Tupperware's CEO Discusses Q2 2012 Results - Earnings Call Transcript

| About: Tupperware Brands (TUP)

Tupperware Brands Corporation (NYSE:TUP)

Q2 2012 Results Earnings Call

July 25, 2012 8:30 AM ET


Rick Goings – Chairman and CEO

Mike Poteshman – Chief Financial Officer

Teresa Burchfield – Head, Investor Relations


Olivia Tong – Bank of America - Merrill Lynch

Jason Gere – RBC Capital Markets

Bill Chappell – SunTrust

Linda Bolton-Weiser – Caris & Company

Sofya Tsinis – J. P. Morgan


Good morning. My name is Alicia, and I will be your conference operator today. At this time, I’d like to welcome everyone to the Tupperware Brands Corporation Second Quarter 2012 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator Instructions)

Thank you. I would now like to turn the conference over to Mr. Rick Goings, Chairman and CEO of Tupperware Brands. Please go ahead, sir.

Rick Goings

Thank you, Alicia, and good morning, everybody. I’m in Sao Paulo, Brazil with 4,000 numbers of our sales was doing a leadership workshop and some press release. Since Mike, our CFO; and Teresa Burchfield, Head of Investor Relations, they are there at our Orlando headquarters and should there be any kind of problem on my phone line, as there was on the last call, when I think I was in Africa. Mike is fully capable of finishing this up.

As always you guys know the -- know the drill on forward-looking statements, so I refer you to that position.

In line with our previous earnings call, style wise, Mike and I are going to try to do our best to keep our opening comments brief, so we can spend more time on answering questions that are important to you.

We did achieve a 5% currency sales increase in the quarter. Our emerging markets, which really comprised 61% of our sales in the quarter that continued to do very well, up 14%, which was in line with our first quarter after adjusting up the first quarter comparison for that extra week we had last year.

Our established markets were down 6%. When I take a look at our portfolio, it is worth noting that there are really only a handful of markets that aren’t performing well and at the level we would like them to and we are a portfolio. I’ll go through the main ones in a bit and also what -- what we’re doing in those markets.

Our adjusted EPS of $1.31, that came in above the high-end of guidance. This really came from better management of the value chain in several of our businesses in Asia, Tupperware North America and South America. We also had several adjustment items in the quarter that impacted it. Mike will get into this.

We did see some impressive performance so in a number of markets, both emerging and established and I’ll highlight some of those, and then we’ll go to the ones where we had performance issues.

Let me begin with our emerging markets. Asia-Pacific is the standout. It was up 24% as a group, as well as our South American markets, which were up 36%. In Asia-Pacific, the real stars there continue to be India and Indonesia, both up 40%.

The momentum of this business is really driven by a growing sales force. Total -- not only total but active and now more than 140,000 sales force in each of these markets, who are really in breaking the earning opportunity that is changing lives for them and their families.

The business in China and Malaysia, we’re also proud to see 20% plus growth in the quarter. China now we have 3600 of these, what we call demonstration outlets and that’s a 12% increase over last year.

I might note that this is the only business in our entire portfolio where we utilize these small kind of storefront outlets, which are owned and operated by the sales force and we do this because many of the apartments in China are simply too small for Tupperware parties, and so we’ve learned that these neighborhood locations were conveniently as both a meeting place a very real social site, and also it’s where the Tupperware parties happen, and we’re seeing consistent growth in that market.

Don’t forget about 40% of the world’s population lives in just these three countries, China, India and Indonesia, and so we’ve got a lot of runway left in this part of the -- in this part of the world. And when you see family formations, when you see growing middle class, our product line particularly in Tupperware is right in the sweet spot.

As I move to South America, our business here in Brazil and in Venezuela both grew over 40%. In Brazil, we saw a 30% increase in the sales force and we had 35% more sellers.

We did have some positive impact from higher prices, when we took a price increase here, but really the real growth in Brazil is driven by volume coming from this larger productive sales force.

Worth noting too, in South America, we opened our business in Colombia year ago and we’re really starting to see that business light up on the topline. And there’s 46 million people there, fairly primitive retail infrastructure and limited earnings opportunities for women.

And by the way, I think I mentioned, I spent an hour and a half with the U.S. ambassador in Bogotá there two months back, kidnappings are down 97%, tourism is way up. You’re going to hear more about Colombia across the Board going forward.

Turning to North America, the Tupperware Mexico business had another solid quarter, with double-digit growth. Worth noting too, that we believe with the election over and the PRI due to take control of the government that we’ll see improvements both in security and heightened growth in the economy.

I’ve developed close relationships with this new President elect and with his senior team and this is a group of Harvard MIT educated. And I think you’ll see the kind of growth you saw initially under Salinas there and we believe there will be reduction in the way he deals with the whole security issues. It’s going to be much more effective than this top down U.S. approach that this current administration has used where 56,000 killed since Calderon took over.

Let me turn to Europe, Turkey had a great quarter, up 20%. The CIS business, this is worth noting too, 7% up in the quarter. This is our first sales increase in Russia and CIS in two years and it’s really fuel by the growth in the sales force size. This is the first time we’ve laughed ourselves and we have better comparisons. We are working on stabilizing this business, making distributor structure, the right size for this market we are starting to see positive results.

