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24, 2014 11:26 AM ET | About: PG Executives
Jon Moeller - CFO
John Chevalier - IR
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
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 instructions.] Welcome to Procter & Gamble's quarter-end conference call. 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.
As required by Regulation G, P&G needs to make you aware that during the call, the company will make a number of references to non-GAAP and other financial measures. Management believes these measures 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 foreign exchange, 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 financial measures.
Now, I will turn the call over to P&G’s Chief Financial Officer Jon Moeller.
Jon Moeller - CFO
Good morning. Our October-December results came in pretty much as we had expected, keeping us on track to deliver our fiscal objectives. All-in sales were up modestly versus the prior year, including a 3point headwind from foreign exchange. Organic sales grew at 3%. Organic sales were in line or ahead of year ago in each reporting segment.
Coupled with 4% growth in the first quarter, this leaves us on track to deliver 3% to 4% organic sales growth for the fiscal year. Sales growth was driven by organic volume growth of 3%. Organic volume was ahead of a year ago in each of our reporting segments. Pricing added 1 point to sales growth and mix reduced sales growth by 1 point.
due to foreign exchange. This reserve reversal accounted for roughly $0. driven by 100 basis points of marketing and overhead productivity savings. The year ago period also included a $0.21. higher commodity costs. Core SG&A improved 80 basis points. We generated $2.02 of earnings per share benefit on the quarter.18.4 billion in free cash flow and remain on track to deliver free cash flow productivity of about 90% for the fiscal year. except for baby. interest expense.Consistent with the reported market growth and market share data you’ve seen. was a relatively strong month for us. Earnings for all segments were ahead of a year ago. Core gross margin was down 90%. December quarter all-in GAAP earnings per share were $1. and higher manufacturing startup costs. foreign exchange of 90 basis points. these two items constitute a 15% core earnings per share growth headwind for the quarter. interest income. December. December organic volume growth was over 5%. Foreign exchange was an $0. Combined. The effective tax rate on core earnings was 21.11 per share headwind for the company in the quarter.5%. and family care. This included a positive 1 point impact from the release of a tax reserve following a favorable outcome in Asia. Cost savings of 130 basis points and volume leverage were offset by geographic and category mix of 130 basis points. which leaves us on track with our plans to deliver 5% to 7% core earnings per share growth for the fiscal year. feminine. The net impact from all of the items below operating income. October and November were relatively soft months for our categories and for P&G. with each sector growing at or above 4%. These benefits were partially offset by foreign exchange imps and targeted innovation and goto-market investments. . Core operating margin was about equal to last year. down 10 basis points. Organic sales were up mid-single digits. and supply chain. core earnings per share were $1. on the other hand. was a slight headwind to core earnings per share growth for the quarter. non-operating income.07 per share gain from the sale of our bleach business in Italy. tax. Organic sales growth leverage and 230 basis points of cost of goods overhead and marketing savings were offset by foreign exchange and negative mix.
Net.5 billion in stock. value creation for consumers and share owners remains our top priority. The actions we’ve taken over the past two years to restore consumer value. In October/December. We’ll continue to focus the company’s portfolio. and where more new households will be formed. and is growing. As we move forward. most profitable markets. We continue to grow and expand our business in developing markets. leaving us on track to deliver our sales and earnings forecast for the fiscal year. progress on gross and operating margin. We need to continue to ensure our home market stays strong. and we repurchased $1. we returned $1. This is where the world’s baby’s will be born. and strong cash flow productivity. We’ll continue to exit businesses where we determine that potential buyers with different capability sets can create more value than ourselves. requiring sales growth. organic sales grew 8% in developing markets. our leading. on both the top and bottom lines. Our strongest brands and business units and total company positions are in the United States. We still have more work to do in a few categories.7 billion of cash to shareholders in dividends. this quarter. most profitable categories. Developing markets will continue to be a significant growth driver for our company this year and for years to come.As planned. We have a stronger brand and product innovation program ahead of us in the U. We’ll begin to make more operating TSR progress as we move into calendar 2014. . the second quarter came in pretty much as we were expecting. Operating TSR drives focus on core brands and businesses. bringing year to date share repurchase to $4 billion. expand our vertical product portfolios and horizontal regimens. which leads to choppy results on a quarter to quarter basis. but we’re making good progress. allocating resources to businesses where we can create value. and lead innovation have enabled us to restore value creating share growth in many parts of the business.S. with a focus on the categories and countries with the largest sizes of prize and the highest likelihood of winning. Operating TSR is an integrated measure of value creation at the business unit level. Operating TSR is our primary business performance measure. and leading. and the competitive environment is intense.
