Procter & Gamble Company (PG) — Q1 2015 Earnings Call Transcript

Good morning. July to September was a challenging quarter from a macro standpoint with slowing market growth in both developed and developing regions. Strong foreign exchange headwinds, market-level challenges in Ukraine, Russia and the Middle East, Venezuela, Argentina, and Hong Kong, along with increased consumption taxes in several large markets including Japan and Mexico. Despite this, we were able to deliver top and bottom-line results for the July-September quarter, which were in line with our going-in expectations. Organic sales grew 2% and were in line or ahead of a year ago in all reporting segments. Organic volume was in line with the prior year, pricing added more than a point to sales growth, and the sales mix was positive. Total sales were roughly equal to the prior year, including more than a point of headwind from foreign exchange and the impact of brand divestitures. Core earnings per share were $1.07, up 2% versus the prior year. Excluding FX, core earnings per share grew 9%. Core gross margin was up 20 basis points with cost savings up approximately 140 basis points; benefits from pricing were partially offset by foreign exchange, higher commodity costs, innovation and capacity investments, and negative margin mix. Core SG&A cost as a percentage of sales increased 30 basis points, with 70 basis points of overhead savings and 50 basis points of marketing savings being more than offset by foreign exchange impacts and investments in R&D and selling capabilities. Total productivity savings in cost of goods sold and SG&A were 260 basis points, and core operating margin was down 20 basis points versus the prior year. The effective tax rate on core earnings was about 23%, nearly 2 points higher than the fiscal year guidance of about 21%. September quarter all-in GAAP earnings per share were $0.69, which includes approximately $0.03 per share of non-core restructuring charges, $0.04 per share of charges related to a change in the exchange rate at which certain historical Venezuela receivables will be paid, and a penny per share of benefit from earnings from the discontinued Pet Care operations. Also included is a $0.32 per share non-core, non-cash charge to write down goodwill and certain intangibles of our Battery business. Duracell is a strong brand with equity in Personal Power, and an attractive business, but we are writing the asset down to be more reflective of the value we'll receive. We recently announced the sale of our interest in the Nanfu Battery joint venture. We generated $3.6 billion in operating cash flow and $2.8 billion in free cash flow with 96% adjusted free cash flow productivity, reflecting our focus on balanced growth and value creation. This quarter is the best first-quarter cash performance in the past five years, and improved results on payables including good progress on our supply chain financing program were the main drivers of the strong cash performance. We returned $4.2 billion of cash to shareholders, including $1.8 billion in dividends and $2.4 billion in share repurchases. In summary, first-quarter sales and core earnings growth were in line with going-in expectations and we continue to build on our strong track record of cash productivity and cash return to shareholders. We expect the headwinds facing our industry to continue. We are consequently continuing to sharpen our strategies, accelerate and increase productivity savings, and strengthen our execution. As we announced last quarter, we’re taking an important strategic step forward to streamline, simplify, and strengthen the Company’s business and brand portfolio. We will become a more focused company of 70 to 80 category-leading, competitively advantaged brands organized into about a dozen business units and four industry-based sectors. We’ll compete in businesses that are structurally attractive and play to P&G’s strengths, where we can achieve sustainable advantage. Every brand we plan to keep is strategic, with the potential to grow and create value. The core 70 to 80 brands are leaders in their industries, categories, or segments. They are brands shoppers buy, consumers use, and customers support. They’re leaders in brand equity, awareness, trial, purchase, and loyalty. They’re leaders in product performance and innovation and in growth and value creation. Over the next 18 to 24 months, we will create a faster-growing, more profitable company that is far simpler to operate. In September, we completed the exit of the Pet Care business. We closed the divestiture of the Americas Pet business to Mars in July. Mars then executed their option to purchase the business in Asia, and last month we signed an agreement to divest the European Pet business to Spectrum Brands. All remaining elements of these transactions should close in calendar year 2015, pending regulatory approval. We generated very good value in this three-stage transaction, earning more than a 20x EBITDA multiple on past three-year average results. The Pet Care exit transitions seven brands to new owners. Over the last five quarters, we have divested, discontinued, or made decisions to consolidate about 25 brands. Today we are announcing the exit of the Personal Power or Battery business. Our goals in this process are to maximize value for P&G’s shareholders and minimize earnings per share dilution. There are two steps to this plan. In late August, we finalized an agreement to sell our interest in a China-based battery joint venture in a cash transaction. The second step is the exit of the Duracell business. Although no decision has been made on the form of exit, our preference is currently a split-off of the Duracell business into a standalone company. Duracell is the global battery market leader with attractive operating profit margins. It’s a brand equity and product innovation leader in the category with a history of strong cash generation. It will receive greater priority and attention as its own company. If we choose to pursue a split-off transaction, P&G shareholders will