Procter & Gamble earnings top estimates, with boost from price hikes; shares jump

The Procter & Gamble Company (NYSE: PG) reported second quarter fiscal year 2019 net sales of $17.4 billion, even with the prior year level. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic sales increased four per cent. Diluted net earnings per share were $1.22, an increase of 31% versus the prior year primarily due to the income tax charges related to transitional impacts of the U.S. Tax Act in the base period. Core earnings per share increased by five per cent to $1.25. Currency-neutral core EPS increased 13% versus the prior year.

Operating cash flow was $4.0 billion for the quarter. Free cash flow productivity was 103%. The Company returned $2.6 billion of cash to shareholders via nearly $1.9 billion of dividend payments and $0.8 billion of common stock repurchases.

We delivered strong organic sales in the second quarter, building on our first quarter momentum, which enables us to increase our outlook for the year,” said David Taylor, Chairman, President and Chief Executive Officer. “Our focus on superiority, productivity and improving P&G’s organization and culture is delivering improved results despite a challenging competitive and macroeconomic environment.

October – December Quarter Discussion

Net sales in the second quarter of the fiscal year 2019 were $17.4 billion, unchanged versus the prior year. Unfavourable foreign exchange was a four percent hurt to sales for the quarter. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic sales increased four percent driven by a two percent increase in shipment volume. Pricing was a one percent help to organic sales. Positive mix impact was a one percent help to organic sales due to the disproportionate growth of the premium Skin Care category behind the SK-II brand and strong growth in developed markets.

• Beauty segment organic sales increased eight percent versus year ago. Skin and Personal Care organic sales increased double digits due to premium innovation, positive product mix from the disproportionate growth of super-premium SK-II and Olay Skin Care brands and increased pricing. Hair Care organic sales increased low single digits primarily due to increased pricing.
• Grooming segment organic sales decreased three percent. Shave Care organic sales decreased mid-single digits due to volume declines following devaluation-driven price increases, volatility in quarter to quarter merchandising events and heightened competitive activity. Appliances organic sales was unchanged.
• Health Care segment organic sales increased five percent. Oral Care organic sales increased mid-single digits due to premium innovation. Personal Health Care organic sales increased mid-single digits due to innovation and increased pricing.
• Fabric and Home Care segment organic sales increased six percent for the quarter. Fabric Care organic sales increased high-single digits driven by innovation, increased pricing and positive mix due to the disproportionate growth of premium products. Home Care organic sales increased low single digits driven by innovation, increased merchandising activities and increased pricing.
• Baby, Feminine and Family Care segment organic sales increased three percent versus year ago. Baby Care organic sales was unchanged due to offsetting impacts. Increased pricing and positive mix due to the disproportionate growth of premium products were offset by competitive activity and volume reductions following increased pricing. Feminine Care organic sales increased high single digits driven by innovation and positive product mix due to the disproportionate growth of premium products. Family Care organic sales increased mid-single digits due to innovation, increased distribution and increased pricing, partially offset by negative mix due to disproportionate growth of large sizes.

Diluted net earnings per share were $1.22, an increase of 31% versus the prior year, primarily due to base period income tax charges related to the transitional impact of the U.S. Tax Act. Core earnings per share were $1.25, an increase of five percent versus the prior year driven primarily by a lower tax rate due to the implementation of the U.S. Tax Act and a reduction in shares outstanding. Currency-neutral core earnings per share increased 13% for the quarter.

Reported gross margin decreased 100 basis points, including a 20 basis point impact from higher non-core restructuring charges versus the prior year. Core gross margin decreased 80 basis points, including 60 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin decreased 20 basis points, as 150 basis points of productivity savings and 50 basis points of pricing help were more than offset by 90 basis points of commodity cost increases, 30 basis points of innovation reinvestments and 100 basis points of unfavourable product mix and other impacts.

Selling, general and administrative expense (SG&A) as a percentage of sales decreased 90 basis points on a reported basis versus the prior year, including a 10 basis point help from a year-on-year decrease in non-core restructuring charges. Core SG&A as a percentage of sales decreased 80 basis points versus the prior year, including approximately 20 basis points of negative foreign exchange impacts. On a currency-neutral basis, core SG&A as a percentage of sales decreased 100 basis points driven by 60 basis points of net savings from overhead, media, agency fee and advertising production cost productivity and 110 basis points of sales leverage, partially offset by 70 basis points of reinvestments and other impacts.

Operating profit margin decreased approximately 20 basis points versus the base period on a reported basis including a 10 basis point hurt from higher non-core restructuring charges. Core operating margin decreased 10 basis points including approximately 90 basis points of negative foreign exchange impacts. On a currency-neutral basis, core operating margin increased 80 basis points including total productivity cost savings of 210 basis points for the quarter.

Fiscal Year 2019 Guidance

The Company is increasing the high end of its guidance for organic sales growth by one percent. Organic sales growth is now estimated in the range of two to four percent for fiscal 2019. The Company now estimates fiscal 2019 all-in sales growth in the range of down one percent to up one percent versus the prior fiscal year, which includes a headwind of three to four percentage points to sales growth from foreign exchange. The net effect of acquisitions and divestitures should have a modest positive impact on all-in sales growth.

The Company also maintained its expectation for core earnings per share growth of three to eight percent versus fiscal 2018 Core EPS of $4.22. This outlook includes an estimated $1.4 billion headwind from foreign exchange and higher commodity and transportation costs. On an all-in GAAP basis, diluted net earnings per share are expected to increase seventeen to twenty-four percent versus the prior year.

The Company now expects to exceed its target of 90% adjusted free cash flow productivity for fiscal 2019. P&G expects to pay over $7 billion in dividends and repurchase up to $5 billion of common shares.

Forward-Looking Statements

Certain statements in this release or presentation, 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. 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. For additional information concerning factors that could cause actual results and events to differ materially from those projected herein, please refer to our most recent 10-K, 10-Q and 8-K reports.