Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's household products and beverage analyst. I'm very pleased to welcome Procter & Gamble back to Morgan Stanley's Global Consumer and Retail Conference. Just before we get started, I have to give a quick disclosure. Please see the Morgan Stanley Research website at www.morganstanley.com for important research disclosures, and feel free to reach out to your Morgan Stanley representative with any questions. Joining us today from Procter & Gamble, we have Procter & Gamble CFO Andre Schulten and Head of Investor Relations John Chevalier. Great to have you guys here again. Thanks so much for joining us. I thought maybe first we could start off on the short-term consumer landscape here, Andre. Since there's been so much volatility, the backdrop is muted category growth.
Maybe we can just start with the U.S., both from a consumer standpoint, where there's been some volatility around the government shutdown, etc., and also from a competitive standpoint, what you're seeing in the market. Let's talk about sort of the pace of the U.S. over the next few quarters here. You have a tough comparison coming up this quarter. Things ease in the back half of the year. Your guidance implies a ramp-up at the corporate level. Obviously, that extends to the U.S., given the size of the market. Just your thoughts around near-term trends in the U.S. and sort of pace of potential recovery as you look out over the next few quarters.
Yeah. Good morning, everyone. It's great to be here with you. Let me start on a more positive note. We have pockets of real strength. We've talked about Latin America. We've talked about China. Western Europe, there's return to share growth. As you say, Dara, I think the context in the U.S. is more volatile, probably the most volatile we've seen in a long time. There were a few elements that we knew com.ing into Q2 out of the last earnings call. We knew the consumer was more nervous and cautious. We knew that there was a stronger competitive environment. We also knew that we had a stronger base period with consumer loading due to two port strikes in the base, where consumers stocked up in fear of product rationing. All of those things were known.
What we didn't know was obviously the incremental context that was provided with the government shutdown, SNAP benefits, etc. You can see that in the macro growth in our categories in Q2. Our most recent reading has the category down, both in volume and in value, significantly in October. I don't expect November to be materially different. As you say, that sets a tougher context for the U.S. business. That said, that's all within the guidance range we provided. We have provided within our guidance range for some of that variability, which we expected throughout the year. Nevertheless, it will play out in Q2, probably more so than on the year. For the year, we feel very comfortable with the guidance range we've provided.
What that means for the U.S., and as you say, the U.S. is a big part of the business, so U.S. recovery will play a big part in where within that guidance range we end. The current best view we have is that our consumption run rates in the U.S. will hold at the current level. Our base plan would suggest that what we see in terms of consumption and shipment in half one will exactly be what we see in half two. Given an easier base period, that will then lead to organic sales growth in the low single digits in the U.S. . Incrementally to just the assumption that we'll keep shipping what we're shipping, the upside we see versus that scenario, or the protection against further volatility in the macro environment, is the strong innovation plan that we're executing across half two.
We've already implemented a few launches, which are promising results. We've done the upgrade on Tide Liquid, the biggest formula upgrade in 20 years, Tide Boost. That's in the market, and the business is responding. We've returned to share growth on Tide Laundry, which is great to see. We have innovation across every part of the portfolio. It's not about the number of innovations that I'm excited about. It's the quality of the innovation that we're seeing coming. Every part of the business we've reviewed, Shailesh and I reviewed every part of the U.S. business with every general manager, literally going through what is the consumer insight and friction point that we're trying to address. Do we have this covered with the product innovation that you're about to launch? How do you bring it to life with the right claim across all the right media channels?
Does it hold from a value equation standpoint for the consumer? If I look at skincare, fabric care, family care, baby care, they all have very strong plans in the back half. Base plan, I would tell you, yes, volatile, hold the run rates, will lead to better indices, protection or upside, strong innovation plans.
Great. That's helpful. Just as you think about innovation, can you put in perspective versus a typical year, maybe how have innovation processes changed in the last couple of years? We'll talk about AI a bit later, but I'd be curious for sort of what's driving that innovation ramp-up and how sustainable it is.
