Edgewell Personal Care Co (EPC) 2006 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Second Quarter 2006 Playtex Products Incorporated Earnings Conference Call. [OPERATOR INSTRUCTIONS] I would now like to turn the call over to Mr. Doug Sinclair, Vice President of Finance for Playtex products. Please proceed, sir.

Good morning, everyone. Welcome to our second quarter 2006 conference call. I'm Doug Sinclair, Vice President of Finance and with me are Neil DeFeo, Chairman, President, and CEO, and Kris Kelley, Executive Vice President and CFO. As most of you are aware, I'm filling in this quarter for Laura Kiernan, our Vice President of Investor Relations, who is on leave right now. I look forward to working with you until she returns.

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

Our remarks this morning will refer primarily to our results excluding certain charges and gains as detailed in this morning's press release and accompanying financial statements. For your convenience, a reconciliation of results as reported which is in accordance with GAAP to results excluding charges and gains, which is a non-GAAP measure isn't included our consolidated statement of income data attached to our press release and on our website at www.playtexproductsinc.com.

A replay of this call will be available this beginning this afternoon and will run through the end of the day on August 7. The replay dial in number is 888-286-8010. And the pass code is 77099241. To access the web replay of this call, please go to the Investor Relations portion of our website at www.playtexproductsinc.com. Now I'll hand it over to Neil.

Good morning, everybody. Thank you, Doug.

For today's call we will discuss a summary of the second quarter results and the progress we've made against our goals. Kris will then take you through the numbers in more detail. We'll have a question and answer period and then we will try to wrap up by about 11:45 today.

In summary, the results for the second quarter were very encouraging. We remain on track to deliver our guidance for the year and we continue to make progress against the strategy we set in place in 2005. Here are some of the details of the quarter.

For the 10th consecutive quarter, we grew net sales of retained brands. There were up 10% this quarter to $180 million. The net sales grew because of growth in both Skin Care and Infant Care.

We had very strong skin-care results, with net sales up 27%, building upon a strong first quarter. Recall our skin care category is comprised of our Banana Boat business, Wet Ones, and our Playtex glove business. So far we have had a very successful summer season with Banana Boat and Wet Ones performing well, with net sales up double digits on both. Gloves have also had a solid quarter with sales equal to a year ago second quarter.

Moving to Infant Care, Infant Care sales were up a solid 5% with consumers responding to our new products, especially our cups.

This growth in both skin-care and Infant Care was partially offset by a decline in our Feminine Care business which was the result of Retailer declines in inventory on Gentle Glide, along with softness in Beyond, which we will discuss in more detail a little later on.

Also during the quarter, we continue to strengthen our gross margins, which are up almost a 140 basis points in Q2 versus year ago, despite higher overall raw material costs of about 80 basis points in the quarter.

Excluding the results of our divested brands, the operating income was up 12% versus a year ago to $31.9 million, despite the fact that we have about $1.2 million more in non-cash equity compensation in this year's numbers. Year to date, we bought back about $94.5 million in bonds, $49 million during the first quarter, which we announced on our last call. In quarter 2 we bought back an additional $19.5 million, and in July, an additional $26 million, resulting in us being very close to our $100 million goal for the year.

As a result of deleveraging, interest expense declined by $1.9 million or 12% in the second quarter of '06 versus the prior quarter and we are on track to deliver about an $8 million savings interest for the full year. We also bought back 500,000 shares of our common stock for $5.8 million against our $15 million approved buyback program.

So in summary, net income in the quarter excluding charges and gains, was $11 million or $0.17 per diluted share versus $8.9 million or $0.14 per diluted share in the comparable period a year ago. We are very pleased with these results.

Now I'd like to talk a little bit more about each of our key categories.

First, Feminine Care. Despite stable share and consumption trends, net sales in Feminine Care were off 7% to $53.9 million for the quarter versus a year ago. The decline in sales is primarily due to trade inventory reductions. We believe the reductions in trade inventory is primarily the result of our retailers cleaning out some older package -- our older packaging of Gentle Glide boxes as they make way for our new packages.

You recall that new Gentle Glide packaging began shipping in the quarter, converting our 20 and 40 count boxes to 18 and 36 count boxes respectively, with no change in suggested retail pricing, bringing Playtex's package counts in line with industry norms. As we discussed on our previous call, this packaging change effectively gives us a price increase, but because of the implementation costs of these changes, we do not expect to see any benefit until 2007. New advertising for Gentle Glide was on the air in June and hopefully, you have all seen it but if not, I can assure you that it is upbeat and tests very well in our consumer testing.

