Procter & Gamble's (PG) CEO David Taylor on Q3 2018 Results - Earnings Call Transcript

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The Procter & Gamble Company (NYSE:PG) Q3 2018 Results Conference Call April 19, 2018 8:30 AM ET

Executives

John Chevalier - VP, IR

Jon Moeller - CFO

David Taylor - Chairman of Board, President & CEO

Analysts

Steve Powers - Deutsche Bank

Lauren Lieberman - Barclays

Dara Mohsenian - Morgan Stanley

Nik Modi - RBC Capital Markets

Wendy Nicholson - Citi

Jason English - Goldman Sachs

Ali Dibadj - Bernstein

Kevin Grundy - Jefferies

Bonnie Herzog - Wells Fargo

Bill Chappell - SunTrust

Jonathan Feeney - Consumer Edge

Joe Altobello - Raymond James

Operator

Good morning and welcome to Procter & Gamble's Quarter End Conference Call.

P&G would like to remind you that today's discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10K, 10Q and 8-K reports, you will see a discussion of factors that could cause the Company's actual results to differ materially from these projections.

Also as required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the Company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful perspective on the underlying growth trends of the business and has posted on its Investor Relations website www.pginvestor.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.

Jon Moeller

Good morning, I'm pleased to be joined this morning by David Taylor, P&G's Chairman of the Board, President and Chief Executive Officer, and John Chevalier our Vice President, Investor Relations.

I'm going to start this morning with a brief review of the Company's results for the January/March quarter and our outlook for the fiscal year. David will provide additional perspective on the year and update on key strategic focus areas and perspective on the announcements we made this morning regarding the planned acquisition of Merck KGaA's OTC healthcare portfolio and the dissolution of our over-the-counter healthcare joint venture with Teva. We will then open up the call for questions.

This was a challenging quarter in a very tough environment. We grew through the challenges delivering modest top and bottom line growth. We continued improving productivity while investing in our brands. As a result, we remain on track to deliver our fiscal year objectives, but we must and will do better than this. The ecosystems in which we operate around the world are being disrupted and transformed.

We must change at an even faster rate winning through superiority, stronger cost and cash productivity and a strengthened organization and culture. Good news, we increased the dividend by 4%, the 62nd consecutive year the P&G dividend has been increased. We also announced this morning significant moves that will strengthen our hand in OTC healthcare positively contributing to the Company's growth and profitability.

Overall volume of value share trends continued to improve. Volume shares now in line with prior year levels improving in both developed and developing markets. Seven of 10 global categories are now growing or holding volume share. Value share is down 30 basis points all in and adjusting for intra-category mix impact is down just 10 basis points. Several large businesses are moving to positive share trends. Feminine Care and Skin and Personal Care shares are growing.

Global Shave Care value share is now in line with prior year on both a three and a six month basis. Fabric Care, Home Care and Personal Health Care are all growing share. Sales growth has been challenging in a very difficult market environment. We have large businesses in several difficult markets Saudi Arabia, Egypt, Nigeria, Brazil collectively more than a 30-basis point top-line headwind.

Retail trade transformation in the U.S. is reshaping our categories. Rapid shifts to e-commerce and aggressive inventory management, trade inventory reductions, primarily in the U.S. drove strong organic sales down by roughly a point this quarter. From a business standpoint, we're not where we need to be on two large businesses, Baby Care and grooming. David will discuss both.

The balance of the Company portfolio is growing organic sales over 3% fiscal year-to-date. We have opportunities continued to improve noticeable product, packaging, communication, go-to-market, and value superiority of our offerings across the portfolio and to fuel this with even increased levels of productivity, each of which we are committed to do.

All-in sales were up 4% including about 3 point benefit from the net of foreign exchange acquisitions and divestitures, organic sales grew 1%. Organic sales growth was again volume driven with volume up 2%.

We delivered solid organic sales growth in Fabric Care, Home Care, Feminine Care, Personal Health Care and Skin and Personal Care. Looking geographically, we delivered mid single-digit growth in Greater China, Japan, France and the Philippines; high single growth in Russia; double-digit organic sales growth in India and Turkey.

E-commerce sales continue to be very strong, up more than 30% fiscal year-to-date. We are holding or growing e-commerce market share in 8 of our 10 product categories. This growth was partially offset by results in Baby Care and Grooming, both of which were down this quarter versus the prior year.

Mix mainly from strong growth of premium priced products added 1 point to organic sales growth. Pricing rounded to a 2 point headwind on organic sales. On its face, the rounded number may appear like a substantial increase in pricing investment, unrounded it’s about 1.5 points, about 30 basis points different than last quarter with some factors driving the pricing now starting to annualize.

U.S. Gillette pricing interventions reduced organic sales by about 30 basis points. We annualized the price change at the start of this month and we expect stronger sales going forward. The U.S. Oral Care business recently rescinded the list price increase they've taken last year in the U.S., which left us operated at an unsustainable price premium. This dynamic is causing a short-term negative price impact as well that would start annualize in July.

Fabric and Home Care pricing is lower due to promotional investments to maintain competitiveness in the U.S. and Europe. These two will annualize later this calendar year. Looking forward, we will continue to ensure our brands inclusive of product performance, remain an excellent competitive value for consumers. This will include price increases and mix improvement as we bring new meaningful benefits to market.

We will also price to offset rising commodity costs when the degree of the cost impact warrants it and competitive realities allow it. With this plus the annualization of key investments, we currently expect to return to positive price trends some time next fiscal year. On the bottom line, all-in earnings per share were $0.95, up 2% versus the prior year. This includes $0.04 per share of non-core restructuring costs and $0.01 of non-core charges related to the tax act.

Core earnings per share were $1, up 4%. Our operating margin declined to 100 basis points. Our gross margin declined to 110 basis points due mainly to higher commodity and freight costs. Core SG&A cost decreased 10 basis points as a percentage of sales. Productivity savings and cost of goods and SG&A were a 310 basis point benefit for the quarter.

The core effective tax rate was 21%; 2 points below the year ago level due mainly to the impact of the U.S. tax act. This benefit was partially offset by increased interest expense and currency swap cost as we optimized international cash management under the new U.S. tax laws. The rate was somewhat lower than we anticipated last quarter as we continue to gain a deeper understanding of the provisions enacted as part of the tax act.

Adjusted free cash flow productivity was a strong 95%. We will continue to make good improvements in working capital as we leverage our supply chain financing initiatives. We repurchased $1.4 billion of shares and distributed $1.8 billion in dividends in total $3.2 billion of value returned to shareowners this quarter. As I mentioned earlier, we increased the dividend by 4%, the 62nd consecutive annual increase and a 128th consecutive years P&G has paid a dividend.

Moving to guidance for fiscal 2018, we're maintaining our guidance range for organic sales growth of 2% or 3%. We're at 1.4% fiscal year-to-date leaving as at the low end of this range potentially rounded up to 2% for the full year. We expect fiscal 2018 all in sales growth of about 3%. This includes a net benefit from the combination of foreign exchange acquisitions and divestitures.

