Articles for Procter & Gamble

Falling Volumes Compound P&G’s Problems as Currency Headwinds Dampen Q2 Results

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Wednesday, January 28th, 2015 by

Global consumer products powerhouse Procter & Gamble (NYSE: PG) reported disappointing second quarter results on January 27th (fiscal year ends in June). The company’s scale played against it in the second quarter as its outsized presence in emerging markets exposed it to severe currency headwinds. Consequently, increased pricing was not sufficient to prevent revenue from falling 4% year on year due to a negative foreign exchange impact of 5 percentage points. Likewise, cost savings could not preclude a year on year decline of 40 basis points in gross margin, which faced the brunt of unfavorable geographic and product mix also. Additionally, heavy impairment and restructuring charges dragged down net income as well as diluted EPS by 31%. Second quarter revenue stood at $20.1 billion, while net income was $2.4 billion and diluted EPS was $0.82.

P&G’s performance was not much better in non-GAAP terms either, which excludes the impact of foreign currency movements. Organic sales expanded by 2% year on year during the quarter, which was at the lower end of the company’s guidance of low to mid-single digit organic sales growth. Core EPS, which excludes discontinued operations and restructuring charges, declined by 2% year on year to $1.06. This puts P&G in a difficult position to achieve its full year guidance of low to mid-single digit growth. However, on a constant currency basis, core EPS grew by 6% in the second quarter, which keeps the company in the run for achieving the full year guidance of double digit growth in constant currency core EPS.

We are currently updating our price estimate of $87 for Procter & Gamble to reflect the second quarter results.

See our complete analysis of Procter & Gamble here

Currency Headwinds Eat Into Revenue Growth

Adverse foreign currency movements dealt a severe blow to Procter & Gamble’s second quarter top line and depressed revenue growth by 5 percentage points. Foreign exchange impact on the company’s business units ranged from 4 to 7 percentage points. The total foreign exchange impact on the bottom line was to the tune of $450 million in the second quarter alone; and the cumulative effect in the current fiscal year is estimated to be at $1.4 billion. Over $1 billion of this headwind is expected to originate from just six countries, namely Russia, Ukraine, Venezuela, Argentina, Japan and Switzerland. This marks the most significant currency impact that P&G has ever faced in any fiscal year.

The strengthening of the US dollar has impacted Procter & Gamble worse than most of its competitors because of the sheer scale of its presence in emerging markets. The company derives over $8.8 billion sales from the aforementioned markets, which is 2 to 3 times its next biggest competitor. This has resulted in disproportionate effect of foreign exchange fluctuation on P&G’s performance.

Higher Prices Impede Volume Growth

In the second quarter, P&G achieved positive volume growth in only one of its business units, Fabric Care and Home Care. Volumes in the Baby, Feminine and Family Care segment were flat compared to the same period previous year, while volumes of Beauty, Hair and Personal Care, Health Care, and Grooming segments fell by 2% each.

In contrast, P&G achieved pricing growth in each of its segments with the exception of Health Care, which remained flat. Pricing growth was the highest in the Grooming unit, in which higher prices contributed 4 percentage points to revenue growth. Interestingly, the Grooming business was also the worst hit by currency headwinds, which pulled down the unit’s revenues by 7 percentage points.

The company resorted to higher prices to counter currency headwinds and commodity cost inflation. Further, it has stated that price upticks in the near term will be centered in the developing markets, while no such increase in prices is planned for the developed markets.

However, declining volumes indicate that consumers may be shunning P&G’s products in favor of lower priced products of its competitors. This is especially true for developing markets, where the premium category products have not seen the same kind of adoption rates as in developed markets. When seen in conjunction with the sluggish economic growth in major markets like China, it is quite possible that P&G’s higher prices may result in loss of market share as consumers switch to cheaper alternatives.

Cost Savings Fail to Protect Margins

P&G’s gross margin fell by 40 basis points in the second quarter, while operating profit margin 80 basis points compared to the same period previous year. The decline in gross margin was led by an unfavorable geographic and product mix, followed by currency headwinds and commodity cost inflation. Selling, general and administrative (SG&A) costs as a percentage of sales also increased by 40 basis points year on year. This, along with the lower gross margin, contributed to the decline in operating profit margin.

On the flip side, the company achieved substantial manufacturing cost savings during the quarter, as part of the ongoing restructuring program. SG&A costs also declined on an absolute basis, thanks to savings from efficiency and productivity efforts in marketing spending and overhead.

However, P&G failed to convert these cost savings into improvement in bottom lines, due to the combination of high commodity cost inflation and currency headwinds. The company has the practice of importing its products into diverse geographic markets rather than manufacturing products locally, which inherently results in higher commodity costs. This practice includes imports into countries like Venezuela, Argentina, Russia and Japan, currencies of each of which have significantly weakened against the US dollar. This resulted in substantial currency headwinds on costs also, which puts additional pressure on the bottom line in the second quarter.

To address this issue, P&G has plans to localize its manufacturing supply chain over time so that its foreign exchange exposure can be curtailed. It is currently building about 20 new manufacturing facilities in those developing markets that have caused the most significant currency headwinds. The company is also attempting to source materials locally in order to further reduce the impact of foreign exchange fluctuations.