Looking briefly at established markets, Germany continued to have positive momentum, growing 8% in the quarter after being up 6% in the first quarter on a run rate basis. Nordic’s up in the mid teens, same kind of growth we saw in the first quarter and despite the challenges of the macro economic environment, we saw 20% growth in both Spain and Portugal.

In Tupperware Australia, an established market, I’m pleased to say that we’re seeing light and stabilization with the sales force and sales this past quarter reaching almost last year’s level. Now we put a new country President there in place a year ago and he’s really making a difference.

Now, allow me to make a couple of comments on a few of our business where we have some performance issues and what we’re doing to fix this.

Let me begin Europe with France, a challenging quarter, spent a lot of time there. This was driven by national elections largely kind of the malaise caused by it. Consumer sales force had become distracted with what’s going on and what we did was we lost our double-digit sales force size advantage.

Elections are now over, but now we’re in the middle of summer and you all will spend a time in Europe in the summer know that you are pretty much are down. So it’s a hard time to build up your sales force recruiting.

France is an established market. We’ve been there for more than 50 years. But I want to point out, it was country of the year of our established markets for 2008, 2009, 2010 and it got there by having double-digit topline growth and then even in last year we had high single-digit topline growth.

So we’ve got to work to get this modest sales force size advantage back to double-digit. It’s going to take the rest of this year, probably, to do this, but I expect better results. It is also important to say, France, is a highly profitable business even with softness on the topline.

In Tupperware South Africa, it’s another market where we’ve seen strong double-digit growth, actually for the last seven years and we talked about the issues in the past with widespread counterfeiting of our products that were introduced. I mean literally it was the same look, the same color and it was branded Tupperware.

Our legal department and the government of South Africa worked I think very effectively to stop this. They have a lot more respect for intellectual property in the government that we see some places of the world and what we’re doing is we’re really starting to introduce some new and different products there, keeping ahead of them. By the way, we’re investing to get this turned around, while South Africa only has $50 million, we still think we’ve got room to grow.

Our other business there, our beauty business that was slaying interestingly was up double digits, 16% in the quarter and that’s in line with what we’ve been seeing. South Africa is a great market for direct selling.

Tupperware Japan struggled in the quarter. We continue to move in our direction to get them to be a demonstration a product business rather than a wholesale buying club and we’re sticking close to our core categories, taking longer than we want. There was another issue in the second quarter which were comparisons and is that the second quarter 2011 was a very heavy promotional period, so difficult comps.

Our Nutrimetics Australia business is another area where we’re working on, pretty much doing the same thing we’re trying to do in Japan. Moving away from be it more passive, hobbyists and sometimes even buyers to more of a really direct selling business, and you’ll see in the release that we took a charge related to purchase accounting. Mike will talk about that. I’m there I think in the next 10 days, so I’ll be able to talk more about that at the end of the third quarter.

Finally, North America, both Fuller and BeautiControl were down on the quarter. BeautiControl has had a focus on recruiting in the quarter. And I’ve got to say, Mike and I were just talking about it that the precursors to growth and enhanced profitability, we’re seeing them in our KPIs their positive results and nearing size of the sales force gap, we’re almost even as a matter of fact with last year.

But even more important, the pipeline for real career builders is growing. So now our focus is getting them trained and getting them really to build bigger businesses. So, I will talk more about BeautiControl as we go forward.

As regard to Fuller Mexico, we are -- I was there yet, well, I left Monday from there and spent the weekend really digging into our business there. We’ve installed a bright, young President, who was President of our Tupperware business in Mexico and formerly in his career path, he was the CFO with Fuller, so he knows the people.

And so we’re regressively working on recruiting, but I will say last year in the third quarter entirely an effective recruiting campaign that brought 90,000 people in that basically we didn’t have the capacity to train.

I reviewed this weekend what our strategies are and one thing we’ve agreed we’re not going to do, we’re not going to meet the competition with the dramatic discounting that a couple of direct sellers in beauty are doing.

We are focusing on the emerging middle class. We’re focusing on our game plan, which is skin care and fragrance, and we’re going to do some work on our sales force structure there. So I feel good about what’s ahead. This is going to be lumpy this year. But I think we’re focusing on the right things.

In our U.S. Tupperware business, we had a lower and less active sales force that led to a decrease in the quarter. One of the biggest areas of opportunities with our Hispanic population there and we’re engaging this segment with new recruiting and marketing campaigns.

Anyway, that’s a quick snapshot around the world. Before I turn it over to Mike, let me make a couple comments. I spent a lot of time this last month doing not only big group but one on one meetings with the investment community, not only in the United States but more and more focusing on Europe where people tend to hold longer. And but one of the key questions I’m asked almost everywhere I’m, is people want to tap into what are we seeing out there and what do we hear out there?

They understand that the bulk of our sales and profits are outside the U.S., which by the way is only 5% of the world’s population and this is an important question because the perspective one has, if they are getting their news from Wall Street Journal, Financial Times, CNBC or even many U.S.-based analyst reports, one would think that the world is in chaos and it’s bleak out there.

