Procter & Gamble Company (PG) — Q4 2016 Earnings Call Transcript

Good morning. I am joined this morning by our Chairman, President and Chief Executive Officer, David Taylor, and by our Vice President of Investor Relations, John Chevalier. I plan to take you through the quarter and provide an update on productivity and our portfolio project. David will discuss our efforts to accelerate top line growth. We'll briefly review progress in each of our 10 business categories. And we'll discuss our plans to further strengthen our organization and culture, all to reliably drive balanced top and bottom line growth. We're making progress in moving P&G's results to a balance of top line, bottom line, and cash flow growth. We increased investments in innovation, advertising, and sales coverage to enhance our long-term prospects for faster sustainable top line growth. And stabilized top line growth rates in several key markets. We have delivered another strong year of productivity improvement and cost savings to help fund this. Cash flow continues to be strong, with fiscal year adjusted free cash flow productivity of 115%. Organic sales for the quarter were up 2%. This includes about a 1-point drag from the combination of the cleanup work we're doing within the ongoing portfolio and the impact of reduced finished product sales to our Venezuelan subsidiaries. As we get through the cleanup work and annualize the Venezuelan headwinds, we'll be closer to 3% growth. Importantly, the sales growth was volume driven with organic volume growing 2%. Organic volume was ahead of year ago in every segment, ranging from plus-1% to plus-5%. Organic sales grew in every segment, ranging from plus-1% to plus-8%. Organic sales were up 1.5 points in developed markets and 3.5 points in developing markets. In North America, organic sales grew 2%, roughly in line with underlying market growth, our second consecutive quarter at this level. Organic volume in North America grew 3% for the second consecutive quarter, slightly ahead of underlying market growth. In China, organic sales were in line versus the prior year, an improvement over last quarter and another step toward returning to market level growth or better. All-in sales for the company were down 3%, including a 3-point headwind from foreign exchange and a 2-point drag from the combination of Venezuela deconsolidation and minor brand divestitures. Core gross margin increased 160 basis points versus the prior year. On a constant currency basis core gross margin was up 240 basis points, including 280 basis points of productivity improvements. Core operating margin was down 150 basis points for the quarter, due to foreign exchange headwinds and a significant increase in advertising support versus the prior year. On a constant currency basis core operating margin was down 30 basis points. Productivity improvements contributed 360 basis points of operating margin benefit in the fourth quarter. Core earnings per share were $0.79, slightly above the high end of our implied guidance range. This is a reduction of 15% versus the prior year, due mainly to foreign exchange, lower non-operating income, and a higher tax rate. Foreign exchange was a $0.07 per share, or $200 million, after tax headwind on fourth quarter earnings. Non-operating income was $0.02 per share headwind, as the base period quarter included higher gains from minor brand divestitures. The core effective tax rate was a $0.06 per share impact on core earnings per share for the quarter at 23.8%, up 540 basis points versus last year. This was a little better than we initially projected, but still a substantial increase compared to last year. These three impacts, foreign exchange, non-operating income, and tax, were a combined core earnings per share growth headwind of $0.15 per share this quarter. Adjusting for these impacts, fourth quarter core EPS was up modestly versus the prior year. On an all-in GAAP basis, earnings per share were $0.69 for the quarter, up 283% versus a prior year quarter that included a significant one-time impact from the deconsolidation of Venezuelan results. We generated $2.8 billion in free cash flow, with 145% adjusted free cash flow productivity. Over the course of the fiscal year we generated $12.1 billion in free cash flow, yielding adjusted free cash flow productivity of 115%. We were able to reduce outstanding shares at a value of over $8 billion through a combination of share repurchase and shares that were exchanged in the Duracell transaction. We paid dividends of more than $7.4 billion. In total, nearly $16 billion in dividend payments, share exchanges, and share repurchase. Now looking forward, we continue to focus on large opportunities that should be within our control, executing what is the largest transformation in our company's history: re-accelerating top line growth with strengthened category business models; innovation plans, and where appropriate, improved value equations; step-change in cost and cash productivity; simplifying and strengthening our product portfolio; and strengthening our organization and culture, all to win more consistently. This transformation is aimed at delivering balanced top and bottom line growth and leadership value creation. Top-line growth is our biggest improvement need and is enabled by both our productivity efforts and the portfolio strengthening that are underway. I'll talk briefly about these enabling efforts, and then turn it over to David for a discussion on top-line acceleration itself. We continue to dramatically improve cost and cash productivity, with significant upside still ahead. We have accelerated and exceeded each of our productivity objectives and have now raised them. Our original 5-year cost of goods savings target was $6 billion. We delivered $7.2 billion, more than $1 billion over our initial target. We delivered cost of goods savings which were at or above target each for the last 5 fiscal years. We've reduced manufacturing enrollment by 22% over the last 4 years. This includes new staffing necessary to support capacity additions. On a same-site basis manufacturing enrollment is down about 27% through June 2016 with additional progress planned in fiscal 2017. These figures exclude divestiture impacts. In February 2012 we announced that we would reduce non-manufacturing or overhead enrollment by 10% over 5 years. As of July 1, we've reduced roles by nearly 25%, 2.5 times the original target. Including divestitures, we'll reduce non-manufacturing or overhead roles by about 35% by the end of fiscal 2017. We're reducing non-working marketing expenditures, costs that don't impact reach frequency or continuity of our advertising and trial generation programs. We were spending $2 billion per year on agency fees. Two years ago we reduced the roughly 6,000 agencies we work with by nearly 40% and cut agency and production spending by about $370 million. In fiscal 2016 we delivered an additional $250 million of agency related savings, reinvesting these savings in advertising and sampling of consumer preferred products. Over $600 million in savings in 2 years. We're driving productivity improvement up and down the income statement and across the balance sheet. Inventory days are down. Payables days are up. Net of reinvestments in innovation, sales coverage, media, and sampling, productivity has enabled us to deliver constant currency gross and operating profit margin improvement and high single- to double-digit constant currency core earnings per share growth in