諾威品牌 (NWL) 2002 Q4 法說會逐字稿

Please stand by for the real-time transcript of the Q4 2002 Newell Rubbermaid Earnings Conference Call. Good morning, ladies and gentlemen and welcome to Newell Rubbermaid's fourth quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. Today's call is also available live via audio webcast at www.NewellCO.com. And digital replay one hour following the call at 1-800-642-1687 for domestic participants and area code 706-645,9291 for international participants. Please provide the conference ID number 7437827 to access the replay. I will now turn the call over to Mr. Jesse Herron, Director of Investor Relations. You may begin.

Good morning and welcome to Newell Rubbermaid's fourth quarter conference call. Today I'm joined by our CEO, Joe Galli, our CFO, Bill Alldredge, and our Corporate Controller, Pat Robinson. Before we begin the call, I begin with our obligatory forward-looking statements. The statements made in the conference call not historical in nature are forward-looking statements are not guarantees, there are difficulties in predicting results and results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors, please refer to our 2001 form 10K with that, I turn over to our CEO, Joe Galli. Joe?

Thank you, Jesse. Hello, everyone. Newell Rubbermaid completed the fourth quarter of 2002 in very strong fashion. First of all, earnings per share came in at 49 cents for the quarter, which is a penny over consensus estimate and a full 10 cents over last year, resulting in a 26% lift in our earnings per share for the fourth quarter. For the full year, earnings per share came in at $1.58, a penny over consensus, representing a 32% increase over last year's $1.20. We're very encouraged at the consistent progress we've made all year in delivering EPS. Turning toward internal sales growth, from the third consecutive quarter, internal sales grew at a very healthy clip, we were up 4.3% in the fourth quarter of 2002. That's particularly impressive when you factor in the fact that we are exiting from some high risk retailers and, in fact, in the fourth quarter, that exit cost us 3 points of growth. So it would have been 7.3 if we had held even with 2001 in terms of sales with high risk retails, but we have pulled out, which we think is the smart move for our company long-term. We still delivered 4.3% internal sales growth in the fourth quarter in a difficult environment.

For the year, we had a 3.3% internal organic growth rate, which we think reflects a very positive signal that our strategies are taking hold and working in the marketplace throughout our account base and throughout our business groups. Turning to free cash flow, we had an outstanding performance from our team in free cash flow. We moved into the year with a budget of $300 million in free cash flow and the team delivered $392 million of free cash flow, which reflected outstanding momentum here in cash flow and also emphasizes the disciplines we've been able to infuse throughout the company with managing cash flow. We strongly believe that free cash flow really is a barometer of the quality of earnings that we deliver and we think that's why it is such a great, great sign for the company. Looking back historically, the $392 million this year equaled last year's record level. Back in the year 2000, our free flow was $82 million, in '99, 128 and '98, negative 53. We've clearly broken a trend and moved our ability to generate free cash flow to a new zone of excellence and it remains the focus in 2003.

You should know that when isolating working capital, our team made excellent progress in all three working capital measurements. In inventory, at the end of 2001, we had 80 days of inventory. We finished up 2002 with 76 days of inventory, a four-day improvement and we did this with -- with an awful lot of effort including a decision we made not to run our manufacturing facilities to build inventory that we really didn't need. Of course that, put some short-term pressure on gross margin and Pat Robinson will talk more about that. But we believe it is the right thing for to us do to generate focus on cash flow and get our inventories down to a level of respectability. Our DSO performance was very encouraging for the year. In fact, we finished out with 62 days in DSO, down from last year's 66 days, a four-day swing, reflecting a tremendous amount of discipline and effort on the part of our team's in and outside the U.S. We put a lot of effort putting DSO under control and winding that number down to the long-term target of 60. DPO, also came in very strong, we were -- we finished up the year at 43 days, a year ago we paid our bills in 36 days. So, our purchasing organizations throughout the company have really stepped up and delivered excellent DPO performance. So, when you look at overall working cap as a percent of sales, one of our five sacred measures in the company was able to improve from last year's 29.6 to this year's 25.8. We have work to do, but we've demonstrated for two years in a row that we're very serious and very focused on working cap excellence here at Newell Rubbermaid.

