Procter & Gamble Company (PG) — Q2 2016 Earnings Call Transcript

Good morning. In the recently completed quarter, we continued to cut costs and reinvest in growth, which has reaccelerated our revenue and produced strong earnings and cash flow. Organic sales rose by 2%, and core earnings per share increased by 9%, with constant currency core earnings per share up 21%. We achieved significant improvements in gross and operating margins, both in constant currency and on an all-in basis. All-in GAAP earnings per share rose by 37%, and adjusted free cash flow productivity reached 117%. This reflects a solid quarter driven by our initiatives to enhance organic growth and earnings per share through productivity savings. However, we are operating in a very challenging and volatile macroeconomic environment. Market growth rates for both volume and value have slowed, primarily due to lower growth in emerging markets. Initially, we estimated the global market to grow around 3% to 4% this year, but we now anticipate growth of 2% to 3%. There are more global challenges than we have seen in recent times, with significant economic and political instability affecting incomes and consumption in key markets like Russia, Ukraine, Egypt, Saudi Arabia, and other parts of the Middle East, including Turkey, Nigeria, Argentina, Venezuela, and Brazil. Currency values are weakening across the board, impacting us by over $750 million since the fiscal year began and more than $1 billion after tax compared to last year. This follows a $1.5 billion negative impact last fiscal year and nearly $1 billion the year prior. Over the past three years, foreign exchange has negatively affected us by approximately $3.5 billion, which is over 30% of our fiscal 2013 core net earnings after tax. Since early December, the current-year foreign exchange headwind has increased by $300 million after tax, influenced by significant devaluation in Argentina, a 15% drop in Russia, and nearly a 10% decline in Mexico. The strength of the dollar poses a greater challenge than it does for our euro and yen-based competitors. The dollar has more than doubled against the ruble in the past two years, while our competitors dealing in euros have faced only 50% to 60% of that impact. We expect these factors—slowing market growth, geopolitical tensions, and a stronger dollar—will remain ongoing realities for us. In light of these conditions, we are staying focused on significant opportunities within our control. We are executing what is the largest transformation in the company’s history while maintaining productivity and enhancing our portfolio, business models, and innovation strategies. This transformation is fundamentally a growth strategy. I will briefly outline our focus areas: productivity, portfolio, and innovation plans before discussing the quarter's specifics. We have markedly improved productivity, with considerable upside still ahead. Our original savings target for cost of goods over five years was $6 billion. We now expect to exceed that, reaching over $7 billion by the year's end, which is 15% above the initial target. Our manufacturing enrollment has decreased by 15% over the past three years, including necessary staffing adjustments for capacity additions. On a same-site basis, enrollment is down nearly 20%. We aim for a cumulative reduction of 25% to 30% by the end of fiscal 2017. In February 2012, we committed to a 10% reduction in non-manufacturing overhead over five years, and as of December 31, we have cut these roles by 23%, significantly exceeding the original target, and are on track to meet our revised goal of 25% to 30% well ahead of schedule. Excluding divestitures, we expect to reduce non-manufacturing roles by over 35%. Ongoing digitization has played a pivotal role in enhancing our overhead and manufacturing enrollment efficiencies. We are cutting non-working marketing costs that do not affect outreach or frequency. Last year, we reduced the number of agencies we worked with by nearly 40% and decreased spending on agencies and production by about $370 million. This year, we’re targeting an additional $200 million in savings related to agency costs. These savings enable us to invest in advertising and in trialing consumer-favorite products. We are enhancing our working marketing programs for greater reach, higher frequency, and improved effectiveness at lower overall costs. Last fiscal year in the US, we increased total marketing and merchandising support for Pantene by 440 basis points, boosted Tide brand spending by 220 basis points, and invested an additional 150 basis points in Fusion with the new FlexBall innovation. This year, we have made similar increases in advertising spending for Shave Care, Fabric Care, Baby Care, and Oral Care both in the US and in key international markets. In North America alone, we’ve increased advertising and in-store merchandising budgets by nearly 100 basis points since the fiscal year's beginning. Beyond these reductions, we are also improving balance sheet productivity. We have reduced inventory days and increased payable days. These balance sheet adjustments have allowed us to maintain our strong track record of free cash flow generation, achieving 102% last fiscal year, 101% in Q1, and 117% in Q2. We are still among the most robust cash generators relative to our competitors and similar large companies. We also rank among the top companies in returning cash to shareholders. In fiscal 2015, we increased our dividend for the 59th consecutive year and returned $11.9 billion in cash to shareholders, representing 105% of adjusted net earnings. Over the past five years, we have returned $60 billion to shareholders and plan to distribute up to $70 billion in dividends and share repurchases over the next four years. Besides transforming our cost structure, we are reshaping our portfolio. We are centering our portfolio on 10 category-based business units where we hold strong market positions, robust brands, and consumer-relevant product technologies. These categories traditionally achieve faster growth and higher margins than the rest of our portfolio. We aim to be a company defined by consumer-preferred