Tupperware Brands Corporation
Q2 2008 Earnings Call Transcript

Published: 24 Jul 2008

[Operator:]

Welcome to the Tupperware Brands Corporation second quarter 2008 Earnings 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.

[Rick Goings:]

Thank you and good morning, everyone. Mike Poteshman is here in New York with me as well as Teresa Burchfield, our VP of Investor Relations. Everybody on the call knows the drill on future outlook, so I refer you to our company position on forward-looking statements in our filings. As always, too, I will do my best here to try to use this time to add some color to business performance and share some information may be incremental to what we sent out in the release rather than simply read you a release. We were pleased though to turn in a quarter with local currency sales growth in all of our segments. And it was ahead of not only our outlook, but last year as well. The second quarter guidance was to be up 6% to 8% in local currency and we came in at 10%. If you bifurcate the segments, Tupperware segment came in at 9% and the Beauty segment up 11%. I think one thing I would say, besides is this, there is a lot of life in our core Tupperware business and we like what we are seeing in Beauty, but Beauty really has not kicked in at all areas. So we are pleased to have a quarter like this continuing from first quarter, when we really have not had the big benefit of Beauty yet. Adding an 8% point benefit from FX, sales were up 18% on a reported basis. We were also pleased to raise our guidance for the full year, modestly by 1%. We were previously in the 6% to 8% range. Now we are moving it to 7% to 9%. And our diluted earnings per share guidance we have raised $0.05 on the GAAP basis and also excluding items. Mike is going to drill down on that in just a moment. Importantly, before I get into the operating segments, I want to say our portfolio of direct selling companies continued to perform well even in this challenging, economic environment in some parts of the world. And our second quarter performance is once again proof of that. We are going through this process of really changing the image of Tupperware, the old Tupperware durables products company, to now to this global portfolio of direct selling companies. Nobody has ever really done that before and we like the way it is working. I might comment we think there are five characteristics of this portfolio and business model that contribute to the balance performance we are seeing even in the midst of some challenging externals. The first is that the strength of our global direct sales management team. We have spent so much time in this past decade not only recruiting, but developing and empowering a very strong management team out there. But frankly, I believe we have got the strongest direct sales management team in the industry. And here I am not only talking about at our headquarters, but in our regions and down into our markets as well. And by the way, from an investment standpoint, I have now done 50 Chairman's retreats all over the world. Most of these are three days, where we take this company apart, put it back together again, and we do it 25 people at a time. So it really does get an incredible level of alignment out there. So, when you have a talented group that are aligned, then they know what to do. So that is the first thing, the strength of the management team. Second, we now have, I like the direction of our product diversification. Now, 65% of our sales are in durables and, by the way more and more were outsourcing products and we are moving down that road as well. 35% of our products are now in the consumables category with Beauty and Personal care. By the way at some point, we expect to see consumables to be the dominant contributor to our business, and by the way, why that is good in direct selling, is that the same direct sales consultant can go with a consumable to her customer every two or three weeks to replenish and show what products are new and what might be on special. Our third big benefit of this model is we have got a broad geographic presence. Prior to this Sara Lee acquisition, we were dominated by sales in Europe. And Europe still continues to be important, but we have two Europe's, our Western Europe business, which is also growing, and the dynamic growing Eastern European business. But the contribution with the other parts of the world, North America, Latin America, Asia-Pacific and even sub Sahara Africa are growing. Fourth, with regard to the characteristics, we have a strong and growing footprint in emerging market economies. Year-to-date, 49% of our sales have come from emerging markets. By the way, we use the definition of the World Bank with regard to GDP. Sales in those markets are up 19% in local currency. By the way, these markets also have characteristics that are particularly positive for our direct selling business models. Number one, there are generally limited earnings opportunities for women and there is a less well-developed retail infrastructure. And I must say, if you look at, we are in the early phases of penetrating most of these markets and it is still looking ahead. If I was saying this was a fourth quarter like a ball-game, this is early days. This is the early innings in the first quarter that we have so much opportunity for growth over the next decade. And while our global portfolio will always be facing certain challenges, operating together, it provides as enough puts and calls, I think, for a dependable growth. The fifth element I think that again characteristic, that is I think it makes Tupperware Brands a good investment is we have got various levers at our disposal that we can utilize to stimulate and grow the business, as well as to act as offsets. We are very much a go-to business. For example in the past couple of years, we have reported challenges in the German market and most of this is a result of the $1 trillion cost of reunification since 1992. Well, in the second quarter we were pleased to report that sales were up for the third consecutive quarter, and their economy really has not improved that much, although the Federal Chancellor Merkel is doing the right kinds of things. Perhaps most importantly, we also saw a turnaround in the quarter in the sales force size comparisons, going from being down 8% at the end of the first quarter, to up 3% at the end of the second quarter. By the way, I might add, in April, I went there and we did 10 cities in five days with regard to talking to our senior distributors, senior managers, our sales consultants and demonstrators and new people. And we talked to 10,000 people in five days, a lot of interest in what we do and the entrepreneurial opportunity. And by the way, the same levers we are using to stimulate our German business are being used in our other businesses to help offset the negative external forces, Particularly the US, where you are starting to see some negative externals. By the way, when I talk about these levers that are at our disposal, I guess my mom always used to say, you cannot change the direction of the wind but you can change the set of your sails. That is the kind of levers I am talking about. We are a go-to business. We do not have to wait for the consumer, for the traffic to walk into the store. We have 2.2 million people who earn when they sell. That sales force goes to the consumer and they demonstrate differentiated products. And I notice that one of the commodity resin plastic container sellers here in the US that starts with an R, they were commenting two weeks ago in their release that, it is difficult now to get a consumer to pay for differentiated products. We do not find that the case. The problem is we own the channel. But for them, they do not own the channel and you cannot differentiate products when it is sitting on the shelf of a store. We can also offer lever-wise incentives to motivate that sales force to work the business through recruiting and selling. Not only go out there to hold parties, to share their brochures, but also when unemployment rates go higher, to recruit more people and she can build her own business by building this down-line. And by the way, we use that through various performance based promotional awards. It is one of the things our management team out there, they are just terrific with. Finally we have got as a lever we can motivate hostesses to hold a party through exciting