Edgewell Personal Care Co (EPC) 2005 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Playtex Products second quarter earnings conference call. My name is Steven. At this time, all participants are in listen-only mode. We will conduct a question-and-answer session toward the end of this conference. [OPERATOR INSTRUCTIONS] As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Laura Kiernan, Vice President of Investor Relations. Please proceed, ma'am.

Good morning everyone. Thank you for joining us today. With me are Neil DeFeo, our President and CEO, and Kris Kelley, Executive Vice President and CFO.

I would like to remind everyone 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 this morning's press release, which discuss in full factors that could cause actual results to say differ from those made in any forward-looking statements.

For our discussion today we will talk about our quarterly results, excluding certain charges and gains as outlined in our press release, as well as update you on the acquisition of the distribution rights for the last three Banana Boat distributors.

For your convenience a reconciliation of the results as reported to results excluding charges and gains is included in the consolidated statement of income data, attached to our press release and on our website.

A replay of this call will be available beginning this afternoon, and will run through the end of the day on August 5th. The replay dial-in is 888-286-8010 and the passcode is 59826979. To access the webcast replay of this call, please go to Investor Relations portion of our website at www.playtexproductsinc.com.

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

Good morning everyone. Thank you for participating in this call. First I would like to say I'm pleased with our second quarter and first half results, but of course we still have a lot of work to in the second half of the year. I remain confident in our ability to achieve our long-term goals. Just to talk about the trends in the second quarter.

Total net sales for quarter were about the same as year ago with comparable net sales in Fem Care and Infant and bottle-feeding and gains in Banana Boat sun care, and Wet Ones hand and face wipes, offset by declines in Diaper Genie, Baby Magic toiletries, cups, and our minor brands. Feminine care net sales for the quarter was essentially the same as a year ago reflecting stability in the franchise. While sales of Gentle Glide were comparable to year ago, Beyond shipments were higher but were offset by sales of Silk Glide, which is being phased out. Overall our tampon shares remain stable at about 25%. Total tampon dollar market share for the quarter and year-to-date period, while down about 1 point versus prior year to slightly above a 25% dollar share, were up in the latest period versus the prior period.

We have tracked at about the $25 share level since September of last year, making future comparisons to prior year easier in the coming periods. Gentle Glide's latest full week market share trends are improving slightly. In fact, for the full week ending June 25, Gentle Glide had a $22.40 dollar share, which is the highest it's been since August of last year. We are cautiously optimistic about future share trends. We're tracking at about a $3.00+ market share with Beyond. We implemented a price decline as you recall, in February of this year, and they're achieving lift we need to make this decrease pay out.

Beyond share has been impacted by competitive activity in the market. We will continue to improve the quality of our marketing plans which should help the progress of both Beyond and Gentle Glide in the out months of the current year. We're excited about launching our new advertising on the Gentle Glide brand in August, and we expect this to help modernize women's view of our brand. The advertising is quite different, and I believe when you see it you'll agree with me.

In Infant Care, bottle-feeding performance was consistent with year ago and remains solid with reusable or hard bottle and pacifier shares up. Disposable shares were the same as last year. Cup trends are improving, but net sales and market shares are still down on a year-over-year basis. We began to ship our new Disney series cups, which as you may recall feature Buzz Lightyear and the Princess series characters in May, and they are showing good performance on the shelf. We expect that when the rerelease of the Toy Story DVD in September, and the Cinderella 50th anniversary rerelease DVDs come out in October, that retailers and of course children, will correspondingly give more attention to these cups.

Diaper Genie sales for the quarter were down versus prior year. This was largely due to difficult comparisons to the prior year as a result of a pipeline shipments from an improved Diaper Genie product launched in the second quarter of 2004. Diaper Genie's market shares remain very strong and are actually growing according to audited figures in track channels.

In Skin Care, we were pleased that the sun did shine for us in June, and in fact it continues to shine in July and August. Our sun protection or in-sun products performed better than the category, giving us gains this year through the latest share periods of July 16. Our new products and package redesigns have helped boost our share in this critical category. Although our sunless tanning consumption has also grown this year-to-date versus prior year, we didn't grow as fast as the total category resulting in sunless share declines. However year-to-date or total dollar of market shares is essentially flat with a year ago for our total SunCare business at 21.4 share. Our new SunCare products are performing well during the current season. We're especially excited about new products in 2006, which we will provide you details with on our third quarter conference call.

Moving on to Wet Ones, net sales continued to grow and were up 11% in the quarter and 9% in the first half of the year versus the prior year, as we benefited from increased distribution at retailers and increased advertising. While market shares of Wet Ones have been impacted by the launch of Kimberly Clark's Kleenex Moist Cloths, our total consumption was up in tracked outlets at retailers during the quarter.

As seen in the past, new entrants like Kleenex actually helped grow the overall category, which we typically benefit from. As in the first quarter and as expected, Baby Magic toiletries were down significantly given the heavy competitive activity in the category. We have an exciting new plan to relaunch this business in 2006, the details of which we'll provide you at the appropriate time. Adjusting for charges and gains, as detailed in our press release net income was 8.9 million, or $0.14 per diluted share in the second quarter of 2005 versus net income of 6.1 million, or $0.10 per diluted share in the second quarter of 2004. The 45% increase in adjusted income reflects significant profit improvements as a result of our cost reduction efforts combined with interest savings from our deleveraging program.

