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The Procter & Gamble's CEO Presents at Consumer Analyst Group of New York Conference (Transcript)

The Procter & Gamble Company (PG) Consumer Analyst Group of New York Conference Call February 20, 2014 9:15 AM ET

Executives

A.G. Lafley - Chairman, President & Chief Executive Officer

Jon Moeller - Chief Financial Officer

Analysts

Operator

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 the full reconciliation of non-GAAP and other financial measures.

Unidentified Company Representative

I am very pleased to introduce Procter & Gamble’s management team, including A.G. Lafley, Procter’s Chairman, President and CEO, who is no stranger to this conference and his first successful spin as Procter’s CEO, but is here for the first time under a second spin. So we are excited to hear about strategy tweaks under A.G. as well as Procter’s CFO, Jon Moeller.

It’s an interesting time for the company, which is in the middle of an aggressive restructuring program that’s generating cost savings and is looking to accelerate organic sales growth though innovation, as well as a focus on the core.

So I’ll turn things over to you Jon.

Jon Moeller

Hi, good morning everyone. I’m going to start with a quick look back at our results for the most recent quarter. As you know our October to December quarter came in pretty much where we expected. Organic sales grew 3%. Organic sales growth was in line or ahead of year ago in each of our reporting segments. They were up 8% in developing markets and about flat in developed markets.

Core earnings per share were $1.21, down a penny versus the prior year. Earnings for all segments were ahead of year ago, except for Baby, Feminine, and Family Care, due to foreign exchange.

Foreign exchange was an $0.11 per share headwind for the company in the quarter. The year ago period also included a $0.07 per share gain from the sale of our bleach business in Italy. Combined, these two items constitute a 15% core earnings per share growth headwind for the quarter.

We returned $1.7 billion of cash to shareholders in dividends, and repurchased $1.5 billion in stock, bringing year-to-date dividend payments to $3.4 billion and share repurchase to $4 billion.

Over the last 10 years, in both good years and bad years P&G has consistently returned cash to shareholders. We have paid out $47 billion in dividends. Excluding $20 billion of share repurchase associated with the Gillette acquisition, we repurchased $51 billion of stock.

In total, through dividend and share repurchased we returned $98 billion of cash or 96% of net earnings to our shareholders. Returning capital to shareholders remains a critical component of our effort to deliver superior shareholder returns.

Before going into the details or updated guidance, I think it will be helpful to put fiscal year 2014 into context. We faced several significant challenges this year. We faced the largest foreign exchange headwind in P&G history, $1.1 billion after tax. [Inaudible] January the foreign exchange headwind has grown by about $230 million after tax.

Global market growth rates have decelerated about a full point in the last two and a half quarters, from around 4% growth last fiscal year to around 3% now. The policy environment has continued to change rapidly from pricing and import controls in some countries, to political unrest that has temporarily disrupted business operations in other countries.

We’ve taken significant steps to offset these challenges. We took and are taking more pricing. However in some markets government policies prevent us from pricing. In other markets like Japan it’s not practical to price, as most of our competition is fully localized and in all markets it takes time to get pricing fully implemented. So pricing can’t be the only answer. That’s why we have been accelerating cost savings.

We’ve targeted a run-rate of $1.2 billion of cost of goods productivity savings per year. We started this fiscal year expecting $1.4 billion in savings and are now forecasting more than $1.6 billion in productivity savings across materials, logistics and manufacturing. This is $400 million more than our initial target for this fiscal year and we see several years of this level of savings ahead of us. Versus a going-in target of 5%, we expect to improve manufacturing productivity by at least 6% this year. We’re up more than 8% fiscal year-to-date.

By the end of December we’d exceeded our 2014 fiscal year overhead reduction goals, only six months into the year, and have begun work to accelerate role reductions planned for fiscal 2015 into 2014. Our stretch objective is to get substantially to our end of 2015 objectives by the end of 2014, which will put us close to or within the 16% to 22% reduction goal we’ve established, one to two years ahead of target.

