Procter & Gamble Company (PG) — Q3 2015 Earnings Call Transcript

Good morning and welcome to Procter & Gamble's quarter-end conference call. Today's discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. As required by Regulation G, P&G needs to make you aware that during the call the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results excluding the impacts of acquisitions and divestitures and foreign exchange where applicable. Adjusted free cash flow represents operating cash flow, less capital expenditures and excluding tax payments for the pet care divestiture. Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings adjusted for impairment charges. Any measure described as core refers to the equivalent GAAP measure adjusted for certain items. Currency neutral refers to the equivalent GAAP measure excluding the impact of foreign exchange rate changes. P&G has posted on its website, www.pg.com, a full reconciliation of non-GAAP and other financial measures. Now I will turn the call over to P&G's Chief Financial Officer Jon Moeller.

Good morning. January to March was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility. The currency challenge increased through the quarter with currencies in Brazil, Turkey and Ukraine weakening sequentially versus the dollar. Despite these challenges we grew cost and currency core earnings per share at a double-digit rate. We grew core gross margin including and excluding foreign exchange and made strong operating margin progress up 170 basis points on a constant currency basis. All of this was enabled by over 400 basis points of productivity savings. Organic sales grew modestly up 1%, Grooming, Healthcare and Baby, Feminine and Family Care, segments grew 9%, 6% and 2% respectively. Organic sales were in line with the prior year in Fabric and Home Care due to the timing of innovation launches in North America in both the base period and the current year. The base period included pipeline shipments for the major Fabric Care innovation bundle including the Tide Plus upgrades and introduction of Tide Simply Clean & Fresh and Gain Flings, which led the 6% organic sales growth for the segment in the year-ago quarter. The current period includes the impact of trade inventory dry down ahead of the launch of new liquid detergent and fabric enhanced reformulations. Fabric Care consumption remains strong in North America with market share growth on both a value and a volume basis. Beauty segment results reflect softness in Prestige Fragrance and mass Skin Care. Organic volume was down two points versus the prior year, developing market volume was down low single digits, following price increases taken to offset foreign exchange devaluation in several countries and adjustments made to correct trade inventories in Mexico and China. These adjustments had about a one-point impact on the company’s top line in the quarter. Developed market organic volume was down 2%, driven mainly by timing impacts associated with the April 1st increase in the Japanese consumption tax last year. Shipments in Japan were up 22%, ahead of the consumption tax increase last year and as a result were down mid-teens in the current year quarter. This had about a half-point impact on total company organic sales growth. Pricing contributed two points to organic sales growth and mix added a point. All-in sales were down 8% versus the prior year, due to an eight-point headwind from foreign exchange and a one-point reduction from minor brand divestitures. We held or grew worldwide share on businesses representing about half of the company’s sales and on businesses representing more than 60% of sales in our home U.S. market. We continue to grow share on many of our category-leading brands in countries where it matters most. Pampers tied, let Fusion and all was in the United States for example. On a constant currency basis core earnings per share were up 10%, keeping us on track for double-digit constant currency core earnings per share growth for the fiscal year. Including FX, which was an 18 percentage point drag on the quarter, core earnings per share were $0.92, down 8% versus the prior year. Foreign exchange costs totaled $530 million after tax in the March quarter and $1.2 billion after tax fiscal year-to-date. They're forecast to be a $1.5 billion after tax hurt for the fiscal year. We’re managing through the FX challenge with the combination of pricing, mix enhancement and productivity cost savings and by pursuing opportunities on brands in countries and regions unaffected by FX. Gross and operating margin growth improved sequentially versus the December quarter both in all and on an ex-currency basis, driven by productivity savings. Core gross margin increased 20 basis points in the March quarter versus the prior year. This compares to a 20 basis point decline last quarter. Excluding the foreign exchange, core gross margin was up 90 basis points. This compares to a 40 basis point improvement last quarter. In the current period, cost savings of approximately 250 basis points and 90 basis points of improvement from higher pricing were offset by a 150 basis points mix, 50 basis points of innovation and capacity investments and a modest increase in commodity cost. Core SG&A costs as a percentage of sales increased 50 basis points, excluding FX they were down 80 basis points. A 160 basis points of overhead and marketing savings were more than offset by a 130 basis points of foreign exchange impacts, 50 points of organization capability investments in R&D and sales and 30 basis points of other operating items. Cost of goods sold and SG&A savings totaled 410 basis points, as we continue to accelerate productivity initiatives and programs and they deliver ahead of our objectives. Core operating margin was down 30 basis points versus the prior year including the FX. This compares to a 60 basis point decline last quarter. Core operating margin excluding the FX was up 170 basis points, 50 basis points better than the 120 point improvement last quarter. We expect even stronger margin expansion in the fourth quarter. The effective tax rate on core earnings was 19.6%, half a point above last year’s quarterly rate. This keeps us on track with our guidance for a fiscal year core tax rate of about 21%, which is roughly in line with last fiscal year’s rate. The all-in GAAP earnings per share for the March quarter was $0.75, which includes approximately $0.07 per share for non-core restructuring charges and $0.10 per share of charges from discontinued operations, primarily an adjustment to carry-in balances to reflect P&G’s March ending stock price. We generated $3.6 billion in operating cash flow and $2.9 billion in adjusted free cash flow, with a 117% adjusted free cash flow productivity this quarter. Last week, we increased our dividend for the 59th consecutive year, up 3%, marking 125 consecutive years of dividend payments since our incorporation in 1890. In summary, we generated modest organic sales growth in the quarter, constant currency core earnings per share grew double digits driven by 410 basis points of productivity savings. Constant currency gross and operating margins were well ahead of a year ago and we continue to build on our strong track record of cash productivity and cash return to shareholders. While we must and will manage through the external headwinds and market volatilities largely out of our control, the bulk of our effort is centered on driving significant opportunities within our control, including brand initiatives and product innovation, business and brand portfolio simplification, overhead savings, and major supply chain productivity initiatives. The company portfolio strengthening and simplification announced last August strategically resets P&G’s where to play choices. We’re focused on winning with consumers and customers who matter most, in the channels and countries that matter most, with core brands and businesses that create the strongest consumer preference and the best balance of growth and value creation. We will eliminate 60% of the brands and the complexity they create, while retaining about 85% of sales and 95% of before-tax profit. That’s a good trade. The new company will consist of about 65 leading brands where the size, the price and probability of winning are the highest in 10 categories that are structurally attractive and play to P&G’s core strengths of consumer understanding, innovation, branding, and market leverage. They will enable more resources and focus on the biggest opportunities resulting in faster, more profitable growth. It’s a focused portfolio with just seven categories representing 84% of sales and 85% of profit. It’s also focused geographically with the top five countries for each category delivering about half to essentially all of global profit. Every brand we plan to keep is strategic, with the potential to grow and create value. Within these brands, we will operate with more efficient product line and SKU offerings. Reducing that SKU count by 15% to 20% on the remaining portfolio over the next two years. This continued focus on new brand and product innovation has ample room to grow. We will create a faster growing, more profitable company that is far simpler to operate. We currently expect to exit approximately 100 brand positions with a fair amount of the work already complete. To date, we’ve divested or planned the consolidation of over 40 brands and about 40% of targeted sales. We’ve exited the Bleach business, Pet Care, Duracell, MDVIP, doubled our fragrance brands, the DDF and Naxzema Skin Care brands, Vicks VapoStream, and the Camay and Zest bar soap brands. We’re targeting to be in a position to have negotiated and announced the entire program or at least the large components as early as this summer. Roughly one year after our initial announcement, we aim to have executed, in other words, closed the program