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Executives

Curtis Stoelting - Chief Executive Officer

Peter Nicholson - Chief Financial Officer

Analysts

Sean McGowan - Needham & Company

Timothy Condor - Wells Fargo

Linda Bolton Weiser - Caris & Company

Gerrick Johnson - BMO Capital Markets

RC2 Corporation, Inc. (RCRC) F1Q09 Earnings Call Transcript April 21, 2009 4:45 PM ET

Operator

Good after afternoon. My name is Ellie and I will be your conference operator today. At this time, I would like to welcome everyone to the RC2 Corporation Q1 2009 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will a question-and-answer session. (Operator Instructions) Thank you. Mr. Stoelting, you may begin your conference.

Curtis Stoelting

Thanks Ellie. Good afternoon everyone and welcome to our 2009 first quarter conference call. Joining me today is Pete Nicholson, our Chief Financial Officer. Peter Henseler is away on assignments so he will not be joining us today.

On the call today, Pete Nicholson will recap our first quarter financial results. I will provide some additional comments and then we will follow that with a Q&A session.

I would like to turn the call over to Pete Nicholson.

Peter Nicholson

Thanks Curt and good afternoon. Before we get started, I would like to mention that this call is being broadcast live over the internet by Thomson Reuters and could be accessed at RC2’s website at rc2.com or at Thomson Reuters’ individual investor website center at earnings.com. Reply will also be available through these websites starting tonight through May 21, 2009.

Also, let me remind everyone that any forward-looking statements made on this call are subject to many uncertainties and the Company's operation and business environment. I refer you to our complete forward-looking statements disclosure in our first quarter 2009 release which is incorporated by references for purposes of this call. I would also refer you to disclosures made in the Company's quarterly and annual filings with the SEC.

By now, everyone should have accessed to our 2009 first quarter earnings release. I will briefly walk through the statements of earnings which are highlighted in the supplemental schedules to the earnings release. Also, I will briefly review some of the discussion around, certain statements of earnings variances for the quarter. Finally, I will review some of the key balance sheet variances from December 31st, 2008.

As stated in the earnings release, 2009 first quarter net sales were $86.3 million a decrease of 7.5% as compared with prior year. For exchange rate fluctuations, reduced consolidated net sales by approximately 6%. Our international operations first quarter 2009 net sales increased 19% in local currencies or reported a decreased of approximately 9% when translated into US dollars.

Gross margin percentage of 40.2% for Q1 2009 decreased by approximately five percentage points compared to Q1 2008, primarily as result of less favorable product mix shift within our mother, infant and toddler products category and to a lesser extent as a result of mix shift between our pre-school youth and adult products category and a mother, infant and toddler products category.

Also contributing to the decrease was unfavorable foreign exchange rate fluctuations and higher product costs which more than offset cost improvement initiatives and price increases. On a sequential quarterly basis, the gross margin percentage of 40.2% for Q1 2009 was similar to the Q4 2008 gross margin of 40.7% as adjusted for nonrecurring items previously disclosed in our Q4 2008 earnings release.

I mentioned this comparison as a Company faced similar comparable challenges in Q4 2008 as well as incurred in Q1 2009. We expect slight gross margin improvements in the second half of 2009 and as product cost improvements and freight in savings are anticipated. It is difficult to get better guidance regarding the timing of gross margin improvement as a timing of the impact of weakening foreign currencies is dependent on the Company’s future international sales product mix.

Selling, general and administrative expenses for the first quarter 2009 were lower by $8.2 million compared the first quarter 2008, of which $1.1 million of the reduction was due to lower recall-related costs in the first quarter of 2009 as compared to prior year. Of the remaining $7.1 million reduction, approximately $2.5 million of the reduction was a result of lower sales volume and impacts from current foreign currency translations. Approximately $1.3 million of the reduction was from the lower trade out and royalty costs resulting from freight rate savings and sales mix, and approximately $3.3 million of the reduction was principally the results of the Company’s operating cost reduction plan which was implemented in the fourth quarter of 2008.

Interest expense for the first quarter 2009 was lower principally due to lower average interest rates versus prior year, as the impact of the lower LIBOR rates offset the higher applicable margin rates on the Company’s new credit facility in the first quarter of 2009 versus 2008.