We continue to drive marketing, productivity and effectiveness through an optimized media mix, with more digital, mobile and social improved message clarity and greater non-advertising marketing efficiency.

Through the first half of the fiscal year we found ways to offset more than $1 billion after tax of slower market growth and foreign exchange headwinds on a base of about $12 billion in after tax profit, while still fully supporting the strong innovation program that’s in market.

With this most recent round of significant evaluations we started a new round of pricing interventions and are taking another hard look at any additional savings we can advance. With these steps we’ll have minimal impact on the current fiscal year.

Another option to offset the latest FX impact was to reduce business support levels; we didn’t think this would be a responsible choice. In the announcement we made last week we maintained, both fiscal year organic sales growth guidance range which was 3% to 4% and the currency neutral core earnings per share guidance range of 12% to 14%.

On the top-line we said we expected foreign exchange to reduce sales growth by 2% to 3%, resulting in a guidance range for all-in sales growth of in-line to up 2% versus the prior year, and the bottom line we provided core earnings per share guidance of plus 3% to 5%.

We’ll continue to be transparent on what risks are covered within guidance and what risks are not. In Venezuela we are assuming no near term price recovery, but we are assuming full access to dollars for imported products and finished goods.

We made the same imports and dollar availability assumptions for Argentina. The guidance we provided last week was based on foreign exchange rates as of the first week of February and market growth rates through January. Further currency weakness or further deceleration of market growth are definitely possible, but are not anticipated within the current guidance range.

We try to be clear on what’s baked into our guidance and what’s not. With that, you can directionally adjust our numbers for your own assumptions and beliefs. We’ll continue as we have to update perspective on both of these factors as we know more.

As you consider your estimates for Q3 and Q4, there are a few items that might be helpful to keep in mind. We’ll have a full quarter of laundry and oral care innovation benefits in Q4. Productivity savings that are being advanced to offset stronger FX impacts and lower market growth will primarily benefit Q4.

We just annualized the impact from last year’s Venezuelan bolivar devaluation in mid-February, half way through Q3. Also we are in the midst of taking pricing in several developing markets as I mentioned to offset current devaluation that occurred both last fiscal year and this. Most of the pricing benefit will fall in Q4.

As we noted in our guidance update last week, the operational impacts from the recent evaluations will impact Q4 somewhat more that Q3 and the balance sheet revaluations for the new exchange rates will all hit in Q3.

We expect to deliver another year of about 90% free cash flow productivity; we plan to pay over $6.5 billion in dividends and repurchase $5 billion to $7 billion of our stock, continuing to deliver on our commitment of cash returned to shareholders.

With the housekeeping complete, I’ll turn it over to A.G. who will talk about what we are focusing on and changing to further improve our results.

A.G. Lafley

Thanks Jon and good morning everyone. Let’s begin with our aspiration or vision. I think it’s pretty straightforward. Consumer preferred brands and products result in leading category and industry positions and that translates to superior industry value creation.

Our objectives: Clear. Our goal: single minded.

Our objective is to consistently deliver market TSR in the top third of the competitive peer group. Something we are capable of and have historically delivered. We translate this external measure into one integrated internal measure of success, operating total shareholder return. It keeps us focused on the real drivers of value creation, sales growth, gross and operating margin expansion and strong cash flow productivity.

Operating TSR results correlate highly with market total shareholder return. Neither our market TSR performance, nor our operating TSR performance has been up to snuff. We’ve not met our objectives over the past seven years. Over the past four years P&G organic sales growth has been in the middle of the pack, and frankly our operating profit has been at the back of the pack.

Enough said, let’s take a quick look at value creation drivers or enablers. We reaffirmed P&G values; they are important, they are meaningful. We refocused first and foremost on consumers. Everything begins with consumer value creation, ends with consumer satisfaction and loyalty. These are our purpose and values.

We emphasize ownership. We are a unique company. Virtually everyone in the company is an owner, senior executives, the entire management team around the world, each and every employee, all significant owners. We are all full on for ownership type accountability and responsibility.

