Procter & Gamble Company (The) (PG)

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Procter & Gambl (PG)

Q1 2011 Earnings Call

October 27, 2010 8:30 am ET

Executives

Jon Moeller - Chief Financial Officer

Teri List - Senior Vice President and Treasurer

Robert McDonald - Chairman, Chief Executive Officer and President

Analysts

Dara Mohsenian - Morgan Stanley

Edward Kelly - Crédit Suisse AG

William Chappell - SunTrust Robinson Humphrey Capital Markets

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

John Faucher - JP Morgan Chase & Co

Ali Dibadj - Bernstein Research

Joseph Altobello - Oppenheimer & Co. Inc.

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Jason Gere - RBC Capital Markets Corporation

Wendy Nicholson - Citigroup Inc

Jon Andersen - William Blair & Company L.L.C.

Andrew Sawyer - Goldman Sachs Group Inc.

Linda Weiser - Caris & Company

Caroline Levy - Credit Agricole Securities (USA) Inc.

John San Marco - Janney Montgomery Scott LLC

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Presentation

Operator

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. Core EPS refers to earnings per share from continuing operations excluding 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. Please proceed.

Jon Moeller

Thanks, and good morning, everyone. Bob McDonald and Teri List joined me this morning. I'll begin today's call with a summary of our first quarter results, Teri will cover business highlights by operating segment and I'll conclude the call with guidance for the fiscal year and the December quarter. Bob, Teri and I will take questions after our prepared remarks. Following the call, Teri, John Chevalier and I will be available to provide additional perspective as needed.

Our first quarter results marked a strong start to the fiscal year. We maintained strong volume momentum. We grew organic sales ahead of market growth, building market share and exceeded our earnings per share growth objectives. Volume increased 8% on an all-in basis and 7% organically, driven by our strong multiyear innovation program and continued marketing investments. This is the first time we delivered three consecutive quarters of 7% or better organic volume growth in five years. The growth is broad-based with all regions, 16 of our top 17 countries and 20 of our $23 billion brands delivering volume growth versus a year ago.

We're continuing to leverage the innovations we launched last fiscal year, such as Pampers Dry Max, Fusion ProGlide, Crest 3D White and our new Pantene lineup in the U.S. where they were first introduced. We've also started to expand some of these initiatives to new markets, which create new sources of incremental sales and share growth. We've already expanded Dry Max to more than 50 countries around the world. We've continued the global expansion of our best-in-class Pro-Health toothpaste formula, we've launched 3D White in Europe and ProGlide is scheduled to expand to over 40 countries in the next 18 months.

In addition, we have a full pipeline of new products that we're launching this fiscal year, including Crest Clinical toothpaste, Tide Acti-Lift laundry detergent, Gain and dishwashing detergent and our upgrade to Downy fabric softeners, all of which started shipping in the September quarter.

And we just announced the new Gillette Guard razor launch in India, which is designed and priced to stimulate market conversion from double-edge blades to Gillette shaving systems. The Guard razor is priced at about INR 15 or roughly $0.33 and the refill blades are priced at about INR 5 or $0.11. And our testing with thousands of Indian men, Gillette Guard was a 6:1 winner versus double-edge blades and has delivered important advantage as an area such as safety, trust and value.

We've also continued to expand our existing portfolio into new markets. In the September quarter, we started the expansion of Febreze air care into Latin America and we began to launch all the natural and feminine care brand in Brazil. Organic sales grew 4% ahead of market growth rates and in line with our expectations.

Pricing and mix combined to reduce sales by 3%, which is a sequential improvement of one point versus the June quarter. As expected, pricing was a modest reduction to sales growth, due mainly to adjustments made in earlier periods which have not yet annualized. Going forward, we expect the pricing impact on sales to turn positive as we lapped these adjustments.

For perspective, the pricing changes we've made to brands such as Duracell, Sheer and the large sizes of Tide will be fully in our base by the end of the December quarter, as will many of the structural adjustments we've made in the Central and Eastern Europe, Middle East and Africa region.

Mix reduced sales by two percentage points, driven primarily by the differential volume growth rates of developed and developing markets. Geographic mix accounted for a point of the two-point mix impact. In the first quarter, organic volume and developed markets grew 4% and developing markets grew 12%. Product mix and price tier mix each affected sales growth by about half a point. All-in sales grew 2%. This includes a 3% negative impact from foreign exchange. The net impact on sales growth from acquisitions and divestitures rounded to a one point held for the quarter.

Global market shares up versus prior year on the past six and three-month basis. Share growth in the quarter was broad-based. We grew share in all geographic regions and held our built share in 13 of our top 17 countries and 17 of our $23 billion brands. Earnings per share was $1.02, up 5% versus prior year core EPS and $0.01 above the top end of our guidance range of $0.97 to $1.01.

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