The Procter & Gamble Company (PG) Q2 2008 Earnings Report, Transcript and Summary

Good day everyone and welcome to the Procter & Gamble second quarter 2008 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 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 impact of acquisitions and divestitures and foreign exchange where applicable. Free cash flow represents operating cash flow plus capital expenditures. P&G has posted on its website www.pg.com a full reconciliation of non-GAAP and other financial measures. Now I’d like to turn the call over to P&G’s Chief Financial Officer Clayt Daley. Please go ahead.

Thanks and good morning everyone. AG Lafley our CEO and Jon Moeller our Treasurer join me this morning. I’ll begin with a summary of our second quarter results and Jon will cover business highlights by operating segment. I’ll then provide some perspective on our announcement this morning to exit the coffee business and I’ll also provide an updated outlook for the fiscal year and our expectations for the March quarter and then AG is going to wrap up with a few comments at the end. Following the call Jon Moeller, Chris Peterson, John Chevalier and I will be available for additional perspective as needed. Now on to our results. We maintained good momentum in the second quarter of the fiscal year. We delivered balanced to and bottom line growth with each geographic region and every reportable segment delivering year on year organic sales growth. Earnings per share for the December quarter increased 17% to $0.98. This was $0.01 ahead of both the consensus estimate and the top end of our going and expectations. EPS growth was driven by strong sales growth and continued Gillette synergy benefits. Total sales increased 9% to $21.6 billion. This was above the top end of our guidance range driven by solid volume growth and better than expected foreign exchange benefits. Organic volume was up 6% for the quarter and organic sales were up 5%. Developing markets set the pace with double-digit organic volume and sales growth. Baby and Family Care led the segments with 8% organic sales growth due to strong initiative performance on Pampers, Charmin and Bounty. Price mix had a negative 1% impact on sales growth due to negative mix from strong developing market growth. Now before I move on I want to address some of the questions that have been raised investors recently relative to the consumer and specifically market growth rates in the US and various markets around the world. You know the recent US FD market and share data has raised some concerns as to where the consumer is in the market. Recall this data only covers 40% to 50% of the US market. The picture on all outlet basis is much more encouraging. The US market continues to grow 2% to 3% on an all outlet basis with non track channels growing significantly faster than track channels. As we said on the last call, while we have seen a modest slowdown in US market growth rates, we are not seeing trade down to private label. In fact over the past three months P&G is growing share in about 75% of the US business while private label shares flat or declining in every one of our top 10 categories and the vast majority of the total categories in which we compete. In Western Europe the market continues to grow 1% to 2%. P&G is growing market share overall and in the majority of categories in which we compete. In developing markets, market growth rates of high single-digits are consistent with prior periods. We have seen no evidence of a slowdown in the consumer products industry. Global market share trends continue to be strong with about a two-thirds of our business growing share. So in net, market growth rates continue to be about 3% to 4% on a global basis and P&G continues to grow market share and we are really not seeing any trade-down in the marketplace. Now earnings and margin performance. Operating income increased 8% to $4.7 billion driven by strong sales growth. Operating margin was down 20 basis points due to lower gross margins. Gross margin was down 110 basis points to 51.8%. Higher commodity and energy costs reduced gross margins by over 150 basis points. This was partially offset by volume leverage and cost savings projects. Commodity energy cost increases were higher than originally anticipated. Diesel fuel, phosphates and resins, just to name a few, increased significantly during the quarter. To offset this significant commodity and energy cost pressure we have announced a number of price increases which go into affect during the Jan-March quarter. As such we expect gross margin [tens] to improve sequentially going forward. Selling, general and administrative expenses were down 90 basis points; strong cost control and Gillette synergy benefits drove significant improvement in overhead costs. Lower overhead costs as a percent of sales more than offset higher marketing spending. Non operating income was up versus a year ago in line with previous guidance due to the closing of the western European Tissue, Towel divestiture. However we continue to expect non operating income to be lower as a percentage of earnings for fiscal ’08 compared to the prior year. The tax rate for the quarter came in at 27.6%. This was slightly lower than anticipated due to geographic mix. Recall, international tax rates are significantly lower than the US. We had a higher percentage of our business outside the US due to both strong developing market growth and a stronger than expected foreign exchange impact. This lowered the tax rate for the quarter. Now let’s turn to cash performance. Operating cash flow in the quarter was $4.1 billion up $1.7 billion from the same period last year. This marks the first time P&G has delivered operating cash flow above $4 billion in a quarter. The improvement was due to earnings growth and good working capital management. Working capital was a significant cash help in the quarter versus year ago. Receivables were down two days versus year ago despite a stronger foreign exchange due to the Gillette integration benefits and a high base period comparison. Inventory days were up one day versus year ago due primarily to foreign exchange and payables were down a day as we took better advantage of supplier term discounts. Capital spending was $650 million in the quarter or 3% of sales well below the company’s 4% annual target. Pre cash flow for the quarter was $3.5 billion. This brings free cash flow productivity to 97% fiscal year to date, well ahead of our year ago level of 75%. This puts us on pace to beat our free cash flow target for the fiscal year. We repurchased 2.9 billion of P&G stock during the December quarter as part of our three year $24 billion to $30 billion share repurchase program. This brings fiscal year to date repurchases to $5.5 billion. Combined with the $2.3 billion in dividends P&G distributed nearly $8 billion to shareholders fiscal year to date or 120% of net earnings. To summarize P&G continues to drive balance top and bottom line growth. We are converting a significant amount of earnings to cash and we are returning this cash to shareholders through dividends and share repurchase. Now I’ll turn it over to Jon for a discussion of our business segment results.

