The Procter & Gamble Company - Q1 2025

Transcript

Operator (participant)

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 (CFO)

Good morning, everyone. Joining me on the call today is John Chevalier, Senior Vice President, Investor Relations. Execution of our integrated strategy delivered another quarter of solid earnings and cash results. These results enable us to maintain our guidance ranges for fiscal year 2025. Organic sales grew 2%, comparing against a strong base period of 7% growth. Volume contributed one point to organic sales growth. Pricing added one point, and mix was roughly in line with prior year. Eight of 10 product categories grew or held organic sales for the quarter. Family care, home care, and personal health care each grew mid-single digits. Hair care, oral care, feminine care, fabric care, and grooming grew low singles. Baby care and skin and personal care were down mid-singles. Organic sales in focus markets grew 2%, and enterprise markets were up 1%.

Organic sales in North America grew 4%, driven by 4 points of volume growth. Over the last five quarters, North America has grown organic sales 7%, 5%, 3%, 4%, and now again, 4%, on volume growth between 3% and 4% each of those quarters. The region delivered broad-based market share growth this quarter, with eight of 10 categories holding or growing volume share, and nine of 10 categories holding or growing value share. In Europe focus markets, organic sales were up 3%. This compares against 50% organic sales growth in the base period and includes a two-point headwind from lower inventory versus the base period. Volume was up four points despite the base period inventory impacts. Over the last five quarters, Europe focus markets have grown organic sales an average of nearly 7% on volume growth of 3%.

Latin America, organic sales were up low single digits against a strong 19% base period comp. Brazil grew mid-singles and Mexico was in line with prior year. Each of these markets comparing against strong 14% growth in the base period. European enterprise markets grew mid-singles, driven by pricing to offset inflation and currency devaluation impacts, in addition to modest volume growth. Greater China, organic sales declined 15%. Underlying market conditions weakened further during the quarter, and we continue to face brand-specific headwinds on SK-II. We will begin to annualize some of the steep market declines and SK-II headwinds late in December, though it will likely be a few more quarters until we return to growth in China. Market conditions in the Asia Pacific, Middle East, Africa region have remained soft, with organic sales down low singles.

Global aggregate value share grew ten basis points, with 28 of our top fifty category country combinations holding or growing share for the quarter. On the bottom line, core earnings per share were $1.93, up 5% versus prior year. On a currency neutral basis, core EPS increased 4%. Core gross margin was in line with prior year, and core operating margin increased thirty basis points. Strong productivity improvement of two hundred and thirty basis points. Currency neutral core operating margin decreased ten basis points. Adjusted Free Cash Flow Productivity was 82%, consistent with our expectations. We returned nearly $4.4 billion of cash to share owners this quarter, over $2.4 billion in dividends and over $1.9 billion in share repurchases. To summarize results, solid top-line growth across roughly 85% of the business, keeping us on track for the fiscal year.

Continued volume and value share gains in North America and improving share trends in Europe focus markets. Earnings and cash results in line with our expectations, also on track with fiscal year guidance. Overall, good performance in what continues to be a challenging economic and geopolitical environment. We will continue to push all levers in our control to offset the headwinds that are largely not in our control. We remain committed to the integrated strategy that has enabled strong results over the past six years, and that is the foundation for balanced growth and value creation. We've made portfolio choices across markets and brands to strengthen our ability to generate U.S dollar-based returns. We are doubling down on superiority across all five vectors, and we are improving productivity in all areas of the operation to fuel investments in superiority, mitigate cost and currency headwinds, and drive margin expansion....

We are driving constructive disruption of ourselves and our industry, a willingness to change, adapt, and create new trends, technologies, and capabilities that will shape the future of our industry and extend our competitive advantage. We are benefiting from an organization that is empowered, agile, and accountable. Our strategic choices on portfolio, superiority, productivity, constructive disruption, and organization reinforce and build on each other, and we remain confident in our strategy and in our ability to drive market growth and to deliver balanced growth and value creation. We will elaborate on the integrated strategy and how it's driving competitive advantage and results at our Investor Day in November. Now moving to guidance for fiscal 2025. With one quarter complete, our guidance ranges for fiscal 2025 remain unchanged, and they are consistent with our long-term algorithm.

We continue to expect the environment around us to remain volatile and challenging, from input costs to currencies, to consumer, competitor, retailer, and geopolitical dynamics. On the top line, we are maintaining our organic sales growth guidance in the range of 3%-5%. Continue to expect the markets in which we compete to deliver local currency sales growth in the range of 3%-4% for the year, and our objective remains to grow organic sales modestly ahead of the underlying growth of these markets. As a reminder, when you're modeling all-in sales, please remember to include the impact of divestitures from last fiscal year. This was an eighty basis points drag in quarter one and will also impact the balance of the fiscal year.

On the bottom line, our core EPS guidance range for fiscal 2025 remains at +5% to 7% versus fiscal 2024 of a core EPS base of $6.59. This guidance equates to a range of $6.91-$7.05 per share. Our outlook for commodity costs and foreign exchange have each improved modestly since our initial guidance for the year. We are now guiding for a commodity cost headwind of approximately $200 million after tax, which equates to a headwind of 8 cents per share for fiscal 2025. We are forecasting foreign exchange to be in line with prior year. We continue to expect lower non-operating income benefits this fiscal year and a somewhat higher tax rate versus prior year. Combined, these are additional 10 cents to 12 cents headwind to core EPS.

