Jon Moeller - CFO John Chevalier - IR.

Chris Ferrara - Wells Fargo John Faucher - JPMorgan Dara Mohsenian - Morgan Stanley Wendy Nicholson - Citigroup Bill Schmitz - Deutsche Bank Lauren Lieberman - Barclays Olivia Tong - Bank of America Nik Modi - RBC Capital Markets Ali Dibadj - Bernstein Jason English - Goldman Sachs Connie Maneaty - BMO Capital Markets Javier Escalante - Consumer Edge Research Joe Altobello - Oppenheimer Bill Chappell - SunTrust Robinson Humphrey Alice Longley - Buckingham Research Mark Astrachan - Stifel Nicolaus Caroline Levy - CLSA Leigh Ferst - Wellington Shields.

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

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

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

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

operating TSR, productivity, innovation, operational excellence, along with targeted reinvestment, will enable us to continue to improve results, even as we work to address several remaining opportunities. We remain on track to deliver our 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 should result in modest overall market share growth. Foreign exchange is expected to be a sales growth headwind of 2 points, which leads to all-in sales growth in the range of 1% to 2% for the fiscal year.

We’re maintaining our forecast for bottom line core earnings per share growth of 5% to 7%, despite stronger headwinds from foreign exchange and softer market growth rates. We aim to make up the difference through productivity advances, which will primarily benefit the fourth quarter.

The fiscal year headwind from foreign exchange has continued to increase. We now expect foreign exchange to be a 7-point headwind to core earnings per share growth. As a result, our guidance now translates to constant currency core earnings per share growth in the range of 12% to 14%.

We now expect the tax rate on core earnings to be a point or so below prior year levels. 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 2014 versus the prior year.

The second half earnings growth increase that’s implied within our guidance is driven by foreign exchange and cost structure improvement. Foreign exchange was a significant headwind in the first half but will moderate in the second half at recent spot rates. We’ll also annualize the operating impacts from last year’s Venezuelan bolivar devaluation.

Manufacturing startup costs will annualize in the second half of fiscal 2014. Productivity savings and devaluation related price increases will build sequentially. As you prepare your estimates for Q3 and Q4, please keep in mind a couple of items. We won’t annualize the Venezuela impact until mid-February in Q3.

We’ll had a full quarter of laundry and oral care innovation impacts in Q4. Productivity savings that are being advanced to offset stronger FX impacts and lower market growth will primarily benefit the fourth quarter. Also, pricing that we’ll be taking to offset recent devaluations in some markets will take effect only in Q4.

We expect another 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. In addition to the assumptions included in our guidance, we want to continue to be very transparent about some key items that are not included.

The guidance we’re reconfirming today is based on last week’s FX spot rates. Further currency weakness is not anticipated within our guidance range.

We continue to monitor unrest in Egypt, which is a large business for us and a base of export for the balance of Africa, as well as unrest in economic instability in the Ukraine, though the situation has recently improved.

Venezuelan price controls, access to dollars for imported products, and devaluation present risk, as do import restrictions, price controls, and devaluation on Argentina. Finally, our guidance assumes no further degradation in market growth rates.

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

We continue to operate in a volatile environment, with uncertainty in foreign exchange, some deceleration in market growth rates, and a rapidly developing policy environment. Against this backdrop, we’ve maintained top line growth and improved constant currency operating earnings growth.

We have an even stronger innovation program in the back half of the year and savings from productivity improvements that will build. We’re making targeted investments in our core businesses, most promising developing markets, and biggest innovation opportunities, and are aggressively driving 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 on slides, which we posted on our website, www.pg.com following the call. Our next significant investor event ahead of A.G.

Lafley is the Cagney conference on February 20. We hope to see many of you there. I’d be happy now to take your questions. .

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

John, I was hoping you could talk a little bit about the cadence of the quarter. I think you mentioned that December was up 5%. Can you put that in the context of sell-in versus sell-through? What was going on in October/November? I think your shipments probably exceeded consumption by a reasonable margin in December.

Why is that? How do you feel about inventory levels there? And then just if you can go through the same sort of cadence for the quarter for the emerging markets too, given all of the concern there, that would be great..

You’re certainly right in that the timing of innovation did affect the timing of shipments in the quarter. We’re very comfortable with inventory levels currently, and offtake in January has been very encouraging. So we really do believe that there’s strength behind the December numbers, and that that should carry through into the third quarter.

