Procter & Gamble reports increased net sales for October - December quarter

The Procter & Gamble Company (NYSE: PG) delivered net sales growth of six percent for the October - December quarter to $21.0 billion.  Organic sales grew five percent which was at the top of the Company's guidance range.  Diluted net earnings per share were $1.49 and diluted net earnings per share from continuing operations were $1.01.  Core EPS increased 22 percent to $1.10 for the quarter, above the Company's guidance range, on better than expected sales growth and margin expansion.  The Company raised its expectations of fiscal 2010 organic sales growth and Core EPS.

"We are pleased with the top- and bottom-line underlying results for the quarter," said Chairman of the Board, President and Chief Executive Officer Bob McDonald.  "Our investments in innovation, portfolio expansion, marketing support and consumer value are working.  We continue to drive simplification and leverage our scale to create cost advantages and accelerate growth.  While economic uncertainty remains, we're confident these strategies will enable P&G to serve more consumers in more parts of the world, more completely and deliver profitable market share growth."  

Executive Summary

• Diluted net earnings per share were $1.49.  Core EPS grew 22 percent to $1.10. Core EPS is earnings per share from continuing operations excluding a legal reserve established in the current period and incremental Folgers-related restructuring charges in the base period.  
• Net sales increased six percent for the quarter to $21.0 billion on higher unit volume and favorable foreign exchange. Organic sales growth, which excludes the impacts of acquisitions, divestitures and foreign exchange, was five percent.  
• Operating margin expanded 160 basis points for the quarter behind a 330 basis point improvement in gross margin, partially offset by a 170 basis point increase in selling, general and administrative (SG&A) expenses.
• Operating cash flow was $3.3 billion for the quarter, an increase of 50 percent.  Adjusted free cash flow, which is operating cash flow less capital spending and the impacts of the global pharmaceuticals divestitures, was $3.1 billion and over 96 percent of net earnings excluding the impacts of the global pharmaceuticals divestitures.  

Key Financial Highlights

Net sales increased six percent during the October - December quarter to $21.0 billion on a five percent increase in unit volume.  Organic sales grew five percent driven by initiative activity, strengthened marketing plans, targeted improvements in consumer value, market growth in some businesses and a base period that was impacted by trade inventory reductions and consumption declines.  Price increases contributed one percent to net sales growth as the impact of prior period increases taken in developing regions to offset currency devaluations were partially offset by pricing investments to improve consumer value.  Negative geographic mix impacts reduced net sales by two percent.  Favorable foreign exchange added two percent to net sales growth as key foreign currencies strengthened versus the U.S. dollar.  Volume growth was broad-based with growth in all geographic regions.  

Diluted net earnings per share from continuing operations increased 13 percent to $1.01 for the second fiscal quarter, including a charge of $0.09 related to pending European legal matters.  Net earnings from continuing operations were $3.1 billion.  The effective tax rate on continuing operations increased 450 basis points primarily due to lower audit settlements and foreign tax credits and the non-deductibility of certain unusual items.  Core EPS grew 22 percent to $1.10 driven by net sales growth and margin expansion.

Diluted net earnings per share declined six percent for the quarter to $1.49.  Net earnings decreased seven percent due to lower current-period after-tax gains on the sale of discontinued operations, partially offset by an increase in earnings from continuing operations.  The current period gain on the sale of the global pharmaceuticals business was $1.5 billion versus a $2.0 billion gain on the sale of the Folgers business in the prior year period.  

Operating margin increased 160 basis points versus the prior year period due to higher gross margin, partially offset by an increase in SG&A as a percentage of net sales.  Gross margin expanded to 53.7 percent of net sales, an increase of 330 basis points mainly due to lower commodity costs and manufacturing cost savings.  SG&A as a percentage of net sales increased 170 basis points due to increased marketing spending, higher foreign currency exchange costs and the aforementioned legal item, partially offset by lower overhead spending as a percentage of net sales.