product offers and purchases that are exclusive to them. Anyway, there are more of that, but the important point is, always have the ability to change that sale and to have some levers that you can work with that are low cost, and that helps our business. Now, let me drill down in some of the specific markets. Again, I will try to not be redundant. Europe, we were pleased to be up 12% in local currency. Really there were two Europe's there. The established markets grew 4% in local currency, while the emerging markets grew 32%. But I believe we did better than any other direct seller, particularly even in the established markets of Western Europe. The emerging markets really were led by Russia, Turkey, and South Africa. Net growth is in large part driven by the continued growth of the sales force and large sales force size advantage. Again it is redundant, but the earning opportunity is a key driver in these markets, and so many women are looking for a way to own their own business and have incremental income. In the established markets, again, Germany was up, sales were up 2%. As I mentioned, this is the third consecutive quarter of growth. Someone asked me last night, is the worm turning there? And w think trends now are going to be good in Germany. It is still heavy season in Germany right now and we are dealing with it quarter-by-quarter, I think, executing on the right fundamentals. We also saw solid growth in our established markets of France and the Nordics, in the high single-digit to low double-digit range. By the way we are the largest direct seller in France. Simon Hemus was just over there looking at our established markets and our established market strategy. And we are pleased to say that we have still got opportunity to grow in those markets. We are really under-penetrated in our established markets of Western Europe, in the higher density urban markets, whether you are talking about Berlin or Paris. That offers us great opportunity. By the way, we have learned how to do that, in Australia. Where Australia is basically five cities and we are adapting the same kind of strategies there. Drilling down a bit more on Germany, here growth was driven by the combination of higher sales per party as well as an increase in the sales force size. So, it was good to see that delta, with regard to a decline in the sales, for size to an increase in the third quarter. Also, we took actions in that market to enhance recruiting and training and, also I think we are enhancing the recognition program. So, this has all impacted positively the party average. By the way, the commission earned by the sales force in their personal sales is a large part of their income and the higher per party sales average is the key way to leverage their time. And anyway, we believe that these kinds of initiatives that have helped us really make positive direction in Germany will also help us in other markets. Let me turn to Asia-Pacific. There, again, two stories. We were up 13% in local currency. The emerging markets were a dominant force there. They were up 33% and that is mostly China, India and Indonesia. By the way, I was in those markets this last month and incredible and impressive. Particularly I dug into the Chinese business. We have got 2700 of these little storefronts there. And I spent a lot of time each day in them just to watch the dynamics, and there are really two kinds there. There is one that is kind of a local neighborhood Tupperware storefront where, I mean, it acts like a mini-sorority house, they get together, and they learn how to share recipes, use our products. And then we have more of the commercial units which are attached to it, a facility like a Carrefour on the edge of it. But, again, the opportunity to not only to sell in there, but sell out of there. Indonesia, also. This is the fourth largest population in the world, I was really pleased to see what is happening there, the dynamics sales force and dynamic double-digit growth. I spent time in Malaysia, Singapore as well, and we are also seeing nice trends in India. Again China, India and Indonesia are almost half the world's population. By the way, moving a bit forward, the other Asia-Pacific is really our established markets and we were flat there in local currency. But really bifurcate that also, because it is really two stories there. Our large Australia, New Zealand businesses really are cooking very strong double-digit in sales increases. Big sales force size advantage. However, it was really offset by decreases in our Japanese business. We have new management, senior management team in place in our Japanese business and we are digging into it right now. So, one kind of offset the other. Moving to the North American segments; even with a negative impact in Mexico of last year in '07, we had a $3 million B2B. Actually it was a $5 million and this year it is $3 million less. Sales were up in this segment for North America, 1% driven by the increase in our core business in Mexico. The US and Canada businesses were flattish in our Tupperware businesses and it is really reflecting the current consumer environment. By the way, I was commenting with someone last night, on this thing that we have yet to begin to see the dramatic increase in the unemployment pool in the US, and that is the lever that gives us this counter-cyclical advantage. Phase 1, as you kind of see consumers get concerned and a compression of spending. Phase 2, business reacts and they start sending out pink slips. That is really what you started seeing happened in the second quarter. And then, thirdly, you see unemployment rates go up and then we are generally the beneficiary of that. We believe we can hold our own in the US and in our Canadian business and not lose ground in this negative environment. Keep in mind that the US market even including BeautiControl, are only 15% of our business. So, overall, putting Tupperware businesses back together again, we grew 19% in sales and 9% in local currency. The largest contributor was our emerging markets. Turning to our Beauty businesses, there we grew 17% in dollars, and 11% in local. Beauty North America was up 6% in local currency. And there, we really had high single-digit sales growth from our Fuller Mexico business. As we reported on the first quarter call, we now have a sales force there of over 0.5 million. And the overall increase for this segment, was also moderated by a low single-digit sales increase in our BeautiControl in North America. I think the same things are impacting our BeautiControl business there in North America as far as this economic environment, as we see in our Tupperware businesses. But we feel good about it going forward. Moving to the Beauty Others segment, that grew nicely 21%. This largely came from Tupperware Venezuela and Brazil units. By the way, they had this incredible increase of over 80%. Fuller Argentina and Fuller Brazil also contributed to the overall sales growth. The largest Nutrimetics business, which is Australia, is still in the transition phase back to a direct selling model. We have been working on this almost three years. I was there in the first quarter and was happy to see the changes, are seen to be getting traction in that market and we are really beginning to see some positive movement in the KPIs in that business. But, really, in the second quarter it was dragged down by early quarter performance, but, it improved as we went through the quarter. So putting it back together, we are cautiously optimistic that we were going to see that Nutrimetics business improving, but, these other ones are really doing well. Again I think one of our greatest growth potentials for the next decade is us expanding this Fuller business of Mexico dramatically into South America, where 55% of all Beauty products are purchased via direct sales, and we think our competition also is vulnerable. By the way, we took an impairment charge related to Nutrimetics, purchase accounting intangibles. But we still by the business today and unfortunately the way GAAP accounting is today, we kind of missed our estimates on allocating the value of each one of these. If I had it to do over again, we made more than $60 million in our Fuller business in Mexico under the nine multiple. It was worth the total acquisition price of all of the Sara Lee businesses. Now, Mike, let me turn it over to you and then you turn it back to me and we will do Q&A.

