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

Hey, folks. All right. Back again. Good to see you all still here with us. So next on stage, we've got Procter & Gamble. Particularly, we've got, CFO, Andre Schulten; and the Head of IR, Mr. John Chevalier. So Mr. Schulten, he's still relatively new to the role of CFO. And my goodness, I hope I'm not butchering your last name. You'd correct me if I am, I'm sure. But he's still relatively new to the role of CFO of P&G, a little over a year under his belt. Prior to assuming the helm as Chief Financial Officer of the company, he was the SVP and GM for the North America Baby Care business. And before that, he was effectively the divisional CFO for Global Baby, Fem and Family Care. As many of you know, he replaced Jon Moeller in the role and as such, has very big shoes to fill, both literally and figuratively. So with -- especially in the interest of the time when the company has been performing at an exceptionally high level, substantially better than it had been a decade ago when Moeller first stepped into this role, so it is -- he's got big shoes to fill and a lot of momentum to keep going. So to tell us how he's going to keep this momentum going and tell us a little bit more about himself, let me stop there and welcome both John and Andre to the table -- or to the stage, please. Thank you.

Thanks, Jason.

Yes. Thank you. Make yourselves at home. All right. Thank you both for joining us today, and thank you to the audience as well. As a reminder, just like we do at every session, I've got plenty of questions to keep us going, at least I hope so. But we love audience engagement. So if any of you have a question at any point in time, raise your hand, flag us down, press the button, feel free to ask it.

But let me get it started. Andre, you're coming off of a -- you, I'm using you figuratively to refer to P&G, are coming off of a multiyear stretch of really phenomenal performance. Market share, top line results, bottom line results have truly been stellar. It hasn't always been that way, I think. I've been covering the company since 2012. And certainly, the performance of the last 3, 4, 5 years has been an exception to the norm that we had known before then. I'm often asked like what drove the improvement, what drove the effective turnaround in P&G. I've got a view. I've got my elevator pitch on that, and I'm happy to share it. But I'd love to hear more so from you. Like what are the key things that changed within the organization that have put you on this trajectory?

Yes. I think the -- I'll start with the portfolio because I think that was the first big intervention that Jon and the company made to get us back to the core of our competency and the core of the categories that we're really set up to win well in. Moving out of more discretionary categories, really focus on health, hygiene-related categories, daily use, performance drives brand choice, that really focused the activity system of the company, the capabilities of the companies and allowed us to define the second part of the strategy, which was to deliver irresistibly superior propositions for consumers. So everything was geared towards winning in those categories and winning in those categories by driving true superiority across product, packaging, communication, go to market and value for both retailers and for customers. The ability to invest into that superiority journey -- when we started and defined the term superiority, we were about 30% superior across our entire net sales base. So we had to invest. The ability to invest came from really intentionally going after productivity across every vector of the P&L, every vector of the balance sheet, and driving those productivity programs allowed us to fuel that superiority early on in the journey. We're now at 75%, 80% superiority. And for me, the biggest proof of the strategy is the results are confirming that where we are superior, in 4 or more vectors of the definition that we have, we grow the market and we grow our share within the category and we drive value creation for both us and for the retailers, which is critical. The last thing which is, in my mind, the most important thing that we have done is to reorganize the company in a way that clarifies accountability; splitting the company into focus markets which represent more than 80% of sales and the majority of profit, which are markets where the strategic business units can drive end-to-end decision-making all the way from front-end innovation to retail execution in one hand. They have full responsibility on resource allocation, full P&L responsibility and it's one CEO that's accountable versus prior to that, we had a matrix of people involved. So decision-making took a long time. It wasn't clear who really could make a decision. It tripped us up in many dimensions. And on the other hand, taking attention away from the enterprise markets for the CEOs and letting the regional leaders run these enterprise markets, which are much more volatile, need more local expertise to maneuver the volatility of the market. And really, the core benefit here was to free up time for the CEOs to focus on the big markets that are most important. So I think it's the combination of portfolio superiority, productivity, enabling the investment in superiority and just a clarified organization structure that freed up a lot of capacity and a lot of energy from the organization, quite frankly, because ownership frees minds and focuses minds on the task to deliver.

