寶潔 (PG) 2010 Q1 法說會逐字稿

Good morning and welcome to Procter & Gamble's quarter end conference call.

Today's discussions 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 impacts of acquisitions and divestitures and foreign exchange, where applicable.

Free cash flow represents operating cash flow less capital expenditures.

Free cash flow productivity is the ratio of free cash flow to net earnings excluding the gain on the sale of Actonel in Japan.

Core EPS refers to earnings per share from continuing operations excluding incremental restructuring charges incurred to offset the dilutive impact of the Folgers divestiture and fiscal 2009.

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.

Please proceed, sir.

Thanks and good morning, everyone.

Bob McDonald and Teri List join me this morning.

I will begin today's call with a summary of first-quarter results.

Teri will cover business highlights by operating segment.

I'll provide guidance at the end of the call; and then Bob, Teri and I will take questions after our prepared remarks.

Following the call, Teri, [Mark Ursig], John Chevalier and I will be available to provide additional perspective as needed.

Last year, as you know, we prioritized protecting the long-term structural economics of our business.

With this achieved, we are now developing and executing plans to positively grow value share.

We're increasing consumer value behind one of the strongest innovation programs in several years.

We are expanding our product portfolio vertically, horizontally and into more geographic white space than ever before.

To fund this, we are accelerating productivity, driving simplification and steadfastly maintaining our focus on cost and cash discipline.

Our objective is to accelerate growth and profitably grow value share by serving more consumers in more parts of the world more completely.

July-September results are very encouraging.

Organic volume improved sequentially.

All-in sales, organic sales and earnings per share each came in well ahead of the top end of our guidance ranges.

Organic volume was down 2%, a 2-point improvement versus last quarter.

Volume strengthened throughout the quarter with September being an all-time record shipment month and ahead of year-ago.

Volume trends are negatively impacted by a very strong base period.

In North America the base period included retailer volume pull-forward, head of last fall's commodity-based price increases.

In developing markets, and Central and Eastern Europe, Middle East and Africa, in particular, the base period included shipment trends that were not yet impacted by the significant foreign exchange-driven pricing we took last year.

For perspective, Central and Eastern Europe, Middle East and Africa accounted for over half of the Company's year-on-year July-September quarterly volume decline.

We fully expect volume growth in future quarters as we lap easier base periods, roll out the balance of our innovation plan, which is back-half skewed, continue to strengthen our media plans and make targeted price adjustments where needed.

Organic sales growth was up 2% versus a guidance range of flat to down 3%.

Progress was broad-based with all reportable segments either growing organic sales or showing sequential organic sales improvement.

Pricing added 3% to sales.

Fiscal 2009 price increases, which have not yet fully annualized, were responsible for the increase.

Favorable geographic mix increased sales 1%.

Foreign exchange had a negative impact of 7 points, resulting in all-in sales being down 6%.

All-in sales were well ahead of guidance, which anticipated a decline of 7% to 10%.

All-in GAAP earnings per share were $1.06, $0.06 per share above the high end of our guidance range and 3% above year ago.

As I already mentioned, top-line organic sales growth was ahead of expectations and was largely responsible for our overdelivery on the bottom line.

Core earnings per share, which on the quarter adjust for the gain of the sale of our Actonel business in Japan, the operating earnings of the pharmaceutical business generated during the first quarter and base period Folgers impacts, were $0.95 per share, in line with year-ago.

Gross margin was up 290 basis points, primarily due to lower commodity costs and the full benefit of last fall's commodity-based pricing actions.

Gross margin also benefited from last year's transaction-based foreign exchange pricing in developing markets, which has not yet annualized.

Operating margin increased 160 basis points as higher gross margin was partially offset by higher SG&A.

SG&A was up by 130 basis points due to negative foreign currency transaction impacts.

The tax rate on the quarter was 27.7%, about in line with year-ago.

We had our strongest cash quarter ever.

With free cash flow of $4 billion, free cash flow productivity was 120%, well ahead of our 90% free cash flow productivity target.

So we are encouraged by the above-target July-September quarter.

As we look to improve sequentially from here, we'll continue to focus on serving consumers and their quest for value, value that is delivered by affordable price points, by product performance and the overall experience with our brands.

To do this, we are accelerating and leveraging our strong innovation program to expand our portfolio vertically and horizontally.

We are driving performance-based value messaging and, where necessary, we are refining pricing to remain competitive.

Early results from our fiscal year innovation program are encouraging.

Laundry additives is off to a strong start.

Tide Stain Release and Ariel Professional have been launched in 15 markets, including the US and Canada, Germany, Italy, Spain and Turkey.

In the United States shares are already in excess of 10%.

We plan to launch into 18 additional markets over the next 18 months.

Bounce Dryer Bar is exceeding expectations, having already captured 7% of the fabric sheet segment in North America.

