<PAGE>
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1994
Commission file number 1-434
THE PROCTER & GAMBLE COMPANY
(Exact name of registrant as specified in its charter)
Ohio 31-0411980
(State of incorporation) (I.R.S. Employer Identification No.)
One Procter & Gamble Plaza, Cincinnati, Ohio 45202
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 983-1100
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No .
There were 685,373,294 shares of Common Stock outstanding as of October 21,
1994.
-1-
<PAGE>
PART I. FINANCIAL INFORMATION
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
Millions of Dollars
<CAPTION>
Three Months Ended September 30
1994 1993
------ ------
<S> <C> <C>
NET SALES $8,161 $7,564
Cost of products sold 4,596 4,228
Marketing, administrative, and other
operating expenses 2,311 2,251
------ ------
OPERATING INCOME 1,254 1,085
Interest expense 119 125
Other income/expense, net 101 94
------ ------
EARNINGS BEFORE INCOME TAXES 1,236 1,054
Income taxes 444 384
------ ------
NET EARNINGS $ 792 $ 670
====== ======
PER COMMON SHARE:
Net earnings $ 1.12 $ .95
Net earnings assuming full dilution $ 1.05 $ .89
Dividends per common share $ .35 $ .31
AVERAGE COMMON SHARES OUTSTANDING (in millions) 684.7 682.0
</TABLE>
-2-
<PAGE>
<PAGE>
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEET
Millions of Dollars
<CAPTION>
September 30 June 30
ASSETS 1994 1994
----------- -------
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 2,429 $ 2,373
Marketable securities 146 283
Accounts receivable, less allowance for
doubtful accounts 3,590 3,115
Inventories
Raw materials and supplies 1,178 1,087
Work in process 198 213
Finished products 1,682 1,577
Deferred income taxes 768 716
Prepaid expenses and other current assets 824 624
------- -------
10,815 9,988
------- -------
PROPERTY, PLANT, AND EQUIPMENT 16,408 15,896
LESS ACCUMULATED DEPRECIATION 6,194 5,872
------- -------
10,214 10,024
------- -------
GOODWILL AND OTHER INTANGIBLE ASSETS 4,260 3,754
OTHER ASSETS 1,843 1,769
------- -------
TOTAL $27,132 $25,535
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable and accruals $ 7,142 $ 6,665
Debt due within one year 1,635 1,375
------- -------
8,777 8,040
------- -------
LONG-TERM DEBT 5,080 4,980
OTHER LIABILITIES 3,351 3,336
DEFERRED INCOME TAXES 459 347
SHAREHOLDERS' EQUITY
Preferred stock 1,932 1,942
Common stock-shares outstanding-Sept. 30 685,206,000 685 684
-June 30 684,348,359
Additional paid-in capital 590 560
Currency translation adjustments (2) (63)
Reserve for ESOP debt retirement (1,761) (1,787)
Retained earnings 8,021 7,496
------- -------
9,465 8,832
------- -------
TOTAL $27,132 $25,535
======= =======
</TABLE>
-3-
<PAGE>
<PAGE>
<TABLE>
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENT OF CASH FLOWS
Millions of Dollars
<CAPTION>
Three Months Ended September 30
1994 1993
---- ----
<S> <C> <C>
Cash and Cash Equivalents, beginning of year $2,373 $2,322
OPERATING ACTIVITIES
Net earnings 792 670
Depreciation, depletion and amortization 304 277
Deferred income taxes 65 58
Increase in accounts receivable (360) (331)
Increase in inventories (80) (110)
Change in payables and accrued liabilities 240 (201)
Change in other liabilities (124) 27
Other (246) 6
------- -------
591 396
------- -------
INVESTING ACTIVITIES
Capital expenditures (345) (351)
Proceeds from asset sales and retirements 150 20
Acquisitions (607) --
Marketable securities 137 (117)
------- -------
(665) (448)
------- -------
FINANCING ACTIVITIES
Dividends to shareholders (265) (236)
Additions to short-term debt 360 362
Additions to long-term debt 230 45
Reduction of long-term debt (232) (217)
Proceeds from stock options 10 7
Purchase of treasury shares (2) (3)
------- -------
101 (42)
------- -------
EFFECT OF EXCHANGE RATES ON CASH AND
CASH EQUIVALENTS 29 (13)
------- -------
CHANGE IN CASH AND CASH EQUIVALENTS 56 (107)
------- -------
Cash and Cash Equivalents, end of period $2,429 $2,215
======= =======
SUPPLEMENTAL DISCLOSURE
Non-cash transactions
Liabilities assumed in acquisitions 140 --
Reduction in employee stock ownership plan debt,
guaranteed by the Company 26 24
Conversion of preferred to common stock 10 6
<FN>
The interim financial statements are unaudited, but in the opinion of the
Company include all adjustments, consisting only of normal recurring items,
necessary for a fair presentation of the data.
</TABLE>
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
Worldwide net earnings for the July-September quarter achieved a record
level of $792 million, or $1.12 per share, an 18% increase over the same
quarter in the prior year. First quarter earnings for the prior year were
$670 million or $.95 per share. The earnings improvement reflects strong
worldwide unit volume growth and good cost control throughout the Company.
Worldwide net sales for the July-September quarter increased 8% from the
same three months a year ago to a record level of $8.2 billion. This
growth was driven by unit volume increases. Worldwide unit volume
increased 10%, which compares to a 5% volume growth in fiscal year 1994.
