Edgewell Personal Care Co (EPC) 2006 Q4 法說會逐字稿

Ladies and gentlemen, welcome to the fourth quarter 2006 Playtex Products earnings conference call. My name is Cheryl, and I'll be your audio coordinator today. At this time, all participants are in listen-only mode. We will be conducting a Q&A session toward the end of this conference. [OPERATOR INSTRUCTIONS] I would like to turn our presentation over to your hostess for today's call, Miss Laura Kiernan, Vice President of Investor Relations. Please proceed, ma'am.

Good afternoon, everyone. Welcome to our fourth quarter 2006 conference call. With me today are Neil DeFeo, Chairman, 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 comments made by management during today's call. We encourage you to read the company's SEC filings and earnings release which discuss in full factors that could cause actual results to differ from those made in any forward-looking statements. Our remarks today, will refer primarily to our results excluding certain charges and gains as outlined in today'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 www.Playtexproducts.com. A replay of this call will be available beginning this afternoon and will run through the end of the day on Thursday February 22. Replay dial-in is 888-286-8010, and the pass code is 93045879. To access the web replay of this call, go to the Investor Relations portion of our website at www.Playtexproducts.com. Now I will hand it over to Neil.

Good day, everyone. For today's call we will discuss the summary of our fourth quarter and full year results. Kris will then talk about the numbers in more detail as [inaudible] will provide the guidance for 2007. We'll do some Q&As, and we expect to wrap up around 3:45. Let me start by saying that overall, 2006 was a very good year for Playtex. During 2006, net sales of retained brands -- that's the brands we obviously didn't sell in our number of divestitures -- hit an all time record high, up 7% for the year. The rate of growth in net sales and earnings of retained businesses began to accelerate, reflecting our increased new product activity. We met and in some cases exceeded our overall objectives for the year. We made significant progress against our long-term strategy including reducing debt and improving our balance sheet. And we also grew total shareholder equity value by 25% last year. So in total it was a very good year.

Turning now to the latest quarter, I'd like to look at the business in detail and highlight some of our accomplishments. For the 12th consecutive quarter, we grew net sales retained brands. They were up 8% in the quarter to $137 million. On a reported basis, net sales were up 3% in the quarter due to the divestiture of noncore brands. Sales growth for the quarter was driven by gains in all three of our segments -- feminine care, skin care and infant care. Looking at each of these, in feminine care, net sales were up 3% in the quarter to $55.8 million. Growth this quarter was due to pipeline and replenishment sales for our new products, Sport tampon, as well as higher sales of our personal cleansing cloths. This growth was partially offset by lower sales of Gentle Glide primarily as a result of some expected cannibalization due to the Sport launch. In terms of market share, our plastic tampon dollar share for the quarter was up slightly, while total tampon share was down in the quarter due to losses on Beyond. Latest share trends are solid and improving in tampons. January shares saw us ahead of year ago on a 4 week and 13 week basis and about even with year ago on a 52 week basis with about a 25 share, and this does not include Wal-Mart. These share results are encouraging and indicate to us that our total franchise is healthy. I want to comment briefly on our feme-care operating income margins in the quarter, which were down versus the fourth quarter last year. This decline was expected and largely due to the startup costs related to the Sport launch. What we have seen in the tampon business over the last couple years is an increase in the general competitive activity and new product introductions. This plus other cost increase are putting pressures on our margin. Our July 2006 price increase should begin to offset this pressure going forward as will a reduction of new product startup costs. So our tampons latest shares and sales results are positive. We were optimistic about this business.

Moving to skin care. Skin care net sales for the quarter were up 18% to $37.5 million. Continuing the growth trends of the first nine months. Growth in skin care during the quarter was due to strong performance by both Banana Boat and Wet Ones. Also, gloves grew in the quarter. For Banana Boat, we have seen gains from having our products in more year-round shelf sets in our stores. We also had a strong sell in the company's new product line for 2007. Additionally, we continue to make significant progress in reducing sun care returns. Our sun care business is doing well and we are benefiting from the distributor rights we brought back in 2005 and increase number and quality of new products we are launching. Wear Ones hand and face wipes net sales grew in the quarter primarily due to increased distribution and share building. Wet Ones also benefited in 2006 from essentially the exit of a competitor from the market during the year. Close fourth quarter 2006 net sales grew versus a year ago as the brand maintains good distribution across all classes of trade and consumers were responsive to successful promotions.

Looking now at infant care. Infant care net sales were up 7% to $44.1 million in the fourth quarter of 2006 versus last year. We had strong new product sales especially in cups and mealtime where we launched the Create-My-Own-Cup new product and a full line of Baby Einstein feeding products. We also benefits from higher sales in Diaper Genie, new breast care items and pacifier products. Continuing previous trends, reusable bottles grew during the fourth quarter. Our reusable bottle business benefited from increased distribution at retailers early in 2006, as well as new advertising. Sales of disposable bottles, that is Playtex Drop-Ins, were negatively impacted in the quarter, as we continue to meet competition in this category from private label and semi-disposal bottles from another competitor.

