Tupperware Brands Corp (TUP) 2006 Q3 法說會逐字稿

Good day everyone. Welcome to the Tupperware Brands Corporation third quarter 2006 earnings conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I'd like to turn the call over Mr. Rick Goings. Go ahead sir.

Thank you Justin. Good morning everyone. Joining me are Mike Poteshman, our Chief Financial Officer, and Jane Garrard, our Vice President of Investor Relations. As usual, some of the discussion will involve the future outlook for the business, so I refer you to the Company's position on forward-looking statements, as it appears in the recent press release, and in our SEC filings.

Getting into my comments it has been about ten months now since the acquisition of Sara Lee's direct selling units. Tupperware Brands is really now is a different business. It is a portfolio of direct selling companies, made up of the former Tupperware businesses, as well as an additional portfolio of exciting international beauty businesses. I will get into some of those.

Our product category mix now consists of 60% Tupperware and 40% beauty. Importantly in most markets these products are sold through separate direct selling companies with separate sales forces. Going forward, we are going to do our best to group our segments for the purpose of these kinds of discussions into the Tupperware businesses, and then separately the beauty businesses. This we believe, will allow greater insight into the contribution of each of these business segments.

Like most portfolios, we are always going to have some puts and calls, particularly when you have a portfolio of international businesses. Yet on balance, which give us height and confidence in the future of Tupperware Brands Corporation, is the increasing number of business units, which are now growing, and will be growth platforms for the future. Also, the number of markets which are experiencing performance issue were rather limited in number, although they are important. I might add that remedial actions are in place in each of these markets.

Let me get into the quarter, starting with the beauty segment, BeautiConrol North America and International beauty, each of these segments were up topline 6% compared with last year. In the International beauty segment, Fuller Cosmeticos in Mexico, which by the way represents more than 50% of the international beauty segment, and a very strong double-digit sales growth in the quarter, which is really driven by the increasing size of that sales force, which now is over 400,000. It is really cutting away at market share with many of the competitors there. We were pleased to achieve also, sales growth international beauty in Central and South America as well, so the future there looks good.

The Nutrametics unit and the Philippine business are feeling some disruption from the acquisition transition, and as a result they were a drag on the topline. And yet I might reiterate, both of these are quite profitable, and we have the, I believe the right initiatives in place to get momentum going.

Regarding BeautiConrol North America there we had an increase in sales and an improvement in the ROS for the quarter. Also, worth noting is the sales leadership pipeline, which is really a key driver of the business, looks really good now, and it is supported also by very effective recruiting during the quarter, so it bodes well for Q4 and next year. The overall second half expectation for BeautiConrol by the way, is a high single digit sales increase.

Let me get now into the Tupperware business units. I'll start with North America, where we were happy to see the number of the sales force metrics strengthen. This is really a result of the refreshing of the major levers of the businesses. This has been a long and difficult transformation of our U.S. business, but nevertheless necessary, and now we are starting to see the traction. We also are starting to see growth in the number and the earnings levels of our key sales leaders, and these are really the career people in the business.

Developing these people is really the key to the future salesforce guys, as they do most of the recruiting. The sales increase in North America the third quarter, by the way was the first time we have seen a sales increase in this business unit since 2002. So it has been a long and winding road, but again necessary. In Q4 we expect a low single digit sales growth. As we get into next year, the sales . trends in the North American business should continue to strengthen, and again we are expecting profitability in 2007.

Let me go to Europe. As a reminder, we moved just for efficiency purposes and proximity, we moved our South African beauty units. We have two businesses down there, [Aborige] Lane and [Swissguard]. We moved those into our Europe, Africa, Middle East segment, as we felt they could be managed for effectively in the same time zone.

After excluding the impact of this move, Europe sales were down. But they were almost entirely driven by weak German results. As we look at our European portfolio, let me share with you how we look at it here, we basically segment it into three components. First there is Germany, because it is so important and so large. Second the remaining of western European markets, and again we cluster sub-Sahara Africa with that. Then finally the emerging eastern European markets. Let me drill down on each one of those and let me start with Germany.