each of the last 4 fiscal years. We improved gross and operating margins by triple-digit indices, both including and excluding currency in fiscal 2016. We said over 4 years ago that we needed to make cost and cash productivity part of our culture, as integral to our culture as innovation. We've made significant progress, and we have significant opportunity. Our strong track record and our line of sight to additional opportunity inform our intent to save as much as another $10 billion in costs over the next 5 years. The majority of these savings will again come from cost of goods sold, an area where we have consistently met or exceeded our targets. Supply chain transformation is in its early stages, first in North America, next in Europe, then in Latin America and India, the Middle East and Africa. We're in investment mode now with savings to ramp-up in 2, 3, and 4 years. Our new U.S. mixing centers are up and running, putting roughly 80% of volume within 24 hours of store shelves. On-time deliveries and frequency of deliveries have increased. We've already seen an improvement in customer service levels, resulting in improved on-shelf availability in the U.S. at more than a point to roughly 96%. We're constructing multi-category manufacturing sites in geographically strategic locations to replace smaller single category sites in less cost effective locations. We're well underway with the construction of a new site in West Virginia that's scheduled to start production in calendar 2017. We've announced moves of production for some laundry detergent, fabric enhancer, perfume, body wash, and hair care products. And we've announced or completed the shutdown of three sites. In Europe, we've announced plans to consolidate production of laundry powders, deodorants, and hard surface cleaners to fewer plants across our European manufacturing network. We're now beginning the consolidation work in Latin America. As we make these moves, we're upgrading and standardizing manufacturing platforms to lower cost and to facilitate faster innovation. We're employing smart automation and digitization to improve manufacturing productivity, raw material and finished product logistics, and demand planning. We have additional opportunity to optimize working capital and further increase the efficiency of our capital spend. After 2 strong years of savings, we'll enter next year still spending about $1.4 billion on agency related costs. Still more room to improve. And as we fully operationalize the new focused 10 category company, there will be additional opportunities to increase organization efficiency, agility, and speed of decision making, enabled in many cases by digitization and automation. Finally, we are working to improve the effectiveness of our promotional spending. We currently spend about $18 billion in deductions between gross and net sales. We see clear opportunities to improve the effectiveness of the spend for us and our retail partners to build the value of our categories and the share of P&G brands. So again we're targeting up to $10 billion of additional savings over the next 5 years. We expect to reinvest a significant amount of the savings in R&D, and product and packaging improvements, sales coverage, and in brand awareness and trial building programs to deliver balanced top and bottom line growth. Moving to portfolio. Over the last 18 months we've divested, discontinued, or consolidated 61 brands, including the completion of the Duracell transaction at the end of February. We have 44 more brands in the exit process, including 41 brands in the deal with Coty. We're currently winding down transition support for Duracell. We've completed the systems work in standing up the Beauty business for the transaction with Coty. We've received anti-trust clearance in all markets. We currently remain on track to close the deal with Coty in October 2016. By the end of the fiscal year we'll have exited 105 brands and all of the complexity they create. These brands represent only about 6% of base period profit. Going forward, our portfolio will be anchored on 10 category-based business units and 65 brands. These are categories where P&G has leading market positions and where product technologies deliver performance differences that matter to consumers. These 10 businesses have historically grown faster with higher margins than the balance of the company. We're moving away from businesses that are more trend driven, where fashion, fragrance, and flavor drive consumer purchase decisions. We're focusing on businesses where product and performance drive purchase decisions, where there are clear consumer jobs to be done and clear objective measures of performance. These are products that consumers purchase and use on a daily basis. And they're in structurally attractive categories. Within these core businesses we're focusing our offerings, making smart choices for short-, mid-, and long-term value creation, foregoing bad businesses, even when these choices create near-term top-line pressure. In our Mexico Family Care business we've discontinued low-tier unprofitable and commoditizing products, and are focusing instead on very profitable high-tier differentiated products, moving from double-digit negative margins to double-digit positive margins. While we first talked about this a year ago, it took several quarters to sell out remaining inventories of the discontinued products. As a result, the top-line drag doesn't fully annualize until the end of this calendar year. In India, we've made a similar choice to de-prioritize several unprofitable lines of business, which negatively impact short-term top line growth rates but will lead longer-term to a much more profitable business that will grow strongly. The strategic part of our India business is growing at a high-single digit pace. Sales in the portion of the business we're fixing or exiting, about 15% of the portfolio, have been down more than 35%. The top line pain is worth it. We're making significant progress in improving local profit margins, up 750 basis points over the last 2 years. We've gone from losing significant money in India to triple-digit profits in just 2 years. We're taking a similar approach in our Fabric Care product portfolio, discontinuing product forms – additives, bars, bleaches, and tablets – and value tier and powder detergents that have been a drag on profitability and value creation. These choices are causing a top line drag on the global Fabric Care business, but improve the profitability and the long-term attractiveness of the business. The SKUs we've eliminated to simplify our Olay line-up caused an incremental drag on sales growth. As we annualize this headwind next year and as we focus our innovation and marketing support on the core boutiques and SKUs in the portfolio, we'll have set the stage for faster, more profitable growth. Combined, these choices have been causing about a 1 point drag on organic sales growth. We expect this headwind to continue for the balance of the calendar year and then dissipate in the second half of next year, as we begin annualizing these effects. So that's productivity and portfolio. Both on or ahead of track with – and this is important – a significant amount of the benefit still ahead of us. I'll now hand it over to David to update you on the top line, provide a brief status review across the 10 product categories, and talk about important steps we've undertaken to strengthen our organization and culture to more consistently create value.

