Tupperware Brands Q4 2007 Earnings Call Transcript

Jan.30.08 | About: Tupperware Brands (TUP)

Tupperware Brands Corporation (NYSE:TUP)

Q4 2007 Earnings Call

January 30, 2008 10:00 am ET

Executives

Rick Goings - Chairman and CEO

Mike Poteshman - SVP, CFO

Teresa Burchfield - VP of IR

Analysts

Doug Lane - Jefferies

Mimi Noel - Sidoti & Company

Dara Mohsenian - JPMorgan

Chad Bowen - Raymond James

Greg Hillman - First Wilshire Securities

Operator

Good day, everyone and welcome to the Tupperware Brands Corporation yearend 2007 Earnings Call. Today's call is being recorded. At this time for opening remarks and introductions, I would like to turn the call over to Mr. Rick Goings. Please go ahead, sir.

Rick Goings

Thank you, Diana, and good morning, everyone. I am here with Mike Poteshman, our CFO; and Teresa Burchfield, our VP of Investor Relations. As always, some of the discussions are going to involve forward-looking statements and -- anyway you all know the drill on this.

Looking at fourth quarter in 2007, we were again encouraged to see the transformation of this business from what you all know is primarily a food storage company 10 years ago to now our global portfolio of direct selling companies. Importantly, each of our direct selling companies do have their own brand names, sales force, product line, and selling methods, and what we really try to do is match all of those to what's appropriate in their particular market.

However, the underlying business drivers across the entire portfolio are basically the same. Being a global portfolio is now allowing us to leverage our strength across all of these markets and at the same time, we've been able to deliver better top-line growth but also better bottom-line profitability. Our portfolio also serves as a natural hedge to offset not only what's going on in currency but also negative trends that sometimes happen in isolated markets.

As we said in our release yesterday and you people on the call know better than us investors appear to be concerned right now about the weakness of US dollar in the economy. Therefore, it's a good place to be with our global direct selling portfolio. We only have 16% of our sales in the US, 84% come from outside the US.

And as you would expect to the extent the dollar declines further, we're going to see even more benefit from currency, but we had a great year even without the added impact of currency.

We believe that we're only going to see modest impact on lower consumer spending in the US. And again, its only 16% of our business is the Tupperware brands business in the US and our BeautiControl business. And importantly, both of these had double-digit sales growth in the fourth quarter.

It is also worth noting that it has been our experience that direct selling, this industry is somewhat countercyclical. Meaning, generally, we see higher recruiting as unemployment rises and individuals look for alternative ways to support the family. We provide that opportunity.

However, in periods of sustained higher unemployment in established markets, such as we've seen in Germany over the past decade, we can sort of feel the impact and as you would know, Germany is mostly a result of reunification in the early 90s.

This is really when -- today when being the global portfolio has its benefit, for example, for the first three quarters of 2007, we didn't see a sales increase in our German business which is our largest Tupperware business. Our just beauty business is a Fuller business in Mexico.

However, we were still able to deliver positive results. Double-digit year-over-year increases in many of the other markets enabled us to close the year with company sales of 9% and segment profit up 18% in local currency, excluding purchase accounting amortization.

By the way, you probably have noticed a modification in our earnings release format. We believe this format will provide a better platform from commentary on our specific business segments and the overall company. Having said that, I'll do my best this morning not to be redundant on points we made in our release.

I said we were pleased with the finish of the fourth quarter with local currency growth in all of our segments and actually double-digit everywhere, but Europe where we were still up by 6%. Our guidance by the way in Q4 was to be up 4% to 6% in local currency and we came in at 11%. If I bifurcate the businesses, the Tupperware segments were up 9% and the Beauty segments were up 14%.

Mike and I were just talking about it, that we really haven't seen the kick-in from some of the other Beauty businesses. Beauty Others as a matter of fact last year, lost money. So we've got lot of potential going forward.

With the added 8 percentage point of benefit from foreign exchange, we were up 19% on a reported basis. By the way, the biggest plus is versus our outlook in Q4 where Germany, Australia and markets throughout Central and South America.

I want to turn to some of our strategic platform just for a quick updates, so you get a feeling how we're doing progress wise. As I had said before, we're certainly not only we ever will declare victory, we'll declare progress on this.

As you know, refreshing the core established Tupperware business has been a key initiative. Here, we are really focusing on three things and we are going to continue to as I have sat with our management team, the wolf is always out there in the yard, sometimes it is closer to the door than we want them to be. And so we have to be really vigilant with these.

These three drivers are unique products, a dynamic selling situation, and a lucrative sales force structure. We've got to always continue to keep these contemporary.

We are pleased that our established markets grew 5% in local currency for the quarter. And also, worth noting is we had double-digit percentage growth in a number of our Tupperware and Beauty markets including both Tupperware USA and BeautiControl USA and Tupperware Australia.

We are also encouraged, but by the way on Australia, we have been there 45 years and it shows that even in an established market if you do the right contemporization with products, selling situation, and sales force structure, you can keep growing.

We are also encouraged by Germany's fourth quarter. Germany achieved a 3% global currency sales increase following double-digit declines in the first three quarters. And I will say a little more about Germany in just a minute.

