Proctor and Gamble 2005 Annual Report Download - page 32

Management’s฀Discussion฀and฀AnalysisThe฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries
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membership฀stores฀in฀the฀U.S.฀Two฀of฀our฀billion-dollar฀brands฀are฀in฀
Snacks฀and฀Coffee฀–฀Pringles฀and฀Folgers.
Forward-Looking฀Statements
We฀discuss฀expectations฀regarding฀future฀performance,฀events฀and฀฀
outcomes,฀such฀as฀our฀business฀outlook฀and฀objectives,฀in฀annual฀฀
and฀quarterly฀reports,฀press฀ releases฀and฀ other฀written฀and฀oral฀฀
communications.฀All฀statements,฀except฀for฀historical฀and฀present฀factual฀
information,฀are฀“forward-looking฀statements”฀within฀the฀meaning฀of฀
the฀“safe฀harbor”฀provisions฀of฀the฀Private฀Security฀Litigation฀Reform฀Act,฀
and฀are฀based฀on฀currently฀available฀competitive,฀financial฀and฀economic฀
data฀and฀our฀business฀plans.฀Forward-looking฀statements฀are฀inherently฀
uncertain,฀and฀investors฀must฀recognize฀that฀events฀could฀be฀significantly฀
different฀from฀our฀expectations.
Ability฀to฀Achieve฀Business฀ Plans.฀We฀are฀a฀consumer฀products฀
company฀and฀rely฀on฀continued฀demand฀for฀our฀brands฀and฀products.฀
To฀achieve฀business฀goals,฀we฀must฀develop฀and฀sell฀products฀that฀
appeal฀to฀consumers฀and฀retail฀trade฀customers.฀Our฀continued฀success฀is฀
dependent฀on฀leading-edge฀innovation,฀with฀respect฀to฀both฀products฀and฀
operations.฀This฀means฀we฀must฀be฀able฀to฀obtain฀patents฀and฀respond฀to฀
technological฀advances฀and฀patents฀granted฀to฀competition.฀Our฀success฀
is฀also฀dependent฀on฀effective฀sales,฀advertising฀and฀marketing฀programs฀
in฀an฀increasingly฀fragmented฀media฀environment.฀Our฀ability฀to฀innovate฀
and฀execute฀in฀these฀areas฀will฀determine฀the฀extent฀to฀which฀we฀are฀
able฀to฀grow฀existing฀sales฀and฀volume฀profitably฀despite฀high฀levels฀of฀
competitive฀activity,฀especially฀with฀respect฀to฀the฀product฀categories฀and฀
geographic฀markets฀(including฀developing฀markets)฀in฀which฀we฀have฀
chosen฀to฀focus.฀There฀continues฀to฀be฀competitive฀product฀and฀pricing฀
pressures฀in฀the฀environments฀in฀which฀we฀operate,฀as฀well฀as฀challenges฀
in฀maintaining฀profit฀margins.฀To฀address฀these฀challenges,฀we฀must฀
respond฀to฀competitive฀factors,฀including฀pricing,฀promotional฀incentives฀
and฀trade฀terms฀for฀products.฀We฀must฀manage฀each฀of฀these฀factors,฀as฀
well฀as฀maintain฀mutually฀beneficial฀relationships฀with฀our฀key฀customers,฀
in฀order฀to฀effectively฀compete฀and฀achieve฀our฀business฀plans.฀Since฀
our฀goals฀include฀a฀growth฀component฀tied฀to฀acquisitions,฀we฀must฀
manage฀and฀integrate฀key฀acquisitions,฀such฀as฀the฀Wella฀acquisition฀
and฀the฀pending฀acquisition฀of฀The฀Gillette฀Company,฀including฀obtaining฀
the฀required฀regulatory฀approvals฀and฀achieving฀the฀cost฀and฀growth฀
synergies฀in฀accordance฀with฀stated฀goals.
Cost฀Pressures.฀Our฀costs฀are฀subject฀to฀fluctuations,฀particularly฀due฀
to฀changes฀in฀commodity฀prices,฀cost฀of฀labor,฀foreign฀exchange฀and฀
interest฀rates.฀Our฀costs฀in฀2005฀were฀impacted฀by฀sharply฀higher฀
commodity฀costs฀and฀we฀expect฀this฀trend฀to฀continue฀in฀2006.฀
Therefore,฀our฀success฀is฀dependent,฀in฀part,฀on฀our฀continued฀ability฀to฀
manage฀these฀fluctuations฀through฀pricing฀actions,฀cost฀savings฀projects,฀
sourcing฀decisions฀and฀certain฀hedging฀transactions.฀We฀also฀must฀
manage฀currency,฀especially฀in฀volatile฀countries,฀and฀debt,฀including฀
debt฀related฀to฀our฀announced฀plan฀to฀repurchase฀shares฀of฀Company฀
common฀stock.฀In฀the฀manufacturing฀and฀general฀overhead฀areas,฀we฀
need฀to฀maintain฀key฀manufacturing฀and฀supply฀arrangements,฀including฀
sole฀supplier฀and฀sole฀manufacturing฀plant฀arrangements.฀We฀must฀also฀
implement,฀achieve฀and฀sustain฀cost฀improvement฀plans,฀including฀our฀
outsourcing฀projects.