We're raising our outlook for core earnings per share growth from a range of 5% to 8% to a range of 6% to 8%. Commodities are projected to be a $350 million after tax headwind for the year consistent with the outlook we provided last quarter. Transportation costs are now a $200 million headwind for the year. Foreign exchange is roughly $175 million after tax benefit. The combined impact of commodities, transportation and foreign exchange are $0.14 per share impact on core earnings per share, a four point drag on core earnings per share growth.

Despite these headwinds, we expect a return to gross margin and operating margin improvement in the fourth quarter, driven by strong productivity progress while maintaining investments in our brands. We now expect the core effective tax rate for the year to be in the range of 22% to 22.5% about a half point lower than our previous outlook. As we discussed last quarter, the changes included in the U.S. tax act are broad and complex. The charges we booked for the non-core impacts and the core effective rate may ultimately differ from our current estimates and require further true up.

There's still potential for changes and regulatory interpretation of tax act provisions. There may be legislative actions that arise because of the act and our estimates of the impacts may change as we refine our calculations for earnings and exchange rates for our foreign subsidiaries. We're also increasing our guidance for adjusted free cash flow productivity from 90% to approximately 95%, reflecting strong year-to-date results in our outlook for the fourth quarter.

This guidance includes capital spending in the range of 5 to 5.5% of sales. Fiscal 2018 will be another year of significant cash return to shareholders. We expect to pay nearly $7.5 billion dollars in dividends and repurchase shares in the range of $6 billion to $8 billion this year. Combined return between 13.5 to 15.5 billion dollars of value to shareowners, following 22 billion last fiscal year and 16 billion in fiscal 2016.

In summary, we're growing the top and bottom line in a difficult environment with improving market share trends. We're driving cost and cash productivity, returning cash to shareowners, investing for the long-term health and competitiveness of our brands and strengthening our OTC healthcare hand.

I'll now turn over to David, who'll talk more about our strategic priorities, the baby and grooming businesses and the acquisitions we announced this morning.

David Taylor

Thanks Jon. Before I talk about the longer term strategic choices we've made, I want to be very clear about something. This is not business as usual at P&G. We will make additional changes needed to accelerate progress. The strategy needed to deliver balanced top and bottom-line growth requires accelerated progress against the five elements of superiority, product, packaging, brand communication, retail execution and value, both consumer and customer as well as stronger progress in productivity to fund these changes.

We also recognized and are taken additional actions to make the needed organizational changes to enable greater speed, local agility and accountability. While our plan is to clearly showing evidence of progress in many areas, we have not yet tied it all together to deliver the industry leading balanced growth in value creation we expect of ourselves.

Before I go further, I want to underscore a point that Jon just made, about how we’re managing this fiscal year. We’ve made a deliberate choice to keep investing in product and package improvements, sales resources, marketing and consumer value despite profit pressure from commodity cost and sluggish sales growth to continue to strengthen the long-term and health and competitiveness of our brands.

Now one example of the additional interventions made include the additional $200 to $300 million of savings to mitigate a portion of the investments needed and deliver our fiscal year objectives, but more is needed to fuel the top plan and deliver share growth and what has been a more challenging environment. What we won’t do is sacrifice the long-term health of the business by cutting import investments.

As you know our portfolio is daily used categories were products solve problems that consumers care about and perform drives brand choice. We understand what it takes to win in all 10 of our core categories. In brand country combinations where we judge ourselves to be noticeably superior in at least four to five elements that we’ve talked, we’re seeing consistent meaningful improvement in the financial measures to success household penetration, which is beginning new users, market growth, value share growth, sales growth and profit.

However, there is still too many brand country combinations where we aren’t superior in at least four of the elements and then these parts of the business we’re not growing at the rate we need to. I’m going to give some very clear examples where we’ve not delivered yet and we’re taking additional steps to address this.

First, Baby Care, Baby Care is our largest improvement opportunity. The challenges we faced are market specific and are very well understood. We’re addressing them quickly and they’ve taken longer than planned to resolve, but recent trends in China on our global pants in naturals launch illustrate that we can make progress with important growing segments. Now, we need to get the total brand growing across the key markets that is the next step.

I’ll give you a little more detail on China baby because I know it’s a high interest area. Overall, diaper organic sales in China were up 2% this quarter. This is important turning point, not the end point, but the first quarter of growth in 16 quarters. We’re getting our portfolio adjusted and we’re getting the capacity and plans in place to win. This compares to a 12% decline at the first half of the year. Clearly, we’re making progress and what’s driving the progress and improvements is pant style diapers and premium taped diapers.

We’re starting to win at the fastest growing segments. Now, they’ll all say the declines in mid tier tapped diapers while our mid tier tape diapers account for about half of our diaper sales in the segment itself is declining into double digit rate. We need to make and are making the needed the interventions to stabilize that segment. But clearly success needs to be winning big on the growing forms whilst stabilizing mainline. If not to plan is it working but clearly its taking more time to stabilize the mainline this distant plan.

Let me move to the U.S., here we faced a very different set of challenges. The market is changing and some customers are aggressively pursuing private label with aggressive pricing. The lower private label pricing has been a real challenge particularly for our Loves brands. While we've taken some steps to restore Loves' competitiveness, it hasn’t had the desired effect yet. For perspective, prices are down almost 20% in some areas. We are taking more action including marketing, in-store presence, and where needed value adjustments.

Looking around the world, Pampers is a large brand in many difficult markets that Jon mentioned earlier in Middle-East, Africa and Brazil. We are going to start to annualize some of these market specific dynamics over the next few quarters. We've also had a tough period in Europe, which has started to reverse. A clear bright spot for Baby Care is the continued progress of Pampers' pants. This segment makes up 25% of the global diaper category and is growing at a mid-teen rate. Pants style diapers now account for 27% of all diaper changes, up 3.5 points in the last year.

Majority of global diaper market growth over the next five years will be driven by pants style products, so it's absolutely critical that we win here. Pampers pants is held the number one global value share position for more than a year currently at about 28% of the form and is extended its lead against the highly capable set of competitors. Another business that's been difficult to grow at our target rates is our Grooming business.

We made a very instead of tough choices to improve our position in grooming in the U.S. a year-ago and we're seeing some positive progress. The U.S. male shave care business grew volume for the fourth straight quarter with male shaving systems up 10% this quarter. We expect the strong shipment growth -- shipment volume growth we've delivered over the last year to translate in the stronger sales growth now that the price changes annualizing this quarter.

This is starting to play out as we're growing volume share and value share in the past one and three month basis in the U.S. Ultimately, our objective is to grow the number of users of Gillette blades and razors. The volume trends to be all encouraging. This is a big improvement following years of declines as of many as 2 million users, and we know we're now facing a new challenge on Gillette in the U.S. where value to your competitors expanding the in-store distribution this quarter, and some of the competitors are expanding their direct-to-consumer proposition to new markets in Europe.

We see these. They are not surprises and we have strong plans in place to support Gillette. When we get the superiority model in place, we stimulate market growth and market share growth. I shared a quiet of few of these examples when we talked at the CAGNY Conference in February. Our Fabric Care business in the U.S., Japan and several markets in Europe are Always Discreet Incontinence products SK-II, Olay in China, and Fairy and Dawn Hand dishwashing liquids. I also shared that we need to respond to a changing world and the changing consumer set of needs. One obvious area is increased demand for natural and sustainable products.

