Edgewell Personal Care Co (EPC) 2007 Q1 法說會逐字稿

Good day ladies and gentlemen and welcome to your first quarter Playtex Products earnings conference call. My name is Jean I'll be your conference coordinator today. Towards the end of the conference call we will be taking questions. (OPERATOR INSTRUCTIONS)

At this time I will turn the call over to Miss Laura Kiernan, Vice President Investor Relations.

Good morning everyone, welcome to our first quarter 2007 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 of 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 SEC filings and earnings release, which discuss in full factors that could cause it actual results to differ from those made in any forward-looking statements. Our remarks today will refer primarily to our results excluding charges and gains as outlined in yesterday'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 web site at playtexproducts.com. A digital replay of this conference call will be available through Friday, May 11th. The replay number is (888)286-8010. And the pass code is 867 977 82. For a webcast replay of the call please go to the investor relations portion of our website and now I will hand it over to Neil.

Good morning everybody. Thank you Laura, nice to hear you stumble for a change. For the day's call we will discuss a summary of the first quarter results along with a summary of where we stand with the Hawaiian Tropic acquisition, which we're very excited about. Then I'll turn the meeting over to Kris Kelly who will talk about the numbers in more detail and give you updated guidance for 2007 for the Hawaiian Tropic acquisition. Then we will come back with Q&A.

We expect to wrap up around 11:45. Overall Playtex had a solid first quarter. We are pleased to be posting another consecutive quarter of growth in a top competitive environment. Both sales and net income grew versus the prior year. Moreover we're excited about Hawaiian Tropic acquisition and its potential for the future.

To start, I will review the total business and then briefly cover each of the core categories. SO as indicated by the release, net sales were up about 3% in the quarter to about a $181 million. New products continue to be the driver of topline growth with more than 30% of end sales made up from new products.

This quarters net sales really don't show the whole picture of our business because trends we saw also will reflect some shipping deferrals on sun care, which reduced sales by several million and on tampons, there were promotion differences versus the prior year which affected the quarter sales. I'll get into more on both of these in just a minute.

Operating income declined about 4% in the quarter versus last year, but this was more than offset by a 9% decrease in interest expense. In total our net income increased by about 6% to 12.8 million and diluted earnings per share were up 5% or $0.20 cents per share. As noted in the press release on a reported basis net income increased 36% versus last year. Our earnings came in as expected and on plan at $0.20 cents.

Let me repeat, as expected and on plan at $0.20 cents. As we said in our year-end conference call and press release our quarterly results will vary due to the timing of new product introductions, promotional differences and other business factors. Several of the results in the first quarters were affected by these differences. Nevertheless earnings were as expected for the quarter.

Looking forward, we are maintaining our guidance for the full year, adjusted of course for the Hawaiian Tropic acquisition. In total we expect sales for the year to increase by between 95 and $100 million versus last year including about $50 million from Hawaiian Tropic. Our April results continue to support this guidance and our goals for the year. Now let's talk about each of the segments. First skin care. Our largest category.

Recall that the Hawaiian Tropic acquisition did not impact the first quarter results because we didn't close on this acquisition until April 18th. Skin care net sales grew about 8% in the first quarter of 2007 to 82.8 million, so it was a very good quarter for skin care. We believe that the 8% growth however does not reflect the true growth of the segment at retail for two reasons. First over the last three years we have seen a trend experienced again this year of the trade, our retail partners purchasing sun care products closer to the time of actual consumption during summer season.

This is because they are improving their systems and are trying to manage their inventories. As a result retailers are moving more of the sun care purchases out of the first quarter, so we expect our second quarter results to be favorably impacted by this trend. Similar to the trend of the past three years. Also, we encountered some supply issues on our new products in the quarter, which actually delay I should say sales into the second quarter. This probably cost us between 4 and $5 million in sales in the quarter.

Growth in skin care during the quarter was due to strong performance by both Banana Boat and Wet Ones and reflects overall higher distribution and display on these products. Gloves declined slightly in the quarter. For Banana Boat, new products are performing well including all of our ultra mist, tear free, dry block, everyday glow products and our Sun Dial products. For you golfers and tennis players out there you really have to try the dry block powder formula, that is a no slip grip product.

It goes on like a lotion, but dries quickly to a powder feel. We also continue to benefit from low returns, returns for 2006 season were favorable to our expectations. Now that we have the right products out there we are waiting for the sun to shine. As I look out my window it's a gorgeous day in Connecticut. Wet Ones hand and face wipes net sales grew in the quarter primarily due to new product sales including sensitive skin, Big Ones and our Fresh n' Flush singles. Skin care operating income continued its growth trajectory growing 7% to 24.6 million. This largely reflects the effects of higher sales and lower returns.

