Cincinnati, Jan. 31, 2008 - The Procter & Gamble Company announced net sales growth of nine percent to $21.6 billion for the quarter. Sales were up behind strong volume growth from continued success on key product initiatives and double-digit organic growth in developing regions.
Organic volume increased six percent and organic sales were up five percent for the quarter. Diluted earnings per share increased 17 percent to $0.98 per share, above the top end of the company's $0.95 to $0.97 per share guidance range. Earnings grew as topline growth and continued Gillette synergy benefits more than offset higher commodity costs.
"This quarter is another demonstration of P&G's capability to deliver strong results in a difficult competitive and commodity cost environment," said A.G. Lafley, Chairman of the Board and Chief Executive Officer. "Solid topline growth and a sharp focus on cost control are driving strong profit and cash generation. Looking ahead, we are confident that the strength of the company's brand portfolio, initiative pipeline and productivity program will enable P&G to continue delivering at or ahead of its targets."
Executive Summary
Net sales increased nine percent to $21.6 billion behind six percent organic volume growth. Every geographic region posted year-on-year organic volume growth, led by double-digit growth in developing regions.
Net Earnings grew 14 percent to $3.3 billion primarily behind the combination of sales growth and overhead cost savings, which more than offset the impact of higher commodity costs. Earnings per share increased 17 percent to $0.98 for the quarter.
Operating cash flow was up 69 percent to $4.1 billion behind higher earnings and a significant improvement in working capital versus the year-ago period. Free cash flow was 107% of earnings, well-ahead of the company's 90% annual target.
Coffee Announcement
P&G announced plans to separate its coffee business and create an independent company named The Folgers Coffee Company. The coffee business had sales of approximately $1.6 billion and operating income of about $350 million in fiscal 2007. The new company will employ approximately 1,250 employees at four sites in the U.S., and will be headquartered in Cincinnati, Ohio.
P&G stated its goals in this transaction are to maximize the after-tax value of the coffee business for P&G shareholders and to minimize earnings per share dilution. In addition, P&G said this decision will enable the company to better focus its resources on faster growing categories and, as a result, enhance P&G's ability to consistently deliver its annual financial goals as the expected growth rate of the coffee business is below P&G's target range.
P&G believes the transaction will be good for the coffee business as the business will get greater priority and attention as a standalone company. Folgers is the leading retail coffee brand in North America, has attractive operating profit margins and is a strong cash generator.
In anticipation of the transaction, P&G has named Mr. Jamie Egasti to serve as Chief Executive Officer of The Folgers Coffee Company. Mr. Egasti currently serves P&G as President, Coffee and Global Snacks.
Although no decision has been made on the form of the separation, P&G expects to do a spin-off or split-off transaction. P&G's current preference is to do a split-off transaction which is expected to be tax-free for shareholders and result in lower annual earnings dilution than could be achieved with a spin-off. In a split-off, P&G shareholders would be given the option of exchanging their P&G shares for shares in the newly formed coffee company.
Assuming a split-off, the company expects the deal to be dilutive to EPS by 3 to 5 cents on an annual basis. Also, a split-off transaction would result in a significant one-time gain which would be partially offset by one- time transition costs and a one-time increase in restructuring spending associated with eliminating stranded overhead costs and offsetting EPS dilution.
P&G expects to determine the final deal structure during the April-June 2008 quarter and complete the transaction during the July-December 2008 period. P&G said the deal structure will be dependent on market conditions, and P&G will execute the transaction only if it achieves sufficient market valuation.
"We greatly appreciate the contributions of our Coffee employees. For over 45 years the Coffee business has been an important contributor to the success of Procter and Gamble," said Mr. Lafley. "This separation allows us to focus on our core businesses and The Folgers Coffee Company to further develop and leverage its brand portfolio in a coffee-specific business model."
