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Operator
Good day everyone and welcome to The Gillette company's second 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 conference over to Ms. Sarah Arcese, please go ahead ma'am.
SARAH SMITHERS ARCESE
Good morning and thank you for joining us on this conference call. I am Sarah Arcese, director of investor relations. Also present on the call are Charles W. Cramb, senior vice president Finance and Chief financial officer, John F. Manfredi, senior vice president corporate affairs, and Eric Kraus vice president, corporate communications. 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 contain an element of uncertainty. Although actual results may differ materially due to risks and uncertainties, the company assumes no obligations to update these statements. Please refer to the cautionary statements contained in the company's 10-K and 10-Q filings for more detailed explanation of the inherent limitations in such forward-looking statements. We will now review Gillette's second quarter 2001 results from continuing operations. Note that all quarterly earning release this year will be based on comparisons results for the year 2000 that exclude stationary products. On a reported basis, net sales for the second quarter 2001 were $2.1 billion, 5% below the last year's second quarter and unfavorable foreign exchange accounted for 4 of the 5% decline. The negative currency affected all product segments, but had the greatest impact on the oral care and Braun businesses. Another important factor affecting second quarter performance was our ongoing program of trade and [_____] and our blade and battery businesses, which reduced net sales for the quarter by approximately 4%. As discussed in the first quarter conference call and the June 6 presentation by our CEO, James Kilts, we introduced an aggressive trade inventory reduction program at the start of 2001. We are well on our way to achieve in the yearend 2001 target that we announced in June. For the blade razor line, these targets are through [_____] from 13 to 10 in North America, from 16-10 in a Europe, and 19-15 weeks in Latin America.
For Duracell, the trade inventory reduction target is 10 weeks, down from last year's 13 weeks. The lower sales stemming from trade destocking were largely offset by improved mix and favorable pricing, which contributed 1%. Continuing on to the P&L, growth profit margins for the second quarter increased slightly due to a combination of cost improvement, mix enhancement, and pricing. Moving to marketing, total spending on a reported dollar basis climbed moderately. The mix between advertising and sales promotion changed significantly, however, with advertising up more than 20% and promotion declining 5% year-over-year. Sales promotion was slapped as a percentage of sales. Overhead and other expenses increased 14% versus prior year due in part to the continued significant investment behind our merchandizing activity. The impact of unmatched real estate gains last year coupled with higher charges this year due to the writedown of inventories also contributed to the increase. The combination of lower sales and higher marketing and overhead expenses resulted in a second quarter profit from operations of $375 million, a 25% decrease from a year ago. Operating margin was 4.8 points lower than prior year. Below PSO, other charges fell 30% primarily reflecting low interest expense as a result of our substantial reduction in debt. Pretax income of $336 million was 24% below that of last year's second quarter.
A somewhat reduced income tax rate resulted in a 22% decrease in net income to $232 million. Our fully diluted earnings per share were in line with consensus at $0.22 down 21% from the prior year. Before I look at the second quarter by product line, let me refer to Jim Kilts's comment in our news release that we are seeing early indications of strengthening vital sign. By this, he is referring to the stabilization indisposed with unit share, gains in CopperTop share, strong growth in our high-margin power oral care segment, increasing shares in manual oral care, as well as profit growth in dry shaving strength in our Braun business. Turning to the product lines, on a reported basis blade razor sales fell 3% excluding exchange sales grew 2%. The Gillette for women Venus shaving system in its first full quarter in the market continued to surpass all expectations. Its strong performance helped offset the negative impact of our blade-destocking program. As I described earlier, we are on target to accomplish our trade inventory reduction. During the first half, we achieved approximately two-thirds of these annual targets on a global basis and we will certainly recoup the balance by yearend. Now, let us look at our two biggest success stories in more detail, starting with the Venus women shaving system.
Venus has made a remarkable start in Europe, North America, and selected Asia-Pacific markets. We expect it to continue to perform extremely well. Venus was a top selling razor in the US in every week of the second quarter capturing 45% of the razor market; male and female combined. Venus has generated record rate of dollar sales through the first four months of launch even exceeding those achieved by Mach3 during the same initial launch period. Venus also achieved a 6% value share of the US blade market in June, which is exceptional at this stage of launch. Our second big success is Mach3, which continues to grow share around the world as we expand our user base through [Santing] and Cool Blue. In the US alone, we sampled Mach3 razors to 10 million households with very positive results today. The new Mach3 Cool Blue is performing strongly and it has helped create incremental razor sales this year. In fact, about one-third of all Mach3 razors now sold in US are Cool-Blue. In developing markets, a lower priced Mach3 razor introduced in key market early this year continues to make share gains. Beyond that moving to our systems business, I am pleased to say that share performance by Gillette disposable razors is also beginning to stabilize after a period of share erosion. Strong promotional support has helped slow the decline, especially in Latin America where sale of indisposables has been most pronounced. In the United States, the combination of improved disposable share and a strong performance of Venus and Mach3 lifted Gillette's overall blade unit and dollar shares in June to their highest levels since March 2000.