First, the couple of comments on the sustainability consumers, here we've had a number of innovations. They include products like Tide, Gain and Ariel unit those detergents. The most compacted detergents available. On the natural side, we are getting to gain and getting new with conviction with brands like Tide Purclean, Gain Botanicals and Dreft Purtouch, they're bio-based olefins and deliver outstanding cleaning performance to consumers want in addition to the naturals profile.

In FemCare, we've launched Whisper pure cotton in the China with the 100% natural cotton top sheet. Pure cotton is off to a very strong start with sales more than double our ingoing expectations. In Baby Care, we're expanding distribution of Pampers' pure protection diapers made with no fragrance, parabens or chlorine bleach. And Pampers' Aqua Pure Wipes made with 99% water and premium cotton.

So far the retailer support has been very good and early consumer reviews are encouraging. For perspective, already our share of in-store is passing several category incumbents in this space that had been in the market much longer. Consumers want performance and more natural ingredients and less of an environmental footprint. P&G brands can deliver that to them. One other example is our recently launched ZzzQuil PURE Zzzs. This is a melatonin based sleep aid, free of artificial flavors, gluten, lactose, and gelatin also with good distribution results.

These organic innovations strengthen our brand equities and attract new users to brands they already know, but now for the combination of performance and added natural and sustainability benefits they want. In many cases, a strong brand can carry this segment. In other cases, we’ll need additional brands. We’ve augmented these organic innovations with recent acquisitions international space. Native, a natural deodorant, and Snowberry Skin Care, a Naturals' brand based in New Zealand. We remained open to whatever it takes to make sure that we win in this fast growing segment.

Next, I would like to comment a little bit on the strengthening of the Personal Health Care portfolio, a category we have previously identified as very attractive to us. Today, we are announcing to be a meaningful step forward. I am sure you’ve all read, we’ve agreed with Teva to terminate our PGT partnership effective July 1. We operated a very successful JV with Teva for nearly seven years. We grew organic sales at a compound average rate of almost 8%.

However, we and Teva have concluded that our strategies and priorities going forward are no longer aligned. The partnership accomplished everything we intended and I want to thank Teva's management, employees who work side-by-side with us to make it such a success. We are moving post Teva to strengthen our OTC capabilities and growth opportunities to with the acquisition of Merck's consumer healthcare business.

Merck's talent and portfolio is a near perfect replacement for the capability and scale lost by dissolving the PGT JV, bringing the significant technical and commercial capability in-house that will complement the capabilities that already reside in P&G’s global consumer health care business. This deal adds a portfolio of about $1 billion in annual sales primarily in Europe, Latin America and Asia. It has been growing mid-to-high single digits.

Another benefit of this acquisition is that Merck's OTC brands bring benefit to new therapeutic areas. They cover a range of treatment areas including relieving muscle, joint, and back pain; colds and headaches as well as supporting physical activity and mobility. Many of treatments -- treatment areas are not currently addressed in our current P&G portfolio.

Currently P&G’s OTC business generates over $2 billion in annual sales and has been a growth and value creation leader for P&G, delivering profitable mid single-digit growth. Our portfolio includes the single largest consumer health care brand in the world Vicks, with over $1 billion in annual sales.

With Vicks, we are leader in OTC cough cold treatments and in digestive health with the Metamucil, Pepto-Bismol and Align brands. We see several areas where Merck's capabilities can accelerate P&G’s brands and businesses. We believe Personal Health Care will continue to be a financially attractive category. It’s a huge category at about $230 billion in sales and with strong profit margins.

The three megatrends that are supported growth of OTC healthcare for the last decade, and they should continue for many years to come. First the aging population, today they're about 650 million people age 65 or over. This is projected to more than double to about 1.6 billion people by 2050. Over the same time period, the global average lifespan is projected to increase by almost 8 years.

Second, as people age, they are focusing more on wellness instead of associating old with a number. People are associating age with how they feel and the quality of their life. And the third big one is consumers are taking more control of their health and wellness, proactively seeking information on products and services that improve their quality of life. In addition, both public and private sectors are trying to mitigate rising healthcare costs.

Given this demographic and societal context, consumers in developed markets already spent a substantial amount of discretionary income on health and wellness. And as incomes grow in emerging markets, they are also spending more to manage their family's health. As a result, we continue to believe that companies with the best consumer insights with meaningful consumer driven innovations deliver on trusted brands will be best positioned to capitalize on these trends.

Leveraging leading capabilities, technologies and brand assets to solve problems for consumers and improve their lives, completely consistent with the strategy for the whole of P&G. Now, I hope you can see, OTC healthcare is a very attractive market and we're excited to add Merck's brands and talent to P&G.

Now, I'll turn it over to Jon to give you some more details on the financial implications for P&G of these transactions including the dissolution of the PGT joint venture with Teva.

Jon Moeller

The Procter & Gamble-Teva joint venture will continue to operate through June, the end of our fiscal year; and the Merck deal will close outside of the fiscal year. So, there's no impact from either transaction on fiscal 2018 forecasts or results. Completion of the Merck consumer health care transaction is of course subject to customary, antitrust, reviews and approvals, while we don't anticipate issues it's difficult to predict precisely when that transaction will close.

If we assume the Merck transaction closes at the end of the calendar year, we expect that we will add about $500 million to P&G all in sales and will be neutral to organic sales, core earnings per share and all in earnings per share growth in fiscal 2019. It will be accretive after that, growing at a faster rate and the balance of the Company at very attractive margins.

We don't expect significant impacts to capital allocation choices and obviously have full line of sight to the deal, as we made the decision to increase the dividend by more than we did in the prior year.

David Taylor

Thanks Jon. We're excited about the potential of this combination creates to continue strong profitable growth of our personal health care business and the balance of the portfolio we're expanding into new relevant benefit areas, amidst these several organic expansions in the natural space. We're solving more problems for consumers Always Discreet in female incontinence except these in fabric enhancers, and we're innovating quicker and more cost-effectively using lean innovation techniques.

We're making progress but we face highly capable competitors who continued to innovate their products and business models, addressing these challenges and extending our product package and demand creation superiority will require investment which underscores the importance of productivity. We will continue to drive productivity improvement to lower cost and generate cash. This must accelerate even from today's pace. We completed a $10 billion productivity program in fiscal 2015 when the second year of a five year program targeting to deliver up to another $10 billion of the savings.

I’ll give you another example of where it's not business as usual for P&G and we’re going to accelerate or pace of change, includes our supply chain transformation and the work we’re going to do reinvent the media supply chain. We’ve talked with you before about the progress we’re making to transform our supply chain. We’re starting production of the first of several categories at our new state-of-the-art multi-category manufacturing facility West Virginia. You’ve probably heard about the changes we’re making in the media supply chain and our work with agencies.

We’re taking big steps to reinvent the media supply chain and how our brands work with agencies. And we’re pioneering a new approach is to dramatically improve our brand building. Agency reinvention is attempting to raise the bar in superior brand communication with greater productivity on non-working marketing spending we create the means to reinvest in maybe and sampling to drive growth.

We started with upgrading and consolidating agencies from 6,000 to 2,500. They’ve been 750 million through 2017. The next phase which goes to 2021 consolidates further to 1,250 agencies and saves another 400 to reinventing agency models. I mentioned just a few of the biggest changes. They include a fixed inflow model where we structure a fixed retainer with the core agency for work like large campaign supplemented with open sourcing agencies on an in and out basis for a flow to the work model.

