The Procter & Gamble’s (PG) CEO AG Lafley on Q4 2014 Results – Earnings Call Transcript

One housekeeping item before we begin all the numbers we will be discussing today assume discontinued operations treatment for the pet care business, reflecting in our planned exit. Impacts of the move from operating results to discontinued operations were provided previously in an 8-K filing and are available online.

Now, on to results, we grew organic sales 3% in the fiscal year we just completed in line with median performance in our industry. We essentially held market share. Core earnings per share increased 5%. Organic sales and earnings per share results were both within our target ranges. In fact, they were both within the pre-Venezuela devaluation ranges that we established going into the fiscal year despite more than a 25% reduction in market growth rates from 4 points a year ago to 2.5 points to 3 points currently and significant negative foreign exchange developments versus our going in plan. Our productivity program, which we will talk more about later, was a significant enabler in delivering in this outcome.

On a constant currency basis, core earnings per share grew double-digits despite market growth headwinds. All-in sales grew 1%. All-in earnings per share grew 4%. We generated $10.1 billion of free cash flow with 86% free cash flow productivity. We increased the dividend 7%, the 58th consecutive year that the dividend has been increased. We have returned $12.9 billion in cash to shareholders, $6.9 billion in dividends, and $6 billion in share repurchase. About 110% of net earnings all-in. We made significant progress on productivity, operating discipline and execution. We delivered $1.6 billion of cost of goods savings, well ahead of our target run rate of $1.2 billion and ahead of our going in estimate of $1.4 billion.

We improved manufacturing productivity by over 7%, reducing overall enrollment while adding new capacity and new sites. We opened the first new multi-category distribution center in the U.S. with five additional centers slated to come online by early next calendar year. We continued to accelerate overhead reduction. In February 2012 we announced the targeted 10% reduction of non-manufacturing enrollment by June of 2016. As of July 1, 2014, we have reduced roles by 16% more than 50% ahead of the original objective two years earlier. We have made good progress driving marketing effectiveness and efficiency through an optimized media mix with more digital, mobile, search and social presence, improved message clarity and greater savings in non-media spending.

While acknowledging the progress I just described across cost of goods sold overhead and marketing you maybe asking yourselves, where have all the savings gone. In the year we just completed most went to offset FX. We have large leading positions in some of the markets where currencies have softened the most Japan, Venezuela and Ukraine and where our price controls are in place. Excluding foreign exchange core earning per share were up double digits. Partly as a result of devaluation we are seeing significant wage inflation in developing markets as much as 30% per annum, which we also need to offset. We are continuing to make targeted investments in innovation, trial generation and in selling coverage to drive growth.

In addition to productivity, we made good progress this year in continuing to focus the portfolio. Just yesterday we closed the Americas pet care sales to Mars. Mars has also chosen to exercise their option to purchase the Asia business which accounts 10% of sales. We are working the European pet transaction with a different set of buyers. We exited concierge health services business and MDVIP. We exited the bleach business and we divested several additional smaller brands Latin America Pert as an example.

Moving from the fiscal year to the fourth quarter organic sales grew 2% in a very challenging macro environment with decelerating levels of market growth in both developed and developing regions and intense competitive spending in several categories. Organic volume was in line with prior year levels, pricing added two points to sales growth. All-in, sales were down one point including the two point headwind from foreign exchange and a modest negative impact from minor brand divestitures.

Core earnings per share were $0.95, a 20% increase versus the prior year. Foreign exchange was a $0.04 headwind on the quarter. Excluding foreign exchange, core earnings per share grew 25%. This includes the 5 point benefit from tax and a 4 point benefit from minor brand divestitures. Core operating margin improved 170 basis points driven by productivity savings. Core gross margin was down 50 basis points. Cost savings were approximately 270 basis points were offset by product category and geographic mix, foreign exchange and higher commodity costs. Core SG&A costs as a percentage of sales improved by 220 basis points, driven by overhead savings of 110 basis points, marketing efficiencies of 30 basis points and other SG&A reductions.

As we previewed in the last call non-operating gains from minor brand and business divestitures added approximately $0.03 to core earnings per share on the quarter. The effective tax rate on core earnings was 19% bringing the fiscal year rate to 21%, consistent with the outlook we provided in the last call. June quarter all-in GAAP earnings per share were $0.89, which include approximately $0.04 per share of non-core restructuring charges and $0.02 of charges from legal reserve adjustments.

