寶潔 (PG) 2005 Q2 法說會逐字稿

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  • Operator

  • Good day and welcome to the Gillette Company second quarter 2005 earnings results conference call.

  • Today's call is being recorded.

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

  • Please go ahead, sir.

  • - VP, IR

  • 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 element of uncertainty.

  • Actual results may differ materially due to risks and uncertainties but we can assume no obligation to update these statements.

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

  • With that out of the way, let's take a look at the quarter and what we see ahead for the year.

  • Obviously our results were strong, stronger than we anticipated at the outset of the second quarter, especially given such demanding comparisons.

  • What makes our results so strong is the tremendous momentum of our business.

  • Momentum that can be seen in the positive consumption trends in our advantage categories.

  • Consumption that's being driven by our world-class marketing programs and our various trade-up ladders.

  • And the momentum created by our tradeup ladders is made possible by our technology leadership, which continues to deliver exciting new products at affordable prices that redefine categories, categories like M3Power and Venus Vibrance, Venus disposable and the new Oral-B Pulsar and Triumph.

  • And finally, momentum in the affordability created by our constant turn-around mentality, which is keeping cost pressures in check and helps fund our growth initiatives.

  • Now, there's been a lot of talk and concern that we would lose focus with our pending merger with P&G.

  • I will share with you two statistics that suggest otherwise.

  • In the month of June, 92% of Gillette's businesses in North America were gaining dollar share in their respective categories.

  • And in the latest readings available in Europe, 95% of our businesses were gaining value share of their markets.

  • Overall, our momentum is excellent and our people are executing.

  • With the tremendous opportunities we have to further build and leverage scale through the merger, we believe that we can extend the momentum that already exists.

  • With that lead-in, let's talk about the numbers that characterize our momentum.

  • We will start with sales.

  • On a reported basis, net sales in the second quarter were $2.8 billion.

  • That's 13% above the second quarter of 2004.

  • Foreign exchange accounted for 3 percentage points of the sales growth.

  • Strength in the euro and pound sterling against the U.S. dollar were the main contributors.

  • Pricing was down 1%.

  • The benefits of price increases in blade razor were offset by a shift in mix towards larger pack sizes of Duracell.

  • And volume mix was up a very healthy 11%.

  • Solid growth was seen along both product lines and geographically.

  • And this was primarily driven by two factors.

  • One was category growth and market share gains across core businesses.

  • In most cases, reflecting the ongoing success of new products.

  • The other factor was an acceleration in shipments in the battery category versus Q2 last year.

  • We also had strong growth in every geography.

  • Despite the highly-difficult comparisons with Q2 2004 when we launched M3Power in North America.

  • Moving to gross profit, Q2 gross profit margin was down 110 basis points to 59.3%, from 60.4% last year.

  • Ongoing manufacturing efficiencies were more than offset by three things.

  • Manufacturing realignment costs at Duracell, unfavorable razor versus blade mix and higher currency-based European manufacturing costs, especially for Braun.

  • That brings us to marketing.

  • Our advertising investment was up by 19% in the quarter.

  • It was also up as a percent of sales to 11% from 10.6% in Q2 2004.

  • And we expect to hold at about that range for the balance of the year.

  • At the overhead and other expense line, just as we saw in Q1, we continued to benefit as our cost reduction efforts are leveraged against solid organic growth.

  • As a result, overhead dropped from 21% of sales in Q2 2004 to 18.6% in Q2 this year.

  • Moving to the bottom line, net income was up 17% for the quarter to $498 million.

  • It was enhanced by our lower tax rate, which fell 1 point to 28% from 29% last year.

  • Now, unless we repatriate significant additional foreign earnings, we expect our tax rate for the remainder of 2005 to be approximately 28%.

  • It is worth noting here that we made a decision to repatriate $600 million of foreign earnings under the American Jobs Creation Act during the second quarter.

