The FINANCIAL — The Procter & Gamble Company reported second quarter fiscal year 2018 net sales of $17.4 billion, an increase of three percent versus the prior year. Organic sales increased two percent.
Diluted net earnings per share were $0.93, a decline of 68% versus the prior year due to the Beauty Brands divestiture gain in the base period and a current period net income tax charge related to the recently enacted U.S. Tax Cuts and Jobs Act (the “Tax Act”). Core earnings per share increased 10% to $1.19, including a $0.05 per share benefit from the Tax Act.
Operating cash flow was $3.7 billion for the quarter. Adjusted free cash flow productivity was 91%. The Company returned $3.6 billion of cash to shareholders via $1.8 billion of dividend payments and $1.8 billion of common stock repurchase, according to the Procter & Gamble Company.
“We accelerated organic sales growth and delivered strong productivity cost savings and cash flow,” said David Taylor, Chairman, President and Chief Executive Officer. “We remain on track to achieve our fiscal year objectives.”
October – December Quarter Discussion
Net sales in the second quarter of fiscal year 2018 were $17.4 billion, an increase of three percent versus the prior year including a one percent positive impact from foreign exchange. Organic sales and volume both increased two percent. A one percent positive mix impact from the disproportionate growth of higher priced categories, Skin & Personal Care and Personal Health Care, was offset by a negative pricing impact of one percent.
Beauty segment organic sales increased nine percent. Skin & Personal Care organic sales grew double digits driven by Olay brand innovation and continued strong growth of the super-premium SK-II brand. Hair Care organic sales increased low single digits driven by growth of all major brands – Pantene, Head & Shoulders, Herbal Essences and Rejoice.
Grooming segment organic sales decreased three percent. Shave Care organic sales decreased mid-single digits primarily due to pricing reductions in the U.S. which were partially offset by volume increases due to reduced pricing and innovation. Appliances organic sales increased double digits driven by innovation on the Braun brand.
Health Care segment increased organic sales four percent. Oral Care organic sales increased low single digits driven by premium Oral-B power toothbrush innovation. Personal Health Care organic sales increased high single digits with increased consumption in the U.S. driven by an early and intense Cough/Cold season and strong international shipments from the PGT joint venture.
Fabric and Home Care segment organic sales increased three percent. Fabric Care organic sales increased low single digits driven by unit dose detergent and scent bead innovations and marketing and merchandising investments. Organic sales in Home Care also increased low single digits driven by marketing and merchandising investments.
Baby, Feminine and Family Care segment organic sales decreased one percent. Baby Care organic sales declined mid-single digits due to competitive activity and trade inventory reductions. Feminine Care organic sales grew mid-single digits driven by innovation on the Always brand and positive mix from premium tier growth. Family Care organic sales grew low single digits driven by recent Charmin innovation and strong consumption of Puffs.
Diluted net earnings per share were $0.93, a decrease of 68% versus the prior year due to the gain from the Beauty Brands divestiture in the base period and a current period income tax charge from the transitional impact of the recently enacted U.S. tax legislation. Diluted net earnings per share from continuing operations were also $0.93, unchanged versus the base period. Core earnings per share, which excludes non-core restructuring charges and U.S. Tax Act transitional impacts, were $1.19, an increase of 10 percent versus the prior year, driven primarily by increased net sales and a lower core effective tax rate. Impacts from the Tax Act and foreign exchange each contributed approximately four percentage points to core earnings per share growth, and higher commodity costs reduced core earnings per share growth by approximately four percentage points.
Reported gross margin decreased 60 basis points, including approximately 20 basis points favorable impact from lower non-core restructuring charges versus the prior year. Core gross margin decreased 80 basis points, including 10 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin decreased 70 basis points. Productivity savings of 150 basis points and 30 basis points of sales growth leverage and other helps were more than offset by 90 basis points of commodity cost increases, 70 basis points of unfavorable geographic and product mix, 50 basis points of unfavorable pricing impacts and 40 basis points of innovation reinvestments.
Selling, general and administrative expense (SG&A) as a percent of sales decreased 60 basis points on a reported basis versus the prior year, including 10 basis point unfavorable impact from higher non-core restructuring charges versus the previous year. Core SG&A as a percentage of sales decreased 80 basis points versus the previous year including a benefit of approximately 40 basis points from foreign exchange. On a currency-neutral basis, Core SG&A as a percentage of sales decreased 40 basis points, as 40 basis points of savings in overhead, agency fees and advertising production costs and 40 basis points of sales growth leverage were partially offset by reinvestments in research & development and information technology. Media spending was in-line with prior year levels.
Reported operating profit margin was unchanged versus the base period. Core operating profit margin decreased 10 basis points including approximately 20 basis points of favorable foreign exchange. On a currency-neutral basis, core operating profit margin decreased 30 basis points. Productivity cost savings contributed 190 basis points of margin benefit for the quarter.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act reduces the federal tax rate on U.S. earnings to 21% and moves from a global taxation regime to a modified territorial regime. As we have a June 30 fiscal year-end, the lower tax rate will be phased in, resulting in a U. S. statutory federal rate of approximately 28% for P&G’s fiscal year ending June 30, 2018. However, there are offsets to the lower tax rate, the most significant being the inherent disallowance under the Act of previously available U.S. tax credits and the loss of the domestic manufacturing deduction. For the quarter ended December 31, 2017 and fiscal 2018, these impacts are resulting in a net benefit of approximately $135 million. The benefit will increase in future years as the 21% rate is fully phased in.
As part of the Tax Act, U.S. companies are required to pay a tax on historical earnings generated offshore that have not been repatriated to the U.S. There are several items which partially offset this charge, the most significant of which is a revaluation of a large net deferred tax liability position at the lower federal base rate of 21 percent. These transitional impacts resulted in a provisional net charge of $628 million for the quarter ended December 31, 2017, comprised of an estimated repatriation tax charge of $3.8 billion (comprised of the U.S. repatriation taxes and foreign withholding taxes) and a net deferred tax benefit of approximately $3.2 billion.
Fiscal Year 2018 Guidance
P&G said it is maintaining its guidance for organic sales growth in the range of two to three percent for fiscal 2018. The Company estimates all-in sales growth of about three percent for fiscal 2018, which includes a neutral to half-a-percentage-point benefit to sales growth from the combined impacts of acquisitions and divestitures and foreign exchange.
P&G said it is raising its core earnings per share growth outlook from five to seven percent to five to eight percent versus fiscal 2017 Core EPS of $3.92. It is raising the upper-end of the guidance range to reflect the potential benefit from the Tax Act. GAAP earnings per share are expected to decrease 30% to 32% versus fiscal year 2017 GAAP EPS of $5.59, which included the significant benefit from the Beauty Brands transaction that was completed in October 2016. The fiscal 2018 GAAP EPS estimate includes approximately $0.10 per share of non-core restructuring costs and $0.24 per share of non-core charges related to the Tax Act.
