諾威品牌 (NWL) 2003 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's First Quarter Earnings Release 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 web cast at www.newellrubbermaid.com and digital replay one hour following the call at 1-800-642-1687 for domestic participants and 706-645-9291 for international participants. Please provide the conference I.D. number 9343098 to access the replay. I will now turn the call over to Mr. David Honan, Vice President of Investor Relations.

Good morning, today I'm joined with our CEO, Joe Galli, our CFO, Bill Alldredge and our Corporate Controller, Pat Robinson.

Before we begin the call, I would like to remind the listeners of our forward looking statements. The statements made in this conference call that are not historical in nature, are forward looking statements. Forward looking statements are not guaranteed, since there are inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward looking statements. For a list of major factors that could cause actual results to differ materially from those projected please refer to our 2002 form 10-K including exhibit 99.1. Additional financial information about the company's 2003 first quarter results are also available at our website. Under the investor relations section. With that said, I would like to turn the call over to our CEO, Joe Galli.

Thank you, David, and good morning, everyone. I'm pleased to report that Newell Rubbermaid did achieve our earnings commitment in the first quarter. We did deliver 27 cents a share in Q 1 wills the is it 12.4% growth over our first quarter of 2002 performance and we are very encouraged by that result given the macro economic environment we all know we're in the midst of.

Turning towards the sales line, our internal sales declined in the quarter .8 of a point. That was impacted as we discussed in the past by our decision to exit high risk retailers, that high risk exit actually reduced our sales line by 2.7% in Q 1 and will continue to exert downward pressure on our sales performance in Q 2 although it will work itself out by the end of the year, but that was 2.7 points of impact resulting in an .8 decline in the quarter. Our overall sales gross came in about 8.7% of course, that was bolstered by the acquisition revenue that we now roll up in our total numbers.

Turning towards our strategic account management program we are very pleased to report that our sales grew 17% at our top A strategic account. This reflects the continuation of us exiting high risk retailers and working very hard to try to align Newell Rubbermaid with those retail partners that we feel have the brightest future. This reconfiguration of our account base is having an impact in the short-term but we believe it's a very wise move for us long-term and will result in our company being much more stronger positioned as we move out of the first half of this year and as we move on into 2004.

Turning towards the gross margin line on the P&L, we were very pleased in the first quarter that our productivity initiative actually offset the [lay cost of resin] and we still delivered net productivity of $24 million. That allowed us to improve gross margins in the first quarter 26 basis points over last year.

As you know, resin was a significant issue moving into the year. Fortunately we anticipated that. Our team was very much aware of the movement of resin prices moving into the year and we did have to go back and work very hard to ensure that our productivity efforts were in place to offset that resin issue and we'll continue to see resin be an issue for the company in the second quarter and throughout the year, although as you know, oil prices have crested and are now coming down and eventually that manifests itself into resin cost reductions. Though we are assuming -- and we have projected in the second quarter what we think is a very realistic estimate, and again that estimate for second quarter reflects what we modeled out the beginning of the year. So this year is very much fully the way we planned and that's why we continue to be very confident about the full year guidance.

Let me turn toward cash flow. In the first quarter we consumed 110 million of cash flow, that's 141 million more than a year ago, and we generated 31 million. This cash flow consumption is a result of us spending significant funds in strategic Cap Ex where we continue to launch new product programs and productivity initiatives and there's some timing here, there were a series of capitals we flowed through the first quarter and the way capital flows, it's not linear throughout the year so there was some timing that reduced that cash flow performance in Q 1.

Additionally we made a decision in our high profit writing instrument business to increase our inventory positions going into back to school season. We're anticipating a very strong back to school season. Last year that that season was stronger than we anticipated, and we simply do not want any service level issues with our customers in this high margin business -- so we did build inventory in the quarter in our writing instrument business. Longer term we have to improve our supply system so that we can satisfy our needs of retailers without inventory, but we're not going to take a chance this year..

The final impact on cash flow was in our frame business where we did have the sales miss and we had more inventory here than we planned. That's the one part of this cash flow miss that we were disappointed in. Although we are taking very swift actions to address that issue in the frame business.

But with all that said, turning towards guidance for the full year, we are reiterating our guidance in EPS for 2003. That guidance is $1.77-1.87 cents a share. That's where we were at the beginning of the year. We are reiterating that. We feel confident we will deliver on our guidance.

We are reiterating our guidance for internal sales growth for 2003. We've got it that we will grow between 2 and 4% organically this year. Of course that doesn't include the acquisition revenue, and that does reflect the downward impact based on our decision to exit high risk retails which again is reducing that sales line by two points, but we will finish this year and we will grow between 2 and 4%.