Our Tupperware US business continues to gain attraction in Q4. That was our sixth consecutive quarter of sales growth and the fourth with double-digit growth. This, by the way was in spite of a fire that we reported to you that destroyed our Hemingway, South Carolina finished goods warehouse and all of the inventory in the US on December 11th.

The best news there was nobody was injured. The fire resulted in the total loss of that dense storage and inventory. Manufacturing capability, however, wasn't impacted. The management team immediately put in place a continuity procedure and we ramped up production in Hemingway and other locations.

And we were pleased to see inventory -- it was started arriving from other facilities around the world in just a few days. We were also able to utilize an existing site warehouse that was underutilized. So in a matter of days, we were shipping orders once again to the sales force.

Now, when we began our January sales program for the US business, we had available for shipment about 75% of the products that we had in the catalogue. And I'm pleased to say that, as of today, we're up back to normal again with regard to our fulfillment, capability.

And I just can't say enough about how the management team of the US managed this crisis, how they managed communication with the sales force. Our sales force remained engaged. There was some disruption at lower levels of the sales force due to the perception of no product availability.

Fortunately, we were able to take advantage of the added size of the sales force. So we're not expecting any long-term impact. By the way, it really spoke also to the culture of our manufacturing and distribution facility in South Carolina. So in fact, we just closed our January sales cycle for the US business last Saturday and our results were right inline with expectations.

So net-net after a few years of investment and in spite of the fire, Tupperware US is back on the grow again and profitable, and not only for the quarter, but for the full year. And anecdotally what I see is when we have these recognition events, younger enthusiastic people walking across the stage and what's also nice to see is a lot of long-serving veterans that are arm-in-arm with them across the stage. So we saved a lot of the talent as we went through the transition, and again, bravo to [Conway] and their whole management team.

Regarding Germany, as I mentioned earlier sales we're up 3%, profit was down slightly from last year, and a decrease in profit was a result of the planned continual promotional activity that increased sales force leadership. But that's really aimed at driving future top line growth. Here, very importantly, I am talking about incentives not discounting.

The total Germany sales force at the end of the year was just slightly below 2006. However, we are seeing an increase in the average party sales as well as increasing in the manager count. That's really important because managers drive not only recruiting but also they are most productive sellers in terms of parties held per person and the amount sold per party.

Going forward, we're hopeful Germany's macroeconomic environment will continue to improve and the new Federal Chancellors Angela Merkel and Sarkozy in France are leading the two dominant markets in Europe. We believe are really going to help with job creation as a whole new attitude there as I am saying.

And while improving the economy there it's going to help our business. It's going to take time. So we have very modest goals ahead for these business units but great management teams, who did a super job.

As I mentioned in our last call, Simon Hemus, the President and Chief Operating Officer, Tupperware Brands, he has assembled a team of some of our most experienced people, and they are working with Mark [Neikirk] and the management team there. Our longer term strategy to stimulate growth in Germany. Frankly, we're using as a template Australia. The ongoing actions being taken are firstly some short-term, continued promotions for recruiting activity, and trying to get more dynamic products selection in the right periods.

More medium-term, we are working to strengthen the sales force structure with the additional level of management. That's called a team leader. And it's now been years since we've had this in place. And we're beginning to see traction, but I would call the traction modest. We also added a new product program coming from things we design and also from outsourcing. This can enable us to get new consumers.

Finally, we're increasing the focus on the ways for our sales force to reach new hostesses that will grow the number of consumers that Germany reaches. By the way, 85% of homes in Germany, according to a latest research have Tupperware in them and the average number is 15. And I’ve got to congratulate again, Mark and our management team there. They have just initiated some very interesting trading programs.

As an example of our established market, again, Australia really would be the one to look at. Our upturn there began a number of years ago. And for 2007, we had strong double-digit sales growth from a larger sales force. And by the way, I need to include New Zealand there as well and we achieved even stronger operating profit there.

We really have reinvigorated the product line with marketing and we've made Tupperware, the management team there, as we made it a lifestyle choice. And I'm so proud of their brochures, their catalogues and the image of the company. Also, they have done a great job implementing this team leader program. So you really get smaller spans of control and it leads to more dynamic leadership.

Another one of our key strategy is for not only top line but bottom line growth has been and will continue to be growing our emerging markets. As a reminder for discussion purposes, we use the World Bank measurement of GDP per capita to identify emerging markets.

And this, by the way, applies to not only our Tupperware businesses but our Beauty businesses as well. Our emerging markets were 44% of total sales in the fourth quarter and grew 19% in local currency. China, the CIS which formerly is the Soviet Union, South Africa, Central and South America and Mexico are the larger contributors in the category of the emerging market.

By segment, the emerging markets in Europe delivered top line growth of about 22% the largest of these was the former Soviet Union, the CSI. Turkey, where our business is just on fire and was just there -- and going back again next month, this market of 75 million people has great potential and also South Africa. By the way, the CSI continues to do very well with the 30% increase in the former Soviet Union in the total and average active sales force for not only quarter but the year.

