P&G at Morgan Stanley Conference Notes

The Procter & Gamble’s (PG) Management Presents at Morgan Stanley Global Consumer Conference
Jon Moeller – Chief Financial Officer

Growth rates decelerating due to developing markets

“We continue to operate in a challenging and volatile macro environment. Market growth rates on both the volume and value bases are decelerating due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 4% globally. We now expect 3%. There are more flashpoints across the globe than in anytime in recent memory. ”

Remain comfortable that we can get some growth in 1Q

“we are sitting here on what’s the date, middle of November. And certainly, we had visibility on what’s happened for the first part of the quarter and we remain comfortable that we can get to some level of growth in the first quarter.”

Promotions aren’t the best way to drive sales

“the problem with promotion, particularly when it’s all focused on price; one, its equity destructive, two, there is nothing proprietary about it. As soon as that promotion is out there in the marketplace, the competitor can match it in a nanosecond.”

WMT is largest customer and we are their largest supplier

“we certainly view Walmart as a valued partner. They are our largest customer. We are their largest supplier. It’s a very important relationship.”

The shelves are getting cluttered at many chains

“A number of the retail chains and I certainly won’t name specific chains, but have increased assortment on their shelves by as much as 2X in the last 5 years. And you all know what’s happened to same-store sales growth across most of the retail channels in North America, it hasn’t grown 2X. And so the amount of consumer confusion that’s associated with that complex assortment is inhibiting purchase. You literarily – when I am in stores you will watch a consumer trying to make sense of the shelf and walking away. They just – they literally give up and we are guilty of that sometimes too. We have some of those shelves that we are working to cleanup. ”

We are guilty of over sku-ing some brands too

“we are guilty in terms of having some of the largest brands and having over sku-ed some of our lineups which we are working to reduce. But also, it’s the addition of other brands, it’s the addition of own label brands as well. It’s all of the above.”

Procter and Gamble FY 1Q16 Earnings Call Notes

Market growth rates decelerating in value and volume thanks to developing markets

“We do continue to operate in a challenging and volatile macro environment. Market growth rates on both a volume and value basis are decelerating, due mainly to slower growth in developing markets.”

Our competitors aren’t having to deal with the same currency fluctuations

“The relative strength of the dollar has made it tougher for us than our euro and yen functional currency competitors. We’re facing, for example, a 40% devaluation in Russia, while our euro functional competitors are facing half of that. Each of these items are realities, not excuses, and many of these dynamics will continue.”

INnovating with Gillette online

“We’re also innovating online. With more men purchasing their blades and razors through e-commerce, it’s critical that Gillette establishes itself as the online leader. Gillette’s online Shave Club launched in June and is off to a very good start, with e-commerce share of blades and razors up four points since launch. We’re building partnerships with e-tailers and retailers. We’re offering our shoppers subscription tie-ins for the Gillette Shave Club. Gillette is now consistently number one in paid search and has gone from number 50 to number two in organic shave club search. Importantly, Gillette’s product is significantly consumer preferred over any and all shave club competition, winning on closeness, smoothness, comfort, and 18 other attributes tested, including importantly, overall better shaves.”

Challenging environment

“So it continues to be a challenging environment. Against this backdrop, we continue to improve productivity, to transform our supply chain, to focus our portfolios, and to invest in superior consumer preferred brands and products. ”

We haven’t had premium products in China and that’s hurt us

“China, our second largest market, so it makes a significant difference both from a top line and bottom line standpoint, we have not fully accessed the opportunity that the market is presenting in terms of growth in the premium price tiers as consumers look for better, more differentiated solutions, and frankly, higher product quality. We are bringing those items to market now, but our absence in those price tiers has, frankly, hurt us fairly significantly.”

Earn a return on marketing dollars

“yes, we expect marketing to increase this year on both an absolute basis and a percentage of sales basis. By marketing, I mean working dollars, so we’re going to continue to fund increases in spending that matters with reduction in spending that doesn’t. And look, if I was asked to spend an additional $1 billion tomorrow, I could obviously do that, but that’s not the question. The question is can we earn a return on that and create value through that investment.”

Promotion is not our game

“We will not, in most cases, be looking to promotion as a way to strengthen our business. We will be competitive where we need to be, but that is not going to be something that we proactively increase. We may increase trade spending at any point in time as a mechanism of adjusting price, but generally that’s not our game.”

