高露潔 (CL) 2003 Q3 法說會逐字稿

Good day everyone and welcome to today's Colgate-Palmolive Company third quarter 2003 earnings conference call. Just as a reminder, today's call is being recorded and is being 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. Now at this time for opening remarks and instructions, I'm pleased to turn the call over to the Vice President of Investor Relations, Ms. Bina Thompson. Please go ahead, Ms. Thompson.

Thank you, Sarah (ph). Good morning and welcome to our 2003 third quarter earnings release conference call. With me this wedding are Reuben Mark, Chairman and CEO; Steve Patrick, CFO; Dennis Hickey, Corporate Controller; and Ed Filusch, Treasurer. We are pleased to report another quarter of double-digit EPS increase achieved with record worldwide sales and net profit. We reached over 2.5 billion in sales for the first time.

This good performance was achieved despite continued macroeconomic difficulties in Latin America, sluggish economies elsewhere in the world, a very vigorous competitive landscape here in this country, and as all of you have known for sometime a very challenging year-over-year comparison. Volume increased worldwide 2.5 percent, increasing in every division except North America. You'll hear more about North America when we get into the specifics of the divisions but I think you all know their results were affected by our launch of Simply White in the year ago quarter.

As mentioned in our press release, marketshares in core businesses continue to increase. As you know, each quarter and each year our results benefit from our truly global footprint. Specifically, we count on strong performances in certain parts of the world to offset the inevitable economic challenges in others. As you will hear, Asia-Pacific, Europe and Hill's, also posted outstanding results setting records on many lines of their P&L.

These results together with corporate savings and efficiencies were able to offset expected difficult comparisons in the U.S. and expected economic sluggishness in Latin America. It's this global portfolio of businesses that allows us to continue to deliver solid results on an ongoing basis worldwide. So, let's turn to the P&L. As I said, we reached an all-time record in sales, 2.5 billion, up 6 percent, volume increased 2.5 percent and currency added 3.5 percent.

Gross margin increased 30 basis points. This is on top of the very large 120 basis point increase in the year-ago period. It was in the third quarter of last year that we launched Simply White, a very high margin product, here in the U.S. Excluding the effect of Simply White, our global gross margin was up 50 basis points. On a nine month basis, our worldwide margin was up 60 basis points and we expect the full year increase to be within our targeted range as well.

You also know that it is part of our financial strategy to generate funds from each line on the P&L so that we can reinvest in the business and grow volume and marketshare. In the quarter, we increased our worldwide commercial investment substantially and this spending behind our core brands went up in every division. Operating profit increased 4 percent to a third quarter record of $535 million reflecting the significant investment in commercial spending around the world.

Net interest expense as expected was 30 million below last year's levels primarily as a result of lower debt. As many of you know, we apply our principle of continuous improvement to every element of the business. Our global taxes are of course one of these elements. In any one time we are working on specific tax initiatives in many countries. The timing of the consummation of these initiatives cannot be predicted with great accuracy, but the overall results have been to consistently lower on global tax rate each year for the last four years.

This repetitive decrease in global taxation is part of the continuous and dependable increase in profitability that Colgate has enjoyed over many years. The specific tax project referred to by Ruben in the press release is a European tax incentive involving several countries in which our people have been working for the best part of a year. It became increasingly feasible as the year wore on and early in the third quarter we were able to move ahead to finish (indiscernible).

The effect of this particular initiative will be to reduce our full year 2003 tax rate by 110 basis points from the previously estimated 31.5 to 30.4 percent. As you may know, accounting rules require that the individual quarter be adjusted to bring down the year to date tax rate to the level of the full year estimate. Accordingly, to bring the year to date to 30.4 percent which is the expected level for the full year, this good quarter was reduced to 27.6 percent, 280 basis points below last year's third-quarter.

From a business perspective as Ruben mentioned in the press release, the reduced tax rate in the quarter allowed us to increase commercial spending meaningfully versus what it would have been. You may ask is this a one-time event? Will earnings benefit in the future? The answer is no and yes. While this particular initiative will not be repeated, others are in development and will occur. As Rueben said in the press release, he is indeed hopeful that the continued use of Colgate's tax expertise could lead to a stream of tax initiatives that will a continuation of global tax reduction next year and beyond.

Just as every other line on our P&L and balance sheet received the benefit of continuous improvement so did global taxes. Going back to the P&L, net income increased 10.5 percent to an all-time record of $365 million at 14.5 percent of sales. EPs also reached a new record increasing 10.5 percent to 63 cents. Our cash flow and balance sheet results were excellent.

After-tax, cash flow increased 6 percent and free cash flow after CAPEX was up 10 percent. Our networking capital reached a new record low of 3.0 percent. As a matter-of-fact, we are quite proud that all financial ratios on our balance sheet showed improvement. Our return on capital already high, was again up substantially, 310 basis points to 37.1 percent. Our coverage ratios continued to improve and are well above the target ranges necessary for us to maintain our AA debt rating.

Overall a very healthy picture with regard to strong cash generation and balance sheet analysis. Turning then to the divisions, we will start with North America. Volume in North America was down three percent with the Simply White sell-in comparison included. Excluding Simply White U.S. volume was up 4 percent as noted in the press release. Commercial investment was up both absolutely and as a percent of sales.

North American operating profit was down about 13 percent reflecting the impact of Simply White and the increase in brand building investment. Looking a little deeper at North American volume as you all have been aware, we started the sell-in of Simply White in the third quarter of last year here in the States. As a result, volume in that quarter was up 8.5 percent creating a well-publicized difficult comparison for this quarter.

Gross margin and operating profit in the U.S. were also affected by the difficult comparison. It is interesting to note though that our top ten accounts in the United States which represent almost 60 percent of the business and are growing fast, increased their all-in case sales 6 percent during the quarter. Excluding Simply White our top 10 accounts in the U.S. increased their case volume by 8 percent. Setting comparison issues aside, Simply White and Simply White Night continued to perform well in the marketplace.

Our most recent trial and repeat date shows that after one year the trial rate is three times that of our leading competitor and the repeat rate is higher as well. As the overall at-home whitening category penetration still remains low, there appears to be further opportunity for considerable overall category growth. Other Colgate categories in the U.S. are performing nicely. Our national toothpaste marketshare is up on a year-to-date basis as measured by Nielsen.

Earlier this year we launched Colgate Total Advanced Fresh, a toothpaste that provides long-lasting fresh breath in addition to all the other Colgate Total benefits. That variant alone now has a 2.5 share and brought the Colgate Total brand to a record quarterly share of 14 percent in the quarter, by a considerable margin, the larger selling individual toothpaste brand in North America.

In the Personal Care category new products have helped to drive share as well. Our liquid soap business reached a record share in the third quarter, 46.7 percent of the market, and finished the quarter with excellent momentum with a September share even a bit higher. Our line of Softsoap Naturals Milk and Honey (ph) just launched this year, has contributed to this excellent performance.

