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Beauty net sales increased 1% to $5.4 billion (global value share down 0.2 points), with volume up high single digits in developing markets (partly due to distribution expansions in Asia), but down mid-single digits in developed regions. Net earnings in the segment declined 8% to $802 million, with higher commodity costs more than offsetting sales growth.
Grooming net sales increased 1% to $2.2 billion, with price increases being cancelled out by mix due to a reduction in premium appliance sales (and resulting in a global value share loss of 0.6 points). As in beauty, volume was up in developing regions (high-single digit), but down in developed markets (mid-single digit). Net earnings increased 2% to $517 million, with lower gross margin due to geographic/product mix offset by lower SG&A.
Health Care net sales increased 1% to $3.2 billion (global share unchanged), with a 3% increase in pricing being met by unfavorable product/geographic mix (-2%); net earnings increased 1% to $537 million, in line with sales growth.
Snacks and Pet Care net sales increased 3% to $824 million, with 2% increase in volume and a 3% increase in pricing being partially cancelled out by unfavorable product/geographic mix. Snacks volume increased mid-single digits mainly due to combination of market growth and continued distribution expansion. Despite the sales increase, net earnings decreased 9% to $61 million as commodity inflation and a higher effective tax rate more than offset net sales growth.
Fabric Care and Home Care net sales increased 5% to $6.6 billion (global value share down half a point), driven by higher pricing and steady volume (up high single digits in developing regions, offset by a low single digit decrease in developed regions). Net earnings declined 5% to $717 million as sales growth, price increases, and increased operating efficiency was more than offset by higher commodity costs.
Baby Care and Family Care net sales increased 6% to $4.2 billion (global value share increased 0.3 points); just like Fabric Care and Home Care, a sizable increase in pricing (6%) was met by stable volume (up double digits in developing regions, while volume in developed regions decreased mid-single digits). Net earnings increased 3% to $516 million as commodity costs (yet again) outweighed price increases, resulting in lower comparable gross margin.
Across the breadth of the company’s business, P&G held or grew share in 9 of their top 15 countries, 3 of their 6 reporting segments, and 11 of their $24 billion brands. Collectively, the company held or increased market share in 45% of its business, down significantly from the roughly 60% reported over the past several quarters; this is due to price increases, which caused market share losses in certain segments where competitors did not follow P&G’s lead. As a result, management has announced price corrections in certain cases (auto dishwashing and laundry power categories, for example) to “ensure that brands continue to be an excellent value to consumers relative to competitive offerings.” CEO Bob McDonald laid out a couple anecdotal cases of what they are seeing competitively, and what they plan to do about it:
“In the U.K., for example, we've continued to see deep discounting from Unilever on both the hair care and laundry categories. In U.K. laundry — and remember, we came from behind in the U.K. in laundry. U.K. is Unilever's home market. We were up to 55 plus share. Unilever's average retail price is now down about 5% over the past 6 months where our average price is up about 4%.
In U.S. auto dish category, Reckitt's not increased prices, and again we're the market leader. In fact, they've increased their trade spending in track channels by more than 40% versus the prior year since we increased prices in June of 2011.
In U.S. laundry, our average Tide powder pricing is up double digits versus year ago while Church & Dwight's average powder pricing is down low single digits. On liquids, we continue to see heavy promotional activity from competitors while the average Tide Liquid pricing is flat versus year ago.
While we can't discuss unannounced plans on particular brands, we're closely monitoring these situations and we're going to react. In fact, we've already announced, as Jon said in his remarks, a price increase rollback on Cascade in North America to deal with the situation on Reckitt. And we have plans moving forward on the other disparities that I discussed.”
Core net earnings per share were
Operating cash flow was $3.3 billion for the quarter, and FCF was $2.4 billion ($947 million of CapEx in Q2); with that cash, the company paid $1.5 billion in dividends (yield is currently around 3.2%) and bought back $500 million worth of common stock.
Management’s full year guidance is for net sales growth of 3-4% in fiscal 2012, with 4-5% organic sales growth and a 1% headwind from foreign exchange effects. Diluted net EPS is expected to be in the range of $3.85 to $4.08, and Core EPS in the range of $4.00 to $4.10, an increase of 1-4% versus 2011 Core EPS of $3.95; this is a reduction from the company’s previous Core EPS guidance of $4.15-$4.33 for the year, due to $0.15-$0.18 of foreign exchange impact that has negatively impacted earnings since the establishment of the original guidance.
About the author:
I'm a value investor, with a focus on patience; I wait for great companies that are suffering from short term issues, and load up when those opportunities become present.
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