|
|
|
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 and 10 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 to generate sufficient income and cash flow to allow the Company to affect 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 execution of supply chain optimizations and sole supplier and sole manufacturing plant arrangements) and to 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 prices of commodities and raw materials, and costs of labor, transportation, energy, pension and healthcare; (6) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to changing consumer habits and 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, distributors, contractors and external business partners; (11) the ability to rely on and maintain key company and third party information technology systems, networks and services, and maintain the security and functionality of such systems, networks and services and the data contained therein; (12) the ability to successfully manage uncertainties related to changing political conditions (including the United Kingdom’s decision to leave the European Union) and potential implications such as exchange rate fluctuations and market contraction; (13) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, intellectual property, antitrust, data protection, tax, environmental, and accounting and financial reporting) and to resolve pending matters within current estimates; (14) the ability to manage changes in applicable tax laws and regulations including maintaining our intended tax treatment of divestiture transactions; (15) the ability to successfully manage our ongoing acquisition, divestiture and joint venture activities, in each case to achieve the Company’s overall business strategy and financial objectives, without impacting the delivery of base business objectives; and (16) the ability to successfully achieve productivity improvements and cost savings and manage ongoing organizational changes, while successfully identifying, developing and retaining key employees, including 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. 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, 2018
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations –
Three Months Ended September 30, 2018
|
|
|
•
|
Business Segment Discussion –
Three Months Ended September 30, 2018
|
|
|
•
|
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), adjusted free cash flow and adjusted free cash flow productivity. The explanation at the end of the MD&A provides the definition of these non-GAAP measures as well as 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, e-commerce, grocery stores, membership club stores, drug stores, department stores, distributors, wholesalers, baby stores, specialty beauty stores, 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
)
|
Metamucil, 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, Puffs
|
|
|
(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, 2018
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
20%
|
|
25%
|
Grooming
|
9%
|
|
12%
|
Health Care
|
11%
|
|
11%
|
Fabric & Home Care
|
33%
|
|
29%
|
Baby, Feminine & Family Care
|
27%
|
|
23%
|
Total Company
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
three
months ended
September 30, 2018
versus the
three
months ended
September 30, 2017
:
|
|
•
|
Net sales were unchanged at
$16.7 billion
. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange,
increased 4%
. Organic sales increased 7% in Beauty, 4% in Grooming and Health Care and 5% in Fabric & Home Care. Organic sales
decreased 1%
in Baby, Feminine & Family Care.
|
|
|
•
|
Unit volume increased
3%
, with organic volume also up
3%
. Volume increased mid-single digits in Grooming and Fabric & Home Care and low single digits in Beauty, Health Care and Baby, Feminine & Family Care. Excluding the impacts of the PGT Healthcare partnership dissolution and other minor divestitures, organic volume increased mid-single digits in Health Care.
|
|
|
•
|
Net earnings were
$3.2 billion
,
an increase of $341 million, or 12%
versus the prior year due to a reduction in income taxes (due primarily to the ongoing impacts of the U.S. Tax Act) and a gain on the dissolution of the PGT Healthcare partnership.
|
|
|
•
|
Diluted net earnings per share increased
15%
to
$1.22
due primarily to the increase in net earnings and a reduction in shares outstanding due to share repurchases.
|
|
|
•
|
Net earnings attributable to Procter & Gamble increased
$346 million
or
12%
versus the prior year period to
$3.2 billion
.
|
|
|
•
|
Core net earnings attributable to Procter & Gamble, which represents net earnings excluding the current period gain on the dissolution of the PGT Healthcare partnership and incremental restructuring charges in both periods, was unchanged at $2.9 billion. Core net earnings per share increased
3%
to
$1.12
due to the reduction in shares outstanding.