Continuing previous trends, Feminine Care net sales were also negatively impacted by lower sales of Beyond tampons. Sales of the Company's new Petals personal cleaning cloths offset the sales decline of the discontinued Heat Therapy products which we announced in our last call. We're pleased to be launching a new tampon in late August to help grow our feminine care business. The costs of this launch, which are significant, are in our forecast. We expect this new product to contribute to our top line growth this year and bottom-line growth in 2007. This product has been well-received by our retailers and we expect broad distribution. For competitive reasons we have not discussed most of the details of this product but we will disclosing it via press release when it begins shipping in late August.

Consistent with previous trends, we estimate Playtex's dollar share of tampons across all channels remain stable at about 25%. Gains in Gentle Glide shares have been largely offset by declines in Beyond.

Now I'd like to move to skin Care. We had a terrific quarter in skin care. Skin Care net sales grew 27% to $85.6 million in the second quarter of '06 versus the prior year, accelerating the growth trends we saw in the first quarter. This significant growth was due to several factors.

Banana Boat sun care was up significant double digits in the quarter, mainly due to the success of the Company's new Continuous Spray and Tear-Free products. And overall consumption was up in response to increased investment in marketing. Also, Banana Boat net sales in the quarter were positively affected by new and innovative promotions, increased marketing and a shifting of timing of shipments as customers continue the trend of purchasing closer to consumption periods.

We also recognized lower estimated return rates as a percentage of shipments for the 2006 season resulting from improved business processes that we described in detail during the past calls.

Wet Ones hand and face wipes net sales grew double digits also in the quarter in response to increased marketing efforts, new products and continued category growth. Gloves net sales were about flat for the quarter as the brand maintains good distribution across all trade channels.

We are also pleased to be supporting The National Breast Cancer Foundation with contributions based on the sale of our Gloves.

Now I'd like to move to Infant Care. Infant Care net sales grew 5% to $40.8 million in the second quarter of 2006 versus year ago as growth in bottle feeding and cups more than offset lower sales of Diaper Genie.

In bottle feeding, the Company's business benefited from increased distribution of retailers in the quarter as consumption in hard bottle feeding remains strong, offsetting some softness in disposable bottle feeding. In our cups business, our new cups, featuring Disney's Nemo and Car characters from the two related popular children's animated films, began shipping in the second order of '06 contributing to our growth. Consumption trends in cups remained strong with Playtex outpacing category growth significantly during the quarter.

In Diaper Genie, as anticipated, sales were negatively impacted in the quarter as price was lowered to meet competition at retail and trade inventories declined due to the implementation of certain product and packaging changes. A new and significantly improved model, Diaper Genie 2, with better ease of use and stronger odor protection has just been added to the product line. The company began shipping its premium priced Diaper Genie 2 pail and refill system in July. From our consumer testing and research, we know that consumers think Diaper Genie 2 is much better and easier to use product than the current offerings in the marketplace. We are excited to see how this product improves at retail. We expect to see sales growth from our Diaper Genie line, by offering both a lower and premium priced units to consumers.

As mentioned in previous calls, we have several new Infant Care items shipping in the fourth quarter in time for the January '07 shelf resets at our major accounts. We will provide you with details of these as we get closer to the launch. We're on track with our total new product program where we expect to launch more than twice the number of new products this year as in '05. Year to date we have delivered a 6% increase in net sales and are on target to achieve our mid single digit sales growth for the year. We are maintaining all of our previous guidance for the year, Kris will provide you with more on this in his comments.

So in summary, results for the quarter are very encouraging and we remain on track to deliver our commitments. I am very pleased that our strategy is working as planned and we continue to follow through with all of our commitments to each of our stakeholders. 2006 is turning out to be a very exciting year and I am looking forward to continued progress as we launch the remaining number of new products this year. As we planned all along, savings from our cost reductions and debt reduction initiatives are enabling us to build our business and to invest in growth for the future.

Now I'd like to turn the call over to Kris, who will provide you with some additional on the rest of the P&L and go over our guidance with you.

Thanks, Neal. I'd like to provide you with some more details on the results for the second quarter, again, excluding charges and gains, and reiterate our guidance for 2006.

As Neil mentioned, our gross margins were up approximately 140 basis points in the second quarter despite higher overall raw material costs of about 80 basis points. The increase was driven largely by the divestiture of the non-core brands and the positive impact of our restructuring programs and business improvement initiatives. In the quarter, we benefited from a lower estimated '06 Seasons Sun Care returns rate due to continued improvements in this area.

