The Procter & Gamble Company (NYSE:PG) 2022 Barclays Global Consumer Staples Conference September 8, 2022 9:00 AM ET
Company Participants
John Chevalier – SVP, IR
Andre Schulten – CFO
Conference Call Participants
Lauren Lieberman – Barclays
John Chevalier
P&G would like to remind you that today’s discussion will include a number of forward-looking statements. If you will refer to PNG’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. Additionally, the company has posted on its investor relations website www.pginvestor.com a full reconciliation of non-GAAP and other financial measures.
Question-and-Answer Session
Q – Lauren Lieberman
So clearly we’ve got P&G up next. So thanks everyone for being here. We have the company’s CFO, Andre Schulten and of course our Director of Investor Relations, John Chevalier. Thanks for being here, good to meet in person. So, going to jump right in and first and foremost to kind of say rightly or wrongly the July results and outlook seem to have taken the market by surprise and I have gotten questions as to whether or not something has changed significantly at P&G relative to competition, for my part it seems to me that things are intact but I would be curious to know how you would react to that question?
Andre Schulten
Yeah, good morning Lauren.
Lauren Lieberman
Good morning. Get right in there.
Andre Schulten
That is right. No distractions. Look my answer is very simple, we’re extremely confident in the future of the company. We are in the perfect set of categories that play to our strengths both from assembled products and formulated product perspective, that unique combination of R&D skills is fairly unique in the peer group, and makes us very confident that we can really add value in the categories we play in. Our strategy to drive market growth is working. Market growth as a driver to share growth is working. And we are focusing and doubling down on the concept of irresistible superiority. 80% of our sales are irresistibly superior cross the five vectors we measure which is product, package, communication, go-to-market, and value. And we continue to reset the bar and drive more innovation and improvements through our communication channel, go-to-market plans to further differentiate our offerings from competition which is going to be critical as we take pricing with the peer group in every market around the world.
The organization is focused on productivity like there’s never been focus on productivity before, that’s going to be a key driver for us to help offset the inflationary pressures that we’re seeing. And gross savings returning to pre-COVID levels across cost of goods, across media, and across all elements of the P&L and that is a huge enabler for us to balance the need for pricing but also enable reinvestment in our brands which we continue to do. We look around the corner to ensure that we understand where the markets are going next which is a critical component with fast go-to-market changes in many of the geographies we operate in. And lastly, I’ve never seen the organization as accountable and clear on decision rights and the alignment of decision rights and accountability and what they are rewarded for is playing out exactly as intended when we established enterprise market and focus markets. Decision timelines have shortened by 90% in many cases and is really playing out in the way that we take pricing, in the way we react to market changes. So all of that gives me a lot of confidence.
I’d be remiss not to mention more than $6 billion of inflation, foreign exchange and T&W Hertz over the last year and expected for this fiscal year. That’s a headwind that everyone is facing, we are dealing with it as it comes along. And I think we are well set up to deal with it within the guidance range we’ve given. So I have confidence in the short-term but I’ve even more confidence in the mid and long-term if we are in the right game plan.
Lauren Lieberman
Great, over the last 12 to 18 months we’ve often written that it felt like P&G was still operating on a different playing field than a lot of their peer set. And one of those key things was around supply chain and continuity of supply. So I guess first, why is that the case, if I am right, why isn’t it the case? But also secondly it feels like maybe that’s become maybe less of competitive advantage of late, there’s been some mentions of some products and supply constraints on your side now. So has anything changed in terms of your supply chain visibility versus maybe where you were really outperforming the peers 12 months ago?
Andre Schulten
Yes. The work that our supply chain has been able to drive over the past two years has been nothing short of remarkable in our mind, getting us through an enormous period of volume growth and at the same time, dealing with frequent supply chain interruptions showing the agility to reformulate on the spot, shift sourcing between regions and suppliers, qualify new materials was really impressive and operate safely through a COVID environment. And all of that doesn’t take away — it’s been great, and it doesn’t take away from the need to continue to do work on supply chain. Our supply chain capabilities have been rated number one in the Advantage Survey of our retail partners in the last seven years. Seven out of seven years. So we could say and sit back and say, all is good, supply chain is fine.
