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

Okay. Good morning, and welcome to day 3 of the 22nd Annual Deutsche Bank Global Consumer Conference. We're thrilled to have you all back, and we're thrilled especially to welcome Procter & Gamble back to the conference. With us today from P&G are Chief Financial Officer, Andre Schulten; and Chief Operating Officer, Shailesh Jejurikar. Together, Andre and Shailesh will run us through a relatively brief presentation and then we'll use the balance of time for some Q&A. And with that, I'm going to hand it over to Andre.

Thank you, Steve. Good morning, everyone. I'll start today with a review of results and then an overview of our strategy. Our Chief Operating Officer, Shailesh Jejurikar, will provide an update on enterprise market results and how our integrated growth strategy is improving performance in all markets to drive balanced top and bottom line growth, and then we look forward to answering any questions you might have. Starting with results. Fiscal year '24 completed 6 consecutive years of 4% or better organic sales growth. We delivered consistent growth pre-COVID, during the pandemic, across periods of supply chain and inflation challenges and consumption slowdown in key markets. Market level challenges increased in fiscal '25 with higher volatility in the consumer and retail environment. Through March, organic sales are up 2%, in line with guidance provided for the fiscal year in our Q3 earnings release. Growth has been broad-based across categories with 9 of 10 categories growing or holding organic sales through the first 3 quarters of fiscal '25. Organic sales in Focus Markets are up 2%. Enterprise Markets are up 1% fiscal year-to-date. Five of 7 regions held or grew organic sales over this period with well-documented market-level challenges in Greater China, Asia, Middle East and Africa. Fiscal year 2024 was our eighth consecutive year of 2% or better core EPS growth, averaging nearly 8% over that period Through the first 3 quarters of fiscal '25, we delivered 3% core EPS growth at the midpoint of our 2% to 4% guidance range for the fiscal year. We are continuing our strong track record of cash returned to shareowners. Over 3 quarters, we have returned more than $13 billion to shareowners through dividends and share repurchase. In April, we announced a 5% increase to our dividend, again reinforcing our commitment to return cash to shareowners. This is the 69th consecutive annual dividend increase and the 135th consecutive year in which P&G has paid a dividend. This is the type of long-term balanced top and bottom line growth. We strive to deliver solid, consistent growth over time. Not every quarter, maybe not even every year will be on algorithm, but we want to deliver consistent algorithm top and bottom line growth over a 2- to 3-year rolling periods. As I mentioned, the point of volatility impacting our business have only increased as the current year has progressed and as we do our detailed financial plan for fiscal year '26. Category growth rates in the U.S. have slowed from around 4% last calendar year to about 2%. A few European markets have seen similar trends. We're closely watching China to see if trade tensions and lower exports disrupt the slow recovery we have been seeing. Finally, ongoing tensions in the Middle East, Ukraine and Russia continue to weigh on consumers. Tariffs introduce additional volatility we're watching closely, including direct costs from moving raw materials and finished products across borders, impacts on foreign exchange and interest rates and potential impacts of nationalistic consumer behavior. Based on tariff rates in effect today, we now expect a headwind of approximately $0.03 to $0.04 per share in the fourth quarter. On a full year basis for fiscal '26 and based on the tariff rates currently in place, we estimate the headwind to be around $600 million before tax. We are confident in our ability to manage these near-term headwinds with our objective of mid- and long-term balanced growth and value creation foremost in our minds. As we discussed at our Investor Day last November, we see significant growth opportunities ahead. In North America, we estimate there is up to $5 billion of market potential in our categories, simply by growing household penetration of our brands among currently unserved and underserved consumers. In Europe, driving consumption and growing markets across the region to best-in-class levels while just maintaining current market share in our existing categories is more than a $10 billion opportunity. Enterprise Markets have significant opportunity. Driving for capital consumption in our top enterprise markets to levels we currently have in Mexico is a $10 billion to $15 billion sales opportunity. Positioning ourselves to best capture these growth opportunities and manage the increasing near-term challenges benefits from disciplined execution of our integrated growth strategy and even more disciplined resource allocation, human and financial. We continue to be active and demanding managers of our portfolio. You saw examples of these efforts last fiscal year with our decision to exit the Argentina market and restructure our operations in Nigeria. You saw this with the divestiture of the Vidal Sassoon brand in China and a few other local brands in Latin America and Europe. In parallel, we have acquired and successfully expanded new businesses, growing Native from $50 million to now $750 million in North America, creating an expanding Zevo brand and now launching the Spruce brand. Each of these steps improved our long-term growth and value-creation potential by focusing resources on the biggest growth opportunities. Another key element of mitigating cost challenges