The Procter & Gamble Company F3Q09 (Qtr End 03/31/09) Earnings Call Transcript

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The Procter & Gamble Company (NYSE:PG)

F3Q09 Earnings Call

April 30, 2009 8:30 am ET


Jon Moeller - Chief Financial Officer

A.G. Lafley – CEO

Teri List – Treasurer


John Faucher – JP Morgan

Bill Schmitz – Deutsche Bank

Bill Pecoriello – Consumer Edge Research

Lauren Lieberman – Barclays

Wendy Nicholson – Citi Investment Research

Joe Altobello – Oppenheimer

Chris Ferrara – Bank of America-Merrill Lynch

Andrew Sawyer – Goldman Sachs

Bill Chappell – SunTrust

[Zee Cramer] – BMO Capital

Jason Gere – RBC Capital

Linda Weiser – Caris

Ali Dibadj – Bernstein

Alice Longley - Buckingham Research


(Operator Instructions) Welcome to Procter & Gamble’s quarter end conference call. Today’s discussion will include a number of forward looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections.

As required by Regulation G, P&G needs to make you aware that during the call the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results excluding the impact of acquisitions and divestitures and foreign exchange where applicable.

Free cash flow represents operating cash flow plus capital expenditures. P&G has posted on its website 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.

Jon Moeller

A.G. Lafley, our CEO and Teri List, our Treasurer join me this morning. I’ll begin with a summary of third quarter results. Teri will cover business highlights by operating segment. I will then outline our priorities before updating guidance. Following the call, Teri, Mark Erceg, John Chevalier and I will be available to provide additional perspective as needed.

We had a good third quarter in light of a very difficult macro economic environment. We continue to grow organic sales despite shrinking global GDP and rising unemployment and importantly maintained global value shares. Organic sales were up 1%. Diluted net earnings per share were $0.84; this was toward the high end of our guidance range of $0.78 to $0.86 per share. Core earnings per share was up 8% versus year ago. Excluding foreign exchange earnings per share grew strong double digits.

Operating margin was up 30 basis points as cost savings, productivity efforts and price increases more then offset volume de-leverage, higher commodity costs and about 60 basis points of incremental Folgers restructuring charges. We had a strong cash quarter, generating $3.5 billion in free cash flow or 136% of earnings. Our free cash flow target for the year remains at or above 90% of earnings excluding the non-cash Folgers gain.

Earlier this month we increased our quarterly dividend by 10% from $0.40 to $0.44 per share, this is the 119th consecutive year since we were incorporated as a company in 1890 that we have paid a dividend and the 53rd consecutive year the dividend has been raised. This notable in the year when many companies will fail to increase or even eliminate their dividends.

We also continue to repurchase shares. Fiscal year to date we have repurchased $6.3 billion of P&G stock, we’ve purchased $16.3 billion of stock since the July 2007 inception of our three year stock repurchase program.

Most important, we’ve continued to invest in innovation, commercialization capability and capacity. We continue to introduce new products and expand into new markets. We continue to focus on bringing value to consumer’s lives. We are making decisions today with an eye toward what will make us stronger tomorrow. This is the hallmark of our company, one that has thrived for over 170 years.

While results are good in this environment they are below our long term targets of 4% to 6% organic sales and double digit earnings per share growth. Let me explain why this is and how we think about it. Our long term financial model is fairly straight forward; most of you know it well. Top line growth is comprised of three to four points of market growth and one to two points of share growth, mix and white space expansion. Combined with operating margin expansion of 50 to 75 basis points this drives double digit earnings per share growth.

There are four important assumptions in this long term model that are causing deviations in the near term. The first is market growth. Market growth rates have declined in both developed and developing markets driven by increases in unemployment, reductions in household wealth, consumer credit issues and fear. Our categories in aggregate are growing but they’re growing one to two points below the 3% to 4% assumed in our sustainable growth model. We expect that to continue until a broad based global economic recovery takes hold.

The second assumption that is implicit in the model is constant trade inventories. Credit and pricing dynamics drove reduction of inventories at some retailers, distributors and wholesalers. We saw the impact of this in both the October-December and January-March quarters, in developed and developing markets. This had an additional negative short term impact on sales.

A third assumption is a stable commodity environment. This clearly has not been the case this fiscal year. Year to year, net commodity impacts remain at about $2 billion. Over time we’re able to recover about 75% of higher commodity costs through pricing but this pricing can lead to near term share volatility when we are the first manufacturer to price across markets and categories.

The fourth important assumption over long periods of time is stable foreign exchange. As we’ve talked previously we’ve witnessed dollar strengthening that is unprecedented in amount, breadth, and speed. This has had a significant impact on our top and our bottom line. We price to recover the transaction impact of currency which impacts every company in a market.

The translation impact which is negative for US based companies but neutral or even positive for non-US competitors passes through to the bottom line. Currently these impacts are meaningful. Absent foreign exchange impacts, our third quarter earnings would have been up strong double digits.

While these short term macro economic fluctuations are important they don’t guide the majority of our actions which are focused on the fundamentals we know are critical to long term success in our industry. Fundamentals like superior consumer value, innovation, cost and cash discipline, and productivity improvement. Focusing on these items and funding them will allow us to maximize results in both the mid and long term and will have a much more enduring impact on our business then short term trade, commodity or FX volatility. I’ll talk more about this towards the end of the call.

The last thing I want to address before turning the presentation over to Teri is volume. Organic volume declined 5% in the quarter. This was driven by retailer de-stocking, foreign exchange, related pricing in developing markets, and market contraction in more discretionary categories. We have already spent a fair amount of time on FX transaction impacts in past conversations but I want to revisit it one more time because absent a clear understanding of this dynamic it is very hard to put current volume trends in context.

Currency markets impact commodity costs because many of the commodities we purchase can only be bought in dollars. When local currencies devalue, commodities increase in local currency terms. The example I’ll use is fluff pulp which is used in baby and feminine care products. Recently the dollar cost of fluff pulp has come down 7% versus year ago. Because fluff pulp is priced primarily in dollars and Latin American currencies and aggregate have devalued by about 25% since July 1st, fluff pulp is actually up 18% in these markets in dollar terms.

In places like Russia and the Ukraine where currencies have devalued 30% or even 40% the cost of fluff pulp is up even more in local currency terms. If not addressed these commodity cost increases can quickly compromise the structural economics of a business. If we don’t price to recover the transaction impact of foreign exchange, our ability to fund investments and innovation and market growth would be greatly diminished.

Price increases of this magnitude can have a fairly dramatic short term impact on volume. Retailers and distributors reduce the volume of inventory they are carrying to manage overall dollars. Consumers reduce pantry inventory and consumption. Volume decreases in developing markets where currencies have devalued account for over 40% of the volume decline on the quarter. All our years of experience managing through these types of situations across a wide range of emerging markets have taught us that while painful, pricing to protect the structural economics of our business is the right thing to do.

Market size reductions in more discretionary categories also had a large impact on volume. For us this includes fragrances, salon hair care, and Braun appliances. These three businesses accounted for 20% of the organic volume decline on the quarter. While these discretionary categories may be out of favor in the short term we take a longer term view. Twenty five of the last 100 years in the United States have been characterized by some form of recession. Seventy five years have been characterized by expansion. Our objective is to design portfolios to win in years that represent 75% of scenarios not 25%.

