Edgewell Personal Care Co (EPC) 2005 Q4 法說會逐字稿

Ladies and gentlemen, good day and welcome to the fourth quarter 2005 Playtex Products Incorporated earnings conference call. My name is Megan and I will be your coordinator for today.

At this time, all participants are in listen-only mode. We will be facilitating a question and answer session toward the end of this conference. [OPERATOR INSTRUCTIONS] I would now lining to turn the presentation over to your host for today's call, Miss Laura Kiernan, Vice President Investor Relations.

Good morning, everyone. And welcome to our fourth quarter and year-end conference call. With me this morning with Neil DeFeo, President and CEO, and Kris Kelley, Executive Vice President and CFO.

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

Our remarks this morning on the fourth quarter and full year will refer primarily to our results excluding charges and gains as detailed in last night's press release and accompanying financial statements. For your convenience, a reconciliation of the results as reported, which is in accordance with GAAP, to results excluding charges and gains, which is a non-GAAP measure, is included in the consolidated statements of income data attached to our press release and on our website at PlaytexProductsInc.com. We have also posted to our website the segment results back to 2003, breaking out divested brands, so that you can update your models for the divestiture, and we have posted our consolidated non-GAAP financial ratio calculations on the website, as well.

A replay of this call will be available beginning this afternoon and will run through the end of the day on February 14. The replay dial-in is 888-286-8010 and the passcode is 42680638. To access the web replay of this call, please go to the Investor Relations portion of our website at PlaytexProductsInc.com. Now I will hand it over to Neil.

Good morning everybody and thank you, Laura. We are very pleased with this quarter's results, which show a strong finish to the year, and sets the stage for what should be another good year in 2006. We're also proud that the team here at Playtex did what we set out to do in 2005. We followed through with our commitments to all of our constituents, and we plan to continue to follow through with our commitments to our associates, consumers, and shareholders in the future. Early last year, we said we would focus on our core brands, we would improve our margins, we would deleverage our balance sheet and we would deliver growth, and we've delivered all of these.

Today's agenda starts with me providing a summary of the quarter and full-year results. Then we will summarize the progress we made in 2005 against our strategy and operating goals. I'll review our revised 2006 guidance, which has been updated. Kris will then talk about the numbers in more detail, we will do some Q&A, questions and answers, and then I will wrap up. We'd like to finish by about 11:15.

So, let's start by looking at the fourth quarter. To summarize the fourth quarter results versus the prior quarter, the following is what we achieved. First of all, core category sales were up 3% to $126.9 million. Gross margins were 54.3% or about 500 basis points ahead of year-ago. Advertising and promotion investments in the quarter were up well into the double-digits. Interest expense declined by $2.3 million or 14% because of our deleveraging program. And net earnings were essentially break-even for the quarter. Essentially the same as the period year-ago. However, excluding the $5.8 million of equity-related compensations expenses, which weren't in last year's results, and apple-to-apples net earnings for 2005 fourth quarter would have been up by approximately $3.5 million more. After tax. We continued our debt repurchase in the fourth quarter, paying down an additional $20 million of 8% notes for a total in 2005 of $120.8 million of 8% notes repurchased.

Now I'd like to take a look at each of our business segments separately. First, Feminine Care. Net sales in Feminine Care for the quarter were off 1%. Recall that last quarter our Feminine Care were up over 8% and I said at the time that the gains were partially driven by promotional timing differences. Our 1% decline in part reflects this. If you take the six-month period, the last six months, our sales in Feminine Care were up about 4%.

Within Feminine Care, net sales of Gentle Glide, our key brand, grew low single-digits in the quarter, versus the prior year, despite the promotional timing differences I just mentioned. Gentle Glide benefited from the stable-to-growing consumption we see at retail and by significantly increased marketing support. Beyond net sales, decline versus year-ago as we focused our efforts mainly on Gentle Glide. Fem Care net sales were also negatively impacted by the discontinuation of our lower margin [Pride] labeled tampon business in 2005. Despite the very slight decline, our dollar share remains stable-to-growing with the latest four weeks' share, according to ACNielsen, up two tenths of a point versus the prior year, or for 24.9 a share. We have consistently been around the 25% dollar share all year long.

Moving to skin care, net sales for the category in the quarter -- our category, skin care category -- were up 15%, due to gains across the board in Banana Boat and Wet Ones, both up in the double digits, and gloves, up in the high single digits. Banana Boat and Wet Ones continue to show very positive trends, and we are pleased that our glove business had begun growing in the fourth quarter, reversing earlier negative trends. Banana Boat shipments were up nicely as retailers were quick to reorder and order our new continuous spray and unique tear-free sun protection products for 2006. Banana Boat has also benefited from significantly-reduced returns, an ongoing trend in our business. Returns this year have declined about 10% versus year ago, a notable improvement. Wet Ones continues to grow as the category grows. This business is also benefiting from increased advertising and increased distribution at some of our key accounts. We will begin to lap these increases in distribution beginning the first quarter of 2006.

In Infant Care, cup sales grew strong double digits, due to the selling of our new Coolster tumbler and Talking Sipster, as well as the continued positive consumption trends at retail. Recall, this business had been declining earlier in the year by about 10%. Partially offsetting the growth in cups were lower sales in our infant bottles, including both disposables and reusables. Bottles declined mainly due to competitive gains in reusable bottle distribution, as well as the impact of private labels on our disposable business. We still remain a strong No. 1 in our infant feeding business, and quarterly dollar share, according to ACNielsen, is essentially flat with year ago, in reusables and disposable bottles and in tracked outlets. Diaper Genie net sales were up slightly in the quarter, partly as a result of sell-in for the first quarter of 2006 discount promotions on our Diaper Genie unit in an effort to meet lower priced competition. Our break-even net earnings in the quarter were essentially the same as year-ago, as a number of positives which included net sales gains in core brands, savings from the structuring and realignment plans, reduced return rates, profit improvements from the acquisition of Banana Boat and distributor rights, lower interest expense were offset by lower sales of [invested] brands, rising raw material costs, higher investments in advertising and promotion, the impact of new equity compensation expense and higher legal expense.

