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Operator
Good day, everyone, and welcome to the Procter & Gamble second-quarter earnings release conference call.
Just a reminder, today's call is being recorded.
The rebroadcast, reproduction or retransmission of this conference call, in whole or in part, is strictly prohibited without the prior written consent of Procter & Gamble Company.
At this time, for opening remarks and introductions, I'd like to turn the call over to the Chief Financial Officer, Mr. Clay Daley.
Please go ahead, sir.
Clay Daley - CFO
Thank you and good morning.
Welcome to Procter & Gamble's quarter-end conference call.
A.G.
Lafley, our CEO, Juan Pedro Hernandez, our outgoing Treasurer, and John Goodwin, our newly appointed Treasurer, join me this morning.
I will begin the call today with a summary of our second-quarter results.
Juan Pedro will cover our results by operating segment and I will wrap up with our expectations for the March quarter and the fiscal year.
A.G. will join the call for the Q&As and as always, following the call, Juan Pedro, John Goodwin, Thomas Tippel (ph), our newly appointed IR Director, and I will be available to provide additional perspective as needed.
Now, onto the December quarter results.
We delivered another quarter of sales above our long-term objective behind strong organic volume growth.
This strong growth is coming on top of a record-volume quarter in 2002.
Diluted net earnings per share were $1.30, at the top end of our revised guidance.
Diluted EPS was up 23 percent versus prior-year reported EPS of $1.06 per share, which included 7 cents per share of restructuring program charges.
Excluding the (indiscernible) restructuring charges, EPS was up 15 percent.
Second-quarter net sales were 13.2 billion, up 20 percent.
Acquisitions and divestitures contributed 10 percent to sales growth, primarily driven by Wella.
Foreign exchange helped sales by another 4 percent.
FX health was due to strengthen in the euro, the Canadian dollar, the British pound and the Japanese yen, which more than offset weakness in some developing-market currencies.
Organic sales growth was up 6 percent.
This is the sixth consecutive quarter where our organic sales growth has been at or above our long-term target.
Reported volume increased 19 percent.
Organic volume grew a very strong 9 percent.
All business units in all regions delivered solid growth, with Health care, Beauty care and developing markets continuing to set the pace.
Health care grew 17 percent behind continued strong results on Prilosec and oral care initiatives.
The North American flu epidemic propelled our cough and cold business to an exceptional quarter.
The respiratory volume in the quarter is not expected to be incremental for the fiscal year.
The U.S.
Centers for Disease Control already reported that incidents of cold and flu in North America had declined significantly as of January.
This indicates that while the cough/cold season peak has come earlier this year, there may be new impact on the total cough/cold market for the entire season.
Beauty care volume grew 45 percent with double-digit organic growth plus the addition of Wella.
Organic growth was driven by broad-based strength in hair care, feminine care and personal beauty care.
As discussed in our December analyst meeting, meeting with more of the world's consumers is a key part of our topline growth strategy.
Today, only about 20 percent of our business is in developing markets, compared to 25 to 45 percent for our major competitors.
But we're catching up, making good progress against this large growth opportunity.
Developing market volume grew nearly 20 percent, more than double the average Company growth rate.
As expected, the disproportionate growth in developing markets results in negative mix, which came in at minus 2 percent on the quarter.
Our exceptional growth in developing markets at margins comparable to the Company average is an indicator that we are executing a sustainable business model.
Pricing was down 1 percent versus a year ago due to continued promotion pending in the U.S. tissue and coffee markets and selected price adjustments on fabric and home care brands.
Next, onto earnings and margin performance.
As a reminder, these comparisons are versus core results in the base period.
Gross margin improved by 140 basis points to 52.2 percent.
About half of the improvement was driven by scale (ph) leverage from higher volume; the other half was driven by business mix shifts towards faster growing health and beauty care businesses, mainly from the addition of Wella.
Marketing, Research and Administrative costs increased 120 basis points.
The majority of the increase is driven by the addition of Wella.
The balance of the increase reflects continued investment to support our product and marketing initiatives and our topline results are evidence that the product and marketing plans are working.
For now, we are very comfortable that our profit growth is being driven more by topline growth than by margin expansion.
Operating income was up 15 percent to $2.7 billion during the quarter.
The operating margin decline of 90 basis points versus last year was due to Wella -- in line with prior guidance.
Now, onto cash.
Operating cash flow in the quarter was 2.4 billion, in line with the same period a year ago.
Strong cash earnings were partly offset by somewhat higher working capital needs as the business grows at an accelerated pace.
Note that the acquisition impact for Wella shows up in the investing section of the cash flow statement.
The operating cash impacts of Wella since the acquisition were not material.
Free cash flow for the quarter was $1.9 billion.
This was modestly below the December quarter of last year due to higher capital expenditures.
Capital expenditures for the quarter were 3.4 percent of sales, very consistent with expectations and below our long-term target of 4 percent.
Free cash flow productivity was 105 percent for the quarter, and we are on track to deliver the year at or above our long-term target of 90 percent.
Now, I will turn it over to Juan Pedro for a discussion of business unit results by segment.
Juan Pedro Hernandez - Treasurer
Thank you, Clay.
The Fabric and Home Care Business unit delivered excellent results for the quarter, posting all-time record volume sales and earnings.
Volume grew 9 percent and sales were 3.4 billion, up 10 percent.
The strong topline was driven by double-digit volume growth from Tide, Gain, Era, Swiffer and Mr. Clean.
Sales growth includes a 4 percent benefit from FX, which was largely offset by mix and pricing.
Negative mix was driven faster growth of laundry products in developing markets, partially offset by positive mix from Swiffer Duster, Mr. Clean Magic Eraser and (indiscernible) products.
Pricing is mainly due to prior-period changes that have not get annualized and reductions from Middle East laundry brands to much competitive actions (ph).
Earnings increased 11 percent to $570 million, driven by the strong volume results and, to a lesser extent, product cost savings.
Fabric Care delivered another quarter of growth-based volume and share growth.
Eleven of P&G's top 16 countries posted share increases.
In the U.S., P&G's laundry (indiscernible) volume share grew (indiscernible) 2.3 percentage points and Fabric Enhancer share grew 2.4 percentage points behind Gain expansion.
Volume growth was also broad-based, led by developing markets up more than 20 percent.
