寶潔 (PG) 2009 Q3 法說會逐字稿

Good morning and welcome to Procter & Gamble's quarter-end 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, 10-Q 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 impact 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 will turn the call over to P&G's Chief Financial Officer, Jon Moeller.

Thanks and good morning, everyone. A.G. Lafley, our CEO and Teri List, our Treasurer, join me this morning. I will begin with a summary of third-quarter results. Terry will cover business highlights by operating segment. I'll then outline our priorities before updating guidance. Following the call, Teri, Mark [Ersing], John Chevalier and I will be available to provide additional perspective as needed.

We had a good third quarter in light of a very difficult macro economic environment. We continue to grow organic sales despite shrinking global GDP and rising unemployment. And importantly, maintained global value shares. Organic sales were up 1%. Diluted net earnings per share were $0.84. This was towards the high end of our guidance range of $0.78 to $0.86 per share. Core earnings per share was up 8% versus year ago. Excluding foreign exchange, earnings per share grew strong double digits. Operating margin was up 30 basis points as cost savings, productivity efforts and price increases more than offset volume deleverage, higher commodity costs and about 60 basis points of incremental folder's restructuring charges.

We had a strong cash quarter, generating $3.5 billion in free cash flow or 136% of earnings. Our free cash flow target for the year remains at or above 90% of earnings, excluding the non-cash folder's gain.

Earlier this month, we increased our quarterly dividend by 10% from $0.40 to $0.44 per share. This is the 119th consecutive year since we were incorporated as a company in 1890 that we have paid a dividend, and the 53rd consecutive year the dividend has been raised. This is notable in a year when many companies will fail to increase or even eliminate their dividends.

We also continue to repurchase shares. Fiscal year to date, we have repurchased $6.3 billion of P&G stock. We've purchased $16.3 billion of stock since the July 2007 inception of our three-year stock repurchase program.

Most important, we have continued to invest, in innovation, commercialization, capabilities and capacity. We continue to introduce new products and expand into new markets. We continue to focus on bringing value to consumers' lives. We're making decisions today with an eye toward what will make us stronger tomorrow. This is the hallmark of our company, one that has thrived for over 170 years.

While results are good in this environment, they are below our long-term targets of 4% to 6% organic sales and double-digit earnings per share growth. Let me explain why this is and how we think about it.

Our long-term financial model is fairly straightforward. Most of you know it well. Top-line growth is comprised of 3 to 4 points of market growth and December 1 to 2 points of share growth mix and white space expansion. Combined with operating margin expansion of 50 to 75 basis points, this drives double-digit earnings per share growth.

There are four important assumptions in this long-term model that are causing deviations in the near term. The first is market growth. Market growth rates have declined in both developed and developing markets, driven by increases in unemployment, reductions in household wealth, consumer credit issues, and fear. Our categories in aggregate are growing, but they are growing 1 to 2 points below the 3% to 4% assumed in our sustainable growth model. We expect that to continue until a broad-based global economic recovery takes hold.

The second assumption that is implicit in the model is constant trade inventories. Credit and pricing dynamics drove reduction of inventories at some retailers, distributors, and wholesalers. We saw the impact of this in both the October-December and January-March quarters in developed and in developing markets. This had an additional negative short-term impact on sales.

A third assumption is a stable commodity environment. This clearly has not been the case this fiscal year. Year to year, net commodity impacts remain at about $2 billion. Over time, we are able to recover about 75% of higher commodity costs through pricing. But this pricing can lead to near-term share volatility when we are the first manufacturers to price across markets and categories.

The fourth important assumption over long periods of time is stable foreign exchange. As we have talked previously, we have witnessed dollar strengthening that is unprecedented in amount, breadth and speed. This has had a significant impact on our top and our bottom line. We price to recover the transaction impact of currency, which impacts every company in a market.

The translation impact, which is negative for US-based companies, but neutral or even positive for non-US competitors, passes through to the bottom line. Currently these impacts are meaningful. Absent foreign exchange impacts, our third-quarter earnings would have been up strong double digits.

While these short-term macro economic fluctuations are important, they don't guide the majority of our actions, which are focused on the fundamentals we know are critical to long-term success in our industry. Fundamentals like superior consumer value, innovation, cost and cash discipline and productivity improvement. Focusing on these items and funding them will allow us to maximize results in both the mid and long term, and will have a much more enduring impact on our business than short-term trade, commodity or FX volatility. I'll talk more about this towards the end of the call.

The last thing I want to address before turning the presentation over to Teri is volume. Organic volume declined 5% in the quarter. This was driven by retailer destocking, foreign-exchange-related pricing in developing markets and market contraction in more discretionary categories. We have already spent a fair amount of time on FX transaction impacts in past conversations. But I want to revisit it one more time because absent a clear understanding of this dynamic, it is very hard to put current volume trends in context.

Currency markets impact commodity costs because many of the commodities we purchase can only be bought in dollars. So when local currencies devalue, commodities increase in local currency terms. The example I will use is fluff pulp, which is used in Baby and Feminine Care products. Recently, the dollar cost of fluff pulp has come down 7% versus year ago. Because fluff pulp is priced primarily in dollars and Latin American currencies in aggregate have devalued by about 25% since July 1, fluff pulp is actually up 18% in these markets in dollar terms. In places like Russia and the Ukraine, where currencies have devalued 30% or even 40%, the cost of fluff pulp is up even more in local currency terms.

If not addressed, these commodity cost increases can quickly compromise the structural economics of a business. If we don't price to recover the transaction impact of foreign exchange, our ability to fund investments in innovation and market growth would be greatly diminished.

Price increases of this magnitude can have a fairly dramatic short-term impact on volume. Retailers and distributors reduce the volume of inventory they are carrying to manage overall dollars. Consumers reduce pantry inventory and consumption. Volume decreases in developing markets where currencies have devalued account for over 40% of the volume decline on the quarter. All our years of experience managing through these types of situations across a wide range of emerging markets have taught us that while painful, pricing to protect the structural economics of our business is the right thing to do.

Market size reductions in more discretionary categories also had a large impact on volume. For us, this includes Fragrances, Salon Hair Care, and Braun appliances. These three businesses accounted for 20% of the organic volume decline on a quarter. While these discretionary categories may be out of favor in the short term, we take a longer-term view. Twenty-five of the last 100 years in the United States have been characterized by some form of recession. Seventy-five years have been characterized by extension. Our objective is to design portfolios to win in years that represent 75% of scenarios, not 25%.

I will make two points in the way of summary. First, the choices we are making on pricing, on portfolio, on investments in innovation, on consumer value and productivity, are guided by what will allow us to win sustainably over the long term.

Second, we are confident in our long-term prospects and are reasonably pleased with our short-term results. We are growing organic sales, earnings per share and cash. We are maintaining value shares and we are making investments in innovation, commercialization, capabilities and capacity.

With that, let me turn the call over to Teri.

Thanks, John. Starting with the Beauty segment, organic sales were in line with prior year as the benefits from higher pricing were largely offset by a 5% decline in shipment volume. There are a couple of key factors driving these results.

First, there are elements of this segment that are more discretionary compared to the balance of our portfolio. As Jon mentioned, the global economic slowdown caused a significant market contraction in the prestige Fragrance category. While we continued to build share and prestige, shipments were down more than 20% due mainly to significant market contraction and trade inventory destocking. The volume decline in prestige accounted for over 40% of the organic volume decline in beauty.

Beauty shipments were also negatively affected by retailer and distributor destocking, mainly in the Central and Eastern Europe, Middle East and Africa regions, following price increases taken to offset the impacts of foreign exchange rate movements on our local cost structure. Beauty shipments in the senior region were down high teens versus the same quarter last year, and accounted for newly half of the volume losses for the Beauty segment.

Looking across the categories, P&G's global Retail Hair Care business grew value share by nearly a point to about 26% of the global market. In the US, Retail Hair Care all outlet value share was up about 0.5. Value shares for Pantene, Head & Shoulders, Herbal Essences, and Aussie were all roughly in line with prior year with a net share gain due to the addition of the Gillette Hair Care brand.

In US hair color, Nice 'N Easy value share is up nearly 2 share points versus prior year behind the premium priced Perfect 10 initiative, which is more than offsetting declines in minor hair color brands.

Skin Care organic volume declined mid-single digits following price increases in the North America and CEEMEA regions and trade inventory reductions in response to slowing market growth in China. Encouragingly, P&G's global value share of the facial skin care market was up nearly a point to more than 12% behind the continued expansion of Olay in developing markets.

Olay all outlet value share facial moisturizers in the US also increased about 0.5 a point this quarter to over 43% behind the launch of Olay Pro-X. Pro-X, which retails for $40-$50 per item, has achieved about 5% value share after only three months in the market. For perspective, this makes Pro-X comparable in size to some of the entire brand franchises we compete with.

In addition, SK-II, P&G's premium skin care brand, grew shipments high single digits this quarter behind innovation and facial treatment essences.

The antiperspirant and deodorants business was particularly strong this quarter, with shipments up mid-single digits. Growth on the Secret, Old Spice, and Gillette brands was driven by the continued success of the clinical strength and professional strength initiatives plus several new product and commercial innovations on Secret that launched this quarter. Secret all outlet value share in the US is up 0.5 a point to more than 16% of the market.

In the US Color Cosmetics business, our market-leading Cover Girl brand built all outlet value share on both a unit and value basis in a category that was essentially flat with prior years. However, Cover Girl shipments were down high single digits this quarter due to sharp retailer destocking.

To summarize Beauty, we continue to be pleased with the fundamental health of our Beauty brand and their growth prospects over time. But we do expect some continued pressure from retailer and distributor destocking. It's also likely that the market for prestige Fragrances will remain soft, given its discretionary nature.

On the positive side, we continue to see strength in our premium beauty offerings, such as Olay Pro-X, Secret Clinical Strength, Nice 'N Easy Perfect 10 and Gucci fine fragrance, reinforcing the importance of delivering a continuous stream of leading innovations, as well as having brand portfolios that can serve the needs of a wide range of consumers at multiple price points.

In grooming, market contractions and inventory reductions significantly impacted shipments, resulting in a 4% organic sales decline. These impacts were particularly acute in Braun, where shipments were down more than 20%. These products are considered more discretionary in tight economic times, particularly in developing markets.

In Blades and Razors, volume declined high single digits, as Fusion shipments increased high single digits were more than offset by a double-digit decline in legacy systems. The growth of the flagship Fusion brand was led by Western Europe with shipments up double digits and in Japan with volume up more than 30%. Fusion value share in the US was up about 3 points versus prior year, and is now over 29% of male Blades and Razors. P&G's past three months value share of all male Blades and Razors is now over 70%.

Fusion is also building share outside the US. In Western Europe, Fusion's share is up nearly 4 points to about 23%. In female Blades and Razors, Venus shipments were down mid singles globally and in the US. However, the brand built unit and value share in the US over the past three months. Again, retailer destocking and market size contraction on a unit basis reconcile these diverging trends.

In Health Care, organic sales were down 2% behind soft results in Personal Health Care and lower shipment volume of Oral Care and Fem Care in the senior region following FX-driven price increases.

As expected, Prilosec OTC continues to be impacted by the loss of market exclusivity in March of 2008. Personal Health Care top-line results were also negatively affected by one of the mildest cold and flu seasons in years according to the US Center for Disease Control and Prevention. This led to a significant contraction of the respiratory care market. As a result, fixed shipments were down 20% in the US for the quarter. However, P&G's all outlet share of the US respiratory care market was in line with prior year on both a unit and value basis.

Oral Care volume declined low single digits as double-digit growth for Oral-B in Western Europe, driven by strong power toothbrush growth, was offset by lower shipments in the senior region following foreign exchange-driven price increases.

Trade inventory reductions in markets like Russia and Turkey led to a mid teens reduction in shipments in the region. Oral Care volume in North America was down mid singles due mainly to soft power toothbrush shipments and market contraction in the tooth whitening segment.

In the US toothpaste market, Crest increased its all outlet value share leadership, growing to nearly 38% of the market. Crest Pro Health continues to be the primary driver of Crest's share gains in the US. Additionally, initial results of our recent introductions of Oral-B tooth paste into Benelux and Brazil are off to a solid start in the first few months in the market.

Feminine Care volume declined low single digits due almost entirely to market impacts in CEEMEA following our FX-driven price increases. In the US, P&G delivered solid market share performance across the Always pads and liners and Tampax tampon segments. P&G's all outlet value share of the US Fem Care category grew 0.5 to over 51%. Always Infinity, which launched last fall, is delivering good results in the US pad market with market share of 6%. We are continuing to support the initiative with strong value messages and trial incentives to drive conversion to this revolutionary new product in Feminine Care protection. Repeat rates have exceeded expectations as consumers who have tried Always Infinity have recognized the value created by this breakthrough technology.

For the Snacks and Pet Care segments, organic sales grew 2% led by Pet Care with strong growth, which more than offset a modest decline in Snacks. Significant pricing actions in both businesses offset a mid-single-digit volume decline in the segments. Decline in Snacks volume is due mainly to a strong base period that included the Rice Infusion initiative in Western Europe and the Extreme Flavors launch in North America. Shipments were also affected by trade inventory adjustments in advance of the Pringles SuperStack initiative that launched late in the quarter, which included a double-digit price increase.

Iams' US value share was roughly in line with prior-year levels at about 8%. Recent Iams innovations, such as Proactive Health, Healthy Naturals and Premium Protection continued to deliver results at or ahead of expectations. Eukanuba volume declined high single digits and market share declined, resulting from the price increases implemented last calendar.

Turning to fabric and Home Care segment, organic sales grew 3% as the benefits from price increases more than offset volume declines. In the majority of cases, globally, price gaps are starting to return to levels similar to those prior to our price increases. We are continuing to monitor the relative consumer value of our brands and we will take targeted actions where necessary to restore consumer value to competitive levels.

Fabric Care shipments were down mid single digits primarily due to lower shipments of Tide and Ariel. Volume declines on these brands were most pronounced in the senior region, with both brands down double digits following foreign-exchange driven price increases taken during the March quarter. Tide volume declined high single digits in the US and all outlet value share was down 3 points to 38% due to significantly higher price gaps versus competitive brands compared to prior year. the Gain brand delivered a strong quarter, with shipments up mid singles and all outlet value share up a point to nearly 16%.

