Tupperware Brands Corp (TUP) 2006 Q2 法說會逐字稿

Good the everyone and welcome to the Tupperware Brands Corporation Second Quarter 2006, Earnings Conference Call. Today's conference 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, sir.

Thank you and good morning, everyone I'm here with Mike Poteshman, our CFO, and Jane Garrard, our Vice President of Investor Relations. As usual, some of the discussions will involve future outlooks. I refer you to the Company's position on such statements as it appears in our recent press release and our SEC filings.

Turning to the second quarter, overall, a lack of growth in the sales force in certain markets resulted in a disappointing 2% decline in our top line for the second quarter. In spite of the significant growth in many of our core Tupperware markets, Fuller Cosmetico, Mexico, as well as dramatic growth in our emerging markets, weakness across most of the smaller international beauty businesses, Germany, and a number of Tupperware countries really dampened results. I'll get into those in just a minute. One of the consequences of those trends is a $0.05 reduction in our full-year outlook range after adjustments.

Notwithstanding, though, the quarter sales comparisons, there are some very strong signs of traction from our strategy in every segment, and I'm going to drill down and update you on those today.

Let me start with a discussion on the transition of the international beauty business. As you know we made the offer in -- it was last August, we closed in December. And so we have been through our second full quarter with these businesses as part of our portfolio. Let me expand.

We continue to see very strong double digit sales growth through the Fuller Cosmetico's brand in Mexico from a sales force of over 400,000 and importantly, the sales force continues to grow. Since this is the biggest market among the acquired businesses, we were very pleased with this performance and we look forward to continuing to capitalize on that momentum. I got a number of people ask us why the Fuller Cosmetico's business, and it was really the crown jewel of this acquisition, why it has done so well while the smaller Sara Lee units have had considerable disruption. And I really think it speaks to the size, momentum, business model, and the strong management team we have at Fuller Cosmetico's. I think it mitigated the disruption, they just plowed right through it, and it we have had continued momentum. We believe we'll start to see the same kind of momentum return to the smaller acquired units. I've looked at them firsthand, we have held retreats with their management teams and we start to see some traction, they are getting their legs under them.

Another point of progress in international beauty is really the power we're going to have combining the Tupperware and Beauty brands in South America. And this is where we function more as a channel of distribution, rather than a brand. We're not planning-- and this is important for me to make this clear-- we're not planning to combine the brands Tupperware and Fuller or our other Sara Lee businesses in our more developed markets of the world like Western Europe, North America. However, it's appropriate in Latin America where the traditional direct seller will carry five catalogs of competing companies. We're looking to replicate our success at Fuller Mexico, where we use a three week selling campaign and a single-level sales force compensation system.

Also in South America, we have about completed a reorganization that includes distribution consolidation and the restructure of the sales and marketing leadership. Now they have also a combined Fuller Tupperware brochure and have moved to that campaign cycle. The combination of both the front and the back end synergies should provide a great opportunity in this region, and we're looking for growth in South America.

Regarding other opportunities for international beauty, we are making progress with our Nutrametics business, primarily the largest piece of that business, which is really Australia. We knew going in that this business was very much like BeautiControl North America, in that we emphasize in this skin care products, as opposed to cosmetics, fragrance, and toiletries We have also a multi--tiered sales force compensation system and it's primarily a party-selling situation. At Nutrametics we have implemented an updated party concept much like we did with BeautiControl, with products tied into an [experiential] demonstration, along with a very strong sales leadership progression program. Again it's very similar to our BeautiControl North America leadership growth plan. Local management and the sales force, they have embraced these concepts and starting in the third quarter, we expect to see positive sales comparisons over last year.

By the way this was the second biggest piece of the acquisition, the Nutrametics Australia.

Our full year sales expectations for all of international beauty is, for organic local currency, sales growth of about 3% with an improvement from 2005's ROS of 10%.