Our goal as I said is single minded, again one integrated measure of value creation; performance that correlates with market return.

P&G Strategies: balanced, focused, prioritized.

Where to play? Simple, we begin in and from our core, that’s where we grow the most value. Second, obviously developing markets driven by demographics and economics; and lastly, always looking for more structurally attractive segments, categories and industries.

How to win? Again pretty straightforward, with clear understanding of consumers, of consumers who matter most in what they need and want; with clear, for the most part proven business models, we believe we can execute against these simple how to win strategies.

Core strengths: We will play our game, leveraging our core strength of consumer understanding and branding, product innovation and productivity, go-to-market and scale. Playing to strength improves chances of winning with consumers and creating value for shareholders.

We have a much simpler structure put in place over the last six months or so. Our brands and categorizes are organized into four logical industry based sectors or global business units. We take these businesses and brands to market through five regions or selling operations.

P&G’s corporate functions support the industry base sectors and regional selling operations directly or via shared services. Our selling operations are focused on the work they do best, on where they add value; superior selling, distribution, pricing execution, shelving, merchandising and of course superior customer service.

Our systems are getting simpler, clearer and more accountable. Our leadership bench is broad and deep. Broadly experienced and truly a global team experienced in every one of these sectors.

P&G leaders, and by this I mean every single P&G-er worldwide are embracing the change underway, stepping up to the challenges and committed to deliver consumer and shareholder value.

We are more externally focused; never enough, but more externally focused. We are trying to be more adaptable, agile and flexible and we are responsive to changes that need to be made. We are one-team, owners and partners connected and collaborating internally to compete more successfully externally. Our people our playing their positions. They know their jobs, they are doing their jobs. As I said there is clear accountability.

These are five of our focus areas. I think they are reasonably self evident, strategies that begin with consumer preferred brands and products and end with strong industry leading value creation for shareholders. As I said, we are recommitted to the consumer. We absolutely, positively have to win more of the three critical moments of truth.

Our strategies our focused and balanced. The first is to win from the core as I said earlier. The vast majority of our sales and profit growth comes from our core brands and categories, our core countries and channels, our core consumers who matter most.

Today P&G is a company of essentially 75 brands; 25 with annual sales of $1 billion to $10 billion plus, 15 with sales of $0.5 billion to a $1 billion, many of those with $1 billion potential and about another 35 with sales of $100 million to $500 million.

Nearly all of our $25 billion brands and the vast majority of our top 75 brands are the number one or two player in their category or segment, but they all have significant growth and value creation upside.

The markets we play in are big. Our current share is relatively small. There is significant growth opportunity and believe me, a lot of value creation opportunity. Our strongest geographic business and total company position is in the U.S., our home market. We absolutely, positively have to insure our home market stays strong, growing and creating value.

We have a leading position in this largest most profitable CPG market in the world. Last fiscal year our U.S. sales were over $30 billion, about 5x higher than our nearest branded competitor sales. As I said, we have the leading one or two positions in over 75% of the categories in which we compete and there is plenty of growth and plenty of value creation ahead in the U.S.

Secondly, expanding into priority developing countries. We grow from extending P&G brands and product lines in developing markets. As I said, this will continue to be led by demographics and economics, and there’s still a very long runway ahead for our industry and for us. We are prioritizing investment and expansion on brands, in categories, in countries with the larger [size as the price] [ph] and the highest likelihood of wining.

Since 1989 we have built our developing market net sales at a compound annual growth rate of 9%, ahead of even our largest global competitor. At $33 billion in sales, believe it or not, we now have the largest household and personal care business in developing markets. And we have the leading household and personal care business in Asia, in Central and Eastern Europe, Middle East and Africa and in Latin-American; the strong foundation on which to grow in the years and decades ahead.

Third, we will continue to enter new structurally attractive categories and channels, where we can create value for consumers, the industry or category for P&G of course and for our shareholders.

