|
|
|
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 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 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, contract manufacturers, 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, product and packaging composition, 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, 2019
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations – Three Months Ended September 30, 2019
|
|
|
•
|
Business Segment Discussion – Three Months Ended September 30, 2019
|
|
|
•
|
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 purchased traditional brick-and-mortar and online data in key markets 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. The Company measures fiscal-year-to-date market shares through the most recent period for which market share data is available, which typically reflects a lag time of one or two months.
OVERVIEW
P&G is a global leader in the fast-moving consumer goods industry, 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 also sell direct to consumers. 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, Herbal Essences, Pantene, Rejoice
|
Skin and Personal Care (Antiperspirant and Deodorant, Personal Cleansing, Skin Care)
|
Olay, Old Spice, Safeguard, SK-II, Secret
|
Grooming
|
Grooming (1) (Shave Care - Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care; Appliances)
|
Braun, Gillette, Venus
|
Health Care
|
Oral Care (Toothbrushes, Toothpaste, Other Oral Care)
|
Crest, Oral-B
|
Personal Health Care (Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Pain Relief, Other Personal Health Care)
|
Metamucil, Neurobion, Pepto Bismol, 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, Fairy, Febreze, Mr. Clean, Swiffer
|
Baby, Feminine & Family Care
|
Baby Care (Baby Wipes, Taped Diapers and Pants)
|
Luvs, Pampers
|
Feminine Care (Adult Incontinence, Feminine Care)
|
Always, Always Discreet, Tampax
|
Family Care (Paper Towels, Tissues, Toilet Paper)
|
Bounty, Charmin, Puffs
|
|
|
(1)
|
The Grooming product category is comprised of the Shave Care and Appliances operating segments.
|
The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended September 30, 2019 (excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
20%
|
|
25%
|
Grooming
|
9%
|
|
10%
|
Health Care
|
12%
|
|
11%
|
Fabric & Home Care
|
33%
|
|
29%
|
Baby, Feminine & Family Care
|
26%
|
|
25%
|
Total Company
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the three months ended September 30, 2019 versus the three months ended September 30, 2018:
|
|
•
|
Net sales increased 7% to $17.8 billion, driven by a 20% increase in Health Care, a high single digits increase in Beauty and mid-single digits increases in Fabric & Home Care and Baby, Feminine & Family Care, partially offset by a low single digit decline in Grooming. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, increased 7%, driven by a double digits increase in Beauty, high single digits increases in Health Care and Fabric & Home Care, a mid-single digit increase in Baby, Feminine & Family Care and a low single digit increase in Grooming.
|
|
|
•
|
Unit volume increased 5%, with organic volume up 4%. Volume increased high teens in Health Care, mid-single digits in Fabric & Home Care, and low single digits in Beauty and in Baby, Feminine & Family Care. Volume decreased low single digits in Grooming. Excluding the impacts of the Merck OTC acquisition, organic volume increased mid-single digits in Health Care.
|
|
|
•
|
Net earnings were $3.6 billion, an increase of $0.4 billion or 13% versus the prior year due to the increase in net sales, an increase in operating margin and a reduction in the current year income tax rate, partially offset by the base period gain on dissolution of the PGT Healthcare partnership.
|
|
|
•
|
Net earnings attributable to Procter & Gamble increased $0.4 billion or 12% versus the prior year to $3.6 billion.
|
|
|
•
|
Diluted net earnings per share increased 11% to $1.36 due primarily to the increase in net earnings.
|
|
|
•
|
Core net earnings attributable to Procter & Gamble, which represents net earnings excluding incremental restructuring charges in both periods and the base period gain on the dissolution of the PGT Healthcare partnership, increased 24% to $3.6 billion. Core net earnings per share increased 22% to $1.37 due primarily to the increase in Core net earnings.
|
|
|
•
|
Operating cash flow was $4.2 billion. Adjusted free cash flow, which is operating cash flow less capital expenditures and certain other impacts, was $3.3 billion. Adjusted free cash flow productivity was 91%.
