Tupperware Brands Corp (TUP) 2006 Q4 法說會逐字稿

Good day, everyone, and welcome to the Tupperware Brands Corporation fourth-quarter 2006 earnings conference call. Today's call is being recorded.

At this time, for opening remarks and introductions, I would like to turn the conference over to Mr. Rick Goings. Mr. Goings, please go ahead, sir.

Thank you very much, and all of you, thank you for joining us. I am with Mike Poteshman, our CFO, and Jane Garrard, our VP of Investor Relations. And as always, our discussion will involve some forward, outward-looking business statements. I refer you to the Company's position on forward-looking statements in our filings and in this release.

Turning to this past year and the fourth quarter, as mentioned in October, Tupperware Brands is entering a new era as we are really transforming this business model from primarily a food storage company to a global portfolio of direct selling companies. I believe in 2006 we made a lot of progress toward this new reality. And while these direct selling businesses each have appropriate product lines, sales methods and structures for the markets where they do business, the business drivers across the entire portfolio are largely the same. So it's a lot easier to manage than it might look on the surface.

Today I want to comment on what we believe is our progress and our accomplishments against these growth platforms, as I don't believe it's the best use of anybody's time for me to, in another version, simply reread the release. The fourth-quarter results were positive. There were puts and calls, but it was in line with our expectations.

Our growth markets are expanding in number and our problem markets are relatively few in number. Really, it is isolated primarily to Germany for this past year.

By the way, we did finish December with a strong recruiting in Germany. However, the gap in the size of the sales force still exists, and the assumption in our 2007 outlook as it relates to Germany is that we will succeed in growing our sales force size there during the year and that our profit will be flat in Germany with 2006. And during our Q&A, we will amplify something on Germany.

Let me now turn to our strategic growth platforms and provide a little update on each one of them. The first platform, and we have been on this road for about five years, is to refresh the core of our business. And we continue to make progress here. We are really focused on three drivers -- the sales force structure, the party and the product. And I will comment on each.

First, the sales force structure -- in our U.S. Tupperware business, we gained traction. As you will remember, we rolled out the new compensation plan across this country in April of 2005, and we have made noticeable progress in the number and the earnings level of the key sales director level.

This has led to sales growth in both the third and the fourth quarter in the U.S., and by the way, that is the first time in four years for this business. So it is a different business today, with many different sales leaders.

We have also had sequential improvement in the average active sales force comparisons, which were down 17% in the third quarter to down 9% -- excuse me, 17% in the second quarter, 9% in the third quarter, and just down 3% in Q4. By the way, we recently rolled out the same compensation plan in our Canadian business, and the acceptance has been positive. So we learned a lot and even how to roll it out.

We have also, with regard to sales force structure, needed to make some structure enhancements in some other parts of the world. And as of this meeting today, we have successfully implemented a new multi-tier compensation plan in our Singapore business, and we are going to be expanding that into Malaysia this next year.

Additionally, we continue to expand the markets utilizing the team leader level. That has been so successful for us in South Africa, where we have had strong double-digit growth for three years. By the way, Germany is one of those markets where we are rolling that out.

The team leader concept creates a new level in the sales force, really in between the unit manager and the distributor, and it provides those top unit managers an opportunity to promote up managers themselves, and therefore earn a lifetime commission on those sales. So this really does allow us to have a team leader have a better career opportunity and us compete more successfully with other opportunities and jobs in those markets.

The second element of refreshment really had to do with the party of this core contemporization. Here, we have really been moving forward in each of our markets where we sell via party plan and doing it in a way that is culturally appropriate.

We are finally seeing a shift in a number of these markets from a technical product presentation, which is what it was for 50 years, to a more entertaining and interactive party. It's more likely to now take place not in the living room, but in the kitchen, with them all together, all involved, and it is truly becoming somewhat of a girls' night out. And that's whether you are talking about Morristown, New Jersey, or Moscow.

Regarding refreshing the party, too, BeautiControl really in the U.S. led the way with the experience party that they call the Spa Escape. And I'm pleased to say we have recently rolled this concept out in our Nutrimetics Australia business as well.

We see this as an important opportunity to leverage our experience and our learning from BeautiControl. Contemporizing this party is an important refinement of the selling process. And I think as most of you would appreciate, the more appealing a party is or our selling situation to the end consumer, the more people come. And that is our opportunity to demonstrate the features and benefits of our products. And also, it is where most of the recruiting actually happens.

The final core refreshment element relates to our products. Let me give you an update on what we are doing there. Clearly, in direct selling, our product launches are important to get the sales force excited about calling on customers and holding parties and consumers wanting to come. It is important, too, that these products differentiate us from our competitors and particularly that our products differentiate us from commodity products out on the marketplace.

And because of our face-to-face selling situation, we have a unique opportunity to demonstrate these differences. The products need to engage and excite the sales force, as I said. And it's got to give them a reason to call on customers.

Now, in our Tupperware portfolio, a good example of the new innovation is in our food storage category. We clearly don't compete on the low end of food storage with the commodity marketers out there. We have new and different and unique products. But we haven't abandoned the category.

We've got a new technique that we have launched this past year, a technique which provides a more effective freezing technique through the use of a silicon wrap or seal that literally wraps around food, eliminating air pockets as you put it into the freezer. The product is called [Full Contact], and in essence, here's how it works.

