寶潔 (PG) 2013 Q1 法說會逐字稿

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

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

If you will refer to P&G's most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the Company's actual results to differ materially from these projections.

As required by Regulation G, P&G needs to make you aware that during the call, the Company will make a number of references to non-GAAP and other financial measures.

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

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

Adjusted free cash flow represents operating cash flow less capital expenditures, and adjusted for after-tax impacts of major divestitures.

Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings excluding divestiture gains.

Any measure described as core refers to the equivalent GAAP measure adjusted for certain 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.

Thanks.

Good morning, everyone.

Joining me this morning are Bob McDonald and Teri List-Stoll.

Our focus for the call this morning is our first-quarter results and outlook for the balance of the year.

I also want to touch on the key elements of, and progress against, our growth and productivity strategy, which will be the focus of our analyst meeting here in Cincinnati in a few weeks.

Our business segment information is provided in our press release and will be available in slides, which will be posted on our website, www.PG.com, following the call.

We'll take questions after our prepared remarks, and we'll be available after the call to provide additional perspective as needed.

With that, let me move to first-quarter results, which were at the high end of our expectations on the top line and ahead of plan on operating profit, earnings per share, and cash.

Our results position us well to deliver our plans for the fiscal year.

We grew organic sales 2%, at the high end of our 0% to 2% guidance range.

Organic volume was equal to prior year levels, and pricing added 2 points to organic sales growth.

Foreign exchange impacts reduced sales growth by 6 points, leaving all-in sales down 4%, also at the high end of our guidance range.

Moving to the bottom line, all-in earnings per share were $0.96.

This includes $0.10 of non-core costs, including $0.09 of non-core restructuring investments.

Core earnings per share were much stronger than we had initially forecast at $1.06, an increase of 5% versus prior year.

The better-than-expected earnings were driven by top-of-range sales growth, lower commodity cost pressure than we had built into our original forecast, and strong productivity progress.

Core operating profit margin grew 90 basis points, including 150 basis points of productivity improvements and cost savings.

Core gross margin improved 80 basis points, cost savings and productivity helped gross margin by 100 basis points, and pricing improved gross margin by roughly 100 basis points.

These benefits were partially offset by a 100-basis-point negative impact from a combination of product and geographic mix.

Commodity costs had a modest negative impact on gross margin for the quarter.

Core SG&A costs decreased 10 basis points, as overhead cost savings of approximately 50 basis points were partially offset by increased plans and benefits costs, which we highlighted in our fiscal-year guidance.

The core tax rate was 24.3%, within the expected range for the quarter.

On an all-in basis, including restructuring cost, gross margin improved 30 basis points and all-in operating profit margin declined 60 basis points.

The decline in reported operating margin was due to non-core restructuring investments of 140 basis points.

We generated $2 billion in free cash flow in the quarter, which was also ahead of our initial forecast.

We continue to expect to deliver close to 90% cash flow productivity for the year.

During the quarter, we returned $4.2 billion of cash to shareholders, $1.6 billion in dividends and $2.6 billion in share repurchase.

Returning capital to shareholders through both dividends and share repurchase remains the central pillar of our effort to deliver superior returns.

[Net], as I highlighted, our first-quarter results were at the high end of our expectations on the top line, and ahead of plan on operating profit, earnings per share, and cash.

We're continuing to make progress against each of our strategic priorities, maintaining strong developing-market momentum, strengthening our core developed-market business, building a strong innovation pipeline, and aggressively driving cost savings and productivity improvements.

We maintain strong growth momentum in developing markets in the September quarter with organic sales up 7%.

We've seen underlying market growth rates soften a bit over the last four or five months.

We've seen modest slowdowns in large markets such as China, Russia, Turkey, India, and Brazil.

We expect the innovation and marketing plans we have in place for the balance of the year will help to further accelerate share and sales growth, despite slower market growth.

We're currently forecasting 8% to 9% organic sales growth in developing markets for the fiscal year.

An important part of our developing market plans is continued deployment of our portfolio.

We have over 20 new category country expansions scheduled this fiscal year.

We're continuing the globalization of our oral care business.

We're nearing the completion of our rollout in Latin America and western Europe.

We recently launched Oral B toothpaste in Venezuela, Greece, and Portugal, with several more markets to come over the next six months.

We also launched Oral B toothpaste in Israel this month.

In addition to toothpaste expansions, we're beginning to build out our full oral care regimen.

For example, we launched Oral B white strips in Brazil earlier this month.

This comes on top of our distribution expansion of toothpaste into high-frequency stores in Brazil.

Oral B paste is now a 7.5% national value share, up 2.5 points versus last year.

Other recent developing-market expansions include the launch of a full range of Vicks cough and cold products in Russia and Poland, Olay Skin Care in Israel, and the launch of Safe Guard in seven countries in Africa -- Nigeria, Ghana, Senegal, Kenya, Uganda, Tanzania, and Ethiopia.

We're continuing to build scale in developing markets behind geographic expansion and market share progress.

We're localizing production as our distribution footprint expands and consumer demand grows.

Increased scale and lower supply chain costs are key drivers for the profit improvement we expect to deliver in our top developing markets this year.

