寶潔 (PG) 2017 Q1 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'll 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 useful 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'll turn the call over to P&G's Chief Financial Officer, Jon Moeller

Good morning. I am going to be relatively brief today. Our results a fairly straightforward. And we're together soon for analyst day, when we will go into much more detail on our progress and plans.

Our first-quarter results marked a good start to the new fiscal, though work and opportunity remain. One of our key priorities has been to accelerate top-line growth. Organic sales for the quarter grew 3%. This includes about a 1 point drag from the combination of the rationalization and strengthening of work we are doing within the ongoing portfolio. And the impact of reduced finish product sales to our [Benefield and subsidiaries].

Top-line growth was broad-based across categories and across markets. Organic sales growth in the US progressed from 1% in the first half of last fiscal year, to 2% in the second half, to 3% in the quarter we just completed. Growth in China minus 8% to minus 2% to plus 2% over those same time periods.

We have been making sequential progress in each of our largest categories. Baby Care minus 2% flat to plus 2%. Grooming plus 2% to plus 3% to plus 3%. Fabric Care plus 1% plus 1% to plus 5%. And Hair Care minus 1% to flat to plus 2%.

[Last] September organic sales grew in each reporting segment and in all 10 product categories. [Still], as l said before work and opportunity remain. Hair Care and Baby Care, two of our largest categories, were both up 2% but below the rates of market growth in these categories. These businesses, along with the Grooming business in the US represent multiple opportunities for further top-line acceleration.

Organic sales grew in each region and in a nine of the 10 largest markets. Hereto, opportunities remain. Sales in the UK, which continues to be very challenging highly promotional market were down 2%. Organic sales in China and Russia were both up 2%, but again, below the pace of market growth. So, in summary, progress with more work to do.

Sales growth in the quarter was volume driven. Organic volume was up 3%. Pricing and mix were each essentially neutral for organic sales growth. All-in, sales for the Company were in line with the prior-year, including a three point headwind from foreign exchange.

As we move forward, progress will not come in a straight line. There will be quarter-to-quarter volatility. Comps will get more difficult. We need to manage significant geopolitical and economic volatility in markets like Egypt, Nigeria, Argentina, even the Philippines. And of course, our competition is not standing still. We still have work remaining and some categories and markets to get our brands back to market levels of growth. These opportunities needed to be addressed category by category, market by market, channel by channel. We're after it, but it won't happen overnight.

Moving to the bottom line, quarter earnings per share were $1.03, up 5% versus the prior year. Foreign-exchange had a negative 7 point headwind on the first-quarter earnings. On a constant currency basis, core earnings per share were up 12%. Core gross margin increased 50 basis points versus the prior year. On a constant currency basis, core gross margin was up 130 basis points. Including 190 basis points of productivity improvement.

Commodities were a modest [hurt to gross] margin in the quarter. Feedstock costs for propylene, ethylene, and tropical oils are up as much as mid-teens, since we set our initial budgets for the year.

Wage inflation is also an increasing challenge in many developing markets. Productivity improvement contributed 270 basis points of operating margin benefit. We reinvested a significant portion of those savings in product and packaging innovation, media reach and continuity, sampling, R&D, sales coverage, and targeted consumer value adjustments in order to accelerate our top-line growth. Core operating margin as a result, was up 20 basis points for the quarter. On a constant currency basis, core operating margin was up 120 basis points.

The core effective tax rate was 23%, about a point below last year's first-quarter level. This includes the adoption of new accounting standards for share-based compensation, which reduced the quarterly tax rate by about 3 points. About $0.04 per share benefit to core earnings per share. The impact on the balance of the quarter [is] this fiscal year from this accounting change is expected to be minimal. But fiscal year impact of this change was assumed in our initial guidance for the year.

All in, GAAP earnings per share were $0.96 for the quarter, also up 5% versus the prior year. We generated $2.3 billion in free cash flow, with 85% free cash flow productivity. Returning $2.9 billion to shareowners, $1.9 billion in dividends, and $1 billion in share repurchase.

Our share repurchase flexibly was limited in the first quarter due to trading restrictions related to the Coty transaction. The day after the quarter ended on October 1, we reached a very important milestone in our portfolio transformation program. Closing the beauty transaction with Coty. This marks the completion of the most significant portfolio transformation in P&G's history.

We have created value for shareowners every step of the way. Including over $4 billion versus our keep price in the beauty deal.

While we will be supporting transition efforts for some time, we can now begin focusing our efforts on the 10 core categories we identified two years ago. The market in each of these 10 core categories is large, and is growing between 1% and 7% per year. These are structurally attractive categories where P&G holds leading market positions.

Our businesses in these categories have historically grown sales a point faster than the Company. And held margins that are 2 points higher than the Company average. They leverage P&G core strengths of consumer understanding, innovation, branding and go to market and benefit from the Company's scale.