In summary, we have just completed a challenging and tough but on-target year. We met our objectives, delivered double digit constant currency earnings growth, meaningfully advanced our productivity and portfolio focus agendas and built on our strong track record of cash return to shareholders. There is more work to do to deliver sustainable sales growth and reliable profit cash and value creation.

I will turn it over to AG to talk about strategies and plans to accomplish this.

AG Lafley – President and Chief Executive Officer

Thanks Jon. So that we are crystal clear, as John reported we delivered our business and financial commitments in 2013-2014, but we could have and should have done better. If just a couple of businesses that missed their going in operating plans had delivered, we would have achieved our internal leadership team goals of 4% sales growth, built modest market share, delivered 7% core EPS instead of 5% and 5% core operating profit growth instead of 2%. Despite all the market realities Jon described, country volatility, market slowdowns, currency hurts, customer and competitor challenges, the point here is delivering a better year was solely in our influence and control. So, while operating discipline and executional capability is getting better, a lot better around here, it must continue to improve to reach the levels of performance this company and our organization is capable of. We are increasing our focus on shoppers and consumers, they are the boss.

Everything begins with consumer understanding winning the zero first and second moments of truth and everything ends with winning the consumer value equation, consumer preference, purchase and loyalty. We are focused on creating and building consumer preferred brands and products that generate leading industry growth and value creation. This is how we will generate top tier total shareholder return. We need to continue to strengthen our brand positions, our product portfolio and pipeline and our selling effectiveness in the country’s channels and customers in a way that maximizes shopper trial and regular purchase, drives brand and category growth and delivers more reliable value creation for customers, partners for P&G and of course for shareowners.

Today, we are announcing an important strategic step forward that will significantly streamline and simplify the company’s business and brand portfolio. We will become a much more focused, much more streamlined company of 70 to 80 brands organized into about a dozen business units and the four focused industry sectors. We will compete in categories that are structurally attractive and that play to P&G strength. Within these categories, we will focus on leading brands marketed in the right countries, channels and customers, where the size of the prize and the probability of winning are highest with product lines and SKUs that really matter to shoppers and customers.

Why this significant strategic where to play change in brand portfolio? These core 70 to 80 brands are consumer preferred and customer supported. These brands are for the most part leaders in their industry category or segment, 23 with sales of $1 billion to $10 billion, another 14 with sales of $0.5 billion to $1 billion, and the remainder 30 to 40 with strong brand equities in sales of $100 million to $500 million. These brands are all well positioned with consumers and customers and well-positioned competitively. These brands have strong equities in differentiated products and a track record of growth and value creation driven by product innovation and brand preference. These brands are core strategic and have very real potential to grow and deliver meaningful value creation.

Over the last three years, the 70 to 80 brand portfolio has accounted for 90% of company sales and over 95% of profit. It has grown 1 point or 100 basis points faster than the total company and has earned more than 1 additional point of before tax margin. This new streamlined P&G should continue to grow faster and more sustainably and reliably create more value. Importantly, this will be a much simpler, much less complex company of leading brands that’s easier to manage and operate. This simplicity will significantly focus investment and resource allocation and enable execution. We will harvest, partner, discontinue or divest the balance 90 to 100 brands. In aggregate, sales of these brands, has been declining 3% per year over the past three years. Profits have been declining 16%. These brands make up less than half the average company margin.

The strategic narrowing and refocusing of the brand portfolio will have a number of significant benefits mutually reinforcing. 70 to 80 brands will bring clarity, focus and prioritization and simplicity to a smaller more integrated better coordinated organization. The brand business units will be responsible for brand and product programs end-to-end down to the local country level. Selling and market operations will be responsible for customer and channel strategies (Technical Difficulty). I will continue. Selling and market operations will be responsible for customer and channel strategies for distribution, shelving, merchandising and pricing execution for winning at the first moment of truth at the retail customer and distributor level. This focus on fewer core strategic brands will enable a strategic rationalization of product lines within brands and an even more significant pruning of unproductive SKUs.

As we rationalized business and brand portfolios, product lines and SKUs, P&G brands and products will be easier to shop and more productive and profitable for our customers, our partners and for the company. This focus on fewer strategic brands will enable R&D to focus product and technology development on more consumer relevant and impactful brand and product ideas. We have already started reallocating R&D resources and budgets, cutting out low value activity and doubling down on our most promising product innovations. This focus on fewer core strategic brands will importantly inform our supply chain transformation. We will now match manufacturing capacity to the brand portfolio and product lines. We will build distribution and mixing centers for only the brands and products we choose to sell. This should enable industry leading responsiveness and service to customers at lower cost throughout the value chain.

