諾威品牌 (NWL) 2004 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 in a listen-only mode. After a brief discussion by management, we will open up the call for questions. Today's call is also available live via audio webcast at www.Newell Rubbermaid.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 I.D. number 6424122 to access the replay. I will now turn the call over to Mr. Jesse Herron, Vice President of Investor Relations. Mr. Herron, you may begin.

Thank you. Good morning. And welcome to Newell Rubbermaid's first quarter earnings conference call. Today I'm joined by our CEO, Joe Galli and our CFO, Pat Robinson. Before we begin, let me take a moment to read the obligatory forward-looking statements.

The statements made in the conference call not historical in nature are forward-looking statements. Forward-looking statements are not guarantees since there are difficulties in predicting future results and actual results could differ materially from those both 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 form 10K, including exhibit 99.1. Additional financial information about the company's 2004 first-quarter results are available under the Investor Relations section of our web site at www.NewellRubbermaid.com.

With that being said, let me turn the conference call over to our CEO, Joe Galli. Joe?

Thank you, Jesse. I'm pleased to report that Newell Rubbermaid made sound progress here in the first quarter of 2004. First of all, we did successfully complete the divestiture of three businesses, Anchor Hocking, Mirro and Bernz collectively adding up to $695 million in revenues.

These -- these low margin businesses were targeted for divestiture candidates and we completed this divestiture ahead of schedule. We were able to secure $310 million in proceeds for these divested businesses, 240 of which we received in cash and an additional 70 that we will collect in accounts receivable.

With that behind us now, we now have management freed up to focus in on our hot potential core businesses. That left us with continuing earnings engine Q1 of 19 cents a share.

This was a penny better than consensus and line with our internal prospectuses and I feel a particularly encouraging performance given the raw material environment the company is facing with other Corporations. In fact, to give you some data points, raw materials inflated in the first quarter and -- in -- for Newell Rubbermaid $21 million. $16 million of this was resin, but $3 million was yield.

$2 million in corrugate and wood and we are in a -- at the end of a decade-long period of deflation in raw materials. We will see raw material inflation and we're planning for it and we have good plans in place this year so that we can continue to deliver our numbers in this new environment.

I also want to comment in the first quarter that we did deliver the number in spite of a margin miss in our office products business worldwide. The good news in office products is that the issues we have here are very much short-term. Let me just touch on these. We will talk about this on analyst day next week.

In office products, first of all, in Europe, we're in the midst of significant restructuring. We had a number of facilities in Europe and we are streamlining that European theater of operations in writing instruments.

Those restructuring actions are taking longer than planned and did reduce margins here in the first quarter. Long-term, we will end up with a very good writing instrument business in Europe. We wish we could complete our restructuring sooner, but that did have an affect on our margins short-term, long-term we're on the right track.

In North America, writing instrument business saw margins go down because first of all our Eldon, our office products area is heavily influenced by resin. This is a business that we moved out of the Rubbermaid sector into office products and so the same resin impact we've seen in Rubbermaid we've seen in the Eldon area, that reduced margins. That was the biggest impact.

We also have, as we shared in the past, we had some of our high-margin new products delayed. And these delays are very much short-term in nature and -- and you'll see next week that the new product machine at -- at writing instruments is about to crank up and deliver a series of interesting high margin new products.

At the same time, our Latin America Asian businesses in writing instruments had a strong first quarter, continued to perform very well. The two keys in the writing instrument business to maintaining and improving margins while we grow the business worldwide are number one, new product and number two, productivity.

Again, next week on analyst day you will see a wide range of new product about to be launched that will have a significant effect on the business over the next 12 months. You also will see that we are making progress implementing our productivity programs here at writing instruments. We have a lot of potential here.

We're a bit behind other parts of the company, but we're very confident that our productivity process will have the same impact at writing instruments as we develop it throughout that business.

Turning toward internal sales for the corporation through the first quarter, our sales were down 4/10 of a point our guidance was down 1 to 3. So, we're a little better than guidance in internal sales. Now, currency actually helped us 3.6%. But we intentionally exited 3.9% worth of sales as part of reducing our sales of low margin products throughout the company.

And, in fact, we discontinued and exited $60 million worth of revenues in Q1. 50 of which were in revenue hump products, 10 throughout the rest of the company. This is per plan as we communicated in the past in an effort to improve our margins and again, get out of products that don't deliver and return.

So, if you look at internal growth throughout the company and our new reporting segments which you see is cleaning and work was down 3.6% at the Rubbermaid area, where we are moving out of products with low margin. Office products was up 3.2, helped by currency. Hardware up 3.3. Again, helped by currency.

Home fashions are Levolor and Gardenia worldwide fashion business had a nice business up -- quarter up 3.3. That's a business that had excellent turn around characteristics and we're on the way to making that a much better business under the leadership of Jim Roberts.

The balance of the company was down 1.2% in terms of internal growth. Turning toward cash flow and working capital, in the first quarter, we did come in at 24% working cap as a percent of sales. That's a full point below last year's level. That's good news in the -- the corporation continues to display good discipline when it comes to managing working capital.

And therefore, our free cash flow came in $9.4 million better than last year. We -- we consumed $101 million of cash versus last year's 110. So, we were encouraged that we're on track in cash flow.

