0001169232-05-000406.txt : 20120703
0001169232-05-000406.hdr.sgml : 20120703
20050202173014
ACCESSION NUMBER: 0001169232-05-000406
CONFORMED SUBMISSION TYPE: 425
PUBLIC DOCUMENT COUNT: 1
FILED AS OF DATE: 20050202
DATE AS OF CHANGE: 20050202
FILED BY:
COMPANY DATA:
COMPANY CONFORMED NAME: PROCTER & GAMBLE CO
CENTRAL INDEX KEY: 0000080424
STANDARD INDUSTRIAL CLASSIFICATION: SOAP, DETERGENT, CLEANING PREPARATIONS, PERFUMES, COSMETICS [2840]
IRS NUMBER: 310411980
STATE OF INCORPORATION: OH
FISCAL YEAR END: 0630
FILING VALUES:
FORM TYPE: 425
BUSINESS ADDRESS:
STREET 1: ONE PROCTER & GAMBLE PLZ
CITY: CINCINNATI
STATE: OH
ZIP: 45202
BUSINESS PHONE: 5139831100
SUBJECT COMPANY:
COMPANY DATA:
COMPANY CONFORMED NAME: GILLETTE CO
CENTRAL INDEX KEY: 0000041499
STANDARD INDUSTRIAL CLASSIFICATION: CUTLERY, HANDTOOLS & GENERAL HARDWARE [3420]
IRS NUMBER: 041366970
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 425
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-00922
FILM NUMBER: 05570432
BUSINESS ADDRESS:
STREET 1: PRUDENTIAL TOWER BLDG
STREET 2: SUITE 4800
CITY: BOSTON
STATE: MA
ZIP: 02199
BUSINESS PHONE: 6174217000
MAIL ADDRESS:
STREET 1: PRUDENTIAL TOWER BLDG
STREET 2: SUITE 4800
CITY: BOSTON
STATE: MA
ZIP: 02199
FORMER COMPANY:
FORMER CONFORMED NAME: GILLETTE SAFETY RAZOR CO
DATE OF NAME CHANGE: 19660911
425
1
d62046_425.txt
FORM 425
Filed Pursuant to Rule 425
Filing Person: The Procter & Gamble Company
Subject Company: The Gillette Company
Commission File No.: 1-922
PROCTER & GAMBLE COMPANY
Moderator: Clayton Daley
January 28, 2005
6:00 a.m. CT
Clayton Daley: Good morning. I want to begin with an apology for the last
minute notice, and for asking you to join us so early in the
morning, but we really appreciate the efforts that you've made
to be with us here today.
Welcome to the meeting to announce the agreement by Procter &
Gamble to purchase the Gillette Company. Joining me today are
A.G. Lafley, our Chief Executive; and Jim Kilts, Gillette's
Chief Executive Officer.
In terms of the agenda for today's meeting. I will first
provide a very brief update on P&G's earnings and recent
business results, including the guidance update. Then, Jim
will offer his perspective on the health of Gillette's
business, and the reason why they approached P&G. Then I'll
outline the deal structure and top line economics.
A.G. will lay out the strategic rationale and why this deal
makes sense for P&G shareholders. I will then take you through
the financial details including the synergy plan. This will be
followed by A.G. and Jim discussing the integration, plan, and
A.G. will wrap it up. We'll, of course, be available for Q&A.
As always, I want to thank you. Our wonderful lawyers did
that. I want to remind you that the presentation this morning
will include a number of forward-looking statements. If you'll
refer to our most recent 10-K and 8-K reports, including the
8-K that we will file today. You'll see a discussion of
factors that could cause the company's actual results to
differ materially from these projections.
Also, as required by Regulation G, we need to make you aware
that earnings presentation ((inaudible)) P&G's momentum
continues to be strong. We delivered another quarter of sales
and earnings growth above our long-term objectives.
Sales grew nine percent, and EPS grew 14 percent behind
continued, strong, organic volume growth and solid operating
margin performance up 50 basis points. The strength of our
innovation program, and the breadth of our portfolio has
helped overcome both continued pressure from higher commodity
prices, and increased competitive spending in a number of
categories.
Diluted net earnings per share were 74 cents, up 14 percent
versus year ago, and two cents ahead of the consensus
estimate. This was the result of better than expected
operating margin expansion. The strong performance was driven
by beauty care and baby and family care. Every global business
unit and all regions are delivering strong top line growth.
Beauty care, and baby and family care are leading bottom line
growth. Beauty care is investing behind numerous initiatives
to sustain strong profitable top line growth with good
progress so far. Baby and family care also delivered excellent
results, behind strong volume growth and pricing to recover
commodity related cost increases.
Fabric and homecare results were inline with year ago. We
continue to invest in a strong fabric and homecare initiative
program and continued geographic expansion in major markets
like
China and Russia. At the same time, we are absorbing the
impact of escalating commodity costs, and expenses related to
the addition of liquid detergent capacity in North America.
We expect margin pressure to persist. Commodity costs will
remain at higher levels for the foreseeable future, although
we clearly expect to recover them via pricing and mix over
time. Snacks and coffee profits were down for the quarter.
However, the recently announced price increase on coffee was
followed by all key competitors, and should largely offset
higher green coffee costs. We expect solid earnings growth for
the balance of the fiscal year. Finally, healthcare was down
slightly as expected, due to a tough based period where
earnings grew more 30 percent.
Recall we over delivered last year's December quarter, due to
the early and severe cough/cold season. And in addition, the
base period included the launch of Crest Premium Whitestrips.
Again, we expect solid earnings growth for the healthcare
segment, during the balance of the fiscal year.
The portfolio of billion brands is expanding volume double
digits, with 15 of 16 brands growing. We are continuing volume
growth in nine of our 10 top customers. All top 16 countries
accounting for about 80 percent of our sales are growing
volume at or above long-term targets.
As discussed in our December analyst meeting, winning with
more of the world's consumers is part of our top line growth
strategy. We are making good progress against this substantial
opportunity. In developing markets, we delivered six
consecutive quarters of mid teens or better volume growth with
China continuing to set the pace.
Last quarter, we again, grew in the high teens. Importantly,
our developing market business delivered returns above the
company's average in the past three years. This is an
indicator that
we are executing a sustainable business model that will reward
shareholders for the additional risks inherent in these
markets.
In summary, we are pleased with our results in the quarter. We
continue to leverage the breadth of our portfolio. Our strong
innovation program is continuing to deliver growth even though
we're going through a challenging cost and operating
environment. Now despite these challenges, and the difficult
base period comps, we delivered another quarter of results
ahead of long-term objectives.
Now let me move on to guidance. As you're aware, over the past
12 months, a number of P&G's key competitors have lowered the
bar with regard to earnings growth commitment's in order to
better compete with P&G's initiative program.
So far, this has not impacted our ability to delivery strong
top line growth behind consumer meaningful innovation and
strong in market execution. However, we are not taking the
success for granted. Instead, we remain focused on sustaining
P&G's momentum, behind our initiative pipeline, which is
particularly robust in the second half of the fiscal year.
Foreign exchange is also expected to contribute a slightly
higher rate on sale of about two percent. With these two
factors together, FX and the strength of our initiative
pipeline, it gives us the confidence to raise our top line
growth expectation for the March quarter, and the fiscal year
to the high single digits. Despite continued margin pressure
from commodities we are also raising our fiscal year EPS
guidance by three cents, to a range of 2.61 to 2.64.
In summary, we're encouraged by our ability to delivery
earnings per share growth of 13 to 14 percent, in a year
that's been characterized by challenging cost, and competitive
environments, while restructuring, of course, is now funded
internally.
