Highlights From PG's Q2 Conference Call: Organic Sales Grew 5%; Guides Slightly Below for Q3 and FY EPS

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January 28, 2010 1:23 PM EST

Procter & Gamble Co. (NYSE: PG) reports Q2 EPS of $1.49, 6 cents better than the analyst estimate of $1.43. Revenue for the quarter was $21.03 billion, which compares to the estimate of $21.07 billion. Shares are up 2.53% today.

Highlights From PG's Q2 Conference Call:

Sees Q3 core EPS $0.77-$0.82, versus the consensus of $0.85. Sees Q3 sales up 7-10%.
(CFO) We have a strong quarter with organic volume growing 5%, a 7 point improvement versus last quarter.
Organic sales grew 5%, a 3 point improvement versus last quarter, and at the top end of our guidance range.
Progress was broadbased. 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%.
The current period gain on the sale 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 cost 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.
Adjusted free cash flow was strong at $3.1 billion. Fiscal year-to-date we've generated $7.1 billion of adjusted free cash flow, which is more than 100% of earnings excluding gains from the global pharmaceuticals divestiture.
October-December quarter we resumed our share repurchase program. $1.4 billion of shares were repurchased.
In terms of acquisitions and divestitures, we announced the closing of the pharmaceuticals sales to Warren Chilcot.
Based on estimated results for the year ended June 2009, this equates to a sales multiple of 1.2 and an EBITDA multiple of 13.3 which we believe represent good value for our shareholders.
Stepping back, we're very pleased with our October-December results. Strong volume growth enabled us to hit the top end of our organic sales range.
In Baby Care, we introduced our tier three diapers Pampers Simply Dry into stain in the December quarter. This builds on successful launches in Germany, France, Greece and the UK.
In our lead market, Germany, we reached our highest ever diaper value share 63.4%, up more than five share points versus a year ago.
Across the Arabian peninsula, Sleep and Play shipments already represent about 10% of our total business.
In the United States, Tide Stain release share exceed 10% and year one retail sales will approach $100 million. While Bounce dryer bar shares are nearly 6%.
In Japan, our newest laundry brand , was introduced in September and is off to a strong start. It's priced at a 15% premium versus the category average and is designed for consumers who want a laundry detergent that cleans well and also provides natural and gentle benefits.
The Oral-B launch in Belgium and Netherlands is also going well having achieved an 8% national share since being launched in February of 2009.
Starting with the beauty segment, organic sales increased 4%, driven mainly by 3% organic unit volume growth and benefits in pricing.
P&G's all outlet value share of U.S. retail hair care is approximately 32% up slightly versus prior year.
Skincare volume was up low single digits with balanced growth in developed and developing markets.
Volume in the Prestige beauty business was down slightly driven by continued market size decline.
Organic volume in the salon professional business was down mid single digits due to ongoing impacts of the global economic downturn.
In the cosmetics business, Cover Girl shipments were up low singles and U.S. all outlet value share was up more than a point to nearly 21%.
Volume was down 2%. Pricing contributes 4% of sales growth and product and geographic mix reduced sales by 2%.
Greater China shipments were up 20% behind distribution expansion of the vector system. And India blades and razor shipments were up more than 25% driven by the November launch of the MACH3 razor.
Gillette all outlet value share of the U.S. males blades and razor category was up nearly half a point to over 77%. Fusion share of U.S. male systems is over 45%, up more than four points versus the prior year.
Braun share hair removal appliances in the U.S. was up a point and a half to more than 24% behind strength of Male Shaver Accessories.
In healthcare, organic sales were up 2% and organic volume increased 3%. The net impact of pricing and mix lowered sales by 1%.
In developing markets Oral-B volume was up 30% in Brazil driven by the launch of Oral-B toothpaste and related market share gains on toothbrushes. And the brand was up nearly 40% in India behind manual toothbrush expansion.
In the U.S., the Always brand grew all outlet value share feminine pads by half a point to 69%. Tampax increased its share of the U.S. tampon market by nearly a point to more than 48% driven by strong advertising and in-store programs for Tampax Pearl.
Align 25% value share of the U.S. probiotic supplement market. These increases more than offset mid teen Prilosec volume due to increased competitive activity.
And the snacks and pet care segment, organic sales were up 3%. Organic volume increases of 1% and pricing of five were partially offset by negative product mix. Snack volumes declined versus prior year.
Organic sales were higher due to price increases taken last year, with a Superstack can restage.
P&G all outshare of the pet penetration business is up prior year and approaching 10%. In the fabric and home care segment, organic sales increased 7% and volume grew 8%. Home care led to growth with volume up double digits.
The Dawn Cascade and Fabreez brands all grew shipments in the teens and Swiffer was up mid single digits.
