A.G. Lafley – Chief Operating Officer Jon Moeller – Chief Financial Officer Teri List – Senior Vice President, Treasurer

Nik Modi – UBS John Faucher – JP Morgan Lauren Leiberman - Barclays Bill Schmitz – Deutsche Bank Ali Dibadj - Sanford Bernstein Wendy Nicholson - Citigroup Andrew Sawyer – Goldman Sachs Chris Ferrara – Merrill Lynch Joe Altobello – Oppenheimer Connie Maneaty – BMO Capital Alice Longley - Buckingham Research Bill Chappell – SunTrust Robinson Humphrey

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

Thanks and good morning everyone. A.G. Lafley, our CEO and Teri List, our new Treasurer join me this morning. I will begin with a summary of our second quarter results. Teri will cover business highlights by operating segment. I will then provide several topical updates before I address the guidance for fiscal 2009 and the March quarter. Following the call, Teri, Mark [Irsig], John Chevalier and I will be available to provide additional perspective as needed. Now let’s move to results for the December quarter. As expected it was a challenging quarter. Consumers, both here and abroad, were under pressure from sharp declines in both housing and financial markets. Unemployment increased and consumer confidence dropped to an all-time low. Much of the developed world fell into recession and growth rates in many developing markets decelerated. The global credit crisis forced some retailers and distributors to cut inventory and conserve cash. Commodity and foreign exchange markets remained extremely volatile. Against this backdrop, P&G delivered. We grew organic sales and delivered on our earnings per share guidance. Diluted net earnings per share increased 61% to $1.58 per share. This includes the one-time gain of $0.63 per share related to the sale of Folgers. Organic sales increased 2%. All six reportable business segments either grew or maintained organic sales for the quarter. Organic volume was 3% below a year ago due primarily to reductions in retailer, distributor and in-home inventories in both developed and developing markets. Volume was also impacted by several price increases that went into effect during September and October. These impacted second quarter volume results in two ways. First, to take advantage of lower prices some retailers and industry leaders placed large orders ahead of these price increases. As a result they did not order as much during the December quarter. Second, our pricing actions resulted in some short-term price gaps versus the competition. Those price gaps with only a few exceptions have recently narrowed and are now closer to historical norms. Importantly, our markets continue to grow in both unit and volume terms and in aggregate we retained market value share. So consumption of our products remains healthy. Pricing added 4% to sales. This is an acceleration of the positive trend we have seen over the past several quarters. Mix increased sales 1%. Favorable business unit and geographic mix were the primarily drivers. Foreign exchange lowered sales by five points, consistent with our most recent estimate. Total sales were 3% below a year ago at $20.4 billion. Operating margin was down 90 basis points for the quarter primarily due to higher commodity costs and 40 basis points of Folgers-related restructuring charges. De-stock spot prices peaked during June and July but because of the length of some supply chains we did not see the full impact in cost of goods until the December quarter. Commodity and energy costs reduced gross margins for the quarter by about 300 basis points. Business unit and geographic mix lowered gross margin by an additional 70 basis points due to faster relative growth from baby and family care and developing markets. Pricing, productivity and cost savings programs offset about 80% of these impacts leaving gross margin down 70 basis points for the quarter. The all-in effective tax rate for the quarter was 15.7%. The unusually low tax rate was due to the tax-free gain of the sale on Folgers. The effective tax rate on continuing operations was 25.7% reflecting the net effect of foreign mix, audit settlements and the effect of foreign repatriations. Moving to cash, we generated $5.6 billion of operating cash flow and $4.2 billion of free cash flow fiscal year-to-date. Free cash flow productivity is currently running below our 90% target due to temporary increases in working capital. While shipment patterns remain highly volatile and uncertain, working capital should improve as production patterns are adjusted to order flow and lower commodity and energy costs result in lower inventory values over the balance of the year. Capital spending is at 3.4% of sales fiscal year-to-date, consistent with our annual target of about 4%. We remain comfortable with our 90% free cash flow productivity target for the year, excluding the one-time gain from Folgers. Fiscal year-to-date we have repurchased $5.2 billion worth of stock. This is consistent with our $8-10 billion target range for the year. We are now exactly half way through our three-year $24-30 billion repurchase program and have bought back $15.3 billion worth of stock thus far. In addition, we retired $2.5 billion worth of stock as part of the Folgers transaction during the December quarter. We paid $1.2 billion in dividends during the quarter. P&G’s dividend yield is 2.8%, the highest it has been in almost 20 years. This was a tough quarter with a number of economic factors moving against us. I thought one example of how these factors impacted segment results might be helpful. Net earnings for our biggest business segment, fabric and home care, dropped by 25% during the second quarter. To put this in perspective, commodities negatively impacted earnings by about 35%. De-stock prices peaked in June and July but because of the fabric and home care supply chain the full impact did not hit until the December quarter. While some commodities have moderated recently, spot prices of other key materials use by fabric and home care such as phosphate, citric acid, soda ash and sodium sulfate are up 50-150% versus a year ago. Foreign exchange negatively impacted net earnings by about 15% as several important markets such as Russia saw the value of their currency drop sharply versus the dollar. The global credit crisis caused retailers and distributors to lower working capital in order to conserve cash and consumer confidence in many countries around the world dropped to record lows. As a result, reductions in trade, distributor and consumer pantry inventories lowered net earnings by an additional 10% during the December quarter. Taken together, commodities, foreign exchange and inventory drive volume impacts lowered fabric and home care profit by about 60% versus last year. Importantly the business offset well over half of these negative impacts with pricing, cost savings and productivity programs. Impacts of this magnitude are unprecedented in our industry and have been felt across each of the business segments to differing degrees. Despite all of this we were able to grow company organic sales, maintain global value shares and deliver earnings per share with our going in line estimates. Looking forward many challenges remain but we believe we have the right plans in place to continue growing top line organic sales and bottom line earnings. I will say more about this later in my comments on guidance. Now let me turn the call over to Teri.

