Procter & Gamble : Regulation G Reconciliation of Non-GAAP Measures

The Procter & Gamble Company Regulation G Reconciliation of Non-GAAP Measures

The following provides definitions of the non-GAAP measures used in Procter & Gamble's July 30, 2020 earnings call, associated slides, and other materials and the reconciliation to the most closely related GAAP measure. We believe that these measures provide useful perspective on underlying business trends (i.e. trends excluding non-recurring or unusual items) and results and provide a supplemental measure of year-on-year results. The non-GAAP measures described below are used by Management in making operating decisions, allocating financial resources and for business strategy purposes. These measures may be useful to investors as they provide supplemental information about business performance and provide investors a view of our business results through the eyes of management. Certain of these measures are also used to evaluate senior management and are a factor in determining their at-risk compensation. These non-GAAP measures are not intended to be considered by the user in place of the related GAAP measure, but rather as supplemental information to our business results. These non-GAAP measures may not be the same as similar measures used by other companies due to possible differences in method and in the items or events being adjusted. The Company is not able to reconcile its forward-lookingnon-GAAP adjusted cash flow productivity measure because the Company cannot predict the timing and amounts of discrete items such as acquisition and divestitures, which could significantly impact GAAP results.

The measures provided are as follows:

1. Organic sales growth - page 3
2. Core EPS and currency-neutral Core EPS - page 6
3. Core gross margin and currency-neutral Core gross margin - page 9
4. Core operating profit margin and currency-neutral Core operating profit margin - page 9
5. Adjusted free cash flow productivity - page 10

Organic sales growth*:Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions and divestitures, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers", the impact from India Goods and Services Tax changes (which were effective on July 1, 2017), the impact of Venezuela deconsolidation in FY 2016, and foreign exchange from year-over-year comparisons. Management believes this measure provides investors with a supplemental understanding of underlying sales trends by providing sales growth on a consistent basis.

The Core earnings measures included in the following reconciliation tables refer to the equivalent GAAP measures adjusted as applicable for the following items:

• Incremental restructuring:The Company has had and continues to have an ongoing level of restructuring activities. Such activities have resulted in ongoing annual restructuring related charges of approximately $250 - $500 million before tax. In 2012 the Company began a $10 billion strategic productivity and cost savings initiative that included incremental restructuring activities. In 2017, the Company communicated details of an additional multi-year productivity and cost savings plan. This results in incremental restructuring charges to accelerate productivity efforts and cost savings. The adjustment to Core earnings includes only the restructuring costs above what we believe are the normal recurring level of restructuring costs.
• Early debt extinguishment charges: In fiscal 2017 and 2018, the Company recorded after-tax charges of $345 and $243 million respectively, due to the early extinguishment of certain long-term debt. These charges represent the difference between the reacquisition price and the par value of the debt extinguished.
• Transitional Impact of U.S. Tax Act: In December 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (the "U.S. Tax Act"). This resulted in a net charge of $602 million for the fiscal year 2018. The adjustment to Core earnings only includes this transitional impact. It does not include the ongoing impacts of the lower U.S. statutory rate on the respective years' earnings.
• Charges for Certain European legal matters: Several countries in Europe issued separate complaints alleging that the Company, along with several other companies, engaged in violations of competition laws in prior periods. In 2016, the Company incurred after-tax charges of $11 million to adjust legal reserves related to these matters.
• Venezuela deconsolidation charges: For accounting purposes, evolving conditions resulted in a lack of control over our Venezuelan subsidiaries. Therefore, in accordance with the applicable accounting standards for consolidation, effective June 30, 2015, we deconsolidated our Venezuelan subsidiaries and began accounting for our investment in those subsidiaries using the cost method of accounting. The charge was incurred to write off our net assets related to Venezuela.
• Venezuela B/S remeasurement & devaluation impacts: Venezuela is a highly inflationary economy under U.S. GAAP. Prior to deconsolidation, the government enacted episodic changes to currency exchange mechanisms and rates, which

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resulted in currency remeasurement charges for non-dollar denominated monetary assets and liabilities held by our Venezuelan subsidiaries.

