寶潔 (PG) 2005 Q3 法說會逐字稿

Good day, everyone, and welcome to the Procter & Gamble third-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 the Procter & Gamble Company.

Now, for opening remarks and introductions, I'd like to turn the call over to the Chief Financial Officer, Mr. Clayt Daley.

Please go ahead, sir.

Thank you and good morning and welcome to Procter & Gamble's quarter-end conference call.

A.G.

Lafley, our CEO, and John Goodwin, our Treasurer, join me this morning.

I will begin the call with a summary of our third-quarter results.

John will cover our results by operating segment, and I will wrap up with an update on the Gillette transaction, our expectations for the June quarter and a brief outlook on next fiscal year.

A.G. will join the call for the Q&As and as always, following the call, John Goodwin, Thomas Tippl and I will be available to provide additional perspective as needed.

Now onto the March quarter results.

We delivered another strong quarter with organic sales growth of 8%, driven by 7% volume growth on a comparable basis.

Diluted net earnings per share were $0.63, up 15% versus year ago and $0.02 ahead of the consensus.

This was our 13th consecutive quarter of top and bottom line growth at or above our long-term objectives.

This performance comes on top of a very strong base period, where organic sales grew a record 9% and EPS grew 14%.

For the quarter, net sales were 14.3 billion, up 10%.

Acquisitions and divestitures reduced sales growth by 1% due to the juice divestiture last August, while foreign exchange added 3%.

Organic sales growth was up 8%, comfortably above the top end of our target range.

Total shipments volume increased 6% and organic volume grew a strong 7%.

All business units delivered volume growth of mid single digits or better, with healthcare, baby and family care and beauty care setting the pace.

Healthcare volume grew 14%, baby and family care was up 8%, and beauty care grew 7%.

Developing market volume grew more than 15%.

In our December analyst meeting, we talked about winning with more of the world's consumers as a key part of our top-line growth strategy.

These results indicate that we're making good progress against this major growth opportunity.

For the first time in four years, price had a positive impact on sales, up 1%.

This is a result of price increases to recover higher commodity costs, and we have announced additional commodity related price increases in the U.S. for diapers, dish care, Pepto-Bismol and Metamucil.

Market acceptance of our price increases has been generally favorable, particularly in developing markets, family care and coffee.

But despite escalating prices for petrochemically derived materials, competition has not changed price since our price increases in fabric care, both in the U.S. and Western Europe.

Also, competition had an escalated promotion spending in categories such as dish care and oral care globally and diapers in Western Europe.

We are carefully monitoring our business progress in these categories over the June quarter and are committed to provide consumers with a competitive value proposition.

Next, earnings and margin performance -- operating income was up 17% to 2.7 billion.

Operating margin expanded a strong 110 basis points.

The improvement was driven primarily by scale leverage from higher volume and tight cost control in areas of cost of goods and SG&A, as well as pricing to partially recover commodity cost increases.

Gross margin was down slightly, as we absorbed a significant negative commodity impact of more than 100 basis points.

We expect that we're close to the peak of year-over-year gross margin compression from commodities, since we will begin to lap higher commodity prices in the base periods.

However, we believe commodity prices will remain at high levels for the foreseeable future.

Selling, general and administrative expenses are down 120 basis points.

We are benefiting from scale leverage in overhead and marketing support, particularly in developing markets as a result of their continued rapid growth.

We are maintaining rigorous cost discipline across all businesses, resulting in lower overhead spending as a percent of sales, and we're making good progress with our marketing ROI work to get more out of each dollar spent.

As a result, we continue to deliver very strong top-line growth with marketing spending as a percent of sales at or below year-ago levels behind a strong initiative program.

In the back half of the fiscal year, we have been launching in North America alone eight beauty care initiatives, including Pantene Color Expressions, Herbal Essences styling products, Nice'n Easy with Colorseal technology and Boss (indiscernible); three fabric and homecare upgrades, including Tide Coldwater and Dawn with Bleach Alternative, four Pet health product initiatives, including a new Eukanuba indoor cat formula as well as a series of oral care initiatives, including Crest Pro-Health rinse, two new Scope flavors and Crest Sensitive toothpastes.

Our initiative program outside of the U.S. is equally robust and supported by strong marketing programs.

This is driving volume and sales growth even in challenging markets such as Western Europe.

Now, before we move to cash performance, I would like to make a few comments on the impact of the share repurchase program, foreign exchange, and tax.

As expected, the stepped-up share repurchase was neutral to EPS in the March quarter.

This is due to the treasury stock accounting method, which has a lag effect on the average quarterly shares outstanding, while the additional interest expense is immediately reflected in the income statement.

For the same reason, plus the fact that we won't purchase shares between the time of the proxy and the shareholder vote, we continue to expect less than $0.01 EPS improvement for the fiscal year as a result of the stepped-up share repurchase program.

With regard to foreign exchange, we are benefiting from unusually stable developing-market currencies.

This year, P&G's basket of emerging market currencies has been appreciating modestly versus the dollar.

Therefore, compared to the past two fiscal years, we estimate a slightly stronger contribution to earnings from currency to the tune of about 1 percentage point.

Now, this is, of course, significantly below the currency benefits on the top line because of our substantial natural hedge position and our corporate hedging programs.

Now, let me turn to tax.

The higher March tax rate of 31.9% is due to a provision for taxes on anticipated dividends from foreign subsidiaries.

This was largely offset by a reduction of tax reserves related to favorable tax settlements in a number of jurisdictions.

These discrete type tax items have to be recorded in the quarter they occur.

In line with prior guidance, the Company still expects the effective tax rate for the fiscal year to come in at about 30.5%.

This is slightly higher than the 30.3% recorded for the first half of the fiscal year due to more profit coming from higher-tax locations.

Now, I want to note that this does not reflect the potential impact of repatriating income earned outside of the United States under the American Jobs Creation Act, commonly referred to as Homeland.

We are still waiting for clarification and revision of provisions that need to be redrafted to determine the amount of earnings we may repatriate, if any, under the Act.

Now, on to cash.

Operating cash flow in the quarter was more than 2.6 billion, about $330 million less than the same period last year.

Working capital performance was negatively impacted by higher inventories, up two days from a year ago.

This is a result of higher commodity costs, pipeline build for the strong initiative program, as well as rebuilding inventories on a number of categories where we were previously on allocation.

Free cash flow for the quarter was $2.2 billion.

Capital spending for the quarter was 3.3% of sales and we are on track for another year of Cap spending at or below our long-term target of 4%.

Free cash flow productivity was 126% for the quarter.

This brings the year-to-date cash flow productivity to 91%, and we remain on track to meet our 90% target for the fiscal year.

Now, I will turn it over to John for a discussion of the business unit results by segment.

Thanks, Clayt.

Our beauty care business delivered very strong results in the quarter.

Volume increased 7%, led by skincare, fine fragrances, and feminine care.

Sales were $4.9 billion, up 9%, including a 3% gain from foreign exchange.

Net earnings were $701 million, an increase of 23%, driven mainly by strong top-line growth.

Earnings were also helped by synergy savings from the Wella acquisition integration, which remain on track with the initial targets.

In addition, the increased ownership of the China business and the Wella domination agreement added to earnings growth.

