PROCTER & GAMBLE Co (PG) Q3 2016 Earnings Summary

Executive Summary

• Q3 FY2016 net sales were $15.8B (-7% YoY) with organic sales +1%; Core EPS was $0.86 (-3% YoY), while diluted EPS was $0.97 (+29% YoY) driven by discontinued operations gains from the Duracell sale and prior-year battery impairments .
• Core operating margin expanded 300 bps and core gross margin expanded 270 bps, primarily from productivity savings, lower commodity costs, and pricing; advertising reinvestment stepped up, lifting SG&A in currency-neutral terms .
• Guidance tightened: Core EPS FY2016 to down 3%–6% (from down 3%–8%), constant-currency Core EPS mid-single-digit growth; all-in GAAP EPS raised to +46%–51%; Q4 Core EPS flagged “significantly lower” on higher ad spend, higher tax rate, FX, and lower non-operating income .
• Cash generation remained strong with $3.3B operating cash flow and adjusted free cash flow productivity of 105%; $1.0B buybacks, $1.9B dividends, plus ~$4.2B in shares received via Duracell completion .

What Went Well and What Went Wrong

What Went Well

• Margin expansion via productivity: “Core operating profit margin increased 300 basis points… including 290 bps of productivity cost savings” .
• Category innovation driving pricing and share: Fabric & Home Care organic sales +3% on innovation and increased marketing; U.S. Pantene and Head & Shoulders gained share .
• Portfolio transformation milestones: “We achieved a significant milestone… with the sale of the Duracell business… increased investments in innovation, advertising and selling” — CEO David Taylor .

What Went Wrong

• Grooming softness in the U.S.: Segment organic sales -1% with unit volume declines; market consumption down ~4% in tracked channels; need to improve lower-tier value and presence in direct-to-consumer e-commerce .
• Health Care volume pressure: Organic sales -1% on “a weak cough and cold season” despite higher pricing .
• Macros and Venezuela: FX headwind reduced all-in sales by ~5 pts; Venezuela deconsolidation and divestitures dragged ~3 pts; Q3 reported no Venezuela sales/profit, cutting organic sales ~20 bps and Core EPS ~$0.05, with up to ~$0.10 headwind for FY2016 if constraints persist .

Financial Results

Segment breakdown – Q3 FY2016:

KPIs – Q3 FY2016:

Guidance Changes

Earnings Call Themes & Trends

Management Commentary

• “We continue to make progress on the transformations we are undertaking to return P&G to balanced top and bottom-line growth and maintain strong cash generation… sale of the Duracell business… strong quarter of productivity improvement and cost savings… increased investments in innovation, advertising and selling” — CEO David Taylor .
• “We’re targeting up to $10 billion of additional savings over the next five years… reinvest a significant amount in R&D, product and packaging, sales capacity, and brand awareness and trial” — CFO Jon Moeller .
• “We expect pricing to be less of a dynamic next year than the last two years… volume reacceleration varies by market” — CFO Jon Moeller .

Q&A Highlights

• Advertising ramp and pricing: Ad up ~130 bps in Q3 and ~140 bps for H2; price adjustments tied to value-gap closures; promotional depth not materially increased .
• $18B promotion spend effectiveness: Large opportunity to improve effectiveness and efficiency; shift from pantry-loading to category growth, prioritize best offerings .
• U.S. Grooming strategy: Strength at premium (ProGlide +18% last fiscal); need value improvements at lower tiers and stronger DTC/e-commerce presence .
• China approach: “And” strategy to maintain mid-tier while pursuing premium, which is ~50% of consumption and growing high-single to double digits .
• FY2017 prelims: Expect improved organic growth with continued reinvestment; EPS benefit from share reductions post-Coty exit; FX likely less onerous if spot holds .

Estimates Context

• Attempted to retrieve S&P Global consensus for PG Q1–Q3 FY2016 EPS and revenue; data were unavailable due to access limits (Daily Request Limit exceeded). As a result, explicit comparisons to Wall Street consensus are not provided this quarter [SPGI request error].
• Given management’s tightened Core EPS range and explicit Q4 headwinds, we expect estimate revisions to reflect lower near-term EPS and increased ad spend assumptions .

Key Takeaways for Investors

• Margin execution remains robust (core GM +270 bps; core OM +300 bps), fueled by durable productivity and lower commodities — a key support for EPS resiliency amid FX and volume pressure .
• Top-line is stabilizing but modest (+1% organic), with Fabric/Home strength offsetting U.S. Grooming/Health Care softness; reinvestment should aid category growth and share over time .
• FY2016 EPS guidance narrowed; expect a weak Q4 on stepped-up advertising, higher taxes, FX, and lower non-operating income, creating a near-term pressure point and potential trading volatility around execution vs plan .
• Portfolio transformation and share count reduction (Duracell, upcoming Coty) support medium-term EPS and ROIC, while the $10B savings program underwrites reinvestment without sacrificing margins .
• Watch Grooming remediation (value-tier pricing, DTC presence) and China premium execution; success here is pivotal to reaccelerating organic growth in FY2017 .
• Cash return remains strong (>$15–16B FY2016 via dividends and repurchases/exchanges), supporting valuation even as near-term EPS dips with reinvestment .