寶潔 (PG) 2002 Q2 法說會逐字稿

Good day, and welcome to the Gillette Company's second quarter earnings results conference call.

Today's call is being recorded.

At this time for opening marks and introductions, I would like to turn the call over to Mr. Chris Jakubic, Vice President of Investor Relations.

Please go ahead sir.

Thank you very much.

This is Chris Jakubic, Vice President of Investor Relations, and thank you for joining us on our conference call for second quarter earnings.

Also present are Chuck Cramb, our Chief Financial Officer, John Manfredi, Senior Vice President, Corporate Affairs, and Eric Kraus, Vice President, Corporate Communications.

As you all know, during this call we may make forward-looking statements about the company's performance.

These statements are based on management's estimates assumptions, and projections as of today, and therefor contain an element of uncertainty.

Although actual results may differ materially due to 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.

Now, let's review Gillette's second quarter 2002 results.

First of all, please note that all quarterly results earnings releases this year will be based on comparisons to 2001 results that reflect the reclassification for EITF-25.

Now, before I get into the numbers I would like to make a few comments.

To start with, make no mistake, our turn around is gaining momentum.

We have good news in sales, gross margins, and free cash flow.

And our Branch franchises are strong and growing.

That said, the job is nowhere near finished.

We have new initiatives and challenges ahead of us.

I think in the second quarter results that we will discuss today, you will see the strength and momentum in our turn around efforts.

Our brands are very healthy.

There is strong trade and consumer acceptance of important new products, and that has translated into significant sales gains.

We have also been able to deliver good traffic growth from operations.

And at the same time, we have increased our advertising, and we have covered incremental expenses to kick off our functional excellence initiative.

Working capital performance also continued to improve substantially, and contributed to free cash flow of about $350 million in the quarter.

That puts us on pace to deliver our target of over $3 billion in free cash flow from 2002 to 2005.

Now let's turn to the numbers.

First of all, please note that both the quarter and year to date numbers quoted from here on out will exclude a one-time gain on the sale of our rights in the Vanica business.

The background on Vanica is as follows.

Vanica was a join venture with Bristol-Myers Squibb for a prescription cream that slows the growth of facial hair in women.

The joint venture was sold to a third party in June, resulting in a net gain of $30 million pretax, $21 million after tax, or two cents a share.

So, with that behind us, on to the income statement.

On a reported basis, net sales for the second quarter were $2.02 billion.

That is 5% above last year.

Exchange had no material impact on sales in the quarter, and that is good news we haven't seen in some time.

Meanwhile volume mix added 7%.

Pricing for quarter reduced sales by 2%.

This was primarily due to higher year over year sales promotion spending at Duracell and Oral Care.

Year to date, net sales rose 6% to $3.76 billion, and here is the break down.

The unfavorable impact of exchange was 1%.

Volume mix added 8%, and pricing was unfavorable by 1%.

Again, the result of higher year over year sales promotion spending.

Moving on to second quarter gross profit margin, it increased 80 basis points to 60.6%.

Again, good news we haven't seen in some time.

The positives were cost savings from the December 2000 restructuring, our strategic sourcing initiative, and favorable product mix in our blade razor business.

But these gains were partially offset by declines at Duracell.

What happened at Duracell?

Two things.

One higher year over year trade spending in response to competitive dynamics in the North American market.

The other is the ongoing mix shift in products, pack size and retail trade channels.

These hurt both sales and growth margin.

Gross margin was down 30 basis points through six months.

We had favorable blade razor mix and SSI savings, but were offset by Duracell's higher year over year trade spending, plus the unfavorable mix shift that I just described.

Moving to marketing.

Total spending on a reported dollar basis grew 6% in the quarter.

Year to date, marketing spending was up 10%.

Within marketing, advertising in the second quarter was up to 7.9% of sales.

It was 7.5% last year.

And year to date advertising was up 13%.

That was driven by higher investment behind both new and established products.

Sales promotion in the second quarter declined slightly as a percentage of sales, from 4.2$% to 4%.

This was mainly due to unmatched Venus launch activity in 2001.

Through six months, sales promotion as a percent of sales was unchanged at 4%.

Let's move to overhead and other expense now, where we continue to make improvements, and is the source of many new initiatives at Gillette.

In the second quarter, overhead and other expense was down as a percent of sales, from 28.6% to 28.1%.

Year to date, it was down slightly as a percent of sales, reflecting savings from the 2000 restructuring and our ZOG efforts.

What is important to note here is that we booked $31 million in incremental expense in the second quarter.

This expense is related to our functional excellence initiative.

And before we go further through our discussion of the income statement, I would like to take a minute to explain our functional excellence initiative.

As many of you may recall from our [INAUDIBLE] presentation in February, Jim Kilts described functional excellence as the third leg of our effort.

It's focused on reducing our overhead costs, and importantly, upgrading our capabilities.

This will be done by improving processes, and eliminating duplication across all our functions.

Functional excellence will be an ongoing program.

It will also be the driving force behind Gillette's achieving world class capability at the lowest possible cost.

Here are the numbers.

Over the three years from 2002 to 2005, we expect functional excellence will entail costs of approximately $350 to $400 million.

Of this amount, we expect to expense approximately $80 million in 2002.

This will increase sharply in 2003, with the remainder in 2004 and 2005.

In terms of savings, annualized savings are expected to be $300 and $350 million by 2006.

The exact flow of costs and benefits is still being worked out, but we currently expect costs to outweigh benefits until 2004.

I would also point out that most of the savings would be reinvested in the business.

For instance, into advertising to support our brands and in turn fuel top line growth.

Beyond the numbers, there are three points I would like to make.

First, we do not anticipate a restructuring charge.

The expenses that we recognized to cover functional excellence costs will be treated as part of our operating expenses.