We continue to reiterate our guidance for the year. We expect 2005 net sales to be up in the low single digits versus prior year for the full year, excluding sales of Woolite, with Fem Care sales about flat for the year and increase in Infant and Skin Care. We also expect slight declines in gross margins in the second half of 2005, as margins are expected to be continue to be adversely impacted by higher raw materials costs which will no longer be fully offset by incremental operational restructuring savings, as the Company began to recognize these savings in June 2004.

Gross margins are expected to be flat year-over-year for the full year 2005. As in the first half, some of the savings related to the realignment of plans in the back half of the year will be reinvested in our business. We expect to make significant investments in advertising spending with total advertising up double digits for the year.

R&D expense is also expected to increase. Please note that due to the timing of advertising and promotional expenses more of the spending will fall in the second half of the year. We expect SG&A will also include approximately $5 million related to compensation expenses for the the full year of 2005. Kris Kelley will go over this in just a moment.

Operating income is expected to range between 105 and $115 million for the year when you exclude charges and gains in the new equity-related compensation expenses. We expect continued savings in interest expense as a result of debt paydown, and would like to repurchase at least $100 million in debt this year, depending on premium levels and the availability of the bonds in the open market, we are well on our way to achieves this goal and have repurchased to date this year, $81.1 million of bonds.

We have a number of new products shipping in the back half of 2005 going into the first quarter 2006, and we are very excited about our new product line-up for next year. For competitive reasons, I can't go into details about these new products, but our excitement about the new and the fundamental improvements we've seen in our business, give us greater confidence about achieving our long-term goals.

Now I'd like to shift the focus towards achievements we've made against our strategy which we talked about in the last quarter. Recall, there are five key elements to our plan. People and pay for performance, core category focus, cost reduction, accelerating new product development with a focus on innovation, and finally international expansion and core business acquisitions.

In the second quarter, we made good progress against our strategic objectives, which our financial results show. We continue to reduce costs, improve operating margins, and generate significant free cash flow. We paid down more debt, deleveraging our balance sheet and reducing our expense. We're very pleased that the Company's cost savings and realignment plans and new marketing programs remain on track, and are generating benefits to the Company.

Against our #1 priority of people and performance focus, we've achieved a great deal in terms of getting the right people on board and the appropriate compensation plans in place. Our stockholders approved our compensation plans in May, and we have implemented the plans company-wide. I'm also pleased that we have three key new members of our Board of Directors and we have the majority of our senior management team in place.

Finally, we continue to execute against our realignment plans, as we work to shape the appropriate-sized organization for our sales base and the future. We also announced that we are acquiring the last three outstanding Banana Boat distributorships for a total purchase price of approximately $32 million. The distribution rights of two distributorships were acquired during the second quarter 2005, and a definitive agreement has been signed to acquire the distribution rights of Banana Boat of California, which is expected to about September 1, 2005. These purchases now give Playtex full control of Bana Boat distribution, and is expected to be slightly accretive to income in 2005, as the 2005 sun season is nearly over, with full-year accretion of approximately $0.03 a share in 2006. The acquisition of these final Banana Boat distributorships is in line with our strategy to make core category acquisitions that are immediatly accretive.

Now I'd like to update you on the latest regarding or new Banana Boat SunCare trade terms and our returns program. Recall, we're trying to get Banana Boat to become a much more profitable business for us. We're moving from extended trade terms to normal trade terms on SunCare. The trade terms will be similar to the terms for all other product categories we sell. As you would expect, this will not only lower our DSOs, but also save us significant carrying costs on receivables. Retailers actually save with this program too, which is why we think it's a win-win for everybody. We are implementing these new terms beginning on the 2006 season.

We're also continuing to execute our returns reduction program. We've dedicated category management resources to help retailers stock the appropriate amount of inventory. In addition, we are getting more accounts to see the benefit of carrying a limited amount of SunCare products year-round instead of returning products to us. We feel this is working well as our sales have increased, our returns have continued to decline. The distribution rights completes -- the purchase of the distribution rights completes the buy back of all distributorships. This coupled with the changes in our SunCare trade terms and our returns reduction will enable us to reduce the complexity and costs of managing this business.

In terms of accelerating our new product development programs with focus on innovation, I am pleased that we have a number of new products shipping late in the second half that have been in development for a while. We also have a number of new products slated for next year, which we will talk about again at the appropriate time. These are expected to be drivers of topline growth 2006. I mentioned previously that I'm very focused on new product development, and so I have aligned my time and resources accordingly to this objective. The goal is to have a significant payoff over the next few years with a combination of singles, doubles, and if you will home runs in the new product areas.

With this overview I'd like to now turn the discussion over to Kris who will provide you specifics on your financial results. Kris.

Thanks, Neil. Since Neil already covered sales I'll jump right to gross margins for the second quarter 2005. Adjusted gross margins improved by approximately 20 basis points to 52.7% of net sales, as the impact on gross margin from the 2003-2004 operational restructuring offset raw material costs increases. In addition, Feminine Care represented a higher percentage of net sales, which therefore had a positive mix impact on our gross margins in the second quarter. We anticipate that the full impact of higher raw material costs which will no longer be offset by incremental operational restructuring savings, will cause gross margins to decline slightly in the back half of the year, with full year gross profit margins anticipated to be flat.

