高露潔 (CL) 2002 Q3 法說會逐字稿

Operator: Good day, everyone, and welcome to today's Colgate-Polmolive Company third quarter 2002 earnings conference call. Today's call is being recorded and is simulcast live at www.Colgate.com. Just as a reminder, there may be a slight delay before the question and answer session begins due to the web simulcast. At this time for opening remarks and introductions, I'd like to turn the call over to the Vice President of Investor Relations, Miss Dena Thompson. Please go ahead.

Thanks, Good morning, everybody. Welcome to our third quarter earnings release conference call. With me this morning are Ruben Mark, Chairman and CEO., Steve Patrick, CFO, and Dennis Hickey, Corporate Controller. As you can imagine we are delighted to report strong third quarter results with what we feel is really excellent quality. The momentum in our global business is building despite difficult economic conditions in several locations around the world. We had said early in 2002 that volume should increase as we go through the year due to new product timing, and it has indeed done that. Our first quarter volume increased two and a half percent. Our second quarter volume increased four percent, and this quarter increased six percent with every division showing good growth. Dollar sales increased three and a half percent, the largest increase in several years with local currency sales increasing six percent. The P&L for the third quarter again reflects our simple financial strategy. We increased growth margins significantly, while at the same time, decreasing our overhead as a percent to sales.

This allowed us to invest in advertising behind our powerful global brands and to increase operating profit at the same time. Cash flow was excellent. Our balance sheet continues to be very solid, and the various financial ratios continue to improve from an already high level. In fact, as Reuben stated in the press release, virtually every balance sheet, P&L and cash flow ratio improved from the year ago period. So let's look at the results in more detail. As I said, volume worldwide increased six percent. Excluding the effects of currency, sales would have increased six percent as well. Actual dollar sales increased three and a half percent after the negative effects of currency primarily in Latin America. I'll cover the details of volume in my divisional review, but it's encouraging to note that even in Latin America, volume increased a better than expected three and a half percent despite the economic turmoil effecting several countries in the region. Pricing worldwide was essentially flat. Even with no increase in pricing, gross margin increased a full 120 basis points, well above our targeted increase range of 50 to 100 basis points.

in previous quarters and years, this very healthy margin increase was the result of our focused, ongoing cost savings program, existing and next generation s.a.p. modules, higher margin new products, and a deliberate shift to our higher margin businesses over time. As for our strategy outlined earlier, worldwide advertising spending was up both absolutely and as a percent to sales. We were able to invest strongly as a result of our excellent volume and gross margin increases. This helped us support the initiatives we have across all divisions as well as maintain the help of our base brands, driving market share gains around the world. Total advertising was up almost six percent and advertising to sales increased 20 basis points. Operating profits or ebit increased eight percent. Net profit before tax increased ten percent as a result of lower interest costs brought about by a combination of lower interest rates in general and our upgrade by both moodys and standard and poors last year. It's interesting to note that the Canadian debt rating agency DBRS recently followed suit, citing our dedication to maintaining the strength of our balance sheet. That strength coupled with lower rates overall has reduced our borrowing costs. Our tax rate was 30.4 percent, slightly below the year ago quarter of 31.0 percent adjusted for the change in accounting for good will. As you know, at the beginning of each year, we attempt to estimate what our full-year tax rate will be as we go through the quarters. The quarterly rate will be adjusted so that the year-to-date rate continues to be our best estimate for the full year.

At the beginning of the year, our guidance to you was to use the full year tax rate of between 31 and 32 percent, and on a nine-month basis, our tax rate now sits at 31.4 percent in line with our guidance and above last year's full-year rate of 30.9 percent adjusted for the change in good will accounting. Net profit increased 11.6 percent to a record of 13.9 percent of sales and eps reached a record $.57 cents, up 16.3 percent. Cash generations in the quarter was excellent, up more than 16 percent and up 14 percent on the year-to-date basis. And return on capital climbed to yet another record 34.0 percent. Global working capital reached an all-time low of 3.3 percent to sales. Inventories sit at just under 60 days and receiveables are at the lowest point in half a decade. 43 days. So let's turn to the divisions. Volume in North America increased eight and a half percent and the U.S. portion of North America was up ten percent. You may recall we indicated that the bulk of new product activity in this division would occur in the second half. The strong volume performance in the quarter reflects it. Pricing was down three and a half percent. As a result of growth oriented promotional activity. As you expect, some of this is related to listing allowances and trial generation activities surrounding the numerous new products launched in the quarter. And importantly, all of what appears as price reductions is growth oriented promotional activity which is reflected in the ten percent volume increase in the U.S.

As you know, all this promotion activity is absorbed as reductions in sales and gross margin and despite this, gross margin in North America increased very strongly, well above the corporate average of 120 basis points. Dollar sales increased five percent for the division. As you would expect, total advertising was up also very strongly double digit in support of the new product activity. Despite the healthy advertising increase, ebit was up about 11 percent, up absolutely 100 percent to sales. While 11 new products were introduced in the quarter in the U.S., the most significant new product launched in the quarter was Colgate simply white, an in-home whiteening product. As many of you already know, this is a very easy to use product. It is a clear gel applied to the teeth twice a day with a simple brush applicator. While the action begins immediately, full whiteening results are visible after two weeks. Simply white started shipping at the end of August, and by the end of the quarter had achieved 76 percent distribution, ahead of the leading competitor in this category. National dollar share as measured by Nielsen was 32.9 percent for the month of September and for the last two weeks, simply white has posted a 48.1 percent share establishing leadership in the segment. Performance in the nonmeasured channels has been very good as well. Overall, toothpaste share was up in the third quarter from the second to a 34.8 share, an increase of 1.9 points, widening the gap between us and the nearest competitor.