Now that concludes the business update. I've condensed this,
of course, significantly in order to provide significant time
to discuss the topic for which we have brought you together at
this early hour. The transformational acquisition of Gillette
company by Procter & Gamble. We'll start by Jim giving you and
update on Gillette's recent results, and the rationale for
their decision to approach us. Jim.
James Kilts: Thanks, Clayt. And good morning everybody. It's great to be
here on this historic day. And I look upon this union of
Gillette and Procter & Gamble is more than a great opportunity
for growth and value creation for shareholders. I believe it's
a unique and historic event in business and certainly in the
consumer product industry.
There are no two consumer products companies in the world with
a better alignment of brands, markets, and philosophies. The
combination will create the best consumer products company in
the world. That's good news for consumers, for customers, for
shareholders, and for employees. Clearly, for Gillette
shareholders both the timing and the terms of the transaction
are attractive.
Four years ago, we were an underperforming and drifting
company, but we've turned the company around. We've rebuilt
the business, and our current share price reflects our
progress. Our share price appreciated more than 20 percent
last year. And the terms of our agreement provide a further
premium to our investors. From a Gillette perspective, our
business has never been stronger, more vibrant, and better
positioned for continued growth.
While I can't talk about our full year performance since we
are still a week away from releasing our numbers, you know
from our nine month results that 2004 has been an outstanding
year for Gillette. For the nine months, sales were up 11
percent. Net income increased 26 percent. Profit from
operations grew 25 percent. And earnings per share rose by 27
percent. And the quality behind our numbers is unmatched.
We had a record setting pace for successful new product
introductions, for continued growth in our core categories,
for trade up growth, to premium products, and for growth in
developing markets. And the strength was evidence across the
power. Our M3Power the first battery powered wet shaving
system for men met all of its targets and is well on its way
to becoming a half billion dollar brand at retail.
In batteries, Duracell built brand equity with our very
successful trusted everywhere advertising campaign. They also
developed new revenue sources, cut costs, and countered
rampant price promotion. In a very tough market, Duracell
achieved record profitability, more than doubling its pricing
of three years ago.
In oral care, we've increased sales by 16 percent with our
most aggressive product effort ever, including the CrossAction
Vitalizer manual toothbrush, the ProfessionalCare 7000 and
8000 premium rechargeable toothbrushes, and the Sonic
Complete, our first entry in to the Sonic rechargeable
segment.
And we entered whole new areas with our Hummingbird battery
powered flossers and Brush-Ups, disposable teeth wipes. In
personal care, we've cut costs. Introduced new improved
products, increased advertising and profitably grew sales. And
at Braun, we've cut costs, doubled our add spending, invested
in filling out the brand portfolio, and significantly improve
profitability.
The progress across all of our businesses reflect a
re-energized marketing company. Our marketing commitment and
effectiveness are clear in two numbers. Our advertising
spending as a percent of sales has risen about 400 basis
points in the past three years, while our trade and consumer
promotion spending has gone down nearly 200 basis points. We
are now earning market share increases and not buying them.
At the same time, we grow operating margins behind a 450 basis
reduction in cost of goods. So when we look across the
consumer product landscape, it's been pretty clear that we're
performing well. But at the same time, there would be clear
benefits in combining Gillette with another industry leader.
A combined company would provide a stronger leadership
position that would make us more innovative for consumers, and
more responsive for our customers. We could also use our
combined scale to generate synergies that create the
affordability to both reinvest and generate value for our
shareholders.
Procter & Gamble is a home run in every one of those
dimensions. From its brands and its operating performance, to
the interface, with customers and the terrific synergies we
have ahead of us. There isn't a weakness in this combination.
That's why we approached Procter & Gamble several months ago,
to explore a potential deal. After a period of discussion we
couldn't agree on terms. Subsequently, Procter & Gamble
reopened the dialogue and fortunately, we were able to reach
an agreement.
Our Board, obviously, had to be comfortable with the value of
the Procter & Gamble stock we are receiving in this deal. And
I will tell you, they are and I am. Inherent in that value is
what we bring, what Procter & Gamble brings, and what we can
create by this great combination. In short, we like what we
see.
With that, I'd like to hand it back to Clayt, who will get in
to detail on the deal and its impact. Clayt.
Clayton Daley: All right. Thanks, Jim. Our respective boards have agreed to a
stock transaction with an exchange ratio of 0.975 P&G shares
for each Gillette share. Concurrently P&G will begin a share
repurchase program in the range of 18 to $22 billion to be
completed over the next 12 to 18
months. When the buyback is complete, this will represent the
equivalent of about a 60 percent equity, 40 percent cash deal.
Now based on yesterday's closing prices, the acquisition
premium is about 18 percent or approximately 14 times EBITDA
when the cost synergies are included. This is a fair price,
for a stable of category leading, global billion dollar brands
with strong growth momentum.
This is also comparable to multiples paid for other world
class properties, such as (Buyersdorff) which was acquired
(Chebo, Mondavi) which was bought by Constellation brands, and
Gatorade which was acquired by Pepsi through the Quaker
acquisition. These are all world class properties, which
justify significant acquisition premiums, because they offer
the acquirer significant growth and cost synergies.
Gillette's razors and blades business is the crown jewel of
the consumer products industry. Therefore, it is no surprise
that the deal multiples fall into established ranges for top
end transactions. Now let's turn over to the overview of the
value potential that is being created by this deal.
We expect this deal to generate 14 to $16 billion of
incremental shareholder value. Ten to $11 billion will come
from cost synergies. Gross synergies should contribute an
additional four to five billion. All other factors, such as
transaction costs, option leakage, benefits from tax, cap ex
and working capital efficiencies are expected to wash out on a
valuation basis.
Probably most of you have already done the math, roughly
eight-and-a-half billion of the incremental value should
accrue to the current Gillette shareholders. This is below the
low end of the range of cost synergies. Five-and-a-half to
seven-and-a-half billion will go to P&G shareholders. This is
a combination of the growth synergies, as well as the upside
on the cost synergies.
Now the key milestones to complete this transaction are as
follows. The 18 to $22 billion share repurchase program starts
today. We expect to mail out the proxy solicitation and S4
registration in mid April. The proxy vote is tentatively
scheduled for P&G and Gillette shareholder meetings in mid
May.
And assuming all goes well with regulatory and governmental
approvals, we would expect to close the deal in the fall. Now
this provides an overview of the deal structure. A.G. will now
walk you though the rationale for this deal, and why it
provides upside to our sustainable growth model.
A.G. Lafley: Thanks a lot, Clayt. Good morning. Last December, we outlined
P&G's strategy for sustainable growth. We also discussed
long-term goals for sales, earnings per share, and for free
cash flow. Today's announcement of our intention to acquire
Gillette is full consistent with these strategies, and will
provide upside to our combined future growth potential.
There are four reasons why this acquisition makes sense
strategically. We're combining two of the leading consumer
products companies in the world, a combination that leverages
the structural characteristics of our industry. We are
accelerating the evolution of P&G's portfolio, towards faster
growing, higher margin, more asset efficient businesses.
We are strengthening already strong relationships with retail
customers. We are leveraging both company's core strengths in
branding, in innovation, in global scale, and in go to market
capability to accelerate growth. So let's look at each of
these benefits more closely. Together, Gillette and P&G can
grow at levels neither company could achieve or sustain on its
own.
The key reason is that consumer products is in the end a scale
business. Scale drives margin growth and the opportunity to
reinvest. The more scale a company can create and leverage,
the
more opportunities there are to keep growing margins, and to
keep reinvesting in brands and innovation. The more we can
reinvest in branding and innovation that really delights
consumers, the more we can grow. The more we grow, the greater
the margin, the greater the scale.
