Tupperware Brands Corporation
Q3 2009 Earnings Call Transcript

Published: 21 Oct 2009

[Operator:]

Good day everyone and welcome to the Tupperware Brands Corporation Third Quarter 2009 Earnings conference call. At this time for opening remarks and introductions I would like to turn the call over to Mr. Rick Goings.

[Rick Goings:]

I'm here with Mike Poteshman our CFO, Nick Poucher our VP and Controller and Nicole Decker our VP of Investor Relations. You know the drill on forward-looking comments so I refer you to the company's position on forward-looking statements in our filings and also in yesterday's release. You've already, I would hope, have seen the results – Hello everybody. I have no idea what time or what point we were dropped from the conference on that end, but I'm going to begin again. You already saw the results of the third quarter. Mike and I will amplify comments in a moment. We're not going to repeat what you've read. We will try to speak to, though, our full year guidance that we've raised at to also the guidance we've given for 2010 and also speak to the future uses of cash inline with the dividend increases and the accelerated share repurchase we outlined. The 9% local currency sales increase, which was about three points north of the high end of our guidance really does reflect, as I mentioned, the visibility or excuse me the viability of our business model and I think importantly the strength of our management team not only here at headquarters, but out in our markets. It also reflects the further strengthening in our business that we've seen over the past number of years and in this year. This quarter we had top line local currency sales growth in all five segments and that was good to see, and the emerging markets were up 15% and the established markets were up 2% in local currency. Overall, total sales were up 7% in the quarter an average active 3%. We were pleased also to see a one point growth in the total sales for us and it's important for me to add to that. There has been a very strong drive to, yes, recruit but really recruit quality because many direct sellers during these kinds of economic times will get just quantity in and they'll actually dumb down the sales force and you pay the price later. We were also happy to see really positive growth in the number of active sellers. Overall, we've seen qualitative improvement also in the people we recruit and we get active. I shared with many of you, who I've met personally the size and the activity of our sales force are our primary drivers to our business. Anyway, let me comment now broadly on the overall portfolio beginning with the established markets. Our established markets grew in the third quarter. Our 2010 sales guidance calls for a 1% to 2% increase in our established markets. By the way, that's not because we don't think that's all we can do, we actually expect our established markets and in their profit plans to grow faster. But we are a global portfolio and there are always some laggards and always some local crisis you're dealing with. Importantly regarding established markets, we've been using what we learned first in Australia where we've been 48 years over the past five years and implementing that elsewhere. By the way, Australia has been up very strong double-digit compound over these past five years and has been our country of the year three of the past six. Also we have been using lessons that we've been learning in France, which was up 19% in the third quarter, and we're working to apply the lessons learned there in other established markets. Every one of these established markets and as a matter of fact every one of our emerging markets you've always had the opportunity to have a learning laboratory and we try to learn from that. This is where we have in France the incremental focus has been on women or white space in urban areas and that's where most of the growth in the sales force has come from. There they've created new theme kind of parties and they really have been very successful with having a girl's night out. In France we've also importantly raised the standards for our sales force and for sales management. For example, instead of providing compensation to the sales force we're merely bringing a recruit in now compensation is earned based on the sales of that recruit. Also additionally in France, our products and our merchandising have also been substantially contemporized. And as a matter of fact we've even launched in Paris a cooking school where we bring in members of the sales force and raise their understanding of the products and how to sell them. And importantly when we launch a product or a set of products or a theme in France, we also launch a cookbook to go along with that and not surprisingly, we are the biggest sellers of cookbooks now in France. We're the biggest direct sales company there as well and the most profitable. It was so nice to see, after 49 years in that business, that sales increase of almost 20% in the quarter and really it speaks to the strength of one other thing, and that is [Denny Grouay] and the management team that's on the ground there. Also important to highlight, our large German business was even with last year in the quarter after being down the first two quarters. We came close to making up the sales force disadvantage. By the way, I was there with all German distributors just three weeks ago. We had a full day retreat, and they're really doing the same kinds of things that we're seeing in France and it's starting to pay dividends. Overall, we're very pleased with how these initiatives are working, and I feel good about Germany's future. I also mentioned at the last call I spent time with the German ambassador to the U.S. and I will tell you two things. The first of all, the strategy they've had in place with regard to keeping consumer spending high has been paying off so it's flat year-over-year. And secondly, the re-election of the Federal Chancellor Angela Merkel, really speaks to positive expectations with regard to the economy in Germany. So we feel good about that. In North America, Tupperware U.S. was up high single-digit and continues to gain momentum. You'll remember, we had to go through dramatic gut-wrenching change in that business and our sales management structure and in our overall compensation structure that really drove that business to losses, but it's a move we had to make. Well, as a result of that, we've got momentum in the business, a younger leadership team out there across the country and they can self-promote. So the business model is really starting to show that it works. One way that it's shown is through increased productivity. There's huge potential in our U.S. business. When I do regression analysis and look at the numbers, I turn back to 1983 when Tupperware made $120 million in its U.S. business. It's still a small business for us here in the U.S. but we're in the top five most respected brand names, so there's a lot of white space for us to grow here in this market. Let me turn to BeautiControl. Now that business it continues to struggle in the quarter. Sales were down in the teens for the quarter. We've got a great team in place that we installed at the beginning of the year and we've really turned that business back towards standards. But as we've learned in some of our other business units, it doesn't snap in a couple quarters. I hope that we'll begin to see positive results beginning in 2010. Importantly too, it is a profitable business but we've got to get it back on the grow again. We've done a lot of good things in BeautiControl. We tripled the size of that company since we did the acquisition, but we certainly have stumbled this past 18 months, but it's all internal. Now let me turn to the emerging markets where we continue to see strong momentum. The