Jon Moeller - CFO John Chevalier - IR.

Bill Schmitz – Deutsche Bank Securities John Faucher – JPMorgan Dara Mohsenian – Morgan Stanley Wendy Nicholson – Citigroup Lauren Lieberman – Barclays Chris Ferrara - Wells Fargo Ali Dibadj - Bernstein Connie Maneaty – BMO Capital Markets Jason English - Goldman Sachs Olivia Tong – Bank of America Merrill Lynch Javier Escalante - Consumer Edge Research Joe Altobello - Oppenheimer Bill Chappell - SunTrust Robinson Humphrey Jon Andersen - William Blair Mark Astrachan - Stifel Nicolaus Alice Longley - Buckingham Research Michael Stieb – Credit Suisse Caroline Levy - CLSA.

Welcome to Procter & Gamble's quarter-end conference call. Today's discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections.

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

Organic refers to reported results excluding the impacts of acquisitions and divestitures and foreign exchange, where applicable. Free cash flow represents operating cash flow less capital expenditures and adjusted for after tax impact of major divestitures. Free cash flow productivity is the ratio of adjusted free cash flow to net earnings.

Any measure described as core refers to the equivalent GAAP measure, adjusted for certain items. P&G has posted on its website, www.pg.com, a full reconciliation of non-GAAP and other financial measures. Now, I will turn the call over to P&G’s Chief Financial Officer Jon Moeller..

operating TSR, productivity, innovation, and operational excellence will enable us to continue to improve results, which brings us to guidance. We’re reconfirming 2014 guidance, top line, bottom line, and cash. We’re maintaining our organic sales growth range of 3% to 4%.

Achieving organic sales growth in the upper half of our target range would result in modest overall market share growth. Foreign exchange is expected to be a sales growth headwind of about 2 points, which leads to all-in sales growth in the range of 1% to 2% for the fiscal year.

On the bottom line, we’re maintaining our forecast for core earnings per share growth of 5% to 7%. This translates to constant currency core earnings per share growth in the range of 11% to 13%. On an all-in GAAP basis, we expect earnings per share to grow approximately 7% to 9%.

This range reflects somewhat lower noncore restructuring costs in fiscal year 2014 versus the prior year. First half core earnings per share growth will likely be flat to slightly down versus prior year. Second half growth will be much stronger. Our second half forecast is not based on a significant deceleration in organic sales growth.

Second half earnings growth increase is driven by foreign exchange and cost structure. Foreign exchange will be a significant headwind in the first half, but will moderate in the second half at recent spot rates. We estimate that about 70% of the fiscal year FX impact will be in the first half of the fiscal year.

We’ll also annualize operating impacts from last year’s Venezuelan bolivar devaluation in the second half. There are several second half cost benefits. Manufacturing startup costs will largely annualize in the second half of fiscal 2014 and productivity savings will build throughout the year.

As you prepare your sales and earnings estimates for Q2, there are a few items you should keep in mind. Recall that the second quarter base period includes a $0.07 per share one-time gain from the sale of the Western European bleach business. We expect the foreign exchange headwind for Q2 to be similar to the impact we saw in the first quarter.

We’re expecting a heightened level of competitive promotional spending, ahead of our product initiative’s launch in early next calendar year, especially in North American fabric care and beauty. We expect to deliver another strong year of about 90% free cash flow productivity.

Our plans assume capital spending in the range of 4% to 5% of sales and share repurchase in the range of $5 billion to $7 billion, continuing to deliver on our commitment of cash return to shareholders. In addition to the assumptions included in our guidance, we continue to be very transparent about some key items that are not included.

Foreign exchange continues to be very volatile. Rates improved somewhat in September and October, largely reversing the large negative move we saw in late July and August. But this could quickly change. The guidance we are reconfirming today is based on mid-October spot rates.

We’re closely watching the unrest in Egypt, which is a large business for us, and a base of export for the balance of Africa. Venezuelan price controls, access to dollars for imported products, and devaluation present risks, as do import restrictions and price controls in Argentina.

