寶潔 (PG) 2004 Q3 法說會逐字稿

Good day and welcome to the Gillette Company's third-quarter 2004 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.

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 Corporate Affairs; and Eric Kraus, Vice President Corporate Communications.

As you know, during this call we may make forward-looking statements about the Company's performance.

These statements are based on 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 10K and 10Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements.

With that out of the way, let's look at the quarter and how we see the year shaping up.

We've had another great quarter.

In fact, for both the quarter and nine months, we generated record sales, operating profit, and earnings.

I want to start today by taking a close look at several trends that are evident in both our Q3 and nine-month results.

There are four to note.

Organic growth being driven by tradeup in both developed and developing markets.

The effectiveness of our sourcing and productivity initiatives more than offsetting higher raw material costs.

Overhead reductions and manufacturing efficiencies, which are fueling investment behind our brands and our new product initiatives.

And reinvestment of free cash flow, boosting shareholder returns.

First, the organic growth, which are the fruits of our innovation.

The ongoing rollout of our 2004 new product lineup has strong trade and consumer acceptance across our core categories.

In developed markets, this means M3Power, Sonic Complete toothbrushes and Right Guard Cool Spray.

In developing markets, it's new entry level systems like Vector-Plus and premium disposable razors like Prestobarba Excel, better performing manual toothbrushes, like Advantage, Vision and Classic, and our SoftPerfection female epilator.

We're benefiting from improving consumption trends in Eastern Europe, Russia and Turkey, as well as in Latin America.

And Europe we're gaining momentum across our businesses.

Over all, all of our new products are off to a good start.

Our market shares have remained strong across our core categories and across the world.

Second, our input cost trends remain favorable.

Like other companies, raw material prices for inputs we use are going up.

However, we have more than offset this through our strategic sourcing initiative and further leveraging our global scale and procurement.

And looking into 2005, we expect to neutralize the impact of commodity cost increases through similar initiatives.

Third, improvements in costs are helping to fund brand building.

It's a very simple formula.

On the cost side, our overhead savings are strong, our Functional Excellence program is on track, and manufacturing efficiencies are supporting solid gross margin trends.

That's providing us the flexibility to fund stepped-up marketing efforts behind our new products.

Efforts that will continue to fuel top-line growth in the future.

And fourth is our use of our free cash flow.

Year-to-date, we've generated $1.3 billion in free cash flow; and we've used a portion of our cash generation to boost shareholder returns through stock repurchase.

Year-to-date, we've bought 19.3 million shares for $775 million or around $40 a share.

Given our results for the first nine months, we're well-positioned to deliver a strong 2004 and will make further progress toward our goal of producing consistent annual earnings growth that will result in top-tier performance within our peer group over time.

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

As we've mentioned for the past two quarters, we have reclassified freight from SG&A to cost of goods sold in both years.

And we've reflected this in our reported financials for both 2003 and 2004.

So, let's dive into the numbers.

On a reported basis, net sales for the third quarter were $2.7 billion; that's 12% above the third quarter of 2003.

Foreign exchange accounted for four percentage points of the sales growth.

Most currencies were strong against the U.S. dollar, but the Euro and pound sterling were standouts.

Pricing was flat.

Blade Razor price increases and lower promotional spending at Duracell were tempered by lower pricing in battery toothbrushes and mid-priced electric shavers, as well as higher consumer spending behind APDOs and Complete Skincare.

And volume mix was up a healthy 8% there.

There were three main drivers here, which I will list in rank order.

First was strong tradeup and consumption in the emerging markets of Latin America and the AMEE region.

The second driver was strong European results, driven by the introduction of M3Power, new Oral Care products and improving performance Duracell, especially in the U.K.

And third was growth in North America from new Oral Care products and from Duracell due to the hurricane activity.

As a side note, acquisitions accounted for only 1 percentage point of the volume mix growth.

Moving to gross profit, Q3 gross profit margin was up 60 basis points to 59.8%.

Manufacturing efficiencies and cost savings at Duracell and Personal Care were the key drivers.

They were partially offset by unfavorable business mix, mainly a lower percentage of quarterly results derived from the Blade Razor business year-over-year.

And that brings us to marketing.

Our advertising investment was 11.8% of sales, up 45% in the quarter.

This reflects investments behind our strong new product programs like M3Power, Professional Care 8,000 power toothbrush and Right Guard Cool Spray.

It also reflects higher spending to drive stepped-up consumption and tradeup in developing markets, like our programs behind Vector-Plus, Prestobarba Excel and Gillette Series shave prep gels.

On a year-to-date basis, advertising was up 42% with double-digit percentage increases in every business and every region.

At the overhead and other expense line, Q3 overhead costs dropped 250 basis points from 21.5% of sales from Q3 2003 to 19% in Q3 this year.

The gains were the result of a combination of cost reduction benefits and strong top-line growth in the quarter.

