寶潔 (PG) 2015 Q1 法說會逐字稿

Good morning and welcome to Procter and 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.

Adjusted free clash cash flow productivity is the ratio of free cash flow to net earnings adjusted for impairment charges.

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

Currency neutral refers to the equivalent GAAP measure excluding the impact of foreign exchange rate changes.

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.

July to September was a challenging quarter from a macro standpoint, with slowing market growth in both developed and developing regions, strong foreign exchange headwinds, market level challenges in the Ukraine, Russia, and the Middle East, Venezuela, Argentina, and Hong Kong, and increased consumption taxes in several large markets, including Japan and Mexico.

Despite this we were able to deliver top- and bottom-line results for the July/September quarter, which were in line with our going-in expectations.

Organic sales grew 2% and were in line or ahead of a year ago in all reporting segments.

Organic volume was in line with the prior year, pricing added more than 1 point to sales growth, and sales mix was positive.

All-in sales were roughly equal to prior year, including more than 1 point of headwind from foreign exchange and the impact of brand divestitures.

Core earnings per share were $1.07, up 2% versus the prior year.

Excluding FX, core earnings per share grew 9%.

Core gross margin was up 20 basis points; cost savings of approximately 140 basis points and benefits from pricing were partially offset by foreign exchange, higher commodity costs, innovation and capacity investments, and negative margin mix.

Core SG&A costs as a percentage of sales increased 30 basis points; 70 basis points of overhead savings and 50 basis points of marketing savings were more than offset by foreign exchange impacts and investments in R&D and selling capabilities.

Total productivity savings and cost of goods sold and SG&A were 260 basis points.

Core operating margin was down 20 basis points versus the prior year.

The effective tax rate on core earnings was about 23%, nearly 2 points higher than the fiscal-year guidance of about 21%.

September quarter all-in GAAP earnings per share were $0.69, which includes approximately $0.03 per share of non-core restructuring charges, $0.04 per share of charges related to a change in the exchange rate at which certain historical Venezuela and receivables will be paid, and $0.01 per share of benefit from earnings of the discontinued pet care operations.

Also included is a $0.32 per share non-core, non-cash charge to write down goodwill and certain intangibles of our battery business.

Duracell is a strong brand equity and personal power and attractive business, but we are writing the asset down to be more reflective of the value we'll receive in the recently announced sale of our interest in the Nanfu battery joint venture.

We generated $3.6 billion in operating cash flow and $2.8 billion in free cash flow, with 96% adjusted free cash flow productivity, reflecting our focus on balanced growth and value creation.

This quarter is the best first quarter cash performance in the past five years.

Improved results on payables, including good progress on our supply chain financing program, were the main driver of the strong cash performance.

We returned $4.2 billion of cash to shareholders, including $1.8 billion in dividends and $2.4 billion in share repurchase.

In summary, first-quarter sales and core earnings growth were in line with going-in expectations, and we continue to build on our strong track record of cash productivity and cash return to shareholders.

We expect the headwinds facing our industry to continue.

We are consequently continuing to sharpen our strategies, accelerate and increase productivity savings, and strengthen our execution.

As we announced last quarter, we are taking an important strategic step forward to streamline, simplify, and strengthen the Company's business and brand portfolio.

We will become a simpler, more focused Company of 70 to 80 category-leading, competitively-advantaged brands, organized into about a dozen business units and four industry-based sectors.

We will compete in businesses that are structurally attractive and play to P&G's strengths where we can achieve sustainable advantage.

Every brand we plan to keep is strategic with the potential to grow and create value.

The core 70 to 80 brands are leaders in their industries, categories, or segments.

They're brands shoppers buy, consumers use, and customers support.

They're leaders in brand equity, awareness, trial, purchase, and loyalty.

They're leaders in product performance and product innovation, and leaders in growth and value creation.

Over the next 18 to 24 months we will create a faster growing, more profitable Company that is far simpler to operate.

In the September quarter we completed the exit of the pet care business.

We closed the divestiture of the America's pet business to Mars in July.

Mars then executed their option to purchase the business in Asia.

And last month we signed an agreement to divest the European pet business to Spectrum Brands.

All remaining elements of these transactions should close in calendar year 2015, pending regulatory approval.

We generated very good value in this three-stage transaction, earning more than a 20 X EBITDA multiple on past three-year average results.

The pet care trends exit transitions seven brands to new owners.

In total, over the last five quarters we've divested, discontinued, or made decisions to consolidate about 25 brands.

Today we're announcing the exit of the personal power or battery business.

Our goals in this process are to maximize value to P&G's shareholders and minimize earnings per share dilution.

There are two steps to this plan.

In late August we finalized an agreement to sell our interest in a China-based battery joint venture in a cash transaction.

The second step is the exit of the Duracell business.

Although no decision has been made on the form of exit, our preference is currently a split off of the Duracell business into a standalone company.

Duracell is a global battery market leader with attractive operating profit margins.

It's the brand equity and product innovation leader in the category, with a history of strong cash generation.

It will receive greater priority and attention as its own company.

If we choose to pursue a split off transaction, P&G shareholders will be given the option of exchanging some, none, or all of their shares, or P&G shares, for shares in the newly formed Duracell Company.

P&G's outstanding share count will be reduced by the number of P&G shares exchanged.

The exact exchange ratio will be set just prior to the completion of the transaction, which we expect will occur in the second half of calendar 2015.

While a split off is our preference, any alternative exit scenario that generates equal or better value will be fully considered.

We're developing incremental savings plans to offset stranded overheads that remain in our core cost structure to minimize the dilutive impact of exiting the Duracell business.

