寶潔 (PG) 2016 Q2 法說會逐字稿

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

P&G would like to remind you that 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.

Also as required by Regulation G, Procter & Gamble needs to make you aware that, during the discussion, the Company will make a number of references to non-GAAP and other financial measures.

Procter & Gamble believes these measures provide investors with valuable information on the underlying growth trends of the Business, and 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.

In the quarter we just completed we continued reducing costs and reinvested in growth, re-accelerating our top line, and delivering strong earnings and cash flow.

Organic sales increased 2%.

Core earnings per share increased 9%, with constant-currency core earnings per share up 21%.

We delivered meaningful triple-digit basis point improvements in gross and operating margins on both a constant-currency and all-in basis.

All-in GAAP earnings per share were up 37%.

Adjusted free cash flow productivity was 117%.

This is a reasonably strong quarter which reflects our efforts to accelerate organic top line and earnings per share growth, fueled by productivity savings.

We continue to operate, though, in a very challenging and volatile macro environment.

Market growth rates on both a volume and value basis have decelerated, due mainly to slower growth in developing markets.

We entered the year expecting the market to grow close to 3% to 4% globally; we now expect 2% to 3%.

There are more flash points across the globe than in any time in recent memory, with significant economic and political instability impacting incomes and consumption in many large and important markets -- Russia, the Ukraine, Egypt, Saudi Arabia and the balance of the Middle East, Turkey, Nigeria, Argentina, Venezuela and Brazil.

Currencies are weakening across the board, more than $0.75 billion since the start of the fiscal, and over $1 billion after tax versus year ago.

This is on top of a $1.5 billion impact last fiscal year, and nearly $1 billion impact the year before.

Across three years, FX has been a $3.5 billion impact, over 30% of fiscal year 2013 core net earnings after tax.

Since the start of December, the current-year FX headwind has increased by $300 million after tax, with a 40% devaluation in Argentina, an additional 15% devaluation in Russia, and nearly a 10% devaluation in Mexico.

The relative strength of the dollar weighs heavier on us than our euro and yen functional currency competitors.

The dollar has more than doubled against the ruble over the past two years, while our euro functional competitors are facing about 50% to 60% of that impact.

We expect these dynamics -- slowing market growth, geopolitical hot spots, and a stronger dollar -- will continue to be part of our reality going forward.

Against this backdrop, we're staying focused on big opportunities in our control, executing what is the largest transformation in our Company's history: step changing productivity; transforming our portfolio; and strengthening category business models and innovation plans.

This transformation strategy, as we'll explain more at CAGNY, is fundamentally a growth strategy.

I'll talk briefly about each of these focus areas -- productivity, portfolio, and business model and innovation plans -- before getting into the details of the quarter.

We continue to dramatically improve productivity, with significant upside still ahead.

Our original five-year cost of goods savings target was $6 billion.

We expect to deliver over $7 billion by the end of this year, 15% above our initial target.

We've reduced manufacturing enrollment by 15% over the last three years.

This includes new staffing necessary to support capacity addition.

On a same-site basis, manufacturing enrollment is down nearly 20%.

We're targeting 25% to 30% cumulative reduction by the end of fiscal 2017.

In February 2012, we announced we would reduce non-manufacturing overhead by 10% over five years.

As of December 31, we have reduced these roles by 23%, more than double the original target, and are well on track to meet our revised target of 25% to 30% by the end of fiscal 2017.

In fact, we currently expect to reach our 25% to 30% objective this year, one year ahead of schedule.

These figures exclude divestitures; including divestitures, we'll reduce non-manufacturing roles by over 35%.

Continued digitization has been, and will be, a big enabler of our overhead and manufacturing enrollment efficiencies.

We're reducing non-working marketing expenditures -- costs that do not impact reach, do not impact frequency.

Last year, we reduced the number of agencies we work with by nearly 40%, and cut agency and production spending by about $370 million.

We're aiming for an additional $200 million of agency-related savings this year.

These are non-working savings that enable us to invest in advertising and in trial of consumer-preferred products.

We're strengthening our working marketing programs: greater reach, higher frequency, greater effectiveness, at less overall marketing cost.

Last fiscal year in the US, we increased total marketing and merchandising support behind Pantene by 440 basis points, increased Tide brand spending by 220 basis points, and invested an additional 150 basis points in Fusion behind the new FlexBall innovation.

This year, we've made similar increases to advertising programs in the US on shave care, fabric care; in Brazil on baby care and fabric care; in China on fabric care and oral care.

In North America alone, we've added nearly 100 basis points to advertising and in-store merchanting budgets since we started the fiscal year.

In addition to cost of goods sold, overhead and non-working marketing cost reduction, we're driving balance sheet productivity.

Inventory days are down.

Payable days are up.

The moves we've made on the balance sheet have enabled us to extend our long track record of very strong adjusted free cash flow productivity: 102% last fiscal year; 101% in Q1; 117% in Q2.

We continue to maintain our position as one of the strongest cash generators among competitive peers and comparable mega-cap companies.

We're also among the top companies in returning cash to shareholders.

In fiscal 2015, we increased our dividend for the 59th consecutive year, and returned $11.9 billion in cash to shareholders, 105% of adjusted net earnings.

Over the past five years, we've returned $60 billion to shareholders, and intend to pay dividends, retire shares, and repurchase shares worth up to $70 billion over just the next four years.

In addition to transforming our cost structure, we're transforming our portfolio.

As you know, we're centering our portfolio on 10 category-based business units where P&G has leading market positions, strong brands, and consumer [to] meaningful product technologies.

These 10 categories have historically grown faster with higher margins than the balance of the Company.

We'll be a Company of consumer-preferred brands and products in these 10 product categories.

Within these core businesses, we're also focusing our offerings to maximize value creation.

We're making smart choices for short-, mid- and long-term value creation, foregoing bad business even when these choices create short-term top-line pressure.

