The Procter & Gamble Company
Q1 2009 Earnings Call Transcript

Published: 29 Oct 2008

[Operator:]

Welcome to Procter & Gamble’s first quarter fiscal year 2009 conference call. (Operator Instructions) Today’s discussion will include a number of forward looking statements. If you will refer to P&G’s most recent 10-K and 8-K reports you will see a discussion of factors that could cause the company’s actual results to differ materially from these projections. As required by Regulation G, P&G needs to make you aware that during the call the company will make a number of references to non-GAAP and other financial measures. Management believes these measures provide investors valuable information on the underlying growth trends of the business. Organic refers to reported results excluding the impact of acquisitions and divestitures and foreign exchange where applicable. Free cash flow represents operating cash flow plus capital expenditures. P&G has posted on its website www.pg.com a full reconciliation of non-GAAP and other financial measures. Now I’d like to turn the call over to P&G’s Chief Financial Officer, Clayt Daley.

[Clayt Daley:]

Good morning everyone. A.G. Lafley, our CEO and Jon Moeller, our Treasurer and newly appointed CFO join me this morning. I will begin with a summary of our first quarter results. Jon will cover business highlights by operating segment. I will then provide a quick update on Folgers and what we are seeing in the credit markets. Following that I will briefly cover pricing, market growth rates and commodities before wrapping up the call with the guidance update. I will also talk about foreign exchange. Following the call, as usual, Jon Moeller, Mark [Irsig], John Chevalier and I will be available to provide additional perspective as needed. Before getting into the results, I want to comment briefly on the organization changes announced yesterday. It has been my plan to retire on or about this timing for several years. I have been fortunate to be P&G’s CFO for the past ten years and by the time I retire next September I will have worked for the company for 35 years. I am proud of what the company and the finance and accounting function have been able to accomplish while I have been part of it. It has been great experience but I am ready to move on. I have been working with A.G. and the board on a seamless transition plan which ensures strong leadership in the years to come. On January 1, Jon will replace me as CFO. I have known Jon for most of his 20-year career with P&G and I have worked directly with him for the past ten years. Most of you had a chance to meet Jon at investor conferences and on your trips to Cincinnati. Jon is an excellent business strategist and operates with the highest level of discipline and he understands the importance of strong corporate governance. He has a deep appreciate for the operating principles that have made and kept this company strong for so many years. He also appreciates the importance of maintaining open lines of communication between the company and its shareholders. I’m sure you will find his perspective on the business insightful and helpful. Replacing Jon as treasurer is Terry [Lizt]. In her 14 years at P&G Terry has had a broad range of experiences across P&G’s GBU, MDO and corporate accounting operations. She is currently the finance leader for our global operations unit. Prior to joining P&G Terry worked in public accounting for nine years. Terry is a very strong business leader and I’m sure you will enjoy working with her in the investor relations responsibilities. Terry will be attending our analyst meeting scheduled for December 10 and 11 in New York and I encourage you to meet her there. Now, I didn’t plan to announce my retirement during a credit crisis but the fact that I am doing so is a testimony to the confidence I have in the next generation of leaders. After all they are going to be managing my money too. I am sure you will join me in congratulating Jon and Terry on their new appointments. Now A.G. would like to make a couple of comments.

[A.G. Daley:]

I have known Clayt Daley since the late 1980’s when we worked together for Steve Donovan in what is now our fabric and home care business. We have worked side by side in the transformation of P&G into a more diversified and global leader in our industry. Together we have focused on more robust strategies on the company and business unit level, on more balanced and sustainable growth both organic and from acquired businesses, on more disciplined and reliable operations and on stronger governance and risk management. With our colleagues on the global leadership council we have developed an outstanding cadre of next generation P&G leaders including Jon Moeller and Terry [Lizt]. I first met Jon when we asked him to move to China in the mid 1990’s. Jon managed the corporate forecast when I became CEO in June of 2000. He is an experienced and talented finance leader who has served in a number of businesses and more recently as treasurer with responsibility in investor relations and mergers and acquisitions. As treasurer he has established the capital structure and strong balance sheet that will serve us well in the current environment. He has been working closely with Clayt, with me and with the company’s leadership for the last decade. He is the right leader to succeed Clayt. This month P&G is 171 years old. Over the last year we have been putting in place some of the next generation of P&G functional leaders to lead this company for the next decade. Sundeep Nagra in Human Resources, Steve Jemison in legal, Bruce Braun in R&D, Mark Pritchard in Marketing and now Jon Moeller in finance. I want to thank Clayt for this many years of dedicated service to P&G. I congratulate Jon on his appointment as CFO. Now back to you Clayt.