For the time being, Duracell will continue to be reported in our core results.

As we continue to strengthen our category and brand portfolio, we will strengthen and focus our brand building and product innovation efforts and investments against our biggest opportunities.

We're committed to be the brand and product innovation leader in the categories in which we compete.

Year after year, decade after decade successful brand building supported by product innovation has built our businesses, transformed our categories, and created entirely new businesses.

Innovation combats commoditization, stimulates category growth, and builds a cumulative advantage of our brands over time.

With branding and product innovation, we've built leading positions in laundry in many markets.

In the US we have nearly 60% share of the US laundry market sales, and earn about 85% of the profit and cash generated in the category.

We launched our North American fabric care brand and product innovation bundle about eight months ago, and upgraded Tide Plus line up that make our best liquid detergents even better, Gain flings!

that accelerate consumer conversion to new premium unit dose detergents, Tide Simply Clean and Fresh that provides value to your consumers, a new and better option from a brand they aspire to use.

New sizes and scents of Downy Unstoppables and Gain Fireworks, and the addition of Bounce Bursts to the scent bead portfolio.

Innovations like these build on the consumer and competitive advantages our brands have created over decades.

Innovations like these enable us to earn a leading share of market sales, and an even greater share of market profit and value creation.

Innovations like these stimulate market growth.

They spark new consumer interest in a category and grow market baskets.

They trade consumers up to higher-performing products.

Tide Pods and Gain flings!

are priced at more than double the average price per load in the detergent category, and are still very affordable for the vast majority of consumer households.

Over the last 30 years the price of a load of laundry has lagged the price of cheese or eggs, and is a much better value than a cup of coffee or a bottle of soda.

The US category's two biggest laundry brands, Tide and Gain, have each grown market share over the past 4, 13, 26, and 52 week periods.

Tide value share was up 2 points for the quarter.

Tide Simply Clean and Fresh is nearly a 3 share with cannibalization results better than expected.

Distribution of Simply Clean and Fresh continues to grow, with a top US retailer expanding to full national distribution earlier this month.

P&G's unit dose business across Tide and Gain is 9% share of the total US detergent market.

We have over 75% share of the unit dose form.

We're continuing to leverage our consumer preferred unit dose form with Tide Free and Gentle Pods, which started shipping in July.

Just over a year ago we introduced a broad range of baby care product innovation in North America.

Nearly every diaper across all sizes and price tiers was improved to deliver better absorbency, comfort, or design.

Our premium mom preferred diaper design, Swaddlers, was extended into sizes four, and five, and subsequently size six.

P&G's US market-leading diaper share is now really 44%, up more than 3 points versus a year ago.

On a global basis, P&G has about 35% of the global diaper value share and earns about half the profit in the category.

We've built this leading baby diaper business despite the absence of a consumer-preferred pant-style diaper offering.

We're now launching Pampers Premium Care Pants beginning in Russia.

Pampers Pants provide exceptional skin comfort and dryness benefits in an underwear-like design.

This should add to the cumulative product and equity advantage we've established with Pampers.

Gillette has a long history of innovation, blades and razors that reset the performance standards in the industry.

Over time we've earned nearly a 70% share of blades and razors sales globally, and a 90% share of value and profit.

ProGlide FlexBall, our newest innovation, is the first razor designed to respond to the contours of a man's face, maintaining maximum contact and delivering a closer, more complete, and comfortable shave.

Every man has a different shaped face.

One Gillette FlexBall razor and cartridge delivers a uniquely better, closer, more comfortable shave for everyone.

Prelaunch testing indicated men preferred FlexBall two to one versus the best selling razor in the world, our own Fusion ProGlide.

Post launch, men who have used FlexBall indicate closer to a 90% preference rate.

Trial has come from across the category, with an encouraging 25% from disposable users.

In the four months since launch we've seen an improvement in US blades and razors market growth, including more than a 25% spike in razor sales, and have seen sequential improvement in our razor shares over the past 12, 6, and 3 month periods.

Gillette earned nearly 80% of male razor sales and nearly 90% of male cartridge sales in the US last quarter.

We'll begin the global expansion of ProGlide FlexBall early next calendar year.

Also next year we'll extend our breakthrough FlexBall technology to women, with our market-leading Venus brand.

FlexBall offers clear benefits to women, helping them to easily manage tricky spots such as knees and ankles.

Women who have tried the new razor love it, preferring it three to one over the current global best-selling women's razor, Venus Embrace.

We believe we can grow the adult incontinence category with innovation, transform the desired consumer experience, and increase consumer, customer, and shareholder value.

This is currently an attractive $7 billion global category, growing at an annual rate of 7%.

Women aren't satisfied with current product offerings.

One in three women over 18 years old suffers from incontinence, but only one in nine uses an adult incontinence product of any kind.

That spells consumer dissatisfaction which spells opportunity for P&G.

We're entering the category with superior pad and pant-style products that deliver better fit and protection from Always, a brand that women trust and prefer.

We began shipments of Always Discreet in the UK in July, where market growth has accelerated by 20% since our launch.

We've quickly grown to over 9% value share.

We started shipping Always Discreet in North America and France in August.

And less than two full months in the market the US adult incontinence market growth rate has accelerated to 10%, and we've grown to over a 7% value share.

Last month we launched Crest Sensi-Stop Strips, providing unprecedented tooth sensitivity relief.

Unlike toothpaste that take several weeks that reduce sensitivity and need to be used twice per day, one Sensi-Stop strip applied for 10 minutes provides immediate relief and up to one month of protection from sensitivity pain for some consumers.

This is another significant market growth opportunity.

