寶潔 (PG) 2010 Q3 法說會逐字稿

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  • Operator

  • Good morning and welcome to Procter & Gamble's third 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.

  • Adjusted free cash flow represents operating cash flow less capital expenditures and the after-tax impacts of the global pharmaceuticals divestitures.

  • Adjusted free cash flow productivity is the ratio of free cash flow to net earnings excluding the gains on divestitures of the pharmaceuticals business.

  • Core EPS refers to earnings per share from continuing operations excluding certain unusual items.

  • 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 go ahead, Jon.

  • Jon Moeller - VP and CFO

  • Thanks, and good morning, everyone.

  • Bob McDonald and Teri List join me this morning.

  • I will begin today's call with a summary of third-quarter results, Teri will cover business highlights by operating segment.

  • I'll then comment on several topical items before providing guidance at the end of the call.

  • 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.

  • We had a very strong quarter with organic volume growing 7%, the fastest rate of organic volume growth in 18 quarters.

  • A strong innovation program supported by higher media weights drove volume growth across all regions and five of the six business segments.

  • Organic sales grew 4%.

  • As expected, pricing was down 1% due to the targeted pricing interventions we've previously discussed.

  • Geographic mix, driven by double-digit growth in China, Saudi Arabia, Brazil, India and Turkey, reduced sales by about 1% and accounted for half of the total mix impact.

  • While we expected emerging market to the growth to rebound, we didn't expect markets like Turkey to recover so sharply with shipments up more than 60% versus year ago.

  • Category and product mix taken together were responsible for the balance of the mix impact.

  • Strong growth of Pampers Simply Dry in Europe, Bounty and Charmin Basic in North America and entry point shaving systems in disposables, coupled with slower growth of our premium prestige fragrance, Salon and Braun businesses, accounted for 1 point of negative mix.

  • Foreign exchange added 3 points to organic sales, resulting in all-in sales being up 7%.

  • All-in GAAP earnings per share were $0.83, above the high end of our guidance range.

  • This included a one-time non-cash charge of $0.05 per share related to the recently enacted health care legislation.

  • Core earnings per share was up $0.89 -- was $0.89 per share, up 10% versus year ago and $0.07 per share above the high end of the Company's guidance range.

  • The over-delivery was primarily driven by higher than expected gross margin expansion behind strong cost reduction efforts.

  • Gross margin was up 290 basis points.

  • The single largest contributor was our ongoing productivity and cost reduction initiatives.

  • Lower commodity costs in volume leverage also contributed.

  • Operating margin increased 80 basis points as higher gross margin was partially offset by an increase in SG&A.

  • SG&A increased 210 basis points behind higher marketing spending, which was increased to fully support our strong innovation program.

  • The effective tax rate from continuing operations was 31.3%, up 600 basis points versus year ago.

  • The increase was driven by a low base period that included a number of audit settlements and the impact of the previously mentioned health care legislation.

  • Adjusted free cash flow was an all-time record at $4.5 billion.

  • Fiscal year to date we generated $11.5 billion of adjusted free cash flow, which is nearly 130% of earnings excluding gains from the global pharmaceutical divestiture.

  • Two weeks ago we increased our quarterly dividend to 9.5% from $0.44 to slightly more than $0.48 per share.

  • This is the 120th consecutive year since we were incorporated as a Company in 1890 that we've paid a dividend and the 54th consecutive year the dividend has been raised.

  • During the past 54 years, P&G's dividends have increase at an average annual compound growth rate of 9.5%.

  • In addition to raising the dividend we increased our share repurchase activity in the March quarter, repurchasing $2 billion worth of stock.

  • This brings fiscal year to date repurchase levels to $3.4 billion.

  • Based on the strength of our business results and cash performance, we are increasing effective repurchase levels from $5 billion to $6 billion for the full fiscal year.

  • All in, we are very pleased with our March results.

  • Volume growth was strong as we accelerated our pace of innovation and increased marketing support.

  • Solid top-line results in conjunction with our cost and productivity efforts enabled us to exceed our earnings per share targets.

  • We generated a significant amount of cash, authorized a sizable dividend increase and increased our share repurchase plans.

  • We are operating more fully as one company, coordinating and scaling our activities in markets and across categories.

  • Our overarching strategy of touching and improving more consumer lives in more parts of the world more completely is working.

  • At the heart of this strategy is a strong multi-year innovation program.

  • The recently released US IRI Pace Center report for 2009 provides continued confirmation of the strength of our innovation program and its ability to drive growth.

  • IRI recognized Proctor & Gamble as the most innovative manufacturer in the consumer packaged goods industry for the last decade, presenting the Company with the Outstanding Achievement and Innovation Award.

  • In 2009 Proctor & Gamble launched five of the top 10 most successful new nonfood consumer products as measured by sales in the United States -- Tide Total Care, Gillette Venus Embrace, Bounty Extra Soft, Always Infinity and Secret Flawless.

  • In the past 15 years, 125 P&G innovations have earned a spot on the Top 25 Pacesetters list, more than our six largest competitors combined.

  • Going forward we will continue to invest behind a strong multi-year innovation program to expand portfolios vertically, horizontally and into geographic white space.

  • We will also continue to upgrade existing product offerings, improving value for consumers.

  • During last quarter's call I took you through our innovation programs in Baby Care, laundry, oral care and hair care.

  • Today I'll focus on three additional categories -- skin care, feminine care and male grooming.

  • In female skin care we are expanding our portfolio vertically with innovations at multiple price points.

  • At the premium end of the market, core whitening innovations like Cellumination and Whitening Source [Derma] Definition have helped grow our SK-II business by double digits for four consecutive quarters, now making SK-II the number-one skincare brand in Asia.

  • The recent introduction of Olay Pro-X in China is solidifying our long-standing position as the number-one skincare brand in China.

  • And launches of Olay Pro-X in Australia and New Zealand are both tracking ahead of expectations.

  • Earlier in the year we launched Olay Regenerist rollerball, and it is already the number one eye product in the United States.

  • Just last month we started shipping our newest product, Olay Pro-X Professional Firming Treatment kit.

  • We are also providing consumers with more mid and value tier skincare offerings.

  • In the mid tier, Olay Natural White was recently introduced in India and the ASEAN markets.

  • After only five months, Natural White is now the largest skincare boutique in the region.

  • In the value tier, Olay Complete, our most affordable skincare boutique, continues to grow behind dedicated trial building activities.

  • We've expanded our skincare portfolio horizontally with the launch of Olay Total Effects Body Wash in Singapore, Malaysia and Thailand, and Olay Total Effects 7-in-1 Anti-Aging Body Wash, our most advanced body wash ever, in the US in February.