Now let's talk about Fem care. Net sales in Fem care declined 5.5% in the quarter to 51.3 million. This was primarily due to lower sales of Beyond and the discontinued slim fits and portables plastic products along with reduced promotion on gentle glide as planned. New Playtex Sports sale growth however, was not enough to offset these losses. Timing differences for gentle glide shipments occurred as a result of promotions both in the first and fourth quarter 2006. We believe the first quarter Fem care results reflect promotion differences more than any fundamental change in our business.

For example if you look it at the last 6 and 12 months our sales of total tampons is essentially flat indexing at 99%. Also in the quarter IRI measured consumption tended to be better than sales, again this is encouraging. Latest four week consumption data which just came in yesterday four week consumption data which just came in yesterday for all outlets is up 3.9% for the last four weeks, again indicating that the results in the quarter don't really reflect the status of the business.

In line with lower net sales feminine care operating income in the first quarter 2007 declined to 11.7 million, 2.9 million below the first quarter '06. In addition, to lower net sales operating income declined due to continued new product launch costs related to Playtex Sport. Our feminine care segment continues to present the most challenges for us in terms of competitive issues. We discussed at the year-end call that this competitiveness would affect our overall feminine care profitability for the year.

While the situation remains fluid and challenging we are continuing to execute in line with our strategy and expect over time the strategy will pay off. We are this a marathon, not in a race. Let's move to infant care. Infant care net sales grew slightly more than 3% to 46.8 million in the quarter. Versus year ago. This growth was largely driven by new product introductions and several in our infant feeding categories, in part offset by a modest decline in bottles.

We launched several new projects in late 2006 and into the first quarter of 2007 including the Baby Einstein meal time line and several new breast feeding products among others. These all are moving into distribution, albeit in some cases at a slower pace than anticipated. Nevertheless we are seeing good growth in many of these segments of infant care. Operating income increased 4% to 12.4 million largely reflecting the higher sales and stable costs. Now to discuss the Hawaiian Tropic acquisition.

Aloha! As you may recall we announced the acquisition of Hawaiian Tropic during the second quarter. The acquisition of Hawaiian Tropic is in line with our strategy as it enables us to expand our presence internationally and in one of our core categories, skin care. This acquisition will also help us diversify our profitability as part of the company's total profits. Finally, consumers are buying and using more sunscreen and related products at overall higher average prices.

These favorable category dynamic are also why we felt the acquisition of Hawaiian Tropic was so important to the company. We expect that once fully integrated in 2009 Hawaiian Tropic will help drive significantly higher profits for our skin care segment. As for the integration we're very excited as we're moving forward with this acquisition. We want to remind everyone that integration of Hawaiian Tropic and Playtex will take time. However initially we're very encouraged. We find Hawaiian Tropic as an organization is very strong.

There are many terrific people with a lot of strengths including R&D capability, excellent trade relations, etc. All of our early discussions with retailers are also very supportive. We must be careful with how we are going about executing this integration and growth strategies for both Hawaiian Tropic and Playtex. We are developing preliminary plans now and integration is moving along on our preliminary schedule, but we can't share these plans with you because they are still being finalized.

Overtime we will share our thinking with you as well as our anticipated impacts on the business. Now I'd like it to turn the meeting over to Kris who will talk about the numbers.

Thanks Neil. Since Neil has off on covered net sales and segment operating income I'll focus on the rest of the P&L, balance sheet and cash flow items as well as go over our updated 2007 guidance for you. Again, my comments relate to our results excluding charges and gains. As we anticipated gross margins declined by about 190 basis points in the first quarter 2007 versus the first quarter of 2006 to 53.3%. This decline is primarily due to cost related to new product launches including the Playtex Sport.

In addition, overall mix impacted the margins as the growth in our lower margin skin care and infant care segments replaced volume from our higher margin Fem care business. In general, raw material cost for the quarter were about even with the prior year quarter SG&A expenses ran at about 34.5% of net sales in the first quarter of 2007. This was down about 70 basis points versus the prior year quarter. Operating income declined in the quarter about 4% to 33.4 million, however this decline of 1.3 million was more than offset by lower interest expense of 1.4 million resulting in pretax income being up slightly.

