寶潔 (PG) 2003 Q3 法說會逐字稿

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

Today's call is being recorded.

At this time for opening remarks and introductions, I would like to turn the call over to 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.

With me are Chuck Cramb, our Chief Financial Officer;

John Manfredi, Senior Vice President of Corporate Affairs; and Eric Krauss, Vice President of Corporate Communications.

As usual I will start with the housekeeping.

During this call, we may make forward-looking statements about the company's performance.

These statements are based on how we see things today, so they contain an element of uncertainty.

Actual results may differ materially due to risks and uncertainties but we can assume 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.

With that duly noted let's look at what we think is a very strong quarter.

Today I'm able to say something that this company has not been able to say for the past six years.

The Gillette Company had record earnings.

The headlines in that performance are strong revenue growth, significant cost savings and efficiencies and a big boost in investments behind our brands.

Another factor was the blackout and hurricane Isabel.

Obviously, both were bad news for a lot of people but for Duracell, they created a surge in battery buying.

Our blade razor offensive plan also impacted results through increased investment in advertising, sampling and displays.

We'll talk more about our plan later in the call.

The key take away is that even with the increased investment in competitive activity, we still expect to deliver top tier earnings for the year.

And we see continued strong performance in 2004.

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

The nine-month numbers quoted from here on out will exclude the one-time gain on the sale of our rights to the Vanica business in 2002.

It amounted to $30 million pretax and $21 million after-tax and you will find a reconciliation of these figures versus our GAAP figures on our investor relations website.

Keeping that in mind, here's a look at the numbers.

On a reported basis, net sales for the third quarter were $2.4 billion, 11% above the third quarter of 2002.

And the gains reflected a combination of factors, our volume mix was up 6%.

Driving the gain were several factors: New product gains in blade razor, from Mach3Turbo, and Passion Venus and Sensor3 disposables; the sell-in ahead of our fourth quarter razor program; and the surge in demand for batteries.

Foreign exchange added 5% to sales growth as currency strength in Europe, Australia, and Canada more than offset unfavorable exchange in Latin America.

Pricing, however was flat.

Blade razor price increases were offset by lower prices from Duracell's price deal realignment in North America.

Year-to-date, net sales rose 12% to $6.6 billion.

Due to volume mix, up a strong 7%, exchange at 5%, and the flat pricing I mentioned.

We had another solid gain in gross profit margin.

It was up 180 basis points, to 61.1% from 59.3% last year.

Again, a mix of drivers.

On the plus side, we had favorable product mix of premium shaving systems, and premium disposables.

Cost savings from our strategic sourcing initiative and greater manufacturing efficiencies, particularly at Duracell.

What were the negatives?

Higher year-over-year manufacturing costs in Europe, due mainly to strength in the Euro and pound sterling, an increase in the ratio of razors versus blades in our blade razor business, and incremental pension expense.

Through nine months, gross margin was up 110 basis points to 61% from 59.9% the year before, with generally the same mix of factors.

Moving to marketing, a few minutes ago I mentioned major marketing investments in the quarter.

And I will take you through the details because it's had a big impact on our results.

Total marketing spending grew 29% in the third quarter, versus last year.

Bringing the year-to-date increase to 21%.

The big item was advertising spending at 9.1% of sales versus 7.4% in 3Q 2002.

Year-to-date, as spending is up 25% to 8.6% of sales from 7.7% last year.

Much of the action was in the blade razor offensive plan, but every division of the company saw a double digit percentage increase.

Again, a big factor in our sales gains across the company in 2003.

We held third quarter sales promotions steady at 3.4% of sales, with most going to display support for the launch of Mach3Turbo Champion.

Nine month sales promotions as a percent of sales was also unchanged at 3.8%.

Let's go to overhead and other expense.

Where we continued to head in the right direction, dropping from 24.5% of sales in Q3, 2002 to 23.5% this year.

And we did that despite higher European-based costs due to exchange and incremental pension expenses.

Year-to-date, overhead and other expense was down to 26.1% from 27% last year, driven by our cost-saving efforts.