Because there's no air pocket between the product -- whatever it is, be it meat or produce -- and the silicon, it freezes food 25% faster. And this really leads to better taste, texture and the maintenance of nutrition. So in essence, you retard the decay process quicker.

We have also continued to extend our high-tech cookware and cutlery lines, and we have created a whole line of professional kitchen tools.

Important to our business also is the creation of multiple, innovative -- we call them blockbuster products each year to get the sales force to really get out there. And we have done a really good job, and our marketing team has, with products like Quick Chef and Happy Chopper, two of the best-sellers in Europe, which are really food preparation tools.

Also, a new product, Cheesesmart, is interesting and worth noting. It utilizes a porous membrane, much like GORE-TEX, and what it does is it releases the moisture in the cheese while keeping your cheese at a high level of freshness. For those of you who have traveled to Europe, you know how important cheese is there. And that is why this new technique and product had been such a success.

Again, when I talk about our business model and what makes it so effective, it is a combination of breakthrough products, plus this face-to-face sales force selling situation, which can explain the features and benefits. So we have made a lot of progress here.

Let me comment on some of the products we have made progress with regard to beauty. The same type of innovation is required as in the Tupperware business -- again, got to differentiate us, and it's got to engage and excite the sales force.

BeautiControl, we have done a great job there at focusing on strong innovation, and primarily with the anti-aging area, with products like platinum regeneration skin serum and advanced eye repair cream. These products contain advanced peptides and polyhydroxide assets to repair damaged skin. And again, what is important here -- these aren't just moisturizers, but they're high-tech solutions to damaged skin.

In the other parts of our beauty portfolio, we're also making advances as well. And I can't talk about a few of those that will be launched this year, for competitive reasons, but we have made some great progress and there will be some significant launches.

What we have learned is we have seven beauty brands out there, and we have many opportunities now to gain synergies through cross-utilization of these brands in formula development and in enhancement.

In particular, in the anti-aging products, we have had a lot of innovation, but we have also had innovation with regard to color and fragrance, particularly in Fuller Mexico, where we really dominate the Mexican fragrance category.

By the way, fragrance is a very important category to us as a direct seller, or in the beauty business, it is known that you can gain trial usage from new customers with fragrance. So it is a great weapon to gain market share from the competition. And it doesn't hurt that it is high margin as well.

That is enough on our core business refreshment. Again, it is the sales force structure. It really gets down to how we sell -- party or brochure selling -- and products. And we are going to continue to make enhancements in these three areas; that is never done.

The second major growth platform really had to do with returning the Tupperware U.S. business to sales growth and profitability. You saw 2006 as a turning point in the second half of the year, the first growth that we have seen in four years.

And while I have just covered the refreshing elements about sales force structure, party and products, I must say these are the primary drivers behind the progress in the U.S. team, coupled with having a great sales organization and a strong management team. Together, they have led to increased sales force activity and productivity, resulting in a fourth-quarter sales improvement of 12% following this 9% year over year we saw in Q3.

During 2006, by the way, the U.S. gross margin improved by 5 points and we reduced the loss level by over $10 million. We do expect to continue this progress in 2007 and expect sales growth in the U.S. and even a small profit.

By the way, we now report Mexico in the North American segment. It is, after all, part of North America. However, we are going to continue to break out the U.S., so you can track our progress.

It is worth noting, too, that all this contemporization and refreshing the core and using the U.S. as a learning laboratory has really helped us in other global markets as well.

Our third growth platform has to do with growing our emerging markets. The five-year CAGR for our emerging markets has been around 30%. And really here, it is the story of China, India, Indonesia, Turkey, Russia, Poland, with sales up 37% in Q4. By the way, together, these markets I just mentioned make up more than half the world's population. Russia, by the way, led the way in Q4, with sales up over 60% in local currency and profit up well over 100%.

China was also worth noting in the fourth quarter, up 40% in local currency sales and double-digit improvement in profit as well. All of these markets that I have mentioned, the China, India, Indonesia, Turkey, Russia, Poland -- all of these markets are profitable and contributed to year-over-year sales and profit improvement. By the way, we expect to continue this growth rate in the 25% to 30% area in 2004 [sic], so as you would expect, they are going to continue to gain in their contribution.

Geographic expansion opportunities really are driven most of this growth in these emerging markets. In Russia, and in fact across what was formerly the Soviet Union, now the Confederation of Independent States, we are opening new distributorships across all of the underpenetrated areas, even to the eastern part of Siberia. We have also been able to add sellers and improve productivity in our established distributorships in areas like around Moscow and St. Petersburg. So where they are growing, it is both width and depth. Ditto for China and the other markets as well.

By the way, in China, we continue to grow through more of these little outlets, and we finished the year there with 25% more of them than the previous year. We are up to 2350. Anyway, if I was to turn the clock ahead five to 10 years, these Tupperware emerging markets, along with our South American businesses, including Tupperware and the beauty businesses, we expect them to be our largest sales and profit contributors.

Now, let me turn to the fourth platform for growth, the expansion of beauty. This is what really is changing the profile of our business, and it is going to help us realize more consistent top-line growth.

It has only been a year and a month since we acquired the Sara Lee direct selling businesses. I must say, commenting on how our management team has done on integration, it has been nearly flawless.

