Good morning and welcome to Procter & Gamble's quarter end conference call. P&G would like to remind you that today's discussion will include a number of forward-looking statements. If you will refer to P&G's most recent 10-K, 10-Q, and 8-K reports, you will see a discussion of factors that could cause the company's actual results to differ materially from these projections. Also, as required by Regulation G, Procter & Gamble needs to make you aware that during the discussion the company will make a number of references to non-GAAP and other financial measures. Procter & Gamble believes these measures provide investors with valuable information on the underlying growth trends of the business and has posted on its website, www.PG.com, a full reconciliation of non-GAAP and other financial measures. Now I will turn the call over to P&G's Chief Financial Officer, Jon Moeller.

Good morning. In the quarter we just completed, we continued reducing costs and reinvested in growth, reaccelerating our top line and delivering strong earnings and cash flow. Organic sales increased 2%. Core earnings per share increased 9% with constant currency core earnings per share up 21%. We delivered meaningful triple-digit basis point improvements in gross and operating margins on both a constant currency and all-in basis. All-in GAAP earnings per share were up 37% and adjusted free cash flow productivity was 117%. This is a reasonably strong quarter which reflects our efforts to accelerate organic top line and earnings per share growth fueled by productivity savings. We continue to operate, though, in a very challenging and volatile macro environment. Market growth rates on both a volume and value basis have decelerated due mainly to slower growth in developing markets. We entered the year expecting the market to grow close to 3% to 4% globally. We now expect 2% to 3%. There are more flashpoints across the globe than at any time in recent memory with significant economic and political instability impacting incomes and consumption in many large and important markets: Russia, the Ukraine, Egypt, Saudi Arabia and the balance of the Middle East, Turkey, Nigeria, Argentina, Venezuela and Brazil. Currencies are weakening across the board, more than three-quarters of a billion dollars since the start of the fiscal and over a $1 billion after-tax versus year ago. This is on top of a $1.5 billion impact last fiscal year and nearly a $1 billion impact the year before. Across three years, FX has been a $3.5 billion impact over 30% of fiscal year 2013 core net earnings after-tax. Since the start of December, the current year FX headwind has increased by $300 million after-tax with a 40% devaluation in Argentina…

[Operator Instructions] Your first question comes from the line of Dara Mohsenian, Morgan Stanley.

Good morning. I wanted to focus a bit more on the topline results. Q2 was a solid sequential improvement despite some of the retail inventory cuts you mentioned in the release. And your full year sales guidance on org sales, looks like it’s moving up given the all-in guidance is unchanged despite the greater FX pressure. So what's driving that more favorable expectation? Are the factors behind it more longer-term in nature, temporary to this year? And then also, can you help explain – if we look at Nielsen Scanner data, we haven't seen improvement in the US, Europe, or emerging markets -- so if you could help explain the dichotomy between the improved expectations but the lack of scanner data sales improvement, that’s be helpful. And then last, last quarter you mentioned second half organic sales growth would likely be above Q2. Is that still the case?

So, first of all, Dara, we have maintained our organic sales growth guidance for the year, which is flat to low singles. So there’s really no change in the overall outlook, which as you rightly say was for acceleration in Q2 and then further improvement in the back half of the year. As I mentioned, the extent of that improvement in the back half of the year is going to be potentially impacted by what happens with access to dollars for imports into Venezuela and it’ll obviously be impacted by other things as well. But even with that we remain confident that we can continue to grow in the second half. In terms of the businesses in the US and the comparisons to scanner data, as you know we pretty dramatically accelerated our growth in the US from minus 2% in the quarter before to plus 3% this quarter. I mentioned that there was about a point of sales that’s ahead of consumption. That’s on things like the ProShield razor that we shipped into the market but still even adjusting for that acceleration as we expected. It’s getting increasingly difficult to look only at scanner data as a measure of a market’s health or a business’ health. That's particularly true in markets like China where a huge portion of the growth of the market is coming in the e-commerce channel which doesn't cross a scanner. And you have some of that same dynamic in the US. So, for example, the Shave Club sales depending on how they’re executed may or may not cross a scanner. And I think that's part of the dichotomy. But generally if we look across several quarters to dampen out some of the short-term volatility and the noise, we continue to be pleased and encouraged by increasing strength in North American business and we expect it to grow going forward.

