|
|
|
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
Forward-Looking Statements
Certain statements in this report, other than purely historical information, including estimates, projections, statements relating to our business plans, objectives, and expected operating results, and the assumptions upon which those statements are based, are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Forward-looking statements may appear throughout this report, including without limitation, the following sections: “Management's Discussion and Analysis,” “Risk Factors,” and "Notes 4 and 10 to the Consolidated Financial Statements." These forward-looking statements generally are identified by the words “believe,” “project,” “expect,” “anticipate,” “estimate,” “intend,” “strategy,” “future,” “opportunity,” “plan,” “may,” “should,” “will,” “would,” “will be,” “will continue,” “will likely result,” and similar expressions. Forward-looking statements are based on current expectations and assumptions, which are subject to risks and uncertainties that may cause results to differ materially from those expressed or implied in the forward-looking statements. We undertake no obligation to update or revise publicly any forward-looking statements, whether because of new information, future events or otherwise.
Risks and uncertainties to which our forward-looking statements are subject include, without limitation: (1) the ability to successfully manage global financial risks, including foreign currency fluctuations, currency exchange or pricing controls and localized volatility; (2) the ability to successfully manage local, regional or global economic volatility, including reduced market growth rates, and to generate sufficient income and cash flow to allow the Company to affect the expected share repurchases and dividend payments; (3) the ability to manage disruptions in credit markets or changes to our credit rating; (4) the ability to maintain key manufacturing and supply arrangements (including execution of supply chain optimizations and sole supplier and sole manufacturing plant arrangements) and to manage disruption of business due to factors outside of our control, such as natural disasters and acts of war or terrorism; (5) the ability to successfully manage cost fluctuations and pressures, including prices of commodities and raw materials, and costs of labor, transportation, energy, pension and healthcare; (6) the ability to stay on the leading edge of innovation, obtain necessary intellectual property protections and successfully respond to changing consumer habits and technological advances attained by, and patents granted to, competitors; (7) the ability to compete with our local and global competitors in new and existing sales channels, including by successfully responding to competitive factors such as prices, promotional incentives and trade terms for products; (8) the ability to manage and maintain key customer relationships; (9) the ability to protect our reputation and brand equity by successfully managing real or perceived issues, including concerns about safety, quality, ingredients, efficacy or similar matters that may arise; (10) the ability to successfully manage the financial, legal, reputational and operational risk associated with third party relationships, such as our suppliers, distributors, contractors and external business partners; (11) the ability to rely on and maintain key company and third party information technology systems, networks and services, and maintain the security and functionality of such systems, networks and services and the data contained therein; (12) the ability to successfully manage uncertainties related to changing political conditions (including the United Kingdom’s decision to leave the European Union) and potential implications such as exchange rate fluctuations and market contraction; (13) the ability to successfully manage regulatory and legal requirements and matters (including, without limitation, those laws and regulations involving product liability, intellectual property, antitrust, data protection, tax, environmental, and accounting and financial reporting) and to resolve pending matters within current estimates; (14) the ability to manage changes in applicable tax laws and regulations including maintaining our intended tax treatment of divestiture transactions; (15) the ability to successfully manage our ongoing acquisition, divestiture and joint venture activities, in each case to achieve the Company’s overall business strategy and financial objectives, without impacting the delivery of base business objectives; and (16) the ability to successfully achieve productivity improvements and cost savings and manage ongoing organizational changes, while successfully identifying, developing and retaining key employees, including in key growth markets where the availability of skilled or experienced employees may be limited. A detailed discussion of risks and uncertainties that could cause actual results and events to differ materially from those projected herein, is included in the section titled “Economic Conditions and Uncertainties” and the section titled “Risk Factors” (Part II, Item 1A of this Form 10-Q).
The purpose of Management's Discussion and Analysis (MD&A) is to provide an understanding of Procter & Gamble's financial condition, results of operations and cash flows by focusing on changes in certain key measures from year to year. The MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and accompanying notes. The MD&A is organized in the following sections:
|
|
•
|
Summary of Results –
Nine
Months Ended
March 31, 2018
|
|
|
•
|
Economic Conditions and Uncertainties
|
|
|
•
|
Results of Operations –
Three and Nine Months Ended March 31, 2018
|
|
|
•
|
Business Segment Discussion –
Three and Nine Months Ended March 31, 2018
|
|
|
•
|
Liquidity and Capital Resources
|
|
|
•
|
Reconciliation of Measures Not Defined by U.S. GAAP
|
Throughout the MD&A, we refer to measures used by management to evaluate performance, including unit volume growth, net sales and net earnings. We also refer to a number of financial measures that are not defined under accounting principles generally accepted in the United States of America (U.S. GAAP), including organic sales growth, core net earnings per share (Core EPS), free cash flow and adjusted free cash flow productivity. The explanation at the end of the MD&A provides the definition of these non-GAAP measures as well as details on the use and the derivation of these measures.
Management also uses certain market share and market consumption estimates to evaluate performance relative to competition despite some limitations on the availability and comparability of share and consumption information. References to market share and market consumption in the MD&A are based on a combination of vendor-reported consumption and market size data, as well as internal estimates. All market share references represent the percentage of sales in dollar terms on a constant currency basis of our products, relative to all product sales in the category.
OVERVIEW
P&G is a global leader in fast-moving consumer goods, focused on providing branded consumer packaged goods of superior quality and value to our consumers around the world. Our products are sold in more than
180
countries and territories primarily through mass merchandisers, 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 and
nine
months ended
March 31, 2018
(excluding net sales and net earnings in Corporate):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
|
Nine Months Ended March 31
|
|
Net Sales
|
|
Net Earnings
|
|
Net Sales
|
|
Net Earnings
|
Beauty
|
18%
|
|
21%
|
|
19%
|
|
23%
|
Grooming
|
9%
|
|
15%
|
|
10%
|
|
14%
|
Health Care
|
12%
|
|
13%
|
|
12%
|
|
14%
|
Fabric & Home Care
|
33%
|
|
28%
|
|
32%
|
|
27%
|
Baby, Feminine & Family Care
|
28%
|
|
23%
|
|
27%
|
|
22%
|
Total Company
|
100%
|
|
100%
|
|
100%
|
|
100%
|
SUMMARY OF RESULTS
Following are highlights of results for the
nine
months ended
March 31, 2018
versus the
nine
months ended
March 31, 2017
:
|
|
•
|
Net sales increased
3%
to
$50.3 billion
. Organic sales, which exclude the impacts of acquisitions and divestitures and foreign exchange,
increased 1%
. Organic sales
increased 6%
in Beauty,
increased 2%
in Health Care and
increased 3%
in Fabric & Home Care. Organic sales
decreased 4%
in Grooming and
decreased 2%
in Baby, Feminine & Family Care.