|
|
|
•
|
Operating cash flow was
$3.6 billion
. Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was
$2.7 billion
. Adjusted free cash flow productivity was
95%
. Adjusted free cash flow and adjusted free cash flow productivity are defined in the section entitled "Reconciliation of Measures not defined by U.S. GAAP"
|
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, Central & Eastern Europe and the Korean peninsula, economic uncertainty related to the execution of the United Kingdom's exit from the European Union, political instability in certain Latin American markets and overall economic slowdowns, 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, transportation costs and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins and paper-based materials like pulp, 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, in 2012 we initiated overhead and supply chain cost improvement projects. In fiscal 2017, we communicated specific elements of an additional multi-year cost reduction program which is resulting in enrollment reductions and other savings. 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. In four of the past five fiscal years, as well as the current year, the U.S. dollar had 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, Russia, Turkey, Brazil, China and India have previously had, and could in the future have, a significant impact on our sales, costs and earnings. Increased pricing in response to certain 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 and profits.
Government Policies
. Our net earnings could be affected by changes in U.S. or foreign government tax policies, for example, the U.S. Tax Act enacted in December 2017, the implications and uncertainties of which are disclosed elsewhere in this report. Additionally, we attempt to carefully manage our debt, currency and other exposures in certain countries with currency exchange, import authorization and pricing controls, such as Nigeria, Algeria and Egypt. Further, our earnings and sales could be affected by changes to international trade agreements in North America and elsewhere, including increases of import tariffs, both currently effective and future potential changes. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings.
For information on risk factors that could impact our results, please refer to “Risk Factors” in Part I, Item 1A of the Company's Form 10-K for the fiscal year ended June 30, 2018.
RESULTS OF OPERATIONS – Three Months Ended
September 30, 2018
The following discussion provides a review of results for the three months ended
September 30, 2018
versus the three months ended
September 30, 2017
.
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
Amounts in millions, except per share amounts
|
2018
|
|
2017
|
|
% Chg
|
Net sales
|
$16,690
|
|
$16,653
|
|
—%
|
Operating income
|
3,554
|
|
3,648
|
|
(3)%
|
Net earnings
|
3,211
|
|
2,870
|
|
12%
|
Net earnings attributable to Procter & Gamble
|
3,199
|
|
2,853
|
|
12%
|
Diluted net earnings per common share
|
1.22
|
|
1.06
|
|
15%
|
Core net earnings per common share
|
1.12
|
|
1.09
|
|
3%
|
|
|
Three Months Ended September 30
|
COMPARISONS AS A PERCENTAGE OF NET SALES
|
2018
|
|
2017
|
|
Basis Pt Chg
|
Gross profit
|
49.2%
|
|
50.3%
|
|
(110)
|
Selling, general & administrative expense
|
27.9%
|
|
28.4%
|
|
(50)
|
Operating income
|
21.3%
|
|
21.9%
|
|
(60)
|
Earnings before income taxes
|
23.6%
|
|
22.5%
|
|
110
|
Net earnings
|
19.2%
|
|
17.2%
|
|
200
|
Net earnings attributable to Procter & Gamble
|
19.2%
|
|
17.1%
|
|
210
|
Net Sales
Net sales for the quarter
were unchanged versus the previous period at
$16.7 billion
including a three percent negative impact from foreign exchange. Unit volume
increased 3%
. Excluding the impact of minor brand divestitures, organic volume also increased 3%. Mix was a one percent positive impact to net sales, driven by disproportionate organic growth of the Skin and Personal Care and Personal Health Care categories and developed regions, all of which have higher than company average prices. Volume increased mid-single digits in Fabric & Home Care and Grooming and increased low single digits in Beauty, Health Care and Baby, Feminine & Family Care. Excluding the impact of the PGT Healthcare partnership dissolution, Health Care organic volume increased mid-single digits. Volume increased mid-single digits in developed and low single digits in developing regions. Organic sales increased
4%
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2018 vs. 2017 (Three Months Ended September 30)
(1)
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other
(2)
|
|
Net Sales Growth
|
Beauty
|
3%
|
|
3%
|
|
(3)%
|
|
2%
|
|
3%
|
|
—%
|
|
5%
|
Grooming
|
5%
|
|
5%
|
|
(4)%
|
|
1%
|
|
(2)%
|
|
(1)%
|
|
(1)%
|
Health Care
|
1%
|
|
4%
|
|
(2)%
|
|
—%
|
|
(1)%
|
|
(1)%
|
|
(3)%
|
Fabric & Home Care
|
4%
|
|
5%
|
|
(2)%
|
|
(1)%
|
|
1%
|
|
—%
|
|
2%
|
Baby, Feminine & Family Care
|
1%
|
|
1%
|
|
(2)%
|
|
(1)%
|
|
—%
|
|
(1)%
|
|
(3)%
|
Total Company
|
3%
|
|
3%
|
|
(3)%
|
|
—%
|
|
1%
|
|
(1)%
|
|
—%
|
(1)
Net sales percentage changes are approximations based on quantitative formulas that are consistently appl
ied.