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All Eyes on P&G’s Brand Consolidation Strategy as Currency Headwinds Weigh on Q2 Results

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Monday, January 26th, 2015 by

Global consumer brands behemoth Procter & Gamble (NYSE: PG) is set to release its 2015 second quarter results on January 27th (the company follows July-June fiscal year). Following the lackluster performance in the first quarter, P&G is guiding second quarter organic sales to grow by low to mid-single digits. Core (non-GAAP) EPS is guided to grow by the same range, despite currency headwinds of 5 to 6 percentage points. It is pertinent to note that the company provided this guidance assuming mid-October spot rates. Given the deterioration in major currencies since then, including the Euro, Ruble, Bolivar and Real, second quarter currency headwinds may be at the higher end of P&G’s guidance.

This also marks the first quarterly results since P&G announced its ambitious plan to trim its nearly 200-strong portfolio of brands down to 70-80 core brands. Additional details of the closely watched strategy and follow-up on the divestments so far are likely to be announced with the earnings.

P&G’s revenue in the first quarter was $20.79 billion, marginally lower than the same period the previous year. GAAP operating income was pulled down by impairment charges of nearly $1 billion and fell to $2.9 billion, declining 29% year on year. On a non-GAAP basis, operating profit margin stood at 19.9%, slightly lower than 20.1% in Q1 2014. It was overall a disappointing performance as volume and pricing growth, as well as cost savings, were wiped out by currency headwinds.

See our complete analysis of Procter & Gamble here

Brand Shedding Continues in Earnest

Procter & Gamble followed up the announcement of its brand portfolio consolidation plan by selling a few of its well-known but (in some but not all cases) poorly performing brands. In November, the company sold off Duracell, a leading battery brand, to Berkshire Hathaway in a $3 billion dollar deal. Having sold off its China-based batteries joint venture, the sale of Duracell marked P&G’s exit from the batteries business. (Read: Personal Care Companies Shed Weight In 2014)

More recently, in December the company announced the sale of its Camay and Zest soap brands to Unilever (NYSE: UL) for an undisclosed amount. (Read: P&G Unloads Camay and Zest Brands to Unilever) Moreover, P&G is also rumored to be exploring options for divesting the Wella hair care unit, a business that is estimated to be valued around $7 billion. Its Braun unit, which makes electric razors and toothbrushes, is also rumored to be up for sale.

Thus, P&G seems to be willing to divest not just non-core brands like Duracell, but also brands that form part of its core business, like Wella, regardless of their revenue share. This indicates that the company’s focus is not on the top line but on its margins; and the primary criteria for brands that it will continue are profitability and growth potential. This bodes well for investors, since improved bottom lines will add firepower to P&G’s strong track record of increasing returns to shareholders. However, GAAP margins may suffer in the short term due to impairment charges and disposal-related costs incurred over the duration of the brand consolidation strategy.

Given that P&G intends to wrap up the ambitious plan in a relatively small period of 18-24 months, it is likely that the company will provide further details on the same in its second quarter earnings report.

Market Share Gains Through Product Innovation May Partially Offset Currency Headwinds

Gaining market share by regularly introducing new innovative products is a hallmark of Procter & Gamble. The company introduces a large number of new products every quarter and has gained market share in each of its core businesses. Notably, P&G entered the premium diapers, feminine hygiene and adult incontinence categories in the second quarter as demand in the premium category is seeing an uptick in the developed markets. With this, it issued a direct threat to Kimberly-Clark (NYSE: KMB), which leads is the market leader in each of these segments.

P&G has stated that it will combine brand consolidation with targeted innovation investments in its core categories. Thus, while brand consolidation will drive bottom line improvement over the long term, increase in investments in innovation will bolster top line growth. The company intends to further support top line growth by targeted reinvestments in core businesses. It has already put this strategy into action by increasing marketing support in the U.S. to its Tide and Campus brands by 60 basis points and 230 basis points, respectively.

The above measures might provide a modicum of relief to revenue growth, which has been battered by strong currency headwinds since the second half of calendar 2014. Adverse currency movements in key emerging markets like Russia, Brazil, Venezuela and Hong Kong, among others, pulled down first quarter revenue growth by one percentage point. This impact is expected to worsen in the second quarter, especially considering that P&G provided its revenue guidance based on mid-October foreign exchange spot rates rather than forward rates.

Cost Savings to Prop-up Core EPS

Procter & Gamble has been keeping a steadfast check on its costs over the last few quarters and has succeeded in preserving profit margins despite currency headwinds and commodity cost inflation. Its gross margin improved by 20 basis points in the first quarter, thanks to a substantial cost savings of 140 basis points. This more than offset currency headwinds, commodity cost inflation and negative margin mix impact. Cost savings were driven by 70 basis points of savings in overheads and 50 basis points in marketing.

These measures trickled down to the core EPS, which expanded by 2% year on year in the first quarter. The improvement in core EPS is all the more noteworthy considering that the company’s revenue declined slightly in the first quarter, compared to the same period previous year. In other words, P&G was able to ensure protection of shareholder value despite a fall in top line.

Going forward, P&G is on an accelerated track for achieving its goal of $10 billion in cost savings, which it set 2012. It also expects to exceed its target of annual $1.2 billion savings in cost of goods by a substantial margin this year. Manufacturing productivity is expected to increase by 6% in fiscal 2015; and global supply chain restructuring efforts are targeted to achieve $1 billion to $2 billion in value creation.

In light of the above factors, we believe that P&G may be able to ward off much of the negative impact from adverse currency movements through its robust cost saving efforts.

