Cincinnati-based Procter & Gamble Company (P&G) has reported that it exceeded consensus  expectations for second quarter results. 

P&G delivered on the high end of its financial guidance for the October-December quarter, behind record quarter unit volume.

For the quarter ended 31 December, unit volume grew 5% versus the prior year led by double-digit growth in the health and beauty care businesses. Excluding acquisitions and divestitures, unit volume increased 4%. Net sales were US$10.4bn, up 2% versus year-ago.

P&G President and CEO A. G. Lafley commented: “We are seeing clear improvements in our results, and we’re pleased to have met our commitments once again. We’re continuing our unyielding focus on delivering better consumer value on our brands, building core  categories, reducing the company’s cost structure and improving our cash flow.”

Net earnings for the quarter were US$1.3bn or US$0.93 per share.

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Results included a US$146m after-tax restructuring charge related to the company’s streamlining of operations and business portfolio. This restructuring charge for the quarter included employee separation costs of US$85m before tax and asset related charges of US$72m before tax. Net earnings in the year-ago quarter were US$1.19bn, including a US$120m after-tax restructuring charge.

Core earnings were up 6% to US$1.03 per share or US$1.45bn for the quarter. This excludes  restructuring charges and the adjustment to the prior year to remove amortization no longer required for goodwill and certain intangibles.

Key Quarterly Financial Highlights

*Core net earnings improvement was driven by operating margin expansion of 0.9% points.

*Core gross margin progress (up 1.8% points) reflects lower manufacturing costs and increased restructuring savings.

*Marketing, research and administration (MR&A) reflects good progress on base savings programs – but increased due to costs associated with the integration of Clairol and increased investments in health care.

*Non-operating income was down behind lower minor brand divestiture gains.

*October-December operating cash flow was US$1.8bn, an increase of US$0.7bn versus prior year.

*Capital spending was down US$0.3bn reflecting a continued focus on driving capital efficiencies – the business is tracking ahead of schedule to deliver the capital spending objective of being at or below 6% of sales.

For the first six months, reported net earnings were US$2.40bn, or US$1.71 per  share.   Results included a US$384m after-tax charge related to the restructuring program. Excluding restructuring charges and the prior year amortization of goodwill and certain intangibles, core net earnings were US$2.79bn; core net earnings per share grew five percent to US$1.99.  Net sales were up 2%, excluding a 2% negative foreign exchange impact.

The following provides additional perspective on the company’s October-December results by business segment:

Food and Beverage

Net earnings in food and beverage increased despite a divestiture in the prior year and commodity-related pricing actions. Sales declined 11% to US$1.05bn on a 9% unit volume decline. Excluding the divestiture impacts, unit volume was down 5% reflecting an increased competitive merchandising environment. Pricing also contributed to decreased sales as we continued to reflect lower green coffee costs into Folgers pricing.  Net earnings were US$126m, up 2%, behind restructuring savings in juice and coffee and other cost savings efforts offset by lower volumes.

Beauty care

Beauty care continued to deliver strong results led by progress on hair care across all regions. Unit volume increased 15% driven by the Clairol acquisition. Excluding the impact of acquisitions and divestitures, volume was up 3%. Net sales were US$2.06bn, up 13%, excluding a 2% negative exchange impact, as strength in hair care – driven by Pantene, Head & Shoulders and Clairol – was partially offset by price adjustments in North America’s personal cleansing category. Excluding acquisitions and divestitures, net sales were up 2%. Net earnings were US$334m, up 17% versus last year despite increased costs associated with the integration of Clairol. This earnings increase was driven by a continued focus on cost control and higher launch costs in the base period.

Health care

Health care posted strong results, with double-digit volume and sales growth, led by oral care and pharmaceuticals. Unit volume increased 15% driven by strong sales of Actonel and Crest (particularly White Strips and Spinbrush). Sales grew 17% to US$1.34bn behind volume growth and positive mix effects. Crest joined the ranks of P&G’s billion dollar brands,  achieving US$1.0bn in sales in calendar year 2001. Net earnings were US$172m, up 5%, as investments behind oral care initiatives and pharmaceutical research and development partially offset gains due to volume.

Baby, feminine and family care

Baby, feminine and family care reflected solid results. Unit volume increased 3% behind strong family care volume, particularly on Bounty in North America and baby care’s Pamper’s Wipes. Net sales were US$3.03bn, down 1%, as commodity-driven price moves in family care and targeted pricing actions in baby care more than offset volume growth. Earnings were US$335m, up 14%, behind a strong focus on cost efficiencies including restructuring gains.

Fabric and home care

Fabric and home care results improved during the second quarter, with 4% volume growth behind strength in Europe fabric care and improved performance in North America home care.  Net sales were US$2.97bn, up 1%, as minor pricing and mix impacts in Western Europe and Asia partially offset increased volume. Net earnings were US$437m, up 12%, due to disciplined cost management led by North America and Western Europe and increased marketing support efficiencies.

Third Quarter Estimates

For the third quarter, the company expects volume to be up in the high single digits. Excluding Clairol, volume growth is expected to be up at about the  same level as the October – December quarter. Sales, excluding foreign exchange, are expected to be up in the mid-single digits versus year ago. At current rates, foreign exchange would negatively impact sales by 2-3%. The company projects core earnings per share growth in the high single digits reflecting strong volume and restructuring benefits.

Fiscal Year Guidance

P&G confirmed that it is comfortable with the guidance provided earlier for fiscal 2002. Core earnings per share growth will be above that achieved last year, but not yet at going levels of double digits. Sales, excluding foreign exchange, are expected to be at or ahead of last year’s growth and approaching the target range of 4-6%. Volume is projected to be in the mid-single digits.