In our Mexico family care business, we made a choice to discontinue low-tier, unprofitable products in favor of very profitable, higher-tier products, albeit with lower sales.

The top-line drag from this choice will dissipate over the next few quarters.

We'll have a solidly value-accretive business going forward.

In India, we've made a choice to de-prioritize several unprofitable lines of business, which negatively impact short-term top-line growth rates, but will lead longer term to a much more profitable business that will grow strongly.

Last fiscal year, organic sales growth slowed by several points, but we made significant progress in improving local profit margin, up 700 basis points.

We went from losing money in India to triple-digit profits.

In the quarter we just completed, India organic sales growth was only 2%.

The strategic part of the business, the part that we're maintaining, grew a healthy 10%.

Sales in the portion of the business we're fixing or exiting, which is about 15% of the portfolio, were down 35%.

Profit is running significantly ahead of even last year's improved levels.

As we come out of this, we'll have strong top-line growth that is really worth something.

There's really no point to growth if it isn't worth something.

Choices like this impacted our organic top-line growth rate by about 1 point in the October-to-December quarter, but will enable us to increase profitability on an ongoing basis.

As we've improved productivity and sharpened our portfolio, we've been strengthening business unit strategies, business models and product offerings, putting particular priority against our four largest categories -- fabric care, baby care, grooming and hair care -- and our two largest markets, the US and China.

We're focusing our laundry business on consumer-preferred brands and product offerings like our premium performance and premium price units dose detergents, and our market-leading and market-expanding scent bead fabric enhancers.

We're launching better performing and more profitable new compact liquid detergents in Russia, Turkey, Mexico, Brazil and China.

In Russia and Turkey, where we launched superior compact liquid detergents early last calendar year, P&G's share of liquid detergents is up 7 and 11 points, respectively.

Fabric care results in the US demonstrate what is possible when we get the strategy balanced, and the innovation program focused on what matters most to consumers: superior value for best-in-class performance at a modest price premium.

The US laundry detergent category is continuing to grow, up more than 4 points on a value basis across all outlets over the last three- and six-month periods.

Within this, our share is growing.

P&G's US laundry detergent value share was up 1 point last fiscal year, and it was up 0.5 points in the December quarter.

We will continue to be the innovation leader in fabric care.

In North America, we're introducing a new regiment on Tide and Downy that addresses the odor problems common to athletic wear.

70% of consumers wear athletic gear multiple times each week.

The Odor Defense collection, anchored by innovation on Tide PODS, brings a proprietary formula of enzymes and surfactants that break down and remove stubborn soils and residues for a great clean and fresh scent.

Paired with the added cleaning power of Tide Odor Defense Rescue laundry booster and Downy Fresh Protect odor defense beads, this regimen promises to eliminate odors from the fast growing market of ath-leisure clothes people are wearing far beyond the gym.

In the US baby care, strong innovation, consumer communication, trial programs and a robust online presence have led to strong growth for Pampers.

Pampers value share of US diapers was up more than 1.5 points last fiscal year, and was up 1 point in the December quarter.

The progress is particularly encouraging considering our latest Pampers innovation with extra absorb channels was on shipment allocation for much of the quarter, as demand succeeded our initial supply.

With increased capacity in place and continued strong demand, we expect a good start to the new calendar year.

We're increasing our investments in Luvs diapers in the second half of the fiscal year to address share declines following a significant price reduction taken by our primary competitor.

Baby care results have been softer in other markets.

To address this, we've strengthened our value proposition in several markets, and accelerated premium innovation on both taped and pull-on diapers to restore our competitiveness at the top end of the market.

We're strengthening our selling resources and programs for baby stores.

We're improving our point-of-market entry programs to deliver higher awareness and trial of Pampers among new moms.

The Gillette FlexBall innovation continues to deliver strong results in grooming.

Globally, an estimated 25 million men have tried FlexBall in the 18 months since launch.

FlexBall has been an important catalyst of growth on ProGlide cartridges.

ProGlide cartridge sales grew 18% last fiscal year compared to a 7% decline in the overall male cartridge market.

ProGlide cartridge share is up 2 to 3 points in each of the past 3-, 6- and 12-month periods through December.

The strong ProGlide results set a very positive stage for our next cartridge innovation, Gillette Fusion ProShield.

ProShield, with lubrication before and after the blades, shields against irritation during every shave.

Retailer response to ProShield has been outstanding, delivering launch orders and display levels well above targets.

We're supporting a broader range of our product ladder from our best product, Fusion FlexBall, to Mach3 systems, to premium price and superior performance disposables, with strong consumer value communication.

We're innovating in-store, helping retailers move out of the lock boxes on shelves and at check out with the use of hard tags.

Hard tags make Gillette much easier to shop.

They take up less space on shelves, so more product can be on a peg, reducing out-of-stocks and improving sales closure rates.

They are very effective at reducing shrink.

We've already made the change in several hundred stores with excellent results, and are rolling out hard tags as fast as we're able.

We're also innovating online.

With more men purchasing their blades and razors through eCommerce, we're establishing Gillette as the online leader.

While we were admittedly late to build out our online offering, Gillette Shave Club launched in June and is off to a very good start.

We've increased our eCommerce share of blades and razors more than 6 points, and nearly doubled online consumption since launching Gillette Shave Club.

We're building partnerships with eTailers and retailers who are offering their shoppers subscription tie-ins for the Gillette Shave Club, which have enabled Gillette to deliver record online sales in each of the past three months.

In hair care, we launched our new conditioner innovation on Pantene in the US earlier this month.

Pantene's new breakthrough conditioner technology delivers weightless conditioning, addressing the most significant consumer trial barrier for conditioners.

The new conditioner innovation is a consumer blind test winner versus our best competitors in North America, China and Japan.

We recently launched two new Head & Shoulders variants in the US, Instant Fresh and Nourishing Care, in our upgraded Head & Shoulders consumer message with a new campaign: use daily to stay 100% flake free for life with Head & Shoulders Scalp Shield technology.

