寶潔 (PG) 2008 Q3 法說會逐字稿

Good day, everyone, and welcome to Procter and Gamble's third quarter earnings conference call.

Today's discussion will include a number of forward-looking statements.

If you refer to P&G's 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, P&G needs to make you aware that during the call, the company will make a number of references to non-GAAP and other financial measures.

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

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

Free cash flow represents operating cash flow, less capital expenditures.

P&G has posted on its website, www.PG.com, a full reconciliation of non-GAAP and other financial measures.

Now I would like to turn the call over to P&G's Chief Financial Officer, Clayton Daley.

Please go ahead.

Thank you.

Good morning, everyone.

A.G.

Lafley, our CEO, and Jon Moeller, our Treasurer, join me this morning.

I'll begin with a summary of our third quarter results, Jon will cover business highlights by operating segment, I'll then discuss our expectations for the June quarter and the current fiscal year, and finally, I will provide a brief outlook on fiscal 2009.

Following the call, as always, Jon Moeller, Mark Ursuk, John Chevalier and I will be available to provide additional perspective as needed.

Now on to the results.

P&G maintains strong momentum in the third quarter, delivering balanced top and bottom line growth in an environment of significant commodity and energy cost pressure.

The breadth and depth of our portfolio, strong innovation, and a focus on productivity drove our results.

Earnings per share from the March quarter increased 11% to $0.82.

This was $0.01 ahead of both the consensus estimate and the top end of our guidance range.

Earnings per share growth was driven by solid sales growth and strong operating margin expansion.

Operating margins expanded behind a continuing focus on productivity improvements and by delivering Gillette synergy benefits.

Total sales increased 9% to $20.5 billion, driven by volume growth and favorable foreign exchange.

Organic sales and volume were both up 5%.

This was the 23rd consecutive quarter we have met or exceeded our top line growth targets.

Developing markets set the pace with strong double-digit organic sales and volume growth.

Pricing added 1 point to sales growth, as many of our brands increased pricing to offset higher commodity and energy costs.

Both developed and developing markets grew sales ahead of volume.

However, because developing markets are growing faster than developed markets, there was a negative 1-point mix effect on the total company.

We expect these dynamics to continue going forward.

The company's business portfolio performed very well, with five of our six reportable segments delivering mid single-digit or better organic volume growth.

Global organic volume grew in 18 of P&G's top 22 product categories, representing over 90% of company sales.

One of our strengths as a company is the fact that our results do not depend on any one category or market, but rather on the diversity and breadth of our total portfolio.

The diversity of our product categories and geographies continue to enable consistent, reliable growth for the company.

For example, beauty care organic sales growth for the quarter was only 3%.

This was below our going-in expectations.

The shortfall was driven mainly by slower market growth in prestige channels and by softness in North American Pantene.

But the softness in beauty care was offset by stronger growth in other parts of the portfolio.

We are confident that our portfolio will continue to deliver reliable organic sales growth of 4 to 6%.

In terms of our markets, U.S.

all outlet dollar market growth has slowed,, but is still growing about 2 to 4% in most of our categories.

Very recently, we have seen a slowdown in the rate of growth across several beauty care categories.

Non-track channels continue to grow significantly faster than track channels and market growth is stronger on a dollar basis than on a unit basis.

Private label shares in the U.S.

have begun to grow in a few of our product categories.

However, in nearly every instance, P&G is also growing share in those same categories.

In Western Europe, markets have softened a bit, but are still growing 1 to 2%, and P&G continues to grow market share overall.

In developing regions, market growth remains in the mid to high single digits.

Net through the third quarter, markets continue to grow and P&G brands continue to build share, despite a challenging economic environment in the U.S.

and the price increases we have taken to recover commodity costs.

Next, earnings and margin performance.

Operating income increased a strong 13% to $4.1 billion, behind sales growth and margin expansion, despite significant commodity and energy cost increases.

Operating margin increased 60 basis points due to overhead productivity improvements and Gillette synergies.

Gross margin was down 30 basis points to 51.3%.

Commodity and energy costs reduced gross margin by over 220 basis points.

This was largely offset by pricing, volume leverage, and cost savings projects.

Selling, general and administrative expenses were down 80 basis points, as our focus on productivity significantly lowered overhead costs as a percent of sales.

Marketing spending increased 9%, in line with sales growth.

We continue to support our brands with consistently high levels of advertising and marketing spending.

Interest expense was up, as we continue to expand debt capacity within our AA credit rating to finance our share buyback program.

Other nonoperating income was down significantly versus year ago, due primarily to divestiture gains in the base period and lower interest income.

This was consistent with previous guidance.

The tax rate for the quarter was 27.9%, also consistent with previous guidance.

Now let's turn to cash performance.

We continue to convert earnings to cash at a strong rate.

Operating cash flow in the quarter was $4.3 billion, driven largely by strong earnings, an unusually large deferred tax benefit and a decrease in accounts receivable.

Operating cash flow was down slightly versus prior year due to inventory increases to support the North American liquid laundry compaction and other major initiative launches.

Capital spending was $668 million in the quarter, or 3.3% of sales, well below the company's 4% annual target.

Free cash flow for the quarter was $3.7 billion.

This was 136% of net earnings.

Fiscal year to date operating cash flow was $11.7 billion, up $1.9 billion from the same period year-ago, and fiscal year to date free cash flow was $9.9 billion, an increase of $2 billion versus year-ago.

This brings free cash flow productivity to 109% fiscal year to date, 12 points ahead of last year.

We remain well on pace to exceed our 90% free cash flow productivity target for the fiscal year.

We repurchased $2.6 billion of P&G stock during the March quarter.

Fiscal year to date, we have repurchased $8 billion, a level that is consistent with our three-year, $24 to $30 billion share repurchase program.