by the end of fiscal 2016. This will enable us to head into fiscal 2017 with a new portfolio fully in place. Another significant opportunity is strengthening and focusing our strategies and business models to win with consumers and in channels and markets that matter most. A strategy topic that has come up with increased frequency in recent investor discussions is whether leading brands are still relevant in a winning model and can still grow. We continue to believe that P&G's strategy and business model, which leverages consumer insights and innovations that lead to consumer-preferred products from brands that over time are leaders in their categories, is a winning formula for us—a constant, reliable, and sustainable driver of balanced growth and value creation. Over the last five years, our category-leading billion-dollar brands have been growing sales a point faster than our half-billion-dollar brands and several points faster than our smaller brands. In most categories, our leading brands have leading equities that promote our scores. They’re the brands that retailers want and need in their stores because category-leading P&G brands drive household penetration and store traffic. Their purchase frequency and modest price premium drive basket size. Premium brands and product innovation grow categories. These large brands serve as platforms for innovations, which can be commercialized far more effectively and profitably than could be done with smaller brands that typically earn a disproportionate amount of category profit and create disproportionate amounts of category value. A good example is Pampers, our largest brand with $10 billion in annual sales. Pampers has been growing at a 5% pace over the past three years. In the largest market, the United States, Pampers is driving category value growth of 3%, reversing a multi-year decline caused by declining birth rates in both competitor and trade price discounting. P&G’s U.S. diaper share is up at over 90% of customers, widening our margin of category value share leadership to 9 points. The premium-priced Pampers Swaddlers line is on track to reach over $750 million in sales this fiscal year, up more than 30% versus the prior year, allowing us to grow in the mid-tier with sales at mid-single digits this fiscal year. We’ve built the leading baby diaper business in the U.S. and in the world without a consumer-preferred pant style diaper. We recently started the rollout of our new Pampers Pants designed to provide exceptional dryness and skin comfort in an underwear-like design. Achieving fair share of the global pant market represents another $2 billion sales growth opportunity. Another good example is Tide, our second-largest brand at about $5 billion in sales. Tide has also been growing ahead of the category growth rate, building share. In the March quarter of last year, we introduced a strengthened fabric care brand and product line that significantly broadened consumer appeal. We offered shoppers a full range of brands and products priced from above $0.12 to $0.28 a laundry load, including broadened pod offerings, new and improved liquid detergent options, and Tide Simply Clean and Fresh, a preferred brand of products for many consumers interested in good basic cleaning at attractive everyday value. In addition, we focused on trading in new-to-the-category consumers to Tide, with new washing machine buyers and new household formation programs. More consumers traded in, traded up, and traded down. In fact, Tide household penetration is up more than 200 basis points for the first time in several years. We recently hit an all-time record high U.S. laundry detergent value share of 60%. Tide now holds a 40% value share of U.S. laundry detergents, with brand equity and net promoter scores as strong as they’ve ever been. Gain is the number two brand in the U.S. detergent category with over a 50% share. Both of these leading brands have grown market share over the past 12, 6, and 3 month periods. The Tide and Gain brands have provided a broad platform for unit-dose innovation. They’re trusted leading brands that consumers are willing to try with their new product offerings. It would take significantly longer and pose greater challenges to generate trial of pods for a significantly smaller brand or across the portfolio of several brands. Tide Pods and Gain Flings have reached a combined value share of over 10% of the U.S. laundry market, and P&G's share of the Unit Dose segment is nearly 80%. We continue to expand Pods around the world, leveraging another multi-billion dollar brand, Ariel. We expect our Unit Dose products alone to reach $1.5 billion in sales this fiscal year. Downy, along with its sister brand Lenor, is another multi-billion dollar franchise in the fabric care category. It has been growing at a high single-digit rate over the past three years, driven mainly by the success of our scent beads innovation. Scent beads are a new product for consumers to add to their laundry regimen. We could have tried to launch them with a new brand. We chose instead to leverage the strong equity of Downy and Lenor, along with Gain and Bounce, to commercialize this new innovation. We launched Downy Unstopables in the U.S. about four years ago. Since then, scent beads have grown to 17% of sales in the fabric enhancer category, sustaining a 3% growth in the category. P&G's big brands have earned nearly an 80% share of the segment. The largest male and female grooming brands—Gillette, Fusion, and Venus—have proven to be huge platforms for blade and razor innovation. The original Fusion razor launched in January 2006 is still P&G's fastest brand to reach $1 billion in sales. We’ve continued the growth of Fusion with the ProGlide innovation in 2010 and the preferred flexible innovation last year. Fusion's value share of male razors is tracking in the high 50s and is up 2 points from last year. The flexible razor handle innovation has translated into share growth on cartridges. Fusion's value share of male cartridges is up more than 2 points versus a year ago. We’ve put 2 million Fusion flexible razors into the hands of men in the U.S. in less than a year since launch, and we’re now extending the breakthrough razor innovation to Venus, the market-leading female razor brand, with Venus Swirl, which began shipping in February. Early consumption results are very strong; in less than three months since launch, we’ve sold over a million Swirl razors in the U.S., and Venus’s value share of female razors was up more than 10 points to nearly 65% in March, during the first four months Venus Swirl was available. These new innovations from Gillette have helped reverse the declining market value trend in U.S. blades and razors, improving year-on-year growth rate by 3 points versus the 12 months prior to the flexible launch. Consumers significantly prefer these better-performing products. The market-leading, consumer-trusted Fusion and Venus brands are driving awareness, trial, and share results from new innovations that would be more difficult for a new smaller brand to achieve. We have taken a similar approach in the female incontinence category, leveraging our multi-billion dollar Always brand to enter this $7 billion faster-growing global category. We began shipments of Always Discreet in the UK in July and in the U.S., Canada, and France in August. In the UK, the adult incontinence category is growing double digits, roughly 50% faster since our entry. The U.S. category growth rate has also more than doubled to around 9%, with P&G's value share exceeding 10% in the most recent four-week period. We’ve continued the expansion of Always Discreet with launches into Germany, Switzerland, and Austria, with more European markets coming soon. A few of our leading brands are not growing like we know they can. We’re bringing the same strategic focus and operating discipline to these brands that we have in the ones I’ve just mentioned. Ensuring the brand strategies and business models are aimed at delighting the target consumer, building a strong pipeline and portfolio of consumer-meaningful product innovations, ensuring SKU assortment and brand presence are attractive and easy to shop on shelves, and ensuring that marketing and sales programs persuasively convey the value relevant to our brands and product benefits to consumers. Another opportunity under our control is productivity. We’ve made great progress and have plenty of runway remaining. We have significantly accelerated and will substantially exceed the cost savings and overhead enrollment goals we set three years ago. We’re driving cost of goods savings well above the original target run rate of $1.2 billion per year, with $1.6 billion of savings this fiscal year. We expect to improve manufacturing productivity by 5% this year, bringing cumulative annual manufacturing enrollment reduction to 15%, including new staffing necessary to support capacity additions. On a same-site basis, enrollment was down nearly 20% over the past three years, enabled by technology in our integrated work systems approach. We expect to start at least eighteen new plants or modules in developing markets in the next few years. This will not only help our foreign exchange exposure but will drive savings in manufacturing, transportation, and customs and duties. As we start up these new sites, we have opportunities to apply technology and automate in a cost-effective manner and integrate further with suppliers to deliver additional manufacturing efficiencies. In developed markets, we began work on one of the biggest supply chain redesigns in the company’s history. We’re designing the supply chain to accelerate consumer-preferred products to market and to fulfill them in a customer service-preferred and cost-effective manner. Supply chain transformation began with the distribution network in the United States, consolidating customer