寶潔 (PG) 2015 Q3 法說會逐字稿

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

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

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

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

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

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

Adjusted free cash flow represents operating cash flow, less capital expenditures and excluding tax payments for the pet care divestiture.

Adjusted free cash flow productivity is the ratio of adjusted 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.

January to March with another challenging quarter from a macro standpoint, with significant foreign exchange headwinds, modest market growth, and continued political and economic volatility.

The currency challenge increased through the quarter, with currencies in Brazil, Turkey, and the Ukraine weakening sequentially versus the dollar.

Despite these challenges, we grew constant-currency core earnings per share at a double-digit rate.

We grew core gross margin, including and excluding foreign exchange, and made strong core operating margin progress up 170 basis points on a constant-currency basis.

All of this was enabled by over 400 basis points of productivity savings.

Organic sales grew modestly, up 1%.

Grooming; healthcare; and baby, feminine, and family care segments grew 9%, 6%, and 2% respectively.

Organic sales were in line with the prior year in fabric and home care due to the timing of innovation launches in North America in both the base period and the current year.

The base period included pipeline and shipments for the major fabric care innovation bundle, including the Tide Plus upgrades and introductions of Tide Simply Clean & Fresh and Gain Flings, which led to 6% organic sales growth for the segment in the year-ago quarter.

The current period includes the impact of trade inventory draw down ahead of the launch of new liquid detergent and fabric enhancer formulations.

Fabric care consumption remains strong in North America, with market share growth on both a value and a volume basis.

Beauty segment results, however, reflect softness in prestige fragrance and mask skin care.

Organic volume was down 2 points versus the prior year.

Developing market volume was down low single digits following price increases taken to offset foreign-exchange devaluation in several countries and adjustments made to correct trade inventories in Mexico and China.

These adjustments had about a 1-point impact on the Company's top line in the quarter.

Developed market organic volume was down 2%, driven mainly by timing impacts associated with the April 1st increase in the Japanese consumption tax last year.

Shipments in Japan were up 22%, ahead of the consumption tax increase last year.

And as a result, were down mid-teens in the current-year quarter.

This had about a 0.5 point impact on total Company organic sales growth.

Pricing contributed 2 points to organic sales growth and mix added 1 point.

All-in sales were down 8% versus the prior year due to an 8-point headwind from foreign exchange and a 1-point reduction from minor brand divestitures.

We held or grew worldwide share on businesses representing about half of Company sales, and on businesses representing more than 60% of sales in our home US market.

We continued to grow share on many of our category-leading brands in countries where it matters most.

Pampers, Tide, Gillette Fusion, and All was in the United States, for example.

On a constant-currency basis, core earnings per share were up 10%, keeping us on track for double-digit constant-currency core earnings per share growth for the fiscal year.

Including FX, which was an 18-percentage-point drag on the quarter, core earnings per share were $0.92, down 8% versus the prior year.

Foreign exchange [hurts] totaled $530 million after-tax in the March quarter and $1.2 billion after-tax fiscal year to date.

They are forecast to be a $1.5 billion after-tax hurt for the fiscal year.

For managing through the FX challenge with a combination of pricing, mix enhancement, and productivity cost savings.

(Inaudible) opportunities on brands in countries and regions unaffected by FX.

Gross and operating margin growth improved sequentially versus the December quarter on both an all-in and X-currency basis, driven by productivity savings.

Core gross margin increased 20 basis points in the March quarter versus the prior year.

This compares to a 20-basis-point decline last quarter.

Excluding foreign exchange, core gross margin was up 90 basis points.

This compares to a 40-basis-point improvement last quarter.

In the current period, cost savings of approximately 250 basis points and 90 basis points of improvement from higher pricing were offset by 150 basis points of mix, 50 basis points of innovation and capacity investments, and a modest increase in commodity costs.

Core SG&A costs as a percentage of sales increased 50 basis points; excluding FX they were down 80 basis points.

160 basis points of overhead and marketing savings were more than offset by 130 basis points of foreign-exchange impacts, 50 points of organization capability investments in R&D and sales, and 30 basis points of other operating items.

Cost of goods sold and SG&A savings totaled 410 basis points, as we continue to accelerate productivity initiatives and programs and they deliver ahead of our objectives.

Core operating margin was down 30 basis points versus the prior year including FX.

This compares to a 60-basis-point decline last quarter.

Core operating margin, excluding FX, was up 170 basis points, 50 basis points better than 120-point improvement last quarter.

We expect even stronger margin expansion in the fourth quarter.

The effective tax rate on core earnings was 19.6%, 0.5 points above last year's quarterly rate.

This leaves us on track for the guidance or fiscal year core tax rate of about 21%, which is roughly in line with last fiscal year's rate.

March quarter all-in GAAP earnings per share were $0.75, which include approximately $0.07 per share for non-core restructuring charges and $0.10 per share of charges from discontinued operations, primarily an adjustment to Duracell carrying balances to reflect P&G's March-ending stock price.

We generated $3.6 billion in operating cash flow and $2.9 billion in adjusted free cash flow, with 117% adjusted free cash flow productivity this quarter.

Last week we increased our dividend for the 59th consecutive year, up 3%.

We will be paying our dividend for the 125th consecutive year, every year since our incorporation in 1890.

In summary, we generated modest organic sales growth in the quarter, constant currency core earnings per share grew double digits, driven by 410 basis points of productivity savings.

Constant-currency growth and operating margins were well ahead of a year ago, and we continue to build on our strong track record of cash productivity and cash return to shareholders.

While we must and will manage through the external headwinds and market volatility that is largely out of our control, the bulk of our effort is centered on driving significant opportunities in our control: brand initiatives and product innovation, business and brand portfolio simplification, overhead savings, and major supply chain productivity initiatives.

The Company and portfolio strengthening and simplification announced last August strategically resets P&G's Where to Play choices.

We're focused on winning with consumers and customers who matter most in channels in countries that matter most, with core brands and businesses that create the strongest consumer preference and the best balance of growth and value creation.

