Jon Moeller - CFO.

Bill Schmitz - Deutsche Bank Dara Mohsenian - Morgan Stanley John Faucher - JPMorgan Olivia Tong - Bank of America Merrill Lynch Chris Ferrara - Wells Fargo Wendy Nicholson - Citi Steve Powers - UBS Lauren Lieberman - Barclays Nik Modi - RBC Capital Markets Javier Escalante - Consumer Edge Research Joe Altobello - Raymond James Ali Dibadj - Sanford C.

Bernstein Caroline Levy - CLSA.

Good morning and 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. Adjusted free cash flow represents operating cash flow, less capital expenditures and excluding tax payments for the pet care divestiture.

Adjusted free cash flow productivity is the ratio of adjusted free cash flow to net earnings adjusted for impairment charges. Any measure described as core refers to the equivalent GAAP measure adjusted for certain items. Currency neutral refers to the equivalent GAAP measure excluding the impact of foreign exchange rate changes.

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..

Good morning. January to March was another challenging quarter from a macro standpoint with significant foreign exchange headwinds, modest market growth and continued political and economic volatility. The currency challenge increased through the quarter with currencies in Brazil, Turkey and the Ukraine weakening sequentially versus the dollar.

Despite these challenges we grew cost and currency core earnings per share at a double digit rate. We grew core gross margin including and excluding foreign exchange and made strong operating margin progress up a 170 basis points on a constant currency basis. All of this was enabled by over 400 basis points of productivity savings.

Organic sales grew modestly up 1%, Grooming, Healthcare and Baby, Feminine and Family Care, segments grew 9%, 6% and 2% respectively. Organic sales were in line with the prior year in Fabric and Home Care due to the timing of innovation launches in North America in both the base period and the current year.

The base period included pipeline shipments for the major Fabric Care innovation bundle including the Tide Plus upgrades and introduction of Tide Simply Clean & Fresh and Gain Flings, which led the 6% organic sales growth for the segment in the year ago quarter.

The current period includes the impact of trade inventory dry down ahead of the launch of new liquid detergent and fabric enhanced reformulations. Fabric Care consumption remains strong in North America with market share growth on both a value and a volume basis. Beauty segment, results reflects softness in Prestige Fragrance and mass Skin Care.

Organic volume was down two points versus the prior year, developing market volume was down low single digits, following price increases taken to offset foreign exchange devaluation in several countries and adjustments made to correct trade inventories in Mexico and China.

These adjustments had about a one point impact on the company’s top-line in the quarter. Developed market organic volume was down 2%, driven mainly by timing impacts associated with the April 1st increase in the Japanese consumption tax last year.

Shipments in Japan were up 22%, ahead of the consumption tax increase last year and as a result were down mid teams in the current year quarter. This had about a half point on total company organic sales growth. Pricing contributed two points to organic sales growth and mix added a point.

All-in sales were down 8% versus the prior year, due to an eight point headwind from foreign exchange and a one point reduction from minor brand divestitures. We held or grew worldwide share on businesses representing about half of company’s sales and on businesses representing more than 60% of sales in our home U.S. market.

We continue to grow share on many of our category leading brands in countries where it matters most. Pampers tied, let Fusion and all was in the United States for example. On a constant currency basis core earnings per share were up 10%, keeping us on track for double digit constant currency core earnings per share growth for the fiscal year.

Including FX, which was an 18 percentage point drag on the quarter, core earnings per share were $0.92, down 8% versus the prior year. Foreign exchange hurts total $530 million after tax in the March quarter and $1.2 billion after tax fiscal year-to-date. They’re forecast to be a $1.5 billion after tax hurt for the fiscal year.

We’re managing through the FX challenge with the combination of pricing, mixed enhancement and productivity cost savings and by pursuing opportunities on brands in countries and regions unaffected by FX.

Gross and operating margin growth improved sequentially versus the December quarter both in all and an ex-currency basis, driven by productivity savings. Core gross margin increased 20 basis points in the March quarter versus the prior year. This compares to a 20 basis point decline last quarter.

Excluding the foreign exchange core gross margin was up 90 basis points. This compares to a 40 basis point improvement last quarter.

In the current period cost savings of approximately 250 basis points and 90 basis points of improvement from higher pricing were offset by a 150 basis points mix, 50 basis points of innovation and capacity investments and a modest increase in commodity cost.

Core SG&A cost as a percentage of sales increased 50 basis points, excluding FX they were down 80 basis points. A 160 basis points of overhead and marketing savings were more than offset by a 130 basis points of foreign exchange impacts, 50 points of organization capability investments in R&D and sales and 30 basis points of other operating items.

Cost of goods sold and SG&A savings totaled 410 basis points, as we continue to accelerate productivity initiatives and programs and they deliver ahead of our objectives. Core operating margin was down 30 basis points versus the prior year including the FX. This compares to a 60 basis point decline last quarter.

Core operating margin excluding the FX was up 170 basis points, 50 basis points better than the 120 point improvement last quarter. We expect even stronger margin expansion in the fourth quarter. The effective tax rate on core earnings was 19.6%, half a point above last year’s quarterly rate.

This leads us on track with our guidance for a fiscal year core tax rate of about 21%, which is roughly in line with last fiscal year’s rate.

March quarter, all-in GAAP earnings per share was $0.75, which include approximately $0.07 per share for non-core restructuring charges and $0.10 per share of charges from discontinued operations, primarily an adjustment to [indiscernible] carry in balances to reflect P&G’s March ending stock price.

We generated $3.6 billion in operating cash flow and $2.9 billion in adjusted free cash flow, with a 117% adjusted free cash flow productivity this quarter. Last week, we increased our dividend for the 59th consecutive year, up 3% where we paying a dividend for the 125th consecutive year every year, since our incorporation in 1890.

In summary, we generated modest organic sales growth in the quarter, constant currency core earnings per share grew double digits driven by 410 basis points of productivity savings.

Constant currency gross and operating margins were well ahead of a year ago and we continue to build on our strong track record of cash productivity and cash return to shareholders.

