P&G Repels Trian In Bid Over Board -- WSJ

Peltz says plan to cut costs hasn't delivered results; company says it is lean and agile

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)

(END) Dow Jones Newswires

July 18, 2017 02:47 ET (06:47 GMT)