Driven by these interventions in laundry, baby care, grooming, hair care and other categories, and by our investment in category-dedicated sales coverage, we're making sequential progress in our largest and most profitable market, the United States.

The US business rebounded from a 2-point organic sales decline in Q1 to deliver 3 points of organic growth in Q2.

The US improvement was despite product allocation, driven by demand in excess of supply in two of our largest categories, baby care and feminine care, and despite a record light cough/cold season impacting the Vicks brand.

Sales are probably 1 point or so ahead of consumption for the October-December quarter, but the progress is encouraging nonetheless.

Our second largest market, both sales and profits, is China.

Here, Q2 organic sales were again down high-single digits, in line with the Q1 trend.

We've gotten behind in premium innovation, which has been a contributor to our soft top-line trends over the last several quarters.

We're aggressively addressing this opportunity.

David Taylor; Kathy Fish, our R&D leader; myself; and several other members of our leadership team spent the last week in China.

We're working with the team there, and with the global business units, to expand our offerings in the premium price tiers, which are the fastest growing; to invest in trial of consumer-preferred products; and to transform our go-to-market operations.

We've launched premium baby care innovations in both the taped and pull-on segments.

We're launching compact area liquid detergents that consumers prefer over competition.

We have new upgrades coming soon on Tide.

We've made meaningful product and packaging improvements in hair care that launched last quarter on both Head & Shoulders and Pantene.

In oral care, we're launching Oral-B gum care, a new super premium gum repair line of Oral-B toothpastes.

The line includes a two-step paste and other single-step paste variants.

Consumer tests show the new line winning against top competition in the super premium tier.

We're importing our best feminine care product, Infinity, to China, with premium power toothbrushes and our best Braun razors.

We're increasing our investment in consumer awareness, point of market entry sampling and trial across categories.

We're strengthening our relationship and presence with key eCommerce and specialty retailers, the fastest growing channels in the Chinese retail market.

We're investing in coverage of these channels, and are working to simplify, standardize and strengthen our overall go-to-market approach.

These moves will take time to fully implement, and the go-to-market changes may actually result in pull-backs before progress, but we're confident they will result in stronger growth over time.

Stepping back then and looking at things on a macro level, the environment continues to be very challenging: slower market growth, stiff foreign exchange headwinds, and a volatile political and policy environment.

Against this backdrop, we continue to improve productivity, to focus our portfolio, and to invest in superior consumer-preferred brands and products.

We're putting particular priority against the four largest categories -- baby care, fabric care, hair care and grooming -- and against our two largest markets, the US and China.

With that context as background, let me get into the details of the quarter we've just completed, as well as the outlook for the fiscal year.

Two housekeeping items before I begin: First, the organic sales and core earnings results we're reporting today are based on our 10 core product categories.

The results of the beauty and batteries businesses that we're in the process of exiting are reported as discontinued operations.

In late October, we provided a restated 10-K for fiscal 2015, presenting historical results on this same basis.

Second, starting last quarter, we're no longer consolidating the results of our Venezuelan subsidiaries in our reported numbers.

Organic sales were up 2% for the quarter versus the prior year.

Each segment was at or ahead of year ago.

As I mentioned previously, sales were slightly ahead of consumption.

Organic sales in China and Russia were significantly lower versus last year, negatively impacting total Company sales growth by more than 1 point.

The category and SKU clean-up efforts drove up to another 1 point of organic sales decline.

These impacts were more than offset by progress in the United States and growth in Latin America.

All-in, sales were down 9%, including an 8-point headwind from foreign exchange, and 3 points from the Venezuela de-consolidation and minor brand divestitures.

Core gross margin and core operating margin each improved on both an all-in and ex-currency basis, driven by productivity savings.

Core gross margin increased 210 basis points versus the prior year.

Excluding foreign exchange, core gross margin was up 290 basis points.

Core SG&A costs improved 140 basis points, driven primarily by overhead cost reductions.

We continue to invest in marketing, reinvesting non-working cost savings.

Marketing expenditures were, in total, equal to year ago as a percentage of sales.

Core operating margin was up 350 basis points versus the prior year, behind 270 basis points of productivity savings.

On a constant-currency basis, our core operating margin was up 390 basis points.

The core effective tax rate was 23.6%, up nearly 1 point versus last year.

Core earnings per share were $1.04, up 9% versus the prior-year quarter.

This includes a 12-percentage-point foreign exchange headwind, approximately $300 million after tax.

On a constant-currency basis, core earnings per share grew 21%.

On an all-in GAAP basis, earnings per share were $1.12 for the quarter, up 37% versus the prior year.

We generated $3.8 billion in free cash flow, yielding 117% adjusted free cash flow productivity.

We returned approximately $3.9 billion to shareholders this quarter through a combination of $1.9 billion in dividends and $2 billion in share repurchase.

Moving to guidance, we're maintaining our outlook for organic sales growth of in line to up low-single digits versus fiscal 2015.

We've been investing to increase awareness and trial of our brands and products in North America, which is a key catalyst for growth in categories like fabric care and baby care.

We're launching a number of new consumer-preferred premium innovations over the next few months in both developed and developing markets.

We're investing in selling capabilities to capitalize on opportunities in the fastest growing channels, and strengthen our presence in our most important markets.

We've also invested in targeted price reductions to narrow consumer value gaps in several categories.

All of these efforts, along with annualizing some of the most significant impacts from last fiscal year, give us confidence we'll continue to grow organic sales in the second half.

The level of growth could be impacted by our access to dollars for finished product import into Venezuela.

About 60% of our Venezuelan business is imported.

The sale of imported products from the importing subsidiary is still reported in our consolidated results.

Failure to continue this business would result in up to 0.5 points impact to top-line growth in the fiscal year.

The headwind from foreign exchange has increased since the start of the year.

