Tupperware Brands Corp (TUP) 2007 Q3 法說會逐字稿

Good day, everyone and welcome to the Tupperware Brands Corporation third quarter 2007 earnings conference call. Today's call is being recorded.

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

Thank you. Thank you and good morning, everyone. With me this morning Mike Poteshman, our CFO; and Teresa Burchfield, our VP of Investor Relations. As always, you know the drill, we're going to be talking about some forward-looking statements. I refer you to our position on forward-looking statements in the filings.

We were pleased with the finish to the third quarter with local currency sales growth in all of our segments and in fact, double digits everywhere, but Europe where we were still up 6%. We're going to go through those numbers but I'm going to try not to just be redundant with what's in the release. Our guidance for the quarter was to be up 5 to 7% in local currency and we achieved a 10% positive sales growth. When you really bifurcate that, the Tupperware segment that division was up 11% and our Beauty segments were up 10%. This, by the way, includes 5% benefit from poor exchange, there where we would be up 15% on a reported basis.

As you know and we've stated on the last call, we report by geographic segments as well by product category mix, and that is the percentage from the Tupperware divisions and the percentage from the Beauty divisions. We're going to continue to do that but we're also going to discuss the markets by emerging and established markets as well, and in the past, we highlighted really only six Tupperware emerging markets, going forward, we think it makes much more sense for us to include the Beauty businesses that are in emerging markets as well as a bit of a more broad group of Tupperware emerging markets as well, and with regard to that, we're using the World Bank's definition for emerging markets and as you probably know that's largely driven by the GDP per capita. We believe reporting it at this more comprehensive way will be more useful for our investment analysis.

Anyway, with that said our emerging markets for the quarter comprised 46% of total sales for the quarter and they grew 20% in local currency. China, India, Russia, South Africa, and Mexico were amongst the biggest contributors in this category. Regarding the established markets, despite a decline in Germany, the established markets were still up slightly reflecting double digit percentage growth in a number of Tupperware and Beauty markets. Most notably, Tupperware France, Japan, Australia, and Beauty Control. I'll drill down by the way, more on Germany in a moment and we'll be happy to discuss it more in the Q&A.

We are for the Corporation raising our full year 2007 guidance again and this really is reflecting progress as we transform Tupperware from that namesake to really a portfolio of direct selling companies. We know there's always going to be in our business like many businesses pluses and minuses but we're really becoming more convinced. Our portfolio today provides a format for more consistent growth in sales and profit, and a case in point is we've had a good quarter, even though we've got issues continuing in our German business, and while on the subject of consistency let me also make a comment with regard to foreign exchange. There seems to be a growing skepticism in the financial markets regarding the relative strength of the U.S. dollar to other currencies. Let me comment on that.

85% of our sales and more than that in our profit come from outside the U.S. By the way I am happy to say that both our U.S. businesses are growing though, but in spite of that in a very real sense, we have a natural market basket of currencies which acts as a bit of a hedge, and we've benefited from this international market basket to the extent that the dollar remains weak, for declines, we're going to benefit even more. So for those in financial markets who are concerned about a weak U.S. dollar, I guess you could say that with that attitude, we're a good place to be given the relative mix of our portfolios contribution.

Now, let me drill down on some of the specific markets. I'll address Europe first. We were pleased that even with the drag of Germany, we had a 6% sales increase in Europe led by Russia and South Africa, and by the way, if you excluded Germany, the rest of Europe would have been up 18%. The emerging markets in this segment delivered growth of 34% and the largest of these were Russia, Turkey, Poland, and South Africa, so there's been no slowing of the sales trends in these important markets.

Regarding Germany, both sales and profits were behind last year, yet we continue to be cautiously optimistic that we can improve these trends through the important actions not only that we have in place now but some new ones we're initiating. In the quarter, we were pleased to see progress in closing Germany's gap in the size of their total salesforce. As a matter of fact at the end of the third quarter, Germany 's total salesforce deficit was down to only 2%. Now, that's compared to 13% GAAP at the end of the first quarter and 5% at the end of the second quarter, so we're really making a lot of progress there.

Importantly too, Germany's macroeconomic environments overall continues to improve, and that's going to be a trend that helps our business, although we don't think the impact there is going to be immediate. I might add that this past month, our President and Chief Operating Officer, Simon Hemus brought together some of our most experienced people to craft the next phase of our German growth plan. Our expectation is in this next quarter, we will implement an incremental number of new initiatives which will enable Germany to experience sales and profit growth again in 2008 and we'll update you on those actions with our year-end call.

Do we think we're going to make progress and be successful with it? Actually, yes. For example, we've been there before in other markets. We went through similar issues and are very profitable and dynamically growing Australia, New Zealand business and by the way we've been in those markets 42 years but by the end of the '90s, they were sluggish, margins were down, low level of profitability, and the business really needed refreshing. So many of the same conditions existed and we put the right actions in place and I must say that since 2001, we've more than doubled sales of that business and we've got a very strong double digit compound annual growth in Australia, New Zealand. So we've done this before and we're going to apply a lot of our learning from other established markets into our German business. So more on Germany when we get to the Q&A.

