Tupperware Brands Corp (TUP) 2003 Q1 法說會逐字稿

Good day, everyone, and welcome to this Tupperware first quarter 2003 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.

Good morning, everyone, and thank you for joining us. I'm joined by Pradeep Mathur, our CFO, and Jane Garrard, our VP of Investor Relations.

Some of the discussions we're going to have this morning will involve future outlook for the business, so I do refer you to the company's position on forward-looking statements as it appears in our recent press release and our ongoing SEC filings.

Let me get to the quarter. Our quarterly results were highlighted with positive upsides in Europe, offset by weakness in the U.S. The three other segments were pretty much where we thought they would be. Before I get into the specifics of the quarter, let me put our business into perspective. We've had lots of individual IR meetings the last couple of months, and these are the kinds of discussions we're having.

Tupperware operates in over 100 countries and, as you would expect, there is always going to be something going on in one market or another. I hear that from individuals. They said it seems like there's something always going on -- it's weather, military conflict, political instability, economic collapses, and now we've got the SARS epidemic. Net-net, this is really the world we live in and while it sometimes results in instability, it also means great opportunity for a global company like Tupperware.

Naturally, though, it's incumbent upon us to minimize those things which negatively impact our performance, and while we can't always, we, as a global company, we need offsets. That's the underlying purpose of our strategies -- to expand our distribution channels and, at the same time, move into more consumable products, particularly in Latin America and Asia Pacific. We remain confident in this direction, and although it may take us two or three more years to fully implement these strategies, once it's done, we expect more stability and performance. It's really our raison d'etre. Importantly, we don't, for a moment, believe we're ever going to eliminate the isolated disruptions in our global portfolio, but what we do expect is to have more offsets.

Now, along those lines, I want to reiterate that the strategic contemporization of Tupperware is not a quick hit. It's taken us six years to create this new direct-selling business template and, as mentioned, probably going to require a couple more years to fully expand it to scale, and so a key question that I get, as we go around the country and in other parts of the world talking with investors is -- why be in the stock and why be in the stock now?

First, we believe, because our strategy is sound and it's going to lead to sustainable and predictable growth. In the meantime, though, there are some compelling factors, which make Tupperware attractive. Firstly, our dividend is strong, and we have a high confidence in our ability to support it. Pradeep will drill down on that.

Also, even in a non-growth environment, we know that we can maintain our dividend at its current level -- 88 cents per share -- and generate about a 6% yield at our current stock price. As a matter of fact, we still, even after covering that in normal capital expenditures, have an additional $20m a year we throw off.

Our value chain at Tupperware is attractive. We operate with 65% gross margins, and looking back over the past 10 years, our operating margins have averaged 15%. Our cash flow continues to improve, and now, as we've announced this past year, we've increased our return on invested capital by developing aggressively here in Orlando the land we have adjacent to our headquarters and converting it to cash to pay down debt and to provide additional assurance for the dividend. And, as we've said, we believe that's going to bring us an $80m to $90m, perhaps more, in the next couple of years.

Net-net, for Tupperware, the company has financial strength; our strong brand equity, and it gives us confidence that, going forward, as we implement our strategies more fully of more channels of access, more products, and more product categories, and expand our sales base, that we'll have even more traction.

Now, let me get into the operating segments. I'll discuss each of them, and then, as mentioned, I'll turn it over to Pradeep to discuss the balance sheet and the full 2003 year outlook.

Let me begin with Europe -- as we continue to see momentum for the latter part of 2002, there are a number of factors, which have impacted the operations in this area, resulting in improving financial results. We strengthened local management there over the past 18 months, and that's giving us even more traction. We also added additional leadership by putting a group president over Europe. What we really got out of that was improved processes, better communication, more accountability and focus on day-to-day performance of our business.

The promotional investments that we shared with you last year and we spoke about are really starting to pay off as the sales force and their activity levels, in this, our most important area of the world, has grown. Additionally, we've also clustered our markets from a marketing and an operations standpoint to better leverage our marketing and promotional skills. Last year, you'll remember we took the aggressive action in Germany with regard to adapting different warranty standards, the same we had in the rest of the world, and now their costs have returned to historic levels, and that's resulted in cost savings.

