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What Procter & Gamble Wants You to Know

By Demitri Kalogeropoulos – May 1, 2019 at 8:15AM

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Why management boosted its growth outlook for the second straight quarter.

Heading into its third-quarter earnings report, Procter & Gamble's (PG -0.69%) full-year sales guidance range imagined widely different operating years. At the low end, the 2% predicted increase would mark no improvement over the prior year. The top end of the range, on the other hand, would constitute P&G's fastest annual expansion since before 2014, when it started its transformation by slashing 100 brands from its portfolio.

P&G resolved that uncertainty in dramatic fashion this week when management erased the low end of its sales outlook range and predicted revenue would in fact rise by a market-thumping 4% this fiscal year. In a conference call with Wall Street analysts, CFO Jon Moeller explained the reasoning behind that upgrade while adding more context for shareholders on the operating and financial challenges ahead. Let's take a look at a few highlights from that presentation.

A baby has its diaper changed.

Image source: Getty Images.

Broad-based wins with a few stumbles

We've made several important strategic choices, which are enabling the progress we're making. One was to focus and strengthen our portfolio in daily use categories where performance drives brand choice, and [in] categories where we occupy a number one or two position, which have historically grown faster ... and are more profitable. This choice is clearly paying out. -- Moeller

P&G's strengthening expansion pace is evident across a few key metrics. Its 5% organic sales increase marked an acceleration from the 4% rate it achieved in each of the last two quarters and put further distance between it and Kimberly-Clark (KMB -1.42%).

Management highlighted the broad-based nature of the growth, too, pointing out that gains occurred in each of its five geographic reasons, including in the U.S., and spanned 8 of its 10 top product categories. The two laggards were the ultra-competitive shaving care and baby care segments. "In total, though," Moeller summarized, "consumption, volume, sales, and [market] share each progressed nicely."

Cash returns are a priority

This will be another year of strong cash return to shareholders. We expect to pay over $7 billion in dividends and repurchase approximately $5 billion of shares in fiscal 2018. -- Moeller

The consumer products giant generated $3.5 billion of operating cash during the quarter and was able to convert 100% of that figure -- after subtracting capital spending -- into free cash flow that's available for dividends and stock repurchases. The success led executives to lift their cash productivity target for the year, but management took the opportunity to step back and frame P&G's cash returns in a broader picture.

The company has returned $67 billion to shareholders over the past 10 years, putting it in the top 2% of all public companies by that metric. Executives plan to continue sending a bit more than 100% of reported earnings back to shareholders in a return metric that they believe is "the most important and enduring measure of a successful enterprise."

A mixed outlook

Moving to guidance, I know we'll all hate to see it go, but with three strong quarters on the books averaging over 4% organic sales growth, we must regretfully abandon the low 2% end of our organic sales guidance range, increasing our organic sales growth outlook for the year to a solid 4%. -- Moeller

Moeller joked that P&G is "regretfully" retiring the low end of its sales growth outlook to now predict sales gains of 4% for the full year, and that light-hearted jab highlights the fact that the company is on far stronger sales footing than investors have seen in years. That said, executives noted that many challenges remain for the year's final quarter and for the upcoming new fiscal year, including sluggish industry growth and aggressive competition.

Thus, while not issuing formal guidance for fiscal 2020, P&G cautioned that it might be hard to maintain its accelerating momentum. That's why investors should expect to see another wide operating forecast range when the company closes the year in late July.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool is short shares of Kimberly Clark and Procter & Gamble. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Procter & Gamble Stock Quote
Procter & Gamble
PG
$129.20 (-0.69%) $0.90
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Kimberly-Clark
KMB
$114.58 (-1.42%) $-1.65

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