CONSUMER PRODUCT INDUSTRY
Carmen • Daniel • George • Tobey • Ying
March 20, 2004
Agenda
Overview of Industry
Company 1: Coca Cola
Company 2 : Procter and Gamble
Financial Highlights
Risk Management
Consumer Product Industry
Definition:
Consumer Products are everything tangible that the
consumer might consider buying
Two Categories:
Cyclical Goods: include vehicles, home furnishings,
toys, jewelry, sporting goods and electronics
Non-Cyclical Goods: include clothing, office supplies,
personal care items and cleaning products.
Structure of Consumer Product Industry
Highly competitive and mature industry
Generates enormous portion of the gross domestic product
Pumps money into other industries
Sales are concentrated in the US, Japan & Western Europe
The populations of United States, Canada, Europe, and Japan
make up less than 20% of the world's population, yet they
consume the vast majority of consumer goods.
Individual consumers make up the majority of this industry’s
customers
Marketing an individual product and promoting a brand
name are key factors to succeed in this industry
Structure of the Consumer Product Industry
This is a great sector for times when the economy is
slow because the companies depend less on the
economy than the companies from other sectors.
Compare the 12 month percentage changes in
indexes (2002) for consumer products with indexes
of other sectors :
INDEX
12 mo. % change
Non-Cyclical Consumer
Consumer Cyclicals
-3.22
-17.61
Energy
Financial
Health Care
Technology
-13.51
-22.01
-19.41
-37.73
Consumer Product Indices vs. S&P 500 during the last 12 months
Hot Industry: Home Appliance
Companies
Current
Stock Price
Revenue
($ in million)
Historical
Growth
Profitability
(EBIT to Revenue)
(01/31/2004)
Electrolux Ab
Whirlpool Corp.
Maytag Corp.
Salton Inc.
Applica Inc.
National Presto
Inds Inc.
$23.14
$75.95
$28.64
$13.75
$8.09
$17,048.2
$11,763.0
$4,791.9
$933.4
$653.0
-2.0%
6.5%
2.7%
-3.0%
0.0%
6.2%
7.3%
6.4%
4.8%
1.3%
$37.2
$132.7
11.7%
14.6%
Hot Industry: Home Appliances
Cold Industry: Housewares and Accessories
Companies
Current
Revenue
Stock Price ($ in millions)
Historical
Growth
Profitability
( EBIT to Revenue)
(01/31/2004)
Newell Rubbermaid Inc.
Blyth Inc.
Tupperware Corp.
Waterford Wedgwood Plc
Libbey Inc.
Oneida Ltd.
Home Products Intl Inc
$24.43
$33.27
$17.65
$0.31
$18.26
$5.35
.$1.48
$7,670.8
$1,329.9
$1,151.9
$966.8
$491.2
$454.1
$235.4
7.9%
9.3%
-1.0%
-4.6%
2.9%
-3.9%
-0.2%
10.3%
11.2%
7.9%
2.3%
9.0%
-2.7%
2.5%
Cold Industry: Housewares and Accessories
Consumer Products in Canada
Canada's consumer products industry consists of furniture,
clothing, textiles, toys, sporting goods, household goods,
electronics, and appliances.
In 2000, furniture sales led the way with 10.7% growth, while
clothing and general merchandise sales grew by 5.5% and
4.4%, respectively.
Over the five year period, from 1996 to 2000, the best
performing export areas in the industry were furniture, with
shipments increasing from $CDN 3.7 billion to $CDN 6.9
billion, and clothing, with shipments increasing from $CDN
1.6 billion to $CDN 3.0 billion.
Challenges & Opportunities of Consumer Product Industry
Industry consolidation takes place
Globalization is the primary avenue of growth for many businesses
Deflation is a more recent phenomenon impacting the way
companies do business
Operating efficiencies, both supply- and demand-based, are the new
trends
Effective brand management is critical to sustaining a competitive
advantage. Successful brand development and management involve
building brand strategies that focus on the customer experience.
