寶潔 (PG) 2001 Q1 法說會逐字稿

GILLETTE CO. CONFERENCE CALL

Good day and welcome to the Gillette Company's first quarter earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Roland Skip Loper, Vice President of Investor Relations. Please go ahead Sir.

Good morning and thank you for joining us on this conference call. We also wanted to welcome the representatives of the media and the audience listening to the Webcast. I am Skip Loper, Vice President of Investor Relations. Also present on the call are Chuck Cramb, Senior Vice President Finance and Chief Financial Officer, John Manfredi, Senior Vice President of Corporate Affairs, and Eric Kraus, Vice President Corporate Communications. The press release announcing the company's first quarter result has been distributed and I will comment on it shortly. During this call, we may make forward-looking statements about the company's performance. These statements are based on management estimates, assumptions, and projections as of today, and therefore have contained an element of uncertainty. Although, actual results may differ materially as a result of risks and uncertainties, the company assumes no obligation to update these statements. Please refer to the Cautionary Statements contained in the company's 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements. We will now review Gillette's first quarter 2001 results from continuing operations. Note that all of the quarterly earnings releases this year will be based on comparisons of 2000 results, which exclude Stationery Products. Let me also remind you that last week we restated 2000 results for EITF 14 and other changes. All 2001 earnings information as well as 2000 comparatives that we released during the year will reflect these changes. On a recorded basis net sales of $1.8 billion were 7% lower than in the first quarter of 2000. Unfavorable exchange accounted for 5% of the 7% decline.

This impacts all product segments but is most significant in Oral Care and Braun where substantially higher proportion of sales are generated outside of the US. After adjusting for exchange and the unmatched sales of the now divested White Rain brand, sales declined 1%. An important factor in the sale decline is our program of trade destocking, which affects blades in particular and also other core categories to a lesser extent. During our conference call of January 26th, we noted that year-ends 2000 trade inventories in blades were higher by several weeks. Therefore, we introduced an aggressive destock plan during the first quarter. Trade inventories were reduced in the first quarter and it did have a material effect on results. Removing the balance of the excess inventory will continue to negatively impact all quarters for the balance of the year. In summary, the sales decline associated with volume reductions and our destock actions was only partially offset by favorable pricing index as well as by pipeline shipments of New Venus Woman shaving system. Continuing on through the P&L, gross profit margin for the quarter increased by 210-basis points. All product statements except blade and razor changed grounds reflecting manufacturing efficiencies and favorable product mix. Blade and razor declined when we saw the higher proportion of Venus razors and lower proportion of high margin blades. Moving to marketing expenditures, in line with our priority to increase investments behind core brands, advertising rose 25% on a recorded basis from a year ago and sales promotion grew 6%.

Adjusting for exchange expenditures for both advertising and sales promotion climbed even higher. Other operating expenses grew up 10% versus prior year. Selling expenses rose, consisted with our increased investment in retail merchandises. There were also some increases on pension-related items impacted by financial market performance. First quarter profits from operations reached $319 million or 18% of sales. Margin was 5 point below prior year due to a lower sales base, increased advertising and promotional support, and higher overhead expenses. A low PFO, other charges rose 5% from a year ago, as lower interest expense was more than offset by unfavorable exchange including the Turkish devaluation. Pretax income of $264 million was 32% lower than prior year. A reduced income tax rate of 31% versus 33.25% generated net income of $182 million that was 29% lower than at 2000. Our fully diluted earnings per share were 17 cents down 29% from prior year. Now, let's look at the first quarter by product line. Excluding exchange, blade and razor sales grew 6%, gains from Venus sale end improved product mix and some increased pricing more than offset volume declines of existing products. The first quarter volume decline of blade products was due to our trade- destocking program.

In January, we had estimated that excess trade inventory at the end of 2000 was in the range of 1-3 weeks. As greater detail became available, we determined that inventories in most geographies were in excess of 3 weeks. Consequently, although we made good progress in the first quarter, there are still significant reductions to come. We anticipate that the reductions will be more significant during our first 6 months of this year than the last. On the plus side Mach3 continued to grow significantly in both unit and value share around the world. Performance was helped by strong sales of 2 recently introduced Mach3 razors. The everyday low price which has been introduced in key developing markets and Cool Blue which was launched in the developed markets. In addition, the Venus Woman's razor has made a remarkable start consistent with our expectations in both Europe and North America. While systems are performing well, we have seen share eroded in disposables primarily due to heavy promotional stepping by competition. First quarter, blade and razor profit from operations decreased substantially reflecting the volume declines from our destocking program, as sizable marketing investment behind Venus and the higher resulting purchase of lower margin razors in the mix. Moving to Toiletries, without the unmatched 2000 sales of our divested White Rain brands and excluding unfavorable exchange, sales were down 6%. Declines are coming from shave, crests, as well as deodorants and antiperspirants. This is driven by unmatched volumes from new product launches in 2000, some share softness, and the ongoing reduction of the deodorant antiperspirant business in non-core markets.

Toiletries profit from operations declined significantly due to the lower volumes. Turning to the battery business, first quarter sales declined 11% in constant currency. The lower sales plus increased marketing investments resulted in profit from operations of $38 million or a 9.5% margin; that represents a reduction of 6.5 margin points. In the important US market the returns in more traditional category growth was offset entirely by reduced marketshare. Furthermore, as the quarter unfolded it became clear that trade inventory had to be reduced. This coupled with the fact that the prior year quarter benefited from Y2K replenishment resulted in lower current year sales. Duracell shares had a mixed performance by traded [_______________]. The mass-market channels are Duracell's greater share erosion. This issue continues to be a company priority. As panorama of our overall assets we recently announced the launch of copper top in the US in the second quarter backed by a heavy marketing program. In Europe for batteries as well as blades, ramp period of price optimization, the program is proceeding as planned and in the later share readings we are flat or slightly off compared to the second half of last year. Consistent with our commitment to provide strong support for batteries, we have substantially increased spending on advertising and sales promotion. For the Oral Care segment, which is made up of Braun Oral-B power plaque removers and Oral-B manual products, reported sales increased 3% in the quarter.