Consumers use these categories on a frequent basis. Typically daily. Purchase choice is driven more by product performance against a clear consumer need or a job to be done than by self-expression or fashion trends. These categories lend themselves to innovation, which creates noticeable superiority.

We'll compete within these categories, from the top of the market building down across middle-priced tiers that are profitable and growing. We will not compete in the lowest price tiers which are generally commoditized where no money is made. We will however, serve cash constrained consumers with smaller, more affordable pack sizes requiring less cash outlay per purchase.

We are in the midst, as you know, of exiting unprofitable commoditizing price tiers, forms, and segments, enabling us to focus our resources on forms and segments that are profitable and growing. Our objective for the new 10 Category Company it's very clear. Balance, top, and bottom line growth but delivers total shareholder return that places P&G consistently in the top third of our peer group.

I've spoke earlier about the reacceleration of our top-line. And we will spend more time on this on analyst day. This is critically important. But productivity improvement in cost savings are also a necessity in achieving our TSR objective. They provide fuel for investment and innovation, advertising, sales coverage, trial and sampling to grow our brands and grow our categories and build margin.

Top and bottom line growth are not separate endeavors. They reinforce and fuel each other. They're part of the same echo system. They live together and depend on each other, they can't be separated. Last fiscal year, we completed our first five-year productivity improvement program, accelerating exceeding each of our cost savings in [aroma] reduction objectives.

We saved over $7 billion in cost of goods sold. We've reduced manufacturing enrollment by 22% over the last four years. This includes new staffing necessary to support capacity additions. On a same site basis, manufacturing enrollment was down 27% through last fiscal with additional progress planned this year. We have reduced the number of manufacturing platforms we produce with by 30% over the same period. Over the last five years, we have reduced non-manufacturing roles by nearly 25%. This excludes the impact of divestitures.

Including divestitures, we have reduced overhead roles both by about 35%. As we have decrease the size of the organization, we've also simplified it. We have gone from managing the global business through 50 market cluster organizations, to just 25. We have simplified our network of suppliers. Reducing, for example, commercial agency support from 6000 vendors to about half of that.

Including re-investments in innovation, sales coverage, media, and sampling, productivity has enabled us to deliver constant currency gross and operating margin improvement in high single to double-digit constant currency core earnings-per-share growth, in each of the last four fiscal years. We improved gross and operating margins by triple digit indices, both including an excluding currency in FY16. And we continue the trend in Q1 with double-digit constant currency core earnings-per-share growth. And triple-digit constant currency margin expansion.

We're driving productivity improvement up-and-down the income statement, and across the balance sheet. Inventory days are down about 10 days over the last five years. Payables days are up more than 30 days, enabled significantly by our supply chain financing program.

We've made significant progress, and we have significant opportunity. Our strong track record and our line of sight to additional opportunity, inform our intent to save as much as another $10 billion in cost over the next five years.

We expect to reinvest a significant amount of the savings in R&D and product and packaging improvements, in sales coverage, and in brand awareness and trial building programs to deliver balance top and bottom line growth, which brings me to fiscal year guidance. We are maintaining our organic sales and core earnings-per-share outlook for this fiscal year.

The first-quarter was a good start. But comps get more difficult, and we continue to face a relatively slow growth volatile world. We're expecting organic sales growth of around 2% for the year. This includes between 0.5 point and 1 point of headwind from the portfolio rationalization and strengthening work within the ongoing 10 product categories. It also includes the headwind from lost sales to our Venezuelan subsidiaries in the first half of the fiscal year.

We expect FY17 all in sales growth of about 1%, including around 1 point drag on growth from the net impact of foreign exchange and divestitures. Our bottom line guidance for core earnings-per-share growth in the mid-single digits. This range reflects the volatility of the markets in which we compete. And it reflects the investments we tend to make in the business to accelerate organic sales growth in a sustainable long-term market-constructive and value-accretive way.

We continue to forecast a reduction in core nonoperating income in FY17, due to lower gains from minor brand divestitures. The core effective tax rates should be roughly in line with the FY16 level.

All-in GAAP earnings-per-share should increase 45% to 50% including the significant one-time gain from the beauty transaction with Coty that will be recognized in the October/December results. Also included in GAAP earnings-per-share are approximately $0.10 per share of non-core restructuring charges and $0.13 per share of charges related to early debt retirement that we initiated earlier this month.

At current rates and prices, FX and commodities combined are about $0.12 per share headwind to FY17 earnings. Significant currency weakness, commodity cost increases, or additional geopolitical disruptions are not anticipated within this guidance range. We expect adjusted free cash flow productivity of 90% or better.

FY17 will be a year of significant value returned to shareowners. We expect to pay over $7 billion in dividends. We reduced outstanding shares by $9.4 billion in the transaction with Coty. And we expect to make over $5 billion of direct share repurchase. In total, about $22 billion in dividend payments, share exchanges, and share repurchases this fiscal year.

