管理層發言
Good morning, and welcome to Procter & Gamble's quarter end conference call. Today's event is being recorded for replay. This discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Chief Financial Officer, Andre Schulten.
Good morning, everyone. Joining me on the call today are John Chevalier and Keri Cohen, our Senior Vice President of Investor Relations. I will start with an overview of results for the third quarter of fiscal '26 and then discuss our progress on near-term business interventions and longer-term transformation efforts. I'll close with guidance for fiscal '26 and then we'll take your questions. As we expected, we saw a solid acceleration in top line results in our fiscal third quarter. Bottom line results reflect the strength of the top line progress with partial offsets from incremental investments in the business and energy cost impacts from the conflict in the Middle East. Taken together, we remain on track to deliver within our guidance ranges for the fiscal year. Organic sales increased more than 3% versus the prior year. Volume increased 2 points, pricing was up 1 point and mix was flat for the quarter.
We delivered broad-based growth across the business with each of our 10 product categories growing organic sales. Skin and Personal Care grew organic sales high single digits. Hair Care, Family Care and Home Care grew mid-single, Personal Health Care, Oral Care, Fabric Care, Baby Care, Feminine Care and Grooming each grew low single digits. Growth was also broad-based geographically with each of our 7 regions growing organic sales. Focus markets were up 3%. Organic sales in North America grew 4%. Volume was up 3 points, driven by improved consumption and trade inventory dynamics. We saw a benefit from base period trade inventory destocking and a modest help from a current period trade inventory increase late in the quarter, driven by Easter timing. Price/mix added a point of growth. The Europe region was up 2%, led by enterprise markets being up 6% and modest growth in focus markets, led by the U.K., Italy and Spain.
Greater China organic sales grew 3%, continued growth in what remains a challenging consumer environment; Pampers and SK-II led the growth, each up double digits. Enterprise markets in aggregate grew 5% for the quarter. Latin America organic sales were up 5%, with Mexico and Brazil each up high single digits. Organic sales in Asia Pacific, Middle East and Africa enterprise region was up 4%. Global aggregate market share improved to in line with prior year with positive trends through the quarter. 26 of our top 50 category-country combinations held or grew share for the quarter. On the bottom line, core earnings per share came in at $1.59, up 3% versus prior year on a currency-neutral basis; core EPS was in line with prior year. Core gross margin was down 100 basis points, and core operating margin was down 80 basis points versus prior year. Strong productivity improvement of 330 basis points was offset by healthy reinvestment in innovation and demand creation.
Currency-neutral core operating margin was down 70 basis points. Adjusted free cash flow productivity was 82% and we returned $3.2 billion of cash to shareowners this quarter, $2.5 billion in dividends and over $600 million in share repurchases. Earlier this month, we announced a 3% increase in our dividend, continuing our commitment to return cash to shareowners, and this marks the seventh consecutive annual dividend increase and the 136th consecutive year P&G has paid a dividend. In summary, this was a solid quarter of progress. Positive sales and share trends and earnings growth in a difficult environment. Geopolitical dynamics have thrown new challenges in front of us, but we will continue to fully support the business to maintain the momentum that we are creating. As we move forward, we remain committed to the integrated growth strategy: a portfolio of daily use products and categories where performance matters.
In these performance-driven categories, we must deliver irresistibly superior products across the product itself, the package, the brand communication, retail execution and value. We continue to drive productivity with multiyear visibility to fund innovation and demand creation and to mitigate cost headwinds. Constructive disruption is key to staying ahead of and to creating emerging trends and opportunities in our fast-changing industry. Finally, an organization that is fully engaged, enabled and excited to serve consumers and to win in the marketplace. Now P&G's point of difference. Our competitive advantage comes from outstanding integrated execution of these strategies across all activity systems in the company and from anticipating what capabilities are needed next. While the core strategy remains constant, on last quarter's call and at the CAGNY conference, we outlined three major changes in the landscape around us.
Media fragmentation and changing consumer media preferences are affecting how consumers are collecting information about our categories, including platforms like social media, retail media and AI portals. The retail landscape is changing: more concentration, but also brand proliferation. Retailers are becoming media platforms and media platforms are becoming retailers. Third is inflation across food, energy, health care and many other areas of spending has taken a toll on consumers and how they assess value. Recent geopolitical events have elevated this to a new level of concern. In short, the consumer path to purchase is changing every day, and we expect an even more intense pace of change in the next three to five years. The interventions and investments we're making in P&G capabilities to adapt to these changes are beginning to bear fruit: strong innovation supported by sharper consumer communication and retail execution.