We’ve now exceeded our 2014 fiscal year non-manufacturing enrollment reduction goals.Consistent with our focus on operating TSR. mobile. We’re equally committed to being the product and commercial innovation leader in our industry. we expect to improve manufacturing productivity by at least 6% this year. We expect absolute marketing spending to come in slightly above prior year levels. Versus a target run rate of $1. Importantly. improved message clarity. precision. We continue to drive marketing productivity and effectiveness through an optimized media mix. more efficient digital and social mobile media and big opportunities to continue to improve the efficiency. driven by new. This is up $200 million since our last update. We have strong productivity plans for fiscal 2014. and effectiveness of our communication. we’re continuing to push forward with our productivity and cost savings efforts. we’re now forecasting more than $1. but marketing as a percentage of sales to decline. 1 to 2 years ahead of target And we won’t stop there. Our strict objective is to get substantially to our end of 2015 objectives by the end of 2014. We continue to identify opportunities to simplify and streamline our organization design. logistics. We see several more years of effectiveness improvement ahead. and social presence. the overall effectiveness and impact of our marketing spending will be well ahead of the prior year.6 billion of cost of good productivity savings this fiscal year. or within. and manufacturing expense. and have begun work to accelerate role reductions planned for fiscal 2015 into 2014. only 6 months into the year.2 billion. with more digital. across materials. . and greater non-advertising marketing efficiencies. This would put us close to. We remain committed to making productivity a core strength and a sustainable competitive advantage. the 16-22% reduction goal we’ve established. We’ve made solid progress over the last fiscal year and a half. We’re up more than 8% fiscal year to date. Versus a going-in target of 5%. and we’re working to accelerate some fiscal 2015 savings into 2014.
an innovation created with technology from our baby care business. U.5 points versus prior year. diaper share is up 1. battery business behind the Quantum innovation and recent distribution increases. locks out future stains and microfine lines in the teeth. comfort. and design innovations are driving diaper market share growth. delivering our most advanced whitening and freshness benefits in one toothpaste. which removes up to 90% of tooth stains in five days. launching in Italy. B Inspired. shelving. new extra-large tub sizes on Tide Pods. . Crest 3D White Luxe White Strips. all with the convenience of a single-load form. Iberia. to over 40%. Vanilla Mint Spark. with new Flexfit Film. growing in the low teens fiscal year to date versus the prior year. our recent baby care absorbency. a multipurpose stain remover that can be used in the laundry or around the house. better freshness. a triplechamber. The Ariel unit [dose] innovation in Western Europe is tracking well above expectations. a new line for experiential consumers. Consumption trends on Tide Pods have remained strong.5 points for the past three months. scent upgrades on Downy Unstoppables and Gain Fireworks in Wash Scent Beads.S.S. and more cleaning power. including flavors like B Dynamic. single-load laundry pack providing Gain consumers with enhanced scent. We’ve received strong retailer support for these innovations. In North America. and B Adventurous Mint Chocolate Trek. specifically designed with the right level of cleaning and freshness for mid-price-tier consumers. and Crest B. and the Balkans earlier this month. and Tide Simply Clean and Fresh laundry detergent. We’re also launching a very strong oral care innovation bundle next month. and with our new White Lock technology. retaking market share and leadership for the first time in many years. and Luvs product lines. Lime Spearmint Zest. our new Crest Sensor Relief Innovation. We continue to strengthen our share position in the U. with particular strength on the Pampers. Gain Flings. which delivers improved sensitivity relief. combined with Scope freshness. that stretches and molds for a custom fit for more whitening coverage. Crest 3D White Luxe.We’re currently bringing significant innovation to market in fabric care. Tide Oxy. Swaddlers. We’re continuing the expansion. overdelivering our distribution. including Crest 3D White Brilliance. and initial merchandising objectives for the launch. P&G batter value share is up 2. including upgrades on all of our Tide Plus value-added liquid detergents.
more consistently and more reliably. the only legally deaf player in the NFL. These product and commercial innovations should contribute to strong top line momentum in the back half which. We’re expanding Old Spice into the rapidly growing North American male hair care segment behind a full array of shampoos. advertisement has driven over 1. we were recently named the top rated manufacturer in China.7 billion consumer impressions in just two weeks. We recently launched our new commercial campaign for the Winter Olympics. we’re improving execution and operating discipline. It features Derek Coleman.6 billion consumer impressions so far. our second largest market. and like Old Spice and Duracell. we started shipping Pantene in North America. and the barriers he’s overcome by trusting his inner power. as rated by our retail partners and both . The advertisement has generated nearly 1 billion consumer impressions globally. Our research shows stronger purchase intent is generated when individual brand executions are closely coupled with the multibrand execution. with improved product performance and packaging. through social media and mass media coverage. We need everyone playing their position and playing it well. The shampoo and conditioner formulas contain a new Pro-V antioxidant complex. To date. conditioners. most of these are earned or free impressions generated through traditional and social media. This started shipping last week. the vast majority of which have been free.In December. The Olympics ad campaign had generated nearly 1. We’re also leveraging Pantene’s Shine Strong advertising that has received global acclaim for tackling gender labels and encouraging women to show their strength and shine. Next. The U. We simply have to execute better. the campaign has generated over 700 million consumer impressions. should enable us to deliver our fiscal year objectives. and styling products. with Old Spice’s most popular scent collections. Old Spice Body Spray is growing strongly behind the new Smellcome to Manhood commercial campaign. since it was launched on January 10.S. delivering clinically proven healthier hair with every wash. Consistent with the customer service improvements we discussed last quarter. Duracell’s Trust Your Power advertisement has also gained high awareness online. combined with productivity savings. The commercial program includes a balanced combination of single brand and multibrand executions.
