諾威品牌 (NWL) 2003 Q3 法說會逐字稿

Good morning ladies and gentlemen. Welcome to Newell Rubbermaid's third 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 available live via audio webcast at www.newellrubbermaid.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 2791930 to access the replay.

I will now turn the call over to Mr. David Honan, Vice President of Investor Relations. Mr. Honan , you may begin.

This morning I am joined with Joe Galli our CEO, and Pat Robinson our CFO. Before we begin the call I would like to read our forward-looking statement reminder. 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 2003 second quarter form 10-Q excluding exhibit 99.1.

We will be referring to non-GAAP financial measures on today's call. A reconciliation of the differences between the non-GAAP measures with the most directly comparable GAAP financial measures is included on our website at www.newellrubbermaid.com under the investor relations site. Additional financial information about the company's 2003 third quarter and nine months results are also available on our website.

With that said I'd like to turn the call over to our CEO, Joe Galli.

Thank you David, and good morning everyone. We would like to cover with you this morning, four areas: number one, detail on our 2003 third quarter results; secondly, Pat Robinson will share with you a more detailed perspective on our financials; next we will cover our priorities for 2004 and our guidance for next year; and then finally, we want to go through an update on our overall strategy in the company and where we stand and where we are going.

First, turning toward Q3 of this year, we did come in at 40 cents a share EPS. That is within guidance, but the low end of our guidance. We did deliver that 40 cents a share with $15 million [indiscernible] in inflation in the quarter. Also with significant inventory reductions performance in the quarter, which was by design and did reduce margins. But was exactly the right thing to do. We also in Q3, completed significant restructuring activity. In fact, we closed four additional facilities in the third quarter, and we discontinued over 25,000 SKU's this quarter. Our team continues to be busy on restructuring. As you know this restructuring activity does have a one-time nonrecurring effect on earnings. But, again, exactly the right thing for us to do. And then finally, our internal sales came in down 2.2% in the quarter. And yet we still delivered the 40 cents a share.

On the positive side in the quarter, our team really continued to do a nice job of streamlining out unnecessary SG&A spending. In that -- those SG&A reductions in many cases are permanent and will help us as we go forward. I also just want to credit the Irwin tool businesses under Jim Robert's leadership. The Irwin team had an outstanding third quarter, both in margin improvement and productivity and in sales growth. That really strengthened our performance and helped us deliver that 40 cents.

A highlight of the third quarter was our free cash flow performance. We delivered $162.6 million free cash flow that was paid by $94 million reduction in inventory here in the quarter. And although again that inventory reduction does reduce margin in the short-term, we believe it was the right thing for us to do to get our company on track for the long-term.

Let me just touch on internal sales. We were down 2.2% in the quarter. And we had a couple of different things going on that affected our internal sales performance. First of all, our worldwide writing instrument business was down 3% in the quarter. This business, you should know, is still a very strong part of our portfolio with significant upside potential. But in the short term, our sales are being effected by a very weak commercial environment, that commercial environment has been stopped [ph] all year, particularly stopped [ph] in Q3.

Our back to school season came in lackluster here in the third quarter. We had a very strong second quarter in Writing Instruments. In fact, the business was up 8%. But in the third quarter reorder rates were lower than we had hoped, and so back-to-school overall season ended up just okay.

And finally, the good news in Writing Instruments is that we have a very strong new product pipeline that will begin to bear fruit here in the fourth quarter, and mostly next year. Some of those new products, however, were late and didn't help us in the third quarter the way we originally had hoped. But you will see a real flow of new products going forward.

A couple of other points on internal sales, the Graco and the Little Tikes businesses both saw orders shipped from Q3 to Q4. We do have visibility in Q4 that we will secure those orders. And then finally, in our low-end cookware business and in our picture frame business, in both cases, sales were well off the prior year. In some cases by design and in some cases, we just saw continued softness in those businesses.

On the flip side, in Q3 we did have a group of businesses perform extremely well from the top line gross standpoint led by the Irwin team where both in hand tools and power tool accessories, the Irwin brand businesses were up over 20% over last year and the momentum is quite exciting in that business. Our Lenox business grew nicely in the quarter. Our Calphalon and Sharpie brand writing instrument arena also grew. So we are seeing continued benefits from our marketing efforts and there are many parts of the company that are enjoying growth even in a difficult economic environment.

Turning toward Q4 we are reaffirming guidance for the year, but we are narrowing our guidance down to $1.62, $1.63 for the full year of 2003. That translates into a 51-54 cent range for Q4 of the current year. Our guidance on free cash flow remains also in tact. We are reaffirming the $200-250 million guidance for free cash flow that we shared last quarter. We have plans to cut another $125 million out of inventory in Q4. And of course that will exert downward pressure on margins which is -- digs into our guidance. And also just wanted to share that our fixed capital estimate for the year will actually come down from the prior 325 to a new level of $300 million. That is per a broader strategic direction that I will touch on in a moment. But fixed capital guidance is now $300 million for the year.

You should know that in the fourth quarter, we -- our guidance includes $12 million resin impact versus last year. So that's part of that guidance that we have, and won't be a further surprise. Finally on Q4 guidance, our internal sales guidance for fourth quarter is up 1 to up 3. And for the full year now, our -- that translates into full year internal sales guidance to down 1%. That is the full year projection.

Patrick?

Thank you, Joe. Good morning, everyone. I'll start with our third quarter P&L performance on a continuing earnings basis. Net sales for the quarter were $1.9 billion, down 4 million or .2% from last year. Internal sales decreased by 2.2% from last year which consisted of the following: we had favorable currency translation of $47 million or positive 2.4%; the exit of high risk accounts was negative $48 million or minus 2.5%; unfavorable pricing in the quarter was $41 million or 2.1%; and our core sales growth was essentially flat; bringing our total to negative $42 million minus 2.2%.

Gross margins in the quarter turned in $524 million or 26.9% of sales, down 1.6 points from last year. The decrease in gross margin is the result of the following: first the unfavorable pricing of negative 2.1% decreased margins by 1 point, 5 points. It was on plan for the quarter. Partially offsetting this was net productivity in the quarter of $6 million or .5%, which increased margins by .3 points. And then unfavorable mix accounted for the remaining margin decline of .4 points.

I'll talk about net productivity of $6 million, which was less than we've achieved in the last few quarters. And this was driven by one item that was different and that was volume. We did plan lower production volumes as we slowed manufacturing facilities to reduce inventory in the quarter. However, this was compounded by our missing sales which drove a further reduction in volume. In total the manufacturing reduction cost us about $30 million of overhead absorption or 1.5 points of margin in the third quarter. And the second item which reduced our net productivity was resin which came in at negative $15 million from the last year. However, this was all on plan. About two-thirds of the volume decrease was planned related to the inventory reduction and about a third was unplanned as we missed our sales target.