Let me turn to BeautiControl North America. Although we had a sales decline in North America, due to lower sales to new recruits, the total and average active sales force were up over last year as you can see from our release, with the sales leadership pipeline now hitting a record high. Remember here, too, in Q2 we're lapping a 36% increase last year. The-- the important news looking forward is, the sales force trend line along with the current recruiting patterns, gives us confidence to confirm today our outlook for double digit sales growth for the second half of the year for this BeautiControl business. Quite frankly they had in the second quarter last year a promotion, which was a record-breaking recruiting promotion, and new recruits start with a lot of inventory, and the recruiting promotion this year was successful, but we found last year, we had an inability to really transition many of these people into activities, so it was a more moderated approach this year. So, again, confirmed today our out look for double digit sales growth for BeautiControl in the second half of this year.

Turning now to Tupperware Brands' markets, the emerging markets came in with a strong 40% up over last year, with Russia up an incredible 80%, and China up over 40%. These markets continue to meet our sales growth expectations, and they are contributing more and more profitability as well.

Walking through each of the segments, though, let me start with Europe. Here we saw sales in profit growth over last year in a number of our markets, France, South Africa, the emerging markets of Turkey, Russia, Poland. However, as you can tell from the release, we had a sales force size deficit in Germany and that lead to lower sales in this, our largest market. Which together with this $3 million lower B to B transactions, which, these are kind of episodic, these B to B transactions, and they're opportunistic, we don't want to do too many of them, but they help brand building when we do the right ones. Anyway, when I combine Germany's softness with the $3 million B to B, this really offset the progress we made in many other markets in Europe. We're continuing to invest in Germany, to recruit and to build the size of that sales force. We have a minor deficit there right now, and we're also investing in sales leadership training to make sure we train our new consultants for heightened business success.

I also want to reiterate, we have a terrific leadership team there in Germany, and they are focused on the right things. I spent a week with them in the first quarter, really taking apart the business, putting it back together again along with Glenn Drake, our Group president, and we have a lot of confidence on who is on the ground there.

Regarding sales leadership, we are, for Europe, rolling out a new subdistributor level in several of our markets in Europe and Asia-Pacific that was piloted in very successfully, I might add, in South Africa. This isn't a dramatic change to our compensation change, dramatic in the case like for the U.S. It is an evolution in compensation, in that the sales force now takes up a leadership role and are compensated for recruiting and developing consultants under them. So it makes it a beefier earning opportunity. This provides support also to the distributors who's span of controls might be too large to provide division sales force training contact, motivation and again, it expands the earning opportunity. Having an avenue to build sales force leaders is the key in our business, because it allows all levels to capitalize on the earning opportunity, while creating a recruiting culture, which is the key driving point of our business, and that builds the sales force.

Additionally we're rolling out the sales leadership training that we launched here in the U.S. about 18 months ago across Europe, and the real focus here is refresher training for those matured distributorships, and new training for the new ones.

In terms of our full year outlook for Europe, we expect sales to be down by low single digit and a return on sales 2 to 3 percentage points below 2005's, and last year it was just under 20%.

Looking specifically to Asia-Pacific and the Mexico segment, we were pleased to see every market in this portfolio up except Australia, in sales and profits over last year. We were particularly pleased, again, to see another quarter of year-over-year sales and profit growth in Japan, where we have had some difficulties over the last several years, but the team has done a great job of rebuilding. This Japanese segment is performing consistently and for the full year we expect a slight increase in sales and a 2 to 3% point improvement in sales for 2005's 11% -- that's for the overall Asia-Pacific and Mexico segment, again, up 2 to 3 percentage points, and ROS improvement moving up to 11%.

Let me turn now to Tupperware North America. We're now 14 months past the rollout of this new multi-tiered compensation plan. We're pleased to see that the leadership pipeline has been growing with the number of sales force members who have committed to sales leadership, really doubling since the first of the year. Additionally the top directors, the top 20 of them, we just did a comparison and they're earning 10% more than last year, and also the number of recruits that place an order within their first month of business continues to strengthen and increase. We have also seen sequential improvement in -- in this deficit of sales decline since the fourth quarter this past year, and based on current sales force trends, we expect to see year-over-year comparison of active sellers improve in the second half. 2006, is our-- we hope our last investment year, and we expect an inflexion point in 2007, leading to sales growth and profit.

