want to get ahead of ourselves. We think 3% is a healthy growth rate within this context. And we know there’s volatility quarter over quarter.

So we want to be realistic in assessing the strength and straight line of the underlying momentum. The strength is real, but it won’t be a straight line. Fabric care specifically — you’re right. In the U.S., fabric care business is growing at 4%, so strong results. In Europe, we’re growing 5% and we’re growing share in both regions. So North America value share’s up 70 bps. Europe value share is up 60 bps over the last three months. And also two largest markets in fabric care — fabric enhancers are growing and the laundry part of the business is growing. So it’s consistent across the portfolio.

And if you look at, you know, what is driving it? The innovation. I think the improvements we’re making in delivering superiority. Evo, the Tide liquid boosted innovation. We innovated on Gain, both on liquid and on unit dose, and that’s driving growth. We have innovation on fabric enhancers — the Luxe edition — that’s driving growth. So I think, again, the return to a consumer-centric assessment of superiority — are we growing users? If we’re not growing users, what are the right interventions — have led the fabric care teams, both in Europe and in North America, to make the right calls.

And I think those calls are playing out in growth. And I feel good about the type of growth we’re generating — slightly ahead of market. But every one of these initiatives is growing the market. Given the premium of Gain, the premium of Tide, the premium of Evo, it’s actually expanding the category by delighting the consumer at each value tier more than anybody else.

OPERATOR

Your next question will come from the line of Nick Modi of RBC Capital Markets. Please go ahead.

Nick Modi (Analyst at RBC Capital Markets)

Yeah, thank you. Good morning, everyone. Andre, maybe you can just peel back the onion on China. You know, there’s been a lot of macro volatility, you know, a lot of commentary that the macro backdrop remains poor. I think you made the same comments, but the business is doing really well. So just wanted to kind of understand exactly, you know, like, what’s going on? Is this a beauty-specific thing? You know, any context would be helpful. Thank you.

Andre Schulten (Chief Financial Officer)

Thanks for the question. Nick, let me start by stepping back for a second. The China business has been strong for six consecutive quarters now. Why? Because the China team, coming out of COVID, I think were the first ones to realize that the structures in the market have changed from strong consumer demand to market decline. All parts of the business were shifting towards digital and social, and retailer interactions were very different, and the traditional distributor system didn’t really work.

So they adjusted every part of the equation, completely reinvented the distributor network, built a social-first marketing machine, built an execution machine that could deal with the social selling channels and online retailers, and at the same time strengthened brick-and-mortar execution and strengthened the innovation machine. All of that together, I think, has led to a well-equipped team that is executing brilliantly, and that’s been driving six consecutive quarters of sales growth and now delivering 8% in quarter one with 5% volume growth.

In terms of categories, let me get the obvious one out of the way. Baby care has been consistently growing at around 20% in quarter one. Now it’s growing almost 50%. That’s obviously driven by the competitive issue that existed in the market, which is driving a ton of trial for Pampers. And I think the team is doing brilliantly in keeping up with the trial machine and then ensuring that we can retain those users over time. But yes, we’ve benefited somewhat, about three points.

So if you take that out, China would still be growing at the 5% that it has been growing, so mid-single digits. The rest of the portfolio is also doing well. SK-II growing 13%, fabric up 5%, femcare up 9%. Hair care is up. But we also still have significant opportunities. So our Olay business in China, for example, is in the middle of reinvention. It’s not growing. We need to get it back to growth similar to North America. Those interventions are underway.

So we’re not firing on all cylinders yet, but we’re very happy with China structural progress and I have very high levels of confidence that we will fix the remainder of the portfolio and see even more sustained growth in China in a difficult market because market growth is still below 100 in our channels and categories, and quite frankly consumer sentiment is not improving. So big congratulations to the China team for winning in a tough environment.

OPERATOR

Your next question will come from Peter Galbo of Bank of America. Please go ahead.

Peter Galbo (Analyst at Bank of America)

Hey, good morning. Thanks for the question, Andre. I know we’ve covered a lot on the call, but maybe just wanted to follow up back on Dara’s earlier question, particularly around the cost environment. Just given that you did raise the, you know, the input cost outlook, I just wanted to assess, I mean, based on your commentary, clearly we’re tracking towards, I think, the higher end of organic sales range based on the outlook you provided. But just like what’s your confidence level still in at least achieving the midpoint range on EPS?

Just given the elevated cost environment, seems like you were still relatively confident in it. But I just wanted to clarify that. Thanks very much.

Andre Schulten (Chief Financial Officer)

Thanks, Peter. Sorry, I don’t want to evade your question, but the confidence I have is that we’ll be in the range. Where in the range? Hey, it’s one quarter, so give us a bit of time to solidify the top-line momentum. Give us a bit of time to get our hands around the commodity impact, pricing plans, productivity, and that’s why we’re reiterating the range. So I’m confident in the range, but we’ll need time to figure out where in that range we’ll end up.

OPERATOR

Your next question will come from the line of Peter Grom of UBS. Please go ahead.

Peter Grom (Analyst at UBS)

Great, thank you. Good morning everyone. So I wanted to just ask a follow-up on the inflation. So Andre, you touched on the fact that it was a 5% headwind in 1Q but expect it to be an 8% headwind for the year. Can you unpack how you see that phasing based on where things stand today? And then you mentioned the team is well equipped to handle this higher inflation. But as we think about productivity and pricing, are there any quarters where you would expect to see a greater gap between those offsets relative to the inflation that can result in more outsized profit pressure.

Andre Schulten (Chief Financial Officer)

Yeah, thanks for the question, Peter. Let me carefully circle this one. So the yes. Quarter one obviously COGS reflect a lower input cost, right, with inventory holding and those effects. So that’s why you see 5%. Q2 has been produced at $100 a barrel. So when I look at eight reflecting $100 a barrel, my assumption, if I were you, would be that flows through in quarter two. Oil at 113 means more is coming in Q3 and Q4. For Q3 and Q4 we have more time to react. For Q2 we have little. So I’ll leave it at that.

OPERATOR

Your next question will come from the line of Andrea Teixeira of JPMorgan. Please go ahead.

Andrea Teixeira (Analyst at JPMorgan)

Thank you everyone. And Andre, you spoke about the pricing phasing and the costs. So should we assume with the comment you just made now that you’d be negotiating with retailers at some point given this outlook and given that you’ve been helping in a way with just 40 basis points of pricing realization, is that something that we should be thinking as you progress the quarter? And then thinking about how you gave this guidance and reiterated this guidance, I’m assuming in the guidance you did not include the pricing that you alluded to that potentially being negotiated.

So I would just want to double check on that. And then in terms of the phasing of productivity, you had this 250 basis point improvement in the operating margin. How we should be thinking of the phasing as we go through the balance of the year.

Andre Schulten (Chief Financial Officer)

Hey Andrea, look, I really won’t be able to tell you more about future pricing. Obviously I can’t announce pricing and I won’t announce pricing in any way, shape or form. The only thing I’ll leave you with is we price with innovation. Innovation is generally timed with modular resets. So you kind of get the drift here. On productivity, we’ve delivered about 500 million, 550 million BT productivity in Q1 and we delivered 2.8 billion last year. So again I think I would expect a similar run up in terms of productivity. Generally we get heavier on productivity in the back half and I think you should expect the same. I don’t see that pattern changing.

OPERATOR

Your next question will come from the line of Kevin Grundy of BNP Paribas. Please go ahead.

Kevin Grundy (Analyst at BNP Paribas)

Great morning everyone and congrats on the strong results. Andre, can we zoom out I guess a bit and maybe just talk about industry growth which despite all the discussion about pressure on the consumer, it seems like the consumer is still fairly resilient and the category growth really hasn’t changed dramatically at this point. So maybe you can just sort of comment, take us around sort of key geographies and comment broadly on industry growth and just reaffirm my understanding that really in key geographies with relatively little change relative to your fiscal 4Q results, excuse me, just a few months ago.

So thank you for that.

Andre Schulten (Chief Financial Officer)

Thanks Kevin. You’re right. In aggregate, the consumer is resilient. We see 2% to 3%, 2.5% to 3% value growth across all categories globally and that is unchanged, maybe a little bit better than what we saw and reported last quarter. We see improvements in the U.S., so we talked about 2% last quarter. We’re running up to 3% now in terms of value growth. We’d like to think that we are part of that acceleration as we launch innovation and we drive growth in our more premium lineup.