In terms of Functional Excellence, we incurred a $21 million in cost this quarter versus $17 million in Q3 2003.

Through nine months, we had 40 million in Functional Excellence costs; and for the full year, we expect total FE costs of around $70 million.

And finally at the bottom line.

Net income was up 14% for the quarter to $475 million.

Here, our strong operating profit growth was enhanced by our lower tax rate, which is down 1 point from 30% last year to 29%.

Unchanged from Q2.

Now to earnings per share.

Our third-quarter diluted earnings per share rose 15% to 47 cents.

That's up from 41 cents the prior year.

EPS growth outpaced net income growth as a result of our share repurchase activities.

Average diluted shares outstanding were down 1% versus Q3 2003.

Now let's turn to the businesses.

We'll start with Blades and Razors, which had a very strong third quarter.

Blade Razor sales were up 7% in the quarter, but that tells only part of the story.

The quarter came in much better than we had anticipated with global consumer takeaway growing a very strong 7%.

And we achieved this growth despite the ongoing competitive environment in the category.

In the U.S., our Blade Razor dollar share increased 60 basis points to 71.8% behind M3Power and Venus Divine.

Our Blade Razor consumer sales grew by 6%, and consumer sales of our razors grew by 37% with Razor share up 12 points to 77%.

In fact, the Mach3 family continued to grow strongly with global dollar share up 1 point to 29%.

And keep in mind, our quarterly sales also faced difficult comparison with some very strong year-ago figures. 17% growth in Q3 2003 as we introduced Mach3 Turbo Champion.

They also reflect the first phase of a pipeline drawdown that will continue in Q4.

All in all it was an outstanding quarter, even when compared with the exceptional quarter a year earlier.

I'll highlight just two of the important factors.

The launch of M3Power in the U.K., Germany and Japan and (technical difficulties) significant tradeup in developing markets. (Technical difficulties).

First, M3Power began shipping in September to Germany, the U.K. and Japan.

Although it's early days, M3Power is achieving the goals we set for these new markets.

In particular, we've been very encouraged by strong demand from the trade and initial consumer response to our advertising and display activities using soccer star David Beckham.

But more to come on this front in the months ahead.

Second, tradeup in developing markets is driving growth and enhancing business mix.

We're seeing tradeup from double edge to entry-level systems in Asia and the AMEE region.

For instance, in Russia, this system segment was up 13% in dollars in Q3, while double edge was down 10%.

We're also seeing tradeup to our Prestobarba Excel premium disposable in Latin America.

It led to our fourth consecutive quarter of blade-share growth in Latin America, and we increased our global dollar share of disposables by 1.5 points to 56%.

And that's now six consecutive quarters of global-share growth.

What about the bottom line in the quarter?

Operating profit was up 5%, while margin fell 80 basis points to 39.2%.

The reason?

We had sales growth from new products and price increases.

But they were offset by a double-digit increase in advertising and incremental costs related to the European manufacturing realignment.

And it's important note that Blade versus Razor mix was neutral year-over-year, while promotional spending was down as a percent of sales.

Looking forward, in the fourth quarter, we continue to expect to ship below consumption.

This is because we will be working off the pipeline shipments of M3Power, in Europe, as well as North America.

Nonetheless, strong consumer offtakes should continue from both ongoing tradeup and consumption of new products in coming months.

Moving on to Duracell.

There is a mix of very good news and ongoing concerns.

Good news first: Sales rose 15% in reported dollars.

The addition of the Nanfu battery business in China accounted for 2 points of the increase.

Our growth came from two areas.

First were the hurricanes.

The five storms that hit Florida and the southeastern U.S. during the past three months added five points to sales growth or about $25 million in the quarter.

And that's despite the difficult comparison with Q3 2003 which had its own $25 million benefit from the hurricane and electrical blackout last year.

Second was significant improvement in performance in Europe and strong emerging market growth in Latin America and AMEE.

And our strong sales had significant leverage on profitability in Q3.

Duracell's profit from operations rose 52% to $161 million.

And margin increased 650 basis points from a year ago to 27.1%.

We were able to support a strong double-digit increase in advertising investment through gains in three areas.

Manufacturing efficiencies, due to high factory utilization rates and cost-savings efforts, lower overhead costs and lower promotional and free-cell activity.

I want to reiterate the point that our trade and consumer spending in Q3 was down, down overall and down in North America.

This last point is important because it underscores that we've been guided by the principles laid out in our price deal realignment of 2003.

We've eliminated giveaways.

We lowered promotional spending, and we focused on some great consumer programs with NASCAR and "Lord of the Rings" along with a significant increase in our world class advertising.

Now, the concerns.

In the past quarter, Energizer's BOGO activity has accelerated and the low price, low-quality zinc carbon segment grew substantially behind aggressive promotion and increased distribution.

While we've highlighted these factors over the past six months, they are now starting to affect our market share.

