|
|
|
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 health care; (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, privacy, 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, 2017
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations – Three Months Ended
September 30, 2017
|
|
|
•
|
Business Segment Discussion – Three Months Ended
September 30, 2017
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Reconciliation of Measures Not Defined by U.S. GAAP
|
Throughout the MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (Core EPS), free cash flow and free cash flow productivity. 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, grocery stores, membership club stores, drug stores, department stores, distributors, baby stores, specialty beauty stores, e-commerce, high-frequency stores and pharmacies. We have on-the-ground operations in approximately
70
countries.
Our market environment is highly competitive with global, regional and local competitors. In many of the markets and industry segments in which we sell our products, we compete against other branded products as well as retailers' private-label brands. Additionally, many of the product segments in which we compete are differentiated by price tiers (referred to as super-premium, premium, mid-tier and value-tier products). We are well positioned in the industry segments and markets in which we operate, often holding a leadership or significant market share position.
The table below provides detail on our reportable segments, including the product categories and brand composition within each segment.
|
|
|
|
Reportable Segments
|
Product Categories (Sub-Categories)
|
Major Brands
|
Beauty
|
Hair Care (
Conditioner, Shampoo, Styling Aids, Treatments
)
|
Head & Shoulders, Pantene, Rejoice
|
Skin and Personal Care (
Antiperspirant and Deodorant, Personal Cleansing, Skin Care
)
|
Olay, Old Spice, Safeguard, SK-II
|
Grooming
|
Grooming
(1)
(Shave Care -
Female Blades & Razors, Male Blades & Razors, Pre- and Post-Shave Products, Other Shave Care;
Appliances)
|
Braun, Fusion, Gillette, Mach3, Prestobarba, Venus
|
Health Care
|
Oral Care (
Toothbrushes, Toothpaste, Other Oral Care
)
|
Crest, Oral-B
|
Personal Health Care (
Gastrointestinal, Rapid Diagnostics, Respiratory, Vitamins/Minerals/Supplements, Other Personal Health Care
)
|
Prilosec, Vicks
|
Fabric & Home Care
|
Fabric Care (
Fabric Enhancers, Laundry Additives, Laundry Detergents
)
|
Ariel, Downy, Gain, Tide
|
Home Care (
Air Care, Dish Care, P&G Professional, Surface Care
)
|
Cascade, Dawn, Febreze, Mr. Clean, Swiffer
|
Baby, Feminine & Family Care
|
Baby Care (
Baby Wipes, Diapers and Pants
)
|
Luvs, Pampers
|
Feminine Care (
Adult Incontinence, Feminine Care
)
|
Always, Tampax
|
Family Care (
Paper Towels, Tissues, Toilet Paper
)
|
Bounty, Charmin
|
|
|
(1)
|
The Grooming product category is comprised of the Shave Care and Appliances Global Business Units.
|
The following table provides the percentage of net sales and net earnings by reportable business segment for the three months ended
September 30, 2017
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
Three Months Ended September 30
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
19%
|
|
24%
|
Grooming
|
10%
|
|
12%
|
Health Care
|
11%
|
|
11%
|
Fabric & Home Care
|
33%
|
|
29%
|
Baby, Feminine & Family Care
|
27%
|
|
24%
|
Total Company
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
three
months ended
September 30, 2017
versus the
three
months ended
September 30, 2016
:
|
|
•
|
Net sales increased 1% to
$16.7 billion
. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange, also increased 1%. Organic sales increased
5%
in Beauty,
1%
in Health Care and
2%
in Fabric & Home Care. Organic sales declined 1% in Baby, Feminine & Family Care and 6% in Grooming.
|
|
|
•
|
Unit volume increased 1%, with organic volume also up 1%. Volume increased low single digits in Fabric & Home Care, was unchanged in Beauty and Health Care and decreased low single digits in Baby, Feminine & Family Care and Grooming segments. Excluding the impacts of minor brand divestitures, organic volume increased low single digits in Health Care and was unchanged in Baby, Feminine & Family Care.
|
|
|
•
|
Net earnings from continuing operations were
$2.9 billion
,
unchanged
versus the prior year period. A decrease in operating income due primarily to lower gross margin, was offset by an increase in non operating income, primarily due to an increase in gains from minor brand divestitures, an increase in interest income and a reduction in interest expense.