Nearly 60% of Americans suffer from sensitive teeth, but only 4 in 10 are satisfied with their available sensitivity product solutions.

Our focus now is on driving awareness and trial of this revolutionary new treatment for tooth sensitivity sufferers.

In July we introduced Qlearquil, a product innovation that extends Vicks into allergy treatments.

This innovation leverages the very strong and trusted Vicks brand equity across a variety of products, including nighttime, daytime, and 24 hour treatments.

Qlearquil is a great product for the numerous occasional sinus and allergy sufferers who only want relief when they need it and don't want or need everyday preventive dosing.

In September we launched a new bundle of product innovations on the Metamucil brand.

This includes a base brand re-stage of Metamucil fiber, with a new satiety benefit of helps you feel less hungry between meals in addition to its current heart health, blood sugar, and digestive health benefits.

Meta Bars are a new fiber bar form that fit with consumers' lifestyles and capitalize on the rapid growth of the health bar, meal supplement, and snack category.

MetaBiotic is a new probiotic that puts Meta into the fast-growing immunity benefit space.

As I said earlier, we are committed to be the brand and product innovation leader in our categories, and we are increasing investment behind it.

The best companies in any industry find a way to lead brand, product, and business model innovation and productivity.

We're turning productivity into a core strength at P&G, making it a systemic and enduring value creation pillar alongside innovation.

We have significantly accelerated and will significantly exceed the $10 billion cost savings goal we set two and half years ago.

We're driving cost of goods savings well above the original target run rate of $1.2 billion per year.

We'll be above target again this year for the third consecutive year with strong savings across materials, manufacturing expense, and logistics.

We expect to improve manufacturing productivity by at least 6% again this year, reducing staffing even as we add capacity and start up new production modules.

We've begun work on what is probably the biggest supply chain redesign in the Company's history, moving from primarily single category production sites to fewer multi-category production plants.

The supply chain plans will be informed by a portfolio decisions that we've made.

We'll build the supply chain around the future portfolio, not the one we have today.

We're taking the opportunity to simplify, standardize, and upgrade manufacturing platforms for faster innovation, qualification, and expansion, and improved product quality.

We're transforming our distribution network in the United States, consolidating customer shipments into fewer distribution centers.

These centers are strategically located closer to key customers in key population centers, enabling 80% of the business to be within one day of the store shelf and the shopper.

We now have two of our new US distribution centers up, and running and we'll open the other four in early 2015.

Earlier this month we announced steps to streamline our distribution network in France, consolidating to fewer, larger distribution centers.

The distribution network projects will allow both P&G and our retail partners to optimize inventory levels, while still improving service and on-shelf availability, and reducing in-store out of stocks.

We've now established a $1 billion to $2 billion value creation target for our global supply chain reinvention effort.

We've doubled the associated cost of goods savings target from this global effort from $200 million to $300 million, up to $400 million to $600 million, and annual savings building to this target level over the next three to five years.

These savings are incremental to the $6 billion cost of goods savings we originally communicated and are on track to exceed.

We expect additional top- and bottom-line benefits from improved service levels.

We've reduced non-manufacturing enrollment by 16% in three years, enabled by several important organization design choices.

We've organized around four industry-based sectors.

We are streamlining and de-duplicating the work of business units and selling operations.

We've consolidated four brand-building functions into one.

Each of these changes reduces complexity and each creates clearer accountability for performance and results.

A more focused portfolio of brands and businesses will enable further changes.

In the first quarter we again reduced enrollment versus the prior quarter, despite the addition of many of this year's new hires to our enrollment ranks.

We have additional opportunity to improve marketing efficiency in both media and non-media areas, while increasing overall marketing effectiveness and the strength of our programs.

We continue to drive marketing productivity through an optimized mix, driven by new, more efficient digital, mobile, and social media.

We're making targeted reinvestments to support strong innovation.

We increased marketing support behind the Tide brand in the US by 60 basis points last year, and increased Pampers marketing in the US by 230 basis points.

As we generate efficiencies we'll look for good opportunities to put some of those savings back to work to improve top-line growth.

The final priority that I'll touch on this morning is execution, the only strategy our consumers and customers actually see.

We're bringing renewed focus to brands, building leadership brands with iconic equities that become the prototype in their categories.

Consistent expression of the brand promise with ideas that attract consumers to the brand's superior benefit, create trial, ongoing preference, and lasting loyalty.

Building trial with targeted advertising and sampling is a significant opportunity for many of our brands.

For example, thousands of recent male high school graduates will receive ProGlide FlexBall razors.

The babies of the 80% to 90% of new moms in the US will try Pampers while they're in the hospital.

Many buyers of new dishwashers or clothes washing machines will have the opportunity to try our best Cascade and Tide product innovations.

We're focusing selling resources to improve coverage, expertise, and execution in the key retail channels, wholesalers, and distributors that make a difference.

This should lead to improved distribution, shelving, merchandising, and pricing execution to consistently win at the first moment of truth.

We are and will continue to increase the amount of sector and category dedication of our salesforce to improve category expertise and tenure and increase channel coverage.

Improving our branding and selling execution will be significantly enabled by the business and brand portfolio focus we have embarked on.

The strategic strengthening of our portfolio, innovation investment in core categories, strengthened and accelerated productivity efforts, and stronger marketing and selling execution should enhance our results.

We're operating though in an extremely difficult macro environment with an increasing number of issues.

In Russia, the Ukraine, the Middle East, Argentina, and Venezuela, with a dollar that continues to strengthen, with markets that continue to decelerate, and with increasing commodity costs despite lower crude oil prices.

We're making targeted investments in value equations and are increasing the level of investments in our brands and product innovation.

