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The Procter & Gamble Company (NYSE: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

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.

Also during the December quarter we announced the acquisition of the Ambi Pur air care business from Sara Lee. Ambi Pur is a strategic homerun. Its geographic presence compliments ours as do its product technologies. The strategic benefits Ambi Pur brings will enable us to more quickly expand and strengthen our air care business. Closing of the acquisition will put us in the air care business in over 80 countries.

The purchase price was 320 million Euros which translates to $470 million on the day the deal was announced. 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. We expect to close the acquisition pending regulatory approval during the April-June quarter.

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, solid top line results couple with our costs from productivity efforts also enabled us to exceed bottom line expectations. We generated a significant amount of cash and effected important strategic adjustments to our portfolio.

We have more work to do particularly in regards to share growth. On a global basis value shares for the December quarter were slightly below year ago levels. Due to time lags associated with reporting the share data, share growth is inherently a trailing indicator. Share improved sequentially through the quarter and should turn positive during the March quarter. This is an important measure to us as it is indicative of whether we are accomplishing our objective of serving more consumers in more parts of the world, more completely.

We are accelerating innovation in the second half, increasing marketing support and improving consumer value to profitably grow valued market share. We’ll do this while maintaining our focus on costs and cash discipline. We’re expanding our portfolio vertically, horizontally, and into geographic white space. We’re also working to constantly improve existing offerings to deliver more value to consumers.

A look at our innovations programs in a couple of key categories over the last two quarters helps illustrate this. In baby care we introduced our Tier 3 diapers, Pampers Simply Dry into Spain during the December quarter. This builds upon successful launches in Germany, France, Greece, and the UK. In all four of these countries we achieved record diaper value shares during the quarter. In our lead market, Germany, we reached our highest ever diaper value share of 63.4% up more than five share points versus year ago.

Similarly the expansion of our Tier 3 diaper called Sleep & Play in the Middle East is off to a strong start. Across the Arabian Peninsula, Sleep & Play shipments already represent about 10% of our total business.

In addition to offering consumers more lower tier options to care for their babies we are expanding our portfolio and improving consumer value at the top end. UnderJams, a premium Pull Up overnight bed wetter product, just started shipping in the UK, Germany, Austria, Switzerland, and Belgium this week. Launches in additional countries will follow.

We recently announced the launch of Pampers Swaddlers & Cruisers with Dry Max technology across North America beginning in March. Pampers Dry Max is the biggest innovation for the Pampers brand in 25 years. It’s our driest diaper ever and is 20% thinner then our existing product. Dry Max is a dramatically improved product with clear benefits for baby, mom, retailers, and the environment.

The revolutionary Dry Max technology helps lock wetness in for up to 12 hours. The new thinner core gives babies more freedom to move and to play. The thinner design allows moms and retailers to carry more diapers in less space. Because Dry Max is being offered at the same price as existing offerings it provides a great consumer value. Finally, Dry Max will positively impact the environment.

If current North American Pampers Swaddlers & Cruisers users switched to Pampers with Dry Max it will save the weight of a billion diapers every three years. The smaller package will reduce packing materials and the amount of energy needed to transport the products. As you can see, in Baby Care we’re expanding the portfolio down and up, expanding our geographic footprint across tiers and dramatically improving our current offerings.

In Laundry we’re expanding our portfolio horizontally with Tide Stain Release and Ariel Professional and laundry additives and Bounce Dryer Bar in the fabric enhancer segment. Both innovations continue to exceed expectations. In our lead market of Turkey, Ariel Professional is over a 25 share. In the United States, Tide Stain Release shares exceed 10% in year one retail sales will approach $100 million, while Bounce Dryer Bar shares are nearly 6%.

We’re also expanding our Laundry portfolio vertically and into geographic white space. In Western Europe we’re innovating in the premium tier with Excel Gel. Excel Gel is a new to the world gel that gives the best cleaning performance possible and saves energy because it cleans well in cold water. It allows for controlled dispensing and is consumer preferred by a margin of 2:1. Excel Gel continues to perform well with value shares approaching 10% in the United Kingdom. Shares are growing in Germany, France, and Spain as well.

In Japan our newest laundry brand [Serosa] was introduced in September and is off to a strong start. [Serosa] is 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.