In the dishwasher category, our new Palmolive Dish Wipes have achieved excellent distribution and after only two months in the market have a 2 percent share. To help to continue the momentum we announced a number of other new products in late September. One is a new toothpaste, Simply White Toothpaste. Simply White Toothpaste uses a breakthrough dual chamber technology which produces dramatic whitening effect.

Most whitening toothpaste only treat surface stain, but Simply White toothpaste contains a bleaching agent which treats deep embedded stains as well. The whitening action is enhanced by a patented whitening accelerate and the peroxide gel formula is patented too. Another new toothpaste is Colgate Total 2 in 1, a product which will deliver all the benefits of Colgate Total in a convenient 2 in 1 packaging and liquid form.

You will be hearing about substantially more new product activity over the coming months. Looking forward to the North American business in the fourth quarter and 2004, while the comparisons remain difficult due to Simply White, you should see good results from other core categories especially toothpaste. Total U.S. volume should come in better in the fourth quarter than the third because our estimates in core business growth are higher than the 4 percent shown in the third-quarter.

Operating profit is expected to be even with last year's all-time record for North America for full year 2003 and up further in 2004. Turning then to Europe. Volume in Europe increased a healthy 3.5 percent on top of the year ago increase of 7 percent. Sales increased 13 percent after an 11.5 percent positive from foreign exchange. Commercial investment increased absolutely and as a percent of sales. Operating profit increased more than 15 percent to a record third quarter level as a percent of sales.

Volume was strong in the UK as well as the Nordic countries and southern Europe. Volume growth in Eastern Europe was excellent. You all know that we announced the sale of our European Heavy-duty Detergents earlier this week. This reflects our clearly stated strategy to move away from our low margins noncore categories to high margin businesses, such as oral and personal care. If you exclude the detergent business, volume in Europe would have been up more than 4 percent for the quarter.

I want to spend just a moment on our recently announced divestments and onetime charges, both of which are currently expected to occur in the fourth quarter. As stated in our press release, it is expected that the gain from the sale will be offset by the charges mostly related to the further rationalization and regionalization of our factories in Europe. As the European detergent business has been negatively affecting both volume and gross margin, this divestment will result in a faster growing more profitable overall business going forward.

In addition, the offsetting regionalizing activity will result in a more productive and cost efficient organization. This will allow us to put even greater focus on oral and personal care which has significantly higher margins and are growing faster. As in the U.S., new product successes have helped increase market share across the region. Earlier this year we launched Colgate Sensitive Toothpaste which is doing well throughout Europe. In fact, our regional share has climbed another point to 27 percent of the European market.

Our Colgate Whitening Tooth Brush, just launched here in the U.S., began shipping in Europe in June. And the Colgate Massager Tooth Brush has helped boost share as well. Our Whitening Tooth Brush has a special cleaning tip to clean deep between teeth and soft polishers which delicately polish your teeth to reveal their natural whiteness. The Massager Tooth Brush combines deep cleaning bristles with soft scrubber tips that gently massage the gums. Our tooth paste share and tooth share in fact, is up about a point and a half.

In Italy our manual tooth brush share has reached an all-time high. In Sweden, our share quarter-over-quarter is up four points and Denmark our share as up 2 points. In the Personal Care category we have launched yet another variant in the aroma therapy line, Palmolive Sensual. In addition in July, we launched a new line of bath and shower gels, Palmolive Thermal Spa. The acception so far has been very good.

Another new product which we just announced in Europe is in the fabric conditioner category. You know we are the world leader in fabric conditioners outside the U.S. and this new product is truly revolutionary (indiscernible) It is a single-dose product that goes in at the start of the wash cycle. Heretofore all fabric conditioners had to be added during the rinse cycle. The product will come in three variances.

We are excited about the momentum in the European business and feel our recent divestment will further focus the business on our strategic priorities. We would expect volume in the fourth quarter to accelerate somewhat from the third quarter performance and that volume should continue in the mid single digit range in 2004. Operating profit should be up strongly in the fourth quarter and should be up absolutely and as a percent of sales for next year, as well.

Turning to Latin America. Volume in Latin America increased 1.5 percent, pricing and consumer and trade promotion increased 7 percent, currency was -5.5 percent. Sales in Latin America increased 3 percent in dollars. It is quite noteworthy in that it's the first dollar sales increase for that division in eight quarters and the first time in 11 quarters that price increases have exceeded devaluation.

Dollar commercial investment increased and operating profit was down about 5 percent. Economies throughout the region are still somewhat fragile but we are seeing gradual improvement in Argentina and Brazil. In Brazil, GDP is now forecast to grow slightly for the full year 2003 compared to previous negative projections. In addition, the Brazilian exchange rate has been strengthening since the end of last year, a welcome change.

Inflation now appears to be under control and the government is not turning to a reduction in interest rates which are down considerably from the beginning of the year. Our business and Brazil is strong. Marketshares are up in toothpaste, toothbrushes, mouthwash and soap. We told you last quarter about the launch of Sorriso Super Refreshing. This new variant in the Sorriso franchise reflects the equity positioning of Kolynos and has met with great success adding two points to the Sorriso share and over a point to the overall company toothpaste share.

Toilet soap (indiscernible) reached the highest share in a decade, up to 18.3 percent of the market. This is as a result of our relaunch of Palmolive Naturals in four for Variants, Soy milk and Oats, Aloe and Olive, Grape Seed and Orchid, and Milk and Honey. The Mexican economy still appears somewhat sluggish. As you know the peso has weakened somewhat in recent months but seems to have stabilized at current levels.

GDP growth for 2003 looks to be only about a percent and a half. The current estimate for 2004 however suggests a reacceleration. The overall health of the Mexican economy still remains very dependent on the performance here in the U.S. But despite current conditions we have continued a strong level of new product activity. In the beginning of the year we launched Simply White, (indiscernible) a small business relative to the whole Mexican subsidiary, results are so far double our going-in expectations.

More recently we launched the new fabric conditioner, Sauvitel, for dark clothes. That will be launching as well in the U.S. and Hispanic markets sometime next year. Mexico will most probably be (indiscernible) up in volume and profit for next year. In Venezuela, despite continued tough economic conditions we continue to strengthen our market position.

Shares are up in toothpaste, toothbrushes, soap and fabric conditioners. Toothbrushes, our share as up four points, and we took market leadership in the quarter. So while we still maintain as always a cautious view on Latin America, we expect volume in the fourth quarter to remain at least at third quarter levels with a clear acceleration early next year. Operating profit should be down slightly in the fourth quarter but is expected to be up next year.

Asia Africa. Asia Africa grew volume 9.5 percent, the strongest quarter of the year. Pricing and consumer and trade promotion was down 4 percent, exchange added 8.5 percent for a total sales gain of 14 percent. Total commercial spending was up both absolutely and as a percent of sales. Despite the heavy investment spending our operating profit was up 25 percent, up both absolutely and as a percent of sales. This division posted particularly good results with record levels of sales, profit and advertising dollars.