Home Care delivered another vigorous home quarter on all major brands.
In the U.S., the past three months, all (indiscernible) shares for Swiffer is up 11.1 percentage points.
Mr. Clean is up 3.1 percentage points.
Downy is up 2.5 percentage points and Cascade is up 1.9 percentage points.
This share improvement is behind new product such as Swiffer Duster, Mr. Clean Magic Eraser and Mr. Clean Ultra Dry that are also helping to expand the Home Care category for retainers.
Beauty Care volume increased 45 percent behind the Wella acquisition.
Organic care volume grew 10 percent on strong results in the skin care, hair care and feminine care segments.
Sales increased 50 percent to 4.5 billion.
Foreign exchange held sales by 5 percentage points.
Organic sales grew 10 percent.
Earnings for the quarter were $681 million, up 34 percent versus a year ago.
Earnings growth was driven by base business, volume growth and cost savings, plus the addition of Wella.
These strong results funded increased marketing investments to support new initiatives and strengthen plans in hair care and skin care.
Global hair care delivered growth-based volume growth as Pantene, Head & Shoulders, Rejoice, and Herbal Essences all increased double digits.
Herbal Essences volume was up over 40 percent outside North America.
U.S. hair care (indiscernible) outlet (ph) volume share was up slightly despite heavy competitive activity.
Pantene continued to grow market share in the U.S. with past three months all outlet share (ph) up 1.4 percentage points to 16 percent.
That was behind continued leverage of product initiatives, effective advertising and a strong trade support.
Olay global volume grew by over 25 percent for the quarter, led by growth in the U.S. and China.
In the U.S., the past three months all-outlet (ph) share for Olay (indiscernible) facial moisturizers increased 5 percentage points to 35 percent.
In China, Olay volume share grew by 7 percentage points to over 27 percent.
The strong results in both regions have been driven by the success of the new Olay Regenerist line-up and the continued growth of Olay Total Effects and base brand products.
Feminine Care quarterly volume growth was also growth-based.
Developed-market volume grew high single digits and developing markets grew high teens.
In the U.S., volume share improved in each of the key segments.
The past three months, all-outlet share for Always pads increased 2.9 percentage points.
Alldays panty liners were up 2 percentage points and Tampax tampons grew 1.5 percentage points.
Next, Baby and Family Care, which delivered solid topline results in a difficult competitive environment -- volume grew 4 percent globally, led by Baby Care -- up high single digits.
Sales increased 6 percent to 2.7 billion.
FX help of 5 percent was partially offset by pricing of minus 1 percent and mix of minus 2 percent.
Lower pricing was mainly due to increased spending in North America Family Care to counter higher competitive promotional activity.
Mix was primarily driven by expansion of volume-tiered diapers in developing markets.
Quarterly earnings continued to be healthy at $281 million.
This was an increase of 2 percent versus an exceptionally strong base period which had increased 21 percent.
Earnings in Baby Care increased due to volume and cost savings, largely offset by pricing investments and pricing commodity costs in Family Care.
Western Europe Baby Care continues to grow share.
The past three months, diaper volume share was 53 percent, up 3.7 percentage points versus a year ago, driven by strong results in the UK, France and Germany.
In the U.S., the past three months estimated all-outlet (ph) volume share for P&G diaper business was 36.9 percent, down versus a year ago.
Pampers diapers was up 0.6 percentage points to 27.5 versus a strong base period.
Luvs estimated all-outlet share was 9.4 percent, down due mainly to lower distribution levels which have been corrected in January.
Latin American Baby Care had another very strong quarter with shipments growing more than 40 percent versus a year ago.
Pampers is now the value share leader at all major Latin American markets where it competes, except Mexico.
Family Care grew the past three months all-outlet volume share in the U.S. by (indiscernible) percentage points to 30.7 percent, driven by Charmin and Puffs and despite escalating competitive promotional spending.
P&G continues to maintain product performance (indiscernible) in the tissue/towel category.
We will launch an improved Charmin Ultra product in April, 2004.
The upgrade brings significant softness, fitness, wet strength and absorbency advantages over all competitive products.
Health Care continued its very strong momentum on volume sales and earnings growth.
Volume grew 17 percent, with personal health care, pharmaceuticals and oral care all growing by 20 percent or more.
Sales were $1.9 billion, an increase of 22 percent.
FX helped sales by 4 percent and pricing added 1 percent.
Earnings for the quarter were 333 million, an increase of 32 percent, driven by a strong volume performance, pricing and mix helps, and cost savings.
Personal health care results were driven by a very strong quarter for the Vicks brand.
As we mentioned in our pre-announcement on January 9th, Vicks benefited from the early and severe cold and flu season in North America.
P&G's all-outlet value share of the U.S. cough and cold market grew 1 percentage point to 19.2 percent.
Also, Prilosec delivered a very good quarter following the successful launch in September.
Prilosec all-outlet value share of U.S. stomach remedies is approximately 20 percent, the leader in the category.
Pharmaceuticals delivered another excellent quarter on the strong growth of Actonel.
Actonel's share of global (indiscernible) for the treatment of osteoporosis rose to nearly 26 percent in the last reported period.
Oral Care grew quarterly volume in developing markets by more than 30 percent behind the growth of value-tier offerings and innovation on the premium tier.
In developed markets, oral care volume grew in the mid teens behind product innovations on DentiFreeze (ph) and tooth whitening.
Crest DentiFreeze past three months U.S. all-outlet volume share increased by an outstanding 3.9 percentage points to 34.6 percent, driven mainly by the Crest Whitening Expressions launch.
The Whitening Expressions lineup is about 5 percent share and is now the number two segment of the Crest business.
Crest share of the U.S. tooth whitening systems is now nearly 70 percent.
This does not yet include the impact of our latest innovation, Crest Whitestrips Premium, which launched earlier this month.
Last, Snack and Beverages delivered solid earnings growth on the quarter.
Volume increased 1 percent.
Sales were $931 million, up 6 percent.
FX helped sales by 4 percent.
Mix improvements of 3 percent were partially offset by negative pricing.
Pricing investments were to support the continued high level of promotional activity in the coffee category.
Earnings were $122 million, an increase of 11 percent behind the volume and mix improvements on lower MRA&O spending.
Pringles past three months global value share improved by 0.3 percentage points.