We expect Adjusted Free Cash Flow Productivity of 90% for the year. We have plans to pay around $10 billion in dividends and to repurchase $6-$7 billion in common stock, combined, returning $16-$17 billions of cash to share owners this fiscal year. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within these guidance ranges. To conclude, the earnings and cash results in the quarter keep us on track with our fiscal year guidance ranges, and we are doubling down on all levers to accelerate growth in the coming quarters.

We continue to believe the best path forward is excellent execution of our market constructive strategy, with a focus on balanced top and bottom-line growth and value creation, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners. Coupled with a strong productivity plan, the earnings power and value creation potential of the company, we believe, are as strong as ever. Finally, as I mentioned, we are hosting our 2024 Investor Day here in Cincinnati on November 21st, and we hope you can join us in person or online. With that, we'll be happy to take your questions.

Operator (participant)

You have a question, please press star followed by 1 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 will come from Steve Powers of Deutsche Bank. Please go ahead.

Steve Powers (Analyst)

Thanks, and good morning, Andre. How are you? I guess to start, you know, I think as we reflect on the quarter and really the last twelve months, I think it's fair to say you've been, you know, kinda continually surprised to the downside on the trajectory of growth. And, you know, obviously, markets like China and the Middle East have caused persistent challenges. The good news, as you suggested, is that we're gonna start to lap those challenges. But, you know, rates of improvement are questionable, as you highlighted. And I think investors are somewhat, you know, fearful of that alongside that the benefit of cycling the challenges, you'll start to have some more deceleration in markets where we had strength, U.S. and Europe focus markets, probably most pertinent.

I guess, how do you assess those challenges? You called out the consistent outlook of market growth of 3%-4%, that's relatively bullish on the dynamics I'm referencing. So, what do you say to investors who are more concerned about deceleration from here in that underlying growth?

Andre Schulten (CFO)

Morning, Steve. Hope you're well. Yeah, let's maybe start with the years before we get into the acceleration on the quarters. If you step back, we did deliver last year on guidance or above guidance for each of the metrics that we had outlined in our guidance: organic sales, core EPS, free cash flow, cash to share owners. And as we had telegraphed in December, we saw these headwinds early on, China, SK-II, Nigeria, Argentina, the Middle East. And despite those headwinds decelerating quarter three and quarter four top-line performance, we said we would deliver within guidance range, which we did. We also were clear that these headwinds would be with us through the front half of this fiscal year.

So, a slower top-line growth versus expected average for the fiscal year in the front half, it's not a surprise. It's actually what we expected within the guidance range. And that's, I think, the part of the guidance that was clear to us. As you rightly point out, I think the level of deceleration in the Middle East and in China, I think is still volatile. More importantly, if you look at the rest of the portfolio, if you look at U.S., Canada, Europe focus markets, Europe enterprise markets, Latin America, those regions constitute 85% of our sales base. And these regions, in aggregate, are growing 4% in quarter one on a 10% based on quarter one last year. North America sales over the past five quarters were consistently up seven, five, three, four, four.

Europe is growing on a 7% average over the past five quarters, 3% of that from a volume growth standpoint. We are growing or holding volume share in all of these regions in aggregate. So, I think the core of the business, 85%, is as strong as we could wish for. It's growing 4%, and it's been growing at that pace significantly with very high base period comps. The last thing I'll leave you with on the 85% of the business that is not impacted by any external factors, we have probably the strongest innovation out there in the second half than we've seen in a long time.

So, a combination of very strong structures, in each of these markets, very strong innovation in the second half, and easing comps in the base, give us confidence that we can see, sustained growth, and also some level of acceleration, in the core of the business. The volatility, as you pointed out, is entirely introduced by China and by the situation in the Middle East. And the way we think about the guidance is if we annualize, and when we annualize these base effects in quarter two and quarter three, we will get to the midpoint of guidance. If we see, more than annualization and some level of improvement in the situation, that could get us to the top end of the guidance. When we see the situation continuing to, decelerate, that would point to the lower end of the guidance.

That's the very simple logic. What you will find in all of this is a strong belief that the core, 85%, will continue to grow in line with what we've seen and grow stronger with innovation in the back half.

Operator (participant)

Our next question will come from Lauren Lieberman of Barclays. Please go ahead.

Lauren Lieberman (Analyst)

Great. Thanks so much. So just to follow on on Steve's thought process there, and Andre, your response. You know, we've heard more, we're early days in earnings season, but there are, you know, a number of multinational companies that are calling out worsening trends. So European consumer was particularly called out yesterday by Nestlé, Latin America, a bit less good. And then, of course, China, I have to assume that that down 15% was a surprise to you guys this quarter. So just what about the, I guess, risk factor around your point on that 85%? Because it doesn't feel like it leaves a lot of room for any kind of slowing in the macro environment, which just feels a little bit contrary to what we're hearing from some other consumer companies. Thanks.

Andre Schulten (CFO)

Good morning, Lauren. Yeah, I mean, when we talk about our consumer, we talk about the consumer in our categories. And we've chosen these categories for a reason. They are daily use. Consumers don't stop washing their hair, they don't stop doing their laundry. And they are categories where the product performance is very important to consumers because they understand that the cost of failure is actually higher than maybe the premium they would pay for a product that promises to perform in line with what their expectations are. And that logic, I think, leads to the consumer continuing to trade into P&G and continuing to trade up. And you see that in terms of share growth in the U.S., we consistently have grown share, both volume share and value share.