As you know, our high risk retailer exit has the most significant impact in the first half. Some impact in the second half, but we recognize that and we knew that going into the year. We again remain committed to this internal sales growth line.

And as you also know, there is a myriad of new products on the way that will strengthen sales that is year unfolds and we're really excited about the impact these new products will have, on the organic sales line and on our margin.

Also in guidance, we for the first time are presenting guidance for Q 2 of 2003, that guidance is 40 to 44 cents a share EPS, that guidance reflects the environment we're in and we have excellent visibility in that environment. That resin situation is exactly where we anticipated when we came into the year, so there's no surprise this year, and also that reflects again the exit of the high risk retailer. So Q2 guidance for earnings is 40 to 44 cents a share which will tie into our full year guidance of $1.77 to 1.87 and also reflects the model that we've built up moving into the year. So so far for us, there's been no surprise this year. We're very much on track.

Finally our cap flow guidance, free cash flow did come in at a negative 1.10, we are reiterating full year guidance for free cash flow, that guidance will generate between $300-350 million of free cash flow -- and is we believe reflects this company's ability to generate free cash flow on a consistent basis, and, again, we're confident in that guidance as well.

I'm going turn it over to Pat Robinson to discuss more details about our financial performance.

Thank you, Joe. Good morning.

I'm going to start with our P&L statement on a continuing earnings basis. Net sales for the quarter were $1.7 billion, up 8.7% from last year. Internal sales declined by .8% in the quarter and that consisted of the following, we had favorable currency translation of 45 million or 2.8% in the quarter, and that was almost entirely offset by our planned exit of high risk accounts which accounted for a sales decline of 43 million or 2.7% in the quarter. We also saw unfavorable pricing in the quarter of 23 million or 1.4%, and finally our core sales growth was up 8 million or .5%.

On the gross margin line in the quarter we came in at 468 million or 26.9% of sales, up 26 basis points to last year. This improvement reflects our continued focus on productivity, which generated a net productivity of 24 million in the quarter more than offsetting the increase in resin costs. This productivity improvement was partially offset by the 1.4% negative pricing.

SG&A continued on plan at 322 million or 18.6% of sales, up 26 million from last year. The acquisitions Lenox and American Tool added an additional 38 million of SG&A in the quarter. Our streamline initiatives more than offset our continued investment in sales, marketing, R&D, and the core part of our business.

Operating income was 145 million or 8.4% of sales, up 12% to last year.

I'll now take a couple of minutes to talk about our segment information.

The Rubbermaid group had net sales of 718 million, up 8% or 1.1% to a year ago. Increases of mid single digits at home products at Rubbermaid Europe and Rubbermaid cleaning divisions were partially offset by a mid single digit decline in the commercial business. Operating income for the group was 9.5% of sales compared to 66 million or 9.3% of sales last year.

At our Sharpie group, excluding 10 million sales of divested business, net sales were 284 million, down 7 million or 2.5% to last year, driven by an almost 5% decline in our North American [INAUDIBLE] business. Operating income for the group again excluding the results of our [INAUDIBLE] business were 33 million, or 11.5% of sales compared to 30 million or 10.1% last year. The operating margin improvement was impacted positively by aggressive mixed management in our productivity initiatives.

At the Irwin group net sales were 482 million, up 151 million or 46% to last year, excluding the effects of the acquired businesses, sales were essentially flat for the quarter. The Levolor Kirsch business was down low double digits in the quarter, reflecting our planned exit of low margin product lines. Additionally sales were positively impacted by single digit increases at our acquired power tool accessories and hand tools businesses. Operating income for the group was 42 million or 8.8% of sales compared to 22 million or 6.8% of sales last year. This increase was a result of 17 million operating income generated from our acquisitions and cost savings from our productivity initiatives.

At the Calphalon Home Group net sales were 242 million down 12 million or 4.7% of last year. This decrease was primarily the result of a double digit decline in our Burns picture frame division which was partially offset at high single digit increases in our US cookware business, and a double digit in our European housewares business. Operating income for the group was 11 million, or 4.7% of sales, compared to 21 million or 8.2% last year. The decrease is primarily due to the lower sales and the unfavorable product mix.

Turning now to cash flow in the quarter, our free cash flow was a use of 110 million compared to generating 31 million positive cash flow last year. The major drivers for this decrease in Quarter 1 were as follows. Capital ex-expenditures were up 57 million, year on year, which reflects our planned investments in new products and productivity. Inventories used an additional 38 million of cash in the quarter. This increase was a result of safety stock related to our new product launches and restructuring programs, and lower than expected sales at our Burns picture frame division. The company also used an additional 107 million in cash in quarter one in the payment of year end accrued liabilities.

