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

Okay. Good morning, everyone. To kick off the HPC portion of the day, we're so glad to welcome back P&G. We have the company's CFO, Andre Schulten, with us. And of course, from Investor Relations, we have [ Kerry Colin, ] who's going to be taking over as Head of Investor Relations early next year. I'm not doing it and John Chevalier, who's going to be retiring. And I promised him and everyone else, there's no tears on this stage this year. So I'm going to keep it tight and just say, we've known each other really a long time, and this isn't goodbye, and thank you for everything over so many years and on behalf of everyone because everyone feels the same way.

Thank you.

Okay. See, very tight, very tight. Okay. So Andre, over the past 9 months, since Shailesh has been CEO, he's been really clear that P&G does not need a full reset of the integrated growth strategy. but it's more a matter of improving execution and that we start to see sales and market shares accelerating again in a 12- to 18-month time frame, again, with the context that he's been CEO for about 9 months.

So first question, just to play devil's advocate, why doesn't P&G need to change its strategy? Because you could argue market shares are stabilizing, but maybe you need to do something bigger or shake things up to get shares growing in a more sustainable material way.

Look, the strategy we're executing is the same strategy this company has been on for 189 years now, which is grounded in understanding the consumer better than everybody else in categories where we can truly add value. The categories we're in are the right categories. We know how to play in them. We have the R&D capabilities, the supply chain capabilities and the consumer understanding to win. They are expandable categories, daily use and performance makes a difference. So our capabilities are relevant to consumer. We know how to deliver superiority. We know how to define it, we know how to measure it and better understanding the consumer and then delivering against those needs is the way that we grow categories, we grow share and we grow our business on a sustainable way. We need outstanding productivity to fuel that momentum consistently and that productivity muscle is well developed. And lastly, we need an organization that is capable and enhancing themselves to continue to develop against those core elements of the strategy. None of that needs to change because everything is very basic. The art in the strategy is not the articulation, the art in the strategy is the consistent execution. And while we are not changing the strategy, we are changing every piece of wiring under the hood. And that's really what it's all about. How do we act faster when we recognize that our propositions are not superior, how do we cut through functional barriers in that conversation. So it doesn't become a R&D versus supply versus go-to-market versus marketing conversation, but an integrated conversation on what does the consumer need and how do we get there quicker. That was one of the fundamental decisions we made is to declare the moment you don't grow users, you are not superior. And we don't care whether it's 1, 2, 3, 4 or 5 of the vectors, but you, dear General Manager, are uniquely responsible for fixing that superiority. That has been the success model in where we see turnaround in the business. literally every category country combinations where we've declared you're not growing users and the organization has accepted the diagnosis and then gone into deep dive of what is the consumer part of the value equation that we're missing, addressed it, the business turns, and it doesn't turn in 12 months. It turns within 60 days, 90 days. We are building capabilities to do that even better by having more data, easier, available to the organization on every KPI that determines what we call superiority. We've talked about our data lake. We talked about the capability that we have in extracting data from that. But now the potential of making that data available using technology, using AI to help us analyze data quantities that otherwise we weren't able to at that speed with that precision, is a whole new world for us to better understand and even faster diagnose where the consumer need is that we haven't met reducing internal work processes. So everything that has to do with reporting, forecasting stewardship, internal analysis, all of that, we're automating, digitizing which frees up the organization to focus externally on those opportunities. Supply Chain 3.0, we've been talking about that for 1.5 years is in full execution, meaning maximum automation of the supply chain, integrated digital capabilities from quality measurement and execution to inventory management to warehouse execution, unattended shifts that will give us productivity runway for the next 5 to 10 years. And then integrated in that superiority conversation is R&D capability, where we're using technology to discover new elements in the innovation toolbox. Molecular discovery suite is one of those elements where we're using AI to just get access to new technologies faster and scale them faster. So the -- to get back to the question, Lauren, the core strategy is not changing, but how we deliver against that strategy is fundamentally shifting. And I think every element of the company is gearing up to leverage technology, to go faster be more agile in diagnosing and addressing potential outages and delivering the productivity we need as a fuel to actually be able to afford all of that while delivering.

Okay. Great. And then my second question on this topic is the 12- to 18-month time frame still the right one to anchor to in the context of since Shailesh became CEO? Or does that change in an environment where we've had continued category growth in the U.S.?

