PROCTER & GAMBLE Co (PG) Q2 2016 Earnings Summary

Executive Summary

Net sales $16.9B, down 9% YoY on an 8pp FX headwind and 2–3pp from Venezuela deconsolidation/divestitures; organic sales +2% as +3% pricing offset -2% organic volume .
Core EPS $1.04 (+9% YoY); currency-neutral core EPS +21%; diluted net EPS $1.12 (+37% YoY), aided by lapping prior-year battery impairments in discontinued operations .
Core operating margin +350bps (currency-neutral +390bps) on productivity savings; core gross margin +210bps (currency-neutral +290bps); SG&A -140bps core .
Guidance: maintain FY16 organic sales “in-line to up low-single digits”; FX headwind to all-in sales now ~7pp; core EPS including FX lowered to down 3–8%; adjusted FCF productivity raised to 100% (from 90%) .
Cash return: Q2 adjusted FCF productivity 117%; repurchased $2.0B and paid $1.9B in dividends; plan $8–9B share retirements and >$7B dividends in FY16 .

What Went Well and What Went Wrong

What Went Well

Margin expansion from productivity: “Core operating profit margin was up 350 basis points… including 270 basis points of productivity cost savings” .
U.S. reacceleration and product innovation: U.S. organic sales moved from -2% (Q1) to +3% (Q2), supported by new Gillette ProShield and stronger NA marketing budgets (+~100bps) .
Strong cash generation and returns: “Adjusted free cash flow productivity was 117%… repurchased $2.0 billion… returned $1.9 billion… as dividends” .

What Went Wrong

Volume declines and emerging market pressure: organic volume -2%; developing markets organic volume -6% with flat organic sales due to pricing to offset FX; China organic down high-single digits .
FX worsened materially: “Currencies are weakening… nearly $300 million after-tax in the December quarter… now expect FX will have a 7 percentage point impact on all-in sales and ~10% on core EPS” .
Back-half EBIT comparison challenged: disproportionate impacts from Venezuela deconsolidation, beauty transition costs and lower non-operating income hit EBIT in H2 despite ongoing constant-currency margin strength .

Financial Results

Quarterly trends (oldest → newest)

Metric	Q4 FY2015 (AMJ)	Q1 FY2016 (JAS)	Q2 FY2016 (OND)
Net Sales ($USD Billions)	$17.79	$16.53	$16.92
Core EPS ($)	$1.00	$0.98	$1.04
Diluted Net EPS ($)	$0.18	$0.91	$1.12
Diluted EPS - Continuing Ops ($)	$0.22	$0.96	$1.01
Gross Margin %	48.0%	50.7%	50.0%
SG&A as % of Sales	31.3%	27.9%	27.2%
Operating Margin %	5.2%	22.8%	22.8%
Organic Sales Growth (%)	0%	-1%	+2%
Organic Volume Change (%)	-3% (ex A/D)	-4% (ex A/D)	-2%

Q2 YoY comparison

Metric	Q2 FY2015 (OND 2014)	Q2 FY2016 (OND 2015)
Net Sales ($USD Billions)	$18.50	$16.92
Core EPS ($)	$0.95	$1.04
Diluted Net EPS ($)	$0.82	$1.12
Diluted EPS - Continuing Ops ($)	$0.92	$1.01
Gross Margin %	48.3%	50.0%
SG&A as % of Sales	29.0%	27.2%
Operating Margin %	19.4%	22.8%
Organic Sales Growth (%)	N/A	+2%

Segment breakdown – Q2 FY2016

Segment	Net Sales ($USD Billions)	YoY Net Sales %	EBT ($MM)	YoY %	Net Earnings from Continuing Ops ($MM)	YoY %	Organic Sales Growth (%)
Beauty	$2.963	-10%	$774	-2%	$585	-4%	+1%
Grooming	$1.806	-10%	$579	-19%	$441	-19%	+3%
Health Care	$1.978	-5%	$564	+10%	$394	+7%	+3%
Fabric & Home Care	$5.347	-7%	$1,177	+9%	$773	+10%	+2%
Baby, Feminine & Family	$4.710	-10%	$1,037	-7%	$683	-10%	0%
Corporate	$0.111	N/A	-$328	N/A	$29	N/A	N/A