Exchange was a major negative factor in the Oral Care segment since a high percentage of power sales have generated in Europe. In constant dollars all Oral Care sales rose 9%. Power Oral Care continued to show very robust growth. In annual Oral Care, shares are healthy and increasing in all geographies. In North America and Europe, however, category contracture due to the increasing incidents of power products in general and battery interest in particular is adversely impacting annual sales. Margins declined 230 basis points to 18.6% to largely to increased overheads. Let's turn now to Braun, which consists of male and female hair remover, household and hair care appliances, and personal diagnostic devices including ear thermometers and blood pressure monitors. First quarter sales for this redefined Braun segment fell 17% as reported. Exchange was significant since more than three quarters of Braun sales are outside the US. Both the unfavorability of the Euro and the Yen were of significance for this segment. Without exchange, Braun sales were down by a lesser amount, 10%. Additionally, there were difficult comparisons since the first quarter last year benefited from Syncro launches in a number of key markets. Lower sales combined with higher market export especially advertising, generated profit from operations of $16.4 million, a decline of 30%. Margin is depressed due to the lower sales phase.

I'll now look briefly at the business by geographic region. In our Africa, Middle East, and Eastern European group, constant dollar sales declined 5% resulting from lower battery sales and the impact of the Turkish devaluation. First quarter Asia-Pacific sales were up 2% after exchange. Oral Care posted double-digit sale gains and blade and razor showed healthy growth following successful launches of Venus and elastomer disposable of Japan. Braun and battery sales declined. Latin American sales fell 10% in constant currency. Blade and razor fell due to the destock. Battery sales were also down but Oral Care moved sharply higher. In Europe, the exchange remained a major factor reducing sales by 7%. The constant dollar decline of 4% can be primarily attributed to declines in Braun, which suffered from comparison with the Syncro launch last year, and Toiletries where we saw some shares softness. Blade and razor grew slightly as blade destocking was more than offset by Venus pipeline. Oral Care sales increased with strong performance in the power segment. Battery sales fell slightly. In North America, first quarter sales excluding White Rain were up 4% from 2000. The blade and razor line was the fastest growing to entirely, to the Venus launch and in spite of trade destocking in existing brands. Braun sales grew marginally and Oral Care was leveled with last year. Battery sales declined in the quarter. I'll now review the balance sheet starting with working capital.

Receivables entered the quarter at $1.4 billion and year-on-year reduction of $195 million. This also represented a $775 million reduction from year-end 2000. Day's Sales Outstanding at the end of the month were approximately equal to year-end 2000 and 5% lower than a year ago. Inventory at $1.4 billion was $103 million below the value of the year ago with inventory trends climbing moderately. Inventory increased $269 million in the quarter. This arose to both to the need to build safety stocks in anticipation of future factory closures and delay in shipments caused by our destock program previously mentioned. Our program to reduce SKUs and eliminate slow moving items continues, and we are confident that in the quarters to come, we will see sustained reduction in inventory levels. You'll recall that we targeted a $1 billion reduction in working capital by the end of 2002 from September 1999, and we achieved 50% of that target by end of 2000. Three months later, we have reached that target. However, as our comments just illustrated we still have work to do in reduction of Day's Sales Outstanding and overdue receivables plus improved inventory trends will remain top priorities of the company going forward. Looking at the balance sheet in general. Total assets fell $704 million reflecting reduction in receivables. In terms of liabilities, total debt dropped $372 million in the quarter and accrued

liabilities fell sharply reflecting reduction and restructuring reserves as planned programs are implemented. The restructuring and asset impairment program announced in December is proceeding as planned. A significant number of organizational changes have already taken place. Most distributed sector closures have been announced, and we are in the early stages of announcing our manufacturing eliminations. We have also just introduced two additional cost cutting initiatives that will complement savings from the restructuring program. The first, called Zero Overhead Growth was launched; it's a process that will halt to grow in administrative and general statement. In order to right size the company, all business units and staff functions will review overall stepping and headcounts by benchmarking and just peer companies. We expect many Gillette units to achieve negative overhead growth as we move through 2002. The second effort is our new strategic source initiative, a global cost reduction program under which we'll review all direct and indirect external spending. We expect to realize substantial savings through aggressive application of strategic sourcing and the latest techniques in e-procurements. That concludes our discussion of the quarter. We will now take your questions. I'll turn the call over to the operator who will explain the procedure for signaling if you do have a question.

Thank-you. Our question and answer sessions will be conducted electronically. If you would like to ask a question, you my do so by pressing the * key followed by the digit 1 on your telephone keypad. Once again for questions, please press, *1. We will take our first question from Wendy Nicholson, with Salomon Smith Barney.

Hi. My question that is primarily on the continuing issue of inventory that retail, because it seems like for years, Gillette has struggled with this, and I go back to my notes from last year, and repeatedly, Chuck you specifically said when asked on conference calls. No, no, no inventories are fine. No, they are fine. We are shipping to consumption. Not a big deal. Yet again we hear that it's just a way out of control. So, what's wrong that you guys can't seem to get a handle on your inventories, and can't stop overshipping?