A few examples. Building on the success of Dawn Powerwash in the U.S., Fairy Skip the Soak in the U.K. is a great example of deep consumer insight that's driving innovation. Consumer research showed us that more than 70% of U.K. consumers soak dishes before washing. With this insight in mind, we created the Fairy Skip the Soak idea, which instantly and intuitively helps consumers understand what the product is and what it's for. Integrated superiority across all vectors, where the product name inspires the packaging, in-store execution and communication, all supported by superior performance that delivers on the promise. Skip the Soak drove Fairy brand household penetration to 61%, up 5 points in its first year. Mr. Clean continues to innovate on its core proposition and solving more cleaning jobs with new additions to the portfolio, Core & More. The brand has launched new innovations on the Magic Eraser platform that improve longevity with a denser form and a wider micro-scrubbing structure that now lasts two times longer.
We restaged the packaging to use room- and mass-focused names that clearly signal where to use the Eraser. At the same time, we launched Mr. Clean Shower & Tub Scrubber to address consumers' #1 most hated cleaning chore, shower and tub. Mr. Clean Shower & Tub Scrubber delivers a quicker, easier and deeper clean with the power of the Magic Eraser, a sturdy grip handle, built-in squeegee and a pivoting head for hard-to-reach areas. The results: Mr. Clean is winning consumers and driving category growth, delivering 18x its fair share of the bath cleaning category growth since launch. Germany Pantene identified an opportunity to improve brand and product superiority awareness by capitalizing on media landscape shifts. The increased investments in social media and influencer partnerships, including top German beauty opinion leaders, hair experts and brand events, including talk-worthy local events like Oktoberfest and Berlin Fashion Week, had strong impact.
Consumer influencer posts grew fourfold and total reach tripled despite a 20% reduction in media spend. Pantene value share in Germany is up 60 basis points versus a year ago and is accelerating. The other examples we've discussed recently also continued to deliver strong results, including Greater China Baby Care, Mexico fabric enhancers, Brazil hair care and U.S. personal care. Finally, Tide boosted liquid detergent in the U.S. continues to deliver strong results; initial weeks in the Tide Evo launch are on track with our high expectations. While we work to improve our near-term results, we're also making progress on the longer-term reinvention of P&G capabilities, the next phase of constructive disruption that will create and extend our competitive advantages in each element of our strategy. The way to break through consistently is to build the strongest brands in the industry. P&G has the unique strength and capabilities to redefine brand building to deliver consumer-relevant superiority.
First, we are leveraging our large iconic brands with huge consumer bases and all the data we gather. We are now scaling the integrated data platforms and the technologies that will enhance our team's ability to mine this data for insights that lead to new product innovations, brand ideas, performance claims and marketing campaigns across all relevant consumer platforms. Next, we are driving our unique set of innovation capabilities: substrate technology, formulaic chemistry, devices and biology to deliver breakthrough solutions in every part of the business. Third, we have tremendous supply chain capability. Supply Chain 3.0 is driving a more complete system connection from purchase signal to our production planning and material ordering to ensure consumers find the product they want each time they shop. We know how to automate, digitize and autonomize our operations. And more importantly, we have qualified a financial framework to generate strong returns on these investments.
Our innovation and supply capabilities are key enablers to win in the volatile market we operate in today. Connecting R&D, supply chain and procurement allows us to adjust sourcing, optimize formulations and qualify alternative supply faster and more effectively than ever done before. It took years to build these underlying platforms and capabilities, and we are now in full scaling mode across the company. The next step is to connect the dots to integrate the pieces. We will close the loop, and we believe this will create a new S-curve for growth and value creation centered around our consumers. We are confident in the short-term progress we're making, and we're excited about the mid- to long-term as we leverage our strengths and unique capabilities to set us apart from the industry. Moving on to guidance. As we saw in our press release this morning, we are maintaining our fiscal '26 guidance ranges across organic sales growth, core EPS and adjusted free cash flow productivity.
However, where we will land within those ranges has become more uncertain given the geopolitical dynamics in the Middle East. We continue to expect organic sales growth of in line to 4%. We're seeing progress in most categories and regions, as you can see in this quarter's results. Underlying global market growth for our portfolio footprint is around 2% on a value basis, with a positive trend over the last two months. However, it's unclear how much higher gasoline and energy costs will impact near-term consumer spending in our categories. Also, as I mentioned earlier, the trade inventory increase we saw in March was driven by Easter timing and likely some protection against potential price increases or supply chain disruptions resulting from the conflict in the Middle East. We expect this to result in fourth quarter organic sales somewhat lower than third quarter. As a reminder, our top line guidance includes a roughly 30 to 50 basis point headwind from product and market exits as part of our restructuring work.
