P&G Q3 Earnings Conference Call: Full Transcript

Operator:

Good morning and welcome to Procter Gamble’s quarter end conference call. P&G would like to remind you that today’s discussion will include a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections.

Also, as required by Regulation G, Procter & Gamble needs to make you aware that during the discussion the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with valuable information on the underlying growth trends of the business and has posted on its website, www.PG.com, a full reconciliation of non-GAAP and other financial measures.

Now I will turn the call over to P&G’s Chief Financial Officer, Jon Moeller.

 

Jon R. Moeller:Chief Financial Officer:

Thanks and good morning. As David Taylor said in the press release we issued earlier this morning, we continue to make progress on the transformation we are making to return P&G’s results to a balance of strong top-line growth, bottom-line growth and cash generation. We achieved a significant milestone this quarter and the transformation of the product portfolio with the axis of the batteries business. We delivered another strong quarter of productivity improvement and costs savings and we increase investments and innovation, advertising and selling capacity to enhance our long-term prospects for faster sustainable top-line growth and value creation.

We do continue to operate in a challenging and volatile macro environment. Market growth rates on both a volume and value basis have decelerated due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 3% to 4% globally. There are more flashpoints across the globe than at any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets; Russia, the Ukraine, Egypt, Saudi Arabia and the balance of the Middle East, Turkey, Nigeria, Argentina, Venezuela and Brazil.

We generate more than 10% of our annual sales and profit in these markets.

Currencies have weakened across the board since the start of our fiscal year. While the dollar has softened a bit recently we still faced up to a $1 billion after tax net earnings impact versus year ago a $200 million increase since just a start of December.


Across four years FX has reduced those earnings by about $4 billion after-tax nearly 40% of the fiscal year 2012 net earnings. Against this backdrop we remained focused on large opportunities in our control executing one of the largest transformation in our company’s history. Step changing costs and cash productivity, transforming our portfolio, strengthening our organization and culture and reaccelerating top-line growth with strengthen category business models and innovation plans and we’re appropriate improve value equations. This transformation aimed at delivering balanced top and bottom-line growth and leadership value creation.

I am going to talk briefly about each of the transformation steps productivity, portfolio, organization and top-line reacceleration before getting into the details of the quarter. We continue to dramatically improve cost and cash productivity with significant upside still ahead. Our original five-year cost of goods savings target was $6 billion. We expect to deliver over $7 billion by the end of this year, $1 billion or more above our initial target.

We’ve reduced manufacturing enrollment by 15% over the last three years. This includes new staffing necessary to support capacity addition. On a same site basis, manufacturing enrollment is down nearly 20%. We’re targeting 25% to 30% cumulative reduction by the end of fiscal 2017.

In February 2012, we announced we will reduce non-manufacturing overhead by 10% over five years. As of March 31st, we’ve reduced these roles by 24%, almost 2.5 times the original target. We expect to meet our latest target of 25% to 30% by the end of this year, one year ahead of schedule. Including divestitures we will reduce non-manufacturing roles by over 35% by the end of fiscal 2017.

We will reducing non-working marketing expenditures cost that do not impact reach frequency or continuity of our advertising and trial generation programs. We were spending $2 billion per year on agency fees. Last year we reduced the roughly 6,000 agencies we work with by nearly 40% and cut agency and production spending by about $370 million.

We’re aiming for an additional $200 million of agency related savings this year reinvesting those savings in advertising and sampling of consumer preferred products. Net of reinvestments and innovation, selling, media and sampling productivity has enabled us to deliver constant currency gross and operating profit margin improvement in each of the last three fiscal years, driving double-digit constant currency core earnings per share growth in each of those years.

We’re on track to improve gross and operating margins by triple digits industries both including and excluding currency impacts again this fiscal year. We’re driving productivity up and down the income statements and across the balance sheet. Inventory days are down. Payables days are up.

Balance sheet productivity has enabled us to extend a long track record of very strong adjusted free cash flow productivity. 102% last fiscal year, 101% in Q1, 117% in Q2, and 105% in the quarter we just completed, even as we spend capital to transform our supply chain.

We continue to maintain our position as one of the strongest cash generators among competitive peers and comparable mega-cap companies. We’re among the top companies in returning cash to shareholders (audio issues) over the past decade we have returned more than $118 billion in cash to shareholders through a combinations of dividends and share repurchase.

We said four years ago that we needed to make cost and cash productivity part of our culture as interval to our cultural as innovation. We’ve made significant progress and we have significant opportunities. Our strong track record and our line of site to additional opportunity both in former intent the save as much as another $10 billion in costs over the next five years. Our supply chain transformation is in its early stages first in North America and Europe, then in Latin America and in India, Middle East and Africa.

We are in an investment mode down was savings to start in 3 to 4 years. Our newly mixing centers are up and running putting roughly 80% of volume within 24 hours of stores shelves. We are constructing multi-category manufacturing sites in geographically strategic locations to replace smaller single category sites and less cost effective locations. We are upgrade in a standardizing manufacturing platforms to lower cost and facilitate faster innovation.

We are employing smart automation and digitization to improve manufacturing productivity, raw material --product logistics and demand planning. We have additional opportunities to optimize working capital and further increased the efficacy of our capital spend.

After two strong years of savings, will in next skill spending $1.5 billion in A to C marketing cost still more going to improve. We will continue to look proficiency than working media with better advertising targeting and earn media campaigns with engaging contents. As we fully operationalize the new focused 10 category company there will undoubtedly the additional opportunities to increase organization efficacy, and speed of decision making. Digitization will continue to enable smart productivity choices.

Finally we will be working to improve the effectiveness and efficacy of our promotions pending. We currently expand the body $18 billion in deductions between gross and net sales. We see clear opportunities to improve the effectiveness of the spend for both us and our retail partners and to improve its efficiency. They were targeting up to $10 billion of additional savings over the next five years.