SG&A for the quarter was $328 million, 16.9% of sales, down 10 million from last year. The acquisition of Lenox added an additional $12 million to SG&A in the quarter. Our streamline initiatives of $39 million more than offset our continued strategic investments of approximately $13 million in the quarter.

Operating income was $196 million or 10.1% of sales, down $21 million or 10% from last year.

I will now turn to our segment information. In our Rubbermaid group, net sales were $768 million up $8 million or 1.1% to last year. Mid-single digit increase of Rubbermaid home products had double digit increase of Rubbermaid Europe primarily courtesy driven, but partially offset by sales declines in the Graco and Little Tikes business as orders originally scheduled for shipment in September slipped to October. Operating income for the group was $59 million or 7.7% of sales compared to $78 million or 10.2% of sales in the prior year. The decrease in operating income is primarily the result of higher raw material cost of approximately 15 million and pricing pressure on non-differentiated items in our Rubbermaid home products business.

At the Sharpie group, net sales were $389 million down $12 million or 3% from last year, excluding $11 million in 2002 sales of a divested (inaudible) business.

Sales decreases are a result of double digit decline in the commercial sector, and lower back-to-school replenishment orders than expected. Our overall back-to-school season was on target or about average for last year. As you remember, we had initial selling in Q2 that was very strong, but just didn't see the replenishment orders that were planned for the third quarter. Operating income for the group of $63 million or 16.1 percent of sales compared to $78 million or 18.9% of sales last year. Operating income was negatively impacted by the sales decrease discussed earlier and by a $43 million inventory reduction in the quarter. In addition SG&A expenses were up $5 million in the quarter as we continue to invest in this high ROIC segment of our business.

The Irwin group net sales were $521 million, up $38 million or 7.9% from last year. While internal sales were down approximately 2% for the quarter. Excluding the double digit decline of the Levolor/Kirsch business resulting from the planned exit of low margin product lines, internal sales increased about 5%. Operating income for the quarter was $72 million or 13.7% of sales compared with $38 million or 7.8% of sales last year. The improvement in operating income was driven by net productivity of 4.7%. New products and the Lenox acquisition partially offset the planned product lines exit at Levolor/Kirsch and continued investments in marketing initiatives and new products.

Finally our capital and home segments saw net sales of $267 million, down $31 million or 10.4% from last year. The sales decrease was the result of double digit declines in our U. S. picture frame business and low-end cookware business. Operating income from the group was $13 million or 4.9% of sales compared to $31 million or 10.4% last year. The decrease in operating income was primarily due to the sales decline noted previously, pricing pressure on OPP product and a decrease of inventory of $33 million in the quarter.

Turning now to cash flow in Q3, as Joe mentioned free cash flow for the quarter was $163 million, up $33 million from last year. The major driver for this increase was the reduction of inventory of 97 million which was 74 million better than a year ago in the quarter and about 20 million ahead of our plan for the quarter.

Capital expenditures of $59 million were approximately $25 million less than last year. This decrease reflects the company's initiative to lower fixed capital spending by, first of all, moving production from high cost countries to low cost countries where appropriate. This lowers fixed capital requirements in two ways. (Indiscernible) equipment is generally less expensive in a low cost country environment; and, secondly, the low cost of labor makes fixed capital relatively more expensive and therefore less desirable.

Secondly, we are now allocating capital more effectively across our business units based on what we have learned in the past three years. Partially offsetting this will be an increase in capital spending for new products in our high ROIC businesses as we improve our capability to develop and launch new products moving forward. Partially offsetting these improvements in cash flow, were an increase of cash restructuring in the quarter of $25 million; the use of an additional $22 million in accounts payable reflecting a reduction in inventory noted previously; and a decrease in our operating earnings for the quarter.

For our year to date results, net sales were $5.7 billion, up $217 million or 4% from last year. Internal sales declined by .9% to last year, consisting of the following: favorable currency translation was $156 million year to date or positive 2.9%; the exit of high risk accounts is negative $146 million or 2.7% year to date; unfavorable pricing is $107 million or 2% year to date; and our core sales growth is up $47 million or positive .9%; internal sales is negative $50 million or minus .9%.

Year to date gross margin was $1.5 billion or 27.3% of sales down 32 basis points from last year. The decrease in gross margin as a result of the unfavorable pricing of 2% which decreased margins by 1.5 points. Offsetting this is net productivity of $57 million or 1.6% year to date. Which improved margins by 1.1 points. The favorable impact of the Lenox acquisition was largely offset by unfavorable mix in the remainder of our business.

Year to date SG&A was $1 billion or 17.7% of sales up $38 million to last year. The acquisition of Lenox and American Tool companies added an additional $70 million of SG&A in the current year. Our streamline initiatives of $100 million more than offset our investment and strategic initiatives of approximately $68 million.

Operating income was $542 million or 9.6% of sales up $4 million or 1% from last year. Cash flow year to date is essentially flat compared to a positive $216 million last year. We did make significant progress in quarter 3 and expect to continue that progress in the fourth quarter.

Q4 cash flow is estimated to be between $200 to 250 million as follows. Sources of cash will be continuing earnings before depreciation and amortization of between 210 and 220 million. We expect an inventory decrease of between 125 and 150 million in the quarter with all other working capital essentially flat, bringing the sources of cash to 335 to 370 million in Q4. Our uses of cash will be capital spending of 50 to 60 million, our dividend payment of 58 million and cash restructuring net of tax 15 to 20 million, bringing our uses of cash to a range of 123 to 138.

Turning now to restructuring, in the third quarter we recorded a restructuring charge of approximately $48 million consistent with the guidance we provided during our last call, bringing our year to date charge to approximately $166 million and our plan to date charge to $338 million. In total we have exited, or begun exiting, 73 facilities and have reduced head count by approximately 9,200 employees. For the full year, the company now expects to incur between 216 and 226 million in restructuring charges. Approximately 50 to 60 million of this charge will take place in the fourth quarter. This previously announced restructuring plan will result in a total charge of between 460 and 480 million, with an annualized estimated savings of between $150 and 175 million when the plan is complete. We are still targeting Q2, 2004 for the completion of the accounting charges associated with the plan.

I will now turn it back over to Joe.

Thanks Pat. I would like to now turn to 2004. We believe here at Newell Rubbermaid that we have, over the past three years, been implementing the right strategy to unleash this company's full potential and deliver our long-term goals. But we have learned some valuable lessons.

First of all, we have learned that transforming this company is a more complex process that we originally had planned. And while we made great progress, that complexity has slowed down the pace in which we achieve our financial targets. Secondly, the overall timing of this transformation is taking longer that we originally had thought. We are going to transform the company, and we are certainly headed the right way, but this is a longer process than we originally planned. And third, we learned that some of the businesses in our portfolio really don't fit our particular model. Not that these are not good businesses is is just that they don't fit our strategy and we believe that they will be better managed by other folks. And therefore, we do need to move on with the process of divesting parts of the company that don't fit.