Volume was good across the region and elsewhere. This was aided by a steady stream of new products and regionwide marketshare gains. We strengthened our base toothpaste business with a new revitalized Colgate Dental Cream as well as launched Colgate 2 in 1 Icy Blast and Colgate Total Plus Whitening. As a result, our market share in China is now over 31 percent of the market at 31.7 percent with the most recent share at 31.9 percent.

In Malaysia our already strong position increased almost a full point to 76.5 percent of the market. In Thailand, our share increased a full point to 50 percent, and in the Philippines we consolidated our leadership position as well. In Austria, we launched both Colgate Total Advanced Fresh and Colgate Sensitive. Our share in the third quarter grew to 65 percent, almost a full point from the full year 2002. Results in the Personal Care category were equally satisfying.

In this quarter we continued the rollout of Palmolive Aroma Therapy Liquid Handsoap and Talcum Powder. In addition under the Protex brand, we have introduced Protex Suncare in bar soap, liquid soap and talcum. This product is designed to help protect against the harmful drying effects of the sun. In Malaysia our market share is up 2 percent in shower gel and in Thailand it increased a percent and a half. Talcum powder share in Thailand increased 2 percent as well, an indication that our new products are successful in the marketplace.

We're very pleased with this quarter's performance in Asia Africa. Volume should continue to be robust to the end of this year and into 2004 and operating profit should be strong as well. Finally health. Health volume increased 3.5 percent, solid performance particularly when compared to the third quarter of last year which was up 6.5 percent and was the strongest increase of 2002. Pricing and consumer and trade promotion added a percent. Currency added 4.5 percent resulting in an overall sales gain of 9 percent.

Commercial investment increased both absolutely and as a percent of sales. Operating profit was up 15 percent of that absolutely and as a percent as well. Volume increased both domestically and internationally with stronger growth coming from Europe and Japan. Importantly, the specialty category continues to grow faster than (indiscernible) market and we are growing share within that category.

New products are driving the success of Hill's as they are in our Colgate business. We told you last quarter about two new products that will be shipping this quarter, Science Diet Advanced Protection and Prescription Diet m/d. Both products have been well-received by the trade during the initial sell-in and the launch has been well supported by promotional activities including high impact offshelf display programs.

In Europe, consumption for our products continued to be very strong. We have continued our rollout of Nature's Best there and the success of that rollout has been reflected in high single digit volume growth or better. In Japan, despite a continued sluggish economy, the pet food market overall is showing some growth and our pet food business is building good momentum particularly on the Prescription Diet side.

We continue to hold the number one share in both cat and dog dry food. In addition, the higher pricing of our Nature's Best line provides additional benefits. So, we're pleased with the continued strengths of our Hill's business worldwide. Volume should continue in the mid single digit range for the balance of this year and next year, as well. Operating profit should continue to show good solid growth.

So in summary we're pleased to report good performance in the face of some unique challenges and extremely difficult comparisons. As you heard several divisions in the world have posted excellent results. Our market shares are strong here in the U.S. and overseas. Our full pipeline of new products bodes well for the fourth quarter and next year. Let me quote Reuben's comment in the press release. He said, I expect that 2004 will be the ninth consecutive year of strong earnings growth for the company. That is all we have for prepared remarks. We can open it up for questions now.

+++ q-and-a.

Today's question-and-answer session will be conducted electronically. (OPERATOR INSTRUCTIONS). Amy Chasen with Goldman Sachs.

Good morning. Two questions. The first is on the North American profitability. Obviously the volume came in below where you guys thought. The operating profit decline was much worse than I would have thought. I'm curious whether you guys increased your spending in North America early in the quarter when you got the sense that the volume was coming in weaker and the volume just simply did not respond to that. Can you comment on that?

I think as Bina said in the write-up, there is no question that our advertising spending, our total commercial spending, in the United States and around the world was up strongly. I think you and everybody else has pointed out that there is definitely a competitive upsurge in this country in many categories. Actually, we were pleased with the share results which showed actually share upticks, especially in toothpaste, our most important product. The answer is, I don't think there was a movement during the quarter itself. I think we had actually expected to be spending more. If anything, the tax initiative that Bina mentioned allowed us to do things that we might not have otherwise been able to do.

I guess I'm just curious whether you were surprised that the volume didn't follow?

The volume didn't follow?

In other words --.

The volume ex -- I think the volume ex Simply White was up 4 percent and in our major accounts, accounting for two-thirds of the business, our case volume was up 6, including Simply White and a couple -- I think it is between 7 and 8, excluding Simply White. Yes, we would have liked to have seen more Simply White volume clearly, but at the same time, we are -- we have good market shares.

Looking forward to the fourth quarter, I don't know if Bina said this or not, but our ex Simply White volume should be up over that 4 percent level that we have here, and my expectation is that we will continue as historically. Yes, it will be more costly from a commercial spending point of view, but fortunately our margins are higher and our mix is better so that as you know, when you talk about profitability, as you know my recollection is that U.S. profitability or North American profitability was at 22 percent for the quarter, which is very high. Fortunately, we're able to afford the spending necessary and still deliver very healthy profits.

In the fourth quarter, do you expect U.S. volume to be up including Simply White?

I think our expectations are that excluding Simply White, it will be up a point or two or three more than the 4 percent. Including Simply White it will be flat to slightly down.

Okay. Alright, great. One last question with a little bit of a longer-term bent to it. I think in the press release --.

By that you mean that sort of deep into the fourth quarter?

I was actually thinking a couple of years, but I guess it depends on who you ask. A couple times on the press release you referred to double-digit EPS growth and I know you guys have been saying that for a while. But, I think you also had a goal of sustaining the types of EPS growth rates that we've seen over the past couple of years which has been more like 13 or 14 percent. Are you of the opinion that over the next couple of years that is going to become increasingly more difficult to do?

Amy, not to correct you and I think we have had this discussion before, we have -- we do not say eleven to thirteen or whatever it is. In fact, we do not ever say a number like that. You guys, the sell-side analysts come up with a range and a consensus and we say whether we're comfortable or not. Historically, it has run north of 13 percent. But the range for next year for example, my recollection is 8 to 12 or thereabouts and we're comfortable with that.

I don't think the words yes we think we can do eleven to thirteen have ever passed my lips. What has passed my lips is we have historically done that very consistently over a very very long period of time. So, just a quick clarification and we will continue in the future. You guys will come up with a number and we will publicly say, not individually, but publicly say we are comfortable or not with it.

I'm just asking, do you think that the historical growth rates are sustainable or has something structurally changed?

I don't think anything has structurally changed. I think the competitive environment at least short-term in the United States, has been altered, but so has the composition of our business and our ability to pay for it. As you read in the press release, the other press release a week or two ago about our position, of our European detergent business.

