The Procter & Gamble Company's Management Discusses F2Q 2014 Results - Earnings Call Transcript

8/13/2019 The Procter & Gamble Company's Management Discusses F2Q 2014 Results - Earnings Call Transcript

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The Procter & Gamble Company's Management Discusses F2Q 2014 Results - Earnings Call Transcript

Jan. 24, 2014 11:26 AM ET | About: PG

Executives

Jon Moeller - CFO

John Chevalier - IR

Analysts

Chris Ferrara - Wells Fargo

John Faucher - JPMorgan

Dara Mohsenian - Morgan Stanley

Wendy Nicholson - Citigroup

Bill Schmitz - Deutsche Bank

Lauren Lieberman - Barclays

Olivia Tong - Bank of America

Nik Modi - RBC Capital Markets


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Ali Dibadj - Bernstein

Jason English - Goldman Sachs

Connie Maneaty - BMO Capital Markets

Javier Escalante - Consumer Edge Research

Joe Altobello - Oppenheimer

Bill Chappell - SunTrust Robinson Humphrey

Alice Longley - Buckingham Research

Mark Astrachan - Stifel Nicolaus

Caroline Levy - CLSA

Leigh Ferst - Wellington Shields

The Procter & Gamble Company (PG) F2Q 2014 Earnings Conference Call October 25, 2013 8:30 AM ET

Operator


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[Operator instructions.] Welcome to Procter & Gamble's quarter-end conference call. Today's discussionwill 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 todiffer materially from these projections.

As required by Regulation G, P&G needs to make you aware that during the call, the company will makea number of references to non-GAAP and other financial measures. Management believes thesemeasures provide investors valuable information on the underlying growth trends of the business.

Organic refers to reported results excluding the impacts of acquisitions and divestitures and foreignexchange, where applicable. Free cash flow represents operating cash flow less capital expenditures.Free cash flow productivity is the ratio of adjusted free cash flow to net earnings.

Any measure described as core refers to the equivalent GAAP measure, adjusted for certain items.P&G has posted on its website, www.pg.com, a full reconciliation of non-GAAP and other financialmeasures.

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

Jon Moeller - CFOGood morning. Our October-December results came in pretty much as we had expected, keeping us ontrack to deliver our fiscal objectives. All-in sales were up modestly versus the prior year, including a 3-point headwind from foreign exchange. Organic sales grew at 3%. Organic sales were in line or ahead ofyear ago in each reporting segment.

Coupled with 4% growth in the first quarter, this leaves us on track to deliver 3% to 4% organic salesgrowth for the fiscal year. Sales growth was driven by organic volume growth of 3%. Organic volume wasahead of a year ago in each of our reporting segments. Pricing added 1 point to sales growth and mixreduced sales growth by 1 point.


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Consiste nt with the reported market growth and market share data youve seen, October andNovember were relatively soft months for our categories and for P&G. December, on the other hand,was a relatively strong month for us. December organic volume growth was over 5%, with each sectorgrowing at or above 4%. Organic sales were up mid-single digits.

December quarter all-in GAAP earnings per share were $1.18, core earnings per share were $1.21, whichleaves us on track with our plans to deliver 5% to 7% core earnings per share growth for the fiscal year.Earnings for all segments were ahead of a year ago, except for baby, feminine, and family care, due toforeign exchange.

Foreign exchange was an $0.11 per share headwind for the company in the quarter. The year ago periodalso included a $0.07 per share gain from the sale of our bleach business in Italy. Combined, these two

items constitute a 15% core earnings per share growth headwind for the quarter.

Core operating margin was about equal to last year, down 10 basis points. Organic sales growth leverageand 230 basis points of cost of goods overhead and marketing savings were offset by foreign exchangeand negative mix. Core gross margin was down 90%. Cost savings of 130 basis points and volumeleverage were offset by geographic and category mix of 130 basis points, foreign exchange of 90 basispoints, higher commodity costs, and higher manufacturing startup costs.

Core SG&A improved 80 basis points, driven by 100 basis points of marketing and overhead productivitysavings. These benefits were partially offset by foreign exchange imps and targeted innovation and go-to-market investments.

The effective tax rate on core earnings was 21.5%. This included a positive 1 point impact from therelease of a tax reserve following a favorable outcome in Asia. This reserve reversal accounted forroughly $0.02 of earnings per share benefit on the quarter.

The net impact from all of the items below operating income, tax, interest expense, interest income,non-operating income, and supply chain, was a slight headwind to core earnings per share growth forthe quarter. We generated $2.4 billion in free cash flow and remain on track to deliver free cash flowproductivity of about 90% for the fiscal year.


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As planned, we returned $1.7 billion of cash to shareholders in dividends, and we repurchased $1.5billion in stock, bringing year to date share repurchase to $4 billion. Net, the second quarter came inpretty much as we were expecting, on both the top and bottom lines, leaving us on track to deliver oursales and earnings forecast for the fiscal year.

