The Procter & Gamble Company (NYSE:PG) announced diluted net earnings per share from continuing operations of $0.83, up six percent on a seven percent increase in net sales. Core EPS was $0.89, up 10 percent and $0.07 above the high end of the Company's guidance range. Volume grew seven percent, the fastest rate of organic volume growth in 18 quarters. A strong innovation program supported by higher media weights drove volume growth across all regions and five of six business segments.

"We are very pleased with this quarter's results," said Chairman of the Board, President and Chief Executive Officer Bob McDonald. "Volume growth was strong as we accelerated our pace of innovation and increased marketing support. Solid top-line results, in conjunction with our cost and productivity efforts, enabled us to exceed our core earnings per share targets. We generated a significant amount of cash, authorized a sizeable dividend increase and raised our share repurchase plans. We are operating more effectively as one company, coordinating and scaling our activities. Our over-arching growth strategy - to touch and improve more consumers' lives, in more parts of the world, more completely - is working."

Executive Summary


• Diluted net earnings per share from continuing operations grew six percent to $0.83. Core EPS, which excludes certain tax, legal and restructuring charges, was $0.89, up 10 percent.

• Net sales increased seven percent for the quarter to $19.2 billion behind unit volume growth of seven percent. Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, grew four percent.

• Operating margin increased 80 basis points for the quarter behind a 290 basis point expansion of gross margin, partially offset by a 210 basis point increase in selling, general and administrative (SG&A).

• Operating cash flow was $4.9 billion for the quarter, an increase of 15 percent. Adjusted free cash flow, which is operating cash flow less capital spending and the impacts of the global pharmaceuticals divestitures, was $4.5 billion and 172 percent of net earnings.


Key Financial Highlights

Net sales increased seven percent to $19.2 billion for the January - March quarter on a seven percent increase in unit volume driven by a strong innovation program, increased marketing and merchandising support. Key initiatives launched this quarter include Pampers Dry Max, Crest 3D White and Olay Pro-X Firming in North America, Always Simply Fit and Pampers Underjams in Western Europe, Naturella, Olay for Men and Olay Natural White in Asia, Oral-B Pro Health toothpaste in Latin America and Pampers Sleep & Play and Always Thick in the Central & Eastern Europe/Middle East/Africa (CEEMEA) region. Volume growth was broad-based with growth in all geographic regions, led by double-digit growth in developing regions. Organic sales growth was four percent. Mix reduced net sales by two percent due primarily to accelerated growth in developing regions. Pricing reduced sales by one percent. Favorable foreign exchange added three percent to net sales growth as key foreign currencies strengthened versus the U.S. dollar.

Diluted net earnings per share from continuing operations increased six percent to $0.83 for the third fiscal quarter, including a charge of $0.05 related to a tax provision in the recently enacted U.S. healthcare reform legislation. Net earnings from continuing operations were $2.6 billion. The effective tax rate on continuing operations increased 600 basis points primarily due to the aforementioned tax charge in the current period and a low base period due to favorable audit settlements in the prior year. Core EPS was up 10 percent to $0.89 driven by net sales growth and margin expansion.

Diluted net earnings per share declined one percent versus prior year period to $0.83 as the loss of contribution from discontinued operations divested in prior periods was mostly offset by the increase in earnings from continuing operations.

Operating margin increased 80 basis points versus the prior year period due to higher gross margin, partially offset by an increase in SG&A as a percentage of net sales. Gross margin expanded 290 basis points to 51.9 percent of net sales driven primarily by lower commodity costs and manufacturing cost savings. SG&A as a percentage of net sales increased 210 basis points due mainly to higher marketing spending.

Operating cash flow was $4.9 billion during the third fiscal quarter, up 15 percent versus the prior year mainly due to working capital improvements. Adjusted free cash flow was an all-time record at $4.5 billion and was 172 percent of net earnings. Capital expenditures were 3.7 percent of net sales.

