Procter & Gamble Co. (PG) surprises Wall Street with revenue results

P&G improves in key areas of concern

CINCINNATI — Procter & Gamble Co. exceeded analyst expectations on revenue and profits in its fourth quarter, as it continued a 10-year cost cutting effort and improved revenue growth in key product categories.

P&G posted a $1.9 billion profit, or 79 cents per share, on net sales of $16.1 billion in its fiscal fourth quarter. Wall Street analysts were expecting net sales of $15.8 billion and earnings per share of 74 cents.

It also delivered some evidence that the massive reconfiguration of P&G – which included thousands of job cuts and the sale of more than 100 brands – is working as company leaders hoped. P&G posted increases in both organic sales, which exclude the impact of foreign exchange and divestitures, and sales volume, which measures the number of units sold.

P&G ended a two-year slump in organic sales growth last quarter, but the growth was driven by price increases – not increased consumption. This quarter, P&G posted volume increases in all product categories. P&G brands gained market share in Japan, Germany and the U.S., which remains P&G's largest market. In China, P&G reversed a three-quarter sales slump and is pursuing multiple strategies to capitalize on the country's growing middle class.

“The fourth quarter was another period of progress,” said Chairman, President and Chief Executive Officer David Taylor, in a news release. “We increased investments in innovation and advertising, funded by strong productivity improvement. Looking forward, we’re committed to continued productivity improvement and cost savings that provide the fuel for innovation and investments needed to accelerate and sustain faster top-line growth.”

For its fiscal 2017, P&G said it expects organic sales to climb about 2 percent, a figure that disappointed some analysts participating in P&G’s earnings call.

“It still seems pretty muted, given the significant level of investment you’ve put in place” to restore growth, said Morgan Stanley analyst Dara Mohsenian.

Taylor responded that P&G is “very committed to get back above market growth, and we recognize that 2 percent is not market growth.” But the company is growing faster than that in product lines where it has reinvested cost savings in increased advertising, product sampling and innovations.

“You’ll see continued building of our business strength,” Taylor added.

P&G shares increased to $86.77 Tuesday, up about a half percent from Monday's close. The stock rose roughly 9 percent since the beginning of the year, while the Standard & Poor's 500 index has risen 6 percent. The stock has increased 12 percent in the past 12 months.

In separate conference calls with reporters and analysts, P&G executives provided extensive detail on its recovery efforts in China, where it started the year with revenue declines of 8 percent but improved to zero growth in the fourth quarter.

“The biggest opportunity for us in terms of getting the company back to (market) share growth is with China,” said Chief Financial Officer Jon Moeller. “It’s our second largest market in terms of sales and profits. It's premiumizing, meaning consumers are moving up the pricing ladder. The top two price tiers are growing at double digits, and 50 percent of consumption is occurring in those pricing tiers. That compares to 2 or 3 percent when I was working in China in the ‘90s. You’re moving to larger families as a result of new laws that enable parents to have more children, moving from a manufacturing-based economy to hopefully a more consumption-based economy.”

But P&G’s revenue growth in China remains behind its competitors because it didn’t have diapers, hair care and skin care products ready to capitalize on higher-spending consumers.

“We are not done yet with getting our portfolio right in China,” Taylor said. “That’ll take time.”

However, P&G has gained new customers with product innovations launched in its Oral-B and laundry brands. Taylor added that the company has “important innovations coming” in diapers hair care and skin care.

“We know we got behind in diapers, and it shows up as one of the most acute categories in terms of share loss, period,” Taylor said. But P&G “refocused on winning” in China against Japanese competitors that have gained in market share. He wouldn’t detail the specific innovations to be launched in the next 18 months, but said P&G has grown market share in Japan with diaper innovations in the last year.

“The encouraging sign for me about the future in China is to look at what we've been able to do recently in Japan,” he said.

P&G has eliminated product lines and retooled its in-store counter displays for its largest skin-care brand, Olay.

“We shut down the counters that are in stores that are not productive, and we've made meaningful investments in upgrading the counters in the stores that we think have a basis to compete,” he said. “It is funded and already happening and is showing up now” in P&G results.

In hair care, P&G will continue to use product innovations to grow its largest shampoo brands, Pantene and Head and Shoulders.

“We’ve also made the choice, funded and staffed on the ground resources to make sure we keep up with the pace of innovation required in the beauty segment, which to me is an important choice about winning in the future in China,” Taylor said.

Another positive sign: P&G is rapidly growing online sales in China, with some categories achieving growth rates of more than 100 percent.

“Our online business is starting to accelerate with growing share in the past six months,” Taylor said. “We’ve now got at least now have a couple of our categories where online share is higher than off-line share, which bodes well for the future given the choice that Chinese consumers are making.”

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