We’d rather establish superior value equations

“We’d much prefer to establish superior value equations with superior products that are adequately supported. And that’s also the reason why maybe the top line isn’t turning as quickly as certainly we would like or understandably as you would like because we’re not going to spend money just to spend money. We’re not going to spend money in ways that are not sustainable in terms of generating growth in a profitable way on our business.”

Procter and Gamble FY 4Q15 Earnings Call Notes

New CEO effective Nov 1

“As you know, earlier this week, we announced that David Taylor had been elected and appointed as the new Chief Financial Officer of the company, which becomes effective November 1. And sorry, Chief Executive Officer.”

1% organic sales growth, but 6 point hit from currency

“For the fiscal year, organic sales grew 1%. Excluding the businesses we’re in the process of exiting, organic sales grew 2%. All in sales were down 5%, including the 6 point headwind from foreign exchange. ”

EPS down 2% y/y. 13 point hit from forex

“Core earnings per share for the year were $4.02, down 2% versus the prior year. This includes a 13 point headwind from foreign exchange, over $1.5 billion after tax. On a constant currency basis, core earnings per share grew at a double digit 11% rate. ”

Cutting costs at advertising agencies

“Marketing spending is another area where we are delivering more, greater reach, higher frequency, more advertising for less overall cost. The savings are coming primarily from non-working marketing spend. One example are the fees and production costs for agencies we use for advertising, media, public relations, package design, and development of in-store materials. We’re simplifying and reducing the number of agency relationships while upgrading agency capability to improve creative quality and communication effectiveness all at a lower cost. Our overall agency costs in fiscal 2015 were down about 15% versus the prior year.”

Essentially completed portfolio reshaping

“With the beauty brands merger with Coty announced earlier this month, we have essentially completed the strategic portfolio reshaping. We’ve completed the decision making, negotiation and contracting work on businesses that represent 95% of in scope sales and essentially all of the in scope profit. ”

Gillette has an online shave club too

“Gillette’s online Shave Club is off to a very good start. We’re building partnerships with e-tailers and retailers who are offering their shoppers subscription tie-ins for the Gillette Shave Club.”

Guiding to low to mid single digit decline in revenue next year

“Against this volatile backdrop, we think it’s prudent to start fiscal 2016 from a guidance standpoint with relatively modest, relatively wide target ranges. We’re projecting organic sales growth in line to up low single digits versus fiscal 2015. We’ve recently delivered towards the low end of this range. We certainly aim to improve, but it’s unlikely that growth acceleration will happen immediately or in a straight line.”

“The headwind from foreign exchange will have a 4% to 5 percentage point impact on all-in sales growth. Also, minor brand divestitures will have a modest drag on all-in sales growth. Taken together, we expect all-in sales growth to be down low to mid single digits versus restated fiscal 2015 results.”

A lot of our markets are challenged, for instance we had to take price in Russia to protect gross margin

“we’re the market leader in a lot of the countries that are difficult right now, Russia’s an example, and as I mentioned, we’ve made a very deliberate choice. The choice we had in Russia was very simple. We could accept negative gross margins in perpetuity, or we could price to restore structural economics so that future growth would be worth something. And that’s the choice we’ve taken there as in other markets. And it’s had a significant impact as we expected. So if you look at the month of June for example, our sales in Russia were down 57%, and we’ve got to work our way through these things. But we’re taking an approach that we’re convinced is the right approach for the long term.”

Clearly we’re over expanded

“this isn’t a continuation of what we were doing and I don’t want to belabor that. But we were clearly over-expanded, okay, into developing markets and even into frontier developing markets, and you know what’s happened there in terms of growth slowdown, economic and political volatility and the FX issue which Jon has mentioned a couple of times is real, and will continue through the end of this calendar year, okay.”

You have to follow the shopper into the channels that are growing

“When you choose to follow the shopper, you obviously have to commit coverage and resources to growing channels, and we’ve done that. So we’re in a much better position for example in e-commerce than we were three years ago. E-commerce is growing 30% to 40%. We’re pretty competitive. There’s still upside opportunities and there’s more to come with subscription and auto-replenishment, okay. So yes. Follow the shopper into the channels that are growing. E-commerce is one. Drug is obviously another one. Small box discounters. I could go on.”