Combined with $3.3 billion in dividends, P&G has distributed $11.4 billion to shareholders fiscal year to date or 126% of earnings.

On April 8, we announced the 14% increase in our quarterly dividend from $0.35 to $0.40 per share.

This represents the 52nd consecutive fiscal year in which P&G has increased dividends.

And over the past 52 years, P&G's dividend has increased at a compound annual rate of nearly 10%.

To summarize, P&G continues to drive balanced top and bottom line growth at or above target levels.

We are converting a significant amount of earnings to cash and we are returning this cash to shareholders through dividends and share repurchase.

Now I'll turn it over to Jon for a discussion of the business unit results by segment.

Thanks, Clayton.

Starting with the beauty segment, all in sales grew 9%, with organic sales up 3%.

Global hair care volume grew mid single digits, behind high teens growth of Head and Shoulders and double-digit growth of Rejoice.

P&G's global hair care value share was in line with prior year at nearly 26%.

P&G all outlet value share in the U.S.

hair care market was down slightly, as declines on Pantene were largely offset by Head & Shoulders and Herbal Essences.

P&G hair care share in Japan was very strong this quarter behind a launch of Head & Shoulders and continued growth of Pantene.

Global hair color sales were up high teens, driven by the launch of Nice & Easy Perfect 10.

Perfect 10 is a revolutionary technology that addresses key unmet needs of the home coloring consumer.

Our in market execution of Perfect 10 has been outstanding and we are on track to beat our launch target objectives.

Nice & Easy all outlet share of U.S.

hair colorants grew more than 3 points to 19%.

Professional hair care shipments were in line with prior year, as strong growth in Central and Eastern Europe was offset by modest declines in developed markets.

Prestige Fragrances had a strong quarter versus prior year with sales up mid teens.

Organic sales grew 9%, well above industry average, driven by the Dolce and Gabbana, Hugo Boss and Gucci brands.

Growth was somewhat lower than expected in the U.S.

and Western Europe, due to slower department store sales.

In skin care, global organic sales grew low single digits, behind solid growth of Olay facial moisturizers in the U.S.

All outlet share of Olay facial moisturizers in the U.S.

increased nearly 2 points to 43%.

Skin care shipments in developing markets were in line with a very difficult year-ago comparison that included the Olay brand expansion in Russia, Poland and Turkey and the launch of Olay Definity in China.

Cosmetic sales grew mid-single digits, driven by the launch of Cover Girl Lash Blast mascara.

Cover Girl value share in the U.S.

grew to nearly 20% for the quarter.

As Clayt said previously, organic sales growth for beauty were below our going-in expectations.

This was due mainly to a soft period for the Pantene brand in North America, slower than anticipated department store channel sales for Prestige and a general slowdown in retail market growth of about a point.

In the grooming segment, sales were up 13% for the quarter, with organic volume and sales growing 6%.

Blades and razors global shipments grew high single digits, driven by double-digit growth in developing markets.

Shave prep shipments also grew high single digits.

P&G is now the shave prep market leader in the U.S., with all outlet value share up more than 3 points to over 35%.

Braun shipments were down mid single digits due largely to soft household appliance results, including the previously announced exit of this business in the U.S.

Overall, global consumption of Gillette blades and razors increased 6% for the quarter, driven by the continued growth of Fusion and strong developing market results.

Gillette's global value share of blades and razors increased for the period to nearly 72%.

Fusion continues to be a strong engine of growth in male shaving.

Fusion's share of global male systems is up more than 8 points versus prior year to 24%.

And Gillette's global share of male systems is up half a point to nearly 84%.

Fusion will deliver more than $1 billion in sales this year, making it P&G's 24th $1 billion brand, the fastest ever to reach this milestone, including Mach3.

The success of Fusion is a great example of the combined strength of P&G and Gillette.

In February, Gillette launched Venus Embrace, the first five-bladed female razor.

Embrace is off to a good start, driving Venus' share of female systems up more than 4 points to nearly 58% in the U.S.

Gillette also launched Mach3 disposables in the U.S.

in the March quarter, after only a few weeks in market Mach3 holds nearly a 10% share of the U.S.

male disposable razor market.

Health care sales increased 11%, including 6 points of favorable foreign exchange.

Feminine care and oral care led the growth, with feminine care volume up high single digits and oral care volume up mid single digits.

In feminine care, Always volume was up high single digits and Naturella grew more than 30%.

Always shipments were driven by strong growth of pantyliners in the U.S.

Always all outlet share of the U.S.

liner category is up more than 2 points to 31%.

Feminine pad share increased nearly a point to 59%.

Naturella brand growth was driven by continued expansion in Latin America, where volume grew more than 20%, and in central and eastern Europe, where volume increased more than 40%.

Oral care delivered mid single digit volume growth in both developed and developing markets.

In North America, volume was up high single digits on strong growth of both Crest and Oral-B brands.

Crest dentrifice maintained it's all outlet value share leadership in the U.S., despite intense competitive promotional activity.

P&G's leading all outlet value share of toothpaste in the U.S.

remained at over 38% and Oral-B toothbrush value share grew nearly 2 points to 43%.

In personal healthcare, Vicks shipments increased high single digits globally and more than 20% in the U.S.

due to a late cold and flu season.

Prilosec OTC delivered solid volume growth, despite [Parago]'s late quarter generic entry into the market.

Prilosec U.S.

all outlet value share grew nearly 2 points to 43%.

While we are pleased with these results for the March quarter, we do expect future sales and share results to reflect the impact of generic competition.

Pharmaceutical volume grew low single digits.

Global Actonel volume increased mid single digits, but was partially offset by lower shipments of other minor brands.

Sales for the snacks, coffee and pet segment increased 11% for the quarter and organic sales grew 8%.

Snacks delivered double-digit volume and sales growth behind the Pringles Rice Infusion initiative in Western Europe and the Extreme Flavors initiative in the U.S.