  • And finally, our second quarter diluted earnings per share rose 17% to $0.49.

  • That's up from $0.42 the prior year.

  • Now let's turn to the businesses.

  • We'll start with blades and razors, which again displayed strong business momentum and the potential to drive tradeup around the world, despite difficult comparisons with the North American launch of M3Power in Q2 2004.

  • Second quarter blade razor sales were up 11%.

  • Foreign exchange contributed 3 points of that.

  • This strong, constant currency growth was driven by new product introductions and by growth in all key segments of our tradeup ladder.

  • During the quarter, the big news was the North American launch of Venus Vibrance.

  • Together with the ongoing rollout of Venus disposables, North American consumer sales of the Venus franchise grew 13% in the quarter.

  • On a global basis, Gillette increased its value share of the blade and razor market by over 1 point to 71.5% in the quarter.

  • And our share increased in razors and blades, systems and disposables.

  • Consumer demand for M3Power has remained strong and it continues to grow the Mach3 franchise.

  • M3Power remained the top-selling razor in the world with a 19% share.

  • In fact, the Mach3 family share of the global blade razor category grew 2 points to 32% versus the prior year.

  • That's higher than all other manufacturers combined.

  • And in developing markets, entry-level systems and Mach3 are driving significant growth and share gains for Gillette.

  • In Q2, they delivered market share gains of 3 or more points in China, Turkey, India, and Korea.

  • As for the bottom line in the quarter, we achieved a 16% increase in blade razor profit.

  • Driving the gains were sales growth from new product and price increases, ongoing tradeup to premium systems, entry level systems and premium disposables in all regions and flat overhead costs.

  • Looking forward, we continue to expect a solid year.

  • Characterized by strong consumer offtake from tradeup in both developed and developing markets.

  • Moving on to Duracell and some unexpectedly strong numbers.

  • Sales rose 18% in reported dollars with currency gains accounting for only 3 points of that increase.

  • Duracell sales growth was largely driven by accelerating category growth in most regions of the world.

  • In North America, it was the result of three factors: At the consumer level, consumers in Florida were able to buy batteries tax-free as part of hurricane preparedness programs.

  • Second, at the wholesale level, retailers built inventories for what is expected to be an early and strong hurricane season in the southeastern U.S.

  • And third, we experienced pipeline shipments related to the rollout of larger pack sizes in certain retail channels.

  • Combined, this added approximately $30 million in Q2 sales this year.

  • In developing markets, increased consumption and share gains drove very strong double-digit growth in Latin America.

  • And growth in Asia continued to be driven by tradeup to alkaline from zinc, as well as higher consumption of AAA batteries due to the growth in MP3 players.

  • Duracell's profit from operations rose 34% to $119 million and margin increased 260 basis points from a year ago to 22.1%.

  • There were a number of drivers.

  • Sales growth, especially in North America, favorable mix to AA batteries in Europe and Asia and manufacturing efficiencies.

  • These were partially offset by an unfavorable shift in mix towards larger pack sizes and costs related to the planned closure of our Lexington plant of $17 million or just more than $0.01 a share impact.

  • While Duracell's first half performance was strong, the balance of the year will be challenging for three reasons.

  • First, in Q3, we will be up against the spike in demand from the 2004 hurricane season and this comparison is now tougher due to the early season buy-in of batteries and large pack pipeline shipments during this past second quarter.

  • We estimate that coming out of the second quarter, the U.S. retail trade was carrying two extra weeks of battery inventory.

  • The second reason is raw material cost increases, primarily zinc, steel, and diam.

  • It continues to be a factor as the year unfolds and we continue to look for alternatives to offset these cost pressures.

  • And third, while our recently-announced price increase will be effective August 15, it remains to be seen how much, if any, benefit will be realized.

  • This is because Duracell is raising both list prices and promotional price floors.

  • For instance, we aim to bring the promoted price of a AA eight-pack above the psychologically important $4 level.

