寶潔 (PG) 2003 Q2 法說會逐字稿

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

Today's call is being recorded.

At this time for opening remarks and introductions I would now like to turn this conference over to Mr. Chris Jakubik, Vice President of Investor Relations.

Please go ahead, sir.

Thank you and good morning.

Thanks for joining us on our 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 of Corporate Affairs and Eric Kraus 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.

My comments today on Gillette's second quarter 2003 results will be relatively brief for two reasons.

First, in many ways our results through the second quarter of 2003 speak for themselves, particularly in the sense that the momentum of 2002 has continued.

The cost savings initiatives are delivering, the quality of our earnings and the strengths of our income statement continue to improve and our brand franchises continue to strengthen with several successful new products.

The second reason is that Marianne Tesh, Vice President of Blade Razor Marketing, will join us to talk about some exciting new product activities in blades and razors that we have planned for the coming months.

Before we get into the details of the quarter, one quick comment on comparisons.

Specifically, the second quarter and six-month numbers quoted from here on out will excluded the one-time gain on the sale of our rights of Vanica in 2002.

If you recall, Vanica is a prescription cream that slows the growth of facial hair in women.

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

And reconciliation of these figures versus our GAAP figures is available on the Investor Relations section of our website.

With that in mind, let's turn to the numbers.

On a recorded basis, net sales for the second quarter were $2.25 billion, 11% above the second quarter of 2002.

Volume mix was up 5% driven by new product gains in blade razor and Oral Care and an exceptionally strong performance in Braun.

The positive impact of foreign exchange added 6% as the strength of European currency more than offset unfavorable exchange in Latin America.

And pricing was flat as the benefit of price increases in blade razor was offset by lower list prices related to Duracells' price deal realignment in North America and increased competitive activity in Oral Care.

Year-to-date net sales rose 13% to $4.2 billion.

And it breaks down like this: volume mix was up a strong 7%, the favorable impact of exchange was 6%.

And pricing was flat, again the result of blade razor price increases offset by lower list prices in Duracell and increased competitive activity in Oral Care.

Continuing on through the P&L, Q2 gross profit margin increased 80 basis points to 61.4% from 60.4% the prior year.

Positives were favorable product mix in our blade razor business, cost savings from our strategic sourcing initiative, or SSI, and manufacturing efficiencies, particularly at Duracell.

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 pension expense and functional excellence cost within cost of goods sold.

Through six months gross margin was up 70 basis points to 61% from 60.3% the year before.

Here again, the main drivers were favorable product mix in blade razor together with SSI savings and manufacturing efficiencies.

And they more than offset higher exchange-driven European-based costs.

Moving to marketing, total spending on a reported dollar basis grew 18% in the second quarter versus last year driven by higher advertising.

Year-to-date marketing spending was up 17%.

Within marketing, advertising in the second quarter rose to 8.2% of sales versus 7.9% in 2Q, 2002 and year-to-date advertising spending was up 19% to 8.3% of sales from 7.9% last year.

Driving this higher spending is the fact that we continue to support new and existing brands with investment grade advertising across all our businesses.

Sales promotion in the second quarter increased slightly as a percent of sales from 4.3% -- or rather, to 4.3 from 4% the prior year as we supported new product activity in blade razor, Oral Care and Personal Care.

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

Let's go to overhead and other expense now.

In the second quarter overhead and other expense as a percent of sales fell 160 basis points from 28.1% in Q2 2002 to 26.5% this year.

This reduction was achieved despite higher European-based costs due to exchange and incremental pension expenses.

Year-to-date OOE was down as a percent of sales, as well, to 27.6% from 28.5% last year.

Over the first six months of 2003 our cost saving efforts offset three drags: higher European-based costs due to exchange, nearly $40 million of incremental functional excellence expense and incremental pension expense.

In terms of our functional excellence initiative overall, we continue to expect 2003 functional excellence expenses will be in the range of 130 to $150 million, having incurred $42 million in Q2 and $86 million year-to-date.

What's important to note is that incremental functional excellence cost did not significantly impact the second quarter performance of any business unit and only blade razor and Braun saw meaningful unfavorable comparisons on a six-month basis.

On to profits from operations.

In the quarter profits from operations excluding the 2002 Vanica gain climbed 21% to $505 million and margin increased 170 basis points to 22.4%.

For the first six months profit from operations climbed 18% to $885 million, with a margin gain of 100 basis points to 20.9%.

Gains in both Q2 and the six months of 2003 were driven by strong sales growth from new products, ongoing favorable mix to our premium shaving systems and SSI cost savings.

And these gains more than offset four factors: higher European-based costs due to exchange, a strong double-digit increase in marketing spending, $55 million of incremental functional excellence expenses in the first half of 2003 and higher pension expenses.

Below operating profits in the second quarter, other charges fell $2 million to $22 million and interest expense was down $5 million reflecting lower rates year-over-year.

However, this was partially offset by a swing from an exchange gain in Q2 of 2002 through an exchange loss this year.

Through six months other charges fell $3 million to $26 million, again with a reduction in net interest expense being partially offset by a swing from an exchange gain in 2002 to an exchange loss in 2003.

So, as a result of everything discussed thus far, pretax income was up a very strong 22% versus last year's second quarter at $483 million.

Moving to net income and excluding the 2002 gain on Vanica, it rose 24% in the second quarter to $338 million.

Year-to-date net income rose 21% to $601 million.

And importantly, net income growth in both Q2 and year-to-date was enhanced by a lower tax rate, which decreased 1 point to 30% from 31%.

In terms of earnings per share, our second quarter diluted earnings per share rose 27% to 33 cents.

That's up from 26 cents the prior year excluding the gain on Vanica.

For the first six months our diluted earnings per share rose 23% to 58 cents.

And in the quarter and year-to-date, EPS growth outpaced net income growth as a result of our strong share repurchase activity with average diluted shares outstanding down 2.8% year-to-date.

