Tupperware Brands Corp (TUP) 2004 Q4 法說會逐字稿

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

Yes, thank you and good morning everyone. I'm joined this morning by Mike Poteshman, our CFO, and Jane Garrard, our VP of Investor Relations.

As all of you know, some of the discussions this morning will involve the future outlook of our business, so I need to refer you to the Company's position on forward-looking statements as it appears in our recent press release and in SEC filings.

You know, because all of you have specific information on the quarter and the year from the release, I'm not going to take your time this morning rereading it to you. Rather, what I'd like to do is give you a top line summary and then I'll discuss briefly our progress on our strategic initiatives. Then, after some amplification by Mike on the financial performance and some additional information on the outlook, then we'll go to your questions.

Overall, I must say, on the quarter and the year, we're pleased with the progress. As always, we had a mixture of pluses and minuses. And, as you know, the key driver of a direct selling company is the growth of its average active sales force, and here we were pleased to see nice gains in Europe, Asia, and BeautiControl offset by declines, most notably in the U.S.

We were also encouraged by the improvement in operating margins in most of our five segments and Mike's going to get into that in more detail. Also achieving 94 million in cash flow is worth noting and meant that our management team really kept their eye on the balance sheet while at the same time growing the sales force and gross margins.

As always, we wish, with regard to our Tupperware business, that reporting our results was a simpler process. We were talking about that again this morning. But, as we do business in so many markets, so many different currencies, and there's so many working parts, that really leads to complexity and we're going to work very hard to put it through the wine press in the future and distill it down to easier to understand story.

Let me now make some comments briefly on the growth initiatives for Tupperware Corporation before I make more detailed remarks on how performance was in each of our business segments. Let me begin with integrated direct access, that's the other channels of distribution for Tupperware.

In the USA our Tupperware showcase sales suffered, due to both a soft retail environment, but more importantly really due to the cash flow constraints of our local distributors and their ability to support this initiative. Net/net they really had to focus on their core party plan business, so they really focused on mostly on A malls [ph]. There were fewer locations than last year, but I am pleased to report that those locations did well.

I must say also, turning to Europe, where it's another point of focus, showcase sales and number of locations were up nicely, and integrated direct access will continue to be for the Corporation an important brand-building initiative. And also it's a very low-cost way to meet stranded customers and to meet new recruits. So, it's going to continue to receive our attention.

Regarding our new product program at Tupperware, we've, we've told you that this is a real point of emphasis and there's a lot of good news for 2004. We are continuing, firstly, to achieve that target of 20 percent plus sales contribution from new products.

Now, this enables us to keep Tupperware out of the commodity price battle by using innovation at Tupperware. Really to go where competition can't go. Our new Flat Out product, as it's called here in the U.S. -- it's a product that compresses from 4-inches to flat and this makes for ease of not only storage, but transportation. You bring it to the office or school full; you bring it home flat. It's been remarkably well received. Fortune magazine, as a matter of fact, in December featured it as one of the year's top 25 most innovative products. We were also pleased that we received the same kind of award in Germany, as it received a "Product of the Year" award. And Good Housekeeping gave it their highest award as well. By the way, second year in a row we've received best product award from Good Housekeeping, and they hadn't had that happen in 20 years. There was also significant progress with regard to other products. A lot of success stories from the -- on the product innovation front. So, that's going very, very well.

Turning to another strategic initiative, the new party interactive party format here in the U.S. that's called Taste of Tupperware. We've now launched this new entertaining -- interactive approach to Tupperware parties in most of our markets outside the U.S. as well. Our experience thus far indicates that it makes the party format more of a social want-to-go occasion. Slowly but surely it's gaining traction and is being well received by the sales force. However, we know that it's going to take some years to really convert all of the sales force to this method. Even at BeautiControl, in spite of the incredible growth of that business, they still think only a third of their sales force utilizes their spa interactive approach.

Now in the U.S., with regard to Taste of Tupperware, in this new interactive party, you're going to see us stepping up and concentrating our public relations efforts to make this transition happen faster. Also, on the strategic front, let me mention a few words about our expansion into Beauty. BeautiControl's numbers speak for themselves. We've doubled that business in four years. BeautiControl's North American growth of 28 percent this year shows the terrific potential this business has, and at the same time I think it shows something we've talked about that our management team has got experience with regard to direct selling in Beauty and we can leverage that in the future.

Importantly, too, international Beauty sales grew 50 percent last year. And while it's still off a small base, together with BeautiControl North American's contribution, it means now that Beauty is 11 percent of Tupperware's total sales. And when we think about the real potential for Beauty, it's outside the U.S. in Latin America and southeast Asia. And our plan, by the way, this next year is to step up our investment in Beauty expansion to grow the business and its contribution even more significantly.

