Edgewell Personal Care Co (EPC) 2003 Q1 法說會逐字稿

Ladies and gentlemen, welcome to your Playtex second-quarter earnings conference call. At this time, all participants are in a listen-only mode, with a question-and-answer session to follow your presentation. [OPERATOR INSTRUCTIONS]. As a reminder, this conference is being recorded for replay purposes.

And now, I would like to turn the program over to your host for today's call, Mr. Glenn Forbes, Executive Vice President and CFO of Playtex.

Thank you. Good morning, everyone, and thank you for joining us today. With me here is Mike Gallagher, our CEO. 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 by management during today's call. We encourage you to read the company's SEC filings and last evening's press release, which discussed in full factors that could cause actual results to differ from those made in any forward-looking statement.

A replay of this call will be available beginning this afternoon, and will run through the end of the day Saturday, July 26. The replay dial-in number is 888-286-8010, and the pass code is 48257502. To access the webcast replay of this call, please go the investor relations portion of our Website, www.PlaytexProductsInc.com.

I will now turn it over to Mike for his comments.

Thanks, Glenn. We're going to cover a summary of our second-quarter 2003 results, and I will give some key highlights regarding the business. Glenn will comment on the financials for 2003 and then 2003 guidance, and we will take your questions and then we will wrap up with a summary comment. But before I begin comments on the quarter, I would like to make a comment on the announcement to pursue strategic alternatives.

As you know, we made an announcement in mid-November that we would embark on a process to review strategic alternatives for Playtex. At this time, I can only reiterate what I said during our last call, and that is that we are in the midst of that process, and we will publicly announce any results at the appropriate time. Beyond that, as a public company, we can make no further comments, and I will be unable to answer any questions related to this process.

Turning to our second-quarter results from an overview standpoint, obviously, we had a difficult quarter and a tough first half for 2003. Clearly, the major factors influencing our business included a very intense competitive battle in our feminine care business. Certainly, the economy is having some impact on a number of our categories, and finally, the weather has been a major disruption to our Sun Care business. Let me give you some perspective by summarizing the major factors of our sales decline versus year-ago for the six-month period, along with a few highlights for each business segment.

Our total sales for the six-month period were below year-ago by $37 million or 9 percent. 70 percent of that, or $26 million, is related to the shortfall in Feminine Care. About half of that a little less than half of that is due to share in consumption loss, and the balance of that loss is due to one-time promotional inventory adjustments that we have discussed in the past that are, indeed, one-time in occurrence. Overall, our dollar share for our tampon business in the second quarter was 27.3, clearly down from year ago, but up from the first-quarter level of 26.8, which is showing gradual improvement, as we had indicated in our last call. Our consumption for this business is below year ago by 11 percent. Our consumption losses in plastic are less than that [--] 8 percent in dollars, 7 percent in units for the six-month period. The balance of consumption loss is related to our cardboard segment, which is a smaller portion of our overall business. We have continued to incrementally spend to defend our brand during this very key time of defense, and we will continue to do what is necessary to protect our franchise from a long-term perspective. The competitive product Pearl's share [ph] remains flat, at about 8 percent of units and 11 percent of dollars. Cannibalization of their base business is running about 85 percent on a year-to-date basis, 85 percent of units. Going forward, we would expect to see gradual share improvement in our business to continue as it has started to already in the second quarter.

I know we will talk more about Pearl later, so let me move on to Infant Care. Here, we had a total sales shortfall of $8 million in the six-month period. A little less than half of that is related to our baby wipe business, which we have indicated in the past is non-core. The balance of it is related more to slower growth in a number of our traditional categories, which have historically shown nice growth, which we believe is related more to the economy and should be more short-term in duration. Our shares have been stable, showing modest improvement in many major segments. We had good progress, we think, from the first quarter to the second quarter, where our core business actually showed growth in Infant Care over the year-ago second quarter.

We have seen some category trends, as I indicated, which have been impacted by the economy, and we believe that that may continue for a short period of time, but should not continue for a long duration, given that babies continue to be born at the rate they have in the past, slightly growing. We continue to see good progress in a number of our businesses. Our Wet Ones brand is showing solid growth and good share gains. Our cup business has started to stabilize and show good performance and, most notably, we have seen excellent gains in the hard bottle segment as a result of our VentAir product. We have now become number one in hard bottles, and for the first time ever, Playtex is number one in all three major forms of infant feeding, which includes hard bottles, cups and disposable feeding. Going forward, we would expect less of an impact in the non-core wipes business to our overall business, and we will continue to bring innovations to the marketplace, which has been the bulwark of our share progress, as we have gone forward.

Turning to Sun Care, clearly, the weather has been a major factor in this category, with the worst recorded summer in the history of the East Coast. The category is off 13 percent through June. This is an anomaly with this category, which has grown every year since we have been involved with Sun Care, and generally grows in the 5 to 7 percent range, on average. Our share for the six-month period is 21.7 versus 21.5 year ago through June. Our returns initiatives is starting to pay dividends. We've continued to monitor our shipment levels throughout the entire selling season. This has resulted in less inventory in the retail channels, which will reduce our returns. In light of the category weakness, we think probably, because of the efforts that we have taken in managing our shipments early on in the season, that our inventories levels are probably lower proportionately than any other Sun Care Company in the marketplace, and we should not have a large negative surprise as we go forward, assuming that the balance of the season continues to perform as well as the July weather has. With several weeks of this consumption to go, we think if the weather is good for the next six to seven weeks, then we ought to be able to come in right on our numbers, as we had expected to, on a net basis.