Summarizing Europe, let me say when you put it all together, our business there strengthened as we moved through the year and we now expect for all of our Europe, Africa, Middle East portfolio for sales and profits to be up although slightly for the whole year. Let me turn to the other pieces of the Tupperware segment, starting with Asia Pacific. There, we had double digit sales growth and there again this quarter, we had a strong return on sales of 19% and that's up 4 percentage points versus last year. The emerging markets in that area, China, India, Indonesia were up nicely too, 27% in local currency. By the way too, worth noting is Indonesia also led the way in those markets. They had their strongest double digit growth quarter since we launched that business 10 years ago.

China had also double digit sales growth. We've continued too to see improved productivity where there are outlets there and also started to see new outlet openings coming in line with our objectives. The established markets of Japan and Australia for Asia Pacific also had a very nice quarter with double digit sales growth from largely a higher salesforce and better activity. We were pleased too to see in the quarter that our Malaysian business in which we've implemented a conversion to a U.S. type multi-tier compensation system, they had growth in the quarter too so we really have learned from implementing that program in the U.S. We had better results, the next country we launched was in Canada and now also we're seeing it did well in Malaysia and in Singapore.

Completing my comments on the Tupperware division, let me turn to North America which includes the United States, Canada and Mexico. In the U.S, We've now had five consecutive quarters of strong sales growth with double digit year-over-year growth in the size of the average active salesforce which is a key driver of sales growth. Also, we were pleased to see that Tupperware's U.S. business was profitable and now we expect full year profits in our U.S. business and boy, that feels good after a number of years of significant investment as we transform that business.

Tupperware Mexico, I was there just a few weeks ago and it's looking very strong too. We were up 13% there in local currency sales. I might add though about half those sales came from a wonderful business-to-business promotion which is going to be very effective for brand building down there and image enhancement but they still even without that they had a good quarter.

So let me summarize the Tupperware segment. Clearly the emerging markets were the strongest growth drivers, who didn't expect that. We also saw nice though growth in a number of our established markets and that led to double digit sales increase in this part of the business together with a 10% return on sales from the Tupperware segments which was 3 points better than last year.

Let me turn to the Beauty division. We also saw sales growth in this part of the business with an increase of 10% in local currency. Our fuller Mexico business continued to be one of our strongest performers and is now our largest business. By the way when you consider this acquisition, that Fuller business makes almost $60 million a year at a 9 multiple but we paid $560 million for all of these Sara Lee businesses, just the Fuller business alone was worth that. In that Fuller, Mexico business, we had double digit sales growth again in the quarter and a strong ROS of over 20% and Simon and I were just there a couple weeks ago too and boy, their plans for the fourth quarter look strong and new product program, the recruiting levels, public relations continue to be impressed by the management team of that business and the results. That business, the Fuller business now has 450,000 members of its salesforce so we're number two position in the Mexico cosmetics, fragrance, and toiletry business and we're clearly stealing share from others.

In the quarter too we were also pleased to see BeautiControl North America return to double digit sales growth. As a matter of fact the strongest quarter and top line that we've seen since 2005. Also, we were pleased to see at BeautiControl the total and active salesforce size continue to grow and we're gaining some ground on productivity. Got a terrific management team there in place and they're just doing a wonderful job not only in the marketing front but really dialing up our expectations with regard to the sales management of that business as well.

In the Beauty Other segment, our emerging markets in Central and South America also grew nicely in sales with a healthy return on sales. We had sales growth too in our Fuller Cosmeticals Brazil business and you know that's an investment market for us so the profit didn't follow, but we're seeing really wonderful progress with that business and it is a dynamic cosmetics and direct sales market. Ditto with regard to Argentina. It's growing but we're not making the profits there we want to, although it is profitable but we're really working on expanding the salesforce there.

The Phillipine Beauty business was experiencing a nice quarter too, strong double digit sales growth in total and a significant improved profit level, so this reflects a better value chain. Regarding our Nutrimetics business in Australia, you see we had an impairment charge there but I must say that's GAAP regulations. We've made great progress in the past year in reestablishing that business from what had become mostly a wholesale buyer business to a party plan direct selling Company. It's much like our BeautiControl business and by the way it took us two years to get BeautiControl on that upward slope. By the way, Sara Lee paid more than $200 million for just that business six, seven years ago, so we believe it's a good business. Sales though have been modestly lower than last year, and also the same with regard to profit, so it's early days for that turnaround but a great management team and all the fixes are in place in that market, so I really am hoping to start seeing progress there beginning in the early quarters of 2008.

Let me put it back together for the Beauty business. Overall we were pleased with the quarter. We saw growth in both our established and emerging Beauty Markets. Remember, our strategy was really to grow the size of the Beauty businesses and try to move that 7 to 10%, and as we said it's been less than two years since we acquired most of these businesses. We're not declaring a victory but we certainly are declaring progress, so anyway, Mike, let me turn it over to you and then we'll open it for Q&A, okay?