Additionally, the reengineering program that required about 36 months has resulted in cost reductions. This also has improved margins in Europe. These factors have resulted in local currency increase of 11% and operating margins now at 22% in the first quarter. This is 5 percentage points better than last year, and it's getting us back to the historic averages that we speak about and that we expect.

What is particularly noteworthy about this is Europe, Africa, and Middle East represents about 40% of our sales and about half of our profits. Now, it is important for me to say that externals in Europe are still difficult. It's a difficult consumer environment, and while we believe this positive momentum that we experienced in the first quarter will continue, it is, nevertheless, a challenging environment, and the wind is in our face.

Let me turn to North America -- simply stated here, the assimilation of over 1,100 Target stores, the impact of multiple record storms and the war in Iraq have led to some distractions in our U.S. business, but let me drill down on each one of those.

First, as we previously discussed, we have expanded into new channels of distribution -- you already know about that -- but this has required both management and the sales force to focus some of their energy on observing these channels, particularly this recent, in the past six months, 1,100 new Target stores. Our U.S. leadership has been devoting a lot of time to doing this right, to training the sales force on how to use these new channels and make them effective and, at the same time, to enhance the party. Unfortunately, there is a learning curve as our sales force is working to juggle all the moving pieces. We've done considerable research in the first quarter and that is confirmed that's the situation. They like it, they enjoy it, it's helping our business, but there's a skill build.

Now, remember, the purpose of this integrated direct access is really to provide consumers more access to Tupperware and, at the same time, provide our sales force with the opportunity to sell, to recruit, and to obtain party leads for new customers. Our retail access point and our other channels really is supposed to work together with our core party business so there's a convergence, and it is happening that way.

Let me update you on each one of these areas -- mall showcases continue to expand. There are 235 opened at the end of the first quarter, there were only 194 last year. The productivity, I must say, though, waned a bit in the sluggish economic environment that we experienced in North America, but they are contributing nicely to the business, and they continue to offer opportunities for us to not only meet new consumers but also lapsed customers and potential new recruits. They are a source of these new recruits.

Also, I'm pleased to report that the Target relationship is going well for both companies. I've met with senior management there, and they feel as good about it as we do. We're pleased with the progress, too. Sales have exceeded our expectations. In fact, the February promotion that placed Tupperware on the front of their 55 million Target circular really was a great success, and we'll continue more with Target.

Internet sales are also going well. We continue to learn how to do business there. We have special campaigns and customer retention programs are going well, indeed. Overall, on the first quarter, integrated direct access contributed about 21% to North American sales. So there is progress there.

But let me get down to some of the other factors related to the quarter, particularly weather in January and February, which caused numerous party cancellations in the U.S. In fact, the research that we initiated in February indicates that it impacted fully half of our U.S. sales organization. Now, it's important to note that not only do party cancellations impact immediate sales, but there is a trickle-down effect. It also impacts recruiting, because that's where we get the other half of our recruits and scheduling of future parties. So, again, there is a cascading effect.

Let me explain in more detail how it really works. Clearly, bad weather -- surprise, surprise -- is part of winter, and when a storm hits, parties cancel. Who didn't know that? And yet we're used to that, and we're used to taking the kinds of actions to rebook these parties, and we generally do it, on average, three weeks later, and our sales management team are pros with regard to making this happen. What was different this year is that January's big storms occurred in our most important promotional selling periods called "Big Weeks," and, importantly, too, they went all the way down through the Carolinas. So it really impacted, as we said, almost half our sales organization. Naturally, our sales management worked with the sales force to rebook them. They rebooked these parties the third week of February. That's when the other shoe dropped. A record 25-year storm hit our most important areas again and, again, most of the parties were canceled and, by the way, after two cancellations, many did not rebook.

Now, this is quite different the way it operates in a party plan business from one-on-one direct sellers where people take orders and sell where they work, where they live, where they socialize, and when there's a weather interruption, it's a day or so of closed school or work. It's different for a party-plan business. It's the difference between an individual evening and the way it would have to be when somebody booked a more complicated event, like a concert.

Now, along these lines, the distraction also with the Iraqi war during the quarter put pressure on our U.S. sales and profits. Trends, I'm pleased to report, did improve as we moved through the quarter, and yet it's going to take us some time to get the momentum back, most importantly not due to just the parties, but the lost recruits and the party leads, and that's what the U.S. team is focusing on -- recruiting and building the activity of the sales force to really get the business back to the momentum they were experiencing. We had to make some additional promotional investment, but we believe we're going to get that traction back as we move forward the rest of the year.

