The Procter & Gamble Company (PG) Q3 2023 Earnings Call Transcript

The Procter & Gamble Company  (NYSE: PG) Q3 2023 earnings call dated Apr. 21, 2023

Corporate Participants:

Andre Schulten — Chief Financial Officer

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Analysts:

Lauren Lieberman — Barclays — Analyst

Bryan Spillane — Bank of America — Analyst

Dara Mohsenian — Morgan Stanley — Analyst

Stephen Powers — Deutsche Bank — Analyst

Kevin Grundy — Jefferies — Analyst

Robert Ottenstein — Evercore ISI — Analyst

Peter Grom — UBS — Analyst

Andrea Teixeira — J.P. Morgan — Analyst

Filippo Falorni — Citi — Analyst

Olivia Tong — Raymond James — Analyst

Chris Carey — Wells Fargo Securities — Analyst

Jason English — Goldman Sachs — Analyst

Mark Astrachan — Stifel. — Analyst

Nik Modi — RBC Capital Markets — Analyst

Edward Lewis — Atlantic Equities — Analyst

Presentation:

Operator

Good morning, and welcome to Procter & Gamble’s Quarter End Conference Call. Today’s event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections.

As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and as posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures.

Now I will turn the call over to P&G’s, Chief Financial Officer, Andre Schulten.

Andre Schulten — Chief Financial Officer

Good morning, everyone. Joining me on the call today are Jon Moeller, Chairman of the Board, President and Chief Executive Officer, and John Chevalier, Senior Vice President, Investor Relations.

Execution of our integrated strategies drove strong results in the January to March quarter. Organic sales grew across all 10 categories in and in six out of seven regions. Global aggregate market share is holding steady, productivity savings are accelerating and enabling sustained investment in the superiority of our brands. In-market execution across all five vectors of superiority is strong and consistent, product, package, communication go-to-market and value.

Superior offerings continue to pay benefits for our consumers and retail partners and in-turn for P&G shareholders. Progress against our plan enables us to increase guidance for organic sales growth and cash return to shareowners, and to maintain guidance for core EPS growth and free cash flow productivity.

Moving to third quarter numbers. Organic sales grew more than 7%, pricing at a 10 points to sales growth and mix was a modest positive contributor for the quarter. Volume declined 3 points, including a 1 point headwind from portfolio reduction in Russia. Growth was broad-based across business units, with each of our 10 product categories growing organic sales. Feminine care was up low-teens. Personal Health Care, Home Care and Hair Care each grew double digits. Grooming, Oral Care and Fabric Care grew high-single-digits. Baby Care was up mid singles and Family Care and Skin and Personal Care grew low singles.

Growth was also broad-based across geographies with six of seven regions growing organic sales. Focus markets grew 5% for the quarter. Organic sales in the US were up 6%, including modest unit volume growth. Europe focus markets were up 8%. Greater China organic sales were up 2% versus prior year as the market begins to recover from COVID lockdowns and as consumer confidence improves. We continue to expect further recovery as consumer mobility increases over the coming quarters. Longer-term, we expect China to return to mid singles underlying market growth rates for our portfolio of categories.

Enterprise markets were up 15% with Latin America, up nearly 30% and Europe enterprise markets up low-teens. This is the fourth consecutive quarter in which all five sectors grew organic sales double-digits in enterprise markets. Global aggregate value share was in-line with prior year, with 30 of our top 50 category country combinations holding or growing share. Excluding Russia, global value share was up 20 basis points.

In the US, all outlet value share was up 40 basis points versus prior year with eight of 10 categories holding or growing share in the quarter. US volume share is up 90 basis points versus the prior year, driven by 2 points of absolute volume consumption growth in a market that is still down modestly versus prior year. Strong US share growth in Personal Care has been led by innovation on the Native brand in deodorants, as well as successful extension into body wash.

Cascade Platinum Plus has driven strong share growth in auto dishwashing and Dawn share continues to be up more than a point with ongoing leverage from the Powerwash an easy squeeze innovations. Vicks continues to be a growth leader in Personal Health Care and we’ve delivered strong share growth in the Metamucil and Pepto-Bismol brands.

In Europe, the new four chamber area of Platinum Plus are driving strong consumer demand in fabric care. [Indecipherable] is growing the Dish category and building market share in Homecare. The new Gillette [Indecipherable] razor male and female intimate Grooming innovations and cardboard packaging upgrades are driving strong growth in Grooming.

Moving to the bottom line, core earnings per share were $1.37, up 3% versus prior year. On a currency-neutral basis, core EPS increased 13%. Good progress as we saved $0.031 per share of cost in foreign exchange headwinds in the quarter. Core operating margin increased 40 basis points, at 150 basis points of gross margin expansion were partially offset by SG&A investments and inflation impacts. Currency-neutral core operating margin increased 160 basis points. Productivity improvements were at 290 basis points help to the quarter. Adjusted free cash flow productivity was at 92%.

We returned $3.6 billion of cash to shareowners, approximately $2.2 billion in dividends and $1.4 billion in share repurchase. Last week, we announced a 3% increase in our dividend, again reinforcing our commitment to return cash to shareowners. This is the 67th consecutive annual dividend increase and the 133rd consecutive year P&G has paid a dividend.

In summary, against what is still a challenging cost and operating environment, continued good results across topline, bottom line and cash for the third quarter. Our team continues to operate with excellence, executing the integrated strategies that have enabled strong results over the past four years and that are the foundation for balanced growth and value creation.

A portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. Ongoing commitment to and investment in irresistible superiority across the five vectors of product, package, brand communication, retail execution and value. We are again raising the bar on our superiority standards to reflect the dynamic nature of this strategy. Productivity improvements in all areas of operations to fund investments in superiority offset cost and currency challenges, expand margins and deliver strong cash generation. An approach of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future.

Finally, an organization that is increasingly more empowered, agile and accountable with little overlap or redundancy flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world. There are four areas we are driving to improve the execution of the integrated strategies, Supply Chain 3.0, digital acumen, environmental sustainability and employee value equation. These are not new or separate strategies. They are necessary elements in continuing to build superiority, reduce cost to enable investment and value creation creation and to further strengthen our organization.

Our strategic choices on portfolio, superiority, productivity, constructive disruption and organization are interdependent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales and profit. We continue to believe that the best path forward to deliver sustainable top and bottom line growth is to double down on these integrated strategies, starting with commitment to deliver irresistible superior propositions to consumers and retail partners.

Now moving to guidance. As we work towards the end of the fiscal year, we are cautiously optimistic. We remain confident in our strategies and the organization’s ability to execute them with excellence. We continue to expect more volatility in the macro and consumer environment and expect sustained pressure in costs and foreign exchange as we move forward. On the whole, our consumer markets remained relatively resilient with US and China volume trends improving, but with inflation pressures in Europe weighing more heavily on consumption.

We continue to think the strategies we’ve chosen, the investments we’ve made and the focus on executional excellence have positioned us well to manage through this volatility over time. Raw and packaging material costs inclusive of commodities and supplier inflation have largely stabilized over the last few months, but still remain a significant headwind versus last fiscal year. Based on current spot prices and latest contracts, we now estimate a $2.2 billion after-tax headwind in fiscal ’23. Foreign exchange is also a significant year-on-year headwind and rates since last quarter have moved modestly against us.

Based on current exchange rates, we now forecast a $1.3 billion after-tax impact to the fiscal year. Freight costs have moderated throughout the year and we now expect them to be roughly in-line with prior year. Combined headwinds from these items are now estimated at approximately $3.5 billion after tax, or a $.40 per share, a 24 percentage point headwind to EPS for the year. In addition to these impacts, we are also facing higher inflation in wages and benefits and higher year-on-year net interest expense. We are offsetting a portion of these cost headwinds with price increases and productivity savings. We are continuing to invest in irresistible superiority and we are investing to improve our supply capacity, resilience and flexibility.

As noted in the outset, our strong results over the first three quarters have enabled us to raise our organic sales outlook and confirm our guidance ranges on EPS and cash. We are increasing our guidance for organic sales growth from a range of 4% to 5% to approximately 6% for the fiscal year. This will put fiscal ’23 in-line with 6% topline growth we’ve averaged over the last four years, which were 5%, 6%, 6%, and 7% from fiscal ’19 through 2022, respectively.

On the bottom line, we’re maintaining our outlook of core earnings per share growth in the range of in-line to plus 4% versus prior year. Significant headwinds from input costs and foreign exchange keep our current expectations towards the lower end of this range. This guidance also reflects our intent to remain fully invested to drive our superiority strategy and increase investments as we value create — as value creating opportunities are available.

We continue to forecast adjusted free cash flow productivity of 90%. We now expect to pay nearly $9 billion in dividends and to repurchase $7.4 billion to $8 billion in common stock. Combined, a plan to return $16 billion to $17 billion of cash to shareowners this fiscal year. This outlook is based on current market growth estimates, commodity prices and foreign exchange rates. Significant additional currency weakness, commodity cost increases, geopolitical disruption, major production stoppages or store closures are not anticipated within this guidance range.

To conclude, we continue to face highly volatile consumer and market dynamics. We also continue to see high year-over-year input costs, inflation in the upstream supply chain and in our own operations. Headwinds from foreign exchange, geopolitical issues and historically high inflation impacting consumer budgets.

As we’ve said before, we believe this is a rough patch to grow through, not the reason to reduce investment in the long-term health of our business. We’re doubling down on the strategy that has been working well and is delivering strong results. We continue to step forward. We remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments, mitigate input cost challenges and to deliver balanced top and bottom line growth.

With that, we’d be happy to take your questions.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Lauren Lieberman of Barclays. Please go ahead.

Lauren Lieberman — Barclays — Analyst

Great, thanks. Good morning, everyone. I wanted to talk a bit about about productivity, because over the last two and half, three years during the pandemic and all the global supply chain challenges, productivity was something that understandably took a backseat. And then this quarter really seemed as significant change in what you’ve been able to realize. So I was curious if there is — we should be thinking about productivity is something where there is like a catch-up, where there’s sort of projects that have been on the listings, you’re able to get out to the productivity could run at an elevated rate going forward. And it’s also interesting I think in the context of marketing, how you’ve been so consistent in investing throughout, there’s actually no catch up on the marketing piece, no need to accelerate reinvestment per se, but maybe some — so again acceleration on the productivity side. So I’ll be curious to hear about that. Thanks.

Andre Schulten — Chief Financial Officer

Great. Good morning, Lauren. I think what as you said, we are catching up right now to return to growth savings levels that are equal or close to equal to those that we’ve delivered pre COVID. We have more line capacity available for us to qualify cost savings, more mind space of our teams to be able to identify new opportunities. And as we are able to engage suppliers and get through this inflationary period, hopefully more ideation and new projects to be created as well.

