Edgewell Personal Care Co (EPC) 2002 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the Playtex Products Incorporated fourth quarter earnings conference call. At this time, all participants under 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 conference, press star zero on your phone. As a reminder, this call is being recorded. I would now like to introduce your host for today's conference, Ms. Laura Kiernan, Director of Investor Relations. Miss Kiernan, you may begin your conference.

Thank you. Good morning and thank you for joining us today. With me is Michael Gallagher and Glenn Forbes. I would like to remind everyone of the cautionary language about forward-looking statements contained in our press release. Same language applies to any comments made by management during today's call. We encourage to you read 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 Thursday, January 30th. The replay dial in is 703-925-2533 and the pass code is 6376265. To access the webcast replay of this call, 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. On our last call, we changed the format of this presentation to reduce the amount of up-front comments. Since we had such good feedback on that, we're going to continue that format today. I'll make a few brief remarks hitting a few points which I'm sure you are all interested in. Then I'll turn it over for Glenn who will briefly cover 2003 guidance. Then we'll hit the q and a, which I think we find more stimulating anyway.

I'm going to cover the process that we announced in November, talk a about bit about some of the results of 2003 and touch on our tampon defense plan. As you all are aware in November, we announced that we are embarking on a process to review the strategic alternatives for Playtex and that we retained J. P. Morgan to assist us in that process. The purpose of that process is to deliver maximum value to our shareholders. We will be willing to entertain offers for the sale of all of the company or mergers and equals. Obviously, there can be no assurances in the final event a transaction will be completed. This process was initiated due to our lack of confidence in the equites market to properly value Playtex in the absolute or relative to our peer set. We began the process near the end of this past year and from the outset, it was my expectation that this complete process would take six to nine months. We are right on track where we thought we would be at this time. I also believed if he beginning of the process that it would be a very robust one and from my perspective, it is. Obviously, there is a lot of [INAUDIBLE] about the process that we're in. We're limited to what we can say about it or questions that we can answer about it. It will be quite a while before we really have any public statements to make regarding where we are in the process. I would ask that those people who are in a position to do so refrain from speculation about what's going on in the process unless you really have some actual facts. And in most cases, facts are very difficult to have as a result of this kind of a process. As soon as we're able to inform the public, we will do so. And we ask for your patience during this process. We will in the mean course, of course, be running our businesses as we have in the past, as aggressively defending those businesses that we need to and continuing to launch products that will provide future growth for our businesses.

Turning to 2002 highlights, obviously we delivered on our promise of delivering 90 corrects earnings per share for the year. Our guidance throughout the year was 88 to 90 cents. We generated very strong cash flow and paid down $61 million in debt this year. We expanded our Feminine Care with complimentary products including our cleansing cloths and heat therapy pads. We stabilized the trends as consumers responded to our new products and marketing communications. We had another strong performance in Sun Care as we had another year of growing market share outpacing the category consumption growth. Plus we implemented a major initiative to reduce the costs of returns which has already begun to have a positive impact in 2002, and we expect annualized savings of $2 million to $3 million starting in 2003. Our new Woolite products have been very successful reaching new record share levels for that brand, and we have generated significant interest savings from refinancing of our bank rates and favorable interest rate environment.

Turning to tampons, I think we've done an excellent job in defending our businesses against the launch of a major competitor. As you know, we built our market share through three quarters and executed a strong defensive plan in the balance of the year. Our trade promotion and consumer promotions were geared to load up our current consumers. Given the very significant support behind the launch of the competitive pearl product, which was targeted directly at our plastic tampon franchise, we have held up very well. Pearl has sourced the vast majority of their business from within their own Tampax franchise, and the balance of the sourcing seems to be coming from the cardboard segment of the tampon category, which includes the private label brands and our own silk glide business. Our plastic consumption of our plastic applicator tampon has held up during the four months of pearl's lodge the four months they've been on the shelves. Our consumption of plastic tampon is even with a year ago and shows no dips whatsoever. As we move into 2003, we've announced a couple of product improvements which will begin shipping in the first quarter and will reach the shelves at the end of the quarter. One is an improved Gee owed rant fragrance. This is the largest portion of our tampon franchise and we're implementing new technology which provides greater deodorants for tampon users. This tested very well in our consumer research. Not only among our existing users but also among pad and competitive tampon users as a source of growth for this business. And importantly, we will also be converting all of our plastic applicator tampons to a soft pearl applicator, which will provide improved insertion comfort for our franchise users and also be more attractive to competitive brand and pad users. We're very excited about the launch of these products. It allows us to use the first quarter of this year as a transition period behind aggressive defensive activity.

Turning into very aggressive offensive efforts. We have strong advertising plans in the first and second quarter of this year. We'll be converting to new copy, moving away from our defensive advertising copy and essentially going back to our strategy of expanding the category by reaching out to pad users to essentially encourage them to use better performing products. Our trade and consumer promotions continue to be beefed up. We will be cross promoting with our personal cleansing cloths and heat therapy pads. This heavy up support will of course impact the quarterly flow of earnings as Glenn will cover in more detail. Over all, we are very pleased with our defense of this franchise. I'm sure there will be a number of questions and allow me to elaborate on why we're so happy with this defense and success of it. One thing that concerns me is the claims that the competitive product is making. We believe those claims to be false and deceptive. We had initiated a lawsuit at the end of last quarter. That lawsuit is active. It will be heard in court at the end of the quarter. And we believe that our position will be sustained that the basis for the very competitive claims are false and deceptive. I will now turn us over to Glenn for 2003 guidance.

