Procter & Gamble Company (The) (PG)

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The Procter & Gamble Company (PG)

F1Q 2014 Earnings Conference Call

October 25, 2013, 8:30 a.m. ET

Executives

Jon Moeller - CFO

John Chevalier - IR

Analysts

Bill Schmitz – Deutsche Bank Securities

John Faucher – JPMorgan

Dara Mohsenian – Morgan Stanley

Wendy Nicholson – Citigroup

Lauren Lieberman – Barclays

Chris Ferrara - Wells Fargo

Ali Dibadj - Bernstein

Connie Maneaty – BMO Capital Markets

Jason English - Goldman Sachs

Olivia Tong – Bank of America Merrill Lynch

Javier Escalante - Consumer Edge Research

Joe Altobello - Oppenheimer

Bill Chappell - SunTrust Robinson Humphrey

Jon Andersen - William Blair

Mark Astrachan - Stifel Nicolaus

Alice Longley - Buckingham Research

Michael Stieb – Credit Suisse

Caroline Levy - CLSA

Presentation

Operator

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 and adjusted for after tax impact of major divestitures. Free cash flow productivity is the ratio of adjusted free cash flow to net earnings.

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.

Jon Moeller

Thanks, and good morning. Before we get to results, I want to start with a few housekeeping items. Consistent with our emphasis on productivity, as well as our focus on annual versus quarterly planning periods, A.G. Lafley and I have decided to apportion our efforts on P&G investor communications as follows.

A.G. will lead our fiscal year end call, providing perspective on the year we’ve just completed and outlining our priorities for the new fiscal year. A.G. will represent P&G at our most significant each year. This year those will be the Barclays Back to School conference and CAGNY. And he will lead the annual shareholders meeting each October.

I’ll head up the non year-end quarterly calls and the remaining investor conferences. We will both continue to meet on a one-on-one basis with current and potential investors. We’ll continue to involve other key executives in investor meetings and conferences, as we have in the past.

Our objective is to provide shareholders the information they want and need in a more productive manner that is consistent with our business planning approach. One last announcement, John Chevalier, who heads up our investor relations practice, will now report directly to me. John was previously reporting to our treasurer, Teri List, who is now at Kraft Foods. John joins me on the call this morning.

Let me move now to our first quarter results. All-in sales grew 2%, including the 2-point headwind from foreign exchange. Organic sales grew 4%, putting us on track to deliver 3% to 4% organic sales growth for the fiscal year. Organic sales growth was driven by strong organic volume growth of 4%. Pricing and mix were both neutral to sales growth for the period.

Organic sales were in line or ahead of a year ago in all reporting segments. Organic sales were up low single digits in developed markets and high single-digits in developing markets. P&G global value market share was around 20% for the most recent 3-month period. We held or grew global market share in businesses representing about two-thirds of global sales.

Moving to the bottom line, all-in earnings per share were $1.04. This includes $0.02 of noncore restructuring costs. Core earnings per share were $1.05, down $0.01 versus the prior year. Foreign exchange was a $0.09 per share headwind. On a currency neutral basis, core earnings per share was up 8% for the quarter.

Core operating profit margin declined 70 basis points as solid organic sales growth and 200 basis points of cost savings were offset by foreign exchange and gross margin mix impacts.

Core gross margin was down 130 basis points. Strong cost savings of 160 basis points and volume leverage was more than offset by geographic and category mix of 140 basis points, foreign exchange of 80 basis points, higher commodity costs, and higher manufacturing startup costs versus the prior year.

Core SG&A costs decreased 60 basis points, driven by overhead cost savings of 40 basis points, marketing spending efficiencies, and volume leverage. These benefits were partially offset by foreign exchange, general wage inflation, and reinvestments in innovation and go-to-market capability.

The effective tax rate for the quarter was 23.8%. The combined impact from tax, interest expense, interest income, non-operating income, and outstanding share count was essentially neutral to core earnings per share growth.

We generated $1.3 billion in free cash flow in the quarter, repurchased $2.5 billion in stock, and returned $1.7 billion of cash to shareholders as dividends. Free cash flow was reduced by a discretionary cash contribution of nearly $1 billion to our German defined benefit pension fund. This is reflected in the change in other operating assets and liabilities line on the cash flow statement.

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