We have consistently been able to trade consumers up within our portfolio, and we're bringing more innovation focused on stronger performance and increasing superiority across the different categories and brands. The same holds true for Europe. When you look at the growth rate in Europe in the last quarter, it was actually 5%, excluding the inventory effect year over year, and we are seeing stabilizing to growing volume share trends in Europe. Again, with very strong innovation in the back half. Latin America is stabilizing. We've articulated that we're growing the biggest two markets, Brazil and Mexico, on a 14% base. And we expect within our construct that the Latin American market growth will return to mid-single digits, 5% to 6%, which is what we're seeing materialize.

So every indication that we have in terms of data and in terms of the plans that the teams are executing, now and into the second half, give us confidence that we can continue the momentum, at the run rate level, which means with easing comps, it would mean an acceleration on a year-over-year comparison. Everything can change. There's no guarantee, but with everything that we can see, we feel confident, that that component of 85% of the sales is holding or strengthening as we go through the year. You are right, China and the Middle East are the least predictable components. That's why they introduce the volatility in the guidance range at this point in time.

Look, the best way to increase the probability that we see an improvement is to focus on the fundamentals, which we are doing. In China, we have cleared the portfolio to focus the organization on those brands where we have the strongest growth potential. We are reinventing our go-to-market model with our distributor partners to increase coverage and quality of coverage. We have strong innovation across the portfolio, which is showing signs of revitalizing the categories. When you look at the Head & Shoulders and Pantene innovation, the baby care portfolio continues to perform strongly. And SK-II is making progress with the launch of the super-premium proposition and beginning national marketing support again. So, we're pointing in the right direction. The macro context is questionable, and we will have to see where this goes.

The same is true for the Middle East, but that's why we have the range within the guidance. So overall, I think we're confident. You're right to point out there's a level of volatility here, which we hope we have adequately communicated.

Operator (participant)

Our next question will come from Dara Mohsenian of Morgan Stanley. Please go ahead.

Dara Mohsenian (Analyst)

Hey, good morning.

Andre Schulten (CFO)

Hey, Dara.

Dara Mohsenian (Analyst)

So, just to follow up on this 85% of sales mix versus 15% dynamic. First, maybe on the 85%, obviously, the U.S. is the lion's share of that. Can you just touch on what you think sustained category growth is here in the U.S. in a moderate pricing environment from an industry perspective, as you look out over the next couple of years here? And I guess you sound pretty confident in the market share momentum in the U.S., but maybe you can touch on that in a bit more detail. And then just on the laggard 15%, it's helpful, the detail you gave us in terms of what a sequential improvement could mean or not mean going forward to corporate OSG. You know, just give us a little more sense of your perspective. The comps are much easier.

Is the base case that there should be an inflection in that 15% going forward, you know, with the easier comps? I understand some of the volatility you mentioned, but just trying to get a sense of how you see that developing on the 15% of mix as you look out over the next few quarters here. Thanks.

Andre Schulten (CFO)

Thank you, Dara. Let me start with the U.S. and then maybe go a little bit broader, but the opportunity we see in the U.S. is still huge. When you look at the categories in which we operate, we see sustained market growth in the range of 3%-4% at this point. It's decelerating, as we had expected from the 5-6% range we saw in previous years, as the pricing component comes down, but it's encouraging that the volume side is actually coming up strongly and is sustaining strong growth. So, we expect the 3%-4% range is where the market's going to be.

But as you know, our job within that, the way we view it, is to continue to drive our categories and continue to drive market growth beyond that 3%-4%, so we can grow ahead and we grow share. The opportunity is in multiple dimensions. Number one, just looking at consumers that we don't serve yet at the full level at which we serve other consumer groups, is about a $5 billion growth opportunity. And we're focusing on that by being more intentional about the benefits that these specific consumer groups are looking for, the way those benefits need to be addressed in a product solution, the way they need to be communicated to register with the consumer group, and where we need to be distributed in order to reach those consumers.

Innovation in that space, both across product package, across communication, and across go-to-market, we believe is a big driver of capturing that $5 billion growth opportunity. We have many categories that across the consumer base are still showing significant penetration opportunities. We frequently talk about fabric enhancers. It's more than a $1 billion business, but household penetration is only about 30% on liquid fabric enhancers, and only about 20% on beads. So, there's a huge growth opportunity to drive more household penetration by, again, finding ways to make this proposition more appealing to more consumers. Power Oral Care, big example of under-penetrated category, a new claim of we're having our power on our Power Oral Care iO business with 100% more plaque bacteria removal.

That business is growing 8%, and the global share is up 2%. So, there are many examples where we see growth opportunity in the U.S. The same is true for Europe. And maybe for perspective, there are some markets in Europe that drag the performance down. France, for example, had a change in terms of legislation on how promotions can be executed in March of last year, in March of this year, but last fiscal year. And that has significantly impacted our performance in France, along with everybody else. So France is down 11%. Normalizing that will give us, on top of the same opportunity I described for the U.S., will lead to a level of acceleration that we expect.

On the 50% of the business, again, our base assumption is that we simply annualize most of these effects. We see stabilization across categories. There are quarter-to-quarter effects in China that need to be taken into account, with shifts in key consumption periods. But I think the general assumption is that we will, over the next couple of quarters, start to annualize both SK-II and the major China market contraction, and that will help towards the stabilization of the total. The same is true for the Middle East. Most important point I still wanna make is, we're not just sitting there and waiting for the business to annualize. We're fundamentally improving every aspect of how we operate the business, from innovation to go-to-market, to media, both in the Middle East and in China.

Operator (participant)

Our next question will come from Brian Spillane of Bank of America. Please go ahead.

