寶潔 (PG) 2002 Q4 法說會逐字稿

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

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to Mr. Chris Jacobic (ph), vice president of investor relations.

Please go ahead.

Thanks.

Good morning.

This is Chris Jacobic, vice president of investor relations, and thanks for joining us on our conference call for fourth quarter earnings.

Also present on the call are Chuck Cramb, our chief financial officer, John Manfredi, senior vice president of corporate affairs, and Eric Krause (ph), vice president of corporate communications.

As you 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 therefore 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 fourth quarter and full-year 2002 results.

Let me start by saying that 2002 was an important year in the turnaround of the Gillette Company.

We are now delivering on all three fronts of our turnaround efforts -- the financial turnaround, the strategic turnaround, and functional excellence.

From a financial perspective, we delivered what we said.

At the beginning of the year, we said first half results would be more about top line growth and second half results would reflect solid operational performance, plus the fact that our SSI and restructuring initiatives over the past year were delivering, and that's exactly what happened.

We delivered 13% growth in operating EPS, and that should be top-tier earnings growth on an apples-to-apples comparison within the fair group.

Meaning that our $1.12 operating EPS excludes nearly 3 cents of one-time gains and was reduced by 8 cents of incremental functional excellence costs.

We also said we would deliver another solid year of free cash flow generation -- the first year in the three-year plan to deliver cumulative free cash flow of $3.5 billion.

In 2002, we generated $1.7 billion in free cash flow, driven by further working capital savings and improved capital discipline.

On the strategic front, we've also made great strides.

In 2002, we introduced new products and initiated other important programs that will strengthen the competitiveness of our products and brand franchises in each business unit of the company.

In fact, new product success across the company and continued trade-up of consumers to our premium blade razor systems were the key revenue drivers in 2002.

We expect this to continue in 2003.

Finally, we began the execution phase of our functional excellence initiative in 2002.

Functional excellence is the cornerstone of Gillette's efforts to achieve world-class capabilities at the lowest possible cost.

Our progress during 2002 on functional excellence efforts was, well, excellent.

And in a moment, I'll talk more about how we were able to accelerate those efforts in the fourth quarter.

Before we get into the details of the quarter, two quick comments.

First, note that our quarterly and full-year earnings release is based on a comparison to 2001 results that reflects the reclassification for EITS (ph) 25.

Second, the fourth quarter and full-year numbers quoted from here on out will exclude three one-time non-operating items.

One item is the restructuring and asset impairment charge we took in the fourth quarter of 2001.

The related cost was $172 million pre-tax, $135 million after-tax, or 13 cents a share.

The second item is a portion of a past restructuring charge that was recovered in the fourth quarter of 2002, amounting to $9 million pre-tax, $6 million after-tax, or just under 1 cent a share.

The third item that only affects the full year 2002 figures is the one-time gain on the sale of our rights to Avantica (ph), a prescription cream that slows the growth of facial hair in women.

In the second quarter of 2002, we recognized a net gain of $30 million pre-tax, $21 million after tax, or 2 cents a share on the Avantica transaction.

Just to repeat, the figures quoted from here on out will exclude these three one-time non-operating items.

Now, let's get into the numbers.

On a reported basis, net sales for the fourth quarter were $2.53 billion, or 5% above 2001.

Volume mix was up 2% driven by new product gains in most product categories.

The positive impact of foreign exchange added 3% as the strength of European currencies more than offset unfavorable exchange in Latin America.

And pricing was flat as higher year-over-year trade spending in oral care offset the benefit of price increases in blade razors.

Looking at total year sales, net sales rose 5% to $8.45 billion.

Volume mix accounted for the entire 5%.

Again, this was driven by new product gains in most product categories.

Exchange was neutral in sales in 2002.

And pricing was neutral, as well, with higher trade spending in Duracell and oral care offset the benefit of price increases in blade razor.

Moving on to fourth quarter gross profit margin, it was essentially flat at 55%.

In the end, cost savings from the December 2000 restructuring and our strategic sourcing initiative, or SSI, together with favorable product mix in our blade razor business were offset by incremental functional excellence expenses, higher manufacturing costs due to strong European currencies, and higher promotional spending and less favorable product mix in oral care.

For the year, gross margin was up 60 basis points to 58.5% from 57.9% the prior year.

Driving the gain was favorable blaze 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 both Duracell and oral care.

Moving to marketing, total spending on a reported dollar basis grew 10% in the fourth quarter.

For the full year, marketing spending was up 8%.

Within marketing, advertising in the fourth quarter was up 24% to 7.5% of sales.

It was 6.4% of sales in the fourth quarter of 2001.

In the quarter, we made the decision to reinvest gains from strong operating performance and currency favorability into incremental advertising.

And we did that by putting additional funds behind some strong new advertising programs developed during the year, such as Duracell's trusted everywhere campaign.

For the year, advertising spending was up 12%, and this was driven by higher investment --sorry.

We're having a bit of an alarm go off here.

Just to continue, sales promotions, the 12% increase was driven by higher investment behind both new and established products.

Sales promotion in the fourth quarter decreased 10% to 3.8% of sales from 4.4% in 2001, and this was consistent with our efforts to pull back on our promotional spending.