(2)
Other includes the sales mix impact from acquisitions and divestitures, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin
decreased 110 basis points to 49.2%
of net sales for the quarter. Gross margin benefited from 170 basis points of gross manufacturing cost savings projects (which nets to 100 basis points due to 30 basis points of product and packaging reinvestments and 40 basis points of manufacturing cyclicality impacts). This was offset by:
|
|
•
|
a 100 basis point decline due to higher commodity costs,
|
|
|
•
|
a 60 basis point decline from unfavorable product mix (primarily within segments due to disproportionate growth of lower margin products forms and club channels in certain categories) and
|
|
|
•
|
a 60 basis point decline from unfavorable foreign exchange
|
Total SG&A spending decreased 2% to $4.7 billion due to decreases in overhead and marketing spending costs. SG&A as a percentage of net sales
decreased 50 basis points to 27.9%
. Reductions in overhead costs and marketing spending as a percentage of net sales were partially offset by an increase in other net operating costs as a percentage of net sales. Overhead costs as a percentage of net sales decreased 40 basis points due to productivity savings and positive scale impacts of the organic net sales increase, partially offset by an increase in restructuring costs. Marketing spending as a percentage of net sales decreased 100 basis points due to the positive scale impacts of the organic net sales increase, savings in agency compensation, production costs and advertising spending, and the impact of adopting the new standard on "Revenue from Contracts with Customers" which prospectively reclassified certain customer spending from marketing (SG&A) expense to a reduction of net sales. Other net operating costs as a percentage of net sales increased 90 basis points primarily due to an increase in foreign exchange transactional charges. Productivity-driven cost savings delivered 80 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was
$129 million
for the quarter, an increase of $14 million versus the prior year period due to an increase in weighted average interest rates. Interest income was
$53 million
for the quarter, a marginal increase versus the prior year period. Other non-operating income was
$462 million
, an increase of
$293 million
versus the prior year period primarily due to a $355 million before-tax gain from the dissolution of the PGT Healthcare partnership, partially offset by the impact of minor brand divestiture gains in the base period.
Income Taxes
For the three months ended September 30, 2018 the effective tax rate decreased 500 basis points versus the prior year period to 18.5% due to:
|
|
•
|
a 390 basis point reduction from the ongoing impacts of the U.S. Tax Act, as the impact of the lower blended U.S. federal rate on current period earnings versus prior year rate was partially offset by reduced foreign tax credits versus prior year due to the inability to fully credit foreign taxes under the U.S. Tax Act,
|
|
|
•
|
a 180 basis point reduction from the tax impact of the gain on the dissolution of the PGT Healthcare partnership,
|
|
|
•
|
a 40 basis point reduction from favorable impacts from geographic mix of earnings,
|
|
|
•
|
a 60 basis point increase from reduced excess tax benefits from the exercise of stock options (50 basis points in the current year versus 110 basis points in the prior year), and
|
|
|
•
|
a 50 basis point increase from reduced favorable discrete impacts related to uncertain tax positions (10 basis points unfavorable in the current year versus 40 basis points favorable in the prior year period).