And importantly, scale is not just about size. The way we
think about scale is much broader. We have industry leading
scale in our breadth, and depth of consumer understanding in
our go to market capabilities with retailers, in distribution,
in innovation, commercialization, in marketing investments, in
research and development exchanges and in business services.
All of this scale translate in the end to leadership. And this
is an industry that rewards leadership. We're bringing
together the two strongest leaders at a time when both
companies' performance is the strongest it's been in a decade.
Second, the addition of Gillette's brands accelerates the
evolution of P&G's portfolio in the faster growing higher
margin, and more asset efficient, health, personal care and
beauty businesses. With the exception of batteries and small
appliances, all Gillette business segments fall in the health,
personal or beauty care, which will now represent a full 50
percent of P&G's portfolio.
This combined company will have an unmatched portfolio of 21
brands with sales of $1 billion to $5 billion each. Combined,
we are the market leader in categories that represent
two-thirds of total company sales. We are increasing the
diversification and the balance of P&G's portfolio and the
flexibility we need to deliver sustainable growth over the
long term.
The third reason this acquisition makes sense is that it
enables us to strengthen our relationships with winning retail
customers around the world. We will bring an even stronger
innovation pipeline across a more diverse and profitable mix
of categories and brands, and even larger portfolio of leading
brands. And we'll also bring greater shopper knowledge and
broader and deeper expertise in both men's and women's
marketing.
The fourth reason the acquisition make sense is that we can
leverage Gillette's and P&G's core strengths. Core strengths
of creating and building brands, of innovation and technology,
up global scale and of the way we go to market. There are many
examples.
One of Gillette's core strengths is it's ability to trade up
consumers, with premium products that perform better, products
like M3Power and Oral-B power brushes. Multiplying their
capability with P&G's marketing and go to market strength
opens significant opportunities for accelerated growth in
developing and developed markets.
In short, this acquisition of Gillette is a perfect fit with
P&G's long-term sustainable growth strategy, and the logical
next step in the evolution of P&G's business portfolio. Now
strategic fit is necessary, but not sufficient. There must
also be opportunities to create additional consumer and
additional shareholder value over the long-term, more value
than either company could create on its own. The Gillette
acquisition passes this test and provides considerable upside
to P&G's sustainable growth model.
Recall, this is how we get to our long term four to six
percent sales growth target. The combination of P&G and
Gillette creates upside in virtually every element of the top
line model. First, we'll benefit from Gillette's portfolio,
which is more concentrated in faster growing markets, such as
razors and blades oral care, and personal care.
Going forward, market growth should contribute three percent
for the combined businesses, versus only a bit ore than two
percent for P&G alone today. We'll also be even better
positioned to deliver additional organic growth from
innovation and technology, which drives share growth, new
business creation and enables geographic white space
expansion. Both P&G and Gillette have an outstanding track
record of innovation leadership.
P&G has generated roughly $5 billion in retail sales in
categories we did not even play in just four years ago.
Gillette has created almost $5 billion in new retail sales
from products launched over the past five years. In fact,
together, P&G and Gillette brought to market, half of the most
successful consumer branded product initiatives for the past
three years.
What's important here is that our innovative capabilities, our
consumer knowledge, and our go to market strengths are
complimentary. On the one hand, we can connect and develop
across common innovation and technology areas in oral care,
and personal care. This will enable us to continue setting the
pace of innovation in core Gillette and P&G businesses.
At the same time, we can leverage complementary consumer
understanding. P&G knows a fair amount about women, how to
innovate for them, and market to them. Gillette's expertise is
an innovation and marketing to men. It's a simple, but we
believe potent combination.
I'll give you just one example, women's hair removal. Today
it's a $10 billion market, projected to grow eight personally
annually over the next five years. Today, there are consumers
who are not fully satisfied with current solutions. We believe
we can combine Gillette and P&G technology with Gillette and
P&G expertise in marketing. We believe we will be able to
market to women and leverage strong Gillette and P&G brands to
deliver this continuous innovation that will truly delight
women.
In addition, we can leverage P&G's strong customer business
development approach with Gillette's out standing execution at
store level. Along with P&G's leadership presence in key
developing markets, we can expand innovation in areas like
hair removal, faster than Gillette could accomplish on its
own.
Developing markets are a significant opportunity. With market
growth projected at five to six percent over the next five
years. We believe we can help Gillette brands take fuller
advantage of
this growth by achieving deeper market penetration and
critical markets like China, and Russia, Mexico and Turkey.
Over the past decade, we've built a strong market position in
a number of these fast growing developing markets. Our go to
market capabilities are reasonably well developed. And our
scale in developing markets is about five times that of
Gillette today.
Equally important, we've been successfully expanding our brand
portfolio to better serve lower income consumers. Our growing
expertise, and low cost, low capital innovation, and our down
to the trade customer penetration can also enable Gillette
brands to profitably serve more of the world's consumers.
In summary, P&G and Gillette, have been delivering at the top
end of their organic growth targets over the past three years.
And we're confident, that by combining these two industry
leading companies, we can create even more upside potential
for top line growth.
There's also considerable upside for the bottom line. Both P&G
and Gillette have robust standalone margin expansion plans
currently in place. We can apply P&G's global scale to
Gillette's current cost structure in many areas, including
purchasing and the way we go to market together. We've
identified substantial costs and growth synergies, which Clayt
will take you through in a moment.
It's clear that this should generate substantial and
sustainable margin and earnings improvements. Importantly,
both companies have a track record, and strong credibility to
delivery productivity improvement. We're confident that the
combined companies can deliver further margin gains, based on
identified synergy opportunities, and additional scale
leverage.
In summary, we remain confident that P&G can sustain growth at
our target levels, the ones we've committed to without the
acquisition of Gillette. But with the acquisition of Gillette,
our sustainable growth model becomes even stronger for the
longer term.
We'll have an even stronger portfolio, and more attractive
industries, greater opportunities to set the pace of
innovation. And we'll have the ability to get more out
Gillette's strong innovation program, by leveraging P&G's go
to market capabilities around the world. As a result, we are
increasing our long term sales target by one full percentage
point from four to six to five to seven percent.
Based on the synergy plan, we expect that the combined entity
will generate 24 to 25 percent operating margins by the end of
this decade, versus the 19 to 20 percent, P&G delivers today.
This should provide P&G shareholders with additional upside,
to our double digit earnings per share growth target.
In short, this acquisition makes sense. It makes sense
strategically, financially and operationally. It's a unique
opportunity to make two industry leaders even stronger, and
even better positioned for sustained long-term growth. Now I'm
going to hand the presentation back to Clayt.
Clayton Daley: Thanks, A.G. Here are the building blocks of how this
transaction generates the 14 to $16 billion of incremental
shareholder value. As I said before, we expect 10 to $11
billion to come from cost synergies. Gross synergies should
contribute an additional four to five billion. So let me first
turn to the plans on cost synergies.
We anticipate more than $1 billion of synergies to be achieved
by year three. We see opportunities in purchasing,
manufacturing, and logistics, through increased sale, improved
asset utilization and coordinated procurement. We see
opportunities to substantially reduce our combined
administrative costs.
We aim to achieve this through elimination of SG&A overlap
between the two companies, the delivery of key support
functions through P&G's global businesses services group,
which delivers best in class cost. And the integration of
Gillette's brands with minimal additional staff, in corporate,
market development, and global business service organizations.