Turning towards 2003, we are pleased to reiterate guidance that we initially articulated at our analyst day in October. We are going to deliver next year EPS performance of between $1.77 and $1.87 per share. That guidance is unchanged and we remain confident that we will deliver on that guidance. The low end of that range, actually represents a 12% EPS growth over 2002. So, we're committed to a minimum growth of not only double digit, but 12% for 2002. And for Q1, our guidance is EPS of 25 to 29 cents a share. That's our range. Also, in terms of 2003 guidance, we are, in terms of internal sales growth, we're guiding to a level of between 2 and 4%. That number would be a good two points higher if it weren't for our continuing exit from high-risk retailers, which we will complete. That process will be complete in 2003. But that process will put downward pressure on internal sales for the year, particularly in the front half and yet we're still committed to -- to internal sales going between 2 and 4%.

In the new product pipeline is so strong and our Phoenix system is -- has become so powerful in the marketplace that we believe we can offset any macroeconomic issues and this extraction from high risk retailers and deliver 2 to 4% top line growth for 2003. Our free cash flow guidance will be between 300 and $350 million for 2003, again, reflecting our continual focus on free cash flow. Throughout Newell Rubbermaid. Finally, I want to emphasize that we are very aware of the macroeconomic factors at work and we have, for example, been very carefully following resin prices, we believe we have a very strong command of what resin is doing now and what the worst case scenario would be for 2003. We're still confident and will deliver our earnings of $1.77 to $1.87 per share no matter what happens in Iraq and with resin, et cetera, we're just confident that all of our productivity initiatives in the works throughout the company will more than offset what will happen with resin and we're highly focused on removing manufacturing costs in many, many other ways to offset what happens here in resin. So, with that said, I will turn it over to Pat Robinson to add additional color on our results for Q4. Patrick?

Thanks, Joe and good morning. I'll first cover the quarter four P&L results. Our net sales came in at $2 billion, 14 million up, 208 million, or 11.5% the last year. Excluding the American Tools acquisition, sales were up $78 million or 4.3%. This internal growth consisted of the following. We had favorable currency translation of $20 million or 1.1% in the quarter. An unfavorable pricing of $27 million or 1.5% in the quarter. And our core sales growth was $85 million or 4.7% bringing you to the total of $78 million or 4.3% growth. This was led by the Calphalon Home group, up 13.2% in sales for the quarter. And Sharpie was up 4.9%. Turning to our gross margin, we came in at $571 million or 28.4% of sales, which was flat to quarter 3, but down a full point to last year.

There were two factors which combined to reduce our margin in the quarter by about 150 basis points. Joe mentioned the first one, we had an inventory reduction in the quarter of over $80 million which put pressure on our margins to about 125 basis points as we slowed down production in our plants to get our inventories aligned. An additional 25 basis point pressure was put on by the growth in some of our lower margin businesses. Cookware, for instance, was up 33% in the quarter. Anchor Hocking was up 15%, These are lower than fleet average gross margin businesses and they put pressure on the margin to the tune of 25 basis points. So, all that combined suppressed the margins by 150 basis points in the quarter. We expect to resume our quarter-over-quarter improvement gross margin in Q1. In fact, for 2003, we expect gross margins to improve by a minimum of 100 basis points. Over 2002. SG&A expenses were $336 million in the quarter, 16.7% of sales, up $17 million to last year.

Excluding American Tool expenses were essentially flat in the quarter as planned incremental investments in sales, marketing, R&D and advertising were offset by our streamlining savings. Operating income was $235 million, or 11.7% of sales, up $37 million or 19% to last year. Excluding the change in accounting for goodwill, operating income was up 10.7% to a year ago. Free cash flow for the quarter was $177 million, up $9 million to last year. This reflects our improvement in operating income, as well as our continued focus on working Capital Management, Joe mentioned our DSO improved four days year on year. DPO, seven day improvement and inventory, four day improvement, resulting if a reduction of working capital percent of sales of 380 basis points, 29.6% to 25.8%. Turning to the full year, our P&L results, net sales were 7,454 million, up $545 million or 7.9% to a year ago. Internal sales improved by 226 million, or 3.3% with all four operating groups delivering internal growth for the year led by Sharpie group, which was up 6.1% and our Calphalon Home group up 5.5. The 3.3% is made up of the following with favorable currency translation of $29 million or .4%. Unfavorable pricing of $101 million or 1.5% and core sales growth of $298 million or 4.3%. Gross margins for the year were 27.8%, up 75 basis points to 2001 reflecting our productivity initiatives, partially offset by the $101 million of unfavorable pricing.