Wendy, in terms of really answering that there is no question we went out the end of last year more aggressively than we should have, and I think if you remember back, the January call, we acknowledged at that time that our trade inventories were higher than we had expected it to be. A portion of it was year-end pushed but there was enthusiasm that should have been founded more and also a part of it was we misread, both are market share and market size performance in some key categories and some key driver business, particularly in Latin America. I can tell you the focus on our management team in terms of the information systems and flows that we have coming in, the visibility that now is apparent across all of our business lines, through our business management teams and our commercial teams. We are not going to lose sight of it again and we will get the trade inventory levels down to a point, but we managed this business on a sales consumption basis and our sales are trying to get some financial figures.

You know, Chuck, that really doesn't hold a lot of water with me because I've been hearing the same thing from you for at least six quarters and for a long time it was blamed on Alvin, and I know you pushed the business too hard and all that kind of stuff, and oh, you know, new reign of management and we are going to focus more, you know, that kind of stuff, so I'm just trying to get a sense of is it systems and if so, you know, do you just need to spend more money on hiring someone who knows how to analyze market share data or is it just management not being honest and straight forward and still pushing to hit quarterly earnings estimate because it just doesn't make sense?

I wouldn't want to say it's management being straight forward. I would say that we have to be closer and tighter to what the pull through, somehow pull through with our businesses and when we look at it we had some share declines. We've had share declines from the whole sole businesses in blade. You know, the Duracell share decline issue. They have had some volatility in the market price on batteries and thank goodness it's finally started to turn around and show some growth, but when you look at those dynamics, we missed it a bit. There has never been an attempt or a desire to deceive anybody, in terms of how we manage it, and in terms of how we get your credibility back, in terms of how you're looking at our performance. I think you just have to measure us going on a forward basis Wendy.

Okay, so to clarify what the guidance is terms of where the inventories were too high. It's razor blades that we should expect to see destocking for the next three quarters?

The most significant trade inventory issue wasn't blade. That's always been the go through business, it's got high margins, and trade loves it, and actually encourages it, and therefore as we went out of the MDD that was the most significant area. The next most significant area was driven primarily by our share performance within batteries. So when you look at our battery performance in the first quarter, what you see reflected there are year-on-year combination of share performance and a reduction in the trade inventory position. So, those are the two big areas.

Okay, thanks.

Thank-you. Once again for questions, please press *1, stop to one question and then one followup question due to the large number of participants willing to ask a question. At this time we'll go next to Carol Wilke with Credit Suisse, First Boston.

Thanks. I've a question on battery profitability. I'm given the margin dropped at 9.5% as you mentioned and the fact that there's going to be the big chunk of increased spending coming up in June. Can you talk a little bit about what the realistic expectations are for what those margins are going to be this year. I know a couple of months ago you had said you expected them to still be higher than 2000, this year, but clearly down in the single digit when we've got a big chunk of spending to come. How much share recovery have you built in because clearly one of the problems this quarter was that the shares didn't recover even though you spent heavily and then you had the inventory issues. So, can you just give in the current situation with the inventories, the increased spending coming up in the very weak share performance, what's the new outlook for that business going forward?

Carol, this is Chuck again. As you know, we will not be giving values either for the total business or by product line. What I would like to say is one, the margin that you saw in the first quarter is disproportionate and low for that business and it's really driven by what is seasonally a small business for the batteries to begin with and then when you look at our reduction sales, year-on-year, that really is what drove the margin down. There is some increased investment as well in the first quarter. As you look forward, we are going to do what it takes to regain the type of retail display and distribution that we need, and we are going to do what it takes to communicate to the consumer the attributes of our battery business and then the premium performance of Duracell, whether it's the copper-and-black, and our copper top brands, or the Ultra. So, yes look for some increased investment spending, we've got some work to do there. Don't read into the first quarter margins, something that's projectable for the full year.

Well, can you at least talk about market shares, I mean, when do you think they're going to go up, before June or is it all really all contingent upon people believing that 10% more power is worth paying up for instead of buying RAL/ROC?

We believe that we have to improve our market share. It's not just a mix game. I think when we did launch Ultra we did take our eyes off of the ball, we know we did retail execution this fall in terms of what would happen to the copper-and-black franchise. So, yes, the mix will still enrich our business, we have a share requirement now. We have to return to share growth in the battery category through copper-and-black.

When you say you have a share requirement, can you just talk about what that means?

It means for us to compete, we need to improve our market share. I'm not going to give you any metrics on it today.

Has there been any change in how the people in Duracell are compensated so that there is more evidence in it to get that business turned around?

I can't answer that one directly, our incentives program, our contemplation program, just where bonus program is very highly geared to performance, and we've done with some business profits exchanges internally, which give us into a very detailed review of business performance on a quarterly basis and if those quarterly performances that are going to drive the total year performance and total year assessment evaluation of our managers. Bonuses haven't been very great in the past because there hasn't been very good performance, and I think that the mix of compensation versus performance is right and what we need to do now is get the performance up.

Thank-you.

Our next question comes from Sally Dessloch with JP Morgan.

Yes, good morning Chuck, good morning Skip. I wonder if I could come back to the trade destocking question and just ask you if you could to quantify for us what you think is the levels of excess trade inventory are by business unit and by region? And then, how long you think it's going to take to work down, I think you said through the year, but whether it's going to extend beyond that and then I have a follow-up question?

