Tupperware Brands Corp (TUP) 2005 Q3 法說會逐字稿

Good day, everyone, and well from to the Tupperware third quarter 2005 earnings results conference call. [OPERATOR INSTRUCTIONS] Today's conference is being recorded. At this time for opening remarks and introductions, I would like to turn the conference over to Mr. Rick Goings. Please go ahead, sir.

Good morning, and thank you for joining us. I'm here with Mike Poteshman, our CFO, and Jane Garrard, our Vice President of Director of Investor Relations. Some of the discussions will involve future outlook of our business so I refer you to the Company's position on forward-looking statements as it appears in our recent press release, and in our SEC's filings.

We're pleased to report earnings ahead of our previous guidance, particularly in light of the economic headwinds both domestically and abroad, along with the headwinds from the hurricanes which particularly affected some of our Tupperware sales force and about 10% of our BeautiControl North America sales force, which are really concentrated in those four states. Overall, globally, we had nice sales growth in the quarter, with local currency sales increasing 3%. Regarding profit, three out of the five segments showed year-over-year improvement.

On December 13th, we're going to hold an analyst investor breakfast here in New York City to discuss the Sara Lee acquisition in a little bit more detail. And also I've asked Simon Hemus, the group president of that segment, to join us. I wanted him to have the opportunity to meet all of you and answer your questions. At that time, by the way, Mike will be with me, and we'll provide you with our initial 2006 outlook and the longer term growth expectations after considering the acquisition of the Sara Lee businesses, and I truly hope you'll be able to join us there.

I want to take a few minutes this morning before I turn it over to Mike Poteshman to update you on trends in some of our larger markets, as well as some of the progress in our strategic initiatives, and then Mike will amplify the quarterly numbers and our outlook going forward. I begin with Germany, which is our largest market, and almost 20% of our worldwide sales. Our management team there has done a remarkable job in closing the sales force size gap. We began the first quarter down 14% in sales force, then in the second quarter, it went to 8%. The third quarter was down just 1%. Since then, I'm pleased to report that as of last week we actually achieved a positive sales force size comparison in 2004 in Germany over -- versus 2004.

This bodes well for results going forward. And it also shows the success of our recent recruiting promotions and consumer incentives to get people to Tupperware parties. we're also pleased to have had a 3% improvement from last year in the quarter in average active sale force combined with a 5% decline last quarter. These are good signs again, they are really precursors to progress in direct sales companies.

If I turn to the U.S., it still is too soon to see the real benefit of the -- in sales from the new compensation plan. However, we do continue to see signs of traction. Recruiting levels now have stabilized after a period of decline, and a number of qualified recruits, those that come in with a subsequent order of at least 250, that number is increasing, as well. This bodes well for the sales force size growing in the future, and the average active sales force increases. They generally, you know, proceed a sales increase as well.

Additionally, we've seen progress in the U.S. with regard to consultant retention, and yet I've got to say, it's important to remember, we're still working from a smaller base, and it's going to take some time before we really do see a sales increase. In the meantime, though, we're continuing to make progress on stemming losses. We are continuing to look for ways to improve the U.S. value chain, to increase our efficiency, and, at the same time, take out costs, and we're going to be doing even more of that going forward. We expect here really to move toward a break-even in 2006. Will we achieve it? Don't know, but certainly we're putting our best foot forward in trying to get the value chain in line with that.

Let me turn to Japan. While we haven't seen a sales force, or sales increase there, as we closed the quarter, we did see a growing number of sales force members promoting up to manager, which is really even the precursor to the sales force size growing. It's a very good sign. Promoting managers is important, too, because we've been shifting this business away from a buying club to more a selling organization, and you need sellers to do that.

Additionally, we're also now selling a higher proportion of our line in full price Tupperware-produced items. Now, one of the things that this indicates is there's a greater acceptance of the Tupperware party plan, and this will also lead to higher gross profit, and profit margins. This, along with lower cost, has led to improved profit there in Japan while we work to regain the size of the total sales force and then get back on the sales growth track.

Let me turn to our emerging markets. We have really six we put in that category, including China, India, Indonesia, Turkey, Russia, and Poland. This quarter they accounted for 8% of sales, compared to 6% last year, so steadily they are growing. There's meaningful progress, also, in our biggest sales contributors, Russia and China, which I'll amplify on. They grew each at a rate greater than 60% this past quarter.

In China, as a matter of fact, we finished the quarter with 1840 of these retail boutiques, which is up 11% from the 1660 we had last quarter. Russia is worth noting, too. This market has become one of our top five markets in Europe, and it's quickly approaching becoming one of our top 10 markets worldwide. In addition to strong sales growth, this market also carries a very strong 20% plus return on sales, which shows that we are capitalizing on this market opportunity. Also very strong margins in China, as well.

