Market Overview

P&G Announces Fourth Quarter and Fiscal Year 2018 Results

Share:

Q4'18: Net Sales +3%; Organic Sales +1%;
Diluted Net EPS $0.72, -12%; Core EPS $0.94, +11%

FY'18: Net Sales +3%; Organic Sales +1%;
Diluted Net EPS $3.67, -34%; Core EPS $4.22, +8%

The Procter & Gamble Company (NYSE:PG) reported fourth quarter fiscal
year 2018 net sales of $16.5 billion, an increase of three percent
versus the prior year period. Organic sales increased one percent for
the quarter driven by a three percent increase in organic shipment
volume. Diluted net earnings per share were $0.72, a decrease of 12%
versus the prior year period due to higher non-core restructuring
charges and early debt extinguishment costs. Core earnings per share
were $0.94, an increase of 11% versus the prior year period. The Company
generated $4.2 billion of operating cash flow in the quarter, with
adjusted free cash flow productivity of 158%.

For fiscal year 2018, net sales were $66.8 billion, a three percent
increase versus the prior year. Organic sales increased one percent for
the year driven by a two percent increase in organic shipment volume.
Diluted net earnings per share were $3.67, a decrease of 34% versus the
prior year primarily due to the Beauty Brands divestiture gain in the
base period. Core earnings per share were $4.22, an increase of eight
percent versus the prior year period. The Company generated $14.9
billion of operating cash flow in fiscal 2018, with adjusted free cash
flow productivity of 104%. P&G returned approximately $14.3 billion of
value to shareowners in fiscal 2018 through the combination of $7.3
billion of dividend payments and $7.0 billion of direct share
repurchases.

"We made important progress in fiscal 2018," said David Taylor,
Chairman, President and Chief Executive Officer. "We delivered strong
volume and consumption growth, market share trends improvement, Core EPS
and cash generation results above going-in targets, albeit with organic
sales slightly below target. We are operating in a very dynamic
environment affecting the cost of operations and consumer demand in our
categories and against highly capable competitors. We will accelerate
change in the organization and culture to meet these challenges. We will
continue to drive cost and cash productivity improvements, and we will
invest in the superiority of our products, packages and demand creation
programs. All of these efforts are aimed at delivering balanced top-line
and bottom-line growth that creates shareholder value over the short,
mid and long term."

April - June 2018 Quarter Discussion

Net sales in the April - June quarter were $16.5 billion, an increase of
three percent versus the prior year period including a two percent
positive impact from foreign exchange. Organic sales increased one
percent on a three percent increase in organic volume. All-in volume
increased two percent. Pricing reduced net sales by two percent due
primarily to increased merchandising investments.

                                         

April - June 2018

   

Foreign

                 

Organic

 

Organic

Net Sales Drivers (1)

Volume

Exchange

Price

Mix

Other(2)

Net Sales

Volume

Sales

Beauty 4% 3% —% 3% —% 10% 4% 7%
Grooming (1)% 2% (3)% 1% —% (1)% (1)% (3)%
Health Care 4% 3% (2)% (1)% —% 4% 4% 1%
Fabric & Home Care 4% 2% (3)% —% —% 3% 5% 2%
Baby, Feminine & Family Care   —%   1%   (1)%   (1)%   (1)%   (2)%           —%   (2)%
Total P&G   2%   2%   (2)%   —%   1%   3%           3%   1%
(1)   Net sales percentage changes are approximations based on
quantitative formulas that are consistently applied.
(2) Other includes the sales mix impact of acquisitions and
divestitures, the impact of India Goods and Services Tax
implementation and rounding impacts necessary to reconcile volume to
net sales.
  • Beauty segment organic sales increased seven percent versus year ago.
    Skin and Personal Care organic sales increased double digits driven by
    product and packaging innovation, increased investments to strengthen
    consumer communication and positive product mix from the
    disproportionate growth of the super-premium SK-II brand and Olay Skin
    Care. Hair Care organic sales increased mid-single digits due to
    product innovation and improved retail execution.
  • Grooming segment organic sales decreased three percent. Shave Care
    organic sales decreased low single digits due to investments to
    improve consumer and customer value, primarily in the North America
    region. Appliances organic sales decreased low single digits due to
    trade inventory reductions.
  • Health Care segment organic sales increased one percent for the
    quarter. Oral Care organic sales increased low single digits due to
    product innovation, partially offset by the reversal of a U.S.
    toothpaste list price increase taken last year. Personal Health Care
    organic sales increased low single digits driven by higher shipments
    and increased pricing.
  • Fabric & Home Care segment organic sales increased two percent for the
    quarter. Fabric Care organic sales increased low single digits driven
    by product innovation and improved retail execution, partially offset
    by increased investments in consumer and customer value. Home Care
    organic sales were unchanged.
  • Baby, Feminine & Family Care segment organic sales decreased two
    percent versus prior year. Baby Care organic sales decreased high
    single digits due to market contraction in certain markets in the
    Middle-East, Africa and Latin America, volume declines following
    reduced deep-discounting by retailers versus the prior year period and
    consumer value investments to restore competitiveness, primarily on
    the Luvs brand. Feminine Care organic sales increased low single
    digits due to innovation and favorable product mix from the
    disproportionate growth of Always Discreet. Family Care organic sales
    increased low single digits due to product innovation and improved
    retail execution, partially offset by negative pack-size mix.