By the way, trends in our U.S. business strengthened as we moved through the second quarter with June even better, and we're seeing that same improvement continuing in July as well. So I think we have got this business model right.

Now before I turn it over to Mike, I would like to highlight a few things regarding our decision to realign our group presidents. Now that International Beauty -- we have been through the second quarter of it being part of Tupperware, we believe we can take better advantage of our growth opportunities in the beauty business by having them fall under one leadership team, so consequently, we're moving the BeautiControl North American business now under Simon Hemus, we didn't have a beauty business in the U.S. under Simon's portfolios. Simon came over from Sara Lee and has had -- at one point in my past life he was head of all marketing for Avon in the U.S., so he's have had lots of experience in this market. So we feel good about this transition. There are also, we believe, more front and back end synergies to be gained in the beauty businesses, in both leveraging our products as well as recruiting and selling techniques, so we think Simon will do a great job, and we think this will be a important piece of our business as beauty continues to grow.

Regarding Europe, as you can tell from our release and my discussion here today, while many of our markets are doing well well, we want to see more progress in several of our markets. We think it's important to have the leader on the ground in Europe to ensure strong focus on the fundamentals of the business, and therefore, we have asked Glenn to really -- Glenn Drake, to focus on Europe, Africa and the Middle East. Quite simply, we make so much money there, we have a very strong and profitable businesses there, and so many growth opportunities, particularly, with the emerging markets, and to best, really, manage that we think Glenn needs to be on the ground there.

Tupperware North America will be turned over to Dave Halversen, and as I was saying at our exec committee meeting yesterday, he turns -- Glenn turns it over to Dave in good condition. We have made all of the big changes. The heavy lifting is done now. We expect to see a start to grow and make profits in 2007. David will have it and he'll continue also with the Tupperware businesses in Asia-Pacific and Mexico. We have a lot of confidence that this structure is going to help us.

Will it be the structure we always use? Probably not, but it's the right structure for today to take advantage of these growth opportunities and to move us toward our operating top line and margin goals.

Let me turn it over to Mike and then we'll handle your Q&A.

Thank you, Rick. I'll start this morning with a look at the earnings per share components for the quarter after adjustments.

Earnings per share excluding items was up $0.04 to $0.49, which was the low end of our guidance range. This reflected accretion from International Beauty segment profit of $0.22. We had smaller upsides in all of the other segments except Europe. Going to the other way we had higher interest expense of $0.09, primarily associated with the acquisition, lower profit in Europe of $0.09, and a higher tax rate accounting for $0.07.

Regarding items that we adjusted out of the GAAP EPS this quarter, the primary component was $6.2 million for amortization of intangible asset related to the International Beauty acquisition and approximately $500,000 of restructuring charges in the Philippines and Argentina. Our sales expectation was $445 to $450 million versus the 439 million we reported, primarily due to lower sales in the beauty segment. Given the trends in International Beauty and lower profitability in Europe, as you can see in the release, we pulled back our full-year guidance after adjustment business $0.05. We continue to expect an annual sales increase of 5 to 7% in 2007 and forward coming from our beauty businesses, Tupperware emerging markets and improved recruiting and sales leadership training in our mature Tupperware businesses.

Rick updated you on our full-year expectations for results by each of our segments. Putting it all together our full year GAAP EPS expectation is $1.40 to $1.50 and after adjustments $1.67 to $1.77. Included in this outlook is a $0.05 decrease in the range we gave in April, excluding items, primarily reflecting lower expectations for sales and profit by International Beauty in Germany. Other changes to the previous outlook are for land sales to be $0.04 from losing one transaction that had been expected in the fourth quarter, net of adding an amount for the sales of excess land in Australia. The outlook for re-engineering costs had been raised $3 million for the full year.