Late in the quarter, we also started shipping a new line of aroma therapy liquid hand soap and body wash under the soft soap name. While it's still a bit early for meaningful share prograss, the initial launch appears to be going well. Overall shares in the liquid soap category were up a quarter over quarter aided by the better than expected performance of Soft Soap Rain Forest. Rain Forest is an innovative package, which has a figurine inside the bottle and makes a wonderful presentation on the kitchen or bathroom sink. We would expect the momentum in liquid soap to continue in the fourth quarter with the full effects not only of Aroma Therapy but also Foam Works, a foaming liquid soap for kids. At a national sales meeting in the third quarter, more new products were presented which will be shipping late this year and early next. Irish Spring Icy Blast is a new variant with an invigorating scent. Its crisp, cool fragrance, ice blue marble look, and high impact packaging capitalize in the fast growing ice trend with consumers. Mennen Speed Stick 24/7 is a new high efficiency antiperspirant offering nonstop protection targeted for younger men. The Colgate massager toothbrush features a flexible head which bends to clean hard to reach areas, soft rubber bristles which gently massage to stimulate gums as well as multiheight bristles that clean deeply between teeth. And finally, Colgate Herbal White is the first Herbal toothpaste to be introduced in this country by a major manufacturer. As you know, this product has been extremely successful in Eastern and Western Europe as well as throughout Asia. So a lot going on in the month and quarters ahead. We expect the trends in the North American business to continue strong and that volume in the fourth quarter should again be excellent and ebit should be up both absolutely and as a percent to sales. Turning to Europe. Volume in Europe increased a very strong seven percent. Currency contributed another nine and a half percent, pricing was negative two and a half percent, and resulting sales increased 14 percent.

As in North America, the pricing negative relates to promotional activity behind new product margins across the region. Total advertising spend was up and ebit increased 26 percent to a record level up absolutely and as a percent to sales. Western Europe's volume performance was excellent with every major country showing positive volume. Every country in Central and Eastern Europe was up as well. In total contributing very strong double digit volume growth. Throughout Western and Eastern Europe, new products have driven volume and market share. Total Plus Whiteening and Herbal White have help achieve record toothpaste shares in a number of countries. In the UK, the most recent three-share periods have registered dollar shares of over 40 percent. In Germany and Italy as well, toothpaste shares reached records in the most recent period. Toothpaste shares increased in every country across Eastern Europe. Palmolive Aroma Therapy, a line of shower gels continues to contribute to pan regional market shares. That line, now being launched in the U.S. under the Soft Soap name has catapulted our European share position to number one from number four. The most recent variant, Tranquility, has helped sustain the momentum. Other new products are slated for the balance of the year. AJax minerals is an all-purpose cleaner aaddressing a new consumer segment, the purest. The translusant bottle and fresh nature labels appear to the desire of the more natural pure way. Palmolive oxygen dish liquid capitalizes on the same purest trend, offering dish cleaning which is effective, mild and natural.

In addition, Colgate massager toothbrush just announced here in the U.S. will be launched across Europe with two waves of shipments, October/November of 2002 for the first group of countries and January of next year for the second group. Trends in Europe for the fourth quarter should remain solid with good volume growth and strong ebit growth as we've seen in this quarter. Turning to Latin America, as I did mention earlier, volume in Latin America increased three and a half percent. Particularly impressive since it's on top of an eight percent increase in the year ago period and at a time when many countries within the region are experiencing macro economic difficulties. We're quite pleased with our progress in Latin America. Pricing added another three and a half percent so that sales and local currenty increased seven percent. With the negative currency impact of 17 percent, dollar sales declined ten percent. As you know, one of our clearly enunciated strategies in periods of massive evaluation is to cut back on promotional spending, but maintain media support to keep our brands in the minds of the consumer. Accordingly in the quarter, media spend in Latin America was up while promotional spending was down. As a result, and as you will hear in a moment, our market shares have reached record highs in a number of countries. An example of our well developed and well practiced ability to manage through these crisis. Ebit in Latin America was down slightly in dollars but up in local currency and its percent to sales. Volume was up in Mexico, Venezuela, Central America and many of the smaller South American countries. To our delight, as was mentioned in our release, Brazil's volume was greater than expected and equal to last year's very strong third quarter. As you would expect, volume was down in Argentina and Columbia. As I mentioned, our share performance is extremely strong. In Venezuela, our toothpaste share climbed over 80 percent for the first time ever. We reached the number one position in bar soaps in the most recent period and underarm shares surpassed 30 percent, an all-time high. Shares are up in the nine of the ten categories in which we compete in that country. In Columbia as well, our toothpaste share has surpassed 80 percent, and our toothpase share in Argentina is just short of that at an all time high. In Mexico, economic fundamentals are relatively sound.

Oil prices are going up, foreign reserves are increasing steadily. The current account deficit is not increasing out of hand. The fiscal deficit is not out of control and inflation is low. Consumer spending was up in the second quarter versus decline in the first. Our volume in Mexico increased in this quarter, and market shares were generally strong. Toothpaste share reached 84 percent in the most recent period. In dish washing, our Axoon brand reached almost a 45 percent value share which was the highest level since 1995. Even in the highly competitive shampoo market, new product introductions under the Palmolive and Casprice brands names have driven our volume share to a record high 38 percent of the market. Now in Brazil, as you know there has been a fair amount of uncertainty surrounding the current elections. Economic activity continues to be positive, however, the pace of recovery is modest. And it's likely volatility in macro economic factors and in the exchange rate will continue until the final election at the end of the month. Despite that, however, the success of our new products activity, particularly with profelis has driven our toothpaste market share to the highest points of the year. Our expectation for the remainder of the year in Latin America is that volume will continue to grow despite the economic conditions. Dollar ebit will probably be down shigtly as a result of some of the maxyed evaluations in the region but will be up in local currency and as a percent to sales. Turning then to Asia Africa. Volume increased four and a half percent. Pricing add another percent and currency a half percent resulting in a dollar sales increase of six percent. Advertising was up both absolutely and as a percent to sales. And even with a very strong increase in advertising, very strong gross margin improvements led to an ebit increase of 32 percent. Volume was up throughout most of Asia Pacific without growth to almost everywhere in the region. In China, Colgate toothpaste continues to enjoy the number one position at 30 percent of the market and almost double the nearest competitor.

