2012 Annual Report CONTENTS Letter to Shareholders 1 Leadership Brands 7 Form 10-K Index 13 Form 10-K 14 Reconciliation of Non-GAAP Financial Measures 85 Global Leadership Council 86 Board of Directors 86 Recognition 87 Company & Shareholder Information 88 FINANCIAL HIGHLIGHTS (unaudited) Amounts in millions, except per share amounts 2012 2011 2010 2009 2008 Net Sales $83,680 $81,104 $77,567 $75,295 $77,714 Operating Income 13,292 15,495 15,732 15,188 15,743 Net Earnings attributable to Procter & Gamble 10,756 11,797 12,736 13,436 12,075 Net Earnings Margin from Continuing Operations 11.1% 14.4% 14.0% 14.1% 14.4% Diluted Net Earnings per Common Share from Continuing Operations(1) $ 3.12 $ 3.85 $ 3.47 $ 3.35 $ 3.36 Diluted Net Earnings per Common Share 3.66 3.93 4.11 4.26 3.64 Dividends per Common Share 2.14 1.97 1.80 1.64 1.45 (1) Diluted net earnings per share are calculated on net earnings attributable to Procter & Gamble. NET SALES OPERATING CASH FLOW DILUTED NET EARNINGS ($ billions) ($ billions) (per common share) 12 $83.7 12 $13.3 12 $3.66 11 $81.1 11 $13.3 11 $3.93 10 $77.6 10 $16.1 10 $4.11 09 $75.3 09 $14.9 09 $4.26 08 $77.7 08 $15.0 08 $3.64 2012 NET SALES BY BUSINESS SEGMENT(2) BY GEOGRAPHIC REGION BY MARKET MATURITY Beauty North America Developed 19% 24% Grooming 18% Western Europe Developing Health Care 39% Central & Eastern 38% Fabric Care & 10% Europe, Middle East 10% Home Care & Africa 32% Baby Care & 14% Latin America 62% 15% Family Care Asia 19% (2) T hese results exclude net sales in Corporate. Robert A. McDonald Chairman of the Board, President and Chief Executive Offi cer Dear Shareholders: P&G is the world’s largest and most profi table consumer packaged goods company, with nearly $84 billion in sales and more than $10 billion in net earnings. We have built a portfolio of 25 billion-dollar brands — each of which generates from $1 billion to more than $10 billion of sales per year. They span a broad range of product categories — including household care, beauty, grooming, and personal health care — and are household names around the world, including Pampers, Gillette, Tide, Ariel, Downy, Pantene, Head & Shoulders, Olay, Oral-B, Crest, Dawn, Fairy and Always. We have three times more billion-dollar brands in our categories than our next-largest competitor and more than most of our remaining competitors combined. Focusing Our We’re celebrating P&G’s 175th anniversary this year, a milestone Growth Strategy that very few companies have achieved. Our long track record of success is based on a time-tested business model — we discover meaningful insights into what consumers need and want; we WE ARE FOCUSING P&G’S growth strategy on translate those insights into noticeably superior products focused on our biggest opportunities: those needs; we communicate that superiority through advertising that includes compelling claims, performance demonstrations, 40 and superior benefi t visuals; and we price our products at a point where consumers experience superior overall value. All of this We are focusing on our 40 largest and drives leadership market share, higher sales and lower costs, most profi table product categories in the most which enable us to reinvest in our business and win on a sustained important geographic markets. These 40 basis. This model is simple and clear — and when we execute it businesses represent about 50% of sales and nearly 70% of operating profi t. consistently, we win. We have used this model to build a company with nearly $84 billion in sales and more than 20 $10 billion in net earnings. We are focusing resources on winning This model has also enabled P&G to deliver reliable and meaningful with our 20 largest innovations. growth over long periods of time, outperforming the market and performing among the very best in our industry. Measuring from the end of each quarter starting in 1980, rolling 10-year returns have 10 exceeded both the S&P 500 and the Dow Jones Industrial Average in 82 out of 88 periods, or 93% of the time. And rolling 20-year returns have exceeded both the S&P 500 and the Dow Jones We are maintaining strong momentum in Industrial Average in 46 out of 48 periods, or 96% of the time. developing markets, targeting the 10 developing markets with the highest potential for growth. Within this longer-term track record, there have been shorter periods of underperformance, as we’ve experienced the past couple of years. These have typically been followed by periods of strong out- performance. This past track record does not in any way guarantee future success. It does refl ect, however, the strength of our time- tested business model. P&G’s Long-Term Growth Targets Organic Sales Growth 1 – 2% above global market growth rates Core EPS Growth High single to low double digits Free Cash Flow 90% of net earnings 2 The Procter & Gamble Company The model works. Funding it with productivity savings and executing Strong Growth in it broadly and consistently with discipline is the proven way for Developing Markets P&G to deliver the business and fi nancial results to which we’ve committed. This is what we are doing. OUR DEVELOPING-MARKET SALES growth has been very strong over the past ten years. Three years ago, Fiscal Year 2012 Financial Results we made an intervention to expand further in these markets, and we’re growing at nearly double the rate Developing-market organic sales growth and cash fl ow productivity of the underlying markets. Developing markets are were both strong in 2012. Developed-market organic sales growth now a $32 billion business for P&G, generating 38% of sales and 44% of our unit volume. and earnings progress were not. We’re focused on our top 10 developing markets where growth prospects are highest, including the In fi scal 2012, we delivered 3% organic important “BRIC” markets of Brazil, Russia, India and sales growth overall. P&G has averaged China, where sales have grown an average of 20% over the past decade. 