With that in mind let me turn to our priority list for 2004. We have four key priorities that we will obsessively drive through this company in 2004. Number one, we want to complete the previously announced restructuring program, which is the $480 million program we talked about on the last call. Those restructuring charges will no longer come from the P&L after the second quarter of 2004.

Although that restructuring activity will certainly be in place throughout the year, and will have a significant effect on the company's results including managerial time and generating nonrecurring cost and start up costs et cetera. We have learned an awful lot about that. We have closed 73 facilities so far. So, first priority is again, to continue on and complete that phase of our restructuring.

Number two, our priority here is to divest businesses that don't fit our model. As I mentioned earlier, we are not going to disclose which specific businesses that we feel we should divest. However, we are -- I can tell you, working very hard on this process. Throughout the last quarter we were very fortunate to recruit Mr. Buddy Blaha from Lehman Brothers, a M&A veteran who will report directly to me. He has been on board full time for about the past two weeks. He is a seasoned professional that we think will be an important driver in the process of managing our divestiture process.

The third priority for next year is to continue the very difficult process of rationalizing low margin product lines or, in some cases, reconfiguring these product lines. Pat already mentioned how we recalibrated the way we will deploy fixed capital, but the fact is that we are either going to jettison or reconfigure product lines that are yielding below our target level of returns. In fact we believe that we will be discontinuing between 2 and $300 million worth of revenues next year in 2004 as we exit low margin product lines. That is the range that we have in our sights at this point.

Additionally, in terms of reconfiguration, we will, in some cases, increase prices on products that have unacceptably low returns, even though unit sales will of course go down. We do believe that that is an important step. And we will look at different models, including sourcing versus manufacturing in the U.S. facilities or European facilities. There is an awful lot of outsourcing opportunities that we are ramping up that will also be part of this solution. So the third priority is rationalize and reconfigure product lines that have unacceptably low return.

The fourth priority for next year, is to continue the deployment of Newell op-ex. This is our -- Newell op-ex is our driving methodology to achieve our productivity goals in the company. One of our key strategies in Rubbermaid is to achieve productivity levels that will exceed price erosion and allow us to include gross margins. Newell op-ex, led by Jim Roberts, is off to a fantastic start in the early group, but still very much in its embryonic stage in the remaining parts of the company. We are now training all of our plant managers and deploying this process, and we are encouraged by its possibility but this is still early days. And we have a lot of work to do, particularly with all the restructuring in place to get this program in place to a point where it's delivering the kind of productivity we need. And eventually to get this program in place to a point where it will offset things like revenue inflation and other externally uncontrollable events.

So with those four priorities in place for next year, we have offered up guidance today for 2004, as follows. We will deliver EPS between next year between $1.60 and a $1.68 per share. So that would be flat to up 5% versus the current consensus estimate for Newell Rubbermaid. And, of course, that is all before any divestitures. That guidance assumes that resin will continue to inflate next year particularly in the first quarter. Right now, all indications suggest it will -- resin will continue to go the wrong way moving into 2004. So we're not naive about that. We are building that into our 2004 model.

Our guidance for cash flow next year is that we will deliver free cash flow, of course this is after dividend, between 225 and $275 million. So that will continue to show good sound progress in generating cash flow. Our fixed capital guidance for next year says that we'll generate -- we will invest between 250 to $275 million fixed capital which, importantly, is below our expected depreciation level of $300 million. We are managing fixed capital down for the reasons that Pat outlined. We are just learning a lot about where we should invest this capital and where we should, in fact, outsource and not tie up the company's fixed capital on certain product lines. So that's the guidance on fixed capital.

I want to touch on use of cash between now and the end of year 2004. The free cash flow we generate will be used to number one, pay down debt; and number 2 to, of course, maintain our dividend which is 84 cents a share. In fact, I just want to reiterate because I have had some questions, we are strongly committed to our dividend level. Our free cash flow is very strong, and we have good visibility and free cash flow going forward. So our dividend is something we are committed to at 84 cents per share.

Let me just summarize where we are as a company and, once again, reiterate that we believe strongly that we have -- with our how-we-win roadmap, we have the right measures in place, the right strategies in place to transform this company into a strong financial performer over the long term. We have an organization in place that has rallied around this strategy and these measures and has made great strides over the past three years in transforming Newell Rubbermaid, a company with immense potential and a great portfolio of brands, but still a lot of upside potential in terms of our financial results. And as I mentioned, we have learned that this transformation process is more complex, is taking more time, and will take more time. And some of our product lines won't fit.

But, to be fair, our team has delivered an awful lot of the broad-based progress here over the past three years. Let me just give you a summary of some things that we are proud of in terms of achievements here in the company. First of all, we've been very busy in terms of restructuring. In fact, we have closed 73 facilities over the past 2 1/2 years. We've discontinued, this year alone, over 75,000 SKU's which is -- I can tell you that's dog work. We have cut 89 legal entities, and we still have more to do. This is time consuming and costly in a nonrecurring way. But the fact is we need to clean our company up. And so we've cut 89 legal entities out. We have cut $125 million of SG&A at an annualized rate, but that is permanent SG&A cuts of redundant unnecessary, or nice to do, overhead that's been cut. And the team continues to do a nice job this year in hacking away at SG&A that we just don't need. We have recruited over 130 VP or President level executives from outside of the company and promoted about that many internal folks. And we now have what we believe is a very strong team here at Newell Rubbermaid. And a team that's rallied around our strategy.

Over the past three years we have integrated three key acquisitions. The PaperMate acquisition that was consummated in 2001 has been successfully integrated. American Tool, that we acquired 18 months ago, has also been a tremendous success for the company. And our Lenox acquisition made at the end of last year has also proven to be a winner for Newell Rubbermaid. So I am encouraged that the three key acquisitions that we made in the last three years have all been successfully plugged in and integrated into our company, and all represent high potential/high ROIC businesses that have great promise for the future.

The measures we put in place in the company and, you know, we have five internal sales growth of income percentage working cap, as a percent of sales cash flow and ROIC, those five measures have driven important behavior changes in the company. For example, in the area of working capital, if you go back to 2001 when we started the year, we had a ratio of 29% working capital as percent of sales. And by the end of this year that number will be down to 24%. So thats a full 500 basis point reduction in working capital as a percent of sales which has taken a tremendous amount of effort and is an important fundamental for our company.

An interesting panorama of our cash flow performance shows that the team really has more broadly really zeroed in on cash flow. If you go back to 1998 to the year 2000, in that three-year period, the company generated $156 million of free cash flow. Between 2001 and the end of this year, we will generate literally a billion dollars worth of free cash flow. And over the three-year period between 2004 and 2006, our visibility says that we will achieve a minimum of 900 million of free cash flow. So we have transformed the company into a strong cash flow generator. And that's why we are very committed to our dividend and reducing our debt through that free cash flow.