I think what drove the innovation ramp-up was an insight about two years ago that the industry at large had driven growth via a lot of price mix and exclusively via price mix for a period of time. It was becoming clear that that growth trajectory was not going to hold. We started thinking through how do we make sure we have enough arrows in the coffer when that hill climb needs to happen, i.e., when we need to restimulate volume growth and category growth with innovation. The plan and the innovation itself was started to develop two and a half years ago. I think the difference in how we approach the innovation design with Shailesh coming in is Shailesh is a brand builder by heart.
He really insists on going deep on the consumer insight, first and foremost, deeper than I've seen any member of the team do so. That, I think, leads to more consistency that we view in the innovation from all the way from consumer friction to consumer idea that can be activated consistently across all touchpoints: media, claims, packaging, retail execution. When we get that right, we really see step change in performance. That review of consistency is key in my mind for the success in half two, and I feel good about where we are.
Okay. Maybe we can turn to China. You've picked up momentum there pretty significantly recently, 5% growth in the last fiscal quarter. You've made some changes in your go-to-market model. You've accelerated innovation, more success targeting e-comm on top of beauty recovery from a category standpoint. Just are we back to sustained growth here as you look going forward? Do you think you can accelerate growth as you look out over the next couple of years, given some of those tailwinds behind you? Also any short-term impact on SK-II just from Japan, China relations in the near term here?
The China team has probably done the most significant restructure of a market that I've seen in my career. About one and a half, two years ago, they really turned every element of the business model upside down, starting with how we go to market, realizing that the traditional brick and mortar was still important but less important than online, realizing that the distributor network and the way we incented distributors was not up to par with where the consumer and the retail environment was going, realizing that wholesale had to play a different role in the market than it did traditionally, streamlining the brand portfolio, changing the way we innovate across all of our categories, and changing the media model. All of that has worked.
When we look at Q1, 5% growth is probably not structurally where we are yet, but I have confidence, and so does the team, that the trajectory is upward. China is China, it will be like this. I do believe that we have all the right elements in place. You can see about 60% of our net sales we deem now superior in China, only 60%. That leaves 40% to be brought to clear superiority. The innovation plans and the marketing plans and go-to-market plans are in place. I expect as we make progress along those five vectors on the remaining 40%, we will see continued acceleration. The market is still difficult. Consumer confidence is still significantly below where it used to be.
The retail environment, as I mentioned before, is structurally shifting, which means a lot of the traditional customers that made companies like ours big in China are struggling. They need to reinvent their model, which puts friction in the system. When I put it all together, I feel very positive about where the China team is headed.
Great. Any thoughts around any near-term brand volatility in China, given some of the political issues?
We are obviously monitoring social media noise on the comments that were made. There has been no specific brand attribution to any of our brands, including SK-II. I think the tone is hopefully easing a little bit between the parties involved.
Okay, great. Any learnings from China? It's obviously a very unique market and different than a lot of the other markets around the world, but any learnings from the success you've had there that you're taking to other markets or you think could be applied?
Yeah, I think the learning is I would say there are two markets that I think are two regions that I think are ahead in terms of the execution of the strategy and adapting to the new environment. One is Latin America, and the other one is China. I think the learning I would have is both organizations have reoriented their teams to entirely look externally. Both regions have reduced internal processes, internal work, and completely focused on very simple things. Can I delight the consumer? How do I know I can delight the consumer? Do I understand the retail environment in which I operate? Do I have the right assortment and portfolio for that retail environment? How can I partner with my retail environment in order to create competitive advantage for them and for me? They have done that consistently.
I think that's the playbook that we are applying now in the U.S. , in Europe. Those two are probably ahead.
I think the evidence for that point is the breadth of growth across the brand portfolio and in Latin America across various sets of markets, either distributor markets, Mexico, Brazil. If it was just a single innovation that was driving the train, that would be very different. This is more broad growth across the market.
Yeah, you're right. It's broad share growth, Brazil, Mexico, distributor markets. Exactly right.
Great. Perhaps we can turn to Western Europe. Macros have been a bit weaker there. Pricing discussions have probably become more difficult off a period of excess pricing versus long-term trend over the last few years. Just how's your business holding up there? Maybe some context for volume growth versus pricing growth. Is it realistic to realize any pricing in Western Europe anymore, or is it difficult in this environment?
