Procter & Gamble (NYSE:PG) this week posted earnings results for its fiscal third quarter. The consumer goods giant met Wall Street's profit expectations. However, sales were weaker than expected and P&G lowered its growth outlook for the full year.
After the announcement, Chief Financial Officer Jon Moeller held a conference call with investors to provided more detail on the results. Here are five highlights from that discussion (all quotes are Moeller's).
1. Sales growth wasn't bad (or good)
January to March was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility.
There's no question that this was a tough quarter for P&G, which is why Moeller opened the conference call with the above quote. Overall organic sales growth came in at 1%, compared to 2% in each of the last two quarters, and 3% at the end of he prior fiscal year.
However, things aren't as bad as the deterioration in that headline number suggests. A tax fluke in Japan caused a 22% sales spike in the prior year period, which dragged down overall comps by about half a percent. Absent that one-time situation, P&G's growth would have held steady at about 2%.
2. Costly exchange rate swings
Sales were down 8% versus the prior year due to an eight point headwind from foreign exchange.
Currency devaluations against the U.S. dollar blew a hole in P&G's books again this quarter. Besides lopping 8 percentage points from sales, the foreign currency issues removed $530 million out of profits.
The total damage so far is $1.2 billion, which management expects to grow to $1.5 billion in fiscal Q4. Stripping out the effect of currency swings, P&G's earnings would have risen 10% in the third quarter instead of the 8% drop the company just reported.
3. Huge productivity gains
We're driving cost savings well above the original target run rate of $1.2 billion per year, with $1.6 billion of savings this fiscal year.
While exchange rates are outside of P&G's control, management does have the ability to lower costs. And the company is making huge strides there, reaping savings on everything from manufacturing to better-targeted advertising.
Productivity savings are running 33% above P&G's initial goal, which benefited profit margin to the tune of 4 percentage points in the quarter. Yes, almost all of that gain was offset by currencies. Still, the lower cost structure should boost results long after foreign exchange rate changes calm down.
4. Creating a simpler company
We will eliminate 60% of the brands and the complexity they create, while retaining about 85% of sales and 95% of before tax profit. That's a good trade.
P&G is 40% through with its brand-shedding strategy, having recently exited the pet care, battery, and bleach businesses. Management estimates there are about 60 brands left to divest between now and the end of fiscal 2016.
The final result should be a company that's easier to manage and quicker to respond to changing customer needs. P&G should also be more profitable as it focuses on blockbuster brands such as Pampers and Tide, which dominate their respective markets and have extremely attractive growth outlooks.
5. Lower, but still strong, cash returns
We plan to return cash to shareholders through dividend payments of more than $7 billion and share repurchase of approximately $5 billion.
Despite the historic foreign currency-fueled earnings pinch (reported earnings are expected to fall 22% this fiscal year), P&G will return a huge amount of cash to shareholders in 2015. Dividend payments should rise modestly from last year's $4.9 billion. Meanwhile, spending on share buybacks will be about $1 billion below 2014's $6 billion outlay.
P&G can afford those hefty returns thanks to its impressive cash generation. Free cash flow is up 19% through the last three quarters. And cash flow productivity is running at 117%, compared to last year's 86% and management's target of at least 90%.
Demitrios Kalogeropoulos has no position in any stocks mentioned. The Motley Fool recommends Procter & Gamble. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.