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Procter & Gamble (NYSE:PG) Q1 2011 Earnings Call

October 27, 2010 8:30 am ET

Executives

Jon Moeller - Chief Financial Officer

Teri List - Senior Vice President and Treasurer

Robert McDonald - Chairman, Chief Executive Officer and President

Analysts

Dara Mohsenian - Morgan Stanley

Edward Kelly - Crédit Suisse AG

William Chappell - SunTrust Robinson Humphrey Capital Markets

Constance Maneaty - BMO Capital Markets U.S.

Lauren Lieberman - Barclays Capital

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

Alice Longley - Buckingham Research Group, Inc.

John Faucher - JP Morgan Chase & Co

Ali Dibadj - Bernstein Research

Joseph Altobello - Oppenheimer & Co. Inc.

William Schmitz - Deutsche Bank AG

Douglas Lane - Jefferies & Company, Inc.

Jason Gere - RBC Capital Markets Corporation

Wendy Nicholson - Citigroup Inc

Jon Andersen - William Blair & Company L.L.C.

Andrew Sawyer - Goldman Sachs Group Inc.

Linda Weiser - Caris & Company

Caroline Levy - Credit Agricole Securities (NYSE:USA) Inc.

John San Marco - Janney Montgomery Scott LLC

Nik Modi - UBS Investment Bank

Christopher Ferrara - BofA Merrill Lynch

Operator

And welcome to Procter & Gamble's Quarter End Conference Call. Today’s discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections.

As required by Regulation G, P&G needs to make you aware that during the call, the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results, excluding the impacts of acquisitions and divestitures and foreign exchange where applicable. Free cash flow represents operating cash flow less capital expenditures. Free cash flow productivity is the ratio of free cash flow to net earnings. Core EPS refers to earnings per share from continuing operations excluding certain 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 proceed.

Jon Moeller

Thanks, and good morning, everyone. Bob McDonald and Teri List joined me this morning. I'll begin today's call with a summary of our first quarter results, Teri will cover business highlights by operating segment and I'll conclude the call with guidance for the fiscal year and the December quarter. Bob, Teri and I will take questions after our prepared remarks. Following the call, Teri, John Chevalier and I will be available to provide additional perspective as needed.

Our first quarter results marked a strong start to the fiscal year. We maintained strong volume momentum. We grew organic sales ahead of market growth, building market share and exceeded our earnings per share growth objectives. Volume increased 8% on an all-in basis and 7% organically, driven by our strong multiyear innovation program and continued marketing investments. This is the first time we delivered three consecutive quarters of 7% or better organic volume growth in five years. The growth is broad-based with all regions, 16 of our top 17 countries and 20 of our $23 billion brands delivering volume growth versus a year ago.

We're continuing to leverage the innovations we launched last fiscal year, such as Pampers Dry Max, Fusion ProGlide, Crest 3D White and our new Pantene lineup in the U.S. where they were first introduced. We've also started to expand some of these initiatives to new markets, which create new sources of incremental sales and share growth. We've already expanded Dry Max to more than 50 countries around the world. We've continued the global expansion of our best-in-class Pro-Health toothpaste formula, we've launched 3D White in Europe and ProGlide is scheduled to expand to over 40 countries in the next 18 months.

In addition, we have a full pipeline of new products that we're launching this fiscal year, including Crest Clinical toothpaste, Tide Acti-Lift laundry detergent, Gain and dishwashing detergent and our upgrade to Downy fabric softeners, all of which started shipping in the September quarter.

And we just announced the new Gillette Guard razor launch in India, which is designed and priced to stimulate market conversion from double-edge blades to Gillette shaving systems. The Guard razor is priced at about INR 15 or roughly $0.33 and the refill blades are priced at about INR 5 or $0.11. And our testing with thousands of Indian men, Gillette Guard was a 6:1 winner versus double-edge blades and has delivered important advantage as an area such as safety, trust and value.

We've also continued to expand our existing portfolio into new markets. In the September quarter, we started the expansion of Febreze air care into Latin America and we began to launch all the natural and feminine care brand in Brazil. Organic sales grew 4% ahead of market growth rates and in line with our expectations.

Pricing and mix combined to reduce sales by 3%, which is a sequential improvement of one point versus the June quarter. As expected, pricing was a modest reduction to sales growth, due mainly to adjustments made in earlier periods which have not yet annualized. Going forward, we expect the pricing impact on sales to turn positive as we lapped these adjustments.

For perspective, the pricing changes we've made to brands such as Duracell, Sheer and the large sizes of Tide will be fully in our base by the end of the December quarter, as will many of the structural adjustments we've made in the Central and Eastern Europe, Middle East and Africa region.

Mix reduced sales by two percentage points, driven primarily by the differential volume growth rates of developed and developing markets. Geographic mix accounted for a point of the two-point mix impact. In the first quarter, organic volume and developed markets grew 4% and developing markets grew 12%. Product mix and price tier mix each affected sales growth by about half a point. All-in sales grew 2%. This includes a 3% negative impact from foreign exchange. The net impact on sales growth from acquisitions and divestitures rounded to a one point held for the quarter.

Global market shares up versus prior year on the past six and three-month basis. Share growth in the quarter was broad-based. We grew share in all geographic regions and held our built share in 13 of our top 17 countries and 17 of our $23 billion brands. Earnings per share was $1.02, up 5% versus prior year core EPS and $0.01 above the top end of our guidance range of $0.97 to $1.01.

We continue the high investment level to support our innovation and portfolio moves. Advertising levels remained strong to drive awareness and trial of our new innovations. Consumer impressions were up double digits versus last year. Gross margin decreased 70 basis points, due mainly to higher commodity cost. Category mix also resulted in lower gross margin, as the Household Care business, which is more cost of goods intensive, grew volume 10% for the quarter compared to 5% growth for the balance of the business. We, again, delivered significant cost savings, which contributed nearly 150 basis points to gross margin. These savings were across all areas of spending, including materials, manufacturing and logistics. These savings along with the benefit of volume leverage largely offset the commodity and mix impacts.

