Procter & Gamble PG Q1 2021 Earnings Call Transcript

Speaker 1: (00:01) Good morning and welcome to 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 10K 10Q, and 8K 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, 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. 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 Vice Chairman, Chief Operating Officer, and Chief Financial Officer, Jon Moeller. Jon Moeller: (01:01) Good morning. We'd like to start by expressing our sincere hope that you and your families remain safe and are well. A good quarter isn't difficult to explain, so we're going to keep our prepared remarks brief, with just a little over 10 minutes, and then turn straight to your questions. The July-September quarter provides a very strong start to the fiscal year, enabling us to increase guidance for organic sales growth, raise guidance for core earnings per share growth, increase guidance for adjusted free cash flow productivity, and raise our commitment for cash return to share owners. Organic sales up more than 9%, seven points of volume growth, one point of positive mix, and one point of price. We built strong momentum leading up to the crisis with 6% organic sales growth in calendar year 2019. We maintained 6% growth in the first half of calendar 2020, overcoming significant challenges, including the lockdown in China, closure of the travel retail, electro, specialty beauty and away-from-home channels. Operational challenges, safely staffing our facilities and sourcing materials necessary to maintain, and in some categories, significantly increase production to serve heightened consumer cleaning health and hygiene needs. Jon Moeller: (02:27) And we accelerated to 9% this quarter against the strong 7% base period comparison. Strong momentum reflecting the underlying strength of our brands and the appropriateness of the strategy, which is driving our business pre, during, and at some point post COVID. Broad based growth, US organic sales up 16%, greater China up 12%, focus markets up 11, and enterprise markets, which are significantly impacted by the COVID pandemic, up five. Nine of 10 product categories grew organic sales. Home care up more than 30%, oral care up mid teens, family care up double digits. Personal health care, fabric care, feminine care, hair care, and skin and personal care up high singles, grooming up mid singles, baby care down low singles. Aggregate market share growth of 30 basis points with 30 of our top 50 country category combinations holding our growing share. E-commerce sales up approximately 50% for the quarter. Turning to earnings, core earnings per share up 19%, currency neutral core earnings per share up 22%. Within this, core gross margin expansion of 140 basis points, up 170 basis points X FX. Jon Moeller: (03:52) Core operating margin up 300 basis points, up 350 basis points excluding FX. Adjusted free cash flow productivity up 95%. We returned $4 billion of value to share owners, $2 billion of dividends paid and $2 billion of P&G stock repurchased. In summary, a very strong start to the fiscal year, strong volume sales and market share trends, strong operating earnings, margins advancing, strong core earnings per share growth. We built strong momentum heading into the COVID crisis and have been able to maintain this through the most recent quarter, supporting the guidance increase for all key financial metrics, organic sales, core earnings per share, cash productivity and cash return. Jon Moeller: (04:43) As we outlined each of the last two quarters, we have established three priorities that have been guiding our actions and our choices in this crisis. Period. First is ensuring the health and safety of our P&G colleagues around the world. Second, maximizing the availability of products we produce to help people and their families with their cleaning, health and hygiene needs. These products are more important than ever given the needs created by the current crisis, increased awareness of health and hygiene and the additional time we're all spending at home. Third, supporting communities, relief agencies and people who are on the front lines of this global pandemic with product donations, PPE production, financial support, and using our marketing and communications expertise to encourage consumers to support public health measures to slow the spread of the virus. These priorities are completely congruent with our strategic choices, which remain the right ones. These strategic choices are the foundation for balanced top and bottom line growth and long-term value creation. As you know, we've focused our portfolio on daily use products and categories where performance plays a significant role in brand choice. In these performance-driven categories, we've raised the bar on all aspects of superiority, product, package, consumer communication, retail execution, and value. Superior offerings delivered with superior execution drive market growth. Leading category growth with superior offerings mathematically builds market share and builds business for our retail partners. We've made investments to strengthen the long-term health and the competitiveness of our brands. And we'll continue to invest to extend our margin of advantage and quality of execution, improving options for consumers around the world. Jon Moeller: (06:40) The strategic need for this investment, the short-term need to manage through this crisis and the ongoing need to drive balanced top and bottom line growth, including margin expansion, underscore the importance of ongoing productivity. We're driving cost savings and cash productivity in all facets of our business, up and down the income statement and across the balance sheet. Next, success in our highly competitive industry requires agility that comes with a mindset of constructive disruption, a