寶潔 (PG) 2004 Q4 法說會逐字稿

Please stand by.

We're about to begin.

Good day.

Welcome to the Gillette Company's fourth quarter 2004 earnings conference call.

Today's call is being recorded.

At this time for opening remarks and introductions, I'd like to turn the call over to Mr. Chris Jakubik, Vice President of Investor Relations.

Please go ahead, sir.

Thank you, and good morning.

Thanks for joining us on our conference call.

I'm Chris Jakubik, Vice President of Investor Relations.

With me are Chuck Cramb, our Chief Financial Officer, John Manfredi, Senior Vice President, 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 10-K and 10-Q filings for a more detailed explanation of the inherent limitations in such forward-looking statements.

These comments might also be considered soliciting material in connection with the proposed merger of Gillette and Proctor & Gamble.

Please refer to the registration statement on form S-4 that will be filed with the SEC for important information in connection with this transaction.

With that out of the way, let's get into our talk about 2004 and how we're positioned going into 2005.

Let's talk about 2004 first because it was truly an outstanding year.

Record sales with growth of 13 percent, record operating profit with growth of 23 percent, and a 180-basis point increase in margin.

Record EPS for the second year in a row with growth of 24 percent, strong free cash flow that funded four things, the repurchase of just over $1 billion of stock, two bolt-on acquisitions, the funding of about $425 million of post retirement benefit programs and the reduction of net debt.

And on the back of all these achievements, we took a giant step into the future.

As Jim Kilts said in today's press release, our planned union with Procter & Gamble will combine two great businesses into what will be the best consumer products Company in the world.

We're very excited about the opportunities presented by teaming with P&G, but last week we said just about all we can say thus far and today's call will focus on the stand alone results and prospects of Gillette.

It's a very robust story.

In 2004 we had strong contributions from and made important progress in every business and in every area of the P&L.

We reduced our overhead costs as a percent of sales during the year.

Manufacturing efficiencies enhanced Duracell's profitability significantly with a 41 percent increase in profit.

In fact, every one of our businesses achieved higher gross margins, a combination of cost savings, and improved product mix.

These gains allowed us to increase our support behind a very active new product program.

With an increase in our advertising budget of over $300 million versus 2003.

That investment is paying off in the form of strong consumer acceptance and trade up to our premium performing products in both developed and developing markets.

For instance, M3 Power is now the top selling razor in the U.S., the UK, and Germany.

Venus Divine drove 9 percent growth of our Venus franchise in the U.S. in the second half of 2004.

We further expanded our global brushing franchise behind Oral-B's Professional Care 8000, Sonic Complete, and Advantage Arctica.

Oral-B Brush Ups and Hummingbird are off to a solid start.

Gillette's complete skin care and Braun's Activator and Cruiser shavers are each driving share gains in their respective product segments in each market in which they have been introduced.

In developing markets like Russia and Latin America, we're accelerating consumption of existing products across our core categories and we're driving trade up to new products like Vector Plus and Prestobarba Excel.

The obvious question is what will the follow through look like in 2005?

The answer is twofold.

First, 2005 will benefit from the momentum built in 2004.

Specifically, new products that were introduced in major markets in 2004 will be rolled out to the rest of the world in 2005.

Cost savings initiatives that have been implemented in the past will provide further benefits in 2005 and in 2004, we established healthy levels of advertising that will benefit our efforts in 2005 and beyond.

This momentum will combine with important introductions of entirely new products in every business, some that have been announced and some that are on the cusp.

And we will see more on the cost savings front.

Overall, we're well positioned to meet the competitive challenges we face and to continue our progress in delivering consistent growth.

That's the big picture.

Let's dive into the numbers now.

Before we get into the details, one reminder on comparisons, as we've mentioned for the past three quarters, we've 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.

On a reported basis, net sales in the fourth quarter were $3.1 billion.

That's 19 percent above the fourth quarter of 2003.

Foreign exchange accounted for 4 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.

The benefits of price increases in blade/razor were tempered by lower pricing in battery toothbrushes and d higher consumer spending behind new Oral Care products.

Volume mix was up a healthy 15 percent, there were four main drivers here.

The first driver was solid North American and European results driven by the introduction of M3 Power and new Oral Care and Braun products.

The second was strong trade up and consumption in the emerging markets of Latin America and the AMEE region.

Third was the comparison to weaker shipment levels in Q4 of 2003 in Oral Care, Braun and blade/razor.

We'll discuss that when I get to the commentary on those businesses.

And fourth was a shift in the calendar versus 2003.

It resulted in two extra days in Q4 2004 versus Q4 2003.

This affected the timing of shipment bookings, particularly in businesses like Oral Care, Braun and Duracell that are at peak shipping season at the end of Q3 and beginning of Q4.

As a side note, we will again have a shift in the calendar in 2005.

It will mean that Q1 2005 will have five extra days versus Q1 2004, and Q4 2005 will have six fewer days than Q4 2004.