Finally, first quarter 2009 has other expense net of $723,000 as compared to $448,000 of other income net in the first quarter 2008, for our total unfavorable variance of $1.2 million.

The activity in both periods is principally the result of currency fluctuations impacting transaction loss and gain recognition within our international subsidiaries which transact in multicurrency.

Finally, the effective tax rate for the first quarter 2009 is tracking to what we anticipate for the full year 2009 within the range of 35% to 36% as in prior year, the first half of the year is impacted unfavorably to a greater expense by discrete tax items which had the tendency to make the face of the income statement effective tax rate higher and whether anticipated for the full year effective tax rate.

Turning now to the balance sheet, cash on hand was lower at March 31st, 2009 as compared to December 31st, 2008 and the Company continued to focus on reduction of debt. As noted in the earnings release, debt was reduced by approximately $90 million during Q1 2009. As a result, our March 31st, 2009 outstanding debt is $76.3 million, resulting in a net debt of approximately $48 million.

The Company’s leverage ratio at March 31st, 2009 based our growth debt outstanding is approximately 1.3 times. Also, inventory was reduced by approximately $7 million during the quarter. Our consolidated day sales outstanding is approximately 72 days, a slight improvement of a prior year 76 days.

Inventory terms were 2.3 times as of March 31st, 2009 versus the prior years 2.6 times mostly due to higher inventory in the international business unit.

Our CapEx for the quarter was approximately $2 million. As presented in the calculation of adjusted EBITDA in the supplemental schedules of the earnings release, for the quarter, depreciation expense was $2.8 million and amortization expense was $0.2 million. Stock based compensation expense for the quarter was $1.2 million.

We continue to anticipate our capital expenditure plan for the full year 2009 to be approximately $11 million with depreciation expense estimated at approximately $12 million. Amortization for 2009 is still expected to be approximately $0.6 million and finally we continue to anticipate compensation expense related to equity awards to be approximately $5 million for 2009.

That concludes the financial information overview. I would like to turn the call back to Curt.

Curtis Stoelting

Thanks Pete. First of all, I would like to thank our management team and our team members around the world to deliver the profitable first quarter. It was no-easy task.

Equally important is the job our team is doing to create new future growth opportunities by developing new innovative mom, infant and toddler products in our first years brand and by growing and diversifying our pre-school play business with new properties like Super WHY!, Chuggington, and Dinosaur Train.

First quarter sales continued to be negatively impacted by conservative retailer ordering and unfavorable foreign currency transactions. During the first quarter 2009, retail sell-through exceeded shipments in many of our product lines. Retail order patterns improved in March and continue to improve thus far in April.

Net sales in our mom, infant and toddler products category increased by over 2%, which is a good result considering the current economic conditions. Based on our IRI data, we are performing better than the overall juvenile products industry. We continue to believe that in 2009 and in 2010, our mother, infant and toddler products category will continue to perform well relative to other consumer product categories.

Excluding discontinued product lines, comparable net sales in our pre-school, youth and adult category declined about 15% in the first quarter with softness across almost all product lines. On the positive side, sales of our Thomas & Friends Wooden Railway product line increased when compared to the prior year first quarter.

We are definitely seeing benefits from our focus on cost reduction and cash preservation. In the first quarter, we generated approximately $17 million a positive cash flow from operations, which included a reduction in our inventories of approximately $7 million. We paid down debt outstanding by approximately $19 million. The impact from our operating cost reduction plan which we implemented in November of last year helped to lower our first quarter operating expenses, which as we noted declined by over $8 million compared to the first quarter of the prior year.

As expected, foreign currency rates, higher product costs and sales mix had a negative impact on our first quarter gross margins. We expect product cost and currency trends to improve in the second half of 2009.

Consistent with our strategic plan, we continue to invest in innovative new products which make parenting easier and more fun for the entire family. We are on track with our planned second half launch of our all new Super WHY! product line. We are excited to expand our Caring Corners product line and extend our highly successful American Red Cross, Lamaze, John Deere and The First Years product lines.

In 2010, we anticipate improved economic conditions and have exciting new product launches planned for Chuggington, Thomas & Friends Wooden Railway and Dinosaur Train. We also expect growth in 2010 in our mom, infant and toddler products category.

