The Procter & Gamble Company's (PG) Management At Barclays Back-To-School Consumer Conference - Earnings Call Transcript

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The Procter & Gamble Company (NYSE:PG) Barclays Back-to-School Consumer Conference September 8, 2016 8:15 AM ET


Jon Moeller - CFO


Lauren Rae Lieberman - Barclays Capital, Inc.


P&G would like to remind you that today's presentation includes 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 presentation, the Company will make a number of references to non-GAAP and other financial measures. For completeness, Procter & Gamble has posted on its website, a copy of the key slides from this presentation and a full reconciliation of non-GAAP and other financial measures.

Lauren Rae Lieberman

So with one word to mark [ph] to start the P&G’s transformation as the CAGNY 2012 cost savings program announcement. We’ll be four and a half years since the turnaround, if sales and earnings trends have only slowed since then. So within this context, we think the biggest question remains how and when P&G can transition to a time a period of sustained, organic sales growth inline or better than its peers. While it’s positive in our mind that nearly $1 billion step up in advertising this year should reach well beyond advertising we’ve [ph] been spending this year. We do think seeing a return on these investments will take time.

Here to discuss some of the changes underway and efforts to accelerate growth, we are fortunate to have CFO, Jon Moeller with us again this year at the conference.

Jon Moeller

Thanks, Lauren and good morning everybody. I’m going to just briefly cover recent results and our outlook for 2017. I’ll talk about our efforts to re-accelerate top line growth. I’ll update you on productivity and portfolio progress and discuss how we are strengthening our organisation and culture to sustainably win.

Fiscal 2016 organic sales growth for the company improved sequentially through the year. Organic sales for the June quarter were up 2%. This includes about a one point drag from the combination of the cleanup work we are doing with the ongoing portfolio and the impact of Venezuela. Excluding these two impacts of 2% would be 3%, progress but with more work to do.

Fourth quarter growth was volume driven. Organic volume grew 2% with progress in every segment. Organic sales also grew in every segment. Market value share trends improved in every segment for the six month period versus the 12-month period and the same is true in the three month period versus the six month period.

Back up sales momentum was in line with the front half or ahead in nine of ten categories, again progress with more work to do.

Turning to the bottom line, constant currency core earnings per share were up 7% last fiscal year. Including foreign exchange, core earnings per share were down 2%. Core gross margin and operating margin improved by triple digit indices including and excluding currency.

We generated $12.1 billion in free cash flow with 115% free cash flow productivity. We paid $7.4 billion in dividends and reduced outstanding shares at a value of over $8 billion through a combination of share repurchase and the Duracell share exchange.

In total, nearly $16 billion in dividend payments share exchange and share repurchase. This year, we are out looking further progress on the top and bottom lines. We don’t expect straight line improvements, some quarters will be better than others, but we should continue over the course of the fiscal year to make progress. We expect another strong year of cash productivity and over $22 billion return to share owners through dividends, share exchange and share repurchase. We continue to outlook up to $70 billion in dividends, share repurchase and share exchange over the four year period through fiscal 2019.

As David indicated in his remarks with our earnings release, we are focused on balanced growth. Top line, bottom line and cash flow, and the reasons are simple. We would need to grow a margin 200 basis points year-in and year-out to deliver top third total share holder return without sales growth that is simply not sustainable.

We would need to grow our top line high single digits year-in and year-out to deliver top third total share holder return in the absence of margin growth. No Company in our industry has ever done this; it’s unlikely that we will.

If we deliver balanced top line growth and margin expansion but don’t turn it into cash as you know we also don’t get home. It’s very simple; we need to grow the top line, build margins and be efficient and turnings [ph] into cash to sustainably deliver top third total share holder return.

We need to accelerate top line growth reaching and sustaining organic sales growth at/or slightly ahead of underlying market growth. Productivity improvement and cost savings are a necessity providing fuel for top line growth and margin expansion. We are also strengthening our product portfolio and our organization and culture to win more consistently.