While we must and will manage through the external headwinds and market volatilities that is largely out of our control, the bulk of our effort is centered on driving significant opportunities in our control.

Brands initiatives and product innovation, business and brand portfolio simplification, overhead savings and major supply chain productivity initiatives. The company portfolio strengthening and simplification announced last August, strategically resets P&G’s where to play choices.

We’re focused on winning with consumers and customers who matter most and channels and countries that matter most, with core brands and businesses that create the strongest consumer preference and the best balance of growth and value creation.

We will eliminate 60% of the brands and the complexity they create, while retaining about 85% of sales and 95% of before tax profit. That’s a good trade.

The new company will consist of about 65 leading brands where the size, the price and probability of winning near the highest in 10 categories that are structurally attractive and play to P&G’s core strengths of consumer understanding, innovation, branding, go to market and leverage P&G’s scale.

They will enable more resources and attention on the biggest opportunities resulting in faster, more profitable growth. It’s a focus portfolio with just seven categories representing 84% of the sales and 85% of profit.

It’s also focused geographically with the top five countries for each category delivering about half to essentially all of global profit. Every brand we plan to keep as strategic, with a potential to grow and create value. Within these brands, we will operate with more efficient product line and skew offerings.

Reducing that skew is 15% to 20% on the remaining portfolio over the next two years. The skews that shoppers want and consumers use. This continued [indiscernible] new brand and product innovation has the ample room to grow. We will create a faster growing, more profitable company that is far simpler to operate.

We currently expect to exit approximately a 100 brand positions with a fair amount of the work already complete. To date we’ve divested this continued or plan the consolidation of over 40 brands and about 40% of targeted sales.

We’ve exited the Bleach business, Pet Care, Duracell, MDVIP, double our fragrance brands, the DDF and Naxzema Skin Care brands, Vicks VapoStream and the Camay and Zest bar soup brands. We’re targeting to be in a position to have negotiated and announced the entire program or at least the large components as early as this summer.

Roughly one year after our initial announcement and to have executed, in other words, closed program by the end of fiscal 2016. This will enable us to head into fiscal 2017 with a new portfolio fully enplaced.

Another significant opportunity is strengthening and focusing our strategies and business models, to win with consumers and in channels and markets that matter most. A strategy topic that has come up with increase in the frequency in recent investor discussions is, if leading brands are still relevant in a winning model and can still grow.

We continue to believe the P&G strategy and business model, consumer insights and innovations that lead to consumer preferred products from brands that overtime are leaders in their categories is a winning formula for us, a constant, reliable and sustainable driver of balance growth and value creation.

Over the last five years our category leading billion dollar brands have been growing sales a point faster than our half a billion dollar brands and several points faster than our smaller brands. In most categories our leading brands have leading equities and that promote our scores.

They’re brands that retailers want and need in their stores because category leading P&G brands, household penetration and reach drive store traffic. And their purchase frequency and modest price premium drive basket size. Premium brands and product innovation grow categories.

These large brands are platforms for innovations, which can be commercialized far more effectively and more profitably and could be done on smaller ones that typically earn disproportionate amount of category profit and create disproportionate amount of category value. A good example is Pampers, our largest brand with $10 billion in annual sales.

Pampers is growing at a 5% pace over the past three years. In the largest market the United States, Pampers is driving category value growth of 3%, reversing a multi-year decline caused by the decline in birth rates in both competitor and trade price discounting. P&G’s U.S.

diaper share is up at over 90% of customers, widening our margin of category value share leadership to 9 points. The premium priced [indiscernible] line is on track to reach over $750 million in sales this fiscal year up more than 30% versus the prior year, allows us growing in the mid-tier with sales at mid single digits this fiscal year.

We’ve built the leading baby diaper business in the U.S. and in the world without a consumer preferred pant style diaper. We recently started the roll out of our new pampers pants designed to provide exceptional dryness and skin comfort in an underwear like design.

Achieving fair share of the global pant market represents another $2 billion sales growth opportunity. Another good example is Tide, our second largest brand at about $5 billion in sales. Tide has also been growing ahead of category growth rate building share.

In the March quarter of last year, we introduced a strengthened fabric care brand and product line that significantly broadened consumer appeal.

We offered shoppers a full range of brands and products priced from above $0.12 to $0.28 a laundry load including broadened pod offerings [ph], new and approved liquid detergent options and Tide Simply Clean and Fresh, a preferred brand of product for many consumers interested in good basic cleaning at attractive everyday value.

In addition, we focused on trading in new to the category consumers to Tide, with new washing machine buyer, a new household formation programs. More consumers traded in and traded up and traded down. In fact, Tide household penetration is up more than 200 basis points for the first time in several years. We recently hit an all-time record high U.S.

laundry detergent value share of 60%. Tide now holds a 40% value share of U.S. laundry detergents, with brand equity and net promoter scores as strong as they’ve never been. Gain is the number two brand in the U.S. detergent category and over a 50 in the share. Both of these leading brands have grown market share over the past 12, 6 and 3 month periods.

The Tide and Gain brands have provided a broad platform for unit-dose innovation. They’re trusted leading brands that consumers are willing to try their new product offerings. It would take a lot longer and cause a lot more to generate trial of pods [ph] for the significantly smaller brand or across the portfolio of several brands.

Tide Pods of Gain Flings have reached a combined value share of over 10% of the US laundry market and P&G share of the Unit Dose segment is nearly 80%. We continue to expand Pods around the world leveraging another multi-billion dollar brand Ariel. We expect our Unit Dose products alone to reach $1.5 billion in sales this fiscal year.

Downy along with its sister brand Lenor is another multi-billion dollar franchise in the fabric care category. It’s been growing at a high single digit rate over the past three years, driven mainly by the success of our scent beads innovation. Scent beads were a new product for consumers to add to their laundry regiment.

We could have tried to launch them with a new brand. We chose instead to leverage the strong equity of Downy and Lenor along with Gain and Bounce to commercialize this new innovation. We launched Downy Unstopables in the U.S. about four years ago.

