Tupperware Brands Corp (TUP) 2005 Q2 法說會逐字稿

Good day, everyone, and welcome to the Tupperware second quarter 2005 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 Mr. Rick Goings. Please go ahead.

Good morning, everyone. I'm in New York City while Mike Poteshman, our CFO, and Jane Garrard, our VP of Investor Relations, they are at our headquarters. Some of the discussions will involve the future outlook of the business, so I refer you to the Company's cautionary comments that are included in this release.

Let me start by saying that we're pleased with our sixth consecutive quarter of year over year earnings improvement. The results for this quarter were driven by a slight increase in local currency sales, primarily from Latin America, and a significant increase in BeautiControl. And as we said before, we're not going to take you through reading you what we just sent you, but we'd like to just amplify on some of this. By the way, the better profitability really came from improvements in Tupperware North America, a lower tax rate, and we had some favorability with FX.

As before, Mike is growing to amplify the quarterly numbers by segments, and he'll also talk a little bit about our outlook for the Q3 and for the full year. He'll do that at -- but I'm going to first take a couple of minutes and update you on the trends in our large markets, as well as the progress that we're seeing with our strategic initiatives. And as we always believe in contingency planning because we're in different locations, if we have any communication problems, the other side will simply pick it up and finish the call.

First, I'd like to go on to our largest market, Germany. Since it is such a significant part of our earnings stream, we were pleased that the gap in the number of sellers did improve in the quarter, and, as a result of good recruiting, it was down 14% at the end of the first quarter, but it was only now down 8% at the end of the second quarter. In fact, I'm also happy to report that July has been a particularly strong recruiting month, which is really -- it's a challenging time of year, because of the six-week vacations that are experienced by many people there, but we had very strong recruiting there, and as all of you know, this is a strong indicator of future performance. Our attention will continue to be focused on recruiting, and this really takes advantage of the high German unemployment rate. And, you know, while there is usually a counter cyclical nature to direct selling that provides opportunity in high unemployment conditions, it is also, I think, important to understand that prolonged periods of high unemployment often really mitigate some of the advantage provided by recruiting, because you get basically compressed consumer spending and lower party attendance, so we've really had to work on that.

We're also providing incentives to party hostesses and to end consumers, so that you not only get the sales force growing, but we make it easier to convert these people to productive sellers. We have a terrific management team in Germany. We were just there with them, our entire senior management team. They've been very proactive on expense management, and they're holding a very strong ROS in spite of some of the sales softness, so, they're working very hard to get the sales force size gap closed, and we've got a lot of confidence in the future of that German business, and it's really driven by the power of our brand, our excellent management team, and perhaps Germany has the most highly trained, motivated, and profitable distributor sales organization that we have anywhere in the world.

Let me turn to Mexico, the biggest market for Latin America. There we've had improved sales trends over the last four quarters. Sales productivity has grown dramatically, and it really has been a result of heightening sales force standards, and that's really led and translated to, more qualified recruits and a higher number of more productive sales managers, as well. Although the average active sales force is still at a deficit level, this sales force productivity has really offset that and it's the strength that's driving sales. Combining the sales improvement in Mexico, we've also seen very nice trends in Venezuela and Brazil, and this has led to consistent growth in Latin America, and I'm pleased to also mention a mid-teen percentage ROS, which is the target for this market.

Going across the Pacific to Japan, another large market, we continue to work on our business transformation there to really shift the balance of contribution from what wholesale kind of 'custo' representatives are doing, they are more buyers than they really are sellers of our products, to get a stronger percentage of proactive sellers who come to Tupperware because they're interested in an earning opportunity. We've been going down this road 18 months, it's difficult, and it's taking time, but it's the second largest direct sales market in the world, and it's worth doing.

Recently, we have put additional emphasis on our merchandising strategy for the second half of the year in Japan, because we want to get more sales out of these 'custo' reps, while we're converting the other parts of the sales organization to more sellers. As I've said before, it's going to take time, and during this transition, we've continued to experience a decline in the overall sales force size and in sales. So Japan's really been a drag on Asia Pacific. The bulk of the other markets there are doing quite well. Mike will talk more about that.