People first approach where we identified the star creative talent we want in our businesses from across agencies and bringing them together for better creativity importantly at the speed of the market and in-sourcing work like media planning that can be done at greater value inside P&G. New media, new support models, some with, some without the TV led communication plan. Our key principal is to connect our brands to consumers in that people empowered, agile and accountable with more resource collocated closer to the consumers they served. While we’ve made progress, further changes will be made to accelerate improvement.

We’re reducing production cost and ensuring that ads we buy are reaching intended consumers at the appropriate time and place. We’re driving media transparency to reduce waste and lower costs. We estimate we've eliminated significant media waste over the past year and we invested those savings to increase reach by 10% in trial program by about 50%. At the same time, we continue to reexamine our organization structure to identify new opportunities to improve productivity, reducing corporate, central staff in reinvesting in resources closer to consumers and customers.

We’re focused not just on cost productivity but also on cash. And an important cash productivity project has been supply chain financing which we continue to expand. This program which is a win for suppliers and P&G has yielded nearly $5 billion in cash in the five years we’ve been driving it. Productivity improvement will be critical to fund investments for sales in market share growth while continuing to expand profit margins. Alongside the productivity work, we continue to evolve our organizational structure and culture to position us to whether the changing retail and competitive landscape.

Clearly, we have learnt and we’re acting on having more resources closer to consumers we serve with higher accountability, more agility and greater speed. Excuse me -- we’re now nine months into the implementation of the end-to-end and freedom within a framework organizational model, simplifying the structure and clarifying responsibility and accountability. We're still in the early stages of the new design, learning, improving and reapplying success models as we go.

Now to give you just the best evidence that I have that is making a difference is what we've done in greater China. We moved from minus 5% sales growth two years ago to plus 6% as clear to date, and I certainly recognize that we plan more changes will be made to ensure we're winning across the broader share of markets. We've talked to you several times about the changes for making in mastery, supplementing on internal talent with skilled, experience external hiring will strengthen our compensation and incentive programs.

We've talked about how we are increasing the granularity of bonus programs, tying them much closer results individuals deliver, and based in part on shareholder input, the board's compensation and leadership development committee has modified the performance stock program to include relative sales growth metrics and a total shareholder return modifier to ensure awards reflect performance versus external competitive benchmarks.

We also explore an additional opportunities to adjust incentive comp to drive greater accountability, including increase the amount of compensation at risk and more closely linking incentives to team and individual performance. And while the current environment presents several challenges we are making progress, we are delivering our financial objectives and we remain committed to improve results in baby and grooming while advancing our strategic priorities and continuing to drive productivity.

Again, it is not business as usual and we are taking the additional steps to drive change. Our efforts to focus and strengthen our portfolio to extend our margin of competitive superiority to transform our supply chain to enhance our industry-leading margins and to simplify our organizational structure and increased accountability are all clearly aimed at delivering balanced top and bottom-line growth to create value over the short, mid and long-term.

And with that, Jon and I would be happy to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Steve Powers with Deutsche Bank.

Steve Powers

Clearly, there are a number of near-term dynamics at play that I'm sure will be in focus throughout the call, pricing and the Merck acquisition probably front and center. But David, I wanted to take advantage of you being here and just step back for a minute, building on some of the comments you just made because when I think back to when you came as the CEO in late '15, you have a definite vision to return P&G to stable, profitable and market share positive growth at the risk of over oversimplify. I think calendar '16 was to be investment year, '17 a year of stabilization, and '18 a year of acceleration toward sustainability going forward. I mean even just six months to nine months ago, the plan was very publicly said to be working and we were supposed to be accelerating into the fiscal year end. So while I appreciate the incremental call to action today, it just feels that with the results today and the updated outlook, we're just a good ways away from that outcome? And I guess the question is 2.5 years in, how do you -- how does the board, how is the rest of the management team assess just the overall state of P&Gs turnaround? And from here, what's the definition of success and how long should investors expect to wait just to get there? So I think we all get the external challenges and we definitely appreciated the organization's efforts today, but at the same time we've been expecting more from the investments made these past two years. I'd just love your perspective.

David Taylor

Just a couple of comments. One I would say, we had -- we have today a meaningful acceleration on eight of our businesses, and I feel good about those. Eight of our businesses are now growing over 3% and the profits are very strong. Core EPS on those selected that part of the business would be strong. We had two that have clearly been a bigger challenge than we anticipated that I anticipated. The steps that we are taking are showing signs, but it’s taking longer. And that’s going to require more change and more interventions, and we are taking those in each one of the brand country combinations in both baby and grooming to get them turned.

What I’ve seen though that I think reinforces that P&G is turning is just the breadth of brands, countries that are showing now strong growth, and it is showing up in share with the exception of in those two categories. I don’t think investors should wait very long. I expect next year that we will turn. And I think right now the critical part is to ensure that Baby Care and Grooming execute their plans and the interventions that are planned and that we also continue to make and we will continue to make changes as needed as new market realities come forward.

The last six months we’ve seen improvements in many really important areas and as P&G getting in a very real way into the natural segment. P&G addresses some of the fastest growing segments. Now, it’s in the first time in many years where we’re starting to see majority of our top 20 markets turning. China is growing now in the mid singles as we said it would, Japan, strong growth in the mid to high singles. Majority of our top 15 to 20 markets are turning. So we do have some issues, we understand them and we are making additional interventions to address them.

Operator

The next question comes from the line of Lauren Lieberman with Barclays.

Lauren Lieberman

I wanted to ask a little bit about the ongoing inventory destocking and that’s seemingly not just in the U.S. We're compings some big destocking, it was an issue last quarter as well. Clearly we keep track of what retailers are having to say. Those are wondering to what degree this is reflecting specific dynamics with some elements of your P&G specific portfolio, not just overall industry destock, whether it’s like you mentioned -- you mentioned Harry's by name but Harry's getting distribution at Walmart, if there’s some shelf base loss for Gillette. Retailers making efforts with private label, what happening with shelf space there? And maybe even in beauty where you’ve got retailers like sourcing their own product in terms of disruptor and upstart brands and may be pressuring some legacy shelf space. So I just was curious about that as a dynamic more than just retailer trying to manage inventory for their own efficiency but it’s really a statement around how the brands are performing and what takeaway is looking like?

David Taylor

I’ll give a comment and Jon, if you have any to jump in there. If I look just at the U.S., recently we’ve turned to kind of right at flat and actually its plus 0.1. Your comments there were very fair. We have seen a couple of dynamics that I think you’re hearing from us and probably some others, the pressure on retailer trade much is real. The pressure in increased emphasis on private label is very real. The dissolution of that is innovation that grows categories and that I think we’re actually well positioned, but we have to do even more. And as we’ve done it, we have certainly seeing progress.

I don’t believe that the end of just the modest inventory reductions is everybody works very hard to improve the supply chains, and we anticipate that and we're looking at that next year. We have seen more adjustments than planned this year as we commented on. The key to me though in each one of these categories is where we've demonstrated we can bring new ideas, not mentioned before the Fabric Care example where we come in with whether it’s unstoppable so whether it's coming with just based laundry upgrades or new line extensions, we've been able to grow the category growth share, the challenge is in all these categories to do the same.

