Filed by The Procter & Gamble Company
Pursuant to Rule 425 under the
Securities Act of 1933
Subject Company: The Gillette Company
Commission File No.: 001-00922
Registration No. 333-123309
PROCTER & GAMBLE
Moderator: Clayt Daley
April 28, 2005
7:30 a.m. CT
Operator: Good day everyone and welcome to the Procter and Gamble third quarter
earnings release conference call. Just a reminder, today's call is being
recorded. The rebroadcast, reproduction, or retransmission of this
conference call in whole or in part is strictly prohibited without the
prior written consent of the Procter and Gamble company.
And now for opening remarks and introductions, I'd like to turn the call
over to the Chief Financial Officer, Mr. Clayt Daley; please go ahead, sir.
Clayt Daley: Thank you. And good morning and welcome to Procter and Gamble's
quarter end conference call.
A.G. Lafley our CEO; and John Goodwin, our Treasurer join me this morning.
I'll begin the call with a summary of our third quarter results. John will
cover our results by operating segment, and I'll wrap up with an update on
the Gillette transaction, our expectations for the June quarter and a brief
outlook on next fiscal year. A.G. will join the call for the Q&A's, and as
always following the call John Goodwin, Thomas Tippl and I will be
available to provide additional perspective as needed.
Now on to the March quarter results. We delivered another strong quarter,
with organic sales growth of eight percent, driven by seven percent volume
growth on a comparable basis. Diluted net earnings per share were 63 cents,
up 15 percent versus year ago, and two cents ahead of the consensus. This
was our 13th consecutive quarter of top and bottom line growth at or above
our long-term objectives. And this performance comes on top of a very
strong base period where organic sales grew a record nine percent, and EPS
grew 14 percent.
Third quarter net sales were 14.3 billion, up 10 percent. Acquisitions and
divestitures reduced sales growth by one percent, due to the juice
divestiture last August, while foreign exchange added three percent.
Organic sales growth was up eight percent, comfortably above the top end of
our target range. Total shipment volume increased six percent, and organic
volume grew a strong seven percent. All business units delivered volume
growth of mid single digits or better with health care, baby and family
care, and beauty care setting the pace. Health care volume grew 14 percent.
Baby and family care was up eight percent. And beauty care grew seven
percent.
Developing market volume grew more than 15 percent. In our December analyst
meeting, we talked about winning with more of the world's consumers, as a
key part of our top line growth strategy. These results indicate that we
are making good progress against this major growth opportunity.
For the first time in four years, price had a positive impact on sales up
one percent. This is a result of price increases to recover higher
commodity costs. And we have announced additional commodity related price
increases in the US for diapers, dish care, Pepto-Bismol and Metamucil.
Market acceptance of our price increases has been generally favorable
particularly in developing markets, family care and coffee. But despite
escalating prices for petro-chemically derived materials competition has
not changed price, since our price increases in fabric care, both in the US
and Western Europe.
Also competition added escalating promotion spending in categories such as
dish care, and oral care globally, and diapers and Western Europe. We are
carefully monitoring our business progress in these categories over the
June quarter, and are permitted to provide consumers with a competitive
value proposition.
Next, earnings and margin performance. Operating income was up 17 percent
to 2.7 billion. Operating margin expanded a strong 110 basis points. The
improvement was driven primarily scale leverage from higher volume, and
tight cost control in areas of cost of goods and SG&A as well as pricings
to partially recover commodity cost increase. Gross margin was down
slightly, as we absorbed a significant negative commodity impact of more
than 100 basis points.
We expect that we are close to the peak of year-over-year gross margin
compression from commodities, since we will begin to (lap) higher commodity
prices in the base period. However, we believe commodity prices will remain
at high levels for the foreseeable future.
Selling, general and administrative expenses are down 120 basis points. We
are benefiting from scale leverage and overhead and marketing support,
particularly in developing markets, as a result of their continued rapid
growth. We are maintaining rigorous cost discipline across all businesses,
resulting in lower overhead spending as a percent of sales. And we are
making good progress with our marketing ROI work, to get more out of each
dollar spent. As a result, we continue to deliver very strong top line
growth with marketing spending as a percent of sales, at or below year ago
levels, behind a strong initiative program.
In the back half of the fiscal year, we have been launching in North
America alone, eight beauty care initiatives, including Pantene color
expressions, Herbal Essence styling products, Nice and Easy with color seal
technology, and (Boss Soul). Three fabric and home care upgrades, including
Tide cold water, and Dawn with bleach alternative, four pet health product
initiatives, including a new Eukanuba indoor cat formula. As a well as a
series of oral care initiatives, including Crest Pro Health Rinse, to new
Scope flavors and Crest sensitive toothpaste. Our initiative program
outside of the US is equally robust and supported by strong marketing
programs. This is driving volume and sales growth even in challenging
markets, such as Western Europe.
Now before we move to cash performance, I would like to make a few comments
on the impact of the share repurchase program, foreign exchange and tax. As
expected, the stepped up share repurchase was neutral to EPS in the March
quarter. This is due to the treasury stock accounting method, which has a
lag effect on the average quarterly shares out standing while the
additional interest expense is immediately reflected in the income
statement. For the same reasons, plus the fact that we won't purchase
shares between the time of the proxy and the shareholder vote, we continue
to expect less than one cent EPS improvement for the fiscal year as a
result of the stepped up share repurchase program.
With regard to foreign exchange, we are benefiting from unusually stable
developing market currencies. This year, P&G's basket of emerging market
currencies has been appreciating modestly versus the dollar. Therefore,
compared to the past two fiscal years, we estimate a slightly stronger
contribution to earnings from currency to the tune of about one percent
point. Now this is, of course, significantly below the currency benefits on
the top line because of our substantial natural hedge position, and our
corporate hedging programs.
Now let me turn to tax. The higher March tax rate of 31.9 percent is due to
a provision for taxes on anticipated dividends from foreign subsidiaries.
This was largely offset by a reduction of tax reserves, relate to favorable
tax settlements in a number of jurisdictions. These discreet tax items have
to be recorded in the quarter they occur. In line with prior guidance, the
company still expects the effective tax rate for the fiscal year to come in
about 30-and-a-half percent. This is slightly higher than the 30.3 percent
recorded for the first half of the fiscal year, due to more profit coming
from higher tax locations. Now I want to note that this does not reflect
the potential impact of repatriating incomes earned outside of the United
States under the American Jobs Creation Act, commonly referred to as
Homeland. We are still waiting for clarification and revision of
provisions, that need to be redrafted, to determine the amount of earnings
we may repatriate, if any under the act.
Now, on to cash. Operating cash flow in the quarter was more than 2.6
billion, about $330 million less than the same period last year. Working
capital performance was negatively impacted by higher inventories, up two
days versus a year ago. This is the result of higher commodity costs,
pipeline build for the strong initiative programs, as well as rebuilding
inventories on a number of categories, where we were previously on
allocation.
Free cash flow for the quarter was $2.2 billion. Capital spending for the
quarter was 3.3 percent of sales. And we are on track for another year of
cap spending at our below our long-term target of four percent. Free cash
flow productivity was 126 percent for the quarter. This brings the
year-to-date cash flow productivity to 91 percent. And we remain on track
to meet our 90 percent target for the fiscal year.
Now I'll turn it over to John for a discussion of the business unit results
by segment.
John Goodwin: Thanks, Clayt. Our beauty care business delivered very strong in
the quarter. Volume increased seven percent led by skin care, fine
fragrances and feminine care. Sales were $4.9 billion, up nine percent,
including a three percent gain from foreign exchange. Net earnings were
$701 million, an increase of 23 percent, driven mainly by strong top line
growth. Earnings were also helped by synergy savings from the weather
acquisition integration which remain on track with the initial targets. In
addition, the increased ownership of the China business, and the weather
domination agreement added to earnings growth. These benefits funded
increased marketing support for new initiatives, such as Olay Quench hand
and body lotions; Olay moisture rinse, in shower body moisturizer; Pantene
pro health and color expressions initiatives; geographical expansion of
Herbal Essences into Japan; and hair and skin care portfolio expansion in
Asia including rejoice, SK2, and Olay white radiance eye cream.
Global skin car delivered its sixth consecutive quarter of greater than 20
percent volume growth. The growth this quarter was broad based, with
developed markets up mid teens, and developing markets up more than 30
percent. In North America, Olay skin care volume was up mid teens behind
the launch of the Quench and (Regenerist) night initiatives. Olay past
three month all outlet value share of US facial moisturizers was 39
percent, up five points versus the prior year.
Global retail hair care volume grew mid single digits. The Pantene brand
grew volume double digits in both developed and developing markets, and the
rejoice brand grew strong double digits driven by new initiatives in
developing Asian markets.
Hair care value share in Western Europe was up nearly two points to 22
percent. In North America, hair care value share was 32 percent, down just
over a point. A steady growth of the market leading Pantene brand was more
than offset by soft Herbal Essences results, and minor brand
discontinuations.
The global feminine care business delivered another quarter of strong
volume growth led by developing markets, with volume up more than 20
percent. Volume of the (Naturella) brand more than doubled versus the same
quarter last year, behind expansion into Central and Eastern Europe and
continued growth in Latin America. The Always Whisper pad franchise grew
double digits behind the new cotton light top sheet upgrade in developed
markets, and mid tier entries in developing regions. Always is now at
record high value share for the feminine pad segments in both the US and UK
with shares of 49 percent and 66 percent respectively.
Health care also delivered very strong results. Volume grew 14 percent in
sales with $2 billion, and increase of 16 percent. Actonel, Prilosec OTC,
Vicks, and the developing markets oral care businesses led the top line
growth. Foreign exchange helped sales by two percent. Net earnings were
$252 million, up 22 percent, driven mainly by the strong top line results.
Also, this is versus a strong grace period, where earnings grew 48 percent.
In personal healthcare, Prilosec OTC volume for the quarter was more than
double the amount shipped in the same quarter last year, partially due to
the rebuilding trade stock. Prilosec OTC US all outlet value share of the
heart burn segment is 32 percent, up two points versus last year.
The Vicks business had a very strong quarter, with double digit global
volume growth due to the later cold and flu season compared to last year.
Global oral volume was up high single digits. Developing markets delivered
another quarter of very strong volume growth which more than offset slight
volume declines in developed markets. The soft developed results were
mainly due to contraction of the US tooth whitening market versus the prior
year. However, volume growth of tooth whitening on a sequential basis, up
high teens versus the December quarter
In the toothpaste segment, P&G's US past three month all outlet share is 33
percent, inline with the same period last year. This is despite increased
levels of competitive spending. In China, Crest past three month value
share is now over 26 percent, up seven points versus the prior year.
Pharmaceuticals posted double digit volume growth led by Actonel. Actonel
continues to deliver broad based share growth and is now over 33 percent
global value share, of (biphosonates) for the treatment of osteoporosis.
Actonel has now grown global share for 34 consecutive months.
Baby and family care had another good quarter of volume, sales and earnings
growth. Volume grew eight percent, led by higher single digit growth in
baby care, and mid single digit growth in family care. Sales increased 13
percent to $3 billion, including a three percent help from foreign
exchange. Pricing helped sales growth by one percent, driven mainly by
increases taken last summer, in North American family care, to partially
recover higher pulp and energy costs. This has been partially offset by
pricing adjustments in select Western European baby care markets, to
respond to heavy competitive promotional spending.
Net earnings for the quarter were $339 million, an increase of 56 percent.
The very strong earnings growth was driven by fixed cost leverage from
volume growth and manufacturing cost savings. Price increases on the family
care business, largely offset the negative impact of higher commodity
prices. In family care, US all outlet share for Bounty is 41 percent, up
nearly a point versus last year. Bounty continues to get excellence
customer support behind the new pack format introduced last year. Charmin
US all outlet share is up 27 percent, up versus a point in the prior year.
Charmin has benefited from a new pack line up and a new mega roll pack to
address consumer's desire for longer tissue roll life.
Baby care delivered broad based volume growth with developed markets up
high single digits, and developing markets, up in the teens. US Pampers
diaper past three month all outlet value share was over 28 percent, up more
than two points versus year ago behind the continued growth of the baby
stages line, specifically the new feel and learn training pant. In
addition, we recently launched can do toddler care wipes, and hand soap in
North America, building on their success in Western Europe. Western Europe
Pampers diaper share is now over 54 percent, up two points versus year ago.
This growth is being driven by ongoing product innovations on both the baby
drive, and the premium baby stages of development line.
Fabric and home care delivered solid top line growth, with volume up five
percent, and sales were $3.8 billion, up seven percent. Foreign exchange
helped sales growth by three percent. Mix lowered sales by one percent due
to rapid growth in the laundry detergents business and developing markets.
Net earnings for the quarter were $508 million an increase - a decrease,
sorry, of six percent versus last year, due mainly to higher commodity
costs. Also, negatively impacting earnings was a one time charge related to
supply chain sourcing optimization.
During the quarter, P&G continued the launch of high end initiatives in the
US with the introduction of Tide cold water. Similar to the recently
introduced Tide with a touch of Downey, this initiative gives the consumer
great total wash value from a premium priced product.
Also during this quarter, P&G increased list prices on the US Era and Gain
brands, by eight percent to partially offset increases in commodity costs.
This was coupled with a temporary increase in promotion funds for these
brands to allow retailers to phase in the higher prices during the quarter.
And to keep our brands competitive with those that have not taken similar
price increases.
Global fabric care volume was up mid single digits, lead by China. P&G
laundry value share in China is now 19 percent, up five points versus last
year. In Western Europe, laundry share is now 32 percent, up a point versus
year ago. And in North America, P&G laundry value share is over 58 percent,
up slightly versus the prior year.
Our home care shipments were inline with a very strong prior year base
period, when volume was up more than 20 percent behind initiative
introductions. Market share positions in home care remain strong. P&G past
three month all outlet value share for Swiffer cleaning systems is 78
percent, up five points versus last year. P&G US hand dish washing liquid
value share is 54 percent, about flat versus last year. And the market
leading dorm brand is up 41 percent share, up more than a point. Cascade
continues to build its leadership share in the US auto dish washing
segment, with value share of 58 percent, up six points since last year. And
Febreeze holds a 77 percent value share of fabric sprays, and has quickly
earned a 12 percent share of the instant air freshener market, behind the
successful launch of Febreeze air effects.
P&G remains focused on growing brands over the long term with meaningful
innovation. But we will also keep brands priced competitively to ensure we
deliver superior consumer value.
Snacks and coffee volume increased six percent for the quarter, led by
double digit volume growth of the coffee business. Sales of $767 million,
up 16 percent. Foreign exchange helped sales by one percent, and pricing
increases to align retail prices with green coffee costs increased sales
growth by nine percent. Net earnings were $105 million, up 91 percent
versus a low based period. Fixed cost leverage from higher volume growth,
the price increases to offset higher green coffee costs, and lower
merchandising spending helped to restore margins to levels existing prior
to the significant increase in raw material prices.
Despite the risk of being the first (mover) to increase prices, Folgers
grew past three month US all outlet value share, versus the prior year, and
is now at 33 percent of the market. Pringles past three month all outlet
value share was over 14 percent, up slightly versus last year. And we
continue to get greater customer and consumer response to our unique
printing and flavor customization initiatives.
That concludes the business unit review. Now I'll turn the call back to
Clayt.
Clayt Daley: Thanks, John. Before closing with guidance, I want to provide a
brief update on the progress of the Gillette acquisition. We have now
formed integration teams for the regions, functions and product lines, led
by (Jim Kilts) and me. Work has started to map out the specific steps that
capture the committed synergies. The plans are being designed to
effectively and efficiently bring together these two great companies. And
while it's early, we're on track so far.
On the people side, we're putting in place processes, to identify the
players we want to field as part of the best team. We've also made several
key decisions about how the combined company will be managed. We will
operate within the P&G, GBU, MDO structure that has proven successful over
the last four years, and is frankly fairly similar to Gillette's current
operating structure.
We will create a new segment for Gillette consisting of blades and razors,
(Braun) and Duracell businesses, including the marketing, R&D,
manufacturing and engineering functions supporting these operations. The
Gillette segment will report to (Jim Kilts); blades and razors will
continue to be based in Boston; Braun in (Kroenberg), Germany; and Duracell
in Bethel, Connecticut for the foreseeable future.
Gillette's all care and personal care businesses will be combined with
P&G's oral care, and deodorant and Old Spice businesses, with locations
still to be determined. The combined oral care business will report to
Kerry Clark while the combined personal care business will report to Susan
Arnold.
Our on the ground operations will go to market as one company everywhere
around the world. This means that P&G's MBO and Gillette's commercial
operations will merge into a single organization.
The combined company will operate under P&G's shared services model. Also,
Gillette will adopt P&G's reporting framework moving to a fiscal year that
ends on June 30.
Now let me update you on the closing timing for the transaction. We expect
to mail the proxy in the first half of May. The P&G shareholder vote is
currently scheduled for June 13th. The Gillette shareholder vote is
currently scheduled to take place on June 14th. These dates are based on
the expectation that the SEC will declare the refilled S-4 effective in
early May.