Now, let me turn my attention to a few comments on each of our operating segments, starting with our largest business: Europe. Clearly, we had the wind in our face, as everyone has for much of this segment, and most of it has to do with very, very difficult externals. Yet we finished the year with a sales force size advantage. And we also had a nice advantage from the strengthening of the Euro. But our core business, even under the strengthening of the Euro, we were pleased with progress.

Germany struggled for a good deal of the year, but we've got a terrific management team there, and a very strong well-seasoned distributor force. And they fought through that difficult environment and worked back to almost flat sales and even grew profits this past year. So they'll continue to struggle with this external environment, but I think we'll be able to hold our own.

Our strongest market in terms of sales growth for the year was Russia, which came in with very high double digit increases. Together with Turkey, Poland, the key emerging markets in Europe now have had sales growth of over 60 percent compared with 2003. Additionally, I'm pleased to say we had nice contributions from South Africa and from some growth in Nordics, particularly with their B to B [ph] business that was planned for 2004.

Going forward for 2005, we should see overall sales growth in Europe as we ended the year with a sales force size advantage.

In Germany, where I mentioned, we had a - have a terrific team in place and distributor sales force; we're going to work really hard this year to hold our own and build a sales force advantage. We do foresee, though, in Europe, making some incremental investments in promotions and in these new strategies in 2005. But even with those incremental investments, we still expect to come in with an ROS north of 20 percent.

Let me turn to the Pacific Rim. Here we have two situations to report on. One, and there's really two stories --- one is with regard to Japan and Indonesia, and the other story is the rest of the region. The Japan and Indonesia being our challenging markets.

The overall Pacific Rim line suffered because, primarily, the decline in our business in Japan. However, this was planned. As we announced in 2004, we made the decision to pretty much put a stick in the ground and transition that business from a wholesale buyer's method, whereby we've been selling a large proportion of high-priced third party source products, back more to a party plan business promoting the Tupperware earning opportunity and really focusing on selling core Tupperware products. And as we've indicated in the past, this transition is going to take time. But when you consider that Japan is the second largest direct selling market in the world, we think it's worth the trip and we have one of our strongest managing directors in the world now. She'll be coming on almost a year in that market as we approach the second quarter of this year. So we feel it's worth it and that will turn around.

Regarding Indonesia, even before the devastation of the tsunami, we already had some sales force and related sales declines. And that's been compounded by the tsunami, and we are currently, you know, in a position where we're trying to evaluate the longer term impact on Indonesia from the tsunami and the rest of the region. We've included that in the outlook, but currently we don't have any more information. And we'll let you know when we get more information.

The other situation is the remainder of the Pacific Rim. And it's very positive. The markets of Korea and the Philippines made great progress in 2004; and Australia, Malaysia, Singapore--they moved forward as well. Also the emerging markets grew 6 percent during 2004, reaching 8 percent of Asia Pacific total sales, up from 15 percent this past year. You really had dynamic growth in China by, you know, actually triple digit. It was offset by decline in Indonesia. That's why this 6 percent growth in the overall emerging markets. It was really China and India up nicely with regard to a decline in Indonesia. We still count Indonesia as a emerging market.

Regarding Beauty in Asia, we have made progress expanding Beauty, particularly in Malaysia and Singapore during this past year. And we doubled the sales contribution in that category in fact. And we expect to continue to expand Beauty in Asia. And we're also going to be more aggressive about expanding it in Philippines during 2005 as well. So, we'll be stepping up our investment there. We think that's the future of our Philippine business.

Moving to Latin America, all three of our markets there, our primary markets--Mexico, Brazil, and Venezuela--improved during the year. Brazil and Venezuela made enormous progress in improving their value chain to grow margins. And Mexico is stabilized with sales growth for the full year.

Our primary strategic focus for 2005 for Latin America, however, is the expansion of Beauty. We've said in the past, Latins spend about 800 million on the Tupperware category of products and over 25 million on personal care products. So, we're getting even more aggressive as we refine the model. Sales of Beauty in Mexico grew 50 percent in 2004, reaching 9 percent of total Mexico sales compared to 6 percent last year. By the way, we call that business there, it's Tupperware: Vida Totale [ph]. So it's for total life.

With this progress, you know, in Mexico, it was good to see, however, truly, we don't think it's happening fast enough in Mexico and that's why we're going to step up our investment in 2005 to accelerate it.

Regarding Venezuela, we launched Beauty in the fourth quarter of '04 and we're currently in Brazil going through the product registration process, and that takes some time. Anyway, given the expected growth from Beauty in 2005 we expect sales growth in Latin America, yet there's going to be some additional investment to expand Beauty, and that's going to have some effect on margin.

