Tupperware Brands Corp (TUP) 2010 Q2 法說會逐字稿

Good morning. My name is Shardai and I will be your conference operator today. At this time ill like to welcome everyone to the Tupperware Brand second quarter 2010 conference call. All lines have been placed on mute to prevent any background noise. After the speakers remarks there will be a question-and-answer period. (Operator Instructions). As a reminder, ladies and gentlemen, this conference is being recorded today, July 20th, 2010. I would now like to introduce Rick Goings, Chairman and CEO of Tupperware Brands Corporation. You may begin your conference.

Thank you very much. Good morning, everyone. I am here with Mike Poteshman, our CFO, and Nicki Decker, our VP of Investor Relations. You all know with drill with regard to forward-looking statements and I refer you to a Company's position on that in our filings. You have seen the results second quarter, Mike and I will give you more detail in a moment and our guidance for the rest of the year. We will also speak to the issue we had in Russia. By the way, when we end this call, talk about Russia, it does include the Common Wealth of Independent States or as it is referred to in the rest of the world as CIS.

Overall, for this second quarter, the Company grew 6% in local currency. This includes the sales impact of correcting that accounting issue, which brought the year-over-year comparison down from 7% sales increase to a 6% we reported. Our beauty other segment had a mid teen local currency increase and our three Tupperware segments delivered mid to high single digit currency sales increase. Our emerging markets were 56% in this quarter. They were 54% in the previous quarter and they continued to deliver strong growth with 15% local currency increase. The established markets were down 3% and primarily this was from BeautiControl, Tupperware Japan and Tupperware Australia. We were pleased also with regard to sales for us to end the quarter up 7%.

Now, before I get into the highlights, let me make just a couple of points regarding the quarter. Firstly, this is the highest second quarter profits we have had in our Company's history in the 14 years since we went public. We were able to achieve this and to come in local currency range even with a $0.14 negative adjustment for the accounting issues. By the way the range was $0.95 to $1.00 and that included 6% positive foreign exchange. Foreign exchange, as it turned out, was only 3% positive so the adjusted range was $0.92 to $0.97. We came in at $0.93. If you added back the 14% adjustment, we actually would have come in and what we were still thinking in early June at $1.07. Well the adjustment is the adjustment. But it does speak to the underlying strength of our business. Back in the 90s, primarily source of our profits was Germany. Now there are multiple sources and platforms.

We have numerous markets to highlight this quarter, and I will start with the established markets. In Europe, our established markets were up 6% in local currency. Tupperware France is once again a key standout with local currency sales in the quarter 21% above last year. This is on top of double digit growth in the second quarter a year ago. Remember, we have been in France for 50 years this year, and our management team really has mastered [contemporizing] direct selling and part of this is the great job they have done in structuring their promotional programs and the kind of parties that they're holding. Also they're terrific with activating the salesforce and increasing sales per party. We ended June with also a significant advantage in the number of sales leaders we have and consultants in France which reflects the success of a program we have told you about in the past that is somewhat of a sub-distributorship called "team leader" where sales leaders develop other sales leaders. We have been using France, and the reason I show case it, we have been using them as a template for other established markets to show how despite significant size of the business, we are the largest direct sales company in France, and a significant number of years in business, there's always ways to find paths for growth.

One of those established markets that we are utilizing these same techniques is in Germany, where we are pleased that we are beginning to really see light. We even had an increase, although modest in the quarter, and we also ended the quarter with 6% more sellers than the prior year. It has been a long time since we had this kind of advantage there. I might say our Managing Director of Germany was previously Managing Director of France. So he knows this, he is Swiss. The larger sales force bodes well for its future [salesforce] in Germany. It is still an important business for us and now we have also upgraded our recruiting standards and our approach. We are seeing this come through with more productivity from each of our sellers, and the promotion of a lot of terrific new sales force managers. And I am pleased to say that I am more confident than before that we are headed in the right direction in this large German business.

Also in the established markets of Europe, let me comment on Tupperware Austria where again we've been nearly 50 years and we've increased local currency sales 22% this quarter. This is another unit where we've had a string of many quarters of double digit year-over-year increases and the management team there, Michael [Chalice] and his team really understand how to recruit and get the sales force active. They have also been utilizing this team leader structure.

Another market in Europe I want to call your attention to is Tupperware Switzerland. It is not a big market but it has been so many years in the penalty box with us, that it has come out now and started to grow with a 15% sales increase in the quarter. So it is really headed in the right direction. We installed a new management team there last year, and Frankie and the new team are really applying terrific fundamentals.

Italy and the Netherlands in western Europe and are part of our established markets also had solid growth, mid-single digit it in the quarter. As a matter of fact, the only established market with a noteworthy sales decrease was Tupperware Greece and that's a result of the economic turmoil going on there. I was just there a couple of weeks ago. Terrific management team and I have confidence. Greece, by the way, is one of our mid-size businesses in that region.

Let me turn to the established markets of Asia Pacific. Now we continue to struggle, there's really only two big established markets there, Australia and Japan. We continue to struggle in both of those markets. Our Australian business and I am leaving for Australia later this afternoon for already a planned series of events there. We have got one of the most experienced management teams there and they're navigating through a very difficult external environment. As you know, the external environment really impacted most of the world almost two years ago, but Australia pretty much withstood it. But they're starting to feel the effects right now. You are starting to see the impact even with the Government change, and part of that is driven by disappointment with the economy. This management team we have there is strong. As a matter of fact, for four out of six years of this first decade of this millennium, Australia has been our market and country of the year. So I feel we don't have any fundamental issues in Australia and we will navigate through this. By the way our New Zealand business is run by the same management team and they're doing better. Anyway, we feel that most of the issues in Australia are external.

