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 Moeller.

Good morning. We'll keep prepared remarks fairly brief today, reflecting a fairly straightforward quarter in the upcoming Deutsche Bank Conference in Paris. We'll provide result headlines, comment briefly on strategic focus areas, and update guidance for the fiscal year before turning to your questions. January-March top line growth was strong, with organic sales growing 5%, driven by volume, pricing, and mix. Eight of 10 categories grew organic sales. Skin and personal care again grew in the teens, feminine care and home care, high singles, Fabric care, family care, hair care, oral care, and personal health care each grew mid-single digits. We delivered strong organic sales growth in our two largest markets, the U.S. up 4%, China up 11%. Organic growth was broad-based, equal to or ahead of a year ago in 13 of our top 15 markets, with all six geographic regions growing organic sales, five up mid-single digits or more. E-commerce organic sales grew more than 20%. Market share trends remain strong. 33 of our top 50 country category combinations holding our growing value share fiscal year to date, up from 26 last fiscal year, 23 in fiscal 17, and 17 in fiscal 16. Some challenges do remain with grooming and baby care each down low singles. In total, though, consumption, volume, sales, and shares each progressing nicely. In addition to very strong sales growth, we delivered strong constant currency earnings growth. Core earnings per share was $1.06, up 6% versus the prior year. Foreign exchange was a $245 million after-tax earnings headwind, about $0.09 per share. So on a constant currency basis, core earnings per share were up 15%. The effective tax rate for the quarter came in around 15.5%, due partly to favorable settlement of prior period audits. A portion of this benefit was initially expected in the April to June period. The tax rate also reflects benefits from higher actual tax deductions on stock option exercises versus deferred taxes booked through option vesting. Core gross margin improved sequentially to flat versus year ago, despite FX and commodity cost headwinds. On a currency neutral basis, core gross margin increased 60 basis points. SG&A costs as a percentage of sales were up versus a year ago, driven in part by the addition of Merck, including temporary integration costs. For the balance of the company, SG&A as a percentage of sales increased modestly due to increased traditional digital and social media investments. On a constant currency basis, core operating profit grew 7%. On top of the sales and earnings growth, cash flow remained strong with free cash flow productivity of 100%. $3.1 billion of cash was returned to share owners, approximately $1.3 billion of share repurchase, and $1.9 billion of dividends. We announced a 4% increase in the dividend earlier this month, the 63rd consecutive annual increase, and the 129th consecutive year in which P&G has paid a dividend. P&G is one of only 10 U.S. companies to pay a dividend for more than 120 consecutive years. Only three U.S. companies have increased dividends more consecutive years than P&G. Over the last 10 years, the annual dividend has increased from $1.64 to $2.90 per share, returning $67 billion of cash dividends to shareholders over those 10 years. 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, a continued best-in-class track record of cash return to shareholders. All of this delivered while working to address some significant category-specific challenges and against a difficult competitive and macro landscape. We continue to accelerate change and our program of constructive disruption to meet the challenges we still face and to further improve results from here. As you know, we've made several important strategic choices which are enabling the progress we're making. One was to focus and strengthen our portfolio in daily use categories where performance drives brand choice, in categories where we occupy a number one or two position, which have historically grown faster than the balance of the company and are more profitable. This choice is clearly paying out. Within these categories, again, categories where performance drives brand choice, we've taken a deliberate step to invest in and advance the superiority of of our products and packages, retail execution, marketing, and value, growing the markets in which we compete, and strengthening the long-term health and competitiveness of our brands. We've spent a lot of time together discussing these advances in the US and China, but they're global in nature. Let's take a look at a few examples in Europe where we have built P&G aggregate share by 20, 30, and 50 basis points over the last 12, six, and three-month periods, respectively. In Europe, our growth in fabric care is driving category growth of 4%, led by the strength of consumer-preferred products such as Ariel pods. Ariel superiority has delivered nearly a point of share growth in Europe fabric care against very favorable local competition, offering consumers superior performance and convenience. Very auto dishwashing is driving mid-single-digit category growth behind superior premium-priced innovation, very platinum. Ferry is delivering double-digit organic sales growth with share up more than 200 basis points. We just launched a new upgrade, Ferry Platinum Plus, in the March quarter. Platinum Plus delivers the outstanding cleaning performance Ferry consumers expect with added anti-dullness technology to keep the finish on dishes looking like new. Early results of Platinum Plus are strong and are further strengthening category growth. In feminine care, our super premium innovation, Always Infinity, is driving Western European market growth in the pad segment. And always discreet continues to drive market growth in the adult incontinence category. In total, always feminine care share is up over half a point year-to-date as we continue to build and expand our advantages in each superiority vector. European oral care is driving market growth and strong organic sales growth, led by high single-digit growth of oral B power brushes. We recently launched Gillette skincare Gillette SkinGuard razors in Western Europe. SkinGuard is designed to delight the 70% of men who report skin sensitivity, which causes many of them to shave less frequently. By addressing this unmet consumer need with a superior performing product, we're creating the opportunity to increase usage, building the category and building share for P&G. After just a few months in market, the razor systems category has accelerated to double-digit growth in France, Germany, and the U.K., with Gillette growing a few points ahead of the market. We've talked a lot about product and packaging superiority, a little bit less about communication and value, and very little about retail execution superiority, a key driver of our accelerated growth results. In the recently published 2018 Global Advantage Monitor Report, which is an independent retailer assessment of manufacturers, Across seven key performance