As we’ve talked on our Investor Day, we see runway on productivity for the next few years driven by Supply Chain 3.0. We have talked about delivering about $1.5 billion of savings with those initiatives between automation and digital capabilities. And we continue to believe that we can generate between $400 million to $500 million a year from media programmatic savings both in terms of scheduling and buying capabilities around the world. Those programs will hold productivity, in my estimation close to pre COVID levels, which will allow us to continue to reinvest in media, which will allow us to fund innovation and superiority. And that is really the intent of the model. So to answer your question directly, I would not expect a disproportionate catch up, but I would expect a steady return to pre COVID levels of net structural savings both across cost and media.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

I agree.

Operator

The next question comes from Bryan Spillane of Bank of America. Please go ahead.

Bryan Spillane — Bank of America — Analyst

Thanks, operator. Good morning, everyone. I actually had just one clarification and then a question. Clarification, on the $125 million of I guess incremental interest expense, can you just give us a little bit more color on that? And again is that something we need to kind of contemplate in our models as even we look past the fourth quarter? So I guess this net interest expense going up.

Andre Schulten — Chief Financial Officer

Yeah. Good morning, Bryan. Yes. I mean, obviously it is, right? Markets are — markets are getting more expensive in terms of credit and we are not — we are not immune to that. So the $135 million BT we’ve quoted for this year, I would expect the trend to continue to go up into next year.

Now, we are still well-positioned relative to peer group because we are able to borrow not only in the US, but also in euro and Pounds and in Yen. So that keeps us very competitive. But nevertheless, we’re not — we’re not immune to those increases so they will continue to go up into next year.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

And just one piece of perspective there Bryan, this is Jon. We’ve understandably because it’s been the primary driver of cost increases, focused our discussion on commodities. But that’s not the only cost increase that we’re seeing. We’ve just talked about interest expense. Andre mentioned in his prepared remarks wages and benefits, which continue to increase. So I would just encourage us all to gain confidence from what’s happened here. But to realize that there are still, as Andre said, many headwinds that we’re working against and we’ll continue to work against as we move forward through the next fiscal year.

Operator

The next question comes from Dara Mohsenian of Morgan Stanley. Please go ahead.

Dara Mohsenian — Morgan Stanley — Analyst

Hey guys, can you hear me.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Yeah, we can.

Dara Mohsenian — Morgan Stanley — Analyst

So on the gross margin side you were up significantly year-over-year in the quarter for the first time in a couple of years. Obviously, some nice sequential progress with outsized cost savings and the strong pricing. But also your full year commodity assumptions and freight assumptions are bit better than they were previously. So just wanted to get a sense if we start to see this sustained improving gross margin environment, what’s your perspective on the bias to sort of reinvest that upside back into marketing versus let it drop to the bottom line this quarter, obviously with the magnitude of gross profit upside you can do both, but just wanted to get a sense on how you think about that going forward?

And if I can slip in the second part. Are you comfortable you’re getting a strong ROI on the higher ad spend, presumably, obviously you did this quarter, but how do you think about that going forward and sort of ROI on any spend that may be opportune or incremental to what you originally expected?

Andre Schulten — Chief Financial Officer

Good morning, Dara. We would expect progress on the gross margin side. Actually, we’re encouraged by the productivity numbers that have helped us on top of pricing to deliver the first modest increase in gross margin after a very long period of heavy cost headwinds impacting us to the negative side. And as we’ve done this quarter, we will continue to look for value creating opportunities to reinvest. We firmly believe the reason why we are able to grow the topline at the range we are growing, the reason why we are able to hold volume share and value share globally in a very tough environment is because of our superiority-driven innovation across product, package, communication and retail execution.

And we believe that as pricing goes into the market and the consumer is even more, I think sensitive towards the value equation that they are being offered, continued investment across all of those vectors is going to create value and serve us well going forward. So we will maintain the flexibility to do so, but we will do it in a disciplined and in a very ROI — ROI-driven as you say.

As to your second part of the question, as ad spending becomes more efficient with our ability to in-house both scheduling and buying of media, more digital capability to be more targeted, that increases the ROI of every dollar we can spend. So, it actually makes investment in media spending more attractive.

At the end of the day, we will maintain the concept of balance between topline growth, bottom line growth and cash generation to stick with our ongoing growth model and value creation model.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Just building on Andre is points which I fully agree with, I want to come back to this notion of balance and our commitment to it. Some of you have heard me talk about this probably many times, but it’s worth repeating so you understand how we’re thinking about things. We have a chart that we use with the leadership team every time we gather, which shows what you would have to believe to deliver top total shareholder return, which is our objective entirely through the top line or entirely through the bottom line. And to do it entirely through the top line, you’d have to assume that we can grow 8% from an organic sales standpoint each and every quarter, which is in our view unrealistic. If you try to do it entirely through the bottom line, you’d have to assume that you could expand margins 180 basis points per year.

So five years 10 margin points and a highly competitive industry where it’s taken us a 187 years to build 22 margin points, equally unlikely. So we are very committed to driving both topline and bottom line. It’s the only way we see to get home. I have a trait little saying that we use on occasion, which is topline with no bottom line a waste of time. Bottom line with no topline just a matter of time. We’re going to continue to operate in that vein. And if we’re successful, you’ll see topline growth driven by proper levels of investment and bottom line growth and margin expansion — modest margin expansion. One last thing on the point of advertising rate of return or ROI. In addition to what Andre was talking about, we simply have, though it may be hard to believe, a lot of low-hanging fruit that’s out there.