|
|
|
•
|
Unit volume increased
1%
, with organic volume up
2%
. Volume increased low single digits in Beauty, Grooming, Health Care and Fabric & Home Care and decreased low single digits in Baby, Feminine & Family Care. Excluding the impacts of minor brand divestitures, organic volume increased mid-single digits in Fabric & Home Care.
|
|
|
•
|
Net earnings from continuing operations were
$8.0 billion
,
unchanged
versus the prior year. An increase in earnings before income taxes, driven primarily by sales growth and prior year charges for early debt extinguishment, was offset by an increase in taxes due primarily to the transitional impact of the U.S. Tax Act.
|
|
|
•
|
Diluted net earnings per share from continuing operations increased
2%
to
$2.94
due primarily to a reduction in shares outstanding caused by both cash repurchases and shares acquired as part of the prior year Beauty Brands divestiture.
|
|
|
•
|
Net earnings attributable to Procter & Gamble decreased $5.3 billion or
40%
versus the prior year period to
$7.9 billion
. The decline was primarily due to a reduction in earnings from discontinued operations related to the base period gain from Beauty Brands divestiture.
|
|
|
•
|
Core net earnings attributable to Procter & Gamble, which represents net earnings from continuing operations, excluding U.S. tax reform transitional impacts, incremental restructuring charges and the base period charge for early extinguishment of debt, increased 4% to $8.8 billion. Core net earnings per share increased
7%
to
$3.28
due to the increase in core net earnings and the reduction in shares outstanding.
|
|
|
•
|
Operating cash flow was
$10.7 billion
. Free cash flow, which is operating cash flow less capital expenditures, was
$7.9 billion
. Adjusted free cash flow productivity, which is the ratio of free cash flow to adjusted net earnings, was
91%
.
|
ECONOMIC CONDITIONS AND UNCERTAINTIES
Global Economic Conditions
. Current macroeconomic factors remain dynamic, and any causes of market size contraction, such as reduced GDP in commodity-dependent economies, greater political unrest in the Middle East, Central & Eastern Europe and the Korean peninsula, further economic instability in 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 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, 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 resulting 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, Russia, 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.
Government Policies
. Our net earnings could be affected by changes in U.S. or foreign government tax policies, for example, the recently enacted U.S. Tax Act, the implications and uncertainties of which are disclosed elsewhere in this report. 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 Egypt. Further, our earnings and sales could be affected by changes to international trade agreements in North America and elsewhere, including potential increases of import tariffs. 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 II, Item 1A of the Company's Form 10-Q for the quarterly period ended December 31, 2017.
RESULTS OF OPERATIONS – Three Months Ended
March 31, 2018
The following discussion provides a review of results for the three months ended
March 31, 2018
versus the three months ended
March 31, 2017
.
|
|
|
|
|
|
|
|
Three Months Ended March 31
|
Amounts in millions, except per share amounts
|
2018
|
|
2017
|
|
% Chg
|
Net sales
|
$16,281
|
|
$15,605
|
|
4%
|
Operating income
|
3,296
|
|
3,360
|
|
(2)%
|
Net earnings from continuing operations
|
2,540
|
|
2,556
|
|
(1)%
|
Net earnings from discontinued operations
|
—
|
|
—
|
|
N/A
|
Net earnings attributable to Procter & Gamble
|
2,511
|
|
2,522
|
|
—%
|
Diluted net earnings per common share
|
0.95
|
|
0.93
|
|
2%
|
Diluted net earnings per share from continuing operations
|
0.95
|
|
0.93
|
|
2%
|
Core net earnings per common share
|
1.00
|
|
0.96
|
|
4%
|
|
|
Three Months Ended March 31
|
COMPARISONS AS A % OF NET SALES
|
2018
|
|
2017
|
|
Basis Pt Chg
|
Gross profit
|
48.8%
|
|
49.8%
|
|
(100)
|
Selling, general & administrative expense
|
28.5%
|
|
28.3%
|
|
20
|
Operating income
|
20.2%
|
|
21.5%
|
|
(130)
|
Earnings from continuing operations before income taxes
|
20.0%
|
|
21.4%
|
|
(140)
|
Net earnings from continuing operations
|
15.6%
|
|
16.4%
|
|
(80)
|
Net earnings attributable to Procter & Gamble
|
15.4%
|
|
16.2%
|
|
(80)
|
Net Sales
Net sales for the quarter
increased 4% to
$16.3 billion
including four percent positive impact from foreign exchange. Unit volume
increased 1%
. Excluding the impact of minor brand divestitures, organic volume increased 2%. A one percent positive impact from mix, driven by disproportionate growth of Skin and Personal Care and Personal Health Care categories and developed regions, all of which have higher than company average prices, was more than offset by a negative pricing impact of two percent. Volume increased low single digits in Grooming, Health Care and Fabric & Home Care and was unchanged in Beauty. Volume decreased low single digits in Baby, Feminine & Family Care. Excluding minor brand divestitures, Fabric & Home Care organic volume increased mid-single digits. Volume increased low single digits in developed and developing regions. Organic sales increased
1%
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2018 vs. 2017 (Three Months Ended March 31)
(1)
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other
(2)
|
|
Net Sales Growth
|
Beauty
|
—%
|
|
—%
|
|
5%
|
|
(1)%
|
|
6%
|
|
—%
|
|
10%
|
Grooming
|
3%
|
|
3%
|
|
5%
|
|
(3)%
|
|
(3)%
|
|
—%
|
|
2%
|
Health Care
|
3%
|
|
3%
|
|
5%
|
|
(2)%
|
|
—%
|
|
(1)%
|
|
5%
|
Fabric & Home Care
|
3%
|
|
4%
|
|
4%
|
|
(1)%
|
|
—%
|
|
—%
|
|
6%
|
Baby, Feminine & Family Care
|
(2)%
|
|
(2)%
|
|
3%
|
|
(1)%
|
|
—%
|
|
—%
|
|
—%
|
Total Company
|
1%
|
|
2%
|
|
4%
|
|
(2)%
|
|
1%
|
|
—%
|
|
4%
|
(1)
Net sales percentage changes are approximations based on quantitative formulas that are consistently appl
ied.
