The Procter & Gamble Company (PG)
F4Q 2013 Earnings Conference Call
August 1, 2013 8:30 a.m. ET
A.G. Lafley - Chairman of the Board, President and Chief Executive Officer
Jon Moeller - Chief Financial Officer
Teri List-Stoll - Senior Vice President and Treasurer
John Faucher – JPMorgan
Bill Schmitz – Deutsche Bank Securities
Lauren Lieberman – Barclays
Dara Mohsenian – Morgan Stanley
Wendy Nicholson – Citi
Jason English - Goldman Sachs
Ali Dibadj - Bernstein
Joe Altobello - Oppenheimer
Connie Maneaty – BMO Capital Markets
Javier Escalante - Consumer Edge Research
Olivia Tong – Bank of America - Merrill Lynch
Michael Stieb – Credit Suisse
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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 impact 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&G’s Chief Financial Officer, Jon Moeller.
Thanks, and good morning everyone. I am joined this morning by A.G. Lafley and Teri List-Stoll. I will start our discussion with a review of our fourth quarter and fiscal 2013 results. A.G. will discuss our key strategies and focus areas going forward and I will then wrap up with guidance for fiscal 2014.
Fourth quarter organic sales results were at the high end of our forecast range with core earnings per share slightly ahead of plan. Organic sales were up 4%. Importantly, this sales growth was underpinned by strong organic volume growth of 5% and was achieved during a period in which underlying market growth rates were decelerating. Pricing was neutral to organic sales growth and mix reduced sales growth by 1 point. Foreign exchange lowered sales growth by 2 points resulting in all-in sales growth of 2%.
P&G global value share was around 20% for the March to May period, roughly in line with the prior year. Market share improved sequentially throughout the quarter. In May, the last period for which we currently have global share data, volume share increased 0.4 points versus prior year with growth in all regions except Central and Eastern Europe, Middle East and Africa. On a mixed adjusted basis, May global value share was up 0.2 points. In the U.S where we have data through June, mix adjusted value share was up 0.3 points. We held or grew global market share in businesses representing nearly 60% of sales in the March to May period. In the U.S, we held or grew value share in businesses representing over 70% of sales.
Moving to the bottom line, core earnings per share were $0.79, $0.02 above the high end of our guidance range due to cost savings and a $0.01 help in tax. Core earnings per share was down 4% versus the prior year as the benefits from top of range organic sales growth and strong cost savings were more than offset by mix, higher marketing spending and a $0.06 per share or roughly 7 percentage points earnings per share growth headwind from foreign exchange rate. All-in earnings per share were $0.64. This includes a $0.02 non-core impact from restructuring costs, a $0.04 non-core impact from legal items in Europe and a $0.10 non-core, non-cash impact of a further impairment of intangible assets related to the Brown business, reflecting the 20% devaluation of the currency in Japan where Brown earns the majority of its profits.
Core operating profit margin declined 130 basis points as core gross margin was down 90 basis points and core SG&A cost increased 40 basis points. Operating margin was about 50 basis points less than we had originally anticipated due largely to foreign exchange. The core effective tax rate for the quarter was 22.3%, in line with last year. We generated 2.8 billion of free cash flow in the quarter, repurchased $1 billion in stock and returned $1.7 billion of cash to shareholders in dividends.
Turning to the fiscal year, we met our commitments on each key measure. Organic sales growth was 3%, in the mid-point of our initial guidance range of 2% to 4%. We grew core earnings per share of 5% above our initial minus 1% to plus 4% guidance range. We absorbed the unexpected impact of the Venezuela Bolívar devaluation and significant overall dollar strengthening, while increasing marketing investments as the year progressed. We continued to make good progress on our productivity plans. Through June we reduced non-manufacturing enrollment by 7,000 roles. This is 1,300 role reductions ahead of our initial enrollment reduction target for June 30, 2013. We delivered over $1.2 billion in cost of goods sold savings and approved manufacturing productivity by 7% versus the target of 5%.
Our progress on working capital and capital spending productivity enabled us to deliver 98% adjusted free cash flow productivity, ahead of our 90% target. We returned $12.5 billion to shareholders, 110% of net earnings through a combination of $6.5 billion in dividends and $6 billion in share repurchase. In April we raised the dividend by 7%. We’re beginning to restore growth in the core U.S. Market that represents over a third of P&G sales and an even greater percentage of profit. U.S. Fourth quarter organic sales grew at 7% on a volume growth of 5%.
We maintained good developing market momentum. Organic sales growth in our top 10 developing markets was up 8% in the fiscal year. We grew profit meaningfully ahead of sales in developing market while increasing investments in these markets year-on-year. We stabilized global market share and ended the year with modest market share growth. We are moving in the right direction, but there is more work to do.