These declines in cash flow were partially offset by an improvement in accounts receivable which generated an additional 33 million in cash and improvements in accounts payable which resulted in 19 million of additional cash flow. The company remains committed to delivering between 300 and 350 million of free cash flow for the year, and we believe that the decline in Q 1 was strictly a timing issue.

Now turning to restructuring, our restructuring plans continue on schedule, to date we have exited or begun to exit 62 facilities and reduced head count by approximately 7200 employees. In the first quarter we recorded a restructuring charge of approximately 60 million, which was consistent with the guidance we presented to you in our last call. Approximately half of this charge relates to the announced closure of one of our manufacturing facilities in the Calphalon Home segment, the remaining charge relates to severance payments, as the company continues to move productions to lower cost countries. For the full year the company expects to incur between 125 and 150 million in restructuring charges with approximately 40 to 60 million of this charge expected in Quarter Two.

With that I'm going turn it back over to our CEO, Joe Galli.

Thank you, Patrick. Let me just give you some brief highlights before we open up for questions.

First of all, on the acquisition side, I just wanted to share that our team has done an excellent job in integrating the last two acquisitions that we've made. Both of these are Jim Roberts Hardware Group and both the American Tool business and the Lenox hand tool-power tool accessory businesses are tracking nicely as we move into this year.

In fact, the Lenox business, in the first quarter that we managed it was up 6.5% over last year. That's in a very tough hand tool environment, and we were really encouraged that in the first quarter right after we bought the company that team went out and grew that business, and in fact our hand tool business on the American Tool side was up 8% in the first quarter. This is 11 months after we acquired the company and begin reflects an excellent integration on the part of Jim Roberts and his team, so we are as you know focused on assimilating that we've since this is not a yield over yield -- you will see us focused on acquisition activity, but I'm very please that had we're very much ahead of track in integrating the ones that we've [constituted] over the past year.

On the divestiture front, we did suggest we divest a business unit in the first quarter, this is an OEM business that wasn't performing well for us. We sold it to a strategic buyer. We're thrilled that it worked out to be a win/win scenario for the team and the new buyer. We're now out of this business. We continue to be focused on exiting low profit, nonstrategic businesses throughout our company. In fact we've sold 11 small nonstrategic businesses over the past two years, but this does reflect a lot of work on the part of Bill Alldredge and our MA team and continuing to streamline our proposal to made sure that's what we end up here is a blue chip portfolio of businesses.

Turning toward our performances of power brands in Q 1, in a very tough economic environment, we saw very exciting evidence of our marketing new product development efforts at work in first quarter.

Keflon brand, for example. The Keflon brand under the leadership Christie [Gethris], Keflon team grew 27%, in the first quarter. That's a result of a whole series of new products in the fact that the first quarter we launched a new line of Keflon cutlery. That is yet another success story to Keflon. And that shows that even in a premium priced product line, if you have the right new product combined with the right marketing and you're in alignment with the right retail partners, you can achieve impressive growth results in a difficult economic environment.

The Sharpie brand, also is an example of what we can achieve with our growth formula. Bob Parker and his team grew the Sharpie brand 18% in Q1, that's thanks to the introduction of new products, the Phoenix effort, alignments with the right retailers, and again a great example of what can be done throughout the company as we continue to ramp up our product development efforts, et cetera.

Over at Rubbermaid Home Products business, John [Constantine's] team was up 8%. It's a good, solid progress in Q1 and it shows the benefit of new products, and I mentioned, too, that the Lenox and hand tool businesses are doing extremely well.

I also will mention this, Patrick shared that the Levolor business is down by design as we exit low profit parts of our Levolor product line, we were down 11% with that brand in Q1, but we are right cycling the business and our focus here is to turn it around and achieve the right level of profitability.

We're managing our brands in a way that ties to the overall strategic plan to get the right mix of growth and get the right financial results. We continue to bring the market a very exciting array of new products in the first quarter, for example, Rubbermaid products division we launched Rubbermaid Sports Station. This is an organizing system for the home, for lacrosse sticks and baseball bats, etcetera, and this was met with tremendous success and it's a great example of the creativity at work at Rubbermaid Home Products and the kind of innovative high margin products we can develop with our product development system. Our take-along [INAUDIBLE] are being expanded here in Q1. And that program continues to be a tremendous success in the Rubbermaid family.