|
Net Earnings
Net earnings
increased $341 million or 12% to $3.2 billion for the quarter
, due primarily to the gain on the dissolution of the PGT Healthcare partnership and the decrease in the effective tax rate, partially offset by the decrease in gross margin, all of which are discussed above. Foreign exchange had a negative $255 million impact on net earnings for the quarter, including both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Net earnings attributable to Procter & Gamble increased $346 million or 12% to $3.2 billion for the quarter. Diluted net earnings per share
increased 15% to $1.22
. The difference between the change in net earnings and diluted net earnings per share was due to a reduction in the number of shares outstanding. Core net earnings per share
increased 3% to $1.12
. Core net earnings per share represents diluted net earnings per share excluding the current period gain on the dissolution of the PGT Healthcare partnership and incremental restructuring charges in both periods related to our productivity and cost savings plans.
BUSINESS SEGMENT DISCUSSION –
Three
Months Ended
September 30, 2018
The following discussion provides a review of results by reportable business segment. Analysis of the results for the
three
-month period ended
September 30, 2018
is provided based on a comparison to the same
three
month period ended
September 30, 2017
. The primary financial measures used to evaluate segment performance are net sales and net earnings. The table below provides supplemental information on net sales and net earnings by reportable business segment for the
three
months ended
September 30, 2018
versus the comparable prior year period (dollar amounts in millions):
Amounts in millions of dollars unless otherwise specified.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
3,289
|
|
|
5
|
%
|
|
$
|
947
|
|
|
13
|
%
|
|
$
|
759
|
|
|
20
|
%
|
Grooming
|
1,562
|
|
|
(1
|
)%
|
|
417
|
|
|
1
|
%
|
|
340
|
|
|
3
|
%
|
Health Care
|
1,845
|
|
|
(3
|
)%
|
|
440
|
|
|
(3
|
)%
|
|
332
|
|
|
9
|
%
|
Fabric & Home Care
|
5,488
|
|
|
2
|
%
|
|
1,144
|
|
|
(3
|
)%
|
|
877
|
|
|
14
|
%
|
Baby, Feminine & Family Care
|
4,390
|
|
|
(3
|
)%
|
|
902
|
|
|
(6
|
)%
|
|
692
|
|
|
10
|
%
|
Corporate
|
116
|
|
|
7
|
%
|
|
90
|
|
|
N/A
|
|
|
211
|
|
|
N/A
|
|
Total Company
|
$
|
16,690
|
|
|
—
|
%
|
|
$
|
3,940
|
|
|
5
|
%
|
|
$
|
3,211
|
|
|
12
|
%
|
Beauty
Three months ended
September 30, 2018
compared with three
months ended
September 30, 2017
Beauty net sales
increased 5% to
$3.3 billion
during the
first fiscal quarter
on
a 3% increase in unit volume
. Favorable product mix added 3% to net sales due to the disproportionate growth of the super-premium SK-II and Olay Skin Care brands, which have higher than segment average selling prices. Higher pricing increased net sales by 2%. Unfavorable foreign exchange impacts reduced net sales by 3%. Organic sales
increased 7%
. Global market share of the Beauty segment
was unchanged
. Volume
increased low single digits
in developed regions and mid-single digits in developing regions.
|
|
•
|
Volume in Hair Care
increased low single digits
. Developed market volume was unchanged. Volume in developing regions increased low single digits due to market growth and product innovation. Global market share of the Hair Care category
decreased slightly
.
|
|
|
•
|
Volume in Skin and Personal Care
increased mid-single digits
. Volume increased low single digits in developed regions due to premium innovation and market growth. Volume increased high single digits in developing regions due to premium innovation, increased marketing spending and market growth. Global market share of the Skin and Personal Care category increased slightly.
|
Net earnings
increased 20% to
$759 million
due to the increase in net sales and a 290 basis-point increase in net earnings margin. The net earnings margin increased primarily due to a decrease in SG&A as a percentage of net sales and a reduction in U.S. income tax rates. Gross margin was relatively unchanged. The reduction in SG&A as a percentage of sales was primarily driven by the positive scale impacts of the net sales increase and the impacts of adopting the new accounting standard on "Revenue from Contracts with Customers."
