Edgewell Personal Care Co (EPC) 2002 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Playtex second quarter earnings conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session and instructions will follow at that time. If anyone should require assistance during the call, please press star then zero on your touch-tone telephone. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference Ms. Laura Kiernan. Ms Kiernan, you may begin your call.

Good morning, everyone and thank you for joining us today. I'm Laura Kiernan, Director of Investor Relations. And with me is Mike Gallagher our Chief Executive Officer and Glenn Forbes our Chief Financial Officer.

I'd like to give you some background on myself for those of you who don't all ready know me.

But before I do, I'd like to remind you of the cautionary language about forward-looking statements contained in our press release. The same language applies to any comments made by management during today's call. We encourage you to read the company's SEC filings and last evening press release which discusses in full factors that could cause actual results to differ from those made in any forward-looking statements.

I joined Playtex in June as the Director of Investor Relations. And I came from Revelon where I served as the Director of Investor Relations for two years and Manager of Corporate Finance and Treasury for three years. I also worked for Philip Morris in various finance, treasury, and accounting roles for six years. I'm a CPA and have an MBA in both finance and marketing from NYU.

I'm very enthusiastic about being here at Playtex. I look forward to speaking with many of you in my role as the primary investor contact at the company. One of my key objectives is to enhance the communications process and to be very proactive in reaching potential new investors with the terrific Playtex story.

I spent much of my first two months at Playtex meeting with literally dozens of people including all members of senior management and several people in finance, marketing, sales, operations and research and development. I visited our facilities in Dover, Delaware and in Allendale, New Jersey. And some of the things that jumped out at me as someone new to the organization and one that has had the chance to spend a lot time with employees of Playtex are things that I think most of you all ready know about Playtex but I want to reiterate them today.

They include - first I've been so impressed by the organization's focus and alignment around key strategic priorities. The ability to focus an organization and have a vision permeate and live throughout the organization really shows here at Playtex. This consistency in alignment and direction over the past several years is a key factor in Playtex's ability to delivery consistent results and to compete effectively.

And secondly, Playtex employees are very passionate about what they do and they work as a cohesive team to get things done. They are constantly trying to improve things to stay one step ahead of the competition. And this is not only evident in their drive to constantly create new product but also in their drive to improve all process internally. And I have seen this consistently across various functions and locations at Playtex and it's very refreshing.

Now to recap yesterday's press release we reported ongoing operations for the second quarter of 2002, net sales were 201.6 million versus 198.4 million, up two percent. Operating earnings were 48.5 million versus 47.6 million last year. EBITDA was 52.2 million versus 51 million last year, and earnings per share, per diluted shared was 32 cents versus 27 cents for the second quarter of 2001.

The earnings figures presented in this recap are excluded - are excluding extraordinary losses related to the early that in both the second quarters of 2000 to - of 2001 and as adjusted in the prior year for the new intangible accounting rule. We have provided a full reconciliation within the statement of earnings.

Glenn will cover each of these items in more detail during the financial portion of this call. Now I will hand it to Mike for his comments.

Thanks, Laura. I appreciate your perspective. And welcome to Playtex, we look forward to your contributions. This morning, I will briefly summarize the results of the quarter and reiterate the outlook for the year, provide additional new product news and elaborate on a proactive initiative we have under taken in our Sun Care business.

As an overview, let me start by saying that we are very pleased with the overall results of the second quarter. The results essentially played out as we expected. The business fundamentals remain solid and we are beginning to see the impact of many of our new products on the trends of our business. During the quarter, total company net sales were up two percent versus year ago. Feminine care was up seven percent. Infant care was up three percent. Sun Care was down seven percent and household products, personal grooming trailed .

What we see going forward has not changed. As mentioned in our press release we expect earnings per share of 88 to 90 cents for the year. Based on our consistent view of the operating trends and continued stability in the interest rate environment, we are comfortable with the outlook. Let me go through the highlights of our business segments starting with feminine care.

Internet sales were up seven percent for the second quarter to $67 million. We look at our market share for tampons. The share was 30.4 for the quarter versus 30.3 a year ago. Retail take away for tampon category was about flat down 0.5 percent. Playtex tampon consumption was up one percent. Our tampon business remains strong as evidenced by the share in consumption results. We have seen improvements in our feminine care volume this quarter due primarily to tampons but also due to personal cleansing which we introduced last year, and continue to steadily to see progress as the number one brand in a small but growing complimentary segment.

We are excited about another new product that fits very nicely with our tampon franchise. Playtex therapy which is just being launched. We began shipping in June and it will begin to appear on shelf later in the third quarter. This product provides women suffering with menstrual pain a discreet method to sooth pain with a comforting heat patch that lasts for 12 hours. The path can be used anywhere the body has pain or aches. And is the only heat patch sold in the feminine care isle. Consumers responded very positively to this product in our research.

