Procter & Gamble Company (The) (PG)

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Procter & Gamble (PG)

Q4 2011 Earnings Call

August 05, 2011 8:30 am ET

Executives

Jon Moeller - Chief Financial Officer

Teri List - Senior Vice President and Treasurer

Unknown Executive -

Robert McDonald - Chairman, Chief Executive Officer and President

Analysts

Javier Escalante - Weeden & Co., LP

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

Ali Dibadj - Sanford C. Bernstein & Co., Inc.

John Faucher - JP Morgan Chase & Co

Per Ostlund - Jefferies & Company, Inc.

Joseph Altobello - Oppenheimer & Co. Inc.

Jason Gere - RBC Capital Markets, LLC

William Schmitz - Deutsche Bank AG

Timothy Conder - Wells Fargo Securities, LLC

Jon Andersen - William Blair & Company L.L.C.

Caroline Levy - Credit Agricole Securities (USA) Inc.

Linda Weiser - Caris & Company

Christopher Ferrara - BofA Merrill Lynch

Nik Modi - UBS Investment Bank

Presentation

Operator

Good day, ladies and gentlemen. [Operator Instructions].

Unknown Executive

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. Core EPS refers to earnings per share from continuing operations excluding certain items. The effective tax rate on core earnings represents the effective tax rate on continuing operations less non-core impacts.

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. Good morning, everyone. Bob McDonald and Teri List join me this morning. I'll begin today's call with the summary of our fiscal year and fourth quarter results, Teri will cover business highlights by operating segments then Bob will provide his thoughts on our strategy and focus areas going forward. And I'll conclude the call with guidance for fiscal year 2012 and the September quarter.

We'll take questions after our prepared remarks and we'll be available following the call as always to provide additional perspective as needed.

We entered fiscal year 2011 with 3 clear objectives. First, to continue executing our purpose-inspired growth strategy to touch and improve more consumers lives in more parts of the world more completely. Second, to grow market share by growing organic sales 1 to 2 percentage points ahead of underlying global market growth rates. Our third objective was to grow core earnings per share in the range of 7% to 9%. We delivered on each of these objectives despite significant external challenges, including the rapid increase in commodity and energy costs, little to no market growth in developed regions and market disruptions ranging from political instability in the Middle East and North Africa to the natural disaster in Japan. And we did this while strengthening investments in our innovation and advertising programs.

First, relative to our strategy, we've accelerated the expansion of our product portfolio vertically, horizontally and to new geographies. We entered 32 new category country combinations last year. We entered 78 new category price tier combinations, and we entered 75 new category channel combinations. In additional, we launched a large number of important product upgrades across the world. Each of these moves enables us to serve more consumers in more parts of the world more completely. We generated strong organic volume growth growing 5% for the fiscal year. The growth was broad-based with increases in 5 of 6 reporting segments, 21 of 24 billion-dollar brands and 15 of our top 17 countries. On a 2-year cumulative basis volume growth is up 10%, ranking P&G towards the top of our global competitive peer group. We grew organic sales over 4% for the fiscal year, roughly 1 point ahead of underlying market growth of about 3%. This top line growth rate was ahead of last fiscal year's growth rate and generally ahead of the growth rate of our competitive set. Global market share was up for the year, with 4 of our 5 regions holding or growing share. We held or built market share in businesses representing about 60% of sales on $17 billion of our $24 billion brands and in 11 of our top 17 countries. All in, earnings per share was $3.93 for the year, core earnings per share was $3.95, up 8% at the midpoint of our initial guidance range for the fiscal year and consistent with our long-term target range for earnings per share growth.

So we delivered on each of our key objectives: strategy, share growth, and earnings per share growth in a very difficult operating environment. Commodity costs were a year-on-year headwind of more than $1.8 billion before tax. This was about $1 billion higher than we expected at the beginning of the year and created an earnings per share headwind of about $0.25 per share or nearly a 7 percentage point drag on earnings per share growth versus our going-in expectations. But differently, absent these commodity cost increases, core earnings per share would have been up strong double digits. Global market growth came in at the low end of our initial expectations due to slow growth in developed regions. For the year, developing markets grew about 8% but developed markets grew only about 1% on a value basis. Despite the cost and market growth challenges, we remain committed to the execution of our strategy. We continue to invest in new innovations and market expansions that will deliver long-term growth for the business and returns for our shareholders. We invested $2 billion this past year in research and development, a figure that's increased for the past 2 years, even as we've improved productivity. We invested $9.3 billion in advertising or 11.3% of sales, to communicate the benefits of our brands to consumers. Advertising spending has also increased each of the last 2 years, and is now $1.8 billion or 24% above what we are investing just 2 years ago. The combination of substantial cost savings and both cost of goods and SG&A and the lower-than-expected tax rate, enabled us to maintain investments in our growth strategy and to offset the rapid increase in commodity costs without sacrificing earnings per share growth. The all-in effective tax rate for the year was 22.3% and the core rate was 23.5%. These rates were below historic levels due to a number of successful audit resolutions and the mix benefit from faster growth in developing markets where tax rates are generally lower.

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