In aggregate, we expect after-tax profits in our top-10 markets to increase by about 35% versus last year, including negative foreign exchange impacts, and around 50% on a local-currency basis.

At the same time, we're making progress in strengthening our core developed-markets business.

We're ensuring that we have sufficient plans to achieve our objectives in the 40 largest category country combinations, most of which are in developed markets, and which account for about 50% of Company sales and 70% of operating profit.

We're working to ensure we have offerings that provide superior performance and value, that our pricing is right, that innovation is strong, that marketing effectively communicates the benefits of our products, and that there is sufficient marketing support.

These plans should be fully deployed and in market by January.

Our early interventions have begun to pay off.

Market share trends have started to improve, consistent with our forecast.

We held or grew market share in businesses representing over 45% of sales in the September quarter, up from 30% in the June quarter.

You'll recall we made early interventions in four categories in the United States -- laundry detergents, auto dish-washing detergent, blades and razors, and oral care.

We're now growing value share in US laundry detergents behind our innovation and consumer value corrections, with the Tide brand up 2.5 points versus the prior year.

Market share in automatic dish washing has improved on a sequential basis to back above the 60% level, though we're still down slightly versus prior year.

We're growing share in the US blades and razors business with Fusion, Venus, and disposables all up versus prior year, and overall blades and razor share up more than 1 point.

Our market share in the US toothpaste category is also growing, up 1 point versus the prior year.

Overall, we're now holding or building share in businesses representing nearly 60% of sales in the US market, up from about 15% in the June quarter.

Underpinning all of our efforts in both developed and developing markets is a continued commitment to innovation.

Tide Pods is on pace to deliver nearly $0.5 billion of sales this fiscal year, and trial rates are still growing at a strong pace.

This is a discontinuous innovation that is reframing value for consumers.

They get the right amount of detergent in one easy step to achieve outstanding cleaning, brightening, and stain removal results.

One of our competitors has indicated that the growth of the unit dose form is hurting category volumes.

Our habits and practices research shows that their consumers often use more than the recommended dosage of their powders and liquids to get the cleaning they need.

In fact, some of their consumers report using twice the recommended dosage or more, which does create a volume risk for them if their consumers move to the unit dose form.

Tide powder and liquid consumers typically dose very close to the recommended level, given the efficacy of these products, so we are not expecting a significant volume impact.

Downy Unstopables, with its newly introduced shimmer scent, has achieved US consumption levels nearly twice as high as expected, and has beat expectations in expansion markets.

ZzzQuil has reached a 20% value share in the US sleep aids category, making it the number-one branded sleep aid in terms of both units and value.

We just introduced a new oral care line called Pro Health For Life, which includes a regimen of products across toothpaste, toothbrush, floss, and rinse, specifically designed for the oral health needs of consumers over 50 years old.

In salon hair care, Illumina color from Wella Professional is off to a strong start in Europe, and will be launching this quarter in the US.

Illumina is truly breakthrough, providing up to 70% more light reflection and superior hair protection compared to competitive offerings.

We recently launched a wave of new Prestige fragrances, including Gucci Floral Garden, Escada Delicate Notes, Hugo Boss Nuit for women.

Our newest male fragrance brand, James Bond 007, and a redesign and relaunch of the core Dolce and Gabbana Pour Homme and Pour Femme fragrances.

These initiatives drove mid-single-digit organic sales growth this quarter in a category pressured by slowing market growth.

Looking forward, we'll be launching Cascade Platinum in the US in January.

This follows the successful share-building launch of Fairy Platinum in western Europe earlier this year.

Cascade and Fairy Platinum not only do an excellent job of cleaning dishes, but they remove hidden grease in the dishwasher.

We have a large bundle of initiatives coming across the skin care portfolio, including Olay Total Effects CC cream, a restage of Olay Regenerist, the largest of the Olay boutiques, and the introduction of a new mid-tier boutique called Olay Fresh Effects, which will be launched in January.

In hair care, we also have a full portfolio of innovation.

In July we launched Pantene Beautiful Lengths, Pantene Daily Moisture Renewal, Head & Shoulders Damage Rescue, and Head & Shoulders Deep Clean.

These initiatives enabled P&G to grow hair care value share for two consecutive months, including Head & Shoulders share up about 0.5 point despite the recent competitive anti-dandruff shampoo launch.

We're following this with the recently announced launch of Pantene Expert Collection, which includes two super premium lines -- Age Defy and Advanced Plus Keratin Repair, priced 200% to 250% above the base Pantene line.

We'll also be introducing a new mid-tier hair care line priced at a 50 to 75 index to the base Pantene shampoos and conditioners.

Our super premium Pantene expert collection and our new mid-tier line will be available in January.

In the March quarter, we'll be launching the first innovation that spans multiple male blades and razors brands, including both Fusion ProGlide and Mach III.

We'll provide more details on this innovation when we get closer to launch.

We're increasing our discontinuous innovation efforts, and have organized to deliver this.

Discontinuous innovations obsolete current products, and create new categories and new brands.

Some of our fastest periods of growth, and some of our largest and most profitable present-day businesses, were driven by discontinuous innovation -- disposable diapers, liquid laundry detergents, two-in-one shampoos and conditioners.