Excel Gel has achieved a 9% value share in our lead market, the United Kingdom, and has been expanded to Germany, France, Spain, Austria, Switzerland, Belgium, Holland, Portugal and Greece.

Fairy Auto Dishwashing detergent in Western Europe is gaining share with past three months value shares across the nine markets where it was launched averaging 17%.

In Sweden, one of our lead markets, value share is exceeding 30%.

We are currently expanding our new premium line, Fairy Platinum, to additional markets.

Three additional SK-II anti-aging products -- a moisturizing cream, a facial mask and a foundation -- were launched during the July-September quarter across Japan, Korea, greater China, Singapore and Malaysia.

Since launch these three SKUs have grown our total SK-II anti-aging business by nearly 30%.

Olay Pro-X, which was launched in North America six months ago, is now being launched into China.

Olay Pro-X is on pace to generate year one retail sales of nearly $100 million.

One last example that demonstrates the strength of our premium innovation program is our new gastrointestinal product, Align.

This new brand, with its proprietary and patented bacterial strain, already accounts for one quarter of the probiotics supplement market.

It's the number one brand recommended by gastroenterologists, the line is building share and has significant upside potential.

We are also improving consumer value by leveraging cost innovation in order to launch more value-tiered products.

Pampers is a great example.

The value share of Pampers in Germany remains strong behind last year's introduction of the value-tier offering, Pampers Simply Dry.

Pampers' past four-week value shares remain above 60% with Pampers Simply Dry value share of 4%.

In June 2009 we launched Pampers Simply Dry into the United Kingdom, which is also off to a strong start.

Pampers value shares in the UK are nearly 60% with Pampers Simply Dry having already achieved a value share of about 5%.

Pampers Simply Dry began shipping in France, Greece, Austria and Switzerland this quarter and will begin shipments in Spain in the October-December quarter.

The recent launch of Naturella into Saudi Arabia is over-delivering versus expectations.

Shipments are at 20% above the going-in forecast.

Naturella is now sold in nearly 30 markets around the world.

Naturella, along with other value-tier offerings, will be expanded to additional markets later this fiscal year.

Crest Pro-Health is another example of cost innovation.

Through work led by scientists in our Beijing Technical Center, we have been able to dramatically reduce the cost of the Pro-Health formula.

This is enabling eventual expansion at affordable prices in all dentifrice markets.

As you know, we just launched Pro-Health formula in the pharmacy channel under the Oral-B brand in Brazil.

Brazilian consumers now have a choice between four distinct price tiers of Oral-B paste.

Market shares continue to exceed expectations.

We're also seeing important halo effect across our oral care business nationally in Brazil.

Prior to launching Oral-B paste, we were tied for value share leadership in the brush segment.

Following the paste launch, P&G's brush value share has risen to nearly 6 points ahead of the next competitor.

We continue to work to ensure consumers clearly understand the superior performance our products provide across all price tiers.

All top brands now have qualified performance-based value messaging on air.

We continue to benefit from attractive media rates and our increasing media delivery.

During the July-September quarter media delivery was up both sequentially and versus year-ago.

Finally, we continue to make targeted price adjustments were value gaps grew too wide between our products and those of our competitors.

Price adjustments have been made in North American laundry, North American tissue-towel and several Eastern European markets.

Where price adjustments have been made, the business has responded positively.

Most of the price adjustments we plan to make are now behind us with about 10% of the portfolio having been impacted.

The actions we have taken and the incremental investments we have made to accelerate and leverage our robust innovation program, drive performance-based value messaging and refine pricing as appropriate have allowed us to achieve organic sales growth in the quarter ahead of our original plan.

There is still, however, work to be done.

Volume needs to grow and we have to make more progress to restore share growth in some categories.

Plans have been strengthened across each of our focus areas since we originally provided guidance for fiscal 2010.

The benefits for our investment program will build sequentially throughout the year as the largest portion of our innovation program comes to market in the back half.

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

Just a couple of things.

First, I wanted to clarify that our core EPS was $0.97, about in line with a year ago.

And I also wanted to briefly comment on two overarching themes that you will see in the review of our segment results.

First, you will see that foreign exchange negatively impacted sales and earnings across all of the business segments.

Additionally, all the segments imported organic volume at or below year-ago.

Both of these are impacts that should dissipate going forward.

Foreign exchange, based on current rates, will reverse and become a help.

And as John mentioned earlier, our organic volume results were heavily affected by two markets.

First, US results were impacted by strong shipments in the base period, ahead of price increases we took last fall.

Additionally, unit volume in the Central and Eastern Europe, Middle East and Africa region was down nearly 10% following significant price increases taken last fiscal.

Both of these items are primarily base period issues versus ongoing structural challenges.

As highlighted earlier, the fact that organic volume was an all-time record in September suggests we are already moving past some of these issues, and we expect volume growth in October-December quarter.

Moving to the segment results and starting with Beauty, organic sales increased 2%.

