Procter & Gamble Company (The) (PG)

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The Procter & Gamble Company (PG)

F3Q 2014 Earnings Conference Call

April 23, 2014 8:30 a.m. ET

Executives

Jon Moeller - CFO

Analysts

John Faucher - JPMorgan

Dara Mohsenian - Morgan Stanley

Wendy Nicholson - Citi Research

Bill Schmitz - Deutsche Bank

Chris Ferrara - Wells Fargo

Olivia Tong - Bank of America

Nik Modi - RBC Capital Markets

Ali Dibadj - Bernstein

Michael Stieb - Credit Suisse

Jason English - Goldman Sachs

Steve Powers - UBS

Connie Maneaty - BMO Capital Markets

Javier Escalante - Consumer Edge Research

Joe Altobello - Oppenheimer

Bill Chappell - SunTrust

Alice Longley - Buckingham Research

Mark Astrachan - Stifel

Jon Andersen - William Blair

Caroline Levy - CLSA

Presentation

Operator

Good morning, and 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 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. Our January-March results came in as we had expected, keeping us on track to deliver our fiscal year objectives. All-in sales were unchanged, versus the prior year, including a three point headwind from foreign exchange.

Organic sales grew more than 3% in a very challenging macro environment, with significant market level events in places like Venezuela, Argentina and the Ukraine, declining levels of market growth in both the developed and developing world and weather-related issues in North America. Organic sales were at or above prior year levels in each of our five reporting segments.

Organic sales growth was driven by strong organic volume growth of 3%. Volume was at or above prior year levels in each of our five reporting segments. Pricing added one point to sales growth and mix reduced sales growth by one point. Fiscal year-to-date, we deliver between 3% and 4% organic sales growth, leaving us on track to deliver 3% to 4% organic sales growth for the fiscal year.

March quarter all-in GAAP earnings per share were $0.90. All-in earnings per share include approximately $0.04 per share of non-core restructuring charges, and $0.10 per share of non-core balance sheet revaluation impacts resulting from foreign exchange policy changes in Venezuela.

Core gross margin declined 110 basis points, cost savings of 200 basis points, pricing and volume leverage were offset by product category and geographic mix of 150 basis points, foreign exchange headwinds of 100 basis points and higher commodity costs.

Core SG&A improved 130 basis points driven by marketing efficiencies and overhead productivity savings. Importantly therefore, core operating margin increased 20 basis points. Core earnings per share grew 5% to $1.4, leaving us on track to deliver 3% to 5% core earnings per share growth for the fiscal year. Foreign exchange was at $0.12 per share headwind for the company on the quarter. Excluding foreign exchange, core earnings per share grew 17%.

The effective tax rate on core earnings was about 20%. Tax accounted for roughly $0.03 of earnings per share benefit on the quarter versus the prior year. We generated $3.2 billion in free cash flow, achieving 119% free cash flow productivity, and remaining on track to deliver free cash flow productivity of about 90% for the fiscal year.

As planned, we returned to 1.7 billion of cash to shareholders in dividends. We also announced a 7% increase in our dividend. P&G has now been paying a dividend for 124 consecutive years since its incorporation in 1890. This is the 58th consecutive year the company has increased its dividend.

We repurchased $1.5 billion in stock bringing year-to-date share repurchase to 5.5 billion. Stepping back, we are satisfied with our top line growth, particularly against the difficult macro backdrop. Constant currency earnings progress was very strong. We're reliably converting earnings to cash, and are building on a strong track record of cash returned to shareholders.

As we move forward, value creation for consumers and shareowners 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, margin progress and strong cash flow productivity. Operating TSR drives focus on core brands and businesses, our leading, most profitable categories, and leading, most profitable markets.

Our strongest brands and business units and total company positions are in the U.S. We need to continue to ensure our home market stays strong and growing. The actions we've taken over the past two years to restore consumer value, expand our vertical product portfolios and horizontal regimens, and lead innovation have enabled us to restore value creating share growth in more parts of the business.

We still have a lot more work to do, and the competitive environment is intense, which leads to choppy results on a quarter-to-quarter basis, but we're making steady progress.

We'll continue to grow and expand our business in developing markets, with a focus on the categories and countries with the largest sizes of prize and the highest likelihood of winning. This is where the world's babies will be born, and where more new households will be formed. Developing markets will continue to be a significant growth driver for our company this year and for years to come.

We'll continue to focus the company's portfolio allocating resources to businesses where we can create value. Over the past six years, we exited businesses that have accounted for over $6 billion in sales, including coffee, pharmaceuticals, snacks, kitchen appliances and water purification. Last quarter, we announced our exit from the bleach business. Two weeks ago, we announced our plan to exit the pet food business. Mars will buy our business in the Americas and several other countries. We expect to sell the European business to a different buyer.

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