How much of P&G's sales growth came from the Wella acquisition versus organic performance?

Of the 20% total net sales growth, about 10 points came from acquisitions and divestitures (primarily Wella), about 4 points from favorable foreign exchange, and about 6 points were organic. Organic unit volume grew 9% versus 19% reported. Beauty Care's total volume rose 45%, but only 10% excluding acquisitions.

Did P&G's margins improve or deteriorate this quarter?

Both. Reported gross margin expanded 210 basis points, and about 70 basis points of that reflected lapping prior-year restructuring charges. The remaining 140 basis points were supported by scale, cost savings and mix, with roughly half coming from Wella. However, MRA&O spending rose 220 basis points excluding base-period restructuring, mainly from Wella's higher marketing intensity and integration costs, and core operating margin fell 90 basis points.

Is P&G's cash generation keeping pace with earnings?

For the quarter, free cash flow of $1.91 billion was 105% of net earnings, above the 90% target. However, for the six months, free cash flow fell to $3.15 billion (88% productivity) from $3.71 billion, as higher accounts receivable behind strong December shipments and increased capital spending weighed on cash flow even as net earnings rose 21%.

What is management's outlook for the rest of fiscal 2004?

Management expects March-quarter sales to rise 14–18% and said consensus is at the top end of EPS expectations. For fiscal 2004, total sales are expected to grow 13–17%, with second-half reported EPS up about 25% (about 10% on a core basis). Wella is expected to be neutral to EPS for the full year.

What changes in reporting should investors be aware of?

Because the multi-year Organization 2005 restructuring program was substantially complete at the end of fiscal 2003, P&G will no longer separately report core results. Future restructuring-type project costs will be absorbed in normal operating costs beginning in the current fiscal year, which means reported results will no longer be adjusted to exclude such charges.

PG 8-K SEC Disclosure — Jan 28, 2004

01—Abstract

Summary

Summary of the 8-K filed January 28, 2004. Cited figures are marked; the original filing is the authoritative source.

Procter & Gamble reported double-digit growth for the October–December 2003 quarter (fiscal Q2 2004), delivering at the top end of its raised earnings expectations.

Net sales rose 20% to $13.22 billion^a, with organic sales up 6%, and reported net earnings increased 22% to $1.82 billion. Reported diluted EPS rose 23% to $1.30, or 15% versus the prior-year base period excluding restructuring charges. Unit volume grew 19%, but only 9% on an organic basis, so the headline strength was substantially aided by the Wella AG acquisition and favorable foreign exchange (about 4 points of sales growth).

The quality of growth is mixed. Gross margin expanded 210 basis points (140 basis points excluding restructuring in the base period), largely from manufacturing savings and volume scale, but MRA&O spending rose sharply, mainly from Wella's higher marketing-to-sales ratio and integration costs. Core operating margin fell 90 basis points versus the base period.

Operating cash flow was $2.36 billion^b and free cash flow was $1.91 billion (105% productivity), though quarterly free cash flow was up only modestly against the prior year's $1.98 billion and six-month free cash flow fell about 15% to $3.15 billion, reflecting higher receivables and capital spending. Total assets rose to $53.9 billion, with goodwill and intangibles up about $7.2 billion, largely from Wella, and total debt climbed to roughly $18.5 billion. Looking ahead, management guided March-quarter sales up 14–18% and said the current consensus is at the top end of EPS expectations.

For fiscal 2004, sales are expected to rise 13–17%^c, with second-half reported EPS up about 25% (about 10% on a core basis). Management also flagged that restructuring charges will no longer be reported separately going forward, and that Wella is expected to be neutral to EPS for the year. Investors should weigh strong top-line momentum and guidance against margin pressure from acquisition-related marketing spend and the cash flow and leverage implications of the Wella deal.

02—Key points

Key Highlights

Net sales rose 20% to $13.22 billion; organic sales grew 6%, with roughly 10 points from acquisitions and 4 points from favorable FX.
Reported net earnings increased 22% to $1.82 billion; diluted EPS rose 23% to $1.30 (up 15% versus core prior-year EPS excluding restructuring charges).
Unit volume grew 19%, but organic volume grew 9%; Health Care led business segments at 17% volume growth and Beauty Care (excluding Wella) grew 10% organically.
Gross margin expanded 210 basis points (140 basis points ex-restructuring), driven by scale, product cost savings and mix, while MRA&O rose 170 basis points, mostly due to Wella.
Free cash flow was $1.91 billion for the quarter (105% productivity versus a 90% target), but six-month free cash flow declined about 15% to $3.15 billion amid higher receivables.
Guidance: March-quarter sales up 14–18%; fiscal 2004 sales up 13–17%; second-half reported EPS up about 25% (about 10% on a core basis).
Balance sheet expanded with total assets of $53.9 billion and goodwill/intangibles up about $7.2 billion since June 2003, largely reflecting the Wella AG acquisition; total debt rose to roughly $18.5 billion.

03—Questions

Frequently Asked Questions

How much of P&G's sales growth came from the Wella acquisition versus organic performance?
Of the 20% total net sales growth, about 10 points came from acquisitions and divestitures (primarily Wella), about 4 points from favorable foreign exchange, and about 6 points were organic. Organic unit volume grew 9% versus 19% reported. Beauty Care's total volume rose 45%, but only 10% excluding acquisitions.
Did P&G's margins improve or deteriorate this quarter?
Both. Reported gross margin expanded 210 basis points, and about 70 basis points of that reflected lapping prior-year restructuring charges. The remaining 140 basis points were supported by scale, cost savings and mix, with roughly half coming from Wella. However, MRA&O spending rose 220 basis points excluding base-period restructuring, mainly from Wella's higher marketing intensity and integration costs, and core operating margin fell 90 basis points.
Is P&G's cash generation keeping pace with earnings?
For the quarter, free cash flow of $1.91 billion was 105% of net earnings, above the 90% target. However, for the six months, free cash flow fell to $3.15 billion (88% productivity) from $3.71 billion, as higher accounts receivable behind strong December shipments and increased capital spending weighed on cash flow even as net earnings rose 21%.
What is management's outlook for the rest of fiscal 2004?
Management expects March-quarter sales to rise 14–18% and said consensus is at the top end of EPS expectations. For fiscal 2004, total sales are expected to grow 13–17%, with second-half reported EPS up about 25% (about 10% on a core basis). Wella is expected to be neutral to EPS for the full year.
What changes in reporting should investors be aware of?
Because the multi-year Organization 2005 restructuring program was substantially complete at the end of fiscal 2003, P&G will no longer separately report core results. Future restructuring-type project costs will be absorbed in normal operating costs beginning in the current fiscal year, which means reported results will no longer be adjusted to exclude such charges.

04—Continue

← View all 8-K filings