Edgewell Personal Care Co (EPC) 2003 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the Playtex Products third quarter 2003 earnings results conference call. At this time, all lines are in a listen only mode. After our presentation, we'll open the call to your questions. Should you require operator assistance at any point, key star followed by 0 on your tone dial phone, and we'll be happy to assist you. We would like to remind you this call is being recorded for replay. I would like to turn the call over to Laura Kiernan, Director of Investor Relations.

Good morning, everyone. Thank you for joining us today. With me is Mike Gallagher, our CEO and Glenn Forbes, or CFO. I would like to remind everyone about the cautionary language about forward looking statements contained in our press release. The same language applies to any statements made by management during today's call. We encourage you to read the company's S.E.C. filings and last evening's press release which discuss in full factors that could cause actual result 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, October 30th. The replay dial-in is 888-286-8010, and the pass code is 10406507. To access the web cast replay of this call, please go to the investor relations portion of our web site, www.playtextproductsInc..com. Now I will hand it over to Michael’s comments.

Thanks Laura, I will summarize our third quarter 2003 results. I'll tell you about some very exciting new product introductions, and then Glenn will give you some comment on our financials and our 2004 preliminary guidance. We'll take some questions and finish up with a brief summary. Before I plunge into the third quarter results, let me -- let me say that we are still in the process to review the strategic alternatives for Playtex that we announced at the end of last year. At this time, I can only reiterate that the process is still ongoing. We will make any necessary public announcements at the appropriate time. Beyond that, as a public company we can make no further comments. Third quarter. Net sales were $150 million, down 7%. The driving force in these results was really our Feminine Care business, where sales were off 13% in the quarter. This was caused by lower consumption of about 11% on tampons, particularly in comparison with the heavy promotion periods a year ago. And also a fairly large pipeline for our heat therapy product, which began shipping in the third quarter a year ago. While our shipments are still lagging consumption in the third quarter as they did in the first and second quarter, we're starting to close the gap between shipments and consumption. Our market shares have been stable at about a 27 share, where it has trended for the past three quarters. And as we anniversary the competitive tampon launch that has caused our consumption decline, I think we've shown an ability to defend our business against a very aggressive launch move toward offense in order to rebuild our business and to begin to regain market share in the future. The next step in our offense is the launch of a Playtex Beyond. Playtex Beyond is an innovative new flushable tampon slated for shipment in January '04. We've invested heavily to develop beyond over the past few years, developing the product, testing the concept with consumers, and building equipment to produce this exciting new business. Beyond is a new product in the flushable segment.

It features a uniquely comfortable contoured tip, colorful flushable applicators, and the incredible insertion and wearing comfort that Playtex has become known for. This tampon will be targeted towards women that want the convenience and flushability of a cardboard product but are dissatisfied with the comfort of their current tampon. We'll also target new users to the tampon category who are at the point of making decisions between pads and tampons. This flushable segment remains a significant portion of the market, and our goal is to get more than our fair share of this business. Our Infant Care net sales were up 1% if you exclude the non-supported baby wipe business. This was largely due to growth in infant feeding. Our market share and sales trends for most of our Infant Care businesses are stable or improving. We continue to rejuvenate and reposition our Infant Care franchise, and we've introduced a number of new items which will begin shipping early next year. We've extended our very successful Ventaire hard bottle, which is the number one hard bottle in hard bottle feeding, with the new Ventaire Wide. This product is developed for consumers who are switching between breast feeding and hard bottle feeding, and we include with the Ventaire Wide a natural latch nipple, which is an exclusive patented design by Playtex that provides the baby with a nipple that is much more similar to the natural nipple that they're using for breast feeding. We're also introducing a one-step breast feeding storage kit, which is an exclusively patented -- patented design, allowing consumers to go directly from breast pumps to storage to feeding, using our drop-in sack technology. We've expanded our cup business with a new exciting sparkling sipster cup, which has not only a clear body, but also a clear top, providing a very high tech look, a very modern look for our Sipster line. We've also updated our base spill-proof cup, moving away from the relatively conservative milky looking, simply designed product, to a multicolored line that includes modern, high tech looking designs. They're more appealing to the modern marketplace.