Good. It's reasonably aligned with the type of answer I've been giving as well.

Glad to hear.

So we're generally aligned on those. I think I also give a little more detail in terms of all the way down within the market in terms of how the sales forces align back to CEO, too, which gives better execution all the way to market. And the one thing that I also introduced, and maybe I'm off base on this so I'd love to hear your thoughts, a lot of it started with big rounds of productivity, very little of which dropped to the bottom line in the early innings. A lot of it was focused on begin the superiority journey and putting more money in the product and in select instances, also absorbing a fair amount of inflation, some beyond which your competitors could endure. And it seems to have resulted, in select instances, to narrowing price gaps or in some instances, improved margin structure for your retail partners on the other side, where there may have been some categories where perhaps they weren't being incented enough which actually created counter-incentives to want them to execute and focus on other things. So is the truth -- is that also a component to it as well?

It -- well, certainly, I think the productivity enabled the superiority investment on product, on package and on communications. You saw our communication spend go up significantly and the quality of our communication go up significantly with different agency choices. From a retailer standpoint, absolutely. I mean our incentives need to be aligned with what retailers want to do. If there's a disconnect, then it won't work. So aligning margin structures across different product tiers, making sure that retailers can create value as we create value is critically important. But beyond the margin piece, Jason, what I would say, our focus on growing categories has been the major breakthrough with retailers. And our credibility in doing so in every category that we compete in by driving innovation and trading consumers up in the category, increasing consumer penetration and showing the runway even in the most established categories that we still have, combined with our retailers, to drive more consumption, create more value in the category, drive our own productivity but also drive the retailers' productivity in effect.

Yes. And one other thing that seems to distinguish P&G from your competitors in the last year or 2 has been the resilience of your supply chain. We haven't heard -- I'm not saying you had been immune from the challenges. Clearly, nobody has been immune from the challenges, but they seem to have impaired your ability to compete in a less -- substantially -- less substantial manner than some of the other manufacturers out there. And I do get the perception that your supply chain is just advantaged, that you've invested more, modernized there. I think West Virginia is one example. We saw some of it at your Analyst Day. I don't know how many years ago that was. Was it 2018? Yes. I was going to say 4 years ago, 4 years ago when we saw some of that. Give us more on that because it's not common that people talk about supply chain as a competitive advantage. I think we have gone through an era where it's almost dismissed. It was like no, no, brands are your competitive advantage. You can outsource supply chain. But I think you demonstrated that no, no, there are actual real means to make the supply chain a competitive advantage. So talk to us about what you've done to modernize. Do you actually view it as a real competitive advantage? And if so, like where? I don't know, it's not every -- where do you view it as competitive advantage?

I think the men and women in our supply chain teams are just the heroes of the pandemic for P&G because if you think about the difficulty of the task, they have to keep the operation running. The ability to keep our employees safe in the distribution centers, in the plants, that's where I would start. That was just the most important requirement, and that's where we started our priority, as you know, during the pandemic. In terms of investments, I would call out a couple of elements. We have invested in business continuity planning early on, meaning understanding options to create alternative material supplies that we need to, reformulating products with different specs if we need to, qualifying those reformulations via digital modeling and getting them on the line maybe more quickly than others could and therefore, having more flexibility -- when some of the supply chain constraints came through, having more flexibility to adjust formulation, adjust product composition in a way that it's invisible for the consumer. It's still a superior proposition but it allows us to source from different suppliers, different regions depending on supply availability or availability of transportation. We've invested in our production infrastructure. You mentioned Tabler Station, West Virginia. We've also invested in multiple other locations to ensure that we have multi-category sites that have scale that build on common capabilities. We have a global supply chain system that allows us to create visibility on where we are in the supply chain in terms of inventory levels, in terms of production levels across the entire supply chain. We've also invested significantly in what we call our customer response network, which is basically the logistics side, which became incredibly important in the pandemic. I would name China and North America as 2 examples where we brought mixing centers much closer to the customer, where every category is in that mixing center. We can fill the trucks, customized to the order of the retailer, and we can fulfill quicker with a more direct route to the retailer. And at the same time, we can source from the plants directly into those mixing centers, which allows us to rebalance inventories. At a global level, we're able to shift production from regions. If there's one region shut down, we have a sister site at another region that can pick up the production of that site. They have the specs available. In some cases, they have the materials available so it doesn't take 6 months before we have get the materials so they can start up. So investment in business continuity planning and just capabilities and investment in sheer capacity and infrastructure are the 2 pieces. You heard Jon talk about supply chain 3.0. We believe supply chain is going to be important and an important differentiator going forward. So you'll see us build on that capability and extend our ability to serve customers well, increase our resiliency in the supply chain but also our ability to respond to supply chain development. So it's going to be a focus area going forward.

