寶潔 (PG) 2013 Q2 法說會逐字稿

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 impacts of acquisitions and divestitures, and foreign exchange, where applicable.

Free cash flow represents operating cash flow, less capital expenditures.

Free cash flow productivity is the ratio of free cash flow to net earnings.

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.

I'm here this morning with Bob McDonald and Teri List-Stoll.

The second-quarter results we released this morning were good, at the high end of our initial forecast on the top line, and well ahead of the forecast on operating profit, earnings per share, and cash flow.

These better-than-expected results will enable us to raise our sales, earnings per share, and share repurchase outlook for the fiscal year, while -- and this is important -- simultaneously strengthening our innovation and marketing plans in the back half.

Organic sales grew a strong 3%, which was as at the high end of our 1% to 3% guidance range.

Organic volume grew 2 points, and pricing added 2 points to organic sales growth.

Product and geographic mix reduced sales by a point.

Organic sales growth was broad-based, with all segments up 2% or more for the quarter.

Foreign exchange impact lowered sales growth by 1 point, leaving all-in sales up 2%, a point above the high end of the guidance range.

Global market share trends have continued to improve.

We held or grew market share in businesses representing nearly 50% of sales in the December quarter, up from 45% of sales in the September quarter, and 30% in the June quarter.

We have more work to do, but the underlying trends are improving.

Moving to the bottom line, all-in earnings per share were $1.39, ahead of our guidance range of $1.18 to $1.25 per share.

All-in earnings include $0.21 of non-core holding gains from the purchase of the balance of our Baby Care and Feminine Care joint venture in Iberia, which we completed in October, and $0.05 of non-core restructuring investments to drive productivity improvement.

Core earnings per share were $1.22, up 12% versus the prior year, much stronger than we had initially forecast.

The better-than-expected earnings were driven by top-of-range sales growth, strong productivity savings, and a small pickup from a higher-than-expected gain on the divestiture of our Western European bleach business.

Core operating profit margin grew 110 basis points, including 160 basis points of productivity improvements and cost savings.

Core gross margin also improved 110 basis points.

Cost savings and productivity helped gross margin by 100 basis points, and pricing improved gross margin by roughly 90 basis points.

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

Commodity costs were essentially neutral to gross margin for the quarter.

Core SG&A costs were in line with the prior year as a percentage of sales.

Overhead cost savings of approximately 60 basis points were offset by increased plans and benefits costs, and modestly higher marketing spending.

The core tax rate was 24.4%, slightly below the prior-year level.

That impact on the year-to-year change in the tax rate was about $0.01 on the quarter.

On an all-in basis, including restructuring costs, gross margin improved 80 basis points and SG&A costs were in line with the prior year as a percentage of sales.

All-in operating profit margin improved by 800 basis points, driven by non-core charges taken in the base period.

We generated $3.1 billion in free cash flow in the quarter, which was also ahead of our initial forecast.

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

During the quarter, we returned $3 billion of cash to shareholders, $1.6 billion in dividends, and $1.4 billion in share repurchase.

During the first half of the fiscal year, we've returned $7.2 billion to shareholders, $3.2 billion in dividends, and $4 billion in share repurchase.

These second-quarter results, combined with those of the first quarter, enable us to raise our outlook on the top line, bottom line, and on share repurchase while simultaneously strengthening plans.

We're continuing to make good progress on the productivity plan we outlined at the Cagney conference last February, and on the growth priorities we discussed at the Citi conference last May.

Our priorities continue to be -- 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 maintained growth momentum in the developing markets in the December quarter, with organic sales up 7%, BRIC markets were up 11%, led by Brazil and India, with organic sales growth of over 20%.

An important component of our developing market plans is continued expansion of our portfolio.

The globalization of our Oral Care portfolio has been one part of this.

We've entered the Oral Care category in 34 countries over the last four years.

Every market is delivering at or above our going-in expectations for both sales and market share.

Progress in some of the early expansion markets continues to be very strong.

In Brazil, Oral Care shipments were up more than 50% in the December quarter, driven by the launch of 3D White toothpaste, Whitestrips, and the benefit of full national distribution.

We're growing in all channels and across all forums in the Oral Care category in Brazil.

Oral-B toothpaste share is now fast approaching 9% on a national basis, up nearly 3 points versus year ago.

Additional Oral Care geographic expansions are planned this calendar year, including a launch in Australia in a few weeks.

Another example is Gillette Guard, our breakthrough value tier-system razor, which has been a big success in India.

We expanded Guard to Egypt last quarter, and we're testing it in other developing markets where double-edge blades are still the predominant shaving tool.

We're continuing to build scale in developing markets, which is enabling solid profit growth.

We're localizing production, which lowers supply chain costs, and we're improving the productivity of our SG&A spending as these businesses grow.

These are two important drivers of the profit improvement we expect to deliver in our top 10 developing markets this year.

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

We're doing all of this while increasing marketing spending and accelerating the pace of innovation.

While we're being appropriately [choiceful], we are in no way pulling back in developing markets.

To the contrary, we're moving strongly forward.

At the same time, we're 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.

These businesses account for about 50% of Company sales, and 70% of operating profit.

The interventions we made during the last calendar year in four core US categories are continuing to drive strong results.