That pretty much sums up the quarter. Now I'd like to talk about the full year. On a comparable basis, we finished the year ahead of year-ago in virtually all areas of the P&L. Core net sales were up 3%, posting the second year of growth in a row. Gross margins were up 200 basis points, despite the negative impact of approximately $12 million of higher raw material costs. Again, the second year of growth. Operating income was up 2% and up significantly more if you exclude the new equity compensation expenses in 2005. Net reduction of $121 million resulted in a reduction of interest expense for the year of over $5 million. The net of these is that the resulting net income, excluding charges and gains, was up 24% ahead of year ago. This income would have even been higher if you -- without the $5 million of after-tax equity compensation, did not occur in 2004. We accomplished all of our goals we set for ourselves at the beginning of 2005 and we built a stronger, more capable company and organization.

Let me talk for a moment about the progress we made against our goals and our strategy. Early in the year, in the year 2005, we announced our strategy and it had five parts. The first part was people and pay-for-performance, second was the focus on our core categories, third was to reduce costs, fourth is to launch new products, and fifth is focus on expanding our business internationally and possibly with acquisitions. I'd like to review our progress in each one of these areas.

First, people and pay-for-performance. We had an extremely good year in this part of our strategy. We have a solid new management team in place with 6 out of the 9 members of our senior management placed either -- team either new in their jobs or new to the company. We rolled out a new training and pay-for-performance plans and have adopted PVM, that is the Playtex Value Measure, which is an EVA measure, as the method against which we measure our progress. Stockholders approved a new performance-based compensation plan in May of '05, which has been implemented companywide. We've added three new members to our Board of Directors, who have direct consumer and retail experience, which should help us at the board level. And we have successfully executed against the realignment plans we announced in February of 2005, which resulted in significant head count reductions while employee morale and productivity has improved.

The second part of our strategy was focus on our core categories. The core categories being Infant Care, Feminine Care and Skin Care. We focused on our investment spending in these areas, reducing spending on non-core brands and increasing spending in our core categories. We sold off our non-core brands in November, which were smaller and declining and, in general, less profitable.

Third element of the strategy, reducing costs. We successfully implemented the restructuring plans of fiscal year '03 and '04, and the realignment plans announced in February '05, which combined have an annualized savings of approximately $37 million a year. We implemented major profit improvements in the Banana Boat Sun Care franchise by significantly reducing returns as a percentage of shipments, eliminating 27% of SKUs, buying the distribution rights we didn't own and improving Banana Boat trade terms. Consistent with our PVM focus, we've managed down our working capital requirements thereby freeing up cash for debt repayment and investments in our core business. And finally in the cost reduction. We have repurchased 120.8 million of our 8% notes through 2005, which reduced our interest expense by approximately $10 million on an annualized basis. In January, of this year, '06, we purchased back approximately another $35 million of these 8% notes.

Moving on to new products. We have significantly improved our approach to new products and development and the way we develop them. Including focusing on our core categories and on high growth opportunities and going after fewer, bigger projects. We expect in 2006 to more than double the number of new product launches versus 2005 and have a rolling three-year pipeline of new products in development at all times. With new products comes added investment that we plan to reinvest much of the cost savings in the launch of these new products. This is in the shareholder's best interest because it will allow us to grow in the long-term.

Finally, the fifth element of our strategy is international and core business acquisitions. Under this strategy element, we acquired the rights to the last three Banana Boat distributor ships at an accretive price. The acquisition gives Playtex full control over the Banana Boat franchise and reduces complexity related to the management of third party distributors. We've also developed a more formalized strategy for international expansion and have reviewed numerous opportunities to expand internationally. This plan will bear fruit in the future. So, in summary, we followed through with our commitments, and we are right on track for the future.

Now I'd like to talk about the 2006 guidance and long range targets through 2008. Last night we issued our initial guidance for 2006. And I'll summarize this, but Kris will give you more details. Excluding net sales of divested brands in 2005, net sales for 2006 are expected to be up mid-single digits versus the prior year. On a reported basis, net sales for 2006 are expected to be down low single digits, versus the prior year, due to the disposition of, or divestiture of the minor brands in 2005.

As stated previously, we expect to essentially double the number of new product launches in 2006 versus 2005, both in terms of the number of products and the number of SKUs. To date, we have announced only a few of these, including our new Sun Care products, Wet Ones hand sanitizer and our improved first Sipster cup. We will update you on the rest of these planned launches as they occur and as they reach the market. We plan to increase pricing on our Feminine Care products by mid year. Competition has already announced their specific plans and it appears that they are raising prices between 2 and 6%, depending upon the products. We expect to announce specifics to our retail partners shortly.

We expect incremental profits from the net sales growth to be partially offset by significant investments in new products, as I mentioned earlier, and related advertising and promotional expenses during 2006. We expect 2006 operating income to be between $103 and $108 million, which compares to 2005 operating income, excluding charges and gains, of $107 million. Now, this $107 million does not, however, -- excuse me, includes more than $8 million of operating income from divested brands. So, to compare what we're projecting in 2006, you'd have to take this out of the $107 million number. This range includes estimated noncash equity compensation in line with 2005 of approximately $9 million. Interest expense will decline in 2006 by approximately $5 million from the impact of debt repurchased in 2005, and we expect that the further -- to be further reduced by additional debt repurchases in 2006.

