November 5, 2015

Ali Dibadj (Senior Analyst) ali.dibadj@bernstein.com +1-212-756-4137

Ian J. Gordon (Analyst) ian.gordon@bernstein.com +1-212-823-3852
Lesley Cook lesley.cook@bernstein.com +1-212-407-5818
Michael Kwok michael.kwok@bernstein.com +1-212-407-5812

Procter & Gamble: Dear David Taylor, Congratulations on

Becoming CEO...Now What?
Ticker
PG
SPX

Rating

CUR

USD

4 Nov 2015
Closing
Price
77.06
2102.31

Target
Price
85.00

TTM
Rel.
Perf.
-17.6%

EPS

P/E

2015A

2016E

2017E

2015A

2016E

2017E

Yield

3.76
116.70

3.72
126.99

4.29
142.81

20.5
18.0

20.7
16.6

18.0
14.7

3.4%
2.1%

O Outperform, M Market-Perform, U Underperform, N Not Rated

Highlights

U.S. Household & Personal Products

David Taylor is now officially the CEO of Procter & Gamble. Our letter below (also mailed to his office in
Cincinnati with some light reading (Exhibit 1)) offers a few ideas for what Mr. Taylor may want to
consider as he attempts to lead a turnaround1 of the company.
David Taylor
Chief Executive Officer
Procter & Gamble
1 Procter & Gamble Plaza
Cincinnati, OH 45202

November 5, 2015

Dear Mr. Taylor,

We hope this note finds you well. Congratulations on your accession to the CEO position at Procter &
Gamble; it must be quite fulfilling after 35 years at the company, starting as an engineer.
In the spirit of believing P&G has enormous potential, we thought it might be useful to offer views on what
your immediate priorities should be. We certainly recognize that you likely have your own thoughts;
however, we are not entirely convinced you are receiving enough outside perspective about P&G.
1) Focus your different businesses differentlyWe beseech you to treat different business units more
differently. For instance, the SKU-intensive, growth-focused, trend-driven skin care business managers
should have significantly more relaxed inventory metrics than they do now, relative to the low-SKU, cashfocused, need-driven consumer tissue business. The hair care business should have different trade terms
with retailers than the laundry business given different competitors, turns, price points, innovation cycles,
and consumer purchase patterns. In the guise of "scale" the company should not blanket similar processes
across the company, stifling entrepreneurialism, and promoting quasi-robotic behavior. Indeed, one of the
biggest complaints from retailers and observations from competitors is that P&G is too slow in changing
anything and generally uncreative. A change in packaging to support a consumer trend, a response to
competitive in-store activity, or a request from a retailer to shift flyer messaging can take six months to
deliver as any decision goes through many stage gates to receive approvaltoo slow for this consumer,
1

And it is a "turnaround" despite what management may say.

See Disclosure Appendix of this report for important disclosures and analyst certifications.

November 5, 2015
Ali Dibadj (Senior Analyst) ali.dibadj@bernstein.com

+1-212-756-4137

competitive, and customer environment. Focusing your different businesses units on their businesses should
simplify decision-making and execution significantly.
2) Never use the word "scale" againWe don't understand why the company keeps saying that it benefits
from "scale." If it did, it would have lower costs than peers, which it doesn't. If "scale" mattered, P&G
would see sustainable success from brands it buys; it would see brands it sells falter; it would see market
shares in its adjacent categories close over time; it would do better than more focused competitors. It does
not. Do away with claiming "scale" benefits, and the company may lose some of its arrogance and
complacency.