The offsets for year-to-date, include exchange, $55 million of incremental functional excellence expense and over $30 million of incremental pension expense.

We currently expect that 2003 functional excellence expenses will be about $140 million, with $17 million expensed in Q3, and $103 million year-to-date.

But I want to add that functional excellence costs did not significantly impact the third quarter performance of any business unit.

And only blade razor, and Braun had a meaningful unfavorable comparison for nine months.

Turning to profit from operations.

We were up 16% to $604 million for the quarter.

With margin up one point to $25.1%.

For the first nine months, profit from operations, excluding the 2002 Vanica gain, climbed 17% to nearly $1.5 billion.

With a margin gain of 110 basis points to 22.5%.

Profit gains for both the quarter and the year came from new product sales growth, premium shaving mix, and savings in purchasing.

The gains were offset by exchange costs in Europe, increased marketing spending, functional excellence costs and higher pension expenses.

Below operating profit for the third quarter, other charges increased $2 million to $11 million, as lower interest expense was offset by unfavorable variances in exchange and other non-operating items.

Through nine months, other charges were essentially flat at $37 million.

This reflected a reduction in net interest being partially offset by lower exchange gains in 2003.

All these numbers add up to a nice gain of pretax income, up 16% versus last year's third quarter, to $593 million.

And that takes us to good news at the bottom line.

An 18% gain in third quarter net income to $416 million and a 20% gain year-to-date, excluding Vanica.

Net income growth in both Q3 and year-to-date was enhanced by our lower tax rate, which decreased one point to 30% from 31%.

Our third quarter diluted earnings per share rose 24% to 41 cents, that's up from 33 cents the prior year.

For the first nine months, our diluted earnings per share rose 24% as well to 99 cents excluding the gain on Vanica.

In the quarter, and year-to-date, EPS growth outpaced net income growth, as a result of our strong share repurchase activities, with average diluted shares outstanding down 4%, versus Q3 2002, and 3% year-to-date.

Okay.

That's a quick look at the numbers.

Again, we think it was a very solid quarter.

And more evidence that our turn around is gaining momentum.

Our brand support is going up.

Our costs are coming down.

And I want to say it again, because it's been a long time, we had record earnings.

Let's take a step closer to the results with a look at the businesses that produced them.

Starting with blades and razors.

I'll start here with a little perspective.

When we talked to you last quarter, we naturally got a lot of questions about Schick.

In response we made three points: One, we said the new entries would help drive dollar growth in the category and the Gillette franchise would continue to grow; two, we said there would be some impact on blade razors earnings growth potential in the near term, because of some inevitable share loss of our very strong market share and systems and because we would increase our marketing; three, we said we we did not expect this new competition to inhibit our ability to deliver our financial growth targets, and that we expect to continue to build on our earnings momentum.

So far, we're three for three.

Results are in line with our expectations, and we have achieved solid growth without an increased in trade promotion spending.

In the third quarter, blade razor sales rose 17% with favorable exchange contributing 5%.

There were three drivers, first, was strong consumer demand for and trade up to our premium systems, Mach3 and Venus.

Mach3Turbo drove 18% constant dollar growth in blade sales of the Mach3 franchise globally.

Venus U.S. razor unit sales grew 8%, outselling Intuition by 25% and Venus Global blade sales rose 15% in constant dollars.

That's exceptional for a 3-year-old product.

Second, was the growth of the Sensor3 premium disposables.

It was launched into Europe and gained further traction in North America, where it helped to grow our disposable dollar share to 47.4%.

Up 1.8 percentage points versus a year ago.

In fact, Sensor3 has a bigger share of the blade market than Schick Intuition, with a fraction of the marketing support.

The third factor was strong trade demand for our Q4 consumer program.

Featuring the new Mach3Turbo Champion red razor.

We estimate that the strong initial sell-in of our Q4 consumer programs in both North America and Europe added an incremental $40 million to Q3 sales and we expect this to temper our Q4 sales by a similar amount.