|
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions. Our products are sold in numerous countries across North America, Europe, Latin America, Asia and Africa with more than half our sales generated outside the United States. As such, we are exposed to and impacted by global macroeconomic factors, U.S. and foreign government policies and foreign exchange fluctuations. 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, Greater China 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 has strengthened versus a number of foreign currencies leading to lower sales and earnings from these foreign exchange impacts. Certain countries experiencing significant exchange rate fluctuations, like Argentina, Brazil, China and the United Kingdom 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, and the current work being led by the OECD for the G20 focused on "Addressing the Challenges of the Digitalization of the Economy." The breadth of this project extends beyond pure digital businesses and is likely to impact all multinational businesses by redefining jursidictional taxing rights. 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, Egypt, Argentina and Turkey. 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, 2019.
RESULTS OF OPERATIONS – Three Months Ended September 30, 2019
The following discussion provides a review of results for the three months ended September 30, 2019 versus the three months ended September 30, 2018.
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
Amounts in millions, except per share amounts
|
2019
|
|
2018
|
|
% Chg
|
Net sales
|
$17,798
|
|
$16,690
|
|
7%
|
Operating income
|
4,290
|
|
3,554
|
|
21%
|
Net earnings
|
3,617
|
|
3,211
|
|
13%
|
Net earnings attributable to Procter & Gamble
|
3,593
|
|
3,199
|
|
12%
|
Diluted net earnings per common share
|
1.36
|
|
1.22
|
|
11%
|
Core net earnings per common share
|
1.37
|
|
1.12
|
|
22%
|
|
|
Three Months Ended September 30
|
COMPARISONS AS A PERCENTAGE OF NET SALES
|
2019
|
|
2018
|
|
Basis Pt Chg
|
Gross profit
|
51.0%
|
|
49.2%
|
|
180
|
Selling, general & administrative expense
|
26.9%
|
|
27.9%
|
|
(100)
|
Operating income
|
24.1%
|
|
21.3%
|
|
280
|
Earnings before income taxes
|
24.4%
|
|
23.6%
|
|
80
|
Net earnings
|
20.3%
|
|
19.2%
|
|
110
|
Net earnings attributable to Procter & Gamble
|
20.2%
|
|
19.2%
|
|
100
|
Net Sales
Net sales for the quarter increased 7% to $17.8 billion including a 2% negative impact from foreign exchange. Unit volume increased 5%. Excluding the impacts of acquisitions and divestitures, organic volume increased 4%. Increased pricing had a 1% favorable impact to net sales. Mix was a 2% positive impact to net sales, driven by disproportionate organic growth of Japan, Skin & Personal Care and Personal Health Care categories, all of which have higher than company average selling prices. Volume increased high teens in Health Care, increased mid-single digits in Fabric & Home Care and increased low single digits in Beauty and in Baby, Feminine & Family Care. Volume decreased low-single digits in Grooming. Excluding the impacts of the Merck OTC acquisition, Health Care organic volume increased mid-single digits. On a regional basis, volume growth was driven by high single digits increases in Latin America and in Asia Pacific, primarily due to inventory build by retailers in Japan in advance of a VAT increase effective October 2019, and mid-single digits increases in North America, Europe, Greater China, and India, Middle East and Africa (IMEA). Excluding the impact of minor acquisitions and divestitures, organic volume increased mid-single digits in Latin America and increased low single digits in Greater China, Europe and IMEA. Organic sales increased 7% on a 4% increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2019 vs. 2018 (Three Months Ended September 30) (1)
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other (1)
|
|
Net Sales Growth (2)
|
Beauty
|
3%
|
|
3%
|
|
(2)%
|
|
3%
|
|
4%
|
|
—%
|
|
8%
|
Grooming
|
(1)%
|
|
(1)%
|
|
(2)%
|
|
1%
|
|
—%
|
|
—%
|
|
(2)%
|
Health Care
|
17%
|
|
6%
|
|
(2)%
|
|
1%
|
|
2%
|
|
2%
|
|
20%
|
Fabric & Home Care
|
6%
|
|
6%
|
|
(1)%
|
|
—%
|
|
1%
|
|
—%
|
|
6%
|
Baby, Feminine & Family Care
|
2%
|
|
2%
|
|
(1)%
|
|
2%
|
|
1%
|
|
—%
|
|
4%
|
Total Company
|
5%
|
|
4%
|
|
(2)%
|
|
1%
|
|
2%
|
|
1%
|
|
7%
|
(1) Other includes the sales mix impact from acquisitions and divestitures and rounding impacts necessary to reconcile volume to net sales.