And as a result of slightly lower tax rate versus the prior period our net income was up 0.8 million to 12.8 million or $0.20 cents per diluted share. Looking at the balance sheet, receivable dollars were in line with March of 2006 and latest 12 month receivable days of 60 are in line with year-end. While inventory dollars at the end of this quarter were up 3.9 million versus last March, latest 12 month inventory days are are down two days from year-end to 71 days and down 6 days from March of last year. Net debt increased by about 34 million to 585 million versus year-end.

Recall this is our seasonly high working capital period so debt balances go up from year-end but decline again in the second and third quarter as we collect on the sun care sales and as seasonal sun care inventories wind down. These numbers do not include any debt related to the Hawaiian Tropic acquisition given that that was closed on April 18th during the second quarter. Under our $20 million 2007 stock repurchase program during the first quarter we repurchased nearly 90,000 shares at a cost of about 1.3 million.

Remember that the goal of the stock repurchase plan is to mitigate dilution of our earnings per share as a result of our compensation programs and to hold diluted shares outstanding at around 64 million shares for the year. Looking at cash flow and liquidity, our liquidity at the end of the quarter was 99 million comprised of cash of 5 million and availability under our asset based lending revolver of 94 million. Working capital use was about 9 million higher in the first quarter of 2007 versus the first quarter of 2006, largely due to the timing of sun care shipments that occurred later in the first quarter versus last year.

Capital spending was 4.9 million in the first quarter 2007 versus 4.1 million last year. And the 1.3 million we spent to repurchase stock was almost offset by 1 million we received from the exercising of stock options. Now to update you on our guidance including Hawaiian Tropic. Note we did not change any base business guidance but we have updated our guidance for this acquisition.

Net sales for 2007 are now expected to increase by approximately 95 to 100 million for the full year including approximately 50 million in net sales for the Hawaiian Tropic business. Due to off season losses from Hawaiian Tropic acquisition and not including the related inventory evaluation that will occur in the second quarter under purchase accounting, gross profit margins are expected to be about 53% for the full year.

Company expects diluted earnings per share excluding any charges or gains such as expenses related to debt repurchases or at the Hawaiian Tropic inventory re-evaluation to be in the range of $0.51 to $0.55 cents per share. This diluted earnings per share estimate also assumes interest expense will now be approximately even with a year ago due to the offsetting effects of financing Hawaiian Tropic acquisition and our continued deleveraging.

Free cash flow defined as net cash provided by operations, less capital expenditures is now anticipated to increase from 55 million in 2006, between 75 and 80 million net of one time cost related to the integration of Hawaiian Tropic. Capital spending is still anticipated to be about 18 million for the year as Hawaiian Tropics operations are not significantly capital intensive. We will continue to use free cash flow to reduce debt outstanding and to repurchase stock under the company's stock repurchase program. And we are still assuming an effective tax rate of about 38% for the full year. Operator, will you please begin the Q&A.

(OPERATOR INSTRUCTIONS) We have a question from Kathleen Reed of Stanford Financial.

Good morning.

Morning.

Just a first question on your feminine care division, can you give us more information on the timing shift of promotions, I think you said between fourth quarter '06 first quarter '07, if they should be more normalized in the second quarter of '07 and just what you think the future is for Beyond since I think it launched in the first quarter of '04 and the results to date haven't been really that great, thanks.

Morning Kathy. Beyond actually launched earlier than that.

Beyond launched I believe at the end of 2002 or 2003, I wasn't with the company at the time.

Okay.

But before the first quarter of 04. And, you know, Beyond remains in our mind a product struggling, it's lost some distribution on the shelf and, you know, but we still have a lot of if you will time for the product, because the product is really superior. We do our testing, it's a very highly accepted product. But right now it's less of a focus than some other things we are doing in feminine care. I'm not going to go beyond that, because we know that we have lots of competitive friends listening in on the call.

In terms of the first quarter, we went into the year in our usual planning of the business and planned our promotion spending in the quarter somewhat differently than in the prior year and the quarter reflected those promotional differences. I guess the best way to think about it is if you look at our shipments in the quarter which were down 5.5% and compare that with our actual consumption you can see consumption was essentially flat in the quarter.

Depending on how you, what you believe, and that difference in terms of consumption is inventory liquidation and why were the inventories down and the answer is they were down because of our planned promotions. When you plan a promotion you ship in for the promotion, the trade then runs the promotion, as you ship behind the promotion inventories go up. So that's the promotion differences we're talking about. Beyond that I don't want to get in any specifics.

Well, were the promotions shifted from the first quarter into the second quarter or were they shifted the from the first quarter back into the fourth quarter, I guess that's the question.