Beauty, and beauty's contribution is growing as well. Commenting first on BeautiControl North America had another great quarter, with a 20% plus total and average active sales force advantage, had a nice top-line sales growth there, too, and we're lapping some pretty spectacular numbers last year. This led to this 20% plus sales growth, and by the way, this is in spite of approximately 10% of the sales force being deeply affected in the areas impacted by Katrina and Rita.

As a matter of fact, from Texas through Louisiana, Mississippi, there's a huge concentration of senior directors in the BeautiControl business. I'm pleased, though, we had the sales increase in spite of that, and the early fall recruiting campaign, which really takes place in the latter part of the third quarter, just completed in September, was the most successful early fall recruiting campaign we've ever had. And while we didn't reach some of our recruiting targets due to the lag of those hurricane states, there was great progress. It probably means, though, a little slower near-term growth rate.

We continue at BeautiControl to work to improve our ROS. You know, it really is going to take improving not only our mix of products that we sell, but near-term we really had some issues with regard to fulfillment and distribution and ramping up our capacity with -- to really match this explosive growth that we've had, tripling the size of this company over the past four years.

Turning to Beauty internationally, through our BeautiControl business, we're seeing progress there, as well. The Mexican Beauty business, the contribution of Beauty grew from 7% to 9% of sales. In total, our global Beauty sales now really are up to 14% of total company sales, compared with just 12 percent last year. And by the way, when we complete the Sara Lee, and close on that acquisition, at the end of this quarter, it will go north of 35% in contribution.

Looking to the future of Beauty, we're excited about the potential that comes with acquiring the Sara Lee direct-selling businesses. I've already mentioned that in numerous conversations with many of you, the closing and financing are progressing as planned, and again we do expect to close in the fourth quarter. Mike will update you on some of the specifics of the financing in a second.

As we did indicate, though, in our release, and the presentation we did in August, the acquisition gives us a very powerful growth platform, as well as it really reduces the risk and the volatility by shifting our product mix to more consumables. And it really does balance our geographic mix to a stronger concentration in Latin America and Asia Pacific, and what we like about that is it better balances the current over-reliance, to our way of thinking, on Europe.

Our previous estimate of 20% EPS accretion still holds firm, and it's based on our 2005 pro forma Tupperware outlook, and Sara Lee Direct full-year fiscal 2005 results ending in June, along with the associated costs, interest costs, which refer to the transition. Mike will get into some of that. The estimate also does not assume any significant amortization associated with purchase accounting.

We have, by the way, really been working toward this whole transition to make the Sara Lee businesses part of our businesses, and I must report that this is going smoothly, with no big surprises. Our team has done, along with theirs, a terrific job of due diligence. I have visited a number of the biggest contributors of the Sara Lee businesses, spent days with the leaders of these teams, and I must tell you that the acquisition by Tupperware has really been positively received.

Anyway, I'll come back for questions. Mike, let me turn it over to you.

Okay. Thank you, Rick.

First going over the details of the quarter, it's important to note that last year we had a net of $0.09 of earnings per share from land sales, partially offset by re-engineering costs. This year we had net unusual charges totaling $0.03 for re-engineering, which included the benefit in Tupperware North America of a reduction in its LIFO reserve, and a charge related to terminating an interest rate hedge in conjunction with obtaining the financing for the Sara Lee acquisition. So together these items accounted for $0.12 of the $0.18 decrease we had in our GAAP earnings per share in the quarter.

The $0.07 shortfall we had versus 2004 on a pro forma basis primarily reflected a lower return on sales in Europe, where we invested some promotionally to drive momentum with our sales force, and where we also had a higher cost of product. This was partially offset by the lower loss by Tupperware North America even beyond the LIFO reserve reduction, where we benefited from our value chain improvement action, even though we had lower sales.

Looking at each segment, European sales were up slightly, and were supported by positive trends in the total sales force, and average active sales force size. Rick mentioned earlier the continuing good momentum we've had in Russia, and that Germany had sequential improvement in its sales force side and crossed over to positive in October. The other two key emerging markets in this region, Turkey and Poland, had high sales increases as well. Our expectation for this segment continues to be for local currency sales to be up slightly for the year with a decline in profit. Our return on sales was 22.3 % last year for the full year, and we expect to be over 20% again in 2005. The lower ROS this year is as expected due to strategic and promotional investments made to get Germany back on track, along with higher raw material costs.

Turning to Asia Pacific. Japan continued to be a drag from a sales perspective, however other markets -- including Australia and China -- contributed strongly during the quarter, leading to an overall sales and profit improvement for the region. We expect local currency sales to be flat this year with a decline in profit while we rebuild the Japanese business. It is important to note that last year we had a $6.2 million reduction in sales for a product recall in the fourth quarter, which will have a favorable impact on the 2005 comparison.