In Germany we're still operating with a sales force size deficit compared with last year. This really has resulted in year-over-year sales decline in the quarter. We didn't close that gap in the quarter, as a matter of fact it got a little wider. Our experienced management team there has been working really hard to close it. A lot of this is the effects of the macro economic environment. For the first few years of a rise in unemployment there is a counter-cyclical nature to direct selling, but as it perpetuates, it makes it more difficult to recruit, and more difficult to get new sales force members started.

The real focus in Germany right now with the management team really lies in three areas, leadership training, targeted recruiting promotion, and thirdly, and we think more enduringly, an enhancement to the sales management structure, and there we are implementing a structure very similar to what we have done in sub-Sahara Africa, and it has been effective, and lead to double-digit growth in that part of the world.

The future of the German market really is going to be dependant on how quickly management there can get the sales force gap closed, and actually get an advantage. We'll update you in our progress as we move forward into 2007. In the interim, this continues though, to be a very big business and very profitable as well.

Let me turn to the next piece of it. The remainder of Europe and sub-Sahara Africa. Overall results and trends are good in South Africa, France, Italy, Greece, dynamic growth continues. This laggards in this segment really are the Netherlands, Switzerland, and Austrian, and I believe management has got its arms around the issues there, and we have identified the proper initiatives. Also in a couple of cases our senior management team there has made some management changes. That looks good going forward.

In the final piece of that Europe, Africa, Middle East segment, is really the emerging market and their dynamic growth continues, especially in Russia, Turkey, and Poland, where together, these markets were up almost 50% top line over last year, by the way good margins on these businesses, and Russia itself was up 60% in local currency, by the way these markets contributed about 12% of sales to Europe, Africa, Middle East third quarter.

So, let me put it all back together again when you put it through the wine press, we believe we have identified the appropriate actions, and are working particularly to get traction back in Germany. Western Europe, we have a couple of laggard markets there, but I think the right things are happening, and the rest of these markets are doing well. The emerging markets are just growing gangbusters, so we feel good about this segment.

Let me now discussion Asia/Pacific and Mexico segment, where before the inclusion of NaturCare Japan. Again, we clustered it there, again it makes efficiency purposes for managing that market, and also NaturCare is the kind of a business we'll want to utilize at some point in China, because of the product line. At any rate, before the inclusion of NaturCare Japan, for this overall segment sales were up mid-single digit for the quarter and year to date.

Along with an increase in the return on sales from 9% last year to 14% this year. By the way, the emerging markets of China, India, Indonesia, continue very strong contributors and momentum, and sales were up 30% in the quarter, and even more in profit during the quarter. So, again, these markets their contribution to the Asia/Pacific, Mexico segment were 18%. So they are growing in importance.

The other Asia/Pacific markets of Malaysia, Singapore, Korea, and Mexico also all contributed sales in profit improvements. Japan, while we are making progress there, and we were up the second quarter, really this changing momentum from building a party plan business out of a wholesale buyers club, is causing some challenges. We did have a modest sales decline in Japan in the third quarter. Distilling that down, Asia/Pacific, the metrics looks good in this segment, our biggest opportunity going forward is to continue this growth in China, India, Indonesia, and at the same time, to really get Japan back on the grow again.

If I look at overall the Tupperware brands portfolio, clearly we are disappointed with the rules this quarter in Germany. However, for the overall portfolio, we did make progress in the quarter, and in fact, as we look through this year 2006, we have had an improvement in sales trend as we progress through the year, and by the way, we expect that sales trend to strengthen and continue into the fourth quarter.

As a matter of fact today, I want to reaffirm our outlook for 2007 forward of a topline 5 to 7% sales growth, with more significant percentage of the sales growth coming from beauty, and the emerging markets.