In terms of the quantification by regions Sally, we aren't going to respond to that or break it out for you. In terms of the total destocks that happened in the first quarter it was significant and if you look at the blade category, for example, the fact that it dropped 1%, the destock was significant and as you know the Venus pipeline was significant to basically last time. In terms of the battery destock, again most of it has been addressed in the first quarter and actually most of the destock will happen in the first six months. Less so going out because the Latin American market is significant again, similar to the US. A lot of the blade destock has happened in the first quarter, most of it will happen in the first six months versus the last six months.

So, if you started off the year with something a little bit in excess of 3 weeks of inventory in the blade and razor business, so let's call it four, would you say that you've worked on half of that or quarter of it, just if you could give us some measurement as to where you think you are?

I'll help him. I think we are probably better or closer to the half than the third. But, we have some more work to do, Sally, it's not done, but we do believe as we go out of this year that we'll have this problem basically behind us, this is always balancing by accounts and by products within the product lines that will take some time, but we believe that we'll have most of the problem behind us and that you'll see a business that will start to perform based on consumption, in the year 2002.

I'm sorry, would four weeks be a good working assumption for what the excessive was for batteries. Is three or four weeks about the same number or is it worse?

We really don't want to give firm metrics on that but those aren't bad numbers.

Okay, and if I could ask, I mean, why are we not seeing issues with some of your other businesses like Oral-B or Braun, if you could comment on that or Toiletries, how do you see your trade inventories there?

They are, looking for work right now, they're reasonable, we've had growing share on an annual size of the Oral Care business, the power size integrates our growth category. So there's been no significant inventory buildup, except for the normal temporal things that have to do with the Christmas buying period and all. Similar for Braun, we've been working very hard for 2 years in order to make sure that we didn't over deliver products for the Christmas season, remember back that 1999 which is still a significant return because we were overly optimistic about the Christmas holiday period. And in Toiletries, it's really been pretty well balanced against consumption, as it's a relatively small business for us.

I think in the prepared remarks Skip might have mentioned that the manual Oral Care market seems to be contracting a bit. Are we likely to hear about that causing some trade inventory issues, as we get a little further in the year?

I think realistically, Sally the manual market while in the first quarter what we looked at as the consumption we're just slightly less than shipments in terms of the value of that compared to batteries or blades that's relatively insignificant, so because our share is growing in that contracted market and we've seen the contraction, I don't anticipate any issues there.

Okay, and as you commented on the battery destocking, I didn't hear you say anything about Asia. Could you comment on what think the trade inventories look like there?

As best we can tell, as you know we have introduced in China the 4X low-priced battery and that's in the process of shipping, Korea has stabilized as far as, so in terms of excess inventories. We don't see an issue in Asia, as we have seen in the developed geographies.

Okay, great. Thank-you.

Our next question from Connie Maneaty with Prudential Securities.

Hi, good morning. I have a question again on batteries. It's a couple of part questions. First of all in last year's first quarter, as I recall, the battery margin dropped to something like 13.4% because of some German pension something or other. Why was it restated upwards and how could it really drop 6 points, I mean, are we looking here at variants and is that why there is a share requirement because I am kind of wondering why you are not content just to grow with the market that is getting healthier. Why just, that it is enough to elicit a response, which may not get you the share growth you hope for?

Okay, there's a lot of questions there. In terms of the profitability due to the restatement, the reason we went through the restatement, and what you are talking about is two things, it's the reallocation of expenses and then the second piece of it is the implementation of EITF 14. On the reallocation of expenses, what we found is we're spending a lot of time trying to come up with all sorts of detailed allocation systems recurring debts or expenses that at the end of the day it didn't significantly alter the expense allocations that were reported. We felt that that really was not value added. So we simplified that whole process using primarily a net sales matrix. The EITF 14 was a restatement of some of the expenses that we have in terms of couponing and some of our sampling costs, what we had traditionally placed those into advertising and the new taskforce initiative calls for them to be restated things. They are either a reduction in net sales, which naturally increases margins, or a transfer from advertising to cost of goods sold, depending on the nature of the expense. So that with the reflect has nothing to do with anything in terms of how we look at the business other than to try to simplify some of our internal procedures. You are right, if we can enjoy category growth and hold our share we would have a good growing business in the battery business, no question about it. However, if you look at our position we do have the best performing products, we do have the strongest brand, and we have lost some market shares. I think it would be wrong not to try and recover, so that we'd have growth that would be even greater than the [_______________].

And if your market share doesn't grow, are we looking at chargers to downsize Duracell to the kind of sales growth that becomes more reasonable?

No, I don't think so.

Okay, and just one final kind of administrative question, with all of these restatements could we get the quarters for 2000, so we can build models on the segment data.

We did send those out, Connie, over a week ago in 2000.

Okay, my mistake.

We'll go next to Andrew McQuilling with UBS Warburg.

Thanks very much. The first question was on the gross margin improvement in the first quarter blade top line was weak and the mix was weak in blades, can you give a sense for what percentage of that gross margin improvement were efficiency gains and what was mix?

Blade performance was weak, you know, it was basically flat, but all the other businesses were down and the blade and razor business had the highest margins.

I hear that your gross margins improved, it was pretty impressive.

Yeah, the other thing that did happen is we do have some efficiency gains, factory performance gains that have impacted our business, particularly in the blade business but also across all of them, but there is no action grade buildup specifically.

Okay, fair enough, can you talk about the timing on Electric Toothbrush launch and any of the new Oral Care launches that you are going to do in 2001?

We have already launched the Power D17 in Europe and in the second quarter we are going to launch the Gift Toothbrush that will be, I believe, in the third quarter in US.

Okay, and in terms of Syncro overall for 2001 understanding that there was pipeline in this quarter, are you expecting a decent year out of Syncro or can you talk about consumer sales maybe of Syncro in the March quarter?