Thanks Jon. Starting with the beauty segment organic sales were in line with the prior year as price increases offset lower shipment volumes. We feel our beauty business is holding up quite well in the current environment relative to others in this industry because of P&G’s diversified portfolio across categories, countries and channels. We have a broad category mix ranging from fine fragrances to skin care to hair care to deodorants. Beauty is one of our more globally diverse businesses with a healthy balance of developed and developing market presence and our beauty business is very well positioned for the current economic climate as it is largely focused on the food drug mass channel. Retail hair care volume grew low single digits with a broad based growth across all major retail brands including Pantene. Volume growth was led by Head and Shoulders, Herbal Essences, Rejoice and Nice ‘n Easy. All grew mid single digits or higher for the quarter. Head and Shoulders delivered double digit growth in [inaudible] and Japan behind new anti breakage innovation and strong sales fundamentals. Herbal Essences grew high single digits in developed markets behind the successful restage of the brand. Across Asia Rejoice volume grew double digits behind the extraordinary smoothness and extraordinary reactions initiatives. Nice ‘n Easy shipments were up high single digits in North America behind the continued success of our Perfect 10 innovation. As a result, Nice ‘n Easy all-outlet value share in the U.S. is up over three points to over 20%. Global hair care shares are growing and U.S. all-outlet value share of retail hair care increased nearly a point to 32%. Professional hair care volume declined mid single digits due primarily to general market softness as consumers reduced the frequency of salon visits. Skin care volumes declined mid single digits mainly due to the divestiture of Noxzema. Olay’s skin care declined slightly as double digit growth in greater China was more than offset by trade inventory reductions and higher levels of competitive promotional activity primarily in North America. Lower volume was partially offset by improved product mix, from higher shipments of SK2 and the Olay Regenerist line. Over the past three months U.S. consumption of both Olay Definity and the Regenerist Line are up over 20%. Global value share of the facial skin market was consistent with prior year. Cosmetics volume declined mid single digits primarily due to trade inventory reductions. Cover Girl’s market leading, U.S. all-outlet value share grew over half a point to 19%. We continue to build share in prestige fragrances although volume declined high single digits due to trade inventory reductions, market contraction and a shift of initiative timing to the second half of the fiscal year. In the grooming segment, organic sales were up 1% as price increases and improved mix more than offset a 5% decline in organic volumes driven largely by double digit declines of Braun. In Blades and Razors, volume declined low single digits due primarily to trade inventory reductions and unit volume market contraction in some developed markets. On a value basis, the global market continued to grow at over 5% driven by trade up to premium systems and pricing. Gillette’s share of the market increased one point behind the continued strength of the Gillette Fusion franchise. Fusion grew share in all of P&G’s top 17 countries in the December quarter and is up nearly three points over the past six months. In the U.S. Fusion’s value share of male systems was up nearly two points to over 20% making us the largest wet shaving system in the U.S. Share gains on Fusion more than offset share declines of legacy systems. In female wet shaving Venus grew behind the continued success of the Embrace and Breathe innovations. Global Venus value shares increased over two points to about 38%. Volume of Braun was down due to market contractions, exit of the home appliance and Tassimo coffee maker businesses and trade inventory reductions. Braun’s value share of the global dry shaving market increased half a point to about 35% behind growth of female epilators. In health care organic sales were in line with prior year as pricing offset organic volume declines. As expected, personal health care continues to be affected by declines in shipments of Prilosec OTC due to the loss in market exclusivity last calendar year. Oral care volumes declined low single digits primarily due to trade inventory reductions in China ahead of a mid-tier brand restage launched late in the December quarter. In the U.S., Crest’s all-outlet value share of toothpaste was in line with prior year at 38% continuing its leadership position. Importantly, shares of Crest Pro Health toothpaste achieved record high levels for the past three months at over 8%, up two points versus a year ago behind the success of Pro Health Whitening. In toothbrushes, Oral B shipments were in line with prior year. P&G shares are up over 1.5 points in both the manual toothbrushes and rechargeable handle segments due to Oral B, Cross Action, Pro Health and Pulsonic innovation. Volume in feminine care was in line with the prior year as double digit growth of Naturella in Russia and Mexico was offset by a mid single digit decline of Tampax globally. In the U.S. Always all-outlet share of the pad segment was up over half a point to more than 58% behind the break through launch of the premium initiative Always Infinity. After just three months in the market, Always Infinity has gained 6% value share while selling for a 60% price premium to the main Always line. For the snacks and pet care segment organic sales grew 4% reflecting significant pricing actions in pet care. Pet care sales increased low single digits and shipments declined mid single digits. The consumption decline was anticipated as we implemented multiple price increases in response to significant input cost increases. Iams value share was flat for the quarter at nearly 8% in a market that grew over 16% in value terms due to pricing. Volume in snacks was down mid single digits. As we have prepared for the restage of Pringles in North America we have had to manage trade inventories to match manufacturing capacity. Pringles all-outlet value share of the U.S. potato chip market declined about 1.5 points versus prior year to 11% due mainly to lower promotional activity ahead of the brand restage. Next in the fabric and home care segment organic sales grew 1% as price increases and improved product mix more than offset volume decline. Fabric care shipments were down mid single digits primarily due to lower shipments of Tide in the U.S., China and Saudi Arabia driven by trade inventory reduction and share declines following price increases. P&G’s all-outlet value share of detergents in the U.S. was down over 2 points as lower shares on Tide were partially offset by increases on Gain. We remain a share leader at 60%. Home care shipments declined low single digits as high single digit growth of Febreez was more than offset by declines in dish care and surface care following price increases. Importantly, P&G gained U.S. all-outlet value share in surface care and air care and maintained share in dish care despite the price increases. Battery shipments were down low double digits behind significant trade inventory reductions, market contractions and share declines. Duracell’s market leading U.S. all-outlet value share of alkaline batteries was down 2 points to 46% for the past three months as private label products gained share in the current economic environment. Next, baby and family care delivered strong organic sales growth of 7% behind price increases and higher volumes. Volume in baby care grew low single digits led by high single digits growth in developing regions. Pampers grew double digits in China, Russia, Saudi Arabia and Turkey. In Western Europe, Pampers grew high single digits behind strong consumer response to the UNICEF Vaccine Partnership campaign. Pampers’ value share of the Western European diaper market is up nearly two points to nearly 55%. In the U.S., P&G’s overall diaper value share was in line with prior year at 36% as the decline in Pampers diaper share from a shift towards lower priced tiers was offset by gains in the Luvs brand. Family care volume declined low single digits as growth in Bounty was offset by a decline in Charmin due to a high base period that included the Charmin Ultra Strong initiative. Bounty was driven by the Best Bounty Ever initiative and strength of the base product line. Bounty U.S. value share grew 1.5 points to over 44%. Charmin U.S. all-outlet value share declined modestly to 27%. That concludes the business segment review and now I will hand the call back to Jon.