(2)
Other includes the sales mix impact from acquisitions and divestitures, the impact from India Goods and Services Tax implementation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin
decreased 100 basis points to 48.8%
of net sales for the quarter. Gross margin benefited from 230 basis points of manufacturing cost savings projects (190 basis points net of product and packaging reinvestments) and 20 basis points of other benefits. This was offset by:
|
|
•
|
a 100 basis point decline due to higher commodity costs,
|
|
|
•
|
a 110 basis point decline from unfavorable mix, including unfavorable product mix (primarily within segments due to disproportionate growth of lower margin products forms and club channels in certain categories), unfavorable geographic mix in certain categories and approximately 40 basis points of transportation cost hurts,
|
|
|
•
|
an 80 basis point decline from reduced pricing and
|
|
|
•
|
a 20 basis point decline from unfavorable foreign exchange.
|
Total SG&A spending increased
5%
to $4.6 billion primarily due to increases in other operating costs. SG&A as a percentage of net sales
increased 20 basis points to 28.5%
. Reductions in overhead costs and marketing spending as a percentage of net sales were more than offset by an increase in other net operating costs as a percentage of net sales. Overhead costs as a percentage of net sales decreased 60 basis points due to productivity savings, partially offset by an increase in restructuring. Marketing spending as a percentage of net sales decreased 60 basis points due to reductions in advertising spending and agency compensation and production costs. Other net operating costs as a percentage of net sales increased 140 basis points primarily due to a gain on the sale of real estate in the base period. Productivity-driven cost savings delivered 80 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was
$133 million
for the quarter, an increase of $37 million versus the prior year period due to increase in long term debt and in weighted average interest rates. Interest income was
$69 million
for the quarter,
an increase of $23 million
versus the prior year period due to an increase in interest-bearing cash and cash equivalents balances, available for sale investment securities balances and increase in weighted average interest rates. Other non-operating income was
$21 million
, a decline of
$5 million
from the prior period.
Income Taxes on Continuing Operations
For the three months ended March 31, 2018, the effective tax rate on continuing operations decreased 150 basis points versus the prior year period to 21.9%. A current quarter charge of $22 million resulting from the enactment of the U.S. Tax Act caused a 70 basis point increase in the current period rate (see Note 2 to the Consolidated Financial Statements for further discussion). The offsetting net reduction of 220 basis points was caused by:
|
|
•
|
a 250 basis point net reduction from the ongoing impacts of the U.S. Tax Act on current period earnings,
|
|
|
•
|
a reduction of approximately 200 basis points from favorable geographic mix of earnings,
|
|
|
•
|
a 120 basis point increase from reduced excess tax benefits from share-based compensation (which totaled 60 basis points in the current year versus 180 basis points in the prior year period) and
|
|
|
•
|
a 110 basis point increase from reduced favorable discrete impacts related to uncertain tax positions (30 basis points in the current year versus 140 basis points in the prior year period).
|
Net Earnings from Continuing Operations
Net earnings from continuing operations decreased 1% to
$2.5 billion
for the quarter as an increase in net sales and a decrease in the effective tax rate were offset by the decrease in gross margin and increase in SG&A as a percent of net sales, all of which are discussed above. Foreign exchange impacts had a positive effect of about $67 million on net earnings for the quarter, including 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 2% to $0.95
. The difference between the change in net earnings from continuing operations and diluted net earnings per share from continuing operations was due to a reduction in the number of shares outstanding.
Discontinued Operations
There were no net earnings from discontinued operations in the three months ended
March 31, 2018
or 2017.
Net Earnings
Net earnings attributable to Procter & Gamble was unchanged at
$2.5 billion
for the quarter. Diluted net earnings per share
increased 2% to $0.95
due to the reduction in shares outstanding. Core net earnings per share
increased 4% to $1.00
. Core net earnings per share represents diluted net earnings per share from continuing operations excluding the current period charge for the transitional impact of the U.S. Tax Act and incremental restructuring charges in both periods related to our productivity and cost savings plans. The increase in core net earnings per share was driven primarily by the increase in net sales and a lower effective tax rate, driven by the ongoing impacts of the U.S. Tax Act partially offset by the decrease in operating margin.
RESULTS OF OPERATIONS –
Nine
Months Ended
March 31, 2018
The following discussion provides a review of results for the
nine
months ended
March 31, 2018
versus the
nine
months ended
March 31, 2017
.
|
|
|
|
|
|
|
|
Nine Months Ended March 31
|
Amounts in millions, except per share amounts
|
2018
|
|
2017
|
|
% Chg
|
Net sales
|
$50,329
|
|
$48,979
|
|
3%
|
Operating income
|
11,034
|
|
11,006
|
|
—%
|
Net earnings from continuing operations
|
7,971
|
|
7,992
|
|
—%
|
Net earnings from discontinued operations
|
—
|
|
5,217
|
|
N/A
|
Net earnings attributable to Procter & Gamble
|
7,859
|
|
13,111
|
|
(40)%
|
Diluted net earnings per common share
|
2.94
|
|
4.76
|
|
(38)%
|
Diluted net earnings per share from continuing operations
|
2.94
|
|
2.87
|
|
2%
|
Core net earnings per common share
|
3.28
|
|
3.07
|
|
7%
|
|
|
Nine Months Ended March 31
|
COMPARISONS AS A % OF NET SALES
|
2018
|
|
2017
|
|
Basis Pt Chg
|
Gross profit
|
49.9%
|
|
50.5%
|
|
(60)
|
Selling, general & administrative expense
|
27.9%
|
|
28.0%
|
|
(10)
|
Operating income
|
21.9%
|
|
22.5%
|
|
(60)
|
Earnings from continuing operations before income taxes
|
21.9%
|
|
21.1%
|
|
80
|
Net earnings from continuing operations
|
15.8%
|
|
16.3%
|
|
(50)
|
Net earnings attributable to Procter & Gamble
|
15.6%
|
|
26.8%
|
|
(1,120)
|
Net Sales
Net sales for the
nine
months ended
March 31, 2018
increased 3% to
$50.3 billion
including a 2% percent benefit from favorable foreign exchange impacts. Unit volume
increased 1%
. Excluding the impact of minor brand divestitures, organic volume increased 2%. Mix had a positive impact of 1% on net sales due to the disproportionate growth of super-premium SK-II brand, Oral care power brush products and developed regions, all of which have higher than company average prices. Reduced pricing had a negative impact of 1% on net sales. Volume increased low single digits in Beauty, Health Care, Fabric & Home Care and Grooming. Volume decreased low single digits in Baby, Feminine & Family Care. Excluding minor brand divestitures, Fabric and Home Care organic volume increased mid-single digits. Volume increased low single digits in developed regions and was unchanged in developing regions. Excluding the impact of minor brand divestitures, organic volume increased low single digits in developing regions. Organic sales increased
1%
driven by a
2%
increase in organic volume.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Sales Change Drivers 2018 vs. 2017 (Nine Months Ended March 31)
(1)
|
|
Volume with Acquisitions & Divestitures
|
|
Volume Excluding Acquisitions & Divestitures
|
|
Foreign Exchange
|
|
Price
|
|
Mix
|
|
Other
(2)
|
|
Net Sales Growth
|
Beauty
|
1%
|
|
1%
|
|
2%
|
|
—%
|
|
5%
|
|
—%
|
|
8%
|
Grooming
|
1%
|
|
1%
|
|
3%
|
|
(3)%
|
|
(2)%
|
|
—%
|
|
(1)%
|
Health Care
|
2%
|
|
2%
|
|
3%
|
|
(1)%
|
|
1%
|
|
—%
|
|
5%
|
Fabric & Home Care
|
3%
|
|
4%
|
|
2%
|
|
(1)%
|
|
—%
|
|
—%
|
|
4%
|
Baby, Feminine & Family Care
|
(1)%
|
|
(1)%
|
|
1%
|
|
(1)%
|
|
—%
|
|
—%
|
|
(1)%
|
Total Company
|
1%
|
|
2%
|
|
2%
|
|
(1)%
|
|
1%
|
|
—%
|
|
3%
|
(1)
Net sales percentage changes are approximations based on quantitative formulas that are consistently appl
ied.