As that happens around the world, that gives us additional ones on a ratio basis in order to support the business. Similarly, our gross margin is going up and our overhead going down as a percentage of sales gives us that. My sense is that I am not saying, making any projections about what precisely our number is going to be. I'm saying if there is not a fundamental change in the business.

Okay. Thank you.

Andrew McQuilling with UBS.

Reuben, just a question on competition in North America since you brought up what is structural or cyclical. In terms of Oral Care, what do you see of competitive activity that seems sensible and rational to you and what seems unsustainable? It seems like everybody in the sector has had earnings trouble this year because of Procter?

I'm just hanging up a little on the earnings trouble, but that's okay. It's not for me to say what is sustainable or not sustainable. Obviously it would be inappropriate to comment on whether I think any competitor's spending is unsustainable. Without question when you do P&L's for the individual businesses, I'm just mentioning Procter, and for any of the companies, is that some of these levels are -- don't appear to be a good use of money and in fact are destructive of value, but so be it.

If that is the way it works, that is the way it works. Fortunately, I think what we bring to that is a very widespread organization with, I think the word footprint was used in one of the either in a press release or (indiscernible) whereby we have the ability to draw on a one area or the other to fund the somewhat -- I wouldn't use the word rational, but high spendings in other places.

My sense is if that continues to work and I think we will continue to be able to do that. That, plus the continuous improvement in gross margin I think is a wonderful offset. When you think about it, each -- this year are all raw and packing materials went up a percent and a half or whatever it is, (indiscernible) use half numbers - if you want them versus previous years.

But were able to offset that and still get a 50 basis points increase. Probably for the year it is 50, 60, whatever it is going to be, and that is despite all the extra spending in the United States which of course knocks down gross profit. So, I think we go in with a fairly distinct advantage in terms of flexibility of spending and discipline longer-term towards margin improvement.

Maybe one more if I could. In terms of Latin America, you have gone through periods obviously, the Mexican event '95 and '96, but it seems like Latin profits have been under pressure for about two years now. Is this all economy or is there anything else going on in Latin America? Is there any real structural change in trade terms that alter your outlook in Latin America?

No, no. There are no change in trade terms and really no change as you know Andrew, in the competitive set because our marketshares, country after country, have gone up rather than down during this crisis period and I think many of you out there have actually seen those numbers and perhaps even been in the country. But what is encouraging is as I'm not sure again this was mentioned, but for the first time for example, in Latin America as a whole, we did better on price increases than devaluations.

That is to say that we got a positive (indiscernible) three points. So that is a very encouraging thing. Also when you look at gross profit, as a result of devaluations and so on, our gross profit -- we had a sequential improvement every quarter this year in terms of gross profit and that. While it was down in the first half, it was up in this quarter and was expected to be pretty good next quarter as well. And next year as a result my sense is that we will be coming (indiscernible).

Right now we're still quite optimistic about both the medium and long-term in Latin America. As a matter-of-fact, the numbers as I am looking at them show both a gross profit and EBIT up meaningfully next year.

Thanks very much. My currency estimate in December happens to be higher than the September number. Are you comfortable with that?

Great. The currency estimate for what period?

December quarter, the whole world, better than 3.5.

Good.

Latin America looks better?

Actually the currencies are looking better for a change, which is good. Again when currency, going back to Amy's question, when currency is helpful, we have absorbed negative currency for many years, but my sense is what is best for the long-term health of the business and the long-term health of the valuation and shareholders, is when you get a break on currency that you in fact spent it on business building activities and commercial investment and so on. Yes, you could drop that to profit but our objective is to get to the profit and put the maximum amount of money into share building that we can. And that to me is how you get progressive marketshare and therefore volume and therefore profit increases over many years.

Thanks very much.

Connie Maneaty with Prudential Equity Group.

I had a couple questions as well. On the Simply White toothpaste, how is this going to be priced? Could you go over again what is patented? It seems to me the last time with saw a dual chamber kind of toothpaste was Mentadent many years ago. Are you talking about a much bigger package for the toothpaste or what is going on there?

Let me answer the second question first. This is a tube that looks like all other tubes. Why is this tube different than all other tubes? Let me give you four answers to that. This is a tube with an internal partition which gives a -- that is one of the things that is proprietary. We have a whole series of protective things surrounding that. So, there are two ingredients in the tube. It squeezes like a regular tube, but the two ingredients come out side-by-side and blend for the first time on the brush.

That allows you to have two incompatible substances in the two different creams and therefore it creates a reaction and in this case bleaching and other implications thereof. It's a totally different -- it is not a pump, a dual pump like Mentadent. It is a tube. It looks like a tube. Pricing as presented to the trade when this presentation was made within the last few weeks, it is going to be -- the particular size that I'm referring is going to be at 4.99 versus Total at 2.90.

So, it is a meaningful premium. It also provides cavity protection, tartar control. It is obviously significantly cheaper than the gel product or the tape product and it is superior, genuinely superior, to other whitening toothpastes, because it does have bleach in which normally cannot be carried because it dissipates itself when you combine the ingredients. The advertising is going to be on the air in the middle of January.

Does this toothpaste whiten your teeth better than Simply White?

No it does not. It whitens -- it is better than any clinically proven whitener is better than any existing toothpaste by a very considerable margin. But, it is not quite up to the level of the strips or the gel.

Also I have a question --.

The differences, of course, is that it is an existing consumer habit and that the incremental penetration of the at-home whitening is only 13 percent. The in-home penetration of toothpaste is 100 percent basically and that what this does is allows the consumer to use it for two or three weeks every few months and then go back to using Colgate Total or whatever it is that the dentist recommends in the interim periods.

Okay.

In our view, we will see. But our view, again it is unproven, but our view is that you will get a lot more repeat with this than with the one use product.

I have a question also on the tax rate. On the second quarter conference call, you said at the time or someone said at the time that the tax what would be between 31 and 32 percent for the year. You know, by the time the second quarter was reported you were already in the third quarter which kind of corresponds for the time that you said that this tax rate change went into effect. How come you haven't, you did not telegraph the changing in the tax rate?

I guess, it would have been better to do so, but you know how conservative we are. Until we get them, until things are actually captured and we can count on them, why should we announce it? It was being worked on, it was looking increasingly good, but at that point I have the estimate before me, we thought the tax rate was going to be about 31.1 or 2. Now it looks like the tax rate will be up somewhere between 30.5 and 31, and my sense is that yes there is a half a point or so difference there.

But since this is not sort of a one shot kind of magical thing, but a methodical mechanism to reduce our tax rate around the year, around the world, it is very much of a piece with our continuous improvement. When you think about it, it is better to go in with a low tax rate and come in higher than the other way around, but our historic way of dealing with the investment community is not to take credit to things until they happen. That is new products and everything else and so this is simply a manifestation of it.