With this refocus on consumer and shopper preferred leading brands, we will be able to focus selling operations by retail, account, wholesaler and distributor, strategies, tactics and in-store executions that really make a difference. The same simplification and prioritization enables all our functions to provide the business units and sales operations better value-added help and support.

In summary, we are going to create a faster growing more profitable company that is far simpler to manage and operate. This will enable P&G people to be more agile and responsive, more flexible and faster, less will be much more. As a result of the company’s strategic focus on its leading brands, we will both accelerate and over-deliver the original $10 billion productivity plan. While we are not going to publish or report specific endpoint savings numbers today, we will clearly over-deliver the original goals and we will update you on progress along the way.

In cost of goods sold, we are driving further and faster than when we established the original savings objectives. The annual manufacturing productivity improvements we are making and have made measured by the number of cases of product produced per person per year are well beyond initial targets that our process reliability and adherence to quality standards is resulting in less raw material and finished product scrapping. Increasing localization of supply chain is driving transportation and warehousing cost savings.

Earlier this year, we initiated what is probably the biggest supply chain redesign in our company’s history. We are moving from primarily single category production sites to fewer multi-category manufacturing plants. We are taking this opportunity to simplify, standardize and upgrade manufacturing platforms for faster innovation, qualification and expansion and improve product quality. We moved to standard manufacturing platforms a little over 10 years ago in baby care. We are developing standardized manufacturing platforms for a number of businesses, fabric care, grooming, oral, and personal power to name a handful.

We are transforming our distribution center network moving from shipping products to customers from many ship points as if they were coming from different companies to consolidating customers shipping into fewer distribution centers. These centers are located strategically closer to customers and key population centers in North America enabling 80% of P&G’s business to be within one day or less of the store shelf and the shopper. This will allow both P&G and our retail partners to optimize inventory levels, while still improving service and on-shelf availability, efficient customer and consumer response and more importantly reducing in-store out of stocks. All of our new distribution centers will be up and running by early 2015.

To manage and operate the simpler brand portfolio, we have made several important organization design changes, move to four industry-based sectors, streamlined and de-duplicate – de-duplication of business units and selling operations, recombination of four brand building functions into one, reduction of hierarchy with all the sales operations and business unit leaders working together and working directly with Jon and with me. Each of these changes reduces complexity. Each creates clear accountability for performance and results.

We are just beginning to benefit from these opportunities to improve performance and reduce overhead costs that the organization changes create. We believe we have more opportunity to improve marketing effectiveness and efficiency in both media or non-media areas, while increasing overall marketing effectiveness and improving top line growth. When we get brand and product innovation right, source and sell brands and products effectively and efficiently we grow and we drive meaningful value creation. We generate higher sales and profit per unit which enables us to capture greater share of the value profit and cash where we choose to compete. It is this share of value the share of profit and cash that is generated that we really want to focus on and if we can disproportionately capture.

Today we have about 60 share of U.S. laundry market sales that earn approximately 85% of the profit and cash generated in the entire category, nearly a 70 share of grooming business worldwide and about a 90 share of value or profit. This disproportionate capture of category value is direct result and reflection of our business strategy and our business models. There has been some discussion in this context about whether premium price brands and products are still drivers of growth and value creation and I want to comment on this briefly this morning. We are shopper and consumer led. Their wants and needs come first. We meet those needs with differentiated brands and better performing products priced to deliver real and perceived consumer value.

In all four industry sectors and in most of our businesses there is as much and often more sales growth and value creation profit and cash in the premium and super premium segments. We have had some success in these segments. In the grooming market premium products generate about 43% of category sales. Gillette has an 88 share of this segment. Four years ago we introduced Fusion ProGlide priced at the higher end of the premium segment. Fusion grew global value share for 31 consecutive quarters reaching $1 billion in sales, faster than any other P&G brand or any other Gillette shaving systems in history. Fusion has been successful in developing markets which accounts for 25% of the brand’s and product line’s total business. In countries where Fusion has been in the market for several years it has earned value shares that rival those is the best developed markets. South Korea we have a 45 share and Russia a 33 share for example.

