The Procter & Gamble Company (PG) Q1 2017 Earnings Report, Transcript and Summary

Good morning and welcome to Procter & Gamble's quarter-end conference call. P&G would like to remind you that 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. Also, as required by Regulation G, Procter & Gamble needs to make you aware that during the discussion, the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with useful information on the underlying growth trends of the business and 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. Jon R. Moeller - Procter & Gamble Co.: Good morning. I'm going to be relatively brief today. Our results are fairly straightforward and we're together soon for our Analyst Day, when we'll go in much more detail on our progress and plans. Our first quarter results mark a good start to the new fiscal, though work and opportunity remain. One of our key priorities has been to accelerate top line growth. Organic sales for the quarter grew 3%. This includes about a 1-point drag from the combination of the rationalization and strengthening work we're doing within the ongoing portfolio and the impact of reduced finished product sales to our Venezuelan subsidiaries. Top line growth was broad-based across categories and across markets. Organic sales growth in the U.S. progressed from 1% in the first half of last fiscal year to 2% in the second half to 3% in the quarter we just completed; growth in China minus 8% to minus 2% to plus 2% over those same time periods. We've been making sequential progress in each of our largest categories: Baby Care minus 2%, flat, to plus 2%; Grooming plus 2% to plus 3% to plus 3%; Fabric Care plus 1%, plus 1% to plus 5%; and Hair Care minus 1% to flat to plus 2%. Since last September, organic sales grew in each reporting segment and in all ten product categories. Still, as I said before, work and opportunity remain. Hair Care and Baby Care, two of our largest categories, were both up 2% but below the rates of market growth in these categories. These businesses along with the Grooming business in the U.S. represent notable opportunities for further top line acceleration. Organic sales grew in each region and in 9 of the 10 largest markets. Here too opportunities remain. Sales in the UK, which continues to be a very challenging, highly promotional market, were down 2%. Organic sales in China and Russia were both up 2%, but again below the pace of market growth; so in summary, progress with more work to do. Sales growth in the quarter was volume-driven. Organic volume was up 3%. Pricing and mix were each essentially neutral to our organic sales growth. All-in sales for the company were in line with the prior year, including the 3-point headwind from foreign exchange. As we move forward, progress will not come in a straight line. There will be quarter-to-quarter volatility. Comps will get more difficult. We need to manage significant geopolitical and economic volatility in markets like Egypt, Nigeria, Argentina, even the Philippines. And of course, our competition is not standing still. We still have work remaining in some categories and markets to get our brands back to market levels of growth. These opportunities need to be addressed category by category, market by market, channel by channel. We're after it, but it won't happen overnight. Moving to the bottom line, core earnings per share were $1.03, up 5% versus the prior year. Foreign exchange had a negative 7-point headwind on the first quarter earnings. On a constant currency basis, core earnings per share were up 12%. Core gross margin increased 50 basis points versus the prior year. On a constant currency basis, core gross margin was up 130 basis points, including 190 basis points of productivity improvement. Commodities were a modest hurt to gross margin in the quarter. Feedstock costs for propylene, ethylene, and tropical oils are up as much as mid-teens since we set our initial budgets for the year. Wage inflation is also an increasing challenge in many developing markets. Productivity improvements contributed 270 basis points of operating margin benefit. We reinvested a significant portion of those savings in product and packaging innovation, media reach and continuity, sampling, R&D, sales coverage, and targeted consumer value adjustments in order to accelerate our top line growth. Core operating margin as a result was up 20 basis points for the quarter. On a constant currency basis, core operating margin was up 120 basis points. The core effective tax rate was 23%, about a point below last year's first quarter level. This includes the adoption of new accounting standards for share-based compensation, which reduced the quarterly tax rate by about 3 points, about $0.04 per share of benefit to core earnings per share. The impact on the balance of the quarter this fiscal year from this accounting change is expected to be minimal. The fiscal year impact of this change was assumed in our initial guidance for the year. All-in GAAP earnings per share were $0.96 for the quarter, also up 5% versus the prior year. We generated $2.3 billion in free cash flow with 85% free cash flow productivity; returning $2.9 billion to shareowners, $1.9 billion in dividends, and $1 billion in share repurchase. Our share repurchase flexibility was limited in the first quarter due to trading restrictions related to the Coty transaction. The day after the quarter ended, on October 1, we reached a very important milestone in our portfolio transformation program, closing the Beauty transaction with Coty. This marks the completion of the most significant portfolio transformation in P&G's history. We have created value for shareowners every step of the way, including over $4 billion versus our keep price in the Beauty deal. While we will be supporting transition efforts for some time, we can now begin focusing our efforts on the 10 core categories we identified two years ago. The market in each of these 10 core categories is large and is growing between 1% and 7% per year. These are structurally attractive categories where P&G holds leading market positions. Our businesses in these categories have historically grown sales a point faster than the company and held margins that are 2 points higher than the company average. They leverage P&G core strengths of consumer understanding, innovation, branding, and go-to-market, and benefit from the company's scale. Consumers use these categories on a frequent basis, typically daily. Purchase choice is driven more by product performance against a clear consumer need or job to be done than by self-expression or fashion trends. These categories lend themselves to innovation, which creates noticeable superiority. We'll