We also updated our previously-announced long-range goals as promised, factoring in the impacts of divested brands, equity compensation expenses and changes in the business. We are targeting net sales by 2008 of $760 million for a five-year compounded growth rate of about 7%, excluding our recent divestitures of brands. Future growth and net sales is expected to be driven by new products with significant investments in advertising and promotion spending. We are targeting operating income of $160 million, which equates to EBITDA of approximately $180 million by fiscal 2008. And we are still targeting double-digit growth in our earnings per share, per year, excluding charges and gains and the impact of our recent divestitures. This will be driven by net sales and operating income growth and continued interest rate savings from deleveraging. Our leverage ratio target to be below 3 times by the end of 2008, based on our projected operating income levels and our stated goals for debt repayment.

Now I'd like to turn the call over to Kris, who will provide you with some additional financial details. Kris?

Thanks, Neil. I'd like to provide you with some more details on the results of the quarter and the year and on our guidance for 2006. Since Neil already covered net sales in much detail, I will start with gross margins for the fourth quarter of 2005.

Gross margins, excluding charges, improved by about 520 basis points to 54.3% of net sales. This increase was despite more than $2 million in higher raw material and freight costs in the quarter. Factors that contributed positively to gross margins include continued restructuring and other cost reduction benefits, more efficient trade spending across all of our brands, lower return rates, mainly from our Banana Boat 2005 season, and benefits from the recently-acquired Banana Boat distributor rights. Significantly lower sales of divested brands, which were at lower margins, also positively impacted the overall gross margin percentage for the quarter versus the prior year quarter.

SG&A expenses versus the prior year, excluding certain charges and gains and equity compensation expense of $5.8 million in the quarter, was 38.2% of net sales versus 36.8% of net sales in the fourth quarter last year. While SG&A decreased dollar-wise, it increased as a percentage of net sales, due to significantly higher advertising and promotional expenses on retained brands as expected and higher legal expenses. These more than offset the benefits of the realignment in the fourth quarter of 2005. Now to talk about segment operating profits, Sun Care operating income was down greater than net sales in the quarter as gains in gross margins were more than offset by investing a third more in advertising and promotions than we invested in the prior year quarter. We expect these incremental investments to help drive future growth.

Operating income in the Skin Care segment was up over $6 million in the quarter, largely due to Banana Boat, which improved due to higher sales and lower return rates and the benefit of cost savings associated with the acquisition of the distributorship rights this past summer. Infant Care operating income declined, in part due to reduced gross margins from higher raw material costs, but also due to increased investments in advertising and promotional support. Due to the large portion of plastic and other petroleum-related raw materials in our Infant Care products, this segment is most impacted by our rising raw material costs.

Noncash equity-related compensation expenses for the quarter were about $5.8 million. Both a blessing and a curse, the year-end closing stock price being significantly above third quarter levels, resulted in our expensing an additional $2 million related to noncash equity comp expense versus our previous guidance. As you know, the accounting for equity compensation is changing for 2006, one aspect of which will significantly reduce this quarter-to-quarter variability and expense.

I want to comment on the restructuring and realignment impacts in the quarter, as well. These plans continue to reduce costs as expected in gross profit and SG&A. These savings enabled us to invest significantly more in advertising and promotion and the new equity-related compensation expenses that affect us in the quarter have masked much of the realignment benefits.

Now, excluding charges and gains, operating income in the fourth quarter of '05 was $14.6 million or 11% of net sales, versus $16.8 million or 11.9% of net sales in the fourth quarter of last year. Interest expense declined by $2.3 million in the quarter, due to our deleveraging. As a result of all of these impacts, net loss, excluding charges and gains was flat to year ago at $0.00 per share. If you exclude the equity compensation expenses of $5.8 million that weren't in last year's results, earnings would be up approximately $3.5 million.

Now let's look at the full year and some additional financial metrics. Gross margins, excluding charges on full-year basis, improved by 200 basis points to 53.5% of net sales. This was despite about 200 basis points or $12 million increase in raw material and freight costs. There were a number of moving parts to the gross margin growth, but similar to the fourth quarter growth, growth was achieved due to restructuring, realignment and other cost savings, lower return rates, the positive impacts of acquiring the remaining Banana Boat distributor rights and selling lower margin divested brands. SG&A expenses in 2005 versus the prior year, excluding certain charges and gains and the equity compensation expense, was 35.3% of net sales, versus 35.7% of net sales last year. Down $10.8 million for the year-end dollars. The decrease in SG&A dollars was due to the cost savings from the realignment, partially offset by higher legal expenses in 2005 versus 2004.

Total advertising and promotion for all brands was up in 2005 by only about a million dollars with a 10% increase on retained brands being mostly offset by significant decreases on divested brand spending. Noncash, equity-related compensation expense for the year were $8 million versus none in 2004. Similar to my discussion on the quarter, the higher year-end closing stock price resulted in our expensing an additional $2 million more above our previous expectations. Excluding charges and gains, operating income in 2005 was $106.8 million or 16.6% of net sales, versus $104.5 million or 15.7% of net sales in 2004.

EBITDA, excluding charges and gains, was $125.4 million for 2005, ahead of year-ago's EBITDA of $120.5 million, despite the lower sales and the inclusion in 2005 of $8 million of equity compensation expense. Just to be clear, as there seems to be some confusion on whether you include equity compensation in EBITDA or not, we do take the charge, the equity comp charge, in our EBITDA calculation. Excluding charges and gains, our related net debt-to-EBITDA leverage ratio was 4.7 times, versus 5.5 times a year ago. And our interest coverage, EBITDA to interest expense, improved to 1.9 times versus 1.7 times a year ago. Interest expense declined by $5.2 million in 2005 versus 2004. Reflecting our debt repayment plan.