Finally, our guidance assumes no further degradation in market growth rates. We continue to operate in a volatile environment, with uncertainty in the foreign exchange, decelerating market growth rates, and a rapidly developing policy environment.

Against this backdrop, we have good market share momentum, a number of strong innovations coming to market over the balance of the year, and savings from productivity improvements that will continue to build.

Our first quarter results were in line with what we expected, putting us on track to deliver our goals for the fiscal year and enabling us to make progress toward our long term growth objectives.

We’re making targeted investments in our core business in the most promising developing markets and biggest innovation opportunities, and are aggressively driving the productivity and cost savings. Above all, we remain focused on value creation for consumers and for our share owners. That concludes our prepared remarks.

As a reminder, business segment information is provided in our press release and will be available in the slides, which we’ve posted on our website, www.pg.com, following the call. I’d be happy now to take any questions..

[Operator instructions.] Your first question comes from the line of Bill Schmitz with Deutsche Bank. You may begin..

Two quick ones. China, it seems like business is doing pretty well market share-wise, everywhere in the world except for China. But if you look across categories, at least in the Nielsen data we have, you know, laundry, diapers, toothpaste, it seems like shares are under quite a bit of pressure recently.

So wondering kind of what’s going on there and sort of what the plan is to kind of fix that.

And the second thing is, and maybe I’m making a huge deal about this, but this [influx] technology on the package side, could that be a game-changer going forward in terms of how you make and buy bottles and give you a pretty neat competitive cost structure advantage?.

First of all, China, volume market share was essentially flat in the quarter. We did lose a little bit of ground on value share, though that continued to build sequentially, has continued to build over the past 12, 6, 3 months. So we’re reasonably comfortable about our position there.

We’ve got a very strong innovation program coming in the back half of the year and expect China to continue to be a significant source of growth for us. On [influx], this is something we actually talked about at CAGNY.

It’s a disruptive proprietary breakthrough in the packaging area, and when rolled out across our businesses, it should deliver about $150 million in cost savings per year and will allow us to avoid about $50 million in capital expenditures annually. It will also bring significant sustainability benefits.

It could reduce resin usage by over 100 million pounds per year and eliminate energy usage by over 250 million kilowatt hours. And finally, we’re hopeful that this breakthrough will allow us to reduce our time to market for package development by up to 50%. So it is something that we’re excited about and should benefit from..

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

Wanted to talk a little bit about the negative FX leverage you’re seeing here in terms of from the top line to the bottom line, particularly how your manufacturing footprint is impacting that, whether that’s a big transactional hit as you’re importing products into countries like Brazil.

And then to sort tie that in, I’ll try to make this two questions, it’s actually one question, can you talk a little bit about the plan for local manufacturing? You’ve got a lot of startup costs there.

When can that go to being a real benefit as you look at not just your manufacturing cost, but also the ability to be more flexible when you’re manufacturing locally?.

You’re absolutely right on the dynamic on foreign exchange and the divergence between the top and bottom line impact. That disparity is primarily driven by very large currency moves in countries that have a significant dollar and euro denominated cost structure for imported materials and finished product.

Just for perspective, Japan and Venezuela, which both fall into that category, account for more than 40% of the FX-related profit hurt on the quarter.

And you’re also right that as we’re able to localize more of the manufacturing, not only will we save a significant amount of money, but we’ll in essence be operationally hedged more on the bottom line.

Timeline, we’re bringing on a number of new facilities currently, as reflected in the startup cost figures that we’ve been discussing for the past couple of quarters. I would look at that to yield benefits more in our next fiscal year..

Your next question comes from the line of Dara Mohsenian from Morgan Stanley..

First, just a detail question. Can you tell us how much U.S. organic sales growth was in the quarter in emerging markets? And then the real question is, I just was hoping you could characterize the pricing environment you’re seeing right now, both in the U.S. and around the world.

Clearly you’ve made significant market share progress, but you did highlight you expected heightened competitive activity going forward.

So should we expect pricing to deteriorate a bit going forward in the balance of the year? And do you view heightened competitive activity as a big threat, at this point, to your markets progress?.