Last month we launched the newest product in the Fusion lineup FlexBall is the first razor designed to respond to the contours of a man’s face maintaining maximum contact in delivering a close or more complete and more comfortable shave. End market go side – premarket men preferred FlexBall two to one versus the then best selling razor in the world our own Fusion ProGlide. FlexBall is off to a very good start and appears to be revitalizing consumer interest in the category. While it’s only been available a couple of months we have seen a 30% spike in male razor category value in the U.S. and acceleration in cartridge sales and shares.

Crest 3D White premium oral care regimen was also launched in the U.S. and grew market share for 17 consecutive quarters, expanded worldwide and has become $1 billion business. 3D White has been an important driver of toothpaste market share growth in Brazil and Mexico adding about 0.5 of share in Brazil and a point in Mexico. We have recently launched 3D White in Spain, France and Australia. Early results are encouraging with growth in both category and our market share. In Western Europe the oral care category grew 3.5% in value this last quarter in the region where many other categories are declining 1% to 2%. 3D White is a big driver of that category growth. Following up on the 3D White launch we introduced Crest 3D White Luxe toothpaste and White Strips. The toothpaste removes up to 90% of surface stains on teeth in just five days and protects against future stains with a proprietary technology. The Whitestrips with FlexFit stretch and mold to your teeth for a custom fit. Tide, Gain, and Ariel unit does laundry detergents have been an innovation breakthrough, resetting the bar for delightful consumer usage experience, product performance and convenience in the laundry detergent category.

Tide Pods have priced at a 20% premium to base Liquid Tide and had grown to over 7% of the laundry category. In March, we launched Gain Flings, their version of Pods, priced at a 60% per use premium to Gain liquid detergent. Flings have already grown to nearly 3% value share, combined Tide Pods and Gain Flings now hold a more than 10 value share of the U.S. laundry category and over 80% of the unit dose segment.

We now offer this innovative product in over 50 countries. And several other markets including Japan and China, we’ve recently launched single chamber unit does product setting the stage for future upgrades as the unit dose segment develops. In Japan, Ariel and Bold unit dose detergents are off to a strong start achieving a nine value share in just three months. Managing a brand and product portfolio is obviously a balance. In some categories where affordable pricing is more important part of the consumer value equation. We broaden our brand, product line, package size and price offerings to serve more consumer needs.

Bounty and Bounty Basic, Charmin and Charmin Basic, Pampers and Luvs, Tide, Gain and now Tide simply clean and fresh. While we will continue to compete with product innovation and brand differentiation, we will not allow ourselves to be uncompetitive on a consumer value basis and segments where we choose to play. There are times we must and will make appropriate pricing adjustments to remain competitive. We’re doing this now, which you know on a targeted basis in U.S. Fabric Care and Family Care where competitors have been price discounting and promoting heavily since last calendar year.

In the end, we follow the shopper and the consumer. We meet their needs with consumer preferred P&G brands in better performing products, priced at a modest premium that delivers superior consumer value. We’re currently entering the female, adult incontinence category. This is an attractive $7 billion global category growing at an annual rate of 7%. We’re entering the category with consumer preferred superior performing products that deliver significant benefit advantages from Always, a brand women trust in prefer. We began shipments of Always, discrete in U.K. last month and we’ll start shipments in North America and France over the next few weeks.

We’ll be sending you more details about this exciting new product line from Always next week. In September, we’re launching Crest Sensi-Stop strips. This is a revolutionary new product technology that provides the tooth sensitivity relief like never before. One strip applied for just 10 minutes, delivers immediately and up to one month of protection from sensitivity, pain for many consumers. We’re setting the brand and product innovation agenda in our industry. When we do this well, we build consumer preference for our brands, extend the level of product competitive advantage, build brand and product consumer preference accumulatively overtime, and capture a larger share of category value, profit and cash.

The final area that will benefit from brand portfolio simplification is the consistency and quality of our brand building and selling execution. This execution is the only strategy our consumers and customers ever really see. We’re bringing renewed focus to brands. When we get brands right, we deeply understand consumers and we create desirable ideas, iconic equities, and become a prototype in the category. We consistently express the brand promise with ideas that attract consumers to the product superior benefits to create trial, purchase lasting preference, and loyalty. This brand focus allows us to improve execution and build on those strategic brands to win ultimately with consumers.

