Tupperware Brands Corp (TUP) 2003 Q2 法說會逐字稿

Welcome to the Tupperware Corporation second-quarter 2003 earnings release conference call. Today's call is being recorded. For opening remarks and introductions, I would like top turn the call over to the Chairman and Chief Executive Officer, Mr. Rick Goings.

I am traveling and our staff is back in Orlando, so if there are any issues with regard to connections, Pradeep will pick up the ball. I want to thank you for joining me. Pradeep, our CFO, is back there in Orlando with Jane Garrard, our Vice President of investor relations. Some of the discussions will involve the outlook of our business, so I am going to refer you to the Company's position on forward-looking statements as it appears in our recent press release and in our SEC filings.

Because you already have the numbers there in the news release, I am going to really spend our time this morning explaining what is behind the numbers. Topline this quarter's performance -- while we are clearly very pleased with our European trends, they were more than offset by the declines in North America. BeautiControl continues to post strong sales and sales trend, and Asia-Pacific and Latin America are performing, as expected earlier in the year, with no surprises.

Let me amplify now each of these operating segments. I will begin with Europe. You already know it is our largest operating segment. Historically, it has contributed about 40 percent of our overall sales and 50 percent of our profits. Here in Europe, we continued the momentum -- strong momentum we saw in the first quarter. The sales force advantage continues to grow, leading to double-digit sales growth; and importantly alongside this, the sales force and sales growth -- the area has reduced its promotional spending levels 2-3 percentage points, and this has really enhanced our ROS. Effective promotional management and product merchandising in this area, lead by, we believe, a very strong management team and a strong sales organization, are really driving the results.

But let me drill down even further. Looking at Germany, first -- which is our largest market in the world -- I spent a good deal of time there this past quarter and had the opportunity to see firsthand the excitement, the strength and the momentum in our business there. After last year's progress -- and we saw sequentially, I believe, 3 quarters in a row last year -- this market has contributed double-digit growth year-to-date, and it is driven primarily by a strong growth in the size of the total sales force (indiscernible). Importantly, recruiting trends in Germany have been excellent, and that, along with a higher average sales per party -- which in some ways is being helped by the strengthening euro -- it has really buoyed the success of this market.

Recruiting trends, I am pleased to say, lend us confidence in the stability of future trends. When we are having one-on-ones, it is interesting -- one usually asks how can our business be strengthening in Europe in a weak economy with low consumer confidence, particularly in a market like Germany, because they are generally in the press each week with the issues there with the shorter government and the economy. First, I just want to remind all of us that there is the incredible appreciation for our higher quality Tupperware products in the higher context markets of Europe, particularly Germany. Also, don't forget that there is a counter-cyclical element to our business -- higher unemployment means more individuals are in our potential recruiting pool. In Germany, unemployment is really twice the level of the US. It is about 11 percent, and it is really skewed -- (indiscernible) the former DDR East Germany, it is in some areas there 18 percent. So net of that, we have been taking advantage of it by growing our sales force. The larger sales force, along with effective hostess and guest promotions, has led to more parties, with increased sales, and therefore, this leads to -- and it is almost like the circle of success -- this leads these more parties, more people attending, to more opportunities for scheduling additional parties, and then finally, the opportunity to recruit more of the people who attend as salespeople. That is the push cycle of our business, and when momentum is on your side, it is terrific. However, the opposite is true when -- it is occurring what is happening in the US, but we will turn to that later.

Turning to the rest of Europe, I am also pleased to report that most of our businesses there are doing well. In fact, our top five European markets are Germany, France, Italy, the Nordics and Austria. Every one of these posted a nice sales and profit growth in the quarter, driven by strong sales force trends. And this gives us confidence in their continued success going forward. Also, with regard to the former Eastern bloc, it is smaller, it is in earlier stages of development, but we are making great progress there, particularly Russia. This market is growing double-digit and is starting to contribute nicely to European profits.

I also want to reinforce that our integrated direct access, IDA, approaches -- they continue to be an important initiative in Europe. Our showcases have been well accepted -- albeit there's fewer malls, and we have had to come out with much more opportunistic approach -- and they really are positively impacting selling, scheduling of parties and recruiting; much of the same things we saw during those first three years in the US. The number of locations of showcases also increased 50 percent from the same quarter last year, so we are seeing progress there. Importantly, it is getting us to new consumer segments to purchase our products and sales force members -- it starts a different recruiting pool.

Additionally, Europe has strengthened its balance sheet nicely, leading to cash flow in excess of growing net income. As distributors experienced increased profitability, receivable balances improve. And intense focus by Pradeep and his senior finance people in Europe has led to inventory management and nice reductions. So net, improving operational performance has led to working capital management improvements as well. Over time, I might say about Europe, that it has been more stable than any other region of the world for Tupperware. The sales drivers there are much more predictable, due to the sales force experience and skills, and, I might also add, the nature of European culture, and, finally, our market leadership there. For these reasons, Europe for Tupperware is less volatile than other areas of the world. Although we are going to start lapping some double-digit growth, we nevertheless continue to have confidence in the positive momentum in this region.

