Did P&G beat expectations this quarter?

Yes. The company reported that it beat analysts' consensus earnings expectations for the July-September quarter, with diluted EPS of $1.26 up 21% year over year. Management also said the quarter reflected record volume and sales.

How much of the growth came from the Wella acquisition versus the underlying business?

Wella contributed roughly 3 percentage points to both sales and volume growth in the quarter. Organic sales growth, which excludes acquisitions, divestitures and currency, was 7%, and organic unit volume growth was 9%. Wella did not have a significant impact on net earnings this quarter, and management expects it to be slightly dilutive in the December quarter.

Why did free cash flow decline so sharply?

Operating cash flow fell to $1.61 billion from $2.01 billion, mainly due to working capital increases (receivables rose to $4.13 billion from $3.04 billion, and inventories to $4.54 billion from $3.64 billion), along with the absence of prior-year joint venture dividends. Management attributed much of this to short-term factors, including initiative-related activity. Capital spending was 3% of sales, which is still below target levels.

Is the margin improvement sustainable given higher marketing spending?

Gross margin gains are being partly reinvested. MRA&O rose 110 bps as a share of sales, with about a third of that increase attributable to Wella. The gross margin expansion from volume leverage and cost savings has so far more than offset the increase in marketing and overhead, but the reported 14.4% net margin is only modestly higher than the 13.6% reported a year earlier, which leaves limited room for error if reinvestment continues to rise.

What is the outlook for the rest of fiscal 2004?

P&G reaffirmed its fiscal-year guidance for total sales growth of 13% to 16%, organic sales growth of 5% to 7%, and diluted EPS growth in line with analyst consensus, and said it still expects double-digit EPS growth. It also expects health care sales to return to underlying consumption levels after the one-time Prilosec OTC pipeline fill, and it expects fabric and home care earnings growth to improve over the remainder of the year.

PG 8-K SEC Disclosure — Oct 27, 2003

01—Abstract

Summary

Summary of the 8-K filed October 27, 2003. Cited figures are marked; the original filing is the authoritative source.

The Procter & Gamble Company (PG) reported fiscal Q1 2004 results (quarter ended September 30, 2003) that beat analysts' consensus earnings expectations, with management highlighting record volume and sales.

Net sales rose 13% to $12.20 billion^a, with organic sales (excluding acquisitions, divestitures and FX) up 7% and unit volume up 12% (9% organic). Net earnings grew 20% to $1.76 billion and diluted EPS rose 21% to $1.26. Excluding restructuring charges in the base period, EPS grew 13%, and the Wella acquisition was not materially dilutive to earnings this quarter, consistent with prior guidance.

Quality of earnings was mixed. Gross margin expanded 260 basis points (180 bps excluding prior-period restructuring), but marketing, research, administrative and other costs rose 110 bps (170 bps on a core basis) as P&G reinvested behind initiatives such as Prilosec OTC, Olay Regenerist and Swiffer. Operating cash flow fell to $1.61 billion^b from $2.01 billion, driven by working capital build, and free cash flow declined 28% to $1.24 billion, with free cash flow productivity dropping to 71% of net earnings from 118%.

Cash fell and debt rose sharply after the Wella purchase, with total assets up to $50.5 billion^c from $43.7 billion. Guidance was reaffirmed.

For the December quarter, P&G expects total sales growth of 14%^d to 19% and organic growth of 5% to 8%, and management said it is comfortable with current analyst EPS estimates despite Wella being slightly dilutive in the quarter. For fiscal 2004, the company expects total sales growth of 13% to 16%, organic sales growth of 5% to 7%, and diluted EPS growth in line with consensus, with management reiterating its double-digit EPS growth target.

02—Key points

Key Highlights

Net sales rose 13% to $12.20 billion; organic sales grew 7% and unit volume rose 12% (9% organic), a record for the company.
Diluted EPS increased 21% to $1.26 (13% on a core basis excluding prior-year restructuring charges), beating analyst consensus.
Gross margin expanded 260 bps to 51.8% of sales, driven by volume scale and base-business cost savings.
MRA&O spending rose to 30.1% of sales (up 110 bps), reflecting reinvestment in Prilosec OTC, Olay Regenerist, Swiffer and Crest Whitestrips.
Free cash flow fell 28% to $1.24 billion as operating cash flow dropped to $1.61 billion on working capital build; FCF productivity was 71% of net earnings versus 118% a year earlier.
Wella acquisition closed in September (P&G owns 99% of voting shares); total assets rose to $50.5 billion, goodwill and intangibles nearly doubled-plus to $19.3 billion, and total debt rose to about $17.3 billion.
FY2004 guidance reaffirmed: total sales growth of 13% to 16%, organic growth of 5% to 7%, and EPS growth in line with consensus; December-quarter sales growth expected at 14% to 19%.

03—Questions

Frequently Asked Questions

Did P&G beat expectations this quarter?
Yes. The company reported that it beat analysts' consensus earnings expectations for the July-September quarter, with diluted EPS of $1.26 up 21% year over year. Management also said the quarter reflected record volume and sales.
How much of the growth came from the Wella acquisition versus the underlying business?
Wella contributed roughly 3 percentage points to both sales and volume growth in the quarter. Organic sales growth, which excludes acquisitions, divestitures and currency, was 7%, and organic unit volume growth was 9%. Wella did not have a significant impact on net earnings this quarter, and management expects it to be slightly dilutive in the December quarter.
Why did free cash flow decline so sharply?
Operating cash flow fell to $1.61 billion from $2.01 billion, mainly due to working capital increases (receivables rose to $4.13 billion from $3.04 billion, and inventories to $4.54 billion from $3.64 billion), along with the absence of prior-year joint venture dividends. Management attributed much of this to short-term factors, including initiative-related activity. Capital spending was 3% of sales, which is still below target levels.
Is the margin improvement sustainable given higher marketing spending?
Gross margin gains are being partly reinvested. MRA&O rose 110 bps as a share of sales, with about a third of that increase attributable to Wella. The gross margin expansion from volume leverage and cost savings has so far more than offset the increase in marketing and overhead, but the reported 14.4% net margin is only modestly higher than the 13.6% reported a year earlier, which leaves limited room for error if reinvestment continues to rise.
What is the outlook for the rest of fiscal 2004?
P&G reaffirmed its fiscal-year guidance for total sales growth of 13% to 16%, organic sales growth of 5% to 7%, and diluted EPS growth in line with analyst consensus, and said it still expects double-digit EPS growth. It also expects health care sales to return to underlying consumption levels after the one-time Prilosec OTC pipeline fill, and it expects fabric and home care earnings growth to improve over the remainder of the year.

04—Continue

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