Coffee sales also increased double digits due to the combination of modest volume growth and pricing to offset increases in green coffee costs.

P&G coffee all outlet share increased more than a point to 37%, driven by the continued success of the Dunkin' Donuts coffee expansion into retail stores.

Year 1 retail sales estimates for Dunkin' Donuts coffee are now in the range of 150 to $200 million.

Pet care sales were up versus prior year, as pricing to recover commodity costs more than offset a modest shipment decline.

Importantly, we have now annualized the wet pet food recall impacts and expect to grow the top and bottom line beginning in the April-June quarter.

The fabric care and home care segment delivered 10% total sales growth and 5% organic sales growth.

Fabric care global shipment volume increased high single digits, with double-digit growth in developing markets and mid single-digit growth in developed regions.

In developing markets, the Ariel and Ace brands each grew volume double digits for the quarter.

In developed markets, growth was led by the Gain brand.

Gain volume increased more than 20%, driven by the Soothing Sensations launch, which shipped in conjunction with the compact liquid detergent rollout in North America.

Gain laundry all outlet value share in the U.S.

is up a point to 15%.

Tide grew volume mid single digits in North America, driven by the improved cleaning initiative launched along with the concentrated formula.

Overall, the conversion to compacted liquid detergent in North America remains on track, with the final conversion wave shipping earlier this month.

Importantly, P&G has continued to build share behind this initiative.

Home care shipments increased mid single digits.

Febreze volume grew double digits behind a launch of Febreze candles and continued growth of Air Effects.

Febreze share of the instant action air care market was up 3 points for the quarter to 20%.

Cascade volume was up high single digits due to heavy orders prior to a price increase which was effective in early March.

Also Fairy hand dish washing and auto dish washing products grew volume double digits.

Batteries volume grew mid single digits, as a double digit growth in developing markets more than offset a decline in North American shipments due to soft market trends.

Duracell all outlet value share in the U.S.

was up nearly a point to 44%.

Baby care and family care all-in sales grew 8%.

Organic sales also grew 8% and organic shipment volumes were up a very strong 7%.

Pampers diapers grew volumes double digit globally, led by high teens growth in developing markets.

Russia, Poland and China continue to be growth leaders for Pampers.

In developed markets, Pampers baby stages Swaddlers and BabyDry also delivered solid growth.

Pampers all outlet value share of the U.S.

diaper market is up nearly a point to more than 29%.

In Western Europe, Pampers market leading diaper share is in line with prior year at a strong 54%.

Family care organic volume grew high single digits, behind double-digit growth on Charmin and mid single digit growth on Bounty in North America.

Charmin's strong results are due to the success of Charmin Ultra Strong.

Charmin's all outlet value share in the U.S.

is up more than a point to 28%.

Bounty's share is also up a point to 46%, a 43-year record high.

That concludes the business segment review and I'll hand the call back to Clayt.

Thanks, Jon.

Before getting into our guidance, I want to provide some perspective on the current cost environment and how we are managing it.

We are facing significant cost challenges brought on by rapid increases in both commodities and energy.

Almost all of our key material inputs are up double digits and energy costs have increased even more dramatically, with oil approaching $120 a barrel and natural gas in excess of $10 per million BTUs.

As a result, we expect to incur approximately $1.4 billion in higher material and energy costs this year.

We have managed these costs while still delivering on financial commitments through a combination of pricing, cost savings projects, including product reformulation, and a focus on driving productivity through a disciplined approach to overhead control.

We have also continued to drive innovation, coupling innovation with pricing has allowed us in many instances to increase prices while also increasing consumer value.

Material and energy forecasts for next year are even more challenging.

We are in the midst of our fiscal 2009 planning process, and we are building our plans on the assumption that material and energy costs will increase by over $2 billion versus the current year.

We expect to manage through this challenging environment by continuing to do what we do best.

First, we will innovate.

Innovation is critical to maintaining superior consumer value.

Better products are even more important during challenging times, when consumers are even more focused on value.

We will also drive cost savings.

One of the ways we will drive cost savings is through product reformulation.

We will use our deep technical mastery to enable us to utilize alternative inputs, while maintaining or improving the performance of our products.

We will accelerate our productivity efforts by reducing organizational redundancy, streamlining decision making, and institutionalizing overhead cost control behind a Hog Nog Zog target management for overhead costs.

Finally, we will drive favorable mix by trading consumers up to value-added products and we will continue to take broad pricing actions as necessary.

As a result, we expect P&G and the overall market to grow sales ahead of unit volume, and this is a trend we are already seeing.

I am confident that with these efforts, we will successfully manage through this challenging period and continue to meet the commitments we have made to our shareholders.

Now, on to guidance.

For the June quarter, organic sales are expected to grow 4 to 6%.

This includes 1 point of positive pricing and mix.

In addition, foreign exchange should add 5 to 6% to sales growth.

Acquisitions and divestitures are expected to have a negative 1 to 2% impact on sales, so in total, we expect all-in sales growth of 8 to 10%.

Operating margins are expected to improve modestly.

SG&A productivity improvements should more than offset lower gross margins, as we face another quarter of significant commodity and energy cost increases.

P&G is continuing to increase prices to offset the impact of higher input costs.

Since our last earnings call, we have announced that we will be taking several additional price increases in the United States, including 4.5% on Always and Tampax, 7% on Crest Pro Health Rinse, 7% on hand dish washing products, 8% on Swiffer refills, and 11% on Oral-B power brushes and refill heads.

These price increases will become effective between May and August and we have announced additional pricing in many other countries around the world.

Competitors, including private label manufacturers and retailers have generally been increasing prices as well.

They are facing the same commodity and energy cost pressures we have been experiencing.

Therefore, we believe we will be able to implement these modest price increases without negatively effecting P&G's market share position.