SG&A expense versus the prior year excluding certain charges and gains declined by approximately 7.1 million in the quarter, and decrease measurable as a percentage of net sales from approximately 37% to less than 35% of sales. The decline in SG&A was due in part was due in part to our realignment efforts but was also due to the timing differences on advertising and promotional spending year to year. We expect advertising spending in the back half of 2005 to be significantly higher than year ago, resulting in increased SG&A expenses versus prior year for the last six months of 2005. Total advertising expenses expected to be up double digits for the full year 2005.

Also, future quarters will include noncash charges for equity compensation that will fluctuate depending upon the Company's stock price and the achievement of performance goals. In the press release we that stated equity-related compensation expense for the quarter was about 0.7 million. We are recognizing these expenses for the first time, as a result of restricted stock and the performance-based equity we issued as part of our new pay-for-performance plans in May, let me just explain this noncash expense and what we expect going forward.

Under current accounting rules, we are not required to recognize expenses related to our time-based options, however, we are required to recognize equity compensation expenses for our new restricted stock and performance-based equity plans using variable accounting. We anticipate total expenses associated with these plans to be about 5 million in 2005 using the assumption that our stock price remains the same as at the close on July 1st of $10.78, and assuming we meet our performance targets for the year. Also, based on these same assumptions, we would expect that our dilated share count would gradually increase to approximately 63 million diluted shares in the fourth quarter, with weighted average shares for the full year at 62.5 million shares.

The expense and our diluted share count will vary accordingly as our stock price changes, and according to actual results versus of our performance targets. The variable accounting I just described will cease at the end of 2005 and like all companies we will be acquired to adopt new fair value-based accounting required on the FAS-123 R, beginning in the first quarter of 2006 with an adjustment for the cumulative effect of this new accounting treatment in our P&L in the first quarter. This new accounting require us to book a noncash fair value-based expense for all equity-based compensation including time-based options. We are still evaluates the impact of the implementation of FAS 123 on our future results.

Now back to the results for the second quarter. Adjusted operating income for the quarter was 31.1 million or 17.6% of net sales in 2005, versus 28.4 million or 15.3% of net sales in 2004. Operating income was up despite lost Woolite profits, which are included in the 2004 period. Cash flow trends remain strong with continued working capital improvements. Average days of inventory on hand declined by 7 days, and average sales outstanding declined by 8 days versus prior year, as measured on the latest 12-month basis.

Liquidity remained strong with 69 million in cash, and 85 million available under the revolver at the end of the second quarter 2005. We will make the remaining cash payments of approximately 28 million related to the acquisitions of the Banana Boat distribution rights in the third quarter. Net debt at the end of the quarter was 650 million, and our net debt to adjusted EBITDA was 5.2 times versus a year ago of 6.3 times, continuing the declining trend.

Capital expenditures in the quarter were only about 1.5 million. This is due to the capital projects as we still anticipate spending approximately 12 to 14 million for the year. We are very pleased that the 2004-2005 realignment plan remains on track, with savings estimated at 12 to 14 million in 2005 begin achieved as planned, and costs for 2005 estimated at 6 to 8 million, in line with target.

We still expect to achieve an incremental 10 million in savings next year as part of this realignment plan for total annual savings of 22 to 24 million. A few weeks ago we announced the changes related to our Banana Boat DSD salesforce in our Canadian operations. With this announcement, we have completed the announcement of all of the major portions of our planning, and we are well under way as far as implementation is concerned.

Operator, will you please begin the Q&A.

Ladies and gentlemen, [OPERATOR INSTRUCTIONS] Our first question comes from David George from Deutsche Banc.

Could you please say what the Infant Care sales excluding the pipeline sale last year would have been?

I don't have that number. I don't have the number. Again, the infant care sales were down because of two pieces of the business. Diaper Genie and our cups business. Our Diaper Genie business is fundamentally quite healthy. Best we can tell the share in monitored accounts continues to be very high. In fact, is up. Our cups business, the trends there are improving, but we have been seeing sales down more than 20%, and the latest declines in that business have moderated to down to about 10%.

And then in terms of SG&A, you talked about reinvesting a large part of the savings in the back half in advertising. What do you expect the lag will be between when we see the benefits of that advertising, and as we think about SG&A as a percent of sales will those cost savings be offset, or will we see some net benefit, in terms of percent of sales in the back half?

It's hard to know exactly the times the effectiveness of advertising will have. Obviously, what we're trying to do is to take inefficiencies out of system and lower our cost structure, and reinvest that money in things that produce high returns for the shareholders. The increase in advertising is designed to drive topline sales and there's often a lag in doing that. I'm not going to give you a specific number of days or months, but hopefully we will see that. The idea is over the long period of time that the lowering of our cost structure will drive sales and SG&A as a percentage of sales will go down, both because the costs are lower and the sales are higher because you're reinvesting some of those savings.

Finally, could you talk a bit about Beyond and what your strategy will be going forward. It sounds like you're talking about refocusing the advertising in the back half. I don't know with if that means incremental advertising and whether you'd hit a run rate in here terms of 3% share, or continue to focus on this brand and grow it, or look elsewhere to reinvigorate the growth in tampons.