Turning toward guidance for the second quarter and the rest of the year, today we're introducing guidance for Q2 of 34 to 38 cents a share and for the full year, we are reaffirming our original guidance post-divestiture of $1.36 to $1.46 a share. We have spent a lot of time looking at the impact of raw materials throughout the company. And we have good handle on that and some of our operating units are performing below plan.

Others are performing above plan. The net of it is that we are reaffirming guidance for the year, we feel good about the year in spite of the raw material environment that we face. We also are reaffirming our free cash flow guidance of 2.25 to $2.75, which, as you know from our previous announcement includes $25 million worth of cash flow related to our recent divestitures. Let me turn it over to Pat Robinson.

Thank you, Joe. I'll start with our first quarter P&L on a continuing earnings basis. Net sales for the quarter were $1.5 billion, down $17 million or 1.1% to last year. Internal sales decreased .4%, consisting of the following: Favorable currency translation was $57 million or 3.6%. Unfavorable pricing was $13 million or .8%. Product line rationalization minus $60 million or negative 3.8%. And core sales were essentially flat in the quarter, minus 17 million or minus .4%.

Gross margin in the quarter was $415 million or 27% of sales, down 1 point to 2003. The decrease in gross margin is consistent with our guidance on our January call and is consistent -- and is a result of the following: Unfavorable pricing of .8% or $13 million in the quarter was better than we communicated in January because of the divestiture of the businesses Joe mentioned.

Raw material inflation of $21 million consisted of resin of $16 million and steel and other inflation of $5 million impacted the margins by minus 130 basis points. By the way, the pricing was a minus 60 basis point impact on the margin.

Gross productivity in the quarter of $25 million or 2.5% was offset by a restructuring related charges of $26 million, primarily in our Sanford Europe and Rubbermaid home product businesses. And that combined had no impact on the margin percentage.

Partially offsetting these items was favorable mix, driven by our rationalization of unprofitable product lines in our Rubbermaid home products business, which added 90 basis points to the margin. SG&A was $314 million or 20.3% of sales, up $22 million to last year.

This increase in SG&A reflects a currency impact of $16 million and a pension cost increase of $4 million. All other SG&A was essentially flat with our streamlining initiatives offsetting continued investments in the business.

Operating income was $102 million or 6.6% of sales, down $44 million to the prior year. I will now take a couple of minutes to talk about our segment information. In our cleaning and organization segment, net sales were $447 million, down $30 million or 6.3% to last year.

A double-digit decline in our home products business due to the planned product line rationalization was partially offset by a 4% increase in the remainder of the segment. Operating income for the group was $16 million or 3.5% of sales compared to $40 million or 8.5% of sales in the prior year.

The decrease in operating income is a result of higher raw material costs, lost absorption in our manufacturing facilities and one-time charges related to restructuring.

In our office product segment, net sales were $333 million, up $11 million or 3.2% to last year, driven by improvement in the commercial sector of the business. Operating income for the group was $32 million or 9.5% of sales compared to $48 million or 14.9% a year ago.

Approximately half of the decrease relates to restructuring-related costs in the European writing instrument business. These costs conclude duplicate facilities as we consolidates manufacturing and distribution and expediting costs to maintain service levels.

The remaining decrease in operating income relates to the Eldon business, resulting from increased raw material costs and additional investments in new product development. In our tools and hardware segment, net sales were $274 million, up $9 million or 3.3% to last year, driven by high single digit sales increases at Irwin and BernzOmatic.

Operating income for the group was $44 million, or 15.7% of sales, compared to $37 million or 13.9% of sales last year. The increase in operating income was related to the sales increases described above and strong productivity at Lennox and Irwin North America, partially offset by increases in raw materials.

In our home fashions segment, net sales were $227 million, up $7 million or 3.4% to last year. The sales increase was primarily the result of favorable currency translation in the current year. Operating income for the group was $5 million or 2% of sales compared to $6 million or 2.7% last year.

In our other segment, net sales were $260 million, down $3 million or 1% to a year ago, excluding $10 million in 2003 sales of the divested Cosmo lab business. Operating income for the group was $14 million or 5.5% of sales compared to $21 million or 7.7% of sales last year. The decrease was due to higher raw material costs and unfavorable product mix.

Turning now to cash flow, free cash flow for the quarter was a use of cash of $101 million, a $10 million improvement to last year. The major drivers in free cash flow are as follows: Sources of cash were net income from continuing operations plus depreciation of $116 million and a working capital decrease of $9 million driven by a reduction in accounts receivable offset by an increase in inventory.

In the uses of cash, we paid down year-end accruals of approximately $105 million with year-end compensation accruals and customer rebate -- year-end customer rebate accruals being the majority of that.

Capital expenses -- expenditures were $37 million in the quarter, dividends were $58 million, cash restructuring payments of $16 million and discontinued ops and other a use of 10 million.

The significant decrease in capital spending was driven primarily by Rubbermaid home products, which decreased from $48 million to $2 million as the company moves to decapitalize this segment of our business.

In the first quarter, we recorded a restructuring charge of $23 million in continuing operations, bringing our plan to date charges to $437 million. In total, we have exited or begun exiting 81 facilities and have reduced head count by approximately 11,000 employees.

