Proctor and Gamble 2005 Annual Report Download - page 33

Management’s฀Discussion฀and฀Analysis The฀Procter฀&฀Gamble฀Company฀and฀Subsidiaries 29
exchange฀increased฀8%,฀well฀above฀the฀Company’s฀target.฀Organic฀
sales,฀which฀exclude฀the฀effects฀of฀acquisitions,฀divestitures฀and฀foreign฀
exchange,฀also฀increased฀8%.฀
In฀ 2 0 0 4 ,฀ unit฀ vo lume฀ incre a s e d฀ 17% ,฀ wit h ฀ a l l฀ GBUs฀ and฀฀
geographic฀ regions฀ achieving฀ unit฀ volume฀ growth.฀ Excluding฀฀
the฀impact฀of฀acquisitions฀and฀divestitures,฀primarily฀Wella,฀unit฀volume฀฀
for฀the฀Company฀increased฀10%.฀Net฀sales฀were฀$51.41฀billion฀in฀2004,฀฀
an฀ increase฀ of฀19%฀compared฀to฀ 2003.฀Organic฀ sales฀increased฀
8%,฀well฀above฀the฀Company’s฀target.฀Net฀sales฀increased฀behind฀฀
volume฀growth,฀including฀the฀addition฀of฀Wella,฀and฀a฀positive฀foreign฀฀
exchange฀impact฀of฀4%฀due฀primarily฀to฀the฀strengthening฀of฀the฀Euro,฀฀
British฀pound฀and฀Canadian฀dollar.฀Product฀mix฀reduced฀sales฀growth฀by฀1%,฀฀
reflecting฀higher฀growth฀in฀developing฀markets,฀including฀Greater฀China฀
and฀Latin฀America,฀which฀generally฀have฀an฀average฀unit฀sales฀price฀
lower฀than฀the฀Company฀average.฀Pricing฀adjustments฀reduced฀sales฀
growth฀by฀1%฀as฀we฀sharpened฀Family฀Care฀and฀Coffee฀category฀pricing฀
to฀remain฀competitive฀on฀shelf฀and฀reduced฀prices฀to฀improve฀consumer฀
value฀and฀stimulate฀growth฀in฀selected฀product฀categories,฀including฀฀
Fabric฀Care฀and฀Feminine฀Care.
Operating฀Costs
Gross฀ margin฀ in฀ 2005฀ was฀ 51.0%,฀ a฀ decrease฀ of฀ 20฀ basis฀
points฀ compared฀ with฀ the฀prior฀ year.฀ Higher฀ commodity฀costs฀
reduced฀ gross฀margin฀ by฀over฀100฀basis฀points.฀We฀were฀ able฀฀
to฀offset฀approximately฀ half฀of฀ this฀ impact฀ through฀the฀ scale฀
benefits฀ of฀ volume฀ growth,฀ with฀ additional฀ offset฀ coming฀฀
from฀supply฀chain฀savings฀and฀pricing.฀Price฀increases฀to฀recover฀฀
commodity฀costs฀were฀taken฀in฀Family฀Care,฀Pet฀Health฀and฀Nutrition,฀
Coffee฀and฀certain฀Fabric฀Care฀markets.฀Gross฀margin฀also฀contracted฀
due฀to฀strong฀growth฀in฀developing฀markets.฀Gross฀margin฀in฀developing฀฀
markets฀is฀generally฀lower฀than฀the฀Company฀average.฀Additionally,฀the฀
sale฀of฀the฀Juice฀business฀in฀August฀of฀2004฀provided฀a฀positive฀impact฀
to฀gross฀margin,฀as฀the฀Juice฀business฀had฀a฀lower฀gross฀margin฀than฀
the฀Company฀average.
In฀2004,฀gross฀margin฀was฀51.2%,฀an฀increase฀of฀220฀basis฀points฀
versus฀the฀previous฀year.฀Charges฀for฀the฀restructuring฀program฀that฀
was฀substantially฀completed฀in฀2003฀accounted฀for฀80฀basis฀points฀
of฀the฀improvement.฀Of฀the฀remaining฀gross฀margin฀expansion,฀฀
approximately฀90฀basis฀points฀were฀driven฀by฀the฀scale฀benefit฀of฀increased฀฀
volume฀and฀40฀basis฀points฀were฀due฀to฀the฀addition฀of฀Wella,฀which฀
has฀a฀higher฀gross฀margin฀than฀the฀balance฀of฀the฀Company.฀Supply฀
chain฀savings฀and฀favorable฀product฀mix฀benefits฀were฀offset฀by฀the฀฀
impact฀of฀higher฀commodity฀costs฀and฀pricing฀actions.฀
Geographic Sales Split
(FY 2005 Net Sales)
48%
5%
23%
24%
North America
Western Europe
Northeast Asia
Developing Geographies
฀ Years฀ended฀June฀30
฀ ฀ Basis฀ ฀ Basis฀
฀ ฀ point฀฀฀point฀฀
฀฀ change฀ 2004฀ change฀ 2003
Comparisons฀as฀a฀percentage฀of฀net฀sales
Gross฀margin฀ ฀ (20)฀ 51.2%฀ 220฀ 49.0%
Selling,฀general฀and฀administrative฀ ฀ (40)฀ 32.1%฀ 120฀ 30.9%
Operating฀margin฀ ฀ 20฀ 19.1%฀ 100฀ 18.1%
Earnings฀before฀income฀taxes฀ ฀ 20฀ 18.2%฀ 80฀ 17.4%
Effective฀tax฀rate฀ ฀ (20)฀ 30.7%฀ (40)฀ 31.1%
Net฀earnings฀ ฀ 20฀ 12.6%฀ 60฀ 12.0%
Gross Margin Progress
(% of sales)
2003 2004 2005
51.2
49.0
48%
49%
50%
51%
52%
51.0
Net Sales
(in billions of dollars)
2003 2004 2005
51.4
43.4
56.7