Well the Syncro pipeline actually happened a year ago in Europe and it was in late 1999 when it hit in Japan, and it was in the fourth quarter, I believe, when it hit the US, so the pipeline Syncro happened in a prior period and that is part of the reason we have a flat comparison in the first quarter, but Syncro shares are doing quite well. They are in Japan, they are close to 30% share, and we are pleased with the performance. So far it's still early days in the US, but Syncro is doing quite well.

Is there any way to kind of target consumer, the consumer takeaway growth in Syncro in the March quarter or are you willing to talk about what you think Syncro can do for you on the full year 2001?

No, I think that we will be guidance only by our product. We wouldn't give that kind of detail. It's the only other thing that I'll add to it is that we have just started the shipments of a mid priced Syncro in Japan as you know we tend to go premium and then come down with a mid price product, and we are just launching that now and certainly the trade receptions are too early of getting the consumer pickups as we just started shipping. Trade reception has been exceptional. That whole concept of beating Sensor is really a winner for us.

All right Chuck, and one last one tax rate in the March quarter 31%, can you talk about the future, is there something one time in that tax rate?

No, I think in the past, it is consistent now; we have always felt that from a tax rate point of view, we've had considerable initiatives from the tax rate point of view it's inappropriate to have tax rates jump up and down within quarters and we believe that this business is sustainable for it's favorable future.

Terrific. Thank-you.

We'll go next to Catherine Lewis with Morgan Stanley.

Thank-you. Chuck if the objective over the next several years is to not touch and prove Gillette's return on operating assets. How does being in the battery appliance and Toiletries businesses really facilitate that? And then, I guess, secondly it seems like you're still being very vague on trade inventory level. Is it because you don't know really how much is out there? I am wondering why Gillette is still not coming clean on that given the atrocious operating performance here.

In terms of the first question, we continue to review all the businesses in which we operate, if they are incremental, if they are of shareholder value, if they are businesses we should be in, if they are not such as stationery, we'll sell them to someone in this business portfolio they better fit. We will continue to look at the businesses in terms of not just the earnings or the profit from operations contribution, but also what is their return on invested capital, so it's got to be a accretive we believe the Gillette company could be a part of our portfolio. Today we are happy with our portfolio. In terms of the trade inventories we are not being elusive or anything else, this is dynamic business out there in terms of what the categories are doing. We believe we've got a very good handbook on the trade inventory. I think we could use some reasonable sense of the magnitude of the problem, and the fact that this going to take us through the year although very heavily in the first half by the year to fall behind us, to get a more detailed metric for that we could be getting closer to guidance.

Okay. And then just to be a real clear and intensive you know, the operating outlook. It sounds like, you know, for the next several quarters we are going to see a continuation of 1Q trends, and that's a quarter where earnings were down 29%, so realistically are we looking at earnings for 01 of 84 cents? Is that the kind of year, you know, Gillette is planning for?

I'll answer that one with just a no.

Okay. And why wouldn't earnings for the full year be down 29%?

I'm not going to give any further guidance for that. But we did take a major step forward in terms of the mix of our business, and getting some of those trade results in the first quarter.

Okay. And then lastly, any rays of hope, I mean, in terms of what you have done, say in the last several months to get the businesses moving again, you know, what kind of milestones would you give investors to look for going forward that would indicate that you are making some tries on that front?

I think, as you know, that Jim will be talking to you folks in early June. I think that kind of question will be best answered when you have a chance to talk with him, when he talks to you about his perspectives of the business, where his focus is and what the issues are that we're addressing. So I'd like to really let him talk through that issue with you then.

Okay. Great. Thank you very much.

Our next question comes from Ann Gillin with Lehman Brothers. 00:41;51 ANN GILLIN: Hi. Just a few follow-ups. Could you share with us what you are anticipating trend battery consumption levels will be, in order for us to understand why the access inventories whittle away by the end of the first half?

By the end of the first quarter, I think, the battery category growth is domestic but I believe the growth was 7 or 8%. I think it was a sharp 9 or 10% in the first month, and then it dropped down a little bit, but I think, we went out of the first quarter with category growth, someplace between that 7-8% range.

This is probably the perennial problem between Neilson and IRI, but we are not seeing that level at the IRI level and though we had problems with IRI in other businesses, is that 7-8 what you are modeling for the second quarter in order to be clear?

I'm not modeling, and I'm not going to give the guidance on what we're modeling in terms of the second quarter.

No, I'm sorry, I'll be clear. Not what you're modeling, but what you anticipate trend consumption has to be for you to clear your inventory?

Oh, this is the way to clear, one is to sell it to consumers and the other is not to sell it to trade, and I would suggest that we'll do both.

Okay. And then let's take up the second, if you don't sell to trade, it sounded like some of the why's in your in-house inventory levels were because of the slow down in shipments to trade, which would imply that if you did continue to slow those down, the margins we saw this quarter may not be, that low enough, because you will have had at least some overhead coverage if you were producing for inventory?

I don't think I understood the question here?

I'm just concerned that if you still potentially have some margin contraction, in blades, in batteries, if as Skip described as he talked us through the inventory levels, there was a comment made, that you saw some increase because you were still producing ahead of shipment, and if that's the case, then if you are going to continue to slow down shipment, slow down production, then margins maybe a little bit worse than what we saw so far this quarter?

Okay. I think, that question relates to Skip's comment about why the inventories grew up?

Exactly.