So clearly, we are taking the competition seriously, but just as clearly as we defend the franchise, we are continuing to be very successful in growing it.

Turning from sales to profits.

Third quarter blade razor profit was up 10% and margin was down 2.5 points to 40%, reflecting the impact of our blade razor offensive plan.

Specifically, the benefit from ongoing favorable mix towards premium products in both the systems and disposable segments was offset in the quarter by the marketing spent behind fourth quarter consumer programs and unfavorable mix of razors versus blades from the launch of our Mach3Turbo Champion razors.

On a year-to-date basis, blade razor sales rose 15%, and the favorable impact of exchange was 5%.

Growth came from the success of our premium shaving systems and disposables, 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 13%, and margin declined 60 basis points to 38.3%.

A favorable mix of our premium systems was more than offset by a double-digit increase in marketing support.

So in summary, our blade razor business continues to show strong underlying growth despite the impact of competitive entries.

Moving on to Duracell.

Sales rose 7% in reported dollars, with currency gains accounting for 4% of the increase.

Let's start here with a side note.

The Q3 sales impact of the integration of the Nanfu Battery Company in China offset the divestment of the carbon zinc battery businesses in South Africa and India.

Now with that out of the way, key to Duracell's Q3 sales was the consumer demand I mentioned from the blackout and the hurricane.

And the gains realized from these unusual events were partially offset by the price deal realignment initiative.

Clearly, there's been a lot of movement in category dynamics so let me provide some details.

Stating with the growth spurt, we estimate that the U.S. alkaline battery category in unit terms grew 8% in the third quarter.

Most of that came from a one-time 6% jump due to the blackout and hurricane.

As a result of these events, reduction of U.S. retail inventories has been slower than we expected. ing forward, we expect consumer destocking will combine with inventory reductions by the trade to [Inaudible] battery category growth in both the fourth quarter of 2003 and into 2004.

Finally, I want to update you on the Duracell price deal realignment.

In the most important respect, it's doing exactly what we anticipated.

There has been wide acceptance by the trade in our efforts at reigning in the out-of-control promotional activity.

In fact, the percentage of alkaline category volumes sold on promotion in Q3 declined 3 percentage points to 48.8%, versus a year ago.

It was the first category decline in promotion in over two years.

And we were the leader.

In addition, the consumer price per sale of Duracell batteries was flat year-over-year in Q3, a trend that is now nine months strong.

But the good work and results ran up against ongoing and aggressive discounting and use of on packed premiums by price value brands and private label.

As a result, Duracell's price gaps versus price brands are significantly above historical levels.

But we have not reacted so far.

We're committed to the objectives of our price deal realignment program.

They're the right way to bring sanity and logic to the category.

But if they don't hold support, and we're not able to maintain our dollar market share, we'll take appropriate action.

Duracell's profit from operations rose 35% to $106 million in the quarter.

A margin increase of 430 basis points from a year ago.

What were the drivers?

Strong sales growth, driven by the unusual events already noted; as well as, the double-digit increase in advertising.

Manufacturing and sourcing cost savings also contributed and lower promotional and pre sale activity added on.

For first nine months, Duracell sales rose 7%, impacted by the same basic factors as the quarter.

Profit from operations year-to-date rose 62% to $199 million.

A margin increase of 510 basis points to 15%.

This reflects solid cost savings, the commitment to significantly higher advertising investment, and to a lesser extent, comparisons with Q1 2002, that included the costs of withdrawing select hearing aid batteries.

Moving on to Oral Care.

Sales rose 3%.

Excluding a 5% favorable impact from exchange, sales declined 2%.

A number of factors contributed to this performance.

The good news was that on a cost and currency basis we had strong growth in both the manual and battery segments in the Latin American and AMEE regions.

But the gains were offset by weakness in the rechargeable segment especially in Germany due to a weak economy.

An aggressive price competition in the battery brush segment.

However, while the category had issues our share position did not.

We extended our number one global position in the total brushing category during Q3.

Our global value share rose nearly 1 percentage point to 33.6% for the highest share point gain among all global competitors.

