Procter & Gamble Company (The) (PG)

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The Proctor & Gamble Company (PG)

F2Q10 Earnings Call

January 28, 2010 8:30 am ET

Executives

Bob McDonald – Chairman and CEO

Jon Moeller - Chief Financial Officer

Teri List – Treasurer

Analysts

Wendy Nicholson – Citi Investment Research

John Faucher – JP Morgan

Lauren Lieberman – Barclays Capital

Bill Schmitz – Deutsche Bank

Nik Modi – UBS

Chris Ferrara – Bank of America

Joe Altobello – Oppenheimer

Andrew Sawyer – Goldman Sachs

Doug Lane – Jefferies & Co.

Jason Gere – RBC Capital

Bill Chappell – SunTrust

Ali Dibadj – Bernstein

Alice Longley - Buckingham Research

Linda Bolton-Weiser – Caris

Caroline Levy – Calyon

Presentation

Operator

(Operator Instructions) 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 impact of acquisitions and divestitures and foreign exchange where applicable.

Adjusted free cash flow represents operating cash flow less capital expenditures and the after tax impact of the global pharmaceutical divestiture. Adjusted free cash flow productivity is the ratio of free cash flow to net earnings excluding the gains on divestitures of our pharmaceutical business. Core EPS refers to earnings per share from continuing operations excluding certain unusual 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

Bob McDonald and Teri List join me this morning. I’ll begin today’s call with a summary of second quarter results. Teri will cover business highlights by operating segment. I’ll then comment briefly on Venezuela and on pricing before providing guidance at the end of the call. Bob, Teri and I will 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.

We had a very strong quarter, with organic volume growing 5% a seven point improvement versus last quarter. While the base period was admittedly a weaker one, this volume progress reflects a strong innovation program supported by higher media weights and shaper consumer value. Organic sales grew 5% a three point improvement versus last quarter and at the top end of our guidance range.

Progress was broad based. Five of six reportable segments grew organic sales. Both developed and developing markets grew organic sales and volume and showed sequential quarter on quarter improvement in growth rates. Foreign exchange added to organic sales resulting in all in sales being up 6%.

All in GAAP earnings per share were $1.49, $0.05 per share above the high end of our guidance range.

The over delivery was driven by strong top line growth and by margin expansion. All in GAAP earnings per share were down 6% versus year ago reflecting the smaller gain on the pharmaceuticals divestiture and the gain on the Folgers divestiture that was in the base period year ago. The current period gain on the sales of global pharmaceuticals business was $1.5 billion which compares to a $2 billion gain on the sale of Folgers.

Core earnings per share which exclude one time items were up 22%. Gross margin was up 330 basis points, primarily due to lower commodity costs and our ongoing productivity and cost reduction initiatives. Operating margin expanded 160 basis points as higher gross margin was partially offset by higher SG&A. SG&A increased 170 basis points due to higher marketing support, the proactive conversion of bolivars into dollars ahead of the Venezuela currency devaluation and the establishment of a reserve for potential legal liabilities.

This reserve relates to ongoing inquires being conducted by competition authorities in Europe, which we and other companies in our industry have previously disclosed. The matters being investigated are not recent, they date back many years. While no final rulings have been made we have decided to establish a reserve for potential liabilities in a couple of countries this quarter.

The effective tax rate on the quarter from continuing operations was 29.8%. This is up 450 basis points versus year ago primarily due to lower audit settlements and foreign tax credits as well as certain non-deductible charges in the current year. Adjusted free cash flow was strong at $3.1 billion. Fiscal year to date we generated $7.1 million of adjusted free cash flow which is more than 100% of earnings excluding gains from the global pharmaceutical divestiture.

In November, Moody’s raised our revised outlook on P&Gs AA- credit rating to stable which reflects the strong cash progress.

During the October-December quarter we resumed our share repurchase program, $1.4 billion of shares were repurchased. We currently expect to repurchase about $5 billion for the full fiscal year. In terms of acquisitions and divestitures we announced the closing of the pharmaceutical sale to Warner Chilcott. This move enables us to focus singularly on winning in consumer healthcare, personal healthcare, oral care, and feminine care, while we’re able to fully leverage our core capabilities at the company.

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