willingness to change, adapt and create new trends and technologies that will shape our industry for the future. In our current environment, that agility and constructive disruption mindset are even more important. Last, our new organizational structure yields a more empowered, agile and accountable organization with little overlap or redundancy, [inaudible 00:07:38] to new demands, seamlessly supporting each other to deliver against our priorities around the world. These strategic choices we've made, portfolio, superiority, productivity, constructive disruption and organization structure and culture, are not independent strategies. They reinforce and build on each other. When executed well, they grow markets, which in turn grows share sales and profit. Jon Moeller: (08:06) We believe our strategies, the success we've had behind them and an increased societal focus on health, hygiene and a clean home all bode well for the future. We believe P&G is well positioned to serve consumers' heightened needs and their changing behaviors, and to serve the changing needs of our retail and distributor partners, all of which are critical to long-term value creation. We like our long-term prospects. Though the near term will continue to be challenging, and it's a little more difficult to predict. Our near term outlook begins with an assumption of how underlying consumer markets will develop. This by itself is highly uncertain. Jon Moeller: (08:49) The reality is that COVID cases are increasing in many parts of the world without the resources infrastructure or in some cases the will to effectively manage it. We'll likely be operating without a broadly available vaccine or advanced therapeutic through fiscal '21. This could prompt tighter containment policies and dramatically reduce mobility, which would affect employment and overall incomes, potentially leading to a deeper and longer recession across large parts of the world. In the US, it's unclear how long we'll be operating at high unemployment levels, and when and how much mitigating economic stimulus will be available. There continues to be social unrest and economic distress in many parts of the world that also affect the prospects for category growth. Jon Moeller: (09:38) These same dynamics can result in an increased cost to operate. And there is an ongoing risk of supply chain disruption, our operations or those of our suppliers. Against this challenging backdrop, we're still holding ourselves to an expectation of meaningful growth, top line and bottom line, and expect to be highly cash generative. With a strong first quarter as a base, we're increasing our fiscal year guidance. We're raising our organic sales growth guidance from a range of two to 4% to a range of four to 5%, which includes some quarter to quarter ramp down from Q1 as retail inventories are fully replenished and as promotions are partially reestablished. Jon Moeller: (10:24) We expect to grow market share in aggregate for the year. We're increasing our core earnings per share growth guidance from a range of three to 7% to a range of five to 8%, versus prior year core earnings per share of $5.12. This bottom line outlook includes headwinds of approximately $325 million after tax of foreign exchange, $150 million from the combination of higher interest expense and lower interest income, and $50 million after tax of higher freight costs. These headwinds should be partially offset by $175 million after tax of commodity costs and tailwinds. Jon Moeller: (11:06) Fiscal 2021, we'll continue our long track record of significant cash generation and cash return to share owners. We're raising our target for adjusted free cash flow productivity from 90% to around 95%. We continue to expect to pay approximately $8 billion in dividends and are increasing our outlook for share repurchase from a range of six to $8 billion to a range of seven to $9 billion. Combined, dividends and share repurchase, a plan to return 15 to $17 billion of cash to share owners this fiscal year. This outlook is based on current market growth rate estimates, current commodity prices and current foreign exchange rates. Significant currency weakness, commodity cost increases, additional geopolitical disruption, major production stoppages, or store closures are not anticipated within these guidance ranges. Jon Moeller: (12:06) Wrapping up, we continue to execute winning strategies, a portfolio in daily use categories where performance drives brand choice, superiority in products, packages, consumer communication, retail execution and value, productivity in all areas of cost and cash, constructive disruption in all facets of the operation, and improved organization, focus, agility, and accountability. We feel we continue to have the right priorities to deal with the immediate challenges the company's facing, ensuring employee health and safety, maximizing product availability and helping society overcome the challenges of the crisis. We're stepping forward, not back. We're doubling down to serve consumers and our communities. We're investing in the superiority of our brands and the capabilities of our organization, always with our eyes fixed on long-term balanced growth and value creation. With that, I'd be happy to take your questions. Speaker 2: (13:12) Ladies and gentlemen, if you have a question, please press star followed by one on your phone. If your question has been answered, or if you'd like to withdraw your question, please press star followed by two. Take our first question comes from the line of Jason English with Goldman Sachs. Jason English: (13:32) Hey, good morning, folks. Thanks for slotting me in. Jeez. First question, so many years to go. I guess I want to jump off a part of one of the higher order questions, Jon. You mentioned your excited views about the consumers' increased focuse on