Home Care shipments declined low single digits due mainly to declines in dish care and hard surface cleaning solutions. Dish care shipments in the US were down due to unit based market contraction following significant price increases last year. P&G's leading US dish care all outlet value share was down slightly and remains above 54% with Cascade above 61% in auto dish and Dawn at 43% in hand dish.

The Swiffer and Febreze brands both grew volume for the quarter. Swiffer volume in the US was up mid singles and all outlet value share increased 1.5 to 16% driven by innovations across all Swiffer items, including upgrades to both the dry and wet refill products and packaging and implement design.

Febreze volume was up in Western Europe behind continued geographic expansion. In the US, Febreze volume was in line with prior year in a category that declined 9% in units. The resulting all outlet value share gains in the US included more than a 5-point gain in instant air fresheners and more than a 2-point gain in candles.

Battery shipments were down high single digits due to market size and share challenges in both developed and developing markets. Share for the Duracell brand was impacted by trade-downs to value and retailer brands and heavy competitive activity in Western Europe.

In the US, Duracell's all outlet value share of alkaline batteries declined 2 points to 44%. In Western Europe, Duracell's share of general-purpose batteries was down 3 points to 33%.

In developing markets, battery shipments were down mid teens in the CEEMEA and Latin America regions due to the soft market following price increases.

Baby and Family Care delivered solid organic sales growth of 6%. Volume was in line with prior year and the net benefit from higher pricing accounted for the sales growth in the quarter. Global Baby Care shipments grew low single digits behind solid growth in North America and Western Europe. Developing market shipments were down slightly versus prior year, following price increases in Latin America.

In the US, P&G's Baby Care business grew shipments mid singles behind low teens growth of Luvs. The Pampers brand also grew shipments in the US for the quarter. P&G's overall share of US diapers increased about 0.5 to over 35% behind the growth of the Luvs brand and Pampers' share was in line with prior year.

In Western Europe, Pampers grew low single digits behind strong consumer response to the UNICEF Vaccine Partnership campaign and the successful launch of the Pampers Simply Dry in Germany. Simply Dry, a tier 3 version of Pampers, has helped the overall Pampers brand grow share by 4 points to 59% in the highly competitive German market. Pampers value share of the total Western European diaper market is up more than a point to nearly 55%.

Family Care volume declined low single digits as growth of Bounty was offset by a decline of Charmin, primarily due to a high base period that included the Charmin Ultra Strong initiative. Bounty added nearly 1 point to its market-leading US all outlet value share, which is now above 46%. While Charmin US value share declined about a 0.5 point, Charmin continues to be the clear market leader with all outlet share of nearly 28%.

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

Thanks, Teri. During the last earnings call, and more recently at CAGNY, we discussed in some detail the priorities we have established to guide our near-term efforts and decisions. Broadly speaking, these three areas are building consumer value, accelerated investments in the future, and driving productivity and simplification even further.

Before moving to guidance, let me take a few moments to provide more detail on these priorities. Consumer value is about more than price and is defined differently by different consumers. Some consumers have a larger price component to their value equation. For those consumers, we are offering more products and lower price tiers than at any point in our history. We've talked previously about Gain in Fabric Care, Luvs in Baby Care and Charmin and Bounty Basic in Family Care, all of which are growing disproportionately in this environment.

But the balance of our product portfolio also has lower-priced offerings. For example, Olay offers a very good basic skin care product in Olay Complete Ageless for $7. And Crest offers excellent basic toothpaste and Crest Cavity Protection at $2 for a 6.4-ounce tube.

We remain committed to offering cost-conscious consumers a broader range of choices. As Teri said, last month, we introduced a tier 3 baby diaper into Germany called Pampers Simply Dry. It's off to a strong start, already having achieved a 4% market share. And just this past week, we launched Naturella, which is a mid-tier Feminine Care product into the Arabian Peninsula, which will further extend our leadership position there.

Other consumers have a larger performance component to their value equation. These consumers are delighted by Olay Pro-X, which is priced at about $50. As we have mentioned, Olay Pro-X has achieved a 5% market share after only 12 weeks on market.

Tide Total Care, despite being priced at a 30% premium, is on pace to deliver $120 million to $150 million in year one sales. Always Infinity is priced at a 60% premium, but has already received a 6% value share. Crest White Strips Advanced Seal was launched at the end of January at a retail price point of about $40, and is already the number one SKU in the whitening category with over a 20% value share. We will continue to extend the portfolio at the top and bottom as part of our objective to deliver better value and serve more of the world's consumers.

As we focus on delivering value that is relevant to specific consumers, we are investing in communicating that value through performance-based value messaging at all touch points. This helps consumers clearly understand the price and performance trade-offs they are making.

We routinely assess value versus competitive offerings, via weighted purchase intent and price gap analysis. There are always situations where adjustments are needed to maintain competitiveness and relative value, but broadly, we are pleased with the relative value equation of our brands. About two-thirds of our brands have weighted purchase intent advantages and we continue to hold global value share, which is another important indicator of value competitiveness.

Investing for the future is another top priority. Our commitment to innovation as an example has never been stronger. R&D spending is nearly 2 times that of our closest competitor and more than most competitors combined. This leadership level of investment is multiplied by our extensive connect and development effort, which leads to an effective spend that far exceeds reported figures. Olay Pro-X, Dawn Hand Renewal, Pantene Nature Fusions, Tide Total Care and Clairol Perfect 10 are all examples of recent innovations that have benefited from connect and develop.

In the case of Clairol Perfect 10, P&G collaborated with 12 external partners in the US, the UK and Russia. These collaborations led to three separate breakthrough innovations that have directly contributed to Perfect 10's success. Perfect 10 achieved a 4% value share since launch despite selling at a 70% price premium to face Nice 'N Easy, which is now the leading color brand in the United States.

We continue to be the innovation leader in our industry not just as measured by spending, but as measured by results. Each year, IRI publishes a new product, Pace-Setter report. This US-based study captures the most successful new CPG products, as measured by sales over the past year. For 2008, P&G's share of the non-food category was 40%, meaning P&G had 10 of the top 25 new product introductions. By comparison, Unilever, J&J, Kimberly-Clark, Colgate, L'Oreal, and Energizer collectively had seven. Over the past 14 years, P&G has had 114 of the top 25 pacesetters versus 94 for that same combined competitive set. In fact, over this period of time, products that were introduced by P&G or Gillette accounted for 50% of all IRI pacesetters.

Advertising is another area where we are investing at leadership levels. We see the current economic environment as an opportunity to increase share of voice within our industry while spending fewer dollars in the absolute. During the March quarter, while costs were down, global media weights were up 5% versus year ago.

We continue to invest in capital as well. This year, capital spending may slightly exceed our 4% of sales target. We are moving forward with the capacity expansion program we started talking about during last year's back-to-school conference. With almost half of the world's 6.8 billion consumers currently using no P&G product and many of the consumers who do use P&G products being underserved, we believe our long-term growth prospects have never been stronger, and are structuring ourselves to support this growth.

