THE PROCTER & GAMBLE COMPANY
NEWS RELEASE One P&G Plaza
- ------------ Cincinnati, OH 45202
FOR IMMEDIATE RELEASE
---------------------
P&G DELIVERS AT TOP END OF INCREASED EARNINGS EXPECTATIONS
----------------------------------------------------------
Strong Top Line Results Drive Another Quarter of Double-digit Earnings Growth
CINCINNATI, Jan. 28, 2004 - The Procter & Gamble Company (NYSE:PG)
announced today double-digit earnings growth for the October - December quarter,
delivering at the top end of increased earnings expectations. Earlier this
month, the company raised its earnings outlook on continued strong organic
volume growth.
EXECUTIVE SUMMARY
- -----------------
o Unit volume grew 19 percent. Organic volume, excluding acquisitions and
divestitures, grew nine percent.
o Volume strength was broad-based with all business segments growing. Product
initiatives, such as Prilosec OTC(R), Olay Regenerist(R) and Crest(R) tooth
whitening products, and developing markets were important factors in the
volume progress.
o Net sales increased 20 percent including four percent from favorable
foreign exchange. Organic sales, which exclude acquisitions, divestitures
and foreign exchange impacts from year-over-year comparisons, grew six
percent.
o Reported net earnings increased 22 percent to $1.82 billion. Higher
earnings were driven by unit volume growth and manufacturing cost savings,
which enabled marketing investments to sustain top line growth.
o Reported net earnings per share increased 23 percent to $1.30. Compared to
core net earnings per share in the base period, which exclude restructuring
program charges, EPS increased 15 percent.
"Our growth continues to be balanced and broad-based with all business
units and regions contributing," said Chairman of the Board, President and Chief
Executive A. G. Lafley. "The strong results in the first half of the year,
despite widespread competitive activity, confirm our belief that we have the
right strategies to deliver sustainable growth over the long term."
QUARTERLY DISCUSSION
- --------------------
The company posted double-digit unit volume, sales and earnings growth
for the quarter ended Dec. 31, 2003.
Unit volume increased 19 percent, including the impact of the recently
completed acquisition of Wella AG. Organic volume, which excludes the impact of
acquisitions and divestitures from year-over-year comparisons, increased nine
percent. Health care led the business segments with unit volume growth of 17
percent. Beauty care (excluding Wella) and fabric and home care also posted
strong growth of 10 and nine percent, respectively. Developing markets posted
strong double-digit unit volume growth.
Net sales increased 20 percent to $13.22 billion. Foreign exchange had
a positive impact of four percent driven primarily by continued strength in the
Euro, Canadian dollar and British pound. Sales were reduced by pricing activity,
largely in response to competition, and mix, primarily from strong growth in
developing markets. Organic sales increased six percent.
Net earnings increased 22 percent to $1.82 billion. Earnings growth was
primarily driven by volume, restructuring program charges of $98 million after
tax in the base period and lower manufacturing costs. This was partially offset
by marketing investments to support base business growth and new initiatives.
Net earnings increased 14 percent when compared to core net earnings in the base
period.
Net earnings per share increased 23 percent to $1.30. When compared to
prior year core results, net earnings per share increased 15 percent. The Wella
acquisition was slightly accretive on the quarter behind better than expected
top line results.
KEY FINANCIAL HIGHLIGHTS
- ------------------------
o Gross margin expanded 210 basis points. Of this, 70 basis points ($75
million before tax) is related to restructuring charges in the prior
period. Of the remaining 140 basis points of expansion, approximately half
was driven by the addition of Wella. The remaining half was driven by the
scale benefit of continued volume growth, the mix impact of higher volume
in the health and beauty care businesses, and product cost savings.
o Marketing, Research, Administrative and Other Costs (MRA&O) as a percentage
of net sales increased 170 basis points. Excluding restructuring charges in
the base period of $57 million, MRA&O as a percentage of net sales
increased 220 basis points. The large majority of this basis point increase
was due to Wella, reflecting a higher ratio of marketing expenses to sales
than the base business, as well as initial post-acquisition costs. The
remaining increase in spending reflects investments behind the base
business and support for initiatives.
o Reported operating margin as a percentage of net sales increased slightly.
Compared to base period core results, operating margin decreased 90 basis
points due to the addition of Wella.
o The company's operating cash flow for the quarter was $2.36 billion versus
$2.32 billion for the base period. Higher net earnings were offset by
increases in working capital, including higher accounts receivable behind
strong December shipments. Capital spending as a percent of sales was three
percent, in line with year-ago and below the company's long-term target.
Free cash flow, defined as operating cash less capital spending, was $1.91
billion. Free cash flow productivity was 105 percent for the quarter, above
the company's long-term target of 90 percent. o
BUSINESS SEGMENT DISCUSSION
- ---------------------------
The following provides perspective on the company's October - December
results by business segment.
o Fabric and home care delivered strong volume, sales and earnings growth.
