Procter & Gamble Co Earnings: Foreign Exchange Dents Sales, but Cost-Cutting Boosts Margins

By Joe

Source:Procter & Gamble

Procter & Gamble reported fiscal 2016 first quarter results on Friday. The owner of brands such as Tide detergent and Gillette razors saw its results hurt by a stronger U.S. dollar, which lowered the value of sales in foreign markets. Yet the company continued to reduce costs as it shed underperforming businesses, which led to a rise in profits.

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Procter & Gamble results: The raw numbers

Source: Procter & Gamble Q1 2016 earnings press release

What happened with Procter & Gamble this quarter?

  • Procter & Gamble's 12% year-over-year decline in sales was largely due to a substantial negative impact from foreign exchange, which reduced sales 9%. Excluding the effect of changes in foreign currency rates, organic sales declined 1%, as a 2% benefit from price increases and 1% positive impact from product mix were more than offset by a 4% reduction in shipment volume.
  • Despite the sales decline, P&G continues to improve its profitability as it progresses with its cost-cutting initiatives. "Core" (a non-GAAP measure that adjusts for restructuring and other non-recurring charges) gross margin and operating margin both increased by more than 300 basis points on a currency-neutral basis.
  • Core earnings per share were $0.98, a decrease of 1% compared to Q1 2015. However, excluding the impact of foreign exchange, currency-neutral Core earnings per share actually increased 12%.
  • Procter & Gamble remains a cash-flow-generating machine -- operating cash flow and free cash flow were $3.5 billion and $3 billion, respectively, in the first quarter. Management continues to pass the majority of that cash flow on to investors, with the company allocating $0.5 billion to share repurchases and $1.9 billion for dividends during the quarter.

What management had to say"We delivered strong first quarter operating profit margin and free cash flow results," said CEO A.G. Lafley in a press release:

Looking forwardTo reflect the impact of P&G's recently announced $12 billion deal to merge 43 of its beauty brands with Coty, P&G revised its fiscal year 2015 Core EPS -- which is based on earnings from continuing operations -- from the $4.02 per share originally reported to $3.76 per share. Based on this restated fiscal 2015 Core EPS figure of $3.76, P&G maintained its guidance for 2016 Core earnings per share of "slightly below to up mid-single digits" versus fiscal 2015 results.

P&G also maintained its outlook for full-year organic sales of "in-line to up low single digits" compared to fiscal 2015. Yet foreign exchange is likely to continue to take a toll on Procter & Gamble's results, with currency translation now expected to reduce full-year 2016 sales growth by five to six percentage points. All told, P&G expects fiscal 2016 all-in sales to be "down high single digits" versus fiscal 2015 results.

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Joe Tenebruso 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.

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