Thanks Teri. Before we get to guidance I want to briefly explain how we are managing in this volatile environment and respond to questions we have been receiving since analyst day in December. We have established the following three priorities to guide our efforts through this period. First and foremost we are focusing on value. We are ensuring we have strong plans and discount channels and winning customers. We are establishing performance based value messaging across all touch points on air, package and in store and are shifting funds where effective to coupons and consumer promotions that deliver better value. We are monitoring pricing closely and intervening where appropriate to maintain appropriate value relationships. As we do all of this we are broadly maintaining investments in brand building and innovation, both of which build value over time for consumers, customers and shareholders. Second, we prioritize cash and profit and profitable share growth in that order. As part of this we are aggressively reducing costs. To date our efforts have identified $1.2 billion in year-to-year savings but we are driving for more. We will save over $100 million this year through the planned reduction in the number of expatriate managers as we build stronger global management teams. We are eliminating unnecessary hierarchy and reducing senior management staffing. We are aggressively negotiating construction in the capital contracts and are working closely with our media partners to drive meaningful efficiency across all markets. These efficiencies should enable us to maintain or increase share of voice while lowering costs. We are reducing travel costs by relying more heavily on video and phone conferencing. So there are a lot of proactive choices being made to reduce costs and improve productivity. Beyond standard cost reduction efforts we are stepping up efforts to dramatically simplify our work and our organization structure. Simplification reduces cost and increases both speed and quality of execution. I will give you one example. We currently use up to 4,000 colors globally for resins that we use in blow molded and injection molded parts for packaging products. By reducing colors up to 50% and restructuring our supply base we estimate that we can save $50 million a year and significantly simplify operations. Third, we are focusing on turning this crisis into an opportunity, refocusing on consumer value; cost and cash discipline and as I just mentioned seeing the crisis as an opportunity to dramatically simplify our operations and our organization. All of the actions we are taking should both help mitigate the short-term impact of the crisis and build an even stronger company for the long-term. Let me now answer some of the questions we have been receiving that may be on your minds starting with market growth rates. Our markets in aggregate continue to grow. There has been some contraction in discretionary categories such as fine fragrances, hair care and quick clean. Some consumers are trading down but our strategy of offering consumers a range of choices within a product category is working. For example, Luvs, Gain, Bounty Basic, Charmin Basic all delivered solid volume growth during the December quarter. Private label is a factor in only some of our categories and in only some of our markets. For example there really isn’t private label dynamics in the developing world and it is a very small factor in beauty. Private label shares in our categories across North America and Western Europe have continued to increase modestly but are up less than 1%. As I mentioned earlier our shares are holding. Innovation continues to create value. For example, by providing men with the best shave possible for as little as a dollar a week, the Fusion represents a great value even in this tough economy. That is why Fusion increased global share by almost three points during the quarter and increased shipments by almost 20%. Women continue to see value in products like Always Infinity. Always Infinity has achieved a 6% value share after only two months at market despite being priced at a 60% premium. Consumers seeking the best performance and comfort in the category see Infinity as an excellent value. So while consumers are under increasing financial pressure they continue to respond to innovation and value and we don’t expect that to change. Next, commodities and pricing, during our analyst meeting last month we revised our fiscal 2009 estimate for the impact of higher commodity and energy cost from about $2.7 billion to about $2 billion. Since that time the commodity and energy markets have remained volatile but have generally been moderating which is good news. As a result we now expect to incur slightly less than $2 billion in incremental commodity and energy costs this year. We continue to receive questions about the potential for price roll backs which I would like to address next. It is important to understand that pricing is related to much more than just short-term trends and commodity costs. Of course, commodity prices do factor into our pricing strategies but they are not the only consideration. A significant portion of our pricing is driven by innovation. Improved products that provide additional benefits to consumers often cost more to produce. Our pricing is designed to recover these costs and create funding to support future innovation. This creates category growth and value for consumers, customers and P&G. We continue to deal as well with significant increases in commodity costs. Over the past three years commodity costs have increased by $4 billion. We have offset only about 75% of these increases with pricing to date. While commodities such as oil, which we don’t actually buy, have moderated a representative basket of key materials we do purchase is 20% more expensive today than at this time last year. For example, the spot price of super absorbents and surfactants are both up 25% versus year ago. Costs are up even more in markets that have experienced significant currency devaluation. In countries such as Russia, the Ukraine, Poland and Mexico the cost of U.S. dollar denominated inputs is up sharply and in many cases is still rising. We continue to monitor price gaps in the relative consumer value of our brands. We will take appropriate action when needed but we do not currently see the need for broad scale pricing interventions. Importantly, if it does become appropriate to reduce price in the future we would expect volume growth to reaccelerate. Next, let me touch on the credit markets and our debt portfolio. We continue to choose commercial paper as a vehicle to cover about 30% of our financing needs. We have had uninterrupted access to this market. We are currently issuing very comfortable maturities of four to six months with coupon rates of about 50 basis points. Our commercial paper program is back stopped by undrawn lines of credit. These lines of credit were renegotiated over the past 18 months and are primarily five year facilities. P&G’s access to the term market is also very good and rates are attractive there as well. In September we issued two floating rate bonds valued at a combined $2 billion at 3 and 18 basis points over LIBOR respectively. Just last month we issued a $2 billion five year fixed rate note at a coupon of 4.6%. All three offers were over-subscribed. These rates are lower than the rates on the bonds that are maturing over the next 18 months. We remain committed to our AA- credit rating and to returning cash to our shareholders through dividends and share repurchase. Moving to guidance, we believe it is prudent to broaden our guidance ranges for the foreseeable future in response to all of the uncertainties we have talked about today. We expect fiscal 2009 organic sales growth of between 2-5%. This lower range reflects second quarter results and continued uncertainty. Price mix should contribute 4-5%. Organic volume is expected to be flat to down 2%. Since analyst day foreign exchange markets have remained very volatile. The dollar strengthened against the British Pound, Euro and Russian Ruble but depreciated versus the Japanese Yen, Australian Dollar and Philippine Peso. These moves have largely offset each other and as a result we continue to expect foreign exchange to reduce sales by about 5% on the year. Acquisition and divestiture impact should be neutral to negative 1% impact on sales growth and in total we expect all in sales to be flat to minus 4%. We continue to see operating margin about flat for the year including Folgers restructuring costs. The tax rate on continuing operations should be between 27-28%. We are comfortable with the current consensus earnings per share estimate of $4.29 which is approximately at the mid point of our revised fiscal 2009 earnings per share guidance range of $4.20 to $4.35. Now for the March quarter much of the credit induced inventory contraction manifested itself in the December quarter however there is likely to be additional impact going forward. If consumer confidence around the world continues to drop we would expect consumption in more discretionary categories to be further impacted. These considerations are reflected in wider guidance ranges for the March quarter. Organic sales are expected to grow 2-5%. Within this, price mix should contribute 5-7% sales growth. We expect organic volume to be down 2-3% versus a year ago. Foreign exchange is estimated to reduce sales by high single digits and acquisitions and divestitures are expected to be neutral on quarter. In total, we expect all in sales to be down 2-7%. Operating margin for the quarter will be down modestly versus prior year including incremental Folgers restructuring. Commodity costs and volume de-leveraging impacts should be largely offset by productivity improvements and cost savings programs. We expect earnings per share to be in the range of $0.78 to $0.86 per share including Folgers related restructuring charges. We wouldn’t typically comment on the June quarter at this time but when your models are updated you will see we expect operating income to significantly improve versus the March quarter. This will be driven by smaller commodity impact, a reduction in trade inventory headwinds, more implementation of productivity and cost reduction programs as well as price increases being executed currently to recover transaction impacts of foreign exchange movement in developing markets. So in summary we continue to operate in a very difficult environment. Despite this we are growing organic sales and earnings per share. We are maintaining global value shares. Our cash flow and balance sheet remains strong and we are returning cash to shareholders through share repurchase and dividends. A lot of uncertainty remains but the entire management team is fully engaged and focused on the fundamentals which are important for our success in our industry. We are continuing to improve productivity and simplify our work processes and organizations. These are the right things to do in the short-term and will build an even stronger company for the long-term. A.G., Teri and I would now like to open the call for questions.