When we look at Household and Personal Grooming, our sales for the first half are off about $2.5 million. We have seen excellent trends on Woolite, as a result of Oxy Deep. Our other categories, while we're showing good share growth, are showing softness, which we think is more related to the economy than any other factor. Based on our first-half results, we recently updated guidance for the balance of the year, and Glenn will provide the specifics to that. Tampon comparisons going forward should get better, as we work on our way through these inventory disruptions, and as we start to record shipments versus the year-ago competitive period. Share trends in other key business segments are positive, and obviously we look forward to improvement in the economy and what influence that will have on our categories, and of course, more normal weather as we go forward.

With that said, I would like to turn this over to Glenn.

Thanks, Mike. For the 2003 guidance, I will reiterate and elaborate upon the company guidance that was updated about a month ago. We indicated net sales would be down for the year by approximately 5 to 6 percent. Within the segments, Feminine Care we would expect to be down about 13 to 15 percent for the year. Infant Care, down in the low single-digit range. Sun Care would be plus or minus low single digits, depending upon the weather factor, and Household/Personal Grooming down mid single over the average of the year.

Our gross margins should continue to be about in line with the year-to-date range, which is in the low 50 percent range. Our SG&A expense for the year should be up about mid single digits over year ago, and our earnings per share, we indicated, would be between 42 and 45 cents for the full year. Our third and fourth quarter breakdown of that guidance is we expect topline to be down about low single digits in each of the quarters. Earnings per share in the third quarter would be in the 5 to 7 cent range, and for the fourth quarter in the 10 to 12 cent range. Within the segments, we would expect sales for Feminine Care in the third quarter to be down about 10 to 12 percent, and in the fourth quarter down low single digits, as we go against the anniversary launch in the fourth quarter of a year ago. Infant Care in the third quarter should be up mid single digits, and about flat in the fourth quarter. Sun Care in the third quarter is a relatively insignificant period, so it should be pretty much in line with a year ago, and the fourth quarter could be up slightly. Household and Personal Grooming would be down mid singles in both the third and the fourth quarter.

From a debt and interest point of view, our total debt at the end of the quarter was $805.5 million. We had no revolver drawings. Our debt repayment target for the year, based upon our new guidance, would be in the $20 to $25 million range, and our interest expense, reflecting the current interest rates and the recent bank credit agreement amended, would range in about the $15 million level per quarter. As I mentioned, we did announce about a month ago a credit agreement amendment that increased our interest rates on both our revolver and our term loan. It has an impact this year up about 2.2 million, and that is baked into our estimates. We also got to revise covenant levels based upon the current operating trends.

From a working-capital point of view, our receivables, according to our calculations, are just up slightly, about 78 days versus 76 last year. And that, again, is driven by the influence of Banana Boat, the seasonality of it. It's a larger portion of our sales this year than last year; it's about 24 percent in the first half versus 22 percent of our business, and it has some influence on our overall trends. And our inventory weeks are relatively flat at about 11 for both periods.

We're ready to take some questions, please.

[OPERATOR INSTRUCTIONS]. George Chalhoub, Deutsche Bank.

Glenn, a couple of housekeeper items first, if you don't mind. How much was exactly available under the revolver net of fees? I know the outstandings were zero.

121.6.

And how much was outstanding on the AR facility?

61.8.

And the CapEx budget for the year, Glenn, is still in the $22 to $23 million area?

Yes, in the low 20's.

In looking at the Feminine Care side, obviously, looking at the market shares, the promotional activity that has gone on has been one of the factors in the weakness. And, Mike, from your comments, you seem confident that that promotional period has kind of taken its cycle through. And looking into the third quarter, we should be seeing the impact of that maybe gone away. In terms of your expectations of market share pick up, or the improvement in the market-share trends in the tampon business going into Q3, and also as we anniversary the launch of the Tampax Pearl, do you feel that the sequential improvement that we're going to see is going to become fairly tangible, once we have the October-November timeframe, or is it hard to say that at this point in time?

I think it's hard to say that at this point in time, George. We are looking for very modest upticks in share, not major upticks. P&G is still spending very aggressively. We expect that they will continue to spend aggressively for, certainly, year two, and probably into year three. We have done quite a bit of modeling of what we think their numbers are and what their numbers probably were from a planned standpoint. If you are interested, I can take you through that. But basically, we are expecting this to be a long-term fight. We think that it will be more and more difficult for P&G to gain any additional share against their current position, and they are facing a very horrendous cannibalization rate that almost takes the majority of their gains away from them from the beginning.

And, Mike, in terms of the injunction that you got on the false advertising, did you see a change in the angle they are pursuing right now, particularly that the cannibalization rate is so high? Are you seeing them try to do something different now, in terms of advertising behind Tampax Pearl?

