Edgewell Personal Care Co (EPC) 2002 Q3 法說會逐字稿

Good day, ladies and gentlemen and welcome to your Playtex third quarter earnings results 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 program, please press star, then zero on your touchtone telephone. As a reminder, ladies and gentlemen, this conference call is being recorded.

I would now like to introduce your host for today's conference, Miss Laura Kiernan, Director of Investor Relations. Ma'am, please go ahead.

Good morning everyone and thank you for joining us today. With me here today is Michael Gallagher, our Chief Executive Officer and Glenn Forbes, our Chief Financial Officer.

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

A replay of this call will be available beginning this afternoon, and will run through the end of the day on Saturday, October 26. The replay dial-in is 703-925-2533, and the pass code is 6236648. To access the webcast replay of this call, please go to the investor relations portion of our web site at www.playtexproductsinc.com.

Now I will hand it over to Mike for his comments.

Thank you, Laura.

We've decided to modify this conference call, since we felt that these opening monologues were getting longer and a little bit redundant and repetitive. I'm going to limit my comments to just a brief couple of points, and then Glenn will make several comments regarding financials, and we'll zip quickly into the Q&A, which we think, frankly, is the most interesting portion of these conference calls. Certainly more interesting to us, and probably to you as well.

Overall we are pleased with the quarter, we thought it was a solid quarter. We saw share growth in two of our three major businesses and see a stabilizing share in the third major business.

We think new products are helping our position in our key businesses. We are pleased with the Playtex heat therapy and personal cleansing cloths volumes. Our insulator cup is a big success in the marketplace. And the addition of the Calming Milk line to the Baby Magic line has been helping rejuvenate that business.

Looks like our (indiscernible) Oxy Deep line extension is a -- going to be a huge success. We have propelled that brand to modern-day share highs that haven't been seen in over 15 years.

As we look at 2003, we have extended our innovation into a couple of new areas, we are extending the insulator sport -- insulator line to include a sport cup, which includes the insulator benefit, along with a flip top straw, and we are introducing a new trainer cup, which we think has significant advantages over the cups in the marketplace and that will be called the First Sipster.

Overall, our Sun Care season sell in for 2003 season is going very well. Trade response to our programs on new products has been excellent. We are in the midst of our proactive effort to eliminate, or reduce, returns substantially, and managing our late season inventories at the retailers. That program seems to be doing very well.

As we expected, it did impact our third quarter shipment levels, which is, of course, the smallest shipment quarter of the year. We anticipated that it will reduce our early season shipments in the month of December, and therefore the fourth quarter, and then we'll have a subsequent increase effect on the first quarter of 2003. We believe this is a very important initiative for us to reduce these returns. It should have a cost-saving advantage of, between 2 million and $3 million, spread out over the next two to three years.

We believe we are well-positioned for 2003, and we are looking forward to the results of our efforts.

Glenn, I'm now going to turn this over to you for the financial overview. Make it brief, please.

Thank you, Mike. I'll try my best to make it as brief as possible.

First, as we noted in the press release, we reconfirmed our 2002 guidance, the outlook has remained unchanged. We expect earnings per share in the 88 to 90 cent range for the year. The fourth quarter we would expect low single digit, 2 to 4% top line growth in the fourth quarter, and we still remain very much on track to pay down debt of approximately $50 million over the course of the calendar year.

The second topic I want to just hit briefly is working capital. We have some very, very good results in the third quarter and I'll provide some statistics on that at a later date, in a couple of minutes.

As you know, the third quarter is not dramatically impacted by our Sun Care season, as the shipments are very low, and the working capital as relative to that seasonality is pretty much flushed through the system.

For the third quarter, our working capital, in total, and I'm referring to accounts receivable, plus inventory, minus accounts payable, for the third quarter of this year was $161 million. At the third quarter last year, it was $162 million. Very much in line with the historical average. When you translate day sales outstanding, that comes out to 67 days. That just utilizes the current period sales and current period receivable balance, and given the seasonality of our Sun Care business that can impact the first half of the year, we think that's a more appropriate measurement in looking at our statistics.