In US laundry detergents, value share has been progressively improving, following the consumer value corrections on the Gain brand and the growth of Tide PODS.

Value share for US detergents are up sequentially on a past 12-, 6-, 3-, and 1-month basis.

Tide share is in the high 30s, up 1.5 points versus prior year, and Gain value share is back to 15% for the first time in over a year.

Market share results in US auto dishwashing detergents have also improved sequentially.

Past 3-month Cascade value share is now at 60%, up 1.5 points versus prior year.

Gillette share is up nearly 2 points, at 74% in the US male blades and razors category.

The Fusion franchise is up more than 1 point at 37.5% and Mach3 is in line with prior year, at about 21%.

In US Oral Care, Crest toothpaste market-leading value share is above 36%, in line with prior year levels.

Across the US business, we held or built share in businesses representing nearly 60% of sales.

We've seen strong sequential improvement in the share trend across our top 20 brands in the US.

On a past12-month basis, only 25% of the top 20 brands were holding or growing share.

That figure is up to 60% on a past 3-month basis and 65% for the most recent period in the United States.

January marks the first month of full plan deployment, and innovation strengthens as the year progresses, so we expect further improvement in market share results in the back half of the fiscal year.

Innovation underpins both developed and developing market efforts, as does our work to drive greater productivity in everything we do.

On the point of innovation, Tide PODS have reached a 6% value share in less than a year.

We expect PODS will generate about $0.5 billion of sales this fiscal year on one brand in one country.

Tide PODS deliver as much cleaning power as the six next leading competitive unit dose products combined, a big reason we currently hold a 75% share of the unit dose form.

We've now established PODS capacity in Europe and will begin the roll-out of Ariel pods in April.

Additional markets and brands will follow.

We've driven the growth in a new category with Downy Unstopables in-wash scent boosters.

Unstopables keep clothes fresh for up to 12 weeks, until you wear them.

Unstopables consumption is nearly twice as high as we had initially expected.

We launched a new spring scent earlier this month to further expand the Unstopables lineup.

We're marketing this innovation in only three countries so far -- the US, Canada and Japan.

Our air care business just introduced new Febreze Stick & Refresh, which combines Febreze's unique slow-release scent technology with a no-residue adhesive from our connect and develop innovation partner, 3M.

Febreze Stick & Refresh sticks to any surface, and works anywhere in your home to keep it fresh and odor-free without plugs or batteries.

The surface care category launched a Swiffer with Gain scent line extension to provide consumers with the fresh scent of Gain as they clean with Swiffer Dusters, WetJet, and Sweepers.

Swiffer is a good example of the benefits of scale and innovation, coupling our substrate and perfume expertise with a strong brand equity from our laundry category to obsolete mops, feather dusters, and rags.

Cascade Platinum launched earlier this month.

This follows the successful launch of Fairy Platinum in Western Europe earlier this year.

Cascade and Fairy Platinum are designed to deliver powerful cleaning for dishes, while also providing film protection to help maintain the sparkling look of dishwasher interiors.

Next month we have three new things to communicate on Bounty.

On the main Bounty lineup, we'll be announcing towels that are two times more absorbent than the next leading national brand.

We're upgrading Bounty Basic, with towels that are 50% stronger than the leading bargain brand, and we're launching a new line called Bounty DuraTowel, letting consumers ditch their dishcloth and switch to Bounty DuraTowel, which is three times cleaner than their dirty dish cloth.

Our entry into the sleep aids category continues to go very well.

ZzzQuil is a non-habit-forming sleep aid that is not for colds, not for pain, just for sleep.

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

We began expanding ZzzQuil into Canada earlier this month.

Expansion of Vicks Cough & Cold products in Russia, Poland, Hungary and the Czech Republic is also progressing well.

The launch features the Vicks Nature Fusion line that combines effective medicine with the soothing experience of natural remedies.

Sales in the expansion markets are ahead of initial expectations.

Oral Care launched its Oral-B Deep Sweep Power Brush two weeks ago.

Deep Sweep cleans like a power brush and moves like a manual brush to remove more than two times the plaque of a regular manual toothbrush.

3D White toothpaste has now delivered market share growth in the US every month since its introduction over 2.5 years ago.

We're expanding the 3D White line, which includes toothpaste, brush, rinse, floss, and Whitestrips, around the world to continue building out our full Oral Care portfolio.

Over the last nine months, we launched 3D White products in the UK, Germany, Italy, Belgium, the Netherlands, Luxembourg, Switzerland, Austria, China, Brazil, and Mexico.

3D White is driving strong share growth in Mexico and the UK.

Mexico reached an all-time high toothpaste value share of over 14% for the quarter, up nearly 4 points versus the prior year.

In the UK, the combination of 3D White, Oral-B Complete, and Oral-B Pro-Expert drove value share to over 10%, up nearly 3 points versus the prior year.

Salon hair care's Illumina color from Wella Professional launched in Western Europe in July, and in North America in December.

Illumina leverages a new patented MicroLight technology, and is Wella's biggest innovation in the last 20 years.

With Wella, consumers experience hair that appears lit from within.

This breakthrough innovation will be launching in Latin America and Australia/New Zealand in March.

US skin care began shipping Olay Total Effects CC, or Color Correction, Cream in December.

