寶潔 (PG) 2003 Q4 法說會逐字稿

Good day, everyone and welcome to the Gillette company's fourth quarter and year end 2003 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.

Thanks very much.

Good Morning.

Thanks for being with us this morning.

As the lady mentioned, I'm Chris Jakubik, Vice President of Investor Relations.

With me are Chuck Cramb, our Chief Financial Officer.

John Manfredi, Senior Vice President, Corporate Affairs and Eric Krause, Vice President, 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 cannot assume an obligation to update these statements.

Please refer to the cautionary statements contained in the company's Form 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements.

With that taken care, let's look at 2003. 2003 was a milestone in our turnaround.

We delivered record earnings despite incremental costs to realign our European Blade Razor manufacturing and increased competition across our businesses.

I will go into the details on the financial and business in a minute.

But first, let me headline our performance for the year.

Top line growth was solid in both reported dollars and constant currency.

We didn't buy that growth.

In fact, there was no increase in the rate of trade and consumer spending even when the effects of Duracell's price deal realignment are excluded.

I don't think you'll find many companies in this environment that can produce an increase in revenue without spending more on trade and consumer deals.

Where we did spend money was on advertising, where investment continues to increase.

Furthermore, as product support is going up, costs are going down.

Our cost focus did two things for us.

It increased profitability and it funded initiatives for more cost savings.

Our businesses is delivered.

Listen to these examples.

New Blade Razor products grossed significant growth for both the category and for Gillette.

Duracell delivered against the objectives of its price deal realignment and showed a significant increase in profitability.

Oral Care continued to gain share around the world.

And personal care reversed course in both market share and profitability.

Looking forward, we fully expect progress to continue in 2004.

As I'll discuss, we do not expect competitive activity to fade, but neither will we.

We have a very strong new product pipeline, cost savings will continue and will sustain a high level of brand support with high impact advertising.

That's the big picture.

Let's move to the numbers and a quick note on comparisons.

From here on out, I'll stick with continuing operations and exclude the one-time gain on the sale of our rights to the Vanica business in 2002.

It amounted to $30 million pre-tax, $21 million after tax, and roughly $2 in EPS.

For reconciliation of these figures versus our GAAP figures, please see our Investor Relations Web site.

With that in mind, here's how we did.

Starting with the quarter, on a reported basis net sales for the fourth quarter were $2.6 billion, 4% above the fourth quarter of 2002.

Foreign exchange added 7% to sales growth, with most currencies strong versus the U.S. dollar, especially in Europe.

Pricing was flat.

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

That leaves small volume mixed, down 3%.

Why was that?

A Number of factors came into play.

We had good product gains from Mach3 Turbo, Sensor 3 disposable and CrossAction power.

But there were two key offsets.

One was Blade Razor.

There, advanced shipments of our holiday Razor programs in Q3 of 2003 tempered sales in Q4.

However, actual consumption in Q4 was strong.

The other factor affecting Braun and the power segment of Oral Care was weak consumption and related trade de-stocking in Europe.

I will discuss those in more detail when we cover the business units.

Full year net sales rose 9% to $9.3 billion, with volume mixed up 4%, exchange at 5%, and the flat pricing that I mentioned.

As you can see, we delivered solid organic growth in 2003, with currency as an added benefit.

What about profitability?

Well, we had another solid gain in gross profit margin in Q4, up 210 basis points to 57.1% from 55% last year.

There was a mix of factors.

Here were the pluses.

Favorable product mix of premium shaving systems and premium disposables, favorable mix of Blade versus Razors, cost savings from our strategic sourcing initiative and greater manufacturing efficiencies, particularly at Duracell.

These gains were partly offset by two factors higher year over year manufacturing costs in Europe due mainly to strength in the Euro and pound sterling, and incremental costs to realign our European Blade and Razor manufacturing.

For the full year, you see generally the same mix of premium products and cost savings.

But again, were partly offset by manufacturing costs in Europe due to currency, and the Q4 costs to realign our Blade and Razor manufacturing.

The net result was a strong 140 basis point gain in gross margin.

It hit 59.9% compared to 58.5% the year before.

I want to pause here to detail the cost benefit stream of our European Blade and Razor manufacturing realignment.

Beyond the $50 million expense in 2003, costs could be as much as two to three cents in any given year until the plan is implemented.

We will begin to realize savings beginning in 2006 and we expect about $50 to $60 million of annualized benefits upon completion of the project in 2007, when our new facility is up and running in Eastern Europe.

Now let's go to marketing.

A big story in the quarter and the year.

In fact, we upped our Q4 marketing investment by over 30%.

Simply put, we spent more money on more advertising.

And testing shows they are some of the best advertising we have ever done, such as Oral B's brush like a dentist campaign, Duracell's trusted everywhere campaign and the high impact Mach3 Turbo and Turbo Champion advertising.

We also increased our high return sampling program behind Mach3 Turbo.

We reached more demographic segments and heightened awareness of our flagship male shaving brand.

In the quarter, continued the trend seen during the year.

Full year ad pending was up 28% to 8.9% of sales from 7.7% last year.

And Blades and Razors wasn't the whole show.

There was a double-digit increase in every division.

And it was a big factor in our sales gains across the company in 2003.

How about our overhead?

Overhead and other expenses dropped to 23.1% of sales from 23.6% in Q4 2002.

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

For the full year, overhead and other was down to 25.3% of sales from 26% last year.

