The Procter & Gamble Company (NYSE:PG) Q3 2023 Earnings Call Transcript

The Procter & Gamble Company (NYSE:PG) Q3 2023 Earnings Call Transcript April 21, 2023

The Procter & Gamble Company beats earnings expectations. Reported EPS is $1.37, expectations were $1.32.

Operator Good morning, and welcome to Procter & Gamble’s Quarter-End Conference Call. Today’s event is being recorded for replay.This discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections.As required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends, and has posted on its investor relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures.Now, I will turn the call over to P&G’s Chief Financial Officer, Andre Schulten.Andre Schulten Good morning, everyone.

Joining me on the call today are Jon Mueller, Chairman of the Board, President and Chief Executive Officer; and John Chevalier, Senior Vice President, Investor Relations.Execution of our integrated strategies drove strong results in the January to March quarter. Organic sales grew across all 10 categories in — and in six out of seven regions. Global aggregate market share is holding steady, productivity savings are accelerating and enabling sustained investment in the superiority of our brands.In-market execution across all five vectors of superiority is strong and consistent: product, package, communication, go-to-market and value. Superior offerings continue to pay benefits for our consumers and retail partners and in turn for P&G shareholders.

Progress against our plan enables us to increase guidance for organic sales growth and cash return to shareowners, and to maintain guidance for core EPS growth and free cash flow productivity.Moving to third quarter numbers. Organic sales grew more than 7%. Pricing added 10 points to sales growth and mix was a modest positive contributor for the quarter. Volume declined 3 points, including a 1 point headwind from portfolio reduction in Russia.Growth was broad based across business units with each of our 10 product categories growing organic sales. Feminine Care was up low teens, Personal Health Care, Home Care and Hair Care each grew double digits, Grooming, Oral Care and Fabric Care grew high single digits, Baby Care was up mid singles, and Family Care and Skin and Personal Care grew low singles.Growth was also broad based across geographies with six of seven regions growing organic sales.

Focus markets grew 5% for the quarter. Organic sales in the U.S. were up 6%, including modest unit volume growth. Europe focus markets were up 8%.Greater China organic sales were up 2% versus prior year, as the market begins to recover from COVID lockdowns and as consumer confidence improves. We continue to expect further recovery as consumer mobility increases over the coming quarters. Longer-term, we expect China to return to mid singles underlying market growth rates for our portfolio of categories.Enterprise markets were up 15% with Latin America up nearly 30% and Europe enterprise markets up low teens. This is the fourth consecutive quarter in which all five sectors grew organic sales double digits in enterprise markets.Global aggregate value share was in line with prior year, with 30 of our top 50 category country combinations holding or growing share.

Excluding Russia, global value share was up 20 basis points. In the U.S., all outlet value share was up 40 basis points versus prior year with eight of 10 categories holding or growing share in the quarter. U.S. volume share is up 90 basis points versus the prior year, driven by 2 points of absolute volume consumption growth in a market that is still down modestly versus prior year.Strong U.S. share growth in Personal Care has been led by innovation on the native brand and deodorants, as well as successful extension into body wash. Cascade Platinum Plus has driven strong share growth in auto dishwashing, and Dawn share continues to be up more than 1 point with ongoing leverage from the power wash and easy squeeze innovations. Vicks continues to be a growth leader in Personal Health Care, and we’ve delivered strong share growth in the Metamucil and Pepto-Bismol brands.In Europe, the new four-chamber Ariel Platinum PODS are driving strong consumer demand in Fabric Care.

Fairy Power Spray is growing the dish category and building market share in Home Care. The new GilletteLabs exfoliating razor, male and female intimate grooming innovations and cardboard packaging upgrades are driving strong growth in grooming.Moving to the bottom-line. Core earnings per share were $1.37, up 3% versus prior year. On a currency neutral basis, core EPS increased 13%, good progress as we faced $0.31 per share of cost and foreign exchange headwinds in the quarter.Core operating margin increased 40 basis points, as 150 basis points of gross margin expansion were partially offset by SG&A investments and inflation impacts. Currency-neutral core operating margin increased 160 basis points. Productivity improvements were a 290 basis point help to the quarter.Adjusted free cash flow productivity was at 92%.We returned $3.6 billion of cash to shareowners, approximately $2.2 billion in dividends and $1.4 billion in share repurchase.

