P&G Braces For “Tough Year” Of Navigating Turbulent Economy
This article was originally published in The Tan Sheet
Executive Summary
Procter & Gamble is bracing for increased commodity costs, weak exchange rates and price increases even though a "balanced brand and geographic portfolio" have insulated it from the global economic downturn so far, the company says
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Procter & Gamble is bracing for increased commodity costs, weak exchange rates and price increases even though a "balanced brand and geographic portfolio" have insulated it from the global economic downturn so far, the company says. The company's net sales grew 9 percent to $22 billion in its fiscal 2009 first quarter on the strength of several diverse segments, which drove net earnings up 9 percent to $3.3 billion, said Chief Financial Officer Clayton Daley during an earnings call Oct. 29. Daley, who has been CFO for 10 years and also is vice chairman, will step down in January 2009 and will continue advising CEO A.G. Lafley before retiring in September after 35 years with the company. Current VP and Treasurer Jon Moeller will succeed Daley as CFO and Teri List, currently finance chief for the global operations office, will become treasurer, according to P&G. "I didn't plan to announce my retirement during a credit crisis, but the fact that I'm doing this is a testimony to the confidence that I have in the next generation of leaders," Daley said. Cincinnati-based P&G's health care division contributed $3.7 billion to net sales - a 4 percent increase from the year-ago quarter - despite a double-digit decline in Prilosec OTC sales. Prilosec OTC sales fell in part due to the onset of private-label competition following P&G's loss of exclusivity in March, the firm said (1 (Also see "Despite Prilosec OTC Weakness, P&G Grows With Price Hikes, Cost Cuts" - Pink Sheet, 11 Aug, 2008.), p. 3). P&G's diversity helped soften the blow from Prilosec OTC's decline. Oral care sales increased by mid-single digits, said Moeller. The Crest line, including the launch of Crest Pro-Health Whitening Paste , led the segment with double-digit growth in developing countries, including a 20 percent increase in China, he said. Net sales also benefited from the beauty segment, which increased 12 percent to $5.1 billion in the quarter. Fabric and home care sales increased 10 percent to $6.5 billion and baby and family care sales grew 10 percent to $3.8 billion, the firm noted. A favorable foreign exchange rate also contributed 5 percent to net sales, thanks in part to "a big profitable business in China" and Venezuela where the currency has held steady despite a turbulent global economy, Daley said. He added the North American market grew 4 percent while developing markets grew approximately 6 to 7 percent and sales in Western Europe were flat. Price increases that went into effect in the past six to nine months also added 3 percent to the net sales growth during the July-September period, the firm notes (2 (Also see "P&G Takes Steps To Offset Rising Costs Without Alienating Customers" - Pink Sheet, 29 Sep, 2008.), p. 3). The price hikes cut both ways, though, and may hurt sales in the near future, but not in the long-term, executives acknowledged during the call. Daley said because P&G was the first company to raise prices in many categories, it lost some market share, but he is confident the firm will regain share points since competitors also are raising prices (3 (Also see "P&G, Colgate Hike Prices To Offset Rising Commodity Costs" - Pink Sheet, 12 May, 2008.), p. 7). Recognizing that it might not escape its fiscal 2009 unscathed by slower consumer spending and rising costs, P&G adjusted the low end of its full-year earnings guidance to $4.15 per share from $4.18 to $4.25. Daley said increasing the range is "prudent" because volatile commodities and currency "are two mega factors" that will significantly influence the firm's financial results. He explained that during the current quarter, the impact of higher oil prices from this summer will hit the company because of "a lag between feed stock market moves and the price P&G pays for its materials." The cost of goods also will rise in the October-December period because phosphate costs doubled and sodium sulfate and soda ash costs jumped 50 percent in the last year, he said. The increase should level off in the second half of the year. P&G also expects a larger negative foreign exchange impact, but it plans to cushion any negative financial effect with ongoing productivity and cost-savings programs, Daley said, adding, "We already knew this was going to be a tough year." - Elizabeth Crawford ([email protected]) |