We expect to reinvest the significant amount of the savings in R&D and product and packaging improvements, sales capacity and in brand awareness and trial building programs to deliver balanced top and bottom line growth and to create value for share owners. In addition to transforming our cost structure, we’re transforming our portfolio. Over the past 18 months, we have divested, discontinued or consolidated 55 brands including the completion of the Duracell transaction at the end of February.

We have 50 more brands in the exit process, including the 41 Beauty brands in the transaction with Coty. The S4 registration statement for the beauty transaction was filed last week we are on track to close the deal in the second half of the calendar year. In total we exit a 105 brands in all the complexity they create. These brands represent only about 6% of fiscal 2013 process.

Going forward we are anchoring our portfolio on 10 category based business units and about 65 brands. These are category for P&G has leading market positions and where product technology is for better performance differences that matters to consumers. These 10 businesses have historically grown faster with higher margins in the balance of the Company. Within these core businesses we are focusing our offerings, making smart choices for short, mid, and long term value creation.

For going bad businesses even when these choice is create near term top-line pressure.

In Mexico for example we made a choice to discontinue low tier, unprofitable, and commoditizing total paper products. In favor a very profitable, high tier differentiate a products. Sales were down 75% but before tax margins have improved by more than 50 basis points. From very negative to nicely positive.

It will take a few more quarters for the top-line drive to dissipate and we will have a solely value accretive business going forward.

In India, we have made a choice to deprioritize 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 would grow strongly. A strategic portion of our India business is growing at a high single digit pace. Sales on the portion were fixing or exiting have been down more than 30%. This top-line pain is worth it, we’re making significant progress and improving local profit margins up about 700 basis points.

We’ve gone from loosing significant money in India to triple digit profits in just two years. We’re taking a similar approach in our Fabric Care product portfolio, discontinuing product forms, adhesives, bars, leaches and tablets and value to a detergents that have been drag unprofitability and value creation. These choices are causing a top-line drag of nearly a point on the global Fabric care business but profitability in the long term attractiveness of the business improves.

Combine these choices are causing about a one point drag on organic sales growth. We expect this headwind to continue for the balance of calendar year and then dissipate as we annualize more of the impacts. As we come out of this, we’ll have stronger top-line growth that is worth something on the bottom-line. We’re transforming our organization and culture, we’re making many changes that by themselves may seem small and obvious but together are significant and important.

As an example we have made several important changes and how we go to market.

We eliminated overlapping resources and duplicative structures and responsibilities of marketing and sales professionals, in the global business units and market development organizations. Clarifying responsibilities and strengthening accountability. Reflecting this we changed the name to the market and organizations to selling and market operations, small but very important.

We’re increasing stock, we’re increasingly stock and leadership roles in the selling and marketing operations with leaders who have significant selling experience. 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 winning. Consistent with this we are dedicating sales resources to categories or sectors.

In our larger market sales resources have greater accountability back to the categories they serve which is a change. We’re aligning incentives at a lower and more specific level of granularity, to better match these responsibilities and to increase accountability.

Another example of the evolution of our thinking on the organization is what David talk about is CAGNY. He said the P&G is fortunate to consistently source and developed strong talent and that we intent to maintain our development from worth in approach. But there are times when the best talent for a role may not be inside our organization. Going forward we’re going to look at outside hiring more often than often when we needed to fill the best team possible.

The bottom-line is that we’re committed to getting keeping and growing the right talent in the right place to better drive business results. Again each of these changes maintain small and rather obvious but collectively they are big and important changes for our organization and culture a very important area of transformation is reacceleration of top-line growth. We expect to make progress and all-time product categories but we’re putting specific emphasis against the four largest categories baby care, fabric care, hair care, and grooming and the two largest market the US and China. These four categories represent over 60% of sales and profit.

These two countries representing 50% of sales and more than 50% of profit.

We’re growing our fabric care business with consumer preferred brands and product offerings like our premium performance and premium and price unit dosed detergents and our market leading and market expanding scent bead fabric enhancers. We’re existing slower volume lower price more commoditized product forms which more difficult to distinguish our product and create value. Fabric care results in US demonstrates what’s possible when we deliver superior value with best in class performance at a modest price premium. The US laundry detergent market is continuing to grow behind these efforts with the category up more than 4 point on a value basis over the last three, six and nine month periods.

The same is super fabric enhancers-- by the rapid growth of scent bead the US fabric enhancers category is growing up more than 6 points on a value basis over the last three, six and nine month periods. Our share has growing. P$G’s laundry detergent and fabric enhancer value shares were each up nearly a point in the March quarter.

We will continue to be the innovation leader in fabric care. In North America we are introducing the new regiments on Tide and Downy that addresses the odor problems common to athletic wear. 70% of consumers wear athletic gear multiple times each week. The Odor Defense collection anchored by innovation on Tide PODS brings the proprietary formula of enzymes and surfactants that break down and remove stubborn soils and residues for a great clean and fresh scent.

Paired with the added cleaning power of Tide Odor Defense Rescue laundry booster and Downy fresh protect order defense beads, this regimen promises to eliminate odors from the fast-growing market of ath-leisure clothes people are wearing far beyond the gym.

Next month we start our learning market on Tide pure clean liquid detergents in the US. Naturals is a large and growing segment in several categories but Naturals are only about 3% of the laundry category. Unlocking growth in Naturals is about solving in detention between green and clean. People want performance and sustainability.

Pure clean provides the cleaning power of Tide with 65% bio based ingredients and is produced with the 100% renewable wind power electricity and the facility operating with zero manufacturing ways to land. We are launching better performing and more profitable new compact liquid detergents in Russia, Turkey, Mexico, Brazil and China. In Russia and Turkey where we launched superior compact liquid detergents early last calendar year P&G share of liquid detergents are up 7 points and 14 points respectively. We have increased sampling and new washing machines a key point of category entry and change for consumers.

Last fiscal year we distributed 5 million samples in washing machines globally. This fiscal year we will distribute about 17 million. In calendar year 2016 we will distribute 30 million samples of our best performing products. In US Baby Care strong innovation, consumer communication, trial programs, and a robust online presence of led the strong growth for Pampers.