We will eliminate 60% of the brands and the complexity they create while retaining about 85% of sales and 95% of before-tax profit.

That's a good trade.

The new Company will consist of about 65 leading brands, where the size of prize and probability of winning are the highest in 10 categories that are structurally attractive, and play to P&G's core strengths of consumer understanding, innovation, branding, go-to-market and leverage P&G's scale.

It will enable more resources and attention on the biggest opportunities, resulting in faster, more profitable growth.

It's a focused portfolio with just seven categories representing 84% of sales and 85% of profit.

It's also focused geographically with the top five countries for each category delivering about half to essentially all of global profits.

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

Within these brands, we will operate with more efficient product line and SKU offerings, reducing SKUs 15% to 20% of the remaining portfolio over the next two years, the SKUs that shoppers want and consumers use.

Discontinued weeding will ensure new brand and product innovation as ample room to grow.

We will create a faster growing, more profitable Company that is far simpler to operate.

We currently expect to exit approximately 100 brand positions with a fair amount of the work already complete.

To date, we have divested, discontinued, or planned the consolidation of over 40 brands and about 40% of targeted sales.

We have exited the bleach business, pet care, Duracell, [MBBIP], several fragrance brands, the DDF and Noxzema skin care brands, Vicks VapoSteam, and the Camay and Zest bar soap brands.

We're targeting to be in a position to have negotiated announced the entire program or at least a large components as early as this summer, roughly one year after our initial announcement, and to have executed, in other words, closed the program, by the end of FY16.

This would enable us to head into FY17 with a new portfolio fully in place.

Another significant opportunity is strengthening and focusing our strategies and business models, to win with consumers and in channels and markets that matter most.

The strategy topic that has come up with increasing frequency in recent investor discussions is if leading brands are still relevant in a winning model and can still grow.

We continue to believe that P&G's strategy and business model, consumer insights and innovations that lead to consumer-preferred products from brands that over time are leaders in their categories, is a winning formula for us, a constant, reliable, and sustainable driver of balanced growth and value creation.

Over the last five years, our category-leading $1-billion brands have been growing sales 1 point faster than our $0.5-billion brands, and several points faster than our smaller brands.

In most categories, our leading brands have the leading equities and net promoter scores.

They are brands that retailers want and need in their stores, because category-leading P&G brands' household penetration and reach drives store traffic, and their purchase frequency and modest price premiums drive basket size.

Leading brands and product innovation grow categories.

These large brands are platforms for innovations which can be commercialized far more effectively and more profitably than can be done on smaller ones.

They typically earn a disproportionate amount of category profit and create a disproportionate amount of category value.

A good example is Pampers, our largest brand with $10 billion in annual sales.

Pampers is growing at a 5% pace over the past three years.

In the largest market, the United States, Pampers is driving category value growth of 3%, reversing a multi-year decline caused by declining birth rates and both competitor and trade price discounting.

P&G's US diaper share is up at over 90% of customers, widening our margin of category value share leadership to 9 points.

The premium priced Swaddlers line is on track to reach over $750 million in sales this fiscal year, up more than 30% versus the prior year, and Loves is growing in the mid-tier with sales up mid-single digits this fiscal year.

We have built the leading baby diaper business in the US and in the world without a consumer preferred pants-style diaper.

We have recently the rollout of our new Pampers Pants, designed to provide exceptional dryness and skin comfort in an underwear-like design.

Achieving fair share of the global pant market represents another $2 billion sales growth opportunity.

Another good example is Tide, our second largest brand, at about $5 billion of sales.

Tide has also been growing ahead of category growth rates, building share.

In the March quarter of last year, we introduced a strengthened fabric care brand and product line that significantly broadened consumer appeal.

We offered shoppers a full range of brands and products priced from about $0.12 to $0.28 a laundry load, including broadened Pod offerings, new and improved liquid detergent options, and Tide Simply Clean & Fresh, a preferred brand of product for many consumers interested in good, basic cleaning at attractive everyday value.

In addition, we focus on trading in new-to-the-category consumers the Tide, with new washing machine buyer and new household formation programs.

More consumers traded in and traded up than traded down.

In fact, Tide household penetration is up more than 200 basis points for the first time in several years.

We recently hit an all-time record high US laundry detergent value share of 60%.

Tide now holds a 40% value share of US laundry detergents, with brand equity and net promoter scores as strong as they've ever been.

Gain is the number two brand in the US detergent category (inaudible).

Both of these leading brands have grown market share over the past 12-, 6-, and 3-month periods.

The Tide and Gain brands have provided a broad platform for unit dose innovation.

They are trusted leading brands that consumers are willing to try their new product offerings.

It would take a lot longer and cost a lot more to generate trial of Pods with a significantly smaller brand or across a portfolio of several brands.

Tide Pods and Gain Flings have reached a combined value share of over 10% of the US laundry market, and P&G's share of the unit dose segment is nearly 80%.

We continue to expand Pods around the world, leveraging another multibillion-dollar brand, Ariel.

We expect our unit dose products alone to reach $1.5 billion in sales this fiscal year.

Downy, along with its sister brand Lenor, is another multibillion-dollar franchise in the fabric care category.

It's been growing at a high single-digit rate over the past three years, driven mainly by the success of our scent beads innovation.

Since scent beads were a new product for consumers to add to their laundry regimen, we could have tried to launch them with a new brand.

We chose instead to leverage the strong equity of Downy and Lenor, along with Gain and Bounce, to commercialize this new innovation.

We launched Downy Unstopables in the US about four years ago.

Since then, scent beads have grown to 17% of sales in the fabric enhancer category and the category has sustained 3% growth.

P&G's big brands have earned nearly an 80% share of the segment.

The largest male and female grooming brands, Gillette's Fusion and Venus, have proven to be huge platforms for blade and razor innovation.

The original Fusion razor launched in January 2006 is still P&G's fastest brand to reach $1 billion in sales.

We've continued the growth of Fusion with the ProGlide innovation in 2010 and the big, obvious, and preferred Flexball innovation last year.

