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Operator
Good day.
Welcome to the Gillette company's first quarter earnings results conference call.
Today's call is being recorded.
At this time for opening remarks and introductions, I'd like to turn the call over to Chris Jakubik, Vice President of Investor Relations.
Please go ahead, sir.
Christopher Jakubik - Vice President - Investor Relations
Thank you.
Good morning and thank you for joining us on the conference call, I'm Chris Jakubik, Vice President of Investor Relations, also present on the call are Chuck Cramb, our Chief Financial Officer, John Manfredi, Senior Vice President, Corporate Affairs and Eric Kraus, Vice President Corporate Communications.
As you know, during this call we may make forward-looking statements about the company's performance.
These statements are based on managements 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 on such forward-looking statements.
Now, let's review Gillette's first quarter 2003 results.
In a nut shell, the momentum of 2002 is continuing, but the balance of the year will remain challenging.
Let me begin with a couple of observations on the quarter.
First, our ongoing efforts to improve the quality of our earnings and strength and structure of our income statement are reflected in our first quarter results.
Evidence of strong trade and consumer demand for important new products and our existing brands drove top line growth and has established good momentum for the remainder of 2003.
We had strong below the line gains in the form of lower tax rate and share repurchase activity, and that helped to fund significantly higher advertising spending.
Also, double digit gains in operating profit and earnings came despite $44 million of unmatched functional excellence expenses.
By unmatched, we mean expenses that did not occur in Q1, 2002.
Functional excellence, as you know, is our multi-year program to enhance capabilities and reduce costs.
I would also note two items that one might term mixed benefits.
One of those was Europe, where the strong euro and pound sterling substantially boosted sales.
At the same time, strength of these occurrences also led to a significant increase in our cost of goods sold and overhead cost.
This is due to our major manufacturing presence in the region and the fact that we are net exporters from Europe.
The other item relates to our battery business.
Significant consumer pantry loading and incremental sales to the military led to strong gains in the Duracell business.
However, only a portion of these sales is likely to be incremental for the year.
And I will discuss our expectations for pantry deloading a bit later.
So overall, the first quarter was a solid extension of the momentum we established in 2002.
However, we anticipate that the rest of the year will have challenges, particularly if the overall environment at retail continues to weaken.
Let's now turn to the numbers.
On reported basis, net sales for the first quarter were just short of $2 billion, 14% above the first quarter of 2002.
Volume mix accounted for 9 percentage points of the upside.
I would highlight three main drivers.
First, new product success and the launch related pipeline building of two important new products, Mach3Turbo into Europe and our CrossAction Battery Toothbrush in the U.S.
The second driver would be sales comparisons in blade razor.
Q1 sales last year were dampened by a pre-price increase buying that occurred in Q4 of 2001.
And finally, there was strong war-related demand for batteries as consumers loaded up on C and D size cells and our sales to the military increased.
The positive impact of foreign exchange added 5 percentage points to sales, as the strength of European, and to a lesser extent Asian currencies more tha offset unfavorable exchange in Latin America.
Pricing was essentially flat as lower list prices, related to Duracell's price realignment, and increased competitive activity in Oral Care offset the benefit of price increases in blade razor.
Continuing on to the P&L.
Gross profit margin for the first quarter increased 60 basis points to 60.5% from 59.9% the prior year.
Driving the gain was favorable blade razor product mix, higher volumes and lower product cost at Duracell and cost savings from our strategic sourcing initiative or SSI.
But these positives were partially offset by higher year over year European based manufacturing costs due to strength in the Euro and pound sterling and incremental warranty expenses recognized by both Braun and Oral Care in the quarter.
The incremental warranty expenses relate to the extension of the warranty period on electronic appliances to two years in Europe, and thus our decision to increase our provision for potential future claims.
Moving to marketing.
Total spending on a reported dollar basis grew 17% in the first quarter versus last year.
Within marketing, advertising was up a strong 23%.
As a percent of sales, our advertising investment rose to 8.5% from 7.9% last year.
This was driven by higher investment and new and established brands and some great new advertising campaigns.
You've probably seen Oral-B's "Brush like a Dentist" campaign, Duracell's "Trusted Everywhere" and our Mach3Turbo advertising, which is now airing in Europe.
Sales promotion in the quarter rose 6% versus the first quarter of 2002, but declined to 3.8% of sales from 4.1% the prior year.
Let's now move to overhead and other expense.
In the first quarter, overhead and other expense was up 14%, due to higher European based costs, higher pension expenses, and $44 million of unmatched functional excellence expenses.
Importantly, without the functional excellence cost, overhead and other expense was actually down as a percent of sales to 26.7% from 29% in Q1 of 2002.
And this reflects our ongoing 0 overhead growth, or ZOG, initiatives.
For background purposes, first quarter 2003 functional excellence expenses were concentrated in three primary areas.
One related to expenses incurred as we establish our financial share service center in Europe.
The second related to the cost of our ongoing efforts to flatten our sales and marketing organizations and improve customer service in both North America and Europe, and third were expenses related to the outsourcing of some IT operations.
In terms of our functional excellence initiative overall, we now expect 2003 functional excellence expenses to be up slightly compared to the costs incurred 2002, which were $121 million.
