Procter & Gamble Company (The)

Good morning and welcome to Procter & 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&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. 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 Chief Financial Officer, Andre Scholten.

Thank you, operator. Good morning, everyone. Joining me on the call today are John Moeller, currently Vice Chair and incoming President and Chief Executive Officer as of November 1st, and John Chevalier, Senior Vice President, Investor Relations. We're going to keep our prepared remarks brief and then turn straight to your questions. The July to September quarter provides a good start to the fiscal year. putting us on track to deliver our guidance for organic sales growth, core EPS growth, free cash flow productivity, and cash return to share owners. We experienced the full impact of rising commodity and transportation costs this quarter, but healthy top-line growth and strong cost savings kept EPS growth nearly in line with the prior year. Earnings growth should improve sequentially through the balance of the fiscal year as price increases go into effect and productivity programs ramp up. So moving to first quarter results, organic sales grew 4%. Volume contributed two points of sales growth, pricing, and mix each added one point. Growth was broad-based across business units with nine out of 10 product categories growing organic sales. Personal health care up double digits. Fabric care grew high singles. Baby care, feminine care, and grooming up mid-singles. Home care, oral care, hair care, and skin and personal care organic sales each up low single digits. Family care declined mid-singles, comping very strong growth in the base period. Organic sales were up 4% in the U.S. despite 16% growth in the base period. On a two-year stack basis, U.S. organic sales are up 20%. Greater China organic sales were in line with prior year due to strong growth in the base period comp and due to intra-quarter softness in beauty market growth. On a two-year stack basis, China organic sales are up 12% in line to slightly ahead of underlying market growth. Focus markets grew 4% for the quarter, and enterprise markets were up 5%. E-commerce sales grew 16% versus prior year. Global aggregate market share increased 50 basis points. 36 of our top 50 category country combinations held or grew share for the quarter. Our superiority strategy continues to drive strong market growth and, in turn, share growth for P&G. All channel market value sales in the U.S. categories in which we compete grew mid-single digits this quarter, and P&G value share continued to grow to over 34%. We are up more than a point and a half versus first quarter last year. Importantly, the share growth is broad-based. Nine of ten product categories grew share over the past three months, with the tenth improving to flat versus year-ago, over the past one month. Consumers are continuing to prefer P&G brands. On the bottom line, core earnings per share were $1.61, down 1% versus the prior year. On a currency neutral basis, core EPS declined 3%, mainly due to growth margin pressure from higher input costs, which we highlighted in our initial outlook for the year. Core gross margin decreased 370 basis points, and currency neutral core gross margin was down 390 basis points. Higher commodity and freight cost impacts combined were a 400 basis point hit to gross margins. Mix was an 80 basis points headwind, primarily due to geographic impacts. Productivity savings, pricing, and foreign exchange provided a partial offset to the gross margin headwinds. Within SG&A, marketing expense as a percentage of sales was in line with prior year level for the quarter, increasing more than 5% in absolute dollars, consistent with all-in sales growth. Cooperating margin decreased 260 basis points. Currency neutral cooperating margin declined 270 basis points. Productivity improvements were 180 basis points held to the quarter. Adjusted free cash flow productivity was 92%. We returned nearly $5 billion of cash to share owners, $2.2 billion in dividends, and approximately $2.8 billion in share repurchase. In summary, in the context of a very challenging cost environment, good results across top line, bottom line, and cash to start the fiscal year. Our team continues to operate with excellence and stay focused on the near-term priorities and long-term strategies that enabled us to create strong momentum prior to the COVID crisis, and to make our business even stronger since the crisis began. We continue to step forward into these challenges and to double down our efforts to delight consumers. As we continue to manage through this crisis, we remain focused on the three priorities that have been guiding our near-term actions and choices. First is ensuring the health and safety of our P&G colleagues around the world. Second, maximizing the availability of all products to help people and their families with their cleaning, health, and hygiene needs. Third priority, supporting the communities, relief agencies, and people who are on the front lines of this global pandemic. The strategic choices we've made are the foundation for balanced top and bottom line growth and value creation, a portfolio of daily used products, many providing cleaning, health, and hygiene benefits in categories where performance plays a significant role in brand choice. In these performance-driven categories, we've raised the bar on all aspects of superiority, product, package, brand communication, retail execution, and value. Superior offerings delivered with superior execution, drive market growth, In our categories, this drives value creation for our retail partners and builds market share for P&G brands. We've made investments to strengthen the health and competitiveness of our brands and will continue to invest to extend our margin of advantage and quality of execution, improving solutions for consumers around the world. The strategic need for investment to continue to strengthen the superiority of our brands The short-term need to manage through this challenging cost environment and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity. We're driving cost savings and cash productivity in all facets of our business. No area of cost is left untouched. Each business is driving productivity within their P&L and balance sheet to support balanced top and bottom line growth and strong cash generation. Success in our highly competitive industry requires agility that comes with a mindset of constructive disruption, a willingness to change, adapt and to create new trends and technology that will shape the industry for the future. In the current