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Operator
Please stand by, we are about to begin.
Good day, and welcome to the Gillette company's third quarter earnings results conference call.
Today's call is being recorded.
At this time, for opening remarks and introductions I would like to turn the call over to Chris Jakubik, Vice President of Investor Relations.
Please go ahead, sir.
- Vice President of Investor Relations
Thanks very much.
Good morning I'm Chris Jakubic, Vice President of Investor Relations.
Thank you for joining us on our conference call for third quarter earnings.
Also joining us Chuck Cramb, our Chief Financial Officer, John Manfredi, Senior Vice President of Corporate Affairs and Eric Kraus, Vice President of Corporate Communications.
We may make forward-looking statements about the companies performance.
They are projections as of today and therefore contain an element of uncertainty.
Although actual results may differ materially, the company assumes no obligation to update these statements.
Please refer to the cautionary statements contained in the companies 10-K and 10-Q filings for more detailed explaination of the inherant limitations in such forward-looking statements.
Okay, housekeeping is done.
Now let's review Gillette's third quarter, 2002 results.
Let me start by saying results were in line with our expectations in both shape and content.
New product success across the company and continued trade offs were the key top line drivers.
Pricing was up two percent in the third quarter.
I'll be talking more about pricing later in this call.
Beyond top line turn around continued to increase.
Third quarter gross margins showed solid improvement, indicative that our SSI and restructuring initiatives over the past year are delivering.
And working capital savings continues to continue to strong free cash flow generation.
Importantly, we have generated $1.2 billion in free cash flow during the first nine months of 2002.
And this puts us on pace to deliver our target of $35 billion in free cash flow in 2002 to 2005.
Before we get into the details of the quarter, two quick comments.
First, please note that our quarterly earnings release is based on a comparison of 2001 results that reflects the reclassification.
Second, the year to date numbers quoted from here on out will exclude the one time gain on the sale of our rights in the Vaniqu business.
So for the nine month figures, the Vaniqu transaction resulted in -- now let's get into the numbers.
On a reported basis, net sales for the third quarter were $2.17 billion or 2% of last year.
Exchange was neutral to sales in the quarter, making this the second quarter in a row where currency had no impact.
Sales were driven by new product gains in almost every product category.
But these gains offset lower year over year shipments of disposable razors and batteries in North America.
In terms of pricing, as I mentioned earlier, it added 2% to sales growth in the third quarter.
This was driven by price increases in blade razor and to a lesser extent, lower trade spending for Duracell.
Somewhat offsetting the gains was higher year over year trade spending in oral care.
What about year to date sales?
Well, year to date, net sales rose 5% to $5.92 billion.
In volume accounted for entire 5% while pricing and exchange were both neutral.
Moving on to third quarter gross profit margin, increased 270 basis points to 59.3%.
So as expected, margin enhancement became the main driver of earnings growth.
What were the key contributors?
Four things.
Cost savings from the December 2000 restructuring, strategic sourcing initiative, favorable product mix in our blade razor business and cost savings and lower trade spending with Duracell.
Now partially offsetting these gains were higher promotional spending and unfavorable product mix in oral care.
Through nine months, gross margin was up 80 basis points.
Driving a gain were favorable blade razor mix and savings from SSI and restructuring.
But these positives were partially offset by higher year over year trade spending and unfavorable product mix shifts in Duracell and oral care.
To marketing, total spending on a reported dollar basis grew 2% in the quarter, year to date, spending was up 7%.
Within marketing, advertising in the third quarter was up 1% to 7.4% of sales.
It was 7.5% last year.
Year to date, advertising spending was up 8%, and this was driven by higher investment behind both new and established products.
Sales promotion in the third quarter increased slightly as a percentage of sales from 3.3 to 3.4.
This was mainly due to increased support behind new oral care and Braun products.
Through nine months sales permotion as a percent of sales was unchanged at 3.8%.
Let's move to overhead and other expense now.
In the third quarter, overhead and other expense was up from 23.5% to 24.5%, excluding functional excellence expenses, overhead and other expenses, effectively flat as a percent of sales.
Year to date, overhead and other expenses down 27.3% to 27%.
And that reflects the savings from the December 2000 restructuring and ZOG efforts.
In terms of the functional excellence initiative, we booked $17 million in incremental expense in the third quarter and booked $48 million year to date.
For the full year 2002, we now expect to expense between $80 and $100 million, depending on the timing of programs.
Note that that's up slightly - versus the $80 million estimate we gave during the second quarter conference call.
Now, back to our third quarter P&L and profits from operations.