We also introduced Tide Naturals in India and Ace in Columbia during the December quarter. Tide Naturals is priced 30% lower then regular Tide at 20 Rupees for 400 grams of product. With 75% of laundry market priced at 20 Rupees or below this will allow us to reach a much broader spectrum of Indian households. Ace is a mid-tier laundry brand which compliments Ariel’s stain removal equity and Bold’s softness equity. In the five months since being launched Ace has grown to almost 2.5% of the Columbian market.

Finally, we introduced Ariel into Uganda and Senegal during the December quarter. This follows the launch of Ariel into Kenya during the September quarter and is part of our strategy to dramatically increase our business in East Africa.

In Oral Care we continue to expand our portfolio as well. Oral-B Toothpaste and Toothbrush shares in Brazil continue to exceed expectations. Based on our end market success we have initiated the second wave of our toothpaste expansion plan which will take us beyond the pharmacy channel. The Oral-B launch in Belgium and Netherlands is also going well having achieved an 8% national share since being launched in February 2009.

Crest Pro Health is off to a strong start in China with initial shipments ahead of expectations. The equity benefit we have created is positively impacting other parts of our Oral Care Business in China. This is one of the reasons Oral Care shipments in China were up double digits in the most recent quarter. The Crest Pro Health formula is being expanded to other markets around the world. For example, blend-a-med expert which uses the Pro Health formula was recently launched in Germany and has pushed total blend-a-med value shares to nearly 11%.

In Hair Care we’re significantly improving and expanding our salon offerings with the introduction of Fekkai advanced. Fekkai advanced will be sold exclusively in high end salons and department stores all around the world, while Fekkai Classic will be launched into mass retail as a super premium offering.

I could go on but I think these examples give you a picture of the work we are doing and the investments we are making to expand our portfolio vertically, horizontally, and geographically in order to serve more consumers and more parts of the world more completely. Bob will provide more perspective on our second half innovation plans at CAGNY in February, we hope to see many of you there.

To summarize, a strong innovation program, increased marketing support, better consumer value, tight cost control and cash discipline have resulted in growing momentum in what was all in a very strong quarter.

With that let me turn the call over to Teri.

Teri List

Staring with the Beauty segment, organic sales increased 4% driven mainly by 3% organic unit volume growth and benefits from pricing. Retail hair care delivered a solid quarter with mid-single digit organic volume growth led by the Pantene, Head & Shoulders and Rejoice brands. All three brands grew volume 5% or more for the quarter. On a geographic basis, China led the hair care growth with shipments of the Pantene; Head & Shoulders and Rejoice brands all up 15% or more. P&Gs all outlet value share of US retail hair care is approximately 32% up slightly versus prior year.

Skin Care volume was up low single digits with balanced growth in developed and developing markets. Global Skin Care value share is up versus prior year to 10% and Olay all outlet value share of US facial moisturizers is up more than a point to over 45%. The strong US share progress is due to the success of the Olay Pro-X line which we continue to leverage.

Personal Cleansing volume increased mid-single digits driven by double digit growth in developing markets. The Safeguard brand was up mid-teens in developing markets. Volume in the Prestige Beauty business was down slightly driven by continued market size declines. Organic volume in the Salon Professional business was down mid-single digits due to the ongoing impact of the global economic downturn.

The Cosmetics business, Cover Girl shipments were up low singles and US all outlet value share was up more than a point to nearly 21%. The strong share performance has been driven by continued leverage of Simply Ageless Foundation and Exact Eyelights Mascara innovation that launched last spring.

In the Grooming segment, organic sales were in line with prior year. Volume was down 2%. Pricing contributed 4% to sales growth and product and geographic mix reduced sales by 2%. In the Male Blades & Razors business organic volume was in line with prior year levels as mid-single digits growth in developing markets was offset by lower shipments in developed markets. Greater China shipments were up 20% behind distribution expansion of the Vector system. India Blades & Razor shipments were up more than 25% driven by the November launch of the Mach 3 Razor.

In developed markets Fusion shipments grew mid-singles but were more than offset by a mid-teens decline of Mach 3. Gillette all outlet value share of the US male Blades & Razors category was up nearly half a point to over 77%. Fusion share of US male systems is over 45% up more than four points versus the prior year. Global Fusion shares have grown versus prior year every quarter since being introduced four years ago.

The Braun business continued to be effected by weak category demand and shipments declined low single digits. However, this was a significant improvement in the trends compared to the mid-teens declines over the last few quarters. Braun’s share of hair removal appliances in the US was up a point and a half to more than 24% behind strength of male shaver accessories.