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

In the second quarter blade razor sales rose 14% in reported dollars or 8% in constant currency.

The key underlying growth drivers were threefold.

First, strong consumer demand for the Mach3 family continued driven by the success of Mach3Turbo in North America and Europe.

In fact, in the second quarter the Mach3 blade value share in the U.S. rose 3 percentage points year-over-year to 33% and in Europe gained 5 points to 35%.

This drove Mach3 global blade value share up 3 points to 28%.

The second gross driver was Venus.

Led by the launch of Venus Passion and the Spa Collection in North America.

And the Q2 numbers on Venus performance are impressive.

Venus U.S. razor sales at retail grew 4% and razor value share was flat in the quarter versus last year despite a strong competitive product launch.

And Venus' value share of blades rose 1 point in the U.S. to nearly a 10% share of the entire blade market, men's and women's combined.

The third growth driver was disposable with a strong initial sell-in of the Sensor 3 disposable in North America.

For the first time in four years we gained dollar share in our disposables business.

In fact, after a late April launch, Sensor 3 achieved a 2.8% value share of total U.S. disposable during Q2, increasing Gillette's total U.S. value share in disposables by nearly 1 point.

And we expect the improvement in disposables to continue into the second half of the year as we launched the Sensor 3 disposable into Europe beginning here in August.

Interestingly, the Sensor 3 disposable is now a larger blade franchise than Schick Intuition, which was launched at the same time with substantially higher advertising spending.

Turning to profit from operations in the blade razor business, second quarter blade razor profit was up 17% and margin climbed 100 basis points to 37.6%.

Margin gains were very straightforward here.

Continued tradeup to premium systems more than compensated for a strong double-digit increase in advertising support.

On a year-to-date basis blade razor sales rose 15%, in constant currency the increase was 10%.

This sales growth was driven by the success of our premium shaving systems plus favorable Q1 comparisons to 2002 when we shipped beneath consumption in the U.S.

Year-to-date blade razor profit from operations was up 16% and margin rose 40 basis points to 37.4%.

Here favorable mix to our premium systems more than offset a double-digit increase in advertising support.

Now, before we move onto Duracell, let me provide two perspectives on blades and razors.

First, from a category perspective, when we take competitive new product entry seriously, we think this activity will help drive dollar growth in the category, and importantly, our franchise will continue to grow.

And Marianne Tesh will go into more detail about our new product initiatives in a moment.

Second, from a financial perspective, we would expect that the heightened level of activity may have some impact on blade razor's earnings growth potential in the near term and we have modeled the possible impact on Gillette as a result of some inevitable loss of our very strong share in systems and increased marketing spending.

No doubt this is difficult exercise since there are so many unknowns, including the ultimate market performance of the products involved.

But our current best guesstimate is that a combination of some share loss and increased marketing spending could reduce our EPS potential in 2003 somewhere in the range of 2 to 4 cents per share, and 2004 earnings potential by 5 to 7 cents.

Clearly this guesstimate is very much subject to change as we gain more information to put into our model.

However, despite this potential impact, we do not expect this activity to inhibit our ability to deliver our financial growth targets.

Specifically, we expect to continue to deliver sales growth of 3 to 5% going forward and we expect that a combination of significant cost savings and underlying growth across our franchises will enable us to continue to deliver on our goal of consistent earnings growth that will result in top tier EPS performance versus our peer group over time.

In short, we expect to continue to build on our earnings momentum well into the future.

Now we'll move to the Duracell battery business.

In the second quarter Duracell sales rose 1% in reported dollars but fell 4% in constant currency.

On a constant currency basis, strong volume gains in Europe and higher volumes in North American specialty batteries were more than offset by lower pricing due to our price deal realignment initiatives and the divestiture of the carbon zinc businesses in South Africa and India.

From a U.S. category perspective, there are two things to note.

First, we estimate that second quarter U.S. category value declined 2.8% reflecting both the beginnings of consumer destocking from Q1 pantry loading and ongoing, aggressive discounting by price value brands and private label.

Second, while Duracell's U.S. category value share was relatively flat in the second quarter, we maintain our guarded view for the second half of 2003.

Specifically, recently announced deep discount price brand programs have only begun to show up at retail.

Their ultimate impact has yet to be determined, and hence, the dynamics of the battery category are still evolving.

We remain committed to the benefits of our price deal realignment program.

However, as we have demonstrated in the past, we are committed to maintaining our dollar market share and will act accordingly.

In terms of Duracell's profits from operations, Duracell's second quarter profit rose 20% to $54 million, a margin increase of 190 basis points from a year ago.

Three important points to make here: first, cost savings from manufacturing efficiencies and our strategic sourcing initiative continue to pay off.

Secondly, the negative pricing as part of the price deal realignment was offset by lower promotional activity and the elimination of free cell giveaways.

And finally, significant profit growth was achieved at the same time our marketing spending rose significantly.

On a year-to-date basis, Duracell sales rose 7%, or 3% on a constant currency basis.

Behind the numbers, U.S. consumer pantry loading in the first quarter of 2003 together with volume gains in Europe offset lower pricing from our price deal realignment initiative and the divestiture of the carbon zinc businesses in South Africa and India.

Profit from operations year-to-date was $93 million, more than double that of last year, achieving a margin of 11.4%.

While this performance was significantly related to the Q1 2002 costs of withdrawing select hearing aid batteries, it is also a reflection of solid cost savings delivered and a commitment to significantly higher advertising investment.

Now let's move to the Oral Care segment.

In Q2 Oral Care sales rose 15%, in constant currency sales grew 8%.

Growth was paced by CrossAction Vitalizer manual and CrossAction power battery brush gains in North America, European strength in both manual and rechargeable brushes and strong growth in both the manual and battery segments in the [AME] region.

And these gains helped to offset unmatched 2Q, 2002 pipeline shipment of Stages children's toothbrushes in North America highly aggressive price discounting by competitors in the European battery brush segment.

Importantly, Gillette Oral Care continues to build on its number one global position in the total brushing category during the second quarter.