Well, the advertising they have on the air now is not making outright claims of superiority against our business. As you know, it was found in court that their claims were false and misleading, and they have had nine months of very extensive spending behind those false and misleading ads. And now, as they go forward, they will have to rely more on techniques of communication that are less boastful about the performance of their product. And how exactly they do that on a long-term basis, I think they are probably working to figure out, at this point in time.

On the Sun Care side, Mike, the Playtex market share obviously continued to go up, as we see it in the IRI data, despite the category weakness overall. But I think one of the notable items, at least to me, was that Coppertone's share was down fairly materially in the last four-week period. What exactly is going on there, for them to be up so much and you guys still kind of picking up some traction?

Well, Coppertone is [--] the sunless segment of the business has not done well, and Coppertone had a big success with the launch of their Endless Summer brand. They are losing share in that segment, and that segment being down, that really has impacted their overall share, probably more than any other factor. Coppertone has had a serious problem in really staking out what their leadership position is in the marketplace, from a long-term perspective standpoint, and that has made an opportunity for Banana Boat to kind of seize that leadership and be the innovative leader and the communication leader to consumers. So I think, from that standpoint, that's pretty much the same trends that we have seen historically. And this is just, we think, a continuation of that story.

Ron Phillis, Band of America Securities.

A quick question about the AR number. It something that we can fairly easily calculate, right? If we take the memo account and net that against the balance sheet, that's basically the number that went out the door to the conduits? Is that how it works?

Yes, basically.

Question for you, Mike. When you think about your increased level of spending to defend share, how do you sort of optimize that? How do you guys think about that?

That's a great question. We have been spending a lot of time in the last couple of months, really, analyzing that, because it's our intention to bring that down back to more normal, traditional levels over time. We have already begun that process. In a way, the amount of activity that exists in the marketplace in the tampon category, from a promotional standpoint, actually makes it easier to do that, because when so many people are throwing so much money at the trade in a category, the effectiveness of what you get for that money starts to come down dramatically, and we think we have seen that in our own numbers. So it becomes easier to start to pull money away and to return to a more proactive approach of talking to consumers through media and other forms of stimulating consumption on a real basis, more long-term commitment efforts, getting people to buy your product from the standpoint of its advantages and benefits to them, as opposed to its pricing structure. We know a significant amount of product bought by Pearl has been bought either on deal or by coupon. And the loyalty level to the Pearl franchise, based on the research that we have got, suggests that it is not very strong, whereas we know the loyalty level to Gentle Glide, our plastic applicator business, is very, very intensely strong. And we think that it will be [--] as long as we do it appropriately and reasoned, it will be okay for us to wind down some of the extensive spending that we have had in defending our business, without having too much disruption against the flow of the consumption panel. When it comes to advertising, we strongly believe in advertising. We think it's the most important way of communicating benefits to consumers and really securing long-term franchise growth. And we will make the adjustments that we need to make over a period of time, in order to get our P&L back in shape on our plastic applicator business.

I hope that answers your question, Ron. We really can't go into more specifics about what our spending is by quarter, obviously, from a competitive standpoint. But it is our intention to start that process, and we have already begun.

Ann Gillin, Lehman Brothers.

Your commentary around the economic activity [--] was it more acute this quarter than you have seen?

No, we saw it in the last quarter, as well. It just seems to be [--] and I've seen it not only in our categories, but in other summaries of consumer categories where a market basket of categories is looked at. It seems as though there has been a fairly broad reduction in the existing levels of growth in numerous categories, and certainly it has been a factor for us. Our infant feeding category, which has historically been growing nicely, is showing a bit of a decline. And we can only assume that that is related, really, to economic factors more than anything else. In the second quarter, the dollar volume of infant feeding was off 3.5 percent, and we know on a long-term basis that's not going to be the case. But it certainly has been true for the past six months.

And that presumably is category?

Category.

And just to be clear, are you seeing it more play out in negative pricing, or you are seeing units, also?

It's actually both, but certainly it's [systemic] to units.

And that just begs the question, is there any sort of mix effect, either by channel or by type of product, that may also be weighing in here?

Not in general, no. Obviously, the past trends continue; the mass class of trade continues to gain more share, generally, of categories, and taking it more from the food class of trade. But I think what we're seeing are real short-term declines in category trends, which we have to believe is related to the economy more than anything else.

Okay. And just switching to Sun Care, you mentioned that your inventory levels are lower than peers.

On a proportionate basis.

I'm sorry?

On a proportionate basis; in other words, in proportion to the size of the business that we have.

Okay. All right. How are they relative to your year-ago level?

That's a great question. And the answer is that they are below year-ago, at this point in time, by 10 percent. We really, thankfully, moved into our returns program at the right time to weather through this very bad period, from a category standpoint, because if we had operated in a more normal approach, we would probably have had another $10 to $15 million in business out there, and would have had a horrendous problem that we would be looking at.

So, as you were doing this, you were also able to adjust back your shipments as you saw the category slowing?

That's exactly right.

So any pickup is [--] that's essentially what you said, any pickup in the last waning weeks of summer, dare I say, you will get the benefit?

Well, certainly the month of July, while we don't have the Nielsens yet, we have been able to look at certain accounts where we have got a glimpse into their performance. And clearly, as soon as the weather changed at the beginning of July, the category started taking off, and so did our consumption. So that's good, and that will only add to our return picture. We have still got another [--] through the end of August, really, is really when the season continues to be pretty buoyant. So we have got another four to five weeks where we'd like to see good weather. And there's a pent-up feeling, I think, among East Coasters, particularly, wanting to be outdoors since we have been cooped up so much through June. And that means that the product has been flying off the shelves for the past four weeks.