Good morning. Our objective is very clear: Balanced top and bottom line growth that delivers total shareholder returns that place P&G consistently in the top third of our peer group. A critically important element of our transformation is re-acceleration of our top line growth to reach and sustain organic sales growth at or slightly ahead of underlying growth at the markets where we compete. Productivity improvement and cost savings are a necessity in this effort, providing fuel for innovation, advertising, sales coverage, and trial and sampling to grow users and usage. Top and bottom line growth are not separate endeavors. They reinforce and fuel each other. Everything in this model starts with delighting consumers and shoppers, winning at the zero, first, and second moments of truth when consumers research our categories and brands, purchase them in a store or online, and use them in homes. And we're making progress in accelerating organic sales growth, but we're not yet where we need to be. There's more work to be done. As Jon just shared, organic sales grew in all five reporting segments and we’re in line or higher in nine of 10 product categories in the April-June quarter. For most of these businesses, the back half of the year was stronger than the first half. Organic sales for the company was essentially flat in the first half of the year and were up 1.5% in the second half. Obvious acceleration, but not where we want to be. Let me spend a minute on each of the 10 categories. We're growing our Fabric Care business with consumer preferred brands and product offerings, like our premium performance and premium priced unit dosed detergents and our market leading, and importantly, expanding scent bead fabric enhancers. We're exiting slower growing, lower priced, more commoditized product forms, where it's more difficult to distinguish our products and create value. Fabric Care results in the U.S. demonstrate what is possible when we deliver superior value from best-in-class performance at a modest price premium. The U.S. laundry detergent market is continuing to grow behind our efforts, with the category up 4 points last year. The same is true for fabric enhancers. Spurred by the rapid growth of scent beads, the U.S. fabric enhancer category is growing, up 7 points on a value basis last year, with scent bead form growing in the mid-20s points. Our share is growing. P&G's laundry detergent and fabric enhancer value shares were up in fiscal 2016. And we will continue to be the innovation leader in Fabric Care. In North America, we're introducing a new regimen on Tide and Downy that addresses the odor problems common to the growing athletic wear segment. 70% of consumers wear athletic gear multiple times each week. The Odor Defense collection, anchored by innovation on Tide Pods, brings a proprietary formula of enzymes and surfactants that break down and remove stubborn soils and residue for a great cleaning and fresh scent. Now paired with the added cleaning power of Tide Odor Defense Rescue laundry booster and Downy Fresh Protect Odor Defense beads, this regimen promises to eliminate odors from the fast growing market of athleisure clothes people are wearing far beyond the gym. We opened a learning market of Tide Pure Clean liquid detergent in the U.S. Naturals is a large and growing segment in several categories, but naturals are only about 3% of the laundry category currently. Unlocking growth in naturals is about solving the tension between green and clean. People want performance and sustainability. Pure Clean provides the cleaning power of Tide with 65% bio-based ingredients. And it's produced with 100% renewable wind power electricity in a facility operating with zero manufacturing waste to landfill. Now it's very early to read results. But after just 5 weeks on shelf with no TV advertising, Pure Clean is approaching a 1 share of detergents within the learning market stores. We're increasing sampling of new washing machines, a key point of category entry and change for consumers. In fiscal 2015 we distributed 5 million samples in washing machines globally. Last fiscal year's we increased that to 17 million. In fiscal 2017 we'll distribute 30 million samples of our best performing products. Turning to Home Care. Our performance in this category has been very strong. Cascade grew sales high-single digits last year behind the continued success of Cascade Platinum, our best performing and most premium priced auto dish detergent. In North America, we increased sampling on Cascade premium by 20% last year. The Dawn brand delivered its ninth consecutive year of organic sales growth in the U.S. This result has also been strong in Japan and Europe on handwashing liquids and auto detergent products. Febreze had a challenging year, down low singles, but we have innovations coming next fiscal. In Hair Care we launched our new conditioner innovation on Pantene in the U.S. early this calendar year. The new conditioner technology is a consumer blind test winner versus our best competition in North America, China, and Japan. Pantene and Head & Shoulders each delivered solid organic sales growth in the U.S. for the second consecutive year. Herbal Essences was the main drag on the Hair