寶潔 (PG) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to Procter & Gamble's first-quarter fiscal year 2008/2009 conference call.

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

If you will refer to P&G's most recent 10-K and 8-K report, 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, 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 flows less capital expenditures.

P&G has posted on its website, www.P&G.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, Clayt Daley.

Please go ahead.

Thank you and good morning, everyone.

A.G.

Lafley, our CEO, and Jon Moeller, our Treasurer and newly appointed CFO, joins me this morning.

I will begin with a summary of our first-quarter results.

Jon will cover business highlights by operating segment.

I will then provide a quick update on Folgers and what we're seeing in the credit markets.

Following that, I will briefly cover pricing, market growth rates and commodities.

Before wrapping up the call with a guidance update, I will also talk about foreign exchange.

Following the call as usual, Jon Moeller, [Mark Ursik], John Chevalier and I will be available to provide additional perspective as needed.

But before getting into the results, I want to comment briefly on the organization changes announced yesterday.

It has been my plan to retire on or about this timing for several years.

I have been fortunate to be P&G's CFO for the past 10 years, and by the time I retire next September, I will have worked for the Company for 35 years.

I'm proud of what the Company and the finance and accounting function have been able to accomplish while I have been part of it.

It has been a great experience, but I'm ready to move on.

I have been working with A.G.

and the board on a seamless transition plan which ensures strong leadership for years to come.

On January 1st, Jon will replace me as CFO.

I have known Jon for most of his 20-year career with P&G, and I have directly with him for the past 10 years.

Most of you had a chance to meet Jon at investor conferences and on your trips to Cincinnati.

Jon is an excellent business strategist and operates with the highest level of discipline.

He understands the importance of strong corporate governance.

He has a deep appreciation for the operating principles that have made and kept this Company strong for so many years.

Jon also appreciates the importance of maintaining open lines of communication between the Company and its shareholders, and I'm sure you'll find his perspective on the business insightful and helpful.

Replacing Jon as Treasurer is [Terry List].

In her 14 years with P&G, Terry has had a broad range of experiences across P&G's GBU, MDO and corporate accounting operations.

She is currently the finance leader for our global operations unit.

Prior to joining P&G, Terry worked in public accounting for nine years.

Terry is a very strong business leader, and I'm sure you will enjoy working with her in the Investor Relations responsibilities.

Terry will be attending our analyst meeting scheduled for December 10th and 11th in New York, and I encourage you to meet her there.

Now I did not plan to announce my retirement during a credit crisis, but the fact that I'm doing so is a testimony to the confidence that I have in the next generation of leaders.

After all they are going to be managing my money, too.

I'm sure you'll join me in congratulating Jon and Terry on their new appointments.

Now A.G.

would like to make a couple of comments.

I have known Clayt Daley since the late 1980s when we worked together for Steve Donovan in what is now our Fabric and Home Care business.

We have worked side-by-side on the transformation of P&G into a more diversified and more global leader in our industry.

Together we have focused on more robust strategies at the Company and business unit level, on more balanced and sustainable growth both organic and from acquired businesses, on more disciplined and reliable operations and on stronger governance and risk management.

With our colleagues on the global leadership counsel, we have developed an outstanding cadre of next generation P&G leaders, including Jon Moeller and Terry List.

I first met Jon when we asked him to move to China in the mid-1990s.

Jon managed the corporate forecast when I became CEO in June 2000.

He is an experienced and talented finance leader who has served in a number businesses and more recently as Treasurer with the responsibility for Investor Relations and Mergers & Acquisitions.

As Treasurer he has established the capital structure and strong balance sheet that will serve us well in the current environment.

He has been working closely with Clayt and with me and with the Company's leadership for the last decade.

He is the right leader to succeed Clayt.

This month P&G is 171-years-old.

Over the last year, we have been putting in place some of the next generation of P&G functional leaders to lead this Company for the next decade -- Moheet Nagrath in Human Resources, Steve Jemison in Legal, Bruce Brown in R&D, Marc Pritchard in Marketing and now Jon Moeller in Finance.

I want to thank Clayt for his many years of dedicated service to P&G, and I congratulate Jon on his appointment as CFO.

Now back to you, Clayt.

Thanks, A.G.

Now let's move on to the results on the quarter.

The September quarter was the 25th consecutive quarter in which P&G delivered topline growth at or above the Company's target.

We also delivered another quarter of earnings growth consistent with our long-term objectives and generated strong cash flow.

Our portfolio continues to be a strength as does our focus on innovation and productivity.

Diluted net earnings per share increased 12% to $1.03 per share.

This was $0.03 per share above the high-end of our guidance range.

Now $0.02 per share of our over-delivery was due to a shift of Folgers-related restructuring spending between quarters, which will have no impact on the year.

The last time we gave guidance, we expected those incremental charges to be about $0.04 in Q1 and Q2 and $0.02 in Q3 and Q4 for a total of $0.12 for the year.

After incurring only $0.02 per share in Q1, we now expect $0.03 in Q2 and Q3 and $0.04 in Q4.

Frankly, our people were simply too optimistic in how fast they could execute these incremental restructuring projects.

Now total sales increased 9% to $22 billion.

Organic sales were up 5%.

Organic volume was up 3% with mid and low tier brands growing organic volume several percentage points higher.

Pricing added 3% to sales as price increases announced during the spring took affect in the quarter.

