Procter & Gamble (PG)

Q1 2012 Earnings Call

October 27, 2011 8:30 am ET


Robert A. McDonald - Chairman, Chief Executive Officer and President

Jon R. Moeller - Chief Financial Officer

Teri L. List-Stoll - Senior Vice President and Treasurer

Unknown Executive -


Javier Escalante - Morgan Stanley

Timothy A. Conder - Wells Fargo Securities, LLC, Research Division

Christopher Ferrara - BofA Merrill Lynch, Research Division

William B. Chappell - SunTrust Robinson Humphrey, Inc., Research Division

Jason Gere - RBC Capital Markets, LLC, Research Division

Dara W. Mohsenian - Morgan Stanley, Research Division

Ali Dibadj - Sanford C. Bernstein & Co., LLC., Research Division

Nik Modi - UBS Investment Bank, Research Division

Lauren R. Lieberman - Barclays Capital, Research Division

John P. San Marco - Janney Montgomery Scott LLC, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Alice Beebe Longley - Buckingham Research Group, Inc.

Wendy Nicholson - Citigroup Inc, Research Division

Jon Andersen - William Blair & Company L.L.C., Research Division

Mark S. Astrachan - Stifel, Nicolaus & Co., Inc., Research Division

Edward J. Kelly - Crédit Suisse AG, Research Division

John A. Faucher - JP Morgan Chase & Co, Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division



Good day, ladies and gentlemen. [Operator Instructions].

Unknown Executive

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Good morning, and welcome to Procter & Gamble's quarter-end conference call. Today’s discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K 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, P&G needs to make you aware that during the call, the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business.

Organic refers to reported results, excluding the impacts of acquisitions and divestitures and foreign exchange where applicable. Free cash flow represents operating cash flow less capital expenditures. Free cash flow productivity is the ratio of free cash flow to net earnings. Core EPS refers to earnings per share from continuing operations excluding certain items. The effective tax rate on core earnings represents the effective tax rate on continuing operations less non-core impacts.

P&G has posted on its website,, a full reconciliation of non-GAAP and other financial measures.

Now, I will turn the call over to P&G's Chief Financial Officer, Jon Moeller

Jon R. Moeller

Thanks, and good morning, everyone. Bob McDonald, and Teri List are joining me this morning. I'll begin today's call with a summary of our first quarter results, and Teri will provide highlights of the results in some of our largest product categories. I'll provide a brief update on our strategies and focus areas, and I'll conclude the call with guidance for fiscal year 2012 and the December quarter.

Based on your feedback, we're taking a slightly different approach towards the business segment portion of the call. We'll provide all of the information you have historically received through the press release we issued this morning, and slides, we'll post to our website,, following the call. This will allow us to streamline the business presentation during the call to focus on our largest categories, those which have the biggest impacts on company results. Our objectives is to provide more context on these key businesses, as well as to allow more time to discuss matters of strategic importance and to answer your questions.

We're trying to be responsive with this approach to your request. Please let us know what you think about these changes. We'll, of course, take questions after our prepared remarks, and we'll be available following the call to provide additional perspective as needed.

The first quarter was a good quarter, putting us on track to deliver our full plan for the year. Top line results came in strong, with organic sales growth of 4% at the high end of our guidance range. Progress was broad-based, with every segment growing organic sales in the quarter. Global market share, on a constant-currency-value basis was essentially in line with prior-year levels and was in line or higher in business representing about 60% of global sales. We held or grew share in 3 of 5 regions, 11 of our top 15 countries, 4 of our 6 reporting segments and on $15 billion of our $24 billion brands.

Organic volume growth was 2%, an impressive outcome given the amount of pricing we took in the quarter. As we noted last quarter, we saw about one percentage point of volume and sales growth pulled from this quarter into the prior quarter due to price increases taken in the June-July timeframe. Adjusting for this volume and sales shift between quarters, our underlying growth momentum is somewhat stronger than the 2% volume and 4% organic sales result. Volume and sales growth accelerated as the quarter progressed, with an all-time record shipment month in September. Pricing contributed 4% to organic sales growth and was up in all 6 reporting segments.

Mix reduced sales by one point due to a combination of geographic and product mix changes. All-in sales growth was 9%, including a 5% benefit from foreign exchange. Our bottom line results were also consistent with our expectations. Earnings per share were $1.03, up 1% versus the prior year and toward the high end of our guidance range. Earnings per share growth was driven mainly by solid sales growth, cost savings and the benefit of share repurchase. These items were offset by higher commodity costs and marketing investments.

Gross margin declined 240 basis points. The combination of pricing, cost savings and fixed cost leverage improved gross margin by roughly 260 basis points. These benefits were more than offset by a 340 basis point negative impact from higher commodity and energy costs and 160 basis point negative impact from the combination of mix and foreign exchange.

SG&A costs were up slightly as the benefit from sales growth leverage were offset by higher marketing investments. The effective tax rate for the quarter was 26.2%, consistent with our going-in expectations. We generated $1.3 billion dollars in free cash flow. The first quarter is typically our lightest cash-generation quarter of the year. Beyond this cyclical dynamic, capital spending increased due to our investments in new manufacturing capacity to support our innovation and geographic expansion program. Also, inventory levels increased due to higher commodity costs and ahead of new innovation launches such as Tide PODS, which will come to market in February.

We returned nearly $2.8 billion of cash to shareholders this quarter, more than 90% of net earnings via dividends and share repurchase. We repurchased about $1.3 billion of stock in the quarter, and we paid $1.5 billion in dividends. At the current annualized dividend of $2.10 per share, our dividend yield is approximately 3.2%.

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