Procter_and_Gamble_Report

Conference Call June 10, 2009 Background The conference call begins with an introduction of all the people who are on the call. The two main people on the call are A.G. Lafley, R.A. Bob McDonald and J.R. Jon Moeller. They also talk about what they have planned for the meeting and everything that will be going over. They are congratulating Bob McDonald on getting his job as Chief Executive Officer. They are talking about the reasons that he is qualified for the job and some of the reasons why they hired him such as being balanced in experience and temperament. Bob has 30 years of experience within the company and around the world. Bob has had about every job that is possible to have in the company. The reiterate many times how confident they are in Bob McDonald. What Bob McDonald is going to do' Bob starts by thanking the company for giving him this tremendous opportunity. He goes on to talk about how he is going to take care of the company. The things he is focused on mostly for Procter and Gamble are the gross strategies and core strengths to bring them through the economic recession. He talks about the significant chances they have to keep growing in the following markets and the percentage of the market they are at right now global house hold care 20%, consumer healthcare 5%, beauty and grooming with a 15% share this shows the tremendous opportunities that they have to continue to grow. They will continue to grow in emerging markets they are only serving 3.5 billon people while the world has 6.8 billon people. He wants to increase the income that comes from Russia and China to the same level that they have in Mexico. He thinks a major thing is to increase productivity and simplify the way the company works to save money and be more efficient. He states that Procter and Gamble is “one team with one goal.” He wants to grow by touching people’s lives by providing easier ways for people to do things, this has always been P&G’s way of thinking and will continue to be. Questions The call then goes back to A.G. Lafley for addressing questions that they have been most asked. The first question is why would they change CEO in such a bad time in the economy' They state that it is the perfect time to change and help to grow and since the CEO is not the only one who makes decisions that changing CEO’s right now seems to be a good move. The next question is how long will the chairman be around and what are his duties going to be' The chairman states he will be around as long as Bob will allow him to be and he will help in almost every facet of the company. The next question is where there be a change in strategy at P&G' There will be some change in some parts of the business but many things will stay the same. But some of the changes would be to become a faster company and becoming more simplified in aspects to make everything better for everyone. The last question is are we changing our growth goals' They state that they are not planning any changes right away and they are going to keep doing what they have been doing to continue to grow. The conference call ends and they tell people if they have further questions that they can be reached during the day. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Gross profit margin measures the percentage of each sales dollar remaining after the firm has paid for its goods. The gross profit margin is calculated by dividing the gross margin, which is found by total sales minus the cost of goods sold, by the net sales. This data is very important to the company because it helps pay for additional expenses and other projects. Over the past four years the gross profit margin has decreased from 51.45% to 50.20%. The highest point was in 2007 probably due to the purchase of Gillette. However, due to the recent suffering economy it is not surprising that the gross profit margin has declined 1.25%. In this economic struggle almost every business has had trouble and has lost sales. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Operating profit margin measures the percentage of each sales dollar remaining after all costs and expenses other than interest, taxes, and preferred stock dividends are deducted. This represents the pure profit earned on each sales dollar. The higher the operating profit margin P&G has the better off they are. The way you calculate the operating profit margin is by taking the operating profits and dividing them by total sales. The operating profit margin has been right around 20.3 percent for the past 3 years but climbed from 2006 to 2007 by 0.8% a rather big jump for one year. In 2009, the operating margin decreased 0.06% which means they did not make as much “pure profit” but still an increase from 2006. Proctor and Gamble has benefitted from strong cost-reduction efforts by the company and has been able to keep profit margins high in the times of this economic crisis. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Net profit margin measures the percentage of each sales dollar remaining after all costs and expenses, including interest, taxes, and preferred stock dividends, have been deducted. This is calculated by taking the earnings available for common stockholders and dividing it by the sales. Since 2006, P&G’s net profit margin has slowly increased. In 2006 the net profit margin was 12.51% and in 2009 it was 16.00%, a total increase of 3.49%. Despite the economic downturn, the company was able to increase net profits thanks to the ability of the management team to reduce costs. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Return on assets measures the overall effectiveness of management in generating profits with its available assets. This is also sometimes known as return on investment. This is calculated by taking the earnings available for common stockholders, or EAC, and dividing it by the firm’s total assets. In 2006, the ROA was 6.29% and in 2009 the ROA was 9.82%, an increase of 3.53% over the last 4 years. In these tough economic conditions the current management has used their resources to the best of their abilities. Despite the hard economic conditions, P&G has managed to increase their ROA and continues to prove how good a company they are. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Total assets turnover indicates the efficiency with which the firm uses its assets to generate sales. Total assets turnover is calculated by taking its sales and dividing by the total assets. From 2006 to 2009, there has been an extraordinary increase of 8.33%. This shows that once again management has been using the assets of the company to the best of their ability. The trend for the total assets turnover is very similar to the return on assets with a steady increase each year. Although the increase from 2008 to 2009 is less than the increase from 2007 to 2008, the company is still heading in the positive direction in times of economic depression. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Return on common equity measures the return earned on the common stockholders’ investment in the firm. This is calculated by taking the earnings available for common stockholders and dividing it by the common stock equity. The higher the return on equity the more profits P&G will gain from their investments. Like the past three graphs, the return on common equity has steadily risen over the past four years. From 2006 to 2009, the return on common equity has risen 7.87%. This is very impressive and shows the efficiency of Procter and Gamble to generate profits from every dollar it invests into its assets. This is a very important ratio that needs to be monitored by Procter and Gamble. Total assets have decreased tremendously over one year which has increased the return on common equity. P&G Profit Analysis 2006-2009 (*See appendix B: Profitability Ratio Calculations) Earning per share, or EPS, represents the number of dollars earned during the period on behalf of each outstanding share of common stock. It is calculated by taking the earnings available for common stockholders and dividing it by the number of shares of common stock outstanding. Again, Procter and Gamble has been able to steadily increase their earnings per share each year for the past four years. From 2006 to 2009, Procter and Gamble has increased the earnings per share by $1.81. These numbers are very pleasing to Procter and Gamble stock owners because they have seen such good results in such a short amount of time. With a reduction in the supply of stock, more earnings are available for the current common stockholders of Procter and Gamble. The management team has once again been able to keep a constant growth in times where growth is almost impossible. Trend Analysis Procter & Gamble Company | | | | | | Trend Analysis | | | | | | | | | | | | | | Years ended June 30 | 2006* | 2006 | 2007 | 2008 | 2009 | Growth % | Net Sales | 66,724 | 100.00 | 112.15 | 122.52 | 118.44 | 5.80% | Gross Margin | 34,549 | 100.00 | 113.38 | 122.18 | 116.16 | 5.11% | Operating Income | 12,916 | 100.00 | 116.16 | 128.81 | 124.83 | 7.67% | Net Earnings | 8,684 | 100.00 | 119.07 | 139.05 | 154.72 | 15.66% | Basic net earnings per common share | 2.79 | 100.00 | 115.41 | 138.35 | 160.93 | 17.19% | Dividends per common share | 1.15 | 100.00 | 111.30 | 126.09 | 142.61 | 12.56% | Research and Development expense | 2,060 | 100.00 | 101.94 | 107.38 | 99.22 | -0.26% | Advertising Expense | 7,045 | 100.00 | 111.43 | 121.83 | 107.57 | 2.47% | Total Assets | 135,695 | 100.00 | 101.70 | 105.90 | 99.37 | -0.21% | Capital Expenditures | 2,667 | 100.00 | 110.42 | 114.21 | 121.41 | 6.68% | Long-Term Debt | 35,976 | 100.00 | 64.97 | 65.55 | 57.40 | 16.89% | Shareholders' Equity | 62,908 | 100.00 | 106.12 | 110.47 | 100.30 | 0.10% | | | | | | | | | | | | | | | Amounts in millions except per share amounts | | | | | | The trend analysis is an analysis of the growth of many different important ratios and items that deal with the companies well being and its future. The trend analysis for Procter and Gamble has all the numbers from the year ended of June 30, 2009. Net sales over the past four years has had a steady growth which shows that Procter and Gamble is moving in the right direction; overall their growth has been 5.8% which is a very substantial number considering the economy is in a downswing. Most of the ratios have shown change in the right direction for what Procter and Gamble is trying to achieve. The ratios that have decreased are Research and Development expense, Total assets, and Long-term Debt. Of these the one that might be the scariest for Procter and Gamble is that they have had a serious decrease in growth in total assets which has gone down 2.5%. This means that they have lost some assets over the past four years. But if you look at the others a decrease in debt and expenses is good because they are paying back debt when the have excess money and with research and development shrinking is that they have found cheaper and more effective ways to come up with new and improved products. Common-size Income Statement (see appendix 2) During the first 3 years of analysis you can see that Procter and Gamble had a steady increase