[Clayt Daley:]

Thanks A.G. Now let’s move onto the results in the quarter. The September quarter was the 25th consecutive quarter in which P&G delivered top line growth at or above the company’s target. We also delivered another quarter of earnings growth consistent with our long-term objectives and generated strong cash flow. Our portfolio continues to be a strength as does our focus on innovation and productivity. Diluted net earnings per share increased 12% to $1.03 per share. This was $0.03 per share above the high end of our guidance range. Now $0.02 of the overall delivery was due to a shift of Folgers related restructuring spending between quarters which will have no impact on the year. The last time we gave guidance we expected those incremental charges to be about $0.04 in Q1 and Q2 and $0.02 in Q3 and Q4 for a total of $0.12 for the year. After incurring only $0.02 per share in Q1, we now expect $0.03 in Q2 and Q3 and $0.04 in Q4. Frankly our people were simply too optimistic in how fast they could implement these incremental restructuring projects. Total sales increased 9% to $22 billion. Organic sales were up 5%. Organic volume was up 3% with mid and low tier brands growing organic volume several percentage points higher. Pricing added 3% to sales as price increases announced during the spring took effect in the quarter. Foreign exchange contributed five points to sales growth. Disproportionate growth in developing regions and mid tier brands resulted in a negative 1% mix impact. Gross margin decreased 240 basis points. This was slightly better than our guidance range of 250-300. SG&A expense was down by 180 basis points. Operating margin was therefore down 60 basis points including the incremental Folgers restructuring related charges. Operating profit increased 6% for the quarter to $4.7 billion. The tax rate for the quarter was 28.5% slightly above guidance. Turning to cash, operating cash flow was up 1% versus a year ago at $3.3 billion. Free cash flow was $2.6 billion. Free cash flow was 76% of earnings, below our 90% productivity target but consistent with September quarter norms. We remain on track to deliver our 90% free cash flow productivity target for the year. During the quarter we continued to repurchase stock at levels consistent with our 3-year share repurchase program. Now before I turn the call over to Jon for the business segment discussion, I want to remind you of a point we have been making repeatedly since our last call. As expected, the pricing we have taken to recover commodity and energy costs has caused organic volume and organic sales growth rates to diverge and has resulted in higher levels of market share volatility. You will see evidence of these dynamics during the individual segment discussions. Despite this near-term volatility and a difficult overall operating environment, we have delivered and expect to continue delivering overall results in line with our long-term objectives. Now let me turn the call over to Jon.

[Jon Moeller:]

