Tupperware Brands Corp (TUP) 2004 Q3 法說會逐字稿

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

Yes, good morning, everyone. I'm joined this morning by Michael Poteshman, our Chief Financial Officer and Jane Garrard, our Vice President of Investor Relations.

As some of the discussion will involve the future outlook of our business, I refer you, as always, to the Company's position on forward-looking statements as it appears in our recent press release and in our SEC filings.

The third-quarter results came in ahead of our expectations. The continued improvement in segment profitability is also worth noting. We saw operating profit improvement in every area except North America, and there, we are working diligently to improve the situation. The head count reductions we announced in late September is a step in that direction, but we will amplify on that subject a little later.

As usual, I'll discuss each of the segments then I'll turn it over to Mike, who will discuss more on the P&L balance sheet. And we will get a little bit into the outlook going forward.

This morning, let me first turn to our BeautiControl business today. We're pleased with the progress we're making in this business. In North America, our success in this business is a prime example how direct selling can gain momentum when the right levers are in place. And for us, we believe those levers are a combination of the competitive earning opportunity, a contemporized party and high-quality products.

Shortly after acquiring BeautiControl in October of 2000, we focused first on the number of field sales leaders that we had by really enhancing the overall promotion of the multi-tiered earnings opportunity that we already had in place their. Additionally, we created a new party called a Spa Escape to take advantage of day spa trends and the growing pressure, particularly on working women. This has been a key driver in the number of parties and the recruits that we've been able to add.

Along with this, we introduced many new products. One -- microderm abrasion, which is really an affordable alternative to expensive treatments. We launched a complete new spa line called Therma Del Sol. And individual products were launched as well. We created a product called Line Reversal wrinkle cream, which is really BeautiControl's answer to a Botox treatment. Anyway, all of these levers working together have led to record recruiting, sales force size advantage; and what we're seeing now is explosive growth and consistent growth in BeautiControl.

Our BeautiControl North America business finished a quarter with over 94,000 sellers, which is a record high. Additionally, we now have the highest number of directors there, ever. Directors are the top level of the field sales force. And by the way, I'm also pleased to report -- we report this in a monthly magazine to the sales force -- the earnings levels of these directors -- a growing number are earning more than 10,000, 20,000, 30,000 per month, and more. So it really is helping to attract even a sharper group of candidates. The record sales force size and the leadership count has resulted in sales growth of 26 percent in the third quarter and 24 percent year-to-date for the entire North American BeautiControl business.

It is also important to note a continuing rise in the return on sales at BeautiControl North America, with segment profit being up over more than 100 percent from last year. We're pleased, too, with the results of BeautiControl North America in that it's a launching pad for our international beauty expansion. That was the prime reason for acquiring BeautiControl, to leverage it elsewhere in the world, particularly Latin American. Currently, BeautiControl worldwide represents 12 percent of the Company's sales in the third quarter.

Additionally, it should be a prime example of the strength of direct selling in the United States with the right business model. And this probably would be an appropriate segue to now turn to Tupperware's North America business.

As you all know, we've been working diligently for more than a few years to contemporize that business model, and we're confident we're on the right path. We did see some improvement in the average active sales force trend in our Tupperware U.S. business this quarter from a 24 percent decline in the second quarter to an 11 percent decline in the third quarter. However, we were unable to convert this into a comparable sales improvement due to weaker productivity.

We are pleased to report that we initiated the launch of the new U.S. compensation plan this quarter to approximately 20 percent of our distributors, and our plans now call for a an entire rollout sometime in late 2005. We've had, we're pleased to report, strong acceptance of the new multi-tiered compensation plan. It's very similar to our BeautiControl plan. It provides a powerful earning opportunity when one actively recruits and holds parties. It also gives the sales force, importantly, the ability to self-promote to higher levels in the organization, and it also provides the benefit of lifetime royalties on one's downline.

