Innovation And Productivity Improvements Drive Procter & Gamble’s Quarterly Results

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Procter & Gamble

Procter & Gamble (NYSE:PG), 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 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. [1]

The fabric care & home care segment outshined all the other segments, registering organic sales growth of 6% year on year and net sales growth of 2% (i.e., as reported). 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 productivity improvements mainly governed the company’s third quarter results, and we believe its focus on these will enhance its results in the next few quarters. [1]

We have a $70 price estimate for P&G’s stock, about 15% lower than its market price. We are in the process of updating our model for the Q3 results.

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Innovation Will Fuel Market Share Gains

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 US consumer product innovations in 2013. Additionally, six products made it to their list of rising stars. [2]

P&G’s recent launches in fabric care, such as Tide pods, Ariel pods and Gain flings, are gaining traction in the developed markets. The company also regained its leadership in baby care from Kimberly-Clark, as an improvement in absorbency, comfort and design across baby diapers in the U.S. helped grow its share in the country’s baby care market. [2]

We think that innovation and new product activity hold the key to accelerating P&G’s market share growth in developed markets as they are saturating. P&G has more innovative products lined up for the current year, which should help drive market growth, a better product mix and market share increases, going forward.

Cost Savings Will Help Offset Currency Translation Losses

The company recently 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 approximately 1% growth, compared to the initial forecast of 1%-2% growth. [3]

Unfavorable exchange rates had a 100 basis points negative impact on P&G’s Q3 gross margins. However, a 200 basis point improvement from manufacturing savings (resulting from restructuring program announced in 2012) helped it to absorb the impact. [1] The motive 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. The company aims to save $6 billion in costs of goods sold through the program. It saved $1.2 billion in FY2013 and is on track to save another $1.6 billion in FY2014, up by $200 million from the company’s last forecast. Moreover, the company 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. [2] We believe these savings will continue to help the company in overcoming currency headwinds, thus providing increased support to gross margins.

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Notes:
  1. P&G Form 10-Q, www.sec.gov, April 23 2014 [] [] []
  2. The Procter & Gamble Company’s Management Discusses F3Q 2014 Results – Earnings Call Transcript, Seeking Alpha, April 23, 2014 [] [] []
  3. P&G Updates Earnings Projections to Reflect Significant Currency Exchange Rate Movements, P&G Investor Relations Website, February 11, 2014 []