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P&G Unloads Camay and Zest Brands to Unilever

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Monday, January 12th, 2015 by

In late December, Procter & Gamble (NYSE: PG) announced the sale of its Camay and Zest soap brands to Unilever (NYSE: UL) for an undisclosed amount. It involves the sale of Zest brand outside of North America and the Carribean, and global sale of the Camay brand. The company will also transfer its Talisman manufacturing facility in Mexico to Unilever as part of the deal. The transaction is expected to close by the first half of calendar 2015.

Continuation of P&G’s Brand Consolidation Strategy

The sale is part of P&G’s strategy of shedding its 80-100 non-core brands and diverting focus to the remaining 70-90 powerhouse brands. The remaining top brands account for over 90% of the company’s net sales and 95% of net profit. (Read: P&G’s Brand Divestitures Should Unlock Greater Value)

Camay and Zest are soap brands that are categorized under P&G’s Skin Care and Makeup sub-segment. The two brands had a combined revenues of $225 million in fiscal 2014, which is just 4% of the Skin Care and Makeup segment revenues. Given the insignificant revenue share of the two brands, it should come as no surprise that P&G chose to divest them. It is worth noting that the company’s coveted billion-dollar club of brands does not include any soap brands.

Skin Care and Makeup segment accounts for 7% of P&G’s total revenues and is part of the broader Beauty division. The company has failed to gain traction in its Skin Care and Makeup segment as revenues remained flat in calendar 2012 and 2013. Since the company derives a majority of its revenue from developed markets and its skin care products are geared towards the premium segment, the slowdown in the developed markets has resulted in poor revenue growth in this division. Consequently, its share in the $82 billion skin care and makeup market has fallen from 8.1% in calendar year 2008 to 7.1% in 2013.

We have a price estimate of about $87 for P&G, which is about 5% lower than its current market price.

Another Step in Unilever’s Long Road to Consolidation in Personal Care Business

In contrast to P&G, Skin and Hair Care is Unilever’s second largest segment and accounted for 26% of the company’s total revenues in calendar 2013. It is behind only the Foods division, which commanded 27% of the total revenues. However, Unilever is actively shifting its focus away from its Foods division and plans to give more attention to its personal care business (Read: Personal Care Companies Shed Weight In 2014). As a result, the Skin and Hair Care segment is set to become Unilever’s driving force in the near future.

P&G’s loss in the skin care market has been Unilever’s gain. In stark contrast to P&G, Unilever derives 57% of its revenues from the emerging markets and its products are predominantly geared towards the mass segment.  These two factors have helped the company withstand the slowdown in developed markets and maintain the growth of its Skin and Hair Care division.

The acquisition of Camay and Zest brands from P&G fits in well with Unilever’s strategy of consolidating its position in the global personal care market. It will add two new names to an already commendable brands portfolio, which includes globally renowned names like Dove, Lux and Lifebuoy. However, whether or not the purchase of Camay and Zest brands pays off for Unilever depends upon the price of the acquisition, which remains undisclosed.

We have a price estimate of about $47 for Unilever, which is about 20% higher than the current market price.

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Personal Care Companies Shed Weight In 2014

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Tuesday, December 30th, 2014 by

2014 was a year of shedding non-core divisions in the personal care industry. Three of the four major global personal care companies sold or spun off at least one brand or division during the year, with more sell-offs likely in the future. These companies seem to have rediscovered the benefits of having slimmer operations focused on their core strengths. In this article, we will summarize the recent divestments by the trio of world leaders in personal care products, namely, Procter & Gamble (NYSE: PG), Unilever (NYSE: UL) and Kimberly-Clark (NYSE: KMB).

Procter & Gamble: 100 Brands Too Many

In August 2014, P&G announced its plan to trim its burgeoning brands portfolio by shedding as many as 100 brands (Read: Brand Divestitures Should Unlock Greater Value). This portfolio consolidation is expected to boost the company’s bottom line by saving on marketing and non-manufacturing related overhead. The company’s overall revenue growth potential will also receive a boost by divestment of brands that have not been able to achieve traction. Post-divestment, P&G will be left with only 70-80 high value brands, of which 23 currently have sales of over $1 billion each.

The company kicked off this plan in November by announcing the sale of its batteries business, Duracell, to Berkshire Hathaway in a deal amounting to $4.7 billion. Even though the sale meant letting go of Duracell’s nearly 25% market share in the global batteries market, it could bode well for P&G since replaceable batteries are rapidly losing steam in favor of the now-widely used built-in, rechargeable power sources. The company has also announced the sale of its 78.8% stake in China’s leading alkaline battery maker, the Fujian Nanping Nanfu Battery Co for $600 million.  This indicates its intention to get out of this non-core business entirely. Batteries, including Duracell, constituted approximately 4% of P&G’s total revenues.

Since the announcement of brand portfolio consolidation in early August, P&G’s shares have jumped by 20% and touched a 52-week high of $92.73 on December 22nd.

Unilever: Cutting Back on Foods Business

Unilever has been slimming down its Foods business since as far back as 2008, selling off a brand or two every year in an effort to retain only the best performing names in its Foods division. This year alone the company has sold off Ragu, Bertolli and Royals pasta sauce brands, as well as the Jack Link’s meat sauce business. The company also has announced the split of its spreads business into a standalone unit.

Unilever’s Foods unit still accounts for over a quarter of its total revenues and generates a healthy 26% EBITDA margin. Furthermore, not all of the divested brands are underperforming – Ragu is one of America’s most popular pasta sauces and has been around since 1937. Thus, it follows that divestment of Unilever’s Foods business is not a matter of performance but preference.