These benefits funded increased marketing support for new initiatives, such as Olay Quench hand and body motions, Olay Moisture rinse in-shower body moisturizer, Pantene Pro-Health and Color Expressions initiatives, geographical expansion of Herbal Essences into Japan, and hair and skincare portfolio expansion in Asia, including Rejoice, SK-II and Olay White Radiance eye cream.

Global skincare delivered its sixth consecutive quarter of greater than 20% volume growth.

The growth this quarter was broad-based with developed markets up midteens and developing markets up more than 30%.

In North America, Olay skincare volume was up midteens behind the launch of the Quench and Regenerist night initiatives.

Olay (indiscernible) three months all-outlet value share of U.S. facial moisturizers was 39%, up 5 points versus the prior year.

Global retail hair care volume grew mid single digits.

The Pantene brand grew volume double digits in both developed and developing markets, and the Rejoice brand grew strong double digits, driven by new initiatives in developing Asian markets.

Haircare value share in Western Europe was up nearly 2 points to 22%.

In North America, haircare value share was 32%, down just over 1 point.

A steady growth of the market-leading Pantene brand was more than offset by soft Herbal Essences results and minor brand discontinuations.

The global feminine care business delivered another quarter of strong volume growth, led by developing markets, with volume up more than 20%.

Volume of the Naturella brand more than doubled versus the same quarter last year behind expansion into Central Eastern Europe and continued growth in Latin America.

The Always/Whisper pad franchise grew double digits behind a new cotton-light top sheet upgrade in developed markets and mid-tier entries in developing regions.

Always is now at record high value share for the feminine pad segment in both the U.S. and UK with shares of 49% and 66% respectively.

Healthcare also delivered very strong results.

Volume grew 14% and sales were $2 billion, an increase of 16%.

Actonel, Prilosec OTC, Vick's and the developing markets oral care businesses led the top line growth.

Foreign exchange helped sales by 2%.

Net earnings were $252 million, up 22%, driven mainly by the strong top-line results.

Also, this is versus the strong base period where earnings grew 48%.

In personal healthcare, Prilosec OTC volume for the quarter was more than double the amount shipped in the same quarter last year, partially due to the rebuilding trade stock.

Prilosec OTC U.S. all-outlet value share of the heartburn segment is 32%, up 2 points versus last year.

The Vick's business had a very strong quarter with double-digit global volume growth due to the later cold and flu season compared to last year.

Global oral care volume was up high single digits.

Developing markets delivered another quarter of very strong volume growth, which more than offset slight volume declines in developed markets.

The soft developed results were mainly due to contraction of the U.S. tooth whitening market versus the prior year.

However, volume growth of tooth whitening on a sequential basis was up high teens versus the December quarter.

In the toothpaste segment, P&G's U.S. past three-month all-outlet share is 33%, in line with the same period last year.

This is despite increased levels of competitive spending.

In China, Crest's past three-month value share is now over 26%, up 7 points versus the prior year.

Pharmaceuticals posted double-digit volume growth, led by Actonel.

Actonel continues to deliver broad-based share growth and is now over 33% global value share of bisphosphonates for the treatment of osteoporosis.

Actonel has now grown global share for 34 consecutive months.

Baby and family care had another good quarter of volume, sales and earnings growth.

Volume grew 8%, led by high single digit growth in baby care and mid single digit growth in family care.

Sales increased 13% to $3 billion, including a 3% help from foreign exchange.

Pricing helped sales growth by 1%, driven by mainly by increases taken last summer in North American family care to partially recover higher pulp and energy costs.

This has been partially offset by pricing adjustments in select Western European baby care markets to respond to heavy competitive promotional spending.

Net earnings for the quarter were $339 million, an increase of 56%.

The very strong earnings growth was driven by fixed cost leverage from volume growth and manufacturing cost savings.

Price increases on the family care business largely offset the negative impacts of higher commodity prices.

In family care, U.S. all-outlet share for Bounty is 41%, up nearly 1 point versus last year.

Bounty continues to get excellent customer support behind the new pack format introduced last year.

Charmin U.S. all-outlet share is up 27%, up versus 1 point in the prior year.

Charmin has benefited from a new pack line-up and the new mega-roll pack to address consumers' desire for longer tissue roll life.

Baby care delivered broad-based volume growth with developed markets up high single digits and developing markets up in the teens.

U.S.

Pampers diaper past three-month all-outlet value share was over 28%, up more than 2 points versus year ago behind the continued growth of the Baby Stages line, specifically, the new Feel 'n Learn training pants.

In addition, we recently launched Kandoo toddler care wipes and hand soap in North America, building on their success in Western Europe.

Western Europe Pampers diaper share is now over 54%, up 2 points versus a year ago.

This growth has been driven by ongoing product innovations on both the Baby Dry and the premium baby stages of development line.

Fabric and home care delivered solid top-line growth with volume up 5% and sales were $3.8 billion, up 7%.

Foreign exchange helped sales growth by 3%.

Mix lowered sales by 1% due to rapid growth in the laundry detergents business in developing markets.

Net earnings for the quarter were $508 million, an increase -- a decrease, sorry, of 6% versus last year due mainly to higher commodity costs.

Also negatively impacting earnings was a one-time charge related to supply-chain sourcing optimization.

During the quarter, P&G continued to launch the high-end initiatives in the U.S. with the introduction of Tide Coldwater.

Similar to the recently introduced Tide With a Touch of Downy, this initiative gives the consumer great total wash value from a premium-priced product.

Also during this quarter, P&G increased list prices on the U.S.

ERA and Gain brands by 8% to partially offset increases in commodity costs.

This is coupled with a temporary increase in promotion funds for these brands to allow retailers to phase in the higher prices during the quarter and to keep our brands competitive with those that have not taken similar price increases.

Global fabric care volume was up mid single digits, led by China.

P&G laundry value share in China is now 19%, up 5 points versus last year.

In Western Europe, laundry share is now 32%, up 1 point versus a year ago.

In North America, P&G laundry value share is over 58%, up slightly versus the prior year.

Home care shipments were in line with a very strong prior-year base period when volume was up more than 20% behind initiative introductions.

Marketshare positions in home care remain strong.

P&G past three-month all-outlet value share for Swiffer cleaner systems is 78%, up 5 points versus last year.

P&G U.S. hand dishwashing liquid's value share is 54%, about flat versus last year, and the market-leading Dawn brand is at 41% share, up more than 1 point.

SK continues to build its leadership share in the U.S. auto dishwashing segment with value share of 58%, up 6 points since last year.

Our Febreeze holds a 77% value share of fabric sprays and has quickly earned a 12% share of the instant air freshener market behind the successful launch of Febreeze Air Effects.

P&G remains focused on growing brands over the long-term with meaningful innovation, but we will also keep brands priced competitively to ensure we deliver superior consumer value.

Snacks and coffee volume increased 6% for the quarter, led by double-digit volume growth of the coffee business -- sales of $767 million, up 16%.

Foreign exchange helped sales by 1% and price increases to align retail prices with green coffee costs increased sales growth by 9%.

Net earnings were $105 million, up 91% versus a low base period.

Fixed-cost leverage from higher volume growth, the price increases to offset higher green coffee costs and lower merchandising spending helped to restore margins to levels existing prior to the significant increase in raw material prices.