In Asia Pacific, in that segment, that includes by the way China, India, Indonesia, Korea plus some other smaller markets. Sales were up 30% in local currency during the quarter. As you know, we have a different kind of a hybrid selling situation in China utilizing store fronts, but they also do parties.

We finished the quarter with now 2,700 of these, up from 2,400 at the end of 2006 and we continue to see improvement in outlet productivity and more new outlets coming online with an objective also of reduction in the number of closures that we have. So management teams are doing a great job. We are pleased to see also a ramping up with the parties held in these stores fronts.

Looking at sales in Mexico, for both Tupperware and Beauty, they had strong growth in the quarter. Again, this includes our largest business Fuller Cosmeticos and I will drill down on that in a second.

For the year, we made also progress across all of our emerging markets there, which are comprised of 45% of total sales. They continue by the way to act as a growth engine with sales increasing high double-digit and profit 32% over 2006.

Now, let me speak on the progress with our third platform. Again, second platform was emerging markets, third is expanding Beauty. And by the way, these haven't changed in the last couple of years and I don't believe they will.

For the year, Beauty grew double-digit in sales and comprised 36% of the total. Over the next several years, we expect to see Beauty become even larger percentage of our business. And frankly before I am gone, I believe it'll be more than 50% of the business.

Fuller Cosmeticos delivered double-digit sales increase there in Mexico in the fourth quarter and this was true for the full year as well. Now, we have a sales force of 480,000 in Mexico. So it really continues to grow.

Again, [Arturo Alessandrio] and great management team have really established a wonderful business template that we are now using in South America, in our other emerging Beauty businesses and that's namely Fuller Brazil where we are still on the investment mode and Argentina.

By the way in Argentina, we just moved in our former Head of Sales in our Mexican business to be the Managing Director in Argentina. So, we are expecting Rafael to replicate the great job he did in Mexico.

During 2007, we saw traction in Brazil and Argentina with the sales force and we are going to continue to focus on these markets in 2008. I am going to be spending a good deal of time because this is you all know 55% of all cosmetic sales in Latin America is from direct selling. They like to sell this way and they like to buy this way and the average Latin American spends more per capita on beauty than does the average American.

By the way our Nuvo Cosmetics business in Uruguay, it's a small country, but I am so pleased to see, we have now got a 50% market share of the entire direct selling beauty industry there. And we even have some competitors exit the market.

By the way, we saw good progress throughout the year in BeautiControl here in North America as well and the US and Canada. In the fourth quarter, it delivered double-digit sales growth, it's a second quarter in a row.

In BeautiControl North America, we continue to focus on getting sales force active early and to make them more productive, improve their retention and also trying to get more people into leadership programs, and this is where somebody really becomes fulltime in BeautiControl. To this end we saw solid increases in our leadership ranks, as we closed the year.

We did take a hit on the west, which reflected some of the aggressive product to offers and we had elevated distribution cost which began in 2002, as we moved in to our new facility there. But we've got a double-digit sales force size advantage and improved leadership numbers, as we move into this year. So, we're pretty well buffered from what happens in the US economy.

Given the high level of also promotional activity in the second half of 2007, it's our hope that we're going to be able to convert these larger sales force into increase sales going forward.

By the way, one of the most significant challenges we face after we did the Sara Lee acquisition and we shared this with you was the Nutrimetics business, the largest one being in Australia and New Zealand, which frankly had deteriorated under Sara Lee's ownership and leadership. By the way, they paid almost a quarter of a billion for those businesses about seven years ago.

We've focused on these businesses at leveraging our strengths and also what we have learned in other business units. Specifically, our business BeautiControl, what we've done in Australia with Nutrimetics is, we implemented many of the same kinds of programs, got a great management team in place there. They came out of BeautiControl right as the topper key.

And we've made progress in reestablishing that Nutrimetics business from what really came almost a wholesale buyer base with more than 90% of sales is coming from just wholesale customers to now back to a party plan direct selling company.

We had modestly lower sales and profit than last year. However, it's a different business than it was a year ago. It's early days of the turnaround and we're going to stay steady and remain focus on these activities. We feel very good about the future of this business. I think, the best news about the Nutrimetics business is the heavy lifting is behind us.

A final strategy for Tupperware brands has been contemporizing our image from the old Tupperware business to new global portfolio of fresh and contemporary company. Here we focused our PR efforts in helping people view our brand through a different lens. For example, we put Tupperware in unexpected places with unexpected people. By the way, I made a Super bowl party in New York City tonight that is hosted by Ice-T and as you know he runs on-and-on about his last Tupperware party on [Quoin ]. So, this gets people to think about Tupperware in a different way.

We also brought Brooke Shields on Board as our spokesperson for our Chain of Confidence initiative which really focuses on bringing Tupperware on positive influence on girls and women through enlightening and powering and encouraging them and that's what Tupperware business does, 2 million strong all over the world.

Good news shows that our research indicates that the needle is moving, as a matter of fact it moved up 25% more thought we were code-and-code "hip and happening business"

So, in summary, the global portfolio, we believe is a better investment then it was in 2007. We've had good cash flow allowing us to pay down our debt, I think, Mike will report on that I think we're down to 53% there debt of total cap.

