|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors,” and Notes 4, 10 and 11 to the Consolidated Financial Statements. These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise.
Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility; (2) the ability to successfully manage local, regional or global economic volatility, including disruptions in credit markets, reduced market growth rates or changes affecting our credit rating, and generate sufficient income and cash flow to allow the Company to effect the expected share repurchases and dividend payments; (3) the ability to maintain key manufacturing and supply arrangements (including sole supplier and sole manufacturing plant arrangements) and manage disruption of business due to factors outside of our control, such as natural disasters and acts of war or terrorism; (4) the ability to successfully manage cost fluctuations and pressures, including commodity prices, raw materials, labor costs, energy costs and pension and health care costs, and achieve cost savings described in our announced productivity plan; (5) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to technological advances attained by, and patents granted to, competitors; (6) the ability to compete with our local and global competitors in new and existing sales channels by successfully responding to competitive factors, including prices, promotional incentives and trade terms for products; (7) the ability to manage and maintain key customer relationships; (8) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, efficacy or similar matters that may arise; (9) the ability to successfully manage the financial, legal, reputational and operational risk associated with third party relationships, such as our suppliers, contractors and external business partners; (10) the ability to rely on and maintain key information technology systems and networks (including Company and third-party systems and networks) and maintain the security and functionality of such systems and networks and the data contained therein; (11) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, intellectual property, antitrust, privacy, accounting standards and environmental) and to resolve pending matters within current estimates; (12) the ability to manage changes in applicable tax laws and regulations; (13) the ability to successfully manage our portfolio optimization strategy, as well as ongoing acquisition, divestiture and joint venture activities, to achieve the Company’s overall business strategy, without impacting the delivery of base business objectives; and (14) the ability to successfully achieve productivity improvements and manage ongoing organizational changes, while successfully identifying, developing and retaining particularly key employees, especially in key growth markets where the availability of skilled or experienced employees may be limited. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from those projected herein is included in the section titled "Economic Conditions and Uncertainties" and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q).
The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. MD&A is organized in the following sections:
|
|
•
|
Summary of Results –
Nine
Months Ended
March 31, 2016
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations – Three and
Nine
Months Ended
March 31, 2016
|
|
|
•
|
Business Segment Discussion – Three and
Nine
Months Ended
March 31, 2016
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Reconciliation of Measures Not Defined by U.S. GAAP
|
Throughout MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (Core EPS), free cash flow and adjusted free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of the Venezuela deconsolidation, acquisitions, divestitures and foreign exchange from year-over-year comparisons. Core EPS is diluted net earnings per share from continuing operations excluding certain items that are not judged to be part of the Company's sustainable results or trends. Free cash flow is operating cash flow less capital spending. Adjusted free cash flow productivity is the ratio of free cash flow to net earnings excluding impairment charges and the gain on the sale of the Batteries business. We believe these measures provide our investors with additional information about our underlying results and trends, as well as insight to some of the metrics used to evaluate management. The explanation at the end of MD&A provides more details on the use and the derivation of these measures.
Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.
OVERVIEW
P&G is a global leader in fast-moving consumer goods, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than
180
countries and territories primarily through mass merchandisers, grocery stores, membership club stores, drug stores, department stores, distributors, e-commerce, high-frequency stores and pharmacies. We have on-the-ground operations in approximately
70
countries.
Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.
The table below provides more information about the components of our reportable segment structure.
|
|
|
|
Reportable Segment
|
Global Business Units (Categories)
|
Billion Dollar Brands
|
Beauty
|
Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care); Hair Care
|
Head & Shoulders, Olay, Pantene, SK-II
|
Grooming
|
Shave Care (Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care); Electronic Hair Removal
|
Fusion, Gillette, Mach3, Prestobarba
|
Health Care
|
Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care); Oral Care (Toothbrush, Toothpaste, Other Oral Care)
|
Crest, Oral-B, Vicks
|
Fabric Care and Home Care
|
Fabric Care (Laundry Additives, Fabric Enhancers, Laundry Detergents); Home Care (Air Care, Dish Care, P&G Professional, Surface Care)
|
Ariel, Dawn, Downy, Febreze, Gain, Tide
|
Baby, Feminine and Family Care
|
Baby Care (Baby Wipes, Diapers and Pants); Feminine Care (Adult Incontinence, Feminine Care); Family Care (Paper Towels, Tissues, Toilet Paper)
|
Always, Bounty, Charmin, Pampers
|
The following table provides the percentage of net sales and net earnings by reportable business segment for the three and
nine
months ended
March 31, 2016
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Nine Months Ended March 31, 2016
|
|
Net Sales
|
|
Net Earnings
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
17%
|
|
19%
|
|
18%
|
|
21%
|
Grooming
|
11%
|
|
15%
|
|
11%
|
|
15%
|
Health Care
|
11%
|
|
12%
|
|
11%
|
|
12%
|
Fabric Care and Home Care
|
32%
|
|
27%
|
|
32%
|
|
27%
|
Baby, Feminine and Family Care
|
29%
|
|
27%
|
|
28%
|
|
25%
|
Total Company
|
100%
|
|
100%
|
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
nine
months ended
March 31, 2016
versus the
nine
months ended
March 31, 2015
:
|
|
•
|
Net sales decreased 9% versus the previous year to
$49.2 billion
. Organic sales, which exclude the impacts of acquisitions and divestitures, foreign exchange and Venezuela deconsolidation, were unchanged. Organic sales increased 2% in Fabric Care and Home Care, 1% in Grooming and in Health Care, decreased 1% in Baby, Feminine and Family Care, and were unchanged in Beauty.
|
|
|
•
|
Unit volume decreased 4% on an all-in and 2% on an organic basis. Volume decreased low single digits in Fabric Care and Home Care and decreased mid-single digits in Beauty, Grooming, Health Care and Baby, Feminine and Family Care.
|
|
|
•
|
Net earnings from continuing operations were
$8.0 billion
, an increase of
$228 million
, or
3%
versus the prior year period. This increase was driven primarily by operating margin expansion, which more than offset the reduction in net sales.
|
|
|
•
|
Diluted net earnings per share from continuing operations increased
4%
to
$2.78
.
|
|
|
•
|
Net earnings attributable to Procter & Gamble were
$8.6 billion
, an increase of
$2.0 billion
, or
31%
versus the prior year period. This was primarily driven by a $1.8 billion increase in earnings from discontinued operations from incremental base period impairment charges of $1.6 billion related to our Batteries business and a $422 million gain on the sale of the Batteries business in the current period.
|
|
|
•
|
Core net earnings per share, which excludes discontinued operations, incremental restructuring charges, prior year charges for balance sheet remeasurement related to the Venezuelan currency and charges for certain European legal matters, increased
2%
to
$2.88
.
|
|
|
•
|
Operating cash flow was
$11.3 billion
. Free cash flow, which is operating cash flow less capital expenditures, was
$9.3 billion
. Adjusted free cash flow productivity, which is the ratio of free cash flow to net earnings excluding impairment charges and the gain on sale of the Batteries business, was
108%
.
|
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions.
Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies as commodity prices decline, greater political unrest in the Middle East and Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets and economic slowdowns in Japan and China, could reduce our sales or erode our operating margin, in either case reducing our earnings.
Changes in Costs.
Our costs are subject to fluctuations, particularly due to changes in commodity prices and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins, and volatility in the market price of these commodity input materials has a direct impact on our costs. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross margin, operating margin and net earnings. Sales could also be adversely impacted following pricing actions if there is a negative impact on consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including outsourcing projects, supply chain optimization and general overhead and workforce optimization. As discussed later in this MD&A, we initiated certain non-manufacturing overhead reduction projects along with manufacturing and other supply chain cost improvements projects in 2012. If we are not successful in executing these changes, there could be a negative impact on our operating margin and net earnings.
Foreign Exchange.
We have both translation and transaction exposure to the fluctuation of exchange rates. Translation exposures relate to exchange rate impacts of measuring income statements of foreign subsidiaries that do not use the U.S. dollar as their functional currency. Transaction exposures relate to 1) the impact from input costs that are denominated in a currency other than the local reporting currency and 2) the revaluation of transaction-related working capital balances denominated in currencies other than the functional currency. In 2016, 2015 and 2014, the U.S. dollar has strengthened versus a number of foreign currencies leading to lower sales and earnings from these foreign exchange impacts. Certain countries experiencing significant exchange rate fluctuations, like Argentina, Brazil, Canada, Japan, Mexico, Russia and Turkey have had, and could have, an additional significant impact on our sales, costs and earnings. Increased pricing in response to these fluctuations in foreign currency exchange rates may offset portions of the currency impacts, but could also have a negative impact on consumption of our products, which would affect our sales.
Government Policies.
Our net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. Additionally, we attempt to carefully manage our debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Argentina, Egypt, Nigeria and Ukraine. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings. During fiscal 2015, the Company deconsolidated its Venezuelan subsidiaries due to evolving conditions that resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and restricted our ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars.
For information on risk factors that could impact our results, refer to Part I, Item 1A "Risk Factors" in the Company's Form 10-K for the fiscal year ended June 30, 2015.
RESULTS OF OPERATIONS – Three Months Ended
March 31, 2016
The following discussion provides a review of results for the three months ended
March 31, 2016
versus the three months ended
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
Amounts in millions, except per share amounts
|
2016
|
|
2015
|
|
% Chg
|
Net sales
|
$
|
15,755
|
|
|
$
|
16,930
|
|
|
(7
|
)%
|
Operating income
|
3,318
|
|
|
3,025
|
|
|
10
|
%
|
Net earnings from continuing operations
|
2,337
|
|
|
2,401
|
|
|
(3
|
)%
|
Net earnings/(loss) from discontinued operations
|
446
|
|
|
(213
|
)
|
|
N/A
|
|
Net earnings attributable to Procter & Gamble
|
2,750
|
|
|
2,153
|
|
|
28
|
%
|
Diluted net earnings per common share
|
0.97
|
|
|
0.75
|
|
|
29
|
%
|
Diluted net earnings per share from continuing operations
|
0.81
|
|
|
0.82
|
|
|
(1
|
)%
|
Core net earnings per common share
|
0.86
|
|
|
0.89
|
|
|
(3
|
)%
|
|
COMPARISONS AS A % OF NET SALES
|
2016
|
|
2015
|
|
Basis Pt Chg
|
Gross margin
|
49.8%
|
|
47.3%
|
|
250
|
Selling, general & administrative expense
|
28.7%
|
|
29.4%
|
|
(70)
|
Operating margin
|
21.1%
|
|
17.9%
|
|
320
|
Earnings from continuing operations before income taxes
|
20.5%
|
|
17.5%
|
|
300
|
Net earnings from continuing operations
|
14.8%
|
|
14.2%
|
|
60
|
Net earnings attributable to Procter & Gamble
|
17.5%
|
|
12.7%
|
|
480
|
Net Sales
Net sales decreased
7%
to
$15.8 billion
for the third quarter. Unit volume decreased 2%. Unfavorable foreign exchange reduced net sales by 5%. Sales growth in most business segments continued to benefit, to varying degrees, from price increases taken with new product innovations and/or to offset the impact of currency devaluation in markets such as Argentina, Canada, Mexico and Turkey. Higher pricing increased net sales by 1%. The impact of minor brand divestitures and the Venezuela deconsolidation reduced net sales by 3%. Volume was unchanged in Fabric Care and Home Care and decreased low single digits in Baby, Feminine and Family Care and in Health Care. Volume decreased mid-single digits in Beauty and in Grooming. Volume increased low single digits in developed regions and decreased high single digits in developing regions. Organic sales increased 1% driven by improved pricing on organic volume that was unchanged.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2016 vs. 2015 (Three Months Ended March 31)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
(5)%
|
|
(1)%
|
|
(5)%
|
|
2%
|
|
—%
|
|
—%
|
|
(8)%
|
Grooming
|
(6)%
|
|
(5)%
|
|
(7)%
|
|
5%
|
|
(1)%
|
|
(1)%
|
|
(10)%
|
Health Care
|
(3)%
|
|
(2)%
|
|
(5)%
|
|
1%
|
|
—%
|
|
—%
|
|
(7)%
|
Fabric Care and Home Care
|
—%
|
|
2%
|
|
(5)%
|
|
1%
|
|
—%
|
|
—%
|
|
(4)%
|
Baby, Feminine and Family Care
|
(2)%
|
|
(1)%
|
|
(5)%
|
|
—%
|
|
—%
|
|
(1)%
|
|
(8)%
|
Total Company
|
(2)%
|
|
—%
|
|
(5)%
|
|
1%
|
|
—%
|
|
(1)%
|
|
(7)%
|
* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
** Other includes the sales mix impact from acquisitions/divestitures, Venezuela deconsolidation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin increased
250
basis points to
49.8%
of net sales for the quarter. Gross margin increased primarily due to a 230 basis point positive impact from manufacturing cost savings, a 130 basis point benefit from lower commodity costs and a 60 basis point benefit of higher pricing. These impacts were partially offset by an 70 basis point negative impact from unfavorable foreign exchange, a 20 basis point decrease due to incremental restructuring charges, an 80 basis point decline from unfavorable mix, including product mix across segments (caused by a disproportionate decline in Grooming which has higher than average gross margin), product forms within certain businesses and other impacts.
