Good morning. If everyone can take their seats, we're going to get started. Happy to kick off this morning with P&G. We have the company's CFO, Andre Schulten, with us, and of course, John Chevalier, Head of Investor Relations. So the way we've set this up is to start with some shorter-term questions, then we'll get into the long-term and strategic. So, where I wanted to start is just with Q4. So Q4 results came in a bit shy of expectations on the top line, and it, I think the conversation has moved on a little bit, but it definitely triggered a lot of dialogue in the day or two kind of following. So maybe we can just start there in terms of, I guess, has anything changed?
People were definitely asking me, like, "Is something wrong?", and I'd just love you to kind of opine on that question.
Sure. So, maybe let me step back from the quarter and just start with the year. We delivered a 2023-2024 result that was very good. We delivered on all our guidance, and we delivered at or above guidance range for each of the metrics. We delivered 4% organic sales growth. We delivered 12% core EPS growth, 105% free cash flow. We returned $14 billion of cash to share owners, so very good year. From the beginning of the year, it was clear that we were looking at a decelerating pace of organic sales growth throughout the quarters. We had talked very early on about markets normalizing from a 6%-7% value growth to 3% to 4%.
So that was anticipated in our guidance range, and we had anticipated that the quarters would slow down as we went through the year. Now, in December, then we communicated, I think very clearly, that we saw incremental headwinds to that normalization of market growth. We saw a slowdown in China. We had an impact on negative brand sentiment on Japanese brands on our SK-II business. We saw deceleration in Argentina beyond what was expected. We had issues in Nigeria, and we exited Nigeria, and we saw the tensions in the Middle East impacting our short-term results. But despite all of that impacting half two, as you rightfully said, the team was able to deliver the year again on guidance range or above guidance range and on algorithm.
So I think the results speak for the fact that even in a more difficult environment, the company was able to deliver the results that we had committed to and wanted to deliver. These headwinds that we were talking about are not in our control. They've got nothing to do with the underlying performance of the company. They've got nothing to do with the viability of the strategy. They are simply external headwinds that we need to face and overcome to deliver the results, and again, that's what the team has been able to do. But then go one step further, Lauren, and say, "Is the company set up to continue to win over the next year, two years, three years, five years?" I think we're still in the best position we've ever been in to continue to drive results.
We have chosen categories that are being used by billions of consumers on a daily basis. More importantly, billions of consumers are not using these categories today, so there's tons of runway to build household penetration around the world. Consumers are looking for superiority in these categories because these jobs to be done are important to them, and they tell us that even with our superiority being very strong, they are not satisfied with absolute performance of products in these categories. Still, a high percentage of parents that use diapers experience leaks overnight or skin irritation. Many women using fem care products still don't feel as protected as they want to feel. Many households don't feel that their laundry regimen is delivering the performance on the first wash that they want.
So there's an opportunity to drive category growth via household penetration and by improving superiority. I think we are uniquely set up. We understand what superiority means. We've been operating this way for five, six years, and the results show that we can drive consistent growth. So we know how to articulate and execute superiority, and we have the financial muscle to do it. We've delivered $2.3 billion of productivity last year. That's a record productivity level for the company. That is the fuel that allows us to reinvest in superiority across the five vectors and stay ahead of what consumers want. And most importantly, we have runway for the next three to five years, clearly identified projects that are staffed and being worked to deliver that same level of productivity.
So we have continued to have the fuel to invest in superiority. We have an organization that is capable of delivering superiority across five vectors, that is highly empowered, but also accountable by sector and by category to deliver those results, and they are paranoid Paranoid about what could go wrong, paranoid about who could be the next competitor coming in, what could existing competitors do, how could consumers desires and behaviors change, what do we see in the retail landscape? So when I put all of that together, I think we're well equipped to continue to win.
Okay, great. And if I take a step back, we looked at the fourth quarter and said, look, 85% of the business, and you guys have talked about the 85%, but 85% of the business grew about 4% in the fourth quarter, roughly in line with what growth was in a more normalized pricing environment. So first, can you kind of comment, is that a good benchmark? You know, is 4% kind of the right number to anchor to in the current environment, for the healthier parts of the portfolio?
