P&G keeps its earnings range as the cost estimate behind it climbs to $0.79 a share

In July, Procter & Gamble warned that core earnings per share for its first fiscal quarter would fall by 5% or more, because the soap, nappies and razors it was selling had been made while oil was expensive. Instead they rose slightly, to $2.00. The company kept its core EPS range for the year at $6.89 to $7.11. What it changed is the estimate underneath: the extra costs it expects to absorb this fiscal year now come to $0.79 a share, against $0.56 in July.

Andre Schulten, the chief financial officer, put the better-than-warned quarter down to a mix of lasting gains and one-offs: cost of goods productivity and leaner overheads on one side; on the other, costs that had not yet fully arrived and about $90 million of tariff refunds. A consumer-goods maker buys resins, pulp and fuel months before the finished goods ship, so a jump in oil reaches its income statement late. He said only part of the commodity cost had passed through in the quarter. He described the lighter cost in the quarter as a one-off that would correct itself as the higher oil price works through.

The full-year bill is larger and arrives later. The company now expects commodity costs of about $1.4 billion after tax, plus higher net interest expense, lower non-operating income and a small currency loss. The estimate assumes Brent crude at $100 a barrel, and management expects materially higher costs in the second quarter and the second half. The range does not allow for significant additional commodity cost increases, and Schulten noted that oil had been above $110 on the morning of the results.

Sales were the quarter's strongest part. Organic sales, which strip out currency and acquisitions, grew 4.0% in the quarter, above the range it kept for the year. Most of that came from selling more units and a richer mix; price contributed little. The same pattern shows in core gross margin: commodities took 140 basis points and pricing gave back 20.

Prices rose in Beauty, Grooming and Health Care but fell in P&G's two largest segments, and the results diverged. Baby, Feminine & Family Care cut prices by 1.2% and its pre-tax earnings fell 4%. Fabric & Home Care also trimmed prices, by 0.3%, but sold more units and grew pre-tax earnings 4%. Each division buys a different mix of materials, so these earnings changes do not measure the effect of price alone.

Asked how P&G would cover the larger bill, Schulten named three things: record productivity savings, pricing tied to new products, and time to recover the cost. He said productivity savings build through the back half of the year. On prices he would not be drawn: "I can't announce pricing, and I won't announce pricing in any way, shape or form".

Part of the quarter's resilience did not depend on timing. Selling, general and administrative costs fell as a share of sales, which held the fall in core operating margin to 0.8 percentage points even as gross margin weakened. That leverage will help against the costs still to come. The range itself rests on the oil assumption, with significant further commodity increases outside it, and Schulten said that everything the company knew was in the outlook.