In the Lenox business we introduced a utility knife that has a literally an unbreakable [bi-]metal technology blade, Bill Burke and his team are rolling this out. We're getting tremendous success in distribution, it's a revolutionary product and a great example of the kind of technology we can bring to market.

I can tell you that our new product pipeline is jammed, it gets better every quarter in terms of impact on the P&L and we are really excited about the traction we have achieved in the new product development system throughout the company.

Finally, on the organizational development front, I just wanted to share with you that we remain committed to leadership development in the company. In fact, we're going to launch Breakthrough Leadership Two, the second round of this breakthrough leadership program that's been very successful in our company last year. We will conduct the session for 13 weeks this year, it's a major commitment on the part of senior management, and it's a transformational training effort, it really is. This program is designed to achieve strategic and cultural line in the company and -- so that we can achieve the breakthrough style results that we're targeting long-term.

We also continue to be very excited about our Phoenix effort. In fact 400 additional Pheonicians will start with the company, these are May graduates that will be trained in the summer and they'll be out in the field in August. This is all budgeted of course, it's all in our financial model and it's very exciting to think of the impact of an infusion of 400 Phoenicians on top of what we're doing now. We are developing very strong leadership capabilities for this Phoenix effort, we're working very closely with our retail partners to help them achieve their goals and we think this is another example of our being pro-active in a difficult economic environment.

Finally, just to wrap this up, I wanted to share with you, last week we conducted our quarterly operating reviews with all the business units in the company, and as we shared with you before, some of our business units are further along in developing and implementing the formula for success that we've developed. In other businesses we're still in the nascent phase of those turnarounds but I have to say in looking at every business unit in the company which we do every quarter, we really are on right track and very encouraged about the overall progress we're making. Several of our businesses need more work before they start posting kind of results they're capable of, but the fact is this company has made extraordinary progress over the last 24 months and it's a different place today. The team is highly motivated to deliver on our goals and that's why we are excite bad reiterating our guidance for this year. With that, I'd like to open it up for questions.

We will now begin the question and answer session. If you have a question, you will need to 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, please press the pound sign. Your questions will be queued in the order that they are received. If you are using a speaker phone, please pick up the hand set before pressing the numbers. If we are unable to get to our question during the conference call, please contact Newell Rubbermaid investor relations at 815-381-8150 after the conclusion of the conference call. Once again, if there are any questions, please press star, and then the number one on your touch tone phone.

Your first question comes from Jim Hoeg of Goldman Sachs.

Hi, good morning. A couple real quick questions for you. I know you had mentioned in the last conference call that in your budget you had anticipated doubling your advertising spending this year. Can you talk about whether that was the case in the first quarter or if that's going to ramp up as the year progresses?

Jim, it does ramp up as the year progresses. It's not a linear ramp, it comes in spurts based on things like back to school or the holiday selling season, but the first quarter is probably the lightest in terms of advertising spending and probably always will be trending on seasonality. Let us be clear that we are committed to the advertising ramp for the year, that's an important long-term investment, and we're going to deliver on our guidance and we are going to make that investment in advertising.

And on the 400 incremental Phoenicians that are coming in, how many are going to be in the field versus I guess what they were this quarter? Are you going to be promoting people? I know you typically will let the bottom 10% go. What sort of expectation can we have for like incremental people in the field?

There's roughly 520 people right now in the field, roughly 120 of those folks will be promoted and if you look at people that attrition out, you know, so there will be 200 to come out. So you go from 3-700. You've got roughly 700 in the field, Jim. We'll fine-tune that number as it unfolds. We actually may recruit a few more folks and promote a few more. It is a meaningful impact, though. If there's at least 200 additional that will be out in the field hitting the beaches by August.

So I guess what I'm trying to triangulate to is from the slight decline in internal sales, is the expectation that you'll have the incremental, the impact from exiting nonstrategic accounts will start to wane in the second half. And I guess in terms of your expectations for sales growth, it's probably more second half loaded and next quarter it will perhaps even accelerate sequentially as the year progresses?

When we modeled that this year, we knew the growth level would ramp throughout the year because the new products flowed that way because the line reviews that we've been fortunate enough to win won't yield 'til-- toward the back half of the year. And because we [gave up the high risk retailers] that's a much bigger impact in the first half than it was in the second. Also the additional wave of Phoenician is a significant event for second half revenue growth, so the way we laid out the year is the way it's unfolding and that's why we're very confident about the year.

Thank you very much.

Your next question comes from Budd Bugatch with Raymond James.