SG&A expenses were $1.3 billion or 17.4% of sales, up $144 million on the year. About half of that increase relates to the American Tool acquisition. The remaining increase is made up of $125 million of planned investment in our growth initiatives, partially offset by streamlining actions taken in '01 and '02. Full year operating income was $774 million, 10.4% of sales, up $117 million or 18% to last year. Just a quick update on the five key measures for the year. Internal sales growth was 3.3% in 2002 compared to a decline in sales of 7.6% last year. Operating income improved by 92 basis points from 9.5% to 10.4. Free cash flow of $392 million was $90 million over our guidance, flat to last year while spending about $50 million more on restructuring efforts year-over-year. Working capital as a percent of sales improved by 380 basis points from 29.6 to 25.8. And return on invested capital improved by 150 basis points from 9.6% to 11.1. We're very encouraged by the progress we made in 2002 and we expect to see continued improvement all five measures in 2003.

In May 2001 we announced a three-year, $350 million restructuring plan. I'd like to update you on that plan and what to expect going forward. In the second half of '01, we took a charge of $49 million. In 2002, we took a charge of $123 million, bringing our project to day charge to $172 million, about 50% complete on the project. About $90 million of that $172 million was spent on severance, affecting 3100 employees. And $80 million on facility exit costs. We have now exited or are in the process of exiting 43 facilities to date. In 2003, you can expect the charge between 125 to $150 million, will bring us to 90% complete by the end of 2003. And in 2004, a charge of 25 to $50 million, all occurring in the first half of the year. As much as 50% of the 2003 charge, between 60 and $70 million, is expected occur in quarter one.

Turning now to our segment information for quarter four, in our Rubbermaid group, sales were $655 million, up 2.7% to last year. Increases of high single digits at Little Tykes and Rubbermaid Home Products were offset by a double digit decline in the Graco business. Operating profit was $55 million or 8.3% of sales, up 6% to last year. The increase was driven by higher margins on new product sales, our continued productivity initiatives, offset by negative pricing of 2% and continued investments in our growth initiatives. Our Sharpie group sales were $491 million, up 4.9% to a year ago. All divisions contributed mid-single digit growth for the year in the group. Operating profit was $96 million, 19.5% of sales, up 17% to a year ago. It was driven by new products and productivity and continues the improvement we've seen in the group in the first nine months of the year. At our Levolor Hardware group, sales were $470 million, up 35% compared to last year. Internal sales declined by 2.5 points in the quarter or mid to high single digit increases at BurnesOmatic, Amerock and York Window Fashions were offset by a double digit decline in the U.S. window fashion business, this was caused by the strategic exit of unprofitable product lines in the business, and you can expect to see similar sales declines in the business throughout 2003 as we exit these product lines.

Operating profit of $35 million was up $7 million or 28% to last year. Reflecting the profit from the ATC acquisition, partially offset by our continued investments in marketing and new product development. Our Calphalon Home group was up, finishing at $399 million, led by a 30% increase in the worldwide cookware business and a double digit increase in the glass business. Operating income of $58 million or 14.5% of sales was up 1% to a year ago. New product and productivity improvements were offset by negative pricing of approximately 3% in the group, and a margin reduction caused by approximately $40 million reduction in inventory in this group. Now I'd like turn it back over to Joe Galli. Joe?

Thank you, Pat. I just wanted to share with you a little bit of perspective about our progress in turning around divisions that we classified as turn around candidates two years ago. We have 10 business units out of our 26 that we designated at the businesses that need to be fundamentally turned around to contribute positively to the company's financial progress and, I'm very pleased to report that coming out of 2002, 7 of these business units really have great traction and they have been fundamentally turned around and will contribute positively to our metrics. Those seven are the teflon business, which is flying right now. The Goody business, which is going through a nice turn around. Our Anchor Hocking glass business, which was for sale for a year, we've taken that business, put great management into place and have shown nice progress. Our Little Tykes business, for the first time in years has shown great progress and contributing to the company. Our Shur-Line business turned around greatly and is contributing. Our Rubbermaid home products business has very strong momentum, led by Stain Shield and Take Along led overall by a great effort in winning back market share and achieving productivity. And the European Hardware business, window and hardware business combined over in Europe has some outstanding progress throughout the last 18 months. So, those businesses really are contributing.

Now, we have three business units that are -- are still in -- in the turn around phase. We still have heavy lifting to do and they're not contributing as nicely as we'd like, although, in and they're Graco, Levolor and Rubbermaid Europe. Of the three, Graco is furthest along. We believe Graco will turn a corner this year. The new line is very exciting. I believe that the Graco management team will really demonstrate excellent progress in '03 and long-term this is going to be a fabulous business for the company. Levolor, Rubbermaid Europe are both businesses are heavy lifting in front of us. We understand what we need to do. We've got restructuring that we're still in the process of executing. Of course, all the restructuring is part of the overall plan to that Pat talked about, but we will get the businesses contributing, but those two are lagging the balance of the group.