emerging markets again up 15% and this quarter we saw these markets even reach 56% of sales. The growth is really driven by two things. The earning opportunity for women and also secondly, in most of these markets you get away from the major metropolitan areas. You have a less developed retail infrastructure and together this makes our model particularly attractive. Also importantly, most direct sellers in emerging markets are beauty direct sellers and we don't have competition particularly our core Tupperware categories there, so it makes it particularly interesting for us. We're in the early innings in terms of penetration and productivity our sales force in most of these markets, but the good news is also, we've reached in many of them scale and are making good profits. We make about the same ROS, we make about the same gross profit margin in emerging markets as we do established markets. Now, let me drill down more with the emerging markets beginning with Europe. We were pleased to see strong double-digit increases in Tupperware South Africa and Russia and in Turkey. In Russia, we continue to see pressure on consumer spending environment, which has really been leading to lower productivity. And we had a couple months in the second quarter which really difficult for us but we came back in July. Third quarter looked good for us, but it is steady as she goes there learning how to navigate through that very difficult economic environment. We have been able there though to increase our total and average active sales force by double-digit percentages and that's helped us to continue to grow sales. What can I say about Tupperware South Africa? We continue to perform there very well, have for quite a few years with strong double- digit growth from the sales force size advantage and improved productivity. In emerging markets of Asia Pacific we also had strong double digit increases in fact in all of our markets, other than China. Let me speak to China for a moment. There the economic environment, yes, it is improving but consumer confidence is weak. And while profitable, our business there is soft. So it has been difficult. We haven't been opening new outlets. We operate there with a hi-bred direct sales market because typically the average Chinese family doesn't have a large enough apartment even to stage a party but it's a difficult time there in China right now. In Indonesia, this is by the way the fifth largest population in the world. Our business in the third quarter was up 70%, and I put this together on the year we're up 99% year-to-date. We've been there, by the way, 19 years so it's a dramatic business for us. And so often I'm asked at investor relations meetings, how can people in markets like that afford your product? Well, when you stop to think about what I would call [inaudible] food, clothing, and shelter, a higher percentage of their income is spent on these categories. So anything she can do that frees her from daily food gathering, enables her to more prepare food in larger quantities and to store it, really changes her lifestyle. So it's an important product category and we're learning how to add flanker categories there to continue growing. In our Latin American emerging markets, let me turn to them for a moment. All if want to say there is our large Fuller Mexican business we were pleased to see a turnaround there. A lot of noise in Mexico, a lot of volatility in the external marketplace with not only the economy with the [narco wars] with other issues there, but our management teams are doing a good job. There we achieved a double-digit sales growth after being down in the first two quarters. We also closed the quarter with a bit of a sales force size deficit, but we were able to increase our average order through some targeted promotional programs. Simon and I are going to go down there for a few days. We try to do it every single quarter to really look at both size of the business not only the market and merchandizing side, but the sales management side as well. Finally, let me highlight that our Tupperware businesses is in Beauty Others performed well in the quarter. And as you know, that segment includes Nutrimetics businesses. And let me say, our Nutrimetics businesses in Australia and New Zealand particularly after since the acquisition 3.5 years ago, we've had a number of quarters of positive growth in that business for the first time since the acquisition. So we're not declaring victory but, wow terrific progress there. Additionally, the Nutrimetics – the next largest Nutrimetics business is in France and we've had wonderful momentum there this last number of quarters, so that's very good to see. Nuvo Cosmetics is also included, Fuller Argentina and our Tupperware and Beauty businesses in Philippines, Venezuela, and Brazil. Those are all included in Beauty Others. Venezuela, it was good to see the sales increase of almost 50%. However, I must alert you the large percentage of this was driven by pricing. We're expecting them to go hyper inflationary because I think they're up at 97% and the trigger point is 100%. Importantly in Brazil too, which is the fourth largest population in the world, we were up 60% in the quarter and that's almost purely driven by volume. Looking to fourth quarter, there's still a lot of economic turmoil in the marketplace and the wind is still in our face. At this point our best guidance is 6% to 8% top line local currency growth as our management teams really there. We're focused on just a few things that are really what we believe keys to our growth. First is the expansion of the sales force, we've got to keep doing that job, number one. Two, ensure continued dynamic pipeline of differentiated products. And thirdly, continually to work to make our selling situation, whether it's group presentations or what some of our business call parties or like our Fuller business grocer or merchandising, we've got to keep those exciting and compelling. I also want to comment on our dividend increase that we just announced. As you know, we paid $0.88 since we went public, we raised it to a $1.00 on an annual basis and we have a lot of confidence in the future in our ability to continue to grow sales and generate cash. This also allows us going forward to more fully offset through share repurchased dilution from an equity incentive position while continuing to reduce our debt balance for the next couple of years. I've said to some of you at individual meetings I think September 29 last year the world kind of changed. It certainly did for me with regard to the attitude about leverage and debt, and we're going to be working toward really reassessing what our debt to total capital level is. We think companies will be rewarded for having really the best balance sheets and the lack of leverage in the marketplace, and for us we know that gives us great flexibility moving forward. Things also I want to mention here that you'll see a number of officers exercising some options and some selling stock. A number of those options have been out eight or nine years. I know a number of us on the senior management team had 10-year options that are finished in the next month. Given the run-up in the stock price, I expect to see quite a few shares moved. Also full disclosure, as many of you know, I've been involved as Chairman of Boys and Girls Club and now Chairman Emeritus. I'm going to be making some donations to charity and I'm going to move some stock because we're not doing clubs here, but we'll open them personally in Mexico and Sub-Sahara Africa. Anyway, I will say though you will see that the bulk of my net worth is still continuing to be held in Tupperware shares. Anyway, enough from me, Mike, let me turn it over to you and then we'll do Q&A and hopefully you'll do a better job sticking to the script then I did.