Fusion value share of male razors is tracking in the high 50s and is up 2 points from last year.

The Flexball razor handle innovation has translated into share growth on cartridges.

Fusion value share of male cartridges is up more than 2 points versus a year ago.

We've put 12 million Fusion Flexball razors into the hands of men in the US in less than a year since launch.

And we're now extending the breakthrough razor innovation to Venus, the market-leading female razor brand, with Venus Swirl, which began shipping in February.

Early consumption results are very strong, and less than three months since launch, we've sold over 1 million Swirl razors in the US.

And Venus's value share of female razors was up more than 10 points, nearly 65% in March, the first full month Venus Swirl was available.

These new innovations from Gillette have helped reverse the declining value trend -- market value trend in US blades and razors, improving year-on-year growth rates by 3 points versus the 12 months prior to the Flexball launch.

Consumers significantly prefer these better performing products.

The market-leader consumer trusted Fusion and Venus brands are driving awareness, trial, and share results from new innovations that will be more difficult for a new smaller brand to achieve.

We're taking a similar approach in the female incontinence category, leveraging our multibillion-dollar Always brand to enter this $7-billion faster-growing global category.

We began shipments of Always Discreet in the UK in July, and the US, Canada, and France in August.

In the UK, the adult incontinence category is growing double digits, roughly 50% faster since our entry.

The US category growth rate has also more than doubled to around 9%, with P&G value share exceeding 10% in the most recent four-week period.

We've continued the expansion of Always Discreet with launches into Germany, Switzerland, and Austria, with more European markets coming soon.

A few of our leading brands are not growing like we know they can.

We're bringing the same strategic focus and operating discipline to these brands that we have to the ones I've just mentioned.

Ensuring the brand strategies and business models are aimed at delighting the target consumer, building strong pipelines and portfolios of consumer meaningful product innovation, ensuring SKU assortment and brand presence are attractive and easy to shop at the shelf, and ensuring that marketing and sales programs persuasively convey the value and relevance of our brands and product benefits to consumers.

Another opportunity directly in our control is productivity.

We have made very good progress and have a lot of runway remaining.

We have significantly accelerated and will significantly exceed the cost savings and overhead enrollment goals we set three years ago.

We're driving cost of goods savings well above the original target run rate of $1.2 billion per year, with $1.6 billion of savings this fiscal year.

We expect to improve manufacturing productivity by 5% this year.

This will bring cumulative past three-year manufacturing enrollment reduction to 15%, including new staffing necessary to support capacity additions.

On a same-site basis, enrollment will be down nearly 20% over this past three years, enabled by technology, and our integrated work systems approach.

We expect to start up at least 18 new plants or modules in the developing markets in the next few years.

This will not only help our foreign exchange exposure, but will drive manufacturing, transportation, and customs and duties savings.

As we start up these new sites, we have opportunities to apply technology and automate in an affordable way and to close couple and integrate further with suppliers, delivering additional manufacturing efficiencies.

In developed markets, we have begun work on what is the biggest supply chain redesign in the Company's history.

We're designing the supply chain to accelerate consumer preferred products to market and to make and distribute them in both the customer service preferred and cost-advantaged way.

Supply chain transformation began with the distribution network in the United States consolidating customer shipments into fewer Company distribution centers.

These distribution centers have strategically located closer to key customers and key population centers, enabling 80% of the Company's business to be within one day of the store shelf and the shopper.

All six of the new distributional [mixing] centers are up and running, all on or ahead of schedule.

We expect to complete the conversion out of legacy locations this year.

In addition to lower costs, this transformation will allow both P&G and our retail partners to optimize inventory levels while improving service and on-shelf availability.

In February, we announced that we will be constructing a new multi-category manufacturing facility in West Virginia, the next step in the North American supply change redesign.

We've taken the first steps in the transformation of our European supply chain.

We recently announced the consolidation of distribution centers in France and the UK and the consolidation of manufacturing for some home care products into our plants in Italy.

We see a $1-billion to $2-billion value-creation opportunity from the global supply chain reinvention effort.

We are targeting to build $400 million to $600 million in annual cost savings over five years and are expecting top-line benefits for more effective customer service and reduction of out-of-stocks.

This value and these savings are incremental to the $6 billion of cost-of-goods savings we originally communicated and are on track to exceed.

Through March, we've reduced non-manufacturing or overhead enrollment by over 19%, nearly double the 10% reduction we initially envisioned when we launched our restructuring program.

We continue to evolve the organization design so that is business-focused, starting with consumers and customers, and so that it is simpler, more effective, more responsive, and more efficient.

We've organized around industry-based sectors; we are streamlining and deduplicating 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 clear accountability for performance and results.

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

We should be close to the high end of our estimated 16% to 22% non-manufacturing enrollment reduction range by the end of this fiscal year, more than a year ahead of plan, with additional opportunity remaining.

As a result, we are increasing our overhead enrollment reduction target to 25% to 30%, excluding divestitures by the end of FY17, reflecting additional opportunities we see.

The third cost area where we continue to have significant savings opportunity is marketing.

By following the consumer, we are improving marketing spending effectiveness and efficiency to deliver more with less.

We're shifting more advertising to digital media, search, social, video, and mobile, which is where consumers are spending more of their time.

One non-media cost area that offers significant opportunity is agency spending, which includes fees and production costs for agencies we use for advertising, media, public relations, package design, and development of in-store materials.

We plan to significantly simplify and reduce the number of agency relationships and the cost associated with the current complexity and inefficiency, while upgrading agency capability to improve creative quality and communication effectiveness.

We see an opportunity for up to $0.5 billion in cost savings in this area, along with stronger communication to consumers across all touch points.

These efficiencies are enabling us to maintain strong media [awaits], despite the cost structure we're facing from foreign exchange and to reinvest in all elements of the marketing mix to improve our positions and support new innovations like Always Discreet; Fusion Flexball; Venus Swirl; Downy Unstopables; and Tide, Gain, and Ariel unit-dose detergents.

Productivity-driven cost savings continue to be a key enabler of our efforts to strengthen profitability in developing markets.