Operating margins declined 10 basis points due to lower gross margin. SG&A spending as a percentage of sales was down 60 basis points. Within SG&A, overhead savings and lower year-on-year foreign exchange transaction cost more than offset a significant increase in marketing spending. The effective tax rate on continuing operations was up 30 basis points versus last year to 28%. We generated $1.9 billion in free cash flow with free cash flow productivity of 63%. As expected, these levels were impacted by the reversal of the strong marketing payables increase that we saw in the fourth quarter as we accelerated marketing spending behind innovation launches.

We continue to expect strong cash generation and free cash flow productivity in more than 90% of net earnings for the year. With this being the case, we continue to return significant levels of cash to shareholders. In the first quarter, we returned $4.4 billion to shareholders, $1.4 billion of dividends and $3 billion of share repurchases.

In summary, we're very pleased with our first quarter results. It was a solid start to the year. These results provide continued evidence that our overarching growth strategy to touch and improve the lives of more consumers in more parts of the world more completely is working.

Now I'll turn the call over to Teri to review highlights of the business segment results.

Teri List

Thanks, Jon. As Jon highlighted, top line growth was broad-based across business segments and geographies. Developing markets continued to lead the growth, which generally results in negative sales mix. You'll see that these trends are driving segment and category growth rates.

Starting with Beauty, organic sales increased 3% behind 4% organic volume growth. Geographic in category mix reduced sales by 2%. Retail Hair Care unit volume grew in the mid-single digits, led by developing markets which increased double digits. Global value share was up almost half a point. Head & Shoulders volume increased in the mid-teens and Pantene shipments increased mid-single digits.

In Female Skin Care, Olay unit volume was up double digits and value share increased almost half a point. Shipments of Olay within the Central and Eastern Europe, Middle East and Africa region increased over 50% versus prior year, driven by continued geographic and product portfolio expansion.

Female Blades and Razors had another strong quarter. Venus unit volume was up almost 20% with global value share growth of more than three points to 42%. The strong growth is a combination of initiative launches, such as the premium Embrace and Simply Venus Disposable razors.

Prestige organic volume declined mid-single digits. Strength in the SK-II business with shipments up over 20% versus year ago was more than offset by weakness in fragrances in Western Europe. Salon Professional volume was also down as we continued our efforts to streamline the portfolio.

Grooming segment organic sales were up 6% on volume growth of 5% and positive pricing of 1% mainly on blades and razors. The Male Blades and Razors business grew organic shipment volume mid-single digits. Fusion unit shipments increased by high single digits and global value share grew by over two and a half points.

In the U.S., Fusion blades and razors' value share increased more than five points to over 35 share behind the continued strength of the Fusion ProGlide initiative. Global MACH3 shipments were up low single digits as strong growth in developing markets was partially offset by the impact of consumers trading up to Fusion in developed markets. MACH3 volume in China increased over 30% and almost doubled in India with the launch of the more affordable MACH3 razor and commercial initiatives encouraging trade in and trade out.

Male personal care unit volume increased mid-single digits growing across both the Gillette and Old Spice brands. Appliances unit volume increased high single digits led by double-digit growth in Western Europe. Braun dry shaving value share grew over 2% globally.

Health Care organic sales increased 4% on a 16% increase in organic volume. Pricing reduced sales by 2%. Oral Care global shipments increased high single digits. U.S. unit volume increased high single digits behind the Crest 3D White initiative that launched in March and the Crest Clinical line that launched in August. U.S. all out lead Oral Care value share is up nearly one and a half points to almost 38%.

Oral Care unit volume increased double digits in developing markets with Latin America up almost 20%. Brazil Oral-B volume grew by more than 40% behind our Oral-B paste initiative. Mexico Crest volume grew almost 40% and value share increased over two points behind the Crest Pro-Health and Crest Complete initiative launched in February 2010. In India, Oral-B toothbrush unit shipments increased over 50%, driven by the Shiny Clean and Cross-Action brush initiative.

Feminine Care unit volume was up mid-single digits with particular strength in greater China and the Central and Eastern Europe, Middle East and Africa regions, which both grew volume double digits. China volume growth came from a combination of commercial innovation on our Whisper Overnight product, growth of Naturella, which launched last March and geographic expansion into additional provinces. Personal Health Care shipments were up low-single digits, developing markets grew mid-teens, global growth of Vicks and Pure more than offset declines in Prisolec.

Snacks and Pet Care organic sales declined 9%. Organic volume was down 4% and pricing declined 2%. Geographic and category mix were a negative 2% impact. Snacks had a strong quarter, shipping high-single digits. The growth came from the Extreme and Multigrain Pringles initiatives in the U.S. and emerging markets strength where value increased over 30%.

Pet Care volume was down due to a temporary supply disruption during by supply-chain restructuring and process improvements and by voluntary product recall impacts. We expect to resume full supply capacity early next calendar year.

The Fabric Care and Home Care segment increased organic sales by 5%. Organic volume grew 9%, led by double-digit growth in developing regions. Mix reduced sales by 2%. Pricing reduced sales by 2%, due mainly to the value corrections in North America, Western Europe and Central and Eastern Europe, Middle East and Africa that have not yet annualized. Fabric Care shipment were up high-single digits and value share increased almost half a point with all regions improving share. U.S. Downy and Gain laundry detergent both grow shipments double digits.

In developing markets, Fabric Care shipments increased in the low teens. In Mexico, Bold more than doubled. In Brazil, Ariel increased more than 50%. In India, strong laundry growth continued with total value share up almost two points to a 17 share behind the Tide Naturals initiative and the new base restage to Tide Plus which includes positive pricing.

Home Care had another strong quarter, increasing unit shipments double digits and growing global value share by over a point. North America volume was up in the low teens with double-digit growth across all categories and share increasing two and a half points. The new Gain hand dish brand, which launched in the U.S. in August, has reached the five share of the category as of September. Simultaneously, Dawn hand dishes grown almost three share points behind improved execution of marketing and in-store fundamentals. U.S. Swiffer volume is up high-single digits and shares increased over a point during by go-to-market executional improvement at the shelf.

