Strong start to the year
- 1Q24 EPS beat market estimates on strong net sales growth and gross margin expansion
- Managements kept their FY24F guidance ranges for organic sales and EPS growth, but expect higher foreign exchange headwind – implies higher constant currency EPS growth of 13%-16% (vs. 9%-12% previously)
- Volume outside Greater China has returned to growth and will contribute more to overall sales growth in the next quarters
1Q24 EPS beat market estimates on strong net sales growth and gross margin expansion. P&G reported diluted net EPS of US$1.83 (+17% y-o-y), above consensus’ estimate of US$1.72 given the strong net sales growth of 6% y-o-y and expansion in gross margin by 460 basis points versus the prior year. On a currency neutral basis, core EPS increased 21% y-o-y. P&G delivered 1Q24 net sales of US$21.9bn (+6% y-o-y), slightly above consensus’ estimate of US$21.6bn. Excluding the impact of foreign exchange, and acquisitions and divestments, P&G’s 1Q24 organic sales rose by 7% y-o-y, on the back of +7%/ +1% increase in pricing/ product mix, partially offset by -1% decline in volume. By segments, organic sales growth were Beauty (+5%); Grooming (+9%); Health care (+10%); Fabric & Home care (+9%); Baby, Feminine & Family care (+7%). Healthcare’s organic volume increased by 2% y-o-y, while Beauty and Fabric & Home care segments reported flat organic volume compared to the prior year. On the other hand, organic volume of Grooming and Baby, Feminine & Family care segments declined by 2% and 3% y-o-y respectively.
Maintaining earlier EPS guidance. Given its strong 1Q24 performance, P&G’s managements are on track to deliver towards the higher end of their FY24F guidance ranges for organic sales and core EPS growth. Sales growth is expected to normalise to 4% for the rest of the year with stronger contribution from volume (2%), lower contribution from pricing (1-2%), and mix impact (1%). Expansion in gross margin is expected to normalise as the quarter progresses in FYE Jun 24F as the benefits from higher pricing and lower commodity prices ebbs, while foreign exchange headwind may turn more evident. That said, P&G will remain committed to grow a head of the market by driving innovation, trade up, superiority, value creation, effective promotion, and productivity improvement. Improving volume growth outside Greater China is an encouraging progress and we expect the company to sustain the strong momentum. Although sales in Greater China are expected to recover slowly, the managements expect the growth to return to mid-single digit in the longer term.
Gross margin benefitted from higher pricing/ commodity, while marketing and wage partially offset flow through to operating margin. In 1Q24, P&G’s gross margin increased 460 basis points versus year ago to 52%. On a currency-neutral basis, gross margin expansion was higher at 520 basis points, due to higher pricing (+330 basis points), favorable commodity costs (+160 basis points), and gross productivity savings (+150 basis points), but partially offset by unfavorable product mix (-60 basis points) and product reinvestments and other impacts (-60 basis points). Meanwhile, P&G’s 1Q24 operating margin improved 240 basis points versus the prior year and 340 basis points on a currency-neutral basis, as operating leverage and productivity savings minimized the impact of higher marketing investments and wage inflation.
Modest volume growth outside Greater China. Across geographies, its Focus markets’ organic sales grew by 6%, driven by strong organic sales growth in the US (+7%) and Europe focus markets (+15%) which offset soft organic sales growth in Greater China (-6%) due to weak consumer confidence and drop in SK-II by low teens. Meanwhile, Enterprise markets’ organic sales increased by 13%, supported by robust growth in Latin America (+19%) and Europe enterprise markets (+15%). The company saw volume returns to growth in the US (+3) and Europe focus markets (+2), while Mexico, Brazil, and India delivered solid volume growth. This offset volume decline in Greater China, Asia Pacific, and Europe enterprise markets. In addition, P&G’s global aggregate value share increased 40 basis points versus prior year, with 32 of P&G’s top 50 category/country combinations holding or growing share for the past three months. In the US, all-outlet value share was up 50 basis points versus prior year and volume share was up 60 basis points. Meanwhile, value share in Europe focus markets was up 40 basis points over the past 3 months.
Managements kept their FY24F guidance ranges for organic sales and EPS growth, but expect higher foreign exchange headwind – implies higher constant currency EPS growth of 13%-16% (vs. 9%-12% previously). P&G adjusted its guidance range for FY24F all-in sales growth to 2%-4% y-o-y (from 3%-4% y-o-y previously) as foreign exchange is now expected to be a headwind of approximately 1%-2%. That said, the managements maintained their FY24F guidance ranges for organic sales growth of 4%-5% y-o-y, as well as their FY24F diluted EPS growth in the range of 6%-9% y-o-y, implying EPS of US$6.25-US$6.43 per share. Management now expects higher headwind from foreign exchange of US$1bn after-tax (vs. US$0.4bn after-tax previously) which will lessen benefit from favorable commodity costs of US$0.8bn after-tax. Hence, the management now expect 7-point foreign exchange headwind, implying in a higher constant currency EPS growth of 13%-16% (vs. 3-point foreign exchange headwind or in constant currency EPS growth of 9%-12% previously). Core effective tax rate estimate is also increased to 21% (vs. 20% previously). That said, P&G still expect to pay more than US$9bn in dividends and to repurchase US$5-US$6bn of common shares in FY24F.