The Procter & Gamble Company (NYSE:PG) Q2 2023 Earnings Call Transcript (2023)

Kevin Grundy : We’ve covered a lot of ground. I want to try to connect the dots here on the 8% organic sales growth if we exclude the items that Andre called out, with comments in the press release around market contraction. So in the release, you mentioned market contractions in Hair Care, Grooming, Fabric Care, Baby Care, Family Care, across much of the portfolio. But as Andre talked about, the org sales in the quarter was closer to 8%. And if we look at the comp, it was actually an acceleration on a two-year stack basis. So what I really want to do is just — I know we’ve covered a lot of ground on this call, just to make sure I’m kind of clear on how you’re seeing category growth, how you’re seeing elasticities and consumer behavior coming out of the quarter.

Because it seems to me that the quarter is actually on a like-for-like basis, possibly even better than The Street had modeled. And setting aside China, you sound pretty constructive on demand dynamics. You sound pretty good on elasticity sort of relatively unchanged. And I just want to make sure that’s the messaging for investors.

Andre Schulten : Yes. And I would characterize, obviously, the Russia element will be with us, and that’s real. I think the market growth has been around 5% to 6% with a negative volume component and a very positive price component. I would expect that in the midterm to moderate to 3% to 4% overall growth and still have a negative volume component with offset by strong pricing that we continue to flow through the market. If you look at overall market size over the past three months, that has been the case, and that’s where we expect it to be going forward. And that’s pretty much in line with how we model the balance of the balance of the fiscal year. Our job here is to be ahead of that. And that’s why we’re investing that we will continue to double down on the priority investments everywhere. Jon, I don’t know if you have anything to add.

Jon Moeller : Yes. It’s a repeat, but it’s worth repeating. It’s a bit of a rain drop on the fray, Kevin. But I just want to highlight so that we don’t get ahead of ourselves, how uncertain, for example, China is. Andre said it several times, we don’t have visibility. We have, within our own operations, offices, innovation centers, plants, our current estimate of the infection rate is up to 80%. And we’re sitting here in the week before Chinese New Year when all the traveling occurs. At the same time, we have a government and a populist who desperately wants things to get better. It’s just very hard to say, hey, we should assume that as we go forward, China comes back like a tire. Certainly, we all hope that’s true. I hope for China, that’s true. But just you really need to understand how uncertain things are.

Operator: The next question comes from Mark Astrachan of Stifel.

Mark Astrachan : I wanted to move from that rain drop question to a bit more funny question and just ask about whether the resilience of the U.S. consumer has surprised you all sort of what’s embedded in guidance from here? I know what you said, Andre, about the category, but that was, I think, on a global basis. So how do you generally think about U.S. trends from here? And within the portfolio, have there been any surprises relative to historical expectations, meaning things that have performed better than you would have expected? And kind of what are you watching from here from a portfolio standpoint, all within the context of the U.S. business?

Andre Schulten : Mark, I wouldn’t expect the U.S. to fundamentally change. If you look back over the past six months, private label shares in the U.S. have been relatively steady. We’ve seen 20 basis points to 30 basis points of increase in private label share, which is a metric we’re watching closely. But if you look at sequential share, absolute shares of private label, it continues to hover around 16%, past three, six and even 12 months. So there hasn’t been a significant shift in consumer behavior in terms of trade down. I think the way that our pricing was executed with great support in innovation and great support in terms of marketing spend has helped. Our strategy isn’t shifting. I don’t see the market shifting significantly.

All of that with a caveat that who knows what the next six months are going to bring. But if past behavior over the last six months, nine months is any indication, I think the consumer is relatively steady in the U.S., which gives us great confidence. It’s our biggest market. We do well, expanding volume share, as I said, and hopefully have a bit more upside here as Family Care and Fabric Care continue to gain momentum.

Jon Moeller : And this continues to be a market, the U.S. market that is very responsive in a positive way to innovation that improves performance, both for the product and the package. And we have many examples, Dawn Powerwash as an example, introduced at a premium price. The brand has grown at 50% since that introduction and Dawn has driven 90% of category growth in that situation. Down Powerwash, again, a premium priced item that was introduced largely during difficult economic times as a standalone brand would be the third largest brand of the category. So I just used that as an example for the continued positive responsiveness of U.S. consumers to innovation, and we’ve got a lot of innovation coming.

Operator: The next question comes from Callum Elliott of Bernstein.

Callum Elliott : Great. I wanted to come back, please, to the brand spend dynamic. And Andre, I think the example you gave to Baby Care is quite powerful. If you can increase so meaningfully while simultaneously cutting dollar spend. I guess that’s probably driven by digital and better targeting there versus traditional media. My question is, do you think these benefits are sustainable or over the longer term, are we not likely to see some of these digital ROIs come back down as digital ad pricing goes up and some of your competitors start to catch up with your capabilities there?

Andre Schulten : I believe that we believe that we’re just at the beginning actually of our productivity curve. And it’s driven by two things. I think Baby Care was one of the — U.S. Baby Care was one of the more aggressive ones and one of the more obvious ones when you think about the consumer target, it’s very narrow, right? You’re looking for households with babies and diapering age. So going from mass TV where you have a lot of ways to hitting that target, which is about 3% to 4% of the population, provided the most obvious opportunity to drive synergies here. But we’ve learned also in other businesses, the opposite works. When you think about Fabric Care, everybody is doing laundry. So you’ve got a very wide target that you need to reach.

And the Fabric Care team in the U.S. has brought their media planning and buying in-house, developing proprietary algorithms to better place ads during the TV programming, for example, and that in and of itself has allowed $65 million of savings in one year, while increasing frequency. So both models work and both models are still not everywhere. So we’ve got two examples in the U.S. There are many categories in the U.S. that are still building their own approach to drive these synergies and there’s the whole world outside of the U.S., which is still building on the capabilities that we are developing. So we see this as a area of continued investment in terms of our own capabilities with a great ability to drive productivity for years to come.

Operator: The next question comes from Chris Pitcher of Redburn.

Chris Pitcher : Apologies for carrying on the inventories question. But Jon, you mentioned you were looking at a normalization. But in the Investor Day, you showed obviously a significant improvement in your supply chain efficiency. Do you think you’re in the position over the next couple of years where U.S. retailers could operate at even lower inventories and improving your relationship with them is working capital part of the conversation that you have with them in sort of helping form share of shelf. And then thank you for the color on the international business. Could you share with how fast your Indian business grew in the period because it looks like the India consumer there is recovering and whether you’re seeing a sustained double-digit recovery there as well?

Jon Moeller : Thanks for the question. I do think that there’s a significant opportunity for the entire supply system to operate at lower levels of inventory. And one of the enablers there in addition to supply dependability is increasingly looking at the supply chain across we historically looked at it as our supply chain and our customer supply chain as we’re beginning to have conversations about this was one supply chain, would we do things differently? And the answer is almost yes. And the opportunities that are resident within that discussion are significant. So I do think we will continue to have that conversation and try to make progress in a way that benefits both ourselves and our retail partners and ultimately the consumer with higher on-shelf availability. And then go ahead, Andre, you want to talk about India?

Andre Schulten : Yes, sure. The India business continues to accelerate. We saw Q1 growing 12% organic sales; Q2, 13%. And India is a good example of those capabilities that we were just talking about actually rolling out and being very effective. So the digital infrastructure we’ve been able — the team has been able to create in India is quite impressive and that’s contributing to our ability to drive disproportionate growth there, both from a sales capability standpoint and from a media capability standpoint.

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