Procter and Gamble FY 2Q17 Earnings Call Notes

The Procter & Gamble’s (PG) Management on Q2 2017 Results

Jon Moeller – Chief Financial Officer

Continue to deal with macro disruption

“We continue to deal with an unprecedented amount of geopolitical disruption and uncertainty, which is affecting market growth, currency and commodities. We are not immune from these macro dynamics. We are aggressively driving cost savings to mitigate these impacts, but we’re protecting investments in the business to accelerate organic sales growth in a sustainable long-term market constructive and value accretive way”

Problems around the world

“Economic crises in Egypt and Nigeria are dramatically impacting category size; market contractions in Russia, Argentina, and Turkey pose real challenges and we’ve had to manage the market impacts of politically-related currency devaluation in places like the UK and Mexico. Our organic topline for the first half of the year has been affected by the portfolio work we’re doing in the ten ongoing categories and by loss sales to our Venezuelan subsidiaries.”

E-commerce sales are $3 billion

“P& G eCommerce sales are now $3 billion. I was with David and the team last week in China. While we have more work to do, our eCommerce business there will reach 20% of sales and will exceed $1 billion this year. With an aggregate eCommerce share larger than the next three largest competitors in our categories combined. In Korea, eCommerce is now 40% of our business. We’re building a full toolkit of capabilities we can put to work where relevant. For diapers, subscription can provide convenience and increase loyalty. For SK-II super premium skin care, direct-to-consumer counseling either in-store or online can help inform the benefits of regimen usage.”

Why we don’t hedge remaining FX exposures

“We’re sometimes asked why we don’t simply hedge away the remaining FX exposures. It’s a good question and something we look at internally and with a different set of outside eyes every year as we prepare our financial plan. The three reasons we typically don’t end up choosing to hedge the majority of the exposure. Up to two-thirds of our foreign exchange losses and a significant amount of our forward exposure is in currencies that are either non-deliverable or are very difficult to hedge. The Argentinian Peso, the Egyptian Pound, the Russian Ruble, Nigerian Naira are some examples. Second, hedging is neither free nor necessarily cheap. Currency volatility increases this cost. The last shortfall as having as the answer is it solves nothing longer term. It does nothing to help us restore the fundamental margin structure of a business.”

We produce 85% of our products in the US domestically

“there are few facts that might be helpful. P&G produces 85% of the products themselves in the U.S. domestically, and we export about 10%. So a net import balance of only about 5% of U.S. sales. The majority of the small amount of imported product is produced in Canada. We estimate that over 90% of the materials we use to manufacture products in the U.S. are sourced domestically.”

There’s no reason that cost of acquisition should be higher today than 5 years ago

“There are actually more options available to us to attract customers to our brand and more tools than there probably were five years ago, so done right. There’s no reason that the cost of acquisition of a customer should be hire today than it was five years ago. Having said that, there’s a lot more complexity in the shopping environment, in the media environment and done wrong, you can’t increase pretty significantly and efficiencies in the cost of customer acquisition. I really can’t give you a more specific answer than that Joe, but I don’t see customer acquisition cost has been significantly increased or inflated as we go forward. We can reach consumers and shoppers today and much richer, more direct ways than we ever could.”

China continues to be a great opportunity

“I want to step back in China first and then I’ll get to your specific questions. I think it’s very important that we understand that China continues to be a very attractive opportunity. This is a market that is among the highest growth rates across the world on a sustained basis and that really hasn’t changed. It’s a market that as we’ve talked before, premiumizing significantly customers are trading up to better performing products across categories. As we move out of the one trial policy, there’s certainly only upside that exist there, as the economy transitions from more of a manufacturing based company to – economy to a degree of a more consumption-based economy. That’s significant upside and we have a market position there and capabilities that, that allows us to take advantage and participate in all of those upsides. So China continues to be – as you know it’s our second largest market both in terms of sales and profits. So it’s also a big focus area for us.”