Operating cash flow was $3.3 billion during the second fiscal quarter, up 50 percent versus the prior year mainly due to reductions in working capital balances driven by higher current period accruals and taxes payable.  Adjusted free cash flow was $3.1 billion and 96 percent of net earnings excluding the impacts of the global pharmaceuticals divestitures.  Capital expenditures were 3.4 percent of net sales.  

Business Segment Discussion

Beauty and Grooming GBU

• Beauty net sales increased seven percent in the second fiscal quarter to $5.2 billion on a two percent increase in unit volume.  Organic sales increased four percent versus the prior year period.  Price increases, primarily in developing regions to offset currency impacts, and favorable foreign exchange added two percent and three percent, respectively, to net sales growth.  Organic volume, which excludes acquisitions and divestitures, was up three percent behind mid-single-digits growth in developing regions.  Organic volume in Hair Care increased mid-single digits mainly due to strong growth in Asia.  Volume in Female Beauty increased low single digits primarily due to higher shipments of female skin care and personal cleansing products.  Volume in Salon Professional was down double digits due to the exit of non-strategic businesses, while organic volume declined mid-single digits mainly behind continued market contractions.  Volume in Prestige decreased low single digits as continued contraction of the fragrance market was mostly offset by trade inventory reductions in the prior year period.  Net earnings were up seven percent versus the prior year period to $876 million on higher net sales and operating margin expansion, partially offset by a higher tax rate.  Gross margin expansion, primarily due to price increases and manufacturing cost savings, was partially offset by higher SG&A as a percentage of sales behind increased marketing spending and higher foreign currency exchange costs.

• Grooming net sales grew three percent to $2.1 billion for the quarter on a two percent decline in unit volume.  Organic sales were consistent with the prior year period as volume declines and negative mix impacts were offset by price increases.  Favorable foreign exchange contributed three percent to net sales.  Price increases, taken mainly in developing regions to offset currency impacts, added four percent to net sales for the quarter.  Negative mix impacts reduced net sales by two percent as volume declines disproportionately affected developed markets and premium shaving systems, both of which have higher than segment average selling prices.  Male Blades and Razors organic volume was in line with the prior year period as market contractions in developed regions and share losses in Western Europe were offset by initiative-driven growth in developing regions.  Volume declines in premium shaving systems were mostly offset by growth in lower priced systems and disposables.  Male Personal Care volume declined high single digits behind increased competitive promotional activity on shave preparation products and distribution declines on a non-strategic deodorant brand.  Braun volume decreased low single digits behind a double-digit decline in developing regions mainly due to market contractions.  Net earnings increased 10 percent to $433 million for the quarter due to net sales growth and operating margin expansion driven by higher gross margin, partially offset by higher SG&A as a percentage on net sales.  Gross margin increased due to price increases and lower commodity costs.  SG&A as a percentage of net sales increased behind higher foreign currency exchange costs, partially offset by lower overhead and marketing spending as a percentage of net sales.

Health & Well-Being GBU

• Health Care net sales were up five percent for the quarter to $3.1 billion on a three percent increase in unit volume.  Organic sales grew two percent.  Favorable foreign exchange and positive pricing impacts added three percent and one percent, respectively, to net sales growth.  These impacts were partially offset by a two percent negative mix impact resulting from disproportionate growth in developing regions and unfavorable product mix.  Volume in developing regions grew high single digits, while developed regions grew low single digits.  Personal Health Care volume increased mid-single digits behind double-digit growth of Vicks due to higher cold and flu levels and double-digit growth of diagnostics products, partially offset by lower shipments of Prilosec OTC in North America due to increased competitive activity.  Feminine Care volume was up low single digits due mainly to growth in the CEEMEA and Asia regions, partially offset by share losses in Latin America following price increases.  Oral Care volume grew mid-single digits behind initiative-driven growth in Western Europe, Latin America and Asia and trade inventory reductions in the base period.  Net earnings grew eight percent in the quarter to $534 million on higher net sales and net earnings margin expansion.  An increase in gross margin due to price increases and manufacturing cost savings was partially offset by higher SG&A as a percentage of net sales driven by higher foreign currency exchange costs and increased investments to support business growth.