Let me comment on margins in the U.S. as the quarter came under pressure from these canceled parties, lost recruits, we did put promotional investment behind the business to drive the sales force activity -- the same kind of thing we did in Europe last year, and it pays results.

Additionally, with regard to margin, on our sales to Target, margins are a little bit lower there we're learning, as we're investing more in packaging costs. However, we're currently reevaluating our packaging in Target, but the changes do impact our profit margins. By the way, recent research says our customers would like less packaging there, so maybe we can reduce that investment.

Looking to the second quarter in the U.S., I am pleased to see very strong recruiting in the past few weeks. Also, going forward in the U.S., there are significant promotions in May, along with increased contact with the sales force, and that's expected to result in improving sales trends in the second quarter. Do we think we'll get back to even again? No. The quarter is expected to be down compared to prior year but not as much as it was in the first quarter, and that's what we're currently seeing.

Let me turn to Asia Pacific -- the segment was down from prior-year due to the continuing challenges we saw in, really, two markets -- Korea and Philippines, mostly. Additionally, we're beginning to see some impact to SARS in the region. In Japan, as I drill down, it's our largest Asian market. It actually was a pretty good quarter. Sales and profits were down slightly, but, at the same time, it's a small quarter for them. We do have some difficult comparisons in Japan, going forward, and the rest of the year, because we had such great success with last year's vacuum cleaner launch, but I must say that's already built into our plan.

Looking to the Philippines, I'm pleased to report that the market appears to be turning the corner, as we thought it would, in not only sales but also growth of the sales force. So trends are improving. However, the Korean market continues to be very weak. We told you we'd be launching a new compensation plan in the first part of the first quarter. We did that. Management believes that it's going to help us balance not only conforming to the regulatory environment but also the needs of the sales force with regard to their earning opportunity. Again, we launched it in the first quarter, actually, it was the middle of the first quarter, and we expect to see some improvement there in the second half of the year.

Let me turn to Latin America -- we are on plan in Latin America. Trends in Mexico in the first quarter, in fact, improved compared to the fourth quarter. In Mexico they're focusing on recruiting to grow the sales force and increase their order activity, and so that's happening, and as the quarter progressed, our active sales force and recruiting trends improved, so we do expect to continue on plan and have a better second half of the year.

Turning to BeautiControl North America -- we also continue to have momentum there with an increase of 17% in sales, and this is supported by the growth of our sales force of 11% and average active sales force of 9%. By the way, to differentiate BeautiControl from our Tupperware U.S. business, it wasn't affected to any degree by the storms, mainly because the geographic location of our BeautiControl sales force, which is largely in the Deep South and the Southwest. Additionally, they continue to not only have the opportunity to sell by parties, but also sell by phone and one-on-one, and they get reorder business, even if they are impacted by weather.

BeautiControl and our management team there has done a great job in building the business, to grow the sales force, and to drive sales, and additionally strong recruiting promotions brought in a significant number of new sales force members in the first quarter.

I'm also really pleased to comment that they've introduced a new party theme called "Spa Escapes," which really has been very effective at booking parties, recruiting, and selling both spa products but also skin care products, and we're learning a great deal from what we're having with regard to success there.

Profits in BeautiControl were just about flat, because we made some investment in these new initiatives, but that's going to pay off in the second half of the year. Regarding our BeautiControl expansion into Mexico, we are moving fast out of the test phase and now have introduced the products to all of our distributors, and I personally was with all our Mexican distributors over the past month, and they are so excited because now, having BeautiControl products, there is allowing them to be able to recruit, train, and motivate a much younger new potential recruit. So they're excited about the opportunity, and we think this is really going to help grow our Latin American business. So it's going well.

Additionally, we introduced BeautiControl in Singapore this past month. That's where we're doing the Learning Laboratory and, as a matter of fact, the reaction there was above our expectations, and we're going to be expanding it to our Malaysian business later this next quarter.

