P&G Third Quarter results

The Procter & Gamble Company reported third quarter fiscal year 2015 core earnings per share of $0.92. On a currency-neutral basis, core earnings per share increased ten percent for the quarter. Diluted net earnings, which include all restructuring charges and impacts from discontinued operations, were $0.75 per share. Net sales were $18.1 billion, a decrease of eight percent versus the prior year period, including a negative eight percentage point impact from foreign exchange and a negative one percentage point impact from minor brand divestitures. Organic sales grew one percent.

“Our third quarter earnings results were largely in-line with what we had expected,” said Chairman, President, and Chief Executive Officer A.G. Lafley. “We delivered double-digit constant currency core EPS growth with significant currency-neutral gross and operating margin expansion from over 400 basis points of productivity savings from programs that continue to gain momentum. This quarter the productivity progress was offset by foreign exchange. As we have done before, we’ll offset foreign exchange over time through a combination of pricing, mix enhancement and cost reduction. We are focused on the significant opportunities in our control, including brand initiatives and product innovation, business and brand portfolio simplification, overhead savings and major supply chain productivity initiatives, to improve results in 2015 and beyond.”

January – March Quarter Discussion

All-in net sales decreased eight percent versus the prior year to $18.1 billion in the January – March quarter, including a negative eight percentage point impact from foreign exchange and a negative one percentage point impact from minor brand divestitures. Organic sales grew one percent. Organic sales were at or above year ago levels in four of five reporting segments. Volume declined two percent. Pricing increased sales by two percent with higher pricing in four of five business segments. Favorable product mix across most segments increased sales by one percent.

– Beauty, Hair, and Personal Care segment organic sales decreased three percent as a positive impact from pricing was more than offset by lower volume. Innovation-driven organic sales growth in the Deodorants, Cosmetics and Salon Hair Care categories were more than offset by sales declines mainly from the Prestige Fragrance and mass Skin Care categories.

– Hair Care organic sales were down in developed markets due mainly to increased competitive promotional activity in the U.S. and customer inventory reductions in China.

– Grooming segment organic sales increased nine percent due to higher pricing across all regions on Blades & Razors, favorable volume and product mix from premium innovation on both the Gillette and Braun businesses.

– Health Care segment organic sales increased six percent behind favorable geographic mix and pricing in Oral Care and higher pricing in Personal Health Care. Higher volume in Personal Health Care driven by a stronger cough and cold season was offset by lower volume in Oral Care developing markets following price increases.

– Fabric Care and Home Care segment organic sales are unchanged versus year ago as the favorable impact of geographic and product mix, along with increased volume in P&G Professional from distribution gains, was offset by lower volume in Fabric Care. Fabric Care organic sales growth in developing markets was more than offset by declines in North America due mainly to a base period which included the ship in of several new product innovations. North American Fabric Care consumption was up two points on the quarter, where both Tide and Gain gained market share.

– Home Care organic sales were up for the quarter behind pricing-driven growth in developing markets.

– Baby, Feminine and Family Care segment organic sales increased two percent behind pricing and mix in Baby Care and Feminine Care, including the benefits from the Always Discreet entry into the adult incontinence category and continued strong growth of Pampers Swaddlers in North America.

Core earnings per share, which exclude non-core restructuring charges and results from discontinued operations, were $0.92, a decrease of eight percent versus the prior year, including a negative 18 percentage point, or negative $0.18 per share, impact from foreign exchange. Core earnings per share were up ten percent on a currency-neutral basis. Reported earnings per share from continuing operations were $0.85, which include $0.07 per share of non-core restructuring charges. Diluted net earnings per share were $0.75, which include non-core restructuring charges and $0.10 per share of impacts from discontinued operations.

Reported gross margin decreased 30 basis points, including 50 basis points of non-core restructuring charges. Core gross margin improved 20 basis points, including 70 basis points of foreign exchange impacts. On a currency-neutral basis, core gross margin increased 90 basis points, driven by 250 basis points of productivity cost savings and a 90 basis point benefit from pricing, which more than offset headwinds from 150 basis points of mix, 50 basis points from innovation and capacity investments and modestly higher commodity costs.

Selling, general and administrative expense (SG&A) decreased 80 basis points on a reported basis versus the prior year, including a 150 basis point benefit from non-core Venezuelan balance sheet re-measurement charges taken in the base period, which was partially offset by a 30 basis point increase in non-core restructuring charges. Core SG&A as a percentage of sales increased 50 basis points, including 130 basis points of foreign exchange impacts. On a currency-neutral basis, core SG&A decreased 80 basis points versus the prior year driven by 160 basis points of productivity savings from overhead and marketing costs, which were partially offset by 80 basis points of organization capability investments and other operating items.

Reported operating profit margin increased 50 basis points. Core operating profit margin declined 30 basis points, including 200 basis points of foreign exchange impacts. On a currency-neutral basis, core operating profit margin increased 170 basis points, including 410 basis points of productivity cost savings.

Operating cash flow was $3.6 billion for the third quarter. Last week, P&G announced a dividend increase for the 59th consecutive year. The Company has been paying a dividend for 125 consecutive years since its incorporation in 1890. Fiscal year-to-date, P&G has returned approximately $9.7 billion to shareholders via $5.4 billion in dividends and $4.3 billion in stock repurchases. Fiscal year-to-date, adjusted free cash flow productivity is 101%.

Discontinued Operations

As a result of the previously announced divestiture of its Duracell battery business to Berkshire Hathaway, expected to close by the end of calendar year 2015, and in accordance with the applicable accounting guidance, the results of the batteries business are presented as discontinued operations. During the third quarter, the Company took a non-cash charge of approximately $300 million after-tax, or $0.10 per share, included in discontinued operations, to adjust the carrying values of the batteries business to reflect a decline in the value of the P&G shares it expects to receive from the share-based transaction with Berkshire Hathaway. The final value of the transaction, and the related carrying value of the batteries business, will be based on P&G’s share price at the closing date.

Fiscal Year 2015 Guidance

P&G said it now expects organic sales growth of low single digits for the fiscal year. Net sales growth is expected to be down five to six percent versus the prior fiscal year, including a negative six to seven percent headwind from foreign exchange and a one percent impact from minor brand divestitures.

P&G maintained its outlook for currency-neutral core earnings per share growth in the double-digits. The Company also maintained guidance for Core EPS to be in-line to down low single digits versus prior year Core EPS of $4.09, consistent with analysts’ current consensus estimate. All-in GAAP diluted net earnings per share are now expected to be down approximately 21 percent to 22 percent versus the prior year. This includes approximately $0.83 per share of non-core costs, primarily from $0.20 per share of non-core restructuring charges and $0.57 of net impacts from discontinued operations.