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

Hi. Good morning, everyone. I'm Dara Mohsenian, Morgan Stanley's Household Products and Beverage analyst. I'm very pleased to welcome Procter & Gamble to Morgan Stanley's Global Consumer and Retail Conference. Before we begin, we have some important disclosures. Please see the Morgan Stanley research website at morganstanley.com/researchdisclosures for disclosures. And if you have any questions, you can contact our Morgan Stanley sales representative. So with that, we're very pleased to welcome Procter here today, including Jon Moeller, who's the CEO of Procter & Gamble; Andre Schulten, CFO; as well as John Chevalier, who's the Senior VP of Investor Relations. Clearly, it's been an exciting few years for Procter, with a strong acceleration in organic sales growth as well as market share changes, post a series of organizational changes that have been implemented in the last few years. So it's a great time to have P&G join us. Thanks, guys, for being here. And just in terms of format, I'm going to turn things over to Andre to run through some slides in the beginning, and then we'll come back to Q&A. So with that, I'll turn things over to you guys.

Thank you, Dara, and good morning, everyone. I'll start today with a review of results. Jon will then discuss strategies, and we'll move to Q&A. Before we start, I need to let you know that, as noted in our safe harbor statement, today's discussion may include a number of forward-looking statements. You can find important cautionary information in our most recent 10-K report, which, together with a reconciliation of non-GAAP measures, is posted on our Investor Relations website. So moving on to results, we've delivered very strong results across the top line, bottom line and cash. Our first quarter was a good start to fiscal 2022 in a challenging cost and operating environment. Growth was broad-based across business units with 9 out of 10 product categories growing organic sales. Focus markets grew 4%, and enterprise markets were up 5%. All regions grew or held sales. 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. Through the first quarter, global value share is up 70 basis points and 34 of our top 50 category country combinations grew or held value share. This was our 13th straight quarter of volume, organic sales, consumption and market share growth. While our results and share momentum give us confidence our strategies are working, our eyes are wide open to the many challenges we face. We see continued impacts from the pandemic around the world, putting pressure on economic recovery in some parts of the world and on supply chains globally. We continue to see increasing labor shortages impacting the entire chain from suppliers to ports, from retailers to our own manufacturing and logistics operations. These challenges require an increasing amount of organizational capacity and agility to mitigate. Commodity and freight costs have increased significantly, up an additional $100 million after tax since we last gave guidance and now up $500 million after tax since our ingoing outlook. Versus last fiscal year, we now see a $2.4 billion after-tax headwind to earnings. We will offset a portion of these higher costs with price increases. We've announced price increases on portions of our portfolio in 9 out of 10 product categories in the U.S. Increases in Baby Care, Feminine Care, adult incontinence, Family Care and mid-tier laundry liquids has been already executed. Increases in large segments of Home Care, Hair Care, Grooming, Oral Care and Skin Care go into effect by mid-January. We're also pricing as needed in markets outside the U.S. for both commodity costs and foreign exchange rate impacts. Our pricing actions are targeted and strategic. They are tailored by market, by category, even by SKU and combined with innovation when possible to deliver value for our consumers. Given the strength of our portfolio, broad-based share gains and early in-market results, we continue to feel confident about our ability to execute pricing, though we will diligently monitor and adjust plans as needed. In addition to pricing, productivity will remain an important lever of our strategy. Each category end market is driving efficiencies in all areas of cost, while ensuring we continue to maintain strong investment in the business. Earnings growth should improve sequentially through the balance of the fiscal year as price increases go into effect and productivity programs ramp up. As we've shared many times before, we are focused on delivering balanced growth, top line, bottom line and cash. This remains our objective and reinforces the importance of continuing to invest in the superiority of our brands across all 5 factors, even when costs are rising sharply in the short and midterm. Now let me turn it over to Jon to discuss our strategies.

