Procter & Gamble Company (PG) — Q3 2017 Earnings Call Transcript

Good morning. With three quarters of the fiscal year complete, we remain on track with our going-in plans for the top and bottom lines against a backdrop of difficult market conditions. We're maintaining top line guidance, we're reconfirming bottom line guidance, and we're increasing our outlook for adjusted free cash flow productivity to approximately 95% for the year. In the January to March quarter, organic sales were up 1%. Core earnings per share were up 12%, up 15% excluding foreign exchange. We generated $2.3 billion in adjusted free cash flow. We increased our dividend by 3%, the 61st consecutive annual increase and the 127th consecutive year P&G has paid a dividend, every year since our incorporation in 1890. The quarter did present challenging macro dynamics. As we and other companies indicated at the CAGNY conference in late February, and as you've seen in the track channel data, growth in our categories decelerated significantly in the quarter. The categories we compete in were growing on a value basis at a global average of nearly 3% in the first half of the fiscal year. Growth slowed to below 2% in the third quarter. In the U.S., our largest and most profitable market, categories in which we compete, grew roughly 2% in the first half but were up less than a point in the March quarter. Several factors contributed to this dynamic including delayed tax returns, higher gas prices, bad weather, and what appears to be a drawdown of at-home inventory during the quarter. Developing markets were up about 5% in the first half but slowed to about 4% in the third quarter. India de-monetization continued to impact consumption in that market. In Saudi Arabia, one of our 15 largest markets, a prototypical household has endured a 20% income reduction, while utility prices have doubled and will more than double again by July as government subsidies are reduced. Economic crises in Egypt and Nigeria are dramatically impacting category size, and markets in Russia, Argentina, and Brazil are also contracting. Retail inventory levels, primarily in the U.S., also contracted. Retail inventory reductions had nearly a full point impact on third quarter organic sales growth. In addition to these market dynamics, P&G organic sales growth continues to be impacted by our work to strengthen and streamline product forms and SKUs in our ongoing 10 product categories. This activity created about a half a point drag on organic sales in the quarter. With these challenges as background, we again grew organic sales 1% in the quarter, which was about what we expected when we give our update on the markets at CAGNY and communicated that it would be our weakest quarter of the fiscal year. For the third straight quarter, sales growth continued to be fueled by volume growth. Organic volume grew 1% on the quarter. Pricing and mix were essentially neutral to organic sales growth. Online organic sales were up 30% for the quarter, significantly outpacing offline sales. Online sales now represent 5% of our total business. Moving to the bottom line, core earnings per share were $0.96, up 12% versus the prior year. Foreign exchange created a three point headwind on third quarter earnings growth, so on a constant currency basis, core earnings per share were up 15%. On a year-to-date basis, constant currency core earnings per share growth is up double digits, on track to extend our streak of high single or double-digit constant currency core earnings per share growth to five straight fiscal years. Constant currency core gross margin decreased 20 basis points. Productivity savings of 210 basis points were more than offset by headwinds from mix, commodities, and product reinvestments. Including foreign exchange, core gross margin was down 40 basis points. Core SG&A costs as a percentage of sales decreased 30 basis points. Productivity savings of 50 basis points and benefits from nonrecurring other operating gains were partially offset by investments in advertising, sales, and R&D. Constant currency core operating margin increased 10 basis points. Productivity improvements contributed 260 basis points of operating margin benefit. Including foreign exchange, core operating margin was down 10 basis points versus the prior year. The core effective tax rate was 23.4%. This included several discrete tax reserve adjustments and the impact of share-based compensation transactions. The core effective tax rate has been in the range of 23% to 24% in six of the last seven quarters, and we're now expecting to finish this fiscal year near the middle of this range. All-in GAAP earnings were $0.93 for the quarter including $0.03 per share of non-core restructuring costs. We generated $2.3 billion of adjusted free cash flow, returning $3.8 billion to shareholders, $1.8 billion in dividends and $2 billion in share repurchase. Earlier this month, we increased our dividend 3% as I said earlier. Fiscal 2017 is a year of significant value return to shareholders. We expect to pay dividends of over $7 billion. We reduced outstanding shares by $9.4 billion in the Beauty transaction and we expect to purchase over $5 billion of our stock. In total, about $22 billion of value returned to shareholders. In summary, despite some significant unforeseen challenges and macroeconomic headwinds, from market growth to currencies to commodities, we currently expect to deliver our going-in forecast for the year and are maintaining our organic sales and core earnings per share guidance ranges. We're holding our organic sales growth range of 2% to 3%. After three quarters, we're obviously at the low end of this range. We expect fiscal 2017 all-in sales growth to be down a point to in line with the prior year. This includes a two- to three-point headwind from the combined impacts of foreign exchange and divestitures. We're maintaining our outlook for core earnings per share growth of mid-single digits. As I've said, we continue to deal with an unprecedented amount of geopolitical disruption and uncertainty which is affecting market growth, currencies, and commodities, and we're not immune from these macro dynamics. We're aggressively driving cost savings to mitigate these impacts, but as we said last quarter and at CAGNY, we're protecting investments in the business to maintain and accelerate organic sales growth in a sustainable, market-constructive, and value-accretive way, even if this causes results to ultimately end up below the current core earnings per share guidance range. All-in GAAP earnings per share are forecast to increase by 48% to 50% including the one-time gain from the Beauty transaction that we booked in the second quarter. We continue to make good progress on cash and as a result are raising our expectations for adjusted free cash flow productivity from 90% or better to approximately 95% for the year. Now looking forward, the external challenges we face: slow market growth, geopolitical and economic instability, foreign exchange impacts from a stronger U.S. dollar, rising commodity costs, and retail trade transformation are all very real and aren't likely to improve meaningfully in the near term. With this as a reality, we're putting even more emphasis on several strategic moves: on product and package superiority, executional excellence, cost and cash productivity, and organization design, culture, and accountability. We're meaningfully raising the bar by establishing an even higher standard of excellence, that of irresistible superiority, for our products and packages coupled with superior execution of communication, in-store fundamentals, and consumer value. This is what will be required in the slow growth environment to grow markets and market share. It's what is required to prevent commoditization of our categories and minimize deflationary impacts. It reduces promotion needs and creates strong relevance for retail partners in all classes of trade. To achieve the outcome we desire—category growth, increased household penetration, strong share positions, and winning sales and profit growth in this difficult environment—we must combine a foundation