  • If this causes our price gaps versus competitive offerings to expand, we will be forced to defend our market share, resulting in incremental costs as the year unfolds.

  • Let's move on to Oral Care.

  • Net sales were up 17%.

  • Favorable exchange contributed 3 points of growth.

  • And the unmatched sales from the 2004 acquisitions of Rembrandt and Zooth added 3 points to sales growth, as well.

  • Oral-B is driving growth on a global basis with gains in all key segments and driven by the ongoing success of our new products in manual, premium rechargeables, and refills.

  • In manual toothbrushes, growth came from tradeup to CrossAction Vitalizer and Advantage Artica in developed markets.

  • And in developing markets, it was tradeup to Advantage, Exceed and CrossAction Vitalizer.

  • On the power brushing side, growth is being driven by our Oral-B Professional 8000 and Sonic Complete premium rechargeable toothbrushes as well as refills for those toothbrushes.

  • It's led to continued advances in North America and a very solid rebound in the European rechargeable toothbrush market.

  • In terms of Oral Care profits, second quarter profit from operations grew 28% and margin increased 160 basis points to 20.7%.

  • Here, higher sales from new products and improved product mix were partially offset by a double-digit increase in advertising and currency-related increases in European-based manufacturing costs.

  • In the second half of 2005, we're now launching Pulsar in North America, and Oral-B Triumph, our new premium rechargeable toothbrush.

  • Next is Braun.

  • Where new products continued to drive strong top line growth.

  • Net sales grew 16% with currency gains producing 3 points of the increase.

  • Solid growth in all major regions reflected a very active new product program in hair removal and new product success in household appliances.

  • In male shavers, Braun grew value share in all key markets through the success of the rollout of the Activator premium shaver and the Cruiser youth shaver.

  • For example, in Japan, Braun achieved its highest unit share on record in May and value share reached 33%, the highest in over two years.

  • And in North America, Braun grew its dollar share 1 point to 23.7% during the second quarter.

  • Female hair removal gains were powered by the ongoing -- by ongoing category growth in epilator's particularly in southern Europe and the AMEE markets.

  • And finally, our household appliance growth was led by Tassimo where growth from the recently-launched markets of France, Switzerland, and the U.K. will be enhanced by launches in the U.S. and other markets later this year.

  • Turning to profit, operating profit was up 8% to $26 million.

  • Solid net sales growth was tempered by a combination of currency-related increases and European-based manufacturing costs, higher marketing support and to a lesser extent, unfavorable product mix due to double-digit growth in household appliances.

  • Looking forward, we expect Braun to deliver a solid year of profit growth and turn EVA positive for all of 2005 for the first time since we've been tracking this metric.

  • Finally, Personal Care.

  • Which had another quarter of solid performance.

  • Performance driven by our tradeup initiatives in shave preps, the ongoing rollout of TAG body sprays and the launch of Mach3 premium shave gel.

  • Reported sales in the quarter were up 9% with the impact of exchange accounting for 3 points of the increase.

  • Solid growth came despite comparisons with last year's launch of Right Guard Cool Spray in North America and Soft & Dri in Mexico and Venezuela.

  • This was mainly achieved by tradeup and new product launches in shave preps, specifically our foam to gel initiatives in Europe and the introduction of our premium Mach3 gel in both the U.S. and Europe.

  • In April, Gillette became the number one manufacturer of shave preps in the U.S. U.S. shave prep share was the highest quarterly share in more than six years at 29% and five-year records were set in the U.K. and Germany in the latest period.

  • TAG continued to grow in its fifth month.

  • It captured a 16.6% dollar share of the fast-growing body spray segment in the second quarter, becoming the solid number two.

  • Personal Care profits grew 25% and margin grew 140 basis points to 11.7%.

  • There were three drivers: Solid organic growth in net sales, improved mix from new products and tradeup from foams to gels and increases in advertising investments behind new product launches and the foam to gel initiative.