We expect 2003 functional excellence costs will be in the range of $130 to $150 million, and importantly, will be dependent on the strength of the euro.
Now, back it our first quarter P&L and on to profit from operations.
In the quarter profit from operations climbed 16% to $380 million, driven by strong sales growth, ongoing favorable mix to our premium shaving systems, and SSI cost savings initiatives.
However, these gains were partially offset by higher European based costs due to exchange, $44 million of functional excellence expenses, and a double-digit increase in advertising.
Below operating profit, in the first quarter other charges were unchanged at $5 million.
Net interest expense was down $4 million, reflecting lower rates year over year.
However, this was offset by a swing from an exchange gain in the first quarter of 2002 to an exchange loss in 2003, mainly due to movement in the Argentinian peso.
So, as a result of everything discussed thus far, first quarter pre tax income climbed 16% versus Q1, 2002 to $376 million.
Moving to net income, it rose 18% to $263 million.
First quarter net income growth was enhanced by our lower tax liability, which decreased one point to 30% from 31% in Q1 of 2002.
For the full year 2003, we now expect our effective tax rate to remain at the new lower level of 30% versus the 31% reported in 2002.
Our fully diluted earnings per share for the quarter were 25 cents, up 19% from 21 cents the prior year.
In the quarter, EPS growth outpaced net income growth as a result of our strong share repurchase activities.
Average fully diluted shares outstanding in the quarter fell 2% to 1 billion 37 million from 1 billion 60 million in Q1 of 2002.
For the remainder of 2003, our intention is to moderate share repurchase from the levels seen in both Q4, 2002 and Q1, 2003.
And we anticipate using free cash flow for both share repurchase and debt reduction.
Now, let's look at the first quarter by product line, and we'll talk about our blade razor division first.
In the first quarter, blade razor sales rose 16% in reported dollars or 12% in constant currency.
The key underlying growth drivers were three-fold.
First, there was strong trade in consumer demand behind our Mach3Turbo launch in Europe.
The launch of Mach3Turbo helped send Gillette's blade value share in Europe up 1 percentage point to 76%.
In the Mach3 families blade value share in Europe rose 4 percentage points to 33%.
Second, there was a favorable comparison with Q1 of 2002.
Specifically we shipped to consumption in the U.S. of Q1 2003.
By contrast, we shipped beneath consumption in Q1 of 2002 on the order of about $50 million, due to a pre-priced increase buying in North America that occurred in Q4 of 2001.
The third factor driving Q1 sales was higher pricing and the ongoing tradeup to our Mach3 and Venus franchises.
Now let me give you a few statistics on the ongoing global success of Venus and Mach3.
In the first quarter, the combined global share of Mach3 and Venus blades rose 3.5 percentage points to 31%, consisting of a 2.8 point increase in the Mach3 families global blade value share to 27%.
And a nearly 1 point increase in the Venus global blade value share to just over 4%.
Beyond our very strong systems business, our disposable razors continued on the path to stabilization, driving stable unit share performance in the quarter, versus a year ago.
And with the second quarter launch of the new Sensor 3 Premium disposable in the U.S., we expect to stabilize our dollar share in disposables going forward.
Let's look now at profit from operations in the blade razor business.
First quarter blade razor profit from operations was up 15%, while the margin declined 30 basis points to 37.1%.
What happened at the margin?
Three things to note, favorable mix to our premium systems was offset by a double digit increase in advertising support, primarily behind Mach3Turbo, and unmatched functional excellence expenses.
Let's turn now to Duracell.
In the first quarter our battery sales rose 16%, in constant currency, net sales were still up a very strong 11% versus Q1 of 2002.
Now, these results were obviously stronger than expected, but I'd like to point out some special circumstances.
First, consumer pantry loading related to homeland security concerns, as well as higher sales to the military led to approximately $30 million in incremental sales in the quarter.
And based on past experience with pantry loading events, such as Y2K, we would expect only about 25% of these sales to be incremental to 2003, hence, the remainder, or about 75% of this upside, will result in lower consumer off take in shipments in coming quarters.
Second, Duracell benefited from favorable sales comparisons due to the dampening effect of recalling select hearing aid batteries in the first quarter of 2002.
And third, versus our expectations for Q1, the sale of our Couth African carbon zinc business closed later than anticipated.
And, together with strength in the South African rand, also enhanced top line growth relative to our expectations.
So excluding these three factors, Duracell's first quarter sales would have declined, as we had anticipated, in the mid single digit range on a constant currency basis.
And this would have been the direct result of our price deal realignment initiative and the divestiture of the carbon zinc business in South Africa and India.
Turning to Duracell's first quarter profit from operations.
Profit of $39 million and margin of 10% were up significantly versus a loss of $1 million in Q1 of 2002.
What led to the upside?
Well, favorable comparisons due to the hearing aid recall in Q1 of 2002, incremental war related volume this year, and favorable exchange in cost savings.
And these factors more than offset higher advertising and unmatched functional excellence costs.
While these results were above expectations, we maintain a guarded view about the balance of the year.