• Gain on Dissolution of the PGT Healthcare Partnership:The Company finalized the dissolution of our PGT Healthcare partnership, a venture between the Company and Teva Pharmaceuticals Industries, Ltd (Teva) in the OTC consumer healthcare business, in the quarter ended September 30, 2018. The transaction was accounted for as a sale of the Teva portion of the PGT business; the Company recognized an after-tax gain on the dissolution of $353 million.
• Shave Care Impairment: In the fourth quarter of fiscal 2019, the company recognized a one-time,non-cash,after-tax charge of $8.0 billion ($8.3 billion before tax) to adjust the carrying values of the Shave Care reporting unit. This was comprised of a before and after-tax impairment charge of $6.8 billion related to goodwill and an after-tax impairment charge of $1.2 billion ($1.6 billion before tax) to reduce the carrying value of the Gillette indefinite-lived intangible assets.
• Anti-dilutiveImpacts:The Shave Care impairment charges caused certain equity instruments that are normally dilutive (and hence normally assumed converted or exercised for the purposes of determining diluted net earnings per share) to be anti-dilutive. Accordingly, for U.S. GAAP diluted earnings per share, these instruments were not assumed to be concerted or exercised. Specifically, in the fourth quarter and total fiscal 2019, the weighted average outstanding preferred shares were not included in the diluted weighted average common shares outstanding. Additionally, in the fourth quarter of fiscal 2019, none of our outstanding share-based equity awards were included in the diluted weighted average common shares outstanding. As a result of the non-GAAP Shave Care impairment adjustment, these instruments are dilutive for non-GAAP earnings per share.

We do not view the above items to be part of our sustainable results, and their exclusion from core earnings measures provides

1. more comparable measure of year-on-year results. These items are also excluded when evaluating senior management in determining their at-risk compensation. Management views the following non-GAAP measures as useful supplemental measures of Company performance and operating efficiency over time.

Core EPS and currency-neutralCore EPS*:Core earnings per share, or Core EPS, is a measure of the Company's diluted net earnings per share from continuing operations adjusted as indicated. Currency-neutral Core EPS is a measure of the Company's Core EPS excluding the incremental current year impact of foreign exchange.

Core gross margin:Core gross margin is a measure of the Company's gross margin adjusted for items as indicated.

Currency-neutralCore gross margin:Currency-neutral Core gross margin is a measure of the Company's Core gross margin excluding the incremental current year impact of foreign exchange.

Core operating profit margin*:Core operating profit margin is a measure of the Company's operating margin adjusted for items as indicated.

Currency-neutralCore operating profit margin*:Currency-neutral Core operating profit margin is a measure of the Company's Core operating profit margin excluding the incremental current year impact of foreign exchange.

Adjusted free cash flow:Adjusted free cash flow is defined as operating cash flow less capital spending and adjustments for items as indicated. Adjusted free cash flow represents the cash that the Company is able to generate after taking into account planned maintenance and asset expansion. Management views adjusted free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends, share repurchases, acquisitions and other discretionary investment.

Adjusted free cash flow productivity*:Adjusted free cash flow productivity is defined as the ratio of adjusted free cash flow to net earnings. Management views adjusted free cash flow productivity as a useful measure to help investors understand P&G's ability to generate cash. Adjusted free cash flow productivity is used by management in making operating decisions, allocating financial resources and for budget planning purposes. The Company's long-term target is to generate annual adjusted free cash flow productivity at or above 90 percent.

• Measure is used to evaluate senior management and is a factor in determining their at-risk compensation. 2

1. Organic sales growth:
					Acquisition &
Three Months Ended	Net Sales		Foreign Exchange		Divestiture		Organic Sales
June 30, 2020	Growth		Impact		Impact/Other*		Growth
Beauty	-%	4%	(1)%	3%
Grooming	(5)%	4%	-%	(1)%
Health Care	(1)%	3%	-%	2%
Fabric Care & Home Care	11%	3%	-%	14%
Baby, Feminine & Family Care	3%	2%	-%	5%
Total P&G	4%	3%	(1)%	6%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.