And we have done [--] I think our team has done an exceptional job of managing inventories by account, and at the same time, working hard to gain business and gain share. It's a delicate balance there, and it requires our sales organization to be much more business-management-oriented than just salesmen. But the business is really, on a long-term basis, benefiting. And certainly, we have weathered a very difficult time. And our numbers don't look great, but from an economic standpoint, we're going to be a lot better off as a result of the step that we have taken. And when the weather returns, our business is going to well-poised as we go forward. And we're learning more about how to be better at this returns management process as days go by, and we're getting better with each of our accounts.

To give you a bit more perspective around it, if you look at it on a season-to-date basis [--] I know on a year-to-date basis we are off only about $1 million, I think. But on a season-to-date basis, looking from November through June, we are actually [--] we have shipped in 6 percent less volume overall, which is about $7 million. And yet, we have been able to maintain our share gains and inventories low so that we would not have a real negative supply in returns later on in the year.

And I heard you loud and clear on not being able to comment on strategic alternatives, but you do have a timeframe out there six to nine months from November, and I am just wondering if that timeframe is still what you are anticipating?

I can't answer your question; I'm sorry. I would love to be able to, but I just can't.

Reza Zaib [ph], Lehman Brothers.

Do you think there is any connection between the inventory de-stocking diminishing in June and Playtex being more promotional itself during the second quarter? Or are those two things totally separate?

Well, I can tell you this. It's a very complicated model that we look at, related to the incremental promotion dollars that we have had against our defense of our business. And what we have gotten for that, where it's gone [--] i.e., whether it went to the trade or whether it went to the consumer -- and how, as the different pro forma, as we go forward from a promotional program against a year-ago heightened period, exactly how the quarters play out. Obviously, it's been difficult for us to project, since we really blew the projection for the second quarter. But when we start to look at the levels of consumption or takeaway for the brand on a monthly basis, those numbers are significantly more modulated [--] flat modulated [--] than our shipment patterns have been, because of the disruption of promotion periods. And what we would really like to see is our shipment patterns pretty much follow our consumption patterns from that more flat modulation trend.

And we're starting to see that, as we look at the month of June versus June consumption, and from what we have seen already of July versus July consumption. And it's our expectation that, as we follow that trend and the trend in consumption becomes more predictable for us, that we will be able to grow our business and not have these kinds of promotional inventory pantry-loading disruptions as we go forward. And we believe that we have kind of worked our way through the bulk of that, and we're starting to see some encouraging signs in that case. I hope that answers your question.

And then, on the household segment, the sales guidance for that business, the weakness [--] is that a reflection of the soft economy, year-over-year comparisons? Any help there?

I think it's more economy-related than anything else. We're seeing a good share gain in Ogilvie, for instance; we have hit a 75 share in that category. But the category has been much softer than the story. We have seen a good share gain in Binaca, and yet that category is also softer. Now, that also is related to a competitive factor, which is the popularity and growth of the breath strips that are in the marketplace. We have recently introduced a Binaca breath strip in order to take advantage of that trend, and to augment our breath freshening line. And so we are hopeful that we can balance out the decline we're seeing in breath fresheners with the popularity that's occurring in breath strips. But generally, when we look at the categories, we're seeing good share improvement but not good category growth numbers.

And then, on the debt paydown guidance [--] I don't know if I caught that correctly, but is it now $25 million? And is that for the year, or is that for the second half? I didn't hear you well, Glenn.

Yes; it's 20 to 25 for the entire year, as you measure December versus December.

And then lastly, your gross margin guidance -- you said, I guess, for the year it would be similar to the first half. And I guess the first half was somewhere around 52.5, 52.6. Does that sound right?

That's right.

So wouldn't that mean that your gross margins for the second half would actually be higher than prior-year second half?

They would be about the same, on average. I think last year it was 53 and 50 in the third quarter to fourth quarter. It averages out to the 51 to 52 range about the same.

It seems they were about 50 basis points to 60 basis points higher than last year. Any particular reasons for that?

No. It generally reflects product mix is the normal fluctuation.

Jim Barrett, C.L.King and Associates.

Mike, could you first talk about your basis for believing that Pearl will continue to spend into year two and possibly year three?

Sure. Obviously, Jim, we have done a significant amount of modeling of the results of Pearl and our war gaming analysis as to what we should do in doing our own modeling. We now have about ten months of marketplace data on Pearl, so we have a pretty good picture of what their year one numbers are. And we also have a pretty good sense, we believe, of what we think their plan was going into year one, based on their comments to the trade, as far as what their expectations were. So let me give you kind of a run-through of how we see it.