Because of the ongoing increase in promotional activity by Energizer and the price segment of Alkaline, Duracell lost 1 point of Alkaline dollar share in North America during Q3.

In addition, the zinc segment is taking share of the general purpose battery market away from Alkaline and away from Duracell.

The proliferation of inferior-performing zinc product is the result of efforts to deliver an opening price point of $1.

This, in turn, has caused an acceleration of deflation in general purpose battery prices.

Our plan is to continue our tactical activities in the marketplace and do what it takes to defend our market share.

Let's move on to Oral Care where sales growth was also impressive in Q3.

Sales were up 27% with acquisitions adding 4 points.

The big news here was and is exceptional new product activity and underlying growth from tradeup.

We launched 11 new products over the last four months in North America alone.

We have new entries in every segment of brushing, from Advantage Artica in manual toothbrushes to the Professional Care 8000 and Sonic Complete power toothbrushes.

We've also extended beyond brushing with Brush Ups, Hummingbird and our new Oral-B Rembrandt whitening strips and whitening pen.

And new productivity should continue to drive strong top-line growth in Q4.

We're also benefiting from strong tradeup in both developed and developing markets.

In the manual segment, Cross-Action Vitalizer is driving tradeup North America and Europe.

While our Vision, Classic and Stages lines are working in markets like Turkey and Poland.

In the rechargeable segment, we gained nine share points in the U.S. to a 45.3% dollar share as we drive tradeup to the high end of the category.

This has all led to further growth of our leading global brushing share.

It grew 150 basis points to 34.7%, with gains in all four brushing segments and higher market share in all regions of the world.

That brings us to profits.

Third-quarter profit from operations in Oral Care was $62 million; that's down from $64 million in Q3 2003.

This was driven by significantly higher advertising and some expenses related to the rework of our entry level power brushes.

Sales growth and lower manufacturing costs funded a very strong double-digit increase in advertising.

We made the decision to aggressively support what amounts to the broadest array of new product activity we've had in Oral Care in recent history.

We've done this because we expect to drive significant tradeup, grow our categories and build our base business.

Next is Braun where net sales grew 9%.

Here we had a strong performance in the developing markets within the AMEE region, particularly female epilators and household appliances.

The first shipments of our top of the line Activator in the U.S. and new youth CruZer shaver in the U.K. also contributed to sales gains and hold promise for a strong Q4 performance in male shavers.

But the male shaver category has been challenging.

While we continue to maintain contain share in key markets, category volumes are soft in North America, and there is significant price discounting in the mid-price segment both Europe and Japan.

Profit was flat in the quarter at $22 million.

It was constrained by three factors, incremental Functional Excellence costs of $7 million, higher currency driven European-based manufacturing costs and unfavorable product mix that affected the gross margin, and a double-digit increase in marketing.

Looking forward, the rollout of Braun's new family of shavers into North America and Europe will continue into Q4, and we anticipate strong profit growth at Braun for the year.

Finally, Personal Care, which posted another quarter of solid results.

Sales in the quarter were up 7% with the impact of exchange accounting for 5 percentage points of the increase.

All regions but North America delivered solid growth versus last year.

The big news in the quarter was strong gains in Europe and the AMEE region.

Those gains were driven by our foam-to-gel tradeup initiatives in shave preparations.

Behind great new advertising, Gillette shave preps posted their highest in four years in the U.S., U.K., Spain and Italy in the latest reporting period.

And we posted value share gains in all our top 10 markets.

Beyond shave preps, our new entry into the male skin care category, the Gillette Complete Skincare line, had the largest value share gain in the fast-growing U.S. male skin care market, becoming number two behind Nivea.

And in deodorants, we continued the launch of Cool Spray, the first major aerosol improvement in over a decade.

In the U.K., Cool Spray has driven our fifth consecutive month of share gains.

In terms of Personal Care profit, they were up 31% versus last year's third quarter to $34 million.

And margin grew 220 basis points to 13.3%.

Improved mix from new products and tradeup from foams to gels, manufacturing savings, including savings in materials, and flat overhead costs funded a double-digit increase in advertising activity behind new products.

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

Through nine months, our working capital increased, receivables were down.

Day sales outstanding were reduced 15 days from a year ago, from 47 days to 32 days.

But that was offset by an increase in inventories.

Days inventory on hand increased to 129 days versus 110 days last year.

As we mentioned last quarter, this buildup is for two reasons: One is to support new product launches in Oral Care and Braun in the second half of 2004.

The other is the building of safety stock to support our European factory and distribution center realignment program.

Capital Expenditures were up substantially during the first nine months.

They totaled $379 million versus $218 million last year.

This was due to two things: Programs supporting new products and the realignment of our Blade Razor manufacturing and distribution in Europe.

Overall, CapEx is about 5% of sales year to date.

For the full year, we now expect to come in around 5% of sales.

That's down from our previous expectation of 6% due to stronger sales performance and capital cost management.

Everything mentioned thus far led to another quarter of strong free cash flow generation.