Acquisitions net of divestitures contributed 3 percentage points to the
volume growth in this quarter.
United States
- - - ----------------
Net earnings in the United States increased 12% versus the first quarter
last year, reflecting increases in Laundry & Cleaning, Paper and Food &
Beverage sectors again due to volume growth and cost control. Sales in the
United States increased 6% on an equal growth in unit volume. The Laundry
& Cleaning sector increased unit volume by 10%, led by growth in the
Laundry Detergent and Fabric Conditioners categories, reflecting the effect
of new product initiatives. The Food & Beverage sector recorded a small
unit volume decline, entirely due to the contraction of the coffee market
resulting from sharp price increases following crop freezes in Brazil. On
the balance of the Food & Beverage line there were broadly based volume
gains. The Paper sector increased unit volume 12% on broadly based market
share gains except for the Diaper category, where market share was flat.
The Tissue/Towel category recorded significant gains due importantly to new
product initiatives. The Beauty Care business also increased unit volume,
while Health Care was about equal to year ago.
International
- - - ---------------
Total International net earnings increased 23% over the first quarter a
year ago, on a sales increase of 8% and a unit volume increase of 13%. The
increase in earnings was driven by unit volume growth and continued cost
reduction efforts. The lower rate of sales versus unit volume growth was
in large part due to more competitive pricing across most regions.
Exchange rates did not have a significant effect on sales or net earnings
for the quarter. Europe's unit volume increased 13% led by broadly based
gains in the Health & Beauty Care sector and Eastern European region. The
European Laundry, Paper and Food & Beverage businesses did well, with
volume up 12% overall. The balance of International unit volume also
advanced by 13% with every region except Latin America growing at a double
digit rate. The economic and political conditions in Mexico and Venezuela
slowed volume advances in the region.
Globally, there are signs of upward pressure on costs, not only for green
coffee beans, but also for pulp and petrochemicals. Although the prices
for many of these materials are up from unusually depressed levels, the
increases may put pressure on pricing.
-5-
<PAGE>
Restructuring Reserve Status
- - - ----------------------------------
In the year ending June 30, 1993 a pre-tax reserve of $2,402 million was
established to cover a worldwide restructuring effort to consolidate
manufacturing systems and reduce overhead costs. The primary elements of
this reserve were costs related to fixed asset disposals and separation-
related activities (86% of the total).
The following information relates to the 1993 reserve (in millions of
dollars pre-tax):
<TABLE>
<CAPTION>
Original Balance July-Sept. Balance
Reserve 6/30/94 Charges 9/30/94
-------- ------- ---------- -------
<S> <C> <C> <C> <C>
Separation-related costs<F1> $ 965 $ 596 $ 67 $ 529
Disposals of fixed assets 1,109 960 10 950
Other<F2> 328 227 17 210
------ ------ ----- ------
$2,402 $1,783 $ 94 $1,689
====== ====== ===== ======
<FN>
<F1>
Includes separation allowances and related benefits, out
placement services, and personnel relocation costs.
<F2>
Including closing, environmental remediation and contract
termination costs for sites shut down or divested, offset by net
proceeds from asset sales. No cost element within this category
exceeds 5% of the total reserve.
</FN>
</TABLE>
Execution of the restructuring program is on track and the cost of
completing it is expected to approximate the original estimates. As
anticipated, charges for the disposal of fixed assets will lag behind
spending for separation-related programs. We have announced more than half
of the sites and production modules to be closed in order to provide early
notice to employees. However, relatively few of these facilities have been
totally shut down at this time.
Benefits continue to be obtained from the restructuring program. We
estimate that incremental savings of about $60 million after-tax were
achieved in the July-September 1994 quarter. This brings cumulative
restructuring savings to about half of the $500 million after-tax objective
established in June, 1993. These amounts reflect estimated gross savings,
which may be offset to some degree by other actions, such as pricing or
research and development spending.
Additional Information
- - - -------------------------
Additional Information responsive to this Item is incorporated by reference
to the Report by Edwin L. Artzt, Chairman and Chief Executive, delivered on
October 11, 1994, during the Company's Annual Meeting of Shareholders
(Exhibit 99).
-6-
<PAGE>
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders:
At the Company's 1994 Annual Meeting of Shareholders held on October 11,
1994, the following actions were taken:
The following Directors were elected for terms of office expiring in 1997:
<TABLE>
<CAPTION>
Votes For Votes Abstentions Broker
Withheld Non-Votes
<S> <C> <C> <C> <C>
David M. Abshire 625,255,050 8,628,297 N/A N/A
Edwin L. Artzt 612,649,332 21,234,015 N/A N/A
Norman R. Augustine 625,567,640 8,315,707 N/A N/A
Richard J. Ferris 625,045,193 8,838,154 N/A N/A
John G. Smale 623,094,568 10,788,779 N/A N/A
Marina V.N. Whitman 624,258,411 9,624,936 N/A N/A
</TABLE>
A proposal by the Board of Directors to ratify the appointment of Deloitte
& Touche LLP as the Company's independent auditors to conduct the annual
audit of the financial statements of the Company and its subsidiaries for
the fiscal year ending June 30, 1995, was approved by the shareholders.