[Mike Poteshman:]

Okay. Thanks, Rick. First looking at our second quarter actual results versus our outlook in April. Our upside in the local currency sales increased where we came in at plus 10% or two points above the high end of our previous 6% to 8% guidance range, came mainly from Europe's emerging market and the Tupperware businesses in Venezuela and Brazil, in the Beauty Other segments. On EPS, our guidance range, excluding items was $0.62 to $0.67. The upside of the $0.75 we turned in reflected higher than foreseen profit from the segment totaling $0.05 from the higher sales in the Europe and Beauty Other segment, along with value change leverage in a couple of the markets in Asia-Pacific. We also benefited by $0.03 from a lower-than-expected tax rate. Rick highlighted where we achieved our 10% local currency sales increase over 2007. We were $0.17 ahead of last year in diluted EPS, excluding items. This reflected a local currency profit increase by the segments of 15%. So 5 points ahead of our sales increase. With the return on sales -improvement coming from sales leverage in Australia and the key emerging markets in Asia Pacific, a better cost structure in the United States and Beauty Other coming in with a profit this year versus a loss in last year's quarter, primarily reflecting a [drop] due to profit from the higher sales by Tupperware Brazil and Venezuela. There was a small offset from the tax rate which at 21% was one point higher than last year in the quarter. Stronger foreign currency versus the US dollar accounted for $0.07 of the upside versus last year. Turning now to our balance sheet and cash flow, our inventory days on hand were better than last year by 8 days at 135. And on accounts receivable days, we were 3 better than last year standing at 28 days at the end of the quarter. Inventory on the balance sheet at $310 million was $45 million over last June of which $21 million was due to stronger foreign currency. As it was last quarter we are still at a higher level than we would like to be in Europe, which is where the bulk of the increase was at comparable exchange rates. We do expect the year-over-year GAAP in Europe to close significantly in the third quarter. Looking at cash from operating and investing activity together, we were at minus $9 million year-to-date versus a positive $53 million last year. The bulk of this difference came in the first quarter when we paid out an accrual of $19 million for Mexican value-added tax and had an outlook for hedging, mainly related to net equity hedges that effectively conferred a portion of our dollar-denominated debt to other currencies, mostly to Europe. For the full year we are raising our cash flow guidance today by $10 million from $110 million to $120 million of cash flow from operating activities, net of investing activities. This reflects proceeds from land sales and insurance recoveries that we have added to our outlook. This outlook includes $65 million to $70 million of capital spending, which is the same as our previous outlook. Our debt at the end of the second quarter stood at $613 million, which was a decrease of $31 million compared with the end of the first quarter, and $20 million above where we ended 2007. Our ratio of debt to EBITDA as defined under our credit agreement improved to 2.1 times for the four quarters ended this June versus 2.3 times in March and 2.7 times last June. As we have stated before, we targeted bringing our leverage down such that we get into the 1.5 to 2 times range. And based on the outlook we have given we should reach that goal later this year. As a side note related to our shares, we want you to be aware that a number of our officers have options expiring shortly, including me and Rick, and in the coming weeks you will likely see an unusual amount of options exercised, due to the upcoming expiration, and also as people look to balance their personal investment portfolio. We have had a lot of interest in our gross margin percentage in the related topic of resin and other cost pressures. For that reason we included Rick's comments on the topic in yesterday's release. I would also like to highlight a few things now. First we have been successful throughout our history in maintaining a strong gross margin percentage. Most recently in the second quarter, we achieved a 66% gross margin, which essentially was equal to the prior year quarter. Drilling down on this further and first looking at the Tupperware segments, we improved overall by 0.7 of a percentage point reflecting higher margins in both the Asia-Pacific and Tupperware North America segments. This was in spite of higher write-down for obsolescence that had a negative impact on the overall comparison of 0.4 percentage point. We did have a lower gross margin percentage in Europe, part of which was due to inventory obsolescence costs with the rest primarily being from higher freight and duty expenses, given the rise in fuel costs and a greater proportion of sales coming in places farther away from our distribution center. We did see $2 million in higher resin costs in this quarter in our income statement for the Tupperware products we produced. As we have noted in our release, we are able to at least partially mitigate higher resin costs through price increases in line with consumer inflation in each market through the management of our sales mix, given our price points and promotional strategies and through manufacturing efficiencies. And looking at the impact of higher resin costs and