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The Procter & Gamble Company (PG)
F2Q 2013 Earnings Conference Call
January 25, 2013 08:30 ET
Bob McDonald - Chairman, President and Chief Executive Officer
Jon Moeller - Chief Financial Officer
Teri List-Stoll - Senior Vice President and Treasurer
Chris Ferrara - Bank of America
Dara Mohsenian - Morgan Stanley
Lauren Lieberman - Barclays
John Faucher - JPMorgan
Nik Modi - UBS
Bill Schmitz - Deutsche Bank
Bill Chappell - SunTrust Robinson Humphrey
Ali Dibadj - Bernstein
Joe Altobello - Oppenheimer
Connie Maneaty - BMO Capital Markets
Javier Escalante - Consumer Edge Research
Jason Gere - RBC Capital Markets
Joe Lachky - Wells Fargo
Mark Astrachan - Stifel Nicolaus
Michael Steib - Credit Suisse
Linda Bolton Weiser - B. Riley Caris
Leigh Ferst - Wellington Shields
Caroline Levy - CLSA
Previous Statements by PG
» P&G's CEO Discusses Q3 2012 Results - Earnings Call Transcript
» The Procter & Gamble's CEO Discusses F4Q2012 Results - Earnings Call Transcript
» Procter & Gamble's CEO Discusses Q3 2012 Results - Earnings Call Transcript
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, www.pg.com, 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.
Thanks. Good morning, everyone. I am here this morning with Bob McDonald and Teri List-Stoll. The second quarter results we released this morning were good at the high end of our initial forecast on the top line and well ahead of the forecast on operating profit, earnings per share, and cash flow. These better than expected results will enable us to raise our sales, earnings per share, and share repurchase outlook for the fiscal year while and this is important simultaneously strengthening our innovation and marketing plans in the back half.
Organic sales grew a strong 3% which was at the high end of our 1% to 3% guidance range. Organic volume grew 2 points and pricing added 2 points to organic sales growth. Product and geographic mix reduced sales by 1 point. Organic sales growth was broad-based with all segments up 2% or more for the quarter. Foreign exchange impacts lowered sales growth by 1 point leaving all-in sales up 2%, a point above the high end of the guidance range. Global market share trends have continued to improve. We held or grew market share in businesses representing nearly 50% of sales in the December quarter, up from 45% of sales in the September quarter and 30% in the June quarter. We have more work to do, but the underlying trends are improving.
Moving to the bottom line, all-in earnings per share were $1.39, ahead of our guidance range of $1.18 to $1.25 per share. All-in earnings include $0.21 of non-core holding gains from the purchase of the balance of our Baby Care and Feminine Care joint venture in Iberia, which we completed in October and $0.05 of non-core restructuring investments to drive productivity improvement. Core earnings per share were $1.22, up 12% versus the prior year, much stronger than we had initially forecast. The better than expected earnings were driven by top of range sales growth, strong productivity savings, and a small pick up from a higher than expected gain on the divestiture of our Western European bleach business.
Core operating profit margin grew 110 basis points, including 160 basis points of productivity improvements and cost savings. Core gross margin also improved 110 basis points. Cost savings and productivity helped gross margin by 100 basis points and pricing improved gross margin by roughly 90 basis points. These benefits were partially offset by a 100 basis point negative impact from a combination of product and geographic mix. Commodity costs were essentially neutral to gross margin for the quarter.
Core SG&A costs were in line with the prior year as a percentage of sales. Overhead cost savings of approximately 60 basis points were offset by increased plans and benefits costs and modestly higher marketing spending. The core tax rate was 24.4% slightly below the prior year level. That impact on the year-to-year change in the tax rate was about $0.01 on the quarter. On an all-in basis, including restructuring costs gross margin improved 80 basis points and SG&A costs were in line with the prior year as a percentage of sales. All-in operating profit margin improved by 800 basis points driven by non-core charges taken in the base period.
We generated $3.1 billion in free cash flow in the quarter, which was also ahead of our initial forecast. We expect to deliver around 90% cash flow productivity for the year. During the quarter, we returned $3 billion of cash to shareholders, $1.6 billion in dividends, and $1.4 billion in share repurchase.