The shareholders cast 625,446,995 votes in favor of this proposal and
5,358,300 votes against. There were 3,078,052 abstentions.
A proposal by the Board of Directors to ratify The Procter & Gamble 1993
Non-Employee Directors' Stock Plan was approved by the shareholders. The
shareholders cast 584,930,595 votes in favor of this proposal and
48,949,871 against. Pursuant to the terms of the Notice of Annual Meeting
and Proxy Statement, abstentions were treated as votes against this
proposal.
A shareholder resolution proposed by Evelyn Y. Davis was defeated by the
shareholders. The proposal recommended that the Company reinstate the
system of electing all Directors annually, in place of the system of
classifying Directors into three classes with overlapping three-year terms
which was approved by the shareholders in 1985. The Board opposed the
resolution. The shareholders cast 183,626,999 votes in favor of the
resolution and 380,215,855 against. There were 9,481,875 abstentions and
60,558,618 broker non-votes.
A shareholder resolution proposed by The New York City Employees'
Retirement System was defeated by the shareholders. The proposal requested
the Company to endorse the CERES Principles as a commitment to be publicly
accountable for its environmental impact. The Board opposed the
resolution. The shareholders cast 55,294,317 votes in favor of the
resolution and 478,634,695 against. There were 39,391,718 abstentions and
60,562,617 broker non-votes.
-7-
<PAGE>
A shareholder resolution proposal by Jayn Meinhardt and Sandy Caron was
defeated by the shareholders. The proposal recommended that the Company
release to the public through product labeling the results of animal
testing on cosmetic and non-medical household products. The Board opposed
the resolution. The shareholders cast 34,116,837 votes in favor of the
resolution and 508,320,619 against. There were 30,862,085 abstentions and
60,583,806 broker non-votes.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
(11) Computation of Earnings per Share
(12) Computation of Ratio of Earnings to Fixed Charges
(27) Financial Data Schedule
(99) Report by Edwin L. Artzt, Chairman and Chief Executive, Delivered
on October 11, 1994, During the Company's Annual Meeting of
Shareholders.
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended
September 30, 1994.
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PROCTER & GAMBLE COMPANY
/S/E. H. EATON
- - - ------------------------------
E. H. Eaton
Vice President and Comptroller
(Principal Accounting Officer)
Date: November 10, 1994
-8-
<PAGE>
EXHIBIT INDEX
Exhibit No. Page No.
(11) Computation of Earnings per Share 10
(12) Computation of Ratio of Earnings to Fixed Charges 11
(27) Financial Data Schedule 12
(99) Report by Edwin L. Artzt, Chairman and Chief Executive,
Delivered on October 11, 1994, During the Company's
Annual Meeting of Shareholders. 13
-9-
<PAGE>
<TABLE>
EXHIBIT (11)
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
=============================================
COMPUTATION OF EARNINGS PER SHARE
---------------------------------
Dollars and Share Amounts in Millions
<CAPTION>
Three Months Ended September 30
NET EARNINGS PER SHARE 1994 1993
- - - ---------------------- ------ ------
<S> <C> <C>
Net earnings $ 792 $ 670
Deduct preferred stock dividends 26 25
------ ------
Net earnings applicable to common stock $ 766 $ 645
- - - --------------------------------------- ====== ======
Average number of common shares
outstanding 684.7 682.0
Per Share
- - - ---------
Net earnings per share $ 1.12 $ .95
====== ======
NET EARNINGS PER SHARE ASSUMING
FULL DILUTION
- - - -------------------------------
Net earnings $ 792 $ 670
Deduct differential -- preferred
vs. common dividends 11 12
------ ------
Net earnings applicable to common stock $ 781 $ 658
- - - --------------------------------------- ====== ======
Average number of common shares
outstanding 684.7 682.0
Add potential effect of:
Exercise of options 6.5 6.2
Conversion of preferred stock 53.2 54.3
------ ------
Average number of common shares
outstanding, assuming full dilution 744.4 742.5
====== ======
Per share assuming full dilution
- - - --------------------------------
Net earnings per share assuming full dilution $1.05 $ .89
====== ======
</TABLE>
-10-
<PAGE>
<TABLE>
EXHIBIT (12)
THE PROCTER & GAMBLE COMPANY AND SUBSIDIARIES
=============================================
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
-------------------------------------------------
Millions of Dollars
<CAPTION>
Three Months
Years Ended June 30 Ended Sept. 30
------------------------------------------------- -----------------
1990 1991 1992 1993 1994 1993 1994
------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C>
EARNINGS AS DEFINED
- - - -------------------
Earnings from operations before income taxes
after eliminating undistributed earnings
of 20% to 50% owned affiliates $2,401 $2,652 $2,870 $ 294 $3,307 $1,054 $1,239
Fixed charges excluding capitalized interest 480 435 584 631 569 146 142
------ ------ ------ ------ ------ ------ ------
TOTAL EARNINGS, AS DEFINED $2,881 $3,087 $3,454 $ 925 $3,876 $1,200 $1,381
====== ====== ====== ====== ====== ====== ======
FIXED CHARGES, AS DEFINED
- - - -------------------------
Interest expense $ 442 $ 395 $ 510 $ 552 $ 482 $ 125 $ 119
1/3 of rental expense 38 40 74 79 87 21 23
------ ------ ------ ------ ------ ------ ------
480 435 584 631 569 146 142
Capitalized interest 3 17 25 25 19 5 3
------ ------ ------ ------ ------ ------ ------
TOTAL FIXED CHARGES, AS DEFINED $ 483 $ 452 $ 609 $ 656 $ 588 $ 151 $ 145
====== ====== ====== ====== ====== ====== ======
RATIO OF EARNINGS TO FIXED CHARGES 6.0 6.8 5.7 1.4 6.6 8.0 9.5
</TABLE>
-11-
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1994 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000080424
