The Procter & Gamble's Management Presents at Deutsche Bank dbAccess Global Consumer Conference (Transcript)

Seeking Alpha

The Procter & Gamble Company (PG)

Deutsche Bank dbAccess Global Consumer Conference Call

June 12, 2013 4:30 am ET

Executives

Jon R. Moeller – Chief Financial Officer

Analysts

Bill Schmitz – Deutsche Bank

Presentation

Bill Schmitz – Deutsche Bank

All right, we are going to get started here with P&G. I am Bill Schmitz, I am the beverages and Household & Personal Care Analyst for North America, Deutsche Bank. Can we go ahead and run the forward-looking language?

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P&G would like to remind you that today’s presentation includes a number of forward-looking statements. If you will refer to P&G’s most recent 10-K, 10-Q and 8-K reports, you will see a discussion of factors that could cause the Company’s actual results to differ materially from these projections. Also as required by regulation G, Procter & Gamble needs to make you aware that during the presentation, the company will make a number of references to non-GAAP and other financial measures. For completeness, Procter& Gamble has posted on its website www.pg.com a copy of the key slides from this presentation and a full reconciliation of non-GAAP and other financial measures.

It took me a couple of practice rounds to record that, but Jon and Teri don’t need any introduction. We very much appreciate them coming back to the conference this year. So without any further ado, Jon Moeller, Procter & Gamble’s Chief Financial Officer.

Jon R. Moeller

Thanks Bill and good morning everyone. I am going to make some pretty short prepared remarks this morning, which will give us a plenty of time for Q&A. Last June, we sat and shared business and productivity plans for fiscal year 2013. Through the first three quarters, we are on track or ahead on each metric.

Organic sales growth is expected to be about 3% for the year; the midpoint of our initial guidance. Each of our productivity measures are tracking ahead of the plan. We have increased the midpoint of our core earnings per share guidance by $0.10, while absorbing the operating impact from the devaluation of the Venezuelan bolívar and while increasing back half investments.

In April, we increased our share repurchase target to $6 billion and increased our dividend by 7%. While the market share trends have been improving, we held or grew market share in businesses representing over 50% of sales in the March quarter; the third consecutive quarter-to-quarter improvement from 30% in the June quarter last year to 45% in the September quarter to just below 50% in the December quarter and now over 50%.

Overall, global market share trends have improved, but we are still down versus prior year levels. We expect this will improve in the current quarter.

We’ve recently made a few important changes in our organizational structure at Procter & Gamble. As you may have heard, we have a new CEO. We have also announced, we will be grouping our global business units into four industry based sectors. These changes will help us operate more effectively and efficiently driving technical, commercial, financial, and organizational synergies.

We expect this structure will facilitate faster global expansion of brand and product innovations to win with consumers and compete more effectively against the best companies in our industry.

While we must always evolve and change and we will continue to do so, we don’t currently expect foundational changes to our near-term priorities. We will continue to focus on maintaining strong and developing market momentum, strengthening our core developed market business, building and leveraging a strong innovation pipeline and aggressively driving cost savings and productivity improvements to fuel growth.

Let me briefly cover progress against each of these priorities. First, maintaining and developing market momentum. By the end of this fiscal year, our developing markets are expected to be $33 billion to $34 billion in sales. This constitutes the largest developing market business of any consumer products company, roughly 50% larger than Unilever and three times larger than L'Oreal and Colgate in our product categories.

Over the last 10 years, sales and after-tax profit in developing markets have increased about fourfold. Profit will be growing ahead of sales this year and next. Our highest priority developing market sales are up 10% fiscal year to-date and profit will grow well ahead of this.

While we have the largest business in developing markets, we also have one of the largest opportunities. By the end of this fiscal year, developing markets are expected to be nearly 40% of our sales, which is roughly double where we were about 10 years ago, but still well behind several of our largest multinational competitors.

Looking more closely at the BRIC markets; India results have been very strong. In the March quarter, organic sales increased more than 20%; this was the 43 rd consecutive quarter of double digit sales growth in India. In the March quarter, over 80% of the sales in the market were growing share.

In Brazil, organic sales have increased high single to low double digits for 31 of the last 36 months or nearly 90% of the time. Value share has been up for 36 consecutive months and 80% of the business was growing share in the March quarter.

