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Productivity Savings Improved Procter & Gamble’s Operating Margin in Fiscal 3Q16

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Gross margin

During its fiscal 3Q16 earnings call, Procter & Gamble (PG), or P&G, reported a slight improvement in its core gross margin. The company’s reported a gross profit margin increase of 250 basis points to 49.8% in fiscal 3Q16, as compared to fiscal 3Q15. On a currency-neutral basis, P&G’s core gross margin increased by 340 basis points, driven by 230 basis points of productivity cost savings, 130 basis points from lower commodity costs, and a 60-basis-point benefit from pricing.

Productivity Savings Improved Procter & Gamble's Operating Margin in Fiscal 3Q16

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Operating margin and SG&A expenses

The reported operating margin for fiscal 3Q16 also increased to 21.1%, as compared to 17.9 in fiscal 3Q15. P&G’s Core operating margin improved by 300 basis points in fiscal 3Q16. This included a net 30-basis-point benefit from foreign exchange impacts, driven by lower foreign currency remeasurement charges. The increase was due to productivity savings.

The SG&A (selling, general, and administrative) expenses as a percentage of sales decreased by 70 basis points on a reported basis over fiscal 3Q15. The decrease was due to lower restructuring charges. P&G’s core SG&A as a percentage of sales decreased by 20 basis points, including a 100-basis-point net benefit from foreign exchange impacts.

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 like Unilever (UL), Colgate-Palmolive (CL) and Kimberly-Clark (KMB). P&G generated $2.5 billion in free cash flow, yielding 105% adjusted free cash flow productivity, despite the investments made in supply chain transformational moves.

Margin expansion

With continued strong operating margin expansion, the company expects to improve its gross and operating margins by triple digit indices, both including and excluding currency impacts. In India, P&G deprioritized 30% of unprofitable lines of businesses, which negatively impacted short-term growth but should improve the local profit margin significantly. It should also help strengthen operating results and margins.

PG made up ~1% of the PowerShares FTSE RAFI US 1000 Portfolio ETF (PRF) as of April 30, 2016.

Continue to the next part for an analysis of P&G’s recent stock price movement.

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