In developing markets, there really wasn’t a significant difference in aggregate across the months of the quarter. We continue to see some softness in market growth rates, but there continues to be very strong growth overall, between 7% and 8% in the quarter we just completed, from a market standpoint.

And we expect that to continue through the third quarter as well. So what we’ve seen in OND, while presenting some challenges, leaves us confident as we head into JFM. .

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

Jon, as you look at the move to more local manufacturing, can you talk about the glide path that we should see in international operating margins over the next couple of years? It seems as though you exclude Russia and China, you’re probably looking at maybe a high single-digit operating margin in your international business.

And how long do you think it will take to see meaningful impact there? And then a related question, given the fact that you guys are still producing in some high-cost countries, and you’re seeing this massive negative transactional impact, are you thinking now about potentially hedging transactional going forward?.

One of the big questions as it relates to glide path going forward on margins in developing markets, obviously is foreign exchange. But if you take that out, last year we were talking about growing profit ahead of sales growth. So improving margins on a constant currency basis in developing markets. We made pretty significant progress.

This year is really the same story. On a constant currency basis, we’ll grow earnings significantly ahead of the rate of sales growth.

So I really can’t, because I can’t predict exchange, give you an exact glide path, but we should continue to make progress quarter on quarter, year on year, on those developing market margins as we, as you mentioned, localize manufacturing, but even more importantly as we continue to bring innovation to those markets, value creative innovation, which allows us to mix consumers up, which is happening pretty encouragingly in places like Brazil and places like China, in Russia.

So I said from the beginning that our developing market efforts, particularly as they’re focused on the biggest opportunities with the highest chance of winning, should, over the long term, be a margin accretive endeavor, not a margin dilutive endeavor. And we continue to see that.

As it relates to hedging, we’ll continue to look for all opportunities to operationally hedge. And obviously, the localization of manufacturing is part and parcel of that effort. In terms of financial hedging, we continue to look at that periodically as well.

A lot of the FX impacts, though, frankly, are in nondeliverable currencies, whether it’s in Egypt, Venezuela, Argentina, the Ukraine, etc., where there really isn’t financial hedging option. And in many of the other markets, the interest rate differential is so high that even the cost of forward hedging gets pretty prohibitive.

And as you know, all that that does is buy time. As those instruments expire, we’re right back to the issue that we started with, and I’d rather, where we have the opportunity, solve the issue real time, up front. .

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

John, beauty continued to drag down the organic sales growth number. The other divisions looked pretty solid. So I was hoping for more detail on how you plan to drive market share improvement going forward in beauty and when you think we’ll start to see some improving share trends.

And also, grooming, you mentioned market contraction in developed markets.

Can you run through what’s driving that? And what are your plans as the category leader to drive improved growth going forward, particularly on the innovation side?.

We continue to make progress on our efforts to strengthen the growth rates in beauty. And many parts of the beauty business are growing quite well. Personal care shipments, for instance, increased double digits in the quarter. Strong growth really in all regions.

Up double digits in China, midteens in central and eastern Europe and more than 25% in Latin America. Cosmetics we continue to do very well in. U.S. Cover Girl value share I think was up about 0.5 point in the quarter behind innovations like the Hunger Games Capital collection and the new Bombshell Volume mascara collection.

Our antiperspirant and deodorant business continues to perform well, with U.S. deodorant value share up 1.5 points versus a year ago, driven by recent innovations on Secret, and as I mentioned, Old Spice. And then we come to haircare. Many parts of the haircare business are doing well.

Head and Shoulders grew mid-single digits in the quarter, including double-digit growth in western Europe and central and eastern Europe, the Middle East, and Africa. Our biggest opportunity there is Pantene. I mentioned the innovation that’s coming to market that we feel good about.

We’re feeling increasingly good about our overall equity and advertising campaign efforts, and as you know, as I mentioned, we’ll also be expanding haircare into the young male segment behind the Old Spice brand. So we’re hopeful that we’re rounding the corner in haircare. On skincare, we still have some work to do, and that’s going to take some time.

So we share the impatience that exists externally. We know that we have more work to do, but we are comforted by the progress that we’re making. On the question of developed markets, market growth and our responsibility as category leaders for market growth, the good news is that the developed markets are growing, albeit at a modest rate.

