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Procter & Gamble (PG) Q3 Earnings Top Estimates, View Raised

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The Procter & Gamble Company PG, popularly known as P&G, reported third-quarter fiscal 2018 financial results, wherein both earnings and revenues surpassed expectations, benefiting from higher demand for skincare products, along with fabric and home care products. The company has also lifted its core earnings per share guidance.

P&G’s fiscal third-quarter core earnings of $1.00 per share beat the Zacks Consensus Estimate of 98 cents by 2%. The bottom line increased 4% from the prior-year quarter. Currency-neutral core earnings per share (EPS) also improved 1%. The upside was primarily driven by increased net sales and a lower core effective tax rate.

Meanwhile, P&G agreed to acquire the consumer-health business of Germany-based Merck KGaA for approximately 3.4 billion euro ($4 billion). Per the terms, P&G will also acquire 51.8% stake in India-listed Merck Ltd. The deal is expected to close during the 2018/19 fiscal. The addition of Merck KGaA’s differentiated as well as physician-supported brands will enhance P&G's existing consumer healthcare capabilities, and brands such as Vicks, Pepto-Bismol and Oral-B. The buyout is expected to boost the company’s brand portfolio and category footprint. It will also expand P&G’s geographic footprint, as Merck KGaA’s consumer health business is active in 44 countries and includes more than 900 products.

Sales in Details

P&G’s reported net sales of $16.3 billion surpassed the Zacks Consensus Estimate of $16.2 billion. The top line grew 4% from the year-ago level, given strong sales from its beauty, and fabric and homecare businesses. Foreign exchange had a 4% positive impact on sales.
    
Organically (excluding the impact of acquisitions, divestitures and foreign exchange), revenues grew 1% (versus 2% growth seen in the preceding quarter) on the back of 2% increase in organic volumes. However, price had a 2% negative impact on sales.

Of the five business segments, three registered positive organic sales growth. Beauty, Health Care, and Fabric & Home Care segments registered organic sales growth of 5%, 1% and 3%, respectively, in the quarter. Grooming and Baby, Feminine & Family Care segments, on the other hand, registered 3% organic sales decline each.

Net sales of the Beauty, Fabric & Home Care, Health Care and Grooming segments grew 10%, 6%, 5% and 2%, respectively. However, Baby, Feminine & Family Care segment’s sales remained flat in the quarter.

Procter & Gamble Company (The) Price, Consensus and EPS Surprise

 

Procter & Gamble Company (The) Price, Consensus and EPS Surprise | Procter & Gamble Company (The) Quote

Margins

Core gross margin decreased 110 basis points (bps) to 49.4%, as productivity savings and higher sales were more than offset by headwinds such as increased commodity costs, unfavorable geographic and product mix, unfavorable pricing impacts and product reinvestments.

Core selling, general and administrative expense (SG&A) margin decreased 10 bps (as a percentage of sales) to 28.3%, driven by productivity savings from overhead, higher revenues, agency fee and ad production costs. Core operating margin decreased 100 bps year over year to 21.1%.

Productivity cost savings contributed 310 bps of margin benefit in the quarter. P&G has been cutting costs aggressively to reduce spending across all areas like supply chain, research & development, marketing and overheads.

Financials

As of Mar 31, 2018, the company’s cash and cash equivalents were $5.3 billion, down from $5.6 billion at the end of fiscal 2017 (as of Jun 30, 2017). Long-term debt was $22.4 billion as of Mar 31, 2018, up from $18 billion at the end of fiscal 2017.

Cash flow from operating activities was $10.7 billion in the first nine months of fiscal 2018, up from $9.1 billion a year ago.

The company returned $3.2 billion of cash to shareholders through $1.8 billion of dividend payments and $1.4 billion of common stock repurchase.

Earlier this month, P&G’s board of directors declared a 4% hike in its quarterly cash dividend to 71.72 cents per share, in a bid to impress investors. This consumer goods giant has consistently increased its dividend and has been paying dividends for 128 years, ever since its incorporation in 1890. In fact, the latest increase marks P&G’s 62nd consecutive year of dividend hike.

Fiscal 2018 Guidance

The Cincinnati, OH-based company maintained its projection for the year and expects organic sales growth in the range of 2-3% for fiscal 2018. However, P&G expects organic sales to be at the low end of the range. All-in sales growth is expected to be about 3%.

The company has lifted its core EPS growth projection to 6-8% (versus 5-8% expected earlier) compared with fiscal 2017 core earnings of $3.92 per share.

On a GAAP basis, EPS is expected to decrease 31-33% (unlike the 30-32% decrease expected earlier) versus the fiscal 2017 GAAP EPS of $5.59, which included a significant benefit from the Beauty Brands transaction that was completed in October 2016. The fiscal 2018 GAAP EPS estimate includes approximately 14 cents per share of non-core restructuring costs and 25 cents per share of non-core charges related to the Tax Act.

P&G carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Upcoming Peer Releases

The Hershey Company HSY and Mondelez International, Inc. MDLZ are slated to report first-quarter 2018 numbers on Apr 26 and May 1, respectively.

The Kraft Heinz Company KHC is slated to report first-quarter 2018 results on May 2.

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