Our bottom line guidance is for core EPS growth in line to 4% versus prior year. This equates to a range of $6.83 to $7.09 per share. This guidance includes a foreign exchange tailwind of approximately $200 million after tax, unchanged from our prior outlook. We now expect a headwind of approximately $150 million after tax for the fiscal year from a combination of commodity-linked cost inflation, feedstock exposures and logistics disruptions resulting from the conflict in the Middle East. Almost all of these increased costs will be in the fiscal fourth quarter. Our teams are doing a tremendous job to protect supply continuity and to minimize cost impacts. Much of this work, such as rapid product reformulation and supply diversification, is enabled by the advanced data tools and capabilities we discussed earlier. With the timing of these cost impacts, there is little opportunity to create short-term offsets within cost of goods sold.
Likewise, we will protect our demand creation investments in the business to support our new innovation and maintain positive momentum. In fact, we've approved incremental investments in several businesses in the last month. Given all the above, we now expect full year EPS results to be towards the lower end of the guidance range. Our fiscal '26 outlook continues to call for approximately $500 million before tax in higher costs from tariffs. Below the operating line, we continue to expect modestly higher interest expense versus last fiscal year and a core effective tax rate in the range of 20% to 21% for fiscal '26 combined — a $250 million after-tax headwind to earnings growth. We continue to forecast adjusted free cash flow productivity in the range of 85% to 90% for the year. This includes an increase in capital spending as we add capacity in several categories and as we incur the cash costs from the restructuring work.
We expect to pay around $10 billion in dividends and to repurchase approximately $5 billion of common stock, combined a plan to return roughly $15 billion of cash to shareowners in fiscal '26. This outlook is based on current market growth rates, commodity prices and foreign exchange rates. Significant additional currency weakness, commodity or other cost increases, further geopolitical disruptions, major supply chain disruptions or store closures are not anticipated within the guidance range. We won't provide guidance for fiscal '27 until our next call in July. However, we understand investor concern about potential cost and supply impacts from the Middle East conflict. For perspective, the annual cost impact of Brent crude at around $100 per barrel is roughly $1.3 billion before tax or $1 billion after tax versus a pre-conflict oil price in the mid-60s. Again, this goes beyond direct commodity cost to include other upstream and downstream cost impacts that would hit our P&L. Regarding supply impact, we are hopeful the full flow of materials will resume in the coming weeks.
We continue to work closely with our suppliers and contract manufacturers to identify potential short-term risks. So far, our business continuity plans continue to perform well despite some force majeure declarations by our direct suppliers or by their upstream suppliers. No company will be immune to these effects. But this is an example of where our capabilities help us buffer the impact on our business. Our business teams have been developing multiple contingency plans to mitigate potential cost and supply disruptions. Underpinning each of these options is a commitment to maintain support for our brands and superior value for our consumers. We remain willing to manage some short-term pressure on the bottom line to come out of this period with stronger brands and business momentum. On the other side, this has proven to be the right path in the past, and we are confident that it is now. In summary, we continue to believe the best path to sustainable balanced growth is to double down on the strategy: stronger integrated execution to delight consumers with superior products at superior value.
Challenging markets like the ones we compete in today are an opportunity for P&G to step out from the pack and to lead. We have the brands, the tools, the capabilities, and most importantly, the people required to win. We're confident in the short-term progress we're making. It won't be a straight line, but we are moving in the right direction. We are building momentum, and we are excited about the long-term opportunities ahead. And with that, we are happy to take your questions.
分析師問答
Your first question comes from the line of Steve Powers of Deutsche Bank.
Andre, you covered a lot of ground in your prepared remarks. But I guess as you look through the puts and takes and timing nuances, in the third quarter, how do you assess underlying progress on organic growth? And to what extent are you confident it could be further progressed into the fourth quarter and into '27? And I guess I asked that in the context of the $1 billion in after-tax cost headwinds that you mentioned have now built for the year ahead as well as the accelerated investments you've set in motion that I presume are also likely to carry forward. And so as you approach fiscal '27 planning with all that in mind, do you think productivity alone will be necessarily relied upon as offense to those factors? Or do you feel the building advantages and momentum you're building will allow for potential use pockets of incremental pricing should the need arise.
Steve, thanks for the question. I have a great amount of confidence in the progress we're making on the growth side. The breadth of the progress is visible across regions and across categories. And if you drill a level deeper and you look at the individual plans that we are executing across the brands that are responding the fastest and the best, they show that our hypothesis underlying our business model is working. When we innovate, when we deliver a better solution for our consumers and our categories, they respond. The prime example for me is the Tide liquid intervention we made: a huge business in the U.S. and the formula upgrade we delivered was the biggest upgrade we made in 25 years and just showing that performance improvement to the consumer at the same price, leading to mid-teens growth on a business like that is impressive. We're seeing the same in the beauty category. SK-II growing 18%, just continuing to invest in the brand proposition, the innovation on the super premium side with different forms is gaining momentum and just great execution.