As such, we are comfortable that these incremental costs will not get in the way of our goal of delivering consistent, top tear earnings performance relative to our peers over time.

Second, unless a project is specific to a business unit, the expenses will be allocated to business units based on net sales in the region in which the expense was incurred.

And third, as a matter of practice, we do not disclose the allocation of specific costs to individual business units.

Now, back to our second quarter P&L, and on to profits from operation.

Please remember the figures I discuss exclude the impact of the Vanica gain.

So, in the quarter, profits from operations grew 12% versus last year.

And the margin expanded 120 basis points to 20.7% of sales.

As a side note, the adoption of FAS-142 amounted in a second quarter decrease in amortization of about $9 million compared with a year ago.

For the first six months, profit from operations climbed 8% to $747 million.

Below operating profits, other charges continue to decline.

We saw reduction of $15 million from $39 million in the second quarter of 2001 to $24 million this quarter.

This was primarily the result of lower interest expense.

Net interest expense was down because of our strong cash flow and significantly lower rates year over year.

Through six months, other charges dropped 69% or $65 million.

The main drivers were twofold.

First, interest expense decreased in both quarters.

And second transactional gains were booked in the first quarter due to dollar based assets held in countries whose currency deteriorated.

As a result of everything discussed thus far, pretax income was up a very strong 18% versus last year's second quarter at $395 million.

Net income rose 18% as well to $272 million, while the tax rate was unchanged at 31%.

And finally, fully diluted earnings per share rose 18% to 26 cents.

That's up from 22 cents the prior year.

Year to date, net income rose 20% to $495 million.

And fully diluted earnings per share were up 21% to 47 cents.

Now, let's look at the second quarter by product line, and we will talk about our blade razor division first.

Blade razor sales climbed 10%.

Excluding unmatched blade destock activity in 2001, sales were up 7%.

This was strong performance by any measure, and was driven by gains in North America, Europe and the AMI markets.

And from a product perspective, the ongoing worldwide success of our premium systems business, Mach-3 and Venus in particular, continue to be the big positive.

North American sales post a strong gains resulting the in excellence performance of the Mach-3 Turbo.

Turbo was the number one selling razor and the number two selling blade in the United States during the quarter.

Together, Mach-3 and Mach-3 Turbo held a 29.6% dollar share of the U.S. shaving category.

That is up 5.8 points from the prior year.

In fact, after just three months on the market, Mach-3 Turbo delivered a 10.4% dollar share of the category.

In Europe, blade razor sales grew at a double digit rate.

This was mainly due to three things.

Unmatched blade destocking activity in 2001, consumption growth driven by our World Cup promotional activities, and continued penetration of the Mach-3 brand.

In AMI, sales grew at a double digit pace for yet another quarter.

This was driven by solid gains by Mach-3 and Venus, along with continued strength of disposables in Russia.

On a global basis, our blade razor value share increased one percentage point to 72% during the latest Nielson reporting period.

What is most striking about that figure is that it shows that Mach-3 is still on fire four years into its launch.

It continues to drive sales and share growth around the world.

The Mach-3 family has now delivered 16 consecutive quarters of double digit growth.

In the latest Nielsen reporting period, retail sales of Mach-3 blade climbed 18% worldwide in constant currency.

Mach-3 global blade share also maintained a strong upward trend.

It gained three percentage points, to a 24% dollar share.

Also driving growth in the blaze razor category was our Venus system for women.

Strong performances in the U.S., Europe and major markets in Asia Pacific and AMI were the key drivers here.

In the 2nd quarter, Venus blade value share in the U.S. rose 2.9 percentage points to 7.8%.

And Venus reached an 8.9% share in June.

This places Venus behind only Mach-3 and Mach-3 Turbo in the total wet shaving category.

Beyond our very strong systems business, Gillette disposable razors continue to improve.

Our global unit share remains stable versus a year ago, despite a highly promotional market environment in the United States.

Let's turn now to profit from operations in the blade razor business.

Second quarter blade razor profit was up 19%, and margin climbed 280 basis points to 36.6%.

What drove the increase?

Three things.

A product mix shift towards our Mach-3 brands globally, favorable blade versus razor mix, and flat overhead that the strong sales growth was able to leverage.

Importantly, these gains more than offset higher advertising behind our new and established products.

On a year to date basis blade razor sales rose 11%.

In constant currency, the increase was 13%.

This sales growth was driven by the success of our premium shaving systems, plus favorable comparison to 2001 when we were selling below consumption.

Year to date, the blade razor profit from operations was up 21%, and margin rose 310 basis points.

The reasons behind these strong year to date gains are the same as those given for second quarter, with one exception.

And that is that the destocking comparisons were a bigger driver in the first quarter.

Now we will move to the Duracell battery business.

In the second quarter, Duracell sales declined 2%.

Unit volume gains in most regions were offset by higher year on year promotional expenditures, the ongoing shift in product mix from Ultra to Coppertop, an adverse shift in pack size mix, and a retail channel shift towards mass merchandisers and club sales.

There are three positives to note in the quarter relative to Duracell sales.

First, we held our share during the quarter in North America.

Second, in Europe, Duracell's gained 1.2 share points in the latest market share rating, achieving a 43.2% value share of the alkaline market, it's highest ever.

Importantly, this came despite some market contraction in the overall general purpose battery market.

And third, from a global perspective, Coppertop value share increased 6/10ths of a point in the latest reading, to 30.7%.

Turning to profit from operations, Duracell's second quarter profit rose 12% to $46 million from a year ago.

Now that is something we haven't been able to say in some time.

So what happened at the profit line?

A couple of things.

Higher volumes and cost savings from initiatives over the past year have begun to deliver.

And importantly, they more than offset higher trade sending in North America, as well as the shifted product mix away from higher margin Ultra to Coppertop.