Third quarter organic sales in China were up a solid 8%. This marked an acceleration versus our first half growth rates. In this fiscal year alone we have introduced a tie with Safeguard, Pantene, Nature Fusion, Head & Shoulders for Men, Yu Lan You Naturals, Mach3 Sensitive, and Gillette ProGlide blades and razors. And we have completed product restages with improved benefits on Rejoice, Olay, Safeguard, Duracell, Whisper, and Pampers. With these innovations, we are growing share across many of our largest businesses. Businesses representing roughly 75% of sales have sequentially improved market share, but we haven’t turned the corner yet on overall share growth.

Russia is another market we are working to strengthen. We are making targeted consumer value interventions to correct competitive price gaps, restoring promotional competitiveness where needed and launching new innovation across many of our categories. While still early, we are beginning to see positive results. Russia value share has stabilized with sequential share improvement in the March quarter.

Next, we are continuing to strengthen our core developed market businesses. In the March quarter, we held or grew share in businesses representing nearly 60% of sales in developed markets. In the U.S., we held or grew value share in businesses representing two-thirds of sales in the March quarter and over 70% of sales in the month of March. This is up from 15% in the June quarter of last fiscal year and about 55% in the first half of this fiscal year. As with overall company results, last quarter market share in developed markets was still down versus prior year levels, but it’s progressing in the right direction.

The work to do in developed markets is focused disproportionately on beauty. Over the last 175 years, P&G has built the largest and most profitable Beauty and Grooming business in the world. We’ve built more billion dollar Beauty and Grooming brands of L'Oreal and Unilever combined. But two of our largest brands, Pantene and Olay are losing share. These brands came to P&G as small parts of a much larger Richardson-Vicks acquisition in 1985. We’ve built them both from very small brands into global leaders.

Today, Pantene is the largest hair care brand in the world. It’s about double the size of the next competitive brand with broad global presence. Olay is the largest facial skin care brand in the world. Collectively, Pantene and Olay account for about $5 billion in global sales and 25% of the beauty reporting segment. Both brands are underperforming. We know it, we are working hard to fix them, major changes in the momentum of brand this size don’t happen overnight. It will take some time.

There are several steps we need to take. It all starts of course with the consumer. We need to leverage consumer insights to drive the right portfolio with the right segmentation across price tiers and product benefits without being over skewed or too complex. We need the right innovation. We need to make sure we are clearly communicating the equity and competitive advantages of our brands to consumers in advertising, on the package and at shelf.

Two, how to win priorities. Innovation and productivity underpin our growth efforts in both developed and developing markets. Innovation strengthens existing offerings and enables us to expand our portfolio into new benefit spaces, new forms, and across price tiers. We are innovating on the premium tier with recent innovations like Tide PODS, and Pantene Expert Collection. And we are upgrading or introducing new mid-tier products, delighting consumers who are looking for superior value at a lower price.

We are quickly expanding many of our innovations to new markets. Ariel 3-in-1 PODS started shipping in April in France, Belgium, and the Netherlands and in May, we began selling PODS in Poland and the Baltic countries.

Distribution results have been excellent and early market shares are strong. With less than three months since launch in Western Europe, we have shipped over 60% of the cases we expected in the first year. Value share here in France was over 5.5% for the last four weeks. We began the launch of Ariel PODS in Latin America with initial shipments starting in Mexico in the March quarter and we recently started shipping in Brazil and South Africa. Pantene Expert series is off to a strong start in the U.S. and is currently being rolled out in 65 countries and Crest and Oral-B 3D White is now being expanded to all regions.

While promotions may win quarters, innovation wins decades. Superior innovation delivers benefits over long periods of time, not just the first few quarters it is launched. We launched Fusion ProGlide in the U.S. in June 2010 three years ago. It’s now present in over 45 markets globally with recent entries in Brazil, Mexico, and China. Fusion has grown global value share for 29 straight quarters, every quarter since the first Fusion product was launched.

Another example is our 3D White innovation, which is now sold in over 40 markets globally. 3D White toothpaste has grown value share for 12 consecutive quarters every quarter since it first launched. We are taking steps to more clearly communicate the superiority and value our innovation creates. We are including powerful claims in our packages and in our advertising and we’re partnering with customers to bring these claims to life on shelf.

