The Procter & Gamble Company (PG) Earnings Call Transcript & Summary

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.

Good morning. I'm now pleased to welcome Procter & Gamble back to the conference. Presenting today on behalf of P&G will be David Taylor, Chairman and CEO; and Jon Moeller, Vice Chairman, COO and CFO. 3 years ago at CAGNY, David and Jon outlined a plan to get P&G back on track, a plan based on the superiority of products, packages, brand communication, retail execution and consumer value; a plan based on restoring balance between top and bottom line growth, all while maximizing free cash flow. I think we'd all say it appears to be working very well. To tell us more about it, I'll turn things over to Jon first. David, Jon, thanks to you both for being here.

Thank you, Steve. I want to start with a chart that you've seen before. It shows the importance of balance by illustrating what would have to be true to deliver top third total shareholder return exclusively through the top line or exclusively through the bottom line. First, top line. To generate top third TSR in our industry exclusively through the top line, we would have to deliver 8% organic sales growth year-on-year every year. This has never happened at our company or in our industry. It's simply not a likely scenario. Delivering top third TSR exclusively through the bottom line requires close to 200 basis points of margin growth per year. 5 years, 10 margin points in a highly competitive industry? Not likely. Top line without bottom line, a waste of time; bottom line without top line, just a matter of time. Both are required, along of course, with strong cash productivity. Better be balanced, one of the most important physical laws of the economic universe. The most sustainable and profitable way to grow is to create new business versus just taking it or trading it. This chart captures a McKinsey study of top line growth drivers in consumer products. That one little red box represents share growth. Superior offerings drive market growth. This creates a winning proposition for all concerned, high expansion versus zero sum. It's the only growth retailers care about, that which is incremental to the category. And if we lead category growth, we will mathematically build share. We increasingly look at contribution to market growth as a critical measure of business health and success. This chart shows how P&G's 10 categories delivered against the goal of driving market growth fiscal year-to-date through November. The white circle is P&G's market share. The blue circle is our contribution to market growth. A blue line signals where we contributed growth above our fair share and a red line where we didn't. In total, we drove 28% of the global growth in the categories in which we compete year-to-date, with 6 categories driving most of this growth. Strong progress, but more work to be done. Here's the U.S. over that same time period: 8 out of 10 categories driving category growth, with 45% of total U.S. growth coming from P&G. Again, that's 45% of the growth in the total market being driven by P&G, ahead of our 32% value share position. So market matters, another physical law in addition to better be balanced of the economic universe. Market matters, as does consumer relevancy and superiority, which drives it, all funded by productivity. With this formula, we've driven front half results: organic sales up 6%; core earnings per share up 18%; currency-neutral core earnings per share up 19%; adjusted free cash flow productivity, 96%; $10 billion of cash returned to owners. Each of these metrics in line or ahead of objectives set going into the year. The last 6 quarters of organic sales growth: 4%, 4%, 5%, 7%, 7% and 5%. Volume, pricing and mix each contributing to top line momentum. Broad-based growth. 10 of our 10 global categories grew or held organic sales in the front half. Skin and Personal Care and Personal Health Care up double digits. Oral Care, Feminine Care, Home Care, Fabric Care, Hair Care and Family Care up mid-single digits. All 6 regions grew organic sales mid-single digits or higher in the front half. 15 out of 15 top markets grew. Aggregate global value share up versus a year ago. 33 of our top 50 country category combinations held or grew value share in the front half, in line with fiscal '19 and up from 26 in fiscal '18, 23 in fiscal '17 and 17 in fiscal '16. So in chronological order, 17, 23, 26, 33, 33. 8 of 10 global categories held or grew share. On the bottom line, as I mentioned earlier, front half fiscal year 2020 core earnings per share up 18%, plus 19% on a currency-neutral basis. Significant margin improvement. Core gross margin up 190 basis points, core operating margin up 220 basis points. This continued progress contributes to our status as a highly profitable company. Before-tax operating margins are among the highest in the industry, behind only Reckitt and Colgate, whose margins reflect their concentrations in health care. We also have significant below-the-line advantages, operating with one of the lowest interest expense percentages and one of the lowest tax rates, putting us near the top of the industry in after-tax margin, already highly profitable and aggressively driving more savings. We're focusing on cost and cash productivity, steadily returning more money at leadership levels to shareowners. We