compete within these categories from the top of the market, building down across middle price tiers that are profitable and growing. We will not compete in the lowest price tiers, which are generally commoditized and where no money is made. We will, however, serve cash constrained consumers with smaller, more affordable pack sizes, requiring less cash outlay per purchase. We're in the midst, as you know, of exiting unprofitable commoditizing price tiers, forms, and segments, enabling us to focus our resources on forms and segments that are profitable and growing. Our objective for the new 10-category company is very clear, balanced top and bottom line growth that delivers total shareholder return that places P&G consistently in the top third of our peer group. I spoke earlier about the reacceleration of our top line, and we're going to spend more time on this on Analyst Day. This is critically important. But productivity improvement and cost savings are also a necessity in achieving our TSR objective. They provide fuel for investment and innovation, advertising, sales coverage, trial, and sampling to grow our brands and grow our categories and build margin. Top and bottom line growth are not separate endeavors. They reinforce and fuel each other. They're part of the same ecosystem. They live together and depend on each other. They can't be separated. Last fiscal year we completed our first 5-year productivity improvement program, accelerating and exceeding each of our cost savings and enrollment reduction objectives. We saved over $7 billion in cost of goods sold. We've reduced manufacturing enrollment by 22% over the last four years. This includes new staffing necessary to support capacity additions. On a same-site basis, manufacturing enrollment was down 27% through last fiscal, with additional progress planned this year. We reduced the number of manufacturing platforms we produce with by 30% over this same period. Over the last five years, we've reduced non-manufacturing roles by nearly 25%. This excludes the impact of divestitures. Including divestitures, we've reduced overhead roles by about 35%. As we've decreased the size of the organization, we've also simplified it. We've gone from managing the global business through 50 market cluster organizations to just 25. We've simplified our network of suppliers, reducing, for example, commercial agency support from 6,000 vendors to about half of that. Including reinvestments in innovation, sales coverage, media, and sampling, productivity has enabled us to deliver constant currency gross and operating margin improvement and high single to double-digit constant currency core earnings per share growth in each of the last four fiscal years. We improved gross and operating margins by triple-digit indices, both including and excluding currency, in fiscal 2016. And we continued the trend in Q1, with double-digit constant currency core earnings per share growth and triple-digit constant currency margin expansion. We're driving productivity improvement up and down the income statement and across the balance sheet. Inventory days are down about 10 days over the last five years. Payables days are up more than 30 days, enabled significantly by our supply chain financing program. We've made significant progress and we have significant opportunity. Our strong track record and our line of sight to additional opportunity inform our intent to save as much as another $10 billion in cost over the next five years. We expect to reinvest a significant amount of the savings in R&D and product and packaging improvements, in sales coverage, and in brand awareness and trial building programs to deliver balanced top and bottom line growth, which brings me to fiscal year guidance. We're maintaining our organic sales and core earnings per share outlook for this fiscal year. The first quarter was a good start, but comps get more difficult and we continue to face a relatively slow growth volatile world. We're expecting organic sales growth of around 2% for the year. This includes between 0.5 point and a point of headwind from the portfolio rationalization and strengthening work within the ongoing 10 product categories. It also includes a headwind from lost sales to our Venezuelan subsidiaries in the first half of the fiscal year. We expect fiscal 2017 all-in sales growth of about 1%, including around a 1-point drag on growth from the net impact of foreign exchange and divestitures. Our bottom line guidance for core earnings per share growth is for core earnings per share growth of mid-single digits. This range reflects the volatility of the markets in which we compete, and it reflects the investments we tend to make in the business to accelerate organic sales growth in a sustainable, long-term, market constructive, and value-accretive way. We continue to forecast a reduction in core non-operating income in fiscal 2017 due to lower gains from minor brand divestitures. The core effective tax rate should be roughly in line with the fiscal 2016 level. All-in GAAP earnings per share should increase 45% to 50%, including the significant one-time gain from the Beauty transaction with Coty that will be recognized in the October – December results. Also included in GAAP earnings per share are approximately $0.10 per share of non-core restructuring charges and $0.13 per share of charges related to early debt retirement that we initiated earlier this month. At current rates and prices, FX and commodities combined are about a $0.12 per share headwind to fiscal 2017 earnings. Significant currency weakness, commodity costs increases, or additional geopolitical disruptions are not anticipated within this guidance range. We expect adjusted free cash flow productivity of 90% or better. Fiscal 2017 will be a year of significant value returned to shareowners. We expect to pay over $7 billion in dividends. We reduced outstanding shares by $9.4 billion in the transaction with Coty, and we expect to make over $5 billion of direct share repurchase; in total, about $22 billion in dividend payments, share exchanges, and share repurchases this fiscal year. We look forward to seeing many of you at our Analyst Day here in Cincinnati on November 17 and 18. David Taylor will lead this session. We'll have nearly all of our top leadership team available to meet with you on the evening of November 17, with many of them discussing their businesses during the management presentation on November 18 along with David Taylor and myself. If you can't make it to Cincinnati, we hope you join the webcast of the presentation on the morning of November 18. That concludes our prepared remarks for this morning. I'd be happy to take questions.