Let me now turn to North America. As you know, last month, we announced the discontinuation of our partnership with Target, and that is effective September 1. Because we dedicated an entire release, conference call, Q&A, to this, today, I am only going to summarize the rationale behind that decision. So we are not going to saw sawdust and go through all of it again. In spite of the testing of this concept -- and I think our US management team did a terrific job testing it in over 100 SuperTarget stores, with, I might add, positive results -- they really couldn't predict the impact that scale -- and that is the key word -- that the scale of over 1100 Target stores would have on the direct sales business until you actually did it. I might also add that sales in Targets were very good. In fact, they exceeded our expectations and Target's as well. However, the availability widespread of Tupperware products in Target gave guests, when invited to a Tupperware party, a real easy reason to tell a hostess -- why do I need to come to a party? And frankly, hostesses are not involved in the Tupperware business other than casually helping people who are friends of theirs who are Tupperware sales consultants. And when we reached the point that we were starting to believe we needed to start training hostesses on how to overcome objections, it became clear we went too far with Target. Although we announced the partnership would be terminated with Target, it is not effective, again, until September 1. So while we know we are on the right track there, product still is available until then, and that still is going to impact the immediate recoverability of the party sales momentum.

I might also add that Target, again, has been a wonderful partner, at the beginning, during the partnership and even as we end this partnership -- terrific business. I want to emphasize also that our integrated direct access strategy will continue to be an important initiative in the United States and in Europe, as well. I might add, the Target experience helped us understand the boundaries better, so it was not all for not. All the integrated's direct access initiatives, we understand, must positively impact our ability to drive Tupperware parties and recruiting. That is why we called it at the onset integrated direct access; if it does not integrate well, then it is not worth doing. If this is compromised, the direct selling business is impacted, and it really speaks to the productivity of Tupperware parties, and we couldn't afford this distraction.

This move, by the way, does not dampen our enthusiasm for IDA -- we will continue to focus now on more mall showcases; and by the way, that was beginning -- the Target -- to hurt some of our mall showcases, where she in fact needs to pay rent, support it with inventory -- she didn't have to do any of that in target. And the mall showcases -- we know from four years' experience, it supports the party and has been a proven site of great recruiting. We hope to have 5-600 mall showcases by the fourth quarter of this year; in fact, we believe we can apply some of what we have learned in the Target experience now -- particularly with regard to merchandising -- in our showcases.

While on the subject of integrated direct access, let me take a moment to mention our new television shopping relationship with QVC. I think we mentioned on the call in June that we were moving from HSN to QVC because QVC really is the dominant player, and it is almost three times the size of HSN. This makes it the second-to-largest TV network and provides us access to a larger customer base. Our first experience with them was last weekend. I am pleased to report it exceeded both their expectations and ours; in fact, they decided to have our product the daily special. The shows will include, as before, the selling of Tupperware product, the demonstration, the promotion of recruiting and the promotion of attendance at a Tupperware party. Additionally, recruiting and party hostessing brochures are included in each and every customer order. So it really does integrate well and drive the party. Television shopping provides significant exposure to our brand, our products, our opportunity -- just like advertising, but with no fixed costs. Again, they will have a QVC hostess on, but one of the Tupperware field hostesses as well. Again, we know from four years' experience on TV, this integrates well with our Tupperware business. We send leads to the sales force, people come by the mall and they call our local distributors.

Regarding the new business model in the US, let me make a comment there. We have made a lot of progress over the last couple of years, but we are still going through the rollout phase. The new model, the whole (indiscernible) is to lower the distributor administrative tasks and costs by leveraging and utilizing Web order entry by each member of her sales organization. It really does lead, also, us to lower receivable -- as a matter of fact, it eliminates receivables for our distributor sales force. But we believe the most important reason is it gets distributors and the sales force focused on the high value-added initiatives -- recruiting, training and motivating the sales organization. The good news is that we are almost finished with it, but we have still got about 25 or so distributors. There is some distraction for the first 6-9 months as a distributor converts, and we are going to continue to feel some of that through the remainder of the year. Yet our studies of AD splits between those on the new business model versus the old business model shows that after this nine-month period, the new business model distributors are in fact more effective and grow faster. So we think this is important.

Looking forward in the US, job one is to get them back on the grow, back to the momentum we experienced there for three years. Let me share with you the key actions the US management team is utilizing to really get this momentum back. Firstly, they have had significant communication with the sales force regarding the Target partnership termination. And frankly, the bold action that the Company has taken in terminating the relationship confirmed to them that they were most important, they were our key to reaching consumers, and it confirmed our support of them and their business opportunity. So a lot of great communication this last month by the management team and the field.

Two, they have initiated what we believe are some exciting and effective promotions to enhance recruiting and motivate the sales force to whole parties. As you will note, one of the key issues we are having in the US is the sales force, as far as total, is down 5 percent, and the average active is down 12 percent. And that all really spun out of that negative loop of the Target business. Unfortunately, however effective these promotions are, summertime is not the optimum time in our business to effect trends, combined with the fact that products are still going to be available for another six weeks in Target. So we hope to start seeing some of that momentum shift in September.