KPIs

KPI	Q1 FY2016 (JAS)	Q2 FY2016 (OND)
Operating Cash Flow ($USD Billions)	$3.538	$4.480
Free Cash Flow ($USD Billions)	$3.006	$3.789
Adjusted FCF Productivity (%)	101%	117%
Share Repurchases ($USD Billions)	$0.5	$2.0
Dividends ($USD Billions)	$1.9	$1.9
Diluted Shares (MM)	2,867.5	2,864.6
Effective Tax Rate (%)	24.0%	23.6%

Estimates vs Actuals

Wall Street consensus (S&P Global) for Q2 FY2016 was unavailable due to an S&P Global request limit. As a result, estimate comparisons and beat/miss determinations cannot be provided (values unavailable from S&P Global).

Guidance Changes

Metric	Period	Previous Guidance	Current Guidance	Change
Organic Sales Growth	FY2016	In-line to up low-single digits	Maintained: in-line to up low-single digits	Maintained
All-in Sales Growth	FY2016	Down high-single digits; FX 5–6pp; 2–3pp divestitures/Venezuela	Down high-single digits; FX 7pp; 2–3pp divestitures/Venezuela	Lowered (FX worsened)
Core EPS (constant currency)	FY2016	Slightly below to up mid-single digits vs restated $3.76	Mid-to-high single digits; outlook at low end	Framed more positively constant-currency; low end
Core EPS (including FX)	FY2016	Not explicitly quantified in Q1; FX headwind 3–4%	Down 3% to 8% vs $3.76 core EPS; FX impact ~~10% (~~$0.37/sh)	Lowered (explicit negative incl. FX)
GAAP EPS	FY2016	Up 53%–63% vs $2.44	Up ~38%–46% (center ~42%)	Lowered
Adjusted FCF Productivity	FY2016	90% target	Increased to 100%	Raised
Share Retirements	FY2016	Not specified in Q1 release	~$8–9B via buybacks and Duracell share exchange	Introduced/affirmed
Dividends	FY2016	Not specified in Q1 release	>$7B dividends (total $15–$16B with buybacks/exchange)	Affirmed magnitude
Core Effective Tax Rate	FY2016	N/A in Q1	~24% (up ~3pp YoY; back half ~24% vs ~19% LY)	Higher tax rate vs LY
Non-Operating Income	FY2016	N/A in Q1	2–3pp drag on core EPS, mainly Q4 (vs $355MM Q4 LY)	Headwind
Venezuela import risk	FY2016	N/A in Q1	Potential up to ~0.5pp top-line impact if import dollars constrained	New risk disclosure

Earnings Call Themes & Trends

Topic	Q4 FY2015 (Q-2)	Q1 FY2016 (Q-1)	Q2 FY2016 (Current)	Trend
FX/macro volatility	Venezuela deconsolidation; large FX hits	FX headwinds guided at 5–6% sales, 3–4% EPS	FX worsened (Argentina -40%, Russia -15%); ~7pp sales, ~10% EPS; $300MM after-tax in Q2	Worsening
Productivity & margins	Core margins stable YoY; savings drivers	Core gross +250bps; op +270bps (currency-neutral)	Core gross +210bps; op +350bps (currency-neutral +390bps)	Improving
U.S. performance	N/A	U.S. organic -2%	U.S. organic +3%; NA ad budgets +~100bps	Improving
China	N/A	Organic down high-single digits; inventory/channel changes	Still down high-single digits; premiumization, e-commerce focus, wholesale inventory cleanup	Stabilizing with plan
Pricing vs volume	Pricing to offset FX; category cleanup begins	Pricing continued; organic volume -4%	Organic volume -2%; developing vol -6% with flat organic sales; willingness to adjust prices back as competitors respond	Gradual normalization
Portfolio actions (Coty/Duracell)	Announced exits; Venezuela accounting change	Clarified restatements; divestiture costs	Duracell closing “this quarter”; Coty closing in back half CY16; transition costs in continuing ops	Executing
E-commerce/online	N/A	N/A	Gillette Shave Club launched; +6pt online share; doubled online consumption; retailer subscription tie-ins	Building
Commodities	N/A	N/A	~$500MM FY tailwind in input costs; net P&L impact likely neutral-to-negative due to EM consumption hit	Modest positive on COGS