Turning to infant care, total infant care sales were $74.1 million for the second quarter, versus 71.8 second quarter year ago, up three percent. If we take out the baby wipe segment our infant care sales were up six percent.

We are beginning to see the impact of our new products on the infant care shipment trend including our insulator cup, new baby magic items and the Diaper Geanie toddler . A few highlights are as follows. We remain excited about the prospects through the insulator cup where full distribution was achieved in the second quarter. And we also began running our adds. In drug accounts and teen mass merchandisers where early distribution was in place, the initial movement results are very encouraging.

The new foaming items in Baby Magic Line introduced late last year have stabilized our share position. This helped set the stage for another new product addition to our line up. We just began shipping Baby Magic Calming based products including a foaming bath, bath lotion and massage lotion.

These products are formulated with skin nourishing health proteins and a calming fragrance of mild lavender and chamomile. Within baby toiletries, the calming segment is growing rapidly. Initial trade acceptance of our calming line has been extremely enthusiastic.

continue to gain in consumption up 7.3 percent in a category growing at 21.8 percent for the quarter. There have been several new entries that have driven the category, though no single competitor has yet to achieve the significant volume level. We have a very strong display presence in the important summer season for hands and face wipes which in the past has been a key driver of volume for .

The disposables category is still soft overall where we have a dominant share of 85 percent. However, we are starting to see the beginnings of improvement in selected accounts behind our updated packaging, new advertising and repositioning of the brand as the best supplement to breast feeding.

Turning to Sun Care. Our margin share for Sun Care to day is 22.2 percent versus 21 percent a year ago. Retail take away for Playtex was up 5.4 percent while the overall category was about flat. We are very pleased with our share gains and consumption trends so far this year. Our share growth is primarily driven by the new products for the 2002 season especially Vita-Skin and indoor tanning.

Sales for the quarter are below prior year at $38.5 million versus 41.2 million a year ago, including 3.3 million to increase our returns accrual for late product returns. A few accounts unexpectedly returned inventories they'd usually keep over the season. The final processing and reconciliation of prior season returns was just completed during the quarter.

Excluding the impact of this adjustment, shipments for the 2002 season are $92.4 million versus $89 million last year for the six month period up four percent. As we go forward, we are taking a very proactive approach to managing late season inventories or retailers in order to significantly reduce returns. As this business has grown year-after-year the cost of returns to the business as well as the inventory impact of returns to both us and retailers has become a significant factor.

With collaboration and information sharing with key accounts and enhanced methods of tracking inventories and consumption, we believe that we will be able to drive cost out of the system in the long run. Further, we are seeking to better alight shipment patterns with consumption patterns for next season which we anticipate will reduce our early season shipments in the fourth quarter of this year and increase them by corresponding them out in the first quarter of 2003. The combination of the collaboration with accounts and the ongoing desire to reduce inventories together with advancements and our ability to service the business through our distribution channels makes this a viable approach for the upcoming 2003 season and beyond.

We also just announced our line up of impressive new products for the 2003 Sun Care season. While we are still enjoying the sunshine of this summer, a few account presentations have all ready taken place for next year. We are introducing several exciting product offerings. For instance, we are combining the heritage of Baby Magic and Banana Boat with three skews for the baby protection segment. In addition, we are introducing Banana Boat which are lotions combined with botanicals lavender and chamomile to enrich the skin while providing protection from the sun. New extensions to our 2002 new products include a Vita-Skin , , and sunless tanner as well as a new indoor tanning skew which provides a cooling sensation while you tan. Trade response to all new items has been out standing.

A few comments about Woolite. Where consumption trends are very strong for the quarter with a 12 percent increase over a year ago. And we have each the share level of 23.5 share points versus 21 a year ago. Like many of our core businesses, these results are being driven by innovative new products, in this case Woolite Power Shot which was launched late 2001. We have just announced another exciting new product Woolite which began shipping July and will be on the shelf late in the third quarter. This product is formulated with an oxygen activated system that removes the toughest spots and stains.

In summary, we have a strong quarter, and we believe the outlook for total year remains unchanged. As we have discussed in virtually all of our calls, we believe that new product innovation is the key to our success in the market and enables us to compete effectively. We are beginning to see the positive impact across portfolio. I have also identified the new product editions for the 2003 Sun Care season, plus three additional new products that we have introduced since the last call, heat therapy, Baby Magic calming products, and Woolite .

We continue to focus our resources on this important area. Relative to the initiative we are taking in Sun Care, there may be some short term impact on our 2002 results as we strive to reduce returned costs. Especially in shipments during the upcoming third quarter which is the lowest and least significant of the Sun Care quarters as well as in the fourth quarter as we ship early season orders into 2003. As always, we are committed to doing those things that benefit the business in the long-run.

Glenn, will you now provide the financial overview?