Foreign exchange contributed 5 points to sales growth.

Disproportionate growth in developing regions and midtier brands resulted in a negative 1% mix impact.

Gross margin decreased 240 basis points.

This was slightly better than our guidance range of 250 to 300.

SG&A expense was down by 180 basis points.

Operating margin was, therefore, down 60 basis points, including the incremental Folgers-related restructuring charges.

Operating profit increased 6% for the quarter to $4.7 billion.

The tax rate for the quarter was 28.5%, slightly above guidance.

Turning to cash, operating cash flow was up 1% versus year ago at $3.3 billion.

Free cash flow was $2.6 billion.

Free cash flow was 76% of earnings below our 90% productivity target but consistent with September quarter norms.

We remain on track to deliver our 90% free cash flow productivity target for the year.

During the quarter we continued to repurchase stock at levels consistent with our three-year share repurchase program.

Now before I turn the call over to Jon for the business segment discussion, I want to remind you of a point we have been making repeatedly since our last call.

As expected, the pricing we have taken to recover commodity and energy costs has caused organic volume and organic sales growth rates to diverge and has resulted in higher levels of marketshare volatility.

You will see evidence of these dynamics during the individual segment discussions.

But despite this near-term volatility and a difficult overall operating environment, we have delivered and expect to continue delivering overall results in line with our long-term objectives.

Now let me turn the call over to Jon.

Thanks, Clayt.

Starting with the Beauty segment, the business delivered strong performance across the retail brand portfolio.

Beauty all-in sales grew 12%, and organic sales grew 6%.

Retail Hair Care volume grew high single digits behind midteens growth of Head & Shoulders and double-digit growth of Rejoice.

Head & Shoulders was led by high-teens or greater volume growth in China, Russia, Saudi Arabia and India.

Rejoice grew midteens in China.

The Pantene brand grew volume mid single digits, including double-digit growth in developing markets and low single digit growth in North America.

Pantene's market-leading US all-outlet value share of more than 14% was up sequentially from the June to September quarters but remained down about a point versus the prior year.

Retail hair color shipments increased low single digits versus prior year as 20% growth on the Nice 'N Easy brand was largely offset by declines on other brands.

Nice 'N Easy all-outlet value share in the US is up nearly 4 points to 21%, driven by the successful Perfect 10 innovation.

Unit volumes for professional hair declined low single digits versus prior year due primarily to market softness in both the US and Europe.

Fine fragrance volume was also down low singles due to slowing market growth and changes in year-on-year initiative timing on major brands.

Despite this, P&G's global value share of fine fragrances increased one full share point to 15.8%.

Skin Care volume grew low single digits, including over 20% growth on SK-II.

Olay Skin Care global volume increased low single digits despite high levels of competitive promotional activity in the US.

The Cosmetics business had a very strong quarter with double-digit volume growth.

The Cover Girl brand grew midteens, driven by the LashBlast Mascara innovation.

Cover Girl US all-outlet value share was up a point to 20% for the quarter.

In the Grooming segment, solid results on premium Blades and Razors systems were largely offset by soft Braun results.

All-in sales for grooming were up 6% for the quarter, and organic sales were in line with prior year.

Braun sales declined double-digits and volume was down midteens due to the exits from the North America home appliance and Tassimo coffeemaker businesses and soft retail markets for male hair removal products.

Blades and Razors sales grew high single digits, driven mainly by price increases taken earlier this calendar year.

Volume was up low single digits, driven by strong growth in developing markets, which benefited from the expansion of Gillette Fusion and Venus and continued growth of Mach 3.

Developed market volume was down slightly due to declines on legacy razors systems and a difficult Gillette Fusion comparison that included base period growth of over 50% in North America and Western Europe.

Importantly, Gillette Fusion all-outlet value share of the US Blades and Razors market continued to increase, growing nearly 2 points to 20%.

And Gillette Fusion's global share of male cartridges increased 7 points to 24%.

In Health Care all-in sales grew 4%, and organic sales were equal to prior year levels.

Good topline growth on the Oral Care and Feminine Care businesses was largely offset by declines in Personal Health Care.

As expected, Personal Health Care results were negatively affected by sharp declines in shipments and sales of Prilosec OTC due to the loss of exclusivity earlier this calendar year.

Oral Care shipments were up mid single digits led by the Crest brand.

Crest volume was up mid singles, including an increase of more than 20% in China.

In the US Crest market leading all-outlet value share of toothpaste was in line with prior year at 38%.

Oral-B shipments grew low singles for the quarter, including mid single digit growth in developing markets.

In the US Oral-B share of toothbrush was steady at 42%.

Feminine Care delivered solid volume growth driven by high single digit growth of the Always brand in developing markets and high-teens growth of Naturella.

Always grew behind continued marketshare growth in China and the Always Ultra initiative across the Central and Eastern Europe, Middle East and Africa region.

In the US Always all-outlet value share of the pad segment was in line with prior year at 58%, and share of the pantiliner grew 2 points to nearly 32%.

For Naturella continued market expansion in Central and Eastern Europe, Middle East and Africa drove shipment growth of nearly 30% in that region.

Sales for the Snacks, Coffee and Pet segment increased 9%, and organic sales grew 7%.

Each category delivered strong sales growth with pricing benefiting Coffee and Pet Care and with initiative-driven volume growth on Snacks.

The Snacks business delivered mid single digit volume growth, driven by solid base business growth in North America and the Pringles Stix and Extreme Flavors initiatives.