Tide PODS deliver as much cleaning power as the next six leading competitive unit dose products combined. Bounty DuraTowel offers you the opportunity to ditch your dish cloth and switch to Bounty DuraTowel, which is three times cleaner. While Pantene Expert series Age Defy lines for hair that acts up to 10 years younger. Let’s watch how it bring consumer benefits to life in this Ariel PODS commercial being aired currently in France.

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Like innovation, productivity also underpins all of our developed and developing market efforts. Here too we are making very good progress. The overhead reduction plan that we announced last February called for reduction in non-manufacturing staffing of 10% or 5700 rolls by the end of this fiscal year, so by June 30.

As of the end of May, we have produced 6700 rolls putting us 1000 rolls or more than 15% above the fiscal year commitment with one month still to go. Exceeding our goals this year gives us a running start on our announced plans to further reduce non-manufacturing enrollment by an additional 2% to 4% per year for the next three fiscal years, bringing the total reduction to between 16% and 22% by the end of fiscal 2016.

We are on track to deliver more than $1.2 billion in savings this fiscal year and cost of goods sold. Our efforts in this area include a targeted 5% increase in net productivity across our manufacturing operations even as we add new manufacturing capacity and enrollment in developing markets. This will allow us to add about 20 new manufacturing operations with no increase in overall headcount.

So for this year, we are tracking well ahead of the 5% target at nearly 7% manufacturing productivity improvement. And while we are still early in the planning process, we already have line of sight to at least $1.3 billion. in additional cost of goods savings for next fiscal year.

We're also achieving efficiencies in marketing spending and are reinvesting these and strengthen plans to support our innovation. We're shifting a greater portion of media spending to digital, which offers a higher return on investment. As part of this, we're also creating marketing campaigns that includes social media plans to maximize incremental earned media or free impressions.

We're also making good progress on cost savings in non-media marketing spending. For example, we're developing fewer bigger creative ideas that travel around the world allowing us to produce fewer but better commercials. We're also producing these commercials in lower cost locations.

Finally, we expect to deliver a free cash flow productivity of 90% or more. This is being driven by the strong progress, we're making on working capital. We're focused on reducing inventory levels and expect that our days on hand will be down versus year ago at the end of the June quarter. Our strong cash flow has enabled us to increase the dividend by 7% and increase our share repurchase target to $6 billion.

We're in the middle of our planning process for fiscal 2014. We’ve planned to give guidance for 2014 on our next earnings call which is scheduled for Thursday, August 1st. Our plans and targets for next fiscal year will reflect the benign commodity environment, continued strong sales and profit growth in developing markets, and our cost and productivity savings. They will also reflect foreign exchange headwinds, challenging dynamics in markets like Venezuela, Argentina, and Egypt and investments in innovation and portfolio. We'll be using the change in leadership as an opportunity to review our guidance framework and will communicate any changes in August.

In summary, we're on track on our plans including the top-line, the bottom-line productivity targets and cash. We've announced an increase in our dividend and have increased our share repurchase targets. While we have more work to do, we remain confident that our focus areas are the right ones and that executing these with excellence should generate over time the kind of earnings progress that will put us among the best in our industry. This combined with strong cash flow and a track record of capital return to shareholders should enable us to generate superior levels of shareholder return.

Thank you very much. Teri and I will now be happy to take any questions.

Question-and-Answer Session

Bill Schmitz – Deutsche Bank

Jon, kind of start – your advertising ratio kind of where it stands, are you sort of happy or content going forward with how much you spend as a percentage of sales in advertising? And then, maybe just some clarity on price gap especially in the U.S., and if you think they're at the right place, or are you thinking you need some more intervention going forward?

Jon R. Moeller

So, relative to advertising, we've talked about trying to reduce advertising as a percentage of sales kind of 10 to 20 basis points per year going forward. So, that would tell you that I think we’re sufficient.

Bill Schmitz – Deutsche Bank

Okay.

Jon R. Moeller

And we should be able to so modestly bring that down over time. We're not going to get hung-up on that, if there are good opportunities to generate high levels of return. We'll, of course, look to make those investments, but that should result in ideally a faster top-line. So I wouldn't expect the ratio to go up from where it is.

