|
|
|
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 reduced market growth rates, and generate sufficient income and cash flow to allow the Company to effect the expected share repurchases and dividend payments; (3) the ability to manage disruptions in credit markets or changes to our credit rating; (4) 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; (5) the ability to successfully manage cost fluctuations and pressures, including commodity prices, raw materials, labor costs, energy costs and pension and health care costs; (6) 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; (7) the ability to compete with our local and global competitors in new and existing sales channels, including by successfully responding to competitive factors such as prices, promotional incentives and trade terms for products; (8) the ability to manage and maintain key customer relationships; (9) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, ingredients, efficacy or similar matters that may arise; (10) 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; (11) 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; (12) 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, tax, accounting standards and environmental) and to resolve pending matters within current estimates; (13) the ability to manage changes in applicable tax laws and regulations; (14) 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; (15) the ability to successfully achieve productivity improvements and cost savings 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; and (16) the ability to manage the uncertain implications of the United Kingdom’s withdrawal from the European Union. 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. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. The MD&A is organized in the following sections:
|
|
•
|
Summary of Results –
Three
Months Ended
September 30, 2016
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations –
Three
Months Ended
September 30, 2016
|
|
|
•
|
Business Segment Discussion –
Three
Months Ended
September 30, 2016
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Reconciliation of Measures Not Defined by U.S. GAAP
|
Throughout the 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 free cash flow productivity. Organic sales growth is net sales growth excluding the impacts of 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. Free cash flow productivity is the ratio of free cash flow to net earnings. 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 the 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 the 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, baby stores, specialty beauty stores, 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 detail on our reportable segments, including the product categories and brand composition within each segment.
|
|
|
|
Reportable Segments
|
Product Categories (Sub-Categories)
|
Major Brands
|
Beauty
|
Hair Care (
Conditioner, Shampoo, Styling Aids, Treatments
)
|
Head & Shoulders, Pantene, Rejoice
|
Skin and Personal Care (
Antiperspirant and Deodorant, Personal Cleansing, Skin Care
)
|
Olay, Old Spice, Safeguard, SK-II
|
Grooming
|
Grooming
(1)
(Shave Care -
Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care;
Appliances)
|
Braun, Fusion, Gillette, Mach3, Prestobarba, Venus
|
Health Care
|
Oral Care (
Toothbrushes, Toothpaste, Other Oral Care
)
|
Crest, Oral-B
|
Personal Health Care (
Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care
)
|
Prilosec, Vicks
|
Fabric & Home Care
|
Fabric Care (
Fabric Enhancers, Laundry Additives, Laundry Detergents
)
|
Ariel, Downy, Gain, Tide
|
Home Care (
Air Care, Dish Care, P&G Professional, Surface Care
)
|
Cascade, Dawn, Febreze, Mr. Clean, Swiffer
|
Baby, Feminine & Family Care
|
Baby Care (
Baby Wipes, Diapers and Pants
)
|
Luvs, Pampers
|
Feminine Care (
Adult Incontinence, Feminine Care
)
|
Always, Tampax
|
Family Care (
Paper Towels, Tissues, Toilet Paper
)
|
Bounty, Charmin
|
|
|
(1)
|
The Grooming product category is comprised of the Shave Care and Appliances Global Business Units.
|
The following table provides the percentage of net sales and net earnings by reportable business segment for the
three
months ended
September 30, 2016
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
18%
|
|
22%
|
Grooming
|
10%
|
|
15%
|
Health Care
|
12%
|
|
12%
|
Fabric & Home Care
|
32%
|
|
26%
|
Baby, Feminine & Family Care
|
28%
|
|
25%
|
Total Company
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
three
months ended
September 30, 2016
versus the
three
months ended
September 30, 2015
:
|
|
•
|
Net sales were unchanged versus the previous year at $16.5 billion. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 3%. Organic sales increased 3% in Beauty and in Grooming, 7% in Health Care, 4% in Fabric & Home Care and 2% in Baby, Feminine & Family Care.