I’ll make two points in the way of summary. First, the choices we are making on pricing, on portfolio, on investments and innovation, on consumer value and productivity are guided by what will allow us to win sustainably over the long term. Second, we are confident in our long term prospects and are reasonably pleased with our short term results. We’re growing, organic sales, earnings per share and cash. We’re maintaining value shares and we’re making investments in innovation, commercialization capabilities and capacity.

With that let me turn the call over to Teri.

Teri List

Starting with the Beauty segment, organic sales were in line with prior year as the benefits from higher pricing were largely offset by a 5% decline in shipment volume. There are a couple key factors driving these results. First, there are elements of this segment that are more discretionary compared to the balance of our portfolio. As Jon mentioned, the global economic slowdown causes significant market contraction in the prestige fragrance category. While we continue to build share in prestige, shipments were down more than 20% due mainly to significant market contraction and trade inventory de-stocking.

The volume decline in prestige accounted for over 40% of the organic volume decline in Beauty. Beauty shipments were also negatively affected by retailer and distributor de-stocking mainly in the Eentral and Eastern Europe, Middle East and Africa regions following price increases taken to offset the impacts of foreign exchange rate movements on local cost structure. Beauty shipments in the CEEMEA region were down high teens versus the same quarter last year and accounted for nearly half of the volume losses for the Beauty segment.

Looking across the categories P&G’s global retail hair care business grew value share by nearly a point to about 26% of the global market. In the US, retail hair care value share was up about half a point. Value shares for Pantene, Head & Shoulders, Herbal Essences and Aussie were all roughly in line with prior year with the net share gain due to the addition of the Gillette hair care brand. In US hair color Nice ‘n Easy value share is up nearly two share points versus prior year behind the premium price Perfect 10 initiative which is more then offsetting declines in minor hair color brands.

Skin care organic volume declined mid single digits following price increases in North America and CEEMEA regions and trade inventory reductions in response to slowing market growth in China. Encouragingly P&G’s global value share of the facial skin care market was up nearly a point to more than 12% behind the continued expansion of Olay in developing markets.

Olay all outlet value share facial moisturizers in the US also increased by half a point this quarter to over 43% behind the launch of Olay Pro-X. Pro-X which retails for $40 to $50 per item has achieved about 5% value share after only three months in the market. For perspective this makes Pro-X comparable in size to some of the entire brand franchises we compete with.

In addition, SK-II, P&G’s premium skin care brand grew shipments high single digits this quarter behind innovation in facial treatment essences.

The antiperspirant and deodorants business was particularly strong this quarter with shipments up mid single digits. Growth on the Secret, Old Spice and Gillette brands was driven by the continued success of the clinical strength and professional strength initiatives, plus several new product and commercial innovations on Secret that launched this quarter. Secret all outlet value share in the US is up half a point to more than 16% of the market.

In the US color cosmetics business our market leading Cover Girl brand built all outlet value share on both the unit and value basis in a category that was essentially flat with prior years. However, Cover Girl shipments were down high single digits this quarter due to sharp retailer de-stocking.

To summarize Beauty, we continue to be pleased with the fundamental health of our Beauty brands and their growth prospects over time. We do expect some continued pressure from retailer and distributor de-stocking. It’s also likely that the markets for prestige fragrances will remain soft given its discretionary nature.

On the positive side, we continue to see strength in our premium beauty offerings such as Olay Pro-X, Secret Clinical Strength, Nice ‘n Easy Perfect 10 and Gucci Fine Fragrance, reinforcing the importance of delivering a continuous stream of leading innovations as well as having brand portfolios that can serve the needs of a wide range of consumers at multiple price points.

In Grooming, market contractions and inventory reductions significantly impacted shipments resulting in a 4% organic sales decline. These impacts were particularly acute in Braun, where shipments were down more than 20%. These products are considered more discretionary in tight economic times particularly in developing markets.

In blades and razors volume declined high single digits as Fusion shipments increased high single digits were more than offset by double digit decline in legacy systems. The growth of the flagship Fusion brand was led by Western Europe with shipments up double digits and in Japan with volume up more than 30%.

Fusion value share in the US was up about three points versus prior year and is now over 29% of male blades and razors. P&G’s past three month value share of all male blades and razors is now over 70%. Fusion’s also building share outside the US. In Western Europe Fusion share is up nearly four points to about 23%.

In female blades and razors Venus shipments were down mid singles globally and in the US. However, the brand built unit and value share in the US over the past three months. Again, retailer de-stocking and market size contraction on the unit basis reconcile these diverging trends.

In Healthcare, organic sales were down 2% behind soft results in personal healthcare and lower shipment volume of oral care and fem care in the CEEMEA region following FX driven price increases. As expected, Prilosec OTC continues to be impacted by the loss of market exclusivity in March of 2008. Personal healthcare top line results were also negatively affected by one of the mildest cold and flu seasons in years according to the US Center for Disease Control and Prevention. This led to a significant contraction of the respiratory care market. As a result, fixed shipments were down 20% in the US for the quarter. However, P&G’s all outlet share of the US respiratory care market was in line with prior year on both the unit and value basis.

Oral care volume declined low single digits as double digit growth for Oral-B in Western Europe driven by strong power toothbrush growth was offset by lower shipments in the CEEMEA region following foreign exchange driving price increases. Trade inventory reductions in markets like Russia and Turkey led to a mid teens reduction in shipments in the region. Oral care volume in North America was down mid singles due mainly to soft power toothbrush shipments and market contraction in the tooth whitening segment.

In the US toothpaste market Crest increased its all outlet value share leadership growing to nearly 38% of the market. Crest Pro Health continues to be the primary driver of Crest share gains in the US. Additionally, initial results of our recent introductions of Oral-B toothpaste into Benalux and Brazil are off to a solid start in the first few months on the market.

Feminine care volume declined low single digits due almost entirely to market impact in CEEMEA following our FX driven price increases. In the US, P&G delivered solid market share performance across the Always pads and liners and Tampax tampon segments. P&G’s all outlet value share of the US fem care category grew half a point to over 51%.

Always Infinity was launched last fall is delivering good results in the US pad market with market share of 6%. We are continuing to support the initiative with strong value messages and trial incentives to drive conversion to this revolutionary new product in feminine care protection. Repeat rates have exceeded expectations as consumers who have tried Always Infinity have recognized the value created by this breakthrough technology.

For the snacks and pet care segment organic sales grew 2% led by pet care with strong growth which more then offset a modest decline in snacks. Significant pricing actions in both businesses offset a mid single digit volume decline in the segment. The decline in snacks volume is due mainly to a strong base period that included the Rice Infusion initiative in Western Europe and the Extreme Flavors launch in North America. Shipments were also affected by trade inventory adjustments in advance of the Pringles Super Stack initiative that launched late in the quarter which included a double digit price increase.