brands and products within these categories. We are strategically narrowing our offerings within these core businesses to maximize value creation, opting for smart short-, mid-, and long-term choices even if they create short-term revenue pressure. For instance, in our Mexico family care business, we chose to eliminate low-tier unprofitable products to focus on more profitable high-tier items, even if it meant lower sales initially. The impact on top-line revenue from this decision will diminish over subsequent quarters, leading to a more profitable business in the future. In India, we have opted to de-prioritize several unprofitable lines, adversely affecting near-term growth but paving the way for a more profitable future. Last fiscal year, our organic sales growth in India slowed down, but we improved local profit margins by 700 basis points, turning losses into triple-digit profits. In the latest quarter, India’s organic sales growth was only 2%, but the strategic segment of our business grew healthily by 10%. The declining segment, making up 15% of our portfolio, saw a 35% drop in sales. Notably, profits are significantly ahead of even last year's improved figures. As we navigate through this transition, we anticipate strong top-line growth that will be meaningful. It's essential that our growth translates to actual value. While these choices affected our organic growth by about 1 point in the last quarter, they will lead to sustained profitability. We've been enhancing productivity and refining our portfolio while fortifying business unit strategies and innovation plans, especially in our four largest categories: Fabric Care, Baby Care, Grooming, and Hair Care, as well as our two largest markets: the US and China. In laundry, we focus on consumer-preferred brands and product offerings like our premium unit-dosed detergents and market-leading scent bead enhancers. We are launching improved new compact liquid detergents in several countries. In Russia and Turkey, where we debuted superior compact liquid detergents last year, we gained market share in these segments. Our Fabric Care performance in the US illustrates what can be achieved when we align strategy with consumer priorities, offering superior value for top-tier performance at a reasonable price. The US laundry detergent market is growing, with P&G's value share increasing last year and further growth noted in the recent quarter. We will maintain our position as the innovation leader in Fabric Care. In North America, we're introducing a new regimen for Tide and Downy aimed at combating odors in athletic wear. With a large number of consumers sporting athletic gear regularly, the Odor Defense collection incorporates advanced cleaning formulas designed to remove stubborn residues. Alongside Tide, we have the added cleaning boost with Tide Odor Defense Rescue and Downy Fresh Protect beads specifically targeting odors from athleisure wear. For Baby Care, our strong innovation, marketing communications, trials, and robust online presence have led to notable growth for Pampers. The Pampers value share in the US rose last fiscal year, even amid challenges with demand exceeding supply for recent innovations. We plan to boost our Luvs diaper investments in response to recent share declines due to competitive pricing strategies. In other markets, Baby Care performance has been less robust. To counter this, we are enhancing our value proposition and speeding up premium innovations for our taped and pull-on diapers to strengthen our market position. We're boosting support for baby stores and enhancing our marketing strategies to raise awareness and product trials among new mothers. The Gillette FlexBall innovation has yielded strong outcomes in grooming, with millions of men trying the product. It has been crucial for ProGlide cartridge growth, which outpaced declines in the overall male cartridge market. ProGlide cartridge shares have seen consistent growth recently, setting the stage for our next innovation: Gillette Fusion ProShield. The early retailer response to ProShield has been impressive, exceeding expectations for launch orders and shelf displays. We are also modernizing our in-store presentation to make Gillette easier to shop and are advancing our online presence, with Gillette Shave Club proving successful since its launch. Our share of online blade and razor sales has surged, enabling record sales in recent months. In Hair Care, we recently launched a new conditioner technology for Pantene that is set to outperform competitors in key markets. We also introduced new Head & Shoulders variants in the US and are enhancing our marketing campaign around these products. These efforts across various categories reflect our continuous progress in our largest and most profitable market, the United States. Our US business improved significantly from a prior decline to deliver organic growth in the latest quarter, despite challenges such as product allocations in key categories. In China, however, results have not been as strong. We are proactively addressing premium innovation gaps and have initiated significant efforts to revitalize our product range. We are enhancing Baby Care offerings, launching preferred liquid detergents and committing to increasing consumer awareness across categories. Additionally, we aim to simplify and reinforce our go-to-market strategies in China, although these processes may present short-term challenges. On a macro level, the environment remains tough with slower growth, increasing foreign exchange difficulties, and a volatile political landscape. Nevertheless, we are committed to improving productivity, focusing our portfolio, and investing in superior consumer brands and products, especially in our largest categories and markets. Now, let's dive into the specifics of the recently completed quarter and our outlook for the fiscal year. First, it's important to note that the organic sales and core earnings results presented are from our 10 core product categories, excluding the beauty and battery segments which are reported as discontinued operations. Organic sales rose 2% compared to last year, with each segment