Procter & Gamble (PG)

Q2 2012 Earnings Call

January 27, 2012 8:30 am ET


Jon R. Moeller - Chief Financial Officer

Robert A. McDonald - Chairman, Chief Executive Officer, President and Member of Proxy Committee

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


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

Linda Bolton-Weiser - Caris & Company, 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

Lauren R. Lieberman - Barclays Capital, Research Division

Nik Modi - UBS Investment Bank, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Alice Beebe Longley - Buckingham Research Group, Inc.

Javier Escalante - Consumer Edge Research, LLC

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

Constance Marie Maneaty - BMO Capital Markets U.S.

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



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Good day, ladies and gentlemen. [Operator Instructions] 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. Core operating margin and core operating profit growth refer to operating profit and margin excluding certain items. Core effective tax rate refers to the effective tax rate adjusted for certain items.

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. Joining me this morning are Bob McDonald and Teri List.

I'll begin today's call with a summary of our second quarter results, and Teri will provide highlights for some of our largest product categories. I'll provide some perspective on our revised outlook for the second half of the year, and I'll conclude the call with guidance for fiscal year 2012 and the March quarter. We'll take questions after our prepared remarks and we'll be available following the call to provide additional perspective. We will also be posting slides containing business segment information on our website,, following the call.

Our second quarter underlying results were in line with our going-in expectations. Organic sales came in at the midpoint of our estimates, with core earnings per share towards the high end of our guidance range. All-in sales growth was 4%. Organic sales growth was also 4% as foreign exchange had essentially neutral impact on the quarter. Top line growth was broad-based, with all 6 reporting segments growing organic sales for the second consecutive quarter.

Organic volume was up 1%. This was on the low side of our expectations, due mainly to a mid-single-digit volume decline in developed markets. Developed market volume was negatively affected by weak economic conditions and pricing taken to offset higher input costs. We continue to see strong growth in developing markets, which are delivering high-single-digit volume growth for the quarter.

Pricing contributed 4 points to organic sales growth, making this the third consecutive quarter where pricing has added at least 3 points to sales growth. Pricing was up in all 6 reporting segments. Mix reduced sales growth by 1% due mainly to the disproportionate growth from developing markets.

We're pleased with these top line results, particularly given the developed market dynamics. There's been little to no growth in our categories in developed markets. In fact, market sizes are actually down in several big category/country combinations, such as laundry detergents in the U.K., diapers in the U.S. and Japan, and shampoos in many Western European countries. We've been able to offset this with the progress we're making in developing markets. We've consistently delivered high-single to low-double-digit organic sales growth in these markets and their importance to P&G's global business is increasing rapidly.

Just 5 years ago, developing markets represented only 27% of our global sales. They grew to 35% last year and they should reach about 37% of sales and about 45% of volume by the end of this fiscal year. Importantly, they've accounted for more than 80% of our organic sales growth so far this year.

We're growing share and building scale in these fast-growing countries. Our BRIC markets have averaged double-digit top line growth for the past 2 years. Our top 11 emerging markets have added about 0.5 share points for the past 12-, 6- and 3-month periods. We've expanded our portfolio to roughly 40 new category/country combinations in developing markets over the last 18 months, with 10 more scheduled for the balance of this fiscal year. Recent expansions have included Safeguard in Africa, Downy in Indonesia and Oral-B in Nigeria. And we'll be continuing our Oral Care expansion with Oral-B toothpaste in Colombia, Chile, Argentina and Peru in the next few months.

Despite the macro challenges, we have numerous opportunities for growth in developed markets. As I mentioned, some big categories are declining, but others such as toothpaste and shampoos in the U.S. and U.K. are still growing at a mid-single-digit pace.

The antidote for slow market growth is innovation. We'll continue to leverage successful innovations such as Crest 3D White, Downy Unstopables and Fusion ProGlide. We'll also drive growth with commercial innovation such as our global multi-brand Olympics campaign. We'll continue to field strong marketing programs. In addition, we will continue to fill in white spaces in our developed market portfolios to compete in both more super premium and value-priced tiers.

Our objective is to continue growing share, and through this, growing sales in developed markets, but we're realistic about the challenges that exist.

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