寶潔 (PG) 2014 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 impact 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 adjusted 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.

Good morning.

Our October-December results came in pretty much as we'd expected, keeping us on track to deliver our fiscal year objectives.

All-in sales were up modestly versus the prior year, including a 3 point headwind from foreign exchange.

Organic sales grew 3%.

Organic sales were in-line or ahead of year-ago in each reporting segment.

Coupled with 4% growth in the first quarter, this leaves us on track to deliver 3% to 4% organic sales growth for the fiscal year.

Organic sales growth was driven by organic volume growth of 3%.

Organic volume was ahead of year ago in each of our reporting segments.

Pricing added 1 point to sales growth, and mix reduced sales growth by 1 point.

Consistent with the reported market growth and market share data you've seen, October and November were relatively soft months for our categories and for P&G.

December, on the other hand, was a relatively strong month for us.

December organic volume growth was over 5%, with each sector growing at or above 4%.

Organic sales were up mid-single-digits.

December quarter all-in GAAP earnings per share were $1.18, core earnings per share were $1.21, which leave us on track with our plans to deliver 5% to 7% core earnings per share growth for the fiscal year.

Earnings for all segments were ahead of year ago, except for Baby, Feminine, and Family Care, due to foreign exchange.

Foreign exchange was an $0.11 per share headwind for the Company in the quarter.

The year ago period also included a $0.07 per share gain from the sale of our bleach business in Italy.

Combined, these two items constitute a 15% core earnings per share growth headwind for the quarter.

Core operating margin was about equal to last year, down 10 basis points.

Organic sales growth leverage and 230 basis points of cost of goods overhead and marketing savings were offset by foreign exchange and negative mix.

Core gross margin was down 90 basis points.

Cost savings of 130 basis points and volume leverage were offset by geographic and category mix of 130 basis points, foreign exchange of 90 basis points, higher commodity costs and higher manufacturing start-up costs.

Core SG&A improved 80 basis points, driven by 100 basis points of marketing and overhead productivity savings.

These benefits were partially offset by foreign exchange impacts and targeted innovation and go-to-market investments.

The effective tax rate on core earnings was 21.5%.

This included a positive 1 point impact from the release of a tax reserve following a favorable audit outcome in Asia.

This reserve reversal accounted for roughly $0.02 of earnings per share benefit on the quarter.

The net impact from all of the items below operating income -- tax, interest expense, interest income, nonoperating income, and share count -- was a slight headwind to core earnings per share growth for the quarter.

We generated $2.4 billion in free cash flow and remain on track to deliver free cash flow productivity of about 90% for the fiscal year.

As planned, we returned $1.7 billion of cash to shareholders in dividends and repurchased $1.5 billion in stock, bringing year-to-date share repurchase to $4 billion.

Net, the second quarter came in pretty much as we were expecting on both the top and bottom lines, leaving us on track to deliver our sales and earnings forecasts for the fiscal year.

As we move forward, value creation for consumers and shareowners remains our top priority.

Operating TSR is our primary business performance measure.

Operating TSR is an integrated measure of value creation at the business unit level, requiring sales growth, progress on gross and operating margin, and strong cash flow productivity.

Operating TSR drives focus on core brands and businesses, our leading, most profitable categories and leading most profitable markets.

We'll begin to make more operating TSR progress as we move into calendar 2014.

Our strongest brands and business unit and total Company positions are in the United States.

We need to continue to ensure our home market stays strong and is growing.

The actions we've taken over the past two years to restore consumer value, expand our vertical product portfolios, and horizontal regimens and lead innovation have enabled us to restore value-creating share growth in many parts of the business.

We still have more work to do in a few categories and the competitive environment is intense, which leads to choppy results on a quarter-to-quarter basis, but we're making good progress.

We have a stronger brand and product innovation program ahead of us in the US this quarter.

We continue to grow and expand our business in developing markets, with a focus on the categories and countries with the largest sizes of prize and the highest likelihood of winning.

This is where the world's babies will be born and where more new households will be formed.

Developing markets will continue to be a significant growth driver for our Company this year and for years to come.

In October-December, organic sales grew 8% in developing markets.

We'll continue to focus the Company's portfolio, allocating resources to businesses where we can create value.

We'll continue to exit businesses where we determine that potential buyers with different capability sets can create more value than ourselves.

Consistent with our focus on operating TSR, we're continuing to push forward with our productivity and cost savings efforts.

We've made solid progress over the last fiscal year and a half.

We have strong productivity plans for fiscal 2014 and we're working to accelerate some fiscal 2015 savings into 2014.

Versus a target run rate of $1.2 billion, we're now forecasting more than $1.6 billion of cost of goods productivity savings this fiscal year, across materials, logistics, and manufacturing expense.

This is up $200 million since our last update.

Versus a going-in target of 5%, we expect to improve manufacturing productivity by at least 6% this year.

We're up more than 8% fiscal year-to-date.

We've now exceeded our 2014 fiscal year non-manufacturing enrollment reduction goals only six months into the year and have begun work to accelerate role reductions planned for fiscal 2015 into 2014.

Our stretch objective is to get substantially to our end of 2015 objectives by the end of 2014.

This would put us close to or within the 16% to 22% reduction goal we've established, one to two years ahead of target.