Grooming
Three months ended
September 30, 2018
compared with three
months ended
September 30, 2017
Grooming net sales
decreased 1% to
$1.6 billion
during the
first fiscal quarter
on
a 5% increase in unit volume
. Foreign exchange had a 4% unfavorable impact on net sales. Pricing had a positive 1% impact on net sales due to price increases in certain markets. Negative mix reduced net sales 2% due to the disproportionate growth of lower tier products and club channels which have lower than segment average selling prices. Organic sales
increased 4%
. Global market share of the Grooming segment
decreased 0.7 points
. Volume increased mid-single digits in developed and developing regions.
|
|
•
|
Shave Care volume
increased mid-single digits
. Developed regions volume increased mid-single digits due to increased competitiveness following price reductions in prior quarters and an increase in consumer promotions. Developing regions volume increased mid-single digits due to increase in consumer promotions and higher trade inventories in certain markets. Global market share of the Shave Care category
was unchanged
.
|
|
|
•
|
Volume in Appliances
increased mid-single digits
. Volume increased mid-single digits in developed regions and low single digits in developing regions due to market growth. Global market share of the Appliances category
decreased more than half a point
.
|
Net earnings
increased 3% to
$340 million
as the reduction in net sales was more than offset by a 90 basis-point increase in net earnings margin. Net earnings margin increased primarily due to a reduction in SG&A as a percentage of net sales and a reduction in U.S. income tax rates, partially offset by a decrease in gross margin. Gross margin declined due to the negative impact of unfavorable product mix and other manufacturing cost increases. SG&A as a percentage of net sales decreased due to reductions in both overhead costs and marketing spending and the impacts from adoption of the new accounting standard on "Revenue from Contracts with Customers."
Health Care
Three months ended
September 30, 2018
compared with three
months ended
September 30, 2017
Health Care net sales
decreased 3% to
$1.8 billion
during the
first fiscal quarter
on
a 1% increase in unit volume
. Excluding the impact of the dissolution of the PGT Healthcare partnership, organic volume increased 4%. Unfavorable foreign exchange impacts decreased net sales by 2%. Unfavorable mix impacts reduced net sales by 1%. Organic sales
increased 4%
. Global market share of the Health Care segment increased 0.4 points. Volume
increased low single digits
in developed regions and
was unchanged
in developing regions. Excluding the impact of the dissolution of the PGT Healthcare partnership, organic volume increased mid-single digits in both developed and developing regions.
|
|
•
|
Oral Care volume
increased low single digits
. Volume increased low single digits in developed regions due to product innovation and lower pricing in the form of increased promotional spending. Volume in developing regions was unchanged. Global market share of the Oral Care category
increased slightly
.
|
|
|
•
|
Volume in Personal Health Care
decreased low single digits
. Excluding the impact of the dissolution of the PGT Healthcare partnership, organic volume increased double digits. Developed regions volume decreased mid-single digits, while organic volume grew mid-single digits due to product innovation and increased advertising spending. Volume in developing regions increased low single digits and double digits on an organic basis, due to innovation and market growth. Global market share of the Personal Health Care category
increased more than half a point
.
|
Net earnings
increased 9% to
$332 million
, as the reduction in net sales was more than offset by a 200 basis point increase in net earnings margin. Net earnings margin increased due to a reduction in SG&A as a percentage of sales and a decrease in U.S. income tax rates, partially offset by a reduction in gross margin. Gross margin decreased driven by unfavorable mix due to the impact of the dissolution of the PGT Healthcare partnership, and other manufacturing cost increases. SG&A as a percentage of net sales decreased primarily due to the impact of the dissolution of the PGT Healthcare partnership and the impacts from adoption of the new accounting standard on "Revenue from Contracts with Customers."