We remain optimistic but we continue to anticipate a difficult 2009. Accordingly, we remain focused on our long term strategic plan, on cost reduction, on cash preservation and on debt reduction. We are confident that our experienced, proven management team will navigate these tough times while building toward sustainable future growth.

With that, we would like to turn the call over to Ellie to begin our Q&A session.

Ellie, are you there?

Question-and-Answer Session

Operator

(Operators Instructions) Your first question comes from the line of Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

Hi guys. If I can, have for you a couple of questions. Pete can you get more specific about what the impact is on gross margin of the foreign currency moves. How much of that drop was related to foreign exchange?

Curtis Stoelting

It would be, I would say, approximately 100 basis points of it.

Sean McGowan - Needham & Company

Okay, thank you. Curt can you give us some idea of what are the low margin products in MIT that accounted for that mix shift within that category?

Curtis Stoelting

Well, as you know Sean, in our MIT business, it is a very broad product line which I think really helps us in times like these. We do a couple of significant new programs this year that are in the lower end of the spectrum in terms of gross margins but we like these products because they tend to be prenatal in their focus and they tend to be very successful and long lasting in the marketplace and those would be in our travel gear category where we continue to expand by bringing to you innovative product to market and in our infant and toddler care categories where we have expanded especially one program that comes to mind is our new safety-gate program on target.

So there, we are looking at a little higher ticket but lower margin items but products that really help build the brand and are very sustainable long term in the marketplace.

Sean McGowan - Needham & Company

Okay, thanks. And Pete, did you, I am now sure I heard you right, did you say that there would be a slight gross margin improvement in the second quarter or rather for the end of the year?

Peter Nicholson

Yes, as we look forward to say what is going to hit us second half, we do expect some on cost improvement. We are seeing some freight savings both on the freight-in and the freight-out side, and also we do expect to see some better mix with shift of play in the second half as that category has a bigger impact in our overall net sales percentage.

Curtis Stoelting

But Sean, I do not think Pete said and I certainly am not telling you to expect any dramatic changes in the second quarter. We see second half as being a time when we will start to see some margin improvement.

Peter Nicholson

Right and I will say this, you asked the question about the currency impact on gross margin, it is difficult to assess the timing of it if we are at trough of the effect in terms of what we are sitting in our balance sheet and what is coming through, so with that caveat in terms of looking forward.

Sean McGowan - Needham & Company

Well, I got that and I think we would expect that kind of cost pressure in the second quarter but given the historical range of gross margins to the Company during times when things are not falling apart, wouldn’t you expect the improvement to be more than just slight in the second half?

Peter Nicholson

Well, we are doing our best Sean and we will just have to see where the chips fall and there is a lot, as you know, because you have been doing this for a long time, there is a lot of factors that play in the margins. The one that we have least control over is mix and it is hard press to figure it today and tell you what the exact product mix is going to be especially in these unpredictable times for the third and fourth quarter.

Sean McGowan - Needham & Company

Okay, thanks. Then two quick housekeeping things and then Curt, I have to ask you to talk a little bit more about some product things. Peter, when you were talking about the components of the cost savings, I missed the very last number, was it 3.3 of the total that came from your cost initiatives?

Peter Nicholson

Yes.

Sean McGowan - Needham & Company

Okay. And your comments on the expected tax rate, should we take from what you are saying that the reported rate for the full year should be somewhere around 35 or 36 even if it does not look like that one in the first quarter?

Peter Nicholson

That is correct.

Sean McGowan - Needham & Company

Okay. And then Curt, do you have any data regarding actual point-of-sale movement for major product categories?

Curtis Stoelting

Sean, this is the most questions you have ever asked from all of us, it is impressive. Okay, can you repeat that again?

Sean McGowan - Needham & Company

Do you have any point-of-sale information for major product categories in the first quarter? You said that the sell-through was better than the sell-in. Do you have any specifics around that?

Curtis Stoelting

Well, I do not want to get in the specifics because that is really confidential information that comes from the retailers. We look at in total and draw some conclusions. I think overall for the quarter, our experience from the data that we have access to is that sell-through was outperforming shipments throughout the quarter which said another way, retailers were working down their inventories. I do not think that is a surprise to anybody. We were working down inventories and I think all retailers across the board, big and small, were working down inventories in the first quarter.