If there was a negative, it is that a number -- and we have mentioned this repeatedly -- that a number of the smaller acquired units did suffer from being on the block for nearly a year, and I think you would further appreciate this when you understand that the sales force in most of these businesses are largely comprised of independent sellers.

This led to a bit of a slow start in our organic sales growth in the first half of 2006. However, as the pig worked its way through the python, sales trends strengthened through the year. We finished the fourth quarter with local currency organic sales growth of 6%, and we expect about 7% sales growth for international beauty in 2007.

By the way, the earnings per share accretion from these acquired units in '06 was $0.38, excluding $0.28 of intangible asset amortization. By the way, that was non-cash. So net-net, it met our 20% accretion target, which is what we communicated to all of you when we announced the acquisition.

Let me for a moment dig a little deeper into the beauty portfolio. The Fuller Cosmeticos business in Mexico, which is more than half of the sales of the acquired units from Sara Lee, it has performed better than our estimate, with very strong double-digit sales and profit growth in the mid-teens. Frankly, if I applied a reasonable multiple to its operating profit in 2006, it would make it alone worth the entire purchase price of the entire international beauty portfolio.

Regarding the rest of Latin America, we are leveraging learnings at Fuller Cosmeticos, but down in Latin America, in South America, we are blending the Tupperware units with our beauty businesses there, and we have seen increasing growth in sales and profits in Argentina, Uruguay, Venezuela and in Central America.

Brazil is still in the investment mode. We planned that it would be. But it represents huge potential.

By the way, we are blending the -- we have commented on this previously -- we are blending the Tupperware and the beauty businesses in South America there and only there, because sales representatives in Latin America more often than not carry multiple product brochures, and this is largely driven by lack of a retail infrastructure. But that is really the only major place we're going to be doing that.

A comment on the Nutrimetics business units, which were part of the Sara Lee acquisition -- they are profitable, and we said this at the time of the acquisition. But we also said they needed some of the same strategic makeover as was seen in BeautiControl during the early days.

And while the sales and profits declined modestly this year in those Nutrimetics business units, we did complete the implementation of this initiative. So almost everything we did at BeautiControl we have now implemented at Nutrimetics. And we believe you'll see us get this business back on the grow again. We've got a great management team there and a strong sales force. And there's some very positive signs of traction. By the way, Sara Lee paid more than $200 million for that business alone about six years ago.

Now finally, regarding beauty, let me comment on BeautiControl North America. After three years of very strong double-digit growth, we really had a tough first half of 2006. Perhaps on regression analysis, this to some degree a result of tripling that business in not many more than three years.

We were glad to see as the year progressed get back to mid-single-digit top-line growth. So it's a good business. And going into 2007, we have a nice advantage with regard to the total in the average active sales force in BeautiControl North America. And we still think we've got to work through some growing pains there. We've got a new manufacturing facility we are just bringing online in the first quarter. But we still expect to deliver growth probably in the mid-single-digit top-line area.

Now let me say a final word on the progress at Tupperware Brands regarding really updating the image of the Company. This is often an issue with us -- primarily it's a public company. In money centers like Boston, New York and Chicago, most people have known us as Tupperware for what Tupperware was.

For the past several years, we have really been focused on utilizing public relations as a driver, particularly in the U.S., to update the brand perception, not only in these money centers, but with consumers as well.

Research showed that while people loved the brand Tupperware, the brand and the party were dated. Well, I am pleased to report that recent and fresh surveys have indicated that the worm is turning -- consumers are beginning to view the brand and our party as more contemporary.

So we are starting to move that needle. In fact, respondents to the survey indicated that their perception of Tupperware was far more favorable than it was even two years ago and that the brand is beginning to be seen as contemporary and in style.

Simply stated, this whole approach has been to, in some cases, shock consumers with Tupperware in unexpected places and unexpected people. And therefore, you have seen us at the Grammys and the Country Music Awards with baby showers for movie stars, with rappers like Ice-T holding Tupperware parties or talking about us on Conan O'Brien, Mariska Hargitay's parties -- anyway -- and design contest across the country. So it is starting to really change. I just reviewed last week the 2007 public relations plans, and I think they're going to take us even up another level.

Anyway, enough from me. Let me just make one other point before turning it over to Mike. I wouldn't classify 2006 as a great year, but I would call it a good year. We made a lot of progress. We have really successfully integrated this significant acquisition. And we moved forward with regard to our growth platforms and the implementation.

I think if I netted the whole thing out, we are a better investment opportunity moving into 2007. Our sales and profit growth opportunities are numerous. Our problem areas, while we take seriously and are significant, they are relatively few in number, and we really feel we've got a handle on it. Our cash flow is growing, and that has allowed us not only to pay down debt, but also live up to a dividend which we are committed to.

And finally, as many of you have said to us during IR meetings, a company with a brand that is top five most respected household brands in the U.S. and with numerous growth platforms should be trading at a higher PE than 13. And we would expect that to begin to grow once we do a more effective job at consistency and once the investment community starts to understand that Tupperware today isn't what Tupperware was in the past.

Anyway, Mike, if you will take over, and then we will open it up to Q&A.

Thanks, Rick. I will start by outlining where our fourth-quarter actual results differed from the outlook we gave in October. Sales came in at $487 million, which was above our outlook range of $460 to $470 million. All segments achieve sales above our expectations, with the biggest contribution from Tupperware U.S., where we had double-digit percentage growth versus 2005. Foreign exchange was also favorable, but only by $4 million versus our October guidance.