Your next question comes from the line of Wendy Nicholson, Citi Research.

Hi, first question just on housekeeping, I think you said China, your sales were down high single-digits. Do you have a sense for what the category growth was, just so we can compare that? and then second question, kind of more broadly on pricing, I guess, two components. Number one, in emerging markets where we continue to see currencies devalue like Russia, like Brazil, how far are you into your price increases, are you going to continue to take price increases to keep in line with inflation or sort of what’s outlook there? And then second part of that, with regard to pricing in North America, it’s surprising to me that there is still so much positive pricing kind of across the whole sector in light of the lower commodity prices. I don’t know whether that’s just the reflection of a stronger US consumer or more innovation but if you can comment kind of broadly on your outlook about pricing in North America and whether you think the price increases you’ve taken are sustainable?

Thanks, Wendy. Well first, China, it depends on the individual category but the market growth rates range roughly from, call it, 5% to 8%, so mid to high singles across the categories. And as I mentioned, we see significant opportunity remaining in China with those very effective growth rates albeit somewhat slower than they were two or three years ago. With the conversion from a manufacturing to a consumption-based economy, with the dramatic potential that exists as a result of larger family sizes from the possibility of two children versus just one and with the premiumization of the market which as I indicated admittedly we’ve not been as agile as we need to be in exploiting. But really, as I mentioned I was there last week, I was there weeks before the Christmas holidays and I walked away with a tremendous sense of encouragement while acknowledging that we have work to do. In terms of pricing, the pricing dynamic should continue to be favorable contributor to topline growth as we move forward, even if all we do is take forward the price increases that have already been executed, they are not fully annualized yet. So that should continue to be a positive on the top line. The pricing calculus or algebra is fairly complicated. You really have to look at the combination of currencies, commodities and competition to determine a course of action going forward in any individual product category or market. And the sum of those three things is very different depending on what market you're in, as influenced by both currencies and by competition. In general the companies in our industry continue to price at some level for foreign-exchange. I mentioned in our prepared remarks that we expect our ability to price to be somewhat lower than it has been historically and we will make up for that over time with productivity and other savings. And in the US, first of all, the commodity impacts aren’t as significant as you would assume, just looking at the headlines on oil prices, for example. If you look at everything from diesel to resin to other inputs that are derived from the petro-complex, while the pricing benefit or cost reduction has occurred, it is not anywhere near the level yet of the crude price reductions. So I think that's a potential source of disconnect as people think about this. Generally we’re taking pricing behind very strong product innovation. We’re looking to improve the strength of our overall value equations, the combination of pricing, product, performance, consumer usage, experience, static [ph] and done in that way I think that continues to be a contributor to growth and value creation.

Your next question comes from the line of Lauren Lieberman, Barclays.

I’ve got a question on SG&A and reinvestment level. So we sort of keep track of the moving piece of your share each quarter and it looks like reinvestment in the business decelerated a bit in the second quarter. And then also to tie to your full year outlook, SG&A probably needs to go up in the back half. So can you just tell me if that’s sort of on the right track and if it’s going up, what the specific areas of reinvestment will be versus the pace of the overhead take-out?

So we expect, for example, our media spending to be up double-digits in the second half versus year ago. So as reinvestment as compared to the prior year that will definitely be increasing. As we look at those choices, we’re obviously not encumbered by the math. We’re looking at the value creation potential that exists behind those investments in both the short and importantly mid and longer-term and we will invest where we have opportunities to do so. So I think that, you should think of the level of investment, reinvestment sequentially increasing as we go forward. I think, I know that will be the case this fiscal year. I expect that will be the case next fiscal year.

Your next question comes from the line of John Faucher, JPMorgan.

Thanks. Just to follow up on that. Jon, it seems as though you’ve delivered upside on the sort of FX neutral earnings growth year-to-date, particularly today you’re going to the low end of the range. Is that because of some of the incremental investments you are talking about? Is that ad spend sort of incremental to what you were thinking before? And then separately -- and thanks for the color on the FX piece – it’s a pretty wide range if we look at that over the balance of the year in terms of the FX impact, it’s probably something in the neighborhood of like $0.20. And so I guess I'm just wondering what drives those differences in outcomes from an FX standpoint because, just so we understand where we need to go within that range?

In terms of over-delivering and then maintaining the constant currency guidance, yes that definitely is reflective of additional investment, I mentioned in our prepared remarks that in North America, for example, we’ve increased our budgets by about 100 basis points since the start of the year, most of that occurring relatively recently, that’s driven both by our encouragement from a response standpoint to the spending that we have in the market and the acceleration of growth particularly in the US. And so yes, your interpretation is correct in terms of the various moving pieces. The guidance range is really reflective of what the underlying constant currency range of outcomes could be and then we just apply the current FX math on top of that. And there’s a lot of – we’re operating in a more volatile environment than we ever have, and I think our range is reflective of that reality as it should be.

Your next question comes from the line of Chris Ferrara with Wells Fargo.

Hey thanks, Jon, make you rehash this a little bit but I guess I'm not -- I'm not totally understanding why the back half EBIT would decline. So I think I understand the below the line impact of tax rate and other. But it looks like FX probably gets less of that in the back half of the year. So I think you said that, right, yet your guidance range really implies a deceleration in EBIT. So and a reasonably substantial one from this past quarter. So I guess, correct me if that's wrong but do you guys expect the gross margin acceleration to slow in the back half of the year, maybe I guess what might I be missing?

Some of those impacts -- that 8 to 9 point impact of things like Venezuela deconsolidation and the beauty transition costs and the non-operating income difference are all in the EBIT line. So that’s a significant driver of lower EBIT comparisons second half versus first half. As I mentioned, most of those hit the second half disproportionately. In terms of currency, there is some let up but not a lot in the back half. And I expect our margin progress to continue to be reasonably strong, certainly constant currency on both gross and operating. So really the comparison is most dramatically driven by FX and by things like the Venezuela deconsolidation, the transition costs associated with the beauty business that are not in discontinued operations. For example, if we have employees in our global business service organization that are working to stand up the new company in terms of building the systems that are required etc. those are employees that are going to remain with Procter & Gamble and therefore their costs are not in discontinued operations, they are in continuing operations. And then as I mentioned, the divestiture gain in non-op is a big driver as well.

Your next question comes from the line of Bill Schmitz with Deutsche Bank.

A couple of questions, just a housekeeping one. Do you still think Duracell is going to close roughly in any day now and is Coty still set to close July, August? And then my real question is, when do you guys – when does market share really start to matter, because I know you’ve kind of sort of downplayed it and said, we’re about expanding categories and protecting the structural integrity of our categories but it just seems that some of the share decline, as some others mentioned, especially some of the emerging markets are a pretty significant. So can you just tell me like, if you’re going to have a point in time where the focus is going to shift, and you’re going to start focusing on market share again and then just in a quarter what percentage of the business is gaining market share?

Duracell, as I mentioned earlier should close this quarter. The exact date will depend on work that still needs to occur but that's on track. Coty is currently scheduled to close as well on the timing that we initially indicated, which should be in the back half of the calendar year, so no changes on either of those, both progressing towards the desired end points that we would hope. In terms of market share, our objective is balanced growth and value creation with the growth objective being over time at to slightly ahead of markets. So market share does matter but particularly in a time when we need to restore structural economics and in response to currency moves we can get ourselves in big trouble, as that becomes the driving metric. And so as we’ve said we’re prepared to lose some share in two situations. One is where we’re restoring our structural economic attractiveness and having a higher market share with a negative gross margin isn’t helpful to anyone. And also where we are doing some of portfolio cleanup that I mentioned on the core categories but we will be in a much better position longer term from both the growth and value creation standpoint if we can focus on the parts of our portfolio that are really working for us. So if you look at the percentage of business that is holding our growing share, it’s about 45% globally currently, we would expect that to be higher going forward. In the US where we are further ahead in the strengthening of our portfolio et cetera, we’ve got about 60% of business holding in our growing share.