In Western Europe Braun share of hair removal appliances was up nearly four points to 42% with strong improvement of both male and female products. Shipments of male personal care products were off high single digits due to soft results for the Tag brand and increased competitive activity in the shave prep category.

In Healthcare organic sales were up 2% and organic volume increased 3%. The net impact of pricing and mix lowered sales by 1%. In Oral Care shipments increased mid-single digits with developing markets up high singles and developed markets in line with prior year. 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. The brand was up nearly 40% in India behind manual toothbrush expansion.

The Crest brand grew mid-teens in China behind the launch of Crest Pro Health Toothpaste which is off to a very strong start. In developed markets solid growth in Western Europe on both the Crest and Oral-B franchises were roughly offset by lower shipments of Oral-B in North America.

Feminine Care volume grew low-single digits as double digit growth in China and over 30% growth in India was largely offset by volume softness in Latin America following price increases. In the US the Always brand grew all outlet value share of feminine pads by half a point to 59%. Tampax increased its share of the US tampon market by nearly a point to more than 48% driven by strong advertising and in store programs for Tampax Pearl.

Personal Health Care volume increased mid-single digits driven mainly by a double digit increase in Vicks shipments due to the early start of the cold and flu season. Pepto Bismol and Metamucil also delivered strong volume growth and the Align Probiotic brand continues to perform well in its first year in market. Align is now at 25% value share of the US probiotic supplement market. These increases more than offset a mid-teens decline on Prilosec OTC volume due to increased competitive activity.

In the Snacks & Pet Care segments organic sales were up 3%. Organic volume increases of 1% and pricing of 5% were partially offset by negative product mix. Snacks volume declined versus prior year but organic sales were higher due to price increases taken last year with the Super Stack can restage. Pringles has begun to see a recovery in trade support in key national accounts which had fallen sharply after the price increase last January. Pringles has now annualized the North American restage in pricing and the brand expects improved volume trends in calendar year 2010.

Pet Care delivered solid volume growth in the mid-single digits behind the continued strength of the Iams Proactive Health, Iams Premium Protection and Eukanuba Naturally Wild initiative. P&G all outlet share of the pet nutrition business is up versus prior year and is approaching 10%.

In the Fabric & Home Care segments organic sales increased 7% and volume grew 8%. Home Care led the growth with volume up double digits. Fabric Care increase high single digits and battery volumes grew low singles. The strong results were aided by weak base period caused by the global economic crisis as well as the effects from the price increases taken in the fall of 2008.

Home Care volume growth was broad based across brands and regions. The Dawn, Cascade and Febreze 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 US Cascade all outlet value share is up more than three points to 67% driven by strong marketing and in store programs designed to increase trial. Febreze all outlet share of the US air care market is also up more than three points to nearly 21% behind the home collections initiative which launched last summer.

Fabric care shipments were also strong across brands and geographies with all regions and major brands delivering healthy volume growth. The Gain brand delivered strong volume growth up low teens due largely to the weak base period. Tide shipments were up high single digits including strong growth in North America behind the Tide Stain Release laundry additive launch. Tide Stain Release is fast approached a 10% value share of the stain removals market in the US. Tide all outlet value share of laundry detergents remains above 30% and is down less than a point versus prior year.

The Downy global franchise grew volume mid-teens driven by nearly 30% growth in both Western Europe and Asia behind strong trade support programs and consumer value interventions. Battery volume was up modestly for the quarter with North American and Western Europe in line with prior year levels. US market size in unit terms recovered somewhat posting all outlet growth of nearly 6%.

With volume essentially flat in a growing market, Duracell market share in both the unit and value bases declined more than three points for the quarter. The brand is acting to stem these share losses with consumer value interventions and larger size packs. The new upcoming packs began showing up in stores this month.

Baby Care and Family Care delivered organic sales growth of 8% and organic volume growth of 10%. Product mix reduced sales by 2% due to a shift towards larger pack sizes. Global Baby Care shipments were up high single digits with strong growth in both developed and developing markets. Pampers shipments were up mid-single in North America, high single in Western Europe and double digits in Asia and the CEEMEA region. The expansion of Pampers Simply Dry value tier diaper in Western Europe continues to progress well as Jon mentioned.