Care growth, down mid-teens last fiscal year. Now we have plans in the works for product, package, and consumer communication improvements in fiscal 2017. In the Skin and Personal Care category SK-II had another very strong year with organic sales up mid- to low-teens. As Jon mentioned, Olay completed a significant streamlining of SKUs in North America last year. In China, Olay's second biggest market, we're executing a similar streamlining of sales counters, retaining the top selling and most profitable counters to focus resources where it matters most, on the doors that create the most value. On Old Spice, sales were up versus the prior year and accelerated in the second half behind the Hardest Working Collection innovation bundle that included performance and scent upgrades to Old Spice detergents and body wash – or rather deodorants and body washes in the U.S. In Grooming, Gillette delivered steady growth in international markets last fiscal, holding or growing value share in each region outside the U.S. behind strong innovation, advertising, and sampling programs. The growth in international markets was offset by soft results in the U.S. To improve our growth and the growth of the market we are reinvesting in innovation, new user trial, and improved consumer value. We completed the global expansion of our very successful Gillette Fusion FlexBall innovation into Asia in 2016. We expanded our performance advantage at the top end of the market. Our most recent cartridge innovation, Gillette Fusion ProShield, launched in January. We're supporting a broader range of our product ladder from our best product, Fusion FlexBall ProShield, to MACH3 systems to premium priced and superior performance disposables with stronger consumer value communication. We're facing more aggressive competition at lower price points. And we will respond to ensure our brands remain a superior consumer value. We're driving trial at point of market entry. We put Fusion ProGlide FlexBall razors in the hands of nearly 80% of young men. Over 2 million samples last year in the U.S. with our 18th birthday sampling program. We're now sampling the FlexBall razor handle and ProShield cartridge, our very best combination of shaving technologies. Fiscal 2016 was a difficult year in Personal Healthcare due to the very weak cough/cold season in the U.S. The category was also comparing against a base period that contained the launch of many new items in the Metamucil and the Vicks brands. Even with these headwinds the category delivered positive organic sales growth for the year. Organic sales in Oral Care were up low-single digits in fiscal 2016 with high-single digit after tax profit growth behind strong productivity improvements. Sales of our top-performing items grew fast this last fiscal with premium Oral-B power toothbrushes and premium HD toothpaste, each up mid-teens. Organic sales in the 42 Oral-B toothpaste expansion markets were up double digits last fiscal year. The solid growth in developed markets was partially offset by lower sales in several developing markets, where we took pricing to offset foreign exchange impacts. In U.S. Baby Care, strong innovation in consumer communication trial programs and a robust online presence have led to strong growth for Pampers. Pampers value share of U.S. diapers was up a point last fiscal. Pampers latest Swaddlers and Cruisers innovation, extra absorb channels, is driving share growth in the premium tier diaper category, with Swaddlers and Cruisers share up more than a point last fiscal year. We strengthened investments in brand awareness and trial at point of category entry. Now 70% of new moms in the U.S. receive samples of our best products through our Prenatal and Hospital programs. Fiscal 2015 marked the seventh consecutive year of sales and value share growth of the Luvs brand in the U.S. However, results were down in fiscal 2016 following a significant price reduction taken by our primary competitor. Now we've taken steps to improve the awareness, trial, and consumer value of Luvs. We're increasing equity building advertising, strengthening in-store programs, and we're currently launching product and packaging improvements. In Japan, Pampers value share grew more than 2 points last year. Pampers is now the value share leader in Japan diapers and also the share leader in the Pants segment. Baby Care results have been softer in other markets. To address this, we're strengthened our value proposition in several markets and accelerated premium innovation on both taped and pull-on diapers to restore our competitiveness at the top end of the market. We're strengthening our selling resources and programs for baby center stores and e-commerce. And we're increasing investments in point-of-market entry programs to drive higher awareness and trial of Pampers among new moms. Fem Care organic sales were up low-single digits for the fiscal year with improved momentum in the second half, including a strong fourth quarter with mid-single digit organic volume and sales growth. Expansion and leverage of innovations, such as Always Infinity and Always Discreet have been the key drivers of improved top line growth. We've also made consumer value interventions in markets like