First of all, because about three-quarters of the war time benefits we experienced in Q1 will be given back during the year, as I said.
And second, because the dynamics of the battery category are still evolving.
Before we go on to discuss Oral Care I'd like to provide our perspective on the progress of Duracell's price deal realignment and the overall dynamics of the U.S. battery category.
Since we began the effort to turn around Duracell, our objectives and actions have been straight forward.
We expect Duracell to achieve industry-leading profit margins, whatever level that might turn out to be, to maintain its market share and to grow the battery category.
To date, Duracell has made significant progress.
Through the price deal realignment, Duracell's retail prices stabilized year over year in the first quarter, while average retail prices for price brands and private label continued to decline through aggressive promotional activities.
In terms of cost savings initiatives, while still in relatively early stages, Duracell is now showing good progress with its profit margins and Duracell is investing in restoring brand value to the category with new product introductions, such as our Alkaline and Lithium Prismatic sales and through our highly effective "Trusted everywhere" advertising campaign.
By contrast, and unfortunately, actions within the price brand segment have caused fundamentals to deteriorate further.
Quite frankly, we think the recently announced price brand program will not contribute to the long-term growth of the category, and will act to compound the deflationary trend seen in the battery category over the past several years.
Specifically, we view this price brand program as representing a continuation of what is essentially a free sale giveaway.
As part of the price deal realignment, Duracell eliminated it's free sale activity in the first quarter of this year.
We did so because free sales don't result in increased consumer use or consumption of batteries.
To sum up, we believe that Duracell's program is focused on what's right for the long-term dynamics of the category, what's right for retailers and what's right for consumers.
We are committed to our price deal realignment program.
However, as we have demonstrated in the past, we are also fully committed to maintaining our dollar market share and will act accordingly.
Now, let's move to the Oral Care segment.
In the first quarter, sales rose 11%, in constant currency sales grew 6%.
These gains were paced by solid growth in both the power and manual segments of the business.
North America saw solid growth behind the launch of the CrossAction Power Battery Toothbrush and saw strong gains across all segments of the manual business, including our new CrossAction Vitalizer manual toothbrush.
Asia Pacific delivered significant gains in manual, driven by classic, vision and our stages line of children's tooth brushes, as well as gains in the battery segment.
However, these gains were tempered by weak Latin American results due to unfavorable exchange, weak consumer spending affecting the rechargeable segment in Europe and unfavorable pricing and higher promotional support due to ongoing competitive activity in the battery segment.
In the quarter, our products continued to display very strong momentum in the total brushing category.
From a category perspective the global market in constant dollars grew in manual but was soft in the overall power segment.
And the softness in power was due to weak category sales in Europe.
Against this backdrop, our Oral Care business built further on its number one global position in the total brushing category.
According to the latest data, Oral Care's value share was 34.9%, up 1.5 percentage points, the highest share point gain among all global competitors.
And importantly, our value share increased in all regions.
Turning to profits.
First quarter profit from operations in Oral Care fell 7% to $49 million and operating margin fell 340 basis points to 16.5%.
What happened here?
We had higher sales from new products and improved factory performance, but they were offset by four factors.
Higher export costs from Europe, a double-digit increase in marketing spending to launch new products, unmatched functional excellence expenses, and higher warranty related costs of approximately $5 million.
Let's turn now to Braun.
In the first quarter, Braun sales rose 15%, but only 3% in constant currency.
Braun drove strong gains in male shaving, particularly in North America, where Braun's U.S. male shaver value share rose 2.4 percentage points to 21.1%.
Female hair removal also posted strong gains in the AME regions and Asia where we had good initial results from the launch of the new Soft Perfection epilator in Japan.
Our gains in these areas were offset by two significant factors, one was soft consumer demand, where ongoing weakness affected results in both the important European market and Latin America.
The other factor was that Braun faced unfavorable sales comparisons in it's household products business.
As you may recall, Q1 2002 results benefited, particularly in Europe and AME, from the bankruptcy and related product line rationalization of Mulinex, a key small appliance competitor in these regions.
Turning to profit from operations.
Braun posted a loss of $6 million in the first quarter compared to a profit of $3 million in Q1 of 2002.
An important factor here was incremental warranty costs of about $11 million.
Higher European manufacturing costs, and unmatched functional excellence expenses also partially offset benefits from improved product mix.
Looking at personal care.
Reported sales in the quarter were up 4% or 1% in constant currency.
In the quarter, the launch of the improved Right Guard, Soft & Dri and Gillette series anti-perspirants and deodorants with our unique odor fighting power-packed capsules saw good initial sell-in to the trade.
However, these gains were significantly offset by the ongoing drag from Latin American currency, and unfavorable comparisons with Q1 2002 when pipeline shipments of the reformulated Gillette Series shave preps in North America commenced.
Turning to profit from operations.
Personal care posted a slight profit of $400,000 in the first quarter, but that was down significantly from profit of $11 million a year ago.
And this decline reflected continued investment to revitalize the business, as well as unmatched functional excellence expenses.
Now, let's look briefly at our business by geographic region.