Thanks Clayt. Starting with the Beauty segment, all end sales grew 10% and organic sales were up 5%. The sequential improvement in organic sales was consistent with expectations shared on the last quarterly call. Top line growth was led by the Prestige Fragrance and Skin Care businesses. In Fragrances, double-digit sales growth was driven by the Dolce and Gabbana and Hugo Boss brands. In Skin Care organic sales grew double-digits. Olay sales were up double-digits driven by the Definity Eye Illuminator initiative and the continued growth of the Regenerist franchise behind the Microsculpting Cream initiative. Olay all outlet value share of US Facial Moisturizers grew to over 42% for the past three months. Hair Care volumes were up low single-digits, Head & Shoulders grew double-digits behind brand restage initiatives in several markets which more than offset lower shipments for professional hair care. Grooming segment sales increased 9% for the quarter. Organic volume was up 8% as developing markets grew nearly 20%. Organic volume in developed markets was up low single-digits. In developed markets Braun appliance shipments were down versus prior year and Blades and Razors growth was impacted by a strong base period that included the Fusion launch in several western European markets. This geographic SKU in shipments resulted in negative sales mix for the quarter. Blades and Razors global shipments were up double-digits for the quarter. Global Blades and Razors value share has increased nearly a point and is now over 71% in a market growing 5% on a value basis and constant dollars. In Male Shaving, Fusion continues to drive strong share growth. Gillette’s global share of male razors up almost three percentage points to nearly 75%. Global share of male cartridges is approaching 86%. And Fusion share of US male cartridges is now over 34% up eight points versus prior year. In female razors, Venus Breeze share of US female razors is now at nearly 25% and total Venus system share is up nearly four points to over 53%. Health Care sales increased 11% led by double-digit growth in Oral Care, Feminine Care and Personal Health Care. Oral Care shipments were up 9% versus prior year behind mid teens growth on Oral-B and mid single-digit growth of Crest. Oral-B grew behind the Smart Guide Brush initiative, ongoing leverage of Oral-B Triumph and strong results in refills. Crest was driven by the launch of Pro Health Night and Crest Plus Scope with Extra Whitening Toothpaste. P&G’s estimated US all outlet value share for Crest Toothpaste is now at 38% up a point versus last year. Developing markets also delivered strong growth with double-digit shipment increases for the quarter. Feminine Care organic volume was up high single-digits. Developing markets led the growth with a double-digit volume increase. On a global basis, Always brand shipments were up high single-digits and the Naturella brand was up more than 20%. In the US all outlet value share for pads, panty liners and tampons improved for the quarter. Share of pads now stands at 57%, tampons at 51% and liners at 32%. In Personal Health Care higher sales were driven mainly by the addition of the Swiss Precision Diagnostics business. Organic shipment volume increased modestly for the quarter as mid teens growth on Prilosec OTC was largely offset by lower volume on Vicks due to the record mild cold and flu season. Pharma Sales were up as geographic mix, pricing and foreign exchange benefits more than offset the impact of lower shipments. Volume was lower versus prior year due mainly to a base period that included very strong western European shipments. Sales for the Snack, Coffee and Pet segment were up 4% for the quarter. The Snacks and Coffee businesses each delivered high single-digit sales growth. The strong Snacks results were driven by the Pringles Minis, Selects, Extreme Flavors and Rice and Fusion initiatives. Coffee sales growth was driven by the Dunkin’ Donuts launch and Folgers new Black Silk and House blend initiatives. Folgers all outlet value share in the US is up versus prior year and now stands at 32%. Dunkin’ Donuts coffee has reached 4% value share in just five months since launch. Pet Care was down versus the prior year due mainly to the temporary discontinuation of most wet pet foods. The business began the relaunch of wet foods in December. Encouragingly Iams dry food sales have returned to levels achieved prior to when the wet food issues occurred last March. Next the Fabric and Home Care segment delivered 10% total sales growth and f5% organic sales growth. Fabric Care global shipment volume was up high single-digits let my developing markets up double-digits behind strong growth of both Tide and Ariel. Fabric Care shipments in North America increased high single-digits behind the Tide, Downy and Bounce Pure Essentials initiative and the continued success of the liquid laundry detergent compaction initiatives. The conversion to compacted detergents has gone very well in the southern tier of the US and we are reapplying the most successful executions in the remaining conversions. Past three month US all outlet value share for P&G laundry detergents increased one point to nearly 63% of the market. Home Care shipments grew low single-digits. Febreze volume was up mid teens behind the launch of Febreze Candles and continued growth of air effects. Febreze share of the air care market including candles was up more than three percentage for the quarter to over 20%. Dish Care shipments were in line with prior year as Dawn and Cascade were comparing against very strong results in the base period. US value share for Dish Care was up modestly for the quarter. Batteries volume was up double-digits behind strong results from holiday merchandising programs and a favorable base period comparison due to supply constraints in the US. Shipments were up double-digits in both developed and developing markets. Duracell all outlet value share in the US was up more than a point versus prior year to 48%. Baby Care and Family Care all end sales grew 8% and organic sales growth was also up 8%. Organic shipment volumes were up double-digits for Baby Care and mid single-digits for Family Care. All end results for the segment were negatively impacted by the divestiture of the western European Family Care business which closed on October 1, 2007. Baby Care growth was due mainly to the ongoing success of Pampers Baby Stages Swaddlers and Cruisers products and Pampers Baby Dry with Caterpillar Flex. In the US Pampers value share is up a point to nearly 30% and in Western Europe value share is in line with prior year at 54%. Pampers also continues to deliver strong growth in developing markets. Shipments in China and Turkey were up more than 30% and Russia and Poland were up double-digits. Family Care top line growth was driven by the success of the new Charmin Ultra Strong innovation and leverage of the Best Bounty Ever initiative. Charmin all outlet value share is up a point to over 27% and Bounty share is also up a point versus prior year to 43%. That concludes the business segment review and now I’ll hand the call back to Clayt.