For competitive reasons I won't give you very specific plans on the business. I don't think you'd expect me to do that. Our plan to restage Beyond, which consisted of lowering our price, improved advertising, better packaging and better marketing plans is working. Latest results on Beyond shares are up about 11%, and we are meeting our projections in terms of the projections we did before we lowered the price, and restaged the brand. Beyond is an important part of our business. It's a product that is very well accepted by consumers, and we're going to continue to put effort behind it. In terms of what it means with for the franchise, I'm not going to get into that in terms of how much money we spend on Beyond versus Gentle Glide, for example.

Okay. Thank you.

Sure.

Our next question comes from Kathleen Reed of Stanford Financial .

Good morning. Just an a follow-up on infant care. Can you give us a little more detail? I think I have from my notes from your prior call that Diaper Genie was only about 15% of your total sales. Can you give us the magnitude of how much Diaper Genie was down in the quarter, even if it's single or double digits or something like that?

Do you have that, Kris?

Our little friend, Diaper Genie. Let's just see. Diaper Genie was down double digits in the quarter.

Okay is it -- I'm sorry, go ahead.

Down double digits in the quarter. Again, we think a substantial portion of that was the result of marketing efforts in the prior year to launch a product improvement.

Is it fair to say in your third quarter we should see nor normalized, or do you think your first quarter benefited from a timing shift of Diaper Genie, this quarter has a negative comp? Third quarter should we just see return to normal?

Yes, our current planning and forecast is the Diaper Genie business will return to normal and we'll just leave it at that. You won't see the big declines or the huge gains that we saw in the first quarter.

Okay. Next on your new equity compensation plan, can you give us a little more info on that? Is this all just your top managers? Does this affect a broader range of your employees than previous compensation plans? If you can, just give us a quick look what are your performance goals set by the Board, just some kind of a formula?

Sure. Our equity compensation plans involve about -- oh, I'd say about half of the -- slightly less than half of the management of the Company. The goals for the vesting of the equity are based on one of three goals depending on who you are participating in the plan. One is achievement of the Company's and the Board's agreed-to Playtex value measure goals, or PVM. Second is a portion of some of these are time-based, and the third is that for certain individuals, myself and Kris and one or two others, based on actual stock price achievement. So for this year, for example, 100% of the expense that we expect to incur will be based on performance-based achievement. So if we don't achieve our results, this expense will not occur.

Okay. Then just to be clear, I know you said in your press release and your stated comments were reiterating your operating income guidance of 105 to 115. But that excluded the early extinguishment of debt and the legal settlement. It also excluded the equity compensation expense, which is going to be an ongoing amount of money. Is that accurate?

Right. Because we are reiterating our guidance for the year and we had previously stated that the 105 to 115 was the number, and that it did not include any equity compensation related expense, because we weren't sure what the final amount would be until, one, the plans were improved and then obviously they fluctuate, we left that in the press release. Granted, going forward as we did this quarter with the 700,000 that's in there, it will be included in our numbers. If you want to adjust it, you could say, instead of 105 to 115 it will be somewhere in the 100 to 110.

Great. Finally just on your Banana Boat, the transaction you did this quarter buying out the remaining distributors, can you just quickly from an accounting point of view, to get to the $0.03 accretion for '06, is it sales and you just don't pay them out on the operating expense line?

No. There's very little sales impact to the acquisition of these Banana Boat distributors. What it really is coming from -- the operating expenses of dealing with the distributors and the complexity.

To give you a quick example, when we sell product to a national account, a Wal-Mart, Target, and they ship that product for instance to say a warehouse in upper California, these distributorships who have for instance the California district, would deserve a -- I don't want if you want to call it a royalty, but they should get the profit on those sales, as though they had made it in their own area. As you can quite imagine, Wal-Mart or Target would take the product from that warehouse, and some would go to Oregon or Washington or wherever.

Therefore you have to have a bunch of people figuring out exactly where the product went to come out with this very complicated calculation. ESP's distributorships do provide us a service for merchandising, et cetera at those national accounts, which we'll have to take over, obviously, here. Net net of the whole thing, there are operational savings and complexity that goes away, that creates the 3% accretion. Very little of it comes from sales.

Great. Thanks very much.

Our next question comes from Reade Kem of Banc of America Securities.

I realize that you can't give away what your new products are in Sun Care, but should we expect maybe fewer SKUs in that product line coming up?

Yes. Absolutely. We're in the process of taking a look at our entire SKUs as a company, and SunCare is one of the areas we looked at first. You can expect fewer SKUs in total coming up.

Okay. Then on the change and the shift in the trade terms, is that something have you vetted that with your key retailers? Is it comparable or maybe not comparable to what the competition is doing?

We're in the process of vetting that with our retailers and are introducing that in our program. I think the response has been okay on the new terms. I think the -- it's not over yet. We're in the process of doing that. The other thing we've done is we've had meaningful discussions with a number of our top retailers about our returns levels, and most of those retailers have the same interest we do, in reducing returns down to zero.

So whether we get there in the next year or two or three, I don't know, but everyone realizes in the business, that if you can take out the complexity in the business, take out the returns, and the other thing is, you will lower everyone's costs, and everyone's profits will go up.

Right. Okay. That's helpful. On the acquisition front, I mean, given the amount of cash you're going to pay to do the Banana Boat buyout here, and what you're left with, how likely are you to be adding more acquisitions here, and what kind of size would we expect?