We won't stop there.

We continue to identify opportunities to simplify and streamline our organization design.

We continue to drive marketing productivity and effectiveness through an optimized media mix with more digital, mobile, and social presence, improved message clarity and greater non-advertising marketing efficiencies.

We expect absolute marketing spending to come in slightly above prior year levels, but marketing as a percentage of sales to decline.

Importantly, the overall effectiveness and impact of our marketing spending will be well ahead of the prior year.

We see several more years of effectiveness improvement ahead, driven by new, more efficient digital mobile and social media, and big opportunities to continue to improve the efficiency, precision, and effectiveness of our communication.

We remain committed to make productivity a core strength and a sustainable competitive advantage.

We're equally committed to being the product and commercial innovation leader in our industry.

We're currently bringing significant innovation to market in Fabric Care, including upgrades on all of our Tide Plus value-added liquid detergents, new extra-large tub sizes on Tide Pods; Gain Flings, a triple chamber, single load laundry pack providing Gain consumers with enhanced scent, better freshness and more cleaning power, all with the convenience of the single load form; scent upgrades on Downy Unstopables and Gain Fireworks In Wash scent beads; Tide Oxi, a multipurpose stain remover that can be used in the laundry or around the house; and Tide Simply Clean & Fresh laundry detergent, specifically designed with the right level of cleaning and freshness for mid-price-tier consumers.

We've received strong retailer support for these innovations, overdelivering our distribution, shelving, and initial merchandising objectives for the launch.

The Ariel unit dose innovation in Western Europe is tracking well above expectations.

We're continuing the expansion, launching in Italy, Iberia, and the Balkans earlier this month.

Consumption trends on Tide Pods have remained strong, growing in the low teens fiscal year-to-date versus the prior year.

We're also launching a very strong Oral Care innovation bundle next month, including Crest 3D White Brilliance, delivering our most advanced whitening and freshness benefits in one toothpaste; Crest 3D White Luxe, which removes up to 90% of tooth stains in five days and with our new Whitelock technology, locks out future stains and microfine lines in the teeth; Crest 3D White Luxe Whitestrips with new Flexfit film, an innovation created with technology from our Baby Care business, that stretches and molds for a custom fit for more whitening and coverage; our new Crest Sensi-Relief innovation, which delivers improved sensitivity relief combined with Scope freshness; and Crest Be, a new line for experiential consumers, including flavors like Be Dynamic Lime Spearmint Zest, Be Inspired Vanilla Mint Spark, and Be Adventurous Mint Chocolate Trek.

In North America, our recent Baby Care absorbency comfort and design innovations are driving diaper market share growth.

US diaper share is up 1.5 points versus prior year with particular strength on the Pampers Swaddlers and Luvs product lines, retaking market share leadership for the first time in many years.

We continue to strengthen our share position in the US battery business behind the Quantum innovation and recent distribution increases.

P&G battery value share is up 2.5 points for the past three months to over 40%.

In December, we started shipping Pantene in North America with improved product performance and packaging.

The shampoo and conditioner formulas contain a new, Pro-V antioxidant complex, delivering clinically proven healthier hair with every wash.

We're also leveraging Pantene's Shine Strong advertising that has received global acclaim for tackling gender labels and encouraging women to show their strength and shine.

The advertisement has generated nearly 1 billion consumer impressions globally.

We're expanding Old Spice into the rapidly growing North American male hair care segment behind a full array of shampoos, conditioners, and styling products with Old Spice's most popular scent collections.

This started shipping last week.

Old Spice body spray is growing strongly behind the new Smellcome to Manhood commercial campaign.

To date, the campaign has generated over 700 million consumer impressions; the vast majority of which have been free, through social media and mass media coverage.

Duracell's Trust Your Power advertisement has also gained high awareness online.

It features Derrick Coleman, the only legally deaf player in NFL and the barriers he's overcome by trusting his inner power.

The US advertisement has driven over 1.7 billion consumer impressions in just two weeks, since it was launched on January 10.

We recently launched our new commercial campaign for the Winter Olympics.

The commercial program includes a balanced combination of single brand and multi-brand executions.

Our research shows stronger purchase intent is generated when individual brand executions are closely coupled with a multi-brand execution.

The Olympics ad campaign has generated nearly 1.6 billion consumer impressions so far and, like Old Spice and Duracell, most of these are earned or free impressions generated through traditional and social media.

These product and commercial innovations should contribute to strong top line momentum in the back half which, combined with productivity savings, should enable us to deliver our fiscal year objectives.

Next, we're improving execution and operating discipline.

We simply have to execute better, more consistently, and more reliably.

We need everyone playing their position and playing it well.

Consistent with the customer service improvements we discussed last quarter, we were recently named the top rated manufacturer in China, our second largest market, as rated by our retail partners in both the Advantage Group and Kantar Retail surveys.

These surveys reflect the quality of our customer business development organization, promotion plans, and customer service reliability.

Last, we're making strategic investments in innovation and go-to-market capabilities.

Targeted R&D investments are enabling us to strengthen our near- and mid-term innovation pipeline.

Targeted go-to-market investments will enable us to strengthen sales coverage in our fastest growing markets and fastest growing channels.