Thank you, sir. Your first question comes from the line of Steve Powers with UBS.

Hey, Jon. Good morning. Jon R. Moeller - Procter & Gamble Co.: Good morning, Steve.

So clearly a good start to the year, and as you say, a fairly straightforward quarter, all things considered. But now we look forward, and I guess my question -really, the question I've been fielding for the last hour or so, is where do we go from here? I know you don't want to give quarterly guidance and I don't expect you to, but just given how significantly the year-over-year comps ramp in Q2 and really how significantly the volume comps ramp all the way through Q4, I was hoping you could just help frame for us your expectations for the OND (15:07) quarter, and really the cadence of organic growth over the balance of the year, fully appreciating your not in a straight line comments. Because the optimist in me wants to believe that we'll start to see incremental returns on all of this investment you've been making in the last nine months. But then the pessimist in me says, this Q1 momentum may be short-lived as Q2 rears its head. So again, I know it's tough to call quarters, especially in this environment, but maybe just a little more context around how you're measuring returns on the investments you've made so far, where you're seeing the biggest bang for the buck, and again, how you're thinking about top line progression over the balance of the year. Thanks. Jon R. Moeller - Procter & Gamble Co.: Thanks, Steve. I think you said several important things – or repeated several important things. One is, not a straight line. Two is, increasingly difficult comps. Obviously, we start the year with a 3% and provide guidance for the year at 2%. There will be a quarter or some quarters below 3%. We've also said that we want to exit the fiscal year closer to the rate of market growth in our categories, setting ourselves up for a strong subsequent year, and so that backs you in to the next two quarters being the more challenging ones in front of us. And that's really as far as I want to go in terms of specific guidance. In terms of return on the investments we're making, I think you see that, both from a top line and a bottom line standpoint in the first quarter. On a constant currency basis, very significant returns, with 12% core earnings per share growth on 3% top line. We are reinvesting, as we said we would, productivity savings. But as we also have said we would, we're going to continue to modestly improve margins. And that is the only recipe for sustained success in this industry, and we're intent on following it and so far are pleased with the results.

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

Hey, good morning, everyone. Jon, maybe you can help us, following up on Steve's question, just the cadence of the reinvestment or the investment both from a marketing and an innovation perspective. Just trying to understand which quarters are going to be heavy in terms of those investments and new product launches. And then just a quick follow-up, bigger picture, Kathy [Fish] took over the R&D function a couple years ago. And usually when you have leadership changes in R&D, it takes a couple of years to fill the pipeline. So I just wanted to get your assessment on what the upstream and the current pipeline looks like in terms of, on a scale of 1 to 10, how you would view it in terms of the immediacy of the new products actually hitting the marketplace. Jon R. Moeller - Procter & Gamble Co.: Thanks, Nik. I apologize in part for my first part of this response, but I really think on a daily basis in terms of fiscal years, not quarters, as you know. And so I really don't even know from a marketing spending exactly what the breakdown or the plan is by quarter. But I know that over the year, we're going to continue to reinvest productivity savings. Those will be more significant as the year progresses. We've also said we want to increase our continuity of marketing spend and trial and sampling building programs, so I expect that statement to lead to relatively constant levels of increase across the quarter. But it's honestly a figure by quarter I don't have currently in my head. The second part of your question about the cadence of new product introductions, we have significant programs coming to market in the third quarter and another batch towards the end of the fourth quarter. In terms of new product launches, the second quarter will be relatively light. And honestly, I've forgotten the last part of your question, but feel free to call me later today and I can catch you up on it.

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

Thanks, good morning. Jon, I was just struck by toward the end of the call you really emphasized some words like market constructive and value-accretive way of reinvesting. So I was just curious about thoughts and actions in terms of consumer value adjustments as you addressed in the press release and in general the status of your relative pricing in some of your major categories and markets, so 2x4 would be great. Jon R. Moeller - Procter & Gamble Co.: Thanks, Lauren. I'm glad you picked up on that because this is important. In the new 10-category company where we have leading positions across those categories, we become increasingly dependent on moving markets, on growing markets. There are category/country combinations where we have 60, 70, 80, 90% market shares, so one more point of share isn't the margin of victory or defeat. And that doesn't mean that share isn't important. Share is important. But we need to be growing markets, increasing the number of users for our brands, and that's what our activity system is all set up to do. So when you talk about, for example, increasing trial and sampling at point of market entry and point of market change with noticeably superior products, that moves markets over time. And being able to price behind superior innovation also moves markets over time. What doesn't move markets is, for example, leading the march down on promotion spending. If you look at the quarter we just completed, price inclusive of promotion was a neutral contributor to the top line. It has been a neutral to positive contributor to the top line for the last 24 quarters. It has been a positive contributor for many years, I think it's 12 in a row. So that's going to continue to be what we're going to emphasize, which is market accretive, market constructive, growth-driving investments. Now having said that, we won't be successful in that endeavor and maintain our shares if we're uncompetitive. And so we will take moves where warranted to ensure that we're offering a competitive value proposition to consumers. We've made several of those moves in the last quarter. What moves happen in the future will be largely dependent on where others take us. But thanks for picking up on that point; it's an important one.