We're also keep continue to support our dividend, our diversified products as well as diversified geography also. They are really going to provide us a natural hedge to mitigate the negative impact either from currency or other actions in market. So, having said that, I think, you are going to see more consistency with this kind of a portfolio.

Anyway, Mike, let me turn it over to you and then we'll open it for any questions people have.

Mike Poteshman

Okay, thanks Rick. As Rick noted, we were nicely above the outlook we gave in October for the fourth quarter local currency sales growth and earnings per share. On sales the 5 point upside in local currency growth versus the previous guidance to up 11% year-over-year came most significantly in Germany, where we hadn't expected to be up for the quarter.

Tupperware Australia, where we hadn't foreseen our strong double-digit growth accelerating in the quarter. And several of the units in the Beauty Other segment, where in particular our Venezuela and Brazilian units continued with strong results.

Diluted EPS at $0.93 after adjustments was $0.10 over the hind of our October guidance, which came mainly from the sales upsides in Germany and Tupperware Australia along with the lower tax rate, largely reflecting an IRS decision in late November. This IRS decision was not made specifically related to review of our facts or returns. It was something that applied to everyone.

We also got a little bit of incremental help from stronger foreign currencies, as the actual benefit for the quarter was $0.10 versus the $0.06 to $0.08 that we've included in our guidance.

And looking at the quarterly comparisons versus last year, as highlighted in yesterday's release we have strong local currency sales increases in all of our segments ranging from 6% in Europe to 18% of Beauty Other.

We also improved our segment profit return on sales by 1.5 percentage points to 16.7% excluding purchase accounting amortization from both years with all segments except Beauty North America contributing.

All of this led to an improvement in diluted earnings per share of $0.23 on a GAAP basis and $0.19 after adjustments, setting aside the $0.10 upside from foreign exchange. This means our EPS after adjustments improved $0.09 in local currency or 11% year-over-year.

On a full year basis compared with last year, we were up 9% in local currency sales with all segments up. This resulted in local currency EPS excluding adjustment items of $2.25 of $0.46 versus 2006.

Importantly, $0.40 of this increase came from operations. Positive effects of $0.19 and lower interest expense up $0.11 were mostly offset by a higher but still very favorable tax rate that hit us for $0.19, and dilution cost by a higher number of shares of $0.05.

Turning now to our balance sheet and cash flow. We also had favorable results versus our October outlook in last year. Our net short-term trade receivables stood at a $161 million at the end of the 2007, up about $8 million versus the end of 2006 in constant currency. This was a two day improvement given our higher sales.

Net inventory at $270 million was up $22 million versus 2006 in constant currency, and this was a three day improvement. Our October outlook for cash from operating activities net of investing activities which for 2007 to commented $100 million to $110 million or actual it was a $152 million with the upset reflecting about $7 million in the sale of former Tupperware Philippines manufacturing plant, and insurance proceeds from the Hemingway fire, along with the upside and any come from our October guidance higher than expected level of accruals.

We were pleased to once again be able to more to convert our net income to cash. This allowed us to reduce our debt by $88 million in 2007 and resulted in a debt to total capital ratio 53% as Rick mentioned, which was down from 63% at the end of 2006. Of course this ratio is also impacted by our equity which rose in 2007 from earnings net of dividend and also from stock option exercises and reduction in our cumulative translation adjustments.

There was a smaller negative impact from our net equity hedges. A ratio of debt to EBITDA is defined in our credit agreement improved to 2.2 times in 2007 versus 3 times in 2006. As we stated before, we target bringing our leverage down such that we get into the 1.5 to 2 times range.

Looking to cash flow for 2008, we expect to be in the $100 million to $110 million range. Again, this is looking at cash from operating activities, net of cash from investing activity. This is on a GAAP basis, as is the $152 million we made in 2007. While we are expecting an increase in cash flow in 2008 versus 2007 related to higher net income, we have some large payments in the first quarter this year that we didn't last year, which are for VAT and payouts under our hedge positions where the strong Euro that has helped us on sales and earnings is hitting us on the hedges.

Our 2008 outlook for capital spending is to be in the $65 million to $70 million range. In 2007, we spent $66 million including $16 million under a capital lease. I would like to highlight that we don't have any amounts in our income statement related to the Hemingway fire.

Based on our insurance coverage and the cost we have incurred and anticipate in current, we don't expect to have any net expense going forward. We do have in our December balance sheet between $5 million and $6 million that we expect to collect in the future from our insurance company including $3.5 million expected in February. This is on top of $3 million that we've already received in December.

Turning now to our outlook before we open the call to questions. First, we'd like to explicitly say today, that going forward, in between our regular quarterly releases, if we see that we are likely to significantly miss our guidance range on the downside, we'll make an announcement on that at that time.

Turning now to full year 2008, we see sales increasing 5% to 7% in local currency, which based on the currently favorable exchange rates we translate into an increase of 8% to 10% on a reported basis.

Our GAAP diluted earnings per share all it range $2.37 to $2.47 and excluding adjustment items is $2.50 to $2.60 versus 2007's $2.25. This 11% to 16% improvement includes $0.10 to $0.12 or 4 to 5 percentage point bump on stronger foreign currency.