health, hygiene and home. What's your view on the durability of those related behavioral changes that we've seen over the last six, eight, nine months? Do you expect them to revert to pre-COVID levels? If so, what's the duration? And if not, why not? Jon Moeller: (14:10) We do expect that there's some stickiness to new habits that are being formed and new awareness that's been raised. It's hard for us to see in our interactions with consumers that we're going to snap back and revert to the same attitudes and the same behaviors that we had collectively pre-COVID. Even things like the amount of inventory, pantry inventory, I keep. In some ways, this is analogous to some of us remember our grandparents, for example, having survived the Great Depression. And they continued to hold on to more food and canned items than I could ever understand. But it was because of what they'd been through. Jon Moeller: (15:03) ... go back to ever understand, but it was because of what they've been through. And super habits, once they're established in our categories, are rarely reversed. On occasion, under duress, they will be, but generally, once people start using a category, once they form a habit, it stays. I'm sure there'll be some level of reversion, but we do expect a permanent change at some level as well. Duration, your calls as good as mine. I have no ability to predict what's going to happen here from a viral standpoint or from a medical solution standpoint. Speaker 3: (15:47) I appreciate the perspective. In that context, did you think about your portfolio construct? Does it change the way you think about where you want to play? Jon Moeller: (16:00) On the margin, it can have an impact on where we want to play. We're happy with each of our current categories. The question is, are there additional opportunities that we want to be able to access? So for example, we've launched a hand sanitizer in the US under the Safeguard brand name. You're aware of the Microban 24 surface disinfectant, which we're working hard to increase capacity on so we can meet very high demands for that product. So generally, again, our portfolio is going to daily use categories, performance drives, brand choice, heavily centered on health, hygiene, and a clean home. That's going to serve us very well in this situation just as it did prior, but the situation does present additional opportunities to step up and serve and help consumers with their health, hygiene, and clean home needs. Speaker 3: (16:57) Thanks a lot. I'll pass it on and congrats again on your continued success. Jon Moeller: (17:02) Thanks. Speaker 4: (17:02) All right. Your next question comes from Rob Ottenstein with Evercore. Rob Ottenstein: (17:10) Great. Thank you very much. And congratulations on a terrific quarter. So 7% volume growth, a percent price, a percent mix, very balanced. Kind of a two-part question. How are you thinking about market share? How much of a priority is that in this environment? And kind of then looking at e-commerce, we've done a lot of work on the US e-commerce business and did a deep dive on that using enumerator data, and what came out of that was a little mix. Certain categories doing extremely well, like Crest, just killing it in e-commerce, but based on the numbers and data we saw, diapers, bath tissue, paper towels, appear to be losing share in e-commerce. So love to kind of get a sense of how you're thinking about market share and then particularly market share in e-commerce and whether, in terms of e-commerce, whether you are hitting kind of the notes of superiority that you're looking for with the rest of your business? Thank you. Jon Moeller: (18:25) Thanks Robert. I want to start in a slightly different place, but I'm going to bring it right around to the core of your question, so be patient with me. We are maniacally focused on increasing and leading market growth. And when we do that, we do that with superior products, continuously increasing our margin of advantage, meeting additional needs, solve intention points across the portfolio. When we disproportionately are able to drive market growth, mathematically, we build share, and that share growth is much more sustainable achieved that way. And is, generally, much more profitable than if we were sourcing market share by taking business from other companies, but we'd rather create than take, and in the process more sustainably build market share, which is very important, as well as sales and profit. Jon Moeller: (19:42) In terms of e-commerce, it's a very competitive marketplace, just like other channels that we compete in. So there are always ups and downs across categories, but we find that the same general strategy that I articulated in our prepared remarks and that I just described parts of it in what I just provided, is highly relevant in e-commerce just like it is in brick and mortar. And we don't see a lot of, there's some, but we don't see a ton of differentiation between our ability to succeed in an e-commerce format and a offline format when we execute our strategies, and when our products, in categories or performance drives brand choice, are truly superior. Jon Moeller: (20:40) So that's our focus. We look carefully at overall share progress, online versus offline, and margin progress, online versus offline. In an aggregate, which is always dangerous, of course, operationally, we moved to lower levels of aggregation, we're indifferent between online and offline shopping, which is exactly where we want to be. I mentioned we grew e-commerce sales 50% in the quarter that we just completed. E-commerce sales are now probably 11 to 12% of our total. So they're important, and we're just as focused on being successful in that channel as we are the others. Speaker 4: (21:34) Okay. next question comes to the line of Dara Mohsenian with Morgan Stanley. Dara