Our inventory is also about 12 1/2 weeks' supply for the same period a year ago.

As a result of the additional questions and analysis that has been requested of us, we have looked, again, very hard at our receivables and inventory, specifically receivables, as it relates to the first half of the year. And again, our analysis indicated that the increase, versus year ago, was almost entirely driven by the seasonality impact of Sun Care. Our day sales outstanding were up about one day, excluding the Sun Care impact. So, going forward, obviously, we'll continue to provide the statistics. We will attempt to break out the Sun Care as best as possible. But given the seasonality, we could see fluctuations again the first half of 2003. But we'll stay tuned for that.

For the total year, 2003, in terms of guidance, we have indicated we are targeting top line growth of 3 to 4%. And a bottom line increase of 7 to 10%.

We have provided this in the context of the current business environment, with the economy sluggish, impacting categories, as well as the very favorable interest rate environment. Our goal will be to maintain and/or improve our margins and we also will target to repay debt next year in the 50 to $55 million range. We are in the midst of our planning process, so these numbers are very preliminary and after we give the -- when we give the full quarter results in February, we will provide much more specific guidance on brand trends, as well as the quarterly expectations.

Operator, could you please begin the Q&A?

Yes, sir.

Ladies and gentlemen, 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, please press the one key on your touch tone telephone.

One moment, please, for our first question.

Our first question comes from Amy Chasen from Goldman Sachs. Your question please.

Hello. Laurie Sherwin for Amy.

Mike, I'm hoping you can provide a little more color behind your sales growth target for next year. You had talked about the new products in your opening comments. When I think back to this time last year, you were equally as excited, and trends are coming in a little weaker than our model had originally suggested.

So, I'm wondering if, perhaps there is something else, and maybe you are looking for some incremental distribution, which is banked into your expectations? I believe you had been looking to accelerate, or roll out the club stores this year. Can you tell us if this materialized, and if so, do you expect to garner additional distribution in clubs or other outlets next year, which would help support the target?

Well, I think I'll let Glenn answer the question regarding guidance?

As we said, we are in the preliminary stages of our planning process, relative to the guidance. Obviously, we feel that the economic impact could impact the growth rate, and therefore we are expecting stronger growth in the back half of the year than the first half of the year.

Just in general, we have had a significant amount of new products in the channel this year. We obviously have a pipeline for next year. We are expecting a very strong Sun Care season, based upon the early response to our new products that we have got in there. And we are getting some momentum behind the Woolite and the Oxy-Clean, so in general, we think that our preliminary plans very fully support the 3 to 4% top line growth expectation.

Does that number assume any incremental distribution next year? Maybe more clubs or more lines in the club store?

It does not.

It does?

It does not.

Let us know, what percent of your business this year was done in clubs?

No, we will not.

Okay. Fair enough.

If we could switch gears, and if I could ask you about the infant care business and what you're seeing in the competitive arena there? I know you had said competition appears to be stabilizing, but when I look at the trends, it looks like sales were flat this quarter, which is actually a deceleration from last quarter, when they were up about 3%.

When we say it's stabilizing, we look at our share by segment, and overall, we feel that our share in infant feeding is beginning to stabilize at the 34 to 35 range, or past eight months, have been right within that range. And we're encouraged by that, because that's a reverse of the trend we had been seeing in the last couple of years, and we think that's due to the innovative product we put in the marketplace.

You have to also remember, particularly when it comes to infant care, the available measurements, the Nielsons and IRIs, really only read approximately, between 40 and 60% of total business, depending upon which subbusiness we are talking about. So we look at our shipment numbers and our trends by account in order to really get an overall appreciation for knowing what our business is doing. From that standpoint we feel we have a big success in our insulator cup. We believe that the products we put behind Baby Magic are beginning to rejuvenate that business.

We know we have some work to do around disposables, but we have taken that one pretty much by the horns and we have introduced a major new program, both to lactation experts and to consumers, positioning the brand as a supplement to breast feeding because the trend towards breast feeding seems to be growing in today's world, and yet the difficulty of continuous breast feeding is much more encumbered by the activities of today's life.