of irresistibly superior product and packaging experiences with superior execution in advertising, sampling, and in-store fundamentals with winning value equations broadly defined. What do we mean by irresistible superiority, and how will we measure it? When a consumer has an irresistibly superior experience with our products and packages, it raises their expectations for performance in the category and makes it hard to go back to what they were using before. To assess irresistible product superiority, we're moving from a single metric: weighted purchase intent, to a body of evidence approach. This provides a holistic and transparent evaluation of the product at the second moment of truth and integrates technical tests, line tests, context-aided tests, household panel data, and in-market product reviews. It adds behavioral data, which is more reliable than the attitudinal data we've historically collected. One element of this, for example, is deprivation testing. In deprivation testing, we ask consumers to score the product they currently use, say out of 100 points. We replace the product they're currently using, typically a competitive product, with the product we're testing and have consumers use it for several weeks. Then we give them back their original product and ask them to score it again. If their score of the original product has not changed appreciably after use of the new product, we've not made a significant difference in expectation or delight and therefore wouldn't rate the new product as irresistibly superior. If they rate their old product significantly lower after use of the new product, we know the new product has elevated the level of performance they expect in the category. Tide PODS and Downy Unstopables scent beads are great examples of products that deliver irresistible superiority. After using PODS and scent beads for a four-week test period, consumers consistently lowered their assessment of their current product by more than 10 points, a meaningful move. Using these products changed consumers' views of what's possible in the Fabric Care category. These products have been on the market for five years and are still driving category growth and growing market share. Our unit dose detergents, Tide PODS, and Gain Flings! have accounted for 90% of laundry detergent category growth. Unit dose products account for about 15% of U.S. category sales with P&G holding nearly an 80% share of the form. We expect this form to continue leading category growth. In 2016, just 16% of U.S. households had tried unit dose detergents. The forecast for 2017 is 23% household penetration, a 40% increase in just one year. We're driving the growth of PODS with increased washing machine sampling. We'll distribute 30 million samples of our best-performing detergents in fiscal 2017, a 75% increase over fiscal 2016. Fabric enhancers are the fastest-growing segment in the overall Fabric Care category, growing 7% to 8%. And scent beads are the fastest-growing form, growing at a 20% rate. P&G's scent bead offerings are growing over 30%, and there's tremendous upside. Scent beads household penetration is only 14%, and beads are currently used in only 4% of laundry loads. We're going to continue driving consumer awareness and trial through advertising campaigns and sampling programs to grow the category and grow our share. Irresistibly superior products are ideally delivered in irresistibly superior packages. Irresistibly superior packaging attracts the consumer at the first moment of truth, provides integrity, and protects the quality of the product and delights consumers during use and in its responsible disposal. Irresistible packaging also creates recognizable brand blocks at shelf, aids the consumer in selecting the best product for their needs, and reinforces the equity of our brands. We're developing a body-of-evidence approach, like we now have with products, to test packaging superiority. Superior products and superior packages drive market growth. They prevent commoditization. Market growth has been an incredibly important part of the journey of our brands. U.S. Fabric Care is a good example. Over the last 40 years, P&G sales have grown five times, or 500%. P&G share has only increased five points. Market growth, driven by P&G, has been the main source of growth. Irresistibly superior product and packaging benefits need to be communicated to consumers with superior brand messaging. Superior brand communication is advertising that makes you think, talk, laugh, cry, smile, act, and of course buy; advertising that drives growth for brands in the categories in which they compete, and is a voice for good by expressing points of view on issues that matter and where the brand matters; advertising that clears the highest bar for creative brilliance, sparking conversations, affecting attitudes, changing behavior, and sometimes even defining popular culture. We're raising the bar in advertising quality with a focus on superior brand performance claims that communicate the brand's benefit superiority to create awareness and trial. We're improving the quality of consumer insights, agency creative talent, and production. We're applying a body-of-evidence assessment to advertising quality. To be assessed as proven effective, our highest bar, a campaign must drive awareness, household penetration, and share growth for at least one full year, and be determined by a panel of objective experts to be effective advertising. Brands currently achieving the standard of quality include Always, Like A Girl; Tide, If It's Got To Be Clean, It's Got To Be Tide; Dawn, A Drop of Dawn and Grease Is Gone; and SK-II, Change Destiny. We're improving media execution, increasing consumer reach by 10 points, and ensuring year-round continuity across top markets. We're increasing point-of-market entry trial coverage by 10 points, or more, on our top brands. We're working to lead the effort on media transparency, eliminating costs in the media supply chain created by poor standards adoption, too many players grading their own homework, too many hidden touches, too many holes where criminals can rip us off, and unsafe places for our brands to have ads. We're letting our spending talk, buying media from those that comply with the new standards we're setting, so that we know our ads are experienced by consumers in the most productive and efficient way. In-store execution is another area where we're raising the bar, redefining excellence to a higher standard. We're determined to make our go-to-market activities a consistent source of competitive advantage to grow categories in our brands. This requires having the right trade coverage with the right product forms, sizes, and price points, and the right in-store shelving and merchandising execution that requires getting the key business drivers right for each category and brand in every store across all channels every day. In Brazil, we've revamped our trade spending programs to reward these specific activities by brand and by channel that are proven to drive sales. On Pampers, for example, it's ensuring we have a full range of sizes available in each store, plus a secondary point of sale. On Gillette, it's ensuring we have the right shelf space, open sales on MACH3, distribution of our three-bladed Prestobarba disposable and Venus razors for women, and increasing the number of distribution points and visibility at checkouts. We're working to make sure our brands stand out in-store. We're demonstrating the value of long-term displays of our leading brands to top retailers. These displays are high-quality and clearly communicate our brand equities and product benefits. They replace in-and-out promotional displays that were often low quality and inefficient, both operationally and financially for P&G and for our retail partners. We're tracking compliance versus category-specific key business drivers in over 7,000 individual stores. When we get it right, category growth accelerates. Our growth accelerates, and we deliver trade spending efficiencies that enable us to reinvest and improve sales coverage to achieve excellence in even more stores. Just as