Home Care developing markets increased shipments double digits led by the Central and Eastern Europe, Middle East and Africa region with volume up over 30%. The growth was driven by market recovery and geographic expansion such as introducing Fairy dish care in Turkey, Egypt and Morocco and Swiffer in Israel.

Battery shipments increased high-single digits for the quarter. Unit volume grew across all regions and global value share was up over half a point. Baby Care and Family Care delivered organic sales growth of 5% and organic volume growth of 10%, with developing market shipments up close to 20%. Geographic and product mix reduced sales 3%. Pricing decreased sales 2% behind prior fiscal year value corrections and temporary merchandising spending increases in North America Family Care to support product initiatives.

Baby Care shipments increased high-single digits and global market share was up over one point, with all regions growing share for the second quarter in a row. Developing markets increased shipments double digits versus year ago with much of this growth driven by distribution expansion in countries such as China, where Pampers shipments increased about 30% and Brazil where Pampers shipments increased almost 20%.

Developed markets also had a strong quarter. North America Baby Care value share increased one point and volume was up high-single digits. U.S. Pampers and Luvs both had strong growth behind solid retailers support. Western Europe value share grew over one point, driven primarily by Dry Max that was introduced in the U.K., Belgium and the Netherlands in June and expanded into 10 additional countries in the region this quarter. Dry Max, which first launch in North America in March, is currently shipping in over 50 countries around the globe.

Family Care unit volume grew double digits and value share was up almost half a point. Charmin volume increased over 20% and U.S. all-out led value share grew over one point. Growth in the U.S. came from product improvements and softness across the portfolio, supported by strong consumer communication in merchandising programs. Bounty shipments were up mid-single digits behind performance upgrades and the brand restage focusing on Bounty's clean benefits.

That concludes the business segment review and I'll hand the call back to Jon to discuss guidance for the fiscal year and the December quarter.

Jon Moeller

Thanks, Teri. Our guidance for organic sales and earnings per share growth for the fiscal year is unchanged. Our outlook for organic sales growth remains at 4% to 6%. Where we land within this range were driven by two factors: underlying market growth rates and our ability to grow ahead of market rates. Based on the strength of our innovation and marketing plans and our share progress to date, we believe we can continue to grow one to two percentage points ahead of market growth.

Regarding market growth, our organic sales guidance assumes global markets growth 3% to 4% for the fiscal year. This is predicated on developing market growth of 6% to 8% and developed market growth of 1% to 2%. We saw 6% to 8% growth in developing markets in the first quarter, the developed markets were at the low end of the range, up only 1%.

We're updating our guidance for all-in sales growth to 3% to 5%. This range is one point higher than prior guidance. We now estimate that foreign exchange will reduce sales by 1% to 2%, and we expect the net impact of acquisitions and divestitures will be a neutral to one point addition to all-in sales growth. On the bottom line, we're maintaining our earnings per share guidance range of $3.91 to $4.01, which equals growth of 7% to 9% versus prior year core earnings per share of $3.67.

While we've seen some modest improvement in foreign exchange since the beginning of our fiscal year, we're also seeing, as we often do, an offset in increase in commodity costs. We encourage you to consider these countervailing forces as you update your projections for the year just as we do when we provide our guidance.

Also, as we've said on a number of occasions, we provide the guidance range versus a single point estimate for a reason. We won't change foreign exchange or commodities or back off on investments simply to deliver a top of the range number or an external estimate. Our actions will continue to be guided by the desire to advance our strategy and by our overwriting objective of creating long-term value for our shareholders. As far as share repurchase is concerned, we continue to outlook a range of $6 billion to $8 billion for the year.

Moving to the December quarter, we're estimating organic sales growth in the range of 3% to 5%. We expect all-in sales growth of 2% to 4%. Within this, we expect foreign exchange to reduce sales by about 2% and the net impact of acquisitions and divestitures to be a one point addition to sales growth.

On the bottom line, earnings per share is estimated in the range of $1.05 to $1.11. This compares to a very strong base period in which core earnings per share was $1.10, up 22% versus the prior year. The base period included very strong gross margin that was aided by favorable commodity cost and marketing spending that was back half weighted due to initiative launched schedules. In this year's December quarter, we're seeing commodity cost increases and we're fully invested behind our innovation and portfolio expansion plans.

I mentioned these dynamics because it's important for our shareholders to understand that core earnings per share growth guidance are down 5% to up 1% should not be interpreted as an absence of savings or a significant step up in spending. To the contrary, the earnings per share growth rate is mainly a function of the dynamics in the base period.

In closing, as I said earlier, we're very pleased with the start of our fiscal year. Organic volume was up 7% with broad-based growth across our biggest geographies and brands. Organic sales were up 4%, in line with our expectations, and price mix improved sequentially by a point. Market share continued to increase on a global basis, and we held our grew share in the large majority of our top countries and brands. Earnings per share was above our expectations and we continue to fully fund our innovation of marketing programs with our good progress on cost savings.

While we still have more work to do, the solid start of the year is evidenced that our purpose-inspired growth strategy is working. We're touching on improving lives of more consumers and more parts of the world more completely with the continuation of innovations from last fiscal year and a full pipeline of new innovations and geographic expansions. We're better integrating our plans across categories and geographies to operate more fully as one company and were simplifying our operations, reducing cost while increasing our productivity, efficiency and agility.

Now Bob, Teri and I will be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Chris Ferrara with Bank of America.

Christopher Ferrara - BofA Merrill Lynch

Obviously, there's a lot of focus on top line. But I just wanted to ask about cost savings, right? So you did 150 basis points to gross margin this quarter, I think about 200 each of the past two quarters. So I mean, if this level of savings is sustainable, obviously it's pretty big implication to the competitive dynamic globally, right? Not just promo advertising, too. So I guess the question is how sustainable is the level of savings you're seeing? And then I guess what was the prior run rate for the last few quarters that you guys have disclosed? Because it probably wasn't zero, maybe it just wasn't big enough to disclose. But can you just put some context around that and then how you plan to deploy those savings when you think about where advertising is today relative to historical levels?