Constant-currency earnings grew two times faster than sales in developing markets in 2013, four times faster than sales in 2014, and are forecast to grow six times faster than sales this fiscal year.

Over those three years, we'll have grown developing market constant-currency earnings 13%, 28%, and 27% respectively.

In total, we're forecasting developing market margins, including FX, to be up about 40 basis points for the year.

We are focused on driving productivity improvement up and down the income statement and across the balance sheet.

Disciplined working capital management, strong execution of our supply chain financing program, and the scarcity mentality in capital spending will continue to drive strong cash flow results.

With that, let me turn to guidance.

As we look to the April/June quarter, productivity savings should continue to grow.

The benefits from portfolio strengthening and simplification should continue to build.

Oil-based commodity costs should become a tailwind and additional foreign-exchange-related pricing will kick in.

With just one quarter remaining, we now expect organic sales growth of low single-digits for the fiscal year.

Prices should be a significant contributor to sales growth again in the fourth quarter, which should more than offset pressure on unit volume growth.

FX will continue to be headwind, and we will continue to invest in category-leading established brands like Pampers, Tide, and Gillette, and product introductions like Always Discreet and Venus Swirl, and R&D for future innovation and sales coverage and effectiveness, and in capabilities and people that will enhance our chances of success in the near, mid, and long term.

We are maintaining our outlook for double-digit, constant-currency core earnings-per-share growth for the fiscal year.

We expect foreign exchange to have about a 13-point impact on core earnings-per-share growth for the year.

We're maintaining our core earnings-per-share guidance range of in line to down low single digits versus last year's core earnings per share of $4.09.

With the current foreign-exchange outlook, we expect to be toward the lower half of this guidance range, consistent with analyst consensus estimates.

We're forecasting all-in sales to be down 5% to 6% for the fiscal year; this includes the 6- to 7-point negative impact from foreign exchange and a 1-point impact for minor brand investitures.

We expect all-in GAAP earnings per share to be down 21% to 22% versus the prior fiscal year.

This includes approximately $0.83 per share of non-core costs, primarily from $0.63 per share of non-cash adjustments to carrying values of the Duracell business and $0.20 per share of non-core restructuring charges.

As you construct your fourth-quarter earnings-per-share models, keep in mind that several of the minor brand divestitures I mentioned earlier are expected to close in the fourth quarter.

Altogether, we're expecting about $0.04 per share of non-operating income gains in core earnings per share versus the prior year.

Reflecting the same productivity focus we're bringing to cost savings, we are now forecasting 100% adjusted free cash flow productivity, above prior guidance of at least 90%.

Key enablers of this strong cash productivity include improved results on payables, including continued progress on our supply chain financing program and steady improvements on inventory management.

We are maintaining our outlook for cash return to shareholders.

We plan to return cash to share owners through dividend payments of more than $7 billion and share repurchase of approximately $5 billion.

This guidance range assumes mid-April spot rates for foreign exchange.

Further significant currency weakness, including Venezuela is not anticipated within this guidance range.

Our outlook is based on current market growth rates, which we are monitoring closely, especially in markets where we are taking large price increases to offset currency impacts.

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

On the flip side, our guidance does not reflect some potential tailwinds.

Our results could improve if currencies ease, if markets began to expand in a sustainable way, or if US economic growth accelerates.

Stepping back, we are continuing to invest in our brands and products, and in critical Company capabilities that will enable much better consumer and customer responsiveness, with systems that are more agile, faster, better, and cheaper.

We continue to invest strategically in additional capacity for critical developing markets, and we continue to rationalize our manufacturing processes so that common, simpler, and more globally standard making and packing platforms support accelerated product innovation and a lower cash, capital, and operating costs.

We continue to evolve the organization design so that it is business-focused, starting with consumers and customers, simpler, more effective, more responsive, and more efficient.

We continue to invest selectively in sales coverage and merchandising to improve execution for shoppers in stores and online.

We continue to invest selectively in product innovation technologies and product initiative acceleration.

We are improving our digital and e-commerce capabilities and are reinventing our supply chain.

Through this transformation, we are creating a more in-touch, agile, coordinated, and integrated organization that puts winning with the consumer first.

We are sharpening our strategies and business models.

We are operating and executing with more consistency.

These are the choices and the capabilities that will enable balanced growth and value creation in the mid- and long-term as we work our way through the currency devaluations in the short term.

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 will be posted on our website, www.pg.com following the call.

Now I'd be happy to take questions.

Thank you.

(Operator Instructions)

Your first question will come from Bill Schmitz from Deutsche Bank.

Good morning.

Good morning.

Hey, can you just talk about the first derivative impact, the strong dollar?

So what's going on in some of the emerging markets with some of the big increases you've taken?

And then you look at some of the (inaudible) in the US and its clearing categories like shampoo where percentage of sales and ACV is massively spiking.

L'Oreal is talking about seeking revenge Henkel is launching Persil exclusively at Walmart.

So can you just talk about what that is relative to your expectations and how you plan on combating that going forward?

Thank you.

Thank you, Bill.

First, I would say it's still relatively early in the development of that, the development of whatever dynamic occurs here.

But so far, markets have held up fairly well.

As I said, it's pretty early, so we really won't know the impacts in markets like Russia until next quarter or the quarter after.

I think you've seen from several of the companies in the industry that have reported through the last quarter the Russian market was actually up, as they anticipate a price increase was coming.

So again, we haven't seen a second lag there.

What I would tell you, broadly is that, and I'll get to the US in a second, but in developing markets, those currencies have devalued not just versus the dollar, but also versus the euro.

If you take the case of Russia, which we talked through in some detail in the last call, there's every reason for both local competitors and multinational competitors to be pricing in many of these markets.

And that's generally won't be in early days what we are seeing.

As it a relates to the overall, the overall promotional environment, competitiveness, etc., and reflecting specifically on the US, if we look at the percentage of volume that was sold on promotion in the January to March quarter, it indexes at 100, so it was identical to last year.