Total Effects CC Cream fights the seven signs of aging to correct fine lines, wrinkles, and age spots, and covers to provide a flawlessly beautiful complexion.

This month, they also introduced a new mid-tier skin care boutique called Olay Fresh Effects, aimed at younger consumers with a collection of cleansers and moisturizers that deep clean and hydrate to keep you looking beautifully fresh and vibrant.

We've also begun a revitalization of Olay Regenerist, with the launch of new Olay Micro-Sculpting Cream.

The reformulation includes two new anti-aging ingredients to penetrate quickly and regenerate surface cells to reveal younger-looking skin fast.

Visible wrinkle reduction starts in just one day, and the look of 10 years of wrinkles can be reduced in just four weeks.

The Cover Girl brand introduced two exciting innovations during the last quarter.

The new Clump Crusher Mascara by LashBlast provides 200% more volume with zero clumps.

Cover Girl mascara sales growth has accelerated by 9 points since the Clump Crusher launch.

Also, Cover Girl has entered the nail segment, with a new Outlast Stay Brilliant Nail Gloss.

This line has 45 shades that provide high-gloss color that can last as long as a week, without the need for a top coat.

Initial results for Cover Girl nails are very strong.

At one leading drug customer, sales have exceeded market-leader Maybelline's, after just six weeks on market.

We're currently launching a hair care innovation bundle that spans the vertical portfolio.

We recently launched 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.

Age Defy leverages a new formula based on our hair biology program, yielding hair that acts 10 years younger, by thickening hair as if it had 6,500 new strands.

The Pantene Advanced Plus Keratin Repair formula leverages a breakthrough in new conditioner technology to repair two years of hair damage in two minutes.

We're expanding Pantene Expert Collection to Latin America later this quarter.

We're also launching Vidal Sassoon Pro Series in the US.

The complete hair care line, offering shampoo, conditioner, styling, and permanent color, to give consumers salon genius, brilliantly priced.

Vidal Sassoon Pro Series is priced at a 50 to 75 index to the base Pantene shampoos and conditioners, providing us with a very strong brand in the salon affordable segment, with a real salon heritage.

We're bringing a bundle of Gillette innovations to market across Fusion and Mach3 blades and razors, as well as shave preps, which is focused on sensitive skin.

70% of men believe they have sensitive skin, and these innovations leverage the fact that our ProGlide products have been recommended by dermatologists in the US as the best shave for sensitive skin.

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

We're making strong progress against our commitments, but won't stop there.

The overhead reduction plan we announced last February called for a reduction in non-manufacturing staffing of 10%, or roughly 5,700 roles by the end of this fiscal year.

As of the end of December, we've reduced 5,500 roles, more than 95% of our target reduction.

It's likely that we'll reach our initial staffing objectives four to five months ahead of schedule, and, as we announced at our Analyst Day meeting in November, we're committed to do more.

Our new objective is to further reduce -- and this is what we introduced at Analyst Day in November, the further reduction of non-manufacturing enrollment by an additional 2% to 4% per year from fiscal year 2014 through 2016.

This will roughly double the amount of direct savings we deliver in core SG&A, reducing our reliance on top-line growth for leverage-driven savings.

Any additional enrollment progress we make in fiscal 2013 beyond our initial target will give us a head start on the fiscal 2014 to 2016 enrollment objectives.

We have solid plans in place to deliver $1.2 billion in savings this fiscal year in cost of goods sold, so I have established a stretch target beyond this of $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.

For the first half of the year we're tracking well ahead of target, at about 6.5% manufacturing productivity improvement.

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

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

At the end of last fiscal year, our core operating profit margin was nearly 19%, which compares to a simple average of 15 competitors of about 15.9%.

Our operating margin is higher than 12 of the 15.

This means we're effectively more 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.

We're building and executing our strategy with the objective of getting the savings and growth balance right.

Now, let's turn to our updated outlook for fiscal 2013 and the January-March quarter.

Starting with the fiscal year, we're increasing organic sales growth guidance to a range of 3% to 4%, compared to our prior range of 2% to 4%.

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

We now expect all-in sales growth of 1% to 2%.

This includes a foreign exchange headwind of about 2 points, based on mid-January spot rates.

We're raising our outlook for core earnings per share growth to a range of 3% to 6%, from a previous range of down 1% to up 4%.

This guidance includes earnings per share headwinds from items such as higher costs for pensions and employee benefit plans, and the impact of mandated price reductions in Venezuela.

Combined, these headwinds are reducing our core earnings per share growth rate by about 3 percentage points.

Adjusting for these, our core earnings per share growth would be 6% to 9% for the year.

The new earnings outlook equates to a core earnings per share range of $3.97 to $4.07, which compares to our previous guidance range of $3.80 to $4 per share.

There are two items we called out as potential risks last quarter, which have largely been resolved with no material impact to earnings.

We have managed through the absorbent gelling material supply issue for our diaper business, with only minor disruption and added cost.

And the US corporate tax extenders that we had assumed in our forecast have now been enacted into law.

There continue to be two notable earnings risks that are not included in our guidance.

Our forecast is based on mid-January foreign exchange spot rates.

A large devaluation of an important currency, such as the Venezuelan bolivar, would likely reduce our earnings outlook.

