P&G's Results Pave Way For Rise In Marketing Spending

Stepped-Up Activity, Innovation Fuels Volume Increase With More to Come

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Procter & Gamble Co. beat analysts' forecasts and raised full-year guidance on the top and bottom line with results for its fiscal second quarter announced today, allowing for higher marketing spending through the balance of the fiscal year and eliminating need to cut prices much further.

Better-than-expected results in North America -- P&G's biggest and most profitable market -- accounted for most of the unexpected top-line strength, said Chief Financial Officer Jon Moeller on a call with analysts.

Jon Moeller
Jon Moeller

That helped P&G hit the top of its forecast for organic sales growth in the quarter at 3% and raise its outlook for full-year organic sales growth to 3% to 4% from the prior 2%-to-4% range.

Some competitors who've reported so far have outperformed P&G on the top line last quarter, including Unilever, up 7.8%, and Kimberly-Clark Corp., up 5%. But P&G improved its market-share trends, gaining or holding share across 50% of its businesses globally and 60% in the U.S.

On the call, Chairman-CEO Bob McDonald said P&G's overall share in the U.S. "is down a little bit, but the trend is getting better."

Bob McDonald
Bob McDonald

Mr. Moeller said P&G's share results improved as the quarter went on and have been better still so far in January, suggesting better things to come in the current quarter.

P&G overdelivered on the bottom line in part because people have been leaving through voluntary separations faster than forecast, with 5,500 of the positions targeted in a 5,700-person reduction in non-manufacturing employment by June having already left.

P&G already planned to step up marketing and innovation in the January to June period, Mr. Moeller said, adding those plans "will be strengthened based on over-delivery in the second quarter."

Filling the retail pipeline behind new launches, particularly beauty introductions for such things as the relaunch of Vidal Sassoon hair care in the U.S., Pantene Expert Series, a host of new Olay products and Cover Girl's entry into nail polish fueled some of a 2% volume increase in the U.S. last quarter, Mr. Moeller said. The pipeline fill also explained some of the difference between that number and a 2% volume decline found in retail-scanner data.

But the P&G executives said its new products, including Tide Pods, continue to be well-received by consumers.

"Consumers remain very receptive to real innovation and are willing to pay for it," Mr. McDonald said. "And importantly, retailers are hungry for real innovation that grows categories and grows market basket."

For P&G and Mr. McDonald, which has been under pressure from analysts and investors including William Ackman of Pershing Square Capital Management, the results relieve some pressure.

"We're focused on the plan," Mr. McDonald said in a call with journalists when asked if the results would relieve investor pressure. "We want a higher share price just like our shareholders do."

P&G's shares rose 3.6% to nearly $73 in early trading today, a five-year high.

In an interview with CNBC today, Mr. Ackman backtracked on prior criticism of Mr. McDonald. "P&G put up a very good quarter," he said. "Their organic revenue growth was a little lower than their competitors, but they're making progress. I hope Bob can turn this thing around. He deserves a lot of credit. Don't misinterpret my previous statement. I think based on the past three years at P&G, it certainly looked like Bob is not the right guy for the company. But if the company can make dramatic progress, and I think this quarter is an indication of very significant progress, then I hope Bob can be successful and can make it."

"With promise of reinvesting productivity savings in stepped-up new product initiatives and marketing support, we believe the company is at an important strategic crossroads to reestablish itself as the growth and innovation leader in the industry," said Deutsche Bank analyst Bill Schmitz in a note this morning.

P&G's improved sales results should also relieve pressure to cut prices, which could lead competitors to do likewise. Mr. Moeller said P&G now has rolled back $500 million of $3.6 billion in prior price hikes but is making only minor adjustments.

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