  • Finally, we continued to expand geographically.

  • We've launched Olay into 15 countries over the past year, the same number of countries Olay was launched into over the previous five years.

  • Olay is now marketed in 70 countries around the world.

  • Where we've launched we've continued to grow.

  • In Spain, Olay has overtaken L'Oreal to become the leader in mass skincare just six years since being launched.

  • In India, Olay skincare has achieved a 5% value share after just three years in market, and in Mexico Olay now has a 13% value sure, twice the level of just one year ago.

  • In feminine care we're also driving both premium and value segments of the market.

  • In January we upgraded the top tier of Always in Western Europe with better absorbing technologies, and in March we launched Tampax Pearl in Spain and in Belgium.

  • In the value tier, we launched Always Simply Fits into the United Kingdom in Belgium, and we expanded our portfolio in India with the launch of Whisper Choice Ultra in February.

  • Shipments to date for Choice Ultra have exceeded expectations, delivering record high Whisper shares of nearly 50%.

  • We continue to expand Naturella into additional geographies, the most recent of which was China in March.

  • Naturella is priced 30% below top-tier Whisper and 20% above mid-tier whisper.

  • While it's still very early, month one shipments are ahead of going-in expectations.

  • Across several of the more than 30 markets where Naturella has already been established, we recently improved the products to include deep channels for better fluid handling, improved skin benefits and improved visual signals.

  • This significant set of upgrades began shipping in Mexico in February and Central and Eastern Europe in April.

  • We are using the same strategic template of expanding our portfolio up and down, horizontally into geographic white space in male grooming.

  • At the top end of our portfolio, we continue to leverage Fusion.

  • Fusion has now grown share for 17 consecutive quarters.

  • On top of that we recently announced the upcoming launch of Gillette Fusion ProGlide, a significant advancement in shaving performance and comfort.

  • Consumers prefer ProGlide over Fusion by a wider margin than Fusion was preferred over Mach3.

  • In the mid tier we recently a notched a new Mach3 razor which is specifically designed to better meet the needs of emerging market consumers.

  • As a result, Mach3 shares are at record levels in both Argentina and Mexico.

  • In India Mach3 value share has grown more than 10 points, and almost half of the incremental growth has come from consumers who have traded up from double-edged blades.

  • We continue to innovate at the low end as well to ensure all consumer needs are being properly served and to stimulate systems growth.

  • Gillette Vector, Prestobarba3 and Mach3 disposables are all performing well and are being expanded to additional markets.

  • Several important horizontal portfolio expansions on the Gillette and Olay brand names into male personal care are also underway.

  • In February we launched a complete line of Gillette male grooming solutions in Brazil.

  • Based on early results we are now expanding the entire product line across the balance of Latin America.

  • In March we introduced a scientific face care regimen under the Gillette name in China.

  • The dermatologist-endorsed regimen includes a specially designed Mach3 razor, a cleanser and a balm.

  • Early shipments are tracking ahead of expectations.

  • And, just last month we launched Olay's first targeted offering specifically designed for men.

  • Olay Men's Solution, a full line of men's skincare products, was introduced in China and is off to a great start.

  • In Western Europe we just launched a complete line of Gillette skincare products.

  • In North America we are introducing Gillette Fusion Pro series, an advanced lineup of male skincare products, in June.

  • Gillette Fusion Pro series fully leverages P&G's skincare technology for the first time ever and significantly enhances the Gillette ProGlide launch, enabling retail and consumer scale events.

  • The examples I just provided of skincare, feminine care and male grooming are illustrative of the work we are doing and investments we're making to expand our portfolio vertically, horizontally and geographically in order to serve more consumers in more parts of the world more completely.

  • We are coordinating our innovation activities across categories and markets and are acting more intentionally as one company.

  • We are scaling commercial activities as well as product innovation.

  • In North America 18 brands helped sponsor the US Winter Olympic and Paralympic teams under a unifying Proctor & Gamble thanks, mom advertising campaign.

  • Other examples of scaled activity which are enabled by the breadth of our brand portfolio include our sustainability-based future friendly program and our ongoing collaboration with Wal-Mart on family-friendly programming, including the recently released family movie, Secrets of the Mountain.

  • These programs, which recognize moms, enable households to make simple changes to save energy, save water and reduce waste and that bring families together, advance our purpose of touching lives and leverage our broad portfolio, turning size into scale and scale into growth.

  • In summary, a strong, scaled and coordinated innovation program, increased marketing support, tight cost control and continued cash discipline have resulted in another strong quarter.

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

  • Teri List - SVP and Treasurer

  • Starting with the Beauty segment, organic sales increased 2% driven by 4% organic (inaudible) growth.

  • Pricing and geographic mix reduced sales by 2%.

  • Female skincare delivered double-digit organic volume growth, including 20% growth in developing markets.

  • The strong results in developing markets were driven by the expansion of Olay Pro-X in China, Australia and New Zealand and Olay Natural White across Asia.

  • In the US Olay all-outlet value share of the facial moisturizer segment was up nearly 1.5 points to over 45% behind the introduction of the Olay Pro-X Professional Firming Treatment Kit and the Olay Regenerist rollerball eye treatment ovation.

  • Retail hair care delivered a solid quarter with mid-single digit organic volume growth.

  • Head & Shoulders led the growth with shipments up mid-teens including over 25% growth in China behind our scalp care innovation.

  • In Japan shipments of H&S are nearly double prior-year levels, driven by the scalp moisturizing innovation and marketing campaign.

  • Pantene shipments were up high-single digits in developing markets behind the expansion of Pantene Nature Fusion and price corrections taken in Turkey and the Arabian Peninsula.

  • In North America Pantene shipments were lower versus prior year as retailers reduced inventories of current products ahead of the base brand restage that will launch later this quarter.

  • The selling of the new Pantene lineup has gone extremely well and the new products will be on shelves in mid June.

  • P&G's all-outlet value share of US retail hair care is approximately 32%, in line with prior-year levels, as [girls and] Herbal Essences offset modest declines on Pantene.

  • Professional hair care volume was down mid-single digits, due mainly to soft global markets.

  • In the prestige beauty business, volume was up mid-single digits, driven primarily by a weak base period comparison in travel retail in Western Europe.

  • The increases in these areas were partially offset by continued market softness in North America.

  • Prestige fragrance market share is roughly in line with prior year at about 15%.

  • In prestige skin care, share is up nearly a point to 7% behind strong results of the SK-II Skin Signature innovation and, as Jon mentioned, SK-II is now the number-one prestige skin care brand in Asia.

