Tupperware Brands Corp (TUP) 2002 Q1 法說會逐字稿

Good day, everyone, and welcome to the Tupperware first quarter 2002 earnings results conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over to the Chairman and Chief Executive Officer, Mr. Rick Goings.

Please go ahead, sir.

Yes, good morning, and thank you.

I'm joined this morning by Pradeep Mathur, our Senior Vice President and Chief Financial Officer. Also, as we - we sent out an announcement on Friday that has been appointed Vice President of Investor Relations. Mike Poteshman is moving over to Europe as our Chief Financial Officer there. And both and Mike are here with us today.

Now since we're going to be discussing the future outlook of the business in our remarks this morning, I refer you to the company's position on forward-looking statements as it appears in yesterday's press release, and in the SEC filings.

As you saw in our release, for the first quarter of 2002 we reported earnings in line with our previous guidance at 28 cents per share before reengineering costs, compared with 33 cents per share last year. Our sales were flat with 2001 in local currency after adjusting for changes in our distributor models in the U.S. and Brazil, a high level of business to business sales that we recorded in this transaction last year, and the drag of foreign exchange. So, net net we held our own through what we would call heavy seas, although we had largely planned to spend more promotionally, we did it in Europe and our other large Asia-Pacific markets, and later we found the need to do it in Mexico in the quarter.

In today's call I'm going to cover our first quarter performance, and then I'll give you an update on the progress we're making on our strategic growth levers. Then I'm going to turn it over to Pradeep who will expand on the financial information and forecast.

Let me first look to North America. Here our performance continued to be strong in the first quarter, profits doubled and we were up 12 percent in sales, and that included a five percent point benefit from distributors moving to a new business model under which we sell directly to the sales force at a higher price. Skewing the comparison negatively was a particular large business to business transaction last year. Excluding the B2B and the new business model on the comparison, sales in the quarter through our party plan and our other channels of distribution increased 15 percent.

In the first quarter in North America, new channels, the IDA programs contributed eight percent of North American sales, up from five percent in last year, 2001. Importantly too, in North America we've now had 11 quarters in a row of sales growth, and nine quarters of profit growth for the first time since the mid-1980s, so we have confidence that this new business template we've created is right and will lead to sustained growth in the U.S.

The strength in our core party plan business in North America was reflected also in the continuing sales for size advantage. At the end of the first quarter, our sales force was up 18 percent, and this was over and above a large increase in last year's first quarter that we're really now lapping. We've accomplished this growth through a record level of recruiting over the past 90 days.

Our recruiting success is mostly a result of a number of things. First, lowering the barriers for new people interested in selling Tupperware, the launch of new innovative programs, and also providing more opportunities for our sales force to require new recruit leads through our additional channels. These multiple channels allow the sales force to stay engaged and result in a constant access now to more people. And we're going to continue to capitalize on these opportunities going forward.

It's also worth nothing that about 50 percent of our new recruits this last year in North America came from sales force - new sales force people which were met at our new retail access . So this really translates into getting to new recruits who lead us to new segments of the population. I'll get into that a little bit further when we talk about the strategic leverage.

In North America, we continue to utilize business alliances also, where we package Tupperware products with major merchandisers for sale in the retail environment. The real reason for this is to build a brand, and also to offer some bounce-back opportunities for our local sales force members.

In the first quarter, we shipped products with Campbell Soup and with Bumblebee Tuna. Moving forward, we are shipping products under an arrangement with Kraft, and it's a Velveeta cheese brand.

We mentioned the new business model implementation for North America that we have underway. Through this new model, we process orders directly for the sales force here at our headquarters, and therefore we take away the administrative task from the distributors, and we free them up to spend more time on those high value-added activities: recruiting, training and motivating their sales force.

Equally important with this new business model, it creates a new low-cost distributor architecture, and that is going to enable us to greatly expand the number of distributors we have in the U.S. Over time, frankly, we believe we can double the number of distributors we have in the U.S. And our distributor is largely like an aircraft carrier, you need to have her out there with the sales forces like planes. And we have many areas which are uncovered.

The first step of bringing distributors into this new model is to set up their sales force for Web order entry. At the end of the first quarter, over 80 percent of our U.S. distributors had this capability, and 30 percent were fully on the new model. For those distributors on the new model, 80 percent of the sales force are now being received through the Web. That's 80 percent of the sales force orders, so it is working and we're moving to it quickly.