In the second quarter of this year, the company expects to incur between 33 and $43 million in restructuring charges. As previously announced restructuring plan will result in a total charge of 470 to $480 million. We will complete the accounting charges associated with this plan this quarter.

The company continues to assess opportunities to divest nonstrategic businesses and we are pleased to report that the company made significant progress in the first quarter. In January, the company completed the sale of its Brazilian cookware division and European picture frames businesses.

In March, the company entered into a definitive agreement to sell substantially all of its U.S. picture frame business, it's Anchor Hocking glassware business and it's Mirro cookware business. By the terms of the agreement the company will retain the accounts receivable of the businesses and the expected total proceeds, including these retained receivables, will be approximately $310 million. The effective date of sale was April 13, 2004.

In connection with these divestitures, the company recorded a loss of a sale in the businesses of $105 million in the first quarter. Turning now to our second quarter outlook. We expect sales to decline 1 to 3% driven by the following: Product line rationalization is expected to reduce sales by about $60 million to last year. Prices is expected to be negative .8% or $15 million.

And foreign currency translation and sales growth in our core of businesses are expected to increase sales by about $40 million.

In the second quarter, we expect continuing earnings to be in the range of 34 to 38 cents, down from 44 cents last year to the mid point of this range represents an 8 cent decline as follows. Again, we expect pricing to be negative .8% or $15 million in the second quarter, resulting in a 4-cent earnings decline compared to a year ago.

Steel, resin and other commodity inflation is expected to have a negative $12 million or 3-cent impact on the earnings for the quarter. SG&A expenses are expected to increase by about $24 million or 6 cents a share driven by currency translation, pension insurance cost increases and the absorption of overhead costs previously charged to the -- to the divested businesses.

Gross productivity of 2.8% or $32 million will be partially offset by restructuring-related charges of $20 million, a net improvement of 3 cents to last year.

And finally, favorable mix, interest and other costs will improve earnings by about 2 cents in the quarter. The net impact of these changes is an 8 cent per share decline in EPS in the second quarter.

Turning to the full year outlook, we expect sales to decline 1 to 3% for the year and expect earnings to be in the range of $1.36 to $1.46 per share. Free cash flow is expected to be between 225 and $275 million. This $25 million increase in our guidance from our initial 2004 cash flow estimate was announced in a press release on April 14.

As previously mentioned, the seasonalization of cash flow will be similar to 2003 with a use of cash in the first six months and a positive cash flow in the back half.

Second quarter cash flow is expected to be in the range of minus $15 million to plus $15 million, compared to a use of cash of $52 million last year. And this breaks down as follows. Sources of cash in the second quarter will be continuing earnings plus depreciation of $163 million, a change in accruals of $30 million and deferred taxes and other impact of $50 million for total sources of $243 million.

Our uses of cash will be in working capital, primarily accounts receivable, use of $75 million to $105 million. Restructuring cash of $40 million, capital expenditures of about $55 million and dividend payments of $58 million for total uses of 228 to $258 million. I will now turn it back over to Joe.

Thanks, Pat. Let me just finish up a review of our organizational changes that we've announced this past week and throughout the quarter.

First of all, Bob Parker, a veteran of the company, has decided to leave Newell Rubbermaid and we wish him well. He has left behind a legacy of an exceptional business worldwide, global writing instrument business. And he's also left behind an outstanding organization. An organization that we believe is positioned to take that business to the next level.

The way we will assume Bob's responsibilities here is we will divide it up as follows. The writing instrument presidents, and there are four, Greg Stoner, the President of North America, our largest business, Denis Terrien is President of Europe, Rodrigo Villanueva is President of Latin America and John Davis, who heads up Asia. Those four gentlemen will report to me in an interim structure until we name, in the future, a worldwide writing instrument president.

We also have an exceptional ops leader of writing instruments, Mike (ph) Ore, who is integral to implementing our productivity plans throughout writing instruments and Mike will also report up to me in this interim structure.

At the same time, we're very pleased to announce the promotion of Tim Jahnke to the newly-created role of Group President of our Home and Family Group. Tim will now, as group president, lead four operating units. Our Graco business, our Calphalon business, little tikes and Goody.

Tim is a company veteran. He's got over 18 years experience, the last 3 1/2 of the senior VP of Human resources, where he has done a superb job in helping to build this organization's bench strength and develop our company into what we believe is now an outstanding team of executives.

Tim also has experience as a president. He used to run our Anchor Hocking business before he became head of HR. We feel extremely fortunate too to have Tim in this role, the reaction inside the company to Tim's promotion has been outstanding and we believe that with Tim focused on those four areas, while we have the four presidents in writing instrument reporting up to me for a period, we believe that we will continue to move forward and make excellent progress throughout this part of the company.

At the same time, in the quarter, Jim Roberts announced that Bill Burke was named group president of our North American tool group. This group includes our Lennox business, our Irwin business, BernzOmatic and Shur-Line. Bill, who reports to Jim Roberts, has done an outstanding job since he joined the company, being president of our Lennox business. We believe that Bill will develop the full potential of that high-margin tool business.