An important part of our portfolio strategy is choosing where not to play; sometimes as or more important as choosing where to play. Deciding which businesses we no longer want to be in and allocating resources to businesses and opportunities where we can create more value.

Over the last several years we’ve exited businesses representing over $6 billion in sales, including coffee, snacks, pharmaceuticals, water purification among others. Today we are announcing the full exist from the bleach business. Last fiscal year we divested the Italian and Portuguese businesses. This month we’ve signed agreements for the divesture of Central and Eastern Europe, Middle East and Africa and Latin-American in the businesses, completing our move out of this category.

Our strategic performance evaluation of all of our businesses, brands and categories is ongoing. We will announce decisions as we make them and the steps that we are taking when the decision is made and completed.

Balance may be the single most important concept for P&G. We perform best when we stay in balance. Operating TSR is fundamentally a measure of balanced value creation. I think the others are pretty self-evident. I’ll talk more about the need for balance on innovation and productivity, the two primary drivers of value creation for our company.

Turning to innovation, for us year after year, decided after decade when we get innovation right, it drives meaningful value creation. Obviously for consumers, it combats commoditization, which frankly is one of the bigger risks in some of our categories; it creates higher sales and profit per unit and as I said, value for shareowners.

Turning to fabric and home care. As you can see its one of our biggest industries. Our global fabric and home care today is about 25%. So there is plenty of room to grow and believe me, there is plenty of room to create significantly more value.

Let’s take a look at the U.S. fabric care portfolio. We are seeking to reach and to serve a few more consumers we believe matter, by building the portfolio across a broader range or value tiers, and we are encouraging product usage across a broader regiment, which will deliver better results and more value.

We talked about unit dose before. Tide Pod has been an innovation breakthrough in the laundry detergent category and it has a long runway. The three chamber, unique three-chamber unit dose product allows a unique combination of chemistries to work better in the wash.

Tide Pods are priced at a modest 20% premium to base liquid side and have grown to over 6% of the laundry category. They now have over a 70-value share of the segment, which is growing at a rate of over 30%. Last year we began expanding the superior product technology into new geographies. We are now present into over 20 countries and have generated over a $1 billion in sales.

This new technology has very real potential to create significant value. We’ve added a larger, more convenient size; we’ve expanded the product, the technology, the gain, the second largest brand in the U.S. laundry market. We’ve upgraded all of our liquid Tide Plus value-added products. This is a big chunk of our business here in the U.S. and in North America and we added a Tide Plus ultra stain release product, which removes virtually all 99% of everyday stains.

We’ve introduced Tide Simply Clean and Fresh as we talked back in September, to address an unmet consumer need for better cleaning and freshness in a value based, priced detergent. This bundle of brand and product initiatives should stimulate category growth; create value for more consumers, customers, our business and of course shareowners.

Beyond detergents we are expanding fabric care adjacencies to increase regiment usage, which also drivers of course the value of the total fabric care category. Downy Unstoppables and Gain Fireworks Beads which popularize, this product form popularized in-scent or in-wash scent boosters have growing to $0.25 billion in sales in a short time in just three markets, and again over a 70% value share of the new segment. We will be expanding.

Finally we are launching new Tide Oxy, a multipurpose stain remover that extends the home fabric care regiment. Regiment is a big business opportunity and our household beauty and healthcare businesses. Even in the U.S. only a quarter of households’ purchase and use more than two products in the regiment on a regular basis.

Turning to health and grooming, we are only a single digit share player in the huge healthcare industry; highly profitable, fragmented marketed with plenty of growth and value creation opportunity. We’ve built to nearly a 20 share in oral care and of course we have a mid-50 to mid-60 value share in men’s and woman’s shaving.

Turning to oral care, slowly but surely over the last decade we’ve gotten this business growing and creating value, and we’ve grown to be the number two oral care player in the world with again a lot of runway ahead.

