Consumer goods giant Procter & Gamble (NYSE:PG) recently posted surprisingly weak earnings results as foreign currency moves sliced into profits. Meanwhile, the company continues to struggle with soft demand around the world.
After the earnings announcement, Chief Financial Officer Jon Moeller held a conference call with analysts to discuss the results. Here are five key points raised in that call.
Quantifying the exchange pinch
Moeller walked Wall Street analysts through an example of the currency swings that CEO A.G. Lafley, earlier in the call, described as "unprecedented." For example , a 54% depreciation of the Russian ruble during the quarter hit P&G in three painful ways: input costs, working capital balances, and balance sheet holdings. Together, these accounted for a whopping $550 million loss in just the last two quarters.
While P&G can adjust to rising input costs with price changes of its own, that won't cover the entire shortfall. As a consequence, management expects foreign exchange to drag earnings lower this year by a total of $1.4 billion. "This is the most significant fiscal year currency impact we have ever incurred," Moeller said.
Meeting growth targets
Against this [challenging] backdrop, we were able to deliver organic top line growth and currency neutral core earnings growth that were in line with our ... expectations. Organic sales grew 2% in four of five business segments: baby, feminine and family care, grooming, healthcare, and fabric and home care reported growth versus the prior year.
The 2% companywide organic sales growth figure was the same as in the prior two quarters. However, P&G only improved sales volume in one category: fabric and home care. All the other divisions reported lower or flat sales volume, indicating soft demand across the board. If there's a silver lining to those weak volume numbers, though, it's that they don't yet reflect recent price increases. Also, there was a slight pickup in the U.S. market, which will be key to any global rebound for P&G.
Cost reductions are paying off
Productivity savings and cost of goods sold and SG&A totaled 330 basis points as we continue to meet or beat all of our productivity objectives.
P&G made real progress in reducing expenses in the quarter. In fact, productivity savings added 2 percentage points to the company's gross profit margin. However, negative factors including foreign currency moves zeroed out that gain, and then some. Still, the company is ahead of its main goal of slicing $10 billion out of its cost structure, and that progress should eventually help profitability growth return.
Cash growth is strong
It was a strong cash quarter, we generated $3.4 billion in operating cash flow and $3 billion in adjusted free cash flow with 95% adjusted free cash flow productivity.
P&G's free cash flow almost doubled from the prior year, helped along by improvements on payables and supply chain management. That success allowed management to send cash back to shareholders in dividends and stock repurchases. P&G spent $3.7 billion on capital returns, split evenly between the two methods.
Management has favored stock buybacks in this fiscal year, spending $4.3 billion on repurchases and $3.6 billion on dividends so far. Given the solid improvement in cash flow, investors have no reason to doubt P&G can continue returning cash to them at a healthy pace.
Building a simpler business
We will become a simpler, more focused company of 70 to 80 category-leading competitively advantaged brands organized into about a dozen business units in four industry based sectors. ... We will create a faster growing, more profitable company that is far simpler to operate.
In keeping with its brand consolidation strategy, P&G plans to close the sale of the Duracell battery business in the second half of the year. That move will bring to 40 the total number of brands that have been kicked out of the operation so far. Within the 75 brands that will be left, management is targeting even more simplification. Moeller described a "more efficient" product line with significantly fewer products within each brand category.
In the meantime, P&G could see improving results in the second half of the year as pricing changes kick in and as the U.S. market strengthens. However, currency risks and a weak macro environment seems likely to keep a lid on P&G's growth in the short term.