					Acquisition &
	Net Sales		Foreign Exchange		Divestiture		Organic Sales
Total Company	Growth		Impact		Impact/Other*		Growth
FY 2020	5%	2%	(1)%	6%

*Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Prior Fiscal Years

			Acquisition/
	Net Sales	Foreign	Divestiture		Organic Sales
Total Company	Growth	Exchange Impact	Impact/Other*		Growth
FY 2019	1%	4%	-%	5%
FY 2018	3%	(2)%	-%	1%
FY 2017	-%	2%	-%	2%
FY 2016	(8)%	6%	3%	1%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers", the impact of India Goods and Services Tax implementation in FY 2018, the impact of Venezuela deconsolidation in 2016 and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Prior Quarters

			Acquisition/
	Net Sales	Foreign	Divestiture		Organic Sales
Total Company	Growth	Exchange Impact	Impact/Other*		Growth
JAS 2018	-%	3%	1%	4%
OND 2018	-%	4%	-%	4%
JFM 2019	1%	5%	(1%)	5%
AMJ 2019	4%	4%	(1)%	7%
JAS 2019	7%	2%	(2)%	7%
OND 2019	5%	1%	(1)%	5%
JFM 2020	5%	2%	(1)%	6%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile net sales to organic sales.

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Organic Sales

2-Year Stacked Growth

	Net Sales		Combined Foreign Exchange &		Organic Sales
Total Company	Growth		Acquisition/Divestiture Impact/Other*		Growth		2-Year Sum
FY 2020	5%	1%	6%	11%
FY 2019	1%	4%	5%	6%
FY 2018	3%	(2)%	1%	3%
FY 2017	-%	2%	2%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers", the impact of India Goods and Services Tax implementation in FY 2018, and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Calendar Year 2019

					Acquisition &
	Net Sales		Foreign Exchange		Divestiture		Organic Sales
Total Company	Growth		Impact		Impact/Other*		Growth
Calendar Year 2019	4%	3%	(1)%	6%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

1st Half FY 2020

					Acquisition &
	Net Sales		Foreign Exchange		Divestiture		Organic Sales
Total Company	Growth		Impact		Impact/Other*		Growth
July - December 2019	6%	1%	(1)%	6%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Grooming

					Acquisition &
	Net Sales		Foreign Exchange		Divestiture		Organic Sales
Total Grooming	Growth		Impact		Impact/Other*		Growth
FY 2020	(2)%	3%	-%	1%
FY 2019	(5)%	5%	1%	1%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers" and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Beauty

					Acquisition &
	Net Sales		Foreign Exchange		Divestiture		Organic Sales
Total Beauty	Growth		Impact		Impact/Other*		Growth
FY 2020	4%	2%	(1)%	5%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods and rounding impacts necessary to reconcile net sales to organic sales.

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Organic Sales

Prior Quarters Beauty

			Acquisition/
	Net Sales	Foreign	Divestiture		Organic Sales
Total Beauty	Growth	Exchange Impact	Impact/Other*		Growth
OND 2015	(10)%	7%	4%	1%
JFM 2016	(8)%	5%	4%	1%
AMJ 2016	(5)%	3%	3%	1%
JAS 2016	(1)%	2%	2%	3%
OND 2016	(1)%	2%	2%	3%
JFM 2017	(2)%	1%	2%	1%
AMJ 2017	2%	2%	1%	5%
JAS 2017	5%	-%	-%	5%
OND 2017	10%	(1)%	-%	9%
JFM 2018	10%	(5)%	-%	5%
AMJ 2018	10%	(3)%	-%	7%
JAS 2018	5%	3%	(1)%	7%
OND 2018	4%	4%	-%	8%
JFM 2019	4%	5%	-%	9%
AMJ 2019	3%	5%	-%	8%
JAS 2019	8%	2%	-%	10%
OND 2019	7%	1%	-%	8%
JFM 2020	(1)%	2%	-%	1%