Europe, I like in Western Europe to the U.S. in terms of consumer sentiment at this point, but less volatile because some of the macro context is just not as volatile as in the U.S. right now. You look at our markets, they used to grow over the past three, past six months between 1%-2%. They are now at about 1%. A slight slowdown, but not a dramatic decline. What's encouraging is the price mix is actually holding to slightly positive by 10 basis points, 20 basis points, not material. That is good to see because Western Europe can slide into a deflationary cycle between retailer competition and manufacturer competition. That is not happening. We see constructive behavior on both ends, which is helpful in the categories.
Europe is a part of our portfolio where we've also started to implement some of the structural changes we're talking about in LA and China earlier than in the U.S. , simply because the market was more challenging at that point in time. We've just returned to share growth in Western Europe, which is actually great to see. That is in the context of competition ramping up. Henkel is clearly back in the game. Unilever is back in the game. Despite all of that, market price mix is holding, so competition is constructive, and we're able to grow share. We also have a very strong innovation plan in the second half, like we have in the U.S. , so I feel good about where we are headed. You're right. When the environment is tougher in Europe, retail conversations tend to get more difficult.
We are entering the annual negotiation cycle in most of the markets in Europe. As always, I expect some level of conversation, discussion, and maybe disruption, but nothing unusual and nothing that we have not included, I think, at the right level within our guidance range.
Okay. Given the consumer weakness we talked about in the U.S. and to some extent Western Europe, what are you seeing in terms of private label share? Also, what are you seeing from a competitive standpoint in terms of promotion in the industry and with a ramp-up there? Is that something that's significant? Is it something that you expected? How would you characterize competitive levels also?
Yeah, it's interesting. Private label shares are not moving in Europe. If anything, the volume and value shares are slightly down in private label. I think it speaks to the strength of branded manufacturers entering the market and building constructive innovation and go-to-market plans with their retail partners. Retail partners had to invest a lot in their private labels with the cost basis increasing. It is less attractive for them to drive private label. It is more attractive for them to drive branded business growth at the moment. We will keep it that way. In terms of private label innovation, there is not much going on there. I think that the most important part is a constructive promotion environment, which we continue to see relatively stable. We will see increases in frequency. We are about back to pre-COVID levels, but not increases in promotion depth.
Promotion frequency, if it's coupled with innovation, is a good thing for the market because it drives trial and ultimately repeat in higher net sales or higher unit sales items. We see a relatively constructive environment right now.
Okay. Are those comments consistent across both the US and Western Europe as we think across the market?
Both. You see pockets, obviously. You see pockets where there's an attempt to drive short-term volume growth in some categories, but they are temporary. Generally, we've chosen not to react. They play out over a 30-day period or maybe even over a quarter, but they don't really result in value share gains. They result in short-term volume share gains, but those rescind quickly once the promotion comes off. As long as we don't see this as a structural tool to drive value disparity between our propositions and whatever is happening, we don't react, and we haven't seen that yet.
Okay. If we look at the last 18 months, historically, the share gains for a number of years were pretty consistent. The last 18 months hasn't occurred as much, and there have even been slight losses. Why has that momentum slowed in your mind, and what actions are you taking to lift category growth? Obviously, share would be a byproduct if you're lifting category growth. What are the actions sort of incrementally today to reinvigorate some of those share trends?
I think the most important action is to really double down on the discipline of the business model and the execution of the business model. As I said, it's about being even sharper on the type of innovation we're launching, being even clearer on the consumer insight, being even more aligned with our retail partners, not only three months out, but six months, nine, twelve months out on how to bring those innovations to life in store and online. We're looking at a very different media environment, much more fragmented, much harder to read where you're actually being seen and how that translates into transaction. Closing that loop and giving us better insights on what part of the significant marketing investment we have made over the past few years is actually working, and then rekindling that.