Turning toward new product, we have strengthened the company's new product development capabilities over the last three years. Our new product pipeline has taken a while to get cranked up. And the fact is, launching a new product development process is not easy and not quick and shortcuts just don't work and we've learned that. I will tell you though that our product development processes that have been infused throughout the company are taking hold, are gaining traction, our pipeline is building, and, although it is taking longer than I originally thought, the fact is over the next eight quarters you will see quarter after quarter very visible signs of our new product development capability with a stream of high margin new products that we will bring to market.

In fact in the fourth quarter we will launch this year, toward the tail end of the fourth quarter, a nice array of new products that will be meaningful for our results in the future. In the Writing Instruments arena, we will launch an expanded line of metallic Sharpies, a new series of Sharpie earthtones, and a new unique technology Sharpie professional range targeting the professional end-user. Those are all brand-new Sharpie products.

In the Irwin family you will see us rollout the new Irwin quick wrench in the vise grip [indiscernible] line, a product that has great promise and is very innovative. And also in our Irwin straight line laser business, we will launch a series of measuring and marketing tools that we think will be important successes for this holiday sell-through season.

And then in our Calphalon business, we will allow during the fourth quarter here a new technology of Calphalon, called Calphalon One. This is a revolutionary cooking surface product with infused anodized surfaces that will outperform existing high-end cookware. We have high hopes for this range of product.

Again, our product pipeline is building, it has taken longer than I expected but when we look out over the next three years, again, we remain highly encouraged that new product is gonna really transform this company's financials.

We also have worked hard on strengthening the company's marketing capability. We are moving from push to pull, we are beginning to do some important consumer marketing. We have seen some good early successes with the Sharpie brand, with the Calphalon brand, our TakeAlongs line in Rubbermaid, our Irwin tools programs. But the fact is, our marketing efforts are very much in the (inaudible) phase and we are really just scratching the surface here on our marketing capability as we go forward. Good progress but still a long way to go.

We also in the company, over the past three years, have launched what we believe is a very effective operating cycle. At the division group and corporate level, we have a very rigorous process, including an annual strategic planning process, an annual budget process, quarterly operating reviews, and the annual overview process. And to manage the financial aspect of that operating cycle, we have successfully integrated Hypereon [ph]software which has improved our visibility and our ability to roll up the financials and plan our business. We are beginning to achieve an operating rhythm in spite of the disappointing year that we've had in 2003. That [indiscernible] is alive and well and gaining traction in the company.

I will also tell you that we are very proud of the organizational structure we have in place and the team of talented leaders here at Newell Rubbermaid. Jim Roberts and Bob Parker now lead the operations of the company. These are two seasoned veterans with an outstanding track record of success. They are both off to a great start in their new roles and I think you will be impressed with what they achieve as roles as Co-Chief Operating Officers of the company.

Jim has reorganized the Rubbermaid home products business at [indiscernible] into two groups to add focus here in this large business. We now have a food group and a home organization group and that is off to a good start. And I think you will see that our organization is solidifying and a sign of strength for the company.

I'm also proud that, over the last 18 months, we've added 2 exceptional board members Ray Viault from General Mills and Tom Clarke from Nike. These two gentlemen, combined with our current board members, have all come together and give us what we feel is a very strong, very engaged board that has been extremely helpful here as we steer this company through this transformation.

I will also say that our Phoenix initiative has been highly successful for the company. We've hired over 1500 of these Phoenicians, over 400 have been promoted. While we continue to refine the deployment of Phoenix so that the Phoenix sales and marketing folks are working on the highest return on invested capital businesses and retail channels of distribution, the fact is this program is going to have a tremendous medium and long-term benefit for the company and we are very excited about that.

We also remain very committed to our breakthrough leadership training efforts for the leaders of the company. We've trained over 250 executives. And the focus next year will be all about new operational excellence.

So just to summarize this call and to open up for questions, I want to conclude by saying Newell Rubbermaid continues to be a company that is solid financially. In fact, it's interesting, many people ask me: How is this turnaround going at Newell Rubbermaid? And the fact is we are here in 2003, even in our $1.60 a share level which is below what we originally targeted, we are still going to be a company this year that generates $780 million worth of operating income. That's a 10% performance of op income. And that's after absorbing a $72 million increase in revenue over 2002.

We are a company this year that is delivering a 10% return on investment capital. Not what we are capable of long-term, but it is a nice place to start in terms of 2003. And, we have a solid financial foundation to build from.

So we do believe here at Newell that we have an outstanding portfolio of businesses that are kind of bundled up in a broader enterprise that needs some divesture and some reconfiguration. We have an outstanding team of people. We believe we have the right plan with the right measures in place. And after we complete our 2004 priorities, which we articulated here on the call, we do believe that Newell Rubbermaid will be poised to maximize the long-term financial potential.

With all that, I would like to open it up now for questions.

Thank you, we will now begin the question and answer session. If you have a question, you will need to press star, then the number 1 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 handset before pressing the numbers. If we are unable to get to your 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 the number one on your touch tone phone.

Your first question comes from Budd Bugatch with Raymond James.

Good morning, Joe. My question goes to try to get to some indication on sales growth going forward I know that you said you are going to discontinue about $200-300 million worth of sales next year likely and some divestitures. Without giving details, can you give us some idea on maybe the sales level of the divestitures that you think would likely happen in 2004?

Budd, I will tell you where we are in the planning process in terms of top line for '04. We have, as you know -- we have parts of our portfolio that are growing nicely and in fact we'll see that growth continue or even accelerate next year. And there are other parts of the portfolio that, by design, if we don't divest we will downsize. And so -- because there are moving parts here, we decided not to present an overarching guidance for internal sales for next year. In fact, it's not the most important metric in total for next year. It's highly important if you are a business like Lenox or a Writing Instrument that has a [indiscernible] future for the company. But, at this point, I think it'll be a conservative overall performance, but we're just not ready, Budd, to offer that specific guidance.

One other thing that you and I have talked about in the past is this new product and the vitality index, and I know you talk about meaningful new products, which is important, I think, for your future. Can you give us any guidance on if you've have gotten anywhere to create that metric that has some meaning?

Yeah, Budd, it's an excellent question. First of all, I will -- I will tell you that I overestimated our ability to ramp the new product process up over the last 24 months. But the pipeline is very encouraging with high impact new products, not SKU line extensions. And that's the key here is, we can't confuse --and that's why we're reluctant to today to provide a metric vitality rate because the key here is impact versus activity. The key is focusing on -- but a narrower range of high potential product areas that can yield great upside and not have so much product activity going on throughout the company that we have, you know, a lot of activity without the impact. So I will defer offering up a metric here to perhaps Analyst Day when I think we'll be ready to give you something more meaningful that you can build a model around.

Okay, and lastly, I just want to confirm that for the fourth quarter it's internal growth that's going to be down flat to negative 1%. Is that. . .

That's right. Negative 1 to flat.

That's for the year, Budd.

I'm sorry, that's for the year. It's 1 to 3 up for the quarter.

That's correct.

Thank you very much.

Thanks, Budd.

Your next question is from Wendy Nicholson with Smith Barney.