As we've indicated before, over 80 percent of the direct sellers in the United States are utilizing a multi-tiered compensation model, and we've needed to make this change for years now to become competitive. But there were many other things we had to do before we could finally make that change in Tupperware U.S.

As I also discussed in my comments on BeautiControl, we've focused on three main levers to grow that BeautiControl business -- the competitive earnings opportunity, an interactive party, and high-quality, innovative products. The formula is quite simply the same to get Tupperware's U.S. business on the grow. However, this is a transition and it's going to take time. As we previously stated, we don't really expect positive year-over-year comps in sales force stats or sales until the latter part of 2005. We will continue in the interim, though, to align our value chain with the current sales level. And many of the actions we have been taking recently will pay off more fully in 2005. As stated in today's release, we are expecting our 2004 loss in our Tupperware U.S. business segment to be greater than last year.

Regarding integrated direct access in the United States, it does continue as an important way to gain access to new customers and new recruits. The fourth quarter is an important time for this initiative, as we capitalize, particularly on showcases during the holiday season. We'll update you on specific results that we achieve when we do our January release. We do, however, anticipate fewer mall showcase locations this year due to -- than we did last year -- due to a smaller sales force that we have, the increasing rent that we're seeing, particularly with many of the A-malls, and the pressure, as a result of lower sales, on distributor cash flow. But again, I want to reiterate, showcases, along with the Internet and QVC, are important venues. And these three legs continue to generate about 10 percent of our North American sales. But again, they lead us to new customer pools, who we can convert to parties and to new recruits.

Let me now turn to Europe, Africa, Middle East. We continue to be pleased here with the sales force size and average active sales force advantage we have there, which led to a local currency increase in sales of 1 percent this quarter. Consistent with last quarter, the sales increase did not near the average active sales force advantage due to the lower productivity from a sales mix shift from Western Europe to Eastern Europe, where the per capita GDP is lower and the party average is much lower. It also was impacted by fewer parties for active sellers in some of our Western markets.

Regarding our important German business, the economic conditions there continue to compress consumer spending, which more recently has made it a little bit more difficult for us to date parties, even for our top sellers. Fewer parties have impacted the size of the sales force as parties are, again, a key source of recruits. To mitigate this, we've enhanced our recruiting promotions, and our focus has really been in getting the activity levels up, of our top managers. Importantly, we still expect to retain a 20 percent plus ROS in Europe for the full-year 2004, even with these investments. And this really is coming out of the benefits we're gaining from prior cost reductions. And I think our management team over there has done a fine job of gross margin management. Full-year currency sales for Europe are expected to be somewhat flattish.

Overall, the European portfolio performed well in the quarter. We had a sales and profit growth in three regions other than Germany. Germany, we count as one region because of its size. Two of the other three regions were up double-digits. We were particularly pleased with trends also in France. It's a large business. We're the largest direct seller there, where earlier this year, we installed a new managing director, who was proven. And they've done a great job implementing strategies which have increased the sales force size and their activity.

Also, we're seeing very nice growth in southern Africa, the Nordics, which is for us -- it's five countries. For Russia -- I visited some of those businesses last month. These contributed very strong year-over-year improvements in both sales and profit. Our emerging markets of Russia, Turkey, and Poland in Europe contributed 5 percent of Europe's overall sales.

Turning to Asia-Pacific, overall sales and profits were slightly ahead of our expectations in July. Sales were down, though, compared with prior year, due primarily to Japan. However, for the entire area, profit was up due to the improved value chain management in a number of our markets.

Regarding Japan, it's our largest market in the Pacific Rim. We, intentionally, at the beginning of this year, embarked on an important transition to move the business to more of a Party Plan selling system. It had migrated to somewhat of a buyer/selling business. We expect continued sales declines through 2004, flatter sales in 2005, while we go through this transition. Importantly, it is the second largest direct selling market in the world, and we want to more fully participate in it. We've installed one of our best managing directors to run the market. And we believe the focus on fundamentals of the opportunity, the Tupperware Party, and products, supported by, really, intense training of the sales force, will put us in better position to do that.