shipments into fewer company distribution centers. These distribution centers are strategically located closer to key customers and population centers, enabling 80% of the company’s business to be delivered within one day to the store shelf and the shopper. All six of the new distribution and mixing centers are up and running, all on or ahead of schedule. We expect to complete the conversion out of legacy operations this year. In addition to lower costs, this transformation will allow both P&G and our retail partners to optimize inventory levels while improving in-store availability. In February, we announced that we will be constructing a new multi-category manufacturing facility in West Virginia, the next step in the North American supply chain redesign. We’ve taken the first steps in the transformation of our European supply chain, recently announcing the consolidation of distribution centers in France and the UK and the consolidation of manufacturing for some homecare products into our plant in Italy. We see a $1 billion to $2 billion value creation opportunity from the global supply chain reinvention effort. We’re targeting to build $400 million to $600 million in annual cost savings over five years and are expecting top-line benefits from more effective customer service and a reduction of out-of-stock situations. This value and these savings are incremental to the $6 billion in cost savings we originally communicated and are on track to exceed. Through March, we’ve reduced non-manufacturing overhead enrollment by over 19%, nearly doubling the 10% reduction we initially envisioned when we launched our restructuring program. We continue to evolve the organization design to be business-focused, starting with consumers and customers and to be simpler, more effective, more responsive, and more efficient. We’ve organized around industry-based sectors, streamlining and de-duplicating the work of business units and selling operations. We’ve 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 organizational changes, which will be close to the high end of our estimated 16% to 22% non-manufacturing enrollment reduction range by the end of this fiscal year—more than a year ahead of plan with additional opportunities remaining. As a result, we’re increasing our overhead enrollment reduction target to 25% to 30% excluding divestitures by the end of fiscal 2017, reflecting additional opportunities we see. The third cost area where we continue to have significant savings opportunities is marketing. By following the consumer, we’re improving marketing spending effectiveness and efficiency to deliver more with less. We’re shifting more advertising to digital media, social, video, and mobile. One non-media cost area that offers significant opportunity is agency spending, which includes fees and production costs for agencies we use for advertising, media, public relations, packaging design and development against raw materials. We plan to significantly simplify and reduce the number of agency relationships and the costs associated with the current complexity and inefficiency while upgrading the agency capabilities to improve creative quality and communication effectiveness. We’ve identified opportunities for up to $0.5 billion in cost savings in this area, along with stronger communication to consumers across all touchpoints. These efficiencies enable us to maintain strong media weight, despite the cost pressures we’re facing from foreign exchange and to reinvest in all elements of the marketing mix to improve our positions and support new innovations, such as Always Discreet, Fusion FlexBall, Venus Swirl, Downy Unstopables, and Tide, Gain, and Ariel Unit Dose detergents. Productivity-driven cost savings continue to be a key enabler of our efforts to strengthen profitability in developing markets. Cost and currency earnings grew two times faster than sales in developed markets in 2013, four times faster than sales in 2014, and are forecast to grow six times faster than sales this fiscal year. Over those three years, we’ve grown developing market constant currency earnings by 13%, 28%, and 27% respectively. In total, we’re forecasting developing market margins including FX to be up about 40 basis points for the year. We’re focused on driving productivity improvements up and down the income statement and across the balance sheet. Disciplined working capital management, stronger execution of our supply chain financing program, and a scarcity mentality in capital spending will continue to drive strong cash flow results. With that, let me turn to guidance. As we look to the April-June quarter, productivity savings should continue to grow. The benefits from portfolio strengthening and simplification should continue to build. Oil-based commodity costs should become a tailwind and additional foreign exchange-related pricing will kick in. With just one quarter remaining, we now expect organic sales growth of low-single digits for the fiscal year. Pricing should be a significant contributor to sales growth again in the fourth quarter, which should more than offset pressure on unit volume growth. FX will continue to be a headwind, and we will continue to invest in category-leading established brands like Pampers, Tide, and Gillette, and product introductions like Always Discreet and Venus Swirl in R&D for future innovation, as well as sales coverage, effectiveness, and capabilities to enhance our chances of success in the near, mid, and long term. We’re maintaining our outlook for double-digit constant currency core earnings per share growth for the fiscal year. We expect foreign exchange to have about a 13-point impact on core earnings per share growth for the year. We’re maintaining our core earnings per share guidance range of in line to down in low single digits versus last year’s core earnings per share of $4.09. With the current foreign exchange outlook, we expect to be towards the lower half of this guidance range, consistent with analyst consensus estimates. Our forecast for all-in sales is to be down 5% to 6% for the fiscal year; this includes the 6 to 7-point negative impact from foreign exchange and a one-point impact from minor brand divestitures. We expect all-in GAAP earnings per share to be down 21% to 22% versus the prior fiscal year. This includes approximately $0.83 per share of non-core costs, primarily from $0.63 per share of non-cash adjustments related to the Duracell business and $0.20 per share of non-core restructuring charges. As you construct your fourth quarter earnings per share model, keep in mind that several of the minor brand divestitures I mentioned earlier are expected to close in the fourth quarter, altogether working back in about $0.04 per share of non-operating income gains in core earnings per share versus the prior year. Reflecting the same focus for bringing in cost savings, we’re now forecasting a 100% adjusted free cash flow productivity, above prior guidance of at least 90%. The enablers of this strong cash productivity include improved results on payables, including continued progress on our supply chain financing program, and steady improvement on inventory management. We’re maintaining our outlook for cash return to shareholders, planning to return cash to shareholders through dividend payments of more than $7 billion and share repurchases of approximately $5 billion. This guidance range assumes mid-April spot rates for foreign exchange, noting that significant currency weakness including Venezuela is not anticipated within this guidance range. Our outlook is based on current market growth rates, which we are monitoring closely, especially in markets where we’re taking large price increases to offset currency impacts. We also continue to monitor several markets in the Middle East, Russia, and Ukraine, as well as markets like Venezuela and Argentina, where pricing controls, import restrictions, and access to dollars present risks. On the flip side, our guidance does not reflect some potential tailwinds. Our results could improve if currencies ease, markets begin to expand in a sustainable way, or if U.S. economic growth accelerates. Stepping back, we’re continuing to invest in our brands and products and in critical company capabilities that will enhance consumer and customer responsiveness with systems that are more agile, faster, better, and cheaper. We continue to strategically invest in additional capacity for critical developing markets and rationalize our manufacturing processes to create common, simpler, and more globally standard packaging platforms. This supports accelerated product innovation and lowers cash, capital, and operating costs. We continue to evolve our organizational designs so that they are business-focused, starting with consumers and customers. We're making them simpler, more effective, more responsive, and more efficient. We are selectively investing in sales coverage and merchandising to improve execution for shoppers and stores, both online and offline. We are strategically investing in product innovation technologies and accelerating product initiatives. We are improving our digital and eCommerce capabilities and reinventing our supply chain. Through this transformation, we are creating a more in-touch, agile, coordinated, and integrated organization that prioritizes winning with customers. We continue to sharpen our strategies and business models, focusing on operations and executing with more consistency. These choices and capabilities will enable balanced growth and value creation in the mid and long term as we work our way through currency devaluations in the short term. That concludes our prepared remarks for this morning. As a reminder, business segment information is provided in your press release and available in slides, which will be posted on our website www.pg.com following the call. I would be happy to take questions.