In North America, first quarter sales increased 13%, led by double digit gains in Duracell due to the consumer pantry loading discussed earlier, in Braun with strong sales in male shavers and in Oral Care where the launch of the CrossAction Vitalizer and CrossAction Power toothbrushes led gains in both manual and power brushing.
Blade razor also delivered significant growth, driven by continued penetration of the Mach3 and Venus franchises and the favorable comparison with Q1 2002 that was noted earlier.
Turning to Europe, reported sales were up 25%, but just 3% in constant currency.
The blade razor business drove growth during the quarter with the launch of Mach3Turbo and continued penetration of the Mach3 and Venus franchises led to double digit constant currency gains.
By contrast, Braun, Oral Care, and to a lesser extent, Duracell, were all impacted by a soft economic climate with slower consumer off take and a declining market in electronic devices.
In Latin America, first quarter sales were down 16% in reported dollars but up 10% in constant currency.
The economic crisis in Argentina, and currency devaluation in Brazil and Mexico, resulted in sales declines across all business segments in reported dollars.
While all business segments achieved price increases to offset devaluation, local consumption across the region continued to drive year over year declines.
Blade razor was a notable standout as Presto Barba and Mach3 fueled strong market share results, particularly in Mexico.
Let's go to the AME region comprising Africa, Middle East and Eastern Europe.
Sales in the quarter climbed 16% in reported dollars and 13% in constant currency.
Growth in the region was driven by strong results across all businesses in the growing Russian market.
For instance, the launch of Mach3Turbo in Russia helped grow Gillettes' value share in Russia from 85%, up 2 percentage points versus a year ago.
The simultaneous restaging of the Gillette Series line of shave preps, shave preps drove significant growth in personal care.
And Braun not only had significant growth in Russia, it had a strong performance across all product lines in AME.
This growth more than offset a Duracell sales decline in the region, due to the divestiture of it's carbon zinc battery business in India and South Africa.
Finally Asia Pacific's reported sales were up 13% in the first quarter, excluding exchange, sales grew 4%.
The key drivers of growth in Asia in the first quarter were blade razor and Oral Care.
Blade razor growth was driven by continued growth in the Mach3 franchise, aided by Mach3Turbo success in Japan and trade up from double edged blades that fueled double digit unit growth in both disposable and systems across the region.
In Oral Care, according to the latest figures, Gillette's value share of total brushing in Asia increased 1.3 percentage points to a solid 19.8%.
This was driven by growth in manual, particularly in China and Korea, as consumers traded up to Vision and Classic and in growth in stages line of the children's tooth brushes across the region.
Importantly, these strengths worked to offset softness in Braun's male shaver business, where we faced increased competitive aggressiveness in Japan's mid priced shaver segment.
I'll now review some highlights of cash flow and the balance sheet for the quarter ended March 31, 2003 and I'll start with working capital.
Receivables were down 14% from last year's first quarter at $1 billion.
Days sales outstanding also improved substantially, falling 15 days from a year ago from 62 days to 47 days.
Progress was also made on inventories, which was down 7% versus last year's first quarter, decreasing to $1.1 billion.
While day's inventory on hand at 108 days was down 12 days versus last year's first quarter and accounts payable increased $58 million to $523 million, up 12% versus 2002.
With days' payable outstanding decreasing 4 days to 53 days versus Q1 of 2002.
Moving on, capital expenditures were lower for the 12th consecutive quarter.
During the first quarter, CAP EX decreased to $48 million from $78 million in Q1 of 2002.
While this represented just 2.4% of net sales in the first quarter, we expect CAP EX will be in the range of 7% of sales in 2003.
All this resulted in very strong free cash flow in the first quarter of $498 million, up from $193 million in the first quarter of 2002, which included a $196 million pension contribution.
We used this free cash flow, together with a reduction in our cash balances, to repurchase 23.5 million shares of our own stock, for a total cost of $706 million or an average cost of approximately $30 per share.
So out of a current authorization of 150 million shares, about 132 million shares have been repurchased to date.
As a result of our share repurchase activity, net debt increased by $364 million compared with year end 2002 to $3.2 billion.
So to summarize what we saw in the first quarter, our new products continue to drive growth.
We are improving the quality of the income statement, but the remainder of the year offers a number of challenges.
That concludes my report.
We'll 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, sir.
The question and answer session will be conducted electronically.
Any participant wishing to ask a question, please press star 1 on your touch tone telephone.
We'll take your questions in the order that you signal and as many as time permits.
Again, that is star 1 to be placed in the queue for a question.
Additionally, if you're on a speaker phone, please be sure that your mute function has been turned off so that your signal can reach our equipment.
Our first question will come from Wendy Nicholson of Smith Barney.
Wendy Nicholson
My first question, just at the very end there you mentioned CAP EX as a percentage of sales going up to 7%.
That's a big number and higher than you've done in the last couple of years.
Can you talk about what's going to accelerate, where you're spending that money?
And is 7%, kind of, a new target or is this year abnormally high for some reason?
Christopher Jakubik - Vice President - Investor Relations
Wendy, I think we've been saying all along that within the financial targets we give you that our target for CAP EX is going to average 7% of sales on a go forward basis.
It was lower last year, yes.
It was lower in the quarter.