For 2002, sales promotion was down as a percent of sales from 4% in 2001 to 3.8% in 2002.

This was driven by higher spending behind new product activity in Braun and oral care, offset by our efforts to pull back on promotional spending at Duracell.

Let's move to overhead and other expense now.

In the fourth quarter, while overhead and other expense was up 7% to 23.9% of sales, this included $54 million of functional excellence expenses.

Without these costs, overhead and other expense was actually down 2.2% to 28 - to 21.8% of sales reflecting our ongoing zero overhead growth, or ZOG, initiatives.

For the full year 2002, overhead and other expense was up 5%, again, as a result of functional excellence expenses.

As a percent of sales, it was flat at 26.1%.

Within overhead and other expense for the year, the incremental functional excellence expense was $94 million, which offset savings from the December 2000 restructuring and our ZOG efforts.

In terms of our functional excellence initiative overall, we booked a total of $73 million in incremental expense in the fourth quarter.

And for the year, we expensed a total of $121 million as we accelerated a number of programs that we did not anticipate at the time of our last conference call.

Looking ahead in 2003, we now expect functional excellence expenses to be essentially flat with the costs incurred in 2002.

Now, back to our fourth quarter P&L and on to profit from operations.

In the quarter, profit from operations was down slightly versus last year and the margin fell 100 basis points -- please standby.

We'll just continue from here.

Okay.

Back to our fourth quarter P&L and on to profit from operation.

In the quarter, profit from operations was down slightly versus last year and the margin fell 100 basis points to 19.8% of sales entirely due to incremental functional excellence expenses.

As a side note, the adoption of FAS 142 resulted in a fourth quarter decrease in amortization of about $9 million.

Just to continue.

Sorry about this.

For the full year, profit from operations climbed 6% to $1.77 billion driven by cost reductions across the organization as well as an improvement in product mix in blade razor.

Below operating profits in the fourth quarter, other charges were virtually unchanged at $19 million.

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

However, this was offset by a swing (ph) from an exchange gain in the fourth quarter of 2001 to an exchange loss in 2002.

For the total year, other charges dropped 64%, or $99 million.

The main drivers were two-fold.

First, net interest expense decreased in each quarter.

Second, transactional gains in 2002 matched up against exchange losses in 2001.

So as a result of everything discussed thus far, fourth quarter pre-tax income from continuing operations was down 1% versus Q4 2001 at $482 million.

Net income fell 1%, as well to $333 million while the tax rate was unchanged at 31%.

Fully diluted earnings per share in the fourth quarter were unchanged at 32 cents.

Looking at the full year, net income from continuing operations, again, excluding all one-time non-operating items rose 13% to $1.18 billion, and fully diluted EPS was up 13% from 99 cents in 2001 to $1.12 in 2002.

Now, let's look at the fourth quarter by product line.

And we'll talk about our blade razor division first.

Let me start by saying that the growth of Mach3, Mach3 Turbo and Venus remains very strong.

In the fourth quarter, blaze razor sales rose 5% in reported dollars, or 4% in constant currency.

And this strong growth came despite the absence of the pre-price increase buy-in in North America that occurred in the fourth quarter of 2001.

The key underlying growth drivers were the same as we've seen throughout the year, namely strong system sales worldwide, higher pricing, and ongoing trade-up to our Mach3 and Venus franchises.

However, I would note three other factors, as well.

The benefit of European currency strength, as it more than offset significant weakness in Latin America, strong growth in the Asian region particularly behind Venus, and significant gain by Mach3 Turbo in North America.

In fact, in the U.S. and after only nine months on the market, Mach3 Turbo was the number one razor on the market with a 33% dollar share in the fourth quarter.

And it was the number two blade with the 10% dollar share.

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

Fourth quarter, blade razor profit from operations was up 1% while the margin declined 120 basis points to 34.7%.

What happened at the margin?

Three things.

Favorable blade razor -- blade versus razor mix was offset by a double-digit increase in advertising and incremental functional excellence expenses.

For the total year, blade razor sales of $3.4 billion rose 7% and constant currency, the increase was 8%.

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

For the full year 2002, our blade razor business reached new heights.

On a global basis and for the full year, our Mach3 franchise delivered constant dollar blade growth of 19% year over year in the latest reading and that's after five years on the market.

Consumer sales of Venus have never been stronger.

Blade sales nearly doubled on a global basis in 2002, and Venus was the number one selling razor in the U.S., men's and women's combined.

Finally, Gillette blades and razors achieved a 72% dollar share of the global market in 2002, the highest on record.

Importantly, we have now begun shipping Mach3 Turbo in Europe to support our first quarter launch across the region.

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

For the year -sorry.

We were just getting another update.

To continue on our update, let me see, back on disposable razors, we said they continue to improve for the year.

Our global unit share remains stable versus 2001.

And our unit share in the U.S. grew slightly despite the highly promotional market environment.

Turning to blade razor's full year profit from operations, it was up 14%.

The margin rose 220 basis points.

This strong full year gain is due mainly to favorable blade versus razor mix as it offset incremental functional excellence costs in 2002, particularly in light of the comparisons with destocking (ph) during the first half of 2002.

Looking at blade razor in 2003, it would be reasonable to expect stronger revenue growth in the first half of the year than the second half.