Jon, good morning. Can you just talk about the first, the way this would impact the strong dollar? So what’s going on in some of the emerging markets or some of the big price increases you take—in the U.S. and it’s clearing categories like shampoo, where your percentage of sales in ACB is massively spiking. L'Oréal is talking about seeking revenge, Henkel is launching Priscilla exclusively at Wal-Mart, so can you just like talk about what that has relative to your expectations and how you plan to address that going forward? Thanks.

Thanks, Bill. First, I’d say it’s still relatively early in the development of whatever occurs here, but so far markets have held up fairly. As I said, it’s pretty early, so we really won’t know the impacts in markets like Russia, Bill, until the next quarter or the quarter after. As you’re seeing from several companies in the industry that are responding, in the last quarter, the Russian market was actually up as they anticipated price increases coming in. So again, we have a stream of a second leg there. What I would broadly say is that—and I’ll get to the U.S. in a second—but in developing markets, those currencies have devalued not just versus the dollar, but also versus the euro. If you take the case of Russia, which I walked through in some detail on the last call, there is every reason for both local and multinational competitors to be pricing in many of these markets, and that’s generally what we might be seeing early on. As it relates to the overall promotional environment, competitiveness, etc., and specifically reflecting on the U.S., if we look at the percentage of volume that was sold on promotion in the January to March quarter, it indexes at 100, so it is identical to last year. If you look at it sequentially quarter-to-quarter, there is very little change. That doesn’t mean that it couldn’t change, but that’s the data thus far, and that’s consistent with the dynamics in our own business. Obviously by category, you mentioned hair care. We may see some more promotion in one quarter or another. There is obviously promotion as competitors and ourselves introduce new products and are trying to generate trial of those items. But to date, there is nothing from either a developing market standpoint or developed market standpoint that would indicate systemic change.