The drop came mainly from cost savings programs, but there were three main offsets for the year.

One was exchange, another was roughly $50 million of incremental pension expense, and the third was $21 million of incremental spending on functional excellence.

Let's take a minute here to talk through functional excellence spending in 2003.

Total spending for the year was $137 million, with a total of $34 million expense in Q4.

That compares to $121 million in 2002 and $73 million in Q4 2002.

Functional excellence costs did not significantly impact the fourth quarter or 2003 performance of any of our business units.

And I want to note that in 2004 we don't intend to reconcile FE costs quarterly.

The up-front heavy listing is behind us.

FE has become a more normalized cost of doing business.

So, year over year comparisons aren't likely to be meaningfully disrupted.

Like anything else we do, the performance of functional excellence is best measured by the overall growth and profitability of the company.

That brings us to profit from operations.

We were up 1% to $514 million for the quarter, with margin down 60 basis points to 19.6%.

For the full year, profit from operations climbed 13% to $2 billion, with a margin gain of 60 basis points to 21.6%.

Profit gains for the quarter and year came from three things: New product sales growth, a richer premium shaving mix, and cost savings in manufacturing and purchasing.

The gains were partially offset by the factors I have already mentioned, exchange costs in Europe, increased marketing, the European Blade Razor and manufacturing realignment, incremental FE costs, and pension expenses.

So for the year, we had solid organic growth in both sales and operating profit.

What did that mean for the bottom line?

Income from continuing operations grew 6% in Q4 to $358 million and 16% in 2003.

The growth in income from continuing operations involved Q4 and 2003 was enhanced by our lower tax rate.

It was down 1 point to 30% from 31% in 2002.

Our fourth quarter-diluted earnings per share rose 9% to 35 cents.

That's up from 32 cents the prior year.

And for the full year, our diluted earnings per share rose 20% to $1.34.

In both the quarter and the year, EPS growth outpaced net income growth as a result of our aggressive share repurchases.

It resulted in a diluted average -- start again.

It resulted in average diluted shares outstanding being down 4% versus Q4 2002.

And 3% year-to-date.

OK, that's a quick look at the numbers.

Again, there were four main headlines: Brand support up, costs down, record earnings, and the turnaround efforts paying off.

Let's go down to the businesses.

Starting with Blades and Razors.

Quarterly there was a lot of news in the category last year, which raised a lot of questions.

So let me start with the statistics and hard facts and there are four things to note.

First, category growth accelerated during the year and premium price systems and disposables were the drivers.

In North America, dollar growth was 4% in the first half of 2003 and 7% in the second half.

Second, the most expensive Blades remain the only source of growth in the category.

In fact, in the U.S, Blades priced at $2 or more grew 105% versus 2002.

Third, the rate of trade up is accelerating, and the user data proves that a higher percentage of users are migrating to premium offerings like Mach3 and Venus.

Fourth is the impact of Schick Quattro and Intuition.

In August we said they would not keep our franchise from growing strongly and we said they would not get in the way of our ability to deliver our financial targets.

We were right on both counts.

Gillette's 2003 global Blade share grew by one-half point to a record share of 72 1/2%, with constant dollar growth of approximately 7%.

The Mach3 family's global share increased by almost 3 points to 28% of the Blade market in 2003, with constant dollar growth of 18%.

Venus share increased by a half point to 5%, with constant dollar growth of 17%.

And again, we did all that without increasing trade and consumer spending as a percent of sales.

So let's look at how that played out in our financial.

In the fourth quarter our Blade Razor sales were up 5% with favorable exchange contributing 7%.

As I mentioned, Q4 growth was dampened by advanced shipment of holiday Razor programs in Q3.

Q4 traded consumer spending was down and consumption of our premium offerings was strong.

In the fourth quarter alone and despite the Quatro and Intuition launches, Mach3's U.S.

Blade value share increased 1.7 points to 35.4%.

For Venus, U.S.

Blade dollar sales grew 1%, share was flat, but Razor volume was up 4%.

And in Europe, Gillette Blade value share increased by 70 basis points.

Also, Sensor 3 disposable drove a one-point increase in Gillette value share of U.S disposables to 48.5%.

That's significant.

It shows that Sensor 3 strengthens our portfolio and is a credit to our franchise.

We take new competition seriously, we take new competition in the category seriously, but the numbers tell the story.

We continue to grow both our franchise and the category.

The profit story is also good.

Fourth quarter Blade Razor profit was down 2% and margin was down 230 basis points to 32.4%.

These numbers reflect $50 million or 540 basis points of margin in incremental costs related to our European manufacturing realignment.

So the ongoing trade up and improving mix continued to deliver organic profit growth.

For the full year, Blade Razor sales rose 13%, including a 6% favorable impact of exchange.

That growth came from the success of premium shaving systems and disposables and several new product rollouts, including Mach3 Turbo and international markets.

Sensor 3 disposable in North America and Europe, and Presto (inaudible) excel disposable in Latin America.

Full year Blade Razor profit was up 10% and margin declined 100 basis points to 36.8%.

Again, the story was favorable mix and increased marketing, offset by European realignment costs.

So what about 2004?

We think we set the stage for a very solid performance.

We expect demand for premium systems and trade up to continue.

We are now implementing a price increase effective next month in North America and February to April in Europe.

That's consistent with what we have done in the past decade.

We anticipate that Sensor 3 systems and Venus Devine will continue to drive franchise growth.