Let me spend just a moment on product -- during our second quarter conference call we're really going to be updating with you on more things we're doing with regard to innovative new products and products categories to be launched this year. As you know, we have recruited Jean Michael Ekblad [ph] to be our head of design. He was formerly with Ikea, Morgan Hair, formerly with not only Home Shopping Network but with Avon, as our global head of product, and they are really starting to produce some results. By the way, this Saturday upcoming we will be introducing to more than 10,000 of our management team in the U.S., of sales managers, a storage product -- I can't tell you much more about it than this -- that it solves the typical problem of filling a storage bowl with too much stuff, filling it to overflowing, and then having to dirty a second bowl by finding something that it fits in. We have solved it -- been working on it a number of years, we're very excited.

Later this year, also, we're going to be unveiling a whole new generation of products in one of our biggest and most important product categories. So, suffice it to say, that there are a lot of things happening in the product area that will contribute to a new and different assortment, to leverage this incredible powerful Tupperware brand name.

Let me turn it over to Pradeep, and then I'll come back, and we'll handle questions that you might have. Pradeep?

Thank you, Rick. I am going to start by talking about the balance sheet. I am pleased to report that we have continued to make progress on working capital this quarter. At the end of March, working capital, excluding short-term debt, was almost $50m more than the same period last year. This was achieved despite a stronger euro, which clearly had an impact on the comparison. And we did make progress in each of the areas.

Accounts receivable day sales outstanding have gone from 43 in March of last year to 34 this year. Additionally, inventory days outstanding have moved down to 166 from 176 last year, primarily due to improvement in Europe.

Now, this continuing improvement in working capital management has been made possible by several different actions we have taken. Our first changing business models as appropriate in each market, strengthening the internal control processes, and also, importantly, tying incentive -- management incentives to improvements in this regard.

The working capital improvement obviously led to better cash flow from operations, resulting in the lowest end balance at the end of the first quarter in five years. Our debt is $110m lower than at the same time last year, and the debt-to-total-capital ratio, which we have been watching carefully, is 64% compared to 76% last year. This gives us confidence in achieving our target at the end of this year to 50% to 55%.

Let me turn to the outlook for 2003, and as mentioned in our release, we don't believe that the first quarter shortfall in North America is likely to be recovered at the balance of this year. We are therefore reducing our expectations from core operations by 10 cents per share. This leads to full-year expectation of $1.40 to $1.50 per share, consisting of a decline from prior-year and core operations of 2 to 9 cents; 6 cents positive impact from foreign currency; and a range of 13 to 16 cents from anticipated gains on land development.

Although we did not record any gains from land development this quarter, we have closed on our transaction in April, which will reflect $1.6m in proceeds in the second quarter.

As we indicated before, the first half of the year will be under pressure, and the second quarter earnings per share is expected to be down significantly from prior-year as well. So you might ask why we expect the second half of the year to be better. Let me take you through several important trends influencing the second half of this year. As Rick mentioned, both Mexico and the Philippines have been performing to plan, and trends there are improving.

The comparison for both of these markets as well as for Korea will be easier in the fourth quarter, which, as you might recall, is our most significant one, because at this time last year we had significant declines in each of these markets. Additionally, the U.S. is expected to improve. We are focusing on recruiting and growing our sales force size, and that will lead to better momentum as the year progresses.

In Europe we expect the stability and our sales force size advantage there that we have gained to be maintained. Going forward, sales are expected to increase but more modestly than they did in the first quarter.

Regarding BeautiControl in North America -- the promotional investments currently being made, which are driving our impressive sales growth there is expected to lead to profit in the second half of the year. So all of these factors put together will impact the second half of the year positively. Obviously, we will update you on our progress as we move through the year.

At this time, I'm going to turn the call over for questions.

Thank you, Pradeep. Operator, we're going to turn it over to questions at this point.

Very good, thank you. Our question-and-answer session is conducted electronically. If you would like to signal to ask a question, it's star 1 on your touchtone phone -- again, star 1 if you would like to signal for a question. If you are using a speakerphone, please make sure you're not muted. That could block your signal. So, again, star 1, and we'll pause for a moment just to give everyone a chance to signal.

Gentlemen, our first question will come from Catherine Imm with Smith Barney.

Hi. First of all, can you talk about how resin prices have impacted your business?

Cathy, resin prices have been increasing but have not had a major impact so far. What we did was, we did stock up a little bit in anticipation of their going up, and now we are beginning to see the pressure ease off. As you all know already, resin prices generally do not have a big impact on our overall profitability because they constitute only about a third of about 35% cost of sales that we have. So I will say it's not made a material impact.