Russia to restore pricing to competitive levels, which helped in the second half. In Family Care the top-tier segments of the Bounty and Charmin brands delivered solid organic sales growth last fiscal. Now as Jon discussed, we made the choice to discontinue low-tier products in Mexico, which drove overall category sales down versus the prior year. Global bottom line results were strong with after tax profits up high-single digits in fiscal 2016. We have product and packaging innovations coming this year on the Bounty Basic and Charmin Basic brands to improve their positioning with consumers in the U.S. Now I'll look briefly at our top two markets. First, the U.S. Organic sales and shipment volume was up about 0.5 point in the first half of the fiscal year. We accelerated this growth in the back half of the year to plus-2% and 2.5% organic sales and shipments, respectively. The second half growth rates are roughly in line with underlying growth of our categories. We plan to build on this momentum. China organic sales were down 5 points last fiscal, but improved sequentially in the third and fourth quarters. The fourth quarter was in line with prior year. Progress, but nothing worth celebrating yet. In fiscal 2017 we'll relaunch product lines in several categories. And we'll implement a new go-to-market program across retailers and distributors in China. These improvements will take some time to fully take hold. Recovery will not be a straight line. But in aggregate, fiscal year results should improve. As we work to accelerate top line growth, enabled by productivity and the portfolio choices, we are transforming our organization and culture. We're making many changes that by themselves may seem small and obvious, but together they are significant and important. As an example, we've made several important changes in how we go to market. We've talked previously about eliminating overlapping resources and duplicative structures and responsibilities of marketing and sales professionals in the global business units and the market development organizations, clarifying responsibilities and strengthening accountability. Reflecting this, a while back we changed the name of our market development organizations to Selling and Market Operations, a small but very important change. We're changing our talent development and assignment planning to drive more mastery and depth. The objective is simple. Improve business results by getting and keeping the right people in the right places to develop and apply deep category mastery to win. Consistent with this, we're dedicating sales resources to categories or sectors in our larger markets. Sales resources have greater accountability back to the categories they serve, which is also a change. Now P&G is fortunate to consistently source and develop strong talent. And we intend to maintain our develop from within approach. But there are times when the best talent for a role may not be inside our organization. We are now implementing and supplementing key businesses with outside hiring more often when we need to field the best team possible. As an example, we've dedicated and added resources to improve category mastery in our North American Personal Healthcare sales force. Two years ago the average tenure of salespeople within the category was less than 12 months. About half of the salespeople were dedicated only to Personal Healthcare. And 100% of the people were either new hires coming to P&G with no work experience or transfers for other P&G businesses. Over the last year or so we've added resources to the Consumer Healthcare sales force. Almost half of those people have prior healthcare sales experience. Today, 100% of people selling the business are dedicated to Personal Healthcare. And the average experience level is now more than 5 years of healthcare sales experience inside or outside of P&G. Over the last 2 years we've added 115 people to the U.S. retail sales force through external hiring. And more than half of them have prior sales experience. Over the last 2 years we've increased category dedication of the U.S. salesforce by 20%, with more than 90% of salespeople now focused on one category. We doubled the number of experienced external hires last fiscal versus the prior year, bringing in experienced talent in five different levels of management, including the Vice President level. Bottom line, we're committed to getting, keeping, and growing the right people in the right place to drive better business results. Again, each of these changes may seem small and rather obvious, but collectively they're big and important changes for our organization and culture. Each area of transformation – top line acceleration, productivity, portfolio, and strengthening our organizational culture – requires change. Let me say again what I said at the CAGNY conference in February: P&G is ready to adapt, evolve, and change whatever is needed to win. We're making good progress in each of these areas. But we know our success will ultimately be graded on the sales, profit, cash, and value creation results we deliver, not on the activities that get us there. We are committed to do everything we can and to change what must be changed to deliver these results.