As defined in our earnings release, we've generated $1.3 billion of free cash flow in the first nine months, equal to 18% of sales.

We used that free cash flow to repurchase Gillette stock and to pay down debt.

Debt less cash and equivalents was down approximately $190 million from the end of 2003.

Under our share repurchase program, during the quarter, we bought 10.3 million shares for $420 million or an average price of $40.76 a share.

At the end of the third quarter, we had 31.7 million shares remaining under current authorizations.

So, that's our story for the third quarter and first nine months of 2004.

It will lead to a strong year with good momentum going into 2005.

We're driving higher consumption and tradeup to more premium products in both developed and developing markets.

Our innovation pipeline remains strong and our new products are delivering top-line growth across the Company and across our categories.

Cost savings are delivering and providing the fuel to invest in our existing brands and our new products.

And our free cash flow remains strong.

In short, we've made good progress against our objective of becoming the best global consumer products company.

Now we would be happy to take any questions you might have, and I will turn the call over the operator who will explain the procedure for signalling if you do have questions.

(OPERATOR INSTRUCTIONS.)

Wendy Nicholson with Smith Barney.

My first question has to do with the pipeline drawdown.

Did you say how much of that in the razor blades business occurred in the third quarter versus the fourth quarter?

In other words, do we see an acceleration of that program in the fourth quarter?

No, the third quarter and fourth quarter we did not quantify.

It will be roughly the same.

Keep in mind, we will continue to destock in North America, and then we'll also be destocking in Europe.

If you look at the numbers where in the third quarter, from a global perspective, in constant currency terms, consumption was up 4%, shipments were up 3%.

So, that's the order of magnitude you're looking at in the third quarter.

Fourth quarter, about the same.

Okay, and then trying to anticipate the other moving pieces in the fourth quarter, are you planning another price increase in the razor blade business at the beginning of next year like you did last year?

We haven't announced anything to date.

I've got nothing to say about it today.

That's pretty much where we're at.

Okay.

And my last question is on Duracell.

You said you were going to probably respond more aggressively in the fourth quarter, I think I heard, to the loss of share, to Energizer.

Does that mean promotions, advertising, pricing?

What's the plan?

As you know, Wendy, we've got a number of levers at our disposal.

I wouldn't want to front run what we may or may not do.

Quite frankly, we have a strategy; we've executed against it; profit is up very nicely.

We've done all the things that we've said we'll do under the price deal realignment, in terms of eliminating giveaways, lowering promotional spending, and focusing on the consumer side, particularly the advertising.

So, I think overall you can count on our tactical activities to continue as we defend our share.

Bill Chappell with SunTrust Robinson.

Two questions.

First, on the Oral Care business, I mean the margins for the quarter seemed to kind of move around quarter-to-quarter.

I'm just trying to understand where that's going and then, you know, if there was anything else in the quarter that would have penalized it this quarter versus -- in trying to understand, I guess, if the recent acquisition had a lower margin product?

Bill, it's Chuck here.

In terms of the Oral Care business, the quarter, because of our new product programs, did have the impact of a significant uplift in advertising support for the business.

The other thing that did impact as well the business was -- are the expenses that we made a provision for, reworking some of the Cross-Action Power product that we are changing the clip on.

So, those two things are what kind of makes the margin jump around on you.

And, Bill, I think the thing to keep in mind is that the cost of that was sort of a contributing factor in the third quarter, in terms of the voluntary removal of that product.

However, if you would have excluded those costs, Oral Care's operating profit would have been up strong double-digit.

So, this is more one-time type stuff?

Yeah, in the quarter.

Second, just on the M3Power, can you give an update?

I guess the original thought, would do maybe about $400 million in the first year out.

It seems like it's on a much stronger clip than that.

And maybe you can tell us, for the quarter, did you get the full benefit from the European rollout?

Or will we see some carryover into fourth quarter?

Bill, in terms of Europe, the launch was in September.

So, the pipeline really happened in September; and once you get into the fourth quarter, we'll be destocking a bit.

In terms of our original projection, M3Power is achieving the goals we originally set.

It's on track to be as big as Mach3 Turbo.

And if you recall, Mach3 Turbo in its first year was $300 million in consumer sales, razors and blades combined, in the U.S.

We'll now move on to Amy Chasen with Goldman Sachs.

Can you talk a little bit about the business outside of the U.S. in general terms?

And in particular, the developing market business?

It looks like that really ramped up this quarter, and I'm curious whether that's, you know, driven by -- I guess one of three things: new products, better just economic conditions in those markets, or whether there's a concerted change in your strategy to really step up your focus on those markets?

Good question, Amy.

And -- you're right, if you look at our international as a whole, it was up 11% in the third quarter and 9% year-to-date and cost and currency terms.

We're very happy with the progress there.

It's contributing to what's going to be a very strong year.