Okay, secondly, in terms of Europe, can you just help explain the disconnect in terms of the average active rep growth up 4%, yet local sales were up pretty huge. So I know that Europe faced easier comparisons, but what else helped local sales growth other than that?

Cathy, I really think one of the things that's happening there is you're starting to get much more effective productivity from numbers of the sales force. What we've really done is we made the investment last year in promotions to not only attract the sales force but, at the same time, to get them productive, and how that plays out in improvement in the party average -- still pressure on getting people to a party, but people are spending more at the party. So I think it's a payoff for the actions this past year.

So you're saying that your average order size is increasing in Europe quarter after quarter?

Yes, it has been. By the way, we got a little bit of bump in some business-to-business. That was 2 percentage points, but it's still the-- still you have the 11% increase. That still gets you to a 9, so we're getting a 5% increase. Some of it is activity; some of it is productivity at the party.

Okay, and then lastly, in terms of the impact of SARS -- in light of this phenomenon, have you changed your strategy in Asia, specifically, I guess, in China?

No. What we're trying to be is very thoughtful. I was on the phone with Kuala Lumpur this morning. I'll tell you, how we've segmented, really, there's two areas. If somebody asks us where do you think you'll be impacted, first the areas where we really don't believe we're going to be impacted much is in Japan, in Korea, in Australia/New Zealand. Those areas of business, we don't think we're going to be impacted very much. There are enough controls in place and disciplines.

Where we do believe we -- and, by the way, those are our biggest units out there -- where we do -- are mindful of what could happen here are very clearly in these other markets in Southeast Asia starting, not only with China but also Hong Kong, Malaysia, Singapore, and, by the way, Philippines. You know, from over there, there is a big migration back and forth of people who work in Hong Kong who are from the Philippines. So we've also red-lined the Philippines.

Let me tell you what we're doing. In a phone conversation this morning, it obviously impacts our Monday assemblies of sales force members. Even in our Malay businesses, Singapore businesses, I believe they're going to be doing this in, now, the Philippines -- temperatures are taken as people enter our assembly -- these kinds of checks and balances. If we provide an environment that gives people a sense of security, then they will come.

The good news is, Cathy, this isn't a big part of our business, but we're taking it very, very seriously.

And can you remind me how many showcases you have in China?

Where are we at now, Pradeep?

I don't have the exact number.

Around 450.

It's about 450, Cathy.

Okay, thank you.

Cathy, the bulk of these two, by the way, just as you know, most of the SARS issue is really centered in that whole Guangdong Province area. So it's interesting -- I don't think SARS is going to impact us much in China, because we're more a retail business. My concern is how it impacts us in Indonesia, Philippines, Malaysia, Singapore, and even there are reported cases now in India.

So, in terms of your lowering of guidance for the year, it sounds like it's primarily because of the weakness that we're seeing in North America, but have you also factored in SARS as also being a potential negative, going forward, that you had not originally estimated?

Yes, Cathy, we have, and we are actually offsetting some of the other downsides by positive upsides in Europe.

Okay, great, thanks.

The absolute only place we've made any changes, because of these party cancellations and what it did in the first quarter in the U.S. -- everything else is pretty much where we thought it would be, and Europe is a little ahead of it, and I think we can get enough extra momentum if we can continue this in Europe to offset -- just because of its scale and profitability -- whatever might happen in Asia Pacific.

So you feel like now you have the right balance of promotional spending in place so, hopefully, we'll begin to see a recovery in profit margins, going forward, as well?

Yes, we do. I think the big investments in promotional spending have been in the U.S. -- and in BeautiControl -- and BeautiControl definitely, it was a planned expenditure. We do expect reducing it in the second half of the year. In the U.S., it was as a result of the softness in the early part of the quarter, and it was necessary to grow our sales force size, but we do see it getting back to normal levels as the year progresses.

Okay, thank you.

Our next question comes from Doug Lane at Avondale Partners.

Good morning. I have two questions -- first, on the developing markets -- the Asia Pacific and Latin America strategy -- were you talking about moving to more consumables and, you know, rolling BeautiControl out and what have you. Can you talk in some sort of quantifiable terms about where that stands now? In other words, what percentage of your business could we qualify as more consumable, lower-ticket items now and where do you think that will be by the end of 2004? And then my second question has to do with the U.S., and can you give us some more color on your success in recruiting at these new distribution outlets in the malls and in Targets?