Our position will be supported by the launch of our entry level battery product in Europe and other key markets in the fourth quarter.

The profit story is also positive.

Third quarter profit from operations in Oral Care grew 6% to $64 million, while margin increased 50 basis to 19.3%.

Four main factors here: Increased sales from new products like the CrossAction power battery brush; tradeup within manual to our CrossAction Vitalizer brush; tradeup within rechargeables; and improved product mix with more power brush refills.

These positives were partially offset by higher European-based manufacturing costs and a double-digit increase in advertising to support both our new product launches and our high-scoring "Brush like a dentist" ad campaign.

For the nine months Oral Care net sales climbed 9%, this was due to new product growth and strength in original markets as well as a favorable impact from exchange of 5%.

Profit from operations year-to-date grew 2%.

Margins fell 120 basis points to 17.7%.

The reason?

Higher sales from new products and improved product mix were offset by higher export costs from Europe, a double-digit increase in marketing spending to launch new products in 2003, and higher warranty-related costs incurred in Q1 2003.

Next is Braun.

Here a number of real bright spots offset weakness in Europe and midpriced shaver competition in Japan.

The quarter netted out at a sales gain of 11%, with currency gains amounting to 8% of the increase.

One of the brightest of those spots was strong growth in male shavers in North America.

This was powered by FreeGlider and Flex XP2 which drove a 1.8 point share gain in U.S. male shavers to 21.3%.

We had strong contribution from new products, highlighted by the soft perfection Epilator, the Q3 launch of our new top of the line activator shaver into Japan and Europe, and continuing strong business in Russia.

At the profit line, Braun's Q3 profit of $22 million was flat versus a year ago.

And margin fell 110 basis points to 7.3%.

We had a favorable mix of higher margin male shavers and higher-priced household appliances and significant strategic sourcing related savings.

But they were offset by a double-digit increase in marketing spending to support new product launches and higher European-based manufacturing costs.

For the nine months, sales rose 16%, with currency gains contributing 10 points of that.

Keys here were gains in both male and female dry shavers, as well as the SARS impact on first half sales of Thermoscan.

Both of which offset ongoing weakness in Europe, especially in Germany.

Nine month profits from operations decreased $4 million to $43 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, in Personal Care, reported sales in the quarter were up 10%, with the impact of exchange accounting for 3% of the increase.

We saw a growth in all regions in Latin America, improving share performance in Europe in both shave preps and anti-perspirant deodorants and continued growth in the U.S. behind new products.

Among the highlights, we extended PowerStripe technology throughout our product line in the U.S. to deodorants and relaunched our Right Guard brand, which is the leading male brand.

In Europe, new packaging and repositioning of the Right Guard brand and improving distribution and marketing in shave preps lifted sales.

And Russia has strong sales gains in both shave preps and APDL [ph] on the strength of expanding distribution.

Q3 Personal Care profit was up 54% versus a year ago at $26 million, and margin increased 320 basis points to 11.1%.

Those results directly reflect our cost-cutting efforts and are significant considering our stepped up marketing investment.

In the third quarter, profit improvement came from growth in new products, margin enhancement from strategic sourcing savings, partially offset by a double-digit increase in advertising behind new product and brand restaging activity.

Year-to-date Personal Care sales increased 7% with foreign exchange adding three percentage points of the growth.

The key driver over nine months was new product success in anti-perspirants and shave preps which more than offset currency devaluation in Latin America.

Profit from operations through nine months rose 50% to $50 million, as higher sales and savings from our SSI initiative were partially offset by increased marketing to support new product launches.

In fact, 2003 year-to-date profit nearly equals that of 2002's total year.

Indicative of the positive impact of our focus on cost cutting and brand investment.

Now, before we take your questions I want to take you through some highlights of the balance sheet and cash flow.

In the third quarter, day sales outstanding fell four days from a year ago, from 51 days to 47 days.

Days inventory on hand at 115 days was a nine-day improvement from last year's third quarter.

And capital expenditures were down 17% to $86 million from $103 million in Q3, 2002.