Yeah, I think the logic is still sound. The 85% of the business outside of these specific headwinds that we addressed is normalizing. It's normalizing in line with our expectations. As I mentioned, we had expected the markets to slow to about 3%-4% value growth, which is what we saw pre-COVID. So that's the sustainable category growth level that we expect for this fiscal year and going forward. About 2% of volume growth, 1-2 points of value growth, and our categories in these markets perform exactly that way. So you've seen North America slow down from 5% growth to now 4% growth. The volume component is coming up strongly, now running at about 3%-4%. Europe, our focus markets continue to hold at 5%-6%.
Brazil, Mexico are normalizing down to 5%-6% value growth, so it's right in line with what we had expected. I think what's important to understand is right in line with what we had expected means that that 85% is slowing from a 5% growth rate to a 3%-4% growth rate. We want to be slightly ahead of that, but again, we have to recognize that in this fiscal year, that growth rate is 3%-4% versus in previous years, in the 5%-6% range. I, when I put that together, I think it means, and we've communicated that, we'll have an accelerated cadence of organic sales growth throughout this fiscal year, right?
We annualize some of the headwinds later in the year, and we see a deceleration of that majority of the business in line with what we had expected, and I think John said it right in the earnings call. If you combine the headwinds and the deceleration as expected in the majority of the business, we would expect quarter one not to look materially different than quarter four of last fiscal year.
Okay. Okay, great. Let me just stick with that for a moment. Any areas where we've seen incremental softness since July? You know, the companies have been talking about some softening in the U.S. So just curious, knowing that Q1 will feel like Q4, but from a market growth standpoint, have you seen any slowdown that's worth calling out?
No, not really, not outside of what the trends that I described. The US is very strong. 3.9% category growth across all categories in the most recent reading. We are growing volume share, we're growing value share. Europe, we have returned to volume share growth in the past one month, which is excellent. We needed to see that return to volume share growth, and it's happening, actually, ahead of our expectations. The market is stable, growing at around 6% right now, so no deceleration there. Brazil, Mexico, normalizing, but again, all of that in line with what we had expected. The consumer is resilient in our categories.
We don't see, and we continue to not see, any significant trade-down in our categories, and we continue to enjoy share growth, most importantly, volume share growth in our biggest markets and regions. And I think it's a function of, again, those categories, the categories we operate in being important to consumers. They are willing to pay the few pennies premium per use in order to have the reassurance that the product actually works. They don't need to wash twice, they don't need to deal with the hassle of a diaper change in the middle of the night. So I think that all still holds true as it has been in previous periods.
Okay, great. Let's shift maybe to the 15%, the other markets, and we'll start with China. So China's your second largest market. Can you talk a little bit about current market dynamics, how that compares to your own performance? And maybe you could talk about it first isolating SK-II, you know, and then the rest of the business, the non-prestige beauty business.
Yeah. Our CEO, Shailesh Jejurikar, and I were in China just two weeks ago. We spent a full week with the team, and I think to start with the good news, we are holding share in China. So excluding SK-II, the business is stable. We are holding share in the offline side of the business, and we are holding share in the online side of the business. But the market continues to be very soft. Consumer confidence is still low. Consumers are very value conscious. They are very nervous when it comes to making significant commitments, even bulk purchases. You know, there's been significant shift in terms of key consumption periods, where consumers loaded up 20%-25% of their annual consumption in key consumption periods. That no longer happens.
So we continue to see a weak market environment. I don't expect that to change from the trends we see. I think the retail landscape is normalizing. Even the fastest- growing channels, Douyin, used to grow at 30%. That growth in our categories is slowing down significantly, so you see a more normalized distribution across the trade channels. And I think we don't yet see recovery. We see stabilization of the trend, but we don't yet see recovery. Our midterm expectation continues to be that this market will look a lot like other developed markets, 3%-5% growth, but we don't expect China to return to double-digit or high single digits or double-digit growth.
Even the return to 3%-5% growth, we assume, will take a number of quarters.
Okay. How about include SK-II? So let's, that's, I think that was comments were more about the-
That's the core business.