We've also introduced a new product which will begin shipping in January behind the successful portion of our Baby Magic lineup, or calming milk line. This is a Baby Magic calming milk shampoo, which combines all the benefits of good shampoo along with the benefits of our calming milk care and soothing line. Our Sun Care business, we basically held share at 22 share of category. The category declined significantly, due to weather as we have discussed in the past two quarters. From a volume standpoint, the third quarter is seasonably insignificant to our sales. We have benefited significantly from our returns initiative, with lower returns and therefore lower costs associated with returns. This is a -- especially meaningful in a year like this when the category declined. Next year, we expect category to grow in a more traditional fashion, and we have a great lineup of new products, including a great new waterproofing product called Surf, which has patented technology, providing eight-hour waterproofing for people who are in and out of the water frequently, and provides immediate waterproofing for those who apply and jump in the water. We have provided a new addition to our kids lineup, an SPF 50, the highest SPF available. We know this is attractive to consumers. We've revamped our kids line to provide one color continuity in all of our offerings, and we've beefed up the SPF in the balance of our offering for kids.

We're also expanding our successful [suntanicals] line, with two new SKUs. One is 30 [FPF] and other is after-tan suntanic lotion. As noted in our press release, we have identified and intensified our focus on cost-reduction opportunities and will incur a two to three-cent charge in the fourth quarter that will result in annualized savings of approximately $4 million starting in 2004. We have identified certain changes in our operation that will result in improved efficiencies and align our organizational structure better to meet the needs of our business. We are continuing to look for additional areas of potential savings as we move -- as we plan in detail for 2004. In summary, Feminine Care will benefit in 2004 by shipping to consumption, and we expect to build impressive share beyond the Beyond launch. Infant Care trends have been improving, and we have a lot of product news impacting most of our segments. The competitive situation in most of Infant Care has been abating this year, and we look forward to a much more traditional Infant Care growth cycle for us as we move into 2004. Sun Care is expected to benefit from the normalized category for 2004 behind our new products and we will continue to focus on cost reduction oppertunities. I will now turn this over to Glenn Forbes.

Thanks, Mike. Good morning, everyone. 2003 guidance is, for the most part, similar to what we gave before. Sales will be approximately 6 to 7% below year ago for the full year. Within the segments, Feminine Care will be down between 10 and 15%. Infant Care, down 3 to 4%. Sun Care, approximately flat with year ago. And household personal grooming down mid single digits. Gross margin will continue to be about in line with the year to date trend, in the low 50% range. SG&A up for the year about 3 or 4% versus prior year. And as he we noted in the press release, the EPS should be reduced for the year by the two to three cents for the initial costs associated with the cost reduction program. That will put earnings per share in the high 30 cent range for the year. The fourth quarter is, obviously the difference between that and the year to date period. We expect the sales to be down about low single digits. Gross margin should be approximately 50%. That's where the initial costs of the cost reduction will also show up. From a debt and interest reduction point of view for the year, our debt repayment is expected to be about $30 to $35 million. An important point, we've continued to generate positive cash flow despite the earnings disappointment and been able to reduce the debt. The debt currently stands at $793.3 million with no drawings under our revolver. During the quarter, we also retired the remaining $10 million of convertible notes that were due in January '04, using our excess cash at the time. Our accounts receivable facility is at 19 million, a low point based upon our seasonality. Our interest expense is currently running in the $14.5 million range at today's interest rates.

Working capital for the quarter was positive. Our receivables were down about two days to 65 days, versus prior year. And inventory weeks, about 12 weeks versus 12.5 prior year. We're now providing our initial 2004 guidance. This is preliminary, as we're still in the depths of our detailed 2004 planning process. The consensus models that are out there today seem to be pretty reasonable to us. Net sales, we're expecting up 3 to 4%. Within the segments, all of those -- all of the segments should be about in that range, plus or minus a percent or two, except for household personal grooming, which will probably be about flat. For our gross margins, we'll target about a 100 basis point increase next year from increased volume as well as our cost reduction program. SG&A should be an increase in line with the sales increase. Interest expense should probably run at the current rate of 14.5 or so at the current interest rates, maybe a little higher in the first half of the year, when working capital tends to trend a little higher. Tax rates should be consistent with the current year, in the 36.5 range. Our EPS guidance was 50 to 55. We would expect to be able to reduce debt from cash flow in the $35 to $40 million range, and our capex should probably be in about the $15 to $18 million range for next year. Operator, could you please begin the Q&A.

Certainly. If you have a question, key star followed by 1 on your tone dial phone. If you want to withdraw your question, key star 2. Again, star 1 for questions. Our first question will come from George Chalhoub from Deutsche bank.

Good morning. Quick question on Q4, Glenn. Away from the charges that you mentioned, which I'm gathering got about a little bit less than 2 million bucks, using the two to three cents a share, if we look at this as a one-time charge, the prior expectations for Q4 are unchanged, I take it? The ones that you've mentioned in the prior conference call.

Yeah, basically.

Okay. I was wondering if you have the -- Mike, if you have the market share data for the month of October, particularly for Feminine Care.

