Wednesday, November 02, 2005

Jawboning the Street


Such are the number of times Procter & Gamble management—first the CFO, then the Treasurer, and then again the CFO—used the word “strong” during their discussion of first quarter earnings yesterday.

That’s a total of 23 times the word “strong” was used even before the question and answer session started.

During the Q&A that followed, in fact, management used the word another 17 times.

Total usage of the adjective “strong” during the P&G conference call: 40 times. That’s got to be some kind of record.

In and of itself, the use of an adjective such as “strong” is meaningless. Who cares if management chooses to say “strong growth” and “strong business momentum” and “very strong top and bottom line results,” as the P&G Treasurer did in three successive paragraphs? When a company has “strong” results and chooses to call them “strong,” that’s their right.

But as I have learned watching other companies over the years, “meaningless adjectives” can be employed in all kinds of ways to defuse, defer and decoy the numbers—and therefore deny reality—until it is too late to deal with the underlying problems.

If any company had the right to use the word “strong” in a recent conference call, it was Google. Google’s growth, both sequential and year-over-year, stayed astonishingly high, and margins didn’t budge—leading to a net earnings number that beat Wall Street’s expectations by a full 20c a share.

Yet Google management used word “strong” exactly twice in the management discussion.

Procter & Gamble, it should be noted, “beat the number” by precisely one penny, and used the word 23 times in the management discussion.

(For the record, P&G did not actually beat the number by a full penny. According to a sharp-eyed reader of this blog, "The reported number was $0.7657, which if it had been 0.0008 less would be be rounded down to $0.76, rather than up to $0.77...about $2 million on a quarterly expense structure of $12 billion.")

But P&G management went further than deliberately infuse the adjective “strong” into their “upbeat” presentation. CFO Clayt Daley devoted the final part of his introductory discussion to a Lyndon Johnson-style in-your-face jawboning effort for a higher P/E ratio:

Now I want to conclude by providing some perspective on our price-earnings ratio. We have received a number of questions recently on this topic. We believe there are some important factors that investors should keep in mind when evaluating P&G's P/E multiple both versus history and versus peers.

After noting P&G’s broad product portfolio, expensing of stock options, near-term dilution from the Gillette acquisition and one-time charges, Daley concluded the P/E lobbying effort as follows:

We believe that a simple P/E comparison does not fully capture the fact that P&G is a very different company today than it was five or 10 years ago. P&G has a much different organization structure that allows the global business units to focus on their consumers and competitors while capturing the scale benefits not available to competition.

Additionally P&G has a much stronger portfolio of businesses, a more diverse geographic mix and a significant opportunity to build shareholder value with Gillette, and we are confident that we will be able to deliver our new top and bottom line targets through the end of the decade.

(Notice he got in another “strong” there!)

Forgive my cynicism here, but most of the times I’ve heard a company baldly lobby for a higher P/E ratio, it’s a management team consisting of two guys in an office suite off Route 101 in Burlingame trying desperately to get whatever half-baked small-cap start-up they’ve put their life savings into lumped together with whatever hot new technology is firing investors’ imaginations at the moment—not the highly regarded heads of one of the oldest and most durable consumer products companies in the world.

Happily, I can report, Wall Street’s Finest did not entirely roll over to have its collective belly scratched by the firm, guiding hand of Mr. Daley.

Deutsche Bank Analyst Bill Schmitz, for one, asked the obvious question:

You sort of gave us a little lecture on valuation and why the P/E is too low. Why wouldn’t you just accelerate your share repurchase then if you thought that the multiple was too low now? You still have considerable flexibility in terms of repurchase…

To which CFO Clayt Daley said:

“I’m buying as much stock as I’m allowed to buy.”

For the record, P&G's shares outstanding dropped by not quite 40 million in the quarter, on a 2.7 billion fully-diluted share base.

So why the jawboning? Why the use of the adjective “strong” forty times during an hour long conference call? Why not just take the company private if it's so darn cheap?

The answer to that lies, I believe, in the guts of yesterday’s conference call, in which management outlined not only the “strong” results, but also numerous headwinds facing a consumer products company that just completed its largest consumer products acquisition ever, at a time when the Federal Reserve seems intent on slowing down the buying habits of those very same consumers to which Procter & Gamble sells diapers, coffee, liquid Tide and now Gillette razors.

Chris, I would just say two quick things. One and the most important one is, when we go into periods like this where there are big increases in energy pricing, especially gasoline, there are consumer households whose budget is stretched. Okay? And one of the typical reactions that you see from retailers is to begin to push their private-label brands. We've seen this happen in the '70s during the oil shock. It has happened in every mild or severe recession since.

So I think we're seeing a normal pattern. Frankly, I'm not -- there the manufacturers of private-label diapers are seeing all the same energy and raw material and packing material price pressures that we are that are operating on much thinner margins than the branded competitors. And in the past, some of them have driven themselves into bankruptcy because the margins got squeezed so severely.

