諾威品牌 (NWL) 2004 Q3 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to Newell Rubbermaid 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. Just a reminder today's conference will be recorded and will be available via audio webcast at www.newellrubbermaid.com. And the digital replay will be available 2 hours following the call at (888) 203-1112 for domestic participants and (719) 457-0820 for international participants. Please provide the conference number of 363357 to access the replay. I will turn the call over to Jesse Herron, Vice President of Investor Relations. Mr. Herron you may begin.

Thank you. Good morning. Welcome to Newell Rubbermaid's third quarter earnings conference call. Today, I'm joined by our CEO Joe Galli and our CFO Pat Robinson. Before we begin the call, let me take a moment to review the forward-looking statements. The statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees 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 form 10-K including exhibit 991. Additional financial information about the Company is available at www.newellrubbermaid.com. With that being said let me now turn the call over to our CEO, Joe Galli. Joe?

Thank you, Jesse. And good morning, everyone. I'm pleased to report that Newell Rubbermaid was able to deliver 36 cents a share in EPS here for Q3 of 2004. This compared favorably with the consensus estimate of 33 about cents. We were encouraged by this result given the raw material environment that we faced throughout the quarter and really throughout the year. In fact raw material inflated in the third quarter alone $31 million. Which is 13 million more than we had projected at the last conference call. So we continue to see raw material inflation in resin, in ferrous and unferrous metals and in corrugates and wood. In spite of that our team was able to offset this raw material inflation and turn in a solid quarter here in Q3. Our gross productivity before raw material really came in at $29 million for Q3. And we actually turned in positive pricing for the first time in years with a $3 million net positive pricing performance here in the third quarter. Our team is working hard and working closely with our retail partners to negotiate pricing actions that reflect and offset some of this raw material inflation throughout the worldwide marketplace. If you look at our Newell operational excellence program what you see is that we are gaining traction throughout the Company.

The third quarter we showed excellent progress. If you look at our 5 reporting segments what you see is the cleaning and organization group, which is our Rubbermaid businesses generated gross productivity of 1.2%. That's impressive given that this business is downsizing and had to deal with a lot of absorption hits because of the volume decline. But they still turned in 1.2% productivity. Our office products team actually turned in positive productivity for the first time in many quarters led by Ray Johnson our new VP of Ops for Worldwide Office Products. That team actually broke through and generated positive productivity a few tenths of a point. Which reflects the beginning phases of launching new operational excellence in that key business. Our Tools and Hardware led by Jim Roberts turned in 5.9% productivity outstanding performance. Home fashions, Jim Roberts, turned in 4.3% productivity. And our home and family business led my Tim Jahnke showed progress turning in 2.9% of productivity. These productivity results are key in the raw material . environment that we face here in 2004 and beyond. If you go back for a moment and look at how raw material has inflated this year what you see is that at the end of the first quarter we had projected raw material inflation for 2004 of $58 million. At the end of the second quarter our projection increased to $70 million.

Today, our projection for the full year past now stands at $105 million of inflation. And that is again in the resins and in the metals areas and the other raw materials that we buy. In spite of that, as you know, we are holding our guidance for the year because our team is working hard to offset this raw material inflation with a blend of productivity and pricing actions in the marketplace. Turning toward the sales line. We made excellent progress in Q3 in exiting low margin product lines that are no longer strategic. That we are trying to move away from. In fact, in the third quarter we discontinued $60 million worth of Rubbermaid home products and $15 million worth of Eldon products in our office products group. So there was $75 million worth of product continuous actions in the third quarter alone. And this is - - this puts us on track to discontinue $275 million worth of low margin products for the 2004 full year. It is important to note because we do have an absorption hit as we move away from these low margin products and team is working hard to offset that, the productivity actions in pricing. If you look at pir topline results throughout the quarter what you see in cleaning and organization RCLs were down 11.4%. That's by design because of the exit of low margin product lines.

Our office products group actually had a very sound quarter in Q3. Now, our business was down worldwide 1% in office products but that's - - it's down because our Eldon business was actually down 24% due to the discontinuance of low margin product lines. The core writing instrument part of the business was actually up 4% in the quarter. And our back to school season turned out after a slow start turned out to be on track and on our plan. And writing instruments actually and our worldwide office products business I'll say, actually delivered - - exceeded their profit estimate in the quarter for the first time in 5 quarters. We were very encouraged by that. Our tools and hardware group was actually up 5/10 point in the quarter. That was paced by outstanding results from our Lenox business, our Amerock business and our BernzOmatic business. On the flip side our Irwin North American business was soft due to timing on the rollout of some of our new laser products. But we remain highly optimistic about this business' long-term potential. Home fashions was up 1.9% in the quarter. Paced by an excellent performance by our European Home Fashions team and good progress in the U.S. And then our home and family group came in down a 1/10 of a point so essentially flat here in the quarter in terms of topline.

Turning towards free cash flow. We had a strong quarter in free cash flow. Our guidance for Q3 was to fall in the $110 million to $140 million range and we actually generated $202 million worth of free cash flow for the third quarter. This was paced by our ongoing decapitalization efforts. Meaning we are reducing the amount of fixed capital we are deploying in many of our low margin businesses in an effort to move to a more of an outsourcing model. And in an effort to move the capital burden on to some of our suppliers as we co-engineer near new products that we are developing with our supply base. So, free cash flow continues to be a highlight for the Company here in Q3 of 2004. Our guidance is being reaffirmed today. So we will hold our full year guidance of $1.36 to $1.41 a share in EPS. That translates to a Q4 guidance of 43-47 cents a share here again in the fourth quarter. Our sales guidance remains unchanged. We project the year will be down between 1% and 3% and Q4 will be the same down between 1% