P&G Reports $0.82 EPS, Up 11%, On 13% Operating Profit Growth

CINCINNATI, April 30 /PRNewswire-FirstCall/ -- The Procter & Gamble Company (NYSE: PG) announced diluted net earnings per share growth of 11 percent to $0.82 per share. Earnings were driven by net sales growth, continuing focus on cost control and Gillette synergy benefits, which more than offset higher commodity costs. Operating profit margin improved 60-basis points, driving a 13 percent increase in operating profit. Net sales increased nine percent to $20.5 billion. Organic volume and sales were both up five percent. Five of the company's six segments delivered mid-single digit or higher organic volume growth.

"This quarter is yet another demonstration of the power of P&G's product category and geographic diversification and disciplined focus on cash and cost productivity," said A.G. Lafley, chairman of the board and chief executive officer. "P&G delivered strong results in-line with long-term targets in a challenging economic and competitive environment with broad-based sales and share growth, earnings growth and overhead cost improvement."

Net sales for the quarter increased nine percent to $20.5 billion. Volume was up four percent, including a negative one percent impact from the Western European Tissue divestiture. Favorable foreign exchange added five percent to net sales. Organic sales grew ahead of organic volume in both developed and developing regions. Disproportionate growth in developing regions drove a negative one percent mix impact. Price increases had a positive one percent impact on net sales. Volume grew primarily behind successful product initiatives and continued double-digit volume growth in developing regions. Growth was broad-based as 18 of our 22 top categories, representing over 90% of total net sales, delivered year-on-year organic volume growth. A number of the company's key brands, including Always, Ariel, Dolce & Gabbana, Febreze, Fusion, Gain, Head & Shoulders, Naturella, Pampers, Pringles, Rejoice, Venus and Vicks, delivered at least high-single digit global volume growth.

Diluted net earnings per share increased 11 percent for the quarter to $0.82 behind strong operating profit growth. Operating profit was up 13 percent as a result of higher net sales and improved operating margin. Operating margin was up 60-basis points as a reduction in overhead spending as a percent of net sales more than offset higher commodity and energy costs.

Gross margin was down 30-basis points to 51.3% of net sales during the quarter. Higher commodity and energy costs had a negative impact of over 220- basis points. Most of this negative cost impact was offset by volume leverage, pricing and cost savings projects.

Selling, general and administrative expenses (SG&A) were 31.2% of net sales, an 80-basis point improvement versus the prior year period due to lower overhead spending as a percent of net sales. Overhead spending improved as a result of increased productivity, Gillette synergies and scale leverage. Marketing spending was up nine percent, in-line with net sales growth.

Other non-operating income for the quarter was down $159 million versus the prior-year period primarily due to higher divestiture gains and investment income in the base period. Interest expense increased $85 million largely due to higher debt levels to support the company's share repurchase program.

Operating cash flow was $4.3 billion for the quarter, driven primarily by strong earnings results, an unusually large deferred tax benefit and a decrease in accounts receivable. Free cash flow was 136% of net earnings for the quarter, well ahead of the company's 90% annual target. Capital expenditures were 3.3% of net sales during the quarter.

The company repurchased $2.6 billion of P&G stock during the quarter as part of the company's previously announced share repurchase program. The company has repurchased $8.0 billion of P&G stock since the inception of this program in July 2007, a level consistent with the company's three year $24 - $30 billion share repurchase plan. Combined with $3.4 billion in dividends, P&G has distributed $11.4 billion to shareholders fiscal year to date, or 126% of net earnings.

Business Segment Discussion

The following provides perspective on the company's January - March quarter results by business segment.

For the 2008 fiscal year, the company expects organic volume and organic sales to both grow approximately five percent. Pricing is expected to add one percentage point to net sales growth, as the company has announced price increases to offset the impact from higher materials and energy costs. Mix is estimated to reduce net sales growth by one percent due to rapid growth of developing markets. In addition, foreign exchange is expected to add approximately five percent to net sales, and the net impact of acquisitions and divestitures is expected to reduce net sales by one percent. In total, the company expects all-in net sales to grow approximately nine percent versus the prior fiscal year.

P&G now expects earnings per share to be in the range of $3.48 to $3.50 for fiscal year 2008. This is an increase compared to the company's prior guidance range of $3.46 to $3.50 due to the strong January - March quarter results. The company now estimates operating margins to improve by 20 or more basis points for the year, as overhead productivity improvements, pricing and cost savings programs should more than offset the impact of higher materials and energy costs.

For the April - June quarter, P&G expects organic sales growth of four to six percent. This includes a net pricing and mix benefit of approximately one percent. Foreign exchange is estimated to add five to six percent to net sales growth, and the net impact of acquisitions and divestitures is expected to reduce net sales by one to two percent. Total net sales are expected to increase eight to ten percent.

Operating margins are expected to improve modestly as the benefits from overhead productivity savings, pricing and other cost savings programs should more than offset the impact of higher input costs. Gross margins are expected to decline versus prior year. The tax rate for the quarter is estimated to be about 28%. The company expects earnings per share to be in the range of $0.76 to $0.78 per share of the fourth quarter.

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. Such statements are based on financial data, market assumptions and 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 statement as a result of new information, future events or other factors. Forward-looking statements are inherently uncertain, and investors must recognize that events could differ significantly from our expectations. 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 with respect to lower income consumers and 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) the ability to successfully execute, manage and integrate key acquisitions and mergers, including (i) the Domination and Profit Transfer Agreement with Wella, and (ii) the Company's merger with The Gillette Company, and to achieve the cost and growth synergies in accordance with the stated goals of these transactions; (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, 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; (6) the ability to successfully implement, achieve and sustain cost improvement plans in manufacturing and overhead areas, including the Company's outsourcing projects; (7) the ability to successfully manage currency (including currency issues in volatile countries), debt, interest rate and commodity cost exposures; (8) the ability to manage continued global political and/or economic uncertainty and disruptions, especially in the Company's significant geographical markets, as well as any political and/or economic uncertainty and disruptions due to terrorist activities; (9) the ability to successfully manage competitive factors, including prices, promotional incentives and trade terms for products; (10) the ability to obtain patents and respond to technological advances attained by competitors and patents granted to competitors; (11) the ability to successfully manage increases in the prices of raw materials used to make the Company's products; (12) the ability to stay close to consumers in an era of increased media fragmentation; (13) the ability to stay on the leading edge of innovation and maintain a positive reputation on our brands; and (14) the ability to successfully separate the company's coffee business. 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

Three billion times a day, P&G brands touch the lives of people around the world. The company has one of the strongest portfolios of trusted, quality, leadership brands, including Pampers(R), Tide(R), Ariel(R), Always(R), Whisper(R), Pantene(R), Mach3(R), Bounty(R), Dawn(R), Gain(R), Pringles(R), Folgers(R), Charmin(R), Downy(R), Lenor(R), Iams(R), Crest(R), Oral-B(R), Actonel(R), Duracell(R), Olay(R), Head & Shoulders(R), Wella(R), Gillette(R), and Braun(R). The P&G community consists of 138,000 employees working in over 80 countries worldwide. Please visit http://www.pg.com for the latest news and in-depth information about P&G and its brands.

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.

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):

SOURCE The Procter & Gamble Company