On a year to date basis, Duracell sales declined 3%, of which 1% was unfavorable currency.

Behind the numbers, favorable unit shipments were offset by increased promotional spending and the adverse shift in mix previously mentioned.

Profit from operations year to date was $45 million, down $33 million versus last year.

This performance was heavily related to the first quarter costs of withdrawing selected hearing aid batteries.

But higher promotional spending, and the unfavorable mix shift from Ultra to Coppertop also contributed to the decline.

Now, in terms of the health of the U.S. battery category.

We do remain concerned about the high level of promotional activity by our competitors.

Our price gaps versus branded competitors and private labels widened during June.

In fact, according to Nielson's two and a half channel scanner data, one of our branded competitor'ss average price for AA cell during the quarter was below private label.

As a result, we have and will continue to use promotional spending to maintain an appropriate value proposition versus competition.

That said, we feel that our commitment to maintain share is becoming well understood in the marketplace.

And we are doing the right things to focus more on the consumer benefits of our products.

And importantly, despite this environment, the aggressive cost reduction measures we have put in place over the past year have enabled us to show the first signs of progress towards our goal of improving our margin.

Let's move now to the oral care segment.

In the second quarter, sales rose 8%.

These gains were paved by high single digit growth in both the manual and power toothbrush segment.

In both cases, new product introductions drove growth and offset higher promotional spending.

In manual oral care, sales gains reflected the highly successful North American launch of our Oral-B Stages line of children's tooth brushes.

Strong growth in Asia and AMI, particularly in Russia, from our entry level Exceed, Vision and Classic toothbrushes, also made a significant contribution.

In power oral care, sales growth reflected sustained gains in several areas.

They including our top of the line 3D Excel rechargeable power toothbrush in North America, incremental battery market share as our rollout continues in North America and Europe, and strong rechargeable gains in Asia.

Second quarter profits from operations in oral care grew 11% to $50 million.

Operating was up 50 basis points to 18.2%.

This reflected sales gains from new products and lower manufacturing costs.

At the same time, marketing spending increased to support the new product launches.

Year to date oral care net sales climbed 8%.

In constant currency, sales increased 9%.

The gains reflect strong growth behind the success of our new product introduction in both the manual and power segments.

Profit from operations year to date climbed 9%, again due to sales gains and new products and cost savers.

Let's turn now Braun, which covers male and female hair removal, household and hair care appliances, and personal diagnostic devices.

In the second quarter, Braun sales rose 5%.

While sales were helped by favorable European currency, strong electric shaver performances in North America and Japan were the main drivers.

And importantly, our shaver strength in these regions offset weakness in a key German market as converging to the Euro has led to market contraction this year.

In terms of the North America sales growth, it reflected the successful launch of the mid priced Flex 400cc shaver, which increased Braun's share to 20% in the quarter.

In the very important Japanese market, our Flex XP, the first Braun washable shaver, improved on it's number one unit position.

Together with the ongoing success of our top of the line Braun Syncro shaver, Braun's value share in Japan increased substantially to 31.8%.

In Europe and Ami, sales of our household appliances continued to benefit from the bankruptcy and related product line rationalization of [Mullenix], a key small appliance competitor in these regions.

At the profit line, Braun's quarterly profit of $22 million fell 8% from a year ago.

The key issues were significantly higher advertising spending behind new products, and the impact of the yen on our margin in Japan.

Unfortunately, these drags more than offset favorable product mix and cost savings initiatives.

Year to date, Braun sales increased 4%, with no impact from currency.

And again, growth growth was driven by the success of our new electric shavers.

Braun profit from operations year to date decreased $15 million to $25 million.

Higher advertising to support new products, and the yen impact on our margin in Japan offset profit growth from sales advances.

Turning to personal care.

Recorded sales in the quarter were up 1%.

But sales were dampened slightly by lower sales in Latin America, where the struggling economy in Argentina, and increased competitive pressures in Colombia, continue to affect volumes and pricing in this region.

Growth was driven by North America, Europe and the Ami markets.

In AMI, Russia contributed strongly with double digit gains.

In North America, there was a strong performance by our new Power Stripe deodorants and antiperspirants.

In fact, Gillette's U.S.

UNIX share in June rose to 20.3%, our highest level in three years.

In addition, our reformulated line of Gillette series shave preps, along with our restaged Satin care line, were well received.

Our U.S. value share of this category was boosted by 3 percentage points to 27.8%.

As an important side note, these products will begin their rollout to other markets during the second half of 2002.

Personal care second quarter profits fell 55%, down 330 basis points from a year ago.

The fall off in profit was driven by our efforts to revitalize this business.

In the quarter, we increased advertising to support new products by 50%.

But as they say, no good deed goes unpunished.

And unfortunately, the higher advertising more than offset not only our good sales gains, but the sales from manufacturing efficiencies, and our strategic sourcing initiative as well.

On a year to date basis, personal care sales increased 2%.

The key drivers over six months were similar to the second quarter.

Namely, new product success that was partially offset by currency evaluation and competitive activity in Latin America.

Profits from operations on a year to date basis decreased 17 percent to $16 million.

Higher sales and savings from our SSI initiative were again more than offset by increased marketing to support the new product launches as we begin to rebuild this franchise.

Now, let's look briefly as our business by geographic region.

Starting with North America.

Second quarter sales increased 5%.

The key contributors were many, and let me name them.

Strong blade razor growth with the continued strength of the Mach-3 franchise.

Strong gains in both power and manual oral care, due to the 3D Excel rechargeable, our new battery powered toothbrush, and strong trade acceptance of our new Stages line of children's manual tooth brushes.

Personal care also contributed to the upward trend, generating good growth in antiperspirant with the new Power Stripe line, and in shave preps, with the reformulated products.

Year to date, sales in North America were up 4%.

