International ratings service Fitch Ratings has assigned an 'AA-' rating to consumer products giant Procter & Gamble's (P&G) approximately US$10.8bn of senior unsecured notes and a 'F1+' rating to its commercial paper programme. The rating outlook is stable.

Fitch said that the ratings reflect P&G's diversified portfolio of leading brands and broad geographic reach, which allow it to generate significant and consistent operating earnings and cash flow. The ratings also acknowledge the company's level of acquisition activity, its competitive operating environment, and continued share repurchases.

P&G continues to focus on growing its core businesses through its large brands and markets, increasing advertising and new product innovation, partnering with key retailers and maintaining a balanced value equation. In addition, P&G continues to shift its portfolio to segments that have the highest growth rates and operating margins. This combined with cost cutting activities, including the restructuring programme announced in 1999, have allowed P&G to strengthen its profitability measures. Over the past five years, EBITDA margin has grown to 23.8% for the year ended 31 March 2002 from 20.6% in 1998. Improved profitability combined with P&G's focus on reducing capital expenditures to below 6% of sales, a level which it achieved in the Q3 2002, have led to strengthened cash flow generation. Net free cash flow, measured by EBITDA less cash interest, cash taxes, capital expenditures, and changes in operating working capital, reached US$7.2bn for the year ended 31 March 2002 up from US$2.3bn in 1998, a more than 200% increase.

However, as a result of P&G's share repurchase and acquisition activity, debt levels have almost doubled to US$15.8bn at 31 March 2002 from US$8bn in 1998. The most recent transaction, the US$4.95bn acquisition of Clairol in November 2001, added significantly to this increase in debt. Fitch anticipates that P&G will direct free cash flow generation to reduce debt balances as was demonstrated by its reduction of US$850m of debt during the Q3 ended 31 March 2002.

Fitch expects debt reduction, together with continued improvement in P&G's operating profitability and cash flow to result in an improvement in its credit statistics. Leverage, measured by total debt-to-EBITDA, was 1.7x and fixed charge coverage was 10.4x for the latest year ended 31 March 2002. While additional large acquisition activity is not anticipated over the near term, debt financed acquisition activity could moderate the improvement in credit statistics over the long-term. However, to the extent that these acquisitions are funded through the use of equity or free cash flow generation, there would not be an impact on the rating level.