Tupperware Brands Corp (TUP) 2004 Q2 法說會逐字稿

Good day everyone and welcome to the Tupperware second-quarter 2004 earnings results conference call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to the Chairman and Chief Executive Officer, Mr. Rick Goings. Please go ahead, sir.

Thank you, Jennifer. Good morning everyone. I'm joined this morning by my Mike Poteshman, our CFO; James Roard (ph), our VP of Investor Relations. As you know, some of the discussions will involve the forward outlook of our business, so I refer you to the Company's position on forward-looking statements.

We were pleased that the quarter came in-line with expectations, including a nice improvement in operating profits from four of our five segments. Let me discuss specifics from each area and then I will turn it over to Mike and we will get into the financials and our outlook as well.

First, turning to Europe, results there were as we expected with a slight decline in sales due to planned lower level of business-to-business sales compared to last year, and I will get into that in a moment. Since we manage our involvement with business-to-business to maximize benefit to brand build and sensitivity to the sales force, we always expect year-to-year comparisons in this category to be somewhat choppy. But still, it's good business when not done all of the time. Sometimes, it's up, sometimes it's down and we will continue to keep you informed of the fluctuations when we have deals like that.

In our largest market, Germany, our total and average after sales for size a (ph) advantage. It's good to see that they're holding steady. We have seen some productivity issues where productivity is under pressure and most of that really is due to the soft economic environment in Germany and compressed consumer spending. Particularly in the former EDR, East Germany, the unemployment rate now is over 20 percent. Also, France and Italy struggled somewhat was sales force productivity and some discounting and that put some pressure on sales. But in these markets as well as in Germany, our sales force size and the activity levels are quite good. So it is a mitigating the negative impact and they're really holding their on. We also had good results in South Africa and Spain did well. Russia, we were up over 100 percent in the quarter; Turkey over 50 percent and these are really nice growing and profitable businesses. As a matter of fact, the emerging markets of Turkey, Russia, Poland; they contributed 6 percent of European sales in the second quarter, which is a period greater than last year. I think it was 4 percent last year.

Europe overall continues to have strong sales force growth trends. Average active sales force is up 12 percent. Now sales do not track the same trend as the sales force size, and there's really three reasons behind it. First, this planned reduction in B-to-B sales I mentioned; second, a sales mix shift and third, consumer spending compression, particularly in the eastern markets -- or excuse me -- the western markets. Let me mention the last two and drill down a little bit further there. We've talked in the past quarters that overall sales force productivity statistics are in Europe -- they are down primarily due to a mix shift from Western Europe to the faster growth that we are experiencing in the Eastern European markets where there is a lower per capital GDP, and this really results in lower disposable income and a lower party (ph) average. It is still good business, though. Also, like Germany, the economic conditions throughout most of Western Europe are compressing consumer spending and they're putting pressure on our party average there.

The good news is that our sales force size advantaged, we believe we will be able to keep it strong and at the same time, maintain our promotional investment level at a reasonable level. It was 23 percent for the quarter, but we believe we can maintain 20 percent ROS on an annualized basis. The 23 percent ROS for the quarter was good news; that's a 4 percent improvement from the second quarter of 2003 and we really achieved that through, first, the improvement in gross margin, but at the same time, lower operating expenses. So the business is a bigger sales force, but we have a more effective expanse base.

Additionally, we have been converting some of these small markets -- Balkans and some other markets out there -- where we have been putting them under a centralized distributorship and this has enabled us to reduce our fixed investment on one hand, and at the same time, it has also a mitigated some of our risks on receivables. So we're real pleased with our progress on that. We're also benefiting from this change in cost structure, as well as the reduced market risk.

So net-net, the overall outlook for Europe is good and we expect year-over-year sales and profit growth this year. Also in Europe, let me mention integrated direct access, or selling of Tupperware products outside the core party, which we do with the sales force. We are continuing to utilize this strategy as a way to get us into other consumer groups, and that's the big opportunity for us in Western Europe. We are pleased that we added sites and we improved our productivity in terms of sales per site versus last year. And importantly, again, it is getting us to new consumer groups and that gets us to new people who can host parties. And so you get a nice chain of circles there.

Moving to North America, you may not, where you are sitting, see much on the outside of the progress, but we are making progress on the inside, transforming this business model. And the whole purpose for this is we want to grow this U.S. business. Party Plan is the fastest growing sector of direct selling in the U.S. and we want to take part in that growth. And frankly, we have needed contemporize our model and we've been working on it nearly a decade. We were pleased to see the rate of declines in profits improve from the first quarter to the second quarter as we begin to see the real impact of the cost we have taken out. We are currently on track to realize the 15 million in cost savings that we announced this past year.