Diluted net earnings per share were $0.72, a decrease of 12% versus the
prior year primarily due to higher non-core restructuring charges and
early debt retirement costs. Core earnings per share were $0.94, an
increase of 11% versus the prior year driven primarily by the increase
in net sales, a lower core effective tax rate and reduction in shares
outstanding, partially offset by a lower core operating profit margin.
Excluding the impact of foreign exchange, currency-neutral core earnings
per share increased 12%.

Reported gross margin decreased 310 basis points, including 170 basis
points due to higher non-core restructuring charges. Core gross margin
declined 140 basis points, including 40 basis points of negative foreign
exchange impacts. On a currency-neutral basis, core gross margin
decreased 100 basis points, as 270 basis points of manufacturing cost
savings were more than offset by 110 basis points of commodity and
shipping cost increases, 80 basis points of unfavorable pricing impacts,
60 basis points of product and packaging and innovation start-up
investments and 120 basis points of unfavorable mix and other impacts.

Selling, general and administrative expense (SG&A) as a percentage of
sales declined approximately 90 basis points on a reported basis versus
the prior year, including approximately 20 basis points of higher
non-core restructuring charges. Core SG&A as a percentage of sales
declined 120 basis points, including approximately 20 basis points of
negative foreign exchange impacts. On a currency-neutral basis, core
SG&A declined 130 basis points versus the prior year driven primarily by
80 basis points of productivity savings from the combination of
overheads and non-working advertising spending (agency fee and
advertising production costs). Working media spending increased as a
percentage of sales versus prior year.

Reported operating profit margin decreased 210 basis points. Core
operating profit margin decreased 30 basis points versus the prior year,
including approximately 60 basis points of negative foreign exchange
impacts. On a currency-neutral basis, core operating profit margin
improved 30 basis points. Total productivity cost savings were 350 basis
points for the quarter.

Fiscal Year 2018 Results

Fiscal year 2018 net sales were $66.8 billion, an increase of three
percent versus the prior year, including a two percent positive impact
from foreign exchange. Organic sales grew one percent on a two percent
increase in organic volume. Diluted net earnings per share were $3.67, a
decrease of 34% versus the prior year, primarily due to the Beauty
brands divestiture gain in the base period. Core earnings per share were
$4.22, an increase of eight percent. Excluding the impact of foreign
exchange, currency-neutral core earnings per share increased six percent
for the year.

Operating cash flow was $14.9 billion for the year. Adjusted free cash
flow productivity was 104%. In total, the Company returned $14.3 billion
in value to shareholders via $7.3 billion in dividends paid to
shareholders and $7 billion of common stock repurchase. P&G announced a
four percent increase to the quarterly dividend in April, making this
the 62nd consecutive year of dividend increases.