Our global value share rose 1.2 percentage points to 33%.

This was the highest share point gain among all global competitors, and we gained value share in all regions.

In North America 2Q value share of total brushing rose 1.7 points to 37.6%.

Our CrossAction Vitalizer brush added 2 points of incremental share in the manual segment and our 2Q value share of the battery segment was 30%, up 17 points from a year ago.

Second quarter profit from operations in Oral Care grew 7% to $53 million, while margin declined 130 basis points to 16.9%.

This reflected increased sales from new products and improved factory performance, being offset by higher export cost from Europe and a double-digit increase in advertising to support our new product launches.

For the six months Oral Care net sales climbed to 13%, in constant currency sales increased 7%.

The gains reflect strong growth behind the success of our new product introductions in both the manual and power segment, and these introductions have been significantly incremental to our base business.

Profit from operations year-to-date fell 1% and the margin was off 230 basis points to 16.7%.

Here higher sales from new products and improved factory performance were offset by three factors: higher export costs from Europe, a double-digit increase in marketing spending to launch new products in the first half of 2003, and higher warranty related costs incurred in Q1 2003.

Now to Braun.

In the second quarter Braun sales rose a very strong 22% and 12% in constant currency.

What happened at Braun?

Mainly two things.

First, the SARS epidemic had a favorable impact on our ThermoScan ear thermometer business, not only to just drive double-digit gain in our Asian sales, we also saw double-digit growth in North America.

Secondly, the new Braun Soft Perfection Epilator saw strong growth in the AME and southern European regions.

Importantly, gains in Soft Perfection and ThermoScan worked to offset a weak economic environment in Europe, which continues to pressure the dry shaving category, particularly higher-priced male shavers.

At the profit line, Braun's Q2 profit of $28 million was 28% higher than a year ago and margin increased 50 basis points to 9.7%.

Our performance reflected strong top line growth in manufacturing efficiencies, partly offset by higher European-based manufacturing costs due to exchange and a higher -- and a double-digit increase in advertising.

Braun sales through six months increased 19% with currency gains amounting to 11 percentage points of that growth.

Growth was driven by significant gains in both male and female dry shavers as well as the SARS benefit to ThermoScan, both of which offset ongoing weakness in both the important European market and Latin America.

Braun profit from operations year-to-date decreased $4 million to $21 million.

Incremental warranty costs incurred in Q1 of 2003 and higher European-based manufacturing costs more than offset benefits from improved product mix, manufacturing efficiencies and strong top line growth.

Finally, Personal Care.

For reported sales in the quarter were up 8% and 3% in constant dollars.

Continued new product successes and a stepped up level of marketing investment drove growth in the quarter.

In North America our Power Strike and Power [CATCH] innovation drove both the Right Guard and Soft&Dri brand.

And in Europe new products on our Gillette series and Satin Care brand drove growth in shave prep.

More importantly, our increased brand and new product investments have begun to pay off in stable market share performances in both the U.S. anti-perspirant deodorant and shave prep categories.

However, the bigger story in Personal Care in the second quarter was profit where our investments and cost savings have begun to pay off as well.

Q2 Personal Care profit was nearly five times that of a year ago at $24 million or a margin of 10.8%.

And importantly, this was achieved while maintaining a stepped up level of marketing investment.

On a year-to-date basis Personal Care sales increased 6% or 2% on a constant currency basis.

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

Namely, new product success in anti-perspirants and shave preps were partially offset by currency devaluation in Latin America.

Profits from operations through six months rose 47% to $24 million as higher sales and savings from our SSI initiative were partially offset by increased marketing to support new product launches.

Now, in the interest of time we will skip our usual discussion of business by geographic region and go straight to some highlights of cash flow and the balance sheet for the quarter ended June 30th, 2003.

Starting with working capital, receivables were down 6% from last year's second quarter at $1.1 billion.

Day sales outstanding also improved falling 9 days from a year ago from 54 days to 45 days.

Inventories were down 4% versus last year's second quarter and days inventory on hand at 115 days was an 11-day improvement from last year's second quarter.

Accounts payable increased 3% to $545 million with days payable outstanding unchanged at 55 days versus last year.

Moving on, capital expenditures were down 15% to $84 million from $97 million in 2Q, 2002.

While this represented 3.7% of net sales in the second quarter, we expect CAPEX will be in the range of 6 to 7% of sales in 2003 reflecting strong sales and better capital efficiency.

Finally, as a result of everything discussed thus far, free cash flow in the first half of 2003 as defined in our earnings release was $895 million, up $349 million from $546 million in 2Q '02.

Net debt of $3.1 billion is up $218 million compared to December 2002, and we repurchased 2.4 million shares of common stock in Q2 for $81 million.

Year-to-date we have repurchased a total of nearly 26 million shares leaving 15.9 million shares remaining under our current authorization of 150 million shares.

I'll now turn the call over to Marianne Tesh, Vice President of Blade Razor Marketing, who will go into more detail of today's product announcement.

Thank you, Chris.

Good morning, everyone.

Today we're announcing the upcoming launches of two new shaving systems and the introduction of a new premium razor.

All three programs are designed to build on the success and momentum of our premium high performance power brands, Mach3, Venus and Sensor.

These introductions affirm our commitment to continue to innovate and provide men and women with the superior products that will drive shaving category growth.

This, as you know, is a proven strategy in the blade and razor category.

Most significant is the launch of Venus Divine in April 2004.

Venus Divine is a superior-performing premium priced version of our phenomenally successful Venus shaving system for women.

Venus was introduced in 2001.

It has become the most successful brand in the history of female shaving and the number two brand male and female in North America.

Today 30 million women around the world use Venus, that's one-third of all female systems users.

Venus has helped drive total Gillette share of women to 51% in North America, up six points since 2000.

In 2002 Venus generated almost half a billion dollars in consumer sales worldwide with nearly 60% of its revenue coming from North America.