meeting or surpassing prior year performance. Sales slightly exceeded consumption overall. However, organic sales in China and Russia were significantly lower, negatively impacting total company growth. Cleanup efforts in categories and SKU offerings also contributed to another point of organic sales decline. However, progress in the United States and growth in Latin America offset these challenges. All-in sales experienced a 9% dip, affected by an 8-point foreign exchange headwind and a 3-point decline from the Venezuela de-consolidation and minor brand divestitures. Core gross and operating margins increased on both all-in and ex-currency bases due to productivity improvements. Core gross margin went up by 210 basis points year over year. Excluding foreign exchange effects, core gross margin rose by 290 basis points. Core SG&A costs improved by 140 basis points, primarily due to overhead savings. We continue to invest in marketing, aligning expenditures with sales percentages. Core operating margin increased by 350 basis points versus last year, supported by 270 basis points in productivity savings. On a constant currency basis, core operating margin rose by 390 basis points. The core effective tax rate was 23.6%, nearly a point higher than the previous year. Core earnings per share reached $1.04, marking a 9% increase from the same quarter last year, despite a 12 percentage point foreign exchange headwind, translating to around $300 million after tax. On a constant currency basis, core earnings per share grew by 21%. All-in GAAP earnings per share for the quarter were $1.12, up 37% from the prior year. We generated approximately $3.8 billion in free cash flow, with a 117% adjusted free cash flow productivity rate. This quarter, we returned approximately $3.9 billion to shareholders through dividends and share repurchases. Looking ahead, we are maintaining our organic sales growth outlook to be in line with low single digits compared to fiscal 2015. We are investing in brand awareness and product trials in North America, key drivers for growth in categories like Fabric Care and Baby Care. We plan to introduce several new premium innovations in both developed and developing markets soon. We are also strengthening our sales capabilities to capture opportunities in the fastest-growing channels and enhance our presence in vital markets. Our targeted price reductions aim to address consumer value gaps across various categories. These initiatives, coupled with the annualization of major impacts from the previous fiscal year, give us confidence in our continued organic sales growth in the latter half of the year. Foreign exchange headwinds have intensified since the beginning of the year, and we now anticipate it will negatively impact all-in sales growth by 7 percentage points. Additionally, the combined effects of the Venezuela de-consolidation and minor brand divestitures will contribute a 2 to 3 percentage point drag on all-in sales growth. Overall, we expect all-in sales to decline in the high single digits compared to the restated results of fiscal 2015. We are also keeping our constant currency core earnings-per-share expectation in the mid to high singles, with our current internal outlook at the lower end of this range. The substantial foreign exchange impact leads us to revise our core earnings per share guidance down to a range of a decline between 3% to 8% compared to last year’s core earnings per share of $3.76. This guidance reflects headwinds from beauty deal and transition expenses, including mergers and de-consolidation. Adjusting for these factors, our forecast indicates modest core earnings growth, with meaningful growth excluding foreign exchange effects. Our core effective tax rate is projected at around 24% for fiscal 2016, close to 3 percentage points higher than last year, creating a roughly four percentage point headwind for core earnings growth. We expect modest non-operating income gains in the latter half of the fiscal year. With many impacts occurring in the second half, the headwinds against core earnings per share in Q3 and Q4 are estimated at about 13 percentage points. Foreign exchange adds another 7% of headwinds in the back half. Therefore, the midpoint of our revised guidance suggests a core earnings per share reduction of about 15% versus last year, with the potential for flat results excluding taxes and non-operating factors and mid-single-digit growth when disregarding currency influences. Given our strong performance to date, we're raising our free cash flow productivity target to a range of 90% to 100% of earnings. We anticipate repurchasing approximately $8 billion to $9 billion in shares over the next year through share buybacks and shares exchanged in the Duracell transaction. In total, we expect to reach $15 billion to $16 billion in dividend payments and share repurchases moving forward. We project all-in GAAP earnings per share to rise by about 42% at the center of our guidance range. Looking ahead, we are dedicated to achieving balanced top-line and bottom-line growth while maintaining strong free cash flow productivity to enhance total shareholder returns. We will continue to address value gaps as they arise, defend our positions, and invest in brand awareness, consumer-driven innovation, and trial efforts. We are committed to optimizing productivity to accelerate top-line growth and remain steadfast in delivering strong cash returns to shareholders. Both David and I look forward to discussing our plans and priorities for promoting balanced growth and value creation beyond this fiscal year at CAGNY. I will also provide an update on our productivity progress and highlight the substantial opportunities ahead that can facilitate our investment and growth strategies. David will cover our strategic choices regarding sustainable top-line growth enhancements and the necessary changes in organization and culture to accelerate our progress. That concludes our prepared remarks for this morning. Business segment details are available in our press release and will also be published in slides on our website following the call. I’m now happy to take your questions.