Mohsenian: (21:40) Hey, good morning. So John, just wanted to better understand the implied balance a year, organic sales growth guidance for the fiscal year after Q1 strength, totaling up 3% of at the end point of your four year range versus 9% this quarter. Doesn't seem to really moved up the Q2 through Q4, implied forecast despite the Q1 upside. So just trying to understand, is that more just related to an uncertain environment here, post COVID? Are there other specific factors driving that forward? Sequential caution? You had mentioned a couple in your prepared remarks, so a bit more detail would be helpful there. And just on promotion, given that did come up in your prepared remarks, is the US promotional environment, is that returning to more of a normalized level? And how do you think about calendar 2021 versus 2020 on that front, just given it was at a normally depressed promotional base? Thanks. Jon Moeller: (22:42) No surprise to you or anyone on this call, we continue to operate in a highly uncertain environment with many more drivers of that uncertainty than we're historically accustomed to. And that certainly helps frame guidance, if not guidance ranges. Second, we've got a long way to go. So we're through one quarter. We've got three more quarters to execute on in this very dynamic environment. Third, market growth, which is where we start in our outlook process, looks to be kind of two to 4% on a normalized basis. That's global. And so four to five, as our new fiscal year guidance range, is consistent with our desire to build market share, but I think a realistic in its approach. Jon Moeller: (23:54) Also, the quarter we just completed has two elements, and you mentioned one of them, that will drive a higher top line result. The first is there's been, there was inventory replenishment to the trade during the quarter. That was probably worth a point or two. And you mentioned, as well, lower levels of promotion. We still have categories where we have replenishment work to do. So some of that benefit will carry forward into subsequent quarters, but many of our categories are now replenished. Jon Moeller: (24:36) And from a promotion standpoint, we've returned to somewhat normal levels of promotion in most categories in the US, except those where we still have work to catch up on replenishment, where demand exceeds our current ability to supply. And that would be our home care business, our tissue towel business, and parts of our healthcare business. We do expect some normalization of promotion rates in the back half of the year, so as we get into 2021, exactly what the cadence is of that, and exactly what level things return to is not entirely clear. We're going to continue, where we have the opportunity, to prioritize spend on innovation and equity. There's nothing proprietary and promotion, but we will be competitive from a promotion standpoint. Jon Moeller: (25:37) I know that answer lacks the specificity you're looking for. It's the best I can do with the current state of knowledge and the current state of volatility. I think, Dara, the question behind the question is, is there a possible upside to the guidance range? I think the answer is yes, but I would also hasten to add that there's also downside. There's just a lot of moving pieces right now. Speaker 4: (26:11) All right. Your next question comes from the line of Lauren Lieberman with Barclays. Lauren Liberman: (26:16) Thanks. Good morning. I wanted to ask a little bit about fields of play. As you'd mentioned, kind of new opportunities out there and the release also had specifically mentioned the Safeguard launch. I was curious though, also about the personal health care business because that's another area where, just like home care, you've been investing and sort of building up a greater presence, pre COVID. And it would seem that this new environment would also open up some interesting incremental opportunities in personal healthcare. So could you talk a little bit about that business kind of where if you are spending differently, focusing on new areas, what the more international footprint of that business opens up for you versus where you were several years ago? I think that could be really helpful. Thanks. Jon Moeller: (27:11) Sure Lauren. That is a ... Personal healthcare is a very attractive field of play, to use your description. It's one that affects your rights. We've been investing behind. We purchased the German Merck OTC portfolio, which we're still in the middle of integrating, but very successfully. Our top line growth on that business and our heritage P&G personal healthcare business outside of the United States, to your question of international, is growing at growth rates, very attractive growth rates, high singles, double digits in some cases, ahead of the plan when we purchased those assets. And the good news is cost synergies are also coming in nicely. So that does give us confidence to continue looking for smart ideas to expand the current portfolio and to look for additional opportunities to create value with. And we'll be doing that. Jon Moeller: (28:27) The German Merck OTC assets gave us about a billion dollar sales international business. Again, combined with things like Vicks and the heritage P&G portfolio. So we now have a meaningful presence in many parts of the world that puts us, and we've secured capabilities, that put us in a position to drive this business and do it profitably, and that will be one of our focus areas going forward. So I don't want to overemphasize that opportunity. We have, as you know, spent a lot of time and a lot of effort to land in the 10 categories that we've landed in and our intention is to grow and to win and to seize opportunities and to do it profitably in each of them. But clearly we see those same opportunities in over the counter medicine's