It was really timing differences between yes, the promotional differences between this, the amount, the number of promotions we had this first quarter versus last year's first quarter as well as the timing for instance in the fourth quarter is when we had the promotions, whether they were late in the quarter or the beginning of the quarter. It can have a difference to the consumption if you have a shipment in the beginning of the quarter versus the end of the quarter.

And so will Q2 have more normalized promotional expenses for Gentle Glide.

We're not going to, we're not going to comment on our plans Kathy going forward. As I said for competitive reasons we're not going to make that comment. I'm also told by Laura who was here that I think we did launch Beyond in the first quarter of 04, frankly I just didn't remember.

Okay.

Then the feminine care positive pricing that you took with the down count of Gentle Glide that you didn't realize any of the benefit last year, I was expecting to see some positive pricing I guess just due to the down count begin to benefit your results in '07, are you seeing that, because it seems like that was overshadowed by the promotional timing issue this quarter and should we expect to see some of that begin in the second quarter through the rest of the year.

I think it was overshadowed by the other factors we have already mentioned, including the expenses of new product launches also Sport, which are ongoing. I think as the year progresses we will see. Obviously we raised the price because we were hoping to get the higher revenue from it and I think we will probably see that as the year goes on.

Okay.

And finally, just on the SG&A line Kris can you just either quantify or just give us a little more information with SG&A costs down year over year how much of that was reduced overhead versus the timing of the promotional expenses for Fem care, so basically if that trend should continue throughout the year, excluding the Hawaiian Tropic impact.

I would chalk it up to more timing differences versus anything permanent. As we mentioned our guidance on SG&A was that it would be relatively flat.

This was before the Hawaiian Tropic impact, so I still feel that for the total year SG&A percentage would be relatively flat. But then reduced down because of Hawaiian Tropic.

Reduced, you mean increased for Hawaiian Tropic.

Yes, excuse me, the percentage will increase, I'm sorry, you're right.

Okay, great, thanks.

Thanks Kathy.

We will take our next question from Lori Scherwin of Goldman Sachs.

Hi. The first question is just on Baby Einstein and the infant care launch, you mentioned the launches were a little slower than you expected, can you comment a little more why that is if it was retail reception or sales execution and if the launches are back on track.

You know, I think the launches are generally on track, I don't think they were ever off track. When you launch new products your ability to get them on the shelf is often determined by what the shelf set program of the retailers are. In other words when they're going to reset their shelves. Broadly speaking we're getting good distribution on our new infant care items with very good acceptance.

In some cases that acceptance is taking a little longer than we anticipated, so our forecast was, you know, not as accurate as perhaps it could have been. But on the other hand, the broad acceptance of the new products looks to be pretty good, it varies by product category.

Do you still expect to have full distribution or whatever you were expecting by the end of the year, just maybe later than in the year than you thought.

Yes, I do. And again, you know, it varies by product line, but we're quite encouraged by a number of the products we have launched.

Then a couple follow-ups on Fem care, first on Kathy's question on Beyond, just curious, you discontinued slim fits and portables why not use it as an opportunity to discontinue Beyond, if you don't want to talk that specifically about Beyond, what was the decision and rationale to discontinue the other two.

The other two were gradually declining of their own results and frankly our focus was originally we launched Beyond and we tried to build that of the but I really don't want to comment on our plans on this Lori.

Okay. I mean it just seems slim fits and portables are declining on their own, so are Beyond.

It's largely the same situation.

Then on gentle glide, sort of forgetting about the one time promotional timing issues in the quarter, looking back over the past call four to five years share is down about four to five points, as you look forward I know this is a competitive business, but do you think that business can get back to its historical shares or at this point are you just happy if it holds its own.

I'm never happy if it just holds its own. I get paid to build the business Lori and we're going to try awfully hard to do that.

If you look at the long view of this business it's, there were many years where Playtex was actually building its share competitive introductions over the last three and four years have affected our business and I think quite candidly perhaps some of our own missteps. Playtex Sport is an exciting new product, it's doing reasonably well certainly within our initial launch parameters and we will just have to see what happens. But our objective is to try to build our business.

Okay.

Then this last question is on Hawaiian Tropics, some of the market shares that have been coming out have been fairly weak and I'm wondering if there's anything you can do to help accelerate that for the sun season or if it's just too late in terms of the calendar set for A&P.

Generally I think it's probably too late. I did notice the same day you saw which came in the latest shares in the last couple days and that meeting to discuss that very subject is I sent an e-mail this morning, is scheduled for the end of the next couple weeks. So we will see, I don't know. It's probably too late to do anything about it. I'm not sure I understand what's going on really in that business.

Remember, in the sun care business even though the shares are maybe up or down early in the season, it's what happens over the next several months that really matters.