our cost of goods sold for full year 2008 versus 2007, we currently foresee having a negative impact of $9 million to $10 million from the resins we used to produce our Tupperware products. This is versus the full year outlook in April of negative $5 million. Based also on the visibility we currently have, we foresee a negative impact in the $10 million range in comparing the cost of resin in 2009 versus 2008. The gross margin percentage in our Beauty segments was down in the quarter a bit over 1 percentage point coming primarily from Fuller Mexico, where we are seeing some higher input costs and have also, in some cases, switched to local suppliers in order to obtain better service and quality. The good news here is that the return on sales in this business is high and in 2008 it was roughly in line with the 2007 quarter. For the whole company, we expect to be able to maintain our strong margin percentage going forward. I would also like to make a couple of comments now about the impairment charge recorded in the second quarter related to trade names acquired from Sara Lee in 2005. The charge totaled $9 million on a pretax basis and reflected a reduction and the assumptions of futures sales compared with what was assumed in the previous valuation done, as of the end of last year's third quarter. This reflected lower actual results then assumed previously, along with lower expectations going forward. That said, we remain confident that the strategies we have in place and are executing will ultimately give us the results that we are looking for. And our current expectations are included in the guidance we have given in yesterday's release and in this call. Now, I will turn to the outlook. Rick has already commented today and you have probably seen in our release that we have raised our full year sales and earnings per share guidance versus what we provided in April. For sales, our outlook is for a full year increase in the 14% to 16% range in reported dollars and for 7% to 9% in local currency with both of these ranges being up one percentage point versus April. For full year 2008, GAAP diluted earnings per share is expected to be in the $2.54 to $2.59 range, including a benefit from stronger currencies versus 2007 of $0.23 to $0.25. Excluding items the new diluted EPS range is $2.77 to $2.82 for the full year. These numbers reflect a $0.10 increase on the low end of the EPS range and a $0.05 increase on the high end. The FX impact on the year-over-year comparison has not changed from the previous guidance. For the full year we now foresee sales growth in local currency in the 8% to 9% range for Europe, the 10% to 11% range for Asia-Pacific and 3% to 4% for Tupperware North America. The Europe and Asia-Pacific ranges are higher than the previous guidance and the North American guidance is lower. Looking at the Beauty segments, we foresee Beauty North America's full year local currency sales increase in the 5% to 6% range and Beauty Other in the 12% to 14% range. The Beauty North America range is down one percentage point on the high end and the Beauty Other range is up four points. Looking at the picture from an established versus emerging market point of view, this would put the established markets up in local currency 1% to 2% for the full year and the emerging markets up 15% to 17%. This is versus the intermediate term guidance we have given in the past that our established markets will grow 2% to 3% per year, and the emerging markets 9% 12% a year. So, that is for future years, 2009 forward. And looking at the return on sales of age of our segments, things have not changed versus our April guidance, and we continue to believe for the full year in the Tupperware segments will be flat to slightly up from 2007 with our return on sales; the Beauty North America will be flat to slightly down in ROS; and that we will have a small profit in the Beauty Other segment, excluding the impact of purchase accounting amortization. We continue to expect full year unallocated expenses in the $43 million to $44 million range and net interest expense of about $33 million to $34 million. The full year outlook for the GAAP tax rate remains at 23% and the rate excluding certain items is 22% versus the previous outlook recalling for 23%. The expectation for full year re-engineering expense remains at $10 million pretax, and for purchase accounting amortization at $9.5 million pretax. We expect the $9 million pretax impairment charge recorded in the second quarter to stay the same for the full year and expect pre-tax land sales and insurance recoveries of $6 million and $7 million in the third and fourth quarters, respectively. The net of these items aftertax is $13 million which is about the same as the net of the items in the forecast provided in April. The outlook for the third quarter is for a sales increase of 13% to 15% which includes a seven percentage point benefit from a stronger foreign currency versus 2007, indicating a local currency increase in the 6% to 8% range. GAAP diluted EPS is expected to be $0.39 to $0.44 and EPS excluding items is expected to be $0.37 to $0.42. This compares with $0.37 in 2007. The EPS comparison versus 2007 includes a $0.05 to $0.06 benefit from stronger foreign currency. The tax rate for the quarter excluding items is expected to be a bit over 23%, which compares with an 11.7% rate on the same basis in 2007, creating a negative impact on a diluted EPS comparison of about $0.06. And with that, I am going to turn it back over to Rick.

