Yesterday after market close, The Procter & Gamble Company (NYSE:PG) announced A.G. Lafley is rejoining the company as Chairman, President & Chief Executive Officer, effective immediately. Mr. Lafley who served in these roles from 2000 to 2009 will succeed Bob McDonald, who is retiring from the company on June 30, 2013. At this point, it is unclear to what degree Mr. Lafley will prove an interim CEO, overseeing a near-term succession plan, or if he will stay on more permanently. Investors seem happy with the move sending shares are up 3.8 percent currently. The announcement has been called a big win for The Procter & Gamble Company (NYSE:PG) investor Bill Ackman.
Little insight was given about the future on the conference call, below is a transcript of the entire call on which only CFO Jon Moeller spoke.
Good morning, everybody. And thanks for joining us on short notice. I want to warn you, this will be a very short call. But I felt it was important, given the announcement we made yesterday, that we, at least, touch base with you, you are obviously a very important constituency.
I only have three points I want to provide you with this morning, first this change very simply reflects Bob McDonald’s decision to retire and the board’s view that AJ laverty was currently the best person to replace Bob and build on the momentum bop has initiated and led.
Second this announcement is not indicative of any kind of bigger problem or financial issue. As you probably noticed in our press release yesterday we reconfirmed guidance for the quarter and the fiscal year, and third, this won’t result in
a dramatic change in our strategy or priorities.
We’ll continue to focus on maintaining momentum in developing markets, on building and strengthening our core development market business, all under, supported by innovation and productivity, and we remain committed to those priorities and continue to be optimistic.
I’ll be at the Deutsche Bank AG (NYSE:DB) (ETR:DBK) conference inpatient and be happy to talk with you then, AG will join me as we discuss our fiscal year earnings in our 2013-14 guidance at the end of July, and currently, though things are subject to change, we’ll both plan on attending the back to school conference in Boston and that is really all we have to say this morning.
A quick summary, no change in financial estimates, no change in fundamental strategies and priorities, we’ll keep building the momentum on both the top and bottom line, I look forward to catching up with you as our paths cross through the summer and into the fall.
We’ll be available today, all day, so if you want further perspective or have questions you feel need an answer, please don’t hesitate to call. And thanks, again, for joining us this morning.
Despite Monday being Memorial day a slew of firms are out with reports on the move. Below we have highlights from all the big names.
Barclays
Meet the New Boss, Same as the Old Boss
Importantly, we think bringing Mr. Lafley back is the right move for now. Mr. Lafley is someone who not only knows P&G intimately, but is also well regarded internally and will likely serve as a calming, charismatic leader in a time of change. We’d have to think morale across the organization has been a major issue and perhaps has even been an impediment to a turnaround, not to mention internal stability. Recently, particularly post F3Q13 earnings and our early May visit to Cincinnati, we’ve thought about this leadership vacuum while at the same time, largely believing the back to basics “40/20/10” strategy coupled with a focus on productivity would yield improved results.
To be sure, even with the company’s two largest beauty brands (Pantene & Olay account for ~25% of Beauty sales) still in a deep rut, there are slowly mounting examples of businesses that are getting back on firmer footing. With the dialog around potential internal and external replacements for Mr. McDonald, we’ve figured that any internal candidate wouldn’t bring change dramatic enough to appease the market while any external hire would, more importantly, prove too and unnecessarily disruptive to the P&G organization. Importantly, Mr. Lafley should represent the best intentions of both potential paths.
40/20/10 is already reminiscent of The Procter & Gamble Company (NYSE:PG)’s turnaround strategy at the outset of Lafley’s tenure as CEO.
Last year, when we first heard Procter & Gamble discuss its plan to support its biggest & most profitable businesses, we couldn’t help but think it sounded a lot like the “winning formula” that Mr. Lafley employed in engineering his (first) turnaround of the company.
After several years of disappointing results and decelerating growth, Mr. Lafley lead The Procter & Gamble Company (NYSE:PG) to nearly a decade of fundamental outperformance (5% average annual organic sales growth & at least 12% core EPS growth between 2001-2009) and a doubling of the company’s market cap. Separately, we think it is worth mentioning that an emphasis on “faster-growing, higher-margin” business such as Beauty and Health Care was also critical to P&G’s strategy through the last decade, such that Lafley was the initial architect of the company’s global beauty build out, acquiring Clairol & Wella. As such, to the degree that investors have questioned if a break-up of the company is necessary, naming Lafley CEO would suggest that a break-up is not currently under consideration by the Board.
Credit Suisse
A.G. Lafley in as Chairman & CEO, Bob McDonald retiring After several quarters of speculation, The Procter & Gamble Company (NYSE:PG) made the bold move of enticing Lafley to return to his previous role. At almost 66 years old (this is an early birthday present – Lafley was born on June 13, 1947), we are not sure if this is an interim assignment or if Lafley expects to assume the role on a more permanent basis, noting the press release states “…and facilitate an ongoing succession process”. Lafley is often credited with building out the now struggling beauty business at P&G and is well respected internally, even as growth slowed in the last several quarters of his previous tenure. If nothing more, his first task is to stem share losses and grow P&G at least in-line with global peers, something that hasn’t happened in over 5 years.
