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 Moeller.

Good morning. I know you're very busy this morning, so I'm going to make this very brief, about 10 minutes, and then turn straight to your questions. Another strong quarter, top line, bottom line, and cash, driven by our portfolio, superiority, productivity, constructive disruption, and organization strategies. Organic sales up 7%, four points of volume growth, three points of price mix. Two-year stock growth strengthening to an average of 5.5%. Over the last five quarters, two-year average growth has accelerated, 2.5, 3, 3, 4, now 5.5. Growth continues to be broad-based. Each global category grew organic sales. In personal care up mid-teens, personal health care grew double digits. Fabric care, home care, feminine care, family care, and oral care each grew high singles. Hair care grew mid-singles. Each geographic region grew organic sales 4% or more. Focus markets and enterprise markets each up high singles. Our two largest markets, the U.S. up six, China up 13. Japan, another large market, was up double digits due in part to the timing benefit of VAT changes that went into effect on October 1st. E-commerce sales grew over 30%. All-channel consumption remained ahead of underlying markets, driving aggregate market share growth. Moving to the bottom line, core earnings per share was $1.37, up 22% versus the prior year. Foreign exchange with a $50 million after-tax headwind, about $0.02 per share. On a constant currency basis, core earnings per share was up 24%. Very strong underlying earnings progress. Core gross margin up 190 basis points. Core operating margin up 260 basis points. Continued strong cash flow with adjusted free cash flow productivity of 91%. $1.9 billion of dividends paid, $3 billion of P&G stock repurchased. In summary, a very strong quarter, solid volume sales and market share trends across categories and geographies. Strong operating earnings, margins advancing, strong core earnings per share growth, and continued high levels of cash return to shareholders. We continue to face challenges from a very volatile macro and geopolitical landscape and from competitive response to our faster growth. But we're making progress behind integrated and mutually reinforcing strategies. 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. If you're in categories where performance drives brand choice, you better perform, We made a deliberate choice to invest in the superiority of our products and packages, retail execution, marketing, and value in all price tiers where we compete, strengthening the short- and long-term health and competitiveness of our brands. We're extending our margin of advantage and increasing the quality of execution. Additional investment will be needed to sustain 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, underscore the continued importance of productivity. Cost out, cash in. Driving cost savings and efficiency improvements in all facets of our business in our second five-year $10 billion productivity program. Expecting strong free cash flow productivity from working capital and CapEx efficiency. Superiority and productivity are critical. but insufficient to keep us ahead in a world with a rapidly changing retail environment, quickly evolving consumer needs, media transformation, revolutionary changes in technology. We must and are leading the constructive disruption of our industry across all areas of the value chain. We're disrupting the way we innovate by accelerating the speed and quality of our learning through lean innovation. We're monetizing innovation across industries to accelerate investment in R&D, and broaden societal impact. We're disrupting retail execution. We're reinventing brand building from wasteful mass marketing to mass one-to-one brand building fueled by data and technology. We continue to disrupt our supply chain with transformation across the globe. Finally, 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. On July 1st, we officially 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're operating in six industry-based sector business units, or SBUs, The SBUs have profit and loss responsibility for the largest markets, what we call the focus markets, which represent about 80% of sales and 90% of the company's profit. The SBU CEOs are focused on winning and driving value creation opportunities in these important markets. We continue to invest in enterprise markets, which have very attractive market growth rates. Our organizational structure there is being optimized to accelerate growth, top and bottom line, in the dynamic macro environments that those markets present. The benefit of this design is the creation of a more focused, agile, accountable organization, operating at a lower cost, focused on winning through superiority, fueled by productivity, moving at the speed of the market. I hope it continues to be evident that we've been successfully disrupting P&Gs. The choices we've made to focus and strengthen our portfolio and daily use categories where performance drives brand choice, to establish and extend superiority of our brands, to make productivity as integral to our culture as innovation, to lead constructive disruption across the value chain, and to improve organization focus, agility, and accountability are not independent strategies. They reinforce and build on each other. They position us well within our industry to deal with near-term macro and competitive challenges. They're the foundation for stronger balance, growth, and value creation over the short, mid, and long term. Moving now to guidance, we're raising our outlook on each key metric, organic sales growth, core earnings per share growth, and free cash flow productivity. We're increasing our outlook for organic sales growth from a range of 3% to 4% to a range of 3% to 5%. The markets in which we compete are growing at a 3% to 3.5% pace, so the midpoint of the higher organic sales range implies continued market share growth. On the bottom line, we're raising our core earnings per share growth guidance from a range of 4% to 9% to a range of 5% to 10%. This reflects very strong first quarter results and our expectation of solid margin expansion for the year. We're raising our outlook for free cash flow productivity, from 90% to 95% for the fiscal year. The year will continue a long track record of significant cash generation and cash return to shareholders. We expect to pay over $7.5 billion in dividends and repurchase $6 to $8 billion of P&G shares in fiscal 2020. While our first quarter results enable us to raise fiscal year targets, please keep in mind that the comps get more difficult as we move through the year. both on the top line and the bottom line. Quarter year ago, top line, 4, 4, 5, 7, as we progressed through last fiscal year, bottom line, 3, 5, 6, 17. Japan VAT-related timing impacts benefited Q1 company sales results by 30 to 40 basis points, but will cause a headwind in Q2. Pricing annualizes as we move through the year, affecting both top and bottom line trends. will comp the earnings gains from the Boston land sale and the oral care brand investitures in Q4. Competitors will likely respond to our outperformance, which underscores the need for continued investment and superiority. Brexit uncertainty and volatility in foreign exchange, Argentina and Turkey, for example, will be impacting balance of year results. Our revised guidance is based on current market growth rates, commodity prices, and foreign exchange rates, significant currency weakness, commodity cost increases, or additional geopolitical disruptions are not anticipated within the new and improved guidance ranges. With that, I'm happy to take 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 if you'd like to withdraw your question, press star followed by the two. Your first question comes from the line of Lauren Lieberman with Barclays.