Thirdly, they have recently launched in the US Taste of Tupperware, and this is something they have been working on for quite some time. It is a completely contemporized approach to the Tupperware party; for some of you may have seen a few months back, the New York Times story on the contemporized Tupperware party, it is a bit of that. Let me explain.

One of the key issues in the US -- and I have spoken one-on-one with many of you on this -- is getting people to come to a Tupperware party, because of their perception of what a Tupperware party is. Many people believe the party is what the party was. Formerly, it was -- through the 1950s, 1960s and much of the 1970s and 1980s -- a technical demonstration of the product attributes and uses. Today, people have changed. They still care about product attributes and value for money, but they are busy. They want an interactive, fun experience.

New party themes, therefore, have been created at Tupperware and have been launched, particularly this last quarter. And I'll just give you a feeling of some of the themes of Taste of Tupperware -- she wears a chef's coat and she does one of the presentations, her entire themes is decadent and delicious desserts. So someone would book this kind of a Tupperware get-together. Another is fit and flavorful foods. All of these are more likely to take place in the kitchen instead of sitting in the living room, and they include guest participation utilizing Tupperware products. Remember, more and more, we are dealing with a consumer base that was not raised just listening to radio or four channels of television, but 200-300 channels of television and interactive video as well. So in these new Taste of Tupperware parties, they get hands on experience with the product, but they also have a great time, learn some easy recipes and some entertaining tips. And there are even some formats where women are invited to really (inaudible)-- husbands -- so it really does become a family affair.

Turning to the US again on their growth opportunity, let me also comment that after years of decline, our US business grew for 3 years. I might also add that party plan direct selling in the US -- I just attended 2 months ago the annual conference of the entire association, and am pleased to report the industry's fastest-growing segment in the US is party plan direct selling. More and more, women today are working and are looking for some release, and as they reported then, kind of a girl's night out and a fun experience. And that is why themes are more important and we’re excited therefore about our new party format. I might also mention that the new theme parties have been favorably received. Early results show that we are getting about 15 percent higher sales with these theme parties versus the traditional format. But again, it is early days, only a small percentage of the US sales force has been converted to the new format. But next month at our upcoming sales convention for the US, that really is the entire thrust of that meeting.

So let me summarize on the US. Clearly, the Target experience did not work. It disrupted our positive momentum, but it was still worth trying. It will end now and forever. When we are asked the question why don't you go full-blown retail, we learn the limits of it. It did, though, change the momentum of our business, and it's going to take some time -- a couple of quarters -- to recover it. The sales force is down and we need to recover that sales force size, and to educate the consumers that are no longer available in Target stores.

Turning to Asia-Pacific, again, as I mentioned earlier, no surprises. We were pleased to see a slight sales increase, led by Japan. Profits were down, primarily there due to promotional pricing to really liquidate excess inventory, mostly third party sourced inventory that had been such a success there. Additionally, our challenges continue in Korea, and this impacted our profits as well. About the Philippines, this market is showing some early signs of increasing stability. Sales force size is improving, and the operating results are starting to slowly move in the right direction. Again in Korea, the new compensation plan -- we launched it in the early stages of the second quarter. It is driving recruiting, and the sales force is starting to grow in Korea. However, as yet, we have not seen that convert to the activity levels which are really necessary to get the sales line growing. So that is what the focus is right now. Regarding other Asia-Pacific markets -- Indonesia, India, Australia, New Zealand, Malaysia and Singapore are all performing quite well. China, Malaysia and Singapore are also recovering from the SARS impact, and it appears that has passed. Overall about Asia-Pacific, it is performing as expected, and we expect continued improvement in the second half of the year.

Now to Latin America. There also, no surprises, performing according to expectations. We are pleased with the sequential improvement we are seeing, both in sales and profits. Since the fourth quarter is really driven by the improving sales force, will be driven by a larger sales force, we are also pleased there that it is growing. The introduction some time ago of beauty products in our Mexican business -- that is our strategy -- is making progress as well, as we are experiencing success with a new merchandising program that is really aimed at expanding trial use and drive unit sales. In essence, what we are doing is turning our attention to sourcing more products locally so we can, in fact, attract more consumers and get more of our sales force excited about selling it, and they are sensitive to the price points. Currently now, we are sourcing about 65 percent of our beauty sales products from locally sourced suppliers, so we are pleased with the progress there. The rollout, also, to Mexican distributors has been well received. I think we held it back by playing it too safe in the beginning 18 months ago, but now we are working to convert many of them to selling the beauty products of BeautiControl. In the quarter, it represented about 7 percent of sales in Mexico, and that is good to see. It is a combined brochure now, and that is our strategy. Remember that in Latin America they spend only about 800 million on products that would be Tupperware to food storage, preparation and serving, and nearly 20 billion on personal care products. So it is our real strategy there to convert more of them.