So a supplement that allows women to go back and forth between breast feeding and using an infant feeding system is very helpful. And we believe that our disposable feeding system is the best method to do that. We are positioning it that way to lactation experts for them to recommend it to their clients, and at the same time, advertising our brand to the marketplace in that fashion.

We have modernized the line, modernized our graphics and brought new items out behind disposables. And we are starting to see encouraging trends in the sale of holders, the new holders we have brought to the marketplace, which always precedes the disposable sack business. We would have expected that growth in holders to now start to flow into disposable sacks.

It's little things like that that cause us to feel that our infant care business is starting to see some rejuvenation and stabilization. We were up 3% last quarter, we're at 2% this quarter. If you take out the effect of the baby wipe business, which has not been successful for us, then the balance of our infant care business was up 2%. And frankly, we're pleased with that.

Are you looking to exit that business?

Exit what business.

The wipes business?

No. We are basically selling our product in the marketplace and it's a small share of business and it's taking its normal course.

When would you net net expect the overall infant care business to start posting sustainable increase in sales growth, can we expect that maybe next quarter?

Well, one quarter is not a sustainable trend. But, yeah, that's what we shoot for, that's what our goals are and we would like to see that happen.

Okay, thank you. That's very helpful.

Our next question comes from Bill Steele from Banc of America Securities. Your question, please.

Thanks. Good morning.

Couple of questions. First of all, Glenn or Mike, could you touch on the new products, how much that contributed to sales in the third quarter? Is there any way to quantify that?

It's tough, Bill. We haven't really broken it out that way. Are you talking about in infant care, or -- ?

Just in general. There's been numerous new product launches and all have been fairly successful. I was just wondering, 2 to 3 points of sales? Is there any way to quantify that?

I'm going to take a rough guess, and that's all it is, Bill, but I would say that the products that we have introduced in the marketplace, now in some cases they've replaced other products we have taken out and they are in their stead. But I would say they represent between 3 and 4% of total.

Is that kind of a fair assumption for next year, as well, in terms of how you're budgeting '03? That a majority of the top line growth will come from new products?

Yes. That's pretty much our model. The economy is still not bouyant out there. I think you know that. You put out a terrific summary that shows what's happening in a broad section of consumer categories. There hasn't been a lot of growth in recent periods. So until that really starts to get back to more normal picture, which we expect it to as the economy gets better, then most of our growth is going to come out of the new products that we put in the marketplace.

The second question has to do with an update on Pearl, what you've seen at the marketplace versus what you've anticipated from P&G, maybe in terms of spending or distribution?

They have done a great job, as we had expected. They've got broad distribution, pretty much overnight. Most of the space has come out of their existing franchise, the original blunt end cardboard product. They have begun advertising, they have dropped their FSI, they had excellent display activity.

P&G is a first-class organization and they get excellent trade response to major initiatives and they certainly have had that. From the very beginning on Pearl. We don't believe that we have lost any distribution as a result of the Pearl launch. We don't think we've lost any shelf facings as a result of the Pearl launch. We have helped influence the trade on the pricing policy behind Pearl. And we have defended our business from the standpoint of putting in specialized promotions to basically, load up our consumer and take them out of the marketplace for a while.

We know that we are going to be targeted by Pearl as the brand to knock off, because we have been essentially the growing brand in the category and represent, in my opinion, the modern brand in the category. The launch of Pearl is probably the biggest admission on P&G's part that their original blunt end product is antiquated product. That it really doesn't belong in the marketplace. The more successful Pearl is, the more the original product will be damaged, and frankly, the better off we will be. That will make our gentle guide plastic product the number one subsegment in the marketplace.

Overall I can give you -- we only have one month of data, which is the month of September. In the month of September, the Pearl brand had a 2.8 share. We did not have any share decline, and Tampax, in total, lost 4/10 of a share point, going from 40.4 to 40.0. Actually, we picked up one share point during that period, going from a 29.3 to a 30.3.

So in the first month, we did well, and it pretty much followed the plan that we thought. We do not see Pearl having a category growth strategy, which we think is a bad thing for P&G, and is a mistake, but it's their mistake to make. That means they will compete for existing users, who generally tend to be pretty happy with the product that they've got. They have a tough situation. I wouldn't want to be in their shoes.