As a result, we anticipate a reduction of about 6,000
positions. And this is roughly four percent of the combined
enrollment of the two companies of 140,000 employees. Of
course, we are committed to fielding the best team. Gillette's
current management will have an equal opportunity in the new
company. And we expect a certain amount of the headcount
reduction to come from the P&G side.
Finally, we see economies of scale, and retail selling and
marketing, including media buying. Savings and material
purchasing, media buying and business support activities are
expected to be realized fairly quickly after the closing.
Synergies and other areas will take a little longer.
Now to put the cost synergies in perspective, we've analyzed
them versus our (Tam) brands, Clairol and Wella commitments.
As you can see, relative to the actual (Tam) brands and
Clairol synergies, the projected - and the projected Wella
synergies, the Gillette estimates are clearly reasonable.
Importantly on (Tam) brands and Clairol, we delivered the
synergies ahead of schedule. The Wella synergies are on track.
And we are confident the synergies we've identified for
Gillette are doable.
Second, we anticipate to create four to five billion of value
through the one point acceleration in top line sales growth,
as A.G. already talked you through this, and the key drivers
which provide the growth upside. The biggest contribution will
come from leveraging our developing market infrastructure to
capture more value from Gillette's brands, and innovation
programs in those geographies.
Now on to the deal's impact on P&G's earnings per share
progression. The deal is expected to be accretive in year
three, and is only slightly dilutive in year two, including a
significantly amount of non cash charges. Year one dilution is
accentuated by one time impacts, and by the fact that many
synergies are tied to system integration, which will take some
investment and some time to complete.
As you can see, we have acquired about 50 cents in earnings
per share, which are expected to grow at a double digit rate.
The dilution impact from the share exchange is partially
offset by the announced share repurchase program. The outline
growth and cost synergies are building up over a three year
period.
The dilution from net new intangibles amortization is expected
to be five to seven cents a share. And finally, the one time
impacts include non qualifying acquisition costs among other
items. We have provided for restructuring costs on the P&G
side, because as I mentioned earlier, it is our objective to
field the best team from the combined P&G and Gillette talent
pool.
Now let's walk briefly through the valuation. As I mentioned
at the beginning, we are paying an 18 percent premium on the
agreed basis of share exchange. It provides Gillette's
shareholders with a post yield valuation of about $54 per
share, based on yesterday's closing price. This represents a
full but fair price for this world class property.
In terms of value creation, the premiums of the Gillette
shareholders is more than justified by the low end of the cost
synergy range. P&G shareholders will capture the growth
opportunities provided by the deal as well as the potential
upside to the cost synergies. This translates to about
five-and-a-half to $7-and-a-half billion. Now let me hand it
back to A.G. and Jim who will talk about the integration and
wrap up the presentation.
A.G. Lafley: We're confident we can manage the integration of the two
companies while staying sharply focused on the health of both
Gillette's and P&G's established businesses. There are three
reasons for this confidence. First, we have complimentary
organization structures, and SAP systems, which are designed
to enable fast, and efficient integration of new businesses
with minimal disruption.
Secondly, both companies are coming from positions of
strength, with healthy business momentum and strong cash flow.
Third, we have a strong cadre of leaders running these
operating businesses. We've done it before. And the combined
Gillette and P&G leadership teams is committed to do it again.
Jim will lead this integration for us, and here are a few more
thoughts from him, Jim.
James Kilts: Thanks, A.G. When we started to evaluate this combination, we
saw many obvious synergies. At the core, they are driven by
having two companies with infrastructures that overlap and
products and geographies that are complimentary.
At the core, they are driven by having two companies with
infrastructures that overlap and products and geographies that
are complimentary. The level of synergies that Clayt detailed
are ones that I know that we can get. In the process, we will
make the business even more capable of driving growth. And I
am committed to working with A.G. to do just that.
If you'll look at the level of synergies, they're big. At the
same time, they are very reasonable. The cost synergies are
consistent with levels that Procter & Gamble has attained in
the past. They are also synergies that I know how to get. We
will utilize both internal and external resources to identify
the specific opportunities.
We will set specific targets for each area of our opportunity.
We will establish teams to pursue these targets. I'll oversee
that entire process along with other senior managers at
Gillette and Procter & Gamble. We will reach these targets,
and accelerate our growth.
On the revenue side, we'll create new benefits and better
value for our consumers, and make it easier for our customers
to deal with us, and to make our company even more important
to them in building their business. These revenue improvements
are going to happen. To achieve these results, I've agreed to
stay on for at least a year to work with the new company, and
lead the integration efforts.
And just in case, I haven't convinced you that I'm a believer,
I have also agreed to roll over all of my Gillette options,
and shares in to Procter & Gamble stock, and hold it for at
least two years. And this is what Gillette's largest investor
thinks of the deal.
Warren Buffett: I'm Warrant Buffett, I'm Chairman of Berkshire Hathaway. And
back in 1989 Berkshire bought what's now the equivalent of 96
million shares of Gillette. During that entire period, we've
never bought or sold a share. I've been happy with the
investment.
But I have to tell you I'm a lot happier today. This merger is
going to create the greatest consumer products company in the
world, a company with a market cap of close 200 billion
combining two companies that already had out standing records,
out standing managements, out standing products, it's a dream
deal.
And to quantify that, description, I intend and will purchase
enough shares or either Procter & Gamble or of Gillette, so
that by the time the deal ends or is made, we will have 100
million shares of Procter & Gamble stock. That makes the math
a little easier, but that's not the reason I'm doing it. I'm
doing it because I like this deal.
James Kilts: The key point you should take away from all of this is P&G's
acquisition of Gillette, makes sense for our consumer. It
makes sense for our retail customers. It makes sense for
employees. And it makes sense for shareholders. It's a unique
opportunity that we're in a strong position to capture and
leverage.
I'm confident P&G is well placed to execute this acquisition
with excellence and deliver the consistent, reliable,
sustained growth shareholders expect, and deserve. Now we'd be
happy to take any of your questions. Thank you.
(Amy): Can you talk about - can you hear me? Hello? It's working now.
Thanks. Two questions, first is just on the accelerated
growth, I understand the cost synergies, that seems pretty
straight forward, but on the top line synergies, Gillette,
obviously I thought those were going to happen with Duracell
and I think they didn't. This is a very different deal.
And there were some specific issues with Duracell, but can you
talk a little bit more about what drives the acceleration in
the top line growth? Because the numbers are substantially
higher than either Gillette or P&G's numbers alone?
And then my second question, A.G. is really on the GBU
structure. My understanding was that the deals you've done so
far, you've sort of plopped in to your existing GBU structure.
Are you going to create a new GBU for Gillette? Are you going
to create three new GBUs for all of Gillette's businesses, can
you talk a little bit about that.
A.G. Lafley: OK. First one first, and Jim should join in here because we've
talked an awful lot about how we drive growth. I mean this
obviously isn't worth doing just to get the cost efficiency
and additional productivity. The simple way to think about is
we need to add one point of growth. If you project a growth
rate to the end of the decade, this company will be about $75
billion in size. We need another $750 million a year, OK.
We believe at least half of that is going to come from
developing markets by simply plugging in and playing with
broader distribution, deeper penetration, the Gillette brands
that will be combined with the P&G brands. And we think that's
pretty dog gone conservative if you look at the growth rates
in those markets, and you look at where we are in terms of
distribution and penetration today in places like China,
Central and Eastern Europe, Mexico, Turkey, et cetera.
The second chunk comes from combining two, you know, at least
in our industry, world class go to market organizations. We
both run without our top retail customers around the world on
what we call customer business development teams or multi
functional teams.