No, we don't, George. We'll be getting that in probably about a week.

Okay. And looking at Beyond, is there a certain range of contribution we can provide to maybe factor into the numbers for next year, be it sales or operating income? Do you have a certain, you know, range of expectations on those two numbers for fiscal '04?

George, we can't do that. I'm sorry. I know that causes problems with your models. And I'm sympathetic to that. But because of the highly competitive nature of this category and the -- and who the competitors are, we're really being very quiet about what our plans are and how much we'll be spending and other details related to this. What I've told you so far this morning is significantly greater than we've said to anyone about this product other than the trade. Our trade sell-in is almost complete. It has been spectacular, and the results by the trade are beyond what we had expected going into our sell-in. This is tested very high in our testing. It is a tampon, frankly, which if someone were inventing the tampon category today, they'd probably be bringing this product to the marketplace. It's that good. Consumers who use it love it. Competitive users who have tried it prefer it three to one to the competitive products that they've been used to using. So we think this will be a success for us. And we're still working out the details of how much support we'll be giving this brand, given the terrific success that we've received from the trade. We're obviously also very conscious about our need to improve our profitability on tampons next year. So it's an entire look at our full support plan behind our plastic business and the need to continue to support that business along with the exciting opportunity that Beyond brings us.

Mike, if we were to look at the segment that we can classify as cardboard and flushable, what's the opportunity? How big is that segment? As a percentage of the tampon or potentially the shifting of pads to tampons.

It's hard to answer that question, George. We've never been able to quantify that. Pads represent 60% of usage and tampons 40%. Within tampons, about 44% is in the disposable area. 46% is in the plastic applicator area, and that's on the basis of sticks, and the balance is in the digital area roughly. The conversion between pads and tampons is so difficult to measure because the largest portion of women tend to use both pads and tampons. Interchangeably. And so what you're really talking about is getting that group of women to use more tampons than they would ordinarily. And we think we've been successful over time in doing that with our Gentle Glide business. We think this Beyond product will appeal to a lot of pad users who have not found the right benefits available in the offerings in the tampon market. Then we think that Beyond satisfies that because it really is the best of both worlds. The disposeability of cardboard and the comfort of plastic.

I mean, suffice it to say, it's a big chunk of the market still out there?

Absolutely.

My last two questions, and I'll leave the lines for others. There is, obviously, some nervousness, Glenn, in terms of potential rating agency actions here. I was wondering, to the extent that you can comment, if you can on sensitivity or discussions you've had very recently with the rating agencies, if any. And also, if you have any news about the renewal of the AR secret addition facility at this point in trim.

Well, the only comment I would make, George, is we do talk to the rating agencies in ordinary course, and that's the extent of any discussions we might have had, you know, things that they touch base with us probably each quarter or so. And then relative to the AR facility, we are in the process of discussing that for renewal, and we do not anticipate any significant issues with that.

Great. Thank you.

And our next question will come from Kathy Reed (ph) from Stanford Financial.

Hi. It's Kathy Reed from Stanford financial. Just a couple quick questions. Can you give us some more detail on the two to three cent charge in the fourth quarter, what exactly that charge relates to, in terms of supply chain or manufacturing savings?

Sure, Kathy. Most of the savings that we have are related to making certain parts of our operation more efficient and effective, you know, consolidating a couple of packaging operations, looking at our crewing and our staffing in certain areas, adjusting our shift schedule, and outsourcing one of our support services. The charges are primarily related to, you know, the initial cost of making those changes in terms of, you know, retraining and training. There's some programs that we put in place that will facilitate the transition for any of those employees that are dislocated, such as like an early retirement thing. And there's some non-cash pension adjustments that would be related to those people. So it's kind of the one-time costs of making the transition.

So is it facility rationalization, more manufacturing side?

Yes. It's related to the manufacturing operation.

Great. On the second quarter call, the Feminine Care business was still negatively impacted by inventory excess inventory levels at retail. Did that have any effect on your third quarter Feminine Care results?

Yes, but not to the same degree. We think that, based on looking at our three class of trade, [Ex] Wal-Mart information, which is the best information we have regarding consumption levels that we can match with our shipment levels, we had a significant dislocation in the first quarter between consumption being higher than shipments. In the second quarter, it was about 80% of that gap was still there. And in the third quarter, it was much smaller. So we're narrowing the gap and should be -- should be getting to the point where shipments and consumption are matching up.

Okay. And -- I mean, but shipments and consumption, but also there was an inventory issue with retailers having your old plastic tampons and then you launching your new upgraded product earlier in the year. Is that inventory through retail? Is that inventory issue worked through?

Yeah. That's worked through.