Despite (indiscernible) being the first mover to increase prices, Folgers grew past three month U.S. all-outlet value share versus the prior year and is now at 33% of the market.

Pringles' past three month all-outlet value share was over 14%, up slightly versus last year.

We continue to get great customer and consumer response to our unique printing and flavor customization initiatives.

That concludes the business unit review.

Now, I will turn the call back to Clayt.

Thanks, John.

Before closing with guidance, I want to provide a brief update on the progress of the Gillette acquisition.

We have now formed integration teams for the regions, functions and product lines led by Jim Kiltz and me.

Workers started to map out the specific steps to capture the committed synergies.

The plans are being designed to effectively and efficiently bring together these two great companies.

While it's early, we are on track so far.

On the people side, we're putting in place processes to identify the players will we want to field as part of the Best team.

We have also made several key decisions about how the combined company will be managed.

We will operate within the P&G, GBU NBO structure that has proven successful over the last four years and is frankly fairly similar to Gillette's current operating structure.

We will create a new segment for Gillette consisting of blades and razors, Braun and Duracell businesses, including the marketing, R&D, manufacturing and engineering functions supporting these operations.

The Gillette segment will report to Jim Kiltz.

Blades and razors will continue to be based in Boston, Braun in Kronberg, Germany, and Duracell in Bethel, Connecticut for the foreseeable future.

Gillette's oral care and personal care businesses will be combined with P&G's oral care and deodorant and Old Spice businesses with locations still to be determined.

The combined oral care business will report to Kerry Clark, while the combined personal care business will report to Susan Arnold.

Our on-the-ground operations will go to market as one company everywhere around the world.

This means that P&G's NBO and Gillette's commercial operations will merge into a single organization.

The combined company will operate under P&G's shared services model.

Also, Gillette will adopt P&G's reporting framework, moving to a fiscal year that ends on June 30.

Now, let me update you on the closing timing for the transaction.

We expect to mail the proxy in the first half of May.

The P&G shareholder vote is currently scheduled for June 13; the Gillette shareholder vote is currently scheduled to take place on June 14.

These dates are based on the expectation that the SEC will declare that we filed S-4 effective in early May.

Next, to guidance for the June quarter.

Topline for the quarter as well as the fiscal year should continue to expand at a high single digits rate.

For the June quarter, foreign exchange is expected to contribute about 2 to 3% to sales growth.

The negative impact from developing market mix and the juice divestitures should be offset by positive pricing.

Operating margin is expected to be about flat versus the June quarter a year ago.

In light of higher commodity prices and uncertainty about competitors following our price increases in developed markets, we believe it is prudent to make sure we have the financial flexibility to address whatever issues confront us in the marketplace.

We remain committed to taking appropriate steps to maintain competitive value where and when necessary.

We will continue to support our strong initiative program to keep the topline growing.

As mentioned earlier in the discussion about tax, we expect the rate for the year to come in at about 30.5%.

We will update tax guidance once we have more clarity about the potential opportunities created by the American Jobs Creation Act.

With record to earnings per share, we continue to expect a range of $0.54 to $0.55 per share for the June quarter and with the March quarter over-delivery, we're raising the fiscal year earnings guidance to a range of 2.64 to 2.65 per share.

In summary, we are pleased with our ability to deliver a second consecutive year of 14% earnings per share growth, especially since this year has been characterized by a very challenging cost and competitive environment.

Now, turning to next fiscal year, our financial planning process is not yet complete, but I want to provide some preliminary perspective.

To be clear, this excludes the impact of the Gillette acquisition, which we outlined at the time of the deal announcement.

We will incorporate Gillette in our guidance once the closing date has been established.

For fiscal 2006, we expect P&G to deliver another year of sales growth, ex-FX, towards the upper end of our 4 to 6% long-term target range.

This is despite a very strong base-period comparison where organic sales have been growing at a rate of about 7%.

Based on our early estimates, we expect fiscal 2006 to be our fifth consecutive year of double-digit EPS growth.

This is consistent with the current analyst consensus estimate of about 10% growth, which we believe is appropriately conservative at the current time.

We continue to expect margin pressure from raw materials, particularly in fabric and home care.

This is a result of the tight supply situation in a number of feedstock chemicals.

We also are not counting on competitors to reduce promotion spending from the current high levels.

Finally, we're going to lap a very strong base period in a number of businesses, including beauty care, baby and family care, as well as developing markets.

Now, with the guidance just mentioned, as I said, it was all on a P&G stand-alone basis without Gillette.

As we laid out in New York, post-Gillette, we will raise our sales growth FX target by 1 point to 5 to 7% through the end of the decade.

We have confidence in our ability to achieve this objective on the basis of our strong track record over the past four years and robust initiative pipeline, Gillette's exposure to faster growing categories and an equally robust pipeline on their side, gross synergies generated by the deal in three key areas -- in developing markets in categories such as personal care, oral care and hair removal, and from approved go-to-market capabilities in developed markets.

Again, this is just a quick overview.

We're still completing our planning for next year and will provide full guidance on fiscal 2006 during the June quarter earnings call.

Now, that concludes the business comments for the quarter.

As you know, the discussions include a number of forward-looking statements.

If you look to our most recent 10-K and 8-K reports, you'll 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 you aware that the call has referred to a number of non-GAAP measures.

Management believes these measures provide our investors valuable information on the underlying growth trends of the business.

Organic refers to reported results, excluding the impacts of foreign exchange and acquisitions and divestitures, where applicable.

Free cash flow refers to 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.

Now A.G., John and I would be happy to open up the call to your questions.

Thank you, Mr. Daley.

The question-and-answer session will be conducted electronically today. (OPERATOR INSTRUCTIONS).

Amy Chasen with Goldman Sachs.

Good morning.

Can you just talk a little bit in more detail about the pricing?

Obviously, you know, it shifted positive.

Is there any place where you've taken pricing where it's not kicking in?

What other opportunities are you thinking about?

Just so you know, Energizer just announced a price increase in the U.S., so is there opportunity in batteries?

So if you could just talk about that.

I guess what I'm really getting at here is you mentioned that, on the mid-tier laundry detergents, that, you know, you are offsetting some of the pricing with promotional activity in the short term.

Are there other categories where you're doing that as well?

Well, first, we obviously can't comment on batteries, so that's a question that would have to be, at this point, directed to Gillette.

A.G., do you want to -- (inaudible)?

I think, Amy, the simple thing -- way to think about our pricing strategy, our tactics and our execution is we are trying to achieve the right balance and we're trying to be responsible and price for commodity increases that are going to sustain.

I think we've talked about this at two previous earnings calls.

We want to make sure that, when we see commodities rise, that we understand where they're going to be and how long they're going to be there, and then take appropriate pricing action.

The only place I can think of where I would say the pricing hasn't stuck as well as we would like is in -- a little bit in Western Europe -- laundry -- and a little bit in the U.S.

I still think it's early in the U.S., though, and it remains to be seen how that's going to work out but in all the other instances I can think of, the pricing -- our retail partners have moved on the pricing; consumers have understood it and have responded.

As John mentioned in the call, in most of the instances, you know, the share progress we were making we continued to make post the price increase.

Can you just tell, if it was up 1% this quarter?

What is your expectation for next year?