and customer service reliability. and cash. despite stronger headwinds from foreign exchange and softer market growth rates. bottom line. Last. Foreign exchange was a significant headwind in the first half . innovation. will enable us to continue to improve results. along with targeted reinvestment. we’re making strategic investments in innovation and go-to-market capabilities. The fiscal year headwind from foreign exchange has continued to increase. This range reflects somewhat lower noncore restructuring costs in fiscal 2014 versus the prior year. The second half earnings growth increase that’s implied within our guidance is driven by foreign exchange and cost structure improvement. productivity. These surveys reflect the quality of our customer business development organization. Foreign exchange is expected to be a sales growth headwind of 2 points. we expect earnings per share to grow approximately 7% to 9%. Targeted go-tomarket investments will enable us to strengthen sales coverage in our fastest-growing markets and fastest-growing channels. We’re maintaining our forecast for bottom line core earnings per share growth of 5% to 7%. We aim to make up the difference through productivity advances. promotion plans. We now expect foreign exchange to be a 7-point headwind to core earnings per share growth. operational excellence. We now expect the tax rate on core earnings to be a point or so below prior year levels. top line. even as we work to address several remaining opportunities. We believe that the focus that we’re bringing to these four areas: operating TSR. which leads to all-in sales growth in the range of 1% to 2% for the fiscal year. our guidance now translates to constant currency core earnings per share growth in the range of 12% to 14%. Achieving organic sales growth in the upper half of our target range should result in modest overall market share growth. As a result. We remain on track to deliver our 2014 guidance. which will primarily benefit the fourth quarter.the Advantage Group and Kantar Retail surveys. On an all-in GAAP basis. We’re maintaining our organic sales growth range of 3% to 4%. Targeted R&D investments are enabling us to strengthen our near and midterm innovation pipeline.
though the situation has recently improved. Against this backdrop. We’ll also annualize the operating impacts from last year’s Venezuelan bolivar devaluation. We continue to monitor unrest in Egypt. which is a large business for us and a base of export for the balance of Africa. and a rapidly developing policy environment. Also. Further currency weakness is not anticipated within our guidance range. Finally. with uncertainty in foreign exchange. as well as unrest in economic instability in the Ukraine. access to dollars for imported products. Our first half results were in line with what we expected. In addition to the assumptions included in our guidance. We expect another year of about 90% free cash flow productivity. putting us on track to deliver our goals for the fiscal year and make progress towards our long term growth objectives.but will moderate in the second half at recent spot rates. Manufacturing startup costs will annualize in the second half of fiscal 2014. we want to continue to be very transparent about some key items that are not included. We continue to operate in a volatile environment. We won’t annualize the Venezuela impact until mid-February in Q3. some deceleration in market growth rates. our guidance assumes no further degradation in market growth rates. We’ll had a full quarter of laundry and oral care innovation impacts in Q4. Our plans assume capital spending in the range of 4% to 5% of sales and share repurchase in the range of $5 billion to $7 billion. Venezuelan price controls. and devaluation on Argentina. pricing that we’ll be taking to offset recent devaluations in some markets will take effect only in Q4. price controls. and devaluation present risk. we’ve maintained top line growth and improved constant currency operating earnings growth. Productivity savings that are being advanced to offset stronger FX impacts and lower market growth will primarily benefit the fourth quarter. As you prepare your estimates for Q3 and Q4. We’re making targeted investments in our core . The guidance we’re reconfirming today is based on last week’s FX spot rates. as do import restrictions. Productivity savings and devaluation related price increases will build sequentially. We have an even stronger innovation program in the back half of the year and savings from productivity improvements that will build. please keep in mind a couple of items.
So we really do believe that there’s strength behind the December numbers. that would be great.Wells Fargo John. Our next significant investor event ahead of A. and are aggressively driving productivity and cost savings. and that that should carry through into the third quarter. That concludes our prepared remarks. Above all. given all of the concern there. I was hoping you could talk a little bit about the cadence of the quarter. Question-and-Answer Session Operator Your first question comes from the line of Chris Ferrara from Wells Fargo. Can you put that in the context of sell-in versus sell-through? What was going on in October/November? I think your shipments probably exceeded consumption by a reasonable margin in December. we remain focused on value creation for consumers and for our share owners. which we posted on our website. Chris Ferrara . www. most promising developing markets. We’re very comfortable with inventory levels currently.businesses. business segment information is provided in our press release and will be available on slides. As a reminder. I’d be happy now to take your questions.com following the call. I think you mentioned that December was up 5%.CFO You’re certainly right in that the timing of innovation did affect the timing of shipments in the quarter.G. We hope to see many of you there. and biggest innovation opportunities. Jon Moeller . 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.pg. Lafley is the Cagney conference on February 20. and offtake in January has been very encouraging. .
as you look at the move to more local manufacturing. So improving margins on a constant currency basis in developing markets. as you mentioned. between 7% and 8% in the quarter we just completed. in Russia. but even more importantly as we continue to bring innovation to those markets. value creative innovation. on those developing market margins as we. while presenting some challenges. year on year. So what we’ve seen in OND. John Faucher . but we should continue to make progress quarter on quarter. are you thinking now about potentially hedging transactional going forward? Jon Moeller . and you’re seeing this massive negative transactional impact. give you an exact glide path. given the fact that you guys are still producing in some high-cost countries.JPMorgan Jon. We continue to see some softness in market growth rates. Operator Your next question comes from the line of John Faucher with JPMorgan.CFO One of the big questions as it relates to glide path going forward on margins in developing markets. there really wasn’t a significant difference in aggregate across the months of the quarter. And how long do you think it will take to see meaningful impact there? And then a related question. can you talk about the glide path that we should see in international operating margins over the next couple of years? It seems as though you exclude Russia and China. from a market standpoint. obviously is foreign exchange. So I really can’t.In developing markets. And we expect that to continue through the third quarter as well. last year we were talking about growing profit ahead of sales growth. leaves us confident as we head into JFM. you’re probably looking at maybe a high single-digit operating margin in your international business. . This year is really the same story. We made pretty significant progress. because I can’t predict exchange. localize manufacturing. which is happening pretty encouragingly in places like Brazil and places like China. but there continues to be very strong growth overall. But if you take that out. On a constant currency basis. we’ll grow earnings significantly ahead of the rate of sales growth. which allows us to mix consumers up.