Good morning. I'll begin by reinforcing Andre's last point, the importance of balanced top and bottom line growth. Our integrated set of strategies have enabled balanced growth and we believe position us well, going forward. Our strategy, a focused portfolio of daily use products, mainly providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. Superiority. We continue to raise the bar on all aspects of superiority, product package, brand communication, retail execution and value. We began doubling down on superiority in fiscal '16. At that time, we judged about 30% of our portfolio was superior. We're now at 75% but the remaining 25% isn't the measure of opportunity. Superiority is a relevant measure versus the best competitors in the market. It's not a static target. There is always upside to grow categories and delight consumers. This includes meeting an increasing consumer desire for environmental and social sustainability. 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. Let's look at how our superiority strategy is coming to life in our Grooming business across our core product lines, male systems, female systems and Appliances. The broad Appliance segment driving superiority and market growth across price tiers. Last year, we restaged mid-tier Braun Series 5, 6 and 7, delivering superior product performance with a superior design. In September, we restaged the premium tier Braun Series 9 lineup, delivering improved performance in a new to the world category or power case, which enabled up to 6 weeks of shaving without charging. The focus on superiority across all 5 vectors and across price tiers has contributed to over 4 points of share growth in North America and Europe in the past 12 months. Moving to Gillette. Our recent premium male systems restage is an example of superiority across all 5 vectors: product package, communication, value and retail execution. We're improving most of our handles and cartridges, moving to plastic-free boxes on our razors, simplifying our lineup, improving shelf fundamentals and improving margin for our retail partners. And the innovation was delivered with 3% pricing on average across all sub-brands, further accelerating category growth. This innovation has contributed to Gillette growing share in both North America and Europe in the past 3 months, good business results and good for the environment. The move away from plastic packaging, which will extend across our Gillette and Venus brands in the U.S. and Europe, saves the equivalent of 85 million water bottles per year. Beyond the sustainability benefit, the improved packaging makes the lineup easier to shop and much easier to open. We executed a similar restage on our premium female systems lineup. Consumers love the improved shopability and more sustainable packaging. Female Shave Care has been steadily improving over the past 12 and 6 months, with past 3 months share up 3.2 points in North America and up 2.6 points in Europe. Our Grooming business continues to deliver superior innovation in new benefit spaces, growing categories while growing our business. Venus recently launched a lineup of female intimate Grooming products, delighting the 80% of millennials who regularly groom or remove pubic hair. This lineup exceeded $50 million in sales in the first year, contributing to the U.S. female shaving market growing high single digits over the past 3, 6 and 12 months, with P&G growing share across all 3 time periods. In the U.S., this razor has seen multiple weeks as the best-selling razor at our top customers across total female and male categories. And with less than 1% trial, there is significant upside. Superior products, superior packaging, strong results. The Grooming segment grew organic sales 6% last fiscal year, with solid growth in each of our 6 regions. Appliances led the growth, with sales up more than 20%. Grooming organic sales grew 4% in the first quarter of this fiscal year, with wet shaving leading the growth. We're currently growing global value share across all segments, male shave, female shave and Appliances, across the past 12-, 6- and 3-month periods. Fabric enhancers, another good example of superiority leading to sustained business success. Fabric enhancers grew organic sales mid-teens in fiscal 2021 and in the first quarter of 2022, with growth in all segments, liquid fabric enhancers, beads and sheets. In the U.S., Downy has disproportionately contributed to double-digit market growth over the past 3-, 6- and 12-month periods, with share up over 2 points. Driving category growth with superior innovation builds markets, builds share and builds business for our retail partners. Premium innovation continues to drive results in laundry as well. Earlier this year, we launched Tide Hygienic Clean, a premium line extension designed to delight consumers doing larger loads, driving correct dosing, combating sudden stains, eliminating strong odors, providing a hygienic clean with a long-lasting scent. In the U.S., these innovations are contributing to high single-digit category growth over the past 3- and 6-month periods, with Hygienic Clean earning over 2 points of share. In addition to product and packaging innovation, we're continuing to innovate in brand communication to demonstrate superiority to consumers. Our current U.S. Tide campaign Turn to Cold, advocates lower washing temperatures. Up to 60% of carbon emissions from laundry -- from the laundry process come from heating the water used in the washing machine. We're educating consumers on how they can benefit from Tide's superior performance in cold water and reduce their environmental footprint. Advancing superiority with sustainable offerings, a higher bar we aim to clear. 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, which Andre described, 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 the business. 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 organizational 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, 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. 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 as we move through and hopefully, 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 in our communities. We're doing this in our interest, and society's interest, and in the interest of our long-term share owners. Thank you, and we'll be happy to take your questions.