Our guidance also assumes current market growth rates continue for the balance of this fiscal year, and are not impacted by the payroll tax increase in the US, dynamics associated with the US debt ceiling debate, or by worsening conditions in Europe.

We're increasing the all-in earnings per share range to $4.04 to $4.14, which compares to our prior range of $3.78 to $4.02 per share.

The increase is largely due to the improvement in our core earnings per share expectations.

In addition, the $0.21 non-core holding gain resulting from our purchase of the balance of our Baby Care and Feminine Care joint venture in Iberia is roughly $0.04 per share higher than anticipated in our last guidance.

We've updated our estimates for non-core restructuring investments, which we now expect to be approximately $0.15 per share for the fiscal year.

This compares to our previous estimate of $0.15 to $0.19 per share.

The difference is driven by a timing shift for asset disposals, and somewhat lower costs for organizational productivity improvements.

We continue to expect free cash flow productivity of about 90% of net earnings for the year.

We now expect capital spending to be around 5% of sales for the year, down from our prior estimate of 5.5%.

This reduction is mainly due to capital efficiency and manufacturing productivity improvements, not a reduction in project scope.

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 Board meeting.

In addition, we will repurchase $5 billion to $6 billion of stock this fiscal year.

Based on current cash projections, we expect to be towards the high end of this range.

This is improved from the $4 billion to $6 billion outlook we discussed at the analyst meeting in November.

Combined, we expect to return $11 billion to $12 billion of cash to shareholders through dividends and share repurchases in fiscal 2013.

This represents a cash return in the range of 5.8% to 6.3% on our market cap of about $190 billion.

For the January to March quarter, we're estimating organic sales growth in the range of 3% to 4%.

At the low end of 3%, this range represents growth in line with what we delivered for the December quarter.

At the high end of 4%, this range represents another quarter of sequential improvement.

Foreign exchange is expected to be roughly neutral to sales growth, which leads to all-in sales growth guidance equal to the organic range of 3% to 4%.

On the bottom line, we expect March quarter core earnings per share in the range of $0.91 to $0.97, or down 3% to up 3%, compared to prior-year core earnings per share of $0.94.

We expect the effective tax rate for the March quarter to be about 1 point lower than last year, due to the true-up needed to reflect the US corporate tax law changes made in early January.

For the fiscal year, we now expect the tax rate on core earnings to be around the prior-year level of 24.2%.

On an all-in basis, we estimate earnings per share in the range of $0.90 to $0.96.

This includes non-core restructuring charges of approximately $0.01 a share.

Our back half earnings per share guidance reflects the strong level of innovation activity going into the market, as well as focused reinvestments to maintain positive market share momentum.

We expect the majority of these investments to be in marketing spending, with the balance focused on trial-building merchandising programs behind our new innovations.

Comparing our first-half core earnings per share growth to the back half, we expect marketing investments to be an 8-to-9-point headwind, and tax to be a 2-to-3-point headwind.

We're offsetting a portion of this with stronger top-line results and higher cost savings, but back-half core earnings per share growth will be several points below the first-half level.

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

These results are enabling us to raise our sales, earnings, and share repurchase outlook for the fiscal year, while creating flexibility to further strengthen our plans in the second half.

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

This, combined with strong cash flow, and a track record of capital returns to shareholders, should enable us to generate superior levels of shareholder return.

That concludes our prepared remarks.

As a reminder, 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.

Bob, Teri, and I will be happy to take your questions, and the IR team will be available after the call to provide additional perspective, as needed.

With that, why don't we turn to questions?

(Operator Instructions)

Your first question comes from the line of Chris Ferrara of Bank of America.

Please proceed.

I guess the question is about the sales acceleration.

So obviously, the sheer number of new products you are launching is much higher than what we've seen more recently, and that alone is going to drive better sales and market share, but I guess, can you give us a sense for why specifically you think that we're truly seeing the impact of higher quality innovation, that might lead to more sustainable sales growth, and why it's not just a result of just accelerated activity, that isn't necessarily sustainable?

Thank you.

Well, I think, Chris, Tide PODS is a great example of that.

We introduced Tide PODS, which is a very discontinuous innovation.

It's taken about 75% of the unit dose category in the United States.

When we look at the consumers that it's gaining, it's gaining consumers from up and down the income spectrum.

So even though it might be priced as a premium on a per-wash basis, you've got consumers who would buy lower-priced brands, trading up to that innovation.

And as Jon said in his remarks, we expect by the end of the year, this will be a $0.5 billion business.

So you take $0.5 billion of new business on one innovation, one discontinuous innovation, one country, one brand, and as Jon said, we've already built the plant.

We're expanding in Western Europe in the April through June quarter, so you can just imagine the sales and earnings potential of just that one discontinuous innovation as we expand it around the world.

I think that's probably the best example.

You'll also remember, Chris, I think in our Analyst Day discussion, and Bruce Brown's presentation on innovation, we talked about an acceleration we're expecting, on what he we refer to as change innovation, which goes beyond commercial activity to truly change the consumer experience and the dynamics of the category.

So we do think we're on a much stronger innovation footing as we go forward.

Of course, there are new categories we've entered, too.

Jon mentioned ZzzQuil and sleep aids.

We entered the auto care fragrance category, and as we also talked, we've bolstered our new category innovation as well, and we fully expect some of those innovations to come to market over the next year or so.