During the first half of the fiscal year, we have returned $7.2 billion to shareholders, $3.2 billion in dividends and $4 billion in share repurchase. These second quarter results combined with those of the first quarter enabled us to raise our outlook on the top line, bottom line, and on share repurchase, while simultaneously strengthening plans. We are continuing to make progress on the productivity plan we outlined at the CAGNY Conference last February, and on the growth priorities we discussed at the Citi Conference last May. Our priorities continue to be maintaining strong developing market momentum, strengthening our core developed market business, building a strong innovation pipeline, and aggressively driving cost savings and productivity improvements.
We maintain growth momentum in the developing markets in the December quarter with organic sales up 7%. BRIC markets were up 11% led by Brazil and India with organic sales growth of over 20%. And an important component of our developing market plans is continued expansion of our portfolio. The globalization of our Oral Care portfolio has been one part of this. We have entered the Oral Care category in 34 countries over the last 4 years. Every market is delivering at or above our going-in expectations for both sales and market share.
Progress on some of the early expansion markets continues to be very strong. In Brazil, Oral Care shipments were up more than 50% in the December quarter driven by the launch of 3D White toothpastes, Whitestrips, and the benefit of full national distribution. We are growing in all channels and across all forms in the oral care category in Brazil. Oral-B toothpaste share is now fast approaching 9% on a national basis, up nearly 3 points versus a year ago.
Additional oral care geographic expansions are planned this calendar year including a lunch in Australia in a few weeks. Another example is Gillette Guard, a breakthrough value tier system razor, which has been a big success in India. We expanded Guard to Egypt last quarter and we are testing it in other developing markets where double-edge blades are still the predominant shaving tool.
We are continuing to build scale in developing markets which is enabling solid profit growth. We are localizing production with lower supply chain costs and we are improving the productivity of our SG&A spending as these businesses grow. These are two important drivers of the profit improvement we expect to deliver in our top ten developing markets this year. In aggregate, we expect after-tax profit in these ten markets to increase by about 35% versus last year, including negative foreign exchange impacts. And around 50% on a local currency basis.
We are doing all of this while increasing marketing spending and accelerating the pace of innovation. While we are being appropriately choice full, we are in no way pulling back in developing markets, to the contrary we are moving strongly forward. At the same time we are strengthening our core developed markets business. We are ensuring that we have sufficient plans to achieve our objectives in the 40 largest category country combinations, most of which are in developed markets. These businesses account for about 50% of the company's sales and 70% of operating profit.
The interventions we made during the last calendar year in four core U.S. categories are continuing to drive strong results. In the U.S. laundry detergents, value share has been progressively improving following the consumer value corrections on the Gain brand and the growth of Tide Pods. Value share for U.S. detergents are up sequentially on a past 12, 6, 3 and 1 month basis. Tide’s share is in the high 30s, up 1.5 point versus prior year. And Gain value share is back to 15% for the first time in over a year.
Market share results in the U.S. auto dishwashing detergents have also improved sequentially. Past three month Cascade value share is now at 60%, up 1.5 point versus prior year. Gillette’s share is up nearly 2 points at 74% in the U.S. mail blades and razors category. The Fusion franchise is up more than a point at 37.5% and MACH3 is in line with prior year at about 21%. In U.S. oral care, Crest toothpaste’s market leading value share is about 36% in line with prior year levels. Across the U.S. business, we held or built share in businesses representing nearly 60% of sales.
We have seen strong sequential improvement in the share trends across our top 20 brands in the U.S. On a past 12 month basis, only 25% of the top 20 brands were holding a growing share. That figure is up to 60% on a past three month basis and 65% for the most recent period in the United States. January marks the first months of full planned deployment. And innovation strengthens as the year progresses. So we expect further improvement in market share results in the back half of the fiscal year.
Innovation underpins both developed and developing market efforts, as is our work to drive greater productivity in everything we do. On the point of innovation, Tide PODS have reached a 6% value share in less than a year. We expect PODS will generate about $0.5 billion of sales this fiscal year on one brand in one country. Tide PODS deliver as much cleaning power as [6x] leading competitive unit dose products combined. A big reason we currently hold a 75% share of the unit dose form.
We have now established PODS capacity in Europe and will began the roll out of Ariel PODS in April. Additional markets and brands will follow. We have driven the growth in a new category with Downy UNSTOPABLES in-wash scent boosters. UNSTOPABLES keep cloths fresh for up to 12-weeks until you were them. UNSTOPABLES consumption is nearly twice as high as we had initially expected. We launched a new spring scent earlier this month to further expand the UNSTOPABLES line up. We are marketing this innovation in only three countries so far. The U.S., Canada, and Japan.