important, we're tracking results against these key measures for our salespeople, ranking and internally publishing these results. The team has embraced this transparency and accountability, and it's driving better performance. We're piloting new approaches and technologies including crowdsourcing, image recognition, and machine learning to obtain granular real-time data on store conditions to optimize our performance and coverage. This ensures we get a transparent, accurate, and unbiased view of in-store execution to hold our own salespeople and our distributors accountable for execution. The last element of superior execution, but certainly not least, is winning consumer and customer value equations. Price is one element of a winning consumer value equation, but what we're really looking at is the superior value of the total proposition. A product that meets a need in a noticeable and irresistibly superior way with a package that's convenient to use, with compelling communication presented in a clear and shoppable way in-store. Margin is one element of the customer value equation, but so is penny profit, trip generation, basket size, and category growth. Where do we stand against these new, higher standards of irresistibly superior product and packaging and superior execution? Where a win on each element is required for a passing grade, we currently earn a passing grade versus this new, much higher benchmark about 30% of the time. Achieving this higher standard of excellence more consistently will require investment in improved product formulations, packaging, sales coverage, advertising sampling, upstream R&D, and consumer and customer value. This need for investment, the external realities we're facing, our historical productivity progress, and future productivity opportunities all inform our plans to save up to another $10 billion this fiscal year through fiscal 2021. We've continued to refine our plans and want to bring them to a more granular level for you today. We've identified $7 billion of saving opportunities in cost of goods sold. This comes on top of the $7.3 billion of cost of goods savings we delivered over the previous five years, exceeding our previous goal of $6 billion. We aim to fully synchronize our supply network and replenishment strategy from our customers to our suppliers, leveraging our supply network transformation in North America and Europe. This holistic transformation will ensure that we have a supply network that will continue to be a demonstrable and sustainable competitive advantage for P&G. This will require continued investment over the next two to three years but provide an attractive payout in ongoing lower costs, lower inventories, better customer service, and lower out-of-stock levels. Within this strategy, the largest opportunity, about $4.5 billion of the $7 billion, is raw packaging materials. These savings will come from strategic supplier partnerships, supplier consolidation, and through an overarching simplification of our SKU lineups and manufacturing platforms. We've established joint business plans with our top suppliers focused on end-to-end supply network synchronization with a goal of reducing product cost year-on-year. To enable integrative thinking, we're co-locating suppliers at our sites with our product supply and R&D professionals to deliver upstream co-innovation that can improve both product performance and drive savings. For example, we already have 55 suppliers co-located at our planning centers, with an objective to expand this further. In the pursuit of consolidating our supplier base, we expect to reduce the number of suppliers by about 20% over the next two years. We have several innovations aimed at delivering better-looking, better-performing, and lower-cost packaging. Better and cheaper—not just cheaper. One example is Air Assist, our fit-to-delight new packaging designed for e-commerce. Air Assist was originally intended to fix the mess that can sometimes result from shipping liquids, like Dawn dishwashing detergent, as single units to consumers. We did much more than fix a distribution problem. Air Assist packaging delivers a significantly better shelf impression, improves consumer in-use experience, and reduces plastic usage by 50%. Better and cheaper packaging that delights consumers and a CFO. We're driving savings in packaging using Imflux, a proprietary injection molding innovation. Imflux enhances existing injection molds and presses and builds new molds that increase throughput up to 100%, resulting in higher-quality injected molded parts, improved speed to market, fewer presses and molds, and significantly lower costs. So that's raw and packaging materials. Manufacturing is our second-largest spend pool, and we're aiming for about $1.5 billion of savings from reduced manufacturing expense. We're on a continuous manufacturing productivity improvement journey. Over the previous five years, we've delivered a cumulative 26% manufacturing productivity improvement defined as the change in headcount per case produced. We've established an objective to deliver an additional 30% improvement over the next five years. Much is driven by five major pillars comprising a renewal of a proprietary manufacturing productivity methodology of integrated work systems or IWS, synchronization of our production to demand signals, leveraging our supply network redesign with multi-category production sites in North America and Europe, and reducing the number of manufacturing platforms from 275 to 150. We're digitizing our manufacturing operations and automating with robotics using, for example, collaborative robots to automate activities like palletizing, and autonomous vehicles to move materials and pallets within our operations. We see an opportunity for an additional $1 billion of savings from transportation, warehousing, and other cost of goods sold. These savings will come from work to improve warehouse productivity by as much as 25%, digitized algorithmic planning that reduces inventory and optimizes vehicle fill rates and rebidding regional transportation lanes based on our optimized manufacturing site and mixing center locations. Our North America mixing centers have driven customer service to an all-time high with on-time deliveries moving from 84% to 94% and the ability to resupply 80% of our sales within 24 hours. We're on track to deliver over $1.5 billion in cost of goods sold savings this fiscal year, ahead of the pace needed to reach the five-year, $7 billion savings goal. We see over $2 billion of savings opportunity in marketing spending with half or more coming from media rates and eliminating media supply chain waste. We're targeting up to $0.5 billion more in savings from reduced agency fees and ad production costs, and we see about $0.5 billion of opportunity in spending for in-store materials, direct-to-consumer programs, and improved efficiency in trial building and sampling programs, all of this while strengthening our overall program, increasing reach, increasing continuity, and improving effectiveness. We're targeting about $1.5 billion of savings in trade spend. This is a $15 billion spend pool, so just a 10% efficiency improvement basically gets us there. These savings will come from improved execution against category and brand key business drivers like the example I shared earlier from Brazil. This will be enabled by new trade spending analytics tools including by SKU gross profit contribution metrics that will be available to each of our salespeople as they manage distribution and merchandising programs with our retail partners. And we'll better optimize investments by category as we implement the end-to-end management model with dedicated sales forces in more large markets. We're estimating we can achieve between $1 billion and $2 billion of additional overhead cost reduction. This will require a particular focus on reducing the cost of activities that are furthest away from consumers or customers and increasing end-to-end business accountability. It will also include further digitization and automation of work processes. So in total, we've identified $12 billion to $13 billion