A couple of things. Can you kind of give us a road map for inventories, when do you think they will come back down and by quarter if you will, what kind of granularity can you give us on that?

Yes, I think that you'll see inventories ramped down nicely throughout the next three quarters. We did make a conscious decision to in our high margin writing instrument business but --make sure we don't have a shortage toward the back end for the sale season for back to school because last two years we were caught off guard, and so I think you'll see improvement for the next three quarters.

Well, in writing instruments, North American instruments were down I think you said 5% and looks like in the overall segment was down 2.5% even with the Sharpie brand being up 18. What can you tell us on that? What comfort do you see to get that back on a positive tract?

First of all, that business is suffering on the top line from exiting high risk retailers. Second point is the commercial side of that business is in a very tough environment that the commercial side of that business serves office buildings industry and that sector's particularly tough right now.

With that all said though, Bob Parker and his team have a great plan for 2003, and they will come back and deliver a budget that they're committed to for the year. We talked to Bob extensively last week and he's doing a super job here. I wouldn't draw any conclusion for the first quarter other than high risk retailers hurt, there's softness in the commercial sector, the new products really ramp up in writing instruments as the year unfolds. And I have the best confidence in Bob and his team.

I understand that, but is there any way you can quantify maybe what that hurt the segment? Is there any.

We don't -- I think you have to circle back and talk to David. We're not going to disclose that kind of specific detail on that sector. I just can tell you that business will certainly achieve its original budget which we established.

And the last question I've got is on Rubbermaid commercial, that one, too, looked like it had a more difficult quarter, that whole segment still economy-bound?

Yeah, that I mean I hate to use the economy as an excuse because the fact is that business Rubbermaid commercial products has so much upside [INAUDIBLE], but as the new products come to market and you will see that team bring -- Dave Klatt and his group have worked very hard in [INAUDIBLE] and Roughneck commercial products. You'll start to see some very interesting launches here in Q2, Q3 and that team will get that number back in other respectability for the year, but they were affected by a brutal job-economic environment for the commercial sector.

Where did the launch for the Wal-Mart cleaning products show, is that in commercial products?

It shows in cleaning, it's a new business unit, it's indeed underneath the Rubbermaid roof. But it's not a commercial.

So it's not part of the impact of the quarter.

No. And they're still rolling - they're ramping up. There's the quarter that will be more significant. The full benefit of that you'll see in Q 2.

Okay. Thanks very much.

Your next question comes from Connie Maneaty from Prudential Securities.

Hi, good morning.

Hi, Connie.

A couple of things. What's wrong with picture frames, and are you budgeting for internal sales to be up or down in the second quarter?

Okay, well, the second question is real simple, we were budgeting internal sales to be up. In terms of the frame business, what's wrong about frames is that we held on in this case far too long to high risk retailers. This is the one business unit that didn't gradually ramp out, and so we're seeing a breathtaking drop in sales in the first half of this year because we don't -- we are ramping out of high risk retailer. What we need to do in frames and in fact we just fortunately we just filled the presidency this past week, we hired an outstanding woman named Kathy Davis who is the new president of our frame business and our strategy in frames is to extend horizontally into newer categories. Especially the categories that we could add to our core frame franchise. That will allow us to grow that business with high margins in retailers that have bright futures, so we have to bring those new products to market. But it's not backed by any plans, we need more work. We're -- right now that business is feeling the effects of hanging on too long to retailers that won't be -- that have high risk.

So there's nothing intrinsically wrong with the category.

No, the category is the same. Retailers make good money on it, it's a high margin business for us, and I will say our team has done a nice job doing the heavy lifting, Connie, in terms of moving out of US operations and into Mexico and China. We have our supply chain really focused the right way in the frames. We have an excellent supply chain leader in that business. The key here is bringing new products to market, and align ourselves with the right retailers. It will take this year to get that all in place, but and the business will perform nicely as we move forward.

And one final question on the Phoenicians, where are the additional or the incremental 200 going to be deployed?

It's a mixture, the largest will be in the Wal-Mart team and then the Phoenicians will also buttress the other teams where the program is working extremely well.

So no new retailers are getting Phoenicians, it's just going --?

Not this year because there's so much potential with the ones we're working with and we're trying to focus and do the best possible jobs with the partners that we're working with right now.

Your next question comes from the line of Carol Wilke with Merrill Lynch.

Thanks. Just a couple more questions on the sales line. Could you give us an idea of how Little Tykes and Graco did in the quarter?

Graco had slight declines in the quarter, low single digit declines.

And -- yes? Sorry?