Pringles all-outlet value share of the US potato chip market is up modestly versus prior year to more than 14%.

Coffees sales were up double-digits, and volume grew low single digits behind the Folgers Roast and Ground restage initiative, the continued growth of the Dunkin' Donuts line and pricing taken in earlier periods to recover higher coffee bean costs.

P&G's market-leading all-outlet value share of US coffee was in line with prior year at about 36%.

Pet Care sales increased high single digits, driven by pricing to recover higher input costs.

Shipments declined low single digits as growth on the Iams brand, driven by the ProActive Health and Premium Protection initiatives, was more than offset by declines on Eukanuba.

Next, topline growth in the Fabric and Home Care segment was driven mainly by very strong global fabric care results.

The Fabric, Home and Battery categories each experienced significant share volatility, driven by price increases implemented during the quarter.

Sales for the segment increased 10%, and organic sales grew 6%.

Volume increased 2%, and pricing added 4% to organic sales growth.

Fabric Care shipments increased mid single digits with solid growth in both developed and developing markets.

In North America volume for the Gain brand grew low teens behind the Soothing Sensations initiative.

In North America Tide was up high single digits, driven by the launch of Tide Total Care.

Prebuying by retailers ahead of the fabric enhancer price increase that went into effect late in the September quarter also drove Fabric Care shipments.

P&G's all-outlet value share of detergents in the US was down about 2 points as lower shares on Tide were partially offset by increases on the Gain brand.

This near-term share volatility is consistent with expectations given the larger price gaps that occurred after pricing was initiated.

Home Care shipments were down versus prior year, due mainly to a strong base period that included the initiative launch for Febreze Candles and Mr.

Clean Wipes.

Volume was also down due to forward buying we mentioned last quarter, ahead of the June price increases on Dish Care and Surface Care.

US all-outlet market shares for the Dawn, Swiffer and Mr.

Clean brands were all essentially in line with prior year.

Battery shipments were in line with prior year as growth in developing markets offset a modest decline in North America.

Duracell's market-leading US all-outlet value share of alkaline batteries was down about a point to 49% for the past three months as private-label products gained share behind high levels of promotional activity.

Baby Care and Family Care delivered another very strong quarter with all-in sales growth of 10%.

Organic sales also grew 10% behind our organic volume growth of 7% for both Baby Care and Family Care and pricing of 5%.

Pampers Diapers global volume grew mid single digits, including low teens growth in developing markets.

Pampers volume in China and Russia was up more than 30% and 20% respectively.

In the US P&G's overall diaper value share was down slightly versus prior year.

Pampers Diapers share was down just over a point due to a market shift towards lower-price tiers.

This shift benefited the Luvs brand, which grew volume nearly 30% and increased all-outlet value share by a point to 7% for the quarter.

Bounty and Charmin continued to deliver strong all-outlet value share gains despite price increases to recover higher costs.

Charmin's US all-outlet value share increased more than a point to over 28% behind the Ultra Soft and Ultra Strong innovations.

Bounty US value share grew nearly 2 points to 46% behind the best Bounty ever initiative.

That concludes the business segment review, and now I will hand the call back to Clayt.

Thanks, Jon.

There are several topics that I would like to address today.

I want to give you a quick update on Folgers, the credit markets, pricing, market growth rates and commodities.

And then I will discuss foreign exchange impacts before providing a guidance update.

The Folgers exchange offer was commenced on October 8th.

On October 16th Smuckers' shareholders approved the transaction, and we think that Smuckers will provide a great home for the Folgers business.

The final exchange ratio will be based on the volume weighted average price of P&G and Smuckers' stock tomorrow, Friday the 31st and Monday, November 3rd.

It will be posted at 9:00 AM on Tuesday, November 4, and the offer will expire at midnight on Wednesday, November 5.

The actual gain we will book on the transaction is a moving target, so for now we will continue to estimate the gain at about $0.50 a share.

We will provide the actual number in the press release when the deal closes.

As I mentioned earlier, we are moving forward with our plans to spend approximately $0.12 a share or $400 million on incremental restructuring in order to eliminate the stranded overheads and offset the dilution caused by this transaction.

These incremental restructuring charges impact operating earnings and will lower operating margin by about 50 basis points on the year.

Turning to the credit markets, P&G has a credit rating in the top 5% of all publicly traded companies.

And as a 171-year-old company, we manage the business and the balance sheet for the long-term.

This philosophy has built long-term shareholder value and has serviced us well in the current environment.

We have been accessing the credit markets without issue and remain comfortable with our cash flow and liquidity.

Our businesses are largely self-funding.

We generate about $1 billion of free cash flow a month with little or no seasonality.

Now moving on to pricing.

For the past three years, we have been pricing to recover incremental commodity and energy costs on largely a dollar for dollar basis, not to recover margins.

While this puts significant pressure on gross and operating margins, we believe this is the right approach long-term.

Consumers around the world are under pressure, and we need to ensure that our brands are providing her and her family with a good value.

Most of the price increases we've previously announced went into effect over the last six to nine months.

In many cases P&G was the first to raise prices in these categories, which has exposed our brands in the short-term to larger shelf price gaps, which in some cases has negatively impacted our marketshares.

Competitors in general are raising prices as well.

They are facing the same cost pressures as we are.

We are confident that our marketshares will recover when our price gaps return to more normal levels.