Even as Unilever slowly exits the Foods business, it is attempting to strengthen its position in the global personal care industry. The company’s shifting priority is evident from the fact that revenue share of its Foods unit has fallen from 35% in 2008 to 27% in 2013, while share of its Personal Care unit has grown from 28% to 36% over the same period. The company has stated that cash generation from the Foods business is being used to finance faster expansion in its Personal Care unit, with an eye on acquisition of premium personal care brands.

Unilever’s shareholders seem to be following its present path with caution, with its shares achieving a negligible 1% growth year to date.

Kimberly-Clark: Healthcare Spin-off

Not to be left behind, Kimberly-Clark completed the spin-off of its healthcare business in November. Its healthcare unit, which formed 8% of the company’s total revenues, has now been hived off into a standalone, publicly traded company named Halyard Health (NYSE: HYH).

This move efficiently rids the company of its worst performing business unit in a tax-free transaction. The healthcare unit’s revenue growth slowed down to 1% and nil in 2012 and 2013, respectively; and with an operating margin of 13% it was the least profitable business of the company. Therefore, this spin-off will not only boost the company’s bottom line, but will also improve its growth rate since it will no longer be dragged down by poor performance of the healthcare division. Perhaps more importantly, this move allows the company to focus exclusively on what it does best – personal care products, consumer tissues and the K-C Professional product line.

Kimberly-Clark’s shares have achieved a moderate growth of 7% since the announcement in November last year.

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P&G Posts Lackluster Q1’15 Results; Duracell Sale Creates Hope Of A Revival

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Tuesday, October 28th, 2014 by

The world’s largest consumer goods company, Procter & Gamble (NYSE:PG), reported its Q1’15 earnings on October 24. (Fiscal years end with June.) Sales faltered against strong currency headwinds and ended marginally lower than Q1’14 sales, at $20.8 billion. Divisionally, P&G’s Healthcare and Baby, Feminine and Family Care segments registered positive growth in sales, supported by increasing volumes and selling prices respectively. However, the growth from these segments failed to add to net sales as other segments such as Beauty, Fabric & Home Care and Grooming witnessed declining sales during the quarter.

GAAP operating and net income margins were impacted by an impairment of intangible assets and goodwill relating to its Duracell brand, which P&G announced it would divest during the recent earnings call. Adjusting for these impairments, non-GAAP margins and earnings were in-line with estimates. Non-GAAP operating profit margin for P&G stood at 19.9% in Q1’15, marginally lower than the 20.1% in Q1’14. Non-GAAP earnings per share stood at $1.07 for the quarter, marginally ahead of $1.05 from Q1’14.

See our complete analysis of Procter & Gamble

P&G Plans to Lighten Its Portfolio in Near Term

On the Q1’15 conference call, P&G Chief Financial Officer Jon Moeller indicated that over the next 18-24 months, management intends to create a faster growing, more profitable company that is far simpler to operate. While this is an operation of gigantic proportions, the intent is definitely a step in the right direction. P&G has close to 200 brands in its portfolio, and more than 120 of these brands account for a meager 10% of total sales.

The company recently decided to shed its Duracell battery business from core P&G, and is pursuing options to either sell it or spin it off into a separate entity as the situation warrants. Duracell, which primarily manufactures non-rechargeable alkaline batteries, has a strong foothold in emerging markets and commands a strong position in the non-rechargeable alkaline battery market.  Last fiscal year, Duracell generated about $2 billion in sales for P&G.

Should the company begin divesting its underperforming brands strategically at accelerated pace going forward, P&G should be left with a much lighter and nimbler portfolio of 70-80 brands that are leaders in their industries, categories or segments. While this process of brand culling would increase near term pressure on earnings, it should be beneficial to both revenue growth rate and long term earnings, and maximize shareholder value.

Product Innovation Drives Market Share Gains

In the current quarter, P&G’s Healthcare and Baby, Feminine and Family Care segments reported positive revenue growth, supported by expanding volumes and increasing selling prices. Within the U.S., P&G launched broad-based product innovations in its baby care portfolio a year ago. These innovations have helped the company increase its U.S. diaper market share by three percentage points to 44% in Q1’15. Globally, P&G has a 35% share in the global diaper market, and intends to roll-out its product innovations from the U.S. into International markets later this year. Innovations such as Pampers Premium Care Pants, which has seen exceptional uptake in North America, will be rolled out in Russia. The company expects subsequent roll-outs of this particular line of products to add to P&G’s existing diaper portfolio and provide accretive equity advantages to the Pampers brand in key international markets.

Additionally, the Healthcare business unit benefited from the strengthening domestic U.S. market. P&G Healthcare segment primarily consists of nutritive supplement products and other discretionary nutraceutical products which witness a significant increase in volumes on the back of an improving macroeconomic environment. In July 2014, P&G extended its presence into allergy medication through its billion-dollar health care brand, Vicks, with the launch of QlearQuil. Similarly, the company launched a new bundle of Metamucil brand that emphasize on the brand’s current heart health, blood sugar and digestive health benefits in a new fiber bar form. Going forward, new innovative product offerings should drive growth in the health care market as the U.S. market for nutrition products expands from increasing discretionary income levels.

