Higher pricing in the grooming segment helped to lift sales and improve margins. Image source: Procter & Gamble.

Procter & Gamble (NYSE:PG) reported fiscal 2016 second-quarter results on Tuesday. The owner of brands, including Gillette razors and Pampers diapers, saw its results hurt by the strength of the U.S. dollar, which lowered the value of sales in foreign markets.

The raw numbers 


Q2 2016

Q2 2015

Growth (YOY)


$16.915 billion

$18.495 billion


Net Income From Continuing Operations

$2.905 billion

$2.674 billion


EPS From Continuing Operations




Data source: Procter & Gamble Q2 2016 earnings press release.

What happened this quarter?
Organic sales -- which exclude the impact of foreign exchange, acquisitions, and divestitures -- increased 2% as a 3% lift from price increases more than offset a 2% reduction in organic shipment volume. However, foreign currency exchange rate movements reduced sales by 8 percentage points, with brand divestitures and the deconsolidation of Venezuelan operations reducing sales by an additional 3 percentage points. That led to an overall year-over-year decline in net sales of 9% to $16.9 billion.

Despite the sales decline, higher prices and cost-cutting initiatives helped to improve the company's profitability during the quarter, with "core" (a non-GAAP measure that adjusts for restructuring and other non-recurring charges) gross margin and operating margin increasing by 290 and 390 basis points, respectively, on a currency-neutral basis. That drove a 21% jump in core earnings per share, excluding currency effects.

And Procter & Gamble continues to gush cash -- operating cash flow exceeded $4.4 billion and free cash flow surpassed $3.7 billion in the second quarter. Management continues to pass the majority of that cash flow on to investors, allocating $2 billion to share repurchases and $1.9 billion to dividends during the quarter.

"We are encouraged by our return to organic sales growth in the quarter," said CEO David Taylor in a press release. "With the top line improvement and continued cost reduction, we delivered solid core operating income and EPS growth in the face of significant macro-economic and geopolitical headwinds."

Looking forward
P&G maintained its outlook for full-year organic sales of "in line to up low single digits" compared to fiscal 2015. Yet management now believes that foreign exchange headwinds will reduce 2016 sales by 7 percentage points, up from the 5 to 6 percentage points that was previously projected. Still, P&G continues to expect its fiscal 2016 all-in sales to be "down high single digits" versus fiscal 2015 results.

The company did, however, lower its projections for core earnings per share to down 3% to 8% from its previous guidance of "slightly below to up mid-single digits" versus fiscal 2015 results. Unfavorable foreign exchange rates are now expected to have a 10 percentage point negative impact on core earnings per share, rather than the 3 percentage points the company had previously estimated.  

On a constant currency basis, P&G said it's maintaining its guidance for core earnings per share growth of "mid-to-high single digits" but noted that its current outlook is at the low end of this range.