First, on U.S. growth rate, organic sales was about 2%, and that’s also consistent with the total developed markets growth rate, which was low singles. Developed markets grew about 8%. On pricing, let me say a couple of things.

First, relative to history, including the last quarter, if you look at price, inclusive of promotion, it was neutral to organic sales growth on the quarter. If you look further back, price, inclusive of promotion, has been neutral to positive for 11 consecutive quarters. It’s been neutral to positive for 9 consecutive years.

We would much rather invest a dollar in innovation or equity, because those benefits are proprietary and sustainable. Promotion, price discounting, there’s nothing proprietary about it, and it’s typically not sustainable.

If you look at our promotion, the percentage of sales that moved on promotion in the July-September quarter, it was down versus a year ago, not up. So that’s the past. As we look forward, it’s important that while we’d rather spend money on innovation and equity, it’s important we be competitive from a promotion standpoint.

We are not going to be ones who lead promotion escalation, but we will be competitive.

We do have a period coming up in the next quarter here that precedes pretty significant initiative launches for us, and it’s not atypical in that environment that we see a little bit of an increase in promotion from the competitive set trying to load consumers ahead of our initiatives.

So we do expect that environment to tighten over the next three months as we head into our big initiative launch. Again, that’s not something that we’ll be leading. We’ll continue to focus on innovation and equity..

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

On the gross margin, I know you don’t want to give too much specifics in terms of the full year outlook, but I assume some of the manufacturing startup costs are going to fall away. Hopefully, anyway.

Can you comment kind of over the full course of this year whether you expect gross margin to be up or down?.

It certainly will sequentially improve, and should be positive certainly by the fourth quarter, early fourth quarter. We’ll have to see where it nets out total year. I honestly don’t think that much about that. But we do expect for gross margin progress to turn positive by the end of the year..

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

I wanted to ask a bit about beauty margins. They were up so significantly in the quarter I was curious what was driving that. The change in allocation of resources, or holding back as you sort of sort out plans for skincare? So questions on that.

And then coupled with that was in your prepared remarks, Jon, when you mentioned the heightened promotional environment expected in the second quarter ahead of initiative launches, you actually mentioned not just fabric care but also I think you said beauty, and that was sort of news to me if there’s something significant coming in beauty, so if you could talk about that, it would be great..

A large part of the quarter to quarter variability in profitability in beauty is being driven by initiative timing, and we have, as I mentioned in the prepared remarks, and as you referenced, we have a strong slate of initiatives coming to market December through March in beauty.

The specifics are not items that we’ve disclosed yet, and we’ll do that as we get closer to the events themselves, but there is significant innovation coming. The other thing that’s impacting quarterly variability, which is a great thing, is real progress on productivity within the beauty business.

They’re working that as hard as anybody, and are frankly doing a great job..

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

I just wanted to ask about Tide Simply. So I guess relative to Charmin and Bounty basic, it looks like the price gap there between the premium and the mid-tier segment in those respective categories is not as wide as in direct to laundry. Premium Tide versus the baseline is a very, very large gap.

So the gap between Tide Simply and premium Tide is likely to be wider than what it is between Bounty and Charmin basics, and those mainline products.

So I guess the question is can you use those two as a benchmark? And how do you manage that? And is the thought process even correct there?.

It ultimately comes down to strong consumer segmentation and benefit alignment against those segments and the benefits that they’re seeking. And it’s more about that than it is about relative price point.

And as you can imagine, we’ve been working this for some period of time, as you know, and we’ve been working very hard to ensure that the offering is very attractive to the consumer segment that we’re targeting and is less attractive to the current Tide consumer, which we believe we have achieved.

And that is more the mark of success on things like Bounty Basic, Charmin Basic, Luvs versus Pampers, that consumer segment and benefit alignment with their needs that drives success..

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

Two things. I first wanted to follow up on the language in the press release and your prepared remarks about the $0.07 I guess now one-time gain you asked us to include in your core last year, although it felt like it was smaller than $0.07 last year. I’m just a little confused.

