Q3 2026 Earnings Call Transcript

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, 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 50 -- 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 136 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 3 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 3 to 5 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 and more. The brand has launched new innovations on the Magic Eraser platform that improves the longevity with a dense form and a wider micro scrubbing structure that now last 2x 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 and top 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 the Oktoberfest and Berlin Fashion Week.

The impact earned consumer earned influencer posts grew 4x 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 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, site boosted liquid detergent in the U.S. continues to deliver strong results, initial weeks in the tight 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 optimized 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 strength at 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 2 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 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 fourth -- 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 and 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 at 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 where we 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 balance 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.

[Operator Instructions] 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 tight liquid intervention we made again, 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 on 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 -- the other examples we gave are just 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 really understanding what is the 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. I think the team even further sharpened their skills and 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 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 pricing -- selective pricing with innovation where the consumer tells us their interest is high, 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 2 follow-ups on Steve's question. Just a -- can you discuss if you can see any advantage on relative sales performance versus competitors here as you look at the post Iron 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 just be, 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. 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 sort 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 it's long supply chains, especially if it's heavily contract manufactured supply chains. So again, if history is any indication of what's to come, I feel relatively good about our position. And if anything, I have more -- even more confidence if that's possible in our supply chain team, procurement team, 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 3. 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 of 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%, as you've seen in the quarter. So last 3 quarters, 5%, 3%, 3%, very good progress. And again, I think the fundamental reinvention of the China model all the way from go-to-market portfolio communication model, innovation model, I think, is starting and is continuing to pay dividends. The market is still difficult.

Consumer confidence is still low and down versus the normal equilibrium. The market growth is still negative across most channels. And the only growth you see is in online and into in yen. So the market content -- context is really still the same.

The positive side of China is the consumer is very discerning and the consumer is very engaged in our categories. And 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. And you see exactly that when the consumer sees excitement, value something that they enjoy, they will go there and pay the premium. The same is true in Baby Care, I think 19% growth in Baby in the quarter.

And for the exact same reason, best-in-class consumer understanding product performance and innovation that is in line with that with the 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 to yen and our brick-and-mortar channels. So I see a lot of upside in the China market because of that maturing thinking in strategy and execution. But again, our closes are always closed.

China is China. So 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. And so 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 but 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, what the world looks like 3 months from now. With what we know today with $1 billion headwind and with the assumption that we can manage through the supply side of things well, we will do everything, everything that 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 honestly, 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 on the business without sacrificing or 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 kind of country products combinations. I believe you said over the last month. And we've heard a little bit about [indiscernible] 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 in from a country product combination standpoint as we start to contemplate Q4 and into '27?

Peter, look, 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 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. And 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.

And 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.

And I could keep going, Peter, but it's basically what I said is 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 do 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 5 to 6 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, just from a 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. Look, there's a natural tension in these situations. You have broad macro cost headwinds which are hitting everyone in the industry, which generally is demanding pricing. So typically, when you see these headwinds, the entire industry will move up in terms of pricing.

And then on the other side, you have the reality that the consumer has been hit with cumulative inflation beyond anything that they've seen in recent history. I think the opposite ends here, the way to square that in our mind is innovation. Consumers do respond well if we give them a truly better proposition in the categories that we're in because they see there is upside. There is still upside in many of our products to make them better deliver a better experience and delight the consumer.

And if we do that and we 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 because we won't price across the entire portfolio just a straight line. But we give the consumer choice. 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, as you know, both from a brand tiering standpoint and from a price point standpoint. So I don't think we've lost pricing power I think pricing power has to be earned and the way to earn pricing power is to combine pricing with truly a delightful experience for the consumer. And if we do that, and we're honest with ourselves, instead of just assuming we can take a straight 5% price increase across everything, I think it will work. So that's the job at hand for the team.

And luckily, again, we're in categories where that generally works because these products are products where you see as a consumer, you use them on a daily basis and you know whether they are delighted or not. And you know whether the product you just bought is better than the one you had before, and therefore, it's worth the price. On the competitive side, too early to say, to be honest. I think this is just a few weeks.

And I think everybody is still -- at least we are grappling with what reality are we looking at. You would expect some pull back, hopefully, in terms of promotion activity but it's too early to observe. What I can tell you, the data we have is still relatively stable, but promotion activity in Europe and the U.S. as the 2 indicators with the closest read are slightly increasing back to pre-COVID levels. So with the data read that we have, nothing has 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 kind of 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 into every effect on the base period versus base period of that base period, we get confused. The simple answer I give you, 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%, but rounding up. With the pull forward, we had a strong 3%, the net impact about 1 point of volume forward from Q4 into Q3. The restructuring program is very well on track. Multiple components. We have the portfolio part of the restructuring with the go-to-market changes in Bangladesh, Pakistan, the portfolio choices across Asia Pacific, all of that is being executed and actually slightly ahead of the 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 2 years with a significant portion of that being delivered this fiscal year, by the end of this fiscal year. The organization programs, look, our objective really is, as we said, to enable our organization to be closer to the consumer and be more empowered than they are even 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 work processes and leg work that they otherwise would have to do.