In the third quarter, profits from operations grew 10% versus last year and the margin expanded 180 basis points to 24.1 percent of sales.
As a side note, the adoption of FAS 142 resulted in a third quarter decrease in amortization of $9 million compared with a year ago.
For the first nine months, profits from operations climbed 9% to $1.27 billion.
Although -- other prices continued to decline.
We charge of $35 million from $44 million in the third quarte of 2001 to $9 million this quarter.
This was primarily the result of lower interest expense.
Net interest expense was down because of strong cash flow and significantly lower rates year over year.
Through nine months, other charges dropped 73% or $100 million.
The main drivers were two fold.
First, interest expense decreased in each quarter.
And second, transactional gains matched up against exchanged losses arising mainly from Turkey.
So as a result of everything discussed thus far, pretax income was up a very strong 20% versus last year's third quarter at $513 million.
Net income rose 20% as well to $354 million while the tax rate was unchanged at 31%.
And finally, fully diluted earnings per share rose 18% to 33 cents.
That is up from 28 cents last year.
Year to date, net income again, excluding the Vaniqu gain rose 20%.
And fully diluted EPS was up 19% to 80 cents.
Now third quarter by product line.
We will talk about the blade razor division first.
Blade razor sales rose 3% or 4% in constant currency.
What happened at the sales line?
Well, our sales growth slightly lagged global consumption growth 4.5% in the third quarter, due to the timing of our 2002 promotional activity which translated into unmatched shipments of disposable razors year over year.
The sales growth were strong system sales worldwide, higher pricing and ongoing trade-up to our Mach3 and Venus franchises.
In fact, the trade-off to and the growth of Mach3, Mach3 Turbo and Venus remains exceptionally strong.
Let me give you some data to illustrate the point.
In the U.S. in the third quarter, Mach3 and Mach3 Turbo and Venus combined for a 40% value share of the entire blade razor market.
And after only six months on the market, Mach3 Turbo was the number 3 blade razor brand behind Mach3 and Venus a 10% dollar share.
Sales are 50% ahead of Censor Excel razors and Censor Excel blades.
And launch the blade dollar sales are three times Censor Excel on a comparable launch pay sis.
On a global basis, our Mach3 and Venus franchises delivered constant blade growth of 22% year over year in the latest ratings.
Blade share for the Mach3 franchise was up three points to 24%.
And Venus blade share was up 1.7 points to 5.4%.
Importantly we will begin shipping Mach3 in Europe thisJanuary for a fourth quarter launch across the region.
Gillette disposable razors continue to improve.
Our global unit share remains stable versus a year ago and our unit share in the U.S. grew slightly despite a highly promotional market environment.
Let's turn now to profits from operations in the blade razor business.
Third quarter blade razor profit was up 14% and margin climbed 410 basis points to 42.5%.
What caused the increase?
Three things, growth in Mach3 and Venus franchises globally, favorable systems versus product mix and SSI savings.
Importantly, these gains more than offset incremental functional excellence expenses and higher manufacturing costs due to the strong Euro.
On a year to date basis, blade razor sales rose 8% in contant [INAUDIBLE] the increase was 10%.
This was driven by success of premium shaving systems, plus favorable comparisons to 2001 when we were selling below consumption.
Year to date, blade razor profits from operations was up 18% and margin rose 330 basis points.
The reasons behind these strong year to date grains same as those given for third quarter with one exception.
That is the destocking comparisons were a driving factor during the first half of 2002.
Now, before we move on to the Duracell battery business, I want to make a quick but important note on blade razor pricing.
Last year at this time, we announced a price increase that would be effective January 1 of 2002 for our North American retail customers.
The increase was 4% on blades excluding Venus.
In the fourth quarter of 2001, we experienced a pre-price increase buy in of approximately two weeks in North America.
That was equivalent to $50 million in sales.
This year, we will not have a price increase effective January 1, 2003, therefore we anticipate no pre-price increase buy in in the fourth quarter of 2002.
However, we have announced to our trade partners in North America that we intend to increase prices on the blade razor products around February 1, 2003.
And similar timing will occur throughout Europe.
Let's turn now to Duracell.
In the third quarter, Duracell sales declined 4% or 5% in constant currency.
There were three positives to highlight here.
First, our European business showed strong unit gains.
And Duracell increased value share 42.3% of the European alkeline market and the latest market share reading.
Second, sales in our North American business benefited from lower trade spending year over year.
And third, from a global perspective, copper top year to date value share increased two points versus last year to 37.8%.
However, four factors led to the sales decline.
First and formost, lower shipments in North America due to share loss as we pull back on promotional spending.