Our air care business just introduce Febreze Stick and Refresh, which Febreze’s unique slow release scent technology with a no-residue adhesive from our connect and develop innovation partner, 3M. Febreze Stick and Refresh sticks to any surface and works anywhere in your home to keep it fresh and odor free without plugs or batteries. The surface care category launched a Swiffer with gain scent line extension to provide consumers with the fresh scent of gain as they clean with Swiffer Dusters, Wet Jet, and Sweepers. Swiffer is a good example of the benefits of scale and innovation coupling our substrate and perfume expertise with the strong brand equity from our laundry category to obsolete mops, feather dusters, and rags. Cascade Platinum launched earlier this month, this follows the successful launch of Fairy Platinum in Western Europe earlier this year. Cascade and Fairy Platinum are designed to deliver powerful cleaning for dishes while also providing film protection to help maintain the sparkling look of dishwasher interiors.
Next month, we have three new things to communicate on Bounty. On the main Bounty lineup, we will be announcing towels that are two times more absorbent than the next leading national brand. We are upgrading Bounty Basic with towels that are 50% stronger than the leading bargain Brand. And we are launching a new line called BOUNTY DURATOWEL letting consumers ditch their dish cloth and switch to BOUNTY DURATOWEL, which is three times cleaner than their dirty dish cloth.
Our entry into the sleep aids category continues to go very well. ZzzQuil is a non-habit forming sleep-aid that was not for colds, not for pain, just for sleep. ZzzQuil has grown to nearly 20% value share in the U.S. sleep aids category making it the number one brand in sleep aid in terms of both units and value in the U.S. We began expanding ZzzQuil into Canada earlier this month. The expansion of Vicks Cough & Cold products in Russia, Poland, Hungary and the Czech Republic is also progressing well. The launch features for the Vicks Nature Fusion line that combines effective medicine with the soothing experience of natural remedies. Sales in the expansion markets are ahead of initial expectations.
Oral Care launched its Oral-B Deep Sweep power brush two weeks ago. Deep Sweep cleans like a power brush and moves like a manual brush to remove more than two times the plaque of a regular manual toothbrush. 3D White toothpaste has now delivered market share growth in the U.S. every month since its introduction over two and a half years ago. We are expanding the 3D White line, which includes toothpaste, brush, rinse, floss, and Whitestrips around the world to continue building out our full Oral Care portfolio. Over the last nine months, we launched 3D White products in the UK, Germany, Italy, Belgium, the Netherlands, Luxembourg, Switzerland, Austria, China, Brazil, and Mexico. 3D White is driving strong share growth in Mexico and the UK. Mexico reached an all-time high toothpaste value share of over 14% for the quarter, up nearly four points versus the prior year. In the UK, the combination of 3D White Oral-B Complete and Oral-B Pro-Expert drove value share to over 10%, up nearly three points versus the prior year.
Salon hair-care’s Illumina Color from Wella Professional launched in Western Europe in July and in North America in December. Illumina leverages a new patented micro-light technology and as well as biggest innovation in the last 20 years. With Wella consumers experience hair that appears lit from within. This breakthrough innovation we will be launching in Latin America, in Australia, New Zealand in March.
U.S. Skin Care began shipping Olay Total Effect CC or Color Correction Cream in December. Total Effect CC Cream fights the seven signs of aging to correct fine lines, wrinkles, and age spots and covers to provide a flawlessly beautiful complexion. This month, they also introduced some new mid-tier Skin Care boutiques called Olay Fresh Effects aimed at younger consumers with a collection of cleansers and moisturizers that deep clean and hydrate to keep you looking beautifully fresh and vibrant.
We have also begun revitalization of Olay Regenerist with the launch of new Olay Micro-Sculpting Cream. The reformulation includes two new anti-aging ingredients to penetrate quickly and regenerate surface cells to reveal younger looking skin fast. Visible wrinkle reduction starts in just one day and the look of 10 years of wrinkles can be reduced in just four weeks.
The COVERGIRL brand introduced two exciting innovations during the last quarter. The new Clump Crusher Mascara by LashBlast provides 200% more volume with zero clumps. COVERGIRL mascara sales growth has accelerated by 9 points since the Clump Crusher launch. Also COVERGIRL has entered the nails segment with the new Outlast Stay Brilliant Nail Gloss. This line has 45 shades that provide high gloss color that can last as long as a week without the need for a top coat. Initial results for COVERGIRL nails are very strong, one leading drug customer sales have exceeded market leader Maybelline’s after just six weeks in market.