All business segments except Duracell drove these gains on the back of strength and new products.

Sales growth in the battery segment was tempered by increased promotional activity.

Turning to Europe.

Reported sales for the second quarter were up 5%, or down 4% in constant currency.

What is happening in Europe.

Well, growth was driven by the blade razor segment, reflecting a strong performance by Mach-3, and drew favorable comparisons with destocking activity in 2001.

However, sales gains were held back by significant weakness in the key German region, where convergence of the Euro has led to slower consumer offtake in a declining market year to date.

And this affected Braun more than our other businesses.

Year to date, net sales in Europe rose 7%.

In constant currency sales were up 4%.

Again, growth was attributable to the continued success of the Mach-3 franchise, and gains from 2001 destocking.

However, as just mentioned, sales were held back by weakness in consumer offtake related to Euro conversion.

In Latin America, second quarter sales were down 10% in reported dollars, but up 8% in constant currency.

Blade razor and oral care posted strong gains, while the Argentinian economic prices continued to depress sales across all business segments.

Year to date net sales in Latin America declined by 5%.

In constant dollars, sales grew 11%.

Blade razor and oral care generated substantial gains.

On the other hand, our personal care, Braun and battery segments were adversely affected by currency devaluation and competitive activity.

In the AMI region, comprising Africa, the Middle East, and Eastern Europe, sales in the quarter climbed 20% in reported dollars, and 24% in constant currency. in constant currency, all segments posted gains.

Blade razor [INAUDIBLE] by disposables in Russia, and continued momentum in the Mach-3 and Venus franchises throughout the Middle East and Mediterrainian.

In addition, continuing oral care gains from low end manual toothbrushes contributed significantly.

Year to date, Ami sales grew 20%.

In constant currency, sales climbed 25%.

These gains were due to substantial increases in Russia across all product lines, as well as the success of our entry level manual tooth brushes, and disposable blade razor products in developing markets.

Finally, Asia Pacific's recorded sales climbed 14% in the second quarter.

Excluding the exchange, sales grew 11%.

Mach-3 and Cool Blue drove growth in blade razors.

At the same time, Braun's Flex XP electric shaver in Japan, and strong gains in power oral care, also contributed to the overall advance.

Year to date, Asia Pacific sales rose 13%.

In constant currency sales were up 13% as well.

Significant growth in our Mach-3 franchise, the success of Braun shavers, and the strength in our manual and power toothbrushes were the main contributors.

Now I'll review the balance sheet for the second quarter, starting with working capital.

Receivables were down 12% from last year's second quarter at $1.2 billion.

We continue to improve day sales outstanding dropping 11 days, from 65 days a year ago to 54 days this year.

Progress was also made on inventories.

They were down 12% versus last year's second quarter, decreasing to $1.2 billion.

Our days inventory on hand, at 126 days, represented a 27 day improvement from last year's second quarter.

Accounts payable increased $169 million to $532 million, up 47% versus the second quarter a year ago.

Days payable outstanding increased 15 days, to 55 days from 40 last year.

Let's move on to CAP-X.

Capital expenditures were lower for the 9th consecutive quarter.

During the 2nd quarter, CAP-X decreased 40% from $162 million to $97 million.

This resulted in strong second quarter free cash flow of $353 million.

We also reduced our net debt by $117 million, or 3.5%, compared with year-end 2001.

To summarize our results for the quarter, operating performance was in line with our expectations.

Our initiatives are beginning to deliver, and we feel very good about the quality and transparency of our operating results.

Specifically, our cost savings initiatives are on track and our gross margin gains have offset the reinvestment in our brands.

Share performance continues to improve, especially in the key blade razor area.

Advertising investment increased significantly.

Both working capital and cash flow improved, and the cost to financing fell dramatically.

That concludes our discussion.

We will now take your questions and I'll turn the call over to the operator, who will explain the procedure for signaling if you do have a question.

Thank you Mr. Jakubic.

Today's question-and-answer session will be conducted electronically.

If you would like to ask a question, please press the star key followed by the digit one on your touchtone phone.

We will proceed in the order that you signal.

Once again, if you would like to ask a question, please press star one.

We will pause momentarily to give everyone an opportunity to signal.

We will take our first question from Jim Gingrich with Sanford Bernstein.

Please go ahead.

Good morning.

I thought the explanation you gave on the functional excellence program was helpful.

Can you give us a sense as well in terms of how you are expecting the savings from the sourcing program to track, as well as how the savings are tracking from last year's restructuring program?

Yes, in terms of the December 2000 restructuring program, as we mentioned in our annual report should be around $135 million, and that is tracking well.

We should be realizing, you know, the full impact of that by the time we reach toward the end of the year.

In terms of SSI savings, I think the original number that we gave out back in June of last year is about a $125 million of savings.

That is on track.

I see no reason to expect that we would not be delivering that again.

As the year progresses, you should be seeing that show up in the numbers.

Actually, I think sourcing savings were more than that, Chris.

But you know, you originally talked about it being a three-year --

Yeah, I'm sorry.

It is $250 million, I just got corrected.

Sorry about that.

You know, a hundred here, a hundred there. [laughter]

So it is $250 million over three years.

And we are on track to deliver that.

Can you give us a sense as to how that will flow over that time period?

No, not really.

I don't think we ever laid out an exact flow of that.

But, you are certainly seeing, as I mentioned the beginning parts of that show up.

Not only in the margin that were -- that we are reporting, but also from the perspective of it was big driver in reducing our inventories.

Okay, okay.

Just so that I'm clear.

In your other operating expense line of $568 million in the current quarter, which is telling us there was $30 million in there for supporting the functional excellence program.

Right, 31.

31.

Okay.

And then the other question I had was just again you sitting here with a lot of cash on the balance sheet.

Is there any thought at this point as to whether or not you are going to be stepping up or looking at share buybacks now that we are seeing the stock price down?