Folgers past three months U.S. all-outlet value share grew 0.9 percentage points to over 38 percent.
Folgers will continue to focus on protecting share with product innovations and improving long-term margins through cost saving programs.
That concludes the business unit review.
I will turn the call back to Clay.
Clay Daley - CFO
Thanks, Juan Pedro.
Before closing with guidance, I want to provide a brief update on the progress of the Wella acquisition.
Based on the early reviews and results to date, we continue to be very encouraged by the strength of the Wella business and especially by the depth and skill and knowledge of the Wella people.
We confirm our expectations that the acquisition will be nondilutive to P&G's fiscal 2004 earnings per share results.
Wella will be releasing their fourth-quarter results in the next few weeks.
As you recall, those results will be prepared under IAS, or International Accounting Standards.
Many of the rules differ big between IAS and U.S.
GAAP -- for example, the classification of the expenses between MRA&O versus net sales and the timing of expense recognition.
We've adjusted the Wella results to U.S.
GAAP for consolidation in our results.
As a result, the information that will be released by Wella will differ from that consolidated with P&G's results.
As you may know, some Wella minority shareholders have called for an extraordinary shareholder meeting on February 3rd.
We believe this event provides no added value to Wella's business.
The allegations by the hedge funds are baseless.
P&G has complied with and will continue to comply with all of the applicable laws in Germany.
P&G is the majority shareholder, has full confidence in Heiner Gurtler's ability to manage Wella in the best interest of all long-term shareholders.
We also want to assure our investors that P&G remains confident in our ability to deliver the synergies outlined in our acquisition announcements.
This is despite the negative PR and legal activities undertaken by the hedge funds.
Note that the 300 million euro synergies will fall primarily in the books of P&G and can be achieved under the current ownership structure.
Of course, all collaborative activity between Wella and P&G will be arms length and will be fully defensible from a legal standpoint.
Now, onto guidance.
For the March quarter, we forecast organic volume growth, excluding acquisitions and divestitures, in the high single digits.
We expect this will be driven by strength in Fabric and Home Care, Health and Beauty Care and developing markets.
FX should help sales by 2 to 3 percent in the quarter.
Acquisitions and divestitures are anticipated to add 7 to 9 percent to sales.
All-in total sales are projected to grow 14 to 18 percent.
Organic sales are expected to grow 5 to 7 percent.
Operating margin is expected to decline by 90 to 120 basis points.
Excluding the impact of Wella, operating margins should be about flat.
On EPS, the current consensus estimate for the quarters is at the upper end of our expectations, as the early cough/cold season pulled earnings forward into the December quarter.
The strong first-half results of averaging 14 percent earnings growth provide a good basis to leverage our initiative program over the second half of the fiscal year.
Reported EPS growth should come in at about 25 percent for the June/June (ph) period.
Excluding the impact of prior-year restructuring charges, earnings per share are expected to grow about 10 percent for the second half of the fiscal year, in line with the Company's long-term targets and on top of a strong base period where EPS grew 14 percent.
We expect gross margin improvements to be reinvested in higher marketing research and admin to support the strong initiative pipeline in Fabric and Home Care and Beauty Care and to defend against competitive launches in Family Care.
We want to make sure we are well positioned to deliver target topline growth going into next fiscal year.
For this fiscal year, the investments to support our strong initiative pipeline are expected to drive 5 to 7 percent organic sales growth -- at or above the high end of our long-term growth objectives. (indiscernible) sales should increase 13 to 17 percent for the year.
In summary, we are expecting another year of double-digit earnings growth.
We are comfortable with the current consensus coming at 12 percent, coming on top of a strong base-period comparison where earnings grew 13 percent.
That concludes the business comments for the quarter.
As you know, this discussion has included a number of forward-looking statements.
If you will refer to our most recent 10-K and 8-K reports, you will see a discussion of factors that could cause the Company's actual results to differ materially from these projections.
As required by Regulation G, we need to make sure that you're aware that, during the call, we made a number of references to non-GAAP measures.
Management believes that these measures provide our investors valuable information on the underlying growth trends of our business.
The only difference between reported and core amounts is the restructuring charges in the base period.
Organic refers to reported results, excluding the impact of foreign exchange and acquisitions and divestitures where applicable.
Free cash flow represents operating cash flow less capital expenditures.
We have posted on our Web site, www.PG.com, a full reconciliation of non-GAAP measures to U.S.
GAAP to provide additional clarification.
Before we turn to the question-and-answer period, I want to simply take this opportunity to recognize Juan Pedro Hernandez for the excellent work he has done as Treasurer of the Company over the last two years and for his significant contributions to our Investor Relations effort.
This will be his last quarter-end conference call.
Thanks, Juan Pedro.
Juan Pedro Hernandez - Treasurer
Thank you.
Clay Daley - CFO
A.G., Juan Pedro, John and I will be happy to open up the call to questions.
Operator
The question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS).
Amy Lou (ph) Chasen from Goldman Sachs.
Amy Lou Chasen - Analyst
Good morning.
Can you talk a little bit --?
It looks like Wella's volume in the quarter was a little bit better than you had anticipated.
Number one, is that the case?
Number two, can you talk about why?
Clay Daley - CFO
Obviously, we measure volume in physical or what we call statistical cases.
We had completed the first steps of finalizing the case definitions for Wella during the quarter, so (indiscernible) the Wella numbers were good although partly that was a function of how we finalized how we defined cases at Wella in comparison to the rest of the Company.
Unidentified Speaker
They were solid in their professional salon business.
Amy, they had a strong fragrance quarter.
Clay Daley - CFO
Strong fragrance quarter going into the holidays.
Amy Lou Chasen - Analyst
Great.
Just on the working capital side, I understand, obviously, the negative implications of Wella on your working capital, but there was also a comment in the press release suggesting that the month of December was particularly strong and that that may have driven some of the increase.
Can you elaborate on that?
Clay Daley - CFO
The strong finish in December had an impact on Accounts Receivable.
Obviously, that's not -- in the broad scheme of things, that's not bad, but because we shipped extra business.
But from a working capital standpoint, it resulted in Accounts Receivable going up a bit versus our earlier expectations.
Amy Lou Chasen - Analyst
Was there any sort of incremental inventory in the trade, or is that because of the strong cost -- (multiple speakers)?