Included in the outlook, unallocated corporate costs in the $43 million to $44 million range are about in line with 2007. And net interest expense of $33 million to $34 million versus $39 million in 2007.

The effective tax rate excluding adjustment items is expected to rise in 2007 to 18.4% to about 23% in 2008.

Our outlook for adjustment items is for about $10 million in pre-tax gains from land sales and insurance recoveries, which is mainly for the sale of our former Belgium manufacturing facility expected in the first quarter. It does not include any insurance recovery income from the Hemingway fire. $10 million pre-tax reengineering costs were expected and $9.5 million pre-tax purchase accounting, intangibles amortization.

For the net of the adjustment items is $9.5 million of pre-tax expense. On a segment basis, sales in the Tupperware Brands segments are expected to rise in the 4% to 6% range for the full year and in the Beauty segments in the 7% to 9% range in local currency.

The overall increase of 5% to 7% being below the 2007 actual local currency sales increase of 9% reflects a more moderate growth rate expected in some of our established markets.

Profit in the segments is expected to grow in line to slightly above the rate of sales, except in Beauty Other where we had a loss of $3 million in 2007 excluding purchase, accounting, amortization and expected small profit in 2008.

The first quarter outlook is also for 5% to 7% increase in local currency sales with 9 percentage point increase on reported basis for 3% to 15% increase including the benefit of stronger currencies.

The diluted EPS outlook is for $0.50 to $0.55 on a GAAP basis and $0.44 to $0.49 excluding adjustment items. This compares with $0.36 in the first quarter of 2007 excluding items and reflects a benefit from stronger foreign currencies of $0.05 to $0.07.

The increase in local currency primarily reflects higher profit in Europe with the other segments flat to up slightly along with lower interest expense and the lower tax rate.

And now, we would like to turn the call over for questions.

Question-and-Answer Session

Operator

Thank you, sir. (Operator Instructions) And we'll go first today to Doug Lane of Jefferies.

Doug Lane - Jefferies

Hi, good morning everybody.

Rick Goings

Good morning, Doug.

Doug Lane - Jefferies

I have a couple of questions on the Beauty Other Rick, can you give us just maybe step back and let's focus on that a little bit because it is losing a little bit of money and is a big investment area for you these days. What are the main companies there and what sort of strategy going forward and at what point do you think we should see some margin being built next segment?

Rick Goings

Yes, Doug, we see Nutrimetics is our biggest piece of that and the main piece of Nutrimetics business is probably 80% of it is Australia and New Zealand business that's the one that Sara Lee came in and paid about a quarter of a AUS$1 billion for about seven years ago. But they had let it become almost a wholesale buying club. So, we put Rick Heath and there Rick by the way was President of our BeautiControl business.

So, Rick's been there two years and he has been converting, they basically have gotten to selling paper kits, now the kit price is well over a $100. It includes training, but that's a radical change for a business, that Nutrimetics also has branches and/or either a separate operating units in Greece, in France, in the Netherlands, the UK and a smaller one in Thailand. So that's Beauty Other.

By the way, the other piece you really would get into, or these Brazil business, which is in the investment mode. By the way, we are focused so much on Brazil because it is the third largest cosmetic market in the world. One of our competitors does $1 billion a year there.

So, we have got a good management team in place and where we're making our investment there, Doug, is in zone mangers. And she is an employee. She then recruits, trains, and motivates a sales force.

We are also -- this year we are building in our facilities there, our own cosmetic manufacturing facility that will really supply to Southern Cone. We've -- in the past had to use outsource or we ship in from the Northern markets.

Ditto with our Argentine business, there we just moved the managing director -- the Head of Sales from our Fuller Cosmeticos down there, and Rafael is focusing on growing there. So, I fully believe that -- I'll project ahead five years when we are talking about where the business is really generating dynamic growth, you will see Mexico, you will see the Central America, Venezuela, Brazil, Argentina, and [Paraguay] will be the stories there.

They are still growing those markets. By the way consumers spending at more than 8% per year, and we also intended to take share from other direct sellers. Mike, did I miss anything on that?

Mike Poteshman

I don't think so.

Rick Goings

Philippines. Yeah.

Mike Poteshman

Yeah. When you look at the KPIs, Doug, we did start to see some sales force growth in Argentina and Brazil in the back half of the year which was good. And while we're still going to be in the investment mode, in Brazil, we did forecast going from the $3 million loss for the segment in '07 to being profitable in '08. So we will start -- we do think we will start to see better profitability going forward.

Rick Goings

Yes. So we're really looking right now, Doug, I mean if the business continues to firm up the overall portfolio and that's what Mike and I was talking about and we're not even getting the advantages of Beauty Other yet.

But I mean, back to your second part of your question is looking ahead, I think you're going to see our Argentine business profitable this year. We still have another year with Brazil of investment, it's probably going to be at a reduced level, but I expect sales force in both of those markets to grow this year.

And we are seeing steady improvement with our Philippine business and we're approaching getting it back to the size it was at the time of the acquisition. That's the business it suffered most from being on the block for a year.

