Source: Seeking Alpha
The Procter & Gamble Company (NYSE:PG)
Q4 2014 Earnings Conference Call
August 1, 2014 08:30 ET
Executives
Jon Moeller – Chief Financial Officer
AG Lafley – President and Chief Executive Officer
John Chevalier – Director, Investor Relations
Analysts
Bill Schmitz – Deutsche Bank
John Faucher – JPMorgan
Lauren Lieberman – Barclays Capital
Wendy Nicholson – Citi Research
Dara Mohsenian – Morgan Stanley
Olivia Tong – Bank of America
Chris Ferrara – Wells Fargo
Nik Modi – RBC Capital Markets
Ali Dibadj – Bernstein
Michael Steib – Credit Suisse
Steve Powers – UBS
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 – Chief Financial Officer
Good morning. I am joined this morning by AG Lafley and John Chevalier. We will start our discussion with a review of fiscal year and fourth quarter results, AG will then discuss our going forward strategy and plans to strengthen our results, and I will close with guidance for fiscal 2015. One housekeeping item before we begin all the numbers we will be discussing today assume discontinued operations treatment for the pet care business, reflecting in our planned exit. Impacts of the move from operating results to discontinued operations were provided previously in an 8-K filing and are available online.
Now, on to results, we grew organic sales 3% in the fiscal year we just completed in line with median performance in our industry. We essentially held market share. Core earnings per share increased 5%. Organic sales and earnings per share results were both within our target ranges. In fact, they were both within the pre-Venezuela devaluation ranges that we established going into the fiscal year despite more than a 25% reduction in market growth rates from 4 points a year ago to 2.5 points to 3 points currently and significant negative foreign exchange developments versus our going in plan. Our productivity program, which we will talk more about later, was a significant enabler in delivering in this outcome.
On a constant currency basis, core earnings per share grew double-digits despite market growth headwinds. All-in sales grew 1%. All-in earnings per share grew 4%. We generated $10.1 billion of free cash flow with 86% free cash flow productivity. We increased the dividend 7%, the 58th consecutive year that the dividend has been increased. We have returned $12.9 billion in cash to shareholders, $6.9 billion in dividends, and $6 billion in share repurchase. About 110% of net earnings all-in. We made significant progress on productivity, operating discipline and execution. We delivered $1.6 billion of cost of goods savings, well ahead of our target run rate of $1.2 billion and ahead of our going in estimate of $1.4 billion.
We improved manufacturing productivity by over 7%, reducing overall enrollment while adding new capacity and new sites. We opened the first new multi-category distribution center in the U.S. with five additional centers slated to come online by early next calendar year. We continued to accelerate overhead reduction. In February 2012 we announced the targeted 10% reduction of non-manufacturing enrollment by June of 2016. As of July 1, 2014, we have reduced roles by 16% more than 50% ahead of the original objective two years earlier. We have made good progress driving marketing effectiveness and efficiency through an optimized media mix with more digital, mobile, search and social presence, improved message clarity and greater savings in non-media spending.
While acknowledging the progress I just described across cost of goods sold overhead and marketing you maybe asking yourselves, where have all the savings gone. In the year we just completed most went to offset FX. We have large leading positions in some of the markets where currencies have softened the most Japan, Venezuela and Ukraine and where our price controls are in place. Excluding foreign exchange core earning per share were up double digits. Partly as a result of devaluation we are seeing significant wage inflation in developing markets as much as 30% per annum, which we also need to offset. We are continuing to make targeted investments in innovation, trial generation and in selling coverage to drive growth.
In addition to productivity, we made good progress this year in continuing to focus the portfolio. Just yesterday we closed the Americas pet care sales to Mars. Mars has also chosen to exercise their option to purchase the Asia business which accounts 10% of sales. We are working the European pet transaction with a different set of buyers. We exited concierge health services business and MDVIP. We exited the bleach business and we divested several additional smaller brands Latin America Pert as an example.
Moving from the fiscal year to the fourth quarter organic sales grew 2% in a very challenging macro environment with decelerating levels of market growth in both developed and developing regions and intense competitive spending in several categories. Organic volume was in line with prior year levels, pricing added two points to sales growth. All-in, sales were down one point including the two point headwind from foreign exchange and a modest negative impact from minor brand divestitures.
Core earnings per share were $0.95, a 20% increase versus the prior year. Foreign exchange was a $0.04 headwind on the quarter. Excluding foreign exchange, core earnings per share grew 25%. This includes the 5 point benefit from tax and a 4 point benefit from minor brand divestitures. Core operating margin improved 170 basis points driven by productivity savings. Core gross margin was down 50 basis points. Cost savings were approximately 270 basis points were offset by product category and geographic mix, foreign exchange and higher commodity costs. Core SG&A costs as a percentage of sales improved by 220 basis points, driven by overhead savings of 110 basis points, marketing efficiencies of 30 basis points and other SG&A reductions.
As we previewed in the last call non-operating gains from minor brand and business divestitures added approximately $0.03 to core earnings per share on the quarter. The effective tax rate on core earnings was 19% bringing the fiscal year rate to 21%, consistent with the outlook we provided in the last call. June quarter all-in GAAP earnings per share were $0.89, which include approximately $0.04 per share of non-core restructuring charges and $0.02 of charges from legal reserve adjustments.
In summary, we have just completed a challenging and tough but on-target year. We met our objectives, delivered double digit constant currency earnings growth, meaningfully advanced our productivity and portfolio focus agendas and built on our strong track record of cash return to shareholders. There is more work to do to deliver sustainable sales growth and reliable profit cash and value creation.
I will turn it over to AG to talk about strategies and plans to accomplish this.
AG Lafley – President and Chief Executive Officer
Thanks Jon. So that we are crystal clear, as John reported we delivered our business and financial commitments in 2013-2014, but we could have and should have done better. If just a couple of businesses that missed their going in operating plans had delivered, we would have achieved our internal leadership team goals of 4% sales growth, built modest market share, delivered 7% core EPS instead of 5% and 5% core operating profit growth instead of 2%. Despite all the market realities Jon described, country volatility, market slowdowns, currency hurts, customer and competitor challenges, the point here is delivering a better year was solely in our influence and control. So, while operating discipline and executional capability is getting better, a lot better around here, it must continue to improve to reach the levels of performance this company and our organization is capable of. We are increasing our focus on shoppers and consumers, they are the boss.
Everything begins with consumer understanding winning the zero first and second moments of truth and everything ends with winning the consumer value equation, consumer preference, purchase and loyalty. We are focused on creating and building consumer preferred brands and products that generate leading industry growth and value creation. This is how we will generate top tier total shareholder return. We need to continue to strengthen our brand positions, our product portfolio and pipeline and our selling effectiveness in the country’s channels and customers in a way that maximizes shopper trial and regular purchase, drives brand and category growth and delivers more reliable value creation for customers, partners for P&G and of course for shareowners.
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