And if you look at it sequentially quarter to quarter, there's very little change.

That doesn't mean that it couldn't change, but that's the data thus far, and that's consistent with the dynamics in our own business.

Obviously, by category, you mentioned hair care; we may see more promotion in one quarter or another.

There's obviously promotion as competitors and ourselves introduce new products and are trying to generate trials of those items.

But to date, there's nothing from either a developing market standpoint or a developed market standpoint that would indicate systemic change.

Our next question will come from Dara Mohsenian of Morgan Stanley.

Hey, good morning.

Good morning, Dara.

So I just wanted to talk a little bit about EPS guidance, and clearly you're keeping the EPS guidance here despite the FX hit and organic sales coming in, that are now expected to come in a bit below what you originally expected.

Do you think you're stretching the organization here to hit these EPS targets?

It seems like every year we've got this hockey stick in Q4 earnings.

You've now got some gains coming through Q4 earnings in Q4; ad spend's been down over the last few years, and I know a lot of that is the external environment.

Clearly macros are working against you.

But I'm just wondering if there was a thought process as you look out to next year in the earnings guidance that, given some of this external volatility and some of the internal issues, you might need to provide yourself more cushion room when you look at guidance versus what has been the case over the last few years here?

Thank you.

So you make a couple of good observations there, Dara.

Let me try to address them holistically.

In terms of the forecast and guidance, we'll obviously get into that in more specifics in August.

We're just in the middle of our prep season right now.

But there is almost no amount of cushion on which you can build in that overcomes $1.5 billion of after-tax foreign exchange cost, the majority of which were not anticipated based on spot markets as we went into the year and structured our budgets last year.

But that doesn't mean, I agree with your point, that we need to provide sufficient room to invest in the business, and frankly, we have not pulled off in that regard.

We have continued to invest, as I tried to make clear in my remarks, in certain parts of the organization, both R&D and sales.

We continue to invest in our brand and product platforms; we have continued to invest in the redesign of our supply chain; we've continued to invest in new product launches and that's clearly going to continue through next quarter.

We're just in the first-quarter launches of things like Venus Swirl and Always Discreet, and they will receive full support.

As well, for instance, the laundry innovations that I briefly mentioned in our opening remarks.

So what allows us, if FX is going to continue to be a headwind and we are going to continue to invest, which we are, what allows us to deliver the fourth-quarter number that, as you rightly point out, will be materially better than the first three quarters.

We will have, as I mentioned, commodity cost tailwinds.

We will have the full benefit of this year's productivity savings.

Pricing for some of the currencies will begin to kick in; there will be a minor impact, as we noted on a minor divesture gains.

But it's those items, look at the 410 basis points of productivity savings in this quarter, while we continue to invest in all of the things I've talked about.

It's a continuation of that that should allow us to deliver.

Philosophically, I have no difference, I'm completely aligned to what you're suggesting in terms of how we construct plans and budgets.

And I think our current plan and budget is constructed that way.

Recall, in the middle of the year, we took earnings-per-share guidance down, so we're not a slave to that.

As I've said many times, if I've proven anything over the last six or seven years, it's that I'm not constrained by guidance.

So we will continue investing, but we will continue to develop productivity savings as well.

And we are hopeful that reinvesting the right amount of those in the top line will get both the top line and bottom line growing at very attractive rates.

We will now move on to John Faucher of JPMorgan.

Thank you.

Jon, can you talk a little bit about gross margin?

You've delivered gross margin expansion a couple of times now, despite pretty weak top line.

And it's -- we're seeing -- it seems like we might be seeing one-off mix benefits from that standpoint, in terms of less emerging markets or potentially grooming being better that's driving that.

So can you talk to us about the progression on gross margin as we look out over the next couple of quarters?

Do you need one-off things to happen within those quarters in order to get there?

And what do you think is the rate of benefit coming from local manufacturing, particularly in terms of lessening the mix impact over time?

Thank you.

So the biggest driver of gross margin, by far, were the productivity savings of 250 basis points, and that's not one time and doesn't rely on certain categories growing faster than others.

That's there; it's systemic.

I suspect we will maintain or increase that, and I expect gross margin to continue to improve next quarter, which would make it, I think three quarters in a row, which again, is some indication of the systemic improvement there.

There was some benefit, as you rightly mentioned, from mix, which is frankly, the developing and developed markets growing at closer rates to each other.

And if developing markets were to accelerate, that mix benefit would be slightly -- excuse me, that mix hurt would be slightly increased.

In terms of the benefit of local manufacturing, that continues to build; it's part of the 250 basis points.

I honestly don't know exactly how that breaks out in terms of basis-point improvement, but John and Katie can help you with that.

But it is significant, and as I mentioned, we're making very good progress on developing market margins through that and other dynamics, including positive mix developments as those markets, in some cases premiumize.

And as I said, we're going constant-currency earnings ahead of constant-currency sales growth 2X three years ago, 4X last year, 6X this year, and that's a trend that should continue.

We will now take a question from Olivia Tong with Bank of America Merrill Lynch.

Thank you very much.

Jon, with organic sales now having deccelerated a bit more, can you talk through some of the incremental big initiatives that need to be taken to drive improvements?

Because it seems a bit too simple to say that getting out of some of the slower growing categories and the portfolioship is going to be enough.

Is it a function of consumers across a number of categories, not just within HPC, but across staples, sort of trading out a bigger brand which has potentially more nichier offerings here and there?

Thank you, Olivia.

Our largest brands are our fastest-growing brands.

That's true over a five-year period, over a three-year period, over a one-year period, and it was true last quarter.

So I'm not disputing the dynamic that you describe in terms of smaller brands' impact in some categories.

I think it's more prevalent, for example in some of the beverage categories and food categories.

But any period of time we look at convinces us that along with the intuitive benefits and big brand platforms in terms of innovation, importance to retailers, etc, convinces us that this is a business model that will continue to work for us.

In terms of -- you mentioned organic sales deceleration, I just want to put that in context a little bit.

I really -- really Is don't see significant deceleration and let me explain that.