of savings opportunity across all cost elements. We've risk-adjusted this down to up to $10 billion to account for the uncertainty that exists in each piece of this work, especially when projecting out several years. We're making good progress this fiscal year through three quarters. We're averaging 220 basis points of gross margin savings and 50 basis points of savings in SG&A. Just as a reminder, where there's much still to do, we start in a fairly good place. We have the second-highest after-tax profit margin in the industry. Only Reckitt is higher, largely due to category mix. We've improved core gross margin by about two points over the last three years. What matters more than aggregate margin is the competitive comparison for each category. As we compare P&G versus competitors on a weighted average basis, we're in line or ahead in nine out of 10 categories. P&G's category gross margins are higher than competition by an average of about five points and up to as many as 14 points. We hold similar advantages in overhead. When we compare P&G's SG&A overhead costs to a competitive average weighted by P&G's business mix by sector, our costs are more than 100 basis points lower. Over the last four years, we've reduced P&G's overhead costs as a percentage of sales by 50 basis points. This has allowed us to grow our aggregate 22% top quintile operating margin by more than two points over the last three fiscal years despite three points of cumulative FX headwind over that same time. We have further advantages in below the line costs; we borrow at some of the most favorable rates in the industry, and we have a tax rate that is among the lowest in the industry. While we're currently competitive, we have significant opportunity ahead of us. Over the next five years, with the plans I just outlined, we'll make further advances in our cost and margin structure. In addition to establishing a new standard of excellence for product performance and packaging and commercial execution, and continuing to drive significant cost savings, we're further strengthening our organization, design, culture, and accountability; deeper mastery, closer to consumers and customers, more agile, more accountable, more efficient, and more effective. We're changing talent development and career planning to drive more mastery and depth in each of our product categories. 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. P&G is fortunate to consistently source and develop very strong talent, but we recognize that there are times when the best talent for a role may not be inside our organization. Going forward, we will supplement internal development with hiring from the outside to add the skill and experience needed to win and field the best team possible. This fits with the broad theme of connecting with external sources of value and ideas. Innovation, connect and develop external advisory boards and partners, technical experts, agency creatives. External hiring has roughly quadrupled across five different levels of management, including senior line management. And last week, a new president-level Chief Information Officer to help our very important digital efforts. We've invested in selling resources and category dedication. In the U.S. over the last two years, we've added approximately 140 salespeople, including experienced external hires, and now have over 90% of our sales covered by dedicated, category-dedicated, profit-aligned category experts. In large markets like the U.S. and China, we're moving to an end-to-end ownership and accountability approach. This approach focuses on category specialization in the markets. We previously focused too much on scale by managing the sales force for a country across all categories, limiting the ability to focus on the unique needs of each category. We're moving to a model where the decision-making authority for the number of salespeople serving a category in a particular country and which channels those salespeople cover is the responsibility of the regional category leader. Category is a point of competition. It's the point at which consumers engage with our brands. Category leaders can choose to add sales resources in a given market and channel and they have the responsibility to pay for them since they're the P&L owners for that business. There's no one-size-fits-all approach. The goal is to drive fast and agile decision-making with each category leader focused on what it takes to win in their business through the lens of consumers, shoppers, and retail partners. We first implemented this end-to-end approach, giving category leaders responsibility from the front end of innovation all the way through to the store in the United States last fiscal year. We brought four more markets into the model this fiscal year, and we plan to add five more markets next year. In total, these markets currently generate over 70% of company sales. In smaller countries where we don't have the scale to organize in a dedicated end-to-end model, we're implementing a new freedom within a framework approach. The objective is to enable these smaller markets to be faster and more agile, within a framework, to be accountable to execute and achieve financial goals. Regional leadership will establish a strategy, product plan, and top and bottom line objectives. As long as the market is executing within the predefined strategies and are delivering the financial target set by the region, they have the freedom, within pre-established executional boundaries, to make real-time changes, adjusting pricing, marketing levels, and in-store merchandising programs as the situation on the ground dictates without the need for engagement with regional resources. In the markets where we've tested this approach, it's enabled us to cut the number of internal review meetings in half, reduce the number of people participating in meetings, and it's importantly enhanced agility in market responsiveness. We're expanding this freedom within a framework approach globally starting July 1. We're aligning incentives at a lower level of granularity to better match responsibilities and to increase accountability. Salespeople in some of our largest markets who are now dedicated to selling one product category now have the majority of their incentive comp tied to the performance of that category versus what was previously a region average across all categories. Category leaders for a region now have their incentive comp tied to the performance of their category in their region versus a global average for that category. Bottom line, we're committed to getting, keeping, and growing the right people in the right places, dedicated to categories to drive better business results. We're putting more granular incentives in place to match the increased end-to-end responsibility we're giving leaders. We believe that by continuing to strengthen the plays I've just talked about, irresistible product and packaging superiority coupled with superior commercial execution, strong cost savings, and continued strengthening of our organization, design, culture, and accountability, we will be able to further accelerate our progress even in the challenging market conditions we face. So to wrap up our comments this morning, we're striving to achieve a higher level of excellence in all areas that support the growth of our categories and brands. We're hopeful this work, enabled by strong cost savings and improvements to our organization, design, culture, and accountability will get us back to the levels of balanced growth that delivers our shareowner value-creation objectives. Also, in summary, as I mentioned earlier, for this fiscal year, we're maintaining organic sales and core earnings per share guidance despite the unforeseen and significant setbacks from FX and slowing market growth. We're just now starting our detailed forecasting for next fiscal year. We won't be sharing specific guidance for fiscal 2018 until our next earnings call currently planned for August 2, but our intent is clearly to deliver another year of sequential improvement on both the top and bottom lines. With that, I'd be happy to take your questions.

