The Procter & Gamble Company (NYSE:PG) Deutsche Bank dbAccess Global Consumer Conference June 16, 2022 4:30 AM ET
Company Participants
Andre Schulten – CFO
Jon Moeller – CEO
Conference Call Participants
Stephen Powers – Deutsche Bank
Unidentified Company Representative
P&G would like to remind you that today’s 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.
Additionally, the company has posted on its Investor Relations website, www.pginvestor.com, a full reconciliation of non-GAAP and other financial measures.
Stephen Powers
All right. Welcome back, everybody, and welcome, P&G, to the conference. With us today from P&G are President and Chief Executive Officer Jon Moeller; and Chief Financial Officer Andre Schulten.
The way that the session will run is we’ll — first, Jon and Andre will tag team on our presentation, and then we’ll use the balance of time for Q&A.
With that, I’m going to hand it over to Andre to kick us off. Thank you.
Andre Schulten
Thank you, Steve. Good morning, everyone. So I’ll start today with a review of results and an update on the macroeconomic headwinds we’re seeing. Jon will discuss strategies, and then we look forward to answering any questions you might have after our prepared remarks.
So starting with results. We see continued strong momentum despite one of the most challenging cost and operational environments we’ve experienced. Through March, organic sales are up 7%; core earnings per share, up 1% despite a 19% impact from macro headwinds.
We’re continuing our strong track record of cash return to shareowners. In April, we announced a 5% increase in our dividend. Through the March quarter, we’ve returned over $15 billion to shareowners, $6.5 billion in dividends and $8.8 billion in share repurchase.
On the top line, Q3 was the 15th straight quarter of organic sales and market share growth. Organic sales growth of 10% in Q3 is the highest level of growth in over 20 years.
The growth is broad based. Each of our 10 product categories grew or held organic sales through the third quarter. Focus markets are up 6%. Enterprise markets up 8%. 5 out of 6 regions grew organic sales.
Share growth is also broad based. 38 of our top 50 category-country combinations grew or held value share through April. Global aggregate market share grew in each of the past 15 months. Globally, 9 of 10 product categories grew or held share over the past 3, 6 and 12 months. Consumers continue to prefer P&G brands, recognizing their superior performance and value.
While our results and share momentum give us confidence our strategies are working, our eyes are also wide open to the many challenges we face. We see continued impact from macroeconomic events, putting pressure on market growth in some parts of the world and on supply chains globally. We continue to see labor shortages impacting the entire chain, from suppliers to ports to trucking, from retailers to our own manufacturing logistics operations.
While the frequency and severity of these issues have improved over the last several months, these challenges still require sustained organizational capacity and financial investment to mitigate. More specifically, in the current quarter, the extended COVID lockdowns in China and the effects on Chinese consumers are resulting in softer market conditions than anticipated when we last gave guidance. In Russia, the pace of shipments has slowed as the combination of a streamlined portfolio and price increases has impacted sales more significantly than expected. In addition, we saw a pull forward of volume into March as retailers were concerned about a lack of product availability.
Commodity, freight and foreign exchange impacts have moved significantly since the start of the year. At the beginning of fiscal ’22, we guided to a combined after-tax headwind of $1.8 billion for the year. When we reported Q3 results in April, those headwinds had increased to $3.2 billion, a 22% negative impact on core EPS growth.
While some feedstock costs and spot rate prices have begun to stabilize, upstream labor and energy cost inflation hitting our suppliers and service providers, along with inflation in our own direct costs, are affecting us more this quarter and will have a larger impact next fiscal year.
Taken together, the headwinds this quarter are modestly higher than expected on both the top and bottom line. While these are relatively modest deviations from where we thought we’d be, we want to be transparent about where we are trending in this dynamic environment and about our intention to continue to invest in our business.
Regarding next fiscal year, we’ll give full guidance when we release earnings on July 29. But as we look forward today, we estimate incremental costs and foreign exchange headwinds of over $2.5 billion after tax in fiscal 2023. These costs and operational challenges are not unique to P&G, and we won’t be immune from their impacts. However, we think the strategies we’ve chosen, the investments we continue to make and our focus on executional excellence have positioned us well to manage through these challenges over time.