Second was the ongoing shift in product mix from ultra copper top which continued to press the top line.
And then the pack size mix related to the retail channel shift in sales towards mass merchandisers and club stores, and finally category weakness in Latin America.
Turning to profits from operations, well quite a different picture.
Duracell's third quarter profit rose 41% from a year ago to $78 million.
Profit margin expanded 520 basis points to 16%.
Yes, that is solid performance.
And importantly, it remains impressive after taking out the effects of lower year over year trade spending.
In the third quarter we made significant increases and these began to pay off.
On a year to date basis, Duracell sales declined 3%.
Behind the numbers, favorable unit shipments were offset by increased promotional spending and the adverse shift in product mix previously mentioned.
Profit from operations year to date was 123 million down 8% versus last year.
This performance was heavily related to the first quarter off withdrawing hearing aid batteries but higher promotional spending in the first and second quarters and unfavorable mix shift also contributed to the decline.
Now, in terms of the health of the U.S. battery category, at the risk of being repetitious, we do remain concerned about the high level of promotional activity by our competitors.
The U.S. battery category remains problematic in that promotional activity continues to be escalating on both branded and private level competitors.
It has been where we see zero profit lift from incremental promotional spending.
That said, we will make sure we meet competitive offers in the important fourth quarter.
Looking at 2003, however, the 2003 programs that we are now taking to retail trade customers substantially reduce Duracell pre-sale activity, promotional frequency and promotional depth, and instead will focus our efforts on the consumer, especially through significant funding behind our trusted everywhere advertising campaign.
Now let's move to the oral care segment.
In the third quarter, sales rose 7%, in constant currency sales grew 6%.
These gains were paved by high single digit growth in the manual and power toothbrush segment driven by new product introduction.
Somewhat offsetting the gains were unfavorable pricing and higher promotional support in light of increased competitive activity in the battery powered brush segment.
In manual oral care, sales gains reflected highly successful north American launch of our Oral-B Stages line of children's toothbrushes.
This success of the redesigned and restaged entry level had strong growth in Russia from our exceed, vision and [ inaudible ] toothbrushes.
Increases included top of the line rechargeable power toothbrush in North America, battery market share in North America and Europe and strong rechargeable gains in Asia.
Third quarter profit from operations in oral care fell 12% to $60 million.
Operating margin was down 390 basis points to 18.8%.
What happened here?
Well, increased sales from new products and improved factory performance were offset by several factors.
We had incremental expenses related to the write down of excess property we are no longer using.
We had unfavorable mix shift to battery brushes.
Higher advertising and promotional support behind new products, and unfavorable pricing and higher trade spending in light of the increased competitive activity in the battery segment.
Year to date, oral care net sales climbed 8%.
Gains reflected strong growth behind success of new product introduction in the manual and power segment.
Oral care profit from operations year to date was $163 million unchanged versus a year ago.
And this was due to gains from new products and cost savings that were offset by increased marketing spending.
Let's turn now to Braun.
In the third quarter, Braun sales rose 8% or 5% in constant currency.
The sales upside was driven by strong electric shaver performances in North America, Japan and the AME region and reportedly our shaver strength offset weakness in the German market as conversion of Euro has led to slow offtake.
In terms of North American sales it reflected the successful launch of the mid prize the Flex 400 CC shaver which increased the share to 20%.
In the very important Japanese market, the Flex XP the first Braun washable razor improved on its number one unit share position.
And to the with the ongoing success of top of the line shaver, Braun's value share in Japan increased to 33.1%, up 4.3 share points versus last year.
At the profit line, Braun's quarterly profit of $22 million fell 12% from a year ago.
The key issues here were incremental costs related to functional excellence, higher advertised spending and the impact of yen on our margin in Japan.
Unfortunately these drags more than offset favorable product mix from cost savings initiatives.
Year to date, Braun sales increased 5% or 4% in constant currency.
Braun profit from operations year to date decreased $18 million to $47 million.
Higher advertising to support new products in the end impacted on our market in Japan offset profit growth from sales.
Turning to personal care.
Reported sales in the quarter were down 1%.
Sales were dampened by two factors here.
Lower sales in Latin America where the struggling economy in Argentina and increased competitive pressures in Columbia the continued to affect volumes in pricing.
And secondly, higher trading in consumer spending to support new products in the U.S.
Unfortunately, these factors combined to offset good underlying unit growth in North America and the AME markets.
In North America, the new power stripe anti-perspirants and deodorants continue to grow market share.
And the Satin Care line were well received.
The value share increased by 1.2 percentage points to 25.1%.
In AME Russia contributed strongly with double digit gains.
