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

All right. We're going to start up again. So up next, we have Andre Schulten, Procter's CFO; and John Chevalier, Procter's SVP of IR, joining us on stage. Now prior to assuming his role as CFO in '21, Andre was the SVP of Procter's North American Baby Care business and has served in several key leadership positions at the company over his nearly 30 years of experience. Now Procter has been one of the most resilient CPG companies over the past several years, even as the industry faced a challenging backdrop with COVID-led supply chain disruptions, geopolitical tensions, record high inflation levels and a rising rate environment. So really excited to have both Andre and John here to talk us through the secrets behind the company's operational excellence as it navigated really through this volatile environment, and it's ultimately path forward. So thank you again, both of you for joining us.

And I guess, Andre, when you sit here today, I wanted to ask you, when you first looked at the company from a CFO's perspective about 3 years ago, what, in your view, was really working well? And then maybe what did you see as some of the areas of improvement that you ultimately identified?

Sure. Good morning, Bonnie. Thanks for having us. Look, the -- let me pick up on the resilience point because I think it's true. The team has been able to deliver outstanding results. I think prior to the pandemic, during the pandemic, in an inflationary environment and now as we're coming out of that inflationary cycle. And I think it's all grounded in the execution of the strategy. If you think about the categories that we operate, we intentionally chose categories that are nondiscretionary. They are daily-use and consumers value product performance. Consumers are willing to pay for products that actually deliver the benefits. If you think about diapers, my previous job, you don't want your diaper to fail. And if you get reassured that the diaper works, you're willing to pay a few pennies more. Same is true for laundry, same is true for fem care products. So performance actually matters to the consumer a lot in these categories. And the team has done a fantastic job of building something we call, irresistible superiority. And what that simply means is that across the dimensions of product performance, the way we package the product, the way it's presented in store or online, the way we communicate the benefit to the consumer and the way that we provide value to the consumer is superior to the next best offering in the market. And as we expand that level of superiority from 30% in 2016 to 80%, you saw the business results go with it. They have been able -- the teams have been able to deliver productivity even through the toughest parts of the supply chain crisis. And that is a core element of how we keep the cycle going because that allows us to reinvest in superiority and drive that growth. Next when looking around the corner, if you think about the developments of where the consumer was going, what we needed to do in order to be distributed in all the channels where the consumer would ultimately shop when value becomes a bigger topic for the consumer. And ultimately, we've got teams that are accountable. But they also have the decision rights at the right level where they can drive the decisions that are relevant for their consumer. So that strategy has worked. The best part about it, Bonnie, is it's market constructive because it grows categories. That's really the idea behind it. Nothing in this company gets changed by one person, right? It's -- we have incredibly capable group of sector CEOs and of market leaders. And when we looked at the company's trajectory 3 years ago, when John took his role, I took my role, we basically said there are strategies working. But there are a few things we want to double down on. And among those things were really redefining irresistible superiority. And the simple way to express that is we were looking at, are we superior versus the next best offering in the market, which is great. But if you think about the constructive nature of the strategy, we really want to be superior to the next best solution that the consumers are using and that keeps them from using our solution. So when you think about a consumer who's using a mop and bucket today, how can we make Swiffer so irresistibly superior for that consumer that they shift into the category. How can we make laundry users trade up from powder to single-unit dose. So that's really the idea. How do we build irresistible superiority that more directly builds the category. And as we did that, we basically reset the superiority from 80% back down to 30% illustrate to the organization that's the new challenge that we want you to go after. In sync with that, we increased the focus on productivity. And most importantly, we decided to look at productivity at the same planning horizon as we do for innovation. Generally do innovation planning on a 3- to 5-year master plan. And it was only logical to say, why don't we plan our productivity efforts on that same cycle to ensure we have sufficiency over that 3- to 5-year period and we can better synchronize productivity savings with the need for investment and innovation. The last element the team decided was to build environmental sustainability into the company's strategy. The way we deliver sustainability is easily described as 3 pillars: reducing our own footprint, scaling technologies that we have in the marketplace when we can't scale them ourselves and monetizing them, like polypropylene recycling, for example. And the last one, which is most important is to reduce the consumers' footprint, because that's really where 80% of the footprint is of these products. It's in the water usage and in the heating of the water in the laundry cycle, for example. And once we reframed the idea that way, became a value-creating and market strategy. If we enable consumers to bridge that gap between environmental sustainability and product efficacy, they don't feel bad about using more. They don't feel better about doing the job more often. That grows the market, and it grows value in the market because they're generally willing to pay up for that proposition. So if you look at Ariel 4-chamber [indiscernible] in Europe, which is high performance in cold wash, which is the claim, we were able to reduce the wash temperature, deliver a packaging that is recyclable and sustainable and the business grew more than 20%. So that's the idea. So long-winded answer.