Key Financial Highlights
Net sales for the quarter increased nine percent to $21.6 billion behind five percent volume growth and a five point favorable foreign exchange impact. Disproportionate growth in developing regions resulted in a negative one percent mix impact. Organic sales were up five percent behind six percent organic volume growth. Growth was driven by continued success on initiative activity across the company. A number of the company's key brands, including Duracell, Febreze, Fusion, Head & Shoulders, Nice 'N Easy, Pampers, Prilosec and Tide, delivered double-digit volume growth.
Diluted net earnings per share increased 17 percent to $0.98. Net earnings increased 14 percent to $3.3 billion behind higher sales growth, increased operating profit and a lower tax rate. Operating margin was down slightly versus the year-ago period as a reduction in overhead spending as a percent of sales was more than offset by higher commodity and energy costs.
Gross margin was down 110-basis points to 51.8% of net sales during the quarter. Higher commodity and energy costs had a negative impact of over 150- basis points. These were partially offset by volume leverage and cost savings projects. To offset the significant commodity and energy cost pressure, the company has announced a number of price increases which go into effect during the January-March quarter.
Selling, general and administrative expenses (SG&A) were 30.0% of net sales, a 90-basis point improvement versus the prior year period. Overhead spending as a percent of net sales was down due to overhead cost controls, Gillette synergies and scale leverage. This more than offset higher marketing spending as a percent of net sales to support brand initiatives.
Other non-operating income increased in-line with previous guidance, due to the gain on the sale of the company's Western European Family Care business which closed on October 1.
Operating cash flow was $4.1 billion, an increase of 69 percent versus the base period. Operating cash flow increased behind higher earnings and a significant improvement in working capital versus the year-ago period. Free cash flow as a percentage of net earnings was 107%, well ahead of the company's 90% annual target. Capital expenditures were 3.0% of net sales during the quarter.
The company repurchased $2.9 billion of P&G stock during the quarter as part of the company's previously announced share repurchase program. The company has repurchased $5.5 billion of P&G stock since the inception of this program in July 2007.
Business Segment Discussion
The following provides perspective on the company's October - December quarter results by business segment.
Beauty GBU
Beauty net sales increased 10 percent during the quarter to $5.1 billion and organic sales grew five percent. Net sales were up behind three percent volume growth, a six percent favorable foreign exchange impact and a positive mix impact driven primarily by strong growth in Skin Care and Prestige Fragrances. Organic volume in Prestige Fragrances was up double-digits with continued strong results on Hugo Boss and Dolce & Gabbana. Skin Care volume increased high-single digits behind Olay Definity and Regenerist. Hair Care volume was up low-single digits as strong results on Head & Shoulders were partially offset by softness in professional hair care. Net earnings in Beauty were up ten percent to $883 million behind sales growth. Higher commodity costs and increased marketing spending were offset by lower overhead costs as a percent of sales.
Grooming net sales increased nine percent to $2.2 billion behind seven percent volume growth. Blades & Razors volume was up double-digits, led by double-digit developing region growth behind the successful expansion of Fusion. In developed regions, high-single digit growth in North America behind Fusion and Venus Breeze more than offset the base period impact of pipeline volume related to the Fusion launch in several Western European markets. In Braun, mid-single digit growth in male and female hair removers was more than offset by lower volume in home appliances resulting from supply constraints at a contract manufacturer, a de-emphasis of the home appliances business in the U.S. and the divestiture of thermometer and blood pressure devices. Net sales for the segment benefited from a seven percent favorable foreign exchange impact, but were negatively impacted by mix resulting primarily from disproportionate developing region growth. Net earnings in Grooming were up 11 percent for the quarter to $429 million primarily behind sales growth and lower overhead costs, which more than offset lower gross margin on Braun.