With all this considered, we are maintaining previous organic sales and core earnings per share guidance ranges while we were to try to offset the macro headwinds with more productivity savings, pricing for FX, and market-accretive, innovation-enabled, top-line growth.

Our forecast for organic sales growth remains at a range of low- to mid-single digits.

We now expect foreign exchange to be a negative 2 point impact on sales growth, and a 5 to 6 point headwind on core earnings per share growth.

This is roughly double the impact we had estimated last quarter.

We're maintaining our core earnings per share growth guidance range of mid-single digits; while FX currently skews us toward lower end of this range, we will do our best to try to offset these impacts with productivity savings and pricing without compromising increased investments and brand equities, value equations, innovation, and selling capability.

This is what we were able to successfully do last year.

Excluding FX, we are now forecasting double-digit core earnings per share growth for the fiscal year.

On an all-in GAAP basis, we expect earnings per share to be down 2% to 5% versus the prior fiscal year, including approximately $0.55 per share of non-core items, mainly $0.20 per share of non-core restructuring costs and the $0.32 impairment charge.

We're targeting to deliver about 90% free cash flow productivity.

We plan to offset additional capital investments with continued working capital improvements.

We plan to return this cash to shareholders through dividend payments of about $7 billion, and share repurchase in the range of the $5 billion to $7 billion.

Our guidance is based on mid-October foreign exchange spot rates; further significant currency weakness including Venezuela is not anticipated within our guidance range.

Our outlook is based on current market growth rates, which we are monitoring closely.

We also continue to monitor unrest in several markets in the Middle East and Eastern Europe, and we continue to closely monitor markets like Venezuela and Argentina where pricing controls, import restrictions, and access to dollars present risk.

The guidance does not assume any impact from major portfolio moves, including the sale of the Nanfu battery joint venture.

We'll update guidance for Nanfu once it closes.

And we'll update for other transactions as they're decided and completed.

There are a few things you should keep in mind as you construct your models for the remainder of the year.

Our top-line comps are more difficult in the second quarter versus the back half of the year.

Benefits from new pricing to offset foreign exchange impacts in Venezuela and other markets will build throughout the year.

We expect significant top- and bottom-line headwinds from foreign exchange in the October/December quarter.

At current FX rates we'll annualize a portion of the FX headwinds in the back half, and productivity savings will build as the year progresses.

We look forward to talking with you more about our strategies, plans, and progress, and engaging with you on your questions at our analyst meeting here in Cincinnati on November 12 and 13.

That concludes our prepared remarks for this morning.

As a reminder, business segment information is provided in our press release and will be available in slides which we have posted on our website, www.PandG.com, following the call.

Now I'd be happy to take your questions.

(Operator Instructions)

Olivia Tong, Bank of America Merrill Lynch.

You walked through a lot of new innovation in your prepared remarks, and that's notable, considering that this is the first time in a few years that mix has actually contributed to top-line growth, but meanwhile, volume continues to be flattish again.

So, perhaps, can you talk through how you think about the contributors to top-line growth going forward?

And then following on that, can you tell us what the breakout was in US growth versus emerging markets?

And given slowing macros, can you talk about how growth progressed through the quarter?

Thank you very much.

I'll try to remember all of that, Olivia.

In terms of the contributors of top-line growth, as you said, volume was relatively flat, and mix was uncharacteristically positive.

We expect, going forward, to resume volume growth.

We will have some benefit from pricing.

I would expect mix to be neutral to negative, as it has typically been and as we have said it will be, though there'll be some volatility by quarter.

And clearly, innovation will be a significant driver of our growth.

But as importantly, base brand execution and brand building where we have significant opportunities also represent some opportunities for growth.

So, that's kind of, without getting really specific, how we're thinking about driving growth forward.

And I think it's important that we just step back a minute in the midst of some of the macro difficulties, and reflect on opportunities for growth.

Developing markets are still growing mid- to high-single digits, depending on the market.

So, while growth rates, in our view, are 1 to 2 points lower than they were a year ago, there's still a lot of opportunity there.

And there are significant opportunities in developed markets.

It's very early, but we're starting to see a little bit of uptick in the market growth rates in North America, presumably driven by lower unemployment, wage rates just beginning to increase, and lower gasoline prices, and hopefully that continues.

But even if that doesn't, there are still significant opportunities for growth in developed markets.

Just one example: think about the aging demographic.

There are 10,000 Americans every day crossing the 65-years-old line.

And we talked in our prepared remarks about the adult incontinence opportunity, the tooth sensitivity opportunity with Crest Sensi-Stop Strips also should benefit from that demographic shift.

And even things like Tide Pods, which are more convenient from a carrying and handling standpoint for older bodies and hands, will help us benefit from that demographic change.

So, we continue to be very aware of the challenges we face, but very hopeful about the opportunities that are in front of us.

In terms of the split between developed and developing, both North America and the developed markets in total were essentially flat on the quarter in terms of organic sales growth, with developing up 4%.

Dara Mohsenian, Morgan Stanley.

Gross margin performance clearly improved in the quarter.

It was up for the first time in a year and a half, year over year, and I'm guessing it was probably better or ahead of what you guys expected.

Can you discuss the key drivers behind that, in terms of the sequential gross margin improvement, and if you think that's sustainable going forward?

And then also just wanted to get an update on the drag you're experiencing from emerging markets growth in terms of gross margin mix, and the progress you expect to make in emerging markets over the next couple of years on gross margins with more localized manufacturing.

The biggest driver, as you would expect, of the gross margin improvement was the productivity savings, which were about 140 basis points.

There was also less difference, if you will, between developing market growth rates and developed market growth rates.

