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

So against a backdrop of rising input costs and supply chain pressures impacting CPG companies to various degrees, Procter & Gamble truly stands out from the pack. As we see it, it's the multitude of investments the company has made over many years in its supply chain, marketing and improved retail execution that are now serving to widen the company's competitive moat. We are thrilled to welcome back David Taylor, P&G's Chairman and CEO; Jon Moeller, current Vice Chairman and COO and CEO-elect. And we're also excited to welcome to our conference for the first time, CFO, Andre Schulten; and P&G's CEO of Beauty, Alex Keith. Now I'll pass it over to you.

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'll start today with a review of our results and strategies. Then Alex Keith, our Beauty sector CEO and executive sponsor for corporate sustainability, will share how our strategies are being brought to life in P&G Beauty. David Taylor will then share his thoughts on P&G's long-term prospects. David, Alex, Jon Moeller and I will be happy to answer your questions after our prepared remarks. Fiscal year '21 was another very strong year, following 2 years of strong results in fiscal '19 and fiscal '20. We exceeded each of our going-in targets for the year despite a challenging cost and operating environment. Organic sales, up 6%; core earnings per share, up 11%; adjusted free cash flow productivity, 107%; over $19 billion of cash returned to shareowners. Top line growth has been broad-based. Each of our 10 product categories grew or held organic sales in fiscal '21. We're also driving strong share momentum. We delivered aggregate global market share growth of 40 basis points in fiscal '20 and 50 basis points in fiscal '21. 32 of our top 50 country category combinations grew or held share in fiscal '21. In summary, another strong year in a challenging and volatile environment. Our eyes are wide open to the many challenges we face. Increased social unrest and economic distress in many parts of the world are putting pressure on local GDP growth. The pandemic continues to create risk for consumers, retail partners and supply chains, and costs have increased significantly. We will offset a portion of these higher costs with price increases. In the past few months, we announced pricing in several U.S. categories. Most recently, we've announced a price increase in U.S. Family Care effective late October. Productivity will remain an important lever of our strategy. As we've shared before, we are focused on delivering balanced growth: top line, bottom line, cash. This remains our objective even under circumstances where costs are rising sharply. Our strategies to do this are working. Our portfolio of daily-use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. We are raising the bar on all aspects of superiority: product, package, brand communication, retail execution and value. When we started focusing on superiority in fiscal '16, we judged about 30% of our portfolio was superior. Now we're 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 is 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. 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're driving cost savings and cash productivity in all facets of our business. Success in our highly competitive industry also requires agility that comes with a mindset of constructive disruption, a willingness to change, adopt 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. These strategic choices on portfolio, superiority, productivity, constructive disruption and organization structure 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, share, earnings and cash results leading to balanced growth and value creation. Here's Alex Keith to talk about how these strategies are driving strong results in our Beauty business.

Thanks, Andre, and hello, everyone. I'm happy to be here with you today. P&G Beauty is more than a $14 billion business, with market-leading brands in the categories in which we play: hair care, skin care and personal care, and with a strong global footprint. In 2016, we made a decision to focus our Beauty portfolio on daily-use categories, where performance drives brand choice. Our focus on portfolio and superiority has enabled us to deliver 23 consecutive quarters of organic sales growth. Over the past 4 years, we have added $3 billion in annual sales, growing 6% on average per year, with profit growth more than double that, adding over $1 billion in after-tax profit. Over this period, we've generated $10 billion in free cash flow. We have weathered the challenges of COVID very well with the breadth and health of our portfolio. P&G Beauty is the only multinational beauty company that consistently delivered top line growth in our portfolio of categories during COVID. Our brands focus on daily hygiene needs, starting at an average price point of $1, and expand all the way to the demanding needs of the Prestige skin care consumer, with SK-II at $200. While SK-II has been a major driver of growth, the balance of Beauty's portfolio is growing as well. Today, about 80% of our portfolio is growing, even if we exclude SK-II. You may be surprised to know that 2 seemingly smaller brands, Old Spice and Safeguard, each exceeded $1 billion in sales in fiscal '21. Overall, this portfolio health helped us continue our quarterly growth trend even when the Prestige skin category was severely impacted by COVID. While the growth was broad-based, there were 3 particular contributors that are worth mentioning: SK-II, China Hair Care and Enterprise Markets overall. First, SK-II. Our biggest COVID-related challenges hit SK-II with severe channel disruptions, including the shutdown of travel retail and department store beauty counters, as well as the rapid development of Hainan. Through all of this, SK-II remained focused on its core target consumer, powerful brand-building and superior innovation to win new users. Their latest Change Destiny campaign, launched just a few weeks ago, demonstrates SK-II's superiority by featuring our 4 global ambassadors remaking their very first SK-II commercial from years ago and talking about how their lives and skin have changed since their first bottle of facial treatment essence. SK-II's decade-long continuous history with these celebrities and our long-term consumer skin studies are the foundation for these stories of superiority. Let's watch an edit of one of these spots. [Presentation]