I will turn it over the Mike in a second but before I do, he will add to my comments and drill down a little further. Let me summarize by saying, we believe we are at the beginning of a new era for Tupperware Brands. We are a different company today, not just Tupperware but a portfolio of direct selling businesses, and we believe that all the major ingredients are present that are going to make Tupperware Brands a much better investment. We now have multiple growth platforms.

We are have always going to have some put and calls as any portfolio does, but now there are many more places to look for growth. Two, we have a very strong cash flow, and that supports a high yield dividend. Our direct selling business model also is about the lowest risk-type of direct selling model you can have.

This is not an MLN business opportunity businesses, where you'll have in many markets catastrophic events, and ebb and flow, it is a more sound direct-selling business model, because you have more permanent people on the ground. Lastly we are trading at a PE that is well below or historic level, so we think this is an important time for Tupperware Brands.

Anyway Mike let me turn it over to you, and you will drill down.

Thank you Rick. First related to the segment reclass, as Rick mentioned, the other thing to keep in mind is that the South Africa beauty units and the NaturCare Japan unit sales were not in our third quarter 2005 numbers, since they were acquired during the fourth quarter last year. So we pointed out in our release, and today in our call, the impact on comparisons for each of the segments. Jane has prior year numbers available for anyone who would like them.

Regarding earnings per share, for the quarter the primary item that resulted in the difference between our adjusted earnings per share guidance and our actual results was a $0.12 benefit from tax planning, and international law changes identified in the third quarter. Before this benefit we were at $0.08.

Looking at our adjustment items, we had a $0.05 gain from an insurance settlement related to the 2004 hurricane here. This item was not in our July outlook, and should now be closed. We had $0.06 in the quarter from land sales, which was $0.04 below our expectation. This was a timing item where we a closing we expected in the third quarter, happened in October. These sales and insurance settlement were partially offset by $0.07 of purchase accounting, amortization, and $0.02 of reengineering during the quarter.

Turning to the cash flow and balance sheet, we had a good quarter as we generated 8 million of cash from operating activities, net of investing activities this year, versus 60 million use last year for a $24 million positive swing. The main drivers were higher net income and good working capital management, most notably on the receivables line.

We closed the quarter with a debt to total capital ratio of 67%, which was a 1 percentage point improvement, compared with this year's second quarter. Our primary uses of cash continue to be $0.88 per share annual dividend, which cost us about $53 million, and then to reduce our debt to total capital ratio to the 45% range, with a goal of regaining low investment grade credit ratings.

Our outlook for full year 2006 cash flow from operating activities net of investing activities, other than the international beauty acquisition, remains at about $85 million. Regarding the outlook for full year 2006, we are narrowing the GAAP range to $0.05, and increasing it to $1.53 to $1.58, from $1.40 to $1.50 we gave last quarter. The improvement comes primarily from a lower tax rate that is now just above 10% for the year, and the insurance settlement which was not in the guidance, partially outset by a lower profit expectation from our segments, mostly from Germany. This results in a fourth quarter GAAP outlook range of $0.64 to $0.69 per share.

Although we benefited in 2006 from some tax planning and law changes, our tax rate for next year is expected to be in the low 20% range. After excluding net full year adjustments of negative $0.22, the earnings per share range is $1.75 to 1.80. The adjustments includes $0.12 of land gains, and $0.05 from the hurricane settlement, offset by $0.29 of intangible asset amortization related to the international beauty acquisition, and $0.10 of reengineering.

Fourth quarter 2006 earnings per share after adjustments is expected to be $0.70 to $0.75. Regarding the segments on a full year basis, Europe is expected to be up by a low single digit in sales, due to the inclusion of the South African beauty units. Without this factor, the outlook is for a decrease of about 5%, including an approximate 1 to 2 percentage point negative impact from less B-to-B sales. ROS is expected to be in the 16% range.