Iams US value share was roughly in line with prior year level at about 8%. Recent Iams innovations such as Proactive Health, Healthy Naturals, and Premium Protection continued to deliver results at or ahead of expectations. Eukanuba volume declined high single digits and market share declined resulting from the price increases implemented last calendar.

Turning to Fabric and Homecare segment, organic sales grew 3% as its benefits from price increases more than offset volume declines. In the majority of cases globally price gaps are starting to return to levels similar to those prior to our price increases. We are continuing to monitor the relative consumer value of our brand and we will take targeted actions where necessary to restore consumer value to competitive levels.

Fabric care shipments were down mid single digits primarily due to lower shipments of Tide and Era. Volume declines on these brands were most pronounced in the CEEMEA region with both brands down double digits following foreign exchange driving price increases taken during the March quarter. Tide volume declined high single digits in the US and all outlet value share was down three points to 38% due to significantly higher price gaps versus competitive brands compared to prior year. The Gain brand delivered a strong quarter with shipments up mid singles and all outlet value share up a point to nearly 16%.

Home care shipments declined low single digits due mainly to declines in dish care and hard surface cleaning solutions. Dish care shipments in the US were down due to unit based market contraction following significant price increases with last year. P&G’s leading US dish care all outlet value share was down slightly and remained above 54% with Cascade above 61% in auto dish and Dawn at 43% in hand dish.

The Swiffer and Febreze brands both grew volume for the quarter. Swiffer volume in the US was up mid singles and all outlet value share increased a point and a half to 16% driven by innovations across all Swiffer items including upgrades to both the dry and wet refill products and packaging and implement design.

Febreze volume was up in Western Europe behind continued geographic expansion. In the US Febreze volume was line with prior year in a category that declined 9% in units. The resulting all outlet value share gains in the US included more than a five point gain in instant air fresheners and more than a two point gain in candles.

Battery shipments were down high single digits due to market size and share challenges in both developed and developing markets. Share for the Duracell brand was impacted by trade down to value in retailer brands and heavy competitive activity in Western Europe.

In the US, Duracell’s all outlet value share of alkaline batteries declined two points to 44%. In Western Europe Duracell share of general purpose batteries was down three points to 33%. In developing markets battery shipments were down mid teens in the CEEMEA and Latin America regions due to the soft market following increases.

Baby and Family Care delivered solid organic sales growth of 6%. Volume was in line with prior year and the net benefit from higher pricing accounted for the sales growth in the quarter. Global baby care shipments grew low single digits behind solid growth in North America and Western Europe. Developing market shipments were down slightly versus prior year following the price increases in Latin America.

In the US, P&G’s baby care business grew shipments mid singles behind low teen growth of Luvs. The Pampers brand also grew shipments in the US for the quarter. P&G’s overall share of US diapers increased about a half a point to over 35% behind the growth of the Luvs brand and Pampers share was in line with prior year.

In Western Europe Pampers grew low single digits behind strong consumer response to the Unisys vaccine partnership campaign and the successful launch of Pampers Simply Dry in Germany. Simply Dry, a tier three version of Pampers has helped the overall Pampers brand and it grew share by four points to 59% in the highly competitive German market. Pampers value share of the total Western European diaper market is up more than a point to nearly 55%.

Family care volume declined low single digits as growth of Bounty was offset by a decline of Charmin primarily due to a high base period that included the Charmin Ultra Strong initiative. Bounty added nearly a point to its market leading US all outlet value share which is now above 46%, while Charmin US value share declined about half a point, Charmin continues to be the clear market leader with all outlet share of nearly 28%.

That concludes the business segment review and I’ll now hand the call back to Jon.

Jon Moeller

During the last earnings call and more recently at CAGNY we discussed in some detail the priorities we have established to guide our near term efforts and decisions. Broadly speaking these three areas are building consumer value, accelerating investments in the future, and driving productivity and simplification even further.

Before moving to guidance let me take a few moments to provide more detail on these priorities. Consumer value is about more than price and is defined differently by different consumers. Some consumers have a larger price component to their value equation. For those consumers we’re offering more products and lower price tiers then any point in our history. We’ve talked previously about Gain in fabric care, Luvs in baby care and Charmin and Bounty Basic in family care, all of which are growing disproportionately in this environment.

The balance of our product portfolio also has lower price offerings. For example, Olay offers a very good basic skincare product in Olay Complete Ageless for $7.00. Crest offers excellent basic toothpaste in Crest Cavity Protection at $2.00 for a 6.4 ounce tube. We remain committed to offering cost conscious consumers a broader range of choices.

As Teri said, last month we introduced a tier three baby diaper into Germany called Pampers Simply Dry. It is off to a strong start already having achieved a 4% market share. Just this past week we launched Naturella which is a mid tier feminine care product into the Arabian Peninsula which will further extend or leadership position there.

Other consumers have a larger performance component to their value equation. These consumers are delighted by Olay Pro-X which is priced at about $50. As we mentioned, Olay Pro-X has achieved a 5% market share after only 12 weeks on the market. Tide Total Care, despite being priced at a 30% premium is on pace to deliver $120 to $150 million in year one sales.

Always Infinity was priced at a 60% premium but has already received a 6% value share. Crest White Strips Advanced Seal was launched at the end of January at a retail price point of about $40 and is already the number one skew in the whitening category with over a 20% value share. We will continue to extend the portfolio at the top and bottom as part of our objective to deliver better value and serve more of the world’s consumers.

As we focus on delivering value that is relevant to specific consumers we are investing in communicating that value through performance based value messaging at all touch points. This helps consumers clearly understand the price and performance trade offs they are making.

We routinely assess value versus competitive offerings, via weighted purchase intents and price gap analysis. There are always situations where adjustments are needed to maintain competitiveness and relative value but broadly we are pleased with the relative value equation of our brands. About two thirds of our brands have weighted purchase intent advantages and we continue to hold global value share which is another important indicator of value competitiveness.

Investing for the future is another top priority. Our commitment to innovation as an example has never been stronger. R&D spending is nearly two times that of our closest competitor and more than most competitors combined. This leadership level of investment is multiplied by our extensive connect and development effort which leads to an effective spend that far exceeds reported figures. Olay Pro-X, Dawn Hand Renewal, Pantene Nature Fusions, Tide Total Care, and Clairol Perfect 10 are all examples of recent innovations that have benefited from connect and develop.

In the case of Clairol Perfect 10, P&G collaborated with 12 external partners in the US, the UK, and Russia. These collaborations led to three separate breakthrough innovations that have directly contributed to Perfect 10’s success. Perfect 10 achieved a 4% value share since launched despite selling at a 70% price premium to base Nice ‘n Easy which is now the leading color brand in the United States.

We continue to be the innovation leader in our industry not just as measured by spending but as measured by results. Each year IRI publishes a new product pace setter report. This US based study captures the most successful new CPG products as measured by sales over the past year. For 2008 P&G share of the non-food category was 40% meaning P&G had 10 of the top 25 new product introductions. By comparison, Unilever, J&J, Kimberly Clark, Colgate, L’Oreal, and Energizer collectively had 7.

Over the past 14 years P&G has had 114 of the top 25 pace setters versus 94 for that same combined competitive set. Over this period of time, products that were introduced by P&G or Gillette accounted for 50% of all IRI pace setters.