Additional.
Yeah, SK-II, obviously, on top of the slow market, has the Japanese brand sentiment that started to hit last October. I think the team has done a wonderful job in taking the time that we were impacted by this to rebuild the brand. Rebuild the brand in multiple ways. Rebuild the entire equity campaign centered around product quality, product efficacy, and the core ingredient of PITERA. Rebuilding how we want to communicate to consumers in a way more targeted way. We have modernized all of the templates in the department stores. We have invested in incremental beauty counselors, and we have just launched a super premium proposition called LXP Craftsman Line with higher concentration of PITERA, wonderful packaging, great reaction from the trade and from the press. So now we're ready to come back.
I think the consumers are more receptive to talk about SK-II, more receptive to include SK-II in their consideration set, so I feel good about the work the team has done. We're at the point where we can restart marketing and communication with consumers. We are in stores, in department stores for consumers to try us. It will take time to rebuild the business, but the foundation is strong.
Okay, great. And I think, I mean, like you said, great news that you're holding share in China, but if I think about, you know, P&G's approach has always been, it's our job to create the market growth.
Yep.
So back to stable and market share, good, good starting point for the conversation. But beyond SK-II, are there areas of the business where, you know, you're thinking about a new approach, changing things in some way, to drive and catalyze that market growth, so that you can, you know, in fact, live the dream of being the driver of market growth?
Absolutely, and you're right. I think that's ultimately the goal for us in China, as in every market, is to contribute to category growth on a disproportionate way. And we have spent the last two years to resetting in resetting the China business in multiple ways. So first of all, portfolio. On the Hair Care side, we streamlined our portfolio from four brands to three brands. We've divested Vidal Sassoon. We have launched new innovation, new marketing campaign on Head & Shoulders and on Pantene. Both work, both drive category growth and share growth. We have now seen the plan on Rejoice. We mentioned in our last earnings call, that was the part of the hair care portfolio we had not yet developed a plan for.
We saw the plan on Rejoice, which is our value tier in haircare, and I think it's very strong. So that's gonna launch here in the next couple of months. Diapers continues to be the leader in the category. Why? Because I think the diaper team in China has probably the strongest insights in terms of what consumers actually want and how to talk to consumers in China in that category. The category is down 10%-15% simply by number of birth. We've been able to grow 6% and grow a point of share. On the other categories, we're again rebuilding the portfolio in order to drive category growth.
The encouraging thing is all the retailers are interested in talking to us because we talk about category growth, and that's what every retail channel in China wants and needs. We are rebuilding our go-to market. We are pushing the boundaries of what we call end-to-end, meaning, every category leads the full funnel from innovation to in-market execution, and we are rebuilding our collaboration with both distributors and retailers in terms of combined supply chain, so we can go to market more effectively, lower cost to serve, faster and better execution, so all of those things are being worked, ultimately with the objective, as you say, to grow the markets, but it will take time.
Okay, great. Outside of China, just in the rest of the 15%, just curious with where we stand now, anything that perhaps in hindsight, I mean, you're exiting Nigeria or have exited, but anything that you think you could have or should have done differently, to manage those regions or categories differently?
We talked about China. I don't think the Middle East. You read the same headlines that we read, so the situation is volatile. I don't think there's anything else any Western business can do other than to continue to operate as much and as normally as we can. But again, the situation is dynamic and is not really in control of any of any company. So I don't think there's anything else we could have done differently.
We talked about SK-II. I think the team has done exactly what they should have done, which is wait until the consumer is receptive to communicate on SK-II and engage again, but use the time to put all the foundational elements in place. So I do think we kind of operated in each of those environments with the degrees of freedom we had, maximizing both growth in the short term, but more importantly, the potential of the business for the long term.
Okay, great. Let's talk a little bit about the competitive environment. Definitely been a topic through earnings season and absolutely in most sessions so far at the conference, so have heard from some of your peers, they're reallocating some advertising spending into promotional spending. What are you guys seeing in the market? Certainly a more pointed U.S. question, to be clear, but if there's any other markets are worth commenting on, are we below or at 19 levels, you know, funded by manufacturers or retailers, but you know, what are you generally seeing promotionally?