Regarding earnings per share, we came in towards the high end of our $0.70 to $0.75 range after adjustments at $0.74, with $0.02 help from the positive impact of foreign exchange versus our October outlook.

The reason earnings per share did not come in higher than our outlook range, even though sales did, was the lower return on sales in Europe, primarily from Germany and in the beauty segment. Additionally, unallocated expenses were a bit higher than expected.

Turning now to the balance sheet, we incurred significant debt to finance the international beauty acquisition in late 2005, resulting in $750 million of debt at the end of 2005. We made great progress reducing debt in 2006, bringing it down $70 million to $680 million, resulting in a debt to total capital ratio of 63% versus 2005's 69%. This was done while continuing to pay our $0.88 per share dividend totaling $53 million, and even with about $100 million of cash on hand at the end of 2006.

Cash flow from operating activities in 2006 improved $33 million to $173 million. This increase was about half from higher income adjusted for non-cash items like depreciation and amortization, and half from an increase in net assets, most notably from higher payables and accruals in 2006 versus an outflow in 2005.

In terms of the cash flow from operating activities net of investing activities that we refer to regularly, we achieved $146 million without, of course, the cost of the international beauty acquisition. This was up quite a bit from the $85 million outlook we gave in October from better working capital management, including the timing of payables, outflows and lower CapEx.

For 2007, we expect to generate cash from operating activities net of CapEx and with land sales in the $90 million range. This outlook includes $70 million of capital spending, which is about $10 million more than our normal run rate, given spending on a facility in Belgium, some of which had been expected in 2006. 2006 CapEx was $53 million versus our initial expectation of $70 million.

Regarding the 2007 sales and profit outlook, as you can see in the release, we are expecting local currency sales growth of 3% to 5%, including progress in all segments over 2006. This will also result in higher profit from all segments, although this will be partially offset by higher interest expense and slightly higher unallocated costs.

We expect pretax profit to be up 11% to 14% after adjustments. While it is too early to fully predict the effective tax rate, we have assumed a low 20% rate versus 2006's 12% after adjustment. This results in an outlook range after adjustments flat with 2006, at the high end of $1.79, and includes positive foreign exchange of $0.04 to $0.06.

It is important to note that we're making operational progress and expect to deliver an 8% pretax return on sales after adjustment, which is in the range we have been giving for 2007 forward. Our 2006 pretax profit return on sales was 7.1%, excluding items.

Our objectives for optimal segment profit return on sales remain at 20% for Europe and a mid-teen percentage for all other segments. Although we won't achieve 20% in Europe in 2007, we believe the potential is there and we will work to move toward it. Our biggest opportunities elsewhere are in the beauty segments in North America, as we already achieved a 16% return on sales in Asia-Pacific in 2006, which was up 5 percentage points from 2005. We will still work to get some improvement there as well.

The first quarter is expected to be $0.27 to $0.32 after adjustments, including a $0.02 to $0.03 positive impact from foreign exchange versus 2006. This is below last year's $0.36. All segments except Europe are expected to have higher sales; however, profit is expected to be lower than last year in both of the beauty segments due to investments at BeautiControl and a new manufacturing facility, and at International Beauty in our Mexico and Australia businesses. Additionally, profit is expected to be lower in Europe due to Germany. Interest expense will also be higher.

And with that, I'm going to turn the call over to Q&A.

(OPERATOR INSTRUCTIONS). Doug Lane, Avondale Partners.

Mike, staying on the financials here, you mentioned you paid down debt, $70 million or whatever, in '06, and yet the interest expense is going to be higher in '07 than it was in '06. Can you give us a couple reasons why that is the case?

Sure. One impact is higher rates. So we've got about $375 million of debt that has been fixed in through swaps. The other $300 million or so will carry about 1 percentage point more average interest cost.

Then we had, for the first nine months of '06, we had cash on deposit coming out of the debt arrangements for the acquisition to pay off some notes that were due in October. So that generated a bit over $3 million of interest income in '06 that won't recur.

Those are the biggest pieces. And then it reflects having debt synthetically in various foreign countries that have higher rates as well.

And I know this is a little bit of history, but what was the $105 million payment in '06? I thought the acquisition had closed in '05.

Yes, it did. The biggest piece there was a tax obligation of -- Sara Lee's that we paid on their behalf as part of the transaction, so that was paid early in the year. That was most of it.

And then just organizationally, I know it's very small, but just to keep it straight, will BeautiControl Mexico report into Tupperware North America or BeautiControl North America?

The BeautiControl piece in Mexico is part of the Tupperware Mexico business, so it will continue to operate within there and be part of the Tupperware North America segment.

And on the capital spending, you mentioned you came in lower this year and then you're going to be above, I guess, what I was looking for next year. Is that simply that Belgian project? Is that the lion's share of it that didn't get done this year that is going to be pushed into next year?

That is a big piece, yes. I mentioned that we see our run rate more in the $60 million range.

So then if we are modeling out '08 and beyond, $60 million is more of an ongoing rate, then, after we get through this project in '07?