And yet, we just did a review and quite frankly, our perspective is there’s more firm places, more (inaudible) firm out there in the world and things look pretty good and look better than we’ve seen in years. Here’s a brief scan.

In Europe, contrary to what you may read, Europe is not going to fall into the Mediterranean, although it sells newspapers. Politicians there are showing a never before level of commitment and flexibility as they work to hold euro land together. And they are driven by two major things, the desire for peace and economic necessity.

But I do the review and I say well, CIS under Putin, Medvedev, Russian style but it works and we feel good. Nordics look good, Germany looks good. We get down into Turkey, looks good. Greece, who cares, it’s too small, Italy, 66 governments since the Second World War, its stability Italian style.

And then we turn it up, Benelux looks good and it is interesting in France, even under Holland, an interesting perspective. Most of the dramatic changes in governments with regard to repositioning government spending to be less happened under mid land who was an extreme left wing. So we, because he had the ability to bring the assembly within, so I feel, okay, about Europe.

Turning to Latin America, a few topline points in major markets, I already mentioned about the PRI in Mexico. So I feel good about that. In Venezuela, it appears Chavez’s grip is slipping, plus he’s sick, Brazil, fifth largest population in the world, sixth largest economy in the world and a real bright future.

In Asia, finally, 40% of the population, China, India, Indonesia and the driving force is going to be the explosive growth of their middle class, which is going to move from $500 million to $1.7 billion by 2020. In each of these markets, importantly, we have been awarded the status Superbrand. This is interesting, because we’ve never advertised.

Now, I know when somebody reads the recent talk of China’s economy slowing, two things are important to remember. Number one, it’s still growing at 7.5% and number two, the government which is very directive has been proactive with the stimulus and matter of fact, they cut the borrowing rates to stimulate the economy twice in one month.

So, net-net, before I turn it over to Mike, a final thought. When you put it all together, we’re confident in our portfolio and our future. We’re not going to hit on all cylinders in every quarter.

But I will tell you, the old question of what keeps you up at night. 1996, we made the bulk of our profits in Germany. Now, today, Germany is back on the growth again, but we utilize that high ROS level to open 24 other countries and they’re really kicking in.

The basic levers in our business models are this, innovative products, 25% of our sales, every year for new products, an effective selling method, and thirdly, this meaningful career opportunity, which makes us especially attractive in emerging markets.

These three things together allow us to navigate through in most negative externals. Raw materials prices can’t derail us because we have high gross margins, we own our own channel and we’ve got very strong purchasing expertise that’s global.

Foreign exchange, while not in our control, we do hedge our balance sheet exposures, as well as cash flow of known transactions and our local sourcing and manufacturing the products also gives us a natural hedge. In fact, Mike had an analysis done of the impact of FX over the last five years through 2011 and it showed a net negative of only $0.01.

However, proof of this continued growth in sales and profits should really be the way we’ve continued to deliver every single year for the past seven years, in spite of all the noise out there in the world.

Mike, you want to take it further?

Mike Poteshman

Yeah. Thank you, Rick. As Rick has highlighted, we continued in the second quarter with a strong trend in our emerging market units with 14% local currency sales growth, which was the same as in the first quarter on a run rate basis taking into account one less week in the first quarter of 2012 and 2011.

Where we did get hit was in our established markets, where we were down 6% in the second quarter after being up 1% on a run rate basis in the first quarter. This is also what caused us to be a 5% overall local currency growth in the quarter versus the high-end of our guidance range of 8%.

Versus our outlook, I mean, upsides were in South America in Brazil and Venezuela, in Germany, CIS and Malaysia, Singapore. The downsides were in France, Tupperware Japan, Nutrimetics Australia, Tupperware U.S. and Canada, and Fuller Mexico. Rick has talked about our issues in these markets and how we’re addressing them.

On profit without unusual items, we were able to come in $0.03 above the high-end of our range. The high-end of our outlook range for the quarter had our segment profit rising 10% over last year in local currency. We actually were able to grow segment profit 12% even with the 5% sales increase. This came from Asia, Tupperware North America and South America.

In Asia, we’ve made faster than expected progress with our value chains in Tupperware Australia and Japan. In the case of Japan, even with the big sales decrease, although, we will give some of this back in the second half.

In Tupperware North America, in the United States and Canada business, we had a good gross margin coming from a good mix of sales and lower operating and distribution expenses. Here, we’ll likely invest more in gross margin and promotion expenses in the back half of the year in order to move the needle with our sales force size and sales. In South America, we did very well in capitalizing on our volume leverage in Brazil.

There in light of some non-income tax issues in the country, we’ve made and are making some adjustments to support our sales force and are likely not see the same degree of leverage on sales growth in the second half.

Beyond the good profit results in the segments, we also had a tax rate that was lower than we had forecast and that helped us by about $3.5. You’ve seen and heard that we took a $0.03 hit from foreign exchange rates versus what we assumed in our April guidance.

Now, before I turn to our outlook, I’m going to make a few comments on the items that we recorded in the second quarter.