Net sales for the year were almost $10.5 billion, or 13 percent higher than 2003.

Currency added 5 points of growth.

Pricing was flat.

Price increases in blade/razor and lower promotional spending at Duracell were offset by two factors, lower pricing in battery tooth brushes and mid priced electric shavers and higher consumer spending behind APDO's and Gillette complete skin care.

Volume mix was up a solid 8 percent.

This was driven by strong trade up and consumption in the emerging markets of Latin America and the AMEE region.

And by the introduction of M3 Power and new Oral Care products in North America and Europe.

Moving to gross profit, Q4 gross profit margin was up 210 basis points to 57 percent and for the full year, gross profit margin was up 140 basis points to 59.3 percent.

In both cases, we had gross margin improvements in every business.

Two big areas of contribution to note were manufacturing efficiencies and cost savings, especially at Duracell and personal care.

Plus, strong sales growth and improved product mix in Oral Care and Braun.

And that brings us to marketing.

Our advertising investment was 11.1 percent of sales in Q4, up 35 percent, and it was 11 percent of sales for the year, up 40 percent from 8.9 percent of sales in 2003.

As I mentioned before, this increase was a strategic initiative that will drive growth for the Company into the future.

It reflects investments behind our strong new product programs and higher spending to drive stepped up consumption in developing markets.

At the overhead and other expense line, our overhead costs dropped 240 basis points from 23.2 percent of sales in 2003 to 20.8 percent in 2004.

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

In Q4, our overhead costs increased 50 basis points to 21.4 percent of sales, that's up from 20.9 percent in Q4 2003.

This was due to a number of items, mainly a disproportionate impact from currency,the write down of intangible assets and the timing of other expenses.

In terms of the functional excellence program, we incurred $35 million in costs this quarter.

That's flat versus Q4 2003.

Through 12 months we had 75 million in functional excellence costs, and total costs taken under the FE program to date are approximately 335 million, which is in line with the 350 to $400 million that we outlined at the start of the program.

At this point, we consider the FE program to be substantially complete.

In 2005 we'll hit what we consider to be an ongoing run rate for business improvement expenses for a Company our size.

As a result, we do not expect such costs to materially impact year-over-year performance going forward.

And so we will reduce our discussion relating to FE.

And finally at the bottom line, net income was up 13 percent for the quarter to $415 million.

Here, a $28 million swing in the exchange line from Q4 2003 was partly offset by a lower tax rate.

The tax rate was 29 percent in Q4 -- versus-- in Q4 versus 30 percent last year and essentially unchanged from the prior three quarters.

This caused Q4 net income growth to lag the 19 percent growth in operating profit and for the year, this meant that net income growth was up 22 percent versus the 23 percent growth in operating profit.

Now to earnings per share.

Our fourth quarter diluted earnings per share rose 14 percent to $0.41 and diluted earnings per share for the full year rose 24 percent to $1.68.

In both periods, EPS growth outpaced net income growth as a result of our share repurchase activities.

Average diluted shares outstanding in Q4 were down1 percent versus Q4 2003 and down 2 percent during the year versus the 12 months of 2003.

Now let's turn to the businesses.

We'll start with blades and razors.

Blade/razor sales were up 16 percent in the quarter, in part due to the timing of shipments.

Remember, growth in Q4 2003 was dampened by advance shipments of our holiday razor program in Q3 2003.

That was the quarter.

The real story is the great year blade/razor had.

Blade/razor sales were up 12 percent in 2004 and profit from operations were up 14 percent.

Taken alone, those are great numbers for a $4 billion global business that's over 100 years old, but the way we generated that growth is even better and holds promise of further growth of our franchise in the years to come.

Blade/razor results were driven by new product success and by growth in all key segments of our trade up ladder.

In entry level systems, in premium disposables and in premium systems.

I'll cover some highlights of each segment in turn starting with our premium systems.

In premium systems, M3 Power, Venus Divine and Sensor 3 system were the big news in 2004.

M3 Power is hitting all the targets we've set for it.

In the fourth quarter, M3 Power was again the top selling razor in the U.S. with a 31 percent dollar share.

That's significantly higher than all competitive razors combined.

It also drove Gillette to an 80 percent share of razors in the UK, up 17 points, and we posted a 70 percent share of razors in Germany, up 20 points.

Global sales of Mach 3 family razors and blades grew at a strong double-digit rate in 2004, driven by over 30 percent growth in razors behind the launch of M3 Power.

As a result, the Mach 3 family share of the blade and razor category grew 1.5 points to 33 percent in Q4.

M3 Power is rolling out to the rest of the world in the first quarter.

The introduction of Venus Divine drove strong growth of the Venus franchise.

Sales of Venus family razors and blades were up 20 percent versus 2003 on a global basis.

And in the U.S., the Venus family sold more than double the number of intuition razors in the second half of the year.