be given the option of exchanging some, none, or all of their shares in P&G for shares in the newly formed Duracell Company. P&G’s outstanding share count would be reduced by the number of P&G shares exchanged, and the exact exchange ratio will be set just prior to the completion of the transaction, which we expect will occur in the second half of calendar 2015. While a split-off is our preference, any alternative exit scenario that generates equal or better value will be fully considered. We are developing incremental savings plans to offset standard overheads that remain in our core cost structure to minimize the dilutive impact of exiting the Duracell business. For the time being, Duracell will continue to be reported in our core results. As we continue to strengthen our category and brand portfolio, we will strengthen and focus our brand building and product innovation efforts and investments against our biggest opportunities. We are committed to being the brand and product innovation leader in the categories in which we compete. Year after year, successful brand building supported by product innovation has built our businesses, transformed our categories, and created entirely new businesses. Innovation fuels commoditization, stimulates category growth, and builds cumulative advantage for our brands over time. With branding and product innovation, we built leading positions in laundry in many markets. In the U.S., we have nearly a 60% share of the U.S. laundry market sales and earn about 85% of the profit in cash generated in the category. We launched our North American Fabric Care brand and product innovation about eight months ago and upgraded Tide Plus line that makes our best liquid detergents even better. Gain Flings accelerated consumer conversion to new premium unit dose detergents. Tide Simply Clean & Fresh provides value to our consumers and presents a new and better option from a brand they aspire to use, while new sizes and scents of Downy Unstopables and Gain Fireworks were tested. Innovations like these build on the consumer and competitive advantages our brands have created over decades. Innovations like these enable us to earn a leading share of market sales and an even greater share of market profit and value creation. Innovations like these stimulate market growth, spark new consumer interest in the category, and grow market baskets. They trade consumers up to higher-performing products. Tide Pods and Gain Flings are priced at more than double the average price per load in the detergent category, and are still very affordable for the vast majority of consumer households. Over the last 30 years, the price of a load of laundry has lagged the price of cheese or eggs, and is a much better value than a cup of coffee or a bottle of soda. The U.S. category’s two biggest laundry brands, Tide and Gain, have each grown market share over the past 4, 13, 26, and 52-week periods. Tide value share was up 2 points for the quarter. Tide Simply Clean & Fresh is nearly a 3 share with cannibalization results better than expected. Distribution of Simply Clean & Fresh continues to grow with a top U.S. retailer expanding to full national distribution earlier this month. P&G’s unit dose business across Tide and Gain has a 9% share of the total U.S. detergent market. We have over 75% share of the unit dose form. We are continuing to leverage our consumer-preferred unit dose form with Tide Free & Gentle Pods which started shipping in July. Just over a year ago, we introduced a broad range of Baby Care product innovations in North America. Nearly every diaper across all sizes and price points was improved to deliver better absorbency, comfort, or design. Our premium mom-preferred Diaper design, Swaddlers, was extended in sizes 4 and 5 and subsequently in size 6. P&G’s U.S. market-leading Diaper share is now nearly 44%, up more than 3 points versus a year ago. On a global basis, P&G has about 35% of the global Diaper share and earns about half the profit in the category. We’ve built this leading Baby Diaper business despite not having a consumer-preferred pant-style Diaper offering. We’re now launching Pampers Premium Care Pants beginning in Russia. Pampers Pants provides exceptional skin comfort and dryness benefits in an underwear-like design, that should add to cumulative product and equity advantages we’ve established with Pampers. Gillette has a long history of innovation, with blades and razors that reset performance standards in the industry. Over time, we’ve earned nearly a 70% share of blades and razor sales globally and a 90% share of value and profit. ProGlide FlexBall, our newest innovation, is the first razor designed to respond to the contours of men’s faces, maintaining maximum contact and delivering a closer and more comfortable shave. Every man has a different-shaped face, and one Gillette FlexBall and cartridge delivers a uniquely better, closer, and more comfortable shave for everyone. Pre-launch testing indicated men preferred FlexBall 2:1 versus the best-selling razor in the world, our own Fusion ProGlide. Post-launch, men who have used FlexBall indicate a closer to 90% preference rate. Trial has come from across the category with an encouraging 25% from disposable users. In the four months since launch, we’ve seen an improvement in U.S. blades and razors market growth, including more than a 25% spike in razor sales, and have seen sequential improvement in our razor shares over the past 12, 6, and 3 months. Gillette earned nearly 80% of the male razor sales and nearly 90% of male cartridge sales in the U.S. last quarter. We’ll begin the global expansion of ProGlide FlexBall early next calendar year. Also next year, we’ll extend our breakthrough FlexBall technology to women with our market-leading Venus brand. FlexBall offers clear benefits to women, helping them easily manage tricky spots such as knees and ankles. Women who have tried the new razor love it, preferring it 3:1 over the current global best-selling women’s razor Venus Embrace. We believe we can grow the adult incontinence