Yes, Doug, first, on the first piece of that, we're not prepared to start breaking out what percentage of sales are coming from beauty, particularly in our Mexico, which is really the launch market for Latin America, and Singapore is the launch market for Asia Pacific. But what I will, moving forward, give you the feeling of the template there. Latins, for example, spend $18b on personal care products per year, and less than $1b on food storage products. If you look at other direct sales competitors, Avon has a sales force in Latin America of about four times our size, and yet they do about 15 times the sales volume. Most of that has to do with the product line down there.

So us, going forward, in our Latin America business, the view there is that in the next five years, you will see the business shift there to much more a beauty business. As a matter of fact, the brochures in Mexico now say "Tupperware/BeautiControl" and you're going to see there the spending shift is going to be similar to replicating how Latins spend their money. So I wouldn't feel awkward in saying that you'll probably see less than 20% of it Tupperware products in five years.

The view of that is in Asia Pacific, it varies by market. We're not going to go to Japan, Korea, et cetera, but you will see us go to a Philippines, China, and continue through Malaysia and Indonesia with that strategy.

Do you think it will be the same kind of ratio in those markets?

What the ratio will mirror is consumer spending. You can't change their habits, and one of the things we feel so good about with regard to the potential for those markets, particularly Latin America, they have the highest vanity level in the world, and that means they spend more on beauty products. Interesting -- beauty product sales in Latin America, whether it's direct sales or retail, are up double-digit this past year in a very difficult consumer environment. So it's going to mirror consumer spending.

We have the ability to recruit 300,000 to 400,000 people in Latin America, and more than that in Asia Pacific. Simply stated, they're selling a durable. We've got them selling the right product line.

Doug, would you repeat your question on the U.S. please?

Sure, I'm just trying to get a feel for how we can measure the success of the expanded distribution, i.e., the mall kiosks and the Target stores, in your recruiting of active distributors.

What we have done is research on where recruits come from, and so what you get is, you'll get some direct feedback on where we got a recruit, but also what we're beginning to learn is we get the indirect impact of them seeing us at the malls, at Target, and on the Internet -- the impact of recruiting. So it's difficult, really, to quantify. As we've said, we learned that in 2001 half our recruits came from alternate sites that, when questioned, we asked them.

Now, we're going to be doing much more research this year because what it will help us do is better understand how to throw our resources at recruiting.

Okay, thank you.

The next question comes from Rommel Dionisio with Roth Capital.

Rick, yeah, actually, just to expand on that last question -- can you talk about this new drop-off in distributors, which I think you talked about on the last call, in Latin America? But what sort of initiatives are you looking to enact in order to increase recruiting trends in Latin America? Is the drop-off in active and total -- has been a result of this changeover in the distributor ranks?

No, it's mostly -- firstly, you go to Brazil, and Brazil is where we really consolidated from having many, many distributors to more mega distributors, and they just basically have under them an area director, who is a former kind of distributor, and we felt that better enabled us in these markets that are more volatile, particularly from a currency standpoint, to manage accounts receivable, et cetera. So that's why we moved to more of this importer model.

But the most significant part of the number of the total sales force is really what we experienced, really, in our Mexican business this past year, and so what we're really looking for is more effective recruiting, so we're going to be looking not only total but an average active sales force as well.

So, you know, we wrestled, Pradeep and I -- should we restate these for you, because worldwide we have a certain attitude with regard to what makes an average active member of the sales force, and they have to have a particular order in a month but in Latin America, basically, it's been our distributors who determine who is active and who is not, and we're working toward going to the same kind of a standard globally.

Thanks very much, Rick.

The next question comes from Budd Bugatch at Raymond James.

Good morning, Rick.

Good morning, Budd.

It's delightful to see that Europe is starting to rebound. I hope that continues. You talk a little bit about Asia Pacific, the average active there -- issue dropped as well, significantly, although the productivity was up significantly as well. It looks like the average order was up about close to 30%, I believe – 27%, 28%. What's happening there? A little more color on that in terms of the activity, going forward, because with the challenges over there, I would worry about that.