We now expect FX will have a 7-percentage-point impact on all-in sales growth.

Also, the combined impact of the Venezuela de-consolidation and minor brand divestitures will have a 2- to 3-percentage-point drag on all-in sales growth.

Taken together, we expect all-in sales to be down high-single digits versus restated fiscal 2015 results.

We're also maintaining constant-currency core earnings per share guidance of mid- to high-singles, with our internal outlook currently at the low end of this range.

Given the magnitude of the foreign exchange impact, I thought it might be helpful to again recount how FX impacts our earnings.

I'll use the example of the Argentinian peso.

We've been most pleased to see the early decisive approach of Argentina's new leadership, and believe the actions they are taking will create long-term benefits, for which we are well positioned to participate.

But the nearly 30% to 40% devaluation of the peso will significantly impact our reported earnings in three ways.

First, transaction impacts increase the cost of non-peso-denominated inputs.

We import, as an example, Gillette blades and razors from Mexico into Argentina.

Widening of the cross-weight between the two peso currencies increases the Argentina unit's cost of razors, and reduces profit.

Similarly, the local cost of plastic bottles, which are denominated in dollars, and imported into Argentina for the production of fabric care and hair care products, have increased significantly.

These transaction cost impacts affect all manufacturers, multi-national or local, whose materials or finished products are imported from similar sources and are similarly denominated.

We attempt to recover these cost increases through pricing, when local legal requirements and market realities allow it, though there's a lag between the time when a currency devalues, the costs are incurred, and the pricing is taken and executed through our channels of distribution.

The second impact is balance sheet revaluation.

We need to revalue transaction-related payables and receivables balances at the end of each quarter.

This includes the revaluation of balances related to transactions between P&G legal entities that operate in different currencies.

To continue the prior example, while razors produced in Mexico are being transported, and are moving through the customs process into Argentina, our Argentinian business holds a Mexico-peso-denominated payable on its books.

At the end of every quarter, payables and receivables balances are revalued at current spot rates.

Gains or losses from revaluing transactional balances flow through SG&A, and are included in core earnings per share.

Third, income statements of foreign subsidiaries like Argentina that do not use the US dollar as their functional currency are translated back to US dollars at the new exchange rates.

Thus, the Argentinian peso transaction, balance sheet revaluation and translation impacts have been, and are projected to be, significant, at about $70 million, $50 million and $20 million after tax, respectively, for a total of $140 million after tax for the year.

Across all currencies, foreign exchange hurts total nearly $300 million after tax in the December quarter, $700 million fiscal year to date, and are forecast to be a $1 billion impact after-tax profit hurt over the course of the fiscal year.

When we talk about foreign exchange impacts, we're sometimes asked why we don't simply hedge these away.

It's a very valid question, and something we look at internally and with a different set of outside eyes every year as we prepare our financial plan.

There are three reasons we typically don't end up choosing to hedge.

Up to two-thirds of our foreign exchange losses, and a significant amount of our forward exposure, is in currencies that are either non-deliverable or are very difficult to hedge: the Argentinian peso, Venezuelan bolivar, and the Ukrainian hryvnia are three examples.

Second, hedging is neither free nor cheap.

Currency volatility in itself increases, sometimes in significant ways, this cost.

So, when you'd want it most, it becomes difficult to afford.

The last shortfall of hedging as the answer is that it solves nothing longer term.

It also does nothing to help restore the margin structure of the Business.

A hedge simply defers volatility.

When the instrument expires, you have the same hit with the same margin impact you would have had, had you not hedged.

While it takes time, and there's a lag between the hurt and the help, we typically look to pricing, sizing, mix enhancement, sourcing choices, and cost reduction to manage FX impacts.

We have historically recovered about two-thirds of FX impacts with pricing over time.

We think this time, given differential impacts for euro and yen functional currency competitors, it will be somewhat less than that.

I said in our last call that we would invest where it was appropriate to do so.

I said we would not cut smart investment to offset foreign exchange impacts, which meant we could very well end up below the earnings per share guidance range.

FX is a near-term reality that has gotten significantly worse.

We're doing our best to offset FX impacts with productivity savings and pricing, while continuing to make investments in brand equities, innovation, trial, and value equations.

We think we've struck a reasonable balance of investment to improve the long-term health of the Business, even though it requires we moderate our short-term earnings outlook, including foreign exchange.

We're reducing our core earnings per share guidance to a range of down 3% to 8% versus last year's core earnings per share of $3.76.

This earnings per share guidance includes headwinds of 8 to 9 percentage points from the combined impacts of beauty, deal and transition expenses -- these are for the businesses moving out to merge with Coty; Venezuela de-consolidation; lower operating income; and a higher -- non-operating income, excuse me -- and a higher tax rate.

Adjusting for these items, our guidance translates to modest core earnings per share growth, with meaningful growth excluding foreign exchange.

Our key assumptions on items below the core operating profit line have not changed.

The core effective tax rate should be about 24% for fiscal 2016, about 3 points higher than last year, roughly a 4-percentage-point headwind on core earnings per share growth.

The core tax rate in the back half of the fiscal year -- of last fiscal year -- was below 19%.

We expect a tax rate of closer to 24% in the back half of this fiscal.

We continue to expect non-operating income will be a 2- to 3-percentage-point drag on core earnings per share growth, mainly impacting the fourth quarter.

We had nearly $440 million of non-operating income gains last year, with over $400 million coming in the second half, including $355 million in the fourth quarter.

We expect modest non-operating income gains in the back half of this fiscal.

With most of these impacts hitting in the back half, the core earnings per share growth headwind across Q3 and Q4 is roughly 13 percentage points, or about $0.24 per share.

FX adds another 7%, or about $0.12 per share, headwind in the back half.

So, while the midpoint of our new guidance range points to roughly a 15% core earnings per share reduction in the back half versus last year, or roughly flat, excluding the tax and non-operating headwinds, and up mid-singles if we adjust for currency.

