April – June quarter sales up 10%, earnings per share up 12%

CINCINNATI , Aug. 1, 2005 – The Procter & Gamble Company (NYSE:PG) announced strong top- and bottom-line growth for the April – June quarter and the fiscal year. The company posted net sales growth of 10 percent for both the quarter and fiscal year. Diluted net earnings per share were $0.56 for the quarter, a 12 percent increase, and $2.66 for the fiscal year, a 15 percent increase. This is the fourth consecutive fiscal year the company delivered results at or above its long-term annual growth rate targets for sales, earnings per share and free cash flow productivity.

Executive Summary

• Net sales for the quarter increased 10 percent to $14.26 billion. For the fiscal year, sales also grew 10 percent to $56.74 billion. Organic sales, which exclude the impacts of acquisitions, divestitures and foreign exchange, grew nine percent for the quarter and eight percent for fiscal year.

April – June Quarter Discussion

Unit volume for the April – June quarter increased six percent. Organic volume grew seven percent, which excludes the impact of acquisitions and divestitures from year-over-year comparisons – primarily the divestiture of the juice business. Volume growth was broad-based, led by strong gains in beauty, fabric, health and home care. All regions posted unit volume growth of mid-single digits or better, led by developing markets with growth in the mid-teens.

Net sales for the quarter increased 10 percent to $14.26 billion. Organic sales increased nine percent, well above the company’s long-term annual target. Foreign exchange added two percent to sales growth due to the strength of the euro, Canadian dollar and British pound. Pricing added two percent to sales growth behind actions that partially recovered the impact of higher commodity costs in family care, pet health & nutrition, coffee and certain fabric care markets.

For the quarter, net earnings increased nine percent to $1.50 billion. Earnings growth was primarily driven by volume and pricing, partially offset by higher commodity costs. Diluted net earnings per share increased 12 percent to $0.56. Diluted net earnings per share grew ahead of net earnings due to share repurchase activity. The company’s stepped up share repurchase activity associated with the Gillette acquisition, net of interest expense, was neutral to earnings per share on the quarter.

Key Financial Highlights for the Quarter

Business Segment Discussion for the Quarter

The following provides perspective on the company’s April – June quarter results by business segment.

• P&G Beauty
  For the quarter, P&G Beauty delivered strong sales and double-digit earnings growth. Unit volume increased eight percent behind broad-based growth, including strong double-digit growth of the Olay® brand and developing markets. Global feminine care volume increased by low-double digits behind product innovations on Always/Whisper® and continued growth of Naturella®. Professional and Prestige grew low-double digits behind strong results in the Professional business. Global hair care volume increased high-single digits behind the continued growth of Pantene®, Head & Shoulders® and Rejoice®. P&G Beauty net sales increased 12 percent to $4.93 billion, including a three percent gain from foreign exchange. Net earnings increased 27 percent to $644 million primarily due to volume growth and cost savings projects.

• P&G Household Care
  Fabric care and home care unit volume increased eight percent in the April – June quarter. Developing market volume increased by mid-teens behind the continued growth of Tide® and Ariel®. Growth was also driven by initiatives -- Swiffer® in Western Europe; Ariel Ion Power Gel® in North East Asia; Tide with a Touch of Downy®, Febreze Air Effects® and Dawn® in North America. Net sales increased 10 percent to $3.85 billion, including a positive foreign exchange impact of two percent. Pricing actions on select brands in the United States , Latin America , Eastern Europe , China and certain Western European countries added one percent to sales growth. The mix effect of strong developing market growth reduced sales by one percent. Net earnings were $458 million, a decrease of 11 percent. Earnings margin declined primarily due to commodity costs, which continued to increase in the quarter.

Fiscal Year Discussion

For the fiscal year, the company delivered results at or above its long-term annual growth targets for sales, earnings per share and free cash flow productivity. Unit volume for the fiscal year increased eight percent. Organic volume also grew eight percent. Volume growth was broad-based, reflecting the overall balance of the company’s portfolio, with double-digit growth from the beauty and health care businesses. All regions delivered mid-single digit volume growth or better, with developing market volume growth in the high-teens. Every one of the company’s top 16 brands and each of the top 16 countries delivered volume growth for the fiscal year.

Net sales for the fiscal year reached a record level of $56.74 billion, an increase of 10 percent versus the prior year. Foreign exchange contributed two percent to net sales growth, primarily driven by the strength of the euro, British pound and Japanese yen. Net sales excluding foreign exchange increased eight percent, above the company’s long-term target of four to six percent. Organic sales, which exclude the effects of acquisitions, divestitures and foreign exchange, also increased eight percent. Mix reduced sales by one percent due to higher relative growth in developing markets. Pricing added one percent to sales growth behind actions to recover higher commodity costs in family care, pet health & nutrition, coffee and in certain fabric care markets. These actions were partially offset by price investments taken primarily earlier in the fiscal year to address the growth of hard discounters in Europe and in response to competitive activity in select fabric care and baby care markets.