Since then, scent beads have grown to 17% of sales in the fabric enhancer category and the category has sustained 3% growth. P&G’s big brands have earned nearly an 80% share of the segment. The largest male and female grooming brands - Gillette, Fusion and Venus have proven to be huge platforms for blade and razor innovation.

The original Fusion razor launched in January 2006 is still P&G’s fastest brand to reach $1 billion in sales. We’ve continued the growth of Fusion with the ProGlide innovation in 2010 and the big obvious and preferred flexible innovation last year. Fusion value share of male razors is tracking in the high 50s and is up 2 points from last year.

The flexible razor handle innovation is translated into share growth on cartridges. Fusion value share of male cartridges is up more than 2 points versus a year ago. We’ve put 2 million Fusion flexible razors into the hands of men in the U.S.

in less than a year since launch and we’re now extending the breakthrough razor innovation to Venus, the market leading female razor brand with Venus Swirl, which began shipping in February. Early consumption results are very strong in less than three months since launch.

We’ve sold over a million Swirl razors in the US and Venus’s value share female razors was up more than 10 points nearly 65% in March, the first four month Venus Swirl was available. These new innovations from Gillette have helped reverse the declining value trend, market value trend in the U.S.

blades and razors improving year-on-year growth rate by 3 points versus the 12 months prior to the flexible launch. Consumers significantly prefer these better performing products.

The market leading consumer trusted Fusion and Venus brands are driving awareness, trial and share results from new innovations that will be more difficult for a new smaller brand to achieve.

We have taken a similar approach in the female incontinence category, leveraging our multi-billion dollar Always brand to enter this $7 billion faster growing global category. We began shipments of Always Discreet in the UK in July and the U.S., Canada and France in August.

In the UK, the adult incontinence category is growing double digits, roughly 50% faster since our entry. The U.S. category growth rate has also more than doubled to around 9%, with P&G value share exceeding 10% in the most recent four week period.

We’ve continued the expansion of Always Discreet with launches into Germany, Switzerland and Austria, with more European markets coming soon. A few of our leading brands are not growing like we know they can. We’re bringing the same strategic focus in operating discipline to these brands that we have in the ones I’ve just mentioned.

Ensuring the brand strategies and business models are aimed at delighting the target consumer, building strong pipelines and portfolios of consumer meaningful product innovation, ensuring skew assortment and brand presence are attractive and easy to shop at shelves and ensuring that marketing and sales programs persuasively convey the value in relevant to our brands and product benefits to consumers.

Another opportunity directly in our control is productivity. We’ve made very good progress and have a lot of runway remaining. We have significantly accelerated and will significantly exceed the cost savings and overhead enrollment goals we set three years ago.

We’re driving cost of good savings well above the original target run rate of $1.2 billion per year, with $1.6 billion of savings this fiscal year. We expect to improve manufacturing productivity by 5% this year.

This will bring cumulative as per year manufacturing enrollment reduction to 15% including new staffing necessary to support capacity additions. On a same site basis, enrollment was down nearly down 20% over this past three years enabled by technology in our integrated work systems approach.

We expect to start up at least eighteen new plans or modules in the developing markets in the next few years. This will not only help our foreign exchange exposure, but will drive manufacturing, transportation and customs and duties saving.

As we start up these new sites, we have opportunities to apply technology and automate in an affordable way and to close a couple and integrate further with supplier delivering additional manufacturing efficiencies. In developed markets, we began work on one of the biggest supply chain redesigned in the company’s history.

We’re designing the supply chain to accelerate consumer preferred products in the market and to make industry with them in both the customer service preferred and cost advantage way. Supply chain transformation began with the distribution network in the United States consolidating customer shipments in the fewer company distribution centers.

These distribution centers are strategically located closer to key customers and key population centers enabling 80% of the company’s business to be within one day at the store shelf and the shopper. All six of the new distribution and mixing centers are up and running, all on or ahead of schedule.

We expect to complete the conversion out of legacy [ph] occasions this year. In addition to lower cost, this transformation will allow both P&G and our retail partners to optimize inventory levels while improving service in on shelf availability.

In February we announced that we will be constructing a new multi-category manufacturing facility in West Virginia, the next step in the North American supply chain redesigned. We’ve taken the first steps in the transformation of our European supply chain.

We recently announced the consolidation of distribution centers in France and the UK and the consolidation of manufacturing for some homecare products into our plant in Italy. We see a $1 billion to $2 billion value creation opportunity from the global supply chain reinvention effort.

We’re targeting to build $400 million to $600 million in annual cost savings in over five years and are expecting top line benefits for more effective customer service and reduction of out of stocks [ph]. This value and these savings are incremental to the $6 billion of cost of goods savings we originally communicated are on track to exceed.

Through March, we’ve reduced non-manufacturing our overhead enrollment by over 19%, nearly doubled the 10% reduction we initially envisioned when we launched our restructuring program.

We continue to evolve the organization design so that it is business focused starting with consumers and costumers and so that it is simpler, more effective, more responsive and more efficient. We’ve organized around industry based sectors, we’re streamlining and de-duplicating the work of business units and selling operations.

We’ve consolidated four brand building functions into one. Each of these changes reduces complexity and each creates clear accountability for performance and results.

A more focused portfolio of brands of businesses will enable further organization changes, which will be close to the high end of our estimated 16% to 22% non-manufacturing enrollment reduction range by the end of this fiscal year, more than a year ahead of plan with additional opportunity remaining.

As a result we’re increasing our overhead enrollment reduction target to 25% to 30% excluding divestitures by the end of fiscal 2017, reflecting additional opportunities we see. The third cost area where we continue to significant savings opportunity is marketing.

By following the consumer, we’re improving marketing spending effectiveness and efficiency to deliver more with less. We’re shifting more advertising to digital media, social, video and mobile, we’re just working, so we’re just spending more of the time.

One non-media cost area that offers significant opportunity is agency spending, which includes fees and production cost for agencies we use for advertising, media, public relations, packers design and development against raw materials.

We plan to significantly simplify and reduce the number of agency relationships and the cost associated with the current complexity and inefficiency, while upgrading the agency capability to improve creative quality and communication effectiveness.