As I said with regard to the other province in Asia Pacific, as far as established markets, Japan, it is a different situation. It is going to take longer. Our product line has focused too long on high price and yet high quality third party products which really are in line with our core and they also emphasize getting too many buyers who rather than sellers who purchased at a discount. Anyway we are on the path now to modifying this range of products and improving the sales force standards. So, I -- it is going to take time though, probably 18 months before we see a lot of progress in Japan. However other established markets of Asia Pacific, it is important to note that Korea terrific market there, and we are growing very nicely.

Now, turning to North America, another established market, Tupperware US and Canada, the businesses were up 3%. We were pleased to maintain positive growth and are focusing on increasing our market penetration through enhancing the party experience. We have a strong brand equity here, although it is a difficult economic environment. We are seeing some signs of progress in the US but it is a rough ride given this consumer spending environment. In our BeautiControl businesses, we continue to focus on building our team of sales force and really sellers rather than just buyers. That is what we have found up until two years ago and it was really a problem we created. The good news is that at the end of the quarter we ended it with a larger number of directors and many more in the pipeline who were set to become directors than this time last year. We have also seen higher recruiting and sales performance in our new recruits recently. By the way, the standard for the new compensation plan provide, the right kind of direction and motivation for really building sales and business leaders, not just buyers. While we are not happy with the decrease in the quarter end sales, we are confident that there's a lot of growth left in this business, and it would be an asset to our portfolio.

Let me turn now to the emerging markets where we continue to see strong sales quarter after quarter. Emerging markets as mentioned were up 15% in local currency. We are 56% of our total sales. It is worth repeating that the two main levers that make us particularly attractive in these kind of markets are the lack of a well developed retail infrastructure and limited earning opportunities for women. We run our emerging markets very well and they continue to operate as a group, actually with a higher ROS than our established markets, even though the per unit cost and selling price of our products are lower. We are also in the early innings of geographic penetration and building productivity in most of these units. So there's a lot of growth ahead.

In our emerging markets in Europe, Africa and the Middle East we saw another quarter of growth in the vast majority of those businesses. While sales in Russia were down slightly, even after excluding the impact of our period [inaudible], we had an 18% increase for the quarter, and the rest of our emerging markets in this Europe, Africa, Middle East segments some real stars in this quarter that just continue to grow their business. South Africa up 30% and some of you and I have met with you previously, we have talked about what is going to be the impact of World Cup and I said to many, I hope it wasn't going to be much but we have never experienced this before to be up 30% and keep this team and our sales force engaged with the distraction of the World Cup really speaks to the strength of our management team there. We grew our local currency sales also in this segment in Turkey by 24% in the quarter and this market is really starting to reach scale. I was there also last month, and it is a country of more than 70 million people and we are having dramatic impact on turkish women. Although still a smaller share of our business than in many markets, we have been successful there at having our sales force hold more parties which is enhancing their productivity. I do want to mention a couple of markets I don't think I have ever mentioned in this portfolio who are really starting to take off. Hungary up 47% in the quarter, Slovakia up 38%.

Turning to Russia and I will only top line it and Mike will get it into. As you saw in the release, we had an issue as a result of amounts related to prior periods that we booked in the quarter. I said Mike will get into it. But I wanted you to hear that yes I am disappointed with the accounting issues there, but we have a very strong control environment at Tupperware Brands. It first begins with our culture and expectation, next to our strong internal audit department, and then thirdly, as the backstop, the strong relationship we have with PWC across the world. Let me be clear here, I believe these accounting errors are isolated incidents and this has nothing to do with payment to Government officials or Foreign Corrupt Practices Act. As I said Michael will get into it.

Turning now to our Asia Pacific markets we were up 34% in local currency sales, and have had double digit increases in all of these businesses. In China, our local currency sales grew 41% over last year, and for the first time, pleased to report we now have more than 3,000 tupperware outlets. This is an outlet where because there isn't space in these apartments, they do Tupperware parties in kind of little small almost like a sorority house, sellers work out of there and they can also do one on one selling out of there. But it is where most of the Tupperware parties in China happen. Indonesia also up, 39% in the quarter. In India, increased our local currency sales 46%. Putting those back together, China, India and Indonesia are just under half of the world's population, and to be growing at 40% per year in each of these markets and we are getting the business of substantial scale really speaks to the opportunity ahead. The growth in these markets is really the result of our management team focusing on the fundamentals of direct selling and setting clear expectations for managers and distributors. But I would be overlooking Malaysia and Singapore if I didn't mention that they were up 21% in the quarter and Korea was up 25% in the quarter. All of these businesses ended the quarter with a sales force size advantage. That sets us up very nicely for the third quarter and for the remainder of the year.

Let me now turn to the Mexican businesses. Our Tupperware business there grew 15% in the quarter over last year. We had a very small business to business sale this year, but the impact on year-over-year comparison this quarter was minor. Last year we had a big one. And by the way, speaking to the chaos that is going on the border and the other side, the [Choapus] area of Mexico, I did a five city tour this last month in Mexico, and it is just as a tribute to strength of our management team, the strength of our business model, and the dynamism of our sales organization that we are able to record these kinds of gains in this kind of an environment. We did benefit in Tupperware there minor from some promotional programs closing. However, even though we ended the quarter with a sales force advantage in Tupperware Mexico, we had a little tougher time recruiting at the end of the quarter, but I am pleased to see how we are coming out of the gate in the third quarter. At Fuller Mexico, this is our largest business unit, we started to see much better recruiting numbers and we currently have crossed the half a million mark in sellers. We also were pleased that we are starting to report gains on sales, low single digit sales increases, and we continue with our focus, really to lower the turnover of our field sales managers and these are the people responsible for really managing this half a million sales force, and for recruiting.