Technology is a major enabler for companies today. It is allowing
companies to operate in a more time-sensitive, cost-conscious,
consumer-centric manner.
Governmental Regulations
The production, distribution and sale in the United States of
consumer products are subject to:
Federal Food, Drug and Cosmetic Act
Occupational Safety and Health Act
Lanham/Trademark Act
Various environment statutes
Various other federal, state and local statutes and
regulations applicable to the production, transportation, sale,
safety, advertising, labeling and ingredients of such
products
Industry Major Players
Rank
Company
Revenue
$ million (2003)
Profit
$ million
# of employees
1
Nestle
50,624
3,993
229,765
2
Unilever
45,914
1,638
279,000
3
Procter & Gamble
39,244
2,922
106,000
4
Kraft
33,875
1,882
114,000
5
ConAgra
27,194
639
89,000
6
PepsiCo
26,935
2,662
143,000
7
Coca-Cola
20,092
3,969
38,000
8
Sara Lee
17,747
2,266
141,500
9
Kimberly-Clark
14,524
1,610
64,200
10
Anheuser-Busch
12,912
1,705
23,432
Our Examples: Two Major Players
Coca-Cola
Procter & Gamble
The Coca-Cola Company and Subsidiaries
Corporate Profile
World’s soft drink company
Invented by Atlanta pharmacist John Pemberton in 1886
Publicly traded in 1919
NYSE: KO
Credit Rating:
LT Debt
Commercial Paper
Standard & Poor’s
A+
A-1
Moody’s
Aa3
P-1
Products
Carbonated Soft Drinks
Non-Carbonated Beverages
Financial Highlights
Coca-Cola
Market Cap.
PepsiCo
$119.40B
$89.62B
Total Debt / Equity
0.385
0.193
Current Ratio
1.065
1.08
Book Value Per Share
5.771
6.977
Profit Margin
20.66%
13.23%
Operating Margin
24.81%
17.73%
ROA
15.77%
14.62%
ROE
31.69%
33.94%
Financial Structure
Revenue Composition
Operating Revenues
Sale of beverage concentrates & syrups
Sale fountain syrups to fountain retailers
Sale of finished beverages
Revenues from Financial Activities
Interest Income
Equity Income
Financial Structure
Cost Structure
Cost of Good Sold
Selling, General, & Admin. Expenses
Other Expenses (i.e. Interest Expense)
Income Statement (in millions)
2003
2002
% Change
$21,044
$19,564
7.56%
7,762
7,105
9.25
$13,282
$12,495
6.30%
7,488
7,001
6.96
573
0
-
Interest Income
$176
$209
-15.79%
Interest Expense
178
199
-10.55
Equity Income – Net
406
384
5.73
(138)
(353)
60.91
8
0
-
$4,347
$3,050
42.52%
Basic Net Income Per Share
$1.77
$1.23
43.90%
Diluted Net Income Per Share
$1.77
$1.23
43.90
Net Operating Revenues
COGS
Gross Profit
Selling, General, & Admin Exp
Other Operating Charges
Other Income (Loss) – Net
Gains on Issuances of Stock by Equity
Investees
Net Income
Structure Cost
Yr Ended Dec 31 (in millions)
2003
% in 2003
2002
Selling Exp
$3,074
41.05%
$2,915
Advertising Exp
1,905
25.44
1,775
General & Admin Exp
2,102
28.07
1,946
Stock-Based Compensation Exp
407
5.44
365
Selling, General, & Admin Exp
$7,488
100%
$7,001
Stock Options (in millions)
Total Stock-based compensation expense
2003
2002
$ 422
$ 365
Stock Options
Stock Option Plans
Max 120 millions shares
Granted to employees at fair market value at date of grant
Exercisable
Expire
Prior to 1999
3 years
10 years
1999 To July 2003
4 years
15 years
Aug to Dec 2003
4 years
10 years
Stock Options