(2) Net sales percentage changes are approximations based on quantitative formulas that are consistently applied.
Operating Costs
Gross margin increased 180 basis points to 51.0% of net sales for the quarter. Gross margin benefited from:
|
|
•
|
90 basis points of gross manufacturing cost savings projects (80 basis points net of product and packaging reinvestments),
|
|
|
•
|
70 basis points of positive pricing impacts,
|
|
|
•
|
40 basis points of lower commodity costs, and
|
|
|
•
|
50 basis points of other benefits
|
These benefits were partially offset by a 10 basis point decline from unfavorable foreign exchange and a 50 basis point net decline from unfavorable product mix (primarily mix within segments due to the growth of lower margin product forms and large sizes in certain categories and due to the disproportionate growth of the Fabric Care category which is one of our largest categories and has lower than company-average margins).
Total SG&A spending increased 3% to $4.8 billion due to increases in marketing spending and overhead costs, partially offset by a reduction in other operating costs. SG&A as a percentage of net sales decreased 100 basis points to 26.9% due to a decrease in overhead, marketing spending and other operating costs as a percentage of net sales. Marketing spending as a percentage of net sales decreased 20 basis points due to the positive scale impacts of the net sales increase and savings in agency compensation, production costs and advertising spending, partially offset by reinvestments in media and other marketing spending. Overhead costs as a percentage of net sales decreased 30 basis points driven by the positive scale impacts of the net sales increase, productivity savings and lower restructuring charges versus the base period, partially offset by inflation, higher incentive compensation costs and other cost increases. Other net operating costs as a percentage of net sales decreased 50 basis points due to a reduction in foreign exchange transaction charges and gains from legal settlements. Productivity-driven cost savings delivered 70 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was $108 million for the quarter, a decrease of $21 million versus the prior year period due to a decrease in average debt balances. Interest income was $58 million for the quarter, a $5 million increase versus the prior year period due to an increase in higher yield investment securities balances. Other non-operating income was $103 million, a decrease of $359 million due to the base period gain from the dissolution of the PGT Healthcare partnership.
Income Taxes
For the three months ended September 30, 2019 the effective tax rate decreased 180 basis points versus the prior year period to 16.7% due to:
|
|
•
|
a 150 basis-point reduction from increased excess tax benefits of share-based compensation (200 basis points in the current year versus 50 basis points in the prior year),
|
|
|
•
|
a 120 basis-point reduction from a non-recurring tax benefit arising from a simplification of our legal entity structure,
|
|
|
•
|
a 90 basis-point reduction from favorable impacts from geographic mix of earnings,
|
|
|
•
|
partially offset by a 180 basis-point increase related to the prior year tax impact of the gain on the dissolution of the PGT Healthcare partnership.
|
Net Earnings
Operating income increased $736 million, or 21% to $4.3 billion due to the net sales increase, the increase in gross margins and the reduction in SG&A as a percentage of sales, all of which are described above. Net earnings increased $406 million or 13% to $3.6 billion due to the increase in operating income and the lower tax rates as described above, partially offset by the base period gain on the PGT Healthcare partnership dissolution. Foreign exchange had a negative impact of $50 million 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 $394 million or 12% to $3.6 billion for the quarter. Diluted net earnings per share increased 11% to $1.36. Core net earnings per share increased 22% to $1.37. Core net earnings per share represents diluted net earnings per share excluding the incremental restructuring charges in both periods related to our productivity and cost savings plans and the gain on dissolution of the PGT Healthcare partnership in the base period.
