The Procter & Gamble Company (NYSE:PG) Q3 2024 Earnings Call Transcript

The Procter & Gamble Company (NYSE:PG) Q3 2024 Earnings Call Transcript April 19, 2024

The Procter & Gamble Company beats earnings expectations. Reported EPS is $1.52, expectations were $1.41. PG isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning, and welcome to The 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, The 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. The 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 Schulten.

Andre Schulten : Good morning, everyone. Joining me on the call today is John Chevalier, Senior Vice President, Investor Relations. Execution of our integrated strategy drove solid sales and market share results and another quarter of strong earnings and cash results. The strong results we’ve delivered in the first three quarters of fiscal 2024 enable us to raise our outlook for core earnings per share and keep us on track to deliver within our fiscal year guidance ranges for organic sales growth, cash productivity, and cash return to shareowners. Specifically on the numbers, organic sales grew 3%. Volume was in line with prior year, showing sequential progress. Pricing contributed 3 points to sales growth as we continue to annualize price increases taken last fiscal year.

Mix was neutral to organic sales growth, and growth across categories continues to be broad based with 8 of 10 product categories holding or growing organic sales in this quarter. Grooming organic sales grew double-digits. Home Care and Hair Care up high singles. Oral Care grew mid-single-digits. Fabric Care, Family Care, Feminine Care and Personal Health Care were up low singles. Skin and Personal Care and Baby Care organic sales were lower versus prior year. Growth was also broad based across geographies. North America, Europe and Asia Pacific focused markets and Latin America and Europe Enterprise markets are each growing organic sales. Global aggregate value share was up versus prior year with 29 of our top 50 category country combinations holding or growing share.

Focus markets grew organic sales 2% for the quarter, and Enterprise Markets grew 4%. Organic sales in North America grew 3% with 3 points of volume growth. Over the last 4 quarters, volume growth in North America has been plus 2%, plus 3%, plus 4%, and now plus 3%. These results include over a point of impact from retail inventory reductions, primarily in personal healthcare. Consumer demand for P&G brands remains very strong in the U.S., with all outlet consumption value growth of 5%, all outlet value share was up 10 basis points versus prior year. U.S. volume share was up 40 basis points, reflecting continued strong volume growth ahead of the underlying market. The gap between consumer offtake of 5% compared to our U.S. sales growth of 3% reflects the aforementioned trade inventory reductions in the quarter.

Europe focus markets were up 7% with 4 points of volume growth. Value share in Europe Focus markets was up 100 basis points over the past 3 months. Latin America organic sales were up 17%. Argentina is a significant contributor to this result given the pricing taken to offset the more than 400% devaluation of the Argentine peso since the start of the year. Mexico and Brazil are annualizing high base periods with organic sales growth in the 20s and 30s, and we expect will normalize back to pre-COVID levels in the mid to high single-digits. As we noted last quarter, there are some specific issues affecting other markets. Those challenges continue to impact results in the quarter. Greater China organic sales were down 10% versus prior year, progress versus the December quarter, but still impacted by weak underlying market conditions and headwinds for SK-II and other Japanese brands in the market.

SK-II sales in Greater China were down around 30% for the quarter. We have seen some month to month improvement in overall Greater China sales trends, though we expect it will be another quarter or two until we return to growth. Volume trends in some of the European Enterprise and Asia Pacific, Middle East Africa countries such as Egypt, Saudi Arabia, Turkey, Indonesia and Malaysia have remained soft since the start of the heightened tensions in the Middle East. Also, shipments in Russia continue to decline, double digits given our reduced footprint and curtailed investments with consumers and retailers. Combined, the headwinds from Greater China and Asia, Middle East Africa markets were a 150 basis point impact on total company sales for the quarter.

We expect these headwinds to moderate or annualize over the coming periods. Moving to the bottom line, core earnings per share were $1.52 up 11% versus prior year. On a currency neutral basis, core EPS increased 18%. Core gross margin increased 310 basis points and operating margin increased 90 basis points. Strong productivity improvement of 320 basis points enabled continued strong investment in superior products, packaging and consumer communication to drive market growth. Currency neutral core operating margin increased 220 basis points. Adjusted free cash flow productivity was 87%. We returned $3.3 billion of cash to share owners, approximately $2.3 billion in dividends and $1 billion in share repurchase. Over 3 quarters, more than $10 billion returned to shareowners in dividends and repurchases.

Last week, we announced a 7% increase in our dividend, again reinforcing our commitment to return cash to share owners. This is the 68th consecutive annual dividend increase and 134th consecutive year P&G has paid a dividend. In summary, again, what continues to be a challenging and volatile operating environment, strong overall results enabling us to increase our earnings projections for the year and to maintain our guidance ranges for organic sales and cash generation, all while sustaining strong investment. It’s a priority to build category consumption and to restore business growth in China and in the Middle East. Our teams continue to operate with excellence, executing the integrated strategy that has enabled strong results over the past 5 years, and that is the foundation for balanced growth and value creation.

A portfolio of daily use products, many providing cleaning, health and hygiene benefits in categories where performance plays a significant role in brand choice. Ongoing commitment to and investment in irresistible superiority across the 5 vectors of products, package, brand communication, retail execution and value for each price tier where we compete. We are again raising the bar on our superiority standards to reflect the dynamic nature of this strategy. Productivity improvements in all areas of our operations to fund investments in superiority, offset cost and currency challenges, expand margins and deliver strong cash generation. An approach of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future.

Finally, an organization that is empowered, agile and accountable. We continue to improve the execution of the integrated strategy with 4 focus areas: strong progress on Supply Chain 3.0, digital acumen, environmental sustainability and a superior employee value equation. These four focus areas are not new or separate strategies. They simply strengthen our ability to execute the strategy. Our strategic choices on portfolio, superiority, productivity, constructive disruption and organization reinforce and build on each other. When executed well, they grow markets, which in turn grow share, sales and profit. We continue to believe that the best path forward to deliver sustainable top and bottom-line growth is to double down on this integrated strategy, starting with a commitment to deliver irresistibly superior propositions to consumers and retail partners, fueled by productivity.

Moving on to guidance. As I mentioned, we expect the environment around us to continue to be volatile and challenging, from input costs to currencies to consumer, retailer and geopolitical dynamics. However, our strong results year to date enable us to raise or maintain key guidance metrics for the year. We’re maintaining our guidance range for organic sales growth of 4% to 5% for the fiscal year. We’re squarely in the middle of this range fiscal year-to-date. This outlook assumes continued normalization in underlying market growth rates that we’ve seen over the past few quarters. Markets will be lapping the last waves of cost recovery pricing and volumes slowly begin to recover. We also expect the market level changes we faced through quarter 3 to continue in Q4 though with some directional improvement.

On the bottom-line, enabled by 15% core EPS growth year-to-date, we are raising our outlook for fiscal 2024 core earnings per share from a range 8% to 9% to a range of 10% to 11%. This outlook includes continued strong investments in innovation and brand building to grow markets and extend the superiority of P&G offerings to consumers. We now estimate commodities will be a tailwind of around $900 million after tax in fiscal ’24 based on current spot prices. This is a modest improvement versus the outlook we provided last quarter, though nearly all of this benefit has been booked in the first three quarters of the year. We now expect foreign exchange to be a headwind of approximately $600 million after tax for the fiscal year. The change versus prior guidance reflects volatility in Argentina exchange rates, including a period of currency appreciation in quarter three and a revised devaluation outlook for quarter four.

We also reflect a reduction in Argentina FX exposure due to the divestiture of our Argentina Fabric and Home Care business, which we completed in mid-March, and reduced assumptions for future volume and pricing given the current rate outlook and recent shipment trends. The net impact of these changes is a relatively modest help to the bottom line, which is reflected in our updated EPS outlook. We expect higher net interest expense of approximately $100 million after tax versus prior year. General inflation and higher wage and benefit costs are also earnings headwinds for the year. We expect adjusted free cash flow productivity of 90%, and we expect to pay more than $9 billion in dividends to repurchase $5 billion to $6 billion in common stock, combined a plan to return $14 billion to $15 billion of cash to share owners for the year.

This outlook is based on current market growth rate estimates, commodity prices and foreign exchange rates, significant additional currency weakness, commodity cost increases, geopolitical disruption or major production stoppages are not anticipated within these guidance ranges. Finally, we’ll be closely watching the more volatile regions we mentioned earlier, including the health of the China market, and we’ll be keeping a close watch on competitive dynamics to ensure P&G brands remain a superior value for consumers and for retailers. The entire P&G organization remains focused on excellent execution of our integrated, market constructive strategy, which has delivered strong results in a challenging operating and competitive environment. While we expect volatile consumer and macro dynamics to continue, we are confident the best path forward is to double down on this strategy, remain fully invested to drive irresistible superiority across every part of our portfolio and stay focused on delivering balanced top and bottom line growth and value creation for our shareowners.

With that, we’ll be happy to take your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Lauren Lieberman with Barclays.

Lauren Lieberman: Andre, I want to talk a little bit about market growth versus market share. So first off, if you could just I know you said volatile a few times, but just if you could give us a sense for sort of a high level expectation for global market growth over the next 12 months. And then digging in a little bit more specifically, you shared you offered comments on share performance, particularly in North America and also in Europe focus. But I was curious if you could talk maybe about market share trends or the degree you can tell in China. And maybe let’s talk about it excluding SK-II because I think that’s an issue unto itself. But just a sense of P&G’s performance versus the China market overall. And since it’s been lagging for quite a while, arguably, things that you guys are seeing, addressing, doing differently or considering doing differently to sift that trend?

Andre Schulten: So let me start with overall consumption strength, because it really is and continues to be strong. The consumption trends in the markets are stable despite multiple headwinds, and P&G is growing consumer off take in terms of value share in 29 of our top 50 category country combinations. Globally, we are growing value share by 10 basis points, and the consumption trends are really strong across markets, with few exceptions, which we’ll get into. U.S. consumption in quarter three was 5%, and P&G value share is up. So our consumption actually grew ahead of that, both in terms of value and in terms of volume, actually with volume share being up 40 basis points on all outlet in the most recent period. So continued strength in consumption trends in North America and continued strength in terms of P&G performance within that consumption.

Europe focused markets consumption is in the range of 8% to 9%, also very strong, and we are growing by more than a share point within that market. Both volume growth very strong with 4 points in the quarter and 3 points of price mix. LA and Europe Enterprise markets are growing, and so the business from a consumption standpoint, which really for us is the most important metric, is in a good place. We continue to deal with very specific headwinds in quarter three that we’ve discussed already in quarter two, but they continue. There’s a soft market consumption in China. We’ll get more into that to the second part of your question. SK-II continues to be a headwind in the quarter, and we see some impact from tensions in the Middle East. When you sum it all up, that’s about a 1.5 impact on the global top-line.

And then we have the inventory reduction in North America, which is about a point on the global top-line as well. And if you put it together, two conclusions. One, the headwinds that we’re calling out are temporary in nature. So first of all, the inventory reduction, which is a point on the top-line, we expect that to be a single event, not a continued phenomena to observe. It was mainly driven by Personal Healthcare, because the supply situation is stabilizing after a softer season, so retailers don’t need to hold safety stock. And the headwinds in China on SK-II and in the Middle East will ease over time and eventually annualize over the coming quarters. That does not mean that we will ignore any of the headwinds. We are fully focused on accelerating growth in China on SK-II and driving sustainable growth in Asia and Middle East markets, but it explains that we can hold our organic sales growth guidance at 4% to 5%.

We’re very confident in that and fiscal year-to-date, as we mentioned in the script, we’re right at that level. Last point on that topic, we remain fully invested, and the gross margin progress the team has made is actually enabling us to continue to double down on investments, drive market growth and drive our own consumption and share within that. Specifically on China to the second part of your question, Lauren, I think it’s a good way to look at China excluding SK-II, as you suggest. We are making sequential progress. The share in the most recent read is flat, and our shipments or our organic sales in China are improving quarter-over-quarter. If we look at quarter two, our organic sales excluding SK-II in China were down 10%. In the most recent quarter, they were down 3%.

So we’re making progress. The market is not yet recovering, but we see the trajectory going in the right direction. We have pockets of strength. Baby Care, for example, in China has grown 11% in the current quarter, our appliance business growing 14%. We are making strong investments in our hair care business with a more streamlined portfolio, and we feel good about our ability to continue to drive market growth, be market constructive in China, and see the upside as we’ve articulated before on a longer term on participating in the Chinese market. Will it be a straight line to recovery? No. It probably takes a few more quarters before we turn back to growth, but we see the trend line improving.

Operator: The next question comes from Steve Powers with Deutsche Bank.

Steve Powers: Andre, I think you mentioned that nearly all of the commodity benefits that you expected this year you’ve essentially fully benefited from through the third quarter. And we’ve seen year-to-date in the calendar year, you’re obviously in oil, right, with some plant related costs. So I guess just some thoughts on that in terms of how that impacts your early planning for fiscal ’25? And maybe sort of related to that, just your confidence and your view, visibility into the productivity pipeline. And can we expect and do you have confidence you can run at an accelerated cadence of productivity over the next 12 to 18 months as well based on that pipeline? Thank you.