Pricing and mix added 4% to sales growth, which more than offset a 1% decline in organic volume.

While organic volume was down, this was several points better than initially expected, due mainly to improvement in businesses such as retail hair care, and skin care.

In the retail hair care business, global unit volume was up low-single digits, led by the Pantene and Head & Shoulders brands.

Pantene shipments were up mid-single digits, driven by growth in North America, Western Europe and Asia.

Head & Shoulders global volume was also up mid-singles on a global basis with strong growth in Western Europe, Latin America and Asia.

Both brands were down double digits in the CEEMEA region.

In global skin care value share is up nearly a point to more than 11%, and US all-outlet value share of facial moisturizers is up 5 points to over 45%.

The strong US share progress is due to the success of the Olay Pro-X line, which we introduced in January.

Retail skin care organic volume was down a point versus prior year, primarily due to a strong base period in the US, ahead of price increases that went into effect last fall.

Prestige skin care organic volume was up high teens, driven by market share gains for the SK-II brand behind recent anti-aging innovations.

Organic volume in both the professional salon and prestige fragrance businesses was down high-single digits as these businesses continued to be affected by the global economic downturn.

In the Grooming segment, market contraction and soft market shares were the primary drivers of a 2% decline in organic sales.

Shipments for the segment were down 8%, while pricing improved sales by 6%.

The Braun business continue to be affected by weak category demand in appliances, with shipments down low teens.

Male personal care volume was off high-single digits, due mainly to increased competitive promotional activity in the shave preps category.

And male blades and razors, shipments declined high-single digits as solid growth of the Fusion brand was more than offset by declines on legacy systems.

These declines were most pronounced in the CEEMEA region, where the Mach III brand was down 40%, due mainly to significant price increases last fiscal.

The Fusion brand continues to build value share in the US, up 3 points to nearly 30% of the male blades and razors category, and on a global basis Fusion value share is up 2 points to over 17%.

Moving to Health Care, organic sales were up 4%, driven by pricing and product mix, as organic volume was about in line with prior-year levels.

Organic volume grew 2% in developed markets, representing a 9-point sequential improvement from the 7% decline reported in the June quarter.

In oral care, global volume was equal to the prior year as strong growth in Western Europe and Latin America was offset by declines in the CEEMEA and Asia regions.

In Western Europe, Oral-B shipments were up double digits with Crest also delivering strong growth.

P&G is now the oral care market share leader in the region.

In Brazil, Oral-B volume was up nearly 20% behind strong toothbrush market share growth and the launch of Oral-B toothpaste in the pharmacy channel.

As Jon indicated, Oral-B has expanded its toothpaste market share leadership in Brazil to nearly 6 points versus the nearest competitor.

Feminine care volume declined slightly on a global basis due to double-digit decline in the CEEMEA region.

The Always brand delivered high single-digit unit growth in Western Europe and mid-singles growth in Asia.

In the US, Always shipments were in line with prior year despite modest category contraction.

Always' market-leading all-outlet value share of the US feminine pad market was up more than a point to 59%, led by the continued growth of Always Infinity.

Infinity has now been in the US market for a year and has grown to 7% value share.

Global fem care value shares are down nearly 1 point, driven primarily by business softness resulting from last year's pricing actions across CEEMEA.

In personal health care, the home diagnostics business grew volume double digits, and Prilosec OTC volume increased to mid-single digits behind strong merchandising programs.

Vicks shipments were in line with prior-year levels as strong unit volume growth in North America, Asia and Latin America was offset by a double-digit decline in the CEEMEA region.

The early and intense flu season has helped to drive the US respiratory care category up by nearly 7 points versus prior year.

In the Snacks and Pet Care segment, organic sales were down 3%, driven by a 10% volume decline which was partially offset by 7 points of pricing and mix benefits.

Snacks volume declined high teens due to lower merchandising support following the Pringles Super Stack cannery stage, which included a price increase, as well as comparison to a base period that included strong merchandising support.

Pet Care delivered strong organic sales growth behind higher pricing that more than offset a modest volume decline.

The strength of Iams Proactive Health, Iams Premium Protection and Eukanuba Naturally Wild initiatives have largely offset the impact of market contraction in the premium segment of the pet nutrition category.

In the Fabric and Home Care segments, organic sales were up 2% as a 2% decline in organic volume was more than offset by a 4% net benefit from pricing and mix.

Fabric care shipments were down modestly, driven by high single-digit declines in the North America and CEEMEA regions.

North America results were heavily affected by a strong base period, driven by the timing of price increases taken last year and CEMEA continues to be affected by the significant price increases taken last fiscal to offset the impact of foreign exchange rate changes.

Western Europe volume was up mid-single digits, driven by strong merchandising programs on detergents and fabric enhancers.

P&G's all-outlet value share declined in the US laundry detergent market has narrowed to just over a point as the business has now lapped the list price increases taken last September and recent targeted value corrections are making an impact in the market.

