Financial Times Europe - 31.07.2019

(Axel Boer) #1
14 ★ † FINANCIAL TIMES Wednesday31 July 2019



Procter & Gamble s growing sales ati its
fastest pace in 13 years, according to its
latest quarterly figures, in the clearest
sign yet that the consumer goods group
is staging a recovery.
While an $8bn writedown at itsGil-
lette having business highlighted per-s
sistent challenges facing legacy brands,
all five of P&G’s main divisions were able
to raise prices for their products in the
company’s fiscal fourth quarter.
Jon Moeller, chief financial officer,
said the USgroup behind productssuch
as Pampers nappies, Ariel detergents
and Pantene haircare was coping with
a “tsunami” of costs and trade tariffs, in
part by passing them on to customers.
Results publishedyesterday showed

the price rises were not hurting overall
volumes. Organic sales rose 7 per cent
from a year ago, the strongest quarterly
growth since 2006.
Wall Street welcomed the figures,
which mark a turnround forthe group
whose longstanding battle to stop con-
sumers defecting to newer brands hit
profitability and made the company a
target two years ago for activist investor
Nelson Peltz.
Shares rallied more than 4 per cent
yesterday, even though a writedown of
goodwill and intangible assets pushed
P&G to a net loss of $5.24bn for the three
months to the end of June.
P&G said the writedown atGillette
was due primarily to currency devalua-
tion, although it also recognised that
grooming had been hit by “market con-

traction of blades and razors, primarily
in developed markets”.
Along with its big rivals, P&G has long
been under pressure from changing
consumer tastes and intensifying com-
petition that have hurt pricing
power. Grooming products have been
among the worst hit. Men are shaving
less and Gillette has lost ground to the
likes ofDollar Shave Club nda Harry’s.
However, speaking to reportersyes-
terday, Mr Moellerinsisted grooming
was a “very attractive” sector for P&G
and Gillette was “a truly global business,
with very strong market positions”.
Mr Moeller said P&G’s strategy to
refocus its portfolio on successful
brands, combined with efficiency
improvements, was bearing fruit. “All of
this is coming together, which is driving
the results that you’re seeing.”
Markets appear to share the opti-
mism. Even beforeyesterday’s rally,
P&G hares had jumped 63 per cents
from the three-year low they hit in 2018.
P&G earnings were the latest in a
series of corporate updates that have
indicated consumers are prepared to
pay more for household staples, provid-
ing welcome relief for a sector that has
long struggled to boost prices.
P&G’s price rises included a 4 per cent
average increase across its fabric and
homecare products in the quarter, help-
ing the company combat higher costs.
Mr Moeller said the strong dollar, ris-
ing commodity and trucking costs and
trade tariffs had created a $1.4bn “after-
tax headwind”during the year.Despite
the pressures, gross margins strength-
ened from 45 per cent a year ago to 47.
per cent in the June-end quarter.
Challenges remain for the company.
While volumes in the quarter rose in all
of the company’s five divisions apart
from grooming, the increases were a
modest 1 per cent in beauty and in baby,
feminine and family care products,
where a falling birth rate has hurt
demand for Pampers.
“The real question is the sustainabil-
ity” of the recovery, said Ali Dibadj, ana-
lyst at Bernstein.

Retail & consumer

P&G turnround

sees sales growth

hit 13-year high

Cost controls and price

rises pull consumer goods
group out of its slump

V.G. Siddhartha:
‘I fought...
but today I
gave up’


BusinessmanV.G. Siddhartha as beenh
reported missing, sending stock in his
Coffee DayEnterprises ownd a fifth.

