Procter & Gamble Company (The) (PG)

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The Procter & Gamble Company (PG)

F2Q 2014 Earnings Conference Call

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

Executives

Jon Moeller - CFO

John Chevalier - IR

Analysts

Chris Ferrara - Wells Fargo

John Faucher - JPMorgan

Dara Mohsenian - Morgan Stanley

Wendy Nicholson - Citigroup

Bill Schmitz - Deutsche Bank

Lauren Lieberman - Barclays

Olivia Tong - Bank of America

Nik Modi - RBC Capital Markets

Ali Dibadj - Bernstein

Jason English - Goldman Sachs

Connie Maneaty - BMO Capital Markets

Javier Escalante - Consumer Edge Research

Joe Altobello - Oppenheimer

Bill Chappell - SunTrust Robinson Humphrey

Alice Longley - Buckingham Research

Mark Astrachan - Stifel Nicolaus

Caroline Levy - CLSA

Leigh Ferst - Wellington Shields

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 impacts 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 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

Good morning. Our October-December results came in pretty much as we had expected, keeping us on track to deliver our fiscal objectives. All-in sales were up modestly versus the prior year, including a 3-point headwind from foreign exchange. Organic sales grew at 3%. Organic sales were in line or ahead of year ago in each reporting segment.

Coupled with 4% growth in the first quarter, this leaves us on track to deliver 3% to 4% organic sales growth for the fiscal year. Sales growth was driven by organic volume growth of 3%. Organic volume was ahead of a year ago in each of our reporting segments. Pricing added 1 point to sales growth and mix reduced sales growth by 1 point.

Consistent with the reported market growth and market share data you’ve seen, October and November were relatively soft months for our categories and for P&G. December, on the other hand, was a relatively strong month for us. December organic volume growth was over 5%, with each sector growing at or above 4%. Organic sales were up mid-single digits.

December quarter all-in GAAP earnings per share were $1.18, core earnings per share were $1.21, which leaves us on track with our plans to deliver 5% to 7% core earnings per share growth for the fiscal year. Earnings for all segments were ahead of a year ago, except for baby, feminine, and family care, due to foreign exchange.

Foreign exchange was an $0.11 per share headwind for the company in the quarter. The year ago period also included a $0.07 per share gain from the sale of our bleach business in Italy. Combined, these two items constitute a 15% core earnings per share growth headwind for the quarter.

Core operating margin was about equal to last year, down 10 basis points. Organic sales growth leverage and 230 basis points of cost of goods overhead and marketing savings were offset by foreign exchange and negative mix. Core gross margin was down 90%. Cost savings of 130 basis points and volume leverage were offset by geographic and category mix of 130 basis points, foreign exchange of 90 basis points, higher commodity costs, and higher manufacturing startup costs.

Core SG&A improved 80 basis points, driven by 100 basis points of marketing and overhead productivity savings. These benefits were partially offset by foreign exchange imps and targeted innovation and go-to-market investments.

The effective tax rate on core earnings was 21.5%. This included a positive 1 point impact from the release of a tax reserve following a favorable outcome in Asia. This reserve reversal accounted for roughly $0.02 of earnings per share benefit on the quarter.

The net impact from all of the items below operating income, tax, interest expense, interest income, non-operating income, and supply chain, was a slight headwind to core earnings per share growth for the quarter. We generated $2.4 billion in free cash flow and remain on track to deliver free cash flow productivity of about 90% for the fiscal year.

As planned, we returned $1.7 billion of cash to shareholders in dividends, and we repurchased $1.5 billion in stock, bringing year to date share repurchase to $4 billion. Net, the second quarter came in pretty much as we were expecting, on both the top and bottom lines, leaving us on track to deliver our sales and earnings forecast for the fiscal year.

As we move forward, value creation for consumers and share owners remains our top priority. Operating TSR is our primary business performance measure. Operating TSR is an integrated measure of value creation at the business unit level, requiring sales growth, progress on gross and operating margin, and strong cash flow productivity.

Operating TSR drives focus on core brands and businesses, our leading, most profitable categories, and leading, most profitable markets. We’ll begin to make more operating TSR progress as we move into calendar 2014.

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