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Procter & Gamble Breaks Down an Unusually Good Quarter

By Demitri Kalogeropoulos – Oct 27, 2020 at 8:05AM

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Sales gains accelerated to kick off P&G's fiscal 2021.

Procter & Gamble (PG -0.98%) is feeling more optimistic about its growth prospects. The consumer staples giant recently announced surprisingly strong fiscal first-quarter results across key metrics like market share, profitability, and cash flow. Management responded by boosting its outlook for 2021, including for cash returns to shareholders.

In a conference call with Wall Street analysts, CFO Jon Moeller and his team broke down that quick start to the year while detailing a few risks to their brightening outlook. Let's look at some highlights from that discussion.

Broad-based growth

We accelerated to 9% this quarter against a strong 7% base period comparison. Strong momentum reflecting the underlying strength of our brands and the appropriateness of the strategy, which is driving our business pre, during and at some point post COVID.

-- Moeller

Sales growth sped up to 9% in Q1 compared with 6% in the prior quarter and 7% in the year-ago period. P&G said the gains showed up across nearly all of its key product niches and markets. Organic sales jumped 16% in the U.S. and rose 12% in China, for example.

Nine of its 10 main categories grew, led by a 30% spike in home cleaning and maintenance supplies like dish detergent and paper towels. The baby care segment, home to Pampers diapers, was the only one to shrink this quarter.

A man cleaning his kitchen counter.

Image source: Getty Images.

P&G estimates that overall market share edged higher despite that challenge, and sales were especially strong in products that saw significant innovative launches. "We've raised the bar on all aspects of superiority, product package, [marketing], retail execution, and value," Moeller said.

Stronger finances

We've built strong momentum heading into the COVID crisis and have been able to maintain this through the most recent quarter, supporting the guidance increase for all key financial metrics, organic sales, core earnings per share, cash productivity and cash return.

-- Moeller

Several positive trends combined to push core earnings per share higher by 22%. In addition to the robust sales growth, these factors include rising prices, reduced expenses, and a shift toward new high-margin products. P&G's operating margin jumped higher by 3 percentage points to 27.3% of sales.

Cash flow was supercharged by these gains. P&G turned 95% of net earnings into free cash flow, in fact, with adjusted free cash flow landing at $4.1 billion. The company returned essentially all of this excess cash to investors, split between $2 billion in dividends and $2 billion in stock buybacks.

Looking forward

The reality is that COVID cases are increasing in many parts of the world without the resources, infrastructure or, in some cases, the will to effectively manage it. We'll likely be operating without a broadly available vaccine or advanced therapeutic through fiscal '21. This could prompt tighter containment policies and dramatically reduce mobility, which would affect employment and overall incomes, potentially leading to a deeper and longer recession across large parts of the world.

-- Moeller

Management cautioned investors about major risks. While executives didn't highlight potential competitive threats as they have in recent calls, they were careful to note that recessions could grip many key markets, including the U.S., through 2021.

Through early fiscal Q2, though, growth and efficiency gains are running higher than P&G initially predicted, and so it boosted its outlook for sales and earnings. The company also sees room to return more cash to shareholders, mainly through extra stock buybacks (rather than dividends) that give it flexibility to scale back if more disruptions hit the business. "Against this challenging backdrop," Moeller said, "we're still holding ourselves to an expectation of meaningful growth ... and expect to be highly cash generative."

Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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