How did we do it? Real consumer insights. We understand what consumers wanted and needed, that they weren’t getting. Clear consumer segmentation, its fundamentally healthcare consumer, there’s fundamentally a cosmetic or social acceptance consumer and there is a simplicity consumer and all of this informs our branding, our marketing, our product development and technology development and of course our selling execution.

We now have a full range of toothpaste at a number of price points that offer superior consumer benefits within the health, cosmetic, etcetera, boutiques. We have a full range of adjacent products that create superior performing regiments and drive category value growth.

Here’s just a few examples of oral care, new products and improved products that are going to market as we speak. Crest 3D White has grown market share in the U.S. for now 45 consecutive months since launch. On its own worldwide, it’s a $1 billion business. We’ve just interdicted Crest 3D White Luxe toothpaste, which removes up-to 90% of surface stains on teeth in just five days.

Our new Crest Sensor Relief, product innovation delivers better tooth and gum sensitivity performance. Crest B, which has really received a lot of press coverage is a new line for experiential consumers with consumer-preferred flavors, essentially co-designed with them.

Today we are announcing that Oral-B is bringing Smartphone technology to brushing teeth with the world’s first available interactive power brush for a smarter and more personalized oral care regiment routine. The Oral-B SmartSeries 7000 is the first of its kind with Bluetooth connectivity. Connecting with the Oral-B Smartphone app while you brush to guide more effective and efficient brushing. This new product will be available in North America later this year.

Turning to grooming and shave care, Gillette has had a long history of driving new innovation in blades and razors that resets the performance standards in the industry. Three years ago we introduced Fusion ProGlide, which is hands down the best shave in the market, not because we say so, but because the men who use the product everyday say so.

The Fusion family of products grew value of share for 31 consecutive quarters post launch. We now play in the super premium tier with the art of shaving, an $80 million plus business, with an opening price point for a razor at $60 and many of you can afford the high-end razors at $150 to $200.

We compete in the premium tier with the Fusion lines and MACH3 Sensitive, Turbo lines. The premium tier represents about 43% of category sales where we have today an 88 share. We also play in the mid tier with another of our MACH3 lines and Sensor. Here we have about a 70 share and we play in the low price tier, including disposables where we have about a 35 share.

The point is we’re building out a full line of shave products, of pre and post shave products and we’re expanding party grooming products and trimmers to meet the needs of men who are interested in facial hair or grooming their facial hair or grooming more than their faces. This broader range of products and services delivers more consumer value, more value creation potential for the industry and of course more value creation for shareholders.

Many have wondered if it’s possible to keep improving premium razors, trading consumers in and up to the next best shave, growing sales for us, for customers in the category. It’s not only possible, but also coming soon. Let’s look.

(Advertisement)

Coming soon to a store near you.

Turning to beauty. One of the largest and faster growing, one of the highest value creation and potential markets we compete in; highly fragmented. Top 10 companies have about a 50 share. It’s a relatively inefficient industry, so there’s a lot of value creation opportunity.

Just like Apple, from 2000 to 2007, P&G Beauty tripled sales and quadrupled profit. Just seven years, by playing to P&G's beauty strategy and P&G’s company strengths, building consumer preferred brands behind consumer-preferred products; often unique, often superior virtually always well differentiated.

Now the problem as you know, we’re stuck at 20 and Apple’s gone on to 150. But if you turn to P&G Prestige and look at that business since 2000, we’ve also tripled our sales and quadrupled our profit. We’re still only about a six share of this business and again we’ve done it with a different business model. A deeper understanding we believe of consumer insights and needs, a different approach to branding and every step of the way consumer relevant and important product innovation.

Today we have four big leading brands; Dolce&Gabbana, Gucci, Hugo Boss, the leader in the male segment and SK-II. They make up about 80% of the total business and these leading brands are winning the consumer value equation in their segments and creating value for our shareholders.

We have the largest retail hair care business in the world; leading brands, billion dollar brands like Pantene and Head & Shoulders. Half a billion plus brands like Herbal Essences and Rejoice. $100 million plus brands like Aussi and Vidal Sassoon and brands with a lot of promise like Frédéric Fekkai. We have a full portfolio of hair care product innovation, bringing you benefits and value to consumers, at a range of price points which you will see beginning now and in the year and years ahead.