Let's update you on our eight largest U.S.-based strategic accounts. We think this is important because we're reconfiguring our account base. Again, moving on the of high risk accounts and strengthening our position and aligning this corporation with those retailers with the brightest futures. Of the eight largest accounts in the U.S., which combine the eight, our results in Q4 were that we did grow our sales here 16% or $84 million, which more than offset the $50 million we gave up in in pulling out of high risk accounts. We were very pleased with our teams and their ability to continue to strengthen our relationships and our market share and win line reviews in the most important strategic accounts. As you look over the year of 2002, what you see is that with those eight strategic accounts,Q1, we were up 11%. Q2, up 12%. Q3, 19. Q4, 16, with the full year up 15%. We think that represents excellent progress here and bodes well for our company's future over the next decade.

Moving on, I just want to touch on highlights on power brands and some of the growth we saw in spite of a very difficult economic environment in the fourth quarter. Rubbermaid Home Products continues to grow, in fact, that business is up 7%. Fueled by Take Along Stain Shield and other new products. Little Tykes was up 9% in Q4, a great performance, particularly compared to the other companies we compete with and we were very encouraged by the selling and sell through and the progress overall. The Sharpie brand was up 24% again in Q4, reflecting the benefit of public relations, the marketing efforts and the beginning of what will be an onslaught of next products. That's designed to maximize the potential of Sharpie, a brand which we think can get a lot bigger and contribute to the company's profitability. Goody was up 6% in Q4. BurnsOmatic, which is in the tool group, was up 11%. Great double digit performance.

The American Tool businesses were actually up 12% in Q4. We think this is particularly impressive because the -- the hardware arena, overall, was considered to be soft in Q4 and yet we've been able to control our destiny here and grow the American Tool business 12% thanks to Phoenix, thanks to new product launches, thanks to market share gains that we captured in the marketplace at the expense of our competitors. Our Vice Grip business was up 16% in the Q4 thanks to the launch of a new generation of Rubber-Grip, vice grip units selling very well. Our Marathon business was up 20% in Q4 reflecting market share gains, at the expense of our competitors and great support from our retail partners. And what we've learned is that the American Tool acquisition is going to turn out to be a real homerun for Newell Rubbermaid. We're very excited about the prospect this business has to contribute long-term. The final thing I will mention is Calphalon. In the fourth quarter, up 42%. And again, a very difficult economic environment and in an environment where department stores certainly not demonstrating outstanding sales growth, but Calphalon team grew the brand 42%, thanks to the rollout in our major strategic retailer with the Cutlery, selling through extremely well and thanks to the launch of a new Calphalon Copper line, this an elegant new line of copper cookware in the brand that's been an instant hit in the retailers where we we've rolled it out.

We continue to make progress in the key power brands and there's lots and lots of potential in front of us. The final update to share it w you is on American Saw, the acquisition we completed in December. We need to tell you we've recruited three exceptional executive that's will now form this and become a part of the senior management team, which manages the Lennox brand of hand tools. The president of this business is named Bill Burg. He spent 15 years in the power tool accessories business, and knows the business that he will be running backwards and forward. Bill's an outstanding leader. Also, Rich Worthley as the VP of sales for American Saw. Rick came out of Danaher and handled sales for that group and managed the exact same distributors and customers that he will have in American Saw. And Rich and Bill have worked together in the past and will form a great team. Also, Chuck Calamaris will be the VP of research and development for American Saw. Chuck also came out of Black & Decker and was a senior technical leader worldwide and will head up the technical activities and product development for the high potential American Saw business.

As we studied the American Saw acquisition, we feel that we're highly comfortable with the projections that we made when we analyzed the acquisition. We -- also believe this business has tremendous potential long-term. To really contribute to the -- to -- to the profitable growth of Newell Rubbermaid in total. You will see exciting things happening with the leadership team as the acquisition is successfully assimilated, and as we achieve the full potential of the brand and the technology we have at the business. Finally, I want to reiterate we were extremely fortunate this past quarter to recruit a new board member, Dr. Tom Clark will join Newell Rubbermaid as our newest board member. Dr. Clark is an executive at Nike, in fact, president of the new ventures, but has been at Nike since 1980. And is really recognized as the executive that developed much of Nike's product development system, the global marketing process, the supply chain and logistics palace and importantly, the order development capabilities. We think Tom's insight will be a tremendous addition to Newell Rubbermaid and are excited to have him on the board.-With all that, I'd like to open it up for questions.