And three times the number of blades. 2005 will see even more activity from Venus, including the first quarter introduction of Venus disposables and in the second quarter, we'll have the U.S. launch of the Venus Vibrant system, the first battery powered wet shaving system for women.

Sensor 3 System is off to a good start as well.

It represented 17 percent of Sensor franchise sales in Q4 in the U.S., including 50 percent of Sensor razor sales.

In fact, Sensor family sales were flat in 2004 after six years of declines.

This was driven not only by the launch of Sensor 3 System, but also by the growth of Sensor from trade up in the AMEE region.

Moving to disposables, Gillette's global dollar share of disposables increased for the seventh consecutive quarter.

For the year, our global dollar share of disposables increased 1 point to 57 percent and Gillette's share of blades in Latin America grew for the first time in over ten years.

This was led by the expansion of premium disposables, like Prestobarba Excel in Latin America and Turkey and Sensor 3 disposables in North America and Europe.

Finally, entry level systems, entry level systems in developing markets grew roughly 50 percent from 2003, as we began to implement our new trade up strategy in selected markets.

We are not only driving growth, we're also gaining share in the process.

In 2004, we gained 2.5 points of blade share in India to a market-leading 35 percent.

And in Russia, our blade share grew 1.5 points to 89 percent.

Entry level systems now represent almost 10 percent of our blade/razor sales in China, India, and Russia, and remain a significant growth opportunity.

The trade up to new products and our increased media spending are driving stepped up growth in developing markets, and enhancing our business mix.

Looking forward, 2005 should be a solid year with strong consumer off take from both ongoing trade up and consumption of new products in coming months.

Moving on to Duracell, Duracell really had a one of a kind year.

For the year, sales rose 11 percent in reported dollars.

Currency added 4 points of growth and the addition of the Nanfu battery business in China accounted for two points of the increase.

Growth was driven by international markets, which represent over 40 percent of Duracell sales.

Specifically, we had strong demand and improving Duracell performance in the UK, France, and Italy and stepped up growth in the emerging markets of Russia and Turkey.

North American sales were flat year-over-year.

Incremental revenue from the 2004 hurricanes were offset by deflationary pressures due to competition.

At the same time, Duracell grew its profit from operations a strong 41 percent and margin increased 480 basis points from a year ago to 22 percent.

There were many drivers.

Sales growth, manufacturing efficiencies from high utilization rates and cost savings efforts, lower overhead costs, and lower promotional and free cell activity.

All of those supported a strong double-digit increase in advertising.

This performance is impressive in light of the difficult competitive conditions in North America where we saw the resurgence of the zinc segment in mass merchandiser channels, a twofold increase in buy one get one free or BOGO activity by Energizer.

And increased promotional activity by private label.

In Q4, Duracell's dollar share was flat in North America as we responded to two developments.

Further growth in the zinc segment and Energizer's BOGO activity.

Energizer ran 30 such promotions in Q4 this s year versus 9 a year earlier.

Our response came in the form of strong advertising and display support.

However, 2005 will be challenging on several fronts.

We begin to anniversary cost savings.

Our raw material prices will increase, particularly in zinc and steel.

We'll be up against the spike in demand from the 2004 hurricane season and Duracell's market share will continue to be under competitive pressure.

On that last point it's worth reiterating that Duracell will defend its market share.

Let's move on to Oral Care, which posted big growth in 2004.

It's true that Q4 net sales growth of 28 percent benefited from comparisons with weak demand and related trade destocking in Europe in Q4 of 2003.--However, sales were up 20 percent in 2004 as oral care executed its strategy of growing its core brushing franchise and growing beyond brushing.

The acquisitions of Rembrandt and Zooth during the year also added 4 points to sales growth in 2004.

There were new entries in every segment of brushing and beyond brushing.

From Advantage Arctica and manual toothbrushes came to the Professional Care 8000 and Sonic Complete power toothbrushes to Brush Ups and Hummingbird.

Some of the following facts highlight Oral Care's progress and also how we're driving strong trade up in both developed and developing markets.

In the latest reading, Oral-B gained further share of the global brushing market.

Oral-B gained dollar share of total brushing in all regions except Latin America.

There, heavy price discounting by Colgate led to a slight decline in Oral-B share.

In the rechargeable toothbrush segment, gains in both the U.S. and Europe extended Oral-B's leading worldwide share.

In fact, Oral-B's new Sonic Complete is outperforming Sonic Care in all markets in which it's been introduced.

In the manual segment, Oral-B's performance was driven by gains in the U.S. behind our high performing Cross-Action Vitalizer and Advantage Arctica toothbrushes.

In our beyond brushing efforts, our new Oral-B Rembrandt whitening strips and whitening pen are off to a great start and these whitening strips and pen will be making their way into select European markets and Australia next month.

In terms of Oral Care profits, profit from operations grew 14 percent in 2004 and margin declined 70 basis points to 15.7 percent.