I think a more simpler setup in the organization, reduction of internal work, reduction of internal process, and 100% focus of the entire organization outward towards the consumer, towards the retailer. If I had to give you three points, those are the three. Ultimately, creating focus by eliminating noise. That is elimination via the restructuring program that we have announced. It is both elimination of small brands, category country combinations, or even countries that require a disproportionate amount of resources and create a lot of noise without creating a lot of value, but also reducing the size of the organization, which will force the organization to use the tools we have available and will focus the organization to look where it matters, which is at the consumer and at the retailer.
Great. That's a great segue into the restructuring program. You've announced a significant reorganization. Can you take us through the genesis of the program, what it's designed to do, key action points? As you think about the savings, we talked about some of the top-line volatility around the world given the consumer environment. I'd love to hear if that sort of gives you visibility that you'll have enough to invest behind the business, gives you visibility from an earnings perspective that you can hit your goals this year and also as you move to the out years over the next few years here, how that sort of fits into the top-line dynamics.
Yeah. The genesis of the restructuring program was the desire for growth. I mentioned that we started creating the innovation pipeline about two, two and a half years ago, knowing that this hill would come where category is decelerating and we would have to stimulate growth. Now we needed the organizational capability and the financial capability to invest behind those innovations, drive trial. That is really the idea behind the restructuring program, the timing when it was launched. The whole idea is growth. Growth in three ways. Number one, create the financial flexibility to invest beyond what we need to create an acceptable EPS outcome. The mantra is the restructuring savings we are generating are flowing back into growth investments. They are not here to bolster EPS. They are here to create future growth.
We need to be able to deliver the EPS outcome from our core business and our underlying business growth. The second element of growth is what I talked about, is simplify the organizational structure. When we are a functionally oriented company, and the moment you have nine functions, you have nine team members on every team by default. Nine team members that all want to contribute, nine team members that always have to report through their function, gain alignment, report back. That is complex. It is a lot of people. It is very slow. We simply wanted to change that. The push to the business is you only need three or four in order to run these business teams.
Every team is downsizing to three or four people who have bigger roles, who can make decisions as a team and who have the authority and the decision authority to make those calls and who are ultimately responsible for a brand or a sub-brand results as an outcome. That is digitally enabled. A lot of process simplification, a lot of automation, a lot of data tools that we have invested in to make those teams functional. We do not have to have the financial analyst to do data extraction. We do not have to have people who put data sheets together. That can happen in a very automated way. Analysis can happen in an AI-enabled. That is the enabling mechanism. The third component here is changing the portfolio and partially changing the go-to-market model. We announced a change in go-to-market model in Argentina. We have changed the go-to-market model.
Are changing the go-to-market model now in Pakistan. Yes, those are attractive markets from a number of consumer standpoint, but they are very hard to create value in US dollar terms with an organization and production on the ground. We simply decided that our resource allocation would be better if we put those resources against bigger, more promising category country combinations and simply use a distributor-based import model to compete in those markets. We divested small brands. We shut down some SKUs and category combinations in other markets. All of that to focus the organization. In a business of our size, it's amazing to me. The moment you have even a small part of the business show up as red on a scorecard consistently, the amount of resources that will flow to fix that red on the scorecard is amazing.
We just needed to eliminate the red on the scorecard.
Okay. Maybe tie productivity into earnings goals relative to the top-line volatility you've seen.
Yeah. I think the look, you've seen our productivity progress outside of restructuring. We consistently deliver around $2 billion in gross productivity across cost of goods, media, overhead structure. That is still intact. That $2 billion-$2.2 billion is still flowing. I feel very good about the visibility that we have. That is embedded within our guidance range for this year. That is embedded in our desire to get closer to algorithm in the following years. We consistently said being on algorithm every year and every quarter is not the objective. The objective is to be on algorithm on a two to three-year rolling basis. With the productivity program, with the trajectory we're expecting on the top line, I think we're in a good place.
Okay. That's helpful. Maybe we can turn to AI and technology and how you're trying to use it to your advantage, particularly as it comes to marketing and innovation, if you view it as more of a top-line opportunity or productivity opportunity. Perhaps also you can specifically touch on agentic AI. In theory, there could be some pressure to brands which have developed brand equity with consumers over decades or centuries in your case as you move to agents or prompts, etc. Just how you think about agentic AI, how you think about AI and technology advancements in general in terms of driving productivity and yield and top-line yield for a Procter.