|
|
|
•
|
Diluted net earnings per share from continuing operations increased 6% to
$1.06
due primarily to reduced shares outstanding.
|
|
|
•
|
Net earnings attributable to Procter & Gamble increased 5% versus the prior year period to
$2.9 billion
. The base period included a loss from discontinued operations.
|
|
|
•
|
Core net earnings attributable to Procter & Gamble, which excludes incremental restructuring charges, increased 1% to $2.9 billion. Core net earnings per share increased 6% to
$1.09
due to the increase in core net earnings and the reduction in shares outstanding.
|
|
|
•
|
Operating cash flow was
$3.6 billion
. Free cash flow, which is operating cash flow less capital expenditures, was
$2.5 billion
. Free cash flow productivity, which is the ratio of free cash flow to net earnings, was
87%
.
|
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions.
Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies, greater political unrest in the Middle East and Central & Eastern Europe, further economic instability in the European Union, political instability in certain Latin American markets, further economic slowdowns in Japan and China and changes to international trade agreements in North America and elsewhere, could reduce our sales or erode our operating margin, in either case reducing our earnings.
Changes in Costs.
Our costs are subject to fluctuations, particularly due to changes in commodity prices and our own productivity efforts. We have significant exposures to certain commodities, in particular certain oil-derived materials like resins, and volatility in the market price of these commodity input materials has a direct impact on our costs. If we are unable to manage commodity fluctuations through pricing actions, cost savings projects and sourcing decisions as well as through consistent productivity improvements, it may adversely impact our gross margin, operating margin and net earnings. Sales could also be adversely impacted following pricing actions if there is a negative impact on consumption of our products. We strive to implement, achieve and sustain cost improvement plans, including outsourcing projects, supply chain optimization and general overhead and workforce optimization. As discussed later in this MD&A, we initiated certain non-manufacturing overhead reduction projects along with manufacturing and other supply chain cost improvement projects in 2012. In fiscal 2016, we announced an additional multi-year cost reduction program. This program is expected to result in meaningful non-manufacturing 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. Over the prior four fiscal years, 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, Egypt, Nigeria, 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 these fluctuations in foreign currency exchange rates may offset portions of the currency impacts but could also have a negative impact on consumption of our products, which would affect our sales.
Government Policies.
Our net earnings could be affected by changes in U.S. or foreign government tax policies. For example, the U.S. is considering corporate tax reform that may significantly impact the corporate tax rate and change the U.S. tax treatment of international earnings. The potential impact of such a change, if ultimately enacted, is uncertain. Additionally, we attempt to carefully manage our debt and currency exposure in certain countries with currency exchange, import authorization and pricing controls, such as Nigeria and Ukraine. Changes in government policies in these areas might cause an increase or decrease in our sales, operating margin and net earnings.
For information on risk factors that could impact our results, please refer to Part I, Item 1A "Risk Factors" in the Company’s Form 10-K for the fiscal year ended June 30, 2017.
RESULTS OF OPERATIONS – Three Months Ended
September 30, 2017
The following discussion provides a review of results for the three months ended
September 30, 2017
versus the three months ended
September 30, 2016
.
|
|
|
|
|
|
|
|
Three Months Ended September 30
|
Amounts in millions, except per share amounts
|
2017
|
|
2016
|
|
% Chg
|
Net sales
|
$16,653
|
|
$16,518
|
|
1%
|
Operating income
|
3,735
|
|
3,771
|
|
(1)%
|
Net earnings from continuing operations
|
2,870
|
|
2,875
|
|
—%
|
Net earnings/(loss) from discontinued operations
|
—
|
|
(118)
|
|
N/A
|
Net earnings attributable to Procter & Gamble
|
2,853
|
|
2,714
|
|
5%
|
Diluted net earnings per common share
|
1.06
|
|
0.96
|
|
10%
|
Diluted net earnings per share from continuing operations
|
1.06
|
|
1.00
|
|
6%
|
Core net earnings per common share
|
1.09
|
|
1.03
|
|
6%
|
|
|
Three Months Ended September 30
|
COMPARISONS AS A % OF NET SALES
|
2017
|
|
2016
|
|
Basis Pt Chg
|
Gross profit
|
50.6%
|
|
51.0%
|
|
(40)
|
Selling, general & administrative expense
|
28.2%
|
|
28.1%
|
|
10
|
Operating income
|
22.4%
|
|
22.8%
|
|
(40)
|
Earnings from continuing operations before income taxes
|
22.5%
|
|
22.6%
|
|
(10)
|
Net earnings from continuing operations
|
17.2%
|
|
17.4%
|
|
(20)
|
Net earnings attributable to Procter & Gamble
|
17.1%
|
|
16.4%
|
|
70
|
Net Sales
Net sales for the quarter
increased 1% to
$16.7 billion
. Unit volume
increased 1%
. Foreign exchange, pricing and mix had no net impact on consolidated net sales. Volume increased low single digits in Fabric & Home Care and was unchanged in Beauty and Health Care. Volume decreased low single digits in Grooming and Baby, Feminine & Family Care. Excluding minor brand divestitures, Baby, Feminine & Family Care volume was unchanged and Health Care increased low single digits. Volume increased low single digits in developed regions and was unchanged in developing regions. Excluding the impact of minor brand divestitures, volume increased low single digits in developing regions. Organic sales increased
1%
driven by a
1%
increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2018 vs. 2017 (Three Months Ended September 30)*
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other**
|
|
Net Sales Growth
|
Beauty
|
—%
|
|
—%
|
|
—%
|
|
1%
|
|
4%
|
|
—%
|
|
5%
|
Grooming
|
(1)%
|
|
(1)%
|
|
1%
|
|
(3)%
|
|
(2)%
|
|
—%
|
|
(5)%
|
Health Care
|
—%
|
|
1%
|
|
1%
|
|
1%
|
|
—%
|
|
—%
|
|
2%
|
Fabric & Home Care
|
2%
|
|
2%
|
|
—%
|
|
—%
|
|
—%
|
|
—%
|
|
2%
|
Baby, Feminine & Family Care
|
(1)%
|
|
—%
|
|
—%
|
|
(1)%
|
|
—%
|
|
1%
|
|
(1)%
|
Total Company
|
1%
|
|
1%
|
|
—%
|
|
—%
|
|
—%
|
|
—%
|
|
1%
|
* Net sales percentage changes are approximations based on quantitative formulas that are consistently appl
ied.
** Other includes the sales mix impact from acquisitions/divestitures, impact from India Goods and Sales Tax implementation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin
decreased 40 basis points to 50.6%
of net sales for the quarter. Gross margin benefited 150 basis points from manufacturing cost savings projects (130 basis points net of product and packaging reinvestments). This impact was offset by:
|
|
•
|
a 70 basis point decline due to higher commodity costs,
|
|
|
•
|
a 50 basis point decline from unfavorable product mix (primarily within segments due to disproportionate growth of lower margin products and between segments caused by the disproportionate net sales growth in Fabric & Home Care, which has lower than company-average gross margin),
|
|
|
•
|
a 30 basis point impact from unfavorable foreign exchange and
|
|
|
•
|
a 20 basis point decline from lower restructuring costs and other impacts.
|
Total SG&A spending
increased 1% to $4.7 billion
due to increases in marketing and overhead spending, partially offset by reduction in other operating expense, primarily from lower foreign exchange transactional charges. SG&A as a percentage of net sales
increased 10 basis points to 28.2%
. A 70 basis point increase in overhead expenses was partially offset by a reduction in other operating expense. Overhead costs as a percent of net sales increased due to wage inflation, investments and other impacts. Marketing spending as a percent of net sales was unchanged as investments in advertising and other marketing activities were offset by reductions in agency compensation and production costs. Productivity-driven cost savings delivered 40 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was
$115 million
for the quarter,
a decrease of $16 million
versus the prior year period, due to a decrease in weighted average interest rates. Interest income was
$49 million
for the quarter,
an increase of $14 million
versus the prior year period due to an increase in interest-bearing cash and cash equivalents balances. Other non-operating income was
$82 million
,
an increase of $19 million
due to an increase in gains from minor brand divestitures.
Income Taxes on Continuing Operations
The effective tax rate on continuing operations increased
40
basis points to
23.5%
versus the prior year period. Lower excess tax benefits associated with share-based payments (110 basis points in the current year versus 310 in the prior year) were partially offset by favorable impacts from geographic mix of earnings due to a higher proportion of earnings outside of the US.
