Procter & Gamble Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
January 23, 2024

There are 16 speakers on the call.

Operator

Good morning, and welcome to Procter and 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 and G's most recent 10 ks, 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 and 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.

Operator

Procter and 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 Scholten.

Speaker 1

Good morning, everyone. Joining me on the call today are John Moeller, Chairman of the Board, President and Chief Executive Officer and John Chevalier, Senior Vice President, Investor Relations. I'll start with an overview of results for the October to December quarter. John will add perspective on our recent results and strategic focus areas and capabilities. We'll close with guidance for fiscal 2024 and then take your questions.

Speaker 1

October to December was another strong quarter. Execution of our integrated strategy drove solid sales and market share results and another quarter of strong margin progress delivering strong earnings and cash results for the quarter. The strong results we've delivered in the first half of fiscal 24 enable us to raise our outlook for core earnings per share and keep us on track to deliver within our fiscal year guidance ranges for organic sales growth, cash productivity and cash return to shareowners. We continue to see the upper range on organic sales and core EPS as likely outcome for fiscal 2023 2024. So moving to 2nd quarter numbers.

Speaker 1

Organic sales grew 4%. Volume rounded down to a decline of 1 point as continued volume acceleration in North America and Europe focused markets was offset by softer shipments in Greater China, Eastern Europe and Middle East Africa regions due to local issues in select markets. Pricing contributed 4 points to sales growth consistent with the guidance we provided. Mix was neutral to organic sales growth. Growth across categories continues to be broad based, with 8 of 10 product categories holding or growing organic sales this quarter.

Speaker 1

Home Care, Hair Care and Grooming grew sales high single digits. Fabric Care, Family Care, Feminine Care and Oral Care were up mid single digits. Baby Care was in line with prior year. Personal Health Care was down low singles against a very tough comp and a late developing cold and flu season this year. Skin and Personal Care was down mid singles due to SK II in China.

Speaker 1

Growth was also broad based across geographies with North America, Europe, Asia Pacific Focus Markets and Latin America and Europe Enterprise Markets each growing organic sales. Focus markets grew 3% for the quarter and enterprise markets grew 7%. Organic sales in North America grew 5% with 4 points of volume growth. Over the last 5 quarters, volume growth in North America has been minus 3%, Flat, then 2% growth, plus 3% and now plus 4%. Strong acceleration well ahead of the underlying market trends.

Speaker 1

Europe focused markets were up 7% with 3 points of volume growth. As expected, both regions saw a step down in pricing contribution to sales growth as a large portion of price increases from last year have annualized. Importantly, volume accelerated in both regions to partially offset the pricing impact. Latin America delivered another very strong quarter with 17% organic sales growth, continued strong results in these regions. There are some targeted issues affecting other markets.

Speaker 1

Greater China organic sales were down minus 15% versus prior year. Underlying market growth was down mid to high single digits As consumer confidence weakened further, the SK II brand in Greater China was down 34% due to soft market conditions and a temporary headwind for Japanese brands in the market. Our consumer research indicates SK II brand sentiment is improving, and we expect to see sequential improvement in the back half. Underlying market trends have softened in some Europe Enterprise and Asia Pacific, Middle East Africa countries such as Egypt, Saudi Arabia and Turkey following multiple rounds of pricing to offset inflation and due to heightened tensions in the Middle East. Global aggregate value share was up 40 basis points versus prior year with 28 of our top 50 category country combinations holding or growing share.

Speaker 1

In the U. S, all outlet value share was up 20 basis points versus Prior year, U. S. Volume share was up 50 basis points, reflecting strong volume growth. Value share in European Focus markets was up 90 basis points over the past 3 months.

Speaker 1

In summary, North America, Europe focused markets, Asia Pacific focused markets and Latin America, which combined represent 3 quarters of company sales, delivered over 6% of organic sales growth in quarter 2 with 3 points of volume growth and 3 points of pricemix. The same markets grew 9% in quarter 1 with around 2 points of volume growth and 7 points of pricemix. Continued strong organic sales growth with accelerating volume growth to mitigate the anticipated annualization of pricing, consistent with our guidance. The balanced 25 percent of company sales, including Greater China, Eastern Europe and Middle East Africa, were impacted by local market issues we described. Quarter 2 organic sales for this group were down 5 points versus prior year.

Speaker 1

We expect most of these effects in these regions to be temporary or annualizing as K2 consumption is sequentially improving. We continue to expect China market growth to improve and over time return to mid singles, and we expect market pressures in the Middle East and Turkey to ease over time. Moving to the bottom line. Core earnings per share were $1.84 up 16% versus prior year. On a currency neutral basis, core EPS increased 18%.

Speaker 1

Core operating margin increased 400 basis points 5.20 basis points of gross margin expansion were partially offset by increased marketing investments, wage and benefit inflation and foreign exchange impacts in SG and A. Currency neutral core operating margin increased 4 70 basis points. Productivity improvements were a very strong 3.40 basis points held to the quarter. Adjusted free cash flow productivity was 95%. We returned $3,300,000,000 of cash to share owners, approximately $2,300,000,000 in dividends and $1,000,000,000 in share repurchase.

Speaker 1

In summary, against what continues to be a challenging and volatile operating environment, strong overall progress in the first half of the year, keeping us on track for our fiscal year guidance ranges. Now I'll pass it over to John for his perspective.

Speaker 2

Thanks, Andre, and good morning, everyone. I'll start by underscoring a few points Andre made in his discussion of the top line trends. Overall, continued strong top line progress. 22nd consecutive quarter of 4% or better organic sales growth, Volume acceleration in key markets, increases in aggregate market shares. This despite several notable headwinds, which should be temporary.

Speaker 2

Tensions in the Middle East will hopefully ease. Enterprise market volume impacts following price increases are usually temporary. While we can't talk specifics of future pricing in any market, more stable foreign exchange commodity costs will ideally reduce the need for additional large price increases. I spent 6 days in China with the team 2 weeks ago, I met with consumers in their homes with retail CEOs, with our team and with several government officials. In my view, the long term China opportunity remains intact.