Okay. So that inventory issue did not have a negative effect in the third quarter, or you said it did just have a little bit?

No. I was talking about inventory in general as a result of our defensive program that was launched the middle of last year and built up fairly heavy levels of inventory in the first and second quarter. And the trade warehouses that has been worked off in the first and second quarter, and there was still a little bit left in the third quarter.

Great. Finally, just on your new cardboard product, what is the price point of that, and when will we see advertising?

I can't comment on that. I will give you a general direction.

Okay.

The pricing of the product is premium to the existing products that are in the marketplace because it is a product that really is a hybrid between the two, offering the best of both. And it will be slightly -- priced slightly below the plastic applicator products on a retail basis.

And any expected competitive response to your new introduction?

I'm sure they will take it very seriously and defend their business.

Great. Thank you.

You're welcome.

And our next question will come from Ron Phillis from Bank of America.

Hi, guys. I was wondering if you could give us some more detail on the timing of the support relative to the ramp-up of sales. And also, I was wondering if you could possibly give us an idea of what type of support you might be providing. And would that be different from how you previously supported new launches? I know it's hard.

That's a difficult one to answer. The support that we're putting behind this brand is certainly, you know, the traditional kind of marketing launch -- advertising, promotion consumer sampling, targeted activities -- which will begin just as we reach a relatively high level of shelf distribution which should be relatively early from the shipment point. So we should be certainly advertising by the second quarter, if not sooner. And our target really is to provide the marketplace with a much better alternative than currently is out there. We're not planning to compete on significant price reductions on this business. We don't think that it is a price offering in any way. So there will be very like reduced price promotional activities. Our emphasis will be more on communication of the availability and benefits of this product and sampling activities.

So it would be correct to assume that the sales benefit would be more up front, and then the -- you know, the support would be something that would come on a little bit later?

Yes.

Okay. Great. Thanks. Appreciate it. On the cost save front, previous -- you know, over the last couple of years, various folks have asked about, you know how you feel about your cost structure and, you know, is there anything that can be done. I think that what we've heard typically is that, you know, on a quarter by quarter basis, you guys really have your eye on efficiencies and costs and that's what you do all day every day. Can you explain to us the difference in thinking at this point in time. So we can understand where the cost savings came from.

Well, the savings are coming from, as Glenn said, from revised manufacturing approaches towards crewing and shifts. Opportunity to provide an early retirement for a number of employees. Restructuring some of our manufacturing lines to create greater efficiencies. And, you know, re-looking, basically, with renewed vigor at all of our cost structures as the times require. But I will point out that in the past we have taken some very significant cost moves. We closed down the plant earlier this year --

It was last year.

Late last year. And we have revamped our logistics operation to outsource a significant portion of our logistics activity in the past, from a distribution standpoint. And there have been a number of outsourcing activities that we have taken over time. We haven't been as -- we haven't packaged it as per se in the past as we are now, and frankly we have a renewed aggressiveness against our costs to find new and better ways and challenge ourselves to find ways to be more effective and more efficient, and there will be more to come on that as time goes by.

Thanks a lot, Mike.

And our next question will come from Lewis Sarks (ph) from Chesapeake Partners.

Hi. Last November -- I believe around the middle of the last November -- you hired J.P. Morgan to look at all alternatives for the company. What you said was you expected a six to nine-month process, and here we are 11 months later. Can we get an update on the process? Where do things stand?

I'm sorry. I can't provide an update at this point in time. I'll stick with what I said at the beginning of my presentation which essentially is that we're still in the process, and when there is something to be announced, it will be announced promptly to the marketplace. Yes, indeed, it has taken longer than what we originally set out to do, but that's what it is.

I mean, have you, in general, been pleased with the level of interest? Is it --

I'm afraid I cannot comment any further.

Is there any end date in sight, though?

I cannot comment.

Thank you.

And our next question will come from Constance Maneaty (ph) from Prudential Equity Group.

Good morning.

Hi, Connie.

Could you talk a little bit about how you view the care products as a category? Are they meeting expectations, and do you think they have an ongoing place?

I do think they have an ongoing place in the marketplace. As you know, P&G launched a product a couple of years ago with a significant amount of marketing support, lots of advertising. And that product was called Thermacare. We laurchled our product last year at this time, basically just for menstrual cramping and put it in the feminine hygiene section. Our research indicated that it would be a much bigger segment than it has turned out to be. But despite that, we think that it is one of these categories that will continue to grow as time goes by. We have approximately a 30 share of that segment for menstrual cramping. That's the smallest segment of the heat pad business. And we think that over time it will continue to grow because it really offers a significant benefit to those women who find that localized heat really does stimulate blood circulation, which essentially relieves cramping pains. And so while the business is more modest than we expected it to be, I'm sure it's much more modest than P&G expected it to be, we do believe that, as it goes on, it will be one of those businesses that grows. Which is really what our personal cleansing cloth did over time and does add product complements to our tampon business that benefits the category sales and profitability for the trade and at the same time provides greater benefits to our consumers.

