Procter & Gamble Company (The) (PG)

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Procter & Gamble Co. (PG)

Q3 2013 Earnings Conference Call

April 24, 2013 08:30 AM ET

Executives

Bob McDonald - Chairman, President and CEO

Jon Moeller - CFO

Teri List-Stoll - SVP and Treasurer

Analysts

Lauren Lieberman - Barclays

Wendy Nicholson - Citi Investment Research

Bill Schmitz - Deutsche Bank

Ali Dibadj - Bernstein

Joe Altobello - Oppenheimer

Jason Gere - RBC Capital Markets

William Chappell - SunTrust Robinson Humphrey

Michael Steib - Credit Suisse

Linda Bolton Weiser - B. Riley Caris

Caroline Levy – CLSA

John Faucher – JPMorgan

Dara Mohsenian - Morgan Stanley

Chris Ferrara - Bank of America

Nik Modi - UBS

Connie Maneaty - BMO Capital Markets

Javier Escalante - Consumer Edge Research

Mark Astrachan - Stifel Nicolaus

Alice Longley - Buckingham Research

Joe Lachky - Wells Fargo Securities

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, 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 and objected for after tax impact of major divestitures. Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings, excluding divestiture gains. 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.

Jon Moeller

Thanks. Good morning, everyone. I am here this morning with Bob McDonald and Teri List-Stoll. Our third quarter results were on track with our plan on the top line, market share showed broad based improvement and strengthened as the quarter progressed. And we’re ahead of plan on operating profit, earnings per share, and cash flow. We announced an increase in our dividend and we’re increasing our share repurchase projection in this call to the top end of our target range.

In the March quarter organic sales grew 3%. Sales came in at the lower end of the guidance range due in part just lower market growth. Underlying global market growth was choppy month-to-month and was down about half a point in the March quarter versus the December quarter. Organic volume grew 2% and pricing added one point to organic sales growth. Product and geographic mix was neutral to sales growth.

Foreign exchange impacts lowered sales growth by one point resulting in all-in sales growth of 2%. Global market share trends have continued to improve. We held or grew market share in businesses representing over 50% of sales in the March quarter, with third consecutive quarter-to-quarter improvement from 305% in the June quarter, 45% in the September quarter to just below 50% in the December quarter and now over 50%. Within the quarter we saw a sequential market share strength ending the period with a strong month in March.

In the U.S. we held or grew value share in businesses representing two-thirds of sales in the March quarter. This is up from 15% in the June quarter of last fiscal year and about 55% in the first half of this fiscal. As with the rest of the Company results strengthened as the quarter progressed with businesses representing over 70% of sales holding or growing share in the month of March. We have more work to do, but trends are continuing to improve.

Moving to the bottom line, all-in earnings per share were $0.88. All-in earnings per share include an $0.8 non-core impact from the devaluation of the Venezuelan bolívar and $0.03 of non-core restructuring investments to derive productivity improvement. Core earnings per share were $0.99, up 5% versus the prior year and $0.03 above the high end of our guidance range.

Better than expected earnings were driven by strong cost savings and productivity progress, particularly in SG&A where we are exceeding enrollment reduction targets. One of the objectives of our productivity and cost savings plan was to create financial flexibility to maintain strong investment levels and long-term growth while delivering on our bottom line commitments even when we face a weaker microenvironment or other challenges. This quarter was a good example. We over delivered our go-in in guidance despite slower market growth.

Cooperating profit margin grew 10 basis points including 260 basis points of productivity improvements and cost savings. Core gross margin improved 20 basis points. Cost savings and productivity helped gross margin by 170 basis points. Pricing and volume leverage improved gross margin by roughly 80 basis points. These benefits were partially offset by 120 basis point negative impact from a combination of product and geographic mix. Innovation and new production capacity startup costs, lower gross margin by about 70 basis points and commodity costs and foreign exchange were a combined negative impact of approximately 40 basis points.

Core SG&A costs increased 10 basis points. Overhead cost savings of approximately 90 basis points and top line leverage were offset by higher marketing spending, increased plans and benefits costs and foreign exchange impacts. On an all-in basis, including restructuring costs and non-core impacts from Venezuela, gross margin improved 50 basis points and SG&A costs increased 40 basis points. All-in, operating profit margin improved 20 points.

As we highlighted on our last earnings call, the March quarter tax rate was reduced by the true-up needed to reflect the extension of U.S. corporate tax law benefits by Congress in early January. The core effective tax rate for the quarter was 22.2%, about a point below the prior year level and consistent with guidance. We generated $3 billion of free cash flow in the quarter which is also ahead of our initial forecast. We delivered adjusted free cash flow productivity of 114% for the quarter, which brings fiscal year-to-date adjusted free cash flow productivity to over 90%. This compares to a year ago, year-to-date cash flow productivity figure of 76%.

During the quarter, we repurchased $1 billion in stock. This brings fiscal year-to-date repurchases to 5 billion compared to our estimate of 5 billion to 6 billion for the full fiscal year. We returned $1.6 billion of cash to shareholders in dividends. Earlier this month, we increased our quarterly dividend by 7%. This marks the 123rd consecutive year in which we paid a dividend and the 57th consecutive year in which the dividend has increased. At the new annualized dividend of $2.41 per share, our current dividend yield is about 3%.

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