Home care shipments were up mid-single digits behind solid growth in all geographic regions.

The Febreze brand grew global volume mid-teens, led by nearly 20% growth in North America behind the initial success of the Home Collections line of air fresheners and home decor innovations.

Febreze all-outlet value share of the US instant action air care market is up more than 4 percentage points to 28%.

The Dawn and Fairy global dish care franchise grew volume high-single digits behind the Fairy Platinum Action Pack launch in Western Europe.

In the US the market-leading Dawn brand grew all outlet value share by about half a point to 44%.

Battery shipments were down mid-single digits, due mainly to a 10% market size contraction in the US and market share challenges in both developed and developing markets.

While the business continues to expect near-term pressure in the disposable power segment, we are encouraged by our recent Duracell Smart Power innovations in the fast-growing rechargeable segment.

The Smart Power line includes the myGrid device recharger and instant power supplies for devices such as BlackBerry's, iPods and cell phones.

In Baby Care and Family Care we delivered organic sales up 1%.

Volume was down 1% but was more than offset by positive pricing.

Global baby care shipments were up low-single digits, led by high single-digit growth in Western Europe behind the Pampers Simply Dry value tier expansion.

Pampers diaper value share in Western Europe was up nearly a point to 54% including a 2.5-point advance in the UK to nearly 60% of the market.

Pampers shipments in the UK were up more than 30%, driven by the Simply Dry launch.

In India, Pampers shipments were up more than 90%, driven by market expansion and share growth, and in the Philippines Pampers volume was up more than 20% following consumer value corrections.

In the US P&G's all-outlet value share of diapers was up more than 0.5 points to nearly 38% with both the Pampers and Luvs brands growing market share.

Family care shipments were down mid-single digits, due primarily to a strong base period, driven by trade inventory builds ahead of price increases taken last year and timing of merchandising events.

US all-outlet value share for Charmin was down by about 1 point to 27%, and Bounty value share was in line with year-ago levels at nearly 46%.

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

Thanks, Teri.

At the back to school conference last month we indicated organic sales would reach an inflection point during the second quarter of fiscal 2010.

This inflection point has occurred a quarter earlier than originally anticipated.

We continue to expect stronger top-line results for the remainder of the year for two reasons.

First and very transparently, the comparisons get easier.

Second, many of our most important innovations don't ship until the second half of the year, so there will be a sequential strengthening of our plans.

Earnings per share will be somewhat lumpy by quarter.

October-December all-in earnings will be down versus year ago.

This is because the sale of the pharmaceutical business will generate a one-time gain that is significantly less than the Folgers one-time gain, which is in the base period.

October-December core earnings per share will be up because commodity prices will be down sharply versus year ago.

In addition, October-December earnings comparisons will benefit from last year's foreign exchange-related pricing, which won't begin annualizing until the third quarter.

Second-half earnings will be impacted by moderating commodity benefits, the annualizing of last year's pricing actions and support behind our strategic investments, which are generally back-half loaded.

Marketing support will have a particularly large impact on Q4, which compares to a base period which was very light on innovation.

With that background, let me move to guidance for fiscal 2010 and the October-December quarter.

For the fiscal year we expect organic sales growth of 2% to 4%.

This is an increase of 1 percentage point versus our previous guidance range of 1% to 3%.

The increase is driven by the July-September over-deliveries and the slight improvement in underlying market growth.

We now expect full-year market growth of 1% to 2%.

This is up 1 point versus prior estimates, but still well below historical levels.

Foreign exchange, based on current spot rates, should positively impact sales by 1% to 2%, resulting in all-in sales of 3% and 6%.

This is up several points ahead of our prior guidance range of 1% to 3%.

We are raising the bottom end of our GAAP earnings per share guidance range by $0.03 to $4.02 per share.

This reflects the slightly higher top-line growth projection.

We are maintaining the high end of our guidance range at $4.12 per share.

We feel this is prudent for several reasons.

It's still very early in the fiscal year, commodities are beginning to rise again, foreign exchange markets remain volatile and while there has been some modest improvement it's not entirely clear what level of global market growth will be sustained.

Core earnings per share are expected to be $3.47 to $3.59 per share, in line with to up 3% versus year-ago.

Turning to October-December, we expect organic sales growth of 2% to 5%.

The midpoint of this range represents solid sequential improvement from the inflection point we achieved during July-September.

With global market growth rates assumed to be up 1% to 2% our guidance range suggests value share growth during the October-December quarter.

All-in sales inclusive of a 1- to 2-point benefit from foreign exchange are expected to be up 3% to 7%.

All-in GAAP earnings per share are expected to be $1.36 to $1.44 per share.

This includes a one-time gain of approximately $0.43 per share from the divestiture of the pharmaceuticals business, which is progressing as planned towards a targeted close date of October 30; that's tomorrow, 2009.