Pampers diaper value share in Western Europe is up two points to over 56% and value share in the UK up more than four points to over 62%. In the US P&G all outlet value share of diapers was up a point to over 38% with both the Pampers and Luvs brands growing market share. The Pampers share progress is especially encouraging since the benefits from the Dry Max innovation won’t be fully reflected in market share data until the June quarter.

Finally, Family Care shipments were up low teens due to a combination of consumer value intervention, initiatives launched earlier in the year and a soft base period. Charmin’s all out let value share of the US toilet tissue category was up more than a point to 28% and Bounty share of the US paper towel category is up two points to over 46%.

That concludes the business segment review. Now I’ll hand the call back to Jon.

Jon Moeller

Before I get to guidance I want to briefly address a couple items. First, Venezuela, it’s been our practice to maintain a proactive stance towards a conversion and repatriation of Venezuela Bolivars in line with current exchange controls while still holding enough local currency assets to efficiently run our business. In anticipation of a potential de-valuation we accelerated the conversion and repatriation of bolivars, which is one of the reasons that SG&A as a percentage of sales increased during the December quarter. There was a similar impact in the September quarter.

Because we’ve managed our exposure proactively any one time translation impact with the currency de-valuation will be negligible. However, both the top and bottom line will be impacted going forward. We estimate net impacts over the balance of the fiscal year will reduced all in sales by about 1%. The bottom line impact is currently estimated at up to $0.05 to $0.10 per share.

A high degree of uncertainty remains in Venezuela. For example, it’s not currently known if enough dollars will be made available at the official rate to preclude the need to enter the parallel market. In addition, the pricing environment and related consumption impacts are not certain at this time. These current year numbers and the ongoing impacts may change.

We’re working to respond quickly but recovery plans will take time to execute. It’s our intention over time to fully restore sales and profit levels seen prior to the de-valuation. We’ve done this historically in Venezuela and in other markets around the world.

We’ve received several questions recently on price reduction which I also wanted to address. We remain committed to delivering good value to our consumers. In many instances we’re able to deliver consumer value through innovations that perform better or add incremental benefits. This is the case, for example, with Pampers Dry Max. Occasionally, however we need to make targeted price adjustments to deliver sufficient consumer value. This is typically done for one of three reasons.

The first instance is where we took commodity or foreign exchange based pricing and then underlying market trends reversed. Or after a period of time our price gaps versus competition remained outside historical norms. The targeted price interventions we’ve made in North America on laundry large sizes and tissue/towel as well as across Central and Eastern Europe, Middle East and Africa have been of this nature.

The second situation where we may lower prices is when we’re making strategic adjustments to our portfolio. A good example of this is the recent intervention we made on Cheer. We lowered Cheer prices 13% in October and in order to give consumers a broader range of choices and further differentiate Cheer from Tide. While it’s still early, we’re confident this decision was the right one. We’re now looking to reposition Era which we believe will optimize our laundry portfolio even further.

The final situation where we may lower prices is when competition has initiated pricing or promotional strategies that caused share loss over an extended period of time. This is the case, as Teri mentioned, in batteries. To restore our consumer value proposition we have upsized some of our AA and AAA pack counts in North America. These pricing interventions are very targeted versus being broad based. All of the pricing investments we’ve made over the past year to improve consumer value represent only about 1% of sales.

Turning to guidance, we’ve been indicating for some time that second half earning growth will be lower then the first half. The biggest driver of this is incremental marketing investments to support our innovation program which, as we’ve mentioned, is back half loaded. Second, 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 recent currency de-valuation in Venezuela will impact second half results.

With that background let me move to specific guidance. We’re increasing fiscal year organic sales growth expectations to 3% to 5%. This is an increase of one percentage point versus our previous guidance range. The increase is driven by December quarter results, confidence in our innovation and investment program and our expectation for slightly higher rates of underlying market growth during the second half of the year.

Foreign exchange based on current spot rates should be flat to up 1% resulting in all in sales of 3% to 6%. Core earnings per share are now expected to be $3.53 to $3.63 per share up 2% to 5% versus year ago. This is an improvement from our prior guidance range of flat to up 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. The legal reserves which are not reflected in core earnings per share are covered within this. Given the impact of Venezuela and the legal reserves and the significant investments we’re making to accelerate growth we believe estimates above the high end of our guidance range may be aggressive.