The inventories grew up to give us the balancing stock availability as we closed factories, and as we redeployed the remaining factories to produce those products, so what will happen in that situation is we'll get the gain for the benefits from the factory closures as we close them. That will be the breaks that we need which will cover the proposed production reduction, or when you close the factory to when we start our production in the factory that picks up those units, that where our inventories come down in our internal limits.

Then you didn't have any of that offset in Q1?

No we have not closed the factory in Q1. We've announced two of them and we are well on the way for some others, but we have not actually, specifically closed the factory in Q1.

Okay. On batteries again, there is a lot of talk of taking market shares, I'm wondering what you might have been doing to benchmark your cost structure relative to your competitors such that you could improve margins, not just from market share gains, but from more efficient operations?

Oh, I just hope to factor into it, no question. We can operate more efficiently.

Okay. And then lastly, is there any potential that either trade inventories or in-house finished good levels inventories are bordering on obsolete given your new products on schedules and how long have you been carrying in-house finished good levels?

No, we do not see any issues in terms of obsolete stocks or obsolete inventories. It's interesting as you look at Gillette Products, they do have a relatively long life in one geography or another or even within a single geography, and as we've looked at what the make up of our finished goods is, we are just sure, we like everybody else have some slow moving goods, but in terms of the potential obsolete problem, at this point of time we haven't identified them.

Okay, but for instance, your Sensor Excel for women is hopefully for your growth in Venus, going to get phased down, I'm just curious as to whether the roles of the products have been effectively upgraded, are still potentially high?

In terms of inventories, no.

Okay. Thanks.

Our next question comes from Amy Chasen with Goldman Sachs.

Hi. Can you explain, you mentioned just in passing, in everyday low pricing Mach3 for developing markets. Can you just tell us in a little more detail what that is?

Yeah. Basically it's different, in terms of emerging and developing markets, with a low disposable income, we have a different presentation of the Mach3 razor. It's still the same product, but its packaging, its tray, the fact that it goes out with a single cartridge is all significantly cost reducing so that we can sell them at a price more appropriate for that market.

Does that suggest that it's getting harder for you to trade up consumers in those developing markets, I mean, it just seems like a change in strategy from management?

No, I think we've talked about this before, Amy, a little and that is that as we've always looked at the top end of the business, in terms of trading people up in the developed markets, we have had an opportunity that we haven't taken advantage of and that's the main virtue of the developing markets being much more aggressive, offering price to get them more quickly into the systems category and we are doing it there. We've also done it with our toothbrushes so what we are doing is being more responsive in those markets where there is low disposable income, to have a product that is aspirationable but more affordable to the consumers. So we are trying to accelerate penetration of other Gillette franchise.

Are you guys thinking at all about whether or not an annual price increase in blades makes sense anymore?

We thought to look at whether it's appropriate to have price increases or not. Yeah.

And what's the conclusion?

We took a price increase in December, in fact in January in the US. We felt it was appropriate.

Okay. Can you tell us in the quarter how much US battery sales were down?

We don't really give any geographic information, Amy, just in total, you know, they were down at cost & currency at 11%.

Okay and just one last question, sorry to believe the destocking point but it sounds like in batteries, the product guidance was in fact that was in fact that your levels were healthy, so it looks like in the first quarter was the first time that you actually instituted a destocking program in that batteries, and I'm curious if that's true why are you so confident that you can finish that for the most part by the end of the second quarter in blades its taken several years?

Because I think that for the trade inventories issue there, remember, and the battery business there's no question we would like to have as many units as possible on the retail floor, and as many different physical locations as possible, the check-out counter and in display or brief standing promotional or floor stance some place in the store. We'd like to have lots and lots of them and that's where you have good trade inventory. What happened at the end of last year particularly was that we had a promotion. There was some concern that because of the implementation of SAPs for Duracell they went on line during 1, but there was some concern that there might be some disruption if you do some of that conversion over. Therefore, we had a significant program with our key customers and (1) SAP went in and probably we were up and running very quickly and (2) Battery inventory that was build which didn't all get retail stores, coupled with our share performance is really what's part of the most of the inventory overhang issue.

So, you're claiming that it's simply an adjustment from what you did in the fourth quarter, it's not a more systemic issue?

It's primarily that. I think the share declines is, you'd have to say is more systemic.

So, that was when your share has been declining in the past year and a half you haven't adjusted your selling program?

Not dramatically. We have had a significant inventory bill but you've seen our Duracell shares and I think our sales are pretty much parallel with them.

Okay. So, then I mean, it just suggests then that there is definitely more than two quarters worth of inventory that needs to come out?

No.

Why not?

Not, not in batteries.

So, you've been basically selling to raised high earthing consumption for the past year and a half?

I think I said that if you track our sales against our market share performance where there may be some trade inventory build, it's not significant at all. Our battery sales are going down.

Okay, so then again it's largely 90% of this, is to fix, kind of, this fourth quarter promotion that you did?

A good hunk of it is from fourth quarter activity, yeah.

Okay and just, I want to be clear, you mentioned that the higher inventory is in Latin America and in the US, which regions in batteries have higher inventory?

Those are the two regions. Latin America we've got, you know, some market dynamics in terms of shrinkage, you've seen what the economies are doing down there. So that's what was being driven there. There was no SAP implementation or year-end selling that gets one there.

Okay. Europe is okay?

Yeah. I think so. Shares are pretty stable there.

Okay. Just why wouldn't you tell us what the actual level of inventory is in both blades and batteries, that's something that you gave us in the past and it was very helpful in being able to make our own assumptions on how much more has to come out. Why is that a number that you're not comfortable giving us?

I think we've given you a close enough range to it, so that you can pretty much figure it out. We are not going to give an absolute number. There is no absolute number.