and funding growth opportunities is productivity. We have averaged $1.8 billion of productivity across cost of goods sold and SG&A over the past 8 years. And we have created 3-year productivity master plans to support sustainable investment while delivering short-term results. We have piloted simpler, more streamlined organizing principles across markets and categories creating smaller, more agile and focused teams. We have developed and qualified systems and digital capabilities to support these teams with automation, better data, insights and analytics. We believe we now have the opportunity to step forward to enable the tremendous growth opportunities we have with an even more focused and efficient portfolio, supply network and organization. In fiscal 2026, we will begin a 2-year noncore restructuring program. This program includes 3 interdependent elements: portfolio choices, supply chain restructuring and organizational design changes. The portfolio choices include exits of brands at the category, country and even product form level, which may include some brand divestitures. We are not announcing specific market or brand exits today, but we plan to have more details available on our fiscal year-end call in July. We expect the brand and product form discontinuations will be a 30 to 50 basis point headwind to organic sales growth in each of the next 2 fiscal years. Brand divestitures, as always, will not impact organic sales growth, it will flow through core earnings. These portfolio moves enable us to make related interventions in the supply chain: rightsizing, right locating production to drive efficiencies, faster innovation, cost reduction and even more reliable and resilient supply. In addition, we are now 6 years into our new Focus and Enterprise Market structure. We see more opportunities to make roles broader and teams smaller, making work more fulfilling, faster and more efficient leveraging digitization and automation opportunities. In doing this, we expect to reduce up to 7,000 nonmanufacturing roles or approximately 15% of our current nonmanufacturing workforce. The productivity benefits from these steps to better focus the portfolio and to streamline our operations and the organization are incremental to what we outlined in Supply Chain 3. 0. We estimate the total noncore cost of this program to be in the range of $1 billion to $1.6 billion before tax. We expect around 25% of these costs will be noncash items, and we remain fully committed to continue our long track record of cash returned to shareowners in the form of dividends and share buybacks. This restructuring program is an important step toward ensuring our ability to deliver our long-term algorithm over the coming 2 to 3 years. It does not, however, remove the near-term challenges that we currently face. All the more reason to double down now on the integrated growth strategy that has enabled strong results over the past 6-plus years, executing our strategy and accelerating this opportunity, especially under pressure is our path forward. These strategic choices across portfolio, superiority, productivity, constructive disruption and organization reinforce and build on each other. A portfolio across markets and brands in daily use categories where performance drives brand choice. Our ongoing commitment to and investment in irresistible superiority through innovation across the 5 vectors of product, package, brand communication, retail execution and value is unchanged. No one vector of superiority can carry the day by itself. It's all 5 working together. Superior performing products and superior packages provide noticeably better benefits to consumers. They become aware of and learn about these products through superior brand communication. This comes to life in stores and online with superior retail execution and deliver superior consumer value at a price that is considered worth it across each price tier in which we choose to compete. Delivering superiority across every part of our portfolio is the path to growing categories, providing value to consumers and retailers and creating value for shareowners. We must do this across all price points, all price tiers where we play, all retail channels and all consumer segments we serve. Productivity to fund investment in superiority mitigate cost and currency headwinds and drive margin expansion. We have opportunities to drive efficiency up and down our P&L and across our balance sheet from cost of goods sold to marketing, to partnering with retailers to drive in-store and online productivity. Our 2-year noncore restructuring program will accelerate productivity in all areas of our operations, leveraging the tools and capabilities we have shared in our digitization and Supply Chain 3.0 efforts, which Shailesh will talk more about a little later. We will continue the constructive disruption of ourselves and our industry, changing, adapting, creating new ideas, technologies and capabilities that will extend our competitive advantage. Finally, empowering our highly capable, agile and accountable organization that is ready to step forward to create value for all our consumers, customers and shareowners. Again, we are evolving into the next phase of our organization design with the program that we have just announced today. The strategy is inherently dynamic. It adapts to the changing needs of consumers, customers and society and the geopolitical dynamics around us. The steps we're taking with our 2-year restructuring program accelerate improvements in each element of the strategy. I will now hand it over to Shailesh to talk more about our integrated growth strategy and how it's improving our ability to deliver our objectives long-term, balanced top and bottom line growth.