Total liquidity at the end of the quarter was $148 million, comprised of cash of $94 million and availability under our $100 million revolver, ABL revolver, of $54 million. We had zero drawn down on the U.S. revolver and had $6 million draw down on the Canadian revolver as Canada is now funding its own working capital needs and has repatriated essentially all of its undistributed profits to the U.S. Cash flow trends remain strong with continued working capital improvement. Average day sales outstanding declined by 6 days to 60 days while average days of inventory on hand remained relatively flat at 76 days, both versus the prior year and both measured on an average LTM basis, or latest 12-month basis.

Net debt at the end of 2005 was $590.7 million versus $662.2 million a year ago. We continue to generate significant amounts of cash through core earnings, reduced use of working capital and have generated cash from the disposition of the noncore assets. In 2005, we generated $52 million of free cash flow, defined as net cash provided by operations less capital expenditures. Our 2005 free cash flow included $10 million in cash restructuring in related payments.

Capital expenditures in the quarter were $3.9 million and for the year, $10.4 million. We have certain projects whose spending have some of which spending has moved into 2006. We are very pleased with the realignment plan as it remains on track with 2005 savings achieved as planned at $13 million. And costs for 2005 at $6 million, both in line with targets. We continue to expect to achieve an incremental $10 million in savings next year as part of this realignment plan for total annualized savings of $23 million.

Now I'd like to elaborate a little bit on our guidance for 2006 that Neil previously spoke about. Gross margins for 2006 are expected to be relatively consistent with our results in the fourth quarter as they will be impacted by continued high raw material and freight costs, although slightly lower than the $12 million, 2005 increase. And will be offset by planned price increases on Feminine Care mid-year, as Neil mentioned, return rate improvements, realignment savings and the [annonized] impact of purchasing the distributorships -- the Banana Boat distributorships. SG&A savings achieved as part of the realignment and other cost reduction plans are expected to be reinvested in advertising and promotional expenses which we plan to increase significantly in 2006. This is required, as Neil mentioned, in order to additively support the level of new product launch activity this year and in the future.

Our preliminary estimates for equity compensation expenses are $9 million in expense for 2006, $1million more than 2005. The quarterly split will be roughly the same amount each quarter, which, as you might note, is different in 2005 as this expense did not start materially until the third quarter. Intangible amortization will be in line with 2005 at about $3 million and. as Neil mentioned, interest expense will decline in 2006 by approximately $5 million from the impact of the debt we repurchased in 2005, and we expect interest to be further reduced by additional debt repurchases in 2006. Pending upon market conditions, including availability and cost, we expect to continue to repurchase debt on the open market and possibly call a portion of our 9 3/8 percent notes in accordance with the indenture starting in June. We have targeted to buy back $100 million in bonds during 2006. And as Neil mentioned, we have already repurchased $34.7 million so far in 2006 toward that goal.

Free cash flow for 2006 is expected to be in line with 2005's $52 million as incremental profits from our continuing brands and interest-savings from our deleveraging are anticipated to be offset by the loss of cash generated by the divested brands, higher capital expenditures and higher cash taxes, in addition to the remaining $4 million in cash restructuring costs to be paid out in 2006. Capital expenditures are expected to be about $14 million in 2006, as some spending on capital projects are falling into 2006 from 2005. Long term average capital expenditures is still estimated to be about 12 million a year. Taxes-- and lastly, taxes are expected to run at about a 40% of pre-tax income. And hopefully this information will help you with your modeling.

Operator, will you please begin the Q & A.

[ OPERATOR INSTRUCTIONS ] And your first question comes from the line of Lori Scherwin with Goldman Sachs.

Hi. Neil, can you talk about your sales growth target? I understand it's 7% over the 2003 to 2008 period, but after taking into account what you have already done -- so, the 5%, '03 to '05 and now the mid-single digits you're looking for this year, that implies close to, I think, 8 to 9% growth in each of '07 and '08. I guess, number one, is my math correct? And number two, if it is, that seems like a pretty lofty goal given your categories and recurring competitive concerns. What specifically are you doing which gives you comfort to get to this level?

Lori, good question. We like lofty goals, to start off with. You know, I think your math is generally right, although I'm not going to go through it exactly with you, but let me position us by saying that -- that we expect to get our goals, Lori, in two ways. First of all, the categories that we compete in, Feminine Care, Skin Care, there's growth in those categories, it varies by category. Feminine Care tends to be about a 1% growth a year. While Skin Care grows much faster, 6, 8, 9%, depending upon whether the sun shines. Wet Ones category last year grew close to 10%.

So, in part, we expect to get our growth from the growth of the categories, because most of the categories we compete in are growing. The second issue is we expect to get the growth from the introduction of new and exciting products. Either in line with our current businesses or possibly line extensions and, of course, we don't talk about those before they're introduced. But we have a significant program for 2006 where we will more than double the new products introduced versus '05, and then we have a three-year program pipeline beyond that to add new products. So, we expect to get this growth from two sources, one category growth and second from the expansion of new products. That's why we're investing in these new products in '06.

I guess on the new products, just given your categories, I would have to think that some of these new products are entries into new adjacencies, maybe higher-priced adjacencies, because even launching continual line extensions on your categories might not be enough.

Could be. Again, I don't want to be specific, but our brands are quite extendible into adjacent categories, if we see fit to move them that way. For example, and again, I don't want to speculate, but take any of our brands, whether it's Banana Boat or Wet Ones. These have many opportunities beyond the current businesses they're now in.

Okay. And in your prepared remarks, you mentioned you now have a more formal strategy for international expansion, if I heard you correctly. So, is that -- are the benefits of that potential international expansion banked into your current long-term goals? Or would, if you did that, would that be incremental?

Well, I think the way to think about it that it's generally in the goals. Because it's a trade-off, we invest in things in international we probably would not be investing in some things in the U.S. We will just have to wait and see. It's a little bit -- I don't want to say more about that at this time, but obviously we believe international represents a very significant opportunity for us, about 5 or 6% of our sales today come from international, and yet certainly in the developed world, most women or people use the same products that we make. The women of the world need baby products, babies are, in fact, born overseas. The sun does shine in places other than the United States and they need Banana Boat, et cetera.

When do you think you will you be more willing to share some of the specific plans? And do you think you need a partner to get this accomplished?

We will share more of the plans when things become clearer and/or when it's the right time to publicize them. In terms of whether we need a partner, again, I wouldn't speculate on that. I think we have certainly the cash resources to do what we want today within reason. We also talk about acquisitions as a potential for us internationally, and these acquisitions would have to meet some very strict criteria of being in businesses that we know how to manage, being immediately accretive and also providing us infrastructure from which we can manage and deploy our new products and existing products that we have in the United States.

Thank you.

You bet, Lori.

Your next question comes from the line of Alexis Gold with UBS.

Hi, good morning.

Good morning.

Just a few questions. I wanted to -- you mentioned potentially calling a portion of the 9 3/8. I -- it looks to me like you're just about in compliance with the [two times and currents] test, which I think lets you at least repurchase the $10 million under the restricted payments test on the 1/8s. Is that something you thought about doing? And I guess my follow-up would be does that basket accrue? Because I don't think you made any repurchases under that in either '04 or '05, either.

Yes. The interest -- the 2:1 interest coverage ratio is defined under the indenture. We have met that at the end of the year. We are allowed to use a basket to do restricted payments, either buying back the 9 3/8 or other things on that basket is estimated to be about $50 million. And the $10 million is inclusive in that basket -- or still subject to that basket. I wasn't able to use the $10 million in 2005. It's not additive.

Okay. And the debt that you've repurchased, subsequent to the quarter. Is that a combination of the 8s and 9 3/8?

So far those are all 8s.

Okay. Thank you. Just, separately, you guys mentioned the $13 million savings from the realignment. I'm just trying to get a sense, are those -- is that $13 million all under the '05 initiatives? And so where your total saving to date from realignment plans 19? Because, I think there was still about $6 million from the previous restructuring and cost initiative plans?

Yes, the -- your numbers are fairly correct, yes, we had $13 million for the '05 initiative, an additional $7 million from the previous year's restructuring initiative.

Okay.

So 20.

Offset by the charges restructuring.

Right. Okay. And just as we look out to the year, you talked about doubling your number of product launches, should we assume that those are going to be fairly back-ended and that your advertising -- your A&P increases will be fairly well aligned with the timing of those product launches?

The A&P increases will be aligned with the product launches and obviously will depend on which product -- Sun Care will happen when the Sun Care products hit the street, et cetera, because of the seasonal nature of it.

Okay, thanks very much.

You bet, thanks.

Your next question comes from the line of Karru Martinson with CIBC World Markets.

Hi. Instead of refinancing just a portion of the 9 3/8 notes, I was wondering, given the improvements in operations, the upgrades, why not just refinance the entire note -- all of the notes?

Obviously, in order to get that done, we would have to get permission from the eights -- the indentures under the eights and there would be a cost relative to that. So we're obviously looking at all ways of making sure we can get to the right financial structure and the best uses of our cash. But at the moment it would be prohibitive to refinance the 9s.

Okay. Interest savings wouldn't offset the costs involved, in your opinion?

We're taking -- we would be taking all of those -- the premiums required and the interest savings, because we are obviously getting about 3% savings on our cash these days, so, the delta in the interest is not as big.

Okay. And in terms of the divested brands that were at lower margins, how much of 520 basis point improvement was kind of attributable to the divested brands.

It was probably about -- somewhere about 150 basis points.

Okay. And in terms of the Beyond brand. I mean is it performing in line -- you mentioned it was somewhat of a timing of promotional and the focus on the Gentle Glide system. Is the brand matching up with your expectations?

Beyond continues -- continues to be a little bit of a challenge to us. You know, we lowered the price earlier in the year to meet competition, the consumption of that brand improved. We were a little disappointed by the fourth quarter trends on that business and actually we're looking at what changes in our marketing plan we need to put in place going forward in 2006. I will tell you this -- this business, Beyond, is a terrific product. It -- we continue to do research on it and consumers continue to tell us it is the preferred cardboard tampon, nearly 2:1 in the research. So, we're very much behind this product. We think it's a great product for consumers.

Okay. And then just to clarify, with Diaper Genie sales up slightly for the quarter, this was a discounted promotional sell-in. Should we see first quarter sales for the brand coming down just because of the timing issue?

Karru, I want to interrupt you for a second, we're going to have make this the last question because we've got to get other callers in.

Absolutely.

I'm not going to predict Diaper Genie or any individual business for the quarter. Diaper Genie is competing, as we said in earlier calls, in a very competitive market. We will just have to see what happens. We've -- we shipped in a strong promotion which gets us more price competitive. We will see how that does. Obviously because we're more price competitive, we will see lower sales from the pricing but we hope to see higher sales because we're more price competitive.

Thank you very much.

You bet, thanks.

Your next question comes from the line of Reza Vahabzadeh with Lehman Brothers.

Good morning.

Good morning.

Did you talk about the quarterly flow of earnings in 2006 much?

No, we are -- similar to the last year, we're not going to be giving quarterly guidance, just full-year guidance.

