This consumer goods giant continues to divest unproductive products to significantly streamline and simplify its business and brand portfolio. The more focused portfolio is believed to be much simpler to manage, and will enable more resources and attention on the biggest opportunities, resulting in faster more profitable growth.
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The Stock On The Radar
The Procter & Gamble Company (PG) provides branded consumer packaged goods and sells its products in more than 180 countries and territories and has operations in about 70 countries worldwide. The company has one of the strongest portfolios of trusted, quality, leadership brands, including Always, Ambi Pur, Ariel, Bounty, Charmin, Crest, Dawn, Downy, Fairy, Febreze, Gain, Gillette, Head & Shoulders, Lenor, Olay, Oral-B, Pampers, Pantene, SK-II, Tide, Vicks, Wella and Whisper.
P&G is a company generating $83 billion in annual sales, with brands and categories organized in four industry-based sectors. It takes its portfolio of brands to consumers through five regional selling and market operations - Asia, Europe, Latin America, North America, and IMEA or India, Middle East & Africa.
A Company Of The World's Most Valuable Brands
P&G has 23 brands with annual sales of $1 billion to more than $10 billion, and 14 with sales of $500 million to $1 billion. The company claims that nearly all of its 23 billion-dollar brands and the vast majority of its $500 million to $1 billion brands holds the number one or two position in their category or segment, and they all have significant growth and value creation potential.
Customer Concentration
The company's customers include mass merchandisers, grocery stores, membership club stores, drug stores, department stores, salons, distributors, e-commerce and high-frequency stores.
Sales to Wal-Mart Stores Inc. and its affiliates represent about 14% of its total revenue in 2014, 2013 and 2012. No other customer represents more than 10% of its net sales. Its top ten customers account for about 30% of its total unit volume in 2014 and 2013, and 31% of its total unit volume in 2012.
Geographic Operations
Net sales in the U.S. account for about 35% of total net sales in 2014, while no other individual country exceeds 10% of total net sales.
Sales from North America, including the United States and Canada, accounted for about 39% in 2014, 2013, and 2012. Western Europe accounted for 18% of total net sales in 2014 and 2013, 19% in 2012. Asia sales accounted for about 18% in the years 2014, 2013 and 2012, while CEEMEA, including Central and Eastern Europe, Middle East and Africa, accounted for 15% in 2014 & 2013, 14% in 2012. Latin America accounted for 10% of total net sales in 2014, 2013 and 2012.
In Focus
In an effort to create a faster growing, more profitable company that is far simpler to manage, P&G has decided to discontinue or divest businesses, brands, product lines, and unproductive products that are structurally unattractive. The 90 to 100 brands the company plans to exit have declining sales of -3%, declining profits of -16% and half the average company margin during the past three years.
P&G will be more focused 70 to 80 brands, organized into four industry-based sectors; streamlining business units and selling operations; recombining four brand building functions into one; and reducing hierarchy, with all of the business unit and selling operations leaders reporting to the CEO. It will compete in businesses that are structurally attractive and best leverage its core capabilities.
The company claims that these core 70 to 80 brands offer differentiated products and have a track record of growth and value creation, driven by product innovation and brand preference. They generate nearly 90% of current P&G sales and more than 95% of current profit.
So far, P&G has already exited from the bleach and pet care businesses. Among the divestments that have been announced so far, Duracell leads the pack as the biggest brand to be sold off. The company has also sold off a few smaller fragrances brands like Naomi Campbell, skin care brands like DDF and Noxzema and soap brands like Camay and Zest.
The company also announced that it will reduce non-manufacturing overhead by 10% by June 2016. It revised that target in November 2012 and increase the range of reductions to 16% - 22% again by June of 2016. Through January of this year, its enrollment is down nearly 18%, 80% more than the company initially envisioned when it launched restructuring program.
Share Of Value/Profit
Propelled by its innovation-focused business strategy and business models, the company has about a 60% share of U.S. laundry market sales, but earns about 85% of the profit and cash generated in the category. It also has nearly 70% share of blades and razors sales globally, and a 90% share of value or profit.
Tide, Gain and Ariel three-chamber unit dose laundry detergents have been an innovation breakthrough in the laundry detergent category, resetting the bar for fabulous consumer usage experience, product performance and convenience.
FY15 Outlook
Looking ahead to fiscal 2015, the company said it continues to expect organic sales growth in the low-to-mid single digit range, and currency-neutral core earnings per share growth in the double-digits.
Core earnings per share is also still projected in the range of in-line to down low-single digits, on projected net sales decline of 3 to 4 percent.
Street is currently looking for full-year 2015 earnings of $4.02 per share, on annual sales decline of 6.3% to $77.82 billion.
The company currently expects annualized help of about $500 million - $700 million before tax. Assuming that oil prices remain at current levels, the company expects to see this benefit flow through starting in the June quarter. All in results are currently expected to improve in the second-half of the fiscal year, top line growth is expected to accelerate slightly and core earnings per share will meaningfully improve versus the first-half of the fiscal year.
Annual Financial Highlights
The company met its business and financial objectives for fiscal 2014.
Organic sales improved 3%, in line with the market.
Generated $10.1 billion of free cash flow, with 86% free cash flow productivity
Hiked dividend 7% - the 58th consecutive year of increase
Returned $12.9 billion in cash to share owners
Net income attributable to Procter & Gamble totaled $11.6 million or $4.01 per share in 2014, compared to $11.3 million or $3.86 per share in 2013, $10.8 million or $3.66 per share in 2012, $11.8 million or $3.93 per share in 2011, and $12.7 million or $4.11 per share in 2010.
Net sales increased to $83.1 million in 2014 from $82.6 million in 2013, $82.0 million in 2012, $79.4 million in 2011, and $75.8 million in 2010.
Summary
The company has already divested or identified for divestment its 35 brands, and 65 brands linedup for divestment in the near future.
P&G believes that it will accelerate and over-deliver the original $10 billion productivity plan it announced in 2012, as a result of its strategic focus on leading brands. Hence, it sees significant savings potential ahead across all spending elements - cost of goods sold, marketing spending, and overhead - for the next several years.
The company has been delivering free cash flow of $10 billion - $11 billion a year for the past four to five years. It believes that it could deliver more as it improves CapEx effectiveness, working capital cash conversion, operating profit performance, and free cash flow productivity further over the next few years.
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