We look forward to seeing many of you at our analyst day here in Cincinnati on November 17 and 18th. David Taylor will lead this session. We will have nearly all our top leadership team available to meet with you on the evening of the 17th, with many of the discussing their businesses during the management presentation on the 18th along with David Taylor and myself. If you can't make it to Cincinnati, we hope you join the webcast of the presentation on the morning of the 18th.

That concludes our prepared remarks for this morning. I would be happy to take questions.

Thank you Sir.

(Operator Instructions)

Steve Powers, UBS.

Jon, good morning.

Morning Steve.

So clearly a good start to the year. And as you say, a fairly straightforward quarter, all things considered. But now we look forward. Really the question I have been [fielding] for the last hour or so is where do we go from here?

I know you don't want to give quarterly guidance. And I don't expected you to. Just given how significantly the year-over-year comps ramp in Q2, and really how significantly the volume comps ramp all the way through Q4. I was hoping you could help frame for us your expectations for the [O&D] quarter? And really the cadence of organic growth over the balance of the year, fully appreciating your not in a straight line comments.

Because the optimist in me wants to believe that we will start to see incremental returns on all this investment you've been in the last nine months. But then the pessimist in me says this Q1 momentum may be short-lived as Q2 rears its head.

So again, I [no its not the comp quarters], especially in this environment, but maybe just a little more context around how you're measuring returns on the investments you made so far. Where you are seeing the biggest bang for the buck. And again how you're thinking about top-line progression over the balance of the year. Thanks.

Thanks Steve. I think you said several important things, or repeated several important things. One is not a straight line, two is increasingly difficult comps. Obviously we start the year with a [3] and provide guidance for the year at [2]. There will be a quarter or some quarters below 3. We've also said that we want to exit the fiscal year closer to the rate of market growth in our category. Setting ourselves up for a strong subsequent year. And so that backs you in to the next two quarters being the more challenging ones, in front of us. That's really as far as I want to go in terms of specific guidance.

In terms of return on investments we are making, I think you see that. Both on the top-line and bottom-line standpoint, in the first quarter. I mean on a constant currency basis, very significant returns with 12% core earnings per share growth. 3% top line, we are reinvesting as we said we would; productivity savings. But as we also have said we would, we're going to continue to modestly improve margins. And that is the only recipe for sustained success in this industry, and we are intent on following it and so far are pleased with the results.

Nik Modi, RBC Capital.

Good morning everyone. Jon maybe you can help us, following up on Steve's question, just the cadence of the reinvestment or the investment. Both from a marketing and innovation perspective. Trying to understand which quarters are going to be heavy in terms of those investments and new product launches.

And then just a quick follow-up bigger picture. Kathy took over the R&D function a couple years ago. And usually when you have leadership changes in R&D, it takes a couple of years to fill the pipeline. So just want to get your assessment on what the upstream and the current pipeline looks like. In terms of on a scale of 1 to 10 how you would view it in terms of the immediacy of the new products actually hitting the marketplace.

Thanks Nik. I apologize in part for my first part of this response. But I really think on a daily basis, in terms of fiscal years, not quarters as you know. So I really don't even know from a marketing [spending] exactly what the breakdown on the plan is by quarter.

But I know that over the year, we're going to continue to reinvest productivity savings [supposedly] more significant as the year progresses. We've also said we want to increase our continuity of marketing spend and trial and sampling building programs. So I expect that statement to lead to relatively constant levels of increase across the quarter. But it's honestly a figure by quarter. I don't have currently in my head.

The second part of your question about the cadence of new product introductions, we have significant programs coming to market in the third quarter and another batch towards the end of the fourth quarter. In terms of new product launches, the second quarter will be relatively light. And honestly I've forgotten the last part of your question. But feel free to call me later today and I can catch you up on it

Lauren Lieberman, Barclays.

Thanks, good morning. Jon I was struck by toward the end of call you really emphasized some words like market constructive and value accretive way of reinvesting. So I was just curious about thoughts and actions in terms of consumer value adjustments as you addressed in the press release. And in general the status of your relative pricing. In some of your major categories and end markets. [A comp two by four] would be great.

Thanks, Lauren. I'm glad you picked up on that. This is important. In the new 10 category company, where we have leading positions across those categories, we become increasingly dependent on moving markets on growing markets. There are category country combinations where we have 60%, 70%, 80%, 90% market shares. So one more point of share isn't the margin of victory or defeat.

And that doesn't mean that shares is not important. Share is important. But we need to be growing markets, increasing the number of users, for our brands. And that's what our activity system is all set up to do.

So when you talk about, for example, increasing trial in sampling that point of market entry and point of market change with noticeably superior products, that moves markets over time. And being able to price behind superior innovation also moves markets over time.