<NAME> THE PROCTER & GAMBLE COMPANY
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1995
<PERIOD-START> JUL-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<CASH> 2,429
<SECURITIES> 146
<RECEIVABLES> 3,590
<ALLOWANCES> 0
<INVENTORY> 3,058
<CURRENT-ASSETS> 10,815
<PP&E> 16,408
<DEPRECIATION> 6,194
<TOTAL-ASSETS> 27,132
<CURRENT-LIABILITIES> 8,777
<BONDS> 5,080
<COMMON> 685
0
1,932
<OTHER-SE> 6,848
<TOTAL-LIABILITY-AND-EQUITY> 27,132
<SALES> 8,161
<TOTAL-REVENUES> 8,161
<CGS> 4,596
<TOTAL-COSTS> 2,311
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 119
<INCOME-PRETAX> 1,236
<INCOME-TAX> 444
<INCOME-CONTINUING> 792
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 792
<EPS-PRIMARY> 1.12
<EPS-DILUTED> 1.05
</TABLE>
<PAGE>
Exhibit (99)
Report by Edwin L. Artzt, Chairman and Chief Executive,
Delivered on October 11, 1994, During the Company's
Annual Meeting of Shareholders.
Today I want to focus my remarks on the overall direction we're pursuing
to ensure the long-term growth of the Company.
But first let me tell you a few facts about our recent and near-term
progress, because it sets the stage for a look at the future.
We are quite encouraged about the state of our business. The pace of
volume growth we reported last year is continuing into the first quarter of
the new year.
We are still about two weeks away from announcing our earnings results
for July-September, but the worldwide volume numbers are in, and we have just
completed a record quarter.
Unit volume for the quarter was up 10% versus July-September a year ago,
with three of the 10 percentage points tracing to new businesses. Existing
businesses grew 7%. Last year, shipments were up 5% for the whole year, so
we're off to a strong start, any way you slice it.
As a result of this strong volume performance and the continuation of
good cost control throughout the Company, we also expect to report record
sales and earnings for the first quarter.
But this latest progress is really an extension of developments that
began some time ago. In fact, a number of these key initiatives converged
during 1993/94 to produce a strengthening of our growth trend in both the
United States and International markets.
First, our focus on improving the value of our brands through cost
reduction, value pricing and virtually an across-the-board introduction of
improved products, built market share in most of our major product categories
and countries. Every sector and every region of the business grew volume,
and share growth was equally widespread.
We finished the year with unit volume up 5%. After-tax earnings,
excluding the derivatives charge, were up 15%, and sales were about flat.
The lack of sales growth traced to a combination of foreign currency exchange
rates which were unfavorable to the dollar, list price reductions totaling
about $700 million during the year, and the continuing effects of the
divestiture of our pulp and orange juice businesses in the base year.
These impacts are now behind us, and we expect to see a resumption of
dollar sales growth in 1994/95.
-13-
<PAGE>
Several years ago we established cash flow as a high-priority focus area
for the Company. New systems and controls were implemented to enable our
operating and staff groups to reduce working capital through better inventory
control and to more efficiently plan and manage capital spending. Those
initiatives are now showing up in our results, as cash flow from operations
reached $3.6 billion in 1993/94.
In fact, we have had three consecutive years of record cash flow from
operations. During this period, our net investment in operating working
capital has been reduced by over $500 million to just $200 million--or 0.7%
of sales. Capital spending has been brought down from 7.3% of sales to 6.1%
of sales. That doesn't sound like much, but it's $360 million a year, and
we're still making all the investments we need to grow the business and to
maintain our facilities in top working order.
Another important contribution to last year's performance was the
savings generated by our restructuring program and by an ongoing effort to
reduce the total delivered cost of our products.
We achieved about a third of the $500 million after-tax savings goal
from our restructuring programs, which was right in line with expectations.
This has been a difficult experience for our employees--painful, but
necessary--and our people have been managing their way through it superbly.
Three years ago, our worldwide Product Supply organization established
the goal of holding the Total Delivered Cost of our products flat for a
period of at least three years. Total Delivered Cost per unit--or TDC, as we
call it--includes all raw materials, packaging, production costs,
warehousing, freight and delivery.
Historically, our TDCs had risen about 2% per year on average, after
inflation, formula improvements and other upcharges, net of cost savings. In
fiscal 1993/94, the Company's worldwide average Total Delivered Cost was
actually 7% below the same figure three years ago. That improvement alone
was worth about $1.3 billion to the Company. It is one of the major reasons
why Procter & Gamble is more competitive today, and is able to offer better
value to its consumers.
It is always difficult when you're experiencing results like these to
avoid painting too rosy a picture, so I want to add some balance to my
optimism.
Clearly, we are benefiting from an economic recovery that started about
two years ago, and it hasn't cooled yet. Real GDP growth in the U.S. has
risen to 4% this year. Unemployment has dropped from 6.6% in the first
quarter of this year to 5.9% in September. Inflation remains low at 2.7%,
and industrial production, housing starts, and a host of other measurements
of the health of the economy are at recent highs.