Advertising is another area where we are investing at leadership levels. We see the current economic environment as an opportunity to increase share of voice within our industry while spending fewer dollars in the absolute. During the March quarter while costs were down, global media weights were up 5% versus year ago.

We continue to invest in capital as well. This year capital spending may slightly exceed our 4% of sales target. We’re moving forward with the capacity expansion program we started talking about during last year’s back to school conference. With almost half of the world 6.8 billion consumers currently using no P&G product and many of the consumer who do use P&G products being underserved we believe our long term growth prospects have never been stronger and are structuring ourselves to support this growth.

India provides just one example. Just over two years ago we launched Pampers into India. At that time the leading competitor had a 70% value share. Today we are the value share leaders in diapers in India. We are continuing to start up a new diaper line about every three weeks somewhere in the developing world.

Our most recent new category launch in India was skincare where Olay Total Effects has already gained 6% of the market and doubled the size of the anti-aging category. The potential for P&G in just this one country is astounding. If over time we increase India’s per capita consumptions just up to the level we currently see in Mexico it would generate an incremental $20 billion in annual sales. These are opportunities we clearly need to support.

We continue to launch new initiatives into both developed and developing markets, initiatives that will be future platforms for growth. I’ve talked about Olay Pro-X and the tier three diaper entry into Germany. We’ve entered the dental care category behind Oral-B in Holland and Belgium and in the pharmacy channel in Brazil.

We continue to expand auto dish across Western Europe and Align is off to a great start. After just a couple of weeks in market, Align is already the number one pro-biotic recommended by gastroenterologists for the treatment of irritable bowel syndrome.

The last focus area is a discipline effort to lower costs, increase productivity and simplify everything we do. This provides fuel to improve consumer value and increase investments in the future. Bob McDonald talked at our analyst meeting in December about the transformational work are doing to redesign our transportation system.

As part of that effort we just executed the single biggest competitive transportation bidding process in P&G’s history. This project included over 150 carriers, 7,600 freight lanes and over 500 million transportation miles across North America. On an annual basis road miles will be reduced by more than 10% and inter-modal usage will increase by 30%.

In Western Europe our goal was to increase rail and inter-model transportation from 10% to 30% by 2015 and we’re making great progress. Currently we’re on pace to achieve 15% by 2009, one year ahead of schedule. These two transportation transformation activities are generating savings of about $75 million per year. That’s part of a holistic effort to continue leveraging P&G supply chain as a competitive advantage for the company.

Another way we’re lowering costs and improving capability is video teleconferencing. We have invested in 50 video collaboration studios around the world which have already saved over $75 million in travel costs. In addition to saving money, this new capability saves time and builds the business by putting us more in touch with each others suppliers and retailers. We’re now conducting global leadership team meetings with this technology, significantly decreasing travel time and costs.

I hope this discussion helps you understand with a few concrete examples how we’re managing the company and what is guiding our decisions. I hope you’ll agree with me that these are the right things to be focused on and the right choices to make as we work to optimize the long term prospects of P&G for P&G shareholders.

Moving to guidance, we expect fiscal ’09 organic sales growth between 2% and 3%. Total sales are expected to be down 2% to 4% driven by foreign exchange hurt of about 5%. Operating margin including 50 basis points of incremental Folgers restructuring charges should be about flat. We’re currently comfortable with consensus GAAP earnings per share of $4.22 as a center point of an earnings per share range of $4.20 to $4.25. This range yields year on year core earnings per share growth of 6% to 8% excluding foreign exchange impacts, earnings per share growth would be strong double digits.

For the June quarter we expect organic sales growth of between 0% and 3%. Total sales are expected to be down 8% to 12% driven by foreign exchange hurt of 11% to 12%. Operating margins should be up driven by strong gross margin improvement versus prior year as volume de-leveraging is largely offset by the net impact of pricing and commodities. We expect earnings per share to be in the range of $0.74 to $0.79 including the Folgers related restructuring charges.

In the near term our results will continue to be heavily influenced by external factors discussed previously that are not entirely predictable or within our control, particularly in market growth and foreign exchange. We’re providing wider guidance ranges to reflect existing volatility. We are committed to do the right thing for the business and the shareholders over the mid and long term and will prioritize our choices on this basis.

We’re still engaged in our planning process for 2009-2010. We’re trying to ensure our plans are built on a most up to date relevant assumption for foreign exchange, commodities and market sizes. We’re also spending time on a disciplined look at investment options, ensuring that we are investing in the right things for the long term.

Our current priorities; building consumer value, driving productivity and simplification, and making the right investment choices will guide our planning for next year. We’ll provide full guidance once plans have been finalized.

A.G., Teri, and I would now like to open up the call for questions.

Question-and-Answer Session


(Operator Instructions) Your first question comes from John Faucher – JP Morgan

John Faucher – JP Morgan

In your sum up comments there you talked about the algorithm in terms of strong double digit growth. As you look at a difficult environment out there that means you’re capturing a lot the margin from raw material favorability going forward and the productivity. The issue is why not leave yourselves with a little bit more flexibility.

Take the lower organic growth and say now’s the time to take that extra margin if we’re getting it, continue to go after some of the structural issues maybe looking at more rapidly increasing the focus in Latin America and some of the other geographies and categories where you’re struggling a little bit. I understand the commentary about productivity and those things but isn’t there an opportunity here given the lower multiple on the stock what have you to really push this aggressively forward?

Jon Moeller

Let me provide a couple pieces of perspective. First of all, in terms of top line expectations as we stated, for the next quarter we’re looking at 0% to 3% so it’s clearly we’re expecting growth below our long term targets. As I also indicated we’re still working on the plans for next year and we’ll be back to you with those.

Importantly in all of this as I’ve tried to indicate we are focusing on where we should be investing to bring more value to consumers to grow the business, to expand the portfolio both up and down and across, and geographically. You should assume that we’re going to take full advantage as would be the case in a normal economic environment to expand our business.

A.G. Lafley

I think you raise a good point; we had a chance to talk about it briefly when you were here last time and I’m very much looking for the right balance. We worked real hard I think to deliver the right balance this year where we actually had a couple of big surprises, the biggest surprise of course was currency which I think we’ve done a pretty good job of managing. Currency hit us for more than $4 billion in the top line before the year is out and will hit us for likely well over $1.5 billion on the bottom line. We’ve got to manage through all of that.

Stepping back to the larger question, what we’ve been doing is stepping up our investments and I think it’s really important to understand that. Our CapEx will likely come in above 4%. We are building 10 new manufacturing plants around the world somewhere this year including a major new manufacturing plant in Utah to serve our Family Care business.

Jon took you through the investment and R&D but if you take our Pharma and take out coffee we have a very solid R&D investment this year and then when you add on top all of the connect and develop investment we get from partners we are stepping it up on the innovation side. We’ll bring as big a portfolio of new products to market as we ever have over the next year.

The third one is marketing; Jon talked about the advertising side of it. We have been delivering more GRPs to the market. It’s always hard to measure but we think in a lot of cases we’re actually building our shares of voice. We’ve also of course had to invest more on the trade side because when you’re leaving pricing up there’s a lot of price discounting that comes from your competitors in the short term and we have to make sure we manage those value gaps.