in net sales but did suffer some what of a set back in the last year (2009) to lower their amount. They have done a good job at lowering their expenses. Their general expense has had a steady decrease over the past four years though it maybe a small decrease any decrease is a good one. This has a direct relation to Procter and Gamble having more operating income. If you decrease expenses you will have more income to operate with because you do not have to pay back or pay to other entities. More important is that there has been a large increase over the past four years in Net Earnings; this has gone up almost 5 percent in the past four years. This is a very good thing for Procter and Gamble because it shows that they are doing well. The last thing that sticks out to me is that there has been a significant increase in earnings per common share; it increased from $2.79 to $4.49. This means that the company’s shareholders’ are making more money on each one of their shares that they own. Common-size Balance Sheet (see appendix 3 and 4) There are many different and important things on the balance sheet for Procter and Gamble but a few things stick out the most. On the assets side of the balance sheet one of the biggest thing is that there has been a slight decrease in total assets over the past four years. This is bad for Procter and Gamble because they don’t have as many liquid assets that they used to so sometime it could be harder to have cash to pay for things. Of the non-current assets there has been very little change to plant, property, and equipment. They have fluctuated slightly in net which is due to the purchasing and depreciation of many machines used to produce goods. Another thing that jumps out to me is the amount of goodwill that Procter and Gamble say that they have. It’s in the 40% range which to me just seems as a high amount of goodwill. On the other side of the balance sheet (liabilities) there are some things that stick out also. The thing that sticks out the most is the increase in total current liabilities; this is bad because they have to pay out more and owe more to other entities. Which is bad because they have had lowering assets so they need to be weary because they could be heading in a bad direction. Memorandum Procter and Gamble TO: Jon R. Moeller, Chief Financial Officer FROM: Patrick Beausejour, Financial Analyst DATE: March 22, 2010 SUBJECT: Cash Flows I am writing to let you know about the recent changes in cash flow that Procter and Gamble has had over the past year. I have looked at the most important activities including Operating Activities, Investing Activities, and Financing Activities. For operating activities in 2009, net earnings increased from $12,075 to $13,436. This is misleading because the operating cash flow has actually decreased by 1% to 14.9 billion this happened because of the adjusting to non-cash items. Accounts receivable decreased from 432 million to 415 million which is an inflow because of the decrease in assets. Accounts payable was -$740 which means an outflow of cash. The next activity to inquire about is the investing activities. Capital expenditures increased from $3.0 billion in 2008 to 3.2 billion dollars in 2009. This was due to investments in cost savings, support capacity, and innovation. Proceeds from asset sales were $1.09 billion dollars which is an inflow because of the decrease in assets. Acquisitions were -$368 for 2009. With fewer acquisitions it is an inflow of cash. The last thing to inquire about is financing activities. Dividends to shareholders were -$5,044 which is an outflow. Procter and Gamble had a small increase in long-term debt in 2009 to $37 billion dollars which was an increase from $36.7 billion in 2008, which translates to an inflow. Treasury purchases were -$6,370 which translates to an outflow. The cash flow activities seem very stable and positive. Despite the economic recession Procter and Gamble’s management team has been able to keep the company afloat. I hope this helps you in understanding the cash flows of Procter and Gamble for 2009. Sincerely, Patrick Beausejour Cash Flow Analysis Operating cash flow per common share is generated from the normal operations of Procter and Gamble. This is found by taking operating cash flow divided by the number of shares outstanding. As you can see there was a fairly significant growth over the first 3 years but had a slight decrease from $5.21 to $5.05 in the last year. This could be an alarming trend if it keeps happening but it has to deal with how Procter and Gamble didn’t have as much operating cash flow available as they did in past years. Free cash flow is operating cash flow minus the capital spending of Procter and Gamble. This is found by taking operating cash flows minus capital expenditures. To Procter and Gamble free cash flow is a major deal to them. They base a lot on this ratio, this is a significant factor in deciding how much cash they have to pay for dividend and other investments that they want to do. Procter and Gamble wants to have at least 90% of net earnings in free cash flow. Inventory turnover is how long inventory sits in the warehouse before it is sold. This is found by taking cost of products sold divided by the inventory available. Looking at the graph you can see that there have been some fluctuations over the past four years. There was a set back in year 3 (2008) but that soon rebounded back to a four year high in 2009. The lower the ratio the less time inventory sits which is a good thing. Inventory age is the amount of time a certain item sits in the warehouse