Now let's look at our full year results. On a full year basis, 2006, feminine care net sales were about flat with a year ago, skin care net sales were up 18% and infant care sales were up 4% versus the prior year. This is a very good result in all of our categories given competition and results reflect the effects of our new product launches, category growth and improved marketing programs. In total, our retained brand portfolio performance was strong with total net sales up 7% and came in at the high end of our guidance which as you will recall was the mid single digits. I am also very pleased that we maintained or grew dollar market share in 2006 in nearly every one of our product categories, including tampons, sun care, hand and face wipes, reusable bottles, cups and mealtimes and pacifiers among others. This is a great accomplishment and again indicates the company's brand franchises remain strong with consumers. For the year, feminine care net sales were flat at $229 million. During the year, growth in plastic tampons shipments, due to the launch of Sport, offset declines in cardboard tampons. Also during 2006, growth in sales of our personal cleaning cloths was largely offset by declines due to discontinuation of heat therapy. For the year our tampon market share was essentially even with the prior year as we made up losses on Beyond with gains on Sport after its fall launch.

Now moving to skin care. Skin care net sales were up 18% in 2006 to $231 million showing significant growth on top of the 7% growth in the prior year. Most of the growth in skin care was due to strong Banana Boat sales, but Wet Ones also had impressive growth, and gloves grew nicely during the year. Each of our skin care businesses grew in '06. Banana Boat grew due to strong sales of new products, share gains and category growth. An effective price increase also helped growth during the year. A small amount of this was due to the full year impact of purchasing the distributor rights in mid 2005. International sales of Banana Boat, while small in comparison to the total, also had a very good year. We've maintained domestic distribution and finally we continue to significantly reduce our sun care returns. Moving to Wet Ones. We estimate the market share grew during 2006 due to increased distribution, new products, strong consumer response to advertising and promotion and also because we benefited from the exit of a competitor from this category . Similar to the quarter, gloves in 2006 net sales grew versus a year ago. For the full year our skin care business grew 18% and became the company's largest business segment. Operating profits grew 29% for the year reflecting both higher volume and lower returns.

Finally, infant care. Infant care sales for the year grew 4% to $176 million in 2006. We have strong new product sales especially in cups and mealtime, Diaper Genie behind a new Diaper Genie launch [inaudible] that was launched in July. We also benefited from higher sales of our breast care items and new pacifier sales. Reusable bottles continue to grow in 2006 benefiting from increased distribution, new advertising and share gains. Sales of disposable bottles, as Playtex Drop-Ins, declined in 2006 as we continue to fight competition for private labels. In terms of market share, we estimate Playtex built share in the year in cups and mealtime, reusable bottles and pacifiers, and this includes Wal-Mart. In terms of dollar market share we've made gains during 2006 in reusable bottles, cups and pacifiers. Disposable bottles have grown against private label in terms of share but the overall category was down somewhat, negatively impacted by competitive semi-disposal offerings. Overall, we were very pleased with the progress we've made in infant care business.

Now I would like to talk just a moment about new products. New products are the life blood of our company. And new product sales as a percentage of total sales continues to grow in line with our long term strategy. Having grown from the mid-teens as a percentage of sales in 2005 to the mid-20s in 2006. Note that we define new product sales as sales from products launched within the prior two years on a continuing business only. As expected, during 2006, we launched more than double the number of new products that we did in 2005. We plan to have about the same number of new product launches in 27 -- in 2007 as we did in 2006. Now I'd like to turn the call over to Kris who will go over the numbers.

Thanks, Neil. Since Neil has covered net sales I'll focus on the rest of the P&L, the balance sheet and cash flow items, as well as go over our initial 2007 guidance with you. Again, my comments relate to our results excluding charges and gains. Looking at our gross margins for the quarter, while gross profit dollars for the fourth quarter actually increased slightly despite the loss of the gross profits from the divested noncore brands, as expected our gross profit margin for the fourth quarter was down about 130 basis points versus a year ago to 52.9%. We had about 75 basis point impact on the gross margin from higher overall raw material and freight cost in the quarter. Overall gains from skin care and the divestiture of the lower margin noncore brands were partially offset by declines in fem care and infant care gross margins as result of the launch cost for the new Sport tampon and the impact of raw material costs increases respectively.

Now on to SG&A for the quarter. SG&A expenses ran at about 38.4% of net sales in the fourth quarter 2006, and were down $4.1 million versus the prior year largely due to lower corporate expenses specifically the timing of equity compensation expenses down approximately $3.7 million and lower legal expenses down $2.4 million versus the prior year. Advertising and promotional investments in the fourth quarter of 2006 increased double digits as a percentage of sales particularly related to feminine care. As a result, operating income in the fourth quarter was up 33% to $19.4 million from $14.6 million last year despite $1 million of foregone income from divested brands. Interest expense declined by $2 million, or 14%, in the quarter due to our deleveraging programs, and as a result, net income in the fourth quarter of 2006, excluding charges and gain, was $4.2 million, or $0.07 per diluted share, versus slight loss of $0.1 million in the fourth quarter of 2005.