SG&A expenses were up 3.3 million or about 5%. This increase was due in part to a higher equity compensation charge of $1.2 million. Excluding equity compensation, SG&A as a percentage of net sales in the second quarter of 2006 increased about 60 basis points versus last year. This increase in SG&A was due to the impact of the divested businesses which had 13 million of net sales and minimal SG&A spending, combined with continued higher investments in advertising, sales promotion, and new product development. Funding for these increased investments came from our realignment savings.

Operating income increased by 800,000, despite lost operating income on divested brands of about 1.8 million and the 1.2 million of higher non-cash equity compensation charges versus year ago. Excluding these items on a comparable basis, operating income would have been up 3.8 million or almost 13%.

By segment, Feminine Care operating margins increased in the quarter despite lower sales due to lower advertising and promotional activities on certain brands. Total Skin Care operating margins were slightly below year ago due to higher advertising and promotional support in the quarter. This increased support helped to drive the significant sales gain of 27% for the quarter. Infant Care operating margins declined year-over-year as anticipated, due to the impact of higher raw material costs which impact this category more materially due to its high resin content.

Corporate operating expenses increased $1.2 million due to the higher equity compensation costs versus a year ago.

As Neil previously mentioned interest expense was down 1.9 million or 12% in the first quarter due to bond repurchases. Diluted shares outstanding increased by 1.2 million shares in the second quarter versus last year's second quarter and were in line with our forecast. During the second quarter '06 we repurchased 500,000 shares of Playtex common stock as part of our previously announced stock repurchase program. The purpose of the program is to mitigate the dilution due to our equity compensation programs. The purchase of the treasury stock in the second quarter '06 essentially resulted in average diluted shares outstanding remaining flat versus the first quarter of '06 which was consistent with the objectives of this program.

On to cash flow and liquidity items. Total liquidity at the end of the quarter was 107.3 million, comprised of cash of 23.6 million and ability under the ABL revolver of 83.7 million. As Neil mentioned, we have now repurchased 94.5 million of our notes, 49 million of our 8% notes and 45.5 million of our 9 3/8% notes. During the second quarter of 2006, we also paid off our previously outstanding 6 million-dollar balance under our Canadian revolver facility.

Free cash flow, defined as operating cash flow less CapEx was 16.1 million in the first half of 2006 versus 20.4 million for the same period in 2005. The decrease was driven by higher capital expenditures in the '06 period of 5.4 million versus a year ago in support of new product initiatives. Cash taxes paid were up $6.6 million as a result of the tax benefits realized in 2005 associated with the American Jobs Creation Act. Cash interest paid declined by $6.5 million as a result of our deleveraging, and working capital use was down slightly in the 6 month period versus year ago.

Now I'd like to reiterate our 2006 guidance, which is based on results excluding charges and gains. Excluding net sales of the brands divested in late 2005, net sales for 2006 are expected to be up mid single digits versus the prior year. This is consistent with our year-to-date results which are up 6% in the first half of 2006. As stated previously, we still expect to more than double the number of new product launches in 2006 versus 2005, both in terms of number of new products and SKU's. We still expect gross margins to be about 54% for the full year and we see no relief in raw material prices as the cost of items such as resin, latex, linerboard, all remain at higher levels versus the prior year. To support new product launch activity, and maintain solid levels on existing products, we expected to increase advertising and promotional spending in 2006 by about 10 million versus 2005, funded by our cost savings programs.

We expect 2006 operating income to be between 103 million and 108 million, which compares to 2005 operating income of 99 million, excluding charges and gains, and the 8 million of operating income from divested brands. This range includes estimated non-cash expense of approximately 9 million charged essentially ratably throughout the year, versus the 8 million in 2005 that was incurred predominantly in the second half of the year. Interest expense is expected to decline in 2006 by approximately $8 million for the year versus prior year, and we expect to achieve our goal to buy back 100 million in bonds this year having already repurchased the 94.5 million through July. As previously mentioned, we have implemented a stock repurchase program of up to 15 million. In the second quarter we repurchased 500,000 shares for 5.8 million under this program and we will likely repurchase a similar amount during the second half of this year in order to maintain our average diluted shares outstanding.

Free cash flow for 2006 is still expected to be about the same as last year in the mid $50 million range including about 14 million of CapEx. Taxes are now expected to run about 38% of pretax income due to anticipated mix of domestic and international earnings.

Operator, will you please begin the Q&A?

[OPERATOR INSTRUCTIONS] And your first question comes from the line of Reza Vahabzadehof Lehman brothers. Please proceed.

Good morning, Neal, Chris, Doug.

Hi, Reza.