|
|
|
•
|
Unit volume increased 2% with organic volume up 3%. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care and in Baby, Feminine & Family Care. Volume was unchanged in Grooming and decreased low single digits in Beauty. Excluding the impacts of minor brand divestitures, organic volume increased low single digits in both Beauty and Grooming.
|
|
|
•
|
Net earnings from continuing operations were
$2.9 billion
, an increase of
$98 million
, or
4%
versus the prior year period. This increase was driven by an increase in other non-operating income due to minor brand divestitures and a lower effective tax rate.
|
|
|
•
|
Diluted net earnings per share from continuing operations increased
4%
to
$1.00
.
|
|
|
•
|
Net earnings attributable to Procter & Gamble were
$2.7 billion
, an increase of
$113 million
, or
4%
versus the prior year period, driven by the increase in net earnings from continuing operations.
|
|
|
•
|
Core net earnings per share, which excludes discontinued operations and incremental restructuring charges, increased 5% to $1.03.
|
|
|
•
|
Operating cash flow was
$3.0 billion
. Free cash flow, which is operating cash flow less capital expenditures, was
$2.3 billion
. Free cash flow productivity, which is the ratio of free cash flow to net earnings, was
85%
.
|
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, 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 and sustaining 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. Over the past four years, 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, Egypt, Mexico, and the United Kingdom have had, and could continue to have, a 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 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. For example, 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, 2016.
RESULTS OF OPERATIONS – Three Months Ended
September 30, 2016
The following discussion provides a review of results for the three months ended
September 30, 2016
versus the three months ended
September 30, 2015
.
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
Amounts in millions, except per share amounts
|
2016
|
|
2015
|
|
% Chg
|
Net sales
|
$
|
16,518
|
|
|
$
|
16,527
|
|
|
—
|
%
|
Operating income
|
3,771
|
|
|
3,768
|
|
|
—
|
%
|
Net earnings from continuing operations
|
2,875
|
|
|
2,777
|
|
|
4
|
%
|
Net earnings/(loss) from discontinued operations
|
(118
|
)
|
|
(142
|
)
|
|
N/A
|
|
Net earnings attributable to Procter & Gamble
|
2,714
|
|
|
2,601
|
|
|
4
|
%
|
Diluted net earnings per common share
|
0.96
|
|
|
0.91
|
|
|
5
|
%
|
Diluted net earnings per share from continuing operations
|
1.00
|
|
|
0.96
|
|
|
4
|
%
|
Core net earnings per common share
|
1.03
|
|
|
0.98
|
|
|
5
|
%
|
|
|
Three Months Ended September 30
|
COMPARISONS AS A % OF NET SALES
|
2016
|
|
2015
|
|
Basis Pt Chg
|
Gross profit
|
51.0%
|
|
50.7%
|
|
30
|
Selling, general & administrative expense
|
28.1%
|
|
27.9%
|
|
20
|
Operating income
|
22.8%
|
|
22.8%
|
|
—
|
Earnings from continuing operations before income taxes
|
22.6%
|
|
22.1%
|
|
50
|
Net earnings from continuing operations
|
17.4%
|
|
16.8%
|
|
60
|
Net earnings attributable to Procter & Gamble
|
16.4%
|
|
15.7%
|
|
70
|
Net Sales
Net sales were unchanged at
$16.5 billion
for the first quarter. Unit volume increased 2%. Unfavorable foreign exchange reduced net sales by 3%. Pricing and mix had no net impact on consolidated net sales. Volume increased mid-single digits in Health Care and low single digits in Fabric & Home Care and in Baby, Feminine & Family Care. Volume was unchanged in Grooming and decreased low single digits in Beauty driven by minor brand divestitures. Volume increased low single digits in developed regions and was unchanged in developing regions. Organic sales increased 3% driven by a 3% increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2016 vs. 2015 (Three Months Ended September 30)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
(2)%
|
|
2%
|
|
(2)%
|
|
1%
|
|
1%
|
|
1%
|
|
(1)%
|
Grooming
|
—%
|
|
3%
|
|
(3)%
|
|
1%
|
|
—%
|
|
1%
|
|
(1)%
|
Health Care
|