Thanks Jon. As part of our ongoing portfolio review process we announced this morning plans to exit the coffee business. The coffee business had sales of approximately $1.6 billion and operating income of about $350 million in fiscal 2007. Our goals in this transaction are maximizing value to P&G shareholders, minimizing earnings per share dilution and executing the transaction in a tax efficient manner. Although no decision has been made given these goals, the most likely structure is a split off transaction. This transaction has several benefits for P&G shareholders. It enhances P&G’s ability to consistently deliver annual financial goals as the expected growth rate of the coffee business is below P&G’s target range. It optimizes the after tax value of the coffee business to our shareholders. And it enables P&G to better focus its resources on faster growing categories. The transaction will also be good for the coffee business as it will get greater and attention as a stand alone company. Folgers is the leading retail coffee brand in North America. The coffee business operates with attractive operating margins and is a strong cash generator. While we could do either a split off or a spin off transaction based on current market conditions our preference is to do a split off. As this transaction structure minimizes EPS dilution. In a split off P&G shareholders will be given the option to exchange some, none or all of their P&G shares for shares in the newly formed coffee company. P&G’s outstanding share count would be reduced by the number of P&G shares exchanged. If we proceed with the split off the precise exchange ratio would be set prior to the completion of the share exchange transaction. We expect to determine the final deal structure during the April-June quarter and complete the transaction during the first half of next fiscal year. Assuming a split off we expect the deal to be dilutive to EPS by $0.03 to $0.05 on an annual basis. In addition there will be one-time impacts. P&G would recognize the significant one-time gain from the transaction. This gain would be partially offset by one-time transition costs and a one-time increase in restructuring spending associated with eliminating stranded overhead costs and offsetting the anticipated $0.03 to $0.05 dilution. We will provide more specific estimates on these amounts once we decide the final transaction structure. Given this time, we do not expect the transaction to affect fiscal 2008 EPS. For fiscal 2009 while we have not completed our planning process, our objective remains to deliver 10% or better EPS growth despite the loss of the coffee earnings, of course excluding the one-time transaction impacts. Now on to guidance. There are a few factors that have changed since we provided our fiscal year outlook last quarter. Commodity and energy costs have increased significantly over the past few months. At current levels we now expect these costs to impact gross margins by about 150 basis points in fiscal 2008. Given this increase in input costs we have announced a number of price increases which take affect over the next few months. Last quarter we announced pricing plans for coffee, fabric softeners, personal cleansing, tissue, towel, diapers and blades and razors. Since that time we have announced new pricing in the US as follows. Affective this month, a 6% increase on Eukanuba Dry Dog Food and Biscuits. An 8% increase on Ascaol. In affective in March, 2008 a 6% increase on Cascade, a 6% increase on powder laundry detergents, 6% on Iams Dry Dog Food and an 8% increase on Safeguard and Zest bar soaps. And we continue to evaluate pricing in other parts of the business. Importantly as we have implemented pricing actions to recover commodity and energy costs in almost every case competitors including private label manufacturers have also increased their prices. As they have the same commodity and energy cost pressures we do. As such we have been able to implement these modest price increases without negatively affecting category consumption or P&G’s market share progress. In total we still expect operating margin improvement in fiscal year despite higher input costs. Pricing, volume leverage, costs savings projects and overhead cost control should more than offset the increase in commodity and energy costs. Now the numbers, for fiscal 2008 we expect organic sales growth of 4% to 6% in line with previous guidance. With this we expect the combination of pricing and mix to be flat to up 1%. Foreign exchange should have a positive impact of about 4%. Acquisitions and divestitures are expected to have a 1% negative impact on top line results. So in total, we expect all end sales growth of 7% to 9% for the year. This is an increase of 1% versus our previous guidance due to the increase foreign exchange outlook. Turning to the bottom line, we are now expecting earnings per share to be in the range of $3.46 to $3.50 up 14% to 15% versus prior year. This is an improvement versus our previous guidance range of $3.46 to $3.49 due to the strong EPS results in the October to December quarter. We now expect operating margins to improve by 25 to 50 basis points as lower overhead costs as a percent of sales should more than offset the gross margin impact from higher commodity and energy costs. We have lowered our operating margin guidance to reflect the increase in input costs and any revised foreign exchange outlook. A greater contribution from non-US markets due to foreign exchange affects operating margins as the US business has a significantly higher operating margin than the international business. On the tax rate, we now expect the fiscal year to be at or slightly below 28%. This is a slight change versus prior guidance due to updated outlooks for foreign exchange and geographic sales mix. We continue to expect share repurchases of $8 billion to $10 billion for the fiscal year as such we expect interest expense to be up due to increased debt levels. Turning to the March quarter, organic sales are expected to grow in the 4% to 6% range. With this we expect the combination of price and mix to be about neutral. Foreign exchange should add about five percentage points to sales; acquisitions and divestitures are expected to have a negative 1% impact on P&G’s top line growth. In total we expect all end sales growth of 8% to 10%. Turning to the bottom line, we expect operating margins to improve modestly as SG&A improvement will largely be offset by lower gross margins. Gross margins are expected to be temporarily lower due to higher commodity and energy costs. We expect gross margins to recover as pricing plans are implemented in the market. In total operating profit is expected to accelerate to double-digits in the quarter. Interest expense is expected to increase substantially versus year ago due to a low base period comparison. And we expect non operating income to be significantly lower versus year ago due to the timing of minor divestitures. Finally the tax rate for the quarter is estimated to be at or slightly below 28%. Net we expect earnings per share to be in the range of $0.79 to $0.80 for the quarter driven by double-digit operating profit growth. To summarize P&G continues to deliver balanced top and bottom line growth. We are converting earnings and free cash flow ahead of target and returning more than 100% of this cash to shareholders through share repurchase and dividends. And we are confident in our sustainable growth model going forward. Now I would like to hand the call over to AG for a brief wrap up.