Global฀Economic฀Conditions.฀Economic฀changes,฀terrorist฀activity฀and฀
political฀unrest฀may฀result฀in฀business฀interruption,฀inflation,฀deflation฀
or฀decreased฀demand฀for฀our฀products.฀Our฀success฀will฀depend฀in฀part฀
on฀our฀ability฀to฀manage฀continued฀global฀political฀and/or฀economic฀
uncertainty,฀especially฀in฀our฀significant฀geographical฀markets,฀as฀฀
well฀as฀any฀political฀or฀economic฀disruption฀due฀to฀terrorist฀and฀other฀
hostile฀activities.
Regulatory฀Environment.฀ Changes฀in฀laws,฀regulations฀and฀the฀related฀
interpretations฀may฀alter฀the฀environment฀in฀which฀we฀do฀business.฀This฀
includes฀changes฀in฀environmental,฀competitive฀and฀product-related฀laws,฀
as฀well฀as฀changes฀in฀accounting฀standards฀and฀taxation฀requirements.฀
Accordingly,฀our฀ability฀to฀manage฀regulatory,฀tax฀and฀legal฀matters฀and฀to฀
resolve฀pending฀matters฀within฀current฀estimates฀may฀impact฀our฀results.
Results฀of฀Operations
Volume฀and฀Net฀Sales฀
Unit฀ volume฀ in฀ 2005฀ increased฀ 8%.฀ Each฀ of฀ our฀ three฀ GBUs฀฀
delivered฀volume฀growth฀rates฀of฀high-single฀digits฀or฀greater฀led฀
by฀P&G฀Beauty,฀up฀12%.฀Every฀one฀of฀our฀geographic-based฀MDOs฀
posted฀volume฀growth,฀led฀by฀developing฀markets฀with฀high-teens฀฀
volume฀growth.฀ Organic฀volume,฀ which฀ excludes฀the฀ impacts฀ of฀฀
acquisitions฀and฀divestitures,฀also฀increased฀8%.฀Additional฀volume฀from฀฀
the฀acquisition฀of฀Wella,฀which฀was฀acquired฀in฀September฀of฀2003,฀was฀
offset฀by฀the฀divestiture฀of฀the฀Juice฀business฀in฀August฀of฀2004.฀The฀฀
increase฀in฀volume฀versus฀the฀prior฀year฀was฀driven฀by:
•฀ High฀single-digit฀growth฀of฀our฀“billion-dollar฀brand”฀portfolio,฀which฀
represents฀approximately฀60%฀of฀total฀Company฀volume;
•฀ Growth฀in฀each฀of฀our฀top฀16฀countries,฀representing฀approximately฀
80%฀of฀total฀Company฀net฀sales;฀
•฀ Market฀share฀growth฀in฀eight฀of฀our฀top฀10฀customers;฀and฀
•฀ Continued฀strength฀in฀developing฀markets,฀particularly฀Greater฀China฀
and฀Central฀and฀Eastern฀Europe/Middle฀East/Africa.
Net฀sales฀reached฀a฀record฀level฀of฀$56.74฀billion,฀an฀increase฀of฀10%฀
versus฀the฀prior฀year.฀Foreign฀exchange฀contributed฀2%฀to฀net฀sales฀
growth,฀primarily฀driven฀by฀the฀strength฀of฀the฀Euro,฀British฀pound฀and฀
Japanese฀yen.฀Higher฀relative฀growth฀in฀developing฀markets,฀where฀the฀
average฀unit฀sales฀price฀is฀lower฀than฀the฀Company฀average,฀resulted฀in฀
a฀negative฀mix฀impact฀of฀1%฀on฀net฀sales฀growth.฀Pricing฀added฀1%฀to฀
sales฀growth.฀Price฀increases฀in฀Family฀Care,฀Pet฀Health฀and฀Nutrition,฀
Pharmaceuticals,฀Coffee฀and฀in฀certain฀Fabric฀Care฀markets฀were฀partially฀
offset฀by฀price฀investments฀taken฀primarily฀in฀Europe฀to฀address฀the฀
growth฀of฀hard฀discounters฀and฀in฀response฀to฀competitive฀activity฀in฀
certain฀Fabric฀Care฀and฀Baby฀Care฀markets.฀Net฀sales฀excluding฀foreign฀