Turning to profit from operations, personal care third quarter profits fell 40% down 530 basis points from a year ago.
This falloff in profits was driven by efforts to revitalize the business.
In the quarter, we increased advertising to support new products by 35%.
Importantly, this is an investment year in personal care in the sense that higher advertising and promotional support is more than offsetting our new product successes and savings from manufacturing effeciency in our strategic sourcing initiative.
On a year to date basis, personal care sales increased 2%.
The key drivers were similar to the third quarter.
Mainly, new product success that was partially offset by currency devaluation and competitive activity in Latin America.
Profit from operations on a year to date basis decreased 31% to $33 million.
Again, higher sales and savings from our SSI initiative were more than offset by increased marketing to support the new product launches as we begin to rebuild the franchise.
Now let's look briefly at our business by geographic region.
Starting with North America, third quarter sales decreased 2%.
Softness in Duracell set strength in other categories.
The Venus franchise behind crystal clear.
Blade razor gains were offset by the declines in disposable razors due to the promotional timing that we talked about earlier.
And oral care, growth was driven by strong trade acceptance of our Advantage Plus and new Stages line of children's manual toothbrushes as well as ongoing growth of patry toothbrushes.
Braun saw strong growth by the nail care success.
For Duracell, an aggressive promotional environment, soft category growth and negative product mix combined for significant reduction in sales year over year.
Year to date, sales in North America were up 2%.
All business segments accept Duracell drove these gains on the strength of new products and sales growth within the battery segment was tempered by increased promotional activity.
Turning to Europe, reported sales for the quarter were up 12% or up 3% in constant currency.
In contrast to North America, Duracell was key contributor to sales growth, increasing penetration and excellent share performances in the U.K. and France were the key drivers.
Growth was also driven by the blade razor segment.
A successful Mach3 sampling program during the first half of the year is showing promise of strong second half follow through, including the stage for our Mach3 turbo launch in 2003.
However, sales gains continue to be held back by significant weakness in the German region where conversion to the Euro is slower offtake and declining market year to date.
This affected Braun and oral care most significantly.
Year to date, net sales in Europe rose 9% in constant currency sales were up 4%.
Again, growth is traceable to the continued success of the Mach3 franchise and gains from 2001 destocking.
However, as just mentioned, sales were held back by weakness consumer offtake related to Euro conversion.
In Latin America, third quarter sales were down 20% in reported dollars but up 1% in constant currency.
The economic crisis in Argentina and currency devaluation elsewhere in the region resulted in sales declines across all business segments.
We have worked hard all year to hold shares in declining markets, however trade down to lower price competitive products is picking a reality in some businesses in the region.
That said, we have been aggressively managing our costs to offset the effects of devaluation.
In year to date, net sales in Latin America declined 10% but in constant dollar sales grew 7%.
Blade razor and oral care generated substantial gains on a local basis.
On the other hand, our personal care, Braun and battery segments were a adversly affected by both competitive activity and devaluation.
Turning to the AME region, Africa, Middle East and eastern Europe, sales in the quarter declined 4% in reported dollars and 6% in constant currency.
Blade razor strength was driven by disposables in Russia and continued Mach3 and Venus throughout Middle East and immediate trainian.
Continuing oral care gains from low end manual toothbrushes contributed significantly and Braun delivered strong growth as well.
In particular, Russia has continued to perform well, is now one of Braun's top 5 markets in the world.
Year to date, AME sales grew 14%, in constant currency sales climbed to 18%.
And these gains were due to stub stantial increases in Russia across all product lines, as well as the success of our entry level manual toothbrushes and disposable blade razor products in developing markets.
Finally, Asia Pacific's reported sales climbed 11% in the third quarter, excluding exchange, sales grew 8%.
Mach3 and Cool Blue drove the growth in blade razor.
At the same time, flex XP electric shaver in Japan and strong gains in power oral care contributed to the overall advance.
Year to date, Asia Pacific sales rose 12% in reported and constant currency.
Significant growth in our Mach3 franchise, the success of our Braun shavers and strength in our manual and power toothbrushes were the main contributors.
I'll now review cash flow and the balance sheet for third quarter, starting with working capital.
Receiveables were down 19% from last year's third quarter from $1.5 billion to $1.2 billion.
We continue to improve day sales outstanding as well.
Jobbing 13 days from 64 days a year ago to 51 days this year.
Progress was made on inventories.
They were down 10% versus last year's third quarter.
Our day's inventory on hand at 124 days represented a 20-day improvement from last year's third quarter.
And accounts payable increased $167 million to $519 million up 47% versus the third quarter a year ago.