Hi, how are you?

Good.

My first question is on the impact, I guess the potential impact of divestitures on EPS next year. And I know that's contingent on a lot of things in terms of how much you sell and the price you get. But, in terms of the guidance that you are giving us, being -- excluding the impact of divestitures, the businesses that you're selling, I think several of them are losing money. So does the divestiture result in an incremental negative revision to EPS or how should we kind of think about that?

Wendy, it's an excellent question. And as you know, we ,of course, don't know exactly what the valuation will be on divested businesses but, I think it's likely that some of the divestitures will, in fact, be dilutive. And the reason is there is some earnings that go along with these businesses and, of course, we have to factor in that corporate overhead is allocated across those businesses. And while we're cutting that and -- I think we will have that under control. I would assume some dilution on the businesses that we sell. That's not in our guidance. I'm certain that it's the right thing for the company to divest its businesses, Wendy, but, that's the assumption that I would make.

And then in terms of kind of the timing of the divestitures, you know, you talked about sort of being in the process of preparing for divestitures -- does that mean, let's hurry up and fix the businesses? Or have we just gotten to a point where it's like, you know what? Just sell them already?

So, Wendy, that's a good question. First let me also, expand on the first answer. I will say that, under any scenario, at this point we believe any divestiture will be accretive to ROIC. So while EPS -- you may see dilution in EPS, there's -- actually return on divested capital will go up because these businesses all, in their current form, are low ROIC businesses. And, you know, our driver at the end of the day here is return on invested capital. And we are obsessive about that and we need to do better there.

In terms of how we are managing businesses that are about to be sold here over the next 18 months, we are going to very thoughtfully continue to manage these businesses. We, of course, are not going to invest significant fixed capital, but we are not going to starve these businesses either. We don't want to be reckless about milking these businesses. So we will manage them thoughtfully, Wendy, we will manage them so that they'll be in a position to transition to another company or another owner. And, you know, in good status without us, let's say, trying to completely fix the issues that are suppressing the earnings this year. I hope that answer helps you and gives you some perspective.

Definitely and that's very encouraging. And the last question I have is I think a naysayer would listen to some of your comments on capital spending and maybe say, gosh, these guys are delaying capital spending in an effort to drive free cash in the near term. And maybe two or three years from now, we are going to have a humongous CAPX budget to make up for some underspending we did when times were tough. Is that the case? Or is it more that you've taken a new perspective on your long-term expectations for capital spending?

I think, Wendy, we have learned an awful lot over the last three years about how much capital is really needed here. And I will say that Tom Clarke, who joined our board from Nike, has been an excellent mentor here. Nike's model is straight outsource. I'm not saying that's going to be our model. But we have become much more open minded, Wendy, about sourcing versus making. And I would expand it to say sourcing and LCC's versus making in places like western Europe and North America.

When you look at that, and we've just gone through an intensive strategic planning process of every business in the company over the past quarter -- when you look at that, the fact is we have some businesses where we haven't been investing fixed capital and we will move to more of an outsource model. That, in no way, will impede the business's growth potential. In fact, it will improve it and make it faster. If you go to the Chinese theater today, there are so many potential partners wanting to work with a company like Newell Rubbermaid that can perhaps invest their capital, allow us to apply our intellectual property which is the real strength of our company. And we end up with new products and growth without the capital burden that we've had in the past.

So in no way is what we're doing to fix capital, in fact, something I would consider to be starving or short-term to make some short-term metric. We still invested 300 million this year, and and will still be 250 million minimum next year. But I think we are more smartly managing capital down.

The final comment Wendy, I will tell you, is that even when we go out and buy fixed capital, we are becoming, I would say, much smarter in the way we buy it, whether we are using reverse auctioning technology which has been a tremendous benefit to us, or whether we are just doing better negotiating, we have significantly upgraded our purchasing team worldwide. And, I am so pleased with the performance that this purchasing team has delivered and they have demonstrated the ability to continue to reduce our capital costs in the future. Pat?

One more point, I think is in our movement now to -- no op-ex and lean manufacturing is also a movement away from fixed capital and being more flexible than fixed capital allows you to be.

It's a great point. The whole premise of Newell op-ex is, if you have a piece of equipment that's producing 100 units a day, and you can take that up to 120 units a day, rather than expand capacity with more fixed capital, you do it through lean and op-ex. And Jim Roberts and his team have demonstrated that we can do that, and there's a lot of upside potential. So those are all the factors that go into fixed capital.

That color is terrific and it sounds great. Thanks.

Thanks, Wendy.

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

Hi, Eric.

Good morning. A couple of things. First of all, with your guidance next year you effectively will have three flat years of earnings during which you will have achieved these cost savings and taken $450 million in charges. Can you just give us a sense of where -- you know, why it's not getting to the bottom line. And why you think in '05, then it starts to show improvement?

Sure, I'll give you directional feedback, Eric. And, Pat, you chime in as well. I mean, Eric, as you know and as we've learned, restructuring doesn't always generate immediate gross margin improvement. And I think we've been overly aggressive in assuming that, when we close down a factory in Western Europe and move to China, that we're gonna instantaneously see the benefit.

The fact is there sometimes is a 9 to 12 month period, maybe longer, where there's redundant inventory, the plant's really not fully closed in France while we are revving up China. And there's a lot of nonrecurring one-time costs that we simply have to factor into our plans. And that has reduced, in some cases, the pace in which we harvest the benefits of restructuring.

Secondly, I think drawing overarching conclusions about Newell Rubbermaid when looking at our overall financials can be misleading. The fact is that many pockets of our company have demonstrated important gross margin improvement. In fact, Eric, if you look at the Irwin team in the third quarter they showed nice progress. And they're just getting started.

But when you look at it in total, you have to remember there are parts of our company where we are seeing significant price erosion and that margin dilution has been effecting our ability to show the overall progress. I hate this excuse but it is factual. And we have to learn how to offset it in the future. But the fact is that resin this year is $72 million more expensive than it was one year ago. And so, if resin was just flat, Eric, you know, that's $72 million gross margin that drops right through.

Now, in the future, I'm encouraged because we will buy resin more intelligently, and we will achieve productivity gains that will offset raw material inflation like this resin issue. But the fact is, to answer your question, that suppressed gross margin improvement [indiscernible] in the short term.

I have a lot to add to that. I think also a lot of new product investments that we made, Eric, to date, have not borne fruit yet. And we've talked about that being a slower process than we had originally anticipated, that's true. We have made the investments, we've added the engineers and marketing people and that's yet to the bear the fruit that it will in the future.

I think, Eric, the only way we can really demonstrate our ability to improve gross margin is just to do it. So we'll need to put up a series quotas in a row before people can see the trend and the capabilities of our management team. But, I do think people would be encouraged if they isolate Irwin hand tools -- Irwin power tool accessories, and Lenox which we just acquired and we've improved since the day we got it , although the margins were very high. And even in Writing Instruments, our overall progress there, after assimilating Paper Mate and that's a high margin business that we've improved over the past three years worldwide. So I am optimistic that long-term you will see important improvements in gross margin.