Thank you. We will now begin the question and answer session. If you have a question, you need press star, then the number one on your touch-tone phone. If your question has been answered and you wish to be removed from the queue, press the pound sign. Your questions will be queued in the order that they are received. If you're using a speaker phone, please pick the handset before pressing the numbers. As I reminder, only one question will be taken from each participant. If time allows, additional questions will be taken. If we are unable to get to your question during the conference call, please contact Newell Rubbermaid Investor Relations at area code 815-381,8150 after the conclusion of the conference call. Once again, if there are any questions, please press star, then the number 1 on your touch-tone phone. Your first question comes from James Hoeg of Goldman Sachs. Please state your question. That question has been withdrawn. Your next question comes from Budd Bugatch of Raymond James.

Good morning, Joe.

Good morning, Budd.

Um, I think that something that seems to have been on investors minds this morning is the issue with depreciation and as it impacts SG&A. Could you kind of run through what maybe that explains in the fourth quarter? And maybe what your expectation is for depreciation next year, as well? And how that will impact SG&A going forward with the extraction of plants from -- from the -- from production?

Budd, this is Jesse, we've been very active in our restructuring initiatives and throughout the year, we've closed, actually, since we started the program, closed 43 facilities now. And a change in depreciation is basically a technical issue because what happens is when we close a facility, according to general accepted accounting principals, you no longer record depreciation or amortization for the facility, however, the property planned equipment for that facility remains in our asset base and we set up a liability on the other side of the balance sheet. You saw no meaningful move on the PP&E, but saw the change in depreciation amortization. We will continue to be active in our restructuring efforts through 2003. So, I would expect this trend to somewhat continue.

What do you think depreciation will be for the end of 2003?

I will get back to you on the specifics.

Thank you.

Thanks.

Your next question from Connie Maneaty of Prudential Securities.

Good morning. Since it's going to come out in the 10Q, can you -- sorry, the 10K, can you tell us how much your sales to Wal-Mart were up in 2002, which new categories you're going into, and which quarters those sales might hit?

Yeah, Connie, we -- at this stage, we will disclose that our sales were up double digit with Wal-Mart and we're making excellent progress throughout Wal-Mart. In terms of new categories, we've rolled out the new Rubbermaid Pro Plus Queen initiative, which is eight feet in over 2000 stores. Rubbermaid brand cleaning products, both chemicals and the -- the mops and mop buckets and rubber gloves that go with that. We also -- we're not changing our chain applicators. We've improved our market share in cookware in Rubbermaid plastic products throughout the store, in Little Tykes, writing instruments over the past year. We're strengthening our position in Graco nicely and overall, the Wal-Mart team is doing a great job. The Phoenix system has been a real boost for our Wal-Mart cross section. In fact, Wal-Mart buyers have been very gracious and very encouraging about Phoenix and they've helped us along the way. And I think our future with Wal-Mart is very, very exciting and any -- we couldn't be more pleased with the momentum we have in Wal-Mart.

Great, thanks.

Your next question comes from David Cumberland of Robert Baird.

Good morning. On the gross margin, Pat, could you elaborate on the decrease that was related to reduced production in inventory? What caused that decision to reduce production? And also, what was the impact of resin on gross margin, thank you.

Sure. The -- well, first of all, the reduction in production is reflected in our -- if our free cash flow for the quarter, which came in, as Joe mentioned, you know, for the year at $392 million significantly above our guidance and part of our efforts to get our working capital in line with where that should be and our goal is to take that to 20% by 2004. We made significant progress in -- in '02, taking from 29.6 to 25.8 and we feel confident we'll hit the 20% target by '04. So, what -- what happens, then, of course, when you take the production out, you lose the absorption on the production in the plant and we took $82 million of inventory out of the system this quarter, which cost us about $25 million in absorption. So, that -- that was the impact from that. The resins impacted us about $10 million in the quarter.