Regarding the Asia-Pacific middle markets, we had a modest sales decline in Australia in the quarter, very modest, but it contributed higher profit. It's a strong business for us and very profitable. Malaysia/Singapore had sales and profits decline, mostly due to competitive pressures from other direct sellers. But we were pleased to see that Korea and the Philippines, both who were problem markets over the last several years, had very nice progress again this quarter, with positive year-over-year comps in both sales and profits.

If I turn to the emerging markets of China, India, Indonesia -- they contributed about 20 percent of the Pacific Rim's sales during the quarter. We've seen triple-digit growth, particularly in China while Indonesia has been struggling recently with some issues concerning the sales force size and activity.

A word about the pending legislation in China concerning direct selling -- it is anticipated now that the ban will be lifted sometime in 2005. However, we expect it's going to take some time before the government gets comfortable with just what is the approved direct selling structure. In the interim, we're not sitting on our hands. We've planned to continue to expand our business there through storefronts, as we're now doing, ending the quarter here in the third quarter with over 1200 storefronts in approximately 200 cities. And we're adding about 70 new storefronts per month. We don't break out individual sales. But China is growing nicely. We plan to leverage this important network when selling methods become liberalized in China. And it's not unreasonable to assume that the shops, in addition to the functioning as retail outlets, will double up as a important support platform for independent consultants, who will work out of the storefronts. It's been a worthwhile brand-building exercise putting these shops all over China.

By the way, a word about BeautiControl products in the Pacific -- we're going to be focusing there, particularly with Singapore and Malaysia and sales there for Beauti grew 36 percent on the same quarter last year. A little later this next year, we will be also launching in the Philippines with BeautiControl.

Our outlook for 2004 in Asia-Pacific is still a modest decrease in sales, but most of that coming right out of Japan, and it's intentional as we shift to more of a selling business. But we think for overall Asia-Pacific, you'll see an improvement in profit due to the cost-structure changes made in several of our markets.

Latin America -- we continue to see sales and profits improvements in most of our major markets there. Mexico, our largest market, had an average active sales force size advantage this quarter. For the first time this year, we are pleased with the progress we're seeing and the strengthening there of the sales force, as well as the expansion of Beauti. Beauti sales, by the way, in local currency in Mexico increased to 11 percent during the quarter compared to last year.

Improvements, by the way, in sales mix and cost structure in Mexico, as well as better pricing and lower-cost in Venezuela and Brazil, have resulted in profit improvements ahead of our sales improvements.

The full-year expectation for Latin America is for improvement in sales and even greater improvement in profits. And we've been seeing this happen through the third quarter. Mike, let me turn it over to you to discuss a little more about the financials, and then we'll open it up to questions. Michael?

Thank you, Rick. First, let me take a minute to walk through the earnings per share components for the quarter. As mentioned in the release, we earned 22 cents per share, which translated to 13 cents after excluding gains on land development and reengineering costs compared with breakeven last year. The quarter included 10 cents from higher profit in our segments and we were very pleased with this contribution, as we made value chain improvements in many of our markets around the world.

Additionally, the quarter included 2 cents from stronger foreign currencies and lower hedging costs, and 1 cent from interest. These items were offset by 3 cents of increased unallocated costs, primarily due to an increase in fees to implement and comply with the requirements of Sarbanes-Oxley. The quarter also included 3 cents positive impact from the net revolution of tax contingencies, reflected in the effective tax rate. The full-year tax rate is expected to be 18 to 19 percent.

Turning to the balance sheet, we ended the quarter with a net debt to total capital ratio of 51 percent, which was consistent with where we've been the last few quarters. As we talked about when we had our second-quarter earnings release, we're currently in the process of negotiating a new $150 million revolving credit facility to replace the one that will expire next April. We've received preliminary commitments in excess of $150 million target subject to agreement on documentation. We expect that the covenants and restrictions in the new agreement will allow a similar borrowing and dividend paying flexibility as under our current facility.