Brian Spillane (Analyst)

Hey, thanks, operator. Good morning, Andre. Good morning, John. My question is just around the gross margins, and the cost of goods sold inflation. And, you know, this morning, the inflation came moderated a bit. So, I guess two questions. One, with any of that moderation of inflation present in the quarter, so did it affect at all gross margins in this quarter? And then as we're thinking about it going forward, you know, as we're thinking about our models, does it-- Is there anything that would offset it actually improving gross margins a little bit more? So whether it's segment mix or geographic mix, just how should we think about how that improvement sort of nets out in our model?

Andre Schulten (CFO)

Yeah. Morning, Brian. Look, I think the main driver of our gross margin progress will continue to be productivity. You see 170 basis points contribution to gross margin in the current quarter. And I expect that level of productivity contribution to remain or accelerate, as we get to our target of $1.5 billion of COGS growth savings throughout the year. We continue to have an effect from SK-II, and SK-II is down 35% in the quarter, so it's a significant impact when you think about the gross margin that business contributes. So, the other driver here is, as we see annualization of the SK-II effects, that will help gross margin going forward.

To the inflation question, there is some level reflected of easing inflation. The majority of that, I think, will spread throughout the year. Again, our P&L variance holding policy, plus contracts, generally make for a six to nine-month delay from actual commodity inflation to it flowing through our P&L. So that will be a help I would probably model towards the latter half of the fiscal year.

Operator (participant)

Our next question will come from Chris Carey of Wells Fargo Securities. Please go ahead.

Chris Carey (Analyst)

Hi, good morning, Andre. I wanted to ask specific questions about the baby business and also the family care business. This is a few quarters in a row that baby is under pressure. Can you just talk about the durability of this pressure? Maybe how much of that has to do with geographic splits between China and the US, and what really the path is to see improvement from here, even if the birthrate dynamic is not in your favor? And secondly, on the family care business, I think this is something like, I don't know, eleven consecutive quarters of growth, but pricing will become less of a tailwind. I don't think there was any real pricing in the quarter. Can you just talk about the sustainability of these growth rates in the family care business?

And also, if you could, just maybe touch on whether you saw any benefit in this quarter from, you know, stock-up activity with some of the port congestion and storms, and whether we should be thinking about that maybe next quarter, or just in general, if that's something that we should be considering as we think about the next quarter or two, going forward in that business. So, thanks. On baby and family care.

Andre Schulten (CFO)

Great. Thank you, Chris. Let me start with Family Care, maybe. The business model in Family Care is very stable and sustainable, and the main driver here is to contribute to category growth. That's really the job of the business, and the way to do that is to drive innovation. The innovation is generally an improvement in the substrate, so an improvement of the Bounty substrate or the Charmin substrate, which leads to the ability to then down count sheets of the roll, increase the roll diameter, or the roll size, so consumers are gonna have actually more product available to them, and that is an ever-repeating cycle of innovation driving category growth. That cycle has been working for decades. I expect it to continue to work the same way.

The innovation capability of the technology in family care, which is unique to P&G, is by far not exhausted, so we have runway in terms of the innovation we can drive, and again, the model has proven to be very sustainable over decades through different economic contexts. On the stock-up situation, we saw a quick run-up with a port strike, but it didn't really have a material impact on this quarter, nor are we expecting any impact on last quarter. It was very short-lived, so therefore, again, no impact current, no impact next quarter. Baby care has been subject to decelerating or decreasing birth rates forever. That is not a new dynamic.

It's a dynamic that has existed within the baby care category for a long, long time, as long as I've been associated with it, which is a long, long time. The way to create value and growth in baby care is not volume growth. It is really to provide superior propositions for consumers and thereby trade them up into higher order benefit spaces and create value from a market perspective and from a share perspective that way. When we do that successfully, even in the most challenging environments, we can grow. Case in point would be China. China has the fastest deceleration in birth rates, but with a very strong portfolio that is innovating across all tiers, we have been able to consistently grow sales and share in China.

So when the business is innovating in line with what consumers are looking for, communicating that info that innovation in the right way, distributed in the right way, the model works very well. Where we don't, the model stutters and that sputters, and that's a little bit the situation in North America. We've talked about this before. We have very strong innovation on the premium tiers, Swaddlers and Cruisers 360. We continue to see share growth. Swaddlers is up, I think, 1.6 share points. Cruisers 360 is up 50 or 60 basis points. So that part of the portfolio is doing very well. We have an opportunity to innovate on the mid-tier. We just launched Pampers Platinum Care.

It's too early to tell, but I think it's encouraging to see it in market, and we are working on strong innovation on the Baby Dry business, and that's the same opportunity that we have in Europe, so the model works, but it requires discipline around strong innovation, and that's what the business is working on. Now that we have full access to lines, because we don't have any capacity shortfalls, I fully expect the business to go back to growth here over the next few quarters.

Operator (participant)

Our next question will come from Filippo Falorni of Citi. Please go ahead.

Filippo Falorni (Analyst)

Hey, good morning, everyone. So, Andre, I wanted to go back to China, and your comments about still being a few quarters until you return to growth. Look, you're starting to annualize some of the impacts from SK-II already in the next quarter. So, should we think about the pace of improvement in China in the sense of less declines, but still negative growth in the balance of the year? And how does the recent stimulus measure in China inform kind of your gradual improvement in the country? And then if I can ask one more at the total company level. I think it will be helpful to give a little bit of context, how you see the progression in terms of organic sales growth from the approximately 2% in Q1.

Should we expect a sequential improvement in Q2, or is it really the improvement to get to your midpoint of your guidance, more skewed to the second half? Thank you.