Thank you, Rick. I'll start by outlining how our third quarter actual results came out versus the outlook we gave in July. Sales came in at $455 million up 10% in local currency, and above our outlook range of 5 to 7%. We benefited by $70 million from stronger foreign currencies versus 2006 which matched the amount in our July outlook. Earnings per share of $0.37 after adjustments was well above our outlook range of $0.19 to $0.24. The upside in sales and profit came primarily from our Tupperware Asia Pacific and Beauty North America segments, specifically from Tupperware Australia and improved value chain by Fuller, Mexico and lower Beauty group costs.

On the sales side Tupperware Russia and South Africa and BeautiControl also made meaningful contributions. In Europe, the impact of the Russian and South African upsides on profit was largely offset by lower profit in Germany. Also contributing to the higher than expected earnings per share was an 11.7% tax rate after adjustments. This was below our expectation due mainly to tax law changes in Mexico although not nearly as good as the third quarter of 2006 when we were in the unusual position of having income from income taxes in the quarter.

Versus our forecast a better tax rate contributed $0.04 of the $0.13 upside from the high end of our range. It's worth highlighting that our pre-tax profit in the quarter after adjustments was up over 4 times versus 2006 on a 15% increase in sales including the benefit of FX. Versus last year, earnings per share for the quarter after adjustments was up $0.17 or 85% with $0.05 coming from positive foreign exchange. The $0.12 increase in constant currency came from a return to profitability in the Beauty Other segment and strong double digit segment profit increases in our other four segments.

Looking at the other elements of net income, unallocated costs were up slightly and net interest expense was down $1.8 million reflecting a lower level of borrowings and the placement of more of our debt than last year in lower interest rate countries. The benefit of the new credit agreement that we entered into on September 28, will be reflected in our results starting in the fourth quarter. Our 11.7% tax rate this year after adjustments cost us $0.05, compared with the $0.10 benefit that we had last year given our negative tax rate then. Dilution from a higher number of shares cost us $0.01 on the comparison. We had two new adjustment items this quarter and I'll comment on them now.

The first related to the new credit agreement we entered into right at the third quarter. In connection with replacing the old agreement had a non-cash write-off of previously deferred debt costs of $6.1 million and had a cash cost of $3.5 million to terminate floating to fixed interest rate swaps in place against the previous term loans. Costs associated with placing the new agreement were about $2.5 million and they will be amortized over the five year term of the new agreement. As mentioned in our September 28, release, the lower interest rate spread and committment fee that we'll pay under the new agreement is expected to save us about $20 million over the next five years in the aggregate versus the previous agreement. We were able to negotiate this new agreement in light of S&P's upgrade of the credit rating to investment grade on this credit instrument.

The other unusual item that we had this quarter was a pretax impairment charge of $11.3 million related to the intangible assets and goodwill recorded in purchase accounting for our Nutrimetics business acquired from Sara Lee Corporation in December 2005. This was necessary following our annual review of these assets that we do as of each third quarter. It reflects our current expectation of future sales and profit which is below what we had for this piece of the acquired Sara Lee business as of the acquisition date. While we believe that the strategies and their implementation are correct, it's taken us longer than expected to get traction. What we may see here is a gestation period of a couple years starting from when we acquire the businesses followed by significant growth which is what we saw at BeautiControl, which is a very similar business.

It's important for me to note here that this non-cash writedown does not reflect any major change in our most current 2007 or forward expectations for these businesses. Arriving at the conclusion that we needed to record this charge was a close call and reflected the requirement that we split the purchase price among the groups of units we acquired. Looking at the sales and profit growth we've achieved at Fuller Mexico just that business unit would justify the price we paid in total in 2005 and while we would have concluded that no impairment charge was necessary looking at the acquired businesses as a whole, this is not how the rules work. We'll continue to do our annual impairment review in 2008 and forward for Nutrimetics and the other acquired businesses and while future charges are possible, none are projected at this time.

Turning now to the balance sheet, our debt to total capital ratio stood at 58% at the end of the September 2007 a nice improvement versus 63% at the end of 2006 and 67% at the end of the third quarter last year. We expect to achieve a further reduction in the fourth quarter. Networking capital at the end of September other than cash and debt stood at $174 million versus $126 million at the end of 2006 and $199 million last September. The amount at year-end mainly reflects our inventory position given the timing of our promotional push periods. In terms of days on hand we were at 164 days this September versus 161 days at September 2006. As in past years we expect a significant inventory reduction in the fourth quarter.

Cash from operating activities for the first nine months at $50 million was $7 million lower than the 2006 period. Net income was $8 million higher this year and included 14.5 million of non-cash pretax for engineering and impairment costs. The main offset was bigger out flow from inventory largely reflecting a lower beginning of the year balance this year than last. We continue to expect 2007 cash flow from operating activities net of investing activities to be in the 100 million to 110 million range.