We also expect incremental sales from the new M3 power, which we believe will have an impact similar to Turbo.

If you recall, Mach3 Turbo had year one-retail sales of about $300 million.

And finally, all our products will be supported by a sustained level of investment in high impact advertising.

So in summary, despite new competitive entries in the category, we haven't changed our direction and we certainly foresee no slow-down in our momentum.

With that, on the Duracell, Q4 net sales rose 5% in reported dollars with currency gains accounting for all of the increase.

We also realized $12 million in sales or nearly 2 points of growth from acquiring the Nanfu business.

That's net of divesting the South African and Indian's ink businesses.

So excluding the impact of currency, acquisitions and divestitures, sales were down.

Why?

Well, lower year over year volumes in North America due to category softness and lower prices from our price deal realignment offset the positive effects of lower trade and consumer spending.

But the big story at Duracell was profit.

Q4 profit from operations rose 35% to $149 million, a margin increase of 490 basis points from a year ago.

Keys here were cost savings in manufacturing and sourcing, lower promotional spending, and the elimination of free cell activity.

Importantly, performance also reflected a 30%-plus increase in advertising.

For the full year, Duracell sales rose 6%, including a 4% favorable impact of exchange.

Sales gains here were driven by Q1 Homeland Security concerns and Q3 blackout and hurricane that combined to increase demand.

2003 profit rose 49% to $348 million for a margin increase of 490 basis points to 17.2%.

Those numbers reflect three things.

Significant cost savings, sales growth, and our commitment to increase advertising.

And I should note that the benefits of lower trade and consumer spending and the elimination of free cell offset the lower prices due to the price deal realignment.

The battery category by contrast is a mixed picture.

On one hand, Duracell delivered against the objectives for the price deal realignment.

We eliminated our free cell and category free cell fell 60%.

Our volumes sold on promotion dropped to 44% from 49% in 2002.

Our average price per AA cell stabilized in 2003, the first time in four years and media spending behind our trusted everywhere campaign was up strong double-digits.

Additionally, our dollar share was flat on an all-out basis at 48.4% in 2003, reflecting a relatively stable month-to-month performance.

On the other hand, 2004 is going to be a challenging year on two fronts.

First, we're up against the spike in demand from the unusual events in 2003.

So we expect consumer de stocking and trade inventory reductions will hold category growth to around 2%.

Second, Duracell is now facing a 50% price gap versus value brands and private label.

Historically that type of gap has resulted in share erosion.

We're starting to see it now and given the large price gap that trend is likely to continue.

We have said that we will not stand by if Duracell's value share decline.

But the future course of action in batteries remains to be seen.

That's all for Duracell.

Great progress in 2003, but the game is not over.

Moving on to Oral Care.

Reported sales were up slightly, but excluding the favorable impact of exchange, sales declined 7%.

And two things hurt our growth in the quarter; one was the weak European economy and two-consumer sentiment, especially in Germany.

And as the power toothbrush segment declined, the trade de stocked compounding the effect on our shipments in Europe.

The other impact was soft shipments in North America.

That was mainly due to promotional timing and a changeover in pack configuration for the club channel.

But the share picture worldwide was excellent.

We extended our number one global position in the total brushing category during Q4, and for all of 2003.

Our global value share rose 1.4 percentage points to 34%.

That's the highest share point gain among all global competitors.

In the U.S. battery segment, we captured a 25% value share in only 17 months on the market.

And our premium manual share is growing despite heavy discounting in the battery segment.

In 2004, new launches will further help our global position, including taking CrossAction Power and CrossAction Vitalizer beyond Europe and North America. (inaudible) profit, Q4 profit from operations fell 12% to $52 million.

Still, there were a number of positives.

They included the success of new products like the CrossAction power battery toothbrush, strong trade up within manual to our CrossAction Vitalizer brush.

Trade up within rechargeable and improved product mix with more power toothbrush refills.

But these were more than offset by higher European-based manufacturing costs due to exchange and double-digit increase in advertising behind new products and I had-scoring brush like a dentist ad campaign.

For the full year, Oral Care net sales climbed 6%, including 5% favorable exchange.

Profit from operations in 2003 decreased 2% and margin fell 140 basis points to 16.4%.

For the year, we had higher sales from new products and improved product mix, but we also had higher export costs out of Europe due to exchange and increased marketing spending, as well as higher warranty provisions in Q1.

To sum up Oral Care, excellent gains in the marketplace, despite category softness and higher margin rechargeable, and adverse currency movements from a cost perspective.

Next is Braun.

With a quarter netted out at a sales gain of 4%, with currency gains of 10%, good news here was strong results in male shavers in North America.

The success of our new Free Glider and Flex XP2 produced a one-point share gain in U.S. male shavers to 24.2%.

Braun also made solid gains in female hair removal worldwide, and a good performance in household appliances.

But the bad news was weak category dynamics in male shavers in Europe and Japan.

In Europe, weakness in consumer spending led to the second year of category contraction.

The result was lower sales and soft market share in our higher margin male shaver business.

In Japan, competition in the low and mid-priced shaver segment dampened overall results, and that was despite the success of our new top of the line activator shaver, which posted a 12% verse value share in Japan in Q4 alone.

In addition, lower consumption in Europe and Japan were compounded by de stocking by the trade, leading to even softer shipments in Q4.

At the profit line, Braun made $6 million in Q4 versus 28 million a year ago.

