BUSINESS

P&G profit rises on brand sales, cost-cutting continues

Alexander Coolidge
acoolidge@enquirer.com

Procter & Gamble on Tuesday reported a $2.8 billion profit for its third quarter ended March 31, a 28 percent increase from a year ago.

Total sales at the Cincinnati-based consumer products giant dropped 12.7 percent to $15.8 billion, from the same period in 2015. Adjusted for the company's ongoing divestiture of nearly 100 noncore brands, sales declined 7 percent from last year. The company said closely-watched organic sales (a metric that excludes the impacts of mergers, acquisitions and foreign exchange) rose 1 percent.

P&G's stock dropped 2.3 percent or $1.86 to close at $79.55 on Tuesday.

Wall Street analysts had forecast for P&G to post a $2.2 billion profit for the quarter, excluding one-time items, according to Bloomberg. They also expected sales to be $15.8 billion. Last year, P&G reported a $2.2 billion profit on sales of $18.1 billion in sales.

“We continue to make progress on the transformations we are undertaking to return P&G to balanced top- and bottom-line growth and maintain strong cash generation,” CEO David Taylor said in a statement.

Profitability was boosted significantly by the final sale of the Duracell battery brand that closed Feb. 29. P&G booked a $422 million gain on the sale during the quarter, while the same quarter a year ago suffered from impairment charges related to the battery business.

Foreign exchange dragged net sales down 5 percent and volume slid 2 percent. The company grew organic sales with a 1 percent increase in prices.

In conference calls with analysts and the media, chief financial officer Jon Moeller said some of its slowing sales performance was due to a deliberate retreat from "bad businesses" with less profit potential. He noted P&G sales have declined in Mexico after it got out of an unprofitable toilet paper business. Similar moves in India have lowered sales there but turned the unit profitable. The company has also fattened profit margins in its fabric care business by getting out of lower-priced detergents, bleach and other products.

"This top line pain is worth it," Moeller said, conceding these tactical decisions were cutting organic sales by 1 percent. "As we come out of this we'll have stronger top line growth that is worth something on the bottom line."

Moeller said P&G has improved results in China, its No. 2 market after the U.S. He said the company's efforts to improve sales in China had slowed market share loss. Organic sales declined there in the quarter 4 percent, an improvement from an 8 percent decline in the previous quarter.

By contrast, organic sales in the U.S. were up 2 percent.

In China, the company upgraded its premium Pampers diapers and make further upgrades, it also launched a premium Oral-B toothpaste in the third quarter as well as an Ariel-brand concentrated liquid detergent. The company's premium skin care line SKII also delivered 20 percent sales growth in China.

P&G will continue to pay for innovation and other efforts with a sustained drive to increase efficiency. Moeller said P&G has cut marketing expenditures by $370 million last year and is trying to cut another $200 million this year. He added there was "still more room to improve" as the company begins its next fiscal year with $1.5 billion in remaining marketing agency costs.

P&G has reclassified more than 40 beauty brands it plans to sell later this year as "discontinued operations" and amended their financial statements to reflect those changes. Had P&G already exited those and other brands already sold off, the company said total sales for the quarter a year ago would have been $16.9 billion.

The brand sale is part of a broader restructuring that has already jettisoned the Duracell batteries brand and Iams pet food and others. Since 2014, P&G has embarked on selling off brands commanding $10 billion in sales to slim down to a $70 billion company doing business under 65 core labels.

The Duracell brand sale to Warren Buffett's Berkshire Hathaway closed in the third quarter. The conglomerate tendered 52 million shares of P&G stock back to the Cincinnati company in exchange for the battery brand.

Based on the stock price at closing and netting out the $1.8 billion P&G was required to reinvest in Duracell before handing it off, the consumer products company got $2.4 billion for the battery brand. But instead of getting a cash infusion, the transaction retired 2 percent of P&G's entire outstanding stock.

Later this year, P&G will close on its divestiture of the beauty brands it has decided to exit, including CoverGirl makeup, Wella and Clairol hair coloring. Those brands doing $6 billion in annual sales will become a separate company that will merge with New York's Coty Inc., which makes Rimmel makeup and is the licensed manufacturer of Calvin Klein and dozens of other fragrances.