I have no comment on future acquisitions. All I can reiterate is that if we do look at things, we'll look at them because they're strategic in our core categories, and because they're immediately accretive. Other than that, I have nothing to say.

Okay. Thanks for the comments.

You bet.

Our next question comes from Bill Chappell of SunTrust Robinson Humphrey.

Good morning. First on the Fem Care side, I know this is the quarter where you introduced multipacks. Did that have impact on the overall share count and also on the sales impact? What impact did that have?

I think it had more impact on our sales in the month or the quarter than in our share, but we haven't been able to take it out in numbers. I can't give you a specific level. There's a little pipeline in our sales numbers. Our Fem Care business in total was up slightly versus last year. Some of that is pipeline. But more importantly, I'm pleased about our share levels, which the latest share period was 25.5, up from a 25.0 in the previous period. Our shares was actually in the 24's back in November, December, January, February. So the share has come back period to period, and we're now at the 25 range in total. Part of that is solidness on Gentle Glide, and some growth on Beyond.

That's great. In the Infant Care side, can you tell us what the new Disney licenses, what that is going to to the margin of the cups or the margin of the overall business?

Well, we don't discuss individual margins on individual products, but obviously in order to get those licenses we have to pay a licensing fee. That comes out of our margins. Those margins will be somewhat less.

On the other hand, one of the things that we concluded in analyzing this business, was that our competition had done its own licensing and was stealing volume from us based on licensed equities. We needed to respond to that in the market. We're pleased that the business overall is improving, trends are improving and I think the margins will be just fine over time.

Got it. Two more. In terms of the debt levels, I mean I know you're-- certainly seem ahead of schedule you'll on the 100 million this year. Is there a point where you slow up on terms repurchasing the 8s, and until we get closer to repurchase the 9s?

Obviously as we get closer to being able to purchase the 9s for two reasons, one is we can buy the 9s once we have a 2 times interest coverage ratio, which I mentioned in previous calls, we are anticipating at the end of this year. Again, that would be a limited based on a formula of approximately 50% of EBITDA since the bonds were issued, the 8s were issued in February of '04. Then the 9s have a callable provision June 1st, so therefore the pricing would be heading toward that call number. So, yes, we're taking that into consideration as time moves on.

One last one. On the SunCare side, any idea what the returns level will be this year before you put in these new initiatives versus kind of last year's numbers?

I don't, but I'm praying for zero.

Good to hear. Thank you.

Thanks, Bill.

Our next question comes from Alexis Gold of CIBC World Markets.

Good morning. Just a couple questions. When you say advertising expenses are expected to be up double digits, you mean in dollars or percentage increase? I wanted to clarify?

Dollars.

So if it was 92 million last year, can you give me us a sense for the magnitude. $10 million higher, $15 million higher?

The 92 million is our advertising and promotion combined. We mentioned specifically that advertising will be up double digits in dollars. That's the media advertising portion of that number.

Right. Can you break out -- could you possibly break out advertising expenses in Q1 or Q2?

No.

Financing for the acquisition, is it going to be cash or revolver draw or both?

Cash. As we mentioned we have -- at the end the quarter we have 69 million in cash and 80-something -- 85 million in availability under the revolver. So we will use cash.

Great. Could you just quantify the synergies realized in the quarter or cost savings?

They're in line with our total year of 12 to 14, but then again, the net income of what get reinvested in the business we aren't disclosing the net. We're right in line with hitting our 12 to $14 million annualized target for this year.

I think it's important to note we are right on schedule with achieving the savings we anticipated when we announced our restructuring, and we expect to still achieve that level of savings that we said at the time, which Kris noted was 12 to 14 million this year.

Great. And just in terms of pricing -- I know you talked a little bit about pricing Beyond -- as raw material prices continue to rise, any thoughts on taking additional -- I think there were price decreases on Beyond, or any thoughts about pricing across the board, potential increases in certain categories?

We don't see major price changes at this time in any of our categories.

Great. Thanks very much.

You bet.

Our next question comes from Lori Scherwin of Goldman Sachs.

Hi. For this stepped-up advertising in the second half, is this mainly because of new products we know about, or are there more things to come in the pipeline which we don't? It sounds from your prepared comments, that it could be both. Maybe talk about where the spending is spread across divisions, and in order of magnitude where the spending is going to be concentrated.

I'm not going to give you particulars on where the spending is going to be concentrated. Let me just say this. We believe in advertising as an investment in the business and not an expense, and we believe it's an important part of our arsenal, in terms of building the businesses. That's why we are -- we've decided to increase our investment in advertising.

We looked at what it takes to compete in the market, and we feel this investment will pay off, in terms of higher sales. As it relates to how we'll spend the money and behind what, I want to remain silent on that.

Maybe we can go back to this question where we can really judge your turnaround from a sales basis. I know it's still early. You just laid out your plans a couple of months ago. When can we expect to see a steady new pipeline, an improvement in sales growth towards your targeted 5% range, to really gauge if all your efforts and initiatives are working?

Maybe just conceptually, some of the other small cap companies that have targeted 5% or greater sales growth seem to having a much difficult time. Have you reviewed that goal, whether it's for one year, or longer term? What makes Playtex different, whether it's from a brand opportunity category or even execution standpoint, to be able to generate higher growth than your comparable peer companies, and do you still think that 5% number is the right number, or do you want to put a range around it?