And it's driven by successful new products, improving consumption in all key categories; and we're using some of our cost savings to step up some good advertising to drive tradeup.

So, if you look at the progress we've made in developing markets, it's not only stronger tradeup driving stronger revenue, but you're also seeing it in terms of -- progress in terms of profitability.

So, it's all three?

Yeah.

And along those lines, just on Europe, specifically that business was stronger than it had been.

Is it the same drivers?

Or is there something else happening in Europe?

Our European business is running very well.

Our numbers look great; our shares are strong; consumption is improving; and there's strong trade demand for our new products.

So, we're very pleased with Europe.

Okay.

On a totally separate note, if you look at your total marketing spend, it's really accelerated as a percent of sales throughout the year.

Do you expect that to continue to accelerate?

Is that just because, you know, your underlying business is coming in better than you thought, so you're redeploying more money into marketing than you expected?

Or can you just talk about what the drivers are and what the expectations should be going forward?

Amy, what we've got right now, the best way to think about it in terms of this year is that we've got a great new product lineup.

We've got great brands.

We've got great advertising creative to invest behind to grow the business, and you're seeing that come through in our sales and our earnings performance.

In terms of longer term, James Kilts has said 8 to 10% is the ongoing long-term range for our advertising to net sales.

But you're so much above that this year, is there a thought that maybe you won't get back down to that level?

But that this is a better number?

Or is this aberrational because you have these new products?

Well, I think the long-term range that I just said is applicable, again, over the long-term.

We haven't really changed that at all.

The best way to look at it is that we are establishing a good base for continued momentum into 2005.

We're going to be seeing that advertising help drive tradeup that will continue across our categories and across our geographies.

The advertising will, you know, the investment there is going to help drive that.

And we're going to have ongoing savings from existing programs as we move forward.

So, 2005, we've got good momentum going into that.

So, for the fourth quarter it sounds like we can expect it to stay at this above-average rate?

Yeah, that's the way we book it, yes.

That's the way accounting works.

And now we'll move on to Ann Gillin with Lehman Brothers.

Chris or Chuck, I wondered, it seems like you have much greater visibility now almost quarter-to-quarter on CapEx.

I just wondered if you could kind of give us a sense as to how much you've been able to really just forecast much closer in than even when the new management team started at Gillette?

In had terms of our business processes, I think you're right, they have improved.

We've really focused in on capital efficiency, capital utilization and when and how and where to install new capacities.

We're also facilitated by fewer factories; and we've shut a number of factories, which I think is one of the factors, not a major factor, but one of the factors that makes it a bit easier to manage.

It's larger projects, a lot less on what I would call general maintenance projects, as we've invested most heavily in either new product programs or in some cost reduction areas.

So, the whole thing is coming together in terms of the way we're managing particularly the factory side, but also the other major area of spend, which is in the IT area, where we've got a lot of the big investments of the early years behind us.

But, you're right, I think our processes have improved, and I do think we have greater visibility and greater control over the pace, you know, the pace of spend that we have.

Very helpful.

And then just tip into the inventory at trade.

I know it's the second quarter where you've highlighted the need to draw it down, but I can't recall in the past that we've had that called out as a issue so soon after a launch of a project.

I just wondered if there's anything unique about the way you went to market with M3Power that might have, you know, made that a unique event in terms of the subsequent quarters?

Yes, Ann, actually there was something unique about the way we went to market with M3Power.

We had -- we were able to ramp up distribution a lot faster than we really ever had, and you're starting to see the same sort of ability to execute and enhanced retailer support because of the improvements we've made in our commercial operations area.

That's leading to a much stronger launch right out of the box.

So, you saw that in North America; and, in fact, although it's early days, we're seeing it in the U.K. and Germany because the launch there is going gangbusters.

I mean it's early days, but distribution there behind M3Power is better than it's ever been on a new product.

But Chris, why would that lead to higher inventories that you then need to pull back on?

Well, the faster you ramp up distribution, the more inventory that's out there, and then the more that will come out subsequent to that.

So, it's a natural progression.

All right.

Thirdly, does the timing, if you have one yet, about the inventory levels in house, when they will start to pull back?

If you think about what's happened, Ann, I know I look at inventories as part of my working capital measure; and gee whiz, they are up versus a year ago.

Overall working capital is great; inventory was a soft spot.

But if you look at it, that -- the new product flow is driving this and that new product flow is really depends on pace and timing throughout any given calendar year.

On the other big driver, the ESNS project, which is our nickname for it -- it's the Blade Razor realignment program -- that will still have an impact through next year; although we do expect to see some improvement.

But if you think about that Blade Razor realignment program, we're talking about five factories that are impact, as well as a number of distribution centers across Europe; so it's a major initiative, and that's really one of the most important components of the inventory lift.

So, look for a little improvement next year and then further improvement the year after.

Just to clarify, Chuck, when Chris, in his prepared remarks, talked about what was driving the higher inventory and how -- was that by order of magnitude, also?