Based on the strength of its business results and cash performance, P&G announced a 9.5 percent increase to its quarterly dividend earlier this month. This is the 120^th consecutive year - since P&G was incorporated in 1890 - in which the company has paid a dividend and the 54^th consecutive year that the dividend has increased. During the past 54 years, P&G's dividend has grown at an annual compound rate of approximately 9.5%. In addition, P&G raised its outlook for share repurchases in fiscal year 2010 to approximately $6 billion, up from its previous estimate of about $5 billion.

Business Segment Discussion

Beauty and Grooming GBU


• Beauty net sales increased six percent to $4.6 billion for the quarter on unit volume growth of four percent. Organic sales were up two percent. Volume growth was driven by double-digit increases in developing regions. Negative geographic mix reduced net sales by one percent due mainly to the disproportionate growth in developing regions where selling prices are below the segment average. Pricing lowered net sales growth by one percent due mainly to strengthened trade programs in the CEEMEA region and in North American Hair Care to support innovation and maintain competitive consumer value. Favorable foreign exchange contributed four percent to net sales growth. Hair Care volume was up mid-single digits driven by double-digit growth in developing regions behind initiative activity and market size expansion. All major Hair Care brands contributed to volume growth. Female Beauty volume grew mid-single digits primarily due to a double-digit increase in shipments of female skin care products driven by the Olay Natural White initiative in Asia. Salon Professional volume declined high single digits mainly due to the exit of non-strategic businesses, while organic volume declined mid-single digits primarily due to continued market contractions. Prestige volume increased mid-single digits due mainly to a weak base period comparison in travel retail and Western Europe, partially offset by continued market softness in Asia and North America. Net earnings were $562 million, up two percent behind higher net sales, a lower tax rate and expanded gross margin, partially offset by an increase in SG&A as a percentage of net sales driven by marketing investments.



• Grooming net sales grew 11 percent for the quarter to $1.8 billion on a six percent increase in unit volume. Organic sales were up four percent driven by volume growth and price increases, partially offset by negative product mix. Price increases contributed two percent to net sales growth. Negative product mix reduced net sales by three percent due mainly to disproportionate growth of disposable razors in developing regions and entry level shaving systems, both of which have lower than segment average selling prices. Favorable foreign exchange added six percent to net sales growth for the quarter. Volume in Male Blades and Razors increased high single digits with strong growth in both developed and developing markets. Gillette Fusion continued to lead volume gains delivering double-digit growth for the quarter. Volume in Male Personal Care grew low single digits due to the Zirh premium skin care acquisition, while organic volume was down low single digits behind market contractions and share losses in Western Europe. Volume in Braun was up mid-single digits behind market growth, particularly in CEEMEA, which was disproportionately impacted by the economic crisis in the prior year period. Net earnings increased 46 percent to $377 million for the quarter due to higher net sales, a lower tax rate and increased gross margin, partially offset by an increase in SG&A as a percentage of net sales due to marketing investments.


Health & Well-Being GBU


• Health Care net sales were up five percent to $2.8 billion during the third fiscal quarter on a five percent increase in unit volume. Organic sales grew one percent as volume growth was mostly offset by unfavorable geographic mix and targeted pricing adjustments. Volume was strongest in developing regions, up double digits, while volume in developed regions was up low single digits. Mix impacts reduced net sales by three percent mainly as a result of the disproportionate growth of developing regions, which have lower than segment average selling prices. Pricing lowered net sales by one percent. Favorable foreign exchange added four percent to net sales growth. Oral Care volume increased high single digits driven mainly by increased initiative activity, including Crest 3D White in North America, Oral-B toothpaste expansions in Latin America and Western Europe and Crest Pro Health in China. Personal Health Care volume declined mid-single digits primarily due to increased competitive activity on Prilosec OTC in North America and the impact of a mild cold and flu season on Vicks shipments. Feminine Care volume grew mid-single digits behind consumer value corrections in CEEMEA, the launch of Naturella in Greater China and the impact of trade inventory reductions in the prior year period. Net earnings increased five percent to $435 million during the quarter mainly due to net sales growth and gross margin expansion, partially offset by higher SG&A as a percentage of net sales.