Speaker 2

The near term is likely to present some challenges. We'll see what happens with the global coughcold season as a soft start to the season either reverses or eventually annualizes. No guarantee of immediate bounce back in any of these, but reason to believe they will improve over time. In addition to continued aggregate top line progress, a very strong bottom line. Mid teens core earnings per share growth 2 quarters in a row, while increasing investments in innovation, brand building and market growth.

Speaker 2

Our team continues to execute our strategy with excellence, enabling strong results over each of the past 5 years, pre COVID, during COVID, and through a historic inflationary and pricing cycle. I want to thank them both for what they delivered and for what they're working to continue to accomplish. Our integrated strategy is unchanged. A focused portfolio of products and daily use categories where performance drives brand choice. The portfolio is performing, delivering broad based growth across nearly all categories and most geographies for several years.

Speaker 2

The announcements we made in December to change our go to market approach in Argentina and Nigeria will further sharpen our focus and strengthen our value creation potential. A good example of the dynamic nature of our strategy and our desire to aggressively allocate resources to where they create the most shareowner value. Next strategy element, ongoing commitment to an investment in irresistible superiority Through innovation across the 5 vectors of product package, brand communication, retail execution and value holistically defined. Leveraging that superiority to grow markets and our share in them to jointly create value with retail partners. The plans across the businesses are broader and stronger than at any time in the recent past, as each team works to increase their margin of superiority and consumer delight.

Speaker 2

Superior innovations that are driven by deep consumer insights, Communicated to consumers with more effective and efficient marketing programs, executed in stores and online in conjunction with retailer strategies to grow categories and our brands, price to deliver superior value across each price tier where we compete. SmoothTerra Charmin Ultra Soft with scalloped edge perforations, a great example of consumer insights driving innovation to improve the end use experience. Consumer response to the new product has been overwhelmingly positive and is driving word-of-mouth recommendations in media. Gillette's superior propositions like the Gillette Labs razor with an exfoliating bar that removes dirt and debris before the blades continue to drive growth in the global grooming category. Gillette Labs has reached shares greater than 20% in markets like Spain and France and is building momentum in the U.

Speaker 2

S. And China. The global grooming category is on track for $1,000,000,000 of retail sales growth this fiscal year with Gillette driving 2 thirds of the increase, well ahead of our global share. Superior innovations like Dawn Powerwash and Dawn Easy Squeeze In the U. S.

Speaker 2

And Fairy Power Spray and Fairy Max in Europe are disproportionately driving market growth in hand dishwashing with value share in the U. S. Approaching 67%, nearly 50% across Europe focused markets. 3rd strategy element, productivity. Improvement in all of our operations to fund investments in innovation, brand building and market growth to mitigate cost and currency challenges and to expand margins and generate cash.

Speaker 2

We're reaccelerating productivity back to pre COVID levels with an objective for gross savings and cost of goods of up to $1,500,000,000 before tax. Visibility to more savings opportunity is increasing, enabled by platform programs with global application across categories like supply chain 3.0. We're working in a new way with retailers on the totality of the supply chain end to end versus simply trying to optimize each piece. One example, using data and machine learning algorithms to optimize truck scheduling to minimize idle time for drivers. We're also using AI tools to optimize fill rates and for dynamic routing and sourcing optimization.

Speaker 2

$200,000,000 to $300,000,000 of savings opportunity across these areas. We have line of sight to savings from improved marketing productivity, More efficiency and greater effectiveness, avoiding excess frequency and reducing waste while increasing reach. We're taking targeted steps to reduce overhead as we digitize more of our operations. The team has delivered strong cost savings in the first half of the year and plans to build on this momentum. Next, constructive disruption of ourselves and our industry, A willingness to change, adapt and create new trends, technologies and capabilities that will shape the future of our industry and extend our competitive advantage.

Speaker 2

We continue to be a constructive disruptor of brand building, in housing more of the media planning and placement activity using our proprietary tools and consumer data to increase effectiveness and efficiency of our communication. We're disrupting traditional lab based innovation miles to dramatically increase the speed and breadth of discovery. Last but clearly not least, we've designed and continue to refine an empowered agile and accountable organization model, Also an increasingly diverse organization, enabling us to better serve an increasingly diverse set of consumers. So strong progress across all strategic pillars with significant opportunity ahead of us. No reason to stand still As illustrated by the 4 focus areas we've outlined previously.

Speaker 2

Supply Chain 3.0 is delivering productivity as we just talked. We're also driving improved capacity planning, greater supply agility, flexibility, data transparency, scale and resilience, all the way up and down the supply chain inclusive of our retail partners. All of this was driving higher quality, increased supply assurance and higher on shelf availability of our products and of course better cash and cost structures. These programs improve superiority with consumers and further strengthen what is already the top ranked supply chain by our retail partners and 3rd party industry surveys. Environmental Sustainability, superior propositions for consumers, customers and shareowners that are sustainable, driving sales and profitability while reducing the footprint of our operations, enabling consumers to reduce their footprint and innovating to deliver cross industry solutions for some of our most pressing challenges.

Speaker 2

A good example is the 4 chamber aerial Pods innovation that we launched in a new cardboard package, extending our superiority advantage in product performance While improving sustainability by enabling great wash results even in cold water, already contributing to a 2 degree Celsius reduction in Europe against a 5 degree target, also extending packaging superiority with a more attractive and more sustainable cardboard box. Digital acumen, leveraging data and digitization to delight consumers, streamline the supply chain, increase quality, drive productivity, all driving shareowner value. 4th, the superior value equation for all employees, inclusive of all genders, races, ethnicities, sexual orientations, ages and abilities for all roles to ensure we continue to attract, retain and develop the best talent in our best position to serve all consumers. These four focus areas are not new and separate strategies. They simply strengthen our ability to execute the strategy.

Speaker 2

Our strategic choices on portfolio, superiority, productivity, constructive disruption and organization Reinforce and build on each other. We continue to believe that there is merit in doubling down on this integrated strategy, Starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners fueled by productivity. We remain as confident as ever in our strategy and our ability to drive market growth and to deliver balanced growth and value creation to delight consumers, customers, employees, society and shareowners. Now back to Andre for guidance.