As those instruments expire. particularly as they’re focused on the biggest opportunities with the highest chance of winning. be a margin accretive endeavor. And as you know. we continue to look at that periodically as well. Operator Your next question comes from the line of Dara Mohsenian from Morgan Stanley. Venezuela. Dara Mohsenian . all that that does is buy time. the interest rate differential is so high that even the cost of forward hedging gets pretty prohibitive. etc. And also. As it relates to hedging. where we have the opportunity.. we’re right back to the issue that we started with. And we continue to see that. Can you run through what’s driving that? And what are your plans as the category leader to drive improved growth going forward. A lot of the FX impacts. whether it’s in Egypt. grooming. not a margin dilutive endeavor. Argentina. beauty continued to drag down the organic sales growth number. are in nondeliverable currencies.Morgan Stanley John. though. solve the issue real time.So I said from the beginning that our developing market efforts. and I’d rather. particularly on the innovation side? Jon Moeller . where there really isn’t financial hedging option. The other divisions looked pretty solid. should. the Ukraine. up front.CFO . the localization of manufacturing is part and parcel of that effort. we’ll continue to look for all opportunities to operationally hedge. And in many of the other markets. frankly. So I was hoping for more detail on how you plan to drive market share improvement going forward in beauty and when you think we’ll start to see some improving share trends. over the long term. you mentioned market contraction in developed markets. And obviously. In terms of financial hedging.
including double-digit growth in western Europe and central and eastern Europe. Up double digits in China.S. And many parts of the beauty business are growing quite well. we’re fairly well-positioned. the Middle East. It kind of oscillates somewhere between 0. the better news is that where market growth is strongest in developed markets is in the U. our retail partners are looking at us as partners in that regard. And then we come to haircare. Cosmetics we continue to do very well in. We’re feeling increasingly good about our overall equity and advertising campaign efforts. Our biggest opportunity there is Pantene. We absolutely accept the responsibility for growing markets. If you look at . and Japan. market growth and our responsibility as category leaders for market growth. midteens in central and eastern Europe and more than 25% in Latin America. Strong growth really in all regions. driven by recent innovations on Secret. increased double digits in the quarter. On skincare. and so from a footprint standpoint relative to developed market growth. And increasingly.5 point in the quarter behind innovations like the Hunger Games Capital collection and the new Bombshell Volume mascara collection. So we’re hopeful that we’re rounding the corner in haircare. Our antiperspirant and deodorant business continues to perform well. but we are comforted by the progress that we’re making.5 points versus a year ago. Head and Shoulders grew mid-single digits in the quarter. On the question of developed markets.5 point and 1 point of value growth per month. Cover Girl value share I think was up about 0. we’ll also be expanding haircare into the young male segment behind the Old Spice brand. We bring innovation that does grow markets. and Africa.S. in the categories where we’re leaders and in the countries where we’re leaders. So we share the impatience that exists externally. and that’s going to take some time. I mentioned the innovation that’s coming to market that we feel good about. and Japan. Old Spice. It’s weakest in Europe. We know that we have more work to do. Personal care shipments. and as you know.S. albeit at a modest rate. And within that. for instance. deodorant value share up 1. we still have some work to do. as I mentioned.We continue to make progress on our efforts to strengthen the growth rates in beauty. Many parts of the haircare business are doing well. U. with U. the good news is that the developed markets are growing.S. We are overdeveloped in both the U. to grow their business as well. and as I mentioned.
what’s happened. Wendy Nicholson . same category. apples to apples growth rate. getting out of diapers in western Europe? Is that the stuff you’re entertaining as well? Jon Moeller . So in the past. It’s actually more important in many places of the world than share. I don’t know exactly. we exited the family care business. historically. same country. . the sort of strength to grow. whether that is at a category country combination level or a brand level. a financial structure and an industry structure where we could sustainably create value for our shareholders. The 7-8% growth in emerging markets. with regard to what AG has talked about. the vast majority of that 8% growth in developing markets that we posted in the latest quarter is. So that should be a pretty good number and representative of the progress that we’re making. and I know you said you’re looking for partners who can grow your businesses better maybe than you can. in various parts of the world because we just didn’t see. but I would guess that the impact of any new white space businesses is well below a point. at that point. So it is very much a part of our focus. we’ve looked at other options. Operator Your next question comes from the line of Wendy Nicholson with Citigroup. kind of like what Kimberly’s doing. or close to it. 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 just clarify that and make sure if that’s a real sort of same-store sales number.Citigroup Just first a clarification. historically for instance. are you entertaining full brand divestitures? Or is there the possibility too of just sort of country category combination exits. And then my second question is. where we determine we can’t create value. if you will. with Crest 3D White and some of the other innovations. And on divestitures. the tissue/towel business.CFO From a developing market growth standpoint. if you look at our efforts in this space. we bring innovation that increases trips and grows market baskets. for instance.