  • Beyond our business unit results, you will also notice that our unallocated expenses went up significantly in the quarter.

  • This was due to an incremental $11 million or about $0.01 a share in costs related to the proposed merger with Proctor & Gamble.

  • Before we take your questions, I'd like to cover some highlights of the balance sheet and cash flow.

  • First, our working capital metrics improved versus Q2 last year.

  • In receivables, day sales outstanding decreased 2 days from a year ago, from 33 days to 31 days.

  • Inventories improved as well with days inventory on hand down to 117 days versus 128 days in last year's second quarter.

  • However, from a cash flow perspective, working capital changes through Q2 this year versus the end of 2004 resulted in a net use of cash.

  • This is because of the exceptionally low levels of working capital that we achieved by the end of 2004.

  • In addition, year-to-date capital expenditures were an incremental use of cash, as well, at $309 million, up from 228 million last year.

  • As a result of the changes in working capital and CapEx, our free cash flow generation, as defined in our earnings release, was only $375 million in the first six months of 2005.

  • We did not repurchase any stocks during the quarter, due to the pending merger with Proctor & Gamble.

  • As a result, debt less cash, cash equivalents, and short-term investments was down approximately $360 million from the end of 2004.

  • So, that's the second quarter of 2005.

  • It was a great quarter and we think it's an indication that our four key growth drivers will sustain our momentum.

  • Our Advantage growth category dynamics remained intact and continued to strengthen.

  • Our broad base of successful new products is being sustained by our technology leadership.

  • Our tradeup capabilities are delivering incremental category growth and continued to enhance an already-strong profit profile.

  • And the benefits of our constant turn-around mentality continue to show up within the P&L and serve as a contrasting element versus those peers facing cost pressures without such benefits.

  • Now, we'd 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 you do have a question.

  • Operator

  • Thank you, gentlemen. [OPERATOR INSTRUCTIONS] We will take our first question from John Faucher with JP Morgan.

  • - Analyst

  • Yes, good morning.

  • Chris, I was wondering if you could talk about the potential for -- even with the load-in and the higher retail inventories in Duracell, do you think there's any potential for additional load-in in advance of the price increase given what you've seen let's say so far in July?

  • Or are inventories so high that you're not going to see the traditional load-in in front of a price increase?

  • - VP, IR

  • I think you're right, John, with the load-in that we had in the second quarter in anticipation of strong storms, and the fact that we were bringing in some larger pack sizes, we would not expect additional load-in in advance of the price increase.

  • And quite frankly -- anything that would happen prior to our August 15, price increase would wash out during the quarter anyway.

  • - Analyst

  • Okay, thank you very much.

  • Operator

  • Our next question will come from Bill Schmitz with Deutsche Banc.

  • - Analyst

  • Yes.

  • Hey, CapEx again jumped up in the quarter, both sequentially and year-over-year.

  • Can you tell me again what that was kind of spent on?

  • - VP, IR

  • Sure.

  • Two things.

  • One would be higher spending reflecting our European blade and razor manufacturing realignment.

  • Keep in mind that we've got some greenfield development going on in Poland there so you've got a lot of spending behind that.

  • And then the other thing is support of new product and our new product pipeline remains pretty robust as you're seeing in the results.

  • That's what's driving the strong business momentum and that's where we're putting capital in place.

  • - Analyst

  • Great, thanks.

  • And then we did a bunch of retail channel checks and we can't find those Panasonic Oxyride batteries anywhere and apparently they're supposed to launch the first week in July.

  • Have they pushed back on doing that?

  • Are they still going to do it?

  • Have you heard anything in the trade?

  • - VP, IR

  • We haven't heard anything.

  • You'd have to check with them.

  • But, if that's the case, we're delighted.

  • - Analyst

  • Okay, thanks very much.

  • Operator

  • Moving on, we will go to Joe Altobello with CIBC World Markets.