[Michael Poteshman:]

First, I'd like to give you a bit more insight on the drivers to our third quarter performance versus the guidance we gave in July. On the sales side, key contributors to the over performance were beginning with Europe France with a high teen increase over last year. And strengthening trend in Germany where we were even with last year after being down 12% in the first quarter and 6% in the second. In Asia, we had foreseen a more then 50% increase Indonesia but were able to come in closer to 75% up. And we were also well ahead of our forecast in Korea which included more B-to-B sales. In both Tupperware U.S. and Canada and Fuller Mexico we were able to get more activity and productivity from our sales forces. And finally, we continued to run very well in Brazil and ahead of our previous outlook. The only place where we performed meaningfully below where we had forecast was at BeautiControl and we've spoken about what we're working to do there. The contribution margin from the higher sales accounted for more than half of our profit upside from our segments. And there were several markets where we achieved a better sales mix and or better leverage from our promotional spending then we had foreseen in July. Beyond the higher profit from our segments we also picked up $0.02 from better foreign exchange rates then we had used in our forecast and a couple cents from lower then foreseen corporate expenses and interest. And again [fees] upside there was a small offset of $0.01 from a higher tax rate where we came in at 24% excluding items versus the 22% in our forecast. Versus last year and in addition to our normal contribution margin from higher sales which runs in the 40% range, we were able to leverage some of the same things that led to our upside versus the forecast mainly of better sales and merchandising mix. And beyond this we also benefited from lower resin costs versus 2008 and the absence of last years loss at Fuller Brazil as we folded that business into Tupperware. Going the other way we continue to see a negative growth margin impact in our non-Euro markets in the Nordics and Eastern Europe, as most of these currencies were devalued significantly versus the Euro in most of our product cost is incurred in that currency. We also incurred higher cost in some of our Beauty businesses as we invested in order to drive the activity and productivity of our sales forces. And finally, we incurred in the third quarter $4.9 million of expense to convert Venezuelan cash into U.S. dollars. A couple of words on resin, as foreseen we had a $5 million benefit in the third quarter. Our outlook for the fourth quarter benefit is up about $1.5 million versus our July outlook to $7 million which would bring the full-year deposit of $15 million. Based on what we currently see for 2010, we got a hit from higher resin cost in the $4 million range versus 2009. Looking at the balance sheet and cash flow, we continue to be pleased with what we been able to do this year. We paid off another $60 million of term loans in the quarter, which together with what we did in the second quarter brings the year-date reduction to $80 million. This brought our debt to total capital ratio at the end of the third quarter to 45% versus 55% both at the end of 2008 and last September. Our debt to EBITDA ratio as defined under a credit agreement stood at 1.6 times for the four quarters ended September, which was down from 1.9 times at the end of 2008. And as a reminder our calculation of EBITDA leverage is detailed in our Website and the link is in yesterday's release. Cash flow from operating activity and net of investing activities in the third quarter was $35 million this year versus an outflow of $9 million last year bringing our year-to-date improvement to about $125 million. In addition to higher net income this came from a success in keeping our inventory level close to that of the beginning of the year even with the higher sales versus a large increase last year along with an inflow from hedging activity this year versus a large outflow last year. Given our progress in managing the balance sheet and our raised full-year earnings guidance, we're increasing our outlook for cash flow from operating activities net of cash flow from investing activity by $10 million from July to $165 million to $175 million. We continue to foresee full-year capital spending of about $40 million in line with our previous guidance. Turning to our outlook, you saw in our release that we've got into a 6% to 8% increase in sales and local currency which along with an 11% benefit from exchange rates leads to a 17% to 19% dollar increase in the fourth quarter. The local currency increase is in line with the longer term sales guidance we've been giving for the last year and we're pleased to be back in that range. This guidance is not a lot different from what was included in our July guidance, and together with our upside in the third quarter versus our July guidance is what takes our full-year sales range up from the 3% to 5% higher in local currency that we said last to up 5% to 6% now. The foreign exchange impact on the year-over-year comparison is improved by two points from July and is now negative 8% bringing an outlook range in dollars to down 2% to 3% for the full-year of 2009. On diluted earnings per share on a GAAP basis we're looking for a $1.06 to a $1.11 in the fourth quarter and $0.98 to a $1.03 excluding item. This includes a $0.16 benefit from [Sun] or foreign currencies and increase of 6% to 10% in local currency profit from our segment after an eight point negative impact or $0.09 from continuing to include in the forecast $8 million in the fourth quarter to convert Venezuelan Bolivars at the parallel exchange rate. This factor has a negative impact of more than one point on our return on sales. On a side note related to Venezuela currency conversion we've assumed in our 2010 outlook that we will incur costs to convert cash equal to Venezuelan net income to U.S. dollars, which is somewhat similar to how we're doing things in 2009. Finally, we're also expecting to incur about $5 million more in unallocated corporate costs in the fourth quarter of 2009 and last year, which is largely related to compensation costs, including the impact of an accrual reversal in 2008 associated with our long-term plan that came from the decrease in our stock price last year. We're also taking a hit from a higher tax rate which was assumed at 24% in the fourth quarter excluding items which compares with 15.4% last year and this difference is costing us about $0.10. For full-year 2009 we raised our EPS range by $0.25. On a GAAP basis which takes us to 250 to 255 and excluding items to 284 to 289. The $0.25 increase excluding items excludes the – or equals the $0.14 we exceeded our third quarter range on local currency plus the $0.10 that our foreign exchange impact improved to negative $0.34 from negative $0.44 as of July, along with the small local currency improvement in the fourth quarter EPS forecast versus what was included in our previous full year guidance. Versus full year 2008, actual EPS excluding items, our new range brings us up 21% to 24% in local currency and up 6% to 8% in dollars. The change in the GAAP EPS range also include $0.03 from the sales in excess facility in Australia where their transaction closed earlier this month, offset by $0.03 more net reengineering and other unusual items versus our July full year outlook. Our full year outlook continues to include approximately $50 million of unallocated corporate expenses and our outlook for net interest expense is now about $29 million down $1 million from the July outlook. On a segment basis, we now have perceive full year local currency sales increase of 3% to 3.5% in Europe, about 14% in Asia Pacific, 6% to 6.5% in Tupperware North America, down 3% to 4% in Beauty North America and up 11% to 12% in Beauty other. We expect our segment profit return on sales excluding items in both years to be up versus last year by about two points in Europe to around 18%, up around a half point in Asia Pacific to slightly over 20%, at 11% to 12% at Tupperware North America versus 9.1% in 2008, about even with last year and Beauty North America at about 14% and close to 6% at Beauty other versus a very small profit last year. Versus the July full year segment guidance, there have been improvements in the three Tupperware segments and the Beauty segments are the same. Turning now to our longer range outlook, we've reconfirmed today the 6% to 8% annual local currency sales growth range that we set last October, along with a 6% benefit from currency this brings our 2010 outlook range up 12% to 14% in dollars. The local currency increase is built on the expectation of annual local currency growth from our emerging market businesses of 12% to 14% and from our established market businesses of 1% to 2%. Based on our current 2009 guidance, our 2009 pretax profit return on sales would be 11% plus excluding items, so we're ahead of the 9.5% to 10.5% longer term range we gave last October and well ahead of 2008 actual and we achieved 9.6%. Our 2010 GAAP EPS guidance is for $3.17 to $3.27 and excluding items $3.33 to $3.43. Versus the midpoint of our 2009 guidance, this assumed a 6% local currency increase at the low end in addition to a $0.27 benefit from better foreign exchange rates. At the high end along with the FX benefit, we forecast an 8% increase in EPS from higher sales, along with improvement in pretax return on sales on a local currency of about a half percentage point. The tax rate excluding items is forecast to be 25% versus the 23% in our outlook for 2009 and we've assumed 64.1 million diluted shares. Going out beyond 2010 in addition to an EPS benefit in line with incremental sales, we'll look to improve our pretax return on sales by a half point per year with an objective of ultimately getting into the teens versus our 2009 guidance of 11% plus. We expect to be able to continue with the tax rate excluding items in the mid-20s range as we forecast for 2010. A couple of other things on our profitability and profitability growth going forward, year-to-date 2009 our overall segment profit as a percentage of sales excluding items has totaled 13.9%. As we look at the profitability of our emerging and established markets as a group, we see that our emerging markets have a segment profit return on sales of two points higher than our established markets. In terms of where do we go from here, when we work on our profitability on a unit by unit basis, we set a threshold of 15% and a goal of several points higher. Most of our large units are above the 15% threshold and many are above our goal, but we think it's a good place to work toward for those below it. Looking at our full year 2009 forecast if all of those units below the 15% threshold were able to get to that level, our overall segment profit return on sales would go up by about two points which is worth over $40 million in pretax profit. Getting all of our units up to our goal would allow us to add several points, although our half point per year guidance for improvement in pretax ROS did not say that we'll necessarily get there or get there quickly. Some of the improvement that we look to make at the unit level comes from higher gross margin percentages but more of the improvement should eventually come from the distribution selling and administrative expense caption. Just on a fixed cost leverage basis, our average contribution margin on higher sales is in the 40% range but clearly we also need to invest some of this margin to drive our sales and to add infrastructure, and we also need to pay incentive costs when we achieve above target performance and the net of what we see leads to the half point per year ROS improvement outlook. In terms of use of cash as outlined in our Release, in addition to a higher dividend we plan to reaccelerate our share repurchases to include not only the use of proceeds from option exercises, but also to offset more of the dilution resulting from shares going out under our incentive plans. And our goal for the fourth quarter of 2009 is to repurchase about $40 million worth of shares in addition to purchasing shares with proceeds from option exercises. As of the end of the third quarter of 2009, we had repurchased since May 2007 under a $150 million authorization, $91 million worth of shares with proceeds from option exercises. Considering our expected dividends and share repurchases based our cash flow forecast, this should still mean we have substantial cash flow to pay down debt and we foresee reducing our debt in the fourth quarter of 2009 and in future years. So with that, we're going to turn the call over to questions.