Jon Moeller

First, let me comment on the overall levels of savings. The 150 basis points of savings is a cost of goods number. As you know, our savings program is comprehensive across our various spend areas. We also had about 60 basis points of savings in SG&A. So in total, over 200 basis points of savings. That level of savings should be sustainable in the near to mid-term because of our intentionality of focus in those areas. And in terms of our desire to what are we going to use those savings for, we'll continue to use them to successfully execute our strategy, expanding the geographic portfolio, expanding the product portfolio and investing behind that, while delivering the earnings per share growth rates that we've talked about both this fiscal year and on an ongoing basis.

Operator

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

William Schmitz - Deutsche Bank AG

Can you just talk maybe a little bit more granularity about how far of the top line is going to trend as the year progresses? I know the volume comps are getting pretty tough. I know you also said that pricing starts to roll off. So have you envisioned further price increases and maybe just sort of like the pieces of organic growth would have to be sort of 5% to 6% growth in the back half of the fiscal year?

Jon Moeller

Yes, we will be pricing in two areas, one where we have a currency devaluation pressure. We've been executing that relatively successfully. The other is behind our premium innovations, whether that's Fusion ProGlide, has that expands globally? Crest 3D White, has that expands globally? But if you just take a look at the math, if you will, if you take our unit sales rates in the first quarter or actual rate that we delivered, and you bring those out across the balance of the quarter and index them to prior year unit sales growth rates, you'll see that on the math alone, we pick up three points of growth in price mix, and that's why we continue to be very confident that the price mix gap will narrow. As I mentioned, most of our price reductions will be annualized by the second quarter, so you should begin to see the full benefit of this pickup in Q3.

Operator

Your next question comes from the line of Nik Modi with UBS.

Nik Modi - UBS Investment Bank

Quick question on category growth. It's pretty clear that a lot of the promo spending that's been put in the marketplace has not been as effective as a lot of companies that get hoped and also the retailers had hoped. And Jon, I'm just curious, when you talk about category growth especially in the developing world, how much do you think of that category slowdown in the developed world has been due to trade spending? And can you just give us some context on how we should think about that over the next 12 months?

Jon Moeller

I can really only contextualize it in the context of our activity and what we're doing. And as we said many times, while we are fielding promotions to generate trial on our new brand initiatives, promotion is not a significant part of our overall strategy. If you look at the percentage of volume that's moving on promotion in the JAS quarter compared to a year ago in more categories than not, that number is down. So again, I just don't see that being a big part of either our historical strategy or our going forward strategy. Nik, as we've said repeatedly, our program about touching, improving more lives, more parts or more completely is supported by the best innovation program we can remember in decades. And if you look across our results, you can see that, that innovation program, as well as the strategy of moving more categories in the more geographies and filling out our portfolios up and down is working. And commercial spending is not a very good antidote to a strong innovation program.

Operator

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

John Faucher - JP Morgan Chase & Co

You guys talked about profitable market share growth in the press release. And I guess, as we look at whether we look at your overall profit growth on a normalized basis adjusting for the divestiture and profit grew slower than both organic revenues and volumes. So I guess, one, is that just simply a comp issue? And Jon, you talked about how the marketing spending comps get easier in the back half of the year. But can you also talk about sort of how you view that phrase profitable market share growth, and will that change as we look at a more inflationary raw material environment going forward?

Jon Moeller

As we talk about -- first of all, we structure our plans to deliver in the long term and we're currently managing an annual plan, and as we talk about profitable share growth, it's in the context of that annual plan. The base period dynamics have a very dramatic effect, as we said when we first provided guidance for this year and as we've continued to say in this call. So as we measure our sales in terms of delivering profitable market share growth, it's really in the context of being on track for the full fiscal year plan, which is earnings per share growth, as you know, of 7% to 9%. And if people want to pick on unit profitability this quarter, that's fine. I just hope they're prepared to celebrate on the third and fourth quarters.

Operator

And your next question comes from the line of Lauren Lieberman with Barclays Capital.

Lauren Lieberman - Barclays Capital

What I was going to ask about, though, is Beauty Care. In particular, I'm just sort of surprised to hear that Prestige is soft. I know you specified Western Europe Fragrance but what we're hearing from other Prestige players is actually that things have sort of stabilized. And I know last quarter, the answer was, while we weren't down as much as they were, we should sort of be trued-up. So my first bit of Beauty question's around Prestige. The second is if U.S. market share enough. Maybe too early to really gauge success or not, but it doesn't look like Pantene is really picking up much ground just yet. So if you can talk a little bit about dynamics there, that would be great.

Robert McDonald

Let me start first, Lauren, with Pantene. The Pantene initial sales throughout the United States are mixed. In the first month of the launch, which is May, Pantene grew value share in the U.S. and in all key retailers. Both distribution and merchandising support were strong with about six straight weeks of record display levels. More recently though, shares were slightly down versus a year ago over the past three months, down about a point or 94 index versus a year ago as we've seen heavy competitive promotional activity following our introductory merchandising period. We've identified all the key opportunities to get Pantene growing more strongly and they're obviously working to improve awareness, trial and feature levels. And we will get it going.

Jon Moeller

And in terms of your Fragrance question, Lauren, our data would indicate that the past three months market growth rate for the five big markets we track is about flat versus a year ago. The U.S. and Spain continued to contract a 99 and 96 index, respectively, with Germany, Italy and France showing modest growth. Our share on those markets is roughly flat. My guess is that if other companies are portraying a more positive outlook, it may have to do with their geographic footprint and be in more exposed in Fragrance, for instance, than we are to Asia and Latin America.

Operator

And your next question comes from the line of Wendy Nicholson with Citi Investment Research.