Step back and generalizing from all of that, the biggest thing that we’re looking at for next year is how much investment and where to make those investments because we have a lot of opportunities for growth.


Your next question comes from Bill Schmitz – Deutsche Bank

Bill Schmitz – Deutsche Bank

I don’t know if I missed it in the prepared comment but can you just give us the breakdown of growth between developed markets and developing markets. Then if you could also breakdown the volume, what percentage was from the distributor and retail inventory de-stocking what was just shipment declines or consumption declines.

Jon Moeller

Volume growth was slightly lower in developing markets then developed so developed grew just a big ahead of developing but not too much difference between the two on the quarter. In terms of the components of the volume decline versus year ago as I indicated in my remarks about 40% of that or two points is de-stocking related to primarily price increases in developing markets.

Another point is related to the market decline in the discretionary categories that we talked about; fragrance, hair salon and Braun. The rest is due to volume as a result of price increases.

A.G. Lafley

The biggest issue in developing markets was CEEMEA and I think that’s pretty evident. We just have to look at what’s happened to GDP and currencies and I think you also know that’s our biggest developing market region by far. The other thing I’d say is we’re clearly going to continue to step our investment in emerging markets. We are not scared off by the macro economic situation.

In fact, the ability to create more, better and cheaper products and fill out our portfolios in more of our categories and across more of our leading brands just gives us the confidence that we can go after more consumers and more households in developing markets and that’s where the babies are going to be born, that’s where the households are formed. That’s where there’s sufficient income to begin to buy our household and personal care products on least a weekly basis.


Your next question comes from Bill Pecoriello – Consumer Edge Research

Bill Pecoriello – Consumer Edge Research

You made it clear that there’s no broad based value adjustments required and you’re holding global volume value share with the 1% organic sales growth. Are there certain categories where you’re losing value share in certain geographies where you need to make tactical adjustment that you’re studying for the investment. With more couponing, adjusting promotional price points, stepping up the value message can you talk about some of the categories where your consumer research is showing that you need to step up that value message.

A.G. Lafley

First of all its all about consumer value and winning the consumer value equation. It all begins in the store at the first moment of truth. Frankly everyday we’re making adjustments in the operating businesses up or down. Broadly we’ve made some surgical adjustments on our Family Care business in North America.

We’re making some tactical adjustments on our Fabric Care business in North America. We led the move to compact detergents in North America. In Fabric Care we’ve led the pricing up, in Fabric Care as we reported. We probably lost a little bit more share then we would have liked on Tide and we probably gained a little bit more share then we thought we would on Gain. We’ll adjust to get that right.

In developing markets we have to watch our opening price point affordability and that’s why we’ve talked about the portfolio, Jon mentioned Naturella but there are a whole raft of product lines across the categories that we introduce and we have to make sure that opening price point is right. You’re dead right and I tried to make the point we’re not only trying to increase our delivery and share of voice in the advertising side but we’ve got to stay competitive on the short term pricing and promotion side.

In the US there’s been more couponing because couponing consumers, there are a segment of consumers that redeem more coupons in recessionary times. I view all of that as sort of ongoing value equation management. The point I think we’re trying to make is that the pricing power and mix power is pretty clear and we think we’re going to hold to most of it because what underpins it is innovation. That’s really the point.

The six points of pricing and mix this quarter is virtually all underpinned by innovation. To the extent the innovation is resonating with consumers whether its more value based innovation or more performance based innovation we’ll be able to hold it.


Your next question comes from Lauren Lieberman – Barclays

Lauren Lieberman – Barclays

I was hoping you could talk a little bit about why and for how long you expect the de-stocking to continue. It seems to me like especially at the distributor level an inventory adjustment that has to do with the distributor wanting to managing working capital levels as you raise pricing should sort of be taken care of in the course of one quarter then from there it really is about consumption and market growth.

Everything in the press release and the comments on the call sound like you’re expecting de-stocking to continue. A little bit on why and then a little bit on for how long.

Jon Moeller

The de-stocking that we saw in the October-December quarter was largely a developed market dynamic as the price increases in developed market and as we went through the credit crisis particularly in North America but also Western Europe. The primary de-stocking dynamic in the quarter that we just completed was in the developing world. That is driven, as we’ve talked about, by very significant price increases some of which have occurred very recently.

As currencies devalue further we’ve had to price further. In some developing markets we’ve taken two or three rounds of pricing. That’s why we’re expecting some level of de-stocking to continue to work its way through the system. You’re generally right in that it should be as a whole a relatively shorter versus a longer term dynamic.

Lauren Lieberman – Barclays

If currency stays where it is now or it was at the end of the quarter.

Jon Moeller

There would still be a little bit of de-stocking next quarter. The way the system works in terms of banks notifying distributors that their credit lines are frozen; all that stuff doesn’t just follow a nice neat pattern. It takes time to work through.

Lauren Lieberman – Barclays

The assumption is that if currency stays where it was at the end of the quarter all the pricing is in place even if it went at the end of the quarter so it should sort of be one quarter left of de-stocking related to these price increases?

Jon Moeller

The world changes.

A.G. Lafley

Everybody’s trying to operate with less inventory. I think that’s good. One of the things that I love about the challenges we’ve had the last year is we’re more agile, we’re more flexible, we’re faster and we’re frankly operating better and executing better. Our case fill rates, which is what the customer’s judge our service levels on are running 98.5% for like six months in a row. We’ve had to get better on the execution side to make sure we’re in stock even when the retailer and the distributor are pulling down their inventories.

The easiest way for them to improve in short term is to pull down their inventories. It is the distributors that are under real cash and bank line pressure. In the case of some of our bigger retailers they pulled it down because it was the end of their fiscal year. I don’t think the inventory de-stocking is necessarily a bad thing until you get to the point where you can’t maintain shopper service levels and you can’t stay in stock. We watch that very closely.

Jon Moeller

There will also be, we expect, an ongoing dynamic relative to retailers wanting to have the most efficient assortment on shelves that they can possibly have is another way to manage their cash and maximize their biggest asset, their shelf space. You will see that continuing to have an impact for some manufacturers. In fact, we’re relatively advantaged in an environment of more efficient assortment.


Your next question comes from Wendy Nicholson – Citi Investment Research

Wendy Nicholson – Citi Investment Research

I know you guys care about benchmarking yourselves relative to your peers as much as we do. I’m surprised with all your commentary it sounds like you think you’re gaining share in a bunch of big categories and what not. The declines that you’re seeing from a volume growth perspective are a lot worse then we’re seeing at any of your competitors both US companies and European HBC guys. I know you think you’re a little bit more oriented towards discretionary businesses and so maybe there’s more shortfall there.

Frankly it sounds like you’re doing really well on some of the discretionary businesses like high end skin care. The story of the emerging markets I just don’t know that I get it because some of your competitors have much bigger emerging market businesses and you’d think that de-stocking would be hurting them more then it would be you. It doesn’t hold together for me. Can you help me with that?

A.G. Lafley

You have to do industry by industry, geography by geography, channel end customer by channel end customer. It sounds like you have some interest in the discretionary category so I’ll do a couple of those and then if you want to talk about another one I’m happy to go there.

Just one quick comment, clearly it’s a good time to have a big business in L.A. We’re doing very well in L.A. It’s not a good time to have a huge business in Central and Eastern Europe and the Middle East. We have the biggest business in Central and Eastern Europe and the Middle East. Part of this is business and geographic mix. Let’s do a few of the discretionary categories.

Fine fragrance is probably the most straightforward one. It’s maybe the most discretionary category that we’re in. We’ve had double digit drops in the market and every period we’re growing our share. In fact, one of the most successful brands right now in the fragrance world is Gucci. Our point of view is we run a very good margin in that business well above the category. We’ve built some very strong brands particularly the Gucci & Dulce Gabbanas to go with Hugo Boss’s and Lacoste. We know it will come back.

We’re probably looking at the worst period for the fragrance business and when an industry or when a geography is contracting what you want to focus on is your value share. When it starts to grow again you’re growing off a stronger value share base. We have clearly prioritized value share above volume share and we’ve clearly prioritized net sales growth above volume growth.

Braun and Salon are slightly different situations. I think there clearly we have something to prove. We’ve actually lost a little bit of share in the salon business and we have some ups and downs on our share performance depending on Braun line. What it’s frankly enabling us to do is to accelerate and deepen the restructure so we’ll get through with major restructures in those businesses faster. We’re focusing on where we really want to win in those businesses and we’re bringing innovation faster so I think again it’s an opportunity.

I was trying to think of a third example. Clearly our CEEMEA exposure is showing up on the de-stocking front. There’ve been huge moves in GDP in a lot of those markets and frankly the currency impact’s been big and the combination of the two; demand softening and the price gaps widening as we price to cover the transaction costs of FX means that distributors who run their inventories on a dollar basis or on a local currency basis have to pull those inventories down pretty quickly.

Another point that Jon made in his comments which I think is really important you build a distributor network and you build relationships with distributors over time so we support these distributors. Frankly we support several of our suppliers and we’re willing to help them get their inventories down in the short term so they can continue to provide the kind of service we want and need and then when times get better which they inevitably will we’ll move back.

What we’re going through in some of these developing markets is not unlike what we went through in the mid 90’s in Asia when I was there. You just have big short term moves in GDP contraction and you have big short term moves in currency. In those environments you’ve got to price to cover as much of the transaction as possible and you’ve got to make sure that you maintain your infrastructure so when things get better you’ll grow.

I think it’s more our footprint, its more our mix of categories then it is anything that’s really different. If you look at what the other best CPG companies are doing they’re doing the same thing. We’re all trying to get five or six points of pricing and mix and we’re getting about that every quarter now. We’re all trying to manage the volatility that we’re seeing in commodity, currency and markets.


Your next question comes from Joe Altobello – Oppenheimer

Joe Altobello – Oppenheimer

I want to go back to a comment you made to Lauren’s question. It sounds like you’ve held shelf space pretty stable throughout this whole period here and I was curious are you seeing any changes in categories where retailers are trying to go after market share in terms of private label.

Secondly, the data point you’ve often talked about in the past for trade down has been unemployment, obviously that keeps creeping up and seems like its going to continue to creep up for the next six to 12 months. In terms of the categories where you’re seeing the most trade down how do you sort of combat that in this type of environment?

Jon Moeller

Clearly there are some retailers that are trying to increase their own store brand presence in their stores. The vast majority of retailers are working on efficient assortment, depending on how they best define it for their shopper. In general we have been gaining shelf space not losing shelf space. Certain of our brands have actually gained a significant amount of shelf space. The question behind the question on private label I think is important to address as well.

If you look at markets and chains that are very efficiently assorted and tend to have a higher presence of store brands. For example, look at Western Europe paper categories baby and feminine care which have a very high private label development. Our market share in those categories in those markets is higher then it is in the US.

If you look at chains like Costco which have a very strong store brand and Kirkland’s or you look at Lidel, the discounter in Western Europe. In those more limited assortment stores our shares are over-developed. In general, the move to more efficient assortment should be a positive thing.

A.G. Lafley

I definitely agree with that. Here’s the key in every recession back to the 70’s generic or private label brands have grown share. We know it’s going to happen, its happening in this recession. There is some trade down, there’s obviously pocketbook pressure. Frankly more consumers will try private label brands and retailer brands then would try them in more normal economic times. The key is to minimize your losses and ideally continue to hold or continue to grow your share in that environment.

Where is there the most pressure? Generic drugs. I think that’s likely going to continue. One of the reasons that we are considering an exit from the Pharma business is because the Pharma business model I think has the historical one that’s worked so well is in question and frankly that industry is going to be under more pressure from generic drugs.

Clearly Prilosec which we built into a phenomenal brand and it’s still a very strong brand is now going through the phase where the generics are going to be introduced and we know we’re going to lose some of that business. The key is how much of it do we hold on to and how do we sustain it. You see it across the OTC drug world there’s a lot of pressure from generics.

One of the things we like about beauty, grooming, and personal care is that those all tend to be categories where there’s much lower private label development and where for a number of reasons consumers are just not even as interested in trying private label. In household it’s a little bit more of a mixed bag but we tend to have very strong brands in the categories that we’re in. If you look at paper towel, Bounty’s been growing share and private label’s been growing share.

If you look at bath tissue the strongest brands including Charmin for the most part have been about holding their share and private label’s been growing share. In laundry detergents surprisingly private labels are more developed in Western Europe but in the US they’re not really that developed. There’s been a little bit of growth in this cycle but they’re still a relatively small part of the market.

Stepping back they will grow during the recession more consumers will try them because their budget is under pressure. They key is we need to be in a position at the shelf and then we need to be delivering with our brands and products, superior value as Jon described, how ever the consumer wants that. Then I hope if we can at least hold or ideally grow share as we’re doing on many of our brands we’ll come out the end of the cycle stronger and then we’ll build from there.


Your next question comes from Chris Ferrara – Bank of America-Merrill Lynch

Chris Ferrara – Bank of America-Merrill Lynch

I understand you working through this stuff now and I get you building a portfolio for the 75% of the time that economics are expanding and that makes sense. At the risk of asking you to front run that investment strategy, as a company and as an investment what’s the broader philosophical view on businesses like Prestige, Profession Braun, and the driver of that 20% of the volume declines. Are you comfortable with the inevitable tradeoff of the faster growth in good times with the greater degree of cyclicality that get you when times are like these?

Also, how do you reconcile the idea of managing that portfolio for the 75% when times are good with the initiative to extend the portfolio at the low end and be more competitive during a terrible global recession that may prove to be nearing a close when those die offerings can create a mixed drag during the 75% of the time when things are good.

I guess it seems like you may be at somewhat of a long term cross roads, maybe that’s too dramatic. I want to see if you could comment on that.

A.G. Lafley

Let me take on Beauty because that’s probably at least the question behind the question, that’s certainly our biggest business with most of the discretionary categories. We still very much like the Beauty and Personal Care business. It has been the single biggest contributor to our net sales and profit growth this decade so far to the present.

Beauty has generated over 40% of our top line growth and 40% to 45% of our bottom line growth. The second biggest contributor has been emerging markets which has sort of been 35% to 40% of our top line growth and about 30% to 35% of our profit growth. In both cases you’re going to have to deal with the downs and the ups and we’re quite willing to do it because in both cases we like the demographics that are underpinning Beauty and emerging markets.

That’s where consumers are, that’s where they’re spending, and they’re buying beauty care products younger, they’re using more of them and they’re sticking with them longer. Even in this quarter our Gillette Fusion share was up, our Head & Shoulders share was up, our Olay share was up, our Clairol Perfect 10 share was up, our Cover Girl share was up and even Pantene eked out a little bit of share growth and we’re still not to the major new initiative launch which we said would come next year.

I guess our point of view is you have to look at the attractiveness of any industry. This is a low CapEx industry, it’s a relatively high gross margin industry, and it’s a highly fragmented industry. We still have a relatively modest share despite the fact that we have a relatively big business. I think if you step back and look at it it’s a branded innovation driven industry that’s shifting to our channels.

One of the things that’s going on right now that’s good for us is a big part of the beauty trade down is out of department stores and out of specialty stores into the array of self select kinds of stores where we have the meat of our business. I think there are a lot of things that are dead right for this and I don’t get too excited by a quarter or two or even a year or two if it’s a good business for us structurally, if it’s a business that fits our strategy and fits our core competencies and strengths.

You asked about a couple of specifics which are slightly tougher nuts. We, on Braun, have a strategy and we have a plan and it has time horizon and the time horizon is appropriate and we’re going to find out what we can do with that business. We’re in the first phase which is accelerating the restructuring. We’ll be moving in the second phase which is we’re going to be very focused on where we want to play and where we believe the Braun brand is leveragable and we’ll see. You know what, if we double the profit or half the profit you won’t notice it.

The other one is the salon business. We’re quite pleased with the fragrance assets we got out of Wella. We’re making good progress on the retail assets that we got out of Wella. I think we finally demonstrated that we can actually make a difference with retail hair color. That shows in Clairol Perfect 10 and our Nice ‘n Easy shares in the markets where we’re established. We’re going to learn this business.

Again, because of Gillette we actually had to put some of the restructuring on Wella on the back burner but you know [Robert Youngsturn] and his team, we’ve got the right leadership crew in there, we’re going to get it restructured this year and next. We’ve got a little bit of encouragement from our Sebastian re-launch. We’re very much focusing that business and you’ll see us do the kinds of things we did in fine fragrance in the salon world.

Is it worth investing for two or three years, heck yes, because a lot of the innovation and a lot of the ideas come out of salons and then go into retail and we want to be on the cutting edge of that. I think again will Wella make the difference in the company’s financial results? It’s a pimple. I hope it’ll become more but right now it’s not going to make a big difference.

Step back, still like Beauty, still like Personal Care, for a lot of structural reasons and a lot of strategic fit reasons. There are a couple of questionable businesses that you’ve asked about. We’re working on them. We think we’re working on them in the right way. We’ll come to appropriate resolution and I hope they will be successful but we don’t know yet.


Your next question comes from Andrew Sawyer – Goldman Sachs

Andrew Sawyer – Goldman Sachs

I have quick one that was very specific to US laundry. It looks like the P&L in that business is coming in pretty nicely. You’ve got the pricing, raw materials, some compaction carry over benefits versus maybe I think you said a 300 basis point decline for Tide share offset by some Gain market share gains. I was wondering if you could kind of help us understand first of all you mentioned some adjustments that you’re making to help improve the market share performance.

How should we think about your tolerance for market share losses in a tough cyclical environment for Tide versus the very positive numbers we’re seeing on a P&L basis for that business?

A.G. Lafley

We’re not very tolerant. What we did is it’s a classic example of first things first. In that business we wanted to lead the move to compaction which has been good for consumers, good for retailers, good for the industry and good for P&G and we capture a big share of that. Two, we’ve had to deal with over $1 billion in commodity cost hurt again this year. We wanted to make sure that we had our structural margin and costs right.

Three, we’ve had to lead the pricing up. As Jon explained, in developing markets to cover the transaction impact of FX and frankly in developed markets to recover the commodities. We’ve sort of stepped through all the things we need to do to make sure that that industry stays attractive. Attractive to retailers, attractive to suppliers and of course attractive to P&G given our leadership overall share.

You’re going to see a lot of innovation out of the laundry business and I’m just going to leave it at that. You’ve seen a fair amount this year. We’re going to step it up. The share will come back, it’s always come back.


Your next question comes from Bill Chappell – SunTrust

Bill Chappell – SunTrust

I think you mentioned in the comments that the media weighting was up 5% year over year but costs were down. I guess that’s a little surprising in that it seemed like you had been cutting back on some media. Do you expect it to continue to grow year over year for the next few quarters and what’s the outlook on costs? What we’ve heard is that after the May up fronts are done that media costs should come down a step further do you see that as well?

A.G. Lafley

The media world has been a good world for buyers and not just in the US. Here’s a simple way to think about it. Auto industry, big media buyers, dramatic drawdown. Financial services industry, big media buyers, substantial drawdown. I would name a few other industries that have moved down and even in some cases out of certain media vehicles. It’s been a buyers market. I don’t want to go into all the details because they’re a whole bunch of negotiations that are ongoing. I think you’re right, in the near term it could be even a bit more of a buyers market.

What we’ve tried to do is take our market mix modeling and our market ROI analysis and figure out how to spend a little less money and get a lot more delivery. There’s nothing more sophisticated then that. Some of it is buying leverage. We are the biggest advertiser in most markets. Some of it is frankly smarter media plans. Some of it is frankly creative ways that we work with the media suppliers to generate value for them and value for us.

I think it’s been good time. Frankly its been important that that’s been the case because as I said before we had to spend a little bit more on couponing here and there, we’ve had to spend a bit more with our customers in store in various channels and in various countries. I think its going to stay pretty attractive situation. Our goal over time, again we don’t look at it on month to month, quarter to quarter basis necessarily, but or goal over time is to strengthen our brand equities. Part of that is delivering a consistent share of media voice.


Your next question comes from [Zee Cramer] – BMO Capital

[Zee Cramer] – BMO Capital

I was wondering if you guys could comment on the, or give us a little bit more color on the article in the Journal yesterday about the restructuring in the Beauty and Grooming business, also as well on the timing and any charges.

A.G. Lafley

On the last part no impact. This is something we’ve wanted to do for a while. We think it’s the next logical phase in how you organize a Beauty and Personal Care business for even more success. Here’s the simple way to think about it. We’re going to organize more by consumer and customer or channel than by product category. It’s the first one of our major sectors that we’re going to do this with. We really do believe the consumer is the boss.

We really do believe in the consumer value equation and we believe that we can accelerate innovation and we believe that we can execute better as we go to market with our customers if we organize around personal beauty care around women and around men, very simple. Then organize several of our other businesses around the channel whether its salon or whether it’s the specialty beauty channels. That’s all it is.