Europe, Latin America, and most parts of Asia are experiencing similar
or even greater uptrends. Japan--while still struggling with the effects of
real estate deflation, high manufacturing costs, and a very strong yen--is
finally showing signs of recovery and expects about 2% GDP growth in 1995.
-14-
<PAGE>
On the other hand, there are some clouds on the horizon. One of the by-
products of strong economic growth is a shift in the supply/demand balance,
particularly in commodities like wood pulp and petrochemicals, and we are
already seeing some upward cost pressure in our supply stream. The Business
Council's economic forecast released last week sees inflation growing to 3.6%
by the end of 1995. That kind of upturn and the prospect of another 100-
basis-point increase in short-term interest rates next year could cool the
economy faster than we would like.
In our own businesses, most of our product groups are very healthy, but
we have some soft spots in a couple of areas that need attention. For
example, Pampers' share in the U.S. has been flat, and we need to do a first-
rate job of introducing our new diaper with stretch elastics to help get that
business growing again. That product began shipping nationally this month.
Overall, we were very satisfied with our business progress last year.
The key disappointment of the year was our derivatives loss--a one-time
charge to earnings to close out two interest rate swaps which never should
have been made. We've already covered this in great detail in our
communications with our shareholders and in our Annual Report, but I'll
briefly restate the facts.
What happened here was an aberration. It involved two high-risk
transactions which were designed by and brought to us by Bankers Trust. It
turned out the transactions were totally inconsistent with Company policy
which prohibits speculative transactions of this type.
Now, straightforward or, as the financial community calls them, plain
vanilla derivatives are a very effective way of managing interest rates and
foreign currency exposures, so we plan to continue using them.
At the same time, we have taken extraordinary measures to ensure that
nothing like this could happen again, including the creation of a Risk
Management Council within the Company that will review significant
derivatives transactions as part of the approval process. This additional
level of scrutiny, which goes well beyond normal corporate operating
controls, will help accomplish this goal.
As mentioned in the press, the SEC is investigating derivatives issues,
including our involvement. In addition, we have a shareholders' derivatives
lawsuit in progress, and we are still considering our own possible legal
actions. Unfortunately, in view of all this, our lawyers are telling us that
we should not get into additional details. I wish we could answer every
question on this, but we simply can't.
Even with the effect of this charge, our earnings in 1993/94 were up
10%, in line with our average over the past 35 years, but we are not making
light of it. The derivatives loss was an incident that we will not soon
forget.
More important, I think, is the underlying financial strength of the
Company, demonstrated by the fact that the Company's after-tax profit margin
of 7.6% in 1993/94 was the highest in 21 years--excluding the derivatives
charge. Return on equity, excluding unusual items, was 23%--the highest
level in 44 years, reflecting both improved profitability and the write-off
of underperforming assets included in the 1993 restructuring reserve.
-15-
<PAGE>
As a consequence of all of this, the Board of Directors authorized a 13%
increase in our common stock dividend from $1.24 per share to $1.40 per share
beginning with the August 1994 dividend, marking the 39th consecutive year of
increased dividend payments.
Last year at this meeting, I addressed the question of why the market
price of P&G common stock had not followed its historic pattern of moving up,
in line with earnings performance. One question the market was asking us
was, "Can P&G get its costs down fast enough to offset lower revenues from
the price reductions we were making in a number of categories?"
Our answer was yes. Our results followed, and the market has responded.
Over the last 12 months, the return to our shareholders from stock price
appreciation has been 20%--well above the average of our peer group of major
consumer products companies.
Over a longer time frame--the way we prefer to look at things--P&G
common stock has been a good investment for shareholders. At the end of June
1989, P&G stock was selling for a split-adjusted price of $27. If you had
invested $100 in P&G stock back then, your investment would be worth $248
today. That's an average compound annual rate of return of 19% including
dividends. The S&P 500 average for that period was about 10%.
Now the question is, how do we keep this good thing going? How do we
keep this enterprise moving in the right direction over the next decade and
beyond?
The answer is focus. We plan to continue to focus on three simple
business strategies that brought the Company to its present level of success.
They are:
1. Building our core established businesses through continuous
innovation;
2. Expanding our core categories into new geographies; and
3. Entering new categories with new brands.
All three of these avenues offer us tremendous upside growth potential.
We also plan to continue to reapply those things that are working for us
wherever they occur in the Company, whether they come from a production line
team in Italy, a brand marketing group in Taiwan, or a Sales Customer
Business Development Team in Arkansas. P&G people reach out and reapply
success. It's one of our competitive strengths.
Another principle within our focus strategy is our belief that we must
have a formula for success which our strategies deploy. We believe there are
two essential tests that we must meet in any category or market we enter: the
potential for growth must be substantial, and we must have evidence in house
that we know what we're doing.
Let me illustrate how we apply these tests.
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<PAGE>
First--building core established businesses through continuous
innovation.
Some people think that because P&G has strong share positions in
established categories like Laundry, Dish Care and Diapers, that
opportunities for growth in these core businesses are limited. This is not
true. The opportunities for growth are tremendous.