Carol, on the Little Tykes side, the commercial part of that business is, it had a tougher time with the economic environment. The consumer part is showing a nice turn-around, so if you look if you dissect it as we do internally, you'd see very positive trends in Little Tykes consumers and the new have been really good. On Graco, the team came in exactly on plan. We're still suffering through the issue of having whole-platform products, although Cathy Williams and her team have -- they're very much on track with their new product programs which you'll see here unfold in the next three quarters.

You talked a lot about the new products picking in the second half in the line. If you look at all your new products for 03, I think as of Q4 you had logged about 10% of them. What percentage of your new products have launched so far this year? I mean you've got a lot tougher comparisons on the internal sales line going forward, and so I would imagine that if you're still sticking with two to four that you're expecting a pretty big --

Yeah, you're exactly right. We feel in a roughly 10% of the new products in the works launched in Q1, the balance in the next three quarters, and we have great visibility in that pipeline. This is not -- these are not products where we have to go figure them out next week. We have been working on this for 18 months. You'll see them come to life here over the next three quarters.

And if I could just ask one other question. I think this sort of touched on, forgive me if we went through it. On the inventory build for the writing instrument business for the back to school, despite the fact that the whole North America writing instruments were down 5%, how does it play that you're expecting a very big back to school business when the business was down? Is it all because of the commercial business which wouldn't be part of your build for back to school?

Exactly. You're exactly right. The retail side of writing instruments is very strong and that's of course the back to school arena, and we have the back to school plan, we've got great visibility in, those programs are basically locked in, so we do -- that's why we're so confident the writing instrument for the balance of the year, and we even see signs that the commercial side has responded and it's coming back little bit as well. But the key here is back to school is the retailing arena and those programs are basically sold in and we have good visibility.

And could I ask you another question? On the margin side for the Levolor, excuse me, the Calphalon Home, I mean I know a lot of that was due to the picture frames being down. When would you expect to at least see margins level off, because that seemed to offset all of the margin improvement for the rest of your businesses?

Well, we expect it to level off in the back half of the year.

And finally, just how much of your SG&A is discretionary in that it could maybe coming back on some of the discretionary SG&A could offset the sales that I would imagine were a little bit lower than you thought on the internal side for the quarter?

Well, actually, Carol, we -- the quarter -- there were no surprises for us in the quarter. We expected sales to be very tough because we're pulling out of these high risk retailers. The biggest impact is Q1, so there wasn't really any suspense here around the first quarter. It came out just basically the way we thought, both in resin and in the stock market. You know, and we've always all along we thought we'd go to year [INAUDIBLE] first quarter. Now, we can answer the discretionary SG&A question.

Our incremental investments in SG&A this year are over 100 million dollars in Phoenix, and in new product development, as well as marketing and advertising. Most of that is back half probably 1/3 in the front half, 2/3 back half, and we'll dial that up or down as we see the sales coming in the second, third and fourth quarters.

Carol, the entire 400-plus team of Phoenicians, for example would be classified as discretionary, and we are not backing off on those things we think are important to the future. The same with advertising and with the other marketing efforts, so, hey, if we continued our streamlining effort and we are trying to be very frugal when it comes to superfluous SG&A, et cetera, and we continue to cut those things throughout the company.

That's right.

Thanks a lot.

Your next question comes from the line of Wendy Nicholson with Smith Barney.

Hi. First question, again, on the sales growth, I remember when you reported your fourth quarter, the sales growth that we saw was a little bit better than I think most people had expected and I'm wondering if you entered January with retailer inventory levels being a little bit high given that it was a tough Christmas that retail and those sorts of things, so is any of the negative sales growth in the first quarter sort of inventory absorption or am I just not thinking about it the right way?

It's an excellent question. We think that our selling efforts in the fourth quarter were no different than the year before. We didn't make any effort to put additional inventory in the channels. With that said, I do think you're right that the sell through levels overall might have been -- were softer than what we might have seen so there is some of that in the top line, but we knew that -- we sort of anticipated that when we built our budget. It didn't catch us off-guard, but we would have liked to see a more buoyant retail sales environment, no question in the first quarter. So there's a little bit of that sales line that's affected by carryover inventory.

But you think that's kind of gone and so we're kind of at a clean level at least in terms of maybe your reorder rates, if you will, from retailers kind of in the back part of the first quarter, I mean we're back to a healthy clean level?

I mean I think the answer is yes, with that said, yes, in an environment that's overall pretty soft, however it's soft. However we have good visibility heading in the back to school, good visibility on line reviews that we've been fortunate enough to win, and good visibility on the acceptance rate of our new products which has been incredibly strong. So, yes, the sort of -- inventories we see are clean -- and retailers are building back, yeah, we're confident in a full year because of these other factors we're doing to control our destiny on the top line.