Sales and sales force trends also have been stabilizing over the past two quarters in the U.S. However, we do not yet see an improvement in the average active sales force trend. And therefore, we're holding what we previously said -- we don't expect to see the positive comparisons in year-over-year average active sales force count until the second half of 2005. And because of this and the related sales declines, North America is still expected, as we've said before, to incur a significant loss in 2004 and give you a feeling, probably in an amount that's close to last year's loss while we are working to regain this sales force size advantage.

The word to contemporize the U.S. business continues and we're focusing in three areas there -- first, refreshing the party; second, enhancing the earning opportunity and thirdly, the introduction of more dynamic and unique products to stay away from the commodity movement that has happened so much in plastic food storage. It has been dumbed down to Rubbermaid, Sterilite, the non-name brands and then you really do see four for a dollar Gladware. So the good news is over this last decade, we have been moving to a new place where we can be competitive and differentiate.

Regarding the party, we're making progress in expanding the penetration of this format we call Taste of Tupperware. In essence, that is an interactive party experience and we are pleased to report that about a third of our sales force are utilizing this format, (indiscernible) average through the second quarter -- they self-report as they order. Additionally, we are seeing a higher party average from Taste of Tupperware -- not a big number, it is in the single-digit range, but the real kicker is we're starting to see significantly higher gatings coming out of core parties, Taste of Tupperware parties, than we used to get at traditional parties. And this is particularly important because one of the purposes of a party is to sell product, second to recruit, but third, to perpetuate the business by it leads to other Tupperware parties.

Also in the U.S., we will be launching a new compensation plan to about 1/5 -- 20 percent -- of the distributors in the U.S. at the beginning of September. These distributors will have the option of this transition to a new plan, or they can remain on the existing plan. They're not forced to do it. The primary components of this tiered compensation plan is really a couple. First, there is a movement from temporary payouts on someone you recruit to lifetime payouts when you recruit them. Second, there is the freedom to recruit anywhere in the U.S. And you know, technology has really made an enabler of that, with not only cellphones, voicemails, but e-mail and now video e-mail. It really makes it easier to even recruit them and work with them. Thirdly, the ability to self-promote to higher levels of the organization. Frankly, the new compensation program -- really the essence if you put it through the wine press, it provides an exciting career path and now different choices for a new consultant in Tupperware. One can choose to simply be a Tupperware sales consultant, hold two parties a week and earn on average $1000 a month for working five or six hours a week. Or, she can go to the next level, build a personal group and continue to hold parties and earn in the $25 to $40,000 a year level, working 25 or 30 hours a week, or she could build an exciting downline business. And there, we have seen in our BeautiControl business, they earn well over six figures there. The whole point of this, we've been working on it for a number of years. This plan allows us to be more competitive with other direct sellers in the U.S. And by the way as I said, the plan is very similar to what we've down with BeautiControl's North America compensation. And that has been instrumental in our success at BeautiControl and it helps us not only get current consultants more excited and committed, but it also helps us attract more potential consultants because it's a better business opportunity.

Under the new plan, an aggressive recruit can become what we call a director in two years and make Tupperware the sole source of income within this period of time and earn incomes really over six figures. However, it's important to understand -- we are only launching it with 20 percent of our distributors. We're going to learn, it's going to be a learning laboratory for -- it could be a year there -- and then we will transition the new plan to the entire organization.

Turning a minute in the U.S. business to product, we continue to be pleased with our offerings and the contribution of new products not only in the U.S., but elsewhere. And I am pleased to say I cannot get into it today, but we're going to be introducing within the next 45 days one of the most significant innovations in the food storage category in our history. We've been working on it for three years. The launch is going to be at our annual jubilee conference here in August and I will be happy at that time to discuss more. We will be sending out samples and releases to most of you on it so you will see. But it is a big breakthrough. And that, combined with new compensation programs, the new Taste of Tupperware, really helps transformed business.

Also in the U.S., I don't want to forget to mention that we're continuing to work on our integrated direct access initiative. It continues to be an important way to gain new consumers and get us into new groups. Right now, we're focusing on increasing the number of access points. Yes, we had a hiccup with Target, but it was the right thing to test it. And it's a tough retail environment right now. We're fairly well developed with all of the prime locations, so our real focus right now is the showcases tend to mirror the sales force size. And therefore, as our sales force and average active sales force grow, then you're going to see distributor profitability increase and at the same time, they will be able to invest in more showcases.

So this, I want to make sure you understand it, it is still a very important strategy to us and it has helped us brand build and move his brand up from number 24 I think we were at the beginning of the '90s to number 11 by the mid '90s to now the number 2 most respected consumer brand. We're not irrelevant anymore.