Net Earnings from Continuing Operations
Net earnings from continuing operations were unchanged at $2.9 billion for the quarter as an increase in net sales and non-operating income were offset by the decrease in gross margin, increase in SG&A as a percent of net sales and increase in effective tax rate, all of which are discussed above. Foreign exchange impacts had a nominal effect on net earnings for the quarter, considering both transactional charges and translational impacts from converting earnings from foreign subsidiaries to U.S. dollars. Diluted net earnings per share from continuing operations
increased 6% to $1.06
due primarily to a reduction in the number of weighted average shares outstanding.
Discontinued Operations
Net earnings from discontinued operations were zero in the current period versus a loss of
$118 million
in the prior year period. The base period result was driven primarily by the transition costs associated with the sale of the Beauty Brands, which closed on October 1, 2016 (see Note 11 to the Consolidated Financial Statements).
Net Earnings
Net earnings attributable to Procter & Gamble
increased $0.1 billion or 5% to $2.9 billion for the quarter.
The increase was due to the improvement in discontinued operations. Diluted net earnings per share
increased 10% to $1.06
. The difference between the increase in net earnings and the increase in the related earnings per share was due to the reduction in weighted average shares outstanding. Core net earnings per share
increased 6% to $1.09
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding incremental restructuring charges related to our productivity and cost savings plans.
BUSINESS SEGMENT DISCUSSION – Three Months Ended
September 30, 2017
The following discussion provides a review of results by reportable business segment. Analyses of the results for the three month period ended
September 30, 2017
are provided based on a comparison to the same three month period ended
September 30, 2016
. The primary financial measures used to evaluate segment performance are net sales and net earnings from continuing operations. The table below provides supplemental information on net sales and net earnings from continuing operations by reportable business segment for the three months ended
September 30, 2017
versus the comparable prior year periods (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
3,138
|
|
|
5
|
%
|
|
$
|
836
|
|
|
7
|
%
|
|
$
|
632
|
|
|
7
|
%
|
Grooming
|
1,577
|
|
|
(5
|
)%
|
|
414
|
|
|
(22
|
)%
|
|
329
|
|
|
(21
|
)%
|
Health Care
|
1,902
|
|
|
2
|
%
|
|
455
|
|
|
(8
|
)%
|
|
305
|
|
|
(5
|
)%
|
Fabric & Home Care
|
5,383
|
|
|
2
|
%
|
|
1,179
|
|
|
4
|
%
|
|
769
|
|
|
6
|
%
|
Baby, Feminine & Family Care
|
4,545
|
|
|
(1
|
)%
|
|
964
|
|
|
(8
|
)%
|
|
630
|
|
|
(10
|
)%
|
Corporate
|
108
|
|
|
2
|
%
|
|
(97
|
)
|
|
N/A
|
|
|
205
|
|
|
N/A
|
|
Total Company
|
$
|
16,653
|
|
|
1
|
%
|
|
$
|
3,751
|
|
|
—
|
%
|
|
$
|
2,870
|
|
|
—
|
%
|
Beauty
Three months ended
September 30, 2017
compared with three
months ended
September 30, 2016
Beauty net sales
increased 5% to
$3.1 billion
during the
first fiscal quarter
on
unit volume that was unchanged
.
Price increases added 1% to net sales while favorable product mix added 4%, due to premium innovation and the disproportionate growth of the super-premium SK-II brand, which has higher than average selling prices. Organic sales
increased 5%
.
Global market share of the Beauty segment
decreased 0.2 points
.
Volume
decreased low single digits
in developed regions and
increased low single digits
in developing regions.
|
|
•
|
Volume in Hair Care
was unchanged
. Developed market volume decreased low single digits due to lower promotional activity at certain customers and following increased pricing. Volume in developing regions was unchanged as increases from product innovation offset decreases following increased pricing. Global market share of the Hair Care category
was unchanged
.
|
|
|
•
|
Volume in Skin and Personal Care
was unchanged
. Volume decreased low single digits in developed regions following increased pricing. Volume increased low single digits in developing regions due to product innovation and increased marketing. Global market share of the Skin and Personal Care category
decreased slightly
.
|
Net earnings
increased 7% to
$632 million
due to the increase in net sales and a 40 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. SG&A as a percentage of net sales decreased due to a decrease in marketing spending as a percent of net sales. Gross margin decreased slightly as higher commodity costs and capacity investments were only partially offset by productivity savings and the benefit of higher pricing.