Clay Daley - CFO
Mostly that and I'll tell you, based on the information we have, trade inventories are in control.
I mean, this (indiscernible) consumption.
Amy Lou Chasen - Analyst
Okay, so then we should see that reverse in the March quarter?
Clay Daley - CFO
We should see that reverse to a degree, yes.
Amy Lou Chasen - Analyst
Last but not least, just on the profitability in the paper business, the Baby and Family Care business, you talked a little bit about it and about the competitive environment.
Can you just elaborate a little bit more on how you see those profit trends evolving over the next several quarters, given that the levels of competition are likely to remain fairly high?
A.G. Lafley - CEO
One quick comment on your working capital question -- if you step back and look at quarter by quarter over ten-plus years, our Accounts Receivable are in control and, as best we can tell, best-in-class in the industry.
Our inventory is also in control and as we've said before, we are working hard on trying to find a way to get a (indiscernible) there starting in Health and Beauty Care.
On Baby and Family Care profitability, fiscal year to date, earnings are actually up 11 percent in those two businesses.
We are seeing more innovation in the Baby Care business, especially in the U.S., and we are seeing more price-discounting and merchandising intensity, plus some innovation in the Family Care business.
But we are going to stay the course on the strategies that we are on.
Baby Care -- I feel pretty doggone good about the business.
We are growing handsomely in Western Europe; we're growing in Latin America; we're growing in Central and Eastern Europe, and Pampers is up in the U.S. despite some really terrific innovation from our best competitor.
So, it's sort of a good time to be a young mom.
There are a lot of good choices; there's a lot of innovation out there and the competition is, for the most part, healthy because it's on the basis of innovation and brand.
In the Family Care business, at least in the U.S., there were some somewhat troubling developments this last quarter because of sort of the amount of promotion and the discounting.
I think we've sort of seen these cycles; they come for quarter or so.
We have talked about them over last three years.
The first thing we have to do is make sure that we stay within our price gap.
Recall, we command the premium; we command the premium on Downy and we command the small premium on Charmin; we just have to make sure that the premium stays within the threshold, so that is job one.
Job two and far more important job is to bring more innovation, more differentiation and more meaningful value to consumers and customers.
You're going to see a very robust program for us in the next twelve months.
Amy Lou Chasen - Analyst
So, in terms of the profitability trend in that -- (Multiple Speakers)?
A.G. Lafley - CEO
I haven't changed their goal.
Juan Pedro Hernandez - Treasurer
Amy, in addition to the increased profitability, our capital requirements are at a smaller (inaudible) lower than they were in this segment.
So, we are reducing CapEx as we improve profitability.
A.G. Lafley - CEO
I think the simple way to think about it in Baby Care is when you have broad strength around the world, particularly in Western Europe, so we can manage.
Clay Daley - CFO
We're not worried about the profit trend on the year.
Operator
Carol Wilke with Merrill Lynch.
Carol Wilke - Analyst
Good morning.
I was just curious on the bigger picture, on the pricing and promotional front versus, say, three months ago.
Have your expectations changed in that it will probably accelerate more than you thought?
It just seems like it continues to be very heavy and I was just curious if there has been anything that's changed from a few months ago on the outlook on the whole pricing/promotion front?
A.G. Lafley - CEO
I think if you step back and look at our business as a whole, one of the unique characteristics of P&G is our diversity across industries and sectors.
We are trying to -- and now we're building our diversity in geographies, developing and developed.
So, we are operating in a lot of businesses that are driving a lot of growth for us that are not particularly price-intensive or promotion-sensitive.
You know, that's one of the virtues of the health and beauty care and personal care businesses; that's one of the virtues, frankly, of several of the developing markets.
The second thing I would say is I think if you look broadly across our major businesses, there has been a positive move on not only our part but also several of our major competitors to more innovation-based growth.
I mean, we've seen -- without boring you with all the details -- probably more innovation in 2003 from our competitors -- you know, two major new hair care brands in the U.S. supported with 100 million or more launches from Unilever and Loreal -- major product upgrades from Casey in Baby Care, you know, a new Dove line of skin care products, Colgate Simply white -- I could go on and on.
But it's been across -- I think the thing that we've been heartened -- one of the things that is heartening for us is that, despite very high levels of competitive activity and innovation, we're still delivering the kind of volume increases were delivering; we're still building share on kind of two-thirds or better of our business, which means consumers are voting for our products.
So there are always a couple pockets of price intensity.
We happened to have one in Family Care this last quarter, but I would say, broadly across most of our businesses, one of the virtues of our businesses is that we can operate on the basis of branding and innovation.
Amy Lou Chasen - Analyst
Can I just ask one other follow-up?
On the Baby Care business, your business in Western Europe is clearly still very strong, even though the product cycle now I think has been over a year and a half or more than two years since the whole Baby Stages.
In the U.S., you commented that there has been a lot of competitive, new products that have actually been helping that company gain some share back.
When you look at the two regions, do you think that the U.S. trend is going to swing to Europe or that what you're seeing in Europe is going to come back to the U.S.?
A.G. Lafley - CEO
I think they are totally independent markets with totally different dynamics.
In Western Europe, you know, we are back well above a 50 share and we are growing strong -- 53-plus share, and we're growing strongly across virtually every market.
You have to remember that the competition is more fragmented.
We are the only major player that is in every major market, and we have been leading on the innovation.
There's still a lot of upside for Baby Stage of development-type diapers and there's still a lot of upside for pull-ons in that market.
Now, we are over three times (indiscernible) the competitor in Western Europe, so it's a totally different market.
In the U.S., as I've said before, we got behind -- P&G got behind back in the '80s when Casey (ph) did a terrific job with the foreign introduction.
What you've seen from us is sort of the first round of innovation coming back.
I think you're going to see a period of 5 to 10 years of tremendous innovation in the U.S. market (indiscernible) mature markets but the competitive dynamics are very different because they are two big plays in the U.S.
The third thing I would mention is we still have a lot of heart for -- and I think you've seen this in some of our briefings -- the developing markets, so we're very encouraged by what we're seeing in Latin America; we're very encourage by what we're seeing in Central and Eastern Europe, even in China.
You know, they are not huge contributors to profitability right now, but that's where the babies are going to be born in the next 10, 20, 30 years.