First, we sold our old manufacturing facility in Belgium, which was replaced by a new high-tech facility a few years ago and recorded a $7.5 million pretax gain and of course, this was a cash item.

The other significant items that we had in the quarter were non-cash charges for purchase accounting or purchase accounting asset impairments of our BeautiControl, Nutrimetics and NatureCare operations. These charges totaled $77 million.

The need for these charges reflected the operating trends that we’ve seen, along with higher discount rates as a result of current macro economic factors, along with our expectations for future performance.

These expectations start from where we are today, of course and are built into the current year guidance we have given in our release today and in our longer range expectation for annual local currency sales growth of 6% to 8% per year, with 50 basis points per year improvement in pretax return on sale excluding items.

You have our third quarter and full-year outlooks in our earnings release. As a reminder, our 5% to 6% full-year local currency sales increase range includes a one-point hit from having one less week this year in the first quarter than in 2011.

Our diluted earnings per share range without items at $4.81 to $4.91 for the full year is down $0.19 from the range we gave in April. The largest factor in the decrease is a $0.16 hit from changes in foreign exchange rates versus rates when we gave the April guidance.

Along with the impact on profit of one percentage pointless sales growth at the high-end of our range. Other, more significant changes versus our April guidance are to reduce our full-year tax rate assumption without items to 24% from 25% and reduce our expected return on sales in Europe from about even with last year’s 17.5% to down 100 basis points plus.

I’ll point out now, as has been the case for a couple of years, our outlook assumes no change in the exchange rate in Venezuela. Our outlook for net interest expense at about $33 million for the year is not changed and our expectation for unallocated corporate expenses is now about $60 million versus down slightly from last year’s $59 million in the April guidance.

Taking this all together at the high-end of our range, we’re going for 14.1% pre-tax return on sales without items, which compares with 13.9% last year and 14.3% in our previous outlook. Versus last year, there was a 50-basis point drag on the return on sales comparison from foreign exchange. And this factor is 20 basis points worse than the impact from rates on the guidance that we gave in April.

Our update on resin is that we currently foresee including in cost of sales this year in the $155 million to $160 million range, which is forecast to cost $1 million less than it would have in 2011. Our previous outlook was for a negative $1 million year-over-year impact.

The change equates to about a 5% reduction in costs in the fourth quarter versus the costs assumed in our April outlook. The fourth quarter is where we have an impact and not sooner due to the lag between when we buy and then use the resin and sell our products.

The April outlook assumes lower costs in 2011, but the picture has improved more than we had anticipated. One last thing to keep in mind on this is that as part of our recent -- is that part of the recent decrease in the price prevail of oil reflects strength in the U.S. dollar.

Given that we buy most of our resin outside of the U.S., there is a partial offset from currency against the lower dollar cost of oil on a per dollar basis. When we talk about year-over-year resin cost, we’re speaking about local currency.

When we look at our cost of products, another factor impacting us is the assumption of lower volume than previously and that has an impact on our cost per unit. Both of these factors are of course built into our updated guidance.

On cash flow, we had a good quarter, generating $68 million from operating activities, net of investing activities, which were close to $20 million better than in the 2011 quarter. This was with $5 million less net income without items due to the big hit we took from foreign exchange. The close to $20 million increase included the $7.5 million of proceeds from selling our former Belgium manufacturing facility.

Our updated full-year guidance for cash flow from operating activities net of financing activities is for $200 million to $210 million, which is $20 million less than our previous guidance. At the high-end of our range, our outlook for net income without items is about $12 million less than our previous guidance and close to $10 million of this is from worse FX.

Beyond this, there’s also an incremental impact on cash flow from FX in that we generate most of our cash in the back half of the year. As is normal for us, we had an outflow cash in the first quarter when rates were much stronger than now.

Our expectation for capital spending is now to be in the $85 million to $90 million range. I would also like to speak to our expectations for capital spending in futures to highlight that in the intermediate term, we would expect to be able to back off of this year’s spending and instead, operate more in the $70 million to $80 million per year range.

Finally, a word on share repurchases and our use of available cash. You saw in our release in addition to the $75 million that we spent on share repurchases in the first half of the year, we expect to repurchase $25 million to $50 million worth of shares in the third quarter and then $75 million to $100 million worth of shares in the fourth quarter.

At the high-end of this range then or $200 million, together with about $75 million worth of dividends, we will have paid out in one way or another to our shareholders about $5 per share this year.

And so on that happy note, we’re going to turn the call over for questions. Alicia?

Question-and-Answer Session


(Operator Instructions) And your first question comes from the line of Olivia Tong with Bank of America-Merrill Lynch.

Olivia Tong – Bank of America - Merrill Lynch

Thank you very much. Appreciate it. I wanted to start, considering the tough global macro backdrop, your Q2 results of plus five, they were certainly strong in the absolute. But there are clearly incremental headwinds and so can you talk a little bit about what gives you confidence that you can accelerate that growth rate from the plus five to the plus five to plus five to seven that you’re expecting in Q3?

What actions are you taking? What can you do to offset -- and what can you do to offset those incremental head winds? Thanks so much.