Doug Lane - Jefferies

Okay. Brazil is a very large direct selling market but it's really dominated by two major players. Can you give us an idea of what the share is that those two major players in Brazil currently have? And then, give us an idea which brands you're talking into Brazil currently?

Rick Goings

Yeah. Well, the two biggest players, there Avon is the biggest player, more than a $1 billon and then Natura is about $780 million there. Natura really compete at that high level of, it is usually a $10 to $12 lipstick, and Avon is more of $3 lipstick. We are bringing our Fuller Cosmeticos brand. Actually, we are operating a template just like we've done it in Mexico. So, as matter of fact, I don't think a lot of the conversion will be to the -- from the Natura. It will be more through the price value players there.

Doug Lane - Jefferies

Similar to Mexico.

Rick Goings

Excuse me.

Doug Lane - Jefferies

And that’s similar to Mexico, right where on the Fuller business in Mexico is on par with Avon in that market?

Rick Goings

Yes.

Doug Lane - Jefferies

Okay. Thank you.

Rick Goings

Yeah, whereas Avon is more color cosmetics, we've really been focused more -- we have color cosmetics but that's 60% gross margins. So we are really focusing more on fragrance which is 80% plus gross margin.

Doug Lane - Jefferies

Okay. Thank you.

Operator

And we'll take our next question from Mimi Noel of Sidoti & Company.

Mimi Noel - Sidoti & Company

Hi. Thanks. A couple of quick questions, first from Mike. Even if I make the adjustments and assume that all goes back into cost of goods, it looks like your gross margin might have eroded in the fourth quarter. First, is that accurate and secondly, if so, what was driving that pressure?

Mike Poteshman

Actually, no. The gross margin was flat for the quarter…

Mimi Noel - Sidoti & Company

Okay.

Mike Poteshman

…versus last year. And really what you saw in terms of the improvement in our list, overall, was better under DS&A line. So we were at 64.3 this year and 64.2 last year.

Mimi Noel - Sidoti & Company

Okay. And then also wanted to ask, I am not sure if you commented on it, but the Tupperware North American sales force totaled down 10%. Did you comment on that, if not, would you please?

Mike Poteshman

Yeah. That was actually sort of three markets in Tupperware North America, the US and Canada business as well as Mexico.

Mimi Noel - Sidoti & Company

Right.

Mike Poteshman

And US have a larger sales force than last year. The decrease is coming from Mexico, where we seen -- recruiting a bit below where we wanted and also though at the same time a bit ramp-up of the productivity of the sales force. So, but that's where the 10% down is coming from. It is not coming from the US.

Rick Goings

Yeah. On that same point, in Mexico, last year we saw that they were really going with a lot less expensive kit and getting people in, weren't getting trained as well and so management there focused more on upgrading the kit and upgrading the training. So we had a sales increase with a smaller sales force but that's the right way to do it.

Mimi Noel - Sidoti & Company

Okay. So you're upgrading in the quality and as a result, you've seen some migration away.

Rick Goings

Yes.

Mimi Noel - Sidoti & Company

Okay. And then the last question I had, Rick, if wouldn't mind elaborating on the team leader program that you had. I think you do it in South Africa as well as you are doing it in Germany. What exactly is the structure and why does it work?

Rick Goings

Well, just imagine, in more of an aim that you've got, you've got a distributor who has the geography. I'll pick a place, Lancaster, Pennsylvania, okay. And there is a -- although, we don't usually structure in the US but I'm taking a geography. Somebody has that market and they have the right to recruit, train and motivate. The typical distributorship will have about 300 sales force.

Up till now, you would have a level above that which would be a unit manager. And a unit manager makes 3% or 4% depending on markets of the world, okay. And so you generally would have a typical unit would be 10 to 15 people. So on a given distributorship, you would have somewhere around 25 or 30 managers.

Mimi Noel - Sidoti & Company

Okay.

Rick Goings

What we basically put in with the team leader is a sub-distributor. And that sub-distributor makes an override and they would build not only their personal open of sales force members but they would build unit managers as well. So, what it really gets down to as more full time people in the business. And you really get there is higher levels; you can grow that sales force closer to 500 people then because the spans of control are smaller.

We first did that business in Italy, but really where they really showed that they could leverage at and get larger sales forces was in South America. And it's been replicated in established markets now in the number of markets, but Australia has shown it. The German culture it slow to convert people, so I said it's -- we're making progress there but it's still modest progress there.

Mimi Noel - Sidoti & Company

Okay. That's very clear. Thanks for your help.

Rick Goings

Okay. And by the way, on that the decision to do that in these markets were our traditional distributorship model still works well. It was a way for us to contemporize this structure without having to go to the extent we had in the US, which was very, very disruptive, but we had to do it that way in the US. So I am convinced we've got the right model for the US.

Mimi Noel - Sidoti & Company

Okay. Thanks again.

Operator

And we will take our next question from Dara Mohsenian of JP Morgan.

Dara Mohsenian - JPMorgan

Hi, guys.

Rick Goings

Hi, Dara.

Dara Mohsenian - JPMorgan

For the second quarter, overall, you posted pretty significant European margin expansion really after years of decline. So, can you take us through the key buckets of what drove that margin expansion? What specifically change in the second half of the year? And then if those drivers remain in place as we move into 2008?