Venus is larger, in fact, than the combined male and female systems business of our nearest competitor.

Fueled by the launch of Passion Pink Venus in the Venus Spa collection in 2003, Venus retail razor sales continued to grow through the first half of this year despite Schick's launch of Intuition in the female segment.

To date Venus has captured nearly 10% of the value of the entire U.S. blade market, men's and women's combined.

Importantly, Venus is changing the way women shave by driving growth in the very profitable systems segment.

Just before Venus was launched, 36% of U.S. women shaved with a refillable system.

By year-end 2002 that number grew 6 points to 42%, driven almost exclusively by Venus.

So, Venus is a great business.

Venus is also a great brand.

By every measure of brand loyalty, Venus exceeds category benchmarks, brand liking, positive purchase interest and user product satisfaction.

What's more, Venus has developed a reputation for delivering on its promises.

That's a key success factor in this performance-driven category, particularly at the premium priced end of the market.

We believe Venus represents an exceptional platform for growth.

Our objectives for growing Venus are to trade up existing users, capture new users and continue to grow the category.

Our strategy is to take a page from a formula that was proven with premium products.

From Sensor to Sensor Excel and Mach3 to Mach3Turbo, we have shown that consumers are willing to trade up to better performing, more premium priced versions of the best shaving products on the market.

In April of 2004 we will introduce Venus Divine.

Venus Divine will set a whole new standard of excellence.

Venus Divine features four major enhancements: improved blades, increased lubrication, enhanced elastimere cushions and an ergonomically superior handle.

The blades further reduce cutting force, which improves glide and provides an even more effective, more comfortable shave.

The improvements to the lubricating strip help to better prepare the hair for shaving and provide increased lubrication.

The redesigned elastimere cushions gently smooth and stretch the skin to pave the way for an even closer, even smoother shave.

And the handle features more elastimere in the primary grip area for added control and comfort in addition to a sophisticated new look.

In consumer use testing conducted according to the most rigorous standards in the industry, Venus Divine significantly outperformed existing Venus, the current gold standard in the category.

And it outperformed Venus in all key areas, including closeness, skin smoothness and skin comfort.

Importantly, after women used the product and assessed all of its benefits, they rated Venus Divine very high on that most critical measure, worth paying more for.

The Venus Divine name and consumer proposition generated exceptional levels of purchase interest, 81% among the total sample and over 90% among Venus users in quantified concept testing.

Based on its superior performance and proposition, we believe Venus Divine will do very well in the marketplace, much as Turbo has done for Mach3.

Like Venus, Venus Divine will be offered in a razor pack with two cartridges as well as a cartridge four-pack and eight-packs, pricing to the trade will be 15% higher than base Venus, again similar to previous line extensions.

Venus Divine will be supported heavily in marketing year one and support levels will be comparable to when we launched Venus.

Venus divine is being presented to major accounts at this time and trade reaction has been exceptional.

Turning now to Sensor.

Some of you might be too young to remember, but not too long ago, the 1980s to be exact, Gillette was in a fight for shaving supremacy, and quite frankly, for survival.

Low end disposable razors were dominating the market.

Profit was being driven through the floor and the category was going down the slippery slope of commoditization.

In 1989 we launched revolutionary Sensor shaving system featuring the worlds first spring mounted blades.

They adapted to facial curves and contours, providing the closest, most comfortable shave ever.

Men loved it and began to migrate back from disposables.

Sensor not only changed the way men shaved, it also proved that a strategy of offering high performance products at premium prices is a winning proposition for the category, for consumers, for retailers and for Gillette.

Because of Sensor, blades and razors now is viewed to be an advantage category.

Today Sensor is still one of the world's great brands.

Sensor has near perfect levels of awareness at 86% and the loyalty rate rivaled by only by Mach3.

Worldwide, Sensor generates annual consumer sales in excess of three-quarters of a billion dollars.

In North America alone, Sensor generates annual consumer sales of approximately one quarter of a billion dollars and has twice as many users as the total systems business of Schick, our nearest competitor.

And while the majority of Sensor users have traded up to Mach3 and Mach3Turbo, 9 million men remain committed to Sensor, making it the number two brand among men.

Brand loyalty and pricing are some of the reasons these men have resisted other products.

We believe the powerful Sensor franchise offers more potential for growth.

With the launch of Sensor Excel in 1992, the Sensor franchise proved its willingness to trade up to superior performing, premium priced products.

Our strategy this time is to offer three blades.

With the launch of Sensor 3 system, we will drive tradeup within the Sensor franchise and continue to grow the value of the category.

Sensor 3 is a true upgrade from Sensor Excel that provides several benefits to the consumer.

Three self-adjusting blades hug every curve of the face, an advanced lubri-strip offers better glide and soft protective microfins help set up the beard.

This all translates to the closest, most comfortable Sensor shave ever.

And to make it easy for a Sensor user to trade up to Sensor 3, all Sensor 3 blades fit current Sensor and Sensor Excel handles.

Sensor 3 will also feature a more contemporary handle, new grip design and color along with the more premium, updated graphics.

The name Sensor 3 leverages the tremendous strength of the Sensor brands equity in North America while differentiating it clearly and easily from the existing Sensor and Sensor Excel offerings.

From a performance standpoint, Sensor 3 system is significantly better than the two-bladed Sensor products.

However, Mach3 significantly outperforms Sensor 3, so Sensor 3's performance is exactly where we want it to be.

This is further proof just how performance sensitive the shaving category is where men can readily differentiate among technologies.

Financially Sensor 3 is an excellent business proposition.

Priced at a 20% premium versus Sensor Excel, it improves profit per user per year versus the current family and by leveraging existing Sensor capital base, incremental capital is not material.

Sensor 3's system joins Sensor 3 disposable, which is performing quite strongly since its launch in late April of this year in North America.

As Chris mentioned Sensor 3 disposable helped drive Gillette disposables value share growth in the U.S. for the first time in four years.