Total SG&A decreased 9% to $4.5 billion due to foreign exchange impacts and productivity efforts. SG&A as a percentage of net sales decreased
70
basis points to
28.7%
due to lower foreign exchange transactional charges and the decreased overhead spending behind productivity efforts, partially offset by increased marketing spending and the negative scale impacts from reduced sales. Marketing spending as a percentage of net sales increased 130 basis points due to the negative scale impacts from reduced sales and increased advertising spending. Overhead costs as a percentage of net sales decreased 60 basis points, as 60 basis points of productivity savings in overhead spending and a 50 basis point benefit from reduced restructuring activity were partially offset by wage inflation, investments in research and development and the negative scale impacts from reduced sales. Lower foreign exchange transactional charges, from revaluing receivables and payables from transactions denominated in a currency other than a local entity’s functional currency, reduced SG&A as a percentage of net sales by 100 basis points.
Non-Operating Expenses and Income
Interest expense was
$146 million
for the quarter, a decrease of
$2 million
versus the prior year period, due to a decrease in weighted average interest rates. Interest income was
$33 million
for the quarter, a decrease of
$5 million
versus the prior period. Other non-operating income was
$21 million
, a decrease of
$32 million
, due to a gain from a minor brand divestiture in the base period.
Income Taxes
The effective tax rate on continuing operations increased 850 basis points to
27.6%
. The current year rate increased due to unfavorable geographic mix of earnings versus the base period, which had an unusually high benefit from favorable geographic mix, and the current year establishment of a valuation allowance on deferred tax assets related to net operating loss carryforwards. These increases were partially offset by the net impact of unfavorable discrete adjustments related to uncertain income tax positions in the base period.
Net Earnings from Continuing Operations
Net earnings from continuing operations decreased
$64 million
or
3%
for the quarter. This decrease was caused by the reduction in net sales and increase in the effective income tax rate, partially offset by the 320 basis point increase in operating income margin discussed above. Foreign exchange impacts reduced net earnings by about $89 million for the quarter due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Canada, Mexico and Turkey. This impact includes both transactional charges as discussed above in Operating Costs and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations decreased
1%
to
$0.81
due to decreased net earnings.
Discontinued Operations
The net earnings from discontinued operations improved by $659 million to
$446 million
in the current period versus a net loss of
$213 million
in the prior period. This change was driven primarily by a $422 million current period after-tax gain from the sale of the Batteries business and a base period $308 million after-tax impairment charge in the Batteries business, partially offset by a decrease in the earnings of the Beauty Brands which declined due to currency-driven declines in sales and operating income margin and an impairment charge associated with the Dolce & Gabbana license (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble increased
$597 million
or
28%
to
$2.8 billion
for the quarter. The increase was due to the increase in net earnings from discontinued operations, partially offset by the decline in net earnings from continuing operations, both discussed above. Diluted net earnings per share increased
29%
to
$0.97
. Core net earnings per share decreased 3% to
$0.86
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding incremental restructuring charges related to our productivity and cost savings plans and charges related to certain European legal matters.
Foreign Currency Translation – Venezuela Impacts
There are a number of currency and other operating controls and restrictions in Venezuela, which have evolved over time and may continue to evolve in the future. These evolving conditions resulted in an other-than-temporary lack of exchangeability between the Venezuelan bolivar and U.S. dollar and restricted our Venezuelan operations’ ability to pay dividends and satisfy certain other obligations denominated in U.S. dollars. For accounting purposes, this resulted in a lack of control over our Venezuelan subsidiaries. Therefore, in accordance with the applicable accounting standards for consolidation, effective June 30, 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investment in those subsidiaries using the cost method of accounting. This resulted in a write-off of all of the net assets of our Venezuela subsidiaries, along with Venezuela related assets held by other subsidiaries. Beginning with the first quarter of fiscal 2016, our financial results only include sales of finished goods to our Venezuelan subsidiaries to the extent we receive payments from the Venezuelan government. Accordingly, we no longer include the results of our Venezuelan subsidiaries’ operations in our financial results.
RESULTS OF OPERATIONS –
Nine
Months Ended
March 31, 2016
The following discussion provides a review of results for the
nine
months ended
March 31, 2016
versus the
nine
months ended
March 31, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31
|
Amounts in millions, except per share amounts
|
2016
|
|
2015
|
|
% Chg
|
Net sales
|
$
|
49,197
|
|
|
$
|
54,196
|
|
|
(9
|
)%
|
Operating income
|
10,939
|
|
|
10,237
|
|
|
7
|
%
|
Net earnings from continuing operations
|
8,019
|
|
|
7,791
|
|
|
3
|
%
|
Net earnings/(loss) from discontinued operations
|
627
|
|
|
(1,185
|
)
|
|
N/A
|
|
Net earnings attributable to Procter & Gamble
|
8,557
|
|
|
6,515
|
|
|
31
|
%
|
Diluted net earnings per common share
|
3.00
|
|
|
2.26
|
|
|
33
|
%
|
Diluted net earnings per share from continuing operations
|
2.78
|
|
|
2.67
|
|
|
4
|
%
|
Core net earnings per common share
|
2.88
|
|
|
2.83
|
|
|
2
|
%
|
|
COMPARISONS AS A % OF NET SALES
|
2016
|
|
2015
|
|
Basis Pt Chg
|
Gross margin
|
50.1%
|
|
47.9%
|
|
220
|
Selling, general & administrative expense
|
27.9%
|
|
29.0%
|
|
(110)
|
Operating margin
|
22.2%
|
|
18.9%
|
|
330
|
Earnings from continuing operations before income taxes
|
21.7%
|
|
18.4%
|
|
330