Health & Well-Being GBU
Health Care net sales were up 11 percent during the quarter to $3.8 billion. Sales grew behind a five percent increase in volume and a six percent favorable foreign exchange impact. Oral Care volume was up high-single digits with strong growth on Crest Pro-Health toothpaste and Oral-B brushes in developed regions and continued double-digit growth in developing regions. Feminine Care volume was up mid-single digits behind higher market share on Always. Volume in Pharmaceuticals and Personal Health was in-line with the year ago period as strong results on Prilosec OTC and the addition of the Swiss Precision Diagnostics joint venture were offset by lower shipment levels on Vicks due to low cough and cold incidence and on Actonel. Net earnings in Health Care were up 10 percent to $715 million. Earnings increased behind sales growth and lower overhead costs as a percent of sales, partially offset by a less profitable product mix and higher commodity costs.
Snacks, Coffee and Pet Care net sales increased four percent to $1.3 billion. Sales were up as a result of a one percent pricing impact in Coffee and Pet Care and three points of favorable foreign exchange. Volume for the segment was in-line with the year-ago level as growth in Snacks and Coffee was offset by a decline in Pet Care primarily due to continued negative impacts from the voluntary wet pet food recall last fiscal year. Snacks volume increased mid-single digits behind successful initiative results on Pringles Minis and Selects. Coffee volume was up low-single digits behind the launch of Dunkin' Donuts, Folgers Black Silk and Folgers House Blend. Net earnings in Snacks, Coffee and Pet Care were down 15 percent to $127 million as the impact of higher net sales was more than offset by increased commodity costs.
Household Care GBU
Fabric Care and Home Care net sales increased 10 percent to $6.1 billion behind seven percent volume growth. Favorable foreign exchange added five percent to net sales, but was partially offset by a negative two percent mix impact resulting primarily from disproportionate growth in developing regions. Fabric Care volume was up high-single digits behind double-digit developing region growth and strong initiative results on Tide, Ariel, Downy and Gain, including continued success on the liquid laundry detergent compaction expansion in North America. Home Care volume was up low-single digits as growth on initiative activity including Febreze Candles and the Western Europe Air Care launch was partially offset by market softness in North America. In Batteries, volume was up double-digits in both developed and developing regions behind successful promotion programs during the holiday period and a soft base period. Net earnings in Fabric Care and Home Care increased six percent to $882 million behind sales growth and overhead improvements, partially offset by increased marketing spending and higher commodity costs.
Baby Care and Family Care net sales increased eight percent to $3.4 billion, including the impact of the Western European Family Care divestiture. Sales were up behind two percent volume growth, five points of favorable foreign exchange and a one percent favorable mix impact. Organic sales, which exclude the impact of the Western European Family Care divestiture and foreign exchange, grew eight percent. Baby Care volume increased double-digits behind strong results in developed regions on Baby Dry, Swaddlers and Luvs and continued successful expansion of Pampers in developing regions. Family Care organic volume was up mid-single digits behind strong results on both Charmin and Bounty. Net earnings in Baby Care and Family Care were up 23 percent to $418 million as sales growth and lower manufacturing and overhead costs as a percent of net sales more than offset higher commodity costs.
Fiscal Year and January - March Quarter Guidance
For the 2008 fiscal year, the company expects organic sales to grow four to six percent, in-line with its long-term target range. The combination of pricing and product mix is expected to have a neutral to positive one percent impact on sales growth. Foreign exchange is expected to have a positive impact of about four percent. The net impact of acquisitions and divestitures is estimated to have a negative one percent impact on sales growth. Total sales are expected to increase seven to nine percent. This is an increase of one percent versus the company's previous guidance range due to the increased foreign exchange outlook.
The company now expects earnings per share to be in the range of $3.46 to $3.50, up 14 to 15 percent versus the prior year. This is an improvement versus the company's prior guidance range of $3.46 to $3.49 due to the strong results in the October-December quarter. Operating margins are expected to improve by 20 to 50-basis points driven by lower overhead costs as a percent of sales. The tax rate for fiscal year 2008 is expected to be at or slightly below 28%.