Looking to Latin America, sales were up mid-single-digit in local currency with profit it in line with sales on a pro forma basis. For the full year, we expect significant increases in sales and profits as all countries have made progress in growing in the sales force and active average sales force size.

North American sales were down 8% in the quarter. However, the sales comparison with 2004 reflected a shift in the promotional calendar that moved approximately $3 million of sales into the third quarter from the fourth quarter of 2005. We continue to make progress reducing losses, which were down $4.2 million this quarter, including $1.4 million related to the reduction in LIFO inventory reserves. We're on track for lower losses in 2005 than 2004 and expect further progress toward break-even in 2006.

BeautiControl North America posted a nice 20% plus improvement in sales while profit was about even with 2004, reflecting costs associated with distribution and fulfillment issues related to the rapid growth along with a shift in sales mix. We expect a significant increase in full-year sales and profit in this segment.

So wrapping all this up, our full-year outlook is now $1.08 to $1.13 per share. Which reflects changes from last quarter, including $0.28 of financing-related costs in connection with the Sara Lee direct-selling acquisition. Other items include the deferral of $0.05 of gains on land sales to 2006 from 2005, due to delays in obtaining governmental approval. Also the outlook now includes an additional $0.08 of re-engineering costs, primarily related to further improvements in the Tupperware U.S. value chain. Most of these costs will be non-cash. This will bring full-year engineering costs to $0.12. The outlook for currency remains at no impact on the full-year comparison.

We now foresee the full-year effective tax rate at about 12%, with most of the reduction versus the 19 to 20% outlook we gave in July coming from the tax benefit associated with the acquisition-related financing costs. It is possible that there will be further reduction in the tax rate in the fourth quarter as certain planning actions under consideration are implemented.

Excluding land sales and re-engineering and financing costs, the EPS range is expected to be $1.45 to $1.50 for the year, which is toward the high end of the range we communicated in July. Although the GAAP effective tax rate went down from 19% -- 20% down to 12% -- the pro forma tax rate should remain around 18%, as communicated previously. Our outlook does not include operating results or incremental interest expense related to the acquisition of Sara Lee's direct selling businesses.

In looking at the fourth quarter, I would like to point out that the current outlook does include a $0.05 negative impact from foreign exchange. Also we had a very low pro forma tax rate last year for the fourth quarter, and based on the outlook we've given today, taxes give us about a 7% shortfall versus 2004.

Turning to our cash flow and balance sheet, we were pleased with our working capital management as in constant currency we came in with inventory $10 million below the end of last year's third quarter, and payables and accruals were $6 million higher. We did have higher trade receivable of $10 million, which was largely due to a year-over-year increase in September sales.

Looking at inventory in terms of days on hand, we were 23 days lower than last September at 163; short-term trade receivable days were about flat with the third quarter of 2004. Net cash provided by operating activities was $10 million higher for the first nine months of 2005 compared with 2004. Note that the total capital stood at 38 percent at the end of the third quarter, versus 51% at the end of the third quarter 2004, and 35% at the end of 2004. The third quarter is traditionally the high point during the year of our net debt-to-total capital ratio.

Let me take a minute to discuss some specifics related to the Sara Lee financing. You may have seen that earlier this month, both Moody's and S&P issued ratings on our new financing at two notches below investment grade. These ratings were in line with our expectations given our leverage profile and have resulted in favorable fees and interest rates.

Turning to our sources of financing. We'll discharge or payoff our existing $100 million note and $150 million notes at the same time the acquisition is closed. The funds to make these payments, finance the acquisition purchase price, and pay transaction costs will be from on-hand cash and an $825 million of new secured term loan and revolving credit borrowings.

The transaction costs are expect to include financing-related items of approximately $17 million after tax, or $0.28 cents, primarily for a Mayco payment on the 2011 notes. The interest rate on the new borrowings is expected to be [inaudible] or plus 150 basis points. Mandatory principal payments on the term loans will be .25% per quarter, about $2 million, with the the remaining $722 million due 7 years from the date of the closing of the acquisition.

The new revolver will be for $200 million, and have a five-year term and it will replace our current $200 million revolving credit facility. As stated in our August 10th call regarding debt covenants, we expect to have a fixed charge of coverage tests and EBITDA leverage tests and a minimum net worth requirement and foresee initially having about $40 million of EBITDA cushion, which gives us comfort in our ability to continue to support our dividend.

With that, we're going to open the call to questions.

Thank you. [OPERATOR INSTRUCTIONS] Our first question will come from Doug Lane with Avondale Partners.

Good morning, everybody. Just a follow-up on the Sara Lee acquisition. The 20% accretion is roughly $0.30. I don't think we had talked about amortization costs before. With purchase accounting, what are you looking at as a potential amortization cost for Sara Lee on a GAAP basis?