(2)
Other includes the sales mix impact from acquisitions and divestitures, the impact from India Goods and Services Tax implementation and rounding impacts necessary to reconcile volume to net sales.
Operating Costs
Gross margin decreased 60 basis points to
49.9%
of net sales for the
nine
months ended
March 31, 2018
versus the prior year period. Gross margin benefited from 180 basis points of manufacturing cost savings projects (150 basis points net of product and packaging reinvestments). This benefit was offset by:
|
|
•
|
a 90 basis point decline due to higher commodity costs,
|
|
|
•
|
a 40 basis point decline from unfavorable product mix (within segments due to disproportionate growth of lower margin product forms, large sizes and club channels and between segments caused by the disproportionate volume growth in Fabric & Home Care, which has lower than company-average gross margin),
|
|
|
•
|
a 30 basis point decline from unfavorable foreign exchange and
|
|
|
•
|
a 50 basis point decline from the impact of reduced pricing.
|
Total SG&A spending increased
2%
to $14.1 billion due to increases in both marketing and overhead spending. SG&A as a percentage of net sales
decreased 10 basis points to 27.9%
. Reductions in marketing and overhead spending as a percentage of net sales were partially offset by an increase in other operating expenses. Marketing spending as a percentage of net sales decreased 30 basis points, primarily driven by reductions in agency compensation and production costs. Overhead costs as a percentage of net sales decreased 20 basis points due to productivity savings and sales growth leverage, partially offset by higher restructuring costs versus the base year period. Other operating expenses increased 40 basis points due to gains on the sale of real estate in the base period. Productivity-driven cost savings delivered 50 basis points of benefit in SG&A.
Non-Operating Expenses and Income
Interest expense was
$370 million
for the current period,
an increase of $21 million
versus the prior year period, due to an increase in long term debt. Interest income was
$184 million
for the quarter,
an increase of $61 million
versus the prior year period, due to an increase in interest-bearing cash and cash equivalents balances and available for sale investment securities. Other non-operating income was $189 million primarily due to gains from minor brand divestitures and other investments. The base period had net other non-operating expenses of $450 million, due to charges for the early extinguishment of debt.
Income Taxes on Continuing Operations
For the
nine
months ended
March 31, 2018
, the effective tax rate on continuing operations increased 520 basis points versus the prior year period to 27.8%. A net transitional charge of $650 million resulting from the enactment of the U.S. Tax Act caused a 590 basis-point increase in the current period rate (see Note 2 to the Consolidated Financial Statements for further discussion). The remaining 70 basis point decrease in the effective rate was driven by:
|
|
•
|
a 370 basis-point reduction from the ongoing impacts of the U.S. Tax Act, as the impact of the lower blended U. S. federal rate on current year earnings versus prior year was partially offset by reduced foreign tax credits versus prior year due to the inability to fully credit foreign taxes under the U.S. Tax Act,
|
|
|
•
|
a reduction of approximately 40 basis-points from favorable geographic mix of earnings,
|
|
|
•
|
a 150 basis-point increase from reduced favorable discrete impacts related to uncertain tax positions (which totaled 20 basis points in the current year versus 170 basis points in the prior year),
|
|
|
•
|
a 120 basis-point increase from reduced excess tax benefits from share-based compensation (60 basis points in the current year versus 180 basis points in the prior year) and
|
|
|
•
|
a 70 basis-point increase from the tax impacts of the prior year extinguishment of long-term debt.
|
Net Earnings from Continuing Operations
Net earnings from continuing operations were unchanged at
$8.0 billion
for the period. An increase in net earnings from continuing operations before income taxes, driven primarily by increased net sales and the base period charge for early extinguishment of debt, was offset by the current period net charge for the transitional impact of the U.S. Tax Act. Foreign exchange had a positive impact of about $164 million on net earnings for the year to date period, including 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 2% to $2.94
due primarily to a reduction in the number of weighted average shares outstanding caused by both ongoing cash repurchases and shares acquired as part of the prior year Beauty brands divestiture.
Discontinued Operations
Net earnings from discontinued operations were zero in the current period versus net earnings of
$5.2 billion
in the prior year period, primarily due to the gain on 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 decreased
40%
to
$7.9 billion
for the
nine
months ended
March 31, 2018
. The decrease was primarily due to the reduction in net earnings from discontinued operations and the increase in income tax caused by the transitional impact of the U.S. Tax Act as discussed above. Diluted net earnings per share
decreased 38% to $2.94
. The difference between the decline in net earnings and the related earnings per share amounts was due to the reduction in weighted average shares outstanding. Core net earnings per share increased 7% to $3.28. Core net earnings per share represents diluted net earnings per share from continuing operations, excluding the current year transitional impact of the U.S. Tax Act, the prior year charge for early extinguishment of debt and incremental restructuring charges in both periods related to our productivity and cost savings plans.