Second quarter blade razor profits from operations decreased 14%, which reflected the lower sales, significantly increased marketing support, and higher other expanses, partially offset by increased growth margins from improved mix and our strong cost reduction program. Turning to Duracell, second quarter sales fell 11% on a reported basis, excluding exchange the decline was 8%. This performance was due to the continued reduction in trade inventories, which is about 75% complete. Results were also adversely impacted by share declines, our own category softness, and negative mix as a proportion of CopperTop sales in the US increased versus Ultra. While certain US Duracell shares of the quarter declined year-over-year, the business improved through the quarter. In June, both unit and value shares for total Duracell franchise increased versus the prior year. The new CopperTop, which features enhanced technology and replaces the former [copper and black] design was introduced in the US last month. The brand has been well received by the trade and distinctive new television advertising began at the end of June. US unit share of CopperTop in June continued the upward pattern that began early this year. CopperTop unit share last month reached 33.5%, the highest rating since October of 1999. Gross margins declined in the quarter due to lower production volumes and a mixed swing towards CopperTop. The rates of marketing expenditure climbed versus a prior year driven by a double-digit increase in advertising. The significantly lower sales and higher marketing support resulted in a low margin of 8%. Profit from operations declined to $40 million.
For the oral care segment, reported sales climbed 5% in the quarter, excluding exchange sales rose 11%. Power oral care continued to show robust growth driven by the success of our rechargeable products, refill brushes, and several new products. We have launched top of the line 3D Excell in Europe and United States, and share performance to date is strong. A new battery-powered toothbrush was introduced in Europe and initial results are encouraging. We expect similar success in the US when we launch the product next quarter. In addition, our kid toothbrush is now available at retail in key geographies worldwide. Within manual oral care, shares are growing in all geographies. In the United States Oral-B's value share in June was the highest achieved in 18 months. Driving these gains are new product introductions and enhancements especially in developing markets as well as high promotional support and increased advertising, both of which showed double-digit growth in the quarter. Gross margins also improved reflecting mixed enhancement and cost favorability aided in part by volume expansion. A larger sales base and improved mix offset the high marketing investment, which grew a full 2 percentage points. As a result, profit from operations was virtually unchanged from a year ago at $45 million and margin reached 16%. Let us turn now to Braun, which consists of male and female hair removal, household, and hair care appliances and personal diagnostic devices. Second quarter sales for the Braun segment fell 6% as reported, but were flat versus a year ago in constant dollars. In men electric shavers, which accounted for just under half of the Braun segment, sales and share continued to post gains.
In North America, the Braun [_____] performed very strongly following effective Father's Day advertising. In Japan, we recently expanded the [_____] product line, results have been encouraging. As planned, Braun continued to improve its non-core product offerings and exit from marginal market, as it continued to focus on the core elements of the portfolio. Overall, higher gross margins combined with lower sales promotion spending generated a 9% improvement in profits from operations, which rose to $24 million in the quarter. Moving to toiletries, the first the third time, White Rain sales are excluded from both years of comparison. Constant dollar sales were down 3%. Sales as reported decreased 6%, the bulk of the reduction was in shave [_____] where we experienced particularly intense competition in the gel segment. Toiletries' profit from operations fell significantly due to the lower volumes and higher advertising. I would now look briefly at the business by geographic region. In the Africa, Middle East, and Eastern Europe group constant dollar sales declined 5% in the second quarter ... the result of blade razor destocking. Asia-Pacific sales were up 9% in constant currency. Growth was fueled by gains in the blade razor and oral care businesses. Latin American sales fell 7% on a constant currency basis primarily reflecting blade destocking. Battery sales declined due to market contraction and aggressive competitive activity in our largest market. In Europe, sales on a reported basis declined 4%; excluding exchange sales climbed 3%.
Blade razor sales posted a small increase as a strong showing by the Venus and Mach3 Cool Blue systems, more than countered volume decline stemming from the trade-destocking program. Oral care sales moved sharply higher due to gains in the power segment, and while battery shares increased sales were down due to the negative impact of price harmonization activities. In North America, second quarter sales were down 2% in constant currency due chiefly to softer battery sales. These reflected volume decline due to destocking activities, quarter on quarter share loss as well as through a change in mix that favored a high proportion of CopperTop versus Ultra. Sales in the toiletries segment also decreased while gains were posted by the blade razor, oral care, and Braun businesses. Looking at the company's performance through six months, net sales declined 6% to $3.88 billion compared with $4.11 billion in 2000. Excluding the adverse effect of exchange, sales fell 1%. Profit from operations decreased 26% to $694 million. I will now review the balance sheet for the second quarter starting with working capital. Receivables showed significant improvement with a $348 million reduction versus prior year. This represents an 11-day or 16% decrease in day sales outstanding versus a year ago from 70 to 59 days versus December 2000. We reduced DSO by nine days and receivables by $747 million. Progress was also made on inventories, which were down $153 million versus last year's second quarter. As expected, given the seasonality of the company's product line, inventories increased $214 million versus yearend 2000. This includes the reductions made from our aggressive program to rationalize SKUs and eliminate the slow moving products. In fact, our program is proceeding ahead of plan. We have now identified 75% of SKUs to eliminate in North America and 50% on a global basis. The impact of this program will be a sales reduction of less than 1% in 2001 and 2002. Finally, our strong working capital performance resulted in improved cash flow and total debt was reduced by $346 million compared with year-end 2000 and by $1.4 billion versus a year ago. That concludes our discussion of the quarter. We will now take your questions. I will now turn the call over to the operator, who will explain the procedure for signaling if you do have a question.
Operator
Thank you, at this time if you would like to ask a question please press * and 1 on your touchtone telephone. Once again to ask a question at this time, press *1 on your touchtone telephone. We will take the first question from [Windy Nicholson] from Solomon Smith Barney.
WINDY NICHOLSON
Hi, good morning. Two questions. First, of all could you clarify exactly which business's advertising was up significantly and I know you said it was up double digits in batteries, was that just behind CopperTop and how much was advertising up behind Venus and the second question is on the SG&A spending that we significantly have year-over-year. Have you started to see any cost savings from the restructuring and head count reduction you took at the end of last year or is it felt too early to foresee that?