Speaker 1

Thanks, John. As I mentioned, we expect the environment around us to continue to be volatile and challenging from input costs to currencies to consumer, retailer and geopolitical dynamics. However, our strong first half results enable us to raise or maintain key guidance metrics for the year. We're maintaining our guidance range for organic sales growth of 4% to 5% for the fiscal year. This outlook includes a normalization underlying market growth rates that we began to see in our Q2 results as the market lapsed the last waves of cost recovery pricing.

Speaker 1

For P and G, we expect the pricing contribution to top line growth to reduce by an additional one to two points In the back half of the year, we will continue to price for new innovations when warranted and to mitigate FX impacts. On the bottom line enabled by very strong earnings growth in the first half of the year, we're raising our outlook for fiscal 2024 core earnings per share from a range of 6% to 9% to a range of 8% to 9% growth versus last fiscal year. This guidance implies Slower bottom line growth in the second half. As we highlighted last quarter, the second half of the fiscal year will see less pricing benefit as we annualize more prior year increases. We will also see less commodity cost benefit in the second half.

Speaker 1

Wage and benefit inflation continues throughout the supply chain and in our direct costs and FX headwinds will increase versus the first half of the fiscal year. As I mentioned, we continue to expect organic sales and core EPS growth toward the upper end of the renewed guidance ranges. We estimate commodities will be a tailwind of around $800,000,000 after tax in fiscal 2024 based on current spot prices. This is consistent with the outlook we provided last quarter. We continue to expect foreign exchange will be a headwind of approximately $1,000,000,000 after tax for the fiscal year.

Speaker 1

The vast majority of this impact is driven by Argentina and is heavily skewed towards the back half of the year. This outlook is based on a forecast continued significant devaluation of the Argentine peso, which we expect to largely offset with appropriate price increases. We now expect higher net interest expense of approximately $100,000,000 after tax versus prior year. General inflation and higher wage and benefit costs are also earnings headwinds for the year. We expect adjusted free cash flow productivity of 90%.

Speaker 1

We expect to pay more than $9,000,000,000 in dividends and to repurchase $5,000,000,000 to $6,000,000,000 in common stock, combined a plan to return $14,000,000,000 to $15,000,000,000 of to shareowners this fiscal year. This outlook is based on current market growth rate estimates, commodity prices and foreign exchange rates, Significant additional currency weakness, commodity cost increases, geopolitical disruptions or major production stoppages are not anticipated within the guidance ranges. Finally, we'll be closely watching the more volatile regions we mentioned earlier, including the health of the China market, and we'll be keeping close watch of competitive dynamics to ensure P and G brands remain superior value for consumers and retailers. Now I'll hand it back to John for closing thoughts.

Speaker 2

We continue to be very pleased with the strong results P and G people are delivering in a challenging operating and competitive environment, continued excellent execution of an integrated market constructive strategy. I want to thank each of them for that. While we expect volatile consumer and macro dynamics to continue, We remain confident that the best path forward is to double down on the strategy that has enabled strong results and remain committed to delivering balanced top and bottom line growth and value creation for shareowners. With that, we'll be happy to take your questions.

Speaker 3

Our first question will come from Dara Mohsenian of Morgan Stanley. Please go ahead.

Speaker 4

Hey, good morning guys. So just wanted to focus on the back half. Clearly, the 4% Q2 core sales growth result wasn't as strong as the 7% Q1 delivery, which is very robust results. So obviously, some quarterly volatility here. Can you just give us some perspective for the fiscal back half relative to Q2 in light of that first half volatility as you think through some of the key geographies and volume versus price mix and some of the temporary impacts John mentioned.

Speaker 4

And then just same question on EPS basically, obviously, very strong first half that continued in Q2. Full year guidance implies a more muted second half. So is there some conservatism baked in there? Help us understand that. Know Andre touched on it, but maybe give us a bit more detail there on the back half from Ares' perspective.

Speaker 4

Thanks.

Speaker 1

Yes. Good morning, Dara. Let me start and John will add. On the top line, if you look at the first half, We are right in line with what we're projecting for the year, an average of 5%, and we obviously then expect about 5% for the back half. We see volatility, as you had pointed out, in some geographies that we mentioned in the script.

Speaker 1

I think the core point though is the core geography, 75% of the sales are performing very well. We continue to see acceleration in volume growth in North America with 4% volume growth, 5% sales growth. Europe is very strong. Latin America very strong. We continue to see volume acceleration in most places.

Speaker 1

So that gives us confidence that, that projects well for the second half of the year. We also expect some of the volatility that we experienced in quarter 2 to disappear or at least improve in the second half. The SK II sentiment is improving based on our consumer research in China, and we are continuing to drive innovation, equity investment and really relying on our most loyal and passionate user base to help amplify that messaging, which is working well. So we expect the effects to improve year over year quarter over quarter. From an enterprise market standpoint, We also view the pricing impacts that are impacting some of the markets like Turkey to disappear over time as pricing in the market is established, competitive pricing catches up.

Speaker 1

And then the impact of the tensions in the Middle East certainly, hopefully, will improve as well. So Very strong continued performance on the core markets, which are 75% of the sales, and we expect somewhat improving trends and stabilization in the other 25%. On the EPS side, very strong performance in the front half, 17% in quarter 1, 16% in quarter 2 sets us up well for the upper end of the guidance range, which is reflected in the tightening of the guidance. However, to keep in mind, we see a reversal of a number of effects that have supported the half one results. We saw the majority of the commodity help flow through in the first half, and this is part of the improvement in quarter 2 EPS.

Speaker 1

We see the flow through happening faster than we would have anticipated in some instances. So that leaves less of a contribution for the second half. We also have the majority of the foreign exchange herd in the second half. About 75% of FX herd of the $1,000,000,000 will hit the second half. As we indicated, the majority of that is Argentina, so we will try to offset via appropriate pricing.

Speaker 1

Nevertheless, the growth impact is tilted towards the back half. Price mix contribution will ease. We saw Still significant contribution in the first half. That will lower by 1 to 2 points in the back half, which also has an impact on EPS growth. And lastly, we continue to see wage inflation in our own operation as well as in our supply chain flowing through.

Speaker 1

Now that being said, if everything goes well, could there be upside? Sure. But we believe The guidance is appropriately reflecting the potential variability here. So those are the core drivers. John, any perspective?