Last week, we announced a 3% increase in our dividend, again reinforcing our commitment to return cash to shareowners. This is the 67th consecutive annual dividend increase and the 133rd consecutive year P&G has paid a dividend.In summary, against what is still a challenging cost and operating environment, continued good results across top-line, bottom-line and cash for the third quarter. Our team continues to operate with excellence, executing the integrated strategies that have enabled strong results over the past four years and that are the foundation for balanced growth and value creation.A portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice.

Ongoing commitment to and investment in irresistible superiority across the five vectors of product, package, brand communication, retail execution and value, we are again raising the bar on our superiority standards to reflect the dynamic nature of this strategy.Productivity improvements in all areas of operations to fund investments in superiority offset cost and currency challenges, extend margins and deliver strong cash generation, an approach of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future.Finally, an organization that is increasingly more empowered, agile and accountable with little overlap or redundancy flowing to new demands seamlessly supporting each other to deliver against our priorities around the world.There are four areas we are driving to improve the execution of the integrated strategies: Supply Chain 3.0, digital acumen, environmental sustainability and employee value equation.

These are not new or separate strategies, they are necessary elements in continuing to build superiority, reduce costs to enable investment and value creation and to further strengthen our organization.Our strategic choices on portfolio, superiority, productivity, constructive disruption and organization are interdependent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales and profit. We continue to believe that the best path forward to deliver sustainable top- and bottom-line growth is to double down on these integrated strategies, starting with the commitment to deliver irresistibly superior propositions to consumers and retail partners.Now, moving to guidance. As we work towards the end of the fiscal year, we are cautiously optimistic.

We remain confident in our strategies and the organization’s ability to execute them with excellence. We continue to expect more volatility in the macro and consumer environment, and expect sustained pressure in costs and foreign exchange as we move forward.On the whole, our consumer markets remained relatively resilient, with U.S. and China volume trends improving, but with inflation pressures in Europe weighing more heavily on consumption. We continue to think the strategies we’ve chosen, the investments we’ve made and the focus on executional excellence have positioned us well to manage through this volatility over time.Raw and packaging material costs, inclusive of commodities and supply inflation, have largely stabilized over the last few months, but still remain a significant headwind versus last fiscal year.

Based on current spot prices and latest contracts, we now estimate a $2.2 billion after-tax headwind in fiscal ’23.Foreign exchange is also a significant year-on-year headwind and rates since last quarter have moved modestly against us. Based on current exchange rates, we now forecast a $1.3 billion after-tax impact to the fiscal year.Freight costs have moderated throughout the year, and we now expect them to be roughly in line with prior year.Combined headwinds from these items are now estimated at approximately $3.5 billion after-tax, or $1.40 per share, a 24 percentage point headwind to EPS growth for the year.In addition to these impacts, we are also facing higher inflation in wages and benefits and higher year-on-year net interest expense.

We are offsetting a portion of these cost headwinds with price increases and productivity savings. We are continuing to invest in irresistible superiority and we are investing to improve our supply capacity, resilience and flexibility.As noted in the outset, our strong results over the first three quarters have enabled us to raise our organic sales outlook and confirm our guidance ranges on EPS and cash. We are increasing our guidance for organic sales growth from a range of 4% to 5% to approximately 6% for the fiscal year. This would put fiscal ’23 in line with 6% top-line growth we’ve averaged over the last four years, which were 5%, 6%, 6% and 7% from fiscal ’19 through ’22, respectively.On the bottom-line, we’re maintaining our outlook of core earnings per share growth in the range of in line to plus 4% versus prior year.

Significant headwinds from input costs and foreign exchange keep our current expectations toward the lower end of this range. This guidance also reflects our intent to remain fully invested to drive our superiority strategy and increase investments as we value — as value creating opportunities are available.We continue to forecast adjusted free cash flow productivity of 90%. We now expect to pay nearly $9 billion in dividends and to repurchase $7.4 billion to $8 billion in common stock, combined a plan to return $16 billion to $17 billion of cash to shareowners this fiscal year.This outlook is based on current market growth estimates, commodity prices and foreign exchange rates. Significant additional currency weakness commodity cost increases, geopolitical disruption, major production stoppages or store closures are not anticipated within this guidance range.To conclude, we continue to face highly volatile consumer and macro dynamics.