We will continue to prioritize innovation to drive the irresistible superiority of our brands. We combine superior innovation with pricing when possible to improve the overall value proposition for our consumers, maintain our superiority advantage and drive category growth for our retail partners.
In addition, we’re committed to driving cost savings and cash productivity in all facets of our business. No area of cost is left untouched. Each business is driving productivity within their P&L and balance sheet to support balanced top and bottom line growth and strong cash generation.
Since the start of the fiscal year, we’ve taken pricing in each of our 10 product categories in the U.S., covering nearly 80% of sales. We’ve already announced additional pricing in Feminine Care, mid-tier laundry and portions of our Home and Oral Care businesses effective this summer. More recently, we’ve announced pricing in U.S. Hair Care, Skin Care and Personal Care. We’re also pricing as needed in markets outside the U.S. for both commodity costs and foreign exchange impacts.
As always, each category in each market is continually assessing the cost impacts they face and the potential need for pricing. If there are decisions to price, the degree and timing of those moves will be very specific to the category, brand and sometimes the individual SKU. This is not a one-size-fits-all approach. Pricing and productivity are necessary to maintain our superiority across all vectors, including value for the consumer, which allows us to drive category growth for us and for our retail partners.
As we’ve said before, we believe this is a bottom line rough patch to grow through. We remain focused on our strategy and on delivering balanced growth, top line, bottom line and cash. This reinforces the importance of continuing to invest in the superiority of our brands even when our costs are rising sharply and especially when consumers are even more focused on the performance and value of the brands they choose.
Now let me turn it over to Jon to discuss our strategies.
Jon Moeller
Thanks, Andre, and good morning. I’ll begin by reinforcing Andre’s last point, the importance of balanced top line growth.
Our integrated set of strategies have enabled balanced growth and we believe position us well going forward, a focused portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice.
Superiority to win with consumers. We continue to raise the bar on all aspects of superiority, product, package, brand communication, retail execution and value, and all price tiers where we compete. We started doubling down on superiority in fiscal ’16. We judged at that time about 30% of our portfolio in terms of sales was superior. We’re now at 75%, but the remaining 25% isn’t the measure of opportunity. Superiority is a relative measure versus the best competitors in the market. It’s not a static target. There’s always upside to grow categories and delight consumers. Superior offerings delivered with superior execution drive market growth. Leading category growth with superior offerings mathematically builds market share and builds business for our retail partners.
Superior products. In January, we launched a superior premium exfoliating razor in the U.S. and the U.K., and early results are strong. In the U.K., Gillette Labs is the number one razor in the country, already achieving 26% market share after only 5 months in market. This is driving total U.K. grooming value share growth of nearly 5 points over the last 6 months. Importantly, this innovation drives category growth. The U.K. male blades and razors category is growing by more than 15% with P&G delivering 85% of this growth. In the U.S., Gillette Labs has obtained over a 9% value share.
Superior packaging. We launched a new paper-based package on our premium Always cotton protection pads in select stores in Germany. It’s made from renewable resources and can be recycled. Let’s watch how these benefits are communicated.
[Audio/Video Presentation]
Jon Moeller
Sales increased over 50%, 5-0 percent, behind this packaging upgrade as we combine this innovation with pricing in the market. This innovation has been recognized externally with two prestigious packaging awards, just one example of how we’re delivering a superior proposition while meeting an increasing consumer desire for environmental and social sustainability.
So we’ve talked product, package, superior communication. We continue to invest in advertising to communicate the superiority of P&G offerings across price tiers. A good example is our premier power toothbrush, Oral-B iO. When Oral-B iO launched in Germany, it became the hero SKU across the Oral-B brand communication, delivering over 2 billion impressions. iO executed a highly targeted plan with nearly 50% of the advertising investments skewed to digital to reach consumers where they’re most receptive. Let’s watch this copy.
[Audio/Video Presentation]
Jon Moeller
Results are strong. One year after the launch, the super premium segment of Oral-B doubled to 30% in Germany, driving category market growth.