Let me now turn to Asia-Pacific. We had there a nice profit improvement in this region, in spite of a sales decline and we did this primarily through cost structure changes in Korea and better capacity utilization in the Philippines. Also, both of these markets had a sequential sales improvement in the first and second quarter. Additionally, Malaysia, Singapore, China and India, they continue to perform quite well. As a group by the way, the emerging markets of China, India and Indonesia contributed about 16 percent of the area's sales for the quarter. I might highlight too China, where we are now, we have 1100 retail storefronts, on the way to 1500 by year end. And we are very pleased also with the penetration of BeautiControl in Asia. Our beachhead market is really Malaysia/Singapore and their BeautiControl sales contribution grew to 13 percent of sales in the quarter, compared to 11 percent last quarter and only 6 percent in the second quarter of last year. So lots of progress there.

The real drag in Asia Pacific is our largest market, Japan. And some of you may be wondering, the economy there in Japan is really starting to show signs of life for the first time in a decade. There has been about three quarters of growth, real growth, there and some estimate it could grow by 3 to 5 percent, the Japanese economy. So you might be wondering why are we experiencing sales and profit declines. Well, frankly, it was a decision we took and we think it was the right one. This past year after much analysis, we decided that to really take advantage of this dynamic direct sales marketplace, we had to refocus our business there to more of a party-centered business featuring Tupperware products at the core of it and away from these third-party sourced big-ticket items, which often, they were hit or miss for us. And we could not tell whether we, as a public company, we would have a good quarter or a bad because you could not tell on the take.

We've also modified our sales force approach, we're in the early stages of it, to really attempt to attract more committed sellers and less -- shift this away from the buyer's club that we saw our Japanese business was turning into. So I guess what it's important for you to know is these declines are not a surprise to us. It's a result of the intentional shifts that we have taken and the decisions we have made and it caused some disruption during this transition. Japan, importantly, is the world's number two direct sales marketplace. And, frankly, we look around the table this year and we said we have got to get a bigger share of that market. The brand is loved, it's a good learning opportunity. So we made the decision six months ago to change the approach and also to install one of our world's best country managers, who really was country manager of the year of the country that for three of the past five years was our country of the year. And so we expect -- she has installed now, been there six months, has a track on what the strategy is going to be, has built the relationships, made the management changes. So we expect these declines in Japan to continue throughout the rest of this year, flat trends through 2005, but we are anxious to see the growth start to come in 2006 at rates that we really have not seen for a decade in Japan.

The only other soft spot in the Pacific Rim is really Indonesia, which over the short-term, has had some declining sales force size connectivity issues. However, the good news there is at quarter-end, we're starting to see some sequential improvement. Overall for the Pacific Rim, we are pleased with the performance for most of our markets there and also our progress in beauty. And we expect to, for the region, it's going to for the full year, have a decrease in sales and profit. But mostly business this is as a result of the actions which are fairly decisive that we're taking in Japan. Yet, this is an extremely profitable area of the world for us and an important place for growth. We believe Japan is worth making these changes for.

Let me turn to Latin America. There, we continue to see positive comparisons in both sales and profit for the third quarter in a row. Mexico, which is our largest market in Latin America, made nice progress in sales to consumers and even more on improving its cost structure and to achieve strong profit growth. Additionally, one measure of growth in a market is how profitable are distributors, and we have seen a dramatic growth in the level of distributor profitability this past year in Mexico. Additionally, our next two important markets -- Venezuela and Brazil -- have made improvements in both pricing and cost structures, leading to nice increases in sales and profits.

I might add too that the sales contribution from BeautiControl products in Mexico continues to grow. It provided 11 percent of our sales, compared to 9 percent last quarter and 6 percent in the same quarter last year. And we are working our way toward our goal in five years is to have half our sales there at least come from beauty. In the quarter, 70 percent of all orders in Mexico contained BeautiControl products, which is a sign that we're continuing to integrate beauty into our core business. And it's an important factor for gaining market share in Mexico.

We're also beginning to make progress on our plans to expand more aggressively beauty into other Latin American markets, including Brazil and Venezuela. Another potential market we're considering down the road is Argentina, but we want to have a measured approach here. Consistent with what we said last quarter, Latin America is expected to contribute year-over-year improvement in both sales and profits.

So while I'm on beauty, let me turn to our BeautiControl business, first in North America. This has been a great strategic story. The acquisition was important. We don't think we did a particularly good job initially in explaining why we were doing, but I think a lot of people have come to understand now. It was important and it's outperforming our expectations. Sales are growing strongly in BeautiControl on North America. They are up 28 percent over last -- the same quarter last year. We made investments to rapidly expand the size of the sales force. This led to a 23 percent sales force size advantage and a 16 percent increase in the average activate. So it is quality and quantity. And this investment is now dropping rapidly to the bottom line. For the first time, we reached a double-digit ROS; it was 10 percent this quarter, compared to last year.

