The Procter & Gamble Co. delivered 4 percent sales growth to $22.1 billion for the October – December quarter. Growth was driven by higher volume and pricing actions, partially offset by geographic and product mix. The company continued to deliver broad-based organic sales growth, with all six business segments up versus the prior year. Diluted net earnings per share were $0.57 per share, reflecting non-core charges of $0.53 per share. The non-core items included a $0.50 per share non-cash impairment charge associated with the appliances and salon professional businesses. Core net earnings per share were $1.10, toward the high end of the company’s expectations for the quarter.
“We continue to make progress against our key business priorities in a difficult macroeconomic environment,” said Bob McDonald, chairman of the board, president and chief executive officer in a prepared statement. “We delivered solid top-line growth and continued to accelerate productivity improvements to drive down costs. With the easing of commodity cost comparisons over the next two quarters, continued solid top-line growth and cost savings progress, we expect operating profit growth to accelerate in the second half of the fiscal year.”
Net sales increased four percent to $22.1 billion in the October-December quarter. Organic sales also grew four percent. Volume increased one percent behind overall market growth, initiatives and continued market expansions. Volume grew at high single-digit rates in developing regions. This growth was partially offset by a mid-single-digit decrease in developed regions. Broad-based price increases across all segments and geographies, designed to recover higher commodity costs and devaluing developing market currencies, increased net sales by four percent. Geographic and product mix reduced net sales by one percent.
Diluted net earnings per share were $0.57, a decrease of 49 percent primarily due to non-core charges of $0.53 per share which include a $0.50 per share non-cash impairment charge. Gross margin contracted 210 basis points due mainly to higher commodity costs, partially offset by pricing and manufacturing cost savings. Selling, general and administrative expenses (SG&A) as a percentage of net sales improved 150 basis points behind net sales leverage, a reduction in overhead spending and lower charges for non-core items. Including the impact of non-core items, operating margin declined 760 basis points.
Excluding the non-core items, core net earnings per share were $1.10, and core operating margin declined 160 basis points.
Operating cash flow was $3.3 billion for the quarter and free cash flow was $2.4 billion. The company repurchased $0.5 billion of shares during the quarter and returned $1.5 billion of cash to shareholders as dividends.
Snacks and pet care net sales and organic sales increased three percent to $824 million on a two percent increase in unit volume. Pricing increased net sales by three percent. Mix reduced net sales by two percent due to unfavorable product and geographic mix. Snacks volume increased mid-single digits mainly due to increased distribution and market growth in developing regions. Pet care volume decreased low single digits due to customer inventory adjustments and market contraction. Net earnings decreased nine percent to $61 million as operating margin contraction and a higher effective tax rate more than offset net sales growth. Operating margin decreased primarily due to a decline in gross margin, partially offset by a decrease in overhead spending as a percentage of net sales. Gross margin decreased behind an increase in commodities, partially offset by price increases and manufacturing cost savings.
1 ?Q '<0 ??p?=EN style='font-size:12.0pt; font-family:"Times New Roman","serif";mso-ansi-language:EN'>Significantly increase investments in its iconic brands and in bringing innovation to market. Advertising and marketing spending will increase by $500 million to $600 million in 2012, the majority in North America. Going forward, it expects to maintain or increase that rate of support as a percentage of revenues. To drive efficiencies, it will reduce the number of agency partners and also take steps to leverage the global scale of its top brand platforms. The brand investments are expected to drive topline growth and enable greater price realization;
"As we implement our strategic priorities in 2012, we've had to make some tough decisions," said Chief Financial Officer Hugh Johnston. "As a result, 2012 will be a year of transition, one in which we will make the right investments to position PepsiCo properly to achieve long-term high-single-digit core constant currency EPS growth."
For 2012, the company is targeting mid-single-digit core constant currency net revenue growth, in-line with its long-term target. It expects a decline in core constant currency EPS of approximately 5 percent from its fiscal 2011 core EPS of $4.40, reflecting a combination of strategic and macroeconomic factors, primarily:
- Marketplace investments: In 2012, the company will step-up its strategic brand investments by $500 million to $600 million, particularly in North American beverages and food –
the benefits from which will be increasingly seen in the second half of 2012 and into 2013. Further, the company anticipates a larger increase in consumer-facing spending through marketing efficiency initiatives. Additionally, incremental investments in routes and display racks will total about $100 million in 2012.
- Commodities: The company anticipates a second consecutive year of global commodity cost inflation that is well above historic levels. In a different economic climate the company would likely offset these additional costs through increased pricing. However, it does not anticipate that it can pass through all of the higher commodity costs to its consumers in 2012 given the continuing challenges that consumers are facing, particularly in the developed economies.
- Pension/interest/taxes: Additionally, the company expects higher pension costs as a result of a lower discount rate, higher net interest expense as it increases indebtedness and also terms-out debt in a low interest rate environment, and a core tax rate of approximately 27 percent, about 50 basis points higher than in 2011.
- Productivity: Partially offsetting these additional costs, major productivity initiatives are expected to result in about a $500 million incremental reduction in operating expenses in 2012.
Based on the current forex market consensus, foreign exchange translation would have a three percentage point unfavorable impact on the Company's full-year core EPS growth in 2012.
On a reported basis, the company's results will reflect charges from its 3-year productivity program, primarily severance costs associated with workforce reductions. In the fourth quarter of 2011, the company incurred pre-tax non-core restructuring charges of $383 million, and it anticipates additional charges of approximately $425 million in 2012 and another $100 million from 2013 through 2015.
The company is targeting about $8 billion in cash flow from operating activities and more than $6 billion in management operating cash flow (excluding certain items) in 2012, which will include the favorable impacts of a 10 percent reduction in capital expenditures and incremental working capital efficiency. The company also expects to make a pre-tax discretionary pension and retiree medical contribution of $1 billion in 2012.
Reflecting the company's commitment to return capital to shareholders and confidence in its long-term growth targets, PepsiCo announced that it will raise the annualized common stock dividend, effective with the dividend payable in June 2012, by 4 percent to $2.15 per share, the 40th consecutive year of dividend growth. The company anticipates increasing share repurchases in 2012 by at least $3 billion, which will be financed by operating cash flow and additional debt.
PepsiCo provided its long-term target of mid-single-digit constant currency net revenue growth. It also announced that it is targeting long-term core constant currency operating profit growth of 6 percent to 7 percent, and long-term high-single-digit core constant currency EPS growth after a transition year in 2012, driven by positive returns from executing its strategic initiatives.