Your next question comes from the line of Mark Astrachan, Stifel Nicolaus.

Good morning, everybody. I wanted to go back to China, Jon. So, does the sales growth guidance for the back half of the year anticipate an improvement in current trends? And then related to that, given the time that you talked about being in the market, do you think it's realistic you can be competitive in all the categories in which you compete today?

The current guidance does an improvement in China in the back half and that should be very doable just based on the math alone. In other words, the annualization of some of the changes that we made in our go to market and inventory levels in the back half of last year. So we do expect that will improve and again as I said our view on China is an opportunistic one, not a pessimistic one. We really think that there is significant continued opportunity there both top and bottom line. And I think we picked the categories that we’re going to compete in, in the new portfolio based on our view of our capability to be more than competitive to win. These are categories that we have won in, we’re global leaders in almost every single one, I think seven out of 10, and we are among the leaders in the balance. There is a margin structure that allows for a significant investment and growth in each of these businesses. These are higher margin businesses and they are businesses that importantly leverage our core capabilities as a company. So they have been deliberately chosen for success.

Your next question comes from the line of Steve Powers with UBS.

Thanks, Jon. So, I guess on the one hand, I think we're all very pleased with the return to positive organic growth, especially alongside the strong cash productivity and margin progression that you called out. And then on the other hand, volumes were still down 2%. I guess 1%, if I exclude the businesses you've chosen to exit. But negative essentially across the whole business nonetheless. And market share, sounds like it was down in aggregate. So I guess just some further comments there would be helpful in terms of how and when you're likely to come out of this negative volume phase? Because if I go back over the last 15 years or so, we're sort of in this anomalous period where last year and sounds like this year we're in negative volume territory. The only time that's ever happened was the financial crisis. So I guess again, how and when can we sort of inflect positive on that key volume number?

So the two drivers of the volume reduction, one, as you indicated there is a portfolio cleanup within the core categories that are still reported within continuing operations and as you rightly indicated, that’s had about a point worth of impact. And the other is the market reaction from a consumption standpoint and in some cases the share price evolution, as we take pricing to offset foreign exchange impacts in large devaluation markets. So if you take Russia, or the Ukraine as an example, where devaluation has been 70%, 80%, 110%, we have negative gross margins, we need to price over time as well as do everything we can from a savings standpoint to restore those margins at least to a positive levels, so the growth is meaningful. And during that process, both at a market level, the markets tend to contract in response to higher price points and sometimes from a share standpoint and Russia and Ukraine are good examples where we’re competing against strong European competitors, in other case, Russia, Japanese competitors as well, and sometimes there's a modest share impact that comes with the pricing that we deem necessary to take. We are not prepared to lose share indefinitely. Our history in this area is that it takes kind of six to nine months to work our way through this. Some of the pricing that we’ve taken has been recent because a lot of the devaluation has been recent. So I don't -- I haven't actually looked at it quarter by quarter to see what’s the quarter where volume will re-inflect positive. We’ll have to work our way through this pricing. I don't believe -- go back to the comments on market share, we fully intend to grow at market growth rates or slightly ahead of market growth rates over longer periods of time, that requires volume growth. I mentioned market is growing 3 percent-nish, we’re not going to be able to take 3% pricing indefinitely, nor is that our intent in any way. So we will -- also we’re not in markets where competitors don’t respond from a pricing standpoint. Remember we – because we are the market leaders typically have to lead or nothing happens, so we’re exposed for that period of time and competitors can take six to nine months sometimes before they respond or they cannot respond at all. And to cases where they don’t respond to the level that are necessarily to maintain are value equation comparisons or where they don’t price at all, we will reduce price. We’re not going to be un-competitive, we’re not going to lose share on a sustained basis.