and how old that piece is. This is calculated by taking 365 days divided by the inventory turnover. As you can see there has been a somewhat steady trend with inventory age. But 64.55 days is the lowest it has been in the past four years. Accounts receivable turnover is calculated by taking net credit sales and then dividing that by the total accounts receivable. As you can see that there was a slight drop in this year 2 but quickly bounced back up to 13.54 in 2009. Accounts receivable age is the amount of time that Procter and Gamble has to wait to get the net credit sale to clear. This is calculated by taking 365 days and dividing it by the accounts receivable age. Procter and Gamble had in the years 2006 to 2008 had just over a month for the accounts to clear but in 2009 they decreased this to just below 27 days. This means that Procter and Gamble gets cash faster for the accounts that they need to receive. Accounts payable turnover is the turnover time for Procter and Gamble to pay back their accounts. This is calculated by taking net credit purchases divided by accounts payable. Procter and Gamble has a very small range over the past four years of the turnover of the their accounts payable but in 2009 it went back up to 6.504 from a 4 year low in 2008 at 5.835. Accounts payable age is the time it takes Procter and Gamble to pay back the accounts payable. This is found by taking 365 days and dividing that by accounts payable turnover. As you can see over the past four years Procter and Gamble has had a steady rate of paying back their accounts. But had a ten day drop between 2008 and 2009 which makes them better because they have fewer liabilities to pay back. Cash turnover is the time it takes for cash to change hands and be used in Procter and Gamble. This is found by taking inventory age plus accounts receivable age minus accounts payable age. This is important because this shows how long it takes before the money is put into the bank to be used by Procter and Gamble. As you can see Procter and Gamble has gotten more efficient at this over the past four years. The have decreased this from 48.85 days in 2006 to 35.39 days in 2009. This is a very good thing for the company because it gets Procter and Gamble more money faster. Cash conversion cycle is the amount of time a firm’s resources are tied up in paperwork and other systems. This is found by taking 365 days divided by the cash turnover. Over the past four years there has been a steady increase in this ratio. This is bad for Procter and Gamble because it means that there is more time until they get their resources. If this trend continues the firm could get hurt by not having enough resources at the time to complete all the jobs that they have planned to do at that time. Dividend Analysis Dividend payout ratio is the amount of each dollar that is given to the owners in the form of cash after all other operations have been completed. This is calculated by taking cash dividends per share and dividing them by its earnings per share. There has been a constant decrease in dividend payout over the last four years and this is an alarming trend because that means the owners have been making less money every year. This could be a direct relation to earnings after taxes have increased at a faster rate than that of the common stock dividends. The decrease is not a large one just about 4 % over four years but Procter and Gamble just needs to monitor this carefully. Dividend per share is the dollar amount that is given out to each outstanding share of common stock. This is calculated by taking common stock dividends divided by the number of common shares outstanding. As you can see over the last four years there has been an increase from $1.12 to $1.64. This is a good thing for Procter and Gamble because it means that their stock holders’ are making more money on the stock that they own. With this continuing to rise it would seem that more and more investors would invest in Procter and Gamble because they are a save investment with a good return almost guaranteed. Investment Outlook The investment outlook for Procter and Gamble seems to be a good one. With a company that is this old and this established will always have investors and are able to withstand a down economy that we are in right now. As you can see through all the ratios I have given that some numbers have slid a little bit but other numbers have jumped up and made the company strong again. Another thing to take into account in investing with Procter and Gamble is the new management. With a new Chief Executive Officer in place it shows that Procter and Gamble is trying to make moves in the company to keep the company strong and going in the direction that they want to go. This also shows that Procter and Gamble is always looking to keep a leg up on the competition with trying to get fresh new ideas in to the upper management division. Table of Contents Management Biography…………………………………………………………..1-4 Chief Executive Officer……………………………………….……...1 Chief Operating Officer………………………………………….…...2 Chief Financial Officer…………………………………………….…3 Assessment ……………………………………………………………4 Conference Call……………………………………………………………………..5 Profit Analysis……………………………………………………………………..6-8 Trend Analysis………………………………………………………………………9 Common-size Analysis……………………………………………………………..10 Cash Flow Analysis……………………………………………………………….11-15 Statement of Cash Flows Memo……………………………………..11 Cash Flow Ratios…………………………………………………..12-15 Dividend Analysis………………………………………………………………......16 Investment Outlook…………………………………………………………………17 Appendix…………………………………………………………………………..18-23