Let me bring you up to date on the progress in the transformation of the U.S. business. We saw progress on the implementation of the new compensation plan in Q2. As indicated last quarter, we completed the rollout of the new compensation plan to the entire sales force at the beginning of the second quarter. We've got some early signs of success, which, you know, include a heightened number of new Directors, and what we call Directors in Qualification. And from our BeautiControl business, we know those are the precursors to really strong growth there, because these people are more career-minded. A director is the term we use, the new term, for what used to be distributors, and more importantly, it's the key leadership position that really recruits, trains, and develops other sales force members.

The U.S. management team has done a great job guiding this transition. They've implemented a very strong new director training program, because they really had to basically change the culture, and it's been well-received. Also, we've shifted from -- as we've shifted from the single tiered compensation to a multi-tier, we've had to convert our business cycle as most multi-tiered direct sellers do, predominantly from a weekly to a monthly business cycle, because most all commissions are measured and the hurdle rates are, what do you do this month. So, it's been really driven by the compensation program. Consistent with that, we've changed, therefore, our methodology for measuring the average active sales force to a monthly calculation, the same way we do it at BeautiControl. We believe it really aligns this important indicator with the underlying realities of the business, and again, it's driven by the comp programs.

So we've restated the comp numbers for prior years, and while the average active sales force is still lower than last year, we're pleased to see a greater productivity from the active sellers in the form of higher average order, and overall our sales were a bit better than our expectations, even though there was shortfall versus 2004. So net net, we're really beginning to see day light again in the U.S. business, and we're really getting traction from these value chain improvements.

Let me turn to BeautiControl and our beauty business. Here we were -- we also saw continued progress on expanding the contribution of beauty both domestically and internationally. BeautiControl North America accomplished another significant increase in the average active sales force size. You know, it's up over 32% in Q2. In April, also, we completed the most successful spring recruiting campaign in the history of that company, bringing the sales force size to over 100,000 with the active sellers approaching 40,000, which is a terrific activity rate. This significant earnings potential of being a BeautiControl sales consultant and director is really what's driving this success. In the past few years, the average director level earnings at BeautiControl has doubled from 20,000 to 42,000.

By the way, these are the individuals who work 20 or so hours a week, some more, some less, and really start to build a career out of it. The top ones in the organization can earn that much a month. So it really is driving the business. This earning opportunity combined with a great spa party experience, innovative products, and we think as strong a training as we've seen in direct selling, has really created the formula for growth.

Our research here indicates that BeautiControl is the fastest-growing beauty business in the U.S., so -- and that's good to see. And what it's also done is it's confirmed the success of this acquisition, and it should signal the management team has done a great job at not only acquiring, managing, integrating, and growing a beauty business. We have doubled the size of BeautiControl while we continue to transform our Tupperware business.

Looking globally at beauty, beauty grew to 14% of total sales compared with 11% last year. We continue to work to accelerate the expansion of beauty, by the way, and in Latin America, recently we've expanded into Venezuela, and we're in the final stage of prep for a launch in the Philippines. And to the extent that beauty accounts for a greater proportion of our sales, we believe this really does with regards to Tupperware, reduce sales volatility as consumables are impacted less be economic trends. Additionally, as we expand beauty into both Latin America and Asia Pacific, it really mitigates some of our reliance on Western Europe. And while we still feel very strong about Europe and our model over there, it will, I think, lead to greater visibility and our earnings stream will likely be much more stable due to this broader geographic diversity.

Let me turn back to the Tupperware business before I turn it over to Mike. In our emerging markets of the Tupperware business, sales also are on the grow. They were up 23% to just under 7% of total sales, compared with 5% for the quarter last year. In Europe, Russia in particular continues to grow rapidly, and is beginning to also make a significant contribution to not only European sales, but it also has a very strong ROS, north of 20%. We also achieved 20% plus sales growth in both Turkey and Poland, our other key European emerging markets. And Asia isn't far behind with regard to the growth of its emerging markets. China finished the quarter with over 660 outlets, which is significant growth from last year, and resulted in another quarter of strong sales growth. China, together with India and Indonesia, these three countries had 20% sales growth in the second quarter, so it was good to see.