Good morning. I wanted to discuss the top line results in more detail. Q2 showed a solid sequential improvement despite some of the retail inventory reductions mentioned in the release. Additionally, your full-year sales guidance for organic sales appears to be increasing, as the overall guidance remains unchanged despite heightened foreign exchange pressures. What is contributing to this more positive outlook? Are these influencing factors more likely to have lasting effects or are they temporary for this year? Furthermore, could you clarify the inconsistency we see between this improved outlook and the lack of improvements in Nielsen Scanner data for the US, Europe, or emerging markets? Lastly, during the last quarter, you indicated that organic sales growth in the second half would likely be higher than in Q2. Is that still true?

So, first of all, Dara, we have maintained our organic sales growth guidance for the year, which is flat to low singles. So there’s really no change in the overall outlook, which as you rightly say was for acceleration in Q2 and then further improvement in the back half of the year. As I mentioned, the extent of that improvement in the back half of the year is going to be potentially impacted by what happens with access to dollars for imports into Venezuela, and it’ll obviously be impacted by other things as well. But even with that, we remain confident that we can continue to grow in the second half. In terms of the businesses in the US and the comparisons to scanner data, as you know we pretty dramatically accelerated our growth in the US from minus 2% in the quarter before to plus 3% this quarter. I mentioned that there was about a point of sales that’s ahead of consumption. That’s on things like the ProShield razor that we shipped into the market but still even adjusting for that acceleration as we expected. It’s getting increasingly difficult to look only at scanner data as a measure of a market’s health or a business’ health. That's particularly true in markets like China where a huge portion of the growth of the market is coming in the e-commerce channel which doesn't cross a scanner. And you have some of that same dynamic in the US. So, for example, the Shave Club sales depending on how they’re executed may or may not cross a scanner. And I think that's part of the dichotomy. But generally if we look across several quarters to dampen out some of the short-term volatility and the noise, we continue to be pleased and encouraged by increasing strength in the North American business and we expect it to grow going forward.

Hi, first question just on housekeeping, I think you said China, your sales were down high single-digits. Do you have a sense for what the category growth was, just so we can compare that? And then second question, kind of more broadly on pricing, I guess, two components. Number one, in emerging markets where we continue to see currencies devalue like Russia, like Brazil, how far are you into your price increases? Are you going to continue to take price increases to keep in line with inflation or sort of what’s outlook there? And then second part of that, with regard to pricing in North America, it’s surprising to me that there is still so much positive pricing kind of across the whole sector in light of the lower commodity prices. I don’t know whether that’s just the reflection of a stronger US consumer or more innovation but if you can comment kind of broadly on your outlook about pricing in North America and whether you think the price increases you’ve taken are sustainable?