Now let me briefly comment on market growth rates.

Our categories are growing 3% to 4% on a value basis in North America.

Western Europe is flat overall with some countries actually declining 1% or 2%.

Developing markets are growing at approximately 6% to 7%.

This means that global market growth on a value basis is in the 3% to 4% range.

Pricing is having some impact on unit volume growth with volume growing 1 to 2 percentage points below value on a global basis.

We're seeing continued evidence of modest trade down, but private-label shares in our categories are still only up in aggregate about a half a share point, excluding the Prilosec impact on Personal Health Care.

Our tiered portfolio strategy continues to offer consumers a range of choices.

Jon mentioned that Luvs shipments were up nearly 30%, and Gain volume increased over 10%, both of which demonstrate the benefit of our tiered portfolio.

Innovation is still driving trade up, and trade up is still working in the market.

Gillette Fusion and Venus continue to gain share.

Premium priced Clairol Perfect 10 hair coloring is growing share, despite very high levels of competitive activity.

Our patented no drip applicator eliminates the messiness typically associated with home hair coloring and provides great results in just 10 minutes.

Regenerist Micro-Sculpting Cream is the number one facial moisturizing SKU in the category at $25 per unit.

Good Housekeeping rates it more effective than department store products selling for $350.

And Secret and Old Spice Clinical Strength Deodorant, which sell for two times the category average, both continue to perform well.

So while many consumers are under increasing financial pressure, great innovation is still working in the marketplace.

Innovation works because innovation creates value.

Now let me shift to commodities and currency.

These are two megaforces which are moving in opposite directions.

Both forces will have a significant impact on our financial results but on different timing.

Let's start with commodities.

There are three important things to understand here.

First, commodity and energy markets have become increasingly volatile.

Oil moved from $119 a barrel on August 5th to $98 a barrel on September 18th, back up to $123 a barrel on September 22nd, before moving to about $65 a barrel today.

Second, there is a lag between feedstock market moves and the price P&G pays for its materials and the ultimate impact of these materials on our income statement.

Oil-based materials flowing through our cost of goods are still increasing, tracing back to the oil run-up in June and July.

We actually will see most of the impact of the steep oil price run-up in the June/July period in our December quarter results.

Third, P&G costs are not directly tied to oil, and the spot prices of many materials are still increasing.

For example, phosphate averaged less than $600 a metric ton during fiscal 2007.

Last year it averaged $1100 a metric ton, and currently it is close to $2000 a metric ton.

Sodium sulfate and soda ash are both up over 50% versus a year ago, and both are still going up in price.

LAB, which is a key surfactant derived from oil, is up 75% versus a year ago.

As such, we expect commodities and energy to increase cost of goods again during the December quarter before moderating in the second half of the year.

This will be a benefit, but it is likely to be offset by foreign exchange impacts.

Now on to foreign exchange.

Historically we have told you that foreign exchange impacts are top-line more than our bottom-line and that the bottom-line impacts are largely translational in nature and that these are partially offset by natural hedges within the portfolio such as commodities.

Now while this is still true, we have seen unprecedented volatility in the foreign exchange markets recently, even more than in the commodity and energy markets.

Since our last earnings call, we have seen almost a three standard deviation move in the euro, pound sterling and Russian ruble.

The India rupee, the Brazilian real and the Mexican peso have seen currency fluctuations of 4, 7 and 8 standard deviations respectively.

The devaluation across the emerging markets that we're witnessing is unprecedented in its breadth, depth and speed.

It is quite clear that none of the historical volatility numbers are valid in today's market.

We have also seen changes in the relationships between currencies and items that have historically provided us with a natural hedge.

As a result of these volatility dynamics, we will see larger foreign exchange impacts than we have seen previously, particularly in emerging markets.

I want to explain what is happening in emerging markets in more detail so that you understand how we will be managing this and directionally what the impact is likely to be.

To do this, let me use a hypothetical example.

Let's assume a business in a developing markets has half of their purchased raw and packing materials denominated in US dollars.

All other costs, including SG&A, are denominated in local currency.

Now let's assume a 30% currency devaluation takes place relative to the US dollar.

Input costs that are denominated in dollars go up 30% in local currency.

This is the transaction impact of the currency devaluation.

Everyone in the market experiences this transaction impact, regardless of their functional currency.

This includes both multinationals and local manufacturers.

It is effectively an increase in commodity costs, which like other commodity cost increases we will plan to recover through pricing as appropriate or through formula cost savings or other cost reduction programs.

When the earnings in this country are translated back into US dollars, they will then be worth 30% less.

This is the translation impact of the currency devaluation.

Translation impacts are much harder to recover through pricing.

The amount of pricing necessary is usually too much for consumers to absorb, and the translation impacts are not shared equally by everyone competing in a given market.

So we have exempted the fact that most of the translation impact cannot be recovered in the current year.

I realize this is an overly simplistic description because underlying commodity costs are also moving, but it helps frame the general dynamics.

Specific circumstances will vary by country, so we need to approach this on a market by market basis.

So, in general, we expect the price to recover transaction impacts, but translation impacts will flow to the bottom-line.

Now let's talk about a partial offset in commodities.

The last time we gave guidance we said that incremental commodity and energy costs would be about $3 billion this fiscal year.

The moves that we have seen since then have lowered this amount by about $300 million, which is not enough to completely offset the translation impact we just discussed.