We want to get back to a higher level of discontinuous innovation.

We began working on this two years ago; it takes time to generate ideas, qualify them, and bring them to market, but we're making good progress, and are building an increasingly promising pipeline of category and brand-creating innovations.

Like innovation, productivity also underpins all of our developed- and developing-market efforts.

In February, we established our five-year $10 billion cost savings initiative.

We're making good progress against this, and will not stop there.

We now have plans to deliver $1.2 billion in savings this fiscal year in cost of goods sold, and so, have established stretch goals beyond this, targeting $1.4 billion.

Our efforts in this area include a 5% net productivity increase across our manufacturing operations, even as we add new manufacturing capacity and enrollment in developing markets.

They also include significant savings of raw material, transportation, and warehousing costs.

We're achieving efficiencies in marketing spend, particularly on non-media expenditures, and are reinvesting these savings in the strengthened developed-market plan.

On a going basis, we'd expect a portion of these efficiencies to come to the bottom line.

We've been making solid progress in the area of overhead costs.

In the July/September quarter we delivered 1,300 net role reductions, bringing the cumulative total to 3,300 positions since we started the program.

We expect roughly another 900 role reductions by the end of the month, bringing the total to 4,200.

This puts us well ahead of pace to deliver the plan to reduce 5,700 roles by the end of this fiscal year.

Now that we're well on track to deliver our initial target of 10% overhead enrollment reduction, we'll aim to do more.

We have identified and will appoint a Senior Group President to the role of Global Officer Productivity and Organization Transformation to lead the next round of design-based productivity improvements in a full-time capacity.

This role will report directly to Bob McDonald, and will be supported by a productivity council of senior managers.

As we embrace this cost-savings work, we must and will keep our eye on the overriding objectives of shareholder value creation, with growth being an important part of this.

At the end of last fiscal year, our core operating margin was nearly 19%, which compares to a simple competitive peer average of 15.9%.

We start with a higher operating margin than 12 out of the 15 companies we benchmark.

This includes SCA, Kimberly Clark, Energizer, Church and Dwight, Unilever, Henkel, Clorox, Beiersdorf, Loreal, Estee Lauder, Avon and Uniterm.

Only three companies are higher -- Colgate, Reckitt, and Johnson & Johnson, driven in large part by the structure and business model of the categories they compete in.

This means that we are more effectively leveraged to growth than most of our competitors, and that there is significant value creation to be delivered through growth.

In our endeavor to cut costs, we will not compromise our growth prospects or capabilities.

Ultimately, the answer to the right amount of cost savings doesn't lie in the math.

It lies in holistic evaluation of value creation potential.

There are opportunities to add cost, take Tide Pods for example, which improve the value of our offerings, extend our competitive advantages, build the business and create significant value, and there are clear opportunities to reduce costs.

We're making strong progress against our $10 billion plan, and we will not stop there.

But we'll not compromise growth in the process.

Our endeavor and our job is to get this balance right.

We'll go into more detail on each of these strategic focus areas I've just described at our analyst day in November.

Now I'll turn to our updated outlook for fiscal-year 2013 and the October-December quarter.

There are two new developments that we're building into our guidance for the balance of the year.

First, given the significant earnings and cash over-delivery in the July-September quarter, and given slowing market growth rates, especially in southern Europe and several large developing markets, we are leaning forward on our equity building marketing investments to support our back-half innovations.

This will temper earnings per share growth in the second half, which would help to improve market share momentum heading into next fiscal year.

The second development is the explosion of the Nippon Shokubai factory in Himeji, Japan.

Nippon Shokubai is one of our suppliers of absorbent gelling material, or AGM, which is used in diapers.

There is still a high level of uncertainty as to when Nippon Shokubai's full AGM production will be restored.

At this point, we are expecting minimal supply disruption to consumers.

We will incur added supply chain costs in the back half of the fiscal year though, as we manage the flow of materials in finished product, and we've accounted for these costs within our guidance range.

Moving to the details, we're maintaining organic sales growth guidance in the range of 2% to 4% for the fiscal year.

This is comprised of volume growth of 1% to 3%, pricing contribution of about 2%, and negative mix of around 1%.

We now expect foreign exchange will be a top line headwind of about 2% to 3% based on mid-October spot rates.

This brings our all-in sales look to essentially flat to up 1% versus the prior year.

We're also maintaining our core earnings per share guidance range of $3.80 to $4.

Within our fiscal-2013 guidance, we expect approximately $0.04 to $0.05 benefit from a combination of lower interest expense and higher non-operating income for minor brand divestitures.

These benefits will be offset by a $0.04 to $0.05 headwind from a higher effective tax rate on core earnings.

There are a couple of significant items included within this guidance, which we've mentioned previously.

Our guidance includes a $0.06 per share negative impact from pension and employee benefit plans, as a result of revised assumptions for the discount rate used to value plan liabilities and projected returns on plan assets.

These costs are relatively equal across the quarters.

We've also included about a $0.06 per share impact from the combination of import restrictions in Argentina, and the carryover impact from mandated price reductions in Venezuela.

Combined, the headwinds from pension and benefit plans, and specific market impacts, are reducing our core earnings per share growth rate by about 3 percentage points.