Most of the pricing benefit will be seen during fiscal 2009, when there will be a positive impact on sales growth.

Our tax rate in the quarter is expected to be about 28%.

On the bottom line, we expect earnings per share for the fourth quarter to be in the range of $0.76 to $0.78, driven by strong top line growth and double-digit operating profit growth.

Next, moving to fiscal 2008, with only one quarter to go, organic sales and volume growth should come in at about 5%.

Within this, we expect pricing to contribute 1 point to sales growth and mix to reduce sales by one point due to fast developing market growth.

In addition, foreign exchange will have a positive impact of about 5%.

Acquisitions and divestitures are expected to have a negative 1% impact on the top line.

Therefore, in total, we expect all-in sales growth of about 9% for the year.

We expect operating margins to improve by 20 or more basis points for the year, as we have seen throughout the year the combination of pricing, cost savings projects and overhead productivity improvements should offset the impact from higher commodity and energy costs.

The tax rate on the year is expected to be at or slightly below 28%.

This includes the nonrecurring favorable tax item in the September quarter of $0.02 a share.

On the bottom line, we are increasing our EPS guidance range from $3.46 to $3.50, to $3.48 to $3.50 a share, reflecting our strong March quarter results.

Now turning to fiscal 2009, we currently expect to deliver another year of top and bottom line growth, consistent with our long-term targets.

4 to 6% organic sales growth, 3 to 5% organic volume growth, about 1% of net pricing and mix, 10% earnings per share growth, and 90% or greater free cash flow productivity.

Of course our GAAP EPS growth will, for fiscal year 2009, will be higher than 10%, due to the net impact of the Folgers transaction in fiscal 2009 and the discrete tax impacts in fiscal 2008.

As we report results next year, we plan to give shareholders perspective on the underlying performance of the company in addition to the GAAP results.

However, our primary guidance will be on a GAAP basis consistent with how we handle Gillette.

To recap our plans on Folgers, during the last call we announced we will split, or spin off the coffee business.

We expect to decide on the deal structure in the June quarter and complete the transaction during the first half of next fiscal year.

Assuming we do a split, the transaction will create a substantial one-time gain in fiscal 2009.

It will also create $0.03 to $0.05 of dilution due to the loss of Folgers operating profit and stranded overheads.

As we said last quarter, we are planning to take a one-time increase in restructuring charges during fiscal 2009.

This will be in addition to our existing 300 to 400 million annual restructuring budget.

This additional restructuring will allow us to eliminate stranded overheads and offset the negative earnings per share impacts from the coffee transaction.

Net, our objective for fiscal 2009 remains to deliver underlying EPS growth of 10%, despite the loss of coffee earnings.

Underlying EPS excludes any one-time Folgers transaction impacts and nonrecurring tax impacts.

Therefore, if we back out the $0.02 gain from our first quarter, 10% earnings per share growth would translate into a fiscal 2009 guidance range for the underlying business of $3.80 to $3.85 a share.

We will provide GAAP guidance in, on a range basis once our August and year-end -- call at year end.

Now, to summarize today's call, we are focusing on the key business drivers of long-term sustainable growth.

We are delivering balanced top and bottom line growth behind the strength of our portfolio, our innovation pipeline, and a focus on productivity.

We are converting earnings to free cash flow ahead of target, returning more than 100% of this cash to shareholders through dividends and share repurchase.

Looking forward, we are confident we should be able to continue to deliver consistent, reliable top and bottom line growth.

The growth that our shareholders expect from P&G, even during challenging times, such as these.

And now we'll open up the call to your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll turn first to Bill Pecoriello with Morgan Stanley.

Question on the $2 billion higher commodity outlook and additional pricing that you're taking, just in terms of how the consumer's been reacting.

You mentioned that in some subcategories, you're seeing private label gain some share, but you're also gaining share, and also we've seen North America, West Europe overall category growth slow, so as you put through these additional prices, what are you watching in some of these subcategories, both on the growth rate of the category and any tradedown?

Thanks.

We're always watching the market shares closely, including, of course, as we said, private labels.

The experience over the last three years, and we've been going through this now for a while is, if we raise prices to recover commodity and energy costs and both other branded competitors and private labels tend to raise prices by about the same percentages because they have the exact same cost problems, we tend to see that the dynamics of the category remain relatively stable.

We have not seen, as we've talked before, substantial trade-down in those circumstances, but we're continuing to watch it and the way we of course read it is to look first and foremost, our market share positions in aggregate and then also watch the dynamics of the rest of the markets.

Bill, one quick addition.

We watch obviously volume consumption, unit consumption, and dollar market shares, and market growth.

And we watch what I would call indicator categories.

One example, paper products are generally a category that come under some pressure when there's an economic downturn, and one of the things that's been heartening for us has been the performance of our paper businesses and especially you get into product lines like the family care, tissue/towel businesses, bath tissue, paper towels, facial tissue, and in every case, we're building share.

We're not seeing the intensity of private label pressure that we've seen in past turndowns and I think the reason we're doing this is we're close to consumers.

We understand the consumer value equation.

We offer tiered product and pricing options from Charmin and Bounty Basic through value-added products, and as Clayt said, we've kept our relative pricing sharp and we've actually improved our consumer value.

Thanks, Bill.

Next we'll turn to John Faucher with JPMorgan.

Yes, good morning.

Clayt, I apologize for this, a point on clarification here.

The $3.80 to $3.85 number is before the impact of Folgers dilution or after the impact of Folgers dilution?

That is, that includes the impact of Folgers.

In other words, we're offsetting the $0.03 to $0.05 of Folgers dilution in that guidance.

Okay, thanks.

Then quickly on the inventory side, your gross margin performance was definitely better than I think people were expecting or fearing from that standpoint.

Your inventories look like they were up.