Now looking at the full year, in line with our previous guidance, gross profit margins for the full year were 54% versus 53.5% in 2005. We had about 125 basis point impact on the gross margins from higher overall raw material and freight costs in the full year that primarily affected our infant care business which is heavily resin based. Overall, gains from skin care and the divestiture of the noncore brands were partially offset by declines in fem care and infant care gross profit margins, similar to the quarter. Our fem care gross margins were negatively impacted in 2006 as a result of changes in our tampon manufacturing. The changes included the Gentle Glide [inaudible] packaging, launching Sport tampons and volume declines in Beyond tampon productions. Skin care gross profit margins benefited in the quarter and the year from a 20% reduction in 2006 season sun care returns as a percentage of gross sales versus the prior there. This was our initial goal going into the year but this accomplishment was only realized this quarter as we got greater visibility later in the year as the actual returns began to come in. We have taken our returns process in-house this year which has enabled us to more closely monitor the returns and reduce the net costs associated with the returns processing. And finally in skin care we had a full -- we had full year's benefit from the outsourcing of gloves production to Malaysia which was completed in the middle of 2005. Now looking at SG&A spending for the full year, SG&A expenses were down about $1.2 million in 2006 versus 2005, in spite of an increase advertising and promotional investments on retained brands which are up about 9% for the full year to approximately $97 million. Even though SG&A dollar spending was down slightly, SG&A spending as a percentage of net sales increased to 36.8% of net sales in 2006 versus 36.5% in 2005, due to the impact of divesting the noncore brands at the end of 2005 as the divested brands had low levels of spending related to them.

Corporate expenses for the full year declined by $1.6 million. While we had higher training and development costs as we continued to develop our biggest asset -- our associates -- we benefited from overall lower corporate expenses including lower legal expenses of $2.4 million. Operating income in 2006 was up slightly to $107.4 million from $106.8 million in 2005. We were pleased that this was at the high end of our guidance. If you were to exclude operating income from divested brands in 2005, operating income would have increased about $9 million or 9% for the year which is higher than our 7% sales increase. The $9 million increase in full year operating income from retained brands was due to gains in skin care operating income of $12.4 million, lower corporate expenses of $1.6 million, partially offset by declines in fem and infant care totaling $5 million. Interest expense declined by $9.6 million or 15% in the full year 2006 versus 2005 as a result of buying back more than $220 million of bonds over the last two years. Similar to net sales, the rate of growth and net income from the year is accelerating versus prior years. On a full year basis, net income was $32.5 million or $0.51 per diluted share versus $25.9 million or $0.41 per diluted share in 2005. This is an increase in earnings per share of 24%.

Balance sheet. Looking at the balance sheet our total debt declined by $106.3 million in 2006, reaching our $100 million debt reduction target for the full year. During the year, we repurchased 100.3 million of notes and repaid the 6 million outstanding under the Canadian revolver earlier in the year. Our leverage rate show defined as net debt to EBITDA is down to 4.5 times. Under our $15 million 2006 stock repurchase program, we repurchased 1 million shares at a cost of about $11.6 million. The goal of the stock repurchase plan was to mitigate delusion about earnings per share as result of our compensation programs and hold diluted shares outstanding at around 63.5 million shares for the year, which we accomplished. The board has approved a similar stock repurchase program for 2007 for up to an aggregate amount of $20 million. Our liquidity at the end of the year was $86.7 million. Comprised of cash of $28.4 million and availability under our ABL revolver of $58.3 million. Free cash flow defined as operating cash flow less cap spending was $55.5 million for the full year 2006 versus $52.4 million in 2005. Free cash flow grew as a result of stronger operating earnings as well as lower interest payments in 2006 versus 2005. During 2006, we spent $6.2 million more on CapEx versus 2005 due to the timing of spending related to capital for new products particularly related to feminine care production. Also during 2006 as anticipated, the company paid more than $9 million in higher cash taxes than in 2005 due to the tax benefits realized in 2005 associated with the American Jobs Creation Act. Working capital was down slightly in the full year 2006, despite the growth in the business as company continues to maintain focus on cash control. Receivable days average 60 days for 2006 in line for the prior year while inventory days averaged 73 days, three days better than last year's average of 76 days. We are pleased that overall these results exceeded our guidance for the year.

Now I would like to provide our initial guidance for 2007 which again is based on results excluding any charges and gains. In line with the company's long term strategic plans, net sales for 2007 are expected to increase in the high single digits for the full year, with variability during the quarters as a result the timing of new product launches in the impact of the seasonality of the company skin care business. Company expects diluted earnings per share, excluding any charges or gains to be in the range of $0.60 to $0.63. This outlook assumes gross profit margins will be close to the 54% we achieved in 2006, despite continued raw material pricing pressures. Operating margins are anticipated to be essentially in line with 2006 margins despite a $0.03 per share increase in equity compensation expenses. This earnings estimate also assumes lower interest expense of approximately $0.04 per share from continued deleveraging and an effective tax rate of about 38%. Free cash flow is anticipated to increase to between $60 and $64 million net of an estimated $18 million in capital expenditures. Available cash and free cash flow will be used to reduce debt outstanding by at least $50 million and to repurchase stock under the company's stock repurchase program in order to allow us to keep diluted shares at our below $64 million outstanding. As Neil mentioned, our business continues to be more competitive each year. But we feel we have a solid strategy to compete successfully and to achieve these objectives for 2007. Now I will turn it back to Neil.