This is an important move because this frees Jim Roberts up a bit to zero in on the Rubbermaid operations that he's responsible for, where he's off to a great start and we have some work to do in improving that business. Of course, we will share much more about this with you on analyst day.

I'd just like to close just by inviting everyone to our analyst day on May 6, Thursday, next week, up in Manhattan. We look forward to it and we will, I think, show you excellent detail of where we are and where we're heading as a company.

With that we'd like to open up for questions.

Thank you, we will now begin the question and answer session. If you have a question, 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're unable to get to your question during the conference call, please contact Newell Rubbermaid Investor Relations at area code 770-407-3994 after the conclusion of the conference call.

Once again, if there are any questions, please press star and then the number 1 on on your touch-tone phone. Your first question comes from Budd Bugatch with Raymond James.

Good morning, Joe.

Good morning, Budd.

Just a couple of just quick questions. The restructuring charges, Pat, that end in the second quarter, do the other charges also end and if not what will they be likely in the third and fourth quarter?

They will decrease substantially in the back half of the year, Budd. I think the total of the back half will be less than $25 million. As you know, the restructuring activity does not end with the accounting charges. That will continue throughout the end of this year, but they will -- they will be reduced substantially. So, about -- about half of what we saw in the front half we will see in the back half.

Budd, this is Jesse, are you referring to the structuring-related charges that impacted our gross margin that are normal, as part of restructuring effort? Or are you talking about the other one-time charges that are reconciling to income? Because those will end. We're really just talking about the continuing impact on the business of doing the restructuring work.

You have kind of broken it down into three pieces. The restructuring charges, which do end in the second quarter, right?

That's right.

Then there are the product line exit charges.

They will also end, Budd. That will end also.

I want to know if those end as well in the second quarter or you're going to continue to break those out and what those will be?

Those will end with the restructuring charges and what I was referring to was the restructuring-related charges charged to continuing operations will continue into the back half. As those activities continue but they will be about half of what we saw in the front half.

And they will be reported as normal operating income and --

That's correct. They're in in our guidance.

There will be no additional unusual charges shown in the second half of the year?

Yes, I misunderstood the original question, but that is correct. The first two pieces will stop in the second quarter. The restructuring-related, which go into continuing ops, will continue, but be about half of what we saw in the front half.

Okay. And the second question is can you kind of breakdown the productivity segment by segment?

No, I don't have that with me, Budd, I can get back to you on that.

Okay, thank you very much.

Your next question comes from Dara Mohsenian with JP Morgan.

Good morning, guys.

Good morning, Dara.

Joe, I'm wondering if you can take us through the impact, the recent divestitures you've made have had on your relationships at retail in your continuing businesses?

Sure. We have worked hard to communicate our -- our plans or rationale for these divestitures and therefore, I think that for the most part, our major retailers worldwide understand where we're going. And they're going to continue to buy these products, they will just buy them from new ownership.

So, I really wouldn't say there's been a major disruption because of these divestitures so far. I think what retailers are most interested in is what's the company going to be going forward? And -- and they're looking for a flow of new products, they're looking for outstanding customer service, they're looking for brands that -- that matter, that consumer want to buy.

And that's what we're trying to develop at Newell Rubbermaid. I think it helps a lot when we articulate our long-term direction and they see evidence of that with the new product flow.

Okay. So, you know, the loss of -- of corporate leverage from those divestitures hasn't really impacted shelf space significantly?

No, there's zero -- first of all the, I want to make it clear that there's not a lot of corporate leverage in the environment we're in. Product lines stay tuned their own, Dara.

If you have a product line that's not competitive versus a knock off or another brand, retailers, my experience is retailers don't reward you with business with market share there because of some corporate relationship or corporate leverage.

They do reward you with market share when you have a compelling market share position with the brands that matter, et cetera. So, there has been no effect at this -- with losing corporate leverage.

Okay, fair enough. And also can you -- can you give us some kind of guidance in terms of the quarterly flow of margins in the writing segment and the balance of the year? Obviously the margins were depressed by some of the manufacturing issues you mentioned this quarter, but I'm just wondering how much improvement we should expect kind of going forward versus this quarter?

Are you specifically referring to the office product segment?

Well, yeah, the office product segment in general.

Yeah, we expect it to be down slightly in the second quarter, not anywhere near the extent it was in the first quarter, and then relatively flat to last year, the rest of the year.

Okay. And then did you guys give a -- a sales number for growth to strategic retailers in the quarter?

We did not.

Do you have that?

We'll have to get back to you.

Okay, thank you very much.

Your next question is from Wendy Nicholson with Smith Barney.

Hi, good morning. My first question has to do with the departure of Bob Parker. I think, you know, you said it on the call yourself, and historically you've always talked about him as being, you know, one of the sort of key and core members of the management team.

Can you talk a little bit about your sense of why he left? And is there a risk that he poaches talent from the Newell organization to wherever he goes next?

Wendy, I think, you know, Bob did a great job for Newell and I -- I think he made a decision to leave the company it was a natural decision. He's been here a long time. And he's worked hard for years building this business.

I think the most important thing to recognize here is that there's a very strong team in the writing instrument group as Bob moves on, that's in place and excited about managing that business.