We have many categories where we are not at our target levels of reach. And that’s very high ROI activity when we can reduce waste and frequency, reinvest that into expanded reach. Very good things happen as you’ve seen, by the way not just this quarter but for the last four years and there’s no reason to change that approach at this point in time.

Operator

The next question comes from Steve Powers of Deutsche Bank. Please go ahead.

Stephen Powers — Deutsche Bank — Analyst

Hey, thanks, and good morning. So overall volume this quarter came in roughly in-line at least with our our expectations, but both price and mix delivered upside, which I think implies just better structural after season your are expecting. And I guess the question is, as as you balance everything just your relative confidence that, that can continue. On the one hand you have some tailwinds for sure that as China comes back and service levels seem to be improving, your reinvestment rate is admirable as as we’ve been talking about, but there’s obviously uncertainties out there. And so I guess, maybe just a little bit of perspective on your overall confidence and where that confidence is more versus less elevated?

Andre Schulten — Chief Financial Officer

Good morning, Steve. I’ll try a careful balance here between giving you a perspective on the global basis and not letting you get ahead of yourself in terms of expectations, but the volume decline is better than we would have expected as you said. Our elasticities remain favorable on an aggregate basis. And if you look at global markets, we actually see a volume consumption stabilizing.

So you would have seen in previous quarters global volumes across our categories down roughly 3 to 4 points. In our most recent read which is the past one month, volumes actually down 70 basis points. This is market volume. And if you exclude Russia, probably more around flat. That’s with China returning to some level of growth and it’s also with pricing moving into the base. So we’ll see as pricing becomes more annualized, we’ll see that stabilization. I don’t know if it’s going to continue to neutral — to be neutral. I would expect some level of negativity in terms of overall market volumes, but certainly improving sequentially.

Within that, I think we’re taking comfort in the fact that we are able to hold global volume share and global value share despite significant pricing that we’ve taken, which has enabled, as we said, we believe by our superiority strategy a strong vertical portfolio both tiers and price points and being present in all channels where consumers want to shop.

In our biggest most important market as we had in our prepared remarks, we were able to grow volume and volume share by 90 basis points over the past three months. So that’s the positive side. On the negative side, Europe continues to be a higher pressure environment. We’ve been able to grow sales 8% in focus markets. But that it was a very strong pricing contribution with negative volumes in the range of 7%. And the European consumer is trading into private label. We see the price differential between private label and branded competitors increasing as private label is delaying price increases.

The consumer continues to be under pressure there. So that’s going to be a continued headwind I think from the volume side. Overall, I think our outlook is balanced. We — as we said, we expect market growth to return to 3% to 4% on the value side and there has to be a positive volume component to that going forward, but it will take a few quarters before we get there.

Operator

The next question comes from Kevin Grundy of Jefferies. Please go ahead.

Kevin Grundy — Jefferies — Analyst

Great, thanks. Good morning everyone and congratulations on another strong set of results. I thought maybe we could spend — spend a moment on China and the reopening there, of course, given the importance of that market for you guys to being the second largest market behind only the US. So up 2% sequential improvement which is encouraging. We see that in the China retail sales, including cosmetics continues to show sequential progress. You’ve been consistent about your target of mid single-digit growth for that market longer-term. However, it also seems possible that you potentially see that level of growth at least in the intermediate term here given easier year-over-year comps and then maybe the potential for some inventory rebalancing at retail, as consumer demand improves.

Can you comment a bit more on what you’re seeing in China? And then perhaps offer some broader views on the pace of the recovery and how you see that playing out? Thank you.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Hey Kevin, this is Jon. I’ll hand it over to Andre to give some more numerical perspective, but I thought it might help just to share briefly the trip that myself and a large contingent of our leadership team were able to make the China in the last three weeks. We spent more than a week there. It was wonderful to reconnect with our organizations who are doing a tremendous job. We spent time in consumer homes. We spent time with our retail partner leaders in their stores and their offices, and of course, we spent time with various government authorities. And without getting into all the details, the bottom line conclusion was very positive one and much more than I was expecting even. And I’m kind of a China fan, having worked there many years ago, having lived there. So my expectations already started high and those were exceeded.

Having said that, and we talked about this on the last call. This is not going to be a vertical restart and there will be a number of twists and turns, including some of the ones that you’ve mentioned along the way. As Andre said in his prepared remarks, we expect China to continue to contribute at a meaningful level over the middle to long-term. But, yeah, everything looks reasonably positive and constructive. Andre, do you have any other perspective on that?

Andre Schulten — Chief Financial Officer

No. I think you said it. I think the other — the other component we’re not yet seeing is any return of Chinese consumers to trouble retail. That is a significant negative for us in the SK-II business specifically. So that hopefully we see a more positive trend there in the near future. That’s the only other upside that I think we have. But as Jon said, I think the recovery of 2% organic sales in the quarter is very consistent with what we would have expected.

Operator

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

Robert Ottenstein — Evercore ISI — Analyst

Great. Thank you very much. Just a quick follow-up on, or clarification on some of the numbers and then my real question. So that the clarification is, I think you mentioned that mix is a positive impact on sales, but it was a slight negative drag on the gross margins. Just like to understand that? And then my focus question really is, if you could go into more detail on the US business and the US consumer, you mentioned that you saw an improving US consumers, so any kind of clarification around that and then an update on your pricing in the US. How much you saw in the quarter, how much more is there to go in the next quarter? And any kind of impact that you’re seeing? Or any granularity on that would be appreciated. Thank you.