The examples we gave are solidifying that same model. So I feel very strong about the progress because I also see the amount of brand-country combinations that is still to come will only increase the momentum. So I feel very good about the diligence the team is applying in really understanding what intervention we need to make across product, package, communication, go-to-market and/or price to give the consumer the value that they will respond to. And I feel very good about our ability to create excitement with the consumer when we innovate into new areas. The confidence in that model comes with conviction that we want to continue to invest behind it. The noise, I would call it, from the commodity exposure is significant. As you know, $1 billion after tax is nothing to sneeze at from a headwind standpoint. And we have a lot of work to do to work through the supply chain side and the cost side.
I think you've seen us excel in that space. The last time when we had to do this coming out of COVID, with the supply chain crisis, the team even further sharpened their skills in reformulation. We further diversified our supply base. We further diversified our flexibility on our formulations and we further sharpened our understanding of what our short-term productivity levers are that we can pull. And honestly, there's a lot of room in our P&L to drive short-term productivity and that will be the first place to go. Will it be sufficient to offset the full $1 billion after tax? Likely not. With that, we continue to innovate. And selective pricing with innovation where the consumer tells us their interest is high and their willingness to pay for better performance is there will be the other part of the offset that we're driving. So we're building those plans, and I'm confident it will leave us in a reasonable place from an earnings growth standpoint, while not jeopardizing the investment in sustained organic sales growth and share growth, which honestly, we're just delighted to see the ship turning this quarter.
Your next question will come from the line of Dara Mohsenian of Morgan Stanley.
Just two follow-ups on Steve's question. First — can you discuss if you can see any advantage on relative sales performance versus competitors here as you look at the post-Iran conflict situation from a supply chain or sourcing standpoint, is that something you think can be significant? Or is it more modest in nature? Obviously, it's a fluid situation, but any thoughts there would be helpful. And second, you mentioned progress in a lot of areas on the growth side, whether it's certain brands, et cetera, with the innovations you put in place, your spending behind the business in Q4. On the first part of the question, you've got some potential competitive advantage here post the Iran conflict. Are you comfortable that you're back to organic sales growth outperformance versus your categories going forward as we look out beyond fiscal Q4? Do you have visibility around that? Just your thoughts around the potential timing of broader outperformance across the portfolio versus some of the areas where you're seeing progress already would be helpful.
The supply chain side is too early to assess. But if history is any indicator for what's to come, our supply chains are generally resilient. We have flexibility. We have ability, as I said, to reformulate and our retail partners tend to lean on us to be their reliable partner in these times, and we've managed not to let them down. We've seen other players struggle, especially if they have long supply chains or are heavily contract manufactured. So again, if history is any indication of what's to come, I feel relatively good about our position. And if anything, I have even more confidence, if that's possible, in our supply chain team, procurement team and our R&D teams who are just on top of every single element of this every day. Outperformance versus the market is absolutely what we want to deliver. We've done it in quarter three. We want to do it in more quarters. Will it be in every quarter?
I don't know. There are many drivers to this, but I feel that we are getting to a point where there's enough mass in the interventions we've made — we've hit enough critical components of the portfolio with the right innovation, with the right interventions across the vectors — that we will see continuous progress every quarter. Again, can I promise that every quarter will outperform the market? No. But I'm more confident than I've been in a long time that we will go exactly in that direction.
Your next question comes from the line of Lauren Lieberman of Barclays.
I wanted to check in on China. So China at 3% this quarter. Just if you could give us a sense for how the market performed in your categories? And then you called out the tremendous acceleration in SK-II. So I just wanted to talk a little bit about what you're seeing in the beauty market in China, in particular.
China delivered 3% in the quarter. Over the last three quarters it's been 5%, 3%, 3% — very good progress. The fundamental reinvention of the China model all the way from go-to-market, portfolio, communication and innovation models is starting and is continuing to pay dividends. The market is still difficult. Consumer confidence is still low versus normal equilibrium. The market growth is still negative across most channels, and the only growth you see is online and in-store. So the market context is really still the same. The positive side of China is the consumer is very discerning and very engaged in our categories. When we deliver true superiority, they are willing to go there, and that's what you see in SK-II. SK-II was up 18% in total; I think China was up 13% in the quarter. China travel retail was up significantly. You see exactly that when the consumer sees excitement and value, they will pay the premium.