Built into this outlook we continue to see capital spending for the year at 65 million to $70 million including about [$50] million from the Belgian Capital lease. As planned we began share repurchases in the third quarter under the $150 million authorization announced in May. The authorization is to use the proceeds from option exercises to make repurchases and in the third quarter we repurchased 1.1 million shares at an aggregate cost of about $32 million or $29.61 per share. This years proceeds from both option exercises in the third quarter along with option proceeds from earlier in 2007.

Turning to the outlook regarding full year 2007 sales and profit, we now expect overall sales to increase by 7% in local currency versus our previous guidance of 6 to 7%. Our new GAAP EPS guidance range is $1.70 to $1.75 and includes the $0.15 negative impact from the third quarter non-cash intangible and goodwill charge for Nutrimetics and a $0.10 of costs associated with exiting our previous credit agreement.

The EPS range excluding items is raised $0.10 to $2.10 to $2.15 from the $2.00 to $2.05 that we indicated in our second quarter release with the main upside coming from improved results in the Asia Pacific and Beauty segments and a lower tax rate. This guidance includes an increase in pre-tax income versus 2006 of 32 to 35% including an 11 percentage point benefit from stronger foreign currencies and also includes a tax rate of about 20% compared with 2006's 11.7%. The higher tax rate yields a negative $0.16 on the comparison of 2007 guidance range with 2006 $1.79 after adjustments.

At the segment level our guidance has remained basically unchanged versus July and is as follows for the full year. For Europe, up slightly in local currency sales and profit for both Tupperware Asia Pacific and North America low double digit increases in sales with a 17 to 18% return on sales in Asia Pacific versus 2006's 16% and in Tupperware North America an ROS of 6 to 7%. Both of the Beauty segments are expected to have a 7% increase in local currency sales with the ROS down slightly in Beauty North America. Beauty Other is expected to have a smaller loss than 2006's $5.3 million.

As for the other elements of our forecast we now expect our unallocated cost to be 40 million t $41 million, which is up from 37 million to $38 million, the range we gave in July, due primarily to higher costs under our incentive programs. We now expect net interest expense to be between 38 million and $39 million versus about $40 million in our July guidance which reflects the benefit of our new credit agreement and we expect an effective tax rate of about 20% excluding adjustments versus 12% in 2006 from the low 20% range guidance we gave in July. We continue to foresee pre-tax land insurance gains totaling about $10 million which have all been realized by the end of the third quarter, intangible asset amortization remains at $13.3 million, and reengineering costs continue to be foreseen at about $10 million.

For the fourth quarter we foresee a 4 to 6% local currency sale of increase with EPS excluding adjustments of $0.78 to $0.83 versus $0.75 last year. This includes about 10% higher profit from our segments, lower interest expense and higher unallocated costs due to higher incentive accruals. Partially offset by a more normal tax rate in the 20% range versus 10% in the fourth quarter of 2006, stronger foreign currencies are expected to have a positive $0.06 to $0.08 impact on the comparison. There is $0.02 of assumed dilution from higher shares. In the fourth quarter we expect $0.07 of expense from intangible asset and reengineering.

A word on expected Orlando land sales, the States have been significantly impacted by the current mortgage credit market crisis. Our outlook for the timing of sales is pending while the uncertainty settles down and while we believe our strong, our long term range, let me--.

That's why I didn't go into finance, Michael, because you have to read all of these details but anyway, the outlook for the timing of sales is pending while this uncertainty in the real estate market, but want to reiterate too that most of the anchor units are in and we're still expecting $125 million to get from this, although we may have to push it out a year or two further. We'll see what happens there. Through this year's third quarter by the way we've received $72 million of proceeds under this program. Anyway, we would like to turn it over now to questions.

Thank you. (OPERATOR INSTRUCTIONS) We'll take our first question from Dara Mohsenian with JPMorgan.

Good morning, guys.

Morning, Dara.

First I just wanted to get some more clarity on what drove the year-over-year margin expansion in Europe in the quarter, and it was up strongly for the first time in years, particularly given it sounded like the country mix was still negative with the strong emerging markets growth? And then second, how sustainable is that margin expansion in Europe? Should we expect to see continued expansion as we look out to 2008?

Yes. It's a mix over there too, because what we've seen is in our German business, one of the ways we've been closing that salesforce size gap, Dara, is by throwing promotional dollars at recruiting, at getting the current salesforce active and at getting customers to come to a party and the combination of those things really starts to enhance the business but we've taken a margin hit in Germany. That's the primary market. It's offset by the other markets.

I mean, the real glow markets over think, you really do have Russia, South Africa, and a number of the other established markets with very strong North of 20% operating margins, and that's why it's interesting in a market like Russia, for example, and I was with them last month. It's a low per capita GDP there but we'll go in with less highly engineered resins, so they can afford the products there but we have very strong gross margins and a very efficient business model there so some would think, hey, these established markets with low GDP's, you can get sales growth but can you make margin and the answer is you can get both there. So I'm feeling better about that. What I'm hoping to start to see, Dara, in Q1 and Q2, is Germany to get back North of this 20% ROS that we're used to and then you really start to see improved European margins.