On the Beyond, Neil, I was wondering what the strategy could be down the road. That's one part of business that's not performing as the other brands are. And the second question really is a housekeeping question for Kris, which is where are you in terms of the RP basket for the senior secured notes and the senior [sub]? Thank you.

I'll answer the first one. You know, Beyond is a terrific product. It's preferred by consumers. We know this in testing. And as you know, it got off to a tough start. We've been fighting an uphill battle on this business since then. Our current focus is to launch our new Feminine Care product later this year. And at the same time, we are evaluating what we need to do on Beyond. We've just launched a new 36 count on Beyond which has had good initial acceptance at retailers. So, you know, our plan is to continue with Beyond. We think it's a terrific product, but we're looking at our plans for the future, actually, as we talk.

On the restrictive basket, we're now currently a little less than $20 million of availability to buy back 9s and buy back stock, which obviously allows us to meet both our goals, that of buying a hundred million dollars back in bonds and maintaining our diluted share outstanding.

The $20 million is I guess the RP on the senior subs, right?

Yes.

Got it. So from now on that RP basket will grow basically according to the net income?

50% of net income.

Thank you.

You bet.

The next question comes on the line of the Lori Scherwin with Goldman Sachs. Please proceed.

Hi. The Nielson data that we see doesn't show as strong sales growth for Playtex especially in Infant and skin care. Can you maybe talk about your point of sales trends in untried channels, both in the quarter but also what you may be seeing so far in July?

Well I'm not going to talk about July, but I can tell you that we've seen good sell through. Let's take Banana Boat first. Our Banana Boat business, we had a very good quarter, and we have good sell-through at the consumer. I'm not going to give you a number, Lori, but the business is progressing well and you will have noticed that the sun is shining not only in New York, but if you watch the weather, we're blessed by good weather throughout the nation.

We're also seeing solid trends in our Infant Care business. Similarly, I'm not going to give you the numbers, but with our mix accounts we are showing again commensurate growth in that business. I don't know what else I can tell you.

I guess for Banana Boat in particular, you know, in the release you cited some of that was timing, but it still sounds like growth was strong. So can you help reconcile how much of that 27% growth was sort of one time or timing related?

Well, the 27% is for our total skin-care business, not just Banana Boat. That includes Wet Ones and Gloves. And, you know, the way to think about this on the Banana Boat portion is we saw some of our accounts delay the ordering from the first quarter to the second quarter. We still had a strong first quarter, as you recall. But I can't characterize it more than that, other than saying that we are seeing also very good consumption. And our Wet Ones business was also good in the quarter and that was -- followed consumption also.

And then on the guidance, you're not taking up the full year and you certainly -- beat my estimate this quarter and I think a lot of other people's us well, and I'm wondering, were we just wrong in our quarterly allocation or are you trying to be conservative and maybe put another way, this quarter recognizing you don't give quarterly guidance, but in hindsight, did you beat your own internal expectations?

I'm not going to comment on whether we beat our own internal expectations, but again we remain comfortable with our annual forecast. You know, philosophically, we very much are a group that likes to meet our commitments. And we've said that before. So I think you can take that at face value, Lori. One quarter does not a success make, but it's nice to have it under your belt.

Okay, thank you

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

Good morning.

Good morning, Kathleen.

First on the Feminine Care business, can you just quantify how much of the sales decline was due to trade destocking, especially if Gentle Glide market shares remained stable versus the declines in Beyond, or is the bulk of it related to the inventory destocking?

Well, when you look at the shares, Kathleen, Gentle Glide is actually growing and Beyond is declining. So the total Feminine Care share is about flat. And it's hard for us to get an accurate estimate, down to the dollar level on inventories. So I'm not going to give you a number. But we did see – you know, and it was anticipated actually, a decline in our inventories at trade level because we changed packaging. When people change packaging, they run out the old packaging and then they bring in what they need in new packaging but it also gives, you know elements of our retailers an opportunity to assess how much retail, how much inventory they have, and they often reduce it. And that's what we think happened this quarter.

I believe on your last call you said the down count was happening in June. So would we expect some inventory reduction still in your third quarter for Fem Care?

I wouldn't expect it, no. I wouldn't expect it. I've been wrong before, but I don't think so. I think we're through most of it and the down counted packages have reached the store shelves by and large. So I don't think so. Again, I don't have any data.

And I think on earlier calls you had given just some full year expectations by category with, I think, you said all categories are expected to post positive sales growth for the year excluding the impact of the divestitures. With two down quarters in Fem Care, are we still expecting Fem Care to have a positive, you know, just of what ever magnitude for the full year?

Yeah, we have no change in our guidance, Kathleen.