This is due to new product launches in the first half of the year and the absence of a pre-price increase buy-in last December.

Let's turn now to Duracell.

In the fourth quarter, Duracell sales declined 2%, or 4% in constant currency.

Higher volumes driven by gains in North America were offset by three factors.

First, on favorable shifts in mix among brands, pack sizes and retail channels continued.

Second was category weakness in Latin America as a national strike in Venezuela and competitive activity in Mexico.

Sorry about that.

Category weakness in Latin America - really a national strike in Venezuela and competitive activity in Mexico magnified an already weak trends due to currency devaluation in the region.

And third, higher year-over-year trade spending in North America.

That said, fourth quarter profits from operations of $110 million was up 32%.

And margin expanded 430 basis points to 16.8% as cost savings programs initiated over the past 18 months continued to pay up.

On a full-year basis, Duracell sales declined 3% and behind the numbers, favorable unit shipments were offset by three things -- increased promotional spending, the adverse shift in product mix, and the Latin-American weakness previously mentioned.

Profit from operations in 2002 was $233 million, up 7% versus last year.

And margin expanded 120 basis points to 12.3%.

Here, again, realization of cost savings initiatives over the past 18 months more than offset higher promotional spending and unfavorable product and pack size mix.

Now, in terms of the overall health of our Duracell battery business, 2002 was an important year, particularly as it relates to Duracell's strategic governing statement.

Duracell's goals are to maintain market share, achieve industry-leading market --industry-leading margins and grow the category.

In 2002, we maintained our market share.

As you know, we lost share in the second and third quarters.

As we attempted to pull back on our trade spending, our competitors accelerated their efforts resulting in expanding price gaps of copper-top versus price value brand.

In the fourth quarter, we ensured our competitiveness in the marketplace with the use of incremental trade spending.

Despite that higher trade spending, we also made significant progress on the path to achieving our goal of industry-leading margins as past cost savings initiatives began to bear fruit.

Earlier this month, we announced Duracell's price deal realignment program for the U.S. market.

The actions are part of our broader efforts to restore brand value to Duracell and will simplify our offering to the trade and consumers with fewer SKUs and price points allow Duracell to achieve more competitive pricing on the shelf every day, create a platform for more efficient trade and consumer promotion, and allow Duracell to reinvest in category and brand building activities.

We believe this program, along with other efforts, will work to eliminate the deflationary ills Duracell has suffered from and enable Duracell to grow the category over time.

As we look to 2003, we are confident that we will make further progress against our strategic governing statement.

Now, let's move to the oral care segment.

In the fourth quarter, sales rose 11%.

In constant currency, sales grew 7%.

These gains were paced by solid growth in both the manual and power toothbrush segment and driven by new product introduction.

Partially offsetting these 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 the highly successful North American launch of our Oral B stages line of children's toothbrushes and strong growth in the developing markets of Asia and AME (ph) from our entry-level Exceed, Vision, and Classic toothbrushes.

In power oral care, sales growth reflected incremental battery sales and market share in both North America and Europe.

In fact, for the business overall, oral care's dollar share increased in all regions in the fourth quarter, increasing its global value share two points to 32%.

Turning to profits, fourth quarter profits from operations in oral care fell 23% to $59 million.

What happened here?

Increased sales from new products and improved factory performance were offset by four factors.

First and foremost, a very strong double-digit increase in advertising behind new products.

Second, incremental functional excellence cost.

Third was a less favorable product mix with a shift toward both manual brushes in developing markets and battery powered brushes overall, and finally, unfavorable pricing and higher trade spending in light of the increased competitive activity in the battery segment.

For all of 2002, oral care net sales of $1.3 billion climbed 9%, or 7% in constant currency.

These gains reflected strong growth behind the success of our new product introductions in both the manual and power segment.

And in the U.S., our 52-week dollar share of the total brushing category increased 1.6 percentage points to 30.5%.

Oral care profit from operations for the year decreased 7% to $222 million with margin down 310 basis points versus 2001.

This was due to sales gains from new products and cost savings that were offset by increased marketing spending, including a strong double-digit gain in advertising and incremental functional excellence expenses.

Let's turn now to Braun.

In the fourth quarter, Braun sales rose 12%, or 6% in constant currency.

The sales upside was driven by a strong second half of new product program.

In particular, our electric shaver performance in North America, Japan, and the AME region were the main drivers of upside in the quarter.

And importantly, our shaver strength in these regions offset a relatively lackluster performance in the key European region.

In terms of North American sales growth, it reflected the successful launch of the low to mid-priced Interface (ph) shaver.

The Interface helped to increase Braun's dollar share to 20% in the quarter, up 2.3 percentage points versus a year ago.

At the profit line, Braun's quarterly profit of $28 million fell 13% in the fourth quarter of 2001.

The key issues here were significant incremental costs related to functional excellence as we continued to draw costs from the Braun infrastructure, 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.

For the full year, Braun sales increased 8%, or 5% in constant currency, and again, growth was driven by the success of our new electric shavers.

In fact, based on the most recent data available, the Braun Synchro (ph) was the number one selling shaver in the world over the past 52 weeks.