[Operator:]

(Operator Instructions) Your first question comes from Dara Mohsenian - Morgan Stanley.

[Dara Mohsenian:]

So in terms of the Q4 organic top line guidance, I was just curious as to why you guys would expect a deceleration in Q4 versus Q3, particularly given you have a much easier comp. Is that just conservatism or is there some specific reason that we should expect a slowdown?

[Rick Goings:]

I'll comment and then I'll ask Mike to fill in the space of what I miss. We've only been through three weeks of the quarter and I wouldn't articulate the way we run our business as I think from a cash flow and a balance sheet standpoint, conservative but we're very vigilant about it and there's a lot of working parts in a direct sales company and big months are ahead of November and December. We've got good sales force advantage, and as I said in my prepared remarks, particularly markets like Germany and Fuller we like what we've seen. But I've got to say there's some things I don't like what I see. I don't like what I'm seeing in China right now. Yes, the economy is getting better but we haven't been able to open any new units this year, so that really has put the wind at our face. And you really had the Chinese consumer there kind of panicked the first half of the year. So I haven't gotten more comfortable with that. North America, I expected more improvement with BeautiControl in the third quarter and didn't see it, and I know we've got the right people on the ground and I want them to stay the course on their standards and not go back to cheap kits and no training. But there's an expectation that we're probably not going to see that. And as I dig into markets like where we make a lot of money like the former Soviet Union, we'll have one great week and then a bad week. And when you put it all together in the third quarter, it was a great third quarter but, boy, there was some noise under there and I saw that, yes, they grew the sales force but they had to do too many promotional things. And, Dara, one way we look at it qualitatively in a quarter is can you make your numbers in a quarter and you don't do a lot of promotional things the third month of the quarter. Retailers would call it fill in the pipeline and things like that. Strategically, we don't do that in our business. I want people to end the third quarter with business as usual with the same kind of pressure. But there were some units within it that they had to do too many promotional things and those are the markets I outlined. I won't feel better about Fuller Mexico until they have a nice sales force size advantage. Yes, we had nice growth in the third quarter but we only got there because we did incredible merchandising during the third quarter. So from my standpoint, it's more a qualitative stand view. Mike?

[Michael Poteshman:]

Yes I agree. I think you said in some ways but the fact that we were ahead of our guidance in the third quarter on the sales side, one of the things that we noted was the better productivity at Fuller Mexico and in Tupperware U.S. and Canada. So we need to continue to work on that from the sales force side as you were talking about. So I think that's right.

[Dara Mohsenian:]

Mike, I was hoping to get some more commentary on your long-term return on sales goals of 50 basis points a year beyond 2010. It seems pretty conservative, particularly versus the recent incremental margins you've been posting. So I'm just wondering are you assuming a large amount of reinvestment behind the business longer term. And I know you gave us a bit of color, but maybe you can give us some more detail on what's limiting even more margin expansion.