Higher sales from new products and improved product mix were offset by three factors.

Higher export costs from Europe, expenses related to the redesign and rework of two entry level power toothbrushes and refills, and a more than 60 percent increase in advertising spending to launch new products.

It's worth noting that in 2004 we aggressively supported what is the broadest array of new product activity in Oral Care history, and that activity will continue to drive good top line growth in 2005.

Next is Braun, which made significant progress in 2004 by growing its core dry shaving franchise and improving its return on capital.

Braun sales growth of 28 percent in Q4 did benefit from comparisons with weak demand and related trade destocking in Europe during Q4 2003.

However, 2004 sales grew 16 percent behind an enhanced new product pipeline.

New products in Europe and North America and stepped up growth behind increased marketing and developing markets like Russia and Turkey were the key drivers.

New products included our top of the line Activator in the U.S. and new youth Cruiser shaver in the UK.

The launch of Activator gave Braun the two top selling male shaver SKUs in the U.S., Activator and Synchro in the key gift-giving month of December.

And market share reached a record 25.6 percent of the U.S. market in the quarter.

These new products led to solid net sales growth and improved product mix versus last year, and it offset a combination of higher European based manufacturing costs and a strong double-digit increase in marketing support.

The result, profit growth of 94 percent and a 290-basis point increase in margin to 7 percent for all of 2004.

Growth in 2005 will continue to be driven by new product introductions.

Finally, personal care, which posted another year of solid top line growth and made further progress in increasing its profit margins to industry benchmark levels.

Sales for the year were up 11 percent, with the impact of exchange accounting for 4 percentage points of the increase.

Growth in all regions was driven by new product introductions, including Gillette Complete Skin Care and Cool Spray.

And strong growth in shave preps in all markets.

In shave preps, double-digit gains in Europe and the AMEE region were driven by our strong foam to gel trade up initiatives.

In fact, we achieved our highest value share reading in five years in Europe during the fourth quarter.

And in the U.S., the Gillette Complete shave prep drove our highest quarterly share and highest 52-week share in 4 years.

Beyond shave preps, the roll out of Gillette Complete Skin Care continued, becoming a solid number two behind Nivea in the U.S..

In deodorants, the launch of Cool Spray has made a big difference driving share gains in the UK following a decade of decline.

In terms of personal care profits, they were up 30 percent versus 2003 to $95 million, and margin grew 150 basis points to 9.9 percent.

These were the key drivers.

Improved product mix from new products and trade up from foams to gels; manufacturing savings, including savings in materials; flat overhead costs; and a double-digit increase in advertising activity behind new products and brand restaging activities.

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

Through 12 months, our working capital increased.

Receivables were down.

Day sales outstanding were reduced 8 days from a year ago from 32 days to 24 days, but that was offset by an increase in inventories.

Days inventory on hand increased to 111 days versus 103 days last year.

The increase was driven by both currency and the building of safety stock to support our European factory and distribution center realignment program.

Capital expenditures were up during the year.

They totaled $616 million versus 408 million last year.

This was due to program supporting new products and the realignment of our blade/razor manufacturing and distribution in Europe.

Overall, CapEx was 6 percent of sales in 2004, up from 4 percent in 2003.

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

As defined in our earning's release, we generated $1.7 billion of free cash flow in 2004, equal to 16 percent of sales, and that's despite $426 million of contributions to post employment benefit programs we made during the year.

We used that free cash flow to repurchase Gillette stock, acquire Rembrandt and Zooth, while debt, less cash and equivalents, was down approximately $310 million from the end of 2003.

Under our share repurchase program, during the quarter we repurchased 5.5 million shares for $242 million, or an average price of $44 a share.

In 2004, we bought 24.8 million shares for just over $1 billion, or an average price of $41 per share.

So that's the story for the fourth quarter and 2004.

It was an outstanding year, one that gives us excellent momentum going into 2005.

We're driving higher consumption and trade up to 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.

Overall, we're building the track record and making good progress against our objective of becoming the best global consumer products Company.

To that end, I'd like to repeat that we're very excited about the opportunities presented by teaming with P&G.

But last week, we said just about all we can say thus far and we can only focus on the stand alone results and prospects of Gillette during the Q&A session.

With that in mind, we would be happy to take any questions you might have and I'll turn the call over to the operator, who will explain the procedure for signaling if do you have a question.

Thank you, sir.

If you would like to ask a question today, please press the star key followed by the digit 1, on your touch-tone phone.

If you are using a speaker phone, please be sure to pick up the hand set or turn off your mute function in order for your signal to reach our equipment.

Once again, if you would like to ask a question today, please press the star key followed by the digit 1.

We go first to Bill Chappell with SunTrust Robinson Humphrey.

Good morning.

Two quick questions.

First, you might have mentioned it, but can you give us an update on price increases in the blade/razor business or in any of the businesses for 2005?