• Snacks and Pet Care net sales increased six percent to $835 million for the quarter on a one percent increase in unit volume.  Organic sales increased three percent.  The carryover impact of pricing to recover higher commodity costs added five percent to net sales.  This was partially offset by negative mix impacts of two percent driven by the discontinuation of premium snack products which had higher than segment average selling prices.  Favorable foreign exchange contributed two percent to net sales growth.  Volume in Snacks declined low single digits driven by lower merchandising activity in North America and the discontinuation of some premium snack products.  Volume in Pet Care increased mid-single digits behind continued success of product initiatives and increased promotional activity.  Net earnings increased 56 percent versus the prior year period to $98 million behind higher gross margin resulting from price increases, lower commodity costs and manufacturing cost savings.  SG&A as a percentage of net sales increased primarily due to higher marketing spending.

Household Care GBU

• Fabric Care and Home Care net sales grew nine percent in the second fiscal quarter to $6.3 billion on an eight percent increase in unit volume.  Organic sales increased seven percent.  Pricing investments to improve consumer value reduced net sales by one percent.  Favorable foreign exchange added two percent to net sales growth.  All major brands contributed to volume growth for the segment.  Fabric Care volume increased high single digits mainly due to a low base period, which included trade inventory reductions, and initiative-driven growth in the current period.  Volume growth was broad-based in Fabric Care, with growth in all regions.  Home Care volume grew double digits due to initiative activity in all regions, market growth in North America and CEEMEA and trade inventory reductions in the prior year period.  Batteries volume increased low single digits due to market growth in developing regions and trade inventory reductions in the prior year period.  Net earnings grew 47 percent to $965 million primarily due to gross margin expansion and net sales growth, partially offset by higher SG&A as a percentage of net sales.  Gross margin increased behind manufacturing cost savings and lower commodity costs.  SG&A as a percentage of net sales increased mainly due to increased marketing spending, partially offset by overhead spending efficiencies.

• Baby Care and Family Care net sales increased 10 percent to $3.8 billion for the quarter on 10 percent volume growth.  Organic sales grew eight percent behind volume growth, partially offset by negative two percent product mix impacts due to a shift toward larger count packages, which have lower than segment average selling prices.  Favorable foreign exchange added two percent to net sales growth.  Baby Care volume was up high single digits behind incremental initiative activity and merchandising support, as well as market growth.  Family Care volume grew double digits due to initiatives launched in the previous quarter and incremental merchandising activity.  Net earnings were up 39 percent for the quarter to $579 million driven by gross margin expansion and net sales growth.  Gross margin increased behind lower commodity costs and manufacturing cost savings.  

Fiscal Year 2010 Guidance

Net sales growth is estimated to be three to six percent for fiscal year 2010.  Foreign exchange is expected to increase net sales by zero to one percent, while the net impact of acquisitions and divestitures is not expected to have a material impact on net sales.  The Company increased its expectations for organic sales growth by one percent to three to five percent versus previous guidance of two to four percent.  The Company maintained its previously communicated diluted net earnings per share guidance of $4.02 to $4.12.  Diluted net earnings per share from continuing operations are expected to be $3.44 to $3.54.  Core EPS guidance increased to $3.53 to $3.63, recognizing improvement in the underlying business.  Core EPS is expected to be up two to five percent versus year ago.

January - March 2010 Quarter Guidance

For the January - March quarter, net sales are expected to increase seven to ten percent.  Organic sales are expected to grow four to six percent.  Foreign exchange is expected to increase net sales by three to four percent, while the net impact of acquisitions and divestitures is not expected to have a material impact on net sales.  Diluted net earnings per share, diluted net earnings per share from continuing operations and Core EPS are each expected to be $0.77 to $0.82.  Diluted net earnings per share are expected to decline two to eight percent, while diluted net earnings per share from continuing operations and Core EPS are expected to be down five to up one percent versus the prior year period, reflecting commodity, market and investment trends.