Stock option activity (in millions):
Shares
Average Exercise Price
Outstanding on Jan 1, 2003
159
$ 50.24
Granted
24
49.67
Exercised
(4)
26.96
Expired
(12)
51.45
Outstanding on Dec 31, 2003
167
$ 50.56
Exercisable on Dec 31, 2003
102
$ 51.97
Stock Options
Restricted Stock Award Plans
Max 29 million shares
Granted to certain officers and key employees
Entitled to vote and receive dividends
# of shares
Fair value
2003 Grants
52,720
$ 42.91
2002 Grants
30,000
$ 50.99
2001 Grants
116,300
$ 48.95
Risk Management
Risks
Interest rates
Foreign Exchange rates
Commodity prices
Other market risks
Interest Rate Management
Strategies:
Monitors % mix of
fixed-rate and variable-rate debt
term debt and non-term debt
Use interest rate swap agreements
Interest Rate Management
Short-Term Borrowings:
Commercial Paper (in millions)
2003
2002
Commercial Paper
$ 2,234
$ 2,122
Weighted-Average Interest rates
1.1%
1.4%
Interest Rate Management
Long-Term Debt (in millions):
2003
2002
Long-Term Debt (Fixed)
$ 1742
61%
$ 1764
61%
Long-Term Debt (Variable)
$ 1098
39%
$ 1117
39%
$2840
100%
$2881
100%
2003
2002
Average interest rate
3.9%
4.2%
Total interest payment
$ 180
$ 197
Interest Rate Management
Long-Term Debt (in millions):
2003
% of 2003
2002
% of 2002
6%US notes due 2003
$-
-
$150
5%
Variable rate euro notes due 2004
296
10%
248
9%
5 7/8% euro notes due 2005
591
21%
496
17%
4% US notes due 2005
749
26%
748
26%
5 3/4% US notes due 2009
399
14%
399
14%
5 3/4% US notes due 2011
498
18%
498
17%
7 3/8% US notes due 2093
116
4%
116
4%
Other, due through 2013 *
191
7%
226
8%
$ 2,840
100%
$ 2,881
100%
Total
Interest Rate Management
Interest rate swap:
Maturity less than 2 years
Interest rate swap
2003
2002
$ 28 million
$ 44 million
Interest Rate Management
Value at risk:
Confidence level: 95%
Time horizon: one-week period
“Any increase in net interest expense would not have material
impact on our financial statements”
Foreign Currency Management
5 geographic segments: net operating revenues
Africa
4%
Latin American
10%
Asia
24%
North America
31%
Europe / Eurasia /
Middle East
31%
Foreign Currency Management
Use 52 functional currencies
Weakness in one $$ is often offset by strengths in another
Impact of US$ on operating income
2003
Weaker US$
+ 2%
2002
Stronger US$
- 3%
2001
Stronger US$
- 5%
Foreign Currency Management
To hedge: Forecasted cash flows denominated in foreign $$
Derivative instruments:
Forward exchange contracts
currency options (euro and Japanese)
1 ~ 2 years maturity
Foreign Currency Management
Hedging effects:
Gains/losses on foreign currency cash flow hedges (in
millions):
Increase (Decrease) to AOCI
2004
(estimates)
2003
2002
$ (40)
$ (31)
$ (151)
Foreign Currency Management
To hedge: Net investment in certain major $$
Derivative instruments:
Forward exchange contracts
Hedging effects:
2003
Increase (Decrease) in foreign
currency translation adjustment
$ (29)
2002
2001
$ (26)
$ (43)
Foreign Currency Management
Value at risk:
Confidence level: 95%
Time horizon: 1-week period
“Fair value of foreign currency derivatives would decline by
less than …”
2003
2002
2001
$ 26 million
$34 million
$43 million
Risk Management