Our next question comes from Ali Dibadj with Bernstein. Ali Dibadj - Sanford C. Bernstein & Co. LLC: Hey. So I want to build on that because despite the language of market accretive and market constructive, your last two quarters have clearly shown a shift towards volume growth versus price/mix. I guess a long-term trajectory, but a long-term trajectory from a top line perspective hasn't been that great. But just now it's starting to look a little bit better, again, volume being the driver. So how do you think about the balance of investments between innovation and ad spend, sampling, and versus less than pure pricing on the top line? Because the perception we're hearing and you heard one of your competitors yesterday say it effectively. The perception you're hearing from them and some of your other competitors is that it is just starting another price war. We've heard this from P&G before. It's going to be a pyrrhic victory or at least a fleeting victory for now. So how do you get comfortable that that's not going to be the case? You can't really control the perceptions of competitors, obviously. But the perception is already clearly forming. So how are you sure that it's not going to be a pyrrhic or fleeting victory for you guys, and how do you think about the competitors' reaction to you guys clearly being a little bit more aggressive and pushing more volume? Jon R. Moeller - Procter & Gamble Co.: Thanks, Ali. We do expect – we compete in a very strong industry with strong competitors, and we expect them to be working just as hard as we are to protect and build their businesses. And that's one of the factors that I cited in terms of guiding to 2% top line growth on the year against the backdrop of a 3% Q1. In terms of ensuring that we're engaged in the activities that best support our brands and businesses, there's really not an aggregate answer to that, though I'm comfortable in aggregate. That's really a choice that's made at individual categories and countries. And the way I think about this very simplistically is in line with your question. If we grow business by, for example, significantly increasing promotion spending, that will be – I think you're absolutely right – a pyrrhic victory. Why, two reasons; number one, nothing proprietary can be matched instantly. That's very different than a successful investment in innovation or equity building or sampling which can create unique advantage. Two, promotion spending by definition, almost by definition, is market dilutive, whereas those other activity streams can be, if executed with excellence, market accretive, and that's just a better place for us to be in. So I'm not going to give a formula or an algorithm, not because I'm afraid of giving one, but simply because it doesn't exist at an aggregate level. That's not how we manage the company. But the emphasis points will continue to be focused on long-term drivers of market growth and brand growth, long-term drivers of new users to our brands, but short-term competitiveness.

Your next question will come from Bill Schmitz with Deutsche Bank.

Hey, Jon. Good morning. I'm going to try to sneak in two questions in one. So the first is, why do you think organic growth grew almost – actually more than 3 points faster? That would have implied by some of the tracked channel data. And so maybe is there a difference between shipments and consumption? And then on the gross margin side, it seems like most of the currency transaction pain, it probably peaked this quarter and is over. So how do you think about that trajectory and how much of that money has to be reinvested back in the business? Jon R. Moeller - Procter & Gamble Co.: Thanks, Bill. First of all, from a comparison of reported results to tracked channel trends, reported tracked channel trends, there are two big drivers within that. One of them is simply the amount of business and the relative growth of that business that's moving online versus offline and to non-tracked customers like Costco, as an example. So in the U.S., for example, that explains about a point of difference, a full point of difference between the tracked channel sales growth numbers and our reported sales growth numbers. In China, that number represents a 5-point reconciliation item between those two numbers, so that's becoming increasingly significant. And as you know, the relative growth rates there are very, very different, 30% in one to call it 3% – 2% in the other. The other difference that exists in the U.S. tracked channel reports, as it should, is the inclusion of the Beauty businesses that were transitioned to Coty as of October 1. So any of the share reports or sales growth reports that have come out to date rightly include that business. They won't going forward. And that dynamic in the U.S. explains about 0.5 point of difference between the tracked channel numbers and the core non-discontinued business numbers that we're reporting today. And that's about – that's another big part of the equation. We do have one situation which I'll make you aware of that falls into your last bucket, which is timing differences that would affect the different quarterly reporting numbers, and that's in China where we transitioned our Hong Kong business to a new distributor. And so there's some pipeline fill to that distributor in the numbers on the quarter, call it 1 to 2 points, relatively small on a total company basis, but that's a 1 to 2-point impact in China itself. So those are the primary drivers of the differences.

Our next question comes from the line of William Chappell with SunTrust.

Thanks, good morning. Jon R. Moeller - Procter & Gamble Co.: Good morning, Bill.

Hey, Jon. One thing you said in the prepared remarks is talking about Hair Care and Grooming as opportunities for growth, and I just wanted to drill into that. And are they really – what we've seen, especially in Grooming, over the years, ups and downs, and you're the dominant player in the category. Is that something that you can get back to reasonable growth? And as you look across all the categories, do you think now with Beauty out, all of them can grow in line with expectations, or are there some that will be laggards over time? Jon R. Moeller - Procter & Gamble Co.: If you just look at the last two quarters on a global basis for Grooming, we grew organic sales 3% in the quarter that we just completed, and the prior quarter we grew 3% as well. We continue to have significant opportunities on the Grooming business for growth. Certainly, the developing market opportunity is very significant. But there are opportunities as we increase our relevance from a channel standpoint, as we increase our relevance from an opening price point standpoint, as we increase innovation across each of the tiers of the business, whether that's disposables, mid-price systems like MACH3, or at the high end. So I do see that as a market that offers growth opportunities to us. And I feel that way about every business within the portfolio, especially relative to the metric of market growth. The market growths are different across the categories. I mentioned in the prepared remarks they range anywhere from 1% to 7%, and so I would expect our businesses to grow at slightly different rates. And obviously the geographic opportunity is different by market. But in general, we settled on this portfolio because it's one we feel we can grow and can do so profitably.