But as you say, there are a couple of things in the short term that we needed to address. Volume growth in some of our categories has simply outpaced our ability to add capacity fast enough and there are three examples. One is tampons in Fem Care, so the Tampax brand. We’ve been growing double digits for quarter-over-quarter, and we just were not able to get the lines fast enough and then store them quickly enough. Fabric Care, fabric enhancers and some of the single unit dose our top suppliers weren’t able to add capacity fast enough. So we’re catching up and we’ve basically caught up to demand there. And then Family Care because of the introduced volatility in the category, we have to change the operating model. So those are the short-term opportunities that play through in some of our decisions in quarter four of last fiscal year to not promote, for example, laundry to the degree that we typically do. Those things are being fixed in the current quarter. Tampax will take a little longer.
In the mid-term, we see our supply chain as a strategic vector that we need to continue to strengthen. It’s a backdrop superiority and like everything in our concept of superiority, it has to be dynamic. So we are talking about further building our supply chain capabilities. We’ll talk about that in Cincinnati in November at the Investor Day. But think about the future potential of digitizing the supply chain synchronization, building automation, and using all of the data that we have to really drive further efficiency, but also available capacity within the supply chain. That’s the next part of the journey. So work will not end, more work to do.
Lauren Lieberman
Great. You mentioned — you referenced the 6-ish billion of inflation over the last two years, inclusive of this year’s guidance, but a lot can change in a few weeks as we keep seeing. So I just wanted to just check in, anything you’ve seen in terms of major changes in FX or raw materials, transportation costs since we last spoke at the very end of July?
Andre Schulten
Yes. As you would have seen, we see some good news on commodity input cost sequentially. So that’s a little bit of help versus the numbers that were underlying our guidance. Transportation in the U.S. is easing a little bit, so the load to driver ratio has come down. It’s reflected in lower spot rates, which starts to translate into contract rates. So that’s a little bit of help. These two forces that work against that is pass-through from suppliers in terms of floor pack material costs as they are working through their cost challenges. And as we kind of work the best plan with them to ensure a steady supply, but at the same time, limit the cost exposure. And the biggest driver is foreign exchange with the U.S. dollar strengthening month over month, day over day. The net is the total exposure that was underlying our guidance is still about the same. We’re still looking at $3.3 billion to $3.4 billion of net headwinds. The composition changes every day.
Lauren Lieberman
Okay. Great. And then also in terms of things that may or may not have changed, anything in terms of retail inventory dynamics in the U.S. that you’ve seen that’s worth noting? And where do you view your categories standing?
Andre Schulten
Yes, we have seen some inventory rebalancing across retailers as would be expected towards the holiday season. Most of our retail partners have built higher inventories over the past two years because of the supply chain constraints. So they’ve actually increased days on hand in our categories. And what we’ve seen over July and August is basically that buffer coming out as the supply chain stabilizes and as they look to redeploy cash into other categories. Nothing material, but that’s the effect we’ve seen. So we’re back to pre-COVID days on hand in our categories in the U.S., which we think is the right level. It allows us to both be efficient on the retailer side and on our side from a cash productivity standpoint, and it allows us to drive the on-shelf availability we need. So I think we’re at the right level right now.
Lauren Lieberman
Okay. Great. And then everyone is sort of looking for signs that the consumer is starting to trade down, particularly in the U.S. and Europe. So just first, if we stick with the U.S., maybe you can talk about what you are or aren’t seeing. There was some talk also earlier this week about value laundry seeing a spike in market share more recently in the U.S., so any commentary on the U.S. consumer environment would be great?
Andre Schulten
Yes. We keep looking for signs, too. So obviously, the most closely watched component of the key drivers. Maybe to start with the U.S., private label in the categories we play in and we look at it from an absolute share basis because the base period comparison is just too volatile. But private label and if you look at covered channels, it’s holding at 15.6%, 15.8%. There’s not much movement past one, three, six months. So private label share is relatively steady. Our shares continue to be growing from a total market, stable to growing. So all of that is working as we intend. We don’t see huge elements of trade down where we are challenged from a share perspective. It’s not really driven by trade down, it’s mostly driven by the capacity situation I was describing. So laundry not being able to merge and basically taking back media because of supply issues over May, June. Fem Care, we see pressure on tampons and Family Care just recovering because they’re getting back into merch.