Next to guidance for the June quarter. Top line for the quarter, as well as
the fiscal year should continue to expand at a high single digit's rate.
For the June quarter, foreign exchange is expected to contribute about two
to three percent to sales growth, the negative impact from developing
market mix and the juice divestiture should be offset by positive pricing.
Operating margins is expected to be about flat versus the June quarter a
year ago.
In light of higher commodity prices, and uncertainty about competitors
following our price increases in developed markets, we believe it is
prudent to make sure we have the financial flexibility to address whatever
issues confront us in the marketplace. We remain committed to taking
appropriate steps to maintain competitive value where and when necessary.
And we will continue to support our strong initiative program to keep the
top line growing.
As mentioned earlier in the discussion about tax, we expect the rate for
the year to come in at about 30-and-a-half percent. We will update tax
guidance, once we have more clarity about the potential opportunities
created by the American Jobs Creation Act.
With regard to earnings per share, we continue and expect a range of 54 to
55 cents per share for the June quarter. And with the March quarter over
delivery, we are raising the fiscal year earnings guidance to a range of
2.64 to 2.65 per share.
In summary, we are pleased with our ability to deliver a second consecutive
year of 14 percent earnings per share growth, especially since this year
has been characterized by a very challenging cost and competitive
environment.
Now turning to the next fiscal year, our financial planning process is not
yet complete, but I want to provide some preliminary perspective. To be
clear, this is excludes the impact of the Gillette acquisition which we
outlined at the time of the deal announcement. We will incorporate Gillette
in our guidance, once the closing date has been established.
For fiscal 2006, we expect P&G to deliver another year of sales growth, XFS
towards the upper end of our four to six percent long term target range.
This is despite a very strong base period comparison where organic sales
had been growing at a rate of about seven percent.
Based on our early estimates, we expect fiscal 2006 to be our fifth
consecutive year of double digit EPS growth. This is consistent with the
current analyst consensus estimate of about 10 percent growth which we
believe is appropriately conservative at the current time.
We continue to expect margin pressure from raw materials, particularly in
fabric and home care. This is a result of the tight supply situation and a
number of feed stock chemicals. We also are not counting on competitors to
reduce promotion spending from the current high levels.
Finally we are going to (lap) a very strong base period in a number of
businesses including beauty care, baby and family care, as well as
developing markets.
Now with the guidance just mentioned, as I said, it was all on a P&G
standalone basis without Gillette. As we laid out in New York, post
Gillette, we will raise our sales growth FX target by one point to five to
seven percent through the end of the decade. We have confidence in our
ability to achieve this objective on the basis of our strong track record
over the past four years, and we'll bust initiative pipeline, Gillette's
exposure to faster growth categories, and an equally robust pipeline on
their side.
Gross synergies generated by the deal in three key areas, in developing
markets, in categories such as personal care, oral care, and hair removal
and from approved go to market capabilities and developed markets.
Again, this is just a quick overview. We are still completing our planning
for next year, and we'll provide full guidance, on fiscal 2006 during the
June quarter earnings call.
Now that concludes the business comments for the quarter. As you know, the
discussions include a number of forward-looking statements. If you will
refer to our 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. And as required by regulation G, we need to make
you aware that the call has referred to a number of non GAAP measures.
Management believes these measures provide our investors valuable
information on the underlying growth trends of the business. Organic refers
to reported results excluding the impacts of foreign exchange and
acquisitions and divestitures where applicable. Free cash flow refers to
operating cash flow less capital expenditures. And we have posted on our
Web site www.pg.com a full reconciliation of non GAAP measures to US GAAP
to provide additional clarification.
And now A.G., John and I would be happy to open up the call to your
questions.
Operator: Thank you, Mr. Daley, the question-and-answer session will be
conducted electronically today. If you'd like to ask a question, please
signal us by pressing star one on your telephone keypad. In fairness to all
participants and in the interest of time, please limit yourself to one
question. And again, press star one to enter the queue.
We'll take our first question today from Amy Chasen with Goldman Sachs.
Amy Chasen: Good morning. Can you just talk a little bit in more detail about
the pricing? Obviously, you know, it shifted positive. Is there any place
where you've taken pricing where it's not kicking in? What other
opportunities are you thinking about? Just so you know Energizer just
announced a price increase in the US, so, you know, is there opportunity in
batteries? And so if you could just talk about that. And I guess what I'm
really getting at here is you mentioned that on the mid tier laundry
detergents, that, you know, you're offsetting some of the pricing with
promotional activity in the short term, are there other categories where
you're doing that as well?
Clayt Daley: Well, first, we obviously can't comment on batteries. So that's a
question that would have to be, at this point, directed to Gillette. A.G.,
do you want to...
A.G. Lafley: Yes, I think Amy, the simple way to think about our pricing
strategies, our tactics, and our execution is where we're trying to achieve
the right balance. And we're trying to be responsible and price for
commodity increases that are going to sustain. And I think we've talked
about this at two previous earnings calls. We want to make sure that when
we see commodities rise, that we understand, you know, where they're going
to be, and how long they're going to be there. And then take appropriate
pricing action.
The only place I can think of where, you know, I would say the pricing
hasn't stuck as well as we would like is in a little bit in Western Europe
laundry, and a little bit in the US. And I still think it's early in the US
though and it remains, you know, to be seen how that's going to work out.
But in all of the other instances I can think of, the pricing, you know,
our retail partners have moved on the pricing. Consumers have understood it
and have responded. And as John mentioned in the call, in most of the
instances, you know, the share progress we were making, we continue to make
post the price increases.
Amy Chasen: Can you just tell us, it was up once percent this quarter, what's
your expectation for next year?
A.G. Lafley: It's too early because we really need to go through all of the
business sector...
Clayt Daley: Yes, it's one of those things where we'll be - next year, we'll be
comparing prices increases we took this year, which will have a partial
year impact to next year. And obviously depending on what happens in
commodities, we're going to have to determine whether any additional
pricing is appropriate, but it probably won't be more than one percent.
Amy Chasen: OK. Could you also just talk a little bit more about Western
Europe, and give us some idea of what your volume growth in the quarter was
in that market? And you also alluded to some promotional activity in
diapers, or maybe it was a list price reduction. Can you give us a little
more detail on what you did there?
A.G. Lafley: OK. Let me take Europe first, we've been growing, you know, mid
singles in Western Europe. And our volume has been growing a big ahead of
our sales. There is some deflationary pricing in some markets in some
categories. As this won't surprise you, Amy, what we watch like a hawk is
our market share progression. And, you know, we fairly consistently been
growing market share on 80 plus percent of our volume in Western Europe. We
also watched the, you know, what I would call the critical markets.
And we - you and I have talked about Germany in the past before. And in
Germany, you know, right now, over the past 12 months, you know, we are
growing our market share in all of our core businesses. We're growing in
laundry. We're growing in baby diapers. We're growing in hair care, shampoo
specifically. And we're growing in fem care. And we're not only growing
faster than the branded competition, but we're growing. And in all cases,
for instance, all of the (open same) period is actually giving up share.
So, you know, if you step back from your questions about pricing, and your
questions about Western Europe, but we're always trying to do is make sure
we have the consumer value equation, right. Make sure that we're
appropriately investing in our innovation so we get trial among consumers,
and watch our market share progressions.
You know, Europe's - I mean you know and I know, several European economies
are slowing down. But our point of view is that's sort of outside our
control. What's inside our control is what we can do in our businesses with
our innovation, our branding, our cost structure and our pricing and we try
to get that right to the consumer and her value.
Amy Chasen: And just lastly, on the Western European diapers, the promotional
activity, or the list price reduction can you talk about that?
A.G. Lafley: On Western Europe diapers, yes, I mean the promotional activity by
our principal competitor is, you know, up dramatically in the past few
months. But despite that, I think, as John mentioned in the call, you know,
our market share in Europe is up a couple of points across the board. And
in the UK where the activity has been really intense, you know, we're above
a 60 share and growing.
So, you know, in the end, we're bringing a better brand, and we're bringing
a better line of products that are delivering value to young moms, and
that's really what's making the difference.
Amy Chasen: So did you take a price cut there? Are you just increasing your
promotional activity?
A.G. Lafley: We're just - I'll tell you what we're doing, market by market, baby
diaper line by baby diaper line, we're looking at where we have to keep the
pricing relative to the competition to continue to offer a good value. So
what we're doing is we're dialing our promotional activity very
specifically on the part of the line where we want to keep the right, and
the country where we want to keep the value right.