Thanks, David. To frame guidance, I think it's helpful to look briefly at the macro environment that confronts us as we start fiscal 2017. Category growth rates slowed throughout last fiscal year and are currently growing at about a 3% pace for our global footprint. As you know, GDP growth rate has slowed to the point that at least 10 countries have moved to negative interest rates, including Germany, Japan, Denmark, France, Italy, Spain, and Switzerland. Political, economic, and foreign exchange volatility each continue to have a large impact on the markets and on the currencies in which we operate. The recent Brexit decision is but one example of a political disruption impact that has knock-on effects on consumer confidence and resulting market growth. The recent coup attempt in Turkey is another example. We continue to face significant FX volatility, such as the recent 40% devaluation of the Nigerian currency and 25% devaluation for open market transactions in Egypt. Our ability to ensure supply and stay on shelf in many markets is dependent on our ability to source U.S. dollars. Currency exchange constraints in markets such as Egypt, Nigeria, Venezuela, and historically, Argentina make operations in those countries very difficult to manage and sometimes result in production shutdowns. In that, we continue to face a relatively slow growth volatile world, which is reflected in our fiscal 2017 guidance. We're currently expecting organic sales growth of around 2%. This includes between half a point and a point of headwind from the cleanup work within the ongoing 10 product categories. It also includes the remaining 2 quarters of headwind from lost sales to our Venezuelan subsidiaries. As we annualize more of the cleanup work, and as we make progress in markets like China, we should be getting back towards market level growth rates by fiscal year's end. We expect fiscal 2017 all in sales growth of about 1%, including a 1-point drag on growth from the net impact of foreign exchange and divestitures. Our bottom line guidance is core earnings per share growth in mid-single digits. This range reflects the volatility of the markets in which we compete. And it reflects the investments we intend to make in the business to accelerate organic sales growth in a sustainable, long term, market constructive, and value accretive way. We'll work with our retail partners to build the value of our categories behind strong product innovation and more effective in-store and online merchandising of our leading brands. We'll reinvest savings to improve product formulations and packaging, sales coverage and media programs, product sampling and in-store demand creation. We'll also invest in consumer value equations, correcting value gaps and quickly responding to competitive challenges as they emerge throughout the year. This guidance includes a fiscal year average share count reduction of approximately 4%, the net outstanding share reductions from the full year impact of the Duracell deal, the Beauty transaction with Coty, discretionary share repurchase, and stock option exercises. The actual impact on outstanding shares from the Beauty transaction won't be known until the deal is completed in October and will of course be dependent on the stock prices of both companies and a transaction discount. We're forecasting a reduction in non-operating income in fiscal 2017 due to lower gains from minor brand divestitures. The core effective tax rate should be roughly in line with the fiscal 2016 level. All in, GAAP earnings per share should increase 45% to 55%, due primarily to the significant one-time gain from the Beauty transaction with Coty. Also included in the GAAP earnings per share range are $0.10 per share of non-core restructuring charges. We expect adjusted free cash flow productivity of 90% or better. CapEx should be in the range of 5% to 5.5% of sales. Fiscal 2017 will be a year of significant value return to shareholders. We expect to pay dividends of over $7 billion. In addition, we expect to reduce outstanding shares at a value of approximately $15 billion through a combination of direct share repurchase and shares that will be exchanged in the Beauty transaction. In total, over $22 billion in dividend payments, share exchanges, and share repurchase. To summarize fiscal 2017 guidance, our current forecast calls for around 2% organic sales growth. All in, sales growth will be around 1%. And we should have a small improvement in profit margins. Non-op income will be a headwind. And share count will contribute about 4% of earnings per share benefit. All current rates and – at current rates and prices, FX and commodities are a modest headwind to fiscal 2017 earnings. Significant currency weaknesses, commodity increases, or additional geopolitical disruptions are not anticipated within this guidance. While we currently expect FX to be only a small headwind for the year, it will still be a notable headwind in Q1. We'll still be impacted by significant devaluations in the U.K., Argentina, Egypt, Nigeria, among others. We'll also still be annualizing the loss of finished product sales to our Venezuelan subsidiaries. Please take these factors into account as you consider the quarterly profile of your sales and earning estimate. With that I'll hand it back to David for his closing comments.