|
Net earnings from continuing operations
|
16.3%
|
|
14.4%
|
|
190
|
Net earnings attributable to Procter & Gamble
|
17.4%
|
|
12.0%
|
|
540
|
Net Sales
Net sales decreased
9%
to
$49.2 billion
fiscal year to date. Unit volume decreased 4%. Unfavorable foreign exchange reduced net sales by 7%. Higher pricing, primarily to offset inflation and devaluation, increased net sales by 2%. Volume decreased low single digits in Fabric Care and Home Care and decreased mid-single digits in Beauty, Grooming, Health Care and in Baby, Feminine and Family Care. Volume increased low single digits in developed regions and decreased high single digits in developing regions due to increased pricing, competitive activity, minor brand divestitures and the impact of the Venezuela deconsolidation. Organic sales were flat on a 2% decline in organic volume due to improved pricing.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2016 vs. 2015 (Nine Months Ended March 31)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
(6)%
|
|
(3)%
|
|
(7)%
|
|
2%
|
|
1%
|
|
—%
|
|
(10)%
|
Grooming
|
(4)%
|
|
(3)%
|
|
(11)%
|
|
5%
|
|
(2)%
|
|
1%
|
|
(11)%
|
Health Care
|
(4)%
|
|
(4)%
|
|
(7)%
|
|
2%
|
|
2%
|
|
(1)%
|
|
(8)%
|
Fabric Care and Home Care
|
(1)%
|
|
—%
|
|
(7)%
|
|
1%
|
|
—%
|
|
(1)%
|
|
(8)%
|
Baby, Feminine and Family Care
|
(4)%
|
|
(3)%
|
|
(7)%
|
|
1%
|
|
—%
|
|
—%
|
|
(10)%
|
Total Company
|
(4)%
|
|
(2)%
|
|
(7)%
|
|
2%
|
|
—%
|
|
—%
|
|
(9)%
|
* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
** Other includes the sales mix impact from acquisitions/divestitures, Venezuela deconsolidation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin increased
220
basis points to
50.1%
of net sales for the fiscal year to date period. Gross margin increased primarily due to a 180 basis point positive impact from manufacturing cost savings, a 110 basis point benefit from lower commodity costs and a 90 basis point benefit of higher pricing. These impacts were partially offset by a 70 basis point negative impact from unfavorable foreign exchange, a 40 basis point decrease due to unfavorable product mix caused by the disproportionate decline of higher margin segments like Beauty and by product form mix within the segments, a 20 basis point decline due to incremental restructuring activity and a 30 basis point decrease from negative scale impacts due to lower volume and other impacts.
Total SG&A decreased 13% to $13.7 billion due to foreign exchange impacts, productivity efforts in both overhead and marketing and a base period Venezuela balance sheet remeasurement charge. SG&A as a percentage of net sales decreased
110
basis points to
27.9%
, due to lower net foreign exchange transactional charges and decreased spending behind productivity efforts, partially offset by the negative scale impacts from reduced sales. Marketing spending as a percentage of net sales increased 50 basis points as lower spending did not keep pace with reduced sales. Overhead costs as a percentage of net sales decreased 30 basis points, as 70 basis points of productivity savings in overhead spending were partially offset by wage inflation, investments in research and development and the negative scale impacts from reduced sales. Lower foreign exchange transactional charges reduced SG&A as a percentage of net sales by 110 basis points. A Venezuelan balance sheet remeasurement charge in the base period prior to deconsolidation drove 30 basis points of this decline. The balance of the reduction relates to lower transactional charges from revaluing receivables and payables from transactions denominated in a currency other than a local entity’s functional currency.
Non-Operating Expenses and Income
Interest expense was
$429 million
fiscal year to date, a decrease of
$49 million
versus the prior year period due to lower average debt and a decrease in weighted average interest rates. Interest income was
$135 million
fiscal year to date, an increase of
$32 million
versus the prior period due to higher cash and investment balances. Other non-operating income decreased
$47 million
to
$38 million
due to greater gains on the sale of minor brands in the base period.
Income Taxes
The effective tax rate on continuing operations increased 320 basis points to
24.9%
. The current year rate increased due to the unfavorable geographic mix of earnings and the current year establishment of a valuation allowance on deferred tax assets related to net operating loss carryforwards.
Net Earnings from Continuing Operations
Net earnings from continuing operations increased
$228 million
or
3%
fiscal year to date. This increase was caused by a 330 basis point increase in operating income margin discussed above, which more than offset the reduction in net sales. Foreign exchange impacts reduced net earnings by about $682 million fiscal year to date due to weakening of certain key currencies against the U.S. dollar, primarily in Argentina, Canada, Mexico and Russia. This impact includes both transactional charges as discussed above in Operating Costs and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations increased
4%
to
$2.78
due to increased net earnings and a reduction in the weighted average number of shares outstanding.
Discontinued Operations
The net earnings from discontinued operations improved $1.8 billion to
$627 million
fiscal year to date versus a net loss of
$1.2 billion
in the prior period. This was driven primarily by a $1.7 billion reduction in after-tax impairment charges in the Batteries business ($350 million in the current nine month period compared to $2.0 billion in the base period) and a $422 million after-tax gain in the current period from the sale of the Batteries business, partially offset by a decrease in the earnings of the Beauty Brands (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble increased
$2.0 billion
or
31%
to
$8.6 billion
fiscal year to date. The increase was due to the change in earnings from discontinued operations and the increase in net earnings from continuing operations (both discussed above). Diluted net earnings per share increased
33%
to
$3.00
. Core net earnings per share increased
2%
to
$2.88
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding incremental restructuring charges in both periods related to our productivity and cost savings plans, charges related to European legal matters in both years and prior year balance sheet remeasurement costs from the Venezuelan currency.