Thanks Clayt. I want to take this opportunity to thank all the P&G people in our Coffee organization for all the hard work they have put into making Folgers the leading brand in retail coffee by a wide margin and creating a growing profitable business. Decisions to separate a business are never easy but we believe this is in the best interest of P&G shareholders. This is one more step, the next step, in the transformation of P&G’s portfolio and business model that we have been driving since the beginning of this decade. Over this period we have doubled the size of the company, diversified into Beauty, Health, Personal Care and developing market, and accelerate the average annual organic sales growth rate to 6%. Market shares have grown in virtually all of our core categories, in some significantly. Core operating margins have grown steadily from below 16% to now over 20%. Cash productivity has run consistently above 90% of earnings. We now generate over $10 billion in free cash flow every year which we have been aggressively returning to shareholders. This year we will complete the successful integration of the largest consumer products goods acquisition in history. Gillette will over deliver cost synergies and revenue synergies are on track with our year three goal. Most importantly Gillette will be an engine of growth for P&G and a significant contributor to strengthening company capabilities and the P&G organization around the world. So how have we done this? We’ve stayed focused. Focused first and foremost on the consumer as the real boss here. We deliver better consumer shopping and usage experiences and we build value into our brands and our product offerings. We partner with customers and with suppliers to serve consumers better and to create value together. We stay strategically focused on our core businesses, on our portfolio shift out of commodity like categories and into faster growing household and beauty, health and personal care categories. We continue to grow our developing market business at double-digit top and bottom line rates from less than $7 billion ten years ago to more than $22 billion today. By the end of this decade developing markets will approach $30 billion in sales and represent at least 30% of total company turnover. We play to our poor competencies and strengths. We continue to invest in consumer understanding. We lead innovation in most of our categories and we have built a strong multi year innovation pipeline. We continue to focus on brands that are or can become leaders in their category. Today our $23 billion brands represent two-thirds of our sales and a greater percentage of profits. Our 41 $.50 billion an up brands represent over 80% of sales and nearly 90% of profits. Going forward I’m confident we are well positioned to deliver growth goals over the long term and in the current economic environment. We have the right portfolio that is uniquely diversified and balanced across household and personal care businesses and across developed and developing geographies. Our unique combination of leadership and strength in both developing markets and the US home market will serve us well in any economic environment. We have the right strategies with plenty of room to keep growing and we have the right core strengths to keep P&G growing reliably year after year. In our industry innovation and productivity are the ultimate drivers of sustainable growth. This is particularly true in the current economic and cost environment we are facing. We look forward to seeing our investors at Cagney next month. At that time we will talk more about P&G’s innovation pipeline including Gillette revenue synergies and we will also talk about specific plans to drive productivity further and faster. Innovation and productivity will allow us to grow top and bottom line in a balanced and sustainable way through the end of this decade and into the next. Now Clayt, Jon and I are open to answer any questions. Thank you.

Your first question comes from William Schmitz - Deutsche Bank

Hey Clayt you mentioned that there’s 150 basis points of gross margin pressure from input costs, but it also seems like the business mix obviously has migrated more to developing markets, have you quantified how much mix impact there is as the business migrates more to developing markets as the developed markets slow a little bit?

We haven’t quantified it but I think you’re assumption here is accurate that as the business shifts to developing markets, you’ve seen the negative 1% on the top line on price and mix and that’s mostly due to mix and it’s mostly due to developing markets. At the end of the day when business shifts to developing markets that’s a drag on gross margin because the gross margins in developing markets are lower, and actually the operating margins are also lower but as we’ve said before after tax margins are about comparable in developing markets to develop but that’s one of the reasons why you see the tax rate go down. So I think you are exactly on the right point.

Your next question comes from John Faucher - JP Morgan

Quick question, I was kind of surprised to see the negative price mix number given the raw material inflation that you talked about and so did you hold off on some of this pricing knowing that you had the other income line to sort of cushion that and I guess furthermore on sort of the gains on sales issues, what are you going to do over the next couple of quarters as you begin to lap bigger numbers there without the asset sales, how are you going to be able to offset that impact?