While there were significant savings from manufacturing and strategic sourcing, margin and profit were driven down for three reasons: Unfavorable product mix due to a weak male shaver segment, higher European based manufacturing costs due to exchange, and a double-digit increase in marketing to support new product launches.

For the full year, sales rose an 11%, with currency gains contributing 9 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 helped offset ongoing weakness in demand and the related trade de-stocking in Europe that I mentioned.

Full year profit fell 35% to $49 million.

Here again, the main factor was an unfavorable shift in product mix due to a weak male shaver segment.

Also piling on were incremental warranty provisions incurred in Q1 and higher European-based manufacturing costs due to exchange.

Combined, these factors more than offset benefits of manufacturing efficiencies and strong top-line growth.

To sum up Braun's performance, we have had a number of issues on the cost side, including the impact of exchange and one-time costs.

But you are using functional excellence to improve operation and we're changing the cost structure with out sourcing.

We look at Braun's pace of recovery, as being about a year behind personal care and personal care is our final stop on the business review.

One year ago we summed up personal care's performance with the term investment year.

Well, the investment is paying off in sales and profits.

Now, reported sales in Q4 were up only 1%, including a 6% positive impact from exchange, but it's actually better than it sounds.

Comparisons with pipeline shipments of the Gillette series re-stage in Europe and AMEE in Q4 2002 hid excellent consumer gains in shave preps and antiperspirants and deodorants.

I'll give you just a few highlights.

We hit our highest U.S. value share in shave preps in three years, 25% for all of 2003.

Record highs for the Gillette series and for Satin Care were key to that performance.

Value share in European shave preps was also at a three-year high reaching 39% in the latest reading.

The main reason was a 1.3-point increase in Satin Care's value share to 71%.

In antiperspirants and deodorants, Gillette's 2003 U.S. value share reached the highest level in four years at 19.5%, driven by our flagship male brand Right Guard.

Turning to profit, personal care's Q4 profit was up 28% versus a year ago, at $23 million.

And margin increased 210 basis points to 10.1%.

Profit improvement came mainly from growth in new products and margin enhancement from strategic sourcing savings.

The gains were partially offset by the double-digit increase in advertising behind new product and brand re-staging activities.

Year-to-date, personal care sales increased 6%; foreign exchange added 4 percentage points of the growth.

The key driver in 2003 was new product success in antiperspirants and shave preps, which more than offset currency devaluation in Latin America.

Profit from operations in the full year rose 43% to $73 million.

The gain reflects successful cost cutting and brand reinvestment.

Higher sales and savings from our SSI initiative were partially offset by increased marketing to support new product launches.

And in 2004, we'll begin shipping several new products, including complete skin care and repackaged Soft & Dri in North America and Mexico.

So that's it for the businesses.

Before we take your questions, I want to take you through some highlights relating to cash flow.

In 2003, capital expenditures were essentially flat at $408 million and Capex to net sales was 4.4% in 2003, reflecting strong sales and better capital efficiency.

That led to another year of strong free cash flow generation.

As defined in our earnings release, we generated $2.3 billion of free cash flow in 2003, equal to 24.6% of sales and we put it to good use.

We bought the Nanfu battery company in China, repurchased Gillette stock, and paid down debt.

Under our share repurchase program we bought almost 41 million shares for $1.3 billion, for an average price of $31.23.

That left us with 51 million shares remaining under current authorization at the end of the year.

Additionally, total Debt was down $345 million from the end of 2002, while cash and cash equivalents down only 120 million.

So that's our story for the fourth quarter of 2003.

Take always are clear and very positive.

Number one is those two words again: Record earnings.

Our turnaround continues and is gaining momentum.

Product innovation is driving top-line growth across the company and across our categories.

Our aggressive cost reduction efforts are continuing to deliver with more to come.

We accelerated our investment in our brands and improved the quality with high impact advertising.

And our free cash continues to flow.

There was the usual assortment of challenges but we had more, many more successes.

So on balance, we're pleased with the year, with where we are and optimistic about 2004.

Now we would be glad to take your questions and I'll turn the call over to the operator who will explain the procedure for signaling if you do have a question.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Andrew McQuilling, UBS

Thanks very much.

Question for Chuck.

Chuck, I just want to make sure that I understand, functional excellence charges in the fourth quarter of the year were 34 million and on top of that there was another 50 million in charges for the European Blade realignment, is that right?

That's correct, in terms of the European Blade manufacturing distribution realignment; we took a provision for $50 million in Q4.

That is a separate program for what we have traditionally called functional excellence.

Thank you.

And so that's in total, those two things are six cents a share.

Yeah, just about.

Talking about cents per share, I do have one thing we ought to get out as a correction before someone picks us on; we just had a slight mis-statement.

As much as I would have loved to have seen it, the Vanica gain last year is 2 cents a share, and I think it might have come across as $2 a share in the presentation so.

We apologize for that one.

Chuck, I wish you made $2 a share on that.

So do I.

Question I goes the functional excellence savings for the quarter, can you talk about, you know, what the run rate on the savings piece of that is?

Well, Andrew, in terms of the savings, we still expect 2004 to be the cross-over year in terms of cost versus benefits, so costs still exceeded the benefits.

That was helpful.

I guess one last one, if you can talk about what type of activity happens for this you're European played realignment in 2004, can you talk about the steps to implement?

Yes, we have to be a little bit general on this one, only because we're still in negotiations regarding site location for a new green field facility.