It kind of oscillates somewhere between 0.5 point and 1 point of value growth per month. And within that, the better news is that where market growth is strongest in developed markets is in the U.S. and Japan. It’s weakest in Europe. We are overdeveloped in both the U.S.

and Japan, and so from a footprint standpoint relative to developed market growth, we’re fairly well-positioned. We absolutely accept the responsibility for growing markets, in the categories where we’re leaders and in the countries where we’re leaders.

And increasingly, our retail partners are looking at us as partners in that regard, to grow their business as well. We bring innovation that does grow markets. If you look at what’s happened, for instance, with Crest 3D White and some of the other innovations, we bring innovation that increases trips and grows market baskets.

So it is very much a part of our focus. It’s actually more important in many places of the world than share..

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

Just first a clarification. The 7-8% growth in emerging markets, less than 100 basis points of that I assume would be the benefit of new country or new category combination launches? So if you could just clarify that and make sure if that’s a real sort of same-store sales number, or close to it.

And then my second question is, with regard to what AG has talked about, the sort of strength to grow, and I know you said you’re looking for partners who can grow your businesses better maybe than you can, are you entertaining full brand divestitures? Or is there the possibility too of just sort of country category combination exits, kind of like what Kimberly’s doing, getting out of diapers in western Europe? Is that the stuff you’re entertaining as well?.

From a developing market growth standpoint, the vast majority of that 8% growth in developing markets that we posted in the latest quarter is, if you will, same country, same category, apples to apples growth rate. I don’t know exactly, but I would guess that the impact of any new white space businesses is well below a point.

So that should be a pretty good number and representative of the progress that we’re making. And on divestitures, historically, if you look at our efforts in this space, where we determine we can’t create value, whether that is at a category country combination level or a brand level, we’ve looked at other options.

So in the past, historically for instance, we exited the family care business, the tissue/towel business, in various parts of the world because we just didn’t see, at that point, a financial structure and an industry structure where we could sustainably create value for our shareholders.

We did the same, as you know, in several categories recently, from pharmaceuticals, to coffee, to snacks, to water purification, and in some markets the bleach business.

And rather than point to specifics, because as you know this is something we really only want to talk about when we have something to talk about, I’ll just reassure you that - hopefully it’s reassuring - that as I mentioned, everything we’re looking at is through the lens of value creation and there’s nothing that’s off the table..

Your next question comes from the line of Bill Schmitz with Deutsche Bank..

Just a follow up, what was the percentage of market share that the holding are gaining both in the U.S. and globally? I don’t think I caught that. And the the growth rate in developed markets? I know you gave us the emerging markets number. And then my real question is clearly the March quarter has been a troubling one for P&G historically.

So can you just give us some more color? I know you gave us some data points. And it seems like, as we look at the back half of the year, it’s really going to be fourth quarter weighted.

But I know you don’t want to give quarterly guidance, but maybe your comfort level and kind of where estimates are now, the Street consensus, that would be very helpful..

Percentage of business holding and growing share is down a bit from where we were last quarter. And that’s primarily driven by two items. One is fabric care in the U.S., the other is haircare in the U.S., both of which are big businesses, which are growing share, and where we lost a little bit of share in the OND quarter.

Both of those categories are items that we highlighted going into the quarter as likely going to be experiencing a significant amount of competitive activity, particularly promotional activity, ahead of our launches in both of those categories, which are just happening now.

So the decline in percentage of business holding or growing share is really driven by those two things, which we expected going in, and we’re very comfortable that both of those businesses, from a share standpoint, will strengthen as the innovations hit the market.

Just for perspective, if you look at, for example, Lever’s percent volume sold on promotion in haircare, in OND, it was up about 6% versus the prior year. If you look at some of our laundry competitors, percent volume sold on promotion in the OND quarter, it was up over 20% versus a year ago.

So again, these were things that we called out going into the quarter, things that we expected, and it’s all ahead, encouragingly, of very strong innovation that’s now just hitting shelves. Your second part of your question, on developed market growth rates, we were about flat, slightly ahead, in developed markets.

So the total is 8% developing, flat or just a little bit ahead in developed. And relative to the March quarter, I think your statement in terms of fourth quarter predominance is correct, and it’s consistent with the various impacts that I was calling out in terms of when the different pieces are going to fall in place.

Having said that, I expect us to make good progress in the JFM quarter, on both the top and bottom line. But as you think about the modeling across the quarters, it will be fourth quarter loaded..

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

The first was just on healthcare. Very big volume number, and then weaker mix impact. So just curious if that was primarily because of the expansion of the personal healthcare business in emerging markets, or if there’ something else driving it.