Finally, let me talk about our businesses in beauty other, where we had a good sales growth in the quarter, an increase 15% in local currency. Brazil headed it up very strong 38% up in the quarter, mainly due to higher volume from recruiting, and a higher number of active productive sellers. As I said earlier with Turkey, some of this productivity comes from greater penetration of party selling. I would tell you that in our average party around the world is between $300 to $400. The top place in the world is Belgium. If you can get an individual seller to hold a party, which lasts about 90 minutes, she makes far more money and her productivity therefore is much greater. Our combined Tupperware and beauty businesses also in the Philippines grew 16% in quarter and I will be there next week. We are pleased to see, we are starting to get some traction in that country. There we're both beauty and Tupperware business.

Venezuela, amidst all the chaos in that market, sales increased 32% and one of our businesses you don't hear us talk very positively about because we have been struggling since the acquisition, is Fuller Argentina and it was nice to see there that we grew local currency sales 20%. I have to say in Venezuela and Argentina because of the inflation in the market, we had price increases. However, this was real sales increased too because we increased the number of active sellers.

At any rate, overall I am very proud of the performance in the majority of our operating units. We are a global portfolio, and we are in 90 markets and we have 40 plus operating units out there. Always have a couple in the penalty box and this the first time in 14 years, we have had an accounting issue, but I remain confident that we are going to make our third quarter and stay with our local currency sales increase for the full year of 6% to 8%. Michael, I will turn it over to you and you will drill down.

Thank you, Rick. As you saw in our release and Rick highlighted that we came in with a 6% increase in sales. We would have hit the low end of our guidance range in April if not for the audit period sales adjustments related to our Russia accounting issue. This also negatively impacted the year over year sales comparison for our Europe segment by about 2 points. Rick talked about the main increases and decreases versus 2009. Looking at where we were better and worse than our forecast for the quarter, the standout on the positive side was Tupperware France, and we were below what we were looking for most notably in Russia, Tupperware Japan, Australia and BeautiControl.

Since it had a noteworthy impact on the sales comparison last quarter and grew some questions, I will mention here that we had about $5 million of B to B sales in the second quarter of this year versus about $3 million last year. And for the full year of 2010 continue to foresee B to B sales about equal to last year, and in the $20 million to $25 million range. On diluted earnings per share excluding items, we came in at $0.93 versus our outlook range of $0.95 to $1 in 2009 actual of $0.86. The $0.93 this year included out of period amounts related to the Russia accounting issues of $0.14 as you have heard. Also impacting the comparison with the guidance range was the worst foreign exchange where the $0.95 to $1 range included $0.06 of a benefit versus 2009, based on the rates when we gave the guidance, where as the actual benefit came in at $0.03. In other words, we were in the local range -- our range in local currency even with the $0.14 hit from Russia included in our numbers.

Our main upside from our segments versus our guidance was in Tupperware North America, coming from better value chains from both Tupperware Mexico and the United States and Canada businesses. While our sales were below the high end of the outlook range, our return on sales was better than we expected, not only in the Tupperware North America segment but also in Asia Pacific where we were able to get more of a drop through to profit from our emerging markets than had been anticipated in our outlook. These units grew their sales in local currency in range of 21% to 46%. We also had a higher than anticipated return on sales in the beauty other segment from a better than expected sales increase in the Philippines, with a good contribution margin, and an improved value chain to Venezuela and the benefit of a better exchange rate there later in the quarter.

Looking at Europe, putting aside the Russia issues for a moment, we had good contribution margins from our high growth markets in the quarter, South Africa, France, Turkey and Austria. We also continue to see an improved value chain in Germany, and we benefited from volume and procurement costs benefits in our manufacturing operations. The big offset, which led to our profit comparison for the quarter being down, was of course our $10.4 million pretax out of period amounts in Russia, and I am going to give you some more details on the situation now.

As we began the process of replacing our long serving Russian CFO who left the business for personal reasons at the beginning of June, we sent in appropriate internal resources to help handle the business. Through these individuals, we realized that certain promotional credits had not been timely paid or accrued, certain account reconciliations had not been properly prepared and acted on, certain prepaid expenses had not been moved to income statement expense in the appropriate periods, and bad debt reserves were not at a high enough level in some cases. We believe that through the amounts recorded in the June quarter, we have materially corrected these errors. Our assessment is that first quarter 2010 pretax income was too high by $4.2 million and that pretax income in periods prior to 2010 was too high by $6.2 million. This includes having overstated sales by $2.3 million in the first quarter of 2010 and $1.7 million in periods prior to 2010. We will develop a remediation plan to insure that we improve our controls. If there's any good news on this, we did catch these errors ourselves. Also we do not believe we have similar accounting issues in other units. We say this in the context of having lower levels of working capital compared with Russia in our other emerging markets. The fact we operate several CIS countries through Russia making processes and analysis complicated and a recognition of the fact that our general ledger systems elsewhere are sophisticated that the rudimentary system currently used in Russia that we are working on changing already.

Turning now to our balance sheet and cash flow, we had a good quarter that brought us the cash flow from operating activities net of investing activities of $66 million for the year-to-date period. While this was below last year's year to date amount of $73 million, it is worth noting that in last year's first half we had about $7 million dollars of insurance recoveries associated with the 2007 warehouse fire that, of course, did not recur in 2010. The other main factors impacting our cash flow comparison were higher net income this year and a greater outflow from inventories that in part affected a lower starting inventory position in 2010 than in 2009. We elected not to pay down any of our term loans in the second quarter, but could have accessed cash and done so within the neighborhood of $35 million of the $120 million in cash with which we ended the quarter. We do plan to make term loan repayments later in the year.