The final gain on this transaction will be provided in January with our December quarter results.

Core earnings per share are expected to be $0.91 to $1.00 per share.

This is up 1% to 11% versus a year-ago base period which included high commodity costs.

We expect strong cash flow results to continue.

Our priorities for cash utilization have not changed.

Our first priority is to maintain our AA-minus credit rating.

This currently enables us to achieve very attractive financing rates.

We have refinanced $6 billion of $10.5 billion of bonds coming due this fiscal at historically low rates, including a $1 billion two-year fixed rate bond we issued during the first quarter with a coupon of only 1.35%.

At that time this was the lowest US dollar coupon on a two-year fixed rate corporate bond by any issuer in recorded history.

As the remaining bonds mature, we expect to continue to take advantage of historically low interest rates, lowering interest expense for the second straight year.

Our second priority for cash usage is to fund business growth opportunities.

This includes investments in manufacturing capacity, which we have maintained throughout the financial crisis, and includes investment behind innovation and portfolio expansion.

It also includes acquisitions that enable us to further strengthen our strategic position and generate attractive returns for shareholders.

Our third priority for cash is maintaining a healthy dividend.

P&G has increased its dividend for 53 consecutive years at a compound annual rate of 9.5% and has paid a dividend every year since being incorporated in 1890.

After the dividend, remaining cash is targeted for share repurchase.

Share repurchase will resume during the October-December quarter.

We are targeting a meaningful level of share repurchase for the year, but the actual amount will likely be below the $8 billion annual threshold we established prior to the global economic crisis.

In closing, the actions we've taken and the incremental investments we're making to leverage our strong innovation program, drive performance-based value messaging and refine value equations as appropriate have allowed us to achieve organic sales growth a full quarter ahead of our original plan.

We are very pleased with this progress but acknowledge there is more work ahead of us.

We will continue to accelerate productivity, drive simplification and manage cost and cash with discipline in order to support plans to profitably grow value share by serving more consumers in more parts of the world more completely.

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

(Operator instructions) Nik Modi, UBS.

I just wanted to get some perspective on the mood in psychology within the Company.

I say that because, having experienced my own rather substantial turnaround at UBS over the past few months, I can really start to appreciate when internal psychology turns from one of sheltering and hiding to one proactively driving the business.

So any thoughts there would really be appreciated.

Nik, this is Bob.

I think the headline of that is that we were all pleased that we're able to move the inflection point of growth a quarter forward from our estimates that we provided at the back to school conference.

But we also realize that there's more work to do.

But I can tell you that the attitude, the morale is up, that we enjoy growth and that we enjoy touching and improving more lives around the world with our products and services.

Bill Schmitz, Deutsche Bank.

Can you just tell us -- maybe I missed it on the prepared comments -- but what the volume organic sales growth mix was between developing and emerging and developed's; and then also, what percentage of the portfolio is considered premium versus value/mid tier?

Well, in terms of the developing versus developed question, from a sales standpoint developing grew significantly ahead of developed, which is not unexpected, given the price increases we took last year that haven't fully annualized.

As you'd expect, that has a negative impact on volume, so volume growth in developing markets was somewhat below developed markets.

Lauren Lieberman, Barclays Capital.

This is actually [Ryan Bennett] sitting in for Lauren today.

Clearly, some businesses have been hit harder than others during the recession, and I guess Central and Eastern Europe was one example highlighted today.

But there are certainly some big categories that have been hit harder, too, like fragrance, batteries, (inaudible), Braun appliances that altogether are probably 10% of sales or maybe even more.

So if they've been down high-single to low-double digits, maybe they've been a point or a point-and-a-half drag to total Company sales versus the last year.

My question is, now that we are beginning to anniversary when the recession hit and destocking began, how do we think about the slope of recovery in those more cyclical businesses?

Are we at a point maybe where those businesses will be flattish and [a longer] (inaudible) as you drag to the top line?

I think you were right in separating the two effects because I think they are very different.

On one hand, if you take the geographic effect, it's really an issue of chronology or timing.

It's the fact that the price increases we took were later and those geographies and also were more substantial in those geographies because of the devaluations.

And so, as we talked, a lot of the lack of growth this quarter was in our senior region where, for example in Russia, we had to take at least four price increases -- I'm generalizing now across all of our categories -- at least four price increases throughout the year, the latest being in the fourth fiscal quarter, AMJ.

So it's going to take a while to work those increases through and to work through their year-on-year comparison effect.

So that's more chronology, but we see the volume in these regions coming back relatively quickly.

The other point you raised is one that's more dedicated to category, focused on category.

And basically, the more discretionary a category, the longer it's going to take that category to return to the kind of growth rates that we may have had before the recession.

Now, you have to mitigate that comment with our innovation program because what we know is, if we innovate, we can affect the market growth of the category.

And certainly, all the Proctor & Gamble people around the world don't take macroeconomics as a given.