Turning to BeautiControl in North America, they continued their strong growth of 24 percent, resulting from, really, a larger sales force size, and it's at its historic high. Promotional spending to grow the sales force has been up a bit, some over-performance, as far as individuals achieving these new levels. This investment is expected to decline in the second half of the year, and the ROS should improve by then. It has been 2.5 years since we acquired BeautiControl and sales are running ahead of schedule. When we purchased BeautiControl, sales were just a bit over 50 million and declining for a number of years. The key level of sales director was also in decline. This year, sales in North America are expected to approach $90 million. The number of directors and directors and qualifications also is at all-time high. And I only mention this because it shows the heightened sense of confidence that we have in our ability to manage a beauty business -- many of us come from that industry -- and to leverage beauty in select markets of Latin America and Asia-Pacific. And again, if you look at Maslow’s hierarchy of needs for Latin America, after food, clothing and shelter, personal care products is next, and this is a big opportunity.

Let me turn it over to Pradeep to discuss the balance sheet trends, as well as our outlook, and then we'll open it for Q&A.

Let me start with the balance sheet. First of all, I am pleased to report continuing progress on working capital management this quarter, which, by the way, has improved every quarter since the second quarter of 2002 -- five quarters in a row. At the end of June, working capital, excluding short-term debt, was almost $27 million below the same period last year. The Accounts Receivable DSO continued to improve, from 43 in June of last year to 34 in March 2003, to 31 in June this year. Inventory days outstanding also have moved down from 160 in the prior year to 141, primarily due to improvement in Europe. So we are pleased to see this improvement, as it allows us to pay down debt and strengthen our balance sheet.

This increased cash flow has also resulted in a debt reduction, and we are at this point 86 million below last year, and a debt to total capital ratio of 57 percent compared to 70 percent in the same period last year. This is the lowest it has been in a long time. Going forward, we expect to have a net cash outflow due to the normal seasonality of our business in the third quarter, and this will result in an increase in the debt to total capital ratio at the end of the third quarter. However, as you know, the fourth quarter is our biggest cash generator, and the cash inflow then is expected to more than offset the third quarter, resulting in a full year operating cash inflow. And we expect to achieve our year-end debt to total capital target of 50-55 percent.

Let me turn to the outlook and summarize several of the important trends influencing the second half of 2003. The North America operation, as Rick mentioned, has been soft. It earned about 30 million last year -- 14 in the first half, 16 in the second. This year, they have already lost 12.5 million year to date, and given the decline and the sales trends and the expectation that it will take several quarters to rebuild momentum, we expect the results for the year, at best, to be at breakeven. Latin America -- we are seeing sequential improvement in Mexico, driven by improved order count and sales force trends. These improved trends, combined with easier comparisons in the fourth quarter, as you might recall, leads to expectation of continued sequential improvement in the second half of this year.

Turning to Asia-Pacific, the Philippines and Korea are expected to show improvement in the second half, due to easier comparisons, particularly in the fourth quarter. Europe is expected to maintain its momentum, due to the sales force size advantage; however, increases will be more modest in the second half. And BeautiControl North America -- our promotional investments that are currently being made are expected to decrease in the second half, leading to improved ROI.

So based on all of these trends, particularly the North America declines, we are reducing our expectations from core operations by about 26-28 cents a share. Full year earnings are expected to be in the range of $1.18-$1.26 per diluted share, and this includes a 10 cent positive impact from foreign currency and a range of 13-16 cents from anticipated gains on land development.

I would also like to reinforce that the Company continues to be committed to the dividend. Let me take a few minutes to discuss our ability to continue paying this dividend in the light of EPS reduction. Since capital expenditures and depreciation offset each other, we expect net income, plus the changes in working capital, to be available for paying the dividend and servicing our debt. Now that we are halfway through the year, we anticipate that by year-end, we will generate about 5-$10 million of positive cash flow from working capital management. Therefore, a range of about 65-$75 million will be available to service the dividend of approximately 50 million, and the remainder will be used for debt reduction, which is sufficient to meet our debt to total capital target. Gains on land development will also be used to pay down debt. Additionally, the primary covenant which could restrict payment of dividends is in consolidated net (indiscernible). At the end of this quarter, the covenant had a $40 million cushion, and therefore is not addressed for restricting payment of the dividend.

That's pretty much our prepared remarks. At this point, I would like to turn over the call for questions.

(CALLER INSTRUCTIONS). Eric Bosshard (ph) at Midwest Research.

First of all, can you talk a little bit in the US about what changed that has made the profits decline at the pace they have, and why -- it doesn't appear that there is any dramatic improvement in the second half -- that it is more of a 2004 story?

