The Procter & Gamble Company (NYSE: PG) reported net sales of $19.8 billion for the July - September quarter which exceeded the Company's guidance. Organic sales growth was up two percent versus a guidance range of flat to minus three percent on better than expected results across most business segments. Diluted net earnings per share increased three percent to $1.06, above the Company's guidance range of $0.95 to $1.00. The Company raised its outlook for the October - December quarter and fiscal 2010 organic sales growth citing modestly higher expectation for market growth. The Company also increased the low end of its fiscal year guidance range by $0.03 per share to reflect the higher top-line growth projection.
"Our September quarter results give us encouragement we are making the right choices to grow market share profitably," said President and Chief Executive Officer Bob McDonald. "We are investing in innovation, expanding our portfolio and improving consumer value to serve more consumers, in more parts of the world, more completely. We are driving simplification and improving execution while leveraging scale to create cost efficiencies that help fund these investments and accelerate growth."
Executive Summary
- Net sales for the quarter were $19.8 billion, a decrease of six percent that was primarily due to unfavorable foreign exchange impacts as the U.S. dollar remained above prior year levels. The company had previously guided to a net sales decrease of seven to ten percent.
- Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, increased two percent.
- Diluted net earnings per share increased three percent to $1.06 for the July - September quarter.
- Operating margin increased 160 basis points for the quarter behind a 290 basis point improvement in gross margin, partially offset by higher selling, general and administrative (SG&A) expenses.
- Operating cash flow was $4.6 billion for the first fiscal quarter. Free cash flow, which is operating cash flow less capital spending, was $4.0 billion, an all-time record and over 120 percent of net earnings excluding the gain on the sale of Actonel in Japan.
Key Financial Highlights
Net sales declined six percent to $19.8 billion for the July - September quarter mainly due to unfavorable foreign exchange impacts of seven percent as the U.S. dollar strengthened versus key foreign currencies. Organic sales grew two percent as price increases and positive product mix more than offset volume declines. Unit volume decreased three percent largely due to a difficult pre-economic crisis base period comparison, market contractions, prior year divestitures and share losses in some categories. These impacts were partially offset by new initiative launches in most segments. Organic volume, which excludes the impact of acquisitions and divestitures, was down two percent for the quarter with the Central & Eastern Europe/Middle East/Africa (CEEMEA) region accounting for over half of the Company's year-on-year quarterly volume decline. Price increases taken primarily in developing regions to offset local currency devaluations added three percent to net sales. Positive geographic product mix increased net sales by one percent.
Diluted net earnings per share were $1.06, an increase of three percent for the quarter. Net earnings decreased one percent primarily due to lower net sales, partially offset by the gain on the sale of Actonel in Japan, which was included in net earnings from discontinued operations.
Diluted net earnings per share from continuing operations increased one percent to $0.97. Net earnings from continuing operations were down three percent behind negative foreign currency impacts, lower net sales and higher base period divestiture gains on minor brands, partially offset by lower commodity and media costs and manufacturing cost savings in the current period. Core EPS, which is earnings per share from continuing operations excluding incremental Folgers-related restructuring charges in the base period, was in line with the prior year period.
Operating margin increased 160 basis points versus the prior year period driven by higher gross margin, partially offset by higher SG&A as a percentage of net sales. Gross margin expanded 290 basis points to 52.6 percent of net sales behind price increases, lower commodity costs and manufacturing cost savings. SG&A as a percentage of net sales increased 130 basis points due to negative foreign currency impacts.
Operating cash flow for the quarter was $4.6 billion, an increase of 32 percent mainly due to reductions in working capital balances. Free cash flow was $4.0 billion and over 120 percent of net earnings excluding the gain on the sale of Actonel in Japan. Capital expenditures were 2.8 percent of net sales.
Business Segment Discussion
Beauty and Grooming GBU
- Beauty net sales were down five percent for the quarter to $4.9 billion on a two percent decline in unit volume. Organic sales grew two percent. Unfavorable foreign exchange impacted net sales by seven percent. Price increases and positive product mix added three percent and one percent to net sales, respectively. Organic volume, which excludes acquisitions and divestitures, was down one percent mainly due to volume declines in the CEEMEA region and in the more discretionary businesses of Professional Salon and Prestige. Hair Care volume grew low single digits behind initiative-driven growth of Pantene, Head & Shoulders and Rejoice and delivered growth in every region except CEEMEA. Professional Salon volume declined double digits due to the exit of non-strategic businesses and continued market contractions. Prestige volume decreased high single digits primarily due to the continued contraction of the fragrance market, partially offset by double-digit growth of SK-II. Female Beauty volume was down mid-single digits primarily due to lower shipments in CEEMEA, share losses on non-strategic personal cleansing brands, lower merchandising and initiative activity in cosmetics and the fiscal 2009 divestiture of Noxzema. Net earnings decreased one percent for the quarter to $777 million as negative foreign currency impacts and lower net sales were mostly offset by lower overhead and marketing costs and manufacturing cost savings.
- Grooming net sales in the first fiscal quarter decreased 11 percent to $1.9 billion. Organic sales declined two percent. Unfavorable foreign exchange and lower unit volume reduced net sales by nine percent and eight percent, respectively. These impacts were partially offset by positive pricing impacts of six percent. Volume in Male Blades and Razors declined high single digits behind market contractions. Gillette Fusion volume continued to grow but was more than offset by volume declines in legacy shaving systems. Volume in Male Personal Care declined high single digits behind lower shipments of shave preparation products due to increased competitive promotional activity. Volume in Braun was down double digits mainly due to market contractions, particularly in home and hair care appliances. Net earnings declined 21 percent versus the prior year period to $351 million primarily driven by lower net sales and negative foreign currency impacts.
Health & Well-Being GBU