Are you now asking us to restate that and take out the $0.07? Or what do you want us to do with that? And then the other question I had is about the 200 basis points that you’re saving this quarter. Obviously that’s good.

Is that enough relative to the way your competitors are doing? It certainly sounds like you’re going to be ramping up that savings number.

How much higher do you think it ramps to and for how long?.

First, relative to the $0.07 gain, what we’re asking you to do is just simply be aware of it. We’re just providing that as an awareness point. What you do with that is obviously your call. But we like people to not be surprised, and that’s simply why we’re calling it out.

It will be in our core numbers in the base, and will be reported as part of our core comparison. So we’re not restating anything here. On savings, look, there’s no amount of savings that’s enough. Now, there is an amount of savings that’s too much, when it starts cutting into capabilities for growth and those kinds of things.

But we’re going for everything we think is feasible and then asking ourselves is there more after that? And I’m not going to speculate on the ultimate amount of savings, but I think as you’ve seen both last year and this year, generally we’re exceeding, as opposed to underdelivering, our savings targets.

Last year we had $1.2 billion in cost of goods savings. That’s about what we need to deliver the $10 billion objective this year. So far we’re at about $1.4 billion. Last year we significantly overdelivered the SG&A enrollment, and this year we’re committed to deliver our 2014 target and work to accelerate 2015 into 2014.

And we really want to make this, as many of us have described before, an ongoing part of our business model, our culture, our ethos. And I think there’s a lot of possibility, to the extent that we’re able to accomplish that..

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

I remember when A.G. first came back he was talking about the cost structure in some parts of the developed world still being too high. I’m wondering where you stand on what sounded like it would be another more traditional type of bricks and mortar restructuring program that would run concurrently with the productivity initiative underway..

That’s what I was referring to in my prepared remarks relative to supply chain redesign in both North America and Western Europe, which is underway. It’s in process, and we’ll talk about it more as we kind of finalize our plans.

But that is a significant opportunity to both reduce cost, improve cash through reduced inventory, and importantly, improve customer service, and we’re pretty excited about that that opportunity. Basically, our supply chains in both of those markets have come about over years, and through a number of acquisitions.

And this is an opportunity to step back and say, you know, if we were doing this over, how would we do this? What are the right levels of aggregation in terms of number of categories that are produced at a site? What are the right locations? How do you think about distribution opportunities serving existing customers and new customers? And so pretty excited about that opportunity, and we will bring more information to you as we finalize those plans..

Your next question will come from the line of Jason English from Goldman Sachs..

I wanted to come back to beauty. You talked a little bit about the innovation slate coming up and some of the margin expansion. I wanted to drill down on the organic sales growth. You were showing signs of acceleration to year-end. We see deceleration despite the easy comp, and it also stands in contrast to what looks to be, in terms of U.S.

consumption offtake, accelerating trends.

Can you help us understand what drove that deceleration, whether there’s anything transitory behind it, and maybe what’s working and what isn’t within that segment?.

First of all, this is a very competitive category. It’s a category where I will readily admit we continue to have more work to do. So we’re not yet where we want to be on this business. There are pieces of it that are working very well.

Our personal cleansing business was up high single-digits on the quarter, our cosmetics business is doing extremely well, our deodorants business is doing extremely well. I mentioned Pantene. In several parts of the world it’s doing well.

We continue to need to make progress on North American Pantene, on Olay, and we need to make progress in our salon professional businesses. So those are kind of the strengths and the weaknesses, as it were, and we’re fully focused on maximizing the opportunity behind the strengths and addressing the opportunities..

Your next question will come from the line of Olivia Tong from Bank of America Merrill Lynch.

Want to talk a little bit about the share improvement. Obviously it continues.

Where do you think that can top out at?.

Well, as I said several times on this call, we are in a very competitive market. Our expectation is that when we get everything working, we should be able to build a little bit of share each year. We’re never going to be in a position where 100% of our business is building share at any given point in time.

That’s just not a realistic scenario in a very competitive industry that we compete in. We’ve talked about targeting kind of two-thirds to 70% of the business growing share, holding or growing share, at any point in time, and that’s the level that leads to modest share growth on an annual basis. So that’s what we’re targeting..