Given very strong progress to date, as I've said before, 101% in Q1 and 117% in Q2, we're increasing our free cash flow productivity target from 90% to 100% of earnings.

We continue to expect to retire shares at a value of approximately $8 billion to $9 billion through a combination of direct share repurchases and shares that will be exchanged during the third quarter in the Duracell transaction.

In addition to the shares we expect to retire, we expect dividend payments of more than $7 billion; in total, $15 billion to $16 billion in dividend payments, share exchange and share repurchase.

We now expect all-in GAAP earnings per share to be up approximately 42% at the center of our guidance range.

Going forward, we are committed to balanced top- and bottom-line growth, and strong free cash flow productivity, to drive total shareholder return.

We will continue to address value gaps if and when they emerge.

We will defend our positions.

We will invest behind brand trial and awareness programs, and of course, consumer-preferred innovation.

We'll do everything we can from a productivity standpoint.

We'll smartly invest to accelerate top-line growth.

We'll continue delivering on our commitment of strong cash return to shareholders.

David and I both look forward to talking with you at CAGNY about the plan, and priorities to deliver balanced growth and value creation beyond this fiscal year.

I'll provide an update on our productivity progress and the significant opportunity that remains in front of us, which can help fuel investment and growth.

David will discuss our strategic choices, how we plan to sustainably improve top-line growth, and the organization and culture changes we'll make to accelerate our progress.

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 posted on our website, www.PG.com following the call.

With that, I'd be happy to take your questions.

(Operator Instructions)

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

Good morning.

Jon, I wanted to focus a bit more on the top line results.

Q2 was a solid sequential improvement despite some of the retail inventory cuts you mentioned in the release.

Your full year sales guidance on org sales looks like it's moving up given the all-in guidance is unchanged despite the greater FX pressure.

So what's driving that more favorable expectation?

Are the factors behind it more longer term in nature, temporary to this year?

Then also, can you help explain -- if we look at Nielsen scanner data, we haven't seen improvement in the US, Europe or emerging markets.

So, if you can help explain the dichotomy between the improved expectations but a lack of scanner data sales improvement, that would be helpful.

Then last, last quarter you mentioned second half organic sales growth would likely be above Q2.

Is that still the case?

Thanks.

So first of all, Dara, we have maintained our organic sales growth guidance for the year, which is flat to low singles.

So there's really no change in the overall outlook, which as you rightly say was for acceleration in Q2 and then further improvement in the back half of the year.

As I mentioned, the extent of that improvement in the back half of the year is going to be potentially impacted by what happens with access to dollars for imports into Venezuela.

It will obviously be impacted by other things as well.

But even with that, we remain confident that we can continue to grow in the second half.

In terms of the businesses in the US and the comparison to scanner data, as you know, we pretty dramatically accelerated our growth in the US from minus 2% in the quarter before to plus 3% in this quarter.

I mentioned that there was about 1 point of sales that's ahead of consumption.

That's on things like the ProShield razor that we shipped into the market.

But still, even adjusting for that acceleration as we expected.

It's getting increasingly difficult to look only at scanner data as a measure of a market's health or a business' health.

That's particularly true in markets like China, where a huge portion of the growth of the market is coming in the e-commerce channel, which doesn't cross a scanner.

You have some of that same dynamic in the US.

So, for example, the Shave Club sales, depending on how they're executed, may or may not cross a scanner.

I think that's part of the dichotomy.

But generally, if we look across several quarters to dampen out some of the short-term volatility and the noise, we continue to be pleased and encouraged by increasing strength in the North American business.

We expect it to grow going forward.

Your next question comes from the line of Wendy Nicholson, Citi Research.

Hi.

First question just on housekeeping.

I think you said China, your sales were down high single-digits.

Do you have a sense for what the category growth was, just so we can compare that?

Then second question, more broadly on pricing, I guess two components.

Number one, in emerging markets, where we continue to see currencies devalue like Russia, like Brazil, how far are you into your price increases?

Are you going to continue to take price increases to keep in line with inflation or what's the outlook there?

Then second part of that, with regard to pricing, in North America, it's surprising to me that there is still so much positive pricing across the whole sector in light of the lower commodity prices.

I don't know whether that's just a reflection of a stronger US consumer or more innovation.

But if you could comment broadly on your outlook about pricing in North America and whether you think the price increases you've taken are sustainable.

Thanks.

Thanks, Wendy.

So first, China.

It depends on the individual category, but the market growth rates range roughly from, call it, 5% to 8%, so mid to high singles across the categories.

As I mentioned -- we see significant opportunity remaining in China: with those very attractive growth rates, albeit somewhat slower than they were two and three years ago; with the conversion from a manufacturing to a consumption based economy; with the dramatic potential that exists as a result of larger family sizes from the possibility of two children versus just one; and with the premiumization of the market, which I indicated, admittedly we have not been as agile as we need to be in exploiting.

But really, as I mentioned, I was there last week.

I was there a week before the Christmas holidays.

I walk away with a tremendous sense of encouragement while acknowledging that we have work to do.

In terms of pricing, the pricing dynamic should continue to be a favorable contributor to top line growth as we move forward, even if all we do is take forward the price increases that have already been executed.

They're not fully annualized yet.

So that should continue to be a positive on the top line.

The pricing calculus or algebra is fairly complicated.

You really have to look at the combination of currencies, commodities and competition to determine a course of action going forward in any individual product category or market.

The sum of those three things is very different depending on what markets you're in, as influenced by both currencies and by competition.

In general, the companies in our industry continue to price at some level for foreign exchange.

I mentioned in our prepared remarks that we expect our ability to price to be somewhat lower than it has been historically.

We'll make up for that over time with productivity and other savings.

In the US -- first of all, the commodity impacts aren't as significant as you would assume just looking at the headlines on oil prices, for example.