India provides just one example. Just over two years ago, we launched Pampers into India. At that time, the leading competitor had a 70% value share. Today, we are the value share leaders in diapers in India. We are continuing to start up a new diaper line about every three weeks somewhere in the developing world.

Our most recent new category launch in India was Skin Care, where Olay Total Effect has already gained 6% of the market and doubled the size of the anti-aging category. The potential for P&G in just this one country is astounding. If, over time, we increase India's per capita consumption just up to the level we currently see in Mexico, it would generate an incremental $20 billion in annual sales. These are opportunities we clearly need to support.

We continue to launch new initiatives into both developed and developing markets. Initiatives that will be future platforms for growth. I talked about Olay Pro-X and the tier 3 diaper entry into Germany. We've entered the diapers category behind Oral-B in Holland and Belgium and in the pharmacy channel in Brazil.

We continue to expand Auto Dish across Western Europe, and Align is off to a great start. After just a couple of weeks in market, Align is already the number one probiotic recommended by gastroenterologists for the treatment of irritable bowel syndrome. The last focus area is a disciplined effort to lower costs, increase productivity and simplify everything we do. This provides fuel to improve consumer value and increase investments in the future.

Bob McDonald talked at our analyst meeting in December about the transformational work we are doing to redesign our transportation system. As part of that effort, we just executed the single biggest competitive transportation bidding process in P&G's history. This project included over 150 carriers, 7,600 freight lanes and over 500 million transportation miles across North America. On an annual basis, road miles will be reduced by more than 10% and intermodal usage will increase by 30%.

In Western Europe, our goal is to increase rail and intermodal transportation from 10% to 30% by 2015, and we're making great progress. Currently we are on pace to achieve 15% by 2009, one year ahead of schedule. These two transportation transformation activities are generating savings of about $75 million per year as part of a holistic effort to continue leveraging P&G's supply chain as a competitive advantage for the Company.

Another way we're lowering costs and improving capability is video teleconferencing. We have invested in 50 video collaboration studios around the world, which have already saved over $75 million in travel costs. In addition to saving money, this new capability saves time and builds the business by putting us more in touch with each others' suppliers and retailers. We are now conducting global leadership team meetings with this technology, significantly decreasing travel time and cost.

I hope this discussion helps you understand, with a few concrete examples, how we are managing the Company and what is guiding our decisions. I hope you will agree with me that these are the right things to be focused on and the right choices to make as we work to optimize the long-term prospects of P&G for P&G's shareholders.

Moving to guidance, we expect fiscal '09 organic sales growth between 2% and 3%. Total sales are expected to be down 2% to 4% driven by a foreign exchange hurt of about 5%. Operating margin, including 50 basis points of incremental folded restructuring charges, should be about flat. We are currently comfortable with consensus GAAP earnings per share of $4.22 as a center point of an earnings per share range of $4.20 to $4.25. This range yields year-on-year core earnings per share growth of 6% to 8%. Excluding foreign exchange impacts, earnings per share growth would be strong double digits.

For the June quarter, we expect organic sales growth of between 0% and 3%. Total sales are expected to be down 8% to 12%, driven by a foreign exchange hurt of 11% to 12%. Operating margins should be up, driven by strong gross margin improvement versus prior year as volume deleveraging is largely offset by the net impact of pricing and commodities. We expect earnings per share to be in the range of $0.74 to $0.79, including the Folgers related restructuring charges.

In the near term, our results will continue to be heavily influenced by external factors discussed previously that are not entirely predictable or within our control, particularly market growth and foreign exchange. We are providing wider guidance ranges to reflect existing volatility. We are committed to do the right things for the business and the shareholders over the mid and long-term and will prioritize our choices on this basis.

We are still engaged in our planning process for 2009 and '10. We are trying to ensure our plans are built on the most up-to-date relevant assumptions for foreign exchange, commodities and market sizes. We are also spending time on a disciplined look at investment options, ensuring that we are investing in the right things for the long term. Our current priorities, building consumer value, driving productivity in simplification and making the right investment choices, will guide our planning for next year. We will provide full guidance once plans have been finalized.

A.G., Teri and I would now like to open up the call for questions.

(Operator Instructions). John Faucher, J.P. Morgan.

Good morning. John, in your last sum-up comments there, you talked about the algorithm in terms of strong double-digit growth. And I guess, as you look at a difficult environment out there, that means you are capturing a lot of the margin from raw material favorability going forward and the productivity. And I guess the issue is why not leave yourselves with a little bit more flexibility, take the lower organic growth and say now is the time to take that extra margin if we're getting it, continue to go after some of the structural issues, maybe looking at more rapidly increasing the focus in Latin America and some of the other geographies and categories where you are struggling a little bit. I mean I understand the commentary about productivity and those things, but isn't there an opportunity here, given the lower multiple on the stock what have you, to really push this aggressively forward?

That's a good question, John. Let me just provide a couple pieces of perspective. First of all, in terms of top-line expectations as we stated, for the next quarter, we're looking at zero to 3, so it's clearly we are accepting growth below our long-term targets. As I also indicated, we're still working on the plans for next year and we will be back to you with those. But importantly, in all of this, as I have tried to indicate, we are focusing on where we should be investing to bring more value to consumers, to grow the business, to expand the portfolio both up and down and across and geographically. So you should assume that we're going to take full advantage, as would be the case in a normal economic environment, to expand our business.

John, very quickly, good morning. I mean I think you raised a good point. We had a chance to talk about it briefly when you were here last time, and I'm very much looking for the right balance. And we worked real hard, I think, to deliver the right balance this year, where we actually had a couple of big surprises. And the biggest surprise, of course, was currency, which I think we have done a pretty good job of managing. But currency hit us for more than $4 billion in the top line before the year is out and will hit us for likely well over $1.5 billion on the bottom line, so we have had to manage through all of that.

But stepping back to the larger question, what we've been doing is stepping up our investment. And I think it's really important to understand that. Our CapEx will likely come in above 4%. We are building 10 new manufacturing plants around the world somewhere this year, including a major new manufacturing plant in Utah to serve our Family Care business. John took you through the investment in R&D. But if you take out pharma and take out coffee, we have a very solid R&D investment this year. And then when you add on top all of the connect and develop investment we get from partners, we are stepping it up on the innovation side. We will bring as big a portfolio of new products to market as we ever have over the next year.

The third one is marketing. Jon talked about the advertising side of it. We are -- we have been delivering more GRPs to the market. It's always hard to measure, but we think in a lot of cases, we're actually building our shares of voice. And we've also of course, had to invest more on the trade side because when you are leading pricing up, there's a lot of price discounting that comes from your competitors in the short term, and we have to make sure we manage those value gaps.

So hey, step back and generalizing from all of that, the biggest thing that we are looking at for next year is how much investment and where to make those investments because we have a lot of opportunities for growth.

Okay, that's great. Thank you.

(Operator Instructions). Bill Schmitz, Deutsche Bank.

Good morning. I don't know if I missed it in the prepared comments, but can you just give us the breakdown of growth between developed markets and developing markets? And then if you could also break down the volume, what percentage was from the distributor and retail inventory destocking and what was just the shipment declines or consumption declines?

