P&G First Quarter ’07 – ’08 Earnings Results on Oct. 30 ...online.wsj.com/public/resources/documents/PG-Transcript-20071030.pdf · 10/30/2007 · Oct. 30. 2007 / 8:30AM, PG

F I N A L T R A N S C R I P T

PG - P&G First Quarter ’07 – ’08 Earnings Results

Event Date/Time: Oct. 30. 2007 / 8:30AM ET

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C O R P O R A T E P A R T I C I P A N T S

Clayt DaleyProcter & Gamble - CFO

Jon MoellerProcter & Gamble - VP & Treasurer

A.G. LafleyProcter & Gamble - Chairman & CEO

C O N F E R E N C E C A L L P A R T I C I P A N T S

Nik ModiUBS - Analyst

Bill PecorielloMorgan Stanley - Analyst

John FaucherJPMorgan - Analyst

Amy ChasenGoldman Sachs - Analyst

Bill SchmitzDeutsche Bank - Analyst

Wendy NicholsonCitigroup - Analyst

Justin HottBear Stearns - Analyst

Lauren LiebermanLehman Brothers - Analyst

April SceeBank of America - Analyst

Chris FerraraMerrill Lynch - Analyst

Ali DibadjSanford Bernstein - Analyst

Jason GereWachovia Capital Markets - Analyst

Bill ChappellSunTrust - Analyst

Joe AltobelloCIBC World Markets - Analyst

Alice LongleyBuckingham Research - Analyst

Linda Bolton WeiserOppenheimer - Analyst

Bill LeachNeuberger Berman - Analyst

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Oct. 30. 2007 / 8:30AM, PG - P&G First Quarter ’07 – ’08 Earnings Results


P R E S E N T A T I O N

Operator

Good morning, everyone, and welcome to Procter & Gamble's first-quarter 2007/2008 conference call. Today's conference isbeing recorded.

Today's discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K and 8-Kreports, 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 referencesto non-GAAP and other financial measures. Management believes these measures provide investors valuable information onthe underlying growth trends of the business. Organic refers to reported results, excluding the impacts of acquisitions anddivestitures and foreign exchange where applicable. Free cash flow represents operating cash flow less capital expenditures.P&G has posted on its website, www.P&G.com, a full reconciliation of non-GAAP and other financial measures.

Now I would like to turn the call over to P&G's Chief Financial Officer, Clayt Daley. Please go ahead, sir.

Clayt Daley - Procter & Gamble - CFO

Thanks and good morning, everyone. A.G. Lafley, our CEO, and Jon Moeller, our Treasurer, join me this morning. I will beginwith a summary of our first-quarter results, and Jon will cover business highlights by operating segment. I will wrap up withour expectations for the December quarter and updated outlook for the fiscal year.

Following the call Jon Moeller, Chris Peterson, John Chevalier and I will be available to provide additional perspective as needed.Now onto our results.

We began fiscal year 2008 with a first quarter in line with our guidance and our long-term growth targets. We delivered balancedtop and bottom-line growth in each geographic region and every reportable segment delivering year-on-year organic growth.Earnings per share for the September quarter increased 16% to $0.92 per share. This included a onetime tax benefit of $0.02per share. Excluding this benefit, the Company's EPS growth was 14%. EPS growth was driven by strong sales growth and amodest operating margin improvement. Total sales increased 8% to $20.2 billion, driven by 5% volume growth and 3 points offoreign exchange. Organic volume of sales for the quarter were each up 5%. Developing markets set the pace with double-digitorganic and volume sales growth. Fabric and Home Care and Baby and Family Care led the segments, each delivering 7% organicsales growth.

Health Care and Beauty Care were at the low end of the segments. This was largely due to a tough based period comparisonin which Crest Pro-Health and Olay Definity began shipping. Also, SK-II in Asia was a 1 point drag on Beauty Care growth.

Importantly, market share in both Health and Beauty Care are up versus prior year. As such, we expect results to improve forthese segments in the balance of the fiscal year.

Global market share trends over the past three months continue to be strong with about two-thirds of our businesses growingshare. Price mix was neutral as pricing actions to recover higher commodity costs were offset by negative mix from strongdeveloping market growth.

Next, earnings and margin performance. Operating income increased 9% to $4.4 billion, driven by sales growth and operatingmargin expansion. Operating margin was up 30 basis points, in line with previous guidance.






Gross margin was up 10 basis points to 52.9%. Pricing, volume leverage and cost-saving projects more than offset the impactof higher commodity costs and laundry compaction conversion costs. Higher commodity and energy costs hurt gross marginsby about 80 basis points.

Selling, general and administrative expenses were down 20 basis points versus year ago. Lower overhead costs as a percent ofsales more than offset higher marketing spending.

The tax rate for the quarter came in at 27.6% due to the onetime tax benefit of $0.02 per share. This onetime tax benefit wasdue to a reduction in German statutory tax rates. As a result, we have revalued our deferred tax assets which generates a onetimegain. We expect this onetime tax benefit to be net incremental for the fiscal year as well.

Now let's turn to cash performance. Operating cash flow in the quarter was $3.2 billion, up nearly $300 million from the sameperiod last year. The improvement was largely due to earnings growth. Working capital was a net use of cash in the quarterversus a year ago, primarily due to strong business growth. Receivable and inventory days were up one and four days respectivelyversus the year ago period. This was primarily due to stronger foreign exchange at the end of the quarter. Payable days wereup four days versus year ago as we were converting a number of suppliers to new longer payment terms.

Capital spending was $540 million in the quarter or 2.7% of sales, well below the Company's 4% annual target. Free cash flowfor the quarter was $2.7 billion. Free cash flow productivity came in at 87%, roughly in line with year ago. This puts us on trackto be our free cash flow target for the fiscal year.

We repurchased $2.6 billion of P&G stock at an average price of $64 during the September quarter as part of our recentlyannounced three-year 24 to $30 billion share repurchase program. Combined with $1.1 billion in dividends, P&G distributed$3.7 billion to shareholders in the September quarter or 120% of net earnings.