And most of these folks are people that have been hired into Newell from -- from other forms. Greg Stoner runs North America, the largest business, he grew up at General Electric and at a number of Newell divisions before going into writing instruments.

He's a very strong leader and a very strong presence in the North American writing instrument business. Denis Terrien joined us from Amazon, he's a Harvard MBA that grew up at Pepsico. Rodrigo Villanueva is a Gillette graduate as is John Davis in Asia. These four presidents, we believe, give us a very strong leadership team.

Certainly the strongest in the global writing instrument industry. In terms of your question on poaching, Wendy, not important thing we can do at Newell Rubbermaid is create an environment where our high potential executives don't want to leave. And I think we've been highly successful so far.

In building an environment where the people that are an important part of our future have elected to stay with us. And, you know, we're doing a lot of heavy lifting around here. There is a lot of work going on and yet I'm very encouraged by our retention track record so far and I look forward to strong retention in the future.

So, is it your sense, I mean we just got guidance, I guess in terms of the margin on the office products business, but I guess the first question is oh, gosh, every other time there's been a management change in a Newell businesses it sort of preceded a shoe to drop in terms of bad news. So I guess my first question is, you know, holey moley, is there something that's bad in office products that we should look for in the second quarter?

Wendy, the -- you know, look, the first quarter in writing instruments, margins were low. We've explained that's European restructuring being delayed and resin inflation on Eldon. You know, there is no other shoe to drop.

You know, I told you in the past that we are -- we are, you know, we grew the writing instrument business historically through acquisitions, now we're in a different mode. Now we have to grow it through new product.

We are launching a very sophisticated new product develop system in writing instruments. You will see good evidence of that at analyst day next week. I think you will be impressed by the number of new products on the way in that business much that's the key to growing it going forward.

There is no other shoe dropping. There is -- this is a high potential, high margin business that needs new product and productivity. Those are the keys and I think you will be encouraged as time goes on.

So, just the last question on that, in terms of, I think you said the sales growth in that business, I think you said the commercial business was one of the businesses that had shown recovery.

We did.

How is the retail business, your market shares, how do they look?

You know, I -- our market shares are -- are -- continue to be strong in North America and worldwide. In Europe, we're -- our focus now is on restructuring and not gaining market share. So, we have -- I would say we have the most work to do in Europe.

Okay.

And North America you can go to retail and see we have a command -- we continue to have a commanding position, which will be strengthened as these new products flow. So, there's no market share attack here. There is nothing like that. There is a lot of upside potential that we need to harvest and that's what we look forward to.

Okay, and just so wrapping up, the office products business, you don't see something structural having changed, ooh, private label has taken over the world or there is too much SKU proliferation, you think the business goes back to it's historical profit margin eventually?

Wendy, there's been private label in writing instruments for a long time. You can go to any hotel in the United States and see a writing instrument with the private label.

Yes, there are major retailers that have private label [inaudible] programs and will continue to do that in the future. Temperature make some of the private label products for them because we have global leadership position.

The key to any of our businesses to managing in the private label environment is having compelling new product that's branded and marketed with high margins. And -- and writing instrument is no different than tools or -- or Graco or Calphalon. We feel very confident we can restore our margins here and grow this business going forward.

That's helpful, thank you, Joe.

Your next question is from Connie Maneaty with Prudential Equity growth.

Hi, a couple of --

Hi, Connie.

Good morning. On the $300 million that you're planning to exit, can you give us an update on what -- what dollar amounts you've already exited? It must be getting close to $100 million at this point.

It is. This is Pat. The numbers come down now because of the divestiture of those businesses that we mentioned earlier. So, the new range is 225 to 250. Saw $60 million of that in the first quarter and we'll see that type of pattern -- that type of number in the second quarter again, as I mentioned. And again, actually pretty flat throughout the rest of the year.

Okay. Great. Back to writing instruments, just to be clear. Of the 500 basis point drop in the margin, about half of it was due to Eldon being transferred from the Rubbermaid division on paper to -- to office and that's where the resin impact is the highest in the office products business?

Connie, where resin matters in writing instrument is that held in product. These are tear mats and resin-based file organizer products and yes, that -- that business unit was transferred from Rubbermaid to office products and it's -- it has the same resin inflation as all the resin-based products. That's -- that's a big chunk of that gross margin decline. That's exactly right.

Okay. What percentage of office products is Europe? And why is the restructuring delayed?

Let me -- let me tell you why it's delayed and Pat will give you the percentage. You know, Connie, we built our European writing instrument business by buying four companies. Reynolds in France, Barrel in the U.K., (ph) Wiltrain in Germany and then we bought the Papermate business from Gilette.

That gave us an awful lot of facilities in Europe, more than we needed and an awful lot of facilities in very high-cost parts of Europe. We've been whittling away at this restructuring here in the past couple of years, but there was more to do here in terms of restructuring than the original plan suggested and it has taken longer than -- than we outlined.

The most important thing here is that we've got to preserve our service over the key accounts and -- and, of course, some of that restructuring in Europe, in writing instrument, we've had to slow things down to maintain service levels to customers that's cost us in the gross margin line, but that's our focus, we're got to preserve our customer service.

