Peltz says plan to cut costs hasn't delivered results; company
says it is lean and agile
By Sharon Terlep
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (July 18, 2017).
Over the years when Procter & Gamble Co. wasn't able to sell
more Tide or Pampers, the company could at least point to one clear
success: a sweeping, $10 billion cost-cutting plan executed ahead
of schedule.
Now that victory is murky.
Activist investor Nelson Peltz said Monday that he would seek a
single board seat in a shareholder vote at the company's annual
meeting in October, making P&G the largest company to ever face
a proxy fight.
Mr. Peltz's Trian Management Fund argues that P&G failed to
capitalize on a five-year savings plan that shrank the company by
tens of thousands of employees, more than a dozen factories and
hundreds of brands. Trian casts doubt on whether a second,
five-year, $10 billion savings plan announced by P&G last year
will produce results.
On Monday, P&G began mounting its defense, first pointing to
a series of metrics outlining the company's improved profit margin,
leaner structure and healthy cash generation.
"Over the past two years, P&G has accomplished the most
significant portfolio transformation in its history," the company
said. "Today, P&G is a leaner, more agile, more accountable and
more efficient organization."
The company also criticized Trian, arguing the hedge fund "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."
Trian, in meetings with P&G Chief Executive David Taylor and
other managers, offered no specific suggestions on how the company
could better optimize cost savings, and was generally
complimentary, according to people familiar with the situation.
P&G ultimately saw no value in adding Mr. Peltz to the board,
they said.
Mr. Peltz first spoke with Mr. Taylor on Feb. 16, two days after
his firm disclosed its investment in the company. Over the next
four months, Mr. Peltz spoke with executives and board members a
number of times, according to a regulatory filing.
Among the discussions was an hour-long meeting on May 4 between
Mr. Peltz and P&G's top 30 executives, moderated by Mr. Taylor.
Later that month, he told P&G that he didn't want to break up
the company, a filing with the Securities and Exchange Commission
said.
Throughout, Mr. Peltz maintained that P&G wasn't moving
quickly enough and that a board seat would put him in better
position him to help the company execute its plans. On July 11, Mr.
Taylor and P&G's lead director, Jim McNerney, "listened to Mr.
Peltz's ideas, but did not agree to give him a Board seat," the
filing said.
The activist isn't saying explicitly it wants more costs cut
than the $10 billion P&G has targeted, and isn't giving
specifics on how it would tackle the costs. But Trian is concerned
about whether the goal will be hit.
Trian says years of P&G's underperformance in revenue and
the stock market have raised questions about why the board should
be given another year to execute without Mr. Peltz in the
boardroom.
Central to Trian's case is the fate of roughly $3 billion of the
$10 billion in P&G's previous cost reductions. P&G said the
other $7 billion in savings were lost to currency fluctuations,
which Trian doesn't dispute.
Trian argues, however, that if P&G were operating
efficiently, the $3 billion would have shown up in increased sales
and profit growth, both of which have been stalled for years.
Trian is concerned the latest cost-cutting initiative "could be
as ineffective as the 2012 productivity program in driving sales
growth, earnings growth and shareholder creation," Trian said in a
regulatory filing Monday.
P&G shares were little changed Monday, rising less than 1%
to $87.56 in late trading. The stock has gained 2% in the past 12
months, compared with a 14% return in the S&P 500.
Gary Bradshaw, a fund manager at Hodges Fund, said he would
support Mr. Peltz for the board. "I don't know he can change things
overnight but, now, earnings aren't growing and that's what will
eventually push the stock higher," said Mr. Bradshaw, whose fund
has about 150,000 P&G shares.
In a presentation to investors last month, P&G finance chief
Jon Moeller said that cost-cutting alone won't be enough to turn
around years of sluggish sales. To drive faster revenue growth, the
Cincinnati-based company also needs to reinvest savings to improve
product formulations and packaging, sales coverage and advertising,
among other areas.
Stagnation remains a challenge even as P&G is a dramatically
different company today than five years ago. It has sold hundreds
of brands and the bulk of its beauty business, including brands
such as Clairol and Cover Girl, to beauty-product maker Coty
Inc.
In April, the company first detailed plans for the second round
of cutting it announced last year. P&G took heat from Wall
Street after initially unveiling the plan with scant details about
where the savings would come from. The biggest reductions will be
in cost-of-goods sold, with $4.5 billion coming from materials,
$1.5 billion in manufacturing expense and $1 billion in
transportation and warehousing savings.
An additional $3.5 billion would come from cuts to marketing and
trade spending.
Trian often focuses on cost structures at sprawling companies
and is a proponent, for instance, of the zero-based-budgeting
program that has won supporters and detractors among food
companies.
In negotiations with P&G, Trian argued that if it was given
insider information and a role in the boardroom it could help guide
Mr. Taylor and the board better, according to people familiar with
the matter.
In a similar situation Trian pushed General Electric Co. this
year on its cost-cutting plans, leading to a disclosure from GE
that it would target a spending number instead of a cost-cutting
number. Trian had argued that would ensure the costs were
eliminated for the bottom line, people familiar with the matter had
said.
Trian didn't seek a board seat at GE and its longtime chief
executive, Jeff Immelt, recently announced plans to retire.
--David Benoit contributed to this article.
Write to Sharon Terlep at sharon.terlep@wsj.com
Corrections & Amplifications The graphic in a previous
version of this story misspelled Procter & Gamble. (July 17,
2017)
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July 18, 2017 02:47 ET (06:47 GMT)
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