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'll start today with a review of results. Jon Moeller will discuss our strategies; and Jen Davis, President of Global Feminine Care, will share how our superiority strategy is being brought to life in fem care. Jon, Jen and I look forward to answering your questions after our prepared remarks. Starting with results. A strong start to the fiscal year despite one of the most challenging costs and operational environments we've experienced. Through the first half, organic sales, up 5%; core earnings per share in line with year ago despite a 16% impact from macro headwinds; adjusted free cash flow productivity, 99%. We're continuing our strong track record of cash return to shareowners. Through the December quarter, we've returned nearly $12 billion of cash to shareowners, $4.4 billion in dividends and $7.5 billion in share repurchase. Back to the top line. Q2 was the 14th straight quarter of strong organic sales and market share growth. Growth is broad-based with 9 of 10 categories growing organic sales in the first half. Each of our 10 product categories grew or held organic sales in the most recent quarter. Personal Health Care grew 20%. Fabric Care and Feminine Care were up double digits. Baby Care was up high single digits. Grooming grew mid-single digits. Hair Care, Skin & Personal Care, Oral Care and Home Care each grew low single digits. Family Care organic sales were in line with prior year. Through December, focus markets grew 5% and enterprise markets grew 6%. All regions are growing or holding organic sales. 35 of our top 50 category country combinations are growing or holding value share through December. Global aggregate market share is up 60 basis points over the past 3-, 6- and 12-month periods, with 9 out of 10 categories growing share. Most of this is coming from outsized contributions to category growth, the most sustainable and profitable way to grow share. 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 of 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, to trucking, from retailers to our own manufacturing and logistics operations. These challenges require an increasing amount of organizational capacity and agility to mitigate. Based on early February spot prices, we estimate a $2.3 billion after-tax commodity cost headwind in fiscal '22. Freight costs have continued to increase. We expect freight and transportation costs to be an incremental $300 million after-tax headwind in fiscal '22. Foreign exchange rates have also moved against us. We expect foreign exchange to be a $200 million after-tax headwind to earnings for this fiscal year. We will offset a portion of these higher costs with price increases. We've announced price increases in all 10 of our product categories in the U.S., covering nearly 80% of U.S. sales. We're also pricing as needed in markets outside the U.S. for both commodity costs and foreign exchange impacts. Our pricing actions are targeted and strategic. They are tailored by market, category and SKU, and combined with innovation when possible to deliver superior value for our consumers. While it's too soon to declare success, given the strength of our portfolio, our broad-based share gains and early in-market results, we feel relatively well positioned about our ability to execute pricing. That said, early results are no guarantee for the future, and therefore, we will diligently monitor and adjust plans as needed. 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. As we said during our earnings call last month, gross and operating margins are expected to improve in the second half as we begin to annualize cost pressure and as the benefit of pricing continues to flow through. We will continue to prioritize innovation to drive irresistible superiority of our brands. We combine superior innovation with pricing when possible to improve the overall value proposition for our consumers and drive category growth for our retail partners. As we've shared many times before, we are focused on delivering balanced growth, top line, bottom line cash. This remains our objective and 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.

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, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. We like our current 10 categories. Our strategies and current portfolio have delivered strong results pre and during COVID. No need for additional restructuring acquisitions or divestitures. Next, superiority to win with consumers. We continue to raise the bar on all aspects of superiority: product, package, brand communication, retail execution and value at all price tiers where we compete. We started doubling down as a priority in fiscal '16. We judge at that time 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 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. 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. The Dawn brand is a great superiority example. With consumers spending more time at home, eating more meals and doing more dishes at home, appreciation for superiority in the Dish Care category is higher than ever. Dawn has delivered outstanding results behind innovation that drives product and packaging superiority, such as Dawn Powerwash, which we launched 2 years ago. And we're innovating to extend this margin of advantage. Earlier this month, we launched Dawn EZ-Squeeze in the U.S., a superior product with an upgraded formula across the entire lineup; superior packaging. The no-flip, no-mess cap makes it easy and fast to use from the first squeeze to the last. Superior communication, flip the way you clean dishes with new Dawn Platinum EZ-Squeeze. Let's watch the copy. [Presentation]

Superiority across all 5 vectors: product package, brand communication, retail execution and value drives strong results. P&G has delivered 100% of the U.S. hand dish category growth over the last 2 years, 40% higher than our fair share. Value share is up nearly 9 points over the last 2 years. Driving category growth with superior innovation builds market share and builds business for our retail partners. Jen Davis will now share how the superiority strategy is brought to life in our Feminine Care business.