These four focus areas are mutually reinforcing, they enable and build upon each other. They each contribute to stronger top line, bottom line and cash flow growth. Top line growth starts and ends with consumer and shopper delight. Winning at the zero, first and second moments of truth. When consumers research our categories and brands, purchase them in a store or online and use them in their homes.

Winning these critical moments of truth requires consumer and shopper insights that inspire products and package innovations. It requires robust value equations and consumer communication with compelling campaigns that lead to competitive advantages for P&G’s brands and products.

We are investing in innovation that delights consumers and builds categories. Superior, better performing consumer preferred products and packages offered at a good value that result in a delightful consumer experience which drives trial, repeat purchase and loyalty.

P&G continues to be the innovation leader in our categories and this year’s IRI Innovation Pacesetter report P&G had four of the top ten innovations and 8 of the top 25. I’ll highlight recent innovations in three of our ten categories to give you an idea of the types of things we are working on in each.

We continue to be the innovation leader in fabric care. We are growing our fabric care business with consumer preferred brands and product offerings like our premium performance and premium priced unit dose detergents. And our market leading and market expanding scent bead fabric enhancers.

Our unit dosed detergents now generate over $1.5 billion in annual sales behind the 3-in-1 technology of a combined detergent stain remover and brightener. In the U.S. unit dose products account for 15% of category sales with P&G holding a 78% share of the form.

Premium products like PODs are driving market growth with the U.S. detergent category up four points last fiscal year. The same is true for fabric enhancers. Spurred by the rapid growth of scent beads, the U.S. fabric enhancer category is growing, up 7 points on a value basis last year, with the scent bead form where P&G holds a 72% share of growing in the mid-20s.

Cascade Platinum Action Pacs cleans stuck-on food in just one wash with no pre wash needed with three times more film-fighting power than the leading competitive gel. Last year in North America, we increased sampling our Cascade Platinum by 20% to increase awareness and trial. Sales grew high single digits.

In Feminine Care, innovations such as All-was-Radiant and All-was-discreet have been the key drivers to improve top line growth. Radiant is our best performing and most highly rated feminine pads. It absorbs ten times its weight with a unique, proprietary absorber material and provides up to a 100% leak free protection, driving nearly a point of market share growth for all -- was in the U.S. last year

Discreet is launched in eight markets and is driving strong category growth post launch. Discreet technology provides protection while offering incredible discretion. Our pads absorb two times more than needed with a leak free guarantee.

We are also investing in packaging which is a key component of winning each of the consumer moments of truth. A winning package attracts, is distinctive, familiar and appealing. It answers the four key messages of strong packaging. Who am I? What am I? Why am I good for you? And how do I work for you?

Our new Ariel packaging upgrade enables consumers to those [ph] to delight with a transparent cap. The cap shape is designed for easy dosing as well as a clean drained back into the bottle which eliminates waste and mess. Let’s watch a quick video that demonstrates the use of dosing with a no-waste drain back top.

[Video Presentation]

This fiscal year [Indiscernible] is launching new consumer preferred packaging with hard [ph] work that improves shelf communication, using nomenclature that drives a clear and simple product understanding. This package grows stronger across all consumer measures and the new marketing campaign drives what is important to consumers cleaning the air versus simply scenting the air with our proprietary odour clear technology.

In May, 2016, Tide launch the new ad campaign urging parents to keep Tide Pods up, closed and safe with the package design featuring a new Child-Guard zipper available on Gain Flings, also available on Gain Flings packages.

We're investing an increased media reach, consistency and effectiveness. In the fourth quarter of last year we increased our media investment versus the prior year by over $200 million. We plan to continue that in fiscal 2017 consistently delivering four quarters of strong brand support.

We have many compelling ad campaigns in market now from our latest Always, Like a Girl Spot, to Charmin, Pause Button, to SK-II Change Destiny. Let's watch our latest, Always, # Like a Girl execution called key plane # Like a Girl.

[Video Presentation]

We started our first Always, #Like a Girl film in 2014, shifting perceptions around the term Like a Girl from negative to positive. Key plane has #Like a Girl results are very strong, more than a 100 million views, the largest reaching Always, #Like a Girl video to-date.

