Proctor and Gamble 2006 Annual Report Download - page 30

The Procter &Gamble Company and Subsidiaries
28 Management’s Discussion and Analysis
• Focusing relentlessly to improve costs and generate cash.
Each organization is evaluated on its ability to support the Company’s
financial goals and increase total shareholder return. This includes
an evaluation of net sales growth, earnings growth, profit margin
expansion and cash productivity. Our organizations are evaluated on
their ability to generate cash, for example, by increasing capacity
utilization and meeting capital spending targets or by reducing
working capital required to run the business.
SUMMARY OF 2006 RESULTS
For the fiscal year ended June 30, 2006, we delivered our fifth
consecutive year of sales growth and free cash flow productivity at
or above our stated targets.
•Net sales increased 20% to $68.22 billion.
°Organic sales, which exclude the impacts of acquisitions,
divestitures and foreign exchange, increased 7%, exceeding our
post-Gillette organic sales growth target range of 4% to 6%.
°Every reportable segment delivered year-on-year organic
sales growth.
°16 of our 17 pre-existing billion-dollar brands increased volume
during the year. Folgers volume did not increase as a result of
Hurricane Katrina impacts. With the addition of Gillette, we now
have a total of 22 billion-dollar brands.
°Every geographic region posted organic volume growth, led by
double-digit growth in developing markets. Organic volume
excludes the impacts of acquisitions and divestitures.
•Diluted net earnings per share increased 4% to $2.64, including an
estimated $0.20–$0.23 of dilution impact from the Gillette acquisition,
which reduced earnings per share growth by 8%–9%.
•Cash flow from operating activities was $11.38 billion.
°Free cash flow productivity was 100%, above our target of 90%.
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 such statements, except for historical and present
factual information, are “forward-looking statements,” and are based
on financial data and our business plans available only as of the time the
statements are made, which may become out-of-date or incomplete.
We assume no obligation to update any forward-looking statements as
a result of new information, future events or other factors. 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
andoperations.Thismeanswemustbeabletoobtainpatentsand
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,
especially with respect to the product categories and geographic
markets (including developing markets) in which we have chosen to
focus. There are high levels of competitive activity in the environments
in which we operate. To address these challenges, we must respond
to competitive factors, including pricing, promotional incentives and
trade terms. 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 Gillette and Wella
acquisitions, including 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, raw materials, cost of labor, foreign
exchange and interest rates. 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 our debt and currency exposure,
especially in volatile countries. We need to maintain key manufacturing
and supply arrangements, including sole supplier and sole manufacturing
plant arrangements. We must implement, achieve and sustain cost
improvement plans, including our outsourcing projects and those
related to general overhead and work force rationalization.
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 geographic
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 (including product liability, patent and intellectual
property matters as well as those related to the integration of Gillette
and its subsidiaries) and to resolve pending matters within current
estimates may impact our results.