We're offsetting the balance with our ongoing productivity and cost savings programs.

$300 million or about 30 basis points is also not enough to warrant revising our pricing decisions, but we will continue to watch consumer value very closely and make interventions as needed.

We already knew this was going to be a tough year.

Given the amount of pricing, we needed to offset commodity and energy cost increases.

That is why we have been focusing so much effort on improving productivity and managing all elements of cost with discipline.

The timing impacts of foreign exchange and commodities will, of course, be different.

Currency impacts will begin hitting the income statement immediately in the second quarter, while commodity benefits will show up later in the year.

This is why I said at the Bank of America conference last month that there's going to be some sales and earnings lumpiness on a quarterly basis until the markets settle down.

With that, let me move on to guidance.

We have historically provided relatively narrow guidance ranges.

This was when volatilities were lower.

With the volatility that we're seeing today in the commodity and foreign exchange markets, we think it is only prudent to widen these ranges.

For fiscal 2009 P&G projects organic sales growth of 4% to 6%, in line with our long-term targets and unchanged versus our prior guidance.

Within that, price mix should contribute to the 3%.

Foreign exchange is now estimated to have a negative 1% to 2% impact.

Acquisitions and divestitures will reduce sales by about 1% to 2%.

In total, we expect all-in sales growth of 1% to 3%.

This is 4 points lower than prior guidance.

All 4 points on both the top and the bottom end of our sales range are solely due to foreign exchange.

Organic volume is still expected to grow 2% to 3%.

Gross margin, operating margin and tax guidance is unchanged versus our last call.

We are widening our fiscal year 2009 EPS guidance to $4.15 to $4.25 per share versus our prior guidance of $4.18 to $4.25 per share.

This maintains the top end of our range, but recognizes continued volatility in both commodity and energy markets and foreign exchange.

This range includes the estimated Folgers onetime gain of $0.50 per share and about $0.12 per share in incremental restructuring charges.

Turning to the December quarter, organic sales are expected to grow 4% to 6%.

Within this, price mix should contribute about 4%.

Foreign exchange is estimated to have a negative impact of 2% to 3%.

Acquisitions and divestitures will reduce sales by about 2%.

So, in total, we expect all-in sales to be about flat, ranging from negative 1% to plus 2% for the quarter.

We expect organic volume to be flat to plus 2%.

The credit crisis does appear to be having some impact on trade and pantry inventory that will impact October/December volume.

We expect earnings per share to be in the range of $1.45 to $1.50, including the $0.50 from the sale of Folgers and the $0.03 a share of additional Folgers-related restructuring charges that I mentioned earlier.

Commodity costs will impact the December quarter more than September, but we will see a greater benefit from pricing.

As a result, gross margins should show some improvement versus the September quarter.

Operating margin will be down modestly versus the prior year as productivity savings largely offset reduced gross margin.

In summary, P&G continues to deliver on our financial commitments.

We're growing organic sales within our long-term target range of 4% to 6% and delivering double-digit earnings per share growth.

Our cash flow and our balance sheet are both strong.

The only real change is a prudent widening of guidance ranges reflecting the current marketplace volatility in both commodity and currency markets.

Most importantly, we remain committed to the fundamentals which we know build our business over the long-term.

We continue to focus on leading innovation and improving productivity to deliver superior consumer and shareholder value.

This focus on delighting consumers with trusted household and personal care products that consumers purchase weekly and use daily gives me continued confidence that P&G will deliver target growth over the long-term even in a very challenging economic environment.

And now we will take your questions.

(Operator Instructions).

Nik Modi, UBS.

First, I just wanted to offer my congratulations to Clayt and Jon and Terry.

Onto my questions, it is pretty clear from almost every company that's sorting across global tables that emerging market growth has held up in the September quarter.

But most investors are really worried about the environment since October and going forward.

Can you just provide some perspective on what you saw after the quarter closed in terms of October trends and if you saw some kind of collapse or if things are still steady-state as they were in September?

Well, no collapse.

We are, as you heard, we are projecting volume growth in the October/December quarter flat to up 2%.

So we're expecting some moderation in volume growth, and that would apply to emerging markets as well.

But we're certainly seeing no dive, if you will, in the growth rates.

Nik, I just got back from a week in Asia mostly in -- a lot of it in China.

GDP growth rates are slowing there, but they are still 9%.

Okay?

And while we're seeing some moderation in volume, a fair amount of that is due to the fact that we're leading pricing in developing markets, too.

So, for instance, in Central and Eastern Europe and Middle East and Africa where we were last month, we expected some moderation in volume, but our net sales trends have stayed strong at double-digits in (inaudible).

So I would say based on everything that we see, it is still holding up pretty well, and we are counting on emerging markets to continue to be half or more of our growth.

John Faucher, JPMorgan.

The calls just are not going to be the same without you.

I have to say that.

And a quick question on the organic sales growth target for the quarter.

As you look at that price mix number, plus 4%, that is up 2% sequentially, is that more the pricing in Q1 rolling through?

Because it sounds like given the commentary about brands like Luvs, etc.

that the mix is going to stay at least as negative as it was this quarter.

That is correct.

It is going to be priced.

We had a number of price increases that were announced in the spring and summer that have become effective in the October/December quarter.

Jon, if I could just say one other thing, too, on the mix side.