But basically we start redeploying and actually moving some equipment, manufacturing equipment, among our European factories during 2004.

And there will be some minor layoffs as well in 2004 related to that, but really it's more of a staging ground, getting ready ground for a program is that going to take three to four years to totally implement.

And in terms of total cost on the European Blade realignment? 2 cents a quarter for how long?

Not a quarter.

It was about 50 million in this quarter and then in the subsequent three years could be up to 2 to 3 cents a share for the next three years.

For the next three years.

For each of the next three years, yes

All right terrific, thank you very much.

We will take our next question from Wendy Nicholson, Smith Barney.

Hi, Good morning.

I have two questions.

The first is on Duracell.

Have you ruled out the idea of another just across the board price cut and are you talking about primarily increasing promotion?

Then I have a question on the cash flow.

In terms of outlook in battery category, let me put some perspective around it.

In 2003 we finished the year with the same share we started with.

We increased profitability significantly, but at the same time history tells that a 50% price gap versus competition means we lose share.

So we'll continue to study the situation.

OK.

So it's a question of just monitoring it month by month and seeing how big the share erosion is and then you adjust?

Yeah, as I said, we'll continue to study the situation, but right now you're in a situation where Rayo Vac priced below private label.

Yeah.

OK.

Al right, so with (inaudible) but guess my other question on the cash flow, when I think about '02 and '03, in each of the last two years your earnings have grown at almost what 8, 9, 10% GAAP over your operating income because you have had terrific cash flow, you have reduced all your working capital, paid down debt, all that kind of stuff.

When you think about how you're going to spend your money, whether it's Capex, or dividend, share buy backs in '04 and move towards sort of an optimal capital structure, do you think we see another 6, 7, 8% GAAP from operating income growth to a high single digit or high you know teens again EPS growth number?

If I got in to those kind of metrics, Wendy, I think I would be very, very close to guidance, so I'm not going to do that.

What I will say is that yes, we have generated marvelous cash flow over the last two years, we have corrected our working capital issues, in fact remember a few years ago we said we're going to go to war, we did go to war in a think we have come out that war victorious.

We still have a ways to go on inventories but that is a structural change and we will see those inventory numbers come down.

As we look at that tremendous cash flow that we generated, the question is what do you do it with and how do you use it?

We would love to reinvest in the business and we will look for opportunities to do that.

Maybe on some acquisitions, they will be small, they will be built-on such acquisitions against core categories, much like the Nanfu battery acquisition in China.

Other than that, we'll look at the mix of debt versus share repurchases, alternative use that cash.

But there's no magic formula to it right now.

Capital structure wise, I'm probably a little bit light on my debt level at the moment, but not bad.

OK, sounds great, thank you very much.

And we will go next to Amy Chasen, Goldman Sachs.

Good morning.

First, a question on Duracell.

Can you just tell us in the fourth quarter what your all outlet share was?

Because the II data shows that it's very, very weak and we're not sure whether it's better in the non-track channel.

It was pretty flat.

During the year it was relatively level.

Clearly we were down from last year because we had a very strong fourth quarter share, so year over year we were down.

But we finished the year with the same dollar share we started with;

I think it was about $48.5 share.

Was the fourth quarter down materially or just a little bit?

Can you give us order of magnitude?

Well, fourth quarter last year we were up around about a 50 share, so that's the magnitude you're looking at.

I'm sorry, what is it this year?

As I said, about $48.5.

OK, got it.

Great.

Can you just tell us what, you know, you said several times, Chris, you're looking to, you're studying the situation.

But what specific milestones are you looking to, you know, what should we be looking at in terms of, you know, I'm not asking what you're going to do, but what are you watching besides the market share trends?

I mean it seems like the market share trends are starting to deteriorate.

Are there other things you're looking at in the category to determine your course of action?

Yeah, I think if I got a little more specific it would indicate what we plan on doing or plan not on doing.

But I mentioned key metrics.

We really look at our dollar share and, you know, we look at how we're positioned and what we expect on a go-forward basis.

As I mentioned, I think we made quite a bit of progress with the price deal realignment, we increased profitability significantly, but we're still facing a 50% gap versus competition.

So best I can do is tell you we will continue to study the situation.

OK.

In terms of the Duracell profitability growth, it just continues to accelerate.

Any reason why this rate of improvement can't continue?

Or were there some sort of structural things that you had to fix this year and so the rate of change will slow down as we look into '04 and beyond?

The rate of change, it was astronomical in 2003, as we executed very, very strong cost reduction programs, cost savings programs both on the manufacturing side as well as on the general overhead side.

I think it would be wrong to conclude that you can maintain that pace, because eventually you would end up with negative costs almost.

But there are continued cost savings initiatives underway, the Duracell team is very aggressive on the cost programs and there are more benefits to come next year being 2004 and beyond.

OK, great.

Last question.

On the working capital side, your days to sell inventory were up in the quarter.

Can you talk about that?

And similarly, your days of sales and receivables were down quite substantially and your full year rate was well, well, well below anywhere it's ever been for you guys.

Are there further improvements to come?

Or you kind of hit rock bottom?

Amy, first on the inventory side, days inventory hand is up based on the metrics that you see.

Unfortunately one of the things that happens when currency moves dramatically in a very short period of time is inventories are translated at the last exchange rate.

So the Euro, as you remember in December, just took off.

And as a result, we had a high dollar inventory value at year-end, much higher than the cost of sales translation that you would have seen.