5%
|
|
5%
|
|
(3)%
|
|
1%
|
|
1%
|
|
—%
|
|
4%
|
Fabric & Home Care
|
2%
|
|
4%
|
|
(2)%
|
|
(1)%
|
|
1%
|
|
1%
|
|
1%
|
Baby, Feminine & Family Care
|
3%
|
|
4%
|
|
(3)%
|
|
(1)%
|
|
(1)%
|
|
1%
|
|
(1)%
|
Total Company
|
2%
|
|
3%
|
|
(3)%
|
|
—%
|
|
—%
|
|
1%
|
|
—%
|
* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
** Other includes the sales mix impact from acquisitions/divestitures and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin increased
30
basis points to
51.0%
of net sales for the quarter. Gross margin increased primarily due to a 190 basis point positive impact from manufacturing cost savings and a 20 basis point benefit from volume scale leverage. These impacts were partially offset by an 80 basis point negative impact from unfavorable foreign exchange, a 20 basis point decrease due to incremental restructuring charges, a 30 basis point decline from unfavorable product mix across segments (caused by net sales declines in Beauty and in Grooming, which have higher than company-average gross margins), and 50 basis points of combined impact from higher commodity costs and initiative investments.
Total SG&A spending increased 1% to $4.6 billion due to increased marketing activities partially offset by lower overhead spending due to productivity efforts. SG&A as a percentage of net sales increased
20
basis points to
28.1%
. Marketing spending as a percentage of net sales increased 60 basis points due to an increase in advertising and other activities. Overhead costs as a percentage of net sales decreased 40 basis points, as 60 basis points of productivity savings in overhead spending was partially offset by wage inflation and foreign exchange.
Non-Operating Expenses and Income
Interest expense was
$131 million
for the quarter, a decrease of
$9 million
versus the prior year period, due to a decrease in weighted average interest rates. Interest income was
$35 million
for the quarter, a decrease of
$9 million
versus the prior year period due to a decrease in cash and cash equivalents. Other non-operating income/(loss) was
$63 million
, an increase of
$81 million
, due to gains from minor brand divestitures.
Income Taxes on Continuing Operations
The effective tax rate on continuing operations decreased 90 basis points to 23.1% primarily due to a 310 basis point impact following the adoption of a new accounting standard on the tax impacts of share-based payments to employees. This was partially offset by unfavorable geographic mix of earnings and the impact of favorable discrete adjustments related to uncertain income tax positions (which netted to 30 basis points in the current year versus 60 basis points in the prior year).
Net Earnings from Continuing Operations
Net earnings from continuing operations increased
$98 million
or
4%
for the quarter. This increase was due to the increase in non-operating income and decrease in the effective income tax rate discussed above. Foreign exchange impacts reduced net earnings by about $200 million for the quarter due to weakening of certain key currencies against the U.S. dollar, primarily the currencies of Argentina, Mexico, Egypt and the United Kingdom. This impact includes both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations increased
4%
to
$1.00
due to increased net earnings.
Discontinued Operations
The net loss from discontinued operations improved by $24 million to
$118 million
in the current period versus a net loss of
$142 million
in the prior period. This change was driven primarily by a base period loss on the Batteries business (as impairment charges more than offset earnings), partially offset by current period Beauty Brands transition costs (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble increased
$113 million
or
4%
to
$2.7 billion
for the quarter. The increase was due to the improvements in net earnings from both continuing and discontinued operations, both discussed above. Diluted net earnings per share increased
5%
to
$0.96
. Core net earnings per share increased
5%
to
$1.03
. 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.