That explains it. If I could just ask one more question. The U.S. volume comparisons are actually more difficult in Q4 than they were in Q3. It just seems as though Simply White -- on paper it looks like Simply White had a much bigger impact in last year's Q4 than Q3. Is that right, or was last year so strong in Q4 because of other things?

They are both right, but yes the other part of the business, i.e. all of the other products, the other 90 percent, all of our core businesses in the U.S. are projected up more than they were in the third quarter. So, therefore, the figures as I say are, the 4 percent that the rest of the business, ex Simply White, is enjoying in the third quarter are expected based on a detailed estimate and the sales quota and all of the stuff that we would normally use are expected a point or two higher than that as a result of promotional bridge. Our marketshare is slightly higher on toothpaste, etc., etc., etc.

So again, one never knows until the results actually come in, but we tend to give you projections based on what our real projections are, and our expectation and you'll be able to check it when it comes in obviously. Is that the (indiscernible) growth of the non-Simply White business where it will be even more robust than it was in the third quarter.

Thank you very much.

Joe Altobello with CIBC World Markets.

Good morning. Reuben, I think earlier you said that you saw a competitive upsurge in North America this quarter. I have been under the impression that it had been pretty competitive all along, we are just seeing it now with the anniversary of Simply White. But it sounds like that is not the case. Is it really just Procter that is driving that and everyone else, including yourselves, are responding, or are there other sort of variables at work here?

If I gave the impression that we just felt it this quarter I did not mean to. Certainly you're right, this has been building for 18 months or so. Again, it is in I think a lot of different categories. We would feel it most in toothpaste, I'm sure, because that is one where we have the largest competitors, but I think it is a general phenomenon. There was a question earlier about sustainability. Who knows, we have to assume that it is sustainable on everybody's part and we're planning to sustain it.

That may mean that as I say that there are times when we had extra earnings in the U.S. because of very good progress, and there were other areas that were undergoing crisis and in terms of harmonization, we allowed some people to spend more and some people to spend less. Obviously at this stage, we are giving the business every effort to continue its building process in the United States, and essentially finding those resources elsewhere.

Okay, but is the --.

It's not a one quarter thing, nor do I think it is specifically one competitor, I think it is a general industry trend cutting across companies and cutting across businesses. The only point I was making earlier is that while we don't have pots of money from restructuring because we tend not to have -- not to take -- we have not taken restructuring charges. For eight years we absorb it in the P&L. The way our whole business is geared, that is to say driving margin up and driving overhead down and focusing only on our core brands, I think puts us in a very good position to do that.

And also, working on each element of the P&L, to generate funds for growth. As you probably know, the three themes of the company and have been for years and I think it is a very worthwhile thing is driving the growth, funding growth, meaning finding the money within the company rather than reducing profits, and then becoming the best place to work on a more -- softer objective basis. My sense, we are well prepared for a competitive battle -- happens to be primarily in one country. We fortunately have the other -- almost 80 percent of our business outside the United States. That is also competitive but not nearly as much.

On a separate subject, obviously you guys have been rationalizing your product portfolio for a few years now, and this continued with the European detergent sale. I'm sure you probably looked at this, but have you guys got a number as far as the percentage of sales that you believe could possibly be sold or divested at some point over the next couple of years?

Let's just stick for a moment to detergents. I think it has been well known that detergents are lower priority for us than Oral Care and Personal Care, if nothing more than another company dominates that worldwide, and we do not. As you know, in the last couple of years, we have sold two major companies, Procter, Unilever and Henkle, particularly our business, our detergent business in Central America, and Mexico, and in Europe.

The remaining detergent businesses which are in a number of countries, not a lot, maybe a dozen countries altogether, (indiscernible) that we do business, in represents about almost $600 million, between $500 and $600 million, about six percent of our sales.

The margins are almost, the gross margins are almost 20 points below the rest of the company and the operating profit is about 4 percent, so it is substantially less profitable as you would expect. So that volume has been declining at about 3 percent a year. So in the good volume figures we have been posting over many years including this quarter, there is a 3 percent drag on that which gradually has disappeared.

One question, if I could, on the inventories obviously it was up 12 percent year-on-year.

I'm being passed a note that says it is just under 500 rather than 552. I guess the 552 includes Europe.

The final question was on inventory, it was up 12 percent year-over-year. What is the dynamic there?

I'm sorry?

The inventory levels?

As you see now, working capital is down at 3 percent which is an all-time low. We explained inventory, finished goods is up very slightly, and the reason for that -- I'm looking for the folder, I can't find it, but basically, it is -- we are moving our Mexican Oral Care operations to a new factory in northern Mexico, so we built up some inventory there. There is some inventory built in Venezuela anticipating (indiscernible). Thailand, the same, we're moving -- it is safety stock on moves and if you took that out, just as an aside, our working capital would be by far the lowest it has ever been, the 3 percent is the lowest. But the reason it is even at 3 percent is because we are about a week or so as I recall longer than we normally would be on finished goods. But it is purely isolated to these specific factory moves where we built safety stocks in.

And temporary as well I would imagine. Thank you.

Bill Steele with Bank of America.

Two questions Reuben. First of all, I guess going back to the tax rate situation. Considering you knew about it in the middle of the quarter, did you spend more money in the second half of the quarter and if so, would we -- could we assume that the volumes accelerated let's say in September versus July?

It is really tough to say when. Every country has their spending prioritized as part of their budget and as part of their latest estimate. When funds become available more or less, that projects are released. It is tough to get to a particular week in a quarter or a first quarter. I can say for what it is worth, that in the U.S. for example, and don't go to the bank on this, the way the quick order started is substantially stronger then the pace during the third quarter (indiscernible) but that is good.

So far, the volume is even better than that accelerated rate that I was telling you about a few moments ago. But, who knows, we shall see what happens. But there is not -- the fuses are not quite that short in spending. You have to plan a little bit ahead and we saw it coming, we started to get more (indiscernible) about some spending (indiscernible) things we might not have otherwise spent, and it was released over time.

The second question, since we have talked a lot about comparison and tough comparisons, you have an awfully tough operating margin comparison in Q4. How should we be directionally thinking about your margin expansion this quarter?

Gross margin, you're talking about?

No, operating margin. You were up 110 percent basis points last year.

Gross margin, let's start with gross margin, in the fourth quarter should expand a bit more than it did in this quarter, that is both with and without. It grew -- it's 30 and 50 with and without (indiscernible). Our expectations, it should be a bit more next quarter or maybe a little more than a bit more, and then there was an analysis that you did which --.

On the operating profit?

Hang on one second. First of all, for whatever it is worth, Hill's and Latin America in particular are expected to do somewhat better in the fourth quarter then the third, and again in comparison to last year. The gross profit comparisons as I said are better, and the SPI's, the selling price increases, specifically in Latin America and specifically in Brazil, which were substantial during the quarter will have full effect. Normally advertising is lower in the fourth quarter, and for what it is worth, this would be icing, is the euro as you know it a bit stronger than it's been lately. But all of that being said, our expectations is we will make our plan.