In BeautiControl in North America, we now have experienced, strong growth for 11 straight quarters with 10 of those quarters being double-digit growth. Let me tell you from experience in my former life in beauty and the Tupperware business, the beauty business is an easier business. Our outlook is for continued strong performance in BeautiControl. Two key elements have really contributed to that growth. The first was the investment and development of a whole new compensation kind of arrangement with sales force leaders and the reconfiguration of that sales management structure. And one element of this program was the introduction of what we call Mustang Madness, the leadership program; it has been innovative in the direct selling industry. This has enhanced the already strong tiered compensation program that existed at BeautiControl. It just refined it and enabled us to attract women, even from higher professional levels, finding this to be even more compelling. It's a greater career opportunity for more and we are so thrilled with the quality of people BeautiControl are attracting.

The second key element has been the introduction of this interactive party. At BeautiControl, it's called a Spa Escape Party and it provides women an experience that matches their needs today. More and more women are working today, more and more women today and all of us today have a more stressful environment in spite of these technology enablers that were supposed to make our life easy. And the party brings quality spa treatment to the home in an affordable way. As a matter of fact, we've had a microderm abrasion process that is less than $50 that really mirrors what would cost nearly $200 at a day spa out there. Importantly too with the Spa Escape Party, they have come up with a format that is easily replicated and we can teach someone in a couple of how to do one herself and start earning money.

In the tradition of the Corporation, BeautiControl is truly bringing high quality products to consumers. And this begins with its new skincare lines and it continues to be very innovative, even in the spa line and we're going to be introducing some new stuff at our very large sales force event in Dallas just this next month. Many more people will attend this year than last year.

Of course, when talking about BeautiControl, the real strategic importance of BeautiControl wasn't the decision to build a beauty business in the U.S. Although we love it and we're going to continue to build in this very exciting market, it really is the international expansion opportunity. We know how to recruit, train and sell in Latin America, but we simply haven't been armed with the right product lines. From our continuing success in building local country teams to coordinate with our BeautiControl teams in Dallas, we are strengthening our investment to continue this expansion into Latin America, primarily because, remember, in Latin America, $25 billion a year is spent on personal care products and 55 percent of those dollars are spent via direct selling in those categories. But also, it's going to be an important opportunity for us in Asia, primarily in markets like Malaysia, Singapore, Thailand and the Philippines. Anyway, we will keep you posted and we will probably be spending more and more time on BeautiControl as it grows even more rapidly and is a more important contributor to overall Tupperware.

Let me now turn it over to Mike, who is going to drill down into the financials and the outlook and then we will be happy to answer your questions. Michael?

Thank you, Rick. First, let me take a minute to walk through the earnings-per-share components for the quarter. As we mentioned in the release, we had 13 cents from improvements in our segment, along with another 6 cents from the combination of lower hedging costs and stronger foreign currencies compared with last year. Additionally, 2 cents came from a favorable resolution of the tax audit cycle, which was affected in the affected tax rate for the quarter. These items were offset by 3 cents of increased unallocated and interest expenses. Also, we originally anticipated 6-7 cents per share of unusual costs in the second quarter, but only incurred 1 cent. We expect an additional 4 to 5 cents to come in the third quarter. It was really the postponement of these costs and the unexpected tax benefit that caused us to exceed our previous expectations. Despite the low tax rate for the quarter, we still expect the full year rate to be 21 to 22 percent.

Turning to the balance sheet, we were pleased with the steady-state of our net debt to total capital ratio as it has remained consistent over the last couple of quarters at around 50 percent. Another area of strength in the balance sheet was continued improvement in receivables. We ended the quarter with days sales outstanding of 28, which was an improvement from 31 in June of last year. Unfortunately, we did not see the same progress in inventory due to increases primarily in Asia-Pacific and North America due to lower sales there. We're focused on reducing these stocks with the year-end goal of being in line with December 2003.

For the first half, we generated $21 million of cash from operating activities. This was approximately $20 million lower than last year, primarily due to the change in cash flow associated with hedging our inner-company loans. These types of hedges generated a cash inflow of $11 million in the second quarter of 2003 and $25 million for the whole year. We've now reduced our exposure to this item.

Other major components impacting cash flow from operating activities in the first half were on the upside, $18 million improvement in net income, offset by the outflow from inventory that I mentioned, as well as a reduction in accrued liability. This reduction in accruals was mainly from higher European bonus payouts in 2004 than 2003, sales and use tax payments and timing of promotional program costs. All of these factors related to the better results in our European business at the end of 2003 compared with the end of 2002.

Turning to the outlook for the full year, as indicated in our earnings release, our range remains the same as discussed in April at $1.28 to $1.38 per share. This outlook includes 12 cents from gains on land development, which as of July, have now all been realized and 5 to 6 cents of unusual costs, primarily for rationalizing manufacturing and other exit costs. Additionally, compared with 2003, this outlook contains 14 cents positive impact from foreign currency at current rates and 18 cents from lower hedging costs.