Jon and Clayt in their comments mentioned that we are also creating value in the mid to upper end of a number of our categories with lines like Clinical Strength Deodorants, Perfect 10, the new line of Olay that was just announced, and you've got to remember we don't have one consumer here.

We have a series of consumer segments.

They all have different value equations, and we're trying to offer a balance.

So affordable entry items like Luvs and Gain, Bounty and Charmin basic, etc.

at the opening price points, and again items at the higher end, which represent a good value versus alternatives that may be sold in different channels.

Bill Pecoriello, Morgan Stanley.

Congratulations to Clayt, Jon and Terry.

A question more digging into the U.S.

since mid-September when we saw this very steep falloff in consumer confidence.

Just give us a little bit more color where you are seeing the further tradedown to lower tiers, consumers putting off purchases you mentioned.

Deloading the pantry, slower category growth, accelerated channel shift.

Where exactly it has changed the most on the margin since mid-September?

Bill, I guess the first point that I would make, which I think is incredibly important, is while categories and markets are slowing in the US, they are still definitely growing.

Okay?

So whether it is on a unit volume basis or whether it is on a net sales basis, we're still looking at growing markets in the US, which is a different situation than Western Europe or Japan, for example.

And I think that is important.

The second thing I would say is, while private-labels are clearly growing, in 19 or 20 of our top 24 categories they are not impacting us.

We are either holding or growing.

So there are a few places where we are being impacted.

We mentioned in Jon's comments, we're being impacted in batteries.

This is not unusual in recessions.

Battery pantry inventories get drawn down, and consumers move more of their purchases into private-label.

In fact, it is not unusual for consumers to try more private labels during economic downturns.

We are seeing some move to private-label in Coffee.

We're holding our share.

We're seeing some move to private-label in Fem and Pet.

Although off a very small base, we're holding our share.

Obviously Prilosec we're getting hurt by the generic in the first year of launch, and we have reported that.

But those are pretty much the markets where the private labels are having any impact on us.

Fortunately in the categories like Baby Diapers, like Family Care, Tissue/Towel is one that is usually affected in a recession, and we're growing share on towels, and we're growing share in bath tissue.

So I think we have done -- the thing I like about the way we have gone into this downturn is we have stronger portfolios in place across categories and stronger portfolios in place across leading brands.

And most of the share volatility we have seen, the modest share loss have been more tied to us leading pricing than they are tied to some move that is being made by a competitor or a move that is being made by private-label.

Lauren Lieberman, Barclays.

I guess a question.

In the press release, it was mentioned the translation -- or sorry, the transaction benefits SG&A based on inventory levels.

If you can just -- because, Clayt, you gave good detail on the hypothetical example, but can you explain how that works?

Is that something that is sort of one-time in nature, probably does not repeat, how big it was as a contributor to SG&A this quarter?

I will let Jon take this one.

The impact that we've talked about in the quarter is simply balance sheet revaluation impact, so it is one-time in nature.

The dynamics that Clayt talked about in terms of transaction and translation are ongoing, and the amount was not something we're going to get into in detail.

Bill Schmitz, Deutsche Bank.

Clayt, we're going to miss your pretty face on CNBC in the morning, and congratulations to both Jon and Terry.

Can you give us some of your assumptions on currency?

Because I know you guided to negative 1 to 2 for the fiscal year, does that assume current spot prices, or do you guys have a forecast?

If I had a forecast, I would be at -- if I thought I knew where this was going, I would be at a trading desk.

But no, we don't view ourselves at any point in time as any smarter than the forward curves on these currencies, and that is why I think that through the balance of the year, we're going to probably see this thing move around.

Ali Dibadj, Sanford Bernstein.

A little bit of clarity, if you would, please.

So it looks like for the year driven mainly by foreign exchange, your top-line comes down by about 4%.

Your commodities come down by $300 million less than I would have expected.

But your EPS obviously does not change nearly as much as I guess I would expect given those two things.

So what other things are you doing to cut costs, and in particular, I want to go back to this SG&A expense, down 180 basis points this year.

I think you really do need to break that out and try to help us understand how much of it was this one time it sounds like foreign transaction gain?

How much of it is other things, and how much should we think about those elements as you break them out going forward, please?

We will be talking about this in more depth in December.

Recall our conversation that we began at CAGNY in February.

We have been working for now three years on a productivity and growth program.

We have test marketed a number of the initiatives in the businesses and in the geographies, and we're now rolling them out.

And some involve organizational structural simplification and de-duplication.

Some involve work processes that enable us to focus on the fewer things that deliver the most value.

In Fabric Care, for example, they have basically cut about 40% of the initiatives in their initiative portfolio on the small end.

They have focused on the larger sized initiatives, and they have been generating a lot more incremental sales profit and ultimate value.

And we're rolling this system, which, of course, we have an acronym for, across all the other businesses.

So we're driving productivity hard.

And, as we said before, this is not a linear program.

We are in sort of the first year when we're beginning to roll it more broadly, but this is a five-year program for us.

And we think it is going to have a meaningful positive structural impact on the Company, and we hope we will end up with sustainable competitive advantage when we're done.

But it really is attentiveness to productivity.

The other thing I would say is we have been very agile and flexible in the management of our formulation input materials and our formulation costs.

We have talked about this before.

We can pretty much formulate on the run in all of our formulated Household Care and Personal Care businesses.

And then lastly, I mean major initiatives like the move to compaction and concentration have real and significant cost takeout and, therefore, profit impacts over time for us.