increased our dividend 4% last April, the 63rd consecutive annual increase and the 129th consecutive year in which P&G has paid a dividend. P&G is one of only 10 U.S. companies to pay a dividend for more than 120 consecutive years. Only 3 U.S. companies have increased dividends more consecutive years than P&G. Over the last 10 years, the annual dividend has increased from $1.64 per share to $2.90 per share, up almost 80%, returning $68 billion of cash to shareowners, $135 billion including share repurchase. We're outlooking another $14.5 billion to $15.5 billion of cash return this fiscal year through a combination of dividends and share repurchase. So again, strong first half results for fiscal 2020 and the second consecutive quarter of increases to our guidance, top line, bottom line and cash. These results required us to overcome meaningful challenges. We continue to operate in a very dynamic environment, changing government policies, including tax, trade, privacy, import restrictions, currency controls. We face market-level challenges in an increasing number of geographies: India, the U.K., Australia, Turkey, Iraq, Nigeria, Kenya, Lebanon, Argentina, Chile, Mexico and the Hong Kong market. We continue to face highly capable multinational and local, branded and private label competitors, each determined to win. And most recently, we face the demand and supply challenges associated with the coronavirus outbreaks. China is our second largest market, sales and profit. Store traffic is down considerably, with many stores closed or operating with reduced hours. Some of the demand has shifted online, but supply of delivery operators and labor is limited. These are -- there are also impacts outside of China: travel retail, a significant reduction in department store traffic in many Asian metro areas, and global supply. We access 387 suppliers in China that ship to us globally more than 9,000 different materials, impacting approximately 17,600 different finished product items. Each of these suppliers faces their own challenges in resuming operations. The operating challenges change with the hour. And of course, the path of the virus is unknown, making it very difficult to provide precise estimates of impact. Results for the January to March quarter in China and for the total company will be materially impacted on both the top and bottom line by these dynamics. We continue to believe, based on what we know today, that our fiscal year top and bottom line guidance ranges, and I emphasize ranges, remain the right ones. We will continue to monitor the situation and obviously update you if and when a different reality becomes apparent. Now the best response to each of the uncertainties and sources of volatility we face is to double down on the integrated set of strategies that we've put in place over the last several years, which are driving the strong results we share this morning. These integrated and mutually reinforcing strategies position us well within our industry to deal with near-term macro, operational and competitive challenges. They are a foundation for strong, balanced growth and value creation over the short, mid and long term. The best response is to push forward, not to pull back, and that's exactly what we intend to do. I'll turn this over to David, who will elaborate on these strategies and their business-building and value-creation potential.

Thanks, Jon, and good morning, everybody. I think it's worth taking a few minutes to highlight the actions we've taken to return P&G to balance and top -- balance top and bottom line growth. As Jon and I stood in front of you at this conference in 2016 and laid out the company's plans to return P&G to balanced growth and value creation, while some of the language has evolved over the last 4 years, the actions and results achieved flow straight from what we described in February 2016. First, we said we would continue to focus our portfolio in the 10 categories that leverage P&G's strengths. These are daily use categories where performance drives brand choice, and categories where we occupy a #1 or #2 position, which have historically grown faster than the balance of the company and done so more profitably. As we move forward, we apply the same screening. We want to win in daily use categories in attractive industries where performance drives brand choice. We've expanded our portfolio organically into fast-growing segments within these categories, including more natural diapers and feminine care products, female razors with the launch of Joy and Gillette Enrich Beard & Face Care, to name a few. We've also made acquisitions where this made more sense. Some examples include This Is L, now the #1 natural feminine care product in the U.S.; Native, the top natural deodorant in the U.S.; First Aid Beauty in the specialty beauty skincare; Walker & Company, Snowberry and, of course, the Merck OTC assets. Each fit the strategic screen we discussed. The Merck acquisition is on track and as of December, fully incorporated into our organic sales and profit. Merck plays across a broad global footprint with strong brands that offer remedies for relieving muscle, joint and back pain, colds and headaches as well as supporting physical activity and mobility, many of which are treatment areas we didn't previously offer in our portfolio. It is a $1 billion consumer health