The campaign delivered 1.5 billion impressions and was named the number one of the Rio 2016 Olympic game by campaign magazine. On a wider side, here's the great ad from Charmin.

[Video Presentation]

In addition to be an official sponsor of the Rio 2016 Olympic Game, Charmin became the unofficial sponsor of the Pause Button, to ensure not a second of the Olympic game were missed.

This spot was so well received. We added online support and integrated this into the Charmin-based TV plan during the two weeks surrounding the games, which drove meaningful increases in both reach and frequency.

Next is our latest spot from SK-II Change Destiny campaign which is centered on the idea that women can change destiny of their skin and their lives. I apologize in advance as this is a little bit longer digital execution.

[Video Presentation]

The Change Destiny campaign has delivered over 8 billion impressions in the past year with over 117 million views to date. More importantly, this campaign contributed to a strong fiscal 2016 by growing new SKU two [ph] users by 20% and delivering sales growth in the low teens.

We are also investing in sampling with a special focus at the point of market entry. We are increasing sampling in new washing machines, a key point of category entry and category change.

In fiscal 2015 we distributed 5 million samples of washing machines globally. Last fiscal year we distributed 17 million samples. This fiscal year we’ll distribute 30 million samples of our best performing products.

We put Fusion ProGlide FlexBall razors in the hands of nearly 80% of young men. Over 2 million samples last year with our 18th birthday sampling program. In Baby Care 70% of new models in the U.S. will receive samples of our best products through our prenatal and hospital programs. And as I mentioned earlier in North America we increased sampling on Cascade Platinum by 20% last year.

We are increasing sales coverage in the fastest growing channels. The e-commerce channel is the fastest growing well above the average 3% of our total market. Our e-commerce sales were up significantly last year with six out of eight top countries holding or growing e-commerce share. This is an opportunity we will continue to invest in.

We continue to consistently improve cost and cash productivity with significant upside still ahead. We have accelerated and exceeded each of our productivity objectives and have now raised them. Our original five year cost of goods savings target was $6 billion. We delivered $7.2 billion, more than a $1 billion above the initial target.

We delivered cost of goods savings which were at or above target each over the last five fiscal years. We’ve reduced manufacturing enrolment by 22% over the last four years. This includes new staffing necessary to support new capacity. On a same side basis, manufacturing enrolment is down about 27% through June of 2016 with additional progress planned in fiscal 2017. These figures exclude divestiture impacts.

Including divestitures will reduce manufacturing enrolment by about 30% by the end of fiscal 2017 which will be about 35% on a same side basis. In February we announced we will reduce non-manufacturing or overhead enrolment by 10% over five years. As of July 1st, we’ve reduced enrolments by nearly 25%, 2.5 times the original target. These figures also exclude the impact of divestitures.

Including divestitures will reduce non-manufacturing enrolments by about 35% by the end of fiscal 2017. We’re reducing non-working marketing expenditures, costs that don’t impact reach frequency or continuity of our advertising in the trial generation programs. We were spending $2 billion per year on agency and production costs. Two years ago we reduced the roughly 6000 agencies we work with by nearly 40% and cut agency and production spending by about $370 million.

In fiscal 2016, we delivered another 250 million of agency related savings. We invest in these savings and advertising and sampling of consumer preferred products, over $600 million of savings in two years. We are driving productivity improvement up and down the income statement and across the balance sheet. Inventory days are down significantly. Payables days are up significantly enabled by our supply chain financing program.

Net of reinvestments in innovation, sales coverage, media, and sampling, productivity has enabled us to deliver constant currency gross and operating profit margin improvement and high single to double-digit constant currency earnings per share growth in each of the last four fiscal years. We improved gross and operating margins by triple-digit indices, both including and excluding currency in fiscal 2016.

We said over four years ago we needed to make cost and cash productivity part of our culture, as integral to our culture as innovation. We've made significant progress, and we have significant opportunity. Our strong track record and our line of sight to additional opportunity inform our intent to save as much as another $10 billion in costs over the next five years. The majority of these savings will come from cost of goods, an area where we have consistently met or exceeded our productivity objectives.