Turning to working capital and cash flow, our good receivables management continued with days sales outstanding improving from 37 last year to 34 this year. Our inventory level remains above where we'd like it, although we did make modest progress in the quarter in closing the days-on-hand gap versus last year. We expect to be able to bring inventory closer to the 2003 amount by year-end. The expectation for cash flows before financing activities in 2004 remains at 60 to $65 million, which includes capital expenditures in the range of 48 to 53 million.

Turning to the outlook for the full-year, as indicated in our earnings release, we narrowed our range to $1.30 to $1.35 per share. The high end of this range is 3 cents below the high end we gave in July due to weaker foreign currency. This outlook includes 13 cents from gains on land development, which has all been realized, and 6 cents of reengineering and impairment charges. Additionally, compared with 2003, this outlook contains 11 cents positive impact from foreign currency at current rates and 18 cents from lower hedging costs. We're in the process of preparing our operating plans for 2005 and plan to communicate initial full-year 2005 guidance in the first half of December.

Finally, many of you have asked about the impact of higher resin costs on our margins. Approximately 20 percent of our cost of goods sold is from resin-based raw materials, and we're working to mitigate the impact of higher costs in a variety of ways. These include global vendor negotiations, evaluating our sales mix, increasing prices in line with consumer inflation, and manufacturing efficiencies. It's clear that if crude oil and natural gas prices remain at their current levels or increase further that there will be some impact on our financial results. This has been factored into our 2004 guidance and will be taken into account in setting our 2005 guidance as well. And with that, we're going to turn the call over for questions.

Thank you. (Operator Instructions). We'll go first to Eric Bosshard at Midwest Research.

The progress on BeautiControl has been impressive. Can you talk a little bit about the margin potential in this business? And within the margin today, is there some and what the magnitude of the investment is still in that business?

Yes, Eric. Firstly, it depends by markets of the world what you can expect on ROS. And I'm saying this from my former life at Avon. In the U.S., it's more of a price value market, and the expectation is to be about a 15 percent ROS business.

However, as you get into the Latin American businesses there, you can expect it to move much more to a 25 percent business. The lowest gross margin category is really colored lip and nail color cosmetics. The highest is really skin care and fragrance. And you have much more of the ability in Latin America to do more with regard to fragrance.

The investment right now in the U.S. has really been on getting out the -- to re-promote the earning opportunity there. Our top person, by the way, and again, we publish this every month in their magazine -- our top field sales leader last month made over $60,000. And we didn't change the compensation value chain. What we launched within six months after acquisition was a program called Mustang Madness, where that, actually now, your a BeautiControl sales director -- if you become a director within 18 months, you get a free red Mustang convertible. As that's spread over a growing number of directors, the cost of it goes down, but we're on track. As a matter of fact, we're a little ahead of schedule with regard to -- Michael, what did we get up to? 11 percent ROS?

We were just over 10 in the second quarter. The third quarter is a little bit smaller of a quarter, so we were in the single digits -- 7 or 8.

Yes, but Eric, we've been pleased with the progress there.

Secondly, in terms of Europe margins, the guidance for 4Q and your comments on Germany, I'd like some more color on the direction of margins from this point. You seem confident the strength in the first three quarters will keep you above 20 for the year. But am I right that we will see some margin contraction in 4Q? And with the momentum in the business, what happens with Europe margins as we start to think about '05?

Well, Eric, we do think we're going to make some investment in Germany that we've talked about, and so that will have some impact. But we do think that we're going to still be able to stay at over 20 percent for the full-year like we said.

As we look at the 2005, you know, we're hopeful that what we're doing now is going to help us with the sales force. And we already have an advantage -- but to be able to build on that. And then we will go from there. There is the raw materials side as well, and we're working on the things that we talked about to try and make that come out the right way.

Okay, and then the last question, Mike, while I have you -- in terms of the doubtful account reserve, it looked like it moved to your benefit about $7 million in the quarter. Can you provide some color behind that and the earnings contribution of that and sort of what that should do going forward?