Yes, rather than $70 million. And Doug, as I think as you know, what we are trying to do there on Belgium is -- you have fewer machines in these higher-cost countries, but Belgium is really where we have a big distribution facility, and that is really going to be a kind of a center of excellence. But we're moving more of our injection molding machines further south and further east in Europe.

So that is really meant to save money. And we are selling, by the way -- Tom is taking care that -- we have had a facility there, and it looks very promising that we will sell that first half of this year.

Can you talk a little bit more about the investment in the IBG infrastructure? You mentioned it is going to impact the profitability in the first quarter. Is there going to be a capital spend associated with that as well?

The investment that I was referring to is more promotional in nature in Mexico and Australia. Rick also mentioned that we had an investment or an operating loss in Brazil in '06, which was lower than the previous year on a full-year basis. We didn't own it for the first 11 months, of course, of '05. And we think that we will still have a loss in '07, but a lower one.

And then how long do you expect this promotional activity to continue? Is this going to be a gradual improvement in margins as the year progresses, or is it just pretty much loaded in the front quarter, then back to sort of normal profitability in the remaining three quarters?

It is a bit of timing. And so we have built that into the overall comments about IB. But it is not some sort of a fundamental change.

And lastly, can you just go through, Rick, where we stand today in Germany, and what are the top three or five things that you're doing in that market to help improve the sales force activity as well as the profitability? You mentioned the change in the leadership structure, if you could elaborate on that and then other points as well.

Happy to, Doug. Firstly, with regard to the issues in Germany, primarily it is the size of our sales force. We got the sales force deficit down to, at one point, 17% in the year. Now, we've got it down to I think around 12%.

As you know, the direct selling is counter-cyclical when there is an economic downturn. However, if you get multiple years of an economic downturn, that benefit wears off in that it is harder to recruit, harder to get parties, and also harder to get new recruits active because there is pressure on disposable income.

So that is the core issue there. By the way, on a macroeconomic basis, we see improvement there. You have been hearing the news coming out of Germany. I just got back from [Davos], and the German Chancellor made a presentation. And it is very positive as far as what is going to be going on in the macroeconomic environment in Germany. But I think it is a three- to five-year turn there. But they have really committed to expansion of jobs, fighting the labor unions and really getting their budget in order. So that looks hopeful for us over time.

Now, what are we doing? We are classifying our actions in two areas -- short term and long term. Firstly, we don't have an issue with our management team there. We've got a very strong management team there.

The actions short term -- for our distributors, we have put them all through refresher training over the last 90 days, almost a week long, to really how to deal more effectively with this kind of a market where you have the wind in your face. And what it did also from a morale standpoint, we just saw a survey -- the morale level is high of our German distributor organization.

Secondly, targeted promotions to the sales force to get them to recruit and to be active. We have implemented those as well. By the way, in the short term, some of that was undermined with this new expansion in VAT in Germany. VAT just went up 3%.

And what it really did -- it went up January 1 -- what it did was consumers in Q4 scurried with the large durable categories, cars, etc., to avoid this 3%. And we weren't the beneficiary of that scurrying out there. So it really hurt us there.

But, by the way, I just read something yesterday on it from a sophisticated economic group in Germany. And they think that it is going to be short term in impact, the VAT blip. As a matter of fact, they think they will work through that by the end of the first quarter. So anyway, that kind of hurt our promotions, that VAT.

Third thing, with regard to consumers, is we've really thrown some incentives at them to get them to attend a party. And the reason that is important is parties are really where we get new recruits -- more than 70% of them. So those are the short-term actions.

The longer-term actions for Germany have been really enhancements to this structure. And it is the team leader program. They launched that in the fourth quarter. It was very well accepted. But as we learned from Italy and South Africa, you really need two to three quarters before you start to feel the impact of that.

And then lastly, longer term, what we're doing is rethinking how we can get more blockbusters and better blockbuster products in our German market. And as a matter of fact, we just had a SWAT team there, all of this last week.

So that is why what we're hoping for this next year is back on track to match the same profit level of this year, which is -- by the way, it is very profitable, north of 20%. But we want to see it get to the levels we are used to in Germany. Forgive the long answer, Doug.

No, it is an important market, so I really wanted to get added color on it. I appreciate it.

Budd Bugatch, Raymond James.

A couple of questions. The tax rate, and I know this is a very difficult issue, but can you give us some color on what are the components of the tax rate? And how should we think about it in terms of kind of normalizing earnings? And I know that that is a real tough question, but maybe you have thought about it more than I have.

I am going to give you part A firstly, and then Mike is going to take you through part B.

Part A of it is we drive the business, really, for pretax to do the right kinds -- and our country managers do that. However, the attitude is to make the investment in a fairly sophisticated tax planning apparatus out there so that, in fact, you have expenses in those high-tax countries. So attitudinally, we go at it this way, but day to day, we run this business, not for after-tax, but pre-tax.

But why don't you get through the second part of that, Mike?

Sure. I think in October, we mentioned that we thought for '07 and forward, intermediate term at least, that we would be in this low 20% range. And what that reflects versus the statutory rate is really where we make our earnings in the international countries, our tax planning in terms of both repatriation of earnings to the U.S. and how that is going to impact our rates, and other types of planning transactions.

In '06, we had some good results, obviously, and that was from some things that we think won't necessarily all recur. So we continue to look for planning opportunities. But what we can see right now is sort of this low 20% range rate, which of course is still significantly below the statutory rate.