It's too early -- because we really need to go through all the business sector -- (multiple speakers).

It's one of those things where we will be -- next year, we will be comparing price increases we took this year, which will have a partial-year impact, to next year.

Obviously, depending on what happens in commodities, we're going to have to determine whether any additional pricing is appropriate.

But it probably won't be more than 1%.

Okay.

Could you also just talk a little bit more about Western Europe and give us some idea of what your volume growth in the quarter was in that market?

You also alluded to some promotional activity in diapers, or maybe it was a list price reduction.

Can you give us a little more detail on what you did there?

Okay, let me take Europe first.

We've been growing, you know, mid singles in Western Europe, and our volume has been growing a bit ahead of our sales.

There is some deflationary pricing in some markets, in some categories.

As this won't surprise you, Amy, what we watch like a hawk is our market-share progression and you know, we've fairly consistently been growing market share 80-plus% of our volume in Western Europe.

We also watch what I would call the critical markets, and you and I have talked about Germany in the past before.

In Germany, right now, over the past 12 months, you know, we are growing our market share in all of our core businesses.

We are growing in laundry; we are growing in baby diapers; we are growing in haircare, shampoo specifically; and we are growing in fem care.

We are not only growing faster than the branded competition, but we are growing and in all cases, for instance, all the over-the-same period is actually giving up share.

So you know, if you step back from your questions about pricing and your questions about Western Europe, what we are always trying to do is make sure we have the consumer value equation right, make sure that we are appropriately investing in our innovation so we get trial among consumers and watch our market share progressions.

You know, Europe -- you know and I know several European economies are slowing down but our point of view is that is sort of outside our control.

What's inside our control is what we can do in our businesses with our innovation, our branding, our cost structure and our pricing.

We try to get that right for the consumer and her value.

Just lastly on the Western European diapers, the promotional activity or the list price reduction -- can you talk about that?

On Western Europe diapers, yes, I mean the promotional activity by our principle competitor is, you know, is up dramatically in the past few months.

Despite that, I think, as John mentioned in the call, you know, our market share in Europe is up a couple of points across the board, and in the UK where the activity has been really intense, we are above a 60 share and growing.

So in the end, in the end, we're bringing a better -- we're bringing a better brand and we're bringing a better line of products that are delivering value to young moms, and that is really what's making the difference.

So did you take a price cut there or are you just increasing your promotional activity?

We are just -- I'll tell you what we're doing.

Market by market, baby diaper line by baby diaper line, we are looking at where we have to keep the pricing relative to the competition to continue to offer a good value.

So what we're doing is we are dialing our promotional activity very specifically on the part of the line where we want to keep the value right in the country where we want to keep the value right. (multiple speakers).

(multiple speakers) -- primarily through promotion spending, not list.

Ann Gillin with Lehman Brothers.

I just wondered if we could switch gears to developing markets.

I'm wondering if you've yet assessed how soon after the Gillette merger you might begin to see a positive benefit to operating margins from growth in emerging markets.

Well, there's clearly an opportunity there and we believe one of the synergies of the Gillette acquisition that can be captured on the early end is in developing markets.

We are in countries like China.

We have an excellent distribution system and we're going to be able to get Gillette products a lot more reach, a lot more distribution in front of a lot more consumers than they have been able to.

On the flip side, Gillette brings meaningful scale to P&G in some countries like the (indiscernible) India, Korea, Australia and New Zealand, where they substantially add to our business.

So, there's a topline opportunity here and I believe that, because the Gillette products have such good gross margins and contribution margins, there's no question that there should be some operating-margin leverage behind that topline.

Those regions are -- as I mentioned on the call, we've already formed integration teams in every region, combining Gillette people with P&G people who are obviously looking at the organization design and how to capture the cost synergies, but are also looking at where we can get topline growth.

Of course, from an anti-trust standpoint, we've had to be careful in some categories about what we talk about but obviously, as you know, in places like blades and razors and batteries, there's little anti-trust sensitivity.

This is A.G.

Just real quickly, I think the simple way to think about it is -- and this shouldn't surprise you -- we're going to drive topline first.

We're going to drive distribution, consumer trials and we're going to drive our sales.

We're going to get scale, as Clayt mentioned, and we're also going to get mix help because of their margins, as Clayt mentioned.

So I think it's a pretty virtuous circle.

So pretty quickly is --.

That's my hope.

Then secondly, I just wondered if you could elaborate on what the allocation of various products and what they were beyond Prilosec costs to revenue growth.

This is A.G.

I really don't want to detail it for obvious competitive reasons, okay?

But I will say it that, in addition to the cost challenges, in addition to the competitive intensity, we had such a strong lineup of innovations this year that, frankly, some of the take-off on some of the items was beyond what all of our pre-market and frankly what our retail partners and P&G expected it would be.

So it was consequential, but we were able to manage it and Prilosec is getting a lot better, and we are pretty much shipping all the turnover products that our retailers need and we are as quickly as possible rebuilding -- building inventory so we can manage relaunches, which many of our retailers want to do.

Virtually everything else is off allocation.

Feel 'n Learn diapers is off.

We may have one or two items that -- (multiple speakers).

(multiple speakers) -- the launch -- (multiple speakers).

(multiple speakers) -- but I mean you are right; it was very tough in the summer, the fall and well into this first quarter, because we had a number of things that were rocketing.

I guess the last thing I would say is, as soon as we have the supply, we're going to go back and reinvent, because we're nowhere near the trial potential on a lot of these items, so we're going to stick with it until we go trial among the targets.

So another way to look at this might be that you got some benefit on the price line this year from having less to ship out or -- (multiple speakers)?

Well, I think -- I don't think that was a major factor on the price line.

I think the price line, the major factor was really we priced where we had to and where it was most urgent first, you know, coffee, tissue towel, fabric, fabric care.

I think that's really what's driving the 1 point in pricing.

Right.

It wasn't product-supply issues.

Then on mix though, we might have taken -- (multiple speakers).

I think our mix could have been -- would have been even better. (multiple speakers) -- shipped everything.

So what I'm looking -- frankly I'm optimistic about it, because as painful as it was and as carefully as we worked with all of our retailers, you know, in the vast majority of cases, we're going to be relaunching these items.

Wendy Nicholson from Smith Barney.

Could you say one more comment on the Western European issue?

I know everybody has focused on that, and I guess the concern is that, even though the economies may be under pressure now, perhaps the role of the deep discounters is more of a secular change or structural change and it's here to stay.

So my question is, if that's the case, where do you stand in terms of your cost structure in Western Europe?

Do you think there's still ample opportunity for you to whittle down your costs so that could still be a strong and profitable market for you?

For sure.

Here's the way that we think about Western Europe.

It is the largest consumer market in the world that we compete in.

I mean, it's an even larger consumer market than the U.S., okay, if you add up all of our categories.

We are still, despite our high development in some of our core businesses, we're still not as developed as we can be in others and we're still not in all of the businesses that would like to be in in Western Europe.

So we sort of take the long-term view of Western Europe, which is it's an attractive market, it's not growing at the rate of the U.S. but it is still growing, and you know, we understand the consumer pretty well there and there are a lot of unmet needs and wants.

The second point is I think you are right about the discounter phenomenon.

It's a different account type of discounter phenomenon but it isn't new; it's been around since the '70s.