After several years, we've seen Olay really start to take hold both in U.S. and China, but what's required was a rethinking of the communication model of our in-store presentation and in many cases new items that appeal to consumers. The most recent launch is doing extremely well. So, I believe category by category, you have to look at and while there is some inventory destocking, I believe the fundamental winning and losing will be determined by do you have a consumer proposition that is preferred and do you have a customer propositions that grows the category and helps create more margin.

And there's a lot of pressure on that right now as the profit pool is being pressured because the dynamics that exist that you're well aware of both from discounters and from the e-commerce side and we'll have to deal with that.

Jon Moeller

There is one other thing, Lauren, that we're actually well proactively contributing to this inventory reduction and that's the supply chain transformation that David talked about, and with our ability now to source, to have 80% of our sales source within 24 hours from production to shelf, there's less system inventory that's required and that's a good thing over periods of time. So, there is that element of contributing as well. And that's certainly U.S. dynamic but increasingly a dynamic in other parts of the world, as we transform the supply chain to better serve our customer base.

Operator

Next, we'll go to Dara Mohsenian with Morgan Stanley.

Dara Mohsenian

So David, your comment in the release about the ecosystems in which you operate being disrupted and transformed, and some of commentary on the call and your presence all seems to be highlighting a change in tone. And I guess my question to you would be, do you think there's been a material change in the profit growth outlook for the categories that P&G competes in, in the U.S. and globally versus what you would have expected a couple years ago? I mean you're pointing to some problems in baby and grooming, but you had negative pricing in every single division this quarter that's despite a commodity spike. That's not the way branded CPG companies are supposed to operate, you know organic sales is weakening despite a lot of that great internal work you've done to strengthen the organization over the last few years. And what I'd argue is that theoretically great macro environment for the U.S. consumer in what's a key geography for you? So I just want to understand would you agree there has been a change in the sort of profit growth algorithm for the industry or the categories you're in? And then, how does that affect your expectations for P&G's longer term EPS growth? B, willingness to invest behind the business? And C, the capital allocation decisions in terms of if M&A and diversification plays a greater role going forward? I know I'm cheating and asking multiple questions, but I think they're all related and important for your shareholders, so thank you.

David Taylor

You did ask many big questions, I'll give comments. Jon will comment and we'll see, if we can some of this. What is clear is what it takes to win has gotten more difficult, do I believe that the profit availability has changed dramatically? No, and then look at some of our probably highest margin and part of the business to invest, but there is SK-II in West Coast where our total beauty business is making very good progress. Our Fabric Care business globally and in the U.S. is making very good progress.

And I think what it takes it's got more difficult and then I mean that should actually favor overtime companies that have tremendous technology and can differentiate through a dimensioned superiority that matters to consumers on the five elements. But I’ve got my eyes wide open that it’s going to take additional funding to make that happen and that’s why we do have to change faster. I am on the call because; one, I think the healthcare change is a meaningful positive step; and secondly, I want to be very clear it is not business as usual P&G.

But it's not because anyway does it take away from the future it actually just reinforce how we’ve made the choice that we’re going to make additional changes to accelerate and get back on positive share growth, top line growth and bottom line growth. There are many things that are working very well on the Company a few are not in those, we’re not going to work that kind of that we’re growing through some tough challenges right now.

But the fundamental strategy owing through some tough challenges right now with the fundamental strategy and the profit potential, I think are very much still there, just requires faster moves and we’re one of the common on this and just illustrates. We have many questions a year ago on China because we come off a very difficult time and there we did have to move in a different way than the past a number of capabilities directly in the market and what we see there is almost instant reaction from the minus five to plus one to the plus six. In the U.S., we’ve got many categories also turning. You have a dynamic in Baby Care that is very difficult and we’re addressing it.

We haven’t had a dynamic a year ago and Shape Care and we’re addressing that and you will start to see the last one to three months meaningful improvements. If you got consumers coming in and you’ve got innovation that is the write down, we’ve seen consumers are willing to pay interestingly the fastest growing segment is around most parts of the world are premium, super premium, new forms and naturals.

All of those till that carry very good profit margins and very good growth rates. We do have to continue to transform our portfolio to increase the percent of our business in those forms and one example that’s playing out across the world is pants and diapers, even though it’s been a difficult category I am very pleased that we’re leading a fastest growing segment the consumers around the world are choosing for their babies.

Jon Moeller

I think the only thing I would add to that, Dara, is our two points. David made a point in his prepared remarks, so I think is very important the talks to the benefits of noticeable superiority, packaging products and communication of the market et cetera, and where we have that right. We’re delivering our business objectives all the way from household penetration to market share to profit growth the vast majority of the time. And where we don’t have that right is very clear we’re not delivering against those objectives. So that’s not a macro dynamic and that scenario that’s holding us back, its increasing the level of advantage that we need to with our current portfolio which as David said we’re going to use productivity to help fund.

The other perspective I give you and this is not in any way an excuse, its perspective on whether it’s a systemic issue here on not in any way an excuse its perspective on whether there is a systemic issue here or not from a market level standpoint to the point of the your question. If you look at as David mentioned this earlier as well. If you look at sales growth, excluding baby and drilling where we know we have work to do we’re 3% fiscal year-to-date, profit growth 9% fiscal year-to-date. So, there is nothing as we look at the totality of the portfolio that indicates to us that those kind of results aren't available on a broader basis.

Operator

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

Nik Modi

So, I guess the question and maybe Jon you can answer this on category growth. How that's looking relative to where we were the last time you have the call three months ago? And if there's any way you can give us context between volume and pricing because it looks like pricing has broadly been deteriorating across the entire industry? And just related to that, I know you've talked a lot about the competition and it seems like the immerging markets, the local players are becoming much more sophisticated and much more of a nuisance for you guys and other multinational companies. So just wanted to understand either changing anyway you're making decisions to help compete against those local companies a bit more effectively?

David Taylor

So let me comment on the market growth dynamics and will have David, comment on how were responding to evolving competitive realities. Market growth in the last quarter was essentially unchanged in aggregate from when we last talked last quarter. It's about 2.5% in our categories that's comprised of mid-singles and developing markets and low singles in developed markets. So, that's the status on market growth, of pricing, as I talked briefly about in my prepared remarks has also essentially unchanged versus when we last talked that is 30 basis points of additional price. But I don't think and clearly I mean I guess the retail dynamics that are recurring there is pressure on price, but where we can bring meaningful benefits superiority to market, we're seeing the ability to price. Pods or a premium priced item, these are premium priced. The Naturals elements items that we're bringing to market are premium price. So to the innovator, there continues to be a pricing opportunity.

Jon Moeller

And let me point a little bit on the emerging markets, we are always trying because this is the biggest one that have the most comprehensive data on that, and I would just spend some time going through that markets carefully with the team. We have and if I look at to kind of where we are losing share we will gain share, you're absolutely right the greatest share losses and difficult periods have been kind of all other companies are local and regional competitors. But even that I have seen change over the last, if I go back two years ago the year ago to more recently, and it takes almost category-by-category FemCare definitely was being hit by Hang On which is a local competitor and some other local competitors.