Gillette has a fantastic in store presence and retail
capability. You know, nobody in the world gets more in store
point of purchase displays than Gillette. And we're pretty
sure, as we look at the opportunities just in the top 10
customers, that together we're going to grow faster.
And then, the last piece is what do we do with the brands, and
the technologies that we have together. And the three areas
we're going to be poking around pretty fast are oral care,
which is a relative no-brainer. They're world class and
leaders.
And on the brush side, we're contenders certainly on the
(dentifrice) side. And there are lots of opportunities to work
together on the innovation that we have in hand, and the
technologies we have in hand. And there are an awful lot of
opportunities for us to go to market, and build these brands,
and build consumption and market share in this area.
The other two opportunities we talked a bit about women's hair
removal. Gillette is off to a terrific start with Venus. I
think, as you know, women's hair removal is about shaving, but
it's also about a lot more. And again, we've got technologies
on both sides that we think can get after this $10 billion
market. And there's really nobody else that's single mindedly
focused on it.
The last piece is Gillette's male grooming and personal care
brand. In their portfolio, understandably given the other
priorities it maybe hasn't had, you know, the full attention
and the full priority. Frankly, it was that way at P&G five or
six years ago. We've learned a lot about personal care.
We've learned a lot about beauty care. We have a lot of
technology, you know, in market, and we have a lot of
technology in the cupboard. And we think we'll be able to
create a leading men's personal care brand in the world. So
that's where the growth synergies are going to come from.
On your second question, (Amy), you know, from a - we have an
organization structure right now, that we can basically plug
in and play. But Jim, and I and his leadership team, and my
leadership team have obviously got to sit down together, and
figure out, you know, where, you know, what's the right way to
get organized.
But I will say this some of the Gillette businesses are
obviously going to be free standing businesses, you know,
obviously. They're different industries. Gillette is the
leader in the industry. It would make absolutely no sense for
us to change any of that.
On the back room side, because we're both on SAP, because
there are tremendous commonalities in what we do our supply
bases are similar, our retail customer basis are virtually
identical, there's a tremendous opportunity for merging and
synergy.
And then, we'll sort through the corporate staff, and we've
got a lot of work to do in the next six to nine months while
the deal closes. But as Jim said, you know, there's a lot of
opportunities for synergies. And there are an awful lot of
cost synergy. And there are an awful lot of opportunities to
improve on the productivity together.
James Kilts: I guess I'll give my example just to add to that. When I made
the calls to my business unit heads last night, I told them
what was happening, there was excitement because the one
comment from one of our business units lads, this opens a
whole new world of opportunity. Can you imagine what we can do
in markets like China and Eastern Europe. We're already doing
well in, and what we can do on top of that with a combination
of the two companies.
From an organization standpoint, I think, it's pretty easy as
A.G. said, there's some free standing things. We're going to
enlist the management teams, get them together, but we've got
a clear vision of how it's going to come together, but we
don't want to get in front of our organizations. We want them
to participate in how we're thinking about it, and clearly,
we'll let you know. But it's the - organizational issue, I
think, is a very easy issue, and one that we can get done
fairly quickly.
A.G. Lafley: Yes, (Bill).
(Bill): Two questions. The first one is when you were looking at
Gillette before this acceleration of that one point you're
talking. What did you view as Gillette's sustainable long-term
profit growth rate? Because Gillette's been executing great
cost savings programs, and growing strong in markets like
Russia and Turkey?
That's the first question in terms of the standalones
sustainable growth rate. And the second question is any needs
for divesting in areas of overlap be it deodorants or
toothbrush in certain markets, that you see a need for?
A.G. Lafley: Yes. Jim, why don't you take the first question, and I'll take
the second question.
James Kilts: Well sustainable growth we've always said at Gillette is three
to five percent on a constant dollar basis. And with
opportunities, and, you know, when we did better than that, a
couple of
people said you said three to five percent, and I said well we
like to give what I call piece dividends, when things go well,
we give more. And things have been going very well.
We've got terrific momentum. And I said if we get great new
products, we'll do even better. And we've got the portfolio of
great new products coming down the line. So I'm very
optimistic, but three to five is what we've said publicly.
When we finish the deal A.G. will be able to make his
judgments on what he wants to say to you, but still as a part
of Gillette, we want to stick to the three to five right now.
A.G. Lafley: Yes, and a Bill, we're comfortable to the five to seven going
forward. I mean if you just look at, you know, the slightly -
the one additional point of market growth that you get given
the mix of industries that Gillette's in. And if you look at
our migration over time and the more health personal care and
beauty care, with higher growth rates in those industries.
Frankly, you can pick up the whole point on market growth
alone. On your second question, you know, there are some
overlaps, a few. There are some issues. We have worked with
the DOJ or FTC, whichever regulatory agency will review this
combination a number of times.
I mean just in the last seven years or so, with the
acquisition of (Tam) brands, with Clairol, with Wella, et
cetera, they're relatively modest, frankly, for a transaction
of this size, and we'll work through it. We'll work through it
with them. We're confident that we're going to retain as many
of the assets as possible. Yes, (John - Anne).
(Anne): Good morning. Two questions. First, does the scale you're
creating now with this combination free you up to take a
harder look at some of your slower growth businesses in your
portfolios for potential disposals or...
A.G. Lafley: That one's directed at me, Jim.
(Anne): Not just batteries, A.G.
A.G. Lafley: No, I said I think that one's directed at me.
(Anne): And then, secondly, a softer question. You're both credited
for really keeping your two organizations focused on growth.
What are you doing incrementally, today, forward, to keep that
focus going in the combined company.
A.G. Lafley: OK. We'll both take a stab at the - I guess we'll both comment
on the slower growth businesses, and then we'll both comment
on the other one.
(Anne), we're always looking at our businesses to see how they
perform, versus our operating TSR, cash flow ROI metrics, OK.
And, they each one has goals. We set the goals versus the best
in class performance in the industry in which they're in.
And we set the goals, versus, sort of what's required to stay
on the P&G team for the long term. And I think, you've seen us
over the last several years, you know, exit the cooking and
oils business, you know, exit the peanut better business, exit
the low end of the household cleaner's business, exit the
juice drinks business. And we did that, because the growth
wasn't there.
OK. So we're obviously - that's an ongoing process. So, you
know, you have to weed the garden every spring, and, you know,
we don't wait for the spring. It's a continuous look. And, you
know, there will be some changes over the next five years. I
can't tell you exactly which ones, you know, there will be.
Jim, you may want to comment on the battery business, you know
more about it than I do.
James Kilts: Yes, no, the battery business is a tough business as I've said
for many years, but it's a business I like. It's not too many
categories that have unit growth in the four to
four-and-a-half percent range. It kind of comes
year-after-year. We've got market shares in the two top
companies and the 70 percent range. Margins are aiming in to
the 20s now.
(Amy) used to ask me what can the margins be in batteries, and
I said well 15, and I think we're up in to the 20s now. So
we've done a pretty good job on that business. We've got a
terrific management team. It's a growth business. We can
expand it internationally and continue to grow it. We've
entered the China market with the leading alkaline battery.
And it's mostly a zinc market, so you're going to get
conversion from zinc to alkaline in that market. And I think,
the infrastructure that we're going to get in the combination
of the companies is going to open up a lot of opportunities
for us. But I've been a big believer that at Gillette our
portfolio is terrific. I was very comfortable with it. You
know, A.G. is going to look at it as part of the Procter &
Gamble combination with Gillette.
A.G. Lafley: (Anne), you had a second question, and it was?
