P&G; Plans $800-Million Restructuring Program : Will Consolidate and Close Factories, Charge Off Costs and Take a Loss for the Fiscal 4th Quarter
Consumer products giant Procter & Gamble on Thursday announced an $800-million, companywide restructuring that calls for consolidating and closing factories that make similar products.
The company will set up an $800-million reserve to cover the cost of the restructuring, which has already begun, and charge off the amount against fourth-quarter earnings. The one-time expense will reduce P&G;’s net income for fiscal 1987 by $435 million after taxes and, analysts said, will result in a loss for the fiscal fourth quarter ending June 30.
Company Chairman John G. Smale said: “Although this restructuring reserve will have a negative effect on current fiscal year income, it will result in a stronger, more competitive company and set the stage for more vigorous earnings growth in the year immediately ahead and in the future.”
Analysts and investors agreed with Smale. On the New York Stock Exchange, P&G;’s shares rose 25 cents a share to $95.625.
The potential cost savings from the restructuring and P&G;’s recent success in regaining market share in the disposable diaper and toothpaste markets bodes well for the company, analysts said.
“Wall Street looks at the company as taking these steps to ensure that the future profitability of the company will be better after these moves,” said analyst Marvin Roffman, a food-industries analyst at Janney Montgomery Scott, a Philadelphia brokerage.
Although some type of restructuring had been anticipated, analysts were surprised by the size and cost. “This is 10 times larger than any restructuring charge they have taken in the past,” analyst Hugh S. Zurkuhlen of Salomon Bros. said.
Analysts speculated that P&G; took the $800-million hit now before the new tax laws reduce the corporate tax rate July 1. If the company had taken the charge in the latter half of the year, the after-tax cost of the charge would be greater than $435 million.
Company officials wouldn’t say exactly how many of its 120 plants worldwide will be closed or consolidated or how many of its 74,500 employees might lose their jobs. But spokeswoman S. M. Hale said that “overall, there will be few plants that will actually be closed and very few employees will be affected.”
In California, P&G; operates plants in Long Beach, Oxnard, Modesto, Hayward, Sacramento and South San Francisco.
So far, P&G; had already announced the closure of three plants: an Omaha baking mix plant, a Cincinnati personal-care products plant and a pulp mill in Green Bay, Wis.
P&G; has also consolidated the production of laundry granules for its Tide, Bold, Cheer and Oxydol products to nine plants from 12. Work is under way to reduce the number of plants making shortening and oil to three from seven.
The company’s roster of factories has grown by 35--many in the same cities with existing P&G; plants--since 1982 as a result of acquiring Norwich Eaton, G. D. Searle’s over-the-counter drug business and Richardson-Vicks Inc. At the same time, improvements in manufacturing technology have allowed the company to boost production with less equipment and fewer locations, P&G; officials said.
Analyst Zurkuhlen estimated that the plants closings and consolidations will result in annual after-tax savings of about $33.6 million, or about 20 cents a share. “Without a doubt,” he said of the restructuring, “it’s bound to improve efficiency.”
The company also said it will lay off some employees at its Duncan Hines cookie manufacturing operations in Jackson, Tenn., and Brockville, Canada, as a result of sharp production cutbacks. Analysts said Duncan Hines ready-to-eat cookies have met with stiff competition since being introduced in 1983. Up to $300 million of the restructuring reserve might be allocated to cutbacks at the cookie factories, Zurkuhlen said.
P&G; said its decision to cut back its ready-to-serve cookie business is related directly to the alleged infringement of its patented technology by three major U.S. manufacturers--Nabisco, Keebler and Frito-Lay. It has patent infringement suits pending against the firms.
P&G; joins other consumer product companies that have restructured to cut costs, improve efficiency and boost profits. Colgate-Palmolive, for instance, allocates 50% of its capital expenditures to increase productivity, Roffman said.
In light of worldwide competition, he said, “the name of the game today is to be efficient. That’s what this is all about.”
