Procter & Gamble (NYSE: PG) executives held an analyst talk on Feb. 23 at the Consumer Analyst Group of New York Conference. The presentation spanned over 60 slides (link opens PDF) and discussed issues ranging from the consumer goods giant's reading on the global economy to its strategies for getting back to strong growth.
Below are a few key slides from the presentation that investors shouldn't miss.
1. Returning to organic sales growth
Last quarter marked the first one in nearly two years in which P&G posted a sequential improvement in organic sales growth. The good news is that the gains were powered by a sharp turnaround in the profitable U.S. market.
The bad news is that they came mostly from price increases, as overall sales volume declined. Still, it's encouraging that growth appears to be headed in the right direction for P&G after a disappointing seven-quarter slump.
2. Competing in rough markets
P&G executives illustrated the uniquely challenging position it is in, relative to competitors like Kimberly-Clark (NYSE: KMB) and Unilever (NYSE: UL). Unlike those consumer-goods rivals, P&G pulls a significant portion of its sales from countries that are going through huge economic and/or political change right now, including Russia, Ukraine, and Venezuela.
This hot-spot exposure helps put sales growth comparisons in perspective. Kimberly-Clark and Unilever both posted 5% organic gains last quarter on a healthy mix of price and volume gains, trouncing P&G's result. They both also forecast significantly higher growth in 2016 than P&G has. However, much of that underperformance can be explained by unusually weak market dynamics across the globe.
3. A faster-growing, more profitable company
Management boiled down the effects of its brand-shedding initiative to just a few key numbers. Once the portfolio changes are done, P&G will compete in 10 product categories while managing just 65 brands, compared to 166 before. These franchises were chosen for their faster-than-average growth rates, both on sales and earnings. In fact, they should collectively improve sales by a full percentage point, while carrying significantly higher profitability.
4. Keeping pace with product innovations
P&G can't just cut its way to success, though -- it also needs to produce high-quality innovations across its product portfolio. As an example of the type of initiatives they're working on, executives highlighted Pampers, its biggest brand. P&G has stolen market share from Kimberly-Clark's Huggies lately, thanks to smart marketing and innovations like swaddlers. The company hopes to keep that momentum going with improvements to its cruisers, baby dry, and easy ups product lines this year.
5. Cash returns are headed higher
Earnings are on a long-term downtrend, thanks to the combination of sluggish growth, brand divestments, and foreign currency swings. Yet P&G has never been in a stronger position when it comes to cash flow. Its operating cash generation is at a record high $16 billion, and last quarter's $4 billion marked a near-30% improvement from the prior quarter.
At the same time, the company just boosted its long-run cash flow productivity target, which is a measure of free cash as a percentage of earnings. For years, the goal has been 90% or better productivity. But recent cost cuts and efficiency gains have convinced management that they'll hit 100% or better this year, even if overall sales growth stays flat.
That's big news for investors because it suggests that P&G will have no problem boosting its cash returns to shareholders. It has sent back $12 billion per year during the last three years in combined dividend and stock-buyback spending, but aims to hike that pace to $18 billion per year. It may be a while before market dynamics help produce much higher growth, but in the meantime, operating improvements should give shareholders increasing returns.