We recently launched fabric softener in the Guam province and that now commands a market-leading 42 percent share of the market. In India, our market shares year-to-date are up over a full point in toothpaste and are up in tooth powder and tooth brushes as well. In Thailand and Malaysia, toothpaste shares are up due to success of our global launches such as Colgate Herbal and Total Crest Whitening. Asia Africa should continue to have a good year with fourth quarter volume growth. Ebit is expected to increase double digit. So finally, Hills. Volume in this division increased a very strong six and a half percent. Pricing added another two and a half percent resulting in local currency sales increase of nine percent. Sales in dollars increased eight percent after a one percent currency negative. Advertising increased strong double digits up absolutely in its percent to sales. Ebit increased 14.4 percent up absolutely and the percent to sales. As with the Colgate business, Hills continues to benefit from a steady stream of innovative new products. Most notable in this quarter is a launch of nature's best here in the U.S., a complete line of all natural dog and cat food under the Science Diet name. Acceptance has been very good and initial selling has been one-third higher than we initially expected. The initial ship of nature's best was supported by off-shelf display units and corner purchase materials, media advertising will begin in November. In Europe and Japan, the introduction of our Science Diet oral care product, as well as prescription Diet BD, designed to help brain aging in dogs have contributed to volume and share growth. In fact, volume in the quarter was strong both domestically and overseas. Market growth in the specialty channel continues to be robust and well ahead of the overall growth of the pet food category.

And within the specialty channel, our share continues to grow up almost half a share point from the year ago period. We're very pleased in the Hills business and expect it to continue as we close out the year. Volume in the fourth quarter should be up in the mid single digits and ebit should increase both absolutely and as a percent to sales. I'd like to move for a moment from the overall corporate quarterly results to our alignment and responsibilities within the company. As previously planned during the third quarter, we made another, in a series of steps in management development process which realligns responsibilities among several senior managers. As with every step taken to date, the goal is to ensure Colgate's talented senior management team is deeply experienced in all aspects of Colgate's global operations and key business functions. Our successful global systems processes and strategies, of course, remain unchanged under the leadership of Chairman and CEO Ruuben Mark and President Bill Shanahan. Lois Juliber, Chief Operating Officer has assumed responsibility for global business development, research and development, manufacturing technology, information technology, corporate development and strategic planning. In addition, she will retain responsibility for the Latin America division. Javier Turawell, Executive Vice President, assumed responsibility for Asia, South Pacific, Central Europe, Russia, Africa Middle East, and Hills.

Ian Cook, Executive Vice President, has assumed responsibility for Europe in addition to the United States, Canada, Puerto Rico, the Caribbean and Colgate oral pharmaceuticals. So going back to our quarterly results, in summary, we are very please at momentum in our business continues worldwide. We're putting healthy support behind our market-leading brands resulting in solid market share increases in every region. We're particularly gratified that our focused approach to increasing gross margins and reducing our fixed expenses has yet again provided ample funds to build the business. Our unit volume is excellent. The investments we have been making behind our brands bode very well for further volume and profit growth for the fourth quarter and into 2003. That concludes my formal remarks, and we'd like to open it up now to questions if we could, please.

Thank you. Today's question and answer session will be conducted electronically. For the telephone audience, if you would like to ask a question, you may do so by pressing a star or asterisk key followed by one on your Touch-Tone phone. We also ask if you are listening on the Internet, please turn down the volume when asking a question. Once again, if you would like to ask a question, please press star one and if you are using a speaker phone, make sure the mute function is turned off to allow your signal to reach our equipment. We'll go first to Amy Chasen of Goldman Sachs.

Good morning. Um, I have two questions. The first question is of the eight and a half percent volume growth in North America, how much of that, um, was due to the selling of Simply White and in particular, the mix effect from that? I know you guys report mix in your volume numbers.

Amy, hi. Amy Chasen: Hi. Actually, in the quarter and in the year, we've gotten good growth out of the other high priority categories as well. For example, personal care, as you know, the whole personal care business, which is an area of major focus in the quarter was up six percent. Surface, which is an area of focus, was up four percent, and toothpaste was up three percent. So we got good volume growth. Elsewhere, those figures are true around the world. Actually, with toothpaste up about four in volume, personal about six and surface about five.

And in terms of mix, in terms of gross profit, or what did you mean, Amy?

On volume.

Well, I think what I just said is a good indication of the key categories are up, as you would expect, for example, detergents are down, which is part of our strategy. So, the answer is that the areas that we want to grow are growing, which is one of the reasons for the good gross margin and the good sales dollars in the United States.

Okay. If we -- let me ask one more question on the volume side. The eight and a half percent volume growth what would that be if you exclude the selling of Simply White?

Well, first of all, in the U.S., it has not been sold in Canada. It's only in the U.S. The U.S. growth is ten percent volume, and the overall North America, which is Canada, U.S., Puerto Rico and so on, if we had good growth in the other categories as well. Okay?

Okay, so in other words, you don't want to tell us the exact number?

Well, we look at it by category, and our -- we have growth categories and nongrowth categories and the growth categories are growing, which is precisely the way we want it. You will find going forward that the U.S. will continue the strong volume we just enjoyed for a number of years, and I think we'll be budgeted up very strongly again next year.

How does the dollar sales number in North America, the five percent, how does that compare with your consumer take away numbers?

Well, why don't I give you -- I think since the best measure of that, Amy, is the trade inventories, because obviously, if trade inventories go up, that means that your take away is less than shipments, and the other way around. Let me give you that as I normally would do because inventories in the trade continue to go down. We go through this with you essentially every quarter. The -- in the third quarter, if we go back to 2000, there was 10.4 weeks. This is the Nielsen measure, and obviously doesn't cover part of the trade including Wal-Mart, but I can tell you the trends in Wal-Mart are identical or similar. What are you shaking your head for? This model -- oh, great, terrific. I'm sorry, this model includes all channels. Everyone was looking panicked for a moment. That's right, it doesn't say Nielsen. It used to say Nielsen on it. The total inventory in the trade is for all Colgate U.S. products was 10.4 weeks in 2000, third quarter of 2001, it was 9.9, ie, down five tenths of a week. In September 2002, it's 9.5.

If you want to put it in an apples to apples basis, you would have to eliminate Simply White, and that takes it down further to 9.3. On an apples to apples basis, six-tenths of a week less in the trade than last year so our consumption -- that would indicate our consumption is higher than our shipments. It's tough to argue with really good volume numbers in declining trade inventories if you want to talk quality.