  • In the Grooming segment, organic sales were up 4% and volume growth of 5%.

  • The net impact of price increases and negative product and geographic mix reduced sales by 1%.

  • In the male blades and razors business organic volume was up high-single digits with strong growth in both developed and developing markets.

  • Shipments in greater China were up more than 20% behind Gillette Vector, our entry point shaving system.

  • In India the relaunch of our lower-cost Mach3 system continues to deliver strong results with shipments up more than 40% for the brand.

  • Fusion shipments were up nearly 20% on a global basis, including over 25% growth in Western Europe, CEEMEA and Asia.

  • In North America, both Fusion and Mach3 grew mid-singles behind strong marketing and in-store programs.

  • Gillette all-outlet value share of the US male blades and razors category was up nearly 0.5 points to over 77% with Fusion up 3 points, the 17th consecutive quarter of Fusion share growth.

  • We are pleased with these strong results leading up to a launch of Fusion ProGlide, our first major upgrade to the Fusion platform, which is scheduled for June.

  • As Jon mentioned, ProGlide is a strong consumer preference winner over the base Fusion product, and we've seen excellent response to our initial consumer awareness building programs around the US.

  • Volume in the appliances category was up mid-single digits with solid growth of Braun in developing markets in Western Europe against a soft base period caused by the economic crisis.

  • In Western Europe, Braun's share of hair removal appliances was up over 4 points to 42% with strong improvement of both male and female products.

  • In Health Care, organic sales were up 1% driven by a 5% increase in organic volume.

  • Targeted price adjustments and negative geographic mix lowered sales by 4%.

  • In oral care shipments increased high-single digits with developing markets up mid-teens and developed markets up mid-singles.

  • In developing markets the Crest brand was up mid-teens in China and over 40% in Mexico behind the launch of Crest Pro-Health toothpaste.

  • The Oral-B brand was up nearly 40% in Brazil behind the second wave of toothpaste expansion, and Oral-B volume was up more than 50% in India on the strength of our toothbrush expansion progress.

  • Western Europe delivered strong volume growth behind the launch of Pro-Health 2 Benelux, and good results on the base Crest and Oral-B franchises in the UK, Germany and France.

  • P&G's share of the Benelux toothpaste market is up more than 7 points versus prior year, and P&G is now the overall oral care market share leader in Western Europe and in Belgium and Holland.

  • In the US oral care shipments were up low singles, and we are seeing strong consumer and customer response to our Crest 3-D White and Pro-Health Sensitive Shield innovation that launched during the quarter.

  • Crest has maintained its market leader position in the US toothpaste category with all-outlet value share of 37%.

  • Feminine care volume grew mid-single digits led by the Naturella brand, which posted mid-teens growth behind the China launch in March.

  • The Always brand also delivered broad-based volume growth with all major regions up mid-single digits or better.

  • Always also continues to see good shipment growth in Western Europe, from the Always Simply Fit innovation.

  • P&G's value share of the Western European feminine care market is in line with prior year at nearly [50]%.

  • North America and Latin America have delivered solid growth behind increased marketing investment behind always, Tampax and Naturella.

  • In the US the Always brand grew all-outlet value share of feminine pads by nearly a point to 59%, and Tampax increased it share of the US tampon market by 0.5 points to nearly 50%.

  • Personal Health Care volume was off mid-single digits due mainly to the significant reduction in cold and flu incidences compared to prior year and increased competitive activity on Prilosec OTC.

  • In the Snacks and Pet Care segment organic sales and volume were down 6%.

  • Snacks volume was lower versus prior year, and the soft post holiday merchandising period in the US was partially offset by solid growth outside the US including mid-teens growth in the CEEMEA region.

  • The business (technical difficulty) to the Pringles Multigrain innovation that launched in the US in February and that will be launched in Europe over the summer.

  • Pet care volume was off low singles due primarily to market contraction in the premium and super-premium segments.

  • P&G all outlet value share in the US pet care market was down slightly to about 9.5%.

  • Fabric and Home Care segment organic sales increased 5% and volume grew 10%.

  • Volume in both Home Care and batteries was up double-digits, and fabric care increased high singles.

  • In Home Care volume growth was broad-based across brands and regions.

  • Febreze shipments were up 30% including very strong growth in North America behind the Home Collections lineup and continued market expansion in Western Europe.

  • Shipments of the Dawn and Fairy dishwashing franchise were up high teens behind strong results of the Dawn Hand renewal initiative in North America and the Fairy Platinum Auto Dish initiative in Western Europe.

  • Swiffer shipments were up double-digits in North America, driven by strong trial building programs and product improvement on Swiffer Wet Jet.

  • US all-outlet market share is up for all major Home Care brands.

  • Dawn's share of hand dishwashing liquids is up 2 points to 45%.

  • Cascade auto dishwashing share is up 4 points to nearly 66%.

  • Febreze share of the air care market is up 3 points to over 23%, and Swiffer's share of the surface care market is up more than a point to nearly 17%.

  • The sharp increase in battery shipments was driven mainly by strong consumer and retailer support following the interventions made on the US Duracell business to remain competitive in light of increased promotional activity from low-cost and private-label competitors.

  • Duracell's shipments were up more than 35% for the quarter in the US.

  • The batteries business also delivered double-digit volume growth in Western Europe behind Duracell's renewable personal power innovations.

  • Fabric Care shipments were also strong, up high-single digits for the quarter.

  • All of P&G's top laundry brands -- Tide, Ariel, Gain, Bold, Dash and Ace -- delivered volume growth of mid-single digits or better.

  • In North America Fabric Care shipments were up high singles behind the Tide Stain Release and Tide with Febreze Sport innovations.

  • Shipments of Gain were up double digits in the US behind strong marketing programs to build both the detergent and fabric enhancer businesses.

  • P&G's all-outlet value share of the US Fabric Care market is in line with prior year levels at 53%.

  • In Western Europe growth of Ariel and Dash brands were driven by the Actilift detergent innovation and the Ariel Professional Laundry additive launch.

  • P&G's value share of the Western European Fabric Care market is up nearly 2 points to over 28%.

  • Tide shipments in India were up nearly 30% following the launch of Tide Naturals, P&G's first entry into the value tier of the powdered detergent market in India.

  • In the CEEMEA region Ariel's shipments were up nearly 30% and Tide was up double digits as we began to see key markets such as Turkey and Saudi Arabia show signs of recovery from the economic crisis.

  • Baby and Family Care delivered organic sales growth of 7% and organic volume growth of 10%.

  • Product mix reduced sales by 2% due to a shift toward larger pack sizes and strong growth of value tier products.

