OREANDA-NEWS. The Procter & Gamble Company (NYSE:PG) reported second quarter fiscal year 2016 net sales of $16.9 billion, a decrease of nine percent versus the prior year due primarily to foreign exchange impacts. Organic sales, which exclude the impact of foreign exchange and acquisitions and divestitures, increased two percent. Core earnings per share were $1.04, an increase of nine percent. Core operating profit margin increased 350 basis points with improvement in gross margin and SG&A costs. Currency-neutral core earnings per share grew 21% versus the prior year. Diluted net earnings per share were $1.12, an increase of 37%.

Operating cash flow was $4.5 billion for the quarter. Adjusted free cash flow productivity was 117%. The Company repurchased $2.0 billion of common stock and returned $1.9 billion of cash to shareholders as dividends.

“We are encouraged by our return to organic sales growth in the quarter,” said President and Chief Executive Officer David Taylor. “With the top-line improvement and continued cost reduction, we delivered solid core operating income and EPS growth in the face of significant macro-economic and geopolitical headwinds.”

October - December Quarter Discussion

Net sales in the second quarter of fiscal year 2016 were $16.9 billion, a nine percent decrease, including a negative eight percentage point impact from foreign exchange and three percentage point impact from the Venezuela deconsolidation and minor brand divestitures. Organic sales increased two percent as a three percent pricing benefit more than offset a two percent reduction in organic shipment volume. Organic sales were in-line or higher in all five reporting segments. All-in and organic volume declined three percent and two percent, respectively. Pricing increased net sales in all five business segments and increased total net sales by three percent.

                                       

October - December 2015

      

Foreign

              

 

        

Organic

  

Organic

Net Sales Drivers*

   Volume   Exchange   Price   Mix   Other**  

Net Sales

         Volume   Sales
Beauty   (7)%   (7)%   4%   —%   —%   (10)%         (3)%   1%
Grooming   (2)%   (12)%   6%   (2)%   —%   (10)%         (1)%   3%
Health Care   (3)%   (8)%   3%   3%   —%   (5)%         (3)%   3%
Fabric Care and Home Care   (1)%   (8)%   1%   1%   —%   (7)%         —%   2%
Baby, Feminine and Family Care   (4)%   (7)%   3%   (1)%   (1)%   (10)%         (3)%   —%
Total P&G   (3)%   (8)%   3%   —%   (1)%   (9)%         (2)%   2%

* Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
** Other includes the sales mix impact of acquisitions/divestitures, Venezuela deconsolidation and rounding impacts necessary to reconcile volume to net sales.

Sales growth in each business segment benefited, to varying degrees, from price increases taken with new product innovations and/or to offset the impact of currency devaluation in markets such as Russia, Brazil and Mexico. Volume growth was negatively affected by retailer actions to manage inventory levels relative to consumption trends in the markets most affected by currency devaluation and in markets where we have recently adjusted trade terms in certain sales channels. The following business segment discussion includes other impacts to sales growth in addition to those mentioned above:

  • Beauty segment organic sales increased one percent as a positive four percent impact from pricing was partially offset by a three percent impact from lower organic volume. Organic sales increases in Personal Care and the super-premium SK-II skin care brand were partially offset by organic sales declines of the Olay brand.
  • Grooming segment organic sales increased three percent as higher pricing in shave care and growth on Braun from innovation more than offset lower volume. Organic sales increased globally in shave care and in Braun in developed markets.
  • Health Care segment organic sales increased three percent as favorable geographic mix and higher pricing in both Oral Care and Personal Health Care were partially offset by lower volume. Organic sales growth was driven by Oral Care in developed markets, particularly power toothbrushes, and Personal Health Care in developing markets.
  • Fabric Care and Home Care segment organic sales increased two percent versus year ago on pricing benefits and favorable mix while organic volume was unchanged. Both Home Care and Fabric Care delivered strong growth in developed markets. This growth was partially offset by a decline in Fabric Care in developing markets.
  • Baby, Feminine and Family Care segment organic sales were unchanged versus year ago as pricing benefits were offset by lower organic volume. Baby Care organic sales declined as the growth of Pampers in North America was more than offset by declines in other regions. Feminine Care organic sales increased due to growth in developed markets from innovation and in developing markets due to pricing. Family Care organic sales were unchanged as increases in North America were offset by strategic distribution decreases in Mexico.

Core earnings per share were $1.04, an increase of nine percent versus the prior year. Excluding the impact of foreign exchange, currency-neutral core earnings per share increased 21% for the quarter. Diluted net earnings per share from continuing operations increased 10% to $1.01. Diluted net earnings per share were $1.12, an increase of 37% versus the prior year, primarily driven by non-cash impairment charges related to the Batteries business in the base period. These charges are reported in results from discontinued operations.

Reported gross margin increased 170 basis points. Excluding the impact of incremental restructuring charges, core gross margin improved 210 basis points, including 80 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin increased 290 basis points, driven by 170 basis points of productivity cost savings, 100 basis points from lower commodity costs and a 130 basis point benefit from pricing, partially offset by unfavorable geographic and product mix, capacity and initiative investments and by negative scale leveraging due to lower volume.

Selling, general and administrative expense (SG&A) decreased 180 basis points on a reported basis versus the prior year, including a 40 basis point net benefit due to lower restructuring and charges for European legal reserves versus the base period. Core SG&A as a percentage of sales decreased 140 basis points, including a 40 basis point net benefit from foreign exchange impacts, driven by lower foreign currency re-measurement charges. On a currency-neutral basis, core SG&A costs decreased 100 basis points versus the prior year driven by a 100 basis point benefit from overhead spending reductions due to productivity efforts, partially offset by organization capability investments.

Reported operating profit margin increased 340 basis points and core operating profit margin was up 350 basis points versus the prior year, including a net 40 basis points of negative foreign exchange impacts. On a currency-neutral basis, core operating profit margin increased 390 basis points, including 270 basis points of productivity cost savings.

Fiscal Year 2016 Guidance

P&G said it is maintaining its outlook for organic sales growth of in-line to up low-single digits versus fiscal 2015. The Company expects all-in sales to be down high-single digits in fiscal 2016, now including a negative seven percentage point foreign exchange impact and a two to three percentage point drag from the combined impacts of the Venezuela deconsolidation and minor brand divestitures.

P&G said it is maintaining its guidance for constant currency Core EPS growth of mid-to-high single digits, with its current outlook at the low end of this range. The Company said Core EPS, including foreign exchange impacts, is now projected to be down three percent to eight percent versus last year’s Core EPS of $3.76. P&G now expects foreign exchange will have a 10%, or a negative $0.37 per share, impact on Core EPS growth for the year. This is seven percentage points, or $0.26 per share, greater than the impact the Company expected at the beginning of the fiscal year. All-in GAAP earnings per share are expected to increase in the range of 38% to 46% versus the prior year.

P&G increased its outlook for Adjusted Free Cash Flow Productivity from 90% to 100% of adjusted net earnings for the fiscal year. The Company continues to expect to retire shares at a value of approximately $8 to $9 billion dollars through a combination of direct share repurchases and shares that will be exchanged in the Duracell transaction. In addition to the share retirements, P&G expects to pay dividends of more than $7 billion dollars, for a total of $15 to $16 billion dollars in dividend payments, share exchanges and share repurchases this fiscal year.