Now Jon was here at Goldman presenting internally a few months ago. And he made -- he had an acronym which I'm totally blanking on. Maybe you know what it is. But minimum order quantity of one was effectively -- but he said -- he had like whatever the acronym was. I don't know if you know. What's that?

MOQ1.

That was it.

MOQ1?

Yes, yes. All right. That was it. It sounds like that's a part of the focus of supply chain 3.0, which sounds like it's realigning for a true omnichannel type environment and customized pick, pack. We're all down to 1 order. Is that feasible? Can you actually achieve something remotely close to that with the same type of scale efficiencies that you have in the existing network?

I think it's a vision. I don't know that it's even necessary to go to an MOQ1. I think it is a vision.

Oh, he said MOQ1. That's not -- yes, that was the catch -- it was catchier when you say MOQ1 than MOQ1. It sounds like speed.

Yes, yes. And I think that's what we're describing, right? I think there's an opportunity to increase the flexibility, especially in the mixing centers, because you can imagine the complexity within the mixing center with the number of SKUs that we're operating. So getting those SKUs assembled more quickly, automated with less labor so we can focus labor really on value-added tasks in the supply chain, that's where we want to get to. And the other component here is we have a vast array of data segments all the way from shelf and POS data, down to our Tier 3 suppliers who are providing raw and packed materials. Integrating that data infrastructure in a way that we can more quickly and more precisely plan and communicate these demand signals so we get a better synchronization in the entire supply chain will allow us to reduce cost, increase agility, reduce inventories. That's what we're after.

Yes, that makes sense. So that's long-term goal. In the near term, you're still dealing with a lot of challenges in your supply chain, particularly on the cost side. So this has been -- I'm sure in your meetings so far, this has come up a lot. It's come up on stage with every presentation we've had. So a couple of questions on that. First, outside looking in, it looks like it took some time for you guys to get pricing in place. Over the last 4 quarters, you absorbed nearly $3 billion of commodity, of logistical cost pressure, realized over $1 billion of price offset. We all want immediate gratification. And we'd love to be able to see like, "Oh, c***, here comes some costs. Don't worry, P&G is there. The pricing lever is on." I realize sometimes that these are unreasonable expectations. But is -- do you think you could have or should have moved faster to get price in place? And for us who are maybe a little critical on the outside and seeing, it looked like, you drag your feet, did you? And is the reason -- was there a strategic thought behind that or no, that's just unreasonable expectation on our behalf?

Two-part answer. There is always an element of lead time to get pricing into retailers, which you know. But in full transparency, we took our time, and we took our time intentionally to do it -- to do pricing the right way. What I mean by that is in our categories, it's critically important that we show value to the consumer. And if we do that right, we can take pricing and still convince the consumer that they're getting a superior proposition and superior value. And the best way to do that is to innovate at the same time as we price. So where we had the choice, where we could take a price increase immediately or we could wait for 60 days or 90 days and combine it with strong innovation, we decided to wait. The second component is some of our categories are very price elastic, and they serve consumers across multiple income levels. And for some of those consumers, value per unit is very important. For some of those consumers, cash outlay is very important. So where we had to make adjustments to protect key price points, especially for channels where those more constrained consumers shop, it takes time. We need to adjust the pack count. We need to adjust the artwork on the pack count. We need to align retailers because it has implications on the shelf, on the shelf setup. So again, we decided to protect those price points and do it in what we believe is the right way forward. So those are the reasons why we moved at the pace we moved versus -- you could go within 30 days straight pricing. You break every price point. You don't care about innovation. We didn't think that was the right path for us.