That technology bundle is being rolled out right now. So data access, data analytics, reporting capability, I would call that toolbox, number one, rolling out. Second toolbox, how do we enable those teams to be better at consumer-facing work. So think about concept ideation, content creation, pushing that content out across all platforms, measuring it, reworking it.

That's toolbox #2, that is being scaled as we speak. Number three, the whole innovation part that's already being used. So think about molecular discovery suite think about perfume discovery, digital twins to qualify innovation, that's already well in place. And then the fourth component of the intervention is automation.

So we talked about unattended shifts. We now have those programs rolled out across 9 categories. And again, the feedback from the plant organization to skip the night shift is great. We are upskilling those people to deliver a higher order task in the factory that is working, and we have multiple automation programs qualified that we are rolling out.

So I think consistent progress on the organization design side and consistent progress on the technology data site that is underpinning that progress on the organization.

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 that we've talked about, this is around ability to price input cost, productivity, kind of controlling what you can control for the organization. The $1.3 billion pretax headwind, thanks for sharing that. That's helpful.

Understanding the volatility of the environment and a lot to sort of digest here around pricing decisions and consumer demand, et cetera. But just to play this back, it sounds like your base case is the gross margins will likely be down, I would say, looking out to next year, given that cost headwind and May using sort of reasonable assumptions implied kind of a lower pricing contribution. I think getting back to Chris' question, like is it different, this may imply like typically the CPG companies are kind of able to price through this. Is that a fair take?

The base cases 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, et cetera, et cetera. So I just want to play that back to you and get your take.

Thanks for the question, Kevin. Look, the honest answer I'll give you is I don't know. The second part of the answer is I don't really care. Not because I don't care about the financial impact.

But what is more important is what are we doing within the activity system that drives top line growth and bottom line growth. that's what ultimately we want to drive and then the gross margin and the margin are outcomes of that. So if we continue to drive great productivity, which we will check, if we continue to drive innovation that's winning even though it's gross margin dilutive, check. If we continue to drive investment in the right trial driving activities on the sales deduct side, check. So if all of those things happen and the gross margin is down, I feel great about it because it will drive top line growth and it will drive 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 for me is very 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 -- in terms of demand 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?

And then also related to this, in terms of like some of the 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?

Yes, Filippo. Look, every enterprise market cluster has been performing very well. As we said, Asia, Middle East, Africa, up 4%, Latin America up 5%, Europe enterprise markets up 6%. So it's encouraging to see the breadth and the consistency of the growth.

I -- as you already pointed out, the Middle East in it of itself is a relatively small part of our global sales, about 2%. And I can only thank the team in the Middle East. Our Dubai-based teams and Middle East-based teams are doing an amazing job showing resiliency and professional commitment to keep the business running while dealing with the situation. So big thank you and shoot to those teams.

So the direct impact on sales, no. Actually, the business is doing well still. And for the rest of the effects, the only thing I can tell you is the upstream supply chain is more exposed in the Southeast Asia region. So that's where we have to do more work to ensure that we can continue to supply have all the feedstock available, et cetera.

So that's a heavy workload there that our supply chain team is mastering. It's too early, I think, to expect any consumer demand impact from the conflict. So we're not seeing that. All markets are growing strongly.

India is growing. So I think that's the question where we have more visibility next quarter and again, part of why I'm happy not to give 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 did highlight unit volume growth in certain markets. So curious to hear 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 I guess, how should we think about the momentum going forward?

Thanks for the question, Bonnie. Baby Care at a global level is growing share. 5 of 7 regions are growing share. And the biggest region, not growing share is the U.S. So that's where the focus is.

The regions that are growing are further ahead in truly driving superior propositions. It's coming back to the same playbook. We've talked about China earth rates down, market volume down, hundreds of competitors were growing 19% in the quarter. Why?

Because we understand the consumer drive the innovation, have the execution. Same is true in the other 4 regions that are growing. That's the opportunity in the U.S. So that's where you see investment in the product.

You see 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 that we get that product into moms and dads hands and on baby's parts as fast as we can. The playbook is the playbook, and we know how it works. What we're in right now is the execution, which takes some time in baby care. It's a complicated manufacturing lineup, et cetera.