Fabric & Home Care
Three months ended
September 30, 2018
compared with three months ended
September 30, 2017
Fabric & Home Care net sales
increased 2% to
$5.5 billion
for the
first fiscal quarter
on
a 4% increase in unit volume
. Unfavorable foreign exchange impacts reduced net sales by 2%. Positive mix impacts increased net sales by 1%, while lower pricing reduced net sales 1%. Organic sales
increased 5%
on a 5% increase in organic volume. Global market share of the Fabric & Home Care segment
increased 0.5 points
. Volume
increased mid-single digits
in developed regions and increased low single digits in developing regions.
|
|
•
|
Fabric Care volume
increased mid-single digits
. Volume in developed regions grew mid-single digits due to product innovation and lower pricing in the form of increased promotional spending. Volume in developing regions increased low single digits. Excluding the impact of minor brand divestitures, developing regions volume increased mid-single digits driven by product innovation and market growth. Global market share of the Fabric Care category
increased more than half a point
.
|
|
|
•
|
Home Care volume
increased mid-single digits
. Volume in developed regions increased high single digits due to product innovation and market growth. Volume in developing regions decreased low single digits due to category contraction in certain markets. Global market share of the Home Care category
increased nearly half a point
.
|
Net earnings
increased 14% to
$877 million
due to the increase in net sales and a 170 basis point increase in net earnings margin. Net earnings margin increase was primarily due to a reduction in SG&A as a percentage of sales and a decrease in U.S. income tax rates partially offset by a reduction in gross margin. Gross margin decreased due to negative product mix impacts (driven by disproportionate growth of product forms with lower than segment-average margins) and an increase in commodity costs, which were partially offset by manufacturing cost savings. SG&A as a percentage of net sales was down due to productivity savings, the positive scale effects of the increase in net sales and the impacts from adoption of the new accounting standard on "Revenue from Contracts with Customers."
Baby, Feminine & Family Care
Three months ended
September 30, 2018
compared with three
months ended
September 30, 2017
Baby, Feminine & Family Care net sales
decreased 3% to
$4.4 billion
during the
first fiscal quarter
on
a 1% increase in unit volume
. Unfavorable foreign exchange impacts decreased net sales by 2%. Lower pricing reduced net sales 1%. Organic sales
decreased 1%
. Global market share of the Baby, Feminine & Family Care segment
decreased 0.2 points
. Volume
increased mid-single digits
in developed regions. Volume in developing regions decreased mid-single digits.
|
|
•
|
Volume in Baby Care
decreased high single digits
. Volume in developed regions declined mid-single digits due to competitive activity, including lower competitor pricing due to higher promotional spending in certain markets. Volume in developing regions declined high single digits due to competitive activity, volume declines following increased prices and category contraction in certain markets. Global market share of the Baby Care category
decreased more than a point
.
|
|
|
•
|
Volume in Feminine Care
increased low single digits
. Volume in developed regions increased mid-single digits due to product innovation and adult incontinence category growth. Volume increased low single digits in developing regions driven by innovation and lower pricing in the form of increased promotional spending. Global market share of the Feminine Care category
increased less than half a point
.
|
|
|
•
|
Volume in Family Care, which is predominantly a North American business,
increased high single digits
driven by product innovation and distribution gains. In the U.S., all-outlet share of the Family Care category
increased more than half a point
.
|
Net earnings
increased 10% to
$692 million
as the reduction in net sales was more than offset by a 190 basis point increase in net earnings margin. Net earnings margin increased primarily due to a decrease in U.S. income tax rates and a reduction in SG&A as a percentage of net sales, partially offset by a reduction in gross margin. Gross margin decreased primarily due to an increase in commodity costs, lower pricing and unfavorable foreign exchange impacts, partially offset by manufacturing cost savings projects. SG&A as a percentage of net sales decreased due to reduced marketing spending and overhead costs, and the impacts from adoption of the new accounting standard on "Revenue from Contracts with Customers."