And then just a follow-up, Joe. You've invested a lot of time and effort with new products and to the point you just made, it's not really borne fruit yet. Is there something structural within the business or the portfolio that's made the new product efforts and investments less successful. Can you just give us some sense on why we've not seen the payback from those?

Yeah, Eric, it's an excellent question. And it's -- you know, I've learned an important lesson here the last three years with the new products. So let me answer this a couple of ways. First of all, again, drawing an overarching conclusion about Newell Rubbermaid's new development process is difficult because the fact that we have some businesses that are extremely skilled at developing/launching new products and these results are visible in their P&L. We have other businesses that are still learning. They're in a [indiscernible] phase. They haven't hired the -- all the R&D folks yet, all the industrial design folks yet. And so they're still learning and developing the process.

In some pace cases where we've tried to truncate the process and taken short cuts, we've found that that, in fact, is not effective. And I think the whole company is learning how to become better at product development. You know, we've benchmarked the best companies in the world with the process. And without exception, in fact, the best companies in the world with new product, have been doing it a long time. Now, it's not going to take us a decade to get really good at new product, Eric, overall in the company, and, in fact, I believe over the next eight quarters --it won't happen all of a sudden, but you will see a gradual flow out of the pipeline of important high-impact/high-margin new products that will stick and make a difference.

And, just -- I know you follow a lot of the food companies and just take a look at the new Irwin quick wrench and tell me what you think about our ability to develop an innovative new product. There are literally a dozen new tool products that are either launching this quarter, whether it's [indiscernible] reach or quick wrench or the new laser products.

Or watch what Jim does -- Jim Roberts does with that business next year. I will say the same thing with Bob Parker's Writing Instrument area. You know, they are going to want, at the tail end of the quarter, a series of really interesting products. There's a new generation Expo -- first new Expo dry erase marker in literally decades. And it will change that industry. And Bob and his team will bring to market a series of very exciting Writing Instruments next year.

So the summary here is that, you know, this has taken longer than I thought. The financial targets that we established for this year assumed more new products than we really got, but there is certainly no insidious problem of structural issue at Newell Rubbermaid. In fact, if anything, I think people will gain increasing confidence in our ability to develop new products.

Thank you.

Your next question is from Bill Steele of Banc of America Securities.

Thanks. Good morning, Joe. I've got two questions. One shorter term, one longer term. If we look at the fourth quarter compared to the third quarter, it looks like you're anticipating additional operating profit, call it, of about $25 million. And I'm wondering, where is that going to come from?

Bill, in the fourth quarter, sales -- we believe we'll have 1 to 3% internally, Bill, in the fourth quarter, compared to the decline we had in the third. So it is primarily sales driven. It's really across al lof our businesses.

But one of the hurdles we get over in Q-3, it's significantly less than in Q-4, is our aggregate of high risk accounts. They are significantly behind us now. There is a slight impact in Q4, but not to the level we've seen previously. We also do have more new products in Q4 than in Q3, particularly in our Graco business and our Sharpie business, and in our tool businesses. And we did have slippage, again, from Q3 to Q4 in our toy and Graco business where we had orders that thought that would ship in September moved to October. So we feel that that's going to be achievable, that 1 to 3% rate. That is the main driver for the improvement on the bottom line.

Okay. So no assumption then in terms of productivity improvement or resin, or anything --

Our gross productivity, Bill, has been pretty consistent all year. And I hate to use that term because it feels like an excuse. But resin is less of an impact in the -- slightly less impact in the fourth quarter than the third. But that's not the main driver. We are going to have about the same gross productivity. Volume is going to be suppressed -- margins in the fourth quarter just like it did in the third as we take the inventory out. But about the same level. So -- I think the main driver is the top line improvement.

Okay.

And, Bill, mitigating the positives as far as fourth quarter, we still will have significant restructuring activity in the company with plant closures [indiscernible] continuous, planned exits out of product lines, and a lot of heavy lifting. You know, and so the guidance reflects I think a good balanced view of the heavy lifting paths plus the positive drivers.

Okay. And the longer term question in '04. If we can call that longer term. It looks like if you were to target high single-digit EPS growth and, let's say, we just assume that it's going to be flat, that yields us $65 million. And how would you be redeploying that $65 million next year?

Could you ask the question again, Bill?

If we were to target high single digit -- or mid to high single digit EPS growth, and then just say, okay, just for argument's sake, you are going to be flat at 160. That delta is about $65 million pretax. I'm just kind of wondering how you guys would be redeploying that money next year?

Bill, first of all, it's a good question, You know, the $1.60 is the low end of the range.

Yeah.

And, you know, I believe that as a management team, we just become more conservative. Our -- we need to commit to numbers that we're going to achieve or exceed. And so -- yeah, when you do the math, you know, barring some external debacle, I do believe these numbers are more conservative. And that's wise for the company. But with that said, I also want to reiterate there is a ton of restructuring activity next year, Bill, that will generate one-time nonrecurring costs, and also importantly will consume, in fact, a lot of managerial bandwidth.

Bill, what we've learned is we just can't close all these facilities, open up China, and have business as usual everywhere else. I mean, we have to factor that into our earnings. And that's a part of this too.

We also, you know, I'd say have learned our lesson on resin, and we are conservative on resin and raw material. And, I think that's an important element too. And the final comment is that when -- I think one of the reasons that we haven't done as much divestiture activity over the past three years as we perhaps should have, is because it takes a lot of work. It's hard work. We are going to focus, in fact, a portion of our managerial bandwidth on the divestiture process supporting Buddy Blaha in his efforts. That will, Bill, take some time and will have some effect in the short-term on earnings.

Also, the rationalizing of our product lines, as Joe mentioned, and we're doing that next year, that does not have a positive impact on EPS in the short-term. It does have a slightly dilutive effect. These are not negative -- in most cases negative gross margin items, but they're items that we don't see our way to achieving the high -- you know, the higher ROIC that we need to achieve going forward. And, therefore, will take it's time to exit those categories. But they're not, in the short-term, they're not accretive for us [indiscernible].

I guess another way to ask this is that the majority of the 65 million is not going to go behind the brand to drive higher unifying growth?

Well, let's -- Bill, you can slice and dice this a lot of ways. The fact is there will be more brand investment and marketing investment next year than this year. Those numbers will ramp-up, But, importantly, they'll be very focused on high impact brands that we think have long-term upside potential, that already have traction or will begin to have traction next year. So we're not -- we're not signalling that we're backing off the strategy we set out to launching the company. It's just that we have these other factors that will keep earnings growing from at a higher rate. I don't know if that makes any sense. But don't look for us to reduce marketing investment next year. The range implies significant, in fact, marketing activities throughout the company.