Let me turn to North America -- and mostly the U.S. -- there's no other way to put it. The transition to a new Tupperware here -- it's difficult and it's taking more time than any of us want, here or there. And yet I've got to say we're optimistic that we're on the right track.

The good news is that most of the transition heavy lifting is done. We have changed the distribution model. We've transformed our product line to distance ourselves from commodity plastics brand. And we have launched a new party format. All of these have taken an incredible amount time.

The last major step is really the transitioning of the North American market from an old-fashioned flat compensation structure to a multi-tiered compensation plan, with the expectation of completing this full roll-out by the end of 2005. I've got to say that early indications, we launched in the third quarter---early indications of the regions that we launched in the third quarter and who have been on it for some months tell us that we're going down the right road. Their productivity and their sales are stronger than other regions of the U.S.

We've also learned what to do and what not to do in the launch of this, and that was also one of the reasons for having a two-step approach. And we hope this is going to lead to less disruption as we roll it out to the rest of the country as we go forward this year.

So the major initiatives that will enable us to grow the U.S. business, they are in place. It's going to take time to get traction. But we believe the payoff for the new party and the compensation plan will really be there.

Along the way, we'll most likely have to make some refinements. However, I think it's important for us to repeatedly say to you that we're not sitting on our hands. We're working hard to turn around this market but it's involved, really, retooling the whole business template. But, I'll tell you, when you start with the most respected brand name in your category and the second most respected in the entire household furnishings category, we've got a lot going for that. You know, there's a lot of credibility with regard to the name Tupperware in direct selling as well.

So this is a transition year for the U.S., and as such, we don't expect any sales growth. Additionally, we still expect to see a loss in the U.S., however, we're confident we've improved the value chain; we've taken out more costs, and that the loss will be less than this last year.

Finally, let me turn to BeautiControl; it's really been our most exciting growth business this past year. And it's been a powerful earnings opportunity that's driven it; also the new Spa Escape format. It's been a record year for BeautiControl, the largest size ever, the largest sales force ever. And as indicated, this business has doubled in size since the acquisition, and we're looking at this momentum to continue.

We begin this year, BeautiControl, with 30 percent sales force size advantage, very strong momentum, and we believe the ROS in this segment can improve to double digit in 2005. Mike, let me turn it over to you to amplify on all of this. Give some outlook and then we'll open it for questions if you will.

Okay, thank you, Rick. As you saw in our release for the quarter, we came in ahead of the high end of the range we gave in December by $0.03. The up side came mainly from higher sales and profit in Europe led by Germany, with a partial off-set from higher incentive accruals.

I'd also like to take a moment to update you on how we're doing against our longer term expectations. We've said before that we foresee getting to a steady state beginning in 2007, amid single digit annual increases in local currency sales with a 10 percent pre-tax profit return on sales. For 2004, before the net positive impact of land sales and re-engineering, our pre-tax profit return on sales rose by 2 percentage points to 8, with all of our segments other than Tupperware North America contributing.

Our 2005 outlook calls for further improvement for return on sales and we believe we are on track to reach our longer-term objectives. Turning to the balance sheet and cash flow, we were very pleased with our fourth quarter employee results. For the full year, we achieved a cash inflow from receivables, inventory and payables and accruals totaling $30 million.

You may recall that mid-year we had an escalation in inventories that we said we'd look to bring back in line by the end of 2004, and we were successful in that we generated $7 million in cash flow from inventory reductions for the full year.

We did have a net $32 million increase in the balance sheet from income tax items, which reflected the U.S. loss that hasn't yet generated a cash benefit and are billed in some tax receivables. We expect to do better in 2005.

Net/net we had $94 million of cash flow before financing activities which was 8 million better than net income. Of the $94 million, about 6 million was from the net of land sales and reengineering.

As a result of our good cash flow and our increase in equity during the year, we had a significant improvement in our net debt to total capital ratio from 50 percent down to 35 percent. This positions us very well versus our debt covenant.

Turning to our outlook for all of 2005, our GAAP range remains at $1.45 to $1.55 per diluted share. Sales are still expected to increase in the mid single digits in percentage terms and to be about flat in local currency.

The earnings range continues to include $0.08 of gains from contracts related to land development and $0.04 of costs related to rationalizing manufacturing. The range includes a $0.12 per share improvement compared with 2004 from foreign currency.

As indicated in our release, the sales outlook precedes local currency increases in all segments except Tupperware North America. In terms of return on sales, we continue to foresee improvements by BeautiControl in Tupperware North America

Return on sales in Europe is expected to remain strong at over 20 percent, but to decline from 2004, reflecting higher resin costs and promotional and strategic investments.