Thanks, Wendy. Well first, China, it depends on the individual category but the market growth rates range roughly from, call it, 5% to 8%, so mid to high singles across the categories. And as I mentioned, we see significant opportunity remaining in China with those very effective growth rates albeit somewhat slower than they were two or three years ago. With the conversion from a manufacturing to a consumption-based economy, with the dramatic potential that exists as a result of larger family sizes from the possibility of two children versus just one, and with the premiumization of the market which as I indicated admittedly we’ve not been as agile as we need to be in exploiting. But really, as I mentioned I was there last week, I walked away with a tremendous sense of encouragement while acknowledging that we have work to do. In terms of pricing, the pricing dynamic should continue to be favorable contributor to top line growth as we move forward, even if all we do is take forward the price increases that have already been executed; they are not fully annualized yet. So that should continue to be a positive on the top line. The pricing calculus is fairly complicated. You really have to look at the combination of currencies, commodities and competition to determine a course of action going forward in any individual product category or market. The sum of those three things is very different depending on what market you're in, as influenced by both currencies and competition. In general the companies in our industry continue to price at some level for foreign exchange. I mentioned in our prepared remarks that we expect our ability to price to be somewhat lower than it has been historically and we will make up for that over time with productivity and other savings. And in the US, first of all, the commodity impacts aren’t as significant as you would assume, just looking at the headlines on oil prices, for example. If you look at everything from diesel to resin to other inputs that are derived from the petro-complex, while the pricing benefit or cost reduction has occurred, it is not anywhere near the level yet of the crude price reductions. So I think that's a potential source of disconnect as people think about this. Generally we’re taking pricing behind very strong product innovation. We’re looking to improve the strength of our overall value equations, the combination of pricing, product, performance, consumer usage experience, and done in that way I think that continues to be a contributor to growth and value creation.

I’ve got a question on SG&A and reinvestment level. So we sort of keep track of the moving piece of your share each quarter and it looks like reinvestment in the business decelerated a bit in the second quarter. And then also to tie to your full-year outlook, SG&A probably needs to go up in the back half. So can you just tell me if that’s sort of on the right track and if it’s going up, what the specific areas of reinvestment will be versus the pace of the overhead take-out?

So we expect, for example, our media spending to be up double-digits in the second half versus a year ago. So as reinvestment compared to the prior year, that will definitely be increasing. As we look at those choices, we’re obviously not encumbered by the math. We’re looking at the value creation potential that exists behind those investments in both the short and importantly mid and longer-term and we will invest where we have opportunities to do so. So I think that you should think of the level of investment reinvestment sequentially increasing as we go forward. I think, I know that will be the case this fiscal year. I expect that will be the case next fiscal year.

Thanks for the follow-up. Jon, it seems you've achieved some upside in FX neutral earnings growth year-to-date, particularly today as you approach the lower end of the range. Is this due to the additional investments you've mentioned? Is the ad spend beyond what you had initially planned? Also, thank you for clarifying the FX aspect. The FX impact appears to have a significant range for the rest of the year, likely around $0.20. I'm curious about what causes these variations in outcomes from an FX perspective, as we need to understand how to navigate within that range.

In terms of over-delivering and then maintaining the constant currency guidance, yes that definitely is reflective of additional investment. I mentioned in our prepared remarks that in North America, for example, we’ve increased our budgets by about 100 basis points since the start of the year, most of that occurring relatively recently, that’s driven both by our encouragement from a response standpoint to the spending that we have in the market and the acceleration of growth particularly in the US. And so yes, your interpretation is correct in terms of the various moving pieces. The guidance range is really reflective of what the underlying constant currency range of outcomes could be and then we just apply the current FX math on top of that. And there’s a lot of – we’re operating in a more volatile environment than we ever have, and I think our range is reflective of that reality as it should be.

Hey thanks, Jon. I guess I'm not totally understanding why the back-half EBIT would decline. So I think I understand the below-the-line impact of tax rate and other. But it looks like FX probably gets less of that in the back half of the year. So I think you said that, right, yet your guidance range really implies a deceleration in EBIT. So, correct me if that's wrong, but do you guys expect the gross margin acceleration to slow in the back half of the year, maybe I guess what might I be missing?