Fiscal Year 2019 Guidance

The Company is projecting organic sales growth in the range of two to
three percent for fiscal year 2019. P&G estimates all-in sales growth in
the range of in-line to up one percent for fiscal 2019, including a
headwind of about two percent from the combination of foreign exchange
and acquisitions & divestitures. P&G expects core earnings per share
growth of three to eight percent for fiscal 2019 versus core EPS of
$4.22 in fiscal 2018. At the midpoint of the range, fiscal 2019 Core EPS
guidance is $4.45. This outlook includes an estimated $0.9 billion
headwind from foreign exchange and higher commodity costs. P&G expects
the core effective tax rate for fiscal 2019 to be in the range of 19% to
20%. The benefit from a lower tax rate is expected to be offset by
higher net interest expense and lower non-operating income. The Company
said that GAAP earnings per share are expected to increase 16% to 23%
versus fiscal year 2018 GAAP EPS of $3.67, as the prior year includes
non-recurring costs related to the U.S. Tax Act and early debt
extinguishment, and fiscal 2019 includes a non-core gain from the
termination of PGT Health Care joint venture with Teva Pharmaceuticals.

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

P&G expects organic sales and core EPS for the second half of fiscal
2019 to be stronger than the first half as higher commodity costs and
foreign exchange headwinds are mitigated with pricing and productivity
savings build throughout fiscal 2019. The Company noted that it is in
the process of executing a line-average four percent price increase on
its Pampers brand in North America and recently began notifying
retailers of a five percent average list price increase on its Bounty,
Charmin and Puffs brands.

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.

About Procter & Gamble

P&G serves consumers around the world with one of the strongest
portfolios of trusted, quality, leadership brands, including Always®,
Ambi Pur®, Ariel®, Bounty®, Charmin®, Crest®, Dawn®, Downy®, Fairy®,
Febreze®, Gain®, Gillette®, Head & Shoulders®, Lenor®, Olay®, Oral-B®,
Pampers®, Pantene®, SK-II®, Tide®, Vicks®, and Whisper®. The P&G
community includes operations in approximately 70 countries worldwide.
Please visit http://www.pg.com for
the latest news and information about P&G and its brands.

 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
       
Three Months Ended June 30 Twelve Months Ended June 30
2018   2017   % Chg 2018   2017   % Chg
NET SALES $ 16,503 $ 16,079 3 % $ 66,832 $ 65,058 3 %
Cost of products sold 9,029   8,299   9 % 34,268   32,535   5 %
GROSS PROFIT 7,474 7,780 (4 )% 32,564 32,523 %
Selling, general and administrative expense 4,797   4,831   (1 )% 18,853   18,568   2 %
OPERATING INCOME 2,677 2,949 (9 )% 13,711 13,955 (2 )%
Interest expense 136 116 17 % 506 465 9 %
Interest income 63 48 31 % 247 171 44 %
Other non-operating income/(expense), net (315 ) 46   (785 )% (126 ) (404 ) (69 )%
EARNINGS FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 2,289 2,927 (22 )% 13,326 13,257 1 %
Income taxes on continuing operations 399   725   (45 )% 3,465   3,063   13 %
NET EARNINGS FROM CONTINUING OPERATIONS 1,890   2,202   (14 )% 9,861   10,194   (3 )%
NET EARNINGS FROM DISCONTINUED OPERATIONS     N/A   5,217   (100 )%
NET EARNINGS 1,890 2,202 (14 )% 9,861 15,411 (36 )%
Less: Net earnings/(loss) attributable to noncontrolling interests (1 ) (13 ) N/A 111   85   31 %
NET EARNINGS ATTRIBUTABLE TO PROCTER & GAMBLE $ 1,891   $ 2,215   (15 )% $ 9,750   $ 15,326   (36 )%
 
EFFECTIVE TAX RATE 17.4 % 24.8 % 26.0 % 23.1 %
 
BASIC NET EARNINGS PER COMMON SHARE: (1)
Earnings from continuing operations $ 0.73 $ 0.84 (13 )% $ 3.75 $ 3.79 (1 )%
Earnings from discontinued operations $   $   N/A $   $ 2.01   (100 )%
BASIC NET EARNINGS PER COMMON SHARE $ 0.73   $ 0.84   (13 )% $ 3.75   $ 5.80   (35 )%
DILUTED NET EARNINGS PER COMMON SHARE: (1)
Earnings from continuing operations $ 0.72 $ 0.82 (12 )% $ 3.67 $ 3.69 (1 )%
Earnings from discontinued operations $   $   N/A $   $ 1.90   (100 )%
DILUTED NET EARNINGS PER COMMON SHARE $ 0.72   $ 0.82   (12 )% $ 3.67   $ 5.59   (34 )%
DIVIDENDS PER COMMON SHARE $ 0.7172   $ 0.6896   4 % $ 2.7860   $ 2.6981   3 %
Diluted Weighted Average Common Shares Outstanding 2,620.9 2,695.6 2,656.7 2,740.4
 