I think we could, you know, we could probably get a good discussion going about whether it has peaked or not.

I don't even want to get into that but I think it will be there;

I think it will be secular; it will be something that we deal with.

That's why we focus so hard on making sure we are offering the right consumer value equation on every one of our brands and every one of our product lines, not just versus the branded competition but also versus the major discounters, the (indiscernible) of the world.

Then finally, in the end, it's all about innovation.

Are we innovating and delivering product performance, quality and value that is a value to consumers?

Because they vote on whether it's a better value for them.

The fact that our share has been growing at 80%-plus of our business is reasonably heartening.

We know we're not going to grow at the same rate that we can grow in other regions because the economies aren't there, but we are hopeful that the economies will improve in a year or two.

But it's too big a market, it's too important for us.

You know, we're going to stay on our strategy, which is deliver better consumer value, improve the equity of our brands, lead on innovation.

On the cost side, because you did start out there, we've improved our cost structure over the last three, four years.

There's still a lot of opportunity to improve it more and Laurent Phillippe and his team are all over it.

If you'd care to assume -- I imagine, given the size of Gillette's business over there, that that would be one area that would offer potentially huge opportunities for incremental cost-cutting?

When we get into it, I think there will be a fair amount of scale leverage as we combine the commercial operations and the go-to-market operations.

I think you are right.

Okay.

Then my second question has to do with your plans for the share buyback.

I know, when you announced the Gillette acquisition, you said that the share buyback would be a big thing over the next couple of quarters, but I believe there is a prohibition from you buying back stock for a big chunk of the second quarter because of the timing of the mailing of the proxy.

Does that mean you're just going to be buying back a lot of stock during the part of the quarter that you're allowed to, or should we see less of a contribution in the quarter?

Well, what we said, yes, there will be about a five-week roughly where we have to be out of the market.

As I say, we've been buying stock since the announcement of the Gillette acquisition; we bought about 30 million shares after that announcement in the quarter.

We are going to continue to buy until the S-4 is issued, the proxy is issued.

Then after the shareholder vote, we will actually be able to buy more.

Okay?

So -- but still, net-net-net, we're talking about less than $0.01 of contribution to EPS in the quarter.

We are really going to start to see the real impact on earnings next fiscal year, although of course we hope to get the Gillette deal closed as soon as practical and that will therefore, obviously with all the new shares that are being issued, have a huge impact in the other direction.

Bill Pecoriello with Morgan Stanley.

Good morning, everyone.

My question is on the -- there's always a trade-off on the margin versus topline.

In this quarter, you delivered upside on both.

Can you talk about the leverage in the SG&A line, how much you increased market spending by in the quarter?

You had mentioned, in the prepared comment, about getting more bang for the buck on the marketing dollars spent.

Also, was there anything in that SG&A line in terms of lapping any restructuring costs in the base period?

Going forward, how should we think about getting leverage out of that line?

Bill, this is AG.

There is leverage on the SG&A line.

There is leverage on the SR&A (ph), the overhead side, which, you know Clayt kind of talked about a number of times, but there's still (inaudible) leverage there.

We continue to get leverage in -- we continue to get leverage in our GBS operations, which is beating our cost objectives, improving the service quality and still allowing us to innovate where we need to.

In IT, we're still getting leverage in the MDO (ph) organization.

As Wendy asked, with Gillette, I think there's more leverage there when you combine commercial (indiscernible) and MDO.

We're still getting leverage in R&D, and we're getting leverage in R&D because we're doing more connect and development.

We continue to do more connect and develop on the outside, so our research dollars are more productive.

On the marketing side specifically, the simple way to think about it is our dollar spending was up in support of the innovation and the initiatives but because of marketing mix modeling and marketing ROI, we're getting more efficient and more productive with every dollar that we spend.

I think there's still a lot of opportunity there.

Every brand in every country that has done market-mix modeling or marketing ROI has improved the productivity of their marketing spending without exception.

So you know, this is just -- we are training it like crazy; we are finding appropriate what we call light versions to get into the developing markets where they don't have all the resources and can't afford, you know, all of the modeling that's required, but I think we're going to benefit from this for at least another two or three years.

Great, so the drivers that we saw in this quarter for some time to come are going to continue to be drivers?

I think so.

Although, Bill, I have to say the margin expansion in this quarter as you saw was unusually high, all right.

So you know, while the leverage points are still there, I wouldn't suggest that we can build this -- well, we are obviously not guiding to this margin improvement in the fourth quarter and fiscal, and this level of margin improvement is well above our long-term goals.

There was nothing unusual, though, in the quarter in terms of the lapping of restructuring this quarter versus last quarter or last year?

Not really.

Then just on the pricing, as you talk about the balance in the portfolio, you mentioned, beyond the Western Europe diapers, some other categories like oral care, dish care where there has been more promotional competitive environment.

As you're looking at the criteria like your marketshare trends, promotional price gaps, if you decide you need to reduce those promotional price gaps, are you looking elsewhere in the portfolio, in terms of additional pricing you can take in other categories or geographies to offset anything you need to do in the ones that you had mentioned?

Well, we always try to balance.

First, we try to balance within the category or GBU worldwide, so across categories and regions.

The second thing we look at is we look at across the portfolio.

The other balance, Bill, is we are still driving cost reduction programs in all of these businesses.

In other words, they all have cost-improvement programs, so we try to offset as much of the commodity cost pressure as we can, you know, on the cost side, because we're trying to keep to consider value-right and we don't want to get in a situation where you have big swings in promotions, levels, you know, the depth of promotion.

We actually -- because we think that leads to -- you know, that can begin to impact consumer loyalty, so when we see deep discounts, you know, that's really not a good thing for consumers, because consumers begin to wonder, gee, what is the price of dish liquid?

Okay?

The other thing we try to do is we think it's bad for your percent promoted to get too high, so we are, frankly, surprised at the level of percent promoted that some other key competitors have gone to in the past -- (multiple speakers) -- but we would steer away from that.

But in response to your question, we would generally not price one place to spend another.

We would look at pricing against cost increases on a category and geography basis.

There's nothing yet alarming to you in terms of your marketshare trends versus the promotional -- the depth of promotion you're seeing in some of these categories, requiring any adjustment at this point -- something you're still monitoring?

Yes, we are monitoring it every day and every week.

That's one of the reasons why we stayed conservative on guidance in the fourth quarter, because we've got to make sure that we've got the flexibility to be competitive on a value basis in the marketplace.

As I mentioned in my section, Bill, our shares are holding up pretty well, so as A.G. mentioned, we're going to monitor them closely in the face of continued competitive spending.

But you know, there's been some other areas, some other companies that have donated shares to some of the competitors that have been doing high promotional spending, but we're going to very closely monitor our situation.

I guess, in general, it's more of an issue in the daily/weekly household businesses.

It is not a major issue in health, personal care or beauty care, and that's one of the virtues of the balance of our portfolio.

You know, they just don't come under a lot of pricing and promotion pressure.

We think, frankly, it has been pretty rational in the family care business; that's tissue and towel.

The places that I watch the most closely are the basic fabric and dish care types of businesses, yes, and oral care.

Bill Schmitz with Deutsche Bank.

Good morning.

Has the allocation stuff gone too far?