Thanks, Mike. Good morning, everyone. I'll briefly cover the second quarter financial highlights and reiterate guidance for the balance of the year, which is unchanged in the aggregate from what we have previously discussed. As a reminder, we also announced on May 29th that we have completed an opportunistic re-pricing amendment to our bank agreement and paid down $21.9 million in bank debt at the time.

We continue to have very strong support from our lenders. And we're able to benefit from the favorable market conditions. The lower pricing on our bank debt will save us approximately $1.5 million this year and $2-and-a-half next year as a result of this amendment. During the second quarter, we reported EBITDA of $52.2 million, up two percent from year ago following the overall sales trend. Gross margin improved to 56.5 percent and from 55.7 percent from favorable product mix and favorable cost conditions, as well as a continuation of effective cost controls.

SG&A expenses for the quarter were higher than - by about 3.7 percent. Other G&A expenses reflect a normal year-to-year level of inflationary increases of three to four percent. And our promotional expenses on a cumulative, six month basis have basically been in line with historical trends and the percent of sales.

Our total debt is currently $850 million down by 38.8 million from year end 2001. In addition, we had a cash balance of 39.9 million, no borrowings under our revolver. And available borrowings under our credit facilities of $122.8 million. Our accounts receivable facility borrowing was at $68 million for the quarter. Our accounts receivable DSO are basically inline with past trends for this time of the year. And there's clearly an impact as a result of the seasonality of Sun Care. And it remains in our balance and we'll work through the process over the course of the third quarter. Inventories of 74.5 million is basically inline with our normal weekly supply of roughly 14 weeks.

2002 guidance the outlook remains the same in the 88 to 90 cents range. This incorporates the positive impact of interest from the bank amendment. And in addition it reflects a potential shift of Sun Care shipments from the fourth quarter of this year into the first quarter of 2003.

Sales, we'll continue to target low single digit growth for the total year. Feminine care at the upper end of the range and all others at the lower. We anticipate the increase. It should be in the mid single digits range for the remaining second two quarters, third and fourth. And with the Sun Care initiative to reduce trade inventories that Mike covered, we expect minimal third quarter shipments and a reduced level versus year ago in the fourth quarter.

Our margins, we expect gross margin to continue to be in line with or slightly ahead in the year ago range as it has been on a cumulative basis for far. And SG&A, we expect it grow at about the same rate as sales, perhaps a little higher as our second half support behind feminine care, heat therapy, some of our intra care will be a little stronger in the second half of the year than in the first half.

From and interest point of view, depending upon interest rates which have been very stable so far, we should expect approximately $16 per quarter in interest and other expense. And this includes the impact of the amending price - the amended pricing to the bank agreement. Earnings per share over the next two quarters, the third quarter should be in the range of 12 to 14 cents as noted in the press release. And the fourth quarter would be in the range of 13 to 15 cents.

As in the past, we will continue to focus on generating cash and applying it to repay debt. We expect a reduction in debt for the year in the 40 to $45 million range for the total year. A replay of this call will be available beginning this afternoon and will run through the end of the day, Saturday July 27th. The replay dial in is 703-925-2533. And the pass code is 6065113. To access the Web cast replay of this call please go to the investor relations portion of our Web site, www.playtexproductsinc.com.

, could you please begin the Q&A session?

Thank you. If you have a question at this time, please press the one key on your touch-tone telephone. If your question has been answered or you wish to remove yourself from the queue, please press the pound key. Again, if you have a question at this time, please press the one key.

Your first question comes from of Deutsche Bank.

Good morning.

Hi, .

Hi. Congratulations to you guys and to Laura as well. I think it's a great addition.

Thank you.

I just wanted to double check on the SG&A as a percentage of sales line, Glenn. It's slightly up. G&A you mentioned was down. So it that promotional expenses that were a little bit higher than support this quarter?

No, I think it's the other way. The brand support has pretty much been in line as a percentage of sales with the history. And the SG&A has gone up in the three to four percent which is, you know, pretty much inflationary levels of increase while the sales for the first half of the year have been relatively flat. You know, we've continued to invest in our programs. And as we've talked in the past, we've beefed up R&D a bit and spending behind technology. And, you know, we continually expect our base SG&A to go up, you know, in the three to four percent range over time.

OK.

I think we should also say that we expect the second half SG&A to go up a bit more than historical levels.

Right. Because of the support levels behind tampons. We'll start advertising heat therapy. Have more of our instant care support, particularly reusables in the second half of the year.

It's really hard ...

It's likely to go up a little bit.

It's our intention to see that go up a little bit in the second half of the year for a temporary period of time. And then we'll get back to more normal levels in 2003.

OK. My second question is on the feminine care side, you know, your market share is doing well obviously. The question is concerning P&G's introduction of the Tampex I wanted to, you know, get your reaction to that, that really focusing sat on the premium end of the market which is where you guys play.

Right. Reaction in what way?

Well are you concerned? Are you not concerned? And, you know, either way, why?