Let me turn to Europe, Africa and the Middle East. Here, we held our own, with sales up slightly, adjusting for the higher December distributor orders, which we told you about at our last conference call. Of note the European economy grew only about a point and a half this last year, and we think that continued through the first quarter, although those numbers for the macroeconomic side are not out yet.

We continued to invest in Europe in promotional programs in order to maintain our sales force momentum, and drive sales as consumer spending there is still sluggish. This paid off as we grew our sales force, but operating profit decreased 33 percent. We anticipate continued higher spending on promotions through the second quarter, with a moderating trend after that. I think our RS was still at the 17 percent level though. We expect this improving trend to develop as we go forward and we make further progress, and also rolling out our integrated direct access points in the region.

As has happened in North America, we expect the sales force to develop significant number of recruiting and party leads as we tap into these new pools that we get from integrated direct access. And as we market to these new people, our promotional costs should fall as well. Overall in Europe we had a seven percent sales for size advantage at the end of the first quarter, and this was up from a five percent advantage at the end of 2001, so even with compression of consumer spending, when you increase the size of the sales force that has a mitigating impact.

This improvement was driven primarily by the middle and emerging markets. The opportunity we have with a larger sales force and with our new channels gives us confidence that we're going to see improvement in our Europe, African and Middle Eastern businesses in the second half of the year, and reach gross targets. Pradeep will talk more about that later.

Now regarding Latin America, as we moved through the quarter we saw some weakness in consumer spending in Mexico, where there has been a drop in discretionary income as they, as a result of the slowdown in the U.S. economy that really spilled over into the Mexican economy. Particularly we saw that in those large maquiladora, the border areas distributorships that we have.

As you might expect, we aren't waiting for their economy to improve, instead we put already in place programs to build on our already sales force size advantage, although it's small, that we had at the end of the first quarter. It's going to take some time to stimulate the consumers, but we're beefing up our promotions as well, so we're really coming at it in two fronts. This impacted for Latin America, and particularly Mexico, our promotional expense, but we expect a payoff in terms of sales growth and better profitability, beginning in the second half of the year.

Turning to the rest of Latin America, as we mentioned, a number of our Latin American market sales were negatively impacted by this transition to a new importer model, where we're selling now to a group of large distributors, but at a lower price. Also, it's worth noting the two countries in Latin America that have been recently in the news. First, Argentina - I must say, it's a small business for us devaluation there has had little effect on Tupperware.

Venezuela is another story. The turmoil there is disrupting our Venezuelan business, and yet it's not a large business for us. Although, we hope to see some improvement there as things quiet down.

For all of Latin America, sales in the quarter were $34.5 million, compared with $41.4 million in the first quarter of last year. Of that gap from last year, $3.3 million was due to this conversion and adoption of the new distributor model, where we're selling at a lower price. However, our margins are the same.

Operating profit was $2.7 million, compared with $3.8 million last year. This comparison reflected about $600,000 investment in the startup of in Mexico, and benefit from more favorable foreign exchange.

Asia Pacific, let me turn to that part of the world. Here, we had healthy growth in our middle and emerging markets, again, in mid quarter. But it was a story. You know this was really led by Australia and Indonesia, which are large and growing businesses for us. However, our big markets: Japan, Korea and the Philippines, they really offset that and they lagged in the face of very difficult externals.

Further, in our Korea market, it was exacerbated, the situation there, by disruption, as we've been required to move to a new commissioned structure under a new law there. We hope to be through this transition by the end of this quarter. The impact of the weakness of the large markets and its change in Korea, along with the spending we've had to do in order to drive sales and maintain momentum with the sales force, led to the declines of seven percent in sales and 20 percent in profit.

We are working to address the situation in our - particularly our large markets in a couple of ways. And it's a formula that's worked well for us and that we know.

First, we're growing the sales force. Here, we've succeeded in generating a 24 percent increase in our total sales force size in the region, and this included also healthy contributions from our large markets. Historically, such successes in building the sales force in these markets through strong recruiting during difficult economic times has led to a profit benefit soon thereafter. We're looking to repeat this pattern.