I know we're at that time of the year.

Then second, just looking with the merger in light of that, I mean what's the expectation for the capital expenditures this year or kind of the European restructuring?

Are there any changes to those plans?

Sure, Bill.

First question first.

In terms of the price increase, yes, we had announced a price increase to the trade in both the U.S. and in Europe.

In the U.S., it's roughly 3 percent on systems and in the -- in Europe, roughly the same and I think in Europe we're taking about a 1 percent price increase in disposables as well.

And both of those will be effective in the February time frame.

So that's the price increase.

In terms of anything related to the deal, as I said at the outset today, we're not here to talk about the combination of the two Companies.

This is an earnings call.

In terms of any activity that we've got going right now, it's full steam ahead, operating things at a stand alone business.

CapEx, as you know, our ongoing target is around 7 percent of sales and that still stands.

Great.

Thank you.

We go next to Andrew McQuilling of UBS.

Thanks very much.

Chris or Chuck, I had a question about the increase in other operating expenses.

Up 117 million year-over-year, could you talk about the size of the intangible asset write down that you took or you mentioned the timing of other expenses.

Yes, certainly.

It's really a combination of a whole lot of pieces that are about similar in size, the intangible itself is about a penny a share.

So, you know, it's in the 14 to $15 million range.

To give you a sense of some of the other things that are in there, we actually have a flow year on year unmatched RAVI trust gains.

We mark those to market.

Last year had we had a gain.

This year it was about a break even, it was about a penny a share.

We also had some expenses that were related to facility closures and then subsequent costs.

Indonesia, China where we got out of our small Pen Yang business, they are about a penny apiece.

Then there's a whole lot of other things, but basically there's no huge number that drives the whole increase, it's a series of relatively smaller amounts.

Cumulatively large.

Cumulatively large, yes.

What was interesting Chuck, is the progress that you've made in overhead expenses for the first three quarters was highly impressive.

Can you talk about the, you know, let's say the core overhead number in 2004 versus 2003, what kind of progress you made there?

Sure.

I think the best way to think about that is to look at just the margin improvement that we've got on the SG&A expenses.

And when you see that dropping down, I don't have it right in front of me, 2.5 points or so, year on year, I think that's an impressive movement because that factors in all the funny things that happen with currency, et cetera, we definitely took costs out of the business year on year.

Okay, and maybe just a question on the European blade realignment.

What type of charges were in there for that?

About $0.02 a share in the year.

I think it was $34 million.

And if I could, one more.

Chuck?

Yes.

Yes, go ahead.

One more and I'm off.

Realized cost savings for the FE program in 2004, do you have a number?

Yes.

We're basically tracking where we should be.

In terms of what we realized in the year, it's in the $100 million range.

We're about 75 percent on an annualized basis run through.

So we feel very good about that program it's delivering on target.

Terrific.

Thanks.

We go next to Lauren Lieberman with Credit Suisse First Boston.

Thanks.

Good morning.

Just wanted some prices on emerging markets.

I sensed emerging markets were more of the dialogue this morning and the greater contributor to results than it seems to have been the last couple of quarters, so a couple questions on that.

One, is it just a matter of timing that some of the strategies may be implemented X number of months or quarters ago are just starting to deliver?

A sense for category growth rates in the emerging market and then also the percentage of your blade/razor business that's in the emerging markets today.

Thanks.

Yes, Lauren, as a matter of practice, we don't give the break downs like that by business unit.

I thought I would sneak it in and you might answer without realizing it.

Good try, but in terms of what's driving it, I mean, yes, the emerging markets have been all year driving the good business momentum, including the record sales, the record operating profit, record earnings.

We're growing those businesses.

We're investing behind those businesses quite significantly, both in terms of incremental marketing and infrastructure, so when you look at the growth rates, I believe that the numbers are along the lines of our developed markets grew around 11 percent in total this year versus about 26 percent in the developing markets and you're seeing that in all businesses across the board.

So it's a very good story and quite frankly, you know, some of the things that we're doing, for instance in blade/razor with you know, Vector Plus, the entry level systems program, which I talked about in my opening comments, really successful program, putting more rungs on the ladder, driving that trade up in developing markets.

It's a great story.

Okay.

I guess just what -- I mean how much of the growth is -- is you guys driving category growth versus trade up?

I mean the share gains you're getting but you're already so dominant, so it's how much is category growth versus trade up?

Well, we're really driving the category, so it's one and the same.

I think maybe versus, you know, GDP growth, I think what you're seeing is us driving -- accelerating our growth off of I guess normal consumer staples industry growth because we're going after the trade up opportunity.

Right.

I guess I mean the idea is how many more users come into the category?

In terms of category growth, I know that because you dominate the category, you drive the category, but not just getting people to buy a more expensive product, but also getting more people into the category in general in emerging markets.

Well, keep in mind, Lauren, that we've got over a billion years out there and particularly in blade/razor, you know those users are using double edge blades.