And then the other question was just perhaps a bit nit-picky, but I was reading through the release yesterday that you guys put out about Gain Flings, and it just struck me as a little bit too reminiscent of some of the innovation in the last two or three years, where it’s like this massive bundling of benefits into one product.

So it’s Gain Flings with great cleaning power, amazing scent, plus Oxy, plus Febreze. It reads like it’s like 10 people sat in a room and couldn’t make up their minds which was the most important benefit.

So I just would love some clarification maybe on the thought process, on why so much in one product, where the form should speak for itself, and how this is or isn’t different from the innovation you guys have been putting out over the last two or three years in terms of that messaging. .

The healthcare difference between the sales line and the volume line is really just category mix more than anything. And John can give you the details on that later today. Sorry, I don’t have that level of detail right here in front of me. But that’s primarily what’s driving it.

On Gain Flings, you know, if you think about it, when we brought Tide Pods to market, which has been extremely successful, that was a multibenefit proposition too. It was not only the form, it was a better cleaning product. So it was an upgrade, from that standpoint, as well.

And obviously nothing comes to market without a lot of work to understand what will delight consumers, and what they’ll be willing to pay for that, and that certainly is the case here as well. Early both customer and consumer reaction to the proposition has been very positive..

Your next question comes from the line of Olivia Tong with BoA..

I wanted to ask about grooming margins, because they were up significantly year over year after being down in Q1.

So going forward, is Q1 or Q2 more indicative of going forward? And is this due more to timing of some cost savings initiatives or promotions or innovation? Or is there something structurally different, so that profit growth will continue?.

It’s hard to draw meaningful understanding from one quarter’s worth of margin increase or decrease in any one of our categories. There’s a lot going on out there, whether it’s foreign exchange, whether there’s pricing in some markets. The cost savings program is itself not ratable. It moves up and down across quarters.

So I would encourage you to look more, call it 12 months, at margin trends as being indicative of what’s happening there. We’re reasonably happy with our margins on that business.

That doesn’t mean that we’re satisfied and we won’t stop working, both on the productivity point and on the innovation point, to improve margins in a way that’s value accretive for consumers..

Your next question comes from the line of Nik Modi with RBC Capital Markets. .

Just a quick question, if you could provide some perspective on some of the transitions that took place in leadership in R&D with Bruce retiring. Just curious on the replacement, any thoughts on changes in terms of processes within the innovation group. Any thoughts there would be much appreciated..

Kathy Fish will be taking R&D leadership for the company. She has a long track record of innovation success and consumer delight across a number of our businesses and across the global portfolio. So we’re very excited to see Kathy taking that responsibility. We just announced this recently.

She and Bruce are in transition, and I wouldn’t want to presume any changes in emphasis that she will choose, working a AG and others, to make at this point. .

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

A couple of things. One is on beauty. We haven’t really heard much about what you need to do to fix Olay. And I wonder sometimes whether you actually need to acquire something in that business, because it really is your only skincare brand, to backstop that business. So I’d love a perspective on that.

And then secondly, when we do see the beauty margins go up, I understand that a quarter doesn’t make a trend, but at least to a broader question that I have, which is when do you expect that crossover point to happen as a company, where the productivity savings ramp up to above your investment level? And if you could talk about that crossover point as you see it going forward, in the context of some of the supply chain work you guys are doing internally, that would be helpful..

The great part of the Olay story is that that remains an incredibly strong equity, with very high equity scores, very high net promoter scores, the highest in the category. So from an equity standpoint, it doesn’t mean we can’t do more work, but we start with a very strong asset. And really, from a product standpoint as well.

We have a very competitive product. But the work to do is in brand architecture, it’s in packaging, it’s in positioning the various properties in a way that is most relevant for consumers. And it’s entering some benefit segments that we’ve, frankly, neglected. And those are growing faster than the benefit segment that we’re in.

It also involves ensuring we reach consumers at different ages, which is part of what we were trying to do with the Olay Fresh Effects item. Now, this is going to take some time, as I said before. But I would feel much more concerned sitting here if this was an equity problem or a fundamental competitive product problem, which it’s not.

In terms of crossover point, back half, and the supply chain work, we’ll talk a little bit more about it at Cagney. We continue to be encouraged about the opportunity to potentially replatform most of our supply chain in both North America and Europe to do really several things.