Okay, and Germany it sounds like you guys are still pretty comfortable that the salesforce trends are improving there and that should eventually lead to sales and profit improvement?

Yes. And it's interesting. We are counter-cyclical when there's high unemployment for generally the first three years or so, but when you get a sustained high unemployment, you really start to feel the effect and we had seven years of that there and that was a primary problem. Now, however when the macro-economics improved, we're not one of the first to come back. I think it takes several more years so I want to be very conservative in our projections for the next couple years in Germany.

A couple things that give me strong confidence there, the brand name is among the most respected there. I was there for each one of their Summer jubilee meetings and saw 4,000 people per meeting. What I'm seeing is the texture of the salesforce is getting younger, better educated, and more urban which that really matches the trends of what's happening with regard to their population, and it speaks to that we've got a real chance then to penetrate this market even more effectively.

The additional thing I'm comfortable with is we're learning from what we, and I alluded to this, what we learned in Australia, we were worn out, our Australian business in the mid '90s, the image of the Company, everybody respected Tupperware but it was dated. Rose Robertson and that management team has transformed our Australian business, starting with the image of, can I make money with Tupperware, is it a real career, they changed the party so it became an experience, a fun girl's night out. They really upgraded their training, all of their promotional materials and we make significantly North of 20% of those markets, so we're using that template from Australia to convert it into our German business and that's why Simon was over there this last month with Glen Drake and the rest of the guys and we're going to be implementing a lot of that stuff in November and December and the good news there is the fixes aren't invasive to the business, don't involve any kind of write-offs, they're enhancements to the business. Forgive the long winded but it's our second biggest market and we spend a lot of time talking about it, Dara.

That's very helpful, thanks. And then Mike, hopefully you've recovered. I just wanted to run through the DS&A line, pretty strong margin performance there. Is that a function mainly of the strong top line growth? Was there any timing issues related to spending? Can you give me a bit more granularity there?

Yes, first of all--?

Michael specializes in granularity, I always question what question I'm going to ask Mike, if he can take it down deeper. Go ahead.

Dara, there were a few things that really drove it. In some cases we've been able to be a bit more effective with our promotional spending and that helped us on that line. There's certainly a leverage benefit associated with having the higher sales and not having to expand our operating expenses as quickly, there was also some timing benefit that we've talked about in the Fuller Mexico business where we said that that was some of the reason why we didn't look as good in the first half and that's coming through in the third and fourth quarter so those are really the biggest drivers.

Okay, thanks a lot, guys.

Thanks, Dara.

Thank you. We'll take our next question from Doug Lane with Jefferies.

Hi, good morning, everybody.

Doug, you've been missed.

Well, you've done okay without me.

Yes.

Mike, start with you. Can you give us an update on resin costs, what the impact is in '07 versus '06 and what your early read on '08 is?

Sure, we went into 2007 actually thinking that we would have a couple million dollar benefit and that's based on what we were seeing at that time in early January. As we moved through the year of course, the raw materials got worse and the crude and natural gas. So we're expecting just a little bit of a negative impact in cost of sales for the full year, nothing significant, and our early read next year again based on what we see would just be a couple million dollar negative. Some of the reasons that that's the case, about half of our resin are the more highly engineered variety and they don't move as directly with some of the more fundamental resins, and then even beyond that, the supply and demand characteristics are not quite as dramatic apparently in the resin markets as they are in the oil and gas markets. So that's what we see at the moment.

Okay sounds fairly benign.

You know what?

Go ahead.

Doug, one thing I think too is that I'm pleased from -- the acquisition was, and this new business model we've created was really primary focus so that we could grow the Company but at the same time, we said how do we enhance our business model from a visibility standpoint, and so that we can have more consistent predictable sales and profit. From a raw materials standpoint, we used to be in our 20% cost of goods sold was resin, things and now it's just North of 10% when you bring these Beauty businesses into it, so we're not so cost dependent. Now I think the other benefit too is when you're operating with 65, 70% gross margins, that buffers you quite well.

That's a good point. It is a lot less important as a percent of cost of goods than it used to be. Moving on, I wanted to drill a little bit further down in the U.S. and Germany. Could you talk order of magnitude, let's talk reported dollar sales with the euro being strong, obviously the local currency sales are down. Do you think the reported dollar sales in Germany will be down this year as well?

Yes, it's really the euro probably at 125 this time last year and you got the 140s area, so I'm looking across the table. Wouldn't you think that? We'll get you an answer on that. I'd still think it would be modestly.

Yes, Doug, I mean we've said double digit local currency declines in the first three quarters, so that's going to be more significant than the benefit from the euro.

Yes, but then if I was going to look at the U.S. and Germany combined, your two sort of most mature markets if you will, with the strength in the U.S. this year, will that more than offset the decline in Germany on dollar basis so maybe when we look at the 10-K for '07, U.S. and Germany dollar-wise will be up in aggregate?