Beyond the sales force size, it's up, we're also working this year in Asia-Pacific on a much more dynamic new product program, including consumables in the Philippines, where we introduced BeautiControl last fall, as well as a much more aggressive new product program throughout the rest of the region. Net net we expect our larger sales force and our better new product program to pay off with sales growth in Asia-Pacific in the remainder, particularly strengthening in the second half of the year.

Turning to BeautiControl, North America, here we had a 13 percent increase in sales in the quarter, continuing with the momentum we saw before and in the second half of last year. In addition, operating profit of a million six represented a nine percent ROS, so it's improving. The sales increase that we're realizing really confirms the effectiveness of the new leadership promotion that we launched last year. The profit comparison reflects, by the way, the elimination of goodwill amortization in the current year under the new FASB rule.

Looking at the sales force in BeautiControl North America, we continued to grow it with a nine percent increase versus prior year, and we ended the quarter with a high number of what we call directors in qualification, an important indicator and precursor for growth. These directors are the members of the sales force that recruit, train and motivate new sales force members, and they're a big key to our long-term success at BeautiControl.

Let me say here that in the 18 months since the acquisition of BeautiControl, we continue to be pleased with how the business has developed. This North American business continues to strengthen and we're also pleased with the beachheads that we've established in Mexico and in the Philippines.

Let me now make a few comments on our strategic growth levers, more channels, more products and categories, and more sales force, before I turn it over to Pradeep. Here I must say we're making solid progress, first on more channels. With integrated direct access, let me comment first on our retail initiatives where our number of access points continues to grow.

In the first quarter in the U.S. we averaged over 300 IDA sites compared with about 150 in the first quarter of 2001. A portion of the growth in 2002 reflected the opening of an additional 13 SuperTarget sites in March, where, which were very enthusiastically accepted by consumers. We are continuing to learn how to build productivity in these SuperTarget sites through various merchandising initiatives and special offers. And at SuperTarget, also, we're putting into place what we are calling weekly events to really help drive traffic and sales to the sites.

These events are designed to build our brand by actually demonstrating our product there. And at time, we're doing it through preparation with food. We began that approach just recently and we noticed a nice pop in the activity and the sales level. You know it's very much like a local in a SuperTarget store Martha Stewart kind of an activity.

We're on target, by the way, with our retail access point goal of 1,000 year-round sites in the next three to four years in the U.S. And they're having an important impact on building our brand.

As we've noted, too, given the success of the integrated direct access channels in the U.S., we are continuing to roll out this concept in Europe, which has a similar set of market characteristics, and where our strong brand recognition parallels that in the U.S. In the first quarter in Europe, we had 130 access points, and we continue to plan to build to 300 access points by the fourth quarter of this year.

The sales contribution from access points in the first quarter in Europe is still small, but it's growing. Importantly, though, it's no longer a test in Europe. Frankly, Europe is now where the U.S. was three years ago. So now it's a question of getting deeper and rolling it out.

Our retail access points in Asia Pacific also continue to grow. We have most of our sites in China, where that really is our main method of business. We're enthusiastically moving forward there, and also we're moving forward in Japan. It's a mature retail market similar to the U.S., and has the similar kind of opportunity.

The average number of access points in the Asia Pacific region in the first quarter was about 350. And that's a significant increase from the 100 we had a year ago.

We also had a strong number, with regard to growth, in our Internet channel, particularly in the U.S. During the quarter, our database of buyers grew, as did the order conversion rate of those entering the Tupperware site, or the individual distributor site. And the average order size is growing as well.

By the way, sales were up 67 percent here in the U.S. in that channel. We closed the quarter now with over 17,000 sales force sites. And that's between 15 and 20 percent of our sales force. So this is an increase of 44 percent from where we were at the end of the first quarter last year.

We believe also importantly, it's going to lead to increased retention of our sales force, and get us into new consumer segments, including As and Bs.

Our internet business in Europe, we're still working on it strategically, but our hope is before the end of the year to add a capability to start selling in at least one market. We'll have more to say about the timing of this project at our next quarter call. We're also testing selling on the internet in Japan.

Turning to TV shopping channel, this continues to provide additional sales opportunities, and results in promotional opportunities for building the brand. In the U.S. we held nine one-hour shows on three different days in the U.S., and in the first quarter, it's really, that's how many happened in the first quarter, and once again, we registered strong per minute sales performance that exceeded Home Shopping Networks' expectations.

