The FINANCIAL — The Procter & Gamble Company reported first quarter fiscal year 2016 currency-neutral Core earnings per share growth of 12% versus the prior year. Core earnings per share were $0.98, a decrease of one percent.
Diluted net earnings per share were $0.91, an increase of 32%. Net sales were $16.5 billion, a decrease of 12% versus the prior year due primarily to significant foreign exchange impacts. Organic sales decreased one percent. Core operating profit margin increased 270 basis points with improvement in gross margin and SG&A costs, according to Procter & Gamble.
Operating cash flow was $3.5 billion for the quarter. Adjusted free cash flow productivity was 101%. The Company repurchased $0.5 billion of common stock and returned $1.9 billion of cash to shareholders as dividends.
“We delivered strong first quarter operating profit margin and free cash flow results,” said Chairman, President, and Chief Executive Officer A.G. Lafley. “Top-line results were soft, as expected, given significant foreign exchange impacts, our deliberate choices to exit unprofitable businesses and the early stage of the improvement plans we’re implementing in our largest categories and markets. We continue to make strong progress on productivity savings, which will fuel smart investments in top-line growth. We expect second quarter organic sales growth to be positive and to further strengthen in the back half as we invest to build awareness and trial of our consumer-preferred products and brands.”
July – September Quarter Discussion
Net sales in the first quarter of fiscal year 2016 were $16.5 billion, a 12% decrease, including a negative nine percentage point impact from foreign exchange and two percentage point impact from the Venezuela deconsolidation and minor brand divestitures. Organic sales declined one percent as a two percent pricing benefit and one percent positive mix were more than offset by a four percent reduction in organic shipment volume. Organic sales were flat in the Fabric Care and Home Care and Grooming segments, and declined low single digits in the remaining segments. All-in and organic volume declined five percent and four percent, respectively. Pricing increased sales by two percent with higher pricing in all five business segments.
Beauty segment organic sales decreased two percent as lower organic volume was partially offset by a positive one percent impact from both pricing and mix. Volume decreased in Skin and Personal Care due to competitive activity and portfolio SKU reductions, partially offset by growth from marketing and innovation on the super-premium SK-II brand. Hair Care volume declined due to competitive activity and price increases in the previous fiscal year.
Grooming segment organic sales were unchanged as higher pricing on Blades & Razors and growth on Braun from innovation and increased trade support was offset by negative geographic and product mix and lower volume in Blades & Razors due to competitive activity and previous fiscal year price increases.
Health Care segment organic sales decreased one percent as lower volume was partially offset by favorable geographic mix and increased pricing in both Oral Care and Personal Health Care. Volume declined in both businesses following strong base period innovation, primarily in oral care, and due to competitive activity and increased pricing.
Fabric Care and Home Care segment organic sales were unchanged versus year ago as pricing and mix benefits offset lower volume. Organic sales in Home Care were in line with last year as pricing and mix benefits from innovation were offset by lower volume due to competitive activity. Fabric Care organic sales were flat as product mix benefits were offset by lower volume mainly due to de-prioritizing less profitable brands and products and increased competitive activity.
Baby, Feminine and Family Care segment organic sales declined three percent versus year ago as pricing benefits in Baby Care and Feminine Care along with mix benefits in Baby Care and Family Care were more than offset by lower volume in each of the three businesses. Baby Care volume declined due to competitive activity and increased pricing. Feminine Care volume declined due to price increases in the previous fiscal year. Family Care volume decreased due to exiting under-performing product lines in Mexico.
Core earnings per share were $0.98, a decrease of one percent versus the prior year. Excluding the impact of foreign exchange, currency-neutral Core earnings per share increased 12% for the quarter. Diluted net earnings per share from continuing operations increased three percent to $0.96. Diluted net earnings per share were $0.91, an increase of 32% versus the prior year, primarily driven by higher base period non-cash impairment charges related to the batteries business in discontinued operations.
Reported operating profit margin increased 340 basis points and Core operating profit margin was up 270 basis points versus the prior year, including 260 basis points of productivity cost savings and 50 basis points of foreign exchange impacts. On a currency-neutral basis, Core operating profit margin increased 320 basis points.
Reported gross margin increased 260 basis points. Core gross margin improved 250 basis points, including 60 basis points of negative foreign exchange impacts. On a currency-neutral basis, Core gross margin increased 310 basis points including 170 basis points of productivity cost savings
Selling, general and administrative expense (SG&A) decreased 90 basis points on a reported basis versus the prior year, including a 70 basis point net benefit due to a Venezuela balance sheet remeasurement charge in the base period. Core SG&A as a percentage of sales decreased 20 basis points, including a 10 basis point benefit from foreign exchange impacts. On a currency-neutral basis, Core SG&A decreased 10 basis points versus the prior year driven by 90 basis points of productivity savings from overhead and marketing costs, partially offset by 80 basis points of organization capability investments and lower sales.
Fiscal Year 2016 Guidance
P&G announced the planned exit of several Beauty categories on July 9, 2015. P&G clarified that its guidance for fiscal year 2016 Core EPS is relative to fiscal 2015 results, revised for the impacts of moving earnings from the Beauty categories it plans to exit to discontinued operations. Fiscal year 2015 Core EPS, which is based on earnings from continuing operations, have been revised from the $4.02 level originally reported to $3.76 per share as a result of this change. P&G referred readers to the informational 8-K furnished on September 8, 2015 which provides more details of the impacts to its financial results due to this change.
P&G maintained its outlook for organic sales of in-line to up low single digits versus fiscal 2015. Foreign exchange is now expected to be a five to six percentage point headwind on all-in sales growth. Additionally, P&G said it expects a two to three point reduction in sales from the combination of minor brand divestitures and the deconsolidation of results of its Venezuelan subsidiaries. As a result, the Company expects all-in sales to be down high single digits versus fiscal 2015 results.
The Company said increased volatility in market growth and foreign exchange rates have made earnings results more difficult to forecast. P&G maintained its guidance for Core earnings per share of slightly below to up mid-single digits versus fiscal 2015 restated Core EPS of $3.76. P&G said it continues to expect strong Core operating profit growth for the fiscal year and will not cut smart investments to offset foreign exchange impacts.
Including the impacts of non-Core restructuring costs and discontinued operations, P&G continues to expect all-in GAAP EPS to be up 53% to 63% versus fiscal year 2015 all-in GAAP EPS of $2.44.