Speaker 1

I have

Speaker 2

nothing to add on Andres' bottom line perspective. I would just reiterate one thing and add one thing on the top line. There are 2 questions that we've been discussing as we've gone through the first half of the year. The first relates to our ability to reaccelerate volume, which we've talked about several times in this conversation this morning. I just want to reiterate, how encouraging that progress has been.

Speaker 2

We said it before, but it's worth saying again, in our largest market, North America, past 5 quarters minus 3.0 plus 2 plus 3 plus 4. Europe, which tends to be fairly price sensitive, volumes plus 3. So that gives us confidence in terms of the momentum of the business on a forward basis. The other thing I would just call out that adds to this discussion is the breadth of the top line progress that the team has been making. 8 out of 10 categories held or grew sales in the quarter that we just completed.

Speaker 2

21 of our top 25 brands did the same. If you look at our top 12 brands, 9 of those are growing at high singles or better rates. And that's inclusive of all the challenges that we're managing around the world. So that gives Us confidence, that the top line growth that we've been delivering should continue, just as Andre said. And that should provide the ability to continue to deliver decent levels of bottom line growth as well.

Speaker 3

The next question comes from Bryan Spillane of Bank of America. Please go ahead.

Speaker 5

Thanks, operator. Good morning, everyone. I just I want a clarification, Andre, to your answer to Dara's question and then I have So the clarification, I think when you responded regarding organic sales growth for the back half and tacking to the year, The 5%, is it that Proctorus is tracking to 5% organic sales for the year? Or were you saying an expectation 5% organic sales growth for the back half. I wasn't quite sure if you were talking full year or specifically about the back half.

Speaker 1

Hey, Brian. No, what I was talking about the full year expectation. So again, we reiterate the range of 4% to 5%, But we see the possibility and strong probability that we'll be able to deliver towards the upper end of that range for the fiscal year.

Speaker 3

The next question comes from Lauren Lieberman of Barclays. Please go ahead.

Speaker 6

Great. Thanks. Good morning. So with the very sizable gross margin delivery this quarter and the outlook for the full year, there's a ton of reinvestment going back into P and L, right? And this quarter you called out the specifics, but I think also that's pretty well implied for the second half as well.

Speaker 6

So I was just curious If you could talk a little bit about incremental areas of reinvestment because the basis points are big and the dollars are even bigger. And so we just I don't know like it might sound ridiculous, but it gets to a point where you start to worry externally is there an excessive amount of reinvestment. So I'd love it, John, if you could talk through your perspective on that on making sure there's not money effectively being spend less efficiently in the P and L simply because you have that much flexibility? Thanks.

Speaker 2

Are you saying Lauren that you want 30% Core earnings per share growth? Just kidding.

Speaker 6

Well, that's kind of what I'm getting at, right?

Speaker 7

Yes.

Speaker 2

I'll speak first on this and I'm sure Andre has some perspective as well. But if you look at the amount of innovation That's coming to market both currently and in the future. And if you look at the opportunity To fully penetrate households with that innovation in ways that delights them and improves their lives, Now is not the time to be pulling back on investments in marketing or commercialization efforts of that innovation. And that's where the majority of the incremental spend is grown has come from and will come from. We look very carefully, I don't want to ignore your question, on the effectiveness of that spend and continue to see through the addition of many tools and data sets that we can increase the effectiveness of that advertising, increase the return rates of that advertising.

Speaker 2

As you see in our bottom line, while increasing reach. So that's what we'll be focusing on. We'll be very disciplined in that effort neither Andre or I or the rest of the team has any desire to spend money that isn't working for us.

Speaker 1

Yes. And maybe just to add, we just talked with our down to the country level, to the brand level, to the channel level when we assess whether we are getting a payout on the investments. But the majority of the spend, as John said, is really focused on driving market growth. When you think about the opportunity on FE, for example, we've created 100% of the market growth in North America on FE, And it's still the biggest opportunity the team has in order to continue to accelerate both our own growth in a constructive way and the market, given the low penetration FE has fabric enhancers. Aura B, another example, Power Aura B, we've launched Orbi io10, and we're also expanding distribution of Orbi io3, 45.

Speaker 1

We've led 70% of global market growth with those launches. So communicating the benefit and driving penetration is a huge opportunity. So be assured, we look at ROI very carefully. And again, market growth continues to be the main area of focus when we invest incrementally.

Speaker 3

The next question comes from Robert Ottenstein of Evercore ISI. Please go ahead.

Speaker 8

Terrific. Thank you very much. I was wondering if you could go into a little bit more detail on the state of the consumer in your 2 most important markets, the U. S. And China, how consumer demand developed through the quarter and into January.

Speaker 8

And when you talk about China, if you could also touch upon Travel Retail and maybe what SK II was on a Greater China basis, including Travel Retail as well? Thank you.

Speaker 1

I'll start. Good morning, Robert. Look, the U. S. Continues to be very solid, continues to impress with, I think, a very smooth transition from pricing annualizing and overall consumption coming up In terms of volume, which is enabling us to post the volume improvements John was quoting over the past few quarters and still accelerating ahead of market with 4% volume growth and 50 basis points of market share growth.

Speaker 1

We continue to see trade up Within our propositions, so as consumers come in, maybe at a lower tier and a lower value proposition, they continue to trade up in the U. S, which speaks to the health of the proposition, but also the health of the consumer and willingness to invest. The last data point I'll give you on the U. S. Is We are able to grow as private label shares are slightly up.

Speaker 1

We are up the same range. So some consumers will look for value in private label, but an equal, if not higher amount of consumers find better value in our propositions as we drive continued superiority via innovation. So feel very strongly about the U. S. We'll continue to invest to drive more market growth there, But the consumer is resilient and the business is doing well.

Speaker 1

On China, I'll begin. I'm sure John has an incremental perspective, but the China opportunity remains intact. If you look at the underlying market size, If you look at the potential development of the middle class, if you look at the ability to drive category penetration In our categories, all of those are huge opportunities for us and all of those point to continued investment and commitment to the Chinese market. We have a very capable organization, and we continue to be very that we can create value. Honestly, when the market requires market growth to be driven by manufacturers, I think that positions us very well with our retail partners in China to have a competitive advantage and execute the model that we know how to execute in many parts of the world.