Our outlook includes a tax rate of about 22%, excluding items which is a 2 percentage point improvement from our last update. Interest expense is expected to be 47 to $48 million with the increase of about $45 million reflecting the write-off of deferred debt costs associated with early pay down of our term loans, along with higher market rates. For the third quarter we are expecting sales at 390 to $400 million, with Tupperware and BeautiControl sales up slightly in total, as reported in local currency, and International Beauty contributing 120 to $125 million. GAAP EPS is expected to be $0.07 to $0.09, and after adjustments, EPS is expected to be $0.08 to $0.10.

In terms of the cash flow and working capital management, our cash flow from operating activities for the six months improved $8 million compared with 2005 while net income together with depreciation amortization was up 3 million. We increased our payables and accruals the first six months of 2006 compared with the large decrease in 2005. This primarily reflected levels of payments at the end of 2005 versus 2004 due though timing of our fiscal year end. 2005 ended on December 31st, as a result of -- of the 53 -- 53rd week in last year's calendar with 2004 ended on Christmas. Going the other way, we had higher receivables this June compared with 2005 reflecting the level of June payments and some higher past dues from distributors that we're working on collecting. Also, we had some income tax refunds in the first half of 2005 in some of our international units which we didn't match in 2006. We were pleased to be able to make a $20 million voluntary pay down on our term loan. Our full year outlook for cash flow provided by operating activities, net of investing activities, is now about $85 million.

And with that, we're going to turn the call over for questions.

Thank you. [OPERATOR INSTRUCTIONS] We'll take our first question from Doug Lane with Avondale Partners.

Good morning, everyone.

Morning Doug.

Mike, just a clarification on the interest expense for this year of 47 to 48 million, is that a number that's net of interest income.

Yes, that's net.

Okay. Rick, on the North America business, sounds like you are pretty positive about the momentum gathering there and if I heard your right, we should be seeing positive numbers on average actives--

Doug, you dropped off.

Sounds like you are pretty positive and that the business is gaining momentum here over the summer, so I just want to make sure I heard right that we should be looking for positive numbers on average actives, sales growth, as well as positive profits for North America in 2007.

Yeah, our look is that this is from what we now see from strengthening momentum is that this should be our last year of investment in the U.S., and it's really sales force growth indicators that are leading us to that. We have our expenses for this new value chain in line. So hopefully we'll see a crossover in the second half of this year in the size of the sales force versus previous year, and that leads to you know, the positive comparisons next year and profitability.

Do you think you could be profitable in the fourth quarter this year, that is usually-- well, I guess it's really not much of a seasonal lift in the fourth quarter, but could we see positive profit in the fourth quarter this year or should we wait until next year to really look for positive numbers?

Frankly I think we ought to wait until next year. They are pressing like mad the U.S. business to do the right kinds of things, you know, but-- but I don't want to get ahead of ourselves. What I think -- is why I'm proud of this team, this is-- as you and I talked in Boston, Doug so many direct sales companies don't make it past 10 years and hardly any past 25 years, but it's rare past 50 years, because they don't transform product line, sales force compensation, all of that. They have done all of that over the past six and seven years, and we're starting to see that traction again, and as the brand has moved up to be the second most respected household brand name, we think that will start to give it even stronger legs on it. So we're very confident this is going to be a very strong business in the future.

Sounds good. Now shifting to international, you mentioned the strong growth in the emerging markets. Do you have a number for what those six markets were as a percentage of sales were in the quarter?

Can we break that out?

Yeah it was 7%, Doug, without International Beauty, because obviously that brings up the total, we would have been about 10%.

They are clawing their way up there especially when we start to get these 80% increases in markets -- Russia is really becoming very significant us to. So I think the two things you'll see in the shift in our business moving forward, is A, this contribution of emerging markets get more significant move into the teens, and again, moving northward the contribution of beauty as well so that the texture of the business looks different.