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

Question on the gross profit, or gross margin side.

To what extent does a lot of what is happening have to do with the category mix in which basically the fabric and baby care are the two [unintelligible] that are leading the growth? And in that context, knowing that beauty and grooming are challenged, can you help us understand healthcare, why the deceleration beyond the recall of the pet food product?.

You’re absolutely right, in terms of the drivers of part of the gross margin pressure. There’s about 140 basis points of mix impact within that gross margin comparison.

Approaching half of that is the product mix, exactly what you referenced, which is faster growth in lower gross margin businesses like fabric care and our paper businesses and slower growth in some of our higher gross margin businesses. In terms of healthcare, the real impact on the quarter was the recall on pet.

The good news there is we’re back up manufacturing full speed a perfectly great product. And so that should be in the past..

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

Just in terms of the portfolio, I think one of the things that A.G.

has tried to hammer home the last three or four months has been that Procter needs to be more focused, and I think the word he’s used a number of times is “choiceful.” And so on that point, can you give us an example or examples of businesses where you believe you’re underinvesting right now, and where you’re overinvesting? And also, could you see yourself doing something like Unilever has done in the past, or like Kimberly-Clark has done more recently, where you actually pull out of certain geographies or categories in whole? And then also in terms of a housekeeping item, you mentioned that you held or gained share in two-thirds of your businesses.

I think that was a global number.

What was that number in the U.S.?.

The two word choices that you provided are accurate, focused and choiceful. And that’s what we’re all working to do here. Obviously you can appreciate from a competitive standpoint why I wouldn’t want to lay over many cards right here in terms of where we’ll accelerate investment or decelerate investment.

But it is very much, as I said in our prepared remarks, a focus of ours, which is flowing investment to the areas, both businesses and geographies, where we believe we can create disproportionate value, and looking real hard at businesses where we’re struggling to create value and looking to see if somebody else could potentially create more value than us.

We have pulled out of regions in the past. We used to be in Asia, in the tissue/towel business. We used to be in Western Europe in the tissue/towel business. And we’re now largely a North American tissue/towel business. And that was all driven by our assessment of our ability to create value in that industry, which we viewed as low potential.

So these are things, both categories and geographies, that we’ll continue to look at. And as we always have done, whether it’s pharmaceuticals or Folgers or snacks, or the Western European tissue/towel business, where we determine that we can create more value on any business in a divestment context, there are two pieces of that.

One is what our prognosis is going forward, the other is obviously we’re not going to exit businesses in a value dilutive manner, so we need to have somebody who’s willing to monetize some of that value they can create for our shareholders..

Your next question will come from the line of Bill Chappell from SunTrust..

Jon, you had talked I guess this morning on CNBC about Europe and kind of moving sideways.

And I was just wondering if maybe you can give us a little more color there, because as you alluded to, a lot of other companies are seeing pockets of growth in certain areas, and didn’t know if it really is just straight sideways, or if there’s any sign of hope, or kind of just any color you have would be great..

There are definitely areas that are stronger within Europe. I’m not telling you anything you don’t know. Northern Europe is certainly stronger than Southern Europe. Southern Europe continues to be a real struggle. And there are markets that are pockets of hope, if you will. But I want to step back on the whole Western European thing for a second.

Changes in Western Europe in the consumer products category space have never been dramatic, and they continue to not be overly dramatic. You know, growth tends to oscillate between minus 1 and plus 1, and it’s a good year when it’s plus 1 and a bad year when it’s minus 1. And we’re not seeing significant departures from that aggregate picture.

And so it continues to be an environment where we think we can build sales. We believe we can build profit and create value. It’s an area that we’re focused on. But we just don’t see a rebound to date..

Your next question will come from the line of Jon Andersen from William Blair..

I’m interested in asking about new channels, specifically the online channel.

How important is the online channel to you today? What role does it play going forward? And are there distinct advantages to Procter from selling online? And I’m thinking of things like increased consumption, reaching more consumers, or perhaps it’s more profitable to sell through that channel..