Turning to the quarterly outlook, the third quarter is the smallest of the year and we only expect to earn 10 percent of our second half income in this period. Note that as is our practice, we're giving this outlook on a GAAP basis and it includes 10 cents from a gain on land development and 4 to 5 cents of unusual costs from manufacturing rationalization and other exit costs. So, if we model our results on other than a GAAP basis, you need to start with the GAAP guidance we've given and adjust from there.

The cash flow outlook for 2004 in now $60 to $65 million, reflecting a reduction from 65 million communicated last quarter due to the second quarter outflow from inner-company loan hedging activity and a lack of a cash tax benefit from losses in our U.S. business. And with that, we're going to turn the call over for questions. Jennifer?

(Operator Instructions) Doug Lane, Avondale Partners.

Good morning everybody. I'll start with Mike, since you just talked about the numbers here. I noticed the tax rate was low in the quarter and there was a onetime audit settlement there. So if we were going to back that out, should we use a 22 percent kind of rate for the quarter is more the ongoing number?

Yes. I think our full year rate is still going to be in the 21 to 22 percent range. So if we hadn't had the unusual item, you would see steady for the whole year.

And when you talk 21 to 22 for full year, that includes the unusual item?

Right.

Okay. So let's just say -- so that is basically 2 cents in the quarter from the tax benefit. And so when I'm backing out non-ongoing items from the full year, I should probably include that. So I have the 12 cents on the land gains, 5 to 6 on the cost of unusual charges and then probably another 2 cents for this onetime tax settlement. Is that probably a good way to look at it?

Well, in the guidance that we gave for the unusual items, we've reflected the tax rate for those items.

But this is over and above that, right?

No, no. So if you used the 21 to 22 percent and come up with your full year number and then use guidance that we've given on the land and the unusual items, that should work for you.

Okay. I'm glad we verified that, then. Rick, you were talking about the North America Taste of Tupperware -- I just missed that number. What percentage of the parties when the reps log in -- did they check a box to say it was a Taste of Tupperware kind of party?

Yes, 30 percent, Doug. And the uptick we're getting is in the mid-single digit range and the size of the party that we're seeing when it's Taste of Tupperware because it's a less pressured selling environment, so it's better. So that is good news. But the real uptick we're getting is parties dated per party.

Did you give us that order of magnitude of how many more were a Taste of Tupperware versus --?

It moves around so much. Sometimes -- you will always want to at least have one party dated per party, or you get a declining birthrate of parties going forward. So that is when the business is at least good (ph). But sometimes it is 1.3, sometimes it is 1.5, sometimes it is 1.2. It's just moving around too much week-two-week right now to settle in. Although we know it is good, it is never below so that is the good news.

On that 30 percent, could you give us so I can see how the progression is what was that over the past couple of years? What was it for the full year?

We did not introduce this until this last year. And even if BeautiControl, it took, after a year of them doing their spa escapes, it was still right around that same level. So that's where I don't want us to get ahead of ourselves here is -- there is a whole core of sales consultants who have been with Tupperware for quite a while, a lot of the managers, that are very reluctant to change from the way they've been doing it. So most of this you really get from a lot of the new ones. We have modulated our expectations for the next year of the growth of that and most of our modeling is -- hey, if we can hold at that 30 on that and just slowly build up, then we will feel good.

Lastly on the new compensation plan, you mentioned 20 percent of distributors, but of the whole point of the -- and that's, do you consider that a conversion or a transition, I guess from the current structure over to this new compensation plan which promotes more of the business opportunity. Are you going to simultaneously offer that on any kind of a test basis to your sales force that is coming up, or is that going to be -- are you going to just use the distributor base as a test market and then offer it to your sales force on a broader basis in '05 or '06?

With the distributor, we basically have 330 distributors in the U.S. and we are taking two of our regions out there. So you really are going to have a number there that's -- 25 to 35 distributorships out there who they will be doing it throughout their whole organization. So every new person that's recruited, and so there is a geographic concentration of it. Now, however, a couple of the elements of the new compensation will be available to everybody beginning at the end of next month and that is first of all, recruiting anywhere you want in the country. And by the way, prior to this for the first fifty years at Tupperware, you lived there in Nashville, Doug, you could only recruit in your proximity. Now, from your time in New York and other places, you can recruit anywhere out there. So that will happen everywhere. But the reason that we're just concentrating on two regions with regard to the full components of compensation is we want to learn better on how to launch it. We have always had a great belief here that you design it, you implement it, you fix it and then you do that next refinement. And by the way, this is the exactly the way I did it at Avon for the compensation program. I used the Atlanta region and the Pacific region, and then we rolled with it, and so it was seamless by the time you go on the national. So I want to learn the things that we haven't taken into consideration. I want to learn it with 20 percent of the country, not with all of them. It's too much disruption.

Okay, thanks, Rick.

Thank you, Doug.

Eric Bosshard, Midwest Research.