  • Shipments for the Baby Care business and the Pampers brand were up double digits with strong growth in both developed and developing markets.

  • Pampers shipments were up double digits in North America behind the launch of Pampers Dry Max, our biggest innovation on Pampers in the last 25 years.

  • While it's too early to assess the launch, we are very encouraged by the strong trade support for this innovation.

  • Importantly, Pampers already had strong momentum in the US with all-outlet value share up 1 point to 31% prior to the launch of the Dry Max innovation, which hit shelves in mid-March.

  • In Western Europe, Pampers shipments were up mid-singles, driven by the continued success of Pampers Simply Dry.

  • Pampers' share of the Western Europe diaper market remains strong, up about 2.5 points to over 56%.

  • In developing markets Pampers volume was up mid-teens, led by Asia and the CEEMEA region.

  • We continue to see excellent growth on Pampers in India, and Pampers is now the clear market leader with over 50% share.

  • In CEEMEA we are seeing signs of recovery in markets such as Turkey and Saudi Arabia, which are more than offsetting continued weakness in Russia and Poland.

  • Pampers' value share is up 1 point to 50% in the CEEMEA region.

  • Family Care shipments were up double digits driven by mid-teens growth of Charmin and high-single-digit growth of Bounty.

  • Both brands benefited from very strong growth of the basic product line and both brands have product innovations launching soon.

  • On Bounty we are in the midst of launching product upgrades across all key elements of the brand, the main Bounty paper towel line, Bounty Basic, Bounty Extra Soft and Bounty Napkins.

  • On Charmin we have upgrades coming in July in all six key elements of the brand -- Charmin, Ultra Soft, Ultra Strong, Mega Roll, Basic, Sensitive and Fresh Mates.

  • Charmin's all outlet value share of the US toilet tissue category was up 0.5 points to over 28%, and Bounty's share of the US paper towel category is in line with prior year at 46%.

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

  • Jon Moeller - VP and CFO

  • Before I get to guidance, I want to briefly address a couple of questions we've been receiving.

  • First, what's happening with trade up and trade down?

  • The answer, as I think you can gather from Teri's business review, is that both continue.

  • Premium innovations increase consumer value through enhanced product performance and continue to perform well.

  • Products like SK-II, Fusion, Ariel Excel Gel, Fairy Platinum and Crest 3-D White are all growing strongly.

  • All five of the P&G products in the 2009 IRI Pacesetter Report I referenced earlier were premium price innovations, succeeding in spite of the worst economic environment in a generation.

  • On the other hand, there's a meaningful group of price conscious consumers who continue to look for lower prices.

  • These consumers are driving double-digit increases on brands like Gain, Pampers Simply Dry, Naturella, Bounty Basic and Charmin Basic.

  • Our strategy and purpose demand we more intentionally serve both performance and price-focused consumers.

  • The vast majority of consumers in either group continue to prefer branded products versus private-label.

  • In the US branded products account for 88% of the sales in the categories in which we compete.

  • Private-label market share has sequentially declined for four of the last five months.

  • In Western Europe where private-label is most developed, private-label shares are sequentially declining and have been flat or lower than year-ago levels for three of the last five months.

  • The second question I want to address relates to margins and is usually framed in the following manner.

  • As P&G expands further into developing markets and innovates across mid- and low-tier segments, will this result in lower prices and margin dilution?

  • I continue to believe it doesn't have to.

  • As we've said many times, our developing market margins on an after-tax basis are comparable to developed market margins.

  • In some cases they are actually higher.

  • These margins will increase as we build scale in these markets, so accelerated activity in developing markets should in aggregate support or build P&G margins.

  • As relates to mid- and low-tier entries, higher margins tend to be correlated with vertically tiered portfolios.

  • Fielding a complete portfolio which extends from the premium segment down to the low tier allows us to reach more consumers, build more scale and increase margins.

  • They also allow us more innovation-driven pricing flexibility at the high end.

  • Let's look at several examples which help illustrate this point.

  • Sales of Bounty Basic, our value tier paper towel, have increased three times over the past three years, while total Bounty margins have increased 300 basis points.

  • Charmin Basic sales have increased four times over the past three years, and after-tax category margins have increased 700 basis points.

  • In India we recently expanded our laundry portfolio with the introduction of a new brand, Tide Naturals.

  • Tide Naturals was initially priced 70% higher than the established value tier.

  • It's functionally superior to other value tier offerings and milder on hands, so Tide Naturals was a way to trade existing value-tier consumers up.

  • With the introduction of Tide Naturals, our profitable and growing laundry business in India now has strong product offerings in the premium, middle and value tiers, and Indian consumers have more choices.

  • By better servicing the needs of India's consumers, P&G's laundry volume in India has grown six times since 2003 and margins are up more than 900 basis points.

  • Turning now to guidance, we continue to expect fiscal 2010 organic sales growth between 3% and 5%.

  • This is a notable improvement versus the start of the year, when organic sales was projected at 1% to 3%.

  • Foreign exchange, based on current spot rates, should be about flat, resulting in all-in sales of 3% to 5%.

  • With only one quarter left to report, we are tightening our all-in GAAP earnings per share and our guidance range.

  • We are raising the low end by $0.04 per share, which improves our all-in GAAP earnings projection range to $4.06 to $4.12 per share, inclusive of the $0.05 per share health care impact mentioned earlier.

  • As we've stated on a number of occasions, we believe estimates above the high end of our guidance range are overly aggressive.

  • As we look to manage our investments and maximize long-term shareholder value creation, we won't chase short-term foreign exchange movements, commodity increases on other one-time impacts simply to hit the high end of our guidance range or a consensus number which is above our guidance range.

  • Core earnings-per-share are expected to be $3.62 to $3.68 per share, up 4% to 6% versus year ago.

  • This is an increase versus our prior guidance of 2% to 5% and is a substantial improvement versus the start of the year, when core earnings per share were expected to be minus 1% to up 3%.

  • Since that time, the strengthening top line and robust cost control and productivity efforts have driven a significant improvement in core earnings per share.

  • Our core earnings per share guidance range has increased by $0.18 per share on the low end and $0.09 per share on the high end, despite incurring an impact of about $0.08 per share related to Venezuela.

  • Turning to the June quarter, we expect organic sales growth of 4% to 5%.

  • All-in sales inclusive of foreign exchange benefit of about 2 points are expected to be up 6% to 7%.

  • Both core and all-in GAAP earnings per share are expected to be $0.68 to $0.74 per share.

  • We've indicated for some time that the second-half and fourth-quarter earnings in particular will be lower than the first half.

  • There are a number of reasons for this.