Pampers value share of US diapers was up more than a 0.5 last fiscal year and was up a point in the March quarter. Pampers latest Swaddlers and Cruisers innovation extra absorb channels was off to a good start in the new calendar year with Swaddlers and Cruisers share up more than a point in the last quarter.

We strengthen investments and brand awareness and trial at the point of market entry. 70% of new Mom’s in the US will receive samples of our best products to our prenatal baby shower and hospital programs. Last fiscal year marked the seventh consecutive year of sales and value share growth for the lowest brand in the US. Carbon results have been down so far this year following its significant price reduction taken by our primary competitor.

We are taking steps to improve the awareness, trial and consumer value of loads. We are increasing equity building advertising strengthening in-store programs and have product and packaging improvements later for launch next quarter. Baby Care results have been softer in other markets. To address this we have strengthened our value proposition in several markets and accelerated premium innovation on both pepped and Poland diapers to restore competitiveness at the top end of the market.

We are strengthening our sell-in resources and programs for Baby stores and we are improving our point of market entry programs to deliver higher awareness in trial of Pampers among new Mom’s.

In Hair Care we launched our new conditioner innovation on Pantene in the US last quarter. Pantene is new breakthrough conditioner technology delivers weightless conditioning. Addressing the most significant consumer trail barrier in the category. The new conditioner innovation is a consumer blind test winner versus our best competition in North America, China and Japan.

We continue to strongly support Head & Shoulders one of our studious and strongest growing brands delivering over 8% compound average sales growth over the past ten years even with significant currency impacts. Organic sales for Pantene and Head & Shoulders were each up high single digits in the US in the March quarter. The -- has delivered steady growth in international market so far this fiscal year behind strong innovation, advertising and sampling programs. To at its holding and growing value shares in each regions outside the US.

The growth in the international markets has been offset by soft results in the US to improve our growth and the growth of the market we are investing in innovation, new user trail, and improve consumer value. For expanding our performance advantage at the top end of the market our most recent cartridge innovation Gillette Fusion ProShield launched last quarter. ProShield with lubrication before and after the blades shields against irritation during every shave. The early consumption results in the US have been tracking ahead of plan.

We are supporting the broader range of our product ladder from our best product Fusion FlexBall ProShield, to MACH3 to premium-priced and superior performance disposables with strong consumer value communication.

We are facing more aggressive competition at lower price points and we will respond to ensure our brands remains a superior consumer value. We stepped up new trail activities in the US with our 18th birthday sampling program. We put Fusion -- flexible razors in the hands of nearly 80% of young men over 2 million samples last year of 33% increase over the prior year level. We have now begun sampling the FlexBall razor handle and ProShield cartridges a very best combinations of shaving technologies.

We are not standing still in the other categories. We delivered solid organic sales growth in the U.S. This quarter in the feminine care, family care and home care categories all big and profitable businesses for us. P&G continuous to be the innovation leader in our U.S. categories.

In the IOI innovation pace status report just published P&G had 4 of the top 10 innovations and six for the top 13.

Top innovations recognize for 2015 sales were type simply cleaning fresh all is discreet, Fusion pro like FlexBall, for Greece unstoppable and types of ultra stand release. Overall in the U.S. organic sales were up 2% in line with underline market growth of our categories. Organic volume was up 3% for the quarter.

We are making progress in China but there are still more work to do. We narrowed sales declines by half this quarter and expect to improve again in next quarter.

We recently upgraded our pampers premium diaper pants to improve fit and softness and we have new innovation coming soon on mid two pants and premium tape diapers. Oral-B super premium toothpaste launched in over 700 stores last quarter reaching roughly a 5% share in those outlets. We’ve tripled distribution on this side in this quarter. The Riyal is growing in China following the concentrated liquid detergent launch in January.

To add Fusion FlexBall has driven male razor system share growth over the past three six and twelve months periods and SK2 continuous to deliver very strong growth for sales for the quarter up nearly 20%.

So some bright spots are emerging but it will take time to get fully back to target growth rates. We are realistic that improvements in top-line growth won’t happen overnight and they won’t happen in the straight line but they will continue to improve overtime.

Let me move now to the quarter we have just completed and to the outlook for the fiscal year. Organic sales were up 1% for the quarter versus the prior year, the impact from the portfolio efforts I discussed earlier was about a 1 point drag on organic sales growth. All-in sales were down 7% including the 5 point headwind from foreign exchange 3 points from the combination of Venezuela deconsolidation and might brand divestitures.

Core earnings per share were $0.86 down 3% versus the prior year, core gross margin increased 270 basis points, core Operating margin increased 300 basis points.

This quarters core earnings per share results included a net FX headwind of approximately $90 million after tax or $0.03 per share comprised with the negative spot rate impact of about $230 million which is partially offset by $140 million balance sheet revaluation impact in the base period that do not recur this year.

Venezuela continues to be a difficult market and was also a drag on March quarter’s results. At the beginning of the fiscal of year we announced our decision to deconsolidated our Venezuelan operations no longer reporting sales a profit from products locally manufactured and sold in Venezuela. We continue to recognize sales and profit and product sold two our Venezuela subsidiaries from the non Venezuelan P&G entities. We highlighted a CAGNY that a disruption in our Venezuela and subsidiaries ability to access dollars to pay for these imports for finished products could have a negative impact on our top and bottom-line results.

We’ve been unable to access US dollars at any size since November and as a result reported no sales profit for Venezuela in a March quarter. This cause a 20 basis points organic sales growth reduction in the quarter on the bottom-line the total impact of Venezuela was $0.05 per share or 6% in terms of core EPS. Assuming these financing constrains continue the bottom-line impact on the year will be up to $0.10 per share or minus 3%.

The core effective tax rate for the quarter was 27.2% up 800 basis points versus last year, a $0.10 per share impact on core earnings per share and 11% as foreign impact on core earnings per share growth. The base period tax rate was unusually low due to geographic mix of earnings and due to RX settlements and the current period rate is inflated by a valuation allowance against net operating loss carry forwards.