Take Laundry--our largest core category. This is a $25 billion global
market. Our strongest shares are in countries where we've been in business
the longest, but on a global basis, we have about a 23% share. If we can
grow that to 33%, that's another $2.5 billion in sales, and I believe that
kind of growth is reasonable to expect before the end of this decade, if we
can continue developing new products that meet important unmet consumer
needs.
Dating all the way back to the introduction of Tide in 1946, every major
product innovation that Procter & Gamble has brought to the market has grown
our worldwide volume and market share. In the late 1980s, there were compact
detergents--a real breakthrough that provided better cleaning power with less
product at a lower cost per use.
In the early '90s, our color protection technology, which keeps clothes
looking like new--even after repeated washings--helped grow market share on
Cheer, Tide, Ariel and a number of our regional brands.
These innovations were followed by others--soil-release polymers that
boost cleaning power, lipase enzymes that improve stain removal. All of
these innovations continue to breathe new life into our largest core
business. In fact, over the last three years, our total Laundry volume
worldwide has grown by 14%, and this volume growth has added about two points
to our global share--and we're not going to let up.
Ariel Futur, our most recent innovation, is expanding in Europe right
now. It's a combination of 11 technologies that sets a new standard for
cleaning and stain removal in this category. We will be expanding to the
U.S. and other parts of the world in 1995.
Beyond Laundry detergents, we see excellent growth potential in our
fabric conditioner and bleach businesses.
Demand is growing around the world for bleaches that won't yellow whites
or damage fabrics. Ace, our market-leading bleach in Italy, meets this
demand. It uses a proprietary bleach technology that whitens better and is
safer for fabrics than traditional bleaches. Ace is now being sold in a
half-dozen European countries, and we're in the process of expanding into new
geographies, as well.
Another established core category with great growth potential for the
Company is Hair Care. It's our third largest dollar volume business today,
but we only have about a 15% share of the $15 billion worldwide market.
We've actually been in this business for about 60 years. Drene and
Prell got us started, but in the early '60s, Head & Shoulders really got us
into Hair Care with a vengeance. Within a year of its introduction, Head &
Shoulders became the U.S. market leader, and by the mid-'60s had a 20% share
and had begun expanding into Canada.
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Those were the Company's pre-globalization days, and Head & Shoulders
was not expanded as far or as fast as was our Laundry and Bar Soap business.
But once the Company scored its next big hit with Pert Plus in the United
States, we were off and running toward becoming the world market leader in
this business.
The proprietary technology in Pert Plus was expanded throughout Latin
America, Europe and the Far East in a variety of brands and by the late
1980s, Procter & Gamble had a significant Hair Care business worldwide.
Innovative technology drove the success, but we had some good luck, too.
When we acquired Richardson-Vicks in 1985, that Company had two real jewels
in the Hair Care business--Pantene and Vidal Sassoon--but both brands were
relatively undeveloped.
Pantene had started in Europe as a hair treatment and had a very
positive image, but it was still a fairly small brand--only about $70 million
in sales at the time we acquired it. Today, Pantene's Pro-V line is an $850
million business--the #1-selling Hair Care brand in the world. By combining
Pantene's excellent reputation with P&G's innovative two-in-one shampoo
technology, we were able to experience dramatic growth in a long-established
core business.
Vidal Sassoon was a slightly larger business than Pantene when we
acquired it--about $100 million--and it, too, enjoyed a strong image. Today,
Vidal Sassoon Hair Care products are a $450 million business, and still
growing rapidly thanks to the Company's innovative technology and the concept
of bringing salon quality hair to the mass market through the professional
authority of Vidal Sassoon himself and the world famous Vidal Sassoon salons.
The Company's Hair Care business has quadrupled in less than 10 years,
and we see substantial growth beyond our current 15% worldwide market share.
One area that we hope to develop is styling products, where we have excellent
proprietary technology that will be reaching the market near the end of this
fiscal year.
There are other brands in the Company's core categories where product
innovation will be stimulating new growth on long-established brands,
including some areas where we are relative newcomers. Brands like Max Factor
International, Cover Girl and Old Spice all have the potential, we think, to
produce global success stories of the same kind as Pantene and Vidal Sassoon.
We are also experiencing good success with this strategy in our Food and
Beverage business. Sunny Delight, acquired in 1989, is a good example. This
brand has grown from a 23% share of the rapidly growing juice drink market to
a 37% share and market leadership in its category today.
Sunny Delight was moved from a regional brand to a national brand in the
U.S. with growth stimulated by unique new products, like Sunny Delight Plus
Calcium and California Style Punch.
Since the acquisition, Sunny Delight's volume has tripled. It is now
the Company's 10th largest brand in the United States, and many elements of
Sunny Delight's success are being shared and reapplied to our growing fruit
drink business in Europe.
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<PAGE>
At the time that we announced our decision to exit the 100% orange juice
business, we said we were going to refocus our strategic effort on fruit
drinks, where we felt there was more opportunity for product innovation and
creative marketing. That strategic redirection has made the future for us in
this business look a good deal more promising.
Our second growth strategy is the expansion of core businesses into new
markets. This has not been as easy to do as it might sound. Competition is
often strongly entrenched and always defends against new entries quite
vigorously. But we have been able to expand our business around the world
pretty successfully by following two simple rules:
First, we only expand brands when they are healthy and growing in their
existing markets. What's working there will usually work elsewhere. And
second, we try to move fast while the brand is hot.