And we are encouraged with the start to the second quarter, Joe. The order rate in April is stronger than the first quarter, and we're encouraged with the trend.

Okay. Switching gears to the margin story for a minute, gross margin I think in January you set your goal for the year of being up 100 basis points but obviously raw materials are much tougher I think that most people would have forecast. How were you thinking about gross margin for the year? Is 100 basis points still the goal or is that going to be tougher to get to?

Well, it is a tough goal but it's still what we're shooting for for the year, we're still making that commitment. We expect it to be progressively better each quarter as we go through the year. Certainly in the back half as we anniversary some of the resin increases, you'll see more improvement in the back half than the front half, but we're on track, but it's not an easy year to get a full 100 basis points but we're still committed to that.

As you know, the July prices have come down, and that is eventually going play itself out into better resin pricing. It's never a linear correlation and sometimes the lag time is shorter or longer than you predict, but we do feel good that the price of oil is a lot lower than it was at its zenith and that will help us achieve that 100 basis points.

I am very impressed with what I've seen our manufacturing team deliver, not just in productivity in the first quarter but in meaningful improvements throughout our manufacturing network and we have 100 factories strong in this company. Our team is installing all sorts of productivity breakthroughs that will give us confidence at this 100 margin improvement is very much something we can deliver this year.

That's right, yeah.

Okay.

Wendy, just one other comment. There was an awful lot of discussion two months ago about raw material inflation, even beyond resin, and I am proud of our team. We did see some raw material inflation and yet we still delivered more productivity than all that inflation collectively and we're still committed to the 100 basis points improving margins this year. And remember we are modeling this pricing erodes 1.5 points for the year, so we offset that as well here in gross margins. So that does say that our operations team is really making progress here.

Did you quantify how much resin hurt your gross margin in the first quarter?

We don't disclose it. We certainly quantify it. We certainly watch it every day. We think that the world is too preoccupied with resin as it relates to Rubbermaid so we don't disclose it.

And then just a last question. I know you quantified I guess it was two to three points of sales growth being eaten up by the exiting high risk retailers.

2.7.

Is there any way to kind of measure their impact on the operating margin? In other words, is there average operating margin 5 points lower than your top eight retailers, any way so we can sort of--?

I think that because there wasn't a lot of investment there in things like Phoenix that it would be safe to assume that the operating margin of that business was the same as our company on average. That's a safe way to model it. It does have a short term effect on earnings, although long-term it's our believe belief that what we're doing here will make us a much stronger company.

Got it. Thank you so much.

Your next question is from the line of Eric Bosshard with Midwest Research.

Good morning, Joe. A couple questions. Second quarter guidance looks like zero to 11% or 5 to 10% earnings growth but perhaps slightly slower earnings growth in 2 than 1Q. Why the more cautious earnings growth guidance for the second quarter?

We always knew that the second quarter this year would be cut this quarter relative to last year because exited high risk retailers has its greatest effect in Q2 and secondly the resin impact year to year is most significant in Q2. So we're not naive about this and that's factored into our model and the way the second quarter is shaking out is the way it looked when we built the budget for the year, but that's why, those two factors have the most pronounced effect on the second quarter.

Secondly, in terms of internal growth, the slowdown in internal growth 1Q versus 4Q, I understand you are winning product line reviews, and that will roll out through the balance of the year, but the stuff you won last year 2Q to 4Q I would have thought would have carried into 1Q. Is there something wrong with my logic or was there something else that changed within internal growth to make the first quarter look so different than the fourth?

There's nothing at all wrong with your logic. I do think is important when you're looking to trend, I think one quarter is a very short period of time and there's an awful lot of episodic events that come into play in a quarter that work themselves out or self mitigate as the year unfolds. Without going through one specific situation after another, I can tell you that we're going to grow 2 to 4 this year, first quarter reflected from retail issues that we discussed as earlier in the call, but there's in our view nothing happened first quarter was a surprise, nor is it cause for any trend change for the year, long term.

In terms of working capital, where you continue to make progress, if you could just touch on payables which were up again 40% on top of being up 40% last year and cash from operations was down as you cited meaningfully year over year, but can you talk about payables where you're still getting a lot of benefit. Can you continue to get meaningful incremental benefit out of that payables line?