Café Coffee Day, founded in 1996 inBan-
galore, is one of India’s most ubiquitous
retail brands ith more than 1,700 cafésw
across the country. Butit is nomoney-
spinner,withpost-tax profit of just $6m
in the past financial year, according to a
company presentation.
In a notice to the Bombaybourse yes-
terday, Coffee Day Enterprises aid Mrs
Siddharthahad “not been reachable
since yesterday evening. We are taking
the help of concerned authorities.Com-
pany is professionally managed and led
by competent leadership team, which
will ensure continuity of business.”
Mr Siddhartha, his wife Malavika
Hegde, and companies associated with
themheld 53 per cent of the equity in
Coffee Day Enterprises but, according to

filings, most of these shares had been
pledged to variousinstitutions over the
past year as security for fresh loans.
As of July 1, Mr Siddhartha, his wife
and related entities had pledged 40.
per cent of the company’sequity as col-
lateral to various lenders,filings show.
The entrepreneur known as “India’s
coffee king” was last seen by his driver
on Monday night, when he got outof his
car close to a bridge across the Nethra-
vathi River, near Mangalore. The driver
sounded the alarm after Mr Siddhartha
failed to return.
Police have launched asearch for Mr
Siddhartha, whose father-in-law .M.S
Krishna s a former foreign ministeri.
Coffee Day Enterprises hasprovided
theexchange with a copy of a letter pur-
portedlyby Mr Siddhartha to the board
in which heregretted that he had “let
down all the people who put their trust
in me. I have failed to create the right
profitable business model despite my

best efforts... I fought for a long time,
but today I gave up.”Pressure “from one
of the private equity partners”required
him to buy back shares, a transaction
that hehad “partially completed six
months ago” by borrowing a large sum
from a friend.
The lettercites pressure from lenders
and “harassment from income tax
authorities” hatt was “very unfair and
has led to a serious liquidity crunch”.
Amit Ranjan, co-founder of tech
group SlideShare, tweeted:
“Black letter day for start-ups &
entrepreneurship in India.”
In 2010, private equity firm
KKRled a consortium that
invested $200m in Cof-

fee Day Enterprises. The group’s listing
on theBombay exchange in October
2015 marked a revival of interest in
India’s then dormant IPO market.
Although KKR sold out a 4.6 per cent
share in the company position in the
IPO, it still holds a 6 per cent share.Nan-
dan Nilekani, one of the founders of
Infosys, holds 2.7 per cent.
In September 2017,Mr Siddhartha’s
home, offices and severalbusiness sites
were raided byauthorities,which later
claimed to have uncovered evidence
of illegal income, which he denied.
Mr Siddhartha has been locked in
battle with tax officials, who earlier
this year tried to stop himselling his
21 per cent stake in IT services group
Mindtree. The businessman
finally sold his stake in
Mindtree in March to
industrial groupLarsen
& Toubrofor an esti-
mated $473m.

Travel & leisure

Indian coffee mogul reported missing

A Café Coffee Day outlet in Bangalore. Filings show that much of the equity in the chain’s parent was pledged as collateral to various lenders —Manjunath Kiran/AFP/Getty

The latest frontin the trade dispute
between Japan and South Korea is a
toxic one. “If you sniff it, you die,” said
oneexpert of thehydrogen fluoride
used for cleaning and etching thewafers
used in computer chips.
The material is at the centre of a
stand-off over compensation for war-
time forced labour that has seen Japan
impose increasing export controls on its
neighbour. Tokyo insists that all claims
were settled in a 1965 treaty, but last
yearKorean courts ruled that the treaty
did not apply to individual cases.
This month Tokyo,dominantinelec-
tronics manufacturing, restricted
exports of hydrogen fluoride s well asa
fluorinated polyamide and photoresists
— among thematerials and components
critical toKorean lectronicse.
Cutting or delaying supplies ofthe
chemicals threatens to choke produc-
tion inKorea and cause chaos in its high-
est-value export industry. But itopens
up atrading frontier, forcing the coun-
try’s techgroups to turn to China.
The change has the potential to
breathelife into Beijing’s decades-long
attempt to secure self-dependency in
chips, an effort that has picked up pace
under Xi Jinping,who has described for-
eign reliance on technology as his coun-
try’s “greatest hidden danger”, and also
in light of theUS-China trade war.
Sanjeev Rana, a Seoul-based analyst
with CLSA, said: “For risk management
purposes, these big ompanies need toc
be looking somewhere else. It does open
a door, that is for sure.”
Samsung Electronics, thebiggest pro-
ducer of memory chips, is among the
companies to have started testing Chi-
na-made substitutes for the Japanese
etching gas, according to a person famil-
iar with matter.
But Chinese chipmaking is not with-
out its problems. While the size and