[Michael Poteshman:]

I think if you look back not just even this year, but going back a few years, we've gone from a 5% pretax return on sales to now 11% plus in our guidance for this year. And that's starting in 2003, at the low end, and we've worked with a lot of the – starting with a lot of the units that were doing the worst as you'd expect and that were the largest and have targeted this 15% threshold for the starting point and then look to go beyond that. So we've gotten a lot of those things done. We're certainly not going – we talked about the possibility of getting another couple of points if we just got all the ones below 15% in this year's guidance up to that. So there's room to get there, but certainly there's times when we need to invest tactically, and then also as we grow, we need to invest from an infrastructure point of view. So we're always looking to try and make things come out better, but we think the right call, again going out into 2010 and beyond, at the moment is to go for that half point per year.

[Rick Goings:]

Yes, and I would add to that. There's no magic to this number of this segment profit threshold of 15%. Generally we try to manage it with the 15% as the threshold and don't let it get much above 22%, but yet to dig under that into the markets, and I'll give you just more anecdotally because we really didn't have any other cylinders to fire on in the mid-90s, you would see us get – Germany got into the high 30%. And what we learned from that is we're paying the price for some of that today that we didn't invest in that business, didn't invest in turning over distributors, didn't invest in upgrading public relations, didn't invest in penetrating metropolitan markets, so that's some of that, that I do think we're gong to have to continue to do this because what we don't want to see – we've talked about this individually, Dara, that we believe every business model works until it doesn't. And the job of management is sustainability and we want to be in a position where we don't have these turnarounds in markets and we do the investing so that, yes, you'll have better years than other years give the wins and given your promotions. But that it's much more predictable and steady state going forward. So that's inherent in our kind of investment strategy, Dara.

[Dara Mohsenian:]

Last question, have you guys seen any impact in the regions with winter weather in Q3 from the Swine Flu? Do you think it had a significant impact on your business, and how much of a risk factor do you that could be coming up here in Q4?

[Rick Goings:]

We've seen none and what we have done though is, as you saw what we did in the second quarter. We had, by the way, a very sophisticated pandemic global plan, market-by-market, so I think we're ready. We did it in Mexico and it had minimal impact there. So I'm fairly confident we'll be able to deal with that.

[Operator:]

Your next question comes from Olivia Tong – Bank of America Merrill Lynch.

[Olivia Tong:]

I just want to talk first a little bit about emerging markets. Clearly, Europe is accelerating behind Russia, but it sounds like it's still a little bit shaky. Could you talk about some of the things that you're doing to sort of solidify the reacceleration in Russia? I know part of it is macro, but what are you guys doing from your standpoint?

[Rick Goings:]

Yes, most of it was macro in Russia because what you really saw is not only in CIS, but all of those non-Euro markets there was a big consumer shakeout in the second quarter as their currencies devalued against the Euro and a real shift to try to find – had stopped purchasing things that were based on the Euro. So what our guys have done, we've got some of the best management people there as anywhere. It was expansion in the size of the sales force, number one. Two, Olivia, it was shift in product line of – we have a buffet line of products to offer – shift to those lower price points. And thirdly, shift promotional dollars from what were on recruiting to more incentives to get people to be active, incentives to get people to come to a party, and incentives to get people to step up the size of their orders. So it's fairly traditional things, but that's what we try to drum into our management teams. If this happens, don't sit on your hands, do this. If this happens, do this. And we do a lot of case study work on this so that when it happens we generally have about three weeks visibility out there in a given business unit, in [inaudible]. By three weeks, we know what's on the books as far as parties that are scheduled in any given European market. If you see that the datings are soft in week number one, there's nothing you can do about it, it's too late. But you can do something about it in week two or three and 50% of all recruits come from a party. All sales come from a party, and there's levers at your disposal. And so that's why it's incumbent upon us to teach our management teams what the levers are and to make sure they have that visibility.

[Olivia Tong:]

So it's now six weeks or so into the quarter, six, seven weeks, so that you've got three weeks of visibility into the partying line, you're pretty much seeing the majority of this quarter play out already. So are the promo needs accelerating, are they decelerating, are they still kind of shaky?

[Rick Goings:]

Well, I've commented on the three markets where I still haven't got a lot of confidence that I'm unwilling to say that parties will hold there three more weeks out. So we came up with a number of 6% to 8% because that's what we believe is the prudent number for the quarter and we make our numbers.

[Olivia Tong:]

Then maybe we could talk a little bit about margins by segment, pretty big swings in a couple of areas. Maybe, Mike, could you give a little bit more color, particularly on Asia Pac and maybe a little bit of Beauty North America. I assume North America – it sounds like the south came in a little bit light so maybe that impacted margins, but if you could give a little more color on that, that would be appreciated.

[Michael Poteshman:]

Well, I guess in the second quarter in Asia Pacific we grew the segment profit return on sales by half a point over last year. In the third quarter, we did a bit better than that around 1.8 point. So that was mainly coming from the gross margin in Asia Pacific, both from continuing to get some better volume leverages. We've really grown sales well there, and then the risen cost benefits coming through in Asia and in the other Tupperware segments as well. So that's really been the move there. In Beauty North America, yes, they're more promotionally driven where we had issues both, as you can see in the numbers, both with BeautiControl and Fuller Mexico in terms of the sales force size. So we were very successful at Fuller Mexico of getting the productivity out of some the promotional costs. In BeautiControl I think it had a positive impact as well. Of course, we didn't end where we wanted to on the sales line, but that's where a lot of that is coming through in Beauty North America. We do think that included in the forecast, that we'll continue to be able to improve the ROS of BeautiControl where it's dropped fairly low, and we had a lot of costs last year that we've been working on.

[Rick Goings:]

Yes, Olivia, one other comment though that leads to fourth quarter and kind of the question of do we see this deceleration? It's no, but we didn't have a bad fourth quarter. We've got some easier comps in certain areas. One of the things we turn to this year and I forgot about fourth quarter last year and I was thinking, Mike, didn't' we have a fourth quarter there? And I was beating on our group president at Europe last year, and he said, "Rick, we were up fourth quarter last year." And that's our biggest area of the world, so he's got, I think, kind of challenging comps to go against there. Most of it, Mike, was North America, wasn't it, last year?