In February, one of our products was even their daily special. This is also the second time we've had that kind of placement. Also in the quarter, we introduced on Home Shopping Network on-air cooking demonstrations, and we think this was a factor that helped raise our productivity. We anticipate holding three shows per month through the rest of the year, so that's, you know, an hour of, what three hours of Tupperware every single month. Last year we had only 12 shows.

We're also moving forward with TV shopping outside the U.S. We held a Home Shopping Network show in Italy last month, and we're planning to utilize the channel there even further. We had TV shopping shows in the past in China and in Japan.

A word about products and categories. In the, in the quarter, new products, and we categorize products as new as products introduced in the last two years, we had sales contribution of 20 percent, which is in line with our goal. We have a strong brand in Tupperware, the second most respected in the U.S. particularly, with high global awareness, and in North America and in Europe we are capitalizing on the brand by making it even more fashionable and contemporary. We'll do the same in Asia-Pacific and Latin America as well, but there we have the opportunity to sell other product categories as well, leveraging the Tupperware brand.

To effectively implement our product strategies, we have been putting together the structure to back up this strategy under the direction of Morgan Hare, who joined us last fall. In addition, we are creating a sourcing group in the Far East to procure products for the worldwide organization. Particularly those products that Tupperware will not make, but we will design. This will allow us to shorten our development cycle and stay more current with marketplace trends. In essence, we now have the strategy and structure in place to be even more competitive and uniquely serve each of our markets.

We believe it's necessary for Tupperware globally to move beyond food storage and food-related products. To grow the business and really differentiate ourselves. As we do this, we realize there is a price for global products, while at the same time, we know that not all markets are the same. So we're striving to become more relevant to individual market.

And here's basically how it looks. In North America and Europe, we're going to stay closer to our core product categories. While in Latin America and Asia Pacific, where there is a limited retail infrastructure in many markets, it's our goal to offer products where we can capitalize on our large sales force to deliver products, including consumables, where our customers don't have easy access.

Let me finally make a note on our third platform, which is really more sellers and more markets. And it's equivalent in retailing, as you know, to more doors.

Looking at what we've done overall, we're pleased with our 12 percent year-over-year growth in the total number of sales force. Our large sales force is a big opportunity for us going forward, and giving us confidence in our second half numbers. It's also worth highlighting that the success we've had in emerging markets: India, China, Indonesia, Russia, Poland and Turkey, here, in just these markets, our sales grew in the first quarter by over 40 percent over the prior year, and our profit more than doubled.

And while these are not scale to Tupperware, they represent still over half the world's population. So they're the future of this business.

Well I'm going to turn it over to Pradeep.

So much of what we've been doing at Tupperware have been crafting a template for, first, our North American and European businesses with new channels, and about Asia Pacific and Latin America with regard to new product categories. We continue to believe that this model is appropriate, and as we move forward, we're looking forward to the economic situation improving in some of the international markets and seeing a greater there.

Let me turn it over to Pradeep and then I'll be coming back for some questions - Pradeep.

Thank you, Rick.

I'm going to start by giving you a quick summary of our results for the year and then get into the details.

As we anticipated in our fourth quarter earnings release, the first quarter this year came in somewhat below the prior year and the pressure on earnings is likely to continue in the second quarter. However, we are maintaining our full year earnings forecast. In terms of the balance sheet and cash flow, we made progress on receivables, which as we said earlier was our main focus. However, we had a higher than anticipated outflow in the inventory line, which we expect to make back by the end of the year.

Now let me turn to the first quarter details. In the first quarter we earned 28 cents per share versus 33 cents last year, excluding reengineering. The five cent variance consisted of 11 cents lower earnings from operations, partly offset by two cents of lower unallocated costs, three cents of lower net interest expense, and one cent from a lower tax rate. Included in the operations captioned was about a cent for a claim under an insurance policy related to a minor equipment failure in Europe.

The reduction in unallocated expenses reflected the benefit of the reengineering actions that we implemented last year, and the absence of BeautiControl startup costs that were included in this caption last year. The lower net interest expense reflected lower U.S. rates, along with the placement of a higher percentage of debt in foreign currencies at lower rates. BeautiControl was slightly accretive to earnings per share in the quarter, reflecting the North American improved profitability that Rick talked about, offset by the modest investment in international operations and the interest costs associated with the debt used to make the acquisition.