So, part of the answer going forward depends on that dynamic.

And there was also an offset from foreign exchange.

So, the dynamics going forward also depend on that dynamic.

We continue to focus on improving the profitability in the developing markets, so that growth there becomes less of a gross margin drag.

If you look at the last two years, and then what we're projecting this year, two years of grow, we grew constant-currency profits in developing markets 2 times faster than sales.

Last year, we grew them 4 times faster than sales.

This year, we're forecasting again to be about double the rate of sales growth.

So, we're very intentional and very deliberate in our efforts to improve developing-market margins to a point where they're not as much of a drag on mix.

But we're very happy with the gross margin performance we delivered.

I think on a fiscal-year basis, while it will continue to be volatile by quarter, we should continue to see progress.

Wendy Nicholson, Citigroup.

When you announced in August that you were going through this portfolio rationalization process, you said that you wouldn't be selling $1-billion brands basically, and yet now we're getting the divestiture or the spin of Duracell.

So, my question is: Does the target for the 10% number of sales that you're going to be exiting, now go up to kind of 12% to 13% when you include Duracell, or has there been some change in how you build up to that 10%?

Thanks.

You're right, Wendy, in referring to the Pareto of brands that we talked about that we'd be divesting, and we said there were many that were much smaller than there were those that were bigger.

But we didn't say that there wouldn't be any large ones.

If we did, that was a misstatement.

But in terms of taking the number up, no; this is part of the plan.

And as I said, we're about 25% of the way through the plan, through the end of the quarter.

This is additive to that.

So, we continue to make progress against that originally articulated plan.

There will be some larger businesses, but the majority will be small.

And I apologize if we miscommunicated that previously.

Michael Steib, Credit Suisse.

Just following on Duracell -- why, even though you've taken a decision to exit this business now, is it still included in the ongoing operations?

And then, related to that, at what point are you going to tell us what level of operating profit you're essentially losing by exiting that business?

And then, secondly, are there significant stranded overhead costs that you're expecting in that disposal process?

US GAAP accounting requirements require that we account for something in a split-off context in continuing operations until the split off is executed.

And that's why it remains in continuing operations.

But as we execute the split off, or as we were to sign any other agreement, the business would move into discontinued operations at that time.

In terms of stranded overhead, there is some overhead that this business is absorbing.

As we talked in the last quarter, we're going to do our best to offset that to help minimize dilution.

And in terms of what the dilution will ultimately be, it's really too early to give you helpful guidance on that because a lot of that's going to depend on what form the transaction ultimately takes.

It will depend on the amount of shares that are exchanged, and that exchange ratio, which won't be set until closer to the transaction itself.

So, we'll try to keep you updated as we have information.

But right now, it would be a pretty wide range.

But, again, I think the takeaway is that we're committed, both through the form of the transaction and through our efforts to reduce stranded overhead to minimize that dilution number.

Bill Chappell, SunTrust.

Jon, can you talk a little bit more about the commodity basket, and what you see over the next -- remainder of FY15?

Clearly, with oil coming down, diesel, freight, other things should be a tailwind, but you've alluded to there were some other headwinds; so, just trying to see what you're seeing, and what the net inflation will be this year?

Yes, we're certainly hopeful that this becomes a tailwind over time.

But it takes a while for, for instance, crude reductions to work their way through the refineries.

And there's a bit of a bottleneck right now in refining capacity in parts of the world, which is why we're not seeing the immediate flow-through into our commodity cost base.

So, our commodities currently are about a 2- to 3-point headwind versus last year.

And we are seeing some moderation and a small decline, for instance, in diesel prices.

And hopefully that continues.

But we still have resins and polypropylenes, due to the dynamic I mentioned earlier, up fairly significantly versus a year ago.

So, hopefully that 2- to 3-point headwind is a worst-case number, and hopefully we get some help as things continue to evolve.

John Faucher, JPMorgan.

Two quick questions -- well, one quick, one probably a little bit longer.

First off, can you talk a little bit about the sustainability of the working capital improvement that you saw this quarter?

There was a nice benefit year over year.

And then the second question relates to the mix from a margin standpoint.

Obviously, it was better this quarter because emerging markets got worse, let's say.

But can you talk about some of the margin improvements you can make outside the US and outside of developed markets that will create a little less margin pressure, particularly on the operating profit line as we look out over the next couple of years?

Thanks.

Thanks, John.

On the sustainability of working capital improvements, I view them as very sustainable.

Cash is one of our clear focus areas, and we have some strong plans there to continue to make progress.

The progress that we made in the quarter that we just reported was driven primarily by the supply chain financing program, which has future benefits associated with it.

We're not all of our way through that yet.

And those benefits are sustainable going forward.

On top of that, as we execute our portfolio-focusing program, there's a significant opportunity, that we're committed to go after, once we've rationalized the category and brand portfolio at the SKU level.

And that also represents a significant inventory and working capital opportunity.

The bottom 5% of our SKUs in terms of movement, not surprisingly, account for a much greater percentage of our inventory.

So, as we get after that, there should be a benefit.

And third, as I mentioned in our supply chain redesign efforts, we're hopeful we can take significant levels of inventory out of the total system.

And at the same time, decrease shelf out-of-stocks, improve customer service.

So, there are a number of big drivers that we should have available to us to continue to make progress in that area, which we're committed to do, in part to offset the impact of some of the capital spending that we're doing in the supply chain redesign on a global basis.

In terms of: What can we do in developing markets to reduce the margin mix impact?

As I mentioned in an answer to a prior question, we are making significant progress in this area on a constant-currency basis, 2 times the rate of organic sales growth two years ago, 4 times last year, at least 2 times again this year.