First of all, if you look at the model of how P&G's results will look overall -- on their U.S. business, obviously [--] they will see a 7.5 percent increase in their revenues, approximately, on the Tampax franchise as a result of Pearl. But only a 2 percent [--] or, actually, a little less increase in actual tampons themselves, the number of tampons. So you have got a conversion of lower-priced tampons in the old original Tampax line for the new Pearl higher-priced tampons, but selling much less tampons than the increase in sales. We have modeled their P&L on their original business, and we call that the base case. And it looks as though, in year one, they will have an approximate 45 percent reduction in their operating profit, and that their margin at the operating-profit level would be declining from about a 46 percent margin to a 23 percent margin. We think that they will see about a 14 percent decline in their base business volume, which is about an 85 percent cannibalization rate of the base business by Pearl. That gives them an overall loss in year one on Pearl of about $50 million after spending almost as much as $90 million in support of their spending, advertising, promotion and other costs. And they did that in order to achieve what will be about a $65 million business at factory. With cannibalization of their baseline, P&G should lose approximately $64 million versus their base case in year one. All right?

Right, okay.

Now, we have modeled that against what we think P&G's plan was going in, and that assumes large category growth, much less categorization and a larger Pearl business. And if we look at that, P&G probably fell short of their plan by more than $50 million in revenue and nearly $45 million in operating profit. Now, of course, analysts and investors will never see this in any P&G report or any statements. And this is our modeling and I have to say this; we certainly don't have all the details of everything related to P&G, but I think it's a fairly [--] we've been very extensive in our work here, and I think it's a pretty good number from directional standpoint. That's a significant hit.

Obviously, to a company like P&G, it's not a big deal. But you have to draw certain conclusions from it. The conclusions we draw is that Pearl has certainly fallen short of their promises to the trade and, we think, to their own expectations, and has developed a franchise which is really no larger a business than either Kotex or OB. The base Tampax line has been seriously weakened by their own efforts. P&G's economics have been trashed. And our plastic applicator business has held up fairly well against this onslaught that directly targeted our users with what has now been proven to be false and misleading advertising claims behind what you would say is a brutally punishing level of media and coupon activity.

The question has been asked, will P&G continue to spend at this rate over the next two years? And of course, we modeled that, and it appears that if P&G would do that, continue to spend the type of money they spent against Pearl in years two and three against our assumptions for volume and cannibalization, which I think are pretty reasonable, it would mean that P&G would lose nearly $200 million versus the steady-state base case by doing that. And they would have an ongoing loss versus their base case on a yearly basis of about $65 million a year. Now, no one is really that foolish, even if you can hide the numbers in a larger picture.

So what we really expect P&G to do is to follow a 100/60/40 model, meaning 100 percent of your investment spending level in year one and then moving to 60 percent of that level in year two and then 40 percent in year three. And we have modeled that out, and in year two, that means that Pearl's spending would be reduced by about 40 percent of the year one. And even then, modeling their volume, that would be generating an operating loss against Pearl. And a further reduction in their year three by an additional 20 percent of year-one spending would mean that Pearl in year three would only have about half of the operating profit margin of the base business, and that overall, P&G would lose approximately $120 million in operating profit versus the base steady-state case over that three-year period, and that the Tampax franchise would never really regain its 2002 profitability levels.

So what we are expecting is not continuation of year one spending in year two and three, but a reduction of year one spending to the point where they are still losing money on Pearl in year two, and where in year three, it still is somewhat investment spending, and from and overall loss standpoint, it's pretty hurtful to P&G even on that basis. The only way it really can work out for them and frankly, it's hard to even make these assumptions -- is if Pearl significantly grows beyond where it currently is and their cannibalization rate drops dramatically. But with what is currently, in the past 13 weeks, a 90 percent cannibalization rate, it's hard to believe that that's going to happen. So from our standpoint, we think we can continue to manage our business under those scenarios, and actually improve our position over time, slowly but steadily.

And the market share numbers you've quoted us. Can you give us some sense [--] in the non-measured channels, are you doing the same as, better than or worse than what is happening in measured channels?

Better than.

Can you give us an update on the new, improved product [--] I know it's early, but any detail on that?

No. it's basically a phase-in replacing the old product on the shelf, and it's pretty much on shelf now. We have announced the news of value of the improved insertion comfort behind our own pearlized applicator. And the merits of the new deodorization system that we have behind our deodorant product, both on package and in advertising that has begun and is continuing. So, from that standpoint, it's a transition; it is getting our user base used to the new applicator, and those deodorant users used to the new deodorant scent. Our research strongly indicated that these would be preferred changes for our franchise base, and we think that it certainly takes away an awful lot of the newsworthiness that P&G had with the launch of Pearl. And now that Pearl has been a year in the marketplace [--] almost a year in the marketplace [--] we think it has become kind of old news, and we now seized the newsworthiness.

And finally, any sense as to what the retail week supply is, currently, vis-a-vis the first quarter or [--]

Well, obviously, because we actually shipped less than we consumed in both the first and second quarter, in-store and warehouse [--] not in-store, but warehouse inventories have come down quite a bit since the beginning of the of the period, to where we think we are running almost at historically low levels of inventory in the trade cycle. And we think that that's really where we needed to be if we're going to track consumption with our shipment level as we go forward.

Amy Chasen, Goldman Sachs.

It's actually Laurie Sherwin [ph]. I was hoping we could switch gears a little bit and talk about the Infant Care business. You said cups were stabilizing and some of the businesses were up 1 percent. I'm wondering what's driving this. Is it a new product, is it moderation of competition? Maybe if you could talk a little bit about what you are seeing?