Mike Poteshman

Sure, Dara. We've had some pressure during the year, in the last couple of years as we've invested in Germany, trying turning things around the sales force. And we saw things level out a bit there as we got into the second half. The other thing we've seen over the last couple of years is much better returns on sales in the emerging markets.

Places like Russia and South Africa, and to some extent in Russia, that was getting the scale South Africa; we've been there, but the business has grown significantly. So, it's a rising ROS in those markets and also a greater share. And so those would be the bigger things.

Dara Mohsenian - JPMorgan

What was your segment margin there, for the quarter?

Mike Poteshman

Alright. Well, for the quarter, it was $22.7 without the items, last year it was $20.4. So, we went up a little bit over two points.

Dara Mohsenian - JPMorgan

Okay. And I assume, as you look forward those drivers should generally remain in place or we should expect to see return on sales extent in '08 in Europe?

Mike Poteshman

Yeah, what we said for the Tupperware segments was that we'll be up in these mid single-digits in sales 4% to 6%, and that we would be flats up a little bit more than that in sales, so get it in profit, in line with the sales growth a little bit better.

Dara Mohsenian - JPMorgan

Okay, alright. And then, have you seen any signs of weakening trends in any of your emerging markets or slowing macros in some of those key emerging markets, it certainly look like in the quarter but may be sequentially within Q4 or so far in January?

Rick Goings

No. As matter of fact, it's been a good January. By the way, it's been a good January and it's the best January we had in quite a few years, even in not emerging but we are about to, say, in Germany as well. So, as we always say, we do a great percentage of our business for the first quarter for Europe in the January and haven't seen in the emerging markets any big shifts.

Now, we've got some markets there that are just had been operating almost to white heat levels, the Australia which is not an emerging, but South Africa, Turkey, the former Soviet Union and when we talked here about vigilance sometimes we're looking at each other and say how can I keep continuing at that level. So, we don't want to be for it in our views going forward on that. So, I think, we are very conservative on our expectations that are going forward.

Dara Mohsenian - JPMorgan

Okay. Fair enough. That's helpful, thanks.

Operator

And we'll take our next question from Chad Bowen of Raymond James.

Chad Bowen - Raymond James

Good morning Rick, good morning Mike, and Teresa. This is Chad going in for Budd.

Rick Goings

Yes, go in.

Chad Bowen - Raymond James

I have a couple of questions for you. You talked about over the line...

Rick Goings

…take for Budd to finally put buy on us, where we are going to have to be 12...

Chad Bowen - Raymond James

Well, you certainly deserve congratulations.

Rick Goings

I talked about, just please tell Budd, I said that.

Chad Bowen - Raymond James

I will pass that along.

Rick Goings

And everybody on the line.

Chad Bowen - Raymond James

A couple of questions for you, you've talked about over the long-term, targeting local currency sales and a growth of about 5% to 7%. Could you apart for us at all sort of what are the contributors to that in terms of may be sales force growth, productivity, new products or pricing. Could you give us a little flavor for what's built into that?

Rick Goings

Basically, when we do our modeling here, there is a component. We certainly wanted get 25% of our sales. It is our target from new products and we defined new products as products that were we launched in the last several years. But, primary is one thing you look forth, average order generally doesn't go up. Productivity is a hard number to change, the key leverage point, and the size of the total and average active sales force. So, in our modeling here, it is the number one thing.

Chad Bowen - Raymond James

Great. And then, with energy prices where they are? What are you seeing in terms of resin cost, delivery cost, what's backed into your '08 guidance on that front?

Rick Goings

Mike?

Mike Poteshman

Well, Chad, I guess, it's based on where we currently are and when you look at resin component. We buy about $150 million a year of resin and we were just slightly negative in '07 versus '06 in cost to sales from resin. And based on what we see right now, we think we'll be negative in the $3 million range in 2008 versus 2007, was not a dramatic impact.

In terms of delivery costs and other things, it's kind of in line with what you've seen in any other company. There is some pressure there, but we look to -- work through it, and yeah, we have built that in our guidance.

Rick Goings

Yeah, I am going to add to it, Chad. One of the things we really have been working for to ship to more of that portfolio of business. It's just like all of you who would have portfolio as you've got some better homeruns and some that feel like, my goodness you strike out on it. What we've tried to do is, we used to be cost to goods sold was 20% when it was just a core Tupperware business, the resin component. Now, it's only 12 and we buy all over the world.

So we are in very good shape on that. And one of the other reasons why it's particularly good, our premium pricing on this, it's a small component when you're almost 70% gross margin. So I would use example, platinum prices go up. It really doesn't impact cardia watch prices that much because you're really getting the advantage of the brand.

Chad Bowen - Raymond James

Sure. And a kind of a follow-up to an earlier question and Beauty Other, could you quantify for us at all what you think you can get through eventually from our return on sales standpoint?

Rick Goings

50% of the target there. And it's a blended rate from established and emerging markets.

Chad Bowen - Raymond James

Okay. That's very helpful, and congratulations on a good quarter.

Rick Goings

Thanks, Chad.