Rick Goings

Good morning, Olivia. Yeah, first thing, what is -- you heard Mike talk about raising 50 basis points per year profitability. And part of that is part of your question. The issue isn’t we’re not going to grow our gross margins much. We were comfortable where we are. It’s that we don’t have all of our businesses doing the 15% ROS that we think is minimum price of entry. And I can take you through. I mean, our U.S. business is not at that rate.

Specific things that we’re doing in the U.S., I think I have already mentioned. It is the focus there primarily is the Hispanic market in the U.S. It is a tough operating environment. But we feel good about that U.S. business. It’s profitable but it’s not 15%.

BeautiControl actually lost money last year. We’ve got to get BeautiControl going the right direction. I was pleased -- when we took over that company, it was about in the high $50 million range. It’s still $100 million company, but we grew that thing to $140 million. And I would tell you all the mistakes at BeautiControl, there were no externals. It was -- we take full responsibility, missteps, put the wrong people in there, made some structure changes that we shouldn’t have made.

So that’s an issue. If I bifurcate the world’s markets then into two kinds, the emerging markets and the established markets, over the last 10 years, what we really focused on in established markets, what is the formula to get these businesses where we’re already highly penetrated, get deeper into those. So we still had some runway to grow.

We perfected that initially in Australia, moved it to France and we’ve doubled our business in France over this last decade. And now we got Germany back on the track again. So I think, Olivia, we have in our quiver, we’ve got the formula. How do you contemporize an established market?

With regard to emerging markets, we already knew how to do that. But as we’re doing these emerging markets, we’re taking a lot of the lessons that we’ve learned with our established markets so as these markets mature, we continue strong double-digit growth. So that’s what it’s going to take. Moving some of these that are in the penalty box to get there, not only their topline growing but to get their 15% ROS and that’s when you see the rest of the portfolio really kick in.

Now, the bad news is, I’ll bet we have some surprises on some disruptions around the world. But the portfolio is big enough and solid enough and our management team out there are talented enough that we’ll be able to offset many of those. Sorry for the long answer, Olivia but a big question.

Olivia Tong – Bank of America - Merrill Lynch

Not at all, but, you know, I guess just to, sort of, zero in on that a little bit, a lot of the things that you talked about in established markets moving more towards the cities and taking learnings from one market to another.

Those are things that you’ve been doing for quite sometime now and certainly adeptly but you are looking for an acceleration in growth in the second half as things get tougher from a macro perspective. So I’m curious what differences are more specific to near-term differences that will drive that acceleration in topline growth rate from the Q2 growth rate to the Q3?

Rick Goings

We have one primary UVAR focus and its expansion in the size of the sales force. That is happening everywhere in the world and that’s one of the things we have to move forward more aggressively. However, then when we get into individual markets, there’s individuals adapt and adopt strategies that are correct for those market conditions and cultures. Sales force size is the primary focus though.

Olivia Tong – Bank of America - Merrill Lynch

Great. Thank you.

Mike Poteshman

Olivia, let me…

Olivia Tong – Bank of America - Merrill Lynch


Mike Poteshman

Let me just add to that a little bit. I think when you -- when we relate back to our -- what we look for in terms of longer-term growth rate, the 6% to 8% with low double digits from emerging markets, we’ve been there, continue to be there on the emerging markets. So with the 14% growth in the second quarter that was about what we would be looking for.

So we think we can continue to have that going forward even though there are some ones that aren’t doing what we want, places like South Africa right now or Mexico, on balance, we’re getting there. Where we missed it, about 6 to 8% range in the second quarter was really in the established market and we expect slower growth there than the emerging markets to begin with.

As we look at how we’re starting the third quarter and where there might be some differences there with our specific facts, we’re doing better in places like France, BeautiControl and hopefully Nutrimetics Australia than some of the significant decreases we saw in the second quarter.

So the low end of our range at 5% to 7% in the third quarter is what we did, a strong five in the second. And we think we can get a little bit more top spin from some of those markets I talked about and then hopefully we’ll have some others kick in as well. That’s how we think about it.

Olivia Tong – Bank of America - Merrill Lynch

Great. I appreciate it. Thank you.


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

Jason Gere – RBC Capital Markets

Okay. Thanks. Good morning. Maybe just kind of following up on Olivia’s question, really focusing on Beauti North America, I guess I just want to get a little more color on, you know, obviously we’ve seen some really tough comps there for the last couple of years and I think the expectations are it does get a little bit better. But at the same point, I think your margin expectation for that segment is to be up for the year. And I do understand you saying with Fuller that you’re not going to match some of the competitive spending out there.

But can you -- I guess, first question, can you really just talk a little bit more about how you can kind of get both at the same time, better improving comps, but at the same time, it seems to be better margins coming through as well?

Mike Poteshman

Sure. So, obviously, there’s two units in there BeautiControl, like Rick talked about, we started to see some better KPIs coming among that broad seller or the more engaged seller group and that’s certainly a precursor to having a good business there. We’re working to better engage the more passive sellers, which make up a large number of the sales force.