Andre Schulten — Chief Financial Officer

Good morning, Robert. On the gross margin and sales connection here from a mix perspective, the effect that you’re seeing here is product mix. So consumers when they come into our P&G portfolio tend to trade up into higher value items. We’ve seen that actually consistently over the past quarters. So that as they trade up into higher unit sales, that’s a positive impact from a mix perspective on the topline. But those higher unit sales items have also have higher unit profit, but the gross margin in percentage is slightly lower for some of them. When you think about adult incontinence, for example, when do you think about Fabric Care, a single unit dose was liquid detergent. Gross margin percentage lower, unit sales higher, unit profit higher. So it’s a positive effect both from the topline and the bottom line standpoint, but the percentage mix is lower.

US consumer I think is holding up well. As we said, any indication that we see on our business is that the consumer is still choosing P&G brands. We are growing volume share in a market that is still down on volume. We are growing absolute volume. So 90 basis points volume share goes 40 basis points value share growth, fairly consistently across periods. We also see private label share stable at 16%, really no movement here over the past one, three, six, nine months, which is a good indication that we don’t see any material — material trade down.

Now we’re watching this very closely. And we believe that a lot of that is again driven by our very intentional strategy to drive superiority, we continue to invest in innovation, we continue to invest in product packaging innovation. We are increasing, as Jon said, communication frequency and reach, where we see a good payout and return. Continue to work with our retail partners to ensure that the presentation of our brands online and in-store is as good as it can be.

Last element I would call out is, we are stable in terms of supply and on-shelf availability, which is also helping our overall position in the market. So stable I think as the characterization, but we’re watching carefully.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

And just one additional point, the 6% topline organic sales growth the team delivered in the quarter. And as Andre said, sales share — value share growth and volume share growth. We still have a couple of categories where we are not supplying in full demand. So that’ll be remedied here fairly quickly. But as you consider the strength of the US consumer, if you look at those key measures and realize that there — while there are both opportunities and risks within the number, there are opportunities as well as risks which continue to point to a relatively healthy US consumption pattern.

Operator

The next question comes from Peter Grom of UBS. Please go ahead.

Peter Grom — UBS — Analyst

Thanks, operator, and good morning, everyone. So I wanted to ask you about the changes in the commodity and freight outlook. Second straight quarter that these headwinds that have moved lower, which is nice to see. Can you maybe just give a sense of what you’re seeing within that bucket, where are cost moving lower, where are costs still sticky? And while I don’t expect you to comment on ’24 at this point, but maybe just conceptually how you see inflation evolving as you look out over the next 12 to 18 months? Thanks.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Good morning, Peter. Freight is relatively stable at this point in time as we’ve mentioned in the prepared remarks. We expect our freight and transportation and warehousing costs to be roughly in line with prior year. And I think that is a reflection of a more balanced capacity situation with a driver to load ratio returning to I think more historical norms. Again, given fuel prices on all other dynamics, I wouldn’t expect any major change going forward, but we’re at least stable.

From a commodity basket standpoint, we continue to see a mixed bag. We have some help in resin-based commodities. We have some help in pulp, though that is moderated by mill shutdowns for maintenance, both planned and unplanned. But on the other side, all our high energy, use such materials. And when you think about caustic soda and think about ammonia, all of those are increase in pricing. So the moderation is really limited and it’s not consistent across the basket. So $100 million after-tax is the only thing we’re seeing at this point in time.

We also continue to see upstream in the supply chain. Our suppliers continue to try to recover their input cost increases. They are labor inflation. And that continues to be a discussion that is ongoing. I think as we mentioned in CAGNY, some of those contracts rollover 12 months, 18 months. So this these headwinds and these discussions will continue to be with us. Overall, we’re expecting as we always do, spot rates will hold on. That’s what’s based and underlying our planning for next year and our guidance for this year.

Operator

The next question comes from Andrea Teixeira of J.P. Morgan. Please go ahead.

Andrea Teixeira — J.P. Morgan — Analyst

Thank you, good morning. So how should we think about the upside in beauty, and both you Jon and Andre spoke briefly about travel retail being an upside in Asia. How should we be thinking also on the other side lapping the triple pandemic and the respiratory benefit you had in healthcare. It seems you could benefit from digestive recently, but how should we be thinking about the other segments? And as we, just a clarification, as we put in and embedded organic in the fourth quarter is a 4%, but it seems as if you are, as Andre commented the exit rate on your volume is potentially flat. Bear in mind, of course, the potential risk in Europe. But should we be thinking more of a better quality in terms of the delivery in organic? So even though it would be a 300 basis points acceleration on a sequential basis, you would still have better volumes, may be flattish to maybe only slightly down and a 4% price price component in there. Thank you so much.

Andre Schulten — Chief Financial Officer

Hey, Andrea. On the — on the category-specific questions, yes we SK-II as a potential beneficiary of travel retail reopening. Overall, SK-II is recovering well outside of that channel. In China Mainland we saw 8% growth in the quarter. In Japan we saw 46% growth in the quarter, but the overall results are still held back by travel retail. So I think we will see a sequential improvement. But there are many gives and takes in that overall Beauty Care sector. So that needs to be seen in context with a lot of other dynamics that are going on around the world.

