The FINANCIAL — The Procter & Gamble Company reported April – June 2017 quarter net sales were $16.1 billion, unchanged versus the prior year period including a negative two percentage point impact from foreign exchange. Organic sales increased two percent for the quarter driven by a two percent increase in organic shipment volume.
Diluted net earnings per share were $0.82, an increase of 19% versus the prior year period. Core earnings per share were $0.85, an increase of eight percent versus the prior year period. The Company generated $3.7 billion of operating cash flow in the quarter, with adjusted free cash flow productivity of 125%.
For fiscal year 2017, net sales were $65.1 billion, unchanged versus the prior year, including a negative two percentage point impact from foreign exchange. Organic sales increased two percent for the year driven by a two percent increase in organic shipment volume. Diluted net earnings per share were $5.59, an increase of 51% versus the prior year period. Core earnings per share were $3.92, an increase of seven percent versus the prior year period. Excluding the impact of foreign exchange, constant currency core earnings per share increased 11% for the year. The Company generated $12.8 billion of operating cash flow in fiscal 2017, with adjusted free cash flow productivity of 94%. P&G returned nearly $22 billion of value to shareholders in fiscal 2017 through the combination of $7.2 billion of dividend payments, $9.4 billion of share exchanges in the Beauty Brands transaction completed in October and $5.2 billion of direct share repurchases, according to the Procter & Gamble Company.
“We met or exceeded each of our going-in objectives for fiscal year 2017 in a challenging macro and competitive environment,” said David Taylor, Chairman, President and Chief Executive Officer. “We made significant progress on our key priorities: accelerating organic sales growth, continuing to drive strong productivity improvement and cost savings, strengthening our organization and culture and completing moves to simplify and strengthen our product portfolio. Looking forward, we will continue to drive productivity improvement and cost savings to provide the fuel for investments needed to accelerate and sustain faster top-line growth while expanding operating profit margin. Our long-term objective is to deliver results at levels that support our goal of balanced growth and value creation and operating total shareholder return in the top third of our competitive peer group.
“As an organization, we are accelerating efforts to execute and deliver on the plans we’ve put into action. Achieving our objectives will not only require continued focus as an organization, but also that we prevent anything from derailing the work that is delivering improvement. We, as a management team and Board, are confident we have the right plan in place.”
April – June 2017 Quarter Discussion
In the April – June quarter net sales were unchanged at $16.1 billion, including a negative two percentage point impact from foreign exchange. Organic sales grew two percent on a two percent increase in organic volume. All-in volume also increased two percent.
Beauty segment organic sales increased five percent versus year ago. Organic sales were up high single digits in Skin & Personal Care driven by the continued growth of the super-premium SK-II skin care brand and increased pricing behind product innovation. Organic sales increased low single digits in Hair Care, primarily due to increased pricing across multiple regions and brands.
Grooming segment organic sales decreased one percent, primarily due to reduced pricing in Shave Care. Organic sales decreased low single digits in Shave Care due to lower pricing in the U.S., partially offset by increased volume globally. Organic sales increased double digits in Appliances, driven by increased volume from the continued success of innovation on Braun shavers and styling tools, along with improved pricing due to more efficient promotional spending.
Health Care segment organic sales decreased one percent for the quarter. Oral Care organic sales decreased low single digits due to competitive activity and reduced pricing on paste, partially offset by the continued success of product innovation on power toothbrushes. Personal Health Care organic sales decreased low single digits due to an earlier cough and cold season versus prior year along with reductions in trade inventories.
Fabric & Home Care segment organic sales increased five percent versus year ago. Fabric Care and Home Care organic sales both increased mid-single digits due to increased volume from product innovation.
Baby, Feminine & Family Care segment organic sales were unchanged versus prior year. Baby Care organic sales decreased low single digits as volume declined mainly due to competitive activity. Feminine Care organic sales increased low single digits due primarily to favorable product mix from the growth of Always Discreet and other premium innovation. Family Care organic sales increased low single digits driven by higher volume from product innovation and increased distribution.
