Procter & Gamble (NYSE:PG) executives held an investor presentation last week that spelled out their latest thinking around a multiyear rebound strategy. Thanks to the biggest portfolio and operating transformation in its history, the consumer goods titan still believes — despite stubborn market-share losses — that it’s on the right track as it wraps up fiscal 2018.
More on those sales growth struggles in a moment. First, here are a few of the key highlights from P&G’s latest investor presentation.
P&G has completed a brand-shedding initiative that saw it cleave over 100 brands from its portfolio. The products that the company sold off or divested were each unattractive for a number of reasons, including weak profit margins, connection to a slow-growing industry, and sporadic usage among consumers.
According to management, today’s portfolio suffers from none of those problems and instead is characterized by daily consumer use, strong branding, and standout product performances against rivals. P&G’s forecasts predict this shift will deliver accelerated organic sales growth and higher profitability, compared to the old collection of franchises.
Thanks to a more focused sales profile, in addition to billions of dollars of cost-cutting, P&G believes it has secured one of the best profit infrastructures in its industry. The company is celebrating a nearly 4-percentage-point improvement in gross profitability since 2012, which adds heft to management’s claim that the new portfolio will carry healthier pricing power.
Its cost-efficiency initiatives have delivered even better results, leading to an increase in operating margin of more than 5 percentage points in five years. P&G trails only Colgate-Palmolive on this metric today, and is well ahead of international rivals Kimberly-Clark and Unilever.
Rising cash flow
According to long-term targets, market-beating organic sales growth forms the foundation of P&G’s entire operating model since it powers two critical financial goals: earnings growth in the mid to high single digits and cash flow productivity of 90% or greater.
A weak industry, combined with surging competitive pressures, has short-circuited the sales-growth part of this equation lately. But P&G has offset that slump with major efficiency gains, especially on cash flow generation. The company has outperformed its 90% target in each of the past two fiscal years, and annual free cash flow passed $12 billion last year, up 20% since fiscal 2014 even though sales are down 14% over that time. As a result, P&G is in better financial shape, with plenty of funds available to reinvest into the business while sending gobs of cash to shareholders through dividends and stock repurchases.
Plan of attack
P&G is on track to grow organic sales at a 2% pace this year, to roughly double last year’s pace. Management wants to improve on that result, though, as it leaves the door open for a third straight year of declining market share.
Management’s sales-rebound plan involves executing better across the core categories of product quality, packaging, marketing, and value. Management holds up the fabric care division as a prime example of what’s possible here. Home to the Tide detergent and Downy clothes softener franchises, this division enjoys consistently fast growth and unusually high profitability. As the undisputed market-share leader, P&G has accumulated more than its fair share of those gains, too.
P&G’s major challenge is to translate the success in its fabric care segment to its other important franchises, like Gillette razors and blades. That powerhouse brand has seen its market share slump from 70% to below 65% in the last five years. No amount of cost-cutting and efficiency gains can completely make up for competitive stumbles like that, and so investors will want to see accelerating organic sales gains as part of any recovery.