What does not move markets is, for example, leading the march down on promotion spending. If you look at the quarter we just completed, price inclusive of promotion, was a neutral contributer to the top line. It's been a neutral to positive contributor to the top line for the last 24 quarters, been a positive contributor for many years. I think it's 12 in a row. So that's going to continue to be what we are going to emphasize, which is market accretive, market constructive, growth driving investments.

Now, having said that, we won't be successful in that endeavor and maintain our shares if we are uncompetitive. And so we will take moves where warranted to ensure that we're offering a competitive value proposition to consumers. We have made several of those moves in the last quarter. What moves happen in the future will be largely dependent on where others take us. But thanks for picking up on that point it's an important one.

Ali Dibadj, Bernstein.

I want to build on that. Because despite the language of market accretive and market constructive, your last two quarters have clearly shown a shift towards volume growth versus price mix. I get the long-term trajectory from a top-line perspective hasn't been that great. Just now it's turning to look a little better again, volume being the drivers.

So how do you think about the balance of investments between innovation and add spend sampling and versus less than peer pricing on the top line? Because the perception we are hearing and you heard one of your competitors yesterday say it's effectively, the perception you're hearing from them and some of your other competitors is that it is just starting other price war. We've heard this from P&G before. It's going to be a [pure] victory or at least a fleeting victory for now.

So how do you get comfortable that's not going to be the case? You can't really control perceptions of competitors obviously, but the perceptions are already clearly forming. So how are you sure that's not going to be a phrrhic or fleeing victory for you guys. And how do you think about the competitors reaction to you guys clearly being a little bit more aggressive and pushing more volume?

Thanks Ali. We do expect -- we compete in a very strong industry with strong competitors. And we expect them to be working just as hard as we are to protect and build their businesses. And that's one of the factors that I cited in terms of guiding the 2% top-line growth on the year, against the backdrop of a 3% Q1.

In terms of ensuring that we are engaged in the activities that best support our brands and businesses, there's really not an aggregate answer to that. Though I am comfortable in aggregate, that's really a choice that's made at individual categories and countries.

And the way I think about this very simplistically, is in line with your question. If we grow business by, for example, significantly increasing promotion spending, that will be, I think you're absolutely right, a phrrhic victory. Why? Two reasons.

Number one, nothing proprietary, can be matched instantly. That's very different than a successful investment in innovation or equity building or sampling which can create unique advantage. Two, promotion spending by definition, almost by definition, is market dilutive. Whereas those other activities streams can be, if executed with excellence, market accretive. And that's a the better place for us to be in.

So I'm not going to give a formula or an algorithm. Not because I'm afraid of giving one, but simply because it doesn't exist at an aggregate level. That's now how we manage the Company. But the emphasis points will continue to be focused on long-term drivers of market growth and brand growth. Long-term drivers of new users to our brands, but short term competitiveness.

Bill Schmitz, Deutsche Bank.

Jon good morning. I'm going to try to sneak in two questions in one. So the first is, what you think organic growth grew almost more than 3 points faster that would've been implied by some of the track channel data. And so maybe there's a difference between [chip into] consumption.

And then on the gross margin side, it seems like most of the currency transaction pain, it probably peaked this quarter and is over. So how do you think about that trajectory? And how much of that money has to be reinvested back into the business?

Thanks, Bill. First of all, from a comparison of reported results to reported track channel trends, there are two big drivers within that. One of them is, simply in the amount of business and the relative the growth of that business that's moving online versus off-line. And to non-tracked customers like Costco as an example.

So in the US for example, that explains about a point of difference a full point of difference between the track channel sales growth numbers in our reported sales growth numbers. In China that number represents a 5 point reconciliation item between those two numbers. So that's becoming increasingly significant. And as you know, the relative growth rates there are very different. 30% in one to call it 3%, 2% in the other.

The other difference that exists in the US track channel reports, as it should, is the inclusion of the beauty businesses that were transitioned to Coty as of October 1. So, any of the share reports or sales growth reports that have come out to date rightly include that business. They won't going forward. And that dynamic in the US explains about 0.5 point of difference between the track channel numbers and the core, non-discontinued business numbers that we're reporting today. And that's another big part of the equation.

We do have one situation which I will make you aware of that falls into your last bucket. Which is timing differences that would affect the different quarterly reporting numbers. And that's in China where we transitioned our Hong Kong business to a new distributor. And so there's some pipeline fill to that distributor in the numbers on the quarter. Call it 1 to 2 points. Relatively small on a total Company basis. But that's about 1 to 2 point impact in China itself. So those are the primary drivers of the differences.

William Chappell, SunTrust.

Thanks, good morning. Jon, one thing you said in the prepared remarks is talking about hair care and grooming as opportunities for growth. And wanted to drill into that. Are they really what we have seen, especially in grooming over years, ups and downs. And you're the dominant player in the category.

Is that something that you can get back to reasonable growth? And as you look across all the categories, I mean do you think now with beauty out all of them can grow in line with expectations? Or are there some that will be laggards over time?