And in the very important Japanese market, our Flex XP and new Free Glider shavers helped drive Braun's value share up 4 percentage points to 33% in 2002.

Braun profit from operations in 2002 decreased $23 million to $75 million.

For the year, we saw a strong double-digit increase in advertising to support new products.

The yen impact on our margin in Japan offsetting profit growth and sales advantage.

Unfavorable product mix in the first quarter and significant functional excellence costs during the year.

Again, all these factors combined to offset excellent progress in reducing manufacturing costs.

Turning to personal care, reported sales in the quarter were up 3%, or 2% in constant currency.

Sales were dampened by two factors here.

First, lower sales in Latin America with the struggling economy in Argentina and increased competitive pressures in Colombia continued to affect volumes and pricing.

And second, higher trade and consumer spending to support new products in the U.S.

These factors combined to offset underlying unit growth in pre and post-shave products in both Europe and North America.

In north America, the new Power Stripe anti-perspirants and deodorants drove growth and market share.

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

In AME, Russia contributed with double digit gains fueled by our fourth quarter relaunch of Gillette series toiletries.

Turning profit from operations, personal care fourth quarter profits fell 12%, down 130 basis points versus Q4 2001.

This fall-off in profits resulted from our efforts to revitalize this business.

Specifically, we more than doubled our advertising versus the fourth quarter 2001 to support new products.

Incremental costs related to functional excellence were also a factor contributing to the decline of profitability.

On a full-year basis, personal care sales of $816 million increased 2%.

This was driven by new product success.

Currency devaluation and competitive activity in Latin America significantly offset the positive impact of this new product success.

Profit from operations on the year-to-date basis decreased 25% to $51 million.

Importantly, 2002 was an investment year in personal care in the sense that we have higher advertising and promotional support as well as incremental functional excellence expenses.

Now, let's look previously at our business by geographic region.

Starting with North America, fourth quarter sales increased to 1% as strength in oral care and Braun was partially offset by softness in other categories.

Blade razor sales were held back by the absence of a pre-price increase buying.

In oral care, growth was driven by performance of our new stage of line of children's manual toothbrushes as well as ongoing growth of our battery toothbrush.

Braun saw strong growth, driven by male dry shaver success.

For Duracell, an aggressive promotional environment and unfavorable product mix combined for a significant reduction in sales year over year.

Full-year sales in North America were up 2%.

All business segments, except Duracell, contributed to these gains.

Sales with in the battery segment were tempered by increased promotional activity and unfavorable product mix.

Turning to Europe, reported sales for the fourth quarter were up 15%, but up only 2% in constant currency.

All business segments posted strong dollar gains partially due to strength in the euro.

Despite slow underlying growth in the market, all Gillette's divisions posted good market share gains.

Year-to-date, net sales in Europe rose 11%.

In constant currency, sales were up 3%.

In blade razor, a successful Mach3 sampling program during the first half of the year led to strong second half follow-through and set the stage for our Mach3 Turbo launch in 2003.

However, sales gains in Europe were held back by significant weakness in Germany for conversion to the euro led to slower consumer off-take and a declining market, and this affected Braun and oral care most significantly.

In Latin America, fourth quarter sales were down 23% in reported dollars, but up 6% in constant currency.

The economic crisis in Argentina and currency devaluation elsewhere in the region resulted in sales decline across all business segments.

For all of 2002, net sales in Latin America declined 14%.

But in constant dollars, sales grew 7%.

Blade razor and oral care generated substantial gains on a local basis.

On the other hand, both currency devaluation and competitive activities adversely affected our personal care, Braun, and battery segments.

Turning to the AME region, comprising Africa, the Middle East, and Eastern Europe, sales in the quarter climbed 5% in reported dollars and 4% in constant currency.

In constant currency, all segments except for Duracell posted gains.

Blade razor's strength was driven by gains in disposables in Russia and continued momentum in the Mach3 and Venus franchises throughout the Middle East and Mediterranean.

Continuing oral care gains from oral and manual toothbrushes contributed significantly, as well, and Braun delivered strong growth with particular strength in Russia.

For the full year, AME sales grew 11%.

In constant currency, sales climbed 14%.

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

Finally, Asia Pacific's reported sales climbed 11% in the fourth quarter.

Excluding exchange, sales grew 7%.

Venus and the Mach3 franchise drove the growth in blade razor.

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

For 2002, Asia Pacific's sales rose 12% in reported dollars and 10% in 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 will now review some highlights of cash flow and the balance sheet for the year ended December 31, 2002, and I will start with working capital.

Receivables were down 18% from 2001, from $1.5 billion to $1.2 billion.

We continue to improve day sales outstanding as well, dropping 12 days from 55 days in 2001 to 43 days in 2002.

Importantly, the lack of the pre-price increase buy-in in our blade razor division further enhanced already-strong gains from our focused efforts.

Progress was also made on inventory.

They were down 8% versus 2001, decreasing to $928 million from $1 billion in 2001.

Our days inventory on hand at 97 days represented an 11-day improvement from 2001.

And accounts payable increased $180 million to $581 million, up 45% versus 2001.

Days payable outstanding increased 17 days to 60 days from 43 in 2001.

In terms of cap-ex, capital expenditures were lower for the 11th consecutive quarter.