Thanks, Mike. Good morning, everyone. For 2003, we reiterate our goals that we stated last quarter for 2003. We're targeted for 3% to 4% top line growth with 7% to 10% increase in earnings appear share. Our sales guidance for the year is as follows. We would expect infant growth to grow. Sun Care and infant products would be above the rate in mid single digit growth rate. Overall feminine care given the defensive strategy in the early part of the year, we would expect low single digit growth there. And personal grooming would be slightly down to flat for the year. We expect to continue to maintain our strong gross margins essentially in line with the 2003 levels. Our total SG&A which includes our 4% to 5% year-over-year driven by higher advertising and promotion expenses in support of tampon as well as some of the introductory support behind heat therapy. Interests are currently running at 13 million dollars per quarter at today's interest rates. We expect that to continue in the short term. And as Mike briefly discussed, our quarterly flow of earnings will be impacted this year by the timing our advertising and promotions support nivtives.

For the first quarter, we expect earnings to be in the 20 to 23 cent range. This is largely because of the investment spending behind again tampon, play tax heat therapy and Woolite Oxy Deep. First quarter net sales increase should be in the low single digit range overall as we expect trade promotion impact on those sales. The second and third quarters of the year are expected to modestly exceed year ago EPS levels. The fourth quarter would significantly be above year ago as a result of sales growth and the return to a more normal level of advertising and promotional support. Our debt reduction goal for the year is to reduce debt by approximately $60 million again in 2003 in line with this very strong results that we achieved in 2002. From a working capital point of view for the quarter, our receivables DSO was down from 77 last year to 72. We've sen seen a positive impact from our Sun Care returns initiative that's allowed us to accelerate the processing and returns and get the credits cleared through the receivables. Our inventory is in line with our normal weeks of supply level with approximately 13 to 14 weeks of supply. The absolute level is a little higher a year ago as a result of Sun Care where we brought inventory back into inventory more quickly as well as we have delayed some of the shipments from the season into the first quarter of 2003 and have our product ready to go for that.

As I wrap up, I want to point out a milestone of sorts in our balance sheet. This quarter, we reported a $5.5 million positive book equity for the first time in many, many years. As you may recall, we have been working off a significant $500 million negative balance that resulted from a leverage buyout transaction in 1988. So we've turned the corner on that specific issue. Operator, could you please begin the Q&A?

Thank you. 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 cue, please press the pound key. One moment, please, for the first question. The first question comes from Connie Maneaty of Prudential securities.

Good morning.

Hi, Connie.

Good morning. Why was the tax rate so low in the fourth quarter? And what is a good assumption for 2003?

Our normalized level will be about 36.5%. It was a little lower in the fourth quarter was the earnings level was pretty low. We had the little built of benefit from tax planning initiatives we did. In general, it averages out close to the 36.5% level I believe.

Okay. And about this lawsuit, what is it if you can talk about it, what is it that p & g is claiming that you find false and misleading?

Well, they're claiming that they have a superior tampon overall, and when you break it apart and look at the pieces of the claims, we don't believe that there's a basis for making one, the sweeping claim. Nor in many ways, for making some of the subclaims. And it is a mixture of parity claims and superiority claims that are intended to give an impression that we believe is false and misleading. I can't go into any detail beyond that because it is an active case, but because it is a case and because it's public, I've been allowed to basically say that our position is that we strongly believe it's fair and misleading. It hasn't hurt our plastic tampon franchise, but we don't believe that it is a fair practice for people to distort facts and be allowed to consistently send out a message that could be harmful to another business unless it's based on substantial fact and we don't believe that's the case here.

And what do you attribute the strength of your plastic applicator business to? Does it have to do with pricing and promotion right now?

Absolutely. It has to do with a lot of things, Connie. Our plans, some of the things we've been public about. Some of the things we're not going to disclose. We rain defensive advertising. We loaded up our consumer base beginning in the summer. We shifted our promotion programs in order to load up the more speculative user, the one who hasn't necessarily totally lacked into our franchise in order to compete competitively from a promotional standpoint against our competitors. That actually hurt our volume because there are other devices that sell more volume but it wouldn't serve the purpose of protecting the franchise. We beefed up our advertising message and of course we spent significant promotional support behind our business along with other things that I really can't get into.

And if I could just ask one final question on Sun Care, how far along is the program to justify the returns?

Well, it's really a year long program that started pretty much at the end of last season. We really began in June and the third quarter of essentially crouton scrutinizing all orders that came in and in essence in some cases, working orders down or eliminating orders in order not to be in a position to just turn around and take those orders back at a later date. In the fourth quarter, we did a lot more of that and working with the trade to schedule shipments at a more just in time kind of environment. We've also worked in getting product back earlier from the trade so that we could recondition and getting in the inventory sooner. That has been extremely successful. That, of course, will play into our profession plans in the first and second quarter. We won't need to produce as much product because we now have inventory that ordinarily sat around for an extra year available to reuse. And we continue this program. We'll continue it throughout this year and then we'll continue our efforts to find ways of bringing down our returns as we go forward. It's being very successful. The trade has been very cooperative in this. They believe it's in their best interest as well. In the long run, it should reduce everyone's costs as a result of this. We're very pleased with where we are today.

Thank you.

Thank you.

Thank you. The next question comes from Tom Ison.

Hello. We're shareholders so we're enthusiastic about the process and the earnings going up and '03, hopefully. But in terms of the stock price, if you were unhappy before, you have to be really unhappy now with the process under way and the stock either unchanged or, you know, significantly down from the 1050 level where it went to. It would be healthy, I think, to provide a little more color to the process. I realize it's opaque and up can't say anything until the end, but in the meantime, we could use a little encouragement, so I want to ask some specific questions. Do you have interested parties interested in buying the entire company who can afford it? And are they financial type buyers looking to do another [INAUDIBLE] or are they, you know, well-healed corporate buyers, strategic buyers, especially out of Europe? And then do you have interest in the pieces? And what is your level of confidence that some sort of transaction value enhancing will occur at this point?