So it is all part of a program.

Relative to the sustainability of the SG&A decrease, you saw that dynamic each of the last two quarters.

We have talked about next quarter continuing to improve SG&A and largely offsetting the gross margin impact.

So you should assume that these productivity efforts are sustainable going forward.

The other thing I think we should comment on here is we try to build a financial plan for the fiscal year that assumes everything does not go right.

And so last year it was commodities, and this year it is emerging market currencies.

So I think what you're seeing here is you're seeing the impact of a Company that tries to make sure it builds a financial plan it can deliver.

Chris Ferrara, Merrill Lynch.

Just following up on that, again, I mean assuming you had FX turn negative commodities got better but not enough to offset.

You have slowing categories.

You need to cut costs more, and you have not changed your organic top-line growth rate at all.

I mean I guess more conceptually, do you guys feel a little bit stretched at least in the near-term?

Well, I think as I alluded to in the last question, and as I think is quite clear in the fact that we widened the guidance ranges, I think the plan for this year has tightened up versus where it would have been two months ago, three months ago and, frankly, our ability to absorb this substantial emerging market currency move that has occurred.

But, as I say, I think it is also a testimony to the strength of the plan.

That is what I was going to say.

We're basically on plan.

Recall when we dialogued three months ago and we outlooked 0% to 3% organic volume growth for the quarter just completed and we delivered 3%, there was a fair amount of feedback that we were being too cautious and too conservative.

But all we were doing was looking at what we were seeing in the markets and trying to be realistic about what we are seeing.

And that is what we're trying to do in October/December.

As Jon and Clayt pointed out earlier, we do have a little pricing momentum, and we do have an initiative program that has some positive mix.

So if you look at our numbers, we're being a little more conservative on the volume side because we think it is going to be a tough quarter, especially for US and Western European consumers, and we think we're going to get a little bit of pickup on the pricing and mix side.

The other thing I want to conclude, and I think this is important, in the past when we have given a guidance range, everybody seems to assume that we are going to make the top of the range.

That is not the assumption that you should be making in this environment.

Andrew Sawyer, Goldman Sachs.

Congratulations to everyone all around.

Just kind of drilling in a little bit on some of the business unit margins, in thinking about some of the divisions where maybe you have a little bit more commodity exposure like Fabric and Home and Baby, Baby and Family, I was kind of struck by the pretty strong margin behavior posting in Baby and Family.

In contrast to Fabric and Home, it had a bit tougher quarter.

I was wondering if you could walk through some of the drivers of each, especially with Fabric and Home having presumably some benefits from compaction flowing through?

Yes, I think really a lot of this is timing of pricing, that the pricing that has occurred in Baby and Family was largely implemented, and therefore, that business has managed to do a better job of maintaining the margin.

And, frankly, a lot of the Fabric Care pricing did not go into effect until the October/December quarter.

That is part of it, and the other part of it is Fabric bore more of the brunt of the commodities, especially the inorganics that Clayt detailed in his comments.

Jason Gere, Wachovia.

Good morning and again congratulations to everyone.

I was just wondering if you could talk a little bit about the marketing mix?

A.G., in the past you have been talking about really stepping up the in-store communication.

So I was wondering if you could talk or share a little color on how you are measuring that and how that is transpiring in this very difficult US consumer?

Okay.

There are -- I thing there are two shifts that I would talk about this morning.

The first one is actually a shift in the communication mix.

Okay?

You will have seen in recent months more what I would call performance/value or value reframing communication from most of our major brands.

Fairly hard-hitting, fairly comparative, very clearly educating, informing, reminding the consumer of the value that is inherent in the performance of our brands.

And there are all kinds.

Washing up twice as many dishes, getting your baby a good overnight rest for a very modest amount of money.

You know, you can shave for less than $1.00 a week with the best performing shaving system in the world, that kind of stuff.

And frankly, I think some of our businesses and brands were a little slow getting to that communication mix.

But we're getting there now, and you're going to see a lot of it from us, and we know it works with consumers.

Okay?

The other side of the mix is the one that you referred to.

We're clearly shifting more of our effort into the store, one obviously in a more recessionary type of environment.

You know more decisions are made in the store, and we have to be competitive in the store.

There is also more -- we're getting better at measuring the effectiveness of certain in-store communication vehicles.

The other thing we're doing is we're clearly targeting more, and that means for some of our brands that have more teams and a younger target, the money is shifting to the Internet or it is shifting to some alternate medium.

So I think you're going to see us -- hopefully you will see us continue the market mix model on a regular basis to analyze our marketing return on investment and to shift the dollars where they deliver the most value to the consumers we serve.

Connie Maneaty, BMO Capital Markets.

Good morning and also congratulations to everyone.

Another question on currency.

The currency impact is actually less than what I was figuring it was going to be.

I'm wondering if it has to do with country mix.

Because there are some countries against which the dollar really has not risen, including China, Japan and Venezuela.

So my question is that what percentage of sales do those three countries in particular represent of total?

And secondly, since you do not break out geographically, what percent of sales in total and profit does the US represent?

Well, I think, as we have said, the US represents roughly 40% of sales and well over 50% of our profits.

And obviously during this period, having a large, very profitable US business is a huge asset in this environment.

Your assumption is correct.

We have a big and profitable business in China, and the Chinese currency has not moved.

A similar situation in Venezuela.