[Rick Goings:]

Thank you, Michael. Before I turn it over to Q&A, last week I was in Europe doing meetings and people basically, one of the things when I am doing one-on-ones out there, people will say to me, hey, what are you hearing out there? What are other people asking? What are the kind of questions? And one of the redundant things I heard was, what is it that people, they look at our P/E and they say, what is it people do not get about this? Obviously, it was lumpy during the 90s, but, as we have gone over this past four, five years, there has been a lot of consistency in this business. And what do you think it is? So, I have really spent some time thinking about it and I think what it gets down to is really most people still think we are what we were, and I put it down to this four basic reasons that I think that we are going to need to get across and communicate that to people for this P/E to climb. Number one, we have successfully transitioned Tupperware from the Durables direct selling company, the old Tupperware company to this global portfolio of direct selling companies. And people keep looking for a model to look to, and, I would think it was something like News corp, where basically their institutional skills are in communications. They own, at the core, traditional newspapers, but they also owned tabloids. The Wall Street Journals and the Dow Jones and, also in broadcast, Fox. They have that global portfolio and they manage it very effectively. There is a lot of things we do not know at Tupperware brands, but, I think we have got the strongest management team with regard to direct selling globally. Secondly, I think what we have got to continue to reinforce and get across is the heavy lifting to take our core Durables business to the next level and to having a business model of sustainable growth is substantially done. We are never going to declare victory when it is over, but we have done the heavy lifting. We have contemporized the core product line for markets using Party Plan. We have converted it to a party that is more in tune with the times. We have updated this gut [retching] change of compensation programs to ensure it is attractive and viable. And then, finally, we have made a lot of progress with regard to updating the image of the company. I think it went up 25 percentage points this past year just in this country alone. So, secondly, the heavy lifting is really done and we have got to communicate that. Third, we have mostly finished our investment in emerging markets. I believe we have got only one in Brazil where we are still in the investment stage. Now we have this significant footprint in emerging markets and I already talked about that enough today. But importantly I had the question asked many times last week, Are you seeing any slowdown in emerging markets? And I must say, not up to now, but it is early stages for us and we have such low penetration level in many of these markets. Now, do I think you are going to see that in certain markets? Yeah, Mexico. The Maquiladoras area, the band south of the US, It is tougher there than it is as you go further south in Mexico. But, largely it is early days for us in emerging markets and again the currents are in our favor. Finally, and I have already said enough about it, the flexibility of this direct selling business model that really puts levers at our disposal. We have got a lot of puts and calls out there. The world has got a lot of change going on, but I think I can tell you hey, where do you see wealth transfer going on for example in Sub Sahara, Africa; our businesses are cooking there, because as the C&D socioeconomic groups gain wealth, that opens up a whole new consumer base. For example in South Africa, 6 million white South African's, and 40 million blacks. So wow, it is helping. It is like having another market there. Political instability, we are still doing well in the Middle East. I will take you through the Venezuela, incredible double-digit growth in spite of the Chavez regime. As a matter of fact our biggest issue, we have two issues in Venezuela, keeping up with supply, number one, and getting your cash out of the business and those are not bad problems to have. So, I think we are a particularly good business model in this time of uncertainty. Anyway, we will be happy to open it to questions.

[Operator:]

Thank you Mr. Goings. (Operator Instructions). We will take our first question from Doug Lane of Jefferies.

[Douglas Lane:]

Yes, hi good morning everybody.

[Rick Goings:]

Good morning Doug.

[Douglas Lane:]

I think Mike touched on this, but if you could elaborate in the Beauty Other segment, where is that growth coming from? Is it primarily the Tupperware side or the Beauty side? Then further, just where are you on your strategy of expanding the Beauty business in the Southern cone?

[Mike Poteshman:]

Yeah Doug, the biggest factors and the biggest pluses in this segment were coming from Tupperware Venezuela and Tupperware Brazil. But we were also pleased we had a nice increase in Argentina. that is a newer, smaller business. We were up in the Fuller Brazil business side as well, and the Philippines, which is in that segment. We just as of July 1st really folded the Tupperware business into the Fuller business and welcomed those distributors in there. That is showing some good comparisons as well, not great comparisons, but positive comparisons. So, those are really the pluses. The Nutrimetics businesses, as we mentioned, were down a bit.

[Douglas Lane:]

Is Fuller the only brand in South America on the Beauty side?

[Mike Poteshman:]

Other than in Tupperware Brazil and Tupperware Venezuela, yes. Yes, only Beauty.

[Rick Goings:]

We have Nuvo in Uruguay. We have a 51% market share of the Beauty direct sales Beauty business with Nuvo.

[Douglas Lane:]

So Fuller is in Brazil now. When did you move Fuller in Brazil and how far along are you in launching that brand there?