Last year at this time we were launching two new super premium lines of Pantene expert collection hair care products, age defy lines and an advanced plus keratin repair line, premium priced. We are very pleased with the year one results. We recently added two new items to these lines. Believe me, they have a ton of trial upside potential.

Our new product innovation this seasoned, is focused on the core Pantene line up. Along with the new products, we’ve introduced Gisele as our new U.S. ambassador for Pantene. Here’s our new commercial with Gisele introducing the latest products.

(Advertisement)

Gisele has been doing a lot for our Latin American business. We are expecting her to do just as much for our North America business.

We have product innovations coming to market in hair care on Herbal Essences, Head & Shoulders, Vidal Sassoon and a new line of Old Spice hair care products for men.

Changing subjects; the best companies in any industry find a way to lead both, innovation and productivity. We absolutely, positively have to turn productivity into a core strength at P&G, making it systemic, not episodic and an enduring value creation teller like innovation.

As Jon mentioned, we are making good progress towards our objective of best-in-class scale and mix adjusted core SG&A costs; that’s a mouthful, as a percentage of sales. We’ve organized into four industry based sectors or global business units. The businesses in each sector are focused on common consumer benefits and needs, they share common technologies, they partner with common customers and common trade channels and they face common competitors.

We believe this structure will facilitate a better balance of growth and value creation. It will drive technical, commercial, financial and organizational synergies to continue to improve the value creation results. These sectors or global business units are big enough for scale and small enough to stay in touch with consumers and markets, and move with the agility and flexibility to consistently grow value.

We are working hard, simplifying and clarifying organization roles and responsibilities and establishing clear accountability. These global business units will create design manufacture and market our brands and products. They will be the locus of brand building.

Turning to brand management, we are returning to brand management. We are moving from four disaggregated functions; design, consumer and market understanding, communications and marketing itself into one integrated brand building or brand management organization.

Brand management will again have single point responsibility for the strategies, the plans and the end market results for building their brands and product lines. Consumer understanding and market knowledge, communications, design, all these functional employees will be either embedded in the business units reporting to the brand or providing services via shared capabilities.

We are changing regional MVO's to selling operations. This is more than a name change. Selling and market operations clarifies the work they need to do and the work they do best, superior effective and efficient selling; distribution; pricing execution; shelving and merchandising everyday, every week in the store, the first moment of truth; sales, resources will be concentrated in the regions, in the channels and with the customers we partner with.

We’re aggregating these SMO's to be more logically focused on the consumers channels and customers and the markets we serve. We’re merging Western Central and Eastern Europe into one Europe. We’re merging India, the Middle East and Africa into IMEA; in P&G we have to have an acronym. 90% of this business will be managed through a distributor-based model, which is proven to be highly effective in these regions so far.

We’re more fully integrating Greater China, ASEAN, Australia, New Zealand, Japan and Korea into one Asia sales operation over the next year and we’re maintaining the separate North American and Latin American businesses. They are both large, they both have scale and they can both operate as independent sales operations.

Within these SMO’s we will aggregate countries, at a higher level reducing the number of geographic country clusters to about 25%, that’s a 20% reduction. We’re also improving supply chain productivity and reducing costs, costs of goods. We continue to improve the process reliability at our manufacturing plants, of our manufacturing lines and reduce the staffing necessary to operate those lines. The net result is a significant improvement in overall manufacturing productivity. Measured is the number of cases of product produced per person per year.

Better process reliability and better adhering to quality standards is resulting in less raw material and finished product scrapping. Localization of our supply chain is driving savings and transportation and warehousing costs. We’re making very good progress, but see a significant multi year opportunity to take more costs out ahead.