Thanks Clayt. Starting with the beauty segment the business delivered strong performance across the retail brand portfolio. Beauty all-in sales grew 12% and organic sales grew 6%. Retail hair care volume grew high single digits behind mid teens growth of Head and Shoulders and double digit growth of Rejoice. Head and Shoulders was led by high teens or greater volume growth in China, Russia, Saudi Arabia and India. Rejoice grew mid teens in China. The Pantene brand grew volume mid single digits including double digit growth in developing markets and low single digit growth in North America. Pantene’s market leading U.S. all-outlet value share of more than 14% was up sequentially from the June to September quarters but remained down about a point versus the prior year. Retail hair color shipments increased low single digits versus prior year as 20% growth on the Nice-n-Easy brand was largely offset by declines in other brands. Nice-n-Easy all-outlet value share is up nearly four points to 21% driven by the successful Perfect 10 innovation. Unit volumes for professional hair declined low single digits versus prior year due primarily to market softness in both the U.S. and Europe. Fine fragrance volume was also down low singles due to slowing market growth and changes in year-over-year initiative timing on major brands. Despite this, P&G’s global value share of fine fragrances increased one full share point to 15.8%. Skin care volume grew low single digits including over 20% growth on SK2. Olay skin care volume increased low single digits despite high levels of competitive promotional activity in the U.S. The cosmetics business had a very strong quarter with double digit volume growth. The Cover Girl brand grew mid teens driven by the Lash Blast mascara innovation. Cover Girl U.S. all-outlet value share was up a point to 20% for the quarter. In the grooming segment, solid results on premium blades and razor systems were largely offset by soft Braun results. All-in sales for grooming were up 6% for the quarter and organic sales were in line with prior year. Braun sales declined double digits and volume was down mid-teens due to the exits from the North American home appliance and Tassimo Coffee Maker businesses and soft retail markets for male hair removal products. Lays and razor sales grew high single digits driven mainly by price increases taken earlier this calendar year. Volume was up low single digits driven by strong growth in developing markets which benefited from the expansion of Gillette Fusion and Venus and continued growth of Mach3. Developed market volume was down slightly due to declines on legacy razor systems and a difficult Gillette Fusion comparison that included base period growth of over 50% in North America and Western Europe. Importantly, Gillette Fusion all-outlet value share of the U.S. Lays and razors market continued to increase growing nearly two points to 20% and Gillette Fusions share of male cartridges increased seven points to 24%. In healthcare all-in sales grew 4% and organic sales were equal to prior-year levels. Good top line growth on the oral care and feminine care businesses were largely offset by declines in personal health care. As expected, personal health care results were negatively affected by sharp declines in shipments and sales of Prilosec OTC due to the loss of exclusivity earlier this calendar year. Oral care shipments were up mid single digits led by the Crest brand. Crest volume was up mid singles and included an increase of more than 20% in China. In the U.S., Crest’s all-outlet value share of toothpaste was in line with prior year at 38%. Oral B shipments grew low singles for the quarter including mid single digit growth in developing markets. In the U.S., Oral B’s share of tooth brushing was steady at 42%. Feminine care delivered solid volume growth driven by high single digit growth of the Always brand in developing markets and high teen’s growth of Naturela. Always grew behind continued market share growth in China and the Always market share initiative in Central Europe and Middle East and Africa region. In the U.S., Always market share of the pad segment was in line with prior year at 58%. Share in the panty liner segment grew two points to nearly 32%. For Naturela, continued market expansion in Central and Eastern Europe, Middle East and Africa drove shipment growth of nearly 30% in that region. Sales for the snacks, coffee and pets segment grew 9% and organic sales grew 7%. Each category delivered strong sales growth with pricing benefiting category in pet care and initiative driven volume growth in snacks. The snacks business delivered mid single digit volume growth driven by solid base business growth in North America and the Pringles Stix and Extreme Flavors initiatives. Pringles all-outlet value share of the U.S. potato chip market is up modestly versus prior year to more than 14%. Coffee sales were up double digits and volume grew low single digits behind the Folgers Roast and Ground restage initiative, the continued growth of Dunkin Donuts line and pricing taken in earlier periods to recover higher coffee bean costs. P&G’s market leading all-outlet value share of U.S. coffee was in line with prior year at about 36%. Pet care sales increased high single digits driven by pricing to recover higher price in put costs. Shipments declined low single digits as growth in the Iams brand, driven by the Pro Active Health and Premium Protection initiatives was more than offset by declines on Eukanuba. Next, top line growth in the fabric and home care segment was driven mainly by very strong global fabric care results. The fabric, home and battery categories each experienced significant share volatility driven by price increases implemented during the quarter. Sales for the segment increased 10% and organic sales grew 6%. Volume increased 2% and volume added 4% to organic sales growth. Fabric care shipments increased mid single digits with solid growth in both developed and developing markets. In North America, volume for the Gain brand grew low teens behind the Soothing Sensations initiative. North America Tide was up high single digits driven by the launch of Tide Total Care. Pre-buying by retailers ahead of the fabric enhancer price increase that went into effect late in the September quarter also drove fabric care shipments. P&G’s all-outlet value share of detergents was down about two points as lower shares on Tide were partially offset by increases on the Gain brand. This near term share volatility is consistent with expectations given the larger price gaps that occurred after pricing was initiated. Home care shipments were down versus prior year due mainly to a strong base period that included the initiative launch for Febreeze candles and Mr. Clean wipes. Volume was also down due to forward buying we mentioned last quarter ahead of the June price increases on dish care and surface care. U.S. all-outlet market shares for the Dawn, Swiffer and Mr. Clean brands were all essentially in line with prior year. Battery shipments were in line with prior year as growth in developing markets offset a modest decline in North America. Duracell’s market leading U.S. all-outlet value share of alkaline batteries was down about a point to 49% for the past three months as private label products gained share behind high levels of promotional activity. Baby care and family care delivered another very strong quarter with all-in sales growth of 10%. Organic sales also grew 10% behind organic volume growth of 7% for both baby care and family care and pricing of 5%. Pampers diapers global volume grew mid single digits including low teens growth in developing markets. Pampers volume in China and Russia was up more than 30% and 20% respectively. In the U.S., P&G’s overall diaper value share was down slightly versus prior year. Pampers diaper share was down just over a point due to a market shift towards lower price peers. This shift benefited the Luvs brand which grew volume nearly 30% and increased all-outlet value share nearly a point to 7% in the quarter. Bounty and Charmin continued to deliver strong all-outlet value share gains despite price increases to recover higher costs. Charmin’s U.S. all-outlet value share increased more than a point to over 28% behind the Ultra Soft and Ultra Strong innovations. Bounty’s U.S. value share grew nearly two points to 46% behind the Best Bounty Ever initiative. That concludes the business segment review and now I’ll hand the call back to Clayt.