[Rick Goings:]

It is been really about four years ago, but, this was during the Sara Lee days. They really did not invest very heavily there. That is what Simon was really strapped for investment there, not only the money but also talent. We just dialed it up this last year. As a matter of fact Doug, we have just moved Luciano Garcia, who was the president of our business in Mexico, our Tupperware business up until about a year ago there. And By the way, Luciano has been with us about 10 years and Luciano, is well, still under his early 40s was president of Nu Skin Mexico. So, we have started to put high, well-trained talent in the ground. Luciano has been on the ground now in Brazil seven days. In January, we moved our Head of Sales of our Fuller business in Mexico, Rafael Garcia, we moved him into Argentina and you are already seeing the impact and we recruited one of the top direct sales merchandisers from a competitor who had all of Latin America. She is now our head of merchandising down there. So, I mean we are really in an attack mode down there, Doug.

[Douglas Lane:]

Okay. So, the investments have been made, the infrastructure is in place and it is just a question of execution at this point?

[Rick Goings:]

Yeah, as a matter of fact, I will give you an idea here. The Nuvo in Uruguay it is a small country, population-wise, but again I said we have more 51% market share of direct sales Beauty. But, even in Argentina, we have got now just under 100 zone managers in that country on the ground. I did a retreat for them, I think it was in February. There we have got a lot of talent on the ground. That is where you make -- because these are company employees on the ground, and there is also a growing size sales force. By the way, to supply those businesses there we made an investment, we have a large facility in Rio with whom we had excess space in that building. We are now fitting it out for cosmetics and it is going to be the beneficiary of -- well, now it is going to reduce our shipping because we were shipping a lot of stuff for Mexico down there. We used to use third party suppliers. So, we get the benefit of the MERCASOR agreement down there. But, the investments have largely been made down there. I expect you are going to start to see things. Mike and I were talking about this last night. I said, I am going to be disappointed if we do not start to see profits in Brazil, the Beauty business by 2009. He thinks it is for the next year. It is probably somewhere in between. It is already in good shape with regard to Argentina and Uruguay.

[Douglas Lane:]

Okay. Thank you.

[Operator:]

Our next question comes from Dara Mohsenian, JPMorgan.

[Dara Mohsenian:]

Hi guys.

[Rick Goings:]

Dara it is the first time I have had anybody pronounce your name correctly.

[Dara Mohsenian:]

It is a first for me also. Just extending on your comments a minute ago, the profitability in Beauty Other really ramped up in Q2. So can you just discuss the margin potential of that region longer-term and what kind of path we should expect from a margin standpoint over the next few years?

[Mike Poteshman:]

Sure and Dara, again the big upside in sales in Tupperware Brazil and Venezuela helped us a lot. We got a lot of leverage out of that and that helped improve the profitability to being around break-even in the quarter. As Rick was talking about, where we are with Argentina is around break-even. I mean we are still in a loss at Fuller Brazil. And I think as we are successful in building out that zone manager model, improving our average order size which gives us a lot of leverage and then doing some other things also on the distribution and are probably the biggest things that will drive and improve value chain down there. So, we tell all of our markets that really the threshold is that we need to see kind of a 15% return on sales. Clearly, in South America and Beauty Other segment right now we are well below that. In many markets since we are right around break-even overall. But, we do think that over time we can get there.

[Dara Mohsenian:]

[About] the emerging markets, it sounds like it is similar to other regions around the world?

[Mike Poteshman:]

Yeah. The Tupperware emerging markets, the key ones we have been in quite a bit longer than Brazil and Argentina. Brazil and Argentina are five or six years from when Sara Lee went in. And Russia, Poland, and so on are more like a dozen years, and those businesses, the six months we talk about in the Tupperware side are all nicely profitable and we get at or above average return on sales in those markets.

[Dara Mohsenian:]

Okay. And then, can you give us an update on what is driving the margin weakness at BeautiControl and what your plans are going forward to try to turn that around?

[Mike Poteshman:]

Yeah. Some of the things that we have seen at BeautiControl, particularly earlier in the year had to do with some short shipments and things where we spent some more in distribution than we would have liked. We also have had more success recently in managing the gross margin in terms of, not so much the production costs, but on the sales mix and how we are doing our promotional offers. So, there, too we think that we will see better comparisons even starting in the third and fourth quarter at BeautiControl.

[Rick Goings:]

Yeah. He mentioned distribution too. We have already announced it there, but we have a sales head, where we have our headquarters, and we have our manufacturing and distribution facility, which is quite large. They are about 20 minutes from another and we are consolidating those and we will be selling that headquarters building. We just do not need all of that. That was the plan by the way since the beginning. But it is meant some incremental distribution costs along the way.

[Dara Mohsenian:]

Okay. Thanks.

[Operator:]

(Operator Instructions). Our next set of question comes from Mimi Noel with Sidoti.

[Mimi Noel:]

Good morning.

[Rick Goings:]

Hi, Mimi.

[Mimi Noel:]

Just two questions. First, with regard to the company you mentioned earlier whose name begins with an R, the potential for them to walk away from a substantial amount of business. Is there any way that Tupperware might benefit from that or does the channel prevent you from getting involved?

[Rick Goings:]

How do you mean that, Mimi? Do you mean…?

[Mimi Noel:]

If they are intentionally walking away from, looks like $500 million in business. Is that potentially your gain?

[Rick Goings:]

No. Well, because as they have outlined in there and I have really read over that release several times. They are getting out of the stuff that is most commodity-like. We have avoided that stuff like the plague.

[Mimi Noel:]

Sure.