Net earnings in 2005 increased 12 percent to $7.26 billion. Net earnings margin increased 20 basis points to 12.8 percent. Earnings margin grew primarily behind volume and cost reduction efforts, which more than offset the effects of higher commodity costs.

Diluted net earnings per share were $2.66, an increase of 15 percent compared to the prior year and above the company’s annual minimum target growth rate of 10 percent. Diluted net earnings per share grew ahead of net earnings due to the company’s share repurchase activity.

The effective tax rate for the fiscal year improved by 20 basis points compared to the prior year. This includes a provision of $295 million for taxes on the anticipated repatriation of income earned outside of the United States under the American Jobs Creation Act. The company plans to repatriate $7.20 billion under the Act. This charge was largely offset by the reversal of tax provisions for the successful resolution of tax audits in certain countries. The effective tax rate also benefited from the overall country mix of taxable income.

Key Financial Highlights for the Fiscal Year

• Gross margin in 2005 was 51.0 percent, a decrease of 20 basis points versus the prior year. The company was able to largely offset higher commodity costs, which reduced gross margin by more than 100 basis points, through the scale benefits of volume growth, supply chain savings and pricing. Gross margin also contracted due to the mix impact of strong growth in developing markets.

• The company’s operating cash flow for the fiscal year was $8.72 billion compared to $9.36 billion in the prior year. The operating cash increase from higher net earnings was offset primarily by changes in inventory and payables. Inventory days on hand were up two days versus the prior year due to higher commodity costs and efforts to rebuild inventory levels in product categories that could not meet customer demand. Days payables were down three days versus the prior year. Operating cash was also reduced by tax payments related to the settlement of prior year audits. Capital expenditures for he year were 3.8 percent of net sales, slightly below the company’s long-term target of about 4 percent of net sales. Free cash flow, defined as cash from operating activities less capital expenditures was $6.54 billion. This represents free cash flow productivity of 90 percent, in-line with the company’s long-term objective.

The following provides perspective on the company’s fiscal year results by business segment.

P&G Beauty

P&G Family Health

• For the fiscal year, baby care and family care delivered very strong results. Unit volume increased seven percent led by baby care’s continued stream of innovation including Feel ‘n Learn training pants in North America , Baby Dry ® fit upgrade and Baby Stages of Development upgrades in Western Europe , and the expansion of Pampers Kandoo ® in North America . Family care volume increased due to product, packaging and format initiatives in North America on both the Bounty and Charmin brands. Net sales increased 11 percent to $11.89 billion, including a positive three percent impact from foreign exchange. Pricing added one percent to sales growth. Actions in North America family care to recover higher commodity costs were partially offset by targeted pricing investments in Western Europe baby care in response to competitive activity. Net earnings increased 28 percent to $1.26 billion, behind volume and manufacturing cost savings, partially offset by marketing investments in support of initiatives.

Fiscal Year 2006 and July – September Quarter Guidance

Effective July 1, the company adopted stock option expensing using the modified retrospective methodology. Prior year results will be restated to reflect stock option expensing, consistent with the pro forma disclosures in the Notes to Consolidated Financial Statements. A summary of the pro forma stock option expense for fiscal year 2005 appears at the end of this release.

Fiscal year guidance does not include any impacts related to the pending acquisition of Gillette or the stepped up share repurchase program. For 2006, the company expects to deliver its fifth consecutive year of growth at or above long-term targets, despite a very strong base period. Organic sales are expected to grow by four to six percent. Foreign exchange is expected to reduce sales by one to two percent. The impact of acquisitions and divestitures is expected to be neutral to sales growth, excluding Gillette. The combination of pricing and product mix is expected to provide a modest gain to sales growth. Total sales are expected to increase hree to five percent. The company stated it is comfortable with the current analysts’ consensus estimate of earnings per share. This estimate excludes stock option expenses, which the company expects will be $0.13 per share. The implied earnings per share growth rate is in line with our double-digit long-term target. Operating margins are expected to be up modestly. The tax rate for fiscal year 2006 is expected to decline 25 to 75 basis points to about 30 percent, due mainly to strong growth in lower tax rate regions.

Guidance for the July – September quarter includes the impact of the company’s stepped up share repurchase program due to the Gillette acquisition. For the quarter, the company expects sales growth of six to eight percent. A modest gain from foreign exchange is expected to be offset by the impact of the juice divestiture in the prior year. The combination of pricing and mix is expected to add one to two percent to sales growth. The company is comfortable with the current analysts’ consensus estimate of earnings per share, which excludes the impacts of stock option expensing and stepped up share repurchases. This is equivalent to earnings per share growth of 10 percent excluding the $0.02 per share gain from the juice divestiture proceeds in the base. Stock option expense for the quarter should be $0.03 per share – in-line with prior year pro forma results. The increase in year-on-year share repurchases, net of associated interest expense, is expected to add up to $0.01 per share. Operating margin is expected to be about neutral versus the comparable prior year period. The tax rate for the quarter is expected to be about 30 percent.

