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CONSUMER PRODUCT INDUSTRY Carmen Daniel George Tobey Ying March 20, 2004.

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Presentation on theme: "CONSUMER PRODUCT INDUSTRY Carmen Daniel George Tobey Ying March 20, 2004."— Presentation transcript:

1 CONSUMER PRODUCT INDUSTRY Carmen Daniel George Tobey Ying March 20, 2004

2 Agenda Overview of Industry Company 1: Coca Cola Company 2 : Procter and Gamble Financial Highlights Risk Management

3 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.

4 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

5 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 : INDEX12 mo. % change Non-Cyclical Consumer -3.22 Consumer Cyclicals -17.61 Energy -13.51 Financial -22.01 Health Care -19.41 Technology -37.73

6 Consumer Product Indices vs. S&P 500 during the last 12 months

7 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%

8 Hot Industry: Home Appliances

9 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%

10 Cold Industry: Housewares and Accessories

11 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.

12 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.

13 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

14 Industry Major Players RankCompanyRevenue $ million (2003) Profit $ million # of employees 1Nestle50,6243,993229,765 2Unilever45,9141,638279,000 3Procter & Gamble39,2442,922106,000 4Kraft33,8751,882114,000 5ConAgra27,19463989,000 6PepsiCo26,9352,662143,000 7Coca-Cola20,0923,96938,000 8Sara Lee17,7472,266141,500 9Kimberly-Clark14,5241,61064,200 10Anheuser-Busch12,9121,70523,432

15 Our Examples: Two Major Players Coca-Cola Procter & Gamble

16 The Coca-Cola Company and Subsidiaries

17 Corporate Profile World’s soft drink company Invented by Atlanta pharmacist John Pemberton in 1886 Publicly traded in 1919 NYSE: KO Credit Rating: LT DebtCommercial Paper Standard & Poor’sA+A-1 Moody’sAa3P-1

18 Products Carbonated Soft Drinks Non-Carbonated Beverages

19 Financial Highlights Coca-ColaPepsiCo Market Cap.$119.40B$89.62B Total Debt / Equity0.3850.193 Current Ratio1.0651.08 Book Value Per Share5.7716.977 Profit Margin20.66%13.23% Operating Margin24.81%17.73% ROA15.77%14.62% ROE31.69%33.94%

20 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

21 Financial Structure Cost Structure Cost of Good Sold Selling, General, & Admin. Expenses Other Expenses (i.e. Interest Expense)

22 Income Statement (in millions) 20032002% Change Net Operating Revenues$21,044$19,5647.56% COGS7,7627,1059.25 Gross Profit$13,282$12,4956.30% Selling, General, & Admin Exp7,4887,0016.96 Other Operating Charges5730- Interest Income$176$209-15.79% Interest Expense178199-10.55 Equity Income – Net4063845.73 Other Income (Loss) – Net(138)(353)60.91 Gains on Issuances of Stock by Equity Investees 80- Net Income$4,347$3,05042.52% Basic Net Income Per Share$1.77$1.2343.90% Diluted Net Income Per Share$1.77$1.2343.90

23 Structure Cost Stock Options (in millions) Yr Ended Dec 31 (in millions)2003% in 20032002 Selling Exp$3,07441.05%$2,915 Advertising Exp1,90525.441,775 General & Admin Exp2,10228.071,946 Stock-Based Compensation Exp4075.44365 Selling, General, & Admin Exp$7,488100%$7,001 20032002 Total Stock-based compensation expense$ 422$ 365

24 Stock Options Stock Option Plans Max 120 millions shares Granted to employees at fair market value at date of grant ExercisableExpire Prior to 19993 years10 years 1999 To July 20034 years15 years Aug to Dec 20034 years10 years

25 Stock Options Stock option activity (in millions): SharesAverage Exercise Price Outstanding on Jan 1, 2003159$ 50.24 Granted24 49.67 Exercised(4) 26.96 Expired(12) 51.45 Outstanding on Dec 31, 2003167$ 50.56 Exercisable on Dec 31, 2003102$ 51.97

26 Stock Options Restricted Stock Award Plans Max 29 million shares Granted to certain officers and key employees Entitled to vote and receive dividends # of sharesFair value 2003 Grants52,720$ 42.91 2002 Grants30,000$ 50.99 2001 Grants116,300$ 48.95

27 Risk Management Risks Interest rates Foreign Exchange rates Commodity prices Other market risks

28 Interest Rate Management Strategies: Monitors % mix of fixed-rate and variable-rate debt term debt and non-term debt Use interest rate swap agreements

29 Interest Rate Management Short-Term Borrowings: Commercial Paper (in millions) 20032002 Commercial Paper$ 2,234$ 2,122 Weighted-Average Interest rates1.1%1.4%

30 Interest Rate Management Long-Term Debt (in millions): 20032002 Long-Term Debt (Fixed)$ 174261%$ 176461% Long-Term Debt (Variable)$ 109839%$ 111739% $2840100%$2881100% 20032002 Average interest rate3.9%4.2% Total interest payment$ 180$ 197

31 Interest Rate Management Long-Term Debt (in millions): 2003% of 20032002% of 2002 6%US notes due 2003$ --$1505% Variable rate euro notes due 200429610%2489% 5 7 / 8 % euro notes due 200559121%49617% 4% US notes due 200574926%74826% 5 3 / 4 % US notes due 200939914%39914% 5 3 / 4 % US notes due 201149818%49817% 7 3 / 8 % US notes due 20931164%1164% Other, due through 2013 *1917%2268% Total$ 2,840100%$ 2,881100%

32 Interest Rate Management Interest rate swap: Maturity less than 2 years 20032002 Interest rate swap$ 28 million$ 44 million

33 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”

34 Foreign Currency Management 5 geographic segments: net operating revenues

35 Foreign Currency Management Use 52 functional currencies Weakness in one $$ is often offset by strengths in another Impact of US$ on operating income 2003Weaker US$+ 2% 2002Stronger US$- 3% 2001Stronger US$- 5%

36 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

37 Foreign Currency Management Hedging effects: Gains/losses on foreign currency cash flow hedges (in millions): 2004 (estimates) 20032002 Increase (Decrease) to AOCI$ (40)$ (31)$ (151)

38 Foreign Currency Management To hedge: Net investment in certain major $$ Derivative instruments: Forward exchange contracts Hedging effects: 200320022001 Increase (Decrease) in foreign currency translation adjustment $ (29)$ (26)$ (43)

39 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 …” 200320022001 $ 26 million$34 million$43 million

40 Risk Management Accumulated Other Comprehensive Income (in millions): 20032002 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)


42 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


44 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

45 P&G Operations 5 global business units $43 Billion in Sales

46 Billion-Dollar Brands Pampers Tide Ariel Always Pantene Charmin

47 Billion-Dollar Brands Bounty Iams Crest Folgers Pringles Downy

48 Business Unit Breakdown 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 P&G $43.3 Billion in Sales

49 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

50 Income Statement




54 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

55 Risk Management Sources of risk Currency rate exposure Credit risk Interest rate risk Commodity market risk Other general business risks

56 Foreign Currency To what degree is foreign currency management important? A lot. Sales and Assets consisted of the following:

57 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

58 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

59 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

60 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

61 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

62 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

63 Interest Rate Risk Management Short-term debt

64 Interest Rate Risk Management Long-term debt

65 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

66 Stock-Based Compensation

67 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

68 Stock-Based Compensation 1.3 Billion Shares Outstanding

69 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

70 Any Questions?

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