However, it's really a matter of timing.
I think getting to that 7% is a function of new product activity.
But we really don't want to get specific behind what.
Wendy Nicholson
Okay.
Must have been my misunderstanding because I thought for the last several years it had been significantly below that, so that strikes me as a big number.
John Manfredi - Senior Vice President - Corporate Affairs
Wendy, last year was significantly below it, that was really, again, looking at the new flow of new product spending.
This year we're back to what we feel is an ongoing target rate of in the vicinity of the 7% number.
As Chris said, it's new product driven.
It's also significantly driven by cost reduction opportunities.
Wendy Nicholson
Okay.
Can you talk a little bit more then, also, about functional excellence, with the pulling forward of some of the expenses.
Number one, did you comment on how much functional excellence savings you expect to see this year, given the fact that your spending is coming forward?
And has anything changed in terms of the total spending, I think the 350 to 400 you were supposed to have done by 2006?
Is that being pulled forward at all in terms of your targets?
Christopher Jakubik - Vice President - Investor Relations
Yeah, Wendy a couple of things.
We still expect the investment stream will outweigh the benefit stream, but we haven't given any targets on what we expect the savings to be.
But, certainly in Q1 we had the opportunity to accelerate the implementation of the program, but we remain on track and are hitting our internal measures.
In terms of cost of the total project, we will be at the higher end of that 350 to 400 range, if not a bit above due to currency.
You have to keep in mind that when the program was put together, the euro was around 90, and about a third of the program is in Europe.
So currency is having an impact there.
Wendy Nicholson
But still the guidance that the savings will offset the spending, that still holds true for 2004?
Christopher Jakubik - Vice President - Investor Relations
Yes.
Wendy Nicholson
Okay.
Terrific.
Thanks.
Operator
And our next question will come from Carol Willke of Merrill Lynch.
Carol Wilke
Thanks.
My first question, on the warranty accurals, is that a one-time impact or are we going to continue to see higher expenses in the Braun and the Oral Care related to that?
Charles Cramb - Senior Vice President-Finance
Carol, this is Chuck.
That is basically a one-time impact.
And it was a change in what we needed to provide for because in Europe w extended the warranties to two years.
Carol Wilke
And what were they before?
Charles Cramb - Senior Vice President-Finance
Before, wer used to offer a one year warranty.
Carol Wilke
And I was interested, in terms of the cautionary comments going forward, about a challenging retail environment.
Because I would - it seems like most of your business, one of the beauties of consumer nondurables, is that it's really not exposed to retail sales with the exception of Braun and some of the higher end products.
I mean, was that a blanket statement or was that particularly in response to, you know, Braun?
Because I don't think you guys usually talk about a challenging retail environment as being a challenge going forward for your company.
Christopher Jakubik - Vice President - Investor Relations
Carol, I think if you talk to the retailers, what they are going to tell you is that gas prices are up, foot traffic is down and the average market basket per trip is down.
And this is going to affect everybody.
That said, the impact to Gillette will be relatively moderate.
I think what we can look at is that we're experienced at driving tradeup in all types of economic climates.
Our compliment if you look what we've accomplished to date during this downturn.
Mach3Turbo captured a 10 share of European blades in three months in a weak environment.
Venus is continuing to gain share globally.
CrossAction Vitalizer and Braun Free-Glider are also gaining share.
Those are all premium end products.
Bottom line, we think there's going to be general weakness out there but we think we'll do relatively better and our shares will hold up.
Carol Wilke
Okay my last question, the 23% increase in advertising in the quarter, is that a good run rate for the rest of the year or was that, I mean, you had some big product launches and I know there's some competition particularly on the female side.
Christopher Jakubik - Vice President - Investor Relations
Carol, I think, we've said we've been targeting the 8% range but I'm not going to give a point estimate for 2003.
We've said all along that we want to invest more in brand equity but also provide for shareholder returns.
I think the key there, in terms of what we're seeing and what we saw in the first quarter was that we've stepped up our spending behind some investment grade advertising that wasn't there before.
Now, you look at Passion Venus, the "Pink Cadillac" commercials, Oral-B's "Brush like a Dentist", in personal care we're going to have star pitcher, Randy Johnson, pitching power cap's anti-perspirants and deodorants.
And then, as you've seen since the fourth quarter, Duracell's "Trusted everywhere" campaign.
Carol Wilke
Thanks a lot.
Operator
And next we'll hear from Amy Chasen of Goldman Sachs.
Amy Chasen
Hi.
I have two questions.
First of all, are you guys hearing anything in the trade about a new male shaving product from Schick?
Christopher Jakubik - Vice President - Investor Relations
Yeah.
I think we've heard, as you have Amy, that Schick will be introducing a four-bladed system in the fourth quarter.
Amy Chasen
Can you comment on, you know, how you guys are going to respond to that and whether you think the cost of doing business in the category could increase in the near term?
Christopher Jakubik - Vice President - Investor Relations
Yeah, Amy.
A couple of things I'd say to that.
While we haven't seen or tested the product, I can say that we know from several decades of research that adding blades alone does not ensure a superior product.