Goldman
We expect the leadership change at P&G to be well received by the market. A.G. is respected by the Street and has potential as a charismatic leader to breathe fresh life into the organization. He was instrumental in accelerating PG’s innovation efforts under his tenure by leaning on outside and consumer led research ideation as well as transforming the company from a household products organization into one that skews more heavily toward higher growth beauty and personal care through the acquisitions of Gillette and Wella (among others) and taking Olay upstream with the creation of a Mastige segment. A.G. first got his call to duty as CEO in June, 2000. After dismal performance pre-A.G. the stock outperformed the XLP by 15% in the first year of his tenure and by 89% over the entire course of his tenure. But, don’t forget performance was sliding when he left the firm and that he left it in the state that Bob McDonald (his former protégé) inherited. A.G.’s intense focus on good-better-best ultimately deserves part of the blame for the company’s creation of price umbrellas that gave competitors fertile hunting ground. And his acquisition spree created less value than initially expected by the Street. While change is welcome news for PG, we are hesitant to bake in too much optimism until we hear more of A.G.’s plans.
Citi
Was McDonald’s Leash Too Short or Too Long? — We have endorsed The Procter & Gamble Company (NYSE:PG)’s story and its stock over the last few years given our support for McDonald’s primary strategic focus—that Procter & Gamble was under-indexed in emerging markets relative to some of its big competitors (e.g., Unilever and CL) and that The Procter & Gamble Company needed to remedy that problem (given the outsized contribution to growth that emerging markets represent for FMCG companies). We have attributed Procter & Gamble’s sub-par revenue and EPS growth performance over the last few years to a combination of the following factors: (i) weak growth and profitability in developed markets, largely due to macro headwinds and (ii) higher-than- and longer-than-expected investment needs in emerging markets, largely due to stronger-than-expected competition.
We also believed The Procter & Gamble Company (NYSE:PG) suffered from poor execution globally (including not enough innovation and not enough investment spending). As a result of a combination of these factors, Procter & Gamble’s stock price performance has been lackluster, as it has underperformed the market since McDonald took over. While we had hoped that things would soon improve for Procter & Gamble (largely with the benefit of the company’s massive cost savings program coupled with an easing macro backdrop in Procter & Gamble’s higher-margin developed markets), it appears that maybe the company’s weaker-than-expected 3Q13 performance was the last straw for the Board in terms of its patience in waiting for a turnaround.
Will A.G. Rebase/Redirect/Restructure…or Re-employ? — The biggest question that we suspect will take some time to be answered is “how will A.G. change things?” First, we think it should be a foregone conclusion that he will lower growth expectations for FY14, as Procter & Gamble’s market share momentum is clearly not as good today as the company had expected it to be when it set its plan to return to its long term EPS target of high single-to-low double-digit EPS growth in FY14. Second, we expect A.G. will redirect some investment dollars to fewer, bigger priorities (as he did before, see below). Third, we expect A.G. to continue to push hard on the goal of generating meaningful restructuring savings (which are basically in full swing from what we can tell). Fourth, and most importantly, we hope A.G. pulls out his rolodex and perhaps brings back some other former Procter & Gamble executives who have left the company in recent years. Indeed, it is this last point, that senior management turnover has been at an exceptionally high level since McDonald took over, that has nagged at us the most consistently over the last few years.
While we’ve never quite understood why so many terrific people left Procter & Gamble in such a short period of time, we have known that it just didn’t feel right, and most importantly, we worry that some of this management upheaval and dissent has contributed to Procter & Gamble’s poor execution in recent years.
Lafley Was Terrific…but Let’s Not Be Too Romantic and Rewrite History — A.G. Lafley became The Procter & Gamble Company (NYSE:PG)’s CEO at a difficult time—after Durk Jager had held the post for only ~two years, during which time the company failed to meet its growth targets (and created a fracas in early 2000 when PG was thought to be interested in making one or more major acquisitions that would have redirected the strategy of the company). At that time, A.G. was a surprise choice for the job, but he clearly rose to the occasion and was widely lauded for bringing Procter & Gamble back to center, as he memorably simplified the company’s focus to its “top 10 brands, top 10 countries and top 10 customers.”
A recurring quote that we remember fondly from A.G. was that “everything yields to a process”—which we think was the hallmark of the early days of his tenure. More than anything, though, we think A.G. was incredibly wellliked internally at PG for being thoughtful, disciplined, focused, and fair. However, five years into his post as CEO, Procter & Gamble’s momentum slowed, as it seemed that innovation hit a dry patch, the strategy of acquiring big businesses had run its course (post Clairol in 2001, Wella in 2003 and Gillette in 2005) and Procter & Gamble’s relative lack of emerging market exposure was beginning to catch up with the company.