Your next question comes from the line of Dara Mohsenian of Morgan Stanley.

Please proceed.

So the increase in the low end of the organic sales growth guidance for the full year, can you discuss where you've come in better than expected on a geographic basis, and what's driving that confidence in general?

And then it looks like in emerging markets, the sales growth has slowed to more like the 7% range the last couple quarters, versus 10% over the past couple years.

So is that more of just a category growth issue with macro slowing a bit, or is it a market share issue?

Can you talk about if you expect emerging markets to reaccelerate in the back half of the year?

Relative to geography, Dara, we're really seeing growth, both in developed markets and developing markets.

Recall, two of our four focus areas are maintaining our momentum in developing markets, and developing markets were up 7% this quarter.

They were up 11% in the BRIC countries.

And if you look at two major countries like China -- like India and Brazil, they were up 20%.

So we're continuing to grow in developing markets.

We're continuing to enter new category-country combinations, we'll enter 20 this year.

We're continuing to build new factories in developing markets, roughly 20 that are on the drawing board now.

So we're growing in developing markets.

A lot of that is the expansion of categories like Jon talked, Oral Care.

A lot of that also is growing market share.

We're also growing in developed markets.

We're strengthening our developing market business.

As Jon said, we've held or built share in businesses representing nearly 60% of the sales in the quarter in the US, and the interventions that we put in place like in US laundry, US auto dish, US male blades and razors, US Oral Care, as Jon covered, are helping us get our shares back to the point that we think they should be.

So it's really broad-based.

I think we said in our remarks, every segment of the business grew organic sales at least 2% or more.

I would just add one thing, then I'll answer the next part of your question.

If you look at -- everything that Bob just said is spot-on.

If you look at versus expectation, what part of the business is exceeding the most, encouragingly, that's North America.

The reason that's encouraging is, one, that's one of our strategic priorities, and second, it's our most profitable business.

We're very encouraged by that.

To the question of developing market growth rates for P&G, and what we should expect going forward, we're still expecting 8% or higher growth, so an acceleration of growth in the back half for the full fiscal year.

Part of the 40/20/10 plans, as Bob mentioned, January's the first month when those are all fully in-market, and those have a big developing market component as well.

So our plans will be strengthening in the back half, in developing markets and we expect to accelerate the rate of sales growth, even beyond what we've done so far.

Your next question comes from the line of Lauren Lieberman of Barclays.

Please proceed.

So just following up on that actually, I was hoping you guys could comment a little bit on China, because I know last quarter was a little bit of a surprise to me that business had slowed, and there's been no mention of China at all in the call so far.

Could you just give us an update?

I know there was a lot, not supposed to accelerate until the second half, but I'd just love an update on progress there.

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

Share is still down a little bit versus last year, but about 50% of the business is holding or growing share, so about 50%.

And share trends are improving on more than two-thirds of the portfolio that we have in China.

We've got a strong portfolio of innovation launching this fiscal year, and particularly here in the back half of the year, and we expect the combination of our interventions that we've already made and our innovation will return us to market share growth in China.

By the way, Lauren, it's nice to hear your voice, and we're glad to have you back.

Your next question comes from the line of John Faucher of JPMorgan.

Please proceed.

As we look at the market share performance, we've obviously seen a ramp-up in US performance, maybe not gaining share, per se, but definitely losing a lot less share.

Europe seems to be the big outlier there, where it doesn't look like your share performance has improved all that much.

Can you talk about what's different about that market from a share perspective, I know it's growing more slowly.

Is there pricing adjustments you need?

Is that an innovation question?

Just a little bit of color on the European market shares.

Thanks.

As you know, John, the market in Europe economically is challenged.

We believe that we will strengthen our share position in Europe over the next few months.

Remember, Jon talked about introducing PODS on Ariel, which is the largest and leading laundry detergent in most of Europe, in the April through June quarter.

We think the innovations like that will help.

We also have introduced Oral Care in Europe in this semester, and so far, all markets are trending above expectation.

So new innovations like that will help us regain share growth in Europe.

Jon?

There are a couple of categories where we do need to adjust prices, and will be adjusting prices, but it's not significant.

If you step back, we took $3.6 billion of pricing last year.

We told you in the last call that we had made choices to roll back about $400 million of that.

That figure is now about $500 million, including the changes that we're making in Europe.

Your next question comes from the line of Nik Modi of UBS.

Please proceed.

Just wanted to follow up on the geographic question.

If you can provide any perspective on how the US actually performed volume-wise, just to give us a little perspective on that market.

And then just the bigger picture question is, Jorge obviously was announced to take over the -- overseeing the productivity and organizational redesign.

Just curious where we are in the process, and when we can expect to get an update?

Thank you.

Let me take the second question first, if I may, Nik.

Jorge and his team are hard at work.

We've identified over 30 new discontinuous innovations that we can bring to market.

We have vetted those throughout the Company.

We're in the midst of consumer research, and we're excited about them.

We took all of our leadership through them recently, and we fully expect to be in market with the beginnings of that -- the fruits of that labor within the next year or so.

And on the North American volume question, we typically don't provide numbers by region.

What I will tell you is that the North American volume results in terms of growth were higher than the Company average, so there's a strong underpinning of volume component in the North American numbers.