To summarize, this is a good start to the new fiscal year. P&G continues to deliver broad-based balanced top and bottom-linegrowth. I will now turn it over to Jon for a discussion of the business unit results by segment.

Jon Moeller - Procter & Gamble - VP & Treasurer

Thanks. Starting with the Beauty segment, sales grew 6%, led by double-digit growth in Prestige Fragrances. The impact of theSK-II business disruption in Asia that began late September last year reduced total Beauty sales by approximately 1 point thisquarter.

In Fragrances very strong double-digit results were driven by recent initiatives on the Dolce & Gabbana, Hugo Boss and Lacostefranchises. Hair Care delivered another solid quarter with mid single digit sales growth led by double-digit growth in developingmarkets behind Head & Shoulders and Pantene. In the US all outlet value share improved for each of P&G's top three retail HairCare brands -- Pantene, Head & Shoulders and Herbal Essences. Combined P&G's value share of US Hair Care increased by nearly2 points to 34%.

Retail hair color sales were in line with prior year as the business prepares for the launch of the revolutionary Nice 'n Easyinitiative, Perfect 10, in January. In Skin Care Olay sales grew double-digit in developing markets behind continued expansionof the key Olay franchises. This includes the launch of Olay Regenerist in Poland, new Olay Total Effects Skin Cleansing SKUs inRussia and a restage of the White Radiance line in China. Olay's excellent developing market results more than offset lowershipments in developed markets where the base period included the Olay Definity launch.

Importantly, Olay Facial Moisturizer US all outlet value share continues to grow with past three months share up more than apoint versus prior year to 43%.






Sales for the Grooming segment increased 9% for the quarter, driven by double-digit global sales growth for Blades and Razors.Global Blades and Razors value share has increased .5 and now stands at nearly 71%. These strong top-line results were led byover 20% sales growth in developing markets. Mach3 delivered high-teens shipment growth of blades in developing markets,due mainly to distribution synergies.

Also, the Presto Barba brand in Latin America has benefited from increased distribution and strong results of the Presto Barba3 initiative.

In male shaving Fusion continues to drive strong share growth. In fact, Fusion has driven share growth in premium male systemsin all markets where it has been launched. In the US Fusion's share of male systems blades is up nearly 12 percentage pointsversus prior year to over 32%. Fusion and Mach3 combined share of US male systems blades is up 5 points to 77%.

In female razors Venus Breeze continues to drive strong share growth with US all outlet value share of razors up almost 5percentage points to nearly 48% for the quarter.

Braun shipments were lower versus prior year due to supply constraints on the Home Appliance business in Western Europeand a deemphasis of the business in the US.

Health Care sales increased 7%, led by high single digit growth in Oral Care and Feminine Care. Sales were up mid single digitsfor Pharmaceuticals and Personal Health Care.

In Oral Care Crest and Oral-B both delivered solid global growth, on top of the base period that included the launch of CrestPro-Health toothpaste in the US.

In the US toothpaste business, Crest all outlet value share was up more than a point to 37% behind new initiatives such as CrestPro-Health Night Toothpaste and Crest Plus Scope Whitening Paste and Rinse. Oral-B manual brush share in the US was upversus prior year as the business improved supply capability.

In Feminine Care developing markets led the growth with a midteens shipment volume increase. The Naturella brand was upmore than 20%, and Always grew double-digit in developing markets. In the US Always and Tampax each grew all outlet valueshare more than a point this quarter and are now at 56% and 51% of the market respectively.

In Personal Health Care and Pharmaceuticals, the addition of the Swiss Precision Diagnostics joint venture, and pricing and mixbenefits in Pharma were the main sales growth drivers. Prilosec OTC US all-outlet value share was up more than 2 points to43%.

Sales for the Snacks, Coffee and Pet segment were up 6% for the quarter as Snacks and Coffee each delivered double-digit salesgrowth. Pet Care was down versus the prior year due to the continued negative impacts of the wet pet food recall last fiscalyear. The strong Snacks results were driven by the Pringles Rice Infusions launch in Western Europe. Coffees sales were up dueto the launch of the Dunkin' Donuts brand into mass retail channels, Folgers new Black Silk and House Blend innovations andprice increases to recover higher commodity costs. Folgers all-outlet value share in the US is up nearly a point to over 31%.

Next, Fabric Care and Home Care delivered another very strong quarter with 10% total sales growth. Home Care shipmentsgrew double-digits, Fabric Care volume was up high single digits and Batteries grew mid single digits. Home Care grew behindthe restage of the Dawn brand in North America, the launch of Febreze Candles and the continued expansion of Fairyauto-dishwashing in Western Europe.

In the US Home Care continues to build value share in key segments. All-outlet share for Dawn, Cascade, Febreze and Swifferall increased from prior year levels.






Fabric Care volume was up in all geographic regions for the quarter, including high single digit growth in North America. P&Glaunched the first wave of the North American liquid laundry compaction initiative in September, and conversion continues togo as planned. The first wave covered the Southern portion of the United States. The second wave will begin in late Januaryand will cover the middle and Northwestern US. And finally, the third wave will ship in April of 2008 covering the NortheasternUS and Canada.

Tide all-outlet value share in the US increased more than a point to over 41% for the quarter. Market share for Gain, thesecond-largest detergent brand in the US, also increased. Batteries volume was up 12% or more in each developing marketbehind distribution increases and solid market growth fundamentals. Sales in developed markets were up mid single digitsbehind volume growth and pricing taken last fiscal year to recover higher input costs. Duracell all-outlet value share in the USis down slightly versus prior year to just under 47%.

Baby Care and Family Care grew 10% on high single digit volume growth for both businesses. Family Care topline growth wasdriven by pipeline shipments of the new Charmin Ultra Strong innovation, continued growth of Charmin basic and strongretailer support for Bounty. Bounty all-outlet value share is up more than a point to 44%. Charmin's share is in line with yearago levels at 27%.

Baby Care topline growth was due mainly to the ongoing success of Pampers Baby Stages, Swaddlers and Cruisers productsand Pampers Baby-Dry with Caterpillar-Flex. In the US Pampers value share is up 2 points to over 30%, and in Western Europevalue share is up a point to 54%. Also, Pampers continues to expand its presence in developing markets with China, Russia,Poland, Saudi Arabia, India and the Philippines all posting shipments up 10% or more for the quarter.