We believe that the focus that we're bringing to these four areas -- operating TSR, productivity, innovation, operational excellence -- along with targeted reinvestment, will enable us to continue to improve results, even as we work to address several remaining opportunities.

We remain on track to deliver our 2014 guidance, top line, bottom line, and cash.

We're maintaining our organic sales growth range of 3% to 4%; achieving organic sales growth in the upper half of our target range should result in modest overall market share growth.

Foreign exchange is expected to be a sales growth headwind of 2 points, which leads to all-in sales growth in the range of 1% to 2% for the fiscal year.

We're maintaining our forecast for bottom line core earnings per share growth of 5% to 7%, despite stronger headwinds from foreign exchange and softer market growth rates.

We aim to make up the difference through productivity advances, which will primarily benefit the fourth quarter.

The fiscal year headwind from foreign exchange has continued to increase.

We now expect foreign exchange to be a 7 point headwind to core earnings per share growth.

As a result, our guidance now translates to constant currency core earnings per share growth in the range of 12% to 14%.

We now expect the tax rate on core earnings to be 1 point or so below prior-year levels.

On an all-in GAAP basis, we expect earnings per share to grow approximately 7% to 9%.

This range reflects somewhat lower non-core restructuring costs in fiscal 2014 versus the prior year.

The second half earnings growth increase that's implied within our guidance is driven by foreign exchange and cost structure improvement.

Foreign exchange was a significant headwind in the first half, but will moderate in the second half at recent spot rates.

We will also annualize the operating impacts from last year's Venezuelan bolivar devaluation.

Manufacturing start-up costs will annualize in the second half of fiscal 2014.

Productivity savings and devaluation-related price increases will build sequentially.

As you prepare your estimates for Q3 and Q4, please keep in mind a couple items.

We won't annualize the Venezuela impact until mid-February in Q3.

We'll have a full quarter of Laundry and Oral Care innovation impacts in Q4.

Productivity savings that are being advanced to offset stronger FX impacts and lower market growth will primarily benefit the fourth quarter; also, pricing we'll be taking to offset recent devaluations in some markets will take effect only in Q4.

We expect to deliver another year of about 90% free cash flow productivity.

Our plans assume capital spending in a range of 4% to 5% of sales and share repurchase in the range of $5 billion to $7 billion.

In addition to the assumptions included in our guidance, we want to continue to be very transparent about some key items that are not included.

The guidance we're reconfirming today is based on last week's FX spot rates; further currency weakness is not anticipated within our guidance range.

We continue to monitor unrest in Egypt, which is a large business for us and a base of export for the balance of Africa, as well as unrest and economic instability in the Ukraine, though the situation has recently improved.

Venezuelan price controls, access to dollars for imported products, and devaluation present risk, as do import restrictions, price controls, and devaluation in Argentina.

Finally, our guidance assumes no further degradation in market growth rates.

Our first half results were in line with what we expected, putting us on track to deliver our goals for the fiscal year and make progress towards our long-term growth objectives.

We continue to operate in a volatile environment with uncertainty in foreign exchange, some deceleration in the market growth rates, and a rapidly developing policy environment.

Against this backdrop, we've maintained top line growth and improved constant currency operating earnings growth.

We have an even stronger innovation program in the back half of the year and savings from productivity improvements that will build.

We're making targeted investments in our core businesses, most promising developing markets and biggest innovation opportunities, and are aggressively driving productivity and cost savings.

Above all, we remain focused on value creation for consumers and for our shareowners.

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.

Our next a significant investor event, headed by A.G. Lafley, is the CAGNY conference on February 20.

We hope to see many of you there.

I'd be happy now to take your questions.

(Operator Instructions) Chris Ferrara, Wells Fargo.

Jon, I was hoping you could talk a little bit about the cadence of the quarter.

I think you mentioned that December was up 5%.

Can you put that in the context of sell-in versus sell-through?

What was going on October, November?

I think your shipments probably exceeded consumption by a reasonable margin in December.

Why is that?

How do you feel about inventory levels there?

Then just if you can go through the same sort of cadence through the quarter for the emerging markets, too, given all of the concern there, that'd be great.

Thank you very much.

Sure, Chris.

You're certainly right in that our innovation, timing of innovation, did affect the timing of shipments in the quarter.

We're very comfortable with inventory levels currently and offtake in January has been very encouraging.

So, we don't see a reason for -- we really do believe that there's strength behind the December numbers and that should carry through into the third quarter.

In developing markets, there really wasn't a significant difference in aggregate across the months of the quarter.

We continue to see some softness in market growth rates, but there continues to be very strong growth overall, between 7% and 8% in the quarter we just completed, from a market standpoint.

We expect that to continue through the third quarter as well.

So what we've seen in OND, while presenting some challenges, leaves us confident as we head into JFM.

John Faucher, JPMorgan.

Jon, as you look at the move to more local manufacturing, can you talk about sort of the glide path that we should see in international operating margins over the next couple years?

It seems as though if you exclude Russia and China, you're probably looking at maybe a high single-digit operating margin in your international business.

How long do you think it will take to see meaningful impact there?

And then, a related question: Given the fact that you guys are still producing in some high cost countries and you're seeing this massive negative transactional impact, are you thinking now about potentially hedging transactional going forward?