We rounded up to two for the last two quarters; this quarter we rounded down to one.

We're talking very small differences quarter to quarter sequentially.

I mentioned in my prepared remarks the impact that the timing of the consumption tax increase had in Japan.

That item alone, if you take that out of the results, we would've rounded to 2. My point is not that that's a measure of victory or defeat; my point is simply that I don't see any systemic deceleration in the sales quarter to quarter.

Portfolio, as you rightly indicate, will help promote the top-line and the bottom-line.

And you are absolutely right, there is additional work on brands into some markets we need to do to fully maximize growth, and I mentioned those in my prepared remarks as well.

We have work to do in Mexico that we're getting through that very nicely.

We have work to do in China, and as I mentioned, China growth rates continue to be good, so that all looks pretty reasonable.

And as you know from our results, we have continued work to do in beauty, some of which will be addressed through the portfolio, and some of which we are currently making significant progress on.

I think when you step back, and I realize it's a little bit difficult to see, and I certainly appreciate that, but we're really on track or ahead with everything we are trying to do to transform this Company to a more sustainable, more reliable grower, on both the top and bottom line.

And that gets lost in the messiness of execution, if you will, and frankly, through the fog of FX currently.

But we are very happy with where we sit in terms of the progress we're making on both the portfolio and on the brands that are going to constitute the new Company.

Now we will take a question from Chris Ferrara from Wells Fargo.

Thank you.

Jon, I guess I apologize in advance for a long question, but inventory reductions and unprofitable promos, right, that you guys have been back out of, I guess.

I wanted to talk a little bit about.

So can you revisit, specifically, the drivers of the weakness in Mexico?

Because I know you're talking about consumption tax.

I think there was some exiting of some unprofitable promotion.

I think you're also citing some inventory reductions.

So can you at least give more specifics around how those issues are maybe related?

And then for Mexico and for China, how long do these inventory corrections take?

I know in China Unilever sort of ripped the Band-Aid off and took a 20% hit.

Do you have a defined strategy on this and how long will it drag?

And then just lastly, are there any other markets where this stuff is happening maybe just even on a smaller scale?

Thank you.

Thank you, Chris.

Let me deal with Mexico first.

This was simply -- in any of the developing markets, the supply chains from a manufacturer's door to a store are long and layered.

China as an example, you're going through distributors, wholesalers, secondary wholesalers.

And so when there's a significant change in market growth rate, as there was in Mexico as a result of the consumption tax increase last year, as there have been in China, as many of our competitors have reported, there is a lot of inventory in the system, which needs to get drawn down.

And you're not in complete control of how quickly that can be accomplished because you are not owning all of that inventory.

But we're working our way through that.

In Mexico, if you look at growth rates quarter to quarter, they've improved significantly on the order of magnitude of 10 points.

And we are expecting significant further improvement in AMJ, so I would say that one, we are largely, at least from a visibility horizon, we see our way through that.

China as I mentioned, if you look at consumption, we're in a very good place in China and in many categories.

We're probably two quarters in to the inventory reduction that needs to occur, and that's largely consistent with what our competitors have reported as well.

I would say we've got another quarter or two to go there, and then we have some structural work that we need to do.

But as I said, these are large, developing markets with very complicated long-layered supply chains, and these are dynamics that are affecting the industry broadly.

But once we're through them, it's back to business as normal, and we compete on the basis of the strength of our products and brands, and we feel very good about that.

I would tell you, Chris, that there are no other large issues like this that I'm currently aware of.

We will have to, and we've talked about this several times, have to manage very carefully in some of the markets where our currency devaluation has been significant, because those market sizes can change pretty significantly, and we'll do that.

And now will go to Wendy Nicholson of Citi.

Hi, a couple things.

First of all, just a follow-up on China.

I was listening to what you said, and I guess I don't understand some of the other companies like Unilever and Colgate talked about destocking in China as of last summer, if not earlier, and now it's only hitting you.

So I'm just curious why does it seem that the timing is unique to one manufacturer at a time?

That's just a follow-up.

But then the bigger question is, from a volume-growth perspective and how it pertains to your longer-term growth algorithm, it just strikes me that we've seen an enormous number of really big, maybe not enormous, but order of magnitude, really big, successful innovations from you over the last four quarters And yet, we still haven't seen much volume growth.

And so, I know we're going to get into it easier comps, but I -- it doesn't sound to me like the innovations that are coming down the pike are as big as Flexball or as big as Pods or Flings or whatnot.

And so, is there a change in your long-term outlook for how much volume growth is going to contribute to the top line?

And last one, I promise, just on the marketing budget.

I understand the idea of doing more with less, but given how competitive the market is and given how low your volume growth is, why wouldn't you choose to take some of those productivity savings and just do more with more?

Thank you.

All right, first, in terms of timing, different companies, frankly, have very different product mixes and they move through different distribution channels.

So if you think about Unilever with a large food business in China, it's very possible that they could have a different dynamic than the other channels.

And we're talking displacement of one quarter here or something like that.

So that's that item.

In terms of volume and initiatives, the biggest impact on volume has been the pricing for FX, and that will continue until those markets recover or until that annualizes.

But our innovations, if you look at the big ones that you mentioned, first they are contributing to both category growth and share growth, and category growth is a real indication of the strength of an innovation.

Does it lift the entire category?

And we have seen that behind the things that I mentioned earlier.

And the good news is that those largely have been fully expanded in one market, the US, and as we expand those globally, we expect to see that same impact, just like we did with Always Discreet in both the UK and the US, for example.

So we're pretty optimistic as we look forward about the strength of our innovation program and what that can do from the top line.

We're going to have to continue to manage the volume impacts of FX, but we're really focused on the revenue number as the leverage to generate operating profit and cash, and we're doing reasonably well there.

On marketing, as I mentioned, we are doing exactly what you would suggest we would do, Wendy, which is invest more where it makes sense to do that.

And these innovations that I've talked about our exactly one place where we are doing just that and we will continue to that.