As we move forward, value creation for consumers and share owners remains our top priority.Operating TSR is our primary business performance measure. Operating TSR is an integrated measure ofvalue creation at the business unit level, requiring sales growth, progress on gross and operating margin,and strong cash flow productivity.

Operating TSR drives focus on core brands and businesses, our leading, most profitable categories, andleading, most profitable markets. Well begin to make more operating TSR progress as we move into

calendar 2014.

Our strongest brands and business units and total company positions are in the United States. We needto continue to ensure our home market stays strong, and is growing . The actions weve taken over thepast two years to restore consumer value, expand our vertical product portfolios and horizontalregimens, and lead innovation have enabled us to restore value creating share growth in many parts ofthe business.

We still have more work to do in a few categories, and the competitive environment is intense, whichleads to choppy results on a quarter to quarter basis, but were making good progress. We have astronger brand and product innovation program ahead of us in the U.S. this quarter.

We continue to grow and expand our business in developing markets, with a focus on the categories andcountries with the largest sizes of prize and the highest likelihood of winning . This is where the worldsbabys will be born, and where more new households will be formed. Developing markets will continueto be a significant growth driver for our company this year and for years to come. In October/December,

organic sales grew 8% in developing markets.

Well continue to focus the companys portfolio, allocating resources to businesses where we can createvalue. Well continue to exit businesses where we determine that potential buyers with differentcapability sets can create more value than ourselves.


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Consistent with our focus on operating TSR, were continuing to push forward with our productivity andcost savings efforts. Weve made solid progress over the last fiscal year and a half. We have strongproductivity plans for fiscal 2014, and were working to accelerate some fiscal 2015 savings into 2014.

Versus a target run rate of $1.2 billion, were now forecasting more than $1.6 billion of cost of goodproductivity savings this fiscal year, across materials, logistics, and manufacturing expense. This is up$200 million since our last update. Versus a going-in target of 5%, we expect to improve manufacturingproductivity by at least 6% this year. Were up more than 8% fiscal year to date.

Weve now exceeded our 2014 fiscal year n on-manufacturing enrollment reduction goals, only 6 monthsinto the year, and have begun work to accelerate role reductions planned for fiscal 2015 into 2014. Ourstrict objective is to get substantially to our end of 2015 objectives by the end of 2014. This would put usclose to, or within, the 16- 22% reduction goal weve established, 1 to 2 years ahead of target

And we wont stop there. We continue to identify opportunities to simplify and streamline ourorganization design. We continue to drive marketing productivity and effectiveness through anoptimized media mix, with more digital, mobile, and social presence, improved message clarity, andgreater non-advertising marketing efficiencies.

We expect absolute marketing spending to come in slightly above prior year levels, but marketing as apercentage of sales to decline. Importantly, the overall effectiveness and impact of our marketingspending will be well ahead of the prior year.

We see several more years of effectiveness improvement ahead, driven by new, more efficient digitaland social mobile media and big opportunities to continue to improve the efficiency, precision, andeffectiveness of our communication.

We remain committed to making productivity a core strength and a sustainable competitive advantage.Were equally committed to being the product and commercial innovation leader in our industry.


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Were currently bringing significant innovation to market in fabric care, including upgrades on all of ourTide Plus value-added liquid detergents; new extra-large tub sizes on Tide Pods; Gain Flings, a triple-chamber, single-load laundry pack providing Gain consumers with enhanced scent, better freshness, andmore cleaning power, all with the convenience of a single-load form; scent upgrades on DownyUnstoppables and Gain Fireworks in Wash Scent Beads; Tide Oxy, a multipurpose stain remover that can

be used in the laundry or around the house; and Tide Simply Clean and Fresh laundry detergent,specifically designed with the right level of cleaning and freshness for mid-price-tier consumers.

Weve received strong retailer support for these innovations, overdelivering our distribution, shelving,and initial merchandising objectives for the launch. The Ariel unit [dose] innovation in Western Europe istracking well above expectations. Were continuing the expansion, launching in Italy, Iberia, and theBalkans earlier this month. Consumption trends on Tide Pods have remained strong, growing in the lowteens fiscal year to date versus the prior year.

Were al so launching a very strong oral care innovation bundle next month, including Crest 3D WhiteBrilliance, delivering our most advanced whitening and freshness benefits in one toothpaste; Crest 3DWhite Luxe, which removes up to 90% of tooth stains in five days, and with our new White Locktechnology, locks out future stains and microfine lines in the teeth; Crest 3D White Luxe White Strips,with new Flexfit Film, an innovation created with technology from our baby care business, that stretchesand molds for a custom fit for more whitening coverage; our new Crest Sensor Relief Innovation, whichdelivers improved sensitivity relief, combined with Scope freshness; and Crest B, a new line forexperiential consumers, including flavors like B Dynamic, Lime Spearmint Zest, B Inspired, Vanilla Mint

Spark, and B Adventurous Mint Chocolate Trek.