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

Just two quick questions. Jon, can you maybe provide just a quick bridge on the volume? When you talk about the US going positive and helping us reconcile how you got to the total consolidated number, just so we get a geographic viewpoint. And then the bigger question is, as you kind of push responsibility closer to those 10 business leaders, how long does that take to really start affecting business decisions and on the ground results? I'm trying to get a sense of what the time lag typically you would expect after making a move like that.

Thanks for the bigger picture question, Nik. It’s actually something we will spend some time talking about at CAGNY. It’s interesting, the market on a relative inflection point standpoint, that’s growing the strongest which is the US, is one where these changes were made first. They were made about year ago, where basically in addition to the 10 categories and their ability to operate somewhat independently, we’ve sectorized our sales force and so we’re going end to end from GBU all the way through to customer with dedicated sales support. We’re not moving people as rapidly across categories. The GBUs have full decision rights on the amount of resources that are supporting their business from a go to market operation standpoint, which has led to some choices quite frankly to increase coverage in some channels, it’s led to choices to hire mid-career talent that has experience in a category that extends beyond the experience of our current employees. So it’s having a dramatic impact and every change has a slightly different timeline in terms of when it could reflect in the business results. But I think we can – I think we’re making good progress in this area. I think we have more to do. Again we will talk about that at CAGNY, and I don't think it takes a long period of time to make a difference.

Your next question comes from the line of Javier Escalante, Consumer Edge Research.

Hi, good morning everyone. Going back to Nik's questions, which I don't think -- at least I didn't hear the response, is that could you break out geographically the growth at, say, in emerging markets between -- also between volume and pricing? Secondly, it is true that volume has been negative for four quarters in a row. To what extent you feel that this has been problems in the way you execute pricing as it happened in Russia and Mexico and whether those execution issues have been resolved? My understanding is that you have removed some of the heads of China and Latin America. All these changes are over. Shall we expect pricing to be less disruptive going forward?

First, sorry, I did miss the first part of Nik’s question, thanks for bringing that back. The relationship of organic volume to organic sales in the October-December quarter, developed markets organic volume was plus 2, organic sales were plus 3. If you look at developing, organic volume was minus 6, organic sales were flat versus year ago. If you look at those comparisons, they are indicative of exactly what I have said a couple times in this call in terms of what’s driving the volume reduction is pricing in developing markets to offset FX where you don't have as much of an FX impact. For instance in the developed markets our volumes grew at 2% in the quarter. In terms of – you mentioned Mexico as an example, we actually had a very good quarter in Mexico. The changes that we’ve made there, we’re very pleased with. Organic sales were up 4% in Mexico in the quarter and remember I talked about the tissue towel impact – the tissue change in the portfolio which has negatively impacted organic sales, that’s in Mexico. Excluding that, Mexico organic sales were up 8% in the quarter and volume was up as well. So again there is a bit of noise as we work through the combination of the portfolio and foreign-exchange. But we expect volume will grow as we go forward and share will also be something that becomes increasingly attainable.

Your next question comes from the line of Joe Altobello with Raymond James.

First question is on Brazil. I apologize if I missed this, but what were the Brazilian sales in the quarter? I think last quarter was down 12%. You were hoping for a little bit of bounce back this quarter. Secondly, on commodities, Jon, you mentioned earlier that you're not seeing the benefit that some would think you would given the move in oil but obviously it is a positive for you this year. So what kind of boost do you see from commodities to earnings this fiscal year?