BUSINESS SEGMENT DISCUSSION – Three and
Nine
Months Ended
March 31, 2016
The following discussion provides a review of results by reportable business segment. Analyses of the results for the three and
nine
month periods ended
March 31, 2016
are provided based on a comparison to the same three and
nine
month periods ended
March 31, 2015
. The primary financial measures used to evaluate segment performance are net sales and net earnings from continuing operations. The table below provides supplemental information on net sales and net earnings from continuing operations by reportable business segment for the three and
nine
months ended
March 31, 2016
versus the comparable prior year period (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
2,719
|
|
|
(8
|
)%
|
|
$
|
604
|
|
|
(6
|
)%
|
|
$
|
458
|
|
|
(5
|
)%
|
Grooming
|
1,623
|
|
|
(10
|
)%
|
|
469
|
|
|
(22
|
)%
|
|
356
|
|
|
(22
|
)%
|
Health Care
|
1,773
|
|
|
(7
|
)%
|
|
414
|
|
|
(10
|
)%
|
|
278
|
|
|
(8
|
)%
|
Fabric Care and Home Care
|
5,028
|
|
|
(4
|
)%
|
|
1,014
|
|
|
8
|
%
|
|
652
|
|
|
10
|
%
|
Baby, Feminine and Family Care
|
4,506
|
|
|
(8
|
)%
|
|
976
|
|
|
(3
|
)%
|
|
631
|
|
|
(9
|
)%
|
Corporate
|
106
|
|
|
N/A
|
|
|
(251
|
)
|
|
N/A
|
|
|
(38
|
)
|
|
N/A
|
|
Total Company
|
$
|
15,755
|
|
|
(7
|
)%
|
|
$
|
3,226
|
|
|
9
|
%
|
|
$
|
2,337
|
|
|
(3
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2016
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
8,723
|
|
|
(10
|
)%
|
|
$
|
2,200
|
|
|
(4
|
)%
|
|
$
|
1,667
|
|
|
(3
|
)%
|
Grooming
|
5,103
|
|
|
(11
|
)%
|
|
1,547
|
|
|
(20
|
)%
|
|
1,187
|
|
|
(19
|
)%
|
Health Care
|
5,547
|
|
|
(8
|
)%
|
|
1,426
|
|
|
(1
|
)%
|
|
990
|
|
|
—
|
%
|
Fabric Care and Home Care
|
15,626
|
|
|
(8
|
)%
|
|
3,311
|
|
|
7
|
%
|
|
2,172
|
|
|
8
|
%
|
Baby, Feminine and Family Care
|
13,874
|
|
|
(10
|
)%
|
|
3,124
|
|
|
(6
|
)%
|
|
2,063
|
|
|
(9
|
)%
|
Corporate
|
324
|
|
|
N/A
|
|
|
(925
|
)
|
|
N/A
|
|
|
(60
|
)
|
|
N/A
|
|
Total Company
|
$
|
49,197
|
|
|
(9
|
)%
|
|
$
|
10,683
|
|
|
7
|
%
|
|
$
|
8,019
|
|
|
3
|
%
|
Beauty
Three months ended
March 31, 2016
compared with three
months ended
March 31, 2015
Beauty net sales decreased
8%
to
$2.7 billion
during the
third fiscal quarter
on a 5% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 5%. Price increases had a 2% positive impact on net sales. Organic sales increased 1% on organic volume that decreased 1%. Global market share of the Beauty segment decreased 0.9 points. Volume decreased low single digits in developed markets. Volume was down high single digits in developing markets, in part due to minor brand divestitures, and was down low single digits on an organic basis.
|
|
•
|
Volume in Hair Care was down low single digits due to minor brand divestitures and Venezuela deconsolidation. Organic volume was unchanged. Developed markets declined low single digits due to competitive activity while developing markets declined mid-single digits due to minor brand divestitures and Venezuela deconsolidation. Organic volume was unchanged in developing markets. Global market share of the hair care category decreased a point.
|
|
|
•
|
Volume in Skin and Personal Care decreased high single digits, while organic volume decreased low single digits, with the difference attributable to the Camay and Zest brand divestitures and Venezuela deconsolidation. Volume decreased low single digits in developed regions as declines due to competitive activity were only partially offset by growth in super-premium skin. Volume decreased double digits in developing regions with organic volume down mid-single digits primarily due to competitive activity. Global market share of the skin and personal care category decreased a point.
|
Net earnings decreased
5%
to
$458 million
primarily due to the reduction in net sales, partially offset by a 60 basis point increase in net earnings margin as an increase in gross margin more than offset an increase in SG&A as a percentage of net sales. Gross margin increased primarily due to increased pricing and productivity savings which were only partially offset by unfavorable product mix in both Hair Care and Skin and Personal Care. SG&A as a percentage of net sales increased as cost savings from productivity efforts were more than offset by the negative scale impact from the reduction in sales.
Nine
months ended
March 31, 2016
compared with
nine
months ended
March 31, 2015
Beauty net sales decreased
10%
to
$8.7 billion
fiscal year to date on a 6% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 7%. Price increases added 2% and favorable geographic mix had a 1% positive impact on net sales due to the disproportionate decline in developing region volume, which has lower than segment-average selling prices. Organic sales were unchanged on organic volume that decreased 3%. Global market share of the Beauty segment decreased 1.0 point. Volume decreased mid-single digits in developed markets. Volume was down high single digits in developing markets, in part due to minor brand divestitures, and was down low single digits on an organic basis.
|
|
•
|
Volume in Hair Care was down mid-single digits. Developed markets declined mid-single digits due to competitive activity while developing markets also declined mid-single digits driven by increased pricing, the Venezuela deconsolidation and minor brand divestitures. Global market share of the hair care category decreased more than a point.
|
|
|
•
|
Volume in Skin and Personal Care decreased double digits, while organic volume decreased mid-single digits, with the difference attributable to the Camay and Zest brand divestitures and Venezuela deconsolidation. Organic volume was unchanged in developed regions as commercial innovation was offset by ongoing competitive activity. Organic volume declined high single digits in developing regions primarily due to increased pricing and competitive activity. Global market share of the skin and personal care category decreased more than a point.
|
Net earnings decreased
3%
to
$1.7 billion
primarily due to the reduction in net sales, partially offset by a 130 basis point increase in net earnings margin, primarily behind gross margin expansion. Gross margin increased primarily due to increased pricing and productivity savings. SG&A as a percentage of net sales increased slightly, as lower marketing and overhead spending from the Company's focus on efficiencies was more than offset by the reduction in sales.
Grooming
Three months ended
March 31, 2016
compared with three
months ended
March 31, 2015
Grooming net sales decreased
10%
to
$1.6 billion
during the
third fiscal quarter
on a 6% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 7%. Price increases in Shave Care contributed 5% to net sales. Unfavorable geographic and product mix decreased net sales by 1% driven by a disproportionate decline in certain developed markets with higher than segment average selling prices and to a lesser extent by product mix within developing regions from the decline of certain higher priced system razor cartridges. Organic sales decreased 1% on organic volume that decreased 5%. Global market share of the Grooming segment decreased 0.9 points. Volume decreased low single digits in developed regions and decreased high single digits in developing regions.
|
|
•
|
Shave Care volume decreased mid-single digits. Volume decreased mid-single digits in developed regions and high single digits in developing regions both due to competitive activity and increased pricing. Global market share of the blades and razors category decreased slightly.
|
|
|
•
|
Volume in Electronic Hair Removal increased low single digits. Volume was up low single digits in developed regions and high single digits in developing regions both from product innovation. Global market share of the electronic hair removal category decreased less than a point.
|
Net earnings decreased
22%
to
$356 million
due to the reduction in net sales and a 340 basis-point decrease in net earnings margin mainly due to increased SG&A spending. Gross margin declined slightly as the benefits of increased pricing and productivity efforts were more than offset by negative geographic mix driven by a disproportionate decline in certain developed markets with higher than segment average gross margin. SG&A as a percent of net sales increased due to increased marketing spending along with the negative scale impact of lower net sales.
