...there is no new economy. there just is one economy...
Some tidbit you picked up from some 'old economy' guy, no doubt. <g>
-JCJ
Bonus:
Out of morbid curiosity, I hunted down this morning's concall transcription between P&G and analysts. My thinking here is that something can be gleaned from a post mortem to do with the language used. Surely, there's a lesson in here about what NOT to say in a concall with analysts. I haven't combed over it yet, but...
We have some new information that we need to share with you right away.
...this is certainly a candidate apparently.
Analysts' Conference Call Script - March 7, 2000
P&G to Deliver 7-8% Second Half Top Line Growth, Revises Earnings Outlook
Clayt Daley, Chief Financial Officer
Good morning. We've arranged today's conference call to provide you with a
mid-quarter update on our expectations for the March quarter and the fiscal year.
Joining me today is our CEO Durk Jager, our Treasurer Gretchen Price, and our
Director of Investor Relations Tom Hills.
We normally provide you an update on the quarter informally during the second
week of March. However, we've just completed our most recent forecast cycle. We
have some new information that we need to share with you right away.
I'll begin the call by providing an overview of our change in guidance along with
the details behind the changes. Then I'll hand the call over to Durk, who will tell
you what actions were taking to address the issues behind our revised guidance. Of
course we'll leave time at the end of the call for questions. Tom, Gretchen, and I
will be available immediately after the call to answer any additional follow-ups you
may have.
First, earnings. Core March earnings per share on a diluted basis are now expected
to be between $0.64 and $0.65, 10 to 11 percent below year ago, excluding
restructuring costs. This is a reduction of about $0.13 to $0.14 per share from our
previous guidance. June quarterly earnings per share will also be between $0.64 and
$0.65, up 16 to 18 percent versus year ago. This is $0.03 to $0.04 below our
previous guidance. The resulting core net earnings per share growth for the fiscal
year should be up about 7 percent versus the 13% we originally had expected.
I want to assure you that our top line growth expectations remain very strong for
both the March and June quarters. Sales growth is expected to be 7 to 8 percent in
each quarter. This is a little lower than our previous top line guidance, driven
mostly by further weakness in foreign currencies, primarily the Euro.
This brings our expected top line growth on the year to 6 to 7 percent. The last
time P&G grew sales at this rate was five years ago. The changes were making as
part of Organization 2005 clearly are working to drive top line growth. And they're
working faster than we had anticipated.
Clearly, sales growth has been our focus, as it should have been given our past 3
year top line growth rate of about 3 percent. Stepping back, had I predicted a year
ago that we would achieve 7 to 8 percent growth for this quarter and next, not one
of you would have believed me. So we're very encouraged by what we've
accomplished so far. By the way P&G people have challenged themselves to go
faster, particularly on new brand expansions. To generate creative ideas that are
driving incremental, sustainable top line growth.
Now this turnaround has taken investment, both to introduce new brands and to
grow existing ones. Investment in higher levels of research and development to
generate new ideas and to commercialize them faster. Higher marketing support to
build awareness. Higher in-store support to build trial and repeat purchase. We've
already discussed with you how this investment is changing our pattern of
quarterly earnings. It's putting pressure on first and third quarter EPS growth as
these quarters see more new product launches because customers increasingly
reset their shelving twice per year. We knew the third quarter, in particular would
be very challenging given the significant amount of activity in the plan.
Now let me discuss the reductions in EPS growth for the second half of the year.
As you know, we have historically built our forecast assuming that everything
doesn't go right. We weathered the currency crisis in Asia in 97/98, and Russia and
Brazil in 98/99. We knew 99/00 would be a tough year, trying to get the business
growing, while implementing a major re-organization with little benefit from our
restructuring program.
Normally, one or two businesses substantially outperform the going-in plan and we
get cost savings from our ongoing programs that offset unexpected problems. This
year, while a few businesses are exceeding expectations like Japan, our cost savings
progress has slowed. This is likely due to our focus on driving the top line and on
completing the transition to the new organization structure. We simply haven't
had enough good news to offset problems in China and competitive activity in
numerous categories and geographies.
The place where we have had upside is in the success of our new initiative program.