Adjusting for these, our core earnings per share growth rate will be in the range of 2% to 7% for the fiscal year.

To aid transparency and enable more informed decision-making, we also wanted to call out some of the potential risks that are not included in our guidance.

Our forecast is based on mid-October foreign exchange spot rates, potential currency risks include significant dollar strengthening and a large devaluation of the Venezuelan bolivar.

Our guidance assumes current market growth rates continue for the balance of the fiscal year.

A significant further deceleration, for example, a deepening of the European financial issues or as a result of the fiscal cliff in the United States, would put additional downward pressure on market growth rates and our outlook.

Last, we're also assuming in our guidance that key provisions of the US tax code, which require regular extension, including the R&D tax credit and sub-part F look-through rules, are in fact extended.

Finalizing the fiscal-year outlook and on an all-in basis, we have increased earnings per share estimates by $0.17, to $3.78 to $4.02.

The increase is due to the estimated non-core holding gain resulting from our purchase of the balance of our baby care and feminine care joint venture in Iberia, which we completed earlier this week.

The amount of the one-time gain is an estimate and may still change as we complete our evaluation of proper purchase accounting.

The transaction is expected to be roughly neutral to core earnings per share results this fiscal year, as the ongoing benefits from full ownership of the business will be offset by a one-time transitional cost.

Our all-in earnings per share guidance range also includes non-core restructuring investments of $0.15 to $0.19 per share, consistent with our prior outlook.

As I mentioned, we continue to expect free cash flow productivity of about 90% of net earnings for the year.

This includes capital spending of about 5.5% of sales.

The first priority for the use of free cash flow is the dividend.

We expect to continue our 122-year track record of dividend payments, and our 56-year track record of dividend increases.

The exact amount of the increase is subject to Board approval, and will be determined by the Board during the April 2013 Board meeting.

For the October-December quarter, we're estimating organic sales growth in the range of 1% to 3%, sequentially better than the 0% to 2% guidance for the July-September period.

Within this, we expect pricing will contribute 2 points to sales growth.

Foreign exchange is expected to reduce sales by 2%, which leads to all-in sales in the range of down 1 to up 1 versus year ago.

On the bottom line, we expect December core earnings per share in the range of $1.07 to $1.13, or down 2% to up 4%, compared to prior year core earnings per share of $1.09.

The guidance range reflects the impact of slower market growth and stronger marketing plans.

The high end of this range includes the potential gain from a minor brand divestiture.

The timing of this transaction is still uncertain, and the higher part of the range is less likely if the deal isn't completed in the quarter.

As you think about comparisons, recall the December quarter base period includes $0.04 per share gain from the divestiture of the Pure business.

On an all-in basis, we estimate earnings per share in the range of $1.18 to $1.25.

This includes non-core restructuring charges in the range of $0.05 to $0.06 per share, and a $0.17 share non-core gain I described earlier.

In summary, our first-quarter results were on track with our plan on the top line, and ahead of plan on operating profit, earnings per share, and cash.

This puts us solidly on track to deliver our commitments for this fiscal year, while creating flexibility to further strengthen our plans for the core business in the second half and offset the cost of managing baby care supply.

We remain confident that our focus on maintaining momentum in developing markets, strengthening our core developed-market business, building a strong innovation pipeline, and aggressively driving cost savings and productivity improvement should generate, over time, the kind of earnings progress that will put us among the best in our industry.

This, combined with our strong cash flow and track record of capital returns to shareholders, should enable us to generate superior levels of shareholder return in both the near and long term.

We'll be going into more depth on each of these areas at our analyst meeting here in Cincinnati on November 15.

If you aren't able to travel to Cincinnati for the meeting, we hope you'll listen to the management presentation via the internet webcast.

That concludes our prepared remarks.

Bob, Teri, and I would be happy to take your questions.

(Operator Instructions)

Mr. Bill Schmitz, Deutsche Bank North America.

Hello guys, good morning.

Good morning, Bill.

Can you just talk about what the US volume and sales growth was organically in the quarter?

Then maybe some color between the delta of the 45%, of the global business where market share was flat or up, and the 60% in the US, which obviously is great incremental progress.

But why was there such a big delta between the global and the US business?

So we had modest growth in organic sales in the US.

Volume is still down slightly versus year ago but importantly, an accelerating trend as we went through the quarter.

In terms of the difference between businesses representing 60% of sales growing share in the US and 45% globally, a big portion of that is there are two drivers of that.

One is China where while we continue to grow at a very attractive rate of 7% in the quarter, for the quarter we were below market level growth rate of about 11% and as you know, China is our second largest business in terms of both sales and profit.

We have strong plans in China going forward.

We expect to get back to share growth in the second half, but that's the predominant driver of the math.

Dara Mohsenian, Morgan Stanley.

Good morning.

Good morning, Dara.

Jon, I know category growth slowed a bit in the quarter around the world but on the other hand you had an Olympic boost and the organic sales growth did decelerate sequentially despite the easier comp and a number of the adjustments that you made.

So, why aren't we seeing more progress on organic sales growth at this point?

And what drives your confidence that you will see an improvement in the remainder of the year and that this marketing will pay off just given the difficult consumer environment out there?