Volume was up nine percent behind Tide(R), Gain(R), Era(R) and the
continued success of initiatives including Mr. Clean Magic Eraser(R) and
Swiffer Duster(R). Net sales increased 10 percent to $3.41 billion. Sales
growth includes a positive four percent foreign exchange impact partially
offset by mix, primarily from strong growth in developing markets, and
continued pricing adjustments to maintain competitiveness. Net earnings
increased 11 percent to $570 million primarily driven by volume, as well as
lower manufacturing costs.
o Beauty care posted excellent results for the quarter with 10 percent
organic volume growth. Strong base business results were led by
double-digit growth of the Pantene(R), Head & Shoulders(R)and Herbal
Essences(R)hair care brands, Olay(R)skin care and the Always(R)feminine
care brand. Total volume increased 45 percent including acquisitions and
divestitures, primarily Wella. Net sales increased 50 percent to $4.49
billion, including a positive five percent foreign exchange impact. Net
earnings were $681 million, an increase of 34 percent, due to strong top
line growth, including Wella. Gross margin expansion was offset by a higher
ratio of marketing expenses to sales in the Wella business, increased
marketing investments in the North America hair care and skin care
businesses, and in support of a strong initiative program (including Boss
Intense(R), Lacoste Pour Femme(R), Rejoice(R) in Greater China,
Always/Alldays(R)upgrades, Herbal Essences and Pantene in Western Europe
and the geographic expansion of Olay Regenerist and Total Effects).
o Baby and family care volume increased four percent on the strength of high
single-digit growth in Baby Care - primarily in Western Europe and
developing markets. Net sales increased six percent to $2.67 billion.
Foreign exchange was a positive impact of five percent. Sales were reduced
by mix impacts due to strong growth in mid-tier diaper products in
developing markets. Promotional activity, primarily in North America family
care to match higher levels of competitive spending, resulted in a one
percent pricing impact. Net earnings grew two percent against strong base
period results (21 percent increase) to $281 million. Earnings in baby care
increased due to volume and cost savings, largely offset by the
aforementioned pricing investments and rising commodity costs in family
care.
o Health care delivered another quarter of outstanding volume, sales and
earnings growth. Unit volume increased 17 percent driven by continued
success of Actonel(R), Prilosec OTC(R) and oral care. Vicks(R) also posted
strong unit volume growth due to the early cough/cold season in North
America. Net sales increased 22 percent to $1.91 billion aided by a
positive four percent foreign exchange impact and one percent for pricing.
Net earnings were $333 million, an increase of 32 percent, on strong volume
and margin expansion due to lower manufacturing costs and product mix.
Marketing spending increased versus the base period primarily behind
continued support of Prilosec OTC, Crest Whitestrips(R) and Crest Night
Effects(R).
o Snacks and beverages delivered solid earnings growth. Unit volume increased
one percent. Beverages volume increased two percent driven primarily by the
Folgers AromaSeal(R) initiative. Net sales increased six percent to $931
million driven primarily by a foreign exchange benefit of four percent.
Volume and mix gains were partially offset by increased merchandising costs
to support the continued high level of promotional activity in the coffee
category. Net earnings increased 11 percent to $122 million behind volume
and sales growth and lower marketing and administrative spending.
JANUARY - MARCH AND FISCAL YEAR GUIDANCE
- ----------------------------------------
For the March quarter, organic volume is expected to be in the high
single-digits. Foreign exchange is expected to increase sales by two to three
percent primarily due to continued strength of the Euro, Canadian dollar and
British pound. Acquisitions (primarily Wella) are expected to add seven to nine
percent to sales growth. Total sales are expected to increase 14 to 18 percent.
The current consensus estimate is at the top end of net earnings per share
expectations for the quarter.
For the fiscal year, total sales are expected to increase 13 to 17
percent. For the second half of the fiscal year, reported net earnings per share
are expected to increase about 25 percent versus the comparable prior year
period. Compared to prior year core results, net earnings per share are expected
to increase about 10 percent in the back half of the fiscal year. This is in
line with the company's long-term targets and on top of a strong base period
comparison where core net earnings per share increased 14 percent (reported net
earnings per share increased 15 percent). The company continues to expect Wella
to be neutral to net earnings per share for the fiscal year.
