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. Also, as required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on underlying business trends and has posted on its investor relations website, www.pginvestor.com, a full reconciliation of non-GAAP financial measures. Now I will turn the call over to P&G's Vice Chairman, Chief Operating Officer, and Chief Financial Officer, John Mueller.

Good morning. David Taylor, Chairman of the Board, President and Chief Executive Officer, and John Chevalier, Vice President, Investor Relations, join me this morning. I'm going to provide an overview of company results. David's going to update us on four strategic focus areas, superiority, productivity, constructive disruption, and organization and culture. I'll close with guidance for fiscal 2020, and we'll, of course, take your questions. For the fiscal year we just completed, organic sales up 5 percent, core earnings per share up 7 percent, currency neutral core earnings per share up 15 percent, adjusted free cash flow productivity 105 percent, $12.5 billion of cash returned to shareholders. Each of these metrics in line or ahead of objectives set going into the year. Gap earnings per share are lower, reflecting a one-time non-cash accounting charge to adjust goodwill and intangibles carrying values of the Gillette shaving business. Grooming continues to be a very attractive business. Organic sales up year over year. April-June sales up 4%. A truly global business with strong market positions. a highly profitable and cash-generative operation. Initial carrying values for Gillette were established nearly 14 years ago, in 2005. We significantly over-delivered acquisition cost synergy commitments, but as outlined in each of our quarterly filings for the past three years, this global business has faced significant and increasing currency impacts over the last decades. Lower shaving frequency has reduced the size of the developed blades and razors market. More recently and much less of an impact, new competitors have entered at prices below the category average. These factors cause us to reduce the accounting carrying value for this business on our balance sheet. As I mentioned earlier, all core metrics, organic sales growth, core earnings per share growth, currency neutral core earnings per share growth, adjusted free cash flow productivity, cash return to share owners in line or ahead of objectives set going into the year. All of this progress against strong headwinds. Foreign exchange, commodities, transportation costs, and tariffs created a $1.4 billion fiscal year after-tax headwind, a 13-point negative impact on core earnings per share. Within this, currency hits of more than $900 million after-tax. large markets with significantly weaker currencies. British pound down 4%, Mexican peso down 4%, Chinese yuan down 5%, Russian ruble down 12%, Brazilian real down 18%, Turkish lira down 14%, the Argentinian peso down 97%. Commodity cost increases of $400 million after tax. Pulp up 14%, resin up 7%, propylene up 10%, and kerosene up 16%. Trucking costs up significantly in the U.S. with increases in many additional markets. Annualized tariff impacts approaching $100 million. All overcome with innovation-driven volume growth, pricing, and productivity yielding strong results for the year. Capping a strong year, a very strong April-June quarter. Organic sales up more than 7%. The four quarters of the fiscal year, 4, 4, 5, and 7 on the top line. Volume, pricing, and mix, each contributing to top line momentum. Broad-based growth. All 10 global categories growing organic sales. Skin and personal care and personal health care, each up mid-teens. Fabric care and home care, each up double digits. Oral care and feminine care, up high singles. Family care and grooming, each up mid-single digits. All six geographic regions also growing organic sales. India, Middle East, and Africa up mid-teens. Greater China up double digits. North America, Latin America, and Asia Pacific up high singles. Europe up mid-singles. Strong organic sales growth in our two largest markets. Up over 7% in the U.S., 10 out of 10 categories growing. Continued progress in China. improving from a 5% sales decline in fiscal 16, 1% growth in fiscal 17, 7% organic sales growth last year, fiscal 19 growth up 10%, up 12% in the April-June quarter. Global e-commerce organic sales up 25%, now well over $5 billion in annual sales, or about 8% of the company total. Strong and improving market share trends, Aggregate global value share up versus year ago. 33 of our top 50 category country combinations holding or growing value share in fiscal 19. Up from 26 in fiscal 18, 23 in fiscal 17, and 17 in fiscal 16. So in chronological order, 17, 23, 26, and now 33. Eight of 10 global categories holding or growing share. On the bottom line, core earnings per share of $1.10, up 17% versus the prior year. Up 26% on a currency neutral basis. Fourth quarter margins improving, both sequentially and versus year ago. Core gross margin up 120 basis points. Strong top line leverage and productivity improvement, more than offset FX commodity cost and mixed headwinds. On a currency neutral basis, core gross margin up 160 basis points. Core operating margin increased 130 basis points. On a currency-neutral basis, up 210 basis points, including 340 basis points of productivity-driven cost savings. Cash flow remains strong. Adjusted free cash flow productivity of 122% for the quarter, 105% for the year. $12.5 billion of cash returned to shareholders, a combination of dividends and share repurchase. Our board increased the dividend by 4% in April, 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 US companies to pay a dividend for more than 120 consecutive years. Only three US companies have increased dividends more consecutive years than Procter & Gamble. Over the last 10 years, the annual dividend has increased from $1.64 per share to $2.90 per share, up almost 80 percent, returning almost $67 billion of cash to shareholders. Over the last decade, we've returned more than 100 percent of net earnings to shareholders as dividends in share repurchase. In summary, we delivered or over-delivered on each of our going and targets other than GAAP earnings per share. We did this while offsetting a foreign exchange commodity transportation and tariff tsunami. We built momentum on sales, share, and margin as the year progressed. We delivered very strong constant currency core earnings per share growth and continued our best-in-class track record of cash return to shareholders. We still face challenges and continue to operate in a very difficult competitive and macro landscape. Our work is not over, but we're making progress behind the integrated and mutually reinforcing strategies David will discuss next.