Turning to the March quarter we expect organic sales growth up 4% to 6%. All in sales inclusive of the three to four point benefit from foreign exchange 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 $0.77 to $0.82 per share.

In closing, we’re very pleased with the progress we’re making while acknowledging there is more work ahead of us. We’ll continue to invest in innovation and portfolio expansion. We remain focused on dramatic simplification and managing costs and cash with discipline to create a sustainable level of support. We’re confident these investments and actions will enable us to serve more consumers in more parts of the world more completely and profitably grow our business.

Bob, Teri, and I would now like to open up the call for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Wendy Nicholson – Citi Investment Research

Wendy Nicholson – Citi Investment Research

My question has to do with the investment spending you’re making in developing markets because some of the numbers you were reading, 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 and 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?

Bob McDonald

As Jon tried to indicate in his remarks about our innovation program, 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. We’re spending behind the innovation program to get the awareness and trial objectives we need to grow market share profitably. 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.

Operator

Your next question comes from John Faucher – JP Morgan

John Faucher – JP Morgan

Back in late August you talked about getting aggressive in terms of the portfolio. Its another six months past then, can you give us your latest thinking in terms of timeline, your thoughts in terms of where you think you can add, obviously very general here. Do you think you still need to do some major pruning or do you feel like most of that work’s been done? The overall status of the portfolio right now.

Bob McDonald

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. We’ve really just started.

Remember we’ve been in China since 1988, we’re only in about 14 categories, and we lead all of them but one. The spending per capita in China is only $3.00 a year on Procter & Gamble products. That compares to the United States where we’re in over 25 categories and the per capita spending here is $100. We’ve got a long way to go but we started to 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. Getting the portfolio right is strategic and that’s our focus.

Operator

Your next question comes from Lauren Lieberman – Barclays Capital

Lauren Lieberman – Barclays Capital

I was struck by how strong organic volume was this quarter and I know that part of it there’s certainly the comparisons help. It’d be great if you could help us understand what in the portfolio still feels negative. You went through the list of things that are positive. What’s still really not where you want it to be, where you’re still hoping for further re-acceleration as we move through the next couple quarters?

Jon Moeller

One area is clearly the more discretionary categories. Teri talked in her remarks about the fragrance business, salon hair care and Braun. We are seeing sequential improvement in the market size reductions for those categories but clearly those are areas that we’re not growing at the rates we expect to longer term.

Bob McDonald

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. Jon mentioned that 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.

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. We’re on our way there, we’re on track.

Operator

Your next question comes from Bill Schmitz – Deutsche Bank

Bill Schmitz – Deutsche Bank

Can you talk about shipments versus consumption, how that’s changed and if you see that improving going forward? There was not a whole lot of commentary on shipments versus end user consumption.

Bob McDonald

Jon talked about cash 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 dog gone closely and we watch it weekly, daily but we review it on a company wide basis with the Vice Chairman weekly. It’s running pretty much one to one.

Operator

Your next question comes from Nik Modi – UBS

Nik Modi – UBS

In terms of the top line for this quarter and then as you think about the March quarter, can you break down how you’re thinking about it in context of your algorithm with category growth and white space and share and if you could just break that down for us that would be helpful.

Jon Moeller

Our general objective, 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.

Operator

Your next question comes from Chris Ferrara – Bank of America

Chris Ferrara – Bank of America

I wanted to talk about pricing again, once upon a time we’ve been talking about pricing hitting 10% of the portfolio and you’re saying it hit 1% of price overall, 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?

Jon Moeller

As you can imagine this is a very fluid situation. We’re constantly managing, as you know, our value metrics versus competitive offerings. We respond to those on a real time basis. I don’t want to get overly granular on a number. The directionality of our commentary both on the 10% of the portfolio and the 1% of sales I think still hold. In no geography are we leading price declines. We’re responding to gaps that we see and we’ll continue to do that. I don’t think you should expect broad based pricing activity.

Operator

Your next question comes from Joe Altobello – Oppenheimer

Joe Altobello – Oppenheimer

I wanted to 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. As a follow up, you mentioned that shares did improve throughout the quarter, is that innovation, is that marketing, or are you starting to see consumers trade up again?

Bob McDonald

In our prepared remarks Jon said that shares naturally lag shipments. 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. 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.

As we look out, remember we said that the innovation program is getting stronger in the second half. That’s one of the things that gives us confidence. 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.