Well as I mentioned in our remarks, our full intervention program in developed markets won't be fully deployed in market until January and as that happens, based on the results that we've seen with the first part of that deployment, which have been positive as I talked, that's one of the reasons we gained confidence both that it is right to invest in those plans and that they will result in accelerated top line progress.

The other thing I hope you picked up as we talked about innovation is that we have a very strong second half innovation program, and obviously I can only talk about innovations that we've already announced for the trade.

There are a number of things that we aren't yet talking about but we should -- that's why we should expect the business to accelerate.

Bob, I don't know if you have any further thoughts on that?

Well I think I would just say, Dara, as Jon said, we're in the early innings of our program, that our 40/20 plan is on track.

It's gaining momentum in developing markets and strengthening the core developed markets.

We're in the early innings of our innovation program, as Jon says, it strengthens after January and we're also in the early innings of our productivity program, so what you should expect to see is continued progress.

We're on track and continued progress is ahead.

John Faucher, JPMorgan.

Yes, thanks.

Just wanted to follow-up a little bit on the beauty category in terms of looking at hair care in particular where the market share trends continue to be very, very weak.

Can you talk a little bit about that from a regional basis in terms of where you think the biggest opportunities are and then, Jon, you talked a lot about the pipeline.

Is this about new products or is this about repositioning that's really going to change the underlying trend in beauty which has been disappointing for quite some time now?

Relative to hair care, we're seeing signs of progress.

In the US, the Pantene share has begun to stabilize and our most recent product launches are performing well.

North America remains a high priority for hair care.

We're investing behind our core brands and we have a full portfolio of innovation this fiscal, particularly strengthening throughout the year.

In July we launched Pantene Beautiful Lengths, Pantene Daily Moisture Renewal, Head & Shoulders Damage Rescue, Head & Shoulders Deep Clean.

In January we're following this with recently announced launch of Pantene Expert Collection, which includes two super premium lines, Age Defy and Advanced Plus Keratin Repair, priced 200% to 250% above the base Pantene line.

We're also introducing the new mid tier hair care line priced at 50 to 75 index to the base Pantene shampoos and conditioners, so we're excited about the hair care business.

We're making progress over time but as I said earlier, it's the early innings and we should see greater progress over time.

And I think to your question, John, of this repositioning of current products or new products.

We're really making a big intervention in the portfolio for the first time in a long time so both -- if you think about hair care, the Pantene super premium items, as well as the launch of a mid tier line up, are completely new to us.

Illumina, which I mentioned in the salon business, is a completely new product that's transforming the way the hair dressers think about color and protecting it.

And then if you think about our skin care portfolio, obviously the new mid tier line up is a completely new item in our portfolio.

So we'll make some pretty significant progress on filling what have been some perennial holes and I think that will stand us in much better stead.

Each one of these products, John, is backed by a new technology which is superior to what's currently available and that's important because that's what delivers the superior benefit for the consumer.

Nik Modi, UBS.

Yes, good morning everyone.

Hi, Nik.

Quick question for me is just on the US side.

The shares have really improved quite dramatically, I'm assuming that's more levels of spending so just wanted to get an understanding of the ramp there.

Should we be expecting a ramp in spending over the next several quarters as you get to a more normalized level that you're comfortable with or do you feel like you're at good levels already.

Thank you.

Well there are two components as you'll recall when we discussed this initially.

One is more competitive pricing, which is one element of what's driving better plans and that's pretty much done.

We talked about $400 million of price roll backs out of the $3.6 billion in our last call.

That's still the figure we're looking at.

Of course, this is something we'll continue to look at on a weekly and monthly basis but that's largely in market.

And then marketing spending, as I mentioned, will increase as we bring our innovation pipeline fully into the market starting in January.

Chris Ferrara, Banc of America.

Hello, thanks.

Guys, you've been using some tempering language around the balancing of cost savings going forward with the ability to grow and I was just wondering, the out performance that you've seen near term on cost savings, is that essentially a pull forward relative to the $10 billion?

Is the $10 billion pie potentially getting bigger?

Then is the 150 basis points of savings you saw this quarter a reasonable run rate to think about going forward?

Thanks.

So Chris, we have to increase -- if you go back to the original $10 billion that we laid out, you'll probably remember that, that was $8 billion of cost reductions and $2 billion of leverage.

That assumed a 5% growth rate on the top line, which we haven't delivered, either last year and aren't forecasting to deliver this year.

So we do have to increase the amount of absolute reductions that we're targeting to make and we'll do that and we won't stop there either, and Bob can talk more about that in a second.

In terms of the level of savings we should see going forward, I think 150 basis points -- this will be lumpy so I wouldn't model that out quarter by quarter, but it's in the range in terms of the level of magnitude you should see.

As we talked about our plan, Chris, you'll recall we talked about the 40/20/10 focus.

We talked about boosting innovation and we talked about the importance of productivity.

In innovation, we've taken steps to improve our discontinuous innovation, we've discussed those in the past and we're continuing to improve our innovation as reflected in the program that Jon described, which is getting stronger throughout the year.

In terms of productivity, we're committed to developing a culture of productivity in our Company equal to our culture of innovation and that's the establishment of the productivity council we talked about, the senior officer for organization transformation productivity.

