In the return volley, the consumer products giant defended its portfolio strategy, its cost-cutting efforts, and its progress at transforming the huge business into a stronger, more flexible organization -- all without addressing a core complaint about its worsening market share position.
What weak returns?
One of the core charges from Nelson Peltz's Trian Fund was that P&G's management has overseen weak shareholder returns over the past decade. The activist investor spelled out how the company's stock has trailed both the market and its peers on a total return basis.
P&G couldn't argue with the narrower point of an underperforming stock, but it mounted a fierce challenge to the idea that the company was failing to reward its owners. In the press release, it outlined how management has returned $100 billion to shareholders over the past decade, including $62 billion in a dividend whose annual growth streak stretches all the way back to 1956.
Direct cash returns have sped up lately and should pass a whopping $22 billion this fiscal year alone. That all adds up to what P&G described as an "outstanding track record of returning value to shareholders," the company argues.
Cost cuts are working
P&G also took issue with Trian Fund's charge that its cost-cutting strategies have been ineffective. Specifically, the initiatives have had "no discernible impact on profits or sales growth," the fund claimed.
The activist investor is stretching on this point. After all, P&G has removed $10 billion out of its expense burden since 2012 and is targeting a further $13 billion in additional improvements. As a result, it is one of the most profitable companies in its peer group today. "These productivity programs have led to an increase of more than two [percentage] points in operating margin over the past four years," management notes.
The market share problem
Nowhere in its response does P&G directly deal with Peltz's complaint of worsening market position, though. That's likely because there's no denying that, as Trian Fund charges, "the company has lost market share across most of its categories" over the past five years.
One of the most dramatic declines has been in the grooming segment, where the core Gillette shaving franchise dove to a 65% global share from 70% in the space of just four years.
Still, P&G's management appears to already be acting with "the greatest possible urgency" that Trian Fund demands in its proxy challenge. It has dramatically reshaped its portfolio, tossing out 100 underperforming brands to focus on the 65 that boast the best growth and profitability outlooks. P&G completely revamped its manufacturing approach and has redesigned its supply chain from the ground up, too.
Its plans for the quarters ahead involve directing funds from the cost-cutting program toward improving production and packaging, supporting core brands through increased marketing, and more quickly meeting pricing challenges from value-based competition. Sure, these initiatives might not succeed in producing a significant market share rebound. But it's hard to argue that they aren't aggressive enough.
Ultimately, P&G believes the Trian Fund wouldn't bring anything more valuable to the table should it win the seat on the board of directors that it is seeking. Management's conclusion on the challenge is that "Trian has not provided any new or actionable ideas to drive additional value for P&G shareholders beyond the continued successful execution of the strategic plan that is in place."