In Asia Pacific the outlook is now for a slight decline [inaudible] as a result of a drag from Indonesia where we are seeing the biggest impact from the recent tsunami, and return on sales in Latin America is expected to be lower, reflecting spending to build the infrastructure to grow Beauty more quickly. Also included in the 2005 outlook is interest expense of 13 to $14 million and unallocated costs of 25 to $27 million.

Our outlook for 2005 earnings, excluding land sales and manufacturing rationalization costs, remain at a $1.41to $1.51 per share. Net/net this reflects an upside in pretax income offset by higher tax rate that we see at a more normalized 22 percent, up 9 points from 2004. And also the $0.12 upside from currencies.

Many of you have asked us about the impact of higher resin costs on our margins. It is clear that the high crude oil and natural gas prices are having an impact on our results and this has been factored into our outlook. Approximately 20 percent of our cost of goods sold is from resin based raw materials and we are 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.

Regarding 2005 cash flow, we expect to generate about 75 to $80 million from operating activities, net of investing activities. This reflects 55 to $60 million in capital spending and a modest increase in working capital. The increase in capital spending versus 2004 is 44 million, reflects some shift to 2005 from 2004 when our spending came in below our expectations. Stronger foreign currencies and spending related to land development in the $5 million range.

The drag from working capital is mainly from the payout of accruals for incentives, Sarbanes-Oxley cost and the fact that our year-end will end on December 31 in 2005, versus December 25 in 2004, which will mean a higher level of December payments.

I would also like to mention here that similar to what we did in 2004---in early January we entered into a series of put options on the Euro that have the effect of hedging our Euro denominated cash flows for 2005. The strike price of the puts is $1.25 to $1.26 to the Euro. So, if the Euro falls below this rate, we will be protected on the downside. The cost of these puts was 1.1 million which will flow through our income statement during the course of the year.

Some of you have asked about what we plan to do with our excess cash. While we had $91 million on the balance sheet at the end of 2004, I'd like to point out that on the one hand that we generate most of our cash in the fourth quarter each year, and on the other hand, we have significant interquarter borrowing needs, so we don't have significant cash available on a day to day basis.

Our stated objective is to continue strengthening our balance sheet until we are able to achieve investment-grade ratings from both of our agencies. At this point we are investment-grade with Moodys, but one notch below with S&P.

Looking to the first quarter of 2005, net income is expected to be $0.16 to $0.20 per share reflecting a down-side of $0.09 from reengineering and manufacturing rationalization costs associated with the decision announced on January 7th to shift a portion of our manufacturing capacity from our South Carolina plant to other plants. This includes severance costs and costs to relocate machineries outlined in our early January 8-K.

Beginning in the second quarter we expect to begin reducing the inventory that we currently carry on a LIFO basis which will result in our release of LIFO reserves. We've included this unusual benefit in the net $0.04 of reengineering and manufacturing rationalization costs that we pro formaed in our outlook.

The 2005 first quarter outlook also includes $0.03 per share upside from stronger foreign currencies compared with first quarter of 2004.

First quarter 2005 earnings per share is expected to be about flat with 2004 after excluding the reengineering and manufacturing rationalization costs from the 2005 quarter, a $0.02 gain from a land sale in the first quarter of 2004, and the favorable impact of foreign exchange.

As a reminder, the 2004 quarter also included $2.5 million of expenses in BeautiControl for an accrual related to legal matters and executive retirement costs. First quarter 2005 sales are expected to decrease slightly in local currency compared with 2004 due to current trends in North America and Japan.

And with that, we'll now turn the call over for questions.

Thank you. [Caller Instructions] Our first question comes from Eric Bosshard, Midwest Research.

Good morning. A couple of questions: First of all, starting in the U.S. on, in terms of sales and profits, when do you think you stabilize the sales line, and then secondly, what is the magnitude of profit improvement that we can see in the U.S. from the changes you have made there?

Well, we've taken -- first of all - the second part of it - we've taken a lot of the expense out, as you saw us in the fourth quarter where we announced in January, we've shifted some of our capacity from our South Carolina facility to other ones, and this really is taking out some of our fixed costs. We have trimmed down the size of the staff. We have realigned some of the regions.

All the things you would think we would do. Because the simple fact of the matter, we don't know exactly when we're going to have that big turning point in the U.S. But we've got to go through it. We just launched the transition in September with two of the regions. Now, I would hope that we had that happen, we go to a positive size sales force sometime in the second half of this year, and that we return to profitability.

Now, I clearly know it won't happen in the first half. But we've got to stay the course on this. Early reads look good.

You know, some people have asked us, too, Eric, why don't we consider some of the other things we might do with the U.S., should you close it, should you go retail? You can't do those things. We've seen the impact of closing a U.S. business when we shut down our U.K. business, the impact on sales force members around the world. If you go retail, they say, "Oh, my goodness, what are you -- are you going to do that to us?"