Operator

(Operator Instructions). We will go next to Greg Hillman with First Wilshire Securities.

Greg Hillman - First Wilshire Securities

Hi. Good morning.

Rick Goings

Hi, Greg.

Greg Hillman - First Wilshire Securities

Rick, I had question about new products, just kind of about new product development kind of what's in the pipeline? But more importantly, what were the new products that were introduced in last several years account for 25% of sales currently? And what new products were introduced of convention recently, how are they doing?

Rick Goings

But, it varies by markets out there. So, that would be hard one to answer on. But, I would just tell you that it's more in categories. We've really introduced a new generation of microwave products. That's doing very well in markets where there is microwaves are used. We've introduced the silicon line that particularly has done well in our European businesses. It looks like rubber but it's red silicon and in those markets like brands where there is a high baking rate that we've done well there.

We've come out with a new category of storage products that are more specialized which is, for example, our cheese mart which basically uses a semi permeable membrane like a Gore-tex. And particularly it's -- they like that in Europe, because it will not contaminate from odor or other things the ambient environment and yet it still allows the moisture to leak.

We launched a bread and toast mart as well. We did a great product too called Happy Chopper that is like a little appliance, but great for product if you're, again, the slice and dice kind of things. So you really start to see it varies by market out there, Greg, and offline I would to be happy to have either myself or Teresa take you through more of those.

Greg Hillman - First Wilshire Securities

Great. I'll do that.

Rick Goings

We've got a lot in the works by the way, that I can't talk about right now. We've noticed that when we did flat out three years ago, which was fortune called one of the 25 most important products of the year, that in spite of us going for patent protection rubber-made came out within eight months and we basically decided, don't spend the $5 million on lawsuits. Let's just get to the next product because they can't explain it and they can't charge what we can.

Greg Hillman - First Wilshire Securities

By the way what is flat out?

Rick Goings

What is flat out? It's a product that -- it looks like a Frisbees, but you push on it, it expands like an accordion. So it's interesting. Somebody is just telling me that every time they take their kids on an aero plane there is no breakfast on any of the airplanes anymore. She fills it up with cheerios that look one of the flat outs, ask them for milk, the kid eat the cheerios and then she just collapse in the flat out and puts it's under purse. Great idea. Maybe, we also start packaging it on that way and do a joint venture with Mike.

Greg Hillman - First Wilshire Securities

Okay. Yeah, it's great. Thanks Rick.

Rick Goings

Thanks, Greg.

Operator

And gentleman, we have no further questions at this time. Mr. Goings, I'll turn the call back over to me.

Rick Goings

Again, I've repeated it before. We appreciate your support and we have not declared, I don't think you'll ever hear us declare, a victory here. We believe that all these business models need constant refreshing out there. But we really got the right kind of portfolio that organically, I believe we can produce predictable results. And, somebody was asking me late yesterday, okay, what are the big reasons to be in your stock right now? And I gave him five reasons.

I said, number one, the strength of the global direct sales management team. They are in the direct seller out there that has the kind of experience that we have, if I take in Germany or France, a Brazil, a China, many of the other direct sales companies today are basically being run as packaged goods marketers. And the drivers of the packaged goods marketing are completely different than direct selling.

Second reason, I think, you're going to see a consistent level of growth. I mean, we're going to have put some call out there, but I think we have growing confidence here. You will see this 5% to 7% growth.

Third, cash flow and dividends were down to 53. Debt-to-Cap targets were in the mid-40s level. We're going to use those -- we don't have any target out there, any other acquisitions, never say never, but we don't see the need to do that. We've got enough beachheads out there. So that basically says, we are going to start thinking about what we do with that cash with regard to either increasing the dividend or share repurchase, but nice cash flow.

Four, our PE, where Sony and GE are I think 12 and 13 as far as the most recognized and respected brand names in US. We are in the top five of most recognized. I think we're going to start getting a better multiple out there. The market will decide that. But, we want to see it clearly in the mid-20s.

And, then, I think, the fifth reason is one of the most important. Particularly in these times, where I just got back from Davos, the World Economic Forum in -- talk about a period of instability in the world, I think we're going to be a very stable investment for a number of reasons.

Firstly, if there are economic downturns, we're not a business that's a come to business, where you have to wait for people to come in to the showroom or the store. We're a go-to business. We will recruit, train and motivate larger sales forces and will get out there and leverage that.

Secondly, the mix is, I think, good for us right now. First of all, the mix in geographies and where we do our businesses, we used to be so heavily dependent just on Europe. Now, we've really got growth engines happening elsewhere in the world. Currency mix, it's not just a bet on the Euro. Right now as a matter of fact, our largest market right now is in Mexico.

If the dollar strengthens, great, we've got two great businesses here in the US, we'll leverage that. And I said earlier, raw material too, it's not a bet on resin prices anymore. So we are going to have to be constantly vigilant that we're going to stay on this constantly refreshing these businesses out there to deliver the kind of consistent results you guys expect from us. So, I think we're getting better at it.

Thank you very much for your time and interest.

Operator

And that concludes today's conference call. Thank you for your participation. You may disconnect at this time.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!