It’s a good question. The timing of price increases really has no bearing to non operating income and there will be some variation from quarter to quarter in non operating income. We obviously had a lot of it in October-December quarter which we did guide for and it’s going to be substantially less in the Jan-March quarter which we are also guiding to. Relative to pricing what we try to do is make sure that as commodity prices and energy prices go up we’re confident that they’re being sustained. You want to go out with pricing when it’s quite clear that it’s a sustained industry phenomenon and as it turns out the price increases we’ve been announcing were not in effect in the October-December quarter so we got virtually no pricing benefit in October-December and that’s what created the gross margin impact. The price increases will begin to come in, in the Jan-March quarter but really much more in the April-June quarter. So that’s why we’re still projecting some gross margin contraction in Jan-March.

John, one more comment on pricing, we look at a number of factors. First what are the consumer and market conditions? Second of all we like to time our pricing with innovation because frankly it’s the value stays right for the consumer when we do that and it works better with most of our key customer strategies. We coordinate with customers. So beyond making sure that it’s sustained, we want to make sure that when we take the pricing that it’s the right level and that it will sustain at that level.

Your next question comes from [Analyst] Morgan Stanley [Analyst] - Morgan Stanley: Just wanted to get some more color on the 3Q versus 4Q earnings flow that you are talking about. I guess the consensus might have been underestimating the falloff in the non operating income in 3Q but also sounds like with the higher commodities you’ve got the price recovery shifting into 4Q which you were just discussing, but I wanted to make sure I understood the double-digit operating profit growth in Q3 despite gross margin down, you expect higher savings in the SG&A line than you had in the second quarter.

Yes, that’s spot on. As we said we’re expecting double-digit operating profit growth in the Jan-March quarter but the bottom line is impacted by much higher interest expense and much lower non operating income and that’s just simply a timing impact of minor brand asset sales and yes as you know we hadn’t provided any impact of guidance on Jan-March prior to today so, it’s not surprising that the estimates on Jan-March were above where we’re coming out. But its then coming back just as you suggest in the fourth quarter which should be better on gross margin than in the third quarter and I think really the non operating phenomenon from quarter to quarter explains most of the variation.

Your next question comes from Amy Chasen - Goldman Sachs

Hi, what percentage of your business are you taking price increases on?

Well over the last, let’s see, Amy I’m going to guess its 40% to 50% but we’re going to get you the hard number. And ….

It’s a very high percentage of the household product side and a much lower percentage on health and beauty particularly beauty, but what we try to do in beauty is price with trade up and mix as opposed to list.

Yes, that’s the key point. On the household side it’s much more in fabric, in paper, in coffee, in snacks and even now in pet, it’s driven by commodities. On the beauty, health and personal care side frankly we’ve been mixing up on virtually all of our key categories on a regular basis as we bring new innovation. The other key part of the question is how much of the commodity cost and energy cost increases are we recovering and over the last three years or so when we’ve had the biggest increases, we’ve been recovering pretty consistently somewhere around 75% to 80% in pricing. We recover the rest of it on the cost side.

Your next question comes from Justin Hott - Bear Stearns

First a housekeeping item, I thought in the press release it said EPS was 79-81 for the next quarter and Clayt I thought you said 79-80.

Okay no 79-81 is correct.

Okay thanks.

If I said 80 I misspoke.

Maybe I got it wrong, and operating margins 25-50…

Yes, 25-50.

Yes, 25-50.

Okay just one major question on pricing, going from your comments Clayt and AG, please your insight would help anything on what we’re seeing with the consumer in this sort of environment that worries you more or less versus the past on your ability to take pricing in this environment?

You know Justin I would say that first of all this will now be the third or fourth year in a row that we’ve had to do this. You have to remember oil didn’t run up from whatever it was $25 or so a barrel to $100 a barrel in the last quarter, okay, that’s been happening over several years and frankly with Katrina and Rita we saw the first big bump up in a number of our chemical commodities pricing and the AG commodity prices have been with us for some time so I would say the key is at least in our household categories, the key is the relatively modest, if you look at our increases they tend to be in the 4% to 6% occasionally a little higher, but generally in that range. The second thing that’s really important is we almost always price with innovation and price with initiative. It’s more difficult to take what we call a naked price increase. In some categories you can, consumers and customers are quite, you know that’s the practice in coffee for example, you know coffee pricing follows green bean pricing. But in May of the household categories you have to price with innovation and initiative and fortunately we’ve been leading innovation. So the strength of our household and paper innovation programs is helping us a lot as we go through this period. And then the third thing I will say is we watch our price spreads or gaps versus all of our competitors and I think as Clayt pointed out the last couple of years and especially most recently private label manufacture margins are so squeezed that they’ve had to price very quickly and in some cases, in some parts of the world, they’re pricing ahead of us. So I think we’re clearly in a situation where everybody is feeling the same commodity cost and energy cost pressure. We’ve actually you know relatively got a little bit more margin cushion. We can give a little gross margin in a quarter and manage through it so we get the timing right and we get the amount right. You know the last thing I’ll say, there are just certain indicators that we watch. How well do we do in channels that serve lower income consumers. You know we’ve been doing very well on the dollar channel. I don’t think it’s any secret that Wal-Mart has done relatively in the most recent period. We do very well with Wal-Mart. So we look at, we track our shares among our top 15 or 20 businesses that serve Hispanic Americans, African Americans who tend to be on average lower income, rural Americans, who tend to be on average lower income. Our shares are growing; you know two thirds sometimes, I think it was African Americans through December our shares have grown over 80% you know in those key brands. So we try to look at all the indicators. If the rebates come in okay, in May I think you know that will be a boost on the consumer spending side in the US and frankly we’ve just got a few months to get through to there and you know we look like as Clayt announced in the guidance we look like we’re going to stay pretty steady on the top line at our sort of 4% to 6% net sales organic growth rate. And in the US we did 6% organic growth in the most recent quarters so you know those are all the kinds of indicators, you know, I’m not going to tell you that there isn’t something out there that you know that we don’t miss, but we turn over every rock and every stone so we can try to stay close to this.