Good morning. BeautiControl, to start with, can you give us a little sense of how big the revenues are of BeautiControl outside North America? You report the North American number, but how much of it -- is it 10 percent of total BeautiControl would be outside of North America? Can you give us any color on how big this non-U.S. business is getting?

First, when we report BeautiControl, the U.S. numbers you know don't include anything from international sales. They're included in our Tupperware business sales outside. So when we are seeing -- you're saying there's a 28 percent increase in BeautiControl, that is just our North American business and I think you probably knew that, didn't you?

Yes.

The other part of that, Michael?

Right now, Eric, it's just assuming a few million dollars in a quarter. So we're going to start going forward reporting the total BeautiControl, at least on an annual basis. But it's just a few million dollars right now.

The terminal profitability of BeautiControl, and I know there is a ton of investment we're looking at the U.S. margin. But can you give us a sense of how profitable this business ought to be? It's hard on your core business, you've got huge profitability in Europe, not much in the U.S.. 10 percent -- is that a good margin? Is the number going to ultimately end up being better than that?

Depending on the markets of the world, I think you really do. Initially, you look for low to mid-teens. But as the business gets more significant in size, you'll even see with some of the other direct sellers in the beauty business in the mid- to high-20 percent range. But that's once you have scale in market. If I had to pick a number on there, you really start to look for, once you're there three to four years in a market, at least 15 percent ROS. The mix there is going to be -- are you in (indiscernible) is it a color cosmetics business, which has lower gross margins; is it a fragrance business, which has margins in the 75 to 85, or a skincare, which has the same kind of 75 to 85 gross margins. And it's interesting, why we're going a little bit slow in Latin America, Eric, is the beauty business for BeautiControl in North America started out as color cosmetics. Now, we are shifting it more to skincare and into the spa. In Latin America, it's a color business and a fragrance business. So we're really having to tiptoe in to get the palate the right way and we have had to create all-new fragrances for down there. But once we get that established, then we can really start to grow with it.

The second question, Mike, on cash flow. Can you just help us explain -- I guess I look at two things. First all, that net income is up 50 or 100 percent year-over-year and cash flow's down 50 percent, and then also the reduction in cash flow guidance. I know you explained it, I would not more color on the intercompany -- however that math works. But I would like understand a little bit better why the cash flow is trailing so far behind the net income progress?

Okay, well those are the big factors. We have a cash flow impact on those intercompany loan hedges, and that's broken out in our numbers last year. You saw 25 million in for the year. And so we did have an $8, $9 million outflow in the first half this year. We have taken out some of that volatility, so we should not have as much going forward. So that is one impact. And then I mentioned the accrual item, and that had to do again with what we had on the books to be paid at the end of 2002 that got paid in 2003 and then the end of 2003 paid in 2004 as the business got better, mainly in Europe.

Last question, Rick. The negative Europe revenues in the quarter, first negative revenues we've seen since, at least on my model, the fourth quarter of 2000. I know you mention B-to-B, but can you give a little bit more color on the momentum in Europe in Q2 and then the momentum into the second half of the year?

Yes, I think the momentum continues strong in Europe, relative to what it has been. I have not seen a change in momentum there. The big issue -- we had a huge increase in previous quarters because we had easier comps and we're now starting to lap ourselves on some of those comps. And when you couple that with these business-to-business. Particularly, we had one in Germany and one in Austria -- we asked our management teams in those markets to slow down on some of those business-to-business because then you start having a target impact that, hey wait a minute, I see these co-packs (ph) in this store of Tupperware products. You can't do it too often out there. So that is why that causes these spotty, choppy comparisons out there. But generally, momentum is good in Europe.

One last question. Mike, can you clarify -- the third quarter earnings guidance is kind of confusing. I understand how it reads, but I guess when I'm done with the math, I sort of feel like you're saying on an operating basis, it made 1 or 2 cents in the quarter. Is that the way to end, or do you want to walk us through how you get to where we are supposed to get to?

Yes. Since we have to give the guidance on a GAAP basis, if you start with whatever you like for the full year, the middle of our range is $1.33, and then back out the 65 cents from the first half that we actually earned, you're left with 68 cents. And we were guiding 10 percent of that. And then noted the unusual items in the third quarter. So 10 cents up from the land. And we've au realized that in July. And then 4 to 5 cents of unusual costs, that's the cost of manufacturing rationalization.

So I guess 10 percent of 68 cents is about 7 cents, and then the net gains are 5 or 6 cents. So I guess my math of an operating number of 1 to 2 cents is sort of what you would come to in a non-GAAP basis? I guess when I look at that number, it's not meaningfully different than what you made in the third quarter last year. And I know this business makes all its money in the fourth quarter. But should we interpret anything about what this means about the Q3 outlook, or is there something going on in Q3 that keeps the earnings number at that rate, which looks okay relative to last year, but third quarter historically, you made more money than that?