That seems logical. And now the pricing is in place, moving. You have a fair amount of momentum on that side. Is -- at what point do you believe we can get to a state of equilibrium, where the amount of pricing that's in the system is offsetting the amount of input cost inflation that's rolling to your P&L?

If I only knew. Look, what do we know? We know the pricing we've taken, and we know that the elasticities that we're seeing in the market are better than what we would have expected based on historical data. That continues to hold in the U.S., about 20% to 30% better price elasticity. I spent a week with our CEO in Europe a couple of weeks ago, and it holds in Europe as well. So the strategy of combining pricing with innovation, the strategy of respecting key price points, communicating value at the same time for us, at this point in time, results in a relatively better price elasticity. There is price elasticity, no question, but better than what we would have expected based on historics. We also know that even at current spot prices, the impact of commodity costs rolling through contracts and annualizing spot next year is going to be a significant headwind. So we're not done even though spot is stabilizing. That rolls through the supply chain and will create a significant headwind next year. So we got to continue to offset that via productivity, innovation and pricing, which we will do. Our objective -- Jason, as you know, we've talked about this multiple times, our objective is to offset the dollar impact from commodity headwinds on fastest possible timing with the parameters we've talked. Once we've done that, we will go back to grow margin because it's part of the growth algorithm. But when that is going to occur, very difficult to say, too many variables, including where spot price is going to go and how are pricing elasticities going to evolve going forward.

Yes. But you did say that even though spot prices are stabilizing, there's going to be the ripple effect. I want to go back to it. Are you seeing evidence that spot prices are stabilizing?

We see...

In aggregate. I know there's going to be pieces going in different directions.

When I say stabilize, what we see is smaller increases than the increases we've seen at the beginning of the fiscal year, for example. So it's certainly reaching the top, hopefully, of the commodity levels. At this point in time, it's hard to know. We see small increases week over week, but it's significantly less than what we have seen early on. And the buckets change, right? I mean diesel cost, for example, is at an all-time high, which you know. Now the freight to -- the driver-to-freight ratio is improving a little bit. So that's the offset on the transportation side. Many of the suppliers that have produced through COVID are now taking long overdue maintenance on their lines, which is putting pressure into the supply chain. So the dynamics are changing, but by no means, I think, the supply chain is out of a very pressured period that is weighing on cost.

Sure. A slight curveball on this one, but you prompted a thought on this. We often have the debate -- it's probably more prevalent on the food side where things can be more volatile than, I think, on the HPC side. But what's better, an environment where -- would you prefer to see over the next 24 months commodity costs come back in, meaning revert closer to levels pre COVID, or would you rather see them stabilize and even modestly inflate at a more manageable 2% to 3% type level?

I don't think my preference matters much unfortunately. I -- logically, the commodities we're dealing with are cyclical. The cycle will complete. They will come down at some point in time as capacity is installed, consumption moderates. I think the question is the sequence of things coming together. We'll continue to offset what we see in spot. Eventually, commodity prices will come down. We'll continue to innovate. And at the same time, at some point in time, the consumer is going to react to more and more pricing. I think in which sequence and with what over or underlap these events happen will determine what the industry will do. It's very hard for me to predict what that sequence looks like. I just know all of these things will happen. I just don't know when.

That's a good answer. Yes, I think that makes sense. The other offset to all those inflation, of course, is productivity, and you guys were crushing it for a number of years. But you no longer are crushing it at the same rate that you had been before. I think just looking at some of the stats here, running $1 billion-plus COGS productivity for a decade. But for the first 3 quarters of this year, it's 440. So you're now tracking sort of well below that prior run rate. Is that where we are in the life cycle? Like, hey, the low-hanging fruit is plucked and we should just now be expecting a more modest rate of productivity? Or is this a moment in time where cadence of projects or something may be causing the rate to be less than what we've been accustomed to seeing?