We see this as an ongoing part of our culture, not as an episodic event and as a result, we want to drive it in the culture and continue it on an ongoing basis.

Wendy Nicholson, Citi.

My question is a follow-up I think on all those points and, Jon, I think your comments on the call about benchmarking your operating margin against your peers.

How your operating margin is already very good raises the question, again, about your long term targeted growth rate of potentially being double-digit on the earnings front and I want to just follow-up on that and ask why that is.

Most of your peers are not putting up double-digit earnings growth.

I think there's a fear, at least that we have, that you are pushing for something that is going to bring Proctor back into a boom and bust cycle of growth.

And given everything out there from a competitive perspective, is it not better to reign in that long term growth rate and just go for consistent earnings growth year after year?

Because it just seems like the gap between 4% market growth, a little bit of market share expansion, a little bit of share buyback seems like double-digit earnings growth is a carrot you just aren't going to get to on a sustainable basis.

So any thoughts I'd appreciate.

Well thanks, Wendy.

First, we continue to keep our long term guidance range anchored in high singles to low doubles.

High singles are in there for a reason and you've hit on some of the key points.

I think there is a big driver though in terms of productivity.

That's the $2 billion of savings a year is worth 11 points in earnings per share by itself, but you're absolutely right that we shouldn't get ahead of ourselves and we shouldn't stretch too far.

Internally we talk about balance.

Balance of growth of developed and developing markets, balance of top and bottom line and balance of short and long term and we will keep that balance in mind as we formalize our guidance going forward.

Ali Dibadj, Bernstein.

Hello, guys, so we're obviously very happy to see that you found religion in cost cutting and you used to sound like it was a tough thing to do and now it's almost raining cost cutting which is good news.

And you're setting up organizationally to do this.

As you think about it going forward -- and we're excited to hear again about it sounds like an increase in cost cutting going forward -- as you think about this going forward.

How do you position yourself in the context of your peers were also increasing their restructuring spending, almost in a tit for tat manner?

And what does it mean, what does it mean to the organization and I say that in the context of one of the things you resisted about doing a big cost cutting was that it would be disruptive to the organization.

Can you revisit that statement from a few years ago and tell us how it's impacting the organization now and more broadly, you think the industry and your competitors are doing the same thing.

Ali, this is Bob.

I think that we've discussed the factors that impacted our past results.

What I want to focus on is the future.

We are committed to creating a culture of productivity in our Company and the way we're going to do it, exactly as we described in our comments, is to put together a guiding coalition of top leaders in this Company.

As we do this, we're going to be looking for opportunities to find efficiency within the organization.

One of the things we know from our organization survey is that the organization is asking for this.

This isn't something that will be disruptive, in fact it should be enabling to higher growth rates because of the way that we currently operate where employees are telling us that they could use better efficiency.

So we're going to be working hard on this and the intention is to create a culture of productivity that outlasts any of us in the current leadership of the organization.

But I think also, Ali, you raise a very valid point which I was trying to get to in my prepared remarks as well.

Back to balance and we are cognizant of the need to keep that balance and that will stay in front of us as we make these choices.

We were cognizant of this balance idea when we put together the plan, the 40/20/10 plan that's about balancing developed and developing.

Most of the 40 are in developed, the 10 are all developing, it's about innovation and it's about innovation and productivity and those two are not contradictory.

And we expect every Procter & Gamble leader to be able to lead with balance and do both simultaneously.

Joe Altobello, Oppenheimer.

Thanks, good morning.

First just wanted to start out with a housekeeping question.

I think earlier you mentioned you're seeing a little bit of slowdown overall in your markets globally and on the last call you mentioned you're looking for about 4% to 5% market growth this year.

So, I would assume you're more comfortable with the lower end of that range at this point going forward.

And secondly in terms of mix, it was flat this quarter.

It has been a drag a little bit.

Could you break down what that looked like versus -- in terms of product versus geographic mix and might that be neutral for the full year?

Thanks.

So I think you're right, Joe, to be thinking about the lower end of the range in terms of market growth rates, and in terms of the mix components, it's really kind of equally split between product and geographic.

I would expect actually the geographic component of mix to increase as a negative going forward, simply because we expect our growth rates in developing markets to accelerate, as I mentioned earlier, and product really is anybody's guess.

That's all dependent on what consumers choose to buy so we'll have to see.

But if you look at the aggregate, it would probably be a drag as opposed to even going forward.

Javier Escalante, Consumer Edge Research.

Hello, good morning, everyone.

I actually have a follow-up on the development and emerging markets.

Yesterday, Kimberly reported 45% volume growth in China diapers and mid teens growth in Brazil, Russia.

This morning also Unilever reported 12% organic sales growth in emerging markets.

So to what extent what you guys are doing, refocusing the Company, somehow is taking resources out of developing and emerging markets?

That's why you decelerated to seven and we should see a ramp up as you put the plans in place or as opposed to just real market deceleration, which other companies don't seem to have seen as much.

I think it's important, Javier, again to go back to the plan.

The 40/20/10 plan focuses on the top 10 developing markets and we as a Company have a smaller footprint in developing markets than our competitors.

