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Procter & Gamble’s Margins Saw an Improvement in 1Q16

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P&G’s 1Q16 margins summary

During its 1Q16 earnings call, Procter & Gamble (PG), or P&G, reported a slight improvement in its core gross margin. The company’s reported gross profit margin rose 260 basis points to 50.7% in 1Q16 from 1Q15. Despite the 60-basis-point negative impact of foreign exchange, the core gross margin rose 250 basis points. The rise was primarily due to productivity cost savings.

The operating profit margin for 1Q16 was reported at 22.8%, compared with 19.4% in 1Q15. The rise was driven by productivity savings. The SG&A (selling, general, and administrative) expenses as a percentage of sales fell 90 basis points on a reported basis from 1Q15. The fall was due to the company’s capability investments and lower sales.

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Cash flow productivity

Despite the weaker top line, P&G is placing emphasis on driving value creation and cash. This makes P&G one of the strongest cash generators among competitive peers and mega-cap companies such as Unilever (UL), Colgate-Palmolive Company (CL), and Kimberly-Clark Corporation (KMB). P&G generated $3.0 billion in adjusted free cash flow with 101% adjusted free cash flow productivity, despite the investments made in supply chain transformational moves.

To learn more about P&G’s updates on growth and transformational moves, please read A Procter & Gamble Investor Update: Growth and Transformational Objectives.

Margin expansion

The company stated in its October 23 conference call that “with continued strong operating margin expansion, we expect to deliver core operating income growth of mid to high single digits. This includes the $0.05 to $0.06 of per share drag on operating earnings from the deconsolidation of results in our Venezuelan business, and it includes $0.02 to $0.03 per share of Beauty deal transition costs that will remain in our core earnings results.” This should help produce strong operating results and strengthen margins.

P&G has exposure to the PowerShares FTSE RAFI US 1000 ETF (PRF), with 1.1%[1. Updated October 26, 2015] of the total weight of the portfolio.

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