If you look at everything from diesel to resin to other inputs that are derived from the petrol complex, while the pricing benefit or cost reduction has occurred, it is not anywhere near the level yet of the crude price reductions.

So I think that's a potential source of disconnect as people think about this.

Generally, we're taking pricing behind very strong product innovation.

We're looking to improve the strength of our overall value equations, the combination of pricing, product performance, consumer usage, experience aesthetic.

Done in that way, I think that continues to be a contributor to growth and value creation.

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

Great.

Thanks so much.

I just had a question on SG&A and reinvestment levels.

So our -- we keep track of the moving pieces you share each quarter.

It looks like reinvestment in the business decelerated a bit in the second quarter.

Then also to tie to your full-year outlook, SG&A probably needs to go up in the back half.

Can you just tell me if that's on the right track?

If it's going up, what the specific areas of reinvestment will be versus the pace of the overhead take-out?

Thanks.

So we expect, for example, our media spending to be up double-digits in the second half versus year-ago.

So as reinvestment as compared to the prior year, that will definitely be increasing.

As we look at those choices, we're obviously not encumbered by the math.

We're looking at the value creation potential that exists behind those investments in both the short and importantly the mid and longer term.

We'll invest where we have opportunities to do so.

So I think that you should think of the level of investment, reinvestment sequentially increasing as we go forward.

I think -- I know that will be the case this fiscal year.

I expect that will be the case next fiscal year.

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

Thanks.

Just a follow-up on that.

Jon, it seems as though -- you've delivered upside on the FX-neutral earnings growth year to date, particularly today.

Yet, you're going to the low end of the range.

Is that because of some of the incremental investments you're talking about?

Is that ad spend incremental to what you were thinking before?

Then separately, just thanks for the color on the FX piece.

It's a pretty wide range if we look at that over the balance of the year in terms of the FX impact, it's probably something in the neighborhood of like $0.20.

So, I guess I'm just wondering what drives those differences in outcomes from an FX standpoint?

Just so we understand where we need to go within that range.

Thanks.

In terms of the over-delivering and then maintaining the constant currency guidance, yes, that definitely is reflective of additional investment.

I mentioned in our prepared remarks that in North America, for example, we have increased our budgets by about 100 basis points since the start of the year, most of that occurring relatively recently.

That's driven both by our encouragement from a response standpoint to the spending that we have in the market and the acceleration of growth, particularly in the US.

So, yes, your interpretation is correct in terms of the various moving pieces.

The guidance range is really reflective of what the underlying constant currency range of outcomes could be.

Then we just apply the current FX math on top of that.

There's a lot of -- we're operating in a more volatile environment than we ever have.

I think our range is reflective of that reality, as it should be.

Your next question comes from the line of Chris Ferrara with Wells Fargo.

Thanks.

Jon, just to make you rehash this a little bit, but I guess I'm not totally understanding why the back half EBIT would decline; right?

So I think I understand the below the line impact of tax rate and other, but it looks like FX probably gets less bad in the back half of the year.

I think you said that, right?

Yet your guidance range really implies a deceleration in EBIT, so -- and a reasonably substantial one from this past quarter.

So I guess correct me if that's wrong, but do you guys expect the gross margin acceleration to slow in the back half of the year maybe?

I guess what might I be missing?

Some of those impacts in that 8 to 9 point impact of things like Venezuela de-consolidation and the beauty transition costs and the non-operating income difference are all in the EBIT line.

So that's a significant driver of lower EBIT comparisons second half versus first half.

As I mentioned, most of those hit the second half disproportionately.

In terms of currency, there is some let-up but not a lot in the back half.

I expect our margin progress to continue to be reasonably strong, certainly constant currency on both gross and operating.

So it's really -- the comparison is most dramatically driven by FX and by things like the Venezuela de-consolidation, the transition costs associated with the beauty business that are not in discontinued operations.

For example, if we have employees in our global business service organization that are working to stand up to the new Company in terms of building the systems that are required, et cetera, those are employees that are going to remain with Procter & Gamble; therefore, their costs are not in discontinued operations, they're in continuing operations.

Then as I mentioned, the divestiture gain in non-op is a big driver as well.

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

Hey, Jon, good morning.

Good morning.

A couple questions.

Just a housekeeping one.

Do you still think Duracell is going to close roughly any day now?

Is Coty still set to close July/August?

Then my real question is, when does market share really start to matter?

Because I know you've kind of sort of down played it and said, we're about expanding categories and protecting the structural integrity of our categories.

But it just seems that some of the share declines that some others mentioned, especially in some of the emerging markets are pretty significant.

So can you just tell me like if you're going to have a point in time where the focus is going to shift and you're going to start focusing on market share again.

Then, just in the quarter, what percentage of the business is gaining market share?

Thanks, Bill.

Duracell, as I mentioned earlier, should close this quarter.

The exact date will depend on work that still needs to occur.

But that's on track.

Coty is currently scheduled to close as well in the timing that we initially indicated, which would be in the back half of the calendar year.

So no changes in either of those, both progressing towards the desired end points as we would hope.

In terms of market share, our objective is balanced growth and value creation, with the growth objective being over time at to slightly ahead of markets.

So market share does matter but particularly in a time when we need to restore structural economics in response to currency moves, we can get ourselves in big trouble if that becomes the driving metric.

So as we've said, we're prepared to lose some share in two situations, one is where we're restoring a structural economic attractiveness.

Having a higher market share with a negative gross margin isn't helpful to anyone.

Also where we're doing some of the portfolio cleanup that I mentioned on the core categories, where we'll be in a much better position longer term from both a growth and value creation standpoint if we can focus on the parts of our portfolio that are really working for us.

So if you look at the percentage of business that is holding or growing share, it's about 45% globally.

Currently, we would expect that to be higher going forward.

In the US, where we're further ahead in the strengthening of our portfolio, et cetera, we've got about 60% of the business holding and are growing share.