I mean, have you gotten too disciplined in terms of your capital spending ahead of big, new products?

Because I know you didn't disclose some of the products that have been on allocation but some of the things we've seen in the marketplace suggest that pretty much every big launch you have had recently has been an allocation out of the blocks. if you look at Febreeze, the Olay Quench, even going back to Pearl.

So is there kind of a change in the mindset that is causing that at P&G right now?

Well, first, to be clear, the vast majority -- the majority of our innovation and initiatives go out and are not in allocation, okay?

You did hit a few that we did have to go in allocation and in every case, our best pre-market research didn't come close to predicting what the take-off would be with consumers.

We went through this with a fine-tooth comb, and there are different root causes in different businesses.

The fact that it sprung up across a number of businesses and the fact that it sprung up on low capital intensity initiatives and mid to high capital-intensity initiatives, you know, led us to conclude that the capital issue was not a root-cause issue.

I mean, I will give you just three or four.

One was the length of supply chains.

You know, the more your supply chains stretch around the world and into developing markets and the more parties that are involved in your supply chains, you know, the more you really have to manage the responsiveness and flexibility of the supply chain.

Frankly, in some cases, we got caught with raw material or packing material shortages, okay, and that was part of the commodity availability issues.

In some cases, frankly, we didn't listen to major retailers who said, you know, we can do a whole lot better.

We didn't listen as carefully, okay?

So when they said we're going to go vertical on this thing and it's going to blow away the numbers that you're seeing in your pre-market, we moved it up some but we didn't move it up all the way and frankly they blew it out of the water.

So those were the kinds of things that got us.

Hopefully, we've learned from it and as I said before, we are going to relaunch, because there's still a lot of demand for these new products and there's still a lot of unmet trial opportunity and we are back in supply in virtually everything and with sufficient supply to relaunch.

So you know, we learned a lot; we work our way through it.

You know, we are looking at this as an engine of growth going forward.

A.G.

Edwards, Jason Gere.

Good morning.

A question for you on the laundry business -- I know that the commodity costs certainly are a big pressure right now, but you also mentioned there was a one-time issue with the supply (indiscernible).

How much did that contribute to the 300 basis point decline in margins in the quarter?

It's a couple of percentage points of it.

Okay.

I mean, when do you expect to see margins start to return back?

I know obviously that Western Europe is a little bit of an overhang right now for everybody.

So I mean, when would you expect to see the margins start to return to kind of some of the levels that they were at before?

Jason, this is A.G.

We are trying to a run a delicate balance in laundry right now and you know, you have to remember the way P&G runs the laundry business.

It looks a lot more structurally like a personal care or beauty care business.

So we have pretty strong, we have a pretty strong margin position going in.

We've got three things going on.

One is we have -- the majority of the commodity cost hit has come in fabric and home care, and as we mentioned earlier, even though we have moved on pricing, you know, in some cases, the market hasn't moved.

The second thing we have going on is we have a lot of innovation that we're bringing to market right now, and we don't want to be pennywise and pound foolish.

We don't want to be to short-term oriented and not do what is right for the mid and long-term, so we've made the conscious decision that, despite the commodity cost pressures, we are going to invest in the launches.

We still have a lot of investment to do in Tide with a Touch of Downy, Tide Coldwater.

We have additional innovation coming out that's next year.

We have the Gain fabric softener; we have the Simple Pleasures.

I mean, we just have a lot of innovation in the laundry business right now, and it wouldn't be the right thing to not invest in it.

Then the third thing is this market is shifting and some of our competitors are exiting or virtually exiting from the market.

As a result, the primary competition is no longer the branded manufacturers; it's the value brand, or it's the retailer brand.

As that happens, we are adjusting our portfolios.

We've talked about this a number of times in previous calls.

That means we are making sure we have a strong lineup of mid-tier brands and we're making sure that our price differences, you know, our price premiums are the right premiums to continue to offer consumer value.

So those are the three things we're trying to dial in, okay?

We are trying to dial in recovering the commodity cost pressures, we are trying to dial in the right amount of investment in our innovation, and we're trying to dial in the right price spread and the right mix of brands and product offerings so we can compete effectively and continue to grow share profitably in a new marketing environment.

Is there any update on the Alexandria plant?

We are up and running, up and running. (multiple speakers) -- bayou!

What's that?

A monster in the bayou.

I was wondering if you could just give a little bit of update on Wella, how the integration is going, if there's any change from your past comments there.

Also, just I guess some of the learnings in beauty care and maybe just touch upon the Herbal Essence weakness.

Well, I think, let me talk briefly about Wella.

Wella's integration is actually going very well and in fact, Wella contributed meaningfully to the beauty care results in the quarter.

You know, once we got the domination agreement in place, that pretty much gave us the green light to do the integration work that we needed to do.

I think the momentum on the Wella business is reasonably good.

Then just on Herbal Essences?

Herbal Essences is a tale of two cities.

As John mentioned, we're still expanding and growing internationally, and we are redoing the equity in the U.S.

Even in the U.S., where all of it has struggled, it's still a 4.5 or 5-share business.

It's still, like, the third or fourth biggest brand, depending on the region, depending on the customer.

So, we are going to give it a good facelift; we're going to get the equity right; we're going to make sure we are targeting the right consumers who are the prime prospects for Herbal Essences, and we're going to bring innovation to the brand and try to get it growing domestically while it growing fast internationally.

It's a great brand.

Terrific.

Thanks a lot.

Connie Maneaty with Prudential.

My question has been answered.

Chris Ferrara with Merrill Lynch.

Have you guys talked a little bit about the role of developing markets in leveraging overhead in the quarter specifically?

I was wondering if, at this point, are there any specific businesses where, on the operating margin side, where the developing markets business actually tends to be margin-accretive for the business as a whole?

Margin-accretive is beauty.

I mean, in general -- and of course this varies from market to market, but in Asia, there's no question about the fact that the beauty business is margin-accretive and in many of the household businesses, we still have upside margin potential, in some cases substantial upside margin opportunity, whereas in places like our Eastern European business, Middle East and Africa, that business is much more balanced, a much bigger household component but a household component that makes good money and the growing beauty care component.

So we, you know -- but at the end of the day, when you are growing your unit volume at 15-plus%, you sure are to be getting some fixed-cost leverage behind that.

I mean, if you look forward, are there other businesses besides beauty that you think, maybe five years from now, where your margins in developing markets are better than developed markets?

I would say some of the personal care businesses could be.

Yes.

-- could be.

There's no reason, in my opinion, why, for instance our femcare business, couldn't generate very good margins, whether they are actually better, because we have 50-plus shares in Western Europe and we have nearly 50 shares in the U.S., but I think they could be very good margins.

There's no reason -- oral care margins are good in developing markets.

I think the only place where the margins are really -- the two places where the margins are really tough in developing markets are laundry.

That's because of the low net sales per case, okay, and affordability issues.

The other place is baby diapers because you need scale.

But I think baby diapers, you know, I've said this several times, our leading competitor in baby diapers is cloth, okay?

There's billions of consumer households around the world who will have babies over the next 25 years, and if we can convert cloth, that industry could take off, but over time, you know, the key is that, over time, we have opportunities to build our margins in developing markets.