• Acquisition & Divestiture Impact/Other includes the volume and mix impact of acquisitions and divestitures for all periods, the impact from the July 1, 2018 adoption of new accounting standards for "Revenue from Contracts with Customers", the impact of India Goods and Services Tax implementation in FY 2018, the impact of Venezuela deconsolidation in 2016 and rounding impacts necessary to reconcile net sales to organic sales.

Organic Sales

Guidance

						Organic Sales
Total Company		Net Sales Growth		Foreign Exchange Impact/Other		Growth
FY 2021 (Estimate)		1% to 3%	1%		+2% to +4%

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2. Core EPS and currency-neutral Core EPS:

Three Months Ended

June 30

	2020		2019
Diluted Net Earnings Per Share	$1.07	$(2.12)
Incremental Restructuring	0.09	0.06
Shave Care Impairment		3.02
Anti-Dilutive Impacts			0.14
Core EPS	$1.16	$1.10
Percentage change vs. prior period	5%
Currency Impact to Earnings	0.06
Currency-Neutral Core EPS	$1.22
Percentage change vs. prior period Core EPS	11%

Note - All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction.

Twelve Months Ended

June 30

	2020		2019
Diluted Net Earnings Per Share	$4.96	$1.43
Incremental Restructuring	0.16	0.13
Gain on Dissolution of PGT Partnership		(0.13)
Shave Care Impairment		3.03
Anti-Dilutive Impacts			0.06
Core EPS	$5.12	$4.52
Percentage change vs. prior period	13%
Currency Impact to Earnings	0.15
Currency-Neutral Core EPS	$5.27
Percentage change vs. prior period Core EPS	17%

Note - All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction.

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Diluted Net Earnings Per Share from Continuing Operations, attributable to P&G

Incremental Restructuring

Early Debt Extinguishment Charges

Transitional Impact of U.S. Tax Act Gain on Dissolution of PGT Partnership

Shave Care Impairment Anti-dilutive Impacts Rounding

Core EPS

Percentage change vs. prior period

Currency Impact to Earnings

Currency-Neutral Core EPS Percentage change vs. prior period Core EPS

Core EPS

Prior Quarters

JAS 18	JAS 17	OND 18	OND 17	JFM 19	JFM 18	AMJ 19	AMJ 18	JAS 19	JAS 18 OND 19 OND 18 JFM 20 JFM 19
$	1.22	$	1.06	$	1.22	$	0.93	$	1.04	$	0.95	$	(2.12)	$	0.72	$	1.36	$	1.22	$ 1.41	$1.22	$1.12	1.04
	0.03		0.03		0.03		0.02		0.02		0.04		0.06		0.14		0.01		0.03	0.01	0.03	0.05	0.02
							-								0.09
							0.24				0.01				(0.02)
	(0.14)																		(0.14)
													3.02
													0.14
	0.01														0.01				0.01
$	1.12	$	1.09	$	1.25	$	1.19	$	1.06	$	1.00	$	1.10	$	0.94	$	1.37	$	1.12	$1.42	$1.25	$1.17	$1.06
	3%				5%				6%				17%			22%			14%		10%
	0.09				0.09				0.09				0.08				0.02			0.02		0.05
$	1.21			$	1.34			$	1.15			$	1.18			$	1.39			$1.44		$1.22
	11%				13%				15%				26%			24%			15%		15%

Note - All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction

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Core EPS

Prior Fiscal Years

Diluted Net Earnings Per Share from Continuing Operations, attributable to P&G Incremental Restructuring