Good morning. I will start with an update on Enterprise Markets. In fiscal year '24, Enterprise Markets delivered over $18 billion in sales with average organic sales growth of 8% over the past 5 years. After-tax profits have grown double digits on average over those 5 years with margins increasing over 1.5x versus what they were in fiscal year '19. Strong, balanced top and bottom line growth. Growth has been slower in the current fiscal, given market headwinds. Enterprise Markets bring some unique challenges such as foreign exchange volatility, long supply chains, evolving consumer demographics and fast-changing retail dynamics. These markets require agility, adopting new ways of working to address volatility while continuing to raise the bar on superiority, establishing a long-term play on consumption growth and value creation. The opportunity for Enterprise Markets remains huge as we focus on driving per capita consumption to Mexico's levels, a $10 billion to $15 billion sales opportunity with very healthy margin potential. Within this context, where the part to value creation is clear, we will double down on superiority to drive market growth and double down on productivity to fund superiority and improve profitability, not just for Enterprise Markets, but for the total company. Starting with superiority. To capture the huge market opportunities Andre mentioned across the U.S., Europe and Enterprise Markets requires an elevated focus on absolute superiority in an effort to drive consumption with current consumers and attract more household users. Absolute superior products with performance better than any other alternative for the job to be done across all 5 vectors. What this means is better consumer insights on what's required for the specific job to be done; integrated technical capabilities applied across formulated chemistry, assembled products and devices to deliver the superior solution; integrated communication across package, shelf, online and other channels; and at a value that balances price and performance for the consumer and the retailer. Let me share some of our best examples with recent innovations. Oral-B, the global market leader in power brushing and the #1 dentist recommended brand, launched its most advanced power toothbrush, Oral-B iO 10, early last year. We followed with iO 2, the first iO designed to incent trade-up from a manual toothbrush to a power brush by removing the barrier of perceived complexity with a simple one-touch start and an accessible price point. Let's see how Oral-B iO delivers a perfect clean for everyone's unique smile. [Presentation]

The combination of premium and entry point innovation is working well with global Oral-B power brush share up 130 basis points and driving market growth of 6% current fiscal year-to-date. The antiperspirants and deodorants category is highly penetrated in Latin America with over 90% market penetration. Sprays represent the most relevant form across the region, accounting for approximately 60% of the market. However, 7 out of 10 consumers claim their deodorant has failed them in the past 2 weeks. Recognizing this opportunity, we developed a strong innovation program for both male and female segments delivering superior odor protection. We commercialized this with superior consumer communication. Take a look. [Presentation]

In the last 5 years, we have doubled our Latin American antiperspirant and deodorant business through excellent execution of our superiority strategy. We have gained value share while also being the top contributor to category growth, achieving 3x more than our fair share over the past 12 months. SK-II recently launched a supercharged product line called LXP. It contains 8x the concentration of PITERA and is positioned in the super premium segment of the Prestige skin market. This superior product in a beautiful package sold online and in department stores with upgraded counters and beauty counselors is a superior shopping experience and value for the PITERA-loving loyal consumer. The superior LXP messaging has the added benefit of haloing over the total SK-II brand and is building brand equity through consistent recognition from top beauty award groups. Since September, SK-II's domestic consumption in China is both ahead of a year ago and ahead of the market and is accelerating in our recent Q3 results. SK-II continues to lead category growth, especially in key consumption periods. While the China market challenges are not over, we are confident that our focus on superiority across the board will strengthen results going forward. Over the past few years, laundry loads in the U.K. have become larger, shorter and washed at colder temperatures. At the same time, laundry machines have gotten bigger, now often exceeding the capacity that single-dose products were designed for. As a result, less than 25% of the U.K. consumers are satisfied with their current laundry cleaning results. To address the change in consumer needs, we recently launched Ariel The Big One PODS. The Big One PODS are larger and provide twice the stained and order removal of regular Ariel PODS and with the added benefit of a built-in pretreatment. Ariel's big pods are designed to tackle tougher loads, offering the peace of mind that clothes will get the maximum Ariel clean at all temperatures. We supported the launch of this superior innovation with superior communication, partnering with the local brand ambassador, Peter Crouch, a British expert baller iconically known for his size, to spread the word that with Ariel The Big One, big messes really are no big deal. Let's watch. [Presentation]