Yes, that's every good question. I'm glad you asked it. I think it's a combination of a lot of things, Laurie. First of all, as you probably remember, we have been really pretty deeply involved in heavy competitive battles in most of our categories for the past two years in Infant Care, and we have taken a number of steps to solidify our line. A lot of it has been in modernization and in new items. We modernized our disposable holder business, and we modernized our hard-bottle business, under the VentAir line. We have introduced new cups under the insulator line, and we have continued to bring better value and newsworthiness to almost all of our segments. And slowly but surely, we have fought competitive battles without trashing our economic structure for our businesses. And in many cases, the competitors who have run in with lots and lots of money in the first year and even in the second year have run out of things to do to disrupt our business.

That's kind of what happens in a competitive fight. And they are seeing less and less returns for their effort, because they now have a base that they have got to sustain, and their products that they introduced are becoming a bit old-fashioned, and they now have the onus of doing the things that we do so well, which is to innovate and modernize. So it's kind of run its course, we believe. And as we go forward, we believe we are in a stronger position in Infant Care than we were going into this, even though we have got to regain share in a number of our segments. But in certain segments [--] for instance, hands and face wipes, where Wet Ones was under significant attack from almost every major company you could name. And we were giving up share while the category was growing nicely. We have started to recover share dramatically on Wet Ones, and we are now up to nearly a 70 share of that category. And I don't think there is anyone else who is actually gaining share.

The next largest guy is now below a 10 share, which means we have got about a 12-times share relationship to the next largest player, which means we really are dominant in that segment. So we have withstood huge attacks and lots of spending by P&G, Kimberly-Clark, J&J and Unilever, and lots of investment spending on their part. None of that stuff has really stuck, and Wet Ones is now a stronger brand than it was before, and it has been fire-tested by this competitive activity, and the trade recognizes its strength and drawing power. So that has happened in a number of our other categories; we really are delighted to see it. It's taken a lot of hard work. It's been frustrating, in some cases. But it's nice to see the share starting to come our way. And for us to have, during this period of time, actually gained the number-one position in hard-bottle feeding, with our VentAir line, where we came from really a 6 share just a few years ago to a 22 share today, has given us the claim that we never had before as the company, the ability to say to the trade we are number one in all three major segments of infant feeding, which increases our clout with the trade and our cachet with the consumer.

So it's been sticking to our strategy, and using our skills and being able to defend our brands over a longer period of time. And we don't control the competitive activity and what they do and what they do it, but we certainly have some say in how well we can defend our brands, and managing our business from a long-term perspective. And that strategy has been the one that we have implemented. We're doing it in Feminine Care right now, and I think it's showing that it works if we stick to it.

You talked about your competitors' spending level in Infant Care. Where is your spending now, relative to where it was before you embarked on all these initiatives?

I am going to talk out of recollection rather than [--] I don't have the number right here in front of me. But my recollection is that we have taken back to the P&L the defensive [--] heavy defensive activity that we had from a promotional standpoint of Infant Care, and that our contribution margin on Infant Care is about where it was prior to this [--] several years ago.

And lastly, when would you expect overall market shares for all of cups and bottles to be up? We are still seeing it down on a year-over-year basis.

Actually, in the second quarter, we had a share increase. It isn't a lot, but it was an increase; we were at 35.1 share of infant feeding, and year ago we were at 35. That's only a 0.1 share increase, but it's the first quarter-to-quarter increase that we have seen since all of this activity has occurred. And we saw an inflection point in our decline turning to quarter-to-quarter changes a number of quarters ago, but this is now the first time we have seen year-over-year share growth.

And you're expecting that to accelerate and in this upcoming quarter?

I would hope that it would. We have got some really [--] we have got a great lineup of products, we're doing a very good job in category management. I think we have got good trade support for our business as we go forward, and I would hope to see incremental increases in our share in infant feeding.

Mark Kaufmann [ph], Lazard.

I was wondering, do you have any breakdowns of what it looks like, your tampon share on age category? It appears to me that P&G is certainly going strongly after the youth market and, of course, looking at your own numbers, you fall off in the cardboard applicator, which is an older style, I guess, basically; some women just never use them again. And so, what's really happening [--] I guess is my question [--] below the numbers, below the general market-share numbers? Can you give me any color on the age group?

Yes. We don't have that kind of information from a share standpoint. There clearly is a battle for the younger user. I think P&G is trying to do what we have done with Gentle Glide, which is to appeal not only to the younger user but also to the [--] I won't say older user, but the middle-aged user of tampons. And I think they have had some success; obviously, they have put a significant amount of effort against getting trial among all age groups. But we have no indication from any of the research that we have run that says that their product appeals more to a younger age group than any other age group. But clearly, as a result of the amount of spending that they have had, it has disrupted our ability to continue to grow among that group, we would guess or speculate. Without any more additional facts regarding that, I really can't say much more about it.

Okay. Can I ask a follow-on question related to the channels? As the channels are become more mass-oriented, and with Procter & Gamble obviously offering discount pricing, I have never known Wal-Mart, in my experience, to be happy to have you come back with higher prices in the future. I guess what I am getting it is, is it possible that Procter & Gamble has just thrown the pricing of the whole category under the bus, for lack of a better word?