Relative to price gaps, broadly we put about $3.6 billion of pricing into the market last year. We have rolled back about $500 million of that. We are in pretty good shape in most product categories in most geographies. We just, as I mentioned in my prepared remarks made a few more changes in Eastern Europe recently, but broadly, Bill, I think we're where we need to be.

Bill Schmitz – Deutsche Bank

Got you. A question, there is one back there.

Unidentified Analyst

Hi.

Jon R. Moeller

Hi.

Unidentified Analyst

What exactly does review guidance framework mean? And then, every time a new CEO comes in, it kind of usually gets kind of a free [inaudible]. So, do you think your current cost savings in restructuring is enough to maybe cushion that potential? And again, what exactly does kind of redoing your guidance framework mean?

Jon R. Moeller

Okay. So, we're not providing guidance for next year today, which I know you know. But what I can tell you relative to the second part of your question is that our new CEO is very committed to continue and accelerate and drive the productivity program and that should provide the benefits that we've all anticipated. Where that nets out in terms of overall guidance, we've got to go through the process and see where we are.

And, in terms of revisiting the framework, we'll be looking at the periods of time which we think are appropriate to provide guidance, the metrics that are appropriate to provide guidance for and obviously if any of you have any strong ideas relative to that please let us know. We're really literally just kind of opening the book or the white sheet of paper and looking at it once again.

Bill Schmitz – Deutsche Bank

Back there.

Unidentified Analyst

Procter & Gamble in the past was sort of a case-study for leadership development, succession planning and from what I've read in the media account for the CEO changeover [inaudible] focusing a lot on leadership development and that there is sort of a leadership gap that develops maybe at the upper-mid level of product line and market management. I wonder if you could speak to that leadership gap and what specific efforts are in place to sort of put Procter & Gamble' leadership development program back where it was in the past.

Jon R. Moeller

My personal view is we have maybe present leader accepted - a tremendous leadership development program and it's the job of every CEO to continue working on that and A.G. will be doing that. I think really his coming back reflects the board's judgment that at this point in time he was the best person for the job. It doesn't reflect necessarily that there is a vacuum and leadership. In fact, I would argue strongly that that's not the case.

Bill Schmitz – Deutsche Bank

Jon, how about Western Europe with some challenges or maybe what you think the problems are and how you fix them since we're here.

Jon R. Moeller

Well, some of the problems are – first of all there are lots – there continue to be lots of meaningful growth opportunities in Western Europe and this is a time on our large businesses where we have large market share positions, where we ought to be able to gain ground and we're working to do that. This is also a market that continues to be responsive to innovation. We're very excited about what we're seeing on the oral care business in Europe. We're very excited about what will be hopefully a smashing success story with the unit-dose laundry detergents. So, there continue to be significant growth opportunities.

We need to ensure more than anything in Europe though that we are providing true value to consumers under pressure in many markets. We think of value in a holistic sense. It's a combination of price, product efficacy, package aesthetic, and we need to have in this environment products that win on that holistic value equation everyday versus our competitors. And, if we do that Europe will be a very attractive market.

Bill Schmitz – Deutsche Bank

Okay. So, your first slide kind of basically suggests that you're actually ahead of all specific guidance metrics that you put in place a year ago. So, the obvious question is why does the board feel the need to change the CEO, so you want to talk to that, it's kind of the elephant in the room?

Jon R. Moeller

Well, I am not a member of Procter & Gamble’s Board of Directors and I'm not privy to their deliberations, so I apologize that I really don't have perspectives that I can share that you could count on of being credible.

Unidentified Company Representative

(inaudible).

Bill Schmitz – Deutsche Bank

Can you please give us some more information as far as the Olay and Pantene, the sort of re-launch strategy if you will you’re planning for the next future given that the competitive environment is as you know very tough and it's a tough game?

Jon R. Moeller

What I can talk about are the things that we've launched and we've launched some pretty exciting innovations on a high-end on Pantene and in the low-end in North America on a product called Vidal Pro Series. So, one of the issues that we’ve had in hair care is not having product offerings in some of the fastest growing portions of the market, the super premium and the lower priced standard and we've addressed that. Similar situation on Olay, where we've introduced the Olay Fresh Effects which is a mid-tier price delay offering, that's targeted at younger consumer. So, those are some of the things that we're starting to do. The balance of the plan obviously has significant competitive sensitivity, and I can't go into it here.