Sensor 3 achieved a 5% value share of the disposable segment in the month of June, driving total Gillette value share of disposables in the U.S. up two points versus June of last year.

Sensor 3 disposable will continue to grow as we roll out into Europe beginning this month.

The rapid development of the Sensor 3 disposables business underscores the power of the Sensor brand.

With far less advertising investment, Sensor 3 disposable is now a larger franchise than Schick's Intuition, launched at the same time.

In 2004 we plan to support the Sensor trademark with an appropriate level of advertising and strong promotional programs.

Both of these will be highly targeted and designed to trade up loyal Sensor users to the Sensor 3 system.

To sum up, the Sensor 3 system will help build category value by trading up loyal committed Sensor and Sensor Excel users to a more profitable product.

In addition, it will enhance shareholder value by strengthening and extending the large and profitable Sensor franchise.

Importantly, it provides Sensor customers with a destination for a superior shave without having to leave their brand.

Finally, I'd like to discuss an exciting initiative on our biggest and most important brand, Mach3.

The Mach3 brand is the most valuable franchise in the history of the shaving category with over $2 billion in sales worldwide last year.

One in every three men in North America shaves with a Mach3 razor.

Among younger men aged 15 to 24 years the statistic is a staggering 58%.

These are impressive numbers when you consider that the highest priced razor on the market is also the most popular.

In addition to size, Mach3 has momentum.

Well into its fifth year, the Mach3 franchise continues to grow at double-digit rates.

Our objective is to continue to fuel the growth of the Mach3 franchise and continue to trade men up to the best performing razor in the world bar none.

Our strategy is to broaden the appeal of the Mach3Turbo franchise by launching an exciting new version of the Mach3Turbo razor.

And so, beginning next month we will rev up the world's best shave with the launch of Mach3Turbo Champion in a high impact new color, racing car red.

Champion will join G-force and the base Mach3Turbo razor to provide men with three choices to experience the closest shave ever with less irritation, even when shaving against the grain.

As was the case with Venus passion pink razor, Champion is more than a color, it's a concept.

Champion will be aggressively supported with dedicated advertising, promotion and point of sale materials.

Most importantly, Champion will help drive sales during the critical holiday gift giving season this year.

Venus Divine, Sensor 3 system and Mach3Turbo Champion, three key new blade and razor initiatives.

As you've heard, we plan to continue to drive category value by leveraging the tremendous potential behind the three most powerful brands in the shaving business.

Thank you.

Thanks, Marianne.

So, to summarize our opening comments today, our new products continue to drive growth.

We are improving the strength and quality of our earnings, and we expect underlying growth across all our franchises will enable us to continue to deliver on our goal of consistent earnings growth that will result in top tier EPS performance versus our peer group over time.

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

Thank you.

Our question and answer session will be conducted electronically.

If you would like to ask a question for our speakers today, you may do so by pressing the star key followed by the digit 1 on your touch-tone telephone.

If you are joining us with a speaker phone, please release your mute function so your signal may reach our equipment.

Once again, that would be star 1 to ask a question.

We will pause for just a moment to assemble our roster.

Our first question will come from Bill Chappell with SunTrust Robinson Humphrey.

Bill Chappell, CFA: Good morning and thanks.

Just a couple quick questions.

One, just trying to understand on the functional excellence, it's obviously a little lower expenditures this quarter than the past couple.

I mean, are you expect that to accelerate the next couple quarters?

It sounds like it from your guidance.

Also, on the pension expense, are you expecting any further contributions for the remainder of the year?

Yeah, Bill.

I'm a little bit confused.

In terms of the functional excellence costs, we had about $42 million in this quarter, which is comparable to last year.

Our program remains on track.

We've done $86 million year-to-date and, as I mentioned, we still think about 130 to $150 million for the year is about right.

In terms of pension, we laid our pension expense of roughly $50-odd million that we expected in terms of an increase in pension expense at the beginning of the year.

There's no change to that outlook.

I don't know if Chuck wants to add on pension contributions.

The only other thing you asked was did we plan on doing any additional funding.

At this point in time, just think back to last year, we were very aggressive in terms of voluntary funding our pension programs.

Outlook right now suggests that we probably will not fund, but we continue to look at that once a month.

Bill Chappell, CFA: Let me re-ask the question a better way.

It seemed like some of your businesses were seeing the benefits of your functional excellence program kind of ahead of schedule.

Is there any speed-up in time frame for seeing the benefits offset the overall cost?

Not materially.

I think, as Chris mentioned, we're on track, actually probably slightly ahead of track in terms of executing the programs that are in place for our functional excellence initiative, and we are starting to see the benefits, and you are starting to see that in some of the margin improvement.

I think importantly, Bill, we've said before, the investment, in 2003 the investment stream will still outweigh the benefit stream.

That still applies.

Bill Chappell, CFA: Great.

Thank you.

Our next question will come from Wendy Nicholson with Smith Barney.

Hi.

I have a couple questions for Marianne, if that's okay.

In developing the Venus Divine, my first question is did you think about or can you talk about your findings in terms of Intuition and is the Intuition concept the, you know, lubrication and shaving in one, a viable design?

I mean, you guys are the leaders in the category, so, if you thought it was, I would imagine we would have heard of something like that.

But could you comment on what your research tells you?

First of all, hi, Wendy.

Hi.

The Intuition product, we think it's a good concept.

It's on the premium end of the category, and it should help grow the category value.

In terms of performance, however, as you well known, performance is critical in this category, and we recently completed a test conducted according to the most rigorous standards in the industry.

And in that consumer use test, Venus was preferred 2 to 1 over Intuition among Venus users.

And Venus was also significantly preferred over Intuition among all female wet shavers.

So, in essence the Gillette technology represented in Venus continues to be the industry leading, providing consumers with the best product overall.

As I just mentioned, Venus Divine significantly outperformed existing Venus.

So, we continue to offer the best product for women in the marketplace.

Fair enough.

But that sort of leads into my second question.