We try to do everything we can to spur market growth, since it helps our consumers, it helps our retail partners by increasing their growth and obviously helps us.

So we are working very hard to get that market growth going.

But clearly, Ryan, as we annualize the big crisis quarters, the year-on-year impact of the drag from the discretionary businesses will subside and that should be a source of relative momentum going forward.

John Faucher, JP Morgan.

In terms of looking at the marketing spend going forward, you talked a little bit about having a little more focus in the back half of the year.

Can you talk about what you're seeing from a competitive standpoint?

You guys had brought earnings expectations down in terms of spending more money back into the business.

Are you seeing your competitors doing the same, or do you think your share of voice is moving up substantially at this point?

Because we -- because the rates of advertising spend have been reduced due to the economic weakness, we now see that we are able to deliver more impressions for the same amount of money.

And because our innovation program is stronger this year, we talked about 30% more significant innovations this year than last year, the marketing spend tends to follow the innovations as we work to generate trial on those innovations.

That's also why we said that the marketing spend in the last fiscal quarter for us in AMJ will be higher than it was year-ago because, as we said, our innovation program is largely back-half loaded.

So I don't want to give the impression that we're out there spending to simply reduce prices on existing items.

We are out there supporting an innovation program which is one of the strongest we've ever had.

Relative to the competition, frankly, we have not -- we obviously track consumer value by category, by country and we have not seen tremendous increases in spending by competitors.

And we think that that's right; we think that we should all compete for the consumer based on innovation and the value of those innovations.

Chris Ferrara, Banc of America.

Just wanted to get a sense -- so like the reported sales growth rate that you guys -- on the guidance for fiscal '10 is going up by almost 3 points, like $2 billion, $2.5 billion in sales -- and Jon, I get that you are trying to be more cautious around FX and commodities.

But it seems like the environment is less volatile than it was before and it seems like you guys think the market is growing faster.

So I just want to try to get a little better understanding and a little more color on why you would only raise the low end of EPS by $0.03, leave the high end, despite this pretty sizable, especially for you guys, really a huge increase in reported sales expectations.

Well, I think the big question here is what happens to market growth and how sustainable is it.

And you can take both sides of the argument.

One of the things that's tempering our enthusiasm is unemployment, which hasn't shown signs of moderating yet.

And obviously, to the extent that market growth exceeds our very modest expectations going forward, there should be upside.

But it's just too early to count on that.

In terms of not raising the top end of the guidance, that does reflect continuing volatility that we do see.

Also it reflects continued strengthening of our plans, as I indicated, behind the back-half innovations.

So hopefully that helps.

And we can talk it more later, if you're so inclined.

Ali Dhibadj, Bernstein.

Wondering if you could talk a little bit more, please, about how the strategies of going a little bit lower end in some of your products with some of the innovation, reducing some prices and getting into the emerging markets won't actually end up being margin dilutive in the future.

I guess I can kind of understand for fiscal year '10, with some of the macro help like foreign exchange and commodities, and media spend and some of the compares that you had, tougher compares that you had, those things helped.

But in a more normalized environment like perhaps fiscal year '11 or more broadly, I guess I'm not sure about how margins aren't more challenged without a bigger focus on cost cutting internally or bigger portfolio changes now.

I guess just a little bit in the context of the previous question, where margins this quarter were great, EPS guidance would suggest that your peak margins, for at least this year -- but so, short-term and long-term, I'm trying to figure out whether it's misguided, I guess, to think about what we just saw in terms of operating margins as peak and how to think about margin progression going forward, longer-term.

Let me start and talk about strategy, and then Jon can talk about the impact on margins.

As we said, our strategy is to touch and improve more consumer lives in more parts of the world more completely.

And we talked about a number of innovations we've brought to market most recently.

Some of them, as you probably have pointed out -- properly have pointed out -- have been extending our portfolio down in terms of price.

But others, and I'm talking about Pampers there, for example, in Western Europe, which we talked about.

But others, importantly, have been extending our portfolio up.

We talked about new anti-aging items in Asia on Olay, we talked about Olay Professional.

And then obviously has a positive impact on margins, not just a negative impact on margins.

We are going to continue to expand more of our categories into more countries around the world.

And, while you would think that that might be margin dilutive, remember what we talked about, for example, in India, where our diaper business has grown 90%.

And the reason it's grown that much is because we are competing against cloth or no diaper at all, not against some competitor which requires us to spend more money.

So I think, as you look at the entire portfolio of activity, what we are about is growth.

And we are focused on growth.

We don't have a margin goal, as such, as we've said, but we are focused on growth.

And so we're going to continue to grow the top line and the bottom line, consistent with the guidance that we've given.

It might be counterintuitive, but it's not necessary that the introduction of more value-tier offerings is -- it's not inherently margin dilutive.

And let me explain that.