technical prowess of its industry rows,g
top manufacturers emain years behindr
rivals from the US, Taiwan andKorea.
“Despite 40 years of investment and
espionage, [China] is unable to make
advanced semiconductors. Only 16 per
cent of the semiconductors used in
China are produced in-country, and
only half of these are made by Chinese
firms,”said James Lewis,head of the
tech olicy programme at the Center forp
Strategic and International Studies.
Chip sector specialists in Seoulnoted
that China groups might notbe able to
produce products like etching gasto the
same quality as Japanese companies.
Macquarie analyst Daniel Kim said:
“For semiconductor companies, pro-
duction yield is everything. That is why
they are very conservative, or reluctant,
to switchprocess chemical vendors. A
slight change in the material composi-
tion, or recipe, might affect the output.”
There is a perceived security risk for
countriesreliant on China’s supply
chain, givenits record of problems with
intellectual property protection and
forced tech ransferst. T hese are con-
cerns not only for the chipmakers that
supply US companies such asAmazon,
AppleandMicrosoft, butfor govern-
ments in Seoul and Washington.

“Helping Korea or Japan or Taiwan
protect that technology is really a
national security interest of the United
States,” said onewestern diplomat.
Mark Newman, a Bernstein analyst,
said that strategically and longer-term,
the shift to hinaC might “put Korea
more in China’s camp, versus Japan,
which is more clearly in the US camp. It
can only benefit China because they are
developing their entire semiconductor
supply chain.”
The export restrictions on chip mate-
rials may be just the beginning. If Tokyo
makes good on its threat to remove
South Korea from its “white list” of
trusted trade partners, Seoul’s supply-
chain woes ould quickly extendc to a
host of other sectors.
Japan’s economy ministry is collating
public comments on the white list pro-
posal, thought to number in the tens of
thousands. According to officials, the
earliest date for a cabinet decision is
likely to be August 2.
If Tokyo forges ahead with the pro-
posal,Korean groups will be obliged to
seek individual approvals for 857 of the
1,120 strategic materials they import
from Japan, according to a research note
from Korea Investment & Securities.
While Japan has not said itwillcut off
supplies, here are fears that the importt
process could take months, disrupting
output across the tech supply chain.
Beyond semiconductors, Japanese
suppliers have significantshares of
components and materials used in high-
end smartphones as well as high-end
display and consumer electronics,
according to CLSA research.
Concern ishigh in the electronics sec-
tor, but Park Chong-hoon, head of South
Korea research at Standard Chartered,
said otherexport industries such as pet-
rochemicals, refineries, hydrogen car-
makers and machinery makers also
“will be hit hard by the Japanese move”.
Goldman Sachs estimates that as
much as 97 per cent of Korea’s imports
from Japan — $52.2bnlast year — could
be temporarily disrupted.
Additional reporting by Robin Harding in
Tokyo, Lucy Hornby in Beijing and Song
Jung-a in Seoul

Technology. Export curbs

Tokyo’s toxic rift with Seoul opens door

to Chinese chip material suppliers

Samsung is among groups

testing substitutes for Japanese

etching gas in boost to Beijing

Xi has described foreign

reliance on technology
as the ‘greatest hidden

danger’ to his country

Focusing on successful

brands, combined with
efficiency improvements,

was bearing fruit for P&G

Contracts & Tenders

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JULY 31 2019 Section:Companies Time: 30/7/2019- 18:28 User:julian.summers Page Name:CONEWS3, Part,Page,Edition:USA, 14, 1






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