The SK-II team stayed focused on their strategy and remained vigilant with their executional discipline in the face of escalating promotional activity on and off-line. The end result is that SK-II had one of its best years ever, with both sales and profits now well ahead of pre-COVID levels. Second, China Hair Care. This is a big business for us. We were the first multinational hair care company to establish a meaningful business in China over 20 years ago. Head & Shoulders is the largest hair care brand in the market, but we struggled to grow the business over the last decade as changes in the consumer, retail environment and category dynamics accelerated. After constructively disrupting our own business model and activity system, China Hair Care delivered double-digit top and bottom line growth for the first time in a decade, and growth was broad-based across all 4 of our large brands. We took a portfolio approach, focusing each brand on a specific consumer target, gaining true insights about those targets and innovating to deliver Irresistible Superiority at more premium price points in order to attract the more demanding Chinese consumer, especially online. A great example of this is the Pantene brand, and its launch of hydration bombs. This product is a single-unit dose-intensive treatment for hair, providing 48 hours of hydration. And it has a cute and memorable name. Influencers love talking about it, given its uniqueness. This innovation has been very successful and is driving substantive growth in the higher-value conditioner and treatment segment in China, which is now well over 1/3 of the Pantene China business. At the same time, given the size of our base business, we needed to increase investment in quality media deeper into China to reach consumers throughout the country and engage them again on Head & Shoulders and Rejoice. The team's disciplined productivity approach generated the funding from within to increase media 45% on these 2 big brands. The third key contributor, Enterprise Markets. These markets have suffered the most with COVID lockdowns and COVID impacts overall, yet these markets were up mid-single digits for P&G Beauty last year, both top and bottom line. The organization structure empowered the teams on the ground to respond with speed to the changing conditions, adjusting business plans and executing with excellence. All of this despite the challenges posed by COVID and other external factors, enabling the sector CEOs like myself to remain focused on winning in our largest and most profitable markets. To note, these results were achieved in markets that were down 1% on average. COVID impacts around the world continue, but we believe our strategies are serving us well to grow now and in the years to come. We have 5 areas of focus in Beauty, which complement the overall company strategies. First, Irresistible Superiority. We enhanced the company definition with some Beauty-specific assets to reflect the total usage experience beauty consumers desire and demand. This raises the bar even higher for us as we design our propositions commercially and technically. More and more, we are clearing that bar. Head & Shoulders Clinical Strength and Olay Retinol24 are just 2 examples of many strong innovations delivered over the past year, all of which have strong superiority. Notably, Olay Retinol24 and Native were Top 10 IRI Pacesetter innovations in the Nonfood category this year, the only beauty products on the top 10 list. Second, Responsible Beauty. We launched this platform in June 2020, and it is our approach to the relevant aspects of ESG. It's a systems thinking-based platform that considers the interrelationships between 5 core elements: quality and performance, safety, sustainability, transparency and equality and inclusion. A choice in one area can have impacts in another, so we are ensuring that all of our teams are working with the whole in mind as they make choices on ingredients, packaging, supply chains and even commercial messaging. We've integrated Responsible Beauty thinking directly into our Irresistible Superiority models and innovation programs, and have published bold goals to ensure that we are a positive force for beauty in the world. This approach is being recognized externally. Women's Wear Daily named it the Sustainability Initiative of the Year for 2020 in both the U.S. and China. And Sina.com, one of China's top news outlets, also recognized it as the Most Influential Sustainability Program. On the topic of sustainability, you may recall that P&G committed to publishing a climate transition action plan by the end of the calendar year. In my expanded responsibility as executive sponsor for corporate sustainability, I'm happy to share that this report will be published in a few weeks and will include updated 2030 targets plus new long-term commitments. Across our businesses, we are baking sustainability into our innovation across the vectors of superiority. This is the way we plan to deliver our targets and also unlock even higher standards for our consumers. Now onto our third Beauty-specific focus area, very strategic entries into meaningful consumer segments close to our core. We have been selective about portfolio expansion with both created and acquired brands, all of which are designed to reach a consumer or shopper that we could not easily reach with our core brands. This portfolio is nearly $300 million and, in each of the past 3 years, has grown organic sales over 40%. Fourth, digitization in all of its forms. Our data and digital strategy is designed to provide insight to and connections between the elements of Irresistible Superiority in a real-time and locally relevant way. As you all know, COVID accelerated e-commerce everywhere, and we were well positioned to benefit from that tailwind. We saw strong growth in e-commerce in fiscal '21. We also significantly increased our direct-to-consumer business, giving us powerful consumer insights based on data. While we don't expect DTC to become a significant portion of our sales, it is an important part of our consumer engagement and insight ecosystem. We will continue to innovate in the ways we reach the consumer with media, diagnostics and recommendations. Finally, disciplined productivity, being choiceful in what we do and innovative in how we do it, leveraging the best digital and data tools to drive efficiency across the board, whether in promotion spending, media or across the supply chain. This is the fuel that allows us to invest. Over the last 3 years, we have generated $300 million annually in savings, allowing us to invest meaningfully in superiority of products, packaging, marketing and retail execution. The people of P&G Beauty are passionate, bold, creative, committed and always raising the bar for themselves and those around them. We are both proud and humble. We are confident in our strategies and our ability to execute them well in an increasingly dynamic world and industry for continued growth and value creation. Now over to David to provide his perspective.