(Operator Instructions) The first question comes from Nik Modi – UBS. Nik Modi – UBS: I’m just curious on your thoughts on the magnitude of volume declines we are seeing across many global HPC companies and the impact on the promotional environment over the next 12 months. The way I look at it are we heading back to the old school price war as commodity costs roll down and the consumer remains under pressure? A.G. Lafley: I don’t think so. If you look at the volume trends I think they are clearly a function of two things. The fact that markets are slowing, but for the most part still growing but some as Jon said of the more discretionary ones actually declining. They are a function of what we hope will be relatively short-term inventory draw downs by our trading customers and by consumers. I think that behavior is understandable. We have seen it in every other recession. I think what you want to watch is the relative changes in share position. I am pretty pleased with this quarter that we just completed because for the most part we held our share position or we were able to, in some important cases like hair care, to modestly improve it. I am also pretty pleased because if you look at the businesses where you can do head-to-head comparisons, the paper businesses, the beauty care businesses, some of the other businesses we are holding up pretty well. I think we are in a relatively strong strategic position and we are operating well. I think that unless you see big changes in market share positions that you will see pretty rational behavior on the part of all of the players in the different industries. The one thing I will say is there is absolutely no doubt in this environment that consumers are looking for value. As Jon tried to point out sometimes that means a low opening price point, an affordable price point, and that is why our basic lines, the Gain and Luvs of the world do relatively better. That is why private label grows in recessionary times. But in many cases value comes with innovation and a higher price point. The thing that we are heartened by is a lot of our value added offerings in our category and brand portfolios are holding up very well and in fact growing a lot of share. That just simply means there are different consumer segments out there that have different sets of needs and a different consumer value equation. So sort of a long-winded way of saying I don’t think you are going to see a return to irrational price wars. I do think you will see a lot of us sort of dialing in the right values to make every offering to consumers a good value but I don’t think you are going to see any big ifs.