Nine
months ended
March 31, 2016
compared with
nine
months ended
March 31, 2015
Grooming net sales decreased
11%
to
$5.1 billion
fiscal year to date on a 4% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 11%. Price increases in both Shave Care and Electronic Hair Removal contributed 5% to net sales. Unfavorable product mix decreased net sales by 2% driven by a higher relative mix of disposable razors, which have lower than segment average selling prices, compared to system razor cartridges. Organic sales increased 1% on organic volume that decreased 3%. Global market share of the Grooming segment decreased 1.2 points. Volume decreased low single digits in developed regions and mid-single digits in developing regions.
|
|
•
|
Shave Care volume decreased mid-single digits. Developed regions decreased low single digits and developing regions decreased mid-single digits both due to competitive activity and increased pricing. Global market share of the blades and razors category decreased more than half a point.
|
|
|
•
|
Volume in Electronic Hair Removal was up low single digits due to a mid-single-digit increase in developed regions from product innovation. Volume in developing regions was unchanged as growth from product innovation offset reductions due to increased pricing. Global market share of the electronic hair removal category decreased less than half a point.
|
Net earnings decreased
19%
to
$1.2 billion
due to the reduction in net sales and a 220 basis-point decrease in net earnings margin. Gross margin declined as the benefits of increased pricing and productivity efforts were more than offset by negative product mix
due to an increase in the proportion of disposable razors compared to system razors. SG&A as a percentage of net sales increased due to the negative scale impact of lower net sales.
Health Care
Three months ended
March 31, 2016
compared with three
months ended
March 31, 2015
Health Care net sales were down
7%
to
$1.8 billion
during the
third fiscal quarter
on a 3% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 5%. Price increases in both Oral Care and Personal Health Care contributed 1% to net sales. Organic sales decreased 1% on organic volume that decreased 2%. Global market share of the Health Care segment decreased 0.8 points. Volume decreased low single digits in developed regions and was down mid-single digits in developing regions.
|
|
•
|
Oral Care volume declined low single digits due to a high single-digit decrease in developing regions caused by increased pricing and reduced imports to Venezuela. Volume in developed regions was unchanged. Global market share of the oral care category decreased more than a point.
|
|
|
•
|
Volume in Personal Health Care decreased low single digits in both developed and developing regions mainly due to a weak cough/cold season as well as increased pricing. Global market share of the personal health care category was down more than half a point.
|
Net earnings decreased
8%
to
$278 million
primarily due to lower net sales. Net earnings margin decreased 20 basis points as increased gross margin from manufacturing cost savings and increased pricing was offset by lower non-operating income due to a gain from a minor brand divestiture in the base period. SG&A as a percentage of net sales declined marginally due to reduced marketing costs from the focus on productivity.
Nine
months ended
March 31, 2016
compared with
nine
months ended
March 31, 2015
Health Care net sales were down
8%
to
$5.5 billion
fiscal year to date on a 4% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 7%. Price increases contributed 2% to net sales. Favorable geographic mix increased net sales 2%, primarily driven by a decline in Oral Care volume in developing regions, which have lower than segment average selling prices. Organic sales increased 1% on organic volume that decreased 4%. Global market share of the Health Care segment decreased 0.8 points. Volume was down low single digits in developed regions and declined high single digits in developing regions.
|
|
•
|
Oral Care volume declined mid-single digits due to a double-digit decrease in developing regions caused by increased pricing, competitive activity and reduced customer inventory. Volume in developed regions increased low single digits driven by product innovation. Global market share of the oral care category was down nearly a point.
|
|
|
•
|
Volume in Personal Health Care decreased mid-single digits primarily due to a mid-single-digit decrease in developed regions driven by competitive activity and a weak cough/cold season. Volume in developing markets decreased low single digits due to increased pricing. Global market share of the personal health care category decreased more than half a point.
|
Net earnings were unchanged at
$1.0 billion
as the reduction in net sales was offset by a 130 basis point increase in net earnings margin. Gross margin increased primarily due to manufacturing cost savings and increased pricing. SG&A declined as a percentage of net sales primarily due to reduced marketing and overhead spending from the focus on productivity.
Fabric Care and Home Care
Three months ended
March 31, 2016
compared with three months ended
March 31, 2015
Fabric Care and Home Care net sales for the
third fiscal quarter
were down
4%
to
$5.0 billion
on unit volume that was unchanged. Unfavorable foreign exchange reduced net sales by 5%. Price increases added 1% to net sales. Organic sales increased 3% on a 2% increase in organic volume. Global market share of the Fabric Care and Home Care segment decreased 0.1 points. Volume increased mid-single digits in developed regions and was down double digits in developing regions.
|
|
•
|
Fabric Care volume was unchanged as a high single-digit increase in developed markets due to innovation and increased marketing offset a double-digit decrease in developing regions driven by competitive activity, reduced distribution of less profitable brands, minor brand divestitures and the Venezuela deconsolidation. Organic volume in developing regions was down high single digits. Global market share of the fabric care category was almost flat.
|
|
|
•
|
Home Care volume was unchanged as a low single digit increase in developed markets due to product innovation offset a mid-single-digit decrease in developing regions following increased pricing. Global market share of the home care category was almost flat.
|
Net earnings increased
10%
to
$652 million
behind a 170 basis-point increase in net earnings margin, which more than offset the reduction in net sales. Net earnings margin increased due to gross margin expansion, partially offset by increased SG&A as a percent of net sales. Increased gross margin was driven by manufacturing cost savings and lower commodity costs. SG&A as a percentage of net sales increased due to increased marketing spending and the negative scale impact of lower sales.