I'd like to note here that in the first quarter we recorded pre-tax income of about 700,000, received as compensation for land to be used for road adjacent to our Orlando, Florida headquarters site. However this income was not included in the 28 cents of earnings before reengineering costs that we highlighted in our release yesterday.

Also, earlier this month we closed on the first parcel of raw land that we have for sale around our headquarters site here in Orlando. This parcel consisted of 26 acres and the sale price was $7.2 million. We will be providing a gain of about $5 million in the second and third quarters associated with this sale. The total amount of property being marketed at this point is about 470 acres, and our expectation is that the land proceeds from sales over the next three to five years will be in the 80 to $90 million range.

In terms of the balance sheet at the end of the quarter, our total debt was $417 million, and our debt to total capital ratio was 76 percent, which was the same percentage at the end of the first quarter of 2001.

A key way to assess our debt level and capacity is our pre-tax coverage, which stands at a solid seven . This places us in the upper of S&P500 companies with similar credit ratings.

Our cash flow from operations in the quarter was $34 million, reflecting the items I just mentioned. Our 2002 management incentive plans include working capital provisions and reduction incentives to better encourage working capital management. The main area of concern, at this point, is inventory, particularly in our European business. And this is getting the appropriate attention. Our debt to total capital target ratio remains at 45 to 50 percent, and we expect to reach this goal by the end of 2003.

In terms of reengineering, we incurred pre-tax costs in the first quarter of about $1.5 million. And to date, we've incurred total costs of about million. A couple of the reengineering actions we have taken in the past were to seize manufacturing in Spain a couple of years ago, and to announce that we will seize operating here at our headquarters in Orlando.

Both properties are currently under contract for sale. The sales are expected to close this year, and the associated gains, which we expect to total about 20 to $25 million, will be offset against our reengineering costs, to bring the net program costs to the level we said it will be, about $65 million. Let me turn to the outlook at this point.

For this year's second quarter, the target is a slight increase in sales and a decrease in net income. Based on current rates, there will be no impact to foreign exchange in the second quarter. So outlook results in EPS of about 43 cents, versus the 50 cents we in the second quarter of 2001. And this outlook is before the April that I just mentioned. So it excludes that.

The seven cent shortfall is the result of lower profitability in our Latin American business, which, first of all, we had a difficult comparison with 2001 and we do face some weakness in our Mexican operation. Also, expected elevated level of spending in Europe and Asia Pacific has an impact on the comparison, but to a lesser extent.

Now let me turn to the full year forecast. Excluding foreign exchange, reengineering costs and - so excluding all of these - our outlook for each of the segments is as follows.

The target for Europe is for sales and profit to be about flat with 2001. This reflects the margin investment I referred to continuing into the second quarter. We do expect sales and profit improvement in the second half of the year. In Asia-Pacific, the outlook is for a mid single digit increase in sales and profit.

For Latin America, we are targeting a slight decrease in local currency sales, and an increase in profit in the low teens. However, the sales outlook reflects a change in Brazil which Rick mentioned, to an importer model where sales are made at a lower percentage, and so on a comparable basis, the outlook would be a mid single digit sales increase actually. The increase in profit reflects higher sales in the second half, along with the benefit to the cost structure in Brazil of the model change we made in the third and fourth quarters of last year. The decrease in the profit outlook from what we said in January reflects the investment in the BeautiControl Mexico start up. This at the time we gave you the was included in the BeautiControl segment.

In North America, the target is for a high single digit sales growth, and a mid single digit growth in operating profit. The sales target excludes the 2002 benefit of moving distributors to the new business model that is being phased in through 2003. And for BeautiControl North America, the outlook is for low teen percent increase in sales and a mid single digit million dollar profit. As with Latin America, the change in outlook from what we said in January reflects a move of BeautiControl's international operations.

Based on the current outlook, our full year expectation is for BeautiControl to be dilutive only a couple of cents. The full year outlook is for 19 to $20 million of unallocated expenses, 20 to 22 million of interest expense, capital expenditures in the range of about 45 to 50 million, and a tax rate of 19.5 percent.