First, if you look at categories where we have a strong value-tier position -- baby care with Luvs, feminine care with Naturella, tissue towel with Charmin and Bounty Basics -- these are businesses with very attractive margins that have continued to build margin sequentially year on year.

Second, we have built in activity systems that support lower prices on value-tier offerings, and we try to create, try to attract new consumers.

So the price isn't different, isolation, but also the product and the performance promise are different.

And as we attract new consumers into the franchise, we build scale, which reduces cost and can have a positive impact on margin.

Last, the existence of value-tier offerings often gives us additional pricing flexibility behind innovation on the premium end of the portfolio so that, while the value tier offering has a lower margin, the total proposition is margin accretive.

Last point on operating margin sequence -- this quarter will likely be a high in terms of year-on-year progress on margin.

That's really driven primarily by the base period dynamics and the big year-on-year commodity helps that we have in the current quarter.

I would also add, as we talked at the back to school conference, one of our how to win strategies is taking advantage of our scale, is simplifying the organization and its work and is executing with excellence.

And as we do those things, we will generate cash and margin accretion.

And we are working very hard, the entire organization is working very hard to reduce the hierarchy, to improve our business processes, to find savings in ways that we can operate more efficiently that will allow us to invest more on growth.

And so that's a big part of the work that we are doing.

Joe Altobello, Oppenheimer.

I was hoping to squeeze in two, this morning.

First, just wanted to follow up on the developing markets topic for a second.

It seems like this has always been a big focus for you guys, obviously.

But with the slowdown in the developed world, it seems like it has taken on a little more urgency.

Has there been a major change in your strategy in terms of how you penetrate those markets, or is it just basically doing more of what you have been doing in the past?

And then, secondly, on the innovation front you talk about second half, a lot of new products coming to market.

To the extent you can, could you give us a sense of where those will be and what they are?

Relative to the developing market, when A.G.

took over as CEO back in '99-2000, we had a strategy of returning focus to growing in developing markets.

We have since refined that strategy to talk more specifically about underserved or unserved consumers around the world because there are many unserved consumers in places like China and India.

But there are also underserved consumers like Hispanics or African-Americans in North America.

We put together very detailed plans about how we are going to reach those consumers, whether it's taking the number of categories in China from the current 12 today that lead to $3 per head per year spending on P&G products to the roughly 25 categories we have in United States.

We have plans, we have them sequenced, we're getting the consumer knowledge, we're building the capacity in order to do that.

That's what we mean when we say touch and improve more consumer lives, more parts of the world, more completely.

And so we have very detailed plans by market, by category, to enter these markets as well as to develop a vertical portfolio and horizontal portfolio in all of the markets.

So in the end, at the end point of that vision, the whole world should look more like our most developed markets, like the United States where the average consumer spends $100 a year on Procter & Gamble products.

So I think what I would say is it's an evolution.

It's very, very deliberate.

And we've got the plans in place, and that's what this investment year is about.

Relative to the second half, Jon and I really can't disclose the innovations that we are bringing to market that we haven't brought to market yet.

That would enable our competition.

However, we have agreed that as soon as we bring them to market, we will let you know.

And we will explain to you how it fits into our overall strategy.

Victoria Collins, Atlantic Equities.

I wonder if we could turn to talk about the Beauty division a little bit, given the good organic growth that's come out despite the high comp base.

I wonder if you could say a little bit more about how you think this has come around, whether we are looking at a market pickup in this more discretionary area, or perhaps you reacted with new ranges or targeted advertising spend to get a little bit of pickup in the hair care and skin care segments.

I think the answer is really that we have -- had a very strong innovation program in Beauty.

You saw that in the results of the hair care segment.

You saw that also as we talked about the entry of new moisturizing items in Asia.

You also saw that when we talked about the introduction of Pro-X and its impact in many markets of the world.

We also outlined the specific countries we entered with many of these things.

And as you can see, we didn't enter every country of the world simultaneously.

So we have a lot of growth runway ahead of us in expanding these items more broadly.

As we also said, our innovation program gets stronger sequentially through the years.

So I think you are going to see even greater innovations from our Beauty program moving through the sequential quarters of the year.

Andrew Sawyer, Goldman Sachs.

Bob, kind of a philosophical question for you guys.

With respect to spend back, and clearly your organic sales and the gross profitability is coming in better than expected, but the implication you guys are doing is that you're going to spend more back against the innovation pipeline.

As we think about both this year and even looking into fiscal 2011, at what -- are you going to continue to spend back until we see organic sales get back to the mid-single digit range?

Or is there something that philosophically you will continue to do, to drive and really emphasize top-line growth, since that seems to be the direction you guys are really emphasizing at this point?

I don't really like the term spend back because it sounds like there's some kind of price competition to buy the consumers' willingness to use our products.

I would rather think about it as supporting the innovations that we put in the market so that we properly communicate their differential competitive advantage versus other brands or products, and also so that we get the trial rates that we need on those products so that consumers actually use them.

