By Cliff Peale
Enquirer staff writer

The proof is in the numbers. Procter & Gamble Co.'s move into beauty care and health care took full bloom in the just-completed fiscal year. Those businesses are not just growing faster; they're providing P&G financial flexibility company veterans say they haven't seen in decades.

Its fastest-growing business, beauty care, also is its most profitable.

With stable and growing giants such as Pampers and Tide, the company reported last week that it generated $9.4 billion in cash during the year ended June 30, allowing it to invest in new technology and marketing. And the businesses where it's investing that cash are the ones where it's able to charge premium prices.

"A lot of companies are simply not in that position," said Jim Russell, director of core equity strategy at Fifth Third Asset Management, which controls more than 20 million Procter shares.

"The past two years of earnings have been astounding in terms of P&G's ability to turn the corner."

The numbers themselves are among the best in P&G's 167-year history. It earned $6.48 billion on sales of $51.41 billion. Volume, or the number of units sold, jumped 17 percent, and 10 percent excluding acquisitions.

Wall Street types, who look behind sales and earnings into profit margins and cash flow, love the numbers.

"Cash is the one thing you really can't play with that much," said Pete Sorrentino, chief investment officer at Bartlett & Co., which manages 2.1 million P&G shares. "It's very clean, very pure earnings, which is nice to see these days."

Ann Gillin, who studies Procter for the Wall Street investment house Lehman Brothers, said the numbers are even better than they appear on the surface.

Take the categories where P&G is introducing the most new products, mainly hair care and cosmetics. They are where it gets the biggest price premiums, her report Tuesday said.

That means P&G should be able to increase its price premiums, which in turn puts pressure on competitors and generates cash to feed back into the business.

While all of P&G's five global business units are performing well, the shift into health care and beauty care is driving many of the results. Those businesses require less up-front capital - for example, diapers are made with huge machines that cost millions of dollars, while shampoo formulation depends mostly on science and marketing - and return greater profits.

A look behind Procter's numbers shows the full benefits of the shift:

• Cash - Even after more than $2 billion in capital spending, P&G generated free cash flow of $7.34 billion in 2003-04, and that was in a year when it completed its biggest acquisition, $5.7 billion for Wella AG. That's 13 percent more than net earnings, meaning the company has that much more cash to pour back into operations, buy back stock or return to shareholders through an increased dividend.

• Profits - P&G's beauty care unit posted a net after-tax profit margin of 14.15 percent last year, lower than the previous year because of the Wella deal. The fabric & home care unit has always earned strong margins - driven by Tide - and was 15.89 percent last year.

But health care margins have jumped by nearly 5 percentage points in the last three years to 13.80 percent. And while margins in the paper businesses (9.29 percent) and food & beverage (10.43 percent) are lower, they have increased since 2000-01.

And Procter can charge higher prices than competitors in some of its faster-growing areas, such as Crest Whitestrips, Iams pet food and salon hair-care products, Fifth Third's Russell said. The professional channel is a new emphasis at P&G, particularly since acquiring Wella, which generated nearly half of its sales from salon products.

"They have pulled that lever," Russell said. "That drives them right down Broadway in dealing with professional beauty care."

• Growth - Generating growth in sales - or "top line" for its placement on income statements - has been one of P&G's top priorities. It's set a conservative goal of 4 percent to 6 percent a year and blown those goals away in the last three years.

But with a $51 billion company, that goal requires adding a brand the size of Tide every year, chairman and chief executive A.G. Lafley told investors after announcing the earnings results.

"They're always going to struggle at that," Lehman Brothers' Gillin said. "Their No. 1 priority has got to be to continue to generate revenue growth."

Lafley pointed to room for growth in health care, beauty care, and in developing markets such as China and Russia.

"I assure you we are guarding against complacency and complexity," Lafley said. "We will continue to have an underdog mentality."

With the quality of the year's earnings, that may not be so easy.

"I think the mood inside Procter has got to be good," said Gillin.

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E-mail cpeale@enquirer.com