We see enterprise markets continuing to grow strongly in the 4% to 6% range, maybe accelerating to 6% to 7% in the most recent reading. So those consumers are holding up well and Europe continues to be stable, but muted at about 1%. So you put it all together, there’s a little bit of positivity here. One, in the U.S. upwards to 3%. And I think enterprise markets represent a huge opportunity for us and that’s why we are talking about user growth and the progress we’re making on user growth in the Middle East. Our user growth in India is actually fantastic. So we’re really encouraged about both the market conditions, but also our ability to drive further market expansion and consumer development penetration here in those regions.

OPERATOR

Your next question will come from the line of Kamil Gajarwala of Jefferies. Please go ahead.

Kamil Gajarwala (Analyst at Jefferies)

Hey Andre. Hey everybody. I’m still struggling, I guess, to reconcile your commentary versus, you know, versus your guidance. It sounds like interventions are working. It sounds like shares are moving in the right direction. It sounds like accelerations across a bunch of these. And your comparison, I think in every division, with the exception of healthcare, gets easier, not harder. And so other than I know you had mentioned macro and that sort of thing, are there any real business reasons to expect such a deceleration into the second quarter versus the first quarter?

Given everything that you’ve said about how the initiatives are working across the different divisions?

Andre Schulten (Chief Financial Officer)

The consumer is the key variable here. Look, we’re looking at fuel prices, gas prices around the world that are creating turmoil. You look at France, you look at the conversation in the U.S., so there’s clearly pressure on the consumer in the short term and so far the consumer has held up. We don’t know if that’s going to continue. There’s a bull case to be made, but there’s a bear case to be made here. So we want to be straight in the middle. That’s why we come back to 3%.

There’s some pre-shipment to merch events, specifically in Europe, that I mentioned. That is part of the balance between Q1 and Q2. And all we want to avoid is you getting ahead of yourselves in terms of straight-line projection. Yes, I think we feel very good about the elements we control. We feel very good about the progress we’re making in our brands. And if the consumer holds up and there’s no other disruptions, could we see improvement on the top line?

Yes, we could, but there’s too many moving pieces right now to confidently tell you that that’s going to happen in quarter two.

OPERATOR

Your next question will come from the line of Olivia Tong with Raymond James. Please go ahead.

Olivia Tong (Analyst at Raymond James)

Great, thank you. Good morning, Andre. Clearly a nice start to the year. So just building on some of your earlier comments, can you talk about how you expect demand to evolve on a category level from here and how much of that second half potential acceleration you’re planning for is based on category improvement versus your own initiatives, and realize that those are obviously very much related. But we talked about some of the interventions in Tissue Towel earlier. What about other categories and your thoughts on what you’ve learned from the interventions you’ve already done and the competitive response to that, and how that might influence the next phase of execution.

And thanks for the extra decimal on revenue growth.

Andre Schulten (Chief Financial Officer)

Appreciate that. Thanks, Olivia. Look, I’ll stay high level here. Category-wise, we continue to expect 2.5% to 3% value growth in our categories. We will make progress on those categories where we’re not yet fully recovered. And clearly our objective is to get to share growth on every one of our global categories. We clearly expect family care to return to share growth in the second half. We’re working hard to accelerate beauty even further And we hope for a great cold-cough season, if I can say it that way. So those are the three most acceleration-prone categories in the back half. On the rest of them, I think steady as she goes. Baby care has to retain the trial we’re generating in China. Making progress with innovation in the second half. I feel good about that. Same for femcare. And we have a very robust plan on fabric care to maintain.

And I can only repeat one more time, it won’t be a straight-line. Competitive environment was mentioned. That’s very valid. Consumer volatility, very valid. Supply chain disruption, cost pricing, very valid. So the things we control are all in control. There are many things that impact our short-term results that we don’t fully control. That’s why we maintain the range.

OPERATOR

Your next question will come from the line of Robert Moskow of TD Securities. Please go ahead.

Robert Moskow (Analyst at TD Securities)

Hi, Andre. You’ve talked about the strategy and the rationale for buying Thorne a couple months ago, but I wanted to clarify a little bit more. Thorne has some aggressive growth objectives over the next couple of years. To what extent does Procter & Gamble help enable that? I think the plan is to have it run separate from Procter & Gamble’s operations. And then in addition to that, what are you doing to make sure you retain the people who made Thorne so successful over the last couple of years?

