Procter & Gamble (PG -0.78%) makes a wide range of products that use a large array of ingredients, packaging, and materials. The extensive logistics involved in gathering those materials, creating the products, and packaging them for sale has given P&G significant insight into the workings of the supply chain and of the broader economy as well. Like many of its consumer staples peers, this insight helps P&G get a pretty good read on inflation and what to expect in the future.
In a presentation on the topic recently, company management said it expects inflation to continue moderating but also remain elevated above the Federal Reserve's 2% target rate. Here's why inflation remains a big problem that's still working its way through the system.
What a hit
In the presentation, P&G provided a slide that outlined the impact of three cost items: foreign exchange, freight, and commodities/materials. This trio created a $3.3 billion headwind in fiscal 2022, which amounted to $1.29 less in earnings per share. In fiscal 2023, the company expects the impact to be $3.5 billion or roughly $1.40 per share.
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There are some important year-over-year changes to note in these figures. For starters, foreign exchange was a $0.3 billion headwind in 2022 and is projected to be a $1.3 billion headwind in fiscal 2023. That's by far the biggest shift in the group dollar-wise. Freight is set to drop from a $0.4 billion headwind in 2022 to zero, making it the biggest percentage change. And the commodities/materials headwind is projected to drop from $2.6 billion in 2022 to $2.2 billion in fiscal 2023. This is the one that has had the biggest ongoing impact on the company's business.
The trend is not your friend
While this is not meant to belittle the impact of currency headwinds, exchange rates tend to even out over time. So it is a big issue in fiscal 2023, assuming the company's projections play out as expected, but currency probably isn't worth losing too much sleep over. Inflation is a bigger problem.
Inflation with regard to freight costs is relatively minor, but is notably going back to more normal levels. In the company's fiscal third-quarter 2023 conference call back in April, management noted that supply chain normalization and oil price declines have both been net benefits here.
The bigger issue for investors to monitor is the commodities/materials bit. There's a decline, but trends are not back to normal by any stretch of the imagination. There are, however, a lot of moving parts. For example, management notes that resin prices have eased, and pulp prices have been better to some degree. But things like caustic soda and ammonia are still seeing price increases. Netting it all out, inflation will remain elevated for commodities and materials.
Notably, Procter & Gamble also highlights that there's more to the story than just commodities. It is the customer of other businesses that are dealing with higher salary and input costs, too. And, like P&G, those suppliers are trying to push through price increases. The consumer staples giant locks in prices with contracts, and those contracts eventually roll over. That's going to play a big role in the cost picture over the next 12 to 18 months or so. The contracts it has in place have protected it from rising prices to some degree, and that's going to end, with pricing likely to rise to market levels. P&G is unlikely to be unique in this regard.
Here to stay
What investors need to worry about with inflation today is that it may moderate to some degree, but less-high inflation isn't the same as the inflation problem going away. When you add in the contract issue, meanwhile, companies like P&G could actually see the impact of inflation linger a bit longer than you might expect relative to news headlines you read that highlight inflation ebbing. In other words, investors in P&G, and other companies that have been hit by inflation, should be prepared for the headwind to linger.