Since launch, we have seen Ariel The Big One grow to 10% of our PODS business and contribute over 60% of the total category growth, and we are currently expanding to additional European markets. What these examples have in common is absolute superiority across all 5 vectors. To deliver absolute superiority at this level, we must continuously invest in our capabilities to create and extend delight in the most efficient and effective manner. This is where superiority and productivity intersect in our integrated strategy. I'll highlight a few capabilities we have built to be more efficient while also more effective. Absolute superior brand communications requires superior reach, effectiveness and efficiency. We are increasingly using programmatic and algorithm-based media buying to enable brands to reach the widest range of consumers where they are most receptive to our brand messages. Our proprietary Consumer 360 data platform enables brand to use target audience algorithms to serve ads at the right frequency each week, all year round, more effective reach and more cost efficient. As a result, in the past 5 years, U.S. average media reach has increased from 64% to 80%, and Europe is up to 75%. We are driving advertising effectiveness, starting with superior consumer insights and leveraging AI as a tool to deliver superior content creation. We're improving efficiency using AI tools for ad testing improving quality, cost and speed. Ads can now be tested and optimized in just a few days versus weeks at 1/10 of the cost versus prior methods. To deliver superior retail execution, we are combining a wealth of point-of-sale data with millions of retail shelf images to recommend optimized shelf design for retailers. Our proprietary tools, including programmatic shelf, enable us to analyze assortment online and offline, both to drive efficiency for retail and create a superior shopping experience for consumers. We're also using digital tools to optimize online content and to automatically adjust search ad buying. These tools are yielding stronger brand communication placed more efficiently and effectively close to the point of consumer purchase. Supply chain is critical to deliver superior quality products with superior execution to our retailers while also being one of our biggest sources of productivity. Our Supply Chain 3.0 efforts are focused on extending supply excellence from our suppliers to our customers all the way to retail shelves. We are investing in advanced supply planning technologies to better anticipate consumer demand and adjust production and inventory levels accordingly, helping minimize stock-outs overproduction and waste. We have enhanced collaboration across retailers and suppliers through these unified digital platforms, facilitating real-time information sharing and decision-making, driving shelf availability, but just as important, building trust and enabling joint value creation for future years. Across our production lines, automation technologies continue to play a key role in accelerating supply chain progress in our manufacturing sites. We are now at this stage where real-time vision cameras on manufacturing lines are able to capture visual data and apply advanced algorithms to analyze products for superior quality. Gone are the days when we could only check the quality of a case picked from the production line every half an hour, an amazing opportunity to eliminate human touches and risk of error, driving productivity while delivering superior quality in every unit produced. In our warehouse operations, we are on a multiyear journey to transform and connect our network of warehousing. In Europe, our warehousing center of excellence will serve as a hub for our 50 distribution centers, coordinating warehousing activity from the moment a truck enters the gate until it leaves. The central coordination is delivering 50% productivity on our indirect administrative work by eliminating redundant positions at each individual site. Let's take a look inside the orchestration room. [Presentation]

We have expectations for Supply Chain 3.0. It targets 98% on-shelf and online availability all the time with a runway of up to $1.5 billion before tax in gross productivity savings every year and 90% of free cash flow productivity, all to enable us to exceed our total shareholder return targets. Each of these superiority and productivity examples are important elements of our plans as we strive to deliver our top and bottom line growth objectives. Those, along with our focused portfolio, constructive disruption and agile and accountable organization, give us confidence in our ability to achieve our objectives. The 2-year restructuring plan Andre outlined will serve to accelerate our progress. Thank you. And with that, we'll be happy to take your questions.