but maybe your comfort level and kind of where estimates are now. One is fabric care in the U. as we look at the back half of the year. to water purification.S. particularly promotional activity. And then my real question is clearly the March quarter has been a troubling one for P&G historically. both of which are big businesses. and in some markets the bleach business. and we’re very comfortable that both of those businesses. that would be very helpful.Deutsche Bank Just a follow up. everything we’re looking at is through the lens of value creation and there’s nothing that’s off the table. And that’s primarily driven by two items.S.We did the same. it’s really going to be fourth quarter weighted. the other is haircare in the U. So can you just give us some more color? I know you gave us some data points. which are growing share. Bill Schmitz . ahead of our launches in both of those categories. and globally? I don’t think I caught that. what was the percentage of market share that the holding are gaining both in the U. which are just happening now.S. and where we lost a little bit of share in the OND quarter. And it seems like. Operator Your next question comes from the line of Bill Schmitz with Deutsche Bank.hopefully it’s reassuring . So the decline in percentage of business holding or growing share is really driven by those two things.. And the the growth rate in developed markets? I know you gave us the emerging markets number. will strengthen as the innovations hit the market. in several categories recently.that as I mentioned. the Street consensus. as you know. But I know you don’t want to give quarterly guidance. because as you know this is something we really only want to talk about when we have something to talk about.. which we expected going in. I’ll just reassure you that . to snacks. from a share standpoint. And rather than point to specifics. from pharmaceuticals.CFO Percentage of business holding and growing share is down a bit from where we were last quarter. Both of those categories are items that we highlighted going into the quarter as likely going to be experiencing a significant amount of competitive activity. . Jon Moeller . to coffee.
Just for perspective. and it just struck me as a little bit too reminiscent of some of the innovation in the last two or three years. amazing scent. encouragingly. and it’s consistent with the various impacts that I was calling out in terms of when the different pieces are going to fall in place. I expect us to make good progress in the JFM quarter. Lever’s percent volume sold on promotion in haircare.Barclays The first was just on healthcare. but I was reading through the release yesterday that you guys put out about Gain Flings. . If you look at some of our laundry competitors. And then the other question was just perhaps a bit nit-picky. in OND. or if there’ something else driving it. it was up about 6% versus the prior year. on both the top and bottom line. of very strong innovation that’s now just hitting shelves. I think your statement in terms of fourth quarter predominance is correct. And relative to the March quarter. flat or just a little bit ahead in developed. on developed market growth rates. it will be fourth quarter loaded. Having said that. percent volume sold on promotion in the OND quarter. in developed markets. It reads like it’s like 10 people sat in a room and couldn’t make up their minds which was the most important benefit. plus Febreze. Your second part of your question. these were things that we called out going into the quarter. plus Oxy. Very big volume number. So the total is 8% developing. Lauren Lieberman . So just curious if that was primarily because of the expansion of the personal healthcare business in emerging markets. if you look at. where it’s like this massive bundling of benefits into one product. So again. for example. and it’s all ahead. and then weaker mix impact. Operator Your next question comes from the line of Lauren Lieberman with Barclays Capital. slightly ahead. it was up over 20% versus a year ago. So it’s Gain Flings with great cleaning power. things that we expected. But as you think about the modeling across the quarters. we were about flat.
and that certainly is the case here as well. So going forward. Operator Your next question comes from the line of Olivia Tong with BoA. whether there’s pricing in some markets. which has been extremely successful. and how this is or isn’t different from the innovation you guys have been putting out over the last two or three years in terms of that messaging. It was not only the form. at margin trends as being indicative of what’s happening there. from that standpoint. you know.Bank of America I wanted to ask about grooming margins. So it was an upgrade. as well. The cost savings program is itself not ratable. But that’s primarily what’s driving it. I don’t have that level of detail right here in front of me. It moves up and down across quarters. So I would encourage you to look more. when we brought Tide Pods to market. There’s a lot going on out there. it was a better cleaning product. And John can give you the details on that later today. if you think about it. Early both customer and consumer reaction to the proposition has been very positive. Jon Moeller .CFO The healthcare difference between the sales line and the volume line is really just category mix more than anything. Olivia Tong . . on why so much in one product. On Gain Flings. is Q1 or Q2 more indicative of going forward? And is this due more to timing of some cost savings initiatives or promotions or innovation? Or is there something structurally different. so that profit growth will continue? Jon Moeller . call it 12 months. and what they’ll be willing to pay for that. And obviously nothing comes to market without a lot of work to understand what will delight consumers. where the form should speak for itself. because they were up significantly year over year after being down in Q1. that was a multibenefit proposition too.So I just would love some clarification maybe on the thought process. whether it’s foreign exchange. Sorry.CFO It’s hard to draw meaningful understanding from one quarter’s worth of margin increase or decrease in any one of our categories.