That concludes the business segment review, and now I will hand the call back to Clayt.


Thanks. For fiscal year 2008, the priority for the Company continues to be to sustain organic sales growth at or above targetlevels. We plan to invest in our leading brand equities, we plan to launch a strong innovation pipeline, and we plan to makesignificant progress on go-to-market reinvention. We again expect to deliver our annual double-digit EPS growth commitmentwithout separately reported restructuring charges and excluding the positive year-on-year impact of Gillette dilution.

Consistent with our plan, since we announced the deal, we expected Gillette to be nondilutive to EPS in fiscal 2008. That are afew factors that have changed since we provided our initial outlook on the fiscal year that should be discussed.

Raw material and energy costs have increased significantly over the past few months. At current levels we now expect thesecosts to impact gross margins by 75 to 100 basis points in fiscal year 2008. Given the increase in input costs, we have announceda number of price increases within the last 45 days. Specifically we have announced the following pricing actions in the US.Effective this month, a 4 to 8% increase on coffee and a 9% increase on fabric softeners. Effective in January 2008, a 5% to 12%increase on Olay and Ivory Personal Cleansing products. And effective in February 2008, a 5.5% increase on Bounty and Charmin,a 5% to 8% increase on Pampers and a 3% to 5% increase on Blades and Razors. We continue to evaluate pricing in other partsof the business.

In total, we still expect modest gross margin improvement in the fiscal year despite higher input costs. Pricing, volume leverageand excellent work in the business to implement cost savings projects should more than offset the increase in commoditiesand energy.

Relative to the consumer, our markets continue to grow in both the US and around the world. While we have seen a modestslowdown in market growth rates in the US, international market growth rates continue to remain strong. In the US we are notseeing any trade down to private-label. Over the past three months, P&G is growing share in about 75% of the US business,






while private-label share is declining in the vast majority of categories in which we compete. And we continue to seek trade-upbehind compelling consumer innovations, innovation is still creating value for consumers for which they are willing to pay apremium. Successful products such as Gillette Fusion, Olay Definity, Tide Cold Water, Downy Simple Pleasures and, of course,Crest Pro-Health are prime examples of what great innovation and affordable price can do despite an economy that is puttingpressure on consumer spending.

Now we also know there's a lot of focus on our Beauty Care business. Beauty delivered 4% organic growth in the quarter,including a negative impact from SK-II of about 1%. While this is within the Company's overall target range, we're lookingforward to accelerated Beauty Care going forward. Competitors have increased spending, and we plan to respond with strongsupport behind our upcoming innovation program. This includes the Perfect 10 hair color launch, the Head & Shoulders restage,new premium items on Olay, Regenerist and Definity, and several new Prestige Fragrance launches.

Now onto the numbers. For fiscal year 2008, we expect organic sales growth of 4% to 6%, in line with previous guidance. Withinthis, we expect the combination of pricing and mix to be flat to up 1%, foreign exchange should have a positive impact of about3%, acquisitions, divestitures are expected to have a 1% negative impact on topline results, and therefore, in total, we expectall-in sales growth of 6% to 8% for the fiscal year. This is an increase of 1% versus our previous guidance due to increase inforeign exchange outlook.

Turning to the bottom line, we're increasing our fiscal year earnings per share outlook by $0.02 per share due to the onetimetax benefit. Specifically we now expect earnings per share to be in the range of 346 to 349, up 14 to 15% versus the prior year.

We now expect operating margins to improve by 50 to 100 basis points driven by lower overhead costs as a percentage of salesand modest gross margin improvement. We have widened our operating margin guidance to reflect the increase in input costsand higher foreign exchange impacts. Foreign exchange affects operating margins as the US business has significantly higheroperating margins than the international business.

On the tax rate, we now expect the fiscal year to be at or slightly below 29%, excluding the 50 basis point benefit from theonetime tax item. This change in the base business tax rate is a result of updating outlooks for foreign exchange impacts,geographic sales mix and the impact of the Company's ongoing tax planning.

Now I want to take a moment to provide some more perspective on tax. As we have said, quarterly tax rates will be more variablethan in the past. Accounting rules require companies to recognize the full impact of discrete tax items in the quarter in whichthey occur. These include events such as resolution of outstanding tax audit settlements. These types of items are estimatedin our guidance, but we have a varying degree of visibility on the timing and amounts. As we gain more visibility, we will updateour guidance for them as we are doing this quarter.

In addition, there will occasionally be true onetime changes that are not foreseen and are not included in our guidance. TheGerman tax rate item this quarter is a prime example. Absent these onetime impacts, we expect our tax rate to be at or belowor slightly below 29%.

We continue to expect our share repurchases to be in the range of 8 to $10 billion for the fiscal year. As such, we expect interestexpense to be up due to increased debt levels.

Turning to the December quarter, organic sales are expected to grow in the 4% to 6% range. Within this, we expect a combinationof pricing and mix to be about neutral, foreign exchange should add 3% to 4% to sales, acquisitions and divestitures are expectedto have a negative 1% to 2% impact on P&G's top-line growth, and therefore, in total, we expect all-in sales growth of 6% to8%.






Within the segments, Beauty Care results should improve. While organic sales growth and grooming is expected to be upmodestly due to a strong base period comparison, while Blades and Razors delivered 8% organic growth behind the Fusionlaunch in several markets.

Turning to the bottom line, we expect margins to improve modestly as SG&A improvement will be largely offset by lower grossmargins. Gross margins are expected to be temporarily lower due to higher commodity and energy costs and the investmentsneeded behind the North America laundry compaction initiative. We expect gross margins to recover in the second half of thefiscal year due to pricing, the benefits of the North American laundry compaction initiative and increased cost savings fromrestructuring projects. We expect nonoperating income to be up versus year ago in the quarter due to the timing of divestitures,but for the fiscal year, we continue to expect nonoperating income to be lower than last year.

