Procter & Gamble Company (The) (PG)

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The Procter & Gamble Co. (PG)

F2Q09 Earnings Call

January 30, 2008 8:30 am ET

Executives

A.G. Lafley – Chief Operating Officer

Jon Moeller – Chief Financial Officer

Teri List – Senior Vice President, Treasurer

Analysts

Nik Modi – UBS

John Faucher – JP Morgan

Lauren Leiberman - Barclays

Bill Schmitz – Deutsche Bank

Ali Dibadj - Sanford Bernstein

Wendy Nicholson - Citigroup

Andrew Sawyer – Goldman Sachs

Chris Ferrara – Merrill Lynch

Joe Altobello – Oppenheimer

Connie Maneaty – BMO Capital

Alice Longley - Buckingham Research

Bill Chappell – SunTrust Robinson Humphrey

Presentation

Operator

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 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 impact of acquisitions and divestitures and foreign exchange where applicable.

Free cash flow represents operating cash flow plus capital expenditures. P&G has posted on its website www.pg.com a full reconciliation of non-GAAP and other financial measures.

Now I’d like to turn the call over to P&G’s Chief Financial Officer, Jon Moeller. Please go ahead Sir.

Jon Moeller

Thanks and good morning everyone. A.G. Lafley, our CEO and Teri List, our new Treasurer join me this morning. I will begin with a summary of our second quarter results. Teri will cover business highlights by operating segment. I will then provide several topical updates before I address the guidance for fiscal 2009 and the March quarter.

Following the call, Teri, Mark [Irsig], John Chevalier and I will be available to provide additional perspective as needed.

Now let’s move to results for the December quarter.

As expected it was a challenging quarter. Consumers, both here and abroad, were under pressure from sharp declines in both housing and financial markets. Unemployment increased and consumer confidence dropped to an all-time low. Much of the developed world fell into recession and growth rates in many developing markets decelerated. The global credit crisis forced some retailers and distributors to cut inventory and conserve cash. Commodity and foreign exchange markets remained extremely volatile.

Against this backdrop, P&G delivered. We grew organic sales and delivered on our earnings per share guidance. Diluted net earnings per share increased 61% to $1.58 per share. This includes the one-time gain of $0.63 per share related to the sale of Folgers. Organic sales increased 2%. All six reportable business segments either grew or maintained organic sales for the quarter. Organic volume was 3% below a year ago due primarily to reductions in retailer, distributor and in-home inventories in both developed and developing markets.

Volume was also impacted by several price increases that went into effect during September and October. These impacted second quarter volume results in two ways. First, to take advantage of lower prices some retailers and industry leaders placed large orders ahead of these price increases. As a result they did not order as much during the December quarter. Second, our pricing actions resulted in some short-term price gaps versus the competition. Those price gaps with only a few exceptions have recently narrowed and are now closer to historical norms.

Importantly, our markets continue to grow in both unit and volume terms and in aggregate we retained market value share. So consumption of our products remains healthy. Pricing added 4% to sales. This is an acceleration of the positive trend we have seen over the past several quarters. Mix increased sales 1%. Favorable business unit and geographic mix were the primarily drivers. Foreign exchange lowered sales by five points, consistent with our most recent estimate.

Total sales were 3% below a year ago at $20.4 billion. Operating margin was down 90 basis points for the quarter primarily due to higher commodity costs and 40 basis points of Folgers-related restructuring charges. De-stock spot prices peaked during June and July but because of the length of some supply chains we did not see the full impact in cost of goods until the December quarter. Commodity and energy costs reduced gross margins for the quarter by about 300 basis points.

Business unit and geographic mix lowered gross margin by an additional 70 basis points due to faster relative growth from baby and family care and developing markets. Pricing, productivity and cost savings programs offset about 80% of these impacts leaving gross margin down 70 basis points for the quarter. The all-in effective tax rate for the quarter was 15.7%. The unusually low tax rate was due to the tax-free gain of the sale on Folgers.

The effective tax rate on continuing operations was 25.7% reflecting the net effect of foreign mix, audit settlements and the effect of foreign repatriations.

Moving to cash, we generated $5.6 billion of operating cash flow and $4.2 billion of free cash flow fiscal year-to-date. Free cash flow productivity is currently running below our 90% target due to temporary increases in working capital. While shipment patterns remain highly volatile and uncertain, working capital should improve as production patterns are adjusted to order flow and lower commodity and energy costs result in lower inventory values over the balance of the year.

Capital spending is at 3.4% of sales fiscal year-to-date, consistent with our annual target of about 4%. We remain comfortable with our 90% free cash flow productivity target for the year, excluding the one-time gain from Folgers. Fiscal year-to-date we have repurchased $5.2 billion worth of stock. This is consistent with our $8-10 billion target range for the year. We are now exactly half way through our three-year $24-30 billion repurchase program and have bought back $15.3 billion worth of stock thus far.

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