Grooming
Three months ended
September 30, 2017
compared with three
months ended
September 30, 2016
Grooming net sales
decreased 5% to
$1.6 billion
during the
first fiscal quarter
on
a 1% decrease in unit volume
.
Price reductions in Shave Care reduced net sales by 3%. Unfavorable product mix reduced net sales by 2% driven by the disproportionate decline of certain developed markets, partially offset by the growth of Appliances, which has higher than segment-average selling prices. Organic sales
decreased 6%
. Global market share of the Grooming segment
decreased 0.8 points
. Volume
decreased low single digits
in developed and
developing
regions.
|
|
•
|
Shave Care volume
decreased low single digits
in both developed and developing regions due to competitive activity, and lower distribution in certain markets. Global market share of the Shave Care category
decreased less than a point
.
|
|
|
•
|
Volume in Appliances
increased double digits
in
both developed and developing regions due to product innovation. Global market share of the Appliances category
increased more than two points
.
|
Net earnings
decreased 21% to
$329 million
due to the reduction in net sales and a 420 basis point decrease in net earnings margin. Net earnings margin decreased due to a reduction in gross margin and an increase in SG&A as a percent of net sales. Gross margin decreased as the negative impact of lower pricing and unfavorable geographic mix was only partially offset by the benefit of cost savings projects. SG&A as a percent of net sales increased due to an increase in both overhead and marketing spending along with the negative scale impacts of the reduction in net sales.
Health Care
Three months ended
September 30, 2017
compared with three
months ended
September 30, 2016
Health Care net sales
increased 2% to
$1.9 billion
during the
first fiscal quarter
on
unit volume that was unchanged
.
Favorable foreign exchange increased net sales by 1% and price increases contributed 1% to net sales. Organic sales
increased 1%
on organic volume that
increased 1%
. Global market share of the Health Care segment
decreased 0.3 points
. Volume
decreased low single digits
in developed regions and
increased low single digits
in developing regions.
|
|
•
|
Oral Care volume
increased low single digits
.
Volume increased low single digits in both developed and developing regions driven by market growth, product innovation and marketing investments. Global market share of the Oral Care category
decreased nearly half a point
.
|
|
|
•
|
Volume in Personal Health Care
decreased low single digits
. Volume decreased mid-single digits in developed regions due to relatively lower levels of product innovation versus year ago. Volume was unchanged in developing regions. Organic volume increased low single digits in developing regions due to increased distribution. Global market share of the Personal Health Care category
was unchanged
.
|
Net earnings
decreased 5% to
$305 million
as the increase in net sales was more than offset by a 110 basis point decrease in net earnings margin. Net earnings margin declined primarily due to a reduction in non-operating income driven by a base period gain from minor brand divestitures. Gross margin increased primarily due to manufacturing cost savings. This was largely offset by an increase in SG&A as a percentage of net sales due to increased marketing and overhead spending.
Fabric & Home Care
Three months ended
September 30, 2017
compared with three months ended
September 30, 2016
Fabric & Home Care net sales
increased 2% to
$5.4 billion
for the
first fiscal quarter
on
a 2% increase in unit volume
.
Organic sales
also
increased 2%
.
Global market share of the Fabric & Home Care segment
decreased 0.1 points
. Volume
increased low single digits
in developed and
developing regions.
|
|
•
|
Fabric Care volume
increased low single digits
. Developed regions grew mid-single digits driven by product innovation. Developing regions grew low single digits due to product innovation and market growth. Global market share of the Fabric Care category
was unchanged
.
|
|
|
•
|
Home Care volume
was unchanged
.
Developed market volume declined low single digits due to hand dishwashing market contraction. Developing regions increased mid-single digits due to product innovation and marketing investments. Global market share of the Home Care category
was unchanged
.
|
Net earnings
increased 6% to
$769 million
due to a 60 basis-point increase in net earnings margin and the increase in net sales. Net earnings margin increased primarily due to an increase in non operating income from gains on minor brand divestitures in the current period. SG&A as a percentage of net sales was unchanged. Gross margin increased slightly due to manufacturing cost savings partially offset by unfavorable foreign exchange and unfavorable product mix (due to an increase in the proportion of product forms and larger package sizes with lower than segment-average margins)
.