  • The biggest driver is incremental marketing investments to support our innovation program, which is back-half loaded and is skewed even more heavily towards the fourth quarter when items like Fusion ProGlide and the Pantene restage are launching.

  • Second, we expect higher cost of goods sold behind less favorable year-on-year commodity comparisons and one-time initiative launch costs.

  • Third, while we have moved quickly to address the situation in Venezuela, the impact of the currency devaluation will impact fourth-quarter results.

  • These dynamics have been and continue to be reflected in our guidance numbers.

  • Regarding fiscal 2011, similar to last year, we're trying to ensure our plans are built on the most up to date, relevant assumptions for foreign exchange, commodities and for market growth.

  • We're also spending time on a disciplined look at investment options, ensuring that we are investing in the right things for the long-term.

  • So, like last year, we have pushed back plan completion closer to the end of our fiscal year.

  • Our plans are targeting continued strength on the top line and sequential improvement on a core basis on the bottom line.

  • We'll provide more specific guidance regarding next fiscal year when our planning process is complete.

  • In closing, we remain pleased with the progress we're making.

  • Volume growth was strong as we accelerated our pace of innovation and increased marketing support.

  • Solid top-line results in conjunction with our cost and productivity efforts enabled us to exceed our earnings per share targets.

  • We generated a significant amount of cash, authorized a sizable dividend increase and increased our share repurchase plans.

  • We are operating more fully as one Company, coordinating and scaling our activities in markets and across categories.

  • Our overarching growth strategy of improving the lives of more consumers in more parts of the world more completely, is working and will enable us to grow our business sustainably and profitable in the future.

  • Bob, Terry and I would now like to open up the call to questions.

  • Operator

  • (Operator instructions) Lauren Lieberman, Barclays.

  • Lauren Lieberman - Analyst

  • I was hoping you could give a little bit more color on productivity, because the gross margin was obviously a big positive surprise, and you were clear to mention that it was more productivity related than necessarily cost depletion.

  • So if you could just walk through some of the things that are going on there and how we should think about that looking forward?

  • Jon Moeller - VP and CFO

  • It is both cost savings programs.

  • We have a very strong cost savings program separately from productivity that looks at everything from lower capital costs to lower inventory carrying costs, cheaper and better formulations.

  • It's a very robust program.

  • And then, in addition, as we are in all parts of the Company, we continue to focus on productivity, increasing sales per employee, really, across the board.

  • And that's something that we'll continue to focus on going forward.

  • Bob McDonald - President, CEO, Chairman

  • I would also add that our scale efforts are also having an impact of delivering results with greater productivity.

  • For example, we mentioned March was a record month for our volume shipments.

  • That month was supported by our Olympic advertising, our thanks, mom campaign, the first time in the history of the Procter & Gamble Company we've advertised the company in the United States and tied it to our brands.

  • And that's a more productive approach using our scale.

  • Operator

  • John Faucher, JP Morgan.

  • John Faucher - Analyst

  • Jon, following up on your comments about emerging market margins or lower-tiered price margins, two questions on that.

  • The first is, how do these products compare from a penny profit standpoint?

  • So, as you get more of your volume growth from those, do we still need to factor that in?

  • And then the second piece would be, as we look out over the next couple of quarters, how long do you think this negative top-line mix continues?

  • Is it something where you start cycling it when we get to January of next year, or do you think this is something where we need to plan on this for a couple of years for a more aggressive long-term buildout of the portfolio?

  • Jon Moeller - VP and CFO

  • On the first question, obviously, as you saw, we accelerated volume growth in developing markets this quarter.

  • There is an impact on top line because of lower sales per unit, lower prices per unit.

  • And that does translate, as you rightly suggest, into somewhat lower penny profit on those items versus the case in developed markets.

  • But the margin really isn't that great, number one.

  • And, number two, as I indicated, in some markets we actually have margins that are higher than developed markets and where penny profit is equal or even better.

  • On the top line, this is a dynamic, frankly, that has been with us for the better part of this decade as our developing markets have grown at a faster rate than the developed markets.

  • It has historically been a drag from a mix standpoint between one and two points per quarter.

  • In more robust economic environments we have been able to offset that as the premium parts of our portfolio, particularly the prestige business, the professional business, the Braun business, were a bit healthier.

  • So going forward it is a dynamic I think you should expect to continue.

  • That doesn't imply, though, that we are going to be negatively mixing for eternity.

  • I would hesitate to give you a date in terms of when the negative mix would dissipate.

  • As I indicated, we are really in the middle of our planning process and we'll have to work through that.

  • But we'll try to provide clarity to that in the subsequent call.

  • Operator

  • Chris Ferrara, Banc of America/Merrill Lynch.

  • Christopher Ferrara - Analyst

  • Not to beat this topic to death more, but it's striking that the gross margin was so strong despite a negative 2 mix and a negative 1 price, and it's been such a hot topic.

  • So I'm just wondering, and I know you said the after-tax margins in D&A are comparable.

  • You guys have been saying that for years.

  • But can you quantify the mix effect to gross margin this quarter and maybe just give a little color on this dynamic?

  • I would have expected it to be at least a reasonably sizable drag with that negative 2 mix.

  • Jon Moeller - VP and CFO

  • Well, as we've said, the gross margins are a little bit lower in developing markets because of the lower price points.

  • I really don't have in front of me the dimensionalization of the exact impact of that on gross margin for the quarter.

  • You can obviously follow up with us post the call.

  • We'll be happy to provide a perspective on that.

  • But as we've been saying all along, while there will be elements of our activity system, be it more value tier entries, expansion into developing markets and accelerated growth in those markets, that will have a margin impact, we expect to be able to continue to hold or build margins (technical difficulty).

  • Operator

  • William Schmitz, Deutsche Bank.

  • William Schmitz - Analyst

  • Can you just tell us what your weighted market share was in the quarter and how that has changed over the last couple, two or three quarters?

  • And then the percentage of your sales where you're gaining market share?

  • And then the second part of that is, I know [A&P] spending was depressed last year and I know you have a big innovation pipeline.

  • So can you just talk about what you think the A&P spend is going to be up year-over-year in the fourth quarter?

  • Bob McDonald - President, CEO, Chairman

  • Let me talk first about our share.

  • Share reports aren't available through March, of course, but we are confident that we grew global value share up about 1% above year ago.

  • All regions have improved sequentially versus quarter two, and all regions but our Central/Eastern Europe, Middle East and Africa should be flat or growing share.

  • Our Household Care business, inclusive of Fabric and Home Care and Baby and Family Care, is the strongest.

  • Female Beauty and male grooming is mixed in share with grooming up and beauty slightly down.

