18 September 2010

PG: Look Ahead to September 2010 Quarterly Results

This post describes our model of Procter & Gamble's (NYSE: PG) Income Statement for the fiscal 2011's first quarter, which will end on 30 September 2010.

The purpose of the model is to establish a baseline for identifying surprises, positive or negative, in the quarterly results the company will report.  Estimates for each line of the Income Statement are derived from management's guidance, the company's historical financial results, and other publicly available data.

We begin by reviewing background information about P&G and the business environment in which it is currently operating.

Procter & Gamble creates and markets many well-known Household and Personal products, which are Consumer Staples, to customers around the world.  The company, based in Cincinnati, traces its roots back to 1837.

P&G reported Net Income of $12.7 billion ($10.9 billion from continuing operations) on Net Sales of $78.9 billion in fiscal 2010, which ended in June.   Sales to Wal-Mart Stores (NYSE: WMT) and its affiliates produced about 16 percent of P&G's Revenue.

The company's market capitalization is nearly $200 billion, which makes P&G the sixth-most valuable U.S. corporation.

Having raised its dividend for 54 consecutive years, P&G has certainly earned its place on the list of S&P 500 Dividend Aristocrats.  P&G is also number 6 on Fortune Magazine's 2010 list of the World's Most Admired Companies.

P&G is organized into units that focus on a particular product category.  At the highest level, the company has three global business units:  Beauty and Grooming, Health and Well-Being, and Household Care.  Each GBU comprises two segments.

In fiscal 2010, the Household Care GBU generated about one half of P&G's net sales and the Beauty and Grooming GBU was responsible for about one third of sales.

The company's most-valuable brands, which are responsible for the lion's share of sales and profits, include Ace, Always, Ariel, Bounty, Braun, Charmin, Crest, Dawn, Downy, Duracel, Gain, Gillette, Head and Shoulders, IAMS, Mach3, Olay, Oral B, Pampers, Pantene, Pringles, Tide, and Wella. 

With such a broad product line, P&G has a lengthy list of competitors.  Colgate-Palmolive (NYSE: CL), Kimberly-Clark (NYSE: KMB),  and Unilever (NYSE: UL) are a few of the better known rivals.  Consumer products compete at large and small retailers on price, quality, features, and marketing.  P&G has long been a top advertiser

P&G adds and divests brands regularly, generally aiming to strengthen growth, improve its return on capital, and exploit synergies.  The company acquired razor-titan Gillette in October 2005 for $57 billion.  P&G sold the Folgers coffee business in 2008 to J.M. Smucker (NYSE: SJM).  In August 2009, P&G agreed to sell its pharmaceutical business to Warner Chilcott (NASDAQ: WCRX).  In December 2009, P&G agreed to acquire Ambi Pur, "a leading global air care brand," from Sara Lee (NYSE: SLE) for about $470 million.

Negotiations this year that might have resulted in Diamond Foods (NASDAQ: DMND) acquiring the Pringles brand have reportedly fallen through.

A fundamental aspect of P&G's strategy is to invest in Research and Development -- roughly $2 billion annually, conducted internally and externally -- to create innovative products deserving of premium pricing and brand loyalty

In the last decade, P&G has made an effort "to extend the availability and affordability of P&G brands to more low-income consumers, particularly in developing markets."  In 2009, 32 percent of the company's total sales were in developing markets, up from 20 percent ten years earlier.

P&G's financial challenges include fluctuations in commodity prices and currency conversion rates.

Procter & Gamble earned $0.71 per diluted share in fiscal 2010's fourth quarter, which ended 30 June.  Earnings per share were 11 percent less than the $0.80 P&G made in the same quarter of 2009.  Core EPS, a non-GAAP measure that excludes certain items, fell from $0.78 to $0.71.

Readers wanting to take another look at Procter & Gamble's June 2010 quarter might wish to review our Income Statement and Financial Gauge analyses.

Now, we are ready to look ahead to P&G results for the September 2010 quarter.

In the press release on 3 August 2010 announcing fourth quarter results, P&G issued the following guidance for the new fiscal year and its first quarter.

Fiscal Year 2011 Guidance

Net sales are expected to increase two to four percent in fiscal 2011. Organic sales are estimated to grow four to six percent. Unfavorable foreign exchange is expected to reduce net sales growth by approximately three percent. The net impact of acquisitions and divestitures is estimated to contribute one percent to net sales growth. Diluted net earnings from continuing operations and Core EPS are expected to be in the range of $3.91 to $4.01, up 11 to 14 percent on a continuing operations basis and up seven to nine percent on a core basis.

July - September 2010 Quarter Guidance

For the July - September quarter, net sales growth is estimated to be one to three percent. Organic sales are expected to grow three to five percent, reflecting continued, strong volume momentum, partially offset by mix and pricing. Unfavorable foreign exchange is expected to reduce net sales growth by approximately three percent. Acquisition and divestiture activity is expected to contribute one percent to net sales for the quarter. Diluted net earnings per share from continuing operating and Core EPS are expected to be in the range of $0.97 to $1.01, in line to up four percent versus prior year Core EPS of $0.97, reflecting the company’s plans to continue strong investment levels in innovation and marketing support
[emphasis added]

A 1-to-3 percent growth rate, as cited above, for the quarter would translate into Net Sales, or reported Revenue, between $20.0 billion and $20.4 billion.  We are using the mid-range figure of $20.2 billion as our target for Revenue in the June quarter.

P&G's Gross Margin as a percentage of Revenue fluctuates slightly with the seasons.  The margin is more likely to be higher in the first half of the fiscal year than the second.  Assuming a similar pattern in fiscal 2011, we are estimating the Gross Margin in the September 2010 quarter will be 53 percent.  Therefore, our estimate of a Cost of Goods Sold is (1 - 0.53) * $20.2 billion = $9.5 billion.

SG&A expenses have been trending up slightly to support sales and marketing activities required for market share growth, although these expenses are often a bit lower as a percentage of Revenue in September quarters.  These factors have led us to set 32 percent as the target for SG&A in the September 2010 quarter, of 0.32 * $20.2 billion = $6.5 billion.

These assumptions would lead to estimated Operating Income of $4.2 billion, which is 4.6 percent less than the comparable amount in the year-earlier quarter.

We expect net non-operating expenses of $250 million, and, therefore, pretax income of approximately $4.0 billion.

We're using an estimate for the effective income tax rate of 27 percent, which is somewhat lower than before because a greater percentage of income is being earned overseas.  This rate would lead to a tax provision of $1.1 billion.

Rolling up these figures, we're looking for Net Income from continuing operations of $2.9 billion ($0.96/share).  This is slightly less than the company's guidance; it is not unusual for us to err on the side of conservatism, and this might be the case again.  However, we are not going to drift too far from assumptions based on historical results in order to get a particular result.

In last year's September quarter, P&G earned $3.3 billion ($1.06/share).  Discontinued operations added $0.09 per share to the September 2009 results.

Please click here to see a full-sized, normalized depiction of the projected results next to P&G's quarterly Income Statements for the last couple of years. [As a consequence of the sale of the pharmaceuticals business, P&G restated some historical financial statements to reflect the pharmaceutical results as a discontinued operation.  We used this information from the company to update our spreadsheets, making estimates where official data was not readily available.] 

Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Full disclosure: No position in PG at time of writing.

No comments:

Post a Comment