Sometimes the best defense is a good offense. Consumer-goods titan Procter & Gamble (NYSE:PG) recently posted improved fiscal Q4 sales growth thanks to ramped-up advertising and marketing spending. The company still lost market share in many of its key categories, but management was encouraged by the healthier expansion trends.
Here are a few quotes from P&G's latest quarterly conference call that help put the results in perspective for investors (all quotes are from chief financial officer Jon Moeller).
A volume rebound to close the year
Organic sales for the quarter were up 2%. ... Importantly, the sales growth was volume driven, with organic volume growing 2%.
By posting 2% higher sales, P&G managed just the second sequential improvement in that metric in over two years. However, while the expansion pace remained far below that of rivals, including Unilever (NYSE:UL) and its 5% organic sales boost, this quarter's growth was driven by higher volume, not just price hikes. In fact, volume improved in each of P&G's five main categories, led by a 5% jump in the healthcare business.
Cleaning up the portfolio
As we get through the clean-up work and annualize the Venezuela headwinds, we'll be closer to 3% growth.
Organic sales would have been higher by a full percentage point after accounting for the hit P&G took in the Venezuela market and the continuing pinch from its portfolio consolidation. The company has discontinued, sold, or consolidated 60 brands in the last two years in hopes of boosting profitability and raising its organic sales growth pace. In the short term, though, that shift is a major headwind.
Choosing its battles
We're moving away from businesses that are more trend-driven, where fashion, fragrance, and flavor drive consumer purchase decisions. We're focusing on businesses where product and performance drive purchase decisions, where there are clear consumer jobs to be done, and clear objective measures of performance. These are products that consumers purchase and use on a daily basis, and they're in structurally attractive categories.
By the end of fiscal 2017, P&G plans to have exited 105 brands, representing about 6% of its fiscal 2015 profits. Executives chose the remaining product lines because they are growing faster and have higher profit margins than the company average.
Aggressively cutting costs
Our strong track record and our line of sight to additional opportunity inform our intent to save as much as another $10 billion in cost over the next five years.
P&G has already sliced billions out of its expense structure. In the cost of goods category alone, expenses are down $7.2 billion, beating executives' original $6 billion goal by over $1 billion.
Management is doubling down on these efficiency initiatives and believes it can cut another $10 billion out of cost of goods over the next five years.
Where the savings are going
We'll reinvest savings to improve product formulations and packaging, sales coverage and media programs, product sampling, and in-store demand creation.
P&G plans to pour most of the proceeds from these cost cuts into areas like advertising and promotions, which should boost sales growth. There's evidence that the strategy is already working since this quarter's volume bounce was driven by a big uptick in marketing spending.
P&G expects to raise ad investments by double digits over the coming fiscal year, helping organic growth pick up to 2% from this past year's 1% pace. The outlook implies slight market share losses, though. Unilever is projecting near 5% sales gains this year.
Excess cash will be headed into shareholders' pockets, and with cash productivity at over 100% of earnings, there will be plenty of that to go around. P&G forecasts delivering $22 billion, split between $7 billion of dividends and $15 billion of share repurchases, back to investors over the next 12 months.
Procter & Gamble has now endured three straight years of below-average organic growth. However, if management can hit its broad targets fiscal 2017 will mark a return to improving sales trends that -- P&G hopes -- will be followed by sustainable market share gains and rising profitability.