So nothing structural Lauren that has me worried about trade down in the U.S. You mentioned laundry, that certainly is something that we’re watching closely. Again, it’s a combination of not merching and not supporting with media in the last quarter and early in the first quarter. That has come back and as we executed pricing in the U.S., there’s also some fine-tuning to do as we saw competition move in terms of price points that we need to cover. That’s not unexpected. We don’t know where the market ends up. So as we see the market play, we left some price points that we should have covered uncovered that is being fixed within the next four to six weeks. So nothing structural, a lot of tactical elements that we need to fix in the short term, but we should get through this in the next, call it, 60 days to six months.
Lauren Lieberman
Okay. Great. And then what about also in Europe, is there a cliff coming every week that comes?
Andre Schulten
So far, Europe certainly sees more private label growth, which is to be expected given the private label penetration there. We are still growing share in Europe in the key markets despite private label growth in those categories. So that’s the good news. And the consumer continues to choose P&G brands. Overall, we’re able to grow the market from a value perspective. I think we’re very closely watching obviously what’s happening as energy prices keep increasing in many of the European markets. People who rent their apartments really get to pay their energy bill only in, call it, February, March. So they accrue the balance, but then the payment is due in the first quarter of next calendar. And the other question becomes do the government incentives and the government support systems flow through fast enough. So, so far Europe is holding up okay, but certainly something we’re watching very, very closely.
Lauren Lieberman
Okay. And then sticking with market shares, a lot of attention to the U.S. Nielsen data. And I think on last quarter’s call, you also referenced all outlet data, what you actually see being a bit different. So could you just talk for a moment about any change in trend you’ve been seeing on your U.S. market share, the U.S. Nielsen versus all outlet? And also how you think about market share because you mentioned the base period dynamics and all the choppiness that’s created for a litany of reasons, and it’s different by category. So when you look at market share, what is your comparison point, are you looking at a year ago, are you looking at sequential to really gauge the health of the business?
Andre Schulten
Yes. The first thing we look at, and that’s the most important thing to us is market growth and our contribution to market growth. So the first data point we’re looking at are we growing the market in value and are we contributing disproportionately to market growth in our categories. If that’s the case, we already feel a lot better because we know that will ultimately drive share growth — sequential share growth. We look — when we look at share, I don’t look at weekly share, I don’t look at monthly share, even the base period and not versus a year ago because the base period is too convoluted with supply issues, different timings for pricing, merch events being either not executed in the base period that typically get executed or shifting between periods. So really comparing weeks or months is extremely confusing, I would say, at this point in time.
So looking at sequential share, I think helps to see if we’re holding and we’re relatively holding relatively steady in the covered channels. And then the other component that is important for us is to look at all outlets here, club channel, for example. And again, there’s a lot more activity in the club channel that has been in the base period in terms of reinstating merch. For example, our Family Care business is back in merch in the club channel. Other events that we typically have done in the club channel that was smaller last year are gaining scale this year. So when we look at all outlet share data, the way that we define it, we are actually holding to growing share over every period. So that’s our indicator of whether we’re doing okay.
Lauren Lieberman
Okay. Great. And then you mentioned that the strategy, of course, is to grow categories, right. Grow markets is the core of the strategy and then market share is more of an outcome of that work. If we’re — if for example, you have a consumer recession coming and consumers making different choices, is it more difficult for P&G to be — what if categories aren’t growing, right, to what degree can you grow categories and then as a result, what does that mean for that algorithm that assumes market growth as the starting point of the strategy?
Andre Schulten
Yes. It might be more difficult. It’s also more important. The — in a period where the entire industry is pricing where the consumer is under pressure, that’s the only way to sustainably create growth. So we will double down on the market growth strategy versus letting go. What it takes is even more focus on irresistible superiority. And that is the most challenging part of the model because that forces us to drive productivity. And that’s why I mentioned in the beginning, the intensity discussion on productivity is higher than ever because we need that investment in order to fuel superiority and reinvest in our brands.
