Procter & Gamble Company (The) (PG)

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Procter & Gamble Co. (PG)

F4Q09 Earnings Call

August 5, 2009 8:30 am ET

Executives

Jon R. Moeller - Chief Financial Officer

A.G. Lafley - Chairman

Robert A. McDonald - Chief Executive Officer, President

Teri List - Treasurer

Analysts

Nik Modi - UBS

Lauren Lieberman - Barclays Capital

John Faucher - J.P. Morgan

William Schmitz - Deutsche Bank Securities

Joseph Altobello - Oppenheimer & Co.

William Pecoriello - Consumer Edge Research

Wendy Nicholson - Citi Investment Research

Connie Maneaty - BMO Capital Markets

Christopher Ferrara - Bank of America - Merrill Lynch

Ali Dibadj - Sanford C. Bernstein

William Chappell - Suntrust Robinson Humphrey

Andrew Sawyer - Goldman Sachs

Alice Longley - Buckingham Research

Victoria Collin - Atlantic Equities

Linda Weiser - Caris & Company

Presentation

Operator

Welcome to Procter & Gamble’s fiscal year end 2009 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 Folgers business. Core EPS refers to earnings per share excluding significant adjustments to tax reserves and the net impact from the sale of the Folgers business.

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 R. Moeller

Good morning everyone and welcome to Procter & Gamble’s fiscal 2009 year end earnings call. A.G. Lafley our Chairman, Bob McDonald our Chief Executive Officer, and Teri List our Treasurer join me this morning.

I’ll begin with a summary of results after which Teri will briefly cover business highlights by segment. A.G. and Bob will both comment on the business before we provide guidance. We will of course take questions after our prepared remarks. Following the call, Teri, Mark Erceg, John Chevalier and I will be available to provide additional perspective as needed.

Early in the fiscal year we just completed, we remain committed to a few key choices. These choices were designed to weather the economic crisis and build the strength of the company for the long term with the objective of coming out of the recession an even stronger company than when we went in. These choices which we’ve shared previously were to focus on cost and cash discipline, protect the long-term structural economics of our business, and invest for future growth. They have served us well.

Against the backdrop of the worst economic environment in 50 years, we grew organic sales 2%. We grew earnings per share 17% on an all-in basis, earning $4.26, a penny above the high end of our guidance range and $0.03 ahead of consensus. Core earnings per share grew 8% and were up strong double digits on a constant currency basis. Despite unprecedented cost increases and 50 basis points of the Folgers restructuring, we held operating margin even with year ago, maintaining the structural economic attractiveness of our business.

We generated close to $12 billion and free cash flow productivity was 102%, well ahead of our 90% target. We increased our dividend 10%, marking the 119th consecutive year we’ve paid a dividend and the 53rd consecutive year of dividend growth. P&G’s average dividend yield is higher than it’s been in 20 years. We repurchased over $6 billion in stock and retired an additional $2.5 billion as part of the reverse Morris Trust split-merge with Folgers and Smucker.

Most importantly, we continue to make investments in our future strategic investments and capacity, incremental restructuring investments, industry leading by a wide margin investments and research and development, and investments to support our brands, spending more in advertising again than last year than any company in the world.

Turning to the fourth quarter, macroeconomic conditions were worse than in the prior three quarters. Global economic growth was negative. Unemployment continued to rise in the US and across the world. Market growth rates decelerated further and were negative in discretionary categories in Eastern Europe, the Middle East, and China.

Foreign exchange continued to significantly impact sales and profits versus a year ago. These foreign exchange trends increased the cost of dollar based commodities and local currencies which we priced to recover in February and March. The volume impact of these pricing moves impacted April and June. All of these trends were reflected in our guidance estimates and results came in largely as expected.

Diluted earnings per share were $0.80, a penny per share above the high end of our guidance range and above consensus. Core earnings per share were up 6% and up strong double digits again on a constant currency basis. Organic volume was down 4%, 1 point better than last quarter. Volume was impacted by the pricing taken in developing markets, by market size contraction in discretionary categories, and some share loss in developed markets where price gaps were widened versus competition.

Organic sales were down 1%, 1 point below our guidance range; 4 points of volume decline and 2 points of negative mix were partially offset by 5 points of pricing. The combined price mix benefit was less than the prior quarter due to the annualizing of some price increases and targeted moves made in the fourth quarter to improve value. Foreign exchange lowered sales 9% leaving all sales down 11%.

Encouragingly, gross margin was up 90 basis points reflecting price increases, moderating commodity costs, and continued cost savings. Operating margins were up 120 basis points on an all-in basis and over 200 basis points excluding Folgers restructuring costs as overhead productivity improvements and lower media rates more than offset volume de-leveraging.

Cash results were very strong. We generated $3.9 billion of free cash flow, and free cash flow productivity was 159%. With our structural economics in good shape, we’re increasing investments in fiscal ’10 to profitably grow market share. Some of the head-wins we’ve been facing will continue through the next quarter but then begin to annualize and even reverse. The benefits of our investment program will also build sequentially as it is fully rolled out. So, this year should be marked by sequential improvements.

With that, let me turn the call over to Teri.

Teri List

Starting with the Beauty segment, organic sales were down 3%. Organic volume was down 4% and net price mix added about 2% to sales growth. Organic volume results were particularly soft in Central and Eastern Europe, Middle East, and Africa regions following several rounds of pricing to recover higher input costs and the transaction impacts from foreign exchange rate changes. We also saw continued market contraction in the more discretionary elements of the beauty portfolio this quarter as professional hair care organic volume was up mid single digits and prestige fragrances was down low single.

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