So, this is very much, Connie, a, you know, most of our restructuring has gone per plan. Some of it ahead. This is one of the cases, unfortunately, where it's taken longer than we had expected. We'll get it done and we'll end up a writing instrument business in Europe that will have the same kind of margin structure that we have in the other three regions of the world, but we just need more time.

With European acquisitions ever combined or is this a country by country delay?

It is -- no. You know, the way Europe grew for writing instrument is four acquisitions were made. With the management team there, they're now led by Denis Terrien is going through the process of integrating the businesses and streamlining out facilities that are unnecessary.

There are a number of countries involved in the restructuring. And to be clear, this is is a high-margin business. The gross margin in Europe is very healthy. It's just that there are one-time costs associated with closing places down in high-cost countries, like Germany, U.K., et cetera.

Okay, great. Thanks.

Okay.

And, Connie, the -- the European business is about 22% of the worldwide office products business.

Thank you very much.

Your next question comes from Linda Bolton Weiser with Oppenheimer.

Thank you. Just another question on the office. As sometimes happens when a business is having some difficulty, a manager may do things to kind of overship into the channels. Do you have a sense for what the inventory levels are like in the office area in the -- in the distribution channels?

You know, Linda, my -- yes, I -- I think the commercial business had a nice first quarter, why? Because inventories there have normalized back in the fourth quarter and I think in general,writing instrument worldwide, we don't have a lot of inventory. There's been no channel issues that -- that we're aware of where there's excessive levels of inventory.

We're looking forward back-to-school. We had good revenues in North America in the first quarter in writing instruments and look forward to a good back-to-school season. That's not an issue there. You know, the issues are what we've -- what we've explained. It's -- really, restructuring in Europe, got to get on with the new products. Those are the keys. And then resin in Eldon. Those are the key things.

Okay. And one other one. In your tools business, I mean Jim Roberts has done a really good job there and the operating margin is really nice at 15.7, but can you give us a sense for how much more margin potential there might be in that business? And what is so good about your tool business versus say some other comparable businesses out there?

Yeah, Linda, you're exactly right. Jim Roberts has done an exceptional job leading that group. I think there is more margin potential in terms of operating margin, but the key here is growth. You know, now that we're over a 15% operating margin, Jim will continue to focus in new product in growing while the margin continues to go up, there is more margin potential. We want to capitalize on a high profit opportunity.

What makes our businesses maybe better than some are the brands that we have in place in -- and the new product machine that we've developed.

The Lennox brand is coveted by professional end users throughout North America and the Irwin brand, with its sub-bands it rapidly gaining that kind of cache. With those brands, Linda, you're able to command premium pricing and when you launch new products it tends to have credibility faster than brands that don't have the same kind of clout.

We were fortunate have a stable of brands that are driving it. The final thing I will say and Jim will go through on analyst day next week, a comprehensive overview of his world, but I think what you will see is that he's built a superb new product development program.

And he's been doing if for over two years in our tool group and now we're getting the benefits of that. There is one product after another coming to market.

Okay. And just one final thing. In the home fashion segment, you know, that one is another one where Jim Roberts seemed to have done a good job getting that turned around, and yet it seems like there was a margin setback also in that business in the quarter. Can you go over what's going on there?

Well, let -- you know, in general -- the way -- the window fashions business -- what do you mean by the margin setback business, Linda?

I've got that the margin, didn't the margin improve and get to something like a 7 or 8% margin - operating margin by the end of the last year and now it's dropped down to I think a low single digit type operating margin.

This is a seasonalization of the margin. The first quarter is generally significantly lower than the margin for the year and it will be in the mid-single digit range for the year.

And, Linda, just to clarify on window, our European business where we have the Gardenia brand led by Karl Kahofer, that business is well ahead in window fashions. They've turned that around. That's a well-run business doing nicely.

In the U.S., our business led by Jeff Hohler is also making progress. It's gone through two tough years of turn around, but this year they're really starting to break through. You can go to retail and see the progress they've made. So under Jim's leadership, you're right, window has been one of our most encouraging turn around stories.

Okay. Thank you very much.

Thank you.

Your next question is from Joe Altobello with CIBC World Markets.

Thanks, good morning, guys.

Good morning.

Quick question on pricing, Joe, if you could give us a little more color here. Curious to hear if you're hearing a pricing weakness across-the-board or there are certain business lines or products that are seeing exceptionally strong price declines?

Well, you know, going into the year, we're still, of course, an environment where we're living with pricing that was established last year.

There's often three to six-month lead times, as you know, on -- on pricing contracts with -- with retail partners. But going forward, you know, we have -- with the raw material environment that we're in, all of our operating units are implementing pricing that's commiserate with their raw material changes so that we ensure that we -- we continue to have the right kind of margins. If that helps?

Yeah, a little bit.

And let me also say, on pricing. Erosion or -- there is no question that businesses like writing instruments that have strong brands don't have anywhere near the price erosion characteristics that businesses like picture frames have where you don't have the brand.

That's one of the reasons why we've been very thoughtful in stratifying our portfolio and we want to end up a company woops brands where we can protect our pricing and perpetuate the right kind of margin structure.

A lot of the carrying in pricing - this is Pat - was in the Rubbermaid home products business and in our -- our window business in the U.K..