Okay. Thank you, both. Let's start with the new news. And Shailesh, at last year's conference, I asked you about your confidence and line of sight into the company's productivity pipeline. And the answer was you had high confidence and high visibility and that carried forward through your Investor Day. So I guess my first question is, to what extent is this new program continuation of that and the sort of evolutionary versus is really new and incremental and where it came from?

I think it came, first and foremost, as we were talking earlier, Steve, from the need for growth. So when we look at what's changed over the past 12 months, I would say there was a fair amount or at least some tailwind, you could argue, because of market growth. I think that's kind of diminished to the point where I'm not sure there is a tailwind. You could argue there are more headwinds. So the first need was, okay, what does it take to create our own tailwinds. And we have an amazing lineup of innovation, portfolio opportunities. So the first thing was, okay, what does it take to accelerate and create our own growth, create our own tailwinds and we knew we needed more, ability to invest. We had been working on all the things that Andre mentioned, whether it's supply chain, whether it's organizational construct and portfolio. In many cases, with changes in landscape asking ourselves if we were entering a market today, what would our portfolio look like? So we had been working those different pieces, but the need to accelerate investment in growth accelerated the need on productivity.

Got it.

To your question, Steve, maybe just to add, if I may. The program is incremental, yes. So everything we've outlined before, the $1.5 billion in cost of goods sold, $0.5 billion in marketing -- media efficiencies, et cetera, are still there. What we're doing now is incremental to that because the growth opportunity, as Shailesh, we see as largely a significant, $20 million, $25 billion market growth we need to capture. And the innovation pipeline to do that has never been stronger. So just the opportunity to accelerate that innovation pipeline, make the right investments and capture that growth opportunity, I think, created the urgency in the organization to say now is the time.

Great. And part of it is the evolution of the organizational framework and structure. I didn't sense any change in the actual designation of Focus versus Enterprise Markets. I just want to confirm.

That is correct.

Okay. Andre, I think coming into the conference, there was a lot of conversation around -- with respect to P&G around whether the superiority strategy that has been so powerful for 7 years now had maybe run its course as people looked at the organic growth going from 7% to 4% to 2% year-to-date and recent global market share performance being a little bit soft. And that led to questions of its runway and whether or not P&G needed to do something different and that drove a lot of conversation around transformational M&A and so on and so forth. What I heard today was I think you used the words doubling down, doubling or tripling down on superiority strategy. Maybe you could just address that and address -- as part of that, address your thoughts on M&A specifically?

No. I think to be clear, we believe that delivering our growth algorithm, mid-single digits top line, mid- to high single EPS, 90% free cash flow productivity or higher, is absolutely feasible with the existing portfolio and enabled by the current strategy. If you just look at our categories, so the daily use categories we are in, the consumer satisfaction in those categories, while we believe we are probably at the upper end of delighting consumers, it's not perfect or even close to perfect in any of these categories. In the Fem Care categories, more than 50% of women complain about not feeling as secure as they want to feel. Diapers still leak. More than 30% of diapers still experience leakages overnight. Only 25% of consumers are happy with their laundry regimen in terms of cleanliness and odor experience. So from a pure consumer standpoint, there is way more room to delight than we've even endeavored so far. That creates opportunity to drive household penetration. Our products, even in the most developed region, North America, in the U.S., our home market, Tide, our biggest brand, is only in 40% of households; Bounty, 30% of households; Cascade, a little bit above 30%. So the household penetration opportunity is huge. Enterprise Markets, Shailesh mentioned the opportunity there is even higher at very healthy margins. So consumer delight is a big potential. Household penetration as a result of delighting consumers better is a big potential. And then I pair that up with the innovation capability that we have. You recall, we talked about resetting the base of superiority from 85% to 30% and everyone was scratching their head like what in the world does that mean? What that meant was an inspiration to the organization to go faster, innovate faster, fill the pipeline up with more ideas, more consumer insights, double down on friction points that we can solve for our consumers, and that's what the organization did. And we are now in a position where when we look at that pipeline of innovation that we have, it is truly the best and truly tailored to those opportunities. So delighting consumers, driving household penetration. And then the only bridge we needed to build was how can we afford execution of that pipeline at an accelerated pace while delivering the EPS expectation that you all have for us. And the only answer was accelerated productivity.