The same is true in Baby Care — I think 19% growth in Baby in the quarter — for the exact same reason: best-in-class consumer understanding, product performance and innovation that is in line with that, with a great communication model, gives us growth in one of the most difficult categories. Great visibility, I think, to driving that model across more categories, more mature thinking around the channel approach that we take between online and our brick-and-mortar channels. So I see a lot of upside in the China market because of that maturing strategy and execution. But again, China is China — a lot of volatility to be expected — but I feel very good about where the team is headed.
Your next question will come from the line of Peter Grom with UBS.
Andre, I know we're not getting guidance for '27 today. But in your response to Steve's question, you touched on productivity and pricing with innovation as offset to inflation and that it would put you, I think you said, in a reasonable place from an earnings growth standpoint. I don't know if I'm reading too much into this, but I just wanted to clarify that despite these headwinds and a commitment to invest in the business, you still see a path to earnings growth next year based on where things stand today.
Thanks, Peter. I'm — look, I'm very happy that I don't have to give guidance today because what do we know about what the world looks like three months from now. With what we know today — with the $1 billion headwind and with the assumption that we can manage the supply side of things well — we will do everything we can to do exactly what you're describing. But it's a work in progress. It's a work in progress on the macro side. It's a work in progress on pushing the productivity lever as hard as we can, and it's work in progress on a lot of tough choices that we can make within our P&L. The one thing we will not compromise on is the investment in the parts of the business that are showing momentum. So I won't give you any more detail than that, but be reassured the team and the work that is happening right now has the sole objective to deliver exactly what you're describing: earnings growth even in light of these challenges, without sacrificing reinvestment in the business and without jeopardizing the momentum we're building.
Your next question will come from the line of Peter Galbo with Bank of America.
I just maybe wanted to click in a bit more. I think you were very deliberate in your comments about increased investments across several country-product combinations. I believe you said over the last month. And we've heard a little bit about Tide Evo in the U.S., SK-II obviously in China. But maybe you can give us a few more just where the incremental investments are really going from a country-product combination standpoint as we start to contemplate Q4 and into '27?
Peter, you will understand I won't give away where we're going in terms of the innovation investment and the strengthening. But it's the areas you would point out that have opportunities. So if you look at Baby Care in the U.S., we're growing share at a global level on Baby Care but the U.S. is not performing where we want it and that requires intervention. The plan is extremely strong. The conviction of the team and our conviction is very high. As we said, we'll continue to drive interventions and innovation in that space. The momentum that the team is building in Beauty Care is fantastic to see. Talking to the team and the number of ideas they have to further build that momentum, I have high confidence to give them the flexibility to continue to invest with the innovation and the commercial ideas that they have. Fabric Care, we just launched Tide Evo, very strong execution in market, retail support is outstanding. So again, an area of significant upside and a significant reason to believe that we can accelerate. I could keep going, Peter, but it's basically what I said: we have a bigger and bigger share of the portfolio where we either have interventions that are already working or we have a very clear plan in place with conviction that investment will pay out and deliver, and that's what we'll execute over time.
Your next question will come from the line of Chris Carey with Wells Fargo Securities.
Andre, I wanted to ask about the concept of pricing power and whether you think that this is different for perhaps the consumer staples industry, but more specifically for P&G. You did mention that there was potentially some front-loading of inventory levels in the quarter as retailers potentially prepared for pricing for inflation. I don't know if I heard that wrong, but nevertheless, it does imply that retailers are aware that incremental pricing is a possibility for this new round of inflation. The reason I bring that up is because I feel a lot of questions around consumer staples companies, including P&G, potentially losing the concept of pricing power into new inflationary cycles with so much inflation over the past five to six years. I wonder if you could just give some thoughts on pricing and whether you think pricing as a concept is different for the sector or for P&G than what it has been more historically. And then just as a follow-up, on competition, you have mentioned in recent earnings calls that competitive activity has heated up now that inflation is moving higher; are you seeing competitive activity start to ease as competition needs to become a bit more rational given cost structures?
Thanks, Chris. There's a natural tension in these situations. You have broad macro cost headwinds which are hitting everyone in the industry, which generally call for pricing. Typically, when you see these headwinds, the entire industry will move up in terms of pricing. And on the other side, the consumer has been hit with cumulative inflation beyond anything in recent history. The way to square that, in our mind, is innovation. Consumers respond well if we give them a truly better proposition in the categories that we're in because they see upside. There is still upside in many of our products to make them better, deliver a better experience and delight the consumer. If we do that and take a little bit of pricing with it, consumers respond. The other reason why that works is it generally comes with a choice for the consumer: we won't price across the entire portfolio as a straight line.