On that, back to kind of the example I used for the German business. What you will really get is why the party, the party becomes key. Because what has happened to the party is, first you sell product, next you date other parties, and third, you recruit. What we saw happening in that, some of it was distorted in the first quarter because of the Iraqi situation, that double hit of weather. So we could not see the impact of Target out of that. We really had a huge cancellation rate of parties -- normally you can have 20-25 percent of people who book a party actually cancel toward the end. We were experiencing rates double that, which led to, then, a decline in not only the number of parties that were held, but that daisy chain all the way down. Simply stated, it just takes time to get that going back again, and it is highly leveraged. So -- and the most challenging time to get the sales force back on the grow again is on the summer, during the summer. Usually, the other three quarters are the real strong recruiting periods, and that is why we do not want to get ahead of ourselves with regard to it, because it is still out there right now; people are still canceling parties because of Target.

I think we are also, in addition to the sales decline, having to make some promotional investments to build back our sales force size. So profits are actually probably lower than what you would have expected from the sales level.

Europe, the performance there has been fantastic for the last couple of quarters, and it sounds like it will be good in the second half. Is there something that you can identify there that has been the catalyst for improvement?

The strategy in Europe has been basically block and tackle with regard to the contemporization things that we are working on in US. And because we have a very senior management team in most of the markets there of dynamic proven people, a very senior group of distributors out there, I think implementation has been close to flawless on it. As a matter of fact, too, is -- we were a lot more conservative with regard to testing of some things in Europe, because it contributes so much in sales and profits, and we utilize the US for that. I think as I mentioned on the call in June, the most significant size retailer, upscale retailer, in all of Europe last year wanted to do the same thing with us that we did at Target. And we said no, not now, we want to test how it works. We simply did not want to risk that business. Everything we have done with regard to integrated direct access in Europe, we first used really -- did the missionary work in the US business. So by the time strategy was handed over to the European management team, we went through the refinement and radically altering process in the US; and I think it is right to test it in a market which is not your biggest market, so the down side is less. But it gives us confidence that the US -- this decline in the US is not driven by externals, it has been -- we went too far with integrated direct access, but we learned.

Kelly Nash at McDonald Investments.

Can you discuss how many mall showcases you currently have in the US? You indicated significant growth going into the second half of the year.

We had 205 showcases this year versus about 298 last year. But when you add the Target stores, of course, we were much higher than we were last year.

I might add, too, and I alluded to this in prepared remarks. Again, we have had, since I joined the Company -- many times we would be at investment meetings and people would say, why don't you just go retail with it? And what we tried to make is the compelling case of why a direct selling model is far more attractive than a retail model, and there's really four major reasons. We operate first on gross margin of about 65 percent, because we have this ability to demonstrate product attributes. And this means that we are not forced to commoditize our product, and so when something happens -- for example, like resin prices go up -- we can absorb that and still maintain the high gross margins.

Secondly, we can take a new product to market fast and with limited extra cost. We introduced three years ago a product called FridgeSmart, which really aids in fruits and vegetables storage, and in many cases can double the shelf life; it has yet to have a competitive product out there because they can't explain it. We are launching this quarter a product called Stuffables, which is -- what's so exciting about it is if you have ever grabbed a container, go to put some leftovers in it and then found out -- oh my goodness, it sticks out the top, you got one that was too small -- we came out with a new seal that, in fact, it expands on the top. And we are very excited about that.

Third, our value chain is more flexible, so that in spite of what is going to happen in the US this year, we think we can start coming out of it and turn it around, because we don't have a fixed costs in our sales force. And I think the other big reason why we are so committed to this direct selling model is in Latin America and Asia Pacific, where it is relatively -- once you get out of major metropolitan areas there is not much of these retail infrastructure, means we can go to those markets. But in showcases, what we even understood there -- as we went to Target, we were undermining, the more we got, our showcase strategy, because some distributors would call us and she'd say -- well why do I want to do a showcase, because Target doesn't even charge me rent, I can put a salesperson there, and I don't even have to put inventory there. What we found out is the salesperson didn't like standing in the aisle of Target. So given the comparison of the two, we think this is going to help us get more of our distributors back on the showcase program. Forgive the long-winded answer, but there was more in that.

I wanted to make sure I understood -- so there's 205 mall showcases currently in North America, and you expect to grow that to 500-600 by the end of the year?

Yes, we typically ramp that up in the fourth quarter. So yes, that is about our target.

And those showcases that you are expanding, are those going to be year-round showcases or does that 500-600 also include a lot of seasonal showcases?

They are mostly seasonal, actually. So it is not a year-round number.

But, the elimination of Targets does -- our ultimate strategy is to have more showcases open 12 months a year. Again, there's 1500 A and B malls, and those are the ones we have identified as best for us. So it is a big opportunity still.

Is there any way you can quantify the impact of the resin cost on your profitability?

Yes. The resin prices, actually, are on their way down now, so what we are experiencing -- what we did was when we expected, with whatever we were hearing, with the Iraqi war, we actually stocked up to prevent us from getting hit with the resin price increase. So we really did not have much of an impact in the second quarter as prices increased. What we are experiencing now is that prices are actually on their way down, so I would say that, overall, the annual impact for this year is almost going to be nothing.

Are you still planning to grow the number of distributors, particularly in North America?