So confusing the metrics on the inventory performance is just the accounting of it.

The inventory programs, there is a little bit of slow down because of some of the relocation that we're going through with the European program, but we continue to make good progress on overall inventory management.

I'm sorry, if you shipped out the currency in both years, would inventory days have been up or down?

I think, I can't do that in my head, but I think the inventory differential for currency in terms of days is in the 8% range.

8% or 8 days, I'm sorry.

8%, which is similar to days.

It's in that same ballpark; depending on what metrics you're doing to calculate your coverage.

OK.

On the AR side, it's sort of the perfect storm that went the right way for us.

The day sales outstanding based on fourth quarter sales are in the low 30s, that's not a sustainable level.

However, we have had wonderful achievements in terms of we have been aggressively re-looking at our trade terms, taking advantage of low interest rate environment, and as a result through some aggressive benchmarking as well we have got several significant areas where we changed, reset trade terms bringing them down.

Also, however, in those numbers was a very favorable mix in terms of the mix of sales between Duracell, Brown and Oral Care appliances which traditionally trade at high dailies outstanding because of the trade channels versus the Blade Razor of business and the manual Oral Care and the personal care business which are a low.

Finally, even country mix went in our favor, and all those elements came together to bring it down.

But we would not expect to see it be able to mean itself at the level that you saw at year-end.

OK.

If we look at the first three-quarters in that mid-40s to low-50s range, can we still see further improvement over the next several years from that more normalized level?

On the average, yeah.

OK, great, thank you.

We will go next to Bill Chappell, SunTrust Robinson Humphrey.

Good morning, thanks.

Just a couple quick questions on the, again, looking out to 200 4, I preface that statement that I know you don't give guidance, but as I'm looking at the advertising and promotional budget and with the new m 3 power and all the other kind of fighting off competition, should I expect that to go materially higher as a percentage of sales or is the budget pretty similar in percentage of sales to 2003 levels?

Bill, we are going to continue to sustain our stepped up level investment in the high impact advertising that was one of the big contributors to the record earnings and how our franchise has performed.

So as you know, we have got a good, very good, if not great, new product flow in the coming year and we're going to support it with better marketing.

But to go beyond that, it would be taking us in to that area called guidance.

Also I guess looking 2004, any incremental changes to like pension contribution and also just kind of overall like insurance benefit, stuff like, that that might be stepped up?

Insurance costs continue to go up.

You know, as they do with a lot of companies, but in terms of our pension it should be relatively flat in terms of pension expense for the year.

Great, thanks a lot.

We will go next to John Sasher, JP Morgan.

Yes.

Good morning.

It seems as though in every division you made comments about inventory de-stocking at the trade.

Can you give us a better handle strictly in core business in terms of where you think retail inventory stands versus where they been historically and maybe how much that has impacted Q4, particularly relative to Q3 when you obviously had a little higher retail inventory levels.

Yeah, a couple points to make there.

First of all, our supply chain organization has made huge progress in customer service, that's led to the inventory reductions for our retail partners and us.

But that's much more in the context of the year and it's much more in terms of days, not weeks.

Comments I made today in terms of Blade Razor in the fourth quarter you certainly, you currently, had these stocking, you know from third quarter to the fourth quarter, because of the ship-in.

And distribution of Quattro increased in Q4, which impacted sales there as well.

However, across the other businesses I mentioned in Oral Care, power Oral Care and Braun, that we have some de-stocking related to soft demand in Europe, put that in context, retailers in Europe did not want to be caught long on inventory as they were in 2002, which led to inventory de-stocking in Q4 over there, particularly in the electro channel over there.

Beyond that, pretty clean situation, other than in the battery category where we think there's approximately, about a week of excess inventory out there in the trade because of those spikes in demand that happened last year.

So that will affect category sales in batteries in 2004.

OK.

So is it safe to say, then, that a side from Blades in the U.S. you feel like in general the inventory, the changes in inventory are tracking changes in retail trends?

From an annual basis I think so.

I think the one area where we'll be looking at next year is in Duracell, not Blades and Razors.

OK, great.

Thanks.

Our next question comes from Alec Patterson, RCM Investment Management.

Yes, hi.

Just a couple of quick ones.

One, the Capex to sales ratio at 4-plus percent, you may have changed this inter year but (inaudible) at the beginning of the year you talked about how this would have to start to progress up to a more normalized 6, 7% rate.

Is that just to push out a year?

Could you speak to that?

Alec, let me start with that and if chuck wants to jump in, in terms of Capex, our benchmark rate as we look forward is 7%.

Clearly we were beneath that in the last couple of years, but as we look over the long-term, 7% is the right number for modeling purposes.

The only thing I would add to that is in any given year, it could be a little above it or a little below it, we have gone through a period where it has been a bit below it, but I would expect to see it pick up.

But that's kind of what you said this time last year, so I'm just wondering, are you sandbagging me a little here?

Or do you really see the business has these needs?

We're not sandbagging you and our business modeling we do have a pickup in Capex.

And to be honest, as we get better at with our engineering, (inaudible), would be lay out on paper at the beginning of the year, we're finding that we become more efficient as we move through the year.

However, on a go-forward basis the 7% target is the right range.

OK.

Just along the lines of Capex, is there any reason why the realignment work in Europe, manufacturing Blades, should not be considered part of Capex?

