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

Robert Ottenstein : Just first a quick follow-up and then my main question. So one, in terms of follow-up, is the volume headwind in this quarter from Russia and sort of the one-offs? Is that just a quarter issue? Or is that going to linger on the following quarters? And then my primary focus is the market share data that you gave us in terms of the U.S., I think, was very impressive, particularly given some of the lingering supply issues that are going to be resolved soon. So can we expect perhaps accelerating improvement in market share as the year goes the supply comes on and maybe give us a little bit more sense of what the drivers were for the encouraging market share momentum in the U.S.?

Andre Schulten : Yes. Robert, on the volume side, I think the Russia effect will be with us for one more quarter before we annualize. And on the inventory side, as we said before, we believe this was a onetime adjustment. I wouldn’t expect this to come back immediately. I wouldn’t expect a significant further reduction in inventory. When we look at the U.S., for example, where we have good data in terms of retailer days on hand, we believe we are at pre-COVID levels, which is about the level that we’ve proven to operate reliably with our retail partners. So I would expect that to be a one-timer with potentially some help coming in back over the next few quarters. The volume share dynamic in the U.S. is driven largely by Fabric Care coming back into supply.

We have talked in the fourth quarter of last fiscal year and also in the first quarter of this fiscal year, that we had some supply constraints on our Fabric Care business that we had to address. We also reinstated merchandising support in the U.S. We’ve reinstated media support and that is playing out in volume share accelerating on the Fabric Care business. The other dynamic is family care sequentially improving from a volume share standpoint where we have seen a very high base when private label was in less supply and didn’t have merchandising in the July to December period of last calendar year. That is being annualized. So those two will continue, hopefully, to be a tailwind to our share position in the U.S. But as John said, it’s hard to predict and look around the corner here, there are many, many variables that we don’t control, but those two businesses explain the strength and hopefully, should have more upside going forward.

Jon Moeller : And just one attempt at changing maybe a little bit some of the semantics from supply issue to supply opportunity. Our supply organization has done a terrific job. If you look at the last 15 quarters or so, our organic sales — the amount of organic sales end of period to beginning of the period is up 80%, 90%, which is a really good thing. And they’ve done a tremendous job of trying to keep pace with that. And as we talked about, there’s just additional upside to fully meet and satisfy that demand.

Operator: The next question comes from Peter Grom of UBS.

Peter Grom : Thanks, operator, and good morning, everyone. I hope you’re doing well. So I wanted to ask about the change in the commodity outlook, which for the first time in quite some time, the outlook has actually moved lower sequentially, understanding that there’s a lot of moving pieces, but can you just help us understand what’s driving that? Is it broad-based? Or are there particular inputs where you’re starting to see inflation moderate more substantially?

Andre Schulten : Peter, it really varies period-over-period, month-over-month. We’ve seen pulp was holding relatively steady. It has come down a little bit now on different grades. Propylene, polyethylene has come down a little bit. But it’s really broad based and it’s changing month over month, week or week. In general, what we’re seeing is — as you would have known, the supply situation is easing a little bit, and that’s obviously helping the market dynamic, both on commodities as well as on transportation and warehousing. There’s no guarantee that, that will continue. We don’t know what China reopening will do to the commodity market. That’s a significant variable that nobody really understands at this point, I would argue.

So we’re watching this closely, and we continue to forecast based on what we know today, which is spot prices. I think the other dynamic we can’t forget is that our suppliers are still working through their input cost inflation, their labor inflation, their energy cost inflation. So there are two opposing forces here. One is the desire of our suppliers as contracts roll over to pass that through to us. And the other one is input costs easing in the short term. So we have to take both into account when we think about our ability to pass through cost helps.

Operator: The next question comes from Andrea Teixeira of JPMorgan.

Andrea Teixeira : I have a clarification and a question. Andre, in your response about the destocking that should be over in the next quarter, is that also applicable for China? And how are you seeing China consumption rebounding as you exit the port and obviously, with the reopening? And if I can squeeze up your question, can you comment on how you’re preparing your portfolio in Europe for potential recession? As you called out, things may — and the bills — energy bills may be kicking up now as we enter your third quarter fiscal.

Andre Schulten : Hey, Andrea. Yes, the China destocking, I think, will largely depend on the China reopening and that’s very hard to predict. I think if consumer mobility returns to normal levels quickly, that will be a tailwind for every retailer with real estate on the ground. And that’s really the major issue that off-line retail is facing. So if traffic returns to normal levels, that will be a big help, and obviously, no further destocking required. I’ll leave it at that because I have no good way of knowing not as anybody else. We expect consumption in China to reaccelerate to mid-single digits over what period is hard to predict. But in the midterm, that’s where we see our China market and it continues to be an important investment market for us.

We have a very capable organization on the ground, and they are spending their days and nights to get ready for that. Fine-tune our innovation, ensure we have the best possible marketing programs, both digitally and with our retail partners on the ground. I think on the European portfolio, we have prepared, like everywhere else, our portfolio for a recession. And it comes back to the basic strategies on the categories we play in. We are in nondiscretionary categories to a large degree that people won’t deselect easily. They continue to wash their laundry, they continue to wash their hair. So that’s number one for recession proving our business model. Step number two is investment in irresistible superiority. When consumers see the benefit our brands can deliver, the value will be clear to them and our ability to communicate that value clearly is critical, and that’s why we continue to invest in both the performance as well as the communication.

And then the last part is just accessibility of the portfolio, both in terms of brand tiering, so having premium brands but also value brands and price points across different channels, be that discounters or other retailers. So I think the portfolio proofing has been done, and I think it’s showing results in a very difficult environment that we think speak to the strength of the strategy.

Operator: The next question comes from Kevin Grundy of Jefferies.

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