Bill Schmitz – Deutsche Bank

Jon, how about acquisitions, AG actually built that beauty business pretty significantly when here running place inorganically, and so, is that going to be part of the strategy as well to may be fill some of the holes?

Jon R. Moeller

Well, if you look at our acquisition track record, we’ve been acquiring now admittedly smaller businesses, but one or two businesses a year. And I don’t see today, as we sit here, reason to believe that there is a significant shift in that dynamics. So we’ll continue to look for smart acquisitions. I think as I told you, many of you before the probability of a larger acquisition is just definitively small. Three things have to be true; an asset has to be available, there is actually not that much available in this market.

We have to be competitive in the bidding process in a way that’s value accretive to our shareholder base, which is not always easy. And third, we need to clear regulatory hurdles, which as the company gets bigger, it is more difficult to do. So the cumulative probability of all those things happening is actually fairly well, but that doesn’t mean we are operating in a business, in an industry that’s consolidating and globalizing albeit slowly and something we need to continue to consider. But I don’t expect a significant change from where we’ve been in the last couple of years.

Bill Schmitz – Deutsche Bank

How big is big, I mean like what’s the cut off between volumes (inaudible).

Jon R. Moeller

I will know when we see it.

Bill Schmitz – Deutsche Bank

Okay, there is couple over here.

Unidentified Analyst

Hi, can you please talk about emerging markets and what is your current position? What you think of the economies and what is the strategy going to be?

Jon R. Moeller

Well the economies in emerging markets have always been looked at over a long periods of time volatile. They will continue to be volatile. So when you look at the underlying demographic macros. They are very powerful in terms of the population growth that’s likely to occur in those markets and the income growth is likely to occur in those markets.

Those two things are big drivers of consumer products category consumption. So over the long period of time while there will be some volatility, I think the line continues to go up and we are positioning ourselves in a focused manner selectively to be able to participate in that continued growth.

Unidentified Analyst

The receipt has been that the Procter & Gamble allowed over a period of time the innovation pipeline was just premiumizing and trading up the whole time. I know you have several years trying to address that. But perhaps you can talk about the U.S. right now and test that against the different tiers in terms of where your market share is increasing, and whether or not the mid segments, the lower segments have started to improve in terms of share.

And then the second thing is aligned to that in terms of channel development, clearly some of the faster growth has been mass dollar some of the lower tiers also in Europe also. Perhaps you can talk about your approach to those different channels that seem to be winning in the marketplace and how share is developing there too?

Jon R. Moeller

Sure, clearly from a product availability standpoint, having an offering in the mid-tier wherein we have that offering in the U.S., and many more product categories today than we did even a year ago. So we just launched for instance a mid-tier dog food called IAMS SO GOOD. I talked about OLAY FRESH EFFECTS earlier, which is the mid-tier launch there, the (inaudible) launch was the mid-tier launch in hair care.

So we are continuing to try to bring products to markets that are attractive for people on a tighter budget for whom pricing is the bigger part of their personal value equation. And obviously as we do that it’s early days, so I wouldn’t say the share needle has moved yet, but it should follow. We are very well positioned in whether it’s the dollar channel, whether it’s the mass channel in North America, we are building share with a number of those customers so that continues to play out very well as well.

Unidentified Analyst

John, you put some data back overall market shares and then essentially looked at Pantene and Olays, two of the big contributors to that, if you took those two out, does that mean that, the rest of the business actually eased growing value share across regions and categories at this point or that’s not all of the picture.

Jon R. Moeller

I haven’t looked at that specific questions, but let me give you a piece for a second, that I think triangulates to it. If we were growing our beauty business, at the rate of the category growth, so holding share, we will be adding about a point to our top line growth, our total company basis every quarter. Olay and Pantene today comprised about 80% of that point, so it’s not the entirety of the story, but it is clearly where the focus need to be.

Unidentified Analyst

One more, so I think I heard you say that, Gillette, Fusion are growing share 26 consecutive quarters was that the right?