BUSINESS SEGMENT DISCUSSION – Three and
Nine
Months Ended
March 31, 2018
The following discussion provides a review of results by reportable business segment. Analyses of the results for the three and
nine
month periods ended
March 31, 2018
are provided based on a comparison to the same three and
nine
month periods ended
March 31, 2017
. 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 and
nine
months ended
March 31, 2018
versus the comparable prior year periods (dollar amounts in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
2,934
|
|
|
10
|
%
|
|
$
|
642
|
|
|
21
|
%
|
|
$
|
488
|
|
|
23
|
%
|
Grooming
|
1,550
|
|
|
2
|
%
|
|
422
|
|
|
(3
|
)%
|
|
334
|
|
|
—
|
%
|
Health Care
|
1,934
|
|
|
5
|
%
|
|
467
|
|
|
(1
|
)%
|
|
305
|
|
|
(2
|
)%
|
Fabric & Home Care
|
5,262
|
|
|
6
|
%
|
|
1,001
|
|
|
3
|
%
|
|
635
|
|
|
6
|
%
|
Baby, Feminine & Family Care
|
4,458
|
|
|
—
|
%
|
|
852
|
|
|
(4
|
)%
|
|
539
|
|
|
(3
|
)%
|
Corporate
|
143
|
|
|
5
|
%
|
|
(131
|
)
|
|
N/A
|
|
|
239
|
|
|
N/A
|
|
Total Company
|
$
|
16,281
|
|
|
4
|
%
|
|
$
|
3,253
|
|
|
(2
|
)%
|
|
$
|
2,540
|
|
|
(1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2018
|
|
Net Sales
|
|
% Change Versus Year Ago
|
|
Earnings/(Loss) from Continuing Operations Before Income Taxes
|
|
% Change Versus Year Ago
|
|
Net Earnings/(Loss) from Continuing Operations
|
|
% Change Versus Year Ago
|
Beauty
|
$
|
9,305
|
|
|
8
|
%
|
|
$
|
2,331
|
|
|
15
|
%
|
|
$
|
1,775
|
|
|
16
|
%
|
Grooming
|
4,903
|
|
|
(1
|
)%
|
|
1,367
|
|
|
(13
|
)%
|
|
1,086
|
|
|
(11
|
)%
|
Health Care
|
6,048
|
|
|
5
|
%
|
|
1,590
|
|
|
1
|
%
|
|
1,065
|
|
|
1
|
%
|
Fabric & Home Care
|
16,079
|
|
|
4
|
%
|
|
3,281
|
|
|
2
|
%
|
|
2,118
|
|
|
3
|
%
|
Baby, Feminine & Family Care
|
13,616
|
|
|
(1
|
)%
|
|
2,749
|
|
|
(8
|
)%
|
|
1,766
|
|
|
(9
|
)%
|
Corporate
|
378
|
|
|
(1
|
)%
|
|
(281
|
)
|
|
N/A
|
|
|
161
|
|
|
N/A
|
|
Total Company
|
$
|
50,329
|
|
|
3
|
%
|
|
$
|
11,037
|
|
|
7
|
%
|
|
$
|
7,971
|
|
|
—
|
%
|
Beauty
Three months ended
March 31, 2018
compared with three
months ended
March 31, 2017
Beauty net sales
increased 10% to
$2.9 billion
during the
third fiscal quarter
on
unit volume that was unchanged
. Favorable product mix added 6% to net sales due to the disproportionate growth of the super-premium SK-II and Olay Skin Care brands, which have higher than segment average selling prices. Lower pricing reduced net sales by 1%. Favorable foreign exchange increased net sales by 5%. Organic sales
increased 5%
. Global market share of the Beauty segment
decreased 0.3 points
. Volume
decreased low single digits
in developed regions and increased low single digits in developing regions.
|
|
•
|
Volume in Hair Care
decreased low single digits
. Developed market volume decreased mid-single digits due to competitive activity. Volume in developing regions increased low single digits due to product innovation and market growth. Global market share of the Hair Care category
decreased half a point
.
|
|
|
•
|
Volume in Skin and Personal Care
increased low single digits
. Volume increased low single digits in developed regions due to product innovation. Volume increased mid-single digits in developing regions due to increased marketing spending and product innovation. Global market share of the Skin and Personal Care category was unchanged.
|
Net earnings
increased 23% to
$488 million
due to the increase in net sales and a 190 basis point increase in net earnings margin. The net earnings margin increased due to an increase in gross margin and a decrease in SG&A as a percentage of net sales. The increase in gross margin was driven by manufacturing cost savings projects, partially offset by higher commodity costs and reduced pricing. The reduction in SG&A as a percentage of sales was primarily driven by the positive scale impacts of the net sales increase.
Nine
months ended
March 31, 2018
compared with
nine
months ended
March 31, 2017
Beauty fiscal year to date net sales
increased 8% to
$9.3 billion
on
a 1% increase in unit volume
. Favorable product mix added 5% to net sales, due to the disproportionate growth of the super-premium SK-II and Olay Skin brands. Organic sales
increased 6%
. 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
. Volume in developed regions decreased low single digits due to competitive activity. Volume in developing regions increased low single digits due to product innovation and improved in-store executions. Global market share of the Hair Care category
decreased slightly
.
|
|
|
•
|
Volume in Skin and Personal Care
increased low single digits
. Volume increased low single digits in developed regions driven by product innovation partially offset by reduced shipments following increased pricing. Volume increased mid-single digits in developing regions due to product innovation and increased marketing. Global market share of the Skin and Personal Care category
was unchanged
.
|
Net earnings
increased 16% to
$1.8 billion
due to the increase in net sales and a 130 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, primarily driven by the positive scale impacts of the net sales increase. Gross margin increased slightly driven by productivity savings.
Grooming
Three months ended
March 31, 2018
compared with three
months ended
March 31, 2017
Grooming net sales
increased 2% to
$1.6 billion
during the
third fiscal quarter
on
a 3% increase in unit volume
. Foreign exchange had a 5% favorable impact on net sales. Pricing had a 3% negative impact on net sales due to price reductions in Shave Care. Negative mix reduced net sales 3% due to the disproportionate growth of lower tier products and developing regions which have lower than segment average selling prices. Disproportionate developing market growth also contributed to the negative mix, in part, due to a higher relative proportion of disposable razors in those markets. Organic sales
decreased 3%
. Global market share of the Grooming segment
decreased 0.3 points
. Volume increased low single digits in developed regions and mid-single digits in developing regions.
|
|
•
|
Shave Care volume
increased low single digits
. Developed regions volume increased low single digits due to increased price competitiveness following price reductions and product innovation. Developing regions volume increased mid-single digits due to lower pricing in the form of higher promotional spending. Global market share of the Shave Care category
was unchanged
.
|
|
|
•
|
Volume in Appliances
decreased low single digits
. Volume decreased mid-single digits in developed regions due to trade inventory reductions and a base period that was up double digits due to innovation. Volume increased high single digits in developing regions due to product innovation and market growth. Global market share of the Appliances category
increased more than a point
.
|
Net earnings
was unchanged at
$334 million
as the increase in net sales was offset by a 30 basis point decrease in net earnings margin. Net earnings margin decreased primarily due to a decrease in gross margin, partially offset by a reduction in SG&A as a percentage of net sales. Gross margin declined due to the negative impact of unfavorable product and geographic mix and lower pricing, partly offset by the benefit of cost savings projects. SG&A as a percentage of net sales decreased due to reductions in marketing spending.
Nine
months ended
March 31, 2018
compared with
nine
months ended
March 31, 2017
Grooming fiscal year to date net sales
decreased 1% to
$4.9 billion
on
a 1% increase in unit volume
. Favorable foreign exchange impacts increased net sales by 3%. Price reductions in Shave Care reduced net sales by 3%. Unfavorable product mix reduced net sales by 2% driven by the disproportionate increase in lower tier shave care products, including disposable razors. Organic sales
decreased 4%
. Global market share of the Grooming segment
decreased 0.6 points
. Volume
increased low single digits
in developed and developing regions.
|
|
•
|
Volume in Shave Care
was unchanged
. Volume in developed regions increased low single digits due to increased competitiveness following price reductions and product innovation. Volume in developing regions was unchanged. Global market share of the Shave Care category
decreased less than half 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 a point
.
|
Net earnings
decreased 11% to
$1.1 billion
due to the reduction in net sales and a 230 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 percentage of net sales. Gross margin decreased due to the negative impact of lower pricing and unfavorable product and geographic mix, partially offset by the benefit of cost savings projects. SG&A as a percentage of net sales increased primarily due to an increase in other operating expense resulting from a base period gain from the sale of real estate along with a current period increase in overhead spending.