We give the consumer choice to either pick the innovation with a bit of pricing and the promise of better performance or stick with what they know. We have a very well-developed vertical portfolio from brand tiering and price point standpoints. So I don't think we've lost pricing power. Pricing power has to be earned, and the way to earn it is to combine pricing with a truly delightful experience for the consumer. If we do that, and we're honest with ourselves, instead of assuming we can take a straight 5% price increase across everything, I think it will work. That's the job at hand for the team. Luckily, again, we're in categories where that generally works because these products are used daily and consumers know whether they are delighted or not and whether the product they just bought is better than the one they had before. On the competitive side, it's too early to say. This is just a few weeks.
I think everybody is still grappling with what reality we're looking at. You would expect some pullback in promotion activity, but it's too early to observe. The data we have is still relatively stable, and promotion activity in Europe and the U.S., as the two indicators with the closest read, are slightly increasing back to pre-COVID levels. So with the data read that we have, nothing has materially changed yet. We'll see where this goes.
Your next question will come from the line of Robert Ottenstein of Evercore.
First, just a follow-up. Can you disaggregate the volume number in the quarter for the Easter impact, the inventory drawdown last year and SKU rationalization that you were planning so we have a better sense globally exactly where volumes are? And then perhaps building on that, maybe give us an update on the restructuring program that you announced in June of last year in terms of head count reorganization and kind of rebalancing some of the functions and the people and responsibilities.
I'll keep it simple because between every effect on the base period versus base period of that base period, we get confused. The simple answer: I think the pull forward from Q4 into Q3 is about 1 point. So we would have rounded to 3% organic sales growth instead of having a strong 3%. That's my easy answer and the IR team can give you all the gory details behind it. But think about it: the underlying growth, in my mind, would have been about 3% rounding up. With the pull forward, we had a strong 3%; the net impact was about 1 point of volume forward from Q4 into Q3. The restructuring program is very well on track with multiple components. We have the portfolio part of the restructuring with the go-to-market changes in Bangladesh, Pakistan, and the portfolio choices across Asia Pacific — all of that is being executed and actually slightly ahead of program objectives. The head count reduction is being executed in line with trajectory.
So we're on track to deliver 15% nonmanufacturing head count reduction over two years with a significant portion of that being delivered this fiscal year, by the end of this fiscal year. The organization programs — our objective really is to enable our organization to be closer to the consumer and be more empowered than they are today. As the next phase of organization design, we want smaller teams that are empowered to make decisions that have the data to make those decisions without a lot of leg work and that are freed of internal processes they otherwise would have to do. That technology bundle is being rolled out right now: data access, analytics and reporting capability — I would call that Toolbox #1 — rolling out. Toolbox #2 is how we enable those teams to be better at consumer-facing work: concept ideation, content creation, pushing that content across all platforms, measuring it and reworking it.
That's being scaled as we speak. Number three is innovation: molecular discovery suite, perfume discovery, digital twins to qualify innovation — that's already well in place. And fourth is automation: unattended shifts, automation programs rolled out across nine categories. Feedback from plant organizations on skipping the night shift has been great. We are upskilling people to deliver higher-order tasks in the factory and we have multiple automation programs qualified that we are rolling out. So consistent progress on organization design and on the technology and data side that underpins that progress.
Your next question comes from the line of Kevin Grundy with BNP Paribas.
Congrats on the progress in the quarter. Andre, I want to come back to gross margin. Not to beat a dead horse here, but kind of pull together some of the threads we've talked about: ability to price, input cost, productivity, controlling what you can control for the organization. The $1.3 billion pretax headwind is helpful. Understanding the volatility of the environment and a lot to digest here around pricing decisions and consumer demand, et cetera. But just to play this back, it sounds like your base case is gross margins will likely be down looking out to next year given that cost headwind and maybe using reasonable assumptions implying a lower pricing contribution. I think getting back to Chris' question, is it fair to say typically CPG companies are able to price through this? Is that fair? The base case today would be that gross margins are down and maybe there is understandably a little bit more trepidation around pricing given the K-shaped economy. So I just want to play that back to you and get your take.
Thanks for the question, Kevin. The honest answer is I don't know. The second part is I don't really care — not because I don't care about the financial impact, but because what's more important is what we're doing within the activity system that drives top line growth and bottom line growth. That's what ultimately we want to drive and then gross margin and operating margin are outcomes of that. If we continue to drive great productivity, which we will, if we continue to drive innovation that's winning even though it's gross-margin dilutive, and if we continue to drive investment in the right trial-driving activities on the sales deduction side, then if gross margin is down I feel great about it because it will drive top line growth and earnings growth. We will not let gross margin dilute because we're not delivering productivity or we're investing in things that don't drive top line and underlying earnings growth. But where exactly that balance comes out is hard to predict and honestly not that relevant as long as the underlying activity system does what we need it to do.