Thanks. Glenn, could you touch on the cap ex budget for '02 and '03?

Yeah. We have traditionally spent between 18 to $23 million, on average. I would expect to be in that range over the next couple years. We would average that. Looks like we'll be at the low end of the range this year, probably a little higher end next year. It averages in the low 20s.

The last question.

Glenn or Mike, with regard to working capital trends, certainly in '01 working capital was a source of funds. Why can't that be, kind of, more the norm? In essence, why can't the company generate substantially more net-free cash flow than $50 million? Is there something structural going on there?

If you look at comparables for companies like us, we actually work at the best end, from a working capital standpoint. Our inventories tend to be lower than those of multi-SKU, small volume businesses, and I think we do an excellent job of satisfying trade needs.

When we have a relatively large SKU business, that doesn't have rapid turn to it, as in the case of infant care or in Sun Care, and to a degree, even in tampons, where we have numerous SKUs in order to satisfy everybody's needs in the marketplace. And so from that standpoint, it isn't as easy as being a bleach manufacturer or a heavy-duty detergent manufacturer, where you have relatively fewer SKUs and higher volumes and you're basically running your product lines without turning them off, and you're taste filling and all that other stuff.

That's a pretty easy world. I've been in those worlds and I know how easy it is to have a very low inventory. We've pretty well gotten to a point where our inventory levels are where they should be in order to properly service the trade. And I don't think that squeezing them any further, frankly, would be in our best interests because we would be creating disruptions in the service.

We have improved our service levels dramatically in Playtex in the past four years. We have gone from, what I would consider to be not a very good service provider, to one that is at the top of the heap from a standpoint of the kind of business that we are in. We really think that's an important covenant we have with the trade. So I wouldn't want to go back on that. You want to talk about the rest of the working capital?

I think in general, as a working guideline, we would expect receivables to pretty much follow the trend of sales over the annual basis, And obviously, we have done things in terms of working capital with our receivables facility that certainly has been effective and helpful for us. And in general, you know, from an overall point of view with the controls we have in place that we are very comfortable with, and consistency of terms, and fighting the retailers to pay you like everybody else is, I don't think it's a major opportunity area, given that it's in pretty good shape as a base.

That's very helpful, thank you.

Our next question comes from George Chalhoub from Deutsche Bank. Please go ahead with your question.

Good morning.

Hey George. Congratulations on your baby. Thank you. She's going to start using some of your stuff. She's using some of it already. That's good to hear. There's a trend out there, we like to see that you're part of it.

Thank you.

Couple of housekeeping items. The availability in the revolver (indiscernible) and how much is borrowed under the AR line, please?

The AR line, we are actually at a very low point of working capital. So AR line was down to $5 million at the end of the third quarter. Very minimal borrowings there. And our availability in the revolver was about 113 million.

I'm sorry, Glenn, 113?

Right.

Glenn, some of the moving parts on the P&L, in terms of gross margin being higher, and SG&A as a percentage of sales being slightly higher is normal as the gross margin initial with the mixed benefit and the SG&A, the promotional spending is increased?

I think that's reasonably fair, yeah.

Focusing a little bit on the Sun Care business, obviously you're managing the business now for lower returns. If we are looking towards the fiscal first quarter, and also the second quarter of next year, what kind of variation should we see in terms of that business, you mentioned you're going to get a little bit of a better cost structure, lower returns. Can we try to quantify that and maybe see how that might be benefiting the timing between Q1 and Q2?

I would say it's a bit premature for us to do that, as we are really working through the specifics of that with our divisional team. It is a major change in how we work with each individual customer. That process is going on right now as they start to set opening orders and when the product will go in. Clearly, we have said there will be less in the fourth quarter of this year and more in the fourth quarter of next year. How the first quarter and second quarter falls out, it's really too early to tell until we get some feedback from the major customers.