And, David, let me -- this is Joe. Let me follow on to Pat's comments and make sure I emphasize the managerial philosophy we have throughout the company. We're not going to do things in the short-term to bolster EPS at the expense of the company's cash flow performance or long-term. We could have easily run our manufacturing facilities, built more inventory, had a better gross margin for the quarter and yet we'd be sitting with higher inventory, lower cash flow and that would have long-term negatively impacted our balance sheet. Additionally, we're embarked on a worldwide initiative to reduce transportation costs, we're closing a series of distribution facilities in Europe and the U.S. and a part of that, reduction in distribution transportation costs, is getting our inventory in line and we think we showed good progress, but there is still a lot of potential for to us reduce our inventories. What that means, those SG&A savings and the gross margin savings would come along with the reduction of warehouses and distribution transportation savings, those gross margin savings are in the future. You reduce inventories now, which allows you have fewer warehouses which means that gross margin will come down in the long-term plan. I want to be sure that everybody understands that we're playing the game for the long-term, we're not interested in doing short-term things, even though we to have made our gross margin number look higher in Q4. That's not the right way for us to run this company long-term.

I want to point out, we did improve our gross margin 75 basis points in the year and again, expect to improve by a minimum of 100 basis points in '03. As we continue taking inventory out of the system and with resin prices being where they are. We will improve our gross margins by 100 basis points this year.

Your next question comes from Wendy Nicholson of Salomon Smith Barney.

Hi, I'd just like to follow-up on a couple of those points. Did you say which businesses the inventory came out of, so, which business had actually a depressed operating margin because of the inventory draw down?

Across all businesses, but the most significant was in the Calphalon Home group, where half of the inventory came out of that group. The rest was across the other three groups.

Okay. And the $80 million on -- did you say you're going continue -- that was that sort of the big nut? Or are you going to continue to draw down inventory to the same degree in the first or second quarter?

We want to get our inventory days to 60 days by 2004. We made significant progress this year reducing it to where we in the year, 76. So, we took out four days out this year. So, we still have some -- some way to go there to get to 60 days by '04, but believe it's achievable and it's in our plan.

We will -- we'll achieve that and we'll deliver the gross margin improvement, that Pat articulated early, the minimum of 100 basis points improvement. We will do that while we reduce inventories this year.

Is there any way, I guess I haven't done all the math, but to try to get to 100 basis points of gross margin expansion in '03, I'm kind of trying to figure out maybe the inventory draw down is going to depress margins by say 100 basis points, raw material pricing is going to depress margins by "X", yet cost savings are on the increase, gross margins by "Y". Is there any math we can do? 100 basis points of gross margin expansion seems like a very big number, but it would be great if you could.

Wendy, first of all, the most powerful way to improve gross margins is the launch of high margin new products. Our new pipeline is jammed. That will really out all four quarters this year. That will be the most significant gross margin improvement dimension of the company. Secondly, you know, we're only in really still the infant stage of productivity. All four of our groups have all kinds of initiatives to in place to reduce manufacturing costs and those productivity initiatives will begin to really amplify as we move into this year. Additionally, remember all of these manufacturing facilities we've closed and all the distribution facilities we've closed, they're all going to end up reducing -- improving our gross margin, so, we'd be happy, you know, give Jeff a call, we will be happy to work with you mildly in gross margin. But I've never felt more confident in our ability to move gross margin up in the zone we need to over 2003 and long-term.

Okay, and just a final, final thing. Is -- in terms of the raw material I know everyone is so focused on resins, can you remind us exactly where are you hedged? How much for how long? Did you can you give us details make us feel more comfortable there?

Yes, Wendy. This is Jesse. What we've done is created for ourselves a natural system. As you know, we buy our resins three ways. We have another portion that is through the supplier. Another portion is through a spot minus "X", effects price based on the volume. Another portion kind of is a 12-month average of spot minus "X" when we intertwine the techniques opportunistically on market favorability. We get some of the pain and some of the benefit, but we sure aren't as volatile as we might have been in the past. That's how we'll continue to manage resins for 2003.

And that being said, I think it's important to remember that resin still represents 8% of the cost of goods sold of the company and that number, actually, goes down a bit after bringing American Saw, a new business that has nothing to do with resin. So, 92% of cost of goods sold has nothing to do with the movement of resin or petroleum. Now, 8% is imported. We manage it carefully. I think we're very good at it. But we presumed a worst case scenario of resin and will deliver on our guidance this year based on the productivity efforts in the other 92% of cost of goods sold.

Thank you, Joe.

Your next question comes from Carol Wilke of Merrill Lynch.

Thanks. I have a question on new products and I'm not sure if it's one you can break out, but I'm curious. When you look at the -- all of the -- the big, new products that are slated for '03, what percentage of those have already shipped? Because I know a lot of them were expected ship in the fourth quarter?