It will be a capital component to it, yes, but that's not in the kind of numbers that we were talking about, we're just talking about the expense side, in addition there will be capital expenditures related to the green field project and related to any additional functionality we might put on manufacturing equipment.

Got it, got it.

On the share count, I know in the past there have been periods where because of where the stock price is; options and the money impact the amount of shares in the diluted share count.

Could you just clarify where we are on that and the way the count came out in the Q4?

Well, year-end stock price close was -- I would have to look.

I think we picked up a couple million shares on that calculation.

I'm just looking right now at something here.

Yes, if you look on the year-to-date pickup due to stock options, it's a couple, almost 2 1/2 million shares.

OK.

And in the quarter, it's a little more, obviously.

So if there's like a 10% upward move in the stock price, there might be a couple million shares added to the share count, that sort of thing?

We would have to look at the schedule that will be put out with the 10-K and the proxy.

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

OK, fair enough.

And just a point of almost philosophy here, the functional expenses where you talked about on an ongoing basis, now you're not going to talk about them quarterly, kind of the ongoing nature of the operation, is that almost to say that functional expense initiatives are perpetual initiative for the company and really shouldn't be considered kind of non-recurring or backed in and out and stuff like that?

Yes, that's exactly how we would look at it.

The blur between what we thought was a major catalyst project, which is how we started with the functional excellence to give you some sense for the real step-up over the long term, that's of natural part of a business and business like Gillette is always going to be investing those kinds of programs.

And, you know, bottom line on that, Alec, future performance not only of this program but any other one from a benefit perspective should be really, really should be measured by the growth in profitability of the company at the end of the day.

Right.

I agree.

OK, great, thanks.

Our next question comes from Andrew Shore, Deutsche Bank.

Good morning, Chris, good morning, Chuck.

I hate to be this crass, but you did mention that with the Duracell issue you're studying it.

This is not a science exam, it's business.

So I'm wondering again if the metric you're looking at is market share, you know, if they say the facts are the facts, why don't you act now instead of waiting till your share goes down a little bit further?

And then I have a follow-up.

Andrew, we never accused you of being crass.

But I think as we look at it, we're trying to do is manage that business for long-term profitability.

That's way we analyze it.

That's way I would hope you would, you know, hope that we annualize it.

So, we're monitoring, yes, we are monitoring dollar share, we're monitoring what the actions and likely actions of the competitive set will be and we have to figure out what we have to do in order to maximize profitability for the business over the long-term.

So that's the, you know, that's criteria.

OK.

We'll move, but seems like there's more than enough information out there to figure out what you need to do.

What's the European Blade and Razor price increase?

It's roughly the same as the U.S., which as Peter Hoffman mentioned about a week and a half ago, 2.8% in the U.S. across, you know, the line.

OK.

And then the follow-up to that is, can you help us understand how you got your arms around a 2.8% price increase?

Because it is that actual.

It's nice that you got it, but is in that actually much lower than what the historic pricing has been?

Well, that's a mix between disposables and systems and you know historically, in fact historically they didn't do anything on disposables.

So you have whatever we did on disposables averaged in to that.

But I would have to get you the specifics.

Bottom line, within the same range as what we have done over the last ten years.

OK.

And then finally, can you help us also understand what the European and North American Blade and Razor volumes were in the quarter?

The volumes, I would have to get back to you on that.

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

But keep in mind; the volumes would have been dampened because of the advanced shipments in the third quarter.

But I'll have to get back to you that.

OK, thank you.

We will go next to Ann Gillin, Lehman Brothers.

That has it great.

Great follow-up to that question, this one if you can disclose the amount of the Q3 advanced shipments you think impacted Q4.

We said with Q3 announcement, it was $40 million.

And it had stayed that way through the quarter?

Well, yeah, we shipped $40 million in the third quarter, so yes, that would have impacted a like amount in the fourth.

OK, terrific.

Just another on housekeeping, it looks like you had discontinued operation in Q4.

We did.

Yeah.

What was it?

That would have been a recovery on the sale of the.

Stationary products business, some of the provisions we set up ended up coming in a little bit favorable so we recovered that as discontinued operations.

OK, great.

And then I just wanted to go back to the Oral Care, Braun trade inventory situation.

Since these things usually don't happen simultaneously like the consumer slows down and the trade automatically reduces inventory, I'm wondering if you could give us amounts bit more history on when consumption trends started to slow.

Within Europe we have seen 18 months of a weak economy and weak consumer sentiment that's led to ongoing contraction in higher ring items like electric Razors, and rechargeable tooth brushes.

And then on top of it, what you had, you know, from a historical perspective in 2002, you had weak demand and retailers didn't cut back on inventory going into the end of the year so they were caught long in the first quarter.

They didn't want to repeat, that so what you had was in fact year over year de-stocking, which again affected the year over year shipments.

OK.

And Chris, if we were to look at your shipments, were you actually pulling back earlier than the Q4 trade de-stock so that we can understand kind of what the impact might have been earlier than this quarter?

No, we were shipping to demand and the order flow so; the order flow would have effected our shipments.

So in other words, you were shipping to the weakened demand and then the trade actually pulled back a little bit further in Q4.

So it would have cut back on their orders, and therefore our shipments.

Great, thanks.

Sure.

Our next question comes from Carol Wilke, Merrill Lynch.

Thanks.

I'm sort of curious, looking at the sales by business in the quarter, excluding affects and acquisitions, they were down across the board, we know for Blades and Razors you had the timing issue.