We’ve seen opportunity for up to $0.5 billion in cost savings in this area, along with stronger communication to consumers across all touch points.

These efficiencies are enabling us to maintain strong media waves, despite the cost pressure we’re facing from foreign exchange and to reinvest in all elements of the marketing mix to improve our positions and support new innovations. Like Always Discreet, Fusion FlexBall, Venus Swirl, Downy Unstopables and Tide, Gain and Ariel Unit Dose detergents.

Productivity driven cost savings continued to be a key enabler of our efforts to strengthen profitability in developing markets. Cost and currency earnings grew two times faster than sales in the wealthy markets in 2013, four times faster than sales in 2014 and are forecast to grow six times faster than sales this fiscal year.

Over those three years we’ve grown developing market constant currency earnings 13%, 28% and 27% respectively. In total we’re forecasting developing market margins including FX to be up about 40 basis points for the year. We’re focused on driving productivity improvement up and down the income statement and across the balance sheet.

Disciplined working capital management, stronger execution of our supply chain financing program and a scarcity mentality in capital spending, we’ll continue to drive strong cash flow results. With that let me turn to guidance. As we look to the April-June quarter, productivity savings should continue to grow.

The benefits from portfolio strengthening and simplification should continue to build. Oil based commodity cost should become a tailwind and additional foreign exchange related pricing will kick in. With just one quarter remaining, we now expect organic sales growth of low single digits for the fiscal year.

Pricing should be a significant contributor to sales growth again in the fourth quarter, which should more than offset pressure on unit volume growth.

FX will continue to be a headwind and we will continue to invest in category leading established brands like Pampers, Tide and Gillette and product introductions like Always Discreet and Venus Swirl in R&D for future innovation and sales coverage and effectiveness and in capabilities and people that will enhance our chances of success in the near mid and long-term.

We’re maintaining our outlook for double digit constant currency core earnings per share growth for the fiscal year, we expect foreign exchange to have about a 13 point impact on core earnings per share growth for the year.

We’re maintaining our core earnings per share guidance range of in line to down and low single digits versus last year’s core earnings per share of $4.09. With the current foreign exchange outlook we expect to be towards the lower half of this guidance range consistent with analyst consensus estimates.

Our forecast in all-in sales to be down 5% to 6% for the fiscal year, this includes the 6 to 7 point negative impact from foreign exchange and a one impact from minor brand divestitures. We expect all-in GAAP earnings per share to be down 21% to 22% versus the prior fiscal year.

This includes approximately $0.83 per share of non-core cost, primarily from $0.63 per share of non-cash adjustments that carry in values on the Duracell business and $0.20 per share of non-core restructuring charges.

As you construct your fourth quarter earnings per share model, keep in mind that several of the minor brand divestitures I mentioned earlier are expected to close in the fourth quarter, altogether works back in about $0.04 per share of non-operating income gains in core earnings per share versus the prior year.

Reflecting the same for activity focus for bringing the cost savings, we’re now forecasting a 100% adjusted free cash flow productivity, above prior guidance of at least 90%.

The enablers of this strong cash productivity include, improved results on payables, including continued progress on our supply chain financing program and steady improvement on inventory management. We’re maintaining our outlook for cash return to shareholders.

We plan to return cash to shareholders through dividend payments of more than $7 billion and share repurchase of approximately $5 billion. This guidance range assumes mid April spot rates for foreign exchange through this significant currency weakness including Venezuela is not anticipated within this guidance range.

Our outlook is based on current market growth rates, which we are monitoring closely especially in markets where we’re taking large price increases to offset currency impacts.

We also continue to monitor on rest of the several markets in the Middle East, Russia and the Ukraine and we continue to closely monitor markets like Venezuela and Argentina, where pricing controls, import restrictions and access to dollars present risk. On the flip side our guidance does not reflect some potential tailwinds.

Our results could improve if currencies ease, if markets begin to expand in a sustainable way or if U.S. economic growth accelerates.

Stepping back, we’re continuing to invest in our brands and products and in critical company capabilities that will enable much better consumer and customer responsiveness with systems that are more agile, faster, better and cheaper.

We continue to invest strategically in additional capacity for critical developing market and we continue to rationalize our manufacturing processes to like common, simpler and more globally standard making the packing platforms, support accelerated product innovation and a lower cash, capital and operating cost.

We continue to evolve the organization designs, so that it is business focused, starting with consumers and customers, simpler, more effective, more responsive and more efficient. We continue to invest selectively in sales coverage and merchandize into improved execution for shoppers and stores and online.

We continue to invest selectively in product innovation technologies and product initiative acceleration. We’re improving our digital and ecommerce capabilities and are reinventing in our supply chain. Through this transformation we’re creating a more in touch, agile, coordinated and integrated organization that puts winning with the customer first.

We’re sharpening our strategies and business models who are operated in executing with more consistency. These are the choices and the capabilities that will enable balanced growth and value creation in the mid and long term as we work our way through the currency devaluations in the short term. That concludes our prepared remarks for this morning.

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

Thank you. [Operator Instructions] Your first question will come from Bill Schmitz - Deutsche Bank..

Jon, good morning. Can you just talk about the first, the way this would [ph] impact the strong dollar. So what’s going on in some of the emerging markets or some of the big price increases you take and then you look at some of the [indiscernible] in the U.S.

and it’s clearing categories like shampoo, where like your percentage of sales in ACB is massively spiking.

L'Oréal is talking about seeking revenge, Henkel is launching Priscilla [ph] exclusively at Wal-Mart, so can you just like talk about what that has relative to your expectations in kind of how you plan to [indiscernible] that going forward? Thanks. .

Thanks, Bill. First I’d say, it’s still relatively early in the development of whatever that occurs here, but so far markets have held up fairly. As I said it’s pretty really, so we really won’t know the impacts in markets like Russia, Bill, the next quarter or the quarter after.

Like you’re seeing from several of the companies in the industry that are responded, in the last quarter the Russian market was actually up as they anticipated price increases come in. So again we have stream of second leg there. What I would broadly is that - and I’ll get to the U.S.

in a second, but in developing markets those currencies have devalued not just versus the dollar, but also versus the euro.