[Clayt Daley:]

Thanks John. There are several topics I would like to address today. I want to give you a quick update on Folgers, the credit markets, pricing, market growth rates and commodities. Then I will discuss foreign exchange impacts before providing the guidance update. The Folgers exchange offer was commenced on October 8th. On October 16th Smuckers shareholders approved the transaction and we think that Smuckers will provide a great home for the Folgers business. The final exchange ratio will be based on the volume weighted average price of P&G and Smuckers stock tomorrow, Friday, October 31 and Monday, November 3. It will be posted at 9

[Operator:]

(Operator Instructions) The first question comes from Nik Modi – UBS.

[Nik Modi:]

It is pretty clear from almost every company exporting [inaudible] that emerging market growth has held up in the September quarter but most investors are really worried about the environment since October and going forward. Can you just provide some perspective on what you saw after the quarter closed and in October trends and if you saw a kind of collapse or if you saw things stay steady as they were in September?

[Clayt Daley:]

No collapse. We are, as you heard, projecting volume growth in the October/December quarter flat to up 2%. So we are expecting some moderation in volume growth and that would apply to emerging markets as well. We are certainly seeing no dive if you will in the growth rates.

[A.G. Lafley:]

I just got back from a week in Asia, a lot of it in China. GDP growth rates are slowing there but they are still 9%. While we are seeing some moderation in volume, a fair amount of that is due to the fact we are leading pricing in developing markets too so for instance in Central and Eastern Europe and Middle East/Africa where we were last month we expected some moderation in volume but our net sales trends have stayed strong at double digits. So I would say based on everything we see it is still holding up pretty well and we are counting on emerging markets to continue to be half or more of our growth.

[Operator:]

The next question comes from John Faucher – JP Morgan.

[John Faucher:]

On the organic sales growth target for the quarter, as you look at the price mix number of 4-6% that is up 2% sequentially. Is that more the pricing in Q1 rolling through? It sounds like given the commentary about brands like Luvs, etc. the mix is going to stay at least as negative as it was this quarter.