I understand that. Is there any way that you can provide some disclosure to us as to what are some of the dollar components of tax that we could make analytical adjustments to get to a more comparable year-over-year comparison? Is that unreasonable? I see other companies starting to do that because of some of the interim period accounting issues that have gone on with tax and when things are recognized, which has a lot more lumpiness than it used to have.

I guess the interim issue is one that we have as well. Like here, we're talking about the annual, but we would be happy to take a look at the kinds of things you have seen and see if there is something else we can do, if you want to help us understand what you're getting at there.

But I must say, Mike, short of -- this is one of our sources of also competitive advantages, that we have basically a tax rate because of the investment we make in it and the attention we've paid to it, that averages 12% to 15% below our direct sales competitors out there who have similar markets where they do business.

So short of tipping our hand on how we'd do all of this, and it is done absolutely legitimately with PwC, but it is something we are very serious about reducing our tax load. We look at it, Budd, as a profit center.

I don't want you to do anything that is competitively challenging, believe me. I'm just trying to understand this analytically and it is an impediment.

Second question --

Mike, would you get offline with Budd on that, because I think that is reasonable, Budd, what you're asking, okay?

I know you have said you're going to break out North America in terms of U.S. And I see the average active for those segments as reported now, including Mexico, looks like it did go down by about 5000 in the quarter. What did the U.S. -- what were the components of that that were -- and you may have touched on this, but I may not have been able to hear it from my cellphone.

The number or the percentage Rick mentioned was we were down 3%. So the trend, obviously, we don't want it to be a minus, but the trend has been pretty good. We were down 18% in the second quarter and 9% in the third, and then, quote/unquote, only 3% in the fourth quarter.

What is worth mentioning, too, Budd, is that if you have seen the 9% and the 12% sales increase, even with the sales force size deficit, the really good news on that is the texture and the quality and productivity of the sales force is better than it has been in the past in the U.S. business. We have had a lot of, in the U.S., custo kind of consultants, and it is moving much more toward fewer hobbyists in the business. And that is what we were looking for -- people who were really looking for a serious earning opportunity.

I see. So if the overall North America average active now were down somewhere between 6% or 7% or 8%, does that mean that Mexico was more down more than the U.S. in this particular quarter?

Yes, it was. And we have been seeing that earlier within the Latin America numbers. What we have done in Mexico over the last year or so is become a bit more stringent in our standards for when we are going to kind of recruit and so on. So it has had a impact on some of the comparisons of the sales force numbers, but sales have been up. So there is a productivity element in there.

Yes, it is that same changing the mix of the sales force. By the way, Budd, in that Nutrimetics business, that is a huge thing. If you look at the Asia-Pacific -- or the International Beauty numbers, Nutrimetics during the six years Sara Lee owned them, moved from being a BeautiControl type business with really serious delays to as many as 80% of the sales force were more these custo-consultants. And we put the brakes on with that. I mean, they were down to $20 sales kits. And now the sales kit is $200.

And so that is why some of those numbers can look wonky. But what you start to get, though, if you are doing it the right way, you start to see what you see in Mexico. There may be a deficit in sales force size, but you see a sales increase. And it is driven by the change in the mix of the kind of sellers.

A couple of other quick questions, if I could. I think in the guidance, you've got $10 million of re-engineering and I think $3 million and change in the first quarter. Does the re-engineering just continue? It has been going on now for, what, seven years. Does this just continue every quarter for the foreseeable future, Rick?

I think that we will continue to see things that we need to do. Some of those things in the first quarter reflect this move we are making at BeautiControl that we've talked about. That is one of the bigger elements.

So I think as we continue to evolve our business, we are now 35%-plus in beauty versus none in beauty seven years ago, as you are referring to, and there's just been a lot of things we needed to change, and there probably will be things we need to change going forward.

The bias here, Budd, is for it to go away, though.

Thank you, Rick. I would concur with that. And lastly, the additional CapEx this year, you said a facility in Belgium, is that what I understood?

Yes, we've started to construct that facility.

We had more than a 100-year-old facility, I think we have had it 50-some years, in Belgium, in Aalst, Belgium, and very inefficient. And so we have constructed this new one, which is adjacent to our big European distribution center.

So that has required this investment this year. But that is going to pay off going forward. And we haven't included the benefit of selling that property there yet. And we've got a big property we are going to now sell there as we move to the new one.

This is for core Tupperware, so this is a molding facility?

Yes. It is a molding engineering design center. So it will probably -- this is going to be our global center of excellence. The technology of really injection molding -- generally in Belgium, you find some of the best in the world. So that is why we chose to locate it there. Not a lot of injection molding machines, though, Budd, there.

So this is not a candidate to outsource as opposed to in-source. A lot of the re-engineering has been for skinnying down employment in a number of factories and even closing some facilities, right?

Absolutely. And, really, the press is on there. Our internal objective is for 50% of our product to be outsourced in five to seven years. And we are now -- we are going to start throwing some resources with regard to people's time and, okay, how do we throw that hook over the bar and pull ourselves there faster? Because we do not want to be building any other facilities. We want to be closing facilities.

And you are aware now on that score, of outsourcing?

We are down in the low 80s, somewhere, of a percent that we make ourselves now. Seven years ago, it was 100% that we made ourselves. Our vision there is the Nike model.