For the January-March quarter, organic sales are expected to grow four to six percent. The combination of pricing and product mix is expected to be about neutral to sales growth. Foreign exchange is expected to have a positive impact of about five percent. The net impact of acquisitions and divestitures is estimated to have a negative one percent impact on sales growth. Total sales are expected to increase eight to ten percent.
Operating margins are expected to improve modestly as overhead cost improvements will largely be offset by lower gross margins. Gross margins are expected to be temporarily lower due to higher commodity and energy costs. The company expects gross margins to recover as pricing actions are implemented in the market. As such, operating profits are expected to accelerate to double-digit growth rates. However, interest expense is expected to be significantly higher than year ago due to a low base period comparison and non-operating income is expected to be significantly lower than year ago due to the timing of divestitures. The tax rate for the quarter is estimated to be at or slightly below 28%. The company expects earnings per share to be in the range of $0.79 to $0.81 for the quarter.
Exhibit 1: Non-GAAP Measures
In accordance with the SEC's Regulation G, the following provides definitions of the non-GAAP measures used in the earnings release and the reconciliation to the most closely related GAAP measure.
Organic Sales Growth. Organic sales growth is a non-GAAP measure of sales growth excluding the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. The company believes this provides investors with a more complete understanding of underlying sales trends by providing sales growth on a consistent basis. Organic sales is also one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation.
The reconciliation of reported sales growth to organic sales in the October-December 2007 quarter
Baby Care &
Total P&G Beauty Family Care
Net Sales Growth 9% 10% 8%
Less: Foreign Exchange Impact -5% -6% -5%
Less: Acquisition/Divestiture Impact +1% +1% +5%
Organic Sales Growth 5% 5% 8%
Free Cash Flow. Free cash flow is defined as operating cash flow less capital spending. Management views free cash flow as an important measure because it is one factor in determining the amount of cash available for dividends and discretionary investment. Free cash flow is also one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation.
Free Cash Flow Productivity. Free cash flow productivity is defined as the ratio of free cash flow to net earnings. The company's long-term target is to generate free cash at or above 90 percent of net earnings. Free cash flow is also one of the measures used to evaluate senior management and is a factor in determining their at-risk compensation.
The reconciliation of free cash flow and free cash flow productivity is provided below ($ millions):
Operating Capital Free Cash Net Free Cash Flow
Cash Flow Spending Flow Earnings Productivity
Oct - Dec '07 $4,141 $(644) $3,497 $3,270 107%