Also, some of the developing-market investments that we made -- for instance, the oral care investments -- those are beginning to accrete, and that should be a source of help going forward.

The productivity savings are not simply a developed-market dynamic.

They are equally a developing-market dynamic on items like TDC, items like marketing, even in the non-manufacturing overhead arena.

And then, as you know, we're also increasingly localizing our production.

We'll be bringing some of the same redesign to parts of the developing world that we're doing in the developed world today, at least from a distribution center standpoint.

And so, I see no reason why, longer term, developing-markets margins should be a significant drag on earnings, though they will continue to be a negative drag in the near term.

Chris Ferrara, Wells Fargo.

Jon, can you talk a little bit about beauty?

In particular, can you go through Pantene US, which -- the scanner data looks a little better recently.

And then also Olay US, your skincare in general US, skincare in China?

And then maybe elaborate on the prestige comments you made in the press release?

That would be great.

So, if you look at beauty, parts of that business are doing fairly well.

We grew anti-perspirants and deodorants mid-single digits.

Cosmetics grew organic sales mid-single digits in the quarter, with Max Factor growing shipments on a double-digit basis globally.

Safeguard was growing mid-single digits globally, with double-digit growth in parts of the developing world.

And we had a pretty strong quarter on Hugo Boss, which is our largest prestige fragrance.

Haircare grew about 2% in the quarter.

We were very encouraged by the developments that you point out on Pantene in the US, where volume was up 11% on the quarter.

As I've cautioned before, this will not be a straight line, and competitive intensity in this category is significant.

But still, forward progress is encouraging.

Olay remains a work in progress.

We are making some good progress in addressing some of the consumer benefit segments that we had neglected and that are important in the category, with items like Luminous, with items like Fresh Effects, but we still have work to do, both in North America and in China.

But sequentially, quarter on quarter, better results in beauty from a top-line standpoint, and we're hopeful we can continue that.

Bill Schmitz, Deutsche Bank.

A couple questions: Just to drill down more in the US, can you just talk about some of the price interventions you discussed last quarter -- if they're done yet and where they happened?

And then, some of the personnel changes in the US?

And your views on the sustainability of the US recovery?

I know it's very nascent, but curious why you think things are improving, and maybe how long you think it will last?

And then, lastly, just urgency on some of the share losses in China, and if you saw any material distributor destocking in any of the major emerging markets?

Sorry for the long question.

Obviously, pricing is a sensitive topic, so I don't want to get into really granular specifics, but we did mention that we had made value equation interventions in both the laundry and the paper products businesses, specifically tissue towel and toilet paper.

And those appear to have been going pretty well.

As I mentioned in the prepared remarks, we've built share on almost any period of time you can look at in the last 52 weeks, in both Gain and Tide.

Tide was up 2 points in the quarter.

So, we'll continue; we need to be competitive on pricing.

We'll continue to be competitive, but I think we're pretty much where we need to be.

I don't see -- of course, this changes on a daily basis, but as we sit here today, I don't see any additional significant moves that need to be made.

In terms of personnel, look, we're just taking advantage of normal retirement and normal attrition to design the Organization that's going to lead this more focused, more strategically oriented Company for balanced growth and value creation.

And that's what we're doing.

We're going to have a management team that's going to manage this Company that will be the same size as the team that existed in 2000, managing a Company that's actually more than 2 times the size of the Company in 2000.

And that's the design intent.

In terms of China -- China continues to be an attractive market, in our view.

It's a market where we've grown over 50% in the last four years.

Market growth continues; the last quarter, based on our look at our categories, market growth was about 6%.

Our inventories are pretty much in line throughout the trade chain.

So, we really have not -- I would view those destocking dynamics as company-specific rather than systemic.

Steve Powers, UBS.

I was hoping maybe just to step back and put this quarter in the broader context of all the improvement efforts that you're doing.

Clearly, there's lots of things that you've done internally over the last 12 months that you summarized, and that could be viewed as positive.

There's the re-org, the supply chain restructuring, overall productivity focus you've built, the brand refocusing initiative, et cetera.

I think all that's good.

But despite that, and despite the innovation successes and the brand strength that you ran through, organic growth is still only rounding up to 2%.

Only two of the divisions grew this quarter.

And I get that improved focus over time and easier compares going forward should help, but even many of the core brands you intend to retain remain pretty sluggish and have been so for some time.

So, I guess in that context, what are you planning to do to change that paradigm?

Is it truly all about the better execution that you mentioned, or are there things that consumers currently want from P&G in certain areas that you're not delivering?

Because I'm trying to discern how much you can do to re-accelerate growth on your own versus how much such improvement is just more dependent on macro improvement.

Thanks.

There's a lot that we can do on our own.

And that's why I talked about the whole brand building and selling execution opportunity.

That's completely within our control.

And I mentioned the sampling opportunities.

We have opportunities to continue to improve the quality and clarity of our communication with consumers.

We have significant opportunities, which the supply chain redesign will help us address at the first moment of truth, just in terms of out-of-stocks.

And generally, while market growth have slowed, consumers continue to be very responsive to innovation that increases the value of the product that they're purchasing.

If we look at the segments of our Business that are growing the fastest -- I talked about some of them in the opening remarks, but many of those are premium-priced items, but come with product superiority and consumer benefit that more than justifies that price.

And put simply: We believe that the antidote to relatively slow overall market sales or market growth is three-fold: it's innovation, it's productivity, and it's execution.

And I would be remiss if I didn't mention in this context that, to the point of the prior question, we still have work to do on our beauty business and on a couple of other pockets of the Business.