So for the company overall, the full year targets remain at a mid single digit percentage increase in local currency sales, and a high single digit percentage increase in net income, excluding reengineering costs and land sales. Using current exchange rates, the unfavorable impact on foreign exchange, which is included in the outlook, would be only one to two cents on earnings.

Let me say here that we have now implemented our plan to broaden our hedging program that we talked about earlier, to include the translation impact of our major currencies on our net income comparison. Although this program does not eliminate the impact of foreign exchange, it does improve the predictability of the annual impact, allowing us now to give you guidance in U.S. orders.

At this point, let me try to give you a sense of how we expect to achieve the improvement in earnings in the second half of the year, following the shortfall in the first half. As we've said, we've got five cents in earnings prior year in the first quarter, and expect to drop another seven cents in the second quarter, a total of 12. Our full year forecast is for an 11 cent improvement over the prior year, using the midpoint range that I just spoke of. This means that together with a small negative , we are forecasting an improvement in the second half EPS of about 24 cents.

Let me tell you how we think we're going to get it. As already articulated by Rick, as a result of various initiatives after a slight decrease in local currency sales in our European, Japanese and Mexican markets in the first half, we foresee a mid single digit increase in the second half in these markets. Not improvement, but a modest improvement in the sales trends in these markets.

This will result in an earnings improvement over the second half of 2001, accounting for a little over half of the overall 24 cent EPS increase we foresee. The remaining improvement we anticipate to get from the reengineering and cost reduction plan, particularly in Brazil, where we had a large in earnings in the second half of 2001, but the business has since been restructured to a much smaller size now.

So we are very confident of all of these cost reduction programs, because they are already in place. There is also a small benefit of no longer having to amortize goodwill from the acquisition do to the new FASB rule.

So, in summary, while we're fairly certain of the cost improvement, obviously there is inherent uncertainty in forecasting sales. There is some risk, but , we're fairly comfortable with the analysts' consensus at this point of the full year estimate of $1.69 per share.

That kind of concludes our prepared comments, and now we're going to open the call for questions.

Thank you.

Today's question-and-answer session will be conducted electronically. If you would like to ask a question at this time, please press the star key, followed by the digit one on your touch-tone phone. Again, that's star, one to ask a question.

We'll go first to Cathy Imm of Salomon Smith Barney.

Hi.

For both Europe and Asia-Pacific, the total sales force size showed a healthy increase, yet your average active reps still remains somewhat an issue despite the increase in promotion spending. Could you talk about what your distributors are seeing in these regions in terms of recruiting productive representatives?

Yes, good morning Cathy. That is, that's the issue with Europe and Asia-Pacific. You see there in Europe we had a seven percent increase in the total size of the sales force, and yet average active sales force was down eight percent. What you really find in those markets is, particularly with the euro coming out at 115 and now being in the middle 80 cent range that 25 percent compression, you really find a real resistance to consumers to spend, and what that causes is a weakness in productivity of the sales force.

So what our sales force and our distributors generally do is, we're always looking for more productive sales force members, but we recruit, you know, quantity and then you try to develop quality. What we try to put in place is those kinds of performance programs which encourage them to get on the phone and date parties, and to be more active. And so that's really what they're focusing on.

Additionally, as we move to these new consumer access points, you know in the U.S. that's what's helped us overcome it there, we're getting to more A and B consumers, you know, they always say as you get into a more recessionary environment, those in the A and B consumer segments feel it less. I think that's probably one of the reasons here Cathy that we've continued to have very nice double digit growth in the U.S., in spite of what's been going on this past year in the economy. So it's a combination of promotions and, aimed at the consumer, promotions aimed at the sales force, and these new access sites. And we're doing both of those in both Europe and in Asia-Pacific.

And so you're forecasting that promotion spending, at least in Europe, is going to ease somewhat in the second half of the year, but just given the recent trends that we're seeing, do you think that the market has just become much more difficult than you originally expected, that you'll still continue with at least a high level of promotion to support the recruiting and whatnot?

Well we hope it, we hope that there is some softening there, and when we, and in a number of our markets, we're very pleased with what's going on there, but it really is central Europe, those economies where a high percentage of spending will even be on items which are dollarized, where you feel that kind of pressure. You know, you talk to currency speculators, today they say there's no way this euro can stay where it is, but it continues to stay there, and the moment that happens, we're going to, you know, it'll ease up.