BUSINESS SEGMENT DISCUSSION –
Three
Months Ended
September 30, 2016
The following discussion provides a review of results by reportable business segment. Analyses of the results for the
three
month period ended
September 30, 2016
are provided based on a comparison to the same
three
month period ended
September 30, 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
months ended
September 30, 2016
versus the comparable prior year period (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 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
|
$
|
2,996
|
|
|
(1
|
)%
|
|
$
|
783
|
|
|
(5
|
)%
|
|
$
|
592
|
|
|
(5
|
)%
|
Grooming
|
1,658
|
|
|
(1
|
)%
|
|
529
|
|
|
6
|
%
|
|
415
|
|
|
6
|
%
|
Health Care
|
1,861
|
|
|
4
|
%
|
|
496
|
|
|
11
|
%
|
|
320
|
|
|
1
|
%
|
Fabric & Home Care
|
5,302
|
|
|
1
|
%
|
|
1,129
|
|
|
1
|
%
|
|
728
|
|
|
(3
|
)%
|
Baby, Feminine & Family Care
|
4,595
|
|
|
(1
|
)%
|
|
1,045
|
|
|
(6
|
)%
|
|
697
|
|
|
(7
|
)%
|
Corporate
|
106
|
|
|
(1
|
)%
|
|
(244
|
)
|
|
N/A
|
|
|
123
|
|
|
N/A
|
|
Total Company
|
$
|
16,518
|
|
|
—
|
%
|
|
$
|
3,738
|
|
|
2
|
%
|
|
$
|
2,875
|
|
|
4
|
%
|
Beauty
Three months ended
September 30, 2016
compared with three
months ended
September 30, 2015
Beauty net sales decreased
1%
to
$3.0 billion
during the
first fiscal quarter
on a 2% decrease in unit volume.
Unfavorable foreign exchange reduced net sales by 2%. Price increases contributed 1% to net sales. Favorable product mix added 1% to net sales primarily due to growth of the super-premium SK-II brand which has higher than average selling prices. Organic sales increased 3% on organic volume that increased 2%. Global market share of the Beauty segment decreased 0.7 points. Volume decreased low single digits in both developed and developing markets. Excluding the impact of minor brand divestitures, organic volume increased low single digits in developing markets.
|
|
•
|
Volume in Hair Care was down low single digits due to minor brand divestitures. Organic volume increased low single digits. Developed markets declined low single digits due to competitive activity and developing markets declined low single digits due to minor brand divestitures. Organic volume increased low single digits in developing markets behind market growth and increased marketing. Global market share of the Hair Care category decreased nearly a point.
|
|
|
•
|
Volume in Skin and Personal Care increased low single digits. Volume increased low single digits in developed regions due to product innovation and increased promotional activity. Volume decreased low single digits in developing regions due to minor brand divestitures, with organic volume up low single digits behind innovation and increased marketing. Global market share of the Skin and Personal Care category decreased half a point.
|
Net earnings decreased
5%
to
$592 million
due to the reduction in net sales, along with an 80 basis point decrease in net earnings margin. The net earnings margin declined due to an increase in SG&A as a percentage of net sales, partially offset by increase in gross margin. SG&A as a percentage of net sales increased due to increases in both marketing and overhead spending. Gross margin increased primarily due to increased pricing and productivity savings, which were only partially offset by unfavorable commodity and foreign exchange impacts.
Grooming
Three months ended
September 30, 2016
compared with three
months ended
September 30, 2015
Grooming net sales decreased
1%
to
$1.7 billion
during the
first fiscal quarter
on unit volume that was unchanged. Unfavorable foreign exchange reduced net sales by 3%. Price increases in Shave Care contributed 1% to net sales. Organic sales increased 3% on a 3% increase in organic volume. Global market share of the Grooming segment decreased 0.1 point. Volume increased low single digits in developed regions and was unchanged in developing regions.
|
|
•
|
Shave Care volume was unchanged in both developed and developing regions as increased marketing support and product innovation were largely offset by competitive activity. Organic volume increased mid-single digits in developing regions. Global market share of the blades and razors category increased slightly.