(Anne): Sorry, incrementally from here forward, what will you both do
to keep both organizations...
A.G. Lafley: Yes, keep the focus on the growth? OK. I think, this is
sometimes hard to understand, but our structure is, I think,
ideally, suited for our industry with global business units,
which in effect, Gillette has, and which P&G has had now for
five years.
Each one of those global businesses is very focused on their
industry. They're spending 100 percent of their time and
energy and commitment to become leaders in those industries.
And to generate as much growth as they possibly can over the
mid and long term in those industries.
So if you think about this combination, there's really very
little distraction to the operating businesses. There are only
a couple of businesses, where there's some commonality. In
oral care, we're going to have to think about how we put a
great brush business together with a great (dentifrice)
business.
We'll have to sort through, you know, how we're going to
manage personal care, but, you know, most of our GBUs are
still going to be single mindedly focused on becoming the
leader, you know, in their industry. And I think that really
helps.
James Kilts: I couldn't agree more. The marketing teams are going to stay
focused. You know, blades and razors teams are going to worry
about their innovation, and driving their innovation. And the
way we're structured, you really think of it. We -across the
one side of the matrix is the business units.
They're focused on their businesses. Then, we have the
infrastructure that supports the business units. A lot of the
activity and the savings that we're looking for will come
across that infrastructure, and we know how to go about that,
because we're organized very similarly.
A.G. Lafley: Yes, sir.
Male: I just wanted to go in to the cost savings for a second. The
billion to billion, 10 to 12 percent of Gillette sales,
compares to your old - to your previous acquisitions.
Although, I should point out, that you A.G. have come out of a
pretty successful five year restructuring program, and are
much leaner than you were. And Jim, obviously has done a great
job as well of cutting overhead at Gillette. How comfortable
are you that you'll be able to get that billion to
1,200,000,000 over the next few years.
A.G. Lafley: I'm very comfortable with it. You know, there are three -
there's obviously going to be a lot of duplication in what the
two companies do at corporate, and we're going to sort through
that with the leaders. We're finding there's tremendous
efficiency and productivity in what we call our global
business shared services operation.
I think we were one of the first companies in our industry, if
not the first to move to that structure, five years ago. We
then, have enhanced the structure with a network partnerships
with the likes of Hewlett-Packard and IBM. And we're already,
as we reported before, running ahead of our cost savings goal,
ahead of our service quality levels.
And we're turning out more and more innovation on the IT side.
So we've got a very robust worldwide backroom operation. We've
also been able to integrate each acquisition, we've been able
to integrate faster, because as long as they're on SAP, even
if it's regional SAP, versus the global SAP we're on, we can
move very quickly. So that's a big advantage.
And I think the third piece is we both have very strong
operations in - that work with customers, and that work in the
countries. And we're going to take really hard look at that,
and I think the focus there will be on productivity. And I
think there are tremendous opportunities for productivity,
Jim.
James Kilts: I couldn't agree more. I think, as I look at the synergies,
you can imagine, when we were looking at the synergies
together, and negotiating price, I'm even more bullish than he
is. But I think these are very reasonable numbers. And, you
know, if we get those numbers, it will be a great acquisition.
My job is to make it even better, working with A.G. and his
team.
A.G. Lafley: I mean if you think about what Clayt said, you know, the low
end of the - actually below the low end of the cost synergies
side is sort of the minimums. And we think, you know, we've
had a track record at Gillette, and we've had a track record
at P&G that commitments are commitments,
and then we try to beat them, OK. And I think that's true for
the cost synergies. And I think you'll see that that's true
for the growth synergies.
Male: One follow up question if I could, I apologize if I missed
this, is there a caller?
A.G. Lafley: Clayt, is there a caller? We've only got one microphone. This
is a high end ...
Clayton Daley: We've got two.
A.G. Lafley: We have two microphone. We splurged.
James Kilts: I think we can shout too.
A.G. Lafley: It is, the synergies are going up already.
Male: Jim, quick question. You know, I got - the question I have is
sort of why? Particularly why you approached Procter & Gamble
in this regard. I think, I may be more bullish than most, but
I can come up with a scenario where your stock is at $54 in
not that long a period of time. So can you walk us through the
rationale?
James Kilts: Yes, I think the rationale is real easy for me. Strength plus
strength equals success. Both companies have come from
turnaround periods. We've got great momentum. And the
infrastructure combination that we can create is going to
leverage our revenue scale and our cost scale as a combined
company and provide a lot of opportunities for employees as we
go ahead.
I'm a great believer in scale. I firmly believe the consumer
products industry needs to consolidate. And I'd rather lead
that consolidation for the long term health of our employees,
our brands, and our business, than get stuck with the
leftovers at the end.
So I want to lead it, and do it with the best company in the
world, Procter & Gamble. The company I was looking at is my
company competitive to be the best consumer products company
in the world. By coming together we've created the best
consumer products company in the world, that's why.
A.G. Lafley: If I could just quick footnote on that. You know, scale is not
just about cost. It's not just about purchasing power or
bargaining leverage. In fact, the most important thing about
scale is it creates the ability to reinvest. And that's been
Gillette's model, and that's been P&G's model. And when the
company's are running well, that scale creates higher margins,
part of the margin is reinvested in the innovations.
So if you are an innovation and technology company in our
industry, which both of us are, if you can generate more scale
to enable the reinvestment, we keep reinvesting and creating
and building brands that create bonds with consumers for life.
And we keep reinvesting in innovation, so we stay in the lead
on the innovation side to delight the consumers we serve.
James Kilts: I think that just says what it's all about. Our operating
philosophies is companies are the same. We believe that we can
bring these things together and build a juggernaut.
A.G. Lafley: Yes, sir.
Male: Yes, it's a question for both A.G. and for Jim. Could you
detail a little more some of the opportunities in emerging
markets for lower end systems and disposables? What type of
scale advantage and distribution there, does P&G bring
Gillette? And is there a price point that, you know, is
enabled by it?
James Kilts: The answer is yes. I mean - what I'd like to do is, you know,
spend about 20 minutes talking about this at some analyst
presentation, because that's where I think we've got huge
opportunities. We've come up and filled out our portfolio with
lower price systems entries to trade development countries,
consumers, up from double edge. We've got a nice ladder of
products.
But what we get with the combination of the two companies is
an infrastructure that allows us instead of worrying about
infrastructure in these companies, Procter & Gamble has got
the be infrastructure already. They've got the scale. And
we're - you know, we've got terrific growth prospects with
great margins, but we didn't even have the scale in these
businesses.
We put our infrastructure in to their infrastructure. And, all
of a sudden, we're touching distribution, focused on growing
the business instead of worrying about trying to create an
infrastructure. We're going to just step up the growth we've
got in developing countries. And right now, we're growing
about 18 percent in our developing countries. I can't tell you
how optimistic I am about the growth we've got ahead of us. So
I think that you've hit the strategy right on the head.
And I've got to tell you I talked to Peter Hoffman who runs
our blade and razor business last night, and he's just pumped
up because I've been after him. How are we going to get the
developing countries going? You know, we can only do so much.
We only have so much infrastructure. If we do this right,
we're going to be able accelerate the terrific growth we have
already. And I intend to do it right.
A.G. Lafley: Just one very simple comment here. We went in to China on
August 8th, 1988. And without going into the details, you
know, our distribution, breadth, and depth, and our
penetration in China is second to none, in one of the two
fastest growing developing markets in the world. And likely,
eventually the second, and maybe the first largest economy in
the world.