Thanks.

One of the big questions as relates to glide path going forward on margins in developing markets, obviously, is foreign exchange.

But if you take that out, last year, we were talking about growing profit ahead of sales growth; so improving margins on a constant currency basis in developing markets.

We made pretty significant progress.

This year is, really, the same story.

On a constant currency basis, we'll grow earnings significantly ahead of the rate of sales growth.

I really can't, because I can't predict exchange, give you an exact glide path, but we should continue to make progress quarter-on-quarter, year-on-year on those developing market margins.

As you mentioned, localized manufacturing, but even more importantly, as we continue to bring innovation to those markets, value creative innovation, which allows us to mix consumers up, which is happening pretty encouragingly in places like Brazil and places like China and Russia.

I've said from the beginning that our developing market efforts, particularly as they're focused on the biggest opportunities with the highest chance of winning should, over the long-term, be a margin accretive endeavor, not a margin dilutive endeavor and we continue to see that.

As relates to hedging, we'll continue to look for all opportunities to operationally hedge and obviously, the localization of manufacturing is part and parcel of that effort.

In terms of financial hedging, we continue to look at that periodically as well.

A lot of the FX impacts though, frankly, are in non-deliverable currencies, whether it's in Egypt, Venezuela, Argentina, the Ukraine, et cetera, where there really isn't a financial hedging option.

Many of the other markets, the interest-rate differential is so high that even the cost of forward hedging gets pretty prohibitive.

As you know, all that that does is buy time.

As those instruments expire, we're right back to the issue that we started with and I'd rather, where we have the opportunity, solve the issue real-time upfront.

Dara Mohsenian, Morgan Stanley.

Jon, Beauty continued to drag down the organic sales growth number.

The other divisions looked pretty solid.

I was hoping for more detail on how you plan to drive market share improvement going forward in Beauty and when you think we'll start to see some improving share trends.

Also, in Grooming, you mentioned market contraction in developed markets.

Can you run through what's driving that and what are your plans, as the category leader, to drive improved growth going forward, particularly on the innovation side?

Thanks.

We continue to make progress on our efforts to strengthen the growth rates in Beauty and many parts of the Beauty business are growing quite well.

Personal Care shipments, for instance, increased double digits in the quarter, with strong growth, really, in all regions; up double digits in China, mid-teens in Central and Eastern Europe, and more than 25% in Latin America.

Cosmetics, we continue to do very well in US; CoverGirl value share, I think, was up about 0.5 point in the quarter behind innovations like the Hunger Games Capitol Collection and the new Bombshell eye and mascara collection.

Our antiperspirant and deodorant business continues to perform well, with US deodorant value share up 1.5 points versus year ago, driven by recent innovations on Secret and, as I mentioned, Old Spice.

Then we come to Hair Care: many parts of the Hair Care business are doing well; Head & Shoulders grew mid-single-digits in the quarter, including double-digit growth in Western Europe and Central and Eastern Europe, Middle East, and Africa.

Our biggest opportunity there is Pantene.

I mentioned the innovation that's coming to market that we feel good about.

We're feeling increasingly good about our overall equity and advertising campaign efforts.

As you know, as I mentioned, we'll also be expanding Hair Care into the young male segment behind the Old Spice brand, so we're hopeful that we're rounding the corner in Hair Care.

On Skin Care, we still have some work to do and that's going to take some time.

We share the impatience that exists externally.

We know that we have more work to do, but we are comforted by the progress that we're making.

On the question of developed markets, market growth, and our responsibility as category leaders for market growth, the good news is that the developed markets, are growing, albeit at a modest rate.

It kind of oscillates somewhere between 0.5 point and 1 point of value growth per month.

Within that, the better news is that where market growth is strongest in developed markets is in the US and Japan.

It's weakest in Europe.

We are overdeveloped in both the US and Japan; and so from a footprint standpoint relative to developed market growth, we're fairly well positioned.

We absolutely accept the responsibility for growing markets in the categories where we're leaders and in the countries where we're leaders.

Increasingly, our retail partners are looking at us as partners in that regard to grow their business as well.

We bring innovation that does grow markets.

If you look at what's happened, for instance, with Crest 3D White and some of the other innovations, we bring innovation that increases trips and grows market baskets, so it is very much a part of our focus.

It's actually more important in many places of the world than share.

Wendy Nicholson, Citigroup.

First, a clarification: the 7% to 8% growth in emerging markets, less than 100 basis points of that, I assume, would be the benefit of new country or new category combination launches.

If you can just clarify that and make sure that's a real sort of same store sales number or close to it.

Then my second question is, with regard to what A.G. has talked about, this shrink to grow -- and I know you said you're looking for partners who can grow your businesses better maybe than you can, are you entertaining full brand divestitures?

Or is there the possibility, too, of just sort of country category combination exits, like what Kimberly's doing, getting out of diapers in Western Europe?

Is that the stuff you're entertaining as well?

Thanks.

From a developing market growth standpoint, the vast majority of that 8% growth in developing markets that we posted in the last quarter, is, if you will, same country, same category, apples to apples growth rate.

I don't know exactly, but I would guess that the impact of any new whitespace business is well below 1 point.