And the last question is just on the tax rate. 37%, you said, and I just wanted to make sure the full year rate would now come in at 38?

Right. The year to date rate is at 38.5 roughly and we anticipate this to be around there, around 38, 38.5 for the full year.

And the new should be an even tax rate for 3Q and 4Q, no weird swing one to the other?

Not that I can think of.

Okay. Thanks so much.

Thanks.

Your next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey. Please proceed.

Good morning. Nice quarter.

Thank you.

First, one question on the Fem Care margins. Looking on the operating margin, from what I can tell it was up 500 basis points year-over-year. Was there anything I'm missing there any reason why that was so strong?

There's some timing differences in marketing expense in the quarter.

So on substantially lower marketing year-over-year you actually -- you're saying you held your share pretty steady?

I'm not saying substantially [lower] (indiscernible), but some lower, yes. Share in total was steady and Gentle Glide actually grew.

Okay. And as I look towards the guidance, I guess, on the 54% gross margin for the full year, that implies lower year-over-year gross margin for the back half of the year after posting two quarters where we've had higher year over year gross margin. Is there anything on the cost side that's getting worse or is it mix, or am I just spending too much time on one number?

There's some costs -- all these new products that we're launching are going to have some impact on the gross margin, the start-up costs of production, scrap, and what have you gets to the right levels. There's also, in some instances, slotting allowances, other things that hit the margins. So there'll be some impacts to our gross margins relative to product launches in the second half as well as the continued to price increases, raw material price increases, excuse me.

When you look at raw material prices, have they gotten worse over the past 6 months or have they just remained high?

No, they haven't got worse. They remain high.

They're higher than last year. And they remain high.

Got you. And one last one, the interest expense, is that $8 million reduction year over year, that's not a change in your guidance, I think that's what you said before isn't it?

We said 7 to 8, and now it's closer to 8, yes.

And there's nothing to stop you from going above $100 million in repurchase?

No, there's not.

Okay, great. Thanks a lot.

You bet.

Gentlemen, your next question comes from the line of Reade Kem with Merrill Lynch. Please proceed.

Good morning. Thanks for taking the call. On the Sun Care Segment, I was wondering, you said in the release that your estimates of returns are lower. When will you know for sure in the season? Is that about another month or so away and has that continued to track in July?

We have to basically get through the third quarter before we can really have a better idea on how the full consumption rates are and then deal with the inventories we have at the trade relative to them coming back or staying on the full year shelf. So we'll have a better idea at the end of the third quarter.

Okay. And I was also wondering given that you bought out some of your distribution rights earlier, how much that might have contributed to the improvement in gross margins. This was obviously a key, Sun Care quarter?

Gross margins improved since we bought them back about this time last year so the cost of the, you know, of those distributor rights which hit our margins has gone away versus the prior year comparison.

So was that a greater impact on the change in return policy or was that mix kind of equal?

The returns were kind of equal across all kinds of SKU reductions, change in terms, buying back distributors, all three of those pieces added to the lower return levels.

Okay. And just another gross margin question I was wondering on the Infant Care, since you mentioned that as suffering a little bit from raw materials, are there any signs of there that you might have any leeway on raising prices or anything competitors are doing that might give you some room to raise pricing?

I don't think so. Hope springs eternal, but I don't think so. It's a competitive business and we're taking steps to offset those increases through savings and other areas. But I don't think we're going to be able to take price, at least not this year. I don't see it.

And last one for you Neil, I was just wondering, you haven't talked about the M&A landscape. I know you're open to doing things possibly -- especially with an international flavor. Any update for us there?

No, no update. Our predisposition remains the same. We are open, we're looking for things that would be accretive, things that we can manage, and things that would provide us with infrastructure capability hopefully in areas we don't do business currently. And we continue to look, but we're not in any hurry to, nor do we feel we must do an acquisition to succeed.

Okay, thanks a lot.

You bet.

Your next question comes in the light of Jim Barrett with C.L. King Associates. Please proceed.

Good morning, everyone. Neil, could you amplify on Kris' answer about the Banana Boat distributors? How do you assess that acquisition a year hence? Any surprises either positively or negatively on that front? What kind of returns do you think you're achieving as well?

Hard to measure the returns, but I assess it very positively. We didn't own those distributors so we couldn't control our own destiny to an extent. And we were paying -- were paying a price for that in terms of the cost of those distributor rights. I think in summary it's been very successful. We were able to take that business, we have a very good team, some of whom came over from the distributor, running that business, and it's off to a very good start. It has, in my judgment, fully met our expectations.

Okay. Thank you very much.