The same thing happened in Central and Eastern Europe when the
wall came down in Berlin, we were first in. And again, we
have, you know, deeper and broader retail distribution and
penetration. And it's just an incredible opportunity to take
these Gillette brands and - which are in those markets, and
doing well, and enable consumers to afford them and try them
and delighted by them in two of the fastest growing developing
areas in the world. (John).
(John): A.G.
A.G. Lafley: Yes.
(John): P&G obviously does many things very, very, well. And one of
the - and I'm not worried about the cost synergies, but the
revenue synergies have been fairly dubious in the last handful
of acquisitions with the exception of Iams, so you can go back
as far as Maxell and think, you know, you've sort of fallen
short on the revenue synergies. So why is it different this
time, as opposed to, you know, the numerous other deals that
we've seen?
A.G. Lafley: World class assets with growth momentum right now. leading
brands, leading innovators. If you think about it - I mean
here's the simple way I think about it. We've actually got
cosmetics and fine fragrances growing. It took us too long,
OK. And now we're actually doing quit well. We - with Wella,
we are the leading, believe it or not, fine fragrance company
in the world.
So that one, just took to long, same with Tampax. You know, I
wish we had had Tampax Pearl three years ago, that's when we
should have had it, OK. Clairol, I think, is quite clear the
cupboard was bare, and the innovation program had been milked.
So basically, what we bought brands that are shells. And we
will now bring technology there, because over the long-term we
want to be in that business.
Actually, the Herbal Essences brand, which we bought, which is
struggling a bit in the U.S. is doing phenomenally well
overseas. So - and we didn't even factor that in initially in
to the acquisition economics. Wella will see, you know,
fragrances off to a good start.
Hair salons we've got to learn the business, frankly, watch
them, you know, grow the business. This one is a relative
no-brainer, because you've got big leading brands, innovation
leaders, and they already have tremendous growth momentum. So
all we're going to do is try to help them go a little bit
faster.
James Kilts: We've got growth momentum and very full portfolios of
innovation that we can build on in the future. So we're loaded
up right now. And the biggest issue I had at Gillette was
figuring out how to sequence my innovations. So that's still
going to be the issue, but with the power of this
infrastructure together, the upside is tremendous.
A.G. Lafley: Yes, (Connie). (Connie's) been sitting here caressing this
microphone.
(Connie): Back to the question on geographic strength, could you talk a
little bit about what the new breakdown of sales is going to
be between emerging markets, and developed markets? And in
terms of geographic white space, are there countries where
Gillette has strengths to give to P&G, and vice versa?
A.G. Lafley: The second one is for sure. Gillette will help us in India.
Gillette will help us in Brazil. Gillette will help us in
other markets, that Jim will fill in that are not on the top
of my head.
James Kilts: And we've got the other way, Japan and China.
A.G. Lafley: Yes. And we'll obviously help in Japan and China. And I think
we're both reasonably strong in Central and Eastern Europe and
Turkey. And we're pretty strong in Mexico, so I think that's
pretty complimentary. I'm sorry, (Connie), and the other
question was...
(Connie): Does anybody have the geographic breakdown now of what
percentage...
A.G. Lafley: Yes, I think, isn't Gillette about 28 percent.
James Kilts: Yes, I think we've got it. We break up the geographies a
little different. Somebody did the numbers, so I don't want to
give it to you off our head. We define developing markets a
little differently. So somebody, I'm sure in investor
relations can give it to you.
A.G. Lafley: (Connie), I think the simple way to think about it is, you
know, we're sort of low 20s now. And without Gillette, we
thought we'd be 26 to 30 by the end of the decade, which is
sort of the numbers we talked about, you know, at the December
conference, and with Gillette that should accelerate.
(Connie): And one final question, does this take a little pressure off
of the shave business to always have the next new product
ready to go in two yeas?
James Kilts: You see this great shave I've got? I've got the next new
product already. I mean, I'm ready.
A.G. Lafley: There's - no you can never take the pressure off innovation
leadership. I mean Gillette's business, and our businesses,
one of the reasons why two thirds of the brands of are leaders
in their industries is because they're innovation leaders.
So - now we put the pressure on ourselves. And our best
competitors put the pressure on us. This is an innovation, you
know, innovation is the life blood in this industry. That's
what keeps fueling the brand. Yes, sir.
Male: A question for A.G. Looking specifically at the Wella
integration right now, I know you've pushed off the cost
savings towards the back end of the three year program, I mean
now that the deal will probably close in the fall, are you
going to try and step that up ahead of time?
A.G. Lafley: Believe me, we did not push off the cost savings. We had a few
legal challenges and other challenges in the first year. I
think, as you know, the domination agreement was filed, and we
essentially, you know, closed the first stage of the
transaction in June. We actually began the real integration in
July, OK, of last year. We will complete the integration on
the retail hair care side, by the spring of this year. So
that's a total fold in.
We decided to run - the two fastest growing fine fragrance
businesses, and best performing fine fragrance businesses
happen to be Wella's and P&G's, we're merging them, OK. So we
keep the best of both. And then, frankly, we're learning and
we'll invest when appropriate in the hair salon business,
where Wella is number two in the world to L'Oreal.
In terms of the cost savings, we're still holding ourselves to
the commitment by the end of year three. What's happened,
obviously was the first year of legal and other issues, that's
what delayed, you know, the cost savings. We're not holding
back. As soon as we could operate, we're in there operating,
and we're in there trying to drive the cost synergies.
Male: Good morning, I have a two questions for Clayton. Clayton,
first one, this morning S&P put your ratings on the review for
downgrade of no more than one notch. How comfortable are you
that you will be able to convince them to maintain your double
A minus rating? And then, secondly,
aside from cash on hand, and very strong cash flow, how do you
plan to finance this share repurchase program? Thank you
Clayton Daley: We met with both S&P and Moody's this week. And basically
shared with them our initial projections, very initial on cash
flow and rations. And therefore, the announcements are totally
expected. What we'll be doing in the next couple of weeks is
getting in to that with them in much more detail.
And then, they will have to make own judgments, of course, as
to what ratings they'll assign to our debt in the short term
because the ratios do come backing double A line, in about 10
years. So the real question at the end of the day is whether
they will look through that, or whether they'll choose to
downgrade us, and that's of course, their call.
From a financing standpoint, this company obviously has plenty
of financing capacity to initiate the share repurchase program
that we discuss today. And so, you know, we'll be financing
our business as we always have with a blend of short term
debt, and then various maturities of long-term debt to keep
our debt portfolio in balance. And the dilution numbers that I
shared earlier, of course, do project interest rates will go
up over a period of years, and that's already baked in to
those numbers.
Male: Hi. I was wondering if you could talk about how important is
integration, and I guess, idea sharing in the R&D and
marketing side, towards getting your revenue synergies? And
how do you foster that? Or I mean should we think of
developing market synergies for Gillette as (building) sort of
a lion's share of the revenue synergies.
A.G. Lafley: Yes, I think you have to divide them in to two pieces. And the
developing market, and putting our customer business
development and operating, you know, country operating
organizations together. You know, those are pretty much, take
what you have plug them in the infrastructure, as Jim said,
and play stronger, all right.
In the areas of oral care, personal care, you know, women's
hair removal, of course, it's going to require a lot of
collaboration, a lot of what we call connect and develop. The
thing I feel great about is we worked real hard over the last
five years to change the culture at P&G in the R&D community.
And I'll, you know, oversimplified 10 years ago, P&G was an
invent from within company, strong R&D but we invented for
ourselves.
What we've tried to do over the last five years is become much
more of a connect and develop to accelerate on the innovation.