environment, that agility and constructive disruption mindset are even more important. Our organization structure yields a more empowered, agile and accountable organization with little overlap or redundancy. flowing to new demands, seamlessly supporting each other to deliver against our priorities around the world. These strategic choices on portfolio, superiority, productivity, constructive disruption, and organization structure and culture are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales, and profits. These strategies were delivering strong results before the crisis and have served us well during the volatile times. We're confident they remain the right strategy framework as we move through and beyond the crisis. Moving on to guidance. We will undoubtedly experience more volatility as we move through this fiscal year. As we saw this quarter, growth results going forward will be heavily influenced by base period effects along with the realities of current year cost pressures and continued effects of the global pandemic. Supply chains are under pressure from tight labor markets, tight transportation markets, and overall capacity constraints. Inflationary pressures are broad-based and sustained. Foreign exchange rates add more volatility to this mix. We have also experienced some short-term disruptions in materials availability in several regions around the world, Our purchasing, R&D, and logistics experts have done a great job managing these challenges. These costs and operational challenges are not unique to P&G, and we won't be immune to the impacts. However, we think the strategies we've chosen, the investments we've made, and the focus on executional excellence have positioned us well to manage through this volatility over time. Input costs have continued to rise since we gave our initial outlook for the year in late July. Based on current spot prices, we now estimate a $2.1 billion after-tax commodity cost headwind in fiscal 2022. Freight costs have also continued to increase. We now expect freight and transportation costs to be an incremental $200 million after-tax headwind in fiscal 2022. We will offset a portion of these higher costs with price increases and with productivity savings. As discussed last quarter and in the more recent investor conferences, we've announced price increases in the US on portions of our baby care, feminine care, adult incontinence, family care, home care, and fabric care businesses. In the last few weeks, we've also announced to retailers in the US that we will increase prices on segments of our grooming, skin care, and oral care businesses. The degree and timing of these moves are very specific to the category, brand, and sometimes the product form within a brand. This is not a one-size-fits-all approach. We're also taking pricing in many markets outside the U.S. to offset commodity, freight, and foreign exchange impacts. As always, we will look to close couple price increases with new product innovations, adding value for consumers along the way. As we said before, we believe this is a temporary bottom line rough patch to grow through, not a reason to reduce investment in the business. We're sticking with a strategy that has been working well before and during the COVID crisis. Our good first quarter results confirm our guidance ranges for the fiscal year across all key metrics. We continue to expect organic sales growth in the range of two to 4%. Our solid start to the fiscal year increases our confidence in the upper half of this range. We expect pricing to be a larger contributor to sales growth in coming quarters as more of our price increases become effective in the market. As this pricing reaches store shelves, we'll be closely monitoring consumption trends. While it's still early in the pricing cycle, we haven't seen notable changes in consumer behavior. On the bottom line, we're maintaining our outlook of core earnings per share growth in the range of 3% to 6%, despite the increased cost challenges we're facing. Foreign exchange is now expected to be neutral to after-tax earnings compared to the modest tailwind we estimated at the start of the year. Considering FX was a modest help to first quarter earnings, we're projecting it to be a headwind for the balance of the year. In total, our revised outlook for the impact of materials, freight, and foreign exchange is now a $2.3 billion after-tax headwind for fiscal 22 earnings, or roughly $0.90 per share. a 16 percentage point headwind to core EPS growth. This is $500 million after tax of incremental cost pressure versus our initial outlook for the year. Despite these cost challenges, we are committed to maintaining strong investment in our brands. So while we are not changing our core EPS guidance range, please take note of these dynamics as you update your outlook for the year. We'll face the most significant cost impacts in the first half of the fiscal year as pricing goes into effect As savings programs ramp up and as we begin to annualize the initial spike in input costs, earnings growth should be sequentially stronger in the third and fourth quarters of the year. We are targeting adjusted free cash flow productivity of 90%. We expect to pay over $8 billion in dividends and to repurchase $7 to $9 billion of common stock. Combined, a plan to return $15 to $17 billion of cash to share owners this fiscal. This outlook is based on current market growth rate estimates, commodity prices, and foreign exchange rates. Significant currency weakness, commodity cost increases, additional geopolitical disruptions, major production stoppages or store closures are not anticipated within the guidance ranges. To conclude, our business exhibited strong momentum well before the COVID crisis. We've strengthened our position further during the crisis, and we believe P&G is well positioned to grow beyond the crisis. We will manage through the near-term cost pressures and continued market level volatility with a strategy we've outlined many times and against the immediate priorities of ensuring employee health and safety, maximizing availability of our products, and helping society overcome the COVID challenges that still exist in many parts of the world. We'll continue to step forward toward our opportunities and remain fully invested in our business. We remain committed to driving productivity improvements to fund growth investments mitigate input cost challenges, and to maintain balanced top and bottom line growth. With that, we'll be happy to take your questions.

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 the star followed by two. Your first question comes from the line of Steve Powers with Deutsche Bank.