We are revising our debt to total capital ratio objective from being below 30% to now a target of 25%. We expect to be able to reach this ratio in 2011 or 2012. Based on June shareholders' equity, we would need to reduce our debt by $170 million to $227 million to reach the 25% ratio, although of course we expect our equity to increase over time. Our actual debt to total capital ratio improved 2 points in the quarter to be 38% at the end of June. Our debt to EBITDA ratio is measured under the credit agreement was 1.12 times, and the calculation of this ratio is laid out in the website. We bought $10 million worth of shares in the second quarter in line with our announced approach of offsetting dilution from shares going out under our the equity incentive programs to keep the number of outstanding shares at about 63 million. We bought 237,000 shares at an average cost of about $42 per share in the quarter, with the $10 million that we spent.

Turning now to our outlook. You saw in our release yesterday that for the third quarter, we are calling for a local currency sales increase of 4% to 6%. This is in line with what was included within our previous full year guidance in April. You will remember we will sequentially more difficult sales comparison as the year progresses. Backing into it, we are also calling for sales increase in our fourth quarter at the high end of the range, about in line with the third quarter outlook. On profit, our diluted earnings per share range, excluding items, is $0.54 to $0.59, this is versus $0.54 in 2009, and the comparison with 2009 includes a $0.01 hit from currency, based on current foreign exchange rates and the local currency increase of 11% at the high end of the range on the 4% to 6% higher sales. At the high end of the range, this will produce a pretax ROS, again excluding items, of 10.2% versus 8.9% in the 2009 actual. The 130 basis point improvement reflects about 100 basis points from not having the $4.9 million of expense we had in 2009 to convert Venezuela bolivar to US dollars at the parallel rates. We had this hit last year because prior to the SEC announcement on exchange rates of Venezuela late in year, we were using the 2.15 bolivars to dollar official exchange rate. The loss came from getting a much worse rate when we actually converted to currency. The remaining 30 basis point improvement reflects in approximately 170 basis point improvement in profit from the segments, less about $4 million higher on allocated corporate costs than 2009.

Also impacting EPS excluding items is a higher tax rate of about 31% versus 24% of last year's third quarter, the full year outlook for the tax rate excluding items remains at the 25% we are been forecasting. The third quarter rate assumes the extenders bill under consideration that Congress passes in the quarter. For the full year, our outlook remains at the 6% to 8% local currency sales growth that we gave as our guidance with our fourth quarter earnings release in February, and again with our first quarter earnings release in April. You will recall that we exceeded the high end of the revenue range in the first quarter and now we are below the high end of the range in the second quarter.

Our outlook for diluted earnings per share excluding items was $3.68 to $3.78 in our April guidance. Primarily as a result of worsening exchange rates, we are adjusting this range down by $0.17 to $3.51 to $3.61 now. On the decrease, $0.13 is from the worse foreign exchange rates that now shows minus $0.01 versus last year for all of 2010, versus the $0.12 benefit in the previous outlook. The remaining $0.04 decrease in our outlook is equal to what we were below the high end of second quarter range in local currency, although this of course includes the $0.14 hit from our out of period amounts in Russia we recorded in the second quarter. Last year's actual diluted earnings per share excluding items was $3.08. So on a recorded basis, we are going from an increase of 14% to 17% and in local currency for an increase from 14% to 18%.

A brief comment on currency. Our two key profit currencies are the Euro and Mexican Peso and other important profit currencies include the Australian dollar, Indonesia Rupiah and Russian Ruble, and South African Rand. Based on the current facts and a full year basis, a 1% change in all of our foreign currencies would impact our EPS without items by about $0.04 to $0.05.

Back to the full year outlook as I mentioned the assumption for the full year tax rate excluding items remains at 25%. The unallocated corporate expense forecast at $56 million is $4 million higher than the previous guidance reflecting foreign exchange, higher incentive costs and costs associated with our Russia issues. The forecast for net interest expense remains at the same $27 million as before. On a segment basis, the changes in the full year sales outlooks are to reduce the ranges by 1 percentage points by Tupperware North America to plus 5% to 7% for the year and Asia Pacific plus 9% to 11%, reflecting where we are in Japan and Australia. The other segments remain where they were which is plus 5% to 7% for Europe for the year, about even with last year for beauty North America, and up in the mid teens in beauty other. In light of the Russia issues, we now expect the full year return on sales in Europe to be up slightly compared with 2009. In April, we had indicated we would have a 1 point ROS improvement for the year. The $6.2 million out of period amounts we recorded in this quarter for periods prior to 2010, negatively impacts the full year ROS outlook for Europe by about 85 basis points. The negative impact on the overall company pretax return on sales excluding items is about 30 basis points.

We have not changed the return on sales outlooks for any other segments versus what we said in April and continue to foresee for the full year all items a 2 point increase in ROS in Asia Pacific, up 3 points in Fuller North American, down 1 point in beauty North America, as we invest in the compensation plan transition in BeautiControl, and recruiting drivers for Beauty Control and Fuller Mexico and ROS of about 10% in beauty other, which is about 7% last year. Our update on residence we foresee having about $135 million in cost of goods sold in 2010 for products that we produce, and the outlook for the year over year comparison with 2009 on cost is negative $10 million versus negative $9 million for the full year in April. We had a $6 million year-over-year benefit in the first quarter from residence and a $5 million has hit in the second quarter. For the rest of the year, we see a $7 million negative comparison in the third quarter, and negative $4 million the fourth quarter. We have changed our full year outlook for cash flow from operating activities net of investing activities to $205 million to $215 million, which is down $10 million from April, about in line with the reduction in our earnings outlook that is mainly from weaker FX rates. Now Rick has a few closing remarks and then we will turn the call over to questions.