Your next question comes from the line of Bill Schmitz of Deutsche Bank.

Please proceed.

Good morning.

I'm going to try to do this in a two-part question.

Unconnected, obviously.

So you say the operating margin leverage on 5% top line growth was 50 to 75 basis points.

I was wondering if that still holds?

And then secondly, if you look at the growth algorithm, it seems like your weighted category growth is 3% to 4%.

If my math is right, it seems like to add 1 incremental point of top-line growth, it's only about 10 basis points of global market share, assuming your global addressable market is $800 billion.

I want to know if that's correct or not.

Thanks.

Both of those are ballpark correct.

Okay.

Thanks.

Your next question comes from the line of Bill Chappell of SunTrust Robinson Humphrey.

Just wanted to look at the two numbers that you throw out, and just try to get some color in terms of gaining close to 50% of your categories, gaining share worldwide, and then 60% in the US.

Is there a number that you're looking for?

Obviously 100% would be ideal, but where you come you away and say -- boy, this is what we're really aiming for and something we can kind of put in perspective.

We think about 65% is really was we would like to do.

For both the US and international?

For every market in the world, sure.

Next question comes from the line of Ali Dibadj of Bernstein.

Please proceed.

So you had mentioned a couple times the organizational structure work that I think Jorge is doing, which sounds encouraging.

But can you help define how that's different than the work Mark Pritchard did, I guess about five years ago, or Kirk Perry did a few years ago?

I bet everybody on the phone, you certainly know the answer about what the org structure will be, as Mark and Kirk came up with, which is something around, there are too many cooks in the kitchen between the GBU, the MDO, the functions now, and maybe even at the GLC level.

So given that premise, will you have -- will he have the power as you actually execute some of the potential recommendations, so layered reductions I'm thinking of.

In some of those structures, can it happen quickly, both to free up costs, but I think importantly, and this is at least my point of view for what it's worth, importantly also for quickening decision-making in the Company.

And when can we hear more about this organizational structure view again, because I think it's key to your sustainable improvement here.

Thanks a lot.

Just to clear up the confusion that I may have caused or may have been caused, Jorge Mesquita is leading our discontinuous innovation program.

Jorge Uribe is leading our productivity and organization transformation program.

What's different this time is that Jorge has a team of top leaders working with him.

I'm involved.

In fact, we had meetings this week and I was involved with the team this week, and our global human resource officer is leading, as well as the functional leaders are involved as well.

And of course, Jorge reports to me, so this is why it will -- we will make big decisions, we will do things quickly, and we will find ways to improve the effectiveness of our organization.

Your next question comes from the line of Joe Altobello of Oppenheimer.

Please proceed.

Just had a quick question on the profit growth across your segments.

If you look at your organic sales growth, it's been pretty remarkably consistent, but the profit growth has been somewhat more uneven.

I'm looking at Grooming and Health Care in particular.

Is that due to the timing of some cost saving initiatives or innovation or is there something more structural in those two segments, that might cause those profit growth to obviously lag the rest of the business?

Thanks.

On the Grooming, you'll recall that we made, as part of some of the big interventions we made last spring, we had a pretty significant pricing and promotion adjustment on that business, and that's one of the reasons that on a year-to-year basis, that index is a little bit lower, but we would not expect that to be an ongoing dynamic.

Obviously, the overall structural attractiveness from a margin standpoint of that business is very high.

And the Health Care dynamic is really a function of a couple of supply-related issues that we've been working through successfully, but we've had to incur some additional costs to manage those effectively.

Your next question comes from the line of Connie Maneaty of BMO Capital Markets.

Please proceed.

I think it's encouraging that the PODS are going into Europe.

It suggests that you've come up with a solution to the capacity constraints in the US.

So, could you comment on that and give us an indication of when you think US sales and merchandising can pick up on PODS in the US, because they've been flat for the last few months.

Thanks.

Well, we have been merchandising PODS, Connie, in the US but we've been merchandising the bags that hold the pods, not the tubs, and we've got additional capacity in the US.

That will ramp up this semester.

And the new capacity that we've put in Europe is the ideal line.

In other words, the first line we used was not ideal.

We've improved that line, and that's the capacity we're putting in.

So you will quickly see unlimited capacity, in this semester, you will see relatively unlimited capacity in the US, as well as incremental capacity in Europe, and obviously as we have said, this is right now on one brand in one country and we plan to expand it.

Your next question comes from the line of Javier Escalante of Consumer Edge Research.

Please proceed.

Hello, good morning everyone and thank you for taking the question.

The question goes back again to the US.

I think that you mentioned that it was ahead of Company average, so ahead of 2%.

And if we look at retail sales, at least in tracked channels, we get declines of 2%.

So if you can explain whether this is a channel issue, the fact that we don't get club data that can explain the gap of over 4 points of growth in volumes, or whether the increased merchandise activity ahead of the product launches in the third quarter in Beauty contributed to the strong growth in North America, if you can quantify that, that would be very helpful.

Thank you.

I'm not sure I can square the full equation, because I haven't spent a lot of time on that.

But the sell-in behind our Beauty initiatives and some of our other initiatives did have a positive volume impact in the second quarter in North America.

But even with that impact stripped out, I would stay with the statement that North American results on a normalized basis from a volume standpoint were better than the Company average.