Budd, your spot on with regard to the drop in the total, but you see that productivity increase -- it's almost all isolated to what's going on in our Korean business there, and that had to do with, again the change in the compensation structure. I hope that this compensation plan that we've launched in the first quarter is going to mitigate some of that. To a lesser degree, some is still in the Philippines, but everything else is -- Pradeep, I believe, everywhere else, if you pull out those two markets, everybody else is up in not only total, aren't they?

Not every single market, but I think we are pretty much on plan in every other market other than Korea and the Philippines, and Philippines we were okay, but I think Korea continues to slide, and that's the major reason for the active sales force to be down, Budd.

We've been in the compensation change in Korea -- I guess this must be the fifth quarter, right now, isn't it? Doesn't it usually take six quarters to get through a year and a half to get through this kind of change? We saw it in Germany, we've seen it in other places before.

No, it doesn't, but actually what happened was we changed the compensation plan in response to legislation, and that plan did not work, just to put it simply. The plan didn't work primarily because some of our top managers did not own quite as much as they were owning previously. We lost a lot of those top managers, and now we have adjusted the plan again. So this is a different one, and we haven't seen anything yet. It's been only four or five weeks since this plan was launched, so it's too early to tell how this will work, but we do believe that we've addressed what the problem is, and we are hoping that this will lead to better results later on.

Budd, but you are correct in that each time we've had this, where we've figured out -- because it's somewhere between an art and a science of what it takes to really get traction in this -- every other time we've had it, it's taken six quarters, but we've been -- it's never taken more than six quarters, and that's where -- not only in Germany but also Italy and elsewhere where we've experienced it, and that's why we're impatient, and that's why we went in again and, in the fourth quarter we had not only Gaylin Olson, our head of Asia Pacific, but Hans Joachim Schwenzer, who is one of our -- he ran our German business during all the halcyon years and was one of the best on that -- they spent most of the quarter in the fourth quarter going into Korea to really get it right. So when they have a high level of confidence, I have high level of confidence, and that's the plan that we've now launched, as Pradeep said, five or six weeks ago.

Okay, just a couple of other areas -- in Europe, and if I missed this, I apologize -- I'm trying to go through the release at the same time -- can you talk a little bit about integrated direct access in Europe? Did you discuss where you are on that and how is Germany doing relative in Europe -- can you give us some color there?

Firstly, we have made progress with regard to integrated direct access. You know, we got up to -- we're almost double at 111 versus, I think we were just under 70 this past year. The important thing, Budd, that's happened there is that they have begun to embrace it as a strategy and, as you know, often, one, as some said, that the U.S. is a caravan and Europe is a citadel. They're much slower to move on some things. We're very pleased that they're starting to embrace it, and they're very productive. As a matter of fact, I just was listening to Germany's results yesterday, and their sales really are strong in these kiosks and, again, what it's helping do also is to recruit, and the biggest thing that's going to drive our European business is getting the total size of the sales force up and now we can start to get some different people in it this way.

I will mention something else along the lines, Budd. We moved forward in the U.S. with Target. We had those kinds of opportunities with others in Europe to also go into some other distribution chains, and we've said, "No, not now." We simply don't want the disruption in Europe that we've experienced in the U.S. We want to learn from this U.S. on how do you do both of these at the same time and not have some of this skill-building that we've been experiencing this past year. So we've slowed down our approach on going with a -- we have two partners over there that just want to go full bore with us, and we've said -- not no -- but we've said, "No, not now."

Okay, and in the U.S., two areas -- one, obviously, when we try to do the metrics of average order or productivity, we can't get meaningful results now because we have the addition of the Target revenue and, I guess, the addition of kiosks as well and HSN. Can you help us size some of that IDA now -- and including Target so that we can make that adjustment? You've done that in the past. I don't know if I heard it on this call.

Sure, Budd. Our IDA sales, we do break it out every quarter, and this quarter it was actually about 21% of our total sales -- so roughly $9m in sales from IDA.

And that includes Target, Pradeep?

That does, yes.

It does include Target, okay, that's very helpful.

But I might add, to put it in perspective -- Jane, what were we in the fourth quarter?

From IDA?

IDA -- it was, like --

We ended the full year around 10% or 11%.

But the fourth quarter is a higher contributor -- it was in the mid-teens. But what I don't want to distort it with, though, is this 21%. Yes, each one of those, really, we're pleased with the progress on those, but I would have been more pleased if it was 14%, 15%. It was a higher percentage because of these lost parties.