You bet.

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

Thank you. I was wondering if you could comment on the progress is made to date in eliminating the overhead expense related to the divested businesses and what's your target timeframe for fully eliminating that overhead. And secondly, can you repeat the advertising expenditure in the quarter?

First of all, on the overhead for the divested businesses, there really wasn't any overhead, a significant amount of overhead, being eliminated. Everything that has been adjusted related to those overhead has been accomplished on A&P, we don't put out A&P numbers on a quarterly basis.

Aren't you willing to say at least the year-over-year change in advertising, how much it was up year-over-year?

No, other than it was up. And as was our promotion spending. Advertising and promotion work together, you know. They were both up year-over-year and we expect them to be up as Kris mentioned in his comments about $10 million for the entire year.

We had significant increases in skin care, as we mentioned. Neil mentioned there were timing differences in Fem Care, so it is really a mixed bag on a quarter by quarter basis. But for the full year we are looking to be up the $10 million.

Okay. And just finally, I know you have a target of at least doubling the number of new products for the year. Can you give us a number in terms of roughly how much it increased in the first half in terms of new products?

The first half -- obviously in the first half you basically have our skin care products being launched. And then our Diaper Genie products has just been launched. We launched the Petals product singles in Feminine Care in the first half. And then coming up you'll have the new tampon product and significant increases in Infant Care products in the fourth quarter in time for resets for January.

In each of these areas, Linda, we had a more significant and substantial new-product launch this year in sun care than we did last year. I don't know if it's actually double the number of SKU's, I haven't counted them, I think it probably is but Diaper Genie was not relaunched last year. Petals is net incremental also and as Kris said for the balance of the year. So we're on pace if anything the intensity for our new products will increase in the second half from what it's been in the first half.

Okay. And just one last thing about I think in previous press releases for the quarter, you had reiterated your long-term goals on operating profit and sales and I didn't see that in this press release. Did I miss it? Are you still feeling confident about those long-term goals?

We have no change in our long-term goals.

Okay, thank you.

No change.

Your next question comes from the line of Alicia Longley with Buckingham Research. Please proceed.

It's Alice. Could you quantify the reduced accruals for returns in the Skin Care division?

Sure. Hi, Alice. How are you?

Hi, great, thank you.

Kris, do you want to take this one?

Will you repeat the question ? Sorry.

Well, I assume that when you say there are reduced returns in skin-care, in Banana Boat, it's reduced accruals for the returns that you've in the past gotten in the December quarter, right?

Right.

And could you quantify that?

What we said going into the year, we were hoping to take down our -- we don't quantify it as far as the specific percentage we're taking back, but we said going into the year that we'd like to try and hit this year at about 20% less returns than we did last year. To date we have accrued better than last year but not quite to the 20% level. But we're hoping with positive pull through in the third quarter that we could still possibly meet that 20% target.

Are you reducing the return accruals by about the same rate through the three quarters? We have to try to figure out how much that 27% increase in sales is driven by reduced accruals.

A portion of it is, but the vast -- it's not going to make a huge difference. The vast majority is the (indiscernible), the sell in--

Alice remember the following. First the 27% is for our total Skin Care business which includes Gloves, Wet Ones, and Sun Care. And the change in the accruals is only a small portion of that gain, very small, probably, a couple of percentage -- couple, 3% may be less. And we'll see. We accrue as best we can based on the facts we have at the time we close the books. And then of course as the third quarter comes, we took a look and the fourth quarter comes and as necessary we make a change. But we want to be conservative in our accruals because we don't want surprises.

Okay. So I'll talk about this with you offline, but the impact in the top line is somewhere like 2 to 3%, that's the order of magnitude.

Of the skin-care business, yes.

Of the skin-care business, right. And then on Wet Ones could you update us on the category growth rate and you said your shares were up, give us that data, if you would.

Our shares were up, I don't have the category growth rates, but that category has been growing, you know close to double digits, but I think it slowed down in the first quarter as reported by Nielsen. I'm just trying to get to the data. You have it, Doug. What is it?

The second quarter shares up 2.1.

Our shares up 2.1. I know that.

To about what?

We're showing 17.7.

And this is -- This is just Nielson, it's not all retailers then?

That's right, just Nielsen.

Looks like the measured market out of Nielsen is up 5.7%.

Do you have a sense of how you're doing or how the category is doing, your shares during if you were to include all the retailers?

Yes, we do. We don't share that information, but let's just say that we are also growing. It's not dissimilar.

Okay, so if I were to look at both of those figures, all retailers, and the trends would be roughly similar, you think?

I think so, yes.