Clayt Daley: It's been primarily through promotion spending, not list.
Amy Chasen: OK. Great, thank you.
A.G. Lafley: OK.
Operator: We'll take our next question from Ann Gillin with Lehman Brothers.
Ann Gillin: Thanks. I just wondered if we could switch gears to developing
markets. And I'm wondering if you've yet assessed how soon after the
Gillette merger, you might begin to see a positive benefit to operating
margins from growth in emerging markets?
Clayt Daley: Well there's clearly an opportunity there. And we believe one of
the synergies of the Gillette acquisition that can be captured on the early
end is in developing markets where in countries like China we have an
excellent distribution system. And we're going to be able to give Gillette
products a lot more reach, a lot more distribution, in front of a lot more
consumers than they have been able to.
And on the flip side, Gillette brings meaningful scale to P&G in some
countries like the (Southern Comb), India, Korea, Australia, New Zealand
where they substantially add to our business. Well there's a top line
opportunity here. And I believe that, you know, because the Gillette
products have such good gross margins and contribution margins, there's no
question that there should be some operating margin leverage behind that
top line. And those regions are - you know, as I mentioned on the call,
we've already formed integration teams in every region combining Gillette
people with P&G people who are obviously looking at the organization design
and how to capture the cost synergies, but are also looking at where we can
get top line growth. Of course, from an anti trust standpoint, we've had to
be careful in some categories about what we talk about, but obviously, as
you know, in places like blades and razors and batteries there's little
anti trust sensitivity.
A.G. Lafley: Ann, this is A.G. Just real quickly, I think the simple way to
think about it is, and this shouldn't surprise you, we're going to drive
top line first. We're going to drive distribution, consumer trial, and
we're going to drive our sales. We're going to get scale, as Clayt
mentioned. And we're also going to get mix help because of their margins as
Clayt mentioned. So I think it's a pretty virtuous circle.
Ann Gillin: So pretty quickly is...
A.G. Lafley: That's my hope.
Ann Gillin: OK. And then, secondly, I just wondered if you could elaborate on
what the allocation of various products, and what they were beyond Prilosec
cost to revenue growth?
A.G. Lafley: Ann, this is A.G. I really don't want to detail it for obvious
competitive reasons, OK. But I will say this, in addition to the cost
challenges, in addition to the competitive intensity, we had such a strong
line up of innovation this year, that frankly, some of the take off on some
of the items was, you know, beyond what all of our pre market, and frankly
what our retail partners, and P&G expected it would be. So it was
consequential. But we were able to manage it. And Prilosec is getting a lot
better. And we're pretty much shipping all of the turn over product that
our retailers need. And we're as quickly as possible rebuilding - building
inventory so we can manage relaunches which many of retailers want to do.
And virtually everything else is off allocation. Feel and learn diapers is
off. We may have one or two items that...
John Goodwin: A couple on beauty care are new initiatives. ((inaudible)) in the
launch period in...
A.G. Lafley: But I mean you're right. It was very tough in the summer, the fall,
and well into this first quarter, because we had a number of things that
were rocketing.
And I guess the last thing I would say is as soon as we have the supply,
we're going to go back and reinvest because we're not where near the trial
potential on a lot of these items. So we're going to stick with it until we
go build trial among the targets.
Ann Gillin: So another way to look at this might be that you got some benefit
on the price line this year from having less to ship out?
A.G. Lafley: No. I think - I wouldn't - I don't think that was a major factor on
the price line. I think the price line and the major factor was really we
priced, you know, where we had to. And, you know, where it was most urgent
first, you know, coffee, tissue towel, fabric care. And I think that's
really what's driving the one point in pricing. It wasn't product supply
issue.
Ann Gillin: And then, on mix, though, we might have taken a little bit.
A.G. Lafley: I think our mix could have been - would have been even better.
Ann Gillin: Right.
A.G. Lafley: If we had shipped everything. So what I'm looking at, frankly, I'm
optimistic about it because as painful as it was, and as carefully as we
worked with all of our retailers, you know, in the vast majority of cases,
you know, we're going to be relaunching these items.
Ann Gillin: Great, thanks very much.
A.G. Lafley: OK.
Operator: We'll take our next question today from Wendy Nicholson from Smith
Barney.
Wendy Nicholson: Hi. Could you say one more comment on the Western European
issue? I know everybody is focused on that. And I guess the concern is that
even though the economies may be under pressure now, perhaps the role of
the deep discounters is more of a secular change, or structural change, and
it's here to stay. So my question is if that's the case, where do you stand
in terms of your cost structure in Western Europe. Do you think there is
still ample opportunity for you to whittle down your costs, so that can
still be, you know, a strong and profitable market for you?
A.G. Lafley: For sure. Wendy, here's the way that we think about Western Europe,
it is the largest consumer market in the world that we compete in. I mean
it's an even larger consumer market than the US, OK, if you add up all of
our categories. We're still - despite our high development in some of our
core businesses, we're still not as developed as we can be in others. And
we're still not in all the businesses that we'd like to be in in Western
Europe. So we sort of take the long term view of Western Europe, which is
it's an attractive market. It's not growing at the rate of the US, but it
is still growing. And, you know, we understand the consumer pretty well
there. And there are a lot of unmet needs and wants.
The second point is, I think, you're right about the discounter phenomenon.
It's a different type of discounter phenomenon, but it isn't new. It's been
around since the 70s. I think it's, you know, we could probably get a good
discussion going about whether it's peaked or not. You know, I don't even
want to get into that. But I think the - I think it will be there. I think
it will be secular. It will be something that we deal with. And that's why
we focus so hard on making sure we're offering the right consume value
equation, on every one of our brands, and everyone of our product lines,
not just versus the branded competition, but also versus the major, you
know, the major discounters, (All Leads) and (Leedles) of the world.
And then, finally, in the end it's all about innovation, are we innovating
and delivering product performance quality and value that is a value to
consumers? Because they vote on whether it's a better value for them. And
the fact that our share has been growing on 80 plus percent of our
businesses is reasonably heartening. We know we're not going to grow at the
same rate that we can grow in other regions because the economies aren't
there. But we're hopeful that the economies, you know, will improve in a
year or two. But it's too big a market. It's too important for us. You
know, we're going to stay on our strategy which is deliver better consumer
value, improve the equity of our brands, lead on innovation.
On the cost side, because you did start out there we've improved our cost
structure over the last three or four years. There's still a lot of
opportunity to improve it more. And (Laurel Felipe) and his team are all
over it.
Wendy Nicholson: And it's fair to assume, I imagine, given the size of
Gillette's business over there, that that would be one area that would
offer potential huge opportunities for incremental cost cutting?
A.G. Lafley: When we get into it, I think there will be a fair amount of scale
leverage in the - as we combine the commercial operations and the go to
market operations. I think you're right.
Wendy Nicholson: OK. And then, my second question has to do with your plans for
the share buyback. I know when you announced the Gillette acquisition you
said that the share buyback would be a big thing over the next couple of
quarters. But I believe there's a prohibition from you buying back stock
for a big chunk of the second quarter because of the timing of the mailing
of the proxy? Does that mean you're just going to be buying back a lot of
stock during the part of the quarter that you're allowed to? Or should we
see less of a contribution in the quarter?
Clayt Daley: Well what we said, yes, there will be about a five week period,
roughly where we have to be out of the market. And as I say, we've been
buying stock since the announcement of the Gillette acquisition. We bought
about 30 million shares after that announcement in the quarter. We're going
to continue to buy until the S-4 is issued, the proxy is issued. And then,
after the shareholder vote, we'll actually be able to buy more, OK.
So but still net net net we're talking about, you know, less than a penny
contribution to EPS in the quarter. We're really going to start to see the
real impact on earnings next fiscal year, although, of course, we hope to
get the Gillette deal closed as soon as practical, and that will therefore,
obviously with all of the news shares that are being issued, have a huge
impact in the other direction.
Wendy Nicholson: Terrific thanks.
Operator: We'll take our next question from Bill Pecoriello with Morgan Stanley.
Bill Pecoriello: Good morning, everyone. My question is there's always a trade
off on the margin versus top line. In this quarter, you delivered upside on
both. Can you talk about the leverage on the SG&A line, how much you
increased market spending by in the quarter? You had mentioned in the
prepared comments about getting more bang for the buck on the marketing
dollars spent.
Also, was there anything in that SG&A line in terms of a (lapping), any
restructuring costs, and the base period? And going forward, how should we
think about getting leverage out of that line?