I mean just kind of directionally, any one quarters where you have more shipments, more AMP, without getting into specific EPS numbers?

No, we're not going to give any more guidance than we already have.

Okay, right. And as far as divestitures, are you essentially done with divestitures? Whether small or large?

Yes.

Got it. And then Infant Care, disposables and reusables, you mentioned competition as well as private label, what can be done to address those issues?

I think the key to address those issues is innovation. And bringing new products to the marketplace. And that's what we're focused on. In the consumer products business, especially in categories like this, if you fail to innovate, your competition is going to catch up to you, launch new products and you will feel the effect on your business. I think in some cases in the past, we've not innovated as fast as we needed to. We're seeing the effects on our bottle business. You know, these businesses tend to come and go and you get the advantage and competition does and right now we need to bring some new innovation to the market in these categories.

Right. And lastly, Kris, gross margin improvement, how much of that was due to the lower returns in Sun Care?

Are you talking about the quarter or the year.

Yes, 4Q '05, year-over-year.

That was worth probably about 120 basis points, 140 basis points.

Is that -- is that something that one should expect kind of going forward? Or is that a one-quarter thing?

Well, the fourth quarter is such a -- a gross margin impact because the sales are so small in that quarter --

Right.

But from looking at return rates, we continue to feel that we can reduce the Sun Care return rate -- rates significantly, and we're putting in some plans that next year we're looking at additional incremental rate reduction versus this year. Recall, one of our -- our efforts last year was to make the Sun Care business in total a better business, which included changing the terms of sale to make them the same as the rest of the company. Reducing returns, launching new products and buying back the distributorships and we're all on track to do all those things to make it a much more attractive business. We are going to have to go on to the next question.

Thank you.

Thank you.

Your next question comes from the line of Linda Bolton Weiser with Oppenheimer.

Thanks, hi, how are you doing?

Hey, Linda.

Just a question on Wet Ones, I think in the commentary you reminded us that we will anniversary some of the distribution gains. Are you kind of hinting around, then, that the growth should taper off here? Or should we expect good growth in '06?

I think you should continue to expect growth in '06. You know, I think the sources of growth will -- will change. The category continues to expand. We will see if it continues to do so. We will be launching some innovation in this category, I think, as time goes by, and those will hopefully help our business also. So, we continue to believe this is a growth category for us.

Okay. And just a question on the advertising and promotion spend. I don't know if you gave this but what was the ratio for the whole year, did you provide that?

The ratio for the year was, I think -- it's approximately -- the full year, this last year, was about $92 million. This year -- $92 million in 2004 it went up about $1 million to $93 million.

Okay. That's a pretty significant -- a pretty healthy ratio. I'm just curious if you're looking at the effectiveness of your spending dollar because as a ratio, in terms of dollars, and as a ratio, you're spending more than Proctor & Gamble. So, are you convinced the effectiveness of the spend is there?

I can promise you we're looking at the effectiveness of our spending. And if we don't think it's there, we won't spend it. Absolutely. You know, when you look at running -- when you run a business and look at the cost of doing that business, you focus on the big spending areas first as the opportunities to save money and/or increase effectiveness. We're certainly doing that across the board.

Okay. And just finally, just on the gross margin again, can you give us how much the distributor purchases in Banana Boat helped the gross margin?

It helps the gross -- the distributorships helped us in the gross margin from a couple of stand points, when we get additional sales that they used to do on their own, too of the costs and complexity of dealing with the distributors helps, but on the other side, we do have incremental SG&A expending because we now have to run those areas as far as merchandising at the stores and handling store by store sales. So, there's a margin pickup and then an SG&A expense related to it. But overall, as we mentioned where we bought them, we're looking for about a $0.03 annualized accretion from doing so.

Okay, great. Thank you very much.

Linda, I just also wanted to -- Kris had mentioned that the gross margins for '06 would be in line with the fourth quarter of '04. I just want to be clear, not the -- '05, I'm sorry, '05. Not the decline, it's the actual percentage that will be in line for the full year. I just wanted to make that clear.

So, full year '06, it should be roughly around the 54% margin rate.

Okay. Thank you very much.

Thanks, Linda.

Your next question comes from the line of Kathleen Reed with Stanford Financial.

Good morning. First of all, there's a line item in your press release, when you were just talking about adjusting your long-term targets. Where you say that you just wanted to update your long-term targets for the impact of divested brands, equity compensation and changes in your business? And I just wondered if there was anything we should be reading into that, if you're seeing increased competition in certain areas or if something is fundamentally changed or how we should interpret that?

Yeah, it -- it's precise. We looked across all of our businesses. What has changed in the year since we first gave our long range goal last April, and one of the bigger ones is product costs have increased significantly more than we thought during 2005. So, that was taken into consideration and so those are the type of things -- and the other ones that you mentioned that we took into consideration, coming up with our revised estimate.

Okay. Second of all, just really quickly, the legal expenses that you site, can you give us a little color on what those are and if we can expect any for '06?

We were involved in various litigations this year, which we've concluded, and hopefully we will not have the similar litigation in the coming year. Those expenses were in the neighborhood of $3 million.

Okay. Was this the Proctor & Gamble issue?

No, this was a separate -- separate patent dispute.

Okay. And back to Fem Care, exiting private label. Can you talk about what kind of a hit that was in the current quarter? I would assume it was lower margin business, so it should actually improve your Fem Care margins in '06? Is that accurate?

Yes, that's correct. I mean it's a minor impact to the sales, but it is -- it is a drag. But from the profit standpoint, it will -- the elimination of those will help us increase our Fem Care overall margins.

Okay, and then lastly, can you just site who your increased competition in bottles is coming from, and what exactly they were doing that your bottles I guess -- I know you said newness, you need new products there, but if you could elaborate on the competition in bottles.