I admire you for asking those questions. I think those are very appropriate questions and well thought out. I'm going to stick with the comments that I made at the very beginning. There are very limited things that I can say. I will repeat what I said, which is that I expected to see a robust process, and I'm not dissatisfied with where we are to date actually. I'm about where I thought we would about both from a timing and interest standpoint. I really can't get into the details of what's into the process for obvious reasons other than to say that at this point in time, I'm pleased with where we are and what's going on. And I know it's agonizing for investors to not know lots of details of things, but that's just unfortunately the way it's going to have to be.

Thank you. The next question comes from Jim Barrett of C.L. King and Associates.

Hi, everyone. Mike, could you talk about what percentage of your Playtex tampon franchise is cardboard currently?

10% of the branded business. Then we have another about 8% that is private label cardboard.

I see. So it's not a large percentage? And to what degree has that segment been affected over the last three to four months?

It has suffered. Private label tampons are down. Our silk glide franchise is off. It had been weak before the launch of pearl, and the applicator business for o.b. is also off. So as we look at the details of where the pearl business is coming from, it doesn't look as though they're getting any competitive plastic applicator users. Kotex has done a good job of defending their business and show no erosion in their franchise. Our plastic applicator business, as I've indicated, has held up very well. But because of all of the attention that the trade is giving to the launch of pearl and to our defense and to Kotex's defense, it's really been the cardboard user who has had the opportunity of converting to a plastic tampon which in many cases is a better product at a higher price than the cardboard products that are available in the marketplace. So I guess it's not unexpected that this would happen. Our whole goal was to pro-protect our plastic applicator business, and we've done a terrific job of that. I'll give you a little more color around that if you want.

Sure.

As we look at the available Nielsen information for the first 17 weeks, which is concluded at the end of December, that's really September through December, that pearl has been in the marketplace and available to consumers, it looks as though based on Nielsen, and this is three outlet west Wal-Mart, that pearl did about 63 million individual tampon applicators, and we call those sticks. 63 million. The overall Tampax franchise was up about 8 million sticks. Meaning that everything in the Tampax franchise ex pearl lost 55 million sticks. That's actually a cannibalization rate of 87%, which is extremely high. The other businesses, if you look at our plastic applicator business during that period of time, we actually had 1 million more sticks consumed by consumers during that four-month period than the previous year four-month period. We were weak in our cardboard business, which was off about 9 million sticks. And private label was off similarly, as was the other small cardboard businesses in the marketplace. So the vast majority of that 63 million sticks that pearl achieved came out of their own cardboard franchise. Then the rest of it came out of other cardboard businesses. Now, interestingly, and let me expand on that, I know people have said Pearl has been a success.

Let me tell you what I think Pearl has done well. P &G is a gifted company at getting a new product into the marketplace in a quick fashion. They got pearl to the shelf almost on an overnight basis. They got tons of trade support behind the launch of pearl, and they launched their coupons aggressively with advertising at very high levels. So we've had four months of significant bombardment in the marketplace of a pearl message of pearl coupons, of pearl trade support, of pearl merchandising, of pearl direct mail, of pearl frequent shopper coupons, of pearl Catalina in-store coupons. They are superb at launching brands and spending money behind their business. We compute that they spend something like $30 million approximately in that period of time to launch pearl. And they received approximately $14.7 million in business as a result of that. So they are paying $2 for every $1 of business they are achieving. By anyone's evaluation, that's absurd. And obviously, nobody even large companies can't succeed at doing that. Moreover ex-pearl told the trade that they would grow the category by 8%. The category is actually down since the launch of pearl. We had historically been the ones able to grow the category. When pearl launch grows the category 8% and the category's down by 1%, that's really a broken promise. Pearl said that they would achieve a 10% share of sticks and a 15% share of dollars. It looks like they are going to achieve maybe 70% of that, two-thirds to 70% of that. Pearl said they'd source about 60% of their volume from our plastic business as -- with no impact on private label. As I indicated, private label which is a significant force of income and profit to the trade has been hurt by the launch of pearl and virtually none of their volume has been sourced by our plastic applicator business.

So through it all, we think we've done a very good job of weathering a significant firestorm that P&G has unleashed behind pearl. And I know many people would think it's been a success, but Frankly in our opinion, they failed to deliver and with us being the guys that were in their bomb sights, really doing as well as we have, I think that the worst Frankly is behind us. Now as we go forward with more outreach and aggressive growth oriented product improvements, we can get this brand back to growing as we go forward.

That's actually very helpful, but if you could just reconcile in Q4 Feminine Care, the factory shipments were down 10%. So if 10% of your business was affected, can you sort of reconcile what was weak in Q4 within Feminine Care?

Well, we've never in the past given detailed information with inside a segment, but the 10% also reflects discounted product that was in the marketplace. Product sold on deal in essence. Shipments of tampons with are not down 10%, and our shipments of plastic applicator tampons were not down anywhere near 10%. We real I had can't go into much detail beyond that. We'd be giving away too much. Also -- yeah, also our defense started really in the second, end of the second quarter and throughout the third quarter. So we had a very aggressive loading of our consumer during that period of time. Overall, if we look at the amount of sticks that we shipped in the year on our plastic franchise, we were up 9% for the year.

Okay, thank you very much.

You're welcome.

Thank you. The next question comes from Michael Doren of Rx.

Good morning. Two questions. Both of them technical. What was the balance of your ar facility at the end of the quarter and what was your Cap Ex in Q4, owe 02.

That's comparing with the prior year 56.5 the prior year. Our Cap Ex ex for the quarter was 5.9 million for the quarter and 16.4 for the year.