Forward-Looking Statements

All statements, other than statements of historical fact included in this release, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. In addition to the risks and uncertainties noted in this release, there are certain factors that could cause actual results to differ materially from those anticipated by some of the statements made. These include: (1) the ability to achieve business plans, including with respect to lower income consumers and growing existing sales and volume profitably despite high levels of competitive activity, especially with respect to the product categories and geographical markets (including developing markets) in which the company has chosen to focus; (2) the ability to successfully execute, manage and integrate key acquisitions and mergers, including (i) the Domination and Profit Transfer Agreement with Wella, and (ii) the company’s agreement to merge with The Gillette Company, including obtaining the related required regulatory approvals; (3) the ability to manage and maintain key customer relationships; (4) the ability to maintain key manufacturing and supply sources (including sole supplier and plant manufacturing sources); (5) the ability to successfully manage regulatory, tax and legal matters (including product liability, patent, and other intellectual property matters), and to resolve pending matters within current estimates; (6) the ability to successfully implement, achieve and sustain cost improvement plans in manufacturing and overhead areas, including the company's outsourcing projects; (7) the ability to successfully manage currency (including currency issues in volatile countries), debt (including debt related to the company’s announced plan to repurchase shares of the company’s stock), interest rate and certain commodity cost exposures; (8) the ability to manage the continued global political and/or economic uncertainty and disruptions, especially in the company's significant geographical markets, as well as any political and/or economic uncertainty and disruptions due to terrorist activities; (9) the ability to successfully manage the pattern of sales, including the variation in sales volume within periods; (10) the ability to successfully manage competitive factors, including prices, promotional incentives and trade terms for products; (11) the ability to obtain patents and respond to technological advances attained by competitors and patents granted to competitors; (12) the ability to successfully manage increases in the prices of raw materials used to make the company's products; (13) the ability to stay close to consumers in an era of increased media fragmentation; and (14) the ability to stay on the leading edge of innovation. For additional information concerning factors that could cause actual results to materially differ from those projected herein, please refer to our mostrecent 10-K, 10-Q and 8-K reports.

About Procter & Gamble

Two billion times a day, P&G brands touch the lives of people around the world. The company has one of the strongest portfolios of trusted, quality, leadership brands, including Pampers®, Tide®, Ariel®, Always®, Whisper®, Pantene®, Bounty®, Pringles®, Folgers®, Charmin®, Downy®, Lenor®, Iams®, Crest®, Actonel®, Olay®, Clairol Nice ‘n Easy®, Head & Shoulders®, and Wella. The P&G community consists of almost 110,000 employees working in over 80 countries worldwide.

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The Procter & Gamble Company

Segment Names
Beginning July 1, 2005 , we renamed our global business units. Beauty Care was renamed P&G Beauty; Health, Baby and Family Care was changed to P&G Family Health; and Household Care was renamed P&G Household Care. No changes were made to the composition or historical results of the global business units.

Pro Forma Stock-Based Compensation
The company’s guidance for fiscal year 2006 and the July – September quarter includes the impacts of stock option expensing. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (SFAS 123(R)). This Statement revises SFAS No. 123 by eliminating the option to account for employee stock options under APB No. 25 and generally requires companies to recognize the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards (the “fair-value-based” method). The company adopted SFAS 123(R) on July 1, 2005 using the modified retrospective method, whereby all prior periods will be adjusted to give effect to the fair-value-based method of accounting for awards granted in fiscal years beginning on or after July 1, 1995 . The following table provides the pro forma stock-based compensation expense for fiscal year 2005:

Measures Not Defined By U.S. GAAP
In accordance with the SEC’s Regulation G, the following provides definitions of measures used in the earnings release that are not defined by accounting principles generally accepted in the United States (U.S. GAAP) and the reconciliation to the most closely related GAAP measure.

Organic sales growth is a non-GAAP measure of reported sales growth excluding the impacts of acquisitions, divestitures and foreign exchange from year-over-year comparisons. The company believes this provides investors with a more complete understanding of underlying results and trends of the base businesses by providing sales on a consistent basis. The reconciliation of reported sales growth to organic sales growth for the quarter and year:

The company also reports free cash flow. Free cash flow is defined as cash from operating activities less capital expenditures. The company views free cash flow as an important indicator of the cash available for dividends and discretionary investment. Free cash flow is also one of the measures used to evaluate management and is a factor in determining at-risk compensation levels. Free cash flow productivity is defined as the ratio of free cash flow to net earnings, and is another measure used to evaluate management’s performance. The company’s target for free cash flow productivity is 90 percent. The reconciliation of free cash flow and free cash flow productivity is provided below: