Teri List - Senior Vice President and Treasurer
Robert McDonald - Chairman, Chief Executive Officer and President
Jon Moeller - Chief Financial Officer
John Faucher - JP Morgan Chase & Co
William Chappell - SunTrust Robinson Humphrey Capital Markets
Constance Maneaty - BMO Capital Markets U.S.
Nik Modi - UBS Investment Bank
Lauren Lieberman - Barclays Capital
Ali Dibadj - Sanford C. Bernstein & Co., Inc.
Edward Kelly - Crédit Suisse First Boston, Inc.
Joseph Altobello - Oppenheimer & Co. Inc.
William Schmitz - Deutsche Bank AG
Douglas Lane - Jefferies & Company, Inc.
Wendy Nicholson - Citigroup Inc
Andrew Sawyer - Goldman Sachs Group Inc.
Linda Weiser - Caris & Company
Christopher Ferrara - BofA Merrill Lynch
Procter & Gambl (PG) Q3 2010 Earnings Call April 29, 2010 8:30 AM ET
Good morning, and welcome to Procter & Gamble's Third Quarter End Conference Call. Today’s discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections. As required by Regulation G, P&G needs to make you aware that during the call, the company will make a number of references to non-GAAP and other financial measures.
Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results, excluding the impacts of acquisitions and divestitures, and foreign exchange where applicable. Adjusted free cash flow represents operating cash flow less capital expenditures and the after-tax impacts of the Global Pharmaceuticals divestitures.
Adjusted free cash flow productivity is the ratio of free cash flow to net earnings, excluding the gains on divestitures of the Pharmaceuticals business. Core EPS refers to earnings per share from continuing operations, excluding certain unusual items. P&G has posted on its website, www.pg.com, a full reconciliation of non-GAAP and other financial measures.
Now I will turn the call over to P&G's Chief Financial Officer, Jon Moeller. Please go ahead, Jon.
Thanks, and good morning, everyone. Bob McDonald and Teri List join me this morning. I'll begin today's call with the summary of third quarter results. Teri will cover business highlights by operating segment. I'll then comment on several topical items before providing guidance at the end of the call. Bob, Teri and I will take questions after our prepared remarks. Following the call, Teri, Mark Erceg, John Chevalier and I will be available to provide additional perspective as needed.
We have a very strong quarter with organic volume growing 7%, the fastest rate for organic volume growth in 18 quarters. A strong innovation program supported by higher media weights drove volume growth across all regions and pilot six business segments. Organic sales grew 4%. As expected, pricing was down 1% due to the targeted pricing interventions we've previously discussed.
Geographic mix, driven by double-digit growth in China, Saudi Arabia, Brazil, India and Turkey reduced sales by about 1% and accounted for half of the total mix impact. While we expected emerging market growth to rebound, we didn't expect markets like Turkey to recover so sharply, with shipments up more than 60% versus a year ago. Category and product mix taken together were responsible for the balance of the mix impact.
Strong growth of Pampers Simply Dry in Europe, Bounty and Charmin Basic in North America, and entry point shaving systems in disposables coupled with slower growth of our premium Prestige Fragrance, Salon and Braun businesses accounted for one point of negative mix.
Foreign exchange had three points organic sales resulting in all in-sales being up 7%. All-in GAAP earnings per share were $0.83, above the high end of our guidance range. This included a one-time, non-cash charge of $0.05 per share related to the recently enacted Health Care legislation.
Core earnings per share was up $0.89. It was $0.89 per share, up 10% versus a year ago and $0.07 per share above the high end of the company's guidance range. The over delivery was primarily driven by higher-than-expected gross margin expansion behind strong cost-reduction efforts.
Gross margin was up 290 basis points. The single largest contributor was our ongoing productivity and cost-reduction initiatives. Lower commodity costs and volume leverage also contributed.
Operating margin increased 80 basis points as higher gross margin was partially offset by an increase in SG&A. SG&A increased 210 basis points behind higher marketing spending, which was increased to fully support our strong innovation program.
The effective tax rate from continuing operations was 31.3%, up 600 basis points versus year ago. The increase was driven by a low base period that included a number of audit settlements and the impact of the previously mentioned Health Care legislation.
Adjusted free cash flow was an all-time record at $4.5 billion. To date, we generated $11.5 billion of adjusted free cash flow, which is nearly 130% of earnings, excluding gains from the Global Pharmaceuticals divestiture. Two weeks ago, we increased our quarterly dividend 9½% from $0.44 to slightly more than $0.48 per share. This is the 120th consecutive year since we were incorporated as a company in 1890 that we've paid a dividend and the 54th consecutive year the dividend has been raised. During the past 54 years, P&G's dividend had increased at an average annual compound growth rate of 9½%.
In addition to raising the dividend, we increased our share repurchase activity in the March quarter, repurchasing $2 billion worth of stock. This brings fiscal year-to-date repurchase levels to $3.4 billion. Base on the strength of our business results and cash performance, we are increasing expected repurchase levels from $5 billion to $6 billion for the full fiscal year. All in, we're very pleased with our March results.
Volume growth was strong as we accelerated our pace of innovation and increased marketing support. Solid top line results in conjunction with our cost and productivity efforts enabled us to exceed our earnings per share targets. We generated a significant amount of cash, authorized a sizable dividend increase and increased our share repurchase plans. We're operating more fully as one company, coordinating and scaling our activities in markets and across categories. Our overarching strategy of touching and improving more consumer lives at more parts of the world more completely is working.
At the heart of the strategy is a strong multi-year innovation program. The recently released U.S. IRI Pacesetter Report for 2009 provides continued confirmation of the strength of our innovation program and its ability to drive growth. IRI recognized Procter & Gamble as the most innovative manufacturer in the consumer package goods industry for the last decade, presenting the company with the Outstanding Achievement in Innovation award.
In 2009, Procter & Gamble launched five of the top 10 most successful new non-food consumer products as measured by sales in the United States. Tide Total Care, Gillette Venus Embrace, Bounty Extra Soft, Always Infinity and Secret Flawless. In the past 15 years, 125 P&G innovations have earned a spot on the top 25 Pacesetters list more than our six largest competitors combined.
Going forward, we will continue to invest behind the strong multi-year innovation program to expand portfolios vertically, horizontally and into geographic white space. We will also continue to upgrade existing product offerings, improving value for consumers.
During last quarter's call, I took you through our innovation programs in Baby Care, Laundry, Oral Care and Health Care. Today, I'll focus on three additional categories: Skin Care, Feminine Care and Male Grooming.
In Female Skin Care, we're expanding our portfolio vertically with innovations at multiple price points. At the premium end of the market, core whitening innovations like Cellumination and Whitening Source Derm Definition have helped grow our SK-II business by double digits for four consecutive quarters, now making SK-II the number one skin care brand in Asia.
The recent introduction of Olay Pro-X in China is solidifying our long-standing position as the number skin care brand in China and launches of Olay Pro-X in Australia and New Zealand are both tracking ahead of expectations.
Earlier in the year, we launched Olay Regenerist Rollerball and it is already the number one eye product in the United States. And since last month, we started shipping our newest product, Olay Pro-X Professional Firming Treatment Kit. We're also providing consumers with more mid-and-value tier skin skincare offerings. In the mid-tier, Olay Natural White was recently introduced in India and the Asian markets. After only five months, Natural White is now the largest skincare boutique in the region. And the value tier, Olay Complete, our most affordable skincare boutique, continues to grow behind dedicated trial building activities.
We've expanded our skincare portfolio horizontally with the launch of Olay Total Effects Body Wash in Singapore, Malaysia and Thailand. And Olay Total Effects 7-in-1 Anti-Aging Body Wash, our most advanced body wash ever in the U.S. in February.
Finally, we continue to expand geographically. We launched Olay into 15 countries over the past year. The same number of countries Olay was launched into over the previous five years. Olay is now marketed in 70 countries around the world. Where we've launched, we've continue to grow. In Spain, Olay has overtaken L'Oreal to become the leader in mask skincare just sits here since being launched. In India, Olay skincare has achieved the 5% value share after just three years in market. And in Mexico, Olay now has a 13% value share, twice the level of just one year ago.
In Feminine Care, we are also driving both premium and value segments of the market. In January, we upgraded the top tier of Always in Western Europe with better absorbing technologies. And in March, we launched Tampax Pearl in Spain and in Belgium.
In the value tier, we launched Always Simply Fits into the United Kingdom and Belgium, and we expanded our portfolio in India with the launch of Whisper Choice Ultra in February. Shipments to date for Choice Ultra has exceeded expectations delivering record high Whisper shares of nearly 50%.
We continue to expand Naturella into additional geographies, the most recent of which was China in March. Naturella is priced 30% below top-tier Whisper and 20% above mid-tier Whisper. While it's still very early, month one shipments are ahead of going in expectations.
Across several of the more than 30 markets where Naturella has already been established, we recently improved the product to include deep channels for better fluid handling, improved skin benefits and improved visual signals. This significant set of upgrades began shipping in Mexico in February and Central and Eastern Europe in April.
We're using the same strategic template of expanding our portfolio up and down, horizontally and into geographic white space in Male Grooming. At the top end of our portfolio, we continue to leverage Fusion. Fusion has now grown share for 17 consecutive quarters. On top of that, we recently announced the upcoming launch of Gillette Fusion ProGlide, a significant advancement in shaving performance and comfort.
Consumers prefer ProGlide over Fusion by a wider margin than Fusion was preferred over MACH3. In the mid-tier, we recently launched the new MACH3 razor, which was specifically designed to better meet the needs of emerging market consumers. As a result, MACH3 shares are at record levels in both Argentina and Mexico. In India, MACH3 value share has grown more than 10 points and almost half of the incremental growth has come from consumers who have traded up from double-edged blades.
We continue to innovate at the low end as well to ensure all consumer needs are being properly served and to stimulate systems growth. Gillette Factor, Prestobarba3 and MACH3 disposables are all performing well and are being expanded to additional markets.
Several important horizontal portfolio expansions of the Gillette and Olay brand names into Male Personal Care are also underway. In February, we launched a complete line of Gillette male grooming solutions in Brazil. Based on early results, we're now expanding the entire product line across the balance of Latin America. In March, we introduced the scientific face care regimen under the Gillette name in China. The dermatologist endorsed regimen include specially designed MACH3 razor, cleanser and a balm. Early shipments are tracking ahead of expectations.
And just last month, we launched Olay's first targeted offerings specifically designed for men. Olay Men solution, a full line of men's skincare products, was introduced in China and is off to a great start. In Western Europe, we just launched a complete line of Gillette skincare products. In North America, we're introducing Gillette Fusion ProSeries, an advanced line up of male skincare products in June. Gillette Fusion ProSeries fully leverages P&G's skin care technology for the first time ever and significantly enhances the Gillette ProGlide launch enabling retailer and consumer scale events.
The example I just provided in Skin Care, Feminine Care and Male Grooming are illustrative of the work we're doing and investments we are making to expand our portfolio vertically, horizontally and geographically in order to serve more consumers in more parts of the world more completely.
We're coordinating our innovation activities across categories of markets and are acting more intentionally as one company. We're scaling commercial activities as well as product innovation. In North America, 18 brands helped sponsor the U.S. Winter Olympics and Paralympic teams under our unifying Procter & Gamble Thanks, Mom advertising campaign. Other examples of scaled activity, which are enabled by the breath of our brand portfolio, include our sustainability-based future friendly program and our ongoing collaboration with Wal-Mart on family-friendly programming, including the recently released family movie, Secrets of the Mountain.
These programs, which recognize moms, enable households to make simple changes to save energy, save water and reduce waste. And that bring families together, advance our purpose of touching lives and leverage our broad portfolio turning size into scale and scale into growth.
In summary, a strong scale and coordinated innovation program increased marketing support, tight cost control and continued cash discipline have resulted in another strong quarter.
With that, let me turn the call over to Teri.
Thanks, Jon. Starting with the Beauty segment, organic sales increased 2% driven by 4% organic unit volume growth. Pricing and geographic mix reduced sales by 2%. Female Skin Care delivered double-digit organic volume growth, including 20% growth in developing markets. The strong results in developing markets were driven by the expansion of Olay Pro-X in China, Australia and New Zealand and Olay Natural White across Asia. In the U.S., Olay all-outlet value share of the Facial Moisturizer segment was up nearly 1½ point to over 45% behind the introduction of the Olay Pro-X Professional Firming Treatment Kit and the Olay Regenerist Rollerball Eye Treatment innovation.
Retail Hair Care delivered a solid quarter with a mid-single-digit organic volume growth. Head & Shoulders lead the growth with shipments up mid-teens, including over 25% growth in China behind our scalp care innovation.
In Japan, shipments of H&S are nearly doubled prior-year levels driven by the scalp moisturizing innovation and marketing campaign. Pantene shipments were up high single digits in developing markets behind the expansion of Pantene Nature Fusion and price corrections taken in Turkey and the Arabian Peninsula. In North America, Pantene shipments were lower versus prior year as retailers reduced inventories of current products ahead of the base brand restage that we'll launch later this quarter. The selling of the new Pantene line up has gone extremely well and the new products will be on shelves in mid-June.
P&G's all-outlet value share of U.S. retail Hair Care is approximately 32% in line with prior-year levels as growth on Herbal Essences offset modest declines on Pantene. Professional Hair Care volume was down mid-single digits due mainly to soft global markets.
In the Prestige Beauty business, volume was up mid-single digits driven primarily by weak base period comparison in Travel Retail in Western Europe. The increase in these areas were partially offset by continued market softness in North America. Prestige Fragrance market share is roughly in line with prior year at about 15%. In Prestige Skin Care, share's up nearly a point to 7% Taurus behind strong results of the SK-II skin signature innovation. And as Jon mentioned, SK-II is now the number one Prestige Skin Care brand in Asia.
In the Grooming segment, organic sales were up 4% on volume growth of 5%. The net impact of price increases and negative product and geographic mix reduced sales by 1%. In the Male Blades and Razors business, organic volume was up high-single digits with strong growth in both developed and developing markets. Shipments in Greater China were up more than 20% behind Gillette Factor, our entry-point shaving system. In India, the relaunch of our lower-cost MACH3 system continues to deliver strong results with shipments up more than 40% for the brand.
Fusion shipments were up nearly 20% on a global basis, including over 25% growth in Western Europe, CEEMEA [Central & Eastern Europe/Middle East/Africa] and Asia. In North America, both Fusion and MACH3 grew mid-singles behind strong marketing and in-store programs. Gillette all-outlet value share of the U.S. Male Blades and Razors category was up nearly half a point to over 77%, with Fusion up three points the 17th consecutive quarter of Fusion share growth.
We're pleased with these strong results, leading up to the launch of Fusion ProGlide provide our first major upgrade to the fusion platform, which is scheduled for June. As Jon mentioned, ProGlide is a strong consumer preference winner over the base Fusion product and we've seen excellent response to our initial consumer awareness building programs around the U.S.
Volume in the Appliances category was up mid-single digits with solid growth of Braun in developing markets and Western Europe against a soft space period caused by the economic crisis. In Western Europe, Braun shared hair removal appliances with was up over four points to 42% with strong improvement of both male and female products.
In Health Care, organic sales were up 1% driven by a 5% increase in organic volume. Targeted price adjustments and negative geographic mix, lower sales by 4%. In Oral Care, shipments increased high-single digits with developing markets up mid-teens and developed markets up mid-single.
In developing markets, the Crest brand was up mid-teens in China and over 40% in Mexico behind the launch of Crest Pro-Health toothpaste. The Oral-B brand was up nearly 40% in Brazil behind the second wave of toothpaste expansion. And Oral-B volume was up more than 50% in India on the strength of our toothbrush expansion progress.
Western Europe delivered strong volume growth behind the launch of Pro-Health toothpaste in Benelux and good results in the base Crest and Oral-B franchises in the U.K., Germany and France. P&G share of the Benelux toothpaste market is up more than seven points versus prior year. And P&G is now the overall Oral Care market share leader in Western Europe and in Belgium and Holland.
In the U.S., Oral Care shipments were up low singles and we're seeing strong consumer and customer response to our Crest 3D White and Pro-Health Sensitive Shield innovation that launched during the quarter. Crest has maintained its market leader position in the U.S. toothpaste category with all-outlet value share of 37%.
Feminine Care volume grew mid-single digits led by the Naturella brand, which posted mid-teens growth behind the China launch in March. The Always brand also delivered broad-based volume growth with all major regions up mid-single digits or better. Always also continued to see good shipment growth in Western Europe from the Always Simply Fit innovation. P&G value share of the Western Europe Feminine Care market is in line with prior year at nearly 50%.
North America and Latin America have delivered solid growth behind increased marketing investments behind Always, Tampax and Naturella. In the U.S., the Always brand grew all-outlet value share feminine pads by nearly a point to 59% and Tampax increased its share of the U.S. tampon market by half a point to nearly 50%.
Personal Health Care volume was up mid-single digits due mainly to the significant reduction in cold and flu incidences compared to prior year and increased competitive activity on Prilosec OTC. In the Snacks and Pet Care segments, organic sales and volume were down 6%. Snacks volume was lower versus prior year at a soft post-holiday merchandising period in the U.S. was partially offset by solid growth outside the U.S., including mid-teens growth in the CEEMEA region.
The business is seeing good response to the Pringles Multigrain innovation that launched in the U.S. in February and that will be launched in Europe over the summer. Pet Care volume was up low singles due primarily to net market contraction in the Premium and Super Premium segments. P&G all-outlet value share in the U.S. pet care market was down slightly to about 9½%.
Fabric and Home Care segment, organic sales increased to 5% and volume grew 10%. Volume in both Home Care and Batteries was up double-digits and Fabric Care increased high singles. In Home Care, volume growth was broad-based across brands and regions. Febreze shipments were up 30%, including very strong growth in North America behind the Home Collection's line up and continued market expansion in Western Europe.
Shipments of the Dawn and Fairy dishwashing franchise were up high-teens behind the strong results of the Dawn Hand Renewal's ship in North America and the Fairy Platinum auto dish initiative in Western Europe. Swiffer shipments were up double digits in North America, driven by strong trial building programs and product improvements on Swiffer.
U.S. all-outlet market share is up for all major Home Care brand. Dawn share of hand dishwashing liquid is up two points to 45%. Cascade auto dishwashing share is up four points to nearly 66%. Febreze share of the Air Care market is up three points to over 23% and Swiffer share of the Surface Care market is up more than a point to nearly 17%.
The sharp increase in battery shipments was driven mainly by strong consumer and retailer support following the interventions made on the U.S. Duracell business to remain competitive, in light of increased promotional activity from low-cost and private label competitors. Duracell shipments were up more than 35% for the quarter in the U.S. The Batteries business also delivered double-digit volume growth in Western Europe behind Duracell's renewable personal power innovation.
Fabric Care shipments were also strong, up high-single digits for the quarter. All of P&G's top laundry brands, Tide, Ariel, Gain, Bold, Daz, Dash and Ace delivered volume growth of mid-single digits or better. In North America, Fabric Care shipments were up high singles behind the Tide Stain Release and Tide with Febreze for innovation. Shipments of Gain were up double digits in the U.S. behind strong marketing programs to build both the Detergent and Fabric Enhancer businesses. P&G's all-outlet value share of the U.S. Fabric Care market is in line with prior-year levels at 53%.
In Western Europe, growth of our Ariel and Dash brands were driven by the active list detergent innovation in the area of professional laundry additive launch. P&G's value share of the Western European Fabric Care market is up nearly two points to over 28%.
Tide shipments in India were up nearly 30% following the launch of Tide Naturals. P&G's first entry into the value tier of the powder detergent market in India. In the CEEMEA region, Ariel shipments were up nearly 30% and Tide was up double digits as we begin to see key markets such as Turkey and Saudi Arabia show signs of recovery from the economic crisis.
Baby and Family Care delivered organic sales growth of 7% and organic volume growth of 10%. Product mix reduced sales by 2% due to a shift toward larger pack sizes and strong growth of value-tier products. Shipments for the Baby Care business and the Pampers brand were up double digits with strong growth in both developed and developing markets.
Pampers shipments were up double digits in North America behind the launch of Pampers Dry Max, our biggest innovation of Pampers in the last 25 years. While it's too early to assess the launch, we're very encouraged by the strong trade support for this innovation. Importantly, Pampers already had strong momentum in the U.S. with all-outlet value share up a point to 31% prior to the launch of the Dry Max innovation, which hit shelves in mid-March.
In Western Europe, Pampers shipments were up mid-singles, driven by the continued success of Pampers Simply Dry. Pampers share of the Western Europe diaper market remains strong, up about 2½ points to over 56%. In developing markets, Pampers volume was up mid-teens led by Asia and the CEEMEA region. We continue to see excellent growth on Pampers and India. And Pampers is now the clear market leader with over 50% share. In CEEMEA, we're seeing signs of recovery in markets such as Turkey and Saudi Arabia, which are more than offsetting continued weakness in Russia and Poland. Pamper's value share is up a point to 50% in the CEEMEA region.
Family Care shipments were up double digits, driven by mid-teens growth of Charmin and high single-digit growth of Bounty. Both brands benefited from very strong growth of the basic product lines and both brands have product innovation launching soon. On Bounty, we're in the midst of launching product upgrades across all key elements of the brand, the main Bounty paper towel line, Bounty Basic, Extra Soft and Bounty Napkins.
On Charmin, we have upgrades coming in July and all 6 key elements of the brand: Charmin Ultra Soft, Ultra Strong, Mega Roll, Basic, Sensitive and Fresh Mates. Charmin's all-outlet value share of the U.S. toilet tissue category was up half a point to over 28% and Bounty share of the U.S. paper towel category is in line with prior year at 46%.
That concludes the business segment review. And I'll hand the call back over to Jon.
Thanks, Teri. Before I get to guidance, I want to briefly address a couple of questions we've been receiving.
First, what's happening with trade up and trade down? The answer as I think you can gather from Teri's business review is that both continue. Premium innovations increased consumer value through enhanced product performance and continue to perform well. Products like SK-II, Fusion, Ariel Excel Gel, Fairy Platinum and Crest 3D White are all growing strongly. All five of the P&G products in the 2009 IRI Pacesetter Report, I referenced earlier, where premium priced innovations, succeeding in spite of the worst economic environment in the generation.
On the other hand, there's a meaningful group of price-conscious consumers who continue to look for lower prices. These consumers are driving double-digit increases on brands like Gain, Pampers Simply Dry, Naturella, Bounty Basic and Charmin Basic.
Our strategy and purpose demand were more intentionally to serve both performance- and price-focused consumers. The vast majority of consumers of either group continue to prefer branded products versus private label. In the U.S., branded products account for 88% of the sales in the categories in which we compete. Private label market share has sequentially decline for four of the last five months. In Western Europe, where private label is most developed, private label shares are sequentially declining and if then [ph] (42:59) flat or lower than year-ago levels for three of the last five months.
The second question I want to address relates to margins and it usually framed in the following manner. As P&G expands further into developing markets and innovates across mid- and low-tier segments, will this result in lower prices and margin dilution?
I continue to believe it doesn't have to. As we've said many times, our developing market margins on an after-tax basis are comparable to developed market margins. In some cases, they're actually higher. These margins will increase as we build scale in these markets so accelerate on activity in developing markets should in aggregate support or build P&G margins. As relates is to mid- and low-tier entries, higher margins tend to be correlated with vertically-tiered portfolios. Building a complete portfolio, which extends from the premium segment down to the low tier, allows us to reach more consumers, build more scale and increase margins. They also allow us more innovation driven pricing flexibility at the high-end.
Let's look at several examples which help illustrate this point. Sales of Bounty Basic, our value tier paper towel, have increased 3x over the past three years while total Bounty margins have increased 300 basis points. Charmin basic sales have increased 4x over the past three years and after-tax category margins have increased 700 basis points.
In India, we recently expanded our laundry portfolio with the introduction of a new brand, Tide Naturals. Tide Naturals was initially priced 70% higher than the established value tier. It's functionally superior to other value tier offerings and milder on hands, so Tide Naturals was a way to trade existing value tier consumers up. With the introduction of Tide Naturals, our profitable and growing Laundry business in India now has strong product offerings in the premium, middle and value tiers. And Indian consumers have more choices. By better serving the needs of India's consumers, P&G's laundry volume in India has grown 6x since 2003 and margins are up more than 900 basis points.
Turning now to guidance. We continue to expect fiscal 2010 organic sales growth between 3% and 5%. This is a notable improvement versus the start of the year when organic sales was projected at 1% to 3%.
Foreign exchange based on current spot rates should be about flat resulting in all-in sales of 3% to 5%. With only one quarter left to report, we're tightening our all-in GAAP earnings per share on the guidance range. We're raising the low end by $0.04 per share, which improves our all-in GAAP earnings projection range to $4.06 to $4.12 per share, inclusive of the $0.05 per share Health Care impact mentioned earlier. As stated on a number of occasions, we believe estimates above the high end of our guidance range are overly aggressive. As we look to manage our investments and maximize long term shareholder value creation, we won't chase short-term foreign exchange movements, commodity increases or other one-time impacts simply to hit the high end of our guidance range or a consensus number, which is above our guidance range.
Core earnings per share are expected to be in $3.62 to $3.68 per share, up 4% to 6% versus a year ago. This is an increase versus our prior guidance of 2% to 5% and is a substantial improvement versus the start of the year when core earnings per share were expected to be minus 1% to up 3%. Since that time of strengthening top line and robust cost control and productivity efforts have driven a significant improvement in core earnings per share. Our core earnings per share guidance range has increased by $0.18 per share on the low end and $0.09 per share on the high end, despite incurring an impact of about $0.08 per share related to Venezuela.
Turning to the June quarter, we expect organic sales growth of 4% to 5%. All-in sales, inclusive of foreign exchange benefit of about two points, are expected to be up 6% to 7%. Both core and all-in GAAP earnings GAAP per share are expected to be $0.68 to $0.74 per share. We've indicated for some time that the second half and fourth quarter earnings, in particular, will be lower than the first half. There are a number of reasons for this. The biggest driver is incremental marketing investments for support or innovation program, which is back half loaded and skewed even more heavily towards the fourth quarter when items like Fusion ProGlide and the Pantene restage are launching.
Second, we expect higher cost of goods sold behind less favorable year-on-year commodity comparisons and one-time initiative launch costs. Third, while we've moved quickly to address the situation at Venezuela, the impact of the currency devaluation will impact fourth quarter results. These dynamics have been and continue to be reflected in our guidance numbers.
Regarding fiscal 2011, similar to last year, we're trying to ensure our plans are built on the most up-to-date relevant assumptions for foreign exchange commodities and for market growth. We're all suspending time on a disciplined look at investment options, ensuring that we're investing in the right things for the long term.
So like last year, we pushed back playing completion closer to the end of our fiscal year. Our plans are targeting continued strengthen from the top line and sequential improvement on a core basis on the bottom line. We'll provide more specific guidance regarding next fiscal year when our planning process is complete.
In closing, we remain pleased with the progress we're making. Volume growth was strong as we accelerated our pace of innovation and increased marketing support. Solid top line results in conjunction with our cost and productivity efforts enabled us to exceed our earnings per share targets. We generated a significant amount of cash, authorized a sizable dividend increase and increased our share repurchase plans.
We're operating more fully as one company, coordinating and scaling our activities in markets and across categories. Our overarching growth strategy of improving the lives of more consumers in more parts of the world more completely is working and will enable us to grow our business sustainably and profitably in the future.
Bob, Teri and I would now like to open up the call for questions.
[Operator Instructions] And our first question is from the line of Lauren Lieberman from Barclays.
Lauren Lieberman - Barclays Capital
I was hoping you could give a little bit more color on productivity because gross margin was obviously a big positive surprise in your -- clear to mention that it was more productivity-related than necessarily cost depletion? So if you just kind of walk through some of the things that are going on there and how should we think about that looking forward?
It is both cost savings programs. We have very strong cost savings program separate from productivity that looks in everything from lower capital costs to lower inventory carrying costs, cheaper and better formulations. It's a very robust program. And then in addition, as we are in all parts of the company, we continue to focus on productivity, increasing sales per employee really across the board. And that's something that we'll continue to focus on going forward.
Lauren, I would also add -- this is Bob. I would also add that our scale efforts are also having an impact of delivering the results with greater productivity. For example, we mentioned March was a record month for our volume shipments. That month was supported by our Olympic advertising, our Thanks, Mom campaign, the first time in the history of Procter & Gamble Co. we've advertised the company in the United States and tied it to our brands. And that's a more productive approach using our scale.
Your next question is from the line of John Faucher with JPMorgan.
John Faucher - JP Morgan Chase & Co
Jon, following up on your comments about emerging market margins or lower-tier priced margins, two questions on that. I guess the first is, how do these products compare from a penny profit standpoint? So as you get more of your volume growth from those, do we still need to factor that in? And then second piece would be as we look out over the next couple of quarters, how long do you think this negative top line mix continue? Is it something where you start cycling that when we get to January of next year or do you think this has something where we need to plan on this for a couple of years for a more aggressive long-term build out of the portfolio?
On the first question, obviously, as we accelerated volume growth in developing markets this quarter, there is an impact on top line because of lower sales per unit or prices per unit. And that does translate as you rightly suggest, John, into somewhat lower penny profit on those items versus the case in developed markets. But the margin is really isn't that great, number one. And number two, as I indicated, in some markets we actually have margins that are higher than developed markets and where penny profit is equal or even better. On the top line, this is a dynamic, frankly, what that does for the better part of this decade as our developing markets have grown at a faster rate than the developed markets. It has historically been a drag from a mix standpoint between one and two points per quarter. In more robust economic environments, we've been able to offset that as the premium parts of our portfolio, particularly the Prestige business, the Professional business, the Braun business were the healthier. So going forward, it is dynamic. I think you should expect to continue. That doesn't imply though that we're going to be negatively mixing it for eternity. I would hesitate to give you a date in terms of when the negative mix would dissipate. As I indicated, we're really in the middle of our planning process and we'll have to work through that, but we'll try to provide clarity to that in the subsequent call.
Your next question is from the line of Chris Ferrara from Bank of America, Merrill Lynch.
Christopher Ferrara - BofA Merrill Lynch
Not to beat this topic to death more, but it's striking that the gross margin was so strong despite a negative two mix and a negative one price. And it's been such a hot topic. So I'm just wondering, and I know you said the after-tax margins and D&A are comparable, you guys have been saying that for years. But can you quantify the mix effect to gross margin this quarter? And maybe just give a little color on this dynamic? Because I would have expected it to be at least a reasonably sizable drag with that negative two mix?
Well, as we've said, the gross margins are a little bit lower in developing markets because of the lower price points. I really don't have it in front of me, Chris, the dimensionalization of the exact impact of that in the gross margin for the quarter. If you want you can follow up post the call, we'd be happy to provide perspective on that. But as we've been saying all along, while there will be elements of our activity system be it more value-tier entries, expansion into developing countries and accelerated growth on those markets, that will have a margin impact. We expect to be able to continue to hold our bill margins
The next question is from the line of William Schmitz from Deutsche.
William Schmitz - Deutsche Bank AG
Can you just tell us what your sort of weighted market share was in the quarter and how that's changed over the last couple of two or three quarters, and then the percentage of your sales where you're gaining market share? And then sort of second part of that is, I know A&P spending was kind of depressed last year. I know you have a big innovation pipeline. So can you just talk about what you kind of think the A&P spend is going to up year-over-year in the fourth quarter?
Well, Bill, this is Bob. Let me talk first about our share. Share reports are available from March of course, but we're confident that we grew global value share up about 1% above a year ago. All regions have improved sequentially versus quarter two, and all regions, but our Central Eastern Europe, Middle East and Africa should be flat or growing share. Our Household Care business inclusive of Fabric and Home Care and Baby and Family Care is the strongest. Female Beauty and Male Grooming is mixed in share with Grooming up and Beauty slightly down. And Health Care is down slightly, driven largely by Prilosec. Snacks and Pet loss the most value share during the quarter. Share growth will continue in the fourth quarter, driven by our strong innovation program, and obviously, a lower base period comparison. In terms of A&P spending, as you know, Bill, we don't provide specific figures on A&P basis, but I would expect as we release our annual results that the A&P spending as a percentage of sales will be up versus a year, ago and that is behind market increases to support the innovation program as we read and point out. We're looking at impressions being up over 20% versus a year ago. And given the back-half loaded nature of our innovation program, particularly the strength in the fourth quarter, you should assume that, that number is even stronger in the fourth quarter.
Bill, if I can just add to what Jon said, because I think it's important that we focus more on the effectiveness of the A&P spending not just the spending itself, it's if you have seen our Secrets of the Mountain movie that we have produced and aired in conjunction with Wal-Mart, it won, it was the number one show for the whole night. 93% of moms liked the movie, 88% thought it was an excellent quantity, 74% rated the commercials favorably. 26% increased the favorability of the brands that were advertised on that show. And in total, the purchase intent for our brands indexed 270%. Research from the Association of National Advertisers indicates that only 23% of moms are happy with the family-oriented programming currently available on television. As the world's largest advertiser, we have a responsibility and an obligation to improve the quality of that programming. And as I showed by these numbers, it's in our best interest to do that because it makes our advertising more effective. So try not to just focus on the spending, but also focus on the quality of the advertising and the context in which it's aired.
Your next question is from the line of Wendy Nicholson with Citigroup.
Wendy Nicholson - Citigroup Inc
Could you go back and talk a little bit more about the comment Jon you made that your higher margins are in your vertically tiered markets because I guess my first question is in couple of your key emerging markets, where do you stand? For example, in China when we were there it struck us as being a surprisingly premium priced market where that's where the innovation's come from and that's how your business mix skews. So my question I guess is in the China or in the Russia or in the Brazil, do you simply launch more new products at the lower end? Is it going to come from just the category diversification? And kind of where do you think you are? I mean ,There's obviously a lot of press when you launch the Tide Naturals, but it also seems like you're doing stuffs at the high-end like Oral-B. So I guess I just don't know where you are kind of in that game of how far along you are.
Wendy, this is Bob. As we've talked, our growth strategies is to touch and improve more consumer lives in more parts of the world more completely. That requires us to build our portfolios vertically in terms of price tiers and consumer benefits. Horizontally, in terms of the number of categories in every country, and horizontally in terms of adjacent categories. When you're in China, you saw that we're only in more than a dozen categories in China, whereas in the U.S. we're in more than two dozen categories. The per capita spending on P&G products in China is only $3 per head per year. Here in the United States, it's over $100. We have a very discreet, very concrete plans to fill out those product categories and to get all categories in all countries over a period of time, metering those investments to make sure we deliver at the top of our peer group in terms of total shareholder return. So every country building blocks, we talk about it, we work on it all the time and we want to satisfy every consumers needs. With the purpose like ours of touching and improving lives, there's no reason we should stop trying to get every consumer in the world, as long as we can continue to deliver the shareholder returns that we need to deliver to be in the top of our peer group.
And I would just add that China actually makes the point, vertically tier portfolios delivering higher margins. I mentioned earlier that at some developing markets, we have margins that are higher than developed markets. China is one of those markets. It's one of our most developing market where we have a good representation across price tiers. Just one more point than that, if you look at China itself, one of our best developed portfolios in terms of tearing is the Hair Care portfolio. And there again, we have higher margins on that business than we have on some of our other businesses where the tiers aren't as well-developed. So I think it's a very good example of exactly the point that we think is relevant.
Our next question is from the line of Andrew Sawyer with Goldman Sachs.
Andrew Sawyer - Goldman Sachs Group Inc.
I was wondering if you could address some of the pricing adjustments that you have targeted to, I guess, in response to drive to private label, and specifically in U.S. Fabric and U.S. Family Care, have those worked as expected? Are you comfortable with where private label is today? In any instances did you perhaps take prices down too far? How should we think about pricing in those two specific categories over the next couple of months are next couple of quarters?
Andrew we are happy with the pricing we've taken. As Jon said, the price impact was about one point this quarter. A year ago, we priced up averagely 5% across the entire company across all categories. And we're doing what we have to do pricewise to stay price competitive. Having said that, that's not the focus of our efforts. The focus of our efforts are to touch and improve lives with our innovation program, and generally many of our innovations, as Jon, talked about, are premium priced like Gillette provide. And some are lower priced like Tide Naturals in India. So were just doing what we have to do the one Q2 in the consumer value equation and we are attempting to do that through innovation through the strongest innovation program that we've had in my 30-year career.
Your next question comes from the line of Nik Modi with UBS.
Nik Modi - UBS Investment Bank
So the question for you, Bob, just talking about the Beauty segment. I would say growth rates have been lacking the tiers and any just give us a perspective of course we understand prestige and professionals build malaise because of the economy. Can you just give us some perspective on what's going on the business, and when do you think you can actually kind of regain some momentum broadly in that business?
Sure, Nik. I understand that the it appears that some of our competitors' organic sales growth rates in Beauty are rebounding faster than ours. And I want to address that. We're seeing increased interest in our Beauty Care segment. Most of the growth rate differential for this year's March quarter is really explained by weaker base periods for our key competitors. The two-year stacked growth rate is equal to the key competitors. In other words, if you take the two-year rate for Procter & Gamble versus the competition, they're roughly, roughly the same. We're also being impacted by the strategic decision to rationalize our Professional Hair Salon portfolio. And you kind of mentioned that, which should enable bigger and more global innovation. An example of this rationalization is the divestiture of Johnson products to Rustic Canyon at the end of March. And the divestiture of Lowanda [ph] (1:06:24) to SAG Holding at the end of May. We've got several large initiatives shipping in the June quarter, including the restage of our Pantene lineup. Remember, Jon talked about our Pantene North America results being depressed by de-stocking in preparation for the relaunch of Pantene, the biggest relaunch since we launched the brand in North America. And we're also introducing things like Gucci for Men in the June quarter, all of that we expect will lead to accelerated growth.
Your next question comes from the line of Coney Maneaty with BMO Capital.
Constance Maneaty - BMO Capital Markets U.S.
I have a question on Venezuela. The $0.08 that you talked about in depressing earnings, was that for the back half of fiscal '10 or just the March quarter? Also, are you doing business at the parallel or non-essential rate and any thoughts on the outlook for fiscal '11 in regard to Venezuela?
First question, the $0.08 is the back half number. It splits fairly equally across the two quarters. In terms of whether we're doing business of the official rate versus the parallel rate, we are translating at the official rate, which is you know now this is much higher than it was. But we are regularly converting bolivars to dollars to support fairly large dollar-denominated purchase needs, such that we don't typically buildup a big balance in bolivars. And, obviously, that transaction, some of it is occurring at the DV [ph] (1:08:16) rates, but a lot of it is occurring at the unofficial rate and gets reported as such in our financial results. So while technically we're reporting at the official rate, in practical terms, there's not a lot of difference between what we're reporting and what would be the parallel rate. I gave up forecasting FX in general long ago, and I gave up for forecasting anything about Venezuela much before that. So I don't have a good outlook for next year. But in general, as we're able to take pricing, which we're doing now in the market to offset the foreign exchange impacts, it should actually be a positive development year-on-year from an earnings per share standpoint.
Your next question is from the line of Joe Altobello with Oppenheimer.
Joseph Altobello - Oppenheimer & Co. Inc.
I just want to go back to the advertising spending topic for a second. You mentioned this year, and obviously it's up very much from the last year, yet you did have an easy base period. You had in a lot of innovation this year, but you also had roughly $800 million or so of commodity deflation in the cost of goods line that you could reinvest. It's obviously early, but next year you might have since you probably won't have $800 million, in fact, you could have a slight inflation next year. So given that, call it, billion dollar swing in commodities, how are you guys thinking about advertising next year? Or are you going to try to keep it sort of at the same level relative to sales as this year? And secondly, from where you sit now, again, it's pretty early, is there any reason to believe you guys wouldn't do, call it, growth next year within that 8% to 12% band that you gave back in February?
Joe, I'll start. Recall Jon talked about the number our new innovations launched in the AMJ quarter. In fact, Gillette ProGlide, you've seen the teaser advertising this morning, it talks about June 6 it's available in your stores. So obviously, the spending to get the awareness and trial of these new items will obviously go over into the next year. Having said that, we're looking at our advertising versus two years ago and three years ago because last year was really an anomaly for us. And at that rate, we'll probably continue to deliver more impressions probably have a higher spending level, but it won't be to the degree as it would be measured versus year ago. I would also caution looking at TV advertising because we're spending more in non-traditional channels. Just take for an example the Secrets of the Mountain movie I mentioned, we add advertising on that movie, but we own the movie, we produced the movie. So the kinds of numbers you're going to be reading that may be TV-only or might exclude things like digital might be misleading. Jon?
I would just add one point, and then I will get to your question about the guidance for next year. But our innovation program that we've been talking about, and I think you've gotten a sense for, is very robust and is multi-year in nature. And we're very focused on continuing to drive that innovation program in support of our purpose and our strategy. So I don't see any reason that we wouldn't continue advertising holistically as Bob described at strong levels. Relative to the question of whether our earnings per share will be within the range that was described at CAGNY, obviously, it would be irresponsible for me to comment specifically I'm now at this point. I just reiterate two points we made during the call. One that our core earnings per share guidance for this year is now at 4% to 6%, and I described an intention or a desire to deliver better than that next fiscal year.
Our next question is from the line of Ed Kelly with Crédit Suisse.
Edward Kelly - Crédit Suisse First Boston, Inc.
I was wondering if you could give us a little bit more color on the Frédéric Fekkai launch in the U.S. Pricing, how aggressive you're going to support it, what your expectations are? And then just a follow-up to your trade-down question. Are you seeing any change in the channel shifting that's taking place during the recession so out of markets into discount for instance?
Ed, relative to Frédéric Fekkai, we're happy with the launch that we've done. We've upgraded the Fekkai product in salons, and it's doing well. And we've taken the classic product into retail in somewhat exclusive distribution or more exclusive distribution. And we're happy with its results as well. So it's off to a good start. It's selling for the pricing we sold it in for, so we're happy with the results so far albeit early days. Relative to channel shift, I would say that we are seeing some channel shift to some discounters at the low end, but we're also seeing channel shift at the high end where people our returning to what you would consider to be a higher-priced stores or a parallel is starting to sell more where higher-priced items, more discretionary items are starting to sell more. So there appears to be just as we were describing the need for a full portfolio. There appears to be consumer shifting depending upon what end of the economic spectrum they're in and how they've been affected by the recession. Some of the channel shift we're actually trying to create, Olay Professional selling in a grocery store at about $40, $45 provides better skin effect than a $300 priced item in a department store. And that also is shifting channels. Pantene in the U.S. we had a campaign talked about Pantene being more efficacious than the salon brand that you would get in the salon, and that obviously shifted some channel as well. Yes, a channel shift is happening. Some of it is impacted by us. But some were also impacted by the economic impact that the individual consumers felt.
Your next question is from the line of Ali Dibadj from Bernstein.
Ali Dibadj - Sanford C. Bernstein & Co., Inc.
I was wondering whether you could talk a little bit about what you do next strategically. And arguably the price mix advertising promo innovation progression strategy has only really been, I guess, partially working. If you look at organic sales growth sequentially it decelerated or is flatten in really every reported segment here, particularly if you look at on them, as you mentioned before, kind of a stacked two-year basis? So I'm trying to understand why, what may be is working with not working, I guess, given that? And what are you going to do next? Particularly is still competitions getting tougher, compared to it's getting tougher, commodities are increasing, foreign exchange is going to hurt. What are you going to do to next to get sequential growth, really growth going here that you have to do something, for example, around cost cutting more aggressively internally to then invest more? Are you planning more price, promo mix trade down to just customer value proposition? Really what's next? Because I think it's partially working, I guess, is my interpretation given stacked sequential organic growth.
Ali, it's Bob. I would say it's working. And I would say it would be premature to move off of our current strategy. Some of the innovations we've been talking about have just recently started shipping. Some haven't even been shipped yet. Gillette ProGlide is an example. You've also seen new and different behavior from Procter & Gamble. You've seen advertising the company behind the Olympics. We talked about Secrets of the Mountain, and effectiveness of that in advertising our brand. You'll seen future friendly in the market place today supporting our brands. You see we have stronger innovation program like never before. It all seems to be working. We don't measure ourselves quarter-to-quarter. I mean in an individual quarter, we obviously look over the longer term. But things seem to be working. We spend over $2 billion in R&D a year. We spent over $2 billion this decade on consumer knowledge. And the fives strengths that have made this company the strong company that is like innovation, like consumer knowledge, like there in the market capability, like global scale, like branding, those are going to be the strengths to drive us forward. Jon, do you have any comments?
Yes, I just have one comment. I mean, as I look at our quarter, I kind of wish every quarter was like this. Organic sales growth two points ahead of the market. Core earnings per share up 10%. Record cash quarter, if that's not working, I'm not quite sure what is.
Remember, our goal is to build market share profitably, and we are now doing that. So by our standards, this was a good quarter, and we're going to continue following the same strategies.
Your next question is from the line of Doug Lane from Jefferies & Company.
Douglas Lane - Jefferies & Company, Inc.
Question on the gross margins. You've delivered 300 basis points or so in gross margin pretty much each quarter so for this fiscal year. Do you expect more the same in the June quarter or some of these commodity cost inflation going to start to hit? or is that more of a 2011 thing and maybe, Jon, if you could just give some color onto the where do you think gross margins are heading in the 2011?
As I discussed in the fourth quarter, the gross margin benefit that we've been receiving will subside in the fourth quarter. The commodity cost comparison gets less favorable. And that's built in to the guidance that we've provided. And I really apologize, but I really don't want to comment at this point of next year's plans until we have next year's plans.
Your next question is from the line of Alice Longley from Buckingham Research.
Could you tell us how fast your categories collectively grew in the quarter in volume and value terms in three regions, the U.S., Europe and developing markets? And then as part of that, I think somebody just said that your sales grew two points faster than the market and I thought earlier you said your shares are up about one point. If you could clarify that.
Alice, it's Bob. Developing markets were up mid to high singles and developed markets were up roughly a point in terms of value. North America, Western Europe in terms of value were up about one point. Japan was down about a point, that gives you developed up about a point. Developing was up about seven points in terms of value and it was a pretty tight shot group with some markets up about four and others up as much as 12 in value. So we said the market value growth for the quarter was roughly 2.5 points.
And on the map, what Bob was referring to as market share, what I would referencing is net sales. Organic sales was up 4%, markets were up about 2.5%, but the point of that is a share. And a point is base period dynamics.
Your next question is from the line of Bill Chappell from SunTrust.
William Chappell - SunTrust Robinson Humphrey Capital Markets
Quick question on the Batteries. Did you say that shipments were up 35%, and kind of along that line, trying to understand for Battery and other categories, you up the pack sizes in Energizer and Rayovac immediately followed. So it seems like it's a zero-sum game. What's the strategy in terms of being more aggressive and how do you really retain share?
We did say that, Bill. And while we did include more cells in the pack, that was a reaction to some pricing we faced in the marketplace. And there was no intention to make that a permanent package. Nevertheless, the dynamic that has changed in the marketplace most recently is some of our retail partners have chosen to de prioritize the Battery category about a year ago. And we now have work because retail partners to help them understand how much sales they've lost. And they have decided to put new priority on the Battery category. And some of that new priority is what you're seeing part in the volume growth this quarter. I suspect that will continue, particularly as we approach the holiday season. I think Batteries will continue to be a very important category for our retail partners. And we will continue to work to grow our market share.
Our next question is from the line of Linda Bolton Weiser from Caris.
Linda Weiser - Caris & Company
I just had question kind of on bigger picture strategies specific to Health Care. I mean AD [ph] Had always talked about Proctor being Personal Care and Health Care. Personal Care and Health Care, that was what he really emphasize. And in Health Care, you've gotten rid of the RX business, and in the OTC, I mean the real action is the RX to OTC switches, especially in the allergy drug area. So how are you going to be able to exploit that growth opportunity when you've got companies like Sanofi-Aventis who both Chattem so they could do Allegra on their own by excluding U.S. partner. Can you talk a bit more about Health Care and also what drove the negative 3% mix in Health Care in the quarter?
Well, in the Health Care it's strategically important to us. We do want to grow our business particularly in OTC or consumer-directed Health Care. We're still in the midst of divesting or disintegrating our RX business. So while we've announced it, that's not over. we're are still in that process. We're also in the process of building the Health Care brands we have already and taking advantage of their equities. And I'm encouraged by some of the work going on there. We still do suffer from the Prilosec entries that the competitive entries versus Prilosec, obviously, and that have a big impact on our numbers. And last, we are working to expand our Health Care portfolio, but I don't want to disclose what we're doing because that's competitively sensitive.
Ladies and gentlemen, unfortunately that's all the time we have for your questions. I will now turn the call over to Mr. Jon Moeller for his closing remarks.
Thanks, everybody. We're obviously available at the balance of the day to answer any follow-up questions.
Thank you, all, for your participation in today's conference call. This concludes the presentation, and you may now disconnect.
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