In North America, our recent baby care absorbency, comfort, and design innovations are driving diapermarket share growth. U.S. diaper share is up 1.5 points versus prior year, with particular strength on thePampers, Swaddlers, and Luvs product lines, retaking market share and leadership for the first time inmany years.

We continue to strengthen our share position in the U.S. battery business behind the Quantuminnovation and recent distribution increases. P&G batter value share is up 2.5 points for the past threemonths, to over 40%.


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the Advantage Group and Kantar Retail surveys. These surveys reflect the quality of our customerbusiness development organization, promotion plans, and customer service reliability.

Last, were making strategic investments in innovation and go -to-market capabilities. Targeted R&Dinvestments are enabling us to strengthen our near and midterm innovation pipeline. Targeted go-to-market investments will enable us to strengthen sales coverage in our fastest-growing markets andfastest-growing channels.

We believe that the focus that were bringing to these four areas: operating TSR, productivity,innovation, operational excellence, along with targeted reinvestment, will enable us to continue toimprove results, even as we work to address several remaining opportunities. We remain on track todeliver our 2014 guidance, top line, bottom line, and cash.

Were maintaining our organic sales growth range of 3% to 4%. Achieving organic sales growth i n theupper half of our target range should result in modest overall market share growth. Foreign exchange isexpected to be a sales growth headwind of 2 points, which leads to all-in sales growth in the range of 1%to 2% for the fiscal year.

Were mainta ining our forecast for bottom line core earnings per share growth of 5% to 7%, despitestronger headwinds from foreign exchange and softer market growth rates. We aim to make up thedifference through productivity advances, which will primarily benefit the fourth quarter.

The fiscal year headwind from foreign exchange has continued to increase. We now expect foreignexchange to be a 7-point headwind to core earnings per share growth. As a result, our guidance nowtranslates to constant currency core earnings per share growth in the range of 12% to 14%.

We now expect the tax rate on core earnings to be a point or so below prior year levels. On an all-inGAAP basis, we expect earnings per share to grow approximately 7% to 9%. This range reflectssomewhat lower noncore restructuring costs in fiscal 2014 versus the prior year.

The second half earnings growth increase thats implied within our guidance is driven by foreignexchange and cost structure improvement. Foreign exchange was a significant headwind in the first half


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but will moderate in the second half at recent spot rates. Well also annualize the operating impactsfrom last years Venezuelan bolivar devaluation.

Manufacturing startup costs will annualize in the second half of fiscal 2014. Productivity savings anddevaluation related price increases will build sequentially. As you prepare your estimates for Q3 and Q4,please keep in mind a couple of items.

We wont annualize the Venezuela impact until mid -February in Q3. Well had a full quarter of lau ndryand oral care innovation impacts in Q4. Productivity savings that are being advanced to offset strongerFX impacts and lower market growth will primarily benefit the fourth quarter. Also, pricing that well betaking to offset recent devaluations in some markets will take effect only in Q4.

We expect another year of about 90% free cash flow productivity. Our plans assume capital spending inthe range of 4% to 5% of sales and share repurchase in the range of $5 billion to $7 billion.

In addition to the assumptions included in our guidance, we want to continue to be very transparentabout some key items that are not included. The guidance were reconfirming today is based on lastweeks FX spot rates. Further currency weakness is not anticipated within our guidance range.

We continue to monitor unrest in Egypt, which is a large business for us and a base of export for thebalance of Africa, as well as unrest in economic instability in the Ukraine, though the situation hasrecently improved. Venezuelan price controls, access to dollars for imported products, and devaluationpresent risk, as do import restrictions, price controls, and devaluation on Argentina.

Finally, our guidance assumes no further degradation in market growth rates. Our first half results werein line with what we expected, putting us on track to deliver our goals for the fiscal year and makeprogress towards our long term growth objectives. We continue to operate in a volatile environment,with uncertainty in foreign exchange, some deceleration in market growth rates, and a rapidlydeveloping policy environment.

Against this backdrop, weve maintained top line growth and improved constant currency operatingearnings growth. We have an even stronger innovation program in the back half of the year and savingsfrom productivity improvements that will build. Were making targeted investments in our core


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businesses, most promising developing markets, and biggest innovation opportunities, and areaggressively driving productivity and cost savings.

Above all, we remain focused on value creation for consumers and for our share owners. That concludesour prepared remarks. As a reminder, business segment information is provided in our press release andwill be available on slides, which we posted on our website, www.pg.com following the call.

Our next significant investor event ahead of A.G. Lafley is the Cagney conference on February 20. Wehope to see many of you there. Id be happy now to take your questions.