Management Commentary

“We are encouraged by our return to organic sales growth in the quarter… delivered solid core operating income and EPS growth in the face of significant macro-economic and geopolitical headwinds.” — CEO David Taylor .
“Core operating profit margin was up 350 basis points… on a currency-neutral basis… up 390 basis points, including 270 basis points of productivity cost savings.” — CFO Jon Moeller .
“Currencies are weakening… nearly $300 million after-tax versus year ago… FX has been a $3.5 billion impact over three years.” — CFO Jon Moeller .
“We will not cut smart investments to offset foreign-exchange impacts… we’re reducing our core EPS guidance to down 3%–8%… adjusting for items, guidance translates to modest core EPS growth with meaningful growth excluding FX.” — CFO Jon Moeller .
“We’ve added nearly 100 basis points to advertising and in-store merchandising budgets in North America since we started the fiscal year.” — CFO Jon Moeller .

Non-GAAP adjustments: Core EPS excludes incremental restructuring and certain legal items; Q2 core EPS reconciles GAAP diluted EPS from continuing ops $1.01 to core $1.04 (+$0.03), and currency-neutral core $1.15 (+$0.11 from FX) . Core gross margin and operating margin similarly adjust for restructuring and legal charges .

Q&A Highlights

Top-line vs scanner data: U.S. organic accelerated to +3% (sales ~1pt ahead of consumption from ProShield shipments); scanner coverage misses e-commerce and shave club contributions .
Pricing sustainability: Pricing remains a positive contributor even as commodity benefit is less than crude suggests; companies price for FX where possible; P&G expects lower pricing recovery than history, offset by productivity .
Reinvestment: Media spending to be up double-digits in H2; NA budgets raised by ~100bps to support growth .
Back-half EBIT deceleration: H2 comparisons pressured by Venezuela deconsolidation, beauty deal transition costs, and lower non-op income; FX relief limited .
Market share stance: Will accept some share loss while restoring structural economics and cleaning portfolio; ~45% of global business holding/gaining share (~60% in U.S.) .

Estimates Context

S&P Global consensus for Q2 FY2016 EPS and revenue was unavailable due to an S&P Global request limit. As a result, we cannot determine beat/miss versus Street. Values unavailable from S&P Global.

Where estimates may need to adjust:

FX headwinds increased (sales -7pp; core EPS ~-10%); non-operating income and tax headwinds concentrated in H2 suggest lower back-half EPS trajectory vs prior expectations .
Constant-currency margin expansion and U.S. growth reacceleration may support upward revisions to constant-currency profitability assumptions .

Key Takeaways for Investors

Constant-currency earnings power intact, but stronger dollar and EM FX materially dampen reported EPS; expect continued FX volatility to drive guidance conservatism .
U.S. topline momentum (Fabric Care, Baby Care, Grooming) and stepped-up H2 media spend are catalysts for continued organic growth improvement .
Margin expansion from productivity is durable; core operating margin +350bps despite FX, implying a favorable cost trajectory .
China remains a watch item: premiumization, e-commerce partnerships, and wholesale inventory normalization underway; expect gradual recovery rather than abrupt inflection .
Portfolio actions (Duracell close in Q3; Coty in H2 CY16) and related transition costs will pressure H2 EBIT; non-operating income tailwinds from prior-year divestitures will not recur .
Cash return remains robust (FCF productivity 100% target; $8–$9B share retirements; >$7B dividends), supporting TSR even as reported EPS faces FX headwinds .
Near-term trading: sensitivity to FX headlines (Argentina, Russia, Mexico) and any updates on Venezuela import dollars; medium-term thesis centers on productivity-driven margin expansion and innovation-led organic growth normalization .