Hopefully we will follow up on that over the next couple weeks.

Okay.

We will take our next question from Bill Chappell of SunTrust Robinson Humphrey.

Good morning.

Morning.

Can you just give us a little more color, I don't fully understand the product shortages in sun care and also going to talk about I know you said earnings were in line with what you expected for the quarter, but were sales in line or I mean were there some shifts that you hadn't expected.

Bill, the sun care, we'll take those in sequence. The sun care shortage, when you introduce a large number of products and we did, sometimes you can encounter production problems and availability. And we also did. In some cases it surprised us. As I mentioned in my prepared remarks we think this probably hurt our business by 4 or $5 million in the quarter.

I don't think we will lose the consumption in that business because of the seasonality of the business, we will ship those later in, in the next couple months I'm sure. In terms of the operating profit we were from profit earnings per share was right on our forecast, right on our plan. Sales because in part of the sun care program for example were below our estimate. You can do the math yourself, if we had had shipped the 4 to 5 million more it would have looked better.

Also we were not quite expecting some of the declines in Fem care on the products that we discontinued that we saw. But in retrospect we should have. So the earnings were in line, sales were slightly below for the reason I just stated.

Okay. And then turning a little bit to Fem care, I mean, if you look at Sport the shares kind of bounce between 3, maybe high threes over the past few months. Is that where your long-term comfort level would be, is there a goal you want higher, I don't know if you will even answer this question, but is that product line now profitable or is it still kind of below break even.

There are a whole bunch of people sitting in the conference room at Procter & Gamble who wish I would answer that question, but I'm not going to.

It sounds like the competitive pressures against that product have remained throughout this quarter.

Yes. You know, you have to understand the Fem care business is a business where people will convert and try products more slowly than some other categories. It's not like for example salad dressing people are very loyal to their products. So getting trial of these products is what it's all about.

We do know Sport is a well, well accepted product and that the repeat usage is very good.

Okay. I think Kris just a couple on the tax rate it was a little lower than 38%, does that mean there's a catchup in the future quarters or just

Yes, there was a little bit of a benefit from the implementation of Fem 48 we did a little bit, as well as the mix of international versus domestic. So I still feel it will be somewhere between 37.5 and 38.

It doesn't necessarily have to bounce above 38 for another quarter.

No.

Then you talked about gross margin for the year excluding the inventory write up, any idea what the impact will be on inventory write up for Hawaiian Tropic.

No, it's just a purchase accounting evaluation write up. We're running the numbers as we speak, we will book that in the second quarter.

Perfect, thanks a lot.

You bet.

And we will take our next question from Jarold Martinson of Deutsche Bank.

It's Karru Martinson.

In terms of the new product launch cost, perhaps I missed it, did you quantify that?

No.

Would you be willing to?

No.

Okay.

For the good and proper reasons.

Understood. In terms of the lower sun care returns, how much of a benefit was that to the quarter?

It was about the same, actually ended up being about the same benefit we got in the first quarter of last year.

As we said before, you know, we do our best year-end to estimate our anticipated returns, but again the fact is it takes longer to get through all those return processes and take them in and turn them back into inventory, sellable inventory or destroy them etc.. so basically the impact in this quarter versus last quarter was about a wash.

Okay. In terms of the 36 count Playtex Sport are we at full distribution here as we're kind of midway through the second quarter.

We're still getting distribution, still shipping in. It is on the shelf in some account, but it's yet to get on the shelf in a number of accounts.

Okay. I was wondering if we could get the revolver balance today reflective of the Hawaiian Tropic acquisition, then just also the restrictive payments basket.

We will do it this way. Our liquidity today, our availability today is probably somewhere in the $40 million range. So we still have plenty of liquidity. As you know we are starting to turn, this is about our peak borrowing period, that will just go up from here forward.

Okay.

And cash usage there, if you were to prioritize between debt and share repurchases it sounds like share repurchases will really be just to maintain the shares outstanding, debt should be the priority, is that kind of a correct read?

That's a correct statement, yes.

Thank you very much.

We will take our next question from Reade Kem of Merrill Lynch.

Good morning. This is actually [Cara Shay] for Reade Kem.

Morning.

Just to focus on the Sport product, I know you said that it's, you know, the sales are in line with what you expected and it's well accepted and repeat usage is very good. I was just wondering how do you track that and some of the data that you're seeing are you seeing that the younger consumers, which seems to be marketed towards are picking up and becoming very interested in the product?

Well, we track this through both our own research and through Nielsen or IRI panels that we purchase.