In terms of the new brands being announced today, or the extensions, if you will, to the brands you have, one of the things I think Jim Kilts talked about a lot when he initially arrived at the company was sort of extending the life cycle, if you will, so that capital requirements and whatnot going forward wouldn't be as great as they've been in the past and maybe, you know, in the 90s we saw too much innovation in too short a period of time.

But here we've got three big brands or extensions being launched next year.

Do you think something's changed in the category where now that Schick is just much more kind of out there you've got to be more competitive, or do you think that the extensions you're launching are small enough in their change so that from a capital spending standpoint it's not that big a deal?

In other words, economically it's still a good decision?

Wendy, I don't see any change to our strategy based on any of the competitive activity.

As I just referenced, existing Venus is a better performing product than existing Intuition.

So, this doesn't really change anything for us.

And as you know, we continue to introduce new brands and extend them and continue to increase the profitability of the user base and leverage the brand to its full potential.

Wendy, this is Chuck.

To add onto that in terms of your question about the capital investment necessary for these new products, we're really leveraging our existing asset base, particularly in things like the women's products as well as the Sensor 3.

And if you think about it, just take a look at the rate of capital expenditure to date.

We've spent most of what we've had to have spent behind these programs.

So, 6 to 7% for the year, preliminary outlook for '04, you won't see a ramp up from that level?

What we've always said is that we should be -- on a long-term basis we believe we would spend at about a 7% rate, 7% of sales any given year.

It could be a little above or a little below that.

To date what you're seeing is, you know, we're bringing the number down slightly, 6 to 7% as opposed to the 7%, we're going to be at the lower end.

Despite focusing on new product spending, despite focusing on cost reductions, we're really enjoying the impact of improved factory efficiencies and performance, we're more productive with our capital expenditures, we're doing it at lower cost.

And I guess the other thing in there that helps a little bit is the strong sales growth.

But really, we are being more productive in terms of the capital investment that we're putting out today.

Fair enough.

Sounds great.

Thanks.

Amy Chasen with Goldman Sachs has our next question.

The first one is for Chuck.

Can you tell us a little bit about when you came up with this estimate for the potential EPS impact of the higher competition in the blade razor category and whether or not, and I know you don't give earnings guidance, but whether or not you've changed your internal expectations for 2003 as a result of that?

Amy, we're constantly modeling the impacts of external influences on the business.

So, there's no magic time or point when we came up with it.

Remember, also, Chris I think used the great word, he said these are guesstimates.

We have yet to have any understanding in terms of how Quatro is going to perform out in the marketplace.

We do know they'll get distribution, we do know they get trial.

I think the interesting question is what kind of retention they'll get.

As we looked at it, we felt that, hey, it is a significant element in the business that all of us were concerned about.

We ought to try to do some modeling in terms of dimensionalizing the potential impact.

We know that in the short-term there will be some sales foregone, whether through distribution or minor share loss.

And we also plan to increase our investment spending significantly in the marketing area.

And we felt it appropriate to dimensionalize it.

I do think I should also say right now because I think you're hinting at something else, whereas we gave that outlook to avoid any impact or any belief that this is going to be a major, major impact on our earnings stream, we are not, and I can assure you with a smile here, we are not changing our overall policy in terms of guidance.

We will not give earnings guidance.

We did feel it appropriate to give you a sense of what we were thinking financially about Schick's competitive entries.

Have you guys seen, and maybe this question is for Marianne, have you seen Quatro, do you know anything about it and can you share any of that with us?

You know, I've seen some of the sales brochures.

And obviously we've looked closely at the patent activity for Quatro.

And from what I could tell, Amy, is that really it seems like a four-bladed protector product.

It's wire wrapped blades.

It seems like another blade using existing technology.

And as you know, we have firsthand information that it's not the quantity of the blades but the quality of the shave that really is what it's all about and that adding another blade doesn't often get you there.

So, you know, we'll take a closer look at it once the product becomes available.

We do think it will get some trial, being a new product, but we're confident that Mach3Turbo with its 56 patents will continue to represent the best performing product in the market place.

And I just have one last question for you, Marianne, on Sensor 3.

Can you tell us what is going to be the discount to Mach3?

And also, how this product is going to be different from Mach3?

Well, first in terms of the difference versus Mach3, Mach3 is our best blade edge technology and it also has a whole different pivoting system, which contributes greatly to the performance of the product.

Also, the lubricating strip is a tri--lobe co-extrusion.

The point is that it's different from Sensor.

And so, there are many, many differences that make Mach3 Mach3 and make it perform significantly better than Sensor 3.

Mach3Turbo is about $1.90 at retail, and we estimate that this will be, you know, about a 15, 20% premium to Sensor Excel.

I'm sorry.

I just don't have the numbers in front of me.

Where will that put the difference between Sensor 3 and Mach3?

We don't have the numbers in front of us, Amy, I'll get back to you on that.

Okay.

Thank you.

Carol Wilke with Merrill Lynch has our next question.

Thanks.

This sort of follows-up on an earlier question.

I was wondering if you could just help clarify what in the other operating expenses was so much improved?

Because you had a pretty big improvement in other operating expenses relative to sales, even with an increase in FE versus the year ago, and we had been seeing sort of flat other operating with the FE.

So, if you can talk about what has improved so dramatically?

I think there's a combination of things.

You've got, you know, definitely the cost savings coming through in terms of manufacturing, some manufacturing efficiencies that are helping that strong sales growth.

SSI is definitely on track, and that's certainly a big driver.

So, I think the improvement you're seeing as a percentage of sales is what's driving that.

So, there's no one specific business or program or anything that's doing that?

And SSI, is that more cost of goods?

Carol, I think your question was not in just the cost of goods line, but it's really in the overhead line.

It is in the overhead line because it was down so much year-over-year related to sales even with bigger FE.

So, I'm just trying to figure out not SSI, but what in the overhead part.

Right.

And what you're seeing coming through there now is the impact of our functional excellence programs, it's the impact of our ZOG program.