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P&G Q1’15 Preview: Markets Slowdown And Currency Headwinds Should Test P&G Brands

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Thursday, October 23rd, 2014 by

Procter & Gamble (NYSE:PG) is scheduled to report its Q1FY15 results on October 24. Last fiscal year, sales for the world’s largest consumer goods company stood at $83 billion, marginally higher than sales from fiscal year 2013. (Fiscal years end with June.)  Company-wide product volumes witnessed a 3% growth in FY14 while currencies had a negative impact of 2% during the period. P&G’s two largest business units (fabric & home care and baby, feminine & family care) had the highest growth rates in volumes across all business units. Product volumes from the fabric care business segment registered a 5% growth rate. Similarly, the baby, feminine and family care business unit registered a 4% growth in year on year volumes. However, growth in these business units in reported terms was restricted by currency headwinds, which had a negative 3% impact.

Growth in the remaining business units of beauty, grooming and health care was tepid, weighed down by weak market conditions in developed and emerging economies. The weakness in these business units was further attenuated by P&G’s many underperforming brands. Recently, The Wall Street Journal reported that P&G plans to sell more than half of its 200 brands to focus exclusively on profitable brands. We expect to gain more clarity on this from the upcoming earnings conference call. Despite the weak top line performance, due to extreme currency volatility, P&G has managed to expand its margins on a year-on-year basis through prudent reductions in manufacturing and non-manufacturing overhead expenses. The operating profit margin for FY14 stood 1 percentage point higher over FY13, at 18.4%. Similarly, the net earnings margin (from continuing operations) expanded 40 basis points to 14.1% in FY14.

The company has an ambitious five-year plan lasting until fiscal year 2016 and expects to cumulatively save about $10 billion in cost of goods sold, marketing expenses and non-manufacturing related overhead. It saved $1.2 billion in cost of goods sold in FY2013 and delivered on its earlier guidance of saving $1.6 billion in cost of goods sold in FY2014. We expect to see additional cost savings on these fronts that should create margin accretion in FY15.

See our complete analysis of Procter & Gamble

Sluggish Developed Markets to Weigh on Results

Last fiscal year, the U.S. accounted for more than 35% of total P&G sales and registered a meager 0.7% year on year growth. Comparatively, its International markets portfolio fared better in FY14, although reported sales only grew 0.6% year on year. This is because the reported sales from International economies were significantly depressed from currency fluctuations in these markets in FY14. P&G’s geographic portfolio is also skewed towards developed economies, unlike its competitors. North America and Western Europe alone accounted for 57% of total FY14 sales. This proportion for other U.S. based FMCG (i.e, Fast Moving Consumer Goods) majors such as Kimberly-Clark and Colgate stand at 50% and 44% year to date in 2014.

Although the domestic U.S. market looks to be gaining momentum, it is yet to deliver on results. In its latest quarterly presentation released October 23, 2014, Unilever reported that the North American market for FMCG products grew 1% on a year on year basis. Market growth in Europe however was much disappointing and declined by over 2% last quarter due to significant price deflation in FMCG products. We expect tepid sales from P&G’s developed markets portfolio, weighed down by sluggish market growth and contracting economies. P&G has already witnessed a slowdown in its beauty product portfolio, especially among hair care, hair color and facial care products in developed markets.

Unfavorable Mix Could Curtail Emerging Market Volume Growth

In addition to slowing sales in developed markets, P&G has not been able to capitalize on its success in emerging markets due to its large brand portfolio. Volumes from markets excluding North America and Europe have remained robust. However, the proportion of overall sales from high growth markets such as Asia and Latin America have remained at 18% and 10%, respectively, for the last three fiscal year periods. We believe the reason for slacking sales, despite a surge in volumes, is an unfavorable mix of products in these markets.

For example, within fabric care, P&G has registered a high single-digit growth in volumes from developing markets and a low single-digit growth in volumes in developed markets. Despite this volume expansion, market share was flat in FY14. Likewise, P&G home care volumes in developing and developed markets in FY14 grew in the same range as fabric care last fiscal year. This resulted in a 50 basis point increase in market share in home care in FY14. Health care sales in FY14 faced a strong influence of unfavorable mix as geographic expansion in developing markets in low-priced product lines such as Vicks dragged down net sales. While in the long term, the expanding geographic reach of P&G products should lead to an acceleration in sales, unfavorable product-price mix could erode net sales in the near term.

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Week In Review: Procter & Gamble, Unilever, Colgate-Palmolive And Kimberly-Clark

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Monday, September 29th, 2014 by

Consumer Goods stocks had a mixed performance last week, with domestic U.S. players such as Procter & Gamble (NYSE:PG), Colgate-Palmolive (NYSE:CL) and Kimberly-Clark Corp. (NYSE:KMB) posting some gains from Monday, September 22 through Friday, September 26. U.S. consumer goods companies such as P&G, Colgate and Kimberly-Clark gained on Wednesday, September 24, after new home sales for August jumped 18%, the fastest since May 2008, signalling an improvement in consumer spending potential.

However, the Anglo-Dutch Consumer Goods major Unilever (NYSE:UL) declined 1.3% during this period, on the back of a broader market contraction on oil concerns in the European Union. The FTSE 100, of which Unilever is a constituent, declined 2.7% during the same period. Comparatively, the S&P 500, which includes P&G, Colgate and Kimberly-Clark as constituents, declined 1.4% this week.

Below, we cover key events from the past week for the above listed Consumer Goods companies.