|
|
|
•
|
Volume in Appliances increased low single digits. Volume was up mid-single digits in developed regions and low single digits in developing regions due to product innovation and market growth. Global market share of the Appliances category decreased a point.
|
Net earnings increased
6%
to
$415 million
as a 170 basis-point increase in net earnings margin was only partially offset by the reduction in net sales. Net earnings margin increased due to an increase in gross margin driven by the benefits of increased pricing and productivity efforts, which were only partially offset by unfavorable foreign exchange and other investments. Gross margin expansion was partially offset by an increase in SG&A as a percent of net sales due to increased marketing spending.
Health Care
Three months ended
September 30, 2016
compared with three
months ended
September 30, 2015
Health Care net sales increased
4%
to
$1.9 billion
during the
first fiscal quarter
on a 5% increase in unit volume. Unfavorable foreign exchange reduced net sales by 3%. Price increases in both Oral Care and Personal Health Care contributed 1% to net sales and favorable product mix added 1% to net sales primarily due to an increase in Oral care product forms with higher than average selling prices. Organic sales increased 7% on a 5% increase in organic volume. Global market share of the Health Care segment decreased 0.3 points. Volume increased mid-single digits in both developed and developing regions.
|
|
•
|
Oral Care volume increased mid-single digits in developed regions and low single digits in developing regions driven by market growth and product innovation. Global market share of the Oral Care category decreased slightly.
|
|
|
•
|
Volume in Personal Health Care increased high single digits with low single-digit growth in developed regions and double-digit growth in developing regions behind market growth, product innovation and expanded distribution. Global market share of the Personal Health Care category decreased nearly half a point.
|
Net earnings increased
1%
to
$320 million
primarily due to the increase in net sales partially offset by a 50 basis point reduction in net earnings margin. Gross margin increased due to manufacturing cost savings and increased pricing, partially offset by unfavorable sales channel mix and foreign exchange impacts. This was more than offset by an increase in SG&A as a percentage of net sales due to a base period benefit related to the earnings of our PGT Healthcare partnership.
Fabric & Home Care
Three months ended
September 30, 2016
compared with three months ended
September 30, 2015
Fabric & Home Care net sales increased
1%
to
$5.3 billion
for the
first fiscal quarter
on a 2% increase in unit volume. Unfavorable foreign exchange reduced net sales by 2%. Favorable geographic mix added 1% to net sales due to the growth of developed regions which have higher than segment-average selling prices. Lower pricing driven by promotional spending had a negative 1% impact on net sales. Organic sales increased 4% on a 4% increase in organic volume. Global market share of the Fabric & Home Care segment was unchanged. Volume increased mid-single digits in developed regions and was down low single digits in developing regions.
|
|
•
|
Fabric Care volume increased low single digits as a mid-single-digit increase in developed markets due to innovation and increased marketing spending were partially offset by a low single-digit decrease in developing regions driven by competitive activity and reduced distribution of less profitable brands. Global market share of the Fabric Care category was unchanged.
|
|
|
•
|
Home Care volume increased low single digits driven by a mid-single-digit increase in developed markets due to product innovation, partially offset by a low single-digit decrease in developing regions due to minor brand divestitures. Organic volume in developing regions increased low single digits due to product innovation. Global market share of the Home Care category was up slightly.
|
Net earnings decreased
3%
to
$728 million
due to a 50 basis-point decrease in net earnings margin, which more than offset the increase in net sales. Net earnings margin decreased primarily due to a higher tax rate. Gross margin expansion was largely offset by increased SG&A as a percent of net sales. Increased gross margin was driven by manufacturing cost savings and favorable geographic and product mix, driven by increases in developed markets and in premium product forms, both of which have higher than segment-average margins, partially offset by unfavorable foreign exchange impacts, lower pricing and other investments. SG&A as a percentage of net sales increased primarily due to increased marketing and overhead spending. The tax rate increased due in part to disproportionate growth in the U.S., which has higher than global-average tax rates.