Thank you.

You're welcome.

Thank you. The next question comes from Gates Capital.

Yes. I was wondering about the plastic applicator trend within the last three months. I think you said during the launch period that it wasn't down. Was the plastic down in the quarter?

Well, again, it can be confused by looking at dollar amounts, and since we're defending a franchise from the standpoint of holding onto our consumption, during this period of time, we think looking at the amount of sticks shift or the amount of sticks consumed is really the right way to look at that. Our plastic applicator stick shipments were basically up for the quarter.

Okay. And my second question is what would you anticipate Cap Ex spending being in '03?

We're growing to target to be approximately $25 million, a little higher level than this year based upon the timing of some of our investment programs.

Okay, thank you.

You're welcome.

Thank you. The next question comes from Lehman Brothers.

Good morning.

Good morning.

Just on the factory shipment comment. If factory volume was down 10% and sales were also down 10.2%, does that mean there was basically no change in pricing whatsoever? Whether it's trade spending or otherwise? So basically, gross volume and there was no net pricing change whatsoever? Because I look at your sales --

let me correct an assumption that you made.

Okay.

Our consumption on a stick basis for the quarter was off 6%.

Right.

Okay. That was principally all in our cardboard brand.

Right.

Very good. There was no reduction in our plastic applicator business. That's consumption, consumer take away.

Right.

Okay? So we're kind of mixing shipments and consumption. We look at our consumption to see the real health of the business frankly.

Right.

And we look at our plastic applicator business as being very healthy during this significant amount of activity going against us from a competitive standpoint. Obviously, our plastic applicator business is not doing as well and had not been doing well prior to that. I mean, our cardboard applicator, thank you, Glenn. Cardboard applicator not doing as well and is off quite a bit, but it's not a big part of our business and not a big part of our profit business in tampons. Don't read too much into the shipment picture which is essentially affected by a lot of loading that occurred in the second and third quarters, and change in promotion activity between 20 count and 40 count packages. And, you know, timing of promotions. And the fact, you know, obviously, we had a significant amount of promoted volume, which changes the relationship between shipments that are reported and actual stick count of shipments out the door. So from that standpoint, without getting into the kind of detail that we ordinarily don't get into, I can tell you factually, our stick consumption on plastic applicators essentially, the product that is most threatened by this launch, is not off in the fourth quarter. It's flat versus year ago in the fourth quarter. And overall for the year it's up.

Fair enough. Now, just directionally, what type of net sales or volume trends do you expect to, say, you know, in the first half of '03 versus the second half of '03 directionally without being necessarily too detailed? Do you basically expect that the fourth quarter sales trend to kind of stabilize in the first quarter or the second quarter and then grow in the second half? Does that make sense?

Well, we've said 3% to 4% overall revenue growth for the entire year.

Right.

We said a little bit lower than that in the first quarter as there still is additional promotional activity and defensive after activities. The rest of the quarters, I think, would be normalized. Obviously, there would be a little bit of pick justify to -- pickup to offset the first quarter but we don't see a wide variation of that overall guidance across any of the quarters.

Okay. And would the magnitude of trade spending support in the first quarter be comparable to the fourth quarter for the Feminine Care business?

Probably about at the same level, maybe a little bit less because, you know there was the height of the activity in November/December.

Right.

But there will be some continuation in the first quarter, yeah.

Great, thank you.

Thank you. The next question comes from Kathy Lam of Salomon Smith Barney.

Can you tell us for the quarter the tampon sales growth.

Oh, for the fourth quarter?

Yeah.

Yeah. Category was down on a sick basis 1.5%. And on a dollar basis was off 1%.

Okay. I think in your comments --

I'm sorry. I read the wrong number there. On the -- it was off a half a percent in the dollar basis for the quarter in dollars.

Down half a percent in dollars and down a point and a half?

Right.

You had talked that the worst is behind you in terms of the level of competitive activity in the tampon category yet we should anticipate that you will increase the promotional spending to defend the tampon market shares. I guess it worries me a bit that perhaps the category is heading into what you went through in the early to mid '90s that was characterized by price reductions. Is that what you expect for the tampon category in '03?

I don't.

What's different?

Well, first of all, we know how to grow the category, as we've demonstrated. Back then, we didn't know how to grow the category. The only thing that we knew was how to defend our business aggressively against a guy who was essentially building his share growth on the basis of very deep discounted promotions. And we blunted that and caused Tampax to essentially decline for about 16 successive months. And that led to their sale of the business to P&G. During that period of time, we also found the secret to growing the franchise. And it's our intention to continue to exercise that knowledge in the marketplace and to get back to growing. We've had to for the past six months become very defensive in order to protect our franchise against somebody basically who was saying they were going to take our business away and they were going to do it very aggressively and certainly they've tried very hard to do so. When I say the worst is behind us, I mean that, you know, P&G is so good at launching a product and so rapidly getting distribution and so quickly firing up the advertising and couponing activity that really anyone who has ever had any interest in seeing a commercial for a new tampon has certainly been exposed to theirs for a myriad of times and anyone who ever wanted deep discount coupons to buy a product certainly has had five or six opportunities already because of their efforts.

So there's going to be a wear out factor, frankly, on their ability to really convert more people. And there are other things we know about, their franchise and what they've developed that suggest to us that they really haven't been successful in getting the hard core tampon user to make a conversion to them. I'm not going to share that with you because it would be competitive information. And I know P&G people dote on our commentary to you. And I'd rather not give away competitive information. Also, you know, we get very good intelligence on the basis of how they're doing account by account on almost a weekly basis. And for the last eight weeks, they've shown very little uptick. Frankly, their share development has been flat as water on a plate. And during that period of time, ordinarily, you would expect that if there was going to be continued growth in their franchise that there would be uplift in their shares over that period of time. We haven't seen it. They quickly built to a level of business, then they basically seem to be plateaued no noter how much money they fire at the marketplace. I think they have weakness in their franchise fill loss philosophy. I don't think they know how to grow the category. I think they think their product is better than consumers think it is, and I think they've underestimated our ability to defend our business.