Asia-Pacific and Mexico sales will be up a mid-teen percentage, which reflects a 7 percentage point benefit from including the NaturCare Japan beauty business. Excluding this side, the outlook is for a sales increase of about 6%. The ROS is expected to improve around 4 percentage points versus 2005 to close to 15%.

Tupperware North America remains at a single digit sales decrease, and will have a significantly lower loss than last year. The International beauty segment is expected to achieve organic sales growth of about 4%, with an ROS around 10%, and BeautiConrol North American is expected to have a high single digit increase in sales in the second half, which will bring the full year to 3 to 5% higher than 2005, and as we have seen year-to-date, the segment is expected to have an improved ROS versus 2005.

With that, I will now turn the call over for questions.

Thank you very much sir. Ladies and gentlemen [OPERATOR INSTRUCTIONS] We will take our first question at this time from Doug Lane with Avondale Partners. Please go ahead.

Hi. Good morning everybody.

Good morning Doug.

You seen the margin come down in Europe pretty dramatically, particularly in the third quarter here, I think we had talked about this before being the trend, it just seems to be a little bit more than at least I anticipated. Can you just elaborate on where the margin erosion is occurring, and what is actually driving it, the two or three factors driving it, and how much longer do you think we will see these unfavorable comparisons in profitability in Europe?

Doug, our goal in Europe and what we have experienced most of this past decade is right around a 20% margin. That is going to be our goal going forward here. What we have had to do this last year, we have had to invest some, most of it is Germany, more than half of it is Germany, and it is a result of lower sales in Germany. We had a little bit of bad debt expense over there and some administrative costs as well. So I mean I would expect that you are going to see some of this pressure so that year-over-year it is more in the 17% or so range, but we're going to do our best to crawl back to the 20.

The issue isn't in gross margin there, the issue really is we made a decision, with regard to closing the gap on the sales force sides, to make an investment in promotional costs for recruiting, to get these new people active, and to encourage customers to come to Tupperware parties, because what that does is that then converts a new recruit into more a permanent active recruit in the business.

And going back three years in the business, three years ago, when we had this experience the last time of a sales force deficit, the better place to put our investment is closing that gap, because then the business comes back to that 20% ROS right after that.

The one thing we are not doing is discounting there, because what that causes is irrepairable damage to the brand Tupperware, so we are much more likely to use a promotional gift, a Purchase-with-Purchase kind of an item, a promotional trip for recruits for activity. That's where we are seeing. It is really a combination of lower sales plus investment in these kinds of matters in a very proactive way.

Okay. That's helpful. One last thing if you can give us an update on resin costs, and the impact in the third quarter, as well as the outlook now that we have seen energy prices come down a little bit.

Mike, why don't you comment?

Sure, Hi Doug. We saw about $1million impact in the third quarter year-over-year. We are seeing, or we think we will see for the full year about a $5.5 million negative impact. We had about 3 million negative in the first half of the year.

As we look out in 2007, looking at the characteristics of the resin market, we think if we are flat with where where we have been. We'll see what come up in the next round of pricing agreements as we move forward. We look to give you more guidance when we get to the January call.

Okay. Thank you.

Doug, let me add one thing too on the Germany situation. I comment that one of the things that we are doing in Germany of a more strategic, not a tactical nature, is the implementation of a sub-sales management structure under our distributorships. Let me reiterate there, because I think that has a more lasting affect.

If you say for example, we have a distributorship, you have Braeman, for example, you the local distributor there, we crafted and we perfected it. First we did it in Italy and then perfected it in South Africa, where we have been up very strong double-digit for the last three years, and almost doubled the size of our business. A sub-distributor structure, we call it Team Leader. What it does is it provides an incremental commission level, coming out of what the normal distributor would make, for individuals who become kind of super-managers of distributors.

What we have noticed is they become career-oriented, whereas some of our managers in Europe can be part-time/full-time. These people are clearly full-time. So you get, when they are out recruiting, they are recruiting people more with a story of the career path with Tupperware, and so they don't have to recruit as much with promotional costs and prizes in the business.