category with innovation, transforming the desired consumer experience and increasing consumer, customer, and shareholder value. This is currently an attractive $7 billion global category growing at an annual rate of 7%. Women aren’t satisfied with current product offerings—1 in 3 women over 18 years old suffers from incontinence, but only 1 in 9 uses an adult incontinence product. That spells consumer dissatisfaction, which spells opportunity for P&G. We’re entering the category with superior pad and pant-style products that deliver better fit and protection from Always, a brand that women trust and prefer. We began shipments of Always Discreet in the UK this July, where market growth has accelerated by 20% since our launch. We have quickly grown to over 9% value share. We started shipping Always Discreet in North America and France in August, and in less than two full months in the market, the U.S. adult incontinence market growth rate has accelerated to 10%, and we’ve grown to over a 7% value share. Last month, we launched Crest Sensi-Stop Strips, providing unprecedented tooth sensitivity relief. Unlike toothpaste that takes several weeks to reduce sensitivity and needs to be used twice per day, one Sensi-Stop Strip applied for 10 minutes provides immediate relief and up to one month of protection from sensitivity pain for sound consumers. This is another significant market growth opportunity, as nearly 60% of Americans suffer from sensitive teeth, but only 4 in 10 are satisfied with their available sensitivity product solutions. Our focus now is on driving awareness and trial of this revolutionary new treatment for tooth sensitivity sufferers. In July, we introduced QlearQuil, a product innovation that extends Vicks into allergy treatments. This innovation leverages strong and trusted Vicks brand equity across a variety of products, including nighttime, daytime, and 24-hour treatments. QlearQuil is a great product for the numerous occasional sinus and allergy sufferers who only want relief when they need it and don’t want or need everyday preventative dosing. In September, we launched a new bundle of Metamucil brand. This includes a base brand restage of Metamucil fiber with a new satiety benefit that helps you feel less hungry between meals, in addition to its current heart health, blood sugar, and digestive health benefits. Meta Bars, our new fiber bar form, fits with consumer lifestyles and capitalizes on the rapid growth of the health bar, meal supplement, and snack category. MetaBiotic is a new probiotic that puts Meta into the fast-growing immunity benefit space. As I said earlier, we’re committed to being the brand and product innovation leader in our categories, and we’re increasing investment behind it. The best companies in any industry find a way to lead brand, product, and business model innovation and productivity, returning productivity into the core strength of P&G, making it a systemic and enduring value creation pillar alongside innovation. We have significantly accelerated and will significantly exceed the $10 billion cost savings goal we set 2.5 years ago. We’re driving cost of goods savings well above the original target run rate of $1.2 billion per year. We’ll be above target again this year for the third consecutive year, with strong savings across materials, manufacturing expense, and logistics. We expect to improve manufacturing productivity by at least 6% again this year, reducing staffing even as we add capacity and start-up new production modules. We have begun work on what is probably the biggest supply chain redesign in the Company’s history, moving from primarily single-category production sites to fewer multi-category production plants. The supply chain plans will be informed by portfolio decisions that we have made. We build the supply chain around the future portfolio, not the one we have today. We are taking the opportunity to simplify, standardize, and upgrade manufacturing platforms for faster innovation, qualification, expansion, and improved product quality. We are transforming our distribution network in the United States, consolidating customer shipments into fewer distribution centers. These centers are strategically located closer to key customers and key population centers, enabling 80% of the business to be within one day of the store shelf and the shopper. We now have two of our new U.S. distribution centers up and running, and we will open the other four in early 2015. Earlier this month, we announced steps to streamline our distribution network in France, consolidating to fewer larger distribution centers. The distribution network projects will allow both P&G and our retail partners to optimize inventory levels, while still improving service and in-store availability and reducing in-store out-of-stocks. We have now established a $1 billion to $2 billion value creation target for our global supply chain reinvention effort. We have doubled the associated cost of goods savings target from this global effort from $200 million to $300 million up to $400 million to $600 million in annual savings, building to this target level over the next three to five years. These savings are incremental to the $6 billion of cost of goods savings we originally communicated and are on track to exceed. We expect additional top and bottom-line benefits from improved service levels. We have reduced non-manufacturing enrollment by 16% in three years, enabled by several important organizational design choices. We have organized around four industry-based sectors; we are streamlining and de-duplicating the work of business units and selling operations. We have consolidated four brand-building functions into one. Each of these changes reduces complexity and creates clear accountability for performance and results. A more focused portfolio of brands and businesses will enable further changes. In the first quarter, we again reduced enrollment versus the prior quarter, despite the addition of many of this year’s new hires to our enrollment ranks. We have additional opportunities to improve