Lastly, you know, you have a business in India. We don't hear much about direct selling in India. I know it's a relatively small market on its own, but I imagine it's a pretty big opportunity. Can you talk about the direct selling market in general in India, and what you see your opportunities there?

We have been in India for about ten years. There are two markets out there that are very complicated and we're not anybody has really figured it out. One is Indonesia and the other is India, and both of them are in the Top 5, population-wise. I mean, Avon-- I think the Avon exited Indonesia, and I remember we opened it when I lived and worked in Hong Kong. We have got a good business in Indonesia, but for the size of the population, it ought to be bigger than it is, and-- and we continue to work to try to figure-- figure it out.

India is the same kind -- with more than one billion people there, but still it's relatively small middle class, you know it's 100 million, but it is a very difficult market to try to figure out what compensation program is -- is correct. Amway has had some success, and we're No. 2 in the market, but the road is littered with a lot of failures over there. I still think we have got to experiment more with our compensation system. We also had a shift, we had to do in India, storage was mostly with products was done with tin. They would store in tin kind of cans and the shift to using a resin. We have made that positive shift. But frankly we look at each other and say India ought to be a bigger contributor to us than it is. But, you know, it's a profitable market.

Okay. Thank you.

[OPERATOR INSTRUCTIONS] We'll go next to Dara Mohsenian with J.P. Morgan.

Good morning.

Hi, Dara.

In Europe, I think I ask this question every quarter but can you give us greater detail on why return on sales has come in below your forecast, and what gives you confidence that's going to ramp back up going forward?

I'll give you a Part A to that, and Mike, if you feel the need to do a Part B, as always, jump in.

Dara, there's really -- we have three Europes, we really have there. We have. one Europe is the emerging markets, and it's everything from the former Soviet Block through Turkey and part of the Middle East, and those are-- you know, as we said, just growing very, very strong. Nice gross margins in those markets. However, you don't get -- the average party size can be 1/4 the size of-- of a Germany.

Second Europe we have a is-- the cluster of other countries there from the Beneluchs, France, the Mediterranean markets, and the Nordics, There we have, eh, a series of puts and calls, but overall, they are up.

And then the third Europe that we have is Germany. It is so large in our-- in our portfolio-- the distributorships are very large.

Getting to your question with regard on margin. The first Europe-- the emerging markets, their sales force are up dramatically. We're holding our margins. The other second piece of Europe from France, Nordics, Beneluchs, Mediterranean, we're not having to invest very much to change our value chain. And their sales force size is strong.

The drag, really, is the size of our German sales force. It's down mid-single digit, and that's where we have to invest. We have to invest in A, recruiting programs, in offers to consumers to come to a party, to buy at a party, so you are really finding that investment is required. It usually starts with investment in the recruiting. I would hope to see that -- us reclaim and start to pass over the size sales force we had last year, before the-- you know, we get into the core of the fourth quarter. But it's going require some more investment.

We have learned from the past, though, dare remarks it is always worth the while to throw resources and get the number of sellers up there. Even if there's softness in the purchase power of consumers, if we can have a greater number of sellers out there, the average consumer may buy less, but when you add it all up, we can have a sales increase in that. And that's usually the counter-cyclical nature of direct selling. So that's why we continue to do it.

Forgive the long-winded answer, but it's not one simple market and one answer.

Great. That's very helpful. And are you considering getting any more aggressive with your cost cutting or your manufacturing base going forward to help offset some of that margin pressure in Europe?

We're continuing to be there, Dara, opportunistic with regard to shifting to third party sourcing. One-- one of-- one of the main reasons that many manufacturers are not building factories in western Europe right now is the exit costs, and so frankly, you know, we'd be-- you know, we'd be more aggressive if we could be, but we would rather just gradually let the attrition in these factories and retirements, than take big charges. But we're pushing like mad and paddling in that direction.