The real question is how much longer is that going to go on. I do not have a great answer for you but what my gut tells me is we are getting near there but we are getting near the end of the cycle. We did see some improvement in ordering patterns from the larger retailers especially in March and as continued in April so that gives us some sense that we may be at the bottom of the inventory liquidation cycle and I do not think the retailers are going to be building inventories but I think we have maybe reached the point of closer equilibrium.

Sean McGowan - Needham & Company

Right, okay, thank you very much.

Operator

Your next question comes from the line of Tim Condor - Wells Fargo.

Timothy Condor - Wells Fargo

Thank you. Just a few gentlemen, following on Sean’s question here, Curt, can you give us a little color on a broader geographic basis how your sell-through went during the quarter and then also just a comment whether your inventories in the channel, where they are in a year-over-year basis up, down, or flat and then staying on that line, any issues remaining from a credit risk perspective with some of your smaller customers?

Curtis Stoelting

Okay, so that was like three for one, right Tim?

Timothy Condor - Wells Fargo

Three for one, we are not done yet.

Curtis Stoelting

Okay, well, it is just good. I am glad you are all so engaged today. We will go back, on the credit side, I think one pleasant surprise out of the current economic condition is we really have not seen that the level of credits or I should say bankruptcies especially in North America that we have in previous cycles, previous downturns. I do not really know why that is but I do not know if it has caused most of the retailers to stay or better capitalize but obviously we had a couple last year that were not big customer of ours, [KB] and Woolworths in the United Kingdom and we did not have significant exposure in those but we really have not seen a lot of trauma there but we continue to monitor credit across both with our large customers and our small customers very carefully and we know we are not out of woods in terms of that risk.

Inventory in the channel, again, we do not have perfect visibility for this Tim. We only see our little piece and I really cannot tell you more than what I already said earlier in the call. The retailers for all the right reasons, big and small, have been liquidating inventories to manage their cash flow and manage their working capital. I plug them for that. That is what we have been doing as well, and I do not know when we are going to hit bottom. I think we are very close on the MIT side. On the play side, I do not really think retailers are going to continue to, pardon the pun ‘play it close’ until just close to the holidays as they can.

Timothy Condor - Wells Fargo

Okay, but again…

Curtis Stoelting

Last one, was there a third one that I did not cover?

Timothy Condor - Wells Fargo

I guess, on a year-over-year basis there occurred on your inventories that are in the channel and then adjusting for discontinuances or however you want to look at it? Are they lower on a year-over-year basis than they were this time last year?

Curtis Stoelting

I think they have to be, again, given everything that we have already said.

Timothy Condor - Wells Fargo

Okay, Then the other one was if you maybe comment on that the sell-through were a little bit better or worse internationally versus domestic?

Curtis Stoelting

I have better visibility on the domestic side. Internationally, the business has actually been very stable if you look at it in local currencies. The market that is probably the softest, if you had to pick out one on the international side, is the United Kingdom, but what we are seeing there is similar to what we are seeing in the United States which again as retailers feel that it is not that bad, shipments are really soft throughout the first quarter but we seem to see some improvement as we have moved through the holiday, Easter seasons in the current period.

So, overall, I do not think the dynamics are much different than what we are seeing in the North American markets.

Timothy Condor - Wells Fargo

Okay. And then if you could just refresh us on your pricing, your price increases year-over-year anything recently implemented and then how should we think about it for the spring set versus what we are then looking for the customer’s holiday set?

Curtis Stoelting

Tim that is a good question, I am glad you brought that up. If you remember last year, we raised prices in 2008; most of those price increases took effect about mid-year, last year June-July timeframe. So, we certainly got some benefits from that on a comparable basis in the first quarter.

Additionally, in our international business unit, we took some price increases in the first quarter a lot of them did not take affect until late in the first quarter and we are taking additional price increases mid-year in our international and then as a reflection of really a lot of the currency factors that are going on.

So, I do believe that we have seen some improvement there but we are not expecting to overcome the headwinds that we are facing on the current exchange ratios but we will be picking some margin back up on those price increases.