Jim, we will continue to look at share repurchase.

But right now our focus continues to be on debt reduction.

No change in that strategy.

I think we've a couple of times said as we get toward the end of year, we will relook our position in terms of the repurchase program.

We still have authorization for 27, 28 million shares under the original program.

But today it is debt reduction.

Okay.

Very good.

Thanks.

Thanks Jim.

We will take our next question from Wendy Nicholson with Soloman Smith Barney.

Please go ahead.

Hi, good morning.

Good morning Wendy.

Another question on the functional excellence.

The 350 to $400 million.

Can you walk through more detail exactly what that money is being spent on over the next couple of years?

There are numerous programs within that.

I think from a conceptional perspective it is addressing the different functions that go into overhead.

We are trying to get the best practices at the best cost.

A lot will be elimination of duplication company wide.

And really, you know, it goes beyond ZOG.

But I think to go into anymore detail than that, is just made of of numerous programs.

So it is not largely new systems, it is just a whole bunch of stuff?

Not new MIS or an expansion of SAP or anything like that?

No.

In fact, what it will do, those systems -- This is Chuck, Wendy.

With those systems in place now, they will form the backbone for some of the changes that we will be making.

Obviously, with a program as big as this, it is global in nature.

It does require some significant changes in infrastructure, changes in the way we do business.

But all that is going to be facilitated significantly by the systems we already have in place.

The other piece of it is, don't forget we are investing in improving our own capabilities, and that is in terms of personnel developments, skill sets, etc..

So there's two big components there.

Get our costs down, and get our capabilities up.

Have you broken out how much of the 300 to $350 million in savings you plan to drop to the bottom line versus to reinvest in more marketing?

No, we haven't.

But we will -- I think from a planning point of view, the bulk or the larger percentage of the return will be reinvested in the business to continue to grow the top line, and strengthen the foundation of our strong share positions.

Okay.

And then, last question.

I think you give it to us on the razors and blade business but not on Duracell.

Can you give us the Duracell sales increase excluding the destocking in a year ago quarter.

it wasn't material, so the number we gave out would be the number including those comparisons.

I thought last year in the second quarter, you had 11% decline in sales, I thought a whole bunch of that was destocking.

I don't believe it was that large.

And you know, you have to also think about this year, year over year, the sales shift from Coppertop to Ultra, so most of impact is from those sources.

So I would have to get back to you in terms of, you know, what we might have reported last year.

Okay.

Thanks very much.

We will take our next question from Katherine Lewis with Morgan Stanley.

Please go ahead.

Hi, good morning.

Can you give us a sense of your competitive position in untracked channels for the battery business?

You know, it looks like more recently in tracked channels the shares have been under a little pressure.

How does the consumer take away look in tracked channels.

And then I have a follow-up.

We don't really discuss any particular client or specific channels.

But I think what you seeing is, you know, from two and a half channels representative of what you seeing overall.

Okay.

And then, in terms of inventory levels at retail for batteries.

You know, how many weeks are out there now, and do you think the inventory levels need to come down a little bit more?

I think what we are seeing, certainly over the first part of the year, retailers did take their inventories down a bit, you know.

And I think that is more symptomatic of retailers just going after incremental cost savings.

I don't have a number for you in terms of weeks out there.

But I think we are at a, you know, a level that I think will be appropriate going forward.

You may see over time retailers bringing their inventories down a bit more as they get more efficient.

But I don't think you are going to see anything you know quite significant in anyone given quarter.

Okay.

And then in terms, again, on the competitive position in batteries.

You had mentioned one of the branded players was a lot more promotional.

You know, what have you seen, say in the last month or two?

Is your expectation that this will continue going into the second half and beginning part of '03?

I think as I mentioned in my opening comments we remain concerned.

As I said, one of our competitors did -- their average price for quarter was below that of private label in terms of you know net price per cell.

And we have said that the category remains problematic.

I think we have definitely established a that we won't lose share, and we will manage our price gaps to maintain share.

And I think you know as we have said, with -- price and promotion is no longer the game to play, we approach the whole management of our price gaps as more of a maintenance activity at this point.

And really, the market is going to dictate whether that is high maintenance or low maintenance activity.

We have got to say is that we are pretty happy that we have been able to make significant efforts to refocus on our consumer proposition over the past year, making performance enhancements and changing our packaging, reemphasis on the Coppertop, and we started to advertise again.

And at the same time we are doing that, we are making progress towards our goal of industry leading margins.

Okay.

And then, just for clarity.

You had mentioned the $135 million in restructuring savings, 250 in strategic sourcing.

How much savings have you achieved in both of those programs to date?

In terms of the restructuring program, and that is the 2000 restructuring program, that program is now completed.

Our run rate, as we run out of the second half of the year, incorporates that $135 million.

What's important is that that is helping us to further fund other initiatives in the P&l, so it is not an automatic drop down.

In terms of the SSI savings, I don't think we've actually quoted a specific number in terms of the quarter, or year to date.

But we are well in line with our own internal plans for drawing that from the 100 to $250 million numbers that Chris is quoted

Okay.

Great, thank you.

We will take our next question from Amy Chasen with Goldman Sachs.

Please go ahead

Hi, good morning.

The first question is Duracell.

Your profit improved dramatically there, despite the fact that you increased promotion, and obviously there was a negative mix impact that you discussed.

Can you just talk a little bit about what was driving that?

I'm assuming that it was aggressive cost savings and if so, that would suggest that most of the improvement was in your international margins.

Is that correct?

I don't know if I would make that assumption.

But, I think the prospective to take, and similar to you know what is driving gross margin gains and overhead reductions, you know, firm wide, it has been the SSI 200 restructuring, and our ZOG initiatives.

So it is the combination of those.