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions Except Per Share Amounts)
Consolidated Earnings Information
OND QUARTER FYTD
% 12/31/ 12/31/ %
OND 07 OND 06 CHG 2007 2006 CHG
NET SALES $21,575 $19,725 9 % $41,774 $38,510 8 %
COST OF PRODUCTS SOLD 10,394 9,287 12 % 19,913 18,152 10 %
GROSS MARGIN 11,181 10,438 7 % 21,861 20,358 7 %
SELLING, GENERAL &
ADMINISTRATIVE EXPENSE 6,467 6,088 6 % 12,729 11,954 6 %
OPERATING INCOME 4,714 4,350 8 % 9,132 8,404 9 %
TOTAL INTEREST EXPENSE 389 339 748 697
OTHER NON-OPERATING
INCOME, NET 192 79 385 259
EARNINGS BEFORE INCOME
TAXES 4,517 4,090 10 % 8,769 7,966 10 %
INCOME TAXES 1,247 1,228 2,420 2,406
NET EARNINGS 3,270 2,862 14 % 6,349 5,560 14 %
EFFECTIVE TAX RATE 27.6 % 30.0 % 27.6 % 30.2 %
PER COMMON SHARE:
BASIC NET EARNINGS $1.04 $0.89 17 % $2.02 $1.73 17 %
DILUTED NET EARNINGS $0.98 $0.84 17 % $1.90 $1.63 17 %
DIVIDENDS $0.35 $0.31 13 % $0.70 $0.62 13 %
AVERAGE DILUTED SHARES
OUTSTANDING 3,341.5 3,406.5 3,348.2 3,410.1
COMPARISONS AS A %
OF NET SALES Basis Basis
Pt Chg Pt Chg
COST OF PRODUCTS SOLD 48.2 % 47.1 % 110 47.7 % 47.1 % 60
GROSS MARGIN 51.8 % 52.9 % (110) 52.3 % 52.9 % (60)
SELLING, GENERAL &
ADMINISTRATIVE EXPENSE 30.0 % 30.9 % (90) 30.5 % 31.0 % (50)
OPERATING MARGIN 21.9 % 22.1 % (20) 21.9 % 21.8 % 10
EARNINGS BEFORE INCOME
TAXES 20.9 % 20.7 % 20 21.0 % 20.7 % 30
NET EARNINGS 15.2 % 14.5 % 70 15.2 % 14.4 % 80
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions)
Consolidated Cash Flows Information
Six Months Ended
December 31
2007 2006
BEGINNING CASH $5,354 $6,693
OPERATING ACTIVITIES
NET EARNINGS 6,349 5,560
DEPRECIATION AND AMORTIZATION 1,503 1,489
SHARE BASED COMPENSATION EXPENSE 242 289
DEFERRED INCOME TAXES 325 201
CHANGES IN:
ACCOUNTS RECEIVABLE (703) (1,668)
INVENTORIES (589) (486)
ACCOUNTS PAYABLE, ACCRUED AND
OTHER LIABILITIES (97) 8
OTHER OPERATING ASSETS &
LIABILITIES 126 (110)
OTHER 215 120
TOTAL OPERATING ACTIVITIES $7,371 $5,403
INVESTING ACTIVITIES
CAPITAL EXPENDITURES (1,184) (1,239)
PROCEEDS FROM ASSET SALES 747 135
ACQUISITIONS, NET OF CASH
ACQUIRED 24 (139)
CHANGE IN INVESTMENT SECURITIES (502) 620
TOTAL INVESTMENT ACTIVITIES $(915) $(623)
FINANCING ACTIVITIES
DIVIDENDS TO SHAREHOLDERS (2,267) (2,045)
CHANGE IN SHORT-TERM DEBT 1,163 9,873
ADDITIONS TO LONG TERM DEBT 5,038 7
REDUCTION OF LONG TERM DEBT (6,129) (12,488)
IMPACT OF STOCK OPTIONS AND OTHER 979 730
TREASURY PURCHASES (5,481) (2,713)
TOTAL FINANCING ACTIVITIES $(6,697) $(6,636)
EXCHANGE EFFECT ON CASH 236 150
CHANGE IN CASH AND CASH EQUIVALENTS (5) (1,706)
ENDING CASH $5,349 $4,987
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions)
Consolidated Balance Sheet Information
December 31, 2007 June 30, 2007
CASH AND CASH EQUIVALENTS $5,349 $5,354
INVESTMENTS SECURITIES 696 202
ACCOUNTS RECEIVABLE 7,688 6,629
TOTAL INVENTORIES 7,690 6,819
OTHER 5,537 5,027
TOTAL CURRENT ASSETS 26,960 24,031
NET PROPERTY, PLANT AND EQUIPMENT 19,888 19,540
NET GOODWILL AND OTHER INTANGIBLE
ASSETS 92,384 90,178
OTHER NON-CURRENT ASSETS 5,169 4,265
TOTAL ASSETS $144,401 $138,014