For instance, if you look at the split of market share in the blade category, Venus and Mach3, our three-bladed systems have a 32% share globally.
If you add up all competitors three-bladed systems, it would only add to a -- add a one share point.
So, you know, that said, I think to date nothing has matched Mach3 or Venus, and we're confident that we'll maintain product superiority, that our product pipeline is strong, that our market share and our brand loyalty will remain strong and marketing support is improving.
Amy Chasen
And so I guess, what I'm just trying to understand, I don't know whether the product is superior either, but even if it isn't, if Energizer decides to support it with heavy spending, that could cause -- that could force you guys to either lose some market share and be billing to do that or to respond to increased spending as well.
Can you comment on that and how you'd be thinking about something like that?
Christopher Jakubik - Vice President - Investor Relations
We expect all competitors' products, you've got intuition, you've got, perhaps this new four-bladed system, they will be marketed aggressively to drive trial, but retention is the key issue.
I think if you take a step back and look across the category, all the new products being introduced right now are at the premium end.
And that adds to category value and growth and quite frankly justifies future price increases on existing lines.
Amy Chasen
Okay.
And just last thing on this topic.
You said that you guys were cautious about the remainder of the year.
Is this upcoming launch from Schick one of the reasons for that caution?
Christopher Jakubik - Vice President - Investor Relations
I think the remainer of the year, as I mentioned, it offers a number of challenges.
The retail environment is weak and not improving, the battery category remains challenging, you've got the pantry deload and certainly ongoing concerns over battery category dynamics.
Currency comparisons are going to become more difficult during as you move through the year and obviously you've got ongoing competition.
Amy Chasen
I guess along those lines I just want to shift gears to batteries for a second.
The statement you made on this call is probably the strongest that I've heard you talk about your competition and about their promotional strategy.
Can we basically make the assumption, based on your comments, that your spending is going to go up in batteries in the remainder of the year, in the next three-quarters?
Christopher Jakubik - Vice President - Investor Relations
I don't think I'd really make any assumptions, other than looking at our experience to date with our program has been very positive.
Retailers like the line pricing concept, the fact that we're flattening the price curving across pack sizes.
And they see the opportunity to stabilize the category and create an environment where there's a possibility to achieve dollar growth.
Certainly remain concerned about the ongoing deflationary pressures in the category, but, as I mentioned, we do not intend to lose dollar share.
And we will assess the situation on a constant basis.
Amy Chasen
It just feels like looking into the next three-quarters that your two biggest businesses, blades and batteries, are experiencing some increased competition, and that that could temper your margins.
Is that a fair way to look at ?
Christopher Jakubik - Vice President - Investor Relations
No, I think as you look at the remainder of the year, as you look at our business superior, we expect competition, healthy competition in our businesses.
And we will address that as we see fit.
And at the end of the day, we're still confident that we will be able to grow our earnings consistently and at a level that will result in top tier performance over time.
Amy Chasen
Okay.
Thank you.
Operator
And next we'll hear from Ann Gilan of Lehman Brothers.
Ann Gilan
Thanks very much.
Chuck, I'm just wondering if you could give us some more color on two aspects with CAP EX.
Is it possible to split it between maintenance and new expenditures?
And then secondly, what the phase in as we get towards 7% for the full year will be first half versus second half?
Charles Cramb - Senior Vice President-Finance
I wouldn't want to go into too much detail in terms of where we're spending the money.
But maintenance or what we would call replacement capital is probably, if you were to tier it, the third tier of the expenditure.
In terms of the pickup in rate of spend over the year, it will consistently pick up quarter by quarter.
Ann Gilan
Terrific.
Then just jumping back to batteries.
Chris, I was struck by your statement that fundamentals are deteriorating, because you've had the best quarter of the three that have now reported in the U.S. in particular.
So I'm wondering if you can give us some more color about what you're seeing at the category level currently?
And in particular, if you could isolate out your pricing actions, what's the incremental deflation you're seeing?
Charles Cramb - Senior Vice President-Finance
Well, from our perspective, if you look at category, in terms of our pricing, we did increase the list price but that was completely offset by a reduction in free sale give aways and a cut in promotional spending.
So our pricing was flat year over year.
So,I think that's what you're looking at on a pricing.
As you look at this quarter, we obviously benefited from the -- I guess the war-related buying.
The interesting take away that I think you should note is that during the emergency buying in February and March, consumers brought the brand they trust, and Duracell gained share.
Sales of our C and D sized cells were up 90% plus year over year.
That's what we see going on.
As you move forward, obviously new pricing strategies from competitors will go into effect and we'll have to see how that plays out.
Ann Gilan
Okay.
But you specifically said that fundamentals are deteriorating, and that's what I'm trying to get a handle on, because the category had one of its strongest quarters as did you.
Charles Cramb - Senior Vice President-Finance
Yeah, well category had strong quarter because of consumer stockpiling.
If you look out, as I said, the pricing environment, we'll have to see how it plays out.
If you do the simple math, Duracell versus price brands will likely be at a 50% premium versus 25% historically.
Or vice versa, price brands will be at a 30% discount versus 20% historically.
So, I mean, that's the math, that's what we're looking at.