[Rick Goings:]

.That is the buckets drain boards where the consumer basically garbage cans, she just does not care, about, she is not branded. The number one decision with regard to buying a trash can for most women, an under-counter trash can is would it fit?' So yes, I mean.

[Mimi Noel:]

It is not really your niche?

[Rick Goings:]

Our competition is Williams Sonoma kind of products out there. And that is why by the way we move towards the more highly engineered resins. I have got to say, Mimi, one of the most important decisions we made product-wise was in the mid 90s when we said, how are we going to fight this battle?' And we said, because Rubbermaid was going into a lot of things. We said we are not going to play that game. We are going to move toward more differentiated product and we're going to move higher and perhaps and by the way what we saw as they tried to introduce a high-tech polycarbonate product called Stain Shield, it was a gross undersell because it sat on the shelf of Wal-Mart because they do not have the ability to demonstrate it. And we have this 2.2 million sales force that gives us an incredible advantage. They have every ability, at Rubbermaid, to buy the same molding machines, to buy the same resins. They have even recruited our designers and if they have knocked off Flat Out, one of our products? The problem is they cannot, they do not have the sales force.

[Mimi Noel:]

Okay. I understand the difference.

[Rick Goings:]

That is also why it did not work for them when they acquired Curver in Europe and then they ended up selling it. So, now you find consumers trading down from Rubbermaid to Sterilite and from Sterilite, if you walk through Wal-Mart to non-branded Chinese in those categories. But, in the kind of categories where we really focus our business, brands matter.

[Mimi Noel:]

Okay. Thank you. Then just one more question on Japan. Can you elaborate on the status of things there? Did you make any company specific missteps or is it more you are responding to a challenging environment with the management changes?

[Rick Goings:]

I think the companies missteps. I would say 70% there. Most of it, by the way the direct sales companies that are having issues there are traditional direct sales companies. They are multilevel marketing companies whereas 80% of their sales are really sales to a distributor group. That really is not retail customers and that is the Amway, NuSkin models. Core direct sellers over in Japan, Pola Cosmetics, [NoelBear], they are doing well. They really have direct selling forces. I think this has been -- we have gone through this whole period of trying to figure out how are we doing this? We saw in the late 90s, we started selling too many third party products and too many of our sales force members were like Costco representatives. So that any time something was new and on special, they activated, this was like 80% of the sales force. So, then we said we got to shift this back to teach these people to go out and demonstrate products. We put in a management team to do this. I think we went too far and we kind of shut down some of that big-ticket business we were seeing. Now, what we are doing is moderating it and learning, hey, it is a bit of both over there. Very complicated marketplace, and we are bouncing around, trying to get it right.

[Mimi Noel:]

All right. Okay. That is helpful. Thank you.

[Rick Goings:]

Yes. Mike, would you add anything to that?

[Mike Poteshman:]

No.

[Operator:]

(Operator Instructions). We will go to John Curti, Principal Global.

[John Curti:]

Good morning. I was wondering if you could talk about the potential margin implications as the percentage of Consumables business rises out of your total sales?

[Rick Goings:]

Yeah, they are comparable John, and it is interesting, they are comparable if I take emerging and established markets, as we get emerging markets start to get scale, margins are comparable whether it is Tupperware or our Consumable products. And between Tupperware products and the Beauty businesses, it is comparable. I think as Mike outlined, the target threshold level is about 15%. We are used to higher margins in Europe and a large lot of that has to do with a couple of things. Firstly, in Europe, because of the market physicality, you have got more effective distribution costs. I mean, you take a place like Western Germany, it is the size of Oregon. I mean, that helps us. Consumers will buy generally, I was mentioning there, when we talked yesterday, you go to Germany and you will find out the two brands, the leading brands of taxis are Audis and Mercedes. So, that helps us there. But as we get scale in these, emerging markets like Mexico, though, you can get above 15%. But we have kind of set an up limit there of do not get too far north of 20% there, and make sure we continue to reinvest in our businesses. So, you know what that leads to, John? It leads to we do not care whether it is Tupperware or Consumables. Both are good businesses.

[John Curti:]

Just have faster inventory turns on the Consumables.

[Rick Goings:]

Well, you know what you do? You have an easier proposition that, in the Tupperware business, it is more this. In the Tupperware business our products last forever or infinity, whichever is longer. I mean, because, of our guarantees on it, we have got products 50 years old out there that still work fine. Thank goodness, we have added fashionability to it, new styles, so customers turn it over. But the Tupperware sales representative, she can only usually go to a customer twice a year to get her to a party. Whereas in our Fuller business in Mexico she is every other week to that same. So the rhythm of the business, one is rock-and-roll and the other is a Strauss waltz, but by the way they like Strauss waltzes in Europe.

[John Curti:]

All right. Thank you.

[Operator:]

And we will take a follow-up from Doug Lane of Jefferies.

[Douglas Lane:]

Yeah, Rick, if you do not mind, can you elaborate on your comment about what you are seeing in Mexico? You mentioned some slowing in the northern areas around the US border. And what kind of outlook do you have for Mexico for the remainder of the year? And while we are on the subject maybe if you could talk about the United States' Tupperware Beauty businesses?

