Procter & Gamble Company (The)

Good morning, and welcome to Procter & Gamble's quarter-end conference call. P&G would like to remind you that today's 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. Additionally, the company has posted on its investor relations website that www.pginvestor.com, a full reconciliation of non-GAAP and other financial measures. Now I will turn the call over to P&G's Vice Chairman and Chief Financial Officer, John Muller.

Good morning, good afternoon. We're going to keep prepared remarks on the short side today. We're talking a fairly straightforward quarter, our recent Investor Day and the Cagney Conference coming up in just a couple weeks. We'll share result headlines, comment briefly on strategic focus areas, update guidance for the fiscal year, and then open the call for your questions. So getting right to it, we delivered a strong organic sales growth in the October-December quarter, putting us ahead of fiscal year targets. Organic sales grew 4%, driven by volume, pricing, and mix. Eight out of 10 global categories grew organic sales, skin and personal care in the teens, fabric care and feminine care, high singles, family care, oral care, and personal health care, mid-single digits. Each of our top 15 markets grew organic sales, with China up 15%, India up 16%, and Japan up 9%. E-commerce organic sales grew nearly 30%. Our natural entries continued to drive growth, including Pampers Pure Protection diapers, Burt's Bees toothpaste, and Native deodorants, which we recently expanded into Target stores. We built aggregate market share. 34 of our top 50 country category combinations held or grew value share, up from 26 last fiscal year, 23 in fiscal 17, and 17 in fiscal 16. Within this strong sequential and absolute progress, we continue to have some challenges. Grooming organic sales were down, low singles. Level baby care trends improved, but with organic sales only at the level of the prior year. In total, though, consumption, volume, sales, and share are each progressing nicely. We also delivered strong constant currency earnings growth. Core earnings per share was $1.25, up 5% versus the prior year. Within this, foreign exchange was a $200 million after-tax earnings headwind, about $0.09 per share. So on a constant currency basis, core earnings per share up 13%. Gross and operating margins improved sequentially, as expected. Net strong underlying earnings progress. Cash flow also remained strong, with $4 billion in operating cash flow and adjusted free cash flow productivity of 103%. $2.6 billion of cash was returned to share owners, $750 million dollars of share repurchase, and $1.9 billion of dividend. We completed the acquisition of the Merck KGA OTC assets, significantly enhancing our international presence in personal health care. We also acquired Walker & Company, with products designed to serve the unique needs of consumers of color. In summary, a strong quarter, solid consumption, volume, and organic sales growth, driving positive market share trends across categories and geographies. strong constant currency core earnings per share growth, and continued high levels of cash generated and returned to share owners. All delivered while working to address some category-specific challenges and against a very difficult competitive and macro landscape. We continue to accelerate change through our program of constructive disruption to meet the remaining challenges we face and to further improve results. Our strategic focus areas remain constant, We've made a deliberate choice to invest, as you know, in the superiority of our products and packages, retail execution, marketing, and value. Not just in the premium tier, but in each price tier where we compete, strengthening the long-term health and competitiveness of our brands. We're making solid progress on extending our margin of advantage and increasing the quality of our execution, which show in our results. As I mentioned earlier, sequential share progress over multiple years. Additional investment will be needed to continue this progress. The need for this investment, the need to offset macro cost headwinds, and the need to drive balanced top and bottom line growth, including margin expansion, underscores the continued importance of productivity. We are continuing cost savings and efficiency improvements in all facets of our business. approaching the midpoint of our second five-year $10 billion productivity program. We've consistently delivered $1.2 to $1.6 billion in annual costs of goods sold savings. We're eliminating substantial waste in the media supply chain, delivering nearly a billion dollars of savings in agency fees and ad production costs over the last four years. We see more savings potential in these areas, along with more efficiency in media delivery. We're continuing to drive savings and organization costs. Total enrollment is down nearly 30% since the start of our first productivity program, about 35% when including contractor role elimination. B&G is a highly profitable company. Before-tax operating margins are among the highest in the industry, behind only Reckitt and Colgate, whose margins reflect their concentrations in healthcare. We have significant below-the-line advantages, operating with one of the lowest interest expense percentages and one of the lowest tax rates, putting us near the top of the industry in after-tax margin, already highly profitable and aggressively driving more savings. We're also focused on cash productivity, with significant progress in all areas of working capital. Over the past five years, we've improved receivables by three days, inventory by 10 days, and payables by more than 30 days. enabling us to fund capital spending needed to transform our global supply chain. Over the last seven fiscal years, we've averaged nearly 100% adjusted free cash flow productivity and have returned an average of over 110% of reported net earnings to share owners through dividends and share repurchase. We're making organization structure and culture changes to strengthen our position to win. We're taking steps to simplify the organization structure, focus effort, clarify responsibility, and increase accountability. We're supplementing internal talent development