The next question comes from John Faucher – JP Morgan. John Faucher – JP Morgan: In looking at your organic revenue growth guidance for the fiscal third quarter it seems as though generally you are looking for a little bit of an acceleration there and given the fact that fiscal Q2 really only had from what we can tell two bad months can you walk us through some of the components in terms of less de-load impact. You are seeing that already. Improvements in Tide, what have you, that give us confidence you can accelerate the organic top line in a quarter where you have three bad months as opposed to two bad months? A.G. Lafley: First of all we are getting more traction each month from our pricing and from our mix moves. So we are actually seeing sequentially month by month an improvement, a relative improvement, in our price mix. Secondly, we know exactly what our innovation and initiative program looks like for the January/March quarter and we have a number of strong initiatives that have either just launched in the quarter that closed in December, are being launched or will be launched in January/March that actually sweeten the mix. Then I guess the third thing is we should see the inventory situation begin to moderate a little but frankly I want to stay cautious there until we actually see it.

The next question comes from Lauren Leiberman – Barclays. Lauren Leiberman - Barclays: Just a question on mix. Something I have been asking about for a couple of quarters and I understand that consumers will continue to pay for value add like in Always Infinity but I am actually surprised that mix was still positive in the quarter given examples like Tide being down double digits or you mentioned developing markets outpacing developed markets and the mid-tier growing faster. If you could explain a little bit about how mix is still positive and also just following up on your comments about innovation initiatives for the third quarter, have you done much consumer testing in those that says consumers will be ready for mix enhancing purchases in this environment or were those things six months ago when people had money in their pockets? A.G. Lafley: Let me take the last question first. As you might imagine the consumer testing is intensive. It is relentless and it is ongoing. Every Monday morning when we get together we look at the latest consumer data on just about anything we can get our hands on. So you are on a very important point there. It has got to be timely consumer data. Clearly, let’s take the Tide example. First of all the double digit drop, just to be clear, in fabric was on the earnings side. The top line has held up better of course. If you look at the Tide portfolio and the Tide mix where we felt the pressure was in the basic Tide offerings. That is where consumers are shifting to Gain or trying one of the price brand alternatives whether it is private label or manufacturer’s brand. We introduced Tide Total Care. I think we have done $100-150 million on Tide Total Care. That is the rate. Tide Cold Water continues to do well where sold at a premium per load. We still sell a fair amount of Tide with a touch of Downey and Tide with Febreez. So for those consumers that represents a good value. Okay? Some choose not to use a separate fabric softener. Some want a little more fabric softener and freshness in the load so it is really hard to generalize across a mass consumer audience because the mass consumer audience doesn’t exist any more. If you step back on your mix question we are still benefiting from some geographic mix positives and if you look, as I said, in a number of category and brand portfolios we are benefiting from some positive mix. If you think about what the consumer pays for most of the P&G portfolio almost everything we sell is sold between $1 and $10 a unit. We are not talking about expensive items that can’t be afforded even in a recession. So based on everything we see we think that is what the price mix is going to be for the next quarter and we will hold that basic price mix for the year.

I just build on that with one point and that is simply the strength of the current environment and to come of our premium price innovation. We are really in a good position across multiple categories and consumers are responding.

The next question comes from Bill Schmitz – Deutsche Bank. Bill Schmitz – Deutsche Bank: Can we just get some more granularity on the cash flow? It looks like free cash flow fell about 60% year-over-year and then the cash conversion cycle keeps creeping up and it has crept up for awhile. I’m wondering if it is a sort of one-time thing this quarter and why should that improve as we look out for the rest of the fiscal year?