business, consistently growing sales in the mid- to high single digits before and since acquisition. We said that within these categories, we would raise the bar on all aspects of superiority. We recognize that our offerings were not sufficiently superior across all dimensions, and we needed to raise the bar. We previously defined superiority in technical terms, in our terms, not the consumers' terms. We focused primarily on product superiority and put insufficient focus on packaging, communication, retail execution and value. As we raised the standards for each of these areas and evaluated our status, only 30% of our products, packages, communication, retail execution and value were truly superior to competitive offerings. While we had established superiority as a critical how-to-win choice, we had a lot of work to do and investments to make. Currently, about 70% of our offerings are judged superior. Good progress, more work to do. We also identified a clear geographic where to play choices. We said we'd start with the U.S. and China and then focus on our top 10 markets. Back then, we called those end-to-end markets. Now they're called focus markets. We said that we'd selectively invest in other markets and change the operating model. At that time, we called them freedom within a framework markets. These became our enterprise markets. We also established fast-growing channels like e-commerce and small format stores as clear where to play choices with the desire to be competitive wherever consumers want to shop. We've made great progress in each of these fronts. We've accelerated U.S. sales to 4% last fiscal year and 5% in the first half of this year. 9 of 10 categories grew organic sales in the front half of fiscal 2020. We've made significant progress in China, improving from a 5% organic sales decline in fiscal '16 to 1% growth in fiscal '17, 7% growth in fiscal '18, 10% fiscal '19, up 13% in the front half of fiscal 2020. E-commerce. Sales have grown 30% in the front half of fiscal 2020, growing or holding value share in 8 of 10 global categories. Annualized, we're now at over $6 billion in sales or about 10% of our company total. To fund these investments we know we needed to make, and to continue to build margin, we announced another round of productivity, up to $10 billion over 5 years, and I'm proud to say productivity has now become who we are and an area of ongoing commitment. Finally, we said we would address P&G's organization and culture, which many had said become too slow, too complicated, too bureaucratic to compete in today's business environment. Over the last few years, we've made the changes necessary to make P&G a leader again and a winner again, such as supplementing our internal talent with skilled, experienced external hiring, tying rewards more closely to results and improving category dedication and mastery. On July 1, 2019 we moved to a new organization structure: 6 industry-based sector business units that manage our 10 product categories with a differentiated approach in focused markets and enterprise markets. This new structure enables a more empowered, agile and accountable organization to accelerate growth and value creation. We closed our 2016 talk by asking the question, is P&G willing to change? I hope you'll agree with us that the answer is a resounding yes. P&G has been and will continue to be willing to change anything and everything needed to win. The only things we will not change are our purpose, values and principles and our commitment to winning and delivering results. This is where the strategy of constructive disruption comes in, which we outlined in our 2018 Analyst Day Presentation. I want to spend the remainder of time highlighting examples of how superiority and constructive disruption, funded by productivity and enabled by a new organization design and culture, are helping us deliver against our objective of sustainable, balanced growth. Superior offerings drive market growth, share growth, sales and profit. Over the last 40 years, P&G U.S. Fabric Care has grown by 5x, 500% in a market that's grown 4x. Market growth has been the main driver of P&G's growth, 80%, which we've driven with leading innovation. When we grow the market, we will grow share as we have in Fabric Care, up 5 points with strong growth in profit and margin. Meaningfully superior unit-dose detergents, Tide PODS and Gain Flings, have driven over 90% of U.S. laundry detergent category growth since they were introduced at roughly a 50% price premium per load. Unit-dose products now generate almost 20% of category sales, with P&G holding nearly an 80% share of the form. 28% of U.S. households now use a unit-dose detergent, up 12 points over the last 3 years with much more opportunity ahead. In the U.K., for example, unit dose is already used by 1/3 of households, in Poland it's over 50%. And we're just getting started in many markets. Just a year ago, we launched 3-chamber unit-dose products in Japan and China. We raised the bar further on our latest unit-dose upgrade, a hands down winner delivering a 15-point consumer preference advantage versus our previous unit-dose offerings. The latest upgrade enables us to deliver excellent cleaning and stain removal in a quick and cold wash, adding incremental value for consumers in times -- in terms of both time and money. This is both a performance and