Days payable outstanding increased 17 days to 55 days from 38 last year.
In terms of CAP-X, capital expenditures were lower for the 10th consecutive quarter.
During the third quarter, CAP-X decreased 21% from $130 million to $103 million.
This resulted in very strong third quarter free cash flow of $627 million.
We also reduced our net debt by $568 million or 17% compared with year-end 2001.
And for those look at the balance sheet, you will notice an increase in the contingent value put option.
Now the put options represent approximately 8 million shares and will be used to continue our share repurchase program.
Under that program, our current authorization is for 125 million shares of which 94.1 million shares have already been repurchased.
So to quickly summarize our results.
Consumer or trade acceptance of important new products and the success of cost saving initiatives drove a 20% increase in net income in the third quarter.
In fact, we feel very good about the quality and transparency of our operating results through nine months of the year.
Specifically, our cost savings initiatives are on track and gross margin gains have offset the reinvestment in our brand.
Share performance continues to improve, especially in the key blade razor area in working capital and cash flow improved and 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.
Operator
Thank you, the question-and-answer session will be conducted electronically today.
If you would like to answer ask a question, do so by signaling us to by pressing star 1.
If using a speaker phone, make sure your mute function is turned off to allow your signal to reach our equipment.
And in the interest of time, limit yourself to one question.
We will take as many questions as time permits.
Once again, that is star 1 to ask a question.
Our first question from Kathryn Lewis from Morgan Stanley.
You mentioned the profit lift from Duracell.
Can you -- or have you reassessed you know the opportunity to roll back prices, Duracell prices at retailer shelves considering you know the GAAP versus private label and some of the share loss that we have seen?
- Vice President of Investor Relations
Yeah, Kathryn.
Thanks for the question.
We have not changed our intention within the business from the perspective of maintaining our market share.
We did say we received zero profit lift from incremental promotional spending but will make sure we will remain competitive in this important fourth quarter.
We will let the market dictate how competitive we get.
That I think that is the perspective to take.
As we mentioned in 2003, the programs we are now taking to our retail trade customers substantially reduced the free sale activity and the promotional frequency and depth.
And that is being well received.
So then the trigger going for the trigger for price concession on the shelf would be further share loss, is that how you thinking about it?
- Vice President of Investor Relations
Well, we are look to maintain market share over time.
There has been no pull back in that sense.
As I said, the key question is -- or rather you know I think what is going to drive our activity on a go forward basis is like I said, letting the market dictate how competitive we get.
And just lastly on pricing.
You mentioned you know the outlook for blade pricing, so it sounds like it is just a shift, roughly a penny or two from first quarter to first quarter; is that correct and do you, are you look for similar magnitude in price increase in February?
- Vice President of Investor Relations
We haven't announced anything in terms of magnitude of price increase to our retail customers.
So until we do so, we can't really communicate anything the.
But in terms of yeah, the shift from the fourth quarter, yeah, that is appropriate.
Great, thanks.
Operator
Up next from Salomon Smith Barney we'll hear from Wendy Nicholson.
Good morning.
Two questions.
First on the Duracell business.
If we go back to Jim's comments 18 months ago about the battery business when he first came on board I thought stated strategy was to get the top line growing, get market shares up and he thought margins in the business sustainably ought to be in the low teens and I think he was clear about that, but now what we see is margins doing better than that and yet market share is not recovering and sales growth really not doing too well.
So is there a change in his thinking, do you think, about what the right margin level is?
Are we going to be looking at mid to upper teens or is this still a lower margin business than the rest of company?
- Vice President of Investor Relations
I think you sort of over emphasizing one quarter.
And I think we are very pleased with the tremendous progress we made on the profitability front.
I think just what happened in the quarter is just representative of what we see going on in the marketplace right now in the sense that you get zero profit lift from incremental promotional spending.
That is really what I think you really came out in the quarter.
But I don't think there is any change on our stance, certainly in terms of enjoying the same level of top line growth as the category has to offer by maintaining market share.
So he would say that the right margin level for the Duracell business over long term is probably not a 16% we saw in this quarter, that is an anomaly?
- Vice President of Investor Relations
Yeah, I think we have been saying low to mid-teens.
We will have to see how it plays out.
Had a good quarter.
Year to date is 10%.
So we are making progress and think we can continue to make progress.
Then I have a second question generally.
The gross margin was better than I was expecting and I wanted to know, you listed four reasons why the margins expanded so much.
The cost savings being the biggest portion, was that 50% of savings, and what I'm trying to get to is to understand the cost savings coming from the restructuring, do we still have several more years of that magnitude of cost savings or we just picking a lot of low hanging fruit and catching up this year so gross margin expansion may catch up next year?