For North America this year, obviously we took price on new products but we made the strategic decision early in the year given the economic times not to make a major price move in the North American market. We wanted to build share and our MIT business which is happening as we speak and we felt that we have taken up price last year and that we would work our way through some of the cost factors that would influence us in the first half but there is a way through due to cost improvements in the second half. So, that is really where we are on the pricing side.

Timothy Condor - Wells Fargo

If you look at overall, Curt, in ’09, what would you say maybe first half versus the second half would be blended in global pricing?

Curtis Stoelting

I do not have a good number for you on that Tim. It is something that I wish I had at my fingertips and I think we will probably have a little better visibility once we know for sure how much of the mid-year price increases going to stick internationally. Whatever my senses will do it will just be fine there.

Timothy Condor - Wells Fargo

Okay. And then a couple of housekeeping items here, back to the Forex impact maybe on the EBIT and net income line, a little detail there and then if you could potentially give us what your other current asset line was on the balance sheet?

Peter Nicholson

In terms of taking the exchange rate impact on the net income, we used a lot of hundred basis points and slow that down that is going to be, at least, in terms of that. In terms of the other incomes, obviously you see that we had a $700,000 hit on top of that in other expense. So, I do not know how you want to look at that but if you put those two together that is we happened.

Curtis Stoelting

Yes, we are negative at the operating margin line and likewise operating and other income while actual transaction was on the line.

Timothy Condor - Wells Fargo

Okay.

Curtis Stoelting

You can calculate out the EPS impact.

Timothy Condor - Wells Fargo

Okay, okay. And then the other current asset line on the balance sheet is sort of trend to look at working capital collective?

Peter Nicholson

I will get that for you. Hang on a second, go ahead and do you have another question?

Timothy Condor - Wells Fargo

Yes, I mean as we have been looked at to try to get through this ’09 here for multiple challenges all the way around, in ’10 would that maybe be a point we guys what may start to look again at potential acquisitions, share repo, or would be the first priority continue to pay out the debt first?

Curtis Stoelting

Well, I think in the current environment we have been very clear of what our objectives are and those are not cutback on our investment in new products, first and foremost because innovation in new products are what we are in the marketplace. So, we are not doing that. But we are being very judicious about where we spend our money both in terms of CapEx and certainly where we spend our money in terms of operating expenses because we need to get the business back in a more profitable format and we have made some great strides on that.

Secondly, we want to continue to manage our cash very carefully and you can see the moves we made in the fourth quarter and in the first quarter. We have done a great job of reducing our debt. We are going to be going into our working capital building cycle here so we will be borrowing some money back more likelier than not under our line of credit which is all in the plan. But right now our goal is to generate in these tough economic times as much our free cash flows possible and to pay on debt and we will continue to look consistent with our strategic plan at all sorts of opportunities whether that is new products, acquisitions, and we will keep working hard on those things but they will come when the time is right and in the meantime we will continue to generate free cash flow and paid on debt.

Peter Nicholson

And, Tim, to answer you question, there is less than a half a million dollar reduction in other assets during the 31st.

Timothy Condor - Wells Fargo

Okay, versus December 31?

Peter Nicholson

Correct.

Operator

Your next question comes from the line of Linda Bolton Weiser - Caris & Company.

Linda Bolton Weiser - Caris & Company

Hi, how are you doing?

Curtis Stoelting

Hi Linda, how are you today?

Linda Bolton Weiser - Caris & Company

I am okay. Almost everything has been asked so I do not know what to say.

Curtis Stoelting

Do not feel compelled.

Linda Bolton Weiser - Caris & Company

No, well, actually on the raw material front, I mean zinc is one thing that has been going up a lot lately, can you remind us like what the exposure is for you now? I am thinking of 5% of your cost of goods sold, something like that. And are you engaged in any hedging to protect yourself against increases there?

Curtis Stoelting

Well, we have always had short term hedges on zinc. We continue to have a program in place. I do not know the exact impact on our raw materials as a percentage. It is probably not as high as it used to be given that we have discontinued a lot of the more collectible oriented product lines which tended to be die-cast oriented.