Amounts in millions of dollars unless otherwise specified.
BUSINESS SEGMENT DISCUSSION – Three Months Ended September 30, 2019
The following discussion provides a review of results by reportable business segment. Analysis of the results for the three months period ended September 30, 2019 is provided based on a comparison to the same three months period ended September 30, 2018. 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, 2019 versus the comparable prior year period (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
3,552
|
|
|
8
|
%
|
|
$
|
1,092
|
|
|
15
|
%
|
|
$
|
874
|
|
|
15
|
%
|
Grooming
|
1,531
|
|
|
(2
|
)%
|
|
426
|
|
|
2
|
%
|
|
353
|
|
|
4
|
%
|
Health Care
|
2,221
|
|
|
20
|
%
|
|
540
|
|
|
23
|
%
|
|
401
|
|
|
21
|
%
|
Fabric & Home Care
|
5,832
|
|
|
6
|
%
|
|
1,338
|
|
|
17
|
%
|
|
1,028
|
|
|
17
|
%
|
Baby, Feminine & Family Care
|
4,567
|
|
|
4
|
%
|
|
1,134
|
|
|
26
|
%
|
|
871
|
|
|
26
|
%
|
Corporate
|
95
|
|
|
N/A
|
|
|
(187
|
)
|
|
N/A
|
|
|
90
|
|
|
N/A
|
|
Total Company
|
$
|
17,798
|
|
|
7
|
%
|
|
$
|
4,343
|
|
|
10
|
%
|
|
$
|
3,617
|
|
|
13
|
%
|
Beauty
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Beauty net sales increased 8% to $3.6 billion during the first fiscal quarter on a 3% increase in unit volume. Favorable product mix added 4% to net sales due to the disproportionate growth of the Skin and Personal Care category, including the super-premium SK-II brand, which has higher than segment average selling prices. Higher pricing increased net sales by 3%. Unfavorable foreign exchange impacts reduced net sales by 2%. Organic sales increased 10%. Global market share of the Beauty segment increased 0.3 points. Volume growth was driven by a mid-single digit increase in North America, Asia Pacific, Latin America and IMEA and a low single digits increase in Europe. The volume increase in Asia Pacific was primarily driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
|
|
•
|
Volume in Hair Care increased low single digits. Increased volume was driven by mid-single digits growth in North America, Asia Pacific, Europe, Latin America and IMEA (due to product innovation, market growth and Japan retailer inventory increase), partially offset by a low single digits decline in Greater China due to competitive activities. Excluding the impact of minor brand acquisitions, volume increased low single digits in North America. Global market share of the Hair Care category was unchanged.
|
|
|
•
|
Volume in Skin and Personal Care increased mid-single digits. Volume increased in all regions, led by a high single digits increase in Greater China and mid-single digits increases in North America and Latin America driven by premium innovation. Global market share of the Skin and Personal Care category increased more than half a point.
|
Net earnings increased 15% to $874 million due to the increase in net sales and a 150 basis-point increase in net earnings margin. The net earnings margin increased primarily due to a reduction in SG&A as a percentage of sales, along with an increase in gross margin. The gross margin increase was primarily driven by increased pricing, partially offset by negative foreign exchange impacts and other hurts related to new manufacturing startup costs. The reduction in SG&A as a percentage of sales was primarily due to the positive scale impacts of the net sales increase.