I think a lot of that was offset by streamlining, again, so I don't think our overall SG&A will be up significantly. It will be up but not significantly. We will continue the investment in the marketing and businesses that are achieving the high returns that we are seeking, and so we are not opting out activity. But we have a lot of moving parts next year, so keep that in mind. The divestiture activity, although it's excluded from our guidance, it does take a lot of management attention, the restructuring and the rationalization of the product lines and the implementation of [indiscernible] it's lot a moving parts. Again, we want to be conservative.

Thank you, that clarifies it.

Thanks, Bill.

Your next question is from David Cumberland with Robert W. Baird.

Good morning. For each of the businesses that do not fit with your long-term plans, have you determined at this stage in each case which ones you'll try to divest, and then which ones that will see a product line rationalization or some other reconfiguration?

David, our strategy is to do whatever makes the most economic sense. If, in fact, it makes more sense for us to divest the business as opposed to going through the heavy lifting of reshaping and reconfiguring it, we're going to pursue that avenue. We are -- there's no sacred cows here. On the other hand, if, from an economic standpoint, a business won't generate the valuation that we're looking for we believe that we know the steps to take. Although they might be painful, as in downsizing and closing facilities. We know the steps we need to take to put those businesses on track to deliver the right ROIC. It's early days and we can't tell you, when we look at that series of businesses, which camp they'll fall into. I can tell you the process is all about what gives us the best economic return.

And then one other question. If you could update us on the growth that you refer to as strategic accounts, and what role destocking by some of your key accounts may have played in the quarter?

Well, we were up double digits as far as strategic account growth in the third quarter which was encouraging and well above, of course, our overall internal growth rate as a company.

There were, I would say, I wouldn't call it destocking -- there were -- there were pockets of tight retail or control in terms of inventory management. You know, you'd see just in Writing Instrument -- the writing instrument business worldwide -- and it's not that they were destocking as much as, I think that we're still in worldwide a tough economic environment and retailers appropriately are being very careful about their inventories. We understand it, but it did affect our -- particularly Writing Instruments in the quarter -- our performance. Year to date it might be helpful that we are up 13% with the strategic account growth that we track as a group which is not bad this year with all the things going on in the company.

Okay. Thank you.

Your next question comes from the line of Connie Maneaty with Prudential -- Prudential Equity Group.

Good morning, I have a couple of questions. Just to be clear, the -- you -- do you intend to discontinue 2 to $300 million in sales in addition to what might be divested?

Yes, Connie. That's correct.

Thanks. And I think Pat mentioned or you mentioned, Joe, that you might take price increases on products where you're getting a low return.

That's exactly right. The -- the -- and ur plan here is, in some cases products are just positioned at too low a price point. There is a demand, you know, when we study price elasticity, what we see is that there is a consumer interest in some products where we're not making money. If we were just to price these products at a higher level, unit sales would go down, and we understand the economic theory, and we are working very closely with our retailer partners to do this in a nondisruptive way. And, you know, we understand in some cases retailer partners may not carry certain products, but our research at the consumer level strongly supports that there is some level of demand even at higher price points. So -- so that is something that we will pursue if it will lead to the right of return on invested capital levels for the company.

And we're not naive. We know that we don't have the capability in all categories by any means with our retailers. That's why you're going to see such, you know, -- a fairly large number, a 2 to $3 million number, in rationalization because if we can't see our way, again, to improving these product lines for these segments to a acceptable ROIC, in the -- not necessarily this year, but two or three years down the road and pricing is one of the ways -- one of the means we have to get there, if that'is not accepted in the marketplace, then we're going to exit that category.

Connie, as a - you know, it's a final does of theory, but, I think, the fact is that some of our products, price denotes quality, and we may have historically mispositioned some things. And so we did -- in our strategic plan process this year, we were, again, very intense and very rigorous at looking at our price points and the element of our -- of our financials. And -- and so we have to be more thoughtful going forward even though, in the short-term, our -- our EPS guidance reflects that there's -- this is not an easy thing to implement.

So as we look at the composition of sales next year, do these proposed price increases offset the current pricing pressure and the expense as lower unit --

No, Connie, I mean -- we think it would be naive to assume that pricing will stop its annual 1 1/2% erosion level. In fact, this year, unfortunately -- as you know our prices eroded at a faster rate than our model Pat assumed at the beginning of year. It's one of the reasons why we had to take our guidance down this year. So, as we go forward, we'll be very conservative and we'll assume price erosion at a 1 1/2% level. These increases -- you know, if we do better than that, then great. But that -- our guidance is going to reflect conservative thinking.

Okay. Also, why did -- could you go over exactly what Jim Roberts did at Rubbermaid. What was it divided into and why?

Well, the Rubbermaid Home Products business that [indiscernible] has grown to a billion dollar plus enterprise. And we decided it was too large to really get our arms around -- for one president. So we've taken John Constantine, the incumbent president, focused him on what we call Home Organization, which is about two-thirds of the revenue, and we've taken Andy Silvernail, [ph] promoted him to the position of president of the Food Storage Products at Rubbermaid Home Products. So that would be StainShields, TakeAlongs, other food products, the new hydrogear [ph] line, et cetera. So Jim's folks divided up because those two businesses, Home Org and Food, have very different dynamics, very different margin structures, very different competitive sets and distribution channels. And we think it makes a lot more sense for us to focus in and deliver our results.

Okay. Could you also comment on how much Europe declined excluding currency?

I'll get back to you on that answer. I don't have that here with me.

Okay. And one final thing. Do you have any sense of what inventory levels are as a trade, and what your ship-in was versus take away in the quarter?

Well, Connie, I'll give you a little perspective. July and August were dreadfully low months in terms of sales. And I believe retail was, in general -- in general retails were reducing their inventory levels and they were skittish. And then September you saw a significant turnaround in the order rates and inventories started building back. But I still say -- I certainly wouldn't say that retail is overstocked now. I think retailers are cautiously building for the holiday season. I use the word "cautious," you know, they watch it every week. When there's traction in a product line in terms of sell-through, they continue the order rate. If there's softness, they -- retailers are becoming very sophisticated about cutting that off, as they should be. So I would say right now there's nothing in our view, you know, it's early days for the fourth quarter, but certainly not overstock. But I still see a very conservative, very skittish retail environment. And our guidance reflects that.

You said that July and August sales were low, was that your sales or retail sales?

Oh, that was -- our sales were low. I do think that's linked somewhat to a broader retail trend. But, you know, again, I think our results, Connie, are -- as time goes on, going to be related less to the overall macroeconomic environment and more to our ability to bring new products -- and market those products to market. And, you know, our new products in some cases were late. And I think other companies had a better third quarter than we did. And they've done a better job on new products. And so I think that while the macro economic environment remains soft, our own internal controllables have more to do with our results.

Many thanks.

Thanks, Connie.

Your next question comes from Carol Wilke with Merrill Lynch.

Thanks. A couple of questions. Which businesses are in the fourth quarter -- do you expect to take the most inventory? You commented this quarter that there were two business in particular that had quite a bit of inventory cut out that helped your 94 million.