And so first quarter '03, is it fair to assume that Sun Care sales should be down but not at the same magnitude but not at the same level as the December category?

Yeah. I think it will be relatively flattish to slightly up if things go in the right direction.

Also, you had talked about how your strategic review how the process has been robust. Can you qualify that? Is it more that the appetite for acquisitions are much stronger than you had originally expected?

You know, I can't really comment on that, frankly. As you know, there hasn't been a lot of M&A activity in the marketplace for quite sometime now whether it be in our industry and other industries. We kind of knew that when we embarked on this process. And that wasn't really a contribution from our standpoint. We have what we consider to be some very outstanding businesses and very strong positions in their segments. We have a very strong number two in the tampon category. And have shown the ability to grow that business. We have a very strong number two in the Sun Care category and have been growing that franchise year-over-year. We have the number one position in most of our Infant Care businesses or a solid number two position, and we've shown our ability to innovate and to defend aggressively these franchises. So we have some organizational capabilities that allow to us compete very successfully against a much larger companies with you might say more resources or willingness to spend more money. We have a great resilience of getting our businesses supported and defended successfully. And we have a franchise position that would be important categories that would be appealing to lots of people. So we expect a robust response to our effort and that's where I think we are.

Great. Thank you.

Thank you. The next question comes from Amy Chasen of Goldman Sachs.

Hi. I just really have one question, which is that, Miami, you know you seem to Kate that proctor will take the foot off the accelerator and I just got off their conference call and they talked about the strategy to have a three-year time horizons where they continue to spend over time and it's not a one-time bliss. And so I'm a little bit concerned, I guess, when I look at your expectations for your earnings for this year, you really haven't changed your guidance either for your sales or your earnings, get your tampon business came in well below expectations in the fourth quarter and, you know, my expectation at least is that P&G will continue to spend at close to those they levels. Why haven't you changed your guidance for '03?

I do not expect P&G to take their foot off the spending pedal. My comment comments were that I don't think they will get the same kind of returns for the additional moneys they are going to spend that they've gotten to date. Because they basically had the ability to flood the marketplace with messages and coupons and inducements to are people to try their product. As you know, money doesn't necessarily buy success or else their Oil of Olay cosmetic line would have been a huge success to date but I think it only lasted in the marketplace one year. The therm ma care brand where they spent well over $100 million should be a booming success are from what we understand is having severe problems in the marketplace and it looks like they again spent $2 to $3 for every sales dollar they achieved. Not that P&G is a pushover or doesn't know what they are doing, but let me tell you, not everyone company out there is able to be successful all the time, and that includes P&G. There is a great difference between what they want to do and what they are capable of achieving despite how much money they spend. We expect them to come at us with everything they've got. We think they are coming at us in a deceptive way and we're suing them over that. We're a dog with a bone. We're never going to give up. We'll defend our business to whatever degree we need to and we're not going to allow P&G to get into our franchise. Frankly, we don't think they understand exactly how to grow a brand in this category or they would have been more successful with tax [INAUDIBLE] but they have been miserably disappointed in the progress despite lots of money.

I guess, Mike, if you are going to defend your business, again, why haven't you changed your sales or earnings forecast to account for that incremental spending you may have to do? I just don't understand given the short fall in the fourth quarter with this business, how you can still have the same assumptions that you did six months ago? Maybe I'm missing something.

No, I don't think you're missing anything, Amy. You're very bright but what you are probably missing is what we expect to get out of the the launch of these improvements in our product and our more business development efforts in order to continue to grow the category and get growth returning more more or less to the kinds of growth patterns that we had in the past. So we see the first quarter as our transition period from defense to essentially aggressive growth activities. Not that we're ignoring the pearl efforts or launch, but frankly, we think that the things that they've done already, if they haven't been any more successful than they currently are, are not likely to be significantly more impactful despite how much money that they spend.

Okay, fair enough. Thank you.

You're welcome.

Thank you. The next question comes from Ronald Phillis of Bank of America Securities.

I was wondering if you could go over the gross margin and SG&A in the fourth quarter in a little more detail for us.

The gross margin was a little bit lower than last year.

Yep.

And that's going to be because of mix. We had lower feminine care and lower Sun Care sales. Those are kind of our stronger players, they all have good margins at the upper end, so that would drive that.

Right.

SG&A, we can see, is -- up a little bit perfect last year. Right. 55.2 against 55.0. That's not a lot. We've done fairly well in controlling our operating costs because included in there is a little bit heavier promotional support in tampons. So in the aggregate, I think it's managed well.

Okay. The question that you may have gone over, I apologize if you have, the inventory days over the past two quarters, I think, let's see, one, two, over the past two quarters, the trend has been favorable.

Receivables, yes.

Well, inventory days as well.

Okay.

Obviously, the receivable days have been trending favorably for a while.

Right.

But for the fourth quarter, I've got your days up about six points.

In inventory?

Yeah.

And that I did comment briefly on that. It's really related to Sun Care.

Okay.

Two things is we've accelerated our process of bringing in the returns from this year and getting them back in inventory more quickly, which is taking the inventory up from a year ago and secondly, we have shifted some of the opening orders to better manage with the trade partners. We've taken volume out of the fourth quarter into the first quarter, and you know, given the capacity you have to drive through the production process to get ready for the season. We still produced about the same amount, but it will ship out after the cutoff of the year as opposed to before. Other than that, all of our other inventories are very much many line with our coming quarter forecast.