So that should be a pretty good number and representative of the progress that we're making.

And I apologize; I've now forgotten the second part of your question.

What was that, John?

Divestitures.

Oh, on divestitures; sorry.

Historically, if you look at our efforts in this space, where we determine we can't create value, whether that is at a category country combination level or a brand level, we've looked at other options.

In the past, historically, for instance, we exited the Family Care business, the Tissue Towel business in various parts of the world because we just didn't see, at that point, a financial structure and an industry structure where we could sustainably create value for our shareholders.

We did the same, as you know, in several categories recently from pharmaceuticals to coffee to snacks to water purification and in some markets, the bleach business.

Rather than point to specifics, because, as you know, this is something we really only want to talk about when we have something to talk about, I'll just reassure you that -- hopefully it's reassuring, that as I mentioned, everything we're looking at is through the lens of value creation and there's nothing that's off the table.

Bill Schmitz, Deutsche Bank.

What was the percentage of market share that's holding or gaining, both in the US and globally?

I don't think I caught that.

Then the growth rate in developed markets, I know you gave us the emerging markets number.

Then my real question is, clearly the March quarter has been a troubling one for P&G historically.

Can you just give us some more color?

I know you gave us some data points and it seems like, as we look at the back half of the year, it's really going to be fourth quarter-weighted.

I know you don't want to give quarterly guidance, but maybe your comfort level and kind of where estimates are now, the Street consensus.

That would be very helpful.

Thanks.

Percentage of businesses holding and growing share is down a bit from where we were last quarter and that's primarily driven by two items: one is Fabric Care in the US, the other is Hair Care in the US, both of which are big businesses which were growing share and where we lost a little bit of share in the OND quarter.

Both of those categories are items that we highlighted going into the quarter as likely going to be experiencing a significant amount of competitive activity, particularly promotional activity, ahead of our launches in both of those categories, which are just happening now.

So the decline in percentage of business holding or growing share is really driven by those two things, which we expected going in and we're very comfortable that both of those businesses, from a share standpoint, will strengthen as the innovations hit the market.

Just for perspective, if you look at, for example, Lever's percent volume sold on promotion in Hair Care in OND, it was up about 6% versus the prior year.

If you look at some of our Laundry competitors' percent volumes sold on promotion in the OND quarter, it was up over 20% versus year ago.

Again, these were things that we called out going into the quarter, things that we expected and it's all ahead, encouragingly, of very strong innovation that's now just hitting shelves.

Your second part of your question on developed market growth rates, we were about flat, slightly ahead in developed markets.

The total is 8% developing, flat or just a little bit ahead in developed.

Relative to the March quarter, I think your statement, in terms of fourth quarter predominance, is correct and it's consistent with various impacts that I was calling out in terms of when the different pieces are going to fall in place.

Having said that, I expect us to make good progress in the JFM quarter on both the top and bottom line, but as you think about the modeling across the quarters, it will be fourth quarter-loaded.

Lauren Lieberman, Barclays Capital.

First thing was just on Health Care, very big volume number and then weaker just mix impact, so just curious if that was primarily because of the expansion of the Personal Health Care business in emerging markets, or if there's something else driving it.

The other question was just perhaps a bit nitpicky, but I was reading through the release yesterday that you guys put out about Gain Flings and it just struck me as a little bit too reminiscent of some of the innovation in the last two or three years where it's like this massive bundling of benefits into one product.

It's Gain Flings with great cleaning power, amazing scent, plus Oxi, plus Febreze -- it reads like 10 people sat in a room and couldn't make up their minds as which was the most important benefit.

I just would love some clarification maybe on the thought process on why so much in one product where the form should speak for itself.

And how this is or isn't different than the innovation you guys have been putting out over the last two or three years in terms of that messaging.

Thanks.

The Health Care difference between the sales volume and the volume line is really just category mix more than anything.

John can give you the details on that later today.

Sorry, I don't have that level of detail right here in front of me, but that's primarily what's driving it.

On Gain Flings, if you think about it, when we brought Tide Pods to market, which has been extremely successful, that was a multi-benefit proposition, too.

It was not only the form, it was a better cleaning product.

So it was an upgrade from that standpoint, as well.

Obviously, nothing comes to market without a lot of work to understand what will delight consumers, what they'll be willing to pay for that and that is certainly the case here, as well.

Early, both customer and consumer reaction to the proposition has been very positive.

Olivia Tong, BoA.

I wanted to ask about Grooming margins because they were up significantly year-over-year after being down in Q1.

Going forward, is Q1 or Q2 more indicative of going forward?

And is this due more to timing of some cost savings initiatives or promotions or innovation?

Or is there something structurally different so that profit growth will continue?

No, it's hard to draw meaningful understanding from one quarter's worth of margin increase or decrease in any one of our categories.

There's a lot going on out there whether it's foreign exchange, whether there's pricing in some markets.

The cost savings program is itself not ratable; it moves up and down across quarters.

I would encourage you to look more, call it, 12 months at margin trends as being indicative of what's happening there.

We're reasonably happy with our margins on that business.

That doesn't mean that we're satisfied and we won't stop working, both on the productivity point and on the innovation point, to improve margins in a way that's value accretive for consumers.