Our next question comes from the line of Dara Mohsenian with Morgan Stanley. Dara W. Mohsenian - Morgan Stanley & Co. LLC: Hey, good morning. Jon R. Moeller - Procter & Gamble Co.: Good morning, Dara. Dara W. Mohsenian - Morgan Stanley & Co. LLC: So, Jon, you articulated that there's room for efficiency in your $18 billion promotional budget previously. That's obviously a very large bucket. So I was just hoping you could give us a bit more granularity on if your efforts in that area are supposed to yield actual savings that are substantial that you can drop to the bottom line over time. Or is your approach more to redistribute any of the potential efficiencies back to drive more effective spending and hopefully higher top line growth over time? And then also, when do you expect the promotional efficiencies to really ramp up and take hold from a timing standpoint? Thanks. Jon R. Moeller - Procter & Gamble Co.: The idea here is to increase both the efficiency and the effectiveness of our spend across the elements of the marketing mix. And there are many cases where promotion spending is a very effective use of our funds, and we'll continue to support that spend. There are other instances where both we and our retail partners would be better off redirecting that spending to other elements of the marketing mix, focusing back again on how can we drive market growth in our categories and how can we drive shopping trips and basket size for our retail partners. And it's really working together in a joint context to identify where those opportunities are, where today we're potentially both engaging in activities that are both market and profit dilutive to both sides of the partnership, and looking for ways to redirect those funds in a way that can be more accretive to both sides of the partnership. I do not see this as being a significant source of bottom line help. I think we're much more in the camp of redirecting and redistributing to encourage market growth, growth in users, and have that happen in a profitable way for both partners.

Our next question comes from the line of Olivia Tong with Bank of America Merrill Lynch.

Great, thanks. Good morning, Jon. Do you guys have any data to suggest you're attracting new consumers with all the sampling that you're doing, and how does that compare to your expectations? Are these consumers younger? Are they shopping more online versus brick-and-mortar, or are they fairly similar to your traditional consumer? And then just also, I'm not sure I heard it. But can you provide the price/mix volume breakdown between developed markets and emerging markets? Thank you. Jon R. Moeller - Procter & Gamble Co.: Sure. So I'm just looking for data here. If I look at volume sales price mix in developed, volume is plus 4%, sales plus 2%, price/mix minus 2%, for a net of plus 2%. That's obviously the all-in number, but organic volume plus 4%, sales plus 2%. In developing, organic volume plus 3%, sales plus 6%, and then – those are the major drivers of what's happening there. In terms of payout on sampling, I'm glad you asked that question. This is something that is typically – if you can sample consumers at point of market entry or point of market change with noticeably superior products in categories where brand loyalty is relatively higher, the lifetime benefit from that relatively modest investment can be significant, but it is a lifetime benefit. A consumer will take a period of time just to use the product that you've sampled them with. And so that's not an investment endeavor that we typically see immediate returns in. That's why, unfortunately, we got into a practice of reducing that spending because it wasn't producing – it never produces immediate short-term result. But it's really the area of spending that should be the last that we cut because of its importance in building users for potentially a lifetime of consumption. So we're happy with our efforts to date, but it's an area of return that we'll be monitoring and measuring for several years to come.

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

Hi, good morning. Just to clarify, I think you called out another 1-point headwind on volumes this quarter from SKU reductions and minor brand divestitures and all that. Is that a number that's going to be in perpetuity, or do you have a time certain in mind that that headwind is going to end? And then secondly, if I'm looking at the Beauty business, and granted the 2% number is much better than we've seen, so that's great. But with Pantene up mid-single digits, and I know SK-II up strongly, I think that that implies that Olay is still really struggling. And maybe that's related to the first question, which is the SKU reductions that I know you've taken there. But what is the timeframe, do you think, for when Olay will return to growth mode? Thanks. Jon R. Moeller - Procter & Gamble Co.: In terms of the drag on the top line from portfolio focusing within the 10 categories, that is something that should start ramping down in the back half of this fiscal year. I expect it to continue, though, at some level through probably the first quarter, first two quarters of next fiscal year. But I don't think it's at a level during that period when we're likely to be talking about it; so still significant through the second quarter, reducing in significance sequentially from there. In terms of the Beauty business, we're very happy with how that's performing overall, as you said, plus 2%. I mentioned the sequential Hair Care acceleration that's occurred over the last 18 months or so. In the quarter, as you mentioned, Pantene was up mid-single digits. Head & Shoulders was up mid-single digits. SK-II was up strong double digits. Our Personal Care business is doing fairly well. Olay is stabilizing. We're going to annualize coming up here in the not too distant future the SKU cuts that we made in the U.S. We should annualize those in the back half. And we're just in the middle of redoing our entire counter system in China, and that includes some reductions in the number of counters to be more relevant in the channels that we want consumers shopping for Olay in and to have a better overall shopping and consumer experience. So I expect that those two items, the SKU reduction in the U.S. and the counter rationalization or redesign in China, will continue to put some pressure on Olay, call it through the balance of the fiscal.