Maybe I didn't get the question; I apologize.

Well, I guess what I'm saying is, it appears to me that the pricing of the product, through promotion or whatever, has come down to the consumer.

That's really not true, if you look at it in the overall context. Because what they have done is they have cannibalized significantly a much lower-priced product in their lineup, their original blunt-in [ph] Tampax product, which retails for almost half the price of their pearl product. So the consumers who have moved from cardboard products to plastic products over this period of time have actually increased their purchase price over time.

But the customer who just buys the new plastic product has never made any adjustment; they have just gone for the higher-priced product, I guess, in their eyes. I guess what I am wondering [--]

Well, our product is actually [--] P&G's product is priced about the same as our Gentle Glide plastic product.

I guess, when you talk about P&G, they cannibalized their business, they are losing all this money. I guess, somehow, in my mind, either they have to reduce their costs of operating the business or try to raise price in the future. And I just don't see that raising price in the future as being an option, given where you are in production [--] excuse me, where you are in distribution of the product. I would say, in the mass channels, and additionally you have to compete on price with P&G. So I guess -- maybe I'm wrong, looking at your numbers. I thought the unit volume wasn't off that great, but there is also some factor in the pricing, in the drop in volume on your part [--] the drop in revenues, excuse me.

It's clearly [--]

That's what I'm saying is, have they ruined it for everybody?

That's a good one [--] that question I really do understand a lot better than the other ones.

I didn't say it right at first.

No, I appreciate that. The simpler you can ask these questions, the better I can answer them. I don't think so, because if anything, they have gotten consumers in the segment used to the idea of paying actually more. If you were in the segment, and you were using private-label cardboard, or you were using Kotex, or you were using our cardboard product, or you were using Tampax original product, and you moved to a pearl product or to a Gentle Glide product as a result of our defensive activity, then you have actually gone up in how much you are willing to pay for the product. And while we have had a significant amount of promotional activity out there, the savings to the consumer has not been so substantial that, in our opinion, it has disrupted the value relationship of normal pricing over time.

Frankly, as we have evaluated this category both recently and on all the historic basis we have looked at, we have never really seen any correlation between pricing battles among the participants and category increases; it's actually been the reverse. You can speculate as to why; I don't really know why. I just know that it's true. Every time there has been, in essence, a promotional war of any length of time, the categories actually declined in the amount of units that have been consumed. And I think it's because this is a category that has the potential to grow significantly over time, with the right outreach marketing efforts, to convince more consumers to come into the category for the benefits of the product, and for more of the pad users to come into the category for the benefits of the product vis-a-vis pads.

And that is how we have been able to grow our business over time, and how we have been able to influence growth in the category. And we are itching to get back to that platform for our business, because we think it's the right one for us and for the category. We have had to take the course we have taken because of the seriousness of P&G's effort in launching their product directly in our consumer, and the need for us to do everything that we could possibly do to defend our franchise.

But as we go forward, I think the consumer out there has come to recognize that P&G has over inflated the benefits of their product, and certainly the court has found that they have falsely misled consumers with their advertising, and therefore that Pearl is really no great revolution in tampons. And now we can start to spend our time talking about why our tampons are significantly better than the pads that consumers might use or are using.

Jeff Kovilar [ph], Salomon Brothers Asset Management.

I am curious about your rolling out the new fragrance, the new applicator, the new packaging. How much is that all out there now? I think you said it was rolling [--]

It's pretty much everywhere now.

And the consumers are all aware of the changes?

Yes.

And about the cup business [--] you said the trends were better. Can you give what the market share in the first quarter and the second quarter?

Yes. Cups in the fourth quarter of '02 were 44.9, in the first quarter of '03, they were 46.9, and in the second quarter of '03, they were 47.1.

And the insulator cup?

Yes; the insulator cup [--] we really don't break this down beyond what I just gave you, but just for your perspective, I can tell you that the insulator cup share of total cups is [--] in the most recent monthly number, when we include the insulator straw cup that we just introduced, it is actually just under 18 share points.

So that's pretty much what's driving this market-share improvement, then?

Yes.

Alice Longley, Credit Suisse First Boston.

Could you take your sales through the first half or the second quarter alone, I don't really care, and break out the decline into how much of that is increased promotional activity that is coming off the top line and also how much of that is reduced shipments because retailers are working down inventories? So we can see how much those two factors are hurting sales?

We have really not broken out the promotional items, Alice. I think we can answer the question about the inventory impact; I think Mike addressed that earlier.

Yes; the inventory impact over the six-month period has been a little bit more than half of the decline in tampons [--] inventory and promotional adjustments.

And is that the category where you have seen this? Or isn't it in other categories, as well?

Well, it's really the difference between what our shipment levels have been versus what our consumption levels have been. All right?

Yes; I am just trying to get [--] I mean, your sales through the six months are down 9 percent companywide. It would be great to sort of break that down into inventory cuts at retail, promotional activity and sales.

Okay. Well, of the 37 million, which is the gap that you're talking about, 26 million is Feminine Care. A little more than half of that is the inventory, promotional disruption. The balance of that is consumption.

In Infant Care, it's $8 million. A little less than half of that is in the noncore business with is actually consumption decline, and the balance of that is probably more economic-related, economy-related, than anything else, due to slower growth in category levels than we have seen historically. Not much inventory adjustment or promotional change in that number.