Basis Pt Basis Pt
COMPARISONS AS A % OF NET SALES Change Change
Gross margin 45.3% 48.4% (310) 48.7% 50.0% (130)
Selling, general and administrative expense 29.1% 30.0% (90) 28.2% 28.5% (30)
Operating margin 16.2% 18.3% (210) 20.5% 21.5% (100)
Earnings from continuing operations before income taxes 13.9% 18.2% (430) 19.9% 20.4% (50)
Net earnings from continuing operations 11.5% 13.7% (220) 14.8% 15.7% (90)
Net earnings attributable to Procter & Gamble 11.5% 13.8% (230) 14.6% 23.6% (900)
(1)   Basic net earnings per common share and Diluted net earnings per
common share are calculated on Net earnings attributable to Procter
& Gamble.
 
 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
   
Three Months Ended June 30, 2018
  % Change   Earnings/(Loss) from   % Change   Net Earnings/(Loss)   % Change
Net Versus Year Continuing Operations Versus Year from Continuing

Versus Year

Sales   Ago   Before Income Taxes   Ago   Operations  

Ago

Beauty $3,101 10% $711 37% $545 41%
Grooming 1,648 (1)% 434 7% 346 8%
Health Care 1,809 4% 332 2% 218 (4)%
Fabric & Home Care 5,362 3% 910 (11)% 590 (11)%
Baby, Feminine & Family Care 4,464 (2)% 778 (13)% 485 (15)%
Corporate 119 (5)% (876) N/A (294) N/A
Total Company $16,503 3% $2,289 (22)% $1,890 (14)%
   
Three Months Ended June 30, 2018
(Percent Change vs. Year Ago) (1)
Volume with   Volume Excluding          
Acquisitions & Acquisitions & Foreign Net Sales
Divestitures   Divestitures   Exchange   Price   Mix  

Other (2)

  Growth
Beauty 4% 4% 3% —% 3% —% 10%
Grooming (1)% (1)% 2% (3)% 1% —% (1)%
Health Care 4% 4% 3% (2)% (1)% —% 4%
Fabric & Home Care 4% 5% 2% (3)% —% —% 3%
Baby, Feminine & Family Care —%   —%   1%   (1)%   (1)%   (1)%   (2)%
Total Company 2%   3%   2%   (2)%   —%   1%   3%
   
Twelve Months Ended June 30, 2018
  % Change   Earnings/(Loss) from   % Change   Net Earnings/(Loss)   % Change
Versus Year Continuing Operations Versus Year from Continuing Versus Year
Net Sales   Ago   Before Income Taxes   Ago   Operations   Ago
Beauty $12,406 9% $3,042 19% $2,320 21%
Grooming 6,551 (1)% 1,801 (9)% 1,432 (7)%
Health Care 7,857 5% 1,922 1% 1,283 —%
Fabric & Home Care 21,441 3% 4,191 (1)% 2,708 —%
Baby, Feminine & Family Care 18,080 (1)% 3,527 (9)% 2,251 (10)%
Corporate 497 (2)% (1,157) N/A (133) N/A
Total Company $66,832 3% $13,326 1% $9,861 (3)%
   
Twelve Months Ended June 30, 2018
(Percent Change vs. Year Ago) (1)
Volume with   Volume Excluding          
Acquisitions & Acquisitions & Foreign Net Sales
Divestitures   Divestitures   Exchange   Price   Mix  

Other (2)

  Growth
Beauty 2% 2% 2% —% 5% —% 9%
Grooming —% —% 3% (3)% (1)% —% (1)%
Health Care 3% 3% 3% (1)% —% —% 5%
Fabric & Home Care 3% 4% 1% (1)% —% —% 3%
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 applied.
(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.
 