Okay. Actually I misled you. I do have a short third question. How much of the increased spending in the third quarter, behind the brands, was spent versus accrued?

I would not be able to answer that and given the dumbstruck look on the part of the Controller and the Chief Financial Officer, they may not be able to answer it.

The only difference would be in coupons where in the coupon you expense the day you drop it as opposed to the day it is redeemed. Otherwise it is expensed and accrued at the same time.

So there are really no accrued expenses in the quarter in terms of spending behind the brand?

As we said, except coupons.

Okay. I just wanted to be clear. Thank you.

Naturally, it is interesting because these guys aren't dumbstruck much.

Wendy Nicholson with Smith Barney.

Just a follow-up. I wasn't sure I heard the answer. Is operating margin going to be up year-over-year in the fourth quarter?

Operating margin meaning percentage?

Operating margin up year-over-year for the overall company.

Operating margin defined as?

A percentage of sales.

In the fourth quarter --.

For the whole company.

For the whole company, it will -- the answer is yes slightly.

Okay. Fine.

It actually is, since we have published this figure, Bina just walked out for a minute, but last year it was twenty-one five and it is expected to be a tad over 22.

A tad over 22.

At least.

Okay. Fine. Going back to the U.S. business, did you say what the percentage change in operating profit would have been if you excluded the Simply White spending in both the third quarter of '03 and the year ago. I know you said volumes would've been up --.

I did not say that and I don't know that we do have it. Let's dig that up and see if we can get that to you. I'm not sure that is a reasonable figure. Bina just walked back in. It was U.S. operating profit, with and without, Simply White. We have not done it that way, but let's do it and we will -- my sense is -- well I don't know what my sense is. We will do it and we will get back in. Obviously if it is any meaningful thing we will release it.

The reason that I asked the question and maybe there is another way of answering it, and I know Nielsen data absolutely does not tell even 50 percent of the story for you in the U.S.. But, I look at the data that was released yesterday, and I'm sure you were cringing saying it is not relevant. But the reality is, in your top three businesses in North America, toothpaste, the Palmolive business and deodorants, your shares were down about 100 percent points a piece.

I worry that all of that spending that is hurting your profits isn't leading to any marketshare expansion. Maybe your business is gangbusters at Wal-Mart but still directionally in 50 percent of your business the spending is not paying off.

Are you talking about Nielsen?

The last Nielsen shares we have and then making them pay more money (indiscernible) getting them sooner than we are, are that we are up several, I think 30 basis points or whatever it is, versus previous quarter and similarly versus a year ago. I have not seen those figures.

So we will just agree to disagree on the Nielsen numbers.

Pardon me?

We will agree to disagree because my numbers are showing you down about 30 basis points for your whole business and down 100 basis points in toothpaste, down 100 basis points in light-duty liquids.

This is a one month share?

Yes, but that is my point. I know this is a limited amount of data but at the same time it surprises me that you spent so much and yet still we are not seeing it have real impact.

Well you know and I know that irrespective of what those numbers are, that there is a longer-term effect, certainly longer than one month in spending. There is a couponing effect which the person puts away and doesn't redeem for the first few weeks and so on and so on and so forth, but we are not seeing that effect.

Okay.

For what it is worth, as I say, the current volume domestically is better than expectations, short period of time and so on.

But, if you look at your profit contraction in the U.S. that has obviously got to be a frustration. I guess my question is how do you as a manager of the business change the way you're running it. Do you go back and look at it say we've got to find the next leg of cost savings, because my sense is that the competitive environment is not going to ease up.

I think so, as well. Clearly what is going to happen is that there are going to be significant spending ongoing for the foreseeable future and our job as always is to make sure that that money is available so that we can spend it where it is appropriate to be spent in incremental couponing and incremental trial and everything else while preserving both the brand and the profitability of the company. And fortunately, there are areas of the world that are moving strongly and are not facing similar threats and similarly, there a number of wonderful savings projects and similarly things like a continuing move in Europe which frees up this move on detergent, it frees up a lot of potential cost savings.

There will be others as well, and my sense is yes, our job is to change the dynamics of the P&L, and carry the world as conditions, short-term conditions, short-term year in year 2003, change and that (indiscernible) to maintain the ability to increase profitability on a continuous basis. To a certain extent our sense Wendy is that is what we get paid for and that is I think, why we are in a good position to face that because our entire organization is not geared towards one-off, let's move the share this month versus next month, but a series of many many projects generating margin spent on advertising and new product innovation in order to gradually build share which is what is happening and I think we will continue that.

Last question. Is there a risk that you need to bring down your 50 to 100 basis point annual goal for gross margin expansion? Or is this year going to come in at the low-end of that really just because raw materials are so high.

I think Wendy you've heard us say it many times, is that last was up one twenty. It was up one twenty. We have said that continually that this 50 to 100 basis point range which has stood us in good stead for many many years. There are some years in which we will go well over the top of it. We have never to my recollection gone below it and I don't think we will. I don't think we need to recalibrate that. In the years where (indiscernible) material like this one are substantially higher, we are able to come middle of 50 or 60 or 70 basis points.

In the years where (indiscernible) year, it's over 100. Again I'm sitting around looking at all the financial people and they're nodding affirmatively. I don't see anything materially different. I think we're finding some extraordinary savings opportunities in the who would have thought it kind of area, and also the forced mix aspect of dropping (indiscernible). I don't (indiscernible) in the future that I will be proved wrong, but I think we are right on track we have been.

Fair enough. Thank you.

Bill Pecoreillo with Morgan Stanley.

A question on the spending that you did in the third quarter North America in terms of how much of the spending if any was for new products being introduced in the fourth quarter where you might absorbed some of the launch cost in the third quarter but won't benefit fully from the revenue until the fourth quarter? Or was the spending mostly behind products that were fully generating revenue within the third quarter?

They were -- third quarter new products clearly listing allowances and couponing and so on, and some of the initial expenses of products that would be -- have full effect in the fourth quarter. I would say the balance was more the former than the latter, that is to say it was mostly products that are out there but there are some (technical difficulty) products that will have their full impact in the fourth quarter.

And that is some of the improvement you're expecting in the fourth quarter as those products are kicking in, generating revenue and also fully absorbing the costs?

Yes, although there are some momentum aspects to (technical difficulty) and other places of the world.

On the Simply White rollout in Europe, could you update us on the status of rolling out to any of the mass channels there?

We have launched in France en masse and we will launch soon this quarter in Germany and elsewhere and I have a list if you want to hear the whole list of all of the countries worldwide, and launched elsewhere in Europe as opportunities and regulations permit. The -- hand on one second and I will give you --. In the third quarter we launched, in the Dominican Republic, Singapore, Malaysia, Peru, China, (indiscernible) China, Colombia, Venezuela and New Guinea. In the fourth quarter, a whole bunch of one, two, three, four, five, six, seven, eight, nine, ten, eleven -- eleven smaller countries. The biggest countries are Brazil, Germany, France, and South Africa.