Indeed, if there was one unfortunate legacy that we think A.G. left behind, it was in our view that while The Procter & Gamble Company (NYSE:PG)’s acquisition of Gillette might have been strategically brilliant, we think many folks consider in hindsight that PG overpaid for the business, and as such, it took Procter & Gamble Company several years longer than expected to get out from under the shadow of hidden/masked earnings dilution. Therefore, while we were somewhat surprised that A.G. stepped down as CEO at age 62 and a year shy of seeing Procter & Gamble through his initial goal to “Deliver the Decade,” i.e., seeing the company through 2010 which would mark the completion of the strategic plan set out by PG in 2005, we felt that at the time, PG was ready for new blood and a fresh perspective in the CEO post.
Will A.G. Be the One to Put Lipstick on Procter & Gamble’s Beauty Business? — Recall, prior to his becoming CEO the first time around, a big part of A.G.’s background was in running The Procter & Gamble Company (NYSE:PG)’s beauty business—both in Japan and in the U.S.—and it was his experience in and focus on the beauty business that we believe contributed to PG making two large hair care acquisitions during his tenure, as well as the terrific success of the Olay and Pantene franchises. With PG in recent years having seen a sharp deceleration in the growth of this business (despite the fact that it is one of the company’s most global franchises), we think it will be a key area of focus for A.G. to get the beauty business (hair and skin mostly, color cosmetics and fragrances to a lesser degree) growing profitably once again.
JPMorgan
A.G. is coming back. We think the return of former CEO A.G. Lafley will be viewed positively, as the market was pleased with the company’s overall performance during his tenure. After taking The Procter & Gamble Company (NYSE:PG) through the “blow up cycle” back in 2000-2001, A.G. oversaw a reacceleration in Procter & Gamble’s top line growth and market shares over his tenure. Earnings growth outstripped peers, and the stock rallied aggressively. While A.G.’s strategy of premiumization ran into trouble in the last few years of his tenure as the global economy worsened, leading to negative EPS revisions, his overall performance should help boost investor confidence.
EPS guidance stays the same. The Procter & Gamble Company (NYSE:PG) is reaffirming EPS guidance, for now, which makes sense given the visibility from productivity, and the relatively anemic top line guidance (and performance) for the year. At this point, we can’t rule out some incremental investment in beauty care in FY14, but with ad/sales having gone up, we think there is not likely to be a big step up.
Succession planning moves to the fore. With A.G. returning to the helm at age 65, there is little doubt that finding a successor will be one of his most important tasks. While we don’t think A.G. should be viewed as an interim CEO, we doubt his tenure will be lengthy. There will likely be much hue and cry from investors to consider outside candidates as the next CEO, but we find that highly unlikely. The company’s promote from within strategy is very ingrained, and we can’t see it ending just now.
Any big changes? While Procter & Gamble was the slowest of our companies to embrace productivity in the post-recession environment, we think the focus could actually improve from here. Furthermore, we think there could be some changes to the organizational structure (although stopping short of moving back to a regional P&L structure that we would like to see), to try and get a better balance of short and long-term growth.
Is there something more ominous? At this point, we think not. The biggest risk right now is that the board saw some looming problem ahead that needed A.G.’s attention to fix. We do not believe that is the case. With productivity in place, PG’s problems are more focused on driving better innovation and better coordination between GBUs and MDOs. In our opinion, these are not massive problems, but rather the difference between 3% and 4-5% organic revenue growth.
BAML
Lafley II to begin immediately P&G announced A.G. Lafley as Chairman, President and CEO. Lafley served as CEO of P&G from 2000 to 2009, a tenure that was broadly considered quite successful. Lafley will succeed embattled CEO Bob McDonald, who will retire after 33yrs with Procter & Gamble. This move is a positive; Lafley should quickly be able to provide leadership and guidance, with a strong reputation both inside and outside P&G. With Lafley approaching his 66th birthday, we would not expect this to be a typical P&G CEO tenure, but this also seems clearly to be more than an interim role. This should also ultimately provide a bridge to the next generation of leaders.
Timing is everything
Lafley is being appointed as a CEO for the second time (Lafley succeeded Durk Jagr in 2000). While not the original architect, Lafley implemented Procter & Gamble’s Organization 2005 restructuring program, including the current GBU/MDO matrix structure. Lafley’s legacy has included driving a robust premiumization in key categories in developed markets, growing the China business to scale, and acquiring Gillette in 2005. Lafley’s final two years at P&G were characterized by lower ad spending and aggressive pricing to manage for commodity inflation and US$ strength, as well as slowing growth in the face of macro pressure.
See A Rising Tide is a Good Gamble – Ira Sohn Conference 2013 Bill Ackman
Morgan Stanley
While Lafley had a very successful prior tenure at The Procter & Gamble Company (NYSE:PG), critics may argue that the end of his tenure was not as successful given at the time of his departure Procter & Gamble was under-exposed to emerging markets, had made a number of acquisitions that were less successful than originally expected (Clairol/Wella/Gillette), and PG’s premium priced focus was ill-suited for a post recession 2008 environment. While these points are not unfair, in our minds this CEO change is a significant positive as Lafley’s tenure was clearly very successful in aggregate, Lafley has experience executing a successful PG turnaround, and a change was necessary at Procter & Gamble in our minds given recent underperformance. We do note that the key hallmark of Procter & Gamble’s success under Lafley (trade-up in developed markets) is unlikely to occur again in a more difficult consumer spending environment.
