Proctor and Gamble 2007 Annual Report Download - page 37

The Procter & Gamble Company 35Management’s Discussion and Analysis
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Net sales increased 12% in 2007 to $76.5 billion. Sales were up behind
9% unit volume growth, including the impact of an extra three months
of Gillette results in the current year. Organic volume, which excludes
the impact of acquisitions and divestitures, increased 5%. Organic
volume growth was broad-based, with 15 of our top 16 countries
posting year-on-year growth. Developing regions continued to lead
the growth with double-digit increases for the year. All reportable
segments increased organic volume for the year except the Snacks,
Coffee and Pet Care segment. Higher pricing, primarily in coffee and
Health Care, contributed 1% to sales growth. Product mix had no net
impact on sales as a more premium product mix driven by the additional
three months of Gillette results in the current year was offset by the
negative mix impact of disproportionate growth in developing markets,
where the average unit sales price is lower than the Company average.
Favorable foreign exchange contributed 2% to sales growth. Organic
sales increased 5% versus the prior year with each reportable segment
posting year-on-year growth.
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Net sales in 2006 were $68.2 billion, an increase of 20% versus the
prior year including the impact of adding the Gillette business on
October 1, 2005. Unit volume increased 19%, while organic volume
increased 6%. Growth was broad-based across our top markets and
on our top brands. Each region delivered organic volume growth, led
by double-digit growth in developing regions. Every reportable segment
delivered organic volume growth with all but one delivering mid-
single digit or higher growth. Price increases taken across most of our
business segments added 1% to sales growth. A more premium
product mix, driven in part by the addition of the Gillette business,
more than offset the mix impact of disproportionate growth in
developing markets, resulting in a positive mix impact of 1% on sales
growth. Foreign exchange had a negative 1% impact on sales growth.
Organic sales increased 7% versus the prior year.
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Gross margin was 52.0% in 2007, an increase of 60-basis points
versus the prior year. Higher commodity costs had a negative impact
of approximately 60-basis points on gross margin. These were more
than offset by scale leverage from organic volume growth, higher
pricing and cost savings projects. The additional three months of the
Gillette business in 2007, which has a higher gross margin than the
base P&G business, drove additional gross margin improvement of
approximately 30-basis points.
Gross margin was 51.4% in 2006, an increase of 50-basis points
versus the prior year. Higher commodity costs had a negative impact
of over 100-basis points on gross margin. These were largely offset by
gross margin improvement on the base business (P&G excluding
Gillette) behind organic volume growth, cost savings projects and
price increases across nearly every business segment. The addition of
the Gillette business drove the remaining gross margin improvement
of approximately 80-basis points.
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Total selling, general and administrative expense (SG&A) increased 11%,
or $2.5 billion, in 2007. SG&A increased primarily due to the additional
three months of Gillette in the current year and to support business
growth, partially offset by overhead and media purchasing synergies
from the Gillette integration. The additional three months of Gillette in
the current year accounted for approximately $1.1 billion of the increase,
including approximately $160 million of incremental acquisition-
related expenses. The incremental acquisition-related expenses were
comprised of three additional months of intangible asset amortization
resulting from revaluing intangible assets in the opening balance sheet
of the acquired Gillette business, costs to restructure the business
post-acquisition and other integration-related expenses.
Basis Point Basis Point
Comparisons as a percentage of net sales; Years ended June 30  Change 2006 Change 2005
Gross margin  60 51.4% 50 50.9%
Selling, general and administrative  (20) 32.0% (40) 32.4%
Operating margin  80 19.4% 90 18.5%
Earnings before income taxes  100 18.2% 60 17.6%
Net earnings  80 12.7% 50 12.2%