Diluted net earnings per share were $0.82, an increase of 19% versus the prior year. Current year results included non-core restructuring costs of $0.02 per share. Core earnings per share, which exclude non-core restructuring charges and the results of discontinued operations, were $0.85, an increase of eight percent versus the prior year.
Reported gross margin increased 50 basis points, including approximately 50 basis points of benefit due to lower non-core restructuring charges. Core gross margin declined 10 basis points, including 20 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin increased 10 basis points, driven primarily by 270 basis points of productivity cost savings, which more than offset headwinds from increased commodity costs of 120 basis points, 90 basis points of unfavorable mix and 50 basis points of product reinvestments and other impacts.
Selling, general and administrative expense (SG&A) as a percent of sales declined 240 basis points on a reported basis versus the prior year, including approximately 10 basis points of benefit due to lower non-core restructuring charges. Core SG&A as a percentage of sales declined 220 basis points, including approximately a 60 basis point benefit from lower foreign exchange impacts. On a currency-neutral basis, core SG&A declined 170 basis points versus the prior year driven by 80 basis points of productivity savings from overhead, agency fee and ad production costs. Digital ad spending was lower versus a high base period and due to current period choices to temporarily restrict spending in digital forums where our ads were not being placed according to our standards and specifications.
Reported operating profit margin increased 280 basis points. Core operating profit margin increased 210 basis points versus the prior year, including approximately a 40 basis point net benefit from foreign exchange. On a currency-neutral basis, core operating profit margin improved 180 basis points. Total productivity cost savings were 350 basis points for the quarter.
Fiscal Year 2017 Results
Fiscal year 2017 net sales were $65.1 billion, unchanged versus the prior year, including a negative two percentage point impact from foreign exchange. Organic sales grew two percent on a two percent increase in organic shipment volume. Diluted net earnings per share were $5.59, an increase of 51% versus the prior year, including diluted net earnings per share from discontinued operations of $1.90 driven by the gain on the sale of the Beauty Brands to Coty in the second fiscal quarter. Core earnings per share were $3.92, an increase of seven percent. Excluding the impact of foreign exchange, currency-neutral core earnings per share increased 11% for the year.
Operating cash flow was $12.8 billion for the year. Adjusted free cash flow productivity was 94%. The Company reduced common stock outstanding at a value of nearly $15 billion through the combination of direct share repurchases and shares that were exchanged in the Beauty Brands transaction. The Company also returned $7.2 billion in cash to shareholders as dividends. In total, nearly $22 billion in value was returned to shareholders via dividends, share exchange and share repurchase. P&G announced an increase to the quarterly dividend in April, making this the 61st consecutive year of dividend increases.
Fiscal Year 2018 Guidance
P&G said it is projecting organic sales growth in the range of two to three percent for fiscal year 2018. P&G 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 foreign exchange and acquisitions & divestitures.
The Company said it expects core earnings per share growth of five to seven percent for fiscal 2018 versus core EPS of $3.92 in fiscal 2017. P&G said it expects core EPS growth in fiscal 2018 to be driven primarily by core operating profit growth. Additionally, a modest benefit to core EPS from a reduction in common shares outstanding will be partially offset by a net headwind from changes in interest expense, interest income and other non-operating income. P&G expects the core effective tax rate to be around 24%, essentially in-line with the fiscal 2017 rate.
All-in GAAP earnings per share are expected to decrease 26% to 28% 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.
P&G said it expects results for the first quarter of fiscal 2018 to be the lowest organic sales and core EPS growth period of the year, as the period compares against the highest organic growth base period. Top-line headwinds from portfolio choices and the recent Gillette price reduction in the U.S. will primarily impact the first half of fiscal 2018 and will annualize as the year progresses. Additionally, productivity savings are expected to build throughout fiscal 2018.