Well I think any time a major player introduces a new product we take it seriously. But we've been preparing for this for some four years now. And we're more than amply prepared. The idea is one that actually traveled with the acquisition to P&G and so we've known about it for a long time. The concept tested quite some time ago. We've tested their product since it's been introduced in mini market that they're in. Test the concept that they're selling it under.

I'd say probably we know as much about the product as anyone other than perhaps P&G. In some cases, maybe we know some things about it they don't know. We are taking it seriously in that we have beefed up our promotional programs in order to support our brand and give our consumers ample opportunity to have a good supply of Playtex tampons or the introductory period of the brand.

We have added some media weight but we all ready had acceptable levels of media. We have made some modest changes to our advertising message to consumers. And we will be making some modest changes to the announcement area on our packages. And there will be other things that we plan to do in the future that I can't discuss. We monitored the mini markets, the three that we can. The product based on our read came out just about where we thought it would which is essentially somewhere between a four and a six share brand. Virtually none of it incremental to Tampex. And during that period we great quite nicely both in share and consumption in those accounts that we were able to read.

We are working with the trade to help them make decisions from a standpoint as to where should go in the section. And how many of the six SKUs that are being offered should be accepted. We know that P&G is probably very disappointed with the results that they saw in the mini market. That certainly doesn't warrant the amount of marketing support that they claim they're going to put behind it.

We've actually sued P&G in the Cincinnati courts over infringement of a patent that we have owned for some 16 or so years where we believe they've infringed a finger grip patent that we have had. And our intention there is basically to see that they wait until that patent elapses before they put the product proudly in market. That should be resolved soon.

We've modified our message slightly in our advertising as I've indicated basically to indicate that the product we provide our consumers is the best possible product for their purposes as a reassurance. The concept tests that came back were not that significant for the brand. And our product testing showed that we have major advantages in key areas that we plan to remind consumers about as we go forward.

So all in all, we take it very seriously. The - we are very ready. And our sales organization and marketing team are eager to show their capabilities in the battle field over this one. We're very encouraged. We see this really as a recognition by P&G that the traditional basic tampon product that has been in the market for so long is antiquated. And that they need to move forward with new offerings. We like the idea that they imitate us by moving to plastic applicators and deodorant tampons. They pretty much imitated most of the actions that we've done in the marketplace historically, but it hasn't gained them much.

Right.

In the long run if we're as successful as I think we will be, this is our opportunity to see Playtex tampons become number one in the marketplace, and that's our goal.

The, you know, when they say they're going to disseminate this broadly into retail Mike, from your standpoint, what timeframe do you think that's going to happen.

Well they should begin shipments to the trade at the end of August. They should be broadly on shelf by mid October to late October. And their marketing activity should begin about that time. I think that's - I think that's what you were asking about?

Yes. Thanks. I have just two more questions. One for Glenn, the guidance that you gave us Glenn in terms of, you know, feminine care being up. And you mentioned the others are going to be down, I was wondering if you can for us Sun Care particularly because you have a timing share obviously because of the initiatives you're taken in the second half of the year. Should we look at Sun Care to be, you know, down in excess of call it five percent in either Q3 or Q4 or both?

Q3 is a very small period anyway.

Right.

Last year, I think we reported $2 million in sales. So that, you know, that could be a percentage but small numbers, again very small. And we expect minimal shipments there.

And in the fourth quarter, last year, we did 16 million. You know, it could be off, you know, measurably from there. A couple of million dollars. You know we're talking about shifting, you know, three to $5 million in the next year so that clearly could be down.

OK. And lastly, the 45 million, the leveraged number you mentioned, or debt pay down you mentioned Glenn, you mentioned it to be for the year.

Right.

I just want to make sure I'm understanding this right including the close to $22 million you've all ready paid down?

Exactly. We're talking end of year 2001, to the end of the year, 2002.

OK. Great. Thank you very much.

You're welcome.

Thank you, sir. You next question comes from of Vista Capital.

Thank you. Good morning. Just one question, what kind of growth are you expecting in your personal grooming products portfolio in the coming quarters?

I'm sorry. We had difficulty hearing your question.

OK. What kind of growth are you expecting in the coming quarters for your personal grooming products portfolio?

OK.

In personal grooming, you know, we said that all of the other brands with the exception of Sun Care would be in the low range for the year, you know, low single digits. So that's pretty much what we're expecting here. Again, those are relatively modest 10 million and 11 million per quarter. So, you know, the growth on that can be a small or a big percentage depending upon how it plays through. But we're not expecting high growth out of them at this particular point in time.

Thank you.

Thank you. Your next question comes from of Lehman Brothers.

Good morning.

Hi, .

I just wondered if you could comment on the - you must be happy about the progress of , I know you've highlighted it. But it looks like you've actually kind of put in double the level of cups that you lost in the cup which looks like it's a better run rate than you might have gone into the quarter thinking about ...

is a success, it's a big success and we think it's going to be a long-term success. It's added to the total cup share in the key accounts that started with the promotion of the item and got into distribution fastest. And we're expecting to have continued impact in the later distributed accounts and segments.