Andre Schulten (Chief Financial Officer)

Thank you, Robert. I will only give you the headlines. I think this would be a perfect conversation to have with Paul at our Investor Day, and he’s certainly more equipped to talk about it than I am. But at the core, job number one is to retain what made Thorne a successful brand within the VMS space. And Paul is 100% focused on that. The people who built this business are fantastic and fantastically equipped to continue to do so. And we certainly have every intent to retain their knowledge and their capabilities.

Where do we add? I think we can add in international expansion because this brand and the benefit space is relevant not only in the U.S. but way beyond the U.S., and Thorne has proven that by shipping and launching in parts of the world. We can help by scaling Thorne, once ready, across different categories. The time is not now; the time is later. And I think we can help where needed by the team in terms of capabilities: supply chain capabilities, ingredient qualification, and marketing scale and marketing support.

I think the principle Paul will bring you towards is we let the Thorne team lead us. So this is not Procter & Gamble integrating Thorne. This is Thorne leveraging Procter & Gamble to maintain what is at its core and leverage where we can complement.

OPERATOR

Your next question will come from the line of Edward Lewis of Rothschild and Co Redburn. Please go ahead.

Edward Lewis (Analyst at Rothschild and Co Redburn)

Thanks very much. Yes, just one for me. Andre, just wondering. You know, you made quite a few changes in terms of the international, or I think more developing market, category-country combinations over the past 12 months. You’re clearly sounding more positive about the outlook in those markets relative in your commentary just now. Just wondering how much have the changes you made helped that international performance and your international outlook.

Andre Schulten (Chief Financial Officer)

Thanks, Ed. I think it’s still early. I wouldn’t attribute the majority of the progress in enterprise markets to the structure change only when it was actually July 1st. But I do attribute a lot to the intentionality that Shailesh and others and our sector CEOs put on growth in those enterprise markets. Putting India into a separate cluster from the rest of the Asia, Middle East, Africa region increases intentionality to grow. Combining Turkey into that cluster helps, and I think we will see even more potential as we focus on user growth in each of those clusters.

The second component clearly is Europe today is basically one big focus market. The retailer structures are similar, the go-to-market and consumer structures are similar. So simplifying the go-to-market approach in Europe was another key component here. Honestly, what gives me confidence is the leaders we have in each of those businesses, the commitment of the sector CEOs and, quite frankly, the fact that even with the restructuring impact that we’re seeing in the current quarter, we’re seeing mid-single-digit growth which, if you take the restructuring out, would be even, even higher.

So I think we’re on the right, on the right trajectory here.

OPERATOR

Your final question will come from the line of Michael Lavery of Piper Sandler. Please go ahead.

Michael Lavery (Analyst at Piper Sandler)

Thank you. Good morning. Just one follow-up to your answer to, I think it was Peter’s question about how, you know, just the second half you’d have more time to react to higher oil prices. You’re obviously pushing restructuring and savings, or productivity and savings, already quite aggressively. You’ve been clear how you price with innovation. I guess maybe could you just elaborate a little bit on what levers you would focus on and push harder to offer some mitigation and maybe what expectations for mitigation might be baked into your outlook as well.

Andre Schulten (Chief Financial Officer)

Everything we know is baked into the outlook. Again, there’s always a balance between commodity input costs and how hard you want to drive productivity within the year. There’s always a way to pull forward things or to push out depending on whether it’s needed or not needed. There’s always time to adjust pricing with innovation; there’s ability to pull forward innovation or push it out. So those are the components that we’ll manage. Again, all of the gives and takes are the reason we have the range.

But more time basically allows us to shift productivity, shift pricing and innovation. And that’s really the flexibility that we have in the second half. And as you can imagine, within a current quarter that flexibility is limited on those levers. Okay, I want to thank you for your time. Again. We had a reasonably good start to the year. We are excited about the progress the teams are making around the world, which is consistent and grounded in the interventions that we wanted to make. They are showing signs of holding, sticking and delivering results. It’s going to be a volatile ride. So I just want to bring us all back to reality. One quarter makes no other end of the guidance range for the year.

We still have a lot of work to do, but we’re excited about where we are. We want to remind you quickly that Investor Day is on November 19. Shailesh and the broad executive team will be there and we can go much deeper into the long-term transformation that is happening at Procter & Gamble to build what we call the CPG company of the future. We hope to see you there and welcome you at our global headquarters next month. Thank you for your time.

OPERATOR

That concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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