Procter & Gamble Company (The) (PG)

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Procter & Gambl (PG)

Q2 2011 Earnings Call

January 27, 2011 8:30 am ET

Executives

Jon Moeller - Chief Financial Officer

Company Speaker -

Teri List - Senior Vice President and Treasurer

Robert McDonald - Chairman, Chief Executive Officer and President

Analysts

Edward Kelly - Crédit Suisse AG

Dara Mohsenian - Morgan Stanley

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.

Jason Gere - RBC Capital Markets, LLC

William Schmitz - Deutsche Bank AG

Timothy Conder - Wells Fargo Securities, LLC

Douglas Lane - Jefferies & Company, Inc.

Alec Patterson - RCM

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.

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Presentation

Operator

Good day, ladies and gentlemen. [Operator Instructions] Before we begin, the company has asked the following statements to be read.

Company Speaker

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 that 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. The effective tax rate on core earnings represents the effective tax rate on continuing operations less noncore impacts. 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, and good morning, everyone. Bob McDonald and Teri List join me this morning. I'll begin today's call with a summary of our second quarter results, Teri will cover business highlights by operating segment, and I'll conclude the call with guidance for both the fiscal year and the March quarter. Bob, Teri and I will take questions as usual after our prepared remarks. Following the call, we'll be available to provide additional perspective as needed.

Our second quarter was another period of solid volume and market share progress. We grew organic sales ahead of market growth rates. We built share broadly, and we delivered core earnings per share growth above the high end of our guidance range.

Volume increased 6%. The growth was broad-based with all regions, 16 of our top 17 countries, five of six reporting segments and 19 of our 23 billion-dollar brands delivering volume growth versus the prior year. Global market share, on a constant dollar value basis grew again this quarter and is now up versus the prior year for the past 12-, six- and three-month periods.

Share growth in the quarter was also broad-based. We grew market share in all geographic regions and held our built share in 12 of our top 17 countries and 16 of our 23 billion-dollar brands.

Overall, market share is in line or up in businesses representing about 60% of global sales. The strong volume and share progress continues to be driven by innovation and expansion programs that flow from our overarching growth strategy to serve more consumers in more parts of the world more completely.

We're expanding our existing category portfolios to reach more consumers, with innovations such as Naturella Feminine Care pads and Head & Shoulders shampoo in Brazil, Gain hand dishwashing liquid in North America, Naturella and the Gillette Fusion shaving system in China and Gillette Guard in India.

We're serving consumers in more parts of the world by entering new category country combinations such as the launch of Olay Skin Care in Brazil, Febreze Hair Care in Colombia and Brazil and Downy Fabric Care in Indonesia.

We're serving consumers more completely by leveraging and expanding recent innovations such as Pampers Dry Max, which we have now expanded to more than 50 countries; Tide Acti-Lift, which is driving solid market share growth in the U.S.; Crest 3D White and Crest Clinical, which have driven U.S. toothpaste market shares in a record levels of over 38%; and Gillette Fusion ProGlide, which started shipping to Germany and France in December. Organic sales grew more than 3%, about a point ahead of global market growth rates albeit at the low end of our guidance range.

Markets for our products continue to grow at a healthy rate in developing markets in the range of 6% to 8%, consistent with our projections. However, developed market growth rates were essentially flat for the quarter compared to our expectation for growth of about 1%. Considering that developed markets account for 2/3 of our sales, this difference in market growth was enough to round our organic sales down to 3% versus being a solid 4%.

Pricing and mix reduced sales by two points. Mix reduced sales by approximately two points, and pricing was down only slightly for the quarter. Versus the July, September quarter, price mix improved by more than half a point and price mix improved sequentially each month during the December quarter. The price mix and related organic sales improvement was broad-based. Five of the six reporting segments had a smaller price mix impact in the December quarter than in the September quarter. And five of six segments delivered quarter-to-quarter improvements in organic sales growth.

The improvements in price mix came mainly from pricing as we continue to annualize adjustments taken early last fiscal year. Pricing rounded to zero for the quarter and will turn positive in the second half of the fiscal year. We've now lapped the adjustments we made to brands such as Duracell, Cheer and the large sizes of Tide and a multiple brands in the Central and Eastern Europe, Middle East and Africa region.

The mix impact was due to primarily to geographic mix of about a point as the developed market volume grew 3% and developing market volume grew 10%. Product mix and price tier mix each affected sales growth by about half a point. All-in sales grew 2%. This includes a 2% negative impact from foreign exchange and a modest benefit from the net impact of acquisitions and divestitures.

All-in GAAP earnings per share were $1.11, down versus the prior year GAAP earnings per share of $1.49, which included the large gain from the divestiture of the Pharmaceuticals business. Core earnings per share were $1.13, $0.02 above the top end of our guidance range and up 3% versus prior-year core earnings per share of $1.10.

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