a sustainability benefit, as the energy used for heating water and the length of cycle are greatly reduced. It also delivers a step change in performance against malodor, which has emerged as a challenge that is equal in importance to consumers as tough stain removal. We're driving single-digit to double-digit growth on the form in the U.S., U.K., France and Poland. This quarter, in the U.S., we're launching Tide Power PODS and Gain Ultra Flings designed for large loads, with more cleaning power than 2 Tide PODS. The new Power PODS create consumer benefits associated with the current realities of larger and fewer loads by driving correct dosage -- dosing, combating set-in stains, eliminating strong odors and giving a long-lasting scent. We anticipate Power PODS will be a category growth driver as consumers experience a superior cleaning with each use. Fabric enhancer scent beads are a great example of a superior product and superior package, packaging that shows the product and communicates the scent benefit with a scent squeeze release, distinctive and appealing. Fabric enhancers are the fastest-growing segment in the U.S. Fabric Care category, up high single digits. And scent beads are the fastest-growing form, growing mid-teens in the front half of fiscal 2020. P&G scent bead offerings are growing ahead of the market with cumulative value share growth of 8 points in the scent beads segment and 9 points in fabric enhancers over the past 4 years. Superior innovation that grows markets and continues to drive results over time. This tremendous upside remains still in this category. In the U.S., scent bead household penetration is only 18%, and beads are only currently used in 7% of laundry loads. We recently launched in China, Thailand and Spain with additional expansion opportunities ahead. And we strive to communicate our product and packaging benefits with superior brand messaging, advertising that makes you think, talk, laugh, cry, smile, act and, of course, buy. Advertising that drives growth for the categories and the brands. Let's watch a recent SK-II spot that merges the ad world and other creative worlds like comedy and music. [Presentation]

The series achieved 661 million views, and the brand experienced a 27% increase in search and double-digit growth in new users. SK-II's organic sales grew double digits in the front half of fiscal 2020, following 4 years of double-digit growth. A superior in-store and online execution also contributes to the growth of categories and brands. In China, we completely revamped our Olay Beauty Counselor Program and upgraded the in-store counters with higher and tighter standards, shown here with before and after images. These superior investments have contributed to the China Olay results of double-digit organic sales growth for the past 11 consecutive quarters, up 29% in the last quarter. Our superior retail execution is being recognized. In the most recent Global Advantage report, an independent retailer assessment of manufacturers across 7 key performance areas, strategic alignment, people, category development, consumer marketing, trade and shopper marketing, supply chain and customer service, P&G ranked #1 globally. We earned the highest number of #1 country ratings, 12 in total, including China, Japan, Mexico, Russia and, importantly, the U.S. And we ranked #1 in all 7 performance areas. Omnichannel results were tabulated for the first time in this past year. P&G was identified as the leading manufacturer overall with the #1 position in the U.S., China, France and Turkey. We were recently recognized by Walmart U.S. as Supplier of the Year in consumables. First time we've earned this distinction in more than a decade driven by innovation that grows markets and increases margin and record service levels enabled by our supply chain transformation. We were also named Supplier of the Year by Walmart in Mexico, Japan and China. We've earned similar recognitions in the U.S. at Target, CVS, Family Dollar and most recently, Walgreens. Now we appreciate this recognition, but what really matters is retailers' improved view of P&G as a partner in joint value creation, return stronger distribution, share of shelf display and feature. Now Home Care is a category that many believe is commoditized, but in fact, through superiority advances, we're growing markets. It continues to deliver fantastic growth for us and the retailers. Over the last 2 years, Global Home Care has step changed the organic sales growth from low single digits to high single digits and has driven almost 2/3 of the category growth. Improvements across the 5 vectors of superiority have grown the category, and P&G's share is up more than 1 point across the past 3-, 6- and 12-month time periods. Global Home Care improved its superiority from less than 60% in fiscal '18 to about 70% in fiscal '19 and is on track to reach almost 80% superiority this fiscal year. We invested in product and packaging. We step changed our communication, leveraging educational TV advertising. We elevated our in-store execution while delivering superior consumer and importantly, customer value. Let me take you through some specific brand examples of the investments that we made. Now Home Care launched product innovations across each subcategory, dish, air and surface. In auto dish, Fairy Platinum Plus was launched in Europe last