Yes. Again, what I -- before we open it for questions, I think there's two things to look at here, overall the performance of the business we are very proud of it, and in the quarter, when you have to consider very much like those of you who manage a portfolio, we have for example, 45 stocks in it. We generally have three to four markets that we have issues with at any given time. Some times it is because of internal, some times it is because of externals, but that's managements job to fix those kind of things, what we don't expect to have is these accounting issues. The first thing is I feel good about how the business underlying is performing and I have been out there about 80% of the time this year. Secondly, again, I want to restate that I think we have got isolated incident with regard to this accounting issues, and I particularly am pleased with the way our financial team has reacted to it when it became clear that there was something wrong in early June, how we have got not only our financial people from all around the world and Europe there, but Price Waterhouse as well to really surround this problem and to work at remedies. Anyway, we can open up for questions.

(Operator Instructions). Your first question comes from Doug Lane with Jefferies and Company.

Good morning, Rick and Mike.

Hi, Doug.

You mentioned the word rudimentary on the accounting systems in Russia and CIS. Can you just put a little more color on where you are system wide, world wide on your system, is there a rolling upgrade or is it something that is just a legacy system or just some background on why the system is different in Russia versus elsewhere.

I will do part A of that and let Mike do part B. He's the IT guy, but Doug what we really got going on there is I think what made this issue is three things going on. Again, we are still investigating, number one contributing factors is explosive growth over this past 10 years, very strong double digit growth. Two, combined with the way we segregated duties and responsibilities as you will remember this is coming out of the Russian system was a centrally planned economy. So you very much have control oriented leaders, and that was the case in our financial organization there. So therefore there wasn't enough segregation of duties, overriding controls and account reconciliation were We are sitting with one person. That was the second issue. And really the third issue is this rudimentary IT system and frankly, we were growing so fast that financial management there felt they had no time to implement some of our more sophisticated systems that we use elsewhere in the world. Mike, if you will pick it up.

Absolutely. So Doug, the system that we use in Russia today has been there for several years and the general ledger package is aimed primarily at the statutory accounting and didn't at the time we put it in, have integrated path to get to the US GAAP. So that has been done through supplementary spread sheet. Knowing that is not where we want to be, we have been in a process to change that system so that it is an integrated package that get us to the GAAP numbers in a more normal way. To the question of where are we in other units, we don't have a similar situation in other units. I think about the largest emerging market in Asia Pacific being Indonesia and it is not a version of JDE. So it is not just the same story there.

I guess go ahead. Sorry.

No, that's really lays out where we are. We knew already we needed to make this change, but hadn't completed it.

I guess its early days, I guess my question is driving at do you think we will see an acceleration in capital spending next year. This issue will compel an overall IT upgrade?

Because we are already on integrated systems, we are on Oracle in the US and JDE in many other places I don't believe that's the case, no.

Okay. Switching gears the strong growth in China, it has been a while since we have seen that kind of number, can you give us an update on that market, why is it slower over the last four to six quarters, and why we saw the nice acceleration in the second quarter?

Let me tag on to first Mike's comments there, first because we have got a great IT department here, and I have been proud through the years of our control environment, with the internal audit and with regard to IT. We were most successful in all of the markets on getting Oracle or JDE, this is one where it is just we have been pushing but boy this is going to make us get that thing done and done quickly because this never should have happened.

Let me turn to China. The China issues were really initially the slow down of China was a result of the slow down in the US purchase environment during 2008 and beginning of 2009. I think I said at one point on this call, our group President was there in Shanghai and he believed he saw the whole Chinese fleet empty and sitting at anchor. Business is flowing again. People are spending in Europe and the US at a more accelerated, with the panic it is I would say the panic is over, but free spending isn't there. So what has happened is you're getting the same kind of thing with regard to the Chinese consumer. We have done a better job too at adapting the product line. We were in 2007 to 2008 higher price cookware products and now they have adopted the product line to lower net per unit items. It has been very good to see that the unit, the outlets had become more profitable again and that's enabled us to open incrementally more. As you know, we've never gone about that 2000 mark and a 40% plus increase in China was good. So we're feeling the momentum returning again. It is going right down to consumer spending, to the products are matching what consumers are looking for and now we also have more outlets. Those are the three things, Doug.

Okay. That's very helpful. Just lastly, Brazil being up 38%, can you, is that mostly durables or is that your beauty business in Brazil?

It is almost entirely our, our Tupperware business. One thing we learned is you have two 800-pound gorillas in the beauty business. It is a very crowded space. We went in what we call Doug, a trojan horse approach. Nobody can match our brand name in our category Tupperware, and Tupperware is now not only the hub of food storage, but there's about 12 flanker categories that come under the Tupperware brand name. So that is a space where you are going have competition. What we now put into the flier and brochure that is are shared at parties is our Fuller cosmetics line. So we try to get consumers to buy it and to get our ever growing sales force to buy the products. We think it is a better way to penetrate that market with regard to beauty, rather than us building a brand Fuller that nobody knows but they certainly know Tupperware.

Okay. Thank you.

Your next question comes from the line of John Faucher with JPMorgan.

Hello.