We’re also focusing selling resources to improve coverage, expertise, and execution in key retail channels, wholesalers, and distributors. This should lead to improve distribution, shelving, merchandising and pricing execution to win consistently at the first moment of truth. We are and we will continue to increase coverage, sector and category dedication of our sales force and merchandisers in the store. I am excited by the opportunity to further elevate brand and selling execution and feel very strongly these efforts will be enabled by the portfolio focus we have embarked on.

I am working directly the sector and SMO leaders on these opportunities to profitably accelerate top line growth, while Jon and the team continue leading the work on portfolio simplification and productivity. This portfolio transformation may take a little more time than any of us would like because streamlining the brand and product portfolio will be governed by our ability to create value on every exit. When we get there to our in effect P&G new-co with the streamlined 70 to 80 brand portfolio, this will enable faster and more sustainable growth and more reliable value creation through the end of the decade and beyond.

We will be a simpler, faster growing, more profitable company that is far easier to manage and operate. We will be a company of brands that consumers prefer and customers support, well positioned competitively. A company of brands simpler to source, sell and service. The streamlined company of leadership household and personal care brands will deliver more reliable value creation for consumers and customers, partners and suppliers and will deliver reliably and sustainably total shareholder return in the top third of our industry peer group.

I look forward to updating you on our progress when we meet for our Analyst Meeting here in Cincinnati in November. Now I will turn the call back to Jon to provide the details on our outlook for this year.

Jon Moeller – Chief Financial Officer

We continue to expect global markets in our categories to grow in value terms 2% to 3%. Against this backdrop we are currently forecasting fiscal 2015 organic sales growth of low to mid-singles. With this level of growth, we will maintain or modestly grow global market share on a local currency basis. We think this is pragmatic and realistic starting point for our fiscal ‘15 financial commitments. Pricing should again be a positive contributor to organic sales growth, though likely not to the same degree we have seen over the past several years.

Foreign exchange is expected to be a one point sales growth headwind. With this level of sales growth we are forecasting mid-single digit core earnings per share growth. We will benefit again from significant productivity savings, but like last year these will be partially offset by FX headwinds which won’t annualize at current spot rates until the back half of the year. We have a few value corrections to make. We are also going to invest and consumer trial of preferred brands and major new product innovations that are in market and that are coming to market.

We will continue to make investments in innovation and go to market coverage in the fastest growing sales channels. Non-operating income and tax should be roughly in line with prior year levels. And we are targeting to deliver 90% or better free cash flow productivity. Our plans assume capital spending in the range of 4% to 5% of sales and share repurchase in the range of $5 billion to $7 billion. At this level, share repurchase should net of option exercises contribute about one percentage of earnings per share growth.

On an all-in GAAP basis we expect earnings per share to also grow mid-single digits including around $0.20 per share of non-core restructuring investments. In addition to the assumptions included in our guidance we want to continue to be very transparent about key items that are not included. The guidance we are providing today is based on last week’s FX spot rates, further currency weakness including Venezuela is not anticipated within our guidance range. We continue to monitor unrest in several markets in the Middle East and Eastern Europe. And we continue to closely monitor markets like Venezuela and Argentina where pricing controls and import restrictions present risk. This guidance does not assume any major portfolio moves. We will update guidance as these occur.

Finally, our guidance assumes no further degradation of market growth rates. There are a few things you should keep in mind as you construct your quarterly models, our toughest top line comps are in the first two quarters. The top and bottom line impacts from consumer value corrections will disproportionately affect the first quarter and the first half. FX impacts will not fully annualize until the back half and productivity savings will build as the year progresses. In summary we are pleased to have delivered an on target year on both the top and bottom lines, but realized there is more work to do. We are realistic about where we stand in the journey and are excited about the path ahead. That concludes our prepared remarks. As a reminder, business segment information is provided in our press release and will be available in slides, which will be posted in our website, www.pg.com following the call.

AG and I will be happy now to take your questions.

Question-and-Answer Session
Read the Full Transcript here

Related Posts

• The Truth About Debt: Why 99% Rich Use It & Others Fear It – Dr. Anil Lamba (Transcript)
• Paulo Nogueira Batista: Decline of the IMF & Rise of the BRICS New Development Bank (Transcript)
• Ex-BlackRock Insider Reveals The Next 2008 Financial Crisis (Transcript)
• Transcript: CEA Dr V Anantha Nageswaran on Growwing India Podcast
• Transcript: Business Expert Natalie Dawson on DOAC Podcast