Wendy Nicholson - Citigroup Inc

Just thinking about kind of how the quarters are going to flow through the year, obviously, you're off to a great start with an upside surprise in the first quarter. But I think what some of us are struggling with is if volume growth is going to slow sequentially as we go through the course of the year which obviously it will with tough comps and with the higher commodity prices, and it doesn't sound like you're taking a lot of pricing to offset that, other than the maybe easy comps on the marketing side to accelerate your core earnings growth through the course of the year sounds like a stretch. It sounds like the cost savings are going to be sustainable but they're not going to get a lot better. Your volume leverage is probably going to be negative. So in terms of your confidence in that back half core EPS growth, kind of what's helping you get there and feel so good today?

Jon Moeller

Well, first relative to commodities, we have much easier comps on those in the back half. You mentioned we have, and you're absolutely right, that we have much easier comps on marketing. And I mentioned the math on the price mix dynamic, which will also improve. I also think that there is -- it's a little bit dangerous to take current volumes and assume that that's on a unit basis, the best we can do. On many of our new initiatives, we're actually supply constrained at the moment. And so that's another thing as we relive those constraints and as we expand those portfolios globally, we think this as continued upside on volume.

Robert McDonald

It is a tremendous momentum in the business right now, Wendy. We try to suggest that the fact that our organic volume growth is stronger than its been in five years, and that we're growing market share in roughly 60% of our category in country combinations around the world. And we laid out for you the innovation program, most of which launched in the April to June quarter and we're in the process of expanding that throughout the world, because most of it launched in the United States. And then on top of that innovation program, we even have newer innovations like Guard in India and others, so you have this layering of volume growth and innovation that I think bodes well for the year and bodes well for continued market share growth.

Operator

Your next question comes from the line of Andrew Sawyer with Goldman Sachs.

Andrew Sawyer - Goldman Sachs Group Inc.

I just wonder if you can give a little more color on the SG&A numbers. As you look at the percent of sales, it's one of the lowest -- second lowest quarterly number we've seen in the last six or seven years. Is that a straight productivity or is there something going on in the timing of that spend or some of the geographic expansion that's influencing that? And I guess secondarily on the margin side, can you talk about how you're thinking about taking with pricing as we see more commodity inflation flow through, or is that something you're not really evaluating at this point?

Jon Moeller

Relative to SG&A, there are two impacts that are affecting the percent and loss comparison that you reference, Andrew. The first are the overhead savings, which we continue to be again very intentional and focused on. The other is, as I mentioned in my remarks, is a transaction impact from a foreign exchange related primarily to Venezuela where we had a hurt in the base period as we translated bolivars to dollars and attempt to manage our balance sheet exposures down ahead of the devaluation. So both of those that are going on within SG&A. And I want to avoid, frankly, talking about any specifics on future pricing or how we're thinking about covering commodities. What I will say is what we've said for a long time, and that is when it's important to take pricing, we endeavor to couple that with innovation, and would expect to continue to do that.

Robert McDonald

And you've been working really hard on developing a cost savings program that continues to produce over sustainable period of time. We've talked before that we want to make this $80 billion company that's growing operate like a $10 billion company. We've been intentional about reducing the hierarchy, we've reduced the number of levels from the lowest in the company to the CEO from seven to five. Our 2010 enrollment decreased by about 5,000 versus the prior year to about 127,000 through a combination of productivity improvements and divestitures. And we've improved sales per employee by about 4% in 2010. We've talked about the fact that we're digitizing the company from end to end. In an example we cited is the Pampers Dry Max, the new Pampers diaper, a lot of the R&D work that was done in that diaper was done virtually using modeling and simulation rather than bench scale prototyping. We've moved to more global standard systems. We've cost saved our logistics operation. I could go on and on, and I think we'll have time to do that in the December Analyst Meeting, but this is a pervasive program that is having an impact and will continue to have an impact.

Operator

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

Joseph Altobello - Oppenheimer & Co. Inc.

Just want to go back to the promotion issue for a second. Is there a difference in your marketing promotion strategy between the developed and developing markets as we roll throughout the balance of 2011? Should we see an abatement in some of your developed markets and maybe an acceleration in the developing world, or is that the wrong way to think about it?

Jon Moeller

Our promotion strategies are particular to our brands, so there won't be any difference developing versus developed. In fact, because of the nature of price promotions where it's retailer country competitive specific, it really is discreet to brand category country combination.

Operator

And your next question comes from the line of Ed Kelly with Crédit Suisse.

Edward Kelly - Crédit Suisse AG

Could you talk about the changes that you're seeing at Wal-Mart? Any impact that it may have on your business? And then kind of a second part of that, are you seeing changes interim by channel in the U.S? A number of retailers have been looking at getting less promotional. Does that change the way that you manage your own promotional strategy at retail?

Robert McDonald

I was just at Wal-Mart a couple weeks ago with Bill Simon. And Bill and I and Doug McMillon and others walked stores together. And we're very supportive of the changes that Bill is trying to make in U.S. stores. Our growth in international has been strong, and where we'd like to see greater growth is in U.S. stores, and we're working hard to help Bill put merchandise items back into action alley to put new items up at the front end, to get better conspicuousness of those promotion items throughout the store red and having everything colored blue and yellow. So we're working real closely with Bill, with Doug, with Mike Duke in order to help Wal-Mart get U.S. sales growing. Relative to channel shift, we are seeing some channel shift. Again, it depends upon the category and it depends upon the item, it depends upon the retailer. But I would say that the dollar channel is obviously growing faster than other channels right now. Although as Jon said in his remarks, private label share is flat to down around the world. So that's probably why you're seeing some abatement in promotion spending. And of course, from our company standpoint, we prefer to see lower to no levels of promotion spending because we would like the consumer to see the very best price they can every single day, and we believe that extreme high lows of promotion spending sometimes erode loyalty to a given brand. But having said that, we hope the retailer execute their strategy and they're in charge of pricing, not us.