The main reason we're focusing on fixing this business is we believe it's a tremendous opportunity in the U.S. However, what we're dealing with is a 50-year-old compensation structure and with 500 direct sales forces in the U.S. competing for our recruits. It's a real difficult environment to do this transition.

What I'm pleased with is the thing that took years changing -- excuse me, changing distribution, changing product lines, those things we're finished with. These are the things that offer a quicker pay back. I will be disappointed if we don't have a sales increase next year in the U.S., Eric.

Next year being '06?

Yeah.

Okay, second question, in terms of Beauty in Latin America, you talked about a 50 percent increase, I think of the international business, off of a low base and U.S. business is almost growing that number off of a big base. What are you doing differently in '05 to accelerate, and significantly expand, that business outside the U.S., mainly Latin America?

A couple of things. Firstly, in Latin America, what we are doing is we're going to be launching a sales force structure that's in addition to what we – our current distribution model that puts in place recruiters out there that recruit, train, and motivate individuals who sell only Beauty. This is incremental investment, incremental effort by people, which will lead to incremental sales force members out. Pretty much this is the program that's worked very successfully in Latin America for Avon, for Sarah Lee's businesses down there and for Jafra's businesses down there. So, we're going to do that in alignment with it.

Secondly, we're going to be beefing up, we're already in the recruiting process, our staffing of individuals at our headquarters that are primarily Beauty only people.

Thirdly, what we're going to be doing there is resourcing more of our products, or sourcing more of our products in market. We made great progress this past year. Why that's important, Eric, is it means that we can get our average selling price there, while maintaining high margins, a lot lower than importing product from the U.S. to our Mexican business. And that will enable us to sell more units.

What we're pleased to see is 70 percent of all orders in Mexico include Beauty, and as a matter of fact, all catalogs, one side there say Tupperware and the other they say BeautiControl. So the reception has happened well. The other thing I would add is that in Asia Pacific we have beefed it up. We have recruited one of the strongest people in direct selling of Beauty in the Philippines to really lead that effort, and so it's going to start with that. And we've already beefed up our personnel there.

We just see that---we understand the Beauty business, it's an easier business model for those markets and we're going to be more aggressive with it now that we've refined the product line.

Okay, that's helpful. Last, a question on the first quarter. Mike, am I right in reading this, that there's a $0.09 reengineering expense in the first quarter, and I guess for the year you're saying the number is .04, so you're basically saying there's a LIFO benefit in 2Q that you're counting against that to turn the .09 in the first quarter into the .04 for the full year? Am I doing that right?

Yeah, that's basically right. The LIFO benefit would start in the second quarter and would continue as we sell down the inventory.

And so am I right that the only reengineering expense you will incur in the year is $0.09 in the first quarter?

That's the only thing we have in the outlook, that's right.

In terms of the reengineering expenses, which have been an ongoing one time expense for the last number of years, is 1Q the end of it or are we going to continue to see these one time charges take place on a quarter to quarter basis? Is there a sense of that?

Well, I think, Eric, that we see them as unusual costs, but we haven't necessarily characterized them as one time. We've talked about manufacturing rationalization and we've taken some steps there and that's a longer term process. So like we said, that's all we have in our outlook, but I don't think it's fair to say we never have any anymore.

Eric, I might add that we had a formalized reengineering program years back that had a beginning, had an end, and it was focused on about four initiatives when we finished this; however, what we did announce about three years ago is we were going to be moving the Corporation from a sourcing model, much more to a Nike model which involved a transition from 16 manufacturing facilities down to much fewer in the 5, 6, 7 range, and we're going down this road, but we're trying to go down it opportunistically.

For example, when we did it in Spain, when we did it in Japan, we didn't have huge exit costs and we didn't have to take many charges. Some of the markets where we operate, if we were more aggressive and just did it today, the cost would be ridiculous. And what we've said: we'd rather evolve to the models as people retire.

In certain European markets, you have to pay three years of salary to every employee. We said, let's be cautious about this as we evolve to it. But, I'm pleased with the progress. We've got another big one out of the way here in the U.S. in our reduction in size there. And we continue to move toward these lower costs markets. So I don't want to characterize though, this is one time, but clearly we're going down this road.

Thank you.

Thank you, Eric.

Our next question comes from Doug Lane, Avondale Partners.

Yes, hi, good morning. Can you elaborate on the change in the compensation plan in North America? How that's going and, you know, give us a little bit more impact on the metrics as far as the sales force impact, the productivity impact, and, you know, how long is this going to take the play out? Is this the kind of thing that you're going to fully implement it in '05, is it going to take a quarter, a year, two years to get fully transitioned?