Yes, when you look at that actually, our debts will clean up some of the receivables. So the reserve did go down, but so did the receivables. If you look at the net number, there wasn't really any unusual movement there. So there wasn't anything strange going through earnings. I mean we always have some provisions and so on.

So the adjustment of that number did not flow through the income statement?

Not in any significant amount. I don't -- there could've been a case here or there.

Okay. And then the last question -- in terms of reengineering, how much -- at what point are we concluded with having these sort of not in the operating or not in the GAAP numbers. At what point will these numbers just flow through the P&L and will no longer be broken out from the reported earnings -- the GAAP earnings?

Well, I mean we're always looking at ways to streamline our business. And I wouldn't say that we exclude them from the GAAP gap numbers. They're in, certainly, in the GAAP numbers, and they are just on a separate line with the reengineering and impairment charges, which are exit-type costs. So, that's why we talk about them. We do highlight them because they are lumpier than some other things.

Okay.

Yes, and Eric, we're still sitting on the 15 factories around the world. And there is a big emphasis to move to some of the lower-cost markets, and to outsource more. And so we're making progress there. But what we want to do is, particularly in some of these Western European markets, where they are very -- the cost of exit -- the social costs are so high, we really want to evolve to that rather than big charges.

Okay. Okay. Great. Thank you.

We'll now go to Budd Bugatch at Raymond James.

Good morning. This is Chris Thornsren (ph) on behalf of Budd; he's traveling right now. I have a real quick question with regard to the lower product costs you state in the release. I know that with resin costs higher, I was a little confused about that statement. Could you go into a little bit more depth as to what that means?

Sure. We talked about resins being about 20 percent of our cost of goods sold, so there's a lot of other components there. And we're continually working to improve our productivity of our machines on the floor, and we've also taken some capacity out in some of our plants, and that's been part of what we've done with the reengineering charges this year. So that concluded some things we've done in the Philippines. And there's been some reduction in the U.S. as well.

Okay. Another question I have is you mentioned you have the new compensation plan in North America. I guess you're expecting that to be rolled out to all the distributors by the end of next year. Where are you right now with that as a percentage of your distributors? And kind of what's the ramp up you're going to see? Is it going to be a little lumpy? Or is it going to be kind of smoothed out over the next couple of quarters?

No, the rollout, Chris, is really -- we rolled it out to one of our regions the first of September. Another, the first of October. So we've got right now about 20 percent of the U.S. is on it. The goal is by the end of 2005, to have the remainder of the U.S. on it. And the reason we're taking our time with that is we want to refine, first of all. But there's been some things where going to learn about it. And I don't want to gamble the whole country on it. It's not a question that it's a test. It's much more of a learning laboratory. And I'm going to have only 20 percent of the country subject to those refinements.

Secondly, we're learning a lot about how to roll it out in a less disruptive way. And I think our team has done a great job with that. As a matter of fact, we will comment at the end of every quarter on how we are doing there, but I can tell you with not much more than a month and a half under our belt, those regions are doing as well as the rest of the country. And you would, in some cases, expect a decline because of the change there. But they're really holding their own and the recruiting is very strong.

Okay. What regions are you rolled out in right now?

I think it's irrelevant. They're calls. I mean if one is called Sunsational (ph), the other is called Pioneer. Let me just tell you where they are. One is the North Central U.S., that really embraces more Chicago land up through areas of Michigan and Wisconsin. And the other takes in South areas -- Southwest -- not far West, but more of Texas. So each are areas where they pretty much replicate the rest of the country, as far as style. So we feel -- and it's from my formal life, that's where we tested things and it did well there.

Okay. Another question regarding inventories. Mike, you mentioned that inventories were a little bit above where you want it to be at the end of this quarter. You expect them to be in lines where you want them at the end of the fourth quarter. Could you go into a little bit more depth as to why inventories were higher than you liked, and what you are going to do to bring those down?