If you take the case Russia, which I walked through in some detail on the last call, there is every reason for both local competitors and multinational competitors to be pricing in many of these markets and that’s generally might be at early days what we’re seeing.

As it relates to the overall promotional environment, competitiveness, et cetera and reflecting specifically on the U.S., if we look at the percentage of volume that was sold on promotion in the January to March quarter, it indexes at a 100, so is identical to last year and if you look at it sequentially quarter-to-quarter there is very little change.

That doesn’t mean that it couldn’t change, but that’s the data thus far and that’s consistent with the dynamics in our own business. Obviously by category, you mentioned hair care. We may see some more promotion in one quarter or another.

There is obviously promotion as competitors and ourselves introduce new products and are trying to generate trial of those items. But to date there is nothing from either a developing market standpoint or developed market standpoint that would indicate systemic change..

Our next question will come from Dara Mohsenian of Morgan Stanley..

Hey good morning..

Hi Dara..

So I just wanted to talk a little bit about EPS guidance and clearly you’re keeping the EPS guidance here despite the FX head and organic sales coming in are now expected to come in a bit below, which you originally expected.

Do you think you are stretching the organization here to hit these EPS targets? It seems like every year we’ve got this hockey stick in Q4 earnings.

You’ve now got some gains coming through Q4 earnings and Q4 add spend has been down over the last few years and I know a lot of that is the external environment clearly macros are working against you, but I’m just wondering if there is a thought process as you look at the next year in the earnings guidance that given some of this external volatility and some of the internal issues you might need to provide yourself more cushion room when you look at guidance versus what has been the case over the last few years here.

Thanks..

So you make a couple of good observations there Dara, let me try to address them holistically. In terms of forecast and guidance we’re obviously into that and more specifics in August. We’re just in the middle of our prep season right now.

If all of us know amount of cushion that you can build in that overcomes this $1.5 billion of after tax foreign exchange cost the majority of which we’re not anticipated based on spot markets as we went into the year and expected our budgets last year.

But that doesn’t mean, I agree with you point that we need to provide a sufficient room to invest in the business and frankly we’ve not pulled off in that regard. We have continued to invest, as I tried to make clear in my remarks, in certain parts of the organization both R&D and sales, we continue to invest in our brand and product platforms.

We continue to invest in the redesign of our supply chain. We’ve continued to invest in new product launches and that’s clearly going to continue through next quarter. I mean, we’re just in the first quarter launches of things like Venus Swirl and Always Discreet and they had received full support.

As well, for instance the laundry innovations that I briefly mentioned in the opening remarks. So what allows us if FX is going to continue to be a headwind and we’re going to continue to invest, which we are, what allows us to deliver the fourth quarter number that as you rightly point out will be materially better than the first three quarters.

We will have as I mentioned commodity cost tailwinds. We will have the full benefit of this year’s productivity savings. Pricing for some of the currencies will begin to kick in. There will be a minor impact as we noted on a minor investor gains [ph].

But it’s those items - look at the 410 basis points of productivity savings in this quarter and how we continue to invest in all the things I talked about. It’s a continuation of that that should allow us to deliver.

Philosophically I have no difference, I’m completely aligning to what you’re suggesting in terms of how we construct plans and budgets and I think our current plan of budget is constructed that way. Recall in the middle of the year we took earning per share guidance down. So we’re not a slave to that.

As I’ve said many times, if I’ve proven anything over the last six or seven years, it’s that I’m not constrained by guidance. So we’ll continue investing, but we’ll continue to deliver productivity savings as well and we’re hopeful that we invest in right amounts of those in the top line.

We’ll get both the top-line and bottom-line growing at very attractive rates..

We will now move on to John Faucher of JPMorgan..

Thanks. Jon, can you talk a little bit about gross margin. You’ve delivered gross margin expansion a couple of times now despite pretty weak top-line it seems like we might be seeing sort of one off mixed benefits from that standpoint in terms of less emerging markets or potentially grooming being better that’s driving that.

So can you talk to us about sort of the progression on gross margin as we look at over the next couple of quarters and do you need sort of one off things to happen within those quarters in order to get there? And what do you think is the rate of benefit coming from local manufacturing particularly in terms of lessening the mixed impact overtime? Thanks..

So the biggest driver of gross margin by far - were the productivity savings of 250 basis points and that’s not one time. It doesn’t rely on certain categories growing faster than others.

That’s there, we’ll maintain our increased path and I expect gross margin to continue to improve next quarter which will make it I think three quarters in a row, which again is some indication of the systemic improvement there.

There was some benefit as you rightly mentioned from mix, which is frankly the developing and developed markets growing at closer rates to each other and if developing markets were to accelerate that mix benefit would be slightly –mix hurt [ph] would be slightly increased. In terms of the benefit of local manufacturing that continues to build.

It’s part of the 250 basis points. I actually don’t know exactly how that breaks out in terms of basis point improvement, but John and Katie [ph] can help you with that.

But it’s significant and as I mentioned we’re making very good progress on developing market margins through that and other dynamics including positive mix developments as those market in some cases premiumlize [ph] and as I said, we’re growing constant currency earnings ahead of constant currency sales growth 2X three years ago, 4X last year, 6X this year and that’s a trend that should continue..

You will now take a question from Olivia Tong with Bank of America Merrill Lynch..

Thanks very much. Jon, with organic sales now having to accelerate a bit more, can you talk through some of the incremental big initiatives that need to be taken to drive improvements because it seems a bit too simple to say that getting out of some of the slower growing categories and the portfolio shift is going to be enough.

I mean is there a function of consumers across a number of categories not just within HVC [ph], but across Staples sort of trading out of bigger brands and so potentially more niche you’re offering here and there?.

Thanks Olivia. Our largest brands are our fastest growing brands. That’s true over a five year period, over a three year period, over a one year period and was true last quarter. So I’m not disputing the dynamic that you describe in terms of smaller brands impact in some categories.

I think it’s more probably, for example in some of the beverage categories and two categories. But any period of time we look at, convinces us that along with the intuitive benefits in big brand platforms in terms of innovation, importance to retailers et cetera, convinces us that this is a business model that will continue to work for us.