Finally, we expect the tax rate for the quarter to be at or slightly above 28% due to the anticipated timing of tax settlements.Net we expect earnings per share to be in the range of $0.95 to $0.97 for the quarter, up 13 to 15%.

In closing, P&G continues to deliver balanced top and bottom-line growth. We are converting earnings to free cash flow aheadof target and returning more than 100% of this cash flow to shareholders through share repurchase and dividends. And we areconfident in our sustainable growth model going forward.

And now I would be happy to open up the call. A.G., Jon and I will take your questions.

Q U E S T I O N S A N D A N S W E R S

Operator

(OPERATOR INSTRUCTIONS). Nik Modi, UBS.

Nik Modi - UBS - Analyst

Just a quick question. If you could just walk us through kind of the MDOs where expectations are in line or above and also wherethey are kind of missing your internal expectations, if you wouldn't mind doing that first?


Well, developing markets are on track as we said in the call. I think once we get beyond developing markets, we did note a slightslowdown in the US market, and certainly not marketshares but the market growth. And that has had some impact on thebusiness, and I think Europe is pretty much as we expected. It is not exciting growth, but it is about the same as it has been.

Operator

Bill Pecoriello, Morgan Stanley.

Bill Pecoriello - Morgan Stanley - Analyst

I wanted to just get a little more detail on the Beauty segment. You had talked about you gained share overall in beauty, but Iwanted to get a feel for how the timing of your innovation pipeline was impacting the growth this quarter versus the accelerationyou expect. Have the categories slowed in the current quarter? You had mentioned competitive spend.






A.G. Lafley - Procter & Gamble - Chairman & CEO

Okay. Overall the first thing we're watching, of course, is the market shares. Okay. And, as we reported, the market shares actuallylook pretty good. Our Hair Care share had one of the biggest pickups we have had in a while in North America. And the goodnews about Hair Care in North America is there has been a lot of competitive activity, and our share pickup was across all of ourmajor brands. So we feel good about that obviously.

If you go around the world without getting into all of the details, we're in good shape from a share standpoint everywhere butOsian and Latin America, and we have got to pick up the pace there. So we're doing pretty well. We're doing very well in SEMEA.We still earned a very strong position in China. We're on an upswing in Japan. I just told you about the US, and we're in a verysolid steady growth position in Western Europe.

There is a timing of initiatives issue. We had a strong base period. We introduced Herbal Essences Hot Spots initiative in I thinkJune last year, and it carried through the first quarter. That is when the big launch was. We had Definity on Olay. So we had apretty strong year ago period. If you look at our sort of schedule of initiatives this year, they get stronger as we go through thefiscal year. And so you've got a base period effect and you've got a post period effect.

I will say two things. Obviously Susan and I would like to have a couple more points of growth out of the Beauty Care business.SK-II has not come back as fast as we would like, and we think it can come back faster. We have got that business refocused. Ijust came back from a couple of weeks in Asia. We will be investing behind our initiative program in the future, and we will beinvesting longer behind it. Because I think as I have talked before it takes longer to build the trial, and we can build more trialover time.

And finally, we are looking at ways that we can combine our Beauty Care initiatives across markets so we get a stronger MDOexecution. And I think there are a lot of opportunities for us there.

So overall Beauty strategy I think is where we want it to be. It is all about initiatives, timing and initiative execution.

Operator

John Faucher, JPMorgan.

John Faucher - JPMorgan - Analyst

There has been a lot of speculation coming from the sell-side in particular in terms of how you are going to change your portfolioin terms of divestitures, etc. Can you talk a little bit about maybe some of the stuff we don't see in terms of the culture thereand how easy you think it will be or how difficult it will be to make changes in terms of selling off brands, businesses, what haveyou? Do you think there's a big cultural component that maybe we're not factoring in?


I would not say that cultural factor is an issue. I think we have been clear in the past on our criteria. We evaluate all of ourbusinesses in terms of their ability to deliver sustainable earnings, sales growth, earnings growth and CFROI. And if they candeliver over long periods of time, we like to have them, and businesses that are either underperformers or inconsistent performersbecome divestiture candidates. We have divested a number of businesses over the years, and there has not really been culturalissues that have impacted those decisions.






The final comment I will make, though, is there has been a whole lot of speculation out there in the press, and that is exactlywhat it is, speculation. There is no news on this subject, and the speculation is just that.


If you look at the track record from 2000 to the present, we on a fairly regular basis sorted through our portfolio, weeded it outand sold off or spun out from the businesses that either do not make strategic sense, aren't performing up to our expectationsor just don't fit. And we're going to continue to do that.

Operator

Amy Chasen, Goldman Sachs.

Amy Chasen - Goldman Sachs - Analyst

First of all, I hate to ask you this, but would you mind just running through these price increases again? I think you went a littlefast.

And then as a follow-up to that, I just wanted to get your sense on how easy it will be to get this pricing relative to the pricingyou took over the last two years, given that the consumer is probably in a less good place than she was two years ago?


Well, I will run through the list again, and then we will comment on the editorial side.

4% to 8% in Coffee. 9% in Fabric Softeners. 5% to 12% on Olay and Ivory Personal Cleansing products. 5.5% on Bounty andCharmin. 5% to 8% on Pampers. And 3% to 5% on Blades and Razors. There was also a Eukanuba price increase implementedas well.

And actually we are -- of course, pricing is always something that can create some uncertainty in the marketplace. But theseare commodity driven. In most cases competitors have announced similar price increases already, including some private-labelcompetitors which is virtually unprecedented. And so I think the chances of these price increases going through relativelyefficiently is very high. And I think what we have seen over the last two or three years as we have been raising prices is thatthese are not huge increases. They are not sticker shock increases. Consumers have seen much larger increases in other thingsthey buy than what they are buying from us. And, as I said, as we said before, we're not seeing private-label shares growing,and therefore, I think this round of pricing we hope will be similar to what we have been doing over the last couple of years.


If you just think about it real quickly, there is not going to be much customer resistance because they are seeing the sameenergy and commodity cost increases, and as Clayt said, they are pricing their private-labels. And they have been pricing thefood side of their business.