A good example is our Tissue/Towel business, which covers toilet tissue,
facial tissue and kitchen-roll towels. Our strategy for globalizing P&G's
Paper business has been focused for many years on disposable diapers and
feminine protection products, and we are now the world leaders in both of
those categories. Now, we're turning to Tissue/Towel as another important
source of future growth for our Paper business.
Tissue/Towel is a $15 billion category worldwide. It's one of the
largest global categories, and one in which we have a strong history of
success, although until quite recently, our only presence was in the United
States.
P&G entered the tissue business in 1957 with the acquisition of the
Charmin Paper Company. Today, we have three national brands in the U.S.--
Bounty towels and Charmin toilet tissue are both the market leaders in their
categories, and Puffs facial tissues is a close #2.
Key to this success is P&G's proprietary papermaking technology, which
delivers superior absorbency, softness and strength while maintaining a cost
advantage versus traditional papermaking approaches.
Our first venture outside the United States was in Canada, where we
acquired the Facelle tissue business three years ago. Our objective there
was to learn how to make superior tissue products similar to the ones that we
sell in the United States, but on conventional rather than P&G-designed paper
machines. This was important learning to us because new papermaking capacity
has a very high capital cost. So, expanding overseas, at least initially,
with acquired papermaking capacity made economic sense.
Our Canadian business started slowly but is now doing quite well, and
based on this learning experience, we moved into the $5.5 billion European
tissue/towel market last July with the acquisition of VP Schickedanz. VPS
has high-quality products and two significant brands in Tempo, the leading
European paper handkerchief--which is similar to our American facial tissues-
- - - -and Bess, the leading toilet tissue in Germany.
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While VPS is sizable in its own right at $525 million in sales, it is
only a starting point. We hope to grow this business substantially over the
next few years by reapplying technology and marketing experience from both
the U.S. and Canada.
We are also aggressively expanding core brands into developing markets
in Eastern Europe, Latin America and Asia--and there's no better illustration
of how much potential exists in these countries than China.
One out of every five people in the world lives in China. There are
half again as many consumers in this country as there are in all of Latin
America and North America combined, and the standard of living in China is
growing rapidly--with real GDP increasing at 13% last year.
We have been operating in China for about eight years, and today we have
a number of highly successful brands. Rejoice, Pantene and Head & Shoulders
are all among the best-selling shampoos in the country. Safeguard is the
market leader in Beijing, a city with more people than Denmark. And our
laundry brands--Ariel and Tide--have helped establish P&G as China's largest
detergent manufacturer.
Even with our strong start in China, our business there is still
relatively small, at about $200 million in sales. But to give you some idea
of the potential, our sales today represent only $.20 per person per year.
When we get that up to $1 per person, which is in our game plan for the next
few years, we'll have a billion dollar business in China alone.
One of the keys to this growth will be the Laundry category. China's
laundry market is about $1 billion. Sounds large, but that is only $1 per
person per year. The U.S. consumer spends $20 per person per year on laundry
detergents. Mexico spends $10 per person.
The laundry detergent market in China should develop to at least $2 per
person or $2.5 billion by the end of the decade. We have a 20% share now, so
even before figuring in share growth, we're looking at a $500 million laundry
detergent business in China by the year 2000. If we can build our share to
30%, as we have in many other countries, we should have a $750 million
laundry detergent business there.
One of our highest priority objectives when we entered China eight years
ago was to develop a strong local Chinese organization. Today, we have 3,500
people working for P&G in China, most of them quite young, and they are doing
an excellent job.
Recently, when U.S. Secretary of Commerce Ron Brown visited our
manufacturing plant in Guangzhou, he commented that this P&G plant could
"literally be picked up and placed anywhere in the world." He went on to say
that "the quality of the products that are manufactured by P&G in Guangzhou,
even though this plant is very much in a start-up mode, matches the quality
of the products manufactured in any other Procter & Gamble facility in the
world."
He concluded by saying that P&G's China operation is a model for other
American companies doing business abroad--which is a real tribute to our
Company and our people in China.
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The opportunity to grow our business through geographic expansion is not
just limited to our biggest categories. Some of our smaller P&G businesses
are well on their way to becoming global leaders. A good example is Pringles
potato crisps.
Three years ago, Pringles was sold mainly in the U.S. and was a distant
fifth-place brand. With a combination of product improvements and highly
successful advertising, Pringles has staged a remarkable turnaround.
Pringles sales have grown by 74% since 1990/91, and today Pringles is
transferring its success in the United States to more than 40 other
countries.
Our third strategy--entering new categories with new brands, or acquired
brands--has become the source of increased activity during the past year.
All of our business sectors are active in new brand and new category
development, but we regard Beauty Care, over-the-counter Health Care,
Pharmaceuticals and Food & Beverage products as core segments of our business
that have particularly significant new category entry potential.
A good example of how this strategy is working is Aleve, a brand that we
developed in a joint venture with Syntex. Aleve is a non-prescription-
strength analgesic--a fast-acting form of naproxen, the medicine in Naprosyn,
which has been the best-selling prescription brand in its class for 10 years
in the United States.
The analgesic category is an important growth opportunity for Procter &
Gamble. It's large--about $2.5 billion in sales in the U.S. and roughly $7
billion worldwide. It's profitable. And it's growing.