For the full year, cap-ex decreased 35% from $624 million in 2001 to $405 million in 2002.

While this represented just 4.8% of net sales in 2002, we continue to believe that cap-ex will be in the range of 7% of sales over time.

All of this resulted in very strong free cash flow in 2002 of $1.7 billion, an increase of 12% versus 2001.

We also reduced our net debt by $514 million, or 15% compared with year-end 2001.

And we re-purchased approximately 14 million shares from the last half of October through to the end of the year.

In addition, our board of directors increased our share re-purchase authorization by 25 million shares.

So out of a total - out of a current authorization of 150 million shares, 108 million shares have been re-purchased to date.

So to quickly summarize our results, in 2002, we reinforced strong momentum in our brand franchises with consumer acceptance of important new products.

We realized significant gains from our ongoing efforts to reduce costs and better utilize our assets.

We set the stage for sustained profitable growth through the implementation of functional excellence initiatives across the company.

And we feel very good about the quality and transparency of our operating results.

In 2003, we should continue to build on the momentum established in 2002.

Before I take your questions, let me apologize for the interruptions during the conference call.

As you may have heard in the background, our building had a water main break, and we received several updates from the fire department.

So I'll now turn the call over to the operator who will explain the procedure for signaling if you do have a question.

Thank you, sir.

This question and answer session will be conducted electronically.

If you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone.

If you are using a speaker phone, please make sure your mute function is turned off to allow your signal to reach our equipment.

We'll proceed in the order that you signal us and we'll take as many questions as time permits.

Once again, please press star one on your touch tone telephone to ask a question.

And we'll take our first question from Wendy Nicholson (ph) of Salomon Smith Barney.

Hi, good morning.

I hope that water main break doesn't mean I have to shake my numbers down for next year.

In terms of the oral care business, that was the business where the margins actually came in a lot lower than what I was looking for.

Can you tell me if there's been some structural change in that market?

I mean, we all know that everybody has a battery-powered toothbrush out there and all that kind of stuff.

Is there just so much pricing sensitivity and increased competition that, that business should be lower margin going forward?

I know you don't want to comment on guidance, but it strikes me that maybe the best is behind that business, if you will.

Thanks for the question, Wendy, and in terms of the water main break, as you know, we're at the early stages of functional excellence, so, you know, we still have a little ways to go.

Thank heavens.

In terms of the Oral B margins, I would say we're very pleased with the progress made in oral care.

Certainly, some of that - you know, you had adverse product mix, you know, more battery, more emerging market manual, and that explains some margin pressure, but I think when you look at it, you know, the big hitters in the quarter and the year were incremental functional excellence, expenses and advertising spending, which was up strong double digits behind key products.

So I think as we look at the oral care business overall, you know, very pleased.

Increased share throughout the world, continued success of our new products, including battery and stages, and I think we're excited about the cross-section power and vitalizer products that we have coming out in the new year.

But do you plan to have the level of trade promotion that you have seen continue at its very high rate?

Well, it has accelerated, and I think, you know, you're looking at, you know, a very dynamic category right now, and typically, when you get a significant acceleration of growth, it will, at the initial stages, cause a sharpening of competitive activity.

I think at the end of the day, we're happy that we're growing strongly in a fast-growing category and taking market share.

Okay.

And then, I guess, just one more quick question.

Functional excellence, I guess you said another kind of $95, $100 million for next year in terms of spending.

Can you articulate, or did I miss it in terms of how much savings we should start to see from functional excellence?

I mean, are you still on track to have savings outweigh spending, I guess, in '04?

Yes.

Well, I think as you look at 2002, it was about $120 million in expenditures.

We spent just over a quarter of the total outline under the program, and you know, that would - you know, those programs would represent about a quarter of the savings, as well.

Now, what was expensed in 2002 will not give a full-year payback in 2003, and I think as you look at 2003, the investment stream will still outweigh the benefit stream, and certainly, you know, a significant portion of the savings at the outset will be reinvested in other growth initiatives, such as advertising, training, and development, et cetera.

Okay.

Got it.

That's helpful.

Thanks.

And moving on, we'll take our next question from Andrew Mcquilling (ph) of UBS Warburg.

Andrew, are you there?

Mr. Mcquilling, your line is open.

We've got to move on.

Yes.

Andrew, maybe you should queue up again.

And moving on, we'll take our next question from Carol Wilke (ph) of Merrill Lynch.

Hi.

I was curious if you could share with us which businesses were the most impacted by functional excellence for the quarter?

And then, do you expect that similar breakdown in next year, will you move into, you know, more heavily in other segments with the spending?

I would say, you know, in terms of the quarter, you know, and in the program, as well, every segment participated and I think, you know, as we move forward -- or rather, what we saw in the past, you know, certainly it was heavy in oral care and Braun, but I think, you know, as we move forward, every segment is going to be participating.

And just to make sure I understand it, there was some programs accelerated into '02 from '03, so whereas before you thought SE costs were going to accelerate quite a bit in '03, now the -- it's flat.

So is the total cost of the program so far, but your expectation's similar, it's just been more of a timing shift, so more of a hit in '02?

Yeah, that's accurate.

And can I ask one other question.