You talked a little bit about volume leverage in the quarter, any impact on the gross margin from that standpoint and is that something we need to account for in the fiscal fourth quarter?

No, not really.

I think the inventories are about in line with what we expected, given what's going on, and there should not be any fourth quarter gross margin impact.

They follow our initiative flow basically.

That's what's going on.

So inventories are up a little bit when we're in a period of heavy initiative launch and they come back down when we're in more of a sustaining period.

Thanks, John.

Now we'll turn to Wendy Nicholson with Citi Investment Research.

I wanted to ask about some of the margin performance by segment, particularly in grooming and beauty.

Grooming margins have just been on fire now for kind of two years and I'm wondering kind of at what point, I assume that's benefiting from some of the integration savings and whatnot, but at what point do those margins start to kind of flat line or expand at a lower rate?

Similarly, on beauty, it's kind of surprising that the margins are continuing to come under pressure.

I'm wondering, are you spending at an outsized rate on advertising in the beauty segment, yet still not getting the volume pickup, or is that just a negative mix shift to the emerging markets?

On grooming, we have seen a lot of progress on grooming margins and that has been a combination of synergies from the Gillette acquisition and as we have reallocated our costs across the new combined company, the Gillette segment has picked up some benefit there as well.

Clearly, we expect ongoing margin improvement from the grooming segment, but not to the degree you've seen it over the last two years.

In beauty, I think what you're seeing in those numbers is the combination of the impact of the divestiture that, where we had the business in the base period and the business is no longer in the segment and you're also seeing the fact that, yes, beauty is a competitive business right now and we are making sure that our marketing and our spending with retailers is competitive during this period.

And Wendy, quickly, it's offensive investment.

I mean we're obviously investing in Head & Shoulders.

You don't drive 17% organic volume growth and 22% organic sales growth on a mature business like that unless you're investing behind the product innovation.

We're investing in Herbal Essences, so the hot spot restage expansion, and we're defending ourselves, and there are some major initiatives by major competitors which we've talked about a number of times, and we're making sure that our consumer continues to have a chance to purchase and try our brands and products, which we think offer better performance and value.

Thanks.

Chris Ferrara with Merrill Lynch, please go ahead.

Hey, guys, just wanted to ask about the beauty category deceleration.

You guys, and I guess others have talked about as well.

It's kind of contrary to things we've seen in the past.

A.G., you talked about indicator categories.

Are we seeing somewhat of a shift?

Why is beauty not hanging in as well as it might have in the past?

And also, do you find retailers pushing private label with better placement?

Because we've seen that anecdotally in the channel.

Chris, I'm going to try to keep this simple, but as you can imagine, we're in so many different beauty categories that it's -- and channels -- different product categories, different channels, and different geographies that it can be a little more complex.

But I think in the past, we have seen slowdown in more discretionary segments in beauty and in more discretionary channels.

So Jon mentioned the slowdown in the department store channel for prestige products.

I don't think that's unusual, okay?

Across our cosmetics line in the past we've seen slowdown on some of the more discretionary items.

We were actually pretty pleased because our cosmetics business held up well, and Cover Girl particularly held up well and in fact grew share in the period.

So there are discretionary fragrance purchases at duty-free shops and airplanes.

They tend to fall off, okay, during periods of economic turndown.

So we've seen some of that, okay?

And there's no doubt that there is some slowing, as John said, but knock on wood, most of these categories are still growing and I think that's important.

That's what I remind our team.

They are slowing, but they are still growing.

As long as there's growth, there's business out there for us.

The second thing that's, that's going on is with the competitive intensity, frankly the pricing gets reduced.

When we have competitors out there basically giving away, buy one, get one free for months, that obviously reduces the value of the consumption that's going on in the market, and then when we feel we have to selectively match, that sort of compounds that issue.

We know from the past that we'll work our way through it because that kind of spending is not sustainable, and the same thing goes on with some of these launches.

Again, I don't want to pick on individual situations, but there is a country in the world right now where there's a major launch by a competitor going on, and they are spending five times what we're spending, in that market.

That is obviously not sustainable, okay?

So I think what's happening is that's depressing the consumption a little bit.

I think the fundamentals in beauty are still very good.

I think they are very good.

And the kind of beauty care brands and product offerings we have are generally affordable broadly.

So I'm still cautiously optimistic about beauty.

We have the stronger initiative program coming and we've got a lot of, a lot of good strong brands and we've got a lot of good innovation programs.

Good innovation still drives business.

It really does.

Thanks.

Next, with Deutsche Bank, Bill Schmitz.

Good morning.

Hi, Bill.

You're always a bigger advertiser then if you look broadly against your peer group.

Do you change that and become more promotional in this environment to make some of the products a little bit more reasonable for people?

I mean you've already talked a little bit of a tradedown from Tide to Gain, it's great that it stays in the family, but will you kind of tweak the promotional spending based on the environment?

Bill, the part of trade spending is essentially pricing and in an environment like this, we watch that very carefully and we try to stay competitive, as Clayt said earlier.

So that slice of our trade spending does increase slightly, okay, in this environment.

And that varies dramatically by category, okay?

But beyond that, we're trying to direct the money to consumers and shoppers because our game is basically a trial game.

I've talked about this before, but if you step back and look at our biggest single upside growth opportunity is to get trial at the target goal rates, on the new brands and new product initiatives we already have in the market, we think that's worth at least $2 billion in incremental net sales.

Okay.

So we try to direct our spending to consumers and shoppers in a way that they can try our new brands and products.

The Swiffer brand has been out for a decade.

We have something like 15, 16, 17% household trial in the U.S.

We convert 60-plus percent of that trial to regular usage.

There are a lot more than 15, 16, 17% of U.S.

households who would be interested in purchasing Swiffer and using it on a regular basis and that's just one of 20 brands that have significant trial opportunity.