These two items account for about six points of the eight point change in the tax rate. These three impacts FX, Venezuela and Tax were combined core earnings per share growth headwind of 20% this quarter.

All-in GAAP basis earnings per share were $0.97 for the quarter up 29% versus the prior year. We generated $2.5 billion in free cash flow yielding 105% adjusted free cash flow productivity. We returned approximately $2.9 billion to shareholders this quarter through a combination of $1.9 billion in dividends and a $1 billion in share repurchase. In addition we received approximately $4.2 billion of stock through the Duracell transaction.

Earlier this month’s we increased the dividends 1%, making this for 60th consecutive year the Company has increased the dividend. The five of the dividend increase reflects FX headwinds, the cash impacts from streamlining and strengthening the business unit portfolio and our plans to increase investments in the business to accelerate top-line growth.

Moving to guidance. Our outlook for the fiscal year reflects four large factors driving lower earnings in the fourth quarter. First, lower and operating income, we expect about $100 million less in the fourth quarter this year versus last year. Second tax, the Q4 tax rate will likely be again about 800 basis points higher than last year, due to the geographic earnings mix and art settlement benefits in the base period.

Third, investment levels. Will have a significant increase in advertising expense coupled with continued reinvestments in R&D and selling capabilities. For us FX will continue to see a significant spot rate impacts on the both the top and bottom line in Q4 and unlike the last two quarters will not have offsets from base period balance sheet evaluation changes.

Combined, we expect these four factors to lower Q4 net earnings by more than $800 million and reduce core earnings per share by more than 32% versus the prior year. For the fiscal year we are maintaining our outlook for organic sales growth of inline to up low single-digit versus fiscal 2015. As I mentioned our outlook assumes with no longer benefits from sales and finished product, to our deconsolidated subsidiaries in Venezuela. This will be roughly a 30 basis points drag on Q4 organic sales growth.

In addition, the roughly one point drag from the core portfolio cleanup will continue into Q4.

We expect Fx will have a 6% to 7% percentage point impact on all in sales growth for the fiscal year. Also the combined impact of the Venezuela deconsolidation and minor brand divestitures will have 2 to 3 percentage point drag on all-in sales growth. Taking together we expect all-in sales will be down high single-digits versus fiscal 2015.

We continue to expect constant currency core earnings per share growth in the mid single-digit for the year, foreign exchange will reduce net earnings by approximately $1 billion versus the prior year resulting in a 9 percentage point or $0.35 per share impact on core earnings per share growth for the year. With one quarter left in the year, we are tightening and improving our core earnings per share guidance range from down 3 to 8, to down 3 to 6 which puts the mid-point of the range at $3.59 per share versus last year’s core earnings per share of $3.76.

Fiscal year earnings per share guidance includes headwinds of 10 percentage points from the combined impacts of beauty deal expenses, Venezuela deconsolidation, lower than operating income and a higher tax-rate. Adjusting for these items our guidance translates to modest core earnings per share growth this meaningful growth excluding foreign exchange.

We expect the core effective tax rate to be 25% or higher for fiscal 2016 more than 4 points higher than last year roughly a 6 point headwinds in core earnings per share growth.

We are raising our fiscal year outlook for free cash flow to a 100% or more of adjusted net earnings. We expect to reduce outstanding shares at a value of over $8 billion to a combinations of direct share repurchases and the shares that we’ll exchange in the Duracell transaction. In addition we expect dividend payments of more than $7 billion in total $15 billion to $16 billion in dividend payments, share exchanges and share repurchases.

We expect all in GAAP earnings per share to be up in the range of 46% to 51%. Moving briefly to 2017. David is going to join me at our next call scheduled for Tuesday, August 2 to discuss our plans and outlook for fiscal 2017.

We’re currently in the early final stages for next year and we will get guidance on the next call but there few things to keep in mind as you review your estimates between now and then. We expect improvements in organic sales growth. The core portfolio cleanup will still be a headwind. Venezuela will be drag in first two quarters of the year.

This currency exchange rates holds steady through next fiscal year, FX should be much more manageable than it’s been for the past few years, but we’ll still had a headwind about top and bottom line particularly in the first two quarters.

Likewise of commodity cost hold at recent levels we’ll continue to see a modest tailwind in the first half or so next fiscal year. We’ll be increasing investments in R&D and product and packaging programs in sales capacity and brand awareness in trial building programs to accelerate top-line growth in a responsible and sustainable way. We’ll defend the roles of consumer value of our brands and invest at rest value gaps if and when they emerge. We will do everything we can, for a productivity standpoint and we will continue to delivering on our commitments of cash return to shareholders.

There will be an EPS benefit from shares eliminated with our category exits till the exact amount which will depend when we close when we actually close the Coty transaction. We will obviously give more specifics on all of these in the next call but we thought it might be helpful to offer you these early thoughts.

To sum up, we continue to make progress on returning P&G to balance top and bottom-line growth we’re nearly completion of the portfolio transformation we have created and our sustaining strong cost savings and cash productivity momentum. We are strengthening in the organization and culture and we are investing to accelerate top-line growth.

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 we posted on our website www.pg.com following the call. Now we will be happy to take your questions.

 

Question & Answer

 

 

Operator:

Ladies and gentlemen if you have a question please press star followed by one on your phone. If your question has been answered or you would like withdraw your question press star followed two.

Your first question comes from the line Olivia Tong from Bank of America Merrill Lynch.

 

Olivia Tong:Bank of America Merrill Lynch:

Good morning thanks. John, you mentioned that advertising was up a 120 basis points and it’s been awhile since we seen increase this magnitude in the add line so is this the level we should expect going forward or did it some move materially from here and then price overall came in so how much of that was incremental promotion step up and sampling that you’re doing and things like that. Perhaps you can break out what the impact of impact price wise between develop and developing markets out there and then just lastly you tightened the core EPS range as you mentioned given that there is one quarter left in the year but you left the full year organic sales target unchanged which obviously implies and incredibly wide range for Q4, so maybe can you refine your expectations a bit there in the main factors that impacts where you fall within that range? Thanks so much.