Great. Just a question on the gross margin. Um, maybe, first of all, could you just break down for us, you know, how much you got from raw materials, how much from cost savings like you normally do, and as a follow on to that, given that, you know, the benefit from raw material costs is likely to be less in '03 than it is in '02, does that mean the gross margin expansion could slow and if so, could you have less flexible to spend and your volume could slow.

I also wanted to add that I was delighted to hear about your election as spokesperson for the entire south side operation. That's great. I meant that very affectionately and very positively. Okay. The breakdown of margin, as you know, margin went up 120 basis points. Our traditional savings projects gave five-tenths of a point. The s.a.p. projects and so on, raw packing materials were down 1.1 precent or positive 1.1 in terms of gross profit, of which market forces accounted for a half a percent, five-tenths and our own proprietary savings accounted for six-tenths and all other changes including price and mix were negative .four. Okay?

Yep.

So that's that's at 120 basis points. Interestingly enough, without the FAS bee -- fasb change that would have dropped 160, 180 basis points up. Okay?

To follow on to that, presumably, you expect less benefit next year? As a result, do you expect expect the gross margin improvement to slow?

Don't forget there's a lot of things that go into that. We have good gross profit momentum. Yes, the preliminary look at next year says that raw and packing materials are up the figure for what it's worth is we say 2.3 percent, but other expectation given everything, given the mix, given the new product configuration, given the worldwide expansion of s.a.p., I would be quite surprised. We haven't done our budget yet, but I would be surprised if we were not again at the high end of our 50 to 100 basis-point range.

Great, thank you.

Thank you.

Operator: We'll go next to Jim Gingrich of Sanford Bernstein.

Good morning. Reuben, just make sure that I understand the guidance here. You are talking 219 for this year and then, um, just understanding the adjectives here. Are you still looking at the 13, 14 percent eps growth next year that you've been averaging?

I'm not sure that we are giving explicit guidance. I think what the press release said and what Venus said is that we are comfortable with what is out there as a consensus for the fourth quarter, and that we are comfortable with what the consensus is for next year and my understanding of those numbers, while they are, of course, the sell side numbers and not you guys manufacturer those numbers, but that shows next year another double digit increase in eps with which we would agree, and our, at least hypothetical P&L for next year shows good volume growth again in the four percent to seven percent range.

It shows sales up less erosion from currency given the strength of the European currencies and marginally offsetting price increases in Latin America. It shows increase in advertising, as I said, the high range of gross profit and double digit increase in eps, tax rate, you know, about the same as this year. Maybe a tad higher. And that is our tentative planning at this point. My own sense is that we're going into next year with very considerable momentum, and if you want to go through all of the quality aspects of this particular quarter, I'd be delighted to do that with you, Jim.

Okay.

Is that clear enough?

I think so. I think what you're saying then is that you are comfortable with the -- because, you know there's some rounding here. I'm just trying to sort out on the fourth quarter if you are endorsing 219 and 58. I'm interpreting it as 58.

I guess I didn't follow that.

58 cents.

If it condenses to 58, we are endorsing it.

Okay.

I guess, Jim, to a certain extent, our focus is more on how we maintain --

as it should be, I agree.

Upline, bottom line ratios, margins, market share growth, worldwide tour of 18 countries rather than the rounding of the 58 cents.

Understood, understood, understood. Then the other question, I mean, I'd be happy to go through all of the quality aspects, that would be great. You know, one of which is I wanted to understand also, I think Dena made the comment that advertising was up 20 basis points as a percent to sales in the quarter, and is that kind of advertising plus promotion, you know, and if it is, I just wondered how much of this, you know, that number is, you know, some of the promotional activity you mentioned in terms of, you know, that we're seeing on the top, the gross to net difference on the top line.

As you know, Jim, advertising, especially with the new rule, the new FASb rule is composed of three aspects, the media, which is carried obviously as media, the promotion that remains in advertising, which are sampling efforts, very specific things that FASB has kept in advertising, and gross to net, which includes a lot of marketing tools like couponing and slotting allowances and display allowances and so on and so forth. I can say that for the quarter, all three were up 2001 third quarter versus 2002 third quarter. And for the full year, the 2002 all three are up.

So, the 20 basis points referred to what?

What does it refer to? Media plus promotion in the advertising line. The advertising line itself.

What's reported in sg & a?

Yes. Yes.

Okay, great. Thanks.

Okay, you mentioned the quality talking about the quality. Jim Gingrich: Fire away. Let me -- I just, it seems, just as an individual, that given the fact that we had strong volume growth strongest in over a year, every division up, including Latin America, the best net sales growth, because of less currency hit, strongest in a number of years. Gross profit up over the top end of our range, despite the challenges, I mean, if we exclude Latin America sales and volume would have been up in the eight percent range, ebit was up strongly, would have been excluding Latin America, up 17 percent, advertising up as I just mentioned, good market shares, very full new product pipeline with accelerating volume, balance sheet, cash flow, pretty good. In fact, excellent. Return on capital up to 34 percent about 500 basis points over the last year. Cash flow up 16 and one half percent, working capital at 3.3 percent.

Net income, I mean, basically, I have a folder that shows that literally every ratio is balance sheet on P&L has improved and there is some degree of consistency and so on. And we don't have many -- we don't have easy comparisons usually because progressively grow. So I think that some of the notes out did note the quality aspects and we're tentatively honest as pleased as I've been in years. That's maybe a parity claim. I'm even more pleased with the quality and outlook.

Thanks.

Operator: We'll go next to Andrew McMilling with UBS Warburg.

Thanks very much. I was hoping could you expand on Latin America in the fourth quarter how you see volumes moving in? Can you talk about some of the restructuring activity, sap implementations, Mexico and Brazil, and how that's helping you offset the obvious presures?

S.A.P. is now throughout Latin America. The Dominican Republic is, I guess, the only country remaining. I guess February in Mexico and July for Brazil getting some really exciting reports, usually it takes six months to even see a start. They're seeing some really good start. We have no, no restructuring over and above what we always do in crisis. As you know, we haven't taken a restructuring charge in almost eight years now. There was ongoing restructuring that we absorb in the P&L. To give you the idea of volume, we expect volume up in the division in the fourth quarter. We expect Mexico to be up.

Brazil to be down slipgtly, although, we were pleasantly surprised to find Brazil flat or slightly up if you eliminate discontinued products. Venezuela, which has been up all year, is expected to be down, which is I think a big sandbag on this piece of paper and Argentina, of course, will be down. Be that as it may, we will continue to do well on Latin America, ebit, which has grown substantially, is basically flat on a year-to-date basis, and will be virtually flat and probably slightly up for the year. It will be budgeted up, we think, next year. We have, of course, as we always do, do a best and worst case and most likely case scenario for places like Brazil. And we appear to be able to absorb even the worst case scenario in Brazil. But one never knows.

The fx, given inflation is reasonably under control, what devaluation are you hoping to get back in pricing? Is it 50 percent this time because of the lack of inflation?

Depends where you're looking. There's a lack of inflation in a couple of countries, in Mexico in particular. If you go to Argentina, there is enormous inflation, almost as much as Argentine -- I was in Argentina several weeks ago and there is enormous inflation. There is inflation beginning in Brazil, but the offset, if you look at the, let me see, for example, as I told you before, Andrew, we look primarily at a ratio called selling pricing combined with foreign exchange.

And that interestingly enough, if you take Latin America, last year, the negative was four-one. This year, as you would expect, since it's worse, is about eight percent. But for what it's worth, even though the first quarter we have at about ten percent for the year next year, we expect to be better off of in the full year next year than this year.

Terrific. And maybe one last one, just repo in the quarter and what price you paid.

Say it again?

Repurchasing the quarter and what price you paid, stock repurchase.

Okay. Hang on one second. I have that here but let me make sure I give you the right number. Okay in the third quarter, we brought $5.387 million shares at a price of $50.57. And just, the impact on eps, just as an aside, as you know, we generate pretty good cash flow and have historically, and we don't have to invest it in working capital because working capital is low at 3.3 percent. So we have, since we don't make acquisitions, as you know, very rarely, we use the money to buy back shares. And I think that's great when you are able to generate sufficient cash to keep your double "A" rating.

Actually, it was increased this past year and buy back shares. There was a figure floating around this morning, the -- as we calculate it, the effect on our eps from a combination of a slightly lower tax rate than last year, and the real tax rate is only lower by, I think, 40 basis points which is noted in the footnote on the thing, the annalyst got, and the reduction in shares is about eight-tenths of a cent. I think something was floating around saying two cents but it's eight-tenths of a cent.

Ruben, congratulations. Thank you.

I was waiting for someone to say that.

Operator: We'll go to Wendy Nicholson with Solomon Smith Barney.

When Andrew moved up to his executive responsibilities, we lost the gentleman who used to say, great quarter. Different Andrew. Now we have a new Andrew, right.

Okay. Hi, it's Wendy.

Hi, Wendy, how are you doing?

Fine, thanks. I guess the first question just going back to what you were talking about in the last q & a about the gap in Latin American between the pricing and currency.

Yep.

In the third quarter, I think you said you hoped to narrow that gap, but in the third quarter, that gap was really big. Even if I go back to '99 or even before when currency was significantly a negative, you had a lot more positive pricing, so is it just some anomaly in timing or is it something that makes it harder to realize pricing?

It's really just a catch up. You are right. That, for example, the biggest quarter last year was 5.1. The first two quarters this year were about between three and a half and four, and this quarter was about negative 13. Which is catch up. That's going to go down somewhat, still about ten or 11 in the fourth quarter and then in the first quarter go down a little further. As with what always happens, we catch up. Since we're talking about Latin America, you might want to take a moment, Wendy, if it goes, obviously Brazil is on everybody's mind, and let me tell what you we are assuming in Brazil. I have a whole page here of budget assumptions, but they include being elected President and that the government would attempt to maintain the status quo, that he tries to fulfill his pledges and so on.

There's a number of economic assumptions, no growth, inflation 30 to 40 percent and I'll give you a worst case, best case. Budget deficit of 4.8, so on and so forth. And our volume modestly growing at one percent well below history. All that in there we have three sets of financial projections, which are three different levels of foreign exchange. As you know, today it's 390, so the most optimistic would be about the same place it is now. The most likely which we would probably budget which is 450 to the dollar and pessimistic, which is six, which is more than a 50 percent devaluation. Obviously there's obviously a P&L for those. The net over all of that is that the most optimistic would have no impact on our eps because that's what we're planning on. I mean, I'm going to say it again.

Would have no impact because we're expecting to lose. As we'll budget, we'll be losing between one and two. When I say losing, versus we make money in Brazil and still make money in Brazil, but it would be one or two cents that we'd have to recover elsewhere. And the most pessimistic would be between two and three cents.

Okay, that's a little scary.

Say again, three cents?

So there is a three-cent risk to the fourth quarter eps?

No, no, no. I'm sorry, if you understood that -- I'm talking about next year best and worst.

Okay.

Brazil we are covered totally in the fourth quarter.

Fine.

My apologies for causing that confusion. This was a future hypothetical, which as always we like to would out best, worst and most likely, given a 50 percent devaluation for the full year of next year as the worst case.

That sounds extremely conservative and all that. My sense is, is this fair even if it did happen, a three cent hit in Brazil, you'd probably be able to make up somewhere else?

Exactly. That's what that's intended to say.

Okay. My original question, though, about Latin America in local currencies, I think the press release says sales and profits increased basically the same amount, high single digits. Has s.a.p. started to benefit margins or is that more of an '03 phenomenon?

It has started, but it's only the tip of the iceburg. My sense is, and obviously I've not completed the budgets yet, but I think you will find that Latin America, which I would be surprised if the growth in margin in Latin America wasn't double what it was this year.

Okay, that's great. Now, can I ask one more question? You brought up this issue of the management development changes, which sounds good, but I guess that raises a question, Reuben, if you could update us on your thinking of retirement and Bill Shanahan and I think you said before that he would go before you do, but are these a precursor to more news on that front?