One is, as you mentioned, to bring in savings, but also to get to standard platforms across the world, which allows for faster initiative expansion, to get closer to our customers with multicategory manufacturing facilities in a way that allows us to serve them better. And it’s something that we’re really just beginning the work on.

I don’t see it having a material impact, say, in the next 12 months. This is going to take a while, both to think through and to execute. But it should enable us to bring in a new round of savings in addition to the savings we’ve been talking about over the last 18 months. But that’s probably two or three years out. .

Your next question comes from the line of Jason English with Goldman Sachs..

Thanks for the incremental color on beauty. I want to drill a bit deeper on laundry. A few questions. First, on Europe, it sounds like Arial Pods are off to a good start, but Nielsen data suggests you’re still struggling in the market.

So what are the offsets there? Second, with the launch upon us, can you give us more detail behind the merchandising location and targeted price points for Simply? And lastly, what signs are you looking for to gauge when or if the U.S.

market will be ready for the next round of compaction?.

Well, it seems like Ali has now trained all of you well. You all ask three-part questions. [laughter] First of all, on Simply, the price is ultimately the sole discretion of our retail partners. But generally, we’re expecting that to be about 30%, on a list price basis, below current Tide.

Compaction is something that we are always looking at as an opportunity, actually across categories, beyond laundry.

And if you think about it, we’re really actively doing that as we sit here, because the unit dose offering, whether it’s Tide or Arial or now Gain, is the most compact form that exists in the marketplace today, and as more of the market converts to that, it has all the benefits of a standard compaction in terms of lower cost, better value equation for the retailer, better value equation for consumers.

And in terms of the question on Europe, really where we’ve lost a little bit of business is in liquids, where we’re responding to heavy competitive promotion levels. So it’s just a very competitive marketplace, which makes sense, as we bring in Pods and people are emphasizing the other parts of their portfolio..

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

I am just going to have to question on Venezuela, and that is as we contemplate another pretty steep devaluation, has there been any change in the policy there about prices? Have you been able to work around any of the pricing restrictions? And do you see any easing of that coming?.

That’s a very good question. Currently, there are price controls in place. That doesn’t mean that there won’t be opportunities to take pricing. The level of pricing is reviewed regularly by the government, and we’re obviously in discussions with them.

And I would say that they understand the need for some level of pricing for both international and local competitors to remain viable. Also, the price controls that exist apply to a portion of the portfolio, not to all. It’s what’s referred to as regulated items, where the pricing controls are relevant.

And there are unregulated items where there’s more pricing flexibility. So we continue to work to improve our financial situation in Venezuela, which starts off from a very attractive place to begin with, but your question is an appropriate one as we look forward.

To the extent that there’s more devaluation, will there be more pricing that’s allowed? And that’s just something I don’t have the answer to today. It’s something that we’ll be very transparent about and keep you updated on.

And that question is one of the reasons I continue, as I talk about guidance, to hold that item out, if you will, because I have no way of forecasting exactly what the puts and calls are going to be. .

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

Question on the negative mix, again. I would like to ask it from a planning standpoint.

Could you tell us whether the commitments that the [DBUs] presented back in August, when you created the fiscal ’14 plan, could you tell us whether beauty and grooming are meeting their plans, considering this very negative gross margin mix? And if they don’t, which DBUs are being asked to overdeliver in light of the reiteration of the corporate outlook for the balance of the year? Or does the plan assume that beauty and grooming are going to accelerate and therefore the negative mix to improve in the next couple of quarters?.

On a macro point, in terms of delivery versus expectation, we’ve been talking about, on the top line, a mix impact of one or two points going forward, and this last quarter was one point, so pretty much in line with what we expected, as was last quarter.

Each of the businesses has a strong commitment to deliver their plan that creates value for consumers and for shareholders. But equally, each of them is looking out for the company and is willing to help out where that’s needed.

As hard as you can imagine, going into a year, knowing exactly what’s going to occur during the course of that year, particularly given the volatility in FX, some of the policy volatility, commodity costs, which are up more in some categories than other categories. And so that’s an equation that gets constantly rebalanced.

But I can tell you that no one in any category is giving up. .

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

Just wanted to go back to beauty for a second. I think in terms of the question from Ali, you mentioned that you don’t think it’s an equity problem, and I would probably agree with that.

But is it a portfolio problem? Do you think that you’re still missing that brand that you could sort of slide in between, let’s say, SK-II and Olay for example, on the skincare side in particular? Is there something you could do there to address that? And then more secondly, in terms of overall beauty, if you look at the successful companies in this space, most of them are pure play.