 

Jon R. Moeller:

Well first of all congratulation --on the birth of your child and welcome back to work you are coming back strong with four questions in one. That’s great to have you back. In terms of the advertising rates we were up about I think 130 basis points in the quarter.

We expect to be up about a 140 basis points on the second half. So there will be some sequential strength in that comparison as we move forward. I tried to say 8 or 9 times in our prepared remarks that we will be investing to grow our top-line will be funding that with productivity and bringing the bottom-line with it.

There has not been a significant increase in the percentage of our business has been sold and promotion. No longer has there been a significant increase in the depth of those promotions. We have in several markets used sales deducts as way to adjust pricing back to competitive levels were we got where we took a more of price increase than our competitors ultimately did. So you see that impact and I would just think about price adjustment and value GAAP closures has been the explanation for the change in the price component of the top-line.

And as for fourth quarter guidance we just provided it is what take this and I think that the range we’ve likely point out is a wide one that’s a reality of the world that we are operating in. With very significant volatility whether its input cost, FX, geopolitical and geo-economic dynamics and the consumer impacts of things like oil prices and we are going to be living with that volatility for the foreseeable future.

 

Operator:

Your next question comes from the line of Steve Powers with UBS.

 

Steve Powers:UBS:

Great thanks. Hey Jon I think you called out $18 billion in gross to net spending which is close to 27%, 28% of your expected net revenues this year and so first I guess can you just confirm that I heard that right. Second assuming that I did can you just talked that how that spending rate compares to be maybe 5 or10 years ago because I think it’s up significantly and then third I’m curious how you assist that ROI in that spending and as you optimize it going forward how much opportunities to reduce it and then on that reduction how much is likely to get reinvested elsewhere in the P&L as we think about the next several years. Thanks.

 

Jon R. Moeller:

So. Yes Steve you have got the number of right to $18 billion. Yes it is increased overtime driven impart by expansion in modern retailers on global basis we brought that business model with them to other parts of the world that previously were for example largely distributor and wholesale markets.

Various significant opportunity within that bucket of spend the first and almost increase its effectiveness. Ensuring that we’re spending in ways that drive category growth on a sustainable basis as suppose to short-term entry loading for example. Shifting spending to our best product offerings increased the trial and repurchase rates of those items with consumers, again not driving so much the in some cases the lower end of the portfolio. The vehicles that we use to communicate in store and how those are constructed and utilized in conjunction with our retail partners.

So there are just massive opportunities to improve the effectiveness of that expand as we work to reaccelerate the top-line growth. there are also efficiency opportunities and this one of those unique and wonderful cost if there is such a thing where if you are able to reduce it benefits both the top-line and the bottom-line. But we will be very judicious as we do that again really wanting where we have opportunities to shift that from in ineffective spend to effective spend as the primary activity in this space. But I am convinced within an $18 billion spend tool we have efficiency opportunities.

 

Operator:

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

 

Bill Schmitz:Deutsche Bank:

Hi Jon, good morning.

 

Jon R. Moeller:

Good morning, Bill.

 

Bill Schmitz:

Can you just give us some more color on the reinvestment strategy. So, you talked about the increase this quarter and next quarter. But, like how long will the advertising restoration period last, like where you going to focus I think you talked about hair care, laundry, and diapers to start and then what you trying to achieve because I think maybe the last two or three years you kind of said market share is not a primary driver of the business, it’s really about growing the categories profitability, but that’s change as you kind of feel more pressure to close to gap in organic growth versus your peers and frankly I think the scoreboard you have is organic right, right, and so, I think that’s obviously really important and then really quickly just housekeeping item, I know you are not, you exact numbers but can just give us rough thought and what you think the earnings upside is from both the -- divestitures.

 

Jon R. Moeller:

Yes, the very important question, Bill. How do we think about top-line growth and what are we trying to achieve there and what’s the how do you think about the different metrics, whether it’s category growth, organic sales or market share. First and foremost we need to accelerate our top-line growth rate and there is no debate about that.

The reason that we’ve talked a little bit about, not following share out the window. We can be gaining shares in categories that are declining and that’s not going to grow our top-line.

What we need to be doing as innovation leaders and our categories is getting the market growing through that innovation and gaining a share of that growth that’s exactly what we are doing in Fabric care in the US for example and it’s taken a while but it’s works extremely well and the categories going 4% we’re gaining a disproportionate part of that growth and that’s what we looking to do across our product categories, so its bringing innovation to the market which grows categories for the industry for our retail partners and allows us to gain a little bit of share in the process and look we need to be growing at the rate of the market or better. But market growth is an important element of that in terms of how attractive that growth ultimately ends up being.

So what’s kind of it’s all of the above. In terms of range per share upside from Duracell and Coty I think we have talked before that we plan to be a non-dilutive from day one we have been working for two years on the standard overheads that are going to be created as a result of this and we also expect that the portfolio that we can be left with is a healthier stronger portfolio that will grow and will grow more profitably.

 

Operator:

Your next question comes from the line of Lauren Lieberman, Barclays.

 

Lauren Lieberman:Barclays:

Thanks and good morning. I am not sure you fully answered what Bill had referenced in terms of like reset on advertising spending. So I am guessing he is still looking for two color and kind of thoughts around reinvestment and maybe extending beyond just as being about advertising but also the investments in product quality and packaging and timeline for that. I also want to get color on your comment on consumer value investments particularly in Gillette in the US and Baby in US.

I just been loves, I wonder about how you think about love is pricing versus private label and positioning and then for Gillette it seems like your time is at lower end of where you compete and initiating category but anything else you can share there will be great. Thank you.

 

Jon R. Moeller:

So thanks for the save for Bill there Lauren, I am sorry I did missed that. As I said in the earlier remarks where we investing in not just advertising, I went through three examples of sampling to generate a trial getting a best products in the hand of consumers. That’s a significant portion of investment, I mentioned as well expanding our sales capacity that’s happening across some of the newer channels but also in our existing channels.

Dedicating sales coverage to individual categories in sectors which is required and will required some investments.