But I'm very confident the team has the plan, and I'm very 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, I think you mentioned very specifically in your prepared remarks, it's not just commodity costs, but all the other sort of things that come with it as part of that $1 billion. Can you maybe just talk a little bit more about what those items are just so it's something that we can watch and track a little more closely? And then on tariffs, we're starting to see some public companies, especially in their filings, talk about potential tariff refunds. Curious where you stand on that.

[ Nick ], the cost impact is broader than just commodity. Obviously, a lot of feedstock. Basically, the majority of our feedstock is petro-based. So it's input NAFTA, you name it input costs into our suppliers' production system, part number one.

Part number 2 is sourcing changes that we are making, either because of cost or availability generally mean less effective sourcing lanes which means higher transportation costs, longer lead times, higher inventory levels, including outside warehouse. The third component is reformulation. When materials are not available, we reformulate into others, which might come with upcharges. In many cases, they do. because we don't want to dilute the performance of the product.

So we have to go to an alternative formulation that generally comes with higher cost. The last component is just finished product logistics again, diesel costs going up. That's the most immediate impact you see in quarter 4, that immediately passes through to the P&L in terms of higher logistics and transportation costs. Force majeure, again, we see some suppliers just not being able to supply at all.

We see some manufacturing facilities that have been compromised by the war. And so it's not just the oil price, it's also the availability of product and input costs that is then driving the exact same comments that I just gave you. Tariff refund, look, we are following the process. The U.S. administration is beginning to lay out.

Once that process is clear, defined and accessible, we will follow it. We have about $150 million after tax in refunds available from the IEEPA tariff. How much of that is recoverable or not, we'll find out.

Your next question comes from the line of Andrea Teixeira with JPMorgan.

Andre, you mentioned the recovery in volumes with innovation. Obviously, that has been remarkable. But I understand that 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 like you mentioned in Baby Care in some of the kind of price cohorts that you may be able to assist the low-income consumer. Can you talk to that, in particular in the context of the U.S. and also focus Europe.

Andrea, I think the volume share gains in the U.S. are broad-based. It's a combination of the innovation launches we are driving. I was talking about tight liquid. That's a big component of volume share gain.

Family Care is a combination of interventions made by the business, but most importantly, also period-over-period effect. Remember, we -- family care was the business that was heavily impacted by the port strikes in Q2. So you see that reverse effect coming through now, that's playing out in share and the growth rates. But we are very careful. Look, we always look at every component of what we know drives consumers purchase decision.

Is it better for them to have a better product, better presented with packaging, with clear communication and execution in store. And if we think that will address the value outage that a consumer might see and not pick our products, we will go there. And that works in most cases, where it is truly an affordability aspect and we are, in relative terms, just too expensive, we will address it that way. And it is not a general theme.

I can give you one way or the other. That is the difficult and very careful calibration we're making brand by brand and honestly SKU by SKU because in some cases, it might just be price point versus price per unit or price per dose. So -- but you see a combination of all 3 drivers, base period here in terms of share, value interventions we're making on the product and performance side and yes, selective interventions in either price point or just value per use.

Your next question comes from the line of Olivia Tong with Raymond James.

You've quickly obviously taken a number of actions to improve trial affordability. I mean it's early days, of course, 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 the divisions?

And is that the amount that we should expect for the foreseeable future?

Olivia, I think the staying power of the of the trial of the growth is strong because it's grounded in consumer insight, and it's again done at that very detailed level, with the right level of diligence to say, what is the outage. Will we get it right in 100% of the cases? No, but I think our hit rate is improving significantly, and that's why you see the pickup. And that's what we are tracking diligently.

So Shailesh and I are sitting down with every business to track whether that is actually delivering against the expectations? And if not, what are the learnings we're taking, but we've done this now for 6, 8 months. And you can see as we cycle through these iterations, we get better and better at diagnosis, triage and then making sure we get the right interventions executed. The reinvestment type and level is really different, therefore, by business, by brand, by country.

So I can't give you a standard recipe of this is what it looks like. It is different, not only by category. It is different by country, it is different by retail, it is different by SKU. The level of reinvestment give us until July.

We are working through those plans right now. I don't want to give you a blanket answer. I think it really depends on the plans as we review them over the next 90 days and what we decide to go forward with and we'll give you more visibility as we get into guidance conversations.

Your next question comes from the line of Robert Moskow of TD Cowen.

A couple of kind of near-term questions and a clarification. Andre, when you talked about fourth quarter being lower than third, I just want to confirm that's in absolute dollars. And then 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 a little bit more about that? Do you have any evidence right now that consumers are doing this to prepare for more inflation ahead?