year, delivering the best cleaning performance in the market with a 13-point purchase intent improvement after use versus our previous platinum, which is already a win versus our competition. It has elevated the cleaning standard to be clean like new, growing total brand share by 3 points and driving more than half of the 6% category growth. In hand dish, Dawn recently launched Spray Powerwash. Its unique spray technology and superior formula work together to provide powerful activated suds that cut grease on contact, enabling 5x faster grease cleaning versus regular Dawn. Just spray, wipe and rinse. Consumer ratings are 4.5 out of 5 stars with pricing 2x base Dawn. Power Wash is driving growth in the hand dish category. In air care, Febreze launched -- relaunched plugs in 2018 with improved technology, growing strong double digits since the launch and more than doubling household penetration of Febreze plug devices. Our product innovations have launched -- have been launched with superior packaging upgrades. Febreze SMALL SPACES is activated with a click of a button on its back and take care of odors for up to 45 days. The sleek packaging blends into the decor of any room in the house, not just the bathroom. It was first launched in Japan, reaching 6% share, and has now been launched in the U.S., adding 8 points of growth to the category. Clean Freak Sprays have a special trigger that can dispense either a small spray or a continuous light mist. They can be sprayed upside down to clean hard-to-reach areas and offer sustainability and value through a starter kit and refill option. Magic Eraser Sheets launched in a booklet form enables easy storage and includes educational cleaning information inside the front cover to encourage increased consumption. This is working. Sheets are more than 70% incremental to the base Magic Eraser franchise. With superior products in superior packaging, our Home Care team had to focus on delivering superior brand communication. The category pivoted from traditional advertising to educational, infomercial-style copy focused on the product, how, when and where to use. The results were immediate, accelerating brand growth by 5% once the copy aired. Let's watch a few of the spots. [Presentation]

Now while this advertising may not win a lot of marketing awards, that's just fine. Because here's the lift to U.S. sales growth on Mr. Clean Eraser after the infomercial-style ad was aired. And here are the results when we applied this same approach to Swiffer and Febreze. This works. So many countries now following. It started in Canada, then the U.S. and is now being reapplied in Europe and Asia. A superior brand communication can also drive sustainable solutions and grow markets. Home Care recently launched an educational campaign that tackles the top myths limiting dishwasher usage, with hard-hitting facts such as: certified dishwashers use 4 gallons of water per cycle versus hand washing, which uses 4 gallons every 2 minutes. Getting consumers to run their dishwasher just one more time per week will grow the category and take a significant step forward in saving water. Let's watch the campaign that was just launched last week. [Presentation]

Home Care made an important retail execution improvements as well. Swiffer established clear vertical shelf blocks for duster, original, heavy-duty, pet and wood, with additional navigational and educational signage to help the consumer choose the product that was right for them. Mr. Clean improved the retail execution in club and mass stores, each requiring their unique solution. In club stores, pallet designs and product packaging were transformed to improve in-store display executions. Mr. Clean Erasers moved from tub containers to flat boxes, creating a large marketing wall for the brand. Where executed, sales have increased by about 20%. In the mass channel, Mr Clean Magic Erasers were moved to gravity drop boxes, which declutter shelves that enable on-shelf marketing. Where executed, the 3D packaging gravity box has contributed to nearly a 30% increase in purchases. Again, all of these superiority investments have yielded strong results. P&G Home Care has driven 2/3 of the category growth, market growth, step changed sales growth from low single digits to high single digits, delivered profit growth, improved share 1.5 points with 21 consecutive months of share growth and increased household penetration, all in the last 2 years. Superiority and productivity are critical but are insufficient to keep us ahead in a world with a rapidly changing retail environment, quickly evolving consumer needs, media ecosystem transformation and revolutionary changes in technology. We must and are leading the constructive disruption of our industry across all areas of the value chain. Each of these drivers are required to win in the highly dynamic and competitive environment we face today: superiority, productivity and constructive disruption. Let's take a look at the products we featured at CES last month as we integrated cutting-edge technologies into everyday products and services that will transform people's lives. [Presentation]