This analyst seems not happy

“So you sound very different than I would have hoped on the call today or on CNBC this morning. There’s still a lot of defiance. There’s still a lot of confidence, it feels like. And look, all the frustration we’re all feeling, I feel as well probably times 10. You’re kind of brushing off the tough questions and maintaining this trust us, it’ll turn, it’ll turn. But just let me offer you a look through the lens of a shareholder, right, who you are as well. And you see what the stock price has done, and you look at organic sales growth and it’s dismal and it’s getting worse, and you admit that….Well I think plan B, which is seriously think about breaking up the company. That’s very complex, is a viable option. It sounds like you guys have looked at it and I don’t understand why it hasn’t worked. … there’s another, bigger solution here, right? Which is it’s just too big to run…Maybe perhaps you’re not even a growth company anymore and you have to think about it differently from just being growth.”

Procter and Gamble at Deutsche Bank Conference Notes

Jon Moeller – Chief Financial Officer

We’ve been transforming our portfolio since 2008

We’ve been on a multi-year journey to transform our portfolio. Since 2008, we’ve divested or split out nine different categories. We’ve exited Coffee, Pharmaceuticals, Water Purification, Snacks, Kitchen Appliances, Bleach, Concierge Healthcare Services, Pet care and Batteries in total about $10 billion in sales.”

“We’re focused on winning with consumers and customers who matter most in channels and countries that matter most with core brands and businesses that create the strongest consumer preference and the best balance of growth and value creation.”

Exiting 100 brands

e currently expect to exit about 100 brands. In aggregate, the sales of these brands have been declining low single digits over the last three years before tax profit is down double digit on a three year basis and these businesses generate only high single digit BT margin. We’ll eliminate 60% of current brands and the complexity they create while retaining 94% of our BT profit. In our view that’s a very good trade.”

The businesses we’re exiting don’t play to our strengths

“The businesses we’re exiting are not bad businesses; most simply don’t play to our strengths of consumer understanding, product innovation, branding, and go-to-market. They don’t fully leverage our scale and some are in structurally less attractive industry. ”

Brands that are left play to our core capabilities

“The businesses that will remain in our portfolio leverage our core capabilities. We understand the consumers of these businesses. These businesses fit our brand and product model, are sold primarily in our core channels of distribution, and we can source them more effectively and efficiently to third parties’

Divested 40 brands already

“The work to get here is well underway. To-date, we’ve divested, discontinued or plan the consolidation of over 40 brands, which is about 40% of the targeted sales number. We’ve exited the Bleach business, Pet Care, Duracell, MDVIP, several smaller fragrance brands, DDF and Noxzema Skin Care brands, Vicks VapoSteam, the Camay and Zest soap brands and Fekkai hair care brand and salons”

Digital delivers higher return on investment than TV or print

“There continues to be significant savings opportunity in marketing, particularly in non-media spending. By following the consumer, we’re proving marketing spending effectiveness and efficiencies to deliver more, longer reach, higher frequency, greater resonance with less. We’re shifting more advertising to digital media, search, social, video and mobile as consumers spend more time there. In general, digital media delivers the higher return on investments in TV or print.”

Bye bye agencies

“One non-media cost area that offers significant opportunities is agency spending, which includes fees and production costs for agencies we use for advertising, media, public relations, package design and development of in-store materials. We plan to significantly simplify and reduce the number of agency relationships and the cost associated with the current complexity and inefficiency, while upgrading agency capability to improve creative quality and communication effectiveness.”

We actually see a slight uptick in consumption in the US

“n the U.S. which is our largest market, we actually see slight uptick in consumption. We are seeing some pressure from a trade inventory standpoint as those inventories continue to be drawn down as tightly as they can. And so unfortunately, we’re seeing a higher level of out of stocks than what we have previously. But generally from a consumption standpoint, things to us in our categories look reasonably good in the U.S. and on a slight uptick. Western Europe continues to be, I would describe it as choppy, but the chop is the level chop”

There is a supply chain redesign going on at the same time we are redesigning the portfolio

“There is a reason that supply chain redesign and portfolio redesign are occurring contemporaneously. We want to make sure that we’re designing the supply chain for the future. It will be modular in nature, so there will be a fair amount of plug-n-play that we will be able to do, and it will make it from a synergy standpoint; there will be more synergies created when we bring a new product into that supply chain than what have been the case in the past.”