Chris, if I can just make one more really quick comment, you know, you've got to remember, in our portfolio, which I thing is pretty balanced now -- it's about a third beauty; it's about a third health and personal care; and it's about a third household.

We still have, you know, roughly 30% of our businesses that are not best-in-class on margins.

So I still think there's a lot of margin upside and you know, those businesses, we know which ones they are and we are working very deliberately to improve their gross margins and improve their operating margins.

So, I certainly don't feel like we've topped out on the margin side and I certainly don't feel like we've topped out on optimizing our cost structure and getting the full benefits of scale.

The other thing, just to conclude the comment, is, in a lot of developing markets, particularly in beauty care, the focus now is on driving top line.

Our margins are just fine.

Therefore, we are very much focused on driving sales.

Then just on a completely different note, you bought about 2 billion shares -- $2 billion worth of shares back I guess.

Why wasn't that number higher?

I mean, I guess it looks like about a billion a quarter, which is actually a little bit below the run-rate for the whole program and presumably just would be where the share might be lowest.

Were you restrained by other regs besides what I would have known about, I guess?

Well, yes.

There are SEC guidelines of the amount of shares you can buy in advance of the proxy and shareholder vote, which provided some limitation on us.

So did you buy back nearly as much as you could have, or could you have even bought back more despite -- (multiple speakers)?

We bought back the maximum that we felt was prudent, given the SEC guidelines.

So now, as I mentioned earlier, once the shareholder vote is complete, we will have more flexibility to buy stock.

Tom Marsico with Marsico Capital.

Thank you.

I just wish you could maybe talk a little bit more about the emerging markets, what you saw during the quarter, the number of new products that were launched in emerging markets, and the successes that you saw from those launches.

Tom, this is A.G.

I think the simplest way to think about emerging markets for us is they are clearly strategic.

We've spent the last three or four years building the capabilities and the capacity to take both our brand platforms and our country organization platforms and to build them to a point where they could be platforms for innovation and growth.

We are in every major developing market region.

We are launching a full range of innovations across our core businesses and important businesses.

So, John mentioned, in the call, Naturella, which is a new femcare brand, but we are also launching major product improvements on Always at the same time we do Naturella, so we're building a portfolio in femcare as we drive towards 40 and 50 shares, which is our ultimate goal in that market.

In baby care, we have a highly integrated innovation program and we run a whole program of innovation in developing markets.

Most of the innovation in developing markets, of course, is on the basic (indiscernible) diaper lines because that's what consumers can afford.

We've just started a very interesting small test of a dramatically new and very affordable baby diaper in China.

I mentioned cloth is our biggest competitor in developing markets; we are very hopeful that this will enable a lot of moms in developing markets to be able to afford disposable diapers.

We've got it priced, you know, I can't remember exactly but I want to say around $0.10 to $0.11 a diaper, which is starting to get pretty close to the price of an egg in the open market.

We feel. if we can get it to the price of an egg which she buys daily, then it might be a product that she could afford to buy for her baby and use daily.

All of our haircare programs are essentially global.

One of the reasons why our haircare business has been so successful in developing markets is we bring the same innovation that you see in the U.S. in a more efficient form and appropriately with the right aesthetics and the packaging and the right sizing and pricing but we bring that to China; we bring it to Latin America; we bring it to Russia; we bring into the Middle East.

So the haircare business is probably our most global business with very strong developing market profile.

In laundry, we have a very vigorous program in developing markets.

Again, we use the same chemistry and the same ingredients; we just combine them in products that are far more efficient.

We may have mentioned this before -- we created an entirely new system in China where the simple way to think about it is we make -- we take the performance actives and make the performance actives cocktail, and then we have contract Chinese manufacturers add the commodity chemicals, bag or box the detergent and put it into our distribution system.

That enables us to be very affordable.

Our share has been growing very rapidly in China, in laundry.

We are now -- we can now see ourselves with a real shot at becoming the leader in the local market, and the leader in the local market has been a Chinese brand from the beginning.

So it's -- Tom, you know, I just feel like we have a really strong program across the board.

That's why, as Clayt said, we are growing 15% on the top line.

That's what I was interested in focusing on a little bit, maybe from even a higher level.

I see that your CapEx is at the lower end as a percentage of sales.

Is your infrastructure in the emerging markets where you're growing at a 15% rate -- instead of talking about Western Europe and pricing in laundry so much, is your infrastructure development in the emerging markets and your opportunity there, is that fulfilled?

Is your geographic reach where you want it to be?

Because there seems to be, if you're spending at the lower end on CapEx as percent of sales, that you have significant leverage there.

Am I missing the point here?

No, definitely no, you got it.

In terms of geographic reach, we are in virtually all the markets we want to be in.

The point, though, is the CapEx goal is not at all limiting.

So if we need capital in developing markets, to grow, we -- (multiple speakers).

Yes, but we have -- what we've done, Tom, is we've devised more efficient capital solutions, okay?

In some cases, it's what we fabricate, where we fabricate it and how we fabricate it, and we do more of the fabrication in developing markets.

In some cases, we have a mix system which, as I explained in China, we do some of the making.

They do the finishing and the packing, so we use the contract network.

In some cases, we just use contractors, which are more efficient, okay, and obviously save us the CapEx.

But to your point about scale and leverage, I don't think -- I can only think of maybe one or two markets that we would like to be in which are not open to us now, but we are in 98%, 99% of the markets we want to be in.

We have the installed manufacturing capacity or we have access to it, so that's not a constraint.

This is important; we also have the local organization in-place now so we can execute with excellence.

That's really important, because we have to have the distribution system in-place; we have to be able to market; we have to be able to do all the things that we have to do to deliver a product to the consumer where she wants it.

So the last question then, it would seem that you have significant operating leverage as GDP of the emerging markets grow at a much more rapid rate than what we're seeing in the developing markets.

We do.

Right on.

That's why we are counting on them for consistent, double-digit top-line growth through the end of the decade.

Right.

Joe Altobello with CIBC World Markets.

I just wanted to see if you could compare and contrast your strategy when it comes to promotional spending, versus that of Gillette and how you think that might change post the acquisition.

Joe, it's tough because I would say it's not -- the compare and contrasting isn't so much company-to-company as it is industry-to-industry, and they are just in different industries.

Just an obvious point of view, they do a lot more sports and personality marketing, okay, in the blades and razors business; we don't do very much of that, okay.

Also frankly, we really shouldn't be commenting on Gillette's promotion practices.

I think they've said publicly before (indiscernible) other promotion spending has been in pretty good control, and so obviously, our objective would be to keep that.

Okay.

Then second question, same topic here -- have you guys had any update from the DOJ or FTC regarding the antitrust issues on personal care and oral care?

We are in dialogue with the FTC.

They have issued a request for a second request for the data, which we are in the process of complying with, and so the process is proceeding pretty much as we would have expected, both in the U.S. and of course we are also engaged in Europe.

Fulcrum, Alice Longley.

Good morning. two questions, one on oral care -- I guess you are growing at high -- in strong double-digits in the emerging markets.

Can you tell me which markets that is?

Is mainly in China and Central and Eastern Europe, or is it other markets as well?

China and Central and Eastern Europe, those are the big ones.

That is primarily it.

Can you tell us what your share are now versus Colgate?

I know you said in China you are 26%.

Where is Colgate and similarly in Russia?