business. Speaker 4: (29:27) Okay. Next question comes from the line of Steve Powers with Deutsche Bank. Mr. Powers, your line is open. Steve Powers: (29:42) Sorry about that. I was muted. So thank you. And John, you've had a couple of tremendous growth quarters in the US, as well as China, the past six months. And you've hinted at it a little bit this morning already, but I was just hoping you could talk a little bit more explicitly around your expectations for those markets over the remainder of the year, both in terms of consumer takeaway- Steve: (30:03) ... those markets over the remainder of the year, both in terms of consumer takeaway as well as your own selling patterns, if they're likely to differ. I guess, I don't know if you consider this a separate question, but I guess I'm curious as to what you attribute that outstanding growth to in those markets versus what I think equates to more low-to-mid-single-digit growth across the rest of the portfolio. I'm wondering if it's just a function of your particular focus, or if there are underlying differences that are more structural in those most focused of your focused markets versus the rest of the world as we think about the go-forward. Thank you. Jon Moeller: (30:40) Thanks, Steve. We've talked for some time, David began talking about this at CAGNY several years ago, about the importance of winning in the US and China. We've been very intentional in establishing superior positions across our categories in those two markets. Even our organization design is structured to allow the leadership of our company to focus their time and effort on the focus markets with, as you say, China and US being the most focused on the focus markets. The combination of that organization choice, that prioritization choice, and the execution of the holistic strategy are what are making the difference in the US and in China. Jon Moeller: (31:42) The US and China, from a category growth standpoint, do have category growth rates that are higher on average than some other parts of the world. I'll take Europe as an example. Currently Southeast Asia, Middle East, and Africa as an example. But I don't think that that is ... There's significant opportunity across the geographic portfolio. Witness on the quarter we just completed, we grew organic sales and we grew earnings in every geographic segment. So as we fully and holistically execute the strategy on a global basis, there should be opportunity to improve growth rates in the non-US and non-China business. And we're going to have to work really hard to maintain strong growth rates in the US and China, where we have very strong and able competition. Jon Moeller: (32:50) The growth rates that we've delivered most recently are very strong, very attractive. They were pre-COVID. They were certainly in the US during COVID. Not so much in China. And the rebound in China has been encouraging to see. But I think from a sustainable standpoint, and we talked about this at Lauren's conference in the fall, earlier in the fall. You need to really start with what you expect market growth to be, and assume we can build a couple share points or a little bit of share on top of that to really ground yourself in what's reasonable to deliver over longer periods of time. Now, as I said earlier in this conversation, we have a responsibility to impact that market growth. We believe we've done that certainly in the US, and we need to continue doing that. Jon Moeller: (33:50) So very long-winded question, but the disproportionate growth in the US and China is partly a function of those markets. It's partly a function of priority. It's partly a function of the execution of the strategy. And I think it's already had application elsewhere, and will continue to even more so as we move forward. Speaker 5: (34:21) The next question comes from the line of Kevin Grundy with Jefferies. Kevin Grundy: (34:26) Hey. Good morning, John, and congrats again on another great quarter. First, a housekeeping question. I apologize if I missed this. Do you have a global retail takeaway number relative to the 9% organic sales growth in the quarter? That would be helpful. Kevin Grundy: (34:40) But my broader question, John, is on the US men's grooming category. I was hoping we could get an update there. I ask, of course, in the context of some of the challenges, some of the demand challenges that that business has faced for a while, which had been compounded a bit by the pandemic and work-from-home trends. And now I also think it's notable that Dollar Shave is rolling out at Walmart just this week. It probably suggests further risk to Schick, and may slow some of Harry's momentum. But can you comment a bit on the potential risk to Gillette's market share position, spending plans that are in place? We talked about promotion earlier. I suspect this will likely be a category or destination for some of that higher promotion, particularly in the competitive environment and some of the demand challenges. And maybe just comment on your level of comfort around pricing ladders and price positions in the category, which I know has been an area of emphasis here in recent years. So thanks for all that, John. Jon Moeller: (35:32) Thanks, Kevin. I'm going to suggest you get with John Chevalier after the call. He can give you a more specific number on retail offtake during the quarter. Going at it kind of from the top of my head, I would guess it's probably seven or eight, but John can help you with that. Jon Moeller: (35:56) In terms of grooming, grooming continues to be a very attractive business. We grew the top line on our grooming business globally two years ago. We grew it last year. So two years in a row of growth, and we grew at 6% in the quarter that we just completed. Part of the pickup in the business is a result of more holistically serving all