On the personal Health Care side, we continue to be very pleased with the results. The team is delivering there. And we see sustained growth in this space across respiratory digestive, nerve care. There are many parts of that portfolio that have very high growth potential. And in some of these areas as we’ve talked before, we’re still held back by supply constraints which might provide upside in the future. But again, we have a combination of 10 categories across multiple markets. Some of them will do well in a period of time, some of them will be held back by negative headwinds. So we continue to strive for a balanced top and bottom line growth picture. It will be driven by different parts of the portfolio of different types.

From a volume versus price component standpoint, what is important to understand is quarter four we will start to lap price increases for the first time. So we had about 8% of pricing in the base, so that will be a negative headwind to the topline growth in quarter four. And while we see stabilization of volumes, I would — I would expect that there still will be negative volume component to the growth in the near future.

We have still Russia portfolio being with us as a negative headwind, China slowly recovering, but not yet in positive territory from a volume perspective. And as I mentioned earlier, the European consumers under a lot of pressure with private label pricing, not yet following the branded competition in those markets. So pricing will come into the base that will be a headwind to the topline. I would expect is still a negative volume component in quarter four.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Yeah. One thing to remember too is that we’ve just taken pricing in both the US and Europe. And I don’t think that the data for the current quarter reflects a potential volume impact from some of that pricing. So I would be looking at volume recovery — volume to slowly improve overtime, but it won’t — it won’t happen overnight.

Operator

The next question comes from Filippo Falorni of Citi. Please go ahead.

Filippo Falorni — Citi — Analyst

Hey, good morning everyone. Thanks for your question. Jon, clearly you’ve gone through a lot of transformation over the past five-six years of the company, both from a portfolio standpoint, organizational standpoint superiority. Can you help us understand how you think internally these changes can help you navigate a potentially weaker consumer environment, if what we’re seeing in Europe were to expand into the US and some other parts of the world? Thank you.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Sure. And Andre may have some thoughts here as well. The — What I really like about the strategic choices that we’ve made and the approach that we’re taking currently is that it is the strongest approach I can think of for a very healthy economic environment or a very difficult economic environment, the indicated actions don’t change.

So think for example about our embedding in productivity is a fundamental part of our DNA. But that’s something that serves us very well in a positive economic environment as critical and a downward economics environment. The importance of superiority to consumers in categories where performance drives brand choice, critical and both a good economic environment and a difficult economic environment.

Focus of the portfolio on daily use categories where performance drives brand choice and superiority within each of those categories across product package communication, go-to-market and value for consumers and customers. I just — I don’t see anything in that, that I would change if we have — obviously, tactically there’ll be some different decisions on the margin, but the broad underlying approach sets us up very well even if, or particularly if we end up in a more difficult environment.

Operator

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

Olivia Tong — Raymond James — Analyst

Great, thanks, good morning. I wanted to follow-up on pricing, particularly on the new pricing, whether, you know, your view in terms of elasticities relative to previous rounds of pricing whether they’ve changed or stay similar to what you’ve seen already? And to the extent that you can draw some conclusions on markets where pricing is now starting to lap versus market where you’re still rolling out price hikes, can you just compare and contrast what you’re seeing especially since you’re starting to see some modest volume growth in the US? Thanks.

Andre Schulten — Chief Financial Officer

Good morning, Olivia. The most recent round of pricing have gone into effect just in February and March across, and I’m calling out across Europe and US because of somewhat visible. So it’s hard for us, as Jon said to determine what the outgoing elasticities are at this point in time. What I can tell you is that elasticities remain stable, remain favorable. And I think it is — it is also a function of continued investment. It is a function of continued innovation. Every price increase or most price increases are connected to innovation — meaningful innovation for the consumer that also guarantees retail support. They are linked to strong value communication.

We’ve talked about area of cold water, tight cold water. [Indecipherable] value communication. And that is meaningful for consumers as they come under pressure. Many of our categories are categories where the consumer doesn’t want to risk failure. You don’t want to wash your clothes twice and you certainly don’t want to deal with the diaper failure. So all of that I think is helping us to maintain favorable elasticities across the — across the board.

The most important insight for us is and that’s what you see us do in Q3, we need to continue that investment. We need to look for opportunities where our value is exposed and I’ll call out Europe as an example because of private label pricing at a lower pace than the branded competitive set. It is critically important that we maintain that investment level to maintain the value equation.

Where we see pricing lapping or I think where we have the strongest portfolio and the strongest execution in terms of innovation and superiority, we see favorable results and the US is a good example of that. Excellent in-market execution by the team compared with a truly strong portfolio and strong innovation is delivering both relatively strong results to the balance of market, but also is driving market growth and recovery.

Operator

The next question comes from Chris Carey of Wells Fargo Securities. Please go ahead.

Chris Carey — Wells Fargo Securities — Analyst

Hi, good morning. Can you just talk about your playbook in Europe. You’ve noted European private label is delaying price increases a number of times on this call. We’ve heard similar commentary from others and people. If price gaps to private label remain wide, do you simply accept that new level or you need — do you need to do something about it to be a bit more offensive to close the gap? And I guess I say it in the context of Europe, of course, but also as a — a bit of a litmus test for price competition that compares globally and of course had, and just how you think about managing through that type of dynamic? Thanks so much.

Andre Schulten — Chief Financial Officer

Yeah, I’ll start Chris and then I’m sure Jon will add. I think the team is accepting the reality of an extended or expanded price gap versus private label as the challenge they need to deal with. And as Jon frequently says, we wake up every Monday morning and deal with the reality in front of us. This is a reality we need to deal with.