marketing efficiency in both media and non-media areas, while increasing overall marketing effectiveness and the strength of our programs. We continue to drive marketing productivity through a targeted mix driven by new, more efficient digital, mobile, and social media. We are making targeted reinvestments to support strong innovation. We increased marketing support behind the Tide brand in the U.S. by 60 basis points last year, and increased Campus market in the U.S. by 230 basis points. As we generate efficiencies, we will seek good opportunities to reinvest some of those savings back to work to improve top-line growth. The final priority that I will touch on this morning is execution. It is the only strategy our consumers and customers actually see. We are bringing a renewed focus to brands, building leadership brands with iconic equities that become the prototype in their categories, consistent expression of the brand promise with ideas that attract consumers to the brand’s superior benefit. Create trial, ongoing preference, and lasting loyalty. Building trial with targeted advertising and sampling is a significant opportunity for many of our brands. For example, thousands of recent male high school graduates will receive ProGlide FlexBall razors. The babies in the 80% to 90% of new moms in the U.S. will try Pampers while they are in the hospital. Many buyers of new dishwashers or cloth washing machines will have the opportunity to try our best Cascade and Tide product innovations. We are focusing resources to improve coverage, expertise, and execution in the key retail channels, wholesalers, and distributors that make a difference. This will lead to improved distribution, shelving, merchandising, and pricing execution to consistently win at the first moment of truth. We are and will continue to increase the amount of sector and category dedication of our salesforce to improve category expertise and tenure, and increase channel coverage. Improving our branding and selling execution will be significantly enabled by the business and brand portfolio focus we have embarked on. The strategic strengthening of our portfolio, innovation investment in core categories, strengthened and accelerated productivity efforts, and stronger marketing and selling execution should enhance our results. We are operating through an extremely difficult macro environment with an increasing number of issues in Russia, Ukraine, the Middle East, Argentina, and Venezuela, with the dollar continuing to strengthen, with markets decelerating, and with increased commodity costs despite lower crude oil prices. We are making targeted investments in our value equations and are increasing investment levels in our brands and product innovation. With all this considered, we are maintaining previous organic sales and core earnings per share guidance ranges while we work to offset the macro headwinds with more productivity savings, pricing for FX, and market-accretive innovation-enabled top-line growth. Our forecast for organic sales growth remains at a range of low to mid-single digits. We now expect foreign exchange to be a negative 2-point impact on sales growth and a 5 to 6-point headwind on core earnings per share growth, roughly double the impact we estimated last quarter. We’re maintaining our core earnings per share growth guidance range of mid-single digits. While FX currently skews us towards the lower end of this range, we will do our best to offset these impacts with productivity savings and pricing, without compromising increased investments in brand equity, value equations, innovation, and selling capability. This is what we were able to successfully do last year. Excluding FX, we’re now forecasting double-digit core earnings per share growth for the fiscal year. On an all-in GAAP basis, we expect earnings per share to be down 2% to 5% versus the prior fiscal year including approximately $0.55 per share of non-core items, mainly $0.20 per share of non-core restructuring costs and a $0.32 impairment charge. We’re targeting to deliver about 90% free cash flow productivity. We plan to offset additional capital investments with continued working capital improvements. We plan to return this cash to shareholders through dividend payments of around $7 billion and share repurchases in the range of $5 billion to $7 billion. Our guidance is based on mid-October foreign exchange, spot rates. Further significant currency weakness, including Venezuela, is not anticipated within our guidance range. Our outlook is based on current market growth rates, which we’re monitoring closely. We also continue to monitor unrest in several markets in the Middle East and Eastern Europe, and we continue to closely monitor markets like Venezuela and Argentina, where pricing controls, import restrictions, and access to dollars present risk. The guidance does not assume any impact from major portfolio moves, including the sale of the Nanfu Battery joint venture. We’ll update guidance for Nanfu once it closes and will update for other transactions as they are decided and completed. There are few things you should keep in mind as you construct your models for the remainder of the year. Our top-line comps are more difficult in the second quarter versus the back of the year. Benefits from new pricing to offset foreign exchange impacts at Venezuela and other markets will build throughout the year. We expect significant top and bottom-line headwinds from foreign exchange in the October-December quarter. At current FX rates, we will annualize a portion of the FX headwinds in the back half, and productivity savings will build as the year progresses. We look forward to discussing our strategies, plans, and progress, and engaging with you on your questions at our Analyst Meeting here in Cincinnati on November 12th and 13th. That concludes our prepared remarks for this morning. As a reminder, business segment information is provided in our press release and will be available in slides posted on our website following the call. Now, I’d be happy to take your questions.