So Jon, maybe we can start with obviously, you've been an integral part of P&G's strategy that's worked so well here over the last few years. But as you stepped into the CEO role, there's always a chance to refocus the organization. So just curious for any strategy tweaks under your and Andre's leadership, how that may play out going forward? And then second, when you look back over the organizational changes that have been so successful in the last few years in driving improved performance, which is really continuing post-COVID, how sustainable do you think those benefits are as you look out longer term?

Thanks, Dara. I view our job, Andre's and mine, the entire team, as strengthening the strategies that we've been executing. Over the last 3 years, we've generated $10 billion in incremental sales at about the 90th percentile of the S&P 500. We've delivered about $4 billion in incremental profits at about 94th percentile of the S&P 500. We need to stay on that road, but we need to strengthen the strategy and we're looking at several focus areas in which to do that. I think it's come through hopefully in our prepared remarks, but really strengthening our hand on environmental sustainability to build superiority, with the focus being on superiority. We have -- the world has changed. You hear it every hour on the news, relative to supply and supply chains. And we want to stay in front and in service to our customers with the best supply chain in the industry. And that requires constructive disruption and change. Digital acumen is another area that we want to continue to increase, and we want to ensure we have a superior value equation for employees. But those are all part of strengthening the existing strategy, not changing the strategy. And the strategy itself is dynamic in nature, not static. It compares ourselves to competition. It requires we meet evolving consumer needs, it requires that we meet the needs of new channel participants and do so in a superior way. So it's not standstill, but it's strengthened the strategy, keep moving on the path that we've been on. In terms of the organization, I honestly don't think we would have gotten through, certainly with the results that we've delivered, COVID under the old organization strategy. It was just too complex and too unwieldy and required multiple interactions to get anything done, which in a COVID-challenged world becomes even more challenging. It served us extraordinarily well and stood the stress test of the pandemic. The organization is extremely healthy. They're focused. They've demonstrated incredible agility and they feel a strong accountability for results. So there too, I think the objective is to strengthen the positive aspects of the organization structure and culture and keep moving down the path.

Great. That's helpful. And then clearly, during COVID, there's been a shift to at-home activities and consumption with higher demand and higher penetration for your products. Obviously, there's been a couple of categories that were negatively impacted. But for the most part, you've seen higher penetration in most of your categories. So can you just discuss some of the strategies you're employing to try to hold on to that incremental demand and make it stickier, both from a category growth as well as P&G market share perspective?

The basic idea is don't stand still, continue to improve the superiority of offerings like Tide Hygienic Clean, at a time when consumers need those products, to meet their needs and the needs of their family. Continue to communicate clearly the benefits of those products and the value that they offer, particularly at a time when we're potentially taking pricing in some categories, ensuring that consumers understand the multiple uses for some of our products, for example, some of our cleaning products. So it's just like the strategy, just like the organization, it's more of the same, step forward, not back, invest in awareness and in product and package, and communication, and go-to-market, and value superiority.

Great. That's helpful. And then, Andre, maybe we can shift to the strong results you mentioned recently in fiscal Q1. You came in at 4% organic sales growth. That's at the high end of your full year range, despite the toughest comparison of the year at 9%. So just help us understand the visibility on organic sales growth here. Obviously, you've had very strong market share results recently. Are you assuming it dissipates in the balance of the year? And maybe more from a longer-term perspective, you can talk about some of the sustainability of these market share gains. And if you're seeing any actions from your competitors that might put that at risk and what type of reactions you're seeing?