Nine
months ended
March 31, 2016
compared with
nine
months ended
March 31, 2015
Fabric Care and Home Care net sales fiscal year to date were down
8%
to
$15.6 billion
on a 1% decrease in unit volume. Unfavorable foreign exchange reduced net sales by 7%. Price increases added 1% to net sales. Organic sales increased 2% on organic volume that was unchanged. Global market share of the Fabric Care and Home Care segment decreased 0.2 points. Volume increased mid-single digits in developed regions and was down double digits in developing regions.
|
|
•
|
Fabric Care volume declined low single digits due to a double-digit decrease in developing regions driven by increased pricing, reduced distribution of less profitable brands and divestitures. Organic volume in developing regions decreased high single digits. Volume in developed markets increased mid-single digits due to innovation and increased marketing. Global market share of the fabric care category was down slightly.
|
|
|
•
|
Home Care volume was down low single digits due to a mid-single-digit decrease in developing regions following increased pricing. Volume in developed markets increased low single digits as benefits from product innovation more than offset impacts from competitive activity. Global market share of the home care category was down less than half a point.
|
Net earnings increased
8%
to
$2.2 billion
behind a 200 basis-point increase in net earnings margin, which more than offset the reduction in net sales. Net earnings margin increased due to gross margin expansion, partially offset by increased SG&A as a percentage of net sales. Increased gross margin was driven by manufacturing cost savings and lower commodity costs. SG&A as a percentage of net sales increased due to the negative scale impacts from the reduction in net sales.
Baby, Feminine and Family Care
Three months ended
March 31, 2016
compared with three
months ended
March 31, 2015
Baby, Feminine and Family Care net sales decreased
8%
to
$4.5 billion
during the
third fiscal quarter
on a 2% decline in unit volume. Unfavorable foreign exchange reduced net sales by 5%. Organic sales were unchanged on organic volume that decreased 1%. Global market share of the Baby, Feminine and Family Care segment decreased 1.1 points. Volume increased low single digits in developed regions and decreased high single digits in developing regions.
|
|
•
|
Volume in Baby Care was down mid-single digits caused by a high single-digit decrease in developing regions following price increases in the previous fiscal year, competitive activity and the Venezuela deconsolidation. Organic volume declined mid-single digits in developing markets. Volume decreased low single digits in developed regions due to competitive activity. Global Baby Care organic volume decreased low single digits. Global market share of the baby care category decreased more than one and a half points, primarily attributable to developing markets.
|
|
|
•
|
Volume in Feminine Care declined low single digits while organic volume increased low single digits with the difference attributable to the Venezuela deconsolidation. Organic volume in developing regions increased low single digits due to market growth. In developed regions, volume was unchanged. Global market share of the feminine care category decreased about a point.
|
|
|
•
|
Volume in Family Care was unchanged as a mid-single-digit increase in developed regions due to product innovation and increased merchandising offset by a double-digit decline in developing regions driven by the discontinuation of non-strategic products. In the U.S., all-outlet share of the family care category decreased less than half a point.
|
Net earnings decreased
9%
to
$631 million
due to the reduction in net sales. Net earnings margin decreased 10 basis points. Gross margin increased due to manufacturing cost savings and lower commodity costs, partially offset by unfavorable product mix from the decline in Baby Care. Higher gross margin was offset by an increase in SG&A as a percentage of net sales due to investments in marketing, the negative scale impact from the reduction in net sales and a higher tax rate versus the prior year due to the geographic mix of earnings.
Nine
months ended
March 31, 2016
compared with
nine
months ended
March 31, 2015
Baby, Feminine and Family Care net sales decreased
10%
to
$13.9 billion
fiscal year to date on a 4% decline in unit volume. Unfavorable foreign exchange reduced net sales by 7%. Price increases in the previous fiscal year, primarily in Baby Care, increased net sales by 1%. Organic sales declined 1% on organic volume that was down 3%. Global market share of the Baby, Feminine and Family Care segment decreased 1.2 points. Volume increased low single digits in developed regions and decreased double digits in developing regions.
|
|
•
|
Volume in Baby Care was down mid-single digits caused by a double-digit decrease in developing regions which declined due to price increases in the previous fiscal year, the Venezuela deconsolidation and competitive activity. Volume was up low single digits in developed regions due to product innovation and market growth. Global market share of the baby care category decreased more than two points, primarily attributable to developing markets.
|
|
|
•
|
Volume in Feminine Care declined mid-single digits while organic volume decreased low single digits with the difference attributable to the Venezuela deconsolidation. Organic volume in developing regions decreased mid-single digits due to competitive activity and price increases in the previous fiscal year, partially offset by market growth. In developed regions, volume was unchanged. Global market share of the feminine care category decreased more than half a point.
|
|
|
•
|
Volume in Family Care decreased low single digits due to a double-digit decline in developing regions driven by the discontinuation of non-strategic products. Volume in developed regions increased low single digits due to product innovation and increased merchandising. In the U.S., all-outlet share of the family care category decreased less than half a point.
|
Net earnings decreased
9%
to
$2.1 billion
primarily due to the reduction in net sales. Net earnings margin increased 10 basis points as higher gross margin driven by manufacturing cost savings and lower commodity costs was mostly offset by a higher tax rate versus the prior year due to the geographic mix of earnings and an increase in SG&A as a percentage of net sales due to investments in marketing and negative scale impacts from the reduction in net sales.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include: the incidental businesses managed at the corporate level; financing and investing activities; other general corporate items; the gains and losses related to certain divested brands and categories; certain restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization; certain significant asset impairment charges; and certain balance sheet impacts from significant foreign exchange devaluations. Corporate also includes reconciling items to adjust the accounting policies used in the segments to U.S. GAAP. The most significant reconciling item includes income taxes to adjust from blended statutory rates that are reflected in the segments to the overall Company effective tax rate.
Corporate net sales decreased $15 million during the
third fiscal quarter
and $32 million fiscal year to date. Corporate net earnings from continuing operations improved by approximately $86 million in the
third fiscal quarter
due mainly to decreased foreign exchange transactional charges and reduced restructuring charges in the current period, partially offset by higher taxes. Corporate net earnings from continuing operations improved by approximately $630 million fiscal year to date, primarily due to decreased foreign exchange transactional charges (including a base period Venezuelan balance sheet remeasurement charge). Additional discussion of these items impacting net earnings in Corporate are included in the Results of Operations section.
Productivity and Cost Savings Plan
In 2012, the Company initiated a productivity and cost savings plan to reduce costs and better leverage scale in the areas of supply chain, research and development, marketing and overheads. The plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to fund the Company's growth strategy.
As part of this plan, which has been expanded since its inception, the Company expects to incur in excess of
$5 billion
in before-tax restructuring costs over a six-year period (from fiscal 2012 through fiscal 2017). Approximately
90%
of the estimated costs have been incurred through
March 2016
. Savings generated from the restructuring costs are difficult to estimate, given the nature of the activities, the corollary benefits achieved (e.g., enrollment reduction achieved via normal attrition), the timing of the execution and the degree of reinvestment. Overall, the costs and other non-manufacturing enrollment reductions are expected to deliver approximately
$3 billion
in annual gross savings (before-tax). The cumulative before-tax savings as of the current year are estimated at approximately
$2.2
to
$2.5
billion. Consistent with our historical policies for ongoing restructuring-type activities, the resulting charges are funded by and included within Corporate for segment reporting.