And that should also, as we improve that, make a significant difference in our ability to grow, not just at, but slightly ahead of, market growth rates.

Lauren Lieberman, Barclays Capital.

Let me just follow up on that a bit, and let's maybe focus on grooming.

Because when you talk about some of the sampling opportunities, some of them sounded familiar, like things you've always done.

The babies in the hospital get Pampers, you've got incredible reach there; sending razors to boys when they turn 18, that dynamic.

So, that's not necessarily new.

So, we focus better on grooming, right?

That's the trial opportunity.

You had a massive innovation with FlexBall.

You gave some really positive statistics on the impact on the market.

Yet the organic sales growth of the Business was flat, and it was all pricing, and volume was down.

So, just maybe focus on a particular business -- what was missing?

If FlexBall has been so successful thus far, what's missing that these numbers are still so weak?

Thanks.

Well, I think there, it's very early.

And you can imagine that most men have an inventory of blades at home that they have to work through before the real driver of growth in that market, which is cartridge consumption, takes place.

But we're beginning to see an increase now in cartridge market share.

We're up about 1.4 points in the quarter.

We're also beginning to see a reduction in the rate of market decline in the grooming segment.

It was down as much as 6% to 7%.

Previously, it's down about 3% on a more recent basis, and as low as past 1% in a couple -- or down 1% in a couple of the recent months.

And remember as well that the FlexBall innovation is not only new to market, it's only in one country, serving one gender.

And as I mentioned in my remarks, we'll begin globalizing this over the balance -- starting in calendar-year 2015.

We'll bring the truly superior benefit of this product to women as well.

And so, we're early days in that whole dynamic.

Also remember that when we sell an initiative, which we did with FlexBall in the last quarter, there's an inherent acceleration of sales into the quarter as we work to stock the shelves and fill the supply chain.

So, grooming organic growth last quarter was 7%.

If you look at it on a two-quarter average basis, which I think is a more representative way to look at it given the initiative dynamics, it's in pretty good shape.

Connie Maneaty, BMO Capital.

How many more businesses are there in your portfolio like the one in China that led to an almost $1-billion non-cash impairment charge?

As you can imagine, we do impairment testing on a routine basis.

We disclosed in our last K that there was some risk on the Duracell valuation -- that we had very little cushion.

And then the selling price that we generated and the impacts of a decision to sell, which frankly changed some of the impairment testing criteria, led to that impairment.

You'll notice in our disclosures that there are no other businesses that we're disclosing a similar risk on.

That doesn't mean there will never be one, but as we sit here today, I see that as very low risk.

Nik Modi, RBC Capital Markets.

Jon, just wanted to tack onto Bill Schmitz's question regarding the personnel changes, and if you can talk about this along two vectors.

One is just near-term disruption, and how we should be thinking about that as you have new folks getting into new roles and getting up the learning curve?

And then the second question is: As you streamline P&G's decision makers and operating model, have you thought about changing incentive structures in any way, shape, or form just to kind of get people focused on the right behaviors and the right geographies and the right product categories?

Thanks.

So, I'm not terribly concerned about near-term disruption.

I think it's a fair question, Nik.

But there are many more people continuing to do their jobs than people changing jobs.

And the people that are changing jobs are veteran, experienced pros, in every case.

So, it's something that we need to stay deliberate and intentional on -- not dropping any balls.

But I'm not really that concerned about that.

Again, it's meant in no way to dismiss the question.

I think it's a very fair question, but I think we're in good shape.

In terms of rewards and incentives, that's something that we're always looking at.

That's something that the Compensation Committee and the Board is always looking at.

I don't have a specific change to announce today.

But it's something that continues to receive the appropriate levels of attention.

Jason English, Goldman Sachs.

I'd like to circle back on an earlier question on beauty, specifically prestige.

I don't think I heard you discuss the drivers of weakness there, and I was hopeful you could elaborate.

And then more broadly, based on your 10-K disclosures, this has been a business with pretty inconsistent performance in the past, and obviously it serves a non-core retail customer for you.

So, in that context, can you walk us through the rationale or maybe the puts and takes of why it either should or shouldn't be considered in your portfolio rationalization initiatives?

Thanks for re-asking the question on the trends in the quarter, Jason; I appreciate that.

Bill asked such a long question, I'd forgotten that part.

And that's not a dig on you, Bill.

(laughter)

The biggest driver, frankly, is a base period dynamic where we had a strong innovation on both Gucci and Lacoste in the year-ago quarter.

And there was less of that this quarter.

As you can understand, maybe not appreciate, I really don't want to spend a lot of time talking about specific businesses and their role in the portfolio as we're going through all the changes that we're going through.

We will announce moves and decisions as they occur, and we'll try to be very clear as to what the rationale is.

And I'll leave it there.

Javier Escalante, Consumer Edge Research.

Jon, a question on the savings and your decision of having double-digit earnings growth in this environment, okay, currency-neutral?

Could you tell us how much savings you extracted this quarter, and remind us what is the target for the year?

And to what extent there is reinvestment allocated in these double-digit earnings growth target at this stage of the turnaround, as my peers are alluding to the very low top-line growth, the 2%?

Okay?

Thank you.

Thank you, Javier.

In the quarter, there were about 250 basis points of savings across cost of goods and SG&A.

And a not insignificant portion of that was reinvested.

I talked about the investment levels that we've increased behind Tide.

When we have a strong innovation, we're going to invest behind it.

We did the same on Pampers, and have continued spending to drive that business, increase consumer awareness, increase household penetration.

I also mentioned that I didn't give it a lot of time, so I understand how people could have glossed over it, but we are being very intentional in reinvesting in two areas.