Andre Schulten (CFO)

Yeah. Thanks, Filippo. Morning. Predicting recovery pace in China is a futile task, I think, so we won't attempt that. That's why we have the range that we have communicated. I would expect sequential improvement simply because of the math of annualization. So, we expect any deceleration to not offset the base effect, but that's where it ends. You know, again, as we've communicated, if China is simply annualizing, that would point to the mid-end, midpoint of the guidance. If it does anything better than that, that would help us towards the upper end. If it continues to decelerate throughout the year, that would point us to the lower end of the guidance range. I won't make any prediction what the pace or the direction by quarter is.

On the progressions per quarter, look, we don't, we don't give you quarterly forecasts for a reason. We need some level of flexibility to manage across quarters. But I think, logically, we have to expect some level of progression going into quarter 2, but it will be the overarching effect that I still want to call out, is the headwinds are still with us in quarter 1 and in quarter 2.

Operator (participant)

The next question will come from Robert Ottenstein of Evercore ISI. Please go ahead.

Robert Ottenstein (Analyst)

Great. Well, you guys have done a fantastic job, obviously in the U.S. and Europe. So I wanna circle back to China on a more bigger picture basis. By my estimates, looks like your sales are now down 20% to 25% over three years, so three years of consecutive declines, and so the question is, are there structural changes in the Chinese market or with the Chinese consumer that need to be addressed, and what you're doing to address those changes, and, you know, I think you also mentioned in terms of SK-II that you're starting to push that brand a little bit more now.

So are you starting to see some green shoots with the consumer and the appreciation of that brand and the ability to get that going again? Thank you.

Andre Schulten (CFO)

Morning, Robert. Thank you. There are many changes to the Chinese consumer that need to be taken into account, and that's the work the team is doing that I was mentioning before. Where consumers buy. Again, online is a significant part of the business, and even within the online spectrum, a shift into Douyin is a significant part of what needs to be taken into account, where the communication model, the way to build brand equity and the way to communicate value is different than in any other digital channel. A shift in the brick-and-mortar business towards club, towards grocers and supers is another area that needs to be taken into account.

So we are, as I mentioned earlier, we are rebuilding our distributor partnerships to ensure that we can reach consumers in the right places with the right prices, with the right on-shelf availability across all propositions. The consumer behavior in terms of benefits to go for are shifting. If you look at the mass skincare space, for example, the benefit space that was very popular over the last few years was toning. Now it's going into anti-aging and multi-benefit. So, we're adjusting our innovation portfolio to meet those requirements. The way media is consumed is changing, so we need to adjust the way that we innovate in our media space and our technical capability to reach consumers without duplication at the right frequency. So, all of those things are changing, Robert, and we are...

I think we are doing a good job. The team is doing a great job in adjusting to those realities, but as you say, as long as the market is not recovering, it will still be an uphill climb, but I do believe that we are very well-positioned in China to continue to win, and we are, on a relative basis, performing well, but again, in line with the market. On SK-II, I would say it's too early to say green shoots, but the brown shoots are disappearing. Let me put it that way.

We have done all the right work in terms of rebuilding the brand equity, focusing on the right campaign messaging, activating the most loyal users to be advocates for the brand, innovating, as I said, on the core and on the super-premium, upgrading our department store presence, investing in beauty counselors. And so, the early signs are positive. But again, I think I wanna give ourselves a little bit of time here before we declare green shoots.

Operator (participant)

Our next question will come from Kevin Grundy of BNP Paribas. Please go ahead.

Kevin Grundy (Analyst)

Great, thanks. Good morning, Andre. I wanted to pivot. So, with respect to areas that you can control, I wanted to ask you about market share performance. And if I'm not mistaken, I think the comment was earlier on the call, you're gaining or holding share in 28 of your top 50 markets, so a bit more than half. Also, if I'm not mistaken, that's down from 75% in fiscal 2022. I believe the company's longer-term target is closer to 65%. And this is also within the context, you reiterated the 3%-4% sort of global category growth, and the company printed 2% organic sales in a quarter, understanding some of the dynamics here in the base and 15% of the business seeing more acute headwinds.

So, with all of that in sort of context, I was hoping you could comment on sort of longer term, the importance of market share as a KPI within the organization. And then two, and I think maybe more immediately, what you see is the greatest areas of opportunity to elevate the company's market share performance. Thank you for that.

Andre Schulten (CFO)

Morning, Kevin. Yeah. Look, the market share trend, I think is generally positive. It wasn't necessarily a surprise that the market share would decrease in terms of number of category country combinations that are growing or holding share, simply because of the level of pricing that we had to take and some of the dynamics where, for example, retailer brand pricing in Europe significantly lagged in terms of timing. So going ahead and leading in many of those markets because we simply are the category leader, generally results in short-term share effects that are less favorable, and I think that's to a large degree the deceleration in terms of number of category country combinations that you see growing.

I would say the way we talk to our teams about it is, what our job is, is to grow markets, and the best way to grow markets is to increase household penetration of our categories. The earliest indication to see whether we're increasing household penetration is volume share. So, it is an important measure for us, if it is a measure of creating incremental consumption. And that's what we ultimately bring it back to. So, it's an early indication for us to say, "Okay, if we don't grow volume share, we're probably not growing household penetration." But the real measure that we're going after is panel-based household penetration, which is the best measure of are we doing our job in growing markets? I think we're making progress here.