Jon R. Moeller

I think it was 30 expectations.

Unidentified Analyst

Is that true for the whole Gillette Razor franchise or just Gillette Fusion?

Jon R. Moeller

It’s different by country, but that statement was relative to Gillette Fusion the premium offering. I don’t know it crossed 36 quarters.

Unidentified Analyst

Procter announced fairly quickly after the return of the A.G., there is a new orange structure, was that something that’s already in plan prior to A.G. returning or just to speak to this the speed and strength of A.G.’s new vision.

Jon R. Moeller

Well, it was in the works, it wasn’t fully cooked, but it was well underway.

Unidentified Analyst

If you would have guess how long you think A.G. is going to be back, because I think historically CEO at the AG have retired like 61, 62 and obviously A.G. turns 66 today I think or tomorrow, I don’t give him a present, but can you just maybe be talk about how long and then how this kind of succession plan work, and maybe it’s like a 4% (inaudible) rates or these are four people they are going to considered for the job, where will it go more broad across the company.

Unidentified Company Representative

Well first I’ll just repeat what A.G. has said about his own tenure which is that he is going to be criteria based not time based, and that’s what we said about that. Again as you start getting into succession planning that’s really the survey of the Board of Directors, and I’m sure they will run a very disciplined robust process. I can’t speak to exactly who would be in that consideration, so. Yeah, short presentation…

Unidentified Analyst

Can you give us kind of walk around the world to tell some of the markets that are kind of what way you are seeing across the globe some of the consumer growth?

Jon R. Moeller

It’s really hasn’t changed a lot since our last conversation on the earnings call, so we’ve seen some contraction in the growth rates in developing markets particularly China and Brazil, but it’s been modest one or two points, really no change in Russia, no change in India, the U.S. continues to be a little choppy some months it’s pretty good actually and then in some months it’s not as good. But generally if that’s looking, that feeling a little stronger, and Western Europe is pretty much where it was.

Unidentified Analyst

Let’s go back a couple of years, you had a slide that you showed us which had country and category continuations which took up several different screens, it was so large and there was a lot of white space in that, there is a lot of potential and so on, now clearly people like Nielsen were saying that the earliest growth has been as good I thought it was going to be because they are not doing because they are not doing all the in-market studies that they anticipate and do against on the back of the slide. And so can you just talk about that slide and what happened to it, is it that the time scale is just slipped all there is actually some of the white spaces just not big enough for you, or good enough for you.

Jon R. Moeller

Well, you recall about a year ago, we said we are going to focus on the biggest opportunities in the developing markets, and that’s what we have been doing, what’s what we continue to do. I talked to my prepared remarks about the significant growth there over the last 10 years, four full growth in both top line and bottom line. I expect that bottom line will now start growing ahead of top line as we get into the accretive phase of the investments that we made.

We’ll continue making smart strategic investments to increase our developing market footprint, but we are going to do it in a focused appropriate fashion.

Unidentified Analyst

Jon do you probably say that (inaudible), so I mean there are only 8 corns that you’re pretty excited about?

Jon R. Moeller

There are a number of things, it’s still early days in the operationalization of the joint venture with Teva for example. The first foray is there with the launch of six products and CME has been very excited. Where we have been put the two force the two sales forces together the growth rate have accelerated in that business, and so that clearly the business that has much more potential than ahead of it, and we are pretty excited about that. So that’s just one example. I mean, something even like, as we’ve talked before, PODS that will be $500 million in sales in the first year in one country and one brand. That is a huge runway ahead of us and it’s not just the current product offering, but it’s the platform for innovation that provides going forward.

Unidentified Analyst

That’s nice segue. So the U.S. laundry category, consumption has been pretty lousy since POD. So what do you think is driving that, just like may be a legacy overdosing and some people are using too much, now they’re using the right amount, and may be what the retail reaction is to the category softness?

Jon R. Moeller

Well, first of all the retail reaction to POD has been widely enthusiastic.

Unidentified Analyst

Okay.