Yes. Look, I mean, our guidance is 2% to 4% on the top line. As we said, we believe the first quarter results give us confidence that we're headed for the upper end of that range. And it's really driven by the superiority concept, right? Where we drive superiority across 5 vectors, we see that our categories grow faster by 3 to 6 points versus those categories where we have 3 or less vectors superior. We also see that in those categories where we drive superiority, a category growth of 4 points ahead of those where we don't have superiority. So the concept of superiority drives market growth and gives us confidence that we are able to continue to participate in that market growth and then generate share growth. And that's really the recipe we're after. That's why you hear us talk about sustained investment in superiority as the nonnegotiable part of the balanced growth model. So as long as we continue to drive superiority in the true sense of all 5 vectors, we believe that we're going to continue to grow markets and continue to sustain the top line momentum. Now it's relative, as Jon said, it's relative to competition. So we don't assume competition stands still. So the equation is certainly shifting, and we need to make sure we stay ahead of it. But the basic model of continuing to invest to drive market growth within that market growth, strengthen our share position, gives us confidence that we can continue to grow in that range.

Okay. That's helpful. And Jon, maybe you could talk a little bit about the competitive response you're seeing. It's rare to see a large cap company and CPG sustain this type of market share momentum over time. Obviously, it's been driven by superiority, which is hard to copy or respond to immediately. But what type of responses are you generally seeing from competitors to the share gains that you've seen, even with the higher category growth on top of that?

Yes, I want to come back first to market growth as to how to deliver market share in a sustainable and profitable way. One approach is to take business from competitors in order to build share. That's not our recipe. Our recipe is to expand the pie. So it's pie expansion versus zero sum. By the way, that's the only business that our retail partners care about incrementally, us taking share from a competitor does nothing for our retail partners. And to the extent that we can continue, just as Andre said, to deliver market growth, I'm not terribly worried about -- not as worried that I would be, potentially about competitive response if we were taking business from others as opposed to creating business. Having said that, the industry generally has been very constructive in terms of its embrace of the importance of efficacy, of strong communication, of all the things that, along with ourselves, drive market growth. And if we stay on that path, I think things will continue to be relatively good. We will always have -- we operate in a very competitive industry with very strong and able competitors. And we'll always have challenges in that regard. But I don't see the challenges currently as heightened versus a steady state. And in fact, I think, we're more insulated from them, given the creation of business as opposed to taking business and doing that with superior offerings.

Great. And then Andre, on the cost front, it sounds like costs continue to clearly move up, even versus when we last spoke to you with earnings results last quarter. FX has moved incrementally against you also with the stronger dollar. So as you think about the business, are there other positive levers you can pull to help offset those things? And look, with the volatility we've seen in costs moving up the last 1.5 years, if we continue to see cost increases, what are the ways in which you can try to offset some of that pressure?

Yes. No, as we said, the commodity cost pressure is not easing. So we saw another $100 million after tax, as we shared in our prepared remarks here, $2.4 billion EPS headwinds from commodity and transportation warehousing now in the forecast. The response is the same response we had before. We continue to focus on productivity. The productivity muscle is alive and well across all elements of the P&L and the balance sheet, across all business units and regions. So that is a significant factor of offset that we're driving. And we continue to believe there's continued runway, significant runway and productivity that we can activate over time. We also continue to drive innovation as we said and we continue to trade up consumers, therefore, improving our relative position in terms of recovery. And we combine pricing, both straight pricing in the market where we can or pricing with innovation. Now we're taking time to ensure the pricing is executed the right way, by market, by category, by SKU. And we believe that the excellence and execution here is more important than the sheer aspect of timing. But you see us move incrementally over quarter 2, we've announced more price increases in the U.S. and certainly around the world. So it's a combination of all 3 measures that will continue to recover. And as you know, our balanced growth strategy that we keep going back to, requires margin expansion. So we will get back on that margin driver.