Thank you. Good morning, Jon. You walked through a lot of new innovation in your prepared remarks, and it’s notable considering that this is the first time in a few years that mix has actually contributed to top-line growth. Meanwhile, volume continues to be flattish again. So perhaps can you talk through how you think about the contributors to top-line growth going forward? And then following on that, can you tell us what the breakout was in U.S. growth versus emerging markets? Given slowing macros, can you talk about how growth progressed through the quarter? Thank you very much.

So that’s kind of without getting really specific how we’re thinking about driving growth forward. It’s important that we step back a minute in the midst of some of the macro difficulties and reflect on opportunities for growth. Developing markets are still growing mid to high single digits depending on the market, so while growth rates are 1 to 2 points lower than they were a year ago, there is still a lot of opportunity there. There are significant opportunities in developed markets; it’s very early, but we’re starting to see a little uptick in the market growth rates in North America, presumably driven by lower unemployment, wages beginning to increase, and lower gasoline prices. Even if that doesn’t continue, there are still significant opportunities for growth in developed markets. Just one example: think about the Asian demographic—10,000 Americans every day cross the 65-year mark, and we talked in our prepared remarks about the adult incontinence opportunity. The tooth sensitivity opportunity with Crest Sensi-Stop Strips should also benefit from that demographic shift, and products like Tide PODS, which are more convenient from a carrying and handling standpoint for older bodies, will help us benefit from that demographic change. We continue to be very aware of the challenges we face but very hopeful about the opportunities that are in front of us. In terms of the split between developed and developing, both North America and developed markets were essentially flat for the quarter in terms of organic sales growth, with developing markets up 4%.

Gross margin performance clearly improved in the quarter; it was up for the first time in a year and a half year-over-year. I’m guessing it was probably better or ahead of what you expected. Can you discuss the key drivers behind that in terms of the sequential gross margin improvement? And do you think that’s sustainable going forward? Also, just wanted to get an update on the drag you are experiencing from emerging markets growth in terms of gross margin mix, and the progress you expect to make in emerging markets over the next couple of years on gross margins with more localized manufacturing?

The biggest driver, as you would expect, of the gross margin improvement was productivity savings, which were about 140 basis points. There was also less difference, if you will, between developing market growth rates and developed market growth rates. So part of the answer going forward depends on that dynamic, along with offsets from foreign exchange. We continue to focus on improving profitability in developing markets so that growth there becomes less of a gross margin drag. If you look back the last two years and what we’re projecting this year—two years ago we grew constant currency profits in developing markets 2 times faster than sales; last year we grew them 4 times faster; this year we are forecasting again to be about double the rate of sales growth. We’re intentional and deliberate in our efforts to improve developing market margins to the point where they are not a significant drag on mix. We are very happy with gross margin performance. On a fiscal year basis, while we will continue to be volatile by quarter, we should continue to see progress.

When you announced in August that you were going through this portfolio rationalization process, you said that you wouldn’t be selling billion-dollar brands, but now we see the divestiture of the spin-off of Duracell. So my question is, does the target for the 10% of sales that you are going to be exiting now go up to around 12% to 13% when you include Duracell, or has there been some change in how you build up to that 10%?

You are right, Wendy, in referring to the portfolio of brands we talked about that we have been re-divesting, and we said there were many that were much smaller than those that were bigger. But we didn’t say that there wouldn’t be any large ones; if we did, that was a misstatement. In terms of taking the number up, no, this is part of the plan, and as I said, we are about 25% of the way through the plan through the end of the quarter. This is additive to that. We continue to make progress against that originally articulated plan. There will be some larger businesses, but the majority will be small, and I apologize if we miscommunicated that previously.

Just following on Duracell, why, even though you have taken a decision to exit this business now, is it still included in the ongoing operations? Related to that, at what point will you tell us what level of operating profit you are losing by exiting that business? Secondly, are there significant stranded overhead costs that you expect in the disposal process?

U.S. GAAP accounting requirements require that we account for something in a split-off context in continuing operations until a split-off is executed. That’s why it remains in continuing operations. But as we execute the split-off or as we sign any other agreement, the business would move into discontinued operations at that time. In terms of stranded overhead, yes, there is some overhead that this business is absorbing. As we talked about in the last quarter, we will do our best to offset that to help minimize dilution. In terms of what the dilution will ultimately be, it’s too early to give you helpful guidance on that, as it will depend on what form the transaction ultimately takes. It will depend on the number of shares that are exchanged and the exchange ratio, which won’t be said until closer to the transaction itself. We will keep you updated as we have more information. Right now, it would be a pretty wide range. But again, the takeaway is that we’re committed through the transaction form and our efforts to reduce standard overhead to minimize that dilution number.