We can give you the exact numbers on the phone later in the day, or we can get you closer than I can spontaneously here on the call.

But yes, there is no question about the fact that our business mix is somewhat of a benefit here.

The fact that we are overdeveloped in China, the fact that we are overdeveloped in the US.

We do not like the fact that we are underdeveloped in Latin America, and we are, frankly, working hard to grow our Latin America business.

But in some of the places where the currency moves have been the most severe, they have affected us a little bit less.

Linda Bolton-Weiser, Caris.

Being that you are looking for additional ways to improve profitability and reduce costs, etc., maybe you could touch on a few of those kind of businesses where there's a lot of room for improvement and maybe touch on some of the actions or thoughts you're having about those businesses, specifically maybe Pet Care, Braun and even what is going on with Pantene and some of the Hair Care?

Okay.

I will start.

First of all, our Hair Care business is the most profitable Hair Care business in the world.

So that is not one where we're worried about the profit side.

And they actually had a pretty doggone good quarter.

Our five biggest Hair Care franchises all had pretty good topline growth, and we deliver the best margins in the industry by a fairly wide margin.

So I do not worry about profitability and margins there.

We do have a few tougher businesses.

You mentioned Braun, you mentioned Pet Care, and I would also add Wella.

On all of those, we have got very active plans in place.

Robert Jongstra is on the Wella business, and his, you know, job one is to improve the structural attractiveness of that business, and that involves obviously getting after the cost structure and improving the margins.

Juan Pedro Hernandez we just moved to the Braun business, and he has got the same goal.

And you see that we are already starting to shut down or move away from parts of the Braun business that are simply not attractive from a structural cost or profitability standpoint.

Pet, we're actually making progress on.

Now it is fair to say that we are not at the margin levels of some of our best-in-class competitors, but we're making steady progress.

We've got a very good plan there, and I think if we execute it, which we intend to, over the next few years, we're going to be in pretty good shape.

Alice Longley, Buckingham Research.

My question is on your volume forecast for the year.

You're still holding to 2% to 3%, and yet the forecast for the December quarter is 0% to 2%, which seems to imply that you expect a pick up in volume in the March and June quarters.

Can you explain why we should see that?

Well, I think we tried to talk about the fact that the October/December quarter is being impacted.

We're seeing it in some trade inventory impacts as customers not surprisingly in this environment are trying to preserve cash and reduce their exposure to the credit markets.

And you're right.

We think that the second half will kind of move back more into the range.

And, of course, we delivered a very strong volume number in the first quarter at 3%.

So against our guidance of 2% to 3% on the year, it puts us in a very good position.

And I guess the last thing I would say is the pricing will be in place.

Looking at what has happened in other categories, usually over three to six months the pricing relationships return to sort of status quo before.

And we know we pick up -- we're going to pick up a little bit of topline momentum when that happens.

Bill Chappell, SunTrust.

Just a question on the price increases.

As you look beyond this next quarter, is it a question of when the price increases start to roll back or if they roll back?

And I guess with that in mind, is it retailers that will eventually try to push for the rollback, or will it be price gaps where you need to -- and trade down that drive that I guess in light of the current commodity recession we are seeing?

Well, first of all, remember that we're not seeing that commodity recession.

(multiple speakers).

You may be seeing it on television, but we're not seeing it in the reality in the marketplace.

Because remember, there is a lag in any change in crude oil pricing.

It can take three, six, nine months -- okay -- to move through our materials and, frankly, the inventories that we carry and the inventories that retailers carry.

Hey, listen, just so we are crystal clear on this, if commodities really move down in a meaningful way, we will adjust our pricing.

We have always done that.

Okay?

And you see what we do in our Family Care or Tissue/Towel businesses.

You see what we have done historically in our Coffee businesses.

We're in the business of delivering good consumer value in the store and in the home and staying competitive.

So we will move if there is a reason to move.

What we're trying to say is, we just don't see it yet.

Okay?

We don't see it.

We see somewhat less commodity cost pressure, $300 million less, and we see an opportunity for commodities to improve in the out year.

Okay?

But we're still looking at the toughest year in this Company's history.

We're still looking at $2.7 billion in higher energy and commodity costs that we have to eat.

Last year was the previously toughest year in this Company's history when we had to eat $1.5 billion in incremental costs.

So we've still got a pretty tough commodity picture out there.

I think the one thing that we would say is we have taken most of the pricing that we have to take, except for the pricing we are going to be taking in emerging markets to cover the transaction component of currency.

We're obviously going to watch price spreads very carefully.

We're not going to let our competitors buy our business away from us by undercutting us on price.

But so this is the kind of thing where the market will play out during calendar 2009.

And remember that if we are in an environment in the future sometime when prices are going down, we would expect some pickup in volume.

That will conclude today's question and answer session.

Gentlemen, I will turn the conference back to you for any additional or closing remarks.

Thank you.

Thank you all for joining us today.

This will be my last conference call as I thought last night I have done about 50 of these conference calls, and I look forward to seeing you at our analyst meeting that will be held in the TimesCenter in New York City on December 10th and 11th.

You will receive a formal invitation within the next two weeks that will provide all the details.

All of us will look forward to seeing you there, and that concludes today's call.

And, as I said earlier, we will be around the rest of the day to take follow-up questions on the phone.

Thanks very much.

And with that, we will conclude today's conference.

Thank you, everyone, for your participation.