Speaker 1

In the short term, we mentioned it in the script, consumer sentiment is not fully recovered yet, And that is reflected in the results. Again, if you want to take a silver lining, We see the attractiveness of key opinion leaders and heavy discounting in key consumption periods decreasing, And that's actually good for us. And we believe that focus on brand equity, a focus on strong everyday value via the priority will allow us to help grow the market back to mid single digits and strengthen our position in the market. Last point on SK II. No specifics.

Speaker 1

The numbers we're quoting, obviously, on the quarter minus 34% include the domestic travel retail channel, nothing else to add there other than we remain confident that as the sentiment improves, which we see already With continued investment in SK II, we see that business recovering over the back half.

Speaker 2

Robert, as Andre suggested, I'll just provide A little bit of additional color on China, having spent a fair amount of my career involved in that market and having just spent almost a full week there. In digesting the Q2 numbers, the P and G numbers in China, you have to think about a couple of things. One is SK II, which just for clarity for everybody is really driven by An anti Japanese brand sentiment, which Andre described in our opening remarks that's related to the release of wastewater from the Fukushima nuclear facility. And we've had not identical, but similar consumer sentiment dynamics in the past as it relates to this brand And as it relates to the relationship between those two countries, and it has always resolved itself with SK II moving to higher heights. So if you look at the decline in China on the quarter on our business,

Speaker 9

I

Speaker 2

don't know the exact number, but basically think of it as 50% of that being the dynamic I just described and 50% of it being the market dynamics. The second thing that Andre referred to is important to understand as well. The heaviest purchase period Historically, in China was in November. I'm talking years past. And that was always a little bit disconcerting for us because a disproportionate amount of product moved during Double 11.

Speaker 2

It filled Consumer pantries, it often has filled some retailer pantries and often our inventories and warehouses It often moved at heavily discounted prices. The amount of movement during that period this year was much lower. And as Andre said, we view that as a good thing. And it's a temporary impact, quarterly impact, a Q2 impact on the indices, but it moves us into a healthier position. If you think about the medium to longer term, Andre mentioned the addition of The expected addition of 200,000,000 middle income consumers to China's population.

Speaker 2

That's very encouraging. Also I mentioned I was in homes, I was in stores, I was with our retail partners. They are they remain Encouraged about the future of China. I was telling I was talking to our organization At the end of the trip, our organization in China, and I told them I had never seen as much alignment In the market between our intentions and our strategy, our retailers' intention on their strategy and the government's intention and their strategy, all focused on what's being referred to as quality market growth. As Andre suggested, that's a very good thing for us.

Speaker 2

We can play very effectively and help with that agenda, Help society on a parallel path. And so you put all that together and I agree With Andre and I said it earlier, I think the growth potential here remains intact. There are some specific items that exacerbate the trend that you're seeing on the quarter, but I expect this will continue to be a source of both growth value creation for P&G. Sorry for the long answer, but I think it's important.

Speaker 3

The next question comes from Steve Powers of Deutsche Bank. Please go ahead.

Speaker 9

Thanks and good morning. At the risk of provoking another long answer, I guess what struck me this morning Is just the confidence and front footedness, if that's a word, in both of your Comment this morning and I think John your strategic perspective just struck me as particularly assertive. And I say that in the context that on the outside, I think, faced with some of the market challenges you've called out, China and the Middle East, etcetera, this quarter, concerns to grow that P and G is likely to be thrown off course or maybe getting complacent. And I guess my question is why is that wrong? And what to you are The key the keys to keeping the organization's eye on the ball, focused, grounded and executing on all those strategic pillars that you went through?

Speaker 1

Thanks, Steve.

Speaker 2

I want to step back first. We do face a lot of challenges in the world that we all live in, and those have impacted our business. But stepping back probably 5 years, The level of challenge has always existed, whether it was COVID, Whether it was the highest consumer inflation in 40 years, whether it was the 50% reduction, five-zero, in our profit over 2 years as a result of commodities, foreign exchange and transportation costs. And this organization overcame all of that. They've overcome the challenges we faced in the last quarter and that gives me A huge amount of confidence that we have the ability, the skills, the strategy and the agility to continue to meet challenges face first and work through them in ways that are constructive for consumers, for customers, For employees, for society and for share owners.

Speaker 2

We talk a lot internally about The complacency and the evils associated with it. So it's front and center, in our thought process. I have a couple of kind of trite sayings that I use in communicating with the organization and one of them is that complacency kills. You don't see a complacent organization when you're looking at the breadth of growth So they're delivering. When you're looking at the continued after a decade, continued work on productivity yielding the kind of margin progress that we saw this quarter.

Speaker 2

You don't see it as they reinvest that into growing markets and to growing household penetration and shares. We're not immune to it, so you're right to raise it. But I feel, as you said, very I feel the organization, not just myself are very much on their front foot as they move to take advantage of the opportunities that we see in front of us. I frankly never seen as many opportunities. Now there's a lot of work associated with capitalizing on those opportunities and There will be lots of challenges and forces that will be working against us in that endeavor.

Speaker 2

But the accomplishments of The midterm past, the most recent past, the reflection of the work that the organization is doing, all the way down the income statement And the innovation progress that I'm seeing not only in market or coming to market, But as we review the pipelines across each of the categories, also give me a good degree of confidence.

Speaker 3

The next question comes from Filippo Falerni of Citi. Please go ahead.

Speaker 10

Hey, good morning, everyone. John, I wanted to go back to China. You mentioned clearly that there was an impact from the cycling of The 11111 shipments, and can you give us some sense like how down it was China and SK during that period and maybe some of the axial rate coming out of December that gives you some confidence in the improvement in the country in the second half? Thank you.

Speaker 2

I apologize. I honestly don't operate at that level of data aggregation. So I don't have the answer, with any degree of specificity. But I know The impact was there. I know it's a good thing for us long term and apologize, but I'm just going to leave it there.

Speaker 3

The next question comes from Chris Carey of Wells Fargo Securities. Please go ahead.

Speaker 11

Hi, good morning. Good morning, Chris. The U. S. Volume growth improvement is very constructive.