Three cost areas make up cost of goods, manufacturing expense, transportation and warehousing and materials, each offer savings. Supply chain transformation is in its early stages, first in North America, next in Europe, then in Latin America and India, the Middle East and Africa. We're in investment mode now with savings to ramp-up in 2, 3, and 4 years.

Our new U.S. mixing centers are up and running, putting roughly 80% of volume within 24 hours of the shelves. U.S. on-shelf availability has improved as a result by more than a point to roughly 96%.

We're constructing multi-category manufacturing sites in geographically strategic locations like West Virginia to replace smaller, single category sites in less cost effective locations. We are well underway with the construction of this new site that's scheduled to start production in calendar year 2017.

As we make these moves, we're upgrading and standardizing manufacturing platforms to lower cost and facilitate faster innovation. These new sites offer opportunity to apply technology to automate more of our operations delivering additional manufacturing efficiencies.

Over the last 18 months we have installed more than 80 collaborative robots and we are aggressively expanding their application. These robots have a variety of uses including picking cases and wrapping pallets. We are testing other technologies like automated forklifts to reduce cost and improve safety. We are digitizing our manufacturing and warehousing systems. We are utilizing new warehouse software that reduces idle time and travel distance of finished product as it moves through our mixing centers, improving productivity by upto 35%.

We are delivering reductions in cost of goods sold through packaging and formulation transformations using iMFLUX, a proprietary injection molding innovation. iMFLUX enhances existing injection molds and presses and builds new molds that increase throughput upto a 100% results in an improved speed to market, fewer presses and molds and significantly lower cost. This technology is exclusive to P&G and select partners and non-P&G market segments and is protected by 45 branded and 200 pending patents globally.

After two strong years of savings we’ll enter next year still spending $1.4 billion on agency related cost. There is still more room to improve here. As we fully operationalize the new focused 10 category company, there will be additional opportunities to increase organization efficiency, agility, and speed of decision making.

Finally, we are working to improve the effectiveness of our promotional spending. We see clear opportunities to improve the effectiveness of this spend for us and our retail partners using new tools and data to build the value of our categories and the share of P&G brands.

So again we're targeting up to $10 billion of additional savings over the next five years. We expect to reinvest a significant amount of the savings in R&D, and product and packaging improvements, in sales coverage, and in brand awareness and trial building programs to deliver balanced top and bottom line growth.

Moving quickly to portfolio. Over the last 18 months we've divested, discontinued, or consolidated 63 brands, including the completion of the Duracell transaction at the end of February. We have 42 more brands in the exit process, including 41 brands in the deal with Coty. We're currently winding down transition support for Duracell. We've completed the systems work in standing up the Beauty business for the transaction with Coty.

By the end of the fiscal year we’ll have exited 105 brands and all the complexity they create. These brands represent only about 6% of base period profit. We currently remain on track to close the deal with Coty in October 2016. A press release was published on September 1st regarding this transaction; the tender of our process is currently estimated to remain open through midnight on September 29th.

Going forward, our portfolio will be anchored on 10 category-based business units and 65 brands. These are categories where P&G has leading market positions and where product technologies deliver performance differences that matter to consumers. These 10 businesses have historically grown faster with higher margins than the balance of the company.

We're focusing on businesses where product and performance drive purchase decisions, where there are clear consumer jobs to be done and clear objective measures of performance. These are products that consumers purchase and use on a daily basis. And they're in structurally attractive categories.

Within these core businesses we're focusing our offerings, making smart choices for short, mid and long-term value creation, foregoing bad businesses, even when these choices create near-term top-line pressure.

In our Mexico Family Care we made a choice to discontinue low-tier, unprofitable and commoditizing products, and they [ph] were very profitable high-tier differentiated products, moving from double-digit negative margins to double-digit positive margins.

The top line head line associated with this should be fully annualized by the end of the calendar year.

In India, we've made a similar choice to de-prioritize several unprofitable lines of business, which negatively impact short-term top line growth rates but will lead longer-term to a much more profitable business that will grow strongly.