Thank you, Kris. Given our strong performance in the fourth quarter and for all of 2006 and our guidance for 2007, I'm sure you are all wondering how we feel about our long term goals. These are the goals we set several years ago for 2008. Let me remind you what these goals were. At the time, we announced these goals at the beginning of 2005, we said we would achieve sales of $760 million and EBITDA of $180 million by the end of 2008. These goals were set based on what we believed at the time we both wanted to do and could achieve. We set the goals to energize the organization and because we believe an historical analysis of our business indicated that we could achieve these results. Moreover, at the time, our long term plans indicated these goals were possible through organic growth alone.

As we sit here today, we have now completed two years of our four year goal period. And in each of these first two years, we have exceeded our plans and street estimates. The guidance we have given today continues to project long-term growth we are experiencing in our business. We were not changing our goals for 2008. As we still believe we can achieve them, but probably not only through internal growth as we once did. This is isn't surprising as competitive environments change, market changes and so will our approach. As the company has paid off its debt and improved its balance sheet and strengthened its core U.S. operations, it's become more apparent that acquisitions -- especially those which provide international infrastructure and category expansion potential -- are more attractive, particular in today's attractive financing market. We have said this before. So, as we look forward to 2008, we are not changing our goals. But remember these guidance for 2008. They are just our goals. Only after we complete 2008 will we know if we've achieved these goals. Our company today is in better shape than it has been in a long time, because of the hard work of our associates worldwide. And we are pleased that our growth over the last couple of years, and this progress continues. With that, I'd like to open this up to questions and answers. Operator, can you please start the q and a.

[OPERATOR INSTRUCTIONS] Our first question will be from the line of Reza Vahabzadeh of Lehman Brothers.

Good afternoon.

Good afternoon, Reza.

I heard different versions of that. But anyways, on the growth margin front, obviously fourth quarter margins were off from prior year whereas in preceding quarters your gross margins especially in the first half were up. I know operating margins are supposed to be relatively flat with '06. But how should we think about the gross margin for '07 there? Are you going to get some pricing and offset that -- that would offset certain amount of cost? Just explain the dynamics there.

As I mentioned, the gross margins for '07, we're anticipating to be close to the same 54% we had this year.

Right. Are there any tail winds or head winds you are think about? Is there a significant raw material input cost inflation that you are facing?

Every year we face ups and downs from costs and for some pricing. We expect to get some cost increases. But if you can predict the price of oil, I will tell you how much those would be. On the other hand, we increased the price of our tampons last year, and we expect some benefit from that in '07. Also expect some of the startup costs associated with some of our new products not to reoccur -- not to reoccur in the same level. As Kris said, we expect margins, after all that, to still be in the 54% range.

I see. Do you have any cost savings just from the prior initiatives that you would still realize in 2007 over 2006 levels?

Nothing in the majors. All the major cost savings were annualized in 2006. As we said before, we continue to look at cost savings in areas of improvement and we will get benefits year after year but nothing in the magnitude of major restructuring.

Okay. And then lastly as far as sales growth, would you anticipate some categories to be growing faster than the overall business and some segments to be growing less and can you comment on that?

Yes. We would assume some to grow more or less because sometimes the categories are. But we won't give you specific guidance on that. We don't give more specific guidance.

Okay. Thank you much.

And sorry for mispronouncing your first name.

No problem.

Our next question is from the line of Kathleen Reed of Stanford Financial.

Hi. Good afternoon. Just first question on your comments regarding your longer term or '08 goals. Could you talk a little bit about -- well, I guess two-part question. One, if your operating margin is expected to be flattish in '07, what kind of significant improvement we'd have to see in '08 to reach those goals. And I guess in the second more important question is, how do you balance debt pay down, share repurchase versus acquisition potential? Would you only spend your free cash flow that you are generating for acquisitions? Or would you think upon -- think about levering back up to make an acquisition?

On the -- obviously the marg -- the operating margins would have to increase in order to hit that goal from their current levels. On the acquisition standpoint, yes, as we look at acquisitions as they come along, we -- our current leverage of 4.5, depending on the synergies of the acquisition, might force us to lever up a little bit higher and in the initial year, acquisition year. But again, our requirements for an acquisition are that they be accretive in year one if it's minor delusion or minor increase in our leverage ratio, that's okay because we know that throw off strong cash too and we can bring it right back down again.

Kathleen, we've spent the last two and a half years paying off debt and strengthening our balance sheet. We like it stronger. But at the same time, in answer to your question of how we look at the use of that balance sheet, our objective is to build share holder value. If we find the right acquisition which we think provides good shareholder value and strengthens our ability to compete in the long term, then we're certainly going to look very carefully at that.