We’re just initiating the biggest change probably in the company’s history, in our end-to-end supply chain in North America and are studying similar opportunity in the new one, Europe. North America today we have 35 manufacturing facilities, only six of which are multi business or multi category. We’re consolidating operations in the multi category sites located closer to customers and consumers we serve, allowing us to respond faster to their needs and provide better service at the best possible cost.

We’re converting the common manufacturing platforms and technologies for faster innovation, qualification and expansion. We’re designing the supply system to allow for online product differentiation and customization. This will be a significant change in the way we supply customers.

We worked it closely and carefully with them and it will drive step change improvement in responsiveness, reducing out of stocks, taking down inventory levels, increasing cash and lowering cost. It will leverage the scale and scope of our production distribution network in a way it’s never done before. We started the first phase of this work in our distribution network in North America.

We’re moving from shipping products from various ship points as if they were coming from different companies, to consolidating customers shipping and product customization operations into fewer distribution centers. These new distribution centers will be located strategically closer to customers and key population centers in the U.S. and North America, enabling 80% of the business to be within one day of the store shelf and the shopper. This will allow both P&G and our customers to optimize inventory levels and still improve service and on-shelf availability, reducing in-store out-of-stocks. New distribution centers are under construction now and we’ll begin the transition later this calendar year.

We continue to drive marketing productivity. We continue to believe we can be a lot more effective and a lot more efficient at the same time. We are committed to make productivity a core strength, systemic competitive advantage, the sustainable source of value creation. I personally have never seen a business that could not take more costs out and become more effective and more efficient. I know every one of ours still has a lot of opportunity.

Productivity in my view is a necessity. It drives value creation, it creates a cushion for commodity and currency volatility and it creates investment capacity for major new brand product and other initiatives. We are going to drive it deep into the P&G culture, make it part of the business strategies, measure it and track it, so we continue to execute against it.

Also importantly, we are working hard on operating discipline. CPG industry in the retail industries are highly executional industries. Details matter. Execution everyday in the store, to the store can be decisive. We simply have to execute better, like we have in the past and like we do today in our best business units. We have to execute more consistently, we have to execute more reliably; that’s what its going to take to win the consumers and customers and to create the value that we see.

Moving forward, how are we going to measure progress? Cumulative value creation. Cumulative value creation in our core brands and in our most important categories. Building back the share leadership over time in the United States creates value for Baby Care and for our shareholders.

Cumulative value creation in developing markets. Despite failed leadership, P&G has probably the most upside in developing markets of any major CPG player, because the balance of players already have a much higher percentage of their business in these markets and they’ve been there a lot longer. So I would argue the potential is significant, the demographics and economics will drive over time despite short-term volatility and this is a long run, years and decades of additional value creation for this company and this industry.

Cumulative value creation from innovation. When we get it right, new and really improved brands and products that consumers prefer, can sustain value creation for a decade or more. We have an improving product innovation pipeline and portfolio that will only get stronger as we focus in the days, weeks and months ahead.

Cumulative value creation through productivity, from productivity, cost of goods, overhead and marketing; we don’t see an end to this runway in the mid term.

So what should you expect from and what should you watch for? The P&G balanced, consistent, reliable, sustainable improvement in value creation. Consistent organic sales growth, expanding eventually gross and operating profit margins, improving asset efficiency and cash flow productivity and some more valued.

Today we’re a company as I said of about 75 brands, generating around $85 billion in sales. These brands and categories are now organized into four industry based sectors or global business units. We take this portfolio of brands and products to our consumers in the market via five regional sales operations, made up of about, when we’re done, 25 country clusters. P&G is not that complicated. In fact for a company of its size and scope, it’s surprisingly simple.

When we get it right, we create, we build, we transform entire categories of consumer preferred brands and product innovation or innovations to combat comoditization, improve the growth rate and profitability and value of our categories and ultimately recreate significant value for our share owners decade after decade.

Thank you all for your attention. Now Jon and I would be happy to take any questions you have.

Dara, would you like to start? I knew you’d want to start. I’m going to sit if that’s okay.

Earnings Call Part 2: