Procter & Gamble Reports In Line; Net Sales Down For 1Q

The Procter & Gamble Company (PG) reported results for the first quarter of fiscal 2010 with earnings of 97 cents per share, in line with the Zacks Consensus Estimate but down 5.8% year-over-year.

Net sales for the quarter declined 5.6% year-over-year to $19.8 billion, as a 3% benefit from pricing and 1% benefit from product mix was fully offset by a 3% decline in unit volume - a 7% unfavorable impact of foreign currency and a 1% impact of divestitures. However, successful product launches, supported by marketing initiatives, contributed to the top line. Organic sales grew 2% during the quarter driven by pricing and product mix.

All three Global Business Units (GBU) witnessed revenue declines during the quarter. The Beauty segment declined 5%, with the low single-digit growth in retail hair care volumes offset by the double-digit decline in Professional salon volume and mid-single-digit decline in female beauty volume. In addition, high single-digit declines in blades & razors impacted the Grooming division. Strong growth of Gillette and Fusion brands were offset by declines in Braun.

The Household Care segment sales contracted 5%. It was impacted by a low single-digit decline in Fabric Care and Home Care segments. The decline in Fabric Care was due to global market share contractions and trade inventory reductions in North America.

In the Baby Care division, volume increased low single-digits, which was partially offset by mid single-digit declines in the Family Care division, primarily attributable to trade inventory reductions and market share losses due to a shift in timing of merchandising activity.

The Health and Well Being segment declined 4%. The segment was impacted by low single-digit volume decline in the Feminine Care business. However, Oral Care volume was in line with the prior-year quarter.

The Snacks division witnessed decline in double-digits due to lower merchandising activity in North America. The Pet Care segment declined low-single-digits as a result of contraction in the premium nutrition category. This was partially offset by the continued success of new product initiatives.

Gross margin for the quarter expanded 287 basis points (bps) to 52.6% versus 49.7% in the comparable prior-year quarter. The increase was primarily driven by benefits of price increases, lower commodity costs and manufacturing cost savings. The operating margin for the quarter also expanded 156 bps to 22.5% from 20.9% in the prior-year quarter.

Operating cash flow for the quarter increased 32% to $4.6 billion, due to reductions in working capital. The company has a debt to capitalization ratio of 25%. Capital expenditures for the quarter were $555 million (2.8% of net sales).

The company is on track to complete the sale of its global pharmaceuticals business to Warner Chilcott, as stated by management earlier. The estimated financial impacts of the transaction are unchanged versus prior guidance.

Based on the performance in the first quarter, management raised its guidance for full fiscal 2010. Organic sales are now expected to grow 2% to 4% compared to 15 to 3% stated earlier. Net sales are expected to grow in the range of 3% to 6%.

Foreign exchange is expected to positively contribute 1% to 2% to net sales growth. Previous guidance was an adverse impact of 0% to 1%. Annual earnings are now expected to be in the range of $4.02 to $4.12. Core earnings are now expected to be in the range of $3.47 to $3.59. Management increased the low end of the guidance range by $0.03 per share.

For the second quarter, management expects organic sales growth of 2% to 5%. Foreign exchange is expected to add 1% to 2% to sales in the quarter. Net sales are expected to increase 3% to 7% versus the prior year. Core earnings are expected in the range of $0.91 to $1.00 per share.

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