Market Overview

P&G Announces Fourth Quarter and Fiscal Year 2019 Results

Share:

Q4'19 GAAP: Net Sales +4%; Diluted Net Loss per Share $2.12, -394%

Q4'19 CORE: Organic Sales +7%; Core EPS $1.10, +17%; Currency-Neutral Core EPS +26%

FY '19 GAAP: Net Sales +1%; Diluted Net EPS $1.43, -61%

FY '19 CORE: Organic Sales +5%; Core EPS $4.52, +7%; Currency-Neutral Core EPS +15%

The Procter & Gamble Company (NYSE:PG) reported fourth quarter fiscal year 2019 net sales of $17.1 billion, an increase of four percent versus the prior year. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic sales increased seven percent, driven by a three percent increase in organic volume. Diluted net loss per share was $2.12, down $2.84 versus the prior year due primarily to one-time, non-cash accounting adjustments to the carrying values of the Gillette Shave Care business. Core earnings per share increased 17% to $1.10 driven by strong organic sales growth and core operating margin expansion. Currency-neutral core EPS increased 26% versus the prior year. The Company generated $4.2 billion of operating cash flow in the quarter, with adjusted free cash flow productivity of 122%.

For fiscal year 2019, the Company reported net sales of $67.7 billion, an increase of one percent versus the prior year. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic sales increased five percent, driven by a two percent increase in organic volume. Diluted net earnings per share were $1.43, a decrease of 61% versus the prior year due primarily to the accounting adjustments to carrying values of the Gillette Shave Care business. Core earnings per share increased seven percent to $4.52. Currency-neutral core EPS increased 15%. The Company generated $15.2 billion of operating cash flow in fiscal 2019 with adjusted free cash flow productivity of 105%. P&G returned $12.5 billion of value to shareholders in fiscal 2019 through $7.5 billion of dividend payments and $5.0 billion of direct share repurchases.

"We met or exceeded each of our going-in core targets for sales, profit and cash in fiscal 2019," said David Taylor, Chairman, President and Chief Executive Officer. "We built sales, market share and profit margin momentum throughout the year, ending with our strongest quarter of organic sales growth in well over a decade. Looking ahead, we will continue to focus on superiority, productivity, constructive disruption and improving P&G's organization and culture to deliver sustainable, balanced top-line and bottom-line growth along with strong cash generation in a challenging competitive and macroeconomic environment."

April - June 2019 Quarter Discussion

Net sales in the fourth quarter of fiscal year 2019 were $17.1 billion, up four percent versus the prior year. Unfavorable foreign exchange was a four percent hurt to sales for the quarter. Excluding the impacts of foreign exchange, acquisitions and divestitures, organic sales increased seven percent driven by a three percent increase in organic shipment volume. Increased pricing added three percentage points to organic sales. Positive mix impact was a two percent help to organic sales due to strong growth in developed markets and disproportionate organic growth of the premium SK-II brand and the Personal Health Care category.

April - June 2019

Net Sales Drivers (1)

Volume

Foreign

Exchange

Price

Mix

Other (2)

Net Sales

Organic

Volume

Organic

Sales

Beauty

2%

(5)%

2%

5%

(1)%

3%

1%

8%

Grooming

(1)%

(6)%

3%

1%

—%

(3)%

(1)%

4%

Health Care

8%

(4)%

3%

4%

2%

13%

3%

10%

Fabric & Home Care

5%

(4)%

4%

1%

(1)%

5%

5%

10%

Baby, Feminine & Family Care

1%

(4)%

3%

1%

—%

1%

1%

5%

Total P&G

3%

(4)%

3%

2%

—%

4%

3%

7%

(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 the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile volume to net sales

  • Beauty segment organic sales increased eight percent versus year ago. Skin and Personal Care organic sales increased mid-teens driven by market growth, innovation, positive product mix from the disproportionate growth of the super-premium SK-II brand and Olay Skin Care and increased pricing. Hair Care organic sales increased low single digits due to innovation and devaluation-driven price increases.
  • Grooming segment organic sales increased four percent. Shave Care organic sales increased low single digits as positive geographic mix help from the growth of developed regions and the benefit of devaluation-driven price increases were partially offset by related unit volume declines and market contraction in certain regions. Appliances organic sales increased double digits due to premium innovation, positive mix help from the disproportionate growth of developed regions and increased pricing.
  • Health Care segment organic sales increased ten percent. Oral Care organic sales increased high single digits driven by premium innovation, positive mix from the disproportionate growth of developed regions and premium power brush and paste products and increased pricing. Personal Health Care organic sales increased mid-teens due to innovation, a late season increase in cough and cold incidents and favorable mix due to the disproportionate growth of developed regions and respiratory products which have higher than category-average selling prices.
  • Fabric and Home Care segment organic sales increased ten percent. Fabric Care organic sales increased double digits driven by innovation, market growth, devaluation-related pricing and positive mix due to the disproportionate growth of premium products. Home Care organic sales increased double digits driven by innovation and devaluation-related price increases.
  • Baby, Feminine and Family Care segment organic sales increased five percent. Baby Care organic sales increased low single digits due to devaluation-related price increases and positive mix from the disproportionate growth of premium products, partially offset by reduced volumes due to increased pricing, competitive activity and category contraction in certain markets. Feminine Care organic sales increased high single digits driven by innovation, favorable mix due to the disproportionate growth of premium products and devaluation-related price increases. Family Care organic sales increased mid-single digits due to innovation and increased pricing, partially offset by negative mix impact from the disproportionate growth of the club channel.