Some of the impacts, such as the 8 to 9 point effect from things like the deconsolidation in Venezuela, beauty transition costs, and differences in non-operating income, are all reflected in the EBIT line. This significantly contributes to the lower EBIT comparisons in the second half compared to the first half. Most of these impacts are felt more sharply in the second half. While there is some easing in terms of currency, it is minimal in the latter half. I anticipate our margin progress to remain fairly strong, particularly in constant currency for both gross and operating margins. Therefore, the most notable comparisons are driven by foreign exchange and factors like the Venezuela deconsolidation and the transition costs related to the beauty business that are not categorized as discontinued operations. For instance, employees in our global business service organization who are working to establish the new company, including the necessary systems, will continue to be part of Procter & Gamble, meaning their costs are recorded under continuing operations, not discontinued operations. Additionally, the gain from the divestiture in non-operating income is also a significant factor.

A couple of questions, just a housekeeping one. Do you still think Duracell is going to close roughly in any day now and is Coty still set to close July, August? And then my real question is, when do you guys – when does market share really start to matter, because I know you’ve downplayed it and said we’re about expanding categories and protecting the structural integrity of our categories but it just seems that some of the share decline, as some others mentioned, especially in some of the emerging markets are pretty significant. So can you just tell me like if you’re going to have a point in time where the focus is going to shift, and you’re going to start focusing on market share again and then just in a quarter what percentage of the business is gaining market share?

Duracell, as I mentioned earlier should close this quarter. The exact date will depend on work that still needs to occur but that's on track. Coty is currently scheduled to close as well on the timing that we initially indicated, which should be in the back half of the calendar year, so no changes on either of those, both progressing towards the desired end points that we would hope. In terms of market share, our objective is balanced growth and value creation with the growth objective being over time at slightly ahead of markets. So market share does matter but particularly in a time when we need to restore structural economics and in response to currency moves we can get ourselves in big trouble, as that becomes the driving metric. And so as we’ve said we’re prepared to lose some share in two situations. One is where we’re restoring our structural economic attractiveness and having a higher market share with a negative gross margin isn’t helpful to anyone. And also where we are doing some of the portfolio cleanup that I mentioned on the core categories but we will be in a much better position longer term from both the growth and value creation standpoint if we can focus on the parts of our portfolio that are really working for us. So if you look at the percentage of business that is holding our growing share, it’s about 45% globally currently; we would expect that to be higher going forward. In the US, where we are further ahead in the strengthening of our portfolio et cetera, we’ve got about 60% of business holding in our growing share.

Good morning, everybody. I wanted to go back to China, Jon. So, does the sales growth guidance for the back half of the year anticipate an improvement in current trends? And then related to that, given the time that you talked about being in the market, do you think it's realistic you can be competitive in all the categories in which you compete today?

The current guidance does anticipate an improvement in China in the back half and that should be very doable just based on the math alone. In other words, the annualization of some of the changes that we made in our go-to-market and inventory levels in the back half of last year. So we do expect that will improve, and again as I said our view on China is an opportunistic one, not a pessimistic one. We really think that there is significant continued opportunity there both top and bottom line. I think we picked the categories that we’re going to compete in, in the new portfolio based on our view of our capability to be more than competitive to win. These are categories that we have won in, we’re global leaders in almost every single one, I think seven out of 10, and we are among the leaders in the balance. There is a margin structure that allows for a significant investment and growth in each of these businesses. These are higher margin businesses and they are businesses that importantly leverage our core capabilities as a company. So they have been deliberately chosen for success.

Thanks, Jon. So, I guess on the one hand, I think we're all very pleased with the return to positive organic growth, especially alongside the strong cash productivity and margin progression that you called out. And then on the other hand, volumes were still down 2%. I guess 1%, if I exclude the businesses you've chosen to exit. But negative essentially across the whole business nonetheless. And market share, sounds like it was down in aggregate. So I guess just some further comments there would be helpful in terms of how and when you're likely to come out of this negative volume phase? Because if I go back over the last 15 years or so, we're sort of in this anomalous period where last year and sounds like this year, we're in negative volume territory. The only time that's ever happened was the financial crisis. So I guess again, how and when can we sort of inflect positive on that key volume number?