CAPEX represented 3.6% of net sales in the third quarter and we currently expect CAPEX will be in the range of 5% of sales in 2003.

Reflecting strong sales and better capital efficiency.

As a result of everything I've discussed this morning, our free cash flow generation, as defined in our earnings release, remains strong in both Q3 and through nine months.

We used that free cash flow in the quarter to acquire the Nanfu Battery Company in China and repurchase Gillette stock.

Under our share repurchase program we bought 8.9 million shares of common stock in Q3 for $282 million.

Year-to-date, that brings us to a total of nearly 35 million shares for over $1 billion.

So out of a previous authorization of 150 million shares about 143 million shares have been repurchased to date.

In addition, in September 2003, our Board of Directors authorized an additional 50 million shares for repurchase.

Finally, debt was up approximately $200 million from the end of 2002.

So that's our story for the third quarter.

I think the take aways are clear and very positive.

Our continuing turn around took us to record earnings.

Product innovation is driving top-line growth across the company, our aggressive cost reduction efforts are continuing to deliver with more to come.

We are accelerating our already strong investment in our brands and our free cash is flowing very well.

In summary, while there were the usual assortment of challenges and successes, we're very pleased with where we are.

Now, we'd be happy to take any questions you might have.

And I will turn the call over to the Operator who will explain the procedure for signalling if you do have a question.

Thank you, Mr. Jakubik.

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

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

We'll take our first question from Wendy Nicholson at Smith Barney.

Hi.

I guess my first question, and this is a hard one to answer is, I think Jim Kilts has been very straight forward about talking about consistent EPS growth, not quarter to quarter but more importantly year to year, and clearly with the 23% increase in EPS in the first nine months this looks like it's just going to be a blowout year.

Has something changed in terms of his use of the word "consistency" or is he simply seeing so many kind of one-time events, whether it is the, whatever, terrorism fears and SARS and all of those sorts things that has benefited the battery category or what not year-to-date, should we be thinking about this full year as an outlier, if you will, in terms of EPS growth?

Wendy, clearly what we're looking for is consistent performance over time that will result in top tier performance and, yes, the year-to-date numbers, particularly in the third quarter are very strong because we did have some ship ahead, or some strong consumption in battery and ship ahead because of the fourth quarter razor program.

But I think there hasn't been any sort of change in philosophy at all.

We're still looking for top tier performance.

So in terms of if you back out all of the one-time events in '03, and whatnot, even though we might have an earnings base that is artificially high we still think low to mid-teens, low teens EPS growth for '04 is a reasonable target?

Well, I think as we look at 2004, as Jim said in the press release, we're looking for strong performance and, again, I think in terms of top tier, that's against our immediate pier group.

But it's top tier on an annual basis not on an average over three years, let's say?

No, I think what we're looking at is over time.

Yeah, Wendy, this is Chuck.

We would definitely would like to consider that we can perform within the top tier year in, year out.

That's the consistency.

Got it.

Okay.

And then can you just quantify maybe for the Duracell business specifically kind of how much the kind of one off, one time things, whether it was the blackout or what not might have added to the top line.

I know you did that at the beginning of the year with the military ship in.

You're right.

That's a good point.

I should have put that in the opening comments.

Yes, the sales driven by the blackout and the hurricane, we put at approximately $25 million in sales.

Okay.

Thank you very much.

We'll go to our next question from Bill Chappell from SunTrust Robinson Humphrey.

Good morning.

Just a couple of questions regarding the blade razor business.

Can you kind of talk about, I guess one year ago, maybe just remind us, was there any ship-ins for products going in the third quarter of last year?

And then also I think I remember, last year you had kind of changed the timing of price increases, moving it out of fourth quarter to first quarter '03.

What's kind of the update on that on price increases for the overall blade razor business going forward?

Sure, Bill.

Thanks for the question.

Yeah, last year we did not have a ship-in for fourth quarter programs anywhere near the magnitude of what the Mach3Turbo Champion program is.