Jon Moeller

As we’ve talked before, while there has been some dynamic of trade down, 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 our progress on Olay Pro-X, the Fusion business up four share points in the last quarter clearly isn’t indicative of a consumer who’s willing to spend for value driven by performance. There are other examples. Its not one size fits all.

Bob McDonald

If you go to a country like India, for example, where our baby care growth has been very strong, we have mothers with arguably lower disposable income then 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 babies 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.

Operator

Your next question comes from Andrew Sawyer – Goldman Sachs

Andrew Sawyer – Goldman Sachs

I was hoping to just zero in a little bit on the Family Care portion of the business. I think you talked about the conditions for targeted pricing reductions and speaking about reversals and foreign exchange and commodities. Clearly this scenario we’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 pulp prices having moved back up, polypropylene moving back up a bit, nat 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?

Jon Moeller

In general, obviously I don’t want to comment on pricing strategies in this kind of a setting. We’ll 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 cost increases that you appropriately mentioned. Beyond that I think it would be inappropriate for me to comment specifically.

Operator

Your next question comes from Doug Lane – Jefferies & Co.

Doug Lane – Jefferies & Co.

Focusing on the Brazil toothpaste, what are your market shares there in the pharmacy channel? Also, is the decision to move beyond the pharmacy channel ahead of expectations?

Bob McDonald

Our shares in the pharmacy channel are roughly 20% in Brazil. As Jon said, we’re now expanding into other channels as of January.

Operator

Your next question comes from Jason Gere – RBC Capital

Jason Gere – RBC Capital

Thinking into 2011 and I know you’re just warning people not to get too aggressive on expectations, I was wondering if you could talk maybe about the scale opportunity versus the spending algorithm? Would that prohibit you as you look forward getting back towards that long term 10% earnings growth that you guys have delivered? Do you see how the innovation and the market growth plays out first before maybe declaring that victory?

Bob McDonald

As we look forward, obviously there is uncertainty as to what the underlying market growth will be. As we’ve said, we have the strongest innovation program we’ve had over the last 30 years or so. We have a very clear strategy of getting our portfolio right all over the world. We want to continue to make the investments necessary to get that portfolio expanded around the world. We are cognizant that we have to do that in a responsible way and deliver the profit necessary, that’s why we’re talking about growing share profitably.

Operator

Your next question comes from Bill Chappell – SunTrust

Bill Chappell – SunTrust

On Venezuela, I didn’t fully understand, had you projected this $0.05 to $0.10 hit in your original expectations or is this incremental in terms of your new guidance? Can you give a little bit more color on the European, the charge taken in the quarter; are there any future charges and what that pertains to?

Jon Moeller

I wish we had a crystal ball that allowed us to predict things like 100% de-valuations but we don’t. The $0.05 to $0.10 is incremental to what we were expecting previously.

Bob McDonald

On the European matter the legal reserve, we and other companies have previously reported, we’ve reported for the last three years in our annual report that there’ve been a number of ongoing anti-trust inquiries in Europe. The reserve relates to potential liabilities resulting from those inquiries. As Jon said during his prepared remarks, this reserve relates to a couple of countries in Europe but there are a number of ongoing inquiries being conducted by competition authorities in Europe. These could result in additional liabilities.

It’s too early for us to reasonably estimate the total amount of fines to which the company will be subject as a result of these various competition law issue. Again, it’s an industry issue, many companies are involved, these are one time in nature and they won’t impact our investment in the business.

Operator

Your next question comes from Ali Dibadj – Bernstein

Ali Dibadj – Bernstein

Would appreciate if you would, a little bit further perspective on your solid organic growth number for this quarter and then going forward along two dimensions, volume and price mix broadly. Along volume, given the retailer and consumer de-stocking that we talked about a year ago this quarter, you described it as about -3% of volume. How should we see your actual take away volume this quarter? Should we think about it about 3% below what you reported at least even assuming no re-stocking?

Secondly, if you could give a little bit more granularity, I understand you don’t want to go into too much detail, what we should expect going forward for price mix? Maybe some idea by segment but at least by US versus rest of world if you could along both of those dimensions that would be helpful.

Bob McDonald

Our Q2 organic sales growth was due to the underlying marketing growth of about 3%, again I’m rounding these off to integers. Inventory rebuild about 2%, share growth as we said not where we want it to be about 0%. About 3% market growth, about 2% inventory rebuild. The organic volume growth was strong in every region and that’s what drove organic sales to the high end of our guidance range. As I said, even with retailer inventories contributing about two points we’re watching those inventories and working with retailers all over the world.