In terms of, you mentioned organic sales acceleration I just want to put that in context a little bit. I really don’t see significant deceleration. Let me explain that. We rounded up to two2 for the last two quarters. This quarter we rounded down to one. We’re talking in very small differences quarter-to-quarter sequentially.

I mentioned in my prepared remarks the impact that the time the expansion tax increase had in Japan. That item alone if you take that out of the results we would have rounded to two. My point is not that, that’s a measure of victory or defeat. My point is simply that I don’t see any systemic deceleration in the sales quarter-to-quarter.

Portfolio as you rightly indicate will help from both the top-line and a bottom-line stand point. And you are absolutely right there is additional work on brands and in some markets we need to do to maximize growth and I mentioned those in my prepared remarks as well. We have work to do in Mexico though we’re getting through that very nicely.

We have work to do in China and as I mentioned China growth rates continue to be good, so that all looks pretty reasonable. And as you know from our results we have continued work to do on beauty some of which will be addressed through the portfolio and some of which we’re currently making significant progress on.

I think when you step back and I realize it’s a little bit difficult to see and I certainly appreciate that, but we’re really on track or ahead of everything we’re trying to do to transform this company to a more sustainable, more reliable grower on both the top and bottom line and that gets lost in the messiness of execution if you will and frankly through the flog of FX currently.

We’re very happy with where we sit in terms of the progress we’re making on both the portfolio and on the brands that are going to constitute the new company..

And now we’ll take a question from Chris Ferrara from Wells Fargo..

Hey, thanks. Jon, I guess I apologize in advance for kind of a long question, but inventory reductions and unprofitable promos right that you guys have been backing out I guess. I want to talk a little bit about.

So can you revisit specifically the drivers of the weakness in Mexico because I know you’re talking about consumption tax? I think there was some exiting of some unprofitable promotion. I think you’re also citing some inventory reductions.

So can you at least give more specifics, I guess around, how those issues are may be related and then for Mexico and for China, how long do these inventory corrections take? I know in China Unilever should have ripped the Band-Aid off and took a 20% hit.

Do you have a defined strategy on this and how long will it drag and then just lastly are there any other markets where this stuff is happening may be just even on a smaller scale. Thanks..

Thank Chris. Let me deal with Mexico first. In any of the developing markets, the supply chains from the manufacturer’s door to a store are long and layered. China is an example; you’re going through distributors wholesalers secondary wholesalers.

And so when there is a significant change in market growth rate as there was in Mexico as a result of the consumption tax increase last year, as there have been in china as many of our competitors have reported, there is a lot of inventory in that system which needs to get drawn down.

And you’re not in complete control of how quickly that can be accomplished because you’re not owning all of that inventory. But we’re working our way through that. In Mexico, if you look at growth rates quarter-to-quarter it improved significantly on the order of magnitude of 10 points and we’re expecting significant further improvement in AMJ.

So I would say that one we are largely at least from a visibility horizon we see our way through that. China as I mentioned there is - if you look at consumption we’re in a very good place in China in many categories.

We are probably two quarters in through the inventory reduction that needs to occur that’s largely consistent with what our competitors have reported as well. I would say we’ve got another quarter or two to go there and then we have some structural work that we need to do.

But as I said these are large developing markets with very complicated long layered supply chains and these are dynamics that are affecting the industry broadly, but once we’re through them, it’s back to business as normal and we compete on the basis of the strength of our products and brands and we feel very good about that.

I would tell you Chris, that there are no other large issues like this that I’m currently aware of. We will have to and we talked about this several times have to manage very carefully in some of the markets where our currency devaluation has been significant because those market sizes can change pretty significantly and we’ll do that..

And now we’ll go to Wendy Nicholson of Citi..

Hi, a couple of things. First of all just a follow up on China, I was listening to what you said and I guess I don’t understand some of the other companies like Unilever and Colgate talked about destocking in China as of last summer if not earlier and now it’s kind of only heading [indiscernible].

I’m just curious, why does it seem that the timing is kind of unique to one manufacturer at a time that’s just a follow up. But then the bigger question is from a volume growth perspective and kind of how it pertains to your kind of longer term growth algorithm.

It just strikes me that we’ve seen an enormous number of really big, may be not enormous, but order magnitude really big successful innovations from you over the last four quarters and yet we still haven’t seen much volume growth.

And so I know we’re going to get into easier comps, but I sort of - it doesn’t sound to me like the innovations are coming down the pike are as big as FlexBall or as big as Pods or Flings or what not.

And so is there a change in your long-term outlook for how much of volume growth is going to contribute to the top line and plus when I promised just on the marketing budget I understand the idea of doing more with less, but given how competitive the market is and given how lower your volume growth is why wouldn’t you choose to take some of those productivity savings and jut do more with more? Thanks.

Alright. First in terms of timing, different companies frankly have very different product mixes and they move through different distribution channels.

So if you think about Unilever as a large food business in China it is very possible that they could have a different dynamic than the other channels and we’re talking displacement of one quarter here or something like that. So that’s that item.

In terms of volume and initiatives, the biggest impact on volume has been the pricing before FX and that will continue until those markets recover or until that annualizes. But our innovations, if you look at the big ones that you mentioned, first they’re contributing to both category growth and share growth.

And category growth is a real indication of the strength of an innovation. Does it lift the entire category? And we’ve seen that behind the things that I mentioned earlier and the good news is that those largely have been fully expanded in one market, the U.S.

And we expand those globally we expect to see that same impact just like we did with all Always Discreet in both the UK and the U.S. for example. So we’re pretty optimistic as we look forward about the strength of our innovation program and what that can do from the top line.

We’re going to have to continue to manage the volume impacts of FX, but we’re really focused on the revenue number as the leverage to generate operating profit and cash and we’re doing reasonably well there. On marketing, as I mentioned we are doing exactly what you would suggest we do Wendy, which is invest more where it makes sense to do that.

And these innovations that I’ve talked about are exactly one place where we’re doing is just that and we’ll continue to do that.

