Procter and Gamble FY 1Q17 Earnings Call Notes

Procter & Gamble (PG) Q1 2017 Results

Jon R. Moeller – Procter & Gamble Co.

Commodities were a hurt to gross margin

“Commodities were a modest hurt to gross margin in the quarter. Feedstock costs for propylene, ethylene, and tropical oils are up as much as mid-teens since we set our initial budgets for the year. Wage inflation is also an increasing challenge in many developing markets.”

Sampling has longer term benefits

“In terms of payout on sampling, I’m glad you asked that question. This is something that is typically – if you can sample consumers at point of market entry or point of market change with noticeably superior products in categories where brand loyalty is relatively higher, the lifetime benefit from that relatively modest investment can be significant, but it is a lifetime benefit. A consumer will take a period of time just to use the product that you’ve sampled them with. And so that’s not an investment endeavor that we typically see immediate returns in. That’s why, unfortunately, we got into a practice of reducing that spending because it wasn’t producing – it never produces immediate short-term result. But it’s really the area of spending that should be the last that we cut because of its importance in building users for potentially a lifetime of consumption”

Harder for us to recoup pricing because our competitors benefited from weakening currencies

“There are real differences between, call it the last year and the years prior to that in the FX dynamics, which drive different decisions. You may recall, when we headed into the most recent round of big FX impacts, which was last year, we said that while historically we’ve been able to regain about 2/3 of the impact through pricing, we didn’t feel we were going to be able to do that this time around. And that was driven in large part simply by a divergence in what was happening to the dollar and what was happening to the functional currencies for some of our significant competitors, namely the euro, the pound, and the yen. And those currencies were weakening over that period of time, and so there was less need for competitors who were reporting results in those currencies to price. And as much as anything, that’s what you’re seeing being reflected in the actuals.”

We are a dollar functional currency company

“In terms of how people are compensated, we are a U.S. dollar functional currency company. We pay dividends in dollars. We repurchase shares in dollars. And our investor base, as you well know, really doesn’t care how many rubles we have or pesos we have. What they care about is how many dollars we have. And so the primary compensation lens is through all-in performance on dollar terms. We do, though, also have a look, because we don’t want to incent behavior that’s too short-term oriented, at constant currency. But over periods of time, we’re going to measure our success or failure based on earnings per share and earnings growth and importantly, cash growth in dollars.”