4% organic sales growth over the past three years, achieving 3% to 5% organic sales growth for 11 consecutive quarters. 14% developing market > net sales* In just three years, we’ve added organic sales of $8.5 billion, the equivalent of adding a Fortune 300 company to our portfolio. P&G has a strong track record 2012 of successful developing- 2007 Growth continues to be very strong in developing markets, which market growth — averaging 2002 >14% growth over the now generate 38% of P&G’s sales and 44% of our unit volume. past decade. It’s a $32 billion business for P&G, the largest developing-market business of any consumer products company. We see signifi cant remaining growth opportunities as our business in developing bric markets net sales* markets is still smaller as a percent of sales than the developing brazil market businesses of some of our competitors, and we will continue 2012 23% to focus on growing our business in the largest and most important 2007 of these markets. 2002 compound annual growth Our growth in developed markets has been weaker, resulting from slower market growth and declining market shares. The share russia declines in these markets were driven primarily by consumer value 2012 25% issues on key brands in several large categories due to a combina- 2007 tion of price increases taken to recover higher commodity costs, 2002 compound annual growth which our competitors did not take, and increased promotional activity by competitors. Developed markets represent about 60% india of our sales and 70% of operating profi ts, so it’s essential that 2012 27% they are healthy and growing. Consequently, developed-market 2007 2002 compound businesses — including fabric care and baby care in the United States annual growth and the largest markets in Western Europe, as well as the United States oral care, skin care, hair care, shave care and feminine care china categories — are a disproportionate focus of strengthened plans 2012 17% that we began to implement earlier this year. We are ensuring we 2007 2002 compound have product offerings from each of these businesses that provide annual growth superior value — at the right price and with innovation that is strong — supported by marketing that effectively communicates the * Bars represent net sales in U.S. dollars. superiority of our products. The Procter & Gamble Company 3 Core earnings per share for fi scal year 2012 were $3.85, which is 1% below the prior-year level. The EPS benefi ts from sales growth, cost savings and share repurchase this past year were more than offset by a combination of headwinds from higher raw material costs, geographic mix, a higher effective core tax rate and increased investments to support our accelerated portfolio expansion into developing markets. Free cash fl ow for the fi scal year was $9.3 billion. Adjusted free cash fl ow productivity was 90%, consistent with our target. During the fi scal year, we returned $10 billion of cash to shareholders through $6 billion of dividends and $4 billion of share repurchase. We paid a dividend for the 122nd consecutive year, making P&G one of only nine publicly more than 2/3 traded companies headquartered in the U.S. to have delivered uninterrupted dividends of the unit dose for 120 years or more. laundry segment We also increased the dividend by 7%. This was the 56th consecutive year we have increased the dividend, one of only six companies to have done this. Over the last 10 years, P&G has paid out $42 billion in dividends. Excluding $20 billion of share repurchase associated with the Innovation that Gillette acquisition, we have repurchased $46 billion of stock. In total, through dividends and share repurchase, we have returned Sets New Standards $88 billion of cash to our shareholders, which is 90% of reported net earnings. TIDE PODS IS AN EXAMPLE OF P&G innovation that obsoletes existing products or creates entirely new product categories. The innovative, three- Returning capital to shareholders, through chamber, pre-measured packet can simply be dropped both dividends and share repurchase, in the wash — no measuring, no worrying — and it remains a central pillar of our efforts to even dissolves in cold water. create superior shareholder value. Since launching in the U.S. in February 2012, Tide PODS has had a very strong performance — ahead of our expectations. Since we began shipping PODS, the unit I’m proud of the extraordinary efforts P&G people have made to dose laundry segment has more than doubled to 6% of total laundry share — and Tide PODS is over two- keep our Company growing through a very demanding economic thirds of this segment. period. We know, however, that we have not delivered suffi cient It’s an innovation that’s making laundry day easier — growth to rank among the best performers in our industry. and is saving consumers loads of time. To do this, we must get back on a path toward our long-term annual objective of high single-digit to low double-digit EPS growth and total shareholder return in the top third of our competitive peer group. 