Can you repeat what that range is?

I think we said north was three weeks.

I'm sorry. Three weeks in absolute. I thought that that was a three-week production.

Well that's all and this is in order to test that.

I'm sorry but are you going to reduce the three weeks for what kind of base?

No. No. We are not going there Amy.

Okay.

We'll go next to Jim Gingrich with Sanford Bernstein.

Good morning. Can you talk to this increase that we saw on the operating expense line, what was behind it, you mentioned the pension related items, you know, what else is going on here with the pension items. Is it something that's not going to carry through to the balance of the year?

There are two big elements. The first one is on the fringe benefit side, which is led by pension; it's also led by the benefit programs that have their support, we supported ours with a Rabbi Trust. Rabbi Trust requires a market-to-market. What's happened to both the pension programs and those Rabbi Trusts, is that because of the equity markets performance where you put all of your, you know, your funding, our equity markets performance as we know has been dismal this year versus last year we're still fairly driving, as a result where we had some small gains last year, we've got some meaningful losses this year, and that's what we are compensating for in terms of those costs. Another significant element we'd mentioned in the release, another significant element is we have increased some of our selling expense, particularly in merchandising, and that's to do the job of retail that still needs to be done.

Right. Right. So this, presumably, then were carried through the balance of the year.

No. The Rabbi Trust is totally victim to whatever the markets performances. Their SAP 500 states about where it is, the impact would diminish dramatically through the year.

Okay. Okay.

There'll still be some pension issues, but, you know, not against materials what we saw in the first quarter.

All right. And in terms of, just a changed subject, in terms of DSOs and inventory days of supply, I mean, I assume you guys have established objectives of where you want to get to. Can you remind us again, if there are any structural reasons why your DSOs or inventory levels should be above peer benchmarks?

Well on the inventory side, outsourcing configuration is different from some of the peer companies that you might be comparing us to and as a result we tend to source out one or two factories as liable in the market. That creates a higher inventory level than someone who produces out of 5, 6, 7, or 8 factories, to supply that same global market. What we have found because of the technology embedded in our factories, that it's from a return on after-investments, we are better off paying the penalty of somewhat higher inventories, but lower capital investment. We get it in terms of the capital where we also get it in terms of how we get the efficiencies out of those factories. To us it's a net-to-net win in terms of return on capital, but it thus result in a higher inventories.

And on the DSOs side check?

On the DSO side you do have to look at the business mix, because some of our businesses still have slightly different terms when you get into the broad business and the appliances. Also, I think the seasonality is something the analysts would like take a look at year-end analysis, over the total year sales, and our seasonality has been significant for Christmas, our rates are from there. However, on receivables, most of our inventory receivables we can and we will do better.

I understand that, I'm just trying to understand how much better. It doesn't sound like there are a lot of structural issues on the DSO side that will make such a difference...

No. No. There are not a lot of structural issues on the DSO. The issues on the DSOs were just a five mix. The Braun business requires somewhat longer terms. The battery business in some cases has a somewhat longer terms, depends on where you are around the world, but not major structural differences.

Okay. Well for example, on the DSOs side the last time you guys, you know, tackled that that had big P&L implications. I guess the question would be at what pace do you see attacking that over the balance of the year and how much of the DSO problems can be behind you before the end of the year is out?

We are looking right now, I've got to be careful I'm not giving you any guidance on this, what we are looking in improved efficiency in terms of DSOs throughout this year, it's on a method bases, but quarter-by-quarter some improvement. We're not looking at dramatic reduction in our efficiency but there will be continued consistent improvement on the DSOs.

Okay, thanks.

Our next question comes from Andrew Shore with Deutsche Banc Alex. Brown.

Boy, I was getting a complex. First Jim Kilts if you are listening, but not speaking, good luck, and Chuck, you know every time, and again, it's only because the horse has not been beaten to death yet on trade destocking, but every time I hear about it, it reminds me about how many Mondays I always plan on going on a diet. Could you just tell me, like in the past 3 months, what magical button did you just press, where now you're serious, and now you actually know the number but you're, of course, not willing to give it to us? What have you done internally, that, now you really feel like you gotten your hands around it, because; let's face it, for 4 years this company has done nothing, right?

I think that the only way I'll answer that is to say that as someone from the inside, working with the management team, there is a focus and a scrutiny on our trade inventory position and on the need to get this business back to performing in line with our consumption that has never been here before.

I mean what is that or is that Jim Kilts threatening everybody? What is that? Because we have heard that every quarter.

There is no threat. This is the way we have to do business and this is what we are going to do.

But that's the way you were going to do it a couple of quarters ago. I mean, again, I just want to know, what really happened in the past couple of months? Was nobody afraid of Ed DeGraan and nobody afraid of Mike Holly? But every body was afraid of Alvin and now every body's afraid of Jim Kilts, I mean, what happened in three months?

I don't think that's the issue at all. I think we've got a management team now, which has got common objectives, brought for all the fronts. We all share the same objectives and we are going to deliver them, and one of those objectives is to get the trade inventories back in town and to manage with business same compartment consumption.

We will take our next question from Adrian Richardson with PT Management Funds.

Good morning. I'm going to say just a couple of questions moving away from inventory levels for environment, number one, on the blade razor gross margin fronts you have got 3 years of in-market experience of the Mach3, just wondering where are we on the course reduction curve specifically, you know, we just want to quantify the magnitude manufacturing efficiency enhancement, can have resetting your blade razor margins back to a 40 plus level and then number 2, it's related to that business mix optimization question, we obviously delighted to see stationery, and very bad at the business to allow Gillette, refocus on achievement and financial resources to the panel houses, but obviously what the audience interested in this morning which is mainly razors and blades and batteries and perhaps Oral Care and I guess the exclusion there is Braun, so really I am just curious what cartridge or appetite does Gillette have reopen the fall on such issues such as where the Braun is non-core?