If you just look at the last two quarters on a global basis for grooming, we grew organic sales 3% in the quarter that we just completed. And the prior quarter we grew 3% as well. We continue to have significant opportunities on the grooming business for growth. Certainly, the developing market opportunity is very significant.

But there's opportunities, as we increase our relevance from a channel standpoint, as we increase our relevance from an opening price points standpoint, as we increase innovation across each of the tiers of the business, whether that's disposables, mid-price systems like Mach3 or at the high-end. So I do see that as a market that offers growth opportunities to us. And I feel that way about every business within the portfolio, especially relative to the metric of market growth.

The market growths are different across the categories. I mentioned in the prepared remarks, they range anywhere from 1% to 7%. So I would expect our businesses to grow at slightly different rates. And obviously the geographic opportunity is different by market. But in general, we've settled on this portfolio because it's one we feel we can grow and can do so profitably.

Dara Mohsenian, Morgan Stanley.

Good morning. Jon, you articulated that there is room for efficiency in your $18 billion promotional budget previously. That's obviously a very large bucket. So I was just hoping you could you give us a bit more granularity on if your efforts in that area are supposed to yield actual savings that are substantial that you can drop to the bottom line over time.

Or is your approach more to redistribute any of the potential efficiencies back to drive more effective spending, and hopefully higher top-line growth over time? And then also, when do you expect the promotional efficiencies to really ramp up and take hold from a timing standpoint. Thanks.

The idea here is to increase both the efficiency and the effectiveness of our spend across the elements of the marketing mix. And there many cases where promotion spending is a very effective use of our funds. And we will continue to support that spend.

There are other instances where both we and our retail partners would be better off redirecting that spending to other elements of the marketing mix. Focusing back again on how can we drive market growth in our categories and how can we drive shopping trips and basket size for our retail partners.

And it's really working together in a joint context to identify where those opportunities are. Where [today] we're potentially both engaging in activities that are both market and profit dilutive to both sides of the partnership. And looking for ways to redirect those funds in a way that can be more accretive to both sides of the partnership.

I do not see this as being a significant source of bottom-line help. I think we're much more in the camp of redirecting and redistributing to encourage market growth both in users and have that happen in a profitable way for both partners.

Olivia Tong, Bank of America Merrill Lynch.

Great thanks. Good morning Jon. Do you guys have any data to suggest you're attracting new consumers with all the sampling that you're doing? And how does that compare to your expectations? Are these consumers younger? Are they shopping more online versa brick and mortar? Or are they fairly similar to your traditional consumer?

And the just also, I'm not sure I hear it, but can you provide the price mix volume breakdown between developed markets and emerging markets? Thank you.

Sure so I'm just looking for data here. If I look at volume sales price mix and developed, volume is plus 4%, sales plus 2%, price mix minus 2%, for a net of plus 2%. That's obviously the all-in number. But organic volume plus 4%, sales plus 2%. And developing organic volume plus 3% sales plus 6%. And then those are the major drivers of what's happening there.

In terms of payout on sampling, I'm glad you asked that question. This is something that is typically -- if you can sample consumers at point of market entry or point of the market change, with noticeably superior products and categories where brand loyalty is relatively higher, the lifetime benefit from that relatively modest investment can be significant. But it is a lifetime benefit.

A consumer will take a period of time just to use the product that you've sampled them with. And so that's not an investment endeavor that we typically see immediate returns in. That's why, unfortunately, we got into a practice of reducing net spending because it was not producing, it never produces immediate short-term result. But it's really the area of spending that should be the last that we cut. Because of its importance in building users for potentially a lifetime of consumption.

So we are happy with our efforts to date. But it's an area of return that we will be monitoring and measuring for several years to come.

Wendy Nicholson, Citigroup.

Hello, good morning. Just to clarify, I think you called out another 1 point headwind on volumes this quarter from SKU reductions and minor brand divestitures and all of that. Is that a number that's going to be in perpetuity? Or do have a time certain in mind that headwind is going to end?

And then secondly, if I'm looking at the beauty business, and granted the 2% number is much better than we have seen. So that's great. But with Pantene up mid single-digits, and I know SK-II up strongly, I think that applies Olay is still really struggling. And maybe that's related to the first question which is the SKU reductions. And I know you've taken there. But what is the timeframe do you think for when Olay will return to growth mode? Thanks.

In terms of the drag on the top line from the portfolio focusing within the 10 categories. That is something that should start ramping down, in the back half of this fiscal year. I expect it to continue though at some level through probably the first quarter, first two quarters of next fiscal year. But I don't think it's at a level during that period when we're likely to be talking about it. So still significant through the second quarter, reducing insignificance sequentially from there.