consumers. So we've talked about SkinGuard as an example that was designed to meet the needs of the high percentage of men who had sensitive skin, for whom shaving was painful, and reduce that barrier to shave frequency and shaving in general. Jon Moeller: (36:56) We've launched now, in some channels and in some parts of the world, a whole lineup of products under the brand of King C. Gillette that are designed to serve men who choose to maintain facial hair. So everything from trimmers, to beard wax, to conditioners, et cetera. That has been going very, very well. Jon Moeller: (37:22) The third thing I would point to is very strong innovation on our dry shave business, which has been growing very attractively as well. This will continue to be a competitive category because of the attractiveness of the category. You should assume that that is built into our thinking and built into our plans. I want to avoid any specific reference to pricing or promotion in a specific category of business, but we like this business. It's growing. It's very profitable, highly cash-generative, and it's something we'll be investing behind. Speaker 5: (38:04) Your next question comes from the line of Andrea Teixeira with J.P. Morgan. Andrea Tiexeira: (38:14) Hi. Good morning. Congrats on your results. John, if you could break down your 7% volume growth in additional distribution and innovation, I guess. Just velocity of the legacy franchises, just to get an idea of the duration of this momentum. Conversely, perhaps if the only area that you may need to improve are the mid-tiers diapers. So, can you give us your view on this segment globally? Thank you. Jon Moeller: (38:41) I really don't know how to break volume down with any confidence along the lines that you're requesting. So, I apologize for that. Jon Moeller: (38:51) We have some great positions in diapers around the world, particularly in the pant-style form, where we're marker heaters. That is the fastest growing segment of the diaper market on a global basis. We're also doing very well in the premium portion of the business. As you rightly point out, we have not been superior in the middle of the market. What we call main line. And we have, as you would expect, been working hard on that and have innovation coming to market across the world beginning this quarter and next, and carrying on through 2021, which we expect to address that situation. Speaker 5: (39:41) Next question comes from the line of Mark Astrachan with Stifel. Mark Astrachan: (39:46) Thanks, and good morning everyone. John, wanted to go back to e-commerce. So 11, 12% of sales. I'm guessing that's somewhere kind of double where it was pre-COVID. So, maybe touch on how much of that increase is sustainable. Meaning how much of those consumers are going to continue to purchase in that medium, and what drives the adoption of those consumers to maintain that presence on a go-forward basis. Things that you've seen. I mean, we all have done our own work and kind of seen that that will continue. I'm curious how you all are thinking about it. And sort of related to that, under any circumstances would you pursue more DTC things like SK- II, even broadly? Anything there would be helpful. Thanks. Jon Moeller: (40:37) We want to serve consumers in a superior fashion wherever they choose to shop, and that's really our focus. So, we're not focused on one channel versus another. We would prefer to be channel-agnostic and let the consumer make that choice. As long as we're very well-positioned with a superior product, a superior package that's relevant for the channel, communication that's relevant to the channel, and have the right value, if they choose to shop in e-commerce, we'll win. If they choose to shop in brick-and-mortar, we'll win. If they choose a hybrid shopping experience like click and collect, if we're appropriately positioned, we should do very well. Jon Moeller: (41:28) So that's our focus, vis- a-vis any specific channel focus. Within that, DTC clearly can play a role. As you mentioned, in some of our businesses, it's already a significant part of the operating model. It allows us to get closer to consumers, to have an even better understanding of their needs and their habits, including their purchase habits. That all can be very complimentary and important in the broader context. So you will see us continue to increase our DTC presence, but again, not at the preference of or the de-prioritization of any other channel or trade. Speaker 5: (42:32) Your next question comes from the line of Olivia Tong with Bank of America. Olivia Tong: (42:36) Great. Thanks. Good morning, and congrats on the quarter. I want to talk broadly about the competitive dynamics, because clearly you're innovating [inaudible 00:12:44]. Your plans from earlier this year to double down on investment is working. So what's your view on competition at this point? Because they mostly talked about picking up the pace in their activity. Have you seen it and it's perhaps just not quite landing how they had anticipated, or is there more to come from competition that's factored into the full-year sales expectations? Olivia Tong: (43:03) And maybe where are you most concerned? Because you talked about still catching up to demand in a couple of categories. Family care, home care, some health care. And meanwhile, growth the non-COVID categories like beauty, grooming, and health care have really started to accelerate. So, I'd love a little bit more color on that. Thank you. Jon Moeller: (43:21) I'm going to start where you ended, Olivia, and then I'll come back to competition. The strong quarters that we've been putting together are a reflection of our brand portfolio and our strategies, which built momentum for the business prior to COVID, have maintained momentum through COVID, and allowed us to accelerate in the quarter