We've now anniversaried some of the functional excellence spending so that no longer shows as a significant uplift in that area.

And we also do benefit in terms of the margin from the strong sales gain.

And just on the blades and razor side, with all the -- your three new SKUs and then the new SKUs that are out there from the competition, what happens at retail from a shelf space standpoint?

I mean, there's just not gonna be an unlimited amount, so how is the process undertaken from a retail standpoint to clear out some older product?

Because it seems like over the next year there's gonna be a whole lot of new SKUs out there.

Well, as you know, this is an advantage category where people can perceive the differences among different technologies and they're willing to pay premium prices.

And with Mach3 and Venus and Sensor, you've got the three best franchises in the world.

And our trade partners are well aware of that.

People are very loyal in this category, and when you go to the shelf and can't find your brand, more inclined to go to another store than you are to go to another brand.

So, given the role in driving category value and given the degree of loyalty, our trade partners will continue to carry and stock the full menu of offerings of our best-performing products.

There are plenty of candidates for deletion in the category, they're mostly at the lower end, they're mostly disposables, they're mostly competitive products.

And my guess is the trade will go there first.

And just my last question, this may be obvious, but I just want to make sure I'm on the right track.

Is it fair to assume that advertising relative to sales will be quite a bit higher than your targeted 8% for the remainder of the year?

And into next year given all the new launches and the significant backing, especially for the Venus

Carol, while I can't give you guidance on that in the back half of the year, what I can tell you is that we have been targeting the 8% range.

We think that's a level that allows adequate investment in our brand equity and certainly provides the scope to provide shareholder return.

Thanks.

Moving on, we'll hear from Joe Altobello with CIBC World Markets.

Joe Altobello, CFA: Thanks.

Good morning.

I had a couple questions.

First, Chris, I think you mentioned aggressive discounting on the part of private label battery makers.

Is that a late reaction to your price realignment, or is that a change in their strategy?

Second, on the Quatro launch, I was curious if you're hearing anything in the trade regarding that, what's been the trade's response?

And will do you any preemptive discounting there?

Sure, Joe.

Let me take the battery question first, and then I'll pass it over to Marianne.

In terms of what's happening in the battery category, it's really two things.

I think first and foremost if you look at the second quarter, Duracell's average price per cell was up slightly in North America and we maintained dollar share.

What you've seen is others reducing their prices through deeper promotions, increasing the price gaps and sort of filling the promotional void in some ways that we have left.

But we're quite happy with our performance so far.

As far as the trade reaction to the Schick Quatro product, I think that's a question for Schick Energizer.

What I can tell you is that the trade is very excited about Mach3Turbo Champion.

Joe Altobello, CFA: Okay.

But they're not saying anything about Quatro to you guys at all?

No, and we don't ask.

Joe Altobello, CFA: Okay.

Thanks.

We will now hear from Andrew McQuilling with UBS Financial Services.

Thank you very much.

I had one for Chuck.

Chuck, share repurchase in the June quarter, 2.4 million, a lot less than you did in March.

You got 30-year treasuries around 4.3%.

I'm sure your borrowing rates are pretty low.

Yes much lower than the treasury rates.

I know you like having cash around.

Yeah.

But have you thought about a little more aggressive share repurchase right now given where the stock is?

Well, you know, we were very, very aggressive in the first quarter given where the stock price was, not dissimilar from where it is now.

We put, I think in the first half of this year almost $800 million into our repurchase program.

We're going to remain active with it.

We've got about 16 million shares under the current authorization, which means we have repurchased, gee, 134 million shares.

That's about 12, 13% of the total -- 12% of the total company's shares outstanding over that program.

We're going to meter it, though.

We're going to look at our strong cash flow, which does continue.

We are realizing it.

And we'll also be sensitive to other opportunities for the cash, be they capital expenditures, bolt on acquisitions or other areas that will enhance the business.

I think the real question you're asking is how do I feel about debt.

I feel very, very comfortable about my current debt level.

And you're right, it is very cheap debt.

So, we'll continue to look at it, we will continue to be active, but we're going to pace ourselves a bit.

Fair enough.

And maybe just one for Marianne.

Marianne, the Venus Divine at a 15% premium to Venus, still not the most premium priced female shaver on the market.

What do you think about the lubricating block concept overall?

Can you talk about the pros and cons of that?

And obviously you have the best blade technology.

Any thoughts on that lubricating block technology?

As I said, this is a performance-based category, so I can't separate a concept from its execution.

The most important thing is what kind of shave it provides because that's all that matters.

And as I mentioned, and my own personal experience supports this, the filings of the recently completed consumer use test show that Venus was preferred among Venus users by a margin of 2 to 1 and significantly preferred to Intuition overall by the general samples.

So, it really is, you know, it's one of those categories where it's all in the execution.

Terrific.

Thank you.

Connie Maneaty with Prudential Equity has our next question.

Morning.

I have a few questions, one for Marianne.

What does your market research tell you about the Sensor 3?

I mean, why would anybody buy Sensor again?

And if you can buy the Mach3, why would you buy the Sensor 3?

Well, you know, Connie, most of the people who use Sensor have gone onto Mach3.

But there are 9 million of them left, and we'd like to give them a place to go to get an even better performing product.

They're loyal to Sensor, and they prefer Sensor.

Sensor's maneuverability, as you know, is very different from Mach3, and for many men they prefer that.

It's a whole different sized cartridge and a pivoting system and it's what they're used to.

They've been shaving for years with Sensor and I think they'd like to continue to shave and have that type of experience but a better result.

So, when we tested the concept and we tested the products, we found that many of those Sensor users were willing to go with us to Sensor 3.

So, I mean, do you have any plans to phase out the Sensor with two blades if men can buy with three?

No, we don't, we'll let the marketplace decide.

But you know, Sensor and Sensor Excel still are in great distribution in the marketplace and they're bigger than some competitive brands.

Okay.

Great.

Could, I guess, Chris or Chuck, could you talk a little bit about Braun?