Sure. We're probably, if you were to compare with last September, we're about $10 million higher on a comparable currency basis. A lot of that is coming from Europe and having to do with the lower sales that we had in September. So it's a matter of repromoting those inventories and using them in the programs we will have in the fourth quarter. And we're always working on things like that. And we will look to bring things back towards alignment by the end of the year.

Okay. One final question here. Looking at the taxes, you said that there was a favorable net tax contingency revolution in the quarter. And just trying to get a handle on what the overall tax rate should have been. I looked at the tax rate including the land sale gains, and including the reengineering costs and it was about 8 percent. And then the tax rate that you're using when you pull those out is about 37 percent. So what is the kind of -- I just need some more insight into how that's working out here.

Well, I guess the way I would characterize that, Chris, is we've been running at a tax rate that's been in the 20 to 22 percent range for the last couple of years. And the things that are unusual in this quarter and in some of the other quarters this year are the reengineering and the land sales get a more -- a rate that's closer to the statutory rate or on the statutory rate based on what they are.

And then these contingency resolutions are really related to tax audits. And so when you close an audit, you're usually not exactly on in terms of what would you need to pay the government and so on, so you true those up. So I would say that the -- what's been normalized the last few years, has been in the low 20 range.

Okay. And you said that was 3 cents from the tax audit resolution?

In this quarter, yes.

In this quarter, okay. Alright, thank you. That's all I have.

We'll next go to Rommel Dionisio at Roth Capital.

Good morning. As you enter the fourth quarter, where you typically generate a fair amount cash, Rick, I wonder if you could just discuss, as you're looking out to your 2005 with debt to capital at about 51 percent -- I believe that was your target -- what your thoughts are in terms of how to deploy that cash -- whether it be a share buyback or paying down more debt, in terms of enhancing shareholder value going forward?

Good morning, Rommel. Right now, I think it's premature to get into that. We don't think debt is going to be the big issue until toward the end of this next year. We have shown in the past that how we'll use it is we have a 5 million share repurchase. That's one consideration. We are very committed also to our dividend. And then at the same time, we've shown though that with the right kind of direct selling model, like the BeautiControl business, that the right kind of a direct selling acquisition makes sense. We believe right now that we could probably get 3 to 4 times what we paid for BeautiControl. But we have no interest to keep getting phone calls, no interest in selling. So the usual suspects are out there on the table with regard to what we'll do with that cash.

We're reevaluating what we want with regard to our debt to total cap levels in the future. But we will get into that probably in the middle of next year. Mike, would you add anything to that?

No, I think that's right. We've also talked about, Rommel, the fact that while we have cash on the balance sheet at the end of the quarter normally, we need to have about 20 million or so in our system just because of all the places we operate. And then inter-quarter, we do, based on our characteristics right now, we do borrow significantly.

Okay, thanks very much.

We'll now go to Mimi Sokolowski at Sidoti & Co.

Thank you. Most of my questions have been answered, but I was hoping that you could collaborate a little more on how you're improving profitability for those five regions.

Okay. It is a bit of a different story on a region-by-region basis. But I guess what I would say is, we talked about over time, two-year kind of horizon, that we ought to be able to be in a mid-teen ROS environment in all of our segments, other than in Europe, where we think we can continue to be in the 20 percent plus range. And so we're at different stages in the various places. And BeautiControl North America, we've already talked a little bit about the progress we've made there this year being up over 10 percent for the first time in the second quarter and then in the smaller quarter, third quarter, being in the single digits.

We've also made a good deal of progress in both Latin American and Asia-Pacific this year, where despite a little bit lower sales in Asia-Pacific, profitability is still up. And then in Latin America, we're growing sales and profit even more quickly. And that's really respecting some of the things we've been able to do to right-size our cost structure. Also in some of our markets, we've moved to an importing structure, and that's helped to contain some of our risk on back debt. And so that's been applicable in some of our Latin markets and also in some of the European markets, and even one or two in Asia-Pacific. So that's helped us.