In terms of the beauty business, we're very happy with how that's performing overall as you said, plus 2%. I mentioned sequential hair care acceleration that has occurred over the last 18 months or so. In the quarter, as you mentioned, Pantene was up mid single-digits. Head and Shoulders was up mid single digits. SK-II was up strong double digits. Our personal care business is doing fairly well. Olay is stabilizing. We're going to annualize coming up here in the not-too-distant future the SKU cuts that we made in the US, we should analyze those in the back half.

And we're just in the middle of redoing our entire counter system in China. And that includes some reductions in the number of counters to be more relevant in the channels that we want consumers shopping for Olay in. And to have a better overall shopping and consumer experience. So I expect that those two items, the SKU reduction in the US and the counter rationalization or redesign in China will continue to put some pressure on Olay. Call it through the balance of the fiscal.

Jason English, Goldman Sachs.

Good morning folks thank you for the question. Jon, you mentioned market growth ranging from 1% to 7% in hopes that you close the gap tracking close to market growth by the end of the year. Can you give us a sense of what all-in that market growth looks like on a weighted average category country basis?

And then, separately, even when we back out this 1 to 2 point to point benefit in China the sequential improvement is notable. So congratulations on that. I was hoping you could expound a little on the drivers of that improvement. Whether it be channel driven, category driven? Just give us a little bit more color.

Thanks Jason. In terms of an aggregate market growth number, it's likely somewhere between 3% and 3.5%. I say likely because as you know, that's a metric that lags. So I don't have data through September for example. It's been declining modestly quarter to quarter, six month period to six month period. But I expect we're going to be somewhere in the 3% to 3.5% range overall.

In terms of China, we've made some real progress on a couple of important businesses. And continue to do reasonably well. And some others with some work in the balance still to do.

If we look at Oral Care for example in China was up almost 15% on the quarter. That's driven by continued progress with the Oral-B brush, as well as the high-end premium Oral-B Paste that we launched a couple of quarters ago. Shave Care, to the point of the question is there growth in grooming that remains up 17% on the quarter in China. Our personal care business is doing extremely well in China as is SK-II. So that the entire skin and personal care business was up about 10% in the quarter.

Our biggest business in China, as you know, is our hair care business. It's a significant portion of the total. We continue to have four or the top leading brands in the market. In Head and Shoulders, Rejoice, Pantene and the Vidal Sassoon. I think those are respectively number one, two, four and five in the market.

We're essentially flat there versus a year ago. Part of that's driven by some new entrants into the market. One thing that clearly continues to be a strong business and offers some upside. But one business where we need to make much more progress is on Baby Care, which was down again double digits on the quarter.

We feel very good about portions of our portfolio. Our [pant offering], for example, is doing extremely well. We have some new premium taped innovation coming into the market in the next six to nine months. Which we are also very excited about. But that is a business that we need to keep working on.

In terms of channels in China, we're doing very well in e-commerce growing ahead of the market. Building share in e-commerce still not yet [for] the level of our brick-and-mortar shares. But improving significantly. We've stabilized the start of growing shares in the hyper and super part of the business which is encouraging.

We still have some challenges both in the wholesale market and in building distribution in some of the specialty channels that are among the fastest growing. But as you're rightly point out overall, real progress, and if I think about China long-term, a significant opportunity on both top and bottom line for the Company.

Kevin Grundy, Jefferies.

Thanks. Good morning Jon.

Good morning Kevin.

Quick housekeeping and then a broader question. So the housekeeping question, just because we have gotten a couple inquiries from investors this morning. The organic volume growth number was strong, albeit against a soft comp. Was there any timing benefit in the quarter? Anything notable that you'd comment on with respect to retail inventory levels.

And then the broader question, and I apologize if I missed this. What are the market growth assumptions contemplated in your outlook? And maybe you could separate the comments Jon into US, other developed markets, and then emerging markets.

And I ask that in the context, we've seen some of your competitors talk about slowing market growth rates, particularly in Latin America. And maybe could also comment on whether that outlook or those growth rates assumptions have changed over the past few months? Thank you.

In terms of the organic volume and any timing impacts within that, not really. The biggest driver there is sell-through to consumption as well as a base period dynamic which you rightly cited. There are certain categories where events are at different times and cross quarters this year versus last year. But in aggregate, that's not a significant driver of the volume progress that occurred.

In terms of the market growth assumptions, a split developed and developing, this is like foreign-exchange or commodities in that I don't know what the future holds. And so our forecast is predicated really on the equivalent of FX or commodity spot rates. Which is just simply the latest data. And the latest data we have the past three months shows market growth of a little over 1% in developed markets. That's inclusive of Western Europe, Japan, et cetera. And it shows 5% growth in developing markets. Weight average together you get close to the 3% to 3.5% number that I was speaking with Jason about.

If you look at the trend of those numbers, and I'm looking at three sequential three month periods, I really don't see a significant difference or significant trend change across those markets. So 0.1% to 0.2% but nothing of significance.

Joe Altobello, Raymond James.