Part one of that is firstly what we tried to learn, Doug, in the launch of it in two of our regions is how to launch it right so you minimize disruption and breakage. I think they've done a very good job with that. And it gives us a heightened sense of confidence that from my former life, before Tupperware, we didn't have a sales decline when we went through this kind of a shift at Avon, because we were very thoughtful in the way we made this transition. So we've got that part one I think we're dealing with.

Let me tell you, the big change, Doug, is really from a model that was really launched in 1952 where it was a multi-local business, very much like you're the local Coca-Cola bottler. Everything that happens there where you are, Doug, in Nashville, is under you. So you recruit, train and motivate a group of people, but they're all within your bottler. They all work for you. The new model that really you started seeing emerging about 15 years ago in a more concentrated way in the U.S. is everybody you recruit has the chance to be the bottler. So it has this element of self-promotion.

Also there's a shift in not only the compensation is for what you sell yourself, but that as you recruit, train and motivate a sales organization, you can actually make more money by building these cells of units of sales organizations.

And by the way, the next major element is that you can recruit anywhere, not just in Nashville. And as mobile as our society is today, you sit there and track as many different places, Doug, as most of us live in our life, most of our relationships, if anybody looks at their holiday list, they're from all over the country. With the former Tupperware model up until this last year you could only recruit locally and only work in that distributorship. So it's freeing up a lot of that. So, we feel very good about it.

By the way, it's the same kind of a business model that we had at our BeautiControl business. And, now let me tell you, we can talk to a new person at BeautiControl, tell her she can work 10 to 20 hours a week, and then within two years we have many women in her category who are making 10,000 a month working 20 hours a week. The top earners are making 60,000 a month, so it really becomes a serious business opportunity and not just a product selling opportunity. Doug, forgive the lengthy explanation, but it is a complex transition.

No, I appreciate the explanation. It sounds like what you're doing ultimately will be the right thing to do. The BeautiControl example is excellent. What I'm wondering is how painful and how long will the transition take? In other words, in the early markets, the Dallas and the middle West, have you already dismantled the distributorship model? Are those distributors now still there or are they reclassified into some other category?

Importantly on this, and we had a lot of our --- our distributors are our partners on this and we’re not dismantling any of them. They were our partners and we said, "Hey, the whole thing is, 'You can't make any more --- if we just divide the pie it doesn't work.'" How do we make the pie bigger? So they were with us as partners on how do we design this so that you can be a part of something even bigger?

So there was a wonderful transition program, so they became charter directors in this new program at an accelerated level that includes some real incentives for them and recognizes their years of service with Tupperware.

So they're a step ahead of the game and they're into it already based on what they've done in the past. What we're seeing thus far is good there. The productivity levels is higher in these areas. You have--- We’re now able to recruit much more with regard to entrepreneurs. We’re starting to see recruiting because you’re incented to recruit now. Earnings used to be temporary if you recruited somebody at Tupperware. Now, as long as you stay active and they're active, it's lifetime override on earnings. I feel good about that.

But, Doug, I’ll tell you. How painful will this be? I don't think you can make it any more painful than 30 plus million lost last year. The pain of the previous year. What we've said this year is we've got to get this value chain down and take expense out, because if it's going to take two years to make this transition, well then let's not lose a lot of money in two years, but let's make sure we've got enough infrastructure in place to support it and so that's the two tracks we've been trying to work on, Doug.

Okay, just to clarify: one quick follow-up--- As '05 is getting towards the third quarter, particularly the fourth quarter, we should look for increases in the major metrics year of the average actives and the sales? And on the profitability front, will we actually go dollar positive or just be cutting losses still at that point?

I want to get – we’ve obviously we're not flying without a net here when working without a model internally here in the U.S. But it's too soon for us to give any direction on that. I want to get a couple of quarters under my belt here.

Suffice it to say we believe we're going to have a sales decline in the U.S. this year because we're starting with a lower size sales force and we think you'll start to see improving trends in the third and fourth quarter of this year. But, just as soon as I say how come it's not going to be sooner? Because in the second quarter you're going to start to see the big transition to all the other distributorships and I certainly don't expect that to be positive, but what we want to do is minimize the breakage at that time.

I see. Okay. Thanks.

Our next question comes from Budd Bugatch of Raymond James.

Good morning Rick. Good morning, Mike.

Good morning, Budd.

Just continuing on the U.S. for a second, you were down about 31 distributors this year versus the end of last year. Can you characterize the health of your distributor partners? How do they look, and what's the likelihood for that base next year?