Okay. Second, just a clarification question on your SG&A expense, why it was down so much year-over-year in your fourth quarter. I understand the equity compensation expense was down. The comment you made, though, about legal expense. I know you had a charges in your fourth quarter of '05 for legal. So this was your $2.4 million in reduced legal expense even excluding that legal charge that you took in the fourth quarter of '05.

The legal charge that was -- the legal charge that was excluded in the fourth quarter of '05 was related to a legal settlement. The actual legal cost of that particular settlement and other legal proceedings that were going on during that quarter runs through our recurring line and that's what caused the reduction to the $2.4 million year to year.

Okay, great. And then, lastly, can you -- without getting specific guidance around any new products that you haven't already disclosed -- can you just tell us what quarters you think you'll have more new product activity. I mean obviously, your first quarter we already have some of the baby products and your sun care shipments. Any other quarter of the year in '07 has more new product shipments than others?

No, nothing we want to disclose at this time.

Okay. Thanks.

Thanks, Kathleen.

Our next question is from the line of Bill Chappell of SunTrust.

Good afternoon.

Afternoon, Bill.

Bill.

I guess the first question -- talking a little bit about the acquisition front, do you have things in the pipeline that you're actually looking at, or as we move through the year, this is just a new wrinkle to the story?

We've always said that we would look -- we would look and are looking at acquisitions. And I don't think it's appropriate for me to comment beyond -- beyond that for what are obvious reasons.

Okay. Switching to sun care, can you remind me, I guess, is the first quarter the quarter where you would see the real benefit from lower returns? And then within that can you give us -- I know you're not going to give the exact return ratio -- but, what kind of improvement you saw from '05 to '06?

Well, the first comment, the '05 ' to '06 improvement was a reduction in the percentage of returns by 20%. The -- as far as which quarter we get the benefit, if we can get the estimate always right, in particular it's usually this fourth quarter. We don't finish processing returns until the end of the first quarter, so sometimes depending on our estimate, how good our estimates are, we might have some adjustments in the first quarter. But generally it's in this quarter that we get everything corrected.

And you're -- still on the sun care, your belief is this is a category that grows double digits for awhile especially with the new products and the trends in the category?

Well the cate -- yes. The category is certainly growing and it grew last year double digits. And I think the drivers for that growth continue to be some fundamentals, and just to recap those fundamentals. More consumers realizing that the sun can, in fact, affect your skin health. And also their appearance in aging. Improvement to the products in terms of the benefits that they offer and also, of course, the new products which offer consumers new reason to consider the category every day.

Okay. And then, Kris, I might be doing the math wrong, but if I just annualize the fourth quarter interest expense for all of '07, that kind of gets me to a $0.04 reduction in -- $0.04 benefit to EPS. Are you not baking in any further debt pay down in first, second, third or fourth quarter?

No, we are doing the -- if you take the fourth quarter estimate -- obviously it depends on how much that gets impacted by interest income of the cash we have. You have to take that out. If you just truly look at our interest expense, obviously trying to annualize what we purchased this year, we finished our $100 million repurchases this year through nine months. So the full year bene -- the annualized benefit of that into '07 is going to be less than if it was straightforward right -- straight line across the board there. As far as when we repurchase our targeted $50 million next year and versus buying back stock to make sure we stay in the 64 million share outstanding, that the impact of that timing impacts the numbers. So --

And was there any reason in the fourth quarter why just let the cash build instead of paying down further debt?

It's a combination of whether I should wait for the call prices to climb. It's a question of whether I -- where my restricted basket was. I had limits on my restricted basket, so therefore -- with that I only had a choice of going after the eight, the ones I [inaudible] the entire basket. So, it's a combination of things, that a lot is a reason why we left the cash there.

And just what's the basket currently stand for the 9 and 3/8.

It gets adjusted every quarter. And as I mentioned before it's in the mid teen.

Okay, great. Thank you.

You bet, Bill.

Our next question is from the line of Alexis Gold of UBS.

Hi. I just wanted to follow-up on the [inaudible] --obviously the bond [inaudible] your thoughts on refinancing, [inaudible] market right now.

Yes. I think we've had this question over the years and our initial reaction has always been that until it's at least MPV positive to do something we weren't going to make a move. Based on where our call prices are now and where the strengthening of the market, as you mentioned, it is worth looking at, or refinancing, and when and exactly if we decide to do something we'll let you know.

And just separately, did you repurchase any bonds or stocks subsequent to the end of the quarter?

The end of the December quarter?

Right.

We don't discuss when we buy back the bonds in the stocks as the year goes. Only at the end of the quarters.

Okay. And just looking at some of the changes we've seen in drugstore consolidation and I guess [inaudible] Rite-Aids to contemplate a merger right now. Could you just talk a little bit about your relationships with both of those companies. I think you've historically had a pretty good relationship with [inaudible] and do you see any opportunity from the merger there, as they have to restock their upper shelves.

We've had good relationships with both of those accounts. I don't know how the merger will affect our business. It gives us an opportunity, I would say, to go in and talk to the account again about the value of carrying and merchandising our products. But I can't predict exactly how that might affect our business.