Health Care
Three months ended
March 31, 2018
compared with three
months ended
March 31, 2017
Health Care net sales
increased 5% to
$1.9 billion
during the
third fiscal quarter
on
a 3% increase in unit volume
. Favorable foreign exchange increased net sales by 5%. Lower prices reduced net sales by 2% due to increased promotional spending. Organic sales
increased 1%
. Global market share of the Health Care segment decreased 0.2 points. Volume
increased low single digits
in developed regions and
increased mid-single digits
in developing regions.
|
|
•
|
Oral Care volume
increased low single digits
. Volume decreased low single digits in developed regions due to trade inventory reductions and competitive activity. Volume increased low single digits in developing regions due to product innovation and increased promotional competitiveness. Global market share of the Oral Care category
decreased half a point
.
|
|
|
•
|
Volume in Personal Health Care
increased high single digits
. Volume increased high single digits in developed regions due to increased consumption from a strong Cough / Cold season and product innovation. Volume in developing regions increased high single digits and double digits on organic basis, due to product innovation and increased consumption from a strong Cough / Cold season. Excluding the impact of minor brand divestitures, organic volume grew double digits. Global market share of the Personal Health Care category
increased less than half a point
.
|
Net earnings
decreased 2% 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 decreased due to a reduction in gross margin partially offset by a reduction in SG&A as a percentage of net sales. Gross margin decreased as the impacts of lower pricing and unfavorable mix due to the disproportionate growth of developing regions which have lower margins, was only partially offset by manufacturing cost savings. SG&A as a percentage of net sales decreased primarily due to the positive scale impacts of the net sales increase.
Nine
months ended
March 31, 2018
compared with
nine
months ended
March 31, 2017
Health Care fiscal year to date net sales
increased 5% to
$6.0 billion
on
a 2% increase in unit volume
. Favorable foreign exchange increased net sales by 3%. Mix improvement increased net sales 1% due to disproportionate growth of premium paste and power brush products, which have higher than segment average prices. Lower prices reduced net sales by 1% primarily due to increased promotional spending. Organic sales
increased 2%
. Global market share of the Health Care segment decreased 0.1 point. Volume
increased low single digits
in both developed and developing regions.
|
|
•
|
Oral Care volume
increased low single digits
. Volume in developed regions increased low single digits driven by product innovation and marketing investments on premium power brush segment. Volume in developing regions was unchanged. Global market share of the Oral Care category
decreased less than half a point
.
|
|
|
•
|
Volume in Personal Health Care
increased mid-single digits
. Volume increased low single digits in developed regions and high single digits in developing regions due to increased consumption from a strong Cough / Cold season and product innovation. Global market share of the Personal Health Care category
increased less than half a point
.
|
Net earnings
increased 1% to
$1.1 billion
due to the increase in net sales, partially offset by 60 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 decreased marginally as the impacts of lower pricing and unfavorable mix due to the disproportionate growth of lower margin product forms, was only partially offset by manufacturing cost savings. SG&A as a percentage of net sales also decreased marginally.
Fabric & Home Care
Three months ended
March 31, 2018
compared with three months ended
March 31, 2017
Fabric & Home Care net sales
increased 6% to
$5.3 billion
for the
third fiscal quarter
on
a 3% increase in unit volume
. Favorable foreign exchange had a positive impact of 4% on net sales. Lower prices reduced net sales 1%. Organic sales
increased 3%
on a 4% increase in organic volume. Global market share of the Fabric & Home Care segment
increased 0.2 points
. Volume
increased mid-single digits
in developed regions. Volume in developing regions was unchanged and increased low single digits excluding the impact of minor brand divestitures.
|
|
•
|
Fabric Care volume
increased low single digits
. Excluding the impact of minor brand divestitures, volume increased mid-single digits. Volume in developed regions grew mid-single digits due to product innovation and lower pricing in the form of increased promotional spending. Volume in developing regions decreased low single digits. Excluding the impact of minor brand divestitures, developing regions volume increased low single digits driven by product innovation. Global market share of the Fabric Care category
increased slightly
.
|
|
|
•
|
Home Care volume
increased mid-single digits
. Volume in developed and developing regions increased mid-single digits due to product innovation, increased marketing and category growth. Global market share of the Home Care category
was unchanged
.
|
Net earnings
increased 6% to
$635 million
due to the increase in net sales. Net earnings margin was unchanged as a reduction in gross margin was largely offset by a reduction in SG&A as a percentage of sales. Gross margin decreased due to negative product mix impacts (driven by disproportionate growth of product forms with lower than segment-average margins and club channel), reduced pricing and an increase in commodity costs, which were partially offset by manufacturing cost savings. SG&A as a percentage of net sales was down due to positive scale effects of the increase in net sales.
Nine
months ended
March 31, 2018
compared with
nine
months ended
March 31, 2017
Fabric & Home Care fiscal year to date net sales
increased 4% to
$16.1 billion
on
a 3% increase in unit volume
. Favorable foreign exchange had a positive impact of 2% on net sales. Lower pricing had a negative 1% impact on net sales. Organic sales
increased 3%
. Global market share of the Fabric & Home Care segment increased 0.1 point. Volume
increased mid-single digits
in developed regions and low single digits in developing regions.
|
|
•
|
Fabric Care volume
increased low single digits
. Excluding the impact of minor brand divestitures, volume increased mid-single digits. Volume in developed regions grew mid-single digits due to product innovation and lower pricing in the form of increased promotional spending. Volume in developing regions grew low single digits due to product innovation and market growth. Global market share of the Fabric Care category
increased slightly
.
|
|
|
•
|
Home Care volume
increased mid-single digits
. Volume in developed regions increased low single digits due to product innovation and increased marketing. Volume in developing regions increased mid-single digits due to product innovation, marketing investments and category growth. Global market share of the Home Care category
was unchanged
.
|
Net earnings
increased 3% to
$2.1 billion
due to the increase in net sales. Net earnings margin was unchanged as a decrease in gross margin was largely offset by a reduction in SG&A as a percentage of net sales. Gross margin decreased due to an increase in commodity costs and unfavorable product mix (due to an increase in the proportion of 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 declined due to the positive scale impacts of net sales increase. Net earnings also benefited from a gain on a minor brand divestiture in the current period.