  • - Analyst

  • Thanks, good morning.

  • Just wanted to go back to the battery situation.

  • What has been the trend in terms of category growth?

  • I apologize if you gave this number out, but in terms of the overall category volumes, how has that been trending?

  • Has it fallen off?

  • Or do you expect it to fall off in the next 12, 18 months or so?

  • - VP, IR

  • Sure, Joe, the category trends have been quite good, in North America alone, volume was up mid-single digit in the quarter.

  • So, the trends have been -- remain pretty strong.

  • You did have, as I mentioned, a bit of pantry-loading on the part of consumers in the southeast so you're seeing the off take being rather healthy.

  • And then outside of North America, what you're getting is the MP3 player growth, which is boosting consumption of AAA batteries.

  • So, that not only helps with the volume growth, but also from a mix perspective.

  • - Analyst

  • Are you seeing any shift toward private labels in Western Europe, in particular?

  • I think one of your competitors had alluded to that very recently?

  • - VP, IR

  • Nothing more than the ongoing pressure that we've seen over the past several years, but I wouldn't say that we've seen any particular spike in private label, in the markets that we're in.

  • - Analyst

  • Great, thanks.

  • Operator

  • With Goldman Sachs, we will hear from Amy Chasen.

  • - Analyst

  • Good morning.

  • First question is just on the developing markets, you know, the Latin America 30% growth, AMEE very strong.

  • Can you just give us a little bit of color, I guess starting with Latin America.

  • Is that just that the market itself is stronger because the economies there are more stable, or is there something more specific that we should be focused on in terms of your strategy in that market?

  • - VP, IR

  • Amy, I think we're certainly executing very well in those markets.

  • However, I -- I think the overriding factor that you saw in this second quarter would have been some strong category growth in what seems to be a continued economic recovery and keep in mind, if you go back to the second quarter of last year, our growth in Latin America was not quite as robust.

  • So, in some ways the comparison perhaps might have been a little bit easier.

  • - Analyst

  • Do you expect that strength to continue?

  • - VP, IR

  • That's difficult to say.

  • I can't really give you an economic forecast here, but what we're seeing right now is some very good category dynamics, based off of economic recovery.

  • - Analyst

  • Okay.

  • And then can you give us some sense of how much volume was up in Western Europe?

  • - VP, IR

  • I don't have that in front of me.

  • I think what you're seeing in Europe, I think from a -- from a broader perspective, is a number of things coming together and as you know, we don't -- we look at volume mix and we're getting a lot of tradeup there.

  • So, it's difficult to say, I mean you're getting 10% growth out of Europe in the quarter here and I think it demonstrates what great execution can deliver, even in difficult environments.

  • You have got a number of things working for you in Europe.

  • You've got a turn-around in the rechargeable toothbrush segment.

  • We're driving foam to gel tradeup in Personal Care.

  • We've got innovation from a product perspective in the form of M3Power and products like Tassimo and then we also have some, for us, we've got unique marketing initiatives like our use of David Beckham and that's really driving the products.

  • That's, I think that would characterize better the strong business momentum we have in that market in contrast to a lot of peer group companies.

  • - Analyst

  • Just my last question, I think this is a little bit more housekeeping.

  • But I was a little bit confused.

  • You said pricing was down 1, pricing was up in blade and razors and that was partly offset by a mixed shift in Duracell.

  • But then when you talked about the volume mix being up 11, you indicated that Duracell mix shift impacted that.

  • So, I'm a little bit confused.

  • - VP, IR

  • Yes, yes, sorry for the confusion, Amy.

  • What it is is that when you have -- your mix shifts towards larger pack size and in Duracell, it brings the average price per battery down.

  • So, that's -- with Duracell, that's the way we calculate pricing.

  • Sorry for any confusion there.

  • - Analyst

  • Okay.

  • But other mix is in the volume mix line?