Thanks Joe. Brazil, for the quarter organic sales were up 11%, that compares to minus 12% the prior quarter, I think that again is another good example of the volatility that’s going to occur here as we get the right pricing set in the market and as well our ability to pull that through and generate growth on a sustainable basis. So again Brazil was up 11% on the quarter. In terms of commodities, look that as a single area, so the reduction of input costs, that impact is about $500 million on the fiscal year. Some of that we anticipated going into the year for us but that’s the amount. I would argue that in total, in other words, inclusive of consumption impacts in oil producing countries where there has been massive disruption and instability, if you think about markets like Saudi Arabia, markets like certainly Venezuela, I would say that the net impact in our P&L is likely neutral negative but the pure cost impact is $500 million.

Your next question comes from the line of Bill Chappell with SunTrust.

Jon, I just wanted to follow-up, since you had highlighted kind of the changes made both in Mexico and India and the not worse gaining sales, if they're not worth anything. I think you said that costs about 1 point to organic growth in the quarter. If that's right, is that the expected impact for the next two, three quarters and is this kind of a program that may accelerate as we move into fiscal ‘17?

The amount is the correct amount, you are right, it was about a point in the quarter. We would expect – we really started this work in terms of execution in July-September, maybe some in the latter part of last fiscal year, so we would expect this to continue through the next couple quarters but then it should dissipate going forward. There may be a few additional choices we need to make but in general you will see it for the next couple of quarters and then it should start to dissipate.

Your final question comes from the line of Ali Dibadj from Bernstein.

Hey, guys, thanks for fitting me into the call. Believe it or not, I still have a few questions. One is just go deeper on volumes. Look, your compares clearly get easier over the next couple quarters, so that should certainly bode well. But can you elaborate a little bit more and perhaps even quantify the inventory management change by retailers and the trade term change that you mentioned in the press release, which is mentioned as a negative. Particularly in the context of what you said on your prepared remarks, which is that sales being slightly ahead of consumption. So give us a sense of the ongoing effects of those if you could? Number one. Number two is on your FX kind of multiplier between the top-line and the bottom-line impact, why did it change so dramatically versus your ‘16 guidance? So what I mean is that in July, your FX impact was going to be negative 4% to 5% top line, negative 3% to 4% bottom line, so kind of a less than 1 ratio. But now it's a negative 7% on top line, negative 10% on the bottom line, so very quickly shifting to a greater than 1 ratio, despite your efforts to localize more, et cetera. So is that all Argentina devaluation? Or is there some forecasting math that I'm not getting or can you give us a sense of how your business is structured or levered differently than we would expect it, because it's big switch in a short period of time? And then third question is more in terms of running these conference calls. Should we infer that the decision was made, because I know you guys were thinking about this, that your CEO will not be on these quarterly calls and will only be at things like CAGNY and the annual calls like AG was doing? Or are you still in the deciding mode? Thanks for the two questions.

On the FX multiplier, as you can imagine the different currencies that have – we have no ability to forecast which currencies are going to move and how much they are going to move. And top and bottom line relationship between currency movements is very different depending on the market. It depends on how the markets source, it depends on the balance sheet of the market, I mentioned balance sheet revaluations, so for example, in Argentina we’ve talked about the balance sheet revaluation that occurred there, so it’s really a function of what actually is happening in the marketplace country by country, how we source to markets and what the balance sheet exposure is in different markets. So I guess I am saying we don't really have a good ability to forecast exactly what the currency impact is going to be on either the top or bottom line and frankly we spend very little time thinking about the relationship between the two. In terms of the comments on trade inventory reduction, that is largely a China dynamic. I mentioned in prior calls that our inventory levels were too high particularly in the wholesale channel in China, and as a result our pricing was too low which was driving a bit of a distortion and difficulty for our distributors. And so we’ve made some choices to address that and that has a short-term volume impact. That’s really what that comment was designed to indicate. Relative to senior executive engagement with the investment community, we intend to be fully engaged with the investment community through a combination of quarterly conference calls, investment conferences, meetings here in Cincinnati. Dave will be on the road frequently as well interacting with the investment community. So again our strategy is one of very high engagement. End of Q&A

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