Accumulated Other Comprehensive Income (in millions):
2003
2002
Accumulated derivatives net losses as of Jan
$ (9)
$ 142
Net changes in fair value of derivatives
(100)
(78)
69
(73)
$ (40)
$ (9)
Net losses reclassified from AOCI into earnings
Accumulated derivative net losses as of Dec
Risk Management Process
BOARD
FINANCE COMMITTEE CHARTER
INTEREST RATE & FOREIGN CURRENCY MANAGEMENT
Financial Committee Charter
Purpose: Aid the Board to oversight financial affairs
Membership:
No fewer than 3 members
Appointed/Removed by the Board
Responsibilities:
Formulate financial policies
Report financial conditions
Prepare annual budgets
Procter & Gamble
Exchange: NYS
Ticker: PG
Established in 1837
Began as a small, family operated soap and candle
company
Based in Cincinnati, Ohio
Markets almost 300 products to more than five billion
consumers in 140 countries
P&G Operations
5 global business units
$43 Billion in Sales
Billion-Dollar Brands
Pampers
Tide
Ariel
Always
Pantene
Charmin
Billion-Dollar Brands
Bounty
Iams
Crest
Folgers
Pringles
Downy
Business Unit Breakdown
P&G
$43.3 Billion in Sales
Baby & Family Care
$9.93 Billion in Sales
Diapers, Tissue
Brands: Pampers, Charmin, Bounty
Fabric & Home Care
$12.6 Billion in Sales
Detergent, Bleach, Household cleaners
Brands: Cheer, Mr. Clean, Febreze
Beauty Care
$12.22 Billion in Sales
Cosmetics, Hair Products, Skin Care, Femine Care
Brands: Pantene, Tampax, Clairol, Ivory Soap
Health Care
$5.8 Billion in Sales
Pet Health/Food, Oral Care, Drugs
Brands: Iams, Crest, Vicks, Metamucil, Pepto-Bismol
Snacks & Beverages
$3.24 Billion in Sales
Snacks and beverages
Brands: Folgers, Pringles, Sunny Delight
Cost Structure/Performance
P&G annualized total shareholder return
nearly 17% over the past 20 years
Strategy for future growth:
Best in branding
Innovation: creating new brands and categories
Scale
Income Statement
Net Sales
Cost of Goods Sold
Gross Profit
R & D Expenditure
SG&A Expense
Depreciation & Amort.
Non-Operating Income
Interest Expense
Income Before Taxes
Prov. For Inc. Taxes
Minority Interest
Investment (Gain/Loss)
Other Income
Net Income Before Extra Items
Extra Items & Disc. Ops.
Net Income
Jun-03
43,377
22,141
21,236
n/a
13,383
n/a
238
561
7,530
2,344
n/a
n/a
n/a
5,186
n/a
5,186
Jun-02
40,238
20,989
19,249
n/a
12,571
n/a
308
603
6,383
2,031
n/a
n/a
n/a
4,352
n/a
4,352
Jun-01
39,244
22,102
17,142
n/a
12,406
n/a
674
794
4,616
1,694
n/a
n/a
n/a
2,922
n/a
2,922
Jun-00
Jun-99
39,951
38,125
21,514
21,027
18,437
17,098
n/a
n/a
12,483
10,845
n/a
n/a
304
235
722
650
5,536
5,838
1,994
2,075
n/a
n/a
n/a
n/a
n/a
n/a
3,542
3,763
n/a
n/a
3,542
3,763
in millions of USD
Risk Management
There is no explicit mentioning of a risk management
committee
Use sensitivity analysis and value-at-risk
With VaR, P&G states that it is 95% confident that there
will be no material impact to their financial statements
concerning interest rates and currency
Risk Management
Sources of risk
Currency rate exposure
Credit risk
Interest rate risk
Commodity market risk
Other general business risks
Foreign Currency
To what degree is foreign currency management important?
A lot.