My final question was, on the feminine care, maybe thinking about this strategically a little bit, I'm trying to gauge the timing. Obviously the Tampax Pearl has, at least according to my knowledge, Mike, last time we spoke, come on the shelf, you know, strongly in October, and clearly you guys are holding share. How should we see the dynamics go from here, do you think you're going to keep your defensive modes for the next couple of months and then see how that works out? Or do you think you're at the point where you can start, maybe take a little bit more conservative view in terms of how much you're spending on promotional expenses to sustain share?

We think the first six months of this launch is really the combat zone and we are going to be continuing to monitor the situation, but we feel we're going to need to support our business during that period of time. The Pearl brand will go up in share, there's no question in our mind. We don't believe, from early indication, that it's going to grow the category. That is problematical for them. That means they'll cannibalize a lot of their own business and therefore, the economics become, especially with the expense of the launch, become a problem.

And we are going to defend our business aggressively during that period of time. We will gauge it, depending on results as we see it. But I wouldn't expect to be pulling back any planned effort for the foreseeable future. And with this business we are better off defending it now than regretting later.

Great. Thank you very much.

Thank you, George.

Our next question comes from Raza Lahoub (phonetic) from Lehman Brothers. Your question, please.

Good morning.

You mentioned that a portion of your new product sales really are replacing existing products. On average, how much is that? How much of your new products really are just minor refinements, packaging of existing products.

There's no way of answering that question. It would depend -- I don't mean to be flip about it. It depends greatly on the product itself and what it is replacing. So business by business, there could be no cannibalization or it can be 100% cannibalization, but even then, that 100% cannibalization might be good, because we are putting a better product in the marketplace that has the potential to grow, and the older product maybe was losing ground. So it's almost (indiscernible) you almost have to take it individually.

We knew the insulator cup would be a success, and we knew it would cannibalize our existing spill-proof cup. And there has been a lot of cannibalization. But we are better off in that situation, because that helps us too, stem the reductions that we had in this category. Prior to having insulator cup out there.

If we look at heat therapy, for instance, it's totally incremental to our tampon business, and totally incremental to the trade in extra sales and profit dollars within the feminine hygiene segment that they have in store. So, here you go from one situation where it's 100% net incremental, to other situations where it's maybe 100% cannibalizing. But in those cases we make a decision on an individually basis, is this the right thing to do and are we willing to accept that cannibalization in order to have a better product out there?

Now, as far as sales growth, we have the dollar sales growth for the company and by major segments. Would you care to give us a volume growth for the whole company and by segments?

We really -- it's almost impossible for us to do that. I marvel at some companies who are able to do it. We have so much different items in the marketplace that unit movement almost means nothing on a total basis. I think the best way to answer that, we have had virtually no pricing impact on our business in this quarter. Therefore, pretty much unit movement will mirror the dollar movement that you see.

And does that apply to each segment, as far as no pricing movement in each one of your major businesses?

Yeah. The heat product is basically new, and it's priced really to retail at the same retail as our 20-count tampon -- plastic tampon product, so that they can be advertised and merchandised together.

Okay.

And then how do you feel about inventory levels with the trade, is that in line with your expectations, do you have any concerns around retailers curtailing inventory levels anymore?

They're always looking for ways to do it. The mass guys have certainly taken out a significant amount of inventory already. The drug guys have moved to do that, many of the food guys are doing the same thing. There continues to be pressure on inventories and we continue to manage around it.

The good news is, you eventually you get to a point where you can't go any farther or else you end up with some significant service problems, and nobody in the trade really wants to see that happen.

Will there be more moves on the part of the trade? Yeah. That's pretty much a major trend. How much it affects us, I really couldn't quantify, because we've already seen a significant amount of reduction in trade levels.

When it does happen, when you have seen inventories reduced by the trade, I presume it happened by specific product, by specific major customer, as opposed to across the board?

Absolutely.

Thank you.

You're welcome.

Our next question comes from Zachs Lazis from ESF Value (indiscernible). Your question, please.

Yes. I was curious, with the growth that you are expecting in the fourth quarter of 2 to 3%, I was wondering if you had to sacrifice some margin in the fourth quarter to get those numbers comparatively to the fourth quarter of last year, given the -- what you call the combat zone for the six-month period of the new product launch at your major competitor?