On top of that it’s a dramatic simplification and reduction in the size of the management structure. We eliminate a lot of overlapping category and geographic complexity that we had before. Thirdly it’s an opportunity for our best performing beauty and grooming leaders to get more responsibility and to grow faster. I think its going to make us more agile. I know its going to get us closer to the consumer and the customers with whom we work to serve the consumer. We’re pretty sure it’s going to accelerate our innovation to market. On top of all of that it’s going to save us some money so it a win, win.


Your next question comes from Jason Gere – RBC Capital

Jason Gere – RBC Capital

You mentioned earlier about possible plans with the Pharma business. I was just wondering if you could just update us more on your thinking on portfolio optimization especially as retailers are cutting back on inventory and certainly looking to exit some of the smaller non-leading brands. I’m just wondering if you can give a little context around your thinking on that right now.

A.G. Lafley

We’ll continue to prune brands from our portfolio that are either not strategic or underperforming. I think you’ve seen that this quarter. Frankly you’ve seen that over the last eight, nine, ten years. We have fairly consistently every year pruned a handful of brands and even more in some years and that will continue. On the bigger category or industry side we’re always looking at what businesses we should be in and what businesses we should not be in.

As I said, while there’s been significant interest in our Pharma business and while we’ve announced that we’re open to look at all options, we are truly look at all strategic options including hanging on to the business. We’re improving our profit year on year in Pharma. We’re going to do what’s right for the shareholder with the Pharma business. Over the long term it’s not a play for us. Over the short term we’re going to do what’s right for the shareholders.

There are a couple of other businesses which I obviously can not call out that we’re looking at that may not be good fits for us. I’m not talking about small brands here I’m talking about categories. I think that’s sort of the state play at any given time and there are a couple businesses that we’d like to get in or we’d like to take a bigger position in. I think you have to look at that side of it too.

This should be a good time to acquire. There is consolidation going on in a number of industries including some that we operate in. I’m hopeful that there’ll be some assets that are available down the road and at the same time I think that we will continue to divest.


Your next question comes from Linda Weiser – Caris

Linda Weiser – Caris

In your professional hair care business do you think Unilever has plans for getting bigger in that area with their recent acquisition of a brand in that industry? Do you have any thoughts on that on whether that may change the competitive landscape there? Secondly, on Olay I’m curious if you think that price points that match retail higher then the Pro-X price points are possible given the issues they have with theft etc. at mass retail.

A.G. Lafley

I’m smiling on the second question because I remember back in 1998 when we had a huge debate, Susan and I were in the room with the team and we had a huge debate on whether we were going to go through the $10 price point on Olay. Most of the Olay in the world was sold at $6 to $10 and we were trying to decide if we could get $10 to $15 for Olay Daily Facials and $15 as the mid point for Total Effects. Now you know we have almost a $2.5 billion brand and we can price it from $5 to $50.

Who knows? I think the real answer is who knows. When the team came up with the Pro-X idea and they developed the product and we started to get consumer response to the concept and the product. I think some were surprised that it could command the pricing that it did but when you look at what we’re delivering, we’re delivering products that are better then $200 and $300 alternatives in department stores, that’s the value equation and it’s a heck of a value equation.

Consumers are smart and I think they’re less concerned about where they shop. We’ve done a heck of a lot of Pro-X business on Amazon believe it or not. It was one of the beauty care brands and initiatives and innovations they wanted to try. It’s been successful. Who knows? I think it will depend on what the consumer wants and hopefully we’ll spot it and give it to her.

On the first question you’ve got to ask Unilever. I have no idea. The only thing I can say is when you enter a new business it takes a certain amount of time to learn it. I wish I could say we could do these things over night but after 32 years it takes you a certain amount of time to learn it. It’s taken us some time to learn the retail color end of the business and to really get our technology and innovation programs geared up so we’re delivering products that are delightful to consumers and offer good value. It’s going to take us some time to learn the salon business but you’ve got to ask them about their intentions.

As far as the competitiveness it’s really too small to be a competitive factor right now. We’ve got far bigger competitive issues to deal with.


Your next question comes from Ali Dibadj – Bernstein

Ali Dibadj – Bernstein

I wanted to talk a little bit about operating margins a little bit and understand the puts and takes there. As far as we can tell volume de-leverage is in the -170 basis points range plus you worked down inventories nicely so I’m assuming there’s a little bit of down time as well. On the flip side you took down some advertising turn the basis points it looks like 170 from the press release. There’s also other moving parts we didn’t hear about so cost cutting, foreign exchange multipliers we’ve been calling it, all that soft of stuff. I want to get a sense of how things plus and minus shake out there.

In that context maybe an attachment question around the snacks and pets business, which I continue to be surprised about how low margins that is, particularly if, excuse me if this is incorrect, I thought the Pringles business was in the kind of 20% to 25% EBT margin range which would suggest pet is much lower. Two parts of the question if you could help that would be great.

A.G. Lafley

Here’s the story on pet margins. I think we’ve doubled them since acquisition so they’re definitely improving, single digit to pretty comfortable double digit. We are not the highest margin player in the industry but I think we’re running second right now. Not surprisingly Hill Science Diet given their vet focus and profile can generate the highest margin in the industry. We’re actually running higher margins than the other big players, Nestle, Mars, etc.

There’s more margin to come because we’re going through a major re-platforming and rationalization of our whole product supply operations and manufacturing operation. I think you’ll continue to see margin improvement. That has been a focus that team, the last three years and they’ve made progress on it and we prioritize margin and structural attractiveness before we started investing in the innovation. By the way, the innovation is all starting to get attraction and you saw that in the top line.

Without going into the details, the chips business is another matter. The only thing I’ll say there is we’re in the early weeks of a major initiative where we’ve upsized Pringles, super sized Pringles. So far so good but too soon to tell. If it works it will be a margin sweetener.


Your last question comes from Alice Longley - Buckingham Research

Alice Longley - Buckingham Research

I’m trying to separate out some of your volume and pricing numbers that you started to separate out earlier when you said that volume was down a little bit worse in developing markets then in developed markets. I’m wondering within developing markets if you can give us some feel for how volume was outside the CEEMEA area and similarly could you break out pricing kind of what pricing was developed versus developing markets so we can see the differentiation there.

A.G. Lafley

You know we report on a global business unit basis not on a regional basis. I’ll just give you a couple of order of magnitude things. In developing markets, L.A. is the most robust now then Asia and obviously the one that’s been hit the hardest as I said earlier is Central and Eastern Europe, Russia in particular. I think that shouldn’t surprise you based on reading any of the business dailies and just looking at what’s happened with those economies and with currency. We will cycle through that.

Jon Moeller

You asked about where we’re taking pricing and where we’re not. Effectively follow the currency devaluations.

A.G. Lafley

Every place we are committed to covering as much of the transaction impact of currency. That’s pretty much the pricing that’s left. All of the pricing for commodities is for the most part done and behind us. In fact, we’ll get benefits from that going forward because we haven’t anniversaried it yet in a lot of businesses.

Jon Moeller

Thanks very much everybody and we’re obviously available for phone calls on further details.


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