CHARLES W. CRAMB
Hi, [Wendy], for instance, in response to the advertising, our program is, as you know from Jim's recent presentation, to reinvest strongly against our core brands and to rebuild our core franchises. As a result of that the advertising spend that you see in the quarter is up against all of our key product areas, be it batteries, be it the blade business, be it the oral care business. In terms of the Duracell spending I think you may have a, I hope you have seen our latest ad which has just started airing towards the end of the quarter, new campaign, new creative, high scoring one in terms of impact and persuasion that is a switch in terms of where we are placing the money because that is an increase in support against the CopperTop brand. So, a quick question and a quick answer, I mean are core franchises, core products, new product driven heavily, and the CopperTop definitely getting increased support. In terms of the SG&A expenses really I think there is a significant increase there, they are up year-on-year as we plan them to be. Those increases really reflect stepup in investments that we are making against the initiatives that we feel are essential in turning our business around. There are some unmatched sides from last year, they relate to the benefits ... [phringe] benefits and some sale of real estate assets, but those really are not material. More significant are cost increases that come from increased merchandizing activity, particularly in North America. I think you remember towards the end of last year's fourth quarter we started to significantly increase our resources and spending level in that area. Additionally, as part of our inventory reduction program, we are much more aggressively addressing our slow moving stocks ... we are eliminating SKUs much more quickly. These actions also result in some asset writedowns and in some cases some rework expenses. We believe those actions are the foundation ... as I said the increased merchandizing, the resolution of slow-moving stocks on a faster basis and timely elimination of SKUs. That is the action that will continue in the future period and the ongoing costs results will not adversely effect ... so I cannot really tell until next year. So, in terms of where the spend came from, that really is an ongoing process and in terms of the savings and benefits most of the restructuring benefits were geared towards our factory closures. We are going to be closing eight factories by the end of the year; the concentration in terms of timing is end of the third quarter and throughout the fourth quarter. So, benefits stream from those activities really will not start to get until next year.
WINDY NICHOLSON
And just to clarify, the merchandizing that you have said, I would have thought that, that increased merchandizing would already be reflected in the ad and promo, and what I was focussing really was on the other G&A kind of line, is it that merchandizing ended as well or is that other ...
CHARLES W. CRAMB
The merchandizing, I am talking about is the hands, the people that are out stocking the shelves, putting up extra display, the in stores significantly strengthening our instore presence. So, that's a personnel or people cost and that is in the overhead line.
WINDY NICHOLSON
Got it. Thank you very much.
Operator
we will take the next question from [Andrew McCulaine] with UBS Warburg.
ANDREW MCCULAINE
Thanks very much. A couple of questions on the blade division. Can you tell us what the stock in blade specifically was, you know, how it dragged on sales this quarter and can you talk at all about your entire de-stocking program and how it splits between systems and handles?
CHARLES W. CRAMB
Sure, the overall destocking program is a key ingredient towards getting the business back to a level of flow ... to getting the business is to be managed on a consumption basis and it is the first step towards getting trade inventory levels down to where we can offer on that basis. In terms of the inventory reduction program, we originally said we would get some metrics by geography in terms of the number of weeks coming out, we would need to take about three weeks out of North America, four weeks out of Latin America, and six weeks out of Europe. We are right on target with our inventory reduction program as in each of those three geographies we are about two-thirds of the way through, two weeks in the US, four weeks in Europe, and right between two and three weeks in Latin America. By the way, that program will continue through the rest of the year, but the bulk of the further reduction to get us the 100% of our target will come in the third quarter. Now in terms of the value of it, I guess before I mention the value, the other piece is the battery piece; we also had about three weeks of excess stocks in batteries in North America. On the battery side, we are a little better than two-thirds, we are probably about 75% of the way there, and that program will be targeted to be completed by the end of the third quarter. The drain on sales in the quarter is about 4%, of that 4% roughly three quarters of it is blade-oriented, and one quarter of it is battery-oriented. The other question you have asked is the mix, it is really a blade or a cartridge program, and it is not a razor program. So, Venus razors or Mach3 razors or Cool Blue razors or some of the older system razors really are not impacted by the destocking activity.
ANDREW MCCULAINE
Terrific, thanks Chuck. With just one more, and then I am done. Can you talk it all about Venus sales in total in the quarter, worldwide?
CHARLES W. CRAMB
Sure, it is a great start and I will let Sarah take that one.
ANDREW MCCULAINE
Thank you.
SARAH SMITHERS ARCESE
Well, Venus sales as you heard have been surpassing all expectations, its now in North America, Europe, and selective Asia Pacific markets, specifically Japan and so all-in-all it is doing very well and posting very high share positions as well.
ANDREW MCCULAINE
I am guessing for the full year right now, it is $300 million, can you talk about the absolute sales level that you did in June for Venus globally and will you talk about full year?
SARAH SMITHERS ARCESE
As of now Andrew, it is not really our practice to issue details like that, so you are going to have to make your own estimates in your model.
ANDREW MCCULAINE
I think I will try. Thank you.
Operator
We go next to [Katherine Lewis] with Morgan Stanley.
KATHERINE LEWIS
Hi there. Can you talk a little about this share erosion at Duracell, how much share erosion will Gillette tolerate before you would reassess your pricing strategy. It seems like, according to IRI, Duracell was sequentially less worse but it was still down year-over-year?