Sales and Assets consisted of the following:
Net Sales (for the year ended June 30)
United States $
International
$
2003
2002
21,853 $
21,198
21,524 $
19,040
2001
$
20,334
$
18,910
Assets (as of June 30)
2003
$ 23,424
$ 20,282
2002
$ 23,434
$ 17,342
2001
$ 18,318
$ 16,069
Foreign Currency Management
Derivative Instruments used:
Forward exchange contracts
Options
Currency swaps
Maturity
<18 months: Forwards and options
<5 years: Swaps
Manages both hedging and non-hedging eligible treatment
Both are immediately recognized in earnings
Foreign Currency Management
Fair Value (June 03 vs. June 02 for Hedges)
Assets: $27 vs. $60
Liabilities: $92 vs. $29
To offset impact on sales, inventory purchases, intercompany royalties and loans in foreign monies
Fair Value (June 03 vs. 02 for Non-Hedging)
Assets: $113 vs. $93
Liabilities: $26 vs. $25
To offset impact on inter-company financing, income
from international operations
Foreign Currency Management
Bottom line impact of gains:
2003: $264
2002: $50
2001: $38
Overall, why so little hedged?
Exposure netting:
35 Manufacturing Sites in America, and
83 Manufacturing Sites, in another 42 countries
Foreign Currency- Net Investment
Hedges net investment position in major currencies
How?
Borrows in foreign currency and designates a portion of
the debt as a hedge of net investments in the currency
(I.e. use foreign denominated earnings to pay foreign
denominated interest payments)
Effects in Other Comprehensive Income
($418) 2003 vs. ($397) 2002
Accumulated Net Balance
($238) 2003 vs. $180 2002
Credit Risk Management
Strict credit guidelines:
Transactions entered with only financial institutions of
investment grade or better
Closely monitoring counter-party exposures
Limiting counter-party’s obligation to a certain amount
P & G doesn’t expect to incur any material losses
Interest Rate Risk Management
Manages cost by using a mix of variable and fixed-rate
debt
Managed through the use of swaps
“agrees to exchange, at specific intervals, the difference
between fixed and variable interest amounts”
Fair value (June 03 vs. June 02)
$322 vs. $231
Interest Rate Risk Management
Short-term debt
Interest Rate Risk Management
Long-term debt
Commodity Price Management
Potential impact of:
Weather
Supply conditions
Political and economic variables
Derivative Instruments used:
Futures and Options
Swaps
Maturity
<1 year: Forwards and options
<5 years: Swaps
Not material for the past 3 years
Stock-Based Compensation
Stock-Based Compensation
Grants to key managers and directors
With exercise prices equal to the market price of the grant
Vested with life of:
Date
<July 1998
July 1998- August 2002
>September 2002
Vested
1 Year
3 Years
3 Years
Life
10 Years
15 Years
10 Years
Valued in 2001 using binomial; 2002 and 2003 using
Black-Scholes
Options Granted
Interest rate
Dividend yield
Expected volatility
Expected life in years
2003
3.9%
1.8%
20.0%
8
Years ended June 30
2002
5.4%
2.2%
20.0%
12
2001
5.8%
2.0%
26.0%
9
Stock-Based Compensation
1.3 Billion Shares Outstanding
Options in Thousands
Outstanding, beginning of year
Granted
2003
120,163
17,880
Outstanding Options
Range of Prices
$28 to 46
54 to 66
67 to 85
85 to 106
June 30
2002
104,196
25,040
2001
82,744
28,400
Exercisable Options
Weighted Avg.
Remaining
Number
Weighted
Number
Weighted Avg. Contractual Exercisable
Average
Outstanding (1000s) Exercise Price
Life Years
(1000s)
Exercise Price
15,847
$35.78
2
15,847
$35.78
36,470
$61.35
10.2
7,938
$59.77
40,575
$74.85
9.7
16,826
$82.63
36,907
$93.17
10
18,490
$95.02
Other types of risks
General business risk
Operational risk
Restructuring risk
Management control risk
Legal risk
Purchase commitments for materials, supplies, services
and fixed assets
Any Questions?