Okay. Great. If I could ask a question on Beyond. I think you said that the trade spelling was almost complete, and I think -- did you use the word spectacular or something like that? But trade sell-in, just to be clear are the orders that retailers are placing and you ship starting in early Q1?

It's really the response of the buyers to the product and the commitment to take our program and our recommendations on planogram sets. And their enthusiasm for the product. And many times, when you get a good cross-section of your buyers as enthusiastic as these buyers are behind a product, it demonstrates their commitment to support the business in a way that they may not ordinarily support the traditional introduction. So we're very gratified by that. And we knew this was a terrific product that served a -- filled a real opportunity void in the category, and the trade really has confirmed that. So we're -- you know, that's one part of our program concluded, which essentially is the sell-in to the trade, which essentially has seen a very good reception. And next part of that will be getting the introductory orders, and then the next part of that will be getting the product to the shelf, and the next part of that will be merchandising and the turning on of advertising and the sampling activities.

Are you getting indications that retailers will be expanding the shelf space they dedicate to the category? And if not, where will the shelf space for Beyond come from?

It will come out of -- it depends on the account and what items are lagging in expectations, and in some accounts it will be some set of items. In other accounts, it will be others. In some accounts it will be increment alto the section. It will come out of ancillary products in the section. On some accounts, it may not be elimination of other SKUs. It may basically be a reduction in the facings for some SKUs.

So as far as Playtex is concerned, are you expecting incremental facings or about the same number?

We're expecting that Beyond will be incremental to our Gentle Glide business.

Okay. And one final question. I assume you're not going to make any superior absorption claims or anything like that? Since these things are pretty regulated, absorption is pretty regulated.

You're absolutely right. Absorption is fairly well regulated by the industry and by the FDA. And we have always taken the point of view that it is improper for anyone to make absorption claims.

Great. Many thanks.

Jim Barrett with C.L.King and Associates will have the next question.

Good morning, everyone. Michael, could you characterize the competitive spending in the tampon category today and what the near term outlook is given what you know about the competitive activity near term?

It's heavy. The past 12 months have been significantly heavy. Because of the launch of the competitive product. Our measurement suggests that there was about $80 million in total support behind the competitive product. Some of that came out of the base brand, which has been weakened significantly as a result of that launch. And, of course, we had very heavy levels of activity. We pretty much wound down our heavy promotional activity at this point. It appears as though that's true for P&G, based on our observations. They don't seem to be spending as much in promotion behind their new item as they did. We expect that their advertising levels will drop. Since year one of the competitive brand was a pretty deep red position for that business, and it is traditional for advertising levels behind one of their three-year launches to kind of drop sizably in the second year. But we really haven't been able to measure that yet. It's our expectation. We certainly know that, because we won the court case against them for false and misleading advertising, that they're probably not going to be making comparative claims. And we would anticipate, as we go into next year, that the levels of spending will be higher than traditional, but not as much as they were in the past 12 months.

And the performance of your tampon product in non-measured channels, how do you characterize that over the past quarter relative to the shares we're seeing in measured channels?

It's basically done better year over year than the three measured channels. That's historically been true in most of our businesses.

And is the Beyond product a patented product?

There are patents related to the design structure and the manufacturing of the Beyond product.

And then, finally, if the strategic process were to end, hypothetically, next week, next month, without any change in the company's structure status of any kind, would the company be issuing a press release indicating as such?

I think that would be the case.

Okay. Well, thank you very much.

Thank you.

And our next question will come from Reza Zaib from Lehman Brothers.

Good morning. Glenn, I was wondering if you could shed some light on your sales guidance for 2004, some of the assumptions underlying that. Specifically, how much of the sales growth is coming from new products versus sales mix versus pricing.

No pricing -- there's very little pricing activity. As you know, the retail environment is very difficult, and the economy's difficult, and retail pricing is very difficult. So any growth that we have will be from a combination of, you know, category growth, share growth, and new products. You know, in being consistent with the comments we made about Beyond, we really don't want to go into specifics about how much new products is, but clearly the increase in sales is going to be from a combination of the returning tampons to a closer level of shipment to consumption and improved weather year as well as the contribution from the various new products, et cetera, that we have across the portfolio. And that's about as specific as I can be at this time.

I see. How about on the Infant Care business? The same thing?