And as we annualize that, we expect the pricing percentage declines to get smaller and, you know, to get better in the back half of the year.

Okay. And in terms of commodity prices, sounds like Dave they've gotten a little bit worse since you gave your initial '04 guidance. Is it -- you know, is it fair to say that that guidance -- hitting that guidance will be a little more difficult in today's environment than it was say three months ago?

You're right that the inflation is higher than we communicated previously and there was -- it's very broad-based now. It's not just resin, it's in steel and wood and corrugate, freight, across the board. So, the offset to that, of course, is what Joe had mentioned earlier, this is a new environment, we haven't seen this type of inflation, broad-based inflation in quite some time and we need to take a look at all our businesses and take pricing where appropriate.

Okay. And just one last question, if I could. Year-end debt, do you have a target?

We do and I don't have that number in front of me. I can probably answer it by the end of the call or handle it offline.

Okay.

Our current debt will be paid down by free cash flow, I just don't have the absolute number in front of me.

Thank you.

Your next question comes from Eric Bosshard with Midwest Research.

Good morning.

Hi, Eric.

Hey! Two questions for you, first of all all, you have indicated that you're basically done with divestitures in the businesses left are the businesses you're going to keep and grow.

I'm interested in a little bit of perspective with the businesses you've retained on a year-over-year basis, we've got the level of margin degradation and I guess more so the lack of volume improvement, seems like the first quarter was a step back from the second half of last year.

I understand that resins an issue, it's been an issue. Can you give a perspective on the momentum of these core businesses you have kept? And I guess the adjunct to that is; are the divestitures done? Give us some perspective on that?

First of all, Eric, we're virtually done. We haven't said we're final -- we're complete with divesting businesses, but we're virtually done. We've done the bulk of it. We will go through -- we'll stratify our plan at analyst day and go through it in detail.

In terms of the volume, though, you know, we have discontinued $60 million of the products in the first quarter. If you pull that out and -- and look at the, the core businesses that have the high margins and the potential in the company, we don't really view the first quarter as a step back.

It -- it was a, you know, good solid quarter in most of the operating units with some exceptions that some businesses did better than planned, others were a bit behind. But I think we're very much on track, Eric, for the year and for transforming the company.

Eric, if you look at the gross margins, we were down a point in the first quarter. We expect to be flat in the second quarter and -- and turn to up over a point in the back half. And I know if you look at that and stand back from it, add some more facts, you would be skeptical.

However, we're looking for our gross productivity throughout the year to improve, not dramatically, but about a 2.5% first quarter actual 2.8% in the second quarter and best 3.5% in the back half. That's really driven by the Newell Op Ex being implemented across all of our divisions.

We expect pricing to improve as we go through the year for the reasons we mentioned earlier. Our raw material inflation was highest in the first quarter because the resin impact was highest in the first quarter.

We expect steel and the other commodities to continue at about the same rate throughout the year. And our structuring related charges that run through continuing earnings where be lower in the back half than the front.

So, we expect the second quarter to be an inflection point for us, if you will, in gross margins. When operating margins -- we'll have to wait one more quarter for the inflection point.

We believe the third quarter will be relatively flat in earnings, plus or minus a penny or two and then the fourth quarter to be up for a lot of the reasons I just described. So, you know, this is following our plan for the year and I think we're on track.

Eric, one final comment, we guided in terms of organic growth Q1 down 1 to down 3%. We were down 4/10 of a point. We, all along, recognized that 2004 was a year where we still have a lot of heavy lifting in this company.

We're doing a lot of restructuring, in fact, we closed three factories in Q1 that brings the grand total of 81 facilities worldwide. This heavy lifting, it requires a lot of managerial time and effort. And therefore this is not a year where the corporation is focused on internal growth as its highest priority. We -- we need to execute.

We need to complete our restructuring programs, we need to discontinue low margin products, clean out SKUs that don't make sense. Continue to discontinue legal entities that are unnecessary, which will put us in a position as we move out of the year to more aggressively focus on the growth side of the equation. But we've got to get this done first.

Pat, you indicated that core volume before the discontinued was flat in the quarter; is that the right way to look at that?

I believe it -- yeah, I believe it is, yes, when you take out the -- the impact of currency and the impact of -- of -- of rationalizing businesses, it was flat.

Okay. And my last question is in terms of working capital, it looked like there was a pretty significant inventory increase, 1Q versus 4Q and payables went the wrong way, explaining the change in cash from operations. Can you give us some color on the inventory and payables swing that took place in the quarter?

Yeah, we did take our inventories up about $100 million in the quarter. But if you remember, we ended the year at our lowest level ever.

So, year on year our growth on inventory was higher first quarter '04 to first quarter '03 and our absolute level of inventory at this point is about $50 million less going into the second quarter than it was a year ago.

And my numbers show that our payables actually improved by 2 days in the quarter. I'm not sure what you're looking at on the payables.

The cash flow statement looked like it said payables was a use of cash of $36 million.

Payables went up 2 days year-over-year.

It would be a use because our production levels are lower even though our inventory grew, our sales levels are lower in Q1, way lower than in Q4. So, the production to support those sales levels is lower. Even though our inventory grew.