Germany is so much bigger than the U.S. business. I'd still think it would be down, if you put them both together, although the growth curve in the U.S. is really starting to look good, and we're convinced we have the right kind of business model for the U.S.

Right. Do you have an average active number for the U.S? I assume that's up nicely?

The total salesforce is up, the average active, I'm going to have Teresa circle back and give that to you, okay?

Okay that's great and I'll just take one more question on, I still like the way you talk about China, India, Indonesia, and then Poland, Russia, and Turkey. Did you give us a number on what those six markets were up in the quarter and what they're looking to be up year-to-date?

We didn't separate it by that. We just made this big decision after a lot of analysis that hey, we just got to start talking about all the emerging markets and we kept hearing that as we did IR meetings out there. They said my goodness, you're only talking about six of them , although Teresa, why don't you circle back and get Doug

Doug, the trend really hasn't changed. We were in the second quarter in the upper 20s and the 3 in Asia and well above 30 in Europe and that was true also in the third quarter. Yes, the CAGR actually for five years was right around 30 and yes, I think you just, Mike I think your spot on it was probably improved a little bit in the third quarter.

Okay, great. Thanks.

Yes.

Thank you. We'll take our next question from Budd Bugatch with Raymond James.

Good morning, Rick, Mike.

Good morning.

I think Doug pretty much took my question. I was going to ask about the U.S. Tupperware. I know it's not a big part of the business but I just was pretty heartened to hear you say it turned profitable. Did I get that right?

Yes, we were profitable in the quarter, yes.

And talk to me about what's going on there then, just to explain what have you done differently? The average active as you reported in Tupperware North America is actually down year-over-year and down sequentially, so how have you been able to do that?

The pieces are coming together and what it really is is a reflection that we've got a more serious career minded salesforce. The Tupperware business had become largely in the early '90s a lot of hobbyists out there, inexpensive kits so a lot of people were just signing up to buy products for themselves and members of their family.

What we've done with regard to this whole new compensation program, they were really three big pieces here. We had the number one to change what the product line is so that we further distance ourselves from the commodity plastics makers out there and you know the brands. Secondly, and products that we could, they could in fact differentiate with a presentation. Had to change the whole party because the party used to be focused on stay at home moms and we're dealing with 65% are working, they've done that. And the third piece was a salesforce that basically there was a career path so you came in, you got a real career kit, you went to real training, and there was a real program of seven steps to get you started. That's coming together as a business so you're starting to get from salesforce better results at a party and better results on sales per salesforce member. The size of the salesforce still matters, I mean, but their productivity, it's a better group.

Yes. I guess, Budd, if you look underneath it a little bit, the size of the salesforce in the U.S. Is about flat, the total.

Right.

We do have more active sellers in that market, the negative in North America overall is coming from Mexico, although we've had a lot better productivity in Mexico as well and when you look at the profitability drivers in the U.S. year-over-year, we've done a lot better on the gross margin and some of that is better mix management but it's also the volume impact giving us a benefit on the cost side. We've also been able to improve distribution somewhat which was an issue for us that we're continuing to try and work on. So that's what really is showing that change if you're looking just quarter-over-quarter.

I think the largest head turn in the business is that people we're recruiting today, we're largely talking to them about a career with Tupperware, rather than make pin money with that, and that is I go there and I was at their Jubilees, and that's where the smell test, you look there and you see a younger group of people, better educated and when you go to the breakout training sessions, they're talking about hard hitting business things, how to data party, how to put it on, how to be an effective presenter, where it was, all of it felt soft in the early '90s when I first joined the Company but I don't ever want to go through this kind of transition again, because it's the hardest thing I've ever been involved in.

Okay, just a couple of other questions for modeling purposes. When we look out into next year and beyond, reengineering and impairment, what do we look like going on for, now that we've gone through a lot of this? I know you said I think the last call there's still a couple more years of this.

Well, we've been putting in there some, there's 8 million to 10 million per year and I'll have Mike clean up what I've said here with exact numbers, but largely, this is the ongoing process of we've got 17 manufacturing operations out there and this shift from us being a manufacturing culture to more a Nike marketing culture, the view for the future is 5 to 7 of those, but we don't want to do that in a destructive way. For example, in some of our European markets, if we wanted to exit our manufacturing, there would be 30 million to $50 million social costs. We're not going to take those. You're not going to see us announce $100 million reengineering program. We said, hey, once somebody retires, you don't hire them. We keep moving in Europe, for example, our machines further South and further East in search of the low cost market. So whereas 10 years ago, almost all our big production was in France and in Belgium, so Budd, we're still going to look at this 8 million to 10 million.