Operator
Wendy Nicholson with Salomon Smith Barney.
Wendy Nicholson - Analyst
Good morning.
Could you talk a little bit more just specifically about the developing and emerging markets?
I think you've seen an acceleration in your volume growth there over the next couple quarters.
I'm trying to, number one, ask sort of the sustainability of the high teens, 20 percent-type volume growth?
But number two, is what you're seeing there more kind of a trouncing of the competitors, if you will, like you've done in the U.S. in part, or is it just the global economic environment getting better and the categories growing more rapidly?
A.G. Lafley - CEO
You know, this is very difficult to generalize across so many countries and so many markets but clearly, there is market growth that can be stimulated and there are new categories that can be created.
I think what's happening with us -- because I think many of our competitors are doing pretty well in developing markets too -- I think what's happening with us, Wendy, is we are starting to create the capabilities we set out to create across more of our businesses -- low or no capital, manufacturing platforms, sourcing that has more local content, true mid-tier offerings that are innovative and hit price points that stimulate more consumption.
You know, a lot of what goes on in developing markets is, in the beginning, the consumer can only afford to buy the brand and product in a category on an infrequent basis.
You know, a baby diaper for the overnight occasion, for example.
As we have been able to get the pricing down, we are dramatically increasing the growth of the hair care market, the skin care market, the baby care market.
Clay Daley - CFO
Having said that, our share results in these markets are pretty good too.
Carol Wilke - Analyst
I was going to say, I don't think any of your competitors are putting up 20 percent volume growth for D&Es (ph) as a whole.
A.G. Lafley - CEO
Our shares are growing but in a lot of these markets, once you get outside of let's say oral care and maybe baby care, our toughest competition is often local -- you know, local players.
So, I just think it's sustainable for a while.
I don't know whether we will run it at this high of a rate when these are our base -- (multiple speakers) -- but in certain markets, I mean, if you look at China over several years, Russia over several years, we have been, in certain markets, been able to run pretty high double-digit growth on a sustained basis.
So, it's definitely a growth engine for us because our starting development is lower than our competitors and we're getting the benefit of markets that are growing faster and our innovation is starting to work there.
Carol Wilke - Analyst
Lastly, could you kind of characterize -- I mean, clearly, China and Eastern Europe sound like they are growing well into the double digits.
Is Latin America also growing double-digit?
A.G. Lafley - CEO
Actually up double-digits in Latin America for the first half of the year in volume of sales -- (multiple speakers) -- but that's pretty encouraging.
We haven't done that for a couple of years.
Carol Wilke - Analyst
That sounds terrific!
Thanks a lot.
Operator
Ann Gillin-Lefever with Lehman Brothers.
Ann Gillin-Lefever - Analyst
I just wanted to go back to Family Care.
I guess if we combine (indiscernible) one quarter phenomenon, but the combination of the highly competitive environment and rising input costs sounds like it's great for the consumer but horrible for manufacturers.
I'm just wondering if you can comment a little bit more on outlook there?
A.G. Lafley - CEO
Well, I guess I would say three things.
One, we have one competitor who has clearly been more aggressive -- price-discounting, selling private-label to major retailers -- who now has an upgrade and who is spending mightily behind the upgrade.
So that will continue for some time, okay?
What we've learned in the past is, until you restore the price gaps and until you bring your innovation, you don't -- how shall we say this?
You don't get back to what I would call rational pricing -- (multiple speakers) -- pricing behavior and discounting behavior.
So we will go through this episode.
I don't know how long it will be.
I don't think it's going to be three years;
I think we're talking a couple of quarters.
The second thing I will say is you are right; there are some headwinds in this business and there are some structural challenges in this business.
The structural challenges have always been there.
On the headwinds, we will have to see how the (inaudible) and energy costs develop.
The third thing I would say, for us -- you know, Family Care is less than 10 percent of our portfolio -- (multiple speakers) -- so we can easily handle and shock-absorb these kinds of issues because we have such a diverse industry line-up and because all of our businesses are contributing to our sales growth and virtually -- all but one or so -- are contributing to our profit growth.
So that puts us in a situation where we really can manage for the mid and long-term and not get too caught up in the short-term pricing game.
Ann Gillin-Lefever - Analyst
That's very helpful, thank you.
Just a follow-up -- given it's maybe early in terms of input costs, headwinds, I'm wondering what you're early read is as far as retailers' reaction in North America and Western Europe to allowing some price increases to go through.
A.G. Lafley - CEO
(LAUGHTER).
I guess the first thing I would say is there are actually retailers who, after several years, are saying, you know, there is probably going to be some pricing in our industry.
So, I think their minds are open to it.
It comes down to case-by-case category (inaudible).
Clay Daley - CFO
What it usually comes down to is the pricing really justified?
A.G. Lafley - CEO
If it's cost-justified, we really have never had a major problem on pricing.
I mean, we routinely price coffee based on the input price of green beans, so I think, I expect -- in most cases, people end up being rational.
Ann Gillin-Lefever - Analyst
It sounds like posture is improving, though, from your reaction?
A.G. Lafley - CEO
I think the posture is improving.
Clay Daley - CFO
I think they understand the situation.
Operator
Bill Piccarillo (ph) from Morgan Stanley.
Bill Piccarillo - Analyst
I had a follow-up on Wella.
In the mid-quarterly update last week when they talked about the consumer segment being down, can you talk about any impact you're seeing there?
Is that any disruption on the integration which is focused on that part of the business?
You had originally anticipated Wella could be slightly dilutive in the quarter.
It came in accretive.
Was that driven by stronger topline, despite the consumer segment being down?
Clay Daley - CFO
As I think we said earlier, they had a good fragrance season in the quarter, which was helpful from a dilution standpoint.
While the consumer business has certainly not been growing and what we would like to see, it's actually relatively flat as opposed to a big problem.
A.G. Lafley - CEO
It's also, Bill, the smallest piece of their business.
Bill Piccarillo - Analyst
Just in the U.S. beauty with the Loreal (indiscernible) stepped up in a number of products they have been introducing, you mentioned that you stepped up your marketing investment in the U.S.
Can you just give us some more specifics behind that?
Is it stepped-up pace of innovation, in-store activity, etc.?