Today, our product lines that consumed die-casts are John Deere collectible and toy product lines and our some of our die-cast product lines Take Along Thomas brand. We do not see in the marketplace any…we are not really concerned at this point about where zinc is going.

Linda Bolton Weiser - Caris & Company

Okay. And I missed it, did you say what CapEx was in the quarter?

Peter Nicholson

Yes, we did. It was $2 million.

Linda Bolton Weiser - Caris & Company

Two million, okay.

Peter Nicholson

Yes.

Linda Bolton Weiser - Caris & Company

And then, can you just comment on some reasons why your sales performance for Thomas would not, why your sales would be up whereas Take Along down? I mean is there a difference in how much inventory is needed to reduce the retail or is the point of sale data mirroring what your sales were? I mean can you just elaborate a little bit more on maybe the difference in performance between the two lines?

Curtis Stoelting

Well, yes, I do not know if I can. I do not like to talk about performance compared to those two lines. But I would say overall I think our wood performed well because it is a very resilient brand. Even though it is high priced, it is a great value to the consumer and in good times and bad consumers will still spend money on things that are of high value and I think that is why that product lines holding up so well.

The promotional calendar I think was similar year-to-year a little bit of timing difference but nothing material in terms of the results. I think obviously there were some factors in the past that might have held sales down of wood that are not there anymore and we expect that to continue and for that product line to perform well throughout 2009 and 2010.

Linda Bolton Weiser - Caris & Company

Okay. And then just for 2010, I mean you sounded pretty confident in your statement about the infant care products continuing to grow. Do you have specific plans to expand into other categories within that area or what is the root of your confidence there on growth?

Curtis Stoelting

Well, really, other than the infant toy business which is a tough low margin business for most everybody that is in it. All of those categories showed growth both in, I think three out of the four, showed growth in the fourth quarter and all for those categories showed growth in the first quarter, and I think it just shows how well we are delivering on new product innovation as expanding distribution for our strong product lines and yes we do have a good pipeline for 2010 from a competitive point of view. We are not going to reveal what new categories were going into but we will continue to expand our gear program both in travel and in other infant and toddler gear in 2010. We will continue to grow our infant and toddler feeding businesses and we will also continue to grow on care area in some new categories.

So, we are doing very well in a tough market and right now I think we are taking market share and our plans are continue to do that through new product innovation.

Linda Bolton Weiser - Caris & Company

Okay. And, well, I guess that is it. Thank you very much.

Operator

Your next question comes from the line of Gerrick Johnson - BMO Capital Markets.

Gerrick Johnson - BMO Capital Markets

Hi good afternoon.

Curtis Stoelting

Hi Gerrick, it is good to have you back.

Gerrick Johnson - BMO Capital Markets

Thanks, good to have you back, as well. Thomas, you said that was up, is that shipments or retail takeaway or is that both?

Curtis Stoelting

Well, it is doing very well, again, I was referring in the release and in my comments to actual shipments on what we focus sales. It was kind of a very good quarter for Thomas despite all the other negatives that are out there today.

Gerrick Johnson - BMO Capital Markets

Right. Now, is that more or less getting back to normal after the whole [web-based stuff] or you actually seeing some real growth through incremental growth in Thomas?

Curtis Stoelting

Well, I mean what our comparison is, we are comparing to a quarter ago and we are seeing real growth. I mean we are seeing expanded distribution at retail. The retailers, the chain like retailers secure that product. They are expanding their business with Thomas Wooden Railway and we are seeing increased globally as well as we continue to globalize that business.

Gerrick Johnson - BMO Capital Markets

Okay, and more specialty retailers getting back into the line, how is that going?

Curtis Stoelting

Well, specialty overall is a tough market right now. I think you probably saw on our reporting that overall our non-chain channels of distribution had a softer quarter than our chain retailers. That is pretty much expected from our point of view. Again, retailers big and small are destocking and selling what they have off versus buying new. We expect that with our specialty toy stores that they will be back ordering stronger late second into the third and fourth quarters closer to the holidays versus in the first quarter.