David? Thanks, John. One of the most encouraging points about the strong results we've delivered is the breadth of the progress we've made across both categories and countries. The breadth of growth gives me confidence that the strategies and focus areas that are guiding our choices and investments are the right ones. It also gives me confidence that we're building the capabilities to sustain the growth at or above market levels. The mutually reinforcing strategic choices we've made are critical to the progress. We focused and strengthened our portfolio in daily use categories where performance drives brand choice, in categories where we occupy a number one or number two position, which have historically grown faster than the balance of the company and are more profitable. And the benefits of the portfolio choices are clearly paying out. Within these 10 categories where performance drives brand choice, we've taken a deliberate step to invest in in advance the superiority of products and packages brand communication, retail execution, and value advantage, growing the markets in which we compete and strengthening the long-term health and competitiveness of our brands. We've raised minimum standards of competitive advantage across each of the superiority drivers and are investing to meet or beat these new standards. And superior offerings drive market growth. And this is one of the things that's incredibly important about the plan. Increasing consumption, creating additional usage occasions, bringing more spent into a category grows the market. This creates top line growth that is typically more sustainable than simply taking business from a competitor. It creates a winning proposition for our retail partners. The pie expansion versus zero sum. It's a positive versus negative spiral. And where we grow markets disproportionately and more sustainably, we build share. We've spoken a lot about the role of product and package superiority in growing markets and P&G share, but communication, go-to-market, and value must also win. We start with understanding our consumers and their needs, wants, and aspirations. We then create advertising that makes you think, talk, laugh, cry, smile, share, and, of course, buy. Advertising that drives growth for categories and brands. advertising that clears the highest bar for creative brilliance, sparking conversations, affecting attitudes, changing behavior, and sometimes even defining popular culture. This year at the Effie Awards, which recognized the most effective marketing communication, P&G won the top honor of most effective marketer, and Tide won the Grand Effie Award. At the Cannes Line's International Festival of Creativity, P&G Advertising earned 16 Lions, 3 Gold, 6 Silver, and 7 Bronze. And at the event, we announced a series of innovative new creative partnerships that reinvent advertising by merging the world of advertising with other creative worlds, such as filmmaking, music, comedy, journalism, and technology. Superior in-store and online execution also grows categories in our brands. the right trade coverage with category mastery, with the right product forms, sizes, and prices, and the right in-store or online presence in merchandising execution, delivering against key business drivers for each category and brand across all channels in every store, every day. On the last earnings call and in recent conference presentations, John has taken you through some of the recognition we've received directly from some of our top customers and in third-party retailer assessments of manufacturers' capabilities. We very much appreciate each of these recognitions, but what really matters is retailers' improved view of P&G as a partner in joint value creation. Driving superiority to grow categories earns stronger distribution, share shelf, display, and feature. The fifth element of superior execution is a winning consumer and customer value equation. For consumers, this means a product that meets an important need in a noticeable and superior way with a package that enhances the usage experience with compelling communication presented in a clear and shoppable way at a compelling price. For the customers, this means margin, penny profit, trip generation, basket size, and very importantly, category growth. We're going to continue to work to make progress in superiority, extending our margin of advantage and increasing the quality of execution, which will require ongoing investment. The need for this investment and the need to offset the macro cost headwinds we talked earlier, and the need to drive balanced top and bottom line growth, including margin expansion, underscores the importance of productivity. We are driving cost savings and efficiency improvement in all facets of the business. Now just past the midpoint of our second five-year, $10 billion productivity program. Through our productivity efforts, P&G has maintained and built its status as a highly profitable company. Now, in the past, John has shown you the charts before, and it deserves repeating. P&G's 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. These results are due to a sustained, intense focus on improving productivity across all cost pools. And