Let me start with the second part of the question. I think the pull forward, if anything, if you're a retailer and you're tuned to what's going on, you might have pulled in a little bit of inventory. But it's hard for us to really quantify that. On the consumer side, no, nothing.

I don't think the consumer is loading pantries at this point in time, nothing visible to us. So I think the consumption side is actually stable. I think the inventory side, which we -- and again, I think I will give you all the glory details between base periods and loading effects. But I wouldn't say the price-driven loading is the biggest part of it.

I think it's just base period, is a significant component of that. When I say Q4 might be lower than Q2, I think it's growth rate we're talking about here. So there's a point -- of shift, a point will come out of the growth rate that you all had anticipated for Q4. And that's the -- as I said, we would have rounded to 3% in Q3 instead of having a solid 3%. So that's the logic of the point to look forward I was talking about.

Your next question comes from the line of Edward Lewis of Rothschild & Co Redburn.

Andre, just wanted to look at sort of supply chain 3.0, which you've talked about. I mean I guess I sort of think of this as a kind of way you're deploying AI across the organization. And when I think about sort of your initial assessment of what costs might be on the cost headwinds heading into fiscal '27, how much of an advantage do you see already from what you're doing on AI in sort of rating that into a certain extent, if that's the right way to think about it? Or is it still too early to really see sort of significant benefits from the moves you're making around AI and supply chain 3.0.

Look, I wouldn't call Supply Chain 3.0 AI. I think it's really applying technology that is available to us in our manufacturing and supply chain processes. Some of it is AI, but a lot of it is a lot more basic automation that we're driving. We are scaling the technologies across all categories.

Again, we talked about unattended shift models that is rolling out throughout more and more categories and more and more plants. Unattended warehousing, including loading and unloading of finished product, pack and raw materials rolling out globally, real-time touchless quality rolling out across the corporation. All of that is embedded in the productivity commitments we've made, so the $2 billion to $2.2 billion, $1.5 billion of that in cost of goods. This gives us confidence that we can continue that level of productivity.

And what we'll be pushing now is how much can we accelerate? How much can we accelerate that 2030 vision that carries the supply chain 3.0 endpoint in our mind. How much of that can we carry forward to help the situation. And I think that will be the conversation over the next 90 days and will inform part of our guidance.

But we know -- we know it works, and we know what to do. We have the technologies available. It's about how fast do we roll them out. And I think that's where we'll push the envelope.

Your final question will come from the line of Michael Lavery of Piper Sandler.

I just wanted to come back to inflation mitigation and maybe a couple of parts to it. I guess just if the pressure is primarily oil price driven, and given the stretched consumer, how do you balance thinking about pricing responses versus just the volatility in something like oil prices? And then just on how to kind of think about the spending piece. This could be nitpicking your words.

I want just clarify it. You said you wouldn't sacrifice spending on businesses that have momentum. Does that suggest potentially for businesses without as much momentum that maybe you would postpone interventions? Or is your thinking that should we hear you as any of those growth-focused investments would continue regardless of the inflation environment.

Thanks for the question. Look, I think the volatility component of where is oil going to be is a reality that we understand. But that's why we are -- what we're trying to do is control our destiny. We control productivity.

We control the choices that we can make in sourcing. We control innovation. So that's where we want to drive the majority of the recovery because if we price with innovation, no matter where oil is, it will be the right thing for the consumer because the innovation is worth the pricing that we're taking. So we're trying to address exactly what you're describing, which is decoupled as much as we can, the interventions we're making from the volatility we're seeing in the market.

So it's the right answer no matter where this goes. Would it be perfect? No, but I think that should be the North Star that we're going after. Look, the very simple answer to your second part of the question is momentum versus investment.

Every business leader's job is to create momentum. And so we need to create a business plan that gives us confidence that where we don't have momentum yet. We will deliver momentum within a very short period of time. And honestly, I have confidence that every 1 of our business leaders is doing that, and I see only increasing conviction that they are able to do it.

So I don't think we're going to have an issue of -- we don't have enough opportunities to invest. We will have the right plans and then it's a matter of wise and sound resource allocation within that. All right. I think that was our last question.

Thank you so much for your time. Again, I want to close out where we started, strong quarter. Thank you to the P&G team. We're building momentum.

Will it be a straight line? Absolutely not. We're working through the headwinds that we have identified. We feel very good about our relative positioning to deal with those headwinds and we'll talk more, and I know you're looking forward to that about next year in the July call.

Please don't hesitate to reach out with questions. Our IR team is available to you. So am I, and thank you very much. Have a great day.

That concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.