So we're driving, you know, what's happening is that we're driving the trade up to entry level systems, premium disposables. and other markets.

So it's -- it's much more about the trade up as opposed to capturing more users.

Okay.

Thanks.

And then just one quick thing on advertising.

Was the rate of increase in advertising against the quarter and the full year similar in emerging markets to developed markets or was one larger than the other?

Given the basis that we were working off of, I would say that -- , I'd have to get back to you on that, but it was strong increases in every region of the world.

Double-digit in every region.

All right, great.

Thanks.

We go next to Amy Chasen with Goldman Sachs.

Hi.

First of all, Chuck, I'm sorry, I have to ask you this question.

These receivable improvements--.

I could have guessed it.

Pretty good performance?

Well, I mean when does it stop?

I don't know.

I think it has, but--.

Chuck, you've been telling me that for four years.

I know, from when it was what 85 or 95 days now down to less than 25 days.

Yes, we should have bet on that.

Yes, pretty good on that.

Is this 26 level kind of a sustainable level?

Was there anything one time in the quarter that impacted it?

I think that a little bit in the timing of the sales in the quarter benefited us early rather than late.

I also think within that also the mix and the mix in the timing of the mix so that we had the faster collecting receivables coming towards the end of the quarter, e.g. Braun and Duracell earlier.

As we're looking forward, as we look at our channel mix and our product line mix, we still believe something in the mid-30s is kind of where the model would tell us that we're going to be.

Doesn't mean we won't try to do better, but don't count on 25 days.

Think in terms of somewhere near the mid-30s.

All right.

I'm not sure I believe you, but that's okay.

Can you guys talk in a little bit more detail about just in the fourth quarter the Duracell margins and why they were down year-over-year?

Sure.

The Duracell margin, you know, the fourth quarter was in line with the rest of the year, and keep in mind, Amy that, we were up against a very strong fourth quarter of 2003, so I think all the same things are at work there.

It's just really a matter of year-over-year comparison.

What do you mean it was in line with the rest of the year?

You mean the full year average?

Yes, yes.

All right.

So I mean is this 22 percent level sustainable, sort of a good run rate to use?

You know, it sounds like you threw a little bit of caution out there for '05, but, again, here to you did you that throughout '04 and you kept beating the numbers.

Good question.

You know, historically, Jim Kilts has said mid to high teens is the sustainable rate for the category.

We've done better because we've executed well against our plan.

Really we'll see what happens going forward.

Yes, I did mention a number of head winds that we're up against for next year that are certainly going to make the year challenging.

I think, Amy, two things that you have to think about that we can't quantify, but number one is if you look at the mix of what's happened in terms of raw material increases, Duracell will get disproportionately impacted because they are so heavily chemical-based.

The other thing is we will continue to work against our strategy, which is to maintain our market share, and, you know, it depends on what happens in the competitive environment.

Okay.

Last question is just on functional excellence, again, you gave the '04 cost savings.

Can you give us an expectation for '05 cost savings and then, Chris, you mentioned that, you know, you won't be talking about functional excellence because the program is finished.

What about functional excellence turbo?

Not aware that there is a functional excellence turbo, first of all.

Let's take that right off the bat.

Really what we're saying is that, you know, functional excellence, there's still going to be activity under that program, no question about it, but what we're saying is that we're at a normalized rate of spending for a Company our size, so when we get together to talk about year-over-year performance, it really shouldn't be a significant factor.

Yes.

Amy, I know you love to build models, so I'll give you a couple of perspectives.

One is our annualized program, or our overall program that we announced when we started functional excellence's initiative said we would deliver $300-plus million of savings and that will have been delivered in 2005 on a cumulative basis from when we started.

The second thing, as Chris says, is we will have continuous investment in improving our productivity, improving our capabilities with the drivers of functional excellence.

That's $0.03 to $0.04 a year is what we figure to be a relatively ongoing expenditure and you should assume that that will pay back in one to two years, but it's going to be business as normal, as Chris says on a go-forward basis.

Okay.

Then, Chuck, the 300 million, how much of it to date -- I don't know if you mentioned that or not.

I don't think you did.

How much of it to date have you realized?

I think we said around 75 percent, 80 percent, something like that.

Okay.

All right.

Thank you.

And we go next to Bill Smith with Deutsche Bank.

Good morning, Chris.

Good morning.

Hey, I know this is kind of random, but can you talk about Palomar and how far you are from commercializing that technology and is that something we should assume will happen in 2005?

Oh, Palomar, you know, project is still ongoing and it's not something that, you know, that we would really comment on in terms of, you know, where progress is or isn't and I would really have to check on that and get back to you.

Okay.

Great.

And then just on funding the pension, you know, 300 million this quarter, are you anticipating incremental pension contributions next year as well?

We always have some pension contributions.

Remember, we have major programs in UK, Germany, U.S., so that's kind of an ongoing thing.