Thanks, Jon. Well, we're encouraged and optimistic as we enter fiscal 2017. We expect this year to represent another significant step toward our goal of balanced growth and value creation. We're committed to continue productivity improvement and cost savings that provide the fuel for innovation and investments needed to accelerate and sustain faster top line growth. We have created and are sustaining strong cash productivity momentum. We're nearing the completion of the major portfolio moves to simplify and strengthen the category portfolio. And we're making similar moves at the brand and product form level to improve the profitability and value creation capability of the categories we'll retain. We're strengthening the organization and culture by improving our approaches toward talent acquisition, career management, decision making, accountability, and incentives. Our standards are high. We're not satisfied with just being a little better. We want to be the best. We're making progress. And we're determined to win. But we're also realistic about the time it will take for the improvements and investments we're making to fully play out in our results. We turn it back to Jon.

That concludes our prepared remarks for this morning. As a reminder, business segment information is provided in our press release and will be available in slides, which will be posted on our website, www.PG.com, following the call. Now David and I would be happy to take any questions.

Hey. Good morning, David and Jon.

Morning.

Hey. A few questions on the guidance. The first is, how do you balance market share versus profitability? Because I know the organization has changed. And if I look at some of the Nielsen data, it still looks like the vast majority of the business is losing market share. And then just in terms of the fiscal 2017 guidance, can you just give us some color around how much of the incremental $10 billion of savings you think are going to come through for the year? And then just a rough cut on what advertising levels are going to be and kind of where you intend to spend the money?

Sure, Bill. So in terms of the relative priority of market share versus profitability, it's an and in our view. We need to be growing at or slightly ahead of the markets in which we're operating in. We fully intend to do that. As we've said, we're going to reinvest a significant portion of the savings that we're generating behind that effort to get back to market share growth. And that will – that's started. You see it in the numbers in the fourth quarter and will continue as we go forward. Just one thing on share trends. And you're absolutely right in your overall observation. But if you look at across the five reporting segments, market share trends past 6 months, past 12 months, were better past 6 months in five out of five segments. The same holds for the past 3 months versus the past 6 months. So again five out of five segments improving. And the same for the past 1 month versus past 3-month comparison. Again, as David very clearly said, we're not where we want to be. But we're starting to see that progress as we reinvest behind the opportunities that are in front of us. In terms of the savings proration across the 5 years, this program will be a little bit more backloaded than our prior program, in part because of the nature of some of the projects that are contained in it. Specifically, the supply chain transformation, whereas I said we're in investment mode now, and the savings will come 2 years, 3 years, 4 years from now. Having said that, there will be a significant contribution from productivity again next year, which will give us the ability to increase investment in the business. We're expecting increases in advertising spend this year versus last. Think about it in the probably mid-single-digit range. We want to increase, as David said in his remarks, a sampling of consumer preferred products in trial generation. We want to be more relevant in store and online. And all of that is part of an activity system that we believe will help us restore the market share growth that we rightly cite as necessary going forward.

Hey, good morning. So the guidance for 2% organic sales growth in fiscal 2017, it still seems pretty muted, given the significant level of investment you put into place in advertising and sampling and R&D in the back half of fiscal 2016. And the plans you just mentioned in place for 2017, particularly given these discontinuations are dissipating, as you also mentioned previously. So I guess why aren't you expecting more of a sales recovery and market share payback? And then separately, are you comfortable that the level of spending, as we leave fiscal 2017, is the right level of spending behind the business longer term? Should we assume we get back to more of that normal EPS growth algorithm post-2017? Thanks.