  • - VP, IR

  • Yes.

  • Other -- and that mix is the mix of product as opposed to pack.

  • - Analyst

  • So, the AAA mix benefit goes in volume mix?

  • - VP, IR

  • Yes.

  • - Analyst

  • Okay.

  • All right, great, thanks.

  • Operator

  • Moving on, we will go to Alec Patterson with RCM Investments.

  • - Analyst

  • Chris, I don't know if you can do this for me, but on the gross margin trend, can you give a sense maybe what raw materials are doing to bring that down and the offset you're getting on your mix and tradeup?

  • - CFO, SVP-Fin.

  • Those are a lot -- this is Chuck here, there's a lot of moving pieces in that.

  • I think the perspective that you really ought to have as you think about raw material price increases.

  • We're still tracking pretty much to what we thought would happen this year, which is an annualized impact of material increases of about $100 million on our business.

  • We've been able to mitigate, in fact pretty much wash that out through our various initiatives, including the SSI, that's our purchasing initiative, changes in sourcing, material substitution.

  • So, we feel we've got it very much under control.

  • Most of those costs would show up as well in the gross margin line, not necessarily all of them.

  • So, net-net, raw materials on an annualized basis, off $100 million, but we've been able to pretty much offset it in various operating units.

  • - Analyst

  • And in terms of sort of the sequential effect here as it blows through inventory check, are we seeing the spot markets reflected in your P&L and kind of a one-quarter lag?

  • How do we see that progress?

  • - CFO, SVP-Fin.

  • Well, it would be a little less than a -- I guess you're right it would be around a quarter lag only because of the timing of inventory.

  • I think what you're really thinking about is the impact of what we've seen on softness in the steel prices.

  • That's not a huge number for us in terms of the overall dynamics of the P&L.

  • Primarily because of the significant processing refinement that we would add, value-added, to the basic raw material.

  • - Analyst

  • So second half impact, less than first half or--?

  • - CFO, SVP-Fin.

  • Not terribly different.

  • And again, we will be able to offset it through those initiatives that are well in place.

  • - VP, IR

  • And Alec, I think the one thing we would highlight though is Duracell because you have a number of inputs there that are trending higher, have been trending higher and that's why we went after the price increase.

  • So, if the price increase comes through and it's sufficient it will help mitigate some of that in the back half.

  • - Analyst

  • The price increase, timing-wise, is still justified on the trends in the underlying raw materials that you guys are--?

  • - CFO, SVP-Fin.

  • Definitely on the battery businesses.

  • Just think about the same prices Indium prices, yes.

  • - Analyst

  • Great, thank you.

  • Operator

  • Javier Escalante with Morgan Stanley has our next question.

  • - Analyst

  • Hi, Chris, again on Duracell.

  • Basically if you help us understand the profit upside there, is it just volume leverage because you have a charge, you are talking about commodities and yet you have these significant margin expansions there.

  • If you can help us understand why is that happening and how long -- much more you have there?

  • - VP, IR

  • Sure, Javier.

  • Absolutely, you've got some significant volume upside there and that impacts things like capacity utilization, et cetera.

  • Just as -- similar to what happened in the third quarter of last year when you saw our margins spike up to levels that we would not -- as we said at the time, would not expect to repeat.

  • So that's the dynamic that you have.

  • As that comes off I would be rather cognizant of that fact as you look at the third quarter because if our volume dips off quite a bit because of the fact that we had the -- we've got the two extra weeks out there in the trade right now, and the fact that you've got the comparison, I think that's certainly one thing you have to keep in mind as you look at this year's third quarter.

  • - Analyst

  • Let me see if I understand this, what that means is that basically you're operating under very low capacity utilization when you have this spike of volumes, you can't really leverage the capacity?

  • Is this is what is happening?

  • - VP, IR

  • Well, I wouldn't say that we're at excessively low levels of utilization, however, when you get these spikes in capacity, you're running 24-7.