Gerrick Johnson - BMO Capital Markets

Okay. And you cannot talk about this, so you answered Linda’s question, but with the mother, infant and toddler business that had four straight quarters of declines but the last two quarters have been two quarters of improvement. What kind of change happened there? Why we are now growing this business when it was in decline and it seems like it is a more difficult environment now for it to grow but it is actually growing and the other prior quarters of end of ’07 or ’08 seems a little bit easier yet you saw declines. What has kind of change in that business for you guys?

Curtis Stoelting

Well, you probably right Gerrick. I cannot ever remember an easy quarter. Maybe you can and I cannot. But I believe if you look at it from a little longer perspective since when we acquired the First Years in the third quarter of 2004, I think we grow at every quarter up until three to four that you mentioned there. At that point, what we really were doing we were transitioned the business. We moved out of a lot of lower margin, low volume skews and it did have an impact on the top line which you have chronicled very well. But it was the right thing to do that reposition and put out our energy into better or higher growth categories and I just think it is a transition period which is natural in most to every business that we were going through.

So, overall we have more than, we have had a positive compounded annual growth rate on that business since we bought it in 2004 and we expect that positive trend to continue as we go forward.

Gerrick Johnson - BMO Capital Markets

Okay, alright, great, thank you.

Operator

(Operators Instructions) You have a follow up question from the line of Sean McGowan - Needham & Company.

Sean McGowan - Needham & Company

Cannot get me out of here yet.

Curtis Stoelting

That is okay, Sean. No, I am glad you are so energized.

Sean McGowan - Needham & Company

I am always energized, just not always for you.

Curtis Stoelting

No, that is good.

Sean McGowan - Needham & Company

Okay, a couple things here, gross margin is I want to go back to that question, when you were forecasting some improvement, were you talking improvement over the first quarter level or improvement over the last year?

Curtis Stoelting

Over the first quarter because that is lower number, right?

Sean McGowan - Needham & Company

Yes, set that bar low [Inaudible]

Peter Nicholson

From where we are today Sean.

Sean McGowan - Needham & Company

Well, let me ask at this time, would expect, I mean given there were quite a number of things last year that adversely affected your gross margins some of which are continuing some of which are not, would you expect the full year gross margin to be higher or lower than a year ago?

Curtis Stoelting

It would just be so much easier if you could just mail your projection over to me and I would fill it out and send it back to you.

Peter Nicholson

Well, again, you have three quarters’ worth of tough comparison for currency, so that is a tough one to get over Sean.

Sean McGowan - Needham & Company

Yes, it is true.

Peter Nicholson

So that is the tough one, so…

Sean McGowan - Needham & Company

It gets a lot easier in the bigger quarter, though, does not it, the fourth quarter?

Curtis Stoelting

We need some operating leverage that helps. Right now this is the first time I can remember in about six or eight quarters that looking forward we think there are some positive margin news at the gross line versus negative.

So, I do not know where it is going to end up. We are going to get back the 55% of gross profits like we used to have back in the old racing champions days, probably not. But can we get back at some point in the future, to 45 plus, I hope so. That is the goal. But I do not know how to say when it is going to be.

Sean McGowan - Needham & Company

Okay, I just wanted to see what your benchmark was there for that comment. Second question then just to make sure we are on the right page here, when you talk about the commentary in the second quarter, it may fall below last year’s adjusted level. The adjusted was level was $0.21 for the second quarter, right?

Peter Nicholson

Correct.

Sean McGowan - Needham & Company

Thanks a lot.

Operator

You have a follow up question from the line of Linda Bolton Weiser - Caris & Company.

Linda Bolton Weiser - Caris & Company

Hi. I was just wondering how Playtex is performing in cups since being acquired by Energizer. Have they had any major innovative new product launches or anything recently?

Curtis Stoelting

Well, I do not know if they are performing because they do not break it out for me. I wish they would but they do not. But we really have not seen a lot of new products from our competitors when as you know we faced a lot of competition in the infant and toddler feeding space and overall I think we are holding our own very strong against any number of competitors.

Linda Bolton Weiser - Caris & Company

Okay, thanks.

Operator

(Operators Instructions) I am showing no further questions at this time.

Curtis Stoelting

Okay, thanks Ellie and I want to thank everyone for their participation on the call today. We look forward to speaking with you throughout the rest of 2009. Have a good evening.

Operator

This does conclude today’s conference. You may now disconnect.

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