Yeah. First, most of the reason we're down in those distributorships is that as we, Budd, in those two big regions of the country, converted to this model, we offered our distributor partners the opportunity. Some could make the --- if they didn't want to go down this road, they could transition out, and we would honor all agreements, and some transitioned out at that period of time. It was the right thing to do, because as we -- we wanted to have the right people on the bus as we take this business forward there. So there was no other reason for the shrinkage in distributorships other than that. So then you start with--- by the way, if you characterize it, it doesn't mean we're just left with a younger group of distributors. Some of them were some of the older distributors as well who say, hey, they were very flexible and open to change.

Now, the health of the distributorships, obviously one of the best things our management team did was take out expense by changing the distributor model to break even, joined the company in 92, typical distributorship they had to do 1.2 million in sales to break even. I think the number now is, of what the average distributor sells is -- you can do the math, I think it's around $700,000. But the break even can be far, far lower than that, because often they don't have a warehouse anymore, they don't have an office anymore. They are the same kind of a model as our BeautiControl business. So it's across the board what is the help of distributorships out there. I think attitudes are very good.

I've got to say, Budd, during the transition in September on, those four months to this new plan, I didn't receive an e-mail or a phone call of complaint from one distributor about we're going down this road. Which says to me that our U.S. management team is doing an excellent job of partnering and communicating. One sign of health though, with regard to financial health -- They didn't have enough extra money to open a lot of extra show cases in the fourth quarter and I alluded to that in my prepared comments, Budd.

Yes, I understood that. When you look at the average active, BeautiControl North America is about 32,000 versus North American Tupperware at 13,000. What I'm not sure I know is the dispersion of BeautiControl North America between U.S. and non-U.S. or to other geographies. Is there an opportunity there to mingle these two?

No. And it has to do --- by the way the 32,000 for BeautiControl North America, primarily -- that is the U.S. We have next to no business in Canada. And our Mexican business is included as Tupperware Mexico. So that is our pure BeautiControl business, Budd.

By the way, to your question, can you really leverage that or commingle it? No, and that doesn't have to do with what we'd like to do, it has to do more with how consumers behave. In this country, BeautiControl is thought of as more of a brand. They're very purist. And consumers generally have rejected direct sales offerings that, where it's treated like a channel where they have multiple brands that they carry. Our BeautiControl people are specialists in the spa and in skin care and in color cosmetics. And one of the hallmarks of success of BeautiControl is incredible training. Within a month of joining BeautiControl, you've got a full weekend of training. By the way, that's some of the lessons we're learning where at Tupperware is we've got to our U.S. organization better trained as our BeautiControl business is.

When I look at just, last question on this U.S. issue, your total sales force is actually up 10,000 from third quarter to fourth quarter, if my numbers are right. Where was that centered, and what does that bode for the future?

Well, we had a burst of some recruiting and most of the real positive recruiting was in the regions where we have gone to the new compensation plan. What we're trying to get away from, Budd, is for 50 years Tupperware has been a promotionally driven recruiting organization, that we give you 40 bucks or we give you this bowl if you go out and get a recruit and it's a one shot deal.

Now with these new compensation programs, if you recruit me, we want you to not be doing it for just the hit of a one time compensation, but that you want to participate in my success. So that you get lifetime income. And early days that looks good there, but recruiting is really the answer here in this shift.

That would imply a lower turnover, then. Don't you normally turn over the sales force once a year or so?

Yeah. In the better multilevel organizations, like our BeautiControl organization, where they're not, you know, if I characterize there's another kind of multilevel like the Amway type where they are, in fact it's a wholesale buying club and over 80 percent of the sales are products that are really purchased by participants who -- but nobody really sells retail much.

BeautiControl really is a selling organization, so it is characterized by lower turnover. And then what you also get then is you don't have to spend as much on promotions for recruiting, so it leads to a better value chain. And we're expecting some improvement this year. Again, I said we hope to get double digit with BeautiControl.

Did you then say whether the turnover in the U.S. was less or more or the same as last year?

In BeautiControl?

No, in the U.S. Tupperware organization.

You know, I hadn't even looked at that number. It's high, still. We're still on a promotional recruiting model in Tupperware. And it's --- and by the way, that promotional recruiting model is fine for certain markets of the world like Europe. Multilevel doesn't work in western Europe. It's not fine for here. But we'd be happy to talk more about that as we go forward, Budd.

Okay.

Budd, you're so close to getting over here, if you'd like to -- really open to have somebody take you through the details of this new compensation program. It sounds complex, but it's simple, because it's like following a map across the country. All you have to worry about is your next turn. You don't have to worry about the rest of the country. So it's simple in what they see when they look at it. And, I think our team has done a great job there. They've simplified it beyond the BeautiControl compensation program.

Okay. A couple of questions for Mike if I could. Mike, you had mentioned an incentive accrual offset. Can you either quantify that and give us what the details might be?