Any thoughts on the launch by Schick (ph) this spring into the lady's - into female shaving at the same price point as Venus?

No.

You're going to have to evaluate that product, you know, as it comes out.

I think, you know, we remain committed to continue the activity and innovation in all segments, and I think if you look at what we've got out there now, Mach3, Turbo and Venus are selling strongly and fueling trade-up on their own.

We're also looking at, you know, particularly in the disposables area.

We stabilized our disposable share this year and in 2003, we will be launching our Sensor3 premium disposable.

So we feel pretty good about what we have out there.

Thanks a lot.

And our next question comes from Amy Chasen (ph) of Goldman Sachs.

Hi.

Two questions.

First on blades and razors, is your price increase for North America still scheduled for February?

Yes, it is.

Okay.

And that's on track.

No issues.

Right.

Okay, and just to follow up on Schick a little bit, you made a statement in your press release that, you know, you were sort of not concerned but that, I guess, Energizer's purchase would make the blade razor market more challenging in '03.

Can you talk a little bit about that?

Because my perspective is that you guys are so far ahead in terms of technology that this really shouldn't be an issue for you.

Well, certainly, from a technological perspective, you know, innovation is really what drives the category and we feel very confident about our pipeline.

I think from an overall perspective, there's really no change in our strategy, you know, we're still looking to stabilize our dollar share on disposables.

We're committed to grow the market and grow our share of the economic profit pool on the category.

So I don't think that's really going to, you know, change our perspective at all.

Okay.

So what was that statement in the press release?

I think, you know, just in terms of I think what Jim was saying is that, you know, with change of ownership, there's always the, you know, a new set of -- potential for a new set of challenges.

I think that's what he was really going after.

Amy, let me amplify on that just a little bit.

Schick in the hands of Pfizer was a relatively small division, and now it's a major part of - or will be a major part of the Energizer portfolio, and you know, they did invest, so they will have invested something, about $930 million for it.

So I think you have to expect that they will be fairly aggressive as they go to market with that new business line.

Okay.

And last but not least on Duracell, Jim has said, you know, 10 to 13% operating margin was the target.

You're already at, you know, 12.5% or something like that, and that includes functional excellence costs, so is it fair to say that that goal is just definitely too conservative?

Well, I think what we said in the past is that, you know, what Jim has said in the past is that from a category perspective, we expect, you know, margins for the category to be in the low to mid-single digits, and if you look at our -- you know, our governing statement, we do want to establish industry-leading margins, so -

I'm sorry, low to mid single digits for the category?

I'm sorry, low to mid teens.

I'm sorry.

Okay.

So you're saying no change to that then?

No.

Okay.

Thank you.

And we'll take our next question from Bill Chapelle (ph) of Suntrust Robinson Humphrey.

Just some clarification.

I guess from the last conference call, you had said you had -- the total expectation for functional excellence was between $80 and $100 million, and you ended up at $120 million.

Is that correct?

You just inter-quarter added an additional $120 million?

And then, maybe you could tell us where that additional $120 million kind of -- was that focused more on oral care, or was that across all business lines?

Yes.

No, you're right.

We did say 80 to 100.

We ended up at about 120, and I think what we were able to accelerate was some customer service initiatives in Europe.

So that was the big program.

So that really would have been spread across all of our divisions within Europe.

Okay.

And the second question, just trying to understand, obviously, with the positive currency affect in the fourth quarter, what are kind of your expectations for currency affect going into 2003?

I've got to handle that one.

Every time we have had expectations, they have proven to be wrong, and we're as good as the experts and they can't get it right.

I would love to see some stability in currency markets on a go-forward basis, but there's so many unknowns out there right now, it's awful hard to predict.

If the war breaks out, that could be -- create greater volatility in the marketplace.

What happens in Latin America economically?

It is stagnant, but still in decline.

So I think it's too early to guess.

But if we could get some stability, I think that would be great for our business.

Yes, Bill.

I think, you know, the other thing, if you look at comparisons, I mean, from where we stand now, you know, Latin America will still be a drag during the first half of 2003, and also as you look at the structure of our business, keep in mind that we are a net exporter of product in Europe.

For instance, you saw the impact, for instance, you know, due to the euro-yen exchange rate on Braun results this year.

Sure.

And I guess one follow-up to that.

When you talked about Latin America, you said on the Duracell side there was some more competitive pricing, and I believe you said something about a strike, I'm sorry.

I missed some of the stuff.

But can you maybe update us on where that stands and -- or is it more currency related and economic related, or are there other market-related things we should worry about going into '03 for Latin America?

Yeah.

In Latin America, what you saw was, you know, certainly was some weakness in category, particularly outblend.

You did see some trade down.

In terms of the strike in Venezuela, you know, there was a national strike that lasted, I think, what was it, about 40 odd days.

Right.

So I think that affected everybody.

But as far as the competitive side, no changes there?

No.

Okay.

One last housekeeping.

I think -- could you tell me again what the constant currency growth was in personal care?

I missed that.

Yeah.

Let me just grab that for you real quick.

Constant currency - you mean for the quarter or the year?

For the quarter.

In personal care, for the year, constant currency growth was 2%.

Thank you.

And we'll take our next question from Alex Patterson (ph) of Grisner RSCM (ph).

Yes.