The European results are, as I mentioned, both in focus markets and enterprise markets. We are holding to growing volume share now, which was very important to see. That's where the private label pricing effect was most pronounced. That's a significant portion of our top 50 category country combinations. Most pleased about the progress in the U.S., where we continue to grow both volume share and value share, and I also think the plans in Latin America are very strong in terms of innovation, so I have confidence that the share progression there will be positive.

Operator (participant)

Our next question will come from Peter Grom of UBS. Please go ahead.

Peter Grom (Analyst)

Thanks, operator. Good morning, everyone. I guess, Andre, I wanted to ask a follow-up to Steve's and Filippo's question, and I don't wanna be too specific, but when you're kind of discussing the rate of improvement or annualizing the impacts from China and the Middle East and kind of the organic revenue range, are you speaking to where it would put organic revenue growth for the year, or are you kinda just speaking conceptually, how you would see it evolving from for the balance of the year? And I guess the reason I ask is it seems that in order to hit the midpoint of the range, you would need some pretty strong performance from here after the 2% in 1Q.

So, I just wasn't sure if you were implying that based on where things stand today, simply annualizing these headwinds would still be enough to hit 4% for the year. Thanks.

Andre Schulten (CFO)

Yeah, I think it would be a combination, Peter, of annualizing the headwinds and maintaining and slightly accelerating the run rate in the 85% of the business, which on an easier comp, would then increase, obviously, the year-over-year quarterly growth. It's hard to say how these two pieces exactly will work together, but conceptually, we know two things need to be true. One, we need to annualize, and we need to annualize at the end of quarter two and quarter three. Number two, the 85% of the business needs to keep running at the pace that it's running at.

Operator (participant)

Our next question today will come from Andrea Teixeira of J.P. Morgan. Please go ahead.

Andrea Teixeira (Analyst)

Thank you, operator, and good morning to all. Andre, can you comment a little bit on what Peter was trying to get to? And I think it's valid in the sense that your skincare performance, right, it was like, I believe, more than 20% negative in total. And then you're annualizing, and if I'm doing the math correctly, that on itself is 700 to 800 basis points sequential easiness in comp. So would that say that needs to be slightly better? So let's say the minus 22%, call it, becoming mid-teens negative on itself, helps your comp. And then on top of that, you're saying kind of stability.

But in terms of stability, what gives you confidence that Europe and the US can keep that stability, or even Latin America can keep that 85% running, all things that we know now for the second quarter? So, it implies, I mean, I'm all to say that it does imply, if you're keeping guidance at the midpoint, it does imply that you're gonna be sequentially better in the second quarter fiscal, if that's the way we should be thinking.

Andre Schulten (CFO)

Andrea, look, I think I wanna be clear, the guidance is a range, so it's three to five on the top line. And all the scenarios you're describing can either lead to five or can lead to three. I think what we're saying is the range is still viable. Yes, if you want to get to five, you have to see a significant acceleration, or you have to see a fast annualization, and some acceleration in China and the Middle East, and you have to see sequential stability on the core of the business. I think I've explained the assumptions, but the range is still viable.

What gives me confidence on the 85% of the business is what I've said before that business has been delivering at these growth rates, not for one quarter, but for five quarters, in some cases for six quarters. So, if you look at that, I think it gives me confidence that we have a sustained track record of delivering at those growth rates. When you look at the shared trajectory, it's pointing upwards, and we have more innovation coming. So, I think the fuel is there, but you're right, there are multiple scenarios where you can construct this, where you end up at a 3%. There are multiple scenarios where you can construct this, where you end up at a 5%.

Operator (participant)

Next question today will come from Kaumil Gajrawala of Jefferies. Please go ahead.

Kaumil Gajrawala (Analyst)

Hi, thank you. Good morning, everyone. Can you talk a bit about price points and promo? And in particular, I guess, you know, I see that mix was negative for both beauty and grooming. Beauty, I guess, I would assume is SK-II, but maybe just talking about, you know, where the consumer is, are you seeing trading down, how you're thinking about that in the context of, promotional activity and, and absolute price points? And then very quickly, anything on inventory, destocking, we're just hearing more and more of that at retailers. Curious if that's something that's impacting you or something that you're watching?

Andre Schulten (CFO)

Yep. Hey, Kaumil. On promo, I would describe the overall market situation as stable. Little change was what we've talked in the previous quarters, both in Europe and in the US. We again focus on promotion that hopefully drives market growth and category growth, in lower penetrated categories, combining with high penetration categories, so we can provide value to consumers, but at the same time, drive growth and trial. Overall, competitive environment is still stable and still slightly below pre-COVID levels. You're right, the beauty negative mix, price mix effect is driven by SK-II. And on grooming, it's really driven by a shift. We had a record appliance period a year ago. Now we have more sales in the Gillette part of the portfolio.

So that's the shift that you see in grooming. Nothing points to the consumer trading down. Nothing points to any increased price-based competition at this point in time. And again, I'm repeating myself, but the categories we're in, we have the right propositions that reassure consumers that the products work. We have the right price ladders, so there's access to consumers at higher cash outlays, lower cash outlays, higher price per unit, lower price per unit. And as long as we keep innovating and driving that irresistible superiority, I believe we will be fine. But we keep watching this very closely. At this point in time, no indications that the consumer is not with us. Private label shares are flat.

And if you look at a sequential basis, private label, the value share in the U.S. is actually down from past twelve months, 16.2% to now 15.7%. So, all of that indicates to me a stable consumer and stable price promotion environment.

Operator (participant)

Your next question will come from Mark Astrachan of Stifel. Please go ahead.