with experienced external hiring, and we're building category dedication and mastery. We're strengthening compensation and incentive programs. As we discussed in detail at our investor day, we're moving to a new organization structure to further dematrix the company and provide even greater clarity on responsibilities and reporting lines to focus and strengthen leadership accountability. We're significantly reducing the level of corporate resources, moving about 60% of corporate roles to the business units and markets. At the same time, we're leading the constructive disruption of our industry. Lean innovation processes to improve speed to market, shots on goal, and success rates of new products. monetizing internally developed technologies to build value and fund even more innovation investment, disrupting the brand building ecosystem with digitally enabled one-to-one mass marketing, supply chain transformation enabled by robotic process automation, and leveraging digitization and data analytics to drive greater efficiency and effectiveness of all facets of our operation. We are creating a more engaged, agile, and accountable organization that operating at a lower cost, focused on winning through superiority, fueled by productivity, working at the speed of the market. We're working urgently to sustain our near-term momentum and to position P&G to win over the mid and long term. Moving to guidance, having delivered a strong first half of the fiscal year, we're increasing the high end of the organic sales growth range by a point, making the new growth range 2% to 4%. We have strong innovation and support plans for the back half of the year. Select SkinGuard in the U.S. and Europe. Upgrades to Titan Aerial Unit Dose Pods in North America, Europe, and Japan. Expansion of Crest and Oral-B Gum Detoxify Toothpaste to Latin America. Continued support of Vicks, VacoCool, NyQuil, DayQuil, and CoughDrops through the cold and flu season. Pantene Rosewater Sulfate-Free Shampoo and Conditioner. Formula and packaging upgrades on head and shoulders. New Olay vitality masks and creams in China. Fit upgrades on Pampers cruisers and continued strong support behind the range of always whisper Tampax and always discreet innovations we've launched recently around the world. We're innovating and investing to maintain top line momentum. But we're also realistic about the market and competitive dynamics that will impact us in the back half of the fiscal year. Pricing should remain positive in the back half, but this will increase volume uncertainty and volatility. We face highly capable competitors with strong plans of their own. Macro uncertainty stemming from issues like Brexit, a crisis of consumer confidence in France, and trade and other policy impacts that can impact both the top and bottom line. Our efforts and results fiscal year to date and the totality of these tailwinds and headwinds leave us comfortable increasing our organic sales guidance, albeit within a relatively wide range. We now expect all-in sales growth in the range of down 1% to up 1% versus last year, reflecting 3 to 4 negative points from foreign exchange. We're maintaining core earnings for share guidance of 3 to 8%, having delivered about 4% fiscal year to date. The combination of stronger-than-expected organic sales growth and productivity-driven cost savings are offsetting a significantly larger challenge from foreign exchange and commodity costs than we originally anticipated. Our fiscal year earnings outlook includes a potential gain on the sale of land at our Gillette site in Boston. The land sale, if it occurs this fiscal, will likely contribute around a point of earnings per share growth for the year. We're currently forecasting a foreign exchange headwind on earnings of about $900 million after tax. Commodity costs are expected to be a $400 million headwind, and trucking costs will likely be up 25% or more versus last year's levels. Combined FX commodities and transportation are nearly a $1.4 billion after-tax headwind, 53 cents per share. As commodity prices and foreign exchange rates move, we will take pricing when the degree of cost impact warrants it and competitive realities allow it. There will be top-line volatility with these pricing moves. Competition may attempt to take advantage of our moves for short-term market share gains. Overall category consumption may be negatively impacted. We'll have to adjust as we go and as we learn. In any scenario, we'll aim to protect superiority-building, value-creative investments in the business. We won't allow short-term pressures to derail the progress we're making towards sustained, profitable, top-line growth. Our outlook for items below the operating line is unchanged. We now expect to exceed our target of 90% adjusted free cash flow productivity. This includes CapEx in the range of 5% to 5.5%. It will be another year of strong cash return to shareholders. We expect to pay over $7 billion in dividends and repurchase up to $5 billion of shares in fiscal 2019. This share repurchase range factors in the cash required to complete the acquisition of Merck's OTC business and other transactions. Our guidance is based on current market growth rates, commodity prices, and foreign exchange rates. Significant additional currency weakness, commodity cost increases, or additional geopolitical disruptions are not anticipated within this guidance. To sum up, the external environment presents many challenges To address these challenges and further strengthen results, we continue to accelerate the pace of change. Efforts to extend our margin of competitive superiority, to drive productivity savings to fund investments for growth and enhance our industry-leading margins, to simplify our organization structure and increase accountability, to constructively disrupt our industry, are and will continue driving improved results and will help us achieve our objective of consistently and sustainably growing sales, margin, and cash. With that, I'm happy to turn to your questions.

Thank you, sir. Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered or you'd like to withdraw your question, please press star followed by two. Your first question comes from the line of Wendy Nicholson with Citi.