We did see certainly better profitability at BeautiControl in the second quarters. We lapped some heavy promotional spending last year. And notwithstanding that, we were able to close the sales force size gap to pretty close to flat. So that’s what we’re starting with as we move forward and that’s what I meant when I was talking to Olivia’s question about how we see things in BeautiControl.

At Fuller, yeah, certainly on the sales line in particular in the third quarter, it’s a tough comparison, where we had all those recruits last year, we were up 7%, as I recall in local currency sales. And certainly that’s not the trend we’ve been on in the first half of the year.

So, we’ll continue to invest, but not as significantly wouldn’t expect as we did in the third quarter last year , when we pegged it at I think $8 million or $9 million of kind of incremental to the prior year spending.

So, we’ll be somewhere between where we were before in that $8 million or $9 million. So that’s how we’re balancing it. We think we could be much more effective with our spending at Fuller Mexico and we’re already doing that at BeautiControl.

Jason Gere – RBC Capital Markets

Okay. And then I guess the second question, I think, Rick, you were talking about before the lessons from established markets kind of being spread to the emerging markets to grow. Can you flip that around and I guess as you think about the established markets next year too, where it could be a little more challenging. What are you seeing out of South America, Asia-Pacific, that you’re maybe not doing in the established markets that you think there could be some best practices to share?

Mike Poteshman

A terrific question. I’ve never had it asked the opposite but there is something very important that we’ve learned in these emerging markets that we’re bringing back into the established markets. It is the key driver in these kinds of countries like Brazil is the earning opportunity.

And what we saw happened over the last 20 years in places like Europe is the sub-management level out there in the sales organization, you would start with a demonstrator and then you could become a unit manager. And then in the next start of the year, you’re a distributor that you owned a certain geography.

Well, that sub-manager level, unit manager used to be a very terrific, strong earning opportunity. She earned a car, she was full-time but then things changed. We started to notice and it’s one of those that we should have been on top of that more in the 90s, that more and more of our unit managers were in fact part time and her income has slid because she wasn’t spending the same amount of time.

Well, what we learned from our emerging markets is they created a level between -- think

of it as kind of a sub-distributor. We call it team leader that you didn’t have to have the same kind of investment level, a fixed-base facility, a lot of capital to invest initially, high break-even point. But you were more of a sales leader and the company did everything for you. What we’ve done is we’ve grown that dramatically. That was the driving growth to South Africa and that’s what’s been the growth here in Brazil.

So what it means is these are full-time women who were making as a team leader can make $3,200,000 per year, very serious money. We’ve taken that same program right back to Europe. They resisted it initially, three or four years ago. But now, it’s a key to what’s happening in Germany and also a key to what’s happening in France. So, that’s one of our guile, sales force structure. And we were able to therefore have more full-time people, who are career minded in our sales force structure. And that enables us to have then greater penetration in the market.

Jason Gere – RBC Capital Markets

Okay. Great. Thank you for that clarity. And then, Mike, I just have two house-keeping questions. I’m not sure if you said this. What should we be thinking about interest expense for the year and then the shares outstanding for the full year? Thanks, guys.

Mike Poteshman

Sure. Yeah. We didn’t change our net interest expense guidance, which still stands then at $33 million for the full year. On the shares, we’re projecting $56.4 million and that’s on the -- also if you want to refer back to it on the outlook schedule, it’s the second to last page.

Jason Gere – RBC Capital Markets

Great. Thank you.


Your next question comes from the line of Bill Chappell with SunTrust.

Bill Chappell – SunTrust

Good morning.

Rick Goings

Hey, Bill.

Bill Chappell – SunTrust

Just quickly, kind of looking at the sales force actives and how that changed. Could you talk a little bit -- maybe I missed it, about Tupperware North America and that being down. Was there kind of a switch over or that had been kind of offsetting some of the beauty business for the past few quarters. Was there something this quarter that was different?

Rick Goings

Yeah. What we really saw there, Bill, is we had some higher value activity prizes in the Tupperware U.S. business. And so that caused just to get some larger order sizes the way they did their parties, but then less activity among that group. Also we didn’t get -- that’s the good news. They’re not as good news as we didn’t get as much activity of -- out of some of our other programs in Tupperware U.S. and Canada and that obviously came through in the sales as well. So that’s something that we’re working on in that business.

Bill Chappell – SunTrust

Okay. And then I guess I’m just also trying to understand how you’re looking at the back half. I mean, is it simple just to say it’s easier comparisons on some of the businesses or do you expect kind of a sequential acceleration in especially some of the developed markets?

Rick Goings

The outlook really continues to be for this double-digit pace in the emerging markets. We could see some change in the mix there. If we can improve some of the ones that are not doing as well, places like Tupperware South Africa. And even though it’s still down, that trend line has improved a bit as we’ve gone through the year.

And then on the established markets, it seem some of the payoff versus least result in the second quarter in the places like France, BeautiControl as we move through the year. And then hopefully these other markets as well, but it doesn’t assume obviously everything happens, all the good things happen.