we will continue to focus on this because it will be a critical driver of our success. Superiority and productivity are critical but insufficient to keep us ahead in a world with rapidly changing retail environment, quickly evolving consumer needs, media transformation, and revolutionary changes in technology. We must and are leading the constructive disruption of our industry across all areas of the value chain. We are disrupting the way we innovate by accelerating the speed and quality of learning through lean innovation. This new approach is delivering significant benefits in time and cost, helping to reduce our learning cycles from months to even days. We're monetizing innovation across industries to accelerate investment in R&D and broaden societal impact. We're disrupting retail execution. SK2 is using AI-supported technologies to enhance a consumer's shopping experience with personalized recommendations based on smart scans of a person's skin, product browsing on virtual shelves, and shopping through the wave of a hand. It's the first augmented reality retail environment which merges physical and digital technology to give the shopper exactly the skincare regimen needed in new smart packaging that features a companion app for personalized skincare every day. Going beyond broad demographic targets to deliver exactly what she is looking for, solutions designed to work for her. We're reinventing brand building from wasteful mass marketing to mass one-to-one brand building fueled by data and technology. We're moving from generic demographic targets like women ages 18 to 49 to more than 350 precise smart audiences. like first-time moms or millennial young professionals or first-time washing machine owners to reach the right people at the right time at the right place. We continue to disrupt our supply chain with transformation across the globe. In Europe, we've optimized both distribution and manufacturing infrastructure to fewer scaled multi-category operations and optimum locations. Manufacturing sites are now down 30%. and distribution centers are down 35%. We're making organization structure and culture changes to better position us to win. We're taking steps to simplify the organization, focusing effort, clarifying responsibility, increasing accountability, and structuring compensation and incentive programs to better align with these objectives. We have an incredibly talented organization of more than 90,000 fully committed people They have moved mountains for years to deliver the progress we're discussing this morning. They deserve the credit. We have historically put in their way a lot. Competing management structures, lack of clear accountability, lack of end-to-end decision making, many people who could say no, and few who could say yes. On July 1, we moved to a new organization structure designed to dematrix the company and provide even greater clarity on responsibilities and reporting lines to focus and strengthen leadership accountability. We are operating as six industry-based sector business units, or SBUs. The SBUs have profit and loss responsibility for the largest markets, the focus markets, which represent about 80% of sales and 90% of profit. The SBU CEOs are focused on winning and driving value creation opportunities in these important markets. We're optimizing the remaining markets, which we're calling enterprise markets, to accelerate growth in dynamic macro environments. The benefit of this design is the creation of a more focused, agile, and accountable organization operating at a lower cost, focused on winning through superiority, fueled by productivity, and operating at the speed of the market. North America was the pilot region beginning three years ago. for the end-to-end SBU approach, and China followed a year or so later. The success of this design is evidenced by the sales and share progress we've made in both of these markets. We are committed to winning everywhere we choose to compete across both the focus and enterprise markets, and we want to win the right way. We want to be a force for good and a force for growth. We've integrated citizenship into how we do business, enabling us to have a bigger impact on the people we serve the communities in which we live and work, and the broader world that surrounds us. In turn, this helps us grow and build our business. My hope is this is evidence that we have been disrupting P&G. The choices we've made to focus and strengthen our portfolio in daily use categories where performance drives brand choice, to establish and extend superiority of our brands, to lead constructive disruption across the value chain, to make productivity an integral part of our culture, just as much as innovation, and to improve the organization focus, agility, and accountability. These are not independent strategies. They reinforce and build on each other. They position us well within our industry to deal with near-term challenges for macro headwinds, trade transformation, and anticipated competitive response. They are the foundation for stronger balanced growth in value creation over the short, mid, and long term. Now I'm going to turn it back over to John to cover our outlook for fiscal 2020.