I didn't like this impairment charge with regard to the Nutrimetics business because I thought it was ridiculous but it's GAAP rules. I mean, we put that whole thing together and when we bought Sara Lee's businesses, we got the Fuller business, we got all of those Latin American businesses, we got Avroy Schlain, Swissgarde in Africa which are both growing double digit, we got NatureCare in Japan and the Nutrimetics. Well, you take all of the pluses and put them up there and we like them, but you have one business where it's taking the modeling that was done, it's taking about the same period as it took us at BeautiControl but you got to take the hit.

I understand. I understand.

Yes, I hope you can sense my frustration with it because it sends a signal to them that they've got a great business there and they've made the big change. When we bought this Company, they were selling $15 paper kits to the salesforce. There was no training. Now it's a $250 kit, they come to professional training, a huge shift in that business and we didn't put the business out of business while they did that, and we took one of our BeautiControls senior execs who is running that Company. So I'd buy that Company again today.

One of our problems also and tax is always another issue, Mike, that gives us difficult in modeling, can you give us some feel as to where it goes going forward now? You had said I think a 19 to 21% kind of normative rate for the long term, is that still your view?

I think what I said was low 20s and that's what I would assume in the intermediate term, yes.

And what else can get in the way of that is there stuff still in the balance sheet that could have to be, come onto the income statement?

Well, I mean, of course, nothing that we know of. We do have a lot of tax assets and we believe that we've got them valued, valuation allowance where we need them so we don't expect anything like that.

Okay.

We've always had, there's always, PWC guys once told us our tax department here is as good as their New York or excuse me, their Washington group, but our guys, we've always got audits going on around the world. They're substantially reserved against and we've never had a year that was a good year turned to a bad year because of tax. I think our guys were very aggressive on tax planning and we don't like to pay taxes.

I understand. And last question goes to share count going forward? Pretty well flat even though you're buying in stock. Was that--?

Yes, I'm sure as you recall what we're doing is using the proceeds from options so it's kind of executing what the Treasury stock method would tell you that you use to get the diluted shares so I wouldn't, not knowing what the stock price is going to do I wouldn't model anything different.

Thank you very much.

Thank you. (OPERATOR INSTRUCTIONS) We'll go next to [Greg Hillman] with [First Wilshire Securities].

Hi, Rick and all. I have a couple questions. First of all, just in the United States, in terms of sales mix, I was wondering how the sales mix has changed over time or more recently in terms of plastic storage containers, serving dishes, cutlery, and cooking wear? Can you talk about that just for the States for starters?

Yes. The shift has gone away from product categories that largely have gotten commoditized with the Gladwares and the Rubermaid kind of things to much more technical kind of products where you can demonstrate the value-added of that product. So we'll go away from the polypropylene storage containers to much more polycarbonate storage where you can use those for food preparation, you can use them for cooking and microwaves but also some of ours, higher tech, you can put them in a microwave and a conventional oven, you can freeze them, you can serve in them and then go back and store again. We've moved more into kitchen tools and gadgets, again with demonstratable benefits and tabletop, these we've had a great success with the Elegancia kind of a line, that's we call it in Europe, and it's a really highly engineered, it's polypropylene, lexan -- excuse me, polycarbonate, lexan, but very fashionable.

Is that a serving dish or is that a decorative thing?

No, it is serving and storage, but appropriate for the tabletop that it looks like glass. So, we've been moving to the areas where we can differentiate and away from commodity categories.

Okay and also, did you have -- going back several years, you had some product liability problems when the containers would shatter if you drop them. Do you still have that problem?

We really -- let me tell you, every year that we do our updates we're at Board meetings with regard to our liability issues. We don't have product liability problems. I'm trying to remember the last time.

Yes, I think that was in the mid '80s?

Yes. We haven't had it. There was a baby bottle that people put in that made out of, pokycar -- I mean, you can see how isolated these are. By the way when we were part of Premark, and we had that slicer division, boy, we used to have all kinds of that misuse, and you just don't get it. That's not an issue with us. We spend more money on intellectual property legal protection than we do in that whole area of product liability.

Okay, and then Rick, moving to the developing markets, one of the earlier questioners asked about the comparables, but right now, in terms of what you call emerging markets, what countries are the additional countries than the Russia , India, China, Brazil, Poland, and Indonesia are there an what you call emerging markets accounts for 46% of

Greg, I'm going to have Teresa circle back to you and give you that list. We've got it here, but just to not take other peoples time we'll circle back and get that right to you, Greg.

Okay, that's fine and just another question about some of the emerging markets. You started to talk country by country a little bit. Can you just tell us about some of the products that are selling well? The traditional Tupperware products in India, Russia, China, Brazil, Poland, Indonesia? What kind of products are you actually selling there?

There you'll go and you don't have, in many of these emerging markets, you do not have two things that really grow our business there from a product standpoint, there's lack of a retail infrastructure in most of those areas once you get away from the big cities and secondly, they're limited earning opportunities for women so those two things drive it.