  • So that certainly -- you take it to the next level from a utilization perspective.

  • And you're thinking about it from a factory cost point of view.

  • The other thing that I think we have to talk about when we talk about the leverage is we continue to ZOG and even NOG our overhead structure and so when you get the leverage on the sales growth in a business like Duracell, the overhead structure, all being held constant or down, also helps on those net margins.

  • So, it's not only a factory phenomenon, but it's a total infrastructure phenomenon.

  • - Analyst

  • Okay.

  • If we can shift to razors, could you give us some sense of the trends in North America and Europe, basically shipments versus consumer take away?

  • I mean you comment on Venus, but if you can tell us the overall business, how it's doing in North America and the U.S., shipments versus consumer take away, that would be helpful.

  • - VP, IR

  • It sounds like you got two questions there.

  • First of all how we're doing within the category.

  • I would say that we're driving market growth, our overall blade mix is richer and our share of the economic profit pool is growing.

  • So, you're seeing Mach3 shares up, Venus share is up and in terms of pure market share, our system share is improving sequentially.

  • The second part of your question has to do with inventory levels, trade inventory levels.

  • I think aside from North American batteries, shipments were in line with consumption in all businesses for the quarter and were at appropriate levels of trade inventory.

  • - Analyst

  • Okay, thank you.

  • Operator

  • Our last question today will come from Justin Hott with Bear Stearns.

  • - Analyst

  • Hi, maybe you can -- first question would be can you compare how Nitro is doing versus the Red razor from over a year ago, first?

  • - VP, IR

  • Oh, the -- the -- M3Power Nitro versus Mach3Turbo Champion?

  • Yes, M3Power is doing very well in North America.

  • Razors are up substantially versus Turbo.

  • Almost magnitude of -- maybe by a third.

  • So the razors on M3Power are doing very well.

  • M3Power is on its way to becoming a $0.5 billion product globally and as I mentioned earlier it's the top-selling razor in the world with about a 19% share.

  • So, it's doing very well.

  • - Analyst

  • Is it the line extension driving it or is it just the core M3Power?

  • - VP, IR

  • Well, the line extension is putting more razor handles in hands.

  • No doubt about it.

  • We had a very good program behind that, great execution here in North America and quite frankly that drove -- that helped to drive our North American business this quarter at a stronger pace than we would have anticipated, given the difficult comparisons.

  • - CFO, SVP-Fin.

  • Given our number of users, incremental users, it's core business.

  • - Analyst

  • And just one last question.

  • On the cost -- I realize we no longer talk in terms of functional excellence, but can you give us maybe a little more color on some of the newer cost initiatives you might have been rolling out recently.

  • - VP, IR

  • Yes, you're right, functional excellence was sort of an isolated step-up program that's largely over.

  • What you're seeing now is what we -- dubbed for you is called our constant turn-around mentality.

  • That's delivering zero overhead growth or ZOG and that's being leveraged against some very strong organic growth.

  • I don't think we can necessarily isolate any particular program.

  • As we move forward, there's going to be a lot more opportunity with the merger and I think that is you look at the strong business momentum that we've got from our ZOG initiatives and how that's being leveraged, we're going to have that much more opportunity through the merger.

  • - Analyst

  • Okay, great, thanks.

  • Operator

  • There are no further questions at this time, Mr. Jakubik.

  • I will turn the call to you for closing remarks.

  • - VP, IR

  • All right, thank you very much.

  • Starting at 11:30 a.m. today, a replay of this call will be available.

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  • Additionally, the replay will be available on our corporate website, Gillette.com, a few hours from now.

  • For members of the media who've listened to the call and have additional questions, please contact Eric Kraus, Vice President, CorporateCommunications at (617)421-7194.

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  • Thank you and have a good day.

  • Operator

  • That does conclude today's conference call.

  • We thank you all for your participation.