Regarding the competition as Clayt said, many of the branded competitors have already announced and even private-labelmanufacturers have announced. Regarding the consumer, we have a pretty good idea of what represents the right valueequation. We have proprietary test methods, and we know what kind of increases we have been able to take. And here is thekey. We're taking increases on brands and product lines that in most cases deliver superior performance and quality. So we will






see, but they are in line with the kind of increases we have taken in similar circumstances before. And we're not talking abouthigh out-of-pocket costs or high out-of-pocket prices for consumers here. And we're talking about staple items.

Operator

Bill Schmitz, Deutsche Bank.

Bill Schmitz - Deutsche Bank - Analyst

Just a quick one and then a follow-up if I could. For the December quarter, the new tax rate, is that going to be another $0.01or $0.02 benefit to numbers?


No, well, I mean the answer is the tax rate at around 28% by itself would create about a $0.01, but that has always been bakedinto our plans.


Okay. So that is nothing new?


Right.


Okay. Great. And then in terms of the retail environment, is it consumer softness or is it the trade getting sort of scared aheadof the holiday season in terms of the US market softness?


I think it is consumer. I mean if you -- the simple -- if you look at our numbers this time, when we do low single digits, we dotwo to fours in Western Europe through the US -- you know, Western Europe to Japan and the US. That is all driven bymacroeconomic and consumer. I don't think it is driven by any trade reaction.

In fact, if anything if you look to what the trade is merchandising and what the trade is featuring and what the trade is focusingon, they are focusing on keeping the traffic flowing. And, in many cases, that benefits our leading brands and benefits ourcategories because they are weekly purchase and daily consumption.

Operator

Wendy Nicholson, Citigroup.






Wendy Nicholson - Citigroup - Analyst

If I've interpreted your message over the last couple of quarters the right way, it was sort of that the emphasis of the Companywas going to shift more towards topline growth, kind of in '08 or '09 and that you were willing to forsake your operating margintarget in order to accelerate that topline growth. But if I look at the numbers today, it clearly looks like you're going to miss theoperating margin target for 2010 by a couple of hundred basis points maybe. But you are sort of struggling to just come in linewith the middle of your long-term guidance on the topline. So it does not look like all that sort of higher spending is reallytranslating to faster topline growth. Do you think that is just sort of a function of the difficult environment in the US?

Second of all can, you talk about the restructuring charges that 400 to $500 million that you were supposed to see in 2008, howmuch of that showed up in the first quarter? I know you don't want to call it out too specifically, but just to give us a sense ofhow much I hit your margins.


I think it's all a matter of balance. First of all, we don't think we are -- we think we are on track for our operating margin targets.So we need to talk with you in detail about that if there is a difference of opinion. We think we're making our gross marginprogress and our operating margin progress. And that is important, okay? But it is a matter of balance.

And, as Clayt said in the prepared remarks, well, first of all, you have got to stuff back. We feel great about our Fabric Care results.We feel great about our Home Care results. We feel great about our Baby and Family Care results. In all cases they are good orbetter than anybody in the marketplace, anybody in the world. Okay? We feel good about our Beauty and Personal Care resultsbecause the marketshares continue to grow. And what you're looking at basically is a difference in footprint and a differencein mix. We have more exposure in developed markets. Some of our competition has a lot more exposure in developing markets,and we're all growing double-digits in developing markets.

There is an issue of balance which I want to be crystal clear about, and that is there are two things going on in some of theBeauty Care categories in some of the countries around the world. And that is that the amount of spending has increased. Whenit is spending behind initiatives that differentiate your brands and product line, bring new consumers or increase the loyalty ofcurrent consumers, we think it is good spending, and we need to stay competitive there. And there are a few places where wehave not been as competitive as we want to be.

The second issue is it takes awhile to build the kind of trial rates in a market like we are in right now, which is hotter, which ismore fragmented, which with a media plan that has far more pieces to it, and we're going to stay with our investment behindour initiatives longer.

And finally, I don't want to get into specific examples, but we have got a couple of competitors that are spending on a singlebrand launch more than we spend across the whole category. Okay? We cannot sit in situations like that and let them try tobuy the market share. That just is not going to happen.

So that is really what we're looking at. It is a dial-turn to get the balance right on the Beauty and Personal Care side of thebusiness, where it is a hot market right now. There is a lot of activity.

But I think if you step back and look at the whole portfolio, it is pretty understandable and the share growth is what we're reallyfocused on. Because in the end, that is about consumers voting for your brands and your products everyday in the store andliking what they use at home because they come back and purchase them again.







And just hopefully and obviously we're still guiding the 1500 basis point margin improvement in this year. The restructuringthat we have announced, the 300 to $400 million program, is baked into those margin plans. And I think what we have said onnumerous occasions before is that we have a target to get to a certain EBIT level by the end of the decade. We're not fixated ona margin number, and we are not -- that is obviously a combination of sales growth and margin expansion -- and we are ontrack to achieve our objectives by the end of the decade.

Operator

Justin Hott, Bear Stearns.

Justin Hott - Bear Stearns - Analyst

Can you tell us a little bit more maybe about how this consumer slowdown might hurt you in the US to some of the others youhave seen and how your strategy might be similar to -- or similar or different from what you have done in the past?

And secondly, maybe a little more color on the innovation pipeline, how you feel on Olay?


Okay. You know I think the pressure on consumers in the US is well reported and extremely well covered. I mean it is on housing.It is on energy costs. It is on debt. And there is more pressure on lower income consumers than there is on middle and upperincome consumers, and I think that shows in the profile of retailer results and channel results. So I think that is -- I think that isfairly well understood.

The second thing I would say is this industry and our Company is a good performer -- a relatively good performer in these kindsof economic conditions. And I think that has been the history at least in the 30 plus years I have been with the Company. Wedo relatively better in recession, and nobody is predicting -- some are predicting a recession right now -- but it is not clear thereis going to be one. And the reason I think is fairly straightforward. We sell almost exclusively certainly predominately every weekpurchase everyday usage Household Care and Personal Care products.

What we're seeing is a little bit of softness in some of the markets, but they are still growing. And that is the key. And that isimportant.