Okay. And the stance of the company on M&A?

I think M&A, we will always look at M&A. We've done very successful bolt-on acquisitions. I mentioned Native, which we acquired at $50 million sales, and then we expanded to now $750 million. I think that's the predominant strategy. Brands that are rooted in daily use categories that have a true benefit space that we can extend, that's our path. There is no need for transformational M&A in our growth strategy. And you'll notice it's not part of our growth strategy, we don't have M&A as a key building block. So it is not required for us to deliver our growth objectives.

Great. Maybe in the time we have left, when we last spoke to you in April, a very dynamic environment. Remains dynamic in different ways, but still dynamic. Maybe just update us on what you're seeing kind of in the current environment, consumption trends. There was a lot of retailer destocking concerns in the last quarter. Where we are as we roll through the fourth quarter?

Yes. So on consumption trends, as Andre mentioned earlier himself, I think we are seeing a slowdown in the market growth rates of anywhere from 1 to 2 points, depending on the region. Definitely, U.S. and Europe are about a couple of points lower than what they were 6 months or a year back. So that is definitely one of the factors that's at play. Retail inventory, depending on -- except for something like Health Care, which is heavily dependent on seasonality and there is some element of that, which happens, but otherwise a big chunk of it is linked to changing retail dynamics, which means some channels are just lighter on inventory in the way they operate. And if they become larger, then the weighted average inventory is going to be lower. So we are seeing some of that happen as well and continue to happen in many places. So reorientation of the channel mix is a factor that's playing up on inventory. And there is some element not in our categories, but generally of -- in some businesses, retailers stocking up ahead of tariffs. And that put some cash constraints.

So I think short-term volatility, as Shailesh said, is definitely there. Let me take the longer-term part. I think our categories will return to 3%, 4% value growth. That's where they've been. I think we've seen a cycle of accelerated growth because of pricing dynamics and inflation dynamics. We see now a deceleration because of uncertainty in the consumer space, all of the tariff conversations, geopolitical uncertainty. I think over the next 12, 18 months, we expect the markets to return to 3% to 4%. It won't be steady by quarter, but on a year basis. That's where we expect it to be.

Okay. And in the couple of minutes we have left, as we -- far too early to pinpoint fiscal '26, for sure. But as you roll through the end of fiscal '25, can you articulate a bit about your -- just your approach to planning in this environment? And maybe provide any kind of framework for us as investors in terms of how to think about '26. I think the tariff number you cited today was about half of what you said in April. Obviously, that's a moving target. But just any kind of building blocks would be great.

I think the biggest building block -- the best way to plan in a highly volatile environment like this is to maximize the levers that are in our control. And what that means is to maximize the amount of innovation that we can push out into the market with the right amount of price mix behind better value for the consumer and for the retailer. And the second component is maximize the investment flexibility via productivity. That's, I think, what you see in our actions as we announced them today. And everything else, we will have to react to where the market is going. If the consumption reaccelerates, fantastic, it gives us even more fuel to accelerate innovation and support the innovation as we go in market. If market consumption stays muted and tariffs increase, the productivity will help us to maintain the flow of innovation and deliver EPS. So that's what we're trying to do, create flexibility in the P&L so we can deal with either of these scenarios. And I think the range will be wide.

Okay. Fair enough. We have 1 more minute. So in terms of the fuel that you're creating over the next couple of years, what's -- when does this program start? When does the fuel build? Do we have -- how much fuel do we have in '26 versus fuel for '27?

I think just logically, the intent of the organization, and this is not led by a corporate effort, this is run by every CEO, every business unit, every region and the great news is every region wants to get through this as fast as possible. So I think the majority of this will be executed next fiscal year, which means the majority of the benefit, though, will flow into the following fiscal year. So that's as much clarity I can give you right now. But I think really the momentum is let's get this going and execute it ASAP in fiscal '26.

Perfect. And with that, we're right at time. So I want to thank Andre, thank Shailesh. Thank you all, and enjoy the rest of the conference.

Thank you.