Your next question comes from Lauren Lieberman - Lehman Brothers

I want to talk a little bit about overhead control. It was last year at your Analyst Day you attended I can remember you guys putting up a slide that talked about really focusing on overhead control and it’s been my sense over the last 12 months up until this quarter that this was maybe a little bit tougher to get at than you thought. This quarter was called out several times in the press release mentioning you’re going to talk more about productivity opportunities at Cagney, through in a comment about restructuring that might come along with the Folgers split which would enable some further overhead control, so if you can just talk a little bit maybe I guess first about what you started to realize in the last three months or what change in your ability to go after that overhead control and is it related to the step up in restructuring spending that started about six months ago.

Lauren, first of all maybe we haven’t talked about it as much as we should have but we’ve been focused on it since 2000 and one of the issues we had back in 2000 was that our overheads had gotten too high. They peaked at near 20% of sales, I think the number was 19.8% we can confirm that that was it, and last year they were down in 6, 7 they were down to about 16.5%. Now obviously with, that’s our measure of SRAP okay, obviously with Gillette you know we’ve been driving a lot of overhead synergy and this is the third year of Gillette and as I said in my comments we’re going to, you know we’re going to beat the Gillette cost synergies and we’ll have more to say about that at Cagney. So I would say it’s the combination of being attentive to the general company position and then going through Clairol, Wella and Gillette that got us really focused on our overheads and the emphasis has been on productivity. Okay, we’ve been running about 5% to 6% a year improvement in productivity, that’s about twice, a little bit better than twice US industry average and we’re looking at ways to accelerate that over the next four to five years and we think we can do it. So I’ll just give you three specific examples. I think you know in R&D, okay at the beginning of the decade we started out spending about 4.8% of sales, you know, now despite a stronger pipeline, despite I would say in many cases category leading innovations, we’re running around 3.2% to 3.3% of sales. When we moved into global business shares services, those that bundle of costs was above 5% you know, we’re now running 2.8% or so. And then the third area of course is our whole market development operation. The reason we went to the market development operations were to be able to run a go to market operation that would be much more efficient and more affective. So we’ve been on it. We’re going to talk more about it at Cagney. It is going to be an engine of growth.

Your next question comes from Wendy Nicholson – Citigroup Wendy Nicholson – Citigroup: I wanted to actually go back up to the gross margin line because I know it was something that you called out in your annual report last year that it was a focus for the company because your gross margins are I think across the board like below 50% of your competitors on an apples to apples basis and yet what we’re seeing from a lot of your competitors is actually gross margin expansion this year, yet yours are falling so it looks like you’ll end ’08 with a wider gap relative to your competitors set and it just doesn’t feel good and it doesn’t sound right and I understand the emerging market mix but at the same time you’d think that because emerging markets are largely I think the beauty businesses and the grooming businesses the gross margin drag shouldn’t be that bad. So I’m just wondering is there something going on from a sourcing perspective or is there something going on that is making you miss the mark on the gross margins pretty significantly. It just doesn’t’ sound right.

Wendy first of all to ground us all in the facts on gross margins in our five biggest businesses, fabric care, blades and razors, feminine and baby which are 60% plus of our enterprise value sales and profits okay, we clearly have the best gross margin in fabric. We have the best gross margin in family. We have the best gross margin in hair and we have far and away the best gross margin in blades and razors so the only one of the top five that are the principle drivers of growth where we have a lower gross margin is baby which I think we’ve been pretty open and clear about and that is a function of our primary competitor having a stronger position in the pants segment of the market. On the, you know, so part of what you’re looking at in the overall gross margin number is our is the balance of our mix, it’s our business mix and we have ….

And we have been growing in not only in developing markets but also growing somewhat disproportionately in household side of the business so far this year.

But if you compare our business mix to companies that are basically personal care companies or in you know higher margin segments of household that’s really what you’re looking at is mix. On the quarter to quarter progression you know frankly we want to get the pricing right before we move and I hope we explained that adequately but that really is our strategy and that is our plan and that is our practice. It works for us when you take pricing you want to make sure that the pricing sustains and I guess the last thing I would say is that we’re still focused like a laser on gross margin, it’s on most of our key businesses strategy and plan, documents and goals and it is a key driver of operating total shareholder returns so we’re going to definitely stay after that.

The other thing of course is our gross margin numbers include our restructuring and that’s another thing that might be an issue when you try to do side by side comparisons.