No wonder the management jawboned. LBJ would have been proud.

Jeff Matthews
I Am Not Making This Up

Updated 11/5/05

© 2005 Jeff Matthews

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


Ed said...

thanks...very interesting perspective on how to interpret conference call transcripts. - ed

credibility said...

excellent. The readers are lucky to have access to your perspective.

The consumer will buy what she needs.

henrymurfey said...

In the glory days of the "evil empire" (oops, Soviet Union), spoken, political dissent warranted a one way ticket to a sanitarium. Presumptively, wondering minds could, with appropriate treatment thereat, become sanitized.

In today's glorious corporate culture, what lies ahead for dissenting speakers? Jeff, I hope that you like institutional white for your digs.

Quick...get the chlorpromazine (in the interest of reducing corporate expense, only generics are available.)

whydibuy said...

I've always considered co's like P&G to be predicated on the dumb consumer and have for years waited for the epiphany of the consumer to realize they are getting gouged. I'm still waiting. How P&G gets guys to pay 15.00 for a 5 pack of razors is beyond me. I tried their free mailed sample vs my .10 disposable and found no difference in result. 3 blade, 4 blade, whatever, they're a gimmick driven co. And obviously great at brainwashing consumers. Or their battery sub, I think its Energiser but I'm not sure but anyway how they get consumers to pay through the nose for brand name batteries when you can buy a Walgreens or any cheap alkaline battery and have just as good product for alot less. Apparently, none of these well educated American consumers pays any attention to Consumers Report which advises you use the cheapest alkaline battery you can find since the lifespan difference between the high cost name brand and the cheap alkalines is about 2-3%. Totally unnoticable in usage. But pricewise the differences can be in the 100's of %. Good 'ol American suckers.

whydibuy said...

One other point, I find it interesting, the dicotomy in W. Buffett. Before his brand name days, he was quoted as saying " maybe the best bubbly does come from a 40 acre tract in France, but I've always felt that the difference was 99% in the telling and 1% in the drinking". So what does he do? Invests in co's ( G, P&G ) that are exactly that, 99% telling and 1% using. Well, he did say he likes sure things so I guess the stupidity of the American consumer would surely qualify in that category. I find house brands today are just as good and often times better than the branded stuff.

Sam S. Park said...

No company is safe when Jeff is on top of it. Frankly, I appreciate hearing the point of view from a hedge fund manager like Jeff. Very interesting Jeff, but it seems like a very ballsy move. I'd assume P&G is banging on your door.

whyidbuy, that new Gillette razor comes with a Duracell battery. So, I'd assume that Duracell is P&G's subsidiary. I didn't really think about it until whyidbuy made his point. I gotta admit that it's one clever marketing. It's like, hey we bought Duracell, make some products that use batteries.

I know that other cheaper brands work just as well, but I can't wait for the 5 or 6 blade razor to come out. And it's always the replacement blades that cost a jack load, which I never buy. I could never afford replacing my blades. Maybe the facial hair fad will comeback in style... unless P&G has something to say about it.

johnokc said...

Actually Jeff, P&G's over use of the word strong is not close to a record. Please recall Enron's use of the word "otstanding" over 40 times in one of their last calls before Jeff Skilling left while maintaining that they were a "logistics company not a trading company" and deserved a much higher P/E. Ths is repoted in "the Samrtest Guys in the Room."

Sam S. Park said...

Interesting correlation... that's fabulous.

Don said...

Jeff Matthews is definitely making it up on this thread. I emailed him this morning and told him that he was mistaken about 2 things in his original rant about yesterday's P&G call:

1. The talk on the shortcomings of a P/E ratio to assess P&G to the analysts (or "Wall Street's Finest" as Jeff refers to them when he wants to talk about their incompetence) was from P&G's CFO Daley, not CEO Lafley.

2. The question about buying back more shares wasn't ducked as Jeff asserts. When CFO Daley said "I'm buying back all the shares I can", wouldn't that be obvious to the typical hedge fund manager that Daley was referring to "I" in his capacity as CFO. It was noted on the call and in the financials that were released that P&G spent $5.6 billion in share repurchases during the quarter. Buying "all I can" in this context refers to the fact that NYSE companies have limits on what percentage of the average daily trading volume they can account for with share repurchases. Again, I'd think a hedge fund manager would know that. The analyst who asked the question seemed to understand the answer perfectly.

I would have thought that after receiving an email if Jeff was interested in being factual he'd note those corrections. But not only did he not do that, he's heaped on more garbage:

"Yes, Duracell is a P&G company--bought in 1997 for $8 billion of stock."

Duracell has only been a P&G company since October 1, the day after the end of the quarter P&G was reporting on. Gillette, not P&G, bought Duracell in 1998. The FTC only cleared P&G's acquisition of Gillette on Friday, September 30 after the market closed. The merger became effective on Saturday, October 1, the day after the quarter ended. As Lafley noted during the call, P&G isn't even required to file financial statements for Gillette (which included Duracell) for the most recent quarter because it wasn't part of P&G. But he said they will release pro-forma results for the quarter for the Gillette business unit prior to Thanksgiving.