As I said, we're going to have to assess it on an ongoing basis.
Ann Gilan
Okay.
Thanks.
And then just two housekeeping, what was the contribution from the shift in the price the increase to early February on blades in North America?
And secondly, when did the South Africa battery sale close?
Charles Cramb - Senior Vice President-Finance
Second one first, South Africa closed end of February.
And in terms of the impact from the price increase in terms of year over year comparisons, we said it was about $50 million in sales.
Ann Gilan
Terrific.
Thanks much.
Operator
Our next question will come from Joe Attebello of CIBC World Markets.
Joe Altobello
Hey, guys.
Good morning.
Just a couple of quick questions.
First, Chris, it sounded like, and maybe I misinterpreted you, it sounded like you guys were somewhat surprised by the reaction of your competitors to your new pricing realignment in batteries.
And let us know if that's the case.
Second on the tax rate, is the reduction in tax rate due to increased over seas sales?
Christopher Jakubik - Vice President - Investor Relations
Yeah, Joe.
Let me take the second one first, again.
In terms of the tax rate, the lower tax rate was driven by geographic mix and some tax planning, but 30% that we're at, that's stain able on a go-forward basis.
In terms of battery category and our price deal realignment, , you know, we're committed to the long-term benefits of that strategy.
Going into it we expected some competitive hits along the way.
At the end of the day the excessive trade sell promotions and giveaways are not part of a winning formula and we won't give in to any exceptions that might arise.
Joe Altobello
But, you did expect your competitors to match you when you reduced prices in February?
Christopher Jakubik - Vice President - Investor Relations
I wouldn't want to speculate on what our expectations may or may not have been.
Joe Altobello
Okay.
Thanks.
Operator
And next we'll hear from Andrew McQuilling of UBS.
Andrew McQuilling
Thanks very much.
Congratulations on a very nice quarter.
Chuck, your cash flows were extremely strong in the March quarter, $500 million or so, up about $100 million, you know, before the pension contributions.
Do you have a public target for 2003 cash flow, and do you have any plans to make further contributions to pension in '03?
Charles Cramb - Senior Vice President-Finance
Number one, we don't have any specific public targets in terms of the year.
We believe in the long-term we should be able to deliver 12% to 13% of sales in terms of free cash flow target.
In terms of the pension contributions, we may make some minor further contributions this year, but they really will be minor to what we've done in the past.
As we look at the pension programs, we do understand, you know, our commitment to keep those well funded.
Today if you look at the numbers against the ABO, I think we're within 95% of the ABO liability.
So we feel pretty good about our level of funding now.
Andrew McQuilling
Terrific.
And I guess you've stated, I think public targets for working capital is about 8% of sales?
Do you see, you know, further progress in this quarter continuing or is 8% the right number to think about?
Charles Cramb - Senior Vice President-Finance
I think that's the targets we've put out in the past, are the right numbers.
We feel pretty good about the level -- we feel very good about the levels which we're operating on both accounts receivable and payables, and we have continuous improvement program under way in inventories.
We think we can take it down further over the intermediate term.
Andrew McQuilling
Maybe one last one.
In battery you've talked about international reconstruction and rationalization as a way to improve international profitability.
Can you talk about the timeframe on those actions and will be willing to state the size of the expected savings for the international battery business?
Charles Cramb - Senior Vice President-Finance
no, I don't think we've ever given out the size of the expected savings.
But what we're looking at is trying to get our operating margins internationally up to industry leading levels.
And we're assessing the different markets that we outlined at Cagne right now.
So - and we've taken the action on South Africa and India in terms of the zinc businesses and we're, you know, the assessment of the rest of the market is ongoing.
Andrew McQuilling
Thanks.
I guess you mentioned a couple of times that you're cautious for the rest of the year given some of the retail outlooks, but you just spent $700 million on your own stock.
Are you happy with your purchases?
Charles Cramb - Senior Vice President-Finance
Very.
Andrew McQuilling
Thanks very much.
Operator
And next we'll here from Art Cecil at T. Rowe Price.
Art Cecil
Good morning.
Christopher Jakubik - Vice President - Investor Relations
Good morning, Art.
How are you all?
Good, how are you doing?
Art Cecil
I'm fine.
Let's see, earnings up 19% in the first quarter and they were flat in the fourth quarter, can you better define consistency for me going forward?
Christopher Jakubik - Vice President - Investor Relations
I think what we're looking at is we do want -- there is a rather consistent pattern as earnings fall during the quarters, there's obviously things in the comparisons that will affect the growth rates.
So I think what we're looking for is consistent performance on an annual basis.
You're always going to have puts and takes on a quarterly basis.
Art Cecil
So, it should be more like 13% of the full year '02?
Christopher Jakubik - Vice President - Investor Relations
That would take me into the area of guidance, Art.
Nice try though.
Art Cecil
Year end debt levels, what would be your best estimate on that?
Christopher Jakubik - Vice President - Investor Relations
Again, that would be getting into the area of guidance.
As we said, use of free cash flow will -- we've got three options, reduce debt, repurchase shares and invest in the business.
So it will be a combination.