Grooming
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Grooming net sales decreased 2% to $1.5 billion during the first fiscal quarter on a 1% decrease in unit volume. Unfavorable foreign exchange had a negative 2% impact on net sales. Pricing had a positive 1% impact on net sales. Organic sales increased 1%. Global market share of the Grooming segment decreased 0.4 points. The volume decrease was driven by a high single digits decline in North America, partially offset by a mid-single digits increase in Greater China and a low single digits increase in Latin America.
|
|
•
|
Shave Care volume decreased low single digits. The volume decrease was driven by a high single digits decline in North America due to competitive activity, partially offset by a mid-single digits increase in Greater China and low single digit increases in Latin America and Asia Pacific due to product innovation. Global market share of the Shave Care category was unchanged.
|
|
|
•
|
Volume in Appliances decreased mid-single digits. A decline of more than 20% in Asia Pacific (due to market contraction, competitive activities and a reduction in trade inventories), was partially offset by mid-single digit volume increase in Greater China due to innovation. Global market share of the Appliances category was unchanged.
|
Net earnings increased 4% to $353 million due to a 130 basis-point increase in net earnings margin, partially offset by the reduction in net sales. Net earnings margin increased primarily due to a reduction in SG&A as a percentage of net sales and a reduction in effective tax rates, partially offset by a reduction in gross margin. Gross margin declined due to the negative impact of unfavorable mix (due to the growth of lower margin products), partially offset by the positive impacts of manufacturing cost savings and increased pricing. SG&A as a percentage of net sales decreased primarily due to a favorable legal settlement in the current period and reduction in overhead costs due to productivity savings, partially offset by the negative scale impacts of the net sales decrease.
Health Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Health Care net sales increased 20% to $2.2 billion during the first fiscal quarter on a 17% increase in unit volume. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic sales increased 9% and organic volume increased 6%. Unfavorable foreign exchange impacts decreased net sales by 2%. Higher pricing increased net sales by 1%. Favorable mix increased net sales by 2% due to the disproportionate organic growth of premium products and the North America region which have higher than segment average margins. Global market share of the Health Care segment increased 0.3 points. Volume increased in all regions, led by over 20% growth in Europe, Latin America, IMEA and Asia Pacific and high single digits growth in North America. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic volume increased high single digits in IMEA and in Latin America and increased low single digits in Europe and in Asia Pacific.
|
|
•
|
Oral Care volume increased mid-single digits. Increased volume was driven by high teens growth in IMEA and high single digits growth in North America, Asia Pacific and Latin America due to innovation and market growth. Global market share of the Oral Care category increased nearly half a point.
|
|
|
•
|
Volume in Personal Health Care increased more than 50% versus the prior year period. Excluding the impact of the Merck OTC consumer healthcare acquisition, organic volume increased high single digits. The organic volume increase was driven by over 20% growth in Europe and double digits growth in North America (due to innovation and higher retailer inventory build for the cough/cold season versus the year ago period), partially offset by double digit volume declines in Asia Pacific due to devaluation-related price increases. Global market share of the Personal Health Care category increased slightly.
|
Net earnings increased 21% to $401 million, primarily due to the increase in net sales. Net earnings margin increased 10 basis points as an increase in gross margin was largely offset by an increase in SG&A as a percentage of sales and an increase in income tax rates. The increase in gross margin was driven by the positive impacts of increased pricing and favorable mix due to the disproportionate growth of the North America region which has higher than segment-average margins, partially offset by the mix impact of the Merck OTC consumer healthcare acquisition. SG&A as a percentage of net sales increased primarily due to an increase in overheads and other operating expenses caused by the impact of the Merck OTC consumer healthcare acquisition, partially offset by the positive scale benefits of the net sales increase.
Fabric & Home Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Fabric & Home Care net sales increased 6% to $5.8 billion during the first fiscal quarter on a 6% increase in unit volume. Unfavorable foreign exchange impacts reduced net sales by 1%. Positive mix impacts increased net sales by 1% due to the disproportionate growth of premium products. Organic sales increased 8%. Global market share of the Fabric & Home Care segment increased 0.7 points. Volume growth was driven by double digit increases in Asia Pacific, Greater China and Latin America and mid-single digit increases in North America and Europe. The volume increase in Asia Pacific was partially driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
|
|
•
|
Fabric Care volume increased high single digits. Volume increased in all regions led by double digits growth in Asia Pacific, Greater China and Latin America, high single digits growth in North America and mid-single digits growth in Europe. Growth was driven by product innovation, market growth and the increase in Japan retailer inventories prior to a VAT increase. Global market share of the Fabric Care category increased half a point.