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; certain employee benefit costs; 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. 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
improved by $8 million
to $
116 million
during the first fiscal quarter. Corporate net earnings increased $6 million to $211 million in the first fiscal quarter as higher current year divestiture gains (driven by the current year gain on the dissolution of the PGT healthcare partnership) was largely offset by higher current year foreign exchange transactional charges and higher income taxes in the current period caused by lower foreign tax credits under the U.S. Tax Act, each of which has been discussed earlier in the Results of Operations section.
Restructuring Program to deliver Productivity and Cost Savings
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. In 2017, the Company communicated specific elements of an additional multi-year productivity and cost savings program.
The current productivity and cost savings plan will further reduce costs in the areas of supply chain, certain marketing activities and overhead expenses. As part of this plan, the Company incurred $1.1 billion in total before-tax restructuring costs in fiscal 2018, with an additional amount of approximately $0.8 billion expected in fiscal 2019. This program is expected to result in additional enrollment reductions, along with further optimization of the supply chain and other manufacturing processes. Consistent with our historical policies for ongoing restructuring-type activities, the resulting charges are funded by and included within Corporate for segment reporting.
In addition to our restructuring programs, we have additional ongoing savings efforts in our supply chain, marketing and overhead areas that yield additional benefits to our operating margins.
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
$3.6 billion
of cash from operating activities fiscal year to date, flat 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 assets), generated
$3.6 billion
of operating cash flow. Working capital and other impacts used
$62 million
of cash in the period. Accounts receivable increased, using
$475 million
of cash due to sales growth and to a lesser extent, the extension of customer payment terms for seasonal products. Inventory consumed
$494 million
of cash primarily due to product initiatives, business growth, and production seasonality builds in certain GBU's. Accounts payable, accrued and other liabilities increased, generating
$933 million
of cash primarily driven by extended payment terms with our suppliers, an increase in payables to support the increase in inventory and an increase in taxes payable due to the timing of payments. All other operating assets and liabilities used
$84 million
of cash, driven by payments of the current year portion of taxes due related to the U.S. Tax Act, partially offset by collection of other receivables.
Investing Activities
Cash used by investing activities was
$865 million
fiscal year to date. Capital expenditures were
$1.1 billion
, or
6.5%
of net sales. Acquisition activity used
$237 million
of cash. We used
$158 million
for purchases of short-term investments. These uses were partially offset by
$649 million
of cash generated from sales and maturities of short-term investments.
Financing Activities
Our financing activities consumed net cash of
$2.7 billion
fiscal year to date. We used
$1.3 billion
for treasury stock purchases and
$1.9 billion
for dividends. Cash from the exercise of stock options and other impacts generated
$425 million
of cash.
As of
September 30, 2018
, our current liabilities exceeded current assets by
$5.9 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 measures.
We believe that these measures provide useful perspective on underlying business results and trends (i.e., trends excluding non-recurring or unusual items) 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.
Organic sales growth
: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions and divestitures, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and foreign exchange from year-over-year comparisons. The impact of the adoption of the new accounting standard for Revenue from Contracts with Customers is driven by the prospective reclassification of certain customer spending from marketing (SG&A) expense to a reduction of Net sales. We believe this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis. This measure is used in assessing achievement of management goals for at-risk compensation.
Adjusted free cash flow
: Adjusted free cash flow is defined as operating cash flow less capital spending and excluding payments for the transitional tax resulting from the comprehensive U.S. legislation commonly referred to as the Tax Cuts and Jobs Act in December 2017 (the U.S. Tax Act). Adjusted free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends, share repurchases, acquisitions and other discretionary investments.
Adjusted free cash flow productivity
: Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings excluding the gain on dissolution of the PGT Healthcare partnership, which is non-recurring and not considered indicative of underlying cash flow performance. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. This measure is also used in assessing the achievement of management goals for at-risk compensation. The Company's long-term target is to generate annual adjusted 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 adjusted as indicated. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time. This measure is also used when evaluating senior management in determining their at-risk compensation.
The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following items:
Incremental Restructuring
: The Company has had 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. In 2012, the Company began a $10 billion strategic productivity and cost savings initiative that included incremental restructuring activities. In 2017, we communicated details of an additional multi-year productivity and cost savings plan. 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.