One, in the SRA area.

One is in R&D to bring even more innovation to market that's more relevant for consumers, and improves their lives in an even stronger way.

And in our selling execution, ensuring that we've got sufficient channel coverage in the channels that are growing and that matter, ensuring that we have an appropriate level of category knowledge and dedication.

So, we are not driven -- we will reinvest when there are good opportunities in which we feel we can drive a strong return.

Mark Astrachan, Stifel.

Wanted to follow up on an earlier question on beauty, and prestige, in particular.

Curious about the recently announced decision to consolidate leadership of the salon and global prestige units under one person.

Is there a change to how the Company is thinking about managing one or both of those units?

And then also, just quickly, anything to read into in the change in the name of that beauty, hair, and now personal care segment, from beauty previously?

(laughter) I'm not in any way trying to back-hand the answer to that question, but there's really not a lot of significance in either of those.

This is -- Patrice Louvet that you're referring to, will be managing those three businesses.

He has a strong track record within the Company.

He's managed our fragrance business; our prestige business previously.

And he's going to be great going forward.

Alice Longley, Buckingham Research.

My question is about what you think your category growth rate was globally in the quarter?

Trying to figure out if you gained or lost share in this quarter.

And then, are you still holding to category growth rate of 2% to 3% for FY15?

And has there been any change in your outlook for category growth rate in the US versus emerging regions for this year?

Thank you.

Okay.

So, overall, category growth rate was about 2.5%.

And that's kind of what we're expecting.

As I mentioned in the prepared remarks, we are basing our guidance on the current market growth rates we see, which are those.

I also mentioned that -- sorry, I might not have mentioned, but we're seeing a slight uptick in growth rates in North America, which is encouraging.

We're talking here fairly modest, and as I've said on other calls, this has tended to be choppy in the past, so it's up one quarter, down the next.

We'll see.

But that's a reason to have a degree of hope there.

And in terms of where we are gaining and losing share, generally we're about flat in North America.

We're up a little bit in Europe.

We're down a little bit in a couple of the developing markets, and that gets you back to even.

Caroline Levy, CLSA.

This goes to both Olay and the baby care business.

And you had mentioned you are looking at how to improve your selling execution in the face of new channel development.

So, in China in particular, the explosion of online sales and mommy stores, beauty shops, just could you dive into a little deeper how much that has disrupted the Business in China?

In particular, if I look at baby, I think you had flat volume in the quarter, and yet you did very, very well in the US in baby.

So, that would be helpful.

Thank you.

First of all, the channels that you mentioned are very relevant channels, and they're growing very quickly.

And we have, as you can imagine, deliberate efforts to participate in that growth.

Also, eCommerce is growing very, very quickly in China.

It's about 40% of the growth in the market.

And we are very well represented there as well.

In terms of the difference between baby share development in the US and China, first of all, we remain, by a wide margin, the market leader in baby care in China.

The competitive sets are different between China and the US.

And as a result, you would expect some different dynamics.

But we continue to be very encouraged about the Business in both areas.

And that's really what I'd have to say.

Ali Dibadj, Bernstein.

So, I wanted to get a better understanding of where you think you are versus plan in the turnaround, since AG came back.

And I think about it along three dimensions at least.

One is productivity.

And I guess I'm reacting a little bit to about a fifth of your productivity coming from advertising spend basis points -- basis advertising spend this quarter.

So, one is advertising spend.

Two is the pace of divestitures.

So, Duracell happening here, very shortly after you said you're going to do something.

Should we expect as fast or a fast pace for larger divestitures like this?

And then third is something folks have referred to a little bit, which is: Two of your five segments are really driving your growth.

And I want to understand, within that, how much of that is less sensitivity of those particular segments to the macro environment?

And how much of that is actually execution, actually innovation, actually things you're doing?

And so, that's the core question.

I just have two follow-up clarity questions on some other things.

One is, what would your growth have been in beauty without the volumes in prestige being an issue?

And what would your growth have been without Duracell in the fabric segment?

Thank you.

In terms of where we are, in innings, if you will, in the execution of the plan, I think we're in some of the early innings.

I think there is a significant -- I know that there's a significant productivity opportunity that still stands in front of us.

We've talked about the redesign of the supply chains.

We've talked about the portfolio focus, which will give us more opportunity to get even more efficient in our overhead approach.

So, I think there is -- we will accelerate and we'll exceed the $10 billion, and we won't stop there.

I see this being characteristic of our opportunities and the environment that we're operating in, for the foreseeable future.

In terms of the advertising question, within that, as we've tried to say many times, most of the reduction that's occurring is in non-media spending.

And of the 50 basis points that we referenced in our prepared remarks, 40 basis points of that was non-advertising marketing spending.

So, it's lower production costs, it's lower talent costs, it's more efficient operation.

It's not less advertising reaching consumers, or in any way less effective advertising reaching consumers.

Our objective here is to continue to strengthen the impact of our marketing and advertising efforts, while reducing costs that don't matter to consumers.

In terms of the pace of divestitures, as we said, as AG said in the call last quarter, and as I mentioned today, we'll do this over an 18- to 24-month period.

Quite frankly, we're not going to be time-driven.

We're going to be value-driven.

And so, it's hard for me to sit here today and say exactly how long it will take.

But we will continue to pursue it at pace.

We'd obviously like to get there as soon as is practical, but don't want to compromise value by focusing overly on timing versus quality of execution.

And honestly, relative to the last part of the question, I think it's very hard to look at one quarter's of results and come to a big conclusion about what's driving anything.

So, I would encourage us to kind of take those segment results over a period of three or four quarters to get a better feel for what's going on.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.