Ask your second question, I'll get back to you in a just a second.

Oh, yes, the second question. On the pension equity charge, last year I think you guys changed your assumptions on each of the [indiscernible] aspects for pensions.

Sure.

Are you making any changes for '04 in terms of the impact on your pension expense that you're assuming for next year, you know, as part of that the reason for taking the charge in the fourth quarter?

We are making one change more than likely, and we are still in the analysis stage. But the discount rate, which is currently at 6.75%, is almost certainly going to be lowered. We haven't reached an exact number yet, but in the 50 basis points would be an approximate reduction there. That does have an impact on pension expense for next year, but the bigger impact on pension expense was really the return of assets that we had in the previous three years. And, you know, with pension accounting, you don't take the P&L charges the year that pension activity happens, you take it over several years. So, to answer your question, pension expense is going up by about 25 to $30 million year-over-year next year.

Thank you.

Okay. I'm sorry, Inventory --

[Inaudible] goes with, I think it was Sharpie and Calphalon that you had the big -- you took a lot of the inventory out in the third quarter. Are those still the two businesses that you see for the fourth quarter --

It's broad-based. But the most significant group, frankly is the Irwin group, this time, with a significant piece coming out of Irwin -- about $40 million in Irwin. The Calphalon group is also, again, taking a significant piece out, also about $40 million. And the remainder is spread across the other two groups. But all four groups are participating in the inventory reduction. The biggest two would be the Irwin and Calphalon.

And, Carol, I just want to add on inventory that this is not -- these are not all unnatural acts. Our business from a seasonality standpoint naturally winds its inventory levels down in the fourth quarter, particularly in the Christmas sell-through oriented businesses. So this is not us having imposed additional steps. In many cases, this is it's natural sales [indiscernible]. In some cases, we are selling off or reducing inventories over and above the normal rate.

And if I could ask just one more question. What do you think is the biggest driver of the weakness in the commercial business of Sharpie?

I think it's, Carol, as simple as the -- our distributors, who are very well managed, and their corresponding customers, they are scaling back on all sorts of purchases. You know, MRO is a real focus in terms of purchasing. And I think materials supplies, any type of MRO, any type of commercial expenses that are discretionary, I think you see retail -- you see those and users deferring purchase or trying to reduce as much as they can. That compounded by the -- I'd say the -- you know, the downsizing of America's white collar workforce. As companies lay folks off at the white collar level -- at the executive level, that reduces the demand for -- in this area. So I think with that said, this year has been particularly tough. And, you know, it's hard to imagine a scenario where it will continue to -- to decline in the commercial sector.

Can I just ask one other question?

Uh-huh.

The new products front. Do you still have the goal, or I should say the requirement, of the new product has 10 point higher gross margins? Or is it certainly higher gross margins, but not necessarily having to have that 10 points?

No, the goal -- the internal target is 10 points or higher. In some cases we've achieved that. In other cases, Carol, we have been disappointed in the past. And part of that is, you know, we've tried to take short cuts in a couple of cases and we've ended up with a small group of products that had margins below the targets. And we're disappointed from it. We've learned from it. And we have to be very disciplined about adhering to our process in terms of developing new products.

But going forward that target is very much capable of being in place, and the fact that all the products I talked about for the fourth quarter, the margins are exceptional and the products that you see -- you'll see over the next eight quarters, the margin impact will be significant and in line with that internal target.

Thanks very much.

Gentleman your final question from the day comes from the line of Linda Bolton Weisner with Oppenheimer.

Thank you. Just a follow-up on what you were saying a little bit earlier about the Irwin group. That was the business that posted the biggest -- well, the only growth margin or, I'm sorry, operating margin expansion in the quarter, and it was a robust margin expansion. Can you comment if that was like a mixed issue from including the acquisition or did that relate to the build up inventory in the Irwin business?

There wasn't a build in in the quarter in the Irwin business. They took inventory out in the quarter also. I don't have the exact number in front of me. The improvement in margins there are related partially to the Lenox acquisition, but also to new products, and to a 4.7% net productivity number in that group for the quarter. So Lenox did contribute. I don't have the exact breakout of their contributions versus the other two items with me, but Dave can answer that off-line, if you like. But, there was significant contribution from the productivity of 4.7% and also from new products in the quarter.

I also, Linda, will add that Jim Roberts is -- and his team in the -- his former responsibility in the Irwin group, they're well ahead of the rest of the company in, number one, infusing a new operational excellence system which will improve margins, reduce costs and improve cycle times. And you'll see real benefits as we go forward. And, secondly, Jim has been leading an awful lot of restructuring activities in Europe and the U.S. And, you know, he's done a particularly good job in western Europe under Karl Kahofer's leadership. And all that activity is showing up, in fact, in his gross margin expansion as well. So this is an area where you are reading the benefit of restructuring and the benefit of [indiscernible] and it's encouraging to us there because as we roll that methodology out throughout the rest of the company, we believe we have an awful lot of potential to improve margin.

And just one more thing. In terms of the inventory reduction that you accomplished in the quarter, was it all through idling of plants or was there actions taken in the retail channel as well? And what would be the proportion of retail channel action versus idling of plants?

It certainly was not all idling of plants. First of all, the company -- over the past three years, we have made progress on reducing our excess obsolete inventory levels, Linda, but we still have too much. Much more than our peer group companies have. In fact, over 10%. And, you know, it's just a number that requires a lot of constant attention and effort. So we reduce excess obsolete inventory. We did -- in some cases where we had adequate inventories, idle plants, in fact, and you know, we're discontinuing a lot of products. We discontinued 25,000 SKUs in the quarter. Those products should be in the inventory reduction. Pat, do you have anything to add?

No. We came in to the back half, as you know, with more inventory than we needed. And so there was a large share that happened by just adjusting our manufacturing levels down, but there was no unnatural acts in the retail trails.

And I guess the final comment, Linda, as you know, when we restructure, what we've learned is that if you close one facility and open up another, we build more inventory in that interim period than we need just to cover service levels and we have -- we had a lot of that, more than we planned in the first half of this year. And we are, in fact, selling off some of that. I wouldn't classify that as idling of plants, what it is though is selling down [indiscernible] stock and inventory that were built, in some cases overbuilt, to buttress our service levels in the time of restructure. That's a big part of it too.

With that final question I'd just like to thank everyone for your interest in Newell Rubbermaid and reiterate that we are very much encouraged about our future of this company. And I believe we're on the right track. You will see that as the quarters unfold. Thank you very much.

If we were unable to get to your question during this call, please call Newell Rubbermaid investor relations at 815-381-8150. Today's call will be available on the web at www.newellrubbermaid.com. And on digital replay at 800-642-1687 domestically, and area code 706-645-9291 internationally with a conference ID number of 2791930 one hour following the conclusion of today's conference for 30 days ending November 30th, 2003. This concludes today's conference call. You may all now disconnect