Speaker 11

It's quite a bit better than what we can see in the U. S. Nielsen data, for example. I know the data is far from perfect, but I wonder if you can just help characterize whether you have any Non track channel boost or in general talk about some of the specifics of what has really driven this volume improvement Over the past 5 quarters and I think maybe just connected to that if you could, there's a lot of debate Right now across consumer staples around just what does drive volume improvement, whether that's Promotional activity or increased advertising or just the lapping of pricing. And I find it interesting today This dynamic of sequential volume growth and I wonder if you can just maybe talk about in general Why this seems to be happening?

Speaker 11

What you're doing to drive this or whether this is just the natural evolution of markets post substantial pricing? So Thanks so much for that.

Speaker 1

Yes. Hey, Chris, let me start. On the non covered channel side, we've seen non covered Outpays cover channels for a period of time, this is not different. There's nothing specific happening there. We see a trend of some consumers going into larger pack sizes, those are in club, those are online.

Speaker 1

And many of those effects continue, but there's nothing differential covered and non covered channels, both are performing well. Non covered, a little bit ahead of covered, so that's why you don't see the results in the track data. What's driving the growth? I would argue it's all of the above that you've mentioned, right? I think we're seeing Pricing lapping, consumers seeing the pricing normalizing on the shelf.

Speaker 1

We don't see an increase in promotion Depth of frequency, quite frankly, we are still operating at about 85% of pre COVID levels from a volume sold on deal perspective. Competition is in a similar range, so there's no escalation of promotion. But what drives it is strong innovation, Innovation that is focused on growing the market and strong communication of that innovation in a very targeted way, Leveraging our capability to be very detailed and very intentional on who we talk to at what point in time with what messaging. And the U. S.

Speaker 1

Is probably our most sophisticated market in that regard, and it shows in the ROIs and in the results back to Lauren's question earlier. Few examples, just the Gillette business, innovation on the core with the Labs razor provides a growth driver. But adding new jobs to be done like female facial hair removal For male and female body hair removal, incremental jobs that when communicated appropriately of the benefit of the product drive incremental consumption. I mentioned Oral B penetration still low on the electric toothbrush. And as we're converting more and more users that drives incremental growth with more innovation, but also expansion of the lower priced options of Orbi-three, 45 and then the launch of Orbi-ten.

Speaker 1

Last example I'll give you and then I'll let John Add is Olay Super Serum, just to cover a few of the categories here, is a new serum, the most successful new serum in the category. 30% of those users are new to the category. So again, communication, strong innovation, premium propositions and bringing new cruises to the categories what's driving that accelerated volume growth.

Speaker 2

And I'll just pile on with I agree with everything that Andres said. So just a couple more examples to show you again the breadth of the innovation that's being commercialized currently. He talked about Olay, very exciting innovation in our hair care business as well. An example, Head and Shoulders Bare, which is a more efficacious, antidandruff offering, with the bare minimum number of ingredients, 9 to be exact, in an eco friendly package, 45% less plastic. And it's one of the drivers of growth, particularly in North America on the Head and Shoulders brand, which is up 8% fiscal year to date.

Speaker 2

Another example in a different category, Swiffer Power Mop, which is driving that business up 11% fiscal year to date and has built both volume and value share at about a 0.5 level. So that's and back To Steve's question on complacency, this is what we need to keep doing. And that's why we talk about the best path forward being doubling down on exactly these things. They do drive market, they do drive volume, they do drive sales and they do it profitably.

Speaker 3

The next question comes from Andrea Teixeira of JPMorgan. Please go ahead.

Speaker 12

Thank you. Good morning. So I wanted to go back to that 4% volume growth commentary in the U. S. And 3% in the you focus markets and despite the tough comparison for the cold and flu season, it seems that you had market share gains in laundry and some other key categories.

Speaker 12

So can you comment on how you exit the quarter for the cold and flu season in the U. S. And in Europe? And separately, have you it seems like you secured more distribution in the balance of this fiscal year. So any Comment on that.

Speaker 12

And a clarification on China. You said that you're confident that the growth will resume to the mid single digit level. I'm assuming that's not a comment for this fiscal year. But as you commented out, John, in terms of like the head shoulder and I know hair care is a big category there and you're comping is comps in hair. So I was wondering if you can elaborate a little bit more than SK II in particular.

Speaker 12

Thank you.

Speaker 2

Let me just take China real quick and then turn it over to Andre on the coughcold trend, etcetera. The mid single digit number that we referred to is an expectation of longer term market growth. You're correct. It is not an expectation of ours for either the market or our business in this current fiscal year. On the broader Beauty question.

Speaker 2

When you take SK II and the market impacts in China Out of the equation, you see a business that's performing extraordinarily well. I mentioned Head and Shoulders, which is the largest shampoo brand in the world, up 8% fiscal year to date. If you look at North America Pantene fiscal year to date up 15%. Our Skin and Personal Care business up double digits. The same is true for the beauty business in Enterprise, LA and then Europe.

Speaker 2

So it's a very strong business benefiting from the exact same strategies Obviously, applied differently that we're executing across the balance of the company. And that will, over time as the market corrects itself, be demonstrated in China as well.

Speaker 1

So on the other two questions on PHC, Andrea, look, the business is obviously very, very strong past full year average growth rate of 13%. So the underlying strength of the business is very healthy. We see an impact of the cold cost season. The season is still above average, but it's below a record season last year. And it's developing a little bit slower in the current profile, which means there could be some upside coming as we as time goes by.

Speaker 1

Last year, VIX was 28% in the same quarter. So you can see the high base that we mentioned in the prepared remarks.

Speaker 2

Just one thing on that. Sorry to interrupt, Andre. That I think is relatively straightforward, but it's worth mentioning. As we were all coming out of COVID, Going through our first cough, our non first non COVID or light COVID cough cold season. It's not surprising, having spent time in our homes for the last 2 to 3 years, that the level of immunity was not high.

Speaker 2

And therefore the level of incidents was very high. So that's what we're annualizing against combined with a slower start to the normal season. As Andre says, we'll wait to see how that all materializes. We have seen some increase in incidents. You can probably hear a little bit of a frog in my voice this morning and I heard one in Andre's.