Communicating the benefits of our superior brands is always important. In the current inflationary environment, communicating the value of our brands is even more important. Let’s look at two examples.
Charmin’s current campaign, Roll It Back, educates consumers they can use less due to Charmin’s superior absorbency. Let’s watch this copy.
[Audio/Video Presentation]
Jon Moeller
Value-focused communication is especially important in family care given the high penetration of private label in these categories. Over the past 6 months, U.S. Family Care value share is up 80 basis points even as private label share starts to recover.
Superior communication extends to multiple touch points, including on-pack value messaging, which reaches the consumer at the point of purchase. In the U.K., on-pack communication highlights that Fairy hand dishwashing liquid washes up to 2x more than the next selling brand. This reinforces the extra mileage and better value of a superior-performing products and drives growth. U.K. Fairy share is up over 1 point in the past 12 months.
Moving to superior execution. In February, we launched Dawn EZ-Squeeze in North America and Fairy Max Power across multiple markets in Europe. Great innovation that delivers superiority across all five vectors. But let’s double-click on the superior retail execution.
In Europe, the Fairy Max Power launch enabled incremental distribution in shelf space across multiple markets and retailers. Early results are encouraging. In the U.K., after only a few months in the market, Max Power has achieved a 10% share, on average, where launched and is driving category premiumization.
In U.S. Dish Care, the Dawn brand is a great example of coupling price increases with innovation. When we launched the Dawn EZ-Squeeze innovation, we also upgraded formulas across the entire Dawn lineup while taking a high single-digit price increase. The EZ-Squeeze innovation checks all the superiority boxes: superior product, package, brand communication, in-store execution and consumer value.
With the strength of the consumer proposition, some retailers chose to merchandise EZ-Squeeze with full-price end cap displays, enhancing shopper awareness of the innovation while improving retailer value in the process.
Tide and Ariel are a great example of building a superior value equation for consumers and customers. For consumers, Tide and Ariel laundry detergents enable superior cleaning performance in cold water washing. This creates cost benefits for consumers and environmental benefits for the planet.
The savings from switching from hot to cold washing can nearly offset the cost of Tide or Ariel liquid detergent in each load. The superior cold water performance is a strong competitive advantage. It enables immediate energy cost savings for consumers and avoids the cost of rewashing, which may be necessary with less effective detergents. In addition, washing with cold water improves sustainability by reducing the energy required to heat water in the laundry process and by improving garment lifespans. For customers, innovation like POWER PODS helps drive category growth, the only growth retailers care about.
Superiority is extremely important in an environment where consumer costs are rising. We’re innovating across price tiers, ensuring we provide value to the consumers in all price tiers where we compete. Providing value for the consumer and value for retail partners in an environment of rising costs drives category growth, and it’s why we’ll continue to invest in our products and our capabilities.
The strategic need for investment to continue to strengthen the long-term health and competitiveness of our brands, the short-term need to manage through significant cost increases and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity. We remain fully committed to productivity as a core driver of balanced top and bottom line growth over time.
Success in our highly competitive industry also requires agility that comes with a mindset of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future. In the current environment, that agility and constructive disruption mindset are even more important.
Our organization structure yields a more empowered, agile and accountable organization with little overlap or redundancy, flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world.
Going forward, there are four areas in which we need to be even more deliberate and intentional to strengthen the execution of our strategy: supply chain innovation, capacity, agility, resilience for a new reality and a new age; environmental sustainability; increase in our digital acumen to drive consumer and customer preference, reduce costs and enable rapid and efficient decision-making; and our employee value equation for all genders, races, ethnicities, sexual orientations, ages and abilities, for all roles to ensure we continue to attract, retain and develop the very best talent.
These are not new or separate strategies. They’re necessary elements in continuing to build superiority and reducing cost to enable investment and value creation and strengthening our organization. They are part of the constructive disruption we must continue to lead.
As mentioned earlier, our focus remains on balanced top and bottom line growth. In the ever more complex world we live in, it’s not just top and bottom line that must be balanced, we must endeavor to balance the needs of an increasing number of constituents, where we’re unlikely to deliver against the needs of any of them.