So, pretty strong underlying.

I really can't reconcile that to the other data, I apologize, but we'll work with you on that.

The very encouraging thing is that while there was some pipeline volume, which was obviously part of our forecast in the second quarter, the January business is very strong.

We've seen no dip at all.

In fact, we've seen acceleration, and so we're pretty comfortable that the volume trends we've seen in the US are sustainable.

The next question comes from the line of Jason Gere of RBC Capital Markets.

Please proceed.

I guess I'll just continue on the last question on the US.

Maybe if you can just talk a little about the competitive landscape and your thoughts maybe over the next six months, just the more benign cost environment, just seems top line is a little bit harder to come by.

I know you have the strength of innovation, but I was just wondering what you're seeing from your peers.

Thanks.

We're seeing the normal level of promotion support.

Perhaps with the exception of the hair care category, which is probably one of the most active, given the number of new entries that have occurred over the last couple of years.

But as you rightly pointed out, Jason, I think the antidote or the method of growth here is behind innovation, and we have a particularly strong innovation program.

As you know, Vidal Sassoon Pro Series, Jon talked about Pantene Expert adding over 6,000 -- like adding over 6,000 hairs to your head.

I know I can certainly use that.

Our Oral Care business continues to grow, Tide PODS.

So again, innovation is key, and we plan to continue that.

As we've talked before, consumers remain very receptive to real innovation and are willing to pay for it, and importantly, retailers are hungry for real innovation that grows categories and grows market basket.

So we've had very strong receptivity on the part of our retail partners to the innovation program.

Your next question comes from the line of Joe Lachky of Wells Fargo Securities.

Please proceed.

I just wanted to focus specifically on the Beauty and Grooming segments where you showed positive organic sales but flat volume.

And specifically on the volume, I guess you did mention you had a little bit of sell-in, the Beauty that gave you a positive impact in that segment.

Maybe if you could quantify that.

And then how do you turn around volume in Grooming?

I know you got some innovation coming, both in Beauty and in Grooming, but maybe if you could describe how you accelerated volume in those two segments?

Thanks.

Well, first of all, our Beauty business has grown organic sales 11 of the last 12 quarters averaging roughly 3% growth over the past three years.

In our Grooming business, 11 out of 12 quarters, averaging 4% growth over the last three years.

In hair care as I said, we're expanding the portfolio vertically, with innovations like Vidal Sassoon Pro Series in the salon affordable segment.

Pantene Expert Series in the super premium space, and then as Jon pointed out, we've got Wella Illumina and Color Recharge in the professional space.

In skin care, we're investing to ensure sufficiency of our core Olay business, and we're bringing new innovation that addresses key segments where we currently have portfolio gaps, and it's critical to fill those portfolio gaps.

Examples include, in the United States, new Olay Micro-Sculpting Cream, Total Effects CC Cream, which stands for Color Correction, and Olay Fresh Effects.

In China, we've got Olay Naturals, Pro X Whitening, the launch of a new mid-tier brand in the coming months.

In blades and razors, the innovations we talked about last fiscal year are working.

The share is up nearly 2 points to 74%, and we're launching a bundle of new innovations across Fusion Mach3 disposables and shave preps that are focused on sensitive skin and every man we talk to about shaving talks about sensitive skin.

Last but not least, Jon talked about cosmetics and the two exciting Cover Girl innovations this quarter, Clump Crusher by LashBlast and Outlast Stay Brilliant Nail Gloss.

Initial results of all of these are at or above our expectation.

Your next question comes from the line of Alice Longley of Buckingham Research.

Please proceed.

My questions are follow-up questions.

I don't think that you gave us how fast you think your markets grew globally, and then in the three geographic regions, US, Europe and emerging regions, and then on the US alone, according to your numbers, did you overall hold, gain or lose share?

Thank you.

From a market growth standpoint, average about 4%, a little over 4%.

And that breaks down to about high singles in developing markets, obviously relatively low singles in developed markets.

And on the share question on the US, Bob, you want to handle that?

Well, as we said, we're growing or holding share in 60% of our business in the US.

If you look at the overall US number, it's down a little bit, but the trend is getting better.

And as you would expect with these new innovations that started shipping at the end of December and with the strength that Jon talked about we're seeing in early January, we would expect those share trends to improve.

Your next question comes from the line of Mark Astrachan of Stifel Nicolaus.

Please proceed.

Back on Beauty, it still seems like you're losing share there in spite of the innovation.

I guess, going forward, how do you think about balancing innovation with acquisitions, new brands, to improve the share trends, and then what do you think is a reasonable go forward expectation for your volume growth in that category?

Yes, Mark, I don't think -- I think there's a timing sequence difference here.

I don't think we're losing share despite the innovations.

In fact, in the places where we're innovating and introducing new innovations, or for example in the Western Europe, Latin America, where we've introduced Oral Care, we're gaining share.

The innovations that we've talked about, particularly those in this call, are really those that have shipped in December, are strengthening the business in January, but you'll really see the impact more in the balance of the fiscal year.

And certainly, that's true with something like Vidal Sassoon Pro Series or Pantene Expert, which only started shipping a couple weeks ago.

And our expectations for our Beauty and Grooming business on a long-term basis are no different than the balance of our business.