Let me go to integrated direct access, this strategy where we continue with -- deserves some amplification. Really what we're doing here, continue to utilize a combination of components that make up integrated direct access. We will continue to utilize mall showcases, QVC television shopping in select markets, the internet, and also some select business to business relationships. All of these together are just tools to help us gain new and stranded consumers, but, at the same time, they've been very, very important in helping us to build the brand Tupperware. And as I've mentioned before, we've gone from, in this country, from 24th most respected brand name at the early '90s, to number 12 by the mid-90s, to top 5 now. So, they're really helping to drive that without us needing to invest in advertising.

Mall showcases are primarily concentrated in the U.S. and some in Europe. The number of mall showcases is down, but for a reason. We have focused our attention this past year in the U.S. on the new compensation plan transition. So it's really had a reduced focus because we really wanted to get our U.S. distributors converted to director models. The show cases continue, though, to be an important source of focus, and we're going to evaluate more ways to capitalize on it. However, we want to get more of our people finished with their new compensation model rollout. It's important that we expand the size of the sales force first, in the U.S., and we want to keep them focused there first. So, you'll hear more about showcases and our investments there in the future. It is still a key component.

The internet also continues to work well, and it's been working mostly, as we do research, with customers. It helps them from being stranded, and, at the same time, it also allows our sales force to have an additional cash flow stream in addition to the money they make from parties.

QVC has also continued to grow, and we've been actually averaging one show per month. And on that show we really, we still have one of their QVC hosts, but also a Tupperware manager there. We talk about the viability of the earning opportunity at Tupperware, and we also talk about the fun of going and the productivity of going to a Tupperware party. So, it's helpful.

Finally a comment on business-to-business transactions. Those are opportunistic. This year, we continue to concentrate most of our efforts there in Europe, because, again, in the U.S., we're focusing on transition to the new comp model. In Europe, we partner, generally, with grocery and department stores from time to time to provide products -- usually for consumer loyalty programs, but it helps us. There's usually a bounce back offer, and it helps us then add new consumers to the pool. So that works well. We had a little - it was a little higher in third quarter, even than we had anticipated.

So summing up IDA, it's not a significant percentage of sales, but these channels remain important to the sales force, to consumers, and to us, and again, it helps us brand build, it helps us gain access to consumers, and it really -- we've learned how to have it support the direct selling system and our sales force.

Looking also to the financial strength of the quarter, I was pleased to see the cash flow and the debt ratios resulting from this cash flow, continued to improve. I think our net debt to total cap is now down below 30%. We continue to support a healthy dividend of $0.88, and we're committed to that, and we can not only support that dividend, but we can pursue other growth strategies that I've discussed here today.

Mike, let me turn it over to you, and then after you amplify on the segments and the outlooks, we'll open it to questions, if you will?

Okay, thanks, Rick. Looking at each of the segments versus last year and going first to Europe, we came in with a low single digit local currency sales increase that included B-to-B sales, higher B-to-B sales of 7.9 million, and that was a few million dollars ahead of our expectation. Growth in our emerging and developing marks, particularly Russia and South Africa, together with this higher B-to-B activity, was mostly offset by a decline in Germany, where we're operating with a smaller active sales force, as Rick mentioned.

Profit came in down 5% in local currency terms, reflecting a lower gross margin, primarily from promotional discounting and higher raw material costs. However, we still maintained a 20% plus ROS. For the full year in Europe, we expect to be about flat in local currency sales, and we foresee a profit decrease for the year, reflecting strategic and promotional investment, as well as higher product costs, but continue to expect to achieve an ROS over 20%.

Turning to Asia Pacific, we had a mid-single digit local currency sales decline here due to Japan, which offset strong increases in Australia and China. The overall sales decline resulted in a profit decrease more than sales, partially due to a one time accrual adjustment in Japan. Due to the decline in Japan resulting from the transition that Rick discussed earlier, we expect local currency sales in Asia to be down slightly this year, and profit to be down a few million dollars in local currency.