Your next question comes from the line of Filippo Falorni of Citi.
Andre, I wanted to ask about your enterprise market business. I think you mentioned 5% growth in the quarter and 4% in Asia, Middle East and Africa. So any impact that you saw within the 4% from the conflict in the Middle East? It seems pretty minimal based on the reported results, but are you expecting some further impact in Q4? Also related to this, in Southeast Asia countries and India — countries that rely more on oil from the Middle East — are you seeing any demand impact in those regions? And how do you think that evolves going forward?
Every enterprise market cluster has been performing very well. Asia, Middle East and Africa were up 4%, Latin America up 5%, and Europe enterprise markets up 6%. It's encouraging to see the breadth and consistency of the growth. The Middle East itself is a relatively small part of our global sales, about 2%. I want to thank our Dubai-based teams and Middle East teams — they're doing an amazing job showing resiliency and professional commitment to keep the business running while dealing with the situation. So big thanks to those teams. The direct impact on sales has been no material hit; the business is still doing well. For other effects, the upstream supply chain is more exposed in the Southeast Asia region, so that's where we have to do more work to ensure we can continue to supply and have feedstock available. That's a heavy workload that our supply chain team is mastering. It's too early to expect any consumer demand impact from the conflict. We're not seeing that. All markets are growing strongly — India is growing. I think we'll have more visibility next quarter, and this is part of why I'm comfortable not giving guidance today.
Your next question comes from the line of Bonnie Herzog with Goldman Sachs.
I have a quick question on Baby Care, which appears to be turning following declines over the past year. You highlighted unit volume growth in certain markets. How much of that is end-market led growth versus market share gains? Also, can you talk about the interventions you've made to drive a turnaround in that business? And how should we think about the momentum going forward?
Baby Care at a global level is growing share. Five of seven regions are growing share, and the biggest region not growing share is the U.S., which is where the focus is. The regions that are growing are further ahead in truly driving superior propositions. It's the same playbook we've discussed: when we understand the consumer and drive the right innovation and execution, they respond. That's the opportunity in the U.S. So you see investment in the product, investment in how we communicate that benefit in a more relevant way to our consumers in the U.S., and trial-building activity to ensure we get that product into moms' and dads' hands and onto babies as fast as we can. The playbook is the playbook, and we know how it works. Execution takes some time in Baby Care; it's a complicated manufacturing setup. But I'm very confident the team has the plan, and I'm confident to put the money where that plan goes.
Your next question comes from the line of Kaumil Gajrawala of Jefferies.
As we're all working through the various puts and takes from the geopolitical issues, you mentioned very specifically in your prepared remarks it's not just commodity costs but other items that come with it as part of that $1 billion. Can you talk a little more about what those items are so we can watch and track them? And on tariffs, we're starting to see some public companies talk about potential tariff refunds. Curious where you stand on that.
The cost impact is broader than just commodity. A lot of our feedstock is petro-based — that's input costs into our suppliers' production systems. Second is sourcing changes we're making, either because of cost or availability, which generally mean less effective sourcing lanes: higher transportation costs, longer lead times, higher inventory levels, including outside warehouses. Third is reformulation: when materials are not available, we reformulate to alternatives which can come with upcharges because we don't want to dilute product performance. The last component is finished-product logistics — diesel costs going up — and that's the most immediate impact you'll see in quarter four, passing through to the P&L as higher logistics and transportation costs. We're also seeing some force majeure declarations where suppliers cannot supply at all or manufacturing facilities are compromised by the war. So it's not just oil price; it's availability of product and input costs that drive these impacts. On tariff refunds, we are following the process. The U.S. administration is beginning to lay out details. Once the process is clear and accessible, we will follow it. We have about $150 million after tax in potential refunds from the IEEPA tariff. How much is recoverable, we'll find out as the process becomes clearer.
Your next question comes from the line of Andrea Teixeira with JPMorgan.
Andre, you mentioned recovery in volumes with innovation. I understand you're also improving affordability in some areas. Have you been able to recover volume share in the most price-sensitive categories? I believe you had some interventions in tissue in the U.S. and in Baby Care in some of the price cohorts to assist lower-income consumers. Can you talk to that, particularly in the context of the U.S. and focus Europe?
