Business Context and Reporting Period
The Procter & Gamble Company reported unaudited results for the three months ended September 30, 2023, its fiscal 2024 first quarter, compared with the three months ended September 30, 2022. P&G sells branded consumer packaged goods 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 | Q1 FY2024 | Q1 FY2023 | Change |
|---|---|---|---|
| Net sales | $21.871 billion | $20.612 billion | +6% |
| Operating income | $5.767 billion | $4.939 billion | +17% |
| Net earnings | $4.556 billion | $3.963 billion | +15% |
| Net earnings attributable to P&G | $4.521 billion | $3.939 billion | +15% |
| Diluted EPS | $1.83 | $1.57 | +17% |
| Operating margin | 26.4% | 24.0% | +240 bps |
| Gross margin | 52.0% | 47.4% | +460 bps |
| Net earnings margin | 20.8% | 19.2% | +160 bps |
| Operating cash flow | $4.904 billion | $4.070 billion | +$834 million |
| Adjusted free cash flow | $4.401 billion | Not provided | 97% productivity |
Reported sales growth reflected 7% higher pricing and 1% favorable mix, partially offset by 1% unfavorable foreign exchange and 1% lower unit volume. Organic sales increased 7%. The effective tax rate increased to 21.5% from 20.7%.
Segment Results
| Segment | Sales | Sales Change | Net Earnings | Earnings Change |
|---|---|---|---|---|
| Beauty | $4.097 billion | +3% | $971 million | -4% |
| Grooming | $1.724 billion | +6% | $421 million | +4% |
| Health Care | $3.074 billion | +11% | $689 million | +12% |
| Fabric & Home Care | $7.646 billion | +8% | $1.569 billion | +34% |
| Baby, Feminine & Family Care | $5.186 billion | +5% | $1.075 billion | +34% |
Liquidity, Debt and Capital Allocation
- Cash and cash equivalents were $9.733 billion at September 30, 2023, up from $8.246 billion at June 30, 2023.
- Current assets were $24.940 billion versus current liabilities of $37.158 billion; management stated that short-term liquidity and operating needs are expected to be supported largely by operating cash flow and access to debt markets.
- Debt due within one year was $11.811 billion and long-term debt was $24.069 billion, for total reported debt of approximately $35.9 billion.
- Operating cash flow funded $925 million of capital expenditures, $2.290 billion of shareholder dividends and $1.500 billion of treasury stock purchases during the quarter.
- The company repurchased 9.841 million shares under publicly announced programs for approximately $1.5 billion. It expects fiscal 2024 direct share repurchases of $5 billion to $6 billion.
- Approximately $5.7 billion owed to suppliers participating in the supply-chain-finance program was included in accounts payable at September 30, 2023.
Material Changes Versus the Prior Comparable Period
- Profitability improved substantially: gross margin increased 460 basis points and operating margin increased 240 basis points, primarily from pricing, lower commodity costs and manufacturing productivity savings.
- SG&A increased 16% to $5.604 billion, and SG&A as a percentage of sales rose 220 basis points to 25.6%, driven by higher marketing, overhead and other operating costs.
- Interest expense increased $102 million to $225 million because of higher interest rates; interest income increased $86 million to $128 million.
- Foreign exchange reduced net earnings by approximately $170 million and contributed to a $409 million foreign-currency translation loss in other comprehensive income.
- Fabric & Home Care and Baby, Feminine & Family Care delivered the largest earnings increases, while Beauty earnings declined due principally to higher SG&A, unfavorable mix and weakness in the super-premium SK-II brand.
- Cash increased by $1.487 billion, compared with a $504 million decrease in the prior-year quarter, despite continued dividends, debt repayments and share repurchases.
Guidance, Outlook, Commentary and Risks
The filing does not provide a clear new full-year sales or earnings guidance figure. Management reaffirmed expectations for fiscal 2024 direct share repurchases of $5 billion to $6 billion. P&G expects to rely on operating cash generation and its debt-market access to meet liquidity needs.
- Management cited continued exposure to commodity, transportation, labor and energy costs, inflation, foreign exchange volatility, pricing-related volume pressure and supply-chain disruptions.
- Greater China experienced market contraction in several categories, while pricing contributed to volume declines in parts of Grooming and Baby, Feminine & Family Care.
- The Russia-Ukraine War, sanctions, geopolitical uncertainty and potential disruptions to manufacturing, suppliers and logistics remain material risks. Russia represented approximately 2% of fiscal 2023 consolidated sales and earnings; Ukraine represented less than 1%.
- Gillette’s indefinite-lived intangible asset had a carrying value of $14.1 billion and only approximately 5% fair-value headroom at the latest annual impairment test. Management identified it as particularly susceptible to future impairment from adverse currency, demand, competitive or macroeconomic conditions; no triggering event occurred in the quarter.
- Litigation and environmental matters were disclosed, but management and counsel stated that currently known matters are not expected to materially affect financial position, results or cash flows. Tax audits remain active across approximately 30 to 40 jurisdictions, with tax years open from 2010 onward.
- Corporate net earnings declined to a $168 million loss, primarily because of higher restructuring charges and higher net interest expense.
Facts Investors Should Verify
- Whether pricing actions can continue to offset inflation and foreign exchange without causing further unit-volume or market-share declines.
- The sustainability of gross-margin improvement after commodity-cost benefits and productivity savings are considered.
- Progress in Greater China, the performance of SK-II and the potential for a Gillette impairment charge.
- Future interest expense, refinancing requirements and the effect of planned $5 billion to $6 billion share repurchases on leverage and cash balances.
- The composition and cash-flow impact of the approximately $5.7 billion supplier-finance balance included in accounts payable.
- Changes in tax audits, international tax rules, litigation, environmental matters and Russia-Ukraine-related restrictions.