Nik Modi, RBC Capital Markets.

If you could provide some perspective on some of the transitions that took place in leadership in R&D with Bruce retiring.

Just curious on the replacement, any thoughts on changes in terms of processes within the innovation group.

Any thoughts there would be much appreciated.

Kathy Fish, who will be taking R&D leadership for the Company, has a long track record of innovation success and consumer delight across a number of our businesses and across the global portfolio.

So we're very excited to see Kathy taking that responsibility.

In terms of -- we just announced this recently.

She and Bruce are in transition and I wouldn't want to presume any changes in emphasis that she will choose working with A.G. and others to make at this point.

Ali Dibadj, Bernstein.

A couple things.

One is on Beauty: we haven't really heard much about what you need to do to fix Olay.

I wonder sometimes whether you actually need to acquire something in that business, because it is really your only skin care brand, to backstop that business?

I'd love a perspective on that.

Then secondly, when we do see the Beauty margins go up, I understand that a quarter doesn't make a trend, but it leads to a broader question that I have which is, when do you expect that crossover point to happen as a Company?

The crossover point to happen where the productivity savings ramp up to above your investment level?

If you could talk about the crossover point, as you see it going forward, in the context of some of the supply chain work you guys are doing internally, the new supply chain work you guys are investigating internally, that would be helpful.

The great part of the Olay story is that that is an incredibly and remains an incredibly strong equity with very high equity scores, very high net promoter scores; the highest in the category.

From an equity standpoint, it doesn't mean we can't do more work, but we start with a very strong asset, and really from a product standpoint as well.

We have a very competitive product.

The work to do is in brand architecture, it's in packaging, it's in positioning the various properties in a way that is most relevant for consumers, and it's entering some benefit segments that we, frankly, neglected and those are growing faster than the benefit segment that we're in.

It also involves reaching, ensuring we reach consumers at different ages, which is part of what we were trying to do with the Olay Fresh Effects item.

This is going to take some time, as I've said before, but I would feel much more concerned sitting here if this was an equity problem or a fundamental competitive product problem, which it's not.

In terms of crossover point, back half.

And the supply chain work, we'll talk a little bit more about at CAGNY, where we continue to be encouraged about the opportunity to potentially replatform most of our supply chain in both North America and Europe to do, really, several things.

One is, as you mentioned, to bring in savings, but also to get to standard platforms across the world, which allows for faster initiative expansion, to get closer to our customers with multi-category manufacturing facilities in a way that allows us to serve them better, and it's something that we're really just beginning to work on.

I don't see it having a material impact, say, in the next 12 months.

This is going to take a while both to think through and to execute.

But it should enable us to bring in a new round of savings in addition to the savings we've been talking about over the last 18 months.

But that's probably two, three years out.

Jason English, Goldman Sachs.

Thanks for the incremental color on Beauty.

I wanted to drill a bit deeper on Laundry.

A few questions.

First, on Europe, it sounds like Ariel Pods are off to a good start, but Nielsen data suggests you're still struggling in the market, so what are the offsets there?

Second, with the launch upon us, can you give us more detail behind the merchandising, location, and targeted price points for Simply?

Lastly, what signs are you looking for to gauge when or if the US market will be ready for the next round of compaction?

Wow, it seems like Ali has now trained all of you well; you all ask three-part questions (laughter).

First of all, on Simply, the price is ultimately the sole discretion of our retail partners.

But generally, we're expecting that to be about 30%, on a list price basis, below current Tide.

Compaction is something that we are always looking at as an opportunity, actually across categories, beyond Laundry.

If you think about it, we're really actively doing that as we sit here because the unit dose offering, whether it's Tide or Ariel or now Gain, is the most compact form that exists in the marketplace today.

As more of the market converts to that, it has all the benefits of a standard compaction in terms of lower cost, better value equation for retailer, better value equation for consumers.

In terms of the question on Europe, really where we've lost a little bit of business is in liquids where we're responding to heavy competitive promotion levels, so it's just a very competitive marketplace, which makes sense as we bring in Pods and people are emphasizing the other parts of their portfolio.

Connie Maneaty, BMO Capital Markets.

I am just going to ask a question on Venezuela and that is, as we contemplate another pretty steep devaluation, has there been any change in the policy there about prices?

Have you been able to work around any of the pricing restrictions?

Is there any -- do you see any easing of that coming?

That's a very good question, Connie.

Currently, there are price controls in place.

That doesn't mean that there won't be opportunities to take pricing.

Pricing controls doesn't mean -- the level of pricing is reviewed regularly by the government and we're obviously in discussions with them.

I would say that they understand the need for some level of pricing for both international and local competitors to remain viable.

Also, the price controls that exist apply to a portion of the portfolio, not to all.

There is what's referred to as regulated items where the pricing controls are relevant and there are unregulated items where there's more pricing flexibility.

We continue to work to improve our financial situation in Venezuela, which starts off from a very attractive place to begin with.

But your question is an appropriate one, as we look forward.

To the extent that there's more devaluation, will there be more pricing that's allowed?

And that's just something I don't have the answer to today, but something we'll be very transparent about and keep you updated on.

That question is one of the reasons I continue, as I talk about guidance, to hold that item out, if you will, because I have no way of forecasting exactly what the puts and calls are going to be.