Mark Astrachan (Analyst)

Yeah, thanks. Morning, everybody. I wanted to ask specifically on SK-II. You know, it seems like the trends in the brand are just a little bit worse than the overall prestige skincare category. I guess I'm curious about how you think about the brand. You've talked before, maybe not last quarter, quarter before that, about work that you had done about brand relevance, awareness, and intent to purchase, improving, and clearly, it's not. You know, I guess some of that's the weaker consumer in China, but at some point, does it become a question of brand impairment and kinda need to reinvest and reinvent the brand to broaden or regain relevance?

So I guess, you know, the question is: how do you think about all of what I just said in the context of just, you know, the underperformance versus the category seems to be widening, and kinda what's a reasonable timeframe for it to return to some sort of improving trend, not even growth? I know what you said about China, but SK-II specifically within that market, too, would be helpful. Thank you.

Andre Schulten (CFO)

Yeah. Thank you, Mark. SK-II, as a brand, continues to be very relevant. The core benefit, and the core ingredient as the reason to believe that that benefit is delivered, plus the efficacy shown in actual consumer experience over decades, I think is still the most relevant proposition, and as close to irresistible superiority that is actually ingredient-driven in the category as you can find, and the consumer is playing that back. We had very strong results in SK-II outside of China and outside of travel retail, and I think the effects that we're seeing, which is dragging the brand down, is the unique combination of a Japanese brand in a Chinese context when there's conflict, and therefore, a negative sentiment towards Japanese brands in aggregate.

That's unique to SK-II, and I think that's what's driving the effect. When the business is down to that degree, there is a level of investment choice that needs to be made, which the team has done. But we've encouraged them to continue to invest at the right level to rebuild the equity of the brand, specifically in China and in travel retail, which I think they are doing well. So I've got not much more to add other than to say the brand is very relevant. The core of the brand is being strengthened with the core messaging of what Pitera is and what the benefit is that the brand delivers. The addition of a super premium tier, I think, is highly relevant for those consumers.

They have the spending power, and they're looking for the best possible offering, and price is a connotation to quality and efficacy in these categories, so I feel very good about the core of the brand, and obviously, the Japanese-Chinese situation is unique to SK-II, which is what we're annualizing beginning quarter two.

Operator (participant)

Next question will come from Nick Modi of RBC Capital Markets. Please go ahead.

Nik Modi (Analyst)

Yes, thank you. Good morning, everyone. Andre, just a quick housekeeping and then a broader question. Just, you mentioned in your prepared commentary that you're not embedding any store closures into the guide. I think that's what I heard, and just given what's going on in the drug channel, just wanted to get your perspective on, have you accounted for some of the dynamics playing out in that market? So that's the housekeeping question. The broader question is just on innovation, and you know, I think P&G is kind of anomalous in the fact that there's real disruptive innovation coming out of the company, more so than I think the broader sector, and so maybe you can just give us an update on, you know, Olay Melts and Tide Evo and kind of how that initiative is progressing.

You know, within the pipeline over the next, you know, one to three years, you know, what other type of... Of course, you're not gonna mention the specifics, but just like, you know, similar type of disruptive type innovations. Is there anything else that you can kind of share with us regarding other types of initiatives like you have with Tide Evo and Olay Melts? Thanks.

Andre Schulten (CFO)

Thank you, Nick. As the guidance says, we've not assumed any major store closures in the U.S. Obviously, when there are selective store closures, that's part of the normal business. So, I will leave it there. On disruptive innovation, Olay Melts is doing very well. Evo test market is also doing really well, at or above expectations, in the test market. But again, it's a test market, so early on. We are making progress on the industrialization of Evo, so the ability to produce at scale, to be able to launch at a national level, and that is also progressing as planned. So, I would say, both based on fiber spinning technology, are very promising propositions, and both seem to resonate very well with consumers.

As you point out, both are highly proprietary to P&G, and the form itself has a lot of runway when you think about our product portfolio. In terms of broader disruptive technology and being able to advance our competitive moat from an innovation standpoint, we're gonna spend a lot of time on that during Investor Day, so I won't go into the details here, but it'll be a big part of the conversation in November.

Operator (participant)

The next question is from Olivia Tong of Raymond James. Please go ahead.

Olivia Tong (Analyst)

Great, thanks. I want to talk about... There's clearly a big divergence in performance across categories, and I realize that some, like beauty, have higher exposure to some underperforming markets. But if we look at, like, fabric and home care, the example you just gave, for instance, can you talk a little bit about what you're doing differently there versus your other categories? Because it feels like in fabric and home, you're innovating more, the innovation is resonating better. Why doesn't it seem to be working in some other categories, you know, baby, for example, or beauty, excluding SK-II for the moment? Because it doesn't seem like competition is any lighter in these categories. If anything, it's just as heavy. Thanks.

Andre Schulten (CFO)

Yep. Morning, Olivia. Look, that's, there's a reason why we have a portfolio of 10 different categories. They, at times, perform at different levels, but, you know, operating the global portfolio will allow us to still deliver all-in, with even some ups and downs across categories. Specifically on your question on beauty, I think it's important to look at beauty excluding China and SK-II. If you look at that picture, North America is growing 8%, Europe, 6%, enterprise markets, 8%. The growth in North American Hair Care is 9% on a 12% base, share is up 90 basis points. Global APDO is growing 11%, in North America, 9%. We've grown Native sales 10 times over the past 5 years.

