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Procter & Gamble: Summary of Earnings Call for Period April - June 2016

| August 08, 2016
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P&G

P&G announced results from its April-June’16 quarter, delivering profit and sales ahead of Wall Street estimates.  These results also included their year-end numbers as P&G has a fiscal year-end of June 30.  Fourth quarter results included organic sales growth of +2% behind shipment volume, 145% adjusted free cash flow (FCF) productivity and organic sales and volume growth across all 5 operating segments.  P&G has been focusing on balancing both top and bottom line growth and it is beginning to pay off.

Some key highlights for the quarter:

  • Organic Sales Growth: While ‘net’ sales growth declined -3%, ‘organic’ sales growth increased +2%. Organic sales growth takes net sales growth and excludes the impacts from foreign exchange and acquisitions and divestitures (A&D), which better defines growth generated within the company.  What is favorable about this quarter’s growth is that it was volume driven, not pricing driven, and it occurred across all 5 reportable segments.
  • Adjusted Free Cash Flow Productivity: Free cash flow is defined as operating cash flow minus capital expenditures (think the cash received from selling products, minus the cost to build plants and buy machinery). The ‘productivity’ piece of the equation is taking that FCF and dividing by net earnings.  P&G’s target is 90% FCF productivity and for Q4 they delivered 145%, exceeding their target by over 60% which is important because FCF is one factor in determining the amount of cash available for dividends and discretionary investment.
  • Operating Segments: P&G is divided into 5 operating segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine and Family Care. All 5 segments reported organic volume and organic sales growth for the quarter:

 

These broad based organic numbers are important because the company has indicated their intentions of top line acceleration (growing sales) to fuel their profit growth and these numbers help support those efforts.

Some key highlights for the year:

  • Organic Sales Growth: P&G has said for fiscal year 2016 they will generate organic sales growth of 0%-3%, with its first reported fiscal quarter (Jul-Sept ’15) being down -1%, second fiscal quarter (Oct-Dec’ 15) up +2%, third fiscal quarter up +1% and now this quarter being up +2%.  Their total year organic sales grew +1% as the benefits of pricing more than offset the reduction in organic shipment volume felt earlier in the fiscal year.
  • Cost Savings & Efficiencies: P&G continued making headway in its cost reduction efforts. Their 5-year target was a $6 billion cost of goods sold (COGS) savings and they have delivered $7.2 billion.  They have also seen a 25% non-manufacturing enrollment reduction.  They have put a heavy focus on supply chain efforts such as new, as well as more efficient, sites.  These efforts have resulted in savings across the income statement and up and down the balance sheet.
  • FY17 Guidance: P&G is projecting organic sales growth of approximately 2% for fiscal year 2017, with the expectation that they will hit category growth levels (~3%) by the end of the year. They also expect to see further improvement in profit margins.  The sale of 41 beauty brands to Coty is still on pace to close in October 2016 and should be the last major divestiture under the current A&D program.  The company has said they would be open to acquisitions if they fit their strategic vision.

As previously noted, P&G is in a transformation period.  With a relatively new CEO and one of the largest brand divestiture programs in the company’s 178 year history currently underway, it will take some time for all the moving parts to settle out.  Provided their efforts to grow the topline, reduce costs and remain a company that puts the needs and wants of the consumer first, the renewed focus and efforts they have underway should play out in their favor.

P&G is an example of the type of stock that we use to build The HCM Dividend Growth Portfolio™.  This portfolio is designed to provide the opportunity for appreciation that comes from equity exposure, while giving investors a growing stream of income through market cycles. 

If you want to walk through this together or just talk about P&G, feel free to reach out to me at jim@hengeholdcapital.com.

Date Posted: 08/08/2016 Advice provided in this article is meant for educational purposes only and financial education is important to us.  This article should not be taken as advice to buy, sell, or hold P&G stock. Before making decisions regarding your personal financial situation, please consult an advisor or conduct your own due diligence.  If you would like to discuss your P&G Retirement Income Plan with an HCM Wealth Advisor, please give us a call – 513-598-5120.  Located in Cincinnati, Ohio, we serve clients in 23 states, and we’d love to help.    

 

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