Javier Escalante, Consumer Edge Research.

Question on the negative mix again, but I would like to ask it from a planning standpoint.

Could you tell us, Jon, whether the commitments that the GBUs presented back in August when you created the fiscal 2014 plan, can you tell us whether Beauty and Grooming are meeting their plans considering this very negative gross margin mix?

If they don't, which GBU has been asked to overdeliver in light of the reiteration of the corporate outlook for the balance of the year?

Or does the plan assume that Beauty and Grooming are going to accelerate and therefore, the negative mix to improve in the next couple of quarters?

Thank you.

On a macro point, in terms of delivery versus expectation, we've been talking about, in the top line, a mix impact of 1 point or 2 points going forward and this last quarter was 1 point, so pretty much in line with what we expected as was last quarter.

Each of the businesses has a strong commitment to deliver their plan that creates value for consumers and for shareholders, but equally, each of them is looking out for the Company and is willing to help out where that's needed.

It's hard, as you can imagine, going into a year knowing exactly what's going to occur during the course of that year, particularly given the volatility in FX, some of the policy volatility, commodity costs, which are up more in some categories than other categories, and so that's an equation that gets constantly rebalanced, but I can tell you that no one in any category is giving up.

Joe Altobello, Oppenheimer.

Just wanted to go back to Beauty for a second.

I think, in terms of the question from Ali, you mentioned that you don't think it's an equity problem and I would probably agree with that.

But is it a portfolio problem?

Do you think that you're still missing that brand that you could sort of slide in between, let's say, SK-II and Olay, for example, on the Skin Care side in particular?

Is there something you could do there to address that?

Secondly, in terms of overall Beauty, if you look at these successful companies in this space, most of them are pure play.

Is it a different mindset and culture that's really required to succeed in that business than, let's say versus Fabric and Home Care, for example?

Thanks for reminding me of that part of Ali's question; sorry, Ali, that I missed that.

In terms of additional equities that may be brought to bear in Skin Care, it's something that we look at routinely.

It's certainly not something that we've crossed off the list.

But also, I think you shouldn't, then, therefore assume that, quote, we need to make an acquisition in order to get Skin Care back to where it needs to be.

There are opportunities on both Olay and SK-II and there are opportunities if we needed to, to create equities or properties organically.

We should think about Olay, really that's a series of properties that were created organically from Total Effects to Regenerist to Pro-X.

So I think the question's a good one and yes, we may need additional properties, whether under existing brands or new brands.

But I wouldn't, necessarily, therefore conclude that we need to acquire in order to make that happen.

In terms of the capabilities and skill sets that are required to grow a successful Beauty business, if you just step back a bit here, over the last 20 years, Procter & Gamble, with its skills sets and capabilities has built the largest and the most profitable beauty company in the world.

If you look at what we were able to do with brands like Pantene, like Olay, like Old Spice, like SK-II, like Hugo Boss, Lacoste, that came from -- Head & Shoulders is another good example -- that literally started out as very small, kind of one country, two country, less than $100 million in sales businesses and now are, in some cases, multi-billion-dollar businesses, category leaders, global leaders in their categories, wouldn't indicate that we don't have the basic skills set and competence required to develop and grow a beauty business.

Having said that, we are not arrogant in our ways and believe that we have all the answers.

We have significant partnerships, many partnerships, externally which give us access to other thinking in the Beauty space; whether that's in the packaging arena, whether that's in the ideation and conceptualization arena, the equity arena, and we're also not averse to where there's very strong talent that meets a specific skill outage to bring that in from the outside.

If you look at -- most of our design group was brought in, and that applies to both Beauty and the balance of the Company, was brought in from other companies, other situations with the knowledge that that was an important capability that we weren't able to source sufficiently internally.

So we will take any help that exists, wherever it exists, but I'm pretty confident we have the abilities across our internal resources and our external partners to keep making progress in this space.

Bill Chappell, SunTrust.

First, on the other Bill's question, I missed the actual percentage in North America and rest of the world of held or gained market share.

Second, Jon, you talked about kind of being ahead of plan on the cost savings, cost of goods sold restructuring and pulling some of that forward from 2015, yet obviously there's no change to your EPS guidance.

Is that just conservatism?

Is that, hey, we're spending more back into promotion and marketing with some of these launches or is that just FX is little bit different from what you thought?

Back to numbers on market share, overall market share was about flat in the quarter; and percent holding or growing, I don't have exact number.

It was probably 55%-ish, so that's the market share numbers, both of which we expect will improve as we head into the back half of the year.

In terms of the acceleration of productivity savings, I'd say there are two motivations for that, maybe three.

The first is we want to make productivity part of our culture; and just like we never ask the question in P&G what is enough innovation, we don't want to be asking the question of what is enough productivity.

We'll always be endeavoring to become more productive and we're doing that for multiple reasons: there's the financial reason, obviously, but there's also speed to market, clarity of decision-making, organization transaction costs, et cetera.

So if we were in a position where FX was a tailwind, we'd be looking to accelerate productivity savings into the current year and identify the next round.

The second motivation is exactly as you described which is that FX, as I mentioned in our prepared remarks, has had a bigger impact, a significantly bigger impact, than we had been expecting.