So you're looking for a 30% increment by when, Rick? When did you say there?

Five to seven years. Let me tell you the impediment we're dealing with there is, back to this re-engineering thing, is we could get there quicker right now, but with some of the particularly European markets, if you shut those things down, the kind of charges with regard to social costs in those markets are just ridiculous. And what we basically said is let's migrate. And so in those high-cost countries, the number of machines is going down every single year. As people retire, we are not building capacity in those units. We're moving south and east.

I am highly sympathetic to your issue there, so I understand the social cost issue. And that is why I was curious as to what the speed that you could accomplish it was.

Dara Mohsenian, JPMorgan.

Rick, I just want to get back to Germany and Europe again for a minute, and you went through the top-line trends in great detail. But from a margin standpoint, you're expecting European return on sales to increase in '07 despite the compression in margins we have seen over the last couple of years. So what is driving that change in margin trends as we look at '07?

Well, it has really been -- primarily you have seen, number one, Germany and investment level of Germany that we have had to make there. We are used to fairly -- and we're still north of 20% in Germany, but we are used to considerably north than that.

There have been a mix shift in some of the products that we have been selling in Europe. And also, what we have had is we have had some of the smaller markets there, the northern part of the Benelux, the Netherlands, Switzerland, Austria, really who have not been doing well. And we are really starting to see those turn as well. So our bogey is to get it back north to 20%. May take us two years to get back there. But it is a combination of those things.

And spending levels in Germany in '07 -- is that fairly flat year over year? Is it still increasing or is it decreasing?

Flat to decreasing, I would say.

What we have really seen there in Germany is very good management of expenses and so on by our management team there, where we have lost some ROSs on the mix of sales between, like Rick said, the sales special and full-line priced products. And that is what we're looking to manage better as well. But I think as we have had less volume there, we have done a good job on the other components of expense.

What gives me some confidence moving forward on a day-to-day basis is, you know, we've named Simon Hemus President and COO. We have a management team in Germany, and Glenn Drake runs all of Europe and does a fine job. But Simon was my marketing chief in my former life at Avon, and Simon is a bear about gross margin. So this has already been even amplified with the spotlight. So gross margin is going to matter a great deal to us in Europe.

And do you have a number in terms of Germany's sales decline in '06, what that number was?

Well, we have to break it out.

I've got the exact percentage.

He'll get that for you. Interesting in our German market, though, is in January, we do a very significant portion of first-quarter sales in January. And it is really mixed right now. We're sitting here talking at the end of January, so a lot of what you will get with regard to our sober views or expectations for this year build into -- we're still seeing the impact of this VAT in January. And I hope the experts are right that this incremental 3% -- I mean, you get VAT, what is it then, 19%, Mike?

Right.

19% added on everything you buy in Germany. I hope it ends by the end of the first quarter. But I haven't liked the feeling coming out of the gate.

So we were just under $200 million in sales, which was down 14%.

Great.

Didn't feel great. But you meant great for the answer, okay.

Mimi Noel, Sidoti & Co.

Mike, I mostly have questions for you -- you were moving a little bit fast for me, and a couple of things in the press release have confused me. So please be patient with me.

When you refer to pretax income up 11% to 14%, that is before interest expense as well?

No, that includes the segment profit, as well as the interest expense and the unallocated corporate expenses.

So pretax income, that includes taxes that -- okay, includes the operating costs as well? And I also wanted to ask -- you refer to a 7.1% margin in 2006.

Right.

Did you say you were expecting to do 8% in 2007 or is that longer term?

No, that is in the guidance in 2007.

So up almost 100 basis points in 2007.

Right. And that is the pretax profit return on sales. So again, including interest and the unallocated.

Just before the income taxes -- just the taxes. And also, would you mind giving me those cash flow numbers again for 2006 and '07 projections?

The 2007 number that we gave for operating activities before investing activities, or before financing activities, is about $90 million. We were at $146 million in 2006 because we had lower CapEx and we also had some good working capital management.

And would you please explain to me why it is the first quarter is going to be down so much relative to the year-earlier period? That investment in Belgium that you added -- there was something else, too, and --

BeautiControl -- the new facility for BeautiControl.

Yes, the biggest piece is --

Germany.

There is some in interest, as the rates are higher and so on. And then we also are down in Europe, and we said a little bit in the beauty segment.

If not for the investment, do you think you would be flat to up for the year, even inclusive of the increased interest expense -- although interest expense was going to be relatively flat?

Well, the investment is really a capital investment in Europe. So I don't think that that is moving the numbers a lot. We do think that -- in the guidance, we said that we did think that the ROS would improve in Europe. There is some actual operating expense going in BeautiControl related to the manufacturing facility. That might be what you are remembering. And then the interest we said would be about $52 million. We were at $47 million in 2006. And that is higher rates, and also we had about $3.5 million of interest income in '06 that won't recur.

However, I just meant for the first quarter.

It's primarily Germany and BeautiControl. Why don't you get together offline with Mike on filling out some of this spreadsheet stuff?

John Emerich, Iron Works Capital.

A couple of unrelated questions. I will ask them separately. One GAAP question -- the amortization you have for '07 of $13.3 million, I have in my notes that it was going to be halved in '07 versus '06. What does that compare to in '06 -- intangible asset amortization?

$25 million.

In '06?

Yes.