Morning. Thanks. Your commentary around sort of irresistibly superior products was quite helpful, but it seemed to be targeted mostly at assessing existing products. I didn't really hear much about innovation, and more importantly, given the slowdown, particularly in emerging markets, what you can do to make products perhaps more affordable to consumers? And is there any thought on making even more meaningful changes in terms of either product formulations, or pack-out sizes to bring the cash outlay for those consumers down? And then, in terms of this new focus area, does that mean that overall spending against sales needs to go higher, and maybe there's sufficient offsets in other buckets so that in aggregate, the margins are relatively unchanged? Thanks.

That's a lot of questions, Olivia. I'll try here. First of all, innovation is the antidote to slow market growth, and so it is definitely something that we continue to focus on and invest in, and we want that to be guided by this notion of irresistibly superior products and packages because we know that when we do that, we can affect the rate of market growth. I gave you the examples earlier of PODS and Downy Unstopables, which clearly do that, and that market growth is so important, as I described, explained in the U.S. laundry example. It historically has accounted for the majority of the company's growth. So we are very focused on maintaining our innovation leadership. If you look at the most recent IRI Pacesetters report, we had five out of the top innovations as measured by revenue in the last year, and that's a focus that will not go away. In terms of affordability, that's important, very important. There are multiple dimensions to that, including package size. I mentioned part of superior execution is ensuring we have the right package sizes in the right stores and channels, but one of the main endpoints there is affordability for consumers. Affordability, though, also is affected by efficacy and how well a product meets the need for which a consumer purchases that product. And that has to continue to be a significant part of our focus as well. Generally, we found when we can create superior value, holistically defined, so combination of the experience, how well the product meets my need, the price of the product, how easy it is to find and use, that price isn't a barrier. That doesn't mean that we don't need to be sharp on our price points. We do, and you've seen us take several moves over the last year to get sharper on price points, but we're going to continue to be driven primarily by the concept of value and value superiority. You asked about spending on sales. We've talked for a couple years now of that being one of the reinvestments that we want to make, and there are two or three elements to that reinvestment. One is ensuring we have sufficient coverage across an increasing number of channels and formats. The second, and very, very important, is ensuring that we have, where it's economically possible, dedicated sales resources with experience and mastery in a category, serving a category on an end-to-end basis aligned with the profit owner of that category. And then the third is the capability to allow us to really step up our in-store execution. As I mentioned, both execution in-store but also the monitoring of that execution on a real-time basis to ensure that we get it right as frequently as possible. So hopefully that gets at the gist of your question.