Cathy, just to add to what Rick said, you know as we get into the new , you saw that we ramped up from almost nothing to about 160 showcases this quarter, to be rolled out to about 300 by the end of this year in Europe alone. And as we get into new customer our requirement for promotional spending dramatically reduces. So we do hope that as we get into the second half we will not have to spend quite as much.

Could you talk about where these showcases in Europe are located, and any new big customers that you've recently signed on? New retail partners, or, I should say, in terms of having their sites available for your kiosks?

Well as we've said, we've - you know, , but the program in Europe right now is not a kind of a program. It's putting these at individual malls and those kind of locations. You're going to see a big thrust in the fourth quarter. Throughout Europe, they do a Christmas market, which basically are at the center sections of all towns. And you're going to see a huge presence.

You noticed our numbers, we're predicting today that we'll ramp from 150 to 300. A lot of that gap will come from those, and that's where a lot of Europeans turn to their spending in the fourth quarter.

By the way, I must say, with regard to how we do with showcases in Europe and their productivity, the model works the same as it does here. We are working, though, with - and negotiations with a couple of chains right now, but it would be premature to report on that today.

OK, great - thanks.

We'll go next to , Raymond James.

I want to focus a little bit on the balance sheet here. Could you give me a little bit more color on what happened, particularly with the working capital. We noticed that - you know, you said that inventories in Europe were up, and I noticed that payables were down, which you did not address. Can you give me some color on why that happened and some information about kind of where your targets are to have that by the end of the year?

OK.

Actually, if you look at our line compared to the second - to the first quarter of 2001, they were almost the same. However, the cash outflow in the first quarter was somewhat higher, because at the end of last year we had an unusually high level of . So we're not that concerned about the line. We continue to work on our receivables line, although, as you will see, we've made significant progress there.

The main concern at this point is our inventory. And, as I've said, most of the increase that we did not anticipate came in our European businesses. And we are currently working to address that. We hope to have that back definitely by the end of the year.

Can you explain why inventories in Europe...

It's a combination of factors , it's the result from, you know, the promotional forecasting of our promotional products essentially that we were somewhat off from our markets, and based on our, the reduction trends in the factories. So, we're working on getting that back in line, it's a matter of time before we wash those out of the system.

OK, I also noticed that your tax rate is dropping. Can you explain what's happening with the tax rate?

Right, our tax rate as you will notice from our cash rate, it even lower than our book rate, so we've done some international tax cutting transactions that have given us this benefit. So if you see it in our lower cash rate, which is what really counts. So it is a real benefit we're getting.

And that's sustainable over the next couple years you think?

Well it's certainly sustainable this year, we had to state a 19.5 percent tax rate. And as we go forward, our tax rate depends really on the mix of earnings we get from our different segments.

OK, and ...

Can we, another question . Yeah, if we need to call and have a conversation let's do that ...

that's fine.

...other, all these other people on the line. Next please.

We'll go next to with Midwest Research.

Good morning. Two questions for you, first of all, the guidance for the year, I'm just wondering your first half down 12 percent, second half, or 12 cents, second half up roughly 21 cents to get you to the number for the year. Why not lower the year guidance as you've kind of lowered the second quarter guidance today? What is giving you so much confidence about this recovery in the second half of the year?

Yeah, good question . I guess, as I said in the, in our previous comments, about half of that is really coming from cost reductions. We had a huge drain on our earnings in the third and fourth quarters of last year from Brazil. As you know, we took a charge on our restructuring last year - we downsized that business, both in our manufacturing operations as well as our sales base there. So we, that is a part of the earnings we are fairly certain that we are going to get.

The remaining half, or probably a little bit more than half of that, is going to come from improved sales trends. At this point, from everything that we know, we do believe that the sales trends will improve in our key European markets and in Japan, and in our Mexican businesses. And again, we are not talking about a huge sales trend line change there, we're talking from, you know, couple of percent down to a probably a mid single digit percent increase, so it isn't like we are focusing a huge improvement there.

And I think the two biggest drivers, , I would add, on the confidence on the sales side is, as you know, the number one driver of our business is the size of the sales force. Our recruiting was robust, and, you know, we're up 12 percent in that kind of an advantage. And as that kind of works its way through the , we think you'll start to see improving trends as we move forward.