I think the thing that you're thinking about is why did it go so high this year and that was we were able to on a tax advantage basis make a significant contribution to our retiring medical program and thus it did jump up more than we would do on a normal basis.

But, you know, we have an ongoing funding program that's pretty moderate in the scope of things.

Okay.

You know, you said the yearly number for the European blade realignment.

How much do you fund the quarter?

The realignment program -- you're talking about -- it's about $10 million in the quarter.

10 million in the quarter.

Yes.

Do you have any intentions to repatriate any earnings next year?

Yes, in the -- when the 10-K comes out, you'll see that we have made a decision to repatriate at least I think it's $325 million and we did take a tax charge for that repatriation.

Our opportunity is significantly larger than that.

However, at this point in time, it's still under analysis and we have made no decisions whether to repatriate any more than that or not.

So do you have a target for your effective tax rate next year as a result of the repatriation?

No.

But it's going to come -- it's going to rise though obviously, yes?

If there is a substantial repatriation next year, it would rise.

Yes there, would be an upward pressure on it, but, you know, as of this point in time, we've made no decisions.

Okay.

Great.

Thanks very much.

And we go next to Bill Pecoriello at Morgan Stanley.

Good morning, Chris.

Could you help us on the details in the shipment growth versus retail take away for blade/razor in North America and global?

I know there's a -- what you're lapping is obviously shipments and -- versus take away from a year ago as a factor as well as you had talked about some deloading still coming into the quarter.

Sure, Bill.

I mean global shipments were slightly below consumption in the fourth quarter.

I would have to get back to you on what the specific numbers were in terms of take away, you know, versus our shipment, but what I could tell you is that we came into 2005 with very healthy trade inventories, not only in blade/razor, but in all of our businesses.

And in North America too, you would have to get back to us on how the take away ran versus the shipments?

Yes, yes, I don't have that number in front of me.

Then in the first quarter as you're rolling out some of the new products, but you're lapping the rollouts from a year ago how would you expect the shipments versus the take away in blade/razor to run in Q1?

It's -- there's a lot of factors that go into that, particularly, you know, keep in mind that we're going to have the extra days in the first quarter as well.

There's going to be a lot of moving pieces, so, you know, yes, there's new product activity this year.

There was new product activity last year, but I would really have to take a look at that and get back to you.

And then on -- can you help us in the battery divisions in North America, the shipment versus take away and the pricing in the quarter, how that looked?

Yes, I think shipments were in line with take away in the fourth quarter in Duracell.

The bigger factor for the Duracell results, if you're trying to sort out the growth rate, was the comparison with last year and the timing of shipments versus last year.

Great.

Then just finally in Oral Care, was there anything in shipments versus take away as you were rolling out new products in terms of North America, global that really stands out as a spread there between the two?

No, not shipments versus take away, but more year-over-year activity because keep in mind last year, we were deloading the trade in Europe on power oral care and then this year because you had the two extra days and, you know, your'e at peak shipping time, and you had acquisitions going on as well, but I think at the end of the day, what you're looking at, again, very healthy trade inventory levels coming into 2005 and, you know, just a lot going on with the comparisons.

Great.

Thanks.

We go next to Alec Patterson with RCM Investment Management.

Chris, I just want to make sure we've got sort of the apples to apples thought process in place on next quarter, that is--.

Can you -- Alec, can you speak up a little bit?

We can't hear you.

Can you hear me now?

Yes, a little bit better.

Barely.

Sorry.

I don't know what's wrong.

It's about the extra shipping days, just understanding the impact on the P&L as it lists sales, is there sort of an artificial, you know, leverage effect on any fixed cost that tend to be more evenly accrued through the year, any factors like that which would create sort of an artificial margin experience?

Not, not materially.

What we're in is -- we report on a 4, 4, 5 basis and that's why we end up having a couple of odd days swing here and there.

You're right, there are some expenses that are fixed on a monthly basis, but it shouldn't impact the margins materially.

There may be a little uplift in the first quarter because of the five days, but it's not going to be dramatic and if it happens, we'll get back to you; in terms of anticipation, I wouldn't expect anything.

Okay, and then just generally on the flow of the year, Chris, the -- obviously the first half is a very tough comparison for you guys, a lot of launches, et cetera.

Just wondering if you could speak to that, you know, dove tailing it with the continued comments as Amy pointed out about Duracell and the threat that you, the tone you guys have had there, but sort of not seeing a whole lot of follow through in terms of the margin structure.

Just hard to get a handle as we're comping some very tough -- some very good results last year in the first half, what you're thinking.

Well, absolutely.

When you look at the flow for the year, clearly we're going to have the five extra days in the first quarter, which will ease the comparison with first quarter of 2004 and you're right.

When you get into the second quarter, you're going to have the same amount of days, but you're going to be up against some very significant launches, not only in blade/razor, but Oral Care.