  • And Health Care is down slightly, driven largely by Prilosec.

  • Snacks and Pet lost the most value share during the quarter.

  • Share growth will continue in the fourth quarter, driven by our strong innovation program and, obviously, a lower base period comparison.

  • In terms of A&P spending, as you know,

  • Jon Moeller - VP and CFO

  • As you know, Bill, we don't provide specific figures on an A&P basis.

  • But I would expect as we release our annual results that the A&P spending as a percentage of sales will be up versus year-ago.

  • And that is behind marketing increases to support the innovation program, as you rightly point out.

  • We're looking at impressions being up over 20% versus year ago.

  • And given the back-half loaded nature of our innovation program, particularly the strength in the fourth quarter, you should assume that that number is even stronger in the fourth quarter.

  • Bob McDonald - President, CEO, Chairman

  • If I can just add to what Jon said, because I think it's important that we focus more on the effectiveness of the A&P spending, not just the spending itself, is if you had seen our Secrets of the Mountain movie that we had produced and aired in conjunction with Wal-Mart, it was the number one show for the whole night.

  • 93% of moms liked the movie, 88% thought it was an excellent quantity, 74% rated the commercials favorably, 26% increased the favorability of the brands that were advertised on that show.

  • And in total the purchase intent for our brands indexed 270%.

  • Research from the Association of National Advertisers indicates that only 23% of moms are happy with the family-oriented programming currently available on television.

  • As the world's largest advertiser we have a responsibility and an obligation to improve the quality of that programming.

  • And as I showed by these numbers, it's in our best interest to do that because it makes our advertising more effective.

  • So try not to just focus on the spending but also focus on the quality of the advertising and the context in which it's aired.

  • Operator

  • Wendy Nicholson, Citigroup.

  • Wendy Nicholson - Analyst

  • Could you go back and talk a little bit more about the comment you made that your higher margins are in your vertically tiered markets?

  • I guess my first question is, in a couple of your key emerging markets, where do you stand?

  • For example, in China when we were there it struck us as being a surprisingly premium priced market where that's where the innovations come from and that's how your business mix skews.

  • So my question is, in a China or in a Russia or in a Brazil, do you need to just simply launch more new products at the lower end?

  • Is it going to come from just category diversification?

  • And where do you think you are?

  • There's obviously a lot of press when you launch a Tide Naturals, but it also seems like you are doing stuff at the high end like Oral-B.

  • So I guess I just don't know where you are in that game or how far along you are.

  • Bob McDonald - President, CEO, Chairman

  • As we've talked, our growth strategy is to touch and improve more consumer lives in more parts of the world more completely.

  • That requires us to build our portfolios vertically in terms of price tiers and consumer benefits, horizontally in terms of the number of categories in every country and horizontally in terms of adjacent categories.

  • When you are in China, you saw that we are only in more than a dozen categories in China, whereas in the US we are in more than two dozen categories.

  • The per capita spending on P&G products in China is only $3 per head per year.

  • Here in the United States it's over $100.

  • We have very discrete, very concrete plans to fill out those product categories and to get all categories in all countries over a period of time, metering those investments to make sure we deliver at the top of our peer group in terms of total shareholder return.

  • So very concrete building blocks.

  • We talk about it and we work on it all the time, and we want to satisfy every consumer's need.

  • Just like ours of touching and improving lives, there's no reason we should stop trying to get to every consumer in the world, as long as we can continue to deliver the shareholder returns that we need to deliver to be in the top of our peer group.

  • Jon Moeller - VP and CFO

  • I would just add that China actually makes the point on vertically tiered portfolios delivering higher margin.

  • I mentioned earlier than in some developing markets we have margins that are higher than developed markets.

  • China is one of those markets.

  • It's one of our most developed developing markets, where we have a good representation across price tiers.

  • Just one more point on that.

  • If you look at China itself, one of our best developed portfolios in terms of tierings is the Hair Care portfolio.

  • There again, we have higher margins on that business than we have on some of our other businesses, where the tiers aren't as well developed.

  • So I think it's a very good example of exactly the point that we think is relevant.

  • Operator

  • Andrew Sawyer, Goldman Sachs.

  • Andrew Sawyer - Analyst

  • I wonder if you could address some of the pricing adjustments that you had targeted in response to private-label.

  • And specifically in US Fabric and US Family Care, have those worked as expected?

  • Are you comfortable with where private-label is today?

  • In any instances did you perhaps take prices down too far?

  • How should we think about pricing in those two specific categories over the next couple of months or the next couple of quarters?

  • Bob McDonald - President, CEO, Chairman

  • Andrew, we are happy with the pricing we've taken.

  • As Jon said, the price impact was about 1 point this quarter.

  • A year ago we priced up averagely 5% across the entire Company across all categories.

  • And we're doing what we have to do price-wise to (technical difficulty) price competitive.

  • Having said that, that's not the focus of our efforts.

  • The focus of our efforts are to touch and improve lives with our innovation program, and generally many of our innovations, as Jon talked about, are premium priced, like Gillette ProGlide, and some are lower-priced, like Tide Naturals in India.

  • So we are just doing what we have to do to continue to win the consumer value equation, and we are attempting to do that through innovation, through the strongest innovation program that we've had in my 30-year career.

  • Operator

  • Nik Modi, UBS.

  • Nik Modi - Analyst

  • So the question for you, Bob, just talking about the Beauty segment, I would say growth rates have been lagging the peers.

  • Can you just give us some perspective -- of course, we understand prestige and professional is still malaise-ing because of the economy.

  • But can you just give us some perspective on what's going on in that business and when you think you can actually regain some share momentum broadly in that business?

  • Bob McDonald - President, CEO, Chairman

  • I understand that it appears that some of our competitors' organic sales growth rates in Beauty are rebounding faster than ours.

  • And I want to address that.

  • We are seeing increased interest in our Beauty Care segment.

  • Most of the growth rate differential for this year's March quarter is really explained by weaker base periods for our key competitors.

  • The two-year stacked growth rate is equal to key competitors.

  • In other words, if you take the two-year rate for Procter & Gamble versus the competition, they are roughly the same.

  • We are also being impacted by the strategic decision to rationalize our professional hair salon portfolio, and you kind of mentioned that, which should enable bigger, more global innovation.

  • An example of this rationalization is the divestiture of Johnson Products to Rustic Canyon at the end of March, and the divestiture of [Wanda] to [SAG Holding] at the end of May.

  • We've got several large initiatives shipping in the June quarter, including the restage of our Pantene lineup.

  • Remember, Jon talked about our Pantene North America results being depressed by destocking in preparation for the relaunch of Pantene, the biggest relaunch and since we relaunched the brand in North America.

