Business Context and Reporting Period
The Procter & Gamble Company reported an unaudited Form 10-Q for the three and six months ended December 31, 2023, representing fiscal 2024 second-quarter and year-to-date results. P&G sells branded consumer products in approximately 180 countries and territories through five reportable segments: Beauty, Grooming, Health Care, Fabric & Home Care, and Baby, Feminine & Family Care.
Key Financial Metrics
| Metric | Three Months Ended Dec. 31, 2023 | Year-over-Year | Six Months Ended Dec. 31, 2023 | Year-over-Year |
|---|---|---|---|---|
| Net sales | $21.441 billion | Up 3% | $43.312 billion | Up 5% |
| Operating income | $4.433 billion | Down 7% | $10.200 billion | Up 5% |
| Net earnings attributable to P&G | $3.468 billion | Down 12% | $7.988 billion | Up 1% |
| Diluted EPS | $1.40 | Down 12% | $3.23 | Up 2% |
| Core EPS | $1.84 | Up 16% | $3.66 | Up 16% |
| Operating cash flow | Not separately provided | — | $10.004 billion | Up $2.360 billion |
| Adjusted free cash flow | Not separately provided | — | $8.684 billion | — |
Six-month gross margin was 52.3%, compared with 47.5% in the prior-year period. Operating margin was 23.6%, compared with 23.5%, while net margin was 18.6%, compared with 19.1%. In the quarter, gross margin was 52.7%, operating margin was 20.7%, and net margin was 16.3%.
Reported six-month sales growth reflected 6% higher pricing, a 1% decline in unit volume, and a 1% unfavorable foreign-exchange impact. Organic sales increased 5%. Adjusted free cash flow productivity was 96%, calculated against net earnings excluding the Gillette impairment charge.
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $7.890 billion at December 31, 2023, compared with $8.246 billion at June 30, 2023.
- Debt due within one year was $10.616 billion and long-term debt was $23.096 billion, for reported total debt of approximately $33.712 billion. The filing separately disclosed long-term debt fair value of $25.6 billion, including the current portion of long-term debt instruments.
- Current liabilities exceeded current assets by $12.8 billion. Management expects to fund short-term liquidity and operating needs primarily through operating cash flow and debt-market refinancing.
- Financing activities used $8.087 billion during the first six months, including $4.578 billion of dividends, $2.503 billion of treasury-stock purchases, and net debt reductions.
- P&G reaffirmed its expectation to repurchase $5 billion to $6 billion of shares during fiscal 2024, financed through operating cash flow and debt issuance.
Material Changes Versus the Prior Comparable Period
- Quarterly sales growth was driven by 4% pricing, partially offset by 1% unfavorable foreign exchange; unit volume and mix were unchanged. Organic sales rose 4%, while organic volume declined 1%.
- Year-to-date sales growth was broad-based: Health Care increased 8%, Fabric & Home Care 7%, Grooming 6%, Baby, Feminine & Family Care 3%, and Beauty 2%.
- Fabric & Home Care and Baby, Feminine & Family Care delivered particularly strong earnings growth, with six-month net earnings increases of 34% and 32%, respectively. Beauty net earnings declined 4%.
- Gross margin benefited from pricing, lower commodity costs, and manufacturing productivity. These gains were partly offset by foreign exchange, product mix, marketing, overhead, and other operating costs.
- SG&A increased 12% year to date to $11.127 billion, with higher marketing, overhead, and other operating expenses.
- Interest expense increased to $472 million year to date from $294 million, primarily because of higher interest rates.
- Foreign exchange reduced net earnings by approximately $249 million year to date and $78 million in the quarter.
Guidance, Outlook, Risks and Unusual Items
- P&G announced a limited market portfolio restructuring, primarily affecting certain Enterprise Markets including Argentina and Nigeria. It expects incremental after-tax restructuring charges of $1.0 billion to $1.5 billion, primarily non-cash foreign-currency translation losses, during fiscal 2024 and 2025.
- The company incurred $181 million of restructuring charges in the first six months, including $89 million in the second quarter. A $195 million restructuring reserve remained at December 31, 2023.
- P&G recorded a $1.341 billion pre-tax, $1.0 billion after-tax, non-cash impairment charge related to the Gillette indefinite-lived intangible asset. The remaining carrying value was $12.8 billion.
- Management identified potential for further Gillette impairment from higher discount rates, weaker currencies, lower demand, market contraction, competitive pressure, changes in grooming habits, and additional reductions in Russia. A 25-basis-point increase in the discount rate or decrease in growth rates would each reduce estimated fair value by approximately 5%, while a 50-basis-point decrease in the royalty rate would reduce it by approximately 4%.
- Key risks include foreign-exchange volatility, commodity and labor costs, inflation, supply-chain disruptions, geopolitical conditions, the Russia-Ukraine war, regulatory and tax changes, litigation, cybersecurity, competition, consumer trading-down, and execution of productivity and restructuring programs.
- P&G reported an unspecified potential civil penalty from the U.K. Environment Agency relating to a prior failure to secure an emissions-trading permit for a London manufacturing site. The filing does not provide a clear estimate of the potential penalty.
- Management stated that existing litigation and environmental matters are not expected to materially affect financial position, results of operations, or cash flows, although outcomes remain uncertain.
Most Important Facts for Investors to Verify
- Whether pricing-led sales growth can continue without further unit-volume deterioration.
- The timing and ultimate after-tax cost of the $1.0 billion to $1.5 billion restructuring program.
- Whether the Gillette brand requires additional impairment charges under adverse currency, growth, royalty-rate, or discount-rate assumptions.
- The effect of higher interest rates, foreign exchange, commodity costs, and marketing spending on operating and net margins.
- P&G’s ability to fund dividends, planned $5 billion to $6 billion share repurchases, debt maturities, and operating requirements while current liabilities exceed current assets.
- Developments involving Russia, Ukraine, Argentina, Nigeria, the U.K. environmental matter, tax audits, and other legal or regulatory contingencies.