Question-and-Answer Session

Operator

Your first question comes from the line of Chris Ferrara from Wells Fargo.

Chris Ferrara - Wells Fargo

John, I was hoping you could talk a little bit about the cadence of the quarter. I think you mentionedthat December was up 5%. Can you put that in the context of sell-in versus sell-through? What wasgoing on in October/November? I think your shipments probably exceeded consumption by areasonable margin in December. Why is that? How do you feel about inventory levels there? And then just if you can go through the same sort of cadence for the quarter for the emerging markets too, givenall of the concern there, that would be great.

Jon Moeller - CFO

Youre certainly right in that the timing of innovation did affect the timing of shipments in the quarter.Were very comfortable with inventory levels currently, and offtake in January has been veryencouraging. So we really do believe that theres streng th behind the December numbers, and that thatshould carry through into the third quarter.


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In developing markets, there really wasnt a significant difference in aggregate across the months of thequarter. We continue to see some softness in market growth rates, but there continues to be verystrong growth overall, between 7% and 8% in the quarter we just completed, from a market standpoint.And we expect that to continue through the third quarter as well. So what weve seen in OND, whilepresenting some challenges, leaves us confident as we head into JFM.

Operator

Your next question comes from the line of John Faucher with JPMorgan.

John Faucher - JPMorgan

Jon, as you look at the move to more local manufacturing, can you talk about the glide path that weshould see in international operating margins over the next couple of years? It seems as though youexclude Russia and China, youre probably looking at maybe a high single -digit operating margin in yourinternational business. And how long do you think it will take to see meaningful impact there? And thena related question, given the fact that you guys are still producing in some high-cost countries, andyoure seeing this massive negative transactional impact, are you thinking now about potentiallyhedging transactional going forward?

Jon Moeller - CFO

One of the big questions as it relates to glide path going forward on margins in developing markets,obviously is foreign exchange. But if you take that out, last year we were talking about growing profitahead of sales growth. So improving margins on a constant currency basis in developing markets. Wemade pretty significant progress.

This year is really the same story. On a constant currency basis, well grow earnings significantly aheadof the rate of sales growth. So I really cant, because I cant predict exchange, give you an exact glidepath, but we should continue to make progress quarter on quarter, year on year, on those developingmarket margins as we, as you mentioned, localize manufacturing, but even more importantly as wecontinue to bring innovation to those markets, value creative innovation, which allows us to mixconsumers up, which is happening pretty encouragingly in places like Brazil and places like China, inRussia.


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We continue to make progress on our efforts to strengthen the growth rates in beauty. And many partsof the beauty business are growing quite well. Personal care shipments, for instance, increased doubledigits in the quarter. Strong growth really in all regions. Up double digits in China, midteens in centraland eastern Europe and more than 25% in Latin America.

Cosmetics we continue to do very well in. U.S. Cover Girl value share I think was up about 0.5 point inthe quarter behind innovations like the Hunger Games Capital collection and the new Bombshell Volumemascara collection. Our antiperspirant and deodorant business continues to perform well, with U.S.deodorant value share up 1.5 points versus a year ago, driven by recent innovations on Secret, and as Imentioned, Old Spice.

And then we come to haircare. Many parts of the haircare business are doing well. Head and Shoulders

grew mid-single digits in the quarter, including double-digit growth in western Europe and central andeastern Europe, the Middle East, and Africa.

Our biggest opportunity t here is Pantene. I mentioned the innovation thats coming to market that wefeel good about. Were feeling increasingly good about our overall equity and advertising campaignefforts, and as you know, as I mentioned, well also be expanding haircare into t he young male segmentbehind the Old Spice brand. So were hopeful that were rounding the corner in haircar e.

On skincare, we still have some work to do, and thats going to take some time. So we share theimpatience that exists externally. We know that we have more work to do, but we are comforted by

the progress that were making.

On the question of developed markets, market growth and our responsibility as category leaders formarket growth, the good news is that the developed markets are growing, albeit at a modest rate. Itkind of oscillates somewhere between 0.5 point and 1 point of value growth per month. And within that,the better news is that where market growth is strongest in developed markets is in the U.S. and Japan.

Its weakest in Europe. We are overdeveloped in both the U.S. and Japan, and so from a footprintstandpoint relative to developed market growth, were fairly well -positioned.

We absolutely accept the responsibility for growing markets, in the categories where were leaders andin the countries where were leaders. And increasingly, our retail partners are looking at us as partnersin that regard, to grow their business as well. We bring innovation that does grow markets. If you look at


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whats happened, for instance, with Crest 3D White and some of the other innovations, we bringinnovation that increases trips and grows market baskets. So it is very much a part of our focus. Itsactually more important in many places of the world than share.

