Procter & Gamble profit tops forecast, plans buybacks

Fri Aug 3, 2012 12:33pm EDT

1 of 2. Procter & Gamble's Gillette shaving foam can be seen on display at a new Wal-Mart store in Chicago, January 24, 2012.

Credit: Reuters/John Gress

(Reuters) - Procter & Gamble Co (PG.N) posted a higher-than-expected quarterly profit despite a drop in sales, as the world's largest household products maker tries to prove that it can make the improvements needed to move past recent disappointments.

The maker of Tide laundry detergent, Olay skin cream and a host of other products also reversed course by announcing a $4 billion share repurchase program just weeks after saying it would not buy back shares this year.

The results, released on Friday, are being watched closely for any signals of how well P&G and its current leadership can fix a long list of problems, especially after activist investor William Ackman stepped in and bought about $1.8 billion worth of its shares.

"Procter & Gamble is a great company, it's a blue chip, it's well-known, but the results that we have seen over the last couple of years have just been pretty uninspiring," said Channing Smith, co-manager of the Capital Advisors Growth Fund (CIAOX.O). "It's a show-me story for the next couple of quarters."

P&G announced a $10 billion restructuring in February and in June cut expectations as it launched a more focused strategy.

During a nearly 90-minute conference call with analysts, Chief Executive Bob McDonald and Chief Financial Officer Jon Moeller repeatedly outlined the steps they believe will right their $83.68 billion ship, from cutting more jobs to setting the right level of investment in sluggish developed markets and growing in developing ones where P&G has less of a presence.

"It really comes down to them delivering what they say," said UBS analyst Nik Modi, who has a "neutral" rating on the shares. "The message sounded like, 'Hey, give us some time, we're showing you that what we're doing is working, give us some time.' ... Obviously that was designed, I believe, to address the stake Ackman has taken."

P&G's forecast for the current quarter sits below Wall Street's estimate, suggesting it could take several more months before the bulk of the company's efforts pay off.

P&G, whose other brands include Pampers and Gillette, said it had talked with Ackman's Pershing Square Capital Management, but did not divulge details of those discussions. Last month it said the board backs McDonald and his turnaround plan and is monitoring the effectiveness of the strategy.

For years, P&G was able to grow as shoppers tried out new products from Swiffer dusters to Crest teeth-whitening strips, but it admits to falling short in innovation of late.

Its latest major new item, Tide Pods concentrated laundry detergent, got off to a slow start. The next big new products with what McDonald calls "disruptive innovation" will not hit stores until fiscal 2014, he said.

P&G now plans to repurchase $4 billion worth of its shares this fiscal year, after calling off buybacks in June because it wanted to preserve its credit rating. Moeller said P&G had changed its mind because it had growing confidence in its turnaround plan and more cash on hand than it had anticipated in June, while interest rates continued to fall.

Shares of P&G, a component of the Dow Jones industrial average .DJI, were up 3.5 percent at $65.72 on Friday afternoon.

'WE KNOW WHAT HAS TO BE DONE'

P&G has struggled as growth dropped off significantly in developed markets, which make up 60 percent of sales, while in emerging markets, it is dealing with mandated price cuts in Venezuela and import curbs in Argentina.

"We know what has to be done at Procter & Gamble, and we're taking the right steps to get it done," said McDonald, who has been at the helm of Cincinnati-based P&G since July 2009.

P&G earned $3.63 billion, or $1.24 per share, in the fourth quarter ended on June 30, compared with $2.51 billion or 84 cents per share a year earlier.

Core earnings, or profit from continuing operations excluding items, were 82 cents per share, in line with a year earlier. That surpassed the company's June forecast of 75 to 79 cents and the analysts' average estimate of 77 cents, according to Thomson Reuters I/B/E/S.

A better-than-anticipated tax rate accounted for 3 cents of the earnings per share, Moeller said.

P&G said it expected core earnings of $3.80 to $4.00 this year. Analysts on average expect it to earn $3.88 per share.

For the current first quarter, P&G expects to post core earnings of 91 to 97 cents per share. The analysts' average forecast is $1.03.

The company's job cuts are coming in ahead of schedule. P&G planned to eliminate 10 percent of its 57,000 nonmanufacturing jobs, with 1,600 layoffs expected in fiscal 2012 and another 4,100 during fiscal 2013.

P&G has cut 5 percent of nonmanufacturing jobs so far and now expects to complete the majority of the 10 percent headcount reduction by the end of this calendar year, McDonald said.

Over time, there could be further reductions beyond the 10 percent, Moeller said.

(Reporting by Jessica Wohl in Chicago; Editing by Lisa Von Ahn and Matthew Lewis)

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