Yes. Thanks. So a quick question here in terms of looking at the Q3 guidance, you talk a little bit about some of the issues affecting top line. As we look at the margin, your guidance implies a margin contraction here, and I guess is it all coming on the corporate line? It looks like corporate expense number for last year was relatively low compared to the run rate and it looks like it will be higher. Is that related to the internal investigations? Is that just also sort of just a really difficult comp from a corporate expense standpoint?

Yes, John you're heading in the right direction with that. Our segment profit ROS built into the high end of our range is up nicely, about 150 basis points or even a little bit more. We are showing this higher corporate costs and some of that is related to Russia. There's also a hit in there for FX because the amount that we charge our unit, the allocation is at fixed and local currency and there's some higher incentive costs in there as well.

But John, don't go down the road with one of the other direct sellers on investigation, this is a million or two. We are -- it is one of them I think it is 100,000,000. This is not the same kind of issue. This is a issue with regard to our accounting systems in an isolated market with primitive IT systems.

Got it. And then, just one further question there, again looking at the year ago corporate expense number, it is dramatically lower. Was there anything sort of unusual in that number in third quarter last year?

I don't think there was anything major, no.

Okay. And then finally, just wondering, does the change in Russia affect sort of how you guys are thinking about growth going forward? Has growth been maybe overstated a little bit over the last year and a half or is it something where you say look when it comes out all in the wash we will throw it at the same rate. Do you lose any of the topline growth by fixing these problems?

The short answer is no. These are small amounts over an 18 month period of time.

Got it. Okay. Great. Thank you very much.

Your next question comes from the line of Dara Mohsenian with Morgan Stanley.

Hi guys.

Hi Dara.

Mike, can you give us a sense of how big the Russian business is from that sales and profit standpoint?

Well, we have said it is our largest emerging market business in the European segment and the share of emerging markets is in the high 30s in Europe. So that sort of frames the size. It has been a over time, through 2009, a good ROS market for us. We have seen some ups and downs in terms of sales quarter by quarter. You probably remember we were down in 2009. So it hasn't been as much of a factor more recently.

Yes, Dara, we don't break it out for competitive reasons for other direct sellers. I will tell you that we had uninterrupted growth for 10 years and the first time we ever felt any blip was really starting in about March 2010 -- it coinciding with the devaluation there, and you saw that through the Baltics as well with. The management team and the distributer did a great job of adjusting and so we had I think it was a record, while it was a disastrous April and May it was record June last year if my memory serves me correctly. Then we felt it throughout building the year. It very clearly has been more wind in our face than we have seen over the last decade. But back to the other question, John's question, I don't think -- this isn't going mitigate growth.

Okay. And then, post the Russian issue, Mike, have you gone back and rechecked some of these issues that emerged in Russia and other markets or do you have visibility in other markets given better systems and just wondering, how you get to a level of confidence that this won't be an issue in other markets?

Right. So we are confident that our control system as a general statement is robust and that includes the oversite review at the group and corporate level and the review of things. When we look at the Russian business versus the other emerging market businesses for example, it has a higher working capital meaning all things equal, there's more risk there to begin with. So we are certainly in the process of controlling our environment in light of what we saw if Russia and we will make whatever adjustments we need to there and talk about that. But we are confident that the numbers are correct.

Okay.

Let me add something on that, too. I can tell you again the first circle of control has to be what is the tone at the top, the culture and any time and we operate in many cultures of the world, where their views may be different but we have one view, we operate according to GAAP and any time we have had incidents and there have been very few since this Company went public, where there have been intentional out of period and somebody was involved they're not with the Company anymore and there were public executions. So they know that is, we pride ourselves in a strong internal audit department and if a market gets a weak audit they're in trouble.

Okay. Then can you give an update on your topline trends so far in Q3 around the world, obviously there are some broader concerns in the market here about consumer spending, do you think you've experienced any pressure on your business from weaker consumer particularly in western Europe and North America?

It is really interesting we said we are going to be up 4% to 6% in the think quarter. I was at a couple of conferences in Europe this past month, Dara, and I heard pretty much, from many companies who were talking about the pressure there. We haven't seen, I went through our portfolios there in western Europe and I think it speaks to the strength of our business model, and our channel. I was this past month in -- well in the past six weeks I have been in the Netherlands, Belgium, France, Germany, Spain, Greece, and where else, what was it, Istanbul in Turkey, and I am seeing these businesses firm during it. I have seen the sales organization, the more they adapt to this new model of here is what a party looks like, here is what the new product line looks like. By the way one of the hottest selling products in Europe right now is called a micro gourmet and it is $150. It is a unique product you can cook in a microwave and the microwave never touch the food. Consumers have gone to that product. It is so important that we moved away from commodity-type products to unique kind of products that really do perform and there's a story around it and therefore you can do a party around it.

Second biggest piece I think is they have been very effective with the implementation of this team leader program and by way of example, Dara, if you were a distributor and let's say in Bordeaux that you had the distributorship there and the people you recruited were demonstrators and you could become a unit manager. There was nothing between unit manager and distributer. The unit manager can make 3% to 4% commission off of sales force. Well, these team leaders can make 5%, 6%, 7%, 8% off of it. So they in essence become like sub distributors but you didn't have to have the infrastructure investment of a facility, of inventory et cetera. So it enabled us to penetrate a lot of white space in these markets. So, western Europe looks good.

I was concerned about South Africa, but it looks good. You heard the numbers there, sales force trends look good. Latin America looks good there. I will tell you that South America is easier than Mexico. Mexico is lumpier than it was given a lot of the crisis in that. So it is a lot harder to get positive results there. You seen it in the Fuller business. We finally got a sales force size advantage but it has taken a lot of incremental activities to get there. It was a little lumpy at the end of the second quarter with our Tupperware business in Mexico. On the recruiting and activity side. But I think we can operate within a range.

