Procter & Gamble Company (The) (PG)

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The Procter & Gamble Company (PG)

Q1 2013 Results Earnings Call

October 25, 2012 08:00 AM ET

Executives

Bob McDonald - Chairman, President and CEO

Jon Moeller - Chief Financial Officer

Teri List-Stoll - SVP and Treasurer

Analysts

Bill Schmitz - Deutsche Bank North America

Dara Mohsenian - Morgan Stanley

John Faucher - JP Morgan Chase

Nik Modi - UBS

Chris Ferrara – Bank of America

Wendy Nicholson - Citi

Ali Dibadj - Bernstein

Joe Altobello - Oppenheimer

Javier Escalante - Consumer Edge Research

Zeke Kramer - BMO Capital Markets

Bill Chappell - SunTrust

Jason Gere - RBC Capital Markets

Alice Longley - Buckingham Research

Joe Lachky - Wells Fargo

Jon Andersen - William Blair

Mark Astrachan - Stifel

Linda Bolton Weiser - Caris

Caroline Levy - CLSA

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 impacts of acquisitions and divestitures and foreign exchange where applicable. Adjusted free cash flow represents operating cash flow less capital expenditures and adjusted for after-tax impacts 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&Gs Chief Financial Officer, Jon Moeller.

Jon Moeller

Thanks. Good morning, everyone. Joining me this morning are Bob McDonald and Teri List-Stoll. Our focus for the call this morning is our first quarter results and outlook for the balance of the year. I also want to touch on the key elements of and progress against our growth and productivity strategy, which will be the focus of our analyst meeting here in Cincinnati in a few weeks.

A business segment information is provided in our press release and will be available in slides which will be posted on our website www.PG.com following the call, we'll take questions after our prepared remarks and we'll be available after the call to provide additional perspective as needed.

With that let me move to first quarter results, which were at the high end of our expectations on the top line and ahead of plan on operating profit earnings per share and cash. Our results position us well to deliver our plans for the fiscal year. We grew organic sales 2% at the high end of our 0% to 2% guidance range. Organic volume was equal to prior year levels and pricing added two points to organic sales growth.

Foreign exchange impacts reduced sales growth by six points leaving all-in sales down 4% also at the high end of our guidance range. Moving to the bottom line all-in earnings per share were $0.96. This includes $0.10 of non-core cost including $0.09 of non-core restructuring investments.

Core earnings per share were much longer than we had initially forecast at a $1.06 and increase of 5% first prior year. Better than expected earnings were driven by top of range sales growth lower commodity cost pressure than we have built into our original forecast and strong productivity progress.

Core operating profit margin grew 90 basis points including 150 basis points of productivity improvements and cost savings. Core gross margin improved 80 basis points. Cost savings and productivity helped gross margin by 100 basis points and pricing improved gross margin by roughly 100 basis points. These benefits were partially offset by 100 basis point negative impact from a combination of product and geographic mix. Commodity cost had a modest negative impact on gross margin for the quarter.

Core SG&A cost decreased 10 basis points as overhead cost savings of approximately 50 basis points were partially offset by increased plans and benefits cost, which we highlighted in our fiscal year guidance. The core tax rate was 24.3% within the expected range for the quarter. On an all-in basis, including restructuring costs gross margin improved 30 basis points and all-in operating profit margin declined 60 basis points. The decline in reported operating margin was due to non-core restructuring investments of 140 basis points.

We generated $2 billion in free cash flow in the quarter which was also ahead of our initial forecast. We continue to expect to deliver close to 90% cash flow productivity for the year. During the quarter, we returned $4.2 billion of cash to shareholders, $1.6 billion in dividends and $2.6 billion in share repurchase.

Returning capital to shareholders through both dividends and share repurchase remains a central pillar of our efforts to deliver superior returns. [Net] as I highlighted our first quarter results with high end of our expectations on the top line and ahead of plan on operating profit earnings per share and cash.

We're continuing to make progress against each of our strategic priorities maintaining strong, developing market momentum, strengthening our core developed market business, building a strong innovation pipeline and aggressively driving cost savings and productivity improvements.

We maintain strong growth momentum in developing markets in the September quarter with organic sales up 7%. We've seen underlying market growth rates soften a bit over the last four or five months. We've seen modest slowdowns in large markets such as China, Russia, Turkey, India and Brazil. We expect the innovation and marketing plans we have in place for the balance of the year will help to further accelerate share and sales growth despite slower market growth.

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