This post is part of a series of posts called “Company Notes.” These posts contain quotes and exhibits from earnings calls, conference presentations, analyst days and SEC filings. Full transcripts can be found at Seeking Alpha
4Q was another challenging quarter from a macro standpoint
“October and December was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility”
FX was a 14 point drag on earnings
“All-in sales were down 4% versus the prior year including a 5 point headwind from foreign exchange and a 1 point reduction from minor brand divestitures. Including FX which was a 14 percentage-point drag on the quarter, core earnings per share were $1.06 down 8% versus the prior year.”
A primer on how FX impacts results
“ First, transaction impacts increased the cost of non-ruble denominated inputs. We import as an example Gillette blades and razors into Russia from Germany. Widening of the cross-rate between the euro and the ruble increases the Russian units cost of razors and reduces profit. Similarly, the local cost of plastic bottles which are denominated in euros and imported into Russia for the production of Fabric Care and Hair Care products have increased significantly. This transaction cost impact affects all manufacturers, multi-national and local, whose materials or finished products are imported from similar sources and are similarly denominated.
We attempt to recover these cost increases through pricing when local legal requirements and market realities allow it though there is a lag between the time the currency devalues, the costs are incurred and the pricing is taken and executed through our channels of distribution.
Second, we need to revalue transaction related foreign currency working capital balances. This includes the revaluation of working capital balances related to transactions between P&G legal entities that operate in different currencies. To continue the prior example while razors produced in Germany are being transported and are moving through the customs process into Russia, our Russian books hold a euro-denominated payable.
At the end of every quarter, working capital balances are revalued at current spot rates. Gains or losses from revaluing transactional working capital balances typically flow through SG&A and are included in core earnings per share. The only exception is the case of a fixed exchange rate currency that is also hyperinflationary. In this case, we need to revalue not just the foreign currency transactional balances, but also the local currency working capital balances. All of these impacts are reported in non-core earnings. The Venezuelan bolivar is the only currency that currently fits this definition.
Third, income statements of foreign subsidiaries like Russia that did not use the U.S. dollar as their functional currency are translated back to U.S. dollars at new exchange rates. Just the Russian ruble transaction, balance sheet revaluation and translation impacts have been and are projected to be significant at about $150 million, $100 million and $300 million after-tax, respectively for a total as I said earlier, of $550 million after-tax for the year.”
This is the most significant fiscal year currency impact we have ever experienced
“Across all currencies, foreign exchange hurts totaled $450 million after-tax in the December quarter, $650 million fiscal year-to-date and are forecast to be at $1.4 billion after-tax profit curve [ph] over the course of the fiscal year. This is the most significant fiscal year currency impact we have ever incurred. The currencies of six countries, Russia, the Ukraine, Venezuela, Argentina, Japan and now Switzerland account for over $1 billion of the $1.4 billion after-tax headwind from FX.”
Breakdown of the impact
“Of the $1.4 billion hurt, about 30% is from transaction, about 20% is from balance sheet revaluation and the remaining 50% is from translation, because of these impacts the outlook for the fiscal year will remain challenging.”
More than 30% of our working media is now Digital
“ We have quietly strengthened and invested in all of our digital capabilities including mobile, search and social with a wide range of partners. More than 30% of our working media is now digital.”
We need to stay balanced
“In a time of unprecedented currency devaluation that impacts our company more than any other in our industry, it’s important to stay balanced. We need to balance doing what’s right for the short, mid and long term. We need to balance the focus on delivering operating cash flow in the short term and continuing to deliver good returns for shareholders with continuing to invest in our businesses, brands, products, capabilities and people for the mid- and long term health of the company.”
Promotion is the last place we like to spend money
“promotion is the last place we would like in most cases to spend a dollar, we would rather spend it on equity or innovation and if you just look at the drivers of our top line growth over time, I think that it bears that out.”