The first part of your question, Bill, volume growth was slightly lower in developing markets than developed, so developed grew just a bit ahead of developing, but not too much difference between the two on the quarter.

In terms of the components of the volume decline versus year ago, as I indicated in my remarks, about 40% of that or 2 points is destocking related to primarily price increases in developing markets. Another point is related to the market decline in the discretionary categories that we talked about, Fragrance, Hair Salon, and Braun, and the rest is due to volume as a result of price increases.

And the biggest issue in developing markets was CEEMEA. And I think that's pretty evident. You just have to look at what's happened with GDP and currencies. And I think you also know that that's our biggest developing market region by far.

I guess the other thing I'd say, Bill, is we are clearly going to continue to step up our investment in emerging markets. We are not scared off by the macro economic situation. In fact, the ability to create more, better and cheaper products and fill out our portfolios in more of our categories and across more of our leading brands just gives us the confidence that we can go after more consumers and more households in developing markets. And that's where the babies are going to be born, and that's where the household are formed. That's where there is sufficient income to begin to buy our Household and Personal Care products on at least a weekly basis point.

Great, thank you.

Bill Pecoriello, Consumer Edge Research.

My question was, you made it clear that there is no broad-based value adjustments required and you're holding global value share with the 1% organic sales growth. But certain categories where you're losing value share in certain geographies where you need to make tactical adjustments that you are studying for the investment and with this more couponing, adjusting promotional price points, stepping up the value message, can you talk about some of the categories where your consumer research is showing that you need to step up that value message? Thanks.

Yes. First of all, it's all about consumer value and winning the consumer value equation. It all begins in the store at the first moment of truth. And frankly, every day we are making adjustments in the operating businesses up or down.

Broadly, we've made some surgical adjustments on our Family Care business in North America. We are making some tactical adjustments on our Fabric Care business in North America. We led the move to compact detergents in North America in Fabric Care. We've led the pricing up in Fabric Care as we reported. We probably lost a little bit more share than we would have liked on Tide, and we probably gained a little bit more share than we thought we would on Gain. So we are trying -- we will adjust to get that right.

In developing markets, we have to watch our opening price point affordability, and that's why we've talked about the portfolio. Jon mentioned Naturella, but there are a whole raft of product lines across the categories that we introduce and we have to make sure that opening price point is right.

So you are dead right and I tried to make the point we are not only trying to increase our delivery and share of voice on the advertising side, but we've got to stay competitive on the short-term pricing and promotion side. And US, there's been more couponing, because couponing consumers, they are a segment of consumers that redeem more coupons in recessionary times.

But I view all of that as ongoing value question management. The point I think we're trying to make is that the pricing power and mix power is pretty clear. And we think we're going to hold onto most of it because what underpins it is innovation. That's really the points. The six points of pricing and mix this quarter is virtually all underpinned by innovation. And to the extent the innovation is resonating with consumers, whether it's more value-based innovation or more performance-based innovation, we will be able to hold it.

Thank you.

Lauren Lieberman, Barclays.

Thanks. Good morning. I was hoping you could talk a little bit about why and for how long you expect the destocking to continue. Because it seems to me like, especially at the distributor level, in inventory adjustments that has to do with the distributor wanting to manage working capital levels, if you raise pricing, should be taken care of in the course of one quarter, and then from there it really is about consumption and market growth. And everything in the press release and the comments on the call sounded like you are expecting destocking to continue. So a little bit on why and a little bit on for how long.

Sure. The destocking that we saw on the October-December quarter was largely a developed market dynamic, as the price increases hit in the developed market and as we went through the credit crisis, particularly in North America, but also Western Europe.

The primary destocking dynamic in the quarter that we've just completed was in the developing world. And that is driven, as we've talked about, by very significant price increases, some of which have occurred very recently. So, as currencies devalue further, we've had to price further in. Some developing markets we taken two or three rounds of pricing. And that's why we are expecting some level of destocking to continue to work its way through the system. But you are generally right in that it should be, as a whole, a relatively shorter versus a longer-term dynamic.

So if currency stays where it is now, or as it was at the end of the quarter we'll even say --?

There would still be a little bit of destocking next quarter. The way the system works, in terms of banks notifying distributors that their credit lines are frozen, all that stuff doesn't just follow a nice, neat pattern. It takes time to work through.

Okay. So the assumption is that if currency stays where it was at the end of the quarter, all the pricing is in place even if it went in at the end of the quarter. So there should be one quarter left of destocking related to these price increases?

[Betterus curibus], yes. The world changes.

Of course. Thank you.

Lauren, I'd just say two quick things. One, everybody is trying to operate with less inventory, okay? And I think that's good. You know, that's good. Our -- one of the things that I love about the challenges we have had the last year is we are more agile, we are more flexible, we are faster, and we are frankly operating better and executing better. I mean our case fill rates, okay, which is what the customers judge our service levels on, are running 98.5% for like six months in a row. So we've had to get better on the execution side to make sure we are in stock even when the retailer and the distributor are pulling down their inventories. But the easiest way for them, the easiest way for them to improve in the short term is to pull down their inventories. It's the distributors that are under real cash and bank line pressure.

In the case of some of our bigger retailers, they pulled it down because it was the end of their fiscal year. So I think -- I don't think the inventory destocking is necessarily a bad thing until you get to the point where you can't maintain shopper service levels and you can't stay in stock. And we watch that very closely.

There will also be, we expect, an ongoing dynamic relative to retailers wanting to have the most efficient assortment on shelves that they can possibly have. It's another way to manage their cash and maximize their biggest assets, their shelf space. So you will see that continuing to have an impact for some manufacturers. In fact, we are relatively advantaged in an environment of more efficient assortment.

Thanks so much.

Wendy Nicholson, Citi Investment Research.

I know you guys care about benchmarking yourself relative to your peers as much as we do. And I guess I'm surprised with all your commentary, it sounds like you think you are gaining share in a bunch of big categories and whatnot. But the declines that you are seeing from a volume growth perspective are a lot worse than we are seeing at any of your competitors, both the US companies and the European multinationals or European HBC guys. And I know you think you are a little bit more oriented towards discretionary businesses and so maybe there's more shortfall there. But frankly, it sounds like you are doing really well on some of the discretionary businesses like high-end skin care. So the story of the emerging markets, I just don't know that I get it because some of your competitors have much bigger emerging-market business and you'd think the destocking would be hurting them more than it would be you. So it just doesn't hold together for me. Can you help me with that?

Wendy, you have to do -- I mean I would be happy to take -- you have to do industry by industry, geography by geography, channel and customer by channel and customer. So why don't -- it sounds like you have some interest in the discretionary category, so I will do a couple of those and then if you want to talk about another one, I'm happy to go there.

I mean clearly, just one quick comment, clearly it's a good time to have a big business in LA. We are doing very well in LA. It's not a good time to have a huge business in Central and Eastern Europe and the Middle East. We have the biggest business in Central, Eastern Europe and the Middle East. So part of this is business and geographic mix.