Refer to Note 9 in the Notes to the Consolidated Financial Statements for more details on the restructuring program.
LIQUIDITY & CAPITAL RESOURCES
Operating Activities
We generated
$11.3 billion
of cash from operating activities fiscal year to date, an increase of
$676 million
versus the prior year. Net earnings, adjusted for non-cash items (depreciation and amortization, share-based compensation, deferred income taxes, loss/(gain) on sale of businesses and goodwill and intangible asset impairment charges), generated $11.4 billion of operating cash flow. Working capital and other impacts used $68 million of cash in the period. Accounts receivable used $129 million of cash primarily due to sales mix. Inventory consumed $94 million of cash. Accounts payable, accrued and other liabilities used $199 million of cash primarily due to a decrease in taxes payable due to the timing of estimated payments. All other operating assets and liabilities generated $354 million of cash primarily due the reduction of prepaid marketing balances.
Investing Activities
Cash used by investing activities was
$4.4 billion
fiscal year to date. Capital expenditures were $2.0 billion, or 4.1% of net sales. Divestiture transactions used cash of $1.1 billion including cash held in restricted accounts of $1.0 billion in connection with the pending sale of the Beauty Brands. We used $2.4 billion for purchases of short-term investments, partially offset by cash generated from proceeds from sales or maturities of short-term investments of $1.2 billion.
Financing Activities
Our financing activities consumed net cash of
$5.6 billion
fiscal year to date. We used $3.5 billion for treasury stock purchases and $5.6 billion for dividends. Cash generated from net debt issuances was $3.2 billion. We transferred $1.7 billion of cash to repurchase P&G stock owned by Berkshire Hathaway in the Batteries divestiture. Cash from the exercise of stock options generated $2.0 billion of cash.
As of
March 31, 2016
, our current assets exceeded current liabilities by $3.0 billion. Excluding assets and liabilities of the Batteries and Beauty businesses held for sale, current liabilities exceeded current assets by $1.8 billion. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures used in the MD&A and the reconciliation to the most closely related GAAP measure. We believe that these measures provide useful perspective of underlying business results and trends and provide a more comparable measure of year-on-year results. These measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to more fully understand our business results. When a non-GAAP measure is used in MD&A, we have provided the comparable GAAP measure in the discussion. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following items:
|
|
•
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charges for incremental restructuring due to increased focus on productivity and cost savings,
|
|
|
•
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charges for European legal matters, and
|
|
|
•
|
charges for balance sheet impacts from the devaluation of the foreign currency exchange rate in Venezuela prior to deconsolidation.
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We do not view these items to be part of our sustainable results.
Organic sales growth:
Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of the Venezuela deconsolidation, acquisitions, divestitures and foreign exchange from year-over-year comparisons. We believe this provides investors with a more complete understanding of underlying sales trends by providing sales growth on a consistent basis.
Core EPS or Core net earnings per share:
Core EPS is a measure of the Company's diluted net earnings per share from continuing operations adjusted as indicated.
Free cash flow:
Free cash flow is defined as operating cash flow less capital spending. We view free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.
Adjusted free cash flow productivity:
Adjusted free cash flow productivity is defined as the ratio of free cash flow to net earnings excluding impairment charges and the gain on the sale of the Batteries business. We view adjusted free cash flow productivity as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.
Organic sales growth
:
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|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
(8)%
|
|
5%
|
|
4%
|
|
1%
|
Grooming
|
(10)%
|
|
7%
|
|
2%
|
|
(1)%
|
Health Care
|
(7)%
|
|
5%
|
|
1%
|
|
(1)%
|
Fabric Care and Home Care
|
(4)%
|
|
5%
|
|
2%
|
|
3%
|
Baby, Feminine and Family Care
|
(8)%
|
|
5%
|
|
3%
|
|
—%
|
Total Company
|
(7)%
|
|
5%
|
|
3%
|
|
1%
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2016
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
(10)%
|
|
7%
|
|
3%
|
|
—%
|
Grooming
|
(11)%
|
|
11%
|
|
1%
|
|
1%
|
Health Care
|
(8)%
|
|
7%
|
|
2%
|
|
1%
|
Fabric Care and Home Care
|
(8)%
|
|
7%
|
|
3%
|
|
2%
|
Baby, Feminine and Family Care
|
(10)%
|
|
7%
|
|
2%
|
|
(1)%
|
Total Company
|
(9)%
|
|
7%
|
|
2%
|
|
—%
|
* Acquisition/Divestiture Impact also includes the Venezuela deconsolidation, the mix impacts of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.
Core EPS or Core net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Nine Months Ended March 31
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
Diluted net earnings per share from continuing operations
|
$
|
0.81
|
|
|
$
|
0.82
|
|
|
$
|
2.78
|
|
|
$
|
2.67
|
|
Incremental restructuring charges
|
0.04
|
|
|
0.06
|
|
|
0.10
|
|
|
0.11
|
|
Charges for European legal matters
|
—
|
|
|
—
|
|
|
—
|
|
|
0.02
|
|
Venezuela balance sheet remeasurement
|
—
|
|
|
—
|
|
|
—
|
|
|
0.04
|
|
Rounding
|
0.01
|
|
|
0.01
|
|
|
—
|
|
|
(0.01
|
)
|
CORE EPS
|
$
|
0.86
|
|
|
$
|
0.89
|
|
|
$
|
2.88
|
|
|
$
|
2.83
|
|
Core EPS growth
|
(3
|
)%
|
|
|
|
2
|
%
|
|
|
Note - All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction.
Free cash flow:
(dollar amounts in millions)
|
|
|
|
|
|
Fiscal Year-to-Date, March 31, 2016
|
Operating Cash Flow
|
|
Capital Spending
|
|
Free Cash Flow
|
$11,296
|
|
$(2,023)
|
|
$9,273
|
Adjusted free cash flow productivity:
(dollar amounts in millions)
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, March 31, 2016
|
Net Earnings
|
|
Impairment Charges and Batteries Gain on Sale
|
|
Net Earnings Excluding Impairment Charges and Batteries Gain on Sale
|
|
Adjusted Free Cash Flow Productivity
|
$8,646
|
|
$(72)
|
|
$8,574
|
|
108%
|