[an error occurred while processing this directive] P&G 2009 AR Letter: Innovation, Credit Rating, Brand-Building
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Balancing Near-Term Results and Long-Term Growth

We made two critical choices to deal with this macroeconomic environment: (1) to focus on disciplined cash and cost management and (2) to invest in capacity, innovation and consumer value this year to ensure P&G is leading and growing market share when we come out of the recession.

We focused first on cash and costs to protect the financial foundation of our businesses. We increased prices to recover higher commodity costs and foreign exchange transaction impacts. Despite $4 billion in price increases, we’ve held global value shares across the majority of categories, which is a reflection of P&G brands’ strength with consumers and retail customers. We knew that increased pricing would lead to market share volatility, and even some short-term share loss. We also knew higher prices might affect consumption in some more-discretionary categories. We were willing to accept these short-term consequences, however, to maintain investment-grade financial health.

We made the cash utilization choices necessary to maintain our strong AA- credit rating, including temporarily suspending share repurchases. Still, we repurchased over $6 billion in stock, retired another $2.5 billion as part of the Folgers divestiture, and returned over 100% of net earnings to shareholders through a combination of dividends and share count reduction.

With our financial house in order, we focused next on innovation and brand-building. We identified and funded product innovation and marketing initiatives across the business, with an emphasis on growing profitable value share in P&G’s core categories. We also maintained our commitment to research and development investments and we delivered strong consumer communication programs that emphasized the powerful performance-based value our products provide.

We’ve continued to make strategic investments to generate strong growth in future years. We are investing 4% of sales in capital spending, including funding for new manufacturing capacity to support future growth. Over the next five years, we will add 20 new manufacturing facilities — 13 of which have already been announced. Almost all of these facilities are in developing markets, and almost all will be multi-product-category facilities. By migrating our manufacturing base closer to the consumers we’ll be serving, P&G will lower costs and enable better value for more consumers.

We delivered results in fiscal 2009 that reflect these choices. We delivered organic sales and EPS growth and maintained operating margin while delivering strong free cash flow — the financial lifeblood of the business.

Overall, our choices balanced short-term returns and long-term investments.

  • Organic sales increased 2%. Net sales declined 3%, to $79 billion.
  • Core earnings per share increased 8%. Excluding the negative foreign exchange impact, core earnings per share would have increased strong double digits. Diluted net earnings per share increased 17% for the fiscal year.
  • We delivered strong free cash flow productivity at more than 100% of earnings, excluding the gain from the Folgers divestiture.

And, we increased our quarterly dividend 10% in a year when many large companies reduced or eliminated dividends. Fiscal 2009 marked the 53rd consecutive year in which P&G increased dividends.

Note: An explanation and reconciliation of organic sales and free cash flow for 2009 are provided in MD&A Other Information. Explanations of core earnings per share and free cash flow productivity are provided in footnotes (2), (3) and (4) of the P&G Report Card.

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