Yes. As a matter of fact, this last year was the first year we really had a noticeable increase in the number of distributors. But even out front of that, we launched a test some time ago on a new compensation model, and we are in the process of upgrading changes to that which will allow for many more distributors in the US. We think we have the opportunity for 500-750 -- that is the number I have mentioned in the past in the US -- to get the coverage that we need and the access consumers need.

Budd Bugatch at Raymond James.

Will the US, Pradeep, be profitable in the third quarter? I know you said you hoped you would at least break even for the year -- but third quarter, do you think it is going to make money, or should we model a loss in the third quarter for the US?

We are going to have a small loss in the third quarter. So our improvement -- we expect our sales trends to continue in the 20 percent range, declines in the third quarter. But we are hoping that in the fourth -- first of all, it's an easier comparison, plus all the investments we are making in the sales force size. And also the Target discontinuing by then. We expect to still see a decline in the fourth quarter in sales but not quite as much, so we do expect to make a profit in the fourth quarter.

I think when we talked about this in the last call that there were no additional exit costs for Target. Is that still the case, and as you get closer to this time, do you have any potential exit costs that you had to book in either Q3 or Q4?

No, we do not anticipate any exit costs.

So no write-downs of inventory or take backs of inventory that has to be done?

None.

In your guidance, you have 10 cents from foreign currency positive. We have hedged away the euro improvement, I thought, for most of the year. I think -- I also remembered you did some of the Asian currencies as well. Can you tell us where that currency comes from and when it will be impacted -- which quarters, which of the following two quarters -- and how?

What is happening is any improvement over the prior year's actually profits are not hedged. So we have hedged whatever was prior year performance, and since Europe is doing so well at this time, that in fact is increasing.

So you have actually busted through the hedge ceiling?

In the sense we've hedged the euro to the extent of last year's actual results, and so anything that is over that gets the benefit of the effect.

Cash flow on land sales for the balance of the year -- what do you expect?

We are still expecting the 13-16 cents. We have a number of contracts in the wings, and they're subject to a lot of approval requirements from different agencies. But at this point, we do still expect to get the 13-16 cents.

I understood the impact on the income statement. I was wondering about what does that equate to in either net cash flow or gross cash flow?

It is mostly -- the net income is almost close to the cash flow impact.

There is no basis it?

There is very little base.

BeautiControl -- as I understand the way you've described it is Latin America now is included into the Latin American segment? Is that correct?

Yes.

When will BeautiControl really be profitable? If we get $90 million worth of sales, the most that we are looking for is like $4 million worth of pre-tax profit this year. When do we see that ramp, and what holds it back?

I think what is holding back the BeautiControl -- you're talking about the BeautiControl North America profits, right?

Yes.

What is holding it back is our promotional investment. As you might remember, about 18 months ago we launched this very aggressive leadership program, and that program has been very successful in increasing the size of our sales organization, and more importantly, the leadership of that sales organization -- the top layer. So that has been successful. It has cost us a lot of money, and we will start to see that coming down in the second half of this year.

(multiple speakers) -- when you bought BeautiControl, I think you paid $65 million for it, and at that time we still had goodwill to amortize. You said it would not be accretive for two years, on that basis -- still doesn't look like it is going to get accretive next year -- is that correct?

It is not dilutive this year at all.

But that doesn't have the goodwill accounting in it, right?

Correct.

You have to take that out of the equation?

Correct.

Percentage of IDA now in Europe -- can you quantify what the IDA sales are in Europe? Is it a meaningful number?

It is not a meaningful number, but what is important is it is ramping up. It's about -- we had 50 percent more showcases than a year ago. It is still a very small percentage of sales, but I think it is contributing to the success in Europe.

The key there is it is really getting us -- what we have needed there is to get to some new consumer pools and some new recruiting pools, and that is what we are getting back from it. So even though it may be a couple of points, it is contributing more than that in the new people we are meeting.

And in countries, is it in Germany? And are you doing anything in East Germany at this point in time?

Yes. As you know, Germany is unified. (multiple speakers) we have got a very nice business in East Germany.

I'm sorry?

Yes, we do a lot of business in the former East Germany.

And is integrated direct access more important in Germany to -- percentage-wise -- to like the way it is with Germany (technical difficulty)? Pardon my phone.

Germany is doing well, but no better than we are seeing in Belgium, Switzerland, France. We have got one person in Europe who is the senior person in charge of integrated direct access in all countries, and each managing director is required to have focused attention to that, and we are pleased with the progress and performance in all of our markets there.

Doug Lane at Avondale Partners.

Back in June, you talked about party cancellations -- a factor of maybe half in a week back in May. Can you give us an update on cancellations in June and July, or maybe some statistic on the number of parties being offered this June and July versus last year, just to see where things have come since May?

You're not getting the cancellation rate that we saw when we reported in June, but the issue is we had already -- the sales force had slid in size, and the parties that were dated were down versus last year. So while cancellations are returning to closer to more historic levels, there were fewer booked. So that is where the pig has to work its way through the python here.