So, I mean, broadly, those are the things we're working on and where we think we can end up. Clearly, our biggest opportunity from a from/to point of you is our Tupperware North America business, where we have a lot of progress that we can make. But we're pleased with a lot of the cost reductions we've been able to take so far. And we're looking to improve the value chain, obviously, a lot more from where it is now. The nice thing about it is that we will have a lot of leverage in the business when we can get sales moving in the right direction just because we've been bringing down a lot of the fixed costs.

Okay. And I don't mean to needle on this, but when you talk about right-sizing the cost structure and improving the value chain, can you get any more specific on that? Give me a few examples of what those initiatives imply?

Sure. Well we had the head count reduction that we announced on September 30th in our U.S. business, which was about 35 positions or so, and 28 that were actually filled at the time. So it's things like that. We've also taken some hedging capacity out of our manufactured -- some of our manufacturing facilities. I mentioned the Philippines and the U.S., that we've done other things on the operation side over the last few years. So things like that.

But then it's also managing the mix of our product sales to see that we're doing the right things in terms of all the flexibility that we have as a direct seller with these high margins. And the amount that we do invest in promotional spending gives us a lot of flexibility as to how we're going to run the business. And we can always look at that to refine it. And if we're not making our theoretical value chain, that's one of the places we look.

Do you think you've moved one way or another on the promotional spending? Or do you think you've been shifting and reallocating more than anything else?

No, the promotional spending has been one of the things that's helped us improve our ROS this year in many of our markets.

But has it gone down or up versus last year?

Well, where it was improved, it’s helped us to go up. It helped the ROS to go up, so it's been -- sometimes constant spending on higher sales and things like that.

Okay. Thank you.

(Operator Instructions). We'll go now to Mike Carrati (ph) at Palmira (ph) Capital.

Hi, good morning. Just a clarification question. You had mentioned earlier your free cash flow guidance for the year was 60 to 65 million? Is that correct?

Right. Before financing, yes.

Okay. So that's just cash flow from operations less your CapEx of 48 to 53 million?

Yes, and it does include the land sales as well because it includes everything in the investing section.

Oh, okay. So it includes some of the onetime gains as well? From around sales?

Yes, it includes everything in those two captions.

Okay. Okay. Thank you.

And we do have a follow-up question from Eric Bosshard at Midwest Research.

A couple of follow-ups. First of all, Mike, I understand now your comment on the debt reserve in regards to just writing off the receivable and running against the reserve. The question is, do you have to reload that reserve because as a percentage of receivables, it's now materially lower? Or is there something different in the business that allows you to now run the business with a lower reserve relative to where it's been in the past?

Yet, Eric, we don't do it as a percentage of receivables or sales. We're doing it on a customer-by-customer basis, and evaluating our situation in the likelihood of collection. So there's no reason that by definition we'd have to "reload." It's a matter of looking at some of the reserves that we've had and saying the time has passed. We've taken the actions that we can. And we're certain we're not going to collect them and just taking the write-off against the reserve.

Okay. Secondly, in terms of --

Yes, Eric, Rick. Let me add, we have made a shift though in certain of the markets that we felt were higher risk. Some of the -- in the Balkans, Latin America, and those that we've shifted, more to the importer model, because we felt that just the upside wasn't worth the risk. Additionally, in businesses like the U.S., we basically, as we moved from a stocking model to a non-stocking model, it's become a cash business. So the value chain is changing on a number of our businesses from a credit standpoint.

Okay. And then secondly, you beat your third-quarter guidance by a significant margin. And the fourth-quarter guidance was effectively lower than what the consensus was (ph), you'd never really given fourth-quarter guidance. Can you talk about, I guess, the month of September or October, or what resulted in the 3Q positive surprise, and the more, I guess I'd term it moderate 4Q guidance, sort of what the difference is between those two periods, 3Q and 4Q.