Or is the factories really more impactful?

They're both significant.

Chris Ferrara from Merrill Lynch has our next question.

I was wondering if you could guys could possibly quantify the savings from strategic sourcing because, I mean, in an environment where everyone is talking about raw mats hitting hard and you're saying '05 year confident that you can neutralize it.

I was wondering, like how much did you have to neutralize in '04 and even in this quarter?

Let me put that into perspective.

All of us are facing increased costs.

There's no question about it.

We've seen it in oil derivative products, plastic resins; we see it in steel; we see it in some of the packaging.

As we've looked at it, had we done nothing, had we just suffered the cost increases that we're seeing coming through now -- and I'm going to talk in terms of next year -- the increased costs would have been approximately 7 to 8 cents a share, a little over $100 million or 100 basis points.

That's the kind of number that we have been able to take out in our overall cost structure as we look to next year's performance.

We've done it through a combination of things.

Strategic sourcing and how we looked at sourcing product; the product and materials substitution is another big area in terms of where we can redeploy a lower cost product.

I think a big thing is that we really and truly have a global procurement process that is centralized.

That enabled to us have greater scale and greater leverage across our universe.

And then finally, although a smaller piece, we also have productivity enhancements in terms of material consumption.

So, all of those have come together, degree of magnitude, 7, maybe 8 cents are offsetting in this year's performance.

Great.

And on the totally different note, I guess, can you just talk specifically about what's driving battery growth in Latin America and where you see Alkaline -- I mean do you guys compete in zinc carbon in Latin America?

No, we do not; we're an alkaline player.

What we're seeing in Latin America is, quite frankly, a tradeup dynamic, where economies are improving and consumers are trading up from zinc carbon to alkaline.

Andrew McQuilling with UBS.

Congratulations to all the Red Sox fans in Boston! [ Laughter ] I guess maybe two questions: Chuck or Chris, can you expand on what's going on in the AMEE region, you know, maybe by country and product line?

Starting with Russia, what's really driving the Russian sales?

How much were they up?

What's driving overall AMEE by-product line?

It would be very difficult to go through by product line, Andrew.

I don't have that level of detail in front of me.

I can circle back to you later.

But just in a general sense, there are a couple of things, and similar to what I answer to AMEE.

You know, we're advertising more in an area that had really been underinvested in historically.

You're seeing better consumption trends because of that; we're getting tradeup as well as just better volume growth, so; and it's coming through in the form of the top line and the bottom line.

So, we're making investments that are paying off quite nicely.

Let me just amplify that a little bit.

I think what you're trying to say is there one place.

It's really broad spread throughout AMEE geographically, and it does feature the blade business and, in some specific markets, the Braun business.

But it really is a broad-spread performance.

So, Russian sales aren't 50%, up 50% or so?

No, but Russia is up strongly.

Okay, maybe a question, if you could just talk about some of the details on this European manufacturing and distribution realignment?

Can you talk about, you know, what's the model you're going to from where?

And how long it's going to take?

Well, I think we felt that from a timing point of view we'd be fully executed by 2007.

And the length of time is dictated by the number of facilities involved.

It does include the closure of the U.K. blade manufacturing facility, and then a realignment of all of our production throughout the rest of Europe, including Poland where we're putting in a major facility, including a realignment of some of the production in Berlin, moving some production up to St. Petersburg, and realigning some of the production in our Chek blade manufacturing facility, as well.

So it really touches on all of our blade manufacturing in Europe, including what some people would call Eastern Europe.

Are there lines that are leaving Berlin?

Yes.

And what are those?

Can you say?

It's on the low-end system side .

Low end systems and those are be moving to Poland?

Primarily, yeah.

Okay.

And maybe one more.

Have you announced new countries for the M3Power?

Everybody deserves the world's best shave?

Yes, in Europe there are no new countries going in in the fourth quarter.

It will be next year.

And we have announced that to the trade.

Alec Patterson with RCM.

Chris, just trying to dig down into the battery side a little bit more.

One, any numbers around unit growth that you can provide?

And maybe a little color on Europe?

You mentioned it being very strong, kind of surprising in a marketplace where deflation in most categories seems to be rampant still.

I was wondering if you could give a little sense of what's going on there?

Sure, I don't have the exact volume growth in front of me for the category, but what I can tell you is that, in terms of category dynamics in North America, quite frankly, it makes no sense to us that competitors are encouraging trade down to zinc.

Alkaline offers up to 6 times the performance for 3 times the price and you're seeing a bit of trade down there.

That's affecting the relative volume growth of alkaline versus zinc.

In Europe, we are getting better consumption from our products, and that's a combination of better performance in the Alkaline category, better execution on our part, particularly with the advertising.

We saw very good performance out of the U.K., and we also -- I think I should mention some of the performance in Europe out of batteries was in part due to the timing of shipments for fourth quarter programs.

But overall we had very solid organic growth in Europe from batteries.