that we just completed. These are a set of strategies and an activity system that were well-suited to the pre-COVID environment, as we saw reflected in our results, are very well-suited to the COVID environment, as you see reflected in our results, and we expect will be very well-suited to someday a post-COVID environment. Jon Moeller: (44:12) That set of strategies, and importantly the execution behind them on the part of 99,000 P&G men and women around the world, is what's driving, as you rightly point, to growth on the top line and the bottom line across each of our franchises. We talked about the challenge we still have in baby care and how we're going to address that. But 9 out of 10 categories grew top line in the quarter. Each of our geographic regions grew top line in the quarter. That's really reflective of the execution of this integrated set of strategies that we've been working on for some time. We feel that is the best insulation against what is certainly a competitive marketplace across the board. I want to be careful though, that we don't- Jon Moeller: (45:03) I want to be careful though that we don't react necessarily to competitive statements about spending as inherently inducing risk. Competitive spending that's constructively structured and that increases consumer awareness and participation in categories is not a bad thing. So what's more important is the how, or the what. And we're early in the execution of some of those competitive agendas and we'll see. But I know for sure that our best chance of continuing our momentum and doing it profitably is to continue to execute the strategy that's been working for us so well. Host: (46:00) We'll next go to Wendy Nicholson with Citi. Wendy Nicholson: (46:04) Hi, good morning. Could you talk about your margins? So gross and operating has just exploded and that's awesome. But I'm wondering how much of that is structural improvements you've made to your organizational structure and all that kind of stuff, and how much of it is just the benefit of favorable operating leverage? So as we think longer term, two years, three years, four years out, have you permanently reset the margin structure for the company or do we think those are going to trickle back when top-line growth normalizes a bit? Thanks. Jon Moeller: (46:41) Well, within the 300 basis points of operating margin improvement, about two thirds is attributable to sales leverage. Which still leaves a healthy third, around a hundred basis points. That's due to the net of savings and productivity and our reinvestment in superiority. So that's the breakdown that you've asked for. We are very clear in our own minds that on a going basis, we need to grow the top line and we need to grow margin. So everything we're executing is designed to do both, both now, and moving forward. Host: (47:34) All right. Your next question comes from the line of Nick Modi with RBC Capital Markets. Nick Modi: (47:41) Yeah. Good morning, everyone. John, I was wondering if you could just spitball on your thoughts on the economy. And I ask this because obviously there's concern that if you do kind of hit tougher times that could be a lot of [inaudible 00:47:53] pressure, not just for profit, but for a lot of CPG companies that tend to play in the more premium end of the category. But I was just wondering what you thought about the whole future of incomes bifurcating or the consumer would bifurcating because the lower income demographic is getting much more impact with furloughs and job loss is that the kind of lower end of the reach spectrum. Yet, middle income and higher income consumers are still doing fairly well. I was just hoping you could just add some thoughts to that whole thought process. Jon Moeller: (48:28) Thanks, Nick. I'm not smart enough to know where this all lands. What I can do is look at the data that are available to date. And that's a fairly encouraging set of data. If we look at private label shares as a proxy for trade down, US private label shares in the last three month period are down a full point, which is an acceleration and the decline versus the prior three month period in the same dynamic generally holds true in Europe. Jon Moeller: (49:12) There's just a heightened need for products that deliver against health hygiene and clean home concerns. And a willingness to spend just a little bit more to ensure that I'm using a product that I know and trust and believe will work for me and for my family. So most of our categories, that's the dynamic that's playing, supporting that direction are very different from prior crisis as a whole reconfiguration of the consumer budget. Jon Moeller: (49:55) They're not spending money generally on travel, on entertainment, at a meal at a restaurant, on apparel. So they do have some flexibility that's more prevalent now than has been the case historically, which they can redirect and many are redirecting if they choose to do so. Now I want to be careful here. I'm not suggesting that there isn't greater economic stress ahead of us or that it won't have more of an impact than we've seen thus far. I just don't have the ability to predict where that goes or lands. I can only really reflect on what we've seen thus far, which is in total, encouraging. Host: (50:50) Your next question comes from the line of [inaudible 00:50:51] with Credit Suisse. Speaker 6: (50:56) Thank you. Good morning [inaudible 00:50:57] everybody. John, I know it's a hard question to answer and you don't have the specific details, but we're getting a lot of questions from investors on how you might be thinking or scenario planning around any changes are really increases in the tax structure if there's a change in the administration? Jon Moeller: (51:21) First of all, any meaningful change in the tax structure at the corporate level in all probability requires