It's related to our bonus programs based on our performance this year. I was just making the comment that that's part of the reason why our accruals are up.

And what were the factors that got the bonus up?

Most of our metrics are based on net income, so this doesn't include unusual items, but net income improved nicely during the year.

Does it also include the real estate gains?

No.

Okay, and in the third quarter you noted that the full year tax rate was to be 18 to 19 percent. And it came in at 14 and change. What accounted for the difference, and have you isolated what that Delta is? My guess is about $0.05 to $0.07 or something in that range.

I haven't done the calculation on this, on the EPS. But the factors that that had to do with were, some of that --- we took some actions related to this new tax law to prepare us, in the case that there's some things we should do there in terms of repatriating cash and all that.

This is the foreign tax impact of that?

Well, --

U.S. impact on foreign repatriated earnings?

Right. Exactly. Then we also had -- we closed a finance subsidiary that we talked about in some of the footnotes and that had more than the effective tax rate impact with the value of that from a tax point of view.

But you are looking for a more normalized tax rate going forward?

Yeah. That's what we said about the 22 percent is what we expected for 2005.

You know, where we average our last five years, I think the 18, 19 range, it really does, the ball bounces around, but from -- we work out a projection, you know, sources of revenue at the beginning of the year, and it looks like 22 percent, if it comes in where we think.

Okay. On the hedging of Euro cash flows, that was an unhappy experience several years ago. Just two questions. One, will you recognize the hedge cost ratably [ph] over the four quarters equal quarter by quarter, or does it vary with some other function? And two, can you kind of maybe just delve into your thinking about that hedge?

Sure, we actually entered into a similar hedge program in 2004 and we think it worked well for us. It didn't pay off because the Euro stayed high. So this is a put you know to protect us on the down side. So the risk is only the cost that we're paying for the put, the 1.1 million. Those are expensed kind of through a mark to market basis, so you don't have --- it's not ratably, but the 1.1 [inaudible] over through the course of the year.

By the way, Budd, the unhappy was that that was a different kind of a hedge. I mean, we used some of the best investment bankers about four or five years ago. He said if we could do a better job of providing analyst guidance with regard to currency, there was a strong feeling that it would have some effect on multiple expansion. So that really was a translation hedge.

Then all of a sudden then the Euro goes, after years of being under the 115 it came out, it goes the other direction. These are purely cash flow. And they're inexpensive. It just basically said, hey, if we could, for not a lot of money, hedge if the Euro goes below 124, it just makes good sense on our cash.

How much -- what's the notional amount of the hedge?

That would get into the projecting cash flow by segment. We make a lot of our cash in Europe.

And are you hedging all of it or 80 percent of it or what?

It's targeted at most of it. We do it on a month by month basis.

Understood. You haven't got all the hedges in place, you'll install them month by month?

No. The puts are in place. It's just they expire each month based on the --.

Twelve months of puts?

Yeah.

Yeah.

Thank you very much.

Budd, it's not a lot of money.

I don't disagree --- I don't disagree with that. Thank you for the explanation, I mean, you know, I have to go back and dredge my poor brain which is faltering at my tender age.

Thanks, Budd.

[Operator Instructions]. We'll go to Rommel Dionisio, Roth Capital.

Hi, good morning, everyone. Just with regards to restructuring expenses in first quarter, are part of those going to be Asia? I know there's been a lot of moving parts there in Asia with Japan being down and seeing some growth in the emerging markets created in the Phillipines. I just wondered how much of future restructuring actions whether it's the first quarter or looking further than that will be in with regards to Asia.

The amount that we've given in the outlook for the first quarter just relates to the Hemingway announcement that we made.

Right.

We don't have any other reengineering amounts in our outlook for 2005 at this point.

How about just more on a strategic basis, there's obviously been a lot of moving parts there and with Japan coming in, and seeing significant growth in some of these emerging markets.

Yeah. We took some actions during 2004, which you've seen in our numbers, to adjust head counts and manufacturing in the past where we thought it made sense.

We'll have to continue to watch where we are with the size of our organization versus sales and so on. I would say the only, probably overriding thing, again, would be the manufacturing rationalization over time that could lead to some things.

Thanks, Mike.

[Operator Instructions]. Okay, Mr. Goings, it appears we have no further questions standing by at this time. We'll turn the conference back over to you for any additional or closing remarks.

Thank you very much, and thank you for your time this morning. I'll tell you, we'll try to do our best at this next call to give you an update also on progress we're making in the U.S. business and at the same time the impact of the tsunami in Southeast Asia. But at this point we think it really is minimal on our business over there.

Again, best to all of you and thank you for your time.

Thank you and that does conclude today's conference call. We thank you for your participation. You may disconnect at this time.