Regarding Latin America, we were pleased with strong local currency sales growth of 17%, and profit growth of 10% in this area during the quarter, due to the increase in sales force size and productivity that we talked about. We expect sales and profit improvement in Latin America this year due to the better sales force productivity we've been experiencing.

North America is still operating with total inactive sales force size deficits, which resulted in a sales decline of 13%. However, we came in with a little more than $0.5 million of profit, that included a $3.1 million positive impact from a LIFO reserve reduction and re-engineering costs. Excluding this unusual upside, the loss decreased 50% from last year due to value chain improvements. We continue to expect a decline in sales this year with a lower loss targeting break-even in 2006. BeautiControl North America had significant sales growth of 36%, building on a successful recruiting campaign. In spite of higher distribution and promotion costs in light of the high recruiting and sales level, this segment still reported a 9% return on sales. Given the sales force trends in this market, we continue to expect sales and profit growth in 2005, significant growth.

Wrapping all of this up, our outlook for 2005 is for the European, Latin American, and BeautiControl segments to have sales increases, while Tupperware North America and Asia Pacific will be down. Tupperware North America, BeautiControl and Latin America are expected to achieve higher profit, while lower profit versus 2004 is expected in Europe and Asia due to trends in Germany and Japan and promotional and strategic investments. While there's no net change to our earnings outlook from operations, we have reduced the range by $0.09 due to the foreign exchange impact of a stronger dollar. Based on current rates, there will be no year-over-year impact of that effect, whereas our outlook we gave in April, when we gave that outlook, there was a $0.09 benefit.

Our full year EPS outlook is now 1.46 to 1.56 per share, and we expect to have an effective tax rate of the 19 to 20% versus the 22% we first saw in April, and this is due to favorable items flowing through the second quarter provision. Reengineering costs net of LIFO adjustments have been -$0.05 year-to-date, and in the second half we expect these items to be a net positive of $0.01, so that would bring the full year to $0.04 of expense. This is the same as our outlook in April.

Looking to the third quarter, we expect local currency sales to be up slightly and to be about break-even on earnings, including $0.01 to $0.03 of reengineering costs. We expect sales and profit upside from Latin America and BeautiControl. Asia and Europe are expected to be down due to trends in Japan and Germany, and Tupperware North America will have a lower loss than last year. The 2005 quarter also includes a normal tax rate, whereas, in 2004 we had income on the tax line. Excluding the re-engineering costs, EPS is expected to be $0.01 to $0.03. Third quarter 2004 results of $0.22 included a gain of $0.11 from land development, and re-engineering costs of $0.02. Based on current rates, the foreign exchange impact on the third quarter comparison is positive $0.01. Based on our actual first half results and third quarter outlook, this means we've included for the fourth quarter a range of $0.51 to $0.63; this would put us from down $0.07 to up $0.05 compared with 2004, excluding the impact of foreign exchange.

Turning to the balance sheet and cash flow. Year-to-date we generated 32.3 million of cash from operating activities net of investing activities. This was up $28.4 million compared with last year, mainly due to higher net income, enclosed from taxes and hedging versus out-closed last year from these items. We continue to do well with receivables management with days outstanding at 26, which was down from 27 last June, and we improved inventory days to 140 to 159 last year. Our net debt to total capital ratio was 29% compared with 33% at the end of the first quarter, as we continue to build equity in cash, in the absence of any debt maturities. We continue to expect full year cash flow from operating activities net of cash from investing activities in the 75 to $80 million range.

And Valerie, with that we'll turn the call over to questions.

All right. Thank you. The question-and-answer session will be conducted electronically, if you would like to ask a question, please do so by pressing the star key followed by the digit one on your touch-tone telephone. If you are using a speaker phone, please make sure your mute function id turned off to allow your signal to reach our equipment. We'll pause for just a moment to give everyone an opportunity to signal for questions. We'll take our first question from Doug Lane from Avondale Partners.