Doug, I think we'll be in a better position to give that outlook when we have this meeting in December, but we don't expect a huge amount to go to the kinds of intangibles that would get amortized, but we don't really have a number on that yet.

Would it be more than a nickel, or more than half of it, or just basic broad brush ballpark?

I'm sure it won't be more than half of it, but we really can't give a specific number at this point.

Okay. And is this --

Doug, important there, as Mike was saying, this isn't a business where we're going to have to go in and close factories and pretty much this is going to be the business as the business is. So that wasn't going to be a big aspect of the overall deal, but that's why we decided, Doug, to have this meeting December 13th, because we wanted to give you a chance, the moment we had better numbers, give them to you, and therefore give you the outlook for 2006.

Did you describe that there were some amortization costs there that would have to take on the P&L that perhaps you thought were indefinite and weren't counting on when you know gave the 20% accretion number back in August?

No, we just hadn't been through the process of doing the purchase accounting valuations, and that's what we're working on now.

Okay. So whatever it is, it will be something less than $0.30 on a GAAP basis for our forecast for '06?

I would imagine that there will some impact of amortization, but we'll be able to give a better outlook when we have the meeting in December.

Okay. On the new term loan, $825 million, is that all variable rate?

The term loan initially will be variable rate. We'll fix in some portion of that, probably 40 or 50%, for a fixed rate, for some time period.

Okay. Also, you know, we read about resin costs going up, and I see that your year-over-year change in gross margins has been going down pretty sharply on a quarterly basis this year. Can you give us an update on the situation with resin costs? First, most importantly, your access to supply, and making sure there's no issues there, and then secondarily what you think the impact of resin costs will be going forward in the fourth quarter in 2006.

Yeah. I mean, we've been monitoring supply closely, and, you know, have managed situations as they have arisen, and haven't had any significant problems there, so we're hopeful that that will continue in the future, and expect that it will. In terms of the impact of resin, it was about $3 million in the quarter so a little bit more than a percentage point of sales, and we think it will probably be a little bit less than that in the fourth quarter -- we're starting to lap some higher prices at the end of last year.

And 2006, any sort of initial indication?

Yeah, we're not -- we -- simply haven't given guidance for 2006, we're really not prepared to talk about that.

Okay.

One thing I might add on resin, we continue to, you know, sell more and more highly engineered resin, and that hasn't been the area where it has been mostly impacted, and at the same time, this getting up to more than 35% of our business from the Beauty business, it makes it less impactful on Tupperware's overall gross margins. As you know, in the Beauty business, it's a very small component.

Right. Thanks, Ric.

Thank you, Doug.

We'll go next to Budd Bugatch with Raymond James.

Good morning, Rick. Good morning, Mike. This is Chris Thornsberry on behalf of Bud. You will have to excuse me, I'm fighting a little bit of a cold here so I apologize. Following up on Doug's question, have you taken any price increases to offset some of the resin costs you're seeing and also any energy costs you're seeing in the manufacturing facilities, have you taken any recent price increases at all?

Chris, we basically have price increases on a regular basis out there, and markets usually pricing to inflation, and sometimes to maintain margins in an area. From time to time, we'll -- it will collapse some of our margins, but, yeah, along the way, and that's win of the benefits of us operating with the 65% gross margins, and when you can demonstrate the product, you can justify these price increases. So, yes.

Okay. And it looks like with the full-year guidance, excluding all of the charges at $1.45 to $1.50., with the third quarter it appears it's a little bit conservative, looks like it's a little bit lower than what we were modeling, what the street was looking at for the fourth quarter. Can you go behind some of the factors behind that? Are you just being conservative in the current environment with costs and what's go in the worldwide global environment, or what are some of the factors behind that?

Well, Chris, when we looked at it, our guidance for the third quarter was $0.01 to $0.03 on pro forma, so we were a few cents above that, and we did take up the low end of our range, recognize where we were, so we really don't see it as much of a change. We've got a little bit more visibility, of course, now that we're further down the road into the fourth quarter, and that's why we narrowed the range to $0.05.

So you took the low end up by about $0.03, and the upper end down by about $0.02, so you have more visibility and that got you to where you are.

Yeah, we were within the previous range toward the high end.

Okay. Moving on to North America, you mentioned that you guys were working towards getting to break-even for 2006, and you may or may not get there but you are improving profitability, you are taking some expenses out of the supply chain there and trying to improve that through some of the re-engineering costs that you guys are taking. Any type of outlook as to when you might start to see positive sales force in either the total sales force or average active sales force comparisons going into '06 in North America?

I don't want to get ahead of ourselves on that right now, either, Chris. It's -- I'll toll you what we are starting to see is some of the benefit that you saw in margin in the U.S., we're losing less money, is we're not having to make some of the same kind of promotional investments with this new kind of structure because it's built into the compensation plan, and importantly, us starting to see recruiting get back to levels that we think are positive without incremental investment in recruiting incentives, is the signal that we're really starting to get some traction. Now -- but we're working off a smaller base. I don't know when that's going to happen next year, but so far it's looking good.