The same thing. It's clearly going to be driven -- we don't have the large weather impact, although there's some impact on Wet Ones to a degree in the summer. You know, we've had category softness in some of these categories, but clearly the driving force is the repositioning of several products that we've done this year. And building on that momentum as well as the five or six items that Mike mentioned that are coming in early 2004.

Let me just ask this question from Mike. The category for Infant Care has been relatively, I guess, flattish this year. Do you expect that rate of growth to change in 2004 or about the same?

I expect it to get better. I think it will get back to more traditional levels of growth. You know, the economy is still a factor, as we look at broad cross-section of consumer product categories. There's still more of them are down than are up. And I don't think that can last forever. Infant feeding has been a nice growing business over time, and we would expect that it would get back to that as we go forward. We think 2004 will be a more normal year from that standpoint and we think also our innovations that we've brought to the marketplace -- we have a much stronger lineup of Infant Care items across the board as we go into 2004 than we did a couple of years ago when we were really heavily under competitive attack in almost every category we're had in. We've won a number of those, most of those battles. Wet Ones was in an unbelievable dogfight with introductions by Unilever of two items, Dove and Lever 2000. Johnson and Johnson, Procter & Gamble, Kimberly Clark, and today most of those businesses have really lost their ability to really be factors in the category, and we've regained a sizable share on Wet Ones, where we're back well beyond the share level we had prior to their attack. And we have a 70 share on some of our monthlies. And that's, you know, nine times larger than the next largest brand. We see in cups and reusables some abatement of the competitive intensity that we had seen for the past couple of years. And toiletries, similar situation. In bubble bath, J&J looks like they've basically left the category. And Mr. Bubble is in a much stronger position in that category as we go forward. So I would expect, this kind of slowness, slow down in consumer categories, which I would say in general are kind of essential types of categories to the formulating family has gone a little longer than we anticipated. But I would expect in 2004 we'd start to see more Normative levels of growth, and I think in the Infant Care business, we'll do very well next year.

And Glenn, on the gross margin, your third quarter gross margin declined much less than the second quarter. Any contributing factors to that? Less trade spending? Better sales mix?

A little bit better sales mix. Obviously, the tampons have less of a decline versus year ago. That helps tremendously, and that's probably the primary thing, sales mix.

Thank you.

You're welcome.

And our next question will come from David Morra (ph) from First Albany.

Good morning, gentlemen. A couple of questions. Just, you know, going into the -- just trying to put the parameters around it. You guys do roughly 225, 230 million bucks in the tampon business in a 27% market share position. So the market for tampons in total is somewhere just under 900 million. Is that about accurate?

At retail.

At retail? And about 44% of that you said was disposable, correct? Or roughly just under 400 million?

Yes.

And right now, I mean, I've always understood that the bulk -- I'm just trying to get –

The 44% is on the basis of sticks. The flushable category is a little smaller when it comes to dollars.

Okay. But essentially, I mean, historically, your strength has always been kind of plastic. I always kind of understood that you know, the Gentle Glide, et cetera, was 86, 90% of the business, and card cardboard, I think, for Playtex was very small, maybe 800 basis points. That's still accurate, right?

Yes. We have a product called silk glide, which is in the cardboard segment, and we will be winding down that business as we move into Beyond.

That's what I'm getting at. As we saw the introduction of Pearl in the plastic category out of tampax, granted, it's done well, but they sure as heck have consumed -- they're cannibalized their own sales. What I'm getting at is given there's such a small concentration of cardboard and now you're going to phase out the Silk Glide piece, you would expect the bulk of this to be additive at the margin business as opposed to taking away from any of the core port folio product.

Yeah. Let me try and answer it this way. It's our goal -- let me back up.

Are you expecting cannibalization or not?

There will be some cannibalization. We factor that into our thinking. We've used the guidance of our research to determine how much that cannibalization will be. So our whole plan behind Beyond does assume a level of cannibalization. We also know where the levers should be so we can minimize that cannibalization, and obviously, we're working towards that. That’s in our best interests. What the launch of the competitive product did, I think was underscore the fact that that basic blunt end cardboard applicator business that has been imitated by a lot of the private label offerings in the marketplace is not a modern business. And is not -- and is highly vulnerable to better products in the marketplace. We think that a good portion of those users like the disposability of the cardboard products, but they know it's an antiquated product. It's certainly been told to them by the manufacturer of that product that it's antiquated by the launch of their newer product. And that product has taken away a number of those users. But because disposability is an important factor, we think that those consumers will move -- if they find an acceptable disposable product that offers the comfort both insertion, wearing, and removal comfort that they're not getting from their existing offering. And our research seems to have confirmed that. In essence, you might call it the sweet spot in the category because it's an area that seems to have great volume potential but nobody's really addressing. Beyond does that.