A.G. Lafley: Bill, this is A.G. There is leverage on the SG&A line. There is
leverage on the SR&A, the overhead side, which, you know, Clayt, and I have
talked about a number of times. But there's still scale leverage there. We
continue to get leverage in - we continue to get leverage in our GBS
operation, which is, you know, beating our cost objectives, improving the
service quality, and still allowing us to innovate where we need to. In IT
there's - we're still getting leverage in the MDO organization. And as
Wendy asked, you know, with Gillette, I think there's more leverage there
when we combine commercial options in MDO. And we're still getting leverage
in R&D. And we're getting leverage in R&D because we're doing more connect
and develop. We continue to do more connect and develop on the outside. So
our research dollars are more productive.
On the marketing side, specifically, the simple way to think about it is
our dollar spending was up in support of the innovations and the
initiatives. But because of marketing mid modeling and marketing ROI, we're
getting more efficient and more productivity with every dollar that we
spend. And I think there's still a lot of opportunity there. Every brand in
every country that has done market mix modeling or marketing ROI has
improved the productivity of their marketing spending without exception.
So, you know, this is just - we're just - we're training it like crazy.
We're finding appropriate, what we call light versions to get into the
developing markets, where they don't have all of the resources, and can't
afford, you know, all of, you know, all of the modeling that's required.
But I think we're going to benefit from this for at least another two or
three years.
Bill Pecoriello: Great, so the drivers that we saw in this quarter for some time
to come are going to continue to be drivers.
A.G. Lafley: I think so.
Clayt Daley: Although, Bill, I have to say the margin expansion in this quarter,
as you saw was unusually high, all right. And so, you know, while the
leverage points are still there, I wouldn't suggest that we can build this
kind of - we're obviously not guiding to this margin improvement in the
fourth quarter and fiscal. And this level of margin improvement is well
above our long-term goals.
Bill Pecoriello: OK. There was nothing unusual, though, in the quarter, in terms
of the (lapping) of restructuring this quarter versus last quarter - last
year?
Clayt Daley: Not really.
Bill Pecoriello: And then, just on the pricing, as you talk about the balance in
the portfolio, and you mention beyond the West Europe diaper some other
categories like oral care, dish care, where there's been more promotional
competitive environment. As you're looking at the criteria like your market
share trends, promotional price gaps, if you decide you need to reduce
those promotional price gaps, are you looking elsewhere in the portfolio,
in terms of additional pricing you can take in other categories or
geographies to offset anything you need to do, and the ones that you had
mentioned.
A.G. Lafley: Well we always try to balance. First, we try to balance within the
category or GBU worldwide. So across categories, and regions. The second
thing we look at is we look at across the portfolio. The other balance,
Bill, is, you know, we're still driving cost reduction programs in all of
these businesses. In other words, they all have cost improvement programs.
So we try to offset as much of the commodity cost pressure as we can, you
know, on the cost side, because we're trying to keep the consumer value
right. And we don't want to get in a situation where you have big swings in
promotion levels, you know, the depth of promotion. We actually - because
we think that leads to - you know, that can begin to impact consumer
loyalty. So when we see deep discounts. You know, that's really not a good
thing for consumers, because consumers begin to wonder, gee what is the
price of dish liquid, OK.
And the other thing we try to do is we think it's bad for your percent
promoted to get too high. So, you know, we're frankly surprised at the
level of percent promoted that some of our key competitors have gone to in
the past, you know, in the past period. We would steer away from that.
Clayt Daley: But in response to your question, we would generally not price one
place to spend another. We would look at pricing against cost increases on
a category and geography basis.
Bill Pecoriello: And there's noting yet alarming to you, in terms of your market
share trends, versus the promotion - the depth of promotion you're seeing
in some of these categories, requiring any adjustment at this point,
something you're still monitoring?
A.G. Lafley: Yes, we're monitoring it every day and every week.
Clayt Daley: It's one of the reasons why we stayed conservative on guidance in
the fourth quarter, because we've got to make sure that we've got the
flexibility to be competitive on a value basis in the market place.
John Goodwin: Yes, as I mentioned in my section Bill, our shares are holding up
pretty well. So as A.G. mentioned we're going to monitor them closely in
the face of continued competitive spending. But there's - you know, there's
been some other areas, some other companies that have donated shares to
some of the competitors that have been doing high promotional spending. But
we're going to very closely monitor our situation.
A.G. Lafley: I guess in general it's more of an issue in the daily, weekly,
household businesses. It is not - it's not a major issue in health,
personal care or beauty care. And that's one of the virtues of the balance
of our portfolio. You know, they just don't come under a lot of pricing and
promotion pressure.
We think, frankly, it's been pretty rationale in the family care business,
that's tissue and towel. And the places that I watch the most closely are,
you know, the basic fabric and dish care types of businesses.
Clayt Daley: Oral.
A.G. Lafley: Yes, and oral care.
Clayt Daley: OK.
Bill Pecoriello: Thank you very much.
A.G. Lafley: Yes.
Operator: Next up is Bill Schmitz with Deutsche Bank.
Bill Schmitz: Good morning.
Clayt Daley: Hi, Bill.
John Goodwin: Good morning.
Bill Schmitz: Has the allocation stuff gone too far? I mean have you gotten too
disciplined in terms of your capital spending ahead of big new products?
Because I know you didn't disclose some of the products that have been in
allocation, but some of the things we've seen in the marketplace suggest
that pretty much every big launch you've had recently has been an
allocation out of the blocks. If you look at Febreeze, the Olay Quench, you
know, even going back to (Pearl). So there kind of a change in the mind set
that is (pausing out of) P&G right now?
A.G. Lafley: Well first, you know, to be clear, the vast majority - the majority
of our innovations and initiatives go out and are not on allocation, OK.
You did hit a few that we did have to go on allocation. And in every case
our best pre market research didn't come close to predicting what the take
off would be with consumers.
We went through this with a fine tooth combed. And there are different root
causes in different businesses. I mean the fact that it sprung up across a
number of businesses. And the fact that it sprung up on low capital
intensity initiatives, and mid to high capital intensity initiatives, you
know, let us to conclude that the capital issue was not - you know, was not
a root cause issue. I mean I'll give you just three or four. One was the
length of supply chains. You know, the more your supply chains stretch
around the world, and in to developing markets and the more parties that
are involved in your supply chains, you know, the more you really have to
manage the responsiveness and flexibility of the supply chain. Frankly, in
some cases, we got caught with raw material or packing material shortages,
OK, and that was part of the economy availability issues.
In some cases, frankly, we didn't listen to major retailers who said, you
know, we can do a whole lot better. We didn't listen as carefully. OK, so
when they said we're going to go vertical on this thing, and it's going to
blow away the numbers that you're seeing in your pre market, we moved it up
some, but we didn't move it up all of the way, and frankly, they blew it
out of the water. So those there kinds of things that got us.
You know, hopefully, we've learned from it. And as I said before, we're
going to relaunch because there's still a lot of demand for these new
products. And there's still a lot of, you know, unmet trial opportunity.
And we're back in supply on virtually everything with sufficient supply to
relaunch. So I - you know we learned a lot. We worked our way through it.
You know, we're looking at this as an engine of growth going forward.
Bill Schmitz: Right. Thanks very much.
A.G. Lafley: Thank you.
Operator: Next, we'll turn to AG Edwards, Jason Gere.
Jason Gere: Good morning.
Clayt Daley: Jason.
Jason Gere: A question for you on the laundry business, I know that the
commodity costs certainly are a big pressure right now. But you also
mentioned there was a one time issue with the supply chain optimization.
How much of that contribute to the 300 basis point decline margins in the
quarter?
Clayt Daley: It's a couple of percentage points of it.
Jason Gere: OK. I mean when do you expect to see margins start to return? I
know, obviously, that Western Europe is a bit of a - little bit of an
overhang right now for everybody. But I mean when would you expect to see
the margins start, you know, return to kind of some of the levels that they
were at before?
A.G. Lafley: Jason, this is A.G. We're trying to run a delicate balance in
laundry right now. And, you know, you have to remember the way P&G runs the
laundry business, it looks a lot more structurally like a personal care of
BD care business. So we have pretty strong - we have a pretty strong margin
position going in. And we've got three things going on. One is we have, you
know, the majority of the commodity cost hit has come in fabric and home
care. And as we mentioned earlier, even though we have moved on pricing,
you know, in some cases the market hasn't moved.
The second thing we have going on is we have a lot of innovation that we're
bringing to market right now, and we don't want to be penny wise, and pound
foolish. You know, we don't want to be too short term oriented, and not do
what's right for the mid and long term. So we've made the conscious
decision that despite the commodity cost pressures we are going to invest
in the launches. And we still have a lot of investment to do. And, you
know, Tide with a touch of Downey, Tide cold waters.