Procter & Gamble

Shares of P&G started the week on a flat note and rose higher on the back of a rising market Wednesday, September 24. However, shares fell along with the market Thursday, September 25, shedding their gains through the week. Year-to-date, shares of P&G have posted marginal gains, with quarterly results weighed down by sluggish sales growth, particularly in the U.S. market. However, prudent cost savings programs have lent buoyancy to shares despite weak top line numbers.

We have a price estimate of $70 for Procter & Gamble, about 17% lower than its current market price of $84. Our full CY14 revenue estimate stands at approximately $84.7 billion, compared to a consensus FY15 estimate of $84.7 billion.

Unilever

Shares of Unilever declined the most among the four consumer goods companies. The weakness in Unilever’s shares continued after the company warned of slowing sales for the second half of 2014 on September 17. Additionally, macroeconomic factors from the European Union weighed on American listed ADRs this week, following oil concerns from the Russia-Ukraine fiasco. Year-to-date, Unilever’s shares fared similar to P&G shares, with sluggish top line performance offset by prudent cost savings to maintain earnings quality.

We have a price estimate of $47 for Unilever, about 12% higher than its current market price of $42. Our full FY14 revenue estimate stands at approximately $68.1 billion, compared to a consensus estimate of $66.68 billion. We expect non-GAAP earnings per share of $2.14 this fiscal year, compared to consensus estimates of $2.20.

Colgate-Palmolive

Colgate’s shares started flat this week and gained about 1.3% on Wednesday. However, shares pared down these gains on Thursday as part of a broader market contraction. The company recent quarterly earnings were a miss on revenues, and shares have remained subdued post these quarterly results on July 31,2014. Year-to-date, Colgate’s shares have remained flat.

We have a price estimate of $65 for Colgate-Palmolive, in line with its current market price. Our full FY14 revenue estimate stands at approximately $18.2 billion, compared to a consensus estimate of $17.6 billion. We expect non-GAAP earnings per share of $3.13 this fiscal year, compared to consensus estimates of $2.97.

Kimberly-Clark

Shares of Kimberly-Clark trended similar to the other consumer goods stocks, starting the week flat before gaining Wednesday, September 24 and declining Thursday, September 25. Year-to-date performance from Kimberly-Clark was relatively lack-luster, weighed down by sluggish domestic sales despite strong sales growth from International markets.

We have a price estimate of $112 for Kimberly-Clark, 4% ahead of its current market price of $107. Our full FY14 revenue estimate stands at approximately $21.7 billion, compared to a consensus estimate of $21.4 billion. We expect non-GAAP earnings per share of $5.93 this fiscal year, compared to consensus estimates of $6.09.

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P&G’s Brand Divestitures Should Unlock Greater Value

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Wednesday, August 27th, 2014 by

Procter & Gamble (NYSE:PG) is the world’s largest consumer goods company, with almost 200 brands in its portfolio. And it competes with other global consumer goods companies such as Unilever (NYSE:UL) and Colgate-Palmolive (NYSE:CL). The company has a market capitalization of approximately $224 billion and annual revenues of about $83 billion in fiscal year 2014, marginally higher than sales from fiscal year 2013. Operating profit margins for FY14 stood 1 percentage point higher over FY13, at 18.4%. Similarly, net earnings margin (from continuing operations) expanded 40 basis points to 14.1% in FY14.

P&G classifies its extensive brand portfolio across five broad product categories, namely: 1) Beauty; 2) Grooming; 3) Health Care; 4) Fabric Care and Home Care; and, 5) Baby, Feminine & Family Care. In this note, we talk about key trends that could impact P&G’s business briefly.

We currently have a $70 price estimate for P&G’s stock, about 16% lower than its current market price.

See our complete analysis of Procter & Gamble

P&G Plans to Trim Portfolio as Consumer Spending Starts Recovery

The sheer size of its brand portfolio has been an issue for P&G in terms of sales growth. The company’s top 70 t0 80 brands make up about 90% of net sales and over 95% of net profit, with the remaining 120 to 130 brands contributing a minimalistic 10% to net sales for the company. However, declining consumer spending in developed markets after the economic crash, combined with inflationary pressures in emerging economies created a weak sales environment globally for consumer goods companies, resulting in a greater emphasis on bottom line through cost savings. The higher emphasis on its earnings growth has led to a deferral in shedding underperforming brands for P&G.

In this regard, P&G has planned an ambitious five-year plan lasting until fiscal year 2016 and expects to cumulatively save about $10 billion in cost of goods sold, marketing expenses and non-manufacturing related overhead. It saved $1.2 billion in cost of goods sold in FY2013 and delivered on its earlier guidance of saving $1.6 billion in cost of goods sold in FY2014. However, more recently, the company announced its intention to shed close to 100 brands that have minimal contributions to P&G’s top line in a bid to accelerate sales growth in the improving global economy.

This strategy should bode well for P&G’s sales, with the savings from discontinuing underperforming brands being reinvested into expanding operations in high growth markets. P&G derived about 43% of FY14 sales from Asia, Central and Eastern Europe, the Middle East, Africa and Latin America combined. Comparatively, the contribution from emerging and frontier markets is much higher for its competitors, such as Unilever and Colgate Palmolive. Despite the recent currency depreciation in emerging economies that has created inflationary pricing pressures on consumers, uptake of consumer goods and products remains higher in emerging markets compared to developed economies and should attract P&G into enhancing its position in these markets.