Speaker 1

Right. We're contributing. There we go. Hey, just last point on PHC. If you look at the share development In every treatment area that we cover in PHC, we're up in share.

Speaker 1

In every treatment area, we're up in organic sales across regions. So Again, it's purely a seasonal element. On distribution, Andrea,

Speaker 13

I won't

Speaker 1

give you an answer other than obviously Driving innovation, driving incremental sales for our retail partners, driving category growth helps with their desire to have our brands present on their shelves.

Speaker 3

The next question comes from Peter Grom of UBS. Please go ahead.

Speaker 7

Thanks, operator, and good morning, everyone. So I know you maintained your commodity outlook this morning, but just given the first half performance, the outlook does not invent as much of a tailwind from here, Which you alluded to Andre, but can you maybe just unpack what you're seeing across your key cost buckets? Where are things getting better? Where are things getting worse? And Maybe just based on current spot rates, like how should we think about the phasing?

Speaker 7

Would you expect deflation in both 3Q and 4Q? Or is there any potential for cost to become a headwind as we exit the year. Thanks.

Speaker 1

Hey, Peter. The commodity basket is wide, complex and changing very quickly. So the best guess we have is what we told you, euros 800,000,000 of tailwind for the year, which the majority of which has been flown through the P and L in the front half. What I'll leave you with, I don't expect any headwind from commodity in the second half. It continues to be a tailwind.

Speaker 1

The second thought I'll leave you with is the impact on the P and L given the time it takes for commodity changes to flow through Our contract structures and our own variance holding policy make the time lag significant. So even if we saw significant volatility on commodity spot prices, the impact on the fiscal will decrease over time simply because of those two dynamics, but continue to expect tailwinds just less than you saw in half 1.

Speaker 3

The next question comes from Jason English of Goldman Sachs. Please go ahead.

Speaker 14

Hey, good morning folks. Thanks for slotting me in and a belated Happy New Year to you all. A couple of questions. We've talked a few times about the North America volume strength. I had in my notes that you're lapping some undershipment that should have been a couple point benefit to this quarter.

Speaker 14

Yet I don't think you've mentioned it so far. So, am I wrong? Was there not a sizable benefit this quarter. And then it's encouraging to hear the confidence that you're expressing around sort of it sounds like an imminent improvement in SK II Well, words like recovery and improvement throughout the back half. With the decline sort of half related to Japan boycotts and related to market conditions, where are you seeing the improvement?

Speaker 14

Is that dissipating concerns around Japanese brands? Or you actually see an improvement in market conditions? Thank you.

Speaker 1

So the volume, we don't see a transitory effect on the volume side, Jason. Morning, first of all. So the base there's always some base volatility, as you know, in terms of inventories, in terms of our ability to ship, but there is no material impact that I would call out that would have to be taken into account if you look at the U. S. Volume results.

Speaker 1

So nothing there. The SK II improvement, again, I want to pace expectations, but the improvement is really in the consumer sentiment that we're seeing, Where we had very high social media coverage in quarter 1, leading to negative sentiment and negative top of mind awareness of the brand, that is now dying down. And honestly, most consumers have gone back to A neutral position open to SK II. And so what we're doing is really doubling down with innovation and doubling down with communication on the efficacy, The quality of the product, the quality of the brand and leveraging the most loyal and passionate consumer group to help us make the case for SK II, which we believe will help us improve run rates in the second half. The market dynamics, we continue to see bumpy even over the next quarters improving, but there will be volatility there.

Speaker 2

It's just An N of 1, Jason. So it's kind of irrelevant. But, I was in the home of a heavy SK II user in Beijing. And I asked her about this dynamic and how it was affecting her purchasing and she kind of laughed and it wasn't the normal Nervous laugh. It was and she said she followed that up with, if Japanese consumers aren't afraid of this, why should I be?

Speaker 2

And she said, I'm much more afraid of the pimple that I will get if I don't use this than I am about. So it's starting to normalize again. That's n of 1. It was also interesting to me to see, what was happening with her kind of personal inventory. And just looking at the liquid fill levels in the bottles, which were low.

Speaker 2

So I think there's a dynamic as well where a number of consumers just Kind of waited to see how this whole thing played out and reduce their personal stocks in the process. But again, that's probably neither here nor there, but I thought it was worth sharing.

Speaker 3

The next question comes from Calum Elliott of Bernstein. Please go ahead.

Speaker 15

Hi, good morning. My question guys is about your enterprise market restructuring, which I think in the release you described as Substantial liquidation of the affected markets in places like Argentina and Nigeria. And I guess, Look, recognizing these are not huge markets for you today, from a profit perspective, this still feels like a Fairly extreme decision and clearly a challenging macro backdrop today in those markets. But the case of Nigeria, probably one of the highest long term potential economic markets. So my question is, John, I know these enterprise markets were your baby, so to speak, for a number of years.

Speaker 15

Just hoping you can walk us through what I imagine must have been a difficult strategic decision.

Speaker 2

Yes, these decisions are not taken lightly. A couple of points. One is, Where we're moving to an import model, which will be the case in Nigeria, we maintain an option on the future of those brands in those markets. We're just choosing to operate in a way that's That frankly is viable. You get into some tough situations in some of these markets with Currency controls with pricing controls with the ability to dividend money out of these markets and at some point you run into a set of conditions that just make it impossible to operate.

Speaker 2

You can't get, you can't source dollars as an example in order to purchase the ingredients and raw materials you need to manufacture your products. And so we've come to a decision, when those situations present themselves To be pragmatic, to be value creative, and to flow resources to bigger opportunities that present more near term opportunity, while in some cases maintaining our optionality on the long term. Andre, I don't know if you want to add anything?

Speaker 1

Yes, I just want to clarify because the strategic intent really is what John described, right? We are Moving in Nigeria to an import market, we will still be present, but it's a better way to serve the consumer and a better way for us to create value. In Argentina, we are divesting our Fabric and Home Care business and again are looking to find a better go to market model. The language you're quoting, Calum, is substantial liquidation. That's an accounting term.

Speaker 1

And that accounting term HIT is really defining the point at which we recognize the accumulated foreign exchange translation loss in those markets, which is part of that non cash restructuring that we talked about. So the accounting term doesn't represent the business execution. It is a technical term that Once we get to that point of substantial liquidation, we will recognize the accumulated foreign exchange translation loss.