We just announced this recently. to improve margins in a way that’s value accretive for consumers. And I wonder sometimes whether you actually need to acquire something in that business. That doesn’t mean that we’re satisfied and we won’t stop working.We’re reasonably happy with our margins on that business. . any thoughts on changes in terms of processes within the innovation group. She and Bruce are in transition. if you could provide some perspective on some of the transitions that took place in leadership in R&D with Bruce retiring. both on the productivity point and on the innovation point. and I wouldn’t want to presume any changes in emphasis that she will choose. Jon Moeller . We haven’t really heard much about what you need to do to fix Olay. She has a long track record of innovation success and consumer delight across a number of our businesses and across the global portfolio. to backstop that business. One is on beauty. because it really is your only skincare brand. Ali Dibadj . Operator Your next question comes from the line of Nik Modi with RBC Capital Markets. Operator Your next question comes from the line of Ali Dibadj from Bernstein.Bernstein A couple of things.RBC Capital Markets Just a quick question. Just curious on the replacement.CFO Kathy Fish will be taking R&D leadership for the company. to make at this point. working a AG and others. Nik Modi . So I’d love a perspective on that. Any thoughts there would be much appreciated. So we’re very excited to see Kathy taking that responsibility.
as I said before. which is part of what we were trying to do with the Olay Fresh Effects item. with very high equity scores. it’s in packaging.And then secondly. One is. to bring in savings. very high net promoter scores. back half. But I would feel much more concerned sitting here if this was an equity problem or a fundamental competitive product problem. So from an equity standpoint. This is going to take a while. And really. the highest in the category. as you mentioned. but at least to a broader question that I have. And it’s entering some benefit segments that we’ve. I understand that a quarter doesn’t make a trend. But it . it doesn’t mean we can’t do more work. Jon Moeller . that would be helpful. say. but also to get to standard platforms across the world. and the supply chain work. But the work to do is in brand architecture. when we do see the beauty margins go up. which is when do you expect that crossover point to happen as a company. in the context of some of the supply chain work you guys are doing internally. it’s in positioning the various properties in a way that is most relevant for consumers. which allows for faster initiative expansion. I don’t see it having a material impact. both to think through and to execute. And those are growing faster than the benefit segment that we’re in. Now. from a product standpoint as well. in the next 12 months. In terms of crossover point. frankly. And it’s something that we’re really just beginning the work on. 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. we’ll talk a little bit more about it at Cagney.CFO The great part of the Olay story is that that remains an incredibly strong equity. neglected. but we start with a very strong asset. It also involves ensuring we reach consumers at different ages. which it’s not. this is going to take some time. to get closer to our customers with multicategory manufacturing facilities in a way that allows us to serve them better. We have a very competitive product. We continue to be encouraged about the opportunity to potentially replatform most of our supply chain in both North America and Europe to do really several things.
can you give us more detail behind the merchandising location and targeted price points for Simply? And lastly. with the launch upon us. it has all the benefits of a standard compaction in terms of lower cost. really where we’ve lost a little bit of business is in liquids.S. And if you think about it. A few questions. is the most compact form that exists in the marketplace today. it sounds like Arial Pods are off to a good start. below current Tide. we’re expecting that to be about 30%. what signs are you looking for to gauge when or if the U. and as more of the market converts to that.Goldman Sachs Thanks for the incremental color on beauty.should enable us to bring in a new round of savings in addition to the savings we’ve been talking about over the last 18 months. actually across categories. better value equation for the retailer. market will be ready for the next round of compaction? Jon Moeller . on a list price basis. And in terms of the question on Europe. First. Operator Your next question comes from the line of Jason English with Goldman Sachs. [laughter] First of all. So it’s just a very competitive . beyond laundry.CFO Well. we’re really actively doing that as we sit here. Jason English . Compaction is something that we are always looking at as an opportunity. whether it’s Tide or Arial or now Gain. it seems like Ali has now trained all of you well. on Simply. because the unit dose offering. the price is ultimately the sole discretion of our retail partners. So what are the offsets there? Second. You all ask three-part questions. but Nielsen data suggests you’re still struggling in the market. on Europe. I want to drill a bit deeper on laundry. But that’s probably two or three years out. But generally. better value equation for consumers. where we’re responding to heavy competitive promotion levels.
It’s what’s referred to as regulated items. as I talk about guidance. but your question is an appropriate one as we look forward. That doesn’t mean that there won’t be opportunities to take pricing. Operator Your next question comes from the line of Connie Maneaty from BMO Capital Markets. as we bring in Pods and people are emphasizing the other parts of their portfolio. which makes sense. And there are unregulated items where there’s more pricing flexibility. the price controls that exist apply to a portion of the portfolio. because I have no way of forecasting exactly what the puts and calls are going to be. 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 . there are price controls in place. which starts off from a very attractive place to begin with.BMO Capital Markets I am just going to have to question on Venezuela. and we’re obviously in discussions with them. And I would say that they understand the need for some level of pricing for both international and local competitors to remain viable. to hold that item out. where the pricing controls are relevant. It’s something that we’ll be very transparent about and keep you updated on. To the extent that there’s more devaluation. So we continue to work to improve our financial situation in Venezuela. And that question is one of the reasons I continue. Also. not to all.marketplace. Currently. The level of pricing is reviewed regularly by the government. if you will. Connie Maneaty .CFO That’s a very good question. will there be more pricing that’s allowed? And that’s just something I don’t have the answer to today. and that is as we contemplate another pretty steep devaluation. Operator .