And I think in terms of pricing, we have not announced anything to our trade partners to date so I don't have an update for you there.

Great.

Thanks.

We'll take our next question from Carol Wilk from Merrill Lynch.

Thanks.

Just to follow up on the Duracell question, you mentioned from a consumer standpoint and from a retailer standpoint that there's excess inventory.

Do you have any idea how many extra weeks of inventory the feeling is that the batteries are at the retailer?

Yeah, we think it's about a week right now.

I think what's happened with the trade is that you've had, year-to-date, three rather unusual events so they do not want to be caught short, in case something else happens.

So that's something that we'll be working with them on, on a go-forward basis.

There's about an extra week of inventory for the category at retail?

Right.

But you're still expecting a Q4 and early '04 destocking?

Yeah, well that's the question is when exactly it comes out.

I mean, historically when, for instance when you had Y2K, that was a fourth quarter event that came out over subsequent quarters.

This time you've had some unusual events earlier in the year and you're going into your highest consumption quarter.

So it's going to be a bit of a question in terms of how this comes out.

In terms of whether or not they would do it during the actual high season or maybe wait until the much smaller Q1.

I think both for the trade and for the consumer.

And that's something we're analyzing as we go by.

It's terribly difficult to get that tight of a fix on it, because, Chris, I think has told you well what's happening at the trade.

The other aspect of it is what's in the consumer's house in terms of pantry loading, how they use that up and how that impacts their purchase rates through the end of the year and into the first quarter.

So it is a difficult one to pace.

And just on a completely different topic, does the brief comment in the results this morning about a possible realignment of European blade and razor manufacturing facilities, is there any more color you can give on that?

What are the opportunities?

What would that mean?

Is it a margin enhancer?

Is it a speed thing?

Is it to bring your costs so they're are not impacted by currency, et cetera.

I will take the currency piece out of it because we're talking about realignment within basically the European community.

It ties in with efficiencies both on production cost and it ties in with efficiency in terms of capital utilization.

It ties in with efficiency in terms of our costs to distribute because we're including the logistics side of it and it will also impact inventories but it's early days yet.

We're in the process of a study, valuation of what we might be able to do.

And finally, on FE the expenses, I think you said were $17 million in the quarter, which was less, we just figured it was going to be sort of balanced in the second half of the year.

Was there any -- and I know in the earlier part of the year had you accelerated some programs.

Has there been any shift in timing of anything in particular on the project side?

No, we're continuing to pace against pretty much where we thought we would be in terms of the overall execution of our functional excellence initiatives.

Thanks a lot.

We'll go next to Amy Chasen with Goldman Sachs.

Good morning.

You mentioned, Chris, that your price gap for Duracell is at historically high levels and I'm curious whether that's gotten worse over the past couple of months, or whether it's just remaining at the high levels that it's been at, or whether you're seeing actual acceleration in some of the promotional activity over the past couple of months.

No, I think it's what you've seen in the past quarter, it's just the distribution of the50% more packs, it's basically gained broader distribution.

Okay, but in addition to the packs, have there been any increased promotional activity from competition?

Or it's just the pack issue?

I think in some ways the private label has filled the promotional gap out there, particularly in the drug channel.

And you're also seeing more activity in terms of on pack premiums, whether it's a flashlight or a toy or something like that.

So you're seeing that.

Okay.

So, again, I'm just trying to get a sense of whether it's gotten worse since the last time we spoke with you.

Well, actually I think, from what we see out there, pricing realignment is really achieving its objectives.

Flash free cell give aways, our own volume sold via bonus packs is down to about 5% now from 30% last year.

We've reduced volumes sold on promotion.

We're stabilizing pricing, simplifying pricing for consumers and we're using our trust everywhere to build the brand equity.

So I think our efforts are delivering, and we're holding dollar share despite some deep discounting by competitors who, for some obscure reason, seem to want to take dollars out of the category.

Okay.

So let me put it in a different context.

So it sounds like your business is holding steady on the promotional side but you are seeing increased promotional activity from your competitors.

Yes.

Okay.