Your next question comes from [Ali Debache – Sandford Bernstein] [Ali Debache – Sandford Bernstein]: I want to talk about beauty and pharma and personal health for a second, if you take beauty it doesn’t look like the underlying organic sales has grown but you really [inaudible] I thought it was about a point on SK 2, it sounds like from the press release and from what you said, hair care is suffering. First question is I really want to understand that, what are you going to do to fix hair care and then on pharma and personal health, particularly given the poor cold and flu season I want to understand how we should expect that going forward particularly given as I would assume there was probably a channel fill quote unquote in front of the season, so both beauty and pharma and personal health really on organic sales please.

Unfortunately people have not been getting sick at a rate that we would all like yet. Look beauty is fairly straight forward. We actually did improve our organic sales growth rate by a point, it was 4% I believe in July-September, it’s 5% in this quarter and beauty will continue to strengthen going forward because frankly the timing of our innovation and initiatives, we just have a stronger innovation and initiative program in the first half, I’m sorry in the second half of the fiscal year, sorry first half of the next calendar. Second point about beauty is you just have to, it’s a tale of two cities, our skin care business is fine, our fragrance business is fine, our cosmetics business is relatively doing pretty okay, and even in hair. You know we’re growing share globally and in the US we’re growing share in hair on the past six and 12 month basis, we had a little bit of a drop off in the last three months and in hair, Head & Shoulders is find, Herbal is fine, Aussi, everything’s fine except for Pantene US and we’re focused like a laser on Pantene US. We didn’t get as much lift off of the last major initiative as we hoped we would. And we will be out with improved Pantene, strengthened Pantene programs for the US in the semester and year ahead. But there are a lot of good things going on in hair around the world. The other thing two things that are impacting hair are in the salon business we put Robert Yongstra into that business and we’re just absolutely positively going to get the cost structure right, you know, before we put our foot in the accelerators so we’re still working through making our strategic choices, getting our structure right before we make significant investments in the salon side and then finally and I think you know this, we’ve just announced Perfect 10 in the retail colorants side and our principle competitor has been defending for months so we’re just beginning to ship so none of that has appeared in the first half of the year. That is by the way the first major product upgrade in this category in decades. So we’ve obviously got to get it tried. But that’s really the issue in hair care. I don’t think we have a, we’re at any fundamental competitive advantage; I think it’s more about the timing of our programs and that will come back. Pharma we had a pretty okay quarter, total personal health care we actually had a pretty good quarter. You’re right the flu season and cold season hasn’t hit yet. I guess I’d leave it there.

Your next question comes from Jason Gere - Wachovia Capital Markets

You were talking earlier about you haven’t seen private you know consumers trading down to private label but just I guess going on to the last question that Ali asked especially in hair care seeing that Pantene’s a little bit soft but some of your mid tier brands are doing better, can you just talk about maybe what you’re anticipating with consumers trading down within the P&G category, which categories and then can you talk about that maybe from a profitability standpoint, is that a slight negative or would that really be more of a neutral.

Hair is really not about trading down at all, hair is about benefits and hair’s about new and hair is about you know bringing new benefits and bringing new products. Head & Shoulders which we premium price in a lot of markets and some markets around the world above Pantene is doing phenomenally well okay, so that’s not really the issue. Herbal is not doing terrifically well because of the price point. It was at that price point prior to the relaunch, the whole new product line, the repositioning of the brand. So you know, no hair is not [poofing] to private label. Hair is very much a branded category and it’s very much a product innovation and news driven category. The only places, you know frankly one of the places where private label is relatively strong is in the coffee business. You know I think its no secret that private label is relatively stronger in food and beverages businesses than it is in household and personal care businesses. On the household side the private label shares are a bit higher in the paper businesses but they haven’t been growing. You know, they haven’t been growing and that’s the key. You know if you look at baby care, it’s basically been P&G and KC that have been growing. If you look at family care you know it’s been the big branded players that have been growing in the principal markets. And I think that’s important. And what that means is that we’re keeping our price gaps manageable so we represent a good value to consumers and frankly we’re bringing a lot of innovation in those businesses that can be when you don’t bring the innovation and keep your price gap sharp more susceptible to private label.

Your next question comes from [Philippe Gusons - Credit Suisse] [Philippe Gusons - Credit Suisse]: Actually a follow-up questions on AG’s earlier comment on the beauty business, AG we’re seeing a significant step up in your marketing and advertising initiatives particularly for Pantene in such countries as Brazil and Argentina, to what extent does that reflect a more competitive environment or is it more a concentrated effort on behalf of P&G to make a renewed push in the hair care category in that part of the world and should we more importantly see that within the broader context of trying to accelerate the organic volume growth within the beauty category.

Philippe you ask a good question, we’re obviously continuing to move into developing markets where there’s a promising or existing attractive hair care business and the southern cone is one. Argentina was essentially our test market or lead market for the southern cone. If you followed that market we’ve done quite well there. Pantene has been quite a success there. And so we have turned our attention to, one we’re continuing to drive our position in Argentina and we’ve begun to run a lead market in Brazil and it’s off to a very good start. But there’s, the one thing I will say about hair and beauty and personal care in developing markets, there is a lot of room to grow because you’re getting a fair amount of consumption and market growth so you’re getting growth in the basic categories, you’re getting growth in regimen and they’re just fruitful areas and we I think as you know have been a little bit later to some of those markets and now we have the brands and the products and the sourcing and therefore the value equation that we think can succeed there and we’re seeing early success.

Your next question comes from Nik Modi – UBS Nik Modi – UBS: Just a quick question on emerging market consumers, is consumption driven by GDP growth or is it just a GDP per capital threshold. If you can just give us some perspective on that.