Thanks, Jon. I'm Jen Davis, President of Global Feminine Care. Global Feminine Care is an attractive $34 billion market that's been growing consistently at a mid-single-digit rate. P&G is the global market leader with sales in 125 countries and nearly a 30 value share with our brands, Always, Whisper, Tampax, Naturella, This is L and Always Discreet. Organic sales grew 6% on average over the past 3 years. We have grown global market share for 16 of the last 18 quarters and are growing share on nearly 80% of our business through December. We have increased our contribution to category growth. Over the past 3 years, we drove 44% of global category growth, over 1.5x our fair share. In the U.S., our largest market, we are the category growth engine, driving nearly 100% of the market growth over the past 4 years, delivering over 40% value share. In China, we have grown sales twice as fast as the market in that same period. The key to these results and sustaining them in the future is a relentless focus on superiority across all vectors, enabling category premiumization and regimen usage. Feminine Care is comprised of 2 major subcategories: menstrual care and incontinence care, and we are well positioned to meet growing consumer demands in each. There's meaningful consumption opportunity in incontinence. Current household penetration is low and the aging global population and the rise of obesity will only increase the incidence of bladder leaks. There's upside in menstrual care even in mature markets by addressing important benefits in a superior way, from fundamentals like protection, comfort and discretion to better consumer education to the growing demand for natural and more sustainable products. Underpinning this, there's significant opportunity in developing countries. As incomes rise and markets mature and as a focus on gender equality helps normalize conversations about periods and bladder leaks, we expect increased demand for menstrual and incontinence products. When P&G entered the incontinence business with Always Discreet 8 years ago, our goal was to deliver a superior consumer experience that would grow the category. We knew that while 1 in 3 women over the age of 18 experienced bladder leaks, only 1 in 9 was using an incontinence product. Always Discreet has been a driving force in category growth, increasing household penetration by 50% since launch. Always Discreet's focus on superior protection in a thinner product has been a win with consumers. The brand has disrupted traditional ideas of the incontinence category with a focus on beautiful feminine products and packaging. We are showcasing the product rather than hiding it with a delightful design that helps women feel good about buying it. Our current campaign "Question Your Protection" directly addresses entrenched category users who don't love their experience but are unsure about switching. Let's watch. [Presentation]

Superior products, superior packaging and superior communication, making a meaningful change in consumers' quality of life and driving strong business results. Over the past 3 years, we have grown sales 3x the rate of the global incontinence category and hold the #2 spot in North America and Europe and the #3 spot in Japan where we entered in 2019. And significant growth opportunity remains within our existing geographic footprint. We are also driving market growth in the menstrual category with innovation focused on one of the most prevalent consumer needs, better protection. The proprietary technology in our super premium Always FlexFoam pad delivers an incredible level of protection and comfort. Let's watch how we disruptively communicate what's different about FlexFoam technology versus traditional pads and how that enables our strongest claim ever up to 0 leaks and 0 feel. [Presentation]

FlexFoam is driving premiumization in the category, accounting for over 80% of U.S. pads category growth over the past 2 years and driving 5 points of Always share growth. In China, FlexFoam at double the category average price has delivered nearly 20% of the pads category growth and increased Whisper share 1.5 points. Superior performance, clearly driving brand choice. We know consumers have the best experience when they use the right product for the occasion which is why we've also focused our innovation in the night benefits space. Night products are uniquely designed, enabling maximum protection for a good night sleep, an unmet need expressed by 25% of consumers and the benefit she is willing to pay a premium for. Consumers use day plus night pads as part of a regimen, optimize change frequency for a better experience. Superior communication is delivering results in Tampax. Two years ago, we set out to reinvigorate the tampon segment following 5 years of stagnant market growth. In July 2020, Tampax launched an educational campaign, grounded in humor, to normalize tampon and period talk. Let's watch Amy Schumer, our tampon guru, as she delivers the message. [Presentation]