We are targeting and want to be able to grow our sales 1 point to 2 points ahead of the market growth rate.

Your next question comes from the line of Michael Steib of Credit Suisse.

Please proceed.

Good morning.

Jon, you spoke earlier about getting the balance between savings and growth right.

The business is so leveraged to grow more so than most of your peers.

My question is, are you investing enough, is the Company investing enough to really drive that top-line growth, even at the high end of your new organic sales growth guidance, basically just implies growth in line with the past few years and still somewhat below some of your global peers.

That's a very good question.

Thank you for that question.

Our objective remains to grow our sales ahead of the market and so you're absolutely right that while we're accelerating, we're still on the journey, and we do intend to get to growth rates that are above the market level.

We're investing significantly to do that.

As I said in my remarks, Bob has said.

We spend a lot of time working on strengthening plans for the second half of the year, with an eye towards doing exactly that, plus strengthening next fiscal year.

And we were already making significant investments in the back half, and those will be strengthened based on the over-delivery in the second quarter.

So, we're pretty confident that results will continue to accelerate, and hopefully we'll get to where you rightly think we should be, sooner rather than later.

And at the same time, our productivity program will continue to accelerate as well.

So there will be even more potential for investment.

Your next question comes from the line of Linda Bolton-Weiser of B. Riley Caris.

Please proceed.

I was wondering if you could more specifically quantify these cost savings, the basis point positive effect on both gross margin and SG&A, and also the commodities comparison, I would assume it was flattish year-over-year or maybe even down.

Is it right to assume the commodity comparison will get even better in the next two quarters?

And then on the Fabric and Home care, did the Hurricane Sandy positive effect, how much was that on the whole category growth?

Was it -- for the segment, was it 0.5 point or 1 point or less than that?

Thanks.

So first of all, you're absolutely right commodity impacts were essentially neutral on the quarter.

That's about what we're expecting on a go-forward basis.

There are some that are moving up a little bit.

There are some that are moving down a little bit.

But in broad terms, it's fairly neutral.

In terms of the cost savings components within gross and operating margin, there were about 100 basis points of savings that positively impacted gross margin and about 60 basis points of savings that positively impacted the SG&A line, so that in total, there were about 160 basis points of productivity savings in the quarter.

That compares to about 150 basis points in the last quarter.

So you are seeing some, as you would expect, increasing contribution from productivity.

Frankly, it would be very hard for us to tease out the Sandy impact on any of our individual businesses.

We worked hard to manage inventories and supply in a way that minimized the impact to consumers, so I would, for all practical purposes consider that a non-impact.

One of the things we did do with our Tide brand is our Tide Loads of Hope Truck which has washing machines on it, was up and down the East Coast, washing the clothes of people who lost their homes and introducing people who had never seen the Tide or never used the Tide brand before to Tide.

So a good trial effort, but also doing some good things at the same time.

Your next question comes from the line of Leigh Ferst of Wellington Shields.

Please proceed.

Can you tell us you how you evaluate your decision to shift more to local manufacturing in the emerging markets?

You said it benefits the supply chain.

Can you talk about how that -- could you talk about other issues that go into your decision, and how you evaluate that differently now versus maybe 5 or 10 years ago.

And finally is there a halo effect on consumption if you're creating more employment with this local manufacturing?

You've hit on some of the criteria for that decision.

Obviously, you want to establish a business that's big enough to create a rate of return for the capacity.

But you also want to look at some key criteria.

Location, government support, the quality of the workforce, the risk-adjusted rate of capital.

These are all things that we look at.

Relative to the change, it's very interesting.

Two things.

One, when I joined the Procter & Gamble Company in 1980, manufacturing expense was a big element that we worried a lot about, and logistics costs was a very small element, because the price of diesel was very low.

Today, manufacturing expense is relatively low, because there's very few people in our manufacturing plants.

Jon talked about our ability to build 20 new plants but not add any enrollment or headcount to the Company, because of 6.5% improving productivity in manufacturing roles.

But the logistics cost has skyrocketed, and as a result of that, we worked very hard to distribute our plants globally.

We have roughly 150 plants around the world.

They have to be near the consumers they serve.

We export very little, and we have a competitive advantage, because we create scale by having all of our global business units around one plant.

So when we buy land, we buy land for all the business you units in the Company, planning to take advantage of that scale.

That scale then helps us in filling logistics orders because our trucks don't weigh out with something like Gillette blades, and they don't cube out with something like Pampers disposable diapers.

We're able to get the optimum balance of weight and cube, which gives us a competitive advantage on cost.

So we've done relatively well on logistic costs year-to-year despite the increase in diesel.

Your final question comes from the line of Caroline Levy of CLSA.

Please proceed.

Good morning.

Having just got back from China actually I just would like to ask you to dive a little deeper into the various segments, I think six major segments you have there, and what the competitive challenges have been.

Is it more from local manufacturers or international competition by your key segments?

That would be a really long answer.

Maybe Caroline, we can take that offline, because that's a really long discussion.

But as you would imagine, in some categories it's the local competitor, in some categories it's the global competitor.

There's not an easy answer.

We are the largest consumer goods Company in China, by a large factor.

We do have an outstanding distribution network and our expectation, as Jon has said, is to grow 1 point to 2 points above the market.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.