"On past calls, P&G has highlighted Duracell income growth. This time, the answer was: "We don't have that number.""

This is completely false. I can only hope Jeff is confusing P&G with Gillette. The subject of Duracell income growth has never come up on a P&G conference call prior to this one because Duracell wasn't a unit of P&G. A search of the conference call transcript for P&G's prior quarter ended in June reveals the word Duracell was never uttered by anybody. In the previous quarter, Duracell was mentioned twice by P&G in an overview of what would be included in the Gillette business unit post-merger. There were no questions about Duracell. The quarters prior to that pre-dated the merger agreement between P&G and Gillette.

I don't know what Jeff's axe to grind against P&G is, but whatever it is it doesn't excuse the kind of garbage he's posted on this subject. Anybody who has ever taken a close look at P&G's performance since Lafley became CEO in 2000 would find a better target.

ptkelly said...

never underestimate the stupidity of the american consumer (especially when acting in groups) - to paraphrase george carlin, think about how dumb the average american is and then realize 50% are even dumber.

which explains all of our finest in washington - placed there by exactly who...

Jeff Matthews said...


#1. On the conference call transcript provided by Street Events, the speaker I quoted who lobbied for a higher PE was mis-identified as A.G. Lafley, CEO of P&G.

In fact, as you point out, it was CFO Clayt Daley.

Okay, it was the CFO who complained about his company's PE ratio, not the CEO--a distinction without a difference, but a fact worth correcting.

#2. You are right: Duracell was acquired by Gillette in 1997, not P&G. That was my mistake entirely and I will correct it.

However, you are wrong that P&G has never discussed Duracell operating profits.

They did indeed do so during the January 2005 conference call.

But now they "don't have those numbers."

#3. As for my "axe" against P&G, I'm not sure what you mean.

I am fully aware of the terrific job Mr. Lafley has done turning around P&G--as you might guess by the fact that I referred to P&G management as "one of the most highly regarded" management teams on the planet.

Until this conference call I merely assumed he was above that sort of silly stuff.

Jeff Matthews said...

"Johnokc": excellent recall regarding Enron and their conference call spin (although I would not put these two companies even remotely in the same boat).

"Sam": funny you should bring up Duracell.

Yes, Duracell is a P&G company--which Gillette bought in 1997 for $8 billion of stock.

And the most surprising answer during the Q&A (in my opinion) was the answer to the question "What happened to Duracell operating profit in the quarter?"

On past calls, P&G has highlighted Duracell income growth. This time, the answer was: "We don't have that number."

Don said...

Jeff, I looked at the transcript of the Jan 28 '05 call and the comments on Duracell were made by Jim Kilts, the Gillette CEO who was invited on the call to talk about Gillette; this call was just after the merger announcement. Kilts' only real comment on the performance of Duracell the following: "Duracell achieved record profitability, more than doubling its profit of three years ago."

Now you've suggested for the second time, even though you clearly knew better at least the second time, that P&G typically talks about Duracell profitability but wouldn't this quarter. That is a gross distortion, and it's clearly an intentional one on your part. Until a merger is approved, other than a joint team that works on the merger there is a Chinese wall between the two companies in case it's not approved by the FTC. Duracell wasn't even part of P&G for the quarter under discussion. And neither Lafley or Daley had EVER made a comment about Duracell performance on past conference calls. Let's face it, you didn't even realize that Duracell was a Gillette business unit, which doesn't give you a lot of credibility on this issue.

Wouldn't it just be easier to admit you were wrong? It's the same type of thing you criticize the Patrick Byrnes of the world for. (As an aside, I'm not one of the ncans lunatics and think Patrick Byrne isn't fit to be the CEO of a public company.)

I think much of what you write is very good but most of your comments and the picture you're trying to paint on this thread is simply nonsense.

RK said...

Jeff: You have yet to correct your error in accusing CFO Daley of dodging the stock buyback question. To those of us actually listening to the call, not reading the transcript, it was completely clear that Daley was referring to his role as agent of P&G and not himself personally when he said "I'm buying as much stock as I can." The commenter "Don" explained this very well in his post, and a call to P&G Investor Relations would confirm it if you don't want to believe "Don," but in your rebuttal you ignore this and only correct yourself regarding who made the comment. Your belief in this alleged "non-answer" from the company is a pretty important piece of your P&G critique, so it is rather ironic that your rebuttal to "Don" was an even greater "non-answer" to his correction of it.

Jeff Matthews said...

RK and others: The corrections have been made.

My apologies for errors of fact (Duracell was not bought in 1997 but came with the Gillette deal), interpretation (CFO Daley's comment that "I am buying all the stock I can" applied to the company, not him personally) and reliance (the Street Events conference call transcript mis-identified certain speakers).

Thanks to all for their input.

Informed comments are not only welcome, but taken to heart.