And in general, both accounts carried similar levels of products. The one thing that I will say is that Rite-Aid does a better job of executing merchandising. So, the combination I think that they are both looking at is that the merchandising and promotions will be more effective.

Great. Thanks very much.

And our next question is from the line of Joe Altobello of CIBC World Markets.

Hi, guys. Good afternoon.

Good afternoon, Joe.

Hi.

Just a couple questions first on the guidance. If I'm doing my numbers right it looks like you guys are looking for a pretty sizable increase in SG&A spend in '07 after come down with it in '06. I'm curious why that was accelerated so much?

We expect to continue to invest in the launch of our new products, is the general answer.

Okay, but if you launched twice as many as you did in '05 and '06 and the same level in '07, I would think you'd probably see the same level of spend in '07 versus '06. Right?

No. It depends on the timing of launch, when you pay the expenses, how much advertising you're going to spend, [inaudible] the fiscal year. Our plans currently are to invest behind -- continue to invest behind the launch of our new products.

And also remember the 2006 versus 2005 SG&A had the benefit of the annualized savings and restructuring continuing into '06 and that kind of hit the individu -- the increase any increase so therefore the normal increases in variable SG&A spending like commissions, et cetera will have to be driven off of the increased sales. So you have to anticipate it increase in the SG&A dollars.

Okay. And then secondly, on the free cash flow guidance, looks like you are implying a pretty good improvement in working capital. What's the guidance in terms of the source of cash for that sale line item.

In general, my guidance on working capital is going to be really neutral next year. Similar to this year. I think this year we was down about -- this year was a source of about 4 or $5 million. I anticipate next year to be around the same level.

Okay. Are there other sources of cash flow then in the [inaudible]? There's probably a $10 million gap there.

Now remember that equity compensation is non-cash. So that's a big item that gets added back in your cash flow analysis. I'm not sure if you have that in your numbers or not.

Okay, I'll figure it out. And lastly, I can probably anticipate your question -- I mean, your answer here, but in terms of your '08 goals, how much of that is organic and what is the implication in terms of acquisitions adding to that.

We're not going to comment on that, which is probably the answer you anticipated.

Yes, that's right. Okay, thanks.

But thank you for your vote of confidence.

We now have the question from the line of Jason Gere of A.G. Edwards.

Good afternoon.

Good afternoon, Jason.

Going back to the top line growth, the high single digits. Certainly 7% organic sales is -- topping that is pretty tough especially in the skin care side. I guess the first question I have is, thinking about the innovation, should we think about more white space expansion like what we saw with Sport this year or more on the brand extension side.

I think we'll be -- we'll be looking at broadening -- potentially broadening some of our lines, much as we did this past year. There will be some of both depending how you define them.

Okay. And then I guess the second question, I think I've gone back to something you said about fem care earlier. You were talking about the puts and takes in terms of why operating income should be better next year and one was the rollups and the startup costs but the benefit of pricing from the middle of last year. And then I thought I heard you say offsetting some of the incremental, I guess some of the spending would go down. Did I hear that correctly? Or I think from a competitive standpoint, or just maybe if you could clarify that.

No, I didn't say that. I said offsetting things like raw material expenses and also we expect to continue to invest as we complete the first year of our Sport rollout behind trial and promotions and its important new entry into the category .

And I guess just on that plate, can you talk a little bit about trade spending, especially in fem care remains competitive and some of your competitors have been stepping it up a bit. And as you look at the category, do you see the level of trade spending increasing this year versus maybe last year.

I can't tell you it will increase this year versus last year. This is a very competitive business. And as the pace of new products has increased so has the level of spending behind those new products. If you look historically, this category had fewer new launches in it than we have today. And when companies launch these new products, they invest in them to get to trial and visibility of these products. And so that's where we are today. I can't predict throughout this year because I don't know what the competition will be doing. I expect that they will be trying to support their business as we are.

Okay, and then finally the appointment of Gary Cohen as your Chief Marketing Officer. What does he bring to the table here that's different than what you've done in the past? Can you give -- share a little bit of your early learning so far.

Gary comes to us from a very successful career in consumer marketing at the Gillette company, largely the Gillette company and then last year, of course, with Procter & Gamble. And Gary is a very experienced marketing. He understands the latest and best techniques for marketing, consumer branding. He has worldwide experience having coordinated some of Gillette's worldwide businesses. And he is a very evenhanded and experienced manager, and I expect him to be able to use those skills effectively within our organization.

Would you, I guess would you mean that to find alternate sources of advertising rather than just the traditional means, would that be incorporated? And I guess when might we get a little bit more color on some of the strategic plans from the marketing standpoint that he might want to or you guys want to implement.

Well, in keeping with our long-term approach to this, we don't generally give advanced information about what we plan to do in marketing but rather only looking at the rear view mirror. So I'm not going to project when we might see some changes. Obviously the world of how you reach consumers has changed significantly over the last five to ten years and we and Gary are certainly involved in using these changes, recognizing these changes and implementing programs through each consumers in the marketplace.