I think AI and the underlying technology in a broader sense have an enormous potential for the company in all the ways you describe. We've been talking about Supply Chain 3.0, fully automated manufacturing operations. We've talked about our Berlin plant running an unattended night shift, which is enabled by technology, AI being part of that toolbox. That technology is now being rolled out across multiple sites, across multiple categories. We will see more unattended manufacturing operations around the world. We moved to dark warehouses, unattended warehouse operations, including unloading and loading. We have automated and fully digitized quality control on the lines.
Instead of people taking product off the line, doing batch testing, every sensor on the line, every image on the line is fed into an AI tool, which determines whether the product quality is up to par or not, which then in return influences the center line of the manufacturing equipment. We are building logistics steering centers, which are AI-enabled, which optimize the logistics flow between our retail partners and ourselves to minimize cost, maximize on-shelf availability. I can keep going. The manufacturing side of the logistics side is very exciting and very real because it is within the next three, four years that we believe we can fully implement most of those programs. I talked about the management side. We are in the process of fully automating and digitizing our demand forecasting with AI, financial forecasting with AI.
All of our marketing plans, including how we schedule media, how we optimize media, is technology-enabled. That will only increase as data integration between retailers and retailer platforms and manufacturers takes place. There is enormous potential there to automate. Creative side, we use AI for concept development, concept ideas, concept verification, copy testing, content testing and optimization, image creation, video creation. Again, it is in its infancy. We have got a ton of runway on the creative side as well. R&D, consumer understanding is the third bucket I would give you. Molecular research is done with AI, which reduces the time we need to identify a specific property we want and find the right molecule to serve that property. Perfume development is done with AI today. I can only see this increasing the more data we have available.
We are one of the most data-rich companies, I would argue, in the sector. The biggest challenge in all of this, Dara, is data. Because a lot of the data is available, it needs to be structured, it needs to be fit for use. That is where we're heavily investing in terms of the underlying data infrastructure. As we employ more and more of those tools, it can be done with the full power of the underlying data that we have. I see significant upside. It's captured, I think, in Supply Chain 3.0 in a more consistent way. We're working to articulate this in a more constructive way with our technology leaders and with Paola, our Chief Technology Officer. We'll have that in one of our next presentations for you.
Okay. The other one thing I'd add is that Andre mentioned the importance of the structured data. We started the digging of our data lake well before six years, five, six years before anyone could spell ChatGPT. This is important because it gives us the chance to be a little further ahead, I think, in getting that data all in the lake and structured in a way that's more usable so we can apply these tools potentially faster and create some competitive advantage that way.
You asked about agentic AI and buying behavior. I think it's a very important development that we all need to understand. What would agents buy? How would they buy? What are the decision criteria? Most importantly, how do we feed into those decision criteria? That is active work that is going on. For me, that is not different than Amazon buttons or voice control Siri. It is a different path to purchase we need to understand. That is the work we are doing.
Great. We're coming up on a CEO transition here near term. There's always a chance under fresh leadership to reinvigorate the organization, right? Push certain points more aggressively despite the strong performance clearly under Jon's leadership. Just what are the points you're emphasizing the organization in terms of incremental opportunities going forward? Maybe for both of you, just any perspective on Shailesh's leadership and the path going forward.
He's listening, so. No. Look, I think it's Shailesh coming in will be exciting for the organization. Jon has left an enormous legacy for the company. Shailesh comes in with a different lens, which will be very helpful. Shailesh is a brand builder at heart. He firmly believes in the strategy. He firmly believes that the underlying strategy is exactly where we need to go. He's also clear that winning yesterday doesn't give us any guarantee that we can win today or win tomorrow. I think the first thing he impresses on the organization is urgency. Urgency to do exactly what we talked about earlier in the conversation. Urgency to start with the consumer and put the consumer firmly at the center of everything we do. Dig deep in consumer insights.
We spend every—and Shailesh and I have been traveling together for the last two years—every visit starts in a consumer home for two, three, four hours to really understand how the consumer is interacting with our products, what they are looking for, what are the friction points, and to educate the teams that that's where their work needs to start every day, not in the office, but in home with consumers. He has a high degree of intellectual discipline. When it comes to discussing whether a proposition is right for the consumer, will be winning in the market, will be winning versus competition, will meet our requirement to grow markets, there are two favorite questions he asks. One is why, and the second one is how do you know?
They can be pretty disarming in the conversation if you have not done your homework in a statistically and intellectually structured way. That is going to be powerful, I think, for the organization. He is very high on urgency. The next question he generally asks is why not faster? Those things, I think, just pressure, speed, focus on the consumer, discipline in terms of the core. One of his mantras is a bigger core, a more healthy core is the first thing we need to build. You cannot not fix the core. Job number one is make sure our core brands are healthy and winning. Yes, you need to have ideas that can grow over time, but those better be big. Do not get lost in small ideas. Do not get lost in flankers. Do not get lost in elements that over time will not make any difference.
He's very disciplined in that portfolio management. I think the last thing I'll leave you with, and then Chevy, you can jump in here. I think he's a great judge of talent, which will also be good. I am very happy for him to come in. I am very happy for Jon to have left the legacy that he has left. I think he will do great things.
The only things I would add is that Jon spent a ton of time as CFO and COO and as CEO ingraining this idea of the importance of balanced top and bottom line growth and the importance of driving market growth as a priority deeply into the organization. Shailesh is picking up right where Jon is handing the baton off. That to me is reassuring that we're not going to see wild divergence in strategy, but a real even more disciplined and urgent focus on execution.
Great. That's helpful. Maybe we can switch to capital allocation. There have been a number of large deals in the consumer space recently across CPG. Just in theory, I think there are more opportunities in a difficult top-line environment. We talked about muted category growth, particularly in the developed markets.
Just your thoughts around M&A appetite, how you think about the size of deals, bolt-ons versus larger deals. Really, as you think about the strategic lens for M&A, where are you most focused on opportunities, whether it's product categories, geographies, etc.?
We always want to be in a position where we do not need M&A to deliver the growth trajectory we want to deliver. I think that is still the case. The opportunities to drive household penetration in our categories, drive adoption, drive trade-up, more consumers, more use, and higher value jobs to be done is still enormous. That has not changed in enterprise markets. We see $10 billion-$15 billion of growth opportunity over the next five years there. We see $5 billion in the US by serving underserved consumers in our categories today, $10 billion in Europe. The growth trajectory that we are on is still sufficient for us to deliver algorithm over a rolling two to three-year basis for the foreseeable future. We never want to be in a position where we have to acquire to stipulate growth.
That said, we will always look at great opportunities for bolt-on acquisitions. The success we've had, not everything works, but Native has worked brilliantly, for example. We have a few other examples that haven't quite grown to that size yet, but they show the same ability to grow across categories and become billion-dollar brands. That's our primary focus. Find those $50 million-$150 million brands that we can scale, we can expand. They have a unique idea that we can build on in the categories that we are in. We are constrained. We can really only acquire materially in healthcare and in beauty care. That's where we're going to focus. We're in, I think, in a good position when it comes to any transformative deal would certainly come to us. We'll look at that.
If it comes at the right value with the right strategic alignment, we will certainly consider. It is not a core building block in our future growth.
Okay. How do you think about the brand portfolio when you look at acquisitions? What are you looking for? I know that's a broad sort of holistic question, but what really would drive value for Procter as you look at targets out there?
I think what drives value for us is we need to be sure the brand is built on performance. The brand is built on superiority and not on equity that is linked or lent from someone else, celebrities, salons, etc. We want to make sure it's a brand that can be built by improving its product performance, improving superiority across the vectors that we talk about. It has to be in a category where we can expand consumption, and it has to fit our activity and ecosystem and our strength. We have to be able to innovate within the capacities and capabilities we have and the go-to-market capabilities we have. When it comes to bigger acquisitions, we have to make sure that the majority of the brands meet those criteria. Otherwise, the tail is too much to deal with and too much complexity.
Right. Great. With that, we're out of time. I really appreciate you coming and attending the conference again. It was very helpful. Thank you, Derek.
Thank you. Appreciate it. Thanks.