I don't expect any impact on our gross margins year to year, it should be in the relative range. When you talk about the combat zone, the defensive spending, that really is in our promotional line, which it's SG&A. So it could impact the bottom line percentage, but on gross margin.

I was talking on an EBITDA basis.

On an EBITDA it could have a minor impact, for sure. Depending upon where the volume falls within that range and how aggressively we defend.

Right.

Where would you expect your accounts receivable facility to be at your end, as a significant change from the third quarter?

We start the building again, and I would expect it to be approaching the $50 million range, we're in that ballpark.

Okay, great.

What was -- what was your cash flow from operations in the quarter?

About 9 million.

Thank you.

Our next question comes from Jim Barrett from CL King & Associates. Your question, please.

Good morning, everyone. Hi.

Mike, could you talk about the Tampax Pearl test market? Have you continued to track Playtex's share and consumption in that market, and can you share that data with us if you have?

We have not, Jim. It gets very muddied once they launched their national business, so we have -- the information we had was very spotty, anyway. It was kind of a compilation of a few stores by a few accounts. It was very rough, so there's no more information that we've got out of that test market.

I know it's a small category, but can you talk about personal grooming and what the marketing plans are for that business in 2003?

It's really affected mostly by two businesses, Ogilvie and Binaca.

In Ogilvie, we are in the middle of a transition behind that business that we think, in the long run, will be beneficial to that brand, but it's kind of tough getting there. We are moving the brand away from being just a total home permanent brand to being a treatment brand that provides consumers with more serious treatments for things like volumizing hair or straightening hair or defrizzing hair. And as we move out of the hair color section and get more into the styling section, we think our visibility will improve and our marketing levels will start to explain what the brand is all about and bring in new users and see some growth for that brand over time.

Binaca is one where we keep, frankly, struggling to find a way to utilize what we consider to be a good brand franchise. That really spreads itself over a relatively small volume. Its segment has been hurt severely by the launch of the -- what do you call those, breath strips, particularly the Listerine one. That really has had a major impact on breath sprays and drops.

Our share has continued to go up in that segment, and in the home permanent segment our share continues to go up. It's really more category related than it is anything that we are doing. That's why we are looking for a way to branch out from the traditional positionings of those two businesses and unlock what we consider to be attractive potential to grow those brands.

Is the idea of selling selected franchises a possibility over the next few years?

Absolutely.

Do you have inquiries along those lines?

Occasionally we do. But generally they are willing to pay for something out of your pocket. But if somebody came to us and said, hey, we have a reasonable proposition for some of our brands that are less than mainframe, we would certainly entertain that. We'll do anything that makes sense for shareholder appreciation.

Okay, thanks, good luck.

Thank you.

Our next question comes from Ann Gillin from Lehman Brothers. Your question, please.

Thanks.

Glenn, just a clarification. On your thoughts on the promo hit to SG&A, we're in that post-EITF world, so isn't it net to sales?

Most of our -- there is a portion of that in that's already built into the sales expectations. But we also have shifted and moved some of our consumer advertising and media, more strongly in the fourth quarter of this year and the first quarter of next year, from the early part of the year. That's obviously another important element of the defense.

So your net, you're 2 to 3 is net of what your expectations are for promo?

Correct.

Same line of thought, I just want to clarify pricing flatish includes -- is basically on a net to sales basis?

Yes.

Okay.

And then, Mike, I'm just wondering, I understand that your thoughts regarding kind of its early days on what will happen Q4 versus Q1 for Sun Care? I'm trying to summarize the positives versus the negatives year to date in Sun Care, and I'm coming out with the thought that you are probably at lower levels of inventory at trade right now than you were year ago?

If that happens, that's a wonderful thing, because it will mean lower returns.

Understood, understood. I'm thinking about the following things, if I might.

We had better weather, of course, because of some of the economic issues we had softer category growth, it looks like you were taking share as the category weakened. And then you had accelerated returns from 2001 summer season, which may have actually scooped up some of 2002 also. So I'm just trying to understand where you think you are as a base as you go into this transition?