It's - based on our Nielsen read it was a 12 share in the most recent period, 12 share of overall cups which is - makes it a winner all ready. And we have yet to see the full impact of its full distribution and support.

It's everything we wanted it to be and possibly more. We're very pleased with this. And, we think that it is the kind of invigoration to our cup business that we basically have been saying we were waiting to implement in the marketplace.

Great. And then can we just walk through the Sun Care selling terms? My previous understanding was that your September quarter was generally the quarter that you saw most of the returns from the prior, current - same year sell in. So I'm surprised we're getting a return from last year's selling season effecting this quarter. And then I'm also wondering, you know, if some of your moderate forecast for Sun Care is because you're still getting returns or you're worried about some of the sell in you've all ready had from December and March quarters?

Yes, that's not really the case but it's - I'm glad you asked the question so we can kind of explain to everybody how our Sun season works. First of all, from a shipment standpoint, historically, the big quarters have been the first and second quarters. And the big consumption quarters have been the second and third quarters. So obviously, you have a lead time on getting the product into the marketplace and up on shelf in preparation for the Sun season.

At the end of the season and that varies by market, some of the southeastern markets much later than some of the northwestern markets for instance. They take down the Sun care set which includes basically products off the shelf. And they're and sent off to a center. The product in the warehouse which is still in cases is also sent to that center. So you have all of the Sun care product coming in from various manufacturers, all mixed together into an outside vendor who basically his purpose is to take this product, sort it out. Clean it up. Throw out the bad product. Repackage the good product and send it off to the manufacturer's distribution sites.

The accounting for that also lags. From an accounting standpoint, we're required to accrue an estimate of what we think based on historical percentages the returns will be against product that is ordered and shipped during the season. And then flips and takes are done as the final results come in. And in many cases, we're not getting returns from accounts until January or February, March even. And the accounting doesn't get to us until the middle of the second quarter which is essentially the case here.

What we want to do as we go forward, and Glenn you may want to make some other comments around that before I go forward.

No, you're on the right path.

OK. Thanks. I like to hear that.

Just like I explained it to you.

Good. What we want to do is take a little more control over this. And, you know, with - it's been kind of a blunt instrument approach. We feel that in order to make sure that all aspects of the trade have all of the SKU's that they need that consumers are going to want during the very peak season when product just flies off the shelf. You have to in essence push as much product out to the trade as you possibly can for the filler warehouses to fill their shelves and to be prepared for any one item to take off like wildfire. And then you take things back at the end of the season.

What we want to do is try and control this a little bit more by using our models to predict based on historical pattern which accounts will need which product at which time. And to encourage them to ship the product back sooner rather than later, so that we can essentially overall have less inventory carried by us, less inventory carried by them. And must fewer returns in the system, because returns are very expensive. The handling cost on returns, the scrapping of products. And the selling off of discontinued items to low cost retailers is an extremely expensive proposition not to factor in the cost of carrying inventory.

So what we want to do is see our overall volume to each account be managed on an individual basis based on historical patterns of consumption and shipments and returns. And by doing that, we should see the profitability of Banana Boat go up. And we should see the shipment pattern of Banana Boat more inline with the consumption patterns that we have seen over the years which have been up every year since we've owned the brand.

And Mike, can you just give me a refresher, wasn't last year, a better selling season than the prior year? And if so, why would returns really have accelerated this year?

Well, you know, that's a great question. And that's probably the most frustrating thing that I've experienced. We had a late start to the season last year. But once it started it caught fire. And the key months of heavy consumption took off. So that overall our business was up 10 percent from a consumption standpoint. But our shipments were relatively flat. And that's because the shipments represent a lot of product that also includes our international sales as well as product that we discontinue and sell at a lower price.

And, on top of that a couple of accounts who ordinarily maintain their inventories over the off season decided to return product to us . And that accounted for the larger increase than we have anticipated.

OK. And then separately and probably related, but can you just comment on the trade terms? Or your cycle of working capital? It just looks like it continues to worsen.

Yes. Obviously we've been responding to that question for several periods. We've gone back as a result of that and really analyzed our receivables again for the past two years by month. And the conclusion that we continue to draw is that we've got a very effective collection and control process with our accounts. We're very pro active. And that what makes our receivables fluctuate and will always make it is the Sun Care impact. It's a little hard to isolate but it's clearly the driving force because you have, you know, you have returns that are involved. You have a disconnect between, you know, we have to provide for them.

And, you know, basically it's going to drive the numbers depending upon when you collect it. The terms with Sun Care extended. One of the most popular ones is you pay for 70 percent of your opening order on June 15th and 30 percent in - on September 15th. And that's historical and traditional in this industry. And so we have a tremendous amount of collections between June 15th and July 15th. And depending upon when they come, when the product got shipped, how much we have to chase them. We can have some volatility particularly in the second quarter of the year, and that's what we've seen.