But let's do a few of the discretionary categories. Fine Fragrance is probably the most straightforward one. It's maybe the most discretionary category that we are in. We've had double-digit drops in the market and every period, we are growing our share. In fact, one of the most successful brands right now in the fragrance world is Gucci.

So our point of view is we run a very good margin in that business, well above the category. We've built some very strong brands, particularly the Guccis and Dolce & Gabbanas to go with the Hugo Bosses and Lacostes, and we know it will come back. So we are probably looking at the worst period for the Fragrance business.

And when an industry or when a geography is contracting, what you want to focus on is your value share, right? So when it starts to grow again, you are growing off a stronger value share base. So we have clearly prioritized value share above volume share and we clearly prioritized net sales growth above volume growth.

Braun and Salon are a slightly different situation. And I think there, clearly, we have something to prove. We have actually lost a little bit of share in the Salon business. And we have some ups and downs on our share performance depending on Braun line. But what it's frankly enabling us to do is to accelerate and deepen the restructure, so we will get through major restructures in those businesses faster. We are focusing on where we really want to win in those businesses, and we are bringing innovation faster. So I think again, it's an opportunity.

Let me think. I was trying to think of a third good example. Clearly, our CEEMEA exposure is showing up on the destocking front. There have been huge moves in GDP in a lot of those markets and frankly, the currency impact has been big. And the combination of the two, demand softening and the price gaps widening as we price to cover the transaction costs of that [back], means that distributors who run their inventories on a dollar basis or on a local currency basis, have to pull those inventories down pretty quickly.

And another point that Jon made in his comments which I think is really important, you build a distributor network and you build relationships with distributors over time, so we support these distributors. And frankly, we support several of our suppliers, and we are willing to help them get their inventories down in the short term so they can continue to provide the kind of service we want and need. And then when times get better, which they inevitably will, we will move back.

What we are going through in some of these developing markets is not unlike what we went through in the mid-90s in Asia when I was there. You just have big short-term moves in GDP contraction and you have big short-term moves in currency. And in those environments, you've got to price to cover as much of the transaction as possible and you've got to make sure that you maintain your infrastructure so when things get better, you will grow. But I think it's more our footprint, it's more our mix of categories than it is anything that's really different.

If you look at what the other best CPG companies are doing, they are doing the same thing. We're all trying to get 5 or 6 points of pricing and mix and we're getting about that every quarter now. We are all trying to manage the volatility that we are seeing in commodity, currency and markets.

Joe Altobello, Oppenheimer.

First question if I could for Jon, just want to go back to a comment you made to Lauren's question on shelf space. It sounds like you have held shelf space pretty stable throughout this whole period here. And I was curious, are you seeing any changes in categories where retailers are trying to go after market share in terms of private label?

And then secondly, for A.G. if I could, the data point you've often talked about in the past for trade-down has been unemployment. Obviously, that keeps creeping up and it seems like it's going to continue to creep up for the next six to 12 months. So in terms of the categories where you've seen the most trade-down, how do you combat that in this type of environment?

I'll take the first one, Joe. Clearly, there are some retailers that are trying to increase their own store brand presence in their stores. And there are -- the vast majority of retailers are working on efficient assortment, depending on how they best define it for their shopper. In general, we have been gaining shelf space, not losing shelf space. And certain of our brands have actually gained a significant amount of shelf space.

But the question behind the question on private label I think is important to address as well. If you look at markets and chains that are very efficiently assorted and tend to have a higher presence of store brands, so for example, look at Western Europe paper categories, baby and Feminine Care, which have a very high private-label development, our market share in those categories in those markets is higher than it is in the US.

If you look at chains like Costco, which have a very strong store brand in Kirkland's, or you look at Lidl, the discounter in Western Europe, again, in those more limited efficient or assortment stores, our shares are overdeveloped. So in general, the move to more efficient assortment should be a positive thing.

Joe, I definitely agree with that. Where is, hey, here's the key in every recession back to the 70s, generic or private label brands have grown share. We know it's going to happen. It's happening in this recession. There is some trade-down. There's obvious pocketbook pressure. And frankly, more consumers will try private label brands and retailer brands than would try them in more normal economic times. The key is to minimize your losses and ideally, continue to hold or continue to grow your share in that environment.

Where is there the most pressure? Generic drugs. And I think that's likely going to continue. One of the reasons that we are considering an exit from the pharma business is because the pharma business model I think has -- the historical one that has worked so well is in question, and frankly, that industry is going to be under more pressure from generic drugs.

Clearly, Prilosec, which we built into a phenomenal brand and is still a very strong brand, is now going through the phase where the generics are going to be introduced and we know we're going to lose some of that business. The key is how much of it do we hold onto and how do we sustain it? And you see it across the OTC drug world. There's a lot of pressure from generics.

One of the things we like about beauty, grooming and Personal Care is that those all tend to be categories where there is much lower private-label development and where, for a number of reasons, consumers are just not even as interested in trying private label.

In Household, it's a little bit more of a mixed bag, but we tend to have very strong brands in the categories that we are in. So if you look at paper towel, Bounty has been growing share and private-label has been growing share. If you look at bath tissue, the strongest brands including Charmin, for the most part, have been about holding their share and private-label has been growing share.

In laundry detergents, surprisingly, private labels are more developed in Western Europe, but in the US, they are not really that developed. There's been a little bit of growth in this cycle, but they are still a relatively small part of the market.

But stepping back, they will grow during the recession. More consumers will try them because their budget is under pressure. The key is we need to be in a position at the shelf and then we need to be delivering with our brands and products superior value as Jon described, however the consumer wants that. And then, I hope, if we can at least hold or ideally grow share as we are doing on many of our brands, we will come out the end of the cycle stronger and then we will build from there.

Chris Ferrara, Banc of America-Merrill Lynch.

I understand you are working through this stuff now and I get you are building a portfolio for the 75% of the time that economies are expanding and that makes sense. But I guess at the risk of asking you to front run that investment strategy, as a company and as an investment, what's the broader philosophical view on businesses like prestige, professional, Braun, driver of that 20% of the volume decline? I guess are you comfortable with the inevitable trade-off of the faster growth in good times with the greater degree of cyclicality that get you when times are like these?

And then I guess also, how do you reconcile the idea of managing that portfolio for the 75% when times are good, with the initiative to extend the portfolio at the low end and be more competitive during a terrible global recession that may prove to be nearing a close when those value offerings can create I guess a mix drag during the 75% of the time when things are good?

I guess it seems like you may be at somewhat of a long-term crossroads. Maybe that's too dramatic. I just want to see if you could comment on that.

Okay, Chris, let me take on Beauty because that probably at least the question behind the question and certainly our biggest business with most of the discretionary categories. We still very much like the Beauty and Personal Care business. It has been the single biggest contributor to our net sales and profit growth this decade so far, okay, to the present. Beauty has generated over 40% of our top-line growth and 40^ to 45% of our bottom-line growth. The second biggest contributor has been emerging markets, which has sort of been 35% to 40% of our top-line growth and about 30% to 35% of our profit growth.