Third quarter, yes, Duracell will have a rather difficult comparison because of the hurricane effect, and that really sums it up.

Okay.

Thanks a lot.

We go next to John Faucher with J.P. Morgan.

Yes, actually I'm fine, thanks.

We go next to Chris Ferrara with Merrill Lynch.

You guys I think cited competitive spending in Oral Care as one of the offsets to higher pricing blades and razors in the pricing discussion.

I was wondering if you could give a little bit more detail on that and what was going on in Oral Care from a net to sales basis, promo.

I think he's talking the price--.

Yes, yes.

There was -- there was some pricing pressure on entry level power, which would include battery and then the other thing is there was, you know, some incremental consumer spending behind some of the new product launches.

For instance, Brush Ups and Hummingbird.

So those would be the two factors that are coming in.

Got it, but it was nothing above and beyond just typical spending on new products for the pricing impact on the promo side?

No.

Got it.

And I think also in personal care you mentioned better manufacturing costs including favorable materials costs.

I was wondering if you can give a little more detail on that and where you're seeing reduced raw materials sales across your business, like where else you might be seeing it.

Chris, keep in mind that our SSI program that we have discussed in the past has been a very significant success for us, and it benefits personal care and to a lesser extent, batteries disproportionately because the direct materials cost are a bigger percentage of cost of goods sold for those businesses.

That's what you're seeing coming through there.

Got it, so it's not the external environment.

It's what you're doing to mitigate the external environment, is that fair?

Right, right.

Got it.

In the Braun business in the U.S. obviously doing really well in it that an evasive category decline or do you see healthy category growth in power shavers in the U.S.?

Power shavers, yes, it's still a challenging environment in the U.S., in Europe, and even more so in Japan, so those are the big three markets for that business.

Braun has done an outstanding job with its new products, both at the high end, the mid tier, and the low end.

So it's actually taking share.

That's what's growing it, the business.

Other than that, the categories have declined sequentially in dollar terms.

Got it.

Thanks a lot.

Sure.

We go next to Ann Gillin with Lehman Brothers.

Thanks.

Just one question, Chuck.

I think every other year I get to ask you what was flowing through the exchange line?

This is one of those quarters.

This is one of those quarters.

We had -- remember in the first quarter when we had some reclasses from CTA into the retained earnings because of the liquidating of subsidiaries, we've got more of that in the fourth quarter relating to, I think it was Indonesia finally cleared out.

So that's one very big piece of it.

The other thing is, it's being compared to a gain of a year ago and that gain was merely a result of a mismatch in position, so we had an exposure that we made profit on.

All right, so one off for '04 and -- more to '05?

Yes, you shouldn't expect plus or minus in that line item.

Okay.

Perfect.

And then just back quickly to batteries as others have talked about it, the retailers in particular seem to be demanding more carbon zinc to kind of bring the price point lower.

I'm wondering whether you have participated at all in supplying carbon zinc and I understand this to be something that kind of kicks in to the industry every eight to ten years or so and I'm wondering how long it's lasted previously?

When does the consumer finally figure out what you're currently advertising about with regards to performance?

Sure.

Historically when zinc spikes up, it is at least history would tell you it has lasted anywhere about 18 months for it to sort of cycle through, but from our perspective, we are not a zinc player.

We don't sell zinc, you know, to any significant extent at all, and it's up to us to go out there and educate consumers, and you really go after zinc and highlight the fact that it's not value for money.

Okay.

Then that would mean that on the alkaline businesses, Chris, you have actually gained some share?

Just because of the shift we have seen from alkaline to carbon zinc, if you're flat, then your alkaline business must be -- on an alkaline basis only gaining.

No, we were flat in alkaline in the fourth quarter.

Okay.

So you actually led losing in total?

Yes.

Okay.

That's it.

Thanks.

We go next to Connie Maneaty with Prudential.

Good morning.

Could you talk a little bit about the kind of raw material cost pressures you see?

Which is your biggest exposure and how much are those materials up this year?

Sure, Connie.

I think we sort of reported it on this last quarter and it's pretty much consistent with what we said.

Overall, because of oil and then oil-based products, whether it's resins or chemicals, we were looking at cost increases that would be in about the $100 million range.

That would be $0.07 maybe $0.08 a share.

Through our SSI initiative through material substitution, through better efficiencies and manufacturing, both in terms of conserving on material usage as well as some conversion costs, as we look into 2005, we pretty much offset that $100 million drag on our business.

So we would look to neutrality year on year.

So in 2004, how much did SSI offset the raw material cost increase?

Oh, boy.

Yes, it would be completely because we ran favorable DCV's during the year.

Yes, and then some, I guess.

Okay.

So in both years, your offsetting increased costs with savings.

Yes.

Oh, yes.

Okay.

Thank you.

That concludes today's question and answer period.

Thank you.

I would like to turn the call back over to senior management for any additional or closing comments.

All right.

Thank you.

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