We also continue to see high year-over-year input costs, inflation in the upstream supply chain and in our own operations. Headwinds from foreign exchange, geopolitical issues, and historically high inflation impacting consumer budgets. As we said before, we believe this is a rough patch to grow through, not a reason to reduce investment in the long-term health of our business.We’re doubling down on the strategy that has been working well and is delivering strong results. We continue to step forward. We remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments, mitigate input cost challenges and to deliver balanced top- and bottom-line growth.With that, we’ll be happy to take your questions.

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Question-and-Answer Session Operator [Operator Instructions]

The first question comes from Lauren Lieberman of Barclays.

Please go ahead.Lauren Lieberman Great. Thanks. Good morning, everyone. I wanted to talk a bit about productivity, because over the last, I guess, two-and-a-half, three years during the pandemic and all the global supply chain challenges, productivity was something that understandably took a back seat. And then, this quarter really seen this significant change in what you’ve been able to realize. So, I was curious if there is — if we should be thinking about productivity of something where there’s, like, a catch up, where there’s sort of projects that have been on the list, things you were able to get at, so that productivity could run at an elevated rate going forward? And it’s also interesting I think in the context of marketing, how you’ve been so consistent in investing throughout?

There’s actually no catch-up on the marketing piece. No need to accelerate reinvestment per se, but maybe some, again, acceleration on the productivity side. So, I’d be curious to hear about that. Thanks.Andre Schulten Great. Good morning, Lauren. I think, as you said, we are catching up right now to return to gross savings levels that are equal or close to equal to those that we’ve delivered pre-COVID. We have more line capacity available for us to qualify cost savings or mind space of our teams to be able to identify new opportunities. And as we are able to engage suppliers and get through this inflationary period, hopefully, more ideation and new projects to be created as well.As we’ve talked on our Investor Day, we see runway on productivity for the next few years, driven by Supply Chain 3.0. We have talked about delivering about $1.5 billion of savings with those initiatives between automation and digital capabilities.

And we continue to believe that we can generate between $400 million to $500 million a year from media, programmatic savings both in terms of scheduling and buying capabilities around the world. Those programs will hold productivity, in my estimation, close to pre-COVID levels, which will allow us to continue to reinvest in media, which will allow us to fund innovation and superiority, and that is really the intent of the model.So, to answer your question directly, I would not expect a disproportionate catch up, but I would expect a steady return to pre-COVID levels of net structure savings, both the cost and media.Jon Moeller I agree.Operator The next question comes from Bryan Spillane of Bank of America. Please go ahead.Bryan Spillane Thanks, operator.

Good morning, everyone. I actually had just one clarification and then a question. The clarification, the $125 million of, I guess, incremental interest expense, can you just give us a little bit more color on that? And again, is that something we need to kind of contemplate in our models as even we look past the fourth quarter? So, I guess, is net interest expense going up?Andre Schulten Yeah, morning, Bryan. Yes, I mean, obviously, it is, right? Markets are getting more expensive in terms of credit and we are not immune to that. So, the $125 million [BT] (ph) we’ve quoted for this year, I would expect the trend to continue to go up into next year. Now we are still well positioned relative peer group because we’re able to borrow not only in the U.S., but also in euro, in pounds and in yen.

So that keeps us very competitive. But nevertheless, we’re not immune to those increases, so they will continue to go up into next year.Jon Moeller And just one piece of perspective there, Bryan. This is Jon. We’ve understandably, because it’s been the primary driver of cost increases, focused our discussion on commodities. But that’s not the only cost increase that we’re seeing. We’ve just talked about interest expense. Andre mentioned in his prepared remarks, wages and benefits, which continue to increase. So, I would just encourage us all to gain confidence from what’s happened here, but to realize that there are still, as Andre said, many headwinds that we’re working against and we’ll continue to work against as we move forward through next fiscal year.Operator The next question comes from Dara Mohsenian of Morgan Stanley.

Please go ahead.Dara Mohsenian Hey guys, can you hear me?Andre Schulten Yes, we can.Dara Mohsenian So, on the gross margin side, you were up significantly year-over-year in the quarter for the first time in a couple of years. Obviously, some nice sequential progress with the outsized cost savings and the strong pricing, but also your full year commodity assumptions and freight assumptions are a bit better than they were previously. So, just wanted to get a sense if we start to see this sustained improving gross margin environment, what’s your perspective on the bias to sort of reinvest that upside back into marketing versus let it drop to the bottom-line? This quarter, obviously, with the magnitude of gross profit upside, you could do both.