Gotcha. You want to follow a little about Amy's comments. This isn't meant to be combative in any way. Whenever I talk about you guys, I typically refer to as you guys as a management team. It is a talented business facing tough competition. There's not a lot can you do about it. But when I hear, you know, the comments about, you know, how much the P&G folks are spending versus how much they are getting, it just really strikes me as very, very similar to the commentary that we heard, you know, a long, long time ago when J&J was entering the category and that commentary went on for a while. We saw the results of it. I just, you know, we just got off the proctor call as well, and they seemed pretty confident and aggressive and they are claiming they are really taking share and growing very significantly. And I just can't see despite your best efforts, I just can't see how you guys are going to stave these people off.

Well, you know, it's hard not to respond to that in a way a bit emotionally.

Right.

Because it says hey, we're not capable of competing against P&G. And you know that's actually an affront to me and my organization. We have a history of being successful against lots and lots of people that have come at us both here and frankly other places where P&G tried to get into some of the businesses I managed and today they have either no or very little foothold. And as you know, P&G is probably about 50% effective with their new product launches. Some of them are very successful and some of them are real, real, real disastrous.

Right.

And within their economic structure, the real disasters are hitting quite well. And they go on to other things. They quickly exit business that they call nonstrategic but base ache little what that means is they weren't able to carpet and that's done all the time. Look, P&G is a wonderful company and they are very, very good but to say we can't compete with them is I think a discredit to our history, our capabilities and in essence, you know, our recent past with you. You talked about, I think you meant Gerber coming into the Infant Care business because J&J did come in and they were kicked out quickly and they had little impact. Gerber has been a significant spender in our cup category and toiletries. We're back to growing share in toilet trees and growing volume in toiletries. Our recent interdiscussions have grown nicely. Gerber has continued to grow and we feel comfortable about our ability to maintain our leadership position in that segment. There is a difference, though, between cups and disposable feeding estimates and tampons.

Tampons are an intensely personal care item probably as personal as any possible category is. People don't just change brands of tampons because of prices or new gimmicks that are offered in the market place. Every woman is different physically and there are lots and lots of different varieties of tampons in the marketplace. Our goal has been to essentially defend ourselves by protecting our plastic applicator franchise from the consumption standpoint. The numbers suggest we've done that. When I say the worst is behind us, what I mean by that is it's not that P&G is going to stop or not going to continue to try or continue to spend and continue to do all kinds of stuff. It's just that the news of pearl and the flashiness of pearl and, you know, the most exciting time of pearl is behind them. And as they go forward, there's a diminishing return and the fact that their shares, I can't tell what you they told you, but I can tell you I'm looking right now at a sheet of paper that shows weekly share progress for pearl, and from a consumption standpoint over eight months, it's as flat as flat can be. Eight weeks, rather. It's as flat as flat can be. That's not a good sign for them. If they had a very successful business, then that should be going up. It's not. There are some other things I know about their product, and the development of their product. I really cannot share with you because I don't want them to know it. That is not encouraging from the standpoint of developing a solid franchise. You just have to trust me on that. We're going to do what we need to do from a spending standpoint to support this business.

I know everyone would like to see us defend aggressively our business and at the same time, grow our top line and our earnings per share and EBITDA and all 6 all of that other stuff on a quarterly basis. You guys know better than that. That's not the way the world is, and no business, no matter how big they are, how well run they are can generate an even smooth quarter to quarter growth over a year ago when they have initiatives like the ones we're doing. Every time we come across that choice of do we try and do that or do the right thing for [INAUDIBLE], it's always been our choice, do the right thing fort business because in the long run, we want healthy, thriving franchises and want to be able to continue to grow our businesses for our shareholders. And the value is in the long term and that's what we're doing. That means we've got to spend more dollars in order to defend a franchise. We'll do that because we're going to maintain our positions and we're going to maintain our ability to grow as we go forward. I think that's the right thing to do and I think it's frankly underestimates us to think that just because P&G wants to or because P&G is spending a lot of money they have a right to take our business away. We have something to say about that and by God, we're going to say it.

Mike, I think you may have, you know, taken my questions the wrong way. I think that any competitor, especially an irrational competitor with a big wallet can certainly create a problem in this market. I recall many, many years ago that's what happened. But that would be something I would key on, which would have nothing to do with your reaction.

Yeah, well, it's not so much just about deciding to spend money irrationally. You have to be able to get something out of it. You might say that the amount of money they spent against the business that they've gained already has been irrational and that that doesn't show as though they are ramping up their business in any way. I expect them to continue to be 'irrational' from a spending part of this. It's up to our devices to find ways to deal with that. I think the fact that we're launching two innovations in our product line that give actual meaningful benefits to our users and to tentative new users is a good sign that we're not just sitting back but becoming aggressive in offensive activity that we think is the best way, frankly to not only defend our business but to grow our business.

Thank you very much.

You're welcome.

Thank you. The next question comes from Alice Longley of Credit Suisse First Boston.

Good morning.

Good morning.

Just an effort to understand the first quartern and fourth quarter a little better. In Feminine Care, can you give us a sense of change in growth sales so we can see how much the 10% decline was hit by the deals for the promotions?

I think the difference is that the gross sales were off by about 6% in the quarter for total scent care as opposed to 4%.

Okay. That's helpful. Then you get into the first quarter. And I think you said that on corporate sales would be up a little and so many care -- Feminine Care would be up a little and you said the promotions would continue to be higher than a year ago. I don't understand how your Feminine Care sales can be up in the first quarter. Is that right?