We are very committed to exceeding market growth. We understand that 2% is not considered market growth. However, as Jon mentioned in his formal remarks, we still have several options to annualize. We made our decision, and it is clear from April, May, and June that we can return to investing in the business at the necessary level. Additionally, we have proven our commitment to supporting our brand for four quarters in the second half of the year. The fourth quarter we increased meaningfully our media investment versus previous year. And we're going to continue that in fiscal 2017. Having said that, we will not stop making key choices where we have businesses that are structurally not profitable. But we think on balance the majority of that choice has been made, and we'll annualize it through this year. So we actually feel very good that the businesses that we have, especially post the close of Coty, that we're very well-positioned to grow sequentially. So I expect the first half to continue to make progress. Second half will be better. And much like we said at CAGNY, you're going to see just continued building of our business strength behind a very clear choice in investing in brand building. And that bias toward point-of-market entry and bringing new consumers on and investing in innovation, both in current brands but also in our P&G Ventures to ensure we're planting the seeds for the mid- and long-term future. And we're going to continue to make the investments in go-to-market capability, including sales coverage, to make sure that we can reach and win in fast-moving channels, be that e-commerce, baby stores, cosmetic stores, or wherever the consumer and shopper want to shop.

Good morning, thanks. So, David, you're clearly in investment mode now, refocused on that top line acceleration, which is great from my perspective. But as Jon laid out, even after the Duracell transaction and with Coty coming to a close here in a couple months, there's still a lot of change afoot. So as you step back and think of what you've observed over the last 3 quarters or so as CEO, what's your confidence at this point that the people of P&G, the culture, the organization, they can truly take on both challenges at once?

Reflecting this, a while back we changed the name of our market development organizations to Selling and Market Operations, a small but very important change. We're changing our talent development and assignment planning to drive more mastery and depth. The objective is simple. Improve business results by getting and keeping the right people in the right places to develop and apply deep category mastery to win.

Now on the guidance points, or your bolt-on questions. As I mentioned, we're targeting 90% free cash flow productivity or better. And the or better lands at about 100%. So somewhere in that range, we'll deliver. And relative to the volume centric nature of sales growth, our current forecast for next year is very similar to the result that we delivered in the fourth quarter in terms of its reliance on volume growth as the primary driver of sales growth.

Thanks. Good morning. I'm going to actually go fairly micro in terms of your portfolio. And I want to talk a little bit about U.S. Fabric Care, because I do find it really interesting, the idea that what you've been able to do in that category in the last couple of years in terms of innovation driving category growth and P&G gaining share sort of as an outcome, as being sort of the gold standard of what you'd like the whole portfolio to look like.

One, Fabric Care is a good example of what happens when we get all the elements working together. And you've seen both the category growth and the share growth associated with it. On the specific comments. We go where the consumer goes and expresses interest and/or frustration. And the athleisure area is an area she has expressed frustration. And so we're trying to address a very specific need some consumers have. And to date that's tested very, very well. And I'm happy to comment on conversations I've had with most of the leading customers. First on China. We see it sequentially improving. We are not done yet with hitting our portfolio right in China. That will take time. There are several categories that we are still losing share. And we're not positioned with the appropriate portfolio in the premium and super premium segments.

Yeah, thanks. Good morning. So, David, Jon, I would love your perspective. You guys have a lot of stuff going on, advertising increases, new incentive structures, delayering the organization, a focus on the go-to-market. If you were to rank the impact that some of these initiatives have had on your top line acceleration this year, I'd be curious on kind of how you think about that.

We, 6 months, 9 months ago, made a choice that we're going to win in China. And then allocated the resources and the capital to ensure that we had the appropriate product innovation coming. It's not yet publicly announced when some of these major innovations are coming. But on both diapers and pants, we're very committed to win. And the growth of the share lost in diapers has been observed. The engagement with consumers to seek out fruitful products is crucial. It's not just innovation, but demonstrating value towards our products will be key in recovering those shares.

Thanks very much for the question. I actually wanted to follow up on that a little bit, about e-commerce broadly. You talked about social media, digital media opportunities. But I mean e-commerce, obviously, the Chinese consumer seems to have skipped a generation as far as how they're behaving with e-commerce. And I think it's one of your major competitors, up to like 13%, 14% of their business in China. I wonder, it seems like a lot of your other categories are susceptible, not just through vehicles like Dollar Shave Club, but through e-commerce broadly.

We see clear opportunities to improve the effectiveness of the spend for us and our retail partners to build the value of our categories and the share of P&G brands. So again we're targeting up to $10 billion of additional savings over the next 5 years. But there are cases where if we would reduce trade spending, shift that money to advertising or sampling, we may be able to increase the rate of growth in a category, again in a way that's beneficial to both our retail partners and ourselves.

Good morning. Thank you very much. I would like to ask a more detailed question about China. You have about five or six major categories. Focusing on diapers, Olay, and Hair Care, could you discuss the anticipated product innovations? Any specific details would be appreciated. It appears that in the diaper market, Japanese brands are lowering their prices, and there's a significant change in purchasing habits. We haven't received much recent information about Olay, and there are still challenges with your largest brands in Hair Care. Your insights would be helpful. Thank you.