Portfolio and Manufacturing Streamlining Could Improve Sales and Margin Growth

As a percentage of revenues, P&G generates about 32% of its sales from the Fabric and Home Care segment, 25% from the Baby, Feminine and Family care segment, and 24% from its Beauty segment. Grooming and Health Care segments constitute smaller revenue shares for P&G, at 10% and 9%, respectively, in fiscal year 2014. The Fabric, Home and Pet Care unit is also P&G’s most valuable segment, accounting for approximately 28% of overall value. Its Beauty segment comes second in the value chain, contributing about 22.5% to P&G’s business.

In Q3FY14, the company completed its sale of the Pet Care business unit to Mars Incorporated for $2.9 billion. P&G’s CEO, AF Lafley, stated that exiting the pet care business was an important part of the company’s overall strategy to focus its product portfolio on the core businesses that provide the most value for consumers and shareholders. We are presently adjusting our P&G model to reflect the sale of its pet care business. However, the divestiture should have marginal impact on the divisional valuation, given that the pet care sales in fiscal year 2014 accounted for a meager 0.9% of overall revenues.

Additionally, the company plans to combine business units and redesign its supply chain system so as to save between $200-$300 million annually over three to four years. P&G plans to reduce its manufacturing footprint from many, single product plants into fewer, multi-category plants that have common manufacturing platforms. Last fiscal year, P&G’s unit volume sales increased 3%, driven by mid-single-digit increases in volumes of its two largest divisions. Unit volumes increased low single digits for Grooming and Health Care segments, while Beauty products had negligible growth in volume sales.

Shedding underperforming brands, streamlining manufacturing operations, and innovating further with its billion dollar brands across business units should take P&G growth higher going forward. Innovation has been a core part of Procter & Gamble’s business strategy, and this has allowed it to become the market leader in consumer products. Seven of the company’s products made it to leading market research company IRI’s list of top 10 non-food U.S. consumer product innovations in 2013. P&G’s recent launches in fabric care, such as Tide Pods, Ariel Pods and Gain Flings, are gaining traction in the developed markets and should be able to lift a nimbler P&G higher post the brand divestitures.


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P&G’s Gross Margins Supported By Cost Savings As Innovations Fuel Market Share Growth

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Wednesday, July 30th, 2014 by

Procter & Gamble (NYSE:PG) is set to release its results for the final quarter and complete fiscal year 2014 on Friday, August 1. The world’s leading consumer goods company posted a 3% year-over-year increase in organic sales (excludes the impact of acquisitions/disposals and foreign currency movements) in Q3 FY2014, at the lower end of its guidance. The increase was largely driven by a 3% rise in organic volumes as a 1% increase in prices offset an equivalent amount of decline due to adverse geographic and product mix. Selling prices in certain geographies and for certain products were lower than average which reduced organic sales. Foreign currency translation effects further weighed on the company’s quarterly results and, as a result, net sales ended flat compared to the year-ago period at $20.6 billion.

In early 2014, P&G lowered its guidance for sales and earnings growth for FY 2014 (fiscal year ends in June) due to unfavorable exchange rate movements in many developing economies and policy changes by the Venezuelan government. It expects currency translation effects to reduce all-in sales (accounting for the impact of currency movements) by 2%-3%. However, it maintained its guidance of 3%-4% growth for organic sales (excludes the impact of foreign currency movements). Consequently, all-in sales are now expected to register up to 2% growth, compared to the initial forecast of 1%-2% growth.

We have a $70 price estimate for P&G’s stock, about 10% lower than its market price. We will update our model after the upcoming results are announced.

See our complete analysis of Procter & Gamble


Innovations Will Drive Gains In Market Share

P&G’s recent launches in fabric care, such as Tide pods, Ariel pods and Gain flings, are gaining traction in the developed markets. This helped the fabric care & home care segment to outshine all the other segments, and register organic sales growth of 6% year on year and net sales growth of 2% in the third quarter. The segment accounts for about 30% of the company’s net sales. The remainder comes from beauty, grooming, family care, health care, baby care and feminine care products, all of which posted organic sales growth of 2% or less and net sales declines of 2% or more.

Innovation and new product activity is especially important to accelerate market share growth in developed markets as they are saturating. Seven of the company’s products made it to leading market research company IRI’s list of top 10 non-food US consumer product innovations in 2013, with Tide Pods topping the list. Additionally, six products made it to their list of rising stars. P&G intends to continue innovating which should help drive market growth, a better product mix and market share increases, going forward.

Cost Savings Will Help Offset Currency Translation Losses

Unfavorable exchange rates reduced P&G’s gross margins in Q3 by 100 basis points. However, a 200 basis point improvement from manufacturing savings (resulting from restructuring program announced in 2012) helped it to absorb the impact. The agenda behind the cost savings program is to have financial flexibility in order to maintain investment levels and drive long-term growth, even in weaker micro environments. P&G aims to save $6 billion in costs of goods sold through the program. It saved $1.2 billion in FY2013 and expects to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. Moreover, P&G is redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years.

We believe these savings will continue to help the company in overcoming currency headwinds, thus providing increased support to gross margins. We think that gross margins can also expand as the company strives to lift its beauty division. Beauty is a higher margin business compared to other product categories such as fabric care and paper.