Would you say that there is positive pricing in Europe in general?

No, it's volume-oriented.

And -- you've got to keep in mind, Europe is behind the U.S. in terms of Alkaline penetration.

And over the last several years you have seen ongoing tradeup from zinc to alkaline.

And that is one of the drivers.

Yeah.

But Europe is also a region which underwent deflation before the U.S. had, you know, value brand fight put into a deflationary mode.

So, you're not saying that there's signs of stabilization on pricing necessarily in Europe; it's just improved category trends and --

You mean in general?

I'm sorry --

Or in batteries?

Batteries.

Yeah.

And I don't think the pricing situation in Europe in batteries is necessarily any worse than it has been.

You're right, it did hit a deflationary patch earlier than the U.S., but it -- yes, it's been an ongoing factor.

What you're seeing is mainly tradeup and, for our business, better consumption of Duracell.

And would there be any logic to the fact that the hurricane and the lift it created on manufacturing efficiencies and sales would have fostered additional promotional dollars back into the marketplace?

And being blunt, do you think Energizer took advantage of the situation to redistribute funds they probably didn't see coming anyway?

You'd have to ask Energizer for what they did.

From our perspective, our promotional spending was down as a percent of sales.

So, what we saw was the lift, and the lift for us resulted in a much higher margin than you would have seen otherwise.

Those were very -- I guess high-margin sales, if you will.

I wouldn't expect the 27 margin to be repeated anytime in the near future.

Joe Altobello with CIBC World Markets.

Chris, staying on Duracell for a second, I was curious how much of the operating income expansion year-over-year was from the reduction of Functional Excellence spending in that business?

It's very difficult to say, Joe.

When we look at it, Functional Excellence, we don't necessarily separate out the savings.

The way we look at it is that the performance of Functional Excellence -- or for that matter, any other program should be measured by the growth and profitability of the company and the division where it happened.

So, very difficult to separate that out.

As I mentioned to Alec earlier, the hurricane effect, it added $50 million in total sales in the quarter, that effect alone.

And it enhanced margins significantly because you simply leveraged your volume.

I was more so talking about spending on Functional Excellence versus last year.

How much was it down this year this quarter versus last year?

It wouldn't have been a significant -- yeah, immaterial.

And looks like you lowered your Functional Excellence spending estimates for this year by about 10 million.

Is that an overall reduction to the program or just pushed out into '05?

No.

The program continues pretty much on track in terms of both the total spend as well as the benefits that we'd expect from it.

What you're seeing us do is coming in, starting to come to equalize against what would be normal in a company our size.

I think we talked in the past about 3 to 4 cents of our earnings should be reinvested in Functional Excellence-type initiatives over the long-term.

We're a little bit above that spin ratio right now.

The only other thing to point out is that we told you we'd cross over cost versus benefits, and we definitely have -- our benefits this year are in excess of our costs.

And Joe, just one other thing to add, if you add the 70 million to what we've spent already, by year-end we will be just over 80% through total project costs that we laid out.

Okay.

And then this last question, I think in your last call you mentioned something specifically about consumer softness in France and Italy, and it sounds like that's disappeared.

Is that the case?

Disappeared?

You will have to ask other companies about their categories.

What we're seeing in ours, you know, again, strong share performance, consumption improving, and there is strong trade demand for our new products.

So, I think at the consumer level, the best way to think about it is that true innovation still drives consumer response, and consumers are willing to trade up to our technology.

Plain and simply.

John Fauscher with JP Morgan.

I'm fine.

All my questions have been answered.

Thanks.

Lauren Lieberman with CS First Boston.

A quick question about the pipeline in the inventory reductions for Blade Razor.

In the press release, it mentioned Venus Divine and also other products launched in the first half of the year.

I wouldn't think there needed to be inventory reductions at retail this late after the launch of those products.

Is that ramp -- you know, is there more color you can give me on why that is?

Is takeaway (ph) even less than you would have expected in those products, or are you getting ready for something else next year?

Really, Lauren, it's a balancing act; it's a display activity that went behind those programs.

Yes, when you look at what went into the marketplace in the second quarter and what's got to come out, yes, you're going to have a bit of that; and certainly we feel that we're going to have more of it to come in North America in the fourth quarter and then to a greater extent in Europe, because of that launch activity.

And I fully understand that for M3Power.

I was just surprised to see Venus Divine and then other products in the first half mentioned in the press release.

Venus Divine, you have to keep in mind the seasonality of the business.

It's still very big in the third quarter.

So you're going to draw down a little bit third quarter to fourth quarter.

Okay.

And then just one thing on Duracell.

How -- what percentage of the Duracell business is in Europe?

I'm doing a quick calculation here.

Between 25 and 30.

Okay, thanks.

Andrew Shore with Deutsche Banc.

I'd hate to, you know, bring up stuff that you've been talking about, all the saber rattling now for the past five quarters with Duracell; but it sort of seems like five or six quarters ago you talked about we're going to keep on watching it, we're going to keep on watching.