We're only 38% of our business in developing markets, our competitors are 40% and 60% and as a result, they get a greater degree of the growth in developing markets than we do.

That's why Jon talked about filling out 20 new category country combinations.

That's why we're building roughly 15 plants in developing markets as we need to increase our footprint in developing markets going forward.

It's one of our strategic priorities, as Jon mentioned, so no, we're not taking resources away from it at all.

In fact, we're focusing on it.

And if you look across the BRIC markets for example, organic sales rates in the last quarter, China was 7%, Russia was 8%, India was 25%, Brazil was 28%, so there's very strong levels of growth.

And as I mentioned, the acceleration that we're expecting is really behind innovation-based plans and category expansion, so I expect it will occur.

Connie Maneaty, BMO Capital Markets.

Hello, it's actually Zee Cramer filling in for Connie.

Given that P&G is 4 points below market growth in China, I wanted to get a sense of where you're seeing weakness and then was also wondering if you could give us an update on the Teva joint venture and what contribution it has made?

Thank you.

Thank you, Zee.

Our China organic sales grew high single-digits in the quarter and grew double-digits last fiscal year.

We've recently experienced some share softness driven mainly by skin care where we've had some portfolio gaps and oral care where we've had price gaps.

We've got a strong portfolio of innovation launching this fiscal year and we're confident that the combination of that innovation and the intervention plans that we've already made are going to return us to market share growth in China.

Your next question --

Give us just a second to comment on Teva.

I mentioned in my remarks the expansion of the Vicks franchise into Russia and Poland.

That's emblematic of the kind of activity that we see ahead of us.

We're now at about a year in and we're very excited about what we see.

We just had a strategy review with our personal health care business last week.

There is a lot of very promising activity building on the combined strengths of both Procter & Gamble and Teva that should allow us to dramatically accelerate our rate of global expansion and our rate of category expansion, even here in the US.

And our healthcare business is strategically important to us.

As we said before, we have the largest and most profitable household care business, the largest and most profitable beauty care business, and one of the largest and most profitable healthcare businesses.

But given the demographics of the world, we think this is a key growth engine for the Company now and into the future and we see Teva as the key enabler.

Bill Chappell, SunTrust.

Good morning.

Just wanted to delve a little bit more into the upside that you're reinvesting in the back half of the year.

Can you give us an idea in terms of marketing?

Is that more trade promotions, is that more advertising?

Will that be more in developing markets or developed markets?

Thanks.

As Jon indicated in his remarks, Bill, this is behind the innovations we're bringing to market and as a result of that, it will be more marketing spending like advertising, trial generation, awareness generation, not trade spending.

And it will go with the innovation, so it will be split relatively on a proportional basis between developing and developed.

Jason Gere, RBC Capital Markets.

Thanks.

Good morning.

I wanted to talk a little bit about Western Europe and yesterday we heard about Kimberly Clark exiting the diaper business out there, obviously they couldn't cover their cost of capital.

So I want to maybe delve in a little bit about that region and the discipline that maybe you guys have in terms of looking at more businesses there that you may have similar situations and really reallocate those resources to the emerging markets as you've talked about with your long term growth plan.

I know you've done this before, consumer tissue is one business that you got out of a few years ago, but if you could provide a little bit of color that would be appreciated, thanks.

Sure, I'll just say a couple things and turn it over to Bob.

Frankly, this is a story that frames scale pretty well.

Kimberly has about a 10% market share in Europe and has difficulty, understandably, earning cost of capital returns.

We have about a 50% share in the baby care business and as a result, have much more attractive structural economics.

We have fairly strong share positions across the categories we operate in Europe and so benefit from scale.

Our margins are in the mid teens and offer us many attractive opportunities, so I wouldn't see a significant redeployment of resources from Europe to other markets.

Yes, I think Jon said it well.

Europe is an important market for us.

We see the contraction there as an opportunity and as Jon said, we're deployed against that opportunity but also we're working in Europe, just as we are in other parts of the world, on improving our productivity while we improve our innovation.

Alice Longley, Buckingham Research.

Hello, good morning.

I've got a question follow-up on your market growth assumptions, so you're announcing globally your markets are growing about 4%.

Could you break that down into how fast your markets are growing in the US, Europe, and emerging regions?

As you do that, tell us how fast the markets are growing in volume and pricing terms.

And then just one other, which is that are you losing share in emerging markets in countries other than China or is it just China?

Thank you.

So in terms of the regionalization of market growth, think of it as about 9% growth in aggregate on a market level and developing markets, 1 to 2 points, probably closer to 1 in the developed world.

Within that 1, Europe would be negative, the US would be positive.

And then in terms of market share broadly, when we're growing at rates like 25% in India and 28% in Brazil, those are share gaining growth rates and so broadly we continue to -- because China's so big, in aggregate we did lose a little bit of share in developing markets but that's really the first quarter out of the last 11 that's happened.

We know why its happened and as Bob said, we've got plans to address it.

We're very comfortable with our forecast of growing share as we go through the rest of the year.

Remember in China, we're about 3.5 to 4 times the size of our next largest competitor.

Joe Lachky, Wells Fargo.

