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A.G. Lafley, Chairman of the Board
When I became CEO in 2000, P&G faced some of the most demanding challenges in the Company’s long history. We made the strategic choices necessary to get P&G back on track to sustainable growth. Overcoming the challenges in 2000 made us a better and more focused company, and in the years since, we have designed P&G to grow consistently and reliably.
We faced even greater challenges in fiscal 2009 as we encountered one of the most difficult economic environments in decades. Shortly after we began the fiscal year, oil reached an all-time high of $147 per barrel. In September, following the Lehman Brothers bankruptcy, credit markets stopped functioning normally. This impacted suppliers, retailers and distributors, some of whom went out of business and many of whom significantly reduced inventory levels to conserve cash.
The credit crisis, combined with falling housing prices and equity markets, led to a severe economic contraction in the U.S. and most other developed countries. Nearly 30 million people lost their jobs worldwide and consumer behavior changed dramatically. Consumers pulled back on discretionary purchases and pushed relentlessly for the best value in nondiscretionary categories. Global economic growth stopped — GDP declined from +4% during the first quarter of calendar 2008 to -6% in the fourth quarter, a ten-point swing.
Economies also slowed in developing markets — in China, Central and Eastern Europe and the Middle East. These markets, which had been growing GDP about +6%, slowed to an average -1% during the fourth quarter of 2008 — a seven-point swing.
Global anxiety and risk aversion drove a flight to the safety of U.S. dollars, resulting in the swiftest, broadest and deepest foreign exchange move in modern times.
Commodity cost and currency exchange rate volatility placed tremendous pressure on our business. We incurred roughly $2 billion in net commodity and energy costs this year, on top of about $1 billion in the prior year. Foreign exchange reduced P&G’s fiscal 2009 sales by about four percentage points, or approximately $4 billion, and profit by more than $1 billion. Consumer spending declined and volume growth in the broad majority of categories in which we compete slowed to an average of 1–2%, versus 3–4% in the prior year.
P&G Report Card
Progress Against P&G’s Goals and Strategies
Growth Results
| Average annual | Goals | 2009 | 2001–2009 |
|---|---|---|---|
|
(1) Organic sales exclude the impacts of acquisitions, divestitures and foreign exchange, which were 6%, on average, in 2001– 2009. (2) Core earnings per share for 2009 excludes a positive $0.14 per share impact from significant adjustments to tax reserves in 2008, a positive $0.68 per share impact from discontinued operations in 2009 and a negative $0.09 per share impact from incremental Folgers-related restructuring charges in 2009. (3) Core earnings per share for 2001– 2009 excludes a negative $0.61 per share impact in 2001 from the Organization 2005 restructuring program charges and amortization of goodwill and intangible assets, positive impacts of $0.06 and $0.68 per share earnings from discontinued operations in 2001 and 2009, respectively and a negative $0.09 per share impact from incremental Folgers-related restructuring charges in 2009. (4) Free cash flow productivity is the ratio of operating cash flow less capital spending to net earnings. For 2009, we have excluded $2,011 million from net earnings due to the gain on the sale of the Folgers business. Free cash flow productivity in 2009 equals $14,919 million of operating cash flow less $3,238 million in capital spending divided by net earnings of $11,425 million which excludes the Folgers gain. Reconciliations of free cash flow and free cash flow productivity for 2001–2009 are provided on page 48. |
|||
| Organic Sales Growth (1) | 4–6% | 2% | 5% |
| Core Earnings per Share Growth | 10% | 8%(2) | 12%(3) |
| Free Cash Flow Productivity (4) | 90% | 102% | 112% |
Growth Strategies (2001–2009)
- Grow from the core: Leading Brands, Big Markets, Top Customers
- Volume up 7%, on average, for P&G’s 23-billion dollar brands (5)
- Volume up 6%, on average, for P&G’s top 16 countries (6)
- Volume up 6%, on average, for P&G’s top 10 retail customers (6)
- Develop faster-growing, higher-margin, more asset-efficient businesses
- Beauty sales more than doubled to $18.8 billion; profits nearly tripled to $2.5 billion
- Health Care sales more than doubled to $13.6 billion; profit increased fourfold to $2.4 billion
- Home Care sales more than doubled; profits more than tripled
- Accelerate growth in developing markets and among low-income consumers
- Developing market sales up 15% per year
- Over 40% of total company sales growth from developing markets
- Developing market profit margins comparable to developed-market margins
(1) Organic sales exclude the impacts of acquisitions, divestitures and foreign exchange, which were 6%, on average, in 2001–2009.
(2) Core earnings per share for 2009 excludes a positive $0.14 per share impact from significant adjustments to tax reserves in 2008, a positive $0.68 per share impact from discontinued operations in 2009 and a negative $0.09 per share impact from incremental Folgers-related restructuring charges in 2009.
(3) Core earnings per share for 2001–2009 excludes a negative $0.61 per share impact in 2001 from the Organization 2005 restructuring program charges and amortization of goodwill and intangible assets, positive impacts of $0.06 and $0.68 per share earnings from discontinued operations in 2001 and 2009, respectively and a negative $0.09 per share impact from incremental Folgers-related restructuring charges in 2009.
(4) Free cash flow productivity is the ratio of operating cash flow less capital spending to net earnings. For 2009, we have excluded $2,011 million from net earnings due to the gain on the sale of the Folgers business. Free cash flow productivity in 2009 equals $14,919 million of operating cash flow less $3,238 million in capital spending divided by net earnings of $11,425 million which excludes the Folgers gain. Reconciliations of free cash flow and free cash flow productivity for 2001–2009 are provided in MD&A Other Information.
(5) Excludes the impact of adding newly acquired billion-dollar brands to the portfolio.
(6) Excludes the impact of adding Gillette.
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