As I said in my prepared remarks we are still expecting to hit our cash flow targets this year. What you are seeing in the second quarter is really a year-to-year impact of accrual levels on marketing expense and things like interest expense which we expect to reverse as the fiscal year continues.

The next question comes from Ali Dibadj - Sanford Bernstein. Ali Dibadj - Sanford Bernstein: I want to focus a little bit on operating margin leverage and really SG&A. I guess I was surprised not to see as much cost cutting as I would have expected in this quarter given the SG&A didn’t really improve as a percentage of sales there. How much of that is related to what Jon was kind enough to take us through in terms of fabric care and in particular in terms of foreign exchange? Fabric care was hit by negative 5% on the top line but negative 15% on the bottom line. So let me get underneath that multiplier as it relates to SG&A. As well, given the context that it sounds like everything has come down, by how much have you shifted that to the top line? Maybe just to add in, you didn’t quite answer the last question, so talk us through inventory if you would please. A.G. Lafley: Why don’t I start and then Jon can jump in. Jon talked about one of the key impacts in the short-term on cash flow. The other one is we are in the process of or have already adjusted our production cycle so we match what we make to what is ordered. On the positive side there we are working ever more closely with most of our major retailers so we can operate on a much shorter cycle so we can produce more of what we manufacture to demand. We are reasonably confident that is going to improve as we go through the balance of the year. On the question about advertising absolutely not. We have held our marketing spending, advertising spending and in fact what is really going on is the advertising markets are softening and for the same dollar we are buying more delivery. When you look at our shares of voice in many businesses we are actually improving our share of voice and that is what matters. What matters is share of spending or more importantly share of delivery to consumers in the marketplace. On the first question on SG&A, Jon do you want to start that?

Really what is happening on SG&A is fairly simple. We are seeing a de-leveraging aspect related to the sales and volume decline which offset in this quarter continued productivity savings. So we really see year-over-year the same level of productivity savings but they have been offset by sales leveraging. A.G. Lafley: Which was your Tide point. But if you step back our productivity program that we first discussed at Cagney now nearly a year ago and updated at the analyst conference in December is on track and in fact we are accelerating it.

The next question comes from Wendy Nicholson – Citigroup. Wendy Nicholson - Citigroup: Two questions, the first one is very quick. With the dividend yield being so high do you still plan to increase it next year or is there a chance that you will sort of tone that down because I know that has been a long-term annual thing for you? Then my bigger question is the comment that operating income is going to grow disproportionately in the June quarter because you would in part be finally realizing the benefit of pricing in emerging markets, I guess that surprises me because the emerging market currencies started to de-value way back in the December quarter so I am surprised the pricing is lagging so much and that is not the same as we have seen from some of your competitors. So can you comment on that and say is that a gain if you were to capture some market share in the short-term or are you just having a hard time implementing that pricing? A.G. Lafley: Last question first, there are actually a number of factors. If you look at October/December the biggest impact was commodities. The second biggest impact was currency. The smallest impact was the draw down on inventories by the trade and consumers. So roll forward to the June quarter commodities look a lot more positive in the June quarter than they do in the December quarter so we are going to get a lot of help from commodities. Currency who knows. We are just staying conservative. As Jon described we think we will get a little bit better on the volume trend as we move through the balance of the year. Those are the primary. The primary driver is commodities.

In terms of the question on the timing of the price increases in developing markets the major moves really occurred at the end of the October/December period and as we have talked before and previously relative to commodities it takes a period of time to get those prices fully implemented and reflected at the shelf. That period of time relates to our normal customer planning cycles. On dividends, we have paid dividends in this company since we were incorporated 118 years in a row. We have increased the dividend for 52 consecutive years. We are projecting continued profitable growth. I would expect, therefore, dividend trend would remain.

The next question comes from Andrew Sawyer – Goldman Sachs. Andrew Sawyer – Goldman Sachs: I was wondering if you could talk a little bit about the long-term sales growth objective. Taking a step back kind of during the peak of the cycle here where emerging markets were strong and you were getting some pricing, you put out 5% and now we are looking at more trough numbers that are I guess as low as 2%. I guess maybe could you walk us through why taking the view that long-term organic sales growth might need to come down a little bit, why we might be overreacting to weak discretionary spending or is that something you are evaluating? A.G. Lafley: The simplest way to think about this is we are evaluating it and every year we go through our strategic growth models by industry and we build it up for the company. My question would be what is long-term? Right now frankly we are focused like a laser on today and this week, okay, making sure we are on top of what consumers want and need and we are working closely with our customers and suppliers. You have seen us moderate our growth goals in the foreseeable future. We have widened the range a bit from 2% to 5%. That looks right in the short-term. I think we are going to have to see when we come out of what looks like is going to be a global recession. We are going to have to see how deep the recession is. We’re going to have to see when we come out and we are going to have to see what GDP market growth looks like when we do come out. We will be realistic. The one thing I think you can hopefully count on us for is when we started this decade in 2000 the first thing we did was we took down the growth goals because they weren’t realistic. The first building block of our growth is market growth. So we will look at where we think market growth is going to come out and then we will have the same building blocks. We will have a building block for what we think we can do with innovation and share growth. We will have a building block for what our ongoing acquisition strategy is going to be and then whatever that adds up to will be our long-term goal. I think we are in a very volatile and obviously uncertain period and it is going to take months and quarters for that to sort out.

