Procter & Gamble's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Procter & Gamble (PG)

Q3 2012 Earnings Call

April 27, 2012 8:30 am ET


Jon R. Moeller - Chief Financial Officer

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

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


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

Christopher Ferrara - BofA Merrill Lynch, Research Division

Nik Modi - UBS Investment Bank, Research Division

William Schmitz - Deutsche Bank AG, Research Division

Wendy Nicholson - Citigroup Inc, Research Division

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

Dara W. Mohsenian - Morgan Stanley, Research Division

Javier Escalante - Consumer Edge Research, LLC

Constance Marie Maneaty - BMO Capital Markets U.S.

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

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

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

Jason Gere - RBC Capital Markets, LLC, Research Division

Alice Beebe Longley - The Buckingham Research Group Incorporated

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

Linda Bolton-Weiser - Caris & Company, Inc., Research Division

Leigh Ferst - Wellington Shields & Co., LLC, Research Division



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. Any measure described as core refers to the equivalent GAAP measure 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 third quarter results, and Teri will provide highlights for some of our largest product categories. I'll provide an update on our growth strategies in both developed and developing markets, as well as our productivity efforts, and then conclude the call with guidance for the June quarter and fiscal year 2012. We'll take questions after our prepared remarks and will be available after the call to provide additional perspective as needed. Also, we'll be posting slides containing the business segment information on our website,, following the call.

As a housekeeping matter, please note that our results and guidance are now presented with the Pringles business reported as discontinued operations, ending the divestiture of the business to Kellogg. Pringles sales and earnings are no longer included in organic sales or core earnings per share numbers. Related to this change, we're moving to 5 reporting segments, with Pet Care now included in the Fabric Care and Home Care segment.

Moving to results, our third quarter underlying results were within our guidance ranges. Organic sales growth was at the low end of our estimates, and core earnings per share were towards the high end of the expected range. All-in sales growth was 2%. This includes a negative 1% impact from foreign exchange. Organic sales were up 3%. Top-line growth was broad-based, with all 5 reporting segments growing organic sales for the third consecutive quarter.

January to March results include the impact of business disruption and substantial price reductions in Venezuela, leading up to and following the publication of the new price control regulations. In the period leading up to the pricing announcement in Venezuela, it was unclear for manufacturers and retailers what pricing would have actually been mandated. Because of this, many retailers reduced or stopped ordering product to prevent holding inventory at a higher cost than what they would eventually be able to sell the product to consumers for. This significantly impacted our volume in the country during the quarter. Additionally, when the pricing restructuring were announced, we began reducing prices on our products by as much as 25%.

While shipments and lower pricing in Venezuela negatively affected third quarter organic sales growth for the total company by more than 0.5%, excluding these impacts, organic sales for the quarter would have been 4%. This marks our 10th consecutive quarter with organic sales growth in the range of 3% to 5%, averaging 4% over those 2.5 years.

Organic volume was in line with prior year levels. Pricing contributed 5 points to organic sales growth, positively benefiting all 5 reporting segments. This marks the third consecutive quarter where pricing has added 4 or more points to sales growth and the third consecutive quarter where pricing has been a positive contributor to sales growth in each reported segment. Mix reduced sales by 2 points is due mainly to disproportionate growth in developing markets.

Shifting now to markets. Market growth has been decelerating on a volume basis. Developed markets were down slightly in our categories in the third quarter, reflecting weak economic conditions. North America volume growth in our categories slowed from 1% over the past 12 months to about 0.5% over the past 6 months to essentially flat for the past 3 months. Western Europe remained down about 0.5 point versus prior year on a volume basis. Developed region market value was up about 2 points on a constant currency value basis due to pricing.

Markets in developing regions are faring much better. Developing regions underlying market volume was up 4% for the quarter, and constant currency sales were up about 10%. We've seen a modest sequential deceleration in market volume in Asia and Latin America over the past 12 months as more price increases have reached the market. However, the value contribution from pricing has more than offset slower volume growth.

P&G global market share for the quarter was down very modestly versus prior year as share growth in developing markets was more than offset by soft market share trends in developed regions. Market share was in line our higher end businesses, representing about 45% of global sales, consistent with December quarter results. We held or grew share in 7 of our top 15 countries and on 13 of our 26 billion-dollar brands. Those who are paying close attention may note that we've increased the number of billion-dollar brands from 24 to 26, as Vicks and SK-II each crossed this billion-dollar annual sales threshold during the March quarter.

There are a few category/country combinations where we lost significant share when we increased list prices and competitors did not. We're taking proactive steps to restore the value of our brands relative to competitive offerings in these markets. In early February, in the U.S. auto dish category, we effectively reversed the 80% lease price increase we took last summer. In U.S. powder laundry detergent, we introduced bonus packs on select brands and sizes and notified the trade of our decision to adjust list prices in the summer. We've also taken steps to correct price gaps in the U.K. laundry detergent business.

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