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Cost Savings Rescue FMCG Giants From Currency Woes

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Monday, June 2nd, 2014 by

In the last year or so, emerging market currencies such as the Brazilian Real (BRL), the Indian Rupee (INR), the South African Rand (ZAR), the Venezuelan Bolivar (VEB) and the Argentine Peso (ARS) have significantly depreciated relative to the dollar. This has negatively weighed in three ways on the operations of FMCG (Fast Moving Consumer Goods) majors, including Unilever, Procter & Gamble, Colgate-Palmolive and Kimberly-Clark. The first and the most significant impact is the slowdown that the currency devaluation has created in the emerging markets. Rapid currency depreciation creates inflationary pressure which forces consumers to reduce buying activity. The remaining two impacts relate to commodity costs and revenues. While inflation has pushed up the commodity costs, currency translation losses have reduced the revenues for the FMCG firms in dollar terms, thus squeezing the operational efficiency from both the ends. Cost savings have become an inevitable measure in such a business environment.

Despite the deceleration in growth, the developing economies continue to grow at higher rates than the developed world. In this article, we analyze the importance of the emerging economies for the four FMCG giants. We also discuss the key highlights of the savings initiatives presently being pursued by each of them to counter currency headwinds in the emerging markets. The common agenda behind the savings programs is to enhance gross margins while also freeing up more resources for investing back into advertising, marketing and brand building. The following table summarizes key metrics for the FMCG companies for 2013 that will be helpful in comprehending this article:

See Our Complete Analysis Of Consumer Stocks: Unilever | Colgate-Palmolive P&G | Kimberly-Clark

Unilever (NYSE:UL): Unilever’s above-market global growth in the last few years has come on its rapidly expanding presence in the emerging markets. The company achieves about 85% of its overall growth and slightly less than 60% of its total revenues from these markets. It intends to lift the revenue contribution of the emerging markets to 75% by 2020.

Unilever saved about €1.5 billion (less than $2 billion) through its cost savings program in 2013. Starting next year, the company expects to save an incremental €500 million ($684 million) annually. This is will be achieved via a combination of measures such as reduction in marketing headcount by 12% globally (mostly in slow growing economies such as the U.S.) and a 30% cut in the number of stock keeping units by the end of this year. The company will also focus on launching more high-margin products in the market to generate higher levels of income.

Our price estimate of $44 for Unilever is almost in line with the market price of the stock.

Colgate-Palmolive (NYSE:CL): Emerging market growth is a strategic priority for Colgate-Palmolive. The company derives more than half of its revenues from emerging markets such as Latin America, Africa and Asia. Its product portfolio in these countries is skewed towards oral care products, which generate more than 50% of total company sales. Colgate is also the oral care market leader in many of the emerging markets, including India and Brazil.

Colgate’s funding-the-growth initiative is helping it to more than offset higher raw and packaging material costs. Under the program, the company has opened new environmentally sustainable distribution centers to offer better service to its customers, while also reducing fuel and transportation costs. It is generating savings on indirect purchases by negotiating better lease terms with its current suppliers in several countries. It is also generating significant savings via raw material substitution, reduction of packaging material, and increase in manufacturing efficiency through reduction in the number of stock keeping units (SKU). In addition to cost savings from its funding-the-growth initiative, Colgate realized $40 million of after-tax savings in 2013 from its global restructuring program, and it expects to save double that amount in 2014.

Our price estimate of $59 for Colgate-Palmolive marks our valuation at a discount of about 10% to the stock’s market price.

Procter & Gamble (NYSE:PG): P&G’s products are usually priced at higher price points due to their premium quality. Therefore, its products witness higher demand in the developed economies than the emerging ones. The company derives less than 40% of its revenues from emerging markets. However, it is now looking to enhance its presence in these markets as they continue to grow at much faster rates than developed economies. The company registered organic sales growth of 8% in its top 10 developing markets in FY 2013.

P&G intends to make productivity its core strength. In recent years, the company has taken significant steps to enhance productivity, including a five-year cost savings initiative that will last until 2016. Through the initiative, P&G aims to save $10 billion in costs associated with cost of goods sold, marketing expenses and non- manufacturing overhead. It saved $1.2 billion in cost of goods sold in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. It is also redesigning its supply chain and distribution network through which it expects to save an incremental $200-$300 million annually over three to four years.

One significant area where the company is striving to reduce costs is energy consumption. In 2010, P&G revealed a sustainability program to drive 20% reduction in energy usage per unit of production by 2020. According to the company’s most recent sustainability report, it has reduced energy consumption by 8%, and continues to introduce energy management systems at new locations to save more energy. Although it is difficult to assess the precise impact of the energy savings, P&G is positive about saving millions of dollars by implementing the energy solutions.

Our price estimate of $70 for Procter & Gamble stands at a discount of over 10% to the market price of the stock.

Kimberly-Clark (NYSE:KMB): The emerging markets contribute less than 40% of Kimberly-Clark’s revenues since the company operates primarily in North America and Europe. Slowing growth and profits in these regions are pushing the company to hunt for more international opportunities. It is currently pursuing strong expansion in Latin America which is the primary factor driving sales growth across its segments. The company also recently completed a major restructuring operation which involved exiting the diaper business in Europe and channelizing resources towards better growth opportunities in China.

Kimberly-Clark aims to identify and deliver cost savings in fields where consumers are not much concerned via its FORCE (Focused On Reducing Costs Everywhere) initiative. The program delivered $310 million in cost savings in 2013, allowing the company to absorb currency translation losses and commodity cost inflation. Savings from the program also allowed the company to invest back into innovation and strategic branding. Kimberly-Clark expects significant currency headwinds and higher commodity costs this year. However, it also expects to save at least $300 million from the FORCE program which should help it overcome these problems.

Our price estimate of $110 for Kimberly-Clark is almost in line with its current market price.

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