So, we believe we can have, even a limited amount of success in Germany compared to this very strong double-digit that we have experienced in South Africa, that will enable us to pull back from some of that promotional investment in Germany, because we'll have many more full-time people who are out there recruiting.

Okay. That makes sense. Is Glenn Drake relocated to Europe now?

Glenn is in Europe right now. He is in Frankfurt today.

Okay. Thank you.

Our next question will come from Dara Mohsenian with JP Morgan. Please go ahead.

Good morning guys.

Good morning Dara.

Mike, I want to check, what is your long term tax rate expectation?

Dara, I think in the intermediate term we would be talking about the low 20% range, what I mentioned for 2007.

Okay. And looking at '06 earnings, it looks like your full year tax rate on an adjusted earnings basis is about 12.5%, is that correct, in that range?

Yes.

In that range?

Yes.

Okay. So if we back out the tax benefit from the $1.75 to $1.80 adjusted EPS guidance, we are getting to more of a normalized number of $1.55 to $1.60. Is that reasonable?

We had initially talked about a 24% or so tax rate when we gave our the initial guidance, and so the 12 point difference is somewhere in the $0.20 plus range.

Okay. All right. Fair enough. And then, I guess in western Europe, it seems like Germany and the rest of Europe is kind of perpetually weaker here over the last few quarters, and you gave us a great review of what drove that weakness, But, I am just wondering, given Germany and western Europe keep coming in below plan, and the macro issues look like they are continuing to some extent, are you looking at more aggressively cutting costs there, or do you start to pull back at all on the investment you are making in the region?

We are doing both. Actually we have had a cluster situation there with regard to 4 major regional clusters there, each had sales, marketing, human resources, and we have collapsed those structures so it is a much more centralized marketing, HR, et cetera, and so that enabled us to not only take out costs, but our prime focus for doing that, really was to get the more organization more gazelle-like, and more rapid decision making, but it did benefit from a cost standpoint.

But, Dara, it wouldn't be right to characterize that we digging in to the point that we don't think there is a growth, I mean we are up very nicely in the French business, which is our second largest market over there, and macro economics aren't very good there. I think this is where the challenge to us is, to make sure we match the market structure with the external conditions. That is why we are making these moves in Germany. By the way, I might add we may be seeing some improvement in the macro economic environment in Germany, a couple things.

Firstly, for the new Chancellor Frau Merkel to become, that was a very strong signal that things had to change. Secondly, something that happened last month, the Metalgesellschaft decision with Volkswagen to shift from a 24-hour work week, back to a more now to, if you can call the French work week of 35 hours, as a big long work week, but this was a huge takeback, and they are not getting any more money for it. The commitment was, is they are now going to invest in jobs and plants in Germany. So, the worm may be turning in Germany with regard to that structure. And that will bode well for us.

Okay. And the reorganization you mentioned, can you give us an idea of what level of cost cutting that will result in?

Well Dara, most of the reengineering charges that we had in the third quarter, you saw the $2 million income statement related to that move, we will build that into our ROS expectations when we give them for 2007, but you know, we were talking somewhere in the neighborhood of 10 to 15 heads.

Okay. So you said 10 to 15--?

Heads.

Head count reduction.

But expensive head counts.

Okay. Right.

They were fairly senior people.

Okay. So is this a couple million dollars, is it in that type of range?

Yes, we'll build that in our guidance once we get it.

Thanks, that's helpful.

It is important too, that I might add, when I say Dara, a portfolio direct of direct-selling companies, none of the direct sellers in the beauty business does well in western Europe, in those western European markets. The durable product line, the brand names, this happens to work very well, consumers like to buy this way.

So we continue, it may take us a couple years to get back to that 20% ROS, but that obviously is the target for us. We have many distributors in Europe, and they are large and they are profitable. But this is really helping us to cause them to modify some of their structures. Europeans generally are reluctant to change. This is helping us on that front.