Consumer, customer, employee, society and shareowner needs must each be met. There is no choice to make here. There is no opt-out. Servicing and balancing the needs of each of these constituents will not be easy, but it’s necessary. And those that do it best, as I expect we will, should thrive. Better be balanced, top line, bottom line, and effective in serving a growing number of constituents.
These strategic choices, portfolio superiority, productivity, constructive disruption and organization and culture, are not independent strategies. They reinforce and build on each other. When executed well, they grow markets and, in turn, deliver strong sales, shares, earnings and cash results, leading to balanced growth and value creation.
Our strategies were delivering strong results before the crisis and have served us well during these more recent volatile times. They remain the right strategic choices to drive balanced growth and value creation. We’re stepping forward, not back, focused on growing through the near-term challenges we’re facing. We’re doubling down to serve consumers and our communities. We’re doing this in our interest, in society’s interest and in the interest of our long-term shareowners. Thank you.
Steve?
Question-and-Answer Session
Q – Stephen Powers
All right. Thank you, both. Let’s start — let’s — first, I want to clarify some of the things that Andre mentioned at the start. Modest deviations both top and bottom line, in the current quarter. Softer conditions associated with China and Russia, yet no change to guidance. So I’m taking that as a — we should shade our expectations lower within the range as opposed to necessarily completely altering our expectations, but can — maybe you can confirm.
Andre Schulten
Yes. As you say, Steve, no change to guidance that we’ve given. But certainly, the degree of difficulty is increasing to get to those ranges. As we said specifically on the bottom line, we had hinted to the lower range of the guidance. So closer to 3% rather than the upper range. That certainly continues to be true. And we just want to register that the difficulty of the guide is increasing, as you would expect with the effects that we described.
Stephen Powers
Yes. And on China specifically, do you have an expectation for the — assuming no further lockdowns, et cetera, which is, I know, a decent size assumption, but from here, given the pace of recovery that you’re seeing, what is the time line of expectations for that business to get up to a more normalized run rate?
Andre Schulten
We’ve seen markets contract over the past 2 months mid-singles in our categories in China. In the latest month, we’ve seen contraction in double digits. We — as the lockdowns ease in many of the cities, we expect to return over a period of time to mid-singles in terms of growth in our categories. What exactly that time line is, I’m not sure, but we certainly hope that towards — over the next few quarters, we’ll see China return to mid-singles.
Jon Moeller
And while it’s right to understand each of the individual challenges, one of the messages I want to leave you with is despite many individual challenges, the growth remained strong on both the top line — and despite massive cost increases, we expect to deliver growth on the bottom line.
Stephen Powers
Okay. Looking ahead, Andre, you mentioned $2.5 billion-or-so incremental costs in ’23, supply chain challenges into ’23. But Jon, you also mentioned, yes, well, emphasized, as you have for a long time, the need to grow both top and bottom line to generate consistent returns to shareholders. Do you expect to be able to grow both top and bottom line in fiscal ’23?
Jon Moeller
Currently, yes.
Stephen Powers
Okay. Is there an order of magnitude associated with the yes?
Jon Moeller
End of August.
Stephen Powers
Very good. Very good. Okay.
Jon Moeller
Sorry, beginning of August. We’ll do better than that. .
Stephen Powers
Yes, right. And pricing and productivity is necessary to offset these challenges. That was — that’s been clear — that was clear in the presentation. We’ve heard differing views on the likelihood of incremental pricing being available, as it has been, as we go forward for a combination of consumer and customer considerations. What’s your perspective on the future pricing environment, how you’re thinking about that, and scenario modeling that, number one? And maybe that varies by geography.
And number two, from a productivity standpoint, what is your visibility into a pool of productivity looking out over the next year?
Andre Schulten
I’ll start. I’m sure Jon will add.
The industry as a whole, I think you’ll continue to see a need for more pricing, and that’s not different for us. And I think the most important element for us is the way we take pricing includes pricing with innovation wherever we can, building value for the consumer and building value for customers at the same time. We’re pricing very deliberately in a way that we respect key price points. We tailor to our customers’ needs by channel. And that is resulting in way better elasticities than what we would have expected based on historical data.