I mean, it sounds like there were a couple of one-time things in the quarter, especially the SARS and ThermoScan.

How much were sales of electric razors in Europe down and what's going on there?

Yeah, I don't have that level of detail, but I think what I can say about what's happening in Europe is that we are taking market share in a soft environment.

So, we're pleased with the progress there.

The issue there is really, you know, end consumer demand.

Okay.

Fine.

One final question for Chuck.

Could you tell us in your debt what the mix fixed to variable is and if you have any plans to make changes?

We actually have been changing slightly.

We're still very heavily on floating rate debt.

But we just launched another bond in this last quarter and, you know, to my treasury people, congratulations.

We have the lowest coupon and lowest all-in yield bond in corporate history out there right now.

But currently our mix is about 25 -- a strong 25 to 30% fixed.

And when I say "fixed," we are only going out about five years.

We still feel very good about our overall strategy, which is more heavily on the floating side.

Great.

Thank you.

Moving on, we'll hear from Neil Goldner with State Street Global Advisors.

Hi.

I have a very simple question, if you don't mind.

Currency was a positive 6% on the top line.

Can you give us a sense what it was on the operating income line and on the net income line?

About 6% top line.

It would have been less than that as you go through the P&L.

You know, small impact once you got to the bottom line.

That's particularly because we are net exporters from Europe.

Was it material to the EPS number?

Material?

No, not really.

And remember, within that P&L that Chris took you through we had a negative swing on exchange.

So, there's a small positive bit it's not what I would call material.

Okay.

Thank you.

Andrew Shore with Deutsche Bank has our next question.

Two questions.

Good morning.

Chris, I'm consistently confused by your consistent use of the word "consistent."

Last year you did 22, 17, 19, 0, 21 and now 27.

First, before I ask my second question, help me understand what that means.

Well, as we look at it on an annual basis, Andrew, what we're after is to deliver consistent earnings growth on an annual basis that over time will place us in the top tier relative to what the peer group does.

So, you know, the definition of top tier I think is what varies over time.

But you know, what we're after is to have consistent performance relative to the group.

Okay.

So, again, you don't really care about the quarterly flows, just the yearly flow?

Yeah.

I think you really -- if you focus too much on the quarters, you tend to lose sight of the business.

And then finally, could you just give us the number?

What was the North American blades and razor business up?

We tend not to go to that level of detail, but it would have been up strongly, not dissimilar to the overall performance of the business.

Okay.

Thanks.

From Lehman Brothers, Anne Gillen has our next question.

Thanks.

Chuck, I just wanted to jump back to CAPEX because there are some hints in the release around more new activity in blades to come.

And I heard that your 6 to 7 number.

I'm wondering in addition to kind of getting more productivity out of the expenditure, whether you're also able to collapse the time in terms of the ramp up towards new products?

I think that would be dependent upon what the new product features are and what the backbone of the manufacturing process is.

So, that answer would be all over the place.

I think what you're saying is we are becoming more effective in terms of the predesign work that we're going into.

We're getting what I call greater capital efficiency out of what we do design, particularly in the blade business where it's our own proprietary manufacturing equipment.

The other thing is we're very conscious about leveraging our existing capacities.

You can see a lot of that in terms of the some of the new product platforms that we've got going on out there.

So, it's a whole host of things.

Can you tell us where you are in terms of leveraging?

I know you entered this cycle of being able to leverage with a lot of capacity available.

How close are we getting to a point where more capacity has to be put in?

Gosh, I can't answer that one.

I don't -- as I'm looking outwards, I don't see -- aside from what you would call new product capacity, I don't see any significant spend plans for increasing capacity of existing products.

Okay.

Perfect.

And then just switching a little bit to the balance sheet, your finished goods as a percentage of total inventories is rising again.

Is that some of the ramp up in the blade business?

That would be the pace and timing of new product launches.

Okay.

And is it primarily blades?

I haven't got that in front of me.

I've got seasonality, as well, I mean natural seasonality to the year.

Right, Chris, but even year-over-year your ramping up isn't finished.

Chris can get back to you in terms of if there's anything significant in the mix.

I don't think there is.

And one last question.

Does the two-blade Sensor disappear, Marianne, or will users who seem to like two blades still have an option?

Users who like two blades will still have an option.

Again, that business base will be bigger than some competitive products.

Great.

Thanks.

We have time for one last question and that will come from Art Cecil with T. Rowe Price.

Good morning.

Good morning, Art.

Andrew stole my thunder, but I guess in terms of yearly consistency, that's what you're talking about as opposed to multi-year consistency, is that accurate?

I think we're talking about both.

It's the multi-year consistency that is going to lead to top tier performance versus the peer group.

Right.

Was this quarter stronger at the bottom line than you all had thought it might be?

I mean, I don't think we could really go there.

It involves a lot in terms of, you know, where -- you know, currency rates are going to go, et cetera, et cetera.

But I don't think we want to go there.

So, we're not even getting guidance in a historical context much less the future?

Yeah.

No guidance in the past, no guidance on the future.

Yeah.

On the other operating expense, which someone else asked you about, would it be fair to say that -- you listed several things that were involved in this number growing at, you know, half the rate of sales.

Would it be fair to say, that cost savings in general, whether it was from strategic sourcing, whether it was from FE, whether it was from ZOG, that that is the preponderant reason for this growing more slowly than it did in the first quarter, for example?

Yeah, I think that's fair.

I think with all of our cost saving programs we're on track if not slightly ahead.

And FE is starting to deliver a little bit a head of schedule.

I think I heard Chuck say that earlier maybe.

A little bit.

Again, though, the investment stream is still going to outweigh the benefit stream.

Right.

And importantly, you're starting to anniversary the cost components.

So, they're less of a, I guess, contributing factor to year-over-year performance.

Okay.

Thanks a lot.

Mr. Chris Jakubik, I'll turn the conference back over to you for final and closing remarks.

Thanks, Phil.

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