P&G's Analyst Day Update
In the recently-held analyst day meeting, Procter & Gamble Company (PG) reaffirmed its previously-provided outlook, highlighted potential for higher share repurchases, announced further job cuts and discussed its innovation pipeline.
Innovation Plans
Innovation is the driving force for P&G and the company has a strong tradition of not only introducing blockbuster new products but also creating entirely new categories. However, P&G has failed to launch any game-changing product in the recent past. At the call, the company announced plans to boost discontinuous innovations; which are breakthrough innovations of existing products.
The company also highlighted some present and upcoming product launches during the call. Some recent successful product launches include Tide Pods, Downy Unstoppables diapers, ZzzQuil sleeping aid product, Pro Health for Life oral care line and some new prestige fragrances among others. Some upcoming product launches include Cascade Platinum dishwasher in U.S, a new line of Olay skin care products, Vidal Sassoon Professional Series hair care products, Fusion Mach3 sensitive and disposable skin products. All of these are scheduled to be launched in January.
Further Job Cuts
P&G maintained that its productivity and cost savings plan will generate $10 billion in cost reductions by the end of fiscal 2016. P&G’s plan also include a workforce reduction of 5,700 by the end of fiscal 2013. The plan was announced in February 2012 and aims to reduce spending across all areas like supply chain, research & development, marketing and overheads. The plan also includes improving net manufacturing productivity by 5% annually.
Till the end of October, the company had reduced around 4,700 positions, which is almost 80% of its target. On top of the current plans, P&G plans to further reduce non-manufacturing jobs by an additional 2% to 4% per year from fiscal 2014 through 2016.
Improved Share Repurchase Outlook
P&G hiked its share repurchase expectations from $4 billion to the range of $4 billion-$6 billion. Moreover, if cash generation remains strong, P&G believes it should be able to meet the top end of the guidance. The company expects to repurchase stock worth $4 billion by the end of fiscal second quarter.
Outlook Reaffirmed
The consumer giant reaffirmed its second quarter and fiscal 2013 guidance provided during the first quarter conference call held late last month.
Management continues to expect organic sales to grow in the range of 2% to 4%. Net revenue is expected to remain flat or increase upto 1% from 2012 levels. Currency is expected to hurt revenues by 2% to 3%. Pricing is expected to add 2 percentage points to top-line growth.
The company also maintained its previously provided core earnings guidance range of $3.80-$4.00, which represents a year-over-year movement of a negative 1% to a positive 4%. However, adjusting for headwinds from pension and benefit plans and import restrictions in Argentina and mandated price reductions in Venezuela, earnings are expected to grow in the range of 2%-7%. Capital expenditure is expected to be around 5.5% of sales in fiscal 2013.
For the second quarter of fiscal 2013, the company expects revenues to range between negative 1% to a positive 1%. Organic sales are expected to grow between 1% and 3%. Foreign exchange is expected to hurt revenue growth by 2%. Core earnings are expected to remain in the range of $1.07 to $1.13, representing a movement in the range of negative 2% to positive 4%. The core earnings guidance includes gains related to the divestiture of P&G’s bleach business in Italy.
Our Recommendation
We currently have a long-term Neutral recommendation on P&G. However, the stock carries a Zacks #3 Rank (a short-term Hold rating). A peer company Kimberly Clark Corporation (KMB) carries a better rank, Zacks #2 ( a short-term ‘Buy’ rating).
P&G’s first quarter results were better than expectations. Slowdown in developed nations and commodity cost increases resulted in a series of disappointing earnings results and guidance cuts for P&G. However, the fourth quarter 2012 and first quarter 2013 results were much better than past quarters. Overall, we are encouraged by P&G’s strong brand recognition, diversified portfolio, rapid growth in developing nations, impressive product development capabilities and marketing prowess.
Fiscal 2012 was a tough year for P&G and the company plans to implement some meaningful changes to re-accelerate its top and bottom-line growth keeping in pace with the peer companies. The company has laid out plans to improve results in developed markets while maintaining momentum in the developing nations. Moreover, the company will increase focus on the most profitable business, its biggest innovations and further accelerate cost savings. We would prefer to wait and see substantial results from the turnaround efforts.
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