Okay, the last differs. We are always reviewing our portfolio businesses. In terms of the Braun business, it has a wonderful blooming business for shaving. The electric razor business is a very, very strong performer. In terms of the other businesses, we have looked at those businesses, we have defined a support role for them that means they are required to pave their own way and they also have to have some other incremental value which is supporting the favorite business and they do, I assume you are an European.

Australian.

But you know if think about what happened particularly in Central Europe that you look at how the Braun business does go to market and the way they have a panorama of Braun products that panorama, that's the display, that presence of retail is strongly supported by the full array of the Braun businesses and it's a valuable asset to have. So, what we have done is we have significantly proved that the DSP pay proliferation what we had in Braun that's to get a better return on assets for the products that have remained. We have also withdrawn some of the marginal products from some of the marginal countries, where we don't make money. So, we have really rephrased and restructured the Braun business to give us a better return as the business itself in terms of the metrics you looked at. The first question in terms of profitability, I can't comment on your blade market projection is going to be counted to our quality and guidance, but in terms of where we are in the faster, we actually are in the Mach3 prosper, are about a year ahead where we were we faced Sensor and Sensor Excel in terms of profit enhancement that doesn't mean the sale is not more, there is still significant more improvement but we now have a new product line out there called Venus which has made a new product entry, and they will also be aggressively attacking it's prosper.

Yeah, and I guess on the Mach3, we are just curious how we went to the Boston day last year we actually thought that there were a level of inefficiencies that could still be stripped out, I guess we could see that in your most recent annual report which kind of highlights the 20% cuts in the production that you have secured in the Mach3 and I think 50% cuts in the Mach3 cartridge, so it would appear to us that there is still some magnitude of deficiencies that could be stripped out and just finally just in regard to overheads, can you give us some indication why they went up?

I don't know if you were on the call earlier, the relative increase in terms of percent is due to sales performance, the absolute increases were due to primarily to the benefit costs and related to the domestic US equity's market as well as a significant increase in selling the job with retail.

We will take our last question today from Heather Murren with Merrill Lynch.

Good morning. One, few radical question, and two short housekeeping questions. Maybe just to start with housekeeping did you give us the breakouts for what units pricing divestiture in destocking and foreign exchange all contributed to the top line in this quarter, did I miss it?

The top one. We gave you the White Rain 1%, we gave the exchange 5%. Is that all you wanted?

Units pricing and destocking?

No, we didn't breakup the units destocking, we wouldn't.

Can you give us pricing?

Yeah, pricing was relatively flat.

Flat.

Yeah, on a global basis.

Is that something you expect to continue because I thought pricing was part of this strategy overall?

You are getting close to guidance again. Look, I wouldn't comment on that. We did take price increases in the US though.

Okay, and also interest expense for the quarter in a year, can you give us any thoughts on that since that's a line item?

Again, when we start talking about the year you are getting guidance, but if you want to talk about the quarter, we've got very strong cash flow, working capital enhancements, I think controls the reduction in terms of our rate of spend on capital this [_______________]. So when you look at it, look at the cash flow elements and that will pretty much explain what that in the interest line which is favorable.

Okay. And just on a few radical basis, my impression has been that you do have a sense that your inventory levels in general need to come down, particularly in blades and obviously in batteries, and that's been an ongoing thing, but I haven't had the impression that you've been able to do any kind of analysis, either from the benchmarking point of view or whatever processes you have internally to determine what the ideal level of inventories are for those businesses. Have you been able to figure that out yet, and if so, could you just show us the process through which you came up with those numbers even if you don't tell us what the numbers are?

There's always a lot of discussion of what's the ideal inventory level is because for one thing we do not want to do is to loose an opportunity on the retail floor and get back to the bench where these will offer consumer sale. However, what we do not want to do is have a trade that has excess inventories in their own distribution system. We went through the metrics in terms of various assumptions, we try and look at the long-term and short-term flow consumption versus what we've shipped, [_______________] measures are whether we are using Neilson or IRI. That gives us a reasonably good fit. I think that the final part of this and it's one that we have to realize this time through is when you no longer need to promote like this or with the shift is when you sell into consumption.

But there hasn't been some sort of analysis done. It says okay, if you run a blade and razor business and you're going to be benchmarking yourselves or some another consumer packaged goods company, so the profit level of inventory is X. It's sounds like and continues to be an ongoing movement...

Yeah, it's a continuous process it's not as it was with the final comparison to draw conclusions particularly in the blade business.

Do you think you'll do something like that at some point or do you think it will continue to be a process rather than a goal?

I don't know. This is an interesting path.

All right. That's helpful, thank you.

Mr. Loper that does conclude our question and answer session today. I'd like to turn the conference back over to you for any additional or closing comments.

Thank-you. Starting in about 2 hours a replay of this call will be available. It will run up till April 30th and May 25th at midnight. The number to call for the replay is 888-203-1112 or 719-457-0820 combination code 668804. At this time the replay will be available on our corporate website Gillette.com few hours from now. For members of the media who have listened to the call and have additional questions, please contact Eric Kraus, Vice President Corporate Communications at 617-421-7194 for analyst category detailed questions involving nonmaterial information, Saturday night we will be available to take your call. Thank you very much.

This does conclude today's conference. We thank you for your participation. You may now disconnect.