as was last quarter. some of the policy volatility. and I would probably agree with that. and this last quarter was one point.Oppenheimer Just wanted to go back to beauty for a second. considering this very negative gross margin mix? And if they don’t. on the top line. going into a year. which DBUs are being asked to overdeliver in light of the reiteration of the corporate outlook for the balance of the year? Or does the plan assume that beauty and grooming are going to accelerate and therefore the negative mix to improve in the next couple of quarters? Jon Moeller . Javier Escalante . As hard as you can imagine. Joe Altobello .Consumer Edge Research Question on the negative mix. again. particularly given the volatility in FX. Each of the businesses has a strong commitment to deliver their plan that creates value for consumers and for shareholders. Operator Your next question comes from the line of Joe Altobello with Oppenheimer. knowing exactly what’s going to occur during the course of that year. But is it a portfolio problem? Do you think that you’re still missing that brand that you could sort of slide in between. we’ve been talking about. in terms of delivery versus expectation. which are up more in some categories than other categories. so pretty much in line with what we expected. when you created the fiscal ’14 plan. each of them is looking out for the company and is willing to help out where that’s needed. But equally. could you tell us whether beauty and grooming are meeting their plans. commodity costs. I would like to ask it from a planning standpoint. a mix impact of one or two points going forward. let’s . But I can tell you that no one in any category is giving up. Could you tell us whether the commitments that the [DBUs] presented back in August. you mentioned that you don’t think it’s an equity problem. And so that’s an equation that gets constantly rebalanced.CFO On a macro point.Your next question comes from the line of Javier Escalante from Consumer Edge Research. I think in terms of the question from Ali.
So is it a different mindset and culture that’s really required to succeed in that business than. like Olay. over the last 20 years. And we’re also not averse to where there’s very strong talent that needs a specific skill [outage]. and there are opportunities if we need to create equities or properties organically. In terms of additional equities that may be brought to bear in skincare. LaCoste. In terms of the capabilities and skill sets that are required to grow a successful beauty business. twocountry. and now are. we may need additional properties. category leaders. Head & Shoulders is another good example. whether that’s in the ideation and conceptualization arena. Procter & Gamble. SK-II and Olay for example. to bring that in from the outside. we are not arrogant in our ways and believe that we have all the answers. There are opportunities on both Olay and SK-II. whether under existing brands or new brands. really that’s a series of properties that were created organically. And so I think the question is a good one. But also. wouldn’t indicate that we don’t have the basic skill set and confidence required to develop and grow a beauty business. But if you think about Olay. Sorry that I missed that. with its skill sets and capabilities. like Hugo Boss. from Total Effects to Regenerist. if you look at the successful companies in this space. if you just step back a bit here. less than $100 million in sales businesses. to ProX. and that applies to both beauty and the balance of the company. If you look at most of our design group. like Old Spice. versus fabric and home care. but I wouldn’t necessarily therefore conclude that we need to acquire in order to make that happen. say.CFO Thanks for reminding me of that part of Ali’s question. externally. many partnerships. that literally started out as very small kind of one-country. in terms of overall beauty. whether that’s in the packaging arena. for example? Jon Moeller .say. which give us access to other thinking in the beauty space. has built the largest and most profitable beauty company in the world. was brought in from other . If you look at what we were able to do with brands like Pantene. on the skincare side in particular? Is there something you could do there to address that? And then more secondly. Having said that. multibillion dollar businesses. global leaders. It’s certainly not something that we’ve crossed off the list. like SK-II. I think you shouldn’t then therefore assume that “we need to make an acquisition” in order to get skincare growth back to where it needs to be. in some cases. We have significant partnerships. most of them are pure play. the equity arena. it’s something that we look at routinely. in their categories. and yes.
restructuring and pulling some of that forward from 2015. wherever it exists. So that’s the market share numbers. yet obviously there’s no change to your EPS guidance. other situations.CFO Back to numbers. There’s the financial reason. on the other Bill’s question. We’ll always be endeavoring to become more productive. on market share. and just like we never ask the question in P&G what is enough innovation.companies. I’d say there are two motivations for that. . that we weren’t able to source sufficiently internally. obviously. Is that just conservatism? Is that we’re spending more back into promotion and marketing with some of these launches? Or is that just FX is a little bit different from what you thought? Jon Moeller . cost of goods sold. we don’t like asking the question of what is enough productivity. both of which we expect will improve as we head into the back half of the year. it was probably 55ish. And percent holding or growing. and we’re doing that for multiple reasons. overall market share was about flat in the quarter. In terms of the acceleration of productivity savings. I don’t have the exact numbers. clarity of decision making. but I’m pretty confident we have the abilities across 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. I missed the actual percentage in North America and the rest of the world of held or gained market share. you talked about kind of being ahead of plan on the cost savings. Bill Chappell . maybe three. with the knowledge that that was an important capability.SunTrust Robinson Humphrey First. So we will take any help that exists. The first is we want to make productivity part of our culture. And then second. but there’s also speed to market.