Geographically, all regions delivered volume growth and developed and developing markets were both up double digits. In the U.S., Cascade all out value share is up more than three points to 67%.
Driven by strong marketing and in-store programs designed to increase trial. Fabreez all out share of the U.S. air care market is also up more than three points to nearly 21% % behind the home collections initiative which launched last summer.
Baby care and family share delivered organic sales growth of 8%, organic volume growth of 10%. Product mix reduced sales by 2%, due to a shift toward larger pack sizes.
And value share in the UK is up more than four points to over 62%. In the U.S., P&G's all out value share of diapers was up a point to over 38%, with both the Pampers and Luvs brands growing market share.
Charmin all out value share of the toilet tissue category was up more than a point to 28%. And Bounty share of the U.S. paper towel category is up two points to over 46%.
(CFO) We lowered Cheer prices 13% in October in order to give consumers a broader range of choices and further differentiate Cheer from tied.
To support our innovation program which, as we mentioned, is back half loaded. Secondly, we expect less favorable year on year commodity comparisons. Third, pricing benefits we've been receiving should continue to diminish as they annualize. Finally, as I indicated earlier, the impact of the recency currency evaluation in Venezuela will impact second half results.
Foreign exchange based on current spot rates should be flat up to 1% resulting in all in sales of three to 6%.
Core earnings per share is now expected to be $3.53 to $3.63 per share up two to 5% versus a year ago. This is an improvement from our prior guidance range of flat up to 3% and recognizes the underlying improvement we're seeing on the business. We're maintaining our all-in GAAP earnings per share guidance range at $4.02 to $4.12 per share. (Consensus $4.15)
Turning to the March quarter, we expect organic sales growth of 4 to 6%. All-in sales inclusive of a three to four point benefit are expected to be up 7 to 10%. At this level of sales growth we expect to grow global value share. Both core and all-in GAAP earnings per share are expected to be 77 cents to 82 cents per share.
(Q&A) My question had to do with the investment spending you're making in developing markets, because some of the numbers you were reading kind of 30% growth in one business in China, 20% growth in another business. I'm wondering if that's a reflection of just a much more buoyant China market generally, whether you're seeing those types of growth rates in India and elsewhere or whether you're just spending a ton of money on advertising and promotion in those markets.(A)Wendy, this is Bob. As Jon tried to indicate in his remarks about our innovation program, and we feel sorry that we had to cut them short. We had to try to summarize. Our innovation program is happening all over the world. And we're spending behind the innovation program to get the awareness and trial objectives we need to grow market share profitably. So there really is not an unevenness in our spending, country to country or innovation to innovation. It's spending behind the innovation program. It's spending behind the core business, and the whole idea is to grow market share profitably.
Bob, back in late August you talked about getting aggressive in terms of the portfolio. And so it's another sort of six months past then. Can you give us your latest thinking in terms of time line, your thoughts in terms of where you think you can add obviously very general here, and do you think you still need to do some major pruning or do you feel like most of that work's been done. So sort of just the overall status of the portfolio right now. Thanks.(A)I would say we've just started. As you know we've turned our purpose, touching and improving lives, into a strategy. Touching and improving more lives, more parts of the world, more completely. Jon gave you some examples of how we've been expanding the portfolio vertically, horizontally and into adjacencies in his remarks. But we've really just
started. Remember, we've been in China since 1988. We're only in about 14 categories. We lead all of them but one. But the spending per capita in China is only $3 year on Procter & Gamble products. That compares to the United States where we're in over 25 categories in the per capita spending year is $100. So we've got a long way to go. But we started the journey. Getting the portfolio right is strategic. And we're working to do that so we can touch and improve more lives. Not surprisingly, there is a direct
correlation between the number of categories we're in in each country. The market share we have in each country, the profit margin we have in each country. And how many lives we're touching and improving and importantly the growth rate in each country. So getting the portfolio right is strategic and
that's our focus.
I was just sort of struck by how strong organic volume was this quarter. And I know that part of it there's certainly the comparisons help. But it would be great if you could help us understand what in the portfolio still feels negative. You went on through the list of things that are positive. What is still really not where you wanted to be where you're still hoping for further acceleration as we move through the next couple of quarters. (A)I think one area, Lauren, is clearly the more discretionary categories. Teri talked in her remarks about the Prestige fragrance business, salon hair care and Braun. We are seeing sequential improvement in the market size reduction for those categories, but clearly those are areas that we're not growing at the rates we expect to longer term.(A)Lauren, I would also add that any business that we have that is not growing market share profitably, we are impatient to get that share growth. And John mentioned we expect on a company average basis we'll see share growth in the March quarter. But as we talked we have to make some interventions to get that share growth. We talked about the intervention we've made on batteries. That's an example of an intervention we've made to get share growth. So our innovations, and the marketing behind those innovations, coupled with some of these interventions, we're hoping to get the majority of the portfolio to share growth by March. And we're on our way there. We're on track.