Good morning.

I wanted to get some clarification on an issue you guys brought up I think on the last quarter call, pension expense in '03.

I guess I'm just still confused over what you're assuming will be the flow-through impact, and how is that being manifested?

And secondly, could you just talk, Chris, about the cap-ex to 7% of sales, the pace of ramp-up from where you are now to the 5-year, couple year?

What do you think in there?

The -- this is Chuck.

First, on the pension side, when we talked to you last time, we talked about a number in the $70 million range as being the incremental cost of our pension programs at that point in time, 2003 versus 2002, if we did nothing.

We did put some fairly significant funding against our pension programs in the fourth quarter.

We've also, you'll see when we issue our 10-K, have adjusted some of our assumptions to be a little bit more conservative.

The net of all that is, instead of about a 5 cent per share hit next year, we think the incremental impact will be about 4 cents a share, so slightly better than what we discussed at the last call.

In terms of the cap-ex, and Chris can add on to this at the end -- in terms of cap-ex spending, we think over the long term, the rate, given our new product programs, given the technology that drives our new products in terms of driving improved performance of those products, we think that over the long term, that spend rate will be about 7% of sales, but in any given year, it could be above or below that number, depending upon really the new product programs and the pace and timing of those programs.

Blade programs take two, three-year investment.

Some of our other programs are also on a long investment curb.

So that's why we feel that this year, yes, it's below the 7%, but over the long term, 7% is about the right number.

Okay, so in modeling purposes, Chuck, on a cash flow, I think that 7% is maybe an average over the next three to four years.

Yes, I would use that.

Okay.

And then on the pension expense, the assumed rate of return or other discount rate assumption changes, what did do you?

We took -- basically on the pensions, we took the rate of returns down from -- we were only about 8.6.

We're down close to 8 in our assumptions, and the other one, which is the big number if you follow the pension accounting is really the discount rate, what's the future liability.

And we've taken that down just a little short of a half point.

I think we're at about 6.2 or so --

Spreads remain the same roughly?

Yeah.

That's right.

The spreads would remain the same.

Okay.

Thank you very much.

And our next question comes from Connie Menetti (ph) of Prudential Securities.

Good morning.

Could you give us an idea of the four or five biggest projects you undertook with functional excellence this year, and tell us what divisions, I mean, were you closing factories?

Was it more G&A related?

Just tell us what - you know, the biggest projects you undertook in this program.

Sure, Connie.

Yes, it was - you know, we didn't close any plants relative to the program.

It was predominantly, you know, G&A related.

There was a little bit that was booked up at the gross margin line as I explained in my opening comment.

I would say, you know, the bigger examples, one, we outsourced our internal audit to Deloitte & Touche, which, you know, will certainly lower the cost, but it will also lead to an upgrading of capabilities there.

Secondly, I would say establishing a financial shared service center in Europe.

That was done in 2002, and then also, just I think general infrastructure activities would be sort of the third category, where we're simply flattening the organizational structure of the company.

So does that mean early retirement as you took layers out of your organizational chart?

Yes.

And which of these three projects has had or will have the biggest impact?

I think they'll all have some pretty significant impact, just in other areas, you know, separate areas.

So I wouldn't, you know, put -- you know, there was no one program that, you know, took up, you know, say 40, 50% of the -- of what we expensed in the year, so it's a lot of programs, you know, across the company.

And why did you accelerate this in the fourth quarter and what did it go toward?

We had the opportunity to accelerate it.

It's really a matter of, you know, when -- if you can accelerate it, can you execute it, can you, you know, justify the recognition of the expense, so - and I think what we saw in the fourth quarter was an acceleration of a program out of Europe, predominantly that was most of the accelerated piece, where we're working on improving our customer service.

Okay.

Great.

Thanks.

And once again, I would like to remind everybody, if you do have a question, press star one on your telephone.

Next, we'll take our question from Joe Altobello (ph) of CIBC World Markets.

Hey guys, good morning.

Two quick questions.

One, have you guys seen any early response from retailers or competitors from either a sale price reduction?

In other words, are you seeing any change in the North American promotional environment, and second on advertising and marketing in general, it looked like it picked up pretty much in the fourth quarter.

Should we expect a similar increase throughout '03 that we saw in '02?

Yeah, let me take the Duracell question first.

You know, certainly it's early days, but the initial feedback is that we're on track to --ahead of our expectations in terms of pass-through.

The retailers like the line pricing concept and the fact that we're also flattening the price curve along pack sizes, and they see the opportunity to stabilize the category and create an environment where there's at least the possibility to achieve dollar growth.

So I think that plan is going according to plan.

In terms of advertising trend, yeah, if fourth quarter was up strong because we invested behind some very impactful, new advertising, particularly in Oral B and Duracell.

As you look at, and really, it was because we had some strong operating performance and currency favorability that enabled that step-up.

As you look at 2003, 2003 expenditures are, as always, going to be a function of conditions in the marketplace.

I mean, obviously, we want to invest more in our brand equity, but we also want to make sure that we provide for shareholder returns.

And just to remind us of your expectations for Duracell in '03.

I think you said sales were going to be down 2% and op being flat for the year.

What we said on the conference call on January 13th, we said that we're looking for Duracell sales to be down mid single digit and operating profit to be stable.