Jon, can you talk a little bit more about the kind of the commodity basket and what you see over the remainder of fiscal ’15? Clearly, with oil coming down and diesel trades, that should be a tailwind, but you kind of alluded to there are some other headwinds. So just trying to see what you're seeing and what the next inflation will be this year?

Yes, we’re certainly hopeful that this becomes a tailwind over time, but it takes a while for crude reductions to work their way through the refineries and there is a bit of a bottleneck right now in refining capacity in parts of the world, which is why we’re not seeing the immediate flow-through into our commodity cost base. So our commodities currently are about a 2 to 3-point headwind versus last year, and we’re seeing some moderation in a small decline, for instance, in diesel prices, and hopefully that continues. But we still have resins and polypropylenes due to the dynamic I mentioned earlier, up fairly significantly versus year ago. So hopefully, that 2 to 3-point headwind is the worst-case number, and hopefully we get some help as things continue to evolve.

Two quick questions. One quick, and probably a little bit longer: First off, can you talk a little bit about the sustainability of the working capital improvement that you saw this quarter? There was a nice benefit year-over-year. Then the second question relates to the mix from a margin standpoint. Obviously, it was better this quarter because emerging markets got worse, but can you talk about some of the margin improvements you can make outside the U.S. and outside of developed markets that will create less margin pressure—particularly on the operating profit line—as we look out over the next couple of years? Thanks.

Thanks John. On the sustainability of working capital improvements, I view them as very sustainable. Cash is one of our clear focus areas and we have some strong plans that are continuing to make progress. The progress we made in the quarter was driven primarily by the supply chain financing program, which has future benefits associated with it. We’re not all the way through that yet, and those benefits are sustainable going forward. On top of that, as we execute our portfolio focusing program, there is a significant opportunity that we’re committed to pursue once we have rationalized the category and brand portfolio at the share level. The bottom 5% of our shares in terms of movement not surprisingly account for a much greater percentage of our inventory, so as we address that, there should be a benefit. In terms of what we can do in developing markets to reduce the margin mix impact, as I mentioned in a prior answer, we’re making significant progress in this area on a constant currency basis. We are projecting margins at 2 times the rate of organic sales growth, two years ago 4 times last year at least 2 times again this year. Also, some of the developing market investments that we made, for instance in oral care, these are beginning to accrue and that should be a source of help going forward. The productivity savings are not simply a developed market dynamic; they are equally a developing market dynamic on items like TDC and marketing, even in the non-manufacturing overhead arena. We’re also increasingly localizing our production and we’ll be bringing some of the same redesign to parts of the developing world that we’re doing in the developed world today, at least from a distribution center standpoint. I see no reason why, longer-term, developing markets margins should be a significant drag on earnings, though they will continue to be a negative drag in the near-term.

Jon, can you talk about beauty? In particular, can you go through Pantene U.S., which the scanner data looks a little better recently, and also Olay U.S., your skincare in general, and U.S. skincare in China? Additionally, could you elaborate on the Prestige comments you made in the press release? That would be great.

If you look at beauty, parts of that business are doing fairly well. We grew antiperspirant and deodorant mid-single-digits, cosmetics grew organic sales mid-single digits in the quarter with Max Factor growing shipments on a double-digit basis globally. Safeguard was growing mid-single-digits globally, with double-digit growth in parts of the developing world. We had a pretty strong quarter on Hugo Boss, which is our largest Prestige fragrance. Hair Care grew about 2% in the quarter. We were very encouraged by the developments that you pointed out on Pantene in the U.S., where volume was up 11% on the quarter. As I have cautioned before, this will not be a straight line, and competitive intensity in this category is significant, but still, forward progress is encouraging. Olay remains a work in progress; we are making some good progress in addressing some of the consumer benefit segments that we had neglected and that are important in the category with items like Luminous and Fresh Effects. However, we still have work to do both in North America and in China, but we see better results in beauty from a top-line standpoint and hope to continue that.

A couple of questions: just to sort of drill down more in the U.S., can you talk about some of the price interventions you discussed last quarter if they are done yet and kind of where they happened? Also, can you address some of the personnel changes in the U.S. and your views on sustainability of the U.S. recovery? I know it’s nascent, but curious why you think things are improving and how long you think it will last. Lastly, just give me your views on urgency regarding some of the share losses in China and if you saw any material distributor destocking in any of the major emerging markets? Sorry for the long question.