Baby, Feminine & Family Care
Three months ended
September 30, 2016
compared with three
months ended
September 30, 2015
Baby, Feminine & Family Care net sales decreased
1%
to
$4.6 billion
during the
first fiscal quarter
o
n a 3% increase in unit volume. Unfavorable foreign exchange reduced net sales by 3%. Unfavorable geographic mix reduced net sales by 1% due to the disproportionate growth of developing regions which have lower than segment-average selling prices. Lower pricing driven by promotional spending had a negative 1% impact on net sales. Organic sales increased 2% on a 4% increase in organic volume. Global market share of the Baby, Feminine & Family Care segment decreased 0.5 points. Volume increased low single digits in developed regions and increased mid-single digits in developing regions.
|
|
•
|
Volume in Baby Care increased low single digits caused by a high single-digit increase in developing regions due to market growth and decreased pricing. Volume decreased low single digits in developed regions due to competitive activity. Global market share of the Baby Care category decreased less than half a point.
|
|
|
•
|
Volume in Feminine Care increased low single digits due to a mid-single-digit increase in developed regions and a low single-digit increase in developing regions, both due to product innovation and market growth. Global market share of the Feminine Care category decreased nearly half a point.
|
|
|
•
|
Volume in Family Care, which is predominantly a North American business, increased mid-single digits driven by market growth, product innovation and increased merchandising. In the U.S., all-outlet share of the Family Care category was up less than half a point.
|
Net earnings decreased
7%
to
$697 million
due to the decline in net sales and a 90 basis point reduction in the net earnings margin. Net earnings margin declined due to an increase in SG&A as a percent of sales driven by higher marketing and overhead spending, partially offset by an increase in gross margin. Gross margin increased slightly due to manufacturing cost savings and lower commodity costs, partially offset by unfavorable foreign exchange impacts and other investments.
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 1% to $
106 million
during the
first fiscal quarter
. Corporate net earnings from continuing operations improved by $174 million to $
123 million
in the
first fiscal quarter
due mainly to a reduction in unallocated corporate overhead spending, due in part to the elimination of stranded overheads from divestitures, and tax benefits resulting from the adoption of a new accounting standard on the tax impacts of share-based payments to employees. Additional discussion of this item is 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 approximately
$5.5 billion
in before-tax restructuring costs over a six-year period (from fiscal 2012 through fiscal 2017). Approximately
91%
of the estimated costs have been incurred through
September 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
$2.5
to
$3
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
$3.0 billion
of cash from operating activities in the quarter, a decrease of
$513 million
versus the prior year. Net earnings, adjusted for non-cash items (depreciation and amortization, share-based compensation expense, deferred income taxes, and gain on sale of businesses), generated $3.3 billion of operating cash flow. Working capital and other impacts used $252 million of cash in the period. Accounts receivable used $424 million of cash in part due to an increase in sales versus the final quarter of fiscal 2016. Inventory consumed $287 million of cash due to initiatives and production seasonality to support holiday shipments. Accounts payable, accrued and other liabilities generated $298 million of cash primarily due to an increase in taxes payable due to the timing of estimated payments. All other operating assets and liabilities generated $135 million of cash.
Investing Activities
Cash used by investing activities was
$2.1 billion
in the quarter. Capital expenditures were $684 million, or 4.1% of net sales. We generated $183 million of cash from proceeds from asset sales primarily from plant asset sales and minor brand divestitures. The pending sale of the Beauty Brands used cash of $1.2 billion, including $348 million of cash transferred to the Beauty business and accounted for in Current assets held for sale and $874 million of borrowings related to the Beauty Brands that were placed in Restricted cash to be used in connection with the sale of the Beauty Brands. We used $631 million for purchases of short-term investments, partially offset by cash generated from proceeds from sales or maturities of short-term investments.