I think it's still the right time frame. We all wake up every morning and something else happened. So certainly, those headwinds that I think everybody is seeing don't help. Category growth being one of them, cost and commodity pressures being another, transportation cost increases due to drivers. So you name them, you've heard them all. I don't think it changes the ambition. And the ambition is to return this business to strong growth in that 12- to 18-month time frame. And if I quickly walk around the regions, enterprise markets are consistently in the 4% to 6% range. China is growing share and now growing 5 quarters in a row, low singles, accelerating to mid-singles. Europe is slow in terms of growth. Market growth is only 1%, but we're growing share. I think we're on path to reaccelerating. And in the U.S., we now stabilized share category growth around 2%, we're growing at around 2.5% on a consumption basis. So I would say the next -- this quarter, next quarter, we're solidifying the base. And I think that gives us confidence that in half 2, we can start growing in the U.S. more consistently and Europe should be reaccelerating. So I think we're on that trajectory. As you know, Lauren, there are many things that can happen. So there's never a guarantee. But if I look at the trajectory the business has been on, if I look at the patch work of category country combinations that we are fixing one by one, the total patch work gets greener and the greener it gets, the more comfortable I get that sustained momentum will only accelerate.

Okay, great. Before we get into some of the near-term interventions that are underway, I wanted to go a little deeper on some of the longer-term capability reinvention work that's going on. So you mentioned Supply Chain 3.0 already yielding stronger productivity. We've spoken about scaling these integrated data platforms. But when would you say we'll start to see how these capabilities translate into a core competitive advantage for the company?

I think it will gradually happen over the next 2 years, different stages of visibility, I think that we will be able to demonstrate on the media transformation. I believe that will become more visible over the next 12 to 18 months as we fully scale the media capabilities across social integrated content creation. We bring -- we now have broad content creation fully in-house. We're leveraging AI capabilities to create more content with higher quality. We're able to deploy that content fully automated across all platforms. We still are working on the measurement side. But I think you'll see those elements becoming a bigger part of the marketing framework and everywhere where I think we're scaling those capabilities, we see great market response. So that is one that I think will become more visible. You see it at Investor Day. You see all of them at Investor Day, but I think that one will be will be clearly having a more immediate impact on the business. The supply chain 3.0. I think we've already talked about many of the elements will share again at Investor Day, the rollout schedule, but that's well underway. We're well on our way in terms of unattended shifts. RTTQ retail touch lift quality as being rolled out globally, fully automated dark warehouse technologies rolled out, including loading and unloading of trucks. So that's just a matter of scaling it over the next 24 months around the world. R&D capability, I don't think we will disclose in much more detail for all the right reasons, but let me just give you one data point. We we're using molecular discovery suite and that sounds great, but it's not that tangible. But to make it tangible, over the last decade, we discovered 2 new molecules in our Fabric Care business. one decade, two molecules. And every time we discover them, it moves us to a new S curve of performance. In the last 6 months, I think Victor, our Chief R&D Officer told me we've discovered 6 or 7. So 6 months, 6 or 7, a decade, 2 that makes it relevant. So the ability to, I think, increase our flexibility and formulation, increased product performance is tangible as an outcome of these technologies, the same across perfumes and many others. Just the integration of data across categories is a huge enabler for our R&D organization, but it also enables faster and earlier integration with the commercial side, because we look at the same consumer insights, the same consumer data, the same consumer testing data. We use the same proprietary consumer digital twins to test propositions including the commercial idea behind the proposition. So if you put that together, you can see how the innovation cycle is just speeding up. The error rate is decreasing and the alignment across functions is just much stronger. So again, some of that will be able to bring to life. Many of those things are more internal than external.

Okay. Let's talk about the evolving retail landscape. So Shailesh has described retailers as media platforms and media platforms as retailers. And you've also talked about joint work with retailers around traffic, profitability, supply chain impact size. What does the best-in-class retail partnership look like today? Or will it look like in this ideal state versus a few years ago? .

It starts with an agreed mission to grow the categories we operate in. I think once we have agreement with the retailer that that's the objective that we have between them and us the rest of the conversation flows more easily. And I think with even the most difficult retailers, I think we're at that point. And I'll tell you from you when you have that conversation with a German hard discounter, and they agree that that's the mission. That's a breakthrough versus where we've been. So once you have that, then it becomes, okay, what's the breadth of the value creation chain that we have available to us. . And when you open up that aperture and you say, well, it's not about a margin conversation on the products that you list, it is on that but it is on innovation. It is on media spending and media activation. It is how we bring the product to life in-store and online. It's about the supply chain cost and the supply chain reliability and quality. Then suddenly, you have a different conversation because you can create more value across a broader set of measures. And then if you can turn that into not a 1-year plan, but into a 3-year plan, which allows you to make fundamental changes to the way you collaborate and operate. That's what we call best in class. I think the other element I give you here is the strategic alignment at the leadership level is generally easy. Operationalizing that alignment down to the buyer level down to each department in their organization, our organization is not that easy. But the other core element that we found is critical is an escalation mechanism that very quickly allows us when we see misalignment at the operating level, we can elevate the conversation to leadership and resolve those issues not within weeks, but within days. And I think that's one thing that, for example, the North American team has done a fabulous job of to say we need an escalation mechanism so we don't store teams for weeks and weeks because of operational issues that never come to the surface. So if you have alignment on the mission, you can turn that into a broader set of value creation. You have a 3-year plan and you can get out of operational issues quickly by elevating, you've got a best-in-class relationship.