Operator

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

Wendy Nicholson - Citigroup

Just first a clarification. The 7-8% growth in emerging markets, less than 100 basis points of that I

assume would be the benefit of new country or new category combination launches? So if you could justclarify that and make sure if thats a real sort of same -store sales number, or close to it.

And then my second question is, with regard to what AG has talked about, the sort of strength to grow,and I know you said youre looking for partners who can grow your businesses better maybe than youcan, are you entertaining full brand divestitures? Or is there the possibility too of just sort of countrycategory combination exits, kind of like what Kimberlys doing, getting out of diaper s in western Europe?Is that the stuff youre entertaining as well?

Jon Moeller - CFO

From a developing market growth standpoint, the vast majority of that 8% growth in developingmarkets that we posted in the latest quarter is, if you will, same country, same category, apples toapples growth rate . I dont know exactly, but I would guess that the impact of any new white spacebusinesses is well below a point. So that should be a pretty good number and representative of theprogress that were making.

And on divestitures, historically, if you look at our efforts in this space, where we determine we cantcreate value, whether that is at a category country combination level or a brand level, weve looked atother options. So in the past, historically for instance, we exited the family care business, thetissue/towel business, in various parts of the world because we just didnt see, at that point, a financialstructure and an industry structure where we could sustainably create value for our shareholders.


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We did the same, as you know, in several categories recently, from pharmaceuticals, to coffee, tosnacks, to water purification, and in some markets the bleach business. And rather than point tospecifics, because as you know this is something we really only want to talk about when we havesomething to talk about, Ill just reassure you that - hopefully its reassuring - that as I mentioned,everything were looking at is through the lens of value creation and theres nothing thats off the table.

Operator

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

Bill Schmitz - Deutsche Bank

Just a follow up, what was the percentage of market share that the holding are gaining both in the U.S.and globally? I dont think I caught that. And the the growth rate in developed markets? I know you gaveus the emerging markets number. And then my real question is clearly the March quarter has been atroubling one for P&G historically. So can you just give us some more color? I know you gave us somedata points. And it seems like, as we look at the back half of the year, its really going to be fourthquarter weighted. But I know you dont want to give quarterly guidance, but maybe your comfort leveland kind of where estimates are now, the Street consensus, that would be very helpful.

Jon Moeller - CFO

Percentage of business holding and growing share is down a bit from where we were last quarter. Andthats primarily driven by two items. One is fabric care in the U.S., the other is haircare in the U.S., bothof which are big businesses, which are growing share, and where we lost a little bit of share in the ONDquarter.

Both of those categories are items that we highlighted going into the quarter as likely going to beexperiencing a significant amount of competitive activity, particularly promotional activity, ahead of ourlaunches in both of those categories, which are just happening now. So the decline in percentage ofbusiness holding or growing share is really driven by those two things, which we expected going in, andwere very comfortable that both of those businesses, from a share standpoint, will strengthen as theinnovations hit the market.


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Just for perspective, if you look at, for example, Levers percent volume sold on promotion in hair care, inOND, it was up about 6% versus the prior year. If you look at some of our laundry competitors, percentvolume sold on promotion in the OND quarter, it was up over 20% versus a year ago. So again, thesewere things that we called out going into the quarter, things that we expected, and its all ahead,encouragingly, of very strong innovation thats now just hitting shelves.

Your second part of your question, on developed market growth rates, we were about flat, slightlyahead, in developed markets. So the total is 8% developing, flat or just a little bit ahead in developed.And relative to the March quarter, I think your statement in terms of fourth quarter predominance iscorrect, and its consistent with the various impacts that I was calling out in terms of when the differentpieces are going to fall in place.

Having said that, I expect us to make good progress in the JFM quarter, on both the top and bottom line.But as you think about the modeling across the quarters, it will be fourth quarter loaded.

Operator

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

Lauren Lieberman - Barclays

The first was just on healthcare. Very big volume number, and then weaker mix impact. So just curious ifthat was primarily because of the expansion of the personal healthcare business in emerging markets, orif there something else driving it.

And then the other question was just perhaps a bit nit-picky, but I was reading through the releaseyesterday that you guys put out about Gain Flings, and it just struck me as a little bit too reminiscent of

some of the innovation in the last two or three years, where its like this massive bundling of benefitsinto one product. So its Gain Flings with great cleaning power, amazing scent, plus Oxy, plus Febreze. Itreads like its like 10 people sat in a room and couldnt make up their minds which was the mostimportant benefit.


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Were reasonably happy with our margins on that business. That doesnt mean that were satisfied andwe wont stop working, both on the productivity point and on the innovation point, to improve marginsin a way t hats value accretive for consumers.

Operator

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

Nik Modi - RBC Capital Markets

Just a quick question, if you could provide some perspective on some of the transitions that took placein leadership in R&D with Bruce retiring. Just curious on the replacement, any thoughts on changes interms of processes within the innovation group. Any thoughts there would be much appreciated.