Hi, good morning, everybody.

Good morning, Doug.

Rick, Germany is an important market, 21% of your sales. Can you elaborate even more on trends there? It seems that, you know, with the B-to-B sales, assuming they hadn't occurred that Europe might have been down, you know, low mid-single digits in local currency, and the strength you have been seeing in Poland and Russian and in Scandinavia and elsewhere, have been able to offset that, and now it hasn't. Is that because the growth markets are slowing, or is it because Germany is deteriorating?

Well, I don't think -- firstly I agree. Germany is a very important market to us, but it has been soft for now three quarters, and I've got to say, the overall -- the rest of Europe is looking very strong, but Germany's so big, it hasn't been dynamic enough to offset Germany. We just had an operating management committee meeting. We had it on-site in Germany, so we got a chance to -- it was, you know, on the schedule to be there. And we all left with a confidence that, a) our management team is strong, the distributor mood is terrific, and that we like the programs that they have in place.

Doug, there's basically two things they're doing there. Part A of the program is a recruiting emphasis where they have incentives for the distributors and managers to close the sales force size gap. And, by the way, that's where we're starting to see gains. We're closing that gap, closed it even further during the month of July, and that's going to be the big offset to the rest of Europe. The other part, part B of the program, is they've implemented incentives, so that not only when you get a recruit, you have the person there, but they taste some success, and there's really three parts to part B, and that is incentives to the sales force to be active, incentives to hostess to invite people, and then finally to consumers to attend a party. So I think they're taking the right kind of action. And they haven't been knee jerk reactions, but as I commented in the text of the call, the counter cyclical nature of direct selling works for a while, but when you have 20%-plus unemployment in former Deutsche Democratic Republic, East Germany, yes, you get more people in, but who do they invite?

The rest of Europe, I like what I'm seeing, in the development and size of the sales force. I mean, take it -- France looks good, the BeneLux looks good. I just was in Austria, I mean, and then we have the fast growers over there, the Poland, the Russia, Turkey, and sub-Sahara Africa is growing like gangbusters. So, it's a portfolio, Doug, and overall, I feel good about what's ahead for Europe.

Can you give me a more -- better feel on the difference in the profit situation in Europe? I mean, looking at the first half, it was flat, maybe up a little bit, back in U.S. dollars, and the back half, to get your full year numbers, we're talking about, you know, pretty substantial double digit declines in operating profit. Now, obviously the dollar is turning against you, but what else are you doing? Is it more promotional spending? Is there something in the raw material front? What is that reduction in profitability in the second half that we didn't see in the first half?

Well, I'm going to answer part A of that and Mike you amplify part B of it, okay? Firstly, overall, we have been able to -- resin prices are only really 1/5 of our overall cost of goods sold. When you have 65% gross margins, you know, it really isn't that big of a component. It was 4 million in the second quarter. It's, I think we're 7 million year-to-date. I think we've got baked into the numbers for the rest of the year the right, you know, the right level there. What you really are seeing, though, is, we have heightened some promotional spending aimed, in the way I mentioned, on Germany to ensure that we close that sales force gap.

And by the way, it's - you do that opportunistically in those markets where you need to. We're not doing it across the board in Europe. And what happens there, then, is we've still been able to keep this ROS north of 20%. Mike, if you'd amplify a little bit more on that?

Yeah, Doug, the other thing you mentioned was the impact of the foreign exchange rates, and I guess to give that a little bit more flesh around it, when you back into what we've said for the full year, or, for the fourth quarter, based on what we said for the full year and so on, that would say a $0.06 shortfall from FX in the fourth quarter, and lot of that, of course, comes from Europe because of the euro and how much we make over there. So I think that's the other element that you're referring to there.

Okay. Yeah. That's a pretty big number. Rick, is Japan your biggest market in Asia?

Yes, it is, but there are some very strong contenders coming on. As a matter of fact, you know, Doug, I was just -- if you put it through the wine press, if you took Latin America and Asia Pacific, the 12 major markets there, only Japan was the drag on it, but it's been, you know, it's been big enough that you do feel it, but overall, I like what I'm seeing in Asia Pacific.