We have additional innovation coming out this next year. We have, you know,
the Gain fabric softener. We have the simple pleasures. I mean we just have
a lot of innovation in the laundry business right now. And it wouldn't be
the right thing to not invest in it.
And then, the third thing is this market is shifting. And some of our
competitors are exiting, or virtually exiting from the market. And as a
result the primary competition is no longer the branded manufacturers, it's
the value brand or its the retailer brand. And as that happens, we're
adjusting our portfolios. And we've talked about this a number of times in
previous calls. And that means we're making sure we have a strong line up
of mid tier brands. And we're making sure that our price differences, you
know, our price premiums are the right premiums to continue to offer
consumer value. So those are the three things we're trying to dial in. OK,
we're trying to dial in the recovering the commodity cost pressures. We're
trying to dial in the right amount of investment in our innovation. And
we're trying to dial in the right price spread, and the right mix of brands
and product offerings so we can compete effectively and continue to grow
share profitably in a new marketing environment.
Jason Gere: Is there any update on the Alexandria plant?
A.G. Lafley: We're up and running.
Jason Gere: OK.
A.G. Lafley: Up and running.
Jason Gere: OK, great. And then just one other question...
A.G. Lafley: (A monster) ...
Jason Gere: What's that?
A.G. Lafley: A monster in the bayou.
Jason Gere: And I was wondering if you could just give a little bit of update on
Wella, how the integration is going? If there's any change from, you know,
your past comments there. And also, just I guess some of the learnings and
beauty care. And maybe touch upon the Herbal Essence weakness.
Clayt Daley: Well I think let me talk briefly about Wella. Wella's integration
is actually going very well. And in fact, Wella contributed meaningfully to
the beauty care results in the quarter.
The integration - you know, once we got the domination agreement in place,
that pretty much gave us the green light to do the integration work that we
needed to, and I think the momentum on the Wella business is reasonably
good.
Jason Gere: OK. And then just on Herbal Essences.
A.G. Lafley: Herbal Essences is the tail of two cities. As John mentioned, we're
still expanding and growing internationally. And we're redoing the equity
in the US. And even in the US, you know, with all of its struggle, it's
still a four-and-a-half or five share business. It's still like the third
or fourth biggest brand depending on the region, and depending on the
customer. So we're going to give it, you know, a good face lift. We'll get
the equity right. We're going to make sure we're targeting the right
consumers how are the prime prospects for Herbal Essence. And we're going
to bring in innovation to the brand, and try to get it growing
domestically, while it's growing fast internationally. It's a great brand.
Jason Gere: OK. Terrific. Thanks a lot.
A.G. Lafley: Yes.
Operator: We'll take our next question from Connie Maneaty with Prudential.
Connie Maneaty: Thanks, my question has been answered.
Clayt Daley: OK.
A.G. Lafley: Thank you, Connie.
Clayt Daley: Thanks.
Operator: And we'll turn now to Chris Ferrara with Merrill Lynch.
Chris Ferrara: Hi. Have you guys talked a little bit about the role of
developing markets in leveraging overhead in the quarter specifically? I
was wondering if at this point, are there any specific businesses, where on
the operating margin side, where the developing markets businesses
actually, you know, tend to be margin accretive for the business as a
whole?
Clayt Daley: Margin accretive is beauty, I mean in general. And of course this
varies from market to market, but in Asia, there's no question about the
fact that the beauty business is margin accretive, and many of the
household businesses we still have upside margin potential in some cases
substantial up side margin opportunity.
Whereas in places like our Eastern European business, Middle East and
Africa, that business is much more balanced, a much bigger household
component, but a household component that makes good money, and a growing
beauty care component.
So we - you know - but at the end of the day, when you're growing your unit
volume at 15 plus percent, you sure ought to be getting some fixed costs
leverage behind that.
Chris Ferrara: And if you look forward, are there other businesses besides
beauty that you think maybe five years from now, where your margins in
developing markets are better than developed markets.
A.G. Lafley: I'd say some of the personal care businesses could be.
Clayt Daley: Yes.
A.G. Lafley: There's no reason, in my opinion, why, for instance our fem care
business couldn't generate very good margins, whether they're actually
better because we have 50 plus shares in Western Europe. And we have, you
know, nearly 50 shares in the US. But I think they could be very good
margins. There's no reason - oral care margins are good in developing
markets.
I think the only place where the margins are really - the two places where
the margins are really tough in developing markets, are laundry and that's
because of the low net sales per (pace), OK, and affordability issues. And
the other place is baby diapers because you need scale. But I think baby
diapers, you know, I've said this several times. Our leading competitor in
baby diapers is cloth, OK. There's billions of consumer households around
the world, you know, who will have babies over the next 25 years. And if we
can convert cloth, you know, that industry could take off. But over time,
you know, the key is that over time we have opportunities to build our
margins in developing markets.
And Chris, if I just make one more really quick comment, you know, you've
got to remember in our portfolio, which I think is pretty balanced now,
it's about a third beauty, it's about a third health and personal care, and
it's about a third household. And we still have, you know, roughly 30
percent of our businesses that are not best in class on margins. So I still
think there's a lot of margin upside. And, you know, those businesses, we
know who - we know which ones they are. And we're working very deliberately
to improve their gross margins and improve their operating margins. So I
certainly don't feel like we've topped out on the margin side. And I
certainly don't feel like we've topped out on optimizing our cost structure
and getting the full benefits of scale.
Clayt Daley: The other thing, just to conclude the comment is in a lot of
developing markets, particularly in beauty care, the focus now is on
driving top line. You know, our margins are just fine. And therefore, we're
very much focused on driving sales.
Chris Ferrara: Got it. And then, just on a completely different note you bought
about $2 billion share, $2 billion worth of shares back. I guess, why
wasn't that number higher? I mean I guess it looks like about a billion a
quarter, which is actually a little bit below the run rate to the whole
program. And presumably this, you know, would be where the share might be
lowest. You know, were you restrained by other regs besides what I would
have known I guess?
Clayt Daley: Well yes, there are SEC guidelines of the amount of shares you can
buy in advance of the proxy and shareholder vote, which provided some
limitation on us.
Chris Ferrara: So did you buy back nearly as much as you could have? Or could
you have even bought back more despite that?
Clayt Daley: We bought back the maximum that we felt was prudent given the SEC
guidelines. So now as I mentioned earlier, once the shareholder vote is
complete, we'll have more flexibility to buy stock.
Chris Ferrara: Thanks a lot.
Operator: We'll take our next question from Tom Marsico with Marsico Capital.
Tom Marsico: Thank you. I just wish you could maybe talk a little bit more
about the emerging markets, what you saw during the quarter. The number of
new products that were launched in the emerging markets, and the successes
that you saw from those launches.
A.G. Lafley: Hi, Tom; this is A.G. I think the simplest way to think about
emerging markets for us is they're clearly strategic. We've spent the last
three or four years building the capabilities and the capacity to take both
our brand platforms, and our country organization platforms and to build
them to a point where they could be platforms for innovation and growth.
We are in every major developing market region; we are launching a full
range of innovation across our core businesses, and important businesses.
So John mentioned in the call, (Naturella) which is a new fem care brand,
but we're also launching major product improvements on Always at the same
time we do (Naturella). So we're building a portfolio in fem care as we
drive towards 40 and 50 shares, which is our ultimate goal in that market.
In baby care, we have a highly integrated innovation program. And we run a
whole program of innovation in developing markets.
Most of the innovation in developing markets, of course, is on the basic
taped diaper lines because that's what consumers can afford. And we just
started a very interesting small test, a dramatically new and very
affordable baby diaper in China. I mentioned cloth is our biggest
competitor in developing markets. We're very hopeful that this will enable
a lot of moms in developing markets to be able to afford disposable
diapers.
We've got it priced, you know, I can't remember exactly but I want to say
around 10 to 11 cents a diaper, which is starting to get pretty close to
the price of an egg in the open market. And we feel if we can get it to the
price of an egg, which she buys daily, then it might a product that she
could afford to buy for her baby and use daily.
All of our hair care programs are essentially global. One of the reasons
why our hair care business has been so successful in developing markets is
we bring the same innovation that you see in the US in a more efficient
form, and appropriately with the right aesthetics and the right packaging,
and the right sizing and pricing. But we bring that to China. We bring it
to Latin America. We bring it to Russia. We bring it to the Middle East. So
the hair care business is probably our most global business with very
strong developing profile.
In laundry we have a very vigorous program in developing markets. And
again, we use the same chemistry and the same ingredients. We just combine
them in products that are far more efficient. And we may have mentioned
this before. We created an entirely new system in China where the simple
way to think about it is we make - we take the performance actives, and
make the performance actives cocktail.