Carol, it's a -- it's a good question. The -- you know, the answer is a very small percentage. I mean less than 10%, I think directionally, would be the right kind of number. The reason is, you have to remember, we're making Newell Rubbermaid from almost no product development activity and transforming the corporation into a new product machine and we're on a ramp-up base. Many divisions are still recruiting engineers and putting the systems in place. Some divisions are ahead of others. But the fact is -- it's a very small percentage has already shipped gear through January. And I think -- I think that every quarter for the next three years, you'll see new product activity build, it will -- it will go up quarter after quarter, there will be a higher percentage of revenue driving new product. A higher percentage of the gross margin will be a function of high margin new product.

You haven't really seen a big benefit yet from the new products, the growth you saw in the quarter, I know you're getting distribution and, you know, some growth in businesses like Tykes, but it seems like a lot of that is still to come. Is that fair?

Carol, that's exactly right. The bulk of the internal growth we delivered last year is a function of Phoenix. We, you know, the Phoenix system has been very powerful in increasing sales on existing product lines. As a little bit of the growth was new product, but the bulk of Phoenix and also, we've become very fielded to the line review process, something we weren't good at a couple of years ago. So, we have fared very well at the expense of a number of competitors in the line reviews and therefore captured market share with existing products, but the new product impact in terms of revenue growth and margin enhancement is really in our future.

And can I ask another quick question on a different topic? Could you update us on where you are in moving your manufacturing offshore in certain businesses? On a percentage basis, if possible? How much of that is done?

Our goal is to be about 50% off a low cost environment by '04 and we are right now around about -- about halfway there. So, we're in the 20, 25% range right now. So, we still -- we still have a significant way to go.

But there doesn't seem, at least so far, to have been any disruption in the process. Is that true? I mean just in terms of operations?

I would say that if anything we've -- we've moved a little more methodically so that our service levels wouldn't be disrupted to customers. So, with the couple of very small, rare exceptions, our service levels have been outstanding. The only issue we have is over in Europe with the relatively small percentage of revenue. In the U.S., we've held up and service levels are better than two years ago. So far, so good. We have to continue to be very thoughtful in the way we move those offshore. If we slow down a little bit that, means down to a pace of keeping the gross margin benefit, we will, because customer service zones are sacred.

Thank you very much.

Your next question comes from Linda Bolton-Weiser of Fahnestock.

Thank you. In the Rubbermaid division, it looks like your operating margin actually improved in the second half of the year in terms of the operating margin expansion year-over-year, even though resin cost certainly wasn't s much of a benefit as in the first half of the year. Is that true of the gross margin for the division, as well?

Yes it is and, again, it's driven by a productivity initiatives, our new products in that division, take-alongs, stain shield and the productivity initiatives have offset the rise in cost of resins and we're seeing a rise in expansion in margin there.

Okay. And secondly, did you have any small acquisitions in the quarter?

One very, very small one that was under $2 million in sales.

Under $2 million in annualized sales?

In the quarter.

Okay. And what division was that in?

That was in the Sharpie group.

I mean what was it, just a small product line?

It actually gave us technology we didn't have the in past.

Okay. And one more thing. My understanding is that the reduction in D&A in '02 versus '01 is due to the elimination of the goodwill amortization.

That's a big piece of it, and impact from exiting the facilities we discussed.

Can you quantify that more specifically?

I can offline.

Amortization is $62.4 million, the D&A. And we have -- what you've seen the manufacturing move is basically explain to why it's trended down the last two quarters. It is flat throughout the whole year.

Okay.

So, I will walk you through it offline.

Your next question comes from Eric Bosshard of Midwest Research.

Hi. First of all, on the sales guidance, you talked about the fourth quarter sales being up call it 7.3% without the impact of the accounts that you're walking away from. The guidance for 2003 is 2 to 4% sales growth or I guess 4 to 6 excluding the impact of those accounts, considering the new product investment, why is the sales growth guidance more conservative or slower for 2003?

Eric, the answer is because we're conservative and don't miss numbers we commit to. I hope we do better, but, you know, we're very confident we will grow between 2 and 4 points next year and deliver the minimum 12% earnings. I think it's healthy for us to be conservative in this economic environment in terms of sales guidance. We remain committed long-term to achieving internal growth levels of 5% on the revenue line, year-over-year, once we get to the end of the three year plan and everything we've seen suggests that we're certainly capable of doing that.

Is there anything --

Unprofitable product lines, as I mentioned in the Levolor division. And that's going to suppress the growth rate a lit bit in '03 that we didn't see in '02.

Okay. And secondly, the explanation in the margin for the fourth quarter was the reduction of inventories, but last year in the fourth quarter, inventories declined as well by 60 or $70 million. It seems like traditionally inventories go down in the fourth quarter. Can you help me understand the inventory reduction was abnormal this year in the fourth quarter relative to the past and explaining the gross margin deterioration?