and I think you can deduct the balance. based on your comments about what’s happening in developing versus developed world. Operator Your next question comes from the line of Alice Longley from Buckingham. But those are the volume numbers. as I mentioned in our prepared remarks. it is down somewhat from what we were expecting when we went into the year. at the margin. that trends and mix and price are quite different in the two regions. than we had been expecting. So the mix dynamics. And . and any acceleration in the developed market business growth rates represents an opportunity to improve mix going forward. which is that FX. the volume growth rates in developed. The second motivation is exactly as you described. and volume? And then as the second part of that. a significantly bigger impact. etc. aren’t that different between the two.S. And as you’ll remember. which was offset. In terms of going forward. So if we were in a position where FX was a tailwind. while market growth still offers ample opportunity for all the best competitors to succeed. has had a bigger impact. this is exactly the kind of thing we were working to be able to do.CFO Let me just give you.Buckingham Research I’m thinking. though obviously there are some differences between them.organization transaction costs. and developing was 6%. which was 1%. macro-level developments without having to compromise our earnings objectives. and I think you can get the rest of it. So could you take your 0% to 1% growth in developed markets and your 8% growth in developing markets and break those down into mix. will mix and pricing get better do you think. price. You have the sales numbers. every problem is a significant opportunity. as one of the objectives. we’d be looking to accelerate productivity savings into the current year and identify the next round. in the U. Alice Longley . in the second half than in the first half? Jon Moeller . when we started talking about productivity. pricing dynamics. And as you know.
And so while we expect that the developing. as an example. for example. but also in developed markets. and we’re in a good position in that regard. Mark Astrachan . to build markets. batteries innovation. and the laundry innovation on a global basis. and that just builds as we go forward.Stifel Nicolaus I wonder if you could talk a bit broadly about expectations for level of competitive activity in the back half of the fiscal year. Operator Your next question comes from the line of Mark Astrachan from Stifel. . developed market dynamic will be prevailing . the tissue/towel innovation. that competitive activity will remain strong. with some of the things I talked about and frankly some of the things I haven’t talked about yet. And think about developing markets. So competing on the basis of innovation is something that is much more comforting than not. I think the other thing that oftentimes is missed. But the biggest antidote to that kind of situation is innovation. behind the baby care innovation. that’s an opportunity to improve mix going forward. and there are opportunities to grow markets. and it goes to the point of one of the questions that was asked earlier about market size. to the extent we continue to make the progress we’re making on beauty. particularly in a developing market context. Jon Moeller . to create new businesses. And more competition tends to be accretive from a market growth standpoint. we really don’t look at this as a zero sum game. The first half innovation program was fairly strong.in other words. we still will have some negative mix going forward .there are many reasons to believe that the magnitude of that impact can lessen over time. It’s really not about share.CFO I expect that in an environment of growth but modest growth. And each of our businesses has its own opportunity to improve mix through value accretive innovation. There’s enough growth for all of the better companies to continue to do well. it’s about market. and how we should think about the split between gross margin and SG&A expense leverage to drive the operating margin that’s expected.clearly.
beauty in particular.CLSA Just going back to beauty margins. while the business itself is challenged. and it will continue to be a balance. And so it gets more difficult to look just at dollar trends and spending and assess sufficiency of support. the margin growth in beauty and grooming. I think the question behind the question is efficiency of support for the growth of that business. Is that a trend that we should expect to continue. and that’s obviously relevant in beauty as well. if there were any standouts there? Jon Moeller . . Caroline Levy . And there’s no reason that. You said it was very strong. in those numbers. but if you could talk about your six major categories. always. the reflection of very strong productivity progress. So we’re very comfortable we’re supporting the new innovations we’re bringing to market heavily. but you’re starting to see. I know you said we should look at it on an annual basis.Operator Your next question comes from the line of Caroline Levy from CLSA. if you could just break out the volume growth in China. Operator Your first question comes from the line of Leigh Ferst of Wellington Shields. but a couple of quarters now where margins are actually going up. we shouldn’t be looking to take productivity savings to the bottom line. If you could help us understand that. we’re working to increase the effectiveness and the strength behind that effectiveness of our advertising and marketing programs across the business. and we are comfortable with the levels of support. while you’re improving things and working to turn around Olay and Pantene? And then secondly. As I mentioned. they seem to be as high as they’ve been in many years in the quarter. on beauty. which is a good thing. if that’s the case. It’s a balance.CFO First.
and what impact will it have on your future spending on an absolute and relative basis. and that’s one of the reasons that we’re seeing higher returns in that space. Could you give us a little more insight into it in the aggregate? Is it a third of your spending? And what kind of impact does that have on your impressions. . and we can much more carefully target content to recipient in a digital environment. that’s going to everybody. as it relates to marketing. If you think very simplistically about men and women. but I really do think this is a world of and not of or.CFO We are continuing to increase our presence in the digital.Wellington Shields You made several references to your digital ad spending. or channels. And a huge number of those impressions were not paid for by us. and we’re really looking at comprehensive campaigns across media that consumers want to access. higher return potential. It does offer. The percent that is in those media. social. depending on what shows you’re on. And you heard me talk in the prepared remarks about some of the dynamics of digital.Leigh Ferst . I think we’re probably about or getting close to 30% of the spending being in those areas. relative to sales? Jon Moeller . social. In total. and mobile spaces. if you’re advertising on TV in particular. The other aspect of those channels and media is that it allows very effective and tighter targeting of a message to a consumer. So I expect that will continue to be an area of focus as we move forward. And that’s why the shift is occurring. is different by category. and mobile media in terms of earned impressions. based on what we’re seeing today. Operator We have no further questions at this time.
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