 

THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

(Amounts in Millions Except Per Share Amounts)

Consolidated Statements of Cash Flows
   
Twelve Months Ended June 30
2018   2017
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR $ 5,569 $ 7,102
OPERATING ACTIVITIES
Net earnings 9,861 15,411
Depreciation and amortization 2,834 2,820
Loss on early extinguishment of debt 346 543
Share-based compensation expense 395 351
Deferred income taxes (1,844 ) (601 )
Gain on sale of assets (176 ) (5,490 )
Change in accounts receivable (177 ) (322 )
Change in inventories (188 ) 71
Change in accounts payable, accrued and other liabilities 1,385 (149 )
Change in other operating assets and liabilities 2,000 (43 )
Other 431   162  
TOTAL OPERATING ACTIVITIES 14,867   12,753  
INVESTING ACTIVITIES
Capital expenditures (3,717 ) (3,384 )
Proceeds from asset sales 269 571
Acquisitions, net of cash acquired (109 ) (16 )
Purchases of short-term investments (3,909 ) (4,843 )
Proceeds from sales and maturities of short-term investments 3,928 1,488
Pre-divestiture addition of restricted cash related to the Beauty
Brands divestiture
(874 )
Cash transferred at closing related to the Beauty Brands divestiture (475 )
Release of restricted cash upon closing of the Beauty Brands
divestiture
1,870
Change in other investments 27   (26 )
TOTAL INVESTING ACTIVITIES (3,511 ) (5,689 )
FINANCING ACTIVITIES
Dividends to shareholders (7,310 ) (7,236 )
Change in short-term debt (3,437 ) 2,727
Additions to long-term debt 5,072 3,603
Reductions of long-term debt (1) (2,873 ) (4,931 )
Treasury stock purchases (7,004 ) (5,204 )
Impact of stock options and other 1,177   2,473  
TOTAL FINANCING ACTIVITIES (14,375 ) (8,568 )
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS 19   (29 )
CHANGE IN CASH AND CASH EQUIVALENTS (3,000 ) (1,533 )
CASH AND CASH EQUIVALENTS, END OF YEAR $ 2,569   $ 5,569  
(1)   Includes costs related to early extinguishment of debt of $346 and
$543 in 2018 and 2017, respectively.
 
 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES

(Amounts in Millions Except Per Share Amounts)

Condensed Consolidated Balance Sheets
   
June 30, 2018 June 30, 2017
Cash and cash equivalents $ 2,569 $ 5,569
Available-for-sale investment securities 9,281 9,568
Accounts receivable 4,686 4,594
Inventories 4,738 4,624
Prepaid expenses and other current assets 2,046   2,139
TOTAL CURRENT ASSETS 23,320 26,494
PROPERTY, PLANT AND EQUIPMENT, NET 20,600 19,893
GOODWILL 45,175 44,699
TRADEMARKS AND OTHER INTANGIBLE ASSETS, NET 23,902 24,187
OTHER NONCURRENT ASSETS 5,313   5,133
TOTAL ASSETS $ 118,310   $ 120,406
 
Accounts payable $ 10,344 $ 9,632
Accrued and other liabilities 7,470 7,024
Debt due within one year 10,423   13,554
TOTAL CURRENT LIABILITIES 28,237 30,210
LONG-TERM DEBT 20,863 18,038
DEFERRED INCOME TAXES 6,163 8,126
OTHER NONCURRENT LIABILITIES 10,164   8,254
TOTAL LIABILITIES 65,427   64,628
TOTAL SHAREHOLDERS' EQUITY 52,883   55,778
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 118,310   $ 120,406

The Procter & Gamble Company

Exhibit 1: Non-GAAP Measures

In accordance with the SEC's Regulation G, the following provides
definitions of the non-GAAP measures used in Procter & Gamble's July 31,
2018 earnings release and the reconciliation to the most closely related
GAAP measure. We believe that these measures provide useful perspective
on underlying business trends (i.e., trends excluding non-recurring or
unusual items) and results and provide a supplemental measure of
year-on-year 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, the
Company began a $10 billion strategic productivity and cost savings
initiative that includes incremental restructuring activities. In 2017,
we communicated details of an additional multi-year productivity and
cost savings plan. 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 Impacts of the U.S. Tax Act:
In December 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the "U.S.
Tax Act"). This resulted in a net charge of $602 million for the fiscal
year 2018. 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: In
fiscal 2018 and 2017, the Company recorded after-tax charges of $243
million and $345 million, respectively, due to the early extinguishment
of certain long-term debt. These charges represent the difference
between the reacquisition price and the par value of the debt
extinguished.