CHARLES W. CRAMB
I guess it depends upon which survey you use, if you look at the Nielson Shares, you see a much stronger story, we are really excited, because we are seeing CopperTop up on a year-on-year basis for the first time, we are seeing continuous sequential improvement in the shares. We are very, very strong in our performance on Duracell in terms of food, drug, and the clubs. The challenge to us and really the big opportunity to just what happens in [_____] and in that area, we have been under index in our performance. We have a very aggressive program leading into the latter half of the year and particularly the fourth quarter, which is the significant seasonal period for the battery business. That program will consist of all elements that are optional in terms of marketing tools. There will be some promotional pricing, we will have special packs, significantly more in terms of display with extra displays, promotional displays, instore merchandises will be heightened, top of that in terms of the consumer, we are going to strengthen our consumer advertising, we have a new campaign, you are seeing the first element of it which is the [_____] commercial. We put a lot more weight on the overall battery program going into the latter part of this year. We are confident that we are going to see continued improvement.
KATHERINE LEWIS
Okay, and then just separately back again on the margin outlook and the cost structure, can you just talk a little bit more tactically about expectations in the second half or figure cost expense and your other operating expense. You know there is lot of mobility to say with the de-stocking restructuring and then redirecting savings, do you expect descent improvements in the margins in the back half of the year?
CHARLES W. CRAMB
The destock in terms of the margins overall that driven by, as you pointed out, a series of things not the least of which is de-stocking, which has been very significantly on the blade business which is a margin the erosion because of the rich mix of the blade business. So, as we move out of that virtually finishing up the de-stocking in the third quarter, fourth quarter will not be hindered, anyway as near as much as the third quarter in terms of the blade de-stock piece of it. As we look at reconstructed PNL, the one thing that we will not do and we have committed to not doing because of its importance of building our brand franchise is compromising at all on our what we call direct marketing support particularly in the area of advertising. So, if you think about the reconstruction in the first half of the year, even though sales were down advertising was up and we will continue to invest at significantly higher rates in our advertising than we have. In terms of other elements of the P&L, we have at this point in time, no expectations of anything that is immaterial on a one-time basis, so the rest of the pieces of the P&L should pretty much be continuation of what you have recently seen. So the net, net will be some margin improvement.
KATHERINE LEWIS
Okay and then again just a flow of that. You expect the margin improvement to start showing up in the fourth quarter, not the third. Is it right?
CHARLES W. CRAMB
Well, what I have said is that the blade destocking or the remainder of it will be primarily in third quarter as with the battery destocking.
KATHERINE LEWIS
Okay, thanks.
Operator
We go next to [Amy Jason] with Goldman Sachs.
AMY JASON
Hi, a question on the battery margin, Chuck, it sounds like from what you are saying about your plans for batteries for the remainder of the year that marketing spending in that segment will actually accelerate, and therefore I would assume that battery margins will continue to decline and may be even out of next accelerated pace in the second half. Is that fair or am I missing something?
CHARLES W. CRAMB
I think you are missing something [Amy]. There is no question ... the turnaround of the battery business and the recovery of what we have lost in Duracell is the number one objective in terms of the turnaround of the Gillette Company's business. As you are looking at the batteries and looking at the margins to date this significantly is impacted by a couple of things. The first is the impact of de-stocking, which is driving down these variable sales and variable contribution from those sales and once that de-stocking program is behind us then that drag wont be there. The other thing that is within the numbers is our own in-house or own inventory reduction program. As we have had some loss in, as we had some lower sales due to the de-stock program, we have been cutting back from dramatically on production in line with our overall inventory targets. That cut back in production through the first six months of this year has a negative impact on what we call a factory variances or factory efficiencies. That too should be mitigated as we go in towards the last half of the year. What will not be mitigated and you have pointed out very well is the support levels, because we will be supporting the battery business more strongly than we have.
AMY JASON
Okay, I got it. And second question is on the SKU reductions, I think the numbers that you guys gave on this call are slightly different from what you said at the meeting, I thought that at the meeting you had said you expected a 5% reduction in North America, which if I remember correctly I calculated to about 2% on a global basis, now I understand 1% [_____], but can you just talk about whether something has changed there?
CHARLES W. CRAMB
No, I think maybe there was a little bit of clarity issue in terms of when we look at the SKU rationalization program and also the program that just writes overall inventories down and clean out some of the slower movers, how much was the sales impact versus how much was the relative inventory impact. And certainly, I think a 1% or less than 1% that Sarah mentioned in the presentation relates to sales and that's a pretty good number.
AMY JASON
Okay and then just lastly on the gross margin, I am a little bit confused, it was actually better than what I have thought and you cited mix, but you know it seems like there is a lot of other negative factors here in terms of internal inventory reduction, you are not yet getting any cost saving from the restructuring, can you just talk about what the drivers of that gross margin were?
CHARLES W. CRAMB
Sure, because I don't know what your base model was, but if you think about the business, although the restructuring benefits in terms of the factory closures contemplated for the end of this year are not yet impacting the numbers, there are prior restructuring activities that are fully and are virtually in our factory cost. I addition, we have ongoing cost reduction programs that are above and beyond the factory closures. So, those have an impact. Also, the mix comment has to do with the mix of sales and although we are de-stocking in the blade business, we still have a pretty rich blade mix due in part to the success of Venus. Also oral care is a relatively rich business and our oral care business is strong. So, that's the mixed component of the gross margin that is probably a little bit surprising to you in just how strong it was.
AMY JASON
Okay, so that offsets the other issues.
CHARLES W. CRAMB
Yes.
AMY JASON
Okay, thank you.
Operator
Once that again that's *1 for questions, I would like to remind you to please limit yourself to one question and one followup. We will go next to [Carol Wilkey] with CS First Boston.
CAROL WILKEY
Thanks. I just had a followup question on the battery margins. You mentioned that mix had been a negative issue because Copper and Black growing better than Ultra. As you go into the second half of the year, now you have got a huge ad campaign behind Copper and Black that was just started, isn't the negative mix going to be exacerbated or is there something down the road that you are going to be doing to, you know continue to get Ultra growing, so that you don't have as much of a negative mix. I am just trying to get a feel for when that balance is or when does the sales rebound enough to offset the impact of negative mix.
CHARLES W. CRAMB
[Carol], I think that you hit it in the last comment you made, the strategy on Duracell is to reinvigorate the CopperTop part of the business or the old Copper and Black part of the business. That by itself in total isolation would have a slight downward impact on margin. Similarly, the increase in support level particularly on the advertising line would have a downward impact on the margin. Offsetting that there is no trade de-stocking as we move out of the third quarter. Offsetting that is the share performance and what we hope to be a continuation of that share performance as we strengthen our business. There is tremendous leverage on the sales line against the cost structures and that net, net should result in some improvement. We are not expecting to get back to some of the margins that we had the year or two ago, which probably are artificially high, but this should be a good solid contributor to our business over the long term.
CAROL WILKEY
And just one more thing on the batteries. You mentioned also that your company had seen some category weakness, as you look into the second half of the year, are you expecting to see more robust category growth in batteries?
CHARLES W. CRAMB
We did see a little category weakness in the second quarter, that business has been growing at 7-8% and because of second quarter weakness, it has dropped down to about 5% growth. Also, it is difficult to determine what that is because it is a slow device driven; we are anticipating that to be a chronic problem on a go forward basis. We believe that we should be able to recover and still show good solid growth in the category.
CAROL WILKEY
Thanks.
Operator
We go next to [Sally Deslock] with J. P. Morgan.
SALLY DESLOCK
Yes, Good morning Chuck, good morning Sarah.
CHARLES W. CRAMB
Hi, [Sally].
SARAH SMITHERS ARCESE
Good morning.
SALLY DESLOCK
Couple of things, just staying the growth margin question for a moment. I think Sarah in your opening remarks you also highlighted pricing as a contributor to the improvement in gross margin, I wonder if you can elaborate on that a little bit.
SARAH SMITHERS ARCESE
The pricing impact in the quarter as I said was about 1% and that's really spending mostly from system blade price increases that we took in the US on January 1st, we did not take increases in disposables, just to remind you, so that is the biggest driver of the price favorability that you are seeing.
SALLY DESLOCK
Okay, if I can recall correctly from the June meeting, is the expectation that Gillette would not be taking that annual price increase going forward, is that right?
SARAH SMITHERS ARCESE
Well certainly, Jim talked about the overall price value equation and that he would look very carefully at managing consumer's perceptions of value and so on, and he would look very closely at the price equation, but I think he is not ruling anything out, it is just we have to be very careful, on I think the term he uses is price moderation.
SALLY DESLOCK
Okay, and then I guess one other thing on the gross margin, Chuck, I think you alluded to mix and Venus as being a contributor to gross margin, but I guess I am going to stop the opposite given that I am going to start on a lot of sales and Venus are still handles and not blades and I would have thought that would have been not as strong a contributor to Mach.
CHARLES W. CRAMB
No, you are right on that piece of it, in terms of the razor versus cartridge mix, I was more referring to the overall richness of just the cartridge mix in our total business I placed against the total company's business. There is a gaping impact because of razor handles, not only for Venus, which has just gone off [_____] just tremendously well, but also for the Cool Blue razor program, the Mach3 program ... we are showing strong growth, strong consumption increases, new consumers going to the Mach3 franchise in line with and ahead of some of our cartridge share development which is still growing, because of that program. So, within the blade business, yes those would be gross margin dampeners, but across the total business the strength of the blade portion including the Venus cartridges was really the mix I was talking about.
SALLY DESLOCK
Great. Just a quick housekeeping issue, I think on the question of other operating expenses you alluded some things that were in last year that were benefit that make the comparison tougher. Can you quantify for us how much they helped last year, so we can back this out and get an apple-to-apple comparison?
CHARLES W. CRAMB
They really are not material enough because if it had not been for a swing from income through expense, I would not have mentioned them, in fact they actually moderated a little bit from the first quarter. So, we are not talking penny of a share, I don't think it would be relevant in the model. I think in your modeling just think about we are doing today, what we are investing in today and how much of what you see on a go forward basis is ongoing which is all of it. We believe that we are setting the right foundation in the year 2001 and that foundation really is the basis for your financial modelling on a go forward basis for 2002 and beyond.
SALLY DESLOCK
Okay, on the investment in the new merchandizing staff, you know how much of this 400 basis points or so of the increase in the ratio there came from that?
CHARLES W. CRAMB
I would not go into that kind of detail, I just say that fourth quarter we had roughly half of the increase in expense rate and starting in the first quarter we were virtually at a 100% of it. So, in terms of doing model you will get it that way but in terms of absolute numbers I prefer not to get those.
SALLY DESLOCK
Okay, I appreciate. Thank you Chuck.
CHARLES W. CRAMB
Sure.
Operator
We go next to [Jim Gangrich] with Sanford Bernstein.
JIM GANGRICH
Hi, could you talk to what type of changes you have made in trade terms to bring receivables down and are you seeing is that impacting sales in any way and as you have made further improvement, you know, do you anticipate any impact on sales?
CHARLES W. CRAMB
The most encouraging thing as we address our working capital and really drive the receivables down and I think we have driven that down.
JIM GANGRICH
Right.
CHARLES W. CRAMB
The performance of our toothbrush, sale has been exceptional.
JIM GANGRICH
But are we seeing any sales impact now Chuck?
CHARLES W. CRAMB
No, that's an encouraging thing. Its great to see that we can execute, and there are some trade terms that have been changed, we had done the pear group bench marking, I think to give ourselves the courage to be much more aggressive, I think another piece that has really helped in terms of the receivable reductions is we are steadfast against the dating, we actually elevated it. I now personally approve all dating so that has really bitten in, but a third thing and a very substantial piece of the program is that we have much better information, and that information flow is enabling us to much more quickly resolve disputes that we have with the trade over what to really do and a big piece of our receivables this year, I think has been in what we have [_____]. [Passive] did not mean it was a problem in collecting ... it was a problem in communicating with our customers as to any differences we had versus them and they though owed to us. The SAP implementation has been a tremendous enabler there and that really has been a key driver, but in terms of impacting our overall sales performance we have seen nothing that bothers us all.
JIM GANGRICH
Okay, now in terms of Ultra, can to talk to what objectives you now have for Ultra from a share standpoint, what type of marketing support, you expect putting behind for Ultra going forward?
CHARLES W. CRAMB
As part of the Duracell turnaround, we believe, there is a position for both CopperTop and the Ultra. I think what we got wrong in the past was we over indexed our marketing support against Ultra, whether it was in the promotional mix, the slight mix, the share of shelf mix ... whether it was in the way we went to market from a promotional perspective, which you will see on a go forward basis is a much more balanced investment against both CopperTop and Ultra which will be much more reflective of their share performance. We may even index a little higher against CopperTop as we try to get back some of the shares that we have lost. So, in terms of mixed spending think of it in terms of well directed towards CopperTop for a while as we are regrouping in share, but longer term there should be indexed against the relative importance.
JIM GANGRICH
And are you seeing any type of competitor response to your increased promotional activity on CopperTop?
CHARLES W. CRAMB
No, but we would expect that with the Christmas season coming it will be a very competitive environment.
JIM GANGRICH
And one last housekeeping question. On the price harmonization that was mentioned, that impacted Duracell in Europe ... can you provide a little bit more color on that and is that pretty much settled out at this point or will it impact the third quarter as well?
CHARLES W. CRAMB
The only issue or the only element of price harmonization was we had a couple of markets, where the pricing which is a significant premium to the rest of the market within the European community. And what we decided as the appropriate thing to do as we move towards the Europe is to balance the prices out and we had a couple of markets where we were totally out of line. There was a price reduction. That price reduction would continue forever, so it has to work its way up through the next coupe of quarters.
JIM GANGRICH
So, it's really that we are going to panelize this on the pricing and I think panelize on Mach3 as the prices pick up?
CHARLES W. CRAMB
Excuse me?
JIM GANGRICH
You are not getting a hit from the volume standpoint where you had to pick the prices up?
CHARLES W. CRAMB
No, we are not. It really is just a price equation on which means the value equation on those couple of markets where we took the price down really dramatically.
JIM GANGRICH
Okay, thanks much.
SARAH SMITHERS ARCESE
In fact, you must have added that ... we are seeing share enhancement in Europe on batteries, we are not seeing any reduction at all.
JIM GANGRICH
Okay, super. Thank you.
Operator
We next go to [Hyder Muran] with Merrill Lynch.
HYDER MURAN
Good morning and a couple of questions. One is just on assumptions that you are using foreign exchange in the back half of the year and whether there is a change in the recent weeks and secondly just on the other SG&A items in the quarter and then that's what you believe would be a normal other SG&A type of ratio going forward.
CHARLES W. CRAMB
Hi [Hyder], I will attack the SG&A question first and then I am going to have to go over the first one because I lost a little bit. On SG&A, we are pretty much of a normalized spin rate right now getting the investment spending we believe is necessary to deliver against the initiatives that we have promised as part of the turnaround. There is nothing one time in nature that is immaterial. So, you are thinking about the future thinking about this year as being a normalized year and fully visible and then think of the future in terms of our commitment to vogue at a minimum 0 overhead growth. What was the first one?
HYDER MURAN
Have your foreign exchanges assumptions changed?
CHARLES W. CRAMB
Whenever I talk about foreign exchange assumptions, I always get them wrong so I have to be careful there. So, I think what you are really referring to is what is happening in Latin America and Argentina and how is that reaching out into the rest of Latin America particularly Brazil we are seeing some value stock currency movements Chile let us turn perhaps to Mexico and is there an economic crisis on hand. It is certainly it is here for a lot of things there are a lot of uncertainty down there, but as half way through this year as we look at what has happened today, we feel that that is manageable within the objectives and the plan and our target. So, we do not see it to be a significant element in terms of what we believe we should be delivering this year. However, if there is a significant further melt down in Latin America, we will have to regress these plans, but right now we think it is totally manageable.
HYDER MURAN
Have you hedged up any of your currency exposure in the back half?
CHARLES W. CRAMB
We have done no financial hedging in the back half. It is still is a significant premium that we do not feel like it is the worth paying by time. We do have our natural hedges fixed on the way we operate and where we incur costs and where we do have some hedging in the way we borrow money, but in terms of taking a financial hedge against profit flows, no.
HYDER MURAN
Are you speaking about overall foreign exchange or it is North America or it is both.
CHARLES W. CRAMB
Both.
HYDER MURAN
Okay Great thanks Chuck.
Operator
We will go next to [Alec Patterson] with [Dresner RCM].
ALEC PATTERSON
Yes Good Morning. Just on two areas ... one the working capital reduction program etc is generating lot of cash here and you are applying the debt reduction ... I was just wondering what the out lying expected usage of this cash might be on the share repurchase ... could you provide an update on that and secondly I think I understand what you are saying that we keep coming back to the other SG&A levels. It sounds like basically you are finding the appropriate level you feel is necessary for running the business and so these are the levels more or less kind of an absolute basis that we should be using from this year from which when sales start to return you are hoping to get leverage is that the way I should read it.
CHARLES W. CRAMB
Pretty much yes from the terms of the SG&A. It is an ongoing cost of the business that may be some periods where there is a little more investment because you did have some variable things like merchandising in there, but in terms of a big significant one-time element substantially changing the characteristics of P&L area there is nothing that we are aware of at this time. In terms of the share repurchase program and the cash, I particularly think that we do have the cash coming in ... I think that is a billion almost a billion and half dollars of debt reduction in twelve months. We still have an active offer right here in the share repurchase program. We have I think something like 27 to 28 million shares still authorized by the board of directors. We look at it periodically however today the focus is very, very much on turning the operations around, getting the operating performance right, and therefore we have elected at the moment to continue to reduce that as a part of that equation. However, we are not fully inactive we do have 3 million books outstanding right now on the repurchase program.
ALEC PATTERSON
I think Charlie that you guys have a lot of concerns over the debt coverage and the interest coverage here ... I would think there would be more of a balance. Are you trying to increase that capacity here or is there ...
CHARLES W. CRAMB
No we have no problems of our debt capacity what so ever. I had significant opportunities if something came up that I really thought I need and I would like to use it.
ALEC PATTERSON
Okay. I am sorry just one clarification this was a rumor possibly I heard yesterday that you guys had said that you might not be doing conferences going forward and I thought I heard that you guys were starting to meet with investors again, so I am confused.
CHARLES W. CRAMB
Me too because I don't not know where that comment came from. I think Jim was very clear in New York ... he will become more active with the investment community and I believe they are in the process that we will be shortly starting to setup the meetings that will enable a greater access to him so I don't know where that rumor has come from.
ALEC PATTERSON
So you guys will be at conferences coming up that you might normally be at?
CHARLES W. CRAMB
Selectively, we will consider each one as we go.
ALEC PATTERSON
Okay. Thank you.
Operator
Next is [Ann Gillion] with Lehman Brothers.
ANN GILLION
Hi Chuck it is a followup on the receivables question. Is part of the offside from the lack of quarter end loading?
CHARLES W. CRAMB
The lack of quarter end loading's impact would be in terms of some of the tools that they used to do the loading, which is dating, although we got rid of that quite a while ago the dating piece with it.
ANN GILLION
That is what you mean by dating. Okay.
CHARLES W. CRAMB
You know what just as I know you are very quantitative in your math ... yes because what was happening is in fact ... you looked at receivables in terms of three months of sales.
ANN GILLION
No. I say it is the place where you beat me, so I am trying to figure out what you sales you made. Just to be very, very careless?
CHARLES W. CRAMB
Dating is no longer an impact there and the fact the impact of the loading was that we used to ship off a lot of goods in the third month and therefore they wanted to collect it all the following quarter.
ANN GILLION
If you would have carried that receivables over the month?
CHARLES W. CRAMB
Yes, we would have carried our receivables over and that is the piece that has an element.
ANN GILLION
Okay, that was more so in the second quarter than the first quarter and if you did see a reduction in the Q1, but this was really noticeable.
CHARLES W. CRAMB
If you want to take a look at what is happening this year in terms of the receivables performance it is all operational. The piece that we are talking about is small in equation. The real ... the troops out there who are responsible in managing those receivables they should be getting the credit for really taking down on terms and taking down on communication with the trade, clearing out dispute much more quickly, getting that path to use under the management. It really is operational benefits that are driving the reduction receivables.
ANN GILLION
That is great. If you could really come to the traded debt ... if you think about where the retailers are taking their working capital?
CHARLES W. CRAMB
Yes.
ANN GILLION
Why stop the inventory de-stock ... the number of weeks stand for example that is still seems to be rather high relative to whether the trader wants to take their one inventory.
CHARLES W. CRAMB
I do not think we have ever intended to give the impression that we are stopping de-stock at that point. We still believe that the trade will continue to works its supply chain efficiencies heavily. That would require them to continue to work more efficiently with their suppliers. That will mean a continuous de-stock by the trade but on a gradual basis. We are doing a correction now. All of our plans and all of our communications have been that we will continue to sell at somewhat lesser consumption recognizing that the trade will continue to get more and more efficient as it consolidates, as it has to drive its own cost down. So, that is I am thinking that this is a continuous program. What we are talking about today is a correction to that past practices.
ANN GILLION
If the correction continues does that mean the ten weeks really the level at which you believe the trade is happy to then go forward from.
CHARLES W. CRAMB
No. I think that you will see gradual reductions against the tenth. I don't know whether it will be 9.5 or 9 but the trade will continue to find ways to operate more efficiently and we help it to it as well in terms of our own supply chain initiatives.
ANN GILLION
That is great. I am sorry I just made be you can follow-up on the questions that you are getting around be overhead in SG&A, but the sampling still up in the other operating expense line there.
CHARLES W. CRAMB
No it does not.
ANN GILLION
Okay, where does sampling show up?
SARAH SMITHERS ARCESE
It is in our advertising line what where we see it.
ANN GILLION
Okay thanks very much.
Operator
Next with [Andrew Shure] with Deutsche Bank Alice brown.
ANDREW SHURE
Good Morning. Hi Chuck. How do you define success in batteries, I mean, would you take basically everything what you have said that shares could remain weak as you trade off higher ticket item into to a lower ticket item, margins could remain little bit under pressure even with some of the stocking even as you trade off also into CopperTop. So, the net at the end of the day, the shares might not really change that much but you spent a $100 million ... how do we or how do you determine that $100 million was an adequate level to spend and how do you determine your return on that. Are you happy spending a $100 million for really no net change and shares just stability?
CHARLES W. CRAMB
We spent a $100 million incremental today, I just believe that you will see a continuation of the share enhancement that we are starting to see and I know that it is early days yet, but it is encouraging to see it as positive as opposed to negative as we have just really started to implement some of our new initiatives. The batteries business will be successful as a core solid performer within Gillette portfolio. It will not have the margin profile that it had two years ago when we were at 22% but it will provide significantly higher returns in its cost of the capital and that is how I would measure the success of the business. It is a growth category, yes, and the second quarter seems to be an anomaly in the US right now ... it is a growth category if we can increase our share in that growth category a bit and get a reasonable return on our investments incrementally, which means getting a return on capital greater that our cost of capital, we will be happy.
ANDREW SHURE
So, net, net at the end of the year you expect Duracel's total share to be higher in dollar terms, right?
CHARLES W. CRAMB
That is what we would like to do.
ANDREW SHURE
It seems there with all the growth really in the mass channel the only way you can do is to we win over the mass channel, which is the hardest channel and the biggest debt?
CHARLES W. CRAMB
I think Andrew we have identified and we have acted very strong in the other channels, which I defined as food, drug, and cloth and the mass merchandised channel is the area that we are under index and that is the area where we are really paying significant attention to as we move into the Christmas season.
ANDREW SHURE
If you wind up cannibalizing all of Ultra to gain back CopperTop dollar for dollar and then for incremental. Are you going to be happy with Ultra at a five share?
CHARLES W. CRAMB
That is a hypothetical ... I really could not address it right now. We will be supporting both Ultra and CopperTop and there will be a relative mix of support.
ANDREW SHURE
Okay thanks.
Operator
We will take our next questions from [Bill Speihl] from Bank Of America.
BILL SPEIHL
Thank you. Chuck, what was the cash flow from operations in the second quarter for the year today figure?
CHARLES W. CRAMB
We all defined it differently ... let us go to the real problem. I think I would rather put it back in terms of what was our ...
BILL SPEIHL
According to the 10Q, what are you going to file?
CHARLES W. CRAMB
Which I have not put together yet. So, it is a little bit premature on that.
BILL SPEIHL
Okay. How will you define it in an alternative?
CHARLES W. CRAMB
What you might what to do is just take your operating profits plus the change in the working capital plus your capital expenditures and you are pretty much to there.
BILL SPEIHL
The second question is the dollar write-down of inventories in the second quarter.
CHARLES W. CRAMB
We don't give the number like that. It was large enough to reference, but not so large as the ... it is not a one time material item. We would expect this as we go forward to continue to have some inventory write-downs either because we have just determined it is better to just go for the product, but also recover some of the rework expenses that we want to recycle it.
BILL SPEIHL
And then last question, Sarah referenced high and other expenses in the blade and razor segment, it is one of the reasons for the profit decline ... what are those high other expenses and how much were those?
SARAH SMITHERS ARCESE
That was just a portion of overhead and other expenses, which was allocated to blade and razor [Bills]. There was nothing specific about it being blade and razor today have to take a very high portion of the expenses because blade and razor is such a large segment.
BILL SPEIHL
Okay Thank you very much.
CHARLES W. CRAMB
[Bill] by the way I just quickly did the numbers and it looks to me like the Q6 months cash from operations will be some more areas in the vicinity of north of $400 ... between $400 and $500 million.
BILL SPEIHL
So that means in the second quarter you are probably down year over year ... I mean you actually posted negative
CHARLES W. CRAMB
Year over year. I do have that information. We can handle that off line.
BILL SPEIHL
Okay, thanks chuck.
Operator
And we will take our final questions today from [Mike Rucy] from AG Edwards.
MIKE RUCY
There is one question for you chuck ... what effect do the recent economic challenges in Latin America have on your retail restocking networks in the region.
CHARLES W. CRAMB
They should have no impact at all. We are on target in our restock program. We said we are going to take about four weeks out ... we have taken just two to three weeks out. We should take the other week and half out next quarter. If I look at what happens to Latin America if the economy gets more volatile and you do see some market shrinkage, we will not shift in excess to whatever that market shrink is requirement is. We are dead set and dead on target to get the trade inventories down to what is appropriate.
MIKE RUCY
Thanks.
Operator
And that does conclude today's question and answer session. I would like to turn the call back to our speakers for any additional or closing comments.
SARAH SMITHERS ARCESE
Starting about two hours, a replay will be available that will run in until Friday July 27, 2001 and mid night EST daylight time. The number to call for the replay is 888-203-1112 or 719-457-0820 with a conformation code of 562813. Additionally, the replay will be available on our corporate website at www.gillette.com a few hours from now. The 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 analysts having more detailed questions involving non-material information, I will be available to take your call. Thank you and have a good day.