Next we'll go to Jason English with Goldman Sachs. Jason English - Goldman Sachs & Co.: Hey, good morning, folks. Thank you for the question. Jon, you mentioned market growth range here from 1% to 7%, and hopes that you close the gap, tracking close to market growth by the end of the year. Can you give us a sense of what all-in that market growth looks like on a weighted average category/country basis? And then separately, even when we back out this 1 to 2-point benefit in China, the sequential improvement is notable, so congratulations on that. I was hoping you could expound a little bit more on the drivers of that improvement, whether it be channel driven, category driven. Just give us a little bit more color. Jon R. Moeller - Procter & Gamble Co.: Thanks, Jason. In terms of an aggregate market growth number, it's likely somewhere between 3% and 3.5%. I say likely because, as you know, that's a metric that lags, so I don't have data through September, for example. It's been declining modestly quarter to quarter, 6-month period to 6-month period, but I expect we're going to be somewhere in the 3% to 3.5% range overall. In terms of China, we've made some real progress on a couple important businesses and continue to do reasonably well in some others, with some work in the balance still to do. If we look at Oral Care, for example, in China it was up almost 15% on the quarter. That's driven by continued progress with the Oral-B brush as well as the high-end premium Oral-B paste that we launched a couple quarters ago. Shave Care, to the point of the question is there growth in Grooming, that remains up 17% on the quarter in China. Our Personal Care business is doing extremely well in China, as is SK-II, so that the entire Skin and Personal Care business was up about 10% in the quarter. Our biggest business in China, as you know, is our Hair Care business, which is a significant portion of the total. We continue to have four of the top leading brands in the market in Head & Shoulders, Rejoice, Pantene, and Vidal Sassoon. I think those are respectively number one, two, four, and five in the market. We're essentially flat there versus year ago, so we do have some – and part of that is driven by some new entrants into the market. One thing, but clearly it continues to be a strong business and offers some upside. The one business where we need to make much more progress is on Baby Care, which was down again double digits on the quarter. We feel very good about portions of our portfolio. Our pant offering, for example, is doing extremely well. We have some new premium taped innovation coming into the market in the next six to nine months, which we're also very excited about. But that is a business that we need to keep working on. In terms of channels in China, we're doing very well in e-commerce, growing ahead of the market, building share in e-commerce, still not yet to the level of our brick-and-mortars shares but improving significantly. We've stabilized and started growing shares in the hyper and super part of the business, which is encouraging. We still have some challenges both in the wholesale market and in building distribution in some of the specialty channels that are among the fastest growing. But as you rightly point out, overall real progress, and as I think about China long term, a significant opportunity on both the top and bottom line for the company.

Our next question comes from the line of Kevin Grundy with Jefferies.

Hey, thanks. Good morning, Jon. Jon R. Moeller - Procter & Gamble Co.: Good morning, Kevin.

A quick housekeeping and then a broader question, so the housekeeping question, just because we've gotten a couple inquiries from investors this morning. The organic volume growth number was strong, albeit against a soft comp. Was there any timing benefit in the quarter or anything notable that you'd comment on with respect to retail inventory levels? And then the broader question, and I apologize if I missed this, what are the market growth assumptions contemplated in your outlook? And maybe you could separate the comments, Jon, into U.S., other developed markets, and then emerging markets. And I ask that in the context, we've seen some of your competitors talk about slowing market growth rates, particularly in Latin America. And maybe you could also comment on whether that outlook or those growth rate assumptions have changed over the past few months. Thank you. Jon R. Moeller - Procter & Gamble Co.: In terms of the organic volume and any timing impacts within that, not really. The biggest driver there is sell-through to consumption as well as the base period dynamic, which you rightly cited. There are certain categories where events are at different times and cross-quarters this year versus last year, but in aggregate that's not a significant driver of the volume progress that occurred. In terms of the market growth assumptions split developed and developing, this is like foreign exchange or commodities in that I don't know what the future holds. And so our forecast is predicated really on the equivalent of FX or commodity spot rates, which is just simply the latest data. And the latest data we have past three months shows market growth of a little over 1% in developed markets. That's inclusive of Western Europe, Japan, et cetera. And it shows 5% growth in developing markets. Weighted average together you get close to the 3% to 3.5% number that I was speaking with Jason about. If you look at the trend of those numbers, and I'm looking at sequential three-month periods, I really don't see a significant difference or a significant trend of change across those markets, so 0.1s and 0.2s, but nothing of significance.