Long-term we set out a goal to get a DPO level of 60 days. We think that's about the top end. As you know, in fact some of the other companies you follow have keyed that, so I don't think there's new terrain we're discovering here. All we're trying to do is to become as good as other well-managed companies, and we're not there yet, we've made good progress, but I remain highly confident that we will eventually get DPO 60 days. I actually let businesses that have been there before we've allowed managers there that have done that before, so we just need to continue our process and we'll get to 60.

And the last question, you've talked a lot today about high risk retailers. Can you spend a little bit of time and review sort of the strategic logic what you're doing to walk away from so much business?

Yeah, I think the strategic logic is very simple.

When a retailer files for bankruptcy, you lose not only the profit on the sales, you lose the entire receivables balance or it becomes contested. We had a retailer file for bankruptcy in 2001 and it cost us over $30 million and we recovered none of that money, now we reserved it all. But that is - that wiped out over two years of sales to that one retailer in terms of our profit, so it's our view and we're a very conservative company and we're not saying our strategy is the only strategy, but our view is that we think that when you end up in a bankruptcy situation, it's such a catastrophic hit to a P&L because you lose the entire receivables balance that it makes all kinds of sense for us to sort of skate to where the puck is going to be and project into the future what the retail environment is going to look like.

Secondly, we don't believe that our highly visible power brand should be in the aisles of a retailers that are viewed by consumers of being high risk. We think that's not a healthy image of our products, and to be honest, we very much a focused company when it comes to retail arena. We believe we work very closely to strategic retailers and put all our effort into those folks that eventually we'll earn market share and do a better job helping those retailers that have such exciting futures for the next decade, so we believe that this is a long-term strategy.

Now, if our goal is to maximize earnings for the first, second, third quarter this year, we wouldn't be doing it. We would hang on to the bitter end with high risk retailers, we'd report earnings in the first, second quarter, and then you see what happens if there's any sort of bankruptcy, but we're running this company for the long-term, that's why we're doing it.

Thanks, Joe.

Your final question comes from the line of Sandra Barker with Montague and Caldwell

Yeah, I have a couple of questions. You talked about the growth in strategic accounts and we know you're exiting high risk accounts, but what about the people who are sort of in the middle, the people that don't have Phoenix and just how are sales doing in those kinds of middle of the road accounts?

That is a very important part of our customer base. I think one of the advantages of Newell Rubbermaid is the companies that we serve such a broad base of retailers and distributors worldwide and, yes, Phoenix is focused primarily on those strategic retailers we talk about, however there are thousands of other outlets where our new products are in place, we have very strong sales teams focused, we formed a new sales division in the Jim Roberts group to call on 50,000 plus outlets that sell hardware and tools and other DIY products and that program is going extremely well for us. Our Lenox business, our hand tool at Lenox, sell through basically distributors that serve plumbers and electricians, et cetera, and and they're up 16.5% in the first quarter. So I'm encouraged by how we're doing with those channels, and in some cases they'll even be Phoenix-like efforts that you'll see that we'll talk about next quarter that will support those general distribution channels.

Could you also expand a little bit on what changes you need to make to your supply chain? You talked about getting better at it so that you don't have to carry extra inventory to keep retailers satisfied.

Yeah, I'll give you a great example. When we acquired the American Tool we found out that it takes us 67 days to manufacture a vice grip pair of pliers, 67 days. This is not a satellite, by the way, this is a pair of pliers. And Jim Roberts and his team have gone through a process called value streaming which basically lays out how long it should take. We think we can build a pair of pliers in two or three days, not 67.

That's a great example of what we need to do in our manufacturing system to get our inventories down below 78 on the way to 60. We need to compress dramatically the amount of time it takes to build a product. We've gone through that analysis that value stream analysis in division after division, in some cases we're bordering real fast but in most cases it takes us 50, 60, 70 days to fill low tech products that should take days if not minutes, so the key here is the sort of relentless pursuit of raising the bar in our manufacturing system and compressing production times so we can get to a more just in time environment.

Great, thanks.

Thank you.

Well, that was our final question for today. I appreciate for all of you to dial in today. Any questions or if you need additional information please check our website at www.newellrubbermaid.com under the Investor Relations section, or feel free to call the investor relations department at 815-381-8150. Thank you very much.

Ladies and gentlemen, if we were unable to get to your question during this call, please call Newell Rubbermaid Investor Relations at area code 815-381-8150. Today's call will be available on the web at www.newellrubbermaid.com and on digital replay at 1-800-643-1687 domestically, and area code 706-645-9291 internationally, with a conference ID number of 9343098 one hour following the conclusion of today's conference for 30 days, ending on May 28, 2003. This concludes today's conference call. You may now all disconnect.