And, you know, SG&A is up 379 beeps this quarter versus last. You continue to spend heavily to defend the brand. You kind of hinted earlier, answering a question, that you think maybe P&G pulls back a little bit from the marketing, so to speak, next year. Although you did -- your earlier comments were talking about '04. You kind of guide SG&A in line with sales. In other words, will we see any benefits of cash holdings in business having more control going forward, or do you kind of have to keep the defensive measures at the current rates of spending?

Part of our support for the business is in trade promotion, and the trade promotion doesn't fall in the SG&A line. That's really where my comments were addressed to. That's the one that really, you know creates a lot of lower priced product on the marketplace and pushes a lot of business around that isn't necessarily long-term franchise building. The other parts of the SG&A, obviously, include overheads and et cetera, but it also includes basic support for our businesses. We continue to believe that the best way for premium products with benefits like ours to support them from a long-term standpoint is sort of consumer promotional activities and through advertising, and we're continuing to support our businesses as a result of that. And we don't plan to back off. The opportunity to look at our cost structure in general out of -- with that out of the mix, we're -- certainly looking at that, and it's our goal to keep the overall SG&A line, hopefully ringing it down over time if we can, certainly as a percent of sales.

Glenn, real quick. If I try to reverse engineer, and even a number for the fourth quarter '04 and coming up with a $26 million number in the fourth quarter and roughly 125 for fiscal '04, can you speak to those in a ballpark?

As you know, we really don't quote on it. You know, your math works pretty good.

And the –any availability under facility? I know you had nothing drawn? LCs?

We just had the LCs, and we have additional borrowing capacity of about $22 million.

22 million?

Yes. Plus the AR facility.

Understood.

And Colleen Major (ph) from Goldman Sachs will have the next question.

Hi. I apologize if I've missed this. I was wondering if you can tell me what share percentage you're targeting to capture of the cardboard segment over the next year with the new product introduction?

We're not divulging that information, Colleen.

Okay. Thank you.

You're welcome.

And our next question will come from Ann Gilland (ph) from Lehman Brothers.

Hi. It's actually Julie Toscano calling for Ann. You guys have answered most of my questions at this point. I was hoping you could focus on capital expenditures a little bit. 4.4 million this quarter was a little bit lighter than we had expected. Are you still thinking that you'll end up in the 20 -- I guess you said low 20s for the year? And what are you looking at for '04?

I think this year will probably be a bit below 20, in the 17, 18 range, you know, as we've gotten into the year, projects have been executed, but we're running a bit below our plan. And then for next year we would expect to be in the same 15 to 18 range at a maximum.

15 to 18 for next year?

Yes.

Okay. Great. Thanks so much.

You're welcome.

And Bill Steele (ph) from Bank of America will have the next question.

Thanks. Mike, I apologize, I know you've answered a lot of questions on the Feminine Care. I'm having a tough time reconciling to your outlook for '04. When you consider for Feminine Care that your consumption outpaced your deliveries in the first half of the year significantly, and when you consider that you have a new product that you're going to pipeline fill and you're not going to cannibalize a whole lot of your sales, I don't see how, you know, going back to Glenn's outlook that sales for the company will be up 3 to 4% and Feminine Care will be plus or minus 1 off of that. It seems to me that Feminine Care would be up minimum high single digits. What am I missing?

You're not missing anything.

Okay. And then the second question has to do with the heat therapy product. As I understand it, the FDA has taken a look at the patches in terms of whether or not they comply with the Monograph. I know that's true for some of the other brands. Is that also true for your product as well?

We've had no communication from the FDA regarding our heat product.

Okay. Great. Thank you very much.

Thank you, Bill.

And the next question will come from Russ Gorman (ph) from Merrill Lynch.

Hi. I just had, I guess, one strategic question and then a couple of financial follow-ups. With respect to the flushable, is it a significantly different landscape out there, where you feel you can make good inroads in there versus whose market dominant in the flushable space right now?

Yeah. At one point in time, the leading brand, or the leading segment of the big brand had over a 50% share of the market. As better brands have come onto the market, our own products, that has really reduced to the point where it's now at about a 26 share, I think, is the most recent numbers. And yet there's still a very sizable portion of the business that has not made the conversion to these, in my opinion, better products. And I think the real reason for that is the lack of disposability. So what we're bringing to the marketplace is probably the most attractive product that will be in the marketplace. Attractive from a number of different standpoints. That has unique benefits that no other product has and is disposable. And we think, from that standpoint, it's the last lever to pull in order to really free up those consumers from the yoke of antiquity they've been operating under and to bring them into a modern franchise. And that's our goal.