We do not view the above 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 India
Goods & Services Tax implementation, acquisitions, divestitures 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.
This measure is also used when evaluating senior management in
determining their at-risk compensation.

Core operating profit margin and currency-neutral
Core operating profit margin
: Core operating profit margin is a
measure of the Company's operating margin adjusted for items as
indicated. Currency-neutral Core operating profit margin is a measure of
the Company's Core operating margin excluding the incremental current
year impact of foreign exchange. Management believes this non-GAAP
measure provides a supplemental perspective to the Company's operating
efficiency over time.

Core gross margin and currency-neutral Core gross
margin
: Core gross margin is a measure of the Company's gross
margin adjusted for items as indicated. Currency-neutral Core gross
margin is a measure of the Company's Core gross margin excluding the
incremental current year impact of foreign exchange. Management believes
this non-GAAP measure provides a supplemental perspective to the
Company's operating efficiency over time.

Core selling, general and administrative (SG&A)
expense as a percentage of net sales and currency-neutral Core SG&A
expense as a percentage of net sales
: Core SG&A expense as a
percentage of net sales is a measure of the Company's selling, general
and administrative expenses adjusted for items as indicated.
Currency-neutral Core SG&A expense as a percentage of net sales is a
measure of the Company's Core SG&A expense as a percentage of net sales
excluding the incremental current year impact of foreign exchange.
Management believes this non-GAAP measure provides a supplemental
perspective to the Company's operating efficiency over time.

Core EPS and currency-neutral 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. Currency-neutral Core EPS is a measure of the Company's Core
EPS excluding the incremental current year impact of foreign exchange.
Management views these non-GAAP measures as a useful supplemental
measure of Company performance over time. These measures are also used
when evaluating senior management in determining their at-risk
compensation.

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 the U.S.
Tax Act and the loss on early debt extinguishment. The underlying
charges are non-recurring and not considered indicative of underlying
earnings performance. The subsequent payments of the U.S. Tax Act charge
in future periods will not be considered indicative of the underlying
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. This measure is also used when evaluating senior
management in determining their at-risk compensation.

 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
 
Three Months Ended June 30, 2018
  AS     TRANSITIONAL      
REPORTED INCREMENTAL IMPACTS OF U.S. EARLY DEBT NON-GAAP
(GAAP)   RESTRUCTURING   TAX ACT   EXTINGUISHMENT   ROUNDING   (CORE)
COST OF PRODUCTS SOLD 9,029 (428 ) (1 ) 8,600
GROSS PROFIT 7,474 428 1 7,903
GROSS MARGIN 45.3 % 2.6 % % % % 47.9 %
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 4,797 (6 ) 2 4,793
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE AS A % OF NET SALES 29.1 % % % % (0.1 )% 29.0 %
OPERATING INCOME 2,677 434 (1 ) 3,110
OPERATING PROFIT MARGIN 16.2 % 2.6 % % % % 18.8 %
INCOME TAX ON CONTINUING OPERATIONS 399 66 48 103 1 617
NET EARNINGS ATTRIBUTABLE TO P&G 1,891 368 (48 ) 243 (1 ) 2,453
EFFECTIVE TAX RATE 17.4 % (0.4 )% 1.6 % 1.4 % 0.1 % 20.1 %
                   

Core EPS:

DILUTED NET EARNINGS PER COMMON SHARE* 0.72     0.14     (0.02 )   0.09     0.01     0.94  
CURRENCY IMPACT TO CORE EARNINGS 0.01
CURRENCY-NEUTRAL CORE EPS   0.95  
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,620.9
COMMON STOCK OUTSTANDING AS OF JUNE 30, 2018 2,498.1

* Diluted net earnings per share are calculated on Net earnings
attributable to Procter & Gamble.