Hello guys, good morning. Just want to focus on Fabric Care if I could this morning. I guess you guys mentioned in the press release organic sales in developed markets up high single digits. First, how sustainable is that? I assume that number was similar in the US. Maybe you can compare up to what category growth was in the US. And maybe finally an update on competitive activity. Typically from Henkel in US fabric care. Thanks.

So starting with the aggregate number. As you know, organic sales in fabric care grew 5% in July/September. Within that, North America was up 7%. So we did build share of about 0.4 points on a past three months basis in North America. The most important thing, though, in North America is the improvement in the rate of market growth going back to our earlier conversations. Up 4 points on a past three months basis, driven by innovation in the category, which is exactly what we hope to see.

Also, growth within that segment is being fueled by our fabric enhancers business. US up 7 points, versus last year. With the scent bead segment, the one that we're innovating and the most significantly growing in the mid-20%s, our fabric enhancer share up 1.5 on a past three months basis.

We have withstood fairly successfully several competitive dynamics. We don't take that casually though. But if we can continue being innovation the leader in the market and moving the market, we believe we will continue to be in a good position.

Will be growth rates stay at that level? I would say likely not to that full extent in developed markets but will continue to be attractive. On the other hand, what's implied deductively in those numbers is declines in developing markets. A lot of that is being driven by the portfolio focusing efforts within Fabric Care. Getting out of some of the lower price tiers. The bars, even powders in some markets, so that's having an impact on growth from a negative standpoint which should dissipate as we go forward. And so, when you put those two things together, I would expect that Fabric Care will continue to be a strong contributor of growth and the total company level.

Mark Astrachan, Stifel Nicolaus.

Thanks. Good morning guys. I want to ask some housekeeping questions. So China category growth, what it did in the markets in which you compete when your competitors are talking about just overall slowdown and just trying to think about whether that's Company or category specific?

And then from an EPS algorithm standpoint for this year, what's embedded there from an input cost standpoint? If you're starting to see things increase a bit there?

China market growth. First of all, it's very different by category. So let me start there. And most of the categories, based on the data that we have, are holding up fairly well. There's been a lot of conversation for example, about the diaper category, market value growth. If I look past 12, six and three months I see 12.0% 11.0% 12.0%. So I don't see a major change in the growth rate of that market. And obviously today very attractive level.

If I look at, for example, Feminine Care. Again, fairly standard growth rates. Fabric Care 4.5%, 4.2%, 4.2%. Where you do see a significant reduction in the market growth rates in the track channel data is in some of the beauty businesses. But I don't have all the data here in front of me. But that is largely driven by the movement of that business online.

It's one of the disproportionate growers on e-commerce in China. And in aggregate, we still see relatively healthy market growths. In total call it 5% to 6% to 7% without a significant change in that trend over the past 12 months.

In terms of input costs. I said in the prepared remarks of the combination of the FX and commodities was a $0.12 headwinds to earnings-per-share. About two thirds of that is coming from commodities.

Caroline Levy, Credit Agricole.

Good morning, thank you. I think the numbers you gave us on developed and developed [paying] market growth were volume at full price down to in developed. And price up 3%, volume up 3% in developing. The question I would have is as currency stabilize, do you think there's less opportunity to get that 3 points of pricing in the developing markets? And so should we be actually a little more cautious on the pricing outlook moving forward?

And then the other thing would be could you just talk about the biggest challenges to market share? I'm assuming it's Olay, China and the US. And it's a couple of other big things. But if you just touch on that.

I think you're right to the extent that foreign-exchange headwinds diminish. The pricing activity that we will be engaging in developing markets would in all likelihood be lower. At the same though, that absence of price increase should lead to stronger volume growth over time.

So I wouldn't necessarily look at developing market growth rates as inherently declining. But I think you're absolutely right that the components of that growth should be different. That's relative to price, specifically.

Relative to mix, I think you're still going to see some benefit there, as major portions of the developing world move up the pricing ladder, the premiumization that we've seen in China which is the largest developing market as one example of that. And I expect that will occur in other markets as well as economies stabilize and improve. So now I've still am relatively bullish on our positions in developing markets and the growth prospects that they bring with them.

In terms of market share losses, I mentioned the categories on a global aggregate basis where we are growing behind the market. And one of them is Hair Care, the other is Baby Care, and I also mentioned an opportunity in the US grooming market. We one on all of those. If you take Hair Care for example, we are making great progress on Head and Shoulders up 5 points in the quarter. We are making great progress on Pantene, up 5 points in the quarter. We have some issues though, with some of our smaller brands like Herbal Essence for an example and we have a whole new program and restage coming to market in the second half of the year.

I mentioned some of the products work we are doing in Baby Care. And when we get that right we tend to perform very well. If you look at the US for example where we do have that right, we're building market share both on Pampers and in aggregate. So as I mentioned, there's opportunity to improve. It's not something that will happen overnight, but it's clearly identified and being aggressively focused on.