So in terms of marketing spend, it could be something like -- it could be something like sampling or it could be something like a multi-brand commercial innovation.

Or, it could be something like our Pampers UNICEF program, where we support the eradication of neonatal tetanus.

Those are the kinds of things that we are investing in, in terms of marketing spend.

It's not -- as Jon said, if you look at the price corrections we've taken, it's only in 10% of the category-country combinations of our business.

And that's really not what we're about.

What we are about is touching and improving lives through our innovation.

And obviously, given the strong innovation program we have for the full fiscal year and particularly in the back half, it's appropriate for us to increase the level of investment.

We've been very transparent since back last May that that's what we are going to be doing, for the reasons that Bob described.

I don't want, though, people to be confused about our understanding of our long-term need to generate earnings growth as well as sales growth.

We are very cognizant on delivering the total shareholder return that investors will find attractive.

And as we said in the back to school conference, our focus this fiscal year is profitable share growth.

And I underline profitable share growth.

Jason Gere, RBC Capital Markets.

I just wanted to talk to you about a couple of categories that you guys mentioned, some market contraction in North America.

Let's talk about laundry, battery and razors and blades.

Can you maybe put a little more color behind that?

And as we look ahead in terms of the planogram resets, your comfort level, with the actions that you've been taking to grow these businesses, I was just wondering if you could put a little more color around that.

Let me start with the second point first.

We are working with many retailers, not just in North America but around the world, as they pursue more efficient assortments in their store.

We would agree that most stores have too many SKUs, they are too crowded and they are hard for our consumers to shop.

And consumers have reported to us that the more SKUs that are available, the less choice they believe they have because they can't find their way through them.

So we are supporting the efforts of retailers around the world who are looking for more efficient assortment.

And as you may understand, that a more efficient assortment in the store actually benefits the leading brands.

So we are obviously focused on making sure all of our brands are strong, that they are considered leading brands, that they fall above the red line any retailer might draw and that they have adequate shelf space on the shelf in order to meet the traffic that the retailer may have.

It's probably not surprising to you, but our biggest issue isn't losing shelf space on our brands because of their slow movement.

Our biggest issue is having enough shelf capacity for things like weekend traffic and weekend sales so that the retailer never has them out of stock.

And oftentimes, that out of stock occurs even with the product in the back room.

So we're working very hard with retailers to make sure we have the right capacity on the shelf and to make sure we get the right products on the shelf to support shopping at all times.

Relative to razors and blades and laundry and category growth or decline, I think largely what you are seeing can also be considered somewhat of a base period phenomenon.

The markets have been extremely volatile month to month and week to week and oftentimes looking at year-ago comparisons get in the way of really understanding the business.

We tend to look more at running rates as well as year-ago and sequential comparisons to understand them.

I don't see any dramatic falloff in market size in laundry or blades and razors that would impact our business.

We are obviously working to increase market growth because that benefits our retailers and benefits us.

And you may have seen some of our advertising, talking about the wear strip on a Fusion blade, to indicate when it's time to change, to talk about how shaving more frequently helps the skin and the appearance of the person and so forth.

The quarter comparisons on a couple of categories you've mentioned, Jason, are also tough, simply because a number of the steps that we've taken that we know will restore growth we are taking at the very end of the quarter.

So, for example, the price reduction on Sheer in North America, while we announced it earlier, isn't effective until October.

The Excel Gel initiative that we are rolling across Europe is just hitting markets and consumers as we speak.

So we've got plans in place.

We understand we need to get those categories growing, and we are confident we can.

I think that's an important point.

The fact that our volume rate picked up month-to-month throughout the quarter and that September was actually a record shipment month and above year-ago suggests that the business is strengthening, particularly when you look at that in the context of year-ago comparison for the quarter where September was somewhat inflated due to some price increases we took in the October period where retailers bought forward to some degree in September.

Bill Chappell, SunTrust.

Just a quick follow-up on the pricing standpoint.

Are pricing actions largely done in the US?

And then, internationally, I remember you had to kind of raise prices more than you probably even wanted to because of currency going against you.

Are you looking to scale back some of that as currency is more in your favor?

Bill, As you can imagine, the work on pricing is never done.

We're always watching value impressions of consumers around the world vis-a-vis competition.

So it's one we have to remain vigilant on.

I don't think you're ever going to see another year like we saw in our last fiscal year, where we had to price so many times on so many businesses in so many countries.

In my 29-year career it was certainly the most concentrated pricing we've ever taken.

So I don't think we'll ever see something like that again.

And certainly, as we have tail winds in commodity costs or in currency, the pressure on pricing will not be there.

And we are going to watch the value to make sure we are delivering good consumer value every day so we can grow market share profitably.

We have no further questions at this time.

Thank you for your participation in today's conference.

This concludes the presentation.

Everyone may now disconnect, and everyone have a great day.