So we try very hard to make sure that most of our spending is directed against the consumer, whether it goes through the trade or whether it goes direct to consumer.

And we try very hard to make sure that we're, that we're spending, on trial generating activity.

Regarding the Tide/Gain situation, what's really going on is we're growing share on Tide and we're growing share on Gain and we're growing it faster, and it's not unlike the tissue towel or family care situation.

We offer a tiered line of brands and product offerings that appeals to different consumer groups at different price points and different value equations.

Thanks.

Now we'll move to Lauren Lieberman with Lehman Brothers.

Thanks.

It's actually a perfect lead-in.

I was going to ask again about mix as being part of your algorithm particularly in developed markets, because I know since you report global business units, we can't see the impact of mix in developed markets and it's been something I've been curious about for a while.

I was surprised to hear that that's still part of your plan for fiscal '09 and how you're going to offset some of the incremental cost inflation.

I would just think there's maybe a little bit less appetite in the market for some of the value-added higher price point innovations that just drives a category slowdown, and, that would apply to everybody, not just to Proctor.

Is that not how you guys are thinking about it?

I mean what am I missing that I would think consumers would not be as interested in the next higher price point blank?

Lauren, it's all about consumer value, okay, and I'll try to give you three or four quick examples.

First of all, I think we need to be crystal clear here.

We're trying to create the right portfolio of brands and product offerings and price points.

So there's a tiered, an appropriately tiered offering that appeals to lower income consumers all the way up to higher income consumers.

But some very quick examples, the hottest item right now in the deodorant business is Clinical Strength.

We command a phenomenal premium on Clinical Strength.

We sell Clinical Strength for twice the retail price and it's flying off the shelves.

The hottest item in coffee right now is Dunkin' Donuts.

It's sold at a premium price.

Folgers gourmet line is going strong.

I mentioned tissue/towel.

Yes, on the one hand we're selling Bounty Basic and Charmin Basic, but on the other hand, we're selling a number of value-added products that, that are, can command 10, 20% premiums in a category where the consumer watches every penny.

Perfect 10 in retail coloring, we're convinced if we can get trial of this product, that there's going to be a lot of conversion.

That's sold at a significant premium, okay, to the at-home colorant offerings that are in the market.

Laundry detergents, the Tide with Febreze, the Tide with a touch of Downy, they sell well to their audience.

In fact, one of our realizations this past six months has been, yes, we've got to cover ourselves on the low end or the point of entry of the market.

That's important, but we also can't miss the opportunities for trade-up, because when you step back, we're still selling our brands and product lines at price points from $2 to $10.

These are not, make or break expenditures for consumers.

Our hottest item in oral care has been Pro-Health.

Our fastest growing line of oral care brushes has been the higher end manual brushes and the power brushes.

I could just go on and on.

Yes, the issue is value, but we can drive higher consumer value ratings and higher consumer value perception with products that are trade-up products.

Now we'll move to Ali Dibadj with Sanford Bernstein.

Hi, guys.

Wanted to ask a question about one of the levers you're pulling to offset these astronomical commodity costs.

In particular, getting a little more flavor around the cost cutting that you're doing and trying to understand I guess two parts.

First off, the mix that you have seen between Gillette synergies, these savings versus reformulations and other overhead savings, playing in so far, then how that mix goes forward.

Secondly, if you can give us a sense of examples or magnitude around those.

Well, I think that the Gillette synergies do not end completely this year, but they, they obviously trail off.

There are some additional synergies from Gillette that come in over the next two years, as we complete primarily the supply chain and the distribution center consolidations, although they become a much smaller factor in the total equation going forward.

So really the cost savings focus stays where it's been this year on very much focused on formulation and what we do on our manufacturing costs, and then as we talked before, and frankly spent a fair amount of time talking about at CAGNY, was our programs to really go after overhead costs, productivity, raising our targets for productivity improvement over the next couple of years.

That's, that's pretty much it.

Ali, I'll give you two that you can follow and a third broad area that we touched on at CAGNY.

You look at our global business shared services operation, and over the course of this decade, we will basically halve the cost of our back room on a percent of sales basis.

So that has just been a tremendous engine of productivity and every year we're finding new quote, unquote, shared services that we can consolidate, and run in that networked partnership.

The other one is you can look at our R&D productivity rates.

As strong as our innovation pipeline has been, I've been just as proud of the ability of our business units and our R&D organization to become more productive and more efficient every year and that shows up in reduced R&D as a percent of sales.

We've talked about Connect + Develop.

Last year half of the new product initiatives we brought to market had at least one external partner.

You know, there's no end to that in sight.

There are a lot of partners out there that we can work with and that, of course, I think increases the effectiveness and success rate of our innovation program, but it also obviously lowers the cost.

And then the third one, Clayt touched on.

We now have a process in place that I think anchors the various businesses depending on their sustainable growth goals.

It anchors their overhead targets, and there are a number of opportunities for us to get a lot more effective and a lot more efficient and we have very quietly launched a five-year program that is going to make us considerably more productive.

We'll move from 5% annual productivity growth in the 80s and 90s to 6% in this decade so far to 7 to 8% and we think we can sustain it.

Thanks.

Andrew Sawyer with Goldman Sachs.

Yeah, sure, hey, guys.

I was hoping to follow up on a question from earlier about consumer reaction to price increases.

I guess you guys talked a bit about what you've seen in the United States, but I was wondering if you could walk us through maybe what type of pricing you're looking at in some of the developing and emerging markets and any early responses from consumers and retailers to that, especially with the backdrop of an inflation across a broader basket of goods.

Thanks.

Well, the pricing in individual markets depends, of course, on what has happened in local currency to the commodity costs, and of course as we know, with the weakness of the U.S.

dollar, commodity and energy costs have gone up the most in dollar denominated markets.

Of course the U.S., but there are also still some markets in places like the Middle East and a few other places that tend to be still dollar linked.