Hey, good morning.

Morning, Dara.

So Jon, you mentioned a few strategic moves or changes today that you highlighted on the call in light of the current difficult environment and I had two questions from that. A, what's the motivation behind all these tweaks? Is it just that the external environment is difficult and you're being responsive to that? And then B, the broader, more strategic question would be, obviously you've made some very significant strategy changes in the last few years from the productivity you discussed in more detail today to paring the portfolio, et cetera, et cetera. You also mentioned a few additional tweaks or areas of emphasis today. So I'm wondering from a forward perspective as we look out, are there other more sizable or really large strategy changes potentially ahead? Or is now it just more a matter of executing on the previously announced changes and tweaks mentioned today as you manage through that difficult external environment? Thanks.

Thanks, Dara. Your question on motivation for change is, simply put, winning. Clearly, the current environment makes that an even bigger challenge so that also informs the choices here, but the motivation is, very simply put, winning. We view the changes that we've talked about today, some of which, for instance, productivity we've talked about before, but we've tried to give you a better sense of the kinds of things we're going after to give you more confidence that that is something that's well within our capability to deliver. But these other things we're talking about, while relatively simple conceptually, are significant interventions. They're not significant interventions in that they disrupt organizations, but they're very significant in improving our execution, the delight that a consumer experiences with our product and package. We just have to get even better at that more consistently across markets, across categories, across brands. And again, as I've mentioned, when we do that successfully, all of our history tells us that we can affect the market growth rate as opposed to become a victim of that market growth rate. And you can see it very clearly across the portfolio where we have achieved this much new higher standard. It's working exactly as I described in most cases, and generally where we haven't, it's not. We're just in a very tough environment, and parity doesn't cut it in that environment. As Olivia mentioned, certainly parity at a higher price doesn't cut it. In terms of what's around the corner, what we're talking about here today is significant, both in terms of the investment, the effort, but more importantly, the result that we think it'll have on the business.