Hello thanks, just filling in for Tim Conder this morning but we were talking a little bit earlier we were talking on the beauty category, the beauty segment lagging as far as organic growth and you talked a lot about the hair care and Pantene.

But I wanted to focus my question more so on the skin care, specifically your strategy in Olay, and particularly in developed markets.

It seems like you're stretching your product portfolio vertically, maybe going up against some prestige manufactures and it seems maybe you're missing out on some mid tier innovation in skin care, so I was just wondering if you could expand on that a little bit.

Thank you, Joe, for the question.

Specifically in the announcement we announced that we're going to be entering the mid tier segment of skin care in North America in the second half of the year with the launch of an Olay item, an Olay Boutique.

So we see that opportunity as well and we're going after it.

That's it.

Jon Andersen, William Blair.

Good morning.

Good morning.

I just had a question on some of the comments around the hale that you're achieving, starting to achieve in emerging markets.

I thought, Jon, your comment was interesting that after-tax profitability is up I think 35% year-over-year in emerging markets.

Do you view fiscal '13 as an inflection point with respect to that, that the scale that you're building and the local production that you're bringing online is positioning you for acceleration on that front?

That would be helpful, thanks.

Yes, first one housekeeping clarification.

The 35% profit growth that I referred to was in our top 10 developing markets but those are the most important and the biggest, so it's meaningful.

And I do think, Jon, this is an inflection point.

I don't view it as a stare step but a true inflection point where we should continue to build profitability going forward.

We're at a point now in many of these markets where local production is justified and we're building factories and as those come on line, and as we get both the benefits of our overall productivity program and the benefit of increased scale in developing markets, things like media purchasing, et cetera, we should see a continued slope on that line.

And this is why, Jon, continued entry into more category country combinations is important.

Also I said earlier that we were disadvantaged by having a lower percent of our business in developing markets vis-a-vis our competition.

But having said that, our lower percentage at 38% still leads to a $32 billion business which is larger in aggregate than some of our competitive companies.

So it's the largest developing market business in aggregate and that's what leads to the scale advantage that Jon just described.

Mark Astrachan, Stifel Nicolaus.

Yes, thanks and good morning.

Just housekeeping first, share repurchase is higher than anticipated in the quarter.

Is there a change or is there any difference versus the expectations you laid out previously on that?

And then back on beauty, just curious how you think about balancing increased SKUs in existing brands with the development of new brands and potentially acquisitions.

So first on share repurchase, we did front load our share repurchase program and that was largely a reflection on where we started the quarter relative to stock price.

We haven't, at this point, changed any guidance relative to the $4 billion we expect to repurchase.

That's obviously something we continue to revisit and our principles are very clear in returning excess cash to shareholders.

So if cash comes in strong, we'll look at our options in that regard.

You raise a good point, Mark, on the incremental SKUs.

We work very hard as part of our innovation development to make sure that we introduce SKUs that will be successful, that are consumer relevant and that the consumers will buy superior performing products at a good value.

And so we also work very hard with retailers to make sure they have an efficient assortment of products on their shelf, that they don't have extraneous SKUs that don't meet the high criteria they have.

Or, alternatively, that they don't support launches of competitive brands which don't succeed.

Because oftentimes, you have a lot of companies bringing out SKUs that don't succeed and later need to be cleaned up.

And we work hard not to be one of those companies and we work hard with retailers to make sure they get the highest return on investment in their space.

And as it relates to acquisitions, I continue to view that -- we continue to view that as a much lower priority than organic growth just given the opportunities we have in front of us.

Linda Bolton-Weiser, Caris.

Hello.

I was wondering, on the topic of disruptive innovation, if you could give a time frame for when we might expect to see that.

I'm assuming not in FY '13 and even though you don't want to tell us about it, have you identified internally what it will be?

Thanks a lot.

Linda, I would offer going to a store today and look at Tide Pods.

I think that's relatively, I think that is disruptive.

It's growing the Tide business strongly, as Jon said, and our laundry business as well.

It's leading to about $0.5 billion in incremental sales or in sales and it's on one country on one brand.

So we still have a long way to go to roll it out.

Relative to the other disruptive or as you've called them disruptive, we call them discontinuous items we're developing, we've said that you'll see things over -- within a year, over the year and we're obviously not going to tell you what they are right now because then our competitors would know as well.

Caroline Levy, CLSA.

Thank you, good morning, everybody.

My question is on China.

A couple of things.

I believe you've moved your beauty headquarters to, I think, Singapore.

So, just to understand what differences you expect to see in the beauty business over there and globally and then just across any other areas as a result of doing that.

The second thing is I don't think you mentioned diapers as a place you'd lost share in China but based on what Kimberly said, it sounds like you are losing share there so could you address the diaper business in China?

First, on beauty.

When we call our category beauty, we're talking about skin care, antiperspirant deodorant, and bar soap -- or bar soap or body wash.

It is true that we have moved the headquarters of that business, we're talking now less than 40 people, to Asia.

The reason for that is that's where the business is greatest, that's where the competition is toughest, and that's where many of the trends are being set.

So that's the reason we did that.

And then on diapers, remember we're starting from a much larger position than Kimberly Clark is at today.

We actually grew the Pampers business 20% in China over the quarter, so we're very happy with how that business is progressing.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.