I mean the investment behind the introduction of new brand in terms of Always Discreet you could imagine is significant and we’re very happy with that because of the returns that we can generate and because of the impact that’s had on those markets which are as I mentioned have doubled the growth rate versus the pre-entry period.

So we’re not talking here about construction on marketing dollars; what we are talking about is, being as efficient and effective as we can and spending those dollars where they drive returns..

And we have a question from Steve Powers of UBS..

Hi, Jon. I just wanted to dig in to your comments on strategy a bit more. As you step back as you mentioned productivity efforts have been sizeable for a number of years and they seem to be running ahead of plan. You’ve made significant shifts in how you’re organizing now, how your portfolio is structured, but alongside that growth has been a struggle.

And I think we’d all acknowledge that the macro environment hasn’t helped, but do you think there is a risk that all this inwardly focused change in operational improvement has actually impeded your efforts to execute on a larger strategy that you articulated namely uncovering consumer insights and driving consumer preferred innovations because it just seems like all these internal improvements are continually being offset by relative struggles in that external marketplace.

I don’t mean for this to be an unfair question, but I’m just wondering what point its worth asking whether organic growth challenges may actually be exacerbated by all this internal change and whether improvement may have to, to some extent just wait until those internal projects run their course? Thanks..

Thanks, Steve. That’s actually a very good and very fair question and it’s something that where we continue to be in active dialogue on here at P&G. We’ve been very deliberate about the pace of some of the changes and ensuring that we have the capacity to execute, to serve consumers, to serve shoppers and do that in a more effective manner every day.

So that’s exactly the question that we ask ourselves. It’s why, for example we said, we’re going to take two years to complete the portfolio program as opposed to overnight. That we have the capacity to do that and deliver the business and so again I think you’re asking the right question.

It’s one that we ask ourselves and we will make choices that maximize the total. That’s one of the beauties of the metric that we’re working against in terms operating TSR, it’s an integrated metric, which strives choice and balance across both growth and value creation.

You simply can’t get there without one leg of that stool and the third leg being cash creation. So we’re approaching this in a very holistic sense, very cognizant of the right question that you asked and are trying to get the balance right.

As I indicated earlier we feel very good about where we are in terms of the progression against those strategic initiatives that you outlined and others including and the redesign of the supply chain. And most of our big brands and categories were growing fairly well.

As I mentioned, if you look at grooming health care, baby care, family care and family care we grew at 9%, 6% and 2% respectively. So that’s not an indication of any systemic pinch point if you will, where we haven’t performed as well, as well it’s more a function of an individual business dynamic..

And now we’ll move to Lauren Lieberman of Barclays..

Thanks, good morning. I thought a follow up I guess on that would - the idea of taking three years for the divestiture process.

I mean to what degree was that creating or is it any disruption on - employees wonder I know about what things sold and when or retailers or competitors are kind of looking at the things that we can pounce on a business where we think that P&G deemphasizing.

So what [indiscernible] did you think that may be actually weighing on organic [indiscernible]. The other thing was that Jon, in talking about how you feel good internally about the progress being made, is it, but a thin map, but messing of the execution.

Maybe doesn’t look a great word to it, but I feel like the one thing that P&G committed to three years ago was - nearly three years ago was, we will improve the execution.

And that doesn’t feel it’s like happening, so whether it’s an one off thing to pop up with China and Mexico there and honestly I’m not convinced there won’t be another big one off two or three quarters from now. So what is it that has or hasn’t changed that on cote-on-cote execution in the market? Thanks..

Let me tackle the last one first. It was a poor word choice. I should have said, the chunkiness of execution. Frankly, we’ve been very intentional in the focus on improving execution. I feel very good about the progress that we’re making there. So I apologize for that word choice.

But there are just big chunks moving in and out as we make these very big transformational moves, which can flatter things up a little bit. In terms of organic sales growth and the portfolio impact, if you look at the businesses, take Duracell as an example, which is we’re currently working to transition to butcher a half away.

But the entire period of the business was working on that project, leading up to the signing of the deal and post the signing of the deal, managing through transition. That business has held up extremely well, building market share.

I won’t go into the details, but several of the other businesses that we’re looking to sell are also performing very well. In other words, growth rates were above the 100 index versus year ago. So I think we’ve got about the right balance in terms of the pace at which we’re moving and the work to be done.

As I said, it’s something that we relook every day, but it’s not major concern at this point..

And now we have a question from Nik Modi of RBC Capital Market..

Yeah, good morning guys. So just few quick ones from me. Jon, some in the media world would suggest that P&G has taken its marketing mix too digital heavy, so I just wondered if you could respond to that and your perspective around that.

And then the second question is, in your prepared remarks you indicated [indiscernible] rationalization will take place in the core portfolio over the next couple of years, if I heard that I right.

Just curious how we should think about that and its impact on organic revenue growth as we look out the next couple of years, I mean I know you’re not giving guidance, but just how should we kind of think about it from a magnitude standpoint?.

These are skews are at the long far tail in terms of productivity. So we have businesses that are less than 1% of the sales and the same is true with profit.

So I think if anything by removing the clutter by allowing us to focus on product lines and skews that really matter to consumers and customers that should have a positive impact on the top-line, not a negative. These are itches in some cases, but they’re meaningful in terms of the amount of complexities that they create.

That’s true in our operations, that’s true at the shelf, that’s true in the warehouse. In terms of our approach to digital versus prudential media, we viewed this very much as an and, not an or, they complement each other. So we look at it very holistically.

We’ve guided in our choice by two things, one is where consumers are spending their time in terms of consumption of media. We need to be reasonably in step with that and the second is, depending on the category, what media they want to interact with and learn about our products on. And that’s different across categories.

So we’re going to be guided, as in everything we do by the consumer and if we stay with that approach we’ll probably not stray too far from what’s right..

And we’ll move to Javier Escalante of Consumer Edge Research..

Good morning, everyone. Jon, I have to say that I’m still having a hard reconciling the top-line growth of 1%, with your positive remarks about some of your big brands Pampers.

The flip side of the response that you gave to Olivia earlier is that you’re basically are telling the investors that Proctor performance in the past quarters had been actually weaker and organic sales only around up to two.

Shouldn’t you be considering a bigger portfolio change or a breakup even, given that sectors like beauty are not only getting more fragmented and smaller than any food and beverages categories that you alluded earlier and instead of reducing SKU’s by 15% and 20% as Nik just said, what you’re going to have is split up [ph] top-line growth for the next two years.

Thank you.

We’re going to try to have fullest ability on the portfolio moves by the summer and I think we’ll be in a position then to articulate why we think these are the right moves and so I’m going to save that conversation for that point in time. But we’re being federal [ph] in our approach across each of the categories and brands.

There’s no business that we haven’t objectively analyzed and so I think we’re going to end up in a pretty good place in that regard. In terms of - look on this whole thing of small brands and fragmentation. One, our data doesn’t support that being an issue from most of the businesses that we’re going to maintain.

Second, where differentiated performance matters and where differentiated performance is delivered, this dynamic does not remain.

So for example, and I’ll bring it to beauty in a second Javier, but if you think about Pampers as an example, I can’t think of a new mother who would be asking herself, where performance really matters, would be asking herself, what’s the new diaper that nobody’s ever tried before or where I can discover the next diaper? That’s not the thought process.

There’s a job that needs to be done, there’s a brand that has proven over decades, it can do the job, it can do it better than the other offerings that are out there and it’s offered at a price that creates a good value. If you think about performance and where performance matters in a beauty context, think about anti dandruff shampoos.

I’ve got a problem, I need a solution. This is not time to experiment, this is time to solve. Head & Shoulders has been solving dandruff issues for decades. It’s a brand that consumers know and trust and it’s offered at a reasonable value.

So I think we have to think about the specific dynamics of a category, the consumer approach to the category, the relevance of innovation of the category and differential performance as a driver of purchase before we make broad conclusions about whether fragmentation is going to occur or not.

In terms of your question on split up, again let’s wait until we have the portfolio in front of us and talk about it at that point. We’re very bullish and again this is not just based on what we think is going to happen. This is based on 10, 5, 3 and 1 years of data which is very consistent and its outcome.

And these are categories that we have long track records of winning in, where we’re typically the market leader with brands and other prototypes in those category. Operator And next we have Joe Altobello with Raymond James. Q - Joe Altobello Hi, this is Christine on for Joe.

I just wanted to change the topic quickly and go to commodity costs and whether you’re still expecting that to be a $500 million to $700 million tail end next year. And how much of that do you actually expect to recover out of pricing. Thanks..

Our current estimate would be more than the order magnitude to $600 million to $800 million of BT commodity cost savings next fiscal year. Really don’t have a point of view yet on how much of that we’ll be able to take to the bottom-line as opposed to past proven price.

So if you just reflect on the dynamics in the industry, this is an industry that, with the exception of some international competitors who have FX tailwinds is challenged from a profit growth stand point and that’s a dynamic that generally supports or using this saving as a way to help that situation.

So we’re hopeful that many of these will come to the bottom line, but that’s something that we’ll have to see as we move forward..

Your next question will come from Ali Dibadj of Bernstein.

Hi guys. Jon, I mean you’re getting the same question from many folks over and over again and I’m not sure the message is necessarily clear which is, we’ve been hearing a lot of promise that help us round the corner for years, years and every back half of the year you kind of limp across the finish line.

If not just this year and I guess, for me at least I just wonder whether P&G has the right to be consistently in a short-term optimist at least given its recent track record.

And now the promise is wait till we break up 14% of sales, 6% operating profit out of our business, things will be much better, but at that point how much longer would we have to wait for you guys to decide that maybe something even bigger has to happen, maybe you really got to rebase your guidance and you shouldn’t be delivering double digit EPS growth, maybe you really have to break up the company even further? I think there’s a lot of frustration in terms of trying to see the logs grant to the macro stuff, grant to the FX, but others have that too.

How much longer do we wait I guess is really the core question and especially after this next promise divestitures, how much longer do we have to wait after that? Thanks..

The last year you mentioned FX, I think you’re right to mention that excluding FX we grew 14% on the bottom-line, this year will grow double digits. I think it’s pretty clear that the operating improvements that we are making, productivity and otherwise are coming through.

And if it weren’t for FX, we would be having a very different discussion right now. We do have brands and businesses where we need to continue to strengthen the top-line, we’re cognizant of that, I mentioned that and that kind of is what it is. We look at the change that we’re in the middle of executing.

It’s probably the biggest transformation this company has gone through across the totality of portfolio, supply chain, organization, structure and design and as I said, it’s hard to see that all come together at this point, but each of the pieces, we’re very happy with the progress and we’ll see..

Your final question will comes from the desk of Caroline Levy of CLSA..

Good morning, thanks so much. Just a question about beauty again, Olay and Pantene are different from Head & Shoulders because there’s not this clear need and promise and delivery. So if you just look at Olay and the performance.

I know China has been very problematic, but around the world, why do you think P&G really should be in that passive business?.

Well, First of all Caroline, younger looking skin I think is a real need. It’s increasingly a need of mine. If you count [ph] my hair care need and I’m not going to comment on specific businesses that we are going to be in or out.

Again we’ll do that when we’re ready to do that, but that’s a business where function and performance, differentiated performance does matter.

It’s what enabled us to build one of the largest, the largest facial skin care brand in the world and continues to have incredibly strong equity and frankly is growing significantly in many parts of the world where we haven’t cluttered the equity in the shelves as badly as we for instance in the U.S. and China.

I was just a couple of weeks ago in the Gulf, in the Middle East and that’s a market where the brand architecture is much cleaner and clear and that business is growing double digits. Something is true in the UK and Olay, we’re again - we haven’t cluttered either the messaging the equity or the shelf.

So skin care is clearly - and SK II as an example, that delivers a clear benefit that’s coveted by women particularly in Asia. So it’ not a business that is all about fashions and style, it’s a business that’s about performance..

Ladies and gentlemen that concludes today’s conference. Thank you for your participation. You may now disconnect. Have a great day..