All right. And final question was with regard to BeautiControl. You touched on that the rapid growth you're seeing there has caused some additional costs due to fulfillment and capacity issues. Can you quantify how much the fulfillment and capacity issues as well as maybe the negative product mix might have cost you in margin in the quarter, at all?

Yeah, obviously those factors are a little bit fuzzy within everything that's going on, but it's probably a point or two, in terms of ROS, and we think that we can improve over time, but we haven't baked in a real rapid improvement.

That was my next question as to kind of what steps you are taking to do that. You're adding capacity, I'm imagining, and what type of other steps are you taking to improve the return on sales there? Because you're seeing the topline is constraining the bottomline leverage there a little bit.

Right. So we're working on all of those things that we listed so the sales mix can be -- will -- should improve over time, and then, as well, we're -- we're looking at capacity. And also to just straighten out how we're running the distribution size, both from internal costs, as well as organizing ourselves for freight and all of those kinds of thing .

And with respect to the product mix issues, can you go into a little bit more detail as to what that was, and how long you might expect that to last? Is that an ongoing thing in the BeautiControl segment?

Well, I think that related to some of the new products that we had, and how -- what the take-up was of those versus the -- coming through in the parties. So exactly when that will work out, I think each campaign we work on having the right kind of products to support the party and to get the mix we expect. We also work with the fact that when people are entering the business, new recruits, they will buy an initial kit of products at a fairly low margin, and also have the opportunity to get started in the business with initial orders that are a little bit lower margin. So actually when we see big recruiting pushes, that can impact the mix as well.

So the product mix issues seem like they go somewhat hand-in-hand with the growth you're seeing in the sales force and the sales line.

Some aspects of it, that's right.

All right. Thank you very much.

Yeah, Chris, we launched some additional color products in Q3, which have lower margin, as well. That impacted it. And another comment about -- our focus with BeautiControl right now is clearly we want to grow the topline, but also grow profitability, but the priority right now is to get share out there right now, and continue to fuel the growth of the sales organization, and make sure we have capacity to keep up with that. So I just want you to have a sense of where our priorities are right now. It's get this business, you know, this kind of growth can keep that momentum going.

Okay. Thanks, Rick.

With J.P. Morgan, we will hear from Dara Mohsenian.

Good morning.

Good morning, Dara.

Getting back to BeautiControl America, was the sales mix issue, or the lack of capacity the bigger margin issue in the quarter?

I don't think it was a lack of capacity. We needed to invest more in capacity. It was more a mix.

Okay. And when do you anticipate these investments behind capacity will start to ease up? Is this something that continues over the next couple of quarters?

Well, on the manufacturing capacity itself, we'll be working on that in the first half of next year to actually add some capacity. Some of the other things that we've had related more to the distribution side in there, as well, as we had manufacturing capacity, that will give us more room on the distribution side, so I think it will be into next year.

Okay. And on Q4, your implied guidance is moving down for Q4 earnings after a better than expected Q3, and I know you highlighted this a bit earlier, but I'm just wondering if there's anything specific that is giving you guys less optimism for Q4 than you might have had a few months ago?

I don't think it's anything in terms of less optimism, but when we looked at what's going on with our various segments and the overall guidance, again we brought up the low end of our range, but then narrowed it as we have more visibility now, and we're comfortable with the full-year at 1.45 to 1.50.

Okay. Thanks.

Our next question will come from Mimi Sokolowski with Sidoti & Company.

Thank you. Mike, I just have one or two questions for you, I think. What was the biggest surprise in the third quarter? Because certainly it was a pretty big upside considering where you were starting from, and it sounds like things were about as you expected, but why did you beat so handedley.

Well, we were a little bit better in Europe, not withstanding we were down versus 2004, we were better than what we baked into the forecast there. We also got a bit on the tax rate, where we had on audit settlement that helped us for little bit over a penny. So those were the two biggest factors.

And that promotional activity that's going on in Europe, how long will that continue and when did it start?

It actually started this last year, to close the size of the sales force gap, primarily in Germany. Again, Q1, we were down if sales force size 8%, and actually this -- about the second quarter of last year, when we started putting more focus on that, although there has been focus, but we've started putting more money behind it, because -- and what it has shown is that now we've closed the gap on that.

And I would add, your last question on surprise is we -- we were hoping to see this happen in the quarter, that we close the sales force size gap, but you can't count on it. There's a big unemployment rate in Germany right now, particularly there's been a lot of unsettlement there with regard to the chancellor, who was going to be the chancellor. There was four weeks of uncertainty there, and that had consumers sitting on the sidelines for most retailers. So if anything, I was to tell you, if I was to say what surprised us is how effective our sales force was at -- and it's the positive to the channel of direct selling, they got out there and fought through that. So I didn't expect it.