[Rick Goings:]

Yes Doug. Well, you could see that in our Fuller business in Mexico we have been operating since we acquired it at double-digit growth. And it went to high single digits there, so that is an incremental impact. We still have a very nice sales force size advantage, of sales forces over 500,000. But when we dig into the businesses and we really dig into it by region, we really see that the greatest pressure is that whole maquiladoras area. During the Fox presidency and administration down there with NAFTA they did a great job of really building up the maquiladoras area there. However they did a horrible job of making it sustainable. They are losing jobs like mad to China up there because they really did not skill-build with those people. All they leveraged was low-cost labor down there. Now, what do I see going forward? We are only three weeks into, now, this third quarter. I mean, my instincts are that we will have a little bit of wind in our face there but we have got a nice sales force size advantage. I hope we can keep it at the high single-digit level down there. Mike, you might comment on that for Mexico and then I will get to the US.

[Mike Poteshman:]

Yes, Doug, so when we talked about the guidance and the change from last time we said 5% to 6% sales growth for the full year in Beauty North America. So that is Fuller Mexico and BeautiControl, and that was down one point on the high end. So that is really where the moderation has in terms of what we had visibility on without being specific.

[Rick Goings:]

If I get into US, Doug, here is where Dara and I were talking about this earlier. Back to this phase again, we still have not seen the unemployment rate bump up substantially in the US. We have seen consumer -- compression of spending as consumers are concerned. All you have to do is walk around here in New York and, my goodness, everybody has got a sale thing in the windows. But Doug, I do not know what is going to happen ahead there when the unemployment rates could -- because that is going to be the biggest thing to help us. Right now it is hurting us with regard to productivity of our sales force out there, and the best way we can mitigate that, we cannot change productivity of a sales force when consumers have pressure on disposable income. How we offset it is, have a bigger sales force. Well, you have got to have more people in the labor market for that.

[Douglas Lane:]

Do you think that is what -- I mean the average actives in Tupperware North America were up 19%. That is a pretty sharp acceleration. Do you think that some of that acceleration is due to the softening economic situation?

[Rick Goings:]

I think it is more a question of the quality of the sales force there. They have just done a great job of developing people and it speaks to the effectiveness of the new sales force structure. As we have gone through the year, we kind of entered the year with a soft pool of directors and qualification. That has been building as we have been getting in the year. And that means people who are doing this to build a career business. So I feel very -- I think how we do this is, kind of in sailing when that wind gets heavy you rip down that sail a little bit. We have got that at our disposal. So, [ConWerse] watching expenses. Good signals though. He has got -- a big Summer Jubilee is in two weeks. Record attendance. These are good precursors to what is ahead. Now what do I think is ahead? I will be happy if we stay kind of at this flattish level for a while until we see the size of the sales force go up substantially.

[Mike Poteshman:]

Yes, and Doug, in looking at that comparison on the sales force side, the active sales force side, it is being driven in this particular quarter mainly from Tupperware Mexico. So we have had a good core business there and we have also over the last year we have been recruiting with higher standards. So we are getting a better sales force and they are more active because of it. The thing that is going the other way a bit we mentioned is having lower business-to-business sales. And that is a big factor in why we are up 19% in the average active sales force for Tupperware North America but sales are only up one in local currency.

[Douglas Lane:]

Okay. So that gap will obviously close?

[Mike Poteshman:]

Yes. We would expect it to normalize.

[Douglas Lane:]

Okay. Thank you.

[Operator:]

And we will go back to Dara Mohsenian of JPMorgan.

[Dara Mohsenian:]

Mike, the European margins compressed year-over-year in the quarter and that is a slowdown from the recent trends and I think you mentioned obsolescence there. What were the other factors driving that?

[Mike Poteshman:]

The biggest factor was really freight and duty, having to do with more of our sales -- well, a higher input cost for fuel and so on, but then having a greater percentage of our sales coming from places that are farther away from the distribution centers and harder to deal with from a customer's point of view. So Russia and Turkey.

[Dara Mohsenian:]

Okay. And how much was the obsolescence in Europe in the second quarter?

[Mike Poteshman:]

I do not have that at my fingertips for that specifically, but I think I said that the impact overall for the European segment was 4.4 of a percentage point on the margin from the obsolescence change.

[Dara Mohsenian:]

Okay. Great. I will see guys in a few minutes.

[Operator:]

Mr. Goings, we have no further questions in the queue at this time. I would like to turn it back to you for any closing remarks.

[Rick Goings:]

Thank you, Margaret. By the way, everybody thanks for being on the call. We are pleased with this momentum. By the way, one thing I have said out there as we do one-on-ones and work with our analysts, we always gain a lot on helping us to craft this story. We feel sometimes better about the business than the story and learning how to do it, so people get it in what we are trying to do. I think what I want to characterize though is, a good quarter, thus far, a good year and we are not hitting on all cylinders. I have had one year of my business career where everything hit on all cylinders. But I think we have got a business model here just like you who are managing portfolios that we do not have to hit on all cylinders to have this nice 7 to 9% top-line growth. I think you are going to see operating margins expand, as Mike said, as we start to get scale with these Beauty businesses in Latin America, the Nutrimetics business. We have raised our operating margins up to what, traced at a 10% level now. I would expect you are never going to see us in the mid-teens, but I would like to see us get in a few years up to the 12% - 13% area up there. But we do not have to be perfect in every market for the business to perform like that. Thank you very much for the interest.

[Operator:]

Ladies and gentlemen, that does conclude today's conference. You may now disconnect.