The investment behind the introduction of new brand, in terms of Always Discreet, as you can imagine is significant, and we're very happy with that because of the return that we can generate and because of the impact that's had on those markets, which are, as I mentioned, have doubled the growth rate versus the pre-entry period.

So we're not talking here about constriction of marketing dollars.

What we are talking about is being as efficient and effective as we can and spending those dollars where they drive returns.

And now we have a question from Steve Powers of UBS.

Hi Jon.

I just wanted to dig in to your comments on strategy a bit more.

As you step back, as you mentioned productivity efforts have been sizable for a number of years, and they seem to be running ahead of plan.

You've made significant shifts in how you're organized and now how your portfolio is structured, but alongside that, growth has been a struggle.

And I think we would all acknowledge that the macro environment hasn't helped.

But do you think there's a risk that all this inwardly focused change in operational improvement has actually impeded your efforts to execute on the larger strategy that you articulated, namely uncovering consumer insights and driving consumer-preferred innovations?

Because it just seems like all these internal improvements are continually being offset by relative struggles in that external marketplace.

And I don't mean for this to be an unfair question, but I'm just wondering at what point it's worth asking whether organic growth challenges may actually be exasperated by all this internal change?

And whether improvement may have to, to some extent, just wait until those internal projects run their course?

Thank you.

Thank you, Steve.

That's actually a very good and very fair question, and it something that we continue to be in active dialogue on here at P&G.

We're being very deliberate about the pace of some of the changes and ensuring that we have the capacity to execute to serve consumers, to serve shoppers, and to do that in a more effective manner every day.

So that's exactly the question that we ask ourselves.

It's why, for example, we said we were going to take two years to complete the portfolio program, as opposed to overnight.

We have the capacity to do that and deliver the business.

So again, I think you are asking the right question.

It's one that we ask ourselves and we will make choices that maximize the total.

That's one of the beauties of the metric that we're working against in terms of operating PSR; it's an integrated metric, which drives choice and balance across both growth and value creation.

We simply can't there without one leg of that stool; the third leg being cash creation.

So we are approaching this in a very holistic sense, very cognizant of the right question that you asked and are trying to get the balance right.

As I indicated earlier, we feel very good about where we are in terms of the progression against those strategic initiatives that you outlined and others, including the redesign of the supply chain.

And in most of our big brands and categories, we're growing fairly well.

As I mentioned, if you look at grooming, healthcare, baby care, and family care, we grew at 9%, 6%, and 2% respectively.

So that's not an indication of any systemic pinch point, if you will.

Where we haven't performed as well is more a function of an individual business dynamic.

And now we will move to Lauren Lieberman of Barclays.

Thank you.

Good morning.

Good morning, Laura.

Good morning.

I had a follow-up on that, was the idea of doing -- taking two years for the divesture process.

To what degree, though, is that creating or is it any disruption on employees wondering about what's being sold and when or retailers or competitors looking at the thing?

Ooh, we can pounce on the business or we think that P&G may be deemphasizing.

So what (inaudible) do you think that may actually be weighing on organic sales trend?

The other thing was that Jon, you've been talking about how you feel good internally about the progress being made.

You said but it's being masked by the messiness of execution.

Maybe this wasn't a great word choice, but I feel like the one thing AG committed to nearly two years ago was we will improve execution, and that doesn't feel like it's happening.

So whether it's the one-off things that pop up with China, Mexico and honestly, I'm not convinced there won't be another big one-off two or three quarters from now.

What is it that has or hasn't changed on the execution in the market?

Thank you.

Well let me tackle that last one first.

It was a poor word choice; I should've said the chunkiness of execution.

Frankly, we've been very intentional in the focus on improving execution and feel very good about the progress that we're making there.

So I apologize for that word choice, but there are just big chunks moving in and out as we make these very big transformational moves, which can butter things up a little bit.

In terms of organic sales growth and the portfolio impact, if you look at the businesses, take Duracell as an example, which is currently working to transition to Berkshire Hathaway.

But the entire period that the business was working on that project leading up to the signing of the deal and post the signing of the deal, managing through transition, that business has held up extremely well.

It's building market share.

I won't go into the details, but several of the other businesses that we will be looking to sell are also performing very well.

In other words, growth rates well above 100 index versus year ago.

So I think we've got about the right balance in terms of the pace at which we are moving and the work to be done.

As I said, it is something that we relook every day, but it's not a major concern at this point.

And now we have a question from Nik Modi of RBC Capital Market.

Yes, good morning, guys.

Just two quick ones for me.

Jon, some in the media world would suggest hat P&G is taking its marketing mix too digital heavy.

So I just wonder if you could respond to that and your perspective around that?

And then the second question is in your prepared remarks you indicated (inaudible) rationalization will take place in the core portfolio the next couple of years, if I heard that right.

Just curious how we should think about that and it's impact on organic revenue growth as we look out the next couple of years.

I know you're not giving guidance, but just how should we think about it from a magnitude standpoint?

These are SKUs that are at the long, far tail in terms of productivity.

So we have businesses where the bottom 20% of the SKUs are less than 1% of the sales, and the same is true with profit.

So I think if anything, by removing the clutter, by allowing us to focus on product lines and SKUs that really matter to consumers and customers, it should have a positive impact on the top line, not a negative; these are [eaches] in some cases.

But they are meaningful in terms of the amount of complexity that they create.

That's true in our operation; that's true at the shelf; that's true in the warehouse.

In terms of our approach to digital versus traditional media, we viewed this very much as and, not an or.

They complement each other, so we look at it very holistically.

We are guided in our choice by two things: one is where consumers are spending their time in terms of consumption of media.

We need to be reasonably in step with that.

And the second is depending on the category, what media they want to interact with and learn about our products on, and that's different across categories.

So we're going to be guided, as in everything we do by the consumer, and if we stay with that approach, we will probably not stray too far from what's right.

And now we will move to Javier Escalante of Consumer Edge Research.

Good morning, everyone.

Jon, I have to say that I'm still having a hard time reconciling the top-line growth of 1%, where your positive remarks about some of your big brands, Tide and Pampers?