So right on, going to 13. And the interest expense -- one more follow-up -- even with the lower free cash flow, you still should pay off about $40 million in debt in '07, is that right?

Yes, our dividend in 2006 was about $53 million.

So your guidance takes that into account, you'll be paying down another $40 million in debt during the year?

Yes, we tend to have our big cash flow quarter in the fourth quarter. So you don't tend to see a lot of that until then.

And then regarding the cash flow, you did have a good working capital year in '06. Why is it going to go the other way in '07? Why can't we have another good year?

I don't think that the guidance assumes a lot of working capital outflow. We have seen in some years, a lot of years, that we have had a higher book tax rate than -- or sorry, a higher cash tax rate than book. That was certainly the case in '06 as well.

That was actually my next question. The tax rate you have offered, is that book and cash? Or is there a difference in '07 -- the low 20% number?

Well, the $90 million contemplates where we will be with tax as well, but we would expect to have a higher cash rate in '07.

Cash rate would be higher than book?

Yes.

And my last question -- if you guys grow operating income low teens for the next couple of years, things are going to work out great for everybody. But the thing that threw me in this whole release was the 3% to 5% top-line growth for next year. That's really not even a nominal GDP-type number. Is that really all that you all think you can do with this business?

No, we have said out there that what we expect is 5% to 7% top-line growth. But it has only been -- this is just the fifth quarter since we have done this acquisition of a company that is 40% our size. And we have had some issues with regard to particularly the smaller business units there, them being on the block for a year -- that, coupled with some of the issues going on in Germany right now.

But no, we are expecting 5% to 7% top-line growth. And the mix of that, really, it comes from 7% to 10% beauty, once we get through this year -- we're still working our way through it -- 7% to 10% from the beauty business. And you really kind of get 3% to 5% from the core Tupperware businesses. Some of them, like the emerging markets, are growing quite significantly. And I said, their CAGR for the last five years is 30%. But they're still less than 10% of our total sales. But it is growing.

And then you've got some of the other markets of Western Europe, where we think winning is just to be flat. So if you blend that together, that makes 5% to 7%.

That makes 5% to 7% long term, but just not in '07?

Not in '07.

And the last question, the unallocated costs of $35 to $37 million, you've mentioned they are up from '06. Why are they up?

They are actually not up a lot. We were at $36 million, I guess, in --

That didn't seem like to me that was --

Yes, just a little bit.

-- higher number.

Greg Hillman, First Wilshire Securities.

I've got just a question about Mexico -- what you can do to make it grow faster on the beauty side. You mentioned you were trying to revitalize the brand in the United States with PR. I was wondering whether a PR effort in Mexico would help, and product placements on TV shows, to take this thing through the roof.

Which business are you talking about, the--?

Beauty in Mexico.

Them beauty business in Mexico, first of all, Fuller Cosmetico is more than $300 million. It is growing in a mid-teen range. Our key competitor there was down either double digit or high single digit. We were up mid-teens there. It is -- and by the way, your suggestion -- that is what they do at Fuller Cosmetico. They sponsor Ms. Mexico. They sponsor soap operas. There is a show on a couple of times every single week, and they really leverage using television personalities with all of their fragrance launches. So they are just doing a great job there.

And by the way, what we are doing with that is we have an operation kind of footprint that you know as much as 20% of the GDP of Mexico is Mexicans who are living in the U.S. and sending money home. It is a well-known brand to them here. So we are really focusing immediately to launch third quarter in California, but getting into those areas where Mexican-Americans are living in the U.S., and it is predominately Southern California, the Texas area and Chicagoland. So they are going to be expanding their business up here.

And they can sponsor representatives in the United States without doing anything special?

It isn't a multi-level business where they -- you generally have a local field manager who -- now, what we will work out is interesting incentives to refer someone in the U.S. to the sales organization. But that is not a multi-level -- it's a single-level kind of a business.

So how are you going to get Mexicans in the United States involved with that business, to have Mexican people -- I didn't quite understand how you are going to involve the people in Mexico --

It is interesting. Coming originally from Chicago, where there is a large Polish population, when Amway opened Poland, it gave an incentive for anyone who has Polish relatives, give us their name, you get this incentive. They recruited 60,000 the first three months. So there's very easy incentives to do this.

When are you going to kick this off?

Third quarter is the target.

Of '07.

Yes. So the brand is growing. Now, where we are not growing as fast in Mexico is our BeautiControl business there. It is staying consistent, but it's still, it's a single-digit percentage of our overall Tupperware BeautiControl business. But these are two separate companies -- Tupperware BeautiControl is one company and the Fuller Cosmeticos are two separate companies and we run them -- just like DaimlerChrysler, you've got Mercedes they've got in their portfolio and Chrysler. They are two separate dealerships, separate companies.

And with that, ladies and gentlemen, we have no further questions on our roster. Therefore, Mr. Goings, I will turn the conference back over to you for any closing remarks.

Thanks, everybody, for your attention today. Again, I think we are really entering this new era where Tupperware Brands now is really this global portfolio of direct selling businesses. And we are going to continue to work very hard on implementation of each one of these four growth platforms. We appreciate your time.

And ladies and gentlemen, this does conclude the Tupperware Brands Corporation's fourth-quarter 2006 earnings conference call. We do appreciate your participation, and you may disconnect at this time.