|
|
|
•
|
Home Care volume increased low single digits. Excluding the impact of minor brand divestitures, organic volume increased mid-single digits. Increased volume was driven by high single digits growth in Asia Pacific, mid-single digits growth in Europe and low single digits growth in North America. Volume grew behind product innovation and the increase in Japan retailer inventories prior to a VAT increase. Global market share of the Home Care category increased more than a point.
|
Net earnings increased 17% to $1.0 billion due to the increase in net sales and a 160 basis point increase in net earnings margin. The net earnings margin increase was primarily due to an increase in gross margin, along with a reduction in SG&A as a percentage of sales. The gross margin increase was driven by manufacturing cost savings and reduction in commodity costs. SG&A expense as a percentage of net sales was down due to the positive scale benefits of the net sales increase.
Baby, Feminine & Family Care
Three months ended September 30, 2019 compared with three months ended September 30, 2018
Baby, Feminine & Family Care net sales increased 4% to $4.6 billion during the first fiscal quarter on a 2% increase in unit volume. Unfavorable foreign exchange impacts decreased net sales by 1%. Higher pricing increased net sales by 2%. Positive mix increased net sales by 1% due to the disproportionate growth of premium products, which have higher than segment average margins. Organic sales increased 5%. Global market share of the Baby, Feminine & Family Care segment decreased 0.5 points. Volume growth was driven by a mid-teens increase in Asia Pacific and a mid-single digit increase in North America, partially offset by a low single digit decline in Europe and Latin America. Excluding the impact of minor brand acquisitions, organic volume increased low single digits in North America. The volume increase in Asia Pacific was primarily driven by an increase in retailer inventories in Japan prior to a VAT increase in October 2019.
|
|
•
|
Volume in Baby Care decreased low single digits. Volume decreased high single digits in Latin America and mid-single digits in Europe due to competitive activity, devaluation related price increases and category contraction in certain markets. This was partially offset by high teens volume increase in Asia Pacific due to the increase in Japan retailer inventories prior to the VAT increase, mid-single digit increase in Greater China, and low single digit increase in North America due to product innovation. Global market share of the Baby Care category decreased more than a point.
|
|
|
•
|
Volume in Feminine Care increased mid-single digits. Volume increased high single digits in IMEA and Latin America and increased mid-single digits in Europe due to product innovation and adult incontinence category growth. Global market share of the Feminine Care category was unchanged.
|
|
|
•
|
Volume in Family Care, which is predominantly a North American business, increased mid-single digits driven by product innovation, partially offset by volume declines due to price increases. North America share of the Family Care category decreased nearly half a point.
|
Net earnings increased 26% to $871 million due to the increase in net sales and a 330 basis point increase in net earnings margin. Net earnings margin increased primarily due to an increase in gross margin,along with a reduction in SG&A as a percentage of net sales. Gross margin increased due to manufacturing cost savings projects, increased pricing and a reduction in commodity costs, partially offset by negative foreign exchange impacts. SG&A as a percentage of net sales decreased due to reduced overhead costs, driven by productivity savings, partially offset by an increase in marketing spending as a percentage of net sales.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include: the incidental businesses managed at the corporate level; financing and investing activities; 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 decreased $21 million to $95 million for the quarter ended September 30, 2019. Corporate net earnings decreased $121 million in the quarter primarily due to the base period gain on the dissolution of the PGT Healthcare partnership, partially offset by lower restructuring charges versus the base period, lower foreign exchange transactional charges, lower interest expense and a decrease in effective tax rates, all of which have been described above.