On the product side, you will see it start with core food storage it starts with because for example, in China, India, or Indonesia, if we can show her more effective food storage, then she is freed from spending her time on food gathering and preparation and she's free with other aspects of her life, so storage is a whole new concept in many of those markets. They're used to just having -- you have today what you pick today or what you've got today. This all of a sudden, it does free her up, so it tends to go to what you would have seen here in the '60s. Good news for us, by the way, is we write-off our molds over a four year period of time. We have $800 million worth of fully amortized molds and how many shapes can you make of a bowl so we go into an India, China, or Indonesia, we'll use a less engineered resin, with a fully amortize mold and it presents a real price value to the consumer, but we make it fashionable in new and different colors and we've learned how to stencil, label, so it makes it a hip and happening product for them and one that they can afford.

Okay, and finally, Rick, just a question, I notice too your emerging markets in your islamic countries I think Indonesia and I guess Turkey, and there's -- I don't think women are allowed to work in those countries; is that correct? And then I guess what I'm trying to get at, is how does women participating in the workforce affect direct selling in a country?

Firstly, you really have to have firstly the real ultra orthodox, the former Afghanistan where women are not allowed to work. As a matter of fact the largest Muslim, I did a tour the month after 9/11 of all of our Muslim countries and as we always say, we're not viewed as an American Company. We don't focus on differences. We focus on the values that we share with them and I'll give you an Indonesia for example, this is kind of the old maffia thing, follow the money.

She starts as a sales representative with us and she builds a big business and by the way, he works for her. It's absolutely transforming the view of that Muslim culture there. She has been empowered because she's the one that really starts making the money, so you go through our distributorships in Indonesia and you'll find she is the leader on stage. By the way, I just did Turkey last month and that's 97% Muslim as well. She's running the business and he's running after her. First of all, he's a beneficiary of a better lifestyle because of her and he acts as the distribution side of the business and it's transforming Muslim cultures, and empowering women.

Okay. So taken these developing markets, the food storage containers are generally not available in retail and retail is hard to get to because as you say the limited retail interest and also the limited transportation infrastructure.

Yes, mostly what's available is junk. In India, they've up to now all they ever used to use was tins, and again, we can demonstrate features and benefits. Even in markets like the Philippines you can pawn Tupperware. It's known, I mean, it's an aspirational product.

Okay. Great. Thanks very much.

Thank you. (OPERATOR INSTRUCTIONS)

We'll go back to Dara Mohsenian with JPMorgan.

Hi, Dara.

You've seen a big rebound in a few markets where you move to multi-tier compensation. Does that mean you're thinking about switching to multi-tier in additional markets going forward?

Not many, as we go forward, Dara. We've actually only, because for example, the multi-tier doesn't work in Latin America. You can see that by following those companies that have been successful elsewhere. They have almost no footprint in Latin America. Doesn't work well in Western Europe, Europeans culturally are offended by that kind of an approach. It does work well in a number of markets of Asia Pacific, for example, Japan, Taiwan, through what the Southeast Asia, it doesn't work, for example, in the Philippines. They're looking for a basic income, not a career plan, so by the way, Doug, that's the interesting piece of our business. Most of the direct selling companies out there have basically been transnational. They've come up with their formula, here is our product line, how is how we sell our product line and here is our compensation structure and they go from let's say the U.S. to just transport that business model elsewhere in the world.

This new business model we've created, we have three pieces of it. We say what's the right product line to sell in that market, what's the right selling method, party, brochures, one on one, which of these, and what's the right compensation structure for that? Is it a traditional where you have distribution? Is it a multi-tiered compensation structure? What? Or is it a single level like an Avon or we use at Fuller, so what we've been able to do is we created this portfolio direct selling companies is put together what we think is the best model for that country out there. For example, parties don't work well in Latin America but brochure selling really works. So, I think that's one of the reasons that we're really starting to get traction out there is we created this new portfolio model and then we take advantage of the synergies between these companies of how do you recruit, train, and motivate salesforces. Forgive the long winded answer there.

Okay, thanks.

Thank you. We'll go to a follow-up from Greg Hillman with First Wilshire Securities.

Yes, Greg.

Do you extend credits to the distributors in Mexico?

Do we extend credit in Mexico?

Yes.

Yes, we do. As a matter of fact we have less than 0.5 of 1% bad credit exposure in any given year. So it works very well, because it's, the local manager is usually someone who knows her and she pays her bills to her friends.

Okay. Thanks.

Okay.

With no further questions I'd like to turn the conference back over for any additional or closing remarks.

Everybody thanks for your time. Again, we're not declaring, hey, this is done, but I'll tell you, after it's been still less than two years since we've put these companies together, six years since we did the acquisition of BeautiControl, but we are getting much more comfortable that this portfolio of direct selling companies really is going to enable us to grow this top line 5 to 7% and produce even better than that from a operating margin level. We're already a month into Q4. Q4 looks good to us and we'll look forward to updating you on that and giving you our projections for 2008 but we expect it also to be a year of continued progress. Thank you very much for your attention and interest.

Thank you. Once again ladies and gentlemen, that will conclude today's conference. We thank you for your participation and you may disconnect at this time.