In fact, 70% of analgesics consumption comes from people over the age of
55--the fastest-growing segment of the U.S. population.
We are very pleased with the early consumer and trade response to Aleve.
It is still early, but after less than three months on the market, Aleve is
already the third best-selling analgesic in the United States, and is well on
its way to becoming a major brand for the Company.
I want to pay a compliment here to our Health Care Sales and Marketing
people. I was recently visiting with one of our major customers, and they
volunteered to me that the Aleve introduction was the best-planned and
executed introduction of a new brand that they had ever seen. You don't hear
that very often from major customers, so our people have a right to be very
proud of what they have accomplished.
Fine fragrances is another relatively new category for P&G--and we
believe it, too, will be an important source of future growth.
This is a big business. Total worldwide sales are about $6.3 billion.
That's more than either the dentifrice or the deodorant categories. And it
gives us a strong foothold in the prestige beauty care market, where we want
to be a leader someday.
This also is a business where product invention and creative marketing
are critical to success--two things we do pretty well.
-21-
<PAGE>
We first entered the fine fragrance category in 1991, with the
acquisition of the Hugo Boss and Laura Biagiotti brands in Europe, as part of
our Max Factor acquisition from Revlon.
Since then, we've had some solid successes with new brands of our own.
Laura Biagiotti Venezia, which we launched in the fall of 1992, is now a $40
million brand--and among the top five female fragrances in several of its
first European expansion markets. Boss Elements, introduced a year ago in
most of continental Europe, is now the #2 male fragrance in Germany, Europe's
largest market. We also recently introduced a Laura Biagiotti male fragrance
called Roma Uomo.
Encouraged by our success in Europe, we took another important step in
this business this past summer by acquiring Giorgio of Beverly Hills. With
this acquisition, we doubled our worldwide sales in the fine fragrance
category to $330 million and moved into the ranks of the top five global fine
fragrance companies.
The Giorgio business also gave us our first significant presence in the
U.S. market, which accounts for 26% of worldwide sales. About two-thirds of
Giorgio's $150 million annual sales volume is in the United States, led by
Giorgio, the #2 U.S. fragrance. Then there's Red, the #12 best-selling
female fragrance, and a very successful new brand called Wings.
Another very important fine fragrance growth opportunity is our recent
licensing agreement with Salvatore Ferragamo, one of the premier names in the
fashion business. We are proud of the fact that Procter & Gamble is the
first company to receive a license of any kind from the Ferragamo family, and
we are quite enthusiastic about the prospects for achieving a major position
for the Ferragamo name in the fine fragrance market.
Procter & Gamble is now the third largest beauty care company in the
world, and I'm confident that we have growth opportunities in fine fragrance,
cosmetics, hair care, skin care, the whole gamut of beauty products that will
enable us to reach our goal of becoming #1 in the world in Beauty Care over
the next several years.
That really sums up what P&G is all about. We want to be the best at
everything we do, because we know that's what it takes to drive our brands to
market leadership.
That constant desire for leadership in our businesses is one of the
emotions that welds our people together and makes them successful in all
kinds of businesses in all parts of the world. We have no secret weapon in
our Company, but if you were to ask me to name one, it would be our people.
Throughout the P&G community worldwide, there are examples of people
achieving extraordinary goals to build the business--from some of our newest
employees in China, who so impressed the Secretary of Commerce, to those who
continue to grow our most mature, established businesses.
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What accounts for the strength of P&G's organization is hard to pin
down. There are many factors, beginning with the high quality of people we
attract and employ, and the training they receive. But perhaps the most
important factor is the emphasis we place on individual contribution. It is
employee initiative that has always been at the root of Procter & Gamble's
success.
We also deeply believe that every Procter & Gamble employee must have an
equal opportunity to advance and succeed in our organization. The enormous
diversity of talent, education, experience, culture and ideas that P&G people
bring to the business is a great competitive strength for our Company.
We are very proud that our progress in building a diverse organization
was recently recognized by the U.S. Department of Labor, which presented P&G
its 1994 Opportunity 2000 Award.
This award is given each year to a single U.S. company for its progress
in hiring, developing, and advancing women and minorities. The government
review process for this award was extremely thorough. Here are some brief
excerpts from the award ceremony which took place in Washington on September
29. The speaker is Secretary of Labor Robert Reich.
"I want to welcome you all to really one of the most important
events of the year. This award ceremony really does give us a
chance to stand before an audience, to look into TV cameras and
tell the world what all of us believe, and that is that prejudice
has absolutely no place in the American workplace; it has no place
in America, but it has no place where most Americans spend most of
their time, and that is on the job.
"Equal opportunity and affirmative action are principles that we
will fight for, we will fight for tirelessly. We need to reward
those who are leading the way--not just meeting the letter of the
law; not just meeting the spirit of the law--but going one step
further.
"We need to celebrate the progress and dedication of
organizations like Procter & Gamble, and tell everyone how great
they are doing, because the model of example--the emulation, the
desire to do as well as the leader--is deeply ingrained in American
institutions and is something that we can take advantage of,
something that we must take advantage of. Procter & Gamble has
applied that lesson very well."
We believe we have the strategies, the products and, most important, the
quality of organization to deliver strong sales and earnings growth in the
years ahead.
To our shareholders, I pledge we will continue our constant desire for
leadership in our businesses and do everything in our power to increase the
value of your investment in P&G. You have my word on it.
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