Yeah. That's a great question, Ann. It's probably one of the more confusing parts of our business is the Sun Care business and related to returns.

Unfortunately, every time we have applied -- tried to use logic to determine what our returns would be, we have been generally surprised to the negative. That's one of the reasons that it's a driving force behind getting on this return management program that we are on, we are just really tired of that.

We did have a good season. Our consumption was up 5% on a year to date basis. Category was relatively flat, up only 1%. And we have been taking steps, from June on, to reduce or eliminate orders that were likely to turn into high returns, from a trade standpoint.

We took a little higher reserve against returns in the third quarter that we just announced. If that all ends up with lower returns than we have budgeted, that would be wonderful, we are not predicting that right now, given our history. We do know the plans we have laid out will definitely reduce the amount of returns in the long haul. And that will significantly save money for us in relation to the cost of handling and managing returns.

So I'd like to see the day when we say hey, we have an over-reserve for returns and we are releasing some of that. We are not at that point right now.

Mike, can you help us think about production, relative to this rollout?

Yeah. We are probably going to produce about the same amount as we did last year, expecting that we will have consumption increases. So we should, relative to the season, produce less product related to how much is consumed than we did on a ratio basis in past years.

Our overall goal would be to ship in less volume on a gross basis, with less returns, ending up with a higher net number than we have had in the past. That, therefore, saves us a significant amount of money. And we have got very detailed plans by account, by quarter, and we are managing -- we plan to manage inventories throughout the season to make sure -- one of two things happen, one is that we use lower returns and we don't have service voids during that season.

When you say manage inventories, it sounds like, if you produce at the same level, you are going to hold some safety stock -- okay. So we should see an increase in, sort of, Sun Care inventories, as you transition through this just to keep yourselves ready to respond?

No, no no, not really. Our Sun Care inventories, over time, should come down, because we have less returns coming back at the end of the year and we'll be making less product as a percent of how much is actually consumed, as we go forward.

Right. I'm more focused on transition period, December, March, it sounds like it rises before it comes down. You have the returns cycling through December from this year, as well as producing at the same level until you are able to take the level down?

Yeah. I think it's probably fair to expect it will be pretty normative, versus a year ago. As we get real good experience with how the inflow and outflow goes, we'll really be able to impact the production cycle and count on less returns next year. A lot of your early production is really geared around new products. We have a very significant new product portfolio for Sun Care for next year, and so we -- obviously we are making sure we can service those needs.

You're exactly right. The amount of returns we get back is certainly an impact to our inventory levels. The later it comes back, the longer impact it is, because we may have to keep something over for more than one season. That's another plus we'll get by managing these inventories down and having a shorter shipping season than we have had in the past.

Great. Thanks, this is very helpful.

Thank you.

Once again, ladies and gentlemen, if you have a question, please press the one key on your touch tone telephone.

Our next question comes from Cathy Iam from Salomon Smith Barney. Your question, please.

Hi.

Going back to infant care, I know you talked about the inaccuracies of relying on scanner data. Looking at IRI over the last few months, the Gerber and Avent have been making tremendous headway with their market shares in the infant feeding category. So could you talk about what you are seeing with your competitors that can help explain these trends?

Avent has had good growth, they've done it largely through distribution expansion. They were pretty much exclusive at Target and Toys R Us brand, they've been expanding out into other accounts, and they have been growing their share of infant feeding. They tend to sell products at the higher end. We think the quality of their products is inferior, but there is a cachet to the brand and we expect that that will continue for a time until it's pretty much universally available and then we would expect it to start to wear out.

Gerber really, in infant feeding seems to have plateaued. Their share has pretty well hung in there between the 24 and 25 share range and we are not seeing significant change in that for quite some time. So we are continuing to -- they are the second largest factor in the category after us. And we continue to believe that the innovative products we are putting in the marketplace and the repositioning of our disposable business, where we have high 80s share, and once we get that category growing, then our share of the infant feeding business, overall, will start to climb again.

And lastly, can you provide the retail take-away for tampons, your infant cups and your disposables?

The retail take-away?

How the category is doing.