Well, we want our products to be available wherever, whenever, and however consumers want to shop. And there is certainly a segment of consumers in some categories that want to shop online, and we’ll work to be available for them. The amount of our business that’s currently in that channel varies by category.

Still, as you would expect, the vast majority of our products are sold in traditional channels. And I think the channel offers several advantages, and several disadvantages, just as our other channels do. It’s a very effective way to target consumers, both from a marketing standpoint and then conversion to purchase.

So we’ll continue to look at it from that standpoint. But we really want to be present and viewed as best in class in each of the retail channels..

Your next question will come from the line of Mark Astrachan from Stifel..

Do you think the competitive environment is getting better or worse relative to your expectations? And I say this in the context of some of what I thought relatively provocative comments by your large competitor yesterday that it plans to rebase cost to fund investments.

And sort of related to that, how do you think about the spending between promotional allowances and real advertising spend? I know you had mentioned that as a percentage of sales it would be up but less so absolutely as a percent?.

That’s true of our aggregate marketing expense. Promotion expense in the July-September quarter, in terms of the percentage of our sales that moved on promotion, was actually down 7% versus a year ago. If you look at the total industry, it was about flat versus a year ago.

So there are certain categories, certain items, certain competitors, where there may be an escalation in promotion, but it’s not a broad characteristic of the environment, at least as we’ve seen it to date..

Your next question will come from the line of Alice Longley from Buckingham Research..

A housekeeping question and then something else. Can you update us as to your category growth rates in emerging regions and the U.S.? And then could you break out the 2% organic sales growth that you had in the U.S.

in terms of volume mix and price? And then my other question is the 140 basis point negative hit to gross margins from mix, are you expecting that to lessen as you go through the year? And maybe [by half]? Is that a significant part of the gross margin improvement you’re expecting?.

In terms of market growth rates, broad strokes we see 1% growth in developed markets, about 7% in developing markets, and aggregate, developing markets ranged from kind of mid-single digits to low double-digits, depending on the region.

And the developed markets range anywhere from 2% market value growth in North America to about a 1% decline, consistent with what I was saying earlier, in Western Europe. Relative to the 140 basis points mix impact and how that evolves going forward, as I mentioned in my response to Javier, about half of that is geographic and about half is product.

And I would hope that over time, as we get our beauty business growing at market growth rates, the product portion of that would largely dissipate.

I do expect we’ll continue to have disproportionate growth in developing markets, and we’re not yet to the point in terms of economic development where those margins will be equal to the balance of the rest of the world. So we will continue to see some drag on mix from a geographic standpoint..

Your next question is from the line of Michael Stieb from Credit Suisse..

I was wondering if you could give us some more detail on the volume decline in the grooming segment.

Is that largely due to category weakness? Or is it from some share losses?.

The category in the last three months was about flat. I think it was a 99 index. We did lose a little bit of share in the latest quarter. That was primarily driven by disproportionate growth in the disposables section of the business, where we are less well-developed.

The encouraging piece of it is that Fusion continued to grow share, and that’s a good thing long term. And if you look over longer periods of time, last year for example we built share in blades and razors, and I would expect that would be more characteristic of the situation going forward..

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

Jon, if you could just go back to the North America share question, I don’t think we got an answer. Just if you could give directionally where things were strongest and weakest. And specifically in cleaning materials, so Tide Pods, if you could just break out what happened on the pod side versus the liquid laundry side..

Thanks for giving me a chance to recover there. Multipart questions, my feeble memory sometimes gets the best of me. In North America we’re holding or growing share in businesses representing between two-thirds to 70% of sales. So that continues to hold up very nicely.

I actually don’t have segment level in terms of pods versus liquids versus powder shares in front of me here, but please feel free to call John or Katie or Brian during the balance of the day and they can get you that information..

We have no other questions at this time..

Thank you, everybody, for joining us this morning. As I mentioned earlier, we’re reasonably happy with our first quarter results. In terms of its relation to our expectation, we know we still have more work to do. We’re determined to do that, and we look forward to connecting with each of you soon. Thanks a lot..