And in both cases, you are going to have to deal with the downs and the ups, okay? And we are quite willing to do it because, in both cases, we like the demographics that are underpinning Beauty in emerging markets. That's where consumers are. That's where they are spending. They are buying Beauty Care products younger. They're using more of them and they are sticking with them longer. Okay? Even in this quarter, okay, our Gillette Fusion share was up; our Head & Shoulders share was up; our Olay share was up; our Clairol Perfect 10 share was up; our Cover Girl share was up; and even Pantene leaked out a little bit of share growth. And we are still not to the major new initiative launch, which we said would come next year.

So I guess our point of view is you have to look at the attractiveness of any industry. This is a low CapEx industry. It's a relatively high gross margin industry. It's a highly fragmented industry. We still have a relatively modest share, okay? Despite the fact that we have a relatively big business.

And I think if you step back and look at it, it's a brand and innovation-driven industry that is shifting to our channels. One of the things that's going on right now that's good for us is big part of the Beauty trade down is out of department stores and out of specialty stores into the array of self-select kinds of stores, where we have the meat of our business. So I think there are a lot of things that are dead right for this, and I don't get too excited by a quarter or two or even a year or two if it is a right -- if it is a good business for us structurally, if it is a business that fits our strategy and fits our core competencies and strengths.

You asked about a couple of specifics which are slightly tougher nuts. We, on Braun, we have -- we have a strategy and we have a plan and it has a time horizon and the time horizon is appropriate, and we are going to find out what we can do with that business. And we are in the first phase, which is accelerating the restructuring. We will be moving in second phase, which is we're going to be very focused on where we want to play and where we believe the Braun brand is leverageable, and we will see. But you know what, if we double the profit or half the profit, you will notice it, okay?

The other one is the Salon business. We are quite pleased with the Fragrance assets we got out of Wella. We are making good progress on the retail assets that we got out of Wella. I think we finally demonstrated that we can actually make a difference with retail hair color. That shows in Clairol Perfect 10 and our Nice 'N Easy shares in the markets where we are established. So, we're going to learn this business.

Now again, because of Gillette, we actually had to put some of the restructuring on Wella on the back burner, but Robert Jongstra and his team, we've got the right leadership crew in there. We're going to get it restructured this year and next. We've got a little bit of encouragement from our Sebastian relaunch. We are very much focusing that business. And you will see us do the kinds of things we did in Fine Fragrance in the Salon world, okay? And again, is it worth investing for two or three years? Heck yes, because a lot of the innovation and a lot of the ideas come out of Salon and then go into retail and we want to be on the cutting edge of that.

But I think, again, will Wella make the difference in the Company's financial results? It's a pimple. Okay? It's a pimple. I hope it will become more, but right now, it's not going to make a big difference.

So step back, still like Beauty, still like Personal Care for a lot of structural reasons and a lot of strategic fit reasons. There are a couple of questionable businesses that you've asked about. We're working on them. We think we are working on them in the right way, and we will come to an appropriate resolution. And I hope they will be successful, but we don't know yet.

Andrew Sawyer, Goldman Sachs.

I had a quick one that was very specific to US laundry. It looks like the P&L on that business is coming in pretty nicely. You've got the pricing, raw materials and compaction carryover benefits, versus maybe I think you said a 300 basis point decline for Tide share offset by some Gain market share gains. So I was wondering if you could help us understand, first of all you mentioned some adjustments that you're making to help improve the market share performance, but how should we think about your tolerance for market share losses in a tough cyclical environment for Tide versus the very positive numbers we are seeing on a P&L basis for that business?

We're not very tolerant. Andrew, what we did is it's a classic example of first things first, okay? And in that business, we wanted to lead the move to compaction, which has been good for consumers, good for retailers, good for the industry, and good for P&G and we capture a big share of that. Okay?

Two, we've had to deal with over $1 billion in commodity cost hurt again this year, and we wanted to make sure that we had our structural margin and costs right.

Three, we've had to lead the pricing up, as Jon explained in developing markets to cover the transaction impact of FX and frankly, in developed markets, to recover the commodities.

So we've sort of stepped through all the things we need to do to make sure that that industry stays attractive. Okay? Attractive to retailers, attractive to suppliers and, of course, attractive to P&G given our leadership overall share.

You're going to see a lot of innovation out of the laundry business, and I'm just going to leave it at that. You have seen a fair amount this year. We're going to step it up. And this year we will come back; it has always come back.

Bill Chappell, SunTrust.

I think you mentioned in the comments that the media weighting was up 5% year over year but costs were down. I guess that's a little surprising in that it seemed like you had been cutting back on some media. Do you expect to continue to grow year over year for the next few quarters? And what's the outlook on costs? What we've heard is that after the May up-fronts are done, that media costs should come down a step further. Do you see that as well?

Okay. The media world has been a good world for buyers, okay, and not just in the US. Here's a simple way to think about it. Auto industry, big media buyers, dramatic drawdowns. Financial services industry, big media buyers, substantial drawdown. And I could name a few other industries that have moved down and even in some cases out of certain media vehicles. So it's been a buyers market. Okay? And I don't want to go into all the details because there are a whole bunch of negotiations that are ongoing. But I think you are right. In the near term, it's going to be even a bit -- could be even a bit more of a buyers market. So what we have tried to do is take our market mix modeling and our market ROI analyses and figure out how to spend a little less money and get a lot more delivery. And there's nothing more sophisticated than that. Some of it is buying leverage. We are the biggest advertiser in most markets. Some of it is frankly smarter media plans. And some of it is, frankly, creative ways that we work with the media suppliers to generate value for them and value for us. So I think it's been -- it's just been a good time.

And frankly it's been important that that's been the case because, as I said before, we've had to spend a little bit more on couponing here and there. We've had to spend a little bit more with our customers in store in various channels and in various countries. So I think it's going to stay a pretty attractive situation. And our goal, over time, and again, we don't look at it on a month-to-month, quarter-to-quarter basis necessarily, but our goal over time is to strengthen our brand equities. And part of that is delivering a consistent share of media voice.

Connie Maneaty, BMO Capital.

Hi, this is actually [Ziek Kramer] with a question for Connie. I was wondering if you guys could comment on the -- or just give us a little bit more color on the article in The Journal yesterday about the restructuring in the Beauty and grooming business and also as well, the timing in any charges.

Okay. Well, on the last part, no impact. Hey, listen, this is something we have wanted to do for awhile. We think it's the next logical phase in how you organize a Beauty and Personal Care business for even more success. Here's the simple way to think about it.

We're going to organize more by consumer and customer or channel than by product category. And it's the first one of our major sectors that we are going to do this with. We really do believe the consumer is the boss. We really do believe in the consumer value equation. And we believe that we can accelerate innovation. And we believe that we can execute better as we go to market with our customers if we organize around Personal Beauty Care around women and around men, very simple, and then organize several of our other businesses around the channel, whether it's Salon or whether it's the specialty beauty channels. But that's all it is.

Now, on top of that, it's a dramatic simplification and reduction in the size of the management structure. We eliminate a lot of overlapping category and geographic complexity that we had before.

And thirdly, it's an opportunity for our best-performing beauty and grooming leaders to get more responsibility and to grow faster.

So I think it's going to make us more agile. I know it's going to get us closer to the consumer and the customers with whom we work to serve the consumer. And we're pretty sure it's going to accelerate our innovation to market. And on top of all of that, it's going to save us some money, so it's a win-win.

