Procter & Gamble Company (The) (PG)

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The Procter & Gamble Company (PG)

F1Q10 Earnings Call

October 29, 2009 8:30 am ET

Executives

Jon R. Moeller - Chief Financial Officer

Teri List - Treasurer

Robert A. McDonald - Chief Executive Officer, President

Analysts

Nik Modi - UBS

William Schmitz - Deutsche Bank

Analyst for Lauren Lieberman - Barclays Capital

John Faucher - J.P. Morgan

Christopher Ferrara - Bank of America Merrill Lynch

Ali Dibadj - Sanford C. Bernstein

Joseph Altobello - Oppenheimer & Co.

Victoria Collin - Atlantic Equities

Andrew Sawyer - Goldman Sachs

Jason Gere - RBC Capital Markets

William Chappell - Suntrust Robinson Humphrey

Presentation

Operator

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 impact 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 excluding the gain on the sale of [Xenol] in Japan. Core EPS refers to earnings per share from continuing operations excluding incremental restructuring charges incurred to offset the dilutive impact of the Folgers divestiture in fiscal 2009.

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. Please proceed, sir.

Jon R. Moeller

Thanks and good morning, everyone. Bob Macdonald and Teri List join me this morning. I will begin today’s call with a summary of first quarter results. Teri will cover business highlights by operating segment. I will provide guidance at the end of the call and then Bob, Teri, and I will take questions after our prepared remarks. Following the call, Teri, Mark [Irsig], John Chevalier and I will be available to provide additional perspective as needed.

Last year as you know, we prioritized protecting the long-term structural economics of our business. With this achieved, we are now developing and executing plans to profitability grow value share. We are increasing consumer value behind one of the strongest innovation programs in several years. We are expanding our product portfolio vertically, horizontally, and into more geographic white space than ever before.

To fund this, we are accelerating productivity, driving simplification and steadfastly maintaining our focus on cost and cash discipline. Our objective is to accelerate growth and profitably grow value share by serving more consumers in more parts of the world more completely.

July-September results are very encouraging. Organic volume improved sequentially. All-in sales, organic sales, and earnings per share each came in well ahead of the top-end of our guidance ranges. Organic volume was down 2%, a 2 point improvement versus last quarter. Volume strengthened throughout the quarter with September being an all-time record shipment month and ahead of year-ago.

Volume trends are negatively impacted by a very strong base period. In North America, the base period included retailer volume pull-forward ahead of last fall’s commodity based price increase. In developing markets in Central Eastern Europe, Middle East, and Africa in particular, the base period included shipment trends that were not yet impacted by the significant foreign exchange driven pricing we took last year.

For perspective, Central and Eastern Europe, Middle East, and Africa accounted for over half of the company’s year-on-year July September quarterly volume decline.

We fully expect volume growth in future quarters as we lap easier base periods, roll out the balance of our innovation plan, which is back-half skewed, continue to strengthen our media plans, and make targeted price adjustments where needed.

Organic sales growth was up 2% versus the guidance range of flat to down 3%. Progress was broad-based with all reportable segments either growing organic sales or showing sequential organic sales improvement. Pricing added 3% to sales. Fiscal 2009 price increases, which have not yet fully annualized, were responsible for the increase. Favorable geographic mix increased sales 1%.

Foreign exchange had a negative impact of seven points, resulting in all-in sales being down 6%. All-in sales were well ahead of guidance, which anticipated a decline of 7% to 10%.

All-in GAAP earnings per share were $1.06, $0.06 per share above the high-end of our guidance range and 3% above year-ago. As I already mentioned, top line organic sales growth was ahead of expectations and was largely responsible for our over-delivery on the bottom line.

Core earnings per share, which on the quarter adjust for the gain of the sale of our [Actenol] business in Japan, the operating earnings of the pharmaceutical business generated during the first quarter, and base period Folgers impacts, were $0.95 per share, in line with year-ago.

Gross margin was up 290 basis points, primarily due to lower commodity costs and the full benefit of last fall’s commodity based pricing actions. Gross margin also benefited from last year’s transaction based foreign exchange pricing in developing markets, which is not yet annualized.

Operating margin increased 160 basis points, as higher gross margin was partially offset by higher SG&A. SG&A was up by 130 basis points due to negative foreign currency transaction impacts.

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