There is nothing we have seen in the near-term that causes us to definitively move our goal. Nothing that says that consumer behavior and normal economic times have fundamentally changed. In the worst operating environment we have seen in a very long time we grew organic sales at 2%. Certainly not [four] but not negative. As A.G. said we will just have to see how this plays out.

The next question comes from Chris Ferrara – Merrill Lynch. Chris Ferrara – Merrill Lynch: I was wondering if you can talk about Jon earlier you referenced a little commentary on category growth rates. Can you just give an update on what you think those category growth rates are for Western Europe, North America and the developing markets and also what percentage of your global categories are you gaining share in right now say over the last three month period? A.G. Lafley: On the last one we really look at by business, industry or category and by region what our share performance is and we are growing modestly in the senior world. We are growing modestly in Asia. We are actually growing modestly in LA and we have given up a little bit of share in Western Europe and the U.S. Total global picture is we are basically holding. If you look at any period; past four weeks, past six weeks, past 12 weeks, past six months it is pretty much a holding pattern. That is not surprising because I think the recession hit harder in the U.S. and we have been managing through in the last six months a period where we have been frankly the pricing up and when you are leading the price up we know there is going to be some short-term period exposure. It is the right thing to do. We are leading it up in a way that is measured. We are leading it up in a way that is still delivering consumer value. We are leading it up in partnership with our retailer partners and we are leading it up in a way that maximizes and optimizes value creation. In the U.S. markets what is really going on is there is some slowing. Okay? So if you look at all the categories we are in which is roughly 40% of our total business if you look at all the categories we are in we are still looking at 4% value.

3-4% value growth North America. We continue to see higher growth in developing markets, albeit somewhat decelerated at 5-6% and no surprise Western Europe and Northeast Asia continue at about flat to 1%. A.G. Lafley: The one phenomenon that is occurring is there is a widening between the volume dynamic and the value dynamic. Again that is understandable given what is going on in the currency market, especially in developing markets but not only in developing markets and what is going on with pricing over the last year. We are actually fortunate. We are still in an industry that is growing. It is slow. It is a slog but it is still growing.

Both in volume and value terms.

The next question comes from Joe Altobello – Oppenheimer. Joe Altobello – Oppenheimer: One quick question on the retailer inventory de-stocking situation. It sounds like it is not getting better in January. I wanted to see about that. Secondly, a lot of retailers have a January fiscal year end. I’m curious if some of this de-stock on their part is window dressing ahead of that fiscal year end and have you gotten any indications the ordering patterns may return back to normal once we get past that into February? A.G. Lafley: I’m not going to use your description but I worked in retail most of my 20’s before I joined P&G at 30 and I think everybody in the business knows that you get your inventories as low as you can before you close your fiscal year. In part it is self defense. It is fewer things to have to count. In part you want to make your business and financial results look as good as possible. So obviously there is some year-end draw down. You are right; we probably haven’t seen the end of it or even the bottom in some of our categories. I think what is more important is what will be the new inventory levels that they try to operate on starting in February. Clearly, and some prominent retailers have been pretty public and vocal about this, clearly they are trying to operate at lower inventory levels and you know what so are we. But in order to pull that off in a way that is really going to work we are going to have to have much better integrated systems and much better coordination and we are working hard on that. The other thing that is still and a little bit more of an unknown and we monitor consumer panels to track this, is what consumers are really doing. We have some businesses that are discretionary and I think they are easy to understand. Fragrance clearly people backed off in the fragrance market. The good news is we grew share. You can delay a $200 electric shaver purchase. Salon visits, we know women are stretching out their salon visits. Some are not going and only coloring at home or whatever. Others are stretching out the time between visits. So I think those are fairly well known. We have some other businesses where pantry inventories are built up. You would be amazed how many batteries are on hand and unfortunately we have been amazed by how many batteries are on hand but that will get drawn down in a period like this. We really need to understand what consumers are going to do business by business with our pantry inventory so that is the one we will keep watching. I want to be cautious on inventories. I don’t want to assume that it is going to end. The last thing I would say is what will determine where retailers and manufacturers end up on inventory levels will be the balance between in-stock and service level on inventories. We already know that some customers have pushed too far. Okay? We have improved our in-stock position sort of quarter-to-quarter and month-to-month but we sort of are hitting a level that we are not getting additional improvement and one of the reasons we are not getting additional improvement is the inventory levels have been drawn down too far. That is not a good trade off. You can do the math. That is just not a good trade off. So the smart retailers won’t let the inventories go too low.

As A.G. indicates that dynamic is essentially self limiting at some point. Currently you see broadly U.S. out of stock levels at the highest levels in 24 months.