Our next question comes from the line of Joe Altobello with Raymond James. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: Hey, guys. Good morning. Jon R. Moeller - Procter & Gamble Co.: Hey, Joe. Joseph Nicholas Altobello - Raymond James & Associates, Inc.: I just wanted to focus on Fabric Care, if I could, this morning. I guess you guys mentioned in the press release organic sales in developed markets up high single digit. I guess first, how sustainable is that? I assume that number was similar in the U.S. And maybe if you can, compare that to what category growth was in the U.S. And maybe finally an update on competitive activity, particularly from Henkel in U.S. laundry – or sorry, in U.S. Fabric Care? Thanks. Jon R. Moeller - Procter & Gamble Co.: So starting with the aggregate number, as you know, organic sales in Fabric Care grew 5% in July – September. Within that, North America was up 7%, so we did build share of about 0.4 points on a past three-months basis in North America. The most important thing, though, in North America is the improvement in the rate of market growth, going back to our earlier conversations, up 4 points on a past three-month basis, driven by innovation in the category, which is exactly what we hoped to see. Also, growth within that segment is being fueled by our fabric enhancers business, the U.S. up 7 points versus last year with the scent beads segment, the one we're innovating in the most significantly, growing in the mid-20s; our fabric enhancer share up 1.5 points on a past three-month basis. We've withstood fairly successfully several competitive dynamics. We don't take that casually, though. But if we can continue to be an innovation leader in the market and moving the market, we believe we'll continue to be in a good position. Will the growth rate stay at that level? I would say likely not to that full extent in developed markets, but they'll continue to be attractive. On the other hand, what's implied deductively in those numbers is declines in developing markets. A lot of that is being driven by the portfolio, focusing efforts within Fabric Care, getting out of some of the lower-priced tiers, the bars, even powders in some markets. And so that's having an impact on growth from a negative standpoint, which should dissipate as we go forward. And so when you put those two things together, I would expect that Fabric Care will continue to be a strong contributor of growth at a total company level.

Our next question comes from the line of Mark Astrachan with Stifel, Nicolaus. Mark Astrachan - Stifel, Nicolaus & Co., Inc.: Thanks and good morning, guys. I wanted to ask a couple housekeeping questions. So China category growth, what is it in the markets in which you compete when your competitors are talking about just overall slowdown? I'm just trying to think about whether that's company or category specific. And then from an EPS algorithm standpoint for this year, what's embedded there from an input cost standpoint if you're starting to see things increase a bit there? Jon R. Moeller - Procter & Gamble Co.: China market growth, when you look at the – first of all, it's very different by category, so let me start there. And most of the categories, based on the data that we have, are holding up fairly well. There's been a lot of conversation, for example, about diaper category market value growth. If I look past 12, 6, and 3 months, I see 12.0%, 11.0%, 12.0%. So I don't see a major change in the growth rate of that market, and obviously it's at a very attractive level. If I look at, for example, Feminine Care, again, fairly simple; it's fairly standard growth rates, Fabric Care 4.5%, 4.2%, 4.2%. Where you do see a significant reduction in the market growth rates in the tracked channel data is in some of the Beauty businesses, but I don't have all the data here in front of me. But that is largely driven by the movement of that business online. It's one of the disproportionate growers on e-commerce in China. And in aggregate, we still see relatively healthy market growth. In total call it 5% to 6% to 7%, without a significant change in that trend over the past 12 months. In terms of input costs, I said in the prepared remarks that the combination of FX and commodities was a $0.12 headwind to earnings per share. About 2/3 of that is coming from commodities.

Our next question comes from the line of Caroline Levy with Crédit Agricole.

Good morning, thank you. Looking, I think that the numbers you gave us on developed and developing market growth were volume up 4%, price down 2% in developed; and price up 3%, volume up 3% in developing. The question I would have is, as currencies stabilize, do you think there's less opportunity to get that 3 points of pricing in the developing markets? And so should we be actually a little more cautious on the pricing outlook moving forward? And then the other thing would be could you just talk about the biggest challenges to market share? I'm assuming it's Olay China and the U.S. and it's a couple of other big things. But if you could, just touch on that. Jon R. Moeller - Procter & Gamble Co.: I think you're right. To the extent that foreign exchange headwinds diminish, the pricing activity that we'll be engaging in, in developing markets would in all likelihood be lower. At the same time, though, that absence of price increase should lead to stronger volume growth over time. So I wouldn't necessarily look at developing market growth rates as inherently declining. But I think you're absolutely right that the components of that growth should be different. That's relative to price specifically. Relative to mix, I think you're still going to see some benefit there as major portions of the developing world move up the pricing ladder. The premiumization that we've seen in China, which is the largest developing market, is one example of that. And I expect that will occur in other markets as well as economies stabilize and improve. So net, I still am relatively bullish on our positions in developing markets and the growth prospects that they bring with them. In terms of market share losses, I mentioned the categories on a global aggregate basis where we're growing behind the market, and one of them is Hair Care. The other is Baby Care. And I also mentioned an opportunity in the U.S. Grooming market. We are on all of those. If you take Hair Care, for example, we're making great progress on Head & Shoulders, up 5 points in the quarter. We're making great progress on Pantene, up 5 points in the quarter. We have some issues, though, with some of our smaller brands, like Herbal Essences, for example, and we have a whole new program and a restage coming to market in the second half of the year. I mentioned some of the product work we're doing in Baby Care. And when we get that right, we tend to perform very well. If you look at the U.S., for example, where we do have that right, we're building market share both on Pampers and in aggregate. So as I mentioned, there's opportunity to improve. It's not something that will happen overnight, but it's clearly identified and being aggressively focused on.