It is our smallest quarter, and so I think you take that into account and some of the things we're working on still in the U.S. to get that turned around, and then the trends you've seen in the other markets.

Is the U.S. the biggest explanation of that? Because historically, you had always made 6, 7, 8 cents in the third quarter.

I think if you look back in history and where we are with the U.S. business right now, that is a factor. And then in Asia-Pacific, particularly Japan, we've had some weakness and we talked but what we're working on there.

Thank you.

Budd Bugatch, Raymond James.

Good morning. Let me ask you a couple of questions, try to go a little bit more into this B-to-B issue. Can you quantify it, Rick, what the impact was in the second quarter? And is there an impact in the third and fourth quarters as well?

We generally don't break out business-to-business. Usually for the partner that we do these businesses with generally does not want us to. But I mean I can tell you, with our Austrian business, it was substantial because it was a big one this last year and we did not do it again.

That was in the second quarter last year?

Yes. We had a high number in the second last year, in terms of -- I mean frame of reference, we were we said without FX, we were down 4.5 million or so in sales or so and the B-to-B was the cause of that.

So we have the same thing? Do we have anything like that in the third and fourth quarter?

We have not given separate guidance on B-to-B, but there are some B-to-Bs planned this year in the second half, and so overall for the year, B-to-B will probably be lower in Europe. But there is some shifting between quarters as well.

But you do have some B-to-B planned this year that you did not have last?

Well, they're with different partners and in different places all of the time.

I think the comps there, Budd, though, it's modest focus on B-to-B this year in Europe. So expect less this year than last year.

Lets go just back to Taste of Tupperware. I think I remember at the end of the second quarter, at the end of the first quarter, it was like 20 percent for using Taste of Tupperware -- was that the right number?

Somewhere in that range. But Budd, that's what we qualified too, though. This is a self-reporting, and there is no way to check it. So we view it directionally as correct, but still, there is a mush factor to it, but that still was in the low 20 percent range.

Okay. But you do track it month to month, and I would think --.

No, weekly. With every order that comes in, it's tracked.

Okay. And where was it at the beginning of the quarter and where was it at the end of the quarter?

Budd, that's up about 10 points for this. But at the same time, I have to say from our experience with BeautiControl, I guess I would be mildly disappointed if it was 20 percent at the end of the third quarter, but I don't put a lot of credibility behind it, it's actually 30 percent. We may have some people reporting it who are really not holding Taste of Tupperware. I will tell you, Budd, I was in February and (indiscernible) our Australian businesses and they said that's what they were doing. And I went out on some of them, and all they were cooking presentations the old way and they thought that was a Taste of Tupperware. So I don't want to kid ourselves or you on it. Directionally, it's gaining more and more traction and we never hear anything negative about it.

Do you believe, by the way, that the U.S. will be profitable again by year-end, as we look at that on a quarterly run rate? You have the loss I think in the first quarter -- second quarter over the first quarter. Do we do that again in the third quarter and do we get profitable by the end of the fourth?

You have the numbers of what now, for the first half of the year and we gave the range of this year. We expect to lose pretty much what we lost last year in the U.S., even in spite of taking out 15 million in costs. And obviously, that is a reflection of the model that there is a declining sales base.

But my question again is, by the fourth quarter, you should just be breakeven, if not profitable?

It gets close to that if you work it out.

I have done that. Let me ask a couple of other questions. The new compensation plan that you're launching in September, is there any cost impact to that?

It is a modest, the impact. Most of the new compensation plan is -- we pay out richly right now, as far as our value chain and what is allocated to the field and in promotions, and it really, it's a redeployment and restructuring of how the money -- very little of our compensation these days is for developing leaders out there. And so we are redeploying that. We are talking more in the neighborhood of, to launch this kind of a thing, in the $2, $3, $4 million area.

And lastly, just a couple of issues on the cash flow. CapEx for the first half is up about $3 million or almost $3 million year-over-year, and yet I think the manufacturing rationalization plan, I thought the CapEx would actually be coming down.

The guidance that we gave in April actually for the full year was 48 to 53 million, and we're not really changing that. And the manufacturing rationalization over time, what we think we're getting is more flexibility and avoiding having to escalate capital expenditures later, but we don't necessarily see a large reduction. A lot of the spending that we do, as you know, is for molds and we will continue to build molds, even if we are having a others manufacture it for us.

So as you look forward, then you still have another nearly $30 million to spend for the balance of this year, and no change in that?

Right. We have not changed our guidance on that.

And depreciation for the year, then, would be about 50 million?

We don't give guidance on that, but obviously, you see what we have for the first half and that would move around more slowly anyway.

So we're still spending more -- just about equal to depreciation on CapEx for the year. And I'm just making sure I'm right on that. Is the something we should expect going forward continuing, Mike?