Can you just talk about shipments versus consumption, how that's changed and if you see that improving going forward, because there was not a whole lot of commentary, shipments versus end user consumption.(A)Jon talked about cash, Bill, and a lot of the outstanding cash discipline we have has been around our management of inventories, both our internal inventories as well as external inventories with our retail customers. As a result of that, our shipments and consumption match up pretty doggone closely, and we watch it weekly. Well, daily. But we review it on a company-wide basis with the vice chairman weekly. And it's running pretty much one-to-one.
Just a quick question, Bob, Jon, whoever cares to take the question in terms of the top line for this quarter and as you think about the March quarter can you break down how you're thinking about it in context with your algorithm with category growth and white space and share and if you could just break that down for us, that would be helpful.(A)Our general objective, Nick, as you know, is to grow our business one to two points ahead of market growth, which obviously is consistent with an objective of building market share. We're looking at currently projecting market growth of 2 to 3% for the fiscal year, which is an improvement versus the last time we've all been together when we were thinking it was about 1 to 2. If you look at that 2 to 3 on the year, compared to sales growth on an organic basis of 3 to 5. I think that gives you the breakdown that you're looking for.
Hey, guys, I wanted to talk about pricing again. Jon, I guess once upon a time we were talking about pricing hitting 1% or I guess 10% of the portfolio. And you're saying it hit 1% of price overall, I guess 1% of the top line. Are there more interventions coming, going forward, and do you still feel comfortable with that view that your pricing interventions would only be across 10% of the portfolio?(A)As you can imagine Chris, this is a very fluid situation. We're constantly managing as you know our value metrics versus competitive offerings. And we respond to those on a real time basis. So I don't want to get overly granular on a number. But the directionality of our commentary, both on 10% of the portfolio and 1% of the sales still holds. We're not looking, in no geography are we leading price declines while responding to gaps we see and we'll continue to do that. But I don't think you should expect broad based pricing activity.
First question, I just wanted to sort of square the disconnect between the pretty solid organic growth you guys saw in the quarter and your commentary about shares being down modestly year over year, and as a follow-up you mentioned shares did improve throughout the quarter. Is that innovation, is that marketing, or are you starting to see consumers trade up again?(A) Joe, this is Bob. I'll start. In our prepared remarks, Jon said that shares naturaly lag shipments. And so the shares we're talking about are shares that are a few months old. We also obviously look at scanner data as well as off-take from our distributors. And that's what gives us confidence in saying that we are making progress in growing market share around the world profitably. That market share growth is generally coming from places where we are innovating, where we have the right consumer value, where we are doing a good job marketing, getting the trial and awareness that we need of our business, both core business as well as new innovations. And as we look out, remember we said that the innovation program is getting stronger in the second half. And that's one of the things that gives us confidence, and also, as Jon said, that we don't see a large amount of pervasive pricing activity in the second half. That's what gives us confidence to see that that trend in share growth will continue.(A) Joe, as we've talked before, while there has been some dynamic of trade-down and I mentioned clearly the market size impact on discretionary categories, we've continued to fare well in the premium portions of the market. Teri mentioned in her remarks, progress on Olay Pro-X, the Fusion business, up four share points in the last quarter, clearly is indicative of a consumer who is willing to spend for value driven by performance. And there are other examples. So it's not one-size-fits-all. (A)It's interesting, if you go to a country like India, for example, where baby care growth has been very strong, we have mothers with arguably lower disposable income than those of us in the United States choosing to buy disposable diapers rather than having their babies not have any diaper at all or use cloth. Because they know that that disposable diaper will help their baby sleep through the night which will aid their development and obviously be better for the mother as well. I think this idea that this economy is causing everyone to trade down is a little bit overly general. And too broadly applied. Innovation and improving lives is really what is critical for us on a consumer-by-consumer basis.
I was hoping to zero in a little bit on the family care portion of the business. I think Jon you talked about the conditions for pricing, targeted pricing reductions and speaking about reversals and foreign exchange and commodities. And clearly this scenario where you've gotten very nice returns on your promotional investment, very strong volume growth. How should we think about the outlook for that going forward with pull prices having moved back up, polypropylene moving back up a bit, and net gas moving up, and how are you weighing the continued promotional investments and the fixed cost leverage you're showing on that versus the higher commodity cost outlook in that division? (A)In general, obviously, I don't want to comment on pricing strategy in this kind of a setting. We will continue to watch this. Any move that we make will obviously be weighed with consumer value in mind and be made on a comparative basis relative to how other competition is responding. It's clearly something we're watching given the commodity costs increases that you appropriately mention. But beyond that I think it would be inappropriate for me to comment specifically.