The Procter & Gamble Co. (NYSE:PG) reported third quarter fiscal year 2014 core earnings per share of $1.04, an increase of 5 percent versus the prior year. On a currency-neutral basis, core earnings per share increased 17 percent for the quarter. Diluted net earnings per share were $0.90, an increase of 2 percent. P&G delivered organic sales growth of 3 percent for the quarter. Net sales were $20.6 billion, unchanged versus the prior year period, including a negative 3 percentage point impact from foreign exchange.
“P&G’s third quarter results came in as we had expected. This leaves us on track to deliver our top- and bottom-line growth objectives for the fiscal year,” said Chairman, President, and Chief Executive Officer A.G. Lafley. “We’re operating in a slow-growth, highly competitive environment, which places even greater importance on strong innovation and productivity improvement. We’re delivering meaningful product innovations that are attracting more consumers to our brands. We’re making good progress on our productivity plans, with cost savings and enrollment reductions ahead of going-in targets for the year. We’re confident that the cumulative benefits from these innovations and productivity improvements will lead, over time, to improved value creation for consumers, customers and shareholders.”
January – March quarter discussion
All-in net sales were unchanged versus the prior year at $20.6 billion in the January – March quarter, including a negative 3 percentage point impact from foreign exchange. Organic sales grew 3 percent. Organic sales were at or above year ago levels in each reporting segment. Volume grew 3 percent. Pricing increased sales by 1 percent with higher pricing in each reporting segment, and unfavorable geographic and product mix decreased sales by 1 percent.
- Beauty segment organic sales increased 2 percent from innovation in Hair Care, Deodorants, and Personal Cleansing, and market growth. This was partially offset by a sales decrease in Salon Professional and Skin Care primarily in Asia.
- Grooming segment organic sales increased 1 percent due to higher pricing and innovation on Blades & Razors and Appliances, which was partially offset by geographic and product mix and market contraction in developed regions.
- Health Care segment organic sales were unchanged. Growth in Oral Care sales from innovation, geographic market expansion and market growth was offset by decreases in Personal Health Care due to lower cold and flu incidents and in Pet Care primarily behind the continuing impacts from product recalls in the previous fiscal year.
- Fabric Care and Home Care segment organic sales increased 6 percent with growth across each business. Fabric Care was up behind new innovation, developing market growth, higher pricing and initial innovation shipments. Home Care and Personal Power sales grew behind innovation and market expansion in developing regions, and Personal Power and Professional increased sales due to distribution expansion.
- Baby, Feminine and Family Care segment organic sales increased 2 percent. Baby Care sales were up behind product innovation and market growth in the developing regions. Feminine Care sales grew due to developing market growth and value interventions in North America. Family Care sales declined due to competitive promotional activity.
Core earnings per share, which exclude non-core restructuring charges and balance sheet revaluation charges resulting from foreign exchange policy changes in Venezuela, were $1.04, an increase of 5 percent versus the prior year. The core effective tax rate decreased 250 basis points versus the prior year, providing a $0.03 earnings per share benefit. Other foreign exchange impacts reduced earnings by $0.12 per share. Core earnings per share were up 17 percent on a currency-neutral basis. Diluted net earnings per share were $0.90, an increase of 2 percent versus the prior year.
Operating profit margin increased 30 basis points driven by a reduction in selling, general and administrative (SG&A) expense, partially offset by a lower gross margin. Gross margin decreased 140 basis points due to 150 basis points of geographic and product mix, 100 basis points from foreign exchange, and higher commodity costs, which were partially offset by manufacturing savings of approximately 200 basis points, volume leverage and pricing. SG&A as a percentage of sales decreased 170 basis points driven by 130 basis points from a combination of marketing efficiencies and overhead productivity savings.
Operating cash flow was $4.1 billion for the third quarter. The Company repurchased $1.5 billion of common stock and returned $1.7 billion of cash to shareholders as dividends. Earlier this month, the Company announced an increase to the quarterly dividend of 7 percent. P&G has been paying a dividend for 124 consecutive years since its incorporation in 1890. This is the 58th consecutive year that the Company has increased its dividend.
Fiscal year 2014 guidance
The Company continues to expect organic sales growth of 3 percent to 4 percent. All-in sales growth is expected to be approximately 1 percent, including a negative foreign exchange impact of 2 to 3 percent. Core earnings per share are expected to grow 3 percent to 5 percent for the fiscal year, and reported earnings per share are expected to grow in the range of 1 percent to 4 percent.
Pet Care divestiture
As announced earlier this month, Mars Inc. has agreed to buy a significant portion of P&G’s global Pet Care business. The transaction is expected to be completed in the second half of calendar 2014, subject to regulatory approvals. P&G said that it intends to sell the remaining portion of its Pet Care business in a separate transaction.
As a result of P&G’s decision to exit the Pet Care business, the Company said that it will begin reporting results of the global Pet Care business as discontinued operations effective with the April-June 2014 quarter. Historical quarterly and fiscal year results will be restated on the same basis. Following is a table that shows the expected impact to quarterly Core EPS results from this change for the Pet Care business.