U.S. Household & Personal Products

3) Understand why your competitors are better than you nowAdmit it, P&G is not the best CPG
company in the world any more. It may be the biggest, but measured by growth, ROIC, margin trajectory,
shareholder return, market share change, etc., etc., P&G is not at the top of the list. This doesn't mean that it
can't get to the top again; indeed, we believe there is plenty of opportunity at P&G, but you can't simply do
things like you used to. The first step in changing is admitting that you are not the best. The next step is to
truly understand why competitors are now better. We understand the geographic, category, currency, etc.
excuses, but in too many category/country combinations you continue to lose share. Why are competitors
better at innovation? Why are competitors better at serving retailers? Why are competitors better at
marketing? Those are the questions you should be asking your team, and demand real answers2.
4) Only commit to what you can deliver or beatIt was not that long ago that P&G was a credible
organization that, when a problem arose, would identify it (often publicly), address it, and make it go away.
For many years now, we have heard that the company is improving, yet, there is little proof of that,
particularly from a topline perspective. For almost every one of the past few years, P&G has disappointed
on one or more of its guidance metrics. We would encourage you to keep a closer eye on what you truly
believe is deliverable and what you commit to. Misses sometimes happen, of course, but holding people
accountable upon repeated misses is essential. The company has a clear credibility gap with investors and
employees that it needs to fix, no matter what others may tell you.
5) Fix China, Beauty, and GilletteAs we look at your company by region, China is clearly the one that
has fallen most from grace. Instead of recognizing that most Chinese consumers were trading up faster than
you had anticipated, you continued to trade down (e.g., shocking lack of diaper pants and lack of liquid
laundry detergent in that market3). Beauty and Gillette were also driven by similar (but opposite) miscues
regarding SKU proliferation and trading-up. Consumers didn't want more Olay SKUs or an extra blade for a
higher price. China, Beauty, and Gillette need to be fixed by reversing those issues: expand liquid laundry
and pants in China (faster!), cut SKUs and prices in Beauty (faster!) and Gillette (see below!). These
categories must clearly be your priority, but articulating the problem, solution, and then delivering is clearly
something P&G has not done about these businesses (again, see above regarding credibility).
6) Close price gapsWe have believed for a while that one of your biggest issues is having taken prices
up too far, too fast over the years in much of the developed world. This has led to hefty operating margins
(approaching 30% in the U.S.), but also years of share losses. To be fair, the company has done a good job
at cutting price gaps in many categories and stabilizing share, but you may need to go even further with
"Tide Thursday" (what we call your version of "Marlboro Friday" and more recently "Walmart
Wednesday"), especially in categories like Grooming and Fabric Care. We understand that lowering price is
against P&G's raison d'tre, but sometimes, the medicine must be taken.
2

By the way, we think much of why competitors do better is that they focus and treat their businesses differently, they
understand what P&G does well and not so well, they over-deliver versus expectations, they have appropriate
incentive compensations, they cut more costs, they rely more on outsiders, etc.
3
While we have shared these anecdotes for over a year, the company only recently launched pants and liquid laundry
detergent in Chinasee above on gummed up decision-making.

November 5, 2015
Ali Dibadj (Senior Analyst) ali.dibadj@bernstein.com

+1-212-756-4137

7) Cut more costsThe good news regarding the medicine of reducing price gaps, is that a spoonful of
cost-cutting may make the medicine go down. P&G is still fat. Much has been done, but much more
remains, including reduced headcount, reduced salaries, reduced stock options, and generally making P&G
a much less pleasant place to work. Sorry, but all will benefit when the stock performs handsomely
supported by cutting costs.
8) Change employee incentivesP&G has long struggled with accountability and incentives, in our view.
Tenure seems to be of primordial importance to the institution, rather than performance. On average, there
has been and is a culture of "sticking it out" in order to retire a millionaire from P&G, particularly from
hefty options packages. It is clearly difficult for us to say how much you should pay your employees, but
we find it easy to suggest wider differentiation based on performance, as opposed to tenure. Indeed, tenure
should be largely irrelevant at the company. For instance, during my own experiences at P&G, I recall
meetings where employees introduced themselves by name, function, and tenure, immediately creating a
hierarchy in the room which stifled newer ideas. We would encourage you to end that practice if it still
exists and pay/promote yourselves more on differentiated performance.

U.S. Household & Personal Products

9) Bring in outsidersDon't take this the wrong way, but we are disappointed that P&G continues to go
internally to pick its CEO. We think you need a fare dose of outside points of view inserted in the company
at all levels, and especially at the most senior levels. Going back to a point above, competitors are doing
better than you are. Why not learn/poach from them? Although diverse on its surface, this need for outside
views also goes for your Board of Directors; almost everyone there has worked at P&G. The company
needs new ideasclearly the old ones aren't working.
10) Seriously consider a breakupIf the company finds it hard to deliver on the above either culturally or
executionally, Procter & Gamble will do better broken up. Certainly we see a sum-of-the-parts opportunity
given P&G's below-peer valuations, but we see more of an opportunity in having different, smaller, nimble,
focused companies with more aligned incentives and a blank slate in terms of credibility.
These 10 items should be at the top of your list for the company. Please do not let company convention
guide you at Procter & Gamble; it has clearly not worked. In that context, we would encourage you to set
up a full day of meetings for you and the Board to hear outside opinions from 2-3 investors, 1-2 sell-siders,
1-2 activist investors, 1-2 bankers, and 1-2 consultants/turnaround advisors.
You might find some reading helpful as well. Please see below a list of several relevant reports we have
written over the years on Procter & Gamble supporting our views above (Exhibit 1). We would be happy to
answer any questions you have, and we truly do wish you best of luck in fixing the companya difficult,
but possible task.
One last thing, we have heard from many industry sources that you are calm and "even keeled". In our
view, it would be a disservice to P&G's history, employees, owners, yourself, and engineers everywhere if
you did not rock the boat at Procter & Gamble.
All my best,