We are currently launching a Hair Care innovation bundle that spans the vertical portfolio. We recently launched Pantene Expert Collection which includes two super-premium lines, Age Defy and Advanced+ Keratin Repair, priced 200%-250% above the base Pantene line. Age Defy leverages a new formula based on our hair biology program, yielding hair that acts ten years younger by thickening hair as if it had 6500 new strands.
The Pantene Advanced+ Keratin Repair formula leverages a breakthrough in new conditioner technology to repair two years of hair damage in two minutes. We are expanding Pantene Expert Collection to Latin America later this quarter. We are also launching Vidal Sassoon Pro series in the U.S., a complete hair care line offering shampoo, conditioner, styling and permanent color, to give salon genius brilliantly prices. Vidal Sassoon Pro series is priced at a 50 to 75 index to the base Pantene shampoos and conditioners providing us with a very strong brand in the salon affordable segment with a real salon heritage.
We are bringing a bundle of Gillette innovations to market across Fusion and MACH3 blades and razors as well as shave preps, which is focused on sensitive skin. 70% of men believe they have sensitive skin and these innovations leverage the fact that our ProGlide products have been recommended by dermatologists in the U.S. as the best shave for sensitive skin.
Like innovation, productivity also underpins all of our developed and developing market efforts. We are making strong progress against our commitments but won't stop there. The overhead reduction plan we announced last February called for a reduction in non-manufacturing staffing of 10%, or roughly 5,700 roles by the end of this fiscal year. As of the end of December, we have reduced 5,500 roles, more than 95% of our target reduction. It’s likely that we will reach our initial staffing objective four to five months ahead of schedule. And as we announced at our analyst day meeting in November, we are committed to do more.
Our new objective is to further reduce and this is what we introduced in analyst day in November, the further reduction of non-manufacturing enrollment by additional 2% to 4% per year from fiscal year 2014 through 2016. This will roughly double the amount of direct savings we deliver in core SG&A reducing our reliance on top line growth for leverage driven savings. Any additional enrollment progress we make in fiscal 2013 beyond our initial target will give us a head start on the fiscal 2014 to 2016 enrollment objectives.
We have solid plans in place to deliver $1.2 billion in savings this fiscal year in cost to goods sold. So I have established a stretched target beyond this of $1.4 billion. Our efforts in this area include a 5% net productivity increase across our manufacturing operations, even as we add new manufacturing capacity and enrollments in developing markets. For the first half of the year we are tracking well ahead of target at about 6.5% manufacturing productivity improvement.
We are achieving efficiencies in marketing spend, particularly on non-media expenditures and are reinvesting these savings and strengthen plans. As we embrace our cost savings work, we must and will keep our eye on the overriding objective of shareholder value creation, with growth being an important part of this. At the end of last fiscal year, our core operating profit margin was nearly 19%, which compares to a simple average of 15 competitors of about 15.9%. Our operating margins is higher than 12 of the 15. This means we are effectively more leveraged to growth than most of our competitors. And there is significant value creation to be delivered through growth.
In our endeavor to cut costs, we will not compromise our growth prospects or capabilities. We are building and executing our strategy with the objective of getting this savings and growth balance right.
Now I will turn to our update on outlook for fiscal 2013 and the January-March quarter. Starting with the fiscal year, we are increasing organic sales growth guidance to a range of 3% to 4% compared to our prior range of 2% to 4%. The new range is comprised of volume growth of 2% to 3%, price contribution of about 2%, and negative mix of around 1%. We now expect all-in sales growth of 1% to 2%. This includes a foreign exchange headwind of about 2 points based on mid-January spot rates.
We are raising our outlook for core earnings per share growth to a range of 3% to 6% from a previous range of down 1% to up 4%. This guidance includes earnings per share headwinds from items such as higher cost for pensions and employee benefit plans and the impact of mandate in price reductions Venezuela. Combined, these headwinds are reducing our core earnings per share growth rate by about 3 percentage points. Adjust for these, our core earnings per share growth would be 6% to 9% for the year.
The new earnings outlook equates to a core earnings per share range of $3.97 to $4.07, which compares to our previous guidance range of $3.80 to $4 per share. There are two items that we called out as potential risks last quarter, which have largely been resolved with no material impact to earnings. We have managed through the absorbent gelling material supply issue for our diaper business, with only minor disruption in added costs. And the U.S. corporate tax extenders that we have assumed in our forecast have now been enacted into law.