a change in the executive branch and control of the Senate. So that's the first handicap that anybody has to do in order to understand and whether it was likely to be changed. The second point I would make is there's a lot of conversation and rhetoric at the surface of this issue. But if we go back to why did so many of us push so hard for so long on corporate tax reform? And again, I'm dealing with the corporate piece of this and why was it eventually enacted? There were some very powerful and important motivators that I don't think have diminished in their importance. The first was we wanted American companies to be fully competitive in non American markets, which would give American companies every opportunity to attract capital, to grow, to create jobs, to increase America's standard of living. Jon Moeller: (52:44) The second motivation was to prevent capital flight. To make it attractive, to be domiciled and headquartered here in America, as opposed to moving operations to other parts of the world. And the third, which is closely related to the second is we wanted to incent capital formation onshore versus offshore. Those are very strong motivators and very important dynamics that I don't think anyone's going to casually walk past. So I just offer that in terms of the amount of thought deliberation and consideration that I expect will go in to any recommended change. Jon Moeller: (53:35) That's to date collectively hasn't been applied most recently to this question. So I'm stopping short of any specific answer on the numeric. It's going to be highly dependent on the details of what if anything happens. And that answer is going to be driven by, I think, a lot more of reflection on the three questions that I just mentioned as well as some others. Host: (54:09) Your next question comes from the line of Bill [Chapel 00:54:11] With Truist Securities. Bill Chapel: (54:14) Thanks. Good morning. Hey, two quick ones. One, John, just remind us how big dry [inaudible 00:54:22] is of total [inaudible 00:00:55:03]. Just I was a little surprised that it could offset the whole business. I mean, even with 30% growth. And then on the commodity front, can you maybe talk a little bit about what's changed and what you see on the horizon just since you gave guidance, I guess two and a half months ago to have a little more of a headwind? Thanks. Jon Moeller: (54:44) I understand the question on the breakdown of drivers is what [inaudible 00:55:03]. I don't have the data, but if you call John, he can certainly get that for you. The commodity environments in my way of thinking hasn't changed dramatically. Jon Moeller: (55:03) Since we provided guidance for the year, there's been an increase in pulp as an example, an increase in some of the other items we purchased. But overall it's a relatively ... on a historical basis, benign environment at the moment. Oil and the Petro complexes is generally somewhat range bound. I'll leave it there. Host: (55:40) We'll take your next question from John Anderson with William Blair. John Anderson: (55:45) Thanks. Good morning. I have two quick questions on [mix 00:11:07]. First one being, if you could describe the impact of [mix 00:55:56] On the P and L whereby adds to sales, organic sales growth, but detracts from gross margin in the quarter. And the second question is the mixed benefit you experienced in the quarter and the top line looks to be driven essentially by fabric and home care, and to a lesser extent healthcare, balance of the divisions neutral while what's happening within those segments that's driving a favorable mix? Thank you. Jon Moeller: (56:37) Mix is a very complicated animal because there's not just category mix, but there's geographic mix. And so for example, when the US grows faster than almost any other market, both with its sales rate or revenue per case and its profitability that has significant impact as do the category differences that you referenced. To get to the conundrum of gross margin going one way is as it relates to mix and [inaudible 00:57:18] and other way. I've talked about this quite a bit, and it's a reason that I really don't, I'm not focused on margins. We're not focused on margins. I don't want that to scare anybody because I didn't say we weren't focused on profit and cash. But margins are an interesting animal. I can't put margins in a bank. I can't return margins to share owners. I can't really invest margins in innovation. Jon Moeller: (57:52) What I can do, what we can do is invest profit and cash in each of those things, we can put that in the bank. We can redistribute that to shareholders, and we can invest it in increasing our margin of superiority. We have many of our premium offerings carry a lower gross margin, but a higher penny profit. [Laundry 00:58:23] [Unidose 00:58:23] is an example of that dynamic. Jon Moeller: (58:26) I'll take that higher penny profit every day of the week. Even though it may degrade our gross margin to some degree. But that's the dynamic, the Delta between a margin and penny profit that's driving the math that you're seeing. And it's why we can't get hung up in margins per se, but we should be very hung up on profit and cash. Host: (59:04) And ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect Have a great day. Jon Moeller: (59:11) Just one ... did a summary for those of you who are still on the line. It began as we reflect on this quarter, the point that I think is most important to take away is the momentum of the business and the robustness of the strategy and the brand portfolio that are driving that momentum pre COVID during COVID now post COVID. Jon Moeller: (59:35) And I'm happy to talk at greater length about that with any of you as the day and the week progresses. But that is the takeaway here. And I really appreciate your time and your questions have a great day.