I understand that. And looking at the impact on profitability to swing to such a significant loss in the U.S., can you give us a flavor of what caused that? Where were the expense levels?

Yeah, sure, Budd. The lost sales contributed about half of the $11m, roughly, $11m difference in the profits, quarter-over-quarter. About half of that came from volume, and half of that came from promotional investments, and a very small amount, it came from the Target lower margin.

And by promotional investment, you mean taking lower margin and giving more premiums, gifts, and discounts to get people interested in having parties or making sales, is that what you're talking about by promotional?

Exactly. It's sales specials, offers to the sales force, et cetera.

We see that in the gross margin line?

Yes.

Okay. Thank you, Rick. Thank you, Pradeep.

And once again, star 1 if you would like to signal to ask a question -- star 1 -- and, remember, please make sure you're not muted. That could block your signal. We'll now go to Eric Bosshard, he's with Midwest Research.

Good morning. A couple of things -- first of all, Pradeep, for the second quarter, you talked about second quarter earnings being down significantly. Can you give us any guidance beyond significantly? Is that 20%, 30%, 40%? Can you give us any range on what that might mean?

Yeah, we don't exactly break that out, but, Eric, it is going to be a big number.

Okay, okay -- secondly, with the first quarter decline and the second quarter decline of a big number, the second half has to be a pretty significant recovery. You did a good job of laying out all the things that get better in the second half, but could you single out the one or two keys to the recovery in the second half that will allow you to achieve the earnings guidance you've given this morning?

Yeah, sure. It's all in the fourth quarter. As you know, our third quarter is a very small one, so you really have to look to the fourth quarter. The biggest piece of those, first of all, our Mexican business basically collapsed in the fourth quarter. So that is a big piece of it, and we are watching the trends every week, every month, and they are building out. So we feel comfortable that our Mexican forecast is now reasonable, and it's going to be significantly above a year ago in the fourth quarter.

The same thing with the Philippines -- we had very soft trends there in the fourth quarter. Those are significantly better. We do expect European momentum to continue, and we expect recovery in the U.S. Put all of that together, we expect a fairly significant increase in the fourth quarter of the year.

And then, lastly, the Europe business -- we've seen a sharp recovery in profitability in Europe the last two quarters now -- 400 or 500 basis points. In the release you seemed to talk somewhat with caution about it continuing at this pace through the year. Can you just de-construct a little bit the source of the margin expansion and then why you perhaps are a little bit conservative in suggesting that it will continue but not at the same pace?

I would say -- good morning, Eric -- the situation in Europe has really been the payoff of some very, very effective use of promotions this year -- last year -- to not only not lose members of the sales force but really start to get some sales force size advantage, and while -- and as I qualified again -- the external environment there is not good. I was just with some other leading direct sales companies in Europe, and they're having a difficult time, and so I really say it really is the combination of the right management that we've got on the ground, the right kind of promotional spending, which is leading to a larger-size sales force.

I don't want to get too bullish on it, because if we started to sense that the sales force started to drop, we would invest in gatekeeping the sales force up because, long term, it will be to our advantage. We don't see that right now, but we're showing a willingness that if we have to do this, it pays off in the long run.

And the only other thing, Eric, I would add to what Rick said is that we did get the benefit of about $3m of a b2b deal in this quarter. Obviously, these are one-off deals, so you cannot expect that to continue through the year.

And that's higher than average profitability?

No, it's just normal, but we make, you know, very high margins on these, so it does go straight to the bottom line.

Very good, thank you.

And, once again, that is star 1 if you would like to signal for questions, star 1. We'll pause for a moment. Mr. Goings, we have no other questions at this time, so I'll turn it back to you for any closing comments, sir.

Okay, thank you -- nothing really else to say other than a mixed quarter -- I do want the understanding -- this is where we spend a lot of time at our board meetings -- understanding, really, the nature of our business, and what we're really trying to do is, long term, get this business positioned so that we'll have enough offsets of all the things that are going on around the world. But the thing I am pleased about is the strategies are going right, and we're managing our cash as we go through this time, and as we get more traction with the strategies, then I think you start to see this top-line growth, which will start to really enhance our profitability. Thank you all for your time.

Thank you, that does conclude our call. We do appreciate your participation. At this time you may disconnect, thank you.