Ali Dibadj

November 5, 2015
Ali Dibadj (Senior Analyst) ali.dibadj@bernstein.com

+1-212-756-4137

Investment Conclusion

Although we support P&G's appropriate strategy of 1) closing value gaps versus peers (partially through
pricing), 2) being more selective about where it plays (by brand, category, price tier, channel, and
geography), and 3) cutting costs, we would like to see more financial progress. In this context, we expect to
see over time that the company stops losing share, which accelerates the topline and allows for more costsavings to flow to the bottom line. Nonetheless, this may deliver slower progress than a company breakup;
we continue to encourage the Board and Management to consider this option if financial progress remains
challenged.
We rate Procter & Gamble Outperform with a target price of $85.
Details

U.S. Household & Personal Products

Exhibit 1
A few pieces of reading for Mr. Taylor regarding Procter & Gamble
October 28, 2015 - P&G: 3 Interactive Exercises that Show Why We Seem Skeptical That This is the Bottom (Although We Are Hopeful)
October 9, 2015 - PG: Does Procter & Gamble Still Have A Price Gap Problem?
August 25, 2015 - Global Media & Consumer: The Big Shift Series - Implications for Investors
July 13, 2015 - Procter & Gamble (PG): Why a Break-up May be Better Than Mere Divestitures for Long-Term Success (In Three Charts)
June 23, 2015 - Procter & Gamble (PG): What Investors Think...A Proprietary Investor Survey; PG Management/Board Must Read This
May 22, 2015 - Procter & Gamble (PG): Dear Board, a Breakup May Be the Best Option...Now, Not Later
March 26, 2015 - P&G: Is There Hope for U.S. Beauty? A Deep Dive into P&G's Struggling Business
November 14, 2014 - Procter & Gamble (PG): Our Impressions from the Analyst Day
September 29, 2014 - U.S. HPP: In Emerging Markets, Are Regional Players Winning in Household & Personal Products?
June 26, 2014 - Activists at the Gate: Consequences of a Changing Consumer Landscape [Conference Call Transcript]
June 18, 2014 - PG: Does a Break Up Make SOTP Sense if a Plan B is Necessary for P&G?
May 22, 2014 - P&G: Price Gap Analysis Suggests Potential Risk (Again!)
May 8, 2014 - P&G: Wait...Is Beauty Actually Getting Better? Closing Price Gaps Helps Improve U.S. Beauty
February 10, 2014 - P&G: Management Visit Suggests FX Guidedown Likely, But Progress is (Slow and) Steady
August 22, 2013 - PG: What Is Different for AG Lafley This Time Around in the HPP Industry?
July 8, 2013 - PG vs. CL: What Investors Really Think About Growth, New CEO, Competition, Valuation, and More
June 27, 2013 - PG: Walled Cities and Implications to P&G's Emerging Market Growth Opportunity
May 20, 2013 - PG: Price Reductions Have Stabilized U.S. Market Shares, But Will We See Organic Sales Acceleration?
March 6, 2013 - PG: What Is Tide Pods Doing to U.S. Laundry? A Closer Look at the PG vs. CHD Debate
January 24, 2013 - P&G: Why the Next Couple Quarters Are So ImportantP&G Alumni Tell All...
January 18, 2013 - Fundamental Drivers of Success for U.S. Household & Personal Products and Beverages & Snacks
January 15, 2013 - PG: When P&G Attacks...Very Early Evidence of a Turnaround?
November 16, 2012 - P&G: Analyst Day Offers Some (Expected) New, But Also Too Much of the Same
September 7, 2012 - Procter & Gamble: Time for Action Enabling Growth Through Lower Costs and Increased Investments
July 20, 2012 - Procter & Gamble (PG): With Pershing Square Involved, What Could an Activist Do? [Conference Call Transcript]
February 8, 2012 - P&G: Management Meeting Message"Wait For CAGNY..." but Will They Disappoint (Again)?
January 20, 2012 - P&G: The Risk of Poor Execution RemainsTide PODS
October 19, 2011 - PG vs. CL: What Investors Really Think...A Proprietary Investor Survey
October 11, 2011 - P&G: Will There Be More Divestitures?
August 8, 2011 - P&G: Dear Management, It's Time to Seize the Restructuring Opportunity - Upgrading to Outperform
June 6, 2011 - PG: Is Olay the Next Pantene? Potential Red Flags in P&G's Beauty Business
May 10, 2011 - PG, ENR: Gillette vs. SchickA Close Historical Look at Innovations in Razors & Blades
May 4, 2011 - Quick Take - P&G: And Then There Were None... (With PG Org Chart and Potential Future Movers)
March 25, 2011 - Teva, P&G: Deal is Good Strategic Fit; Will Take Time; Challenging Execution
March 7, 2011 - P&G: White Spaces"Sitting In" on P&G's Corporate Strategy Sessions
January 25, 2011 - Procter & Gamble: What to Consider in Assessing P&G's Prospects Going Forward
May 19, 2010 - P&G: Why We Push P&G On Cost-Cutting, and How Much Opportunity Might There Be (If Pursued)?
April 13, 2010 - P&G: Price Wars Begin in IndiaWhat Could It Mean More Broadly?
October 13, 2009 - Procter & Gamble: A $10 Billion Restructuring?...Why We Don't Think It's (Completely) Unthinkable
October 2, 2009 - P&G: The Anatomy of EPS GrowthOpportunities and Challenges
August 18, 2009 - Procter & Gamble: Why Will Value-Oriented Products Be a Challenge, or What Do Moscow and Mobile Have in Common?
July 16, 2009 - P&G: Where Divestitures May Be Targeted
May 26, 2009 - PG: Who Might Be Impacted the Most/Least If P&G Decides to Invest More Aggressively in A&P?
October 2, 2007 - PG: What will become of Duracell, Coffee, and Pringles? What will be the impact on EPS?
May 9, 2007 - Procter & Gamble: Think Health & Beauty, not Home Care - Outperform, $75 Price Target
Source: Bernstein