Okay.

Great.

Thanks.

And we'll take our next question from Art Cecil (ph) of T. Rowe Price.

Good morning.

Good morning, Art.

I'm sorry to keep talking about this functional excellence thing.

Also, the December '00 restructuring program, I think at one time, was said to yield cost savings in '02 of $135 million, and that would be a $90 million increment to '01.

Can you update those numbers?

Yeah, I think we said that in the annual report, and that's what it delivered.

Okay.

So we had $90 million in incremental cost savings from that restructuring program.

Now, on functional excellence, you spent $120 million in '02, and nothing in '01.

Is that right?

Right.

That's correct.

And in '03, you're going to spend $140 million or less or what?

I think we said that right now, we expect functional excellence expenditures to be relatively level with what you saw in '02.

Okay, and what have you said again, Chris, about the expected long-term cost savings from the functional excellence effort?

Yeah.

We targeted about $300, $350 million over the course of the program, and you get full realization of that by 2006.

And in '03, will there be something?

Yeah.

Well, in terms of --as I mentioned, in terms of what we expensed in 2002, you'll get some, but you're not going to get a full year of payback simply because of the timing of implementation and, you know, how long it takes to get the savings out.

Okay.

Now, I guess one of my real questions is, how do you separate, how do you really separate what you call functional excellence spending from normal everyday spending that any company would do to try to improve its operations?

That's the first one, and the second one is, is this functional excellence spending going to disappear entirely at the end of '05 or '06, or whatever it is, or is some portion of this going to be an ongoing expense to support these upgrades?

I'll take it, and on the first question, which really is, how do you define functional excellence from sort of normal activities, what I would call productivity activities -- we looked at the functional excellence program as being a very specific, significant initiative above and beyond normal productivity improvements that you would expect out of the business.

As a result, when we look at it, we've actually set up a process where functional excellence initiatives, be they to increase our capabilities or to reduce our costs, they come in with a cost benefit analysis that goes through a rigorous financial review, that financial review actually terminates or ends with my approval of the project.

So we look at it as specific project activities above and beyond normal productivity improvements.

As we look at what we're trying to do, we really wanted to jump start against a problem we've had because we felt we were out of line in terms of our SG&A expenses, and we didn't have what I would call excellent processes, excellent capabilities that would have matched that kind of spend level, so we're trying to balance the two.

I think it's an interesting question when you say, does it end?

I think the emphasis, the change management part in terms of getting our basis right, getting to operate at an efficient level, that's what we talked about when we talk about 2006.

But I think there will always be opportunities for further enhancement in our programs, whether it's capability building or cost reduction, but not in the degree that we're operating at right now, so 2006 and onwards, sure, we will continue to have initiatives to drive our costs down or increase our capabilities.

And I think our - you know, what you're trying to do with functional excellence, I mean, there are specific programs behind functional excellence, but what - you know, I guess the byproduct of that is also going to be, you know, creating a culture of continuous improvement.

That's really what you're after at the end.

Finally, I know you guys don't give earnings guidance, but can you give any guidelines on stuff like the tax rate, interest expense, marketing, that sort of thing for '03 without going into the totality of it?

We really don't go into the line items on the P&L in terms of guidance.

All right.

Thank you.

Thanks, Art.

And moving on, we'll take our next question from Justin Morrow (ph) of Lord Abbott (ph).

Good morning, guys.

Just quick on Duracell.

What's your tolerance on market share?

I know you guys have kind of flipped from, you know, focusing on market share the early part of last year to now focusing on profitability, but if things kind of get crazy again from a market share, promotional standpoint since you guys have taken away half of it but not all of it, is it something you would consider, or are you guys just focused, you know, first and foremost and just on the profit side and don't want to even focus on market share anymore?

No.

You know, first of all, the governing statement for that business has not changed.

You know, we're looking to maintain our share, bring our profitability to industry --bring our margins to industry-leading levels, and grow the categories, so in terms of the price deal realignment, I would say, you know, we're committed to the long-term benefits of the strategy.

Certainly, we're going to see some competitive hits along the way, but you know, we've shown that excessive trade promotion is not a winning formula, and you know, we won't give in to any exceptions that might arise.

Gotcha.

Okay.

Thank you.

And we will now go to Andrew Mcquilling of UBS Warburg.

Andrew, are you there?

Pick up your phone.

Okay.

I will tell you what, I will give you a call directly, Andrew.

So is that it then?

And it appears that we have no further time for questions.

At this time I would like to turn the conference back over to Mr. Jacobic for any additional or closing remarks.

Okay.

Thanks very much.

Well, starting at 11:30 a.m. today, a replay of this call will be available.

It will run until midnight, Thursday, February 6th, Eastern Standard Time.

The number to call for the replay is 888-203-1112, or 719-457-0820 with a confirmation code of 585353.

Additionally, the replay will be available on our corporate website, gillette.com a few hours from now.

For members of the media who have listened to the call and have additional questions, please contact Eric Krause, vice president, corporate communications at 617-421-7194.

For analysts having more detailed questions involving non-material information, I will be available to take your calls.

Thank you.

And have a good day.

And that concludes today's conference.

Thank you for your participation.