Not to my knowledge. Ian is siting in the room, and I think that Lois is listening in a remote location. Not too remote, and Javier is also in a very remote location, but no, I think it's part of the overall plan. I have no intention of retiring for a considerable period, and Bill's plans are, as always, fluid. But I think that this is, as it was described by Dena and our internal announcements, it's to make sure that the most senior level of management has the experience basically being involved with and running all parts of the world, including the business development and technology side and all of the integral pieces that will lead to growth in the future.

Sounds great. Thank you.

Appreciate it, Wendy.

Operator: We'll go next to Carol Wilky of Merrill Lynch.

Thanks. This is a question on sg & a and not really on the advertising side. On an apples to apples basis, it looked like it was up over 80 basis points. The other 60 basis points, was that due to increased pension expense? And would you expect sg & a sales to be up?

There's more -- I don't want to get over the 20 basis points. Our overhead, per se, what we consider overhead is down as a percentage to sales. And down I believe absolutely. Yes, people are nodding yes. And I can dig up that figure. From 21 and a fraction down to 21 and a less fraction. It was between ten and 20 basis points down from about 21.8 in terms of real overhead and with the pension costs are included. In which pension costs are included.

So I guess I'm trying to figure out what increase 60 basis points are directed to sales on total sg & a? Of the 80, 20 was advertising.

It's possible we're reading different numbers but I'm seeing sg & a went from 32.9 percent to sales to 33.1 percent of sales.

I was adjusting for good will on the year ago so it's apples to apples. So 32.3 up to 33.1.

Okay. Why don't we then have Carol get back to you because the essence of it is that the advertising portion is up and overhead, which we look at very carefully is down. Let's reconcile that together. Steve will give you a call.

And on a completely separate issue. Have you seen a rebound of your shares as a result of the price adjustment of the active brush?

Again, you have to look at our shares of the actibrush and motion brush. Shares are flat on the dollar basis up on a volume basis. Which is not surprising, considering that the cheaper brush, the 499 brush is taking the share.

Okay, thanks a lot.

Okay.

We'll go next to Alek Patterson, of Dressner RCN.

Yeah, good morning. Just a couple of quick ones. One, just to get clarification. The foreign exchange negative hit to Hills, what was the source of that, and then secondly in the pension area, are you guys looking to make a contribution this year, and even if you do or not, look into '03, should we expect a further step function in pension expense in line with what happened this past year? We had a big step function. Is there another one for '03?

Okay. The first question with regard to Hills, that was Japan. As you know, we have a substantial business in Japan. That was balanced by the modest business in Latin America. They got positive in Europe and big negative in Japan.

So Japan's bigger than Europe?

Well, there are different levels -- I'll give the actual breakdown if you want it. Hang on one second. And let me be -- are you referring to the ratio in the coupon and pension? Are you referring to the ratio to equity -- the answer is we are overfunded in our domestic programs that have to be funded. And it is not our expectation that we will have to add till at least theoretically based on current expectations until after 2010, but even if I think I saw figures, we did a what-if figure in order to put any money in by 2004, our investments would have to drop in the pension fund by 45 percent this year. Actually, they are down about five and a half percent.

Okay. So no contribution and pension expense in '03 expected to just be a normal course of increase, not any step function?

No step function. We did take up a step function last year as you know going into this year. But that's expected to go up a modest percentage. In terms of Hills, Europe is 45 percent larger than Japan but the foreign exchange negative in Japan was greater. And also, there's a built-in hedge that we manufacturer in Europe. We ship Hills product from the United States to Japan so the effect is magnified.

Okay, thanks.

Operator: We'll go next to Connie Minetti of Prudential securities.

I want to ask more questions.

Could you talk a bit louder if you could?

I wanted to ask a few more questions on Latin America. You said in the fourth quarter you expected Brazilian volume to be down. Would that be down a little bit? Was that because of a tough comparison for one reason or another or slower economic activity?

Well, if you look at Brazil and Brazil has always been volatile long before these current crises, hang on one second. Let me make sure I give you the right number. Okay. Is that actually last year, they were up three percent, but it bounced up very big double digit in the first quarter down in the second quarter, up very big third quarter, down in the fourth quarter. So the comparison is not difficult, but in a situation like this, you lose volume for some time. I would guess, though, given how well they did, I'm showing about a 4 percent volume drop. I would be surprised if it was not better than that but we as always will always be conservative.

Okay. On your worst case scenario for Latin America, does it include anywhere that falls in Brazil and what difference would that really make?

Well, I think that probably to get to the worst case that I gave you, which is a 50 percent devaluation, that would have to be on top of what's already happened, it would have to be something cataclysmic happen and certainly default is cataclysmic. My sense, I was in Mexico last week and we had considerable discussions about Brazil. I would expect absolutely that not to happen, but if anything, there are most of the people who theoretically know what they are talking about currency rates says that assuming it gets in, that the exchange rate should strengthen rather than weaken but I'm not sure you can pay much for those projections but nonetheless, that's what they are saying.

Okay, if I could ask just one more question. On your new product rollouts for next year, will it be more evenly spaced and are there any products or the magnitude of what Simply White looks like it's going to produce?

Well, of course, Simply White will be expanded within the next six months. It's going to 17 countries around the world. But since the new product graded especially in the U.S. was oriented to the second half this year by definition, we will get a bump in the first half of next year, and that is essentially through worldwide. So I think I would be looking for quite good volume in the first half of next year.

Great. Thank you.

Operator: We'll go next to Ann Gillen of Lehman Brothers.

Hi, Ruben. Is there any way of walking us through the timing or the benefit you'll get from the promotional spending this quarter? Just to kind of take the notion of whether a lot of this quarter was bought volume or whether it's more of a lay in for '03 and Q4?

Ann, I'm not sure in the United States with so much of companies like our business with Wal-Mart and Target there is such a thing as buying volume. Number two, we did go over earlier, I guess, with Amy the inventory figures. This was not just -- this was inventory throughout the entire tray, all classes. And that shows that the inventory is going down. If this was, "bought volume," I think you would see it going the other way. Let me try to answer your question in terms of what our projections are for volume.

Great.