  • And we're also introducing things like Gucci for Men in the June quarter.

  • All of that, we expect, will lead to accelerated growth.

  • Operator

  • Connie Maneaty, BMO Capital.

  • Connie Maneaty - Analyst

  • I have a question on Venezuela.

  • The $0.08 that you talked about is depressing earnings -- was that for the back half of fiscal '10 or just the March quarter?

  • Also, are you doing business at the parallel or nonessential rate?

  • And any thoughts on the outlook for fiscal '11 in regard to Venezuela?

  • Jon Moeller - VP and CFO

  • Okay, first question, the $0.08 is the back-half number that splits fairly equally across the two quarters.

  • In terms of whether we are doing business at the official rate versus the parallel rate, we are translating at the official rate, which, as you know now, is much higher than it was.

  • But we are regularly converting dollars -- or Bolivars to dollars to support fairly large dollar-denominated purchase needs, such that we don't typically built up a big balance in Bolivars.

  • And obviously that transaction, some of it is occurring at [-- to BV] rates, but a lot of it is occurring at the unofficial rate and gets reported as such in our financial results.

  • So, while technically we're reporting at the official rate, in practical terms there's not a lot of difference between what we are reporting and what would be the parallel rate.

  • I gave up forecasting FX in general long ago, and I gave up forecasting anything about Venezuela much before that.

  • I don't have a good outlook for next year.

  • But in general, as we are able to take pricing, which we are doing now in the market, to offset the foreign exchange impacts, it should actually be a positive development year on year from an earnings per share standpoint.

  • Operator

  • Joe Altobello, Oppenheimer.

  • Joe Altobello - Analyst

  • I just wanted to get back to the advertising spending topic for a second.

  • You mentioned this year, obviously it's up very much from last year.

  • You did have an easy base period.

  • You had a lot of innovation this year.

  • But, you also had roughly $800 million or so of commodity deflation in the cost of goods line that you could reinvest.

  • It's obviously early, but next year my guess is you probably won't have $800 million; in fact, you could have a slight inflation next year.

  • So, given that $1 billion swing in commodities, how are you guys thinking about advertising next year?

  • Are you going to try to keep it at the same level relative to sales as this year?

  • Secondly, from where you sit now -- again, it's pretty early -- is there any reason to believe you guys wouldn't do core EPS growth next year within that 8% to 12% band that you gave back in February?

  • Bob McDonald - President, CEO, Chairman

  • Joe, I'll start.

  • Recall, Jon talked about the number of our new innovations launched in the AMJ quarter.

  • In fact, Gillette ProGlide, if you've seen the teaser advertising this morning, talks about June 6 it's available in your stores.

  • So obviously, the spending to get the awareness and trial of these new items will obviously go over into the next year.

  • Having said that, we are looking at our advertising versus two years ago and three years ago because last year was really an anomaly for us.

  • And at that rate we'll probably continue to deliver more impressions, probably have a higher spending level.

  • But it won't be to the degree as it would be measured versus year-ago.

  • I would also caution looking at TV advertising because we're spending more in nontraditional channels.

  • Just take, for an example, the Secrets of the Mountain movie I mentioned.

  • We had advertising on that movie, but we own the movie.

  • We produced the movie.

  • So the kinds of numbers you are going to be reading that might be TV-only or might exclude things like digital might be misleading.

  • Jon Moeller - VP and CFO

  • I'll just add one point and then I'll get to your question about guidance for next year.

  • Our innovation program that we've been talking about, and I think you've gotten a sense for it, is very robust and is multi-year in nature.

  • And we are very focused on continuing to drive that innovation program in support of our purpose and our strategy.

  • So I don't see any reason that we wouldn't continue advertising holistically, as Bob described, at strong levels.

  • Relative to the question of whether our earnings-per-share will be within the range that was described that CAGNY, obviously it would be irresponsible for me to comment specifically on that at this point.

  • I'd just reiterate two points we made during the call -- one, that our core earnings per share guidance for this year is now at 4% to 6%.

  • And I described an intention or a desire to deliver better than that next fiscal year.

  • Operator

  • Edward Kelly, Credit Suisse.

  • Edward Kelly - Analyst

  • I was wondering if you could give us a little bit more color on the Frederic Fekkai launch in the US -- pricing, how aggressive you are going to support it, what your expectations are.

  • And then just a follow-up to your trade-down question.

  • Are you seeing any change in the channel shifting that's taken place during the recession, so out of supermarkets into discounters, for instance?

  • Bob McDonald - President, CEO, Chairman

  • Ed, relative to Frederic Fekkai, we're very happy with the launch that we've done.

  • We've upgraded the Fekkai product in salons, and it's doing well.

  • And we've taken the classic product into retail in somewhat exclusive distribution or more exclusive distribution, and we are happy with its results as well.

  • So it's off to a good start.

  • It's selling for the pricing we sold it in for, so we're happy with the results so far, albeit early days.

  • Relative to channel shift, I would say that we are seeing some channel shift to some discounters at the low end.

  • But we're also seeing channel shift at the high end, where people are returning to what you would consider to be higher-priced stores where apparel is starting to sell more, where higher-priced items, more discretionary items are starting to sell more.

  • So there appears to be, just as we were describing the need for a full portfolio, there appears to be consumers shifting, depending upon what end of the economic spectrum they are in and how they have been affected by the recession.

  • Some of the channel shift we are actually trying to create.

  • Olay Professional selling in a grocery store at about $40-$45 provides better skin effect than a $300-priced item in a department store, and that also is shifting channels.

  • Pantene in the US -- we had a campaign, talked about Pantene being more efficacious than the salon brand that you would get in the salon.

  • And that obviously shifted some channel as well.

  • So channel shift is happening.

  • Some of it is impacted by us, but some of it is also impacted by the economic impact that the individual consumers felt.

  • Operator

  • Ali Dibadj, Bernstein.

  • Ali Dibadj - Analyst

  • I was wondering whether we could talk a little bit about what you do next to strategically.

  • Arguably, the price mix, advertising promo innovation aggression strategy has only really been, I guess, partially working.

  • If you look at your organic sales growth sequentially, it has decelerated or is flat in really every reported segment here, particularly if you look at it on, as you mentioned before, kind of a stacked two-year basis.

  • So I'm trying to understand why, what maybe is working, what's not working, I guess, given that.

  • And, what are you going to do next?

  • [Particularly is], feel that competition is getting tougher, compares are clearly getting tougher, commodities are increasing, foreign exchange is going to hurt.

  • What are you going to do next to get sequential growth really going here?