Jon Moeller - CFO

Kathy Fish will be taking R&D leadership for the company. She has a long track record of innovationsuccess and consumer delight across a number of our businesses and across the global portfolio. Sowere very excited to see Kathy taking that responsibility. We just announced this rece ntly. She andBruce are in transition, and I wouldnt want to presume any changes in emphasis that she will choose,working a AG and others, to make at this point.

Operator

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

Ali Dibadj - Bernstein

A couple of things. One is on beauty. We havent really heard much about what you need to do to fixOlay. And I wonder sometimes whether you actually need to acquire something in that business,because it really is your only skincare brand, to backstop that business . So Id love a perspective on that.


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And then secondly, when we do see the beauty margins go up, I understand that a quarter doesnt makea trend, but at least to a broader question that I have, which is when do you expect that crossover pointto happen as a company, where the productivity savings ramp up to above your investment level? And if

you could talk about that crossover point as you see it going forward, in the context of some of thesupply chain work you guys are doing internally, that would be helpful.

Jon Moeller - CFO

The great part of the Olay story is that that remains an incredibly strong equity, with very high equityscores, very high net promoter scores, the highest in the category. So from an equity standpoint, itdoesnt mean we cant do more work, but we start with a very strong asset. And really, from a productstandpoint as well. We have a very competitive product.

But the work to do is in brand architecture, its in packaging, its in positioning the various pr operties in away that is most relevant for consumers. And its entering some benefit segments that weve, frankly,neglected. And those are growing faster than the benefit segment that were in.

It also involves ensuring we reach consumers at different ages, which is part of what we were trying todo with the Olay Fresh Effects item. Now, this is going to take some time, as I said before. But I wouldfeel much more concerned sitting here if this was an equity problem or a fundamental competitiveproduct p roblem, which its not.

In terms of crossover point, back half, and the supply chain work, well talk a little bit more about it atCagney. We continue to be encouraged about the opportunity to potentially replatform most of oursupply chain in both North America and Europe to do really several things.

One is, as you mentioned, to bring in savings, but also to get to standard platforms across the world,which allows for faster initiative expansion, to get closer to our customers with multicategorymanufacturing facilities in a way that allows us to serve them better.

And its something that were really just beginning the work on. I dont see it having a material impact,say, in the next 12 months. This is going to take a while, both to think through and to execute. But it


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should enable us to bring in a new round of savings in addition to the savings weve been talking aboutover the last 18 months. But thats probably two or three years out.

Operator

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

Jason English - Goldman Sachs

Thanks for the incremental color on beauty. I want to drill a bit deeper on laundry. A few questions.First, on Europe, it sounds like Arial Pods are off to a good start, but Nielsen data suggests youre still

struggling in the market. So what are the offsets there?

Second, with the launch upon us, can you give us more detail behind the merchandising location andtargeted price points for Simply? And lastly, what signs are you looking for to gauge when or if the U.S.market will be ready for the next round of compaction?

Jon Moeller - CFO

Well, it seems like Ali has now trained all of you well. You all ask three-part questions. [laughter] First ofall, on Simply, the price is ultimately the sole di scretion of our retail partners. But generally, wereexpecting that to be about 30%, on a list price basis, below current Tide.

Compaction is something that we are always looking at as an opportunity, actually across categories,beyond laundry. And if yo u think about it, were really actively doing that as we sit here, because theunit dose offering, whether its Tide or Arial or now Gain, is the most compact form that exists in themarketplace today, and as more of the market converts to that, it has all the benefits of a standardcompaction in terms of lower cost, better value equation for the retailer, better value equation forconsumers.

And in terms of the question on Europe, really where weve lost a little bit of business is in liquids,where were responding to heavy competitive promotion levels. So its just a very competitive


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marketplace, which makes sense, as we bring in Pods and people are emphasizing the other parts oftheir portfolio.

Operator

Your next question comes from the line of Connie Maneaty from BMO Capital Markets.

Connie Maneaty - BMO Capital Markets

I am just going to have to question on Venezuela, and that is as we contemplate another pretty steepdevaluation, has there been any change in the policy there about prices? Have you been able to work

around any of the pricing restrictions? And do you see any easing of that coming?

Jon Moeller - CFO

Thats a very good question. Currently, there are price controls in place. That doesnt mean that therewont be opportunities to take p ricing. The level of pricing is reviewed regularly by the government, andwere obviously in discussions with them. And I would say that they understand the need for some levelof pricing for both international and local competitors to remain viable.

Also, the price controls that exist apply to a portion of the portfolio, not to all. Its whats referred to asregulated items, where the pricing controls are relevant . And there are unregulated items where theresmore pricing flexibility. So we continue to work to improve our financial situation in Venezuela, whichstarts off from a very attractive place to begin with, but your question is an appropriate one as we lookforward. To the extent that theres more devaluation, will there be more pricing thats al lowed?