Just in terms of how you see the year two, the way it is played out in the U.S. in terms of Simply White in year two, do you see it following a similar pattern in international markets where you have the initial trial in year one and it is likely to be down in year two or do you see it growing over time, the paint on version?

I can't remember what the paint on is our word, or paint on is the competitive word about us. The jury is still out, we shall see. The initial results have been quite good in the smaller countries that we have launched, even where one would think going in, there is a price (indiscernible). But I think what I have been saying on each conference call and we believe what we will depend is how -- whether or not long-term this is a category of interest to the big players, is will the price be able to hold at some regional point, number one, and number two, whether there is repeat business.

That is why we expect that the Simply White toothpaste is I would hope a more predictable kind of substantial entry because it is very much in our own backyard and it meets consumer habits. I think that the data in the U.S. indicates that the category obviously has slowed down significantly for everyone, as you know. Our in-home incidents and our competitive incidents is about the same actually, both about 6.5. In other words, 6.5 percent of the homes in this country have Colgate Simply White and 6.5 percent have our big competitor's product.

We just got a new share and one thing we should note is, about slightly over seven percent, and I do know what their is (technical difficulty). But our trial is substantially higher as I think Bina mentioned, than the competitive product and our repeat is substantially higher. Now, at the same time we are priced half the price of their product, and so that on a value share basis that (indiscernible) but we shall see. It is an interesting product, an interesting opportunity. It represents this year about 1 percent of our business and profit worldwide and probably next year will represent 2 to 2.5 percent of our business. But, anyway we shall see.

Thank you.

Rebecca Schutamin (ph) with Allstate.

Good morning. I was just wondering of the 8 percent increase in SG&A, how much was SG&A up and how much was marketing initiatives in (indiscernible)?

It was mostly marketing initiative. The balance was largely pension expense.

Okay, so I think that you had said pension expense would be up about 60 million for the year, did you say that? Is that a safe assumption?

A bit less than that, but yes.

I can prorate that over the quarters and assume that that was the increase and the rest was media?

It was increase in media and promotion that goes into SG&A. Media was specifically up this quarter. As you know a considerable amount of the commercial spending disappears off the top line. That part, you should know Rebecca, that part of that is also foreign exchange because the absolute amount is translated into dollars, and because of the strength of the euro that would have gone up a bit for those areas of the world as well.

Okay.

I mean without any real change in ratio spending.

Great. Thank you.

Linda Bolton Weiser with Oppenheimer.

Thank you. I'm just going back to the wording in the press release regarding your anticipation of earnings growth and it was very specifically worded that you expected double-digit EPS growth in '03, but I noticed that there was not any wording that really specifically referred to double-digit EPS growth in '04 and Simply White did probably contribute pretty substantially to results in the first half of '03. So would it be safe to say that double digit EPS growth is probably not in the cards for '04?

I wouldn’t say that at all, number one. Number two is the -- any profit on or loss on Simply White in the first half of this year in the United States was meaningless in the overall context of the company's profits, number one. Number two, for what it's worth, I originally had that particular sentence, it's my quote after all, saying double-digit and attorneys thought I should take that out because we have never really done that in terms of, as I told Amy in the beginning specifically.

But historically when the company has said they are going to be strong or have been strong and I think we should stick by that. I'm specifically not saying that it is not going to be double-digit. In other words, for clarification, we expect a strong year. Our history is that we've come up with eight or nine or whatever it is years of double-digit. I see nothing fundamentally. I see in one country a lot more spending, but I also see some great margin opportunities to fund it. So, I am not saying that.

Okay. Also, capital spending was sort of flattish in the first two quarters, in each of the first two quarters of '03, and yet it looks to me like it declined about 30 percent in the third quarter of '03. Can you just comment on that and talk about what your outlook might be for the rest of the year and for '04 for capital spending?

CAPEX has ranged between in the last number of years between 320 million to 380 million. This year it will probably be somewhere between 320 and 330. It has historically been between three and four percent of sales. It is now as well. The average rate of return on savings projects is 43 percent, and that is about what it has been throughout. My guess is for next year, it should again be between three and four percent of sales.

There is very little variation especially quarter-to-quarter, but there is very little variation Linda in our capital budget. If anything, as you know, we have fewer and fewer factories. This move in Europe means we will for example have two fewer factories, the Nordic factory and the Portuguese factory. Therefore, those are -- you have fewer installations in which to work capital. I think this is a perfectly normal and ordinary thing.

So the decline in the quarter does not signal any policy shift or strategic shift in your allocation of capital?

Absolutely not.

Okay. Just one more question if I may. In your cash flow statement you provided, it did indicate that cash flow related to other noncurrent assets and liabilities was a pretty favorable swing in the first nine months of this year versus last year? What comprises that item there?

I don't want to answer that offhand. As indicated, the first nine months, the free cash flow, that is the cash flow without -- after CAPEX, after dividends rather -- sorry, is up about 10 percent. Let me see if I can -- how about Linda we get back to you on that?

Okay. I will call later. Thank you.

Andrew Shore with Deutsche Bank.

Good afternoon. Two quick questions. The first one is, I hate to beat up Simply White to death, but if you look at your expectations one year out, and your expectations from basis (ph), or basis expectations, are you satisfied with Simply White? Is it better than expected in line, disappointing?

Yes, I'm not that familiar with the original basis numbers but what I would say would be this, is that the initial reaction to Simply White was greater than we would've anticipated from basis, and that therefore -- which is one of the reasons we didn't talk about. A lot of people talked about the whole category and I think that is -- our competition found the same thing. But -- and therefore that was the basis on which expectations grew externally. Then, in terms of the repeat and in-home incidents, that perhaps did not meet these revised upper expectations. I think that if we end up which would appear, but who knows, with $100 plus million business in the United States with Oral Care margins, and hopefully over time a modified -- a moderate spending or even a high spending level justified by the high margins, it is a very good business.

If on the other hand, the price, it is eroded or there is no repeat business. I've said in each of the conference calls that the way we have been able to and we'll continue to be able to generate value for investors is having regularly purchased products for small amounts of money by hundreds of millions of consumers. If this ends up meeting our definition, terrific. If it doesn't, I think it will have exceeded of all the basis projections, but it will not have lived up to the revised expectations that the world had meaning inside and outside the company, based on the initial (technical difficulty).

Thank you. Just a follow-up --.

That is as straightforward and lack of spin as I can tell you.

Talk about spin, let me just try to get clarification then to the next point. I know you mentioned that Simply White had trial three times the next largest competitor. Were you referring to DenMat (ph) because your next largest competitor is not Simply White?

We were talking about the (indiscernible).

Okay. Thanks.

Alec Patterson (ph) with Dresdner RCM.

I was wondering if I could get the usual run down on cost -- sorry, gross margin sources, changing gross margin sources? And in particular could you speak to the impact --.