Bill Chappell – SunTrust

Okay. And then I guess last one. I mean, take nothing away from returning $5 to shareholders this year, but is there a price point or is there a thought process that maybe you could even set that up even further in terms of share repurchases, whereas do you feel like that’s a pretty good number for this year?

Mike Poteshman

We’ve really looked with our board. Rick has looked with our board at the overall capital profile of the company. And we think being at this one and half times debt-to-EBITDA leverage is a good place to be in terms of flexibility, including the rating on our debt. And so the discussion beyond that has gone towards how do we split that between dividends and share repurchases?

And we’re in the 30% to 35% range on the dividend side, which we think is good, given where we are in the total situation and being able to sustain that over time, should there be any slip. And then we’ve been taking the rest of that excess capital and paying it back to the shareholders. So, that’s really how we thought about it, not so much about where is the stock price at any particular point.

Bill Chappell – SunTrust

So no change is expected any time soon?

Mike Poteshman


Bill Chappell – SunTrust

Okay. Thanks so much.


(Operator Instructions) Your next question comes from the line of Linda Bolton-Weiser with Caris & Company.

Linda Bolton-Weiser – Caris & Company

Hi. I just had a couple of questions about the emerging Europe region. Sorry, if you said it, but did you actually say whether the CIS, Russia was up or down in the quarter? And also, can you just explain again why South Africa, I think it was down last quarter and then it was up, improved this quarter, what accounted for that improvement.

And I’m just trying to gauge going forward, this improvement that you saw. I mean, it was better growth in the emerging Europe versus last quarter. It was up versus a decline. And also, the active reps were down whereas the local currency sales were up 1% in emerging Europe. So, I’m wondering about that active rep decline. So, if you could give a little more color on that region? Thanks a lot.

Rick Goings

Mike, let me handle that one. Hi, good morning, Linda. Firstly, let me turn to I think you’re accurate firstly and improvement in those areas. The CIS, this has been a two-year issue and this is going to back in earlier question, what we had was a 10-year double-digit growth. And I mean at certain years, it would be 25% growth per year in the CIS. And we want from having six distributors to just under 200 distributors and frankly the architecture wasn’t right.

We had at the French areas, you get wait out to ride of this stock smaller distributorships out there. So, we expanded the business into too many distributorships. What we should have done and this is back to my comments of our team leaders, we should have kept that distributor talent and have sealing of around 150 and then build team leaders under it.

Well, that’s in track what we’ve done now and we learned that from our emerging markets of the world. And it’s really getting traction now. And what it meant was these French distributors who weren’t big enough to handle high fixed overhead. Now, all those costs have gone away and it kind of a mega distributor handles that for them and their team leaders under it.

So, we in fact are on the road to back to growth again in the CIS. And we were up in the quarter. By the way, worth nothing in each of our three big areas of the world, the Americas, Europe, Africa, Middle East and Asia-Pacific, we have started doing -- the most important level we have on the ground is called a regional sales manager, a country like Russia has eight of them, Germany, eight of them.

And these are 30 something on average guys or girls and we have started bringing them together once or twice a year. And I just was with that whole group from Europe, Africa, Middle East and particularly I spend a lot of time. This was last month with the ones from the emerging European and African and Middle East markets and those debts have levered that’s really changing our business there.

They are sharp. They understand our business. And they understand the architecture to how to make it grow. I feel the -- back to your question again on South Africa, it did improve what we saw, but what we still haven’t close the gap of the sales force that we need to. That’s the primary thing that’s really helping us there.

In previous years, we’ve grown that business mostly by the expansion of team leaders and $2 and $10, we grew team leaders by about one third to a level we did the previous year.

We are back on that kind of growth this year, but it’s going to take the year to fill in on that. So, its -- it has been an issue. But emerging market Europe, I’m going to have all the Board and this can grow in about two weeks and -- because I want them to meet is the sales management and marketing teams from each one of the emerging market European teams, because that’s probably our real strength there.

Linda Bolton-Weiser – Caris & Company

Okay. Thanks a lot.


Your next question comes from the line of Sofya Tsinis with J. P. Morgan.

Sofya Tsinis – J. P. Morgan

Hi. Good morning. If we look at of the recent performance over the past year, so your business such as Tupperware U.S. and Fuller Mexico, its clear that their performance really picked up only when their incremental investment levels went up. So, I wanted to see whether you think it’s possible that the ongoing rate of investment needs to grow up in those markets not for them to deliver the kind of growth that you are hoping for on a more sustainable basis? Thanks.

Rick Goings

Mike, I let you answer, but Mike, sure the answer is no.

Mike Poteshman

Yeah. Sofya, like Rick said, I mean clearly, you are right. There has been some time where we’ve invested heavily and seen it in the numbers. We do think that there is a right way to run our businesses and we’re always trying to leverage both on the sales force compensation line and then on the promotion line and how we handle gross margin to balance that to get the best leverage that we can. And we do find ways to get there.

So, there has been other places where we’ve had to invest heavily in the past, places like Germany in the past, a point in time in France. And we’ve been able to work that overtime to still have a very good value chain as we work to the underlying fundamentals with the sales force and get the right advantage there and productivity.