We chose early in the year to reinvest the higher profit to accelerate more new
initiatives. In hindsight, we probably should have held some of this back.
Now let me address the issues we're facing in more detail, specifically the
Jan-March quarter. Each of these has come to light since our December
quarter-end conference call at the end of January. None of them, individually, are
significant - but taken collectively they are.
First, higher raw material costs, primarily pulp. In January, we announced a
pulp-based price increase on paper towels and toilet tissue effective with April
shipments. At that time, we felt confident that the timing of the price increase
matched our market exposure to pulp price increases. Unfortunately, since
January, pulp prices have risen faster than we expected. This has been compounded
by much higher costs of petroleum, which are influencing both petroleum-based
feed stocks like surfactants but importantly, distribution costs that effect our entire
business.
Second, we are incurring higher manufacturing and logistics costs in Western
Europe due to an inventory build in the December quarter.
As you know, Western Europe has undergone the biggest transformation as a
result of our new structure. We have redesigned operations in most countries.
Strategic regional arms of the Global Business Units have been moving to Geneva.
On-the-ground marketing and sales capability has been streamlined into a
pan-European approach supporting all of the GBU's. Administrative and support
activities are being moved to European Global Service Centers in England and
Brussels.
We made all of these changes right on top of launching an extraordinary number
of new initiatives across the continent in a short period -- Ariel tablets, Ariel
anti-bacterial Hygiene, Swiffer, Bold, and Dryel. Planning and communication
issues resulted, creating higher inventories.
Our European organization is correcting these supply planning issues. But we've
had to adjust production to reduce inventory. This has led to higher manufacturing
costs. We were aware in January that some higher costs could result from the
work-off of inventory. However, our recent forecast has now indicated the full
magnitude of these costs. We've begun driving down working capital in Western
Europe and expect our manufacturing plants to return to their usual high levels of
operating efficiency over the next several months.
Third, we've seen a shift in milestone payments and some minor asset sales from
the March quarter and into the June quarter. The majority of this is associated
with a delay in the approval in the US of our osteoporosis drug Actonel.
As you know, Actonel just received approval from the European Union covering
twelve new countries in Europe with very favorable labeling terms including the
prevention and treatment of post-menopausal osteoporosis. Importantly, the
labeling included more flexible dosing than existing drug therapies. We are
currently working with the FDA in the US to obtain similar labeling.
We had hoped to get full US approval this quarter. It now appears that our labeling
discussions with the FDA will take a little longer than expected. This moves a
contractual milestone payment from our partner Aventis out of the March quarter
and into the June quarter. While this doesn't have any profit impact on this year, it
does accentuate the change in January-March.
Next, competitive response. As you know, we introduced our premium detergent
Ariel into Argentina, Brazil, and Chile last March at a price slightly above
Unilever's leading brand. We have also launched companion brands in several of
these countries. Unilever responded aggressively to defend share, as we expected.
Despite Unilever's defense, our share has grown to 17 percent in Brazil, 24 percent
in Argentina, and 11 percent in Chile.
Unilever recently lowered prices yet again - 20 percent down in Argentina.
They've taken 30 to 50 percent off bundle packs that represent a third of their
volume in Chile. And in Brazil, Unilever continues to resist price increases despite
the 57% devaluation of the Real a year ago. We have matched these moves and
remain committed to our launch in the region. While we had anticipated much of
this, our latest pricing moves has impacted the March quarter. Importantly, our
share progress remains ahead of plan and we continue to believe we can achieve a
satisfactory return on our investment in the South Cone.
And last, softer volumes in Food and Beverage. We've recently seen a ramp-up of
competitive activity in the Snacks category in North America. In addition,
unfounded negative publicity surrounding Sunny Delight in the UK has hurt sales
in the quarter.
Net, these changes require us to lower our EPS in the March quarter by $0.13 to
$0.14. We expect some of this to continue into the June quarter - approximately
$0.03 to $0.04. Pricing in Tissue/Towel goes into effect with April shipments. The
shift of the contribution from the Actonel milestone payment and minor asset
sales into the June quarter should mitigate most of the pricing risk in the South
Cone.
Still, higher petroleum costs and some risk associated with competitive response
require us to prudently reduce the June quarter.