Again, on this potential realignment in Europe, Chuck, do you anticipate that there would be a restructuring charge associated with that, or that that would be absorbed in ongoing business.

Oh, since we're still in the evaluation stage, we're not in a position to measure a degree of magnitude in the event we have a cost.

Obviously, there will be a cost.

Today we wouldn't plan to take an old-fashioned restructuring charge.

We plan to pay as we go.

Okay.

And last but not least, it seems like in the third quarter that the benefits from cost savings initiatives and SSI, in particular, accelerated.

Is that a good assessment of what's happened and do you expect that that's going to continue over the next several quarters.

Well, I think it -- with regards to SSI, we're realizing the savings a little bit faster than we had originally laid out so I think we mentioned about $250 million in savings over a three-year period and we'll probably achieve the $250 million by the end of this year, which would be about six months ahead of plan.

By the end of '03?

Yes.

Great.

Thanks a lot.

We'll go next to Andrew McQuilling with UBS.

Thanks very much.

A question for Chuck on Quattro, if you could.

Do you have any consumer use tests, any early results that you could share with us on performance Quattro versus the turbo.

No, we're a little early on that.

You must be interested.

Oh, absolutely.

Any initial thoughts on the type of dollar share in the early days you've got -- the early type of share gain for Quattro and for Schick overall that you might anticipate.

I think it's too early right now to be too predictive on it.

What we do know is, obviously is they will get distribution and they are getting it.

Obviously, they will get trial and they are getting that and that's where you see the first impact short term on share.

I think the more interesting thing is what kind of conversion rate and what kind of retention rate they get.

It's too early to get a good read on that piece.

That's part of what the testing will give us a good indication on.

But we won't have those results for a while.

And in terms of the blade defense, you mentioned that two to three cents was the number for 2003.

Is that number, has that gone up in your planning for 2003?

And how much was in the third quarter?

No, go ahead, Chris.

Well, first of all we said two to four for this year, five to seven next year.

So far the results are in line with our expectations.

There's no change to our outlook and still no impact to our ability to deliver top-tier earnings performance and I think you are seeing that given the record earnings that we've reported today.

And, maybe one last one.

Were there any functional excellence savings in the quarter.

Sure.

Sure.

Some of the programs that were implemented last year, generally it takes 6 to 12 months to see those programs through implementation and then you see start to see the benefits.

Yeah, Andrew, I think we're still on track for the costs outweighing the benefits.

You get that cross over point some time in 2004.

So we're still on track with that.

Terrific.

Thank you very much.

We go next to Joe Altobello with CIBC World Markets.

Thanks.

Good morning.

Just a couple of questions.

Chris, quickly you guys usually take a price increase on your blades and razors around January 1.

Is that going to happen this year and how much?

And, second, should we expect the marketing spending to remain at this high level as far as the percentage of sales going forward?

Okay.

First of all in terms of price increase, this past year it happened in February.

And when we did this call last year, we didn't have any news for you, so you're sort of at the same point in time.

So I don't have any news for you today.

In terms of marketing, advertising in particular, we said we'll be in that 8% range, I think we're 8.6% year-to-date and we're getting a great return on our investment and every division saw a double-digit increase in advertising.

We're pretty happy with our spending levels.

Okay.

And as far as new product pipeline for '04, is there anything that you can talk about today?

Well, I think on the last call we talked about the Sensor3 system, and the Venus Devine, but beyond that, no.

Okay.

Great.

Thanks.

We'll take our next question come from Connie Maneaty with Prudential Equity Group.

Good morning.

Good morning, Connie.

Typically ing the fourth quarter, I guess there's a seasonality to Braun sales, and it usually results in a gross margin in Q4 that's lower than the first three months.

Do we expect that kind of pattern to continue.

I don't think there's anything that -- we're just checking on the fourth quarter on the gross margin.

Connie I think you said the Braun margin would be dampened.

The fourth quarter is a big quarter for Braun and that would be margin enhancing.

Margin enhancing --

In terms of the math.

I thought Braun had a lower gross margin than some of the other businesses.