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

Thanks.

Good morning, everybody.

I wanted to go back to China, Jon.

So, does the sales growth guidance for the back half of the year anticipate an improvement in current trends?

Then related to that, given the time that you talked about being in the market, do you think it's realistic you can be competitive in all the categories in which you compete today?

The current guidance does expect an improvement in China in the back half.

That should be very doable, just based on the math alone, in other words, the annualization of some of the changes that we made in our go-to-market and inventory levels in the back half of last year.

So we do expect that will improve.

Again, as I said, our view on China is an opportunistic one, not a pessimistic one.

We really think that there's significant continued opportunity there, both top and bottom line.

I think -- we picked the categories that we're going to compete in, in the new portfolio based on our view of our capability to be more than competitive, to win.

These are categories that we have won in.

We're global leaders in almost every single one, I think 7 out of the 10.

We're among the leaders in the balance.

There's a margin structure that allows for significant investment and growth in each of these businesses.

These are our higher margin businesses.

They're businesses that importantly leverage our core capabilities as a Company.

So they've been deliberately chosen for success.

Your next question comes from the line of Steve Powers with UBS.

Thanks, Jon.

So, I guess on the one hand, I think we're all very pleased with the return to positive organic growth, especially alongside the strong cash productivity and margin progression that you called out.

Then on the other hand, volumes were still down 2%.

I guess 1%, if I exclude the businesses you've chosen to exit.

But negative essentially across the whole business nonetheless.

Market share sounds like it was down in aggregate.

So I guess just some further comments there would be helpful in terms of how and when you're likely to come out of this negative volume phase?

Because if I go back over the last 15 years or so, we're sort of in this anomalous period where last year and sounds like this year, we're in negative volume territory.

The only time that's ever happened was the financial crisis.

So I guess again, how and when can we inflect positive on that key volume number?

Thanks.

So the two drivers of the volume reduction, one as you indicated is the portfolio cleanup within the core categories that are still reported within continuing operations, and as you rightly indicated that's had about 1 point worth of impact.

The other is the market reaction from a consumption standpoint and in some cases the share price evolution as we take pricing to offset foreign exchange impacts in large devaluation markets.

So if you take Russia or the Ukraine as an example, where devaluation has been 70%, 80%, 110%, we have negative gross margins.

We need to price over time as well as do everything we can from a savings standpoint to restore those margins of at least to a positive level so that growth is meaningful.

During that process both at a market level, markets tend to contract in response to higher price points and sometimes from a share standpoint and Russia and the Ukraine are good examples where we're competing against strong European competitors.

In the case of Russia, Japanese competitors as well.

Sometimes there's a modest share impact that comes with the pricing that we deem necessary to take.

We are not prepared to lose share indefinitely.

Our history in this area is that we -- it takes six to nine months to work your way through this.

Some of the pricing that we've taken has been recent because a lot of the devaluation has been recent.

So I haven't actually looked at it quarter by quarter to see, what's the quarter where volume will re-inflect positive.

We'll have to work our way through this pricing.

I don't believe -- go back to the comments on market share.

We fully intend to grow at market growth rates or slightly ahead of market growth rates over longer periods of time.

That requires volume growth.

I mentioned markets growing 3%-ish.

We're not going to be able to take 3% pricing indefinitely, nor is that our intent in any way.

So we will -- also, we're not -- in markets where competitors don't respond from a pricing standpoint, remember, we, because we're the market leaders, typically have to lead or nothing happens.

So we're exposed for that period of time.

Competitors can take six to nine months sometimes before they respond or they cannot respond at all.

In the cases where they don't respond to the levels that are necessary to maintain our value equation comparisons, or where they don't price at all, we will reduce price.

We're not going to be uncompetitive.

We're not going to lose share on a sustained basis.

Your next question comes from the line of Nik Modi with RBC Capital Markets.

Good morning, guys.

Just two quick questions.

Jon, can you maybe provide just a quick bridge on the volume?

When you talk about the US going positive and helping us reconcile how you got to the total consolidated number, just so we get a geographic viewpoint.

Then the bigger picture question is, as you push responsibility closer to those 10 business leaders, how long does that take to really start affecting business decisions and on-the-ground results?

I'm trying to get a sense of what the time lag typically you would expect after making a move like that?

Thanks.

Thanks for the bigger picture question, Nik.

That's actually something we'll spend some time talking about at CAGNY.

It's interesting, the market on a relative inflection point -- standpoint that's growing the strongest, which is the US, is one where these changes were made first.

They were made about a year ago, were basically -- in addition to the 10 categories and their ability to operate somewhat independently, we've sectorized our sales force.

So we're going end-to-end from the GBU all the way through to the customer with dedicated sales support.

We're not moving people as rapidly across categories.

The GBUs have full decision rights on the amount of resources that are supporting their business from a go-to-market operations standpoint, which has led to some choices quite frankly to increase coverage.

In some channels, it's led to choices to hire mid-career talent that has experience in a category that extends beyond the experience of our current employees.

So it's having a dramatic impact.

Every change has a slightly different time line in terms of, one, it gets reflected in business results but I think we can -- I think we're making good progress in this area.

I think we have more to do.

Again, we'll talk about that at CAGNY.

I don't think it takes a long period of time to make a difference.

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

Hi, good morning, everyone.

Going back to Nik's questions, which I don't think -- at least I didn't hear the response, is that could you break out geographically the growth at, say, in emerging markets between -- also between volume and pricing?

Secondly, it is true that volume has been negative four quarters in a row.

To what extent you feel that this has been problems in the way you execute pricing as it happened in Russia and Mexico and whether those execution issues have been resolved?

My understanding is that you have removed some of the heads of China and Latin America.

All these changes are over.

Shall we expect pricing to be less disruptive going forward?

Thank you.

So first, sorry, I did miss the first part of Nik's question.

Thanks for bringing that back.