Okay, excellent. Thank you.

You bet, Alice.

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

Good morning. I'm not in the office so I hope I have this information right.

Good morning, Connie.

Good morning. Can you explain why the skin Care margins declined from 30% in the first quarter to 26% in the second quarter?

Well, I don't know. Mostly, you know, the advertising and promotional spending impacted marketing that I mentioned before. In the first quarter you ship in, but you don't spend your advertising and promotional dollars until the summer season. That happens every year.

Okay. So it's a seasonal swing?

Absolutely. All the money spent in the second and third quarter in advertising.

Then in the Fem Care section, there was a big increase in margin sequentially in Q2 because advertising was somewhat lighter. But as we look in the back half of the year between sliding allowances and probably more advertising, should the Fem Care margin come down from the second quarter rate of 32.5%?

Yes, probably. I think you're going to see substantial costs for launching new products in the second and third quarter, slotting, etcetera.

So something on the order of the first quarter rate or even lower would make sense given the Initiatives?

I don't know if it is on the first quarter, just lower.

Does the timing of the new Fem Care product coincide with planogram changes in the category? Or are you doing this between planogram changes?

It's between planogram changes, but we've been working with our retail partners and it's been well planned for quite awhile.

So are you getting more shelf space or are you just swapping out some of your own?

It's a good question, Connie, as always. I think at the end of the day we'll end up with more shelf space. But again, we haven't begun shipping it, so we'll just wait and see.

Then finally, your -- the implied price increase you're going to get from the package count changes is more than the industry price increase. So by the time you realize the price increase, are you going to be at the 5 or 6% rate that the other competitors are taking or are you dealing back more to retailers?

Well, I'm not going to discuss the pieces of it, but we expect as we said in previous calls that the net of our price increase will be on average what everyone else has taken.

Okay. That's all I have. Thanks.

Your next question comes from the line of Karen Miller with Bear Stearns. Please proceed.

Hi, good morning.

Morning, Karen.

You mentioned in the past but that your target is to have 3 times the net debt by 2008. Could you reconfirm that for us, and also, how you plan to get there? Would it be EBITDA growth or further debt repurchases? You purchased approximately over 200 million in debt since 2004. I'm wondering if we can expect that same magnitude over the next couple of years?

Karen, yes, the less than 3 times target which is our 2008 target, as Neil mentioned all of our targets for 2008, we're still holding to. As far as getting to that target, yes, it will be a combination of deleveraging and EBITDA growth. But to your last comment, as you know, in the 200 or so million that was paid back, we had about $100 million coming from divestitures at the end of the Woolite deal at the end of '04 and then this past brands at the end of '05. So that's not going to be recurring. So the debt buybacks will be related to free cash flow which as we said before, this year is right to be about 50 million, but we anticipate it to grow with EBITDA growth in the future.

Okay. And in view of your improving credit metrics, have you got into the rating agencies, have you had any positive feedback from them?

We've talked with the rating agencies recently and they seem to be positive about the news. I have no idea whether or not they're going to make any changes.

Okay, thanks.

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

Hi, good morning.

Morning.

Just to follow-up on that a little bit. You talked about your plans for free cash flow and repaying debt. Any thoughts on refinancing the 9 3/8 that are currently callable?

You were fading out a little bit, but I think your question was with the 9 3/8?

Any thoughts on refinancing, given that they are callable?

They are callable, but the question is the cost of it versus what you're going to replace it with in today's market pricing at the moment, doesn't make sense. So I have no plans at the current moment. As the call price comes down in the future, and depending on what happens with rates that I can refinance it with, that might change.

Okay. And just free cash flow in the second half, you talked about the $100 million target. You talked a little bit about your plans for further out. But the $100 million target on your debt, you're pretty close to and 50 million share repurchase approval, it sound like you'll see maybe another 6 million or so in the second half. So if you're at 50 million free cash flow for the year, what are your thoughts for the rest of the cash flow, can [we] expect you to go over that $100 million target for the year? Do you think you could repurchase additional shares? Or is it mostly to reinvest in the business and new product launches and additional advertising associated with the new product launches?

As we go -- our seasonal cash flow, we have to build up cash flow in the fourth quarter as our working capital needs change. No, as I look at what we are going to do with the cash, whether I use it to go past $100 million, you know, or invest it, we look at that on a day-to-day basis, make those decisions going forward.

And just to go back to Beyond for a second, I know you spent a lot time talking about Fem Care, but we look at Beyond, in our channel checks, there were actually certain markets where, in a, it didn't appear to be on the shelves, at least to the degree that it has in the past. Are you seeing shelf space reductions at all with the Beyond product and do you expect to be offset with new product launches? I guess, as you look at the category, do you expect to be net shelf space positive for the year?