A.G. Lafley - CEO
I think, Bill, what you're seeing is a lot of innovation from Loreal and P&G and others.
Even Unilever, water (ph) in their channels in beauty care and the pickup in marketing that you're seeing from us is simply investment in awareness and trial activity; most of it is advertising and other trial activity.
So, the great thing about the beauty care business and the health care business, for the most part, is that the marketing investments are on the demand-creation side and the trial side; they're not on the discounting side.
Clay Daley - CFO
Some of this is a play-out of our launch and leverage program, where we are building business on Pantene and continuing to drive the big base brands as opposed to necessarily needing to introduce new products, as competitors have, in order to move the business.
A.G. Lafley - CEO
One of the things that's worked for us in all of our businesses but particularly in HABA, is we've brought innovation across our established, leading brands; we've brought innovation to create new segments -- you know, daily facials, Crest Whitestrips, those kinds of things, totally new segments -- and we've been able to stimulate some category growth.
Bill Piccarillo - Analyst
Thank you.
Operator
Andrew Shore with Deutsche Bank.
Andrew Shore - Analyst
Good morning.
Can you give us a little bit of an understanding in terms of what are you doing with Charmin Ultra to make it softer?
If I am right, I think you already use 100 percent eucalyptus, so what are you doing to make it softer?
Is this going to be a list change, or are you going to downsheet it, or is it going to be at parity with current Charmin Ultra pricing?
Clay Daley - CFO
Well, I think, Andrew, there have been a number of -- the technology that we have in tissue is flexible in terms of creating softness improvements, which don't necessarily relate to pulp mix but relate to formation of the sheet on the machine.
Our folks have always -- I think it's safe to say we've been a leader in terms of how to develop softness upgrades over time.
You know, on the sheeting, we are going to be sheeting down by some amount.
Therefore, fewer sheets does create more thickness and more loft on the sheet.
A.G. Lafley - CEO
But at least in our testing, Andrew, it has been a consumer value winner.
But I think you know we've been (indiscernible) drying for a couple of decades and what's really going on is we think we are -- we keep getting up the money for it.
Clay Daley - CFO
Actually, our data, over a long period of time, suggests that when we provide, shall we say, thicker, more functional sheets, the consumer does tend to use fewer sheets.
So even though there are fewer sheets on the roll, there aren't necessarily a reduction in functionality (sic).
Andrew Shore - Analyst
But it's not going to have more pulp, right?
It's just (indiscernible) change on the manufacturing side?
Clay Daley - CFO
Correct.
Andrew Shore - Analyst
A.G., I think when you referred to (indiscernible) professional, you said solid.
Is that solid in the context of Loreal that's growing three 1to four times faster than professional?
A.G. Lafley - CEO
Loreal is growing faster than us in the short-term but we are in pretty good shape in a number of leading markets.
I'm not overly concerned about the professional business; they have a very strong -- we have a very strong number two position, number one in some markets.
I think the big uncertainty phase was actually several months ago for women who frequent these salons.
The traffic numbers are actually improving and of course, in the short-term, Loreal tried to take advantage in certain markets but I think that's a pretty solid business.
Operator
Joe Altobello with CIBC World Markets.
Joe Altobello - Analyst
Good morning, guys.
We are now roughly five months removed, I guess, from the closing of the Wella acquisition.
I was curious what your thought are on potential future acquisitions.
I think, in the past, you said that, in a perfect world, you would take one to two years to integrate Wella and then look at do another acquisition but would consider a unique opportunity.
I was curious if that is still your mindset at this point?
Clay Daley - CFO
As we've said before, Joe, in most cases, we don't decide when these things come up for sale, so we have to, in general, act on potential targets when they are available.
We are always, of course, looking for smaller, more tack-on kinds of acquisitions, as we did (indiscernible) Colgate detergent business in Europe and things of that ilk.
The big ones are ones where -- we are prepared to move if the right thing comes on the market.
You know, you've seen our balance sheet; our cash position is strong.
You know, we have, we think, an organization structure now that makes acquisition integration much easier than where we were before in terms of being able to integrate acquisitions (indiscernible) and our GBS organizations.
On the other hand, as we've also said, we are also very happy to repurchase our stock if those major acquisitions aren't there, and that's what we will do.
A.G. Lafley - CEO
Joe, Why do you consider us big?
Joe Altobello - Analyst
Well --.
Unidentified Speaker
I was just going to say, right now, we are very much focused on organic growth.
You know, we looked at -- I think this is our sixth quarter in a row with organic sales or net sales growth at 6 percent or higher.
It's our eighth quarter in a row with volume growth at 5 percent higher, ex acquisition and divestiture.
We were looking at over 20 years and we did nine in a row, nine quarters in a row in sort of the 93 to 95 period when Central and Eastern Europe was first opening up, when China was opening up.
So we are very much focused, very much focused on driving the businesses that we have.
There's a lot of growth opportunity in those businesses, and we've got to get the job done on Wella.
We've got a lot to do on Wella and we've got a great team working on Wella right now.
Hopefully, we will be making an impact on the Wella business by the summer of this year -- a very positive impact.
Clay Daley - CFO
As we've also said before, our long-term growth objectives are not dependent on big acquisitions.
Operator
John Voucher (ph) with J.P. Morgan.
John Voucher - Analyst
Yes, good morning, everyone.
A quick question about dollar stores -- you have highlighted some opportunities internationally in terms of going after lower income consumers and you have sort of talked a little bit about it in the US.
Can you talk about, in the face of declining dollar store comps, any programs you have in place?
Do you think that this is an opportunity for you to, going forward, out-execute versus your competitors there, given your supply-chain flexibility and your manufacturing flexibility in terms of maybe providing some differentiated packages in this channel?
Any thoughts, going forward, on dollars?
A.G. Lafley - CEO
We are actually in a very strong distribution and I think we are the number one supplier on a fairly wide margin of the two major dollar chains in the U.S., Family Dollar and Dollar General.
We do customize products and packaging for that channel, just as we do for other retailers in other channels -- (Multiple Speakers) -- drug or mass merchandisers (indiscernible).
I think, despite an improving economy, broadly speaking, over the years, the discounters, regardless of format, are still the faster growing retailers.
So we obviously have to be very attuned to the discounters, whether they are big club stores, whether they are various mass merchandiser formats, whether they are discount drugstores or whether they are dollars.