Jon R. Moeller

It increases their ring for load of [watch] just like it does for us and their support has been tremendous. The category dynamics are really driven by three things. One is some price reductions that were taken. We took down powder detergents pricing about 15% and that obviously has an impact on category sales growth. Second, there was a lot of promotional activity in the base period to defend against the launch of PODS. And third, there is some reduction and usage, particularly with lower price detergent users who move to PODS. They’re overdosing with that lower price detergent in order to get the efficacy they need. They don’t have to do that with PODS. So that’s kind of a one-time relatively modest contraction for certain brands in certain consumer service.

Unidentified Analyst

Okay. How about capital allocation? Have you any big change? Then maybe sort of speak to that in regards to local market production, I guess, which is like a big, maybe a longer term and this as if you are doing. And then, maybe like a little bit of [necessary] question, but when do you think mix is going to become neutral on emerging markets, and is that like a 20 year thing or is that like a five year thing?

Jon R. Moeller

So first I wouldn’t expect big changes in capital allocation. We’re going to continue to prioritize investment in the business where we can generate good returns. Part of that includes localization of production in developing markets. But I would expect that we’d be able to keep capital spending pretty close to between 4% and 5% of sales. As we do that I don’t expect significant change in either the dividend policy or the share repurchase policy. We continue to believe that the cash that we have on hand is not ours, it’s yours and it needs to go back to in one form or another. If you look at the last 10 years, we’ve returned $90 billion of cash to shareholders in a combination of dividends to share repurchase. That’s about 90% of earnings over that period of time. I wouldn’t expect that general dynamic to change either. And there was a second part to your question.

Unidentified Analyst

About the mix and that so…

Jon R. Moeller

Okay. So the answer is I don’t know. But we’ve shown you charts before, in these presentations of the average price per unit in developing markets in certain product categories. I think we’ve showed you three or four categories in Brazil where we’re moving very steadily up that mix curve and it’s just a function of how quickly that adoption occurs. But right now it’s moving pretty well and I’d say it’s certainly not 20 years, but it’s not two years.

Unidentified Analyst

Got you.

Unidentified Analyst

Yeah. Jon, you mentioned in terms of your emerging markets some of them are moving as they were, albeit China, Brazil although a bit slower from where the trend was. I’d assume a lot of that is just the sell through from the point of sale. But have you also moderated the amount of new products for new categories that you’re putting into those markets, or moderated your efforts in terms of building out distribution? It’s the first question.

Jon R. Moeller

We continue to push forward on distribution, are making good progress. So that continues to be our focus area. It’s actually a focus area for reinvestment of some of the savings that we’re generating. And we’ll continue to introduce products where we have a winning proposition and a reason to believe that we can build value for shareholders in those developing markets.

Unidentified Analyst

Okay. And then, because of two Analyst Day ago though in Ohio you had to – your focus were in Oral Care [teams] that they had some impactful revolutionary Oral Care products that would be coming out in the next several years. Is that still in the hamper?

Jon R. Moeller

We have a very strong innovation pipeline on Oral Care. So, yes.

Unidentified Analyst

Okay. Thank you.

Bill Schmitz – Deutsche Bank

But, so it’s just one on the case of Oral Care, would love to have an update as to how you are in the international rollout of that business.

Jon R. Moeller

We’re now in 40 countries that we weren’t in a couple of years ago. Literally every country that we’ve entered so far is at or ahead of where we expect it to be. We continue to build the business even in the markets where we’ve been for three or four years. If you look at Brazil and Mexico this year, we grew close to 50% in the Oral Care business. So we’re very pleased with that rollout. It’s still early days. There is still a lot more work to do. It won’t be a straight line, but it’s going very well.

Bill Schmitz – Deutsche Bank

How about India on that front? Maybe the timeline for the Indian Oral Care launched.

Jon R. Moeller

We have said that we would start the launch of Oral Care in India in the month of June.

Bill Schmitz – Deutsche Bank

Okay.

Unidentified Analyst

Not to expect large acquisitions, but what about large divestitures? Would you consider at this point (inaudible) and all that you really need to out to in ions and batteries, is that something that you’re going to start with a small base and grow from there?

Jon R. Moeller

Well, as we think first of all we’ve been fairly disciplined pruners of our portfolio. We divested the coffee business, the pharmaceuticals business, the snacks business, our water filtration business. We’re divesting a big part to our bleach business. So that will continue to be something that we look at would discipline our rigger and we need to view that. That’s the same lens that we view acquisitions through. In other words, it needs to be a value accretive endeavor for shareholders and where we can determine that we can create more value for shareholders in divestiture context and that’s our obligation to proceed and we will as we have in the past. Where we can’t, our obligation is to maximize the value inside the current portfolio.