Okay. And finally, in the U.S., you talked about the early impact from the new compensation plan. When do you think -- and, again, you've recharacterized or reclassified your average activities, and I understand why, but from where you sit today, what's your best guess on when the average actives start to improve year-over-year?

It's going to happen, obviously. Our internals, we believe it's going to happen next year. Sooner would be better -- [laughter] than later. But we find in those kinds of businesses, if I'll go back to the BeautiControl experience, it took us, once we had the modifications to their compensation program, it took us five quarters, then to start seeing any of it happen. We just did this launch in the first or the second -- the beginning of the second quarter. So, you know, I've got a little bit of a reference there.

I'll tell you, the big thing that's going to drive that is the attitude out there. And I've got to say, I have not received one negative phone call or e-mail, and they all know how to get in touch with me, since they've done this transition. So I'm very impress with what the U.S. management team has done there. Net-net, it's going to be sometime next year, or I will be very disappointed.

Okay. Thank you.

And we'll take our next question from Eric Bosshard from Midwest Research.

Good morning.

Hi, Eric.

Good morning, Eric.

A couple of things, first of all, BeautiControl, the revenue performance has been fantastic. My question is, what's the operating margin opportunity in this business, and when does that opportunity become realized?

Okay, Doug or Eric, firstly, it's the first time I've ever heard anybody pronounce your name correctly, so it's great to hear. BeautiControl, we think it's, in the U.S. it's about a 15% ROS. If you really -- and this is from my former life at Avon experience, that you find that the U.S. and most of the Anglo markets are price value markets from a beauty product standpoint, and there is a lot of sensitivity here. In continental Europe and in Latin America, you can get a higher ROS there.

As a matter of fact, most direct sellers in Latin America in a beauty business can average over 20%, but what they do is they do a lot of fragrance business, and fragrance is generally over 80% gross margin. So what we're targeting is 15%. By the way, Eric, we've had these discussions internally. Do you want to get them to 15% right now? Or do you want to keep fueling this explosive growth? And we've basically made the decision keep going for stealing share right now, and I'll sign up for a 9%, 10% ROS, if you can keep these growth rates north of 20%.

So in the second quarter, really most of that, as Mike commented, frankly, we ran out of capacity. We moved, within six months, into another facility for distribution so that we could free up space for manufacturing. We're already to the limits there. So this is -- we're really chasing this capacity to make sure we don't want to have stock-outs to the sales organization.

When do you think you get to a 15 or even a low teen margin in the system?

Yes, I'll be surprised if we're not there this next year on it. Looking at, again, you know, we were already in the early stages of starting to look at what '06 looks like. So, you know, you're -- you know, in that 13 to 15% range is not unheard of. Mike, you might comment on that, too.

Yes, I think that that's what we have the potential for, and as we work through some of these issues that we've had, because of the higher recruiting, which have impacted both the commission line and some of the distribution costs, so we can start to see progress in the second half.

Secondly, Mike, the $3.1 million, can you explain the LIFO, and is that a reserve reversal in that, as well? Can you explain what that $3.1 million number is?

Sure. The LIFO piece of that was 3.7 million, and that has to do with reductions in those LIFO inventories that's in large part due to the shift of the capacity out of the Hemingway Plant. And as that inventory, that LIFO accounted-for inventory comes down, we do reduce the reserves accordingly. The 600,000 offset are reengineering, also related to that shift.

Okay. And then also, Mike, while I -- on accounting issue, can you talk a little bit about receivables and reserves to receivables? I think there was some movement within that, as well?

Yes, I don't think there was anything unusual there. I mentioned that our days were down one. I think we provided $1 million in the quarter. And our overall receivable level was lower.

Okay. And then lastly, to circle back. Rick, on North America, again, you've done a great job of taking costs out and reducing the loss there, but 2006 is this first half 2006, second half 2006 that we will see recruiting and revenues grow in the U.S. business?