Thanks, Andre. Thanks, Alex. Our strategies are working. Our team is outstanding. I could not be more confident in the next generation of leadership that will take the reins of P&G later this year. Last month, we announced that I will retire as CEO on November 1, that the Board of Directors has elected Jon Moeller as the incoming President and CEO. I will remain as Executive Chair of the Board. We also announced that Shailesh Jejurikar has been elected Chief Operating Officer effective October 1, 2021, transitioning behind Jon Moeller. These moves have been thoughtfully planned and provide P&G with highly capable and experienced leadership going forward. I have full confidence and strongly support these changes. In closing, our strategies were delivering strong results before the crisis and have served us well during these more recent volatile times. We're confident they remain the right strategic choices to drive balanced growth and value creation as we move through and beyond the crisis. 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. And now we'd be happy to take your questions.

Okay. That was great. So thanks very much for that video. David, I just want to start with you, if possible. Now looking back at your tenure over the past 5 years or so, I like to think back a lot to the first presentation you gave to The Street as CEO at CAGNY in 2016. And you talked about growing users in order to grow top line, focus on the 4 biggest categories, 2 biggest geographies. If you gave yourself a bit of a progress report on this kind of 4 by 2, what would you say? And as you look forward and think about future growth drivers, is 4 by 2 still the right area to focus? What might you add?

Lauren, I'd say the 4 by 2 worked very well. And the word that drove that was focus. We focused on U.S. and China, our biggest markets. We've evolved now to the Focus Markets, really, of the top 10, but it was the forerunner to that. And we have moved the U.S. from 1% up to 4%, and then much more during COVID. In China, at that time, it was minus 5%, and it's moved up to double-digit growth. So yes, it worked and worked well. But we evolved it now to Focus Markets. And Focus Markets are 80% of our business in sales, 90% in profit. And you're seeing the majority of those now growing share in the innovation growing markets. So I think it's working very, very well. We have Focus Markets. We have the Enterprise Markets that we've talked in the past. And that strategy, I think, is one that is working and has a lot more upside going forward. And instead of 4 categories, which we've made very good progress, we've widened it to say all 10 have opportunities to grow. And we feel very good about each of the 10 categories, having a growth story, balanced top and bottom line, and our top 10 Focus Markets. And then the Enterprise Markets, we will be more choiceful and find ways to grow and create value, and the strategy to me is working very well.

Okay. Great. Alex, so much of what P&G has talked about over the last 4 years, right, since narrowing the portfolio has been about, again, focusing on categories where performance drives brand choice. But in Beauty, I think, sometimes that performance-driving choice could be seen as less relevant. How would you respond to that? I mean does performance matter in the same way? And when you put it in respect to your comments on the presentation on Responsible Beauty, how would you tie those things together?

Yes. I think while the immediate benefit of our products may not be as immediately obvious as some other P&G categories, the performance really matters in Beauty. Consumers look for proof of performance and to know that the products will deliver for them. As examples, I would say, in ratings and reviews, as we look at those, over 60% of those are driven by comments on performance across the board. We also -- I think if you look at the industry, you see a number of before and after photos in Skin Care and Hair Care to show the benefit that the product will give you. And through our testing, we found that those before and afters done well can drive conversion by over 20%. So I mean they're very impactful when they're done well. And I think just speaking to the Irresistible Superiority framework, I'll give you the example of Hair Care. Over the last 3 years, we have doubled the percent of our business that we see as irresistibly superior, and our sales have -- our sales growth has doubled at that same time. So I think there is a direct correlation between performance and superiority and how important it is to Beauty consumers to know the product will work for them. I think, as we think about Responsible Beauty, and now adding the importance of sustainability and the total Responsible Beauty framework, that's only going to elevate the superiority and the performance of the products. I mean making a product perform and be sustainable and address the issues that we're facing and that places a -- is a unique opportunity that, I think, we can uniquely create value and gives consumers even better products that -- for them.