Well, it's just across the board, the standard competitors. They're launching new products, and they're getting some distribution, which they're bound have. The major competitor there is Advent. And we've seen them enter the market over the last couple of years and they've got some innovations and obviously we have our plans to meet them.

Okay. Thanks so much.

You bet.

Your next question comes from the line of Bill Chappell with SunTrust.

Good morning, just want to go back to Fem Care real quick. Over the past year, I know especially in the back half of the year, you stepped up the marketing and promotion and reworked the some of the ad campaign. It looks like the overall share is relatively flat from start to finish and with Beyond kind of trailing off toward the end. What will it take to move market share forward, and how do you re-look at that going into '06?

That's a good question, Bill. You know, to get market share growing in this category, I think it's going to take both doing what we're now doing, which is continuing to focusing on the fundamentals, continue to strengthen our advertising support, and then over time, I'm not going to give you the time schedule bringing innovation to the marketplace. We're heartened by the fact that our major business, Gentle Glide, continues to grow share period to period.

When we introduced Beyond, we, in my judgment, made a mistake because we cut Gentle Glide advertising and support to launch Beyond. But Gentle Glide is the major franchise representing 85 or so percentage or more of our business and this business is now growing again as we're supporting it. So, we're quite optimistic. And I guess, finally, I'd say, we continue to do the testing and confirm that our products are very consumer acceptable and we believe in some cases, preferred versus the competition.

So, there's not a timeframe. It's just continuing to do more of the same and we will kind of keep a watch on it through this year?

Yes, and innovation will come when it comes.

And on that, exiting the private label, will that have -- what kind of impact does that have on your reported market share?

Very little.

Okay. And second, just want to make sure I understand on the guidance, you know, what's kind of your expectation for the dilution of the divestiture in '06 EPS?

We didn't -- as I mentioned before, it's -- we roughly said for '05, it'll be a $0.06 dilution, which is basically the 8 or $9 million in profits and net of $3 million of interest savings from the proceeds. The 2006 impact would be roughly the same, if the businesses were flat or slightly less if they were going to decline. We had a lot of programs related to maybe magic and what have you, but we don't have those next year, so, the impact of what would have been in '06, I'm not going to guesstimate at.

And of course it depends upon if we're able to use that cash and when we use that cash to buy back the bonds.

Got it. And then just two quick questions on Infant Care. Can you give us an update of as you went through the quarter, how Diaper Genie shares trended? And then also when you're talking about the bottles, do you have something relatively near-term to offset the competitive stuff? Or will it be a while?

Good questions, Bill. As usual! We -- again, I'm not going to announce the innovations before they hit the markets, so, on the bottles and on Diaper Genie for that matter, all I will tell you is these are important businesses to us. Innovation is important to our success. And we will be bringing innovation on a timely basis into the market on these businesses.

In terms of Diaper Genie's share in the quarter, I don't have the -- the full week by full week look and quite frankly, the Neilsen data on this is notoriously inaccurate because it doesn't cover two major accounts that we do business in, Wal-Mart and Toys or Babies "R" Us. So, we tend not to look at this, but the sales, as I said, grew slightly in the quarter. And for the year, Diaper Genie sales were actually up, also.

Okay, great, thank you.

Right, and Bill, just so you know, I think we mentioned in the script, that the sell-in for Diaper Genie is related -- a lot of that is related to promotional sales in the first quarter of '06.

You now have a question coming from the line of Jim Barrett with CL King & Associates.

Good morning, everyone.

Good morning.

Neil, if we can refocus on the sales target for 2008 of 760, is the assumption there that that is organic growth or would acquisitions be on top of that?

The assumption there is organic growth and acquisitions would have to be whatever they are at the time. Whether they're on top of that or there's a potential we could make an acquisition and use some of our cash to buy the acquisition versus support the entry into new brands, but since we couldn't predict acquisitions, that number, 760, is just -- is organic growth.

And then on a related point, when I look at your three major segments, and if we fast-forward to 2008, do you expect there to be any change either in it the sales or relative profit contribution in a meaningful way between the three segments by 2008?

Golly, my crystal ball is not quite that good.

Okay.

I would say that we'll continue to make progress in all of these categories. I would expect Banana Boat profits to continue to be strong and improve. Infant Care, which right now is being affected by the increases in petrol costs because of the plastic nature of the products, we should see profits perhaps by 2008 improving in this category, also. Through either a combination of pricing or reduced oil-related expense.

Okay, and finally, I mean, you do have insights into the new product pipeline. Is it relatively equally spread across these three segments? Or is one likely to benefit more so than the others or two likely to benefit more so?

Again, I'm not going to give you the specifics, but we're looking at new products across all of our business.

Thank you very much.

You bet, thank you.

Your next question comes from the line of Joe Norton with Banc of America Securities.

Yes, thanks, good morning.

Good morning, Joe.

Just wondering if you could give us the remaining components when -- of the overall gross margin improvement in the quarter. You know, how much from restructuring, how much from the more effective trade?

No, I'd rather not. If -- in general term, they're about equal. There are lots of puts and takes in the gross margin growth. And I'm not going to get into the details of picking out little different pieces.

Okay. And SG&A? I mean I know $3 million -- $3 million was legal in the quarter, can you give us anymore in terms of how much was A&P and what the savings were? Or the realignment savings?

The A&P was the more significant increase in costs. Probably double the legal expenditures. That was the major cost driver in the SG&A section.

Okay.

The realignment savings of $13 million this year were relatively consistent across the quarters.

Okay. And then in terms of pricing, can you -- on the cups and bottles, specifically, it sounds like there's not really any opportunity to take pricing there because of competitive --

That's right. That's right.