We were indexing from four years between 94 and 95 index, in fiscal '16, '17, we grew modestly to 105. We're right now tracking this fiscal year above the 115. Why? We put the pure cotton product out there. We've got the right -- it's the whole lineup is right now and the team has just done a beautiful job one by one understanding the consumer we had to re-staff in a way we are in addition to a strong team adding the capability to make decisions on the ground and that included another more fully functional capability there and we assign people from this center to the market.

The same thing happened in Olay which were for many years, if go back to '14 to '15 and '15 to '16 with index in the 90s. This year's can be above 110, and it's showing it can accelerate now what's happened is that it had new some things additional to what we're doing in the rest of the market because you are right, local and regional competitors are doing a lot of stuff in the market. I will draw a distinction between where they may be some share gains and where people are creating value and sustaining that.

We are showing, again, whether it’s FemCare, Oral Care or Personal Care business, one by one getting better and which is why in aggregate is 6 and actually Mainland China is a little better than that. That's our Greater China unit. Mainland China is 1 point above that, as we can win against a very aggressive set of competitors. What’s different is the innovation cycle is much shorter. The speed of decisions has to be faster and we’ve had to reorganize to make that happen. That’s part of the end-to-end but go much more aggressively in China. India, which is another market, is very, very difficult.

And you see the India market where the whole world went through the too big transitions last year, we’re now double-digit this year doing the same thing, making sure we have the right go-to-market capability for that specific market and then making sure we’ve got superior consumer preferred both products. And one of the biggest changes is getting more latitude to the market to adjust the communication to meet and communicate with the local consumer. So actually I do believe that has been but I’ve got a lot of evidence we can win in China and India, the two biggest markets who are now starting to grow and growing at an accelerating pace as we go through the fiscal year.

Jon Moeller

And I think as well just reflecting on China for a second to your question, Nik about price potential on a global basis. I mean that’s a market we’re at a market level. The premium and super premium tiers are more than 100% of the growth of the market, which continues to be very attractive in total. And our business as well in that market David mentioned Feminine Care is growing fastest at the premium portion of the market. So as we look globally, there continues to be significant opportunities for growth from a sales standpoint and doing that very profitably.

Operator

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

Wendy Nicholson

Hi, I had a couple of questions but they are short and discrete, probably that’s okay. First of all, the private label growth in the diaper market in U.S., are you seeing that more in-store or is that an Amazon phenomenon? Number two, is the fact that you’re buying the Merck business, does that mean or imply or suggest that you won’t be buying a big piece of the Pfizer business? And then third question is just on the guidance for pricing to remain negative and aggregate for the next several quarters but the gross margin is supposed to be up in the fourth quarter if I heard that right. Does it seem strange to me not only given the negative pricing but all the commodity inflation we’re seeing. So can you explain from a productivity initiative perspective like what’s the light switch that goes on in the fourth quarter that’s going to get gross margins up?

David Taylor

On private label?

Jon Moeller

Yes, private label what we are seeing is an acceleration of support, I am seeing more but actually in-store in some of our retailers and I think in part due to defending versus the lead on holiday launches that have continued to expand. And because of the importance of that consumer, both all the retailers recognized getting the young mom is important for the basket. And because the profitability pressure, there is a lot of movement there. What we have to do in our doing is making sure our products preferred and that’s the way best to win versus private label and we’ve demonstrated that in Europe over a decade and we’re going to have to sharpen and speed up in terms of some of the changes that we are making to make sure we win with the U.S. consumer.

But it is I think a reaction to two dynamics both online and the discounter moves that occurred in the last year, but baby diapers specifically it’s disproportionate off-line versus online. So Amazon, for example, is not a huge dynamic in that category other than as David said it's influencing the behavior of other retailers. In terms of your question on pricing and commodity inflation and productivity and gross margin, pricing will remain a negative impact to top line for the next quarter that's as far as we guided at this point other than I do expect it to turn positive sometime next year. The amount of the impact should lessen over time and one of the big drivers Wendy is simply that we annualize the big Gillette U.S. pricing reduction starting now.

Also productivity as we've talked about tends to be back-loaded so increases as the year progresses and bring on additional savings, David mentioned for example the start of production in West Virginia and so I feel reasonably confident that we can grow gross margins in the face of a continued price impact on the top line albeit at lower levels. Sorry, you also asked, this is the trouble with multipart questions is I forget. You also asked about acquisitions and as you will readily appreciate positively or negatively that's not a topic we comment on.

Operator

Your next question comes from the line of Jason English with Goldman Sachs.

Jason English

I've got some few potential questions on the table, but I want to come back to the pricing one. The narrative of premium tiers driving growth isn't really new nor is the narrative of you upgrading your portfolio and intervening into those premium tiers? And yet, it clearly results your price mix is eroding and if you look at Nielsen down the U.S., you sold more promotion the U.S. last quarter than any time last five years. And obviously costs, your European competitors facing FX historically this has been fairly counter your pricing. So from the outside looking in, it seems like you're chasing a price value equation lower in the wake of all this disruption that you're talking about on the retail side, the competitive front as well, none of that disruption looks like it's poised to abate anytime soon. So why should we expect price to improve going forward? Why shouldn't we be assuming that this is sort of a new reality and maybe looking to address the business model the cost structure more aggressively to adapt to this new reality?

David Taylor

I'd say there is some element of new reality there, Jason. I think that's a very valid point. And as David said, this is not business as usual, so were changing everything to adapt to that new reality, whether it's entering segments that are new segments that also carry premium prices that are going fast like the natural segment. We talked about ever-increasing levels of productivity to be able to allow us to continue to invest while holding and building margins $200 million to $300 million ahead of our going in target this year and I expect we will have a very aggressive plan next year as well. So we want to be prepared to win in a scenario where this is a continuing dynamic, but again in many parts of the world it’s a very different market reality and in those markets we need to position ourselves to win with those consumers.

Jason English

The only thing reinforced and maybe I haven’t, it is clearly communicated as I want to, we do recognize changes must be made and the cost structure demands are real into more than the past period. That’s real and what we had anticipated is not sufficient therefore we need to do more. I do believe that the strategy is right. What is going to take to bring it to life and deliver the outcome we want, means we’re going to have to do more things differently than we’ve done before and we look at some choices we’ve made to make sure that we’re making immediate progress over the timeframe we’re talking and to me right now that is going on in the Company and will continue to go the Company because there is a reality that you’d got whether it's in the discount or is the e-commerce and retailers are working hard to make sure they get their share of the value created in an industry and the winners is going to the ones that have products consumers. Weren’t more than anything and once they can help grow margins and to do that we’re going to have to have more investment available and that’s got to come through our cost structure?

David Taylor

And this also isn’t a dynamic that’s new. We’ve talked before about for example what happens when the discounter expanded in Europe and private label shares grew significantly as a percentage of the market in Europe over the last 20 years and our business has went through peace in valleys and it wasn’t an easy adjustment but we made the adjustments we needed to make and our business has performed very well in that context building share and the vast majority of our big brands and categories in Europe over that period of time. That’s no guarantee for success with the current dynamic in the U.S. We certainly don’t approach it that way but it's also a reason to believe that it can be done.

Operator

Next question comes from the line of Olivia Tong with Bank of America Merrill Lynch.