Speak a little louder, I can't hear you.

The usual run down on gross margin change basis point impact for materials, pricing, etc. I was hoping you could speak to the impact of regional mix the business had with North America down so much and Asia Africa up so much, it must've had an impact? I have another question after that.

The total increase was 30 basis points including this whole Simply White thing that we have been talking about. Internal savings, proprietary savings projects and proprietary purchasing savings, i.e. longer-term contracts, computer modeling and so on, were a total of 1.1 positive which is extremely encouraging. Raw and packing material costs, just straight price increases on the part of raw and packing materials, was a negative three, and then pricing was down slightly.

I guess the balance between pricing and all of the other changes were about even and that comes out to be the 0.3, I think. Does it? (indiscernible). To me -- and also we don't break out and I'm not sure we can break it out, but there is a significant downward push for us and everybody else from couponing because our couponing increased this year over last. And the fact that we went up essentially 50 basis points despite the couponing I think is a reflection of what we talked about earlier that there is some darn good initiatives which allow us to spend more money.

Talking to your second point Alec about geographic mix, yes, the gross profit in Asia is lower. Hand on one second. I'll give you those numbers to be specific. The gross profit in Asia is roughly 49 percent which is about six points below the company average. So there was a negative mix variance there and the U.S. which is the highest in the company as you know, the registered volume was down slightly and therefore that had a -- so yes interestingly we have not done that calculation. It's an interesting thought, but I think we concluded there was enough included and excluded in the discussion. But what's interesting, is that there was some -- an unusually so, a slight mix variance in the margin and one would expect that that obviously will change because both Latin America and the U.S., both will do I think quite good next year.

Okay. My second question maybe for Steve. Regarding the tax rate, I'm trying to reconcile it a little bit with what seemed to be going on in deferred taxes to get a handle on the true cash tax rate. It looked like at least year-over-year for the quarter, the deferred taxes as a cash source were down seemingly as an offset to your lower reported book tax rate. So, I wonder what might be going on there and I just want to get clarification again, your outlook for 2004 and beyond reported tax rate.

Steve can give -- but let me say and I know there is no implication there of that Alec, but I can categorically state that this is not a release of tax reserves in anyway, absolutely not. This is a, without question, a real tax development, number one. Number two, what -- in terms of future years, again I expressed the thought in the press release and really do mean it that this continuous drop in the reported tax rate will be able to continue. We now have the lowest tax rate in the group and there are a number of ongoing projects on the stove, so to speak, which I would think will allow us to continue that. Again, we shall see.

The 30.4 or so tax rate of '03 is a number you feel comfortable with for '04 and beyond? I'm asking it simply because the way you describe the European tax benefits as incentives, and that somewhat suggests a pulling forward of benefits and maybe paying them off later.

That is not what it is. But I can tell you we have -- there is an interesting battle always within companies I guess in that the financial people want to be conservative of the tax rate and so they always what to go on a high and those people like me want to be more realistic. The trouble is it always ends up pretty high, that is to say it goes in high and comes out low and then therefore people say (indiscernible). But all that being said and let me personalize it, I do think that we will do the 30.4 or better next year. I think the guidance should still be between 30 and 31, but I think we will do better than 30.4.

Okay. Thank you.

Why don't we do one more question or two more.

Lauren Lieberman (ph) with CS First Boston.

I guess first I wanted to follow-up on Latin America. I had thought that this quarter -- I remember on last quarter's conference call you discussed raw material pricing and the price increases starting to catch up. So I at least thought we would see sequential improvement in operating profit margins this quarter, but we didn't. So, does that happen next quarter, is that when we see some sequential improvement?

I think what we did see is that Latin America gross profit was up in the quarter which is where are would see it because operating profit is a reflection of a lot of things including spending levels and volume and so on. So that (indiscernible) a positive increase versus the previous several quarters of a negative, of a drop in gross profit in Latin America, and hopefully I think that will continue, and as a matter-of-fact, let me give you the operating profit.

Operating profit -- I'm sure I was careful not to say operating profit was going to go up because I didn't think it was and that clear from our projections. But our operating profit in Latin America is down about half of the level it was in the first half as a result of the margins and the fact that the (indiscernible) been previously. Our expectation for next year, for what it is worth, is that EBIT in Latin America will be substantially better than this year, and will be up for the year. This year, Latin American EBIT, given currency and everything else, is down. Next year, it will be budgeted up as I said earlier.

Great. Can I ask one more actually? Asia, pricing was actually down more than I expected. Just wonder if I could get some color on that and on continued margin expansion in Asia, what was really driving it this quarter?

Asia. Okay. Asia had 9 percent volume growth. I don't know if we gave this to you, but a strong double-digit operating profit growth, a gross profit growth of year-to-date of about 120 basis points, and advertising up double-digit this quarter. My sense is that it is tough to bolt (ph) that. The price increase -- let me see the price increases, and I might add -- where is the price increases?

Price down for --?

Price down for -- it's been down each quarter but I think you have to take into account, the interaction between foreign exchange and price is that the reason that it is down this year and in other years would have been priced up, is when currency strengthens, and don't forget Australia, New Zealand, South Africa -- the commonwealth countries have strengthened quite substantially this year and those situations, just as you raise prices when the currencies weaken, in effect the prices drop somewhat. But overall it is very tough to follow what is going. In Asia/Africa it looks very good and expect it to continue in the fourth quarter and next year as well.

Simply White, how is that doing in China in particular?

So far so good, (indiscernible). As you know, we continue to be the market leader in toothpaste in China with our share, as I recall, about 31.

Thanks.

One more question please.

Carol Wolf (ph) with Merrill Lynch.

I was just curious if you expect cash from operations to be up in the fourth quarter, after two quarters was down?

Absolutely, yes.

Is that because the inventory situation with moving the plants will be gone? It seems like it was delayed about a quarter, but is the outlook for Q4, that the finished goods will be through that?

Don't forget, it is the movement in working capital rather than the absolute level. Working capital has gone down so working capital is a cash generator and that if those inventories stay at the same level it will have a zero effect on cash. If they do go down it will be incremental cash, but simply cash from operations we have a very liquid business. That business, it carries a lot of cash and operating cash flow will increase meaningfully we think in the fourth quarter.

So if it is not the inventory swing what will be the driver of it swinging to a positive?

I'm sorry, cash (indiscernible) positive?

Well because it was down, and cash from operations year over year was down in Q2 and it was down one percent in Q3, so I'm just wondering?

Operating profit is expected to be up higher in the fourth quarter than the third quarter, and in the final analysis, the main driver of cash is profitability and ratio management and asset control. As Linda pointed out, our capital budget is under control, our working capital is under control and our operating profit will go up in the fourth quarter. We therefore like all the other (indiscernible) good year-to-date cash flow.

All right. Thanks.

(indiscernible).

That's it. I'm worn out. You probably are too.

That concludes today's teleconference and we thank you all for joining us.