Okay. That's great. Jon, so we've been thinking a lot about P&G's relative competitive advantage over the past 18 months, during the pandemic, and especially during the most recent quarter. And one of the things I think that probably hadn't appreciated enough, right, is the strength of the global supply chain. Could you talk a little bit about what you think you've done differently versus some others in the industry, or even compared to P&G 10 years ago, that allowed the company to continue to operate without a glitch, as far as we could see on the outside, while others are seemingly struggling through this environment?

Well, this is probably the most challenging supply environment that we've all worked through, and certainly, the 30-plus years that I've been involved in this industry. And we have had our challenges. But very fortuitously, we focused, actually, at the Board level, ahead of COVID on business continuity and really identifying what were the pinch points in the supply chain. What were the long-length supply chains? What would we do to provide agility, flexibility and dependability for customers and consumers if those pinch points were challenged? So that's put us in a very good place. And again, it doesn't mean we don't have our challenges, but it's really helped raise the game. And then I would just say that the men and women who operate our supply chain have done a fantastic job stepping up in very challenging times, challenging times personally, challenging times from a business standpoint, and they've just done a super, super job. And I do think -- just one more thing on competitive differentiation. It all comes down to superiority across the vectors. We could do a super job of supplying products that were inferior, and that would not move the needle. So it starts with superiority. But supply chain effectiveness is very important in terms of delivering go-to-market superiority, in terms of delivering superiority of customer and consumer value, and our team has done just an awesome job.

Okay. I wanted to next go back to a comment that David made on the earnings call in August, that you don't have any markets that aren't growth markets, in discussing the potential of mature markets outside the U.S. So Jon, I mean, what do you think your growth should look like in Western Europe or Japan, markets where your shares aren't as strong as they are in the U.S., but the right to win is equally strong? Should we anticipate kind of acceleration this year in reinvestment spending in some of these regions, with the U.S. almost funding the growth of these non-U.S. markets, given the outperformance you've seen domestically?

We're going to continue to strengthen the program in the U.S. It's working very well. We're at record share levels, both in terms of absolute share and the growth of that share. And we're doing a very good job growing markets in North America. So the last thing, I think, we should do is take our eye off that ball. One of the characteristics of the last 3 years has been very broad growth, and I expect that to continue. And there's no reason we can't grow in a market like Japan or Western Europe. If we look at the last fiscal year, we grew the company about 6% on the top line. Within that, Enterprise Markets grew between 5% and 6%. So again, there's a nice balance of growth across the portfolio, both markets and categories. And I expect us to continue to pursue that.

Okay. Great. Andre, so last year at our conference, Jon mentioned that U.S. category growth was north of 4% after growing in the 3% to 4% range over the last few years, and that P&G's U.S. business should be able to sustainably grow in the 4% to 6% range. So first, would you say that's still the right way to think about category growth and your own growth over the medium term? And then secondly, it'd be great if you could talk a little bit about market dynamics in the U.S., what you're seeing in terms of consumer demand, anything changing with the rise of the Delta variant, promotional levels and retailer receptivity to price increases? So it's a lot.

Sure. All right. Let me try to get through those. In terms of growth objectives for every market, we start with the underlying market growth, as you say. I think, as we said, our job within that is to really grow markets by driving innovations with priority trade-up and penetration in all categories. If you look at the U.S., I mean, the market has grown, I think, about 4%. It's gone up to 10%, but then came back down to 2%, overall, during the pandemic. We've been able to grow ahead of that market consistently, which is what we want to do. Hard to say where the market will level out. I think the one thing that we can say that we see is it will be volatile over the next few quarters. So we expect volatility, but our objective continues to be to grow ahead of market and contribute to market growth and, thereby, grow share. In terms of recent market growth, I think the last 13 weeks, we see about mid-singles in the U.S. in terms of market growth in the tracked channels. We have to see where the overall channels come out. The one dynamic we need to watch out for is that a lot of growth in the base was in the noncovered channels. So as we see strength in the covered channels, we might not -- we got to be careful to not overinterpret the actual consumer demand that we're seeing at this point in time. So again, speaking to the point, it's going to be volatile over the next few months, but we see strong consumer demand sustaining at least in the midterm. In terms of promotion dynamics, we were -- we saw the business about 33% promoted pre-COVID. It went all the way down to 16%, 17%. We're back up to about 27%. So we see promotion coming back into the market, not quite to the level that we saw pre-pandemic. And in terms of retail environment, again, many of the price increases we talked about in the presentation have now been announced. And we are really focusing with our retailers on the best execution. There's a little discussion on the need for the price increase because of the inflationary environment we're all seeing. It's mostly about what is the right timing and what is the right execution to maximize the impact of the pricing.

Okay. All right. That's great. We are out of time, but I could keep going. So thank all of you for being with us today virtually. Hopefully, we get to do it in person in the near future, and I look forward to talking again soon.

Thanks, Lauren. Bye. Take care.

Thank you, Lauren.

Thank you.