Our next question comes from the line of Jonathan Feeney with Consumer Edge Research.

Good morning, thanks for the question. So it looks like as of last March, P&G had seen 17 consecutive quarters of negative foreign exchange effect, and it's a record (54:28) going back to 2000, but I don't know about before that. It's pretty extraordinary. In 15 of those 17 quarters, you took pricing, and now we've had two quarters in a row where you haven't, and absorbed a foreign exchange hit. Now that could just be coincidence, or I guess it could be an indication of a new direction broadly. But what I'd ask is first, could we – following on Caroline's question, can we expect, based on what you know right now, foreign exchange, would pricing be a component of the 2% – positive pricing be a component of the 2% organic sales target for this year, based on what you know right now? And when you think about value, as you mentioned in your remarks, can that include probably the highly likely benefits you get from gaining market share right now in developing markets, at a time when foreign currency is almost sure to turn around at some point? Is that included in the value equation when you compensate people when you manage these businesses? Thanks very much. Jon R. Moeller - Procter & Gamble Co.: There are real differences between, call it the last year and the years prior to that in the FX dynamics, which drive different decisions. You may recall, when we headed into the most recent round of big FX impacts, which was last year, we said that while historically we've been able to regain about 2/3 of the impact through pricing, we didn't feel we were going to be able to do that this time around. And that was driven in large part simply by a divergence in what was happening to the dollar and what was happening to the functional currencies for some of our significant competitors, namely the euro, the pound, and the yen. And those currencies were weakening over that period of time, and so there was less need for competitors who were reporting results in those currencies to price. And as much as anything, that's what you're seeing being reflected in the actuals. We're going to be pragmatic. We're going to offer a good value to consumers. But we're also going to work through every means we have available to us, including cost savings and mix improvement innovation to maintain attractive structural economics so that growth is worth something in these markets. And that's a different answer in every category and every market, month to month, week to week. So we're going to try to manage that as intelligently as we can. I wouldn't expect at this point, based on your point on where we sit today, do I expect pricing to be a significant part of the equation the balance of the year? I do not. In terms of how people are compensated, we are a U.S. dollar functional currency company. We pay dividends in dollars. We repurchase shares in dollars. And our investor base, as you well know, really doesn't care how many rubles we have or pesos we have. What they care about is how many dollars we have. And so the primary compensation lens is through all-in performance on dollar terms. We do, though, also have a look, because we don't want to incent behavior that's too short-term oriented, at constant currency. But over periods of time, we're going to measure our success or failure based on earnings per share and earnings growth and importantly, cash growth in dollars.

And your final question comes from the line of Jon Andersen with William Blair. Jon R. Andersen - William Blair & Co. LLC: Good morning, thanks for the question. Hey, Jon, I just wanted to ask a little more broadly about two higher growth potential areas of your business. One is direct-to-consumer, and the second is green or environmentally sound or sustainable, whatever you'd like to call it. Are you happy or satisfied overall with the progress that the company is making here? And I know you have programs like Gillette Shave Club and products like Tide Pure Clean. Is this something that you can accomplish internally, be it internal focus or organic focus, or do you think you need to supplement or look to accelerate it with M&A as well? Thanks. Jon R. Moeller - Procter & Gamble Co.: Thanks, Jon. Let me address green and sustainable first. While we're open to both inorganic and organic ways of increasing our product superiority and the sustainability of our products, and that's an important 'and', it hasn't been our experience that there's a lot available on the market that delivers that 'and', which something like Tide Pure Clean definitely delivers. We've been on this for a while. While Tide Pure Clean is new, and is doing very well, if you look at share of the segment, it's done remarkably well in a short period of time. Things like Tide Cold Water, if you look at the entire energy consumption stream involved in washing clothes, there's more consumed in terms of energy to heat water than there is in the process of manufacturing and distributing detergent. So we're going to continue to look at all vectors that enable us to improve our sustainability across the value chain from a sustainability standpoint to have products that consumers can choose that enable them to improve their impact on the environment while still delivering against the need or the job to be done. So I don't think anything is required from an acquisition standpoint, but I also don't want you to think that we're not very open-minded in our pursuit of this objective, because we are. As it relates to DTC, this is an area I think that's important that we frame, first of all. Direct-to-consumer sales in our product categories globally currently represent 0.3% of sales. And it's not a reason – I'm not saying that to indicate that it's not a potentially important tool for us, I believe it is. And we've been going direct-to-consumer. Think about SK-II, as an example, for a period of time. There are opportunities for us to increase our relevance from a selling and brand building standpoint in a direct-to-consumer context across several of our categories, and we're mobilizing against those. And again, I don't want this to be taken the wrong way, but I don't see a mass move, call it 20% or 30% of the market, to direct-to-consumer consumption. If you just think about the experience of that, how many people do you really know that want to satisfy their household products shopping needs in a month or two by going to 40 different websites with 40 different passwords and 40 different packages that arrive at 40 different times? Again, I'm not in any way denigrating the opportunity that tool presents us and we need to fully capitalize on that, which we're working to do, but I did want to provide just a little bit of context.

And, ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day. Jon R. Moeller - Procter & Gamble Co.: Thanks, everybody, and hope to see you here in November.