Okay. Great. So one thing also on this topic is you've always talked about country category combinations growing share. But this quarter was new to us as a mention of the percentage of customer brand combinations in North America, and that number moved from less than 10% in the first half to 50% in the second half. Can you tell us about this new metric and kind of what -- like why we're looking at it in this way? And what changed specifically to see that big of an improvement in such a short period of time in North America?

We quoted the metric because it's the metric we use internally. If you look at some of our U.S. customers, they are bigger than markets. So it's completely fair to look at them and look at category customer combination while we look around the world at category country combinations simply because of the size of them. More importantly, it's how we're organizing the effort in the U.S. to say by category or by brand and by customer, do we really understand, a, are we growing? And if we're not growing users and share, do we understand why? And do we have an aligned plan how to fix it? And I think the -- to your question on how did we accelerate from 7% at the beginning of the year to now 50%, and I think we will accelerate to 80% plus by the end of the calendar year. It's that intentionality to say every category that every customer needs to have a plan that either is already in execution or will be in execution within the next 60 to 90 days to grow users and grow share. And once you have that clarity of mission, then it's only a matter of doing the work, sitting down at the customer team level, identify the issue, align priority, funding and resource allocation and grow. And I think that intentionality that Shailesh was driving with the North America team helped focus. And I think also gave a clear measure because trust me, the one conversation you don't want to have is be part of that red customer category combination for a series of months. So I think it's just good, very disciplined management of what we want to accomplish.

Okay. Great. In North America, it does like there's been much more volatility in your performance over the last year. So both why do you think that's been the case? And then specifically in the fourth quarter, there was a 3-point gap between sell-in and sellout. Has that gap continued into 1Q? Or are you seeing narrowing of that between shipment and consumption dynamic?

Yes. I think Q4 was a was an unfortunate confluence of multiple factors that provided the disconnect between consistent sellout at 2% and the sell-in that was significantly lower. I don't see that in the current quarter. I hope that, that's not something we'll see in the future. But the real answer to your question is why we're not growing fast enough. We're not growing fast enough in the U.S. I think once the category returns to 3% growth, that will be growing at 4%, that volatility will go away because you have enough velocity in the retail that they will have to maintain stock levels, inventory levels to serve that flow through. And once that pipe is stable, it is just that, it's stable. But if you're growing at 2% and the pipe is built for 4%, you can turn off the pipe for a period of time and wait and then you refuel, so it creates more volatility. So I think the real underlying mission here is we got to get back in the U.S. to 3% to 4% growth.

Okay. Let's shift gears to China, market that has been pretty encouraging proof point in the portfolio, as you mentioned earlier. What is in the 1 or 2 most important changes implemented in China that are responsible for the improvement? And how much of that playbook do you think is transferable to other markets, particularly in North America that have been a little bit more challenged?

Yes, you recall the China surgery was probably one of the most [indiscernible] inventions we've made. About 2 years ago, we started by changing the go-to-market model, we reduced the number of distributors, higher capability distributors, increased our intentionality on which channels, off-line and online, we want to win in and staffed accordingly. We changed and transformed our brand building model, much in line with what I was talking before, way more focused on social and digital because the market was ahead and still is ahead of the rest of the world in social penetration. We changed our innovation strategy, our research strategy to be more local and locally relevant. So all of those elements, I view as the right interventions at the time, and they majorly contributed to the turnaround in China. So we saw with the investment in innovation, with the investment in go-to-market, we're now growing share off-line, and we're growing share online. And that's in all honesty, without all categories firing. So we still have a significant opportunity in Oral Care. We still have a significant opportunity in mass skin on our Olay brand. We still have not reached potential on Fabric Care, for example, but you can see how the team is freed up to focus on the consumer and how it's working in every channel consistently. There's a bit of a tailwind on the diaper business right now. But even before that tailwind, the China business was growing consistently now for 5 quarters, 3% to 5%. The diaper opportunity is is a great opportunity for us now to build trial and that's what the team is focused on. So I do believe it's very sustainable because it's grounded in the right interventions to get the team focused. And in that sense, I think it's reapplicable to the rest of the world, and that's exactly what I was describing to different degrees, but it's the same underlying playbook.

Okay. Great. Let's talk a little bit about some of the near-term interventions that are on the work more broadly. On the call, the fourth quarter call, you'd mentioned some pricing intervention, have these been put in the market in the cases where we're already in, are you seeing any improvement in sales or market share performance?