Olivia Tong

David, you went through a number of initiatives around baby, grooming and a few other categories. Most of the moves they're seemed to be around pricing and promotion, less around products. So as a market leader in the majority of your categories, why do you think that these are the right moves? And why do you believe they’re not potentially contributing to taking even more dollars out of these categories? And if I could just follow up on earlier question on margins, lot of pressure right now on gross margin obviously and those pressures seem to be growing maybe pricing less than July action slab but you’ve got negative mix, the freight issue et cetera that you’re dealing with. Do you think that there is enough productivity benefits next year to offset these to get gross margin expansion as we look at the fiscal ’19?

David Taylor

Well first, we will make pricing adjustments where we’re lost consumer value but that is not how we lead, that’s not our lead strategy. Our strategy is to drive consumer and actually trade consumers up and then in Baby Care the fastest growing segments are pants and premium trait. What we have to do and are doing is innovating on those platforms what has taken more time then I would want is to get a platforms in place in the cost optimize as we get winning products out. In pants, the product is winning and we’re growing share in the categories growing fast. We’ve got a large inst all business on mainline across many countries and that segment is under tremendous pressure and you are right, that part of the business is very price sensitive.

And as we get more and more of our portfolio in the premium and super premium segments, we actually insulate ourselves from some of the issues that you’re talking. The same is true on Gillette as we continue to trade people up than we have stronger profitability where we were missing and what required this intervention was we were losing too many users and over the long-term that is a real problem and so we had to strengthen our innovation on all three tiers, disposables the mid-tier systems which is marked and the premium systems which is the fusion.

Family, each of those have innovations in the past we only invented at the high end the risk in that as you lose users and losing users overtime was the issue that lead to the intervention that on, but on categories our pricing interventions are meant to be very competitive our strategy to win is on premium super premium superior products.

Jon Moeller

And on your question on margins, we're just in the beginning phases of putting our plans together for next year, Olivia, so I don't want to provide specific guidance, but our objective clearly will be to continue our margin growth on both the gross and operating margin line and we will be just as we did this year looking to increase the level of productivity savings that we can bring to bear in that situation, and I expect as well if the commodity trends continue that there will be pricing in some categories and some markets to help offset this as well.

Operator

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

Ali Dibadj

So because there are two for topics M&A and obviously kind of your core business, maybe I'll indulge with the two questions. One is on the M&A, why is this the right time to do the Merck OTC deal in both Merck KG OTC deal? So many other thing is going on it was not a cheap valuation as some would argue, it doesn't really move the needle. Was it really that the kind of Teva either pulling out or you guys are excited that JV doesn’t work is that really kind of precipitate this is the first question? And then the second question, building on some the things we've been talking about. I guess I'm wondering what plan B and you may say it's too early to talk about that, but look less as there is little bit drama but acquisition for sure and it comes up to be more smaller compelling pack of change if any guy do a really good job your market organization in terms of talking about change but why not if we can make much films about it and the actual numbers aren't good, right. You're pricing guides were down 2% and this is after a quarters and quarters and quarters the accommodation and no price wars when we heard children that this question we really just ask this question. And by the way it only becomes positive it sounds like sometime in that fiscal year and towards the pricing but that doesn’t feel good. You said look we are 8 out of 10 are good, and two of them are not good into your categories but there is always through they are not good right. I mean it just seems like there is always something at P&G as some calorie combinations are doing well which impacts the whole business it hasn’t come together we get that but I guess why will it now continues to be the question we ask and if you look at as that business is neutral but we have heard some form and that business is real for at least five years. So I guess what if the strategy doesn’t work, what if the world is actually two dramatically different HPC you start look like packaged foods for investors perspective what is Plan B. One of the things you guys think about as a record option as I just don’t innovate is it shakes your headcounts by 80% not 25%. Are you just going to have excess and we're going to have expected all of your earning. I really want to get underneath this Plan B part as well please?

David Taylor

So, let me take this last questions and commentary there. First on is this the right time. This was a very good transition that Teva and you’re probably with the situation right now with Teva and our discussion with Teva, it was clear that the ongoing future of the JV needed change and that’s been one of the strongest parts of the business.

At the same time, Merck complements what we have and strengthens what is left once we separate from Teva. It gives us a better geographic footprint. It gives us some additional therapeutic areas. They are growing in the mid to high single-digits. When you put the two together, and this transition, it gives us a stronger business in a category that’s got attractive margins and strong growth rate. It’s a positive mix for the Company.

If you looked on a go forward basis, and these things happen when they happen and those opportunity and I am very pleased we got this done. I think it’s very positive for P&G shareholders in the future. And we don’t pick the timing on when all these things happen, there’s other parties involved. But when it does, you get it done, you get done it right.

The second one is you have many, many questions and some comments and there just a comment on there’s always some business certainly recognize that and to our history there’s always been some businesses up and down. We have two particularly large businesses that have had particularly meaningful perks. The changes over the last couple of years show a level of breadth that indicates P&G can win across a wide range of markets and a wide range of categories.

I completely accept that we must improve to aggregate P&G company top, bottom and share, cash performance has been very strong. And we are making the interventions to do that. Will we look at more significant interventions and how we’re organized in taking cost out? We’ve already addressed that. Yes, we will in ways to create the productivity savings in order to make the interventions needed.

I don’t think there is a broad HPC industry can’t win or can’t generate value, I don’t buy that scenario. And I believe it’s just incumbent upon the leaders in the categories to come up in the innovation that does create value. And there’s periods you go through in a category they're difficult, and the winners are the ones that come out with fundamentals that are strong consumer preferred products. And it has to be done even more than in the past in a way where the retailer sees category growth and margin growth.

And that requires again additional productivity to fund it. And what we are doing is adjusting and in some cases going to have to do a meaningful additional effort to make that happen.

David Taylor

And just back to timing on Merck, we’ve been trying to communicate this morning that we realized that we are operating in a world that is changing and we need to change with it. And we can’t in that context ignore work or complexity that we take on in order to make those changes. And one of those changes has been and will continue to be increasingly attractiveness of the footprint of the portfolio. And OTC is a very attractive space for us. This opportunity became available. We embrace the change opportunity that it represented, both the sun-setting of the JV, which has been very successful and this new opportunity. And we’ll continue across our activity system to take on necessary change to improve outcomes.

Operator

Next question comes from the line of Kevin Grundy with Jefferies.

Kevin Grundy

David just sticking with the topic of M&A and of course I appreciate you won't comment on specific asset that was brought up earlier, but in light of this acquisition and many of the challenges that have been discussed does M&A play an increasing role in the capital allocation strategy to move into categories that are growing faster particularly than some that are challenging the existing portfolio. I was hoping you could touch on your M&A criteria maybe the appetite for potentially larger deals. Maybe that's not what the Company needs at this point I think there's some merit to that argument and then potential categories, geographies of interest and just the last part of that just given the significant amount of portfolio pruning which has happened over the past several years. Can you just confirm that the areas of interest are only within Proctor's existing ten that are in the portfolio at this point of time?