Baby, Feminine & Family Care
Three months ended
September 30, 2017
compared with three
months ended
September 30, 2016
Baby, Feminine & Family Care net sales
decreased 1% to
$4.5 billion
during the
first fiscal quarter
on
a 1% decrease in unit volume
.
Organic volume, which excludes the impact of minor brand divestitures, was unchanged.
Lower pricing reduced net sales by 1%. Organic sales
decreased 1%
.
Global market share of the Baby, Feminine & Family Care segment
decreased 0.4 points
.
Volume was unchanged in developed regions and decreased low single digits in developing regions.
|
|
•
|
Volume in Baby Care
decreased mid-single digits
. Developed regions declined low single digits due to competitive activities. Developing regions declined high single digits due to volume decline following increased pricing, competitive activity and reduction in trade inventories. Global market share of the Baby Care category
decreased more than a point
.
|
|
|
•
|
Volume in Feminine Care
decreased low single digits
. Organic volume, which excludes the impact of minor brand divestitures, increased low single digits. Organic volume decreased low single digits in developed regions due to competitive activity. Volume increased mid-single digits in developing regions due to product innovation and market 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, distribution gains and increased marketing activities. In the U.S., all-outlet share of the Family Care category
increased more than a point
.
|
Net earnings
decreased 10% to
$630 million
due to a 130 basis-point decrease in net earnings margin and the reduction in net sales. Net earnings margin decreased primarily due to a decline in gross margin. Gross margin decreased due to an increase in commodity costs and unfavorable product mix (from an increase in product forms and larger package sizes with lower than segment-average margins), partially offset by manufacturing cost savings. SG&A as a percentage of net sales was unchanged
.
Corporate
Corporate includes certain operating and non-operating activities not allocated to specific business segments. These include: the incidental businesses managed at the corporate level; financing and investing activities; other general corporate items; the gains and losses related to certain divested brands and categories; certain restructuring-type activities to maintain a competitive cost structure, including manufacturing and workforce optimization; and certain significant asset impairment charges. 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
increased 2% to
$
108 million
during the
first fiscal quarter
.
Corporate net earnings from continuing operations
improved by $82 million in the
first fiscal quarter
. Corporate net earnings increased due to gains on minor brand divestitures and a reduction in foreign exchange transactional charges, partially offset by reduced current year excess tax benefits associated with share-based payments. Additional discussion of these items is included in the Results of Operations section.
Productivity and Cost Savings Plan
In 2012, the Company initiated a productivity and cost savings plan to reduce costs and better leverage scale in the areas of supply chain, research and development, marketing and overheads. The plan was designed to accelerate cost reductions by streamlining management decision making, manufacturing and other work processes to fund the Company's growth strategy. In 2016, the Company communicated additional multi-year productivity and cost savings targets. In 2017, the Company communicated specific elements of the productivity and cost savings targets.
The additional 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 expects to incur approximately $1.2 billion in total before-tax restructuring costs in fiscal 2018 and 2019. This program is expected to result in meaningful non-manufacturing 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, an increase of
$0.6 billion
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
$4.0 billion
of operating cash flow. Working capital and other impacts used
$0.4 billion
of cash in the period. Accounts receivable used
$304 million
of cash due to the timing of quarter-end (which fell on a weekend, resulting in fewer days collection) and to a lesser extent, the extension of customer payment terms for seasonal products. Inventory consumed
$357 million
of cash primarily due to product initiatives and seasonal inventory builds in certain GBUs. Accounts payable, accrued and other liabilities generated
$235 million
of cash primarily driven by extended payment terms with our suppliers. All other operating assets and liabilities used
$30 million
of cash.
Investing Activities
Cash used by investing activities was
$2.5 billion
fiscal year to date. Capital expenditures were
$1.1 billion
, or
6.8%
of net sales. We generated
$120 million
of cash from proceeds from asset sales, primarily from plant sales and minor brand divestitures. We used
$1.9 billion
for purchases of short-term investments, partially offset by
$388 million
of cash generated from sales and maturities of short-term investments.