Volume share gains in the U.S. are broad-based. It's a combination of innovation launches like Tide liquid and interventions in Family Care. Family Care also had a base-period effect — it was heavily impacted by port strikes in Q2, so you see some reversal now. We are careful: we look at every component that drives consumer purchase decisions — better product, presentation, packaging, clear communication and in-store execution. If we think that will address a value gap and bring consumers back to our products, we will pursue it. That generally works in most cases. Where it is truly an affordability issue and we are too expensive in relative terms, we will address it. It's not a general theme; it's a careful calibration brand by brand and SKU by SKU. Sometimes it's about price point versus price per unit or price per dose. You see a combination of drivers: base-period effects, value interventions on product and performance, and selective interventions on price point or value per use.
Your next question comes from the line of Olivia Tong with Raymond James.
You've quickly taken a number of actions to improve trial affordability. It's early days, but what's your read on the staying power of the volume lift it has had and could have going forward? And the 100 basis points of reinvestment in gross margin, was it fairly similar by division or did it vary materially across divisions? Is that the amount we should expect for the foreseeable future?
I think the staying power of trial-driven growth is strong because it's grounded in consumer insight and done at a detailed level with diligence to diagnose the issue. Will we get it right 100% of the time? No. But our hit rate is improving and that's why you see the pickup. Shailesh and I are sitting down with every business to track whether initiatives are delivering against expectations, and if not, what learnings we take. We've been doing this for six to eight months and as we iterate, we get better at diagnosis, triage and execution. The reinvestment level and type differ by business, brand and country. I can't give you a standard recipe — it's different by category, country, retailer and SKU. We'll be working through those plans up until July. I don't want to give a blanket answer today; it depends on plans we review over the next 90 days and what we decide to go forward with. We'll provide more visibility during guidance conversations.
Your next question comes from the line of Robert Moskow of TD Cowen.
A couple of near-term questions and a clarification. Andre, when you talked about fourth quarter being lower than third, I want to confirm that's in growth rate versus absolute dollars. And I think in your prepared remarks you talked about consumers pulling forward purchases as an inflation hedge. I thought that's what I heard — maybe the trade is doing it. Can you speak more about that? Do you have any evidence right now that consumers are pulling forward purchases to prepare for more inflation?
On the second part: I think the pull forward, if anything, is more on the retailer side. If you're a retailer tuned to what's going on, you might pull in a little inventory. But it's hard for us to quantify that. On the consumer side, no — nothing visible that consumers are loading pantries at this point. Consumption is stable. The inventory side explains more of the movement. When I say Q4 might be lower than Q3, I'm talking about growth rate. There's a point of shift in the growth rate you all had anticipated for Q4. As I said earlier, we would have rounded to 3% in Q3 instead of having a strong 3% without the pull-forward effect. That's the logic behind the point I mentioned.
Your next question comes from the line of Edward Lewis of Rothschild & Co Redburn.
Andre, just wanted to look at Supply Chain 3.0, which you've talked about. I think of this as deploying AI across the organization. When you initially assessed what costs might be heading into fiscal '27, how much of an advantage do you see already from what you're doing on AI in supply chain? Or is it still too early to see significant benefits from moves around AI and Supply Chain 3.0?
I wouldn't call Supply Chain 3.0 just AI. It's applying technology available to our manufacturing and supply chain processes. Some of it is AI, but a lot is basic automation. We are scaling technologies across categories: unattended shift models rolling out through plants, unattended warehousing including loading/unloading finished product and raw materials globally, real-time touchless quality across the corporation. All of that is embedded in the productivity commitments we've made — the $2 billion to $2.2 billion program, with about $1.5 billion in cost of goods — which gives us confidence we can continue that level of productivity. Now it's about how much we can accelerate, how much of that 2030 vision we can bring forward to help the near-term situation. That's the conversation over the next 90 days and will inform part of our guidance. We know it works and we have the technologies available; it's about roll-out speed.
Your final question will come from the line of Michael Lavery of Piper Sandler.
I want to come back to inflation mitigation. If the pressure is primarily oil-price driven and given the stretched consumer, how do you balance thinking about pricing responses versus volatility in oil prices? And on spending: you said you wouldn't sacrifice spending on businesses that have momentum. Does that suggest for businesses without momentum you might postpone interventions? Or would growth-focused investments continue regardless of the inflation environment?
We understand the volatility in oil prices. We're trying to control what we can: productivity, sourcing choices and innovation. That's where we will drive the majority of recovery. If we price with innovation, no matter where oil goes, it's the right answer for the consumer because the innovation makes the pricing worthwhile. We're trying to decouple interventions as much as possible from market volatility. On momentum versus investment: every business leader's job is to create momentum. We need business plans that give us confidence that where we don't have momentum yet, we will deliver it within a short period. I have confidence our business leaders are doing that, and I see increasing conviction that they are able to deliver. We won't face an issue of not having opportunities to invest; it will be a matter of wise resource allocation.
That concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.