The flip side of the response that you gave to Olivia earlier is that you basically are telling investors that Procter performance in the past quarters have been actually weaker, and organic sales only round up to 2.

Shouldn't you be considering a bigger portfolio change or breakup even, given that sectors like beauty are not only getting more fermented and smaller than any food and beverages category that you alluded earlier?

And instead of reducing SKUs by 15% and 20%, as Nik just said, what you are going to have is subpar, top-line growth for the next two years?

Thank you.

We're going to try to have full visibility on the portfolio moves by the summer, and I think we will be in a position then to articulate why we think these are the right moves.

And so I'm going to save that conversation for that point in time.

But we are being thorough in our approach across each of the categories and brands.

There's no business that we haven't objectively analyzed, and so I think we're going to end up in a pretty good place in that regard.

In terms of -- look, on this whole thing of small brands and fragmentation, one, our data doesn't support that being an issue for most of the businesses that we're going to maintain.

Second, where differentiated performance matters and where differentiated performance is delivered, this dynamic is not germane.

So for example, and I'll bring it to beauty in a second, Javier, but if you think about Pampers as an example, I can't think of a new mother who would be asking herself where performance really matters, would be asking herself what's the new diaper that nobody's ever tried before?

Where can I discover the next diaper?

That's not the thought process.

There's a job that needs to be done.

There's a brand that has proven over decades it can do the job.

It can do it better than the other offerings that are out there, and it's offered at a price that creates a good value.

If you think about performance and where performance matters in a beauty context, think about anti-dandruff shampoos.

I've got a problem, I need a solution.

This is not time to experiment, this time to solve.

Head & Shoulders has been solving dandruff issues for decades.

It's a brand that consumers know and trust, and it's offered at a reasonable value.

So I think we have to think about the specific dynamics of a category, the consumer approach to the category, the relevance of innovation of the category and differential performance as a driver of purchase, before we make broad conclusions about whether fragmentation is going to occur or not.

And in terms of your question on split up, again, let's wait until we have the portfolio in front of us and talk about it at that point.

We're very bullish.

And again, this is not just based on what we think is going to happen; this is based on 10, 5, 3, and 1 years of data, which is very consistent in its outcome.

And these are categories that we have long track records of winning in, where we are typically the market leader with brands and prototypes in those categories.

And next we have Joe Altobello with Raymond James.

Hi this is Christine on for Joe.

I just wanted to change the topic quickly and go to commodity costs and whether you are still expecting that to be a $500 million to $700 million tailwind next year?

And how much of that do you actually expect to recover net of pricing?

We would -- our current estimate would be more on the order of magnitude of $600 million to $800 million of BT commodity costs savings next fiscal year.

Really don't have a point of view yet on how much of that we'll be able to take to the bottom line, as opposed to pass through in price.

So if you just reflect on the dynamics in the industry, this was an industry that, with the exception of some international competitors who have FX tailwinds, is challenged from a profit-growth standpoint.

And that's a dynamic that generally supports using these savings as a way to help that situation.

So we're hopeful that many of these will come to the bottom line, but that's something that we will have to see as we move forward.

Your next question will come from Ali Dibadj at Bernstein.

Hey guys.

Jon, you're getting the same question from many folks over and over again, and I'm not sure the message is necessarily clear, which is we've been hearing a lot of promise that help is around the corner for years, years.

And every back half of the year, you kind of limp across the finish line; it's not just this year.

And I guess for me at least, I just wonder whether P&G has the right to be consistently in a short-term optimist at least, given its recent track record.

And now the promise is wait till we break up 14% sales, 6% of operating cost out of our business, things will be much better.

But at that point, how much longer would we have to wait to -- for you guys to decide that maybe something even bigger has to happen.

Maybe you really got to rebase your guidance, and you should be delivering double-digit EPS growth.

Maybe you really have to break up the Company even further.

I think there's a lot of frustration in terms of trying to see results, granted the macro stuff, granted the FX, but others have that too.

How much longer do we have to wait, I guess, is really the core question?

Especially after this next promise of divestitures, how much longer do we have to wait after that?

Thank you.

So last year you mentioned FX, I think you're right to mention that.

Excluding FX, we grew 14% on the bottom line last year.

This year, we will grow double digits.

I think it's pretty clear that the operating improvements that we're making, productivity and otherwise, are coming through.

And if it weren't for FX, we'd be having a very different discussion right now.

We do have brands and businesses where we need to continue to strengthen the top line; we are cognizant of that.

I mentioned that.

And that is what it is.

As we look at the change that we're in the middle of executing, it's probably the biggest transformation this Company has gone through across the totality of portfolio supply chain, organization, structure, and designed.

And as I said, it's hard to see that all come together at this point.

But each of the pieces we're very happy with the progress, and we'll see.

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

Good morning, thank you much.

Just a question about beauty again.

Olay and Pantene are different from Head & Shoulders because there's not this clear need and promise and delivery.

So if you just look at Olay and the performance, I know China has been very problematic, but around the world, why do you think P&G really should be in that type of business?

What first of all, Caroline, younger looking skin, I think is a real need.

It's increasingly a need of mine beyond my hair-care need.

And I'm not going to comment on specific businesses that we're going to be in or out again.

We'll do that when we are ready to do that.

But that's a business where function and performance -- differentiated performance does matter.

It's what enabled us to build one of the largest -- the largest facial skin care brand in the world.

That continues to have incredibly strong equity, and frankly, is growing significantly in many parts of the world where we haven't cluttered the equity on the shelf as badly as we have, for instance in the US and in China.

I was just, a couple weeks ago in the Gulf, in the Middle East, and that's a market where the brand architecture is much cleaner and clear.

And that business is growing double digits.

The same thing is true in the UK on Olay where again, we haven't cluttered either the messaging, the equity, or the shelf.

So skin care is clearly, look at SK2 as an example; it delivers a clear benefit that's coveted by women particularly in Asia.

So it's not a business that is all about fashions and style; it's about a business -- it's a business that's about performance.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may down disconnect.

Have a great day.