- Vice President of Investor Relations
The gross margin expansion, obviously we are pleased with the progress we made there.
I did have a bit of blade razor mix come into the gross margin to help it out a bit.
But in terms of the restructuring programs, what we have done in terms of SSI, we said it was going to be $250 million in savings.
We are about midway through that.
In terms of the December 2000 restructuring, we said it would be $135 million by the end of this year and we are on track to deliver that.
And I think importantly, what you are seeing going on is the cot savings initiatives, whether it is SSI, December 2000 or even ZOG are delivering at the gross margin line and also providing the funding to reinvest in our brands and we are getting quite a bit of success behind the new products there and the functional excellence initiatives hold promise for future.
That is helpful, thanks.
Operator
Moving on, we will hear from Andrew McWilling from UBS Warburg.
Can you quantify the battery business in the third quarter.
- Vice President of Investor Relations
I don't think we will start quantity finding it to that level of detail, but I think similar to what you saw in the second quarter, the main driver was certainly the cost savings initiatives that we have been going after.
So it would have been primarily you know SSI, restructuring and lower product costs coming through.
Thanks.
Chris, can you expand on functional excellence, both the expenses as well as the timing of savings, how you see those, you know over say the year 2003, '04, and '0 5.
Can you talk about that yet?
- Vice President of Investor Relations
Yes, I think what we laid out, the total costs would be $250 to $400 million over to 2005 analyzed savings and by 2006 of $300 to $350 million and then you know, we gave you the update today for 2002 instead of $80 million it is going to be between $80 and $100 million, depending on the timing of the program.
We have done $48 million of that year to date.
And then looking at 2003 as we mentioned I think last conference call it would be up substantially from 2002 levels in terms of costs.
In terms of savings, I think what we are looking at is you know, savings coming through, but I don't think we will start separating out savings for you as we realize them because we will than -- they will be used to fund higher investment in our brands and you know as well as other -- other initiatives such as higher levels of funding for training and development.
Fair enough.
And how about just the roll over of when savings start to exceed costs within the functional excellence program, timing?
- Vice President of Investor Relations
Yeah, we said the last quarter was 2004 when you make that cross over.
Terrific, thank you.
Operator
Our next question comes from Amy Chasen with Goldman Sachs.
I just wanted to go back to Duracell for a second.
In the third quarter, if we take a look at total marketing spending so you know trade sending, sales promotion and advertising, was that up or down.
- Vice President of Investor Relations
I'm sorry, the trade spending or advertising promotion?
The total, if you add them all together.
- Vice President of Investor Relations
Oh I see.
Yeah, yeah.
No, it would have been down.
Definitely would have been down.
But I think key contributors again were, you know, the gross margin enhancements, the cost savings that we have been coming through with.
Certainly, we have mentioned that the trade spending would have been down.
The ad spending would have been down a little bit more for comparison reasons as we were comping against the copper top relaunch last year.
Okay.
And you indicated -- well, just a strategic question.
I'm not sure I understand why in the fourth quarter you're basically going to meet promotional levels of spending or competitive levels of promotion spending but in 03 it sounds like you sort of have your own strategy and going to go with that strategy regardless of what competition does.
Can you explain the disconnect there?
- Vice President of Investor Relations
I don't know there is necessarily a disconnect there.
We have always intended to maintain market share.
We intend to maintain market share in Q4 and I think as we look at next year coming out of the box, we, you know, going with the strategy that we think will work.
But, there is no change in terms of our intention to maintain market share over time.
Okay.
And do you expect Duracell margins to improve year over year in the fourth quarter to the same degree that we saw them improve in the third?
- Vice President of Investor Relations
Oh, I think you know, Amy, -- I think we have given you enough -- plenty of background information and metrics on that in terms of what the competitive environment would be in the fourth quarter.
I would expect, it has been a deflationary environment all year.
I would expect more of the same.
But, we will have to see how competitive the market really gets.
So, I think to go beyond that we would be getting in the area of guidance.
I'm sorry, last question, the blade and razor margin was 42 1/2%, do you guys now feel that you con sustain a margin over 40% in that business?
I don't know we have given guidance in terms of what we think we can sustain in that business.
What I would say is keep in mind that what you had it work in part this quarter are the lower shipments of disposables because the promotional timing so you did have a bit of a favorable mix impact to the margins there.
Okay.
So -- and that is not sustainable?
- Vice President of Investor Relations
I think again, we would be in the area of guidance there.
Okay, thank you.
Operator
Up next, Jim Gingrich with Sanford Bernstein.