Operator

And your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Dara Mohsenian - Morgan Stanley

Can you give us an update on your rollout in toothpaste with the Oral-B brands? A, how the current markets are performing? And then b, if you plan to expand to additional geographies in 2011? And what kind of pace we should expect in general for a geographic rollout of Oral-B to more markets over the next few years?

Robert McDonald

I don't want to give away competitive information, but I can tell you about how we're doing. For example, in Brazil and Mexico and some of the markets, the expansion of Oral-B paste in Brazil is very encouraging. Shipment share results are ahead of objective. While national paste share is about three and a half points, it's significantly higher in the outlets where we compete with multiple retailers in double digits. If you look at the outlets where we compete, our value shares are closer to 8%. We're only in about 30% ECV right now and we're obviously still expanding that in Brazil. Recent share is over 23% in drugstores which is our original test market. So shares are growing sequentially period-to-period and trial and repeat rates are also trending above target. Where we launched Crest and Oral-B Pro-Health in Mexico, it continues to deliver ahead of expectations. The national value share is 11.5%, which is up about three and a half points versus year ago. In modern retail, the value shares at 13.4%, up almost five points and P&G continues to be the manual brush leader in Mexico with shares over 47%. In Benelux, after 19 months, we launched in February of 2009 Oral-B Pro-Health is well ahead of target, past three month value share averaging 11.3%, up over three points from the previous three months; in Belgium, it's at 13.1%, up two points; Netherlands at 9.4%, up one point. Crest Pro-Health launch in China, we launched in August of 2009 continues to deliver outstanding results. Volume is indexing at 129 and sales is indexing at 132 versus a pretty challenging goal. Even more promising trial and repeat continued outperform expectation as well as outperform key competition. In addition, we got solid plans in place to continue to leverage Pro-Health in China and to maintain the strong momentum. In Germany, Blend-a-Med paste momentum continues, led by the launch of 3D White this summer. Total Blend-a-Med value share continues to grow reaching 11% in September, that's up 0.6 points versus year ago. In Poland, we launched Blend-a-Med Pro-Expert in April of 2010. This launch enabled us to further extend our leadership in Poland, leading to an all-time high value share of 27.8%. Both Russia and Turkey launched Pro-Expert nationally in July. Shipments were in line with expectation. We don't have share data yet because share in those markets is very limited. And you didn't ask this question specifically, but Crest 3D White is off to a great start in the U.S. with strong retailers support. After six months in market, 3D White paste has already achieved the 5.8% share in track channels which is more than 5x ahead of Colgate's launch of ProClinical over the same time frame. 3D White contributed to Crest market leading value share which is up 1.4 points to 38.6% in the United States over the past three months. 3D White Rinse and 3D White Pulsar brush are priced at a premium to Pro-Health Rinse and base Pulsar, respectively. So that's a little bit of a tour of the Oral Care world without disclosing future plans.

Jon Moeller

And then I just would add to that, much like in the broader innovation program where we're leveraging prior launches and we're globalizing those launches, which we're doing in Oral Care as Bob described were also bringing the whole lot of new innovation, which hasn't yet affected those market shares. Crest Clinical, the sensitivity lineup and a number of other very important innovation still coming.

Operator

And your next question comes from the line of Connie Maneaty with BMO Capital Markets.

Constance Maneaty - BMO Capital Markets U.S.

I was hoping to get a little bit more clarity also on SG&A. As I recall, the last couple of years had some stranded overhead from the divestitures of soldiers in the Pharma business. If the change in SG&A right now reflective -- does that reflect the fact that perhaps saw that stranded overhead has been dispensed with? And also, what's the outlook for internal restructuring in 2011 and what was it in the last two years?

Jon Moeller

Let me answer the last question first. We've talked about $400 million of restructuring roughly in 2011. That compares to about $495 million the prior year, $700 million the year before that. The reason that those numbers were higher in prior years was largely because we were dealing with the stranded overhead issue that you described.

Operator

Your next question comes from the line of Jon Andersen with William Blair.

Jon Andersen - William Blair & Company L.L.C.

I have a more qualitative question. A concern I hear from some investors is really the organization stability to manage your change program bulking up in value tiers, expanding in emerging markets, accelerating cost savings and restructuring. What would you say that concerns related to execution risk or the organization's capacity to sustain these parallel efforts, some of which represent a shift from your historical approach?

Robert McDonald

We obviously keep track of that very closely. One of the things that our purpose inspired growth strategy has done is allowed us to focus the organization and what really matters. When you talk about touching and improving lives of more consumers in more parts of the world more completely, it's very discreet, it's very granular and it focuses everyone in the organization on expanding categories in the countries, expanding vertical portfolios and expanding into adjacencies which we may have hereto for not addressed. That focus results in a tremendous simplification. And in fact, we have an effort going on within the company to simplify. We're cutting the number of SKUs, we're changing our business planning process. And so far, as you can see from the results, it looks pretty good. Also, every year, the Procter & Gamble company runs a employee opinion trend survey. We've done it now for the last eight years or so. And the survey this year was a record in all measures. We had record response rates. We surveyed more than 110,000 employees worldwide, that's out of 127,000. The overall aggregate scores increased for the second consecutive year and they are the highest we've experienced over the past five years. The survey content is comprehensive and robust. We measured 20 categories including employee pride in company and evaluation of meaningful work, feedback on employees personal well-being. And the biggest increase from 2009 was seen in confidence in building unit leadership. And a large number of employees feel that there is a clear and inspiring vision for the future. So I think the program is working. And I think employees are telling us it's working and that's what gives us confidence in the future.

Operator

And your next question comes from the line of Jason Gere with RBC Capital Markets.

Jason Gere - RBC Capital Markets Corporation

I was just wondering, you obviously got a nice lift again on the spending. I was just wondering if you can kind of segregate where you're getting better in ROI between the advertising spending, and maybe some of the in-store marketing stuff that's in the gross to net? And how you look at, I guess, deploying some of your capital ahead? I know you are talking about some of your promotional stuff coming back and advertising obviously had a nice tick up here, but I was just wondering if you could provide some context.