You know, I start with the general and go to the specific. I think overall for the long term, we're standing by our 5% long-term growth objective. There's nothing new I'm seeing that would get me to change that or even put a range on it. Obviously, if you go out five years, our ability to predict with confidence, that 5% goes down, but I think over the long term 5% remains what we're thinking.

In terms of when we will be able to see the trends, I think we need, you know, to think about a year from now you should be able to see the results of our new products substantially in the marketplace. New products take time to develop. When you launch them, they take time to affect your business. So I've always thought in this business it would take us 1.5 years to 2 years to see meaningful topline growth, and I still feel that way.

We're talking second half of '06?

I think that's right.

Lastly Kris I think I heard you say for this comp charge for option expensing, you're assuming that the stock stays at the July 1st price. Are you just being prudent? Is that because of the accounting rules? Why did you use that as an assumption? If you're hitting or exceeding your goals, then the stock should go up. Maybe I'm reading more into this than I should be.

Just to the give you some guesstimate for what the impact would be for this year, the $5 million number, that number was derived based on the stock price not moving. If the stock price goes up, that $5 million number goes up.

Is there a way that we can quantify that, or look at it if the stock price goes up or down, how we can impact or reflect that in our models?

I don't want to -- I guess I don't want to turn it into an accounting class, but the one issue is the way that's modeled and all that impact for this year is all going to get thrown out the door on January 1st, and the new accounting rules require you to use a different basis of doing it. So for this year I wouldn't waste time trying to guesstimate that number.

Conceptually is there a way to think about it if a stock moving a certain percent that number really swings and has an impact?

Yes. If the stock goes 10% the $5 million probably goes up 10%, so $5.5 million. That wouldn't be too far off.

Okay thank you.

Of course, we hope the stock does go up.

Okay. Good.

Our next question comes from Ann Gillin-Lefever of Lehman Brothers.

Good morning all.

How are you?

Very well. If I could let me go back to Sun Care. I'm always struggling to understand how retailers win, because I always think about them buying on consignment. So if you're going to collapse those consignment terms, what do they get in return?

You're talking about the buy-ins, et cetera. Well, first of all, if you think about this business, the SunCare business on a national basis is much more of a year-round business than would be indicated or be thought about when you think about the trends in the business. The Sun Care season starts in January or February in Florida and south Texas and in Arizona and runs almost the full year.

Most of our major accounts are doing business on a full-year basis because they have national businesses whether it's Wal-Mart, or Kmart, or Target, or whoever. Second of all, more of these accounts are setting up year-round Sun Care sections, which includes sunless and in-sun products. So there's no reason for those to have exceptional terms. It's better to not encourage accounts to buy -- forward buy.

It's better to encourage them in the positive to buy product as they need it and as they sell it, so they save money on their inventory, we save money by collecting the money sooner, and by selling them only what they need, because of a more efficient supply system, Ann.

This is the problem I struggle with. They really don't have to pay you for the inventory unless they've just deciding to go year-round. Then number two --

No they've always had to pay us for the inventory.

At what point? Right now you would be collapsing that, if you give them normal similar deal terms to other businesses in your portfolio?

We've established, you know, a sharing, if you will. We sweetened the terms a little bit with these accounts as we've launched our new program of terms with them. We've given them an incentive. In a sense, we're sharing the gain with them.

That's what I was looking for just to understand.

It's a small percentage. We want this to be a win-win.

I want to amplify something else I mentioned earlier, which is the other side of this business, which made the business difficult, was returns. When we talked to our key accounts -- I'm not going to mention names. They're very large accounts we do business with, none have an interest in returning products to us. They all want to find a way profitably to get out of the returns business because nobody makes money on it.

And then, Neil, does your new system envision that you'll be shipping more to regional distribution? So if I use the year-round Sun Care, a large customer has an excess in New York typically that you would take back, are you trying to discourage them from having it in New York, or are you trying to encourage them to somehow move it to Florida?

Both. We're very careful about late in the season how we ship to our customers. We look at every order. We try to work with them so that we don't ship in and get the product back, and we do it individually.

We also work with accounts that have a -- you know, a business in Minneapolis and a business in south Florida, so that when the season ends in Minneapolis, they're not sending us back product from Minneapolis, so we can ship it to them again in Florida.

So they'll move it around, and you'll help them?

Again, we're working with them. It's all computer-based inventory management.

One quick question on the distributors that you have bought. Is there any excess inventory above what you would typically carry in this business, that you'll be inheriting?

No.

Okay. And then just skipping now to two quick general questions. The accrued expenses number jumped this quarter pretty quickly on the sequential basis, as well as of course year-over-year. I'm wondering if you can elaborate on what might be driving that. I know that's where ad promo sits. You've got SunCare returns, employee comp. Can you walk us through what might have driven that increase?

We also have the restructuring related charges that are accrued in that, that weren't there last year. So on a year-to-year comparable and we have some timing in payments for -- bills from professionals for advertising and things like that, that are between payables and accruals just happens based on timings of billings.

Is restructuring the largest in terms of the delta?

Yes.

All right. Helpful. My last question is to just understand on A&P timing in the current quarter, was it down year-over-year, and that's one of the reason we're seeing the acceleration in the second half?

Yes. As we mentioned advertising is going to be up in the second half for two reasons. One is to offset the year-to-year downness -- if that's a word -- in the second quarter in the first half, and then on top of that we're going to increase advertising in total for the year double digits.