We're expecting to ship a good bill bit of volume in the first quarter over a year ago.

So it's sort of ship in being higher than sell through?

It should be good sell through as well. We've got some very promotional activities scheduled with the major accounts along with sampling efforts against our new items in the personal cleansing cloth and heat therapy and tie in promotions against those with good display activities. We're expecting good volume even though there is aggressive promotion against netting out to hopefully either flat or slight increase over a year ago on a net basis.

All right. And as far as the quarterly progression of the year is it concerned, the bottom line increase will be pretty even between second, third and fourth quarters? It sounded like you said the second quarter goes back to the rates of growth you expect for the year?

Yeah. The second and third would be --

I'm talking bottom line.

EPS?

Yeah.

And obviously the fourth quarter would be a bigger improvement because of the timing of promotional activity between the first and the fourth.

Okay. And then I'm sorry, back to the first quarter. Sales are up but the bottom line is down a little bit. Where is the big increase in expenditures going to be that we'll push margins down?

SG&A line.

Do you want to give us some, you know, up like how many basis points?

Oh, I can back it out, I guess.

The gross margin, that should be fairly even?

Yes, reasonably close to a year ago.

All right. And then I guess one other question. If nobody's really asked about yet. I think you in Sun Care, you're expecting a 5% increase for the year, but you were going to be continuing working on the return policy which intended to take something off of sales. What's the rationale for getting up 5% for the year on sales of Sun Care?

Well, we've done a couple of things in terms of our program where we shifted some volume from 2002 into 2003, so that clearly helps. Plus, we're expecting as we did this year, we grew the consumption by 5%. So this year should start to reflect a sales corelation that ties to the way that the market is driving consumption and we have a tremendous program. Good, new products, and we're off to a terrific start in terms of the order levels from all of the major customers.

Okay.

The rationale is that we want to see our shipments over a period of time on Sun Care grow at the same rate our consumption has been growing. We want to take significant costs out of the redundancy of shipping in volume that at the end of the year gets returned to us and costs us money to inventory, recondition and repackage. And in some cases repackage and in some cases discard and throw away. It's costly and extensive. We think we can have a much more streamlined approach at a much less expense and have more of a representative picture of what our Sun Care business really is, a nice, growing business year-over-year.

So Sun Care sales may be up more than 5% in the first quarter because of the shift?

Possibly. Just depends on when we work with our customers to determine the best time for them to receive it, whether it's the first quarter, second quarter. Obviously, the big part of the season covers January through April so there could be a swing between quarters, but in the aggregate, we're expecting sales growth at the higher range.

And Infant Care in the first quarter has a very easy comparison so it might be up particularly strongly in the first quarter, too?

We expect it to be in line with the total company guidance.

All right. Thank you very much.

Thank you.

Thank you. The next question comes from David Camen of Angelo Gordon.

Hi. Ed Kresseler for David Camen. Just on the sales process. Wondering if any books had gone out?

I'm looking at Glenn and Glenn's looking at me. We're trying to figure out if we can answer that question. Yes.

Thank you very much.

Thank you.

Thank you. We have a follow-up question from Connie Maneaty of Prudential Securities.

Hi. I'm sitting here playing with my quarter [INAUDIBLE] model while all of the questions were being asked, and in order to get to the same kind of earnings with the way the quarters are progressing, the fourth quarter looks like it needs operating profit to grow something on the order of 40% with a 7 point increase in the margins. Could you give us the business reasons why that would be reasonable or possible?

Yeah. We expect that by the fourth quarter we will see the full impact of the tampon improvements that I mentioned earlier taking effect. We will see the benefit of the launch dollars that we're spending in the first quarter against our new items, including heat therapy and our [INAUDIBLE] deep Woolite product, which is just doing a great job in the marketplace driving that brand to record highs. And being very responsive to the advertising that we've already run. And we'll be able to tail back on a lot of spending that we had that was really one-time spending in the fourth quarter of this year. So when you put it all together, we think we'll have solid volume numbers over a year ago, and also, we won't have the unusual impact of the Sun Care season return program that we had and that we suffered through in this fourth quarter. So we're back to a more healthy Sun Care situation on a year-over-year basis. So when you put all of that together, also, we'll have the benefit of cost reduction reductions on the initiatives we kicked off. So it should be a very solid quarter for us.

And what are the big cost reduction programs for 2003 and final question, are you launching new products in your other categories that you've either announced to the trade and can talk about or otherwise could you tell us which quarters they'd be in?

We have a couple of new cups and I am not sure whether I announced it last time or not, but we have a new toddler cup that is vastly superior to the toddler cups that are currently in the marketplace. And we have a sport version of our very successful insulator cup which will be shipping in time for the summertime season when insulated cups seem to sell the best and outdoor insulated cup for older kids should be quite incremental volume for us. I think that's pretty much it that we haven't announced, right?

Right.

Okay. Was there another question that you had?

Yeah, on the cost reduction side, was there any particular programs that will kick in?

Yeah, we have a couple. The benefits of Sun Care returns really starts to materialize in 2003. We see that as being between $2 million and $3 million in savings over a longer period of time. We also have a major effort within the company to reduce the cost of unsaleables in the field, which is, you know, sounds hike a small factor but to us is a significant cost. And we found in our analysis that reducing unsaleables almost has a dollar for dollar impact on sales dollars and profits so it's very attractive to us. Plus we have an ongoing program which generates a significant amount of cost savings each year.

Okay, great. Thanks.

Thank you. The next question comes from Brian Long of Chesapeake Partners.

Hi, I was wondering if you could clarify a term you used during the call when talking about the process you are going through. You used robust to describe it. What does that refer to? Does that refer to preliminary interest or something else?