           
CHANGE VERSUS YEAR AGO              
CORE GROSS MARGIN (140 ) BPS
CORE SELLING GENERAL & ADMINISTRATIVE EXPENSE AS A % OF NET SALES (120 ) BPS
CORE OPERATING PROFIT MARGIN (30 ) BPS
CORE EPS 11 %
CURRENCY-NEUTRAL CORE EPS 12 %
 
   
Three Months Ended
June 30
2018   2017
Operating Profit Margin 16.2%   18.3%
Incremental Restructuring 2.6%   0.8%
Core Operating Profit Margin 18.8% 19.1%
Basis point change vs. prior year Core margin (30)
Currency Impact to Margin 0.6%
Currency-Neutral Core Operating Profit Margin 19.4%
Basis point change vs. prior year Core margin 30
 
 
Three Months Ended
June 30
2018   2017
Gross Margin 45.3% 48.4%
Incremental Restructuring 2.6%   0.9%
Core Gross Margin 47.9% 49.3%
Basis point change vs. prior year Core margin (140)
Currency Impact to Margin 0.4%
Currency-Neutral Core Gross Margin 48.3%
Basis point change vs. prior year Core margin (100)
 
 
Three Months Ended
June 30
2018   2017
SG&A Margin 29.1% 30.0%
Incremental Restructuring —% 0.1%
Rounding (0.1)%   0.1%
Core SG&A Margin 29.0% 30.2%
Basis points change vs. prior period (120)
Currency Impact to Margin (0.1)%
Currency-Neutral Core SG&A Margin 28.9%
Basis point change vs. prior year Core margin (130)
 
 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
Three Months Ended June 30, 2017
  AS REPORTED   INCREMENTAL    
(GAAP) RESTRUCTURING ROUNDING NON-GAAP (CORE)
COST OF PRODUCTS SOLD 8,299 (146 ) (1 ) 8,152
GROSS PROFIT 7,780 146 1 7,927
GROSS MARGIN 48.4 % 0.9 % % 49.3 %
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 4,831 18 1 4,850
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE AS A % OF NET SALES 30.0 % 0.1 % 0.1 % 30.2 %
OPERATING INCOME 2,949 128 3,077
OPERATING PROFIT MARGIN 18.3 % 0.8 % % 19.1 %
INCOME TAX ON CONTINUING OPERATIONS 725 63 1 789
NET EARNINGS ATTRIBUTABLE TO P&G 2,215 65 (1 ) 2,279
EFFECTIVE TAX RATE 24.8 % 1.0 % % 25.8 %
            Core EPS:
DILUTED NET EARNINGS PER COMMON SHARE* 0.82     0.02     0.01     0.85  
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,695.6

* 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
Twelve Months Ended June 30, 2018
  AS     TRANSITIONAL      
REPORTED INCREMENTAL IMPACTS OF THE EARLY DEBT NON-GAAP
(GAAP) RESTRUCTURING U.S. TAX ACT EXTINGUISHMENT ROUNDING (CORE)
COST OF PRODUCTS SOLD 34,268 (724 ) (1 ) 33,543
GROSS PROFIT 32,564 724 1 33,289

GROSS MARGIN

48.7

%

1.1

%

%

%

%

49.8

%

SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 18,853 (15 )

 

1 18,839
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE AS A % OF NET SALES 28.2 % % %

%

% 28.2 %
OPERATING INCOME 13,711 739 14,450
OPERATING PROFIT MARGIN 20.5 % 1.1 % % % % 21.6 %
INCOME TAX ON CONTINUING OPERATIONS 3,465 129 (602 ) 103 3,095
NET EARNINGS ATTRIBUTABLE TO P&G 9,750 610 602 243 (1 ) 11,204
EFFECTIVE TAX RATE 26.0 % (0.4 )% (4.2 )% 0.1 % % 21.5 %
                    Core EPS:
DILUTED NET EARNINGS PER COMMON SHARE* 3.67 0.23 0.23 0.09 4.22  
CURRENCY IMPACT TO CORE EARNINGS (0.05 )
CURRENCY-NEUTRAL CORE EPS   4.17  
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,656.7
COMMON STOCK OUTSTANDING AS OF JUNE 30, 2018 2,498.1

* Diluted net earnings per share are calculated on Net earnings
attributable to Procter & Gamble.

