Procter & Gamble (PG), one of the largest branded consumer products companies in the world (with products in more than 180 countries) reported Q1 2012 earnings on Thursday. I wrote an article back in August about the full year 2011 results; here are some of the highlights from last year:
“Net sales for the year came to $82.6 billion, up 5% compared to 2010; organic sales, which exclude acquisitions, divestitures and foreign exchange, grew 4% for the year.
Every segment saw a year-over-year sales increase, with the slowest growth coming from Snacks & Pet Care at 1%. On the other end of the spectrum, Baby Care and Family Care was the fastest grower in the year, adding 6% in 2011 to cross $15.6 billion in annual sales and nearly 19% of company-wide sales. This growth was driven by developing markets, such as Greater China, India, the Philippines, and Brazil, all which had volume growth in excess of 25%.
Diluted net EPS for the full year was $3.93, an increase of 11%, strong growth considering the many challenges facing companies like Procter & Gamble in this economic environment.
The company returned nearly $13 billion to shareholders in the year, repurchasing $7 billion of P&G stock and paying $5.8 billion in dividends to shareholders; this marked the 55th consecutive year of a dividend increase and the 121st consecutive year in which Procter & Gamble paid a dividend. Over the past three years, P&G has returned over $35 billion to shareholders through dividends and share repurchases.”
Coming into the first quarter of 2012, the expectation was for a lot more of the same: trouble in developed markets, continued double digit growth in emerging markets (current growth rate in BRIC markets is around 15%), and a whole bunch of commodity inflation/volatility to throw margins out of whack (expected to be up $1.8 billion YOY); in the quarter, that’s a pretty good summary of what we saw:
Sales increased 9% in the quarter to $21.9 billion; organic sales (which as I mentioned above, exclude the impact of acquisitions, divestitures, and foreign exchange) increased 4%, split evenly between higher volume and price/mix.
Sales were spread evenly across the business, with growth occurring in all six segments; market share was in-line or higher in businesses representing 60% of sales (three of five regions, 11 of the company’s top 15 countries, four of six reporting segments and 15 of the company’s 24 billion-dollar brands).
The one complaint some investors have with P&G is too much focus on the developed world compared to competitors like Unilever; while this is true today, it is rapidly changing, quite a feat for a company with more than $80 billion in annual sales. At the same time, which is often lost in the sound bites highlighting sales growth, Procter & Gamble has been able to do this while maintaining margins; here is what CFO Jon Moeller had to say about the transformation in emerging market sales:
“The big opportunity for growth in developing markets has led to the question of whether that growth will be margin dilutive. In just the last 6 years, developing markets have grown from about 23% of sales, or about $13 billion, to 35% or about $29 billion at the end of last fiscal year. Despite this dramatic increase in developing market sales and despite more than $6 billion (or 750 basis points) in commodity cost headwinds over the same period, operating profit margins have remained essentially flat.”
Despite higher pricing, cost savings, and fixed cost leverage (260 basis points of combined impact), gross margin contracted 240 basis points due to higher commodity costs (340 basis point negative impact) and the negative impact from mix and foreign exchange (combined 160 basis points). Operating margin declined even further (260 basis points), with increased SG&A as a percentage of net sales accounting for the difference; as noted by Mr. Moeller on the call, this increase was due to higher marketing investments (with marketing spend already up 24% over the past 2 years).
Diluted EPS was $1.03, up 1% versus Q1 2011 and at the high end of management’s guidance; this was driven by the share repurchases over the past year, with net earnings (on a company-wide basis) down 2%. In the quarter, the company repurchased $1.3 billion of shares and paid $1.5 billion of cash as dividends. For the full year, dividend should be right around $6 billion, while buybacks are still up in the air, with a guidance of $4-6 billion in fiscal 2012; based on this activity ($10-12 billion back to shareholders), the current yield to shareholders as a percentage of the market cap is around 6%.
Organic sales growth is expected to be in the range of 3-6% in 2012 (1-2% developed, 6-8% developing). On the bottom line, the company maintained their EPS guidance of $4.17-$4.33 for the fiscal year, an increase of 6-10% from 2011 core EPS of $3.95.
While the markets roared higher, P&G was relatively stable, closing up less than 0.5%; the stock is currently trading at $65.26 per share, a forward P/E of about 15 on management’s 2012 EPS estimates.
Many are undoubtedly feeling nervous about shrinking margins and sales growth; while they may miss expectations in the short term, I think it’s important to remember the words of CEO Bob McDonald from this year’s Annual Letter: “Our experience has proven that price promotion may win a quarter here and there, but innovation wins decades.” For investors looking to own a company for decades, Procter & Gamble may be a great place to begin your search.