The picture has not changed materially from what we talked in July. We continue to see most of the competitive set returning to pre-COVID levels in terms of promotion percentages of volumes held on promotion. We're still slightly below. We generally still see a constructive price and promotion environment, which makes sense, given the behavior in the category and the sensitivity in the category towards pricing versus innovation. When we see short-term promotion, honestly, our position is to wait and just sit it out. We strongly believe that our way to create value is through innovation. Our way to create value is through better brand building, better execution in store, and if we do promotion, we want to drive promotion that actually drives category growth.
So when we are able to combine a high-penetrated category with a low-penetration category, combining a promotion of Tide liquid detergent with a fabric enhancer, that drives trial of the fabric enhancer. It gives value to the consumer, allows the retailer to show value, but at the same time, it drives total category growth. That's promotions we are willing to engage on. Single unit, deep price promotions, we don't believe make a ton of sense.
Okay, great. In particular, U.S. Laundry has gotten a lot of attention in terms of the promotional environment. So notwithstanding your comments on your willingness to participate or not, I think it'd just be great to get your perspective on what you are seeing in U.S. Laundry in terms of the promotional environment.
Not dissimilar from what I described. I think we see pockets of promotions. Some of the promotions are retailer-driven, some of them are manufacturer-driven. Generally, when you look at the data, you don't see a sales uplift, you see a short-term volume spike, but the sales uplift is negative or neutral. So again, we recognize there's some promotion going on. I don't think it changes our stance.
Okay.
The other factor is that in some cases, these promotions are happening at price tiers that are below our major brands.
Mm-hmm.
So there's more interaction between competitive brands than there are necessarily with P&G brands.
Okay.
Even when that promotion occurs.
Okay. Okay, great. As we've seen, you know, more pressure in the U.S. consumer environment, I think, you know, there are pretty significant differences in the portfolio from where you were, the- let's call it, the last go around of the financial crisis, if we want to reference that. So it'd be great if you could comment, maybe on how the portfolio is working, right? Whether in laundry, my, my brain went right to Tide Simply, but just sort of, how the portfolio is working, your ability to keep driving price and innovation in a more challenged consumer environment in the U.S., well, globally, really.
Yeah, I think the portfolio is different in multiple ways. Number one, we've built a vertical portfolio of brand tiers that allows us to effectively compete with consumers at different spend levels in terms of price per unit. You've mentioned Tide Simply, we have Luvs Diapers, we have lower tiers in each of the categories. So consumers can choose at what level they want to enter the P&G portfolio, all the way from a mid-tier value tier to a premium, super premium tier. That didn't exist in 2008, not to the full extent. We were very intentional in building different cash outlays, from an opening price point of $5 or $10, all the way to $50-$60 price points in some of the categories.
So some consumers that are looking for a lower cash outlay can find the lower cash outlay and purchase more frequently in the P&G portfolio. Others who have the cash available and look for the lowest price per unit can go to the biggest box available, the biggest unit available, in purchasing club or online. The third element I would tell you is we've built distribution across all channels. So if you look today at our share position at different channels in the U.S., it's relatively consistent. So whether shoppers decide to shop in the dollar channel or shop at Walmart, shop at Target, or shop at Amazon, we are there, consistently distributed, and they can generally find opening price points or higher transaction size across the channels. So we're relatively channel-agnostic.
Consumers can find different value tiers, they can find different price points, and I think that portfolio combination is working very well, as evidenced by the fact that we continue to be able to grow both volume share and value share in the U.S.
Okay, great. Let's shift to the longer term.
All right.
So, you know, one of the, I think, the best parts of your strategy in the last several years has been its consistency, and that when, you know, times get tough or there's some surprise, we've had plenty of them in the last few years, instead of changing course, you've doubled down and really stuck with it. But as you look out over the next few years, are there any sort of tweaks or adjustments you think that are in the cards? You know, areas you want to get more focused on, and yes, I'm thinking ahead to your Investor Day, later this year.