And it is too early to get a read of when you think those lines will cross and your parties will start to increase again? Is that correct?

Yes, versus last year, because we are dealing with a sales force in the US that's -- the average (indiscernible) it's important -- that's down 12 percent since last year, so you have already got the wind in your face on that, that you've got to over-perform just to get even with that. And it is harder to get productivity increases. So the best way to close the gap on getting the number of parties that we had last year -- because you -- very rarely in a direct sales company can you impact significantly over time activity rates of the sales force; you can do it short-term, but it is often quite spike-driven, artificial and you pay for it. What we have got to do, and the best way to get it up, is we have to get the total sales force up, and their activity level will probably be close to what it was.

So what kind of programs can you talk about that you are putting into place to goose recruiting here in North America in the second half of the year?

They have launched it this summer. First of all, they have simplified the recruiting process -- but they are always working to do that, but I think they have made noticeable progress there. The kit is an easy kit to explain and an easy kit to start with. Most of the kits, by the way, are kits that have to do with the themes that we are talking about. So somebody could start with a decadent and delicious party format kit, and she would start off with all the things she would need to put on one of those kinds of parties, real easy to understand, and fun. That is one of the -- next, we throw promotions behind it that if you in fact introduce somebody to the Tupperware opportunity, there is not only a percentage of that individual's sales that you can earn, but now, even a fee for recruiting that individual. And we don't do that all the time, so that has gotten their attention.

Broader here -- with the company-wide average active distributors down 9 percent or so in the first half of the year, you sort of have -- Europe notwithstanding, which seems to have decent momentum -- you do have company-wide this recruiting or activity headwind. And when do you think that that number will start working in your favor? Is that something that could turn positive in 2004?

Pradeep, I don't have all the numbers -- I think, Doug, you meant number of sales people, not distributors -- correct?

The number I was looking at is average active distributors.

Average active sales force. I think the issue is we have about four markets where they're major markets for us which have declined over the prior year. So while Mexico, Philippines, Korea -- these are performing to our expectations -- they are all below a year ago. So when you add it up to the US decline, that translates to, I think for this quarter, the 7 percent below last year. So will this change? I think first of all as we start lapping this, it is certainly going to change. But also, as we work our way up in each of these markets, that should start to change.

(multiple speakers) I would add, too, that the important way to look at those is individually. And I would just comment on each, and we have already made some comments on it. Mexico really was the key to Latin America, and we have seen, as we have gone through the year, improved sales force trends, and getting better and better in closing the gap. That is good. So they are on track. In the US, we have already commented on that, and I truly do believe it is going to take early this next year before you really see them close the gap. Because you just don't get that much with regard to recruiting in the third quarter. So many people make that decision in the fourth quarter and, historically, the first quarter. That is when they say -- hey, I want to start a business of my own. So that is when I think the timing is in the US. In Asia-Pacific, it really has been isolated primarily to our Korean business there, and we have started to close the gap there, but we have not seen positive impact with converting them to active sales force. And we are not going to feel good about it until we start to see it. So that is primarily where most of this is happening and distorting it.

That's correct, average active sales force is the number I was looking at. And write down 7 percent in the second quarter, and then -- which is an improvement from 12 percent in the first quarter. So should we, do you think, Pradeep -- if I am sort of thinking about this quarterly over the next six quarters -- that that should sequentially improve, and perhaps even turn positive sometime in 2004?

That is certainly our expectation.

Rommel Dionisio with Roth Capital.

Rick, in your prepared comments you seemed to reference a number of the emerging markets that you have targeted, like Indonesia and Russia and so forth, as doing fairly well. Is it possible to quantify -- I know you don't break out individual markets, but to what extent are these actually having a significant impact now on results, and have they achieved corporate level (multiple speakers)

We have commented in I think it was the last quarter that these emerging markets are four or five percent of sales, so they are still small -- all profitable, but not to scale yet. If I was to comment directionally, Indonesia has become for us the largest of those markets, and we are really seeing this market doing well. And it is going to, I would predict, this next year, move into our top tier group. As you know, it is the fifth largest population in the world. But once you get behind -- Russia is dramatic in its growth, and in its growth in profitability. But if I go to the next tier of these markets -- China, India -- much smaller markets, but very nice double-digit growth. I do think it is 2-3 years away before you start to see them really being meaningful, particularly with regard to a profit contribution.

We made the decision, by the way, in markets like China -- where technically, direct selling is still not a legal method of selling -- we have very warm relations with the government, and we use a showcase approach. And we have ramped up that business to the point that we are opening 50-60 of these a month. Keep in mind, you have got a very low per capita GDP in China, but we are in the mode there of brand building. What we have decided to do, and I have mentioned this on a call -- we took Christian Schroeder (ph), who is a Senior Vice President -- more than two years ago, Christian had -- at one time he's been a managing director, he's run all of our European businesses. He runs a cluster called emerging markets. And Christian knows that his whole strategy is, and this 5-10 year planning cycle we are working on, that we want his cluster of markets to be meaningful contributors, because they make up well over 50 percent of the world's population. So call this our incubator, if you will.