Thanks. Good morning, Jon.

Morning.

A question for you on Grooming, which was obviously soft in the quarter, down 6%. I was hoping you could talk – I have a handful of questions here, Jon. The negative price and unfavorable mix in the quarter, maybe you could discuss that a bit. Also Jon, the growth differential between the U.S. and international because more recently the company has been able to deliver some growth in that business despite the challenges or the much-discussed challenges in the U.S., that would be helpful. And then two others and if you don't have this, I can follow up with Mr. Chevalier. With respect to Shave Clubs, are you still seeing penetration rates slow in the U.S.? Some of the more recent commentary suggested that. And then lastly, with some of the price cuts that you announced in the U.S. at the mid and lower end of the portfolio, is it your expectation you'll be able to offset that, or should we expect to see some margin erosion in that business? Thank you, and sorry for so many questions.

No, good questions, Kevin. Thank you. In terms of the mix dynamic within that segment, that is largely geographic mix which gets to your second question. The sales outside of the U.S. were basically flat for the quarter, and I'll come back to that, so all the reduction is being driven by the U.S., and as you know, those are our most profitable cases and higher price cases. So that's simply what's going on there. In terms of the non-U.S. markets, and your point about them historically offering us growth is exactly accurate. Really what's happening is that we're annualizing a significant launch on the ProShield product in Europe, so Europe was down 5% with that in the base, but that's largely a base period dynamic. The way I would view Grooming broadly is pretty solid outside the U.S. Very strong progress on the female side of the business with Venus. We have a U.S. dynamic that's driven both by societal trends and by increased competition, which we're addressing very explicitly as you know. That's something that did not affect the results in the quarter, so that's still to come. But even before that, we're seeing, to your question on the Shave Club and other competitive dynamics, if you look at U.S. shave care volume shares, over the past 12 months, we're down 3.6 points. Over the past three months, we're down 0.8 points. For the past month, we're up 0.7 points. And so part of that is annualizing a difficult period. I readily acknowledge that. But there's underlying progress that we're starting to see in terms of the share from a volume basis, and again, that's before the price reductions and the other interventions hit the marketplace. So again, very simply, it's appropriately an area of focus—good business outside the U.S. Venus is going gangbusters. We've got a U.S. issue which we put plans in the market that have not yet taken place fully to address that.

Thanks. Good morning. First, Jon, I may have just misheard that, but did you say that non-U.S. sales were flat in the quarter? So then I'm guessing that means U.S. would've been up like two-ish? If you could just break those two out, that would be great for the first point.

So sorry, Lauren. I was talking about Grooming. Yeah, so from a U.S. standpoint, total company sales were down one point, and so the balance was up two to three points. Especially in developed markets. Developed markets are flat; developing markets were up three points in the quarter.

Okay. Thank you. So just with that in context, a lot of interesting and really important commentary on the call, but we haven't talked a lot about the quarter itself. So share progress, right, share and approaching market growth rates and so on was something that you guys had talked about as being very important to gauging success for 2017. So can you talk about progress in that regard, I guess in the U.S. and China, kind of two biggest markets, and then in the four big categories you've highlighted as being critical to success in gauging where things stand? Thanks.

So overall share is still a small decrease, about 0.3 points over the past three months. If you split that across developed and developing, we're largely holding share in developed. We're flat versus year ago over the past three-month period. Most of the decline is in developing where we're down 0.6 share points. The majority of that is in China as we've talked, and is primarily driven by the Baby category where we've lost significant share because we don't have a competitive product, much less an irresistibly superior product in the premium, taped segment of the market. We have an entry that we're very excited about that will launch in August in that segment in China that's being sold into the trade currently. The testing on that product against some of the metrics that I described earlier is very encouraging so we're hopeful to be able to address that. The other major area of share loss we've already talked about this morning which is U.S. Grooming. So there's a market dynamic, and there's a share dynamic. And again, we've talked there about the steps we've taken to address that. Now sorry for mixing questions here, but getting back a little bit to Kevin's question as well, that is going to have a negative impact on top line growth in our margins in the near term, but it should improve our volume share position and allow us to both increase consumption, or at least remove a barrier for consumption, and be more competitive, allowing us to restart the cycle of growth on both the top and bottom lines. If you look at top-50 category country combinations as another measure of share progress, we held or improved our share position in 36 out of those 50 markets, so we continue to make progress, but we're not yet where we want to be.