Additionally, we believe we're going to get the pop from the traction we're getting from integrated direct access. Because, importantly, that is getting us - I can't overstate the importance to what we learned about this last year. And over half our new recruits came from kiosks, people that we met there. Which meant they were younger and they were more affluent.

And that helps us buffer some of this economic wind that we're feeling in our face. It's getting us fishing in new pools out there. So you're - it's interesting, I might add one other comment on that.

If we continue just to press on recruiting and we don't have integrated direct access and we run a recruiting promotion, it's interesting. What people normally do is they go and recruit their hostesses. And the moment they recruit their hostesses, that has a counterproductive impact in that then you hold a promotion for sales, who is going to be the hostess? Well the hostess is now a sales force member, so you had to then create a whole new group of hostesses.

If you recruit from outside the hostess pool, it gets you into a whole fresh consumer segment. Generally more affluent and younger, and you don't have to replace your hostesses. That's one of the reasons that we feel this nice traction in the U.S. We're going to get some of that benefit in Europe where we've never had that benefit. We've been working off the same group in Europe for years.

And then one follow-up - Pradeep, can you give a little better clarification on receivables? You talked about progress made in receivables, yet receivables are still up $14 million year over year, 1Q versus 1Q. Can you talk about how the new distribution models should be affecting receivables? Which I would have expected meant that receivables should have gone down.

Talk about that, and when we should see receivables down year over year.

OK.

Our big increase in receivables at the end of last year came from our European businesses. reflected somewhat higher distributor orders in December. So as those started to get in, so we saw significant decline.

However, we continue to face challenges in Europe and in Mexico on our receivables lines. And what we're doing is to focus our distributors on those in our management groups on receivables. So we continue to make progress there. We certainly have more work to do.

Now in our U.S. business on the other hand, as we get to the new business models, and 30 percent of our distributors are on it, receivables basically go away. Now it takes a little time for that to happen because what in essence a new business model the consultant pays for a order before the order is actually shipped. So as we convert the distributor it takes a, it takes a little while to get the current receivables back, but then once that happens then we basically have no receivables. So over a period of time you will see the U.S. receivables really go down significantly, and then we continue to focus on our other markets to get those in line.

Great, thank you.

Again that is star one for questions. We'll go next to with Freedmans Billings.

Hi, good morning. Got a couple of quick questions Rick and Pradeep with regards to Asia-Pacific. First, could you talk about the increase in distributors and the size of the sales force, what markets that's really coming from? Is that more from the Chinas and the Indonesias of the world, or the core markets, and when you look for recovery in the back half of the year, where would you expect to that really come from - more of a recovery from Japan, Korea and the Philippines, or some of these newer emerging markets?

Well the good news is that in Japan we really are seeing growth in the size of the sales force. The bad news there is this continued compression of consumer spending, each new government stimulus program, what they've found is the consumer is not spending that money, she in fact is saving more money. So our difficulty there is converting those new recruits into productive recruits, and that's why we've needed to invest in promotions.

The other place we're really getting the big impact of recruiting is in the Philippines. We have a large sales force there, a good management team in place, but the need there really has been for us to broaden our product line and get into more consumables. We are though, getting nice gains in a number of the other markets as well. Our India business continues to grow, ditto Indonesia, and China. As a matter of fact, I'm going to go visit each one of those markets. They are, we're very pleased with what's going on there. Problem is, Japan and Korea are our biggest business units over there, and you can't have a good quarter if they don't have a good quarter.

And just to add to that, some one of the big challenges we have faced in Korea is this conversion of our sales force to a commission agent structure. This change took place earlier part of the first quarter. It has had a significant impact on our business, we expect to be done with that transition by the end of this - actually we are finished with the transition - but just to get that in place and get the sales force in sync with it by the end of this quarter. So we certainly hope to have the Korean business much better in the second half of the year.

OK, thank you very much.

Again, that is star, one for questions.

At this time, there appears to be no further questions.

OK. Thank you very much. I want to thank all of you for joining us today.

You know we've got a different global environment. You know that from the other companies you follow. But with each quarter, we are gaining confidence that we've got the right strategies in place, not only for our U.S. and European businesses, but for our Latin American businesses and Asia Pacific as well. And we look forward to reporting progress as we move forward.

And thank you again very much for your time.

This does conclude today's conference call. Thank you for your participation. You may disconnect at this time.