Hey, good morning.

Hi, Dara.

I just wanted to talk a little bit about EPS guidance. Clearly, you’re keeping the EPS guidance here despite the FX head and organic sales coming in expected to be a bit below what you initially anticipated. Do you think you are stretching the organization here to hit these EPS targets? It seems like every year we’ve got this hockey stick in Q4 earnings. You’ve now got some gains coming through Q4 earnings and Q4 ad spend has been down over the last few years. I know a lot of that is the external environment; clearly macros are working against you, but I’m just wondering if there is a thought process as you look at the next year in the earnings guidance that given some of this external volatility and some of the internal issues, you might need to provide yourself more cushion room when you look at guidance versus what has been the case over the last few years here. Thanks.

So you make a couple of good observations there, Dara. Let me try to address them holistically. In terms of forecast and guidance, we’re obviously in that and will provide more specifics in August. We’re just in the middle of our prep season right now. You all know about the amount of cushion that you can build in that overcomes this $1.5 billion of after-tax foreign exchange costs, the majority of which we hadn’t anticipated based on spot markets as we went into the year and expected our budgets last year. But that doesn’t mean—I agree with your point that we need to provide sufficient room to invest in the business, and frankly we’ve not pulled off in that regard. We have continued to invest, as I tried to make clear in my remarks, in certain parts of the organization—both R&D and sales. We continue to invest in our brand and product platforms. We continue to invest in the redesign of our supply chain. We’ve continued to invest in new product launches, and that will clearly continue through next quarter. I mean, we’re just in the first-quarter launches of things like Venus Swirl and Always Discreet, and they have received full support. As well, for instance, the laundry innovations that I briefly mentioned in the opening remarks. So what allows us—if FX is going to continue to be a headwind and we’re going to continue to invest, which we are—what enables us to deliver the fourth-quarter number that, as you rightly point out, will be materially better than the first three quarters? We will have, as I mentioned, commodity cost tailwinds. We will also benefit from this year’s productivity savings. Pricing for some of the currencies will begin to kick in. There will be a minor impact as we noted on a few minor investor gains. But it’s those items—look at the 410 basis points of productivity savings in this quarter and how we continue to invest in all the things I talked about. It’s a continuation of that that should allow us to deliver. Philosophically, I have no difference; I’m completely aligned with what you’re suggesting in terms of how we construct plans and budgets, and I think our current plan and budget is constructed that way. Recall that in the middle of the year we took earnings per share guidance down. So we’re not a slave to that. As I’ve said many times, if I’ve proven anything over the last six or seven years, it’s that I’m not constrained by guidance. We’ll continue to invest, but we’ll also continue to deliver productivity savings as well, and we’re hopeful that if we invest the right amounts of those in the top line, we’ll get both the top-line and bottom-line growing at very attractive rates.

Thanks. Jon, can you talk a little bit about gross margin? You’ve delivered gross margin expansion a couple of times now despite pretty weak top-line. It seems like we might be seeing sort of one-off mixed benefits from that standpoint in terms of less emerging markets or potentially grooming being better that’s driving that. So can you talk to us about sort of the progression on gross margin as we look over the next couple of quarters? Do you need sort of one-off things to happen within those quarters in order to get there? And what do you think is the rate of benefit coming from local manufacturing particularly in terms of lessening the mixed impact over time? Thanks.

The biggest driver of gross margin by far was the productivity savings of 250 basis points, and that’s not one time. It doesn’t rely on certain categories growing faster than others. That’s there; we'll maintain our increased path, and I expect gross margin to continue to improve next quarter, which will make it three quarters in a row. This again is some indication of systematic improvement. There was some benefit, as you rightly mentioned, from mix, which is frankly the developing and developed markets growing at closer rates to each other, and if developing markets were to accelerate, that mix benefit would be slightly increased. In terms of the benefit of local manufacturing, that continues to build. It’s part of the 250 basis points. I actually don’t know exactly how that breaks out in terms of basis point improvement, but John and Katie can help you with that. But it’s significant, and as I mentioned, we’re making very good progress on developing market margins through that and other dynamics, including positive mix developments as those markets in some cases premiumize. And as I said, we’re growing constant currency earnings ahead of constant currency sales growth at 2X three years ago, 4X last year, and 6X this year, and that’s a trend that should continue.

Thanks very much. Jon, with organic sales now having to accelerate a bit more, can you talk through some of the incremental big initiatives that need to be taken to drive improvements? It seems a bit too simple to say that getting out of some of the slower growing categories and the portfolio shift is going to be enough. I mean, is there a function of consumers across a number of categories—not just within HVC—but across Staples sort of trading out of bigger brands and so potentially more niche offerings here and there?