So, what that means is we need to create innovation. We need to create product and packaging innovation, communication strategies and in-market execution that are able to provide value to consumers and retailers. And that’s what we’re focused on. I don’t think that trying to eliminate the price differential is a meaningful and helpful strategy for us. But if we can generate growth via innovation and via superiority, that’s both helpful for us in the market and the path forward we’re choosing.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

I couldn’t agree more. And frankly, while Andre rightly points to a difficult consumer environment. If you look at our results thus far in Europe, they are very encouraging, not just in the last quarter but through last fiscal year as well. We’re achieving growth rates in Europe that are higher than we’ve seen in a long-time.

And so now is not the time to back-off, its the time to move forward and strengthen the execution just as Andre described. That doesn’t mean we have our heads in the sand. We’ve made several adjustments to price gap’s not just versus private label, but versus branded competition as we’ve gone through this period of pricing and we need to continue to be sensitive to that. But first and foremost, we need to delight consumers and customers the offerings that we’re bringing to market and go from there.

Operator

The next question comes from Jason English of Goldman Sachs. Please go ahead.

Jason English — Goldman Sachs — Analyst

Hey, good morning folks. Thanks for slotting me in and congrats on the strong results. Couple of quick questions. So, first on pricing. Can you give us a little more quantification on perhaps breadth and magnitude and when you blend it all together, what sort of order of magnitude should we expect the consolidated level in terms of organic sales contribution going forward?

And then secondly SG&A, want to see the reinvestment back in the business but really sharp sequential change both in terms of year-on-year for overall SG&A and just sequential dollar step up. Can you unpack a bit more kind of where the money is? What’s — where the extra investment is going?

Andre Schulten — Chief Financial Officer

Yeah. Good morning, Jason. Pricing magnitude, the latest round of pricing is fairly consistent with what you would have seen in the past, but it’s very tailored to the market as we said before. Mid single digits I think as the ballpark I would give you for the latest increase. And I think pricing over-time will move back to be a contributor to topline, but not the sole contributor to topline. So we need, and the market needs to find a balance here over the next few quarters to return to modest volume growth and pricing contribution to return these categories to mid single-digit growth. That’s what we’re working towards.

On the SG&A line. Look, a lot of our reinvestment is driven by innovation timing, so when are the right initiatives in market to double down on. They are driven by pricing, timing. So when we and can we support our brands as we take pricing and drive innovation. What I would tell you is the latest push we had as a management team to our earlier discussion was to really double click on our sufficiency in Europe, and to see how high is up, what — how hard can we push especially the media and communication side in terms of value communication across Europe. So that’s the one area I would give you where we paid a lot of attention over the last three, four months.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

I would just add one thing. It’s our category leaders that determine the level of investments that we’re making at any point in time. And prior to this quarter, but just as you go back in time, there were more situations where we weren’t able to fully supply demand and obviously those are — those are situations that you continue to invest in mental awareness and, but not spike that investment because you can’t supply it. And as we get into an increasingly better supply environment as we did in the last quarter, you resume a level of spending, now that you can fully support it. So that’s a part of the dynamic, in addition to the dynamic that Andre described.

Operator

The next question comes from Mark Astrachan of Stifel. Please go ahead.

Mark Astrachan — Stifel. — Analyst

Yeah. Thanks and good morning everyone. Wanted to ask sort of related to per question more about US, but I suppose you could — you could talk globally if relevant. How sticky do you think this strategy of irresistible superiority is in terms of volumes? Obviously, we see that you’re gaining share if you look at the US. So you’re effectively trading consumers to higher value products that work better than pure sets, right? So it would suggest then there is a stickiness here that perhaps didn’t exist in kind of prior cycles. So I’ll be curious how you think about that and how it flows through from a volume standpoint going forward?

And related to that on just the volumes, what’s your best guess as to why volumes are down from a consumer standpoint? Is it pantry destocking on loading? Does that imply that there potentially is reloading at a later time if and when consumer sentiment improves? Thanks

Andre Schulten — Chief Financial Officer

Hey, Mark, I’ll take the first crack. I think the concept of irresistible superiority is; A, dynamic and must be dynamic. And B, is relevant across value tiers. So as consumers get more careful with their spending, for example, that just means we need to double down on our view of what’s superiority in some of our lower value tiers means. So you think about diapers in the US, for example. We have Luvs which is about half the price of a [Indecipherable] diaper. And that means that we need innovation on Luvs because we’re now competing with private label and we need to make sure as consumers look for value, that brand can stand on its own from a product, packaging, communication and retail execution standpoint to provide value to those consumers.

So it’s really not a strategy that by default drives trade up. It’s a strategy that follows the consumer and is grounded in what the consumer needs and wants over time. So if we get more stress, that just means we need to double click on the type of innovation and investments we need.

From a consumption standpoint, as pricing goes into the market, we generally see consumers reacting with what you’ve described. If there are pantry inventories available, they for a period of time drawdown those inventories. And recall coming out of the pandemic, I think Jon mentioned this earlier, there were increased pantry inventories available across multiple categories. So I think that’s part of the effect that we’ve seen. I wouldn’t expect any major restocking because I think we’re just returning to more normal levels as supply stabilize, is kind of the — the COVID pandemic goes more into the past, I think consumers return to the normal behaviors.

The other element we’re seeing is more careful usage. You know if you are overall made aware of inflation in everyday media, every day you look twice before you use another paper towel, etc. And partially that’s part of our value communication, right? When we talk about Charmin rollback, because the product is more absorbent and has more strength, we explicitly talk about the ability for consumers to use less. So it’s really driven in those elements.