• Snacks and Pet Care net sales were $747 million, down two percent for the quarter driven by a unit volume decline of six percent. Favorable foreign exchange added four percent to net sales. Organic sales decreased six percent. Volume in Snacks decreased high single digits primarily due to lower levels of merchandising activity in North America and the discontinuation of some premium snack products. Volume in Pet Care was down low single digits mainly due to market contractions in the premium nutrition category. Net earnings increased 51 percent versus the prior year period to $77 million driven mainly by higher gross margin and a lower tax rate, partially offset by higher SG&A as a percentage of net sales.


Household Care GBU


• Fabric Care and Home Care net sales increased eight percent to $5.8 billion for the quarter on a 10 percent increase in unit volume. Organic sales grew five percent as double-digit volume growth was partially offset by negative mix impacts and pricing. Each billion-dollar brand delivered high single digits or better volume growth for the segment. Mix reduced net sales by two percent due to unfavorable geographic mix and disproportionate growth of laundry powder and mid-tier brands, which have lower than segment average selling prices. Pricing lowered net sales by three percent. Favorable foreign exchange contributed three percent to net sales growth. Fabric Care volume increased high single digits behind targeted investments to improve consumer value, higher media weights and trade inventory increases to support merchandising activity in North America. Home Care volume was up double digits due to market size expansion and share growth, which was driven by the continued success of new products launched in prior quarters, increased merchandising activity and higher media weights. Batteries volume increased double digits mainly due to consumer value corrections in North America and higher demand from business customers. Net earnings were up four percent for the quarter to $752 million due primarily to sales growth and gross margin expansion, partially offset by increased SG&A as a percentage of net sales behind marketing investments.



• Baby Care and Family Care net sales increased nine percent to $3.8 billion for the quarter on 10 percent volume growth. Organic sales grew seven percent behind volume growth, partially offset by negative product mix impacts and pricing. Volume growth was broad-based with all major geographic regions contributing mid-single digits or higher to volume growth. Mix lowered net sales growth by two percent due to disproportionate growth of mid-tier products, larger pack counts and developing regions, all of which have lower than segment average selling prices. Pricing reduced net sales by one percent. Favorable foreign exchange added two percent to net sales growth. Volume in Baby Care grew double digits primarily due to share growth, market size expansion and trade inventory increases to support the launch of Dry Max in North America. Volume in Family Care was up double digits behind incremental merchandising activity, consumer value corrections, primarily executed in prior periods, and double-digit growth of Basic product lines. Net earnings grew 32 percent to $558 million for the quarter driven by gross margin expansion and net sales growth, partially offset by increased SG&A as a percentage of net sales due mainly to additional marketing investments.


Fiscal Year 2010 Guidance

Net sales growth is estimated to be three to five percent for fiscal year 2010. Foreign exchange is not forecast to have a material impact on net sales. The Company raised the low end of its guidance range for diluted net earnings per share by $0.04 to a range of $4.06 to $4.12. Diluted net earnings per share from continuing operations are expected to be $3.48 to $3.54. Core EPS guidance increased to $3.62 to $3.68, up from $3.53 to $3.63, reflecting strengthening top line results and robust cost and productivity efforts. Core EPS is expected to be up four to six percent versus year ago.

April - June 2010 Quarter Guidance

For the April - June quarter, net sales are expected to increase six to seven percent. Organic sales are expected to grow four to five percent. Foreign exchange is expected to contribute about two percent to net sales growth. The net impact of acquisitions and divestitures is not expected to have a material impact on net sales. Diluted net earnings per share, diluted net earnings per share from continuing operations and Core EPS are each expected to be $0.68 to $0.74.