Thanks, Olivia. Our largest brands are our fastest growing brands. That’s true over a five-year period, over a three-year period, over a one-year period, and was true last quarter. So I’m not disputing the dynamic that you describe in terms of smaller brands impacting some categories. I think that’s more probably, for instance, in some of the beverage categories and two categories. But any period of time we look at convinces us that along with the intuitive benefits in big brand platforms in terms of innovation and importance to retailers, this is a business model that will continue to work for us. In terms of, you mentioned organic sales acceleration, I just want to put that in context a little bit: I really don’t see significant deceleration. Let me explain that. We rounded up to 2 for the last two quarters. This quarter we rounded down to 1. We’re talking in very small differences quarter-to-quarter sequentially. I mentioned in my prepared remarks the impact that the timing of the expansion tax increase had in Japan. That item alone, if you take that out of the results, we would have rounded to 2. My point is not to measure victory or defeat, but simply that I don’t see any systemic deceleration in sales quarter-to-quarter. The portfolio, as you rightly indicate, will help from both a top-line and bottom-line standpoint. And you are absolutely right; there is additional work on brands and in some markets that we need to do to maximize growth. I mentioned those in my prepared remarks as well. We have work to do in Mexico, though we’re getting through that very nicely. We have work to do in China and, as I mentioned, China growth rates continue to be good, so that all looks pretty reasonable. And as you know from our results, we have continued work to do on beauty, some of which will be addressed through the portfolio and some of which we’re currently making significant progress on. I think when you step back, and I realize it’s a little bit difficult to see, but we’re really on track or ahead of everything we’re trying to do to transform this company into a more sustainable, more reliable grower on both the top and bottom line, and that can get lost in the messiness of execution and frankly through the fog of FX currently. We’re very happy with where we sit in terms of the progress we’re making on both the portfolio and on the brands that will constitute the new company.

Hey, thanks. Jon, I guess I apologize in advance for kind of a long question, but inventory reductions and unprofitable promotions, right, that you guys have been backing out. I want to talk a little bit about. Can you revisit specifically the drivers of the weakness in Mexico? Because I know you’re talking about consumption tax. I think there was some exiting of some unprofitable promotion. I think you’re also citing some inventory reductions. So can you at least give more specifics, I guess, around how those issues are maybe related? Then for Mexico and China, how long do these inventory corrections take? I know in China Unilever should have ripped the Band-Aid off and taken a 20% hit. Do you have a defined strategy on this and how long will it drag? And then just lastly, are there any other markets where this stuff is happening, maybe just even on a smaller scale? Thanks.

Thanks, Chris. Let me deal with Mexico first. In any of the developing markets, the supply chains from the manufacturer’s door to a store are long and layered. China is an example; you’re going through distributors, wholesalers, secondary wholesalers. And so when there is a significant change in market growth rate, as there was in Mexico due to the consumption tax increase last year, as has been seen in China as many of our competitors have reported, there is a lot of inventory in that system that needs to get drawn down. And you’re not in complete control of how quickly that can be accomplished because you’re not owning all of that inventory. But we’re working our way through that. In Mexico, if you look at growth rates quarter-to-quarter, it improved significantly on the order of magnitude of 10 points, and we’re expecting significant further improvement in April, May, and June. So I would say that we are largely, at least from a visibility horizon, starting to see our way through that. China, as I mentioned, is in a very good place in many categories in terms of consumption. We’re probably two quarters in through the inventory reduction that needs to occur—that’s largely consistent with what our competitors have reported as well. I would say we’ve got another quarter or two to go there, and then we have some structural work that we need to do. But as I said, these are large developing markets with very complicated long-layered supply chains, and these are dynamics affecting the industry broadly; but once we’re through them, it’s back to business as normal, and we compete based on the strength of our products and brands. We feel very good about that. I would tell you, Chris, that there are no other large issues like this that I’m currently aware of. We’ll have to manage very carefully in some markets where currency devaluation has been significant because those market sizes can change pretty significantly, and we’ll do that.

Hi, a couple of things. First of all, just a follow-up on China. I was listening to what you said, and I guess I don’t understand. Some of the other companies like Unilever and Colgate talked about destocking in China as of last summer, if not earlier, and now it’s kind of only coming up. I’m just curious—why does it seem that the timing is kind of unique to one manufacturer at a time? That’s just a follow-up. But then the bigger question is from a volume growth perspective and how it pertains to your longer-term growth algorithm. It just strikes me that we’ve seen an enormous number of really big, maybe not enormous, but rather significant successful innovations from you over the last four quarters, and yet we still haven’t seen much volume growth. I know we’re going to get into easier comps, but it doesn’t sound to me like the innovations coming down the pike are as big as FlexBall or Tide Pods or Flings or whatnot. So is there a change in your long-term outlook for how much of volume growth is going to contribute to the top line? Plus when I promised just on the marketing budget, I understand the idea of doing more with less, but given how competitive the market is and how low your volume growth is, why wouldn’t you choose to take some of those productivity savings and just do more with more? Thanks.

Alright. First in terms of timing, different companies frankly have very different product mixes, and they move through different distribution channels. So if you think about Unilever as a large food business in China, it is very possible that they could have a different dynamic than the other categories, and we’re talking displacement over one quarter here or something like that. So that’s that item. In terms of volume and initiatives, the biggest impact on volume has been the pricing before FX, and that will continue until those markets recover or until that annualizes. But our innovations, if you look at the big ones that you mentioned, first they’re contributing to both category growth and share growth. Category growth is a real indication of the strength of an innovation—does it lift the entire category? We’ve seen that behind the things I mentioned earlier, and the good news is that those largely have been fully expanded in one market, the U.S. As we expand those globally, we expect to see that same impact just like we did with Always Discreet in both the UK and the U.S., for example. So we’re pretty optimistic about the strength of our innovation program and what that can do from the top line. We’re going to have to continue to manage the volume impacts of FX, but we’re really focused on the revenue number as the leverage to generate operating profit and cash, and we’re doing reasonably well there. Regarding marketing, as I mentioned, we’re doing exactly what you would suggest we do, which is invest more where it makes sense to do that. These innovations I’ve talked about are exactly one place where we’re doing just that, and we’ll continue to do that. I mean, the investment behind the introduction of the new brand, such as Always Discreet, could be significant, and we’re very happy with that because of the returns we can generate and its impact on those markets, which, as I mentioned, have doubled the growth rate versus the pre-entry period. So we’re not talking about cuts in marketing dollars; rather, we are talking about being as efficient and effective as we can and spending those dollars where they drive returns.