No. That's great.

But at the end of the day, it's about executing the strategy. Enhancing maybe, but not fundamentally tweaked.

No, that's great. And then as you described that, do you think you as an organization are better about sharing best practices. So the example you just provided how can you leverage some of the learnings from that, ultimately bringing that into other markets and vice versa.

Yes, for sure. I think the organization has learned, "not-invented here" phenomena is largely gone. And we've all learned that cross-fertilization across these sectors is critically important and can accelerate. And we -- John does a very good job of incenting that and celebrating these examples across the organization, which is...

And then you touched on this a bit earlier, but your company certainly was a big beneficiary of the superior supply chain that you have during -- especially during COVID. As certainly many of your peers struggled to keep their products on the shelf. Now as you think about today, competition really hasn't stayed still, and supply chains really have recovered and competition has intensified. So could you talk to us a little bit about the steps you're taking to sustain this superiority going forward?

Yes. I think the most important recognition of our supply chain is what our retail partners are saying. They've voted us #1 supply chain in the industry on a global basis now for 9 years in a row. That's no need to stand still, it's actually motivation for the team to go further. And they are driving every element of the supply chain. Very simple things. First of all, we've learned -- I mean, it took as a while to catch up to the level of demand we're able to create over the last 5 years. And what we've learned is that we need a higher capacity-to-demand ratio. Number one, there's more volatility in the demand pattern than there ever was. Number two, when we get all 5 vectors of a proposition right, we are almost always surprised by the size of the upside. So the first thing we did and we are doing right now is continue to invest in capacity. So we have that flexibility to deal with the volatility and to deal with the upside that our propositions are generating. The second element was to further build on the resiliency that we had started to benefit from in the supply chain crisis. What that means for us is have formulation flexibility. We have great digital capabilities to reformulate products. Meaning reformulate ingredients, model that digitally and then deploy it digitally to the production facilities, which allows us to reformulate in a matter of weeks instead of doing it for over 6 months or 12 months, which it took us before we had that capability. That, combined with a supply chain, where we have very intentionally moved from global limited number of suppliers to more regional suppliers and local suppliers, allows us to source differently if there's an availability issue for a material or if there's a cost arbitrage that we had. So that capability we're still building and expanding. Digital and automation is a big topic in what we call Supply Chain 3.0. It's the enabler of resilience, but it's also the enabler of productivity and quality improvements. Simple example, typically, in a diaper production line, we would sample batches of product. If a diaper has a defect, you have to scrap the batch. Now we have sensors and cameras on every line that basically checks every diaper that moves through that line. It avoids the batch issue. It avoids the scrapping. It improves quality and it reduces manual labor as we don't have to do that off-line anymore. Last element, I think our colleagues in the manufacturing sites and the distribution centers are our biggest asset. The work that they have done and are doing every day is critically important, making sure we provide the right value equation to them to ensure we can attract the right talent and retain the right talent is critically important. But you'll hear more about it, we will talk about Supply Chain 3.0 in more detail at our Investor Day in November, and I'm quite excited about it.

Okay. Thank you for that. Switching gears a little bit, I wanted to touch on the consumer, right? And as we sit here today, I'd love to hear your perspective on the consumer, especially the low-income consumer, as we're really seeing some softening in some of the macro data. So have you seen any shifts in consumer behavior as a result of these dynamics?