Jonathan Feeney, Consumer Edge Research.

Good morning. Thanks for the question. So it looks like as a last mark, at P&G had seen 17 consecutive quarters of negative foreign exchange effect. And record going back to 2000. I don't know about before that. Seemed pretty extraordinary. In 15 of those 17 quarters you took pricing. And now we've had two quarters in a row are you haven't and absorbed the foreign-exchange hit. Now that could just be coincidence, or I it could be an indication of a new direction broadly.

But what I've asked is first, following on Caroline's question, can we expect based on what you know right now, foreign-exchange, would pricing be a component of 2% -- positive pricing be a component of the 2% organic sales target for this year? But still let you know right now?

And when you think about value as you mentioned in your remarks, can that include the probably the highly likely benefits you'd get from gaining market share right now in developing markets? At a time when foreign currencies almost sure to turnaround at some point? Is that included in the value equation when you compensate people? When you manage these businesses? Thanks very much.

There are real differences between, call it the last year and the years prior to that in the FX dynamics which drive different decisions. You may recall when we headed into the most recent round of big FX impact which was last year, we said that while historically we've been able to regain about two thirds of the impact through pricing, we didn't feel we were going to be able to do that this time around.

And that was driven in large part simply by divergence and what was happening to the dollar. And what was happening to the functional currencies for some our significant competitors, namely the euro, the pound, and the yen. In those currencies were weakening over that period of time. And so there was less need for competitors who were reporting results in those currencies to price.

As much as anything, that's what you're seeing being reflected in the actuals. And we're going to be pragmatic. We're going to offer a good value to consumers. But we are also going to work through every means we have available to us including cost savings and mix improvement innovation, to maintain attractive structural economics so that growth is worth something in these markets. And that's a different answer in every category and every market. Month-to-month, week to week, so we're going to try to manage that is intelligently as we can.

I wouldn't expect at this point based on your point on where we sit today, do I expect pricing to be a significant part of the equation the balance of the year, I do not. In terms of how people are compensated, we are a US dollar functional currency Company. We pay dividends in dollars, we repurchase shares in dollars. And our investor base as you well know, really doesn't care how many rubles we have or pesos we have. What they care about is how many dollars we have. And so, the primary compensation lens is through all in performance on dollar terms.

We do though, also have a look. Because we don't want to incent behavior that's too short-term oriented at constant currency. But, over periods of time we're going to measure our success or failure based on earnings-per-share and earnings growth and importantly cash growth in dollars.

Jon Andersen, William Blair.

Good morning, thanks for the question. Jon I just wanted to ask a little more broadly about two higher growth potential areas in your business. One is direct to consumer and the second is green, or environmentally sound or sustainable. Whatever you'd like to call it. Are you happy or satisfied overall with the progress that the Company's making here?

And I know you have programs like Gillette Shave Club and products like Tide Pure Clean. Is this something that you can accomplish internally via internal focus organic focus? Or you think you need to supplement or look to accelerate it with M&A as well? Thanks.

Thanks Jon. Let me address green and sustainable first. While we are open to both inorganic and organic ways of increasing our product superiority and the sustainability of our products, and that's an important and, it hasn't been our experience that there's a lot available on the market to delivers that and. Which something like Tide Pure Clean definitely delivers.

We've been on this for a while. While Tide Pure Clean is new, and it's doing very well if you look at share of the segment. It's done remarkably well in a short period of time. Things like Tide Coldwater, if you look at the entire energy consumption stream involved in washing clothes, there's more consume in terms of energy to heat water than there is in the process of manufacturing and distributing detergent.

So we're going continue to look at all vectors that enable us to improve our sustainability across the value chain from a sustainability standpoint to have products that consumers can choose that enable them to improve their impact on the environment, while still delivering against the need or the job to be done. So I don't think anything is required from an acquisition standpoint. But I also don't want you to think that we're not very open-minded in our pursuit of this objective because we are.

As relates to DTC, this is an area I think it's important that we frame, first of all, direct to consumer sales in our product category globally currently represents 0.3% of sales. I'm not saying that to indicate that it's not a potentially important tool for us. I believe it is. And we've been going direct to consumer think about SK-II as an example for a period of time. There are opportunities for us to increase our relevance from a selling and brand building standpoint, and a direct to consumer contacts across several of our categories. And we're mobilizing against those.

Again I do not want this to be taken wrong way but it don't see a mass move. Call it 20% or 30% of the market, to direct to consumer consumption. If we just think about the experience of that, how many people do you really know that want to satisfy their household products shopping needs in a month or two, by going to 40 different websites with 40 different passwords and 40 different packages that arrive at 40 different times.

Again, not in any way denigrating the opportunity that tool presents us. And we need to fully capitalize on that, which we're working to do. But I did want to provide just a little bit of context.

That concludes today's conference, thank your participation. You may now disconnect. Have a great day.

Thanks everybody. Hope to see you here in November.