So Dollar is important to us.
They meet the needs of rural and small town consumers and they meet the needs of families and women who have very limited amounts of cash to spend every weekend and shop on a weekly basis.
So we've got to be there; we need to serve all of these consumers.
John Voucher - Analyst
Given the profile of the Dollar consumer, do you see an opportunity for actually positive mix coming out of that channel in terms of the Dollar consumer seems willing to spend more per ounce relative.
Can that maybe counteract some of the mix -- (multiple speakers) -- elsewhere?
A.G. Lafley - CEO
It is a positive mix for us.
Clay Daley - CFO
You are absolutely right.
They tend to buy smaller sizes and those smaller sizes do tend to be premium priced per ounce or use.
A.G. Lafley - CEO
(indiscernible) it's a limited distribution channel.
Obviously, it's sort of like a club store; you are either in distribution or you're not.
They don't carry the whole range of brands; they tend to carry the leading brand.
Since we have the leading brand in -- whatever -- 30-plus categories in the U.S., that obviously puts us in a good position.
We like limited distribution retailers.
John Voucher - Analyst
Now, we have seen some slowdown in comp growth at Dollar stores.
Is that something you're seeing?
A.G. Lafley - CEO
I think one of the things that's going on is the economy has strengthened and there's a little more money in consumers' pockets.
Inflation has stayed low, so that consumer -- you know, no consumer shops only one retail store;
I think consumers shop a set of retail stores across a group of channels.
So I think what you're seeing is -- I would have to get into the actual research data, but I would hypothesize that her mix of shopping is just moved a little bit out of the Dollar stores.
She feels a little bit more flush and has a little bit more money in her pocket.
The thing I feel good about is we're growing our shares at all but one of our top 13, 14, 15 retailers in the U.S., and we are growing our shares, cumulatively, in the last three months.
I'm sorry, we're growing our volume 7 percent in our top 12 customers worldwide.
So we have to serve consumers wherever they shop and we have to represent a better value and a preferred brand wherever they shop, and the Dollar stores are a part of that.
Operator
Lauren Lieberman with Credit Suisse First Boston.
Lauren Lieberman - Analyst
Good morning.
First, I was looking for an update on the U.S. hair color business.
I think I picked that up there were some management changes or shifts in that area and I was hoping you could elaborate on products, the business, the management changes and any initiatives you've got coming up?
A.G. Lafley - CEO
Where I'm headed tomorrow!
Trends -- we're going to do a quarterly review in Stanford.
Our hair coloring share trends have stabilized.
Our value share I think is about 36 percent -- where we've brought innovation to market on Nice 'd Easy and Herbal Essences.
We've been growing our share.
The other brands are still soft.
We've got a lot of innovation scheduled for 2004, so hopefully, we will get more of the line growing.
I guess I would say, beyond that, we are trying to focus on the basics.
We're trying to understand the segments of consumers, where they shop, how they shop.
We're trying to improve the shopping experience; it's not a great shopping experience.
We're also focused on the at-home coloring experience and we're trying to improve that.
But we still think it's a good market,.
We think there is an opportunity to get the market growing a little bit faster.
You asked about the change in leadership.
What we've really done is just have Rob Matteucci, who leads our Clairol operation in Stanford, report to Mark Pritchard, one of our presidents who -- Mark has led our cosmetics business for the past many years; he's done a terrific job in cosmetics.
There are obvious parallels between color cosmetics and hair colorants and we're just trying to get up the learning curve a lot faster by connecting our cosmetic learning to our colorant learning.
The other thing we've done, obviously, is connect our Clairol colorant learning to our Wella colorant learning and that helps us get up the learning curve a little faster.
I think we've retained -- out of like the 65 top managers or key managers at Clairol, I think we have like 52 or so that are still with us.
So we had a couple of people who left early on for location preferences or a job opportunity but most of the team has stayed with us.
And that's good because we need their knowledge, we need their experience and then we want to build on it.
Lauren Lieberman - Analyst
How much of the difficulties or challenges you've had with Clairol, with the hair coloring business, is based on marketing and communicating to the consumer that something (inaudible) versus the actual product quality?
A.G. Lafley - CEO
No.
Our product quality is fine; it's just as good as anybody's.
Wella and Clairol products are outstanding and in the consumer acceptance tests, they do just fine.
If you examine the shares brand by brand, actually most of the brands have been giving up share in the past year.
Colour Expert from Loreal was a new item that created some share growth in a new segment and has done pretty well, although it is reasonably small.
Then Nice 'n Easy and Herbal Essences has grown, and maybe one other brand.
So I think it's all about innovation and creating the better consumer experience.
If we can get into our innovation rhythm, which we are starting to, and if we can create a better shopping and a better coloring-at-home experience, I'm pretty confident we will do very well in this business.
Lauren Lieberman - Analyst
I'd like to follow up maybe a little bit more quantitative on Wella.
Usually you give -- or last quarter anyway, you gave the Company operating margin change, excluding Wella.
Do you have that for this quarter?
Clay Daley - CFO
We said it was basically flat.
Lauren Lieberman - Analyst
Okay, so it's flat, ex-Wella?
Clay Daley - CFO
Ex-Wella, Right-o.
Lauren Lieberman - Analyst
Okay.
The other question (indiscernible) the comment of arms length collaboration.
Any implications in terms of R&D or distribution that we should be aware of that you are more limited in terms of what you can do in the coming quarters?
Clay Daley - CFO
Actually, what's interesting is there was a pre-existing technology and R&D agreement between Clairol and Wella -- so when we bough Clairol.
So the ability for Clairol and Wella to cooperate in and R&D standpoint is based on a deal that preexists both acquisitions.
Related to your question is, as they say, we are going to be setting up collaboration arrangements with Wella that will be beneficial for both companies, where Wella management will be able to defend, fully, their cooperation with P&G from a legal standpoint in terms of the arms-length nature (inaudible) and it will be good for the business.
But as I said in my prepared comments, though, from a strictly cost-synergy standpoint, more than half the synergies are going to fall on P&G's side but still, there will be enough benefit on the Wella side so that they will be able to defend their position as an independent management team.
Operator
Andrew McQuilling with UBS Warburg.