Hi, Jon. I just wanted to dig into your comments on strategy a bit more. As you step back, as you mentioned, productivity efforts have been sizable for a number of years and they seem to be running ahead of plan. You’ve made significant shifts in how you’re organizing now and how your portfolio is structured, but alongside that, growth has been a struggle. I think we’d all acknowledge that the macro environment hasn’t helped, but do you think there is a risk that all this inwardly focused change and operational improvement has actually impeded your efforts to execute on a larger strategy that you articulated—namely, uncovering consumer insights and driving consumer-preferred innovations? Because it just seems like all these internal improvements are continually being offset by relative struggles in that external marketplace. I don’t mean for this to be an unfair question, but I’m just wondering at what point it’s worth asking whether organic growth challenges may be exacerbated by all this internal change and whether improvement may have to, to some extent, just wait until those internal projects run their course? Thanks.

Thanks, Steve. That’s actually a very good and very fair question, and it’s something where we continue to be in active dialogue here at P&G. We’ve been very deliberate about the pace of some of the changes and ensuring that we have the capacity to execute, to serve consumers, and to serve shoppers effectively every day. So that’s exactly the question that we ask ourselves. It’s why, for example, we said we’re going to take two years to complete the portfolio program as opposed to overnight—to ensure we have the capacity to do that and deliver the business. So again, I think you’re asking the right question. It’s one that we ask ourselves, and we will make choices that maximize the total. That’s one of the beauties of the metric that we’re working against in terms of operating TSR: it’s an integrated metric, which strives for choice and balance across both growth and value creation. You simply can’t get there without one leg of that stool and the third leg being cash creation. So we’re approaching this in a very holistic sense, very cognizant of the right question that you asked, and are trying to get the balance right. As I indicated earlier, we feel very good about where we are in terms of the progression against those strategic initiatives that you outlined and others, including the redesign of the supply chain. Most of our big brands and categories are growing fairly well. If you look at Grooming, Healthcare, Baby Care, Family Care, those segments grew at 9%, 6%, and 2% respectively. So that’s not an indication of any systemic pinch point if you will, where we haven’t performed as well. It’s more a function of an individual business dynamic.

Thanks, good morning. I thought a follow-up I guess on that would—the idea of taking three years for the divestiture process. I mean, to what degree was that creating or is it any disruption for employees wondering about what things would be sold and when? Or retailers or competitors looking at the things that we can pounce on a business where we think P&G is deemphasizing? So what do you think that may be actually weighing on organic sales growth? The other thing was that Jon, in talking about how you feel good internally about the progress being made—but just a thin map of the execution, maybe doesn’t look like a great word to it—but I feel like the one thing that P&G committed to nearly three years ago was that we will improve execution. And that doesn’t feel like it’s happening; so whether it’s a one-off thing to pop up with China and Mexico or there, honestly I’m not convinced there won’t be another big one-off two or three quarters from now. So what is it that has or hasn’t changed that on a cote-on-cote execution in the market? Thanks.

Let me tackle the last one first. It was a poor word choice. I should have said the chunkiness of execution. Frankly, we’ve been very intentional in the focus on improving execution. I feel very good about the progress that we’re making there. So I apologize for that word choice. But there are just big chunks moving in and out as we make these very big transformational moves, which can flatter things up a little bit. In terms of organic sales growth and the portfolio impact, if you look at the businesses, take Duracell as an example, which we’re currently working to transition away from. But during that entire period of the business, we were working on that project—leading up to the signing of the deal and post the signing of the deal—managing through the transition. That business has held up extremely well, building market share. I won’t go into the details, but several other businesses that we’re looking to sell are also performing very well. In other words, growth rates were above the 100 index versus the year ago. So I think we’ve got about the right balance in terms of the pace at which we’re moving and the work to be done. As I said, it’s something that we reevaluate every day, but it’s not a major concern at this point.

Yeah, good morning guys. So just a few quick ones from me. Jon, some in the media world would suggest that P&G has taken its marketing mix too digital-heavy, so I just wondered if you could respond to that and your perspective around that. And then the second question is, in your prepared remarks you indicated that SKU rationalization will take place in the core portfolio over the next couple of years—if I heard that right. Just curious how we should think about that and its impact on organic revenue growth as we look out over the next couple of years; I know you’re not giving guidance, but just how should we kind of think about it from a magnitude standpoint?

These are SKUs at the long far tail in terms of productivity. So we have businesses that are less than 1% of the sales, and the same is true with profit. I think if anything, by removing the clutter and allowing us to focus on product lines and SKUs that really matter to consumers and customers, that should have a positive impact on the top line, not a negative. These are items in some instances, but they’re meaningful in terms of the complexities they create. That’s true in our operations, true on the shelf, and true in the warehouse. In terms of our approach to digital versus traditional media, we view this very much as an 'and', not an 'or'; they complement each other. So we look at it very holistically. We’ve guided in our choices by two things: one, where consumers are spending their time in terms of consumption of media—we need to be reasonably in step with that; and the second is, depending on the category, what media they want to interact with and learn about our products on. That’s different across categories. So we’re going to be guided, as in everything we do, by the consumer, and if we stay with that approach, we’ll probably not stray too far from what’s right.