Well, now you're actually watching it and your shares are falling.

Is there a reason why you haven't acted immediately?

Because you just wanted to milk Duracell profits for the past year?

I wouldn't characterize it as us doing nothing.

Clearly, we have a strategy; we've executed against it.

As I've mentioned, we've eliminated the giveaways; we've lowered promotional spending.

We focused on consumer programs like NASCAR and "Lord of the Rings," and we've significantly increased investment in advertising that builds the brand equity.

So, we haven't been standing still.

And I think as we move forward, we will continue with those tactical types of activities in order to defend our share.

I think we've been very consistent with what we've said we'll do and what -- with what we've done.

I don't expect a change from that.

Okay.

And can you also flush out the 3% local sales gain in Blades and Razors?

How much of it was M3Power pipeline into Europe?

How much was pricing?

And how much were the other products that were introduced in the March/April period?

I'd have to get back to you on that, Andrew.

How much was pricing?

About 1 to 2%.

Okay.

So right there you're starting with 1 to 2% then in core volume?

Right.

I'm sure there was some pipeline?

I mean, did you have no growth in Blades and Razors, ex the pipeline?

Well, keep in mind, we reduced our trade inventories in North America.

North America was down year-over-year from a revenue perspective in the third quarter.

So, it's not only a function of what we did this quarter from pipeline reduction, it's also the comparison with last year and last year was very strong.

So, it was, yes, it was down in North America because of the comparison and the pipeline drawdown; and then we did pipeline some new product into three countries from an M3Power perspective.

And so, I mean, you've got that dynamic, and then layered on top of it is the fact that we had some very strong performance in the developing markets where we're getting ongoing tradeup to entry-level systems, for instance.

And I would like to ask you, though, to answer Lauren's question, because I thought it was actually a quite good question.

Why is it six months later that you're still drawing down inventory on Venus Divine and Sensor3 systems?

I mean, is it a demand issue?

No, no, not at all.

It's just the trade flow; and quite frankly, there's going to be some drawdown, but nothing as significant as M3Power.

But clearly, there's still going to be some drawdown.

There is nothing abnormal, Andrew, about the pace of the drawdown.

We launched a product; you know, we're very good at getting not only traditional display, but incremental display throughout the stores, and it does take the trade a significant amount of time to work that down and redeploy it back on shelf.

And I think the good news is that we probably even have better metrics of terms of seeing and understanding that; and, you know, that is contributing to the trade inventory reduction that we would expect to see over what happened this quarter and what's going to happen next.

Constance Maneaty with Prudential Equity Group.

I have a couple of questions.

On the Duracell share loss, can you quantify how much has gone to zinc carbon and how much has gone to other promotional activities?

And along with that, wouldn't you expect the tradedown with zinc carbon to be related to, you know, how people feel about their disposable income and if gas prices ever go down, you know, the tradeup will continue?

That sort of thing?

Two things to that, Connie.

First of all, to help dimensionalize what's been lost, we lost one share point in Alkaline.

We lost three from a general purpose battery perspective.

General purpose being alkaline plus zinc.

That's the best way I can dimensionalize that.

And in terms of the zinc segment, it's really a matter of consumers seeing something called heavy-duty and thinking that is -- that it's the equivalent of Alkaline.

And as you know, Alkaline offers up to about six times the performance for three times the price.

That, I don't think, is in any way related to the, you know, the state of the economy because we've seen tradeup; and quite frankly, we've gone to a point in the U.S. where 90-plus percent of the market is alkaline.

So, this is just something that is much more of a promotion and distribution phenomenon than it is anything related to the state of disposable income.

Right.

And then my last question is, how should we start thinking about 2005?

Because, you know, your earnings growth this year is, you know, 22, 24% is clearly top of the heap; but maybe next year, you know, 10% is top of the heap.

So, how should we start looking and thinking about 2005 given that the first half has pretty tough comps?

As you know, Connie, our long-term objective is to deliver consistent growth on an annual basis that will result in top-tier performance versus the peer group over time.

If you look at what we've done in 2004, it being a strong year, I think one of the key takeaways is that we're establishing a very good base for continued momentum in 2005.

But the tradeup will continue across the categories, across our geographies; our advertising investment will support our future growth; and we've got ongoing savings from existing programs.

So that's the best answer I can give you.

Okay.

If you budget for full-year earnings, which I think we all understand, would you also -- if it came out this way, would you budget for a first quarter 2005 decline?

Or would you find some way to show an increase?

We're still going through our budget process and so to try and make that flow out.

We've basically let things fall as they may.

That's why we end up having these long conversations about business flow and comparisons.

So, really it -- that's how we manage it.

That concludes the question-and-answer session today.

At this time, Mr. Jakubik, I'd like to turn the conference back over to you for any additional or closing remarks.

Okay, thanks very much.

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