Speaker 2

By the way, the prior CFO would have had no hope of explaining that to you as eloquently as the current CFO just did.

Speaker 1

I won't comment.

Speaker 3

The next question comes from Olivia Tong of Raymond James. Please go ahead. Great. Thanks. Good morning.

Speaker 12

Clearly, you've generated some impressive growth in the U. S. And Europe, so I wanted to bring it Developed markets and you've held on very nicely to price. So I wanted to ask you about competitive response and any pushback from retailers Or, increasing promotion from competition, given the share gains you've made and whether you're seeing any response there? Thanks.

Speaker 2

You want to talk competitive promotion, Andre, and then I'll talk customers? Happy to.

Speaker 1

Hey, Olivia. So I started to mention this in the U. S. Our promotion level is still below pre COVID, about an 85 index Competitive promotion level around a 90 index, so very similar. We don't see a substantial increase in either depth or frequency in the U.

Speaker 1

S. In Europe, we do see an increase in frequency. We do not see any increase in-depth. Actually, both Frequency and depth are still below pre COVID levels, but frequency is increasing. So competitive environment still stable.

Speaker 1

And I think it's also driven by the fact that we are driving growth. We are driving market growth. And that contributes to the share growth, which means we can grow, but also it doesn't drive necessarily negative cycles in terms of pricing in the market.

Speaker 2

The whole idea just building on Andre's last point there is to create business, not take business. And that works out well for us. It works out well for the categories that we compete in and it works out well for our retail partners. And that is really, the focus of the existing interchange with our retail partners. It was number 1, 2 and 3 supply.

Speaker 2

As we've solidified our supply chains, The conversation moves very quickly to how do we work together to grow markets. That's a win win proposition, a win position, a win for them, a win for us, a win for consumers, and of course, adding a 4th win for share owners. So that's the state of play and I experienced that in Europe. I experienced that I was in Europe just before Christmas. As you know, I was just in China.

Speaker 2

That was the nature of the conversation there and it's clearly the nature of the conversation here in the U. S.

Speaker 3

The next question comes from Mark Astrachan of Stifel. Please go ahead.

Speaker 13

Thanks and good morning everybody. I wanted to go back to China for seventh or eighth time I guess on this call. The last quarter you guys have talked about a portfolio structure examination. I guess I'm curious whether there's Any update on that or what even does that mean? And maybe specifically, any underlying changes And consumer attitude towards beauty as a category, including what is perceived to be relevant by brand or efficacy, and also sort of related to that, it just seems a bit more of a Pickle category, more trendy category than some of the others that you are in.

Speaker 13

And I guess I'm specifically talking in China as opposed to globally. So you parse out that I guess if you want, but any thoughts on maintaining a presence in a category that has more subjective sort of usage than some of your other categories everyday usage. Thanks.

Speaker 2

I'd offer a couple of thoughts there. 1, China is our 2nd largest market, sales and profits. Beauty represents a significantly disproportionate amount of the business. So if we weren't committed to the beauty business in China, you'd have to ask yourself a different question. 2nd, When we did our significant portfolio restructuring, however many years ago that was now, Into daily use categories where performance drives brand choice, we did the same with beauty.

Speaker 2

Exiting the most fickle, To use your semantics portions of the business, we exited what I call fashion Fragrances and Flavors. The brands that we have remaining and the categories that we play in, there's real opportunity to drive long term loyalty with superior performance. That's true in China. That's true outside of China. And there will always be Higher trial rate in that category than in many other categories.

Speaker 2

That's not a bad thing. It helps demonstrate the superiority of what we do offer, and people come back to our brands. So now if the question is commitment to beauty in China, the answer is yes.

Speaker 3

Our final question will come from Edward Lewis of Redburn Atlantic. Please go ahead.

Speaker 15

Yes, thanks very much. We've been accustomed to strong performance in the U. S. For a number of years, But notable to see the strong performance in Europe again with volume and price. I guess that comes at a time when there's plenty of scrutiny over here on pricing levels.

Speaker 15

So can you talk more about What's behind the strong results for Europe at present?

Speaker 1

Look, I think the execution of the strategy in Europe is really behind the strength of the results. The team has done a fantastic job in combining the price increases that needed to be taken to recover the commodity cost increases with very strong innovation that delights the consumer at the time when they see higher pricing materialize on the shelf. And that's really behind the benign volume impact as we took the pricing and behind the acceleration of volume growth now that pricing is established in the market. We've done that few examples. John mentioned Aereol.

Speaker 1

I'll mention Ariel as well, but Ariel parts in a more sustainable packaging launched with The price increase that we needed to take has been building organic sales by up to 20% or higher. So the results are really a combination of strong innovation, pricing and therefore, maintaining consumers coming into the franchise and trading up, Not different from the U. S.

Speaker 2

We convinced ourselves for years that what mattered most in Europe was price, Specifically, the lower the better. And that wasn't an uninformed decision. You had the highest development of heavy discounters, for example, in Europe, which would indicate that price is an important part of the consumer value proposition. But as Andre said, In the last number of years, we've really pushed innovation as a driver of value, not forgetting about value, but delivering it through performance. And that combined with the executional capability of that market, which has just been phenomenal.

Speaker 2

And I want to thank them all as long as you've given me the opportunity to do that, has led to just really terrific results and I believe sustainable results. Great. Thank you for your time this morning. I know it's a little bit of a difficult quarter to unpack. There's a lot going on.

Speaker 2

The net of that although is very positive, Strong, really strong earnings per share growth, while increasing investments in the business, both present and future, maintaining top line momentum, building volume momentum and building share. As I expressed before, I have a high degree of confidence in our ability To achieve a level of success going forward and that's based entirely on both the strategy and The ability of our organization to deliver against that. Look forward to seeing many of you at CAGNY in a month or so. And we'll advance the conversation at that point. We're around John Chevalier Sitting across the table from me right now, he's around all day.

Speaker 2

Andre is around. They'll get angry if you call me, so call them. But have a great day. Thanks.

Speaker 3

That concludes today's conference.

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Earnings Conference Call
Procter & Gamble Q2 2024
00:00 / 00:00