All right. Thank you. Good morning. Jon, I sort of have a follow-on question on your endeavor to strive for irresistible superiority as it relates to your retail partners. While a very noble strategy on your part, I guess does such a premiumization strategy work in an environment where retailers are primarily looking to lower prices and increase value as a means of driving foot traffic? I guess I'm curious if you've been getting any pushback from your retail partners just because it sounds a little counter to what they might be looking for.

Thank you, Bonnie. First, an important point. Irresistibly superior does not connote more expensive. It may in some cases. In other cases, it may not. And remember, we talked about superior execution as well, part of which is superior value equation holistically defined. If you talk about the retail universe broadly defined, what's driving most of their behavior is a search for their own organic growth, and foot traffic is an important part of that growth. Frankly, irresistibly superior offerings drive that traffic, and our retail partners look for us to play that role in their portfolios. It drives typically market basket, which is also something that's very important to them. So you're absolutely right to refer to the transforming retail trade landscape as something that we need to manage with, and frankly, I think there's no better tool available to us than exactly what we described.

Hi. A couple follow-ups. Number one, you talked about packaging as being sort of a new area of emphasis or focus, whatnot. That surprises me a little bit because some of your competitors have talked about packaging maybe being less important going forward, particularly as consumers shop more and more online so how the product looks on shelves is less important. So I'd love your take on that and whether you're contemplating different packaging for products depending on which channel they're sold in.

That's a very interesting question. First, let me just comment on the progress on e-commerce. I mentioned earlier, organic sales grew 30% online in the quarter. It's now 5% of our business, maybe it's about a $3 billion business. It's primarily focused, but not exclusively, in the U.S., China, and in Northeast Asia, particularly Korea. China is about a $1 billion business online currently. I would expect that will be 20% to even as high as 30% of our business within the next 12 to 18 months, so that's moving very quickly. Korea, it's 40% of the business today. The U.S. development in e-commerce is very different by category, with some of the bulkier and heavier products appealing to people online, so they're not having to fill up their shopping carts with those items, baby diapers, as an example, but also items were more specialized attention. Skin care, for example, is seen as a benefit. In terms of the broad statement on preference for development of this channel versus other channels, we want to be in a position to be agnostic. We want to serve consumers in a superior and delightful way wherever they choose to shop. There has been a lot of talk though about kind of the other side of your question, which is what happens to big brands, businesses like P&G in an e-commerce context, and is that good or bad? And we actually believe that it's good, that we can be very effective in an e-commerce world, and our market shares currently bear that out. Our online shares, on an aggregate basis globally, about equal to our offline shares, and as I said, the growth rates, not just from a growth standpoint but also from a share growth standpoint, are currently higher online than they are offline. There are two kind of discussions that occur relative to the online environment, and people who prognosticate the demise of big brands in that environment refer to lower barriers to entry, and they refer to what I'll call the land of endless assortment. And clearly, there are lower barriers to entry, which is a threat to our business but is also something we can benefit from if we're proactive about it just as well as anybody else can. From an assortment standpoint, if you actually look at shopping behavior, a typical shopper exposes themselves to a lower, smaller assortment online than they do offline. When they go to the store, they're exposed to whatever's there. Very few shoppers click through to the third or fourth page of a search, and what typically shows up on the first page of a search are the more popular offerings, the larger offerings. And then there are tools, whether it's subscription or other tools that allow us to increase the loyalty of those consumers to our brands. So there are many aspects of that environment, sorry for being so long-winded, that we see as real advantages and that we can exploit. But we also like our odds in brick-and-mortar environments, which continue to comprise 95% of purchases of our products.

Thanks, and morning, everybody. Wanted to ask a different way on the Beauty question. So I guess given relaunches of certain hair care brands, certain SKUs of Olay, are you pleased with the performance, so far, I guess especially if you back out continued strong growth of SK-II? And what else do you need to do to really reinvigorate the business? Because even inclusive of SK-II, it would seem that the results are a bit below category growth. And then just one housekeeping question. What is the new breakout in COGS for product reinvestments? What is that? How should we think about that on a go-forward basis just given I think that was new this press release?

Beauty care has been continually improving. I think this is our sixth quarter in a row of organic sales growth. We have some very strong brands within that. Certainly, SK-II is one of them. Head & Shoulders is another one. Pantene, on a global basis, has been doing very well. Some of our personal care businesses have been doing well. So I don't want to give you the impression that it's—we're very happy with the progress on SK-II, but it's not carrying the show in its entirety. We still have opportunities in Beauty, as well, in the hair care line, some of the smaller brands. We just relaunched and re-staged Herbal Essence which is doing extremely well. That grew 6% in the quarter versus a year ago. But we still have work to do on Aussie and Rejoice as an example and within skin care, we're still making progress on Olay. But six quarters of growth we'll take, and we have very strong plans going forward. So overall, we've made progress and we remain committed to going after the opportunities in these spaces to drive growth. Thank you for your questions.