David Taylor

What I would say you know there's so much I could say about future and about M&A, the core growth will come from organic sales and profit growth within our existing portfolio. We are open as demonstrated by the announcement today, where we see an opportunity create value, especially if it causes us to play in a category that is very attractive to demographics and the structural profitability and I'd just we stay very open. I think you also said, we're looking a lot outside our ten categories. The key is to stay focused on the 10 but look for ways and they're maybe some adjacencies that leverage core capabilities of the Company and for those I would be open as well. But again, it's not a C shift to say primarily driven by growth by inorganic approaches, no but a level of openness probably that's more in the past because we finished the portfolio pruning, and now we believe each category ought to be active managers in the portfolio.

Operator

Your next question comes from the line of Bonnie Herzog with Wells Fargo.

Bonnie Herzog

I just have a quick question regarding you know macro indicators such as consumer confidence really are at or near highs but category growth still remains quite weak, so could you guys help reconcile this for us and better understand the disconnect between these factors.

David Taylor

The category growth varies widely, it stayed strong in China it's picked up in India. The U.S. has been difficult and part of that is aggressive pricing action is taken place with some of the dynamics we talked before, between online and offline and a couple of big highly contested categories with Baby Care being the best example I can think of where many are after that consumer and have been willing to price pretty aggressively even different from what we may sell to them. And that kind of goes up and down.

I do believe in most markets around the world we're seeing actually stable to anything slightly improving and that's because of the progress in India has been a big plus. A couple markets and Jon mentioned one earlier that has been a real challenge, markets like Saudi, it contracted a great deal and that's by a choice by the government to focus on the Saudization and the diversification of the economy and we've seen that hit both Saudi and it's had the impact on the Gulf states.

And there's always been volatility in Africa, but if a look at Europe, stable, if anything slightly improving. The U.S. in terms of volume is stable and in some categories improving. Pricing is difficult right now. And Brazil, the outlook by most would be improving in the future, difficult the last few years coming out of two years of a severe recession. Mexico is stable and pretty solid. And who knows, I think Russia is impacted pretty heavily by some external events that are going on right now.

But I don’t see a weakening of the global consumer demand, if anything probably just sequentially a modest improvement outside of the U.S. and stably in U.S.

Operator

Next we will go to Bill Chappell with SunTrust.

Unidentified Analyst

This is actually Grant on for Bill. We just had a question on the Grooming segment and kind of the entrants of that value-tiered player into large U.S. retailer. Here’s our question is more on to that player entered into another U.S. retailer this past year. And I was wondering what impact of that was on your business then, maybe if there’s any additional pricing pressure forward -- going forward due to that entrant in that retailer?

David Taylor

The entrant that is going through a novel and is right, already present, when they first came was coincident or actually right before, we took the pricing action. And the issue was we were not serving consumers in the below $10 price range. We didn’t have what we needed at the $799 to $999 price point, so then came into one of the large U.S. retailers and it did have an impact. Post the intervention we’ve made as we said our volume has picked up. Though we enter this next phase, while it still will be a challenge, we have the portfolio now where we have key price points covered.

We have got innovation going in across disposables to mid tiers to bring in systems and we are in a much better place to compete. And we are also taking aggressive defensive actions to make sure that we communicate with our consumers. In fact the volume is improving is a positive sign. The fact that even the past one in three month value shares have improved is positive. We will have another challenge when they first enter and -- but we’re in a very different competitive place in grooming and our eyes are wide open this time to make sure we defend our business aggressively.

The same is true on some of the online entrants in Europe. This time we are going to defend our business and work to keep our consumers and certainly attract consumers that are interested in online experiences. We recognize that competitive environment will continue to be challenging, all that just means acceleration, make changes that are needed and if what you’re doing doesn’t work, be open to new ideas and we are.

Operator

Next question comes from the line of Jonathan Feeney with Consumer Edge.

Jonathan Feeney

David, you mentioned the user base in grooming a couple of times and I’ve to come to you in the Q&A, the need to hold on to these users. I mean what if it's a case that fragmentation is just natural here and kind of users who want a more low end experience just are your -- aren't great 20-year Gillette and that there’s going to be a next wave of innovation that takes care of this and what you need is higher prices and higher value and to pull consumers up. I mean I know that sounds like pie in the sky at this pint with all these entrants. But I also observe that doing this for 17 years in food, beverage, HPC, I can’t think of a time when absolutely dominant and global leader with a price premium has kind of heal by category by taking price and profit out of it. But that's scared that's basically restored order and by the way what's happening. What is if that makes you walk the user base to be higher at the expense of profit? And what data do you see that makes you think that's the right answer?

David Taylor

I think there is a good set of data if you in Gillette specifically, if the consumers enter Gillette, I'll call it that their portfolio ladder has been lot of evidenced that they experience better and what they were using before at whatever price here and then we can expose them to the next level up in performance and consumers move up. And so what was problematic was if you're losing too many new consumers, certainly a time where there is some societal trends around the frequency of shaving.

You put those two together and said we're not going to sit by and watch the significant portion of new users, more millennial consumers not been exposed to Gillette and get on habits that one don’t given the best consumer experience and secondly would compromise the brand. So their maybe interventions it did bring the volume back and again we've got a lot of evidenced overtime and you think about almost any category you get in, if you are pleased with the performance of the product when you enter you opening to ideas from that ideas and products from that brand.

It is to be a losing strategy to have a smaller and smaller group of consumers playing more and more and believe that will continue and grow your business at acceptable rate. And that's why we want to play in the premium and super premium, but we also have an appropriate entry in most of our categories to bring consumers in and then given the delightful experiences that they are happy to pay more. And that's true and than in the 8 of the 10 categories working.

It's also why we start early in with pampers with great products, but we also have Loves or mid-tier as we want to be present to bring consumers in, but then once they are into anyone of our brand franchises have a meaningfully better experience, and give them the choice as the world is trading up and we have a lot of average overtime, a lot of categories that they will, but you have to be price competitive at the point the consumer invest in the category.

Operator

And now your final question comes from the line of Joe Altobello with Raymond James.

Joe Altobello

Just want to go back to the shift in emphasis to private label on the part of retailers in certain categories I actually get the fact that you see better margins for them, but it's always been brands that really drive traffic. Is that a commentary on the impact on this of innovation by branded players like yourself in certain categories? Or does the consumer simply value product performance differently today than they did three or five years ago?

David Taylor

I don’t think there is a fundamental difference in the consumers valuing from seeing private-label different and I think private label has improve their quality, and I think we have to maintain the level of advantage and justify as the price premium and it is simple as that. When we do that and do that well and we got all kinds of examples. We're able to earn the consumer's trust and the additional cost is actually a good value for them. I expect the private-label manufacturers will continue to and what they generally do is look what the large manufactures are doing or the branded players and they will add new features and we need to be innovative in bringing new ideas and meaningfully better performance.

It is so fundamental to why the strategy of meaningful superiority has to be implemented. In the categories where we've done that we're seeing just what you want to see and we want to see. The top line growth that grow share, bottom line growth that creates value in higher single digits, we've got a few where that isn't the case and if you have a very long and that has weighted down the Company, but when achieved the strategy works. The challenge is to achieve it more consistently, in more brands, across more countries. And while we have those, we have a few big rocks still to move and we've been very open about what those are and we're willing to take additional actions and we will take additional actions to make sure we have the funding and the capability to make that happen.

Operator

And ladies and gentlemen that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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