Right. Okay. And on the subject to pricing, can you talk about your strategy to pricing in the sale size cost environment? We only saw pricing up 1% year-over-year at the corporate level last quarter despite commodities being a 350 basis point negative impact to gross margin. So clearly outsized cost pressures. I know normalization and promotion probably took a point or so out of that pricing. So probably stronger on an underlying basis. But just in terms of how the organization approaches pricing, given the commodity environment is so outsized, should we expect a pretty significant ramp in pricing going forward? And how do you think about that?

Yes. I think the organization is obviously reacting and anticipating the commodity hurts that we're seeing. We're pricing around the world, as we've mentioned, those price increases partially have been announced. Other price increases are being worked and being assessed. But the objective is to, over time, price to a level where we can recover the cost increases, not the margin, but we can recover the cost. So what you should expect, what we want to see is the sequential increase of the price contribution. It will be both price and mix depending on whether we do straight pricing or innovation pricing. But what you should expect that we will see is an increase of that contribution to the top line sequentially here within the fiscal.

Well, I think that if you just step back a second, it's a challenging time, and there's no getting around that. And we will have challenges just as the rest of the industry will have challenges. But I like our relative position. If you're a company whose strategy is focused on innovation and is the leading spender on innovation within the space, the ability that, that gives you to maintain or build value as you price, is significant. And at the same time, as Andre mentioned, which wasn't the case during the last commodity cycle, the productivity muscle, that's not something we have to start creating today, it's alive and well and there's a pipeline of projects that should enable us to help here. Again, it doesn't mean it will be easy. It doesn't mean we won't have challenges, we will. But from a relative position standpoint, I like our hand.

Okay. And then on pricing, can you discuss the consumer reaction so far to pricing and demand elasticity, perhaps compare that versus past cycles, retailer acceptance of pricing and what you're seeing from your competitive set? So pricing across the consumer retailer and competitive spectrum here?

So I'll start, and I'm sure Andre has some thoughts here, too. We're in a very different place than we were, again, during the last cycle. And we have to be careful about looking at historical elasticities as a predictor of the future. What's different? Our portfolio is markedly different. We're no longer in many highly discretionary categories. We're in daily use categories, where performance drives brand choice. We have strengthened our pricing ladders. So there are more products available at lower price points for consumers, for whom that's important. At the same time, our superiority level, we talked about it in our prepared remarks, that 75% across the vectors, across the portfolio compared to 35% last time. At the same time, in many markets, stimulus available to consumers. And you put all of that together and you say what you should see is some diminution of price elasticity. I would argue it's too early to declare that's true, but our early observations have been generally consistent with that. That doesn't mean that there isn't price elasticity, there is. But it's -- we're not seeing it at the same levels that we saw in prior cycles. The other change that's obvious is just a real dependence on the part of families around the world on products that perform. And we've all seen the migration, for example, from private label to branded products. That helps as well. So again, we won't be immune from pricing elasticity, but I think we're going to be in a better position than we have historically been, and we'll need a little bit of time to see how that plays out. As Andre said, some of the price increases won't go into effect until the middle of January. I don't know, Andre, if you have any other comments on that question?

No, I think you covered it. The only thing I would say is, Dara, if you look at the early pricing executions in the U.S. where you have visibility, they point to what Jon is saying. If you look at Pampers, for example, in the U.S., the price increase was executed in September, share continues to be up significantly because the product basically is superior at this point. So we see it across Fem Care, we see it across Baby Care, what early indications point to the dynamic that Jon was describing.

Okay. And is consumer retailer acceptance, generally high price increases, is the reality of the environment we're in and you're seeing competitors follow? Obviously, a lot of different businesses and geographies. But in general, what are you seeing on those fronts?

I think -- I mean, where -- particularly where we're able to couple pricing with innovation, so that value has improved from a consumer perception standpoint and where we have the opportunity to improve retailer margins, receptivity has been very high.

Okay. Great. Well, with that, we're out of time. Thanks very much to the 3 of you for joining us today. We appreciate it, and we'll end things there.

Thanks, Dara.

Thanks, Dara. Good luck with the conference.

Thank you.

Bye.