Turning to Asia Pacific I already commented to Doug on China, it appears to be getting better. I was in India two months ago and it is just gained gangbusters in India and in Indonesia earlier in the year and again I have seen no change there. Australia is very clearly a stand out with regard to issues, with regard to externals. The last Prime Minister was a shock he was thrown out but there's a lot of concern over the economy. I thought Australia was a market that could dodge all of this global but it doesn't appear that. I will know more and have more texture and can talk to you when I get back in two weeks.

The US, I think it is tough in the US right now. It is recruiting isn't any easier than it was a year ago because we have had this now we are moving into three years of a difficult economic environment. And that hasn't made it easier for us to turn around that BeautiControl business. But again, we look at this thing, we say we have 45 names in our portfolio, and we not allowed to have five but it seems like ever since I have been this direct sales, there's usually about 10% of your portfolio that you are sitting there worrying on and working on, and by the time you get those fixed, something else comes up somewhere else.

Okay. Thanks. That's helpful. Mike, I will get off because I am probably over staying my welcome here but just COGS and SG&A from a Russian accounting standpoint, can you give us those numbers in the quarter split between COGS and SG&A?

Yes. So -- yes. Let us pull that together ask and get back to you on that.

Thanks.

I am working on that.

Your next question comes from Olivia Tong of Banc of America/Merrill Lynch.

Hi, good morning, thanks. Was hoping you could help me bridget the gap on the full year sales outlook. You are keeping it at 6% to 8% but two of the segments you took down by a point and left the others unchanged. Is it just a matter of where you end up within those ranges?

That's right, Olivia.

And then, on the, you mentioned tougher times recruiting in Mexico, what is driving that?

I will take each of the businesses, first of all the Fuller business, we have a level there that other direct sellers don't have. We have the district manager as others would have but then we have a field sales manager. We have about 3,000 of them and she's really responsible for primarily for recruiting. One of the issues that we have been working on actually since the acquisition is we believe the field manager turnover is too high, and the real low hanging fruit there and the best opportunity to make this Fuller business which has a very high ROS and has been growing double digit per year up until the last 18 months is to reduce the field manager turnover because that will make more effective recruiting out there. And we are making gains on that. What we have really started Olivia, it has been very interesting, field managers report into a district manager and we actually started talking about controls and internal kind of audit program that if your recruiter is a field sales manager we now have a small little audit team that calls you as a field sales manager on a weekly basis to insure you are getting the leadership guidance and direction you are supposed to be getting from the district manager. So it was our way of finding out how do we make sure you get what you need to succeed in the business. So, we are reporting some gains on that. So, I feel good about that.

The second piece of it, let me add the other piece on the Fuller business, I said I did a five city tour there. We are really talking about our business more as a career path than, and less pure products and selling than we talk about career path to change your life. And so there are all kinds of different kinds of classes she can be part of. So this becomes her path to growth and she goes through in some cases a 13 week program and she graduates from that program. We think that is going to not only help us recruit more people, but also be able to reduce the turnover level.

Turning to the Tupperware business, same kind of things there, what we saw is our unit managers, we had too low of a qualification and lower standards for unit managers two years ago and we have worked to improve those and the standards therefore lead to when they recruit they not recruiting buyers, they're recruiting real sellers and they train them. So I am seeing headway on both of those.

Right. Thank you. Then just turning to the numbers still looked very strong plus seven, but the active sales force dipped a little more, particularly meaningful decelerations in Asia Pac and Tupperware North America. Can you talk a little bit about what's going on there and why the active sales force number seems to be slowing down a bit?

I am looking at Mike because I haven't looked at that number because what we will often get is a judgment in certain markets, around the world where you are flush certain members across the board that what it means to be an active seller. Some of our business units it means a sale that month and some of our business units because of the way they operate and the kind of sales force program they have, they will flush every three to four months.

Yes, Olivia, actually so in the first quarter we were even with last year in active sellers year-over-year and this quarter we were up one, so it got a little better in that sense. The main places where we have better sales than active numbers are in Europe and in beauty other. And in the case of Europe, what we are seeing, we put in less than a year ago a requirement in Russia, for someone to be counted as an active in our program, they needed to turn in at least a $20 retail sales order so that reduced the number of actives without changing the sales because they can still turn in an order in the distributors end up ordering from us. We have always raised as we have worked on the model and getting the team leaders in and just the whole process in places like Austria and Italy we have increased the standards and that has caused the productivity comparison versus the active number to get better. And then in beauty other, what we see, some of it is better productivity in Brazil including having more party plan penetration now than we've had in the past, also as Brazil and Venezuela on the housewares side that's a higher price per unit so we get higher order sizes in the more personal care focus care until, and then there's the price increases in Venezuela and Argentina that Rick talked about which don't impact the active seller number but the sales number goes up. Those are really the main drivers in the comparison on the 6% increase in sales versus the 1% increase in the actives.

Got it, that's helpful. Then just turning back to Russia, have you reviewed everything there, is there any potential for additional reversal or is the review complete now and you have looked at everything you need to look at?

We are confident that we have the numbers reported correctly. What we are finishing and working on is evaluation of the controls and what all of that means. But we believe the numbers are correct.

Okay. And then, on just for clarification, on beauty others, how much is beauty versus other, the mix between the two?

We haven't broken that out. The Brazilian business is big and has been going quickly and as Rick mentioned it is almost all upward products, is same is true in Venezuela, and so I don't have the break down.