Firstly, (indiscernible), Eric, with regard to 3Q, July and August don't mean much to us, and you pretty much have to, from an expectation standpoint, keep your powder dry until you get into the first couple weeks of September to see what you've got in that quarter. Because particularly with our big European businesses, they're pretty much shut down the first two months of it. So we saw enough there that it came in higher than it did. We're now already through a couple weeks of October. October is a very important month for us in the fourth quarter. We like what we see, but there's still a lot out there. So with regard to the comfort we gave, we're really not going to change that range very much right now. We took it down 3 cents based on what we've seen. But we've still got out there a series of puts and calls on the fourth quarter. Mike, would you add?

Yes, I think it reflects what we've said in both the September 30th release and now, where we've seen some weakness in the German situation, and so we're working on that. We still have a sales force size advantage there and throughout Europe, and kind of working to build it with these promotional investments.

Okay. And then the last question, Mike, you acknowledge that you've gotten more bang for your buck on promotional spending this year. And I guess I look at total sales, I'd say well you've just spent more efficiently or frugally on promotion money. But I guess what I'm interested in some feedback on, the fact that you've been able to pull back on promotional spend, and confirmation that that's a fact. Do you now have to ramp that up? Is there an impact you see in the business in terms of the cyclicality of promotional spending and where it might go from here.

Let me add comment on one thing, and then Mike, you add whatever you like. I think what we've become is a lot more effective at the diagnostics of where to apply promotions. Do you put them against the consumer to get her to a party? Do you give it on discounts to get her to not only come, but then to increase her average order? Or do you apply it against the sales force to get down to one-a-day parties and be active? I think we've become more effective as an organization at looking in each of our markets rather than just throw promotional dollars out there at each one of the sectors. And that's where we're finding a greater level of efficiency with regard to -- it's much more targeted.

For example, I can tell you right now, in a German situation, in the past, you might have seen more deep discounting from a consumer standpoint there. So you would have had margin impact on gross margin there and at the same time, you would have seen us throw it against the sales force. Almost all the promotions right now are targeted at growing that sales force number over there. And while she's selling less, getting fewer people to parties, if we can keep that advantage -- every other direct seller in Germany has significant declines over last year. We're doing better than anybody, and I think it's because that they've applied their promotions correctly.

Okay. Thank you.

(Operator Instructions). We have no other questions at this time. So Mr. Goings, I'd like to turn it back to you for any closing comments, sir.

Everybody, thanks for your time. Let me kind of what it all kind of back through the one winepress. You know, you see a stark difference here in the performance of our BeautiControl business, which we've had for three years, and the remainder of the Tupperware business. I think what it speaks to is the appropriateness, when you have the right kind of a direct selling model. But what I would hope it will also -- we certainly feel this way -- it speaks to our very positive feelings about when we get this Tupperware business model right, what it can perform like.

It's interesting. There is no big successful direct seller in Western Europe, because the traditional direct selling beauty business models don't seem to work there except for the UK and Russia, whereas nobody makes more money on direct selling than we do with our Tupperware model over there. So what I would hope you would see is us going forward, is we're going to have the appropriate models for the right markets. We think we're about 85 percent of the way through this transformation with Tupperware.

We've gone from a commodity product category to much more a Williams Sonoma category of products. We've made that change. That took years. We've rebuilt the brand from being No. 24 most-respected to the second most-respected household brand name in the U.S. That's happened over the last seven years. We've gone from a stocking distributor model in the U.S., which was gut-wrenching change to now a centralized pick/pack system, that basically has taken, as I said, credit out of the mix. We've gone from a post World War II compensation structure to now a multi-tiered compensation structure and we feel good about what that model will be.

Now, we've got this big shift in Latin America to beauty. And you know, the largest direct seller in Latin America does almost 2 billion down there at a 25 percent ROS. It is a dynamic direct-selling market, and we hope now to leverage that beauty business down there, as well. Anyway, it's taking longer than we would have liked it. But it's been a big business to turn it around. But we feel we're making progress quarter by quarter, and we thank you for your patience and for your continued investment.

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