So, certainly, it’s a tougher goal for us in established markets and we see that just based on the sales guidance that we give longer term, low single for the established markets, but low double for the emerging markets. So we do find ways and believe those ways to succeed with our normal value chain.

Rick Goings

Two points, I would add to that Sofya, two. But we spend across the Board in most any market of the world about 18% on promotions. And there is promotions to drive sales force activity, to drive recruiting, to drive customers coming to parties, there is a -- it’s of the same line of things where you will allocate or deploy that 18%. We have the flexibility when we do it right and we don’t always do it right to that.

If in fact, you noticed in the market that all of a sudden unemployment has gone for example in Spain to north of 20%. You don’t have to spend your money recruiting there anymore, because that recruiting pool out there is just so significant. What we have to do there though is because there is high unemployment that means there is softness on disposable income.

So, we have to redeploy what we normally what has been on recruiting to now getting the customer to come to a Tupperware party and in centers for her to come, plus we need to be very, very creative on and what products can we sell to her, that she would be willing to spend money during the difficult time.

And how we’ve done in the past is for example, we’ll push our product like FridgeSmarts, which basically Europeans and Americans as well throw away about a third of their produce that they buy at the store just because they store it the wrong way.

So that party will sit there and show her how to save money and so she’ll come. So, I would tell you, anytime we’ve had to do the incremental investment, it’s generally because we made a mistake in one of the levers of it and we try to learn from those.

Sofya Tsinis – J. P. Morgan

Great. Thanks


Your next question is a follow-up from the line of Olivia Tong with Bank of America - Merrill Lynch.

Olivia Tong – Bank of America - Merrill Lynch

Thanks for taking the follow-up. Just following up on that last question. Talking about the need to potentially pull different levers and put a bigger emphasis on value price items.

Is there a big divergence in margins on products across the portfolio, so that if you had to put more of an emphasis on maybe lower priced items, does that cause pressure on the product mix from margin perspective?

Rick Goings

There’s more a divergence, Olivia in the cosmetics, fragrances and toiletry business than in the Tupperware business. And the -- as you know, in the cosmetics business prestige fragrance and skin care had very come in -- very, very high margins, particularly the skin care that are treatment products.

As a matter of fact, we learned in Germany, excuse me, in BeautiControl, in January, we had the ability. We ran out of it. Their triple over sale took three months to fill the orders of a small treatment product for a face $96 and 80% plus gross margins out there.

You get into color cosmetics and you can get into the 55%, 65% gross margin area. Now when you get into the Tupperware products, pretty high margins across the Board. Mike, you might add to that.

Mike Poteshman

Yeah. I think that’s right, Olivia. When we look at our margins, the standard margins are fairly high in most of our products. Sometimes there can even be a lower margin and high price point products, because we think it’s a good product and we want to get it out there.

What -- where we see more variability is on the decisions we make on how we are going to manage our realized margins with our gift we purchase, purchase-with-purchase and our various strategies.

And as you’ve seen overtime we’ve been able to manage through a very good margins. So, for your basic question, I’d say, no, there is not a huge variability between low price and high price point products.

Rick Goings

There is interesting side bar on that too, Olivia. In that, when I joined the company we had 16 factories, everything, everything Tupperware sold, Tupperware made, as a matter of fact, on my first Board meeting, I basically advised the Board, we are not a direct selling company. We are a manufacturing company that has a direct selling arm that sells what they make, which is the wrong position to be.

We had to be, first of all, a marketing and a direct selling company and if we sold whatever we thought would be successful to what consumers would allow us to sell under the Tupperware brand.

Today, we only have one more factory. The companies almost tripled the size of it and what we’ve been able to learn how to do is to even though outsource products maintain the same high gross margins.

And so, when I look at the hub and spokes of food storage in the middle and then all of the different categories we are in, we went -- we’ve done the same kind of things as they’ve done at Apple.

You go outside, telecommunications with the phone, music business with Mp3 player, but somebody else is making it. But because you own the channel, you can, in fact can command the high gross margins.

So someone ask me years ago, well, if you outsource, doesn’t that mean your margins, you are going to beat market sharing, aren’t you going to come way down and we said, we are going to try not to have that happen and it’s been reality. We are -- I think right now, we have 41% of our products are outsourced.

Mike Poteshman


Olivia Tong – Bank of America - Merrill Lynch

Thank you. Sorry, thank you.

Mike Poteshman

Okay. Great.


And there are no further questions at this time. I’d like to turn the conference back to Rick Goings for any closing remarks.

Rick Goings

Thank you everybody for your time. I will tell you, this next, we did the math on this. Our BeautiControl, Nutrimetics Australia business and this NaturCare where we took charges, these are about 7% of our total portfolio.

We feel good about those businesses going forward, but I hope I can report to you when we talk again in October some progress, because we -- there is always going to be somebody over there under panel lead box.

We had one year in my entire career where everything clicked. But we are going to keep working on this. But we continue to learn from those and then we adapted to other markets in the world. Thank you for your interest and time.


Thank you. This concludes today’s Tupperware Brands Corporation second quarter 2012 earnings conference call. You may now disconnect.

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