Financing Activities
Our financing activities consumed net cash of
$507 million
in the quarter. We used $1.0 billion for treasury stock purchases and $1.9 billion for dividends. Cash generated from net debt issuances was $1.4 billion. Cash from the exercise of stock options and other impacts generated $937 million of cash.
As of
September 30, 2016
, our current assets exceeded current liabilities by $2.8 billion. Excluding assets and liabilities of the Beauty businesses held for sale, current liabilities exceeded current assets by $1.2 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 and the reconciliation to the most closely related GAAP measure. We believe that these measures provide useful perspective of underlying business trends (i.e. trends excluding non-recurring or unusual items) and results and provide a supplemental measure of year-on-year results. The non-GAAP measures described below are used by Management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. 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 our business results. 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 item:
Incremental restructuring
: The Company has and continues to have an ongoing level of restructuring activities. Such activities have resulted in ongoing annual restructuring related charges of approximately $250 - $500 million before tax. Beginning in 2012 Procter & Gamble began a $10 billion strategic productivity and cost savings initiative that includes incremental restructuring activities. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs.
We do not view the above item to be part of our sustainable results and its exclusion from Core earnings measures provides a more comparable measure of year-on-year results.
Organic sales growth
: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis, and this measure is used in assessing achievement of management goals for at-risk compensation.
Free cash flow
: Free cash flow is defined as operating cash flow less capital spending. Free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views 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.
Free cash flow productivity
: Free cash flow productivity is defined as the ratio of free cash flow to net earnings. Management views free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. The Company's long-term target is to generate annual free cash flow productivity at or above 90 percent.
Core EPS
: Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share from continuing operations adjusted as indicated. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time.
Organic sales growth
:
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2016
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
(1)%
|
|
2%
|
|
2%
|
|
3%
|
Grooming
|
(1)%
|
|
3%
|
|
1%
|
|
3%
|
Health Care
|
4%
|
|
3%
|
|
—%
|
|
7%
|
Fabric & Home Care
|
1%
|
|
2%
|
|
1%
|
|
4%
|
Baby, Feminine & Family Care
|
(1)%
|
|
3%
|
|
—%
|
|
2%
|
Total Company
|
—%
|
|
3%
|
|
—%
|
|
3%
|
* Acquisition/Divestiture Impact includes the mix impacts of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.
Free cash flow and free cash flow productivity (dollar amounts in millions)
:
|
|
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, September 30, 2016
|
Operating Cash Flow
|
|
Capital Spending
|
|
Free Cash Flow
|
|
Net Earnings
|
|
Free Cash Flow Productivity
|
$3,025
|
|
$(684)
|
|
$2,341
|
|
$2,757
|
|
85%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2016
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,102
|
|
|
—
|
|
|
(111
|
)
|
|
—
|
|
|
7,991
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,645
|
|
|
—
|
|
|
23
|
|
|
(1
|
)
|
|
4,667
|
|
OPERATING INCOME
|
3,771
|
|
|
—
|
|
|
88
|
|
|
1
|
|
|
3,860
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
863
|
|
|
—
|
|
|
15
|
|
|
1
|
|
|
879
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,714
|
|
|
118
|
|
|
73
|
|
|
—
|
|
|
2,905
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
0.96
|
|
|
0.04
|
|
|
0.03
|
|
|
—
|
|
|
1.03
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
CORE EPS
|
5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2015
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,152
|
|
|
—
|
|
|
(72
|
)
|
|
—
|
|
|
8,080
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,607
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
4,607
|
|
OPERATING INCOME
|
3,768
|
|
|
—
|
|
|
72
|
|
|
—
|
|
|
3,840
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
877
|
|
|
—
|
|
|
14
|
|
|
1
|
|
|
892
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,601
|
|
|
142
|
|
|
58
|
|
|
(1
|
)
|
|
2,800
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
0.91
|
|
|
0.05
|
|
|
0.02
|
|
|
—
|
|
|
0.98
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.