As you know, de-stocking as retailers do actually benefit the Procter & Gamble company because we create market leading brands. The leading brands are usually the ones that end up being on the shelf and end up selling more.

Jon Moeller

I would add one point, the point of momentum. Volume we were down two points in JS and in this quarter, depending on how you want to look at is, whether it’s 5% or 3% its significant progress versus the prior quarter growth rate. Going forward we talked about growing the business sequentially we’re guiding to 4% to 6% organic sales growth with volume ahead of that slightly in the third quarter. There may be some inventory impacts as you sight but the general trend is continued very positive.

Operator

Your next question comes from Alice Longley - Buckingham Research

Alice Longley - Buckingham Research

Building on that information, could you break out market growth in the US broadly, Western Europe, and developing markets, and also tell us where you gained share and where you lost share among those three pieces?

Bob McDonald

Basically we gained market share, again this is through November, remember these numbers lag our shipments quite substantially. We gained share in places like Latin America. Our share was basically flat in places like Western Europe, Asia. We lost a little bit of share in North America. The biggest change was really in Central/Eastern Europe, Middle East and Africa where the economies plummeted quite precipitously last year. As a result we had to take substantial pricing and as we take that substantial pricing our competitors typically do not follow us immediately. That’s where we lost the largest amount of share over the last three months through that November period.

Jon Moeller

In terms of market growth, we’re seeing stronger market growth in developing markets then developed markets, obviously not back to the levels that it was. China is growing again. The markets that were most severely impacted by the economic crisis namely Eastern Europe and the Middle East have bounced back the sharpest. Markets like Latin America and India which really weren’t affected by the crisis continue to grow.

We’re seeing growth in developing markets at healthy rates albeit below historical levels. We’re seeing modest growth in developed markets from a market standpoint. Our business split really in terms of volume growth is about four points of growth in developed and about six points in developing.

Operator

Your next question comes from Linda Bolton-Weiser – Caris

Linda Bolton-Weiser – Caris

In terms of your decision to take Fekkai into the mass market, it seems to be a trend developing in the profession hair care segment. Maybe L’Oreal will come out with something, it just seems like the market is moving that way. Is that not a threat long term to the salon channel and the professional hair care in the salon channel because the consumer will find the convenience of buying the products at mass? Can you explain your decision and whether you think it will impact the Wella business long term?

Bob McDonald

We don’t expect it to impact the Wella business. In fact, we introduced a new more advanced Fekkai for the professional channel before we took the classic Fekkai into retail. Just like we have Eukanuba in pet specialty stores and we have Iams in grocery stores. Our principal as a company is to have our products for sales wherever the consumer wants to shop, whether that’s online, whether that’s in the specialty store, or whether that’s in a professional salon.

We’re going to continue to do that but we also recognize we have a responsibility to work with retailers and consumers to differentiate those offerings based upon the consumers who shop in those specific channels. You can still get and can still use a professional Fekkai in department stores and in salons but you will also be able to buy the classic Fekkai in your normal retail outlets, they are different.

Operator

Your last question comes from Caroline Levy – Calyon

Caroline Levy – Calyon

My question is around how retailers are behaving and whether you see any differences, I’m sure you do, from the US to Western Europe and obviously in the developing markets are you seeing some changes in behavior, maybe starting with Wal-Mart?

Bob McDonald

As you can imagine I’ve met with most of the major retailers recently. I think it’s a very encouraging environment. The industry is moving to something we call new ways of working together. It’s supported by people like Mike Duke at Wal-Mart, people like Lars Olofsson at Carrefour, Sir Terry Leahy at Tesco and all of our other partners around the world.

Which for the first time retailers and manufacturers are going to work together focused on delighting the consumer. Previously there was a lot of antagonistic behavior between retailers and manufacturers so I’m actually encouraged that the new consumer goods forum which I’m obviously part of, I helped sponsor the operational excellence group, is focused on new ways of working together where retailers and manufacturers can work together to help reduce costs, provide better value, and delight consumers who shop in retail stores.

Operator

Thank you for your participation in today’s conference. This concludes the presentation and you may now disconnect.

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Source: The Procter & Gamble Company F2Q10 (Qtr End 12/31/09) Earnings Call Transcript
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