[Clayt Daley:]

That is correct. It is going to be price. We had a number of price increases that were announced in the spring and summer that will becoming effective in the October/December quarter.

[A.G. Lafley:]

If I could just say one other thing too on the mix side, John and Clayt in their comments mentioned that we are also creating value in the mid to upper end of a number of our categories with lines like Clinical Strength Deodorant, Perfect 10, the new line of Olay that was just announced and you have got to remember that we don’t have one consumer here. We have a series of consumer segments. They all have different value equations and we are trying to offer a balance. So affordable entry items like Luvs, Gain, Bounty and Charmin Basic, etc. at the opening price points and again items at the higher end which represent a good value versus alternatives that may be sold in different channels.

[Operator:]

The next question comes from Bill Pecoriello - Morgan Stanley.

[Bill Pecoriello:]

A question more digging into the U.S. since mid-September when we saw this very steep fall off in consumer confidence, just give us a bit more color where you are seeing the further trade down to lower tiers, consumers putting off purchases as you mentioned in the pantry, slower category growth, accelerated channel shift. Where exactly it has changed on the margin since mid-September.

[A.G. Lafley:]

I guess the first point that I would make which I think is incredibly important is while categories and markets are slowing in the U.S. they are still definitely growing. Okay? So whether it is on a unit volume basis or whether it is on a net sales basis we are still looking at growing markets in the U.S. which is a different situation than western Europe or Japan for example. I think that is important. The second thing I would say is while private labels are clearly growing and 19-20 of our top four categories they are not impacting us. We are either holding or growing. So there are a few places where we are being impacted. We mentioned in Jon’s comments we are being impacted in batteries. This is not unusual in recessions. Battery pantry inventories get drawn down and consumers move more of their purchases into private label. In fact it is not unusual for consumers to try on more private labels during economic downturns. We are seeing some move to private label in coffee. We are holding our share. We are seeing some move to private label in fem and pet, although a very small space, we are holding our share. Obviously Prilosec we are getting hurt by generic in the first year of launch and we have reported that but those are pretty much the markets where the private labels are having any impact on us. Fortunately in the categories like baby diapers, like family care, tissue and towels, one that is usually affected in a recession and we are growing share on towels and we are growing share in bath tissue. The thing I like about the way we have gone into this downturn is we have stronger portfolios in place across categories and stronger portfolios in place across leading brands and most of the share volatility we have seen, the modest share loss has been more tied to us leading pricing than they are tied to some move that is being made by a competitor or a move that is being made by private label.

[Operator:]

The next question comes from Lauren Leiberman – Barclays.

[Lauren Leiberman:]

In the press release it was mentioned the transaction benefit to SG&A based on inventory levels. You gave good detail on the hypothetical example but can you explain how that works? Is that something that is sort of one-time in nature, probably doesn’t repeat and how big of an impact it was on SG&A this quarter?

[Jon Moeller:]

The impact that we talked about in the quarter is simply balance sheet revaluation impact so it is one-time in nature. The dynamics that Clayt talked about in terms of transaction and translation are ongoing. The amount was not something we are going to get into in detail.

[Operator:]

The next question comes from Bill Schmitz – Deutsche Bank.

[Bill Schmitz:]

Can you give us some of your assumptions on currency? I know you got into negative one to negative two for fiscal year. Does that assume current spot prices or do you guys have a forecast?

[Clayt Daley:]

If I knew where this was going I’d be on a trading desk. No, we don’t view ourselves at any point in time as any smarter than the forward curves on these currencies. That is why I think through the balance of the year we are probably going to see this thing move around.

[Operator:]

The next question comes from Ali Dibadj - Sanford Bernstein.

[Ali Dibadj:]

A little bit of clarity if you would please. It looks like for the year driven mainly by foreign exchange your top line comes down by about 4%. Your commodities come down by $300 million, less than I would have expected but your EPS update hasn’t changed nearly as I guess I would have expected given those two things. So what other things are you doing to cut costs and in particular I want to go back to this SG&A expense down 180 basis points this year. I think you really do need to break that out and try to help us understand how much of this was one-time. It sounds like foreign transaction gains. How much of it is other things and how should we think about those elements as you break them out going forward?