(CALLER INSTRUCTIONS). David Liebowitz at Burnham.

Briefly -- is there are a change that occurred between the conference call in June and today, that the annual guidance seems to be weaker than the numbers you came in with the quarter, which were a penny higher than the outside of the range you gave us of 20-23 cents?

In June, we did not update the full year. What we did say was that we are going to have an 8-10 cent decline in the second quarter in the US, and we would evaluate the rest of the year and how much we could offset in Europe. So I don't think it is any different from what we said.

So nothing that you came across in the intervening period came as a surprise to you, in terms of weakness domestic?

Certainly, we're disappointed with what we now expect for the rest of the year in the US. And it has taken us a month since we announced the Target discontinuation to evaluate what would happen in the US the rest of this year.

I might add -- yes, since then, with our 5 pieces of portfolio, we basically -- all of this is concentrated on the US business and taking it out through the rest of the year. Europe is better than it was performance-wise in sales and profits. Latin America Asia-Pacific is where we thought they would be, and BeautiControl is where we thought we would be; and Pradeep was putting lots of pressure on them and BeautiControl to increase their ROS in the second half of the year.

A few unrelated points. Coming back to the US market, what percentage of your revenue were from non-traditional Tupperware products, such as cutlery, etc.?

I would say that probably it's in the 15 percent area.

Are they producing a greater percentage of profitability than the 15 percent?

No. I think you could get down to a reasonable comparison. In some cases, there is a reduced gross margin on them, but the operating profit we can make off that product can many times match our core Tupperware products, because we don't have to have the investment in molds, for example, and development.

Company-wide, do you have greater write-offs of discontinued items this year than a year ago?

No.

Are they comparable, less then, then?

You're talking about write-offs on what?

Write-down on either discontinued or...

Inventories?

Inventories.

No. Actually, as our level of stock comes down, we should see that producing.

One of the interesting things about the direct sales channel is that we can promotionally liquidate in most markets those products and still get margin. The isolated example we commented on in this -- in our prepared remarks, was in Japan. There were some big-ticket third party products that we really put pressure on the management team to liquidate. But with most of our lower ticket items, this is not an issue.

You mentioned the gains in real estate development. How much more available real estate does the Company have, and can we put a dollar value on that?

Yes. We have indicated that our total real estate sales would be in the region of 80-90 million, of which we have already realized I think, about 20 million or so.

When do we expect to realize, or over what time schedule might you realize the balance of that real estate?

Over about a three-year period.

And that is beyond this year?

Yes.

Kelly Nash of McDonald.

First, can you quantify the percentage of Asia-Pacific that Korea does contribute? Secondly, what do you anticipate the North America mall showcase count to look like at this time next year?

We don't break down individual markets, as you probably know, so we are not going to do that. I'm sorry, what was your second question?

The North America showcase count. You had indicated that some of the mall showcases would be growing, and I was just wondering what you thought the mall showcase count for the region would look like for second quarter of 2004?

Second quarter of 2004? We don't have any guidance at this time on that.

I guess I was just trying to get an idea of what kind of growth in year-round mall showcases you were looking for going into next year?

Directionally, with Target going out we are looking at ramping up our showcases once again, because as Rick mentioned, they sort of took a downtown in the distributor's mind. But the North American business is certainly working to ramp those numbers up, so my expectation is you will see increases going forward.

I might add anecdotally, the individuals -- there is a team that was in charge -- they are all part of the integrated direct access group, but there was one team that was in charge of showcases and another team in charge of Targets, and we needed to make sure they integrated. But they really competed, and we heard great complaining throughout this last year from our showcase leadership team that how can they compete with a venue that requires no rent, you don't have to put inventory in, and we said -- we still needed to find more ways to make it happen on showcases. And where it became clear, though, is that the independent manager and the sales consultant, she enjoyed the showcase more than she enjoyed the Target. And so that is when we started getting some momentum back in the showcase business. But clearly, again, Target hurt showcases.

We have no other questions in the queue. I will turn the call back to Mr. Goings for any closing comments.

Thank you. I might add just wrapping up, thank you for your time today. I want to reiterate what we said at the end of our first quarter. We believe that for us to get consistency in our business we need to continue forward on these three prongs of our strategy, to not only expand the sales force, get these other channels of distribution, but also expand the product line. And clearly, that means consumable products in Latin America and Asia-Pacific. One of the things many of you who manage portfolios, again, look for is when something blows up in your portfolio, you have got something offsetting. Our issue right now is we have got basically 8 markets that dominate our profitability. We believe we need to, as I mentioned, get this to about 15 markets. So we are going to have something in every quarter, but you will then get something offsetting. So we think we are going down the right road with regard to this strategy, and it is starting to take hold. We thank you for your time and for your interest in Tupperware.

That does conclude our conference call. We do appreciate your participation. At this time, you may disconnect.

(CONFERENCE CALL CONCLUDED)