Our messages and educational videos reach consumers across a range of platforms, including TikTok, YouTube and even gaming. And the response has been resoundingly positive. Since the campaign's inception, we have led nearly 10% growth in the tampon segment in North America, where more than 60% of global tampon sales occur, and our share of the tampon business has grown nearly 6 points. Naturals are another area of growing interest among consumers, making it one of the fastest-growing segments in feminine care, up more than 40% in the U.S. and 30% in Western Europe in the past year. P&G is the segment leader in these markets, contributing more than 5x our fair share of global category growth behind a portfolio of offerings from Always, Tampax and This is L. Over half of consumers say they are interested in natural or more sustainable products, but few are willing to give up on product performance. So we've integrated sustainability into our superiority proposition. We launched a new paper-based package on our super premium Always cotton protection pads in select stores in Germany. It is made from renewable resources and can be recycled. Sales increased over 50% behind this packaging upgrade despite a higher price. This innovation has been recognized externally with 2 prestigious packaging awards. Just one example of how we are delivering a superior proposition to those unwilling to compromise performance, while seeking good-for-me and good-for-the-planet options. Our strategy is to innovate and provide a range of product forms and useful information to empower our consumers with choice and to live fully with freedom and confidence through every stage of life. This has always been our guiding purpose, and we approach environmental sustainability in the same way. We believe that if we do this well, brands like Always and Tampax will continue to be a force for growth and a force for good. We have a long history of supporting girls, women and underserved communities through programs that champion equality, access and education. For more than 35 years, Always has been providing puberty education, reaching more than 15 million people in over 25 countries. The Always, Like A Girl campaign, has received more than 250 industry awards across all aspects of brand building since its launch in 2014. We are proud of what we've accomplished, but there's more to be done to ensure that no one loses confidence at puberty because of their gender or their period. To ensure equal access to menstrual products, we introduced the Always End Period Poverty campaign to raise awareness that 1 in 5 girls in countries like the U.S. miss school because of a lack of access to menstrual products. Through our partnerships with retailers and NGOs, we've donated over 160 million period products. Our most recent campaign, Always Keep Playing is another example of how Always has continued its mission to help girls build confidence by rallying society to keep them in sports. Nearly 1 and 2 girls in the U.S. quit sports during puberty. To help change this, Always has donated over $800,000 to our partners the YMCA and Women's Sports Foundation to support thousands of girls. Let's watch the video. [Presentation]

Campaigns like this drive brand awareness and equity. We collaborated with over 85 influencers, driving over 2 million impressions within the first 72 hours of the campaign, and we garnered strong support from our customers. This program helps secure merchandising, display and drove more than 10% incremental sales at major U.S. retailers. When we combine our purpose and focus on driving value for consumers, retailers, shareowners and our communities, we are confident we can deliver sustainable, balanced growth. Our team is agile, passionate and committed to continuously improve our ability to serve consumers across the world from puberty through motherhood, menopause and beyond. We are proud of our market leadership and look forward to accelerating this category even further in the future. Thank you. Back to you, Jon.

Thanks, Jen. Superiority is especially important in an environment where consumer costs are rising. We're innovating across tiers, ensuring we provide value to the consumer in all price tiers where we compete. Providing value for the consumer and value for retail partners in an environment of rising cost drives category growth, and it's why we'll continue to invest in our products and 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 4 areas in which we need to be even more deliberate and intentional to strengthen the execution of our strategy: environmental sustainability; increasing our digital acumen to drive consumer and customer preference, reduce cost and enable rapid and efficient decision-making; supply sufficiency, capacity, agility, resilience for a new reality and a new age; and our employee value equation for all genders, races, ethnicities, orientations, identities and abilities for all roles. These are not new or separate strategies. They are 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 or we're unlikely to deliver against the needs of any of them. Consumer customer, employee, society and shareowner needs must each be met. There's 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 and bottom line and effective in serving a growing number of constituents. 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, 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 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 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.