  • Do you have to do something, for example, around cost cutting more aggressively internally to then invest more?

  • Are you planning more price promo mix trade-down to adjust consumer value proposition?

  • Really, what's next?

  • Because I think it's partially working, I guess, is my interpretation, given stacked sequential organic growth.

  • Bob McDonald - President, CEO, Chairman

  • I would say it's working, and I would say it would be premature to move off of our current strategy.

  • Some of the innovations we've been talking about have just recently started shipping.

  • Some haven't even shipped yet.

  • Gillette ProGlide is an example.

  • You've also seen new and different behavior from Procter & Gamble.

  • You've seen advertising the company behind the Olympics.

  • We talked about Secrets of the Mountain and the effectiveness of that and advertising our brands.

  • You see future friendly in the marketplace today supporting our brands.

  • You're seeing a stronger innovation program than ever before.

  • It all seems to be working.

  • We don't measure ourselves quarter to quarter -- I mean, in an individual quarter.

  • We obviously look over the longer term.

  • But things seem to be working.

  • We spend over $2 billion in R&D a year.

  • We've spent over $2 billion this decade on consumer knowledge.

  • And the five strengths that have made this Company the strong company that it is -- like innovation, like consumer knowledge, like go-to-market capability, like global scale, like branding -- those are going to be the strengths that drive us forward.

  • Jon, do you have any comment?

  • Jon Moeller - VP and CFO

  • I have just one comment.

  • As I look at our quarter, I kind of wish every quarter was like this -- sales growth, organic sales growth two points ahead of the market, core earnings per share up 10%, record cash quarter.

  • If that's not working, I'm not quite sure what is.

  • Bob McDonald - President, CEO, Chairman

  • Remember, our goal is to build market share profitably, and we are now doing that.

  • So by our standards this was a good quarter and we're going to continue following the same strategies.

  • Operator

  • Doug Lane, Jefferies & Co.

  • Doug Lane - Analyst

  • A question on the gross margins.

  • You've delivered 300 basis points or so of gross margin pretty much each quarter so far this fiscal year.

  • Do you expect more of the same in the June quarter, or is some of this cost commodity inflation going to start to hit?

  • Or is that more of a 2011 thing?

  • And maybe, Jon, if you could at least give some color onto where you think gross margins are heading into 2011?

  • Jon Moeller - VP and CFO

  • As I indicated, as I discussed the fourth quarter, the gross margin benefit that we've been receiving will subside in the fourth quarter.

  • The commodity cost comparison gets less favorable, and that's built into the guidance that we've provided.

  • And I really apologize, but I really don't want to comment at this point on next year's plans until we have next year's plans.

  • Operator

  • Alice Longley, Buckingham Research.

  • Alice Longley - Analyst

  • Could you tell us how fast your categories collectively grew in the quarter, in volume and value terms, in three regions -- the US, Europe and developing markets?

  • And then as part of that, I think somebody just said that your sales grew 2 points faster than the market, and I thought earlier you said that your shares were up about 1 point.

  • So if you could clarify that?

  • Bob McDonald - President, CEO, Chairman

  • Developing markets were up mid- to high-singles, and developed markets were up roughly a point in terms of value.

  • North America, Western Europe in terms of value were up about a point, Japan was down about a point, and that gives you developed at up about a point.

  • Developing was up about 7 points in terms of value, and it was a pretty tight shot group with some markets up about 4 and others up as much as 12 in value.

  • So we said the market value growth for the quarter was roughly 2.5 points.

  • Jon Moeller - VP and CFO

  • On the math, what Bob was referring to is market share.

  • What I was referencing is net sales.

  • Net sales was -- organic sales was up about 4%, markets were up about 2.5%.

  • About 1 point of that is share, and 1 point is base period dynamics.

  • Operator

  • Bill Chappell, SunTrust.

  • Bill Chappell - Analyst

  • Quick question on the battery side -- did you say that shipments are up 35%?

  • And along that line, trying to understand for battery and other categories, you upped the pack sizes and Energizer and Rayovac immediately followed.

  • So it seems like it's a zero-sum game.

  • What's the strategy in terms of being more aggressive?

  • How do you really retain share?

  • Bob McDonald - President, CEO, Chairman

  • We did say that, Bill, and while we did include more cells in the packs, that was a reaction to some pricing we faced in the marketplace, and there was no intention to make that a permanent package.

  • Nevertheless, the dynamic that has changed in the marketplace most recently is some of our retail partners have chosen to [de-prioritize] the battery category about a year ago.

  • And we now have worked with those retail partners to help them understand how much sales they've lost, and they have decided to put new priority on the battery category.

  • And some of that new priority is what you're seeing and part of the volume growth this quarter.

  • I suspect that will continue.

  • Particularly as we approach the holiday season, I think battery's will continue to be a very important category for our retail partners, and we will continue to work to grow market share.

  • Operator

  • Linda Bolton-Weiser, Caris.

  • Linda Bolton-Weiser - Analyst

  • I just had a question on bigger picture strategy, specific to health care.

  • [AG] had always talked about Proctor being personal care and health care, personal care and health care.

  • That was what he really emphasize.

  • And in health care you've gotten rid of the RX business, and in the OTC, the real action is the RX to OTC switches, especially in the allergy drug area.

  • So how are you going to be able to exploit that growth opportunity when you've got companies like Sanofi-Aventis who bought Chatham so they could do Allegra on their own by excluding you as a partner?

  • Can you just talk about it a little more, health care?

  • And also, what drove the negative 3% mix in health care in the quarter?

  • Bob McDonald - President, CEO, Chairman

  • Well, health care is strategically important to us.

  • We do want to grow our business, particularly in OTC or consumer-directed health care.

  • We are still in the midst of divesting or disintegrating our RX business.

  • So, while we've announced it, that's not over.

  • We're still in that process.

  • We're also in the process of building the health care brands we have already and taking advantage of their equities.

  • And I'm encouraged by some of the work going on there.

  • We still do suffer from the Prilosec entries, the competitive entries versus Prilosec, obviously, and that is a big impact on our numbers.

  • And last, we are working to expand our health care portfolio.

  • But I don't want to disclose what we are doing because that's competitively sensitive.

  • Operator

  • Ladies and gentlemen, unfortunately, that's all the time we have for your questions.

  • I will now turn the call over to Mr.

  • Jon Moeller for closing remarks.

  • Jon Moeller - VP and CFO

  • Thanks, everybody.

  • We are obviously available the balance of the day to answer any follow-up questions.

  • Operator

  • Thank you all for your participation on today's conference call.

  • This concludes the presentation, and you may now disconnect.