Robert McDonald

Our marketing spend is becoming more and more effective. Marc Pritchard, our Global Brand Building Officer and his organization, our marketing organization, largely is getting stronger and stronger at getting the higher ROI out of our effort. A lot of it is inspired by our purpose. If you think, for example, of our Old Spice brand, Old Spice defines their purpose is to help guys navigate the season of manhood. And we think about guys lies in a larger context than just consuming body wash and deodorants, and this is the power of purpose. And when you think about our advertising, smell like a man with the former football player as in Mustafa, you see how we've taken an idea, an insight. We turned it into superior product. We turned it into a big idea. We turned it in the consumer engagement and we turned it into a movement. The insight is the guy want to smell like a man, and deep down, all guys are scared that they don't smell like man. And so what this ad talks about is now you have a product where that insecurity goes away and you can smell like a man, man. And that's why he says, look at your man and I look back at me and I look at your man, and it's such an effective advertising campaign that we're getting impressions that we didn't pay for. There are nearly 200 videos that have been shot over the last few days by people, different people, Ellen DeGeneres, Alyssa Milano, there's a Twitter campaign that's created because people are starting to ask the Old Spice guy questions. There's YouTube 20 million times. So what we've done is we've created a movement, and that movement has really a high ROI because they're not paying for all these impressions. I was in Washington D.C. not so many weeks ago to meet with the President and I opened up the Washington Post, I think it was, there is a cartoon of President Obama riding a horse backwards asking if he smelled like a man-man. It had something to do with Republicans and Democrats. But anyway, when people parity your add, you know that you're getting the high ROI and that's what we're trying to do on all of our brands.

Operator

And your next question comes from the line of Doug Lane with Jefferies & Company.

Douglas Lane - Jefferies & Company, Inc.

Looking at gross margins, they were down 70 basis points as you mentioned, and they were up 50 basis points in June, so a pretty big sequential shift. Jon, can you go over maybe the top four or five pressure points as regards to input costs and raising margin trends over the next several quarters?

Jon Moeller

Well, we don't -- I'm not going to get to provide answer to specific margin guidance. What I will tell you is that if you look at the base period dynamics on commodities, this was a harder comp than the prior quarter. Next quarter will be even a harder comp, but then it should begin to reverse itself. The other thing that's important to understand within, you mentioned, the gross margin progress last quarter versus small decrease this quarter. As I mentioned in my remarks, the big part of that has to do with mix as well, with our Household Care business growing volume at 10%, that's a much more lower gross margin business. The rest of our business growing volume of 5%. So that's also driving that mix. Having said that, looking at on all-in basis, our Household Care business is a very profitable business. So from an operating margin standpoint, that's not something that gets us too concerned.

Operator

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

William Chappell - SunTrust Robinson Humphrey Capital Markets

Bob, just kind of a big picture question as we look to calendar 2011, what's your outlook on the consumer spending both for developed and developing markets? And maybe how is that changed over the past two to three months? Has it gotten more optimistic, less optimistic or kind of no change?

Robert McDonald

The way I look at an economic recovery from a recession is that it's always uneven. You have a couple of months where things look good, you have a month where things drop backwards. My expectation is the global economy will continue to improve, that we will continue to see the kind of growth we've seen in developing markets. We said this quarter, market value growth where we compete was plus eight points, and I think we'll also see improvement in developed markets. But I think the improvement in developed markets will be slower, and in a kind of one to two points that we forecast is the kind that we'll see. Certainly, over the last four to six weeks, there's been negative news in the U.S. economy but that's not unexpected because as I said, recoveries are always uneven. The risk moving forward are what happens with the state of government intervention around the world as it pertains to free trade, as it pertains to taxing and changing of tax structure of multinational companies, and we're obviously trying to influence where governments around the world come out on those issues.

Operator

Your next question comes from the line of Caroline Levy with Calyon.

Caroline Levy - Credit Agricole Securities (USA) Inc.

I wonder if you could help on the corporate line just to call out how much Venezuela was a year ago, those currency things, because that was such a huge improvement on corporate. And also just an update on what's going on with Blades in the U.S.? Because it doesn't really look as if the Blade sales have picked up yet and I'm wondering if you're expecting that to happen?

Jon Moeller

The rough impact of the Venezuela item is about $300 million hurt in the base period that isn't in the current quarter in terms of corporate.

Robert McDonald

Talking about Blades in the U.S., Caroline, the Fusion ProGlide is doing extremely well in the market. Through September, Fusion's past three months all out value share, Blades and Razors was 35%, up 5.5 points versus a year ago, while the Schick sheer blades and razors was flat versus a year ago at 16.8%. The sale of replacement cartridges is probably the best indicator of consumer preference in repeat. And sale of P&G's Fusion ProGlide cartridges have been at the rate of more than 3x the rate of the ProGlide Razors, while Schick's replacement cartridges are only selling at about one time the Hydro razor sales. The ProGlide launch is tracking significantly ahead of our awareness trial in repeat goals. In August, ProGlide achieved 76% brand awareness and this is a full 10 points ahead of our forecast and 11 points ahead of the original Fusion launch. So it's going very well.

Operator

Your next question comes from the line of Linda Bolton Weiser with Caris & Company.

Linda Weiser - Caris & Company

I was wondering if you could comment on how competitors internationally are responding as you move your top innovations in brands into some of these markets? Can you just generally comment both how regional competitors and other multinationals are responding?

Robert McDonald

I think what we see, Linda, is the response that generally we expect, which is the initial reaction of most companies who are challenged by a competitive innovation is to initially price down. And then, as they face the reality of lower profitability, they tend to price back up. And what we're trying to do is innovate and grow market share profitably. And I think the quarter's results suggest we're doing that. But we haven't seen anything extraordinary that we didn't expect.

Operator

And your next question comes from the line of Alice Longley with Buckingham Research.

Alice Longley - Buckingham Research Group, Inc.

I just have another question on SG&A, could you update us with guidance on what the ad ratio for the year should be for fiscal '11? Should it be flat versus fiscal '10, up or down? And I'm assuming it's up to maybe the first three quarters and then down in the fourth? Could you elaborate on that, too?