Yes. I mean, we haven't done our planning for next year, but I don't think we're going to see a big swing in capital. A little bit of what we're doing this year, which does relate to things we need to do for land development, so it's kind of an outflow for a short period of time and then we sell later. So that has a little bit of an impact.

And the land proceeds will show up in the third quarter, is that right?

Yes.

Thank you very much.

Rommel Dionisio, Roth Capital Partners.

Good morning. Rick, could you talk about some of the pricing trends that we've seen? Obviously, you've been seeing some local currency sales declines in markets like Europe, Asia-Pacific and Latin America, that improve profitability. So I wondered if you could walk through for those three particular markets, what you might be seeing, in terms of pricing trends?

We have continued, Rommel, to really stick with a price really to inflation in those markets and we have been steady with that. So there has not been anything happen there in a more unique way. Mike, you might comment and even drill down even further where have been changes.

Yes, (technical difficulty) slight increases in those markets, and that's part of the benefit in Latin America.

That was catch-up.

Exactly.

Okay, thank you very much.

As a matter of fact, every time we deprive profit plans with our markets, we spend -- one of the components is what they're pricing is going to be. And generally, by the way, when we do price increases, it usually isn't across the board, it is more strategically to where we think we came get it. And so when you blend it back in. For example, when we launch a unique product, we will try to get a lot of margin on that and products that have been out quite a while that become more well known and soft. That is where you try to get more competitive. But blended, we try to price to inflation.

Thanks, Rick.

Michael Lewis, JL Advisors.

Good morning. Could you talk about working capital in the third quarter? What would you expect that to look like?

I think we're happy with what we're doing with the receivables, and so we were better in the first quarter and the second there and so we'll look to try and continue that trend there. The payables and accruals, it's somewhat based on the time of the year, and then we had the thing we talked about with an outflow in Europe because of the better results at the end of 2003. So that would not really change. And then on inventory as we work through the rest of the year, we'll be looking to try and make our goal of going back in line with where we were at the end of 2003. So I don't think we're going to get a separate outlook on just the third quarter, though.

Well, will it be a source or a use in the third quarter? Net-net, working capital, source or a use?

We're not going to give that kind of specific guidance.

Well, when you look at your third quarter guidance then, going back to a question a couple of minutes ago, absent working capital, if you have net income you're guiding for around $4 million, CapEx, plus depreciation, working capital makes a huge swing factor, whether or not you are the accuser of cash or only a moderate user of cash. And I guess my question is -- pre the dividend, how are we supposed to look at the funding of the dividend? Is there anyway the cash flow needs in the third quarter can make us comfortable with that dividend?

Sure. I don't think we see any risk with the dividend. We --.

Can you quantify that statement, though? Can you help us walk through the numbers?

Sure. We have a $150 million revolving credit facility and we have nothing outstanding at the end of the second quarter.

So do you see needing to draw on that $150 million line to pay the dividend?

Again, I'm not going to go that deep into it. But I think if you look back over the last several years, we have had had an outflow in cash in the third quarter. Our biggest cash flow generating quarter is normally the fourth quarter.

So we should expect to see your line of credit be drawn down at the end of the third quarter, be drawn on at the end of the third quarter?

We're just not going to get any more specific than that.

Next question.

Rob Schwartz, JL Advisors.

Hi, guys. Just to go back on those previous questions about Europe, when we're looking at the back half story, given the change in the B-to-B strategy, should we look at Europe as more of a margin story or do you expect it topline to be positive in the back half as well?

First, Rob, there's not a change in our B-to-B strategy. You don't drive B-to-B every quarter, it undermines the core business. So you know, continuing -- no, we're looking to grow in our European businesses. The contribution is more and more shifting to Eastern European markets for the growth side of the business. But for the steady high ROS, we're getting that from the Western European markets. So I don't believe you're going to see us be able to maintain 23 percent ROS always going forward, but we're looking for 20 percent ROS.

Okay, so year-over-year, we should continue to see some margin improvement and you hope to see European sales, ex-currency, be positive in the back half as well?

Yes. The guidance we gave for Europe as a segment was for an increase in both sales and profit for the year. But we're not giving guidance by quarter, by segment.

Okay, thank you.

At this time, I'm showing we have no further questions. Mr. Goings, I'd like to turn the call back over to you for any additional or closing remarks.

Everybody, thanks for your time. You know, it becomes impossible, you make the commitment, you don't want to give any guidance through quarters, but it's almost impossible to leave people out there working on models without giving some kind of direction. So we hope we gave you enough directionally. But I think the important news from us is there has been no surprises this quarter from our end. Business is operating as we expect it to. And most of the problems, we see solutions to those. We have to right people in the right markets, we feel very good about the strategies, we're taking advantage of growth in the future. So thank you very much and we appreciate your time and interest.

Once again, ladies and gentlemen, that does conclude today's conference. We appreciate your participation and you may now disconnect.