The Procter & Gamble Company reported first quarter fiscal year 2015 core earnings per share of $1.07, an increase of two percent versus the prior year. On a currency-neutral basis, core earnings per share increased nine percent. Diluted net earnings per share were $0.69, including non-core items of $0.38 per share. Organic sales grew two percent for the quarter. Reported net sales were $20.8 billion, unchanged versus the prior year, including a negative two percentage point impact from the combination of foreign exchange and minor divestitures.

P&G generated operating cash flow of $3.6 billion and free cash flow of $2.8 billion for the quarter. Adjusted free cash flow productivity was 96%. P&G returned $4.2 billion in cash to shareholders, including $1.8 billion in dividends and $2.4 billion of common stock repurchases.

“P&G’s first quarter results were in-line with our expectations, despite a very difficult operating environment,” said Chairman, President, and Chief Executive Officer A.G. Lafley. “This keeps us on-track to deliver our fiscal year commitments.”

“We continue to accelerate and increase productivity savings, sharpen our strategies and strengthen our portfolio by focusing on our biggest opportunities. The pet care divestiture and exit of the battery business will allow us to further focus these efforts.”

July – September Quarter Discussion

Net sales were unchanged versus year ago at $20.8 billion in the July – September quarter, including a negative two percentage point impact from the combination of foreign exchange and minor divestitures. Organic sales grew two percent, in line or higher versus the prior year in all reporting segments. Organic volume was unchanged versus the prior year in both developed and developing regions. Pricing added one percentage point to sales growth, and geographic and product mix was also positive.

• Beauty, Hair, and Personal Care segment organic sales were unchanged as pricing benefits from prior year increases across all business units were offset by lower volume in Prestige.
• Grooming segment organic sales were unchanged as higher pricing and innovation on Blades & Razors and higher volume in Appliances from innovation were offset by lower Blades & Razors volume in developed regions.
• Health Care segment organic sales increased six percent behind innovation-driven volume growth in Oral Care and Personal Health Care along with higher pricing in Oral Care.
• Fabric Care and Home Care segment organic sales were unchanged as increased Fabric Care volume behind initiatives was offset by a decline in Personal Power due to high volume in the base period from new distribution.
• Baby, Feminine and Family Care segment organic sales increased four percent behind pricing, primarily in Baby Care, and positive sales mix, driven mainly by Feminine Care.

Core earnings per share were $1.07, an increase of two percent versus the prior year. Foreign exchange reduced core earnings by $0.07 per share, resulting in a nine percent increase in core earnings per share on a currency-neutral basis. Diluted net earnings per share were $0.69, including non-core items of $0.38 per share. Non-core items include a $0.32 per share non-cash goodwill and intangible asset impairment charge related to the battery business. For a full reconciliation of non-core items, please see Exhibit #1: Non-GAAP Measures.

Core operating profit margin decreased 20 basis points as a 20 basis point improvement in core gross margin was more than offset by a 30 basis point increase in core SG&A as a percentage of net sales. Reported operating profit margin decreased 570 basis points primarily due to the impairment charges. Reported gross margin was unchanged as manufacturing savings of 140 basis points were offset by foreign exchange, higher commodity costs, incremental restructuring charges and innovation and capacity expansion investments. Reported SG&A as a percentage of sales increased 90 basis points as productivity savings of 70 basis points from overhead and 50 basis points of marketing efficiencies were more than offset by foreign exchange impacts, including a non-core charge for adjustments to remeasure certain balances in Venezuela. Total productivity savings in cost of goods sold and SG&A were 260 basis points.

Pet Care Divestiture

During the quarter, the Company completed plans to exit the Pet Care business. P&G closed the divestiture of its pet business in the Americas to Mars, Inc. in July. Mars then exercised their option to purchase P&G’s pet business in Asia. In September, P&G signed an agreement to divest its European pet business to Spectrum Brands. All remaining elements of these transactions are expected to close in calendar year 2015, pending regulatory approvals.

Duracell Announcement

Consistent with its plans to focus and strengthen its brand and category portfolio, P&G announced its intention today to exit the Duracell personal power business by creating a stand-alone Duracell company. P&G said its goals in the process of exiting this business are to maximize value to P&G’s shareholders and minimize earnings per share dilution.

P&G said it is exiting the battery business in two steps. The first step was finalizing an agreement to sell its interest in a China-based battery joint venture, which it accomplished in late-August. Terms of this transaction were not disclosed.

The second step is the exit of the Duracell business. Although no decision has been made on the form of the exit, P&G’s current preference is a split-off of the Duracell business into a stand-alone company.

In a split-off, P&G shareholders would be given the option of exchanging some, none, or all of their P&G shares for shares in the newly formed Duracell company. P&G’s outstanding share count would be reduced by the number of P&G shares exchanged. The exact exchange ratio would be set just prior to the completion of the transaction, which P&G expects would occur in the second half of calendar year 2015.

P&G said it would notify its shareholders when a final decision is made regarding the form of the business separation. The Company added that any alternative exit scenario – including a spin-off, divestiture or other offer – that generates equal or better value will be considered.

“We greatly appreciate the contributions of our Duracell employees. Since we acquired the business in 2005 as part of Gillette, Duracell has strengthened its position as the global market leader in the battery category,” said Mr. Lafley. “It’s a business with attractive operating profit margins and a history of strong cash generation. I’m confident the business and its employees will continue to thrive as its own company.”

The Company said it will continue to report results of the Duracell business as continuing operations for the time being.

Goodwill and Intangible Impairment

During the quarter the Company took a non-cash charge of $932 million after-tax, or $0.32 per share, to adjust the carrying values of goodwill and indefinite-lived intangible assets in its Duracell battery business. The Company said it is writing down the asset value of its battery business to be more reflective of the value it will receive from the recently announced sale of its interest in a China-based battery joint-venture.

Fiscal Year 2015 Guidance

P&G reiterated its organic sales growth and core earnings per share growth guidance ranges for fiscal year 2015. P&G added that the quarterly profile of earnings will be heavily influenced by the variation of foreign exchange impacts from period-to-period. The Company expects significant negative sales and earnings impacts from foreign exchange in the October-December 2014 quarter.

The Company continues to expect organic sales growth in the low-to-mid single digit range. Net sales growth is now expected to be in-line to up low single digits versus the prior fiscal year, including a negative two point impact from foreign exchange.

P&G maintained its outlook for core earnings per share growth in the range of mid-single digits. All-in GAAP diluted net earnings per share are now expected to be down two percent to down five percent versus the prior year, including approximately $0.55 per share of non-core charges, primarily from $0.20 per share of non-core restructuring charges and $0.32 of impairment charges.