Okay. Just moving on a couple of financial questions. Glenn, the AR facility, what sort of scope does that have in terms of total receivables involved in the program, LCs that might be issued under it, and then you just recently gave us the current outstandings under that. If you could give us a feel for peak use, that would be helpful.

We have a maximum line of 75 million at this point in time. And the peak was at the second quarter about 62 million. Again, it fluctuates it our seasonal working capital, which is really driven by Sun Care in the first half of the year.

And any LC usage out of that line?

No.

Okay. For interests, I know you had an amendment to the credit facilities, and there was an interest aspect to that. Could you tell me what your annual interest expense is.

We're currently running at about $14.5 million, which includes interest plus the related fees of the receivables [Inaudible]. That includes interest rates and at current [Inaudible] spreads from the bank amendments

And annually?

Well, it would probably be,roughly four times that. Depending upon interest rate fluctuation.

56m.

Yeah. 56m or 59m, including the AR facility. And, obviously, it would be a little higher at the beginning of the year, and then as we pay down debt in the middle of that, it would be a little less toward the end of the year.

And taxes, is that still -- like 12m to 14m, is that still a good range?

In terms of cash taxes?

Yeah.

A little lower than that this year, but on a normalized basis it should be in that level.

And I was just going up, 30 cents a share at 61 million shares, I come up with a pretax EBIT of about 31 million. And then I added 14 for a tax allowance -- excuse me. For depreciation allowance and then 55 for interest, and I was coming at about 100 million in annual EBITDA. And I was just wondering if you could comment on where I'm getting that wrong because, obviously, it's divergent from the 125 number we talked about earlier.

How about you give Laura a call, and we'll work through that with you.

And then, finally, under the new covenants, could you give us a flavor of where you came in covenant wise at the end of the quarter, in terms of breathing room.

We're obviously within all the covenant levels, with a little bit of breathing room going forward as we get into '04. We should create more breathing room, but they're certainly tight in the short term.

Could you give a dollar range.

No.

Okay. Thank you very much.

You're welcome.

And our next question will come from Ben Alexander from Alexander Capital.

Good afternoon. One of the -- I wanted to ask you a kind of a strategic or big picture question. Are you actively looking at -- or have you all looked at in the past some kind of an international strategy?

We have an international operation that works more as an export operation using distributors in various parts of the world. We have a -- you know, we consider Canada international. I know we have a very nice business in the Canadian market. And Puerto Rico, we have our own operation there. Other than that, we're using distributors around the world. It was our decision early on, given the leverage of the company, that we would be better off focusing on the North American market, as we have done rather than investing in the development of the business offshore. So with the export operation, it gives us an opportunity to be in the international arena on a modest basis without investment spending. And we think that that's the right decision given our current leverage. And our current set of skills, which are really more focused on being able to build businesses in north America.

Very good. Thank you.

You're welcome.

And Mitchell Spiegel from CSFB will have the next question.

All my questions have been answered. Thanks.

And the next question will come from Kevin Bannon (ph) from LC Capital.

Good afternoon. Most of my questions have been answered as well. I guess the remaining one would be we've been talking about what the guidance per share translates into in EBITDA. Does that keep you in appliance with the covenants that have tightened? For example, interest coverage steps up to 2.25, I believe, in September of '04? Or was there another one that's tighter?

No. Our '04 projections at this point would allow us to be in compliance.

Great. Thank you.

And that will conclude our question and answer session. I'll turn it back over to Mike Gallagher for closing statements.

Thank you. This has gone a little longer than we anticipated. I know everybody wants to get to lunch. Let me wrap up by saying this year kind of happened to us. We had a significant competitor spend all the money in the world to dislodge our consumer from our base franchise, and we've had to support that business as aggressively as we know how. We would have liked to have seen our business hold up better than it did, but it certainly held up a lot better than our competitor intended it to. And we had just one awful weather year, which compounded the situation. Rather than just let that affect us, we've been aggressively developing plans for the future and innovating against all of our lines. I am very excited about the launch of our new tampon. It should be a meaningful new contender in the marketplace. Our Infant Care lineup is very strong, and I am very confident we will have an excellent year next year in Infant Care. And our Sun Care lineup is equally strong, and we now have our returns initiative in place, running and paying benefits. With just a normal summer, we should have a significant improvement in our Sun Care business as well. That coupled with a renewed aggressiveness against the cost structure, I'm very confident in our 2004 opportunities, and I'm looking forward to competing in the marketplace with what we have available. Thank you very much.