Well, I'm going to go right back to what I said before. I said that I expected the process to be robust, and from my perspective, it is. I think you can interpret from that interest.

Okay. And let me ask you a follow-up. You know, a lot of us share your frustration with where the stock price has been. Now that you've, you know, taken the step to look at opportunities out there, can you see going back to business as usual or in your mind, you know, does something, you know, one form or another have to happen here to change things?

We really will be prepared for all eventualities. This is a terrific organization who is committed to getting the most out of the business. Their response to our announcement has been obviously a great interest and somewhat concern but at the same time, they know that what is in the best interest of the shareholders is the right thing to do. And then in the long run, it could create greater opportunities for people. That means we will do what makes the most sense from a shareholder standpoint. And if it's any of the alternatives that I mentioned, that's what we will do, whatever it is. And if that also means that at the end of the day, we think continuing to execute our strategy and find new ways to grow the business over time through acquisitions and continued delivering of it is what we'll do. Our organization will certainly be ready to do that without losing a beat.

Okay, great. Thank you very much.

You're welcome. Thank you.

Thank you. We have a follow-up question from Kathy Lam of Salomon Smith Barney.

Hi, can you go over the details what drove in the care business?

It's solid across most of our businesses. We saw growth in our disposables from a shipping standpoint. Growth in our hard bottle reusable business. Growth in our soothing business. We saw growth in our wet ones growth in baby magic business. We were flat in diaper genie and basically a pretty solid growth year-over-year in a lot of our businesses in Infant Care.

So what are you seeing from the competitive front in '03?

Oh, it continues to be very, very intense and aggressive, but as I said before, after a while, there is a wear out factor on people and when we introduced our insulator cup, you know, we saw a great response to that. Lots of people were running around trying to get an insulator cup in the marketplace. We've seen a few but none of them frankly, either look like or perform as well as our product does because we opened up a new technology. In most places, we are becoming the innovator and we are seeing good response to them from a consumer standpoint. We feel as though we just stepped up to a higher level of competitiveness and we're -- we've built it into our expectations and performance and this business is, you know, is certainly looking good right now.

For the quarter, was your Infant Care sales above the category growth rate?

Well, you know. We're in so many different businesses it depends.

For feeding.

If you look at the feeding business and you break it out in the four segments we are were above '03 for hard battles, and above the category growth rate for soothing, which are pacifiers. We are the category in disposables so with an 85 share or whatever, so in cups we were below the category growth rate, but we think that's more related to the fact that our insulator cup is really tends to be more of the supper time impact than in the wintertime. It's very successful cup and think it will get back to showing more growth as we go more towards the summer.

Great, thanks.

You're welcome.

Thank you. The next question comes from Bill Weiss of High Rock Capital.

Hi. I was worried the company might get sold before I got to ask my question.

This is a long conference call.

Thanks for going extra. I appreciate it. Just being curious. Obviously, everybody's frustrated with the value of the stock price in the public marketplace. You've taken the steps that I say I admire, you know, potentially you guys putting the company on the block and potentially putting yourselves out of the job for the benefit of your shareholders. What that tells me is that your conviction level is extremely high that the stock is not being quoted at a proper valuation in the public marketplace. I'm curious, when you started this process or decided to go ahead with it, you know, what were the either other private market transactions you were looking at or what you consider to be pure company value I guess? What do you think is a more appropriate measure or benchmark for people to be using or people to be using?

I'm not sure I could answer that because I think it would be miss interpreted by people as me giving an indication of what we are expecting out of the process. I think you can do your own homework and see what our multiple is and what the multiple is of our peer group of the consumer products companies and personal care companies. We have, in my opinion, done and on uncertain economic times and great competitive activity and we're probably at the lowest [INAUDIBLE]. I know the market is irrational today and all of the other things. Given the frankly disrespect that our efforts and our earnings and our dollars in the marketplace have been worth, we felt this was the right thing to do because our shareholders certainly have been supportive and loyal and understanding and deserve a solid return. You can bet that whatever is the right thing to do for shareholders as a result of this process, we will do.

Thanks, good luck.

Thank you.

Thank you. At this time, we're showing no further questions.

Well, then that's a good time. This has gone a little bit longer, I guess I'm not surprised given the amount of things we had to talk about. You know when I look at it all and look at 2002, I have to tell you that I'm awfully pleased and proud of what the organization has done, given the things that have occurred this year. I mean, there really have been three major initiatives that we've taken on. One, of course, was to get into this returns issue related to our Sun Care business and develop a much better plan of going to market than in the long run will reduce costs and essentially show the Sun Care growth that we are getting from a consumption share standpoint year-over-year. It has indeed taken volume out of this year, certainly out of the fourth quarter and out of the third quarter, but it was the right thing to do in the long run and our organization stepped up to it and we've done it and we're pleased with where we are to date. We wanted to return our Infant Care business to help and it's taken longer than we would like, but we're pretty pleased with the progress we've seen to date. It's not to say every quarter will be growth over a year ago but we think with where we are today is a strong position and we're delighted to see the fourth quarter results and we have great expectations for the year as we go into 2003. Then obviously along the way, and on top of all of the other things we have to do, it was our responsibility to aggressively defend our tampon business, particularly our plastic applicator business begins a firestorm of a launch from p & g and their pearl launch. I think our team has done a fantastic job on that. On top of that, they've had to do it with the knowledge that the company is going through a very detailed process in order to maximize shareholder value. Moreover, we returned 90 cents earnings per share which was right on top of our guidance for the year. We generated $61 million that we used for debt reaction. I would say by anyone's measure, that is a terrific year and I'm proud of my team for having done it. We look forward to competing in 2003. Thank you very much.

Ladies and gentlemen, thank you for your participation in today's conference. This concludes the program. Good day.