ACCOUNTS PAYABLE $4,829 $5,710
ACCRUED AND OTHER LIABILITIES 11,818 9,586
TAXES PAYABLE 1,263 3,382
DEBT DUE WITHIN ONE YEAR 13,569 12,039
TOTAL CURRENT LIABILITIES 31,479 30,717
LONG-TERM DEBT 23,528 23,375
OTHER 21,151 17,162
TOTAL LIABILITIES 76,158 71,254
TOTAL SHAREHOLDERS' EQUITY 68,243 66,760
TOTAL LIABILITIES & SHAREHOLDERS'
EQUITY $144,401 $138,014
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
(Amounts in Millions)
Consolidated Earnings Information
Three Months Ended December 31, 2007
% % %
Change Earnings Change Change
Versus Before Versus Versus
Net Year Income Year Net Year
Sales Ago Taxes Ago Earnings Ago
Beauty $5,137 10% $1,120 9% $883 10%
Grooming 2,161 9% 596 12% 429 11%
Beauty GBU 7,298 10% 1,716 10% 1,312 10%
Health Care 3,772 11% 1,056 10% 715 10%
Snacks, Coffee and Pet Care 1,302 4% 201 -13% 127 -15%
Health and Well-Being GBU 5,074 9% 1,257 5% 842 6%
Fabric Care and Home Care 6,074 10% 1,306 6% 882 6%
Baby Care and Family Care 3,374 8% 652 19% 418 23%
Household Care GBU 9,448 9% 1,958 10% 1,300 11%
Total Business Segments 21,820 10% 4,931 9% 3,454 9%
Corporate (245) N/A (414) N/A (184) N/A
Total Company 21,575 9% 4,517 10% 3,270 14%
Six Months Ended December 31, 2007
% % %
Change Earnings Change Change
Versus Before Versus Versus
Net Year Income Year Net Year
Sales Ago Taxes Ago Earnings Ago
Beauty $9,736 8% $2,004 8% $1,572 9%
Grooming 4,176 9% 1,210 14% 880 14%
Beauty GBU 13,912 9% 3,214 10% 2,452 11%
Health Care 7,331 9% 2,036 11% 1,363 10%
Snacks, Coffee and Pet Care 2,425 5% 385 2% 240 1%
Health and Well-Being GBU 9,756 8% 2,421 9% 1,603 8%
Fabric Care and Home Care 11,978 10% 2,662 8% 1,798 8%
Baby Care and Family Care 6,794 9% 1,330 16% 848 17%
Household Care GBU 18,772 10% 3,992 11% 2,646 11%
Total Business Segments 42,440 9% 9,627 10% 6,701 10%
Corporate (666) N/A (858) N/A (352) N/A
Total Company 41,774 8% 8,769 10% 6,349 14%
OCTOBER - DECEMBER NET SALES INFORMATION
(Percent Change vs. Year Ago) *
Volume Volume
With Without
Acqui- Acqui-
sitions/ sitions/ Net
Divesti- Divesti- Foreign Mix/ Sales
tures tures Exchange Price Other Growth
Beauty GBU
Beauty 3% 3% 6% 0% 1% 10%
Grooming 7% 8% 7% 0% -5% 9%
Health and Well-Being GBU
Health Care 5% 5% 6% 0% 0% 11%
Snacks, Coffee and Pet
Care 0% 0% 3% 1% 0% 4%
Household Care GBU
Fabric Care and Home Care 7% 7% 5% 0% -2% 10%
Baby Care and Family Care 2% 8% 5% 0% 1% 8%
Total Company 5% 6% 5% 0% -1% 9%
FISCAL YEAR 2007/2008 NET SALES INFORMATION
(Percent Change vs. Year Ago) *
Volume Volume
With Without
Acqui- Acqui-
sitions/ sitions/ Net
Divesti- Divesti- Foreign Mix/ Sales
tures tures Exchange Price Other Growth
Beauty GBU
Beauty 2% 3% 5% 0% 1% 8%
Grooming 6% 7% 6% 1% -4% 9%
Health and Well-Being GBU
Health Care 5% 4% 5% 0% -1% 9%
Snacks, Coffee and Pet
Care 1% 1% 3% 0% 1% 5%
Household Care GBU
Fabric Care and Home Care 8% 8% 4% 0% -2% 10%
Baby Care and Family Care 5% 9% 4% 0% 0% 9%
Total Company 5% 6% 4% 0% -1% 8%
* These sales percentage changes are approximations based on
quantitative formulas that are consistently applied.