We're taking a similar approach in our Fabric Care product portfolio, discontinuing product forms, additives, bars, bleaches, and tablets and value tier and powder detergents that have been a drag on profitability and value creation. These choices are causing a top line drag on the global Fabric Care business, but improve the profitability and the long-term attractiveness of the business.

The combined portfolio choices have been causing about a one point drag on organic sales growth. We expect this headwind to continue for the balance of the calendar year and anticipate in the second half of the fiscal as we began annualizing these effects.

As we come out of this, we’ll have strong top line growth that has really worked something. There is really no point to growth if it isn’t worth something. Over the past few fiscal years we’ve reduced SKUs by about 18% on the ongoing ten category portfolio. This has also impacted our top line negatively in the near term, longer term it will yield top and bottom line benefits through clear assortment, enhance shopability, fewer outer stocks and lower costs.

As we work to accelerate top line growth, enabled by productivity and the portfolio, we are transforming our organization and culture. We're making many changes that by themselves may seem small and obvious, but together they are significant and important.

As an example, we've made several important changes in how we go to market. We've eliminated overlapping resources and duplicative structures and responsibilities of marketing and sales professionals in the global business units and the market development organizations, clarifying responsibilities and strengthening accountability.

Reflecting this, we changed the name of the market development organizations to Selling and Market Operations, small but very important.

We’ve moved more resources into regional and local markets, learning from innovating for and serving local consumers. Only 10% of our commercial function employees including management brands, sales and finance set in global roles. Global categories drive scale of manufacturing platforms; they own hard points on global equities and set global pricing strategies.

The vast majority, 90% of our commercial function employees set [ph] in regional and local roles, focussed on managing the business in their country. Regional roles owned profit-and-loss statements launch innovation pipelines and set pricing and promotional strategy.

Local markets influence innovation with their market insights and execute the daily business with the necessary flexibility within an agreed framework to manage local dynamics on a real time basis. We are changing our talent development and assignment planning to drive more mastery and depth. The objective is simple. Improve business results by getting and keeping the right people in the right places to develop and apply deep category mastery to win.

Consistent with this, we're dedicating sales resources to categories or sectors. In our larger markets sales resources have greater accountability back to the categories they serve, which is also a change.

An example, of where we dedicated and added resources to improve category mastery is our North American Personal Healthcare sales force. Two years ago, the average tenure of salespeople within the category was less than 12 months. Only about half of the sales people were dedicated only to Personal Healthcare. And 100% of the people were either new hires coming to P&G with no work experience or were transfers from other P&G businesses.

Over the last year or so we've added resources to the Consumer Healthcare sales force. Almost half of those people have prior healthcare sales experience. Today, 100% of people selling the business are dedicated to Personal Healthcare. And the average experience level is now more than five years of healthcare sales experience inside or outside of P&G.

We're aligning incentives at lower and more specific level of granularity to better match these responsibilities and then to increase accountability.

Two changes will take place in fiscal 2017; annual bonus awards will be determined by their specific results of individual business teams at a region or country level versus global average results making their rewards much more closely to their work.

Second, our long term incentive program or our performance stock program will be expanded to include all people at the Vice President level raising participation from about 30 top executives to about 250. This program enables broader alignment across top leaders to a strategy of balanced top to bottom line growth as well as strong cash flow productivity, the drivers of total operating share holder return.

P&G is fortunate to consistently source and develop strong talent. But we intend to maintain and we intend to maintain or develop from within approach. But there are times when the best talent for a role will not be inside our organization. Going forward, we are going to look at outside hiring more often when we needed to field the best team possible.

Over the last two years we've added 115 people to the U.S. retail sales force through external hiring. And more than half of them have prior sales experience. Over the last two years we've increased category dedication of the U.S. sales force by 20%, with more than 90% of sales now covered by category dedicated resources.

We doubled the number of experienced external hires last fiscal versus the prior year, bringing in experienced talent in five different levels of management, including at the Vice President level. Experienced hires comprised about 5% of all management hiring in 2016.