The relationship of organic volume to organic sales in the October/December quarter, developed markets organic volume was plus 2%, organic sales were plus 3%.

If you look at developing organic volume was minus 6%, organic sales were flat versus year-ago.

If you look at those comparisons, they are indicative of exactly what I've said a couple times in this call in terms of what's driving the volume reductions.

It's pricing in developing markets to offset FX.

Where you don't have as much of an FX impact, for instance, in the developed markets, our volumes grew at 2% on the quarter.

In terms of -- you mentioned Mexico can as an example.

We actually had a very good quarter in Mexico.

The changes that we've made there we're very pleased with.

Organic sales were up 4% in Mexico in the quarter.

Remember, I talked about the tissue/towel impact or the fact that tissue change in the portfolio which has negatively impacted organic sales, that's in Mexico.

Excluding that, Mexico organic sales were up 8% in the quarter.

Volume was up as well.

So again, there's a bit of noise as we work through the combination of the portfolio and foreign exchange.

But we expect volume will grow as we go forward and share will also be something that becomes increasingly attainable.

Your next question comes from the line of Joe Altobello with Raymond James.

Hi.

Thanks.

Good morning.

First question is on Brazil.

I apologize if I missed this, but what were the Brazilian sales in the quarter?

I think last quarter was down 12%.

You were hoping for a little bit of bounce back this quarter.

Secondly, on commodities, Jon, you mentioned earlier that you're not seeing the benefit that some would think you would given the move in oil but obviously it is a positive for you this year.

So what kind of boost do you see from commodities to earnings this fiscal year?

Thanks.

Thanks, Joe.

Brazil, for the quarter, organic sales were up 11%, that compares to minus 12% the prior quarter.

I think that again is another good example of the volatility that's going to occur here as we get the right pricing set in the market and as well, our ability to pull that through and generate growth on a sustainable basis.

So again, Brazil was up 11% on the quarter.

In terms of commodities, looked at as a single variant, so just the reduction of input costs, that impact is about $500 million on the fiscal year.

Some of that we anticipated going into the year, of course, but that's the amount.

I would argue that, in total, in other words, inclusive of consumption impacts in oil producing countries where there's been massive disruption and instability, if you think about markets like Saudi Arabia, markets like certainly Venezuela, I would say that the net impact in our P&L is likely neutral to negative but the pure cost impact is $500 million.

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

Thanks.

Good morning.

Jon, I just wanted to follow-up, since you had highlighted the changes made both in Mexico and India and the not worth gaining sales, if they're not worth anything.

I think you said that costs about 1 point to organic growth in the quarter.

If that's right, is that the expected impact for the next two, three quarters and is this kind of a program that may accelerate as we move into FY17?

The amount is the correct amount, you're right.

It was about 1 point on the quarter.

We would expect -- we really started this work in terms of execution in July/September, maybe some in the latter part of last fiscal year.

So we would expect this continue through the next couple quarters, but then it should dissipate going forward.

There may be a few additional choices we need to make but in general, you'll see it for the next couple quarters and then it should start to dissipate.

Your final question comes from the line of Ali Dibadj from Bernstein.

Hey, guys, thanks for fitting me into the call.

Believe it or not, I still have a few questions.

One is just go deeper on volumes.

Look, your compares clearly get easier over the next couple quarters, so that should certainly bode well.

But can you elaborate a little bit more and perhaps even quantify the inventory management change by retailers and the trade term change that you mentioned in the press release, which is mentioned as a negative.

Particularly in the context of what you said on your prepared remarks, which is that sales being slightly ahead of consumption.

So give us a sense of the ongoing effects of those if you could?

Number one.

Number two is on your FX kind of multiplier between the top-line and the bottom-line impact, why did it change so dramatically versus your 2016 guidance?

So what I mean is that in July, your FX impact was going to be negative 4% to 5% top line, negative 3% to 4% bottom line, so kind of a less than 1 ratio.

But now it's a negative 7% on top line, negative 10% on the bottom line, so very quickly shifting to a greater than 1 ratio, despite your efforts to localize more, et cetera.

So is that all Argentina devaluation?

Or is there some forecasting math that I'm not getting?

Or can you give us a sense of how you're business is structured or levered differently than we would expect it, because it's big switch in a short period of time?

Then third question is more in terms of running these conference calls.

Should we infer that the decision was made, because I know you guys were thinking about this, that your CEO will not be on these quarterly calls and will only be at things like CAGNY and the annual calls like [AG] was doing?

Or are you still in the deciding mode?

Thanks for the two questions.

On the FX multiplier, as you can imagine the different currencies that have -- we have no ability to forecast which currencies are going to move and how much they're going to move.

The top and bottom line relationship between currency movements is very different depending on the market.

It depends on how the market's sourced.

It depends on the balance sheet of the market.

I mentioned balance sheet revaluations.

So for example, in Argentina, we talked about the balance sheet revaluation that occurred there.

So it's really a function of what actually is happening in the marketplace country by country, how we source the markets and what the balance sheet exposure is in different markets.

So I guess I'm saying we don't really have a good ability to forecast exactly what the currency impact is going to be on either the top or bottom line.

Frankly, we spend very little time thinking about the relationship between the two.

In terms of the comments on trade inventory reduction, that is largely a China dynamic.

I've mentioned in prior calls that our inventory levels were too high, particularly in the wholesale channel in China.

As a result, our pricing was too low, which was driving a bit of distortion and difficulty for our distributors.

So we have made some choices to address that and that has a short-term volume impact.

That's really what that comment was designed to indicate.

Relative to senior executive engagement with the investment community, we tend to be fully engaged with the investment community through a combination of quarterly conference calls, investment conferences, meetings here in Cincinnati.

David will be on the road frequently as well interacting with the investment community.

So again, our strategy is one of very high engagement.

Ladies and gentlemen, that concludes today's conference.

Thank you for your participation.

You may now disconnect.

Have a great day.