In terms of the younger users I would like not to comment on that. except to say that when we went into this business we conducted research and did estimates and anticipated what the rate of sale and growth of the product would be. And broadly speaking we got a range and Sport remains within the range that we saw prior to launch.

Okay. And some of the consumers of the slim fit and portable products are you seeing them start to look at the Sport product?

I don't know the answer to that, because I wouldn't know how to get that data.

Okay. All right.

Moving into your cost pressures, what is your outlook for the rest of the year in terms of cost?

Crystal ball right now we're hoping cost will be similar to the first quarter, hopefully break even, but who knows.

What's your estimate for what oil will be at the end of the year?

All right. Last question, just on the acquisition front, should we be surprised to see any more acquisition announcements this year?

Should you been surprised to see. Well, you know, acquisitions is somewhat serendipitous.

We are always looking at things that are meet our criteria, I remind you what those criteria are, that they're accretive in the first year of ownership, they're within our core categories and they allow us both infrastructure and strategic ability to expand our business internationally or in other places we want to go. If we could find acquisitions that met those criteria we would certainly look at them, we are constantly looking at things as we speak.

And one more question, just on each of the segments, could you give us a little more color on some of the drivers of the profitability behind each of the segments, and if you don't want to give specifics at least directionally.

I mean just looking at Fem care I think it's pretty clear the operating, operating we discussed most of those. Skin care is pretty much operating margin is slightly down, but that's not very significant, I think it's less than 30 points or something. And infant care is, it's sales, basically almost right on. Infant care is sales, infant care has a higher component of its cost structure based on plastic, so if oil prices go to the moon we could see some cost pressures there.

In sun care I would add to what Kris said and simply say our ability to manage returns is very important to the overall profitability of that business, but obviously sales growth is the key.

In Fem care I think we have already covered it.

Okay, great, thank you very much.

Thank you.

We will take our next question from Jason Gere AG Edwards.

Good morning.

Morning Jason.

Two questions, one, what was your A&P spending, how much did that go up in the quarter?

We don't break out A&P spending other than annually, so I don't want to comment on that.

Okay. Then I guess the second question just looking at going back to Fem care, I mean with discontinuation of the two brands and Sport, obviously still competitive pressures out there from Procter, what's your outlook for Fem care, do you think that sales can be flat with last year or do you think that you actually can see an acceleration through the rest of the year?

I'm not going to comment on the our growth projections for a specific category.

We are maintaining our guidance for the full year, which is that the total company sales will be up in the, will grow in the high single digits or with Hawaiian Tropic translates to a total gain of $95 to $100 million dollars in sales. And that's all I'm prepared to say for obvious and competitive reasons.

Okay. Well, I mean if I strip out the 50 million from the Hawaiian Tropic and 95 to 100 million increase, is there any one category, would you just expect the sun care would continue to accelerate at the pace that maybe it's been over the past few years, could you comment on that.

Again, I mean, I don't want to go further You know, we're not in a race here, we're in a marathon. To run any business what happens throughout the year is that you're often surprised does the sun shine, does it not shine, is there a competitive entry, is there not a competitive entry, is your product more successful or less, all these things will determine what we do by category, but I'm not going to give you a projection because some of those projections would indicate what marketing plans we have for the future and we don't talk about those until they reach the field.

Okay.

And again here's a question I guess maybe this one you will be able to answer, just on the free cash flow, can you break that down, where do you see the most biggest and dramatic changes, more in the working capital or because 55 up to 75 to 80 and still with Hawaiian Tropic being somewhat I think should be diluted to operating income for the year, I was wondering if you kind of flush that out a little bit more.

The interesting thing is that although Hawaiian Tropic we bought at the part of the season where from an operating income standpoint it's negative, from a cash flow we it's actually very positive. So you have that unusual impact this year for Hawaiian Tropic.

Okay, great, thank you.

We will take our next question from Reza Vahabzadeh of Lehman Brothers.

Good morning.

Morning.

Just on that cash flow question, a follow up, to what extent is the increase in your free cash flow guidance due to the Hawaiian Tropical working capital unwinding for the balance of the year.

I think those original guidance we gave of free cash flow was 60 to 65 and that is still the cash flow for our ongoing business, the delta is the Hawaiian Tropic impact.

Okay. So in total your free cash flow guidance of 75 to 80, how much of that is working capital whether it's the base business or the acquired business.

Similar to our comments when we gave original guidance, working capital, I don't think you will see significant positive in flows from working capital as the business growth, sales growth will drive increased working capital investment. So it's not going to come from working capital.

Except for the Hawaiian Tropic.