The reduction in volume is influenced by two main factors. First, there is a portfolio cleanup within core categories reported in continuing operations, which has led to an approximate one-point impact. Second, market reactions to consumption and share price fluctuations are significant as we adjust pricing to counteract foreign exchange impacts in heavily devalued markets. For instance, in Russia and Ukraine, where devaluation has reached levels of 70%, 80%, or even 110%, we face negative gross margins, and it is crucial to adjust prices gradually while implementing cost-saving measures to restore margins to positive levels for meaningful growth. During this period, we often see market contractions in response to increased prices, and there can be a modest loss of market share as we compete against strong European and Japanese competitors. We are not willing to sustain a loss of market share indefinitely. Historically, this adjustment process takes about six to nine months. Much of the recent pricing we have implemented is due to recent devaluation. I have not assessed specific quarterly trends to predict when volumes will turn positive. We aim to grow at or slightly above market growth rates over the long term, which requires volume growth. The market is experiencing around a 3% growth rate, and we cannot continuously raise prices by 3%; that is not our plan. Additionally, we operate in markets where competitors typically do respond to pricing changes. As market leaders, we usually have to take the lead in pricing; therefore, we are vulnerable during the time it takes competitors to respond, which can also take six to nine months or longer. If competitors fail to adjust their prices accordingly, we will lower our prices to remain competitive. We will not compromise our competitiveness or allow long-term market share loss.

Just two quick questions. Jon, can you maybe provide just a quick bridge on the volume? When you talk about the US going positive and helping us reconcile how you got to the total consolidated number, just so we get a geographic viewpoint. And then the bigger question is, as you kind of push responsibility closer to those 10 business leaders, how long does that take to really start affecting business decisions and on-the-ground results? I'm trying to get a sense of what the time lag typically you would expect after making a move like that.

Thanks for the bigger picture question, Nik. It’s actually something we will spend some time talking about at CAGNY. It’s interesting, the market on a relative inflection point standpoint, that’s growing the strongest which is the US, is one where these changes were made first. They were made about a year ago, where basically in addition to the 10 categories and their ability to operate somewhat independently, we’ve sectorized our sales force and so we’re going end to end from GBU all the way through to customer with dedicated sales support. We’re not moving people as rapidly across categories. The GBUs have full decision rights on the amount of resources that are supporting their business from a go-to-market operation standpoint, which has led to some choices quite frankly to increase coverage in some channels, it’s led to choices to hire mid-career talent that has experience in a category that extends beyond the experience of our current employees. So it’s having a dramatic impact and every change has a slightly different timeline in terms of when it could reflect in the business results. But I think we can – I think we’re making good progress in this area. I think we have more to do. Again we will talk about that at CAGNY, and I don't think it takes a long period of time to make a difference.

Good morning, everyone. To revisit Nik's questions, could you provide a geographic breakdown of growth in emerging markets, specifically separating volume and pricing? Additionally, volume has been negative for four consecutive quarters. How much do you attribute this to challenges in your pricing execution, similar to what you experienced in Russia and Mexico, and have those issues been resolved? I've heard that you've made some leadership changes in China and Latin America. With all these adjustments completed, can we expect pricing to be less disruptive moving forward?

First, sorry, I did miss the first part of Nik’s question, thanks for bringing that back. The relationship of organic volume to organic sales in the October-December quarter, developed markets organic volume was plus 2, organic sales were plus 3. If you look at developing, organic volume was minus 6, organic sales were flat versus last year. If you look at those comparisons, they are indicative of exactly what I have said a couple times in this call in terms of what’s driving the volume reduction is pricing in developing markets to offset FX where you don't have as much of an FX impact. For instance in the developed markets our volumes grew at 2% in the quarter. In terms of – you mentioned Mexico as an example, we actually had a very good quarter in Mexico. The changes that we’ve made there, we’re very pleased with. Organic sales were up 4% in Mexico in the quarter and remember I talked about the tissue towel impact – the tissue change in the portfolio which has negatively impacted organic sales, that’s in Mexico. Excluding that, Mexico organic sales were up 8% in the quarter and volume was up as well. So again there is a bit of noise as we work through the combination of the portfolio and foreign exchange. But we expect volume will grow as we go forward and share will also be something that becomes increasingly attainable.