Are you extrapolating any sort of trend surrounding that into the December quarter?

What we see there in terms of return on sales, if you look at the fourth quarter last year in Europe, we were at about 28% for return on sales, and given what we've said about being 20% plus this year for the full year, it implies that we'll still be a few points below that, below last year in the fourth quarter, but that's how we kind of see it coming together.

Okay.

Give us the confidence that it will be 20% or better, though, for the full year.

Okay. And the last question definitely is for you, Mike. Was there any favorable currency impact in the fourth quarter of December last year?

You mean the year-over-year last year?

1.28.

I think it was. We can go back and get that number. When we look at 2005 versus 2004, based on the rates at the end of last week, we'll be $0.05 worse in FX in the fourth quarter this year versus last year.

Okay. That's helpful. Thank you very much.

You're welcome.

Our next question will come from Eric Bosshard with Midwest Research.

Good morning. A couple of things. First of all, the Europe moment and the Europe profit line I would like to understand a little bit better. First of all, on the sales momentum, I think you commented Germany crossed into positive territory in October. Can you talk more about your confidence in the sustainability of that, and what has driven that recovery after that market has been weak for quite a long time.

Part of the, Eric, the confidence, I would say I have a moderate confidence going forward, because to close the gap in the size of the sales force, we didn't do anything extraordinary, like drop the price of the sales kit, or offer extraordinary kinds of things. You still -- these are still high quality recruits out there, they're still having to go through the normal hurdles. So that gives me a moderate level of confidence going forward that we'll see some better trends in Germany.

Do I think we're going to see anything dynamic in Germany? Not with 22% unemployment in East Germany, the former East Germany, and 12% overall. It still is the wind's in your face.

When was the last time Germany was up year-over-year, and have we seen some points in time of that, or has it been awhile?

I think it was the second quarter of 2004 when we last had a year-over-year positive in the total.

Okay. And your comment notwithstanding, Rick, you think Germany can be up in the fourth quarter here, fourth quarter of '05?

Well, we're well positioned. The first thing that would be the precursor to it is what is the size of the sales force, and the sales force, they're entering with a plus. If we had a deficit, I would say unlikely, because the only way you're going to make is through increased activity or productivity, which are hard things to move.

Secondly, the profit swing in 3Q, the operating profit was below what we were looking for in 3Q, and it looks like you get that money back to a degree in 4Q, was it simply just the timing of the promotion of that move from September into October, and if so was the magnitude of that spending similar to what we had last year just the timing was different this year?

Well, Eric, in the third quarter, we did spend more, all other things being equal, not just timing, on getting the sales force moving in Europe, so that was a difference, it's not timing. When you look at the manufacturing cost, some of that is the resin, and we talked about the fourth quarter comparison actually still being negative, but probably not quite as negative, at least based on what we see right now, as it was in the third quarter on resin. So those are two factors.

We did see, also, some higher costs come through because of lower capacity utilization. Some of that was in the second quarter, and then that comes through in what you actually sell in the third quarter, and so those are the main factors.

Eric, I'd comment on that, the last one on the lower capacity utilization off of sales increase. Part of the reason for that is that a part of our long-term strategy is to get more third party source products. Well the short-term negative to that is capacity utilization.

As we -- again we're making some investments in Europe right now to shift our capacities to the lower-cost southern countries and eastern countries. But we felt some of that in the third quarter. That contributed, and also inventories in Europe at the end of the second quarter last year were pretty high. We made too much in the second quarter last year, in 2004. Since we didn't repeat that, that was some of that utilization, as well.

So if you look at operating profit in this segment was up in the first half of the year, it was down sharply here against a tough comparison in 3Q, is the lower operating rate or lower capacity utilization the big fact contributor to what we saw in 3Q? I know that there's a bunch of issues, but is that the single largest? Or is it promotion timing?

It's all three of them -- it's the promotional timing, it's the raw materials, and it's the capacity utilization. All three contribute.

Kind of equal contributors

Okay. And is there anything planned to deal with the excess capacity now that you have strategically moved a little bit more source product?

I think the capacity utilization probably will be fine in terms of comparing it period over period, and it was really more to do with reducing the inventory, or not producing too much in the second quarter this year versus last year.

Okay. And then --

Eric, I think it would be worthwhile at our December 13th meeting for us to, as part of the presentation, update you on our progress with regard to our whole supply chain management there. Because we're make something investments there at BeautiControl and in Europe to shift some of that. And to give you guys a little better understanding of how we're doing that.

What we don't want to do is go into one of these countries where we have a manufacturing facility, and shut it down where you've got to pay three to four years a segment and take a huge hit. We would rather really be orderly in how we shift this, and do it in a more gradual, almost transparent basis so you don't notice it much, and we don't notice it much. It's through retirements as they come.