I would say its both although clearly the take off trigger tends to be household income. It tends to be household income and we know with some degree of certainty what the household income triggers are for different household and personal care categories. But most of the big developing markets that are driving most of the growth have gotten well beyond the thresholds at least in the cities, okay at least in the cities and I mean not just the largest cities but large cities and medium sized cities and one of the little known facts, our biggest customer is high frequency stores. So all of these small stores in developing markets are the biggest share of our business and they’re growing comfortably at double-digits as you might expect since developing markets are growing at double-digits and even a market like Mexico still half of the turnover, half of our turnover is in these high frequency stores that’s developed as the, as up the trade is. You know market growth has continued strong across developing markets and its running sort of on average across our household and personal care categories at high single-digits.

I would say its both although clearly the take off trigger tends to be household income. It tends to be household income and we know with some degree of certainty what the household income triggers are for different household and personal care categories. But most of the big developing markets that are driving most of the growth have gotten well beyond the thresholds at least in the cities, okay at least in the cities and I mean not just the largest cities but large cities and medium sized cities and one of the little known facts, our biggest customer is high frequency stores. So all of these small stores in developing markets are the biggest share of our business and they’re growing comfortably at double-digits as you might expect since developing markets are growing at double-digits and even a market like Mexico still half of the turnover, half of our turnover is in these high frequency stores that’s developed as the, as up the trade is. You know market growth has continued strong across developing markets and its running sort of on average across our household and personal care categories at high single-digits.

Your next question comes from Joseph Altobello - Oppenheimer & Co. Joseph Altobello – Oppenheimer & Co. : Just wanted to continue on with Nik’s question here in terms of the developing markets. If we do enter a period of decelerating growth in the US how much do you think that would impact consumption in some of these developing markets given that these markets are typically export economy is pretty reliant on the US for a lot of their incomes.

I don’t think it’s going to have that much of an impact in our businesses. I think it could potentially similar to what we’ve seen in the US our categories have stayed relatively strong and whereas some of the higher ticket items have softened and we would not expect that if consumption of imported goods from developing markets into the United States would trigger a change in market growth in our businesses in those developing markets. But that one’s very difficult to kind of try to square.

Even if you look at the US economy over the last three to six months most of the consumption from borrowing more on your home went into discretionary items, went back into the home, went into electronics, went into more vacations, went into eating out more often. People are not reducing tooth brushing incidents, they are not going to the bathroom less often, they are not shaving meaningfully less often and there it’s a style issue, it’s not a consumption issue. Most of our business is staple. Even on the personal care side, I mean there was, there’s some discretion, we watch duty free stores in fragrances because that’s an early indicator but it’s a tiny bit of our business. Cosmetics is another area that, color cosmetics that everybody watches and you see a little bit, okay of fall off in consumption but for the most part, skin care has become a staple. Hair care has become a staple. So we’re for the most part in staple businesses. The one thing I would say about developing markets is there’s another issue and that’s whether the habit’s formed. So part of it’s driven by the economic side, part of it’s driven by habit formation. If the habit’s formed and it’s still affordable and our products are very affordable in developing markets then we’re okay. If the habit’s not formed then it could be an issue but I can’t think of any major category where we don’t have good habit formation right now.

And the other thing too is all the stuff that we, our stuff is relatively low labor content. So as I said, I just don’t see this as being a major factor.

Your next question comes from William Chappell - Suntrust Robinson Humphrey

I’ve got a two part question here, first just an update on compaction, maybe a little more color on what you guys expect in terms of gross margin expansion in the next year as a function of the program and then second part of the question is just maybe an update on the battery business, what were the improvements and what drove the improvements and maybe how that affects, how you guys view the business going forward on a sustainable basis.

Batteries is pretty straight forward. Better branding, better marketing, better merchandising, better execution in store….

And better integration of the battery business into the P&G MDO operations.

And we still see Mark’s team at Duracell and now plugged in more tightly to the whole household care business with Dimitri; we still see some pretty promising upside on Duracell.

On laundry compaction it’s just so far so good. I mean the southern wave has gone well. We’ve just begun shipping the second wave and you know when we look at the market shares we look at the market size, I think the execution on the part of our organization has been brilliant and its as I say, so far so good.

We’re growing the category; we’re getting consistent share growth. We just started shipping the second wave, we’re looking forward to it delivering as we expect.

Your next question comes from [Alice Longley – Buckingham Research] [Alice Longley – Buckingham Research]: You gave us the growth rates all retailers included in the US and Western Europe, could you quantify what the slowdown has been compared to trailing 12 months and also we understand that you’re gaining share but how fast did you grow in these two regions in this period and have you slowed?

Well AG already commented about North America, I would say the market growth in North America has slowed by maybe 1% on a dollar basis. It has slowed a little bit more on a unit volume basis. And so our growth rate in these markets exceeded market growth more in the US than Western Europe, our growth rate in Western Europe was pretty close to the market growth rate.

Otherwise we reported Alice, we’re still growing share on the majority of our businesses in Western Europe. No our growth rate in the US was 6%; our growth rate in Western Europe was lower single-digits.

And with that we’ll conclude our question and answer session, gentlemen I’ll turn the conference back over to you.

Thanks very much everybody for being with us today and as I said at the outset we’ll be around for the rest of the day to handle any follow-up questions you have. Thanks a lot.