November 5, 2015
Ali Dibadj (Senior Analyst) ali.dibadj@bernstein.com

+1-212-756-4137

Disclosure Appendix
Valuation Methodology

Our primary valuation methodology is based on market multiples, with price-to-forward-earnings (P/FE)
serving as our preferred metric. We evaluate historical trends of each company's multiples relative both to
the overall market (the S&P 500 index) and the relevant industry group which informs our choice of target
multiple. This multiple is then applied to our EPS estimate for the period 13-24 months from now to
calculate a target share price in 12 months' time.
This P/FE market multiple approach is then validated through the application of two independent, yet
complementary discounted cash flow (DCF) valuation methodologies. Each of these DCF models are based
on annual cash flow forecasts over an explicit period, combined with a continuing value component
intended to capture the firms value into perpetuity. The first method (what we refer to as our Traditional
DCF) estimates fair value based on explicit annual projections for NOPAT, working capital investment
and net capital expenditures made within our current earnings model over the forecast period. The second
method (what we refer to as our ROIC-based DCF) uses normalized expectations for operating profit
growth and marginal return on invested capital (ROIC) as the primary inputs in establishing current
intrinsic value. The fair-market value of common equity determined by each of these methods is divided by
the current diluted share count and multiplied by one plus the cost of equity minus the current dividend
yield (1 + Ke d) to calculate a target share price in 12 months' time.
For PG, based on our EPS estimate of $4.38 over the next 13-24 months and a target multiple of 19.4x, we
derive a one-year price target of $85.

U.S. Household & Personal Products

Risks

Risks to our target price for P&G include:

- Sales growth or margins deviating from what we expect, particularly in emerging markets either due to
political, economic, or competitive conditions;
- Fluctuations in commodities and/or foreign exchange;
- The company not capturing what we expect in terms of synergies, scale benefits and/or other cost
savings plans;
- P&G needing to reinvest more or less of its potential savings in advertising or other parts of the
organization;
- Problems executing its portfolio reshaping strategy, including a delayed timetable for or inability to
divest certain brands; and
- The potential for P&G to engage in additional acquisitions, particularly large ones that may divert
management focus on growing the business organically.

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Outperform: Stock will outpace the market index by more than 15 pp in the year ahead.
Market-Perform: Stock will perform in line with the market index to within +/-15 pp in the year ahead.
Underperform: Stock will trail the performance of the market index by more than 15 pp in the year ahead.
Not Rated: The stock Rating, Target Price and estimates (if any) have been suspended temporarily.

As of 11/04/2015, Bernstein's ratings were distributed as follows: Outperform - 50.1% (1.0% banking clients) ; Market-Perform - 41.3%
(0.4% banking clients); Underperform - 8.5% (0.0% banking clients); Not Rated - 0.2% (0.0% banking clients). The numbers in parentheses
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12-Month Rating History as of 11/04/2015

Ticker Rating Changes
PG

O (RC) 08/08/11

Rating Guide: O - Outperform, M - Market-Perform, U - Underperform, N - Not Rated

Rating Actions: IC - Initiated Coverage, DC - Dropped Coverage, RC - Rating Change

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CERTIFICATIONS

I/(we), Ali Dibadj, Senior Analyst(s)/Analyst(s), certify that all of the views expressed in this publication accurately reflect my/(our) personal
views about any and all of the subject securities or issuers and that no part of my/(our) compensation was, is, or will be, directly or
indirectly, related to the specific recommendations or views in this publication.

Approved By: NK
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