Now, we remain comfortable with next year's guidance of 6-8% top line growth.
And we continue to believe we can achieve earnings-per-share growth next year
at the upper end of our 13 to 15% target range, albeit on the revised Fiscal 2000
base. This will come by better balancing top-line growth and bottom-line earnings
performance.
That wraps up the revised guidance. Now I'll turn the call over to Durk.
Durk Jager, Chairman, Chief Executive and President
We're not happy that weve had to take our numbers down. We've had a track
record of meeting our bottom-line commitments. Disappointing you in the first
year of our program is very unfortunate. I'm confident with this new guidance that
we'll not disappoint you again.
Organization 2005 is vital to the long term success of P&G. This is a setback, but
in no way changes my strategic game plan going forward. We've learned a lot in
this first year of Organization 2005. First, we've learned that we can drive top line
growth faster by innovating bigger and taking on a bit more risk. Febreze, Swiffer,
Dryel are creating important new categories - that should build over time. Sales on
Febreze and Swiffer each should exceed $400 MM globally this year. And Dryel's
sales should be well above $100 MM.
Next, we know we have a wealth of ideas to commercialize. Our internal venture
capital fund is nurturing some 50 new brand ideas. And there are many more that
we simply can't consider at this time. And the products from the venture fund are
coming to market with greater speed. Products like Mr. Clean Wipe-Ups, with
demand 2-3 times our original expectation. SKII facial cleansing cloths, off to a
very fast start in Japan. Impress food wrap, Fit fruit and vegetable wash, and many
more. We're committed to making these and others very big and very profitable.
And we've learned that we can't simply focus on the top-line to make the
bottom-line grow. It takes more - resource allocation and prioritization, a focus on
continual cost reduction, elimination of all unnecessary overheads.
Let me assure you that we're taking significant steps as a result of this shortfall.
We are resharpening our focus on cost savings and overhead reductions to drive
the top line more profitably. We're going to find ways to launch initiatives so that
we better balance long-term growth and near-term earnings. And we've put more
of our top managers' pay at risk. These moves should increase our headroom going
forward, so we can accommodate unanticipated problems more easily.
I want to emphasize that this year our top line growth rate will be more than
double last year's. This is what differentiates us from other peers who have seen
profit shortfalls caused by poor top line growth. And although we wanted more
profit growth, our volume growth represents strong progress during a year marked
by the most significant organizational change we've ever undertaken.
Because of the strength of our people and the progress we've made so far, I
continue to remain confident that the improvements we're making through
Organization 2005 will create sustained 6-8% top line growth rates and
earnings-per-share increases at the top end of our 13 to 15% target.
In my view, the O-2005 restructuring is absolutely needed. It delivers more robust
strategies. More innovation. More speed. Without it, we could never break away
from commodity-like rates of growth that would support at best single digit
earnings growth over the long term.
This has been a transition year. We're now getting back to Procter & Gamble
basics - hard-nosed cost management and commitment to deliver expectations -
along with accelerating sales growth.
Now I'll turn back the call to Clayt, who will wrap things up.
Clayt Daley
Thanks, Durk.
I want to emphasize a couple of points in closing.
First, we're obviously very unhappy in taking our guidance down. But we intend to
only take it down once. As you know, many companies follow-up a reduction in
guidance with several more. This won't happen here. We're going to put the March
problems behind us, improve our cost effectiveness going forward, and continue to
deliver against the strategic objectives we've set as part of our new structure.
Second, we know we must work hard to regain your confidence. And the best way
to do so is to deliver excellent top line and bottom line growth going forward.
We've been focusing on breakthrough top-line growth. Now we need to
accompany that with breakthrough bottom-line growth. That is our mission for
the next quarter and for the fiscal years that follow.
Finally, we remain very confident in the future prospects of the Company.
Consequently, we will continue to use our free cash flow to repurchase shares as
part of our ongoing discretionary stock repurchase program.
That concludes our business comments today. As you know, this discussion has
included a number of forward-looking statements. If you will refer to our most
recent 10-K report, you will see a discussion of factors that could cause the
Company's actual results to differ materially from these projections.
Now, we would now like to open the call up for your questions.
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