So its broad-based, you mentioned package, their clear opportunities to continue to improve our first moment of truth, which is a lot about the package and will continue to do that as well.

In terms of specific numbers for next year across those buckets we are in a early stages of putting that plan together for next year. But our intense is clear I think, and as I said we will continue to work to fund those investments through continued productivity savings as well. On value creation, there is really no change here in terms of our intent to be competitive a cross price tiers big businesses that matter in big markets that matter and clearly that involves grooming in the US you mentioned Baby in the US. I am not going to get into specifics about the pricing moves that will be made.

I not allowed to do that by law but we’ll be competitive. I don’t think in fact I well, I leave it there.

 

Operator:

your next question comes from the line of John Faucher with JP Morgan.

 

John Faucher:JPMorgan:

Thanks. Jon you mentioned improvement in profitability, I think it was in India over the past several years, mostly coming from I think in improved manufacturing with just it’s in local markets. Can you talk about the state of that process, and are there still markets an emerging markets where you are losing money where you could benefit from moving that and then I guess from the flip side of that, you know volumes have been weak generally and so, you know how do you deal with, you know some of the standard manufacturing capacity in the some of the major markets where you have been producing this product and is that a piece of the productivity we have been seeing for the past couple of years.

And then you know how long do you think takes to get to the more sustainable operating margin in some of these emerging markets on a broader basis. Thanks.

 

Jon R. Moeller:

Well on that broad question of developing a market margins and steady states. I can’t answer that without getting into unfortunately FX the answer for the question involves what happens to foreign exchange rates going forward. For perspective we have been growing constant currency earnings in developing markets well ahead of constant currency sales.

Going back three years ago, 2X the year after that 4X last year 8X this year 8X and that reflects the things that you are describing in terms of supply chain, it also reflects the overall productivity programs and it benefits in the developing market and it reflects a lot of work that we have been doing on our portfolio, as I describe o as I described in our earlier commentary the biggest driver of the really nice mark of profit improvement in India has been portfolio work. So it’s all of that. In terms of volume and the impact that is had our fixed cost rates if you will and the supply change is definitely had an impact.

The good news is that we are right in the middle of the supply transformation and that’s going to be multi geography in nature. So that gives us an opportunity where we need to rationalize that fixed cost infrastructure. At the same time hopefully the main benefit going forward in terms of that is the acceleration of volume and sales.

 

Operator:

Your next question comes from the line of Nik Modi with RBC Capital Markets.

 

Nik Modi:RBC Capital Markets:

Yes thanks. Jon just can you provide some context on where within the -- organization the pricing decision made and how those decisions changes or are you planning to can’t change who dictates local market pricing for new innovation and the core portfolio. Any context on that will be helpful.

 

Jon R. Moeller:

So there are kind of two forms of pricing decisions if you think about it. One but our cause in strategic choices. That’s the establishment of the prices strategy price quarter you want to hold between market the price quarters you want hold competitors whether they be branded or retail competitors and those choices are made by our global business units who have representation in both regions and countries more representation in regions in countries then headquarters.

These are people who are very close to what’s happen in the market place in term of the consumption, in term of the trade customers, in terms of competitors and consumers. And then there is kind of tactical adjustments that occur on routine basis of each day and we can and we’re trying to give more flexibility to resources located closer to the action to move easily there as they need. So we’re going to hopefully achieve the best results and we’ll see that works forward.

 

Operator:

Your next question comes from the line of Wendy Nicholson with Citi Research.

 

Wendy Nicholson:Citi Research:

Hi. Good morning two questions first of all can you talk on a little bit more about China I know you said that your business is showing some signs of improvement down not as much given some of the premium price innovation you’re doing. But on how confident are you in the strategy of pursuing well its sounds like almost excursively premium price innovation has it does sound like some of the other competitors out there that there is also price base competition going on in some of your big markets as you can talk about China more broadly and strategy there will be great. And then my second question has to do with your comment that I think we’ve heard I mean I think we’re heard from Bob -- the few years ago.

The P&G was increasingly opened to hiring from the outside and I know we had certain partnerships and R&D staff, but in terms of actual physical new hires outside of kind of legal and tax and HR I can’t think of anybody on the business side the we actually how brought in from upside. So given that you been seeing after so long or put together areas and where you think that, that is the priority is it marketing is that something in specific businesses and why say it for so many years and then not have it actually happen. Thanks.

 

Jon R. Moeller:

First on China, I am so glad you ask the question you did Wendy. That big middle of the portfolio is very important and we are not losing sight of that. We have fantastic positions in that portion of the market which we intend to maintain and build.

But we also want to take advantage of the higher growth portion of the market which is currently the premium tears. 30% of consumption as currently in those tears across our categories. They are growing that high single to double digit rates and we obviously want to participate in that not only for the sales and volume benefit but also for the equity here already provides to our brands. So let is clearly and the strategy not an oil strategy.

 

Your question on our approach to bringing in talent from outside the organization, I think David was very clear about that at CAGNY that we are going to maintain broadly our promote within and develop from within most importantly program. But we are going to put the like people the best people in jobs across the organization and when that requires that we go outside we will do that. We have for example hired a number of experienced sales people I mentioned building our sales capacity. As we are dedicating selling organizations two categories and sectors there are cases where we can find more experience outside the company.

People who have had 10 years experience in a category will may be under represented and that will bring those people in. The whole area of digital marketing and media where we need resources, we need a partnering with agencies who have that capability in some cases we are bringing it in. I don’t think that’s limited to any portion of the organization that includes a line management and but we are going approaches deliberately having someone come in just for the sake of having to come in and being able to say that we are making progress there is obviously not something interest as very much.

But having the right people in the right jobs bring in mastery to help us win across the board we are definitely committed to.

 

Operator:

your next question comes from the line Dara Mohsenian, Morgan Stanley.

 

Dara Mohsenian:Morgan Stanley:

Hi. Good morning.

 

Jon R. Moeller:

Good Morning Dara.