Okay. So that business will just -- unless there's innovation where you can get a higher price product out there, that will continue to be challenged by the raw materials?

I think that's a good assessment, certainly for the short-term.

Okay. And then just finally on Diaper Genie, are you saying that's going to be an impact, meaning -- was that kind of like the third quarter Fem Care, you've sold in some business in the fourth quarter and it's going to be light in the first quarter? Is that what you're kind of telling us here?

No, what I said was there was some promotional sale or promotion product in the fourth quarter where we -- where net -- we were offering the consumer a better value. And, you know, we will see how effective the promotion was. On one sense because it's offering the consumer a better value, we can see it in the sales. But because it's a better value, we will hopefully see higher sales from the number of units sold. We will have to see what happens.

Okay, got it. Thanks.

You bet.

Your next question comes from the line of Connie Maneaty with Prudential.

Good morning.

Good morning, Connie.

Seems to me that the gross margin improvement in the fourth quarter came from events that are just starting as opposed to ending. They're not one-time. Either the Banana Boat increased distribution or more efficient trade spending or a couple of other things you mentioned. So, why shouldn't the gross margin in 2006 be between 55 and 56%?

I don't know that I would agree that the fourth quarter did not get the full benefit of a lot of those things that you mentioned. I believe it has. So that's why I would say that the fourth quarter is getting -- $54 million is about what we will see in '06. Also take into consideration, as I mentioned, that we're going to have additional cost increases above the costing $12 million we had this year in next year, that will be depressing the margins and not allowing the full -- some of the pieces that have incremental annualzation pieces to them, to have the benefits flow down to the margin percentage.

But the impact of the divested businesses will show up in the first three quarters of 2006, right?

That's correct.

And the increased distribution and better return policy will show up on Banana Boat on a seasonal basis, right?

Yes. Correct.

So, are you saying that the cost increases are more than the benefit of these events?

They will offset the benefit of these events, yes.

And where exactly is the cost pressure the greatest?

Mostly petroleum-related products.

Back to Infant Care?

And freight. As you know, because costs -- although costs have not significantly increased in recent months we do have contracts in other things, so, the pull through of the increases is deferred a little bit. So that's why we will get significantly more cost increases in '06 versus what's going on in the market today.

Okay, thanks.

You bet.

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And your next question comes from the line of David George with Deutsche Bank.

Hi. Could you say what the average price paid 8% coupon in January was?

No, we don't disclose that.

Oh. And then just a working capital, the -- sounds like it's a source, can you say order of magnitude what you expect for the full year?

'06?

Yes.

'06, with the more significant growth in the top line -- you're going to see incremental dollars required. We will see impacts on reduced days and receivables and hopefully on inventories as would come up with a lot of SKU reduction and other plans that are going to be implemented in 2006. Overall, all that washes out, it will probably be -- working capital will probably be a wash for next year.

So, pretty much flat. And then finally, I guess you don't have any NOLs left at the end of these past years, so, would your cash tax rate pretty much near your book tax rate for the year?

Not quite, it's not going to be the 40% book rate. We have and continue to have deferred taxes that reduce that rate not to the extent it was in 2005 because of repatriation, et cetera, but it will be lower than the 40%.

Do you know by how much? Can you estimate?

No, I can't.

Okay. Thank you.

You now have a follow-up coming from the line of Lori Scherwin with Goldman Sachs.

Yeah, hi, Kris. Can you just talk about the stock option expense? It was pretty variable this year along with the stock price movements. Is the accounting the same for '06? Or is there something new that could either move or not move that $9 million expense this year one way or the other?

Okay, without -- without wanting to go into a long dissertation on accounting for 123-R, just to be clear, we have restricted stock and performance-based options in 2005 that are subject to the old accounting rules, which was basically that you take restrictive stock and performance-based options and market them to market each quarter. So, whatever the price of the stock is at the end of the quarter, that -- you make that adjustment and that kind of calculates your expense or increases or impacts your expense. And under the old accounting rules there, was no expense to regular nonperformance-based options.

As we walk into 2006 under 123-R, you no longer have this market to market issue -- what happens is when the options or restricted stocks are granted, whatever the price is on the grant date that is what determines the cost. If it's say a three year vesting period then you would take that cost and amortize it over three years and you build in a lot of other things, like how many people are going to leave the Company and not exercise and a bunch of other things. So, I'm trying to make this simple, but in essence that locks the price. Once that is granted, the price of the stock does not impact that expense going forward. So, the $9 million and again we, like a lot of companies, are still running the numbers so that isn't a final, final number for us. The $9 million won't vary as much quarter-to-quarter.

The only one issue that obviously is we have built into that number is an estimate on how many shares we will issue or grant in options and restricted stock when we do our annual grant this spring and at what price that will be this spring but in general, I think the $9 million -- it's going to be $9 million plus or minus a million or probably -- probably minus a -- somewhere between 8 and 9 is my guess as to where it will be.

Great, thank you.

Yes.

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And with no further questions in the queue, I'd like to turn the call over for any closing remarks.

Okay. Well, thank you very much. In summary, as I said at the opening, we posted strong results for the fourth quarter and for the full year 2005. Importantly, we followed through with our commitments for our shareholders and investment community as well as our associates, our customers and our consumers this year. We set a strategy going into 2005 to grow sales, profits and deleverage, and we made progress on each of these elements.

I look for 2006 to be a year of real excitement as we expect to see momentum generated from our investments and product launches and related advertising and promotion, make possible our significant cost savings generate further growth. We remain continued -- continued to commit to improving in every way as a company, following through on our promises to make life a little bit better for our consumers. I want to thank all of you for participating in this 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.