As you went through your discussion, I mean there seems to be an issue in every business that doesn't seem to be a one-quarter issue, again with the exception of Blades and Razors.

I mean what is the outlook, I'm not asking for guidance, but I am trying to figure out are your sales going to grow next year excluding currency?

What in each of these businesses is going to swing to the positive?

Seems like there's pretty challenges whether it's economy-driven or competition in different price points, I would be curious, any thoughts on that.

Well, I think the best thing to look at in terms of the health of our franchises and why our core franchises remain strong is market share.

We're doing very well in the marketplace.

We outlined the various reasons for you that impacted Q4 sales, you know, advanced Razor shipments, weak European demand and the pipeline fell on personal care.

But underlying it all, we delivered record 2003 earnings; record free cash flow, despite heightened competition and significant reinvestment.

And beyond that, as you look at our market shares and the performance within our core categories, we're doing very well.

I guess it just seems like you're coming up the year with some challenges and facing some very impressive sales growth on a comp basis.

Well, comp basis; if you look at our constant currency sales, they were 5% for the year 2002, and 4% this year.

So we're delivering within that 3% to 5% organic growth rate target that we have got.

OK.

I'll just move on.

This is sort of already asked, but on the whole, the Duracell issue, I mean when does it end?

I think I'm sure you guys were thinking that last year when you took the first step to, you know, go to across the board pricing, that would make the category more rational, and then Rayovac (ph) came out with very aggressive response, now they're taking share, now you're back.

I mean is this just going to continue on and on?

I'm assuming that I think Andrew was asking if there's a bogey on the profit side below what you're not going to -- because just sort of in conflict, we will do whatever it takes to maintain our dollar share, but on the other hand you have had huge margin improvement.

I'm assuming that's probably one, I guess I just want the reiteration, is that bad, probably the thing keeping you from acting now, is trying to figure out just how low or how much of a hit you would be willing to take on the margins that you recovered.

I don't think it would be really productive if I sat here to try to speculate all the different scenarios, etc.

But at the end of the day, we're managing the business for the long-term profitability, period.

So we have got to look at a number of different variables, including dollar share, including cost savings, etc, So, you know, we have to do what's right for the brand, what's right for the franchise and what's right for the shareholder.

Is the prior statement that's been said quite a few times, that you will do whatever it takes to maintain dollar share, is that maybe a little strong now?

Given the other things that you just talked about?

Well, look at 2003.

As I mentioned, we finished the year with the same share we started with, so, you know, we're relatively happy with that.

And in addition to which we increased profitability significantly.

So all I can tell you is we will monitor it on an ongoing basis and we do not want to lose dollar share over, you know, over the long-term.

It just doesn't make any sense it's going to damage the franchise.

OK, thanks.

We will go next to Art Cecil, T. Rowe price.

Good morning.

Good morning, Art.

I appreciated the forward-looking comment that you made about the business gaining momentum.

Right.

I'm just wondering with respect to '04 if could you kind of clarify or define what you would mean by gaining momentum and how we as investors should therefore interpret what you produce in '04.

Well without getting in to the area of guidance, I mean we would expect to build on 2003, with a continued solid performance.

Our new products will continue to drive growth across our franchises, and we have got great new product flow, we'll come at it with better marketing, and little capital investment.

So we have had little capital investment.

So you know, beyond that, you're going to see our cost savings initiatives continue to deliver and we will sustain that stepped up level of investment and high impact advertising.

To really go beyond that, you know, the lawyers would get all over me.

Well But to get in to semantics, you actually did say our turnaround is gaining momentum and that, you know, using a dictionary, might be interpreted an improving rate of change, OK?

And where would you expect us to see an improving rate of change over what you've been doing?

What we mean by, that for instance, as we look at functional excellence, we're making excellent progress on both costs and capabilities, so as that happens, you tend to gain momentum with, you know, with what you do, with what you're spending and how you're doing in the marketplace.

But it would be fair, I suppose, to take that statement, and say this should mean that they are looking forward to continuing gains in market share, continuing increases in local currency sales, continuing increases of some magnitude and EPS, is that not fair?

Up to the point of EPS, yes, I think that's what we're looking at.

And with EPS, as you know, we have said all along is that our objective is to deliver growth consistently and achieve top-tier earnings performance over the long-term.

Chris, did fourth quarter local currency sales, meet your plan?

Fourth quarter, I'm sorry, say that again.

Fourth quarter local currency sales, did they meet your plan?

Because I think there's a sense -

That would be fair to say, yes.

Because advertising and promotion was stepped up so much and I think may be in baking out currency it looked like sales were kind of on the light side, but you're saying you got your bang for the buck in your advertising.

Absolutely, and in fact the promotion was down, the sales promotion as you see it in the P&L, that's related to display costs, on but our trade and consumer promotion was actually down.

Thank you very much.

Sure.

And, due to time, constraints, this time we will take our final question from Conny.

Question has been answered, thank you.

This does conclude the question and answer session.

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

Starting at 11:30 a.m. today a replay of this call will be available; it will run until Thursday, February 5 at midnight, Eastern Standard Time.

The number to call for the replay is 888-203-1112 or 719-457-0820.

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Additionally, the replay will be available on our Corporate Web site, www.gillette.com a few hours from now.

For members of the media who listened to the call and have additional questions, please contact Eric Krause, Vice President, Corporate Communications, at 617-421-7194.

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Thank you and have a good day.