There continue to be two notable earnings risks that are not included in our guidance. Our forecast is based on mid-January foreign exchange spot rates. A large devaluation of an important currency such as the Venezuelan Bolivar would likely reduce our earnings outlook. Our guidance also assumes current market growth rates continue for the balance of this fiscal year and are not impacted by the payroll tax increase in the U.S., dynamics associated with the U.S. debt ceiling debate, or by worsening conditions in Europe.
We are increasing the all-in earnings per share range to $4.04 to $4.14, which compares to our prior range of $3.78 to $4.02 per share. The increase is largely due to the improvement in our core earnings per share expectations. In addition, the $0.21 non-core holding gain resulting from our purchase of the balance of our Baby Care and Feminine Care joint venture in Iberia is roughly $0.04 per share higher than anticipated in our last guidance.
We have updated our estimates for non-core restructuring investments which we now expect to be approximately $0.15 per share for the fiscal year. This compares to our previous estimate of $0.15 to $0.19 per share. The difference is driven by a timing shift for asset disposals and somewhat lower cost for organizational productivity improvements. We continue to expect free cash flow productivity of about 90% of net earnings for the year. We now expect capital spending to be around 5% of sales for the year, down from our prior estimate of 5.5%. This reduction is mainly due to capital efficiency and manufacturing productivity improvements, not a reduction in project scope. We expect to continue our 122-year track record of dividend payments and our 56-year track record of dividend increases. The exact amount of the increase is subject to Board approval and will be determined by the Board during the April Board meeting.
In addition, we will repurchase $5 billion to $6 billion of stock this fiscal year. Based on current cash projections, we expect to be towards the high end of this range. This has improved from the $4 billion to $6 billion outlook we discussed at the Analyst Meeting in November. Combined, we expect to return $11 billion to $12 billion of cash to shareholders through dividends and share repurchases in fiscal 2013. This represents a cash return in the range of 5.8% to 6.3% on our market cap of about $190 billion.
For the January to March quarter, we are estimating organic sales growth in the range of 3% to 4%. At the low end of 3%, this range represents growth in line with what we delivered for the December quarter. At the high end of 4%, this range represents another quarter of sequential improvement. Foreign exchange is expected to be roughly neutral to sales growth, which leads to all-in sales growth guidance equal to the organic range of 3% to 4%. On the bottom line, we expect March quarter core earnings per share in the range of $0.91 to $0.97 or down 3% to up 3% compared to prior year core earning per share of $0.94. We expect the effective tax rate for the March quarter to be about a point lower than last year due to the true up needed to reflect the U.S. corporate tax law changes made in early January.
For the fiscal year, we now expect the tax rate on core earnings to be around the prior year level of 24.2%. On an all-in basis, we estimate earnings per share in the range of $0.90 to $0.96. This includes non-core restructuring charges of approximately $0.01 a share. Our back half earnings per share guidance reflects the strong level of innovation activity going into the market as well as focused reinvestments to maintain positive market share momentum. We expect the majority of these investments to be in marketing spending with the balance focused on trial building merchandizing programs behind our new innovations.
Comparing our first half core earnings per share growth to the back half, we expect marketing investments to be an 8 to 9 point headwind and tax to be a 2 to 3 point headwind. We are offsetting a portion of this with stronger top-line results and higher cost savings, but back half core earnings per share growth will be several points below the first half level.
In summary, our second quarter results were on track with our plan on the top line and ahead of plan on operating profit, earnings per share, and cash. These results were enabling us to raise our sales, earnings, and share repurchase outlook for the fiscal year, while creating flexibility to further strengthen our plans in the second half.
We remain confident that our focus areas, maintaining momentum in developing markets, strengthening our core developed market business, building a strong innovation pipeline, and aggressively driving cost savings and productivity improvements, are the right ones and should generate overtime the kind of earnings progress that will put us among the best in our industry. This combined with strong cash flow and a track record of capital returns to shareholders should enable us to generate superior level of shareholder return.
That concludes our prepared remarks. As a reminder, business segment information is provided in our press release and will be available in slides which we have posted on our website www.pg.com following the call. Bob, Teri and I will be happy to take your questions and the IR team will be available after the call to provide additional perspective as needed. With that why don’t we turn to questions?