Baby, Feminine & Family Care
Three months ended
March 31, 2018
compared with three
months ended
March 31, 2017
Baby, Feminine & Family Care net sales
was unchanged at
$4.5 billion
during the
third fiscal quarter
on
a 2% decrease in unit volume
. Favorable foreign exchange increased net sales by 3%. Lower pricing reduced net sales 1%. Organic sales
decreased 3%
. Global market share of the Baby, Feminine & Family Care segment
decreased 0.7 points
. Volume
decreased low single digits
in developed and developing regions.
|
|
•
|
Volume in Baby Care
decreased mid-single digits
. Volume in developed regions declined low single digits due to trade inventory reductions and competitive activity. Volume in developing regions declined high single digits due to competitive activity including lower competitor pricing in certain markets. 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. Volume in developed regions declined low single digits, but increased low single digits on an organic basis due to product innovation and adult incontinence category growth. Volume increased low single digits in developing regions driven by product innovation and increased promotional spending. Global market share of the Feminine Care category
increased slightly
.
|
|
|
•
|
Volume in Family Care, which is predominantly a North American business,
was unchanged
as the impacts of product innovation and distribution gains was offset by trade inventory reductions. In the U.S., all-outlet share of the Family Care category
was unchanged
.
|
Net earnings
decreased 3% to
$539 million
due to a 30 basis-point decrease in net earnings margin. Net earnings margin decreased primarily due to a decline in gross margin, partially offset by a reduction in SG&A as a percentage of net sales. Gross margin decreased primarily due to an increase in commodity costs, lower pricing 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 projects. SG&A as a percentage of net sales decreased as reduced marketing spending was partially offset by an increase in overhead costs.
Nine
months ended
March 31, 2018
compared with
nine
months ended
March 31, 2017
Baby, Feminine & Family Care fiscal year to date net sales
decreased 1% to
$13.6 billion
on
a 1% decrease in unit volume
. Favorable foreign exchange had a 1% benefit on net sales. Lower pricing reduced net sales by 1%. Organic sales
decreased 2%
. Global market share of the Baby, Feminine and Family Care segment
decreased 0.8 points
. Volume
was unchanged
in developed regions and increased low single digits excluding the impact of minor brand divestitures. Volume
decreased mid-single digits
in developing regions.
|
|
•
|
Baby Care volume
decreased mid-single digits
. Volume in developed regions declined low single digits due to competitive activities and trade inventory reductions. Volume in developing regions declined high single digits due to competitive activity, reduced shipments following increased pricing and a reduction in trade inventories. Global market share of the Baby Care category
decreased more than a point
.
|
|
|
•
|
Feminine Care volume
decreased low single digits
. Organic volume, which excludes the impact of minor brand divestitures, increased low single digits. Organic volume increased low single digits in developed regions due to product innovation. Volume increased low single digits in developing regions due to product innovation and market growth. Global market share of the Feminine Care category
was unchanged
.
|
|
|
•
|
Family Care volume
increased low single digits
, driven by product innovation and distribution gains. In the U.S., all-outlet share of the Family Care category
was unchanged
.
|
Net earnings
decreased 9% to
$1.8 billion
due to reduced net sales and a 110 basis-point decrease in net earnings margin. Net earnings margin decreased due to a decline in gross margin partially offset by a slight reduction in SG&A as a percentage of net sales. Gross margin decreased due to an increase in commodity costs, reduced pricing 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 decreased slightly, as reduced marketing spending was partially offset by an increase in overhead costs.
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
improved by $7 million
to $
143 million
during the
third fiscal quarter
and
decreased $2 million
to
$378 million
fiscal year to date. Corporate net earnings from continuing operations decreased $124 million to $239 million in the
third fiscal quarter
primarily due to the real estate gain in the base period and the current period increases in interest expense and restructuring charges, each of which has been discussed earlier in the Results of Operations section. Fiscal year to date Corporate net earnings decreased $50 million to
$161 million
primarily driven by the increase in income tax expense caused by the current period charge for the transitional impacts of U.S. tax legislation, partially offset by the base period charge related to early extinguishment of debt.
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
$10.7 billion
of cash from operating activities fiscal year to date, an increase of
$1.6 billion
versus the prior year period. Net earnings, adjusted for non-cash items (depreciation and amortization, share-based compensation expense, deferred income taxes, and gain on sale of assets), generated
$8.3 billion
of operating cash flow. Working capital and other impacts generated
$2.4 billion
of cash in the period. Accounts receivable used
$450 million
of cash due to sales growth and the timing of the quarter-end (which fell on a weekend, resulting in fewer days collection). Inventory consumed
$457 million
of cash primarily due to product initiatives and business growth. Accounts payable, accrued and other liabilities generated
$752 million
of cash primarily driven by extended payment terms with our suppliers, increased marketing accruals based on timing of spending and the current year impacts on taxes payable due to the U.S. Tax Act. All other operating assets and liabilities generated
$2.3 billion
of cash, primarily driven by the long-term portion of the payable related to the U.S. tax reform repatriation charge.
Investing Activities
Cash used by investing activities was
$3.6 billion
fiscal year to date. Capital expenditures were
$2.8 billion
, or
5.6%
of net sales. We generated
$246 million
of cash from proceeds from asset sales, primarily from minor brand divestitures. We used
$3.8 billion
for purchases of short-term investments, partially offset by
$2.8 billion
of cash generated from sales and maturities of short-term investments.
Financing Activities
Our financing activities consumed net cash of
$7.5 billion
fiscal year to date. We used
$5.6 billion
for treasury stock purchases and
$5.4 billion
for dividends. Cash generated from the net effect of debt issuances and payments was
$2.4 billion
. Cash from the exercise of stock options and other impacts generated
$1.2 billion
of cash.
As of
March 31, 2018
, our current liabilities exceeded current assets by
$2.8 billion
. We have short- and long-term debt to meet our financing needs. We anticipate being able to support our short-term liquidity and operating needs largely through cash generated from operations. We have strong short- and long-term debt ratings that have enabled and should continue to enable us to refinance our debt as it becomes due at favorable rates in commercial paper and bond markets. In addition, we have agreements with a diverse group of financial institutions that, if needed, should provide sufficient credit funding to meet short-term financing requirements.
RECONCILIATION OF MEASURES NOT DEFINED BY U.S. GAAP
In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures and the reconciliation to the most closely related GAAP measures.
We believe that these measures provide useful perspective on underlying business trends (i.e., trends excluding non-recurring or unusual items) and provide a supplemental measure of year-on-year underlying 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.
Transitional Impact of U.S. Tax Reform
: As discussed in Note 2 to the Consolidated Financial Statements, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the “U.S. Tax Act”) in December 2017. This resulted in a net charge of $650 million for the nine months ended March 31, 2018, comprised of an estimated repatriation tax charge of $3.9 billion and a net deferred tax benefit of $3.2 billion. The adjustment to core earnings only includes this transitional impact. It does not include the ongoing impacts of the lower U.S. statutory rate on current year earnings.
Early debt extinguishment charges
: During the three months ended December 31, 2016, the Company recorded a charge of $345 million after tax due to the early extinguishment of certain long-term debt. This charge represents the difference between the reacquisition price and the par value of the debt extinguished. Management does not view this charge as indicative of the Company’s operating performance or underlying business results.