Right, exactly. Then on gentle guide, do you see your shelf space at retail or the AC Nielsen or [mass] as having been relatively stable for the last year or so?

In which category.

In Fem care for gentle glide.

Yes, it has been, we are if good shape in shelf space. Obviously on any given day one account is up, one account is down, but our shelf space is certainly stable.

Got it. And then have you seen any retailer destocking of a meaningful magnitude affecting your businesses away from sun care?

No. No destocking.

I mean again timing of promotions will and can affect relative inventory over the short term, but I don't see any initiatives by our trading retail partners to substantially change inventory positions.

Right. And then lastly, the gross margin guidance of roughly 53 is that primarily sales mix explaining the difference from 2006.

It's all Hawaiian Tropic.

Hawaiian Tropic, thank you much.

You bet.

We will take our next question from Linda Bolton Weiser from Oppenheimer.

Thank you.

You know, I'm just trying to work out the math here in terms of the sales growth. If you're still expecting high single digit organic growth for the year because your fastest growing business sun care is smallest in the third and fourth quarter, I guess from the math, we should expect a really big growth period in the second quarter overall. I'm thinking even double digit organic growth, am I thinking on the right track there?

Well, we put it this way Linda. As I said we're maintaining our guidance. Our sales in April which we just closed continue to indicate that guidance is achievable and that's all I'm going to say.

Okay.

And also just in terms of the segment operating margins, again your original guidance for the base business was operating margin would be flattish for the full year with Fem care expected to be down but I guess I would have expected to get to that flat, I would have expected skin care to be sort of up for the year. We see it down in the first quarter, so I'm wondering what are the issues that are going to change, that will make that margin improvement happen later in the year for skin care.

Similar to the sales comment, we don't give any future guidance impact by our segment, so we're not going to as we say in total that's what we're looking at and we don't want to break it down by our segments.

Did you say there was a negative mix affect in the skin care business in the quarter?

I said there's a negative impact in total to our operating margins as growth in infant and skin replaced some of the loss in the higher Fem care.

Higher margin Fem care.

Okay. But you don't want to comment in terms of specifically skin care, the mix situation.

Skin care, it only went down 20 basis points. It was not, it was not 50 basis points, so it's really it's just that's not a lot for one quarter.

Okay.

And can you comment a little bit more on I think you mentioned there was a decline in bottle sales and RC2 has been doing a lot in the infant care category and their sales were up 17% in the first quarter in infant care, is it the competition from them, are you losing share or what's going on exactly.

I think competition from, there's a lot of new entries, people who have expanded their business over the last year. Whether it's Advent, Dr. Brown or RC2. I think the RC2 gains are in part driven by their very substantial international business. Also they're starting from a very small base.

I'm not trying to minimize what they're doing, I think they're doing a good job in the marketplace. Our business has got two parts. The reusable bottles and disposable bottles. In both of these we have had excellent business and in the disposables of course we created that business and have had had the shares up into the 80s, for a while. So we're seeing more short term entries. We have our own marketing plans, we're not moving away from the business. I think you should look at these as just short-term effects.

Okay. And can you indicate, was Wet Ones up double digit or single digit.

Again, we don't break out specific products Linda.

Okay. And just one final question.

I know you want me to, I wish I could, but I can't.

Okay, that's all right. In terms of a little bit longer term thinking I think we're all optimistic about some gains you can get internationally on some of your other products and brands as a benefit from the Hawaiian Tropic acquisition.

So do you think that will actually cause your organic growth rate to accelerate beyond high single digit or is it just going to be an offset to some of these competitive issues you're facing in some of the other businesses.

Well, I don't know yet. Obviously we bought Hawaiian Tropic for its current business, but also for the infrastructure that it brought us in some of key markets that we have interest. Also obviously our interest is in expanding the balance of our business into some of these markets.

If we're successful with these plans then I think it will result in better growth for the company. We will just have to see. In terms of predicting whether it will be above high single digits or not, we all hope.

But certainly at a minimum it solidifies at least the high single digit growth rates we were thinking of before, right?

Again, our guidance for the year remains unchanged. Hawaiian Tropic I think is a net additive to us in the long term.

Okay, thank you very much.

You bet.

We will take our next question from Jo Altobello from CIBC World Markets.

Thanks, good morning guys.

Morning Joe.

Most of my questions have been answered, but I wanted to be clear on the Fem care business. Neil, it sounds like you have not seen any abatement in Q2 thus far in the competitive activity in that segment.

No, I haven't and I think it's a very competitive segment.