I'm not talking gross margin.

I was just talking you know total margin.

Do you mean that the Braun business is bigger within the mix of the company's performance in the fourth quarter?

Yes.

Oh, okay.

Well, yeah that's fair.

That's fair.

So it makes sense that the Q4 gross margin, because of this normal mix shift should be lower than the gross margin for the first three months?

The first nine months, sorry.

That's making a lot of assumptions about what the rest of the business does and I don't think we want to get too far down that road in terms of guidance.

You've got the Braun impact correct, though.

Okay.

Thanks.

Once again, everyone, if you have a question, please press star one on your phone.

We'll take our next question from Andrew Shore with Deutsche Banc.

Good morning, John, John and Chuck.

Quickly, I think, Chris, you mentioned that related to Duracell and the price gaps, we haven't reacted yet.

Are you telling us something?

Yeah, I think as we look at it, the best thing to look at is our dollar share and we do not intend to lose dollar share.

We're continuing to market behind the brand equity.

Okay.

So back to Amy's point, though, I mean just the sheer fact that Rayo Vac is getting increased distribution of its 50% large pack, then the gaps widen, things get worse in the fourth quarter, so is there a high probability of a price realignment in the fourth quarter?

Well, I think, as we look at it, like I said, Andrew, I don't want to get into hypotheticals or anything like that, what may happen, what may not, but I think the best thing to do to sort of look at what we may or may not do is our dollar share.

And, to date, we're holding dollar share.

Okay.

Then finally, can you just tell us, unless I heard this incorrectly, you said CAPEX is going to be 5% of sales for the full year, which means you need to spend about $240 million or so in the fourth quarter.

In that range.

What are you spending on?

It's more of the same in terms of its cost reduction programs and it is new product programs.

Okay.

So we've seen the early stages of you building new blade capacity?

I mean, because if it's more of the same, it will be 3% of sales.

Well, no, I think, more of the same year-to-date, you have to look at it on a total year budget perspective, which as Chuck said, always includes a mix of cost savings programs and new product efforts across all the businesses.

So I don't think there's -- it's more a question of timing as opposed to where exactly it's going.

Okay.

Thanks.

We'll take our next question from Ann Gillin with Lehman Brothers.

Good morning.

I just have a question on the blade business.

With all the activity, can you comment on trade and consumer inventories for blades and razors?

We think, well, trade inventories, aside from the fact that we shipped in for a strong fourth quarter program, we think are very clean.

Consumer inventory is the same way.

Okay.

Perfect.

And then I just want to go back to the dollar share on Duracell.

We're seeing the same, that you're holding your dollar share.

At what point, or how quickly could you react if you started to lose dollar share in the Q4, all important Q4?

Yeah, again I think as I mentioned to Andrew, I really don't want to get into hypotheticals but it's something that we monitor rather closely.

Okay.

And, Chris, just a clarification, within the quarter, if you would react, would you go more for promotional spending, or could price be put in?

I think we've got a lot of levers at our disposable.

I don't think I want to telegraph anything about what what we may or may not do.

Okay.

Thanks.

We'll go next to Blane Marter with Seminole Capital Partners.

Yes.

Thanks for the free razor in the mail, I'm enjoying it.

Can you give me a sense, will that kind of promotional activity continue in the fourth quarter and how are you measuring the success of that program?

Well, with all of our marketing spending we look at what the returns are and clearly the returns on sampling are quite attractive.

And I think as we look at it, the plan that we've got in place, we sort of look at it as much more of an offensive plan where we want to reinforce consumer awareness and excitement about Mach3Turbo.

So the different components are really across all elements of our marketing mix, as we would normally do.

So it's advertising, sampling, retail tie-ins to the Champion program, PR activity, but I think importantly, the important take away here is that we did not increase trade promotion spending.

Not in the quarter, not for the year within blade razor.

Thanks.

This concludes today's question-and-answer session.

Mr. Jakubik, I will turn the conference back over to you for any additional or closing remarks.

Okay.

Thanks very much.

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