So, you know, it's very hard to predict with great accuracy. But our analysis continues to support the fact that we have a solid, you know, portfolio of receivables. That's also validated by the controls and the evaluation that's in place by a third party who manages our accounts receivables facility. But the Banana Boat, the seasonality of it plays havoc with the predictability.

And what's happening on the payable side?

Well the payables, there's nothing fancy there. We have very standard terms with our suppliers. And, you know, just depending upon what you buy and when you buy it and when it comes due that, you know, that's - you know it's not very predictable either. Again, it depends upon, you know, the timing of what's flowing through the system. Again, we've reviewed that as well.

And obviously, from a cash management point of view over the years we've been very, you know, proactive in trying to manage our cash and been very effective at it. But the payables will just bounce around depending upon the flow of receipts and invoices.

Let me jump in her and assure you. I mean we have basic terms for our business which have not been changed and have not been extended. Our Sun Care terms have not been changed and have not been extended beyond what we have historically run. And the only products that we offer any extended terms are the Sun Care season and are new items that we introduce which is basically a traditional activity for most consumer packaged kids companies.

So there's nothing that's there from the standpoint of inducing people to buy more on the basis of better terms for extension of terms at all.

Is there any mix shift going on? Channel mix shift that's creating some of this?

No our terms are consistent across channels.

OK. Thank you. I know I've taken a lot of your time.

Thank you.

Thank you.

Thank you. Your next question comes from of Goldman Sachs.

Good morning. A couple of things. First of all on feminine care, can you break down for us what kind of - if you take the seven percent growth how much of that was tampons, how much was the contribution for wipes and how much was the sell in from the pads?

I'm not sure we actually go that deep into our segments. Glenn, have we done that in the past?

Not in the past.

OK.

A couple of percent versus the other products.

So tampon was up maybe five percent?

you're terrific. Let's say this, our tampons are up nicely. I'm going to help you but I don't want to break the pattern here so that we have to start doing this for each one of our segments. How about this, of the increase we saw in feminine care, two-thirds of it, two-thirds?

Yes.

Well it's from tampons.

Right.

Perfect. Great. That's very helpful. My second question is just on Sun Care and I know you've spent a lot of time on this all ready so I'll keep it brief. But what I'm hearing is very similar to what I've been hearing in the past several years from you that, you know, you're shifting shipments from the second half of the prior year to the first half of the following year.

And so I'm not really clear on why this is different what you've been talking about for say the past three to five years.

Actually, it's just the reverse of what we've been saying. We actually have been moving product shipments into December in order to make sure that the trade had adequate inventories. And that we were able to satisfy them by the time the season started. Because we have such a crush of volume that occurs in the first quarter that we almost - we had to extend it out. Some aspects of the trade wanted to start their opening shipments earlier and that became a growing trend.

What we really think we can do now given our capabilities from a logistics standpoint is to satisfy that greater need closer to when the product is consumed. And we want to see that happening. At the same time, we want to monitor the shipments, and the orders - rather the orders that we get to make sure we're not loading up any one aspect of the trade with too much of one thing. So that at the end of the season it comes back to us and we want to have more collaboration with the trade. So what that we're sending them is a better mix of product based on their history and pattern of performance against various SKUs. And give them more advice even when it's not requested so that we can end up with lower returns at the end of the season .

The lower returns benefits us significantly more than it does the trade. Their handling costs should down, but at the same time a lot of those costs were passed along to us. But we do believe that they'll - excuse me - we do believe that they'll be very interested in seeing a more efficient approach towards handling Sun Care by our involvement in this way.

So in essence this is really kind of a different pattern than we've ever talked about in the past.

What was the catalyst behind the change?

The catalyst is we're just tired of seeing this growth in the returns an the expense of the returns. And we think that if we do this prudently, in the past, we've always been afraid that we wouldn't be able to satisfy the trades with all of their needs. That we'd end up running out of stock in the key selling period, the key consumption period with inadequate inventories at store shelves and in trade warehouses.

Now we think that with the tools that are available to us and our distribution capabilities that we can actually manage that better without going out of stock. It's a fine balance. What we don't want to do is trade lower returns for impacted consumption. What we want to do is maximize consumption and at the same time minimize returns.

So then if I'm understanding this correctly, when you report your third and fourth quarters, shouldn't we see receivables down year-over-year quite significantly because of the Sun Care shift?

It should have a very minimal impact on receivables because, like we said, we only did $2 million last year in the third quarter, and we did 15 million in the fourth quarter. So if the numbers are one and 12 it's not a big difference on receivables. The receivables impact is primarily in the first and second quarters because that's when the dating and the seasonality of the receivable trends is most impactable.

So then in the first and second quarters of next year will we see receivables go up even more?

I don't think it's really going to be related to the receivables that much.

Explain why.