The opportunities are still huge. We talked a little bit earlier about driving regimen in laundry, for example. Household penetration in the U.S. on fabric enhancers, liquid fabric enhancers, around 30%, low penetration, only about 50%. Beats fabric enhancers, household penetration is only 20%, load penetration, 30%. So what do we do in a situation like this, we co-merch laundry detergent with fabric enhancers, provides great value to the trade, great value to the consumer, and we drive regimen trials. That regimen trial expands the market, leads to repeat. So for us, that’s a core strategy instead of going on single liquid merch, we drive regimen.
Other opportunities when you look at AI, the entire premise of that launch, adult incontinence, was the enormous potential in market growth, only one in nine women were using AI products. With superior products, destigmatizing the category and really stronger product design and communication, we were able to grow the market in the U.S., grow the market in Europe, grow the market in Japan and create share growth and value creation for us. So there are plenty of examples where we’ve done it successfully. We will not deviate from that.
Lauren Lieberman
Let’s shift maybe and talk a bit about China. So growth has been kind of subpar for a few quarters now, not just related to supply chain or seemingly the slowdown in underlying market growth. I think some of your shares have wobbled a bit. So if you could just talk a little bit about some of the reasons for the underperformance and kind of what’s being done and to get market shares on track? And what are the key categories where that’s been an issue?
Andre Schulten
Yes, China has been — after a fantastic run over the past three, four, five years with high single to low double-digit growth rates obviously, in the second year of COVID, China started to slow down. The obvious reason, consumer mobility was significantly compromised with the COVID lockdowns, and that has driven a lot of decline in our business because we’re at a relatively higher exposure to brick-and-mortar in China than maybe some of our competitor set. So department stores, hypermarkets, supermarkets, and obviously that is an immediate impact. The travel retail channel shutdown is a significant impact on SK-II, which has impacted our results negatively.
The total market contracted, as you know, in the last quarter of last fiscal year, 8% to 10%. The good news is the market is coming back. So we’re seeing neutral to positive market growth across our categories in the first quarter. Olay is doing well, Head & Shoulders is doing well, Fem Care is doing well, and when you dissect those categories that are doing well, they are superior across the five vectors of superiority.
The other categories where we’re still reconstructing have opportunities and we talked about at Baby Care’s opportunities to continue to premiumize which the team is working on. SK-II has an opportunity to, number one, as the market reopens, reestablish the trial machine and department stores. But also, there are some opportunities in terms of brand communication that the team is focusing on where we got away from the core of the proposition, and we need to focus communication again on the key benefit spaces and the ingredient story on SK-II. So the team is energized. They have the capability, both from a commercial standpoint as well as from a supply standpoint. And honestly, we’re seeing the results come back. Will it be tomorrow? No. It will probably take a few quarters before China returns to mid-single-digit growth. But I’m confident we’re on the right path, and we’ve got the right team.
Lauren Lieberman
Okay. Just two quick follow-ups on that. You mentioned Head & Shoulders being strong, is that about half of the hair care business?
Andre Schulten
Yes, Head & Shoulders is the biggest part of the portfolio and then we’ve got Pantene and Rejoice. And those two have the same opportunities that we’ve been talking about. They just — we need to work on clearly defining their position in the market, which is work underway.
Lauren Lieberman
Okay. And then the comment on growth on market, I think it was market growth is now flat to slightly up. So are you trending in line with that or shares, I guess, I’m going to guess shares are still off. So you’re still a bit below that?
Andre Schulten
Yes, it’s too early to say. Again, we’re just getting the early results. But it’s — if I look at the trend line, it’s pointing in the right direction. Whether we’re going to be over that critical zero, I don’t know yet.
Lauren Lieberman
Okay. Great. I want to come back to Europe, I know we talked a little bit about private label already. But your performance in Western Europe has been remarkable, right. And I think that may be something that a lot of investors have missed since we don’t report geographically, right. So it kind of gets washed away under the broader discussion. I’d still love to hear a bit more about why you think that is, right, why — sorry, it’s not why investors haven’t caught it, but why your performance has accelerated to the degree that it has in Western Europe over the last, I guess, it’s probably 12-ish months at this point that’s really kind of taken off and followed with what the performance has already been in the U.S.?