And thats just something I dont have the answer to today. Its something that well be very transparentabout and keep you updated on. And that question is one of the reasons I continue, as I talk aboutguidance, to hold that item out, if you will, because I have no way of forecasting exactly what the putsand calls are going to be.

Operator


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

Javier Escalante - Consumer Edge Research

Question on the negative mix, again. I would like to ask it from a planning standpoint. Could you tell uswhether the commitments that the [DBUs] presented back in August, when you created the fiscal 14plan, could you tell us whether beauty and grooming are meeting their plans, considering this verynegative gross margin mix ? And if they dont, w hich DBUs are being asked to overdeliver in light of thereiteration of the corporate outlook for the balance of the year? Or does the plan assume that beautyand grooming are going to accelerate and therefore the negative mix to improve in the next couple ofquarters?

Jon Moeller - CFO

On a macro point, in terms of delivery versus expectation, weve been talking about, on the top line, amix impact of one or two points going forward, and this last quarter was one point, so pretty much inline with what we expected, as was last quarter. Each of the businesses has a strong commitment todeliver their plan that creates value for consumers and for shareholders.

But equally, each of them is l ooking out for the company and is willing to help out where thats needed.As hard as you can imagine, going into a year, knowing exactly whats going to occur during the courseof that year, particularly given the volatility in FX, some of the policy volatility, commodity costs, whichare up more in some categories than other categories. And so thats an equation that gets constantlyrebalanced. But I can tell you that no one in any category is giving up.

Operator

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

Joe Altobello - Oppenheimer

Just wanted to go back to beauty for a second. I think in terms of the question from Ali, you mentionedthat you dont think its an equity problem, and I would probably agree with that. But is it a portfolioproblem? Do you think that youre still missing that brand that you could sort of slide in between, lets


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say, SK-II and Olay for example, on the skincare side in particular? Is there something you could do thereto address that?

And then more secondly, in terms of overall beauty, if you look at the successful companies in thisspace, most of them are pure play. So is it a different mindset and culture thats really required tosucceed in that business than, say, versus fabric and home care, for example?

Jon Moeller - CFO

Thanks for reminding me of that part of Alis question. Sorry that I missed that. In terms of additionalequities that may be brought to bear in skincare, its something that we look at routinely. Its certainlynot someth ing that weve crossed off the list. But also, I think you shouldnt then therefore assume thatwe need to make an acquisition in order to get skincare growth back to where it needs to be.

There are opportunities on both Olay and SK-II, and there are opportunities if we need to create equitiesor properties organically. But if you think about Olay, really thats a series of properties that werecreated organically, from Total Effects to Regenerist, to ProX. And so I think the question is a good one,and yes, we may need additional properties, whether under existing brands or new brands, but Iwouldnt necessarily therefore conclude that we need to acquire in order to make that happen.

In terms of the capabilities and skill sets that are required to grow a successful beauty business, if you just step back a bit here, over the last 20 years, Procter & Gamble, with its skill sets and capabilities, hasbuilt the largest and most profitable beauty company in the world. If you look at what we were able todo with brands like Pantene, like Olay, like Old Spice, like SK-II, like Hugo Boss, LaCoste, Head &Shoulders is another good example, that literally started out as very small kind of one-country, two-country, less than $100 million in sales businesses, and now are, in some cases, multibillion dollarbusinesses, category leaders, global leaders, in their categories, wouldnt indicate that we dont havethe basic skill set and confidence required to develop and grow a beauty business.

Having said that, we are not arrogant in our ways and believe that we have all the answers. We havesignificant partnerships, many partnerships, externally, which give us access to other thinking in thebeauty space, whether thats in the packaging arena, whether thats in the ideat ion andconceptualization arena, the equity arena. And were also not averse to where theres very strong talentthat needs a specific skill [outage], to bring that in from the outside. If you look at most of our designgroup, and that applies to both beauty and the balance of the company, was brought in from other


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companies, other situations, with the knowledge that that was an important capability, that we werentable to source sufficiently internally.

So we will take any help that exists, wherever it e xists, but Im pretty confident we have the abilitiesacross our internal resources and our external partners to keep making progress in this space.

Operator

Your next question comes from the line of Bill Chappell from SunTrust.

Bill Chappell - SunTrust Robinson Humphrey

First, on the other Bills question, I missed the actual percentage in North America and the rest of theworld of held or gained market share. And then second, you talked about kind of being ahead of plan onthe cost savings, cost of goods sold, restructuring and pulling some of that forward from 2015, yetobviously theres no change to your EPS guidance. Is that just conservatism? Is that were spendingmore back into promotion and marketing with some of these launches? Or is that just FX is a little bitdifferent from what you thought?