Pricing is a sensitive topic, so I don’t want to get into really granular specifics. However, we mentioned that we had made value equation interventions in both the laundry and paper products businesses, specifically tissue, towel, and toilet paper. These appear to have been going pretty well. As I mentioned in the prepared remarks, we have built share, almost in a period of time, you can look at it in the last 52 weeks on both Gain and Tide. Tide was up 2 points in the quarter. We will continue to be competitive on pricing. I don’t see any additional significant moves that need to be made for now. In terms of personnel, we are just taking advantage of normal retirement and normal attrition to design the organization that’s going to lead this more focused and strategically-oriented company for balanced growth and value creation. That’s what we’re doing. We will have a management team managing this company that will be the same size as the team that existed in 2000, managing a company that’s over 2x the size of the company in 2000. In terms of China, it continues to be an attractive market; it’s a market where we’ve grown over 50% in the last four years. Market growth continues; based on our look at our categories, market growth was about 6% last quarter. Our inventories are pretty much in line throughout the trade chain, and we don’t really view those destocking dynamics as company-specific rather than systemic.

I was hoping maybe just to step back and put this quarter in a better context of all the improvement efforts that you are making. Clearly, there are lots of things that you’ve done internally over the past 12 months that you summarized and view as positive, like the re-org, supply chain restructuring, overall productivity focus, brand refocusing initiative, etc. But despite that, and despite the innovation successes and brand strength you ran through, organic growth is still only rounding up to 2%. Only two of the divisions grew this quarter. I guess that improved focus over time and easier comparisons going forward should help, but even many of the core brands you attempt to retain remain pretty sluggish. In that context, what are you planning to do to change that paradigm? Is it all about better execution or are there things that consumers currently want from P&G in certain areas that you are not delivering? I’m trying to discern how much you can do to re-accelerate growth on your own versus how much such improvement is just more dependent on macro improvement?

There is a lot that we can do on our own. That’s why I talked about the whole brand-building and selling execution opportunity, which is completely within our control. I mentioned the sampling opportunities and our ability to improve the quality and clarity of our communication with consumers. We have significant opportunities that the supply chain redesign will help us address at the first moment of truth, just in terms of out-of-stocks. Generally, while market growths have slowed, consumers continue to be very responsive to innovation that increases the value of the product that they purchase. If we look at the segments of our business that are growing the fastest, many of those are premium-priced items but come with product superiority and consumer benefits that more than justify that price. Put simply, we believe the antidote to relatively slow overall market sales or market growth is threefold: it’s innovation, it’s productivity, and it’s execution. I must also mention that to the prior question, we still have work to do on our beauty business and other pockets of the business, and improving these areas should also make a significant difference in our ability to grow at or slightly ahead of market growth rates.

Maybe just back up on that a bit and focus on grooming because when you talk about some of the sampling opportunities, some of them sound familiar, like things you’ve always done—babies in the hospital getting Pampers, you’ve got incredible reach there, sending razors to boys when they turn 18, etc. If we focus a bit on grooming, right, that’s the trial opportunity. You had massive innovation with FlexBall; you gave some really positive statistics on the impact on the market, yet the organic sales growth of the business was flat and it was all pricing. Volume was down. So just to focus on that area, what was missing? If FlexBall has been so successful thus far, what’s missing that these numbers are still so weak?

I think there—and it’s very early—most men have an inventory of blades at home that they have to work through before the real driver of growth in that market, which is cartridge consumption, takes place. However, we’re starting to see an increase now in cartridge market share. We’re up about 1.4 points in the quarter, and we’re also beginning to see a reduction in the rate of market decline in the grooming segment, which has been down as much as 6% to 7%. It’s now down about 3% on a more recent basis and as low as past 1% in a couple of the recent months. Also, remember that the FlexBall innovation is not only new to market, but it’s only in one country serving one gender. As I mentioned in my remarks, we’ll begin globalizing this over the balance of the year, starting in calendar year 2015. And remember as well that when we sell an initiative, as we did with FlexBall in the last quarter, there is an inherent acceleration of sales into the quarter as we work to stock the shelves and fill the supply chain. So grooming organic growth last quarter was 7%. If you look at it on a two-quarter average basis, which I think better represents reality given the initiative dynamics, it’s in pretty good shape.

How many more businesses are there in your portfolio like the one in China that led to almost a billion-dollar non-cash impairment charge?

As you can imagine, we do impairment testing on a routine basis. We disclosed in our last 10-K that there was some risk on the Duracell evaluation, that we had a cushion there. The selling price that we generated and the impacts of the decision to sell led to that impairment. You’ll note in our disclosures that there are no other businesses that we’re disclosing a similar risk on, but that doesn’t mean there will never be one. As we sit here today, that is a very low risk.

I just wanted to tack onto Bill Schmitz’s question regarding the personnel changes. Could you just talk about two vectors? One is just near-term disruption and how we should be thinking about that as you have new folks getting into new roles. The second question is, as you streamline P&G’s decision-makers and operating model, have you thought about changing incentive structures in any way to get people focused on the right behaviors, geographies, and product categories?

I am not terribly concerned about near-term disruption. I think it’s a fair question, Nick, but there are many more people continuing to do their jobs than those changing jobs. Also, the people changing jobs are experienced professionals in almost every case. While it’s something we need to be deliberate and intentional about, I’m not really concerned. In terms of rewards and incentives, that’s something we’re always looking at, and that’s something the Compensation Committee at the Board is always evaluating. I don’t have a specific change to announce today, but it’s something that continues to receive the appropriate level of attention.

I would like to circle back on an earlier question on beauty. Specifically, Prestige—I don’t think I heard you discuss the drivers of weakness there. I was hopeful you could elaborate. More broadly, based on your 10-K disclosures, this business has had pretty inconsistent performance in the past and serves a non-core retail customer for you. In that context, can you walk us through the rationale and the puts and takes of why it should or shouldn’t be considered in your portfolio rationalization initiatives?

Thanks for asking about the trends in the quarter, Jason. I appreciate that. The biggest driver is a base period dynamic where we had a strong innovation on both Gucci and Lacoste in the previous year’s quarter, and there was less of that this quarter. I don’t want to spend a lot of time talking about specific businesses and their role in the portfolio while we’re going through these changes. We will announce moves and decisions as they occur and try to be very clear on the rationale. I’ll leave it at that.

Jon, a question on the savings and your decision to aim for double-digit earnings growth in this environment—okay, currency neutral. Could you tell us how much savings you struck this quarter? And remind us what the target is for the year? To what extent is there reinvestment allocated in these double-digit earnings growth targets at this stage of the turnaround?

Thank you, Javier. In the quarter, there were about 250 basis points of savings across cost of goods and SG&A. A not insignificant portion of that was reinvested. I talked about investment levels that we have increased behind Tide when we have strong innovation; we are going to invest in it. We did the same for Pampers and continued spending to drive that business, increase consumer awareness, and improve household penetration. I also mentioned that we are being very intentional in reinvesting in two areas: one in the SRA area, and the other in R&D to bring more relevant innovation to market. We aim to improve realization in an even stronger way, as well as investing in our selling execution to ensure we have sufficient channel coverage in growing channels, guaranteeing an appropriate level of category knowledge and dedication. We will reinvest when there are good opportunities and when we believe we can drive a strong return.

I wanted to follow up on an earlier question on beauty and Prestige in particular. I’m curious about the recently announced decision to consolidate leadership of the salon and global Prestige units under one person. Is there a change in how the company is managing one or both of those units? Additionally, anything to read into the change in the name of that beauty hair segment to personal care?

I’m not trying to be vague, but there’s really not a lot of significance in either of those changes. The individual you referred to—Patrice Louvet—will be managing those three businesses. He has a strong track record within the company and has previously managed our fragrance and Prestige business. He will be great going forward.

Hi, good morning. My question is about what you think your global category growth rate was in the quarter. I’m trying to figure out if you gained or lost share in this quarter? Also, are you still holding the category growth rate of 2% to 3% for fiscal '15? Has there been any change in your outlook for category growth rates in the U.S. versus emerging regions for this year?

Overall, category growth rate was 2.5%, and that’s kind of what we’re expecting. As I mentioned in the prepared remarks, we’re basing our guidance on the current market growth rates we see, which are those. I also mentioned that we’re seeing a slight uptick in growth rates in North America, which is encouraging. While we’re talking share, we’re fairly modest, and as I have said in other calls, this has tended to be choppy in the past—so it’s up one quarter, down the next—we’ll see. In terms of where we’re gaining and losing share, generally, we’re about flat in North America but up a little bit in Europe, down a little in a couple of the developing markets, and that gets you back to even.

This goes to both Olay and the Baby Care business. You mentioned you’re looking at how to improve your selling execution in the face of new channel development—specifically in China with the explosion of online sales and mummy stores, beauty shops. Could you dive a little deeper into how much that has disrupted the business in China? Particularly if I look at Baby, you registered flat volume in the quarter, yet did very well in the U.S. with Baby. Any thoughts?

First, the channels you mentioned are very relevant and are growing quickly, and we have deliberately aimed to participate in that growth. E-commerce, in particular, is growing very quickly in China—it accounts for about 40% of the market’s growth, and we’re very well represented there too. In terms of the difference between Baby share development in the U.S. and China, we remain, by a wide margin, the market leader in Baby Care in China. The competitive sets are different between China and the U.S. As a result, you would expect different dynamics, but we remain encouraged about the business in both areas.

Thank you for your questions and for joining us today. We will continue to work on delivering value to our shareholders and driving growth across our business. We look forward to our next conversation at the Analyst Meeting in November. Have a great day!