Financing Activities
Our financing activities consumed net cash of
$1.7 billion
fiscal year to date. We used
$2.5 billion
for treasury stock purchases and
$1.8 billion
for dividends. Cash generated from the net effect of debt issuances and payments was
$2.0 billion
. Cash from the exercise of stock options and other impacts generated
$580 million
of cash.
As of
September 30, 2017
, our current liabilities exceeded current assets by
$2.6 billion
. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measure.
We believe that these measures provide useful perspective on underlying business trends (i.e., trends excluding non-recurring or unusual items) and results and provide a supplemental measure of year-on-year results. The non-GAAP measures described below are used by management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. These measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted.
The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following 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, Procter & Gamble began a $10 billion strategic productivity and cost savings initiative that includes incremental restructuring activities. In 2016, the Company communicated additional multi-year productivity and cost savings targets. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs.
We do not view these 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
: Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions, divestitures, the impact from India Goods and Services Tax changes (which were effective on July 1, 2017) and foreign exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis.
Free cash flow
: Free cash flow is defined as operating cash flow less capital spending. Free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.
Free cash flow productivity
: Free cash flow productivity is defined as the ratio of free cash flow to net earnings. Management views free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. The Company's long-term target is to generate annual free cash flow productivity at or above 90 percent.
Core EPS
: Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share from continuing operations adjusted as indicated. Management views this non-GAAP measure as a useful supplemental measure of Company performance over time.
Organic sales growth
:
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, 2017
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition/Divestiture Impact*
|
|
Organic Sales Growth
|
Beauty
|
5%
|
|
—%
|
|
—%
|
|
5%
|
Grooming
|
(5)%
|
|
(1)%
|
|
—%
|
|
(6)%
|
Health Care
|
2%
|
|
(1)%
|
|
—%
|
|
1%
|
Fabric & Home Care
|
2%
|
|
—%
|
|
—%
|
|
2%
|
Baby, Feminine & Family Care
|
(1)%
|
|
—%
|
|
—%
|
|
(1)%
|
Total Company
|
1%
|
|
—%
|
|
—%
|
|
1%
|
* Acquisition/Divestiture Impact includes both the volume and mix impact of acquisitions and divestitures and also includes the impact of India Goods and Services Tax changes and rounding impacts necessary to reconcile net sales to organic sales.
Free cash flow (dollar amounts in millions)
:
|
|
|
|
|
|
Fiscal Year-to-Date, September 30, 2017
|
Operating Cash Flow
|
|
Capital Spending
|
|
Free Cash Flow
|
$3,631
|
|
$(1,132)
|
|
$2,499
|
Free cash flow productivity (dollar amounts in millions)
:
|
|
|
|
|
|
Fiscal Year-to-Date, September 30, 2017
|
Free Cash Flow
|
|
Net Earnings
|
|
Free Cash Flow Productivity
|
$2,499
|
|
$2,870
|
|
87%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
8,229
|
|
|
(100
|
)
|
|
—
|
|
|
8,129
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,689
|
|
|
5
|
|
|
—
|
|
|
4,694
|
|
OPERATING INCOME
|
3,735
|
|
|
95
|
|
|
—
|
|
|
3,830
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
881
|
|
|
20
|
|
|
—
|
|
|
901
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,853
|
|
|
75
|
|
|
—
|
|
|
2,928
|
|
|
|
|
|
|
|
|
Core EPS
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
1.06
|
|
|
0.03
|
|
|
—
|
|
|
1.09
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
|
|
|
|
CORE EPS
|
6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended September 30, 2016
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,102
|
|
|
—
|
|
|
(111
|
)
|
|
—
|
|
|
7,991
|
|
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE
|
4,645
|
|
|
—
|
|
|
23
|
|
|
(1
|
)
|
|
4,667
|
|
OPERATING INCOME
|
3,771
|
|
|
—
|
|
|
88
|
|
|
1
|
|
|
3,860
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
863
|
|
|
—
|
|
|
15
|
|
|
1
|
|
|
879
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,714
|
|
|
118
|
|
|
73
|
|
|
—
|
|
|
2,905
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE*
|
0.96
|
|
|
0.04
|
|
|
0.03
|
|
|
—
|
|
|
1.03
|
|
* Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.