The FINANCIAL — The Procter & Gamble Company reported April – June 2016 quarter net sales of $16.1 billion, a decrease of three percent versus the prior year period driven by a negative three percentage point impact from foreign exchange and a negative two percent combined impact from Venezuela deconsolidation and minor brand divestitures.
Organic sales increased two percent for the quarter driven by a two percent increase in organic shipment volume. Diluted net earnings per share were $0.69, an increase of 283% versus the prior year period that included a Venezuelan deconsolidation charge of $0.71 per share. Core earnings per share were $0.79, a decrease of 15%. Core EPS results declined due to increased marketing investments, lower gains from minor brand divestitures, and a higher core effective tax rate versus the comparison period. Excluding the impact of foreign exchange, currency-neutral core earnings per share decreased eight percent. P&G delivered 145% adjusted free cash flow productivity for the quarter, according to P&G.
“The fourth quarter was another period of progress driving P&G’s results to a balance of strong top-line growth, bottom-line growth and cash generation,” said Chairman, President and Chief Executive Officer David Taylor. “We grew organic volume and sales in all reporting segments. We increased investments in innovation and advertising, funded by strong productivity improvement. Looking forward, we’re committed to continued productivity improvement and cost savings that provide the fuel for innovation and investments needed to accelerate and sustain faster top-line growth. We expect fiscal 2017 to mark another significant step toward our goal of balanced growth and value creation and total shareholder return in the top third of our competitive peer group.”
April – June 2016 Quarter Discussion
In the April – June quarter net sales decreased three percent to $16.1 billion, including a negative three percentage point impact from foreign exchange and a negative two percent combined impact from Venezuela deconsolidation and minor brand divestitures. Organic sales grew two percent on a two percent increase in organic volume. All-in volume was unchanged.
Beauty segment organic sales grew one percent versus the prior year driven by pricing benefits and higher organic volume. Organic sales increased in Skin and Personal Care driven by growth of the super-premium SK-II skin care brand, partially offset by lower sales of Olay. Hair Care organic sales were unchanged as innovation-driven growth on Pantene and Head & Shoulders was offset by declines in other brands from competitive activity.
Grooming segment organic sales increased seven percent driven by higher pricing and volume. Sales growth was strong in developing markets driven by Fusion FlexBall innovation expansion and higher pricing while in developed markets sales growth behind the Fusion ProShield launch was offset by competitive activity in North America. Organic sales increased on Braun behind innovation-driven volume increases.
Health Care segment organic sales increased eight percent. Organic sales in Oral Care were up versus the prior year driven by increased marketing, strong innovation results and increased pricing. Personal Health Care organic sales increased due to a late cough and cold season and due to higher pricing mainly in developing markets.
Fabric & Home Care segment organic sales increased one percent due to an increase in organic volume. Fabric Care organic sales were unchanged as increased organic volume from premium product innovation and increased marketing support was offset by pricing investments. Home Care sales increased primarily due to strong innovation-driven growth in the Dish Care business.
Baby, Feminine & Family Care segment organic sales increased one percent versus year ago. Baby Care and Feminine Care organic sales both increased behind innovation-driven volume growth. Family Care organic sales decreased as volume growth in the U.S. was more than offset by pricing investments and a decline in Mexico from discontinuation of certain product lines.
Diluted net earnings per share from continuing operations were $0.71, an increase of 318% over the base period that included a Venezuelan deconsolidation charge of $0.71 per share. Diluted net earnings per share were $0.69, an increase of 283% versus the prior year. Current year results included a $0.02 per share loss from discontinued operations and non-core restructuring costs of $0.08 per share. Core earnings per share, which exclude non-core restructuring charges and the results of discontinued operations, were $0.79, a decrease of 15% versus the prior year. Excluding the impact of foreign exchange, currency-neutral core earnings per share decreased eight percent for the quarter.
Reported gross margin increased 130 basis points, including a 30 basis point increase in non-core restructuring charges. Core gross margin improved 160 basis points, including 80 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin increased 240 basis points, driven by 280 basis points of productivity cost savings and a 110 basis point benefit from lower commodity costs, which more than offset headwinds from 140 basis points of unfavorable mix and 10 basis points from innovation and capacity investments.
Selling, general and administrative expense (SG&A) as a percent of sales increased 290 basis points on a reported basis versus the prior year, including a 20 basis point net benefit from a year-on-year decline in non-core restructuring charges. Core SG&A as a percentage of sales increased 310 basis points, including 40 basis points of unfavorable foreign exchange impacts. On a currency-neutral basis, core SG&A increased 270 basis points versus the prior year driven by 280 basis points of increased advertising and sampling investments and 70 basis points of R&D and sales coverage investments and other operating costs, partially offset by 40 basis points of productivity savings from overhead and 40 basis points of savings in agency-related marketing costs.
Reported operating profit margin increased 1,060 basis points driven by the impact of the non-core Venezuelan charge in the prior year. Core operating profit margin was down 150 basis points versus the prior year, including 120 basis points of foreign exchange impacts. On a currency-neutral basis, core operating profit margin decreased 30 basis points as the gross margin improvement was more than offset by the increased investments in SG&A. Total productivity cost savings were 360 basis points for the quarter.
Fiscal Year 2016 Results
Fiscal year 2016 net sales were $65.3 billion, a decrease of eight percent versus the prior year, including a negative six percentage point impact from foreign exchange and a negative two percent from the combined impacts of Venezuela and minor brand divestitures. Organic sales grew one percent as the benefit of increased pricing more than offset a reduction in organic shipment volume. Diluted net earnings per share were $3.69, an increase of 51% versus the prior year which included the one-time charge for the deconsolidation of Venezuela. Core earnings per share were $3.67, a decrease of two percent.
Operating cash flow was $15.4 billion for the year. Adjusted free cash flow productivity was 115%. The Company reduced common stock outstanding at a value more than $8 billion through the combination of direct share repurchases and shares that were exchanged in the Duracell transaction. The Company also returned $7.4 billion of cash to shareholders as dividends. P&G announced an increase to the quarterly dividend in April, making this the 60th consecutive year of dividend increases.
Fiscal Year 2017 Guidance
P&G said it is projecting organic sales growth of approximately 2% for fiscal 2017. The Company expects the combined headwinds of foreign exchange and minor brand divestitures to reduce sales growth by about one percentage point. As a result, P&G estimates all-in sales growth of about 1% for fiscal 2017.
The Company said it expects core earnings per share growth of mid-single digits versus fiscal 2016 core EPS of $3.67. P&G noted that core EPS growth in the first quarter of fiscal 2017 will be disproportionately affected by foreign exchange headwinds, which do not fully annualize until later in the year, and the impact of lost finished product sales to its Venezuelan subsidiaries.
All-in GAAP earnings per share are expected to increase 45% to 55% versus fiscal year 2016 GAAP EPS of $3.69. The fiscal 2017 GAAP EPS estimate includes approximately $0.10 per share of non-core restructuring costs and a substantial gain from the divestiture of 41 beauty brands to Coty Inc. The exact earnings gain from the transaction with Coty will not be known until the completion of the deal, which is targeted for October 2016.