Emerges as a leaner outfit after productivity savings and minor brand divestitures
Consumer goods maker Procter & Gamble Company (NYSE: PG) announced its Q4 FY16 and full year FY16 financial results on August 2nd, 2016. The Cincinnati, Ohio-based company provides consumer packaged goods. Its organizational structure consists of Global Business Units (GBUs), Global Operations Global Business Services (GBS), and Corporate Functions (CF). The GBUs are responsible for developing overall brand strategy, new product upgrades, and innovations and marketing plans. Global Operations consists of the Company’s Sales and Market Operations, while Corporate Functions provides company level strategy and portfolio analysis, among other functional support.
The Company operates in five segments under GBUs: Beauty, Grooming, Health Care, Fabric Care and Home Care, and Baby Feminine and Family Care. Read more about P&G’s financial results below.
Q4 FY16 financial highlights
During Q4 FY16, Procter & Gamble reported a 3% Y-o-Y decline in net sales to $16.1 billion on account of a 3% negative impact from foreign exchange and a 2% negative combined impact from Venezuela deconsolidation and minor brand divestitures. Organic sales grew 2%, driven by a 2% higher organic shipment volume.
Procter & Gamble’s Q4 FY16 gross margins grew 130 basis points (bps), including a 30bps increase in non-core restructuring charges, while core gross margins improved 160bps, including 80bps of negative foreign exchange impact. On a currency-neutral basis, core gross margin expanded 240bps, driven by 280bps of productivity cost savings and 110bps from lower commodity costs. These increases more than offset headwinds from 140bps of unfavorable mix and 10bps from innovation and capacity investments during the reporting quarter.
Procter & Gamble’s Q4 FY16 selling, general and administrative expenses (SG&A), as a percentage of sales, grew 290bps on a reported basis versus the prior year, and included a 20bps net benefit from a Y-o-Y decline in non-core restructuring charges. Core SG&A, as a percentage of sales, jumped 310bps including 40bps of unfavorable foreign exchange impacts. On a currency-neutral basis, core SG&A increased 270bps Y-o-Y, driven by 280bps of increased advertising and sampling investments and 70bps of R&D and sales coverage investments, partially offset by 40bps of productivity savings from overheads and 40bps of savings in agency related marketing costs.
Owing to productivity savings, Procter & Gamble’s Q4 FY16 reported operating profit margin jumped 1,060bps driven by the impact of the non-core Venezuelan charge in the prior year. Core operating profit margin declined 150bps Y-o-Y, owing to foreign exchange impacts. On a currency-neutral basis, core operating profit margin fell 30bps as the gross margin improvement was more than offset by higher SG&A costs. Total productivity cost savings amounted to 360bps for the reporting quarter.
Procter & Gamble’s Q4 FY16 diluted net EPS jumped 283% to $0.69 versus the prior year period that included a Venezuelan deconsolidation charge of $0.71 per share. However, core EPS fell 15% to $0.79 due to higher marketing investments, lower gains from minor brand divestitures, and a higher core effective tax rate versus the year-ago period. Excluding the impact of foreign exchange, currency-neutral core EPS fell 8%.
Procter & Gamble’s Q4 FY16 Beauty segment organic sales grew 1% Y-o-Y driven by pricing benefits and higher organic volume. Organic sales increased in Skin and Personal Care driven by growth of the SK-II skin care brand, partially offset by lower sales of Olay. Hair Care organic sales were flat as innovation-driven growth on Pantene and Head & Shoulders was offset by declines in other brands.
Procter & Gamble’s Q4 FY16 Grooming segment organic sales grew 7% Y-o-Y driven by higher pricing and volume. Sales growth was driven by Fusion FlexBall innovation and higher pricing. In developed markets, sales growth from the Fusion ProShield launch was offset by competitive activity in North America. Organic sales increased on Braun, driven by innovation-driven volume increases.
Procter & Gamble’s Q4 FY16 Health Care segment organic sales rose 8% Y-o-Y driven by increased marketing, strong innovation results, and higher pricing. Personal Health Care organic sales grew due to a late cough and cold season and higher pricing in developing markets.
Procter & Gamble’s Q4 FY16 Fabric & Home Care segment organic sales inched up 1% Y-o-Y due to higher organic volume. Fabric Care organic sales remained flat as higher organic volume was offset by pricing investments. Home Care sales rose due to strong innovation-driven growth in the Dish Care business.
Procter & Gamble’s Q4 FY16 Baby, Feminine & Family Care segment organic sales increased 1% Y-o-Y due to innovation-driven volume growth. Family Care organic sales decreased as volume growth in the U.S. was more than offset by pricing investments and discontinuation of certain product lines in Mexico.
FY16 financial highlights
Procter & Gamble’s FY16 net sales fell 8% to $65.3 billion as compared with FY15, including a negative 6% impact from foreign exchange and a negative 2% from the combined impacts of Venezuela and minor brand divestitures. Organic sales grew 1% as the benefits of higher pricing more than offset a reduction in organic shipment volumes. Diluted net EPS jumped 51% to $3.69 versus the prior year, which included the one-time charge for the deconsolidation of Venezuela. Core EPS declined 2% to $3.67 during the reporting year.
Operating cash flow came in at $15.4 billion for FY16, while adjusted free cash flow productivity was 115%.
Procter & Gamble began an incremental restructuring $10 billion plan back in 2012 and continues to have an ongoing level of restructuring activities to date. So far, the Company has achieved strategic productivity and cost savings through incremental restructuring activities. As a result, P&G delivered 145% adjusted free cash flow productivity for Q4 FY16.
Share repurchases & dividends
Procter & Gamble reduced common stock outstanding at a value more than $8 billion through the combination of direct share repurchases and shares that were exchanged in the Duracell transaction.
The Company also returned $7.4 billion of cash to shareholders as dividends.
Guidance for full year FY17
Procter & Gamble is projecting organic sales growth of about 2% for FY17. The Company expects headwinds from foreign exchange and minor brand divestitures to hurt sales by about 1%. As a result, P&G estimates all-in sales growth of about 1% for FY17.
The Company’s FY17 core EPS is expected to grow by mid-single digits versus FY16 core EPS of $3.67. Moreover, core EPS growth in Q1 FY17 is likely to be affected by foreign exchange headwinds, which do not fully annualize until later in the year, and the impact of lost finished product sales to its Venezuelan subsidiaries.
All-in GAAP EPS is expected to increase 45% to 55% versus FY16 GAAP EPS of $3.69. The FY17 GAAP EPS estimate includes approximately $0.10 per share of non-core restructuring costs and a substantial gain from the divestiture of 41 beauty brands to Coty Inc. (NYSE: COTY). The exact earnings gain from the transaction with Coty will not be known until the completion of the deal, which is targeted for October 2016.
P&G’s stock ended the day at $85.78, slipping 0.31%, at the close on Friday, August 5th, 2016, having vacillated between an intraday high of $86.44 and a low of $85.53 during the session. The stock’s trading volume was at 6,729,686 for the day. The Company’s market cap was at $230.22 billion as of Friday’s close.