Early Debt Extinguishment Charges

Transitional Impact of U.S. Tax Act

Venezuela B/S Remeasurement and Devaluation Impacts

Charges for Pending European Legal Matters

Venezuela Deconsolidation Charges

Gain on PGT Dissolution

Shave Care Impairment

Anti-dilutive Impacts

Rounding

Core EPS

Percentage change vs. prior period

Currency Impact to Earnings

Currency-Neutral Core EPS

Percentage change vs. prior period Core EPS

2019	2018	2017		2016	2015
$1.43	$	3.67	$	3.69	$	3.49	$ 2.84
0.13		0.23		0.10		0.18	0.17
		0.09		0.13
		0.23
							0.04
							0.01
							0.71
(0.13)
3.03
0.06
							(0.01)
$4.52	$	4.22	$	3.92	$	3.67	$3.76
7%		8%		7%		(2)%
0.35		(0.05)		0.15		0.35
$4.87	$	4.17	$	4.07	$	4.02
15%		6%		11%		7%

Note - All reconciling items are presented net of tax. Tax effects are calculated consistent with the nature of the underlying transaction

		Core EPS
		Guidance
		Impact of Incremental
Total Company	Diluted EPS Growth	Non-Core Items*	Core EPS Growth
FY 2021 (Estimate)	+6% to +10%	(3)%	+3% to +7%

* Includes year-over-year changes in incremental non-core restructuring charges.

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3. Core gross margin:

Three Months Ended

June 30

		2020	2019
Gross Margin	49.5%	47.7%
Incremental Restructuring		1.4%	1.1%
Core Gross Margin	50.9%	48.8%
Basis point change vs. prior year Core margin	210
Currency Impact to Margin		0.4%
Currency-Neutral Core Gross Margin	51.3%
Basis point change vs prior year Core margin	250
		Twelve Months Ended
			June 30
		2020	2019
Gross Margin	50.3%	48.6%
Incremental Restructuring	0.7%	0.6%
Rounding			0.1%
Core Gross Margin	51.0%	49.3%
Basis point change vs. prior year Core margin	170
Currency Impact to Margin		0.2%
Currency-Neutral Core Gross Margin	51.2%
Basis point change vs prior year Core margin	190
4. Core operating profit margin:
		Three Months Ended
			June 30
		2020	2019
Operating Profit Margin	19.7%	(30.4)%
Incremental Restructuring	1.3%	1.1%
Shave Care Impairment			48.8%
Rounding			0.1%
Core Operating Profit Margin	21.0%	19.6%
Basis point change vs. prior year Core margin	140
Currency Impact Margin		0.5%
Currency-Neutral Core Operating Profit Margin	21.5%
Basis point change vs. prior year Core Margin	190
		Twelve Months Ended
			June 30
		2020	2019
Operating Profit Margin	22.1%	8.1%
Incremental Restructuring	0.6%	0.6%
Shave Care Impairment			12.3%
Rounding		0.1%
Core Operating Profit Margin	22.8%	21.0%
Basis point change vs. prior year Core margin	180
Currency Impact Margin		0.3%
Currency-Neutral Core Operating Profit Margin	23.1%
Basis point change vs. prior year Core Margin	210
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5. Adjusted free cash flow productivity (dollar amounts in millions):

Three Months Ended June 30, 2020

Operating Cash	Capital Spending	Adjustments*	Adjusted Free Cash	Net Earnings	Adjusted Free Cash
Flow	Flow	Flow Productivity
$4,806	$(658)	$328	$4,476	$2,786	161%

*Adjustments to free cash flow include tax payments related to the Merck OTC Consumer Healthcare acquisition.

Twelve Months Ended June 30, 2020

Operating Cash	Capital Spending	Adjustments*	Adjusted Free Cash	Net Earnings	Adjusted Free Cash
Flow	Flow	Flow Productivity
$17,403	$(3,073)	$543	$14,873	$13,103	114%

*Adjustments to free cash flow include tax payments for the transitional tax resulting from the U.S. Tax Act and tax payments related to the Merck OTC Consumer Healthcare acquisition.

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