Diluted net loss per share was $2.12, significantly below prior year due to the one-time, non-cash charge to adjust the carrying value of Gillette Shave Care goodwill and trade name intangible assets. This impact was partially offset by the charges for early debt extinguishment in the base period. Core earnings per share were $1.10, a 17% increase versus the prior year, driven primarily by the increase in net sales, increased core operating margins and a lower effective tax rate. Currency-neutral core earnings per share increased 26% for the quarter.

Reported gross margin increased 270 basis points, including 150 basis points of lower non-core restructuring charges versus the prior year. Core gross margin increased 120 basis points, including 40 basis points of negative foreign exchange impacts. On a currency-neutral basis, core gross margin increased 160 basis points. 200 basis points of productivity savings and 160 basis points of pricing benefit were partially offset by 60 basis points of commodity cost increases, 20 basis points of innovation reinvestments and 120 basis points of unfavorable product mix and other impacts.

Reported selling, general and administrative expense (SG&A) as a percentage of sales decreased 10 basis points versus the prior year. Core SG&A as a percentage of sales decreased approximately 20 basis points versus the prior year, including approximately 30 basis points of negative foreign exchange impacts. On a currency-neutral basis, core SG&A as a percentage of sales decreased approximately 50 basis points. 190 basis points of sales leverage benefit, 140 basis points of savings from marketing expenses and overheads and 100 basis points of gain from the sale of real estate in Boston were partially offset by 170 basis points of marketing reinvestments, 180 basis points from capability investments primarily in sales and research and development, higher compensation costs driven by above-target results and general salary inflation, and 30 basis points from costs related to the Merck OTC business and other impacts.

Reported operating profit margin was negative 30.4% in the period due to the current period charges for the Gillette Shave Care carrying value adjustments. Excluding this adjustment and 150 basis points of help from lower non-core restructuring charges, core operating margin increased 130 basis points to 19.6%, including approximately 80 basis points of negative foreign exchange impacts. On a currency-neutral basis, core operating margin increased 210 basis points including total productivity cost savings of 340 basis points for the quarter.

Fiscal Year 2019 Results

Fiscal year 2019 net sales were $67.7 billion, an increase of one percent versus the prior year. Excluding the impact of foreign exchange, acquisitions and divestitures, organic sales increased five percent on a two percent increase in organic volume. Diluted net earnings per share were $1.43, a decrease of 61% versus the prior year, primarily due to the charges to reduce the Gillette Shave Care carrying value in fiscal 2019. This impact was partially offset by early debt extinguishment and U.S. tax reform charges in the base period. Core earnings per share were $4.52, an increase of seven percent driven by the increase in net sales and lower effective tax rates. Excluding the impact of foreign currency, currency-neutral core earnings per share increased 15%.

Goodwill and Intangibles Impairment

During the April-June 2019 quarter, the Company took a non-cash, after-tax charge of $8 billion to adjust U.S. Dollar carrying values of goodwill and trade name intangible assets in the Gillette Shave Care business. The charge is a non-core EPS adjustment of $3.02 in the quarter and $3.03 in fiscal year 2019. (Refer to Exhibit 1: Non-GAAP Measures for the full reconciliation of GAAP to Core EPS results for the quarter and fiscal year.) The impairment was due primarily to significant currency devaluations that have occurred since carrying values were initially established nearly 14 years ago in 2005. The Shave Care business has also been negatively impacted by market contraction of blades and razors, primarily in developed markets, due to lower shaving frequency, and competitive activities. P&G said the Shave Care business has consistently generated significant earnings and cash flow and continues to be a strategic business with attractive earnings, cash flow and growth opportunities.

Fiscal Year 2020 Guidance

The Company said it expects fiscal year 2020 all-in sales growth in the range of three to four percent versus the prior fiscal year. The estimate includes a modest negative impact from foreign exchange, which is largely offset by a positive net impact from acquisitions and divestitures. P&G expects organic sales growth in the range of three to four percent.

The Company is guiding to a GAAP diluted net earnings per share growth in the range of 222% to 240%, noting that the comparison period is significantly depressed by the Gillette Shave Care carrying value adjustment discussed above. Core earnings per share are expected to increase four to nine percent (mid-to-high single digits) versus fiscal 2019 Core EPS of $4.52. P&G said its current outlook for commodities, foreign exchange, transportation and tariffs is expected to provide a modest net benefit to earnings growth in fiscal year 2020.

The Company is not able to reconcile its forward-looking non-GAAP effective tax rate and non-GAAP cash flow productivity measures without unreasonable efforts because the Company cannot predict the timing and amounts of discrete items, such as acquisitions, divestitures, or impairments, which could significantly impact GAAP results.

P&G said its core effective tax rate in fiscal 2020 should be in the range of 17% to 18%.

P&G expects adjusted free cash flow productivity of 90% for the fiscal year.

Capital spending is estimated to be in the range of 4.5% to 5% of net sales.

P&G estimates it will pay more than $7.5 billion in dividends and repurchase $6 billion to $8 billion of common shares in fiscal 2020.

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 repurch

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