Well let me put it, I guess, another way. Over the next year would you -- would we as investors or analysts be able to see some of the differentiated marketing approaches that you take that might be something that Gary brings to the table?

I would hope so. He is probably listening to this call so he is going to want a raise after this discussion.

Okay. Thanks a lot.

Okay.

And we have a question from the line of [Andrew Pairnic] of Deutsche Bank.

It's actually George Chalhoub.

Hi, George.

Hi. Neil, in terms of the acquisition, have you already made up your mind if you want to buy something that could be a fourth business segment, if you will, or something that would reinforce one of the three that you already have?

George, we've always said that what we are looking for is acquisitions that are very close in. In or closely relined to the categories we now compete in. And these acquisitions should be accretive, and they should be enabling. You know that most of our business, 90-some odd%, 95% is U.S. North American based. But the consumers use our products, or products like ours, worldwide. So we look for acquisitions that not only would allow us to expand or strengthen our businesses in the United States, but also give us that international infrastructure.

Okay. And Neil, when you talk about the 180 million EBITDA for 2008, the potential implication that one might see is that you might do an acquisition that will probably get you incremental, call it, 40 to 50 EBITDA to get you there. Is this is the way we should think of this? Or if you see something that you like and maybe even a bigger acquisition that gets you way beyond 180 but you feel it's a good stretch for the business you may even go for something that may be unexpected but good for you.

I think all of those are possible. Our approach is going to be what's in the best interest of the shareholders and what do we think we can both manage and deliver on. I don't want to fall into the trap of having our eyes being bigger than our digestive tract. I think it's important to be realistic. But, on the other hand it's just as easy to be bold as it is to be conservative sometimes.

Okay. And my last question is on the [inaudible] financing, obviously you stated the financing environment out there will be attractive to some extent some of these multiples have gone up because private equity money is really playing a big role there. If you get something that you feel you really want to get, I know you have -- you want to be accretive in year one -- but could you be in a situation where you may issue a combination of equity and debt to get where you want to be, or at this stage your view is it's going to be purely debt given what you think may be getting.

George, again, I don't want to be predictive here. I think it depends what could happen in the future. Obviously, our first -- the first thought is to decide we want to buy something, and the second thought is what's the best way in the interest of the shareholders to buy it.

Thank you very much.

You bet.

And we have a question from the line of Karen Miller of Bear, Stearns.

Hi. Good afternoon.

Good afternoon.

In terms of the progress you've made on deleveraging and bringing down your leverage almost one turn year after year, have you gone to rating agencies with this improvement? Any feedback from them?

We did touch base with them once last year, and we'll be in touch with them in the near term this year as we wanted to wait until we released our yearly earnings here in our guidance for 2007. I'm sure we will be setting up meetings in the near future.

And then, the second question, just going over your guidance and what you've given us during the conference call as well as in your printed comments, you talked about $60 to $64 million in free cash flow generation for '07. $20 million stock repurchase or up to and $50 million debt reduction. So that adds up to 70. Where is the difference? Like if you had to prioritize what would you see giving?

The difference is I have 20-what, $28 million of cash on the books at the end of this year.

Okay. So, but if you look -- So then you are committed to that $20 million and that $50 million. Because if you look historically, your cash at least at year end has been much higher than $28 million. At one point, you had something in the 20s, but basically your cash on hand has been somewhat higher than that $28 million that you have now.

And that's always been the case when we look at what to use the cash for. I mean, a few years ago the restricted basket wasn't available so I could only go after the 8% bonds and they were selling at a premium that didn't make sense. So therefore, it was beneficial just to hold on to the cash than to go after the 8% bond.

And you said that restricted payment basket was somewhere in the high teens.

Mid teens.

Mid teens. Okay.

And it grows obviously as the -- as we -- at 50% of our earnings. Every quarter it gets adjusted and will increase during this year.

So not withstanding there is no acquisition, we can expect to see $50 million debt reduction as well as close to $20 million stock repayment or purchase.

That's the assumption, yes.

Okay, great. That's helpful. Thanks a lot.

And now we have a follow-up from the line of Reza Vahabzadeh of Lehman Brothers.

Yes, just on the leverage question and relating to acquisition. Is there a leverage level beyond which you would feel uncomfortable or that you would prefer to stay under?

That's a hard one to answer. You are talking to two guys who have managed pretty leveraged businesses. But having said that, I like less leverage that we were at today a lot. And I have to say that if we were going to increase our leverage, it's going to have to be for a very good reason and would be very short-termed because we have the ability to generate a lot of cash here and we want to pay down the debt.

Okay. And then on the cost fund, just to input cost fund, this time last year you talked about input cost fund being inflationary on a number of fronts but you had the cost savings to offset it. How do you feel about just the input cost outlook at this time -- at this point in time, and do you think that -- do you have any hedges on by any chance?