[Michael Poteshman:]

Yes, and Beauty North America.

[Rick Goings:]

Yes.

[Olivia Tong:]

Then just lastly about the debt pay down. You're now at a debt to capital 45%, you've said 40 to 45 is sort of your goal and then you want to go lower than that. What is sort of – have you decided what is sort of a target ratio at this point or is it just keep on going and there's not necessarily a bogey at this point beyond the 40 to 45?

[Michael Poteshman:]

Obviously, we've had some conversations internally and with our board, but we've looked at it in the more difficult external environment, both in getting credit and how it works with the rating agencies, we've taken the view that it makes sense for us to get out of the high yield kind of debt covenants that we have right now, which you've heard us talk about from time to time. We're operating very comfortably under them right at the moment, but there's been times where it's been tougher and so we want to get back to a position or to a position where we can get out of those. And then also, again, like I said, because of the external environment we want to be a bit more conservatively levered. So we're not trying to say we're aiming to be at zero leverage, but we'll continue to pay down, like we said in the fourth quarter and certainly next year. And it's moderated somewhat because the dividend's higher and we're going to be doing these stock repurchases, but we'll have more to say about that as we move along.

[Rick Goings:]

Yes, almost just think we want an attractive dividend. When we're confident that we – because dividend's not something you want to raise and then reduce. So when we're confident in our ability to pay out a dividend going forward, we'll raise it. We want to guard against dilution. It isn't job won on with regard to share repurchase just to reduce the number of shares in the markets. Our only real focus there is to the dilution impact there, and then we'll go forward and we'll continue to look at it. But we think less leverage is better in the future and it gives us greater flexibility for two things. Firstly, if there's turmoil out there that we've got a war chest to invest and secondly, to guard against the needs in certain markets to drive up their ROS to the point of long-term hurting their business. I don't want us to be in that kind of position and reducing our debt level gives us that.

[Operator:]

Your next question comes from Doug Lane – Jefferies & Co.

[Doug Lane:]

Staying on the user free cash flow, with a significant [raised] the dividend for the first time and the stock buy back is back on the front burner here. If we look out on a regular basis, should we expect an annual increase in the dividend and kind of a steady regular pace of stock buy back on the order of maybe $30 million or $40 million a quarter?

[Michael Poteshman:]

I don't think the board has decided about when exactly there may or may not be future dividend increases, but we did aim the dollar in addition to being a round number, is 35%-ish of this year's outlook range with that item of EPS without items and so that's one metric. It's also how we came out of the pre-marked spin-off in 1996, that's what the $0.88 was, but I don't think the Board has decided that. And then on the share repurchases, along the lines of what Rick was saying, we were offsetting some dilution by buying back with the proceeds. And now what we're saying, what we've said is it will offset more of the dilution. And so that's what we're saying we expect to be doing.

[Rick Goings:]

And then we're really also be driven, Doug, by what else are we going to do with our cash? There really isn't any acquisition candidates out there that match what we're looking for. We have enough opportunities for our organic growth and the usual suspects. It's raise the dividend or share repurchase. We know that many of our shareholders out there have commented to me that we would prefer you give us the cash and let us decide what stocks to buy with it. There can be an argument made for that. So we'll keep talking to our shareholders out there. And from this side here, we just want to throw off cash and have that flexibility of having a low debt level. And that's a high class problem for us to have is, what are we going to do with it?

[Doug Lane:]

No, I agree. And then switching gears operationally back to Fuller Mexico, it's a pretty sharp reversal from the first half trends to the third quarter. Could you just give us a little bit more color on specifically what you did in that market to have such a reversal, or was the comparison unusually easy or is something else going on that we're not getting?

[Rick Goings:]

The comparison wasn't easy. Last year part of the issue was we had promoted our head of sales two years ago and moved him to Argentina and we put in a green head of sales and did fine. But really, there were some issues within the sales management side of the business that as Simon and I went down in the early, the first quarter of last year, we set was substandard. What we saw was too high a level of local field sales manager turnover and we have almost 3,000 of those. And so we made a change and installed another director of sales and moved that person into another position. And we saw quite a remarkable change in that management turnover of these field sales managers. And they're the individuals, Doug, who are responsible for all of the recruiting. I'll tell you what we did on that, we instituted really a three-pronged program. Number one, we basically put in, they called it in Spanish, but it English it was called the Godmother program. So that if you're a new field sales manager, you're assigned another field sales manager who's kind of like your big brother, big sister in the organization who is incented for your success. Doug, you don't report to that person, but they're incented for your success, particularly during the time critical period of the first nine selling periods, which is 18 weeks. Secondly, there's a [cliffed] incentive that if you make it as a field sales manager through that 18 weeks, you're bumped up and there's a big incentive given you. Thirdly, a step-by-step better sales management training program. So what I feel good about there, Doug, is that this is what I worry about in a number of direct sales companies where the band-aids or the fixes are promotional, they're discounting, they're one-time offers, they're gift with purchase. Those things have no permanence to them. But if you put the proper permanence on really, real qualitative sales management, that pays off long-term. And so, that's what I'm seeing happening there, although, it's a very difficult marketplace. We had this week, one of our trucks hijacked. I mean, we say well, what happened to it, it's gone, it is gone. So it is a very, very difficult place to do business. But I'll tell you, this business model we have, both for Tupperware and our Fuller business model, it really works there and works well. And I think we've learned how to put up with the instability there, whether it's currency, crime, the [narco wars], and the economy. We've learned how to navigate through that and provide incomes for people and make money ourselves.

[Doug Lane:]

Well, Mexico is still your biggest single country, isn't it?

[Rick Goings:]

Yes.

[Doug Lane:]

Yes, and lastly on a really big picture scale, I remember when you bought the Sara Lee businesses and the diversification into the beauty business was supposed to be a buffer against cyclicality. And it looks like coming out of the global recession, your durables business actually performed better than your beauty business. Any insight on how that worked out?