Well, I (LAUGHTER) we are ahead in China and Russia right now, and I think it's going to stay nip-and-tuck.

So I don't want to get too hung up.

You know what's important, Alice?

It's not what our share is versus Colgate.

What's important is that these markets are converting to world-class products and product technology, they are responding to the kind of brands that we offer in blendamed and Crest.

I think developing market consumers want an oral care experience, if it's affordable, that's not unlike the oral care experience and product line that we offer in the U.S.

The other thing you have to remember is there's still half the market in China that is wide open to Colgate and/or P&G, and we obviously want to get more than our fair share of that.

The same is true in Central and Eastern Europe, so they are relatively white space in developing markets that are not walled cities and that's why we are attracted to them.

Okay.

My other question is back to this pricing issue.

Can you give us a little bit more specificity on the numbers?

In other words, in Western Europe, is pricing on average down 1% or down 5%?

Is it mainly to other branded companies that are, you know, causing this, or is it the hard discounters?

It's definitely not 5%.

We are talking about a percent or two in most cases, and on average.

You know, again, the problem with talking about this subject is it's almost a different story in every country and every category as to whether it's been a branded competitor or whether it's been hard discounters because, not surprisingly, discounters have responded to some of the share progress we've made, as well as the branded competition.

The way to think about it, though, Alice, I think is, if you look at our scale -- I mean take laundry for example.

If you look at our scale and you look at the fundamental cost structure of that industry, there's not a lot of room; you know, there's just not a lot.

We are the only ones that have a lot of room.

So, I think what you're seeing is, you know, you are seeing this all stabilize.

I'm sure that some competitors in some markets have taken certain hedges; we have taken certainly hedges.

That plays into the game in the short term, but overall, I wouldn't obsess -- I don't obsess on the price thing.

I'm more interested in who is our target consumer, what is affordability for her, and what represents superior consumer value?

You've got to remember. when you step back from this, most P&G brands are sold at a premium; some are sold at substantial premiums, even in the household business.

So the issue isn't whether we can command a premium.

We've got brand strength, brand trust, brand equity, and we are delivering products that are superior in performance quality and value so we can handle the premium.

The only thing we have to watch is when the premium gets too high.

We went through this in some detail over the last year or so, but there was a situation in Germany two or three years ago where our spreads, our premiums had gotten too high, so we managed our premiums down and we invested in innovation and we reinvested in our brands in marketing and all the shares in all the core businesses are up.

So I don't get -- if these were commodity businesses, I would be watching every penny or every percent, but they are not commodity businesses; they are branded, value-added, differentiated businesses.

So, it's more about managing the mix than it is about obsessing with just a price point -- (multiple speakers).

If we put your volume in Germany together with pricing in Germany, were you up in Germany?

Yes!

Okay.

The last part of that question is, if I were to look at pricing in the U.S. alone, which is where you've taken all of these price increases, about how much is pricing up here?

Is it something like 5% on average?

No, we're talking about -- even though the coffee increase is all here in the U.S., the U.S. wouldn't be more than two.

Yes, because coffee is a small percent of our business.

Remember, we didn't price the entire laundry line; we just priced part of the laundry line -- (multiple speakers) -- tissue towels.

But if you add it all up, you're only looking at a couple of percent.

Perfect!

Thank you very much.

Lauren Lieberman with CS First Boston.

I'm sorry.

I know this is getting to be lengthy.

I just wanted to talk about margins by division and I guess overall operating profit margin.

With the huge outperformance in baby and family care, I guess my specific question is how much of that is due to the plants running I guess 24/7 to work on the allocation issue and to rebuilding safety stocks?

Not a whole lot.

I think the margin leverage in baby care has been obviously volume-driven.

It is a relatively fixed-cost-intensive business, so -- and mix up with a lot of new products and a lot of innovation.

Baby stage of development, Feel 'n Learn, they all improve our mix.

They improve our sales mix and they improve our margin mix.

Right but either of those points on volume or mix are not necessarily new this quarter or --.

No, what they are becoming is an increasingly larger percentage of our business there.

The other thing is I said, Lauren, we've got ongoing cost reduction programs in all of these businesses and frankly, our paper business has just done a good job with our cost-reduction programs.

They got them cranked up five years ago because we had to.

They were in businesses with, you know, more-intensive capital structure and with more importance on managing every penny of your costs.

You've also got to remember that while we think we are tied or maybe even have a small advantage on being best-in-class in tissue/towel, we are still not best-in-class in baby diapers because we don't have as much of our business in pants and we don't have the pants margins that our best competitor has.

So we've still got opportunities to improve the margins.

So then does that mean we should be thinking of this, as this margin changes, quarters being like a step function?

I mean, we are now adding --.

No, again, as I said earlier, we obviously made more margin progress this quarter than we anticipate as an ongoing impact.

Obviously, that disproportionately occurred in the paper business.

I mean, we made margin progress as a company at a time where actually the fabric and homecare margin was down, so the other businesses did extremely well on margin.

And so -- but there's no question about the fact that margin improvement has been a key focus area for the baby care business, and they are delivering.

Our approach on margin is more longer-term, Lauren -- (multiple speakers) -- long-term restructuring, continuing improvement.

You can't look at one quarter unfortunately and read too much into it because there's all sorts of lumpiness within that line.

So you've got to look over a longer period of time to see the trend.

The trend, though, in paper is up.

Okay, all right.

Then just one last thing is the healthcare division revenues were -- actually volume was just about double what I expected.

So, good work there!

But I wanted to know if some of that is from Prilosec coming off of allocation and again, is -- (multiple speakers)?

There's no question there's been some pipeline refill on Prilosec.

Actonel's been incredibly strong -- (multiple speakers) -- Vick's had a good quarter.

You have to remember the whole cold season came later this year.

So I mean, we're doing well on Metamucil; we're doing well on ThermaCare (indiscernible) so it's not -- healthcare is not a one-trick pony.

Okay.

Then just you mentioned Actonel.

Any outlook for changes for Actonel as (indiscernible) comes to market I think next month?

Not really.

I mean, we are still -- obviously it is a new competitor.

We're going to have to see what doc and consumer/patient acceptance of Boniva is going to be, but you know, we think we are positioned well.

Osteoporosis is a disease of fracturing and physicians are selecting therapy based upon strong fracture-reduction data.

I think you know Actonel provides rapid and sustained fracture reduction at both vertebral and non-vertebral sites such as the wrist and hip.

This is what's important to women and men who suffer from that disease.

Boniva has not demonstrated non-vertebral fracture protection.

So I think -- you also have to remember this is still an under-diagnosed, under-treated disease.

In a market that's been growing 20% a year.

Yes, so I think -- here's the win-win.

Boniva stimulates another round of market expansion and growth and we get more than our fair share of it, which is sort of what's been the pattern over the last five years.

But Actonel is a proven drug and we keep building share with that brand.

Thanks, guys.

That's all the time we have for questions today.

Gentlemen, I will go ahead and turn the call back to you for any additional or closing remarks.

Well, thanks very much for joining us today and as I said at the outset, John Goodwin, Thomas Tippl and I will be around for the rest of the day to take any other questions you have.

Thanks for joining us.

With that, we will conclude today's conference.

Thank you, everyone, for your participation.