 

Dara Mohsenian:

Jon as you look out to fiscal 2017 are you expecting to be able to recover some of the net negative historical gap between FX and pricing from the last couple of years through pricing, or with the lower commodities and least less owner FX, pricing not expected to be a large factor next year and then also we are just hoping for some commentary on if you are confident that you see will an equivalent volume rebound going forward as the overall level of pricing decelerates? Thanks.

 

Jon R. Moeller:

Thanks Dara. I will expect pricing to be less of a dynamic next year than it has been the last two years. Simply because at current sport rates FX will be less of dynamics next year than it has been for last two years.

I also mentioned that in some cases, where we’ve had large gaps emerge we will be working to close those. But we’re still seeing significant devaluation in some markets there is still situations we’re going to be taking additional pricing where we feel that, that will be matched.

So, we’ll continue to be a dynamic but a little bit less going forward. On the volume piece, I certainly don’t have a crystal ball but if I look at what’s happened historically, that volume has come back overtime and it sometime it depends on the market volume reacceleration and markets like Latin America has been fairly quick and other markets for example Russia the last crises it took us three years to get back from a volume stand point. So, we’ll have to see.

 

Operator:

Then next question comes from the line of Bill Chappell with SunTrust.

 

William B. Chappell:SunTrust:

Thanks. Good morning. Just two things; one, on the US shaving business can you give us a little more color, I mean that’s the focus area both the US in shaving, you had new innovation but do you see signs that as we move through the quarter as we move into next year that the growth dynamics can change and maybe follow more like laundry and then also maybe for a bigger question, I understand the next year still going to be a transition year and you’re stepping up advertising and marketing how long does it take to get to your kind of growth algorithms excluding stuff like Russia or global crises for say?

 

Jon R. Moeller:

In terms of grooming, this is really, it is primarily driven by two things. One, is the market, as you rightly point out, and the other is some of the promotion at primarily the lower end of the portfolio. If you look at the past three months market consumption attract channels was down 4%. That’s largely due to lower shaving incidents and also that number just to math of that number doesn’t pick up the volume from direct sellers and that’s had some impact on that track channel number as well.

 

We estimate that total market growth inclusive of e-commerce sales is slight to flat slightly growing versus year go and that’s an improvement versus where we have been. The top end of our portfolio is doing very well, ProGlide cartridges sales grew 18% last fiscal compared to a 7% decline in the overall market most kind trends are continuing as I mentioned we need to more work on the lower end of the portfoli0. We also need to be more present and we are in the direct to consumption e-commerce channels and we need to bring innovation equally across the portfolio and marketing equally across the portfolio which we are committed to do.

 

Operator:

Your next comes from the line of Javier Escalante - Consumer Edge Research.

 

Javier Escalante:Consumer Edge Research:

Good morning everyone John I think that it would be helpful if you kind make you a sense kind of like a very top-line way volume and pricing between developed and emerging markets I know that the U.S. Was up 3% but I would like to know what’s happened with Europe as well and how was that aggregate growth in emerging markets and in emerging markets how much of that has been continuous to be destocking in China or there is any other one time in terms of wholesalers dynamic that is impacting your growth in developing markets again in china why the stock and so appropriative shouldn’t have you be better off to get -- wholesalers inventory I am just starting to rollout whatever innovation that you have. Thank you.

 

Jon R. Moeller:

So in terms of the break down between developed and developing area volume in developing was down five and developed was up three which is really strong by the way. Organic sales growth in developing was down one and developed its was plus two and so obviously price mix then deductively was plus four and developing in minus one in developed. In terms of the trade stocking issue in china we’re making progress as I said the rate of decline was half in the quarter and in many categories we’ve return to growth and we’re doing everything we can to bring that back in a responsible way and we will continue to do that.

 

 

Operator:

Your next question comes from line of Mark Astrachan with Stifel.

 

Mark Astrachan:Stifel:

Yes thanks and good morning everybody. I want to give too much detail on fiscal ‘17, but you talk about expect organic sales growth to improve in the year. I guess given FX headwinds in the first half in your prior commentary about not -- our market share given FX headwinds is fair to say that any share improvement than will be back half waited and then more broadly how should we all think about reinvestment require to return the business to top-line growth. Can you talk about all this reinvestment on a go forward basis, but is there some way that we can quantify it or measure it not just the in terms of the what the advertising spend is on a quarter-by-quarter basis.

But is there is some sort of bogie out there would bench-marked that sort of helps us to figure out basically where your head.

 

Jon R. Moeller:

Third question Mark, unfortunately I had difficult time answering that as we’ve said it today. We would literally just beginning the process of putting our plans together for next year. To give you some inside into that process we are going to go through each of the large category country combinations and assure that we are efficient in terms of our investment to change the growth profile and really to grow at the markets and then to go through the year.

I am trying to improve that. I am not going to call a quarter in which that’s going to happen it’s going to take time as I said in the prepared remarks it’s not going to be straight line. But I think we will see improvement overtime and there is no bogie in terms of that a number related to investments this is strategic plan in other category country, brand level that we are just beginning to do. You have seen the increase investment profile in the back half of this fiscal year that’s the only one I really have real inside into at this point, and I certainly wouldn’t expect the investment levels could be lower as we go forward into year.

 

Operator:

Your next question comes from the line of Joe Altobello with Raymond James.

 

Joe Altobello:Raymond James:

Thanks, good morning guys. First question in terms of the 1% organic growth can you tell us how that compare to consumption and that was a deceleration from last quarter but last quarter you shift little bit ahead of consumption so I was curious if that even doubt in this quarter and exact link just going back to Bill Chappell’s question for second what is the P&G’s long-term algorithm right now given the change in portfolio and how quickly can you get there I imagine ‘17 is probably too optimistic but could we see a return to that by fiscal ‘18. Thanks.

 

Jon R. Moeller:

In terms of the relationship between consumption and shipments you’re right we’ve said in January that for the December quarter it was a little bit more selling and consumption and you see that reflected in the third quarter. That’s why that’s really reverse itself in and even down. So I think we’re in the steady state at this point in the process.

