Is P&G on the right track? Shareholders unsure

Posted at 11:59 AM, Oct 14, 2015

CINCINNATI - A.G. Lafley confronted a skeptical bunch of shareholders Tuesday in his last appearance as CEO of a Procter & Gamble Co. annual meeting.

“Last year, we paid for non-performance,” said Leland Wykoff, who traveled from Pigeon Forge, Tenn., to attend his first P&G shareholders meeting. He was one of several who questioned the company’s business strategies and pay plans in a 40-minute Q&A session that forced Lafley to defend the “shrink to grow” approach that defined his second term as chief executive.

Leland Wykoff

“We are transforming P&G,” Lafley said. “We are leading the most comprehensive series of changes in the company’s history. We’re putting strategies and capabilities in place to transform P&G into a faster growing, more profitable and far simpler company.”

Wykoff wasn't alone in his consternation. Shareholder Karen Meyer told Lafley that his management team "drove the P&G bus into a ditch" and asked what assurances he could provide that the same leadership team can reverse the trend of sluggish growth and a declining share price.

Wykoff said the sale of P&G brands creates new risk for the company in that it no longer has “lower-performing brands to move up the scale” and leaves P&G too dependent on blockbuster brands.

“The facts are that our U.S. laundry share is up,” Lafley said. “Our sales are up and our profits are growing. When I joined the company in the mid-‘70s, we were selling 14 laundry brands. We had a 40 (percent) share of the U.S. market. Today we sell five and we have nearly a 60 share of the market. Consumers do not need 20 laundry brands to choose from. Tide is above a 40 share now at the highest level it’s ever been, and growing household penetration. So, I know it seems counterintuitive to some, but believe it or not, some of our businesses have actually grown with fewer brands.”

After the meeting, Wykoff said he wasn’t satisfied by Lafley’s response. Among other things, he is worried that Tide Pods – and related products -- will be banned globally because of safety concerns about child poisoning.

“Pods are under attack,” he said. “They’re not going to be able to sell them much longer.”

Lafley told shareholders that unit-dose laundry products now generate more than $1.5 billion in retail sales.

“The segment has grown at 20 percent over the last year and we have about a 70 share of it,” he said. “We know that we still have significant upside in the product with trial levels in the U.S. still under 15 percent.”

Lafley also addressed shareholder concerns about its use of cash flow to buy back shares, its choice of venues for P&G shareholder meetings and its inability to combat foreign exchange losses with currency hedging programs.

Here’s a summary of Lafley’s responses:

  • P&G returned $11.9 billion to shareholders in dividends and share buy backs in its 2015 fiscal year and plans return another $70 billion in the next five years. Lafley said the top priority is funding a dividend that extends P&G’s 59-year streak of dividend growth. After that, it’s a choice between investing in the business and buying back shares. “We’ve had enough cash to reinvest in the business,” he said, “and we didn’t think it was the right time for a large acquisition. So we returned the money to shareholders.”
  • P&G shifted its annual meeting away from public venues like the Aronoff Center and Duke Energy Convention Center because it wanted a more business-like and efficient setting. “Last year, we had about 400 attendees,” “ Lafley said. “We were in this cavernous convention center and could barely see each other. This venue actually seats 425. It is actually a better place to have a conversation.“
  • P&G lost more than $1.5 billion from foreign-exchange fluctuations caused by the strength of the U.S. dollar against the Russian Ruble, the Japanese Yen and the Brazilian Real. Two shareholders questioned why P&G can’t do more to hedge its risk against currency problems. Lafley deferred to CFO Jon Moeller, who explained that most of P&G’s foreign-exchange losses came with “non-deliverable currencies” in which there are no hedging options.

Lafley spent more than 10 percent of his prepared remarks on an endorsement of David Taylor, who will become P&G’s next CEO on Nov. 1. Lafley called Taylor “a proven strategist” who can lead the company into future success.

David Taylor

“His breadth of experience and track record of success are strong ones,” Lafley said. “David is hands-on with deep knowledge of consumers and customers and categories. He’s very focused and strategic, a man of high character and integrity … a lifetime learner with an open mind.”