And then we have contract Chinese manufacturers add the commodity
chemicals, bag or box the detergent and put it into our distribution
system. And that enables us to be very affordable. And our share has been
growing very rapidly in China in laundry. And we're now - we can now see
ourselves with a real shot at becoming the leader in the local market. And
the leader in the local market has been a Chinese brand from the beginning.
So it's -I mean Tom, I just feel like we have a really strong program
across the board. That's why, as Clayt said, we're growing 15 percent on
the top line.
Tom Marsico: No, that's what I was interested in focusing on a little bit maybe
from even a higher level. I see that your cap ex is at the lower end as a
percentage of sales. Is your infrastructure in the emerging markets, where
you're growing at a 15 percent rate, instead of talking about Western
Europe and pricing and laundry so much, is your infrastructure developing
in the emerging markets and your opportunity there? Is that fulfilled? Is
your geographic reach where you want it to be? Because there seems to be,
if you're spending at the lower end on cap ex as a percent of says that you
have significant leverage there. Am I missing the point here?
A.G. Lafley: No. You definitely - you got it. In terms of geographic reach,
we're in virtually all of the markets we want to be in.
Clayt Daley: The point though is, the cap ex goal is not at all limiting. So if
we need capital in developing markets to grow we give it to them.
A.G. Lafley: We spend it, yes. But we have- what we've done (Tom) is we've
devised more efficient capital solutions. OK, in some cases it's what we
fabricate, where we fabricate it and how we fabricate it. And we do more of
the fabrication in the developing market. In some cases, we have a mix
system, which as I explained in China, we do some of the making. They do
the finishing and the packing. So we use the contract network. In some
cases, we just use contractors, which are more efficient, OK, and obviously
save of the cap ex.
But to your point about scale and leverage, I don't think there - I can
only think of maybe one or two markets, that we would like to be in which
are not open to us now. But we're in 98 percent, 99 percent of the markets
we want to be in. We have the installed manufacturing capacity or we have
access to it, so that's not a constraint. And this is important. We also
have the local organization in place now, so we can execute with
excellence, and that's really important. Because we have to have the
distribution system in place. We have to be to market. We have to be able
to do all of the things that we have to do to deliver the product to the
consumer where she wants it.
Tom Marsico: So last question then, it would seem, then you have significant
operating leverage a GDP of the emerging markets go to a much more rapid
rate than what we're seeing in the developing markets.
A.G. Lafley: We do.
Tom Marsico: Thank you.
A.G. Lafley: And that's why we're counting on them for consistent double digit
top line growth the end of the decade.
Clayt Daley: Right.
Tom Marsico: Thanks very much.
A.G. Lafley: Thank you, Tom.
Operator: Next, we'll turn to Joe Altobello with CIBC World Markets.
Joe Altobello: Thanks, good morning, guys.
Clayt Daley: Hi, Joe.
Joe Altobello: I just wanted to see if you could compare and contrast your
strategy when it comes to promotional spending versus that of Gillette's
and how you think that might change post the acquisition?
A.G. Lafley: Joe, it's tough because I would say it's not - the compare and
contrast thing isn't so much company to company as it is industry to
industry. And they're just in different industries. And I mean, just an
obvious point of view, they do a lot more sports and personality marketing,
OK in the blades and razors business. We do very much of that.
Clayt Daley: Actually...
A.G. Lafley: And also, frankly, you know, we don't - we really shouldn't be
commenting on Gillette's promotion practices.
Clayt Daley: I think they've said publicly before, you know, their promotion
spending has been in pretty good control. And so obviously our objective
would be to keep that.
Joe Altobello: OK. And then second question, same topic here, have you guys had
any updates from the DOJ or FTC regarding the anti trust issues on personal
care and oral care?
Clayt Daley: We are in dialogue with the FTC. They have issued a request for a
second request of data, which we are in the process of complying with. And
so the process is proceeding pretty much as we would have expected both in
the US, and of course, we're also engaged in Europe.
Joe Altobello: OK. Great, thank you.
A.G. Lafley: Thank you
Operator: We'll now turn to Fulcrum's Alice Longley.
Alice Longley: Hi, good morning.
Clayt Daley: Hi, Alice.
Alice Longley: Hi, two questions. One on oral care, I guess you're growing at
high in strong double digits in the emerging markets. Can you tell me which
markets that is, is it mainly China and Central and Eastern Europe? Or is
it other markets as well?
A.G. Lafley: China and Central and Eastern Europe those are the big ones.
Clayt Daley: That's primarily it.
Alice Longley: And can you tell us what the - what your shares are now versus
Colgate? I know you said in China you're 26 percent, whereas Colgate, and
similarly in Russia?
A.G. Lafley: Well we're ahead in China and Russia right now. And I think, you
know, I think it's going to stay nip and tuck. So I don't want to get too
hung up.
You know, what's important Alice is not what our share versus Colgate.
What's important is that these markets are converting to world class
products, and product technology. They're responding to the kind of brand
that we offer in the (Blendamid) and Crest. And I think developing market
consumers, you know, want an oral care experience, if it's affordable,
that's not unlike the oral care experience and product line that we offer
in the US.
The other thing you have to remember is there's still have the market in
China that's wide open, you know, to Colgate, and/or P&G. And we obviously
want to get more than our fair share of that. And the same is true in
Central and Eastern Europe. So they are relatively white space in
developing markets. They're not walled cities, and that's we're attracted
to them.
Alice Longley: OK. And then my other question is back to this pricing issue, can
you give us a little bit more specificity on the numbers? In other words,
in Western Europe is pricing on average down one percent, or down five
percent? And is it mainly other branded companies that are, you know,
causing this? Or is it the hard discounters?
Clayt Daley: It's definitely not five percent. We're talking about a percent or
two in most cases and - on average. And, you know, again the problem with
talking about this subject is it's almost a different story in every
country and every category as to whether it's been a branded competitor, or
whether it's been hard discounters. Because not surprisingly, discounters
have responded to some of the share progress we've made, as well as the
branded competition.
A.G. Lafley: The way to think about it, though Alice, I think, is if you look at
our scale, I mean take laundry for example, if you look at our scale, and
you look at the fundamental cost structure of that industry there's not a
lot of room, you know, there's just not a lot of - we're the only ones that
have a lot of room.
So, you know, so I think what you're seeing is, you know, you're seeing
this all stabilized. And I'm sure that some competitors, and some markets
have taken certain hedges. We've taken certain hedges, you know that plays
in to the game in the short term. But, you know, overall I wouldn't obsess
- I don't obsess on the price thing. I'm much more interested in who's our
target consumer. What is affordability for her? And what represents
superior consumer value. You've got to remember, when you step back from
this, most P&G brands are sold at a premium. Some are sold at substantial
premiums, even in the household business. So the issue isn't whether we can
command a premium. We've got brand strength, brand trust, brand equity, and
we're delivering products that are superior in performance quality and
value so we can handle the premium.
The only thing we have to watch is when the premium gets too high. And we
went through this in some detail over the last year or so, but there was a
situation in Germany two or three years ago, where our spreads, our
premiums had gotten too high. So we managed our premiums down. And we
invested in innovation. And we reinvested in our brands and marketing, and
all of the shares and all of the core businesses are up. So I don't get -
you know, if this were - if these were commodity businesses I'd be watching
every penny or every percent. But they're not commodity businesses. They're
branded, value added, differentiated businesses. And so it's more about
managing the mix, than it is about obsessing with just a price point.
Alice Longley: If we put your volume in Germany together with pricing in
Germany, were you up in Germany?
A.G. Lafley: Yes.
Clayt Daley: Yes.
Alice Longley: Good. OK. And the last part of that question is if I were to look
at pricing in the US alone, which is where you've taken all of these price
increases, about how much is pricing up here? Is it something like five
percent on average?
A.G. Lafley: No.
Clayt Daley: No. We're talking about, even though the coffee increase is all
here in the US, the US wouldn't be more than two.
A.G. Lafley: Yes, because coffee is a small percent of our business. Remember,
we didn't price the entire laundry line. We just priced part of the laundry
line.
Alice Longley: Right.
A.G. Lafley: We priced the...
Alice Longley: Tissue towel.
A.G. Lafley: The tissue towel.
Clayt Daley: The tissue towel.
A.G. Lafley: But I mean if you add it all up, you're, you know, you're only
looking at couple of percent.
Alice Longley: Perfect. Thank you very much. Thank you.
Operator: We'll take our next question from Lauren Lieberman with CS First
Boston.