We do anticipate and we’ve announced more price increases, which we managed in the script. We have not seen — other than constructive discussions with our retailers on how to maximize the impact and protect traffic and protect the consumer in the right way, but we’ve not seen broad pushback on pricing, and we don’t expect that going forward. So pricing will continue to be an important building block in the recovery, and we’ll continue to do it in a very deliberate way, combining it with innovation, reflecting key price points, tailoring it to our customers’ needs by channel.
Stephen Powers
Okay.
Andre Schulten
Anything on pricing, Jon, before you go to productivity?
Jon Moeller
Move on.
Andre Schulten
On productivity, it has to be and will continue to be a key focus area for us in recovering gross margin dollars and gross margin percentages over time. .
In terms of the sources of productivity on our marketing investment, we continue to see significant opportunity by further digitizing and targeting better, improving reach and quality of reach at the same time. No change.
In terms of cost of goods productivity, three buckets I will describe. One is commercial savings available to us. The second bucket is just sheer improvement in our throughput and now the way that we produce. And the third one is innovation-related improvements.
Buckets 2 and 3, fully available to us. Actually, if anything, we’ve delayed some of those cost of good savings, and we are hopefully able to execute those over the next few months.
The big headwind relates to supplier commercial savings. And as we’ve mentioned in the script, our suppliers up the chain are also seeing significant impacts from labor costs, their input costs, their energy costs, and that will hinder the ability to really generate commercial savings in that context.
Stephen Powers
Is that inflation in the $2.5 billion you mentioned? Or is that incremental to the $2.5 billion?
Andre Schulten
That is in that number.
Stephen Powers
Sorry, in?
Andre Schulten
It is in that number, yes.
Jon Moeller
Yes.
Stephen Powers
Very good. This — the bucket 2, I think it was, the operational savings, the supply chain challenges that linger and that you see persisting into the year, that’s not an inhibitor to you going after those savings? Because that has been a bit of a challenge so far.
Jon Moeller
We’re getting to a point of more efficient operations, more closely matching both demand and supply. We’re in a much better place than we were, say, 6, 12 months ago. And that gives us — we’re also bringing on new capacity.
So I view the whole supply equation as a tailwind as we move forward.
Stephen Powers
Okay.
Jon Moeller
And it’s the one thing that our retail partners are most interested in having as they try to meet the demands of their shoppers. So supply should be a very good story going forward.
Stephen Powers
Okay. As your supply improves and as retailers face pressure, as we now have seen them facing pressure, does that put pressure and a headwind on inventories, basically, inventories in the channel? Do you expect to be challenged to run leaner as your capabilities improve? .
Jon Moeller
There’s always pressure on inventories. But inventories are in a very good place across the chain right now. So that’s not in any way a large part of the conversation we’re having with our retail partners currently. It’s much more about supply and restocking the inventory and making sure that on-shelf availability is high. And most importantly, it’s about how can we work together to grow markets. What innovation are you bringing to the marketplace that will allow me to increase trips, that will allow me to increase the average size of a market basket? Those are 1, 2, 3, 4, 5 and 6 points of the discussion. .
Stephen Powers
Okay. Okay. So the superiority model, which has been so powerful over the last several years since — really since you unveiled it, it hasn’t been recession tested, at least not in a big, big way. How does the application of that model change, if at all, in a recessionary environment? .
Jon Moeller
The emphasis increases.
Stephen Powers
Okay.
Jon Moeller
And it actually, in a strange way, has been tested, albeit, you’re right, not necessarily in a North American or European context. But if we look at the enterprise market world, which I worked in for the last 2 or 3 years, take a market like Turkey, Argentina, Egypt, very significant pricing to cover both commodities and foreign exchange, continued investment in superiority. And as a result, over time, margins holding or growing and essentially maintaining our market share positions. So in that context, it is tested and it holds up.
Andre Schulten
The only other thing I would mention, it’s important to recall that superiority doesn’t mean premiumization.
Jon Moeller
Right.