I would be surprised if the fourth quarter did not show, well, I mean, an eight and a half percent volume gain is extraordinary but did not show above trend line volume as well. You know, we say four to seven. I would hope it would be near the high end of that. Similarly, I would expect that in the first quarter of next year, let me make sure I don't give you the wrong -- yeah, in the first quarter of next year, it again should be towards the high end of that range. And it's reflected in market shares as Dena said in this new category of whiteeners. We are now the leader. The dollar leader, even our product is priced at a half to a third of the competitor product. But, you know, and they are pretty strict rules about on our side and on the trade side about buying volume. I mean, you can't do that.

Understood. I guess there's been some concerns raised about whether the pricing, which I think could be directly, you know, used to offset some of the volume if you were in a build this year mode. But I hear what you are saying.

I think what's important, Ann, is you really have to look at that because in the pricing are trial devices and couponing and slotting allowances and everything else.

That's what I was trying to get at actually and I'm sorry for not saying that early on. You have models that suggest that that sort of investment you're making now has -- you have some expectation for the return on that in the future. That's what I was trying to get at.

Right. I think the thing everybody should keep their eye on, which certainly we do, is that despite those all of those things that are now coming out of gross profit, the gross profit in the U.S. was up, I don't know if we gave the numbers, but 160 basis points. We now gave it. 160 basis points in the quarter, which is terrific, and that's after absorbing the slotting allowances.

Thank you. I'm only half of the Andrew but great quarter.

Thanks.

Operator: We'll go next to Neil Goldburg of State Street Global Advisors.

Hi. Just a really quick question. Just more of a quickly large picture thing. It's talking aI lot about liquid soap and soft soap now for at least a couple of quarters. We've seen the video of South America where you have, you know, kids learning how to wash their hands. I'm curious if liquid soap has become a priority one brand? I know it's always been a priority two brand but with all of the attention you are giving to it, is it moving up?

Well, I'll react because on a worldwide basis, and now as you know Ian is responsible for U.S. and Europe where we have in the U.S. 42 or 41 percent of that market in Europe we have whatever we have. It is a high priority product. And we are the world market leader. I have to say that in my own mind, it is not as high priority, for example, as some other areas of personal care and oral care simply because even though we've been able to build those shares and hold onto the business, it potentially is more subject to price competition than toothpaste. We have worked very hard and been successful in establishing personal relationships but those of you who have heard me talk about personal relationships it is a little tougher to do than liquid soap.

Thank you.

Nonetheless, a very successful high margin product.

Thanks.

Thanks, Neil.

Operator: We'll go noext to Linda Boltenwiser of Finestock.

Thank you. Since about 1998, you've been -- your expenditure on share repurchase has exceeded your internally regenerated cash flow. Can you talk about that strategy going forward and if that will continue and what it's related to in terms of interest rates or can you just talk about that, please?

Okay. Well, first of all, I think many people on the call, including you, Linda, probably have seen the chart over the almost 20 years of buying back shares, which show that we bought back a total of -- we have a 600 million shares outstanding. We bought back 323 million as of yesterday. They cost us six billion and are worth 17 billion so that over time this consistent program has generated a, you know, a third of our market cap. Our board takes a look at this very frequently, and we keep doing intrinsic value analysis to determine if we should keep purchasing, and that I think the feeling on the part of the board is that as long as we can keep eps growing on a double digit basis that we've been doing, it is a good investment, and that while, yes, debt has increased somewhat, the reason we were upgraded to a double "A" is that the ratios, which are looked at most importantly, are the things that govern what we do. The coverage ratios for example, let me see -- hang on. I have to find the folder. For example, we have a rainge in ebit to interest. We have a target range of seven and a half to nine times to get us to keep us where we want to be with a double "A" rating. Last year, it was ten times and the goal was seven and a half to nine. This year it's 12 to five. The ebit interest target range was to 11. It's 14.5 this year. Pretext operating cash flow we talked about.

Operating cash flow to debt, um, has gone from 52 to 49 to 43 and so on, so that the debt per se, which is relatively low for our sized company, is of course less important than what our coverage ratios are. It would be our expectation that you could continue. We have historically stayed away from acquisitions. We see no reason to change that. I think acquisitions destroyed a considerable amount of value over the last three years. As long as we can keep our working capital going down to very low levels, as it is, and keep increasing our cash generation, as I think I noted it went up 16 percent this quarter, my sense is that that program will continue.

Okay. Think you very much.

Thank you.

Operator: We'll go next to Catherine Willis of Morgan Stanley.

Hi. You mentioned that for Simply White, you were going to expand into 17 countries. Are these, you know, larger markets like Mexico? I'm trying to get a feel for, you know, how impactful the launch will be next year?

Okay.

I clearly don't want to tell you ones that we haven't announced yet, but the ones we have announced, well, there are ones that we have announced are Canada, Puerto Rico, New Zealand, Hong Kong and the Mexico, Columbias, Venezuelas, Italys, we have not announced yet.

And is that because -- it's not because of regulatory hurdles in the specific markets?

There are in some specific markets but not in others. There are parts of Europe where we have to have a different formula and will. No problems in Latin America and no problems in the far east. I think we are on the shelf in Australia as we speak. Catherine Willis: And just on a separate topic. The margin trends in both Europe and Asia were, you know, pretty tremendous. You know, what type of projects do you have in the pipeline that could -- that could potentially, you know, either sustain or continue to show improvement in productivity in those regions? Well, we're enjoying in Asia, these sort of early fruits of s.a.p. in the first couple of years among other things. That should continue. If we were looking at, hang on a second. Let me go to Asia. And I think that we would expect next year -- do we have next year? Okay. This year, it's substantially, 50, 60 basis points higher than the rest of the company and my sense is it will be higher next year as well.

Similarly, the other division you mentioned was Europe. Europe has had good gross profit growth, about on the company average for this full year. It probably will do as well next year. Latin America should accelerate. The recent recipient of s.a.p. and U.S. especially for internal programs and mix. Next year should be very good.

Okay, great, thanks. Thanks.

Operator: We'll go next to Jim Baker of Newburgher bermen.

Yes. Good afternoon, Reuben. I had a few questions I wanted to run by you. One is on the pension, maybe somebody asked this, I was off the call for a few minutes. How much cash contribution do you expect to actually make this year to the benefit plans?

I think it's pretty much in line with our budget, which was, I think, $40 to $50 million.

40 to 50?