areas, strategic alignment, people, category development, consumer marketing, trade and shopper marketing, supply chain, and customer service, P&G ranked number one globally. We earned the highest number of number one country ratings, 12 in total, including China, Japan, Mexico, Russia, and the US. And we ranked number one in all seven performance areas. Omni-channel results were tabulated for the first time this past year. P&G was identified as the leading manufacturer overall with the number one position in the US, China, France, and Turkey. P&G was recently recognized by Walmart US as supplier of the year in consumables. The first time we've earned this distinction in more than a decade. Driven by innovation that grows markets and increases margin and record service levels enabled by our supply chain transformation. We were also named supplier of the year by Walmart in Mexico, Japan, and China. We've recently earned similar recognitions in the U.S. at Target, CVS, and Family Dollar. We appreciate this recognition, but what really matters is retailers' improved view of P&G as a partner in joint value creation, which earns us stronger distribution, share of shelf, display, and feature. While we're making solid progress across the superiority drivers, we're working and investing to continue extending our margin of advantage, which will require additional investment. 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 importance of productivity. We're driving cost savings and efficiency improvement in all facets of our business, as a part of our second five-year $10 billion productivity program. We've consistently delivered $1.2 to $1.6 billion in annual cost of goods sold savings. We're eliminating substantial waste in the media supply chain, delivering nearly $1 billion 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 and effectiveness in media delivery. We're continuing to drive savings in organization costs, Total enrollment, including contractor positions, is down about 30% since the start of our first productivity program. Through our productivity efforts, P&G has maintained and built its status as 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 driving cost productivity and cash productivity with significant progress in all areas of working capital. Over the past five years, we've reduced receivables by three days, cut inventory by 10 days, and increased payables by more than 30 days, enabling us to fund capital spending needed to transform our global supply chain, while growing our dividend and maintaining an active share repurchase program. Over the last seven fiscal years, we've averaged nearly 100% adjusted free cash flow productivity, returning an average of over 110% of reported net earnings to shareholders through a combination of dividend and share repurchase. We're making organization structure and culture changes to better position us to win. We're taking steps to simplify the organization structure, focus effort, clarify responsibility, increase accountability. We're supplementing internal talent development with experienced external hiring and are improving category dedication and mastery. We're strengthening compensation and incentive programs to align with the organization's structure changes. 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. These portfolio superiority, productivity, organization design, and constructive disruption agendas are not independent strategies. They reinforce and, importantly, build on each other. Together, they position us well on a relative basis within our industry to deal with near-term challenges from macro headwinds, trade transformation, and anticipated competitive response. And they're the foundation for stronger balanced growth and value creation over the short and long term. Moving to guidance, I know we'll all hate to see it go, but with three strong quarters on the books, averaging over 4% organic sales growth, we must regretfully abandon the low 2% end of our organic sales guidance range, increasing our organic sales growth outlook for the year to a solid 4%. We now expect all-in sales growth in the range of in line to up 1% versus last year, reflecting three to four points of negative points of foreign exchange. The net impact of acquisitions and investors should have a modest positive impact on all-in sales. We're maintaining our core earnings per share guidance range of 3% to 8%, which translates to a range of 11% to 16% on a constant currency basis. This 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 range. A little bit of perspective on the core EPS guidance. After three quarters, we're up 4.3%, more than a point below the middle of the fiscal year range. Our outlook for foreign exchange, commodities, transportation, and tariff impacts are unchanged, remaining at a combined $1.4 billion after-tax headwind for the year. We now expect an effective tax rate for the year of 17% to 18%. Factoring in higher option exercises, we now expect diluted shares outstanding to decrease by 1% for the fiscal year, and Q4 diluted shares to be higher than last year by about 1%. We're increasing our outlook for free cash flow productivity to at least 100%, well above our going-in target of 90%. We continue to expect within this CapEx spending in the range of 5% to 5.5% of sales. This will be another year of strong cash return to shareholders. We expect to pay over $7 billion in dividends and repurchase approximately $5 billion of shares in fiscal 2019. As I noted just a minute ago, this continues a long track record of significant cash generation and cash return to shareholders, ultimately the most important and enduring measure of a successful enterprise. Over the last 10 years, P&G has generated more operating profit in cash than 98% of publicly listed companies around the world. Only three companies have returned a higher percentage of cash to shareholders. We won't provide specific guidance for next fiscal year until our next earnings call on July 30th, but want to provide a few preview points for your consideration. We're pleased with the top line momentum we've created, but we expect a strong competitive response, and obviously the comps will be more difficult next year. Some of the unusual bottom line help we've had this year from the land sale and in tax are unlikely to repeat next year, so these will create tough earnings comparisons. FX commodities and transportation markets remain volatile. Media markets and retail shopping are being transformed. I expect as we sit here today, all of this will lead to fairly wide top and bottom line guidance ranges as we head into next year. To sum up, we delivered our third strong quarter of the year, giving us confidence to raise sales and cash productivity targets. 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 driving improved results. But the external environment presents many challenges. To address these challenges and further strengthen results, we continue to accelerate the pace of change. With that, I'm happy to take your questions.

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