[Rick Goings:]

Firstly, I am so pleased we made the acquisition because we really didn't have the right kind of a product line I would say for the next decade in Latin America where we could really get bigger and bigger and bigger because she simply doesn't spend enough on the Tupperware product category. And what we're learning is we've got in Brazil, for example, we've called it our Trojan horse strategy that we now have folded beauty into the Tupperware brand catalog there so that when she's selling Tupperware, she's selling Tupperware and down there you're more a channel of distribution than a brand. But our brand is respected Tupperware, and that's helping us to sell the beauty, or excuse me, the Fuller brand down there. So I think you've seen strong double-digit growth in Latin America at a more sustained level than we've had since I've been here. And part of the reason for that is, yes the Tupperware business but also now we have the beauty businesses down there. But another thing I would comment on is there's been a number of things in my career I've gotten wrong, but one thing I did get wrong clearly at the time of the acquisition is the underestimation of how powerful it is not to have any direct sales competitors in our Tupperware Durables business. And so you see the fights going on between Avon, Mary Kay, Oriflame in former Soviet Union, we've got nobody to fight against and nobody can compete with us. And then you sit there in your core Tupperware business and that's why you haven't seen us launch a beauty business there. So basically we've taken core Tupperware product line and I've got three things of telling our guys three things we focus on that'll ensure sustainability in every single market going forward for 50 years. Number one, have differentiated, relevant products, number one. Number two, compelling selling situations and that is in Latin America, brochures and how we do sampling etc. But in our Tupperware, boy, one thing we have been driving at this last 90 days is get focused on more and better parties. Start measuring where the percentage of your business done through group presentation's selling, what we call GPS because our biggest markets of the world, not biggest by number of people, but biggest party Belgium, $850. Imagine what she makes if she makes 30% and does three parties per week, so real focus on compelling products, compelling selling situations. And the third is attractive, dynamic earning opportunities. Well when you put that altogether in a Tupperware business, that really cooks for us. Now I think we're going to have great offsetting businesses with our beauty businesses there. Nutrimetics in Australia, Avroy Schlain in sub-Sahara Africa, and I think you're going to see growing us taking share from Avon and Natura in Latin America. That's certainly what we're aiming to do.

[Operator:]

Your next question comes from Mimi Noel - Sidoti & Company.

[Mimi Noel:]

Rick, this would be touching on what you were just talking about and also in your prepared remarks. You talked about the emerging markets and how you feel as though you have little competition. Is that just in reference to the Durable side of things, or are you also saying in certain markets you don't have quite the same competition in beauty as well?

[Rick Goings:]

Yes, it's more the latter. In some markets we don't have we don't have I mean Avon withdrew from Indonesia, and you know I was the group president of Asia-Pacific for Avon when we opened Indonesia. That was in the 80s and they've abandoned it. There's only one other major direct sales company there, so we're really getting a dominant position in India. And when I go to China, where we see it's a crowded space in other product categories, you don't go into those product categories. But the wonderful thing about, Mimi, us having the power of our brand name, which is important us getting in June, being named a design company of the year. That gives us the opportunity to go into flanker categories that sometimes aren't even durable in these markets. We do wonderful spices and sauces in certain markets, but it does have that relationship, that's our TupperChef series. So we're learning new and different ways to do that.

[Mimi Noel:]

Then somewhat related, I think this time last year, maybe it was last November, as you looked forward 2009, I don't want to say you took a conservative approach to managing the business, but you were certainly managing the business for what was going to be a very difficult economic time. As you stand here now and look at 2010, how do you regard next year?

[Rick Goings:]

A little bit more optimistically than we felt about 2009 for two reasons. A number of the markets, the case I used on Germany [inaudible] we see because how they're managing their markets macro economically. I see the same kind of things happening with putting [influence] still in former Soviet Union. So that gives you a feeling of much more predictability. The way the macro economics are being managed in Brazil and even Argentina, I mean as a matter of fact, the only wild card in Latin America right now is this character in Venezuela who's running the country into the ground. Then I turn to Asia-Pacific the turnover of government there, very pragmatic, stable. In one country's we haven't even mentioned here today, but it's a very important – it's the largest direct sales market for competitors in the world, Japan. We've seen strengthening of both our businesses there and you've seen macro economically some good things, so I'm seeing the world view to me, and I'm out there. I've been out there 81% of the time this year. We just did the numbers. There's greater stability, as a matter of fact, the most unstable I am right now in any market is this country here and what are we going to do because we're just printing money over here. They love us out there, love our attitude with regard to not interfering and the president going out there apologizing to the world, and then we come back and print more money. So if I was a currency speculator right now, boy would I short the dollar.

[Mimi Noel:]

So given that outlook then, are you planning on managing the business more aggressively than you did last year in terms of your pursuit for growth and I guess potentially in the form of reinvestment?

[Rick Goings:]

No, and I'll tell you one of the things, I don't want to pull back on investment. We spend about 18% on promotional investment in markets and all you do is when the case has been made, we're countercyclical. Yes, we're countercyclical, but I'll tell you, that doesn't mean we do well during bad economic times. We just do less poorly than others do, so that a year like this year we can still have a pretty good year and a very critical macroeconomic time. But given everything, I want to see us do well. Now what we'll end up doing is money that we didn't have to spend on recruiting, then you got to start spending it more on recruiting because the available pool is smaller. I mean we had a plan in place this year called the Vigilance Plan that was our over-plan to ensure we made our numbers, the freeing up of investment dollars you had to reach certain hurdles, and Mike's managing the Vigilance Plan. You've got it this next year too, don't you Mike?

[Michael Poteshman:]

Yes.

[Rick Goings:]

So we don't think it's gotten that much easier out there.

[Operator:]

Your next question comes from John Faucher - JP Morgan.

[John Faucher:]

So to follow up on some comments about the beauty control business, you talked a little bit about focusing on the ROI, and it's one of the businesses, one of the few businesses that isn't performing as well as you would like. And I guess the question is can you get the top line and the ROI moving at the same time? Is that something where you an multitask on this business or is it fixing the ROI fist and then worrying more about the top line a little bit later?