[A.G. Lafley:]

We will be talking about this in more depth in December. Recall our conversation that we began at Cagney in February. We have been working for now three years on a productivity and growth program. We have best marketed a number of the initiatives in the businesses and in the geographies and we are now rolling them out. Some involve organizational structural simplification and de-duplication. Some involve work processes that enable us to focus on the fewer things that deliver the most value. In fabric care, for example, they basically cut about 40% of their initiatives on their initiative portfolio on the small end. They have focused on the larger sized initiatives and they have been driving a lot more incremental sales profit and ultimate value. We are rolling this system, which of course we have, an acronym for, across all the other businesses. So we are driving productivity hard. As we said before, this is not a linear program. We are in sort of the first year when we are beginning to roll it more broadly but this is a five-year program for us and we think it is going to have a meaningful, positive structural impact on the company and we hope we will end up with sustainable competitive advantage when we are done. But it really is attentiveness to productivity. The other thing I would say is we have been very agile and flexible in the management of our formulation input materials and our formulation costs. We have talked about this before. We can pretty much formulate on the run in all of our formulated household care and personal care businesses and then lastly major initiatives like the move to compaction and concentration have real and significant cost take out and therefore profit impacts over time for us. It is all part of a program.

[Jon Moeller:]

Relative to sustainability of the SG&A decrease you saw that dynamic each of the last two quarters. We talked about next quarter continuing to improve SG&A and largely offsetting the gross margin impact so you should assume that these productivity efforts are sustainable going forward.

[Clayt Daley:]

The other thing I think we should comment on here is we try to build a financial plan for the fiscal year that assume everything doesn’t go right. So, last year it was commodities and this year it is emerging market currencies. So I think what you are seeing here is you are seeing the impact of a company that tries to make sure it builds a financial plan it can deliver.

[Operator:]

The next question comes from Chris Ferrara – Merrill Lynch.

[Chris Ferrara:]

Just following up on that, you had FX turn negative, commodities got better but not enough to offset. You have slowing categories. You need to cut costs more and you haven’t changed your organic top line growth rate at all. More conceptually do you guys feel a little bit more stretched at least in the near term?

[Clayt Daley:]

I think as I alluded to in the last question, and as I think is quite clear in the fact we widened the guidance ranges, I think the plan for this year has tightened up versus where it would have been two or three months ago. Frankly, our ability to absorb this substantial emerging market currency move that has occurred and I think as I say I think it is also a testimony to the strength of the plan.

[A.G. Lafley:]

That is what I was also going to say. We are basically on plan. Recall when we dialoged three months ago and we outlooked 0-3% organic volume growth for the quarter we just completed and we delivered 3%. There was a fair amount of feedback that we were being too cautious and too conservative. All we were doing was looking at what we were seeing in the markets and trying to be realistic about what we were seeing and that is what we are trying to do in October/December. As Jon and Clayt pointed out earlier we do have a little pricing momentum and we do have an initiative program that has some positive mix. So if you look at our numbers we are being a little more conservative on the volume side because we think it is going to be a little more tough for U.S. and Western European consumers and we think we are going to get a little bit of pick up on the mix side.

[Clayt Daley:]

The other thing I want to conclude and I think this is important, in the past when we have given a guidance range everybody seems to assume we are going to make the top of the range. That is not the assumption you should be making in this environment.

[Operator:]

The next question comes from Andrew Sawyer – Goldman Sachs.

[Andrew Sawyer:]

Kind of drilling in a little it on some of the business unit margins and thinking about some of the segments where you might have a little bit more commodity exposure like fabric and home and baby and family, I was kind of struck by the strong margin behavior you were posting in baby and family in contrast to fabric and home that had a bit tougher quarter. I was wondering if you could just walk through some of the drivers of each especially with fabric and home having presumably some benefits from compaction flowing through.