In markets that are either Euro-based or tend to move with the Euro or markets where currencies have not weakened as much, we'll price accordingly in the local market, depending on what costs we need to recover.

And of course importantly, what cost increases and local currency have competitors seen.

And -- but we are taking price increases very broadly across the world.

We have taken -- because it doesn't -- no matter what currency you're in, commodity and energy costs are up, and so we have priced broadly in Western Europe.

We're pricing broadly in eastern Europe, across Asian markets and even in China.

So, we're just seeing the need to pretty broadly increase prices in most of our categories.

The only quick thing I would add is if you look the a the relative impact on consumers, let's come back to the U.S., clearly gasoline at the pump is far more of a shock than our fairly modest 3 to, usually 3 to 7% or so, most of them range.

And the other thing is they have already seen much higher increases on most of their food items because of the pressure of agricultural commodities.

So there's no doubt the consumer's under fairly broad pressure, but I'll just keep coming back to this.

It all depends on the consumer value equation, and we watch that like a hawk.

The other thing you have to remember is virtually everything we sell is not discretionary.

It's a staple.

You have to go to the bathroom.

You have to get up in the morning and brush your teeth.

You've got to shower.

You've got to shave.

Wash your clothes.

On and on, you've got to wash your clothes.

We know there's been no change in shampooing frequency.

Once these habits are established, they become part of the routine and then it's a matter of where do I get the best value, where do I get what I want and what I need?

So, so far, knock on wood, it's holding up, as we said.

Thanks.

Next up is Jason Gere with Wachovia Capital Markets.

Good morning.

Your marketing spending up 9% was pretty nice.

Just two questions, one, can you talk about what that was in the U.S., and two, with cable and network advertising rates been going up over the last few months, I was just wondering, can you talk about the number of impressions that you've seen and have you been doing any shifting to more, other alternative channels, such as online advertising and how you're managing that process?

Thanks.

Jason, you're into details that I would be guessing at and I'm not going to guess.

But I will tell you broadly what we're doing.

We are, we are looking at any and all ways to reach consumers when we believe and/or hopefully know they are most receptive to our communication and our message.

And that means a lot more diversification in our media programs.

We have major brands now with a majority of their communication in non-television.

You look at our, what we do in our feminine care business, for example, which is a big business, the vast majority of the media that we run in that is what we call alternative media.

So we're looking for effectiveness and efficiency.

We're running market mix modeling and market return on investment analyses on an ongoing basis to make sure we are spending our money wisely.

In some categories, we can spend a little less and be more effective.

In other categories, Wendy's question about beauty care, we're spending a little more in some places because we need to.

But we're trying to be strategic on the one hand and practical and pragmatic on the other.

Thanks, Jason.

Joe Altobello with Oppenheimer, please go ahead.

Thanks, good morning, guys.

Joe.

Just want to go back to the commodity cost situation for a second.

Over the last, let's call it 6 or 8 weeks, have you seen rising commodity costs start to impose some discipline in some of your more commodity-intensive categories?

Are competitors still heavily promoting in those categories?

Also, on the $2 billion incremental for '09, does that assume that commodities continue to accelerate, or does that assume some leveling off?

Well, in the second part of the question, it assumes that the feed stock prices stay at current high levels.

So we're not assuming that oil and natural gas go higher, but we're also not assuming that they go down.

And therefore, those higher feed stock costs will eventually play through the refiner and cracker spreads and through into the materials that we buy.

There's obviously some time lag between when we pay the higher prices for the materials that we buy, but we're expecting this to all flow through into our costs for next fiscal year.

Now, the first part of the question relative to promotion spending, I don't think we've seen anything significant of promotion spending cutbacks, and I think part of that's because of the time lag.

The feed stock prices are up, but the, the actual prices and the materials move on a time lag.

So what we would expect to happen is we're going to try to raise prices to recover commodities, presumably other manufacturers will do as well, and therefore there ought to be some, normal stability in the marketplace.

And that tends to be what we've seen over the last two or three years.

Joe, in terms of trade promotion rates and consumer promotion rates, they are more dependent on the competitiveness caused by the ebb and flow of innovation in the marketplace.

So I think, all the best players invest when they have a major new initiative and they defend.

There are two things that we have seen.

One, in some critical material areas, there are actually shortages.

It's not just an issue of cost.

It's an issue of availability, and frankly, it's a good time to be a leader and to be, be truly global because there are some instances where we've been able to get access and to get availability at a reasonable price when we know that all the players in the market were not able to get the material.

Okay, and that obviously enables us to, to continue to deliver performance, quality and value in our products.

Thanks.

Next, Connie Maneaty with BMO Capital Markets.

Good morning.

Hi, Connie.

I have to ask a question on batteries.

What is Duracell's split between U.S.

and international battery sales?

Has Duracell regained the market share that it lost while Gillette was being integrated?

And then finally, was the decline in the U.S.

battery sales due more to inventory management at retail or a decline in category growth?

That's a three-part question, Connie.

We'll see if we can get them.

Yes to the last one.

And recall we saw -- yes, in part, to the last one.

I think the other phenomenon that's going on is there is a battery inventory at home, and you can draw the battery inventory down a little bit.

So there's, there's a consumer behavior, an understandable consumer behavior cause, and then there's also, you know, a retailer phenomenon.

But the battery market has softened, but as we reported, our share is up.

We've regained some to most, depending on the market, of the share that was sort of bought away from us in the first year, plus.

I think we've been candid in the past that when we integrated Gillette into P&G, we were very focused on blade razor, very focused on oral care.

We did not brilliantly integrate Duracell and I think we really, though, have gotten our act together.

And you saw it in the execution in the Thanksgiving and Christmas period.

And if you've been in stores, you'll see it in our execution now.