I believe it's a moment in time for a couple of reasons. One, we had to prioritize -- and I talked about this in the last 2 earnings calls. We had to prioritize supply chain, delivery of product to retailers and to consumers. And especially in the cost of goods area, qualifying new materials that give you cost savings or qualifying different line speeds or different elements on the line that give you cost savings take line time. And when you have to choose between line time that gets you revenue because you're shipping to your customers or line time that gets you cost savings, we prioritize line time for getting product out the door. We also prioritize innovation. So we qualified innovation on the line instead of qualifying cost savings because taking pricing without innovation in favor of productivity, we didn't think, was the right choice. So all of these cost savings that we didn't qualify and didn't execute are available to us, and we will bring them on as supply chain stabilizes, which hopefully happens here in the next few months. So those potential cost savings are still available across. I talked about supply chain investments. The beauty of these supply chain enhancements that we've talked about, synchronization, using data to better align inventory levels, automation, all of those things drive cost savings. So they not only improve the resilience and the agility of the supply chain, they also drive cost savings. On the media side, you've seen us significantly increase spending over the last 2 years because there was positive ROI in building more reach and higher-quality reach. We will continue to do that where the payout is good, but we're also at the point where we believe we can increase reach and quality of reach by using digital data and media tools. And those savings are available to us. So we still see significant buckets of productivity. And the model requires us, Jason, to get back to that level of productivity you've seen to fuel the investment in innovation and things of priority. So...

Yes. Well, that was a great lead into another question I had on my list. We're all conditioned to look for warning signs at P&L. And one of the warning signs is things get tough for a company and they pull back on some of the spend into their business hoping that they can recover quick. It doesn't and then you pull back more. And pretty soon, you've dug yourself in a hole and you've got protracted, elongated problems. I'm not accusing you of being at that point yet. But last quarter, SG&A spend down 7%. And based on the guidance and the composition, all the pieces we put together for the fourth quarter, it looks like something similar. Is this just the productivity? Or are you guys indeed like tightening the belt to make sure that you can make numbers this year?

A couple of effects here. One, the base period in Q3 you compare to had a very high spend. If you look at the past 3 quarters, we're exactly at the same spend rate in terms of percent of sales. So the base period was higher in Q3. And it always -- investment always phases with innovation. So you want to make sure you spend the money when you have the biggest news out there. So that can shift from one quarter to the other, and that's what we're seeing at the moment. I do think that as things get tight, we will not compromise on reach. We will not compromise on quality of reach. We will not compromise on the ability of our brands to be out there. And even now, it's very important to send the right superiority message to consumers, send the right value message to consumers. So you won't see us compromise on that. What you will see is be a bit more intentional about flowing productivity and media spend to the bottom line if we need to. So if that's a better choice versus taking more pricing, you'll see us make that trade-off. So I think that's part of the dynamic that going forward, I bet some of the CEOs will go in that direction. And the decision is with all of the different business units and all the CEOs. Jon is very clear, I am very clear, the CEOs are very clear, we will not jeopardize investment in the brands at no point. That's not the model, and we need to stay with that superiority strategy. That's what's -- honestly, that's what put us in the position that allowed us to win prior to pandemic, through the pandemic and even now. So we will not compromise.

And this goes back to the whole commitment to balanced growth, top and bottom line, over time.

Yes.

You don't get it all every year, and you certainly aren't getting the bottom line this year that we would like to get compared to the top line that we're getting. But you have to stay invested. And we know -- we've seen the movie before when we didn't do that. We don't want to go back there.