And Sun Care is really not related to either one of those; it's related more to the weather pattern and the consumption trend. I've given some numbers that show that, if we look at it on a season basis, we shipped in $7 million less on a seasonal basis, November through June, which is our choosing to do, less than we did the previous November through June, because we wanted to manage returns down. We didn't know that the weather would be lousy; we did it because it was the right thing to do from our economics on this business. It turned out to be a blessing, really, from the standpoint of when we did find out the weather was bad.

So that is really, I guess you would have to say, inventory adjustment because it significantly a greater decline than what we're seeing in the consumption on our Sun Care business on a weighted basis for all classes of trade, and that of course means lower returns. And then, in the balance of the business, I really don't have the detail. We don't have the ability to say that. There probably is some inventory decline. You can look at our consumption versus shipment numbers and say that there is a gap there, and there is probably some inventory decline related to [--] I've heard kind of secondhand that the trade is generally squeezing smaller categories' inventories because of their own lack of generating growth and their continued interest in better asset management. And so, I think there is a factor there, because we can't explain all of the shipment decline versus consumption relation to ship. So there is a little bit of that. That's about as far as I can go, Alice; I hope that helps you.

No, that is helpful. And then I have one other question, which is you gave us the number that Infant Feeding, the category was down 3.5 percent, I guess, in the second quarter. First of all, is that dollars or units?

That was dollars. Units in infant feeding is just [--] it's just too many different kinds of things. We don't have a stat case concept in that, so dollars is really the best way to look at it.

And does that include your best numbers from Wal-Mart? And is that all channels in?

No, that's just the traditional three classes of trade that's read by the Nielsens.

So one of the reasons for the decline is you're not getting the growing retailers in that number?

That's true. In Infant Care, the traditional three classes of trade Nielsen really only reads, in general, about 50 to 60 percent of any one of our Infant Care businesses because we do such a large volume in places like Toys "R" Us and baby stores, and the mass merchandisers who are not read in those traditional Nielsens.

So in other words, the category probably isn't nearly as bad as those numbers suggest, because you're just [--]

But it's an indicator of [--] if the category had been growing, say, 5 percent, and it's now down 3 percent in that same segment, there may be a little bit of leakage to the other class of trade. But you are saying that that's a pretty big shift, and that's got to be related more to the economy, plus we look at our business in these other classes of trade, and they are not as buoyant as they had been in the past. So there's clearly [--] and we know we are gaining or maintaining share in these segments. So from our standpoint, we see something that is hard to explain, and I believe it's economy-related; I can't think of anything else.

[Technical difficulties]

Mitchell Spiegel, Credit Suisse First Boston. When you look at your full-year numbers, what is your expectation in terms of cash taxes? And my second question relates more to sort of on the working capital side. Given the decline in revenues, do you expect year-over-year working capital changes to be a source for use of cash?

From a cash tax point of view, they will be relatively minor this year. We have a refund from a year ago, and we have some deferred benefits. So it will be in the [--] just a couple of million dollars for the year.

In working capital, we would expect it to be a small use, at this point in time. The hope is that we have a stronger going-out-of-the-year position, which would build the receivables balance a little bit. We will be building inventories for next year's Sun Care season, et cetera, with some new products in there. And, you know, a couple of million here and there would be our general expectation, at this point.

Ben Alexander, Alexander Capital.

I wanted to ask you, do you all have any comments on the lawsuit with P&G, the patent infringement suit? Can you elaborate at all on that?

No, not really. It's a live case. It's related [--] I'll say what I've said in the past. It's related to infringement of a patent we've held for some time, related to a flat fingerprint. It is being tried in the Dayton circuit. It is going to be tried by a judge. It should go to the judge [--] it's been delayed slightly [--] toward the end of August, beginning of September. We feel that P&G [--] frankly, I believe they willfully infringed our patent. That's my opinion, and we believe we have got a good case, or else we wouldn't have brought it, just as we believe we had a good case in the false and misleading advertising case.

And I'll make one other comment. I don't like having to go to court against competitors. It's not something that we really relish doing, but in many cases, we find ourselves with no choice but to pursue legal remedies when what you would consider to be normally ethical companies [--] and certainly, our competitive set consists of worldwide, class A companies [--] when they act in less than ethical ways.

There are no further questions at this time.

Well, let me wrap up. I think we had a good gamut of questions. They covered the board. They certainly got to the heart of the issues and were very strategic, and I appreciate that. It's not been, obviously, the greatest period of time, from a business performance standpoint, but I think you can tell when you look inside our answers that we have heart for what we are doing, for where our businesses stand, and the positions they have in their categories. And we don't control the weather, and we don't control the economy, and we cannot control what our competitors will or will not do, or how much money they will spend, or how consistent they may be. But we certainly have a strategy that we have implemented in these situations, and I think by building our businesses with a long-term perspective that the short-term disruption that we are seeing in our results will be behind us, and we'll be in a more growth-oriented mode as we go forward with restoration of our very attractive earnings pictures. That's our goal, and I believe we can accomplish it.

Ladies and gentlemen, thank you for your participation in today's Playtex second-quarter earnings conference. This concludes your program.