It's not about the headcount side. We've actually increased,
you know, maintained the headcount. It's about, you know,
getting more innovation productivity commercializing more of
your innovation, you know, from the same group of scientists
and researchers.
And I think, it's pretty clear we'll work with anybody
virtually all of our drugs are partnered. We're working with
at least two or three direct competitors, not in the areas
where we compete, but we work with (Unicharm) in Japan, we
compete like crazy with them in the disposable paper
businesses. We work together with them on certain
technologies, one of which we used in Swiffer. One of which -
one of ours which they're using in their home care products.
We compete with Clorox, on the other hand, if you saw the "New
York Times" article, you know, the (Flex Wraps) and the (Flex
Bags), those are our inventions, our patents. We take, what is
it Clayt, a 20 percent - we take a 20 percent minority share
of the joint venture.
We have 50-50 joint ventures in Italy and Spain and disposable
paper. We compete with the other party in some businesses, but
we ally with them, and it's all about innovation. It's all
about innovation, because you can never have enough
innovation.
So I'm very hopeful. I mean Gillette's got a very
collaborative culture, as I understand, and I think Jim has
encouraged that. And I'm very hopeful of that. I think
everybody is excited to get together and compare ideas. And
that will happen on the marketing side, too. Yes, sir.
Male: Many of the global food behemoths that have consolidated over
the last few years have found that increased scope and scale
have not produced the leverage with retailers that they had
hoped. And I'm wondering what your thoughts are about how
you're going to see that from this merger?
A.G. Lafley: You know, fundamentally you have to ask yourself whether
you're inherently a commodity business, or inherently an
innovation business. And I hope we've - I hope you've seen at
Gillette, I think we've seen, and Jim has helped create an
innovation engine, that's creates brands that are well
differentiated and command premium value.
We've tried to do the same. So it's just a different business
model. I think the food business model is different. And if
you just look at how private labels have developed over the
last 25 years, private label penetration in virtually every
major market is much higher, much higher in the food
businesses, than it is in the personal care, healthcare,
beauty care, and even household businesses.
Lastly, one of the reasons why we've been migrating from sort
of 30 percent plus of P&G's business in household and food, to
half of our business in health, personal care, and beauty care
is because we like the structural attractiveness of health
personal care and beauty care. And one of the drivers of those
industries is innovation. So I think it's fundamentally
innovation. You know, are you driven by innovation? Or do you
become more like a commodity over time.
Female: Hi, A.G., I guess, I understand how in the future there's this
convergence going on between personal care and healthcare. But
I guess, when I think of personal care, and healthcare, I
think of them as separate things.
So I wonder if this is a subtle strategy change for you
long-term? And what does this mean for your drug business? And
will that still be very important as this convergence
continues? Or is it going to be (minimalized) with your
importance?
A.G. Lafley: Well you have to remember, I mean our entire pharmaceutical
business is two billion plus, and a company of 55 billion
plus. So it's a business that we made an investment in. We've
had - we have the leader in its segment in Asacol. We the
number two brand growing fast in Actonel, but it's clearly,
you know, been a development business for P&G.
Second point, I've talked several times about the way we think
about healthcare. We don't think about healthcare as just
regulated drugs, so we don't just think about it as
pharmaceutical drugs or even over the counter drugs. We think
about what we call consumer healthcare, which is unregulated.
ThermaCare is probably the best example of that. And the last
thing I will say is if you talk to consumers, especially
women, there's clearly an overlap and a merging going on
between beauty care, personal care, and healthcare.
Last thing I want to say, I'm really looking forward to
working with Jim. We are both committed to meeting or beating
the commitments that we made to you today, and we're both
looking forward with real excitement to putting these two
world class leadership teams together, world class brands
together. And the sky is the limit.
James Kilts: Great to be part of the best consumer products company in the
world.
A.G. Lafley: Terrific, thank you very much.
END
Additional Information and Where to Find it
In connection with the proposed merger, The Procter & Gamble Company ("P&G") and
The Gillette Company ("Gillette") will file a joint proxy statement/prospectus
with the Securities and Exchange Commission. INVESTORS AND SECURITY HOLDERS ARE
ADVISED TO READ THE JOINT PROXY STATEMENT/PROSPECTUS WHEN IT BECOMES AVAILABLE,
BECAUSE IT WILL CONTAIN IMPORTANT INFORMATION. Investors and security holders
may obtain a free copy of the joint proxy statement/prospectus (when available)
and other documents filed by P&G and Gillette with the Commission at the
Commission's web site at http://www.sec.gov. Free copies of the joint proxy
statement/prospectus, once available, and each company's other filings with the
Commission may also be obtained from the respective companies. Free copies of
P&G's filings may be obtained by directing a request to The Procter & Gamble
Company, Investor Relations, P.O. Box 599, Cincinnati, Ohio 45201-0599. Free
copies of Gillette's filings may be obtained by directing a request to The
Gillette Company, Investor Relations, Prudential Tower, Boston, Massachusetts,
02199-8004.
This communication shall not constitute an offer to sell or the solicitation of
an offer to buy securities, nor shall there by any sale of securities in any
jurisdiction in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of such jurisdiction.
Participants in the Solicitation
P&G, Gillette and their respective directors, executive officers and other
members of their management and employees may be soliciting proxies from their
respective stockholders in favor of the merger. Information concerning persons
who may be considered participants in the solicitation of P&G's stockholders
under the rules of the Commission is set forth in the Proxy Statement filed by
P&G with the Commission on August 27, 2004, and information concerning persons
who may be considered participants in the solicitation of Gillette's
stockholders under the rules of the Commission is set forth in the Proxy
Statement filed by Gillette with the Commission on April 12, 2004.
Forward-Looking Statements
All statements, other than statements of historical fact included in this
release, are forward-looking statements, as that term is defined in the Private
Securities Litigation Reform Act of 1995. In addition to the risks and
uncertainties noted in this release, there are certain factors that could cause
actual results to differ materially from those anticipated by some of the
statements made. These include: (1) the ability to achieve business plans,
including with respect to lower income consumers and growing existing sales and
volume profitably despite high levels of competitive activity, especially with
respect to the product categories and geographical markets (including developing
markets) in which the Company has chosen to
focus; (2) successfully executing, managing and integrating key acquisitions,
including (i) the Domination and Profit Transfer Agreement with Wella, and (ii)
the Company's agreement to acquire The Gillette Company, including obtaining the
related required shareholder and regulatory approvals; (3) the ability to manage
and maintain key customer relationships; (4) the ability to maintain key
manufacturing and supply sources (including sole supplier and plant
manufacturing sources); (5) the ability to successfully manage regulatory, tax
and legal matters (including product liability, patent, and other intellectual
property matters), and to resolve pending matters within current estimates; (6)
the ability to successfully implement, achieve and sustain cost improvement
plans in manufacturing and overhead areas, including the success of the
Company's outsourcing projects; (7) the ability to successfully manage currency
(including currency issues in volatile countries), debt (including debt related
to the Company's announced plan to repurchase shares of the Company's stock in
connection with the Company's pending acquisition of The Gillette Company),
interest rate and certain commodity cost exposures; (8) the ability to manage
the continued global political and/or economic uncertainty and disruptions,
especially in the Company's significant geographical markets, as well as any
political and/or economic uncertainty and disruptions due to terrorist
activities; (9) the ability to successfully manage increases in the prices of
raw materials used to make the Company's products; (10) the ability to stay
close to consumers in an era of increased media fragmentation; and (11) the
ability to stay on the leading edge of innovation. For additional information
concerning factors that could cause actual results to materially differ from
those projected herein, please refer to our most recent 10-K, 10-Q and 8-K
reports.