Because we'll still ship a strong amount of product in. And with the Sun Care season growing, you know, the business growing I think it will still be a significant impact. And what we hope to impact is not necessarily the shipment in but more importantly the returns factor. And the returns really doesn't impact the receivables in the first half of the year because that's accrued as an offset in another - as an accrued liability basically.

Right. But if you're shipping more product in in the first half of next year than you did the first half of this year, then presumably your receivables go up, you know, and then you get paid.

Yes. And we normally would expect to see that for the most part in line with the overall shipment trend of the total company. But clearly, the Sun Care will bounce it around a little bit as it always has.

What we really want to see is lower gross shipments and lower returns for a higher net shipment. So that's what we can accomplish which I think we will be able to do very well. And it shouldn't have major impact.

OK. I may - we may follow up with you afterwards. But just one last question. If you exclude the benefit from goodwill your operating profits in the quarter were up about two percent and the margins were about flat. Can we look for that to start to improve over the next several quarters? And if so, you know, what will the drivers be? And if not, why not?

Well I think that the comments we made about SG&A in the second half of the year with the support levels going up. I think we'll continue to see a relatively flat margin overall particularly through this year. And then we would expect, perhaps next year, you know, in this - in that time period to start to see an improved margin percentage.

What would drive the improvement? I mean are there any cost reduction programs? Is it just that the comps will be easier.

Well, you know, first of all, I mean we just talked - spent about 15 minutes talking about a major cost reduction program. This whole Banana Boat returns things is a huge cost reduction program that should save significant amount of cost. We closed a plant and we announced that last quarter as a major cost savings. We have ongoing cost saving programs in our plans that turn up significant amounts of dollars every year.

And depending upon what's going on in the business we can choose to either put that against the business in order to drive market place results or let it flow to the bottom line. We choose in the next six months to see that support the business as we aggressively defend our tampon business and launch some new products.

OK. Thank you.

You're welcome.

Thank you. Your next question come from of Salomon Smith Barney.

Hi, .

Hi. I just want to follow up on question about the feminine care business. I think you said retail take away in tampons was flat. But from the answer to her question your shipments were up about five percent. And if I look back in my notes from the first quarter, there was a similar four or five point gap between your shipments being higher than retail take away. What am I missing there? I guess I'm a little bit nervous that in the third or fourth quarter we're going to hear about retail inventories in tampons being too high and having to destock.

Well we use Nielsen. Nielsen is not terribly precise. It doesn't necessarily cover all outlets, particularly on a product like tampons which is - can be found everywhere. The bias would be towards under coverage. Also, Wal-Mart which is a significant factor is not read at all at Nielsen. And we do real well in Wal-Mart.

And clubs.

And clubs where we have had significant success. So there are a number of outlets that - so this probably only represents I'm going to guess maybe at best 60 percent of our overall - the overall consumption of the marketplace. And these other non included factors probably are growing better than the rest of the monitored segments.

But there are, I think, fairly good indications form a relative standpoint. In other words how is one brand doing versus another brand which is what's happening to the share because it's large enough to read that. And generally what's happening relatively between brands is happening pretty much everywhere.

So the receivables, if we knew what the receivables were by business line you wouldn't see receivables up significantly in the feminine care business that's fair to say?

Well you wouldn't see them up as the days out standing because they're under our standard terms. But obviously, as the business has grown, the absolute balance grows as well.

Fine. But there isn't any, you know, funny stuff going on with you offering favorable terms to the trade or anything like that?

No.

I've all ready said that. We're not - we've not offered - we do not offer extended terms on our standard brands.

OK. Sounds good. Thank you.

You're welcome.

Thank you. Your next question comes from of Bank of America of Securities.

My questions have been answered. Thank you very much.

That was an easy one. Hello?

can we move to the next question?

Sorry. Your next question comes from of Lehman Brothers.

Sorry. Just a quick follow up, Sun Care related. Can you tell us what the period that the retailer is allowed to return is? In other words, how long after the selling season can they still be returning through the third party?

Well historically we've allowed them to return without any cut off date. We are moving to encourage them to return by the end of January. And what we're doing is we're moving to meet with the retailers who have - we have pretty good data now that we haven't had several years ago as to which retailers are returning late and how much. So we're now working with those retailers to get down to move the product through their system more aggressively than they have in the past.

And just on the accounting as it comes back into you, can you walk us through. Is it being put back into inventories?

The product?

Yes.

A certain percentage of the product is discarded.

That happens at a the third party level, right.

Yes.

That happens at the third party level.

And once it goes back into our warehouse for return, absolutely it goes back into our inventory.

At cost finished goods levels.

Sure.

OK. Perfect. Thank you so much.

Thank you. Your next question come from of JP Morgan.

Actually that's . Hi everybody.

Hi, .

I just had a couple of questions Mike, first of all, on feminine care, you know, it strikes me that you're starting to broaden out the product line a little bit with the wipes first and now the heat therapy pads. And I'm just wondering whether you see some additional opportunities there? And how you assess the market sizes for these new add on products?