Jon Moeller

Your quarterly expectations are accurate. We would expect for the full fiscal year would be up a little bit but significantly ahead in the first three quarters, and then as you said, down in the last quarter. Number of consumer impressions both through our direct spend. And as Bob described, as our advertising campaign gets picked up more broadly, we expect the number of consumer impressions to continue to be meaningfully ahead of year ago.

Robert McDonald

But even though the total spend will be up, the percent of sales will be roughly the same as it's been historically.

Operator

Your next question comes from the line of Ali Dibadj with Sanford Bernstein.

Ali Dibadj - Bernstein Research

A quick housekeeping one and then just a broader question. Housekeeping one relates to -- and your business segment margins being down about 170 basis points, but it's being offset by about 185 basis points on the corporate expense line. So just to get a better sense of how that should trend going forward, you mentioned, Jon, Venezuela, is that all in 185 basis points or is that across? So just a sense of the negative 170 going forward and a plus 185 perhaps we can join you in celebrating, is that flips. Then the broader question is if you look at your results not just this quarter but over the past several quarters, there's been a pretty strong correlation, if you will, between average price down and share growth, sales growth and the fact some margin degradation from a business segment perspective like the Fabric Care, Home Care, Baby Care, Family Care. If I understand, how do you think that correlation breaks? You clearly have a better look in terms of pricing going forward but then, why then you have so much confidence on the correlation breaking down? Do you expect that the competitive environment changes from here? Do you expect the consumer changes from here? That's kind of a broader question, the housekeeping question will be helpful as well, if you can.

Jon Moeller

The housekeeping question, we'll continue to have that year-to-year help that you're seeing in the corporate line this quarter through next quarter. But then obviously, once we get to the annualization of the devaluation, that stops. But what accelerates then are the business segment margin and that impact will more than offset the impact that you're seeing in corporate that will go away. And why do we continue to have confidence in that and what will break the correlation that you've seen thus far? I mean, first of all, the behavior is different. So we've talked about how in the last three quarters, we've initiated more price increases than decreases. I talked about how percent volume moving on promotion and North America was decreasing versus a year ago. And then, you get into the math again on the base period with a more favorable year-to-year commodity comparison in the back half and a more favorable -- significantly more favorable SG&A comparison behind the advertising comp. But also realized that as this goes on, we're continuing to go back to some -- and Bob said, we're continuing to simplify, we're continuing to reduce cost and that momentum builds as the year goes on as well.

Operator

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

Mark Astrachan - Stifel, Nicolaus & Co., Inc.

On the market share initiative, just curious how you measure the success of the cited market share increases. Are there specific amounts in each country in region? And then on an overall basis, at what level do you achieve necessary scale to retain that share?

Robert McDonald

Well, we measure market share granularly, Mark. I mean, we look at market share by SKUs so that we know if an innovation is working. We look at it on a brand basis, we look at it on the category basis and then of course, we roll it up company-wide. The same is true, we look at it by retailer, we look at it by country, we roll up the geographies. For us, success is market share growth. Now when I say that, we hold our sales to a high standard in the sense that a 0.1 increase or 0.2 increase is basically flat for us. And we force ourselves to make sure that there's statistical significance in the kinds of differences that we look at. So before we do any kind of celebration, it's got to be a statistically significant difference at a high confidence interval, and we look at it obviously on a sequential basis which helps us understand this is a real trend or is it not. And to the point of the question of sustainability, on what share level do you have to get to be sustainable, in general, our approach for years has been and we'll continue to be trying to be the number one or two player in the market. And generally, when you achieve that position, it's sustainable.

Jon Moeller

I think one of the things that's compelling about this quarter or even the last six months is no matter how you cut the share, it's up. So in other words, past six months, North America is up, Western Europe's up, Central Eastern Europe, Middle East, Africa is up, Latin America is up, Asia is up. Past three months, same thing, North America is up, Western Europe is up by higher amounts. Meaning, the market share growth is accelerating. So when you see that kind of pervasiveness of share growth, you know that your innovation program is working, you know your go-to-market program is working, and that gives us confidence that we can hold those shares and grow them further in the future.

Operator

And your final question comes from the line of John San Marco with Janney Montgomery Scott.

John San Marco - Janney Montgomery Scott LLC

I think I've heard at least two references to supply constraints today. Can you talk about your CapEx needs both in near and long term and whether we should expect any change on that front?

Jon Moeller

For the current year, we expect capital spending to be in about the neighborhood of 4% of sales consistent with what's it been historically. We do have an ambitious capacity program that we've embarked on. We've been doing this for sometime. We've become much more efficient in terms of that program, the capital cost per unit, if you will, but the cost of capacity has come down almost by half over the last five years. But we'll do what we need to do to make sure that we're able to serve consumers all around the world that may result in some increase in spending in certain years. But generally, we should be pretty close to where we've been historically.

Robert McDonald

As Jon said, our cost per unit in capacity has gone down by about half over the last decade and we're continuing to make strong efforts to improve the productivity of our capital spending. For example, this is a great example of operating as one company. When you build a new factory, about 50% of the cost is the infrastructure of the factory and about 50% are the operating lines. And because we're a multi-business unit company, that 50% of the cost and infrastructure gets spread over many more business units as we locate more and more business units in our new factories. So that reduces the capital requirement. As we've said earlier, we got about 19 new factories under construction right now. About five are starting up and about five are on the drawing board. And we expect to continue that kind of pace of capital spending and construction in order to touch and improve more lives in more parts of the world more completely.

Jon Moeller

Before we sign off, we just like to remind everyone that we'll be hosting our 2010 Analyst Meeting here in Cincinnati on December 15 and 16. If you haven't already received the electronic invitation and would like to attend, please give John or the IR team a call. Thanks for your time this morning. Have a great day.

Operator

Thank you for joining today's conference. That concludes the presentation. You may now disconnect. And have a great day.

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