Yes, yes, yes. So on that point of superiority, this is -- I'm sure you get this question. We're all a little bit nervous about consumer price sensitivity growing, trade-down dynamics building, some early evidence that maybe that's happening, although clearly not ubiquitously. We could find some pockets though, where it is. Some argue that you will be a victim from that because this is back to the old good, better, best. You're winning on the best, and therefore, the consumer could start to trade back out. The other side of the argument is heck no. Like we earned this. We earned this because we invested in the product. It's not like -- it wasn't just the consumer flush with cash who opted to trade into us. We went out, we earned it with a better price/value proposition that wasn't based on price. It was based on the value side. You're clearly a biased source, so I know what your answer will be on which side that falls. But is there any evidence that can like give us some confidence that, no, no, that's it, like you earned it, it wasn't just a consumer who had more discretionary cash so they opted up for the Tide PODS instead of the box of powder?

Yes. The first thing I would say is you never earn it. You have to earn it every day. And that's what we're seeing, and that's where we keep everybody focused. The things I think the businesses have done extremely well is to get ready, get ready by driving the priority and making sure that we are clearly superior not only in the top end of the portfolio but at every part of the price ladder. And where we didn't have an offering at a relevant part of the price ladder, we created an offering, right? When you think about diapers, we talked about this multiple times, Luvs is the value brand that we have in the portfolio. Luvs needs to be superior versus that set of competitors that are playing at that price point of $0.18 to $0.20 a diaper. Then comes Baby Dry at $0.28 a diaper, then comes Swaddlers at $0.30 a diaper, then comes Pure at $0.38 a diaper. The set of competitors at each of these value propositions is different. And we need to be superior, and we measure our superiority against that set of competitors. The same is true in laundry, and I can walk through the examples there. You know them well. We also were very intentional to ensure that -- and I talked about this before on the pricing side, that we have cash offerings -- cash outlay offerings that are relevant for consumers. So if you're not able to spend $20 or $40 on a pack of diapers, there's an option at $8.99 or in some channels, even at $5.99, making sure that those cash outlays are tailored to the consumer we're trying to go for in the brand offering but also in the channel in which we're competing. We built distribution intentionally in hard discounters in Europe, which we didn't have before. We built distribution in the dollar channel in the U.S. to ensure that we can deal with channel shifts as the consumer looks for different value propositions. We intentionally communicate value. We talked about Tide and Ariel cold wash. We're communicating to the consumer if you switch from hot water to cold water, the energy saving effectively offsets the cost of the detergent. We have claims on Fairy in the U.K. of 2x more efficacy versus comparable product. So there's a communication component that plays into it. That entire activity system needs to work to avoid what you're describing as the risk. So far, it does. And actually, we see consumers even under pressure trading up into our higher order propositions because they believe they have better values. No guarantee for the future, hard work every day.

That makes sense to me. We're running out of time. I'd love to leg in just looking for any hands, but you're not seeing any. Let's spend a little bit of time talking about your second largest market, China, which we've got a larger body of reported results now than when you guys first went out, and there's clearly a mosaic forming of like it's tough and it's only gotten a little bit tougher. So what's happening in the market? Can you give us some more color?

Two aspects. One is the supply chain. We've got 2 plants which were shut down for a number of weeks because of the COVID lockdown restrictions. Both plants are back to operation, which is good news. They operate in a closed-loop system, which means the employees stay in the plant, and we are very thankful for the commitment of the employees to do so. But both plants are operating and producing. On the consumption side, obviously, the lockdowns continue to have significant impact on retailers' ability to get product to the consumer or consumers' ability to consume and shop for product. And we still see that. In the Q3 earnings call, we mentioned that we expected April to be down versus a year ago in terms of category consumption within the categories we compete. We saw that play out, and we continue to expect reasonable headwinds in the near term until the lockdown situation eases. Now we continue to believe that China will return to mid-single, high single-digit growth in our categories. We continue to develop and invest in innovation. We continue to develop and invest in brand-building so when that market returns to full capacity in terms of consumption, we're ready to go.

Okay. Excellent. Time for one more in the audience. Anyone? All right. Let's not press it because we only have a minute and change left. So I'd rather wrap with a minute and change left on the table than end up going over. Thank you so much. John, Andre, pleasure.

Thank you.

Thank you, Jason.

Thank you all.