The next question comes from Connie Maneaty – BMO Capital. Connie Maneaty – BMO Capital: I have a follow-up on that and if I could just ask a separate question on skin care. It seems to me that some time ago sophisticated manufacturers were doing automatic replenishment with their major partners. If that is the case were you not making products to demand for some time? So the first question is what kind of increase in this making to demand are you seeing? Then secondly, I have a question on skin care. As we talked about this period also being one also of opportunity. It is such a cluttered, messy category. Even with your own products. You see print ads with Definity and Regenerist and I imagine if women don’t notice this sort of stuff they may wonder why you are advertising two brands. But in some categories we are seeing the weaker players being squeezed out. I am wondering what the opportunity is in skin care to make it easier to shop and to gain more market share? A.G. Lafley: First on produce to demand, yes we are on a journey to increase the amount of our business that we would produce to demand. But, you have to understand that even in certain categories where we produce to demand ultimately the retailer sets his inventory levels. So a very simple thing like the number of cartridge packs per hook in the store when that is prescribed by the retailer and when it doesn’t have enough holding power we have an in-stock problem. Okay? As Jon said, if you walk as I often do on the weekend stores that are representative of our major retailers they just don’t have the holding power either because they set the in store inventory bogie or target too low or because they are not replenishing at a rate they need to replenish to stay in stock on the shelf. So what are we doing about it? One of the things we are doing about it is we have a large organization called Retail Pulse and we have increased our investment in Retail Pulse. Retail Pulse are merchandisers that physically go into stores and work with retailers where they permit this kind of support and make sure we are in stock, we are priced right and that the category is allocated right. More importantly we are working with a number of retailers on getting the shelf sets and category assortments right. That really in the end is going to be the solution. Still unfortunately too many retailers are over sorted and they are not really assorted by the principle of space according to movement and therefore they don’t have enough holding power for the fastest moving brands and SKU’s. It is a real problem. It is an ongoing problem and we are working on it. There is real business benefit there for us. On skin care, the good news is channel trade down. I mean clearly you are all following what is going on in department stores and that is not just a U.S. phenomenon and there is trade down and out on department stores and specialty stores and in a number of beauty categories and personal care categories there is trade in to our channel. That is good. We have been on a crusade for a decade or more now to democratize beauty and to make it accessible and available to more women, the best products accessible and affordable for women. We do have to be careful on the portfolio as Teri reported we are actually growing share on the Regenerist and Definity lines so I think what that says is we know who that consumer segment is and we are very clear with her that we are speaking to her and we are very clear with her about the benefits and the value of what we offer. I also think that in categories like this there is a real opportunity to sort out and that is going to require these category resets that I was talking about earlier and we are working on that with major retailers. Fortunately we are essentially a two-brand player in skin care, SK2 is actually coming back and Olay is holding its own and is one of the largest skin care brands in the world so I think we are relatively well positioned.

The next question comes from Alice Longley - Buckingham Research. Alice Longley - Buckingham Research: One follow-up and one new question on your categories altogether in the U.S. you said in value turns they were up 3-4% in the quarter all retailers included. What was the volume performance so that maybe we can see that pantry de-loading? My other question is could you give us a little bit more gross margin guidance for the third quarter and the year specifically can gross margins be up in the third quarter? A.G. Lafley: On the category volume trends where it is 3-4%, I have the U.S. numbers at hand it is in the same 3-6 month period sort of up 0.2% to 1% so that is the gap you are seeing. Okay? About a 2-3% gap between volume shares and value shares.

Gross margin going forward should get sequentially better primarily driven by two dynamics; one the abatement in commodity costs going through cost of goods sold as we move forward. Two, as we talked about earlier the full reflection of pricing.

The next question comes from Bill Chappell – SunTrust Robinson Humphrey. Bill Chappell – SunTrust Robinson Humphrey: Also a quick follow-up and another question. Can you give us a quantification of what you think de-stock will do to organic volume in the next quarter, in the third fiscal quarter and just as a follow up and a new question on advertising versus promotion as you look going forward certainly ad rates have dropped pretty dramatically. Do you look to change the mix and maybe step up your trade promotions to try to attract more of the value consumer? A.G. Lafley: Jon talked about the guidance so I will let him comment on that one. On the mix, the marketing mix it just varies across industries and categories. What we do in skin care is going to be totally different from what we do in laundry detergent which is going to be totally different from what we do in oral care. They are situational. Having said that we have been shifting support in general to the store and the point of purchase. It is not trade spending in the sense of just handing the trade more money. Okay? We don’t do that. We pay for performance but if you walk stores you would see our performance and value messaging much more prominent on shelf, on package, on display. It is couponing in markets where couponing is a well established consumer habit and coupon redemptions go up in recessionary times. In markets like the U.S. we have clearly shifted dollars to coupons. But if you look at the way we coupon every one of our coupons has a brand equity communication message on it and it has a performance value message on it so it is not just $0.50 off your next purchase. Then depending on the market we are doing more digital and there are a number of categories that are doing quite well with the digital. I think the simple way to think about it is we do market mix modeling. We actually calculate the return on investment on every brand on every element of the mix and we move the dollars around to where the dollars are more effective and more efficient.

On your question of organic volume growth in the third quarter as I said earlier we are guiding down 2-3%. There are two dynamics behind that. One is as A.G. said we are going to be prudently conservative going forward. We still expect there to be some inventory dynamic in the first part of the quarter. Second, as I mentioned we are currently raising prices in parts of the developing world to offset the transaction impacts in de-valuation and that obviously will have a volume impact as well.

With that we will conclude today’s question-and-answer session. I will go ahead and turn the conference back over for any additional or closing remarks. A.G. Lafley: Jon and Teri and Mark will be available the rest of the morning and the rest of the day for any questions that you have. Thank you very much for your attention and for your questions and for your support. Have a good day.

With that we will conclude today’s conference. Thank you everyone for joining us today. and are: Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.: THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S: If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!