[Clayt Daley:]

I think really a lot of this is timing of pricing that the pricing that has occurred in baby and family was largely implemented. Therefore that business has managed to do a better job of maintaining the margin. Frankly a lot of the fabric care pricing did not go into effect until the October/December quarter.

[A.G. Lafley:]

That is part of it and the other part of it is fabric bore more of the brunt of the commodities especially the in-organics that Clayt detailed in his comments.

[Operator:]

The next question comes from Jason Gere – Wachovia.

[Jason Gere:]

I was just wondering if you could talk a little bit about the marketing mix. A.G. in the past you have been talking about really stepping up the in-store communication so I was wondering if you could share a little color on how you are measuring that and how that is transpiring in this very difficult U.S. consumer.

[A.G. Lafley:]

There are two shifts that I would talk about this morning. The first one is actually a shift in the communication mix. You will have seen in recent months more what I would call performance/value or value reframing communication from most of our major brands. Fairly hard hitting, fairly comparative, very clearly educating, informing and reminding the consumer of the value that is inherent in the performance of our brands. There are all kinds. Washing up twice as many dishes, getting your baby a good overnight rest for a very modest amount of money. You can shave for less than a dollar a week with the best performing shaving system in the world. That kind of stuff. Frankly, I think some of our businesses and brands were a little slow getting to that communication mix but we are getting there now and you are going to see a lot of it from us and we know it works with consumers. The other side of the mix is the one you referred to. We are clearly shifting more of our efforts into the store. One obviously and a more recessionary type of environment, more decisions are made in the store and we have to be competitive in the store. There is also we are getting better at measuring the effectiveness of certain in-store communication vehicles. The other thing we are doing is we are clearly targeting more. That means for some of our brands that have more teens and younger target the money is shifting to the internet or it is shifting to some alternate medium. I think you are going to see us hopefully continue to market mix model on a regular basis to analyze our marketing return on investment and shift the dollars where they deliver the most value to the consumers we serve.

[Operator:]

The next question comes from Connie Maneaty – BMO Capital.

[Connie Maneaty:]

Another question on currency. The currency impact is actually less than what I was figuring it was going to be. I’m wondering if it has to do with country mix because there are some countries against which the dollar really hasn’t risen including China, Japan and Venezuela. So my question is this, what percentage of sales do those three countries in particular represent of total and secondly since you don’t break out geographically what percent of sales in total of profit does the U.S. represent?

[Clayt Daley:]

I think as we have said the U.S. represents roughly 40% of sales and well over 50% of our profits. Obviously during this period having a large, very profitable U.S. business is a huge asset in this environment. Your assumption is correct. We have a big and profitable business in China and the Chinese currency has not moved. Similar situation in Venezuela. We can give you the exact numbers on the phone later in the day or we can get you closer than I can spontaneously here on the call but yes there is no question about the fact that our business mix is somewhat of a benefit here. The fact we are overdeveloped in China. The fact we are overdeveloped in the U.S. We don’t like the fact we are under-developed in Latin America and we are frankly working hard to grow our Latin America business but in some of the places where the currency moves have been the most severe they have affected us a little bit less.

[Operator:]

The next question comes from Linda Wiser – Caris & Co.

[Linda Wiser:]

Being that you are looking for additional ways to improve profitability and reduce costs, etc. maybe you could touch on a few of those businesses where there is a lot of room for improvement and maybe touch on some of the actions or thoughts you are having about those businesses. Specifically maybe pet care, Braun and even what’s going on with Pantene in some of the hair care.