The second thing we're seeing is that the question that we got from Amy about pricing is a good one, but we are not seeingpressure on the consumer value side. We would not be building share on 77% of our business in the US if our consumer valuewas out of line. So the consumer value looks about right. And, as you know, we have been driving trade-up in a lot of HouseholdCare and Personal Care businesses. So that is fairly encouraging. In fact, the private-label shares are as weak as they have beenthis decade in the US. So that suggests that the price premiums that we're taking still represent excellent consumer value.

Now we are obviously all over that testing for pre-market and watching it in market. And the last thing I would say is about theinnovation program. That is when we are ready to go. And for a lot of good reasons, this program gets little bit stronger eachquarter as we go through this fiscal year. We have new lines on the Skin Care side and specifically on the Olay side. We havenew lines of Regenerist products. We have new SK-II bundles. We have Definity, a new line of Definity products. I think you haveseen our clinical strength products from Secret and Gillette, and we have got some new cosmetic products coming on CoverGirl and Max Factor, and we have a very full bundle of Fragrance products that I think as you know go in for the Christmas seasonfor the most part every year. So we've got a pretty good lineup on Skin Care.






Operator

Lauren Lieberman, Lehman Brothers.

Lauren Lieberman - Lehman Brothers - Analyst

Just a question about the overall model. Going back a couple of years, one thing that I think I always missed was the power ofthe leverage you were getting on growing the top line and controlling overhead. So it does seem like that is going a long wayto offset some of the raw materials cost inflation you're going to be facing. But it does feel like that leverage is maybe deceleratinga little bit. And also it feels like the higher margins, structurally attractive mantra of a couple of years ago that some of thosebusinesses may be requiring greater investment to get the growth than you had initially thought. Are those fair statements orwhat am I maybe missing?


Well, I think obviously there has been a surge on the Gillette synergies over two years and continuing this year that has positivelyimpacted the overhead costs in SG&A. But our view is that we're committed to ongoing productivity improvements in SG&A,and we have specific targets by business unit. And we believe that those targets that we have established by business unit, theyare relative to their growth plans. And so they are not going to inhibit their growth plans. So we believe we can adequatelyfund innovation for growth at the same time we can improve overhead cost efficiency going forward.


We have run 5% to 6% a year productivity improvement this decade. We're going to continue it. Okay? And we are structuredto do it. We are focused on it, and as Clayt said, we have specific goals by businesses.

Your question about support is a good one, and it is actually a tale of two cities. Clearly in some of the Beauty categories theprice of poker has gone up. That is crystal clear. Part of that is driven by the amount of new brand and new product activity.That pace has quickened. Part of it has been driven by the intensity of the competition.

But one critical point that you have to keep in mind, the Beauty industry is huge worldwide. Hundreds of billions of dollars. Andif you take the top five competitors and add them up, you're still only at about 40% of any market.

So there is plenty of room for everybody to grow share. Okay? When you get into developing markets, there is even more roomfor everybody to grow share and to grow their business at a fairly good pace because you've got a lot of category developmentgoing on in addition to the markets that are there, especially in the larger urban centers.

What is going on on our household businesses is actually the cost of doing business is stable or going down a bit because there'sless competition. So if you look at our Fabric Care business, and you know the story there. There have been withdrawals by acouple of major competitors from major markets that reduces the cost of playing poker. If you look at some of the other bigbusinesses we're in -- Home Care or Baby Care or Family Care -- I think the MSA and MDA spending has been fairly what I wouldcall measured and prudent because of the structural nature of those kinds of businesses.

So yes, it is costing a little bit more in some businesses to compete, but in other businesses it is not.







And, of course, part of our ongoing plans is not to reduce marketing investment as a percent of sales and that which is embeddedin the SG&A.

Operator

April Scee, Bank of America.

April Scee - Bank of America - Analyst

Most of my questions have been answered, but could you just give us a quick update on the litigation between Procter & Gambleand Teva for Actonel? And specifically, how do you think about the chances of an at launch risk by Teva given Teva's propensityto be somewhat aggressive and the unusually long time for the court to make a decision? Are you doing anything to preparefor that possibility?


Well, obviously the decision is pending. We think our case and our position is a strong one, and we will carry the day. Yes, Tevaor any other genetic manufacturer could take the risk that you described, but it is triple damages if they lose.

So it is a big bet, you know, and that is their choice. But that is the game in pharmaceuticals right now, and we think we willprevail. We have got patent protection through 2013, and we're just going to have to see.

Operator

Chris Ferrara, Merrill Lynch.

Chris Ferrara - Merrill Lynch - Analyst

Can you talk about I guess the combined impact of higher commodity costs, which I guess you said were about 15 to 25 basispoints more than you had said in the previous guidance I guess and then all of the pricing you just cited? So, in other words,how much of that pricing you cited today is incremental relative to your guidance? Is that overall pricing or commodity/pricingdrag greater than it was before, and is that why the full-year EPS guidance when you exclude the tax change is a little bit lowerthan it was before?


Well, it has nothing to do with the tax change, so let me say that right upfront. I would say that the pricing we have done, andI'm not going to be specific, by the way, by business, but the pricing we have done is a little bit greater than we had anticipatedgoing into the fiscal year. And so some of that could be timing and some of that could be amount, but clearly I think if you recallwhat we said three months ago, six months ago, we actually were hoping commodity and energy costs would begin to plateaugoing into this year, and you saw the commodity impact decline in each quarter last fiscal year, and now you have seen thecommodity impact step back up in July, September. And so we have obviously had to react to that.







Chris, the way to think about this is the combination of firm price contracts, hedges, inventories on hand, dampen the effect abit on the current fiscal year. But obviously there will be -- we're all -- we have all got our crystal balls out to try to figure outwhere things are going to go in 2008. We believe the prudent approach is to take the pricing. Okay? And then that gives usmore flexibility. If commodities come off, we can always adjust pricing. And if they stay high or continue up, we're in a betterposition.