I think that's realistic, yes.

Which, first half or second half?

Towards the second half, because, as a matter of fact, we're focused much more on getting some of these directors in the organization profitable, excited and building their organizations, so, I'm much more comfortable with second half of this next year, because they've said right now, do you -- okay, what's the real focus?

Focus in the U.S. isn't just sales force size, it's getting -- the first focus is getting a core of directors there who are very productive, and, as a matter of fact, you know, there's some 800 of these directors now, but we've only gotten -- what have we got, Mike, 70 of them through training only right now?

Right.

Yes, we've got to -- so when they're asking us right now, what do you want me to focus on? Or they're telling us, because the management team's running that business, they want to get those people, you know, knowledgeable and get through the training program.

Great. Thank you.

You know, adding on to that U.S. -- somebody was asking me earlier today, we did talk about - what's the real 'so whats' of the business, what you're seeing right now of the quarter and the business right now? And I think the real big story of the business is that Europe is not a one trick pony. You can have this softness in Germany, and still we can do fine, and, and there's some comers in eastern Europe that are really starting to come on strong. The U.S., they've really got their value chain improvement in line. As a matter of fact, you know, and the sales are really starting to take hold.

Latin America, and Asia Pacific, of the top dozen markets we have in these two portfolios, there's only one drag, and that's Japan. And lastly, this beauty business, I think we've shown that we can acquire, integrate, and grow a beauty business. So it's a portfolio. And you get puts and calls in a portfolio.

We'll take our next question from Chris Thornsberry from Raymond James.

Good morning, Rick.

Good morning, Chris.

How are you doing?

Great.

A couple of real quick questions, if I may? First off, the B-to-B. You said that was 7.9 million in the quarter. Mike mentioned that that was a little bit higher than expectations, a few million. What was -- what were you guys expecting in the quarter?

Mike, you've got the numbers, it was 5 and change, right?

Yes, the 7.9, Chris, was the increase, and we did -- we had B-to-B activity in Italy, Greece, Spain, Switzerland, Nordics, Belgium, and so, we had baked in, like I said, a few million short -- few million less than actually came out.

So you're looking at maybe 5 to 6 million above what you're expecting?

No, a few million more than we expected, so, you know, about three 3 million more than we had thought.

Okay, and what do you think the profitability impact was of that B-to-B in the quarter?

Well, the B-to-B, the gross margin percentages on the B-to-Bs are comparable to our line business, so it's right in the same value chain.

Okay. And then how about for the rest of the year, what are you looking at in terms of B-to-B? I know that's not something you typically plan for, so to speak, but, you know, in the third and fourth quarter guidance, what are you -- are you baking in any expectations there for B-to-B business?

There is some B-to-B. When we look at it overall, we actually had a fairly low number for the B-to-B last year, and for this year, it'll probably be more in the range of what it was in 2003, which was -- we had about 14 million in 2003, so somewhere like that for the full year.

So you're looking at you had about 3 or so, a little bit less than 4 in the first quarter, 8 in the second quarter, and so now you're looking at maybe 5 million for the back half of the year?

Yes, we don't really get that specific by line like that, but.

Okay.

Yes, Chris, I would add, it really is opportunistic and we don't like to see -- it is good in a market when they do it from time to time, and if I had to give you a -- what's the right amount of time, you don't want to see a market do more than one B-to-B every other year. It's too much beyond that. It really is additive on brand building, with bounce back programs to getting new consumers and dating parties if you do it, though, but you've got to do it really selectively.

And I wish we could give you all more guidance on it, but, again, you don't know when you're going to close, you'll be in lots of discussions on them, and when you find one that's the right kind of a company, you do it, and they hit fairly quickly then.

And Rick, when you mentioned by market, that's by country, right?

Yes, that's by count -- that's by country.

And one final question if I might. On the tax rate, you mentioned that was a little bit lower than expected. That was about $0.03 positive impact in this quarter. What's causing the tax rate to vary so much from expectations on a quarter-to-quarter basis? Is that the net operating losses you're able to utilize in Europe, or is it something else?

