Proctor and Gamble 2007 Annual Report Download - page 42

The Procter & Gamble Company
40 Management’s Discussion and Analysis
Snacks, Coffee and Pet Care net sales increased 2% to $4.4 billion in
2006. Unit volume was at despite a high-single digit decline in our
coffee volume caused by shipment disruptions following Hurricane
Katrina in August 2005. Our primary coffee manufacturing and
warehousing facilities, located in New Orleans, incurred signicant
disruption from Hurricane Katrina. We were unable to manufacture
and ship at full capacity for several months in 2006, resulting in a
temporary decline in our U.S. market share of approximately 2 points.
Pet care volume declined slightly during the year due to strong
competitive activity, particularly in North America and Western Europe.
These declines were offset by mid-single digit growth in snacks behind
Pringles. Price increases in coffee added 2% to sales growth. Earnings
declined 13% to $385 million in 2006 as costs incurred during the
scal year related to Hurricane Katrina, higher green coffee prices and
lower pet care earnings more than offset the impact of pricing in
coffee and earnings growth in snacks.

As disclosed in Note 2 to the Consolidated Financial Statements, we
completed the acquisition of The Gillette Company on October 1, 2005.
This acquisition resulted in two new reportable segments for the
Company: the Blades and Razors and the Duracell and Braun reportable
segments. The Gillette oral care and personal care businesses were
subsumed within the existing Health Care and Beauty reportable
segments, respectively.
Because the acquisition was completed in October 2005, there are no
results for the two new reportable segments in the 2005 scal year
period. In order to provide our investors with more insight into the
results of the Blades and Razors and the Duracell and Braun reportable
segments, we previously provided supplemental pro forma net sales
and earnings data for these segments for each of the quarters in the
year ended June 30, 2005, and for the quarter ended September 30,
2005 (as presented in our Form 8-K releases on October 4, 2005 and
November 22, 2005). Management’s discussion of the current year
results of these two segments is in relation to the comparable prior
year results including pro forma net sales and earnings for the July to
September 2005 period and reported results for the October 2005 to
June 2006 period. Management’s discussion of the scal year 2006
results of these segments covers the nine-month post-acquisition
period from October 1, 2005 to June 30, 2006, and is in relation to
such comparable prior year pro forma net sales and earnings data.
With respect to the earnings data, the analyses for both periods are
based on earnings before income taxes. The previously disclosed
Blades and Razors and Duracell and Braun pro forma information
reconciled “Prot from Operations,” the measure used by Gillette in
its historical lings, to Earnings before Income Taxes, the comparable
measure used by P&G. Gillette did not allocate income tax expense to
its reportable segments.

Change vs. Change vs.
(in millions of dollars)  Prior Year* 2006* Prior Year*
Volume  n/a n/a n/a
Net sales  n/a $3,499 n/a
Net earnings  n/a $ 781 n/a
* The Gillette business was acquired on October 1, 2005. Therefore, scal 2006 only includes
results for the nine-month period that P&G owned the business.
Net sales in Blades and Razors increased 12% in 2007 to $5.2 billion
versus 2006 full-year pro forma results. Sales increased primarily
behind the continued expansion of the Fusion razor system and
growth on Mach3 in countries where Fusion has not yet launched.
Fusion was launched in North America in scal 2006 and expanded
into other markets including Western Europe in scal 2007. Overall,
volume/mix contributed 7% to sales growth while price increases
taken across most shaving systems added 1%. Favorable foreign
exchange had a positive 4% impact on sales.
Earnings before income taxes increased 14% in 2007 to $1.7 billion
versus the comparable 2006 full-year pro forma results. Earnings
growth was driven by sales growth and integration-driven synergy
savings, partially offset by higher marketing investment behind Fusion
and incremental acquisition-related charges. We incurred $63 million
of incremental acquisition-related charges in the current scal year.
The incremental acquisition-related charges are comprised of
amortization charges from revaluing intangible assets in the opening
balance sheet, partially offset by base period product costs related to
revaluing Gillette’s opening inventory balance. Amortization charges
are higher in the current scal year due to the extra three months of
Gillette post-acquisition results in the current period (amortization
charges are not included in the pro forma results for the quarter
ended September 30, 2005). Net earnings in 2007 were $1.2 billion.
In 2006, Blades and Razors net sales for the nine-month post-
acquisition period increased 1% to $3.5 billion versus the comparable
prior year period pro forma results, including a negative 1% foreign
exchange impact. Mid-single digit sales growth in North America
behind the launch of Fusion, coupled with double-digit growth in
Latin America and Central & Eastern Europe, was largely offset by
declines in Western Europe and Asia. Sales in Western Europe were
negatively impacted by a base period which included the launch of
M3Power as well as a current year period with signicant retailer
inventory reductions. In several developing markets in Asia, sales
declined as a result of reduced distributor inventory levels following
integration of Gillette into existing P&G distributors. Global consumption
in blades and razors increased 5% during the year. Price increases
contributed 2% to sales growth. Earnings before income taxes
declined 13% to $1.1 billion, including $294 million of acquisition-
related charges that negatively impacted earnings by 24% during
the period. The acquisition-related charges included $277 million of
increased amortization expense as a result of revaluing Gillette’s
intangible assets to fair market value. The balance of the charges were
primarily due to higher product costs from revaluing opening inventory
balances at fair value. Earnings were also impacted by an increase in