I think that’s also an important point and understanding the difference between the 2% among last quarter and 1% this quarter in terms of organic sales growth. That in Venezuela really explain all of that change. So thanks for asking that question. I think it would be in terms of the long-term algorithm that is not change we wanted to growing with the market to slightly ahead of the market and we believe that with the continued productivity progress that should translate into mid to high single-digit earnings per share growth.

I do think that getting back fully to that algorithm next year would be difficult, but again we’re just beginning to put our plans together.

 

Operator:

Your next question comes from the line of Jason English with Goldman Sachs.

 

Jason English:Goldman Sachs:

Hey good morning thanks for squeezing in. I’m going ask multi-part question as well. First kind of going back to top-line you mentioned category growth is slowing from I think 3 to 4 % to roughly 3%. How much of that is volume related versus price related and for your comments on sort of the forward with FX if it holds commodities if they hold potentially price rebating should we expect global category growth to just volume a further and then the second question was on the savings target this could just be a matters where but I heard you say up to $10 billion so should we consider $10 billion is the cap and a bit of stretch goal that may not be achieve and also on the supply chain side you mentioned sort of upfront investments savings will build in 3 to 4 years.

Should we thinking about the delivery against those saving as be it further out so a bit more -- to what we seen over less $10 billion.

 

Jon R. Moeller:

Great so from a if I just look at the difference between value growth and volume growth in the markets to get for question of how much of it is pricing and developed markets if I just look over past the year basically volume growth is actually accelerated a little bit going from zero to one value growth is unchanged about one and developing markets value growth is going from 9 to 6 volume growth is going from 2 to 1. So I think those that set of numbers you can put the picture together that’s you’re looking to put together.

In terms of savings target and semantics around up to best those are the words we have used since we have first talking about those back at CAGNY and that doesn’t imply our cap there is no reason to cap but it does imply a range of outcomes and last time we said $10 billion over delivered that so again there was no cap.

I think $10 billion is a good number that to shoot for and I am sure we’ll get somewhere close to that, if not there. You may recall conversation that some of these we’re having four years ago on this topic and there was a lot of concerned about whether we would actually get $10 billion and I said again that’s the right number to shoot for and if we only get to nine I’m going to be pretty happy and I look it at the same way this time around. So really no change there.

On the supply chain transformation that particular portion of the savings will be, will come later as we’ve indicated since we started talking about supply chain transformation, I wouldn’t take that as indicative of the entire program. Last time around that was pretty evenly spaced across the fiscal years that’s not the design attempt that just how it fell. I don’t see a reason for it, fall significantly different from that, this time.

Remember though and I know you know this, we are going to be reinvesting a lot of these savings and on a relative basis, more of that investments acceleration a few will, will occur in the early years and as that it gets fully in place and that obviously less year-on-year impact.

 

Operator:

Your final question comes from the line of Ali Dibadj from Bernstein.

 

Ali Dibadj:Bernstein:

Hey guys I am actually appreciate it always give me when I call in. Have to sign off respect for our work. So two things, one is, you are pretty reluctant to talk about 2017 guidance on this call but what seem that analyst and investors have at least been interpreting some sort of message from you guys, given many EPS numbers have come down over the past month or so, and significantly more negatively it what seem, that Jon some of the messaging you talked about at least on this call. So I am trying to get a sense specially with the Coty benefit or that a share retirement benefit.

So I am trying to get a sense of recap of your thinking on 2017 in terms of reinvestments and returns there is clearly there is some interpret there, and if you can balance kind of the clinical continued progress that your CEO says versus an out street line that you mentioned and give us a little more color I think it would be appreciate because there is message getting out there clearly.

The second question is Jon, you joked a few years ago that you weren’t want to be CFO of P&G at a time when the dividend didn’t grow and I think we’re collectively glad but it did grow. But can you give us a more color on the 1% dividend increase, I mean shareholders have been waiting around for you guys for quite some time, you have some very challenging times that macros have been very challenging, other than your peer groups suggest that they increased better dividend a little bit more aggressively than yours and I get your dividend yield and I get your payout ratio.

But what would in the end be the true cost of a slight ratings down rate here, sort of work shareholders little bit more aggressively. Thanks for those two.

 

Jon R. Moeller:

In terms of the message that’s been interpreted externally, I personally have a hard time sorting through that simply because of the very wide range that exist and estimates right now. But I am not sure what message has been received in terms of the message we’re providing its very much the one you described today with just a minute ago we’re just continued progress, on both the top and bottom-lines as well as our cash flow, and obviously we want to accelerate all of that as quickly as we are able, but do are in a sustainable responsible way and as a indicated we’ve just putting our plans together for next year and we will see what amount of progress we make.

Our competitors don’t said still markets are volatile and so that’s were the not straight line comment comes in. I just think that’s a reflection of reality. The -- benefits in terms of the share retirement will depend on exactly when those shares get retired, but there should definitely a benefit associated with that and we view that as in this part of the overall equation. In terms of the dividend increase as you know we are very committed to the principle of cash return to shareholders over the last 10 years as I mentioned earlier we have returned $118 billion.

This year between dividend share repurchase and share exchange will effectively return $15 billion to $16 billion.

There is now a lot of juice if you’ll to the amount of cash available from the borrowing standpoint between our current credit rating and one or two not just down so to do that to the credit rating for small amount of additional dividend increases not something that made a lot of sense to us. We were very happy to increase the dividend we remained committed to cash return to shareholders. But we also need to reflect reality in our dividend planning. Significant FX headwinds we are creating smarter company and our earnings per share are below year ago and we have a responsibility there as you all appreciate as well.

So that’s the balancing of those two things I completely get and understand the question and it’s a very fair one, but that’s where we made it out. I will live with there. Thank you everybody for your questions this morning we will be available for the balance of the week to talk to any of this with you.

We are very happy about the progress that we are making, but we clearly understand we have more to do. Thanks a lot.

 

Operator:

Ladies and gentlemen that does conclude today’s conference. Thank you for your participation. You may now disconnect. Have a great day.

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