Gain on Dissolution of PGT Healthcare Partnership:
The Company finalized the dissolution of our PGT Healthcare partnership, a venture between the Company and Teva Pharmaceuticals Industries, Ltd. (Teva) in the OTC consumer healthcare business, in the quarter ended September 30, 2018. The transaction was accounted for as a sale of the Teva portion of the PGT business; the Company recognized an after-tax gain on the dissolution of $353 million.
We do not view the above items to be part of our sustainable results and their exclusion from Core earnings measures provides a more comparable measure of year-on-year results. These items are also excluded when evaluating senior management in determining their at-risk compensation.
Organic sales growth
:
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2018
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition & Divestiture Impact/Other
(1)
|
|
Organic Sales Growth
|
Beauty
|
5%
|
|
3%
|
|
(1)%
|
|
7%
|
Grooming
|
(1)%
|
|
4%
|
|
1%
|
|
4%
|
Health Care
|
(3)%
|
|
2%
|
|
5%
|
|
4%
|
Fabric & Home Care
|
2%
|
|
2%
|
|
1%
|
|
5%
|
Baby, Feminine & Family Care
|
(3)%
|
|
2%
|
|
—%
|
|
(1)%
|
Total Company
|
—%
|
|
3%
|
|
1%
|
|
4%
|
(1)
Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile net sales to organic sales.
Adjusted free cash flow (dollar amounts in millions)
:
|
|
|
|
|
|
|
Fiscal Year-to-Date, September 30, 2018
|
Operating Cash Flow
|
|
Capital Spending
|
U.S. Tax Act Payments
|
|
Adjusted Free Cash Flow
|
$3,567
|
|
$(1,080)
|
$235
|
|
$2,722
|
Adjusted free cash flow productivity (dollar amounts in millions)
:
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, September 30, 2018
|
Adjusted Free Cash Flow
|
|
Net Earnings
|
Gain on Dissolution of PGT Partnership
|
Adjusted Net Earnings
|
|
Adjusted Free Cash Flow Productivity
|
$2,722
|
|
$3,211
|
$(353)
|
$2,858
|
|
95%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2018
|
|
AS REPORTED (GAAP)
|
|
INCREMENTAL RESTRUCTURING
|
|
GAIN ON DISSOLUTION OF PGT PARTNERSHIP
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,484
|
|
|
(46
|
)
|
|
—
|
|
|
—
|
|
|
8,438
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
4,652
|
|
|
(28
|
)
|
|
—
|
|
|
1
|
|
|
4,625
|
|
OPERATING INCOME
|
3,554
|
|
|
74
|
|
|
—
|
|
|
(1
|
)
|
|
3,627
|
|
INCOME TAX
|
729
|
|
|
6
|
|
|
(2
|
)
|
|
1
|
|
|
734
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
3,199
|
|
|
69
|
|
|
(353
|
)
|
|
—
|
|
|
2,915
|
|
|
|
|
|
|
|
|
|
|
Core EPS
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
1.22
|
|
|
0.03
|
|
|
(0.14
|
)
|
|
0.01
|
|
|
1.12
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
|
|
|
|
CORE EPS
|
3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2017
|
|
AS REPORTED (GAAP)
|
|
|
INCREMENTAL RESTRUCTURING
|
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,269
|
|
|
|
(100
|
)
|
|
|
—
|
|
|
8,169
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
4,736
|
|
|
|
7
|
|
|
|
—
|
|
|
4,743
|
|
OPERATING INCOME
|
3,648
|
|
|
|
93
|
|
|
|
—
|
|
|
3,741
|
|
INCOME TAX
|
881
|
|
|
|
20
|
|
|
|
—
|
|
|
901
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,853
|
|
|
|
75
|
|
|
|
—
|
|
|
2,928
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
1.06
|
|
|
|
0.03
|
|
|
|
—
|
|
|
1.09
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.