Procter & Gamble (NYSE:PG) is headed in the wrong direction. The consumer-goods giant posted earnings results last week that showed a worsening sales slump: growth slowed to a 1% pace for fiscal 2015 -- down from 3% last year.
In a subsequent conference call with Wall Street analysts, outgoing CEO A.G. Lafley discussed these results along with P&G's progress at returning the business toward strong profit and sales growth. Here are five key points from that call.
Zero sales growth
"Organic sales grew modestly, rounding down to a level that was equal to the prior year." --Chief Financial Officer Jon Moeller
Organic sales growth, which strips out foreign currency swings and new product line acquisitions, is critical to P&G's business. The company aims to keep that figure just above market growth rates, and a good year can bring organic growth as high as 4%.
But sales were flat this quarter, slowing down from 1% growth in the prior quarter, which itself was a slowdown from the 2% gains in each the prior three quarters. Overall, P&G's sales growth clocked in at just 1% for the 2015 fiscal year, compared to 3% in each of the prior two.
Brand shedding is over
"We've made excellent progress on plans to strengthen and focus our business and brand portfolio." --Moeller
Investors should expect sales growth and profit trends to improve now that management's strategic brand-shedding initiative is a wrap. P&G has cut more than 100 underperforming brands from its portfolio, leaving just 65 leading brands across 10 product categories.
Management says these remaining products are growing faster and carry a higher operating margin than the total company. They are also highly concentrated in a few large markets around the world, which should make P&G's operations easier to manage.
Cash production is strong
"We continue to be one of the strongest cash generators among competitive peers in comparable megacap companies." --Moeller
P&G posted strong cash flow despite the soft sales results. The company generated $12 billion this past fiscal year, which works out to slightly more than 100% of earnings. Management sliced nearly $2 billion out of its cost structure and made significant improvements to the supply chain.
These efficiency gains are helping power increased cash returns to shareholders even as the business struggles with low growth: P&G has returned about $12 billion to investors each year since 2010 and plans to deliver $17.5 billion annually over the next four fiscal years.
"Much of the sales growth is ahead of us. We have a strong lineup of new and improved products that are coming to market over the next one, two and three fiscal years." --Lafley
P&G has aggressive plans to roll out innovation through all 10 of its key product categories in the years ahead, including new features for the Bounty and Charmin brands that launch this year. Meanwhile, the company is expanding on prior innovations that have already worked, including with Tide PODS detergent and Crest's Oral-B toothpaste. These changes are aimed at keeping sales marching predictably higher. "We believe more of the resulting sales growth will be sustainable," Lafley said.
"We think it's prudent to start fiscal 2016 from a guidance standpoint with relatively modest, relatively wide target ranges." --Moeller
P&G is forecasting organic sales growth anywhere between zero and "low single digits" for the year ahead. That range includes everything from a good year for growth -- to P&G's weakest in recent memory. The reasons for the broad forecast include uncertainty from 1) shrinking economic growth in China and Brazil, 2) huge currency swings in places like Russia and Venezuela, and 3) the continued transition of underperforming brands off the books.
At worst, P&G's management sees growth continuing at the frustratingly slow pace it saw in this most recent quarter. "We certainly aim to improve," Moeller said, "but it's unlikely that growth acceleration will happen immediately or in a straight line."