                   
CHANGE VERSUS YEAR AGO                    
CORE EPS 8 %
CURRENCY NEUTRAL CORE EPS 6 %
 
 
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Reconciliation of Non-GAAP Measures
Twelve Months Ended June 30, 2017
  AS REPORTED   DISCONTINUED   INCREMENTAL   EARLY DEBT     NON-GAAP
(GAAP) OPERATIONS RESTRUCTURING EXTINGUISHMENT ROUNDING (CORE)
COST OF PRODUCTS SOLD 32,535 (498 ) 32,037
GROSS PROFIT 32,523 498 33,021
GROSS MARGIN 50.0 % % 0.8 % % % 50.8 %
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSE 18,568 99 18,667
SELLING, GENERAL AND ADMINISTRATIVE EXPENSE AS A % OF NET SALES 28.5 % % 0.2 % % % 28.7 %
OPERATING INCOME 13,955 399 14,354
OPERATING PROFIT MARGIN 21.5 % % 0.6 % % % 22.1 %
INCOME TAX ON CONTINUING OPERATIONS 3,063 120 198 3,381
NET EARNINGS ATTRIBUTABLE TO P&G 15,326 (5,217 ) 279 345 (1 ) 10,732
EFFECTIVE TAX RATE 23.1 % % 0.2 % 0.5 % % 23.8 %
                    Core EPS:
DILUTED NET EARNINGS PER COMMON SHARE* 5.59     (1.90 )   0.10     0.13         3.92  
DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 2,740.4
* Diluted net earnings per share are calculated on Net earnings
attributable to Procter & Gamble.
 

Organic sales growth:

The reconciliation of reported sales growth to organic sales is as
follows:

                 
   

Foreign

 

Acquisition &

 

Net Sales

Exchange

Divestiture

Organic Sales

April - June 2018

Growth

Impact

Impact/Other*

Growth

Beauty 10% (3)% —% 7%
Grooming (1)% (2)% —% (3)%
Health Care 4% (3)% —% 1%
Fabric & Home Care 3% (2)% 1% 2%
Baby, Feminine & Family Care   (2)%   (1)%   1%   (2)%
Total Company   3%   (2)%   —%   1%
 
                 

Foreign

Acquisition &

 

Net Sales

Exchange

Divestiture

Organic Sales

FY 2018

Growth

Impact

Impact/Other*

Growth

Total Company   3%   (2)%

 

—%

 

1%

             
   

Combined Foreign Exchange &

 

Organic Sales

Total Company

Net Sales Growth

Acquisition/Divestiture Impact*

Growth

FY 2019
(Estimate)   0% to +1%   About (2%)   +2% to +3%
*   Acquisition & Divestiture Impact/Other also includes the mix impacts
of acquisitions and divestitures, the impact of India Goods and
Services Tax implementation in FY 2018 and rounding impacts
necessary to reconcile net sales to organic sales.
 

Core EPS and currency-neutral Core EPS:

             
 

Diluted EPS

   

Core EPS

Total Company

Growth

Impact of Change in Non-Core Items*

Growth

FY 2019
(Estimate)   +16% to +23%   (13%) to (15%)   +3% to +8%
*   Includes impact of loss on early extinguishment of debt and impact
of U.S. Tax Act in 2018, year over year changes in incremental
non-core restructuring charges and gain on PGT Health Care joint
venture dissolution in 2019.
 

Free cash flow (dollars in millions):

 

Three Months Ended June 30, 2018

Operating Cash Flow

     

Capital Spending

     

Free Cash Flow

$4,199   $(907)   $3,292
 
Twelve Months Ended June 30, 2018

Operating Cash Flow

     

Capital Spending

     

Free Cash Flow

$14,867   $(3,717)   $11,150
 

Adjusted free cash flow productivity (dollars in
millions)
:

 
Three Months Ended June 30, 2018
       

Adjusted Free

Adjustments to Net

Adjusted Net

Cash Flow

Net Earnings

Earnings (1)

Earnings

Free Cash Flow

Productivity

$1,890   $195   $2,085   $3,292   158%
 
Twelve Months Ended June 30, 2018
       

Adjusted Free

Adjustments to Net

Adjusted Net

Cash Flow

Net Earnings

Earnings (1)

Earnings

Free Cash Flow

Productivity

$9,861   $845   $10,706   $11,150   104%
(1)   Adjustments to Net Earnings relate to the transitional impact of the
U.S. Tax Act and the loss on early debt extinguishment.

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