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.
Adjusted free cash flow productivity
: Adjusted free cash flow productivity is defined as the ratio of free cash flow to net earnings excluding the transitional impact of U.S. Tax Reform, which is non-recurring and not considered indicative of underlying earnings or cash flow performance. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G’s ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. 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 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 March 31, 2018
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition & Divestiture Impact/Other
(1)
|
|
Organic Sales Growth
|
Beauty
|
10%
|
|
(5)%
|
|
—%
|
|
5%
|
Grooming
|
2%
|
|
(5)%
|
|
—%
|
|
(3)%
|
Health Care
|
5%
|
|
(5)%
|
|
1%
|
|
1%
|
Fabric & Home Care
|
6%
|
|
(4)%
|
|
1%
|
|
3%
|
Baby, Feminine & Family Care
|
—%
|
|
(3)%
|
|
—%
|
|
(3)%
|
Total Company
|
4%
|
|
(4)%
|
|
1%
|
|
1%
|
|
|
|
|
|
|
|
|
|
Nine Months Ended March 31, 2018
|
Net Sales Growth
|
|
Foreign Exchange Impact
|
|
Acquisition & Divestiture Impact/Other
(1)
|
|
Organic Sales Growth
|
Beauty
|
8%
|
|
(2)%
|
|
—%
|
|
6%
|
Grooming
|
(1)%
|
|
(3)%
|
|
—%
|
|
(4)%
|
Health Care
|
5%
|
|
(3)%
|
|
—%
|
|
2%
|
Fabric & Home Care
|
4%
|
|
(2)%
|
|
1%
|
|
3%
|
Baby, Feminine & Family Care
|
(1)%
|
|
(1)%
|
|
—%
|
|
(2)%
|
Total Company
|
3%
|
|
(2)%
|
|
—%
|
|
1%
|
(1)
Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures, 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, March 31, 2018
|
Operating Cash Flow
|
|
Capital Spending
|
|
Free Cash Flow
|
$10,668
|
|
$(2,810)
|
|
$7,858
|
Adjusted free cash flow productivity (dollar amounts in millions)
:
|
|
|
|
|
|
|
|
Fiscal Year-to-Date, March 31, 2018
|
Free Cash Flow
|
|
Net Earnings
|
Net U.S. Tax Reform Charge
|
Adjusted Net Earnings
|
|
Adjusted Free Cash Flow Productivity
|
$7,858
|
|
$7,971
|
$650
|
$8,621
|
|
91%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended March 31, 2018
|
|
AS REPORTED (GAAP)
|
|
INCREMENTAL RESTRUCTURING
|
|
TRANSITIONAL IMPACTS OF U.S. TAX REFORM
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
8,343
|
|
|
(110
|
)
|
|
—
|
|
|
(1
|
)
|
|
8,232
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
4,642
|
|
|
(28
|
)
|
|
—
|
|
|
—
|
|
|
4,614
|
|
OPERATING INCOME
|
3,296
|
|
|
138
|
|
|
—
|
|
|
1
|
|
|
3,435
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
713
|
|
|
22
|
|
|
(22
|
)
|
|
(1
|
)
|
|
712
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,511
|
|
|
116
|
|
|
22
|
|
|
—
|
|
|
2,649
|
|
|
|
|
|
|
|
|
|
|
Core EPS
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
0.95
|
|
|
0.04
|
|
|
0.01
|
|
|
—
|
|
|
1.00
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
|
|
|
|
CORE EPS
|
4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Three Months Ended March 31, 2017
|
|
AS REPORTED (GAAP)
|
|
INCREMENTAL RESTRUCTURING
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
7,836
|
|
|
(113
|
)
|
|
1
|
|
|
7,724
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
4,409
|
|
|
22
|
|
|
(1
|
)
|
|
4,430
|
|
OPERATING INCOME
|
3,360
|
|
|
91
|
|
|
—
|
|
|
3,451
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
780
|
|
|
21
|
|
|
(1
|
)
|
|
800
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
2,522
|
|
|
70
|
|
|
—
|
|
|
2,592
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
0.93
|
|
|
0.03
|
|
|
—
|
|
|
0.96
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Nine Months Ended March 31, 2018
|
|
AS REPORTED (GAAP)
|
|
INCREMENTAL RESTRUCTURING
|
|
TRANSITIONAL IMPACTS OF U.S. TAX REFORM
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
25,239
|
|
|
(296
|
)
|
|
—
|
|
|
—
|
|
|
24,943
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
14,056
|
|
|
(9
|
)
|
|
—
|
|
|
(1
|
)
|
|
14,046
|
|
OPERATING INCOME
|
11,034
|
|
|
305
|
|
|
—
|
|
|
1
|
|
|
11,340
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
3,066
|
|
|
63
|
|
|
(650
|
)
|
|
(1
|
)
|
|
2,478
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
7,859
|
|
|
242
|
|
|
650
|
|
|
—
|
|
|
8,751
|
|
|
|
|
|
|
|
|
|
|
Core EPS
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
2.94
|
|
|
0.09
|
|
|
0.24
|
|
|
0.01
|
|
|
3.28
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.
|
|
|
|
|
|
|
|
|
|
|
CHANGE VERSUS YEAR AGO
|
|
|
|
|
|
|
CORE EPS
|
7
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
|
Nine Months Ended March 31, 2017
|
|
AS REPORTED (GAAP)
|
|
DISCONTINUED OPERATIONS
|
|
INCREMENTAL RESTRUCTURING
|
|
EARLY DEBT EXTINGUISHMENT
|
|
ROUNDING
|
|
NON-GAAP (CORE)
|
COST OF PRODUCTS SOLD
|
24,236
|
|
|
—
|
|
|
(352
|
)
|
|
—
|
|
|
1
|
|
|
23,885
|
|
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE
|
13,737
|
|
|
—
|
|
|
81
|
|
|
—
|
|
|
(1
|
)
|
|
13,817
|
|
OPERATING INCOME
|
11,006
|
|
|
—
|
|
|
271
|
|
|
—
|
|
|
—
|
|
|
11,277
|
|
INCOME TAX ON CONTINUING OPERATIONS
|
2,338
|
|
|
—
|
|
|
57
|
|
|
198
|
|
|
(1
|
)
|
|
2,592
|
|
NET EARNINGS ATTRIBUTABLE TO P&G
|
13,111
|
|
|
(5,217
|
)
|
|
214
|
|
|
345
|
|
|
—
|
|
|
8,453
|
|
|
|
|
|
|
|
|
|
|
|
|
Core EPS:
|
DILUTED NET EARNINGS PER COMMON SHARE
(1)
|
4.76
|
|
|
(1.89
|
)
|
|
0.08
|
|
|
0.13
|
|
|
(0.01
|
)
|
|
3.07
|
|
(1)
Diluted net earnings per share are calculated on Net earnings attributable to Procter & Gamble.