We have not. And we continue to see the same stability of our consumer that we've really observed over the last 2, 3 years. I think it partially comes back to, Bonnie, the categories we're in. Consumers don't stop doing laundry. They don't stop buying diapers, they don't stop buying fem care products. So nondiscretionary is a huge asset for us. Number two, I think, again, driving irresistible superiority, so they understand, consumers understand the value that we're offering. And we've built a portfolio of brands that cover both premium end of the market and the value end of the market. We've built excise portfolio that covers price points from $5 to $50. So there's choice for the consumer to find their value proposition within our portfolio. And what that means for us is if you aggregate it all up in North America or in the U.S., in our categories, private label share is stable. Nothing -- really no movement in absolute private label share. And we continue to grow volume share, which means we have more consumers trading into our portfolio than trading out, obviously. And once they come into the portfolio, we continue to see trade-up into higher value propositions. The same is true in Europe, only difference being, in Europe, private label is growing as well. So there's more of a bifurcation of the [consumer]. But even within that, we are able to grow share and we are able to drive market growth in [indiscernible]. So at the macro level, we don't see trade down. Is there some trade down when we don't get things right? Yes. So on a couple of brands, we don't have the value equation right, specifically value tier brands, when you think about Luvs and diapers, and we know how to fix it. So the team is then very quickly thinking through what's the innovation I need, what's the product upgrade I need to fix that value equation. But there's no broad trend in our consumer base that is shifting down.

As an organization, you're faster, as I think back few years ago and certainly the different price tiers, just more laser-focused, ability to [ be nimble ] in the market as an example you just described.

Yes, I agree. And I think the nimbleness is driven by having the accountability and the decision rights aligned at the right level. So if you run the North America Baby Care business, you own innovation, you own the go-to-market execution all the way to the customer. So you're enabled, empowered and encouraged to make those decisions way more quickly than if you have to enroll a global organization all the way back down. I think that's helping us. I think the culture has also shifted, and David was a huge advocate of transparency and straight talk, that has continued. We embrace the fact that if something is not working, it's not working. And I think embracing -- one of our leaders called it embracing the red. So look for the red because then you can fix it.

And then think of price tiers and how you've successfully navigated that and limited trade downs, also thinking around the context of promotional levels, which have remained below pre-COVID levels. And curious to hear, based on discussions with retailers, do you see structural factors that support these subdued levels? And then -- or if not, do you think promotional levels are going to kind of creep back up maybe towards the back half of this year? And in the context of that, how do you manage that while protecting margins going forward?

Yes. The promotion levels remained remarkably stable below pre-COVID levels in the markets where we have the best visibility, which is the U.S. In Europe, we saw frequency come up to pre-COVID levels, but not depth of promotion. So all of those indicators are healthy. And I think they are a result of everyone [ rebuilding ] margins at this point in time. As we come out of the pricing cycles, you see the commodity easing is reversing. So you see some commodities coming back up. So the cost pressure, I think, is increasing again. And generally, I think the more -- you see many of our competitors adopting part of our philosophy of being market constructive and actually driving growth instead of taking share. I think that's a great development for the marketplace, for retailers, for the consumer. It means better products, better options. We see pockets of that not holding true. So there are some heavy promotions going on in some categories. Look, it always happens. I think our response is we will be competitive, but we'll ultimately win via delivering superior products to our consumers, but we will.

Speaking of driving growth, something that we've been hearing about with investors is when you look at your organic growth in the last couple of quarters, it's been good but maybe a little bit below expectations. And then in your last quarterly call, you did maintain full year organic growth guidance of 4% to 5%, but you're no longer are targeting that top end of the range. So with half the quarter-ish behind us already, just trying to get your sense of how comfortable you feel with that guidance and, ultimately, the growth.

What I'll tell you is in the beginning of this conversation, I mentioned there's more volatility than ever. That still holds true. But we feel very confident in the guidance that we've given. It's a range for a reason, about 4% to 5% is absolutely where we think we're going to land. And if you look at the underlying strength of the business, a, fiscal year-to-date, delivery exactly is 4.5%. So if you just extract that out, I think we're going to be able to deliver that. Most importantly, what I look at is consumption, not necessarily shipments. And we had few consumption to inventory effects here over the past couple of quarters, and I think those will even out. So when I look at just what the consumer behavior tells us, it's right in that 5% range. So we're confident.

So on that point, the guidance also implies us an acceleration in Q4. So this is more along the lines of the shipments and timing perspective for the full year.

It implies an acceleration in shipments, not an acceleration in consumption. Consumption has actually been steady around...

The 5%.

The 5%. We saw some volatility due to shipment patterns. We don't expect that to -- so that basically lines up consumption with shipments.

And really, this algo is a medium and long term, I know you're not giving guidance for next fiscal year, but it's realistic to assume.