DBRS Confirms Procter & Gamble at AA (low)

DBRS has today confirmed the Senior Long-Term Debt rating of The Procter & Gamble Company (P&G or the Company) at AA (low) and its Commercial Paper rating at R-1 (middle), both with Stable trends. P&G’s earnings profile remains very strong as a result of the Company’s portfolio of leading brands, large scale and excellent product/geographic diversification. P&G achieved organic sales growth of 5% in F2008, in line with the Company’s target range of 4% to 6%. Gross margin only decreased 70 basis points (bps), despite the sharp increase in input costs due to benefits from enhanced operating leverage, manufacturing efficiency improvements and product reformulations.

P&G’s financial profile remains strong for the current rating category, based primarily on the Company’s significant and consistent ability to generate cash flow. In F2008, free cash flow before working capital increased to approximately $7.5 billion (vs. $6.3 billion yoy) and was used to finance $10 billion of share repurchases. Higher operating income/cash flow, coupled with only a modest increase in gross debt, resulted in a relatively strong improvement to key financial credit metrics. P&G’s strategy continues to include focusing on faster-growing brands that deliver higher margins and/or greater asset efficiency, enhancing brand/geographic diversification and strengthening retail relationships.

DBRS expects the Company’s strong earnings profile to remain stable in the near to medium term, based on steady organic revenue growth rates and profitability. DBRS expects near-term organic sales growth to be at the high end of the Company’s 4% to 6% target range, driven primarily by price increases, as much of the impact of sharply rising costs is passed on to customers. Although most of P&G’s product lines are considered to be non-cyclical, DBRS anticipates that higher pricing, combined with a weaker economic environment, will somewhat temper volume growth and mix improvement. In terms of margins, DBRS expects P&G should continue to benefit from its enhanced scale and cost-savings programs, which should enable the Company to achieve its operating margin expansion target of 50 to 75 bps per year. DBRS believes P&G’s financial profile will remain strong as a result of solid free cash flow-generating ability; DBRS forecasts free cash flow of between approximately $9 billion and $10 billion in F2009.

By the end of F2008, the Company had repurchased $10 billion of shares from its $24 billion to $30 billion share repurchase program. The remainder of the program should be carried out over the next two years and DBRS expects key financial leverage metrics to remain close to current levels. Further acquisitions are not anticipated at this time; however, if an opportunity should arise, DBRS believes it will be financed with funds that would otherwise be used for the share repurchase program.

Note:
All figures are in U.S. dollars unless otherwise noted.