Unidentified Analyst

Jon, what’s your take on the U.S. consumer broadly? I mean, I think can you better, I mean, the worse is staying the same and is it incorrect, the correlations kind of hold that your business is very tied at consumer confidence. Is that still the case and obviously those metrics have picked up a little bit recently.

Jon R. Moeller

Yeah, I mean this is not scientific. It does. It just feels a little bit more solid and you see it reflected in the housing market. You see it reflected, but there are still issues because you don’t see huge gains in reversing unemployment. There continue to be a lot of part-time workers. So we feel better about it and clearly to the extent that the U.S. economy continues to improve, that’s a wonderful thing for Procter & Gamble because we are, if you will, overexposed to the U.S. consumer, but I think it’s going to be slow progress.

Unidentified Analyst

Got you. And [making a correction] I think you guys have the same correlations when you look at with confidence. I know it’s a relatively small market, but how about Mexico? I mean it was a great market for a while. It’s been pretty tough the last two or three years. I mean, is there an invention plan there? I think leadership changed. Am I right? Or it’s changing…

Jon R. Moeller

We did recently change the leadership in Mexico. That’s a market that’s doing fairly well overall and we have some categories that are doing extremely well and others that need some attention. So it is a market that we’ll bring effort against.

Unidentified Company Representative

And it’s a priority to us.

Jon R. Moeller

Yeah.

Unidentified Company Representative

To get that around, yes.

Unidentified Analyst

And then, how about in diapers? Do you think you have the right technology platform, and especially in places like Asia because obviously the pull-up diapers are becoming big and your legacy has always been tape diapers?

Jon R. Moeller

We also have an extremely strong innovation pipeline on baby diapers and that’s really all I can say on that, but we’re very comfortable with the way the pipeline is evolving.

Unidentified Analyst

Got you. How about the market share trends and does it seem like a wave really U.S. problem, it’s more of a China and Western Europe problem, I mean there is some issues in the U.S. that’s not really as fad as…

Jon R. Moeller

Always it’s very much a U.S. problem.

Unidentified Analyst


Really? Because the market shares, the stuff we get in Europe ones like the $14 a share to $9.99 a share and…

Jon R. Moeller

I don’t want to leave anybody with the false impression that LA in North America doesn’t need attention. That needs attention.

Unidentified Analyst

Okay.

Jon R. Moeller

In a period of complete [calendar].

Unidentified Analyst

Can I just come back to the question about the guidance framework? So can you talk a little bit about why you are looking at that, are you suggesting that the way in which you’ve given guidance or the way in which you’ve kind of narrowly guided people by quarter is constraining the way in which you manage the business or invest properly for the future?

Jon R. Moeller

Now, first of all we’ve, over the last three years, significantly widened our guidance ranges. And I don’t like to say this, but if I’ve proven over the last four years it’s that I’m not constrained by guidance. So I don’t think it’s affecting how we manage the business. So we want to provide it in a way that’s helpful for our shareholders. We want to provide it in a way that’s consistent with how we think about an outcome of the business and it’s something we reevaluate every so often. With this change of leadership it’s a good time to reevaluate.

Unidentified Analyst

Okay. Jon, you guys done any employee tracking studies since PG came back and maybe like what they were like before and what they were like after?

Jon R. Moeller

It’s been about 12 days. We just completed our annual employee spending survey, which is done by an independent party. We received responses from 90,000 of our 121,000 employees. So it’s fairly robust and the scores were very encouraging, some of the best we’ve seen in the history of the company in terms of employees’ confidence in the strategy, employees’ confidence in the leadership, identification with the company engagement, having the tools to do my job. So overall, we’re in pretty good shape from an employee standpoint and the organization loves PG, they know PG and that's certainly only as.

Bill Schmitz – Deutsche Bank

All right. Time for one more. [Can’t] do one more. All right. Well, thank you guys very much. I appreciate it.

Jon R. Moeller

Thank you very much.

Unidentified Company Representative

Thank you.

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