Okay. Thanks.

[OPERATOR INSTRUCTIONS] Our next question is from John Emerich with Iron Works Capital. Please go ahead.

Thanks. I know you sound like you are going over ground you just went over, but one more time if I could summarize and you could clarify, it sounds like in North American Tupperware you have got growth and you have got profitability, and the way we look at it that the new world, that is sustainable.

In Europe, Germany is disappointing but you have seen some response to initiatives that you have put in place, that make you optimistic that the turn is out there if you will, both in topline and in profits, and if so, can you clarify just what it is that is going to work?

Yes, first with North America, by the way, from years of us doing one-on-one IR meetings John, we know that because most of the money centers where people invest in Tupperware, Boston, New York, Chicago, et cetera, we know from those conversations that it is a big emotional thing, that if we can show that the U.S. business can in fact turn around, it really signals there is an ability to contemporize this Company, and it will greatly enhance the value of the Company.

I think that's what we have shown with regard to North America. Its early days, we have got a lot of rebuilding still to do, but no more new strategic work. It has been now more than a year since we made the final change, which was the salesforce structure. The product line has changed. The parties changed, and the brand name has gone from #12 to #2 Most Respected. So that's on the way and we expect growth going forward.

With regard to Germany and that, I think the things that we are starting to see is one of the major things we did in the U.S. was send all our big distributorships to refresher training. It took more than a year to do that. Germany got it done in 6 weeks, all through the month of September and October, every distributor attended a whole refresher training course. I don't care whether they have been distributors 20 years, they went back to the fundamentals of the business.

When I was in the Navy, they used to send you every spring to Guantanamo Bay to do a 3-week refresher training, and then you were fresh out again late in the spring. As we got this idea and found it was remarkable the impact it had on changing attitudes with our distributors in the U.S., you have got to remember, when we recruit a new sales consultant these are all volunteers, they actually pay for a kit, so attitude is a big part of the business.

That's all done in Germany now, and it is done in the latter part of the third quarter, beginning of the fourth. We have isolated down distributors who were lower in their productivity in Germany, and we are going to move on those, and then finally we have this new substructure that we're going to be dropping in.

These are things that are more strategic in nature. Clearly under that we are doing a lot of promotional activity that is more short term. But we want to see some systemic changes, so that we don't have these ups and downs, quarter by quarter in Germany. So we are trying to do both of these.

Did the refresher training course have both a profit, a cost drag, because you spent money on doing it, plus a top line drag, since while they were in the refresher, they weren't out there selling?

A minimal cost doing it, but clearly a little bit of a distraction, when you have got people out for a week, but nevertheless the right use of their time.

I understand and agree. Thank you very much.

Thank you, John.

[OPERATOR INSTRUCTIONS] It looks like there are no further questions from the phone audience. I'll turn it back over to you for any final or closing remarks.

Justin, thank you very much. Again, as I have mentioned, I think we are at the cusp of this new era for Tupperware. We are now a portfolio of direct selling companies. It is interesting, while disappointed in Germany, we are hopeful we have got a very strong management team there on the ground. A large 165 distributors there, who are very, very profitable and experienced, and now have gone through refresher training.

But again for offsets, now our biggest market in the entire world is Mexico. We are experiencing double-digit growth there, and that's a beauty business mostly in our Mexican business, when you combine the Tupperware BeautiControl businesses in Mexico, and the Fuller Cosmeticos businesses down there.

So I think we are always going to have something going on somewhere, but we're always now going to have offsets, particularly in some large growth segments. So we think the future looks pretty bright for this Corporation. We hope we can start climbing up from being an 11 PE, which most would think we are a rust belt manufacturer with that kind of a PE.

Anyway. Thanks for your support.

That does conclude today's presentation. We thank you very much for your participation. You may now disconnect. Have a great day.