Okay. Great. And I'd love your perspective on the U.S. consumer at this point, and if you think you have seen any impact to your beauty business or the Tupperware business in the U.S. and your perspective on the consumer at this point.

Yes. The-- I guess what we're seeing is with consumers, consumers are looking for values, and we have got to spend more -- pay more attention to having the right kinds of promotions, and in our beauty business in the U.S. and in our Tupperware businesses, you know, a good way to look at it is the way Lauder would do a promotion. You hardly ever say Lauder or [Urmays] put things on sales because it really dilutes the brand image. What they'll do is purchase with purchase and gift with purchase. So it requires us, because we're a leading brands and -- particularly with your Tupperware business and we're a fairly high-priced band with your BeautiControl, to be much more creative with consumers there, because consumers are looking for what is new and what is a better deal, and we're reluctant to get there just by discounting.

Okay. Thanks.

We'll go next Mitchell Spiegel with Credit Suisse.

Hi, do you guys have any pro forma information on how to look at the business with Sara Lee adjusted in '05.

Yes, we do. We can get you that if you want to contact Jane Garrard.

Okay. So you don't have anything handy that gives you that more apples to apples comparison on how results were in the quarter.

Yes, in the quarter, we were-- I guess, all in, we were down about 1% for the segments, if you were to have the International Beauty results in there last year on sales.

Okay. And then your guidance of 140, how do you call-- do-- what is that backed up into in terms of EBITDA? What is the range?

It-- it's 140, I believe is somewhere around 230 million in EBITDA. I would have to go back and do the math.

Okay. Terrific. Thank you.

Mitchell important thing on these acquired Sara Lee businesses, I mentioned it in my prepared marks, but it's really interesting. We're looking at this big -- our main attraction was the Nutrametics and the Fuller Cosmetico's business, and the Fuller Cosmetico's business, overall these businesses were almost half a billion and Fuller was half of that. This thing is operating at very strong double digit topline and a very strong double digit ROS, and it's been remarkable how it's withstood some of this disruption this last year. But the other ones-- I'm getting growing confidence, we're disappointed that they got banged around during the year. A lot of-- there was a lot of poaching of sales managers from other direct sales companies as we went through the year, but that is-- that is really discontinuing. So I'm feeling better about the rest of that portfolio. But all in all I have got to say, this integration of these businesses, the culture, the business model, it's really going well.

You said the Fuller Cosmetico did about 250, revenue?

Prior to the acquisition.

And how would you compare the competitive landscape in Mexico as it relates to Jaffer?

We're very competitive with them, but we compete in a different segment. I'll give you an example of that. Jaffer will sell on average a $10 lipstick, and as you know you have less than 10% of the population there that are middle class in Mexico. We're competitive with Avon there. As a matter of fact we're about $0.50 per stick less than -- we're averaging a $2.99 lipstick, so we really do value for money down there.

The other thing that we-- we-- we're competitive with Jaffer is more of a skin care business down there, whereas Mexico is much more a color and fragrance market, and our Fuller business has the dominant market share of fragrance. And the good news about fragrance is that it's generally north of 80% gross margin. So we think we can compete with the bulk of the population can afford to buy our products in color, and in fragrance, whereas Jaffer is kind of forced to really deal with that upper tier, and it's not really big, and particularly it doesn't go much outside Mexico City and about four other main cities.

Forgive the long answer, again, it's a complex market.

Thank you very much.

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

Thank you. Again, thanks for you interest in Tupperware brands. An important thing is happening here, and I think one of our challenges is to communicate the shift in what Tupperware is to what Tupperware is becoming. We were a company that sold plastic food storage products, primarily one method. Now Tupperware is really shifting to a portfolio of direct-selling businesses, which also includes Tupperware. And we utilize now, business models, compensation plans, and product lines, which are appropriate for the various markets where we're going to complete. So as we go forward, we're going to be talking about framing the company much more along those kinds of lines. Anyway, we thank you for your continued interest.

Thank you, everyone. That does conclude today's conference. You may now disconnect.