[A.G. Lafley:]

First of all, our hair care business is the most profitable hair care business in the world. So that is not one where we are worried about the profit side. They actually had a pretty doggone good quarter. Our five biggest hair care franchises all had pretty good top line growth and we deliver the best margins in the industry by a fairly wide margin. So I don’t worry about profitability and margins there. We do have a few tough businesses. You mentioned Braun. You mentioned pet care and I would also add Wella. On all of those we have got very active plans in place. Robert [inaudible] is on the Wella business and his job one is to improve the structural attractiveness of that business. That involves obviously getting after the cost structure and improving the margin. Juan Pedro Hernandez we just moved to the Braun business and he has got the same goal and you see that we are already starting to shut down or move away from parts of the Braun business that are simply not attractive from a structural profitability standpoint. Pet we are actually making progress on. Now it is fair to say we are not at the margin levels of some of our best in class competitors but we are making steady progress. We have got a very good plan there and I think if we execute it, which we intend to do, over the next few years we are going to be in pretty good shape.

[Operator:]

The next question comes from Alice Longley - Buckingham Research.

[Alice Longley:]

My question is on your volume forecast for the year. You are still holding to 2-3% and yet the forecast for the December quarter is 0-2% which implies you expect a pick up in the March and June quarters. Can you explain why we should see that?

[Clayt Daley:]

I think we tried to talk about the fact that the October/December quarter is being impacted. We are seeing it in some freight inventory impacts as customers, not surprisingly in this environment, are trying to preserve cash and reduce their exposure to the credit markets and you are right, we think the second half will kind of move back more into the range.

[Jon Moeller:]

Of course we delivered a very strong volume number in the first quarter at 3, so against our guidance of 2-3% on the year it puts us in a very good position.

[A.G. Lafley:]

I guess the last thing I would say is pricing will be in place. Looking at what has happened in other categories usually over 3-6 months the pricing relationships return to sort of status quo before. We know we are going to pick up a little bit of top line momentum when that happens.

[Operator:]

The next question comes from Bill Chappell – SunTrust Robinson Humphrey.

[Bill Chappell:]

Just a question on the price increase. As you look beyond this next quarter is it a question of when the price increases start to roll back or if they roll back and I guess with that in mind is it retailers that will eventually try to push for the roll back or will it be price gaps and trade down that drive that I guess in light of the current commodity recession we are seeing?

[A.G. Lafley:]

First of all remember we are not seeing that commodity recession. You may be seeing it on television but we are not seeing it in the reality of the marketplace because remember there is a lag in any chance in crude oil pricing. It can take 3, 6 or 9 months to move through our materials and frankly the inventories we carry and the inventories that retailers carry. Listen, just so we are crystal clear on this, if commodities really move down in a meaningful way we will adjust our pricing. We have always done that. You see what we do in our family care, our tissue and towel business and you have seen what we do historically in our coffee business. We are in the business of delivering good consumer value in the store and in the home and staying competitive. We will move if there is a reason to move but we are trying to say we just don’t see it yet. We don’t see it. We see somewhat less commodity cost pressure, $300 million less, and we see an opportunity for commodities to improve in the out year but we are still looking at the toughest year in this company’s history. We are still looking at $2.7 billion in higher energy and commodity costs that we have to eat. Last year was the previously toughest year in this company’s history when we had to eat $1.5 billion in incremental cost. So we have still got a pretty tough commodity picture. I think the one thing we would say is that we have taken most of the pricing we have to take except for the pricing we are going to be taking in emerging markets to cover the transaction component of currency.

[Clayt Daley:]

We are obviously going to watch price point very carefully. We are not going to let our competitors buy our business by undercutting us on price. So this is the kind of thing where the market will play out during 2009.

[Jon Moeller:]

Remember that if we are in an environment in the future some time when prices are going down we would expect some [inaudible].

[Operator:]

With that we have concluded today’s question-and-answer session. Gentlemen I will turn the conference back to you for any additional or closing remarks.

[Clayt Daley:]

Thank you. Thank you all for joining us today. This will be my last conference call as I thought last night I think I have done about 50 of these conference calls. I look forward to seeing you at our analyst meeting that will be held in Times Center in New York City on December 10-11. You will receive a formal invitation within the next two weeks that will provide all the details. All of us will look forward to seeing you there and that concludes today’s call. As I said earlier we will be around the rest of the day to take follow-up questions on the phone. Thanks very much.

[Operator:]

With that we will conclude today’s conference.