Good morning, could you talk a little bit about the thought process in moving the price increase back from January 1 to February 1 and did I understand you correctly that there will also be a price increase in Europe this year?
- Vice President of Investor Relations
Yes, yes you did understand correctly.
I think, Jim, when you look at the market, you can definitely tell with the strength of the performance of Mach3 and Venus that the consumer has an appetite for better performing premium priced products that are worth paying more for.
Historically that has been a January 1 price increase, but this year it will be around February 1.
And you know, as always, it is a decision that will be driven by costs and competitive circumstances.
So I think that is the best I can do.
Okay.
So did you sea whether you will do anything on disposables?
- Vice President of Investor Relations
No.
We didn't say.
We didn't give any price increases on any of the product line.
Okay.
You also mentioned a that in the quarter consumption growth was up 4 1/2% in the razor and blade categories.
Do you have a sense as to the difference between systems, growth in the system side versus disposables?
- Vice President of Investor Relations
Yeah, I think the system side would be growing at a faster clip.
As I said, our trade-up strategy is working very well worldwide.
I mean, the growth of Mach3 globally still, you know in the high teens to 20% four years from launch, that number that we have was a global number.
So yeah, it is definitely much stronger on the system side than what you see.
But you don't have those numbers handy?
- Vice President of Investor Relations
, No I'll to have get back to you.
Okay.
And then your comment on promotional timing on disposables SRBs that promotional activity that has moved from 3Q to 4Q?
- Vice President of Investor Relations
Yeah, actually, it has.
I think it was a timing issue where he had a promotion that we shipped to in the third quarter of last year, it simply didn't occur in the third quarter of this year.
Any promotional activity going to occur in 4Q this year?
- Vice President of Investor Relations
Yeah, I think it is.
And then lastly on Braun.
Your comment on the Japanese yen, is that really an issue with the Euro to yen exchange rate, chuck, or is that a -- because I don't think the yen is all that different year over year versus the dollar. , No it is relative to the Euro.
So what it is, it is a strong Euro?
- Vice President of Investor Relations
And the yen as you say has been like it was last year.
The margin squeeze as a result of the imported product cost.
Thanks.
Operator
As a reminder, due to the time and interest, please limit yourself to one question.
Moving on from Merrill Lynch, we will hear from Carol Wilkey.
Thanks.
Chuck than can you discuss what the increase is for functional excellence for the expense -- I mean, what is driving the expected higher spending that you had originally thought?
- Senior Vice President of Finance, Chief Financial Officer
It really is timing as we are look at how we are implementing various programs.
We have a program that goes about 3 1/2 years.
As we are looking at executing portions of it, where the opportunities are, where we -- because of certain accounting rules, where we intend to make announcements regarding the restructuring that takes place on the downsizing as we looked at the program and the flow of programs, we are feel we have a few more opportunities than we did when we talked to you last.
There is no specific single program or single area or single initiative that is driving the tendency to be higher than the $80 million.
And just as a follow-up on the shipping to consumption on the blades and razor, do you expect that in the fourth quarter you will begin to ship to consumption?
- Vice President of Investor Relations
I think we have been shipping to consumption all year.
I don't think there is any difference.
Just matter of the pre-price increase, $50 million or around two cents that was just not going to occur.
Way is referring when you said the blade and razor sales were up 3% when lagged the 4 1/2% consumption in the category so I was not implying you were overshipping and you undershipped do you expect it to be to consumption in the fourth quarter?
- Vice President of Investor Relations
We will be in line with consumption in the fourth quarter.
Thanks.
Operator
Up next, we will hear Rick Lyle with John W. Bristol.
Hi, wondered if you could be more specific behind the drivers of operating in Duracell.
You talked about the reduced trade promotional spending but how much came in the gross margin expansion.
Thank you.
- Vice President of Investor Relations
Yeah, that was the primary drivers were really savings from SSI to the December -- components of the December 2000 restructuring and just, you know, general product cost initiatives that you know, the group has been very hard at work on over the last year.
Can you be more specific about the brack down between the three categories?
- Vice President of Investor Relations
No, I think it is pretty well -- it is equally shared.
I don't think there was much difference at all.
But I can follow-up with you.
But I see Chuck nodding his head that it was pretty well equally shared.
And the difference between gross profit margin and operating profit margin was shared how?
- Vice President of Investor Relations
We really don't get into that kind of break down on the P&L but gross profit margin was a substantial piece of the total improvement.
Thanks so much.
Operator
Up next from Dresner we will hear from Alec Patterson.
Good morning.