That's been calculated in our cash flow. It's already made. Nothing incremental from now on.

For the rest of the year?

Yep.

Okay. And the person who asked an earlier question about the apples to apples sg & a, I wanted to clarify, was all of the good will amortization in sg & a in 2001?

Yes. Yes.

Have you ever disclosed in terms of the geographic segments how the good will amortization was allocated last year so we can better understand the geographic segment comparisons when you publish the queue on an apples to apples basis.

I think we do that simply because in the press release, we did track each operating division of how much their earnings were affected by the -- by that. So we have that, and rather than take the time now, we can give it to you. Basically, you can reconstruct it out of each division's results. But once you phone, they'll give it to you.

Just to clarify, in other words, the figures given today, ebit up in Latin America and Europe, those are not adjusted, right? Those are not apples to apples.

Again, let me read you the press release, if you would. Hang on. North America says -- unaffected. Unaffected so that North America was unaffected.

Okay.

And on page number -- next time they will be numbered. On page flee of the press release, North Americae profit increased 11 percent and is largely unaffected.

Okay, largely unaffected.

So 20 basis points, ten basis points.

But that's by the combination of the good will and benefit changes. Some people like to disaggregate the increase and pension from the lack of good will amortization.

We can provide that to you if you want.

Okay.

And the similar comments in each of the divisions.

Thank you, Reuben.

Thanks, Jim.

Operator: We'll go next to Andrew Shore of Deutsche Banc.

Reuben, good afternoon. Now that I'm a little more global and actually more Anglo, brilliant quarter.

I know you had to top it.

Can you help us understand what is the one or two things that really changed in this quarter that made this quarter so much better than the last quarter when the global economy got so much worse?

I think as we've been saying all year was that the combination of some slight difference in comparisons and the way the new product grid rolled out because of product developments of simply white and others, it was going to lay that way. You remember even without us saying it, many analysts were saying that the first half was going to be tougher comparisons and therefore we would have to wait and see in this whole second half. That's simply what -- simply what's happening. Also, we're getting real momentum on worldwide cost savings and worldwide marketing through being hooked up for the first time worldwide in s.a.p. I mean, the more I learn about what we're doing and what we can do, the more I am impressed by it. And that simply helps and will continue to help.

Okay, great. Thank you.

Thanks, Andrew.

Operator: We'll go next to Alex Patterson of Dresner RCM.

Just quickly, Reuben, a follow-up. The negative 40 basis point hit in gross margin due to all other, is that somewhat in capturing the impact of the pricing line from the top line?

Yes. It's primarily that, actually.

Okay. So if we go into an inflationary period, raw materials are up, theoretically, its competitors all respond normally. That sort of thing so to speak? One would hope so, but we're not counting on it.

Okay, fair enough. I agree with you.

That 40 negative is essentially a price. Okay. Just secondly, European volume's up seven percent.

I'm just wondering if there's any sense you are seeing in the competitorive environment in Europe, particularly from the European competitors whether the strong Euro has had an impact in their -- Euro has had an impact on their new product introductions, anything they may have cut back on because they no longer have the tail end of a strong dollar and weak Euro?

I'm not sure we've seen that specifically, but have I in analysis here that show that our share of voice, which has you know,how we look at advertising frequently or is up in the United States, and up even more in Europe, which may give credence to what you are saying. Whether or not is to the strength of the Euro or who knows. I don't think Dina said it in her commentary, but there was a combination of good growth in western Europe between four percent and five percent which in volume was great for western Europe. But very substantial almost 20 percent volume growth in Eastern Europe where it is clearly market shares and, you know, good spending and getting increased market shares and over time, again, that part of the world is going to become increasingly important. Alex Patterson: So you feel good about that trend continuing then we take it?

Again, if we look at next year, we are Europe as a whole, I mean, if you look at volume in Europe, last year was up 5.3. This year, we expect it to be up close to six and we're estimating, again, in the classic four to seven percent range next year. Now, a few years ago, you would have said about Europe and the United States, hey, if we get two or three percent volume, that's good. But clearly on a regular basis, we're doing better. Precisely. Great.

Operator: We'll go next to Amy Chaseman of Goldman Sachs.

I jut wanted to follow up on the Latin American situation. The -- I understand all of the comments you made about Brazil. I'm wondering if you've done any scenario analysis, if some of the problems in Brazil spread temporarily to places like Mexico?

Clearly, Mexico is a big business for us. Don't forget, that we have ended up much more -- after the mid '90s crisis in Mexico, much stronger in Mexico in terms of market shares and so on. I think we talked about an 80 percent market share. And yes, if something should come up, that would be substantially less given the impact on the United States, given NAFTA, given President Fox's relationship to President Bush, and for what it's worth, when I was in Mexico the other day, I participated in a dinner where President Fox was cautiously optimistic about next year, has promised a reduction and deficit and while we have assumed a devaluation, a modest evaluation in Mexico in our planning, he he very strongly feels that has not happened.

Can you tell us what you assumed?

We have assumed 2003 an average of and just the spot rate this morning to put it in reference is 998. We have assumed an average of 1024 and a going out of 1050. Okay? So that the average is about a seven percent devaluation or there abouts.

Okay. I want to understand you mentioned, Ruben, that you haven't yet done your budget process and yet you seem to have, you know, a fair amount of detail in what your expectations are for 2003. What's the disconnect there? Is that just the top down versus the bottoms up?

I mean, as you know, we believe in process a lot. The numbers I just gave you are, which are currency projections almost by definition, you have to start your budget process with those in hand. So that's a first step and that has been done. The volume projections are done with the divisional controllers and the corporate budget people based on everything they know. You're right, it is not yet as you would expect, and we're sitting at the beginning of the fourth quarter of this year. We do not have the actual budget, but I think our history, I would respectfully submit, Amy in making it happen the way we think it's going to happen is fairly good, at least relatively good to some people.

Great. Thank you.

Great, thanks.

Operator: At this time, there are no other questions in the queue.

Thank you very much. Appreciate all of your support and we look forward to talking to you again. We are looking forward to a great finish to the year and a strong year next year. Bye-bye.

Operator: That concludes today's conference call. We thank you for your participation. You may disconnect at this time.