As you know, at the margin, while market growth still offers ample opportunity for all the best competitors to succeed, it is down somewhat from what we were expecting when we went into the year.

As you remember when we started talking about productivity, this is exactly the kind of thing we were working to be able to do, which is offset, as one of the objectives, macro level developments without having to compromise our earnings objectives.

Alice Longley, Buckingham.

I'm thinking, based on your comments about what's happening in developing versus developed worlds, that trends in mix and price are quite different in the two regions.

Could you take your 0% to 1% growth in developed markets and your 8% growth in developing markets and break those down into mix, price, and volume?

Then as the second part of that, will mix and pricing get better, do you think, in the US in the second half than the first half?

Thank you.

Let me just give you, and I think you can get the rest of it, Alice, the volume growth rates in developed, which was 1% and developing was 6%.

The mix dynamics, pricing dynamics, aren't that different between the two, though obviously, there are some differences between them.

But those are the volume numbers, you have the sales numbers, and I think you can deduct the balance.

In terms of going forward, every problem is a significant opportunity and any acceleration in developed markets business or growth rates represents an opportunity to improve mix going forward.

Clearly, to the extent we continue to make the progress we're making on Beauty, as an example, that's an opportunity to improve mix going forward.

Each of our businesses has its own opportunity to improve mix through value accretive innovation.

So while we expect that the developing/developed market dynamic will be prevailing, in other words, we still will have some negative mix going forward, there are many reasons to believe that the magnitude of that impact can lessen over time.

Mark Astrachan, Stifel.

I wonder if you could talk a bit broadly about expectations for level of competitive activity in the back half of the fiscal year and how we should think about the split between gross margin and SG&A expense leverage to drive the operating margin that's expected?

Thanks.

I expect that, in an environment of growth, but modest growth, that competitive activity will remain strong, but the biggest antidote to that kind of situation is innovation.

We have one of the -- much stronger -- the first half innovation program was fairly strong behind the Baby Care innovation, the Tissue/Towel innovation, Batteries innovation, and the Laundry innovation, on a global basis, and that just builds, as we go forward, with some of the things I've talked about and frankly, some of the things I haven't talked about yet.

Competing on the basis of innovation is something that is much more comforting than not and we're in a good position in that regard.

I think the other thing that oftentimes is missed, particularly in a developing market context, but also in developed markets is, and it goes to the point of one of the questions that was asked earlier about market size, we really don't look at this as a zero-sum game.

There's enough growth for all of the better companies to continue to do well, and there are opportunities to grow markets, to create new businesses, to build markets.

Think about developing markets, for example; it's really not about share, it's about market.

More competition tends to be accretive from a market growth standpoint.

Caroline Levy, CLSA.

Just going back to Beauty margins, they seem to be as high as they've been in many years in the quarter.

If you could help us understand, I know you said we should look at it on an annual basis, but a couple of quarters now where margins are actually going up while the business itself is challenged.

Is that a trend that we should expect to continue, the margin growth in Beauty and Grooming, Beauty, in particular, while you're improving things and working to turn around Olay and Pantene?

Then secondly, if you could just break out the volume growth in China and you said it was very strong, but if you could talk about your six major categories which how -- if there were any standouts there?

First on Beauty, I think the question behind the question is sufficiency of support for the growth of that business.

We are comfortable with the levels of support.

As I mentioned, we're working to increase the effectiveness, and the strength behind that effectiveness, of our advertising and marketing programs across the business and that's obviously relevant in Beauty, as well.

It gets more difficult to look just at dollar trends and spending and assess sufficiency of support.

But we're very comfortable.

We're supporting the new innovations we're bringing to market heavily, and there's no reason that, if that's the case, we shouldn't be looking to take productivity savings to the bottom line.

It's a balance, always, and it will continue to be a balance, but you're starting to see, in those numbers, the reflection of very strong productivity progress, which is a good thing.

Leigh Ferst, Wellington Shields.

You made several references to your digital ad spending.

Could you give us a little more insight into it in the aggregate?

Is it one-third of your spending and what kind of impact does it have on your impressions and what impact will it have on your future spending on an absolute and a relative basis, relative to sales?

We are continuing to increase our presence in the digital, social, and mobile spaces as relates to marketing.

The percent that is in those media channels is different by category.

In total, I think, we're probably about at or getting close to 30% of the spending being in those areas.

It does offer, based on what we're seeing today, higher return potential and that's why the shift is occurring.

You heard me talk, in the prepared remarks, about some of the dynamics of digital, social, and mobile media in terms of earned impressions and that's one of the reasons that we're seeing higher returns in that space.

A huge number of those impressions were not paid for by us.

The other aspect of those channels and media is it allows very effective and tighter targeting of a message to a consumer.

You think very simplistically about men and women: if you're advertising on TV, in particular, depending on what shows you're on, that's going to everybody; and we can much more carefully target content to recipient in a digital environment.

So I expect that will continue to be an area of focus as we move forward, but I really do think this is a world of and, not of or, and we're really looking at comprehensive campaigns across media that consumers want to access.

We have no further questions at this time.

Thank you very much.

John, myself, the rest of the team are available at your convenience, the balance of the day.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.