So is it a different mindset and culture that’s really required to succeed in that business than, say, versus fabric and home care, for example?.

Thanks for reminding me of that part of Ali’s question. Sorry that I missed that. In terms of additional equities that may be brought to bear in skincare, it’s something that we look at routinely. It’s certainly not something that we’ve crossed off the list.

But also, I think you shouldn’t then therefore assume that “we need to make an acquisition” in order to get skincare growth back to where it needs to be. There are opportunities on both Olay and SK-II, and there are opportunities if we need to create equities or properties organically.

But if you think about Olay, really that’s a series of properties that were created organically, from Total Effects to Regenerist, to ProX.

And so I think the question is a good one, and yes, we may need additional properties, whether under existing brands or new brands, but I wouldn’t necessarily therefore conclude that we need to acquire in order to make that happen.

In terms of the capabilities and skill sets that are required to grow a successful beauty business, if you just step back a bit here, over the last 20 years, Procter & Gamble, with its skill sets and capabilities, has built the largest and most profitable beauty company in the world.

If you look at what we were able to do with brands like Pantene, like Olay, like Old Spice, like SK-II, like Hugo Boss, LaCoste, Head & Shoulders is another good example, that literally started out as very small kind of one-country, two-country, less than $100 million in sales businesses, and now are, in some cases, multibillion dollar businesses, category leaders, global leaders, in their categories, wouldn’t indicate that we don’t have the basic skill set and confidence required to develop and grow a beauty business.

Having said that, we are not arrogant in our ways and believe that we have all the answers. We have significant partnerships, many partnerships, externally, which give us access to other thinking in the beauty space, whether that’s in the packaging arena, whether that’s in the ideation and conceptualization arena, the equity arena.

And we’re also not averse to where there’s very strong talent that needs a specific skill [outage], to bring that in from the outside.

If you look at most of our design group, and that applies to both beauty and the balance of the company, was brought in from other companies, other situations, with the knowledge that that was an important capability, that we weren’t able to source sufficiently internally.

So we will take any help that exits, wherever it exists, but I’m pretty confident we have the abilities across our internal resources and our external partners to keep making progress in this space..

Your next question comes from the line of Bill Chappell from SunTrust..

First, on the other Bill’s question, I missed the actual percentage in North America and the rest of the world of held or gained market share.

And then second, you talked about kind of being ahead of plan on the cost savings, cost of goods sold, restructuring and pulling some of that forward from 2015, yet obviously there’s no change to your EPS guidance.

Is that just conservatism? Is that we’re spending more back into promotion and marketing with some of these launches? Or is that just FX is a little bit different from what you thought?.

Back to numbers, on market share, overall market share was about flat in the quarter. And percent holding or growing, I don’t have the exact numbers, it was probably 55ish. So that’s the market share numbers, both of which we expect will improve as we head into the back half of the year.

In terms of the acceleration of productivity savings, I’d say there are two motivations for that, maybe three. The first is we want to make productivity part of our culture, and just like we never ask the question in P&G what is enough innovation, we don’t like asking the question of what is enough productivity.

We’ll always be endeavoring to become more productive, and we’re doing that for multiple reasons. There’s the financial reason, obviously, but there’s also speed to market, clarity of decision making, organization transaction costs, etc.

So if we were in a position where FX was a tailwind, we’d be looking to accelerate productivity savings into the current year and identify the next round. The second motivation is exactly as you described, which is that FX, as I mentioned in our prepared remarks, has had a bigger impact, a significantly bigger impact, than we had been expecting.

And as you know, at the margin, while market growth still offers ample opportunity for all the best competitors to succeed, it is down somewhat from what we were expecting when we went into the year.

And as you’ll remember, when we started talking about productivity, this is exactly the kind of thing we were working to be able to do, which was offset, as one of the objectives, macro-level developments without having to compromise our earnings objectives..

Your next question comes from the line of Alice Longley from Buckingham..

I’m thinking, based on your comments about what’s happening in developing versus developed world, that trends and mix and price are quite different in the two regions.

So could you take your 0% to 1% growth in developed markets and your 8% growth in developing markets and break those down into mix, price, and volume? And then as the second part of that, will mix and pricing get better do you think, in the U.S.

in the second half than in the first half?.