Lauren Lieberman: Thanks. I'm sorry; I know this is getting to be lengthy. I
just wanted to talk about margins by division, and I guess overall
operating profit margin. With the huge out performance in baby and family
care, I guess my specific question is how much of that is due to the plants
running, I guess, 24/7 to work on the allocation issue and to rebuilding
safety stocks?
Clayt Daley: Not a whole lot. I mean I think the margin leverage in baby care,
has been obviously volume driven. It is a relatively fixed cost, and
intensive business. So in mix up, with a lot of new products, and a lot of
innovation.
A.G. Lafley: Baby stage of development, feel and learn they all improve our mix.
They improve our sales mix, and they improve our margin mix.
Lauren Lieberman: Right. But I mean either of those points on volume or mix are
not necessarily new this quarter for...
A.G. Lafley: No. But they become - what they are becoming is an increasingly
larger percentage of our business there. And the other thing, as I said
Lauren, we've got ongoing cost reduction programs in all of these
businesses, and frankly our paper businesses have done a good job with our
cost reduction programs. They've got them cranked up five years ago because
we had to. They're in businesses with, you know, more intensive capital
structure. And with, you know, more importance on managing every penny of
your cost.
And you've also go to remember that while we think we're tied or maybe even
have a small advantage on being best in class in tissue towel, you know,
we're still not best in class in baby diapers, because we don't have as
much of our business in pants. And we don't have the pants margins that our
best competitors have. So we've still got opportunities to improve the
margins.
Clayt Daley: Right.
Lauren Lieberman: OK. So then does that mean we should be thinking of this
margin change this quarter as being like a step function? I mean we're now
at a ...
Clayt Daley: You know, again, as I said earlier, we obviously made more margin
progress this quarter than we anticipate as an ongoing impact. And
obviously that disproportionately occurred in the paper business. I mean we
made margin progress as a company at a time where actually the fabric and
home care margin was down, so the other businesses did extremely well on
margin. And so it - but there's no question about the fact that margin
improvement has been a key focus area for the baby care business, and
they're delivering.
Lauren Lieberman: OK.
John Goodwin: But our approach on margin is more longer term, Lauren.
((inaudible)) restructuring, continuing improvement, you can't look at one
quarter, unfortunately, and read too much into it, you know, because
there's all sorts of lumpiness within that line. So you've got to look over
a longer period of time to see the trend.
Clayt Daley: The trend though in paper is up.
Lauren Lieberman: OK. All right. And then, just one last thing is the healthcare
division revenues were - actually volume was just about double what I had
expected, so good work there. But I wanted to know if some of that is from
Prilosec, you know, coming off of allocation? And again is it...
Clayt Daley: There's no question, there's been some pipeline and refill on
Prilo.
A.G. Lafley: Well Actonel has been incredibly strong.
John Goodwin: Vicks had a good quarter.
A.G. Lafley: Vicks had a good quarter. You have to remember the whole cold
season came later this year. So I mean we're doing well on Metamucil. You
know, we're doing well on Thermacare. So I mean it's not - healthcare is
not a one trick pony.
Lauren Lieberman: OK. And then just you mentioned Actonel, any outlook for
changes for Actonel as (Beniva) comes to market, I think next month?
A.G. Lafley: Not really. I mean we're still - obviously it's a new competitor.
We're going to have to see what doc and consumer patient acceptance of
(Beniva) is going to be. But, you know, we think we're well positioned
well. Osteoporosis is a disease of fracturing. And physicians are selecting
therapy based upon strong fracture reduction data. And I think you know
Actonel provides rapid, and sustained fracture reduction at both vertebral
and non vertebral sites, such as the write and hip. And this is what's
important to women and men who suffer from that disease.
(Beniva) has not demonstrated non vertebral fracture protection. So I think
- you also have to remember that this is still an under diagnosed, under
treated disease.
Clayt Daley: You've got a number that's been growing 20 percent a year.
A.G. Lafley: Yes, so I think what - here's the win-win. (Beniva) stimulates
another round of market expansion and growth and we get more than our fair
share of it, which is sort of what's been the pattern over the last five
years. But Actonel is a proven drug. And we keep building share, you know,
with that brand.
Lauren Lieberman: OK. Thanks, guys.
Clayt Daley: Yes.
A.G. Lafley: Thank you.
Operator: That's all the time we have for questions today. Gentlemen, I'll go
ahead and turn the call back to you for any additional or closing remarks.
Clayt Daley: Well thanks very much for joining us today. And as I said at the
outset, John Goodwin, Thomas Tippl and I will be around for the rest of the
day to take any other questions you have. Thanks for joining us.
Operator: With that, we will conclude today's conference. Thank you everyone for
your participation.
# # #
ADDITIONAL INFORMATION AND WHERE TO FIND IT
-------------------------------------------
In connection with the proposed merger, The Procter & Gamble Company ("P&G") has
filed a registration statement on Form S-4 on March 14, 2005 with the Securities
and Exchange Commission (Registration No. 333-123309), containing a preliminary
joint proxy statement/prospectus, and Amendment No. 1 to the preliminary joint
proxy statement/prospectus on April 22, 2005. INVESTORS AND SECURITY HOLDERS ARE
ADVISED TO READ THE DEFINITIVE JOINT PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES
AVAILABLE, BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors and security
holders may obtain a free copy of the definitive joint proxy
statement/prospectus (when available) and other documents filed by P&G and The
Gillette Company ("Gillette") with the Commission at the Commission's web site
at http://www.sec.gov. Free copies of the definitive joint proxy
statement/prospectus, once available, and each company's other filings with the
Commission may also be obtained from the respective companies. Free copies of
P&G's filings may be obtained by directing a request to P&G Investor Relations
at 513-983-2415. Free copies of Gillette's filings may be obtained by directing
a request to Gillette Investor Relations at 617-421-8172.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy securities, nor shall there be any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such jurisdiction.
PARTICIPANTS IN THE SOLICITATION
--------------------------------
P&G, Gillette and their respective directors, executive officers and other
members of their management and employees may be soliciting proxies from their
respective stockholders in favor of the merger. Information concerning persons
who may be considered participants in the solicitation of P&G's stockholders
under the rules of the Commission is set forth in the Proxy Statement filed by
P&G with the Commission on August 27, 2004, and information concerning persons
who may be considered participants in the solicitation of Gillette's
stockholders under the rules of the Commission is set forth in the Proxy
Statement filed by Gillette with the Commission on April 12, 2004.
FORWARD-LOOKING STATEMENTS
--------------------------
All statements, other than statements of historical fact included in this
release, are forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. In addition to the risks and
uncertainties noted in this release, there are certain factors that could cause
actual results to differ materially from those anticipated by some of the
statements made. These include: (1) the ability to achieve business plans,
including with respect to lower income consumers and growing existing sales and
volume profitably despite high levels of competitive activity, especially with
respect to the product categories and geographical markets (including developing
markets) in which the Company has chosen to focus; (2) the ability to
successfully execute, manage and integrate key acquisitions and mergers,
including (i) the Domination and Profit Transfer Agreement with Wella, and (ii)
the Company's agreement to merge with The Gillette Company, including obtaining'
the related required shareholder and regulatory approvals; (3) the ability to
manage and maintain key customer relationships; (4) the ability to maintain key
manufacturing and supply sources (including sole supplier and plant
manufacturing sources); (5) the ability to successfully manage regulatory, tax
and legal matters (including product liability, patent, and other intellectual
property matters), and to resolve pending matters within current estimates; (6)
the ability to successfully implement, achieve and sustain cost improvement
plans in manufacturing and overhead areas, including the Company's outsourcing
projects; (7) the ability to successfully manage currency (including currency
issues in volatile countries), debt (including debt related to the Company's
announced plan to repurchase shares of the Company's stock), interest rate and
certain commodity cost exposures; (8) the ability to manage the continued global
political and/or economic uncertainty and disruptions, especially in the
Company's significant geographical markets, as well as any political and/or
economic uncertainty and disruptions due to terrorist activities; (9) the
ability to successfully manage the pattern of sales, including the variation in
sales volume within periods; (10) the ability to successfully manage competitive
factors, including prices, promotional incentives and trade terms for products;
(11) the ability to obtain patents and respond to technological advances
attained by competitors and patents granted to competitors; (12) the ability to
successfully manage increases in the prices of raw materials used to make the
Company's products; (13) the ability to stay close to consumers in an era of
increased media fragmentation; and (14) the ability to stay on the leading edge
of innovation. For additional information concerning factors that could cause
actual results to materially differ from those projected herein, please refer to
our most recent 10-K, 10-Q and 8-K reports.