Jason Gere, RBC Capital Markets.

Thanks, good morning. A.G., you mentioned earlier about possible plans with the pharma business. But I was just wondering if you could just update us more on your thinking on portfolio optimization, especially as retailers are coming back and inventory and certainly looking to exit some of the smaller, non-leading brands. But I'm just wondering if you can give a little context around your thinking on that right now?

We will continue to prune brands from our portfolio that are either not strategic or underperforming. And I think you have seen that this quarter, okay? And frankly you've seen that over the last eight, nine, 10 years. We have fairly consistently every year pruned a handful of brands and even more in some years, and that will continue.

On the bigger category or industry side, we are always looking at what businesses we should be in and what businesses we should not be in. As I said, while there has been significant interest in our pharma business, and while we have announced that we are open to look at all options, we are truly looking at all strategic options, including hanging on to the business. We are improving our profit year on year in pharma. So we're going to do what's right for the shareholder with the pharma business. But over the long term, it's not a play for us. Over the short term, we're going to do what's right for the shareholder.

There are a couple of other businesses which I obviously cannot call out that we're looking at that may not be good fits for us, and I'm not talking about small brands here. I'm talking about categories. But I think that sort of the state of play at any given time, and there are a couple of businesses that we would like to get in or we would like to take a bigger position in. And I think you have to look at that side of it too. I mean this should be a good time to acquire. There is consolidation going on in a number of industries, including some that we operate in. So I'm hopeful that there will be some assets that are available down the road. And at the same time, I think that we will continue to divest.

Linda Bolton-Weiser, Caris.

Just a couple of questions on the Beauty business. First, in your Professional Hair Care business, do you think Unilever has plans for getting bigger in that area with their recent acquisition of a brand in that industry? Do you have any thoughts on that and whether that may change the competitive landscape there?

And then secondly on Olay, I'm curious if you think that price points at mass retail higher than the Pro-X price points are possible given the issues they have with [fast], etc. at mass retail? Thanks.

I'm smiling on the second question because I remember back in 1998 when we had a huge debate, Susan and I were in the room with the team and we had a huge debate about whether we were going to go through the $10 price point on Olay. Most of the Olay in the world was sold at $6 to $10, and we were trying to decide if we could get $15 for -- $10 to $15 for Olay Daily Facials and $15 as the midpoint for Total Effects. And now you know we have almost a $2.5 billion brand and we can price it from $5-$50. You know, who knows.

I think the real answer is who knows. When the team came up with the Pro-X idea and they developed the product and we started to get consumer response to the concept and the product, I think some were surprised that it could command the pricing that it did. But when you look at what we are delivering, we are delivering products that are better than $200 and $300 alternatives in department stores, you know, that's the value equation, and it's a hell of a value equation, okay?

And consumers are smart and I think they are less concerned about where they shop. We've done a hell of a lot of Pro-X business on Amazon, believe it or not. It was one of the Beauty Care brands and initiatives and innovations they wanted to try and it's been successful. So who knows. I think it will depend on what the consumer wants and hopefully we will spot it and give it to her.

Hey, on the first question, you've got to ask Unilever. You know, I have no idea. The only thing I can say is when you enter a new business, it takes a certain amount of time to learn it. I wish I could say we could do these things overnight, but after 32 year's, it's just -- it takes you a certain amount of time to learn it. And it's taken us some time to learn the retail coloring business and to really get our technology and innovation programs geared up, so we are delivering products that are delightful for consumers and offer good value. It's going to take us some time to learn the salon business. But you've got to ask them about their intentions.

As far as the competitiveness, it's really too small to be a competitive factor right now. So we've got far bigger competitive issues to deal with.

Ali Dibadj, Bernstein.

I wanted to talk a little bit about operating margins a little bit and understand the puts and takes there. As far as we can tell, volume deleverages is in the call it, 170 basis points range, negative 170 basis points range, plus, you worked on inventories nicely, so I'm assuming there's a little bit of downtime as well. On the flip side, obviously, you took down some advertising. In terms of basis points, it looks like 170 from the press release. But there's also other moving parts we didn't hear about. So cost cutting, foreign exchange multipliers we've been calling it, all that sort of stuff. So just want to get a sense of how things plus and minus shake out there.

And in that context, maybe an attachment question around the Snacks and Pet business, which I continue to be surprised about how low margin that is, particularly if, and disabuse me of this if this is incorrect. But I thought the Pringles business was in the kind of 20, 25% [EBIT] margin range, which would suggest Pet is much lower. So two parts of the question. If you could help, that would be great.

We typically answer one question and we will go to Pet. You can follow up with the guidance online on the other.

And John had pointed at me. Ali, here's the story on pet margins. I think we've doubled them since acquisition, so they're definitely improving, single digit to pretty comfortable double-digit. We are not the highest margin player in the industry, but I think we are running second right now. So not surprisingly, Hill's Science Diet given their vet focus and profile can generate the highest margin in the industry. But we are actually running higher margins than the other big players, Nestle, Mars, etc.

And, there's more margin to come because we are going through a major replatforming and rationalization of our whole product supply operation and manufacturing operation. So I think you will continue to see margin improvement. That has been a focus of that team the last three years, and they have made progress on it and we prioritized margin and structural attractiveness before we started investing in the innovation. And by the way, the innovation is all starting to get traction, and you saw that in the top lien.

Without going into the details, the chips business is another matter. And the only thing I will say there is we have -- we are in the early weeks of a major initiative, where we have upsized Pringles -- super-sized Pringles. So far so good, but too soon to tell, and if it works, it will be a margin sweetener.

At this time, we have time for one last question. Your last question comes from the line of Alice Longley was Buckingham Research. Please proceed.

I'm glad I squeezed in. I am trying to separate out some of your volume and pricing numbers that you started to separate out earlier when you said that volume was down a little bit worse in developing markets than in developed markets. I am wondering within developing markets if you can give us some feel for how volume was outside the CEEMEA area. And similarly, could you break out pricing, you know, what pricing was US or developed versus developing markets so we can see the differentiation there? Thank you.

Alice, you know we report on a global business unit basis, not on a regional basis, but I will just give you a couple of order of magnitude things. In developing markets, LA is the most robust now than Asia. And obviously the one that's been hit the hardest, as I said earlier, is Central and Eastern Europe, Russia in particular, okay? And I think that shouldn't surprise you based on reading any of the business dailies and just looking at what's happened with those economies and with currency. So we are sort of -- we will cycle through that, okay?

I forgot the other part of the question. Sorry, Jon, help me out. The main one?

That's basically -- and you asked about where we are taking pricing and where we are not. Effectively, follow the currency devaluations.

Yes. I mean everyplace, we are committed to covering as much of the transaction impact of currency, and that's pretty much the pricing that's left. All of the pricing for commodities is, for the most part, done and behind us, right? And in fact, we will get benefit from that going forward because we haven't anniversaried it yet in a lot of businesses. Okay?

Thanks very much, everybody, and we are obviously available for phone calls on further details.

Thank you for your participation in today's conference. This concludes the presentation and you may now disconnect, and good day.