Well we think this is a terrific opportunity for us to expand our business in the feminine care area. We did it first with our personal cleansing cloths. And now with heat therapy both being housed right in feminine hygiene particularly next to tampons. We think this strategy is one that we can continue to still influence. We think it makes a good destination for consumers and easy shop for women who are going to the section and they're going there once a month.

Products that are used essentially for menstruation purposes and ancillary purposes. Given the consumer an easy opportunity to try these products and see the benefits of them. It is indeed our strategy that has worked out very well. We have a small but growing personal cleansing cloth business that we think over time can be a very, very nice business. It's got a good margin to it. It's a terrific product. We are the leader in this small segment now.

And we think in the heat therapy we'll be - we'll clearly be the only heat pad in the segment. Not the only one in the marketplace but the only one in the tampon and feminine hygiene segment. And this product could be a homerun. The women who have tried this product rave about it and cannot seem to do without out. We believe that with ample trial and sample of this product it could be quite a big business over time and we're very pleased with it. We're planning on advertising it fairly aggressively in the second half of this year. And sampling the product where we can affordable do so particularly on our - in our tampon packages.

And over time, we'll be looking for other products that we can introduce in the segment.

I'm just wondering how you would compare the selling proposition of the heat therapy product with P&Gs ? I mean I recognize they're not merchandized in the same aisle. But how do the products compare from a feature standpoint and a price standpoint?

OK. P&Gs product is housed in the analgesic segment. It's priced a couple of a dollars a box higher than our retail. Our retail will be approximately 4.99 priced equally to our tampons. You'll get three heat patches for the 4.99. So from a retail standpoint it's significantly less than the thermacare product. It's more accessible to the user. And readily available to the user by being in the feminine hygiene segment.

Also it's developed with the consumer in mind. In other words, it's a thinner pad that still generates heat up to eight to 12 hours. And so it can be worn discreetly outside the home. And it's not bulgy in any way or uncomfortable in any way. We think the product which is a good product was really developed more for the back pain market. It seems to be the one that they're stressing with consumers. It generates heat broadly. It is a bulkier product and more noticeable and less discreet. Probably one to be worn more at home rather than away from home.

So there's a market for both products.

And I guess it would be safe to assume that you're outsourcing the production of this?

Yes, we are.

OK. All right. And then just to wrap up on the Sun Care discussion. I'm just wondering how many of your key retailers you've presented this idea to and what their reaction was. And than I have a quick follow up question.

We're really in the process of training our sales organization to this. We've talked to a couple of accounts and they seem to be enthusiastic about it. It requires really a better level of communication and coordination with the accounts which frankly isn't bad. It get us more involved therefore in what the initial order should be, what the order pattern should be, what the inventory levels are. It requires more of us in our sales organization but we think we're capable of doing that. And it really bonds us closer to the trade. It benefits them really in the long run as well. This helps us keep our costs down and makes it a more of an efficient distribution pattern.

And do I recall correctly that you're category captain for a number of your key accounts in this category?

We have a say in almost all major accounts whether we're captain or validator or advisor. And we think that this will only enhance that position.

And if it's well received, you would expect the rest of the manufacturers to follow suit?

I would think so. It - this whole return thing. From what we understand, our return level while unsatisfactory to us and we believe one that we can manage down significantly is actually relatively low for other companies particularly smaller companies. For instance, you know, there's been a lot of talk about P&G. I know P&G was in the sun care season for a year or two when they owned and we understand that that return level was well over 50 percent and that's one of the reasons P&G decided to get out of the business.

OK. Great. Thanks, Mike.

You're welcome.

Thank you. Again, if you have a question at this time, please press the one key on your touch-tone telephone.

Well if there are no more questions why don't I summarize. I'll repeat. We're very pleased with the quarter. There wasn't a lot of discussion about infant care. We're pleased to see the progress we're making in infant care. And we expect to see continued growth in this business as we go forward and we'll continue to innovate over time.

I've made a lot of comments in past conferences about our reliance upon innovation. I think that the things that we have done in the past, the things we talk about now, and the things we will talk about in the future support our ability to innovate and bring creative products to the marketplace which will enhance our position.

Also, we build our business from a long-term standpoint. And I think the moves we're taking in Sun Care reflect that. It will improve the performance of this business in the long-term. It will improve the profitability of this business in the long-term. And I think it will improve our relationships with the trade in the long-term.

And we have always said we will market our business and run business with the long-term in mind and we are doing so.

Finally, let me say from a defensive standpoint, we, I think, have also shown our capabilities in defending our businesses whether it be in infant care or feminine care or any of our businesses. We are going to do so very aggressively in our feminine care market. We think we're in great shape. And we like our position and we like what we have coming down the pike. So we look forward to some good quarters as we go forward.

Thank you for your support. Look forward to talking to you in three months.