P&G to spend $1bn to lift profit

Written by The Financial Times | Updated: Oct 29 2011, 08:01am hrs
By Barney Jopson in New York

Procter & Gamble has vowed to spend up to $1bn on restructuring and boost its profit margins in the first half of next year after coming under sustained pressure from investors to raise productivity.

The worlds biggest consumer products maker by sales made the declaration as it reported a 2 per cent fall in quarterly net income to $3bn on net sales that rose 8.9 per cent to $21.9bn, largely as a result of growth in emerging markets.

The Cincinnati-based group - whose brands include Gillette razors and Ariel detergent - has faced calls from investors to raise profitability and shift its focus to emerging markets. Analysts said it trailed rivals in both respects.

Jon Moeller, chief financial officer, acknowledged that P&Gs overhead costs as a percentage of sales were high and said it was committed to reducing them. We expect to invest up to $1bn before tax, or in the range of $700m to $800m after tax, on productivity improvement opportunities to fund both our [ongoing] and incremental restructuring plans, he said.

P&Gs selling, general and administrative expenses are roughly $26bn a year. Critics said its cost base was too heavily weighted towards the slow-growing US, where it employs about 40,000 of its 129,000 staff, instead of fast-growing markets such as China.

Ali Dibadj, a Sanford Bernstein analyst who has been vocal in calling for restructuring, was not satisfied by the $1bn pledge and asked the company on a call why it was not acting more aggressively.

In the three months to September 30, P&Gs operating margin declined 2.6 percentage points to 19.8 per cent, which it blamed on commodity price inflation. The company has implemented two-thirds of the price increases it planned to offset the impact.

Forecasting a rebound in margins, Mr Moeller said: We expect an inflection in operating profit growth in [the first half of 2012] when well benefit from the full impact of the [price increases] we have planned, when well have easier commodity cost comparisons, and as cost savings accelerate.

Mr Moeller said P&G had not finalised restructuring plans but that it was taking a long-term approach to make lasting improvements to our cost structure without creating unnecessary distraction for our employees or unnecessary risk for our business.

P&Gs sales grew 9 per cent in developing markets and 1 per cent in developed markets, excluding foreign exchange effects and acquisitions and divestitures.

On Thursday Colgate-Palmolive, P&Gs smaller rival that is more established in emerging markets and more profitable, reported a decline in operating margin from 24.3 per cent to 23.6 per cent.

The Financial Times Limited 2011