Then lastly in terms of the discontinued tampon products, the shelf space that it had, it's kind of small, but you expect to maintain that shelf space going forward.

A lot of it went to Sport.

Perfect. Okay, that's all, thanks.

They were discontinued, yes.

Got you, thanks.

We will take our next question from Connie Maneaty of Prudential Equity Group.

Good morning. I have questions on gross margin decline. Especially given that raw material costs were flat, I think that's what you said Kris, they were flat.

Yes.

I understand the negative mix shift as lower margin, as the lower margin products grew faster than higher margin Fem care, but within the Fem care business itself I mean your scrap rates have to be a lot lower, they should be nonexistent by this point. There is a positive mix shift in what you sell.

From the down count, that ought to be positive, all these things point to somewhat of a positive bent to what's going on in Fem care, so the question is is the trade spending that you're doing now enough to reduce the growth to net so much that we have got this sort of gross margin decline in the first quarter?

One thing to take to remember is promotional spending such as couponing and other things affect the gross margin. Not all down in A &P, there are reductions in net sales.

Right.

So as we mention the we have those type of launch costs and promotional costs on our new products, so those are also impacting our gross margin.

So that's where, because advertising itself and some forms of other consumer promotion would be in SG&A, but is the majority of what you're spending right now directed towards the trade.

Obviously for competitive reasons I don't want to break down what it is, there is an impact to our gross margins from our promotions.

Okay. Because the kind of decline that was reported this morning is surprising and in my mind that's the only thing that makes any sense as a source for that magnitude of a decline. Should we expect the gross margin then to decline also in the second quarter? Excluding the inventory adjustment for Hawaiian Tropic.

Again, we're just giving the guidance for the full year, it will be 53% is our guidance for the full year.

Given the factors that are in place rot now, does it make sense that as you start to anniversary these launch costs that the gross margin should improve sequentially as the year goes on?

Again, we're only going to give guidance the 53% is our full year guidance.

Connie, we're maintaining our guidance for the year.

Obviously it's important to us, we get paid, our bonuses are all tied to the same numbers we have provided street in the past. We believe we can make our objectives and our commitments, as you know those bonus payments are based on our net operating profits after tax minus a charge for capital employee. So if you will we remain confident that we can deliver our forecast.

Okay, thanks.

You bet.

We will take our next question from Justin Boisseau from Gates Capital Management.

Hi, thanks. What do you expect one time costs to be for integrating Hawaiian Tropic acquisition?

We're not going to break them out, but they are included in the free cash flow numbers we discussed.

It is included?

Yes.

Okay. And then what sort of D&A number would you expect, how much do you think Hawaiian Tropic will add?

From a D&A number?

Yes.

Not a lot. Like 2.

Okay, thanks.

We will take our last final question from Alice Longley of Buckingham Research Group

Hi, good morning.

Morning Alice.

My question is on Hawaiian Tropic, when you did your first call there was some discussion of owner related costs that the operation has that you might be able to quickly get rid of and I was wondering if you could give us an update as to how much those costs are, quantify them if you could, then how much of that can you get rid of immediately and how much of it over I don't know a period of 12 months or something like that.

I can't give you an exact number. Actually I can, but I'm not going to for obvious reasons. But this company we purchased was actually a sub chapter S corporation, so they're all manner of personal related costs in there that once we purchased it went away very, very quickly. Effectively have already gone away.

Could you tell us how much of that sort of cost is going to remain so frankly it sounds like easy cost to get rid of as you indicated, but I understood that some of it it will remain and you might be able to eliminate those costs over the course of a year.

No, think much much much shorter time period. I think if they're not already all gone they will certainly be gone very quickly.

Again just to be clear, the 11 million of synergy estimate does not include those type of costs, these are in addition to those type costs.

All right, thank you.

At this time I'm showing no questions. I'll turn the call back over to the presenters for closing remarks.

Okay, thank you. Thank you all for your questions and thank you for participating in this call. As I stated previously this was a solid quarter for Playtex and we're very pleased we continue to make earnings progress. We continue to expect a good year and are very excited about the Hawaiian Tropic acquisition.

Those of you that know us know that we believe strongly in meeting our commitments to all of our constituents, the investors, board, employees, customers, and consumers and to ourselves. We strife always to meet these. So far we have been successful over the years of doing that at Playtex and I sure hope we can continue in the future. I want to thank all of you for participating, I want to thank the many Playtex associates worldwide who make it it happen. Please feel free to follow up with any questions to Laura Kiernan that you may have, thank you very much.

Ladies and gentlemen, thank you for joining us on the call today. You may now disconnect your phone lines.