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 $1.8 billion in total before-tax restructuring costs across fiscal 2018 and fiscal 2019, with an additional amount of approximately $0.6 billion expected in fiscal 2020. 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 $4.2 billion of cash from operating activities fiscal year to date, an increase of $602 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 assets), generated $3.9 billion of operating cash flow. Working capital and other impacts generated $307 million of cash in the period. Accounts receivable increased, using $261 million of cash, primarily due to sales growth and to a lesser extent, the extension of customer payment terms for seasonal products. These increases were partially offset by the timing of the quarter-end (which fell on a Monday versus Sunday in the prior year end, resulting in greater collections). Inventory consumed $549 million of cash primarily to support business growth, holiday seasonality builds in certain categories and product initiatives. Accounts payable, accrued and other liabilities increased, generating $1.2 billion of cash. An increase in taxes payable drove approximately $900 million of the increase, including an approximate $500 million increase in taxes payable related to the integration of Merck, which had no impact on operating cash flows, as there was an equal and offsetting release of a deferred tax liability created on the acquisition of Merck. The remaining balance of the increase was primarily driven by an increase in payables to support the increase in inventory and to a lesser extent extended payment terms with our suppliers, partially offset by the payment of prior fiscal year incentive compensation. All other operating assets and liabilities used $35 million of cash.
Investing Activities
Investing activities generated $5.1 billion of cash fiscal year to date. Capital expenditures were $1.1 billion, or 6.1% of net sales. We received $6.2 billion of cash from sales and maturities of investment securities.
Financing Activities
Our financing activities used $4.1 billion of net cash fiscal year to date. We used $3.0 billion for treasury stock purchases, $1.9 billion for dividends and $61 million for debt repayments. Cash from the exercise of stock options and other impacts generated $875 million of cash.
As of September 30, 2019, our current liabilities exceeded current assets by $8.3 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 S-K Item 10(e), 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 and foreign exchange from year-over-year comparisons. 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 enacted 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. 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 and resulted in the Company recognizing 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, 2019
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition & Divestiture Impact/Other (1)
|
|
Organic Sales Growth
|
Beauty
|
8%
|
|
2%
|
|
—%
|
|
10%
|
Grooming
|
(2)%
|
|
2%
|
|
1%
|
|
1%
|
Health Care
|
20%
|
|
2%
|
|
(13)%
|
|
9%
|
Fabric & Home Care
|
6%
|
|
1%
|
|
1%
|
|
8%
|
Baby, Feminine & Family Care
|
4%
|
|
1%
|
|
—%
|
|
5%
|
Total Company
|
7%
|
|
2%
|
|
(2)%
|
|
7%
|
(1) Includes rounding impacts necessary to reconcile net sales to organic sales.
Adjusted free cash flow (dollar amounts in millions):
|
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
Operating Cash Flow
|
|
Capital Spending
|
U.S. Tax Act Payments
|
|
Adjusted Free Cash Flow
|
$4,169
|
|
$(1,079)
|
$215
|
|
$3,305
|
Adjusted free cash flow productivity (dollar amounts in millions):
|
|
|
|
|
|
Three Months Ended September 30, 2019
|
Adjusted Free Cash Flow
|
|
Net Earnings
|
|
Adjusted Free Cash Flow Productivity
|
$3,305
|
|
$3,617
|
|
91%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2019
|
|
AS REPORTED (GAAP)
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
$
|
8,723
|
|
|
$
|
(52
|
)
|
|
$
|
—
|
|
|
$
|
8,671
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
4,785
|
|
|
22
|
|
|
—
|
|
|
4,807
|
|
OPERATING INCOME
|
4,290
|
|
|
30
|
|
|
—
|
|
|
4,320
|
|
INCOME TAX
|
726
|
|
|
1
|
|
|
—
|
|
|
727
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
3,593
|
|
|
31
|
|
|
(1
|
)
|
|
3,623
|
|
|
|
|
|
|
|
|
Core EPS
|
DILUTED NET EARNINGS PER COMMON SHARE (1)
|
$
|
1.36
|
|
|
$
|
0.01
|
|
|
$
|
—
|
|
|
$
|
1.37
|
|
(1) Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
|
|
|
|
CORE NET EARNINGS ATTRIBUTABLE TO P&G
|
24
|
%
|
|
|
|
|
|
CORE EPS
|
22
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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.