So I think the team is doing a tremendous job reading the consumer, developing propositions that match consumers' needs, communicating in the right way, bringing them to market, and that's, I think, what's reflected. But it's hard to overcome with a significant part of your business in China, those headwinds. Fabric and home care is doing a tremendous job in innovation. We've talked about Evo, we've talked about fabric enhancers. The runway is also huge across both categories because they both represent relatively big opportunities in terms of incremental household penetration. When you think about Swiffer, for example, PowerMop is a new product to the category and is driving significant category growth. It's up 9%.

Downy and Tide Rinse are new adds to the laundry regime as odor removers, and they are the number one driver of category growth. So when we find those opportunities, that accelerates business market growth, and is sustainable. And we have pockets of that in baby care. When you think about Ninjamas, for example, which is a bedwetter category, which was very underserved. When we innovated in that category, we drove category growth of 6%-7% and took significant share. So there are opportunities in all of those categories. Will they all be at the same time, and so we see consistent growth across all? No, but all these categories are rich with opportunity to drive innovation, drive category growth, and delight more consumers.

Operator (participant)

Our next question is from Korinne Wolfmeyer of Piper Sandler. Please go ahead.

Korinne Wolfmeyer (Analyst)

Hey, good morning. Thanks for taking the question. I'd like to hopefully get a little bit more color on what you're seeing with your retailer partners. How are inventory orders tracking? Has there been any change throughout the quarter, and how are you expecting those orders to trend over the next several quarters? And then just generally speaking, you know, how are you viewing the broader retail dynamic, both in the U.S. and then in Europe and LatAm, and how are those differing? Thank you.

Andre Schulten (CFO)

Thank you. Inventory levels at retailers, broadly speaking, are stable. There's no major movement. The only effect worth calling out was the base period effect in Europe, where some retailers increased inventory levels in quarter one of last year because we had announced a supply chain program that was cutting over at that time. Other than that, I would characterize it with relative stability, nothing to report. The general retailer relationship with P&G is extremely constructive. I would describe it as probably the best retailer relationships we've had as far as I can remember, and that's true for the US, that is true for Europe, where we have built strong partnerships with our retailers, all under the common objective to grow markets.

And the more retailers understand, embrace, and see how a partnership with P&G, strong innovation, and ability to reach underserved or unserved consumers, can help them grow their categories and our categories, that partnership is only strengthening. On the supply chain side, we are building very powerful programs to integrate our supply chains, create more value, reduce inventory levels and cash needed. Those programs are off to a very promising start, and so all of that contributes, I think, to the very positive retailer relationships that we see around the globe.

Operator (participant)

The next question will come from Rob Moskow of TD Securities. Please go ahead.

Rob Moskow (Analyst)

Hi, thanks for the question. Andre, regarding the $300 million positive benefit in terms of your outlook for commodity costs, could you tell me, like, how you think about that versus your original guide? Like, do you intend to, like, hold it back and maybe deploy it in categories where you kinda need to compete more effectively because of price competition? Or can you think... Do you have more proactive plans with that money to put it into areas of growth? Like, how are you thinking about that benefit?

Andre Schulten (CFO)

Look, we're still looking at a $200 million AT headwind for the year. So, in relative terms, it's not, not really a healthy year-over-year. It's still a $200 million AT cost headwind that we need to absorb. And honestly, the way this works within our structure is the business units control what to do in terms of offset any headwinds, or if there are tailwinds, how to reinvest and if to reinvest within the business. So, there's no corporate approach to any of this. It's really based on what is best for each of the categories in each of the regions. And therefore, I can't really give you a constructive answer here other than to say it's still a $200 million after-tax headwind. We'll deal with it.

It's embedded in our guidance range.

Operator (participant)

Your final question comes from the line of Linda Bolton Weiser of D.A. Davidson. Please go ahead.

Linda Bolton Weiser (Analyst)

Yes. Hi. I just wanted to ask a little bit more about the beauty segment. I was curious about Olay in North America and what's being done there in terms of the competition, the derm kind of base brands, the competition there. And then on China again, you know, we're all talking about SK-II, but how was the haircare piece in China? Was that decline less? And how is Pantene doing, and what are you doing there on the haircare side in China? Thanks.

Andre Schulten (CFO)

Thank you, Linda. As I said, the beauty business overall in North America is doing very well. You point to the Olay business, and within Olay, the innovation on Super Serums is incredibly successful, the most successful entry in the segment, in recent years, and 65% of consumers are incremental to the category. So exactly what we want to see. Melts is very successful, resonating with consumers, and that's a new form. So, us being able to, I think, communicate the benefit of the form, consumers experiencing it and repeating now is also great to see. Now, we have an opportunity on the core business, specifically on the jar business, to rejuvenate the franchise, and that's the work that the team is doing with urgency.

So, recognized an opportunity there, and it's being worked. On the haircare China side, strong innovation. We've divested our Vidal Sassoon business. We're now focusing on the three brands we have, Head & Shoulders, Pantene, and Rejoice. We have strong innovation launch in Head & Shoulders premium innovation. We've launched innovation on Pantene. Both are performing very well. Pantene was the number one haircare brand online, ahead of Kérastase, for the first time in the last quarter. Head & Shoulders is growing share, and the plan on Rejoice is launching later in the year. So the team is doing great work on the haircare brands. But again, all of this is done in a context where the market is still down.

So the most important element here is, as we've said all along, the market needs to annualize and stabilize. All right, thank you. I hope you agree with us that it's a strong start to the year on the majority of the business. We continue to see the headwinds that we had telegraphed in December, but we are confident that even with those headwinds and the strength of the core of the business, we will be able to deliver within guidance range on all metrics. We will be available for more questions during the day, so feel free to reach out, and thanks for spending the time with us. Have a great day.