No, we make a lot of money in Europe, so it's certainly not that. It has to do with things that are discreet events. In the second quarter, we had a resolution of an audit item, a tax audit item, a favorable one, and then we also, in finalizing some of our transfer pricing related to 2004, we got a better result, and those were discreet items, and GAAP these days has changed such that you put discreet items in the quarter that they occur in; you don't just change the effective rate for the year.

So you've had a tax audit resolution in the second quarter as well?

Right.

And how much was that?

Well, together these two things were about $3 million.

And how should we look at that going forward? I know you're looking at 19 to 20% for the year. If we're looking at 21% or 22% for the next two quarters is that reasonable? And, and looking out further, how variable will this be? I guess you said that you're kind of taking these resolutions and other things and putting them in the results per GAAP now, so it makes it a little bit more choppy.

Yes, I mean, obviously we put what we know into our outlook, and the outlook for the third quarter, fourth quarter, hasn't changed from before, in terms of the expectation. It was just these discrete items in the second quarter and how that affects the full year rate.

Okay. So we're looking more for that 22% range, like you said, in the past?

Yeah, somewhere in there, 21, 22.

All right. Thank you very much.

You're welcome.

And we'll take our next question from Rob Schwartz from JL Advisors.

Hey, guys. As we start to look at '06 and planning our models there, on the currency side, are you hedged at all -- I think you had bought [puts] a while ago. I'm wondering if you're hedged into '06 and how should we be looking at that? You know, especially for the first half.

Rob, we're not hedging P&L we're hedging cash flow. And Mike if you might amplify that. And it's only select currencies.

Yes, Rob, the euro puts that you're referring to, your recollection is correct. So we hedged really the month of -- on a month-by-month basis just for 2005, so that's what's in place.

Okay. So the guidance now, you're hedged -- if the euro continues to fall, you're hedged throughout the rest of the '05?

It's the cash flow, though, that's hedged. There were a couple of the months, August and September that are -- that do go through P&L, but we're not, for instance -- the fourth quarter months are hedged, and then it will go through equity. So we'd have a cash benefit if the euro went way down, and since they are options, there's no negative impact.

Okay. Thank you.

Yeah, I think we're 125, 126, isn't it, Mike, the hedged right now?

That's right.

Yes.

Once again, to ask questions, it's star one, and now we'll take a follow-up question from Eric Bosshard from Midwest Research.

Mike, I guess my question on the receivable reserve was not on the current receivables. On the long term receivable it looked like you took that receivable for that reserve down, as you took the receivable down. Can you -- I mean it looks like you probably just wrote off a bad account, but is the current reserve sufficient? Can you just help us understand that a little bit?

Yes, we think that the current reserve is sufficient. The big change you see from the end of last year that you saw was some old receivables in the U.S., mainly, was the big decrease there. When you look at it on a net basis, clearly the change is a lot less, and that's because those were write-offs of fully reserved receivables. And there were some, you know, beyond that, we had some collections, so -- the big mover in the reserves, though, is mainly from the U.S., and the U.S., of course, is now, for all the new sales, is on a cash basis.

Okay, so this is old, this is basically just sort of old distributors, old distributor receivables? Is that what, likely, is in there?

Yes.

Okay. Great. Thank you.

It appears there are no further questions at this time. Mr. Goings I'd like to turn the conference back over to you for any additional or closing remarks.

Thanks, Valerie. Well, I hope you all can see the operational trends pretty much were staying the same. I think we see some light here with regard to the big German business, because the actions the management team has taken. We don't foresee, though, that the German economy is going to get much better but our guys have shown they're fairly gazelle like in encountering that over time, and we have very strong margins there. The other drag we really do have is Japan, but it was a tact that we decided on to take advantage of this number to direct sales market. All the other pieces of the portfolio, we really like how they're performing. We've had a little bit of movement on the strengthening of the U.S. dollar, but we're continuing to feel better about the overall trends in the organization, and we thank you for your time today.

That concludes today's conference. You may now disconnect.