First question is on Brazil. I apologize if I missed this, but what were the Brazilian sales in the quarter? I think last quarter was down 12%. You were hoping for a little bit of bounce back this quarter. Secondly, on commodities, Jon, you mentioned earlier that you're not seeing the benefit that some would think you would given the move in oil, but obviously it is a positive for you this year. So what kind of boost do you see from commodities to earnings this fiscal year?

Thanks Joe. Brazil, for the quarter, organic sales were up 11%, that compares to minus 12% the prior quarter, I think that again is another good example of the volatility that’s going to occur here as we get the right pricing set in the market and as well our ability to pull that through and generate growth on a sustainable basis. So again, Brazil was up 11% on the quarter. In terms of commodities, look that as a single area, so the reduction of input costs, that impact is about $500 million on the fiscal year. Some of that we anticipated going into the year for us but that’s the amount. I would argue that in total, in other words, inclusive of consumption impacts in oil producing countries where there has been massive disruption and instability, if you think about markets like Saudi Arabia, markets like certainly Venezuela, I would say that the net impact in our P&L is likely neutral negative but the pure cost impact is $500 million.

Jon, I just wanted to follow-up, since you had highlighted kind of the changes made both in Mexico and India and the not worse gaining sales, if they're not worth anything. I think you said that costs about 1 point to organic growth in the quarter. If that's right, is that the expected impact for the next two, three quarters and is this kind of a program that may accelerate as we move into fiscal ‘17?

The amount is the correct amount, you are right, it was about a point in the quarter. We would expect – we really started this work in terms of execution in July-September, maybe some in the latter part of last fiscal year, so we would expect this to continue through the next couple quarters but then it should dissipate going forward. There may be a few additional choices we need to make but in general you will see it for the next couple of quarters and then it should start to dissipate.

Hey, guys, thanks for fitting me into the call. Believe it or not, I still have a few questions. One is just go deeper on volumes. Look, your compares clearly get easier over the next couple quarters, so that should certainly bode well. But can you elaborate a little bit more and perhaps even quantify the inventory management change by retailers and the trade term change that you mentioned in the press release, which is mentioned as a negative. Particularly in the context of what you said on your prepared remarks, which is that sales being slightly ahead of consumption. So give us a sense of the ongoing effects of those if you could? Number one. Number two is on your FX kind of multiplier between the top-line and the bottom-line impact, why did it change so dramatically versus your ‘16 guidance? So what I mean is that in July, your FX impact was going to be negative 4% to 5% top line, negative 3% to 4% bottom line, so kind of a less than 1 ratio. But now it's a negative 7% on top line, negative 10% on the bottom line, so very quickly shifting to a greater than 1 ratio, despite your efforts to localize more, et cetera. So is that all Argentina devaluation? Or is there some forecasting math that I'm not getting or can you give us a sense of how your business is structured or levered differently than we would expect it, because it's big switch in a short period of time? And then third question is more in terms of running these conference calls. Should we infer that the decision was made, because I know you guys were thinking about this, that your CEO will not be on these quarterly calls and will only be at things like CAGNY and the annual calls like AG was doing? Or are you still in the deciding mode? Thanks for the two questions.

On the FX multiplier, as you can imagine the different currencies that have – we have no ability to forecast which currencies are going to move and how much they are going to move. And top and bottom line relationship between currency movements is very different depending on the market. It depends on how the markets source, it depends on the balance sheet of the market, I mentioned balance sheet revaluations. So, for example, in Argentina we’ve talked about the balance sheet revaluation that occurred there, so it’s really a function of what actually is happening in the marketplace country by country, how we source to markets and what the balance sheet exposure is in different markets. So I guess I am saying we don't really have a good ability to forecast exactly what the currency impact is going to be on either the top or bottom line and frankly we spend very little time thinking about the relationship between the two. In terms of the comments on trade inventory reduction, that is largely a China dynamic. I mentioned in prior calls that our inventory levels were too high particularly in the wholesale channel in China, and as a result, our pricing was too low which was driving a bit of a distortion and difficulty for our distributors. And so we’ve made some choices to address that and that has a short-term volume impact. That’s really what that comment was designed to indicate. Relative to senior executive engagement with the investment community, we intend to be fully engaged with the investment community through a combination of quarterly conference calls, investment conferences, meetings here in Cincinnati. Dave will be on the road frequently as well interacting with the investment community. So again, our strategy is one of very high engagement.