Let me just give you, and I think you can get the rest of it, the volume growth rates in developed, which was 1%, and developing was 6%. So the mix dynamics, pricing dynamics, aren’t that different between the two, though obviously there are some differences between them. But those are the volume numbers.

You have the sales numbers, and I think you can deduct the balance. In terms of going forward, every problem is a significant opportunity, and any acceleration in the developed market business growth rates represents an opportunity to improve mix going forward.

And clearly, to the extent we continue to make the progress we’re making on beauty, as an example, that’s an opportunity to improve mix going forward. And each of our businesses has its own opportunity to improve mix through value accretive innovation.

And so while we expect that the developing, developed market dynamic will be prevailing - in other words, we still will have some negative mix going forward - there are many reasons to believe that the magnitude of that impact can lessen over time. .

Your next question comes from the line of Mark Astrachan from Stifel..

I wonder if you could talk a bit broadly about expectations for level of competitive activity in the back half of the fiscal year, and how we should think about the split between gross margin and SG&A expense leverage to drive the operating margin that’s expected..

I expect that in an environment of growth but modest growth, that competitive activity will remain strong. But the biggest antidote to that kind of situation is innovation.

The first half innovation program was fairly strong, behind the baby care innovation, the tissue/towel innovation, batteries innovation, and the laundry innovation on a global basis, and that just builds as we go forward, with some of the things I talked about and frankly some of the things I haven’t talked about yet.

So competing on the basis of innovation is something that is much more comforting than not, and we’re in a good position in that regard.

I think the other thing that oftentimes is missed, particularly in a developing market context, but also in developed markets, and it goes to the point of one of the questions that was asked earlier about market size, we really don’t look at this as a zero sum game.

There’s enough growth for all of the better companies to continue to do well, and there are opportunities to grow markets, to create new businesses, to build markets. And think about developing markets, for example. It’s really not about share, it’s about market. And more competition tends to be accretive from a market growth standpoint..

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

Just going back to beauty margins, they seem to be as high as they’ve been in many years in the quarter. If you could help us understand that. I know you said we should look at it on an annual basis, but a couple of quarters now where margins are actually going up, while the business itself is challenged.

Is that a trend that we should expect to continue, the margin growth in beauty and grooming, beauty in particular, while you’re improving things and working to turn around Olay and Pantene? And then secondly, if you could just break out the volume growth in China.

You said it was very strong, but if you could talk about your six major categories, if there were any standouts there?.

First, on beauty, I think the question behind the question is efficiency of support for the growth of that business, and we are comfortable with the levels of support.

As I mentioned, we’re working to increase the effectiveness and the strength behind that effectiveness of our advertising and marketing programs across the business, and that’s obviously relevant in beauty as well. And so it gets more difficult to look just at dollar trends and spending and assess sufficiency of support.

So we’re very comfortable we’re supporting the new innovations we’re bringing to market heavily. And there’s no reason that, if that’s the case, we shouldn’t be looking to take productivity savings to the bottom line.

It’s a balance, always, and it will continue to be a balance, but you’re starting to see, in those numbers, the reflection of very strong productivity progress, which is a good thing..

Your first question comes from the line of Leigh Ferst of Wellington Shields. .

You made several references to your digital ad spending.

Could you give us a little more insight into it in the aggregate? Is it a third of your spending? And what kind of impact does that have on your impressions, and what impact will it have on your future spending on an absolute and relative basis, relative to sales?.

We are continuing to increase our presence in the digital, social, and mobile spaces, as it relates to marketing. The percent that is in those media, or channels, is different by category. In total, I think we’re probably about or getting close to 30% of the spending being in those areas.

It does offer, based on what we’re seeing today, higher return potential. And that’s why the shift is occurring. And you heard me talk in the prepared remarks about some of the dynamics of digital, social, and mobile media in terms of earned impressions, and that’s one of the reasons that we’re seeing higher returns in that space.

And a huge number of those impressions were not paid for by us. The other aspect of those channels and media is that it allows very effective and tighter targeting of a message to a consumer.

If you think very simplistically about men and women, if you’re advertising on TV in particular, depending on what shows you’re on, that’s going to everybody, and we can much more carefully target content to recipient in a digital environment.

So I expect that will continue to be an area of focus as we move forward, but I really do think this is a world of and not of or, and we’re really looking at comprehensive campaigns across media that consumers want to access. .

We have no further questions at this time..

Thank you very much. John, myself, the rest of the team, are available at your convenience the balance of the day..