Large brands are platforms for innovation

“our experiences have been that those large brands are platforms for innovation which fundamentally drives market and share growth, and the historical data is very consistent on that point.”

Very few people try a diaper brand that no one has ever tried before

“n mindset, between the consumer as he is purchasing maybe a food item, maybe a beauty item and for example baby diapers, it’s a very different mindset. There are very few first time moms who try to find the diaper that nobody’s tried before but that isn’t how the category’s approached.”

Procter and Gamble 4Q14 Earnings Call Notes

This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha

4Q was another challenging quarter from a macro standpoint

“October and December was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility”

FX was a 14 point drag on earnings

“All-in sales were down 4% versus the prior year including a 5 point headwind from foreign exchange and a 1 point reduction from minor brand divestitures. Including FX which was a 14 percentage-point drag on the quarter, core earnings per share were $1.06 down 8% versus the prior year.”

A primer on how FX impacts results

“ First, transaction impacts increased the cost of non-ruble denominated inputs. We import as an example Gillette blades and razors into Russia from Germany. Widening of the cross-rate between the euro and the ruble increases the Russian units cost of razors and reduces profit. Similarly, the local cost of plastic bottles which are denominated in euros and imported into Russia for the production of Fabric Care and Hair Care products have increased significantly. This transaction cost impact affects all manufacturers, multi-national and local, whose materials or finished products are imported from similar sources and are similarly denominated.

We attempt to recover these cost increases through pricing when local legal requirements and market realities allow it though there is a lag between the time the currency devalues, the costs are incurred and the pricing is taken and executed through our channels of distribution.
Second, we need to revalue transaction related foreign currency working capital balances. This includes the revaluation of working capital balances related to transactions between P&G legal entities that operate in different currencies. To continue the prior example while razors produced in Germany are being transported and are moving through the customs process into Russia, our Russian books hold a euro-denominated payable.

At the end of every quarter, working capital balances are revalued at current spot rates. Gains or losses from revaluing transactional working capital balances typically flow through SG&A and are included in core earnings per share. The only exception is the case of a fixed exchange rate currency that is also hyperinflationary. In this case, we need to revalue not just the foreign currency transactional balances, but also the local currency working capital balances. All of these impacts are reported in non-core earnings. The Venezuelan bolivar is the only currency that currently fits this definition.

Third, income statements of foreign subsidiaries like Russia that did not use the U.S. dollar as their functional currency are translated back to U.S. dollars at new exchange rates. Just the Russian ruble transaction, balance sheet revaluation and translation impacts have been and are projected to be significant at about $150 million, $100 million and $300 million after-tax, respectively for a total as I said earlier, of $550 million after-tax for the year.”

This is the most significant fiscal year currency impact we have ever experienced

“Across all currencies, foreign exchange hurts totaled $450 million after-tax in the December quarter, $650 million fiscal year-to-date and are forecast to be at $1.4 billion after-tax profit curve [ph] over the course of the fiscal year. This is the most significant fiscal year currency impact we have ever incurred. The currencies of six countries, Russia, the Ukraine, Venezuela, Argentina, Japan and now Switzerland account for over $1 billion of the $1.4 billion after-tax headwind from FX.”

Breakdown of the impact

“Of the $1.4 billion hurt, about 30% is from transaction, about 20% is from balance sheet revaluation and the remaining 50% is from translation, because of these impacts the outlook for the fiscal year will remain challenging.”

More than 30% of our working media is now Digital

“ We have quietly strengthened and invested in all of our digital capabilities including mobile, search and social with a wide range of partners. More than 30% of our working media is now digital.”

We need to stay balanced

“In a time of unprecedented currency devaluation that impacts our company more than any other in our industry, it’s important to stay balanced. We need to balance doing what’s right for the short, mid and long term. We need to balance the focus on delivering operating cash flow in the short term and continuing to deliver good returns for shareholders with continuing to invest in our businesses, brands, products, capabilities and people for the mid- and long term health of the company.”
Promotion is the last place we like to spend money
“promotion is the last place we would like in most cases to spend a dollar, we would rather spend it on equity or innovation and if you just look at the drivers of our top line growth over time, I think that it bears that out.”