Andre Schulten
Yes, and it’s really — when you step back over a longer period of time, it’s really a microcosm of what the company went through. Europe used to grow somewhere between minus 1 and plus 1 for the longest period of time. The portfolio consolidation that we’ve done as a company to focus on the categories we’re in today, has been the biggest help in Europe because it really focused that organization on where we can truly create value. We also have simplified the organization set up. So the end-to-end setup in focus markets allowed us to get more clarity on who’s driving and who’s got the hands on the wheel, which is the biggest issue in multi-country geographies, right, because we always have the tension between category and market and clarifying that tension with the end-to-end model and focus on enterprise markets was a key enabler to get decision rights clean and setting up the go-to-market structure that way.
We’ve invested in sales force capability. That was probably five, six years back to ensure that we’ve got better coverage in Europe than we had before, and we drove significant productivity. So that’s set up the structural elements. And then over the past three years, we really started to benefit from fixing the superiority. And I’ll give you the example of Baby Care, the product versus the private label proposition simply was not superior three years ago. So we fundamentally stepped back and redesigned the entire diaper proposition. We changed the packaging, we changed the diaper, we changed the communication approach, and Baby Care started to grow and is outpacing the market. The same was true for Gillette, the same was true for Fem Care. So it’s the same playbook the company has used and that has shown, I think, the results. So the key focus now is obviously with the pressure on the consumer and the pressure on the P&L in Europe is to sustain that level of investment and superiority.
Lauren Lieberman
Productivity, so something that I’ve definitely talked about a bunch of the last year or so that productivity has been below historical trend line. It’s been tough to get at during this tumultuous period. As you put together the 2023 guidance, so productivity is going to play a much bigger role. And so I guess, just curious, what are some of the key buckets of savings we should think about as you return to kind of pre-COVID levels and is there anything that’s like a catch up from the past two years that you’re able to do to make up for lost time?
Andre Schulten
Yes. Let me go by bucket maybe. So COGS, the biggest driver of productivity — and there’s certainly catch up to do. As you know, we had to deprioritize cost savings for line time reasons to ensure that we get cases out the door and drive innovation. That was a conscious choice over the past 18 months. As we get our capacity-to-demand ratio back into the right place, we are catching up on those cost savings. As I mentioned before, those cost savings were always available to us. Now we have the time to qualify them on the line and they will flow through.
There is plenty of capability that has been built. So I was mentioning the reformulation capability and digital qualification there, that gives us new vectors of productivity in our cost structure. Because now we can use the same capability instead of creating flexibility and supply structure, we can create flexibility and cost structure because we could choose different materials. There’s a lot of incremental cost in the base where we had to ship products from different places that weren’t optimal in terms of lane structure and in terms of overall cost structure. But we had to because it was the only way we could get the supply, that is coming out of the base. So on our net structural savings, the growth savings part is coming back to pre-COVID levels and we’re pushing hard to get it even higher and that will be desperately needed to offset the material inflation, both commodity cost increases and raw pack material increases
Media, we have chosen over the past three years to invest in media, in working media, more than $1.2 billion, way ahead of sales growth. And on top of that, we’ve reinvested every dollar of media savings that we were able to generate. We believe that at this point in time, it’s prudent to step back. So we will take some of the media productivity we are able to generate, protect frequency and reach, but flow some of those savings through the P&L. But again, making sure that we have sufficient media in every market on every category. The capabilities in terms of generating media savings, so moving from linear TV to programmatic buying to digital tools to one-on-one, the pressure helps because now we’re rolling it out across the globe even faster and that is generating a significant amount of savings, which we then can decide whether we reinvest or we flow through. So I feel on the media side, productivity is going well. The other component that is refreshing, it’s not only the way we buy or execute media, the quality of the communication is improving significantly. So driving local insights is a key component of how we drive effectiveness and our organizations on the ground have done a fantastic job in leveraging local insights. So the communication is just a lot more to the task in each of the markets.
John Chevalier
And value communication also in an environment like this.
Andre Schulten
And then on the org side, we continue to look at opportunities to streamline the organization. So that’s been an ongoing effort, but more in the sense of again, further clarifying direct access to the market, direct access to decisions.
Lauren Lieberman
Okay. And also longer term, productivity, which isn’t really what supply chain 3.0 is but I still find it goes in this bucket. Net iteration of supply chain reinvention and you’ve mentioned a few times over the last couple of months, I think we’ll get a lot more dialogue around that in November. But I just, maybe to set the stage for why we’re talking about that now, the sort of what that means for future-proofing the company, and how far out this project is meant to take you, just how far are you thinking in this design work, which, again, we’ll get more details on to come?
Andre Schulten
Yes, it really is building on a lot of the base capabilities that we’ve seen play out over the past three years. And the intention is twofold. Number one, we’ve been making capacity and we’re making capacity investments this year in order to catch up with significant volume growth we’ve experienced. And the next wave of that relief of capacity is much more efficiently done by increasing the efficiency of our supply chain instead of simply adding new lines. So that’s one objective. The other objective is to consistently improve service levels to our customers, and we’re just living in a different world today. Pre-COVID, we were used to a relatively stable demand and supply stream. I think that world has gone. There’s much more volatility that we need to deal with. So using data and data synchronization all the way from the shelf signal to our supply chain upstream is going to be a critical capability to ensure that we have early visibility and we can deal with this volatility without increasing costs significantly and without compromising service levels. There’s a component of digitization and automation, both in the qualification of new products, qualification of cost savings, but also moving P&G work to higher order tasks and automating maybe tasks where P&G people don’t add that much value. And that also has a resiliency component. So those are the elements we’re looking at. The program, think of it as a three to five-year program. But you’ll hear more in November.
Lauren Lieberman
Okay. Great. Digital, you just mentioned, and I think that’s been one of John’s focus areas. So as you think about digital capabilities as they exist today, where do you think P&G is relative to the industry, I guess — and what does that mean in practice, like are there bottlenecks to moving as quickly as you might want to?
Andre Schulten
I think the — the objective here is to use the enormous amount of data that we have coming our way to drive faster decision-making, better decision-making, eliminate duplication of work within the organization and really enable all the data points to be connected. When you think about we’re getting data from retailers, we’re getting data from our suppliers, we’re getting end market data, getting consumer data via our consumer hotline, we get great instant reviews, we’re getting quality data from our lines, process reliability, all of those things. What we’ve been able to do — what we’ve been doing over the past years is put all those data signals in one data lake. So first of all, they are accessible and they are compatible. So we can now put those data sets together.
The next idea here is to then use the data in the most effective way. And it’s not about using algorithms or using technology, it’s about what are we trying to accomplish and what we’re trying to accomplish is better decision making, faster decision making, automation and efficiency. So that’s what we’re after. What it requires is upskilling in the organization because to a degree, it requires everyone to be able to put those data sets together. It requires more integrated decision-making, meaning less people involved. And so we’re combining it with a more skill-based organization set so that the people who are — who have access to the data are capable of using it in the most efficient way.
Lauren Lieberman
Okay. Just quickly, last question. I just wanted to touch on capital allocation. Is there room for P&G to do deals that are slightly larger than what you’ve seen lately in beauty or appetite, of the recent acquisitions you’ve done in the past few years, has anything really kind of underperformed or not lived up to expectations that’s worth calling out?
Andre Schulten
Capital allocation, the same principle supply that we’ve applied over the past years, we will fully fund the business, no compromise there. You’ve seen us increase our CAPEX spend forecast to 4% to 5% this year to deal with the capacity catch up and building the supply chain stream for no capabilities. We will continue to pay a dividend. We won’t deviate there. And then if there is a need and desire for an acquisition, that’s certainly possible. We don’t have a strong desire to do larger acquisitions. It’s not needed. It will distract us. And at this point in time, there’s really no desire or visibility to anything we would do. The smaller acquisitions that we’ve done are working well. Native is a good example of us being successfully able to scale. The other ones are too early, but you’ll see us stick with that strategy, small tuck-ins that we can scale.
Lauren Lieberman
Okay. Great. We’re exactly out of time. So we’re going to go to break out. But everyone, please join me in thanking Andre and John for being with us this year.
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