As I said to an earlier question, we expect to be net positive at the end in the total category. The retailers constantly are looking at their shelf sets, and sometimes we lose distribution, sometimes we gain distribution. And so it's a constantly moving target, if you will. But I think by the end, at the end of the year, we will hopefully have picked up some shelf space in total in our Feminine Care business.

And what about with Beyond?

Well, Beyond, as I said, we're in the early stages of introducing a new 36 count, which seems to be getting good acceptance by our retailers. And we'll see what happens with this.

Great. Thanks very much.

Your next question comes from the line of Reza Vahabzadeh with Lehman brothers. Please proceed.

Neil, aside from the packaging change, and the related inventory destocking, do you anticipate any other kind of inventory destocking?

I do not.

Okay. And Kris, as far as raw material cost pressures, does your guidance take into account any potential accelerations in the rate of raw materials increases year-over-year in the second half?

No, not acceleration. Right now we are assuming that the prices will pretty much hold where they are today.

Is that because you are -- you are locked on some contracts or is that just your general?

That's just our general -- that's the way we went into the year and I can't guess whether it's going to be higher or lower. So my guidance is based on where I know the prices are today.

Do you have contracts in place for some portion of your raw materials?

A little bit, but these days, as prices have kind of been volatile, the vendors have pushed to reduce the length of those contracts. So before when you could lock in some prices, some contracts, 6 to 8 months, now you're looking at 2 to 3 months before there's a price adjustment.

Thank you much.

Your next question comes from the line of Jason Gere with A.G. Edwards. Please proceed.

Good morning.

Good morning, Jason.

Quick question on the guidance, the 54% margins. Obviously for the back half of the year, probably looking in the 53 and change area and probably down maybe 50, 60 basis points year over year. I was wondering if you can go over the components, you could break down between mix, price costs, you know, cost inflation, if you can kind of go through that a little bit? Or new launches as well?

It's really a mix of a lot of things that related to the product launches and mix. I mean, I guess the year over year, you know, cost -- we're kind of calendarising a lot of our restructuring. So the year-over-year increases that offset price increases are kind of going away. But I'm not going to get into the specifics quantifying each one of the various pieces that are going to be in that reduction.

Okay, all right. Add just a separate question on Diaper Genie 2. Assuming, that the majority of your sales come from the non measured channel, was wondering if you could talk about some of those not measured channels like the Babies R Us, are they cutting back on the originals? Are they giving you more shelf space for the new product or is it just kind of work with what they've given you in the past?

Basically, they're taking the new product in addition to the old. So we'll see what happens over time. But, you know, now we have 2 products in the marketplace at 2 different price points.

Okay, terrific. Thanks a lot.

Okay, Jason.

Your next question comes from the line of Justin Boisseau with Gates Capital Management. Please proceed.

I just had a question. It looks like you guys have reached or about reached your long-term goals in terms of inventory at about 60 days. What's your timing for getting the accounts receivable to 45 days?

Well, from the way I run the numbers, on a, you know, a 13 month average basis, we haven't reached our inventory goals or receivables goals. We have made year-to-year progress and we continue to think we could hit the estimates of 45 and 60 days by '08. At the end of '08, excuse me.

Okay, thanks.

Gentlemen, you have no further questions at this time. I'd like to turn the call back to you for closing comments.

Okay. Thank you, everybody for your participation and your questions.

This quarter's results evidenced a continued improvement of our business fundamentals and shows that our strategy is working. When you look at our results on an apples to apples basis, sales growth is very strong, gross profit margins continue to improve in spite of overall raw material costs, and operating income is growing despite the higher investments in advertising and promotion and lost operating income on our divested brands. This, added to the lower interest expense as a result of our declining net debt balance has contributed to strong earnings growth year over year.

Thanks to the effort of all of our Playtex associates, we continue to produce results in-line with what we have said we would do, and let me make it clear. It is the work of all of our people that make the difference.

Playtex continues to focus on its consumers and customers to provide the right products at the right price in the right place. At the same time, we continue to build value for our shareholders by continually improving the fundamentals of Playtex through business process improvements, associate training, and the focus on cost and debt reduction. We believe our efforts will result in significant enhanced shareholder value over time.

I want to thank all of you for participating in this conference call today and for your interest in Playtex. Please feel free to follow-up with Doug Sinclair on any questions you may have after this call. Thank you and good morning.

Thank you for your participation in today's conference. This concludes the presentation. You may now disconnect.