FORWARD-LOOKING STATEMENTS
- --------------------------
All statements, other than statements of historical fact included in
this release, are forward-looking statements, as that term is defined in the
Private Securities Litigation Reform Act of 1995. In addition to the risks and
uncertainties noted in this release, there are certain factors that could cause
actual results to differ materially from those anticipated by some of the
statements made. These include: (1) the ability to achieve business plans,
including growing existing sales and volume profitably despite high levels of
competitive activity, especially with respect to the product categories and
geographical markets (including developing markets) in which the company has
chosen to focus; (2) successfully executing, managing and integrating key
acquisitions (including Wella) and completing planned divestitures (including
the potential divestiture of the company's juice business), (3) the ability to
manage and maintain key customer relationships; (4) the ability to maintain key
manufacturing and supply sources (including sole supplier and plant
manufacturing sources); (5) the ability to successfully manage regulatory, tax
and legal matters (including product liability matters), and to resolve pending
matters within current estimates; (6) the ability to successfully implement,
achieve and sustain cost improvement plans in manufacturing and overhead areas,
including successful completion of the company's outsourcing projects; (7) the
ability to successfully manage currency (including currency issues in volatile
countries), interest rate and certain commodity cost exposures; (8) the ability
to manage the continued global political and/or economic uncertainty, especially
in the company's significant geographical markets, as well as any political
and/or economic uncertainty due to terrorist activities; and (9) the ability to
successfully manage increases in the prices of raw materials used to make the
company's products. If the company's assumptions and estimates are incorrect or
do not come to fruition, or if the company does not achieve all of these key
factors, then the company's actual results might differ materially from the
forward-looking statements made herein. For additional information concerning
factors that could cause actual results to materially differ from those
projected herein, please refer to our most recent 10-K, 10-Q and 8-K reports.
ABOUT PROCTER & GAMBLE
- ----------------------
Two billion times a day, P&G brands touch the lives of people around
the world. The company has one of the largest and strongest portfolios of
trusted, quality brands, including Pampers(R), Tide(R), Ariel(R), Always(R),
Whisper(R), Pantene(R), Bounty(R), Pringles(R), Folgers(R), Charmin(R),
Downy(R), Lenor(R), Iams(R), Crest(R), Actonel(R), Olay(R) and Clairol Nice `n
Easy(R). The P&G community consists of nearly 98,000 employees working in almost
80 countries worldwide. Please visit WWW.PG.COM for the latest news and in-depth
information about P&G and its brands.
# # #
P&G MEDIA CONTACT:
- -----------------
In the US: 1-800-866-PROCTER or 1-866-776-2837
International: +1-513-945-9087
P&G INVESTOR RELATIONS CONTACT:
- ------------------------------
John P. Goodwin -(513) 983-2414
The Procter & Gamble Company
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.
All references to base period "core" financial measures (core net
earnings, core net earnings per share, core gross margin, core MRA&O, core
operating margin) in this news release are non-GAAP measures which exclude
restructuring charges from base period results. The attached income statement
provides a reconciliation of the restructuring charges in the base period to the
most comparable GAAP measure.
The restructuring program began in 1999 as part of the company's
Organization 2005 initiative and was substantially completed at the end of
fiscal year 2003. Restructuring program charges include separation related
costs, asset write-downs, accelerated depreciation and other costs directly
associated with the company's reorganization. Restructuring program charges are
not included in business segment results, but instead are reported in corporate.
The company believes investors gain additional perspective of underlying
business trends and results by providing a measure of earnings excluding
restructuring program charges. This is consistent with the company's external
reporting and internal management goal-setting, and is a factor used in
determining at-risk compensation levels. A historical reconciliation of
reported-to-core financials during the Organization 2005 initiative is available
on the company's website at www.pg.com/investor.
Going forward, the company will continue to conduct projects consistent
with the focus of productivity improvement and margin expansion. Beginning with
the current fiscal year, charges associated with these future projects will be
absorbed in normal operating costs.
Organic sales growth is a non-GAAP measure of reported sales growth
excluding the impact of acquisitions and divestitures and foreign exchange from
year-over-year comparisons. The company believes this provides investors with a
more complete understanding of underlying results and trends of the base
businesses by providing sales on a consistent basis. The reconciliation of
reported sales growth to organic sales growth:
October - December Total Sales Growth 20%
Less: Foreign Exchange Impact 4%
Less: Sales due to Acquisitions/Divestitures 10%
---
Organic Sales Growth 6%
The company also reports free cash flow. Free cash flow is defined as
operating cash flow less capital spending. The company views free cash flow as
an important indicator of the cash available for dividends and discretionary
investment. Free cash flow is also one of the measures used to evaluate
management and is a factor in determining at-risk compensation levels. Free cash
flow productivity is defined as the ratio of free cash flow to net earnings. The
company's target for free cash flow productivity is 90 percent. The
reconciliation of free cash flow and free cash flow productivity is provided
below:
Operating Capital Free Net Free Cash
($MM) Cash Flow Spending Cash Flow Earnings Flow Productivity
- --------------------------------------------------------------------------------
Jul - Sep'02 2,010 281 1,729 1,464 118%
Oct - Dec'02 2,316 335 1,981 1,494 133%
Jul - Dec'02 4,326 616 3,710 2,958 125%
Jul - Sep'03 1,606 364 1,242 1,761 71%
Oct - Dec'03 2,355 446 1,909 1,818 105%
Jul - Dec`03 3,961 810 3,151 3,579 88%