I don't think we have indicated whether it is -- whether we have seen more gains in North America or internationally.

At meetings with Jim Kilts, he did suggest that your U.S. margins were in line with your competition, but that your international margins I guess had much room for improvement.

So I mean, are we seeing the improvement in the international margins?

Yeah.

I think, as Jim mentioned, we do have perhaps more opportunity in the international margins because they are a bit lower.

But I think we have got equal opportunity to raise the U.S. margins as well.

And on the charge that you took in the quarter, the $31 million.

Is it fair to say that most of that was Duracell related?

No, it is not.

It is spread across all product lines.

And it is a lot of it infrastructure related, so it would be spread across all product lines

Can you give us some idea, if we think about your two biggest businesses, blades and batteries, where the bulk -- I mean, where the bulk of the cost savings is going to be?

In other words, do equal opportunities to improve your blade margins as you do to improve your Duracell margins?

Amy, as I mentioned, what functional excellence is, it's targeted at our overhead.

So -- and as I mentioned, the costs are going to be allocated, you know, per project based on net sales in a given region where the activity is happening.

So I don't think -- I don't know if that is necessarily the right way to look at it.

Okay.

Just two last questions.

Your accounts receivable and inventory days continue to improve, and I think every quarter you guys keep saying we are where we want to be don't look for a lot of improvement, and you come in better than we thought.

Can you comment and on that, and why is coming in so much better than you anticipated?

The second half of the question is I think focus and commitment.

It is interesting, Amy.

In the old days we used to talk about sales and PFO, and as an afterthought we would talk about working capital.

Today when I travel around the Gillette universe, virtually the first thing we talk is about the working capital initiatives and improvements.

I think in terms of the receivables and the payables, we'll continue to look at terms that we're offering, whether they are competitive in the markets in which we're operating against the trade channels in the product line.

So our comments that hey, we are more or less where we should be I think is there.

Other than minor improvements to come possibly.

I think area of inventory we still have significant ways to go.

I think we shared with you that we would like to overtime move down to about four turns a year, and that still remains an objective for us.

And Amy, if I could just add on that. it's a -- I think the perspective to take, because obviously the comparisons will be getting a little bit more difficult.

And I think you know the big gains, the corrective actions are behind us.

I think the focus now is more like we are striving for continuous improvements.

Okay.

And just last question on the sales growth.

Obviously sales in the first half were, you know, strong, better than I had anticipated.

Is there any reason to believe that we can't continue to see 5 or 6% sales growth into the second half of the year?

Well, I think, Amy, if you come back to where our comments were on this call, a quarter -- you know, last quarter, the way we described how the Euro probably will unfold is, you know ,first half would be driven more by you know sales and -- sales gains and mixed benefits, where as the second half is going to be much more about you know cost savings as you see in a more full manner our ZOG, December 2000 and SSI come through in a bigger way.

Okay, but -- and I understand all of that, and so your EPS growth should accelerate.

But is there any reason why the sales growth would decelerate?

I mean, there is nothing that I see in the last two quarters that shouldn't continue into the second half, except maybe for a little bit of easier comp and destocking comp.

Don't put words in my mouth in terms of excellerating EPS growth, because we'd start getting into the area of guidance.

But, I think what certainly what you saw in the first half, you know, comparisons with destock we were shipping below consumption, was very big factor in the first half of 2001.

And I think on destock, we are getting to the point where it is not even one percentage point for the entire company.

In fact, it was even less than that in the quarter.

Analyst: So it sounds like you think that sales growth will decelerate, is that fair?

[laughter] No guidance.

Okay.

Thanks.

We will take our next question from Sally Desloche with J.P. Morgan.

Please go ahead.

Yes, good morning, everyone.

I guess a couple of questions.

First of all, I wondered if you could talk a little bit more about what you are looking for in the personal care business.

I mean, it sounds like the step up in advertising expense was the big hit to profits in this quarter.

And just kind of backing into it sounds like it might have been as much as 7 or $8 million in incremental advertising expense.

Would you expect that to continue in the second half?

We wouldn't really quantify what the amount would be on a quarterly basis in any one division.

But I think as you look at the business, and the way we have described it in the past is that you know, a reinvestment in the business.

The progress that we should make on personal care is almost a one year lag with the rest of company, in the sense that Joe [Scalza] came in, you know, late last year.

And, you know, that is his main project is to turn around the franchise.

So if I read between the lines in what you just said, we should continue to expect personal care to be a little bit weak on the profit line for another couple of quarters?

That would be fair.

Okay.

And just -- the way I got that 7 or 8$ million of incremental expenses, I just looked at the difference between last year's margins and this year, and applied to it sales and got that $7 to $8 million.

And if I'm in the ballpark, it would appear that the personal care advertising increase constituted maybe as much as half of your year over year increase in advertising expense this quarter.

Am I off base in concluded that?

It sounds a bit high.

Sounds quite high.

But, yeah, I would have to get back to you on that.

There are ups and downs in other product lines, so --

Okay. because I guess I was just trying to get a better sense of what was happening X personal care, and whether we should expect to see the advertising continue to ratchet up from this level, or whether this is a good run rate.

I mean, 8% of sales, is that a good number do you think?

Yeah.

I mean, I think -- That is what Jim talked about in the past.

And I think you are seeing the advertising investment work.

And that is our objective, as we've mentioned in the past, to improve the quality of the income statement, and that is one of the main criteria.

Okay.

And then, just going back to the promotional spending that gets netted off of gross sales.

I think you indicated that in the aggregate for the total company that, you know, that was something like a two point reduction to gross sales to get to reported.

And I'm just wondering, I know you won't break that out business by business, but I wonder if you could walk through the businesses, and say which ones saw a reduction greater than the corporate average, and which ones saw a reduction less than the corporate average.

Yeah, it is really mainly been driven by Duracell.

And you know, to a degree oral care.

I think that is really where you are seeing that activity.

What we have, Sally, is an uplift in both allowances that go between the gross sales and the net sales in those two product lines, Duracell and oral care.

The Duracell, the competitive situation where we're bound and determined to maintain our share, and the oral care reflects the competitive environment out there, particularly on some of the power products.

Okay, great.

Well, then based on that, we can probably back into what those look like on the individual businesses.

And then just finally, I wonder if you could share with us what your foreign exchange assumptions are for the balance of the year.

I know foreign exchange was neutral this quarter but frankly, the strength in the Euro developed kind of late in the quarter.

So I'm wondering whether you would see foreign exchange being a benefit in the second half, and if so, do you expect that to drop to the bottom line?

yeah, I think -- In Europe, you probably have more dedicated resources to try to figure that out.

I mean, we came in today and the Euro dipped back below a dollar.

So it is a difficult call.

I think way to think about it is that, you know, we set out a target of 3 to 5% top line growth, you know, per annum as one of our objectives.

And I think as Jim has mentioned in the past, is our results are coming in, you know, according to plan.

If we do run ahead of plan, if Jim can accelerate spending for the future behind either franchises or cost structure, he will do so.

But, you know, at the same time, we want to, and we are comfortable in our ability, to outperform you know, the group over time.

Just a little add-on to that.

As I think about currency, it is great to see the Euro back up close to parity with the dollar.

But you're right.

It came quickly and very late in the quarter.

Really only had an impact on one month.

And as quick as it came in, we could lose it again.

That is a volatile situation.

The other thing is, I continue to be worried about two major geographies.

The first one is Latin America, and what the impacts are in brazil and Mexico.

And then over in Asia, particularly in the Japanese market where we have seen the strength recently.

But as you know, that one too has a 10 to 15% volatility in it.

So it is not all rosey with the Euro [INAUDIBLE] right now, but I sure am glad to see it up there close to parity.

Okay, great Thanks, Chuck, thanks Chris.

We will take our next question from Carol Wilke with Merrill Lynch.

Please go ahead.

Thanks.

I just wanted to get clarification on one thing.

I think earlier in the call you said blades and razors X destocking would be up 7%.

But then Chris, I think a few minutes ago you said it is really more less than a one point difficult retail between consumption and the whole destocking.

Can you go over that one more time?

Because I know last quarter's very helpful in terms of what consumption was versus, you know, [INAUDIBLE] the destocks.

Right, right.

No, you're right. it was -- Blade razor was up 7% excluding the destock.

The impact from the destock comparison was less than 1 percentage point on total company sales.

Oh, I see.

And so is it -- the consumption at the retail level running at about 7% as well?

I'm trying to think.

Yeah, maybe -- maybe a little bit less than that, a little bit less than that..

Because there was some sell-in of the Turbo?

Right, right.

And just one other question.

On the battery business, the negative spread between volume and sales.

Are you seeing a negative spread between the volume and sales numbers in all of your geographies, or is that mostly the U.S.?

And would you expect it at about 7 points -- given the promotional heavy activity, is that just assumed it's going to continue?

I don't know if we want to quantify a number, but it is mainly the U.S., yes.

I mean, as we have mentioned, I think that's the, you know, when we talk about the category of remaining problematic, it definitely is a North American phenomenon.

Analyst: And by your calculations for the total category growth for the quarter on a volume and sales basis?

This past quarter?

Yeah.

I would have to get back to you on that, I don't have the number in front of me for the category.

And just finally, if you run through this I apologize.

You didn't seem to have the negative mix issue from the blades and razor business.

It sound like you were expecting coming into the quarter, because of Mach-3 Turbo.

So did that just not materialize because the blades, you could use on the regular Mach-3?

Right, the offtake on the Turbo blades was very good, and I think other thing is you did get the mix effect.

And I think we said this in the last quarter call, was that because of the comparison with the destock in 2001, you should have expected a bit of mixed benefit, you know, from the comparison perspective.

But, you know, that said, yeah, probably got a little bit better on the Turbo launch than we anticipated.

So the positive mix should continue even though you lapped the destock?

Because wouldn't this have been the biggest quarter for handle hit?

It should well have been.

Okay.

Thanks a lot.

We will take our next question from Bill Steel with Bank of America Securities.

Please go ahead.

Thanks.

Chuck, could you tell us what cash flow from operations was for the quarter?

I know you gave us free cash flow, but do you have that --

You and I have had this conversation before, and we constantly have different numbers.

And quarter on quarter is tough.

I haven't got it right here in front of me, Bill.

I'll have Chris get back to you on that.

Or do we, Chris?

Yeah, yeah, um --

Isn't it about 430?

You know what Bill?

Why don't I give you a call after the call, because I want to make sure our definitions are lining up.

Okay, okay.

And then, just --

I would have it a little higher than that Bill, but I'm going from a couple of scratches here.

Okay.

And then just, regarding the payable line item in particular, which obviously contributed quite a bit to cash.

What is the strategy there?

We went out and benchmarked a couple of things.

The first one, first one we benchmarked was ourselves, and are we adhering to the terms that we have with our suppliers.

Or are we paying a little bit quicker than we needed to.

Then the second thing we did is benchmarked against what our peer group companies are doing country by country.

What we found were a couple of things, one, yes, we were a bit on the accelerated on the pace of payment.

And the second was we were in fact I guess generous in terms of the terms we were dealing with, and we did change our terms with most of our key suppliers.

And when you look at the 15 days that we picked up, it is basically that change in terms.

And that was a total global initiative that we kicked off.

Then last question, Chuck.

Of the $980 million, why don't you use it to pay down your revolver?

Why are you building cash, which is obviously at a fairly low interest rate.

The revolver is just a back-up to my commercial paper.

There is nothing outstanding on that.

That is just the stand by we are required to maintain our commercial paper program.

Okay, great.

Thank you.

We will take our next question from Ann Gillan with Lehman Brothers.

Please go ahead.

Good morning.

Morning Ann.

I don't know if I have the correct notes from a year ago, But I think a year ago you talked about a trade destock hitting Duracell by about 4% -- little under 4%.

Like I said, I will have to go back to notes on that, and we will have to get back to you on that.

Okay, understood.

I'm just -- I'm trying to understand the benefit you've got from the volume side at Duracell this quarter.

I know it is a stronger quarter volumewise than Q1.

But your sequential improvement was larger than we thought.

In profit terms.

So I'm wondering how much of that --

In terms of profit?

Because of the higher volume.

Yeah, I think most of the profit gains were again more due to the cost savings initiatives.

As opposed to, you know, pushing more volume through.

Okay.

Okay.

And then, last question is on Euro conversion.

Can you just give us sense as to what the consumption levels are for products that Braun is selling in Germany?

Well, actually it is hitting more than just Braun.

You know, I think in terms of Euro conversion, the core issue is really German retail offtake post convergent to the Euro.

If you speak to the European retail analysts, you talk to either the auto makers, electronics makers, they are all seeing the impact.

And it tends to be with the higher price point devices.

So Braun took a bit of a hit.

Our power oral care would have taken a hit.

And then in relation to that, I think the softening in, you know, the general purpose battery market in Europe would have had a knock-on effect on that.

So that is really you know the issue.

In terms of our market shares and our brand franchises, they are still very strong.

It is really a consumption issue as people are adjusting to what in some countries looks like sticker shock from their perspective.

And again, I think you had a much stronger effect in the second quarter than the first quarter.

Why do you think it happened in the second quarter?

They got their currencies in the first quarter.

I think it is still an adjustment period.

You are working things out, and at the same time, once you got into the second quarter the perception from what I understand is that, you know, retailers took the opportunity to raise prices.

Now, you know, that can be a function of a couple of things.

It was sort of an unwritten agreement that a lot of the retailers and manufacturers would not take price increases, you know, at the time of the Euro conversion.

So you probably got, you know, a bit of a bundling in a lot of price increases across the board as you got into April and May.

Okay.

And do you think that this might suggest that the pricing is not too aggressive, and that it has got to be pulled back a bit?

We haven't really seen any suggestion of that.

We are starting to see the impact abate a bit.

I think it is really more a matter of, you know, consumer perception, because it is not like we saw it across Europe.

It was more in say the German region, central Europe, where you know because of what the list prices had been on the old currency compared to what the list prices look like now under the Euro, there is a bit of a sticker shock there.

Okay.

Yeah, consumer confidence as well.

Yeah, between those and [INAUDIBLE].

Great, thank you.

We will take our next question from Connie [Menity] with Prudential Securities.

Please go ahead.

Hi.

I have two questions.

One is a follow on to what was going on in Europe.

I'm looking at it very simply.

If your local currency sales were down 4% and reported sales were up 5%, does that really mean that you had a 9 point currency benefit from the euro?

It would be euro, it would include the pound, and any, you know, the Swiss franc, because they're not in the euro either.

So it was a combination, it wasn't just the Euro.

As I remember, when you guys were harmonizing your businesses in Europe, it was my understanding that with all of the Braun pricing across Europe, you were harmonizing them more towards German pricing than say towards what the price had been in Spain?

So I'm a little confused as to why there is sticker shock now.

Well, I think that is, you know, that is a function of of the local consumer and what their perception of price is post conversion.

It's not that their -- you know, Germans are traveling to Spain and saying I'm paying a higher price at home.

It is more from a local perspective.

It is also a market phenomenon.

It is not just Gillette products.

It is what is happening in central Europe, and specifically in Germany, whether it is the car industry, the white goods industry.

I think all of it is reflective, when you take a look at some of the consumer confidence numbers that you see there.

They still are running unfavorable, negative.

Okay.

And one final question.

On the other income line, there was a $14 million swing between last year's second quarter and this year's.

I know they are small numbers, but what is in there?

$14 million swing --

I'm looking for a $14 million swing.

Yeah.

I don't --

I don't see --

I don't see a $14 million swing.

Oh, are you look at the exchange line by any chance?

Yeah, right.

It's --

yeah, that's -- Last year we had a transaction -- [INAUDIBLE] transaction losses, primarily in Turkey.

Remember that a lot of us who had business in Turkey -- consumer goods companies, all took a hit when Turkey went through massive devaluation.

So that is unmatched this year

Okay.

Thanks.

One more question, please.

We will take our last question from Rebecca Shinomen with Allstate.

Please go ahead.

Yes, thank you.

You had outlined the different drivers of gross margin.

And I was wondering if you could help to quantify that in any way, or at least you know let me know what the largest drivers were.

I think as we mentioned in opening comments, the December 2000 restructuring, it is strategic sourcing initiatives, and We did get a bit of mixed benefit in the blade razor business.

The shift from, you know, razors to blades in terms of the mix.

Those were the main drivers.

I don't know if we would be able to go into anymore detail beyond that.

Could you just tell me if you listed those in order of magnitude?

You know, why don't you follow-up with me after the call, and I would be able to probably go into that in a little bit more detail.

But I don't have anything in front of me right now.

Okay.

Great, thank you.

This does conclude today's question-and-answer session.

I will now turn the call back over to Mr. Jakubic for closing comments.

Thanks very much.

Starting at 1:30 today the recall of this call will be available.

It will run until Tuesday, July 30th at midnight, Eastern Daylight Savings time.

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Thank you, and have a good day.

This does conclude todays Gillette Company's second quarter earnings results conference call.

We do thank you for your participation, and you may disconnect at this time.