We constantly tweak and adjust. That's the power of the strategy. The power of the strategy is to never stand still. We tweak and adjust the way we think about superiority. You've heard us talk about a full reset of superiority, where we were assessing ourselves as superior on 80% of our business. We reset that bar. We're now only superior in our own definition on 30% of the business. Why? That was the preemptive measure to ensure the organization doesn't get complacent, that the organization understands that we can't expect to continue to grow if we don't make the product better every day, every month, every year. If we don't improve the packaging, how do we expect new consumers to come into the category? How do we expect to drive category growth?
If we don't grow shelf space, if we don't grow placement in the store, how do we expect to grow quarter- over- quarter? If we don't communicate to more consumers in a better way, how do we expect to grow the category and grow our business? So that was one adjustment. That will not stop. We're still tweaking how we define that superiority and how to actually measure and operationalize that superiority every day. Productivity. You heard us talk about Supply Chain 3.0. We're at the very beginning of operationalizing that concept, including the integration of our supply chain and optimizing the end-to-end value chain between our suppliers, our own manufacturing and operating system, and our retailers' supply chain.
We have pilots and active projects going on in multiple regions in China, in the U.S., in Europe, and the value creation potential is huge. So we're still learning with our retail partners and with our suppliers, how to best integrate and leverage our combined assets across the supply chain. Organization, I talked about tweaking the end-to-end model in China. We're also running different pilots of creating smaller, not function-based teams that can operate the business in a more agile, more end-to-end way. Typically, every brand team, every business team, has representatives from every function, and there's a functional alignment that is necessary and obviously a team alignment in order to make decisions. Do we really need both dimensions?
Can we create smaller teams that are more function-agnostic, that are able to act faster, make decisions more quickly, and that are supported by a more digital infrastructure, so we don't need an army of people doing analysis, driving data extraction, but that can be automated and driven in a better and digitized way? All of those projects are active. You're gonna hear more about them at Investor Day in November.
Okay, great. Where do I wanna go next? Let's look at and talk a bit about margin structure. So growth margins have fully recovered to pre-pandemic levels, and operating margins could reach 25% this year, which I think is a peak. My model goes back really far. So how should we think about the drivers of margin expansion going forward? And, you know, is there a ceiling on how high is high?
We don't really care about the margin.
Okay.
No, we care about the margin, but it's an outcome. What we're focused on is top line growth, bottom line growth, free cash flow, productivity. If we follow the algorithm that we think we need in order to deliver in the top third of our peer group from a market TSR and operating TSR perspective, we need mid-single digit top line growth and mid to high single digit bottom line growth. That implies margin expansion, so 50 basis points of margin expansion is implied in the model. What's important to us as we communicate with our teams is to ensure that we earn the margin.
And earning the margin means we have to earn it by better innovation, premium innovation that makes consumers trade up, and we have to earn it by delivering at least $2 billion of gross productivity every year. That allows us to not only reinvest in innovation and superiority, but also drive the business in a way that we can deliver the algorithm, and then the margin becomes an outcome. If we do it that way, so if we follow that model, I don't see margin growth as a ceiling. I think it's an outcome of a healthy business model, driving the top line growth and the bottom line growth based on category growth and superiority.
Okay. I think something that frankly, the media likes to jump onto, and sometimes investors do, is how does that idea work vis-a-vis retailers versus manufacturers, as a broad statement across CPG, not specific to P&G? So do you ever find yourself in conversations or drawn in conversations with a retailer CEO that's really pushing and saying, "You guys are making too much money?
I don't think that conversation is relevant as long as we do our job. If you are part of a retail conversation, it's mostly about: Are you delivering growth for me? Are you delivering growth in my categories? And is your margin structure that you're providing for me sufficient to compete in the category that you wanna compete in? As long as those hygiene factors are all there, we're okay, because it's our business to create our structure and margin. It's their business to create theirs, but our job in their store is to provide the products that generate the velocity and the operating margin, so they want to carry them. That's the conversation. It's never my margin versus your margin. I don't think that's a constructive way to engage.