And just to try to close the loop on the tax area, as the foreign exchange has increased the percentage of our business outsidethe US, that has an impact of lowering the tax rate. It also has an impact of modestly lowering the margin because the marginsoutside the US are lower than the US. So really what you're seeing here is a big kind of mix effect as opposed to changinganything fundamentally.

Operator

Ali Dibadj, Sanford Bernstein.

Ali Dibadj - Sanford Bernstein - Analyst

It just kind of looks like, as I look at this, you are banking more and more on this growing nonoperating income line to makesome of your numbers. I want to understand two things. One is, just to understand why that needs to be. How should we expectthat growing or changing going forward, one?

And then two, really unraveling on the pure operations of the Company. I mean as far as we're concerned the gross margin wasa little bit higher than we had expected and I think than your guidance was, and operating margin was a little bit less. I'm justtrying to get underneath the real operations of it and understand a little bit of the puts and takes on marketing, on savings, andin particular how should we expect that going forward? So kind of those two parts would be real helpful.


Well, in non-op I think we have said the non-op is going to be down for the year. Okay? Although it varies very much for quarterto quarter. And, of course, a lot of that relates to an ongoing minor divestiture program that we do that hits certain quarters.But I don't think it is a factor on the year.

Now related to the margin --


Well, our plan -- I mean I think as we have said, we plan to continue to improve the gross margin line and the operating marginline. You asked for some additional detail on the components. Our marketing spending was actually up a bit this quarter. Sothe issue which I tried to be clear on, if we had it to do over again, it would have been up a bit more in Beauty, and we wouldhave made it happen. And you can with a stronger initiative program going forward, you can anticipate where the marketingspending is going to be going forward. We're going to support the initiatives.

Regarding the overhead, I think we have been clear on the overhead. We done a good job of managing our productivity, andwe're getting good scale leverage there. And then the one other piece we have not talked about is cost of goods, which we call






total delivered costs. And I would say the organization has done a pretty doggone good job there. We have not been able toobviously offset all of the energy and commodity cost pressure, but we have ongoing programs that put a dent in it so we don'thave to rely on pricing for all of it.

And then the last piece that I think is relevant and important is how we are managing our mix. And I think we're doing areasonably good job of managing our mix. In the Household categories, we're demonstrating that the consumer will trade upand pay a bit more for better performing, better quality products, and that has been the case for several years in the Beautyand Personal Care categories.


And then relative to the operating income, operating income was up 9%. The operating margin was up right in line withguidance. So maybe we ought to chat on the phone later to understand what your concerns are.

Operator

Jason Gere, Wachovia Capital Markets.

Jason Gere - Wachovia Capital Markets - Analyst

I'm not sure if you have talked about products that are on allocation. Can you talk about how much that impacted organic salesthis quarter, and how that compares to last quarter, and can you talk about maybe the progress on building capacity?


Actually very little now, except Braun. There's still some Braun household items where we have a supply problem. But that is --


We're pretty much out of the woods on brushes, toothbrushes -- (multiple speakers)


And disposable razors.


And disposable razors which were big issues. Braun has been an ongoing issue because we are converting out of the big [braces]Spanish manufacturing facility and moving into Eastern Europe.

Broadly the capacity question is, we're going to begin investing in capacity, and a lot of it is going into developing markets forobvious reasons. If you're growing double digits in developing markets on a business that is well over $20 billion now, you aregoing to be investing in capacity. So in places like SEMEA and places like Asia, there is going to be a lot of capacity going in. Butwe will get it done at 4% or less CapEx which is our commitment.






Operator

Bill Chappell, SunTrust.

Bill Chappell - SunTrust - Analyst

Just if you could give us a little more update on compaction in terms of I guess we have heard from some vendors there isactually some volume growth as consumers are getting used to the new bottle sizes. Are you seeing that, and when will youhave an idea kind of to quantify the benefits on gross margin for that business in terms of like seeing other competitors giveback price or whether the prices will hold?


Compaction and concentration is going really well. Now I have got to hasten to say we are seven weeks into it or six weeks intoit, so it is very early days. I think we started shipping on about the 10th of September.

But the sell-in has gone really well. The distribution is in good shape. The resets in retail stores across America are well underway,and we estimate that 90% of them will be done by the end of October.

We're seeing most of the competition is basically following. There have been public reports by some of our major customersthat they are going to drive for full conversion as soon as the third wave is launched, which I believe is April of next year. All ofthe early anecdotal -- and it is primarily anecdotal -- qualitative feedback from consumers has been relatively encouraging. Theyunderstand it. And they are buying at the rates we expected and hoped they would buy at.

We're going to know a lot more after the next quarter. We're expecting this to be good for -- frankly, a win for consumers, a winfor retailers and a win for manufacturers. But the value is holding, and the price per load is holding so far. There are indicationsthat some consumers are trading up. So so far, so good, and we will obviously be all over it.

And your question on gross margin, I don't think we have been specific, but obviously this is going to be a margin builder.


Well, it is a margin builder, and given what is going on in commodity prices right now, I think the chances that the savings getpriced away are pretty low.

Operator

Joe Altobello, CIBC World Markets.

Joe Altobello - CIBC World Markets - Analyst

Just a quick question on your margin target for 2010. I just want to go back to that for a second. You mentioned earlier obviouslythat US businesses have much higher margins than international. But it seems like the US versus rest of world growth differentialhas widened given the slowdown in the US. If we do see a protracted consumer slowdown here in the US, does that put yourtarget at risk?







Well, I think, Joe, really the target is really an EBIT target. Okay? And our target is to expand margin by 50 to 75 basis points peryear. But really the controlling objective is to get to an earnings per share number, which requires us to get to an EBIT number.And, therefore, the exact split between sales growth and margin expansion is one where it will fall the way it falls.

I would not say that this situation in the US relative to international growth at this point would cause us to change our 50 to75% target. I still think we're likely to fall in that range despite the mix shift that may be occurring. Some of it related to currencyand some of it related to relative market growth. So I still think we feel pretty good about the goals toward the end of thedecade.