Good morning, everyone. Jon, I have to say that I’m still having a hard time reconciling the top-line growth of 1% with your positive remarks about some of your big brands Pampers. The flip side of the response that you gave to Olivia earlier is that you’re basically telling the investors that Procter performance in the past quarters had been actually weaker and organic sales are only rounding up to 2%. Shouldn’t you be considering a bigger portfolio change or a breakup even, given that sectors like beauty are not only getting more fragmented and smaller than any food and beverages categories that you alluded to earlier? Instead of reducing SKUs by 15% and 20%, as Nik just said, what you’re going to have is dilute top-line growth over the next two years? Thank you.

We’re going to try to have fullest ability on the portfolio moves by the summer, and I think we’ll be in a position then to articulate why we think these are the right moves and so I’m going to save that conversation for that point in time. But we’re being deliberate in our approach across each of the categories and brands. There’s no business that we haven’t objectively analyzed, and so I think we’re going to end up in a pretty good place in that regard. In terms of—look on this whole thing of small brands and fragmentation, our data doesn’t support that being an issue for most of the businesses that we’re going to maintain. Second, where differentiated performance matters and where differentiated performance is delivered, this dynamic does not remain. So for example, and I’ll bring it to beauty in a second, but if you think about Pampers as an example, I can’t think of a new mother who would be asking herself, where performance really matters, would be asking herself, what’s the new diaper that nobody’s ever tried before or where I can discover the next diaper? That’s not the thought process. There’s a job that needs to be done, a brand that has proven over decades it can do the job better than other offerings out there, and it’s offered at a price that creates good value. If you think about performance and where performance matters in a beauty context, think about anti-dandruff shampoos. I’ve got a problem; I need a solution. This is not the time to experiment; this is the time to solve. Head & Shoulders has been solving dandruff issues for decades. It’s a brand that consumers know and trust and is offered at a reasonable value. So I think we must think about the specific dynamics of a category, the consumer approach to the category, the relevance of innovation in the category, and differential performance as a driver of purchase before we make broad conclusions about whether fragmentation is going to occur or not. In terms of your question about a split up, again, let’s wait until we have the portfolio in front of us and talk about it at that point. We’re very bullish, and again, this is not just based on what we think is going to happen. This is based on 10, 5, 3, and 1 years of data that is very consistent with its outcome. These are categories where we have long track records of winning, where we’re typically the market leader with brands and other prototypes in those categories.

Hi, this is Christine on for Joe. I just wanted to change the topic quickly and go to commodity costs and whether you’re still expecting that to be a $500 million to $700 million tailwind next year. And how much of that do you actually expect to recover through pricing? Thanks.

Our current estimate would be on the order of magnitude of $600 million to $800 million of commodity cost savings next fiscal year. We really don’t have a point of view yet on how much of that we’ll be able to take to the bottom line as opposed to passing through the price increases. So if you reflect on the dynamics in the industry, this is an industry that, with the exception of some international competitors with FX tailwinds, is challenged from a profit growth standpoint. That’s a dynamic that supports using these savings as a way to help that situation. So we’re hopeful that many of these will contribute to the bottom line, but that’s something we’ll have to see as we move forward.

Hi guys. Jon, I mean you’re getting the same question from many folks over and over again, and I’m not sure the message is necessarily clear—which is, we’ve been hearing a lot of promise that help us round the corner for years, and every back half of the year, you kind of limp across the finish line. If not just this year, I guess for me at least, I just wonder whether P&G has the right to be consistently in a short-term optimist, at least given its recent track record. And now the promise is wait till we break up 14% of sales, 6% operating profit out of our business, things will be much better. But at that point, how much longer would we have to wait for you to decide that maybe something even bigger needs to happen—that you really need to rebase your guidance and shouldn’t be delivering double-digit EPS growth? Maybe you really have to break up the company even further? I think there’s a lot of frustration in terms of trying to see the logs—granted the macro stuff and FX, but others have that too. How much longer do we wait, I guess, is really the core question, and especially after this next promise divestiture? How much longer do we have to wait after that? Thanks.

That last year you mentioned, FX—I think you’re right to mention that excluding FX, we grew 14% on the bottom line; this year will grow double digits. I think it’s pretty clear that the operating improvements we are making, in terms of productivity and otherwise, are coming through. If it weren’t for FX, we would be having a very different discussion right now. We do have brands and businesses where we need to continue to strengthen the top line. We’re cognizant of that, and I mentioned that, and that kind of is what it is. We look at the change we’re executing; it’s probably the biggest transformation this company has gone through across the totality of portfolio, supply chain, organization, structure, and design, and, as I said, it’s hard to see that all come together at this point, but we’re very happy with the progress and we’ll see.

Good morning, thanks so much. Just a question about beauty again. Olay and Pantene are different from Head & Shoulders because there’s not this clear need and promise and delivery. So if you just look at Olay and its performance, I know China has been very problematic, but worldwide, why do you think P&G really should be in that passive business?

Well, first of all, Caroline, younger-looking skin I think is a real need. It’s increasingly a need of mine. If you count my hair care need, I’m not going to comment on specific businesses that we are going to be in or out. Again, we’ll do that when we’re ready to do that, but that’s a business for which function and performance, differentiated performance does matter. It’s what enabled us to build one of the largest, the largest facial skincare brand in the world, and it continues to have incredibly strong equity and, frankly, is growing significantly in many parts of the world where we haven’t cluttered the equity on the shelves as badly as we have, for instance, in the U.S. and China. I was just a couple of weeks ago in the Gulf, in the Middle East, and that’s a market where the brand architecture is much clearer, and that business is growing double digits. This is true in the UK, and Olay—we’re again not cluttering either the messaging, the equity, or the shelf. So skincare is clearly—and SK-II, as an example—delivers a clear benefit that’s coveted by women, particularly in Asia. So it’s not a business that is all about fashion and style; it’s a business that’s about performance.