Okay, great, so that's the perfect Andre to talk about innovation. So, you know, I would argue, I have argued that P&G has been remarkably consistent in delivering high-quality innovation throughout, I mean, in particular, the last four to five years, where there was a lot of companies had to put a stop on those activities. One thing, though, that was interesting, is there was a lot of new brand development out of P&G during that period. A lot of, you know, Joy, Waterless, there's a long list of them. I guess, how many of these smaller brands that you launched, would you say, broadly, kind of still are in the market? What is the role? Do you think this small brand development, is it something that still matters? Is it something retailers and/or consumers are still interested in?
I think the outcome of the crisis and the supply chain difficulties that were part of the post-COVID era, I think have refocused both retailers and manufacturers on the importance of bigger, more resilient supply chains, and have illustrated the potential Achilles' heel of a very complex product portfolio, both on shelves and from a supply chain standpoint. So in that sense, I think everyone right now is a bit more cautious about how much complexity do I want to add to my category portfolio? Our conversations with retailers actually go the other way. Say, if you look at, and again, it comes back to if you look at the entire supply chain end-to-end, it's still true that in our categories, the 25% of SKUs make less than 5% of sales.
So if you think through that, that's an enormous amount of unproductive SKUs. Our push with retailers and their push is more towards how can we simplify the portfolio? Now, there's always a role for core brands, and then that's what we call more. Some consumers are looking for new brands, new ideas. Retailers are looking for differentiation, so it will always be there. But I would argue the balance has gone to, well, let's make sure the core is healthy, and we can operate the core as efficiently as we can, and then let's add, you know, a few brands on the side that are either retailer-specific or for a specific niche in that particular category.
But I don't think anybody wants to go into the proliferation that we might have seen in earlier years. China, different story. I mean, in China, the simple fact that the ecosystem produces so many brands, there are, I think 30,000+ brands operating in all categories. 1/3 of those brands trade in and trade out every nine months, so that's just part of the ecosystem. But again, our position in that is we don't play that game. We focus on our core brands, and we continue to innovate to have category growth that way. The rest is a different part of the category model that we don't wanna play in.
Okay. And in China specifically, I think, And you mentioned a little bit earlier, and you certainly mentioned it earlier this year, about working differently with retailers. And I thought it was really interesting, the idea that this would be, a testing ground for some of the end-to-end and supply chain integration work, 'cause I don't think that would be the common perception of where the Chinese retail landscape is. So, can you talk about why start there? Kind of early reads on some of those pilot programs that you've had.
Our supply chain in China is probably one of the most developed supply chains we have in terms of data integration, and so it was logical to start there because the data signals from both retailers and our own ability to process the data signals and operationalize them was the highest. The trade environment is very complex between direct retailers and retailers that we service via distributors, so the complexity that is generated by that is also huge. So the potential, the value creation potential by simplifying and streamlining their total system, was very high. It's very early days, but again, we spent a good amount of time two weeks ago with a team there, and it's very promising.
I think there's a lot of value to be created, and the actual collaboration is taking shape, so I think we're making progress.
Okay, great. I'm gonna squeeze in one more, and it's back to the shorter term, which is the guidance for the year on organic sales is 3%-5%. So how should we think about where you fall in that range? Kind of, what are the determinants in high end, low end, and midpoint?
I think the 15% of the business determines the majority of that volatility between three and five. If we see normalization of the consumption rates in China, if we see the Middle East stabilizing, and therefore, we annualize most of the effects that were with us through the second half of last fiscal year. In the second half of this fiscal year, I think we have a shot at being at the upper end. If we see continued slowdown in China, the Middle East situation further deteriorates or something else happens, that trends us more to the lower end of the range. I feel very good about the 85% of the business. I think that's performing just in line as we have expected.
The last thing I'll leave you with is if you put together the quarters on a two-year stack basis, the two-year stack actually is flat throughout the year, so it really is a base period game, that shows the cadence of the quarters for this year. We have very strong innovation in the back half, so I think we're pushing all the levers that we can in order to be at the 4% or higher, but the outcome will be, to a large degree, determined by these external factors that I was describing.
Okay, perfect. We have to end there, and we will go to a breakout session. So please join me in thanking P&G for being at the conference.