P&G Health Care Outshines Other Segments In Q2

The Procter & Gamble Company’s health care segment outshined its other businesses in the second quarter of 2017, with the unit achieving 5% growth (7% organically) to $2.07bn on innovation in oral care and personal health products, the firm reported in a Jan. 20 earnings call, during which it also announced that organic sales exceeded analyst expectations, with 2% growth.

Product innovation, particularly in the area of high-end toothbrushes, drove a high single-digit increase in organic sales in oral care, which includes the company’s Crest toothpaste, Oral-B toothbrushes and Scope mouthwash, the company reported in slides accompanying its same-day presentation by Chief Financial Officer Jon Moeller.

In personal care, which includes the Vick’s cough and cold brand, Prilosec OTC heartburn medicine and Pepto Bismol stomach upset remedy, organic sales advanced low single digits in the quarter ended Dec. 31, the Cincinnati-based firm noted.

“Developed market sales increased high single digits driven by strong volume growth in paste and power [toothbrushes] as well as favorable form mix,” P&G stated in slides. “Developing markets increased double digits driven by strong volume growth and mix help across power [toothbrushes], paste and manual brushes, especially in China and Latin America.”

During his presentation, Moeller touched upon P&G’s growing eCommerce strategy for core brands, including Crest, which it sells through P&G Shop and branded websites including Crest.com. The company recently stated that while it is expanding its eCommerce strategy, it plans to maintain its focus on brick-and-mortar retail sales and does not plan to make a “mass move” to direct or subscription sales. (Also see "P&G Keeps Direct-to-Consumer In Perspective, Retail Distribution Primary" - Pink Sheet, 26 Oct, 2016.)

Moeller noted that P&G’s eCommerce business is now valued at $3bn, with much of that growth taking place in China, where its eCommerce will account for 20% of total sales and will exceed $1bn this year.

Net earnings for the health care segment grew 7% to $422m.

In its earnings release, P&G reported organic growth for all five of its business sectors, including its largest division, beauty, which recorded organic sales of 3% (down 1% in net sales) to $2.94bn. The second quarter represents the first quarter the company has reported on beauty since divesting a large chunk of its beauty unit – including Cover Girl and Clairol – to Coty for $11.4bn last fall.

Analysts Weigh In On Progress

P&G’s 2% increase in total organic sales to $16.9bn for the period is “ahead of plan” for the first half of the year, even though it includes a one-point drag from the rationalization of the ongoing portfolio and reduced finished product sales to the company’s Venezuelan subsidiaries, Moeller noted.

The company has embarked on a portfolio-skimming effort targeting half of its brands. (Also see "P&G To Cut Portfolio In Half, Refocus On Core In Simplification Strategy" - Pink Sheet, 1 Aug, 2014.)

“We grew organic sales about 0.5% faster in each of the first two quarters than we were forecasting going in,” Moeller said. “We’re making sequential progress in most of our top categories and markets,” he added.

P&G reported core earnings per share for the quarter jumped 4% to $1.08, versus the prior year period. Most analysts polled by Thomson Reuters expected P&G to report $1.06 in core earnings.

The company also reported it is raising its organic sales guidance for fiscal 2017 from an initial projection of 2% to a range of 2% to 3%. However, P&G expects combined headwinds of foreign exchange and minor brand divestitures to reduce net sales growth by 2 to 3 percentage points. The firm maintained its expectation for core earnings per share growth of mid-single digits versus fiscal 2016 core EPS of $3.67.

As one of the world’s largest multinational consumer packaged goods companies and with its second quarter earnings call scheduled earlier than its peers, P&G’s results were anticipated by some analysts as an indication for the health of consumer spending at the beginning of 2017.

Most analysts who cover P&G’s stock responded enthusiastically to the second quarter organic sales result, which builds upon 3% organic sales last quarter, and were also pleased with projections for the year.

“We view P&G’s upwardly revised 2%-3% organic sales guidance for FY17 as achievable (vs. 1% in FY16) and see today’s results/outlook as further evidence of expected progress as the [company] returns to industry growth rates,” said Jeffries Equity Analyst Kevin Grundy in a Jan. 20 analyst flash note. “FY17 marks transitional/investment year with 2Q another good step toward restoring investor confidence.”

Deutsch Bank Securities, Inc. analyst Bill Schmitz also shared similar perspective in a Jan. 20 report.

“Overall, this was a high quality quarter with higher marketing spending,” he said, though tempering his enthusiasm a bit. “While fundamentals appear to be heading in the right direction, recovery is unlikely to be linear noting [the] company has ample flexibility to reinvest aggressively.”

From the editors of the Tan Sheet.