On the input cost increase, we don't see -- there is some pressures but we aren't talking about 100 basis points or anything like that. We were talking 10 to 20 basis points assuming things are roughly where they are today. But as Neil mentioned before who knows where the prices will go. So they're nowhere near the increases that we had over the past two years year on year. So as far as hedges go, no, we don't really have hedges on our products because in a lot of the products the suppliers have taken -- not allowed you get into that many hedges. So the extent of how much you can hedge is somewhat limited. So --

Right. And the cost pressures that you touched on, the 10, 20 basis points is that primarily packaging or any other items?

It's a combination of resins, packaging -- prices, shipping for gas prices and shipping, et cetera.

Wonderful. Thank you.

Thank you.

We have a question now from the line of Lori Scherwin of Goldman Sachs.

Hi. I wanted to clarify on the not changing long-term goal, so that you probably won't get there without an acquisition. Is this just the increased competition or is there anything -- anything else going on that we should be thinking about? And then can you talk about the competition you may be seeing aside from fem care.

Well, I really don't have any more to say about competition than we said before. We are in very competitive markets. And we put our original plan together three years ago. That plan is kind of like a battle plan in war. And just like no battle plan survives first contact with the enemy, no business plan survives really first contact with your competition. And so we put our guidance or our goals in place in 2005 for the long term because as I said, we wanted to establish where we wanted to go as an organization, where we felt we could go, and we had good reason to believe we could deliver those. We're not changing them. The purpose of a goal isn't to walk away from it but to find ways to achieve it even if one set of one method is less attractive than others going forward.

Okay. But that's the primary reason?

Yes.

Okay. And you said you don't have a lot else to say about competition but we spend a lot of time on the call about fem care. Is it equally tough in the other categories, as well, or is it really worse in fem care.

I don't know if it's worse. Each category has its own competitive set and its competitive necessaries -- necessities. All consumer product categories that we compete, at least, in are quite competitive. Certainly the sun care business is competitive. Wet Ones business, our infant care products are very competitive. In each of these categories we compete with different competitors. But again, I think we were doing quite well, certainly we're satisfied with our most recent results.

Okay. And then for the sales growth this quarter, any way to quantify how much is the 8% was attributed to pipeline or selling of new products?

No we don't have -- it's not material.

Thanks.

Thank you.

And we have a question from the line of Kathleen Reed of Stanford financial.

Thanks. Just a quick follow-up, if you could. Just elaborate a little bit more on Beyond, what's going on there, if we think that product could eventually disappear or if you have any other plans. I think earlier in the year you took a pricing adjustment on the product and it seems like the share or the sales are still down year-over-year. A little more info on that product.

Beyond has been disappointing. We continue to struggle with this product despite the fact that our testing indicates it's really a preferred product. We're not walking away from it though. We were in the process of developing plans and trying to make decisions on what we're going to do with it. I have no -- nothing more to report. But I will tell you it's still a terrific product. The consumers who use it like it.

Okay, thanks.

You bet.

[OPERATOR INSTRUCTIONS] And we have a question from the line of Jeff Kobylarz of Stone Harbor Investment.

Yes, curious about your skin care business. I think you said that returns were down 20% for '06. And can you say what your target is for '07 as far as reducing returns.

Only thing we'll say year to year is we want them to go down lower. As far as an exact percentage for '07, I'm going to wait until we see this year come in for the final numbers versus our estimates this year end close. As I mentioned earlier in the call, this is the first year we're taking returns process in-house, and I want to see how that finishes up. So, before we give any guidance on the magnitude of the lower returns percentage for '07. We'll give you that on the next call.

Okay. And can you say what percentage of your sales in '06 came from new products that were introduced in '06 in any guidance you have for the '07 year.

As we mentioned, what we say is new products, we say new products have been introduced over the past two years and have gone from last year in the mid teens to this year in the mid-20s.

As a percentage of tot --

Excuse me as a percentage of sale.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] And there are no further names in queue. This will conclude our question and answer session. I would like to return the call to Mr. Neil DeFeo, Chairman and CEO.

Thank you, thank you. And thank you all for participating in this call. I'll just wrap up. As we stated in the beginning of our mark, we are quite pleased with 2006 as a year. It was a good year for the company. On a full year basis, we have accelerated the growth rate of our sales and our retained business as well as the growth rate of our net income. This growth is driven by our keen focus on innovation and new product development as well as attention to detail on running the business as efficiently as possible. We again met and in some cases exceeded our commitments for the year and made significant progress against our long-term strategy. Our strategic plan is working because we made difficult choices early on and the turnaround is paying off. And finally, by following through with our commitments, we achieved solid value creation for our shareholders. Shareholder equity value was up 25% in '06 and that's on top of a similar growth in shareholder equity value during '05. It was our associates, of course, who made all of these accomplishments possible. The men and women who worked so hard all year long. As you may recall, we're on a pay-for-performance system as a company, and this pay-for-performance encourages all of our associates to contribute. And they do.

Lastly, we are optimistic about our future. With the right strategy in place we can continue to execute against our plan and strive for continued growth and increased value to our shareholders. 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 Laura Kiernan on any questions you may have after this call. Thank you. Good day.

Ladies and gentlemen, this concludes our quest -- our presentation. Thank you for your participation today. You may now disconnect.