And the last thing I would say, Joe, is while our margins are obviously strong in the US given our share leadership positions, ourmargins are improving at a good rate in developing markets. And we make good margins -- (multiple speakers)


After-tax margins and developing are comparable to developed. But there is a different mix on the internals where we tend tobe outside the US, a lower tax rate, therefore a slightly lower operating margin and somewhat lower gross margins. So therecan be some change in the internals, but we get to the same end point, and that is the objective.

Operator

Alice Longley, Buckingham Research.

Alice Longley - Buckingham Research - Analyst

A major theme of this call is that competition is spending more in some Beauty categories in some countries. Are you talkingmainly about Skin Care in the US and Europe, or are there more categories and more countries involved?


Well, I think it is pretty clear if you just look at the activity, there is a fair amount of spending in Hair. And that is -- you just needto look at where the competition (multiple speakers) launched, and you need to -- I mean I just got back from two weeks inAsia, and there is a lot of activity going on. Asia is a very hot market right now.

So Hair has been a very competitive market. Skin has been a very competitive market. We're going into a very competitiveseason in Fragrance. I don't think it is isolated. I think the whole thing has picked up.

And, by the way, I don't think it is a bad thing. Okay? I have got to try to make this point again. It is good for consumers becausethere is a helluva lot of new innovative products going to market, and they are getting a lot of choices and better performingand better quality products at good prices. It is good for retailers because Beauty and Personal Care categories are growing,and they desperately need growth. Okay? And, frankly, it is good for manufacturers because if you look at the way the beautymarkets are structured and you take the big manufacturers and you add us all up, we're still a minority of the total market.






I mean there are what, 900 Chinese Hair Care brands, and we have half the market in shampoos. And the shampooing frequencyis all the way up to two times a week. One more shampoo a week and the shampoo market grows another 50%. Okay? And itwill -- that will happen.

The conditioner and treatment market is relatively modest in China but starting to catch on because so many women areworking. Their hair is much thicker, and conditioning and treatment matters a lot more. The styling market is relatively immaturein China, and it is starting to take off in the cities.

Retail coloring, there is a small but clearly viable retail coloring business.

So I just think the market still remains very attractive in Beauty and Personal Care. There is a lot of growth to be had. And notsurprisingly, the multicategory competitors like the Unilever's and P&G and the pure-plays are going after the growth. Andthere is a little bit more spending going on. And we watch it; of course, we watch it. But it is hard to know every minute exactlywhat is being spent.

Operator

Linda Bolton Weiser, Oppenheimer.

Linda Bolton Weiser - Oppenheimer - Analyst

Just a specific question on the Health Care business. Prilosec OTC is a huge part of your business, and my understanding is thatthere has been an agreement reached between AstraZeneca and the patent challenger, Dexcel. Do you have any knowledgeof what that agreement has to do with? Has AstraZeneca informed you of any of that?


That agreement is confidential. Sorry, I can't be more specific.

Operator

Bill Leach, Neuberger Berman.

Bill Leach - Neuberger Berman - Analyst

I just wanted to double-check here. Full-year guidance includes about $0.10 a share in restructuring charges, and I was justwondering how much was in the first quarter?


We're not disclosing it, Bill. First of all, your assumption is right. We have said 300 to $400 million after-tax in restructuring, andtherefore, the centerline on that would be about a $0.10 a share. Again, I don't -- the spending tends to occur reasonablyconsistently throughout the year. So I think the safe assumption is that we are spending about 25% of the annual number inthe first quarter.






Operator

That is all the time we have for questions today. Gentlemen, I will go ahead and turn the conference back to you for any additionalor closing remarks.


Thank you for joining us today, and as I said at the outset, we will be around for the rest of the day to take additional questionson the phone as needed. Thank you very much for joining us.

Operator

And with that, we will conclude today's conference. Thank you, everyone, for your participation.

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Cover PageCorporate ParticipantsClayt Daley (22 Turns)Jon Moeller (1 Turn)A.G. Lafley (15 Turns)

Conference Call ParticipantsNik Modi (1 Turn)Bill Pecoriello (1 Turn)John Faucher (1 Turn)Amy Chasen (1 Turn)Bill Schmitz (3 Turns)Wendy Nicholson (1 Turn)Justin Hott (1 Turn)Lauren Lieberman (1 Turn)April Scee (1 Turn)Chris Ferrara (1 Turn)Ali Dibadj (1 Turn)Jason Gere (1 Turn)Bill Chappell (1 Turn)Joe Altobello (1 Turn)Alice Longley (1 Turn)Linda Bolton Weiser (1 Turn)Bill Leach (1 Turn)

PRESENTATION1. Operator2. Clayt Daley3. Jon Moeller4. Clayt Daley

QUESTIONS AND ANSWERS1. Operator2. Nik Modi3. Clayt Daley4. Operator5. Bill Pecoriello6. A.G. Lafley7. Operator8. John Faucher9. Clayt Daley10. A.G. Lafley11. Operator12. Amy Chasen13. Clayt Daley14. A.G. Lafley15. Operator16. Bill Schmitz17. Clayt Daley18. Bill Schmitz19. Clayt Daley20. Bill Schmitz21. A.G. Lafley22. Operator23. Wendy Nicholson24. A.G. Lafley25. Clayt Daley26. Operator27. Justin Hott28. A.G. Lafley29. Operator30. Lauren Lieberman31. Clayt Daley32. A.G. Lafley33. Clayt Daley34. Operator35. April Scee36. A.G. Lafley37. Operator38. Chris Ferrara39. Clayt Daley40. A.G. Lafley41. Clayt Daley42. Operator43. Ali Dibadj44. Clayt Daley45. A.G. Lafley46. Clayt Daley47. Operator48. Jason Gere49. Clayt Daley50. A.G. Lafley51. Clayt Daley52. A.G. Lafley53. Operator54. Bill Chappell55. A.G. Lafley56. Clayt Daley57. Operator58. Joe Altobello59. Clayt Daley60. A.G. Lafley61. Clayt Daley62. Operator63. Alice Longley64. A.G. Lafley65. Operator66. Linda Bolton Weiser67. Clayt Daley68. Operator69. Bill Leach70. Clayt Daley71. Operator72. Clayt Daley73. Operator

Disclaimer

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