Just trying to tick off a couple of the items you seem to be highlighting and you not giving guidance way of doing things on the fourth quarter.
There was the slight uptick in functional excellence spending, the pushoff in the pricing for if blade business thus impacting shipments, anything else that we should be aware of?
- Vice President of Investor Relations
No.
I think -- you mean from the perspective of just trying to give you an idea of how the business is flowing.
That is what we are looking at.
Basically, we hope to be able to accelerate some rough the functional excellence initiatives, so you know, we raise the range on that.
And with the lack of a pre-price increase buy in about $50 million you know in the two, maybe a strong two cents a share.
Okay.
Just wanted to be clear on that, thanks.
Operator
Our next question from Joe Attabello with CIBC World Markets.
The delay on price increase on blades is that due to retailer pressures on you guys and is there a chance you wouldn't raise prices in February?
- Vice President of Investor Relations
No, no, no.
In terms of -- I think what we are after is to you know maximize our what we can -- the growth and the profitabilitying instrument category for ourselves and the retailer.
So, we are going to do that as we deem appropriate on a go forward basis.
But not getting pricing resistance from retailers?
- Vice President of Investor Relations
Not that I'm aware of.
Operator
Next question from Connie Menity with Prudential.
Good morning, could you talk a bit about the kind of capacity changes you have made at Duracell?
It seems that you closed a plant in India and have you been taking down lines domestically as well?
- Vice President of Investor Relations
Connie, yeah, you right, we did cease operations at plant in India at the end of last year, beginning of this year, so we did make some progress there and then really what we have been able to do you know in making tremendous efforts within the four walls of the remaining plant, so yes, a combination of the two.
So it is safe to assume you have taken down some lines in what remains?
- Vice President of Investor Relations
Yeah.
And we will continue to make efforts along those lines.
So how much has capacity utilization improved?
- Vice President of Investor Relations
I don't think I have god got a good number for you and tends to be something we don't really discuss.
I'll do checking and try to get back to you.
Just a question for Chuck on the share of purchase year to date.
It sounds as though you going to become a lot more active in your share buy back but what of you done year to date?
- Senior Vice President of Finance, Chief Financial Officer
I think operative word is we are going to become more active.
It appears to us to be a good time to be buying shares.
We have the program in place when we traditionally use historically as part of the foundation for buying shares.
As we are look at that strong cash flow, we have some other opportunities for it as well.
I think you have been reading in the press recently about pension programs and whether there is significant underfunded.
We have a defined benefit program, does have a pension cost issue that we are facing and underfunded position as we go to the end of this year.
We gave you a new metrics.
I guess I should give you a metric on that.
If today's assumption and today's market held, we could be hit by 5 cents a share.
And I think it is important to get that out in the domain as a lot of our peer companies are.
So we have two areas we are looking at, one is share repurchase, and the other is whether we should be topping up some of our pension funding.
So those two will via for great cash flow we have got.
So your earnings are going to be hit by five cents a share next year from pension costs?
- Senior Vice President of Finance, Chief Financial Officer
All other things equal.
Yeah.
And that is based upon today's assumptions that the volatility we see in the equity markets, the valuation we do is as of December 31st, it is literally a mark to market calculation.
And we are look at a number that based on today's equity market based upon our funded position would be 5b a 5% charge.
But you said that was all being equal.
Would expect to offset the five cents?
- Senior Vice President of Finance, Chief Financial Officer
We are still look at it and developing budget.
It will be hitting us next year and forever more unless something changes in the equity market.
Great, thanks.
Operator
We have time for one final question.
That question will come from Ann Gillian with Lehman Brothers.
If you could flush out pricing over plus two percent for total, could you give us a sense to where it came from in each of the business lines?
- Vice President of Investor Relations
Well, I think the primary drivers there and I think I mentioned in my opening comment you definitely had the benefits in blade razor and that was the most significant driver and in Duracell because of the lower trade spending.
So those were the two main drivers.
Were the others down?
- Vice President of Investor Relations
I'm trying to think -- yeah, in oral care, we mentioned it would have been down slightly because of higher promotional spending.
And that is really it.
The other areas would not have had a significant impact.
Thanks.
Operator
And that does conclude our question-and-answer session for today.
I'll turn the conference back over to you gentlemen.
- Vice President of Investor Relations
Thank you very much.
Starting at 1:30 today we put a replay of this call available.
It will run until Tuesday October 29th at midnight eastern daylight savings time.
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Additionally, the replay will be available on our corporate website Gillette.com a few hours from now.
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Thank you and have a good day.
Operator
Operator: That does conclude today's teleconference.
Thank you for your participation.