We're just executing a lot better at retail and we have a strong experienced Duracell team.

I don't know the exact split of developing and developed, but I will say this, we still think we have growth potential in developed, okay, and we think there's a lot of growth potential in developing.

Now, in general, Gillette was very strong in developed markets and growing off a very small base in developing and we've been able to expand distribution in developing markets.

We've been able to deliver a lot more coverage and frankly, we can deliver great value.

And there's still an opportunity in a lot of developing markets to execute conversion to alkaline from zinc carbon that of course occurred in the developed markets over a couple of decades.

Thanks.

Filippe Goossens with Credit Suisse, please go ahead.

Yes, good morning.

And question on the hair care side.

Obviously hair care is a big component of your beauty business.

If you look specifically at the Pantene brand, Clayt, somewhat of a diverging, in terms of, diverging in terms of performance between the U.S.

and the emerging markets.

So my question is two-fold.

Within the U.S., how much of the weakness in Pantene is the result of category issues, or is it again, as you mentioned, in the last earnings call, a result of less than expected consumer acceptance of the last reformulation of the product and then the question obviously is what can you do to kind of boost the performance of Pantene in the U.S.?

In emerging markets, then, as my second part to the question, you have stepped up significantly your advertising spending, particularly in Latin America.

What is the initial read in terms of volume and the impact on your margin structure there?

Okay.

That's a multipart question, so let me take developing markets first.

You're right, Pantene is strong in developing markets and it's growing -- it's one of our engines of growth in China right now.

You're seeing the investment in Brazil as we begin to build stronger a hair care position in Brazil.

It has been one of our engines of growth in SEMEA, so Pantene is strong there.

Pantene has also been incredibly strong in Japan and Korea.

In fact, our hottest brand the last few years in Japan has been Pantene.

We've introduced a high end line called Clinicare.

It's been received very well by Japanese consumers.

In Western Europe, we're solid, but we're basically flat, and the issue, as we've said, is the U.S.

Now there are three things going on in the U.S.

There's a little bit of market softness, but frankly, the hair care market's still growing at a fine rate.

There are a lot of -- there have been a lot of initiatives out there from us and from competitors, and we've basically held our share.

I think we were down 0.4 in the recent period.

So basically the losses on Pantene were picked up by Head and Shoulders, Herbal Herbal Essences and Aussie.

And you're right, the last initiative did not resonate with consumers as well as we hoped it would and frankly as well as our premarket research and learning indicated it would.

So we're working, the right people are working on this and you'll see over the next 6, 12, 18 months initiatives on Pantene to get it growing again in the U.S.

That's the issue.

But if you step back, we've still got basically a 15-share brand that's, we got 14.8 or whatever share brand on Pantene, we've got a 13.8 or whatever share brand on Head and Shoulders, and if you look at the competitive brands, the biggest ones are sort of around 6, 6.5, so we still have a very strong franchise.

We don't have a wounded duck here.

We just have a big brand that we've got to take to the next level.

Thanks.

William Chappell with SunTrust Robinson Humphries, please go ahead.

Thanks.

Bill.

Going back to your commentary I guess pre, or during CAGNY, it seemed like in the U.S.

you were basically seeing kind of a channel shift, but no real huge softness in the consumer.

Now it sounds like the consumer's slowing down a little bit, maybe implies that March was kind of worse than January-February.

Is that the case, and then kind of what trends are you seeing in the U.S.

as we've moved through April?

Actually, March was a little bit stronger, so I think the channel shift you're referring to is the move to discounters and frankly discounters with what I would call clear value offerings.

And you see that in the retail, retailer reports every month.

I mean the club stores led by Costco, Sam's and BJ's have held up pretty well.

And, Wal-Mart has performed pretty well.

And I don't think that should be surprising.

Okay.

I don't think that should be surprising.

They have known value offerings in terms of their retail format and I think shoppers understand the value equation very clearly, and I think there has been a correlation between the retailers who have been clearer about their value offering.

The only thing we've seen -- the only changes we've seen is some slowing, but still growth in some of the markets and the other changes we've seen are in the consumer behavior around number of shopping trips, how far they will go to shop.

I mean for obvious reasons with gasoline getting close to $4 a gallon in some parts of the U.S., people are consolidating their trips, they are reducing their trips.

Now, the baskets are going up, and then in terms of the mix that's in the basket, our mix has been holding up pretty well.

We wouldn't be building share on 60-plus percent of our business in the U.S.

if it weren't.

So I think, the whole issue is how long does the downturn last and how deep does it get.

And we'll know more, and that's why we've been -- we'll know more in the months ahead and that's why -- that, and the energy and cost commodity pressures is why we're being appropriately conservative and cautious about next year.

Now we'll turn to Alice Longley with Buckingham Research.

Hi.

I'm looking for an update on what your organic growth rate was by geographic region.

Usually you give us a little sense of that in the U.S.

and Western Europe and local currencies and then developing markets.

I think in the December quarter, your U.S.

organic growth was 6% and then low single digits in Western Europe, and what is it now?

The North America was basically in the -- as far as organic sales growth, North America was mid singles.

Western Europe was low singles, and the developing markets, as we said, were low double digits.

And that is, you know, relatively consistent with the patterns we saw, we have seen in the last couple of quarters.

And frankly, relatively consistent with the market growth patterns, right?

Europe's 1 to 2.

Yeah.

You know, U.S.

is 2 to 4, and developing are sort of, you know, mid to high single digits and we're running at the top end or above.

Thanks.

And that's all the time we have for questions.

Gentlemen, I'll go ahead and turn the conference back to you for any additional or closing remarks.

All right.

Thank you again for joining us this morning.

And as I said at the outset, the, the IR team and myself included will be around the rest of the day to answer any questions you have.

So thanks for joining us, again.

With that, we'll conclude today's conference.

Thank you, everyone, for your participation.