4 The Procter & Gamble Company To accelerate progress down this path and address our shortfalls, Driving Productivity we have implemented three meaningful changes: strengthening and Cost Savings our core business, renewing our focus on discontinuous innovation, and implementing a $10 billion productivity program. PRODUCTIVITY IS THE GREAT ENABLER that allows us to invest in leadership levels of consumer Focusing on Our Core understanding and innovation, ensure our brands are priced competitively, overcome macro The fi rst change is our 40/20/10 focus — focusing resources on headwinds and deliver bottom-line growth… the 40 largest and most profi table businesses, many of which are simultaneously. in developed markets; on our 20 largest innovations; and on the Earlier this year, we announced our objective of 10 most important developing markets. delivering $10 billion* in cost savings by the end of fi scal year 2016. This program includes $6 billion Our 40 largest businesses generate more than 50% of sales and of savings in cost of goods sold, $1 billion from marketing effi ciencies, and $3 billion from non- nearly 70% of operating profi t. They are disproportionately in the manufacturing overhead. U.S. and China, which are P&G’s fi rst and second largest, most profi table markets, respectively. cost reduction progress Our 20 most important innovations are We’re making good progress in all these areas. nearly 10 times larger on average than the rest of the initiatives. This is the core of our innovation pipeline. Our 10 most important developing markets are critical to P&G’s future growth. Between 2010 and 2020, the world’s population will grow by 700 million people, and 95% of this population growth will be in developing markets. During that same period, $6B the world’s middle class will increase by 1.4 billion people, 98% cost of goods in developing markets. Population growth and household income $3B growth are the primary drivers of our business growth, so these overhead trends are highly encouraging for P&G’s future. We are maintain- ing strong momentum in developing markets, targeting the 10 developing markets with the highest potential for growth. $1B We will innovate and execute with excellence across all our busi- nesses, but this sharp focus on core businesses, our biggest marketing innovations and developing markets will have the greatest impact on getting P&G back on track to leadership levels of growth and shareholder value. Winning with Innovation The second change we’ve made is a deliberate refocus on discontinuous innovation — innovation that obsoletes current $10 these productivity plans will help P&G fi nance top-line products and creates new categories and new brands. Examples growth, ensure our consumer value are products such as Tide PODS, Swiffer, and Crest Whitestrips. propositions are superior, overcome billion macro headwinds and deliver better bottom-line growth. We will maintain our commitment to ongoing innovation in our base business (i.e., the innovations that enable P&G’s brands to maintain superior performance and value between more * Based on projected revenue and costs growing at a 5% annual rate through 2016. The Procter & Gamble Company 5 Time-Tested disruptive innovations), but some of our fastest periods of Business Model growth — and some of our largest and most profi table present- day businesses — were driven by discontinuous innovation: disposable diapers, liquid laundry detergents, home care P&G’S LONG TRACK RECORD OF SUCCESS is items like Swiffer and Febreze. We need to get back to this based on a time-tested business model: level of innovation in a meaningful way. • We discover meaningful We have an increasingly promising insights into what consumers pipeline of category- and brand-creating need and want. innovations. It will take some time to • We translate those insights into get these innovations ready for launch, noticeably superior products. but I am confi dent they will make a • We communicate product meaningful and sustainable difference superiority through advertising that includes compelling claims, as they enter the market. performance demonstrations and superior benefi t visuals. Improving Productivity • We price our products so that consumers experience superior The third change is the $10 billion productivity program overall value. we announced in February. This is critical because productivity is the great enabler. It enables us to fund top- line growth, to ensure our consumer value propositions are This drives leadership market shares, higher superior, to overcome macro headwinds, and to deliver sales and lower costs, enabling us to reinvest in our business. better bottom-line growth. The model is simple and clear — and when we execute it consistently, we win. 6 The Procter & Gamble Company Leadership Brands Brands with strong equities in the minds of consumers. Brands that retailers want in their stores. Brands that are platforms for innovation.