Again I think the job that we have as market leaders in many of our categories is to drive volume growth back to sustainable levels, and there are many levers. We still have huge household penetration opportunities around the world in many of our categories. We can create new usage occasions, create regimen use across many of our categories. So those are the things we’re focused on.

Operator

The next question comes from Nik Modi of RBC Capital Markets. Please go ahead.

Nik Modi — RBC Capital Markets — Analyst

Yeah. Thank you. Good morning, everyone. I just wanted to follow-up quickly on China. Jon, maybe just given that you were there recently, just on the ground consumer behavioral insights, like what are they going through right now? Are they just hesitating? And it’s kind of like a choppy, hey maybe I’ll checkout outside and see if I get sick. I mean, just any perspective on kind of how the consumer is actually behaving on the ground?

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Yeah, you can imagine with what many of them have been through, there’s a bit of a whiplash aspect to — for three years I was told that going outside was dangerous and now I’ve been encouraged to reemerge. I’m probably in a relatively small dwelling, many times with multi generations. And I don’t want to negatively impact my family. So there is a degree of hesitance and questioning. On the same time, there is an overwhelming feeling, at least as I experienced that of liberation, of hope. And was in Beijing one sunny Saturday afternoon and the streets were packed. It was absolutely wonderful and joyous. So I continue to hold on and believe in the mid and long-term opportunities that China presents us with. It’s certainly, you know, plus 2 is a lot better than a negative number that we had in the last couple of quarters. So there is clear improvement. But I think it’ll be a little bit choppy. And all it will take is a little bit of nervousness to to stop the reacceleration of the growth. But I would, I would my takeaway, Nik, is a positive one, but with near-term caution.

Operator

Our final question comes from Edward Lewis of Atlantic Equities. Please go ahead.

Edward Lewis — Atlantic Equities — Analyst

Yes, thanks very much. I guess I’d just cover a little ground, but I’d be interested just on the enterprise market performance. Just looking in particular Latin America, I think you said, Andre 30% growth this quarter and I think that would be an acceleration around 20% in the first half, presumably there’s a healthy enterprise behind that, but would just be interested to hear what’s driving this improved performance in that region?

Andre Schulten — Chief Financial Officer

There is a — there is a very healthy element of pricing there, like in every other region because we’re pricing not only for commodities but we’re also pricing for foreign exchange rate exposure in all of these markets. I think the positive effect is the volume is holding much better than in some of our focus markets. The consumer strength is there.

I think the overall strength of the brands is better than we’ve ever seen. In-market execution is better than we’ve ever seen. Retail partnerships are better than we’ve ever seen. So all of that I think is contributing to a strong price component with a positive volume component and that drives the 30% results in Latin America.

Jon R. Moeller — Chairman of the Board, President and Chief Executive Officer

Yeah, just for perspective, in our two largest markets in Latin America, Brazil and Mexico, as Andre said, we’re seeing volumes high single-digit. So I don’t want you to take away that all of sales growth as Andre has already said is pricing. It’s a healthy combination. And I also need to give a nod to the team in Latin America who’s just doing a fantastic job.

Listen, I want to close up with just a couple comments and reflections. And the first relates to what we’ve been through and what I think it portends for the future and then I’ll come in and talk a little bit more about the quarter that we just completed.

But if we’d had a conversation three or four years ago and you told me, look, here’s what’s going to happen, we’re going to have this thing called a global pandemic, people are going to die, borders are going to be closed, you aren’t going to be able to get to your largest markets and they aren’t going to be able to get to you, you’re gonna have difficulty getting your colleagues into manufacturing facilities, innovation centers. sales offices. But don’t worry that’s not all. We’ll have the largest land war in Europe since World War II.

The combination of foreign exchange and commodity cost inflation is going to wipe out half year earnings. You’re going to see dramatic channel shift in some of your largest markets in terms of where consumers are doing their shopping. And when all that’s over, you’re going to find that’s it difficult to get people to come back to work. How do you think you’re going to do? And my answer to that three or four years ago would be that while. So do you think you can grow topline, bottom line, deliver cash and return that to shareholders through all that.

Without taking you through the details which you know very well, that’s exactly what this team has done. Over the four years that ended, last fiscal year they created $13 billion in incremental sales, $5 billion in incremental profit. Now if you bring that forward and look at what happened, what they accomplished in the last quarter. Broad-based sales growth, sequential progress in shipment volume, value share, volume share, return to gross margin expansion, strong productivity savings, at the same time healthy reinvestment in the topline and advancing our level of superiority, our margin of difference, end-market growth in household penetration. If those are the kinds of things our investors want to see, they are there in spades in the quarter that we just delivered.

Last point I promise, but we’ve talked several times, both Andre and I about the challenges ahead and they are real. We will continue trying our level best to do — to serve consumers, customers, each other society and clearly shareowners. But it’s going to be just as it has been a bit choppy. And, but we’re taking a long-term approach here. And if there are choices that are right for the long-term that cause bottom line difficulty in the near-term, we’re going to make those choices. And we’ll talk more about that as we approach guidance for for next year.

But if you’re thinking across mid and longer periods of time, I think we’ve got a great setup here, a great strategy, a great set of capabilities that should enable us to serve all those constituents that I mentioned very effectively, but we’re thinking about that in years, not quarters. Thank you very much.

Operator

[Operator Closing Remarks]