And then second question on a similar -- in a similar vein, re-engineering expense went up significantly relative to what you had previously stated, and it appears that you're going to spend more in the U.S. Can you just tell us exactly or specifically as you can what you doing different in the U.S. within this re-engineering and what the expected benefit from that should be?

Well, I mean, it's similar types of actions, the kinds of things we've done in the past, which, you know, we'll have a lot more to say about them, I think, after we've done them. In terms of the impact, it's part of what gets us on the road toward break-even, and we'll give our guidance on December 13th.

Okay. Okay. Very good. Thank you.

We have a follow-up question from Doug Lane with Avondale Partners.

Yes, hi, can you hear me?

Yes.

Follow up was on Mexico and your comment that turns have softened there. Have you brought down your fourth quarter forecast from Latin America as a result of that, as part of the reason why the EPS number is kind of coming out at the lower end of your previous range? And then can you expand on that into the potential impact to the accretion from Sara Lee Direct in '06, because it was just a vague comment in your release, and just some color on what you're seeing in Mexico would be helpful.

We were still positive in the third quarter in Mexico, it just wasn't at as a high of rate as we saw in the first half, which was really some better increases. So we toned it down there in terms of describing the situation. There wasn't a big impact in terms of a change on the guidance in Latin America on the overall picture.

In fourth quarter?

Right.

Okay. And then any comment on how that changes your outlook for Sara Lee Direct in '06?

No, I mean I think when we -- when we kind of reiterated today that based on 2005 pro forma that we still see the 20% accretion, that includes a big contribution from Mexico. I'm talking about House of Fuller Mexico, Sara Lee Mexico, because that's the largest piece of that business.

What exactly have you seen just from a macro standpoint in Mexico that warranted a comment in the third quarter press release? Could you just give us more color generically?

The comment was about the comparisons that we're seeing in our -- in the Tupperware business itself, and so the slowing trend is saying we were still up but not as up as we were up in the first half.

So the macro, the backdrop is still no real change there, just that your sales gains are decreasing because your comparisons are getting tougher.

Yeah, I think that that's fair. There was also some impact, particularly from hurricane Stan in a couple of the regions in Mexico that we have to work through.

Yeah, the whole Chiapas area, we have a strong sales force down there. That's been impacted. I was just down there, Doug, three weeks ago and spent a week down there looking not only our businesses there, but our Sara Lee House of Fuller, and Fuller Cosmetics business down there and they look good. Product line coming up looks good. New promotions look good, so I'm not seeing any big change. I did spend a considerable amount of time with some senior government officials, and, you know, there are significant issues down there, but we've learned to generally deal with them. It's a -- it's a difficult environment.

Okay. But your business has been doing pretty well, even with that difficult environment, right?

Yeah,

Yeah.

So you haven't seen any --

No, I don't want to signal a sea change. Maybe by some of the comments in our script here, yeah, we're putting too much emphasis and probably shouldn't have mentioned it.

Okay. Thank you.

Our next question will come from Mitchell Spiegel with Credit Suisse First Boston.

Just a couple of questions. On the financing for the acquisition, just to be clear, you are going to [inaudible] plus a 200 million revolver?

We're going to enter into the term loan and we'll have the revolver, the total borrowings are expected to initially be $825 million.

But the components of the term are how much?

The term is 775.

Okay. The entity issuing the debt is the holding company?

Right.

Okay. Do you have any issues repatriating money from abroad, or do you move cash pretty seamlessly across the world?

Well, it's something we always need to work one on but we've been successful and expect to continue to be successful in getting back the cash that we need. We generally had, in quarters where we've been able to pay debt, which hasn't been recently, we've had about $20 million of cash in the system.

Okay. So when you look at the balance sheet number for the cash at the end of the quarter, it's [inaudible] million?

Yeah.

How much of that is in the U.S.?

Well, I mean, we didn't feel it necessary to try and emphasize getting cash back for the U.S., because we didn't have any debt to pay, but it gets back to the 20 million or so that we would have in the system. Normally would be foreign cash. If, you know, we had debt to pay, we would repatriate everything and pay down, and still have 20 million in the foreign units.

Okay. And your ability to repatriate cash, is it subject to any unusual tax rates?

Well, I mean, it's a case-by-case basis that we manage, so that we get, we repatriate higher or lower tax earnings when we have foreign tax credit credits we can use and manage things that way. So certainly it's not a free ride, but we've been able to manage that over time very successfully.

Okay. And then your comments regarding your dividend, you -- everything we've seen so far, you plan out on maintaining it with this new cap structure?

That's right.

Okay. Thank you.

We'll hear next from Tom DiBella with Turner Investment Partners.