Andre Schulten
It means superiority in every tier, at every price point. So at the lower price points, we built out a price level over the past 5, 6 years that meets the demand for cash outlay and value for more consumers. And we’re clearly benchmarking at each level to be superior. So not just at the premium level.
Jon Moeller
And there is a subset of consumers for whom price alone is extraordinarily important just from a cash outlay standpoint. And we’re very intentional, ensuring we have offerings that meet those low-cash outlay needs.
But for the majority of consumers, it’s not about price in isolation. It really isn’t. It’s about value and am I getting something that’s worth paying that extra nickel or dime for, which is why we cannot step backwards on these investments and the delight that our products provide consumers and their families. But it’s that value equation that we have to deliver on, not — typically except for that subset of consumers at a given price point.
Stephen Powers
Right. For that subset, how do you balance the messaging to that cohort of consumers so that you’re able to capture but not necessarily entice trade down?
Andre Schulten
I think we showed some examples of it earlier, but it is performance-based value messaging, very deliberate in copy, on package, at the shelf, whether that’s a physical or a virtual shelf.
And just for context, if we look at the U.S. as an example, the percentage of households that we serve that we would classify as lower income and, therefore, more susceptible to this dynamic is about 15%, meaning that 85% of households we’re serving follow a different value dynamic. So it’s not something we can ignore, but it’s not something that — and we shouldn’t ignore the 85%.
Stephen Powers
And the readiness of the portfolio to capture that cohort of consumers that want use the trade down with things like Tide Simply in laundry and Bounty Essentials and Charmin Essentials and — can you, I guess…
Jon Moeller
Never good enough but much better than during the last recession by a mile. .
Stephen Powers
Okay. Good. Your reinvestment plans, as the superiority model becomes more important, the investments you’ve been making, and you mentioned a number of them around — against digital, against supply chain and obviously against R&D and branding, do those — or is P&G on offense? Do those reinvestments continue if not accelerate? Or is this a time when P&G potentially pulls back in order to deliver the balanced growth we talked about earlier? .
Andre Schulten
As Jon said, I think in the current situation from our point of view, the only way forward is to double down on the strategy, double down on superiority but double down on productivity as well. But productivity needs to be seen as true efficiency, not as reducing the investment in our brands.
So absolutely, we will double down on innovation, we will double down on brand investments, higher reach, better quality of reach. So you won’t see us back away from that and will actually double down on supply chain investments to make our supply chain an even more important vector in terms of strategic superiority for our retail partners. So all of that is true.
At the same time, we need to continue to drive efficiency in each of these buckets. So the investment levels will continue; focus on efficiency at the same time.
Jon Moeller
Steve, if we step back from superiority, from a commitment to driving market growth, creating business versus taking business, I quit. I’m not going to a different movie.
Stephen Powers
Okay. Don’t quit. From a portfolio construction standpoint, you’ve worked very hard to get the portfolio to where it is. But you’ve also talked about openness to optimization through addition at this point.
In the current — against the current backdrop, does that appetite or interest level in adding inorganically change at all? Does it go up? Does it go down? Do you believe there’ll be more opportunity, less opportunity to do that? How do you think about it?
Jon Moeller
It’s not a big part of the overall equation to start with. And the level depends on the degree of opportunity and the value of that opportunity. So it’s really an individual assessment across individual opportunities. I hope and I think you’ve seen us be very disciplined in this regard, and I expect us to continue to be.
Stephen Powers
Okay. We’ve just got a couple of minutes left, so maybe one last question. And that is essentially, how should we all measure your success a year from now when we come back here? What do you need to achieve both maybe quantitatively against objectives you set in August but also qualitatively in terms of furthering the strategy?
Jon Moeller
Continuing to be a disproportionate contributor to market growth across our categories, across the regions we compete in; balanced growth, growing both the top and bottom line in a very, very difficult environment; and an organization that is extremely committed and excited about continuing their service to consumers and customers.
Stephen Powers
Great. On that note, we’ll end.
Andre Schulten
Thank you very much.
Jon Moeller
Thanks, everybody.
Andre Schulten
Thank you.
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