[Rick Goings:]

No. Job one, John, is fix the top line. Get the size of the sales force where it needs to be, not only quantitatively but qualitatively, and that's what we screwed up. Inside out leadership team here that managed BeautiControl and the one that was on the ground at BeautiControl quite simply let the business become 70% wholesale buyers by shifting the business rather than a couple promotional periods per year using the less expensive kits, they went to 10 months a year doing it. And now you get the sales force that you grow and we ended up having a sales forces that were more casual, custo-rep types that weren't holding parties or what we call beauty spas which that's where you make – it's a $500 party, and at BeautiControl you can 50%. So it became the different person there. Now the leadership out there as far as directors and senior level and all those, I mean that's remained intact, but what we lost is the feeder pool of new directors who were once great consultants who became managers and I think that's more an 18 month problem. We've got to fix the top line before – we don't lose money there, but that's not the button we're pushing right now. We're pushing right now get the top line moving right now. Not by buying sales, but by growing the sales force.

[John Faucher:]

Okay and then the ROI focus is sort of going to your point that you just made. It's about getting the top line moving in the right way I guess is what you're saying.

[Rick Goings:]

Yes, and that's what happens. John that's what's happened in Nutrimetics, that's what'll happen at Avroy Schlain, you get the right numbers on the top line. With regard it starts off the pig going through the python is number one. You get the right kind of recruits in, the right standards on those recruits, she'll have the right level of sales there, and then all of a sudden you start to make bigger sales increases and this is where, what is it 45% falls right through and most of our businesses, Mike?

[Michael Poteshman:]

We talked about the average being around 40 due to control it's a little lower because we sell to the consultants. I think, John, as we look at it, we are spending a lot this year to get there and where we would really see normally a fall in profitability when we're investing is more of it didn't work. If it's working and we're getting sales, the drops will normally at least compensate for whatever it is we have to invest.

[Operator:]

Your next question comes from Greg Hillman - First Wilshire Security Management

[Gregg Hillman:]

Could you go over Indonesia in more detail for me, in particular the 18-year history there? And then basically what products are driving sales there and how big can it get and what are the flanker products in Indonesia.

[Rick Goings:]

First on the last part Gregg, I don't want to get into the products they're doing well because retailers would love to get the information from us of what they should be selling out there. We went in to the country and we used a distributor model going into the country and it took us about five years to achieve profitability in Indonesia. We started off 60% of the population is on the island of Java, that's where the bulk is and as you know Jakarta has about 60% of that population. So it was a business that was clustered hub and spokes around Jakarta and the metropolitan cities that were within three hours of Java. Phase number two of that business was taking it across to the rest of Java. That happened in about year six, seven. And then we took it to the other islands and there are thousands of them, but four major islands. And then we made a decision about four years ago, we put in a dynamic woman who was head of marketing then, [Ning Pernama] and we turned the country over to her. And you must remember this may seem awkward because it's one of the largest, well it is the largest Muslim population in the world. She has just done a wonderful job because there was a guy running the company before then and what it did is coming together with the strategy of, here's the right products, get focused on party selling rather than just brochure selling and here's the kind of career opportunity it can be. It reached a critical mass then so you had these repeater stations all throughout the island of Java that it wasn't just [Ning Pernama] doing the pitch. So we launched a program called Chain of Confidence, that's what we used here Brooke Shields but there and I did a big meeting there with all their distributors that was a full day workshop with, I don't speak [bahasa] so with simultaneous translation and we had been growing about 40% or so per year the last five years. It just exploded after that. So now you have these big distributors there who are making serious six figure incomes and they're not just in Jakarta, but they're all over Java and there are the other islands and so now we're just filling in the white space. So I expect it to continue. There is such limited earning opportunities for women in Indonesia. So the business model is just terrific for that market.

[Gregg Hillman:]

It sounds good. Do you sell water filters in Indonesia by the way?

[Rick Goings:]

Yes, and one of our strategies going forward here, by the way is, we're working on it right now is one of our key categories in the future is going to be water, we plan on owning it. And how we mean it by that? We've broken all world markets into green and red. Red are the markets where the water typically you can't even drink the water that's available to you locally. That's the India's, Indonesia's you see it so much through Southeast Asia and Sub Sahara all over Africa. And then there's the green markets of the world well like the U.S. and Western Europe. Now the remarkable thing is more bottled water was sold in the green markets where you could go turn on a faucet and we know here 40 billion bottles are going in garbage dumps of these PET bottles. So our strategy is what drives it in the U.S. and Europe is convenience and I've already seen the designs. We're going to be coming out with really new and different designs so that in your house you're not buying these 24 packs of bottles, but conveniently you can have your bottles. There's different colors, there's sets, there's sets for when you work out, etc. so that we know that studies indicate that there's only 3% of the market in the U.S. where the water in your spigot isn't up to the standards of what it would be in bottled water out there. And look how Coke's dominating it with basically spigot water with their Dasani line. Then in the green markets of the world, we're doing filtration on those so we're really coming out with some new techniques. I mean this is going to be over the next three years, but we've got a team assigned to it and we think it's exciting because we're known for quality storage products, why not be known for water? And we already sell those kinds of products in certain of these markets, but we've never focused on it, and now we are going to. So, some of our distributors may just have a big water business.

[Operator:]

Your next question is a follow-up from Dara Mohsenian - Morgan Stanley.

[Dara Mohsenian:]

You know what it's been a long call so I'll just catch up with you guys offline.

[Rick Goings:]

Okay, Dara, good talking to you too.

[Operator:]

And there are no further questions in the queue.

[Rick Goings:]

Guys, thank you, I think we've kept you on the line. I'm sorry for the glitch in the beginning, but I hope what you get it measures. We're not trying to be I mean maybe our physical policy is conservative we're trying to be very pragmatic and prudent as we drive our business forward. I don't want to give you numbers that we don't have a high level of confidence that we have the leverage that our disposable the chain. So I guess what you got from us on what our fourth quarter is and for next year is as far as we're willing to go until we see more out there in the marketplace and that's probably going to be the way we're going to continue to manage. We think giving you guidance, by the way, matters and it becomes an outgrowth of us needing to give ourselves guidance on how we run our business or how could we run these businesses in the market. And if we're unwilling to go any further, it's because we don't have the comfort level in that. So again, thanks for the support and for great questions.

[Operator:]

Again, that does conclude today's presentation. We thank you for your participation.