Can you tell us how much it was down in the quarter?

Advertising was down -- I think it was in the 3 to $4 million range.

No. Less. Somewhat less than that. But it was down significantly, but again, Ann, there's timing issues here. One of the reasons why advertising was down is we decided to wait for the development of new advertising on some of our products, which we want to invest in, behind when that advertising is ready, which it will be in the second half of the year.

I understand that. I think it's great to be now having the prospect of new products to link these to. So congratulations. I'm just trying to understand the lumpiness for current year and year-over-year compares also.

The other thing you have in there is the whole SG&A structure for Woolite, which is no longer with us, it is coming down there.

Okay. Thanks much.

Yes.

Our next question comes from George Chalhoub of Deutsche Banc.

Good morning.

Good morning, George.

On the Feminine Care, is the phase-out of Silk Glide complete out right now? If I read Neil, if I read into your comments, you're hope is to start showing market share trends improving on a year-over-year basis in Feminine Care in the back half of the year?

Silk Glide is essentially gone, and what we would expect is hopefully our share will begin to see to some very modest growth in the back half of the year, yes. Again, right now we feel our business is stable at about a 25 share slightly growing period to period. Again -- I caution you that the Nielsen data simply is not that accurate over a short period of time.

Yes. On the raw materials costs, you obviously everything is as expected. There are no surprises here. You guys have told us what the second half would look like. Are you seeing any, you know, increase in the raw materials overall, and/or is that what you expected and that you're still not going to be able to compensate for it?

No. We're still seeing about the same amount, level of annualized raw material price increases, which we have mentioned in previous calls would be about 6 to $7 million this year.

So nothing changes, kind of the same outlook?

Right.

On the working capital, you've made nice improvements on the inventory turns and also reducing the DSOs. Should the change in working capital be significantly beneficial versus historical, you know, trends in the second half of the year?

There will be continued declines in those -- both those numbers. They won't be as dramatic as we've done over the first comparisons, but they will continue to decline, particularly as we -- when we get the impact for the returns initiatives, and the normalized trade terms for the Sun Care business.

And can you say Kris if the change in working capital should be positive or not in the second half of the year? I know you ramp up for the Sun Care season and the tail end of it, but overall for the second half should we see a nice cash benefit from that?

Yes. Overall I anticipate our working capital year-to-year versus last year to be a benefit. Not as much as I said in the past, because we had a lot of benefit programs in the last year. As you remember we wanted to reduce average inventories for $10 million, which we did, and most of that was in the second half of last year.

My last question. With gross margins slightly down, and SG&A up because of the increased ad spending, should we expect second half EBITDA to be down on a year-over-year basis given the slight sales increase?

Yes.

Okay. Thank you.

George, I just want to clarify one point. You were talking about the year-over-year share in tampons, and Neil said he expected to see some modest growth. But --

Potentially modest growth

Because we're tracking down a share point for the full year, we won't be up. We're saying on a sequential basis.

My only comment Laura was going into the second half of this year. I'm not talking about the full year, year-over-year comps.

I wanted to make sure because it can be confusing talking sequential trends and year-over-year trends.

In the ensuing month between now and December, hopefully we should start seeing year-over-year improvement in market share?

Right, because we're traversing share in August, we'll hopefully cross over that share point.

For example, our shares to date measured by Nielsen is 25.5. Our share in November was 24.9. If we maintained our share at 25.5 through November, we would be seeing growth versus the year ago period.

That's right. Great. Thank you.

You bet.

Our next questions comes from Reza Vahabzadeh from Lehman Brothers.

On the Sun Care trade terms, and the trade terms you're going out with right now are they similar or comparable to your competitors in this space?

Sun Care?

Yes.

So the industry really was deploying a different trade spending go to market strategy all along, different than Playtex and Playtex is catching up?

Not all along. It's basically we're all moving in the same direction. Some have moved earlier than others.

I see. So you're not the pioneer yet?

No.

Okay. Do you anticipate any kind of inventory correction or change in shipment patterns as a result of this on a full year-round basis?

Not on a full-year basis. There might be less forward buy, so you might see month-to-month differences. But over a six-month period, it would all work out.

Would that mean, for instance, your first quarter shipments would be perhaps less than prior years, or maybe even all the way to April or May?

Could be. You know, again, I don't think it will be meaningful

On a full-year basis I understand. On a quarter basis you're saying there could be some changes?

I think there could be. I think it remains to be seen.

Generally speaking how do you feel about inventory at retail for your products? Is it pretty much where it should be? Is it too high or too low?

I think it is where it should be across all the categories, except currently Banana Boat which I think is low, because we started the season with a record cold, and then it became very hot across the nation. Now many of our accounts are -- have very low inventories on Sun Care products. Of course, we're walking a very tight rope for shipping them big orders and getting it back as returns if it doesn't sell. So we're working with our accounts on this.

Okay. Kris, cash taxes for the year, any guesstimates on that?

No. Again, Bill, they'll be significantly lower than provisional taxes. I would think they'd be more or less in-line with prior years.

Prior year I think was a refund.

Yes, excuse me. Without that refund from the settlement.

I see. It's too bad you don't expect another refund.

No. I'm sorry.

I agree too. We'd like one.

With regard to the taxes, I noticed some of the models have a lower tax rate than our effective tax rate. So I would use maybe a 40% tax rate.