Andrew McQuilling - Analyst
A.G., just a question on the U.S. whitening category -- 70 percent share is terrific.
Can you give us update on how the overall market is growing, maybe an update on trial and repeat and maybe a sense for a timing when competition may ease a bit and profitability gets better?
A.G. Lafley - CEO
On the last one, profitability is very good and with a 70 share, competition is easy.
On the market side, you know, the market is still growing.
We are very much interested in continuing to find ways to stimulate accelerating growth.
You know, we've done a lot of work on occasions.
I think you've seen our marketing around proms and weddings and things like that.
It's an issue of frequency; it's an issue actually of trial and frequency.
Our trial is still relatively low.
We are hoping we can -- with the premium Whitestrips, which get you more widening faster and are more convenient -- you don't have to stick with them for a thirty-day regimen; you just have to stick with them for a week-long regiment -- that this will be another stimulus to trial.
Our repeat has been pretty good, so if we can encourage consumers to try the product, they are pretty happy with the results.
Night Effects -- we're still in early days, very low trial rate.
It's a very different habit; it's a very different experience, and we're going to have to find out if many consumers like that form and like the overnight process.
Let's see, the market must be somewhere above 400 million, and we would obviously like to, over time -- as we have done with sort of the home cleaning systems market or some of the other markets we've created in the last couple of years -- you know, keep building.
It would be wonderful if it could be $1 billion market.
We don't know if it can but with relatively low trial rates, it's not out of the question.
Andrew McQuilling - Analyst
A.G., are trial still under 10 percent?
Then I had a question about where you think the near-term European opportunity is, or any other bright spots internationally.
A.G. Lafley - CEO
I think our trial rate is a bit over 10 of Whitestrips.
I'm relatively certain Night Effects is still single digits and probably relatively low single digits.
Clay Daley - CFO
The total trial of the segment is now in the teens, we believe.
A.G. Lafley - CEO
We have launched in Germany.
We do think the innovation will travel.
The issue, of course, is you have to work the regulatory issues market by market and you have to work the channels and distribution market by market because they are different.
We have launched in Germany.
When I was there last year, it was off to a very good start.
It sold through the pharmacists, and we have a small display.
We had a very good coverage of distribution and display and the pick-up was very good by German consumers.
I don't know off the top of my head, Andrew, what the market share is.
I'm not even sure we get shares from the pharmacies but we know, from the volume and we know from the consumer research that we're doing, that we're getting a very positive response.
But I think the simple way to think about this is we believe it's an innovation that has got legs and that has legs (indiscernible) the first country it was introduced in, and then has legs to go to other countries around the world.
Andrew McQuilling - Analyst
Terrific.
Maybe one more, if I could?
You mentioned that double-digit sales and volume growth in Latin America?
Unidentified Speaker
Yes.
Andrew McQuilling - Analyst
Mexico is your fifth biggest market.
How is Mexico doing overall?
What are your, I guess, expectations for it through calendar '04?
A.G. Lafley - CEO
Mexico is also up double digits volume on a 3, 6, and twelve-month basis, so Mexico has been a very steady contributor for us.
We think Mexico has a lot of potential.
I won't bore you with all of the details of the opportunities but in some of core businesses, we had relatively smaller positions.
One where we've clearly made a big improvement in the last year or so is feminine care and we're working methodically -- the year before, we made a big move in hair care.
We are working methodically through our core categories.
We are adding in some of our higher growth categories, and we're focusing on high frequency stores.
About half of the consumption in Mexico goes through what we call "up the trade", you know, the big grocers and Wal-Mart-type mass merchandisers.
But half of the consumption goes through very small -- what we call high frequency stores.
We've been in a concerted effort for the last couple of years to improve our distribution there and it's on the increase.
Andrew McQuilling - Analyst
A.G., those high frequency stores -- do you have a sense for just what P&G's percentage of Mexican sales move through that, what type of improvement you've seen in the last five years?
A.G. Lafley - CEO
I will tell you broadly, total consumption is about half and we've been underdeveloped, so less than half of our business moves through there.
It's obviously been an engine for growth for us in the last year when we've generated double-digit growth.
We are catching up.
Andrew McQuilling - Analyst
Terrific!
Thank you.
Operator
Alec Patterson (ph) with RCF (ph).
Alec Patterson - Analyst
Clay, I've got a question for you.
Just following up on the cash flow opportunities for you, you mentioned share repurchase activity (indiscernible) nobody is going to come up to you and say, "Buy my business".
From what I can see, shares outstanding haven't really changed much over the past couple of years.
I was wondering whether because of acquisitions you've made, you've had to hold off, or you're really just kind of in a want to reduce the debt -- which I don't think it's very much-- mode.
What is holding back from the shares outstanding count from really coming down, given your really high free cash flow?
Clay Daley - CFO
There are a couple of factors.
Obviously, the acquisitions, Clairol and Wella had some impact on our ability to do share repurchase, as we had a strong interest in maintaining our AA credit rating.
Beyond that, though, in the share count, what you've seen happen over the last couple of years is, as our stock price has gone up, more of our option shares come into the shares outstanding calculation for EPS purposes.
So that has tended to offset some of the share repurchase activity we've done.
But we still, as I say, we still like share repurchase.
We've purchased about the same amount of stock in the first half of this fiscal year as we did last fiscal year but obviously, last fiscal year, we were heading into Wella and that had an impact on our share repurchases.
So, I think you'll see share repurchase at higher levels in the second half of this fiscal year than you did last fiscal year.
Andrew McQuilling - Analyst
So if we were to see the stock price kind of hold at levels here, would you expect the in-the-money options to level out and thus we will see a net reduction in shares outstanding?
Clay Daley - CFO
That would tend to happen, yes.
If we continue buying shares, which we will, and the stock price were to -- of course, we hope the stock price doesn't actually stay where it is, but -- (LAUGHTER) -- I think you're going to see the share count continue to trend down.
Operator
With that, we will conclude today's question-and-answer session.
Gentlemen, I will turn the call back to you for any additional or closing remarks.
Clay Daley - CFO
Thanks very much for joining us today.
As I said at the outset, John Goodwin, Juan Pedro, Thomas Tippel (ph) and I will be around to answer any follow-up questions.
We have tried to shorten up this call today.
Thanks very much for joining us.
A.G. Lafley - CEO
Thank you.