The category, sure. Let me see. You said first -- tampons.

Uh-huh.

The tampon category in the third quarter was up -- it was down 2%.

Infant -- your cups.

Cups category was up 2 1/2%. What was the other one?

Disposables.

Disposables. Is down 7 -- 7.7%.

Okay. One last question.

In terms of your FEM care growth being up 6%, can you tell us how much of that was due to the heat therapy product?

We don't do that. We don't break out results by individual brand, but just over a majority of that business came from heat therapy and personal cleansing cloths, of the growth.

The majority of the 6% did come from the new product?

Just over the majority.

Okay.

Trying to be helpful here without breaking our rules.

Thanks.

Our next question comes from John Emerig from Brick Capital. Your question, please. Mr. Emerig, your line is open.

At least he's not snoring.

He probably stepped away from the phone.

Our next question comes from Amy Chasen from Goldman Sachs. Your question, please.

Question's been answered. Thank you.

You're welcome.

Our next question comes from Alice Longley from Credit Suisse First Boston. Your question, please.

My question is guidance for margins for 2003. You have given us the top line and the bottom line. Should I assume operating margins are about flat for the year with 2002?

I think that's a good going in assumption.

Is that what you see for yourself, sort of long term? That the top line goes 3 to 4%, operating profits go at about the same rate, and then you get more bottom line because of cash flow reducing debt and interest expense?

I think that's fair for the immediate term. Long term, we would like to see growth in the mid-single digits and maintaining and/or improving margins by leveraging the fixed cost structure. But I think in the short-term environment your assumptions are valid.

And then for next year, gross margin overall, is that flat or as maybe that goes up a little, and SG&A goes up a little bit?

Why don't we assume it's relatively flat as we are just in our initial stages of our planning process and the brands can move in a little bit? Overall our expectations is that they'll hold pretty true.

Okay, so all these different ratios are, sort of, flatish for next year?

Yes.

That's all I needed. Thanks a lot.

Our next question comes from Ron Phillis from Banc of America. Your question, please.

Hi, guys.

You folks have two facilities here, the revolver, $125 million revolver and the $100 million accounts receivable facility. Arguably the accounts receivable facility should be -- I believe is cheaper. If you look back over the past six quarters you're barely in the revolver at all. If you go back further than that, you're in it, barely, as well. And then, if you look at the receivable facility, it looks like you've had decent liquidity under that facility too. I'm wondering whether or not you guys are considering reducing the revolver, because it costs money?

No, not at this time, Ron As you know, we refinanced completely back in May of 2001, we went to the bank group in 2002 with a pricing optimization, and we are just very comfortable with having that dry powder.

You're in compliance, and there has to be some significant room in your covenants?

Absolutely.

So, does that tell us something? Cause we know you've look at acquisitions in the past ,and I guess, this is what I'm driving to. Does this tell us something of what you might be thinking in terms of acquisitions in the future?

No. We are thinking really of one thing, and that is deleveraging and driving our debt to EBITDA ratio down, down, down.

Thanks.

Thank you.

I'm showing no further questions at this time. Please go ahead with any further remarks.

Alright. Thanks very much.

I like these more time to spend for Q&A, I think it's a more stimulating part of these presentations, and I think we'll continue this as we go forward.

We think we had a solid quarter. Obviously, we would be more pleased with 5% growth than 2% growth, but the environment that we are competing in is fairly tough, from an economic standpoint, and I think some of the categories are probably not growing to their normal level. We certainly are in the right kinds of categories. These are functional products that people really must have, no matter how the economy does, so I guess, if the downside of the economy is 2% growth instead of 5% growth, we'll take it.

We are pleased with our share trends on pretty much most of our businesses. We have had some success with new products, we have had some success with repositioning. We have got other things we have to do in order to get all aspects of our business going well, I think we have defended our businesses well, I think it's a skill we have demonstrated, and obviously, it's one we will continue to rely on as we going forward.

Thank you very much for your interest and we will talk to you next quarter.

Ladies and gentlemen, thank you for your participation in today's conference call. This does conclude the program and you may now all disconnect. Everyone, have a great day.