Art Cecil
Chris, you gave some numbers on the share repurchase to date on the existing authorization, and I wasn't quite clear on the numbers.
Are there like 18 million shares left on the current authorization?
Christopher Jakubik - Vice President - Investor Relations
That's correct.
Charles Cramb - Senior Vice President-Finance
That's the correct number.
Art Cecil
When does the board meet?
Charles Cramb - Senior Vice President-Finance
Meets six times a year.
Art Cecil
I wanted to clarify the functional excellence spending of $44 million in the first quarter.
And that was versus 0 a year ago?
Christopher Jakubik - Vice President - Investor Relations
Yes.
Art Cecil
So all of last year's $120 million, or whatever it was, was done in the last three-quarters?
Christopher Jakubik - Vice President - Investor Relations
Yes.
Art Cecil
What was the second quarter last year.
Christopher Jakubik - Vice President - Investor Relations
Second quarter was -- second quarter last year was $34 million.
Art Cecil
Okay.
And then as far as -- I'm just trying to figure out whether the functional excellence spending that you're doing, do you consider this all one-time spending, or is some of this ongoing spending related to having an upgraded organization, upgraded system?
In other words, if somebody looks at $44 million, should we think of that as one time?
Christopher Jakubik - Vice President - Investor Relations
I think it's the cost of doing business, of improving the business.
We're not going to try and get into the game of playing the one timers.
It's a defined program.
As we said, $350 to $400 million, if not a bit above due to currency, on this program.
I think if you ask Jim Kilts if he has the opportunity to get things beyond functional excellence, maybe you're looking at, you know -- if he can get $40 to $50 million on an ongoing basis and get the types of returns we expect, yeah, it may be done.
Art Cecil
Okay.
Did you quantify the total incremental sales from new products in the first quarter?
I know you've mentioned, you know, the launch in Europe and the Oral Care products.
But all together, did you put any numbers on that?
Christopher Jakubik - Vice President - Investor Relations
No, we didn't.
Art Cecil
Okay.
And then the final thing is regarding -- through the income statement, pension retiree expenses, this sort of thing, what did that number look like in the first quarter versus a year ago?
Christopher Jakubik - Vice President - Investor Relations
Well, in addition to the required amortization of the $55 million on the year, in the first quarter we had a minor stepup in overseas pension expenses, but it wasn't material.
So I think you're still looking at around that figure.
Art Cecil
Okay.
Thanks a lot.
Christopher Jakubik - Vice President - Investor Relations
Any more questions?
Operator
Again, it is star 1 to be placed in the queue for a question.
We'll next hear from Andrew Shore from Deutsche Banc.
Andrew Shore
Good morning.
Chris, first, you can sell a hammer to the Pentagon for $200, can you tell me are these higher margin sales to the military?
Christopher Jakubik - Vice President - Investor Relations
[laughter] No.
No.
No.
We're standup about that stuff.
It's, you know -- it was incremental sales to the military, but it would not have affected, by itself, in a material fashion.
Andrew Shore
Okay.
And then also treat me like a five-year-old.
In the press release it says, "We intend to maintain both our market leadership and market share in batteries."
How do you plan on doing that, when RayOvac's spread now is the biggest spread ever?
Does this sort of negate your (INAUDIBLE) move?
Christopher Jakubik - Vice President - Investor Relations
We'll have to see how things play out.
We have been very encouraged by the way retailers have adopted our program.
We'll have to see how much retailer support they get.
Andrew Shore
But what do you do if your shares start to fall?
I mean, how do you fight this battle without lowering prices again?
Christopher Jakubik - Vice President - Investor Relations
I think there's a lot of levers we have at our disposal, but I wouldn't really want to speculate on any one of them.
Andrew Shore
It seems like the game is played, 90% of the biggest lever is priced.
So I guess we can sort of leave it at that.
Christopher Jakubik - Vice President - Investor Relations
As I said, Andrew, we don't expect to lose dollar share on a go-forward basis, and we will act accordingly.
Andrew Shore
Also your sales force in Oral Care is trying to sale power tooth brushes by making the commentary the category is over SKUed.
You're particularly going after Colgate.
Has that worked?
Christopher Jakubik - Vice President - Investor Relations
I wouldn't want to confirm that we're making any sort of sales pitch along those lines.
I think what we're looking at is we're coming out with some great new products.
And as you look across the Oral Care category, it's, you know, you're getting a significant acceleration of growth, which always causes a lot of new products and some sharpening and competitive activity.
The market is still settling out in terms of price points and products that the consumer favors.
So all we can do is come out with the best product we can.
Andrew Shore
And to follow up on Art's question about quantifying new product sales, you said you didn't do but I'm asking can you do it?
What do you get from Mach3Turbo launch in Europe year?
This quarter.
Christopher Jakubik - Vice President - Investor Relations
That's a level of detail that we just don't quantify.
Andrew Shore
Okay.
Thanks.
Operator
And that's all the time we have for questions.
I'll turn it back over to you, sir, for any closing comments or remarks.
Christopher Jakubik - Vice President - Investor Relations
Alright.
Thanks a lot.
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Thank you and have a good day.
Operator
That concludes today's conference.
We thank everyone for your participation.