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CONSUMER PRODUCT INDUSTRYCONSUMER PRODUCT INDUSTRY
Carmen • Daniel • George • Tobey • YingCarmen • Daniel • George • Tobey • Ying
March 20, 2004March 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 EuropeThe 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 -3.22Consumer Cyclicals -17.61
Energy -13.51Financial -22.01Health Care -19.41Technology -37.73
Consumer Product Indices vs. S&P 500 during the last 12 months
Hot Industry: Home Appliance
Companies Current Revenue Historical Profitability
Stock Price ($ in million) Growth (EBIT to Revenue)
(01/31/2004)
Electrolux Ab $23.14 $17,048.2 -2.0% 6.2%
Whirlpool Corp. $75.95 $11,763.0 6.5% 7.3%
Maytag Corp. $28.64 $4,791.9 2.7% 6.4%
Salton Inc. $13.75 $933.4 -3.0% 4.8%
Applica Inc. $8.09 $653.0 0.0% 1.3%
National Presto
Inds Inc. $37.2 $132.7 11.7% 14.6%
Hot Industry: Home Appliances
Cold Industry: Housewares and Accessories
Companies Current Revenue Historical Profitability
Stock Price ($ in millions) Growth ( EBIT to Revenue)
(01/31/2004)
Newell Rubbermaid Inc. $24.43 $7,670.8 7.9% 10.3%
Blyth Inc. $33.27 $1,329.9 9.3% 11.2%
Tupperware Corp. $17.65 $1,151.9 -1.0% 7.9%
Waterford Wedgwood Plc $0.31 $966.8 -4.6% 2.3%
Libbey Inc. $18.26 $491.2 2.9% 9.0%
Oneida Ltd. $5.35 $454.1 -3.9% -2.7%
Home Products Intl Inc .$1.48 $235.4 -0.2% 2.5%
Cold Industry: Housewares and Accessories
Consumer Products in CanadaCanada'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 SubsidiariesThe 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 PepsiCo
Market Cap. $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
Net Operating Revenues $21,044 $19,564 7.56%
COGS 7,762 7,105 9.25
Gross Profit $13,282 $12,495 6.30%
Selling, General, & Admin Exp 7,488 7,001 6.96
Other Operating Charges 573 0 -
Interest Income $176 $209 -15.79%
Interest Expense 178 199 -10.55
Equity Income – Net 406 384 5.73
Other Income (Loss) – Net (138) (353) 60.91
Gains on Issuances of Stock by Equity Investees
8 0 -
Net Income $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
Structure Cost
Stock Options (in millions)
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
2003 2002
Total Stock-based compensation expense $ 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%
Total $ 2,840 100% $ 2,881 100%
Interest Rate Management
Interest rate swap:
Maturity less than 2 years
2003 2002
Interest rate swap $ 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
Europe / Eurasia / Middle East
31%
Africa4%
Latin American10%
Asia24%
North America31%
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):
2004 (estimates)
2003 2002
Increase (Decrease) to AOCI $ (40) $ (31) $ (151)
Foreign Currency Management
To hedge: Net investment in certain major $$
Derivative instruments:
Forward exchange contracts
Hedging effects:
2003 2002 2001
Increase (Decrease) in foreign currency translation adjustment
$ (29) $ (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)
Net losses reclassified from AOCI into earnings 69 (73)
Accumulated derivative net losses as of Dec $ (40) $ (9)
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
Baby & Family Care$9.93 Billion in Sales
Diapers, TissueBrands: Pampers, Charmin, Bounty
Fabric & Home Care$12.6 Billion in Sales
Detergent, Bleach, Household cleanersBrands: Cheer, Mr. Clean, Febreze
Beauty Care$12.22 Billion in Sales
Cosmetics, Hair Products, Skin Care, Femine CareBrands: Pantene, Tampax, Clairol, Ivory Soap
Health Care$5.8 Billion in Sales
Pet Health/Food, Oral Care, DrugsBrands: Iams, Crest, Vicks, Metamucil, Pepto-Bismol
Snacks & Beverages$3.24 Billion in Sales
Snacks and beveragesBrands: Folgers, Pringles, Sunny Delight
P&G$43.3 Billion in Sales
Cost Structure/Performance
P&G annualized total shareholder return nearly 17% over the past 20 years
Strategy for future growth:Best in brandingInnovation: creating new brands and categoriesScale
Income Statement
Jun-03 Jun-02 Jun-01 Jun-00 Jun-99Net Sales 43,377 40,238 39,244 39,951 38,125Cost of Goods Sold 22,141 20,989 22,102 21,514 21,027Gross Profit 21,236 19,249 17,142 18,437 17,098R & D Expenditure n/a n/a n/a n/a n/a SG&A Expense 13,383 12,571 12,406 12,483 10,845Depreciation & Amort. n/a n/a n/a n/a n/a Non-Operating Income 238 308 674 304 235Interest Expense 561 603 794 722 650Income Before Taxes 7,530 6,383 4,616 5,536 5,838Prov. For Inc. Taxes 2,344 2,031 1,694 1,994 2,075Minority Interest n/a n/a n/a n/a n/a Investment (Gain/Loss) n/a n/a n/a n/a n/a Other Income n/a n/a n/a n/a n/a Net Income Before Extra Items 5,186 4,352 2,922 3,542 3,763Extra Items & Disc. Ops. n/a n/a n/a n/a n/a Net Income 5,186 4,352 2,922 3,542 3,763
in millions of USD
Risk Management
There is no explicit mentioning of a risk management committee
Use sensitivity analysis and value-at-risk
With VaR, P&G states that it is 95% confident that there will be no material impact to their financial statements concerning interest rates and currency
Risk Management
Sources of risk
Currency rate exposure
Credit risk
Interest rate risk
Commodity market risk
Other general business risks
Foreign Currency
To what degree is foreign currency management important?A lot.Sales and Assets consisted of the following:
2003 2002 2001 2003 2002 2001United States 21,853$ 21,198$ 20,334$ 23,424$ 23,434$ 18,318$ International 21,524$ 19,040$ 18,910$ 20,282$ 17,342$ 16,069$
Assets (as of June 30)Net Sales (for the year ended June 30)
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, inter-company 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:WeatherSupply conditionsPolitical and economic variables
Derivative Instruments used:Futures and OptionsSwaps
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:
Valued in 2001 using binomial; 2002 and 2003 using Black-Scholes
Date Vested Life<July 1998 1 Year 10 Years
July 1998- August 2002 3 Years 15 Years>September 2002 3 Years 10 Years
Options Granted 2003 2002 2001Interest rate 3.9% 5.4% 5.8%Dividend yield 1.8% 2.2% 2.0%Expected volatility 20.0% 20.0% 26.0%Expected life in years 8 12 9
Years ended June 30
Stock-Based Compensation
1.3 Billion Shares Outstanding
Options in Thousands 2003 2002 2001Outstanding, beginning of year 120,163 104,196 82,744Granted 17,880 25,040 28,400
June 30
Weighted Avg.Remaining Number Weighted
Number Weighted Avg. Contractual Exercisable AverageRange of Prices Outstanding (1000s) Exercise Price Life Years (1000s) Exercise Price
$28 to 46 15,847 $35.78 2 15,847 $35.7854 to 66 36,470 $61.35 10.2 7,938 $59.7767 to 85 40,575 $74.85 9.7 16,826 $82.63
85 to 106 36,907 $93.17 10 18,490 $95.02
Outstanding Options Exercisable Options
Other types of risks
General business risk
Operational riskRestructuring riskManagement control risk
Legal riskPurchase commitments for materials, supplies, services and fixed assets
Any Questions?