The results were again strong, over 8 billion earned media impressions, over 4,000 total media placements, top 1% most searched exhibitor, over 500 customer and partner leads and 7 awards. P&G will continue to disrupt the way we innovate, developing integrated consumer experiences that create value, innovating faster with small launches to learn quickly before we scale, and building on the strength of our connect and development program with academics and suppliers. We will look for new partners to unlock sources of growth from technologies, products, services and solutions. Now last year, we introduced our partnership with M13. M13 incubates and develops selected P&G venture brands into sustainable businesses that could eventually be folded back into 1 of our 6 business sectors. As of today, P&G Ventures and the M13 Build Studio have announced creative partnerships on 2 brands: Kindra, previously called Pepper & Wits; and Bodewell, previously known as MetaDerm. Kindra is a revolutionary approach to menopause as a direct-to-consumer business that offers estrogen-free solutions to help manage many common menopause symptoms. Not only does Kindra offer products but also supportive digital environment tailored for women in midlife. Bodewell offers an over-the-counter solution with natural active ingredients that effectively treat and help protect against flare-ups related to eczema and psoriasis when used as part of a daily skin care routine. The products are steroid-free and clinically tested to be gentle enough for everyday use. You can find both brands for sale now online. We are reinventing brand building, from wasteful mass marketing to mass one-to-one brand building fueled by data and technology with a propensity focus. This is driving growth while delivering savings and efficiencies to reinvest for more growth and profit. Our consumer database enables advanced programmatic media buying that finds people with the highest propensity to buy and reaches them without annoying ad frequency. China is our most sophisticated market with 80% of our digital media buy bought this way. Last fiscal year, they reduced media digital waste by 30% and increased the number of people that we reached by 50%. The consumer database enables movement from generic audiences to smart audiences. Consumer groups identified with proprietary algorithms based on demographic and behavioral characteristics, such as those who purchased or sampled a product, treats many people with one-to-one precision. For example, last fiscal year in the U.S., Olay used smart audiences to reach 65 million high potential users, more than the generic audience of women ages 25 to 54, and spent 10% less with high single-digit sales growth. The Secret brand is disrupting how we communicate. The brand no longer has an agency of record. The brand team has become its own agency, bringing nearly all advertising creation and media planning in-house. Let's take a look at our most recent All Strength, No Sweat spot, You Got This, shot locally in Cincinnati, Ohio, featuring a group of confident, modern women and our new Secret essentials oils. [Presentation]

Secret's approach is disrupting the cost, speed and agility of consumer communication. The new ads are being created for as little as 1/10 of the cost of traditional executions. The time from idea to execution has significantly reduced, producing content in under a month versus an average production time of 3 to 5 months. These benefits, combined with in-house media planning, give the brand complete control and flexibility to react in real-time to current events and consumer response to our ads. There's tremendous opportunity in this area across brands, ahead of us. Another area of constructive disruption we continue to drive is the monetization of new technologies we develop, which can fund innovation and increase societal value. Until now, the low quality and high cost of recycled polypropylene has been barriers to its use. P&G invented a breakthrough technology that removes the color, odor and contaminants from used polypropylene to restore it to virgin-like resin quality. This process fully closes the loop in the reuse of recycled plastics while making it more affordable and accessible. We knew the technology could be a big benefit to P&G, but it could be an even bigger benefit to society. To drive the scale of this application, we licensed the technology to PureCycle Technologies, which began operating its first feedstock evaluation unit earlier this year and plans to open a full-scale recycling plant in 2021. We're monetizing this technology for P&G shareholders by making it widely available, and we're helping to revolutionize an industry that reduces waste to landfills. Now I hope it's evident that we've been disrupting everything at P&G. The choices we've made to focus and strengthen our portfolio in daily use categories where performance drives brand choice, to establish and extend the superiority of our brands, to make productivity as integral to our culture as innovation, to lead constructive disruption across the value chain and to improve organization focus, agility and accountability, are making a positive difference in our results. These are not independent strategies. They reinforce and build each other. They position us well within our industry to deal with the near-term challenges from macro headwinds, trade transformation and anticipated competitive response. And they are the foundation for strong balanced growth and value creation over the short, mid and long term. With that, Jon and I are happy to take questions.