Bottom line, we're committed to getting, keeping, and growing the right people in the right place to drive better business results. Again, each of these changes may seem small and rather obvious, but collectively they're big and important changes for our organization and culture.

Each area of this transformation top line acceleration, productivity, portfolio, and strengthening our organizational and culture requires change. We're making good progress in each of these areas. But we know our success will ultimately be graded on the sales, profit, cash, and value creation results we deliver, not on the activities that get us there. We are committed to do everything we can and to change what must be changed to deliver these results.

We expect this year to represent another step towards our goal of balanced growth and value creation. We are committed to continued productivity improvement and cost savings that provides a fuel for innovation and investments needed to accelerate and sustain faster top line growth. We’ve created in our sustaining strong cash productivity momentum. We are nearing the completion of the major portfolio moves to simplify and strengthen the category portfolio. And we're making similar moves at the brand and product form level to improve the profitability and value creation capability of the categories that we'll retain.

We're strengthening the organization and culture by improving our approaches toward talent acquisition, career management, decision making, accountability, and incentives. Our standards are high. We aren’t satisfied with just being a little bit better. We want to be the best. We're making progress. And we're determined to win. But we're also realistic about the time it will take for the improvements and investments we're making to fully play out in our results.

Just one more thing before we go to Q&A, I want to mention two upcoming events including our first quarter 2017 earnings call scheduled for October 25 and importantly the P&G Analyst meeting in Cincinnati that’s been scheduled for November 17 and 18. You’ll receive invitations for these events very soon.

And with that I’d be happy to take any questions. Lauren.

Question-and-Answer Session

Q - Lauren Rae Lieberman

So Jon, I think you’ve been consistent and clear you know that the piece of the puzzle that are coming together will take time to fully manifest themselves in result. And that’s that I still couldn’t help but notice in the 10-K and comment on the discussion of long term target for EPS growth is now mid to high single digit not high single digits, that was a long term statement, so I just wanted you to maybe roughly you know discuss why the change?

Jon Moeller

So our long term algorithm starts with the top line, which is market growth or a little bit ahead. And as everybody in this room knows, market growth particularly in the developing markets has been decelerated so that reference to mid single digit simply reflects that near term reality. That’s not what we are shooting for, we are shooting for high single digits, but we feel we have a responsibility to be very clear as to what the world affords us and our investors so we made that small change to the long term representation. [Indiscernible]

Lauren Rae Lieberman

I’m sure that someone in this room has a question, but I’ll just go again. And maybe shorter term just an update on China, so I know we’ve seen sequential improvements and moving towards stabilization but just thought process and timing on kind of getting closer to a rate of market growth where you stand [ph] on some of your bigger categories putting some of the key changes in place and as that sort of has developed.

Jon Moeller

So we are making significant changes both to address the change in channel structure in China which is significant to move away from bigger format, hyper super channels into speciality channels, small box and e-commerce. We are making changes in our product portfolio to be more relevant to premium consumers, where 50% of the market is now being transacted and which is growing at double digits as opposed to the rest of the category which – the market which is flat to declining. We are totally changing our trade spending program and how we work with our distributor partners and our retailers and as Lauren [ph] said all of us are going to take some time, probably the longest lead time on that in some categories which have long product development cycles is getting the appropriate premium innovation into the market place.

Our hope certainly as we exit this fiscal year that you’ll see continued momentum. We’ve gone from minus eight on a quarter basis, minus 8% on the top line, minus 8, minus 4 and zero. I don’t think you should extrapolate that too far forward as a straight line but its representative of our progress and I would hope as we are sitting here next year you know we’d be back to where you are talking. John [Indiscernible]

Unidentified Analyst

China, will that be a drag on results?

Jon Moeller

China will be depends on how you look at it. I mean China in the last four quarters has grown below the category of the company, so by definition it’s been a drag. I don’t see that stopping in the next couple of quarters for sure, so yes, it will continue to be a drag on results.

Unidentified Analyst


Jon Moeller

Let’s call -- break out. Thank you very much everybody.

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