“Net sales for the year came to $82.6 billion, up 5% compared to 2010; organic sales, which exclude acquisitions, divestitures and foreign exchange, grew 4% for the year.
Every segment saw a year-over-year sales increase, with the slowest growth coming from Snacks & Pet Care at 1%. On the other end of the spectrum, Baby Care and Family Care was the fastest grower in the year, adding 6% in 2011 to cross $15.6 billion in annual sales and nearly 19% of company-wide sales. This growth was driven by developing markets, such as Greater China, India, the Philippines, and Brazil, all which had volume growth in excess of 25%.
Diluted net EPS for the full year was $3.93, an increase of 11%, strong growth considering the many challenges facing companies like Procter & Gamble in this economic environment.
The company returned nearly $13 billion to shareholders in the year, repurchasing $7 billion of P&G stock and paying $5.8 billion in dividends to shareholders; this marked the 55th consecutive year of a dividend increase and the 121st consecutive year in which Procter & Gamble paid a dividend. Over the past three years, P&G has returned over $35 billion to shareholders through dividends and share repurchases.”
Coming into the first quarter of 2012, the expectation was for a lot more of the same: trouble in developed markets, continued double digit growth in emerging markets (current growth rate in BRIC markets is around 15%), and a whole bunch of commodity inflation/volatility to throw margins out of whack (expected to be up $1.8 billion YOY); in the quarter, that’s a pretty good summary of what we saw:
Sales increased 9% in the quarter to $21.9 billion; organic sales (which as I mentioned above, exclude the impact of acquisitions, divestitures, and foreign exchange) increased 4%, split evenly between higher volume and price/mix.
Sales were spread evenly across the business, with growth occurring in all six segments; market share was in-line or higher in businesses representing 60% of sales (three of five regions, 11 of the company’s top 15 countries, four of six reporting segments and 15 of the company’s 24 billion-dollar brands).
The one complaint some investors have with P&G is too much focus on the developed world compared to competitors like Unilever; while this is true today, it is rapidly changing, quite a feat for a company with more than $80 billion in annual sales. At the same time, which is often lost in the sound bites highlighting sales growth, Procter & Gamble has been able to do this while maintaining margins; here is what CFO Jon Moeller had to say about the transformation in emerging market sales:
“The big opportunity for growth in developing markets has led to the question of whether that growth will be margin dilutive. In just the last 6 years, developing markets have grown from about 23% of sales, or about $13 billion, to 35% or about $29 billion at the end of last fiscal year. Despite this dramatic increase in developing market sales and despite more than $6 billion (or 750 basis points) in commodity cost headwinds over the same period, operating profit margins have remained essentially flat.”
Despite higher pricing, cost savings, and fixed cost leverage (260 basis points of combined impact), gross margin contracted 240 basis points due to higher commodity costs (340 basis point negative impact) and the negative impact from mix and foreign exchange (combined 160 basis points). Operating margin declined even further (260 basis points), with increased SG&A as a percentage of net sales accounting for the difference; as noted by Mr. Moeller on the call, this increase was due to higher marketing investments (with marketing spend already up 24% over the past 2 years).
Diluted EPS was $1.03, up 1% versus Q1 2011 and at the high end of management’s guidance; this was driven by the share repurchases over the past year, with net earnings (on a company-wide basis) down 2%. In the quarter, the company repurchased $1.3 billion of shares and paid $1.5 billion of cash as dividends. For the full year, dividend should be right around $6 billion, while buybacks are still up in the air, with a guidance of $4-6 billion in fiscal 2012; based on this activity ($10-12 billion back to shareholders), the current yield to shareholders as a percentage of the market cap is around 6%.
Organic sales growth is expected to be in the range of 3-6% in 2012 (1-2% developed, 6-8% developing). On the bottom line, the company maintained their EPS guidance of $4.17-$4.33 for the fiscal year, an increase of 6-10% from 2011 core EPS of $3.95.
While the markets roared higher, P&G was relatively stable, closing up less than 0.5%; the stock is currently trading at $65.26 per share, a forward P/E of about 15 on management’s 2012 EPS estimates.
Many are undoubtedly feeling nervous about shrinking margins and sales growth; while they may miss expectations in the short term, I think it’s important to remember the words of CEO Bob McDonald from this year’s Annual Letter: “Our experience has proven that price promotion may win a quarter here and there, but innovation wins decades.” For investors looking to own a company for decades, Procter & Gamble may be a great place to begin your search.