On a book basis?

Right.

Thank you.

Our next question comes from Linda Bolton Weiser of Oppenheimer. Thanks. How are you? Are you still expecting operating cash flow to be slightly down for full year '05?

Yes. Okay. Thanks.

Our next question comes from Jack Salzman of Kings Point Partners.

Hello?

Yes, Neil.

Hey, Jack.

How are you?

Good. How are you?

Okay. I wonder if you can give us us a little more detail on the new product cycle you folks are cranking up in the second half into next year. Are these going to be flankers or line extensions, or will we see actual new product additions to the complement of products you have right now? In terms of effort and marketing expense, is it likely to peak into the fourth quarter or peak into the first half of next year?

We're going to be launching hopefully a number of different products in each of our categories. The kinds of products will vary by category, and I'm not going to say any more about the specificness of them. Some will be line extensions, some will be new, some will be replacements or improvements on existing products, the things you'd expect from us.

In terms of marketing expense, marketing expense will follow the timing of the launch the products. While I haven't seen a specific analysis of when that would peak, my guess is that it would peak more towards the second half of the year. Again, I haven't seen or done that analysis, and it will depend upon when the actual date of launch of those products.

You folks account on marketing expenses as incurred?

Yes.

Last question on the raw material costs. It sounds like you have no plans right now to initiate any price increase just to offset any slight margin deterioration from the cost side. If costs continue to climb a little bit, do you feel that would necessitate you to initiate price increases, or do you still feel that you can achieve your gross margin objectives with the cost pressures you're incurring right now?

I think we would cross that bridge when we came to it. Our objective is to provide high value to our consumers. We want to avoid price increases if we can.

On the other hand, if markets move significantly and costs go up, then we will take the price increases as needed to maintain margins. Again, we look at this on an individual basis, as you expect we would.

Thanks guys.

Sure.

Our next question comes from Connie Maneaty from Prudential.

Good morning. I have some questions on SG&A as well. The increase in advertising expense in the second half is beyond the timing difference is it an incremental expense? Are you investing more now than you thought you would be when you joined the company, Neil?

When I joined the company, I didn't know anything. Some would argue -- I won't go there. When we did our planning for the current year, we expected to take advertising as a company up. What we did, in fact, was we did two things. With our focused new strategy, we took advertising out of some businesses because they weren't core businesses, and began investing it in others. I'm going to give you an example of exactly one of them.

Secondly, we wanted to look at each of these businesses to make sure that the money we were spending was working for us. An example is on Wet Ones. For the past two years before this year we spent no money in advertising, and this year we began investing again in advertising. That's a growing business, and we want to support it.

In terms of the timing year to year, that really is dependent upon the marketing plans for each of the businesses. Well, related to your budget, does the second half increase take you over your budget when you did your planning, or is it right on budget? It's essentially online with the budget.

Then on to the compensation expense. As I understand it, the compensation expense this year is primarily restricted stock, is that right?

It's restricted stock in performance-based options, yes

And the $5 million, is that a full-year number? I should know maybe this accounting, but I don't. Is that a full-year number you're booking in the second half, or is it just a second half expense, the 5 million?

I'll answer that two ways. It is an expense that is -- that goes from May through the end of the year. It is not necessarily an annualized number that you can just annualize if you were trying to think what the full-year impact would be.

I guess a better way to look at it is if you were to go and look at our balance sheet, which we have about 10 million and change in our equity section, that represents the future costs over three years of the restricted stock and performance-based options that would run through our P&L, given current pricing targets-- price levels for our stock.

So it's really -- it's really more of a 3 to $4 million number under the current accounting rules, but it's kind of loaded in the first part of the year. Obviously, although some of our plans were issued in May, they related to the full year of '05 and therefore it's being expensed from May to December, but relates to the performance of the Company over the 2005 full-year period. Does that answer your question?

Yes. So if we were to look into 2006 and excluding the time-based options, the expense for -- the expense would be greater than 5 million, but less than 10? Is that a good way to think of it?

It's hard to tell. First of all, the $5 million that's calculated for the restricted stock and performance-based options is under the current accounting rules. That all changes, so that expense will be different for those pieces next year, under the new accounting rules. In general it will be lower. I can tell you that. On top of that you will have the add to compensation for the time-based options that aren't required under current accounting. So net/net it's -- like I say, it's not a million and it's not 10 million. It will be somewhere in between.

Just one final question. For the options expensing next year, have you decided whether or not you're going to restate 2005?

No, we haven't made that decision yet.

Because it sure would be helpful if you could. I know you know that. Okay. Thanks.

Sure.

It appears there are no further questions, sir. Okay.

That's great. I want to thank everybody for participating. In summary, I want to reiterate that things are going pretty much as we planned in this transitional year. We posted positive results so far, and our plans for the year is still on target. We continue to execute against our strategy and are well underway in making progress for each of our strategic objectives.

I am more confident than ever about us achieving our long-term goals, and I'm proud of our associates who have done a great job so far this year. We still have a lot of work ahead of us this year, but I feel very good about our results so far, and the results to come. I want to thank all of you for participating in the conference call today, and for your interest in Playtex. Feel free to follow up with Laura on any questions you may have after this call. Thank you, and good morning.

Ladies and gentlemen, this concludes the presentation. You may now disconnect. Have a good day.