And the Cap Ex number for the year is still 250?

No. No, it's actually now about 225. Because we divested the businesses that we discussed earlier.

Thank you.

Thanks, Eric.

Your next question comes from Chris Ferrara with Merrill Lynch.

Good morning.

Good morning, Chris!

How you doing?

Good!

When you talked, I guess about six months ago about stratifying the businesses and I know you said you're going to do this in the May analyst meeting, but you mentioned that, I guess about 15% of sales were in negative operating businesses and about 60% in were the 5 to 7% operating margin section.

Can you talk about the businesses you've divested and what categories they would have fallen in. Is it fair that most of them have been negative operating margin businesses? Or is that not necessarily the case.

Well, first of all, we're - Pat do you want to -

We're going to discuss this more on analyst day, first of all. But they were very low margin businesses, not necessarily negative, but if you look at the numbers last year on the businesses, they were close to break even on an operating income basis and they were expected to improve this year in our budgeted numbers and they also, by the way, absorbed some corporate overhead, so, there is impact on this year's earnings by the divestiture, but on a fully burdened basis with the corporate overhead, they were break even a year ago.

So, is it in the not necessarily fair to think that the businesses that were originally called negative operating businesses were all earmarked for divestiture? Some of those potentially were expected to be turned?

It's -- well, we've retained our, as you know, our Rubbermaid home products business, which we will review for you next Thursday, but that's another business that's operating margins are, you know, close to break even or even slightly negative.

Okay. Do you still expect 100 basis points much of gross margin improvement for the year?

We expect over 100 points in the back half and we will commit to 50 basis points for the year it could be as high as 100 basis points if we perform very well in the back half.

All right, thank you.

Thanks.

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

Good morning.

Good morning, David.

Following up on pricing. You mentioned implementing pricing in relation to raw material cost increases. Are you able to do that on existing products? Or is that mainly through your new products?

Well, first of all, new products are -- are essential here in our long-term gross margin expansion. Why? Because new products carry higher margin that needs to be cannibalized, new products have excitement in brand and compelling features, et cetera. So, a part of that is certainly new product.

With that said, we are, as Patrick pointed out, we're in a very different environment in terms of raw material inflation. This hasn't happened for a long time. And therefore, our operating units have -- are implementing pricing actions where the raw materials drive it. And we're in the process of doing that and that's -- that's a necessary step given the environment that we're in.

Thanks. One other question. What is the expectation for depreciation and amortization in 2004?

After the divestiture of the businesses, it will be around $260 million.

Thank you.

Gentlemen, our final question for the day comes from the line of Bill Steele with Bank of America.

Thanks, two questions. First of all, with regard to the restructuring program, of the $430 million that you guys have taken so far, what have been the cost savings derived from that initiative?

We're going to review that very thoroughly with you next Thursday. The cash payback has been a two-year cash payback on the average. So, of the total charges of 470 to 480, a little over $300 million of that is cash and savings on that has been about $160 million on an annualized basis at the completion of the program.

So, some of that was run through in 2002. Some more in 2003. More this year in the final impact will read through in '05, but the full annualized impact at the completion of the program will be about $160 million on a cash basis.

Could you kind of go through the '02 and '03 numbers in --

I don't have them in front of me, but I will do that next Thursday.

Okay, great. And the second question, with regard to working capital, what has changed in this company over the last, you know, three or four years? I look at working capital on a quarterly basis, as I'm sure you do, and it's been a use of $115 million in each of the last two years in the first quarter. But in the prior two years, in the first quarter, the working capital use has been closer to 25 to 30.

What's changed in this business that would make it so much more seasonal than it historically has been?

I think we took some of the low-hanging fruit in the accounts payable area, in particular. You know, three years ago. And two years ago, even, you know, where we were running about 22 days in accounts payable and now run about 50 days and we're not -- we're not going to have those types of improvements from the new level and we've also taken some of the low-hanging fruit in the inventory, also. I can't remember the exact days three years ago, but weed this year at 62 days in inventory.

We ended three years ago probably around 90 days. So, you know, we've made a lot of progress there, we just aren't going to see that magnitude of progress from this point.

So, going forward, I should just expect or project, excuse me, project, that first quarter and second quarter cash flows are going to be rather negative and that the cash flow generation will be back-end loaded?

Yes, the first half will be a use of cash. The second half will be cash positive.

That will be the same in '05, '06, so on and so forth, for the most part?

That's correct. Our total cash flow, I believe, will be in the, you know, 250 to 300 range. I will review that with you next Thursday. The restructuring charges will be behind us, more or less offsetting the improvements we see in working capital.

Thank you.

Thanks, Bill. At this point, we just -- that's the last -- okay. We just want to thank everyone for joining us on the call. We welcome you at our analyst day again, next Thursday in Manhattan. Thank you.

If we were unable to get to your question during this call, call Newell Rubbermaid Investor Relations at 770-407-3994. Today's call will be available on the web at www.Newellrubbermaid.com and on digital replay at 1-800-642-1687 domestically and area code 706-645-9291 internationally. With a conference I.D. number of 6424122, one hour following the conclusion of today's conference, for 30 days ending May 29, 2004. This concludes today's conference. You may now disconnect.