We took eight days of inventory out in the fourth quarter of '02, Eric. Significantly more than we took out a year ago. I don't have the exact numbers, I think it was four days a year ago. So the inventory reduction was significantly higher. But offline I can walk you through the exact year on year I tried to normalize this quarter's gross margin without the inventory reduction there. Were some one-time events last year that made the gross margin higher. I can do that offline.

Thank you.

Your next question comes from Joe Altobello of CIBC.

Hey, guys, good morning. Two quick questions, one, advertising. What did you guys spend this year and what is it budgeted to increase by for next year? And second, on the pension costs, what are you assuming as far as a step up in pension costs for '03 in your guidance?

Okay, I'm going to get the second part first on the pension. First of all, our -- our assumptions on pension are long-term return on assets is 8.5% in '03 and going forward. Our discount rate is 6.75% and our wage rate increases 4.5%. So, we've adjusted all of these in light of the recent changes in the market environment and the change in the assumptions has caused about a $20 million increase in pension expense year on year and that is already baked into the guidance that we've given you.

And the first part of the question, on advertising spend, in 2001, we spent $15 million. In the year 2000, we spent 0. So, 2001 it went up to $15 million. In 2002, we invested $40 million and this is key to advertising. In 2003, our budget calls for $75 million spent in that expense with the way it looks like the year is going to unfold.

So, incremental, $35 million on advertising and $20 million in pension?

That's right.

All right. Great. Thanks.

Your next question comes from Shane McGrath of AG Edwards.

Thank you. You guys said that walking away from retail accounts cost you guys three points of sales if the quarter. What would it be on a full-year basis?

About -- I'm going to say about 200 basis points in the year.

Okay, so more like a 5.3 internal if you would have saw it there?

Yeah, that's right.

Flat in high risk retail. Just flat.

Okay.

Your final question comes from Mr. Budd Bugatch of Raymond James.

Joe, can you give us any more guidance on what you're planning to do in Europe and I know you're going to take some Levolor, as well, maybe, and when you think those will turn?

Well, Budd, the question on Europe, Europe is four groups I would say the Levolor business in Europe has performed beautifully and has great traction. That business is very profitable and contributing nicely to the company. The European hardware and window fashions business features the Swiss brands and, you know, the hardware business, that business turned around, they're doing a great job. So,those two cases, that's contributing across-the-board. The third area, in the cookware, picture frames area, they actually had a very strong fourth quarter and we're highly encouraged that business is tracking nicely and will contribute this year. Rubbermaid Europe has got more heavy lifting. We've got important restructuring in front of us. The business won't make a major contribution this year, but we will fix it up like we fixed it in the U.S. Rubbermaid and for the next three years business will be fine. That's the one that will lag, but it's remain one out of four of the European businesses that -- that still is in the to be fixed mode.

And Levolor, domestically?

Levolor domestically I would classify the same. You know, we had a lot of heavy getting the manufacturing operations right in terms of reducing scrap and waste and in terms of moving to low cost countries, moving away from high labor zones. So, that work is heavy lifting as you know, the team has a good plan, they've made good progress, but it is a year where the team has a lot of moving parts. We've assumed very modest contribution on a part of that Levolor domestic business in '03 recognizing that '04, 5 and 6 it will contribute nicely.

And last question is with Phoenix now. Where does that program lie?

Well, Phoenix is on fire. We -- we've recruited, you know, what we call offcycle in the December campus. We landed 100 recruits. The caliber of recruits keeps getting better and we [Due to audio difficulties, a portion of this transcript is missing.]

You're breaking up. I don't know if I'm still online.

Ladies and gentlemen, please remain on hold. The conference will resume momentarily. Mr. Heron, sir, you may resume.

I will resume with closing comments by our CEO, Joe Galli.

Sorry about the technical malfunction here. For the folks still on the call I wanted to thank you for your interest in Newell Rubbermaid. We're very excited about our fourth quarter results and importantly we -- we think our future's never been brighter. So, thank you very much for your support and I look forward to the next call where you will continue to see progress out of us.

thank you.

If we unable to get to your question during this call, call Newell Rubbermaid Investor Relations at 815-381-8150. Today's call will be available on the web at www.NewellCO.com. And on replay at 1-800-642-1687 domestically and 706-645-9291 internationally Wye a conference ID number of 7437827. One more following the conclusion of today's conference through February 28. This concludes today's conference. You may now all disconnect.