Hi, I have two questions. One thing is probably a misunderstanding on my part, but I thought you said that the impact from the resin cost is about 3 million for the quarter, but you expected that to be lower in the fourth quarter. Is that correct?

Yeah, I was referring to the year-over-year impact.

Oh, the year-over-year. Okay. Because I was going to say on a seasonal basis, you're much stronger in the fourth quarter, so that would be a significant decline in resin cost then, right, if I was just looking at the absolute number?

Right, but we're talking about the year-over-year quarterly comparison.

The second question is, could you give us on update on the sale of the land, how that's going? And of course, on a corporate level you had considered maybe being a little more aggressive there, since you are taking on this debt, a debt of which you can handle, but, you know, you could reduce it a little bit by being more aggressive on the real estate side.

I think the land development process is going extremely well. We did talk about this slight delay because of some governmental approvals that moved $0.05 of what we had in our outlook in July -- $0.05 of earnings -- into 2006, and so in term of being aggressive, we're actively marketing and selling as quickly as we can, while still maximizing pricing by doing the right thing kinds of things to get that done. So I think we'll continue down that track, and over the next couple of years we'll be able to sell the land.

Can the land be expanded a little bit? Can you sell a little bit more based on what's going on there, or is it basically it's the full tilt which you've put up?

We've basically put up for sale the land that we have.

Okay.

Yeah, we sat out there initially, my goodness, it's been probably four years, we said it was 80 million to 90 million we would get. We're just shy, aren't we, Jane, of 40 million right now, at -- By the way, big, you know, all of the zoning approvals are in, and what we're working through is negotiating impact fees with the local governments, and so we're managing this on a very orderly basis, and one might say to be more aggressive, just sell it in a lump to one developer. Why would we do that? It would be like giving away margin.

We have a nice flow going through right now. We're working with Orange and Osceola county, and I expect, you know, as a matter of fact, what I would like to do in December, let's update you more on the land, as well. But, you know, we've still got minimum 50 million to go.

Okay.

In the next couple of years.

Okay. Thank you.

Our next question will come from Connie Maneaty with Prudential.

Hi, I have two questions. First of all, can you tell from your consultants about the tenor of Christmas, how consumers are feeling?

Well, I mean, I can -- yeah, we get a lot of feedback there, and I can tell you through the Christmas season with regard to retailers, if I was business particularly affected by these hurricanes, I would be concerned as a retailer. Basically, we're a go-to business, where our sales force gets people out there. If we were waiting for them to come in, I would have a concern over the fourth quarter, because what we're noticing in conversations, just anecdotally with the sales, is that they've got to line into it a little bit more.

You saw what happened at -- even with the exodus in Houston -- Katrina startled a lot of people, and so you have some people re-evaluating. I saw some studies in Florida, consumer confidence studies just this last week, by the way, that the consumer confidence level was down 11% in the last two months, and they said it was directly related to gas prices, and amount of disposable income. So I think there are some issues there in this country.

That's helpful. Secondly, as you go about recruiting, can you tell if your new recruits are coming from other direct sellers, or are they new to direct selling?

Primarily they're new. Most people when they come into a direct sales company, they're invited, for example, to a Tupperware or BeautiControl party, and then at the end of it, the host, who is usually someone they know, says, hey, you ought to think about it. They're generally not considering do I do this or another direct sales business. So, I mean, I would say that the number is probably less than 10% come from another direct sales company.

All right. That's helpful. Thanks.

There are no further questions at this time. Mr. Goings, I'll turn the call over to you for closing remarks.

Thank you. Thanks everybody for your time. I mentioned earlier we're going to be holding a breakfast here in December. You might want to write it down. We'll be sending out -- Jane, it may even have gone out. It's at the Four Seasons here. We're going to try to make it a very brief, crisp meeting here from 8:00 to 10:00 a.m. in the morning. And at that time, we're really going to amplify this Sara Lee businesses. We're very, very excited about this acquisition, and then we'll give you the outlook on 2006.

We're also very confident that this portfolio, together with our Tupperware business, we have a high level of confidence in our Tupperware business as well. But when you put them both together, the Sara Lee businesses give us a greater engine for topline growth, and, you know, and you get some of the great cash flows and strong margins out of the Tupperware business, so it's a wonderful combination. We think our business model, Tupperware, is the strongest for Western Europe in direct selling, and it's going to be a great combination putting both of these together. So I want you all to be able to meet some of the personalities involved with this.

Again, part of the reason of this was to grow the topline, but the other reason was to make it a better investment portfolio, and we think what it should have is some kind of multiple expansion impact. Everything we've seen thus far going through the due diligence process, and now the couple of months since then, there have been no surprises out there. We've got a good management team, they're good companies and good brands, and I have a lot of confidence for the future with these two together.

Anyway, thank you for your time today.

That does conclude today's conference. We thank you all for your participation. Have a great day.