You bring up something interesting and I was talking earlier this morning. We have got at the end of this year, I am encouraging us to reclassify it because the way we needed to do it when we did, but it is confusing, it is confusing to us. I am finding myself two hours ago in a meeting, okay what's in beauty other again and I forgot Phillipines in there. So we have got to do a better job at reclassifying the beauty others, and it is still a result of this acquisition and reporting relationships.

Yes, overall if you looked at the overall Company, we are about 70% Tupperware brand products and 30% beauty and personal care products. You don't get a significantly different answer, if you take the three Tupperware segments as report them versus beauty other but yes, you are right, Rick.

Got it. Thank you very much.

Your next question comes from the line of Jason Gere with RBC Capital Markets.

Good morning. Hey Rick you were talking about Russia was one of those I guess three to five markets that you real always have to watch closely, can you talk about the other markets are? And just in lieu of what happened here with Russia I know you talk about the systems, but why not spend more money on internal audit review work right now just for I guess safety reasons?

Well, firstly, Russia is not only the list as far as that. Russia has been we have a dynamic woman who is a doctor who 10 years ago became President of the business there, and is just a tank commander, she has done such a great job of showing people success. We haven't had issues with Russia. The -- what I am saying is that generally have just like -- doctor take patients are you guys managing a list of stocks. I've had one year in my business career why everything went right. It just seems like given the globe and the externals and the internals, you always seem to have 5% to 7% maybe 10% of your markets where you're, they're in the penalty box and you are working on them. Right now that would be, I put BeautiControl in that. It is a prime one. I put Japan, and I put Australia. A year ago Switzerland was in it but it is out now what you do is work on it and we keep trying to work formulas where you see the signals where there could be an issue ahead here, and you try to catch it before it is an issue because what you have to remember in direct sales only about 3% of the entire organization, its a volunteer army out there. But you have to stay ahead of that. That's why I think we have had very good controls. I don't think there's a Company the direct sales that has on the ground and in their head quarters a more knowledgeable group of people that understand how the manage direct selling companies.

Back to the thing about internal audit. We have a very strong internal audit team. My goodness gracious, PWC was in Russia second quarter, 2009 on it and we were doing a SOX review there. This wasn't caught. So we have an environmental of controls, and I think as Mike said in his comments we are the ones who caught this.

Jason, it is Mike. I think as we go through the control issues and come up with the remediation plan which we with expect to articulate in the 10-Q in a few weeks we will see what we need to do and we will do the right thing and spend whatever we need to make it all happen. But we think that our outlook reflects the spending we will have and so on.

It is clear, two things have to happen, Jason. Number one we have to get up to speed on even though we have been growing so fast there, we've got to get the new IT system in that's in conformance with what we have around the world. And number two, you cannot have such central control of the finance function, there's got to be checks and balances there. So this is a great wake up call on that.

Okay. The only reason I say is I know prior questions have talked about growing too fast and I guess that's just some of the investor concern want to make sure it is not a trickle down or just other regions where you can see the same thing, but. The other thing did you say the CFO, he left because of accounting issues or was there --

I don't want to get into detail but he had a very serious automobile accident. This was a long-serving, eight years, very serious automobile accident, and fall over the last and we supported him through this period of time. But clearly, when you have it so centralized behind one person, and that go sideways for that person, you pay the price.

Okay. And I guess the second question going back to BeautiControl, now, with the flat sales guidance, I guess for clarification, is that Fuller Mexico or when does BeautiControl get better in this back half of the year or is at that more of a 2011?

It is more about, the easiest thing it is more of a 2011 but I will also add to you that I going to be disappointed if we don't have progress in the second half of the year at BeautiControl because we have made the moves and we're making the investment. There's a good management team and it is a great product, great promotions and they've got a good sales leadership team out there in the field, so I expect to see some gains. But when you're making those kinds of changes in a very difficult US beauty environment consumer environment it just makes it more difficult. This would have been a lot easier to make these changes had we had momentum on our side. The Fuller business I am expecting progress. By the way, for everybody to, I want to call your attention to again, because we have heard, the first for calling when I was in Paris, they said oh you are planning on slowing on the year? I said no, we said the year was 6% to 8% up, but if you take 2009, we were up 1%, 2%, second quarter I think it was 8% to 9% and then 10% in the fourth quarter. I said going through the year, if you put against 6% to 8% increase, I think over on top of that it says more difficult comps going through the year. Now the one business I think will have a more difficult time on comps is businesses like the US.

Okay. Hey, just the last question, I know you said takes a couple of weeks for Q to come out. What will be in the Q you haven't talked about with regard to Russia and seeing the overhang on the stock today and you guys have done a good job articulating the reasons behind it, but is there anything else to wait on, or is really everything has been cleared up today?

We are confident that we have the right numbers recorded and so we will be speaking to those numbers is what we expect, and then we will complete our assessment of the control environment, and come up with what we would expect our remediation plan and speak to whatever we need to there.

And we will report on anything we find out that we don't know now. But we have been, had our Controller our European CFO, and other terrific people there with our European group and PWC. I am not expecting any surprises but I have been surprised before. But I think they have got at it. By the way, the -- our Controller was the former CFO of the European businesses so very confident in these markets and used to working in that market.

Okay. Thank you.

We have reached the allotted time for questions. I will now turn the call over to Rick Goings for concluding remarks.

All right. Thank you for your time and your interest. I am obviously disappointed by the $0.14 because I would have liked to -- this would have been easier than if we had within $1.07 that we had been reporting today but the good news we think it is isolated and one time, and a buying opportunity. Thanks, guys.

This concludes today's conference call. You may now disconnect.