Jon Moeller - CFO

Back to numbers, on market share, overall market share was about flat in the quarter. And percentholding or growing, I dont have the exact numbers, it was probably 55ish. So thats the market sharenumbers, both of which we expect will improve as we head into the back half of the year.

In terms of the acceleration of productivity savings, Id say there are two motivations for that, maybethree. The first is we want to make productivity part of our culture, and just like we never ask thequestion in P&G what is enough innovation, we dont like asking the question of what is enoughproductivity.

Well always be endeavoring to become more productive, and were doing that for multiple reas ons.Theres the financial reason, obviously, but theres also speed to market, clarity of decision making,


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organization transaction costs, etc. So if we were in a position where FX was a tailwind, wed be lookingto accelerate productivity savings into the current year and identify the next round.

The second motivation is exactly as you described, which is that FX, as I mentioned in our preparedremarks, has had a bigger impact, a significantly bigger impact, than we had been expecting. And as youknow, at the margin, while market growth still offers ample opportunity for all the best competitors tosucceed, it is down somewhat from what we were expecting when we went into the year.

And as youll remember, when we started talking about productivity, this is exactly the kind of thing wewere working to be able to do, which was offset, as one of the objectives, macro-level developmentswithout having to compromise our earnings objectives.

Operator

Your next question comes from the line of Alice Longley from Buckingham.

Alice Longley - Buckingham Research

Im thinking, based on your comments about whats happening in developing versus developed world,that trends and mix and price are quite different in the two regions. So could you take your 0% to 1%growth in developed markets and your 8% growth in developing markets and break those down intomix, price, and volume? And then as the second part of that, will mix and pricing get better do you think,in the U.S. in the second half than in the first half?

Jon Moeller - CFO

Let me just give you, and I think you can get the rest of it, the volume growth rates in developed, whichwas 1%, and developing was 6%. So the mix dynamics, pricing dynamics, arent that different betweenthe two, though obviously there are some differences between them. But those are the volumenumbers. You have the sales numbers, and I think you can deduct the balance.

In terms of going forward, every problem is a significant opportunity, and any acceleration in thedeveloped market business growth rates represents an opportunity to improve mix going forward. And


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Operator

Your next question comes from the line of Caroline Levy from CLSA.

Caroline Levy - CLSA

Just going back to beauty margins, they seem to be as high as theyve been in many years in the quarter. If you could help us understand that. I know you said we should look at it on an annual basis, but acouple of quarters now where margins are actually going up, while the business itself is challenged. Isthat a trend that we should expect to continue, the margin growth in beauty and grooming, beauty inparticular, while youre improving things and working to turn around Olay and Pantene ?

And then secondly, if you could just break out the volume growth in China. You said it was very strong,but if you could talk about your six major categories, if there were any standouts there?

Jon Moeller - CFO

First, on beauty, I think the question behind the question is efficiency of support for the growth of thatbusiness, and we are comfortable with the levels of support. As I mentioned, were working to increasethe effectiveness and the strength behind that effectiveness of our advertising and marketing programsacross the business, and thats obviously relevant in beauty as well.

And so it gets more difficult to look just at dollar trends and spending and assess sufficiency of support.So were very comfortable were supporting the new innovations were bringing to market heavily. Andtheres no reason that, if thats the case, we shouldnt be looking to take productivity savings to thebottom line. Its a balance, always, and it will continue to be a balance, but youre starting to see, inthose numbers, the reflection of very strong productivity progress, which is a good thing.

Operator

Your first question comes from the line of Leigh Ferst of Wellington Shields.


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Leigh Ferst - Wellington Shields

You made several references to your digital ad spending. Could you give us a little more insight into it inthe aggregate? Is it a third of your spending? And what kind of impact does that have on yourimpressions, and what impact will it have on your future spending on an absolute and relative basis,relative to sales?

Jon Moeller - CFO

We are continuing to increase our presence in the digital, social, and mobile spaces, as it relates tomarketing. The percent that is in those media, or channels, is different by category. In total, I think wereprobably about or getting close to 30% of the spending being in those areas. It does offer, based onwhat were seeing today, higher return potential.

And thats why the shift is occurring. And you heard me talk in the prepared remarks about some of thedynami cs of digital, social, and mobile media in terms of earned impressions, and thats one of thereasons that were seeing higher returns in that space. And a huge number of those impressions werenot paid for by us.

The other aspect of those channels and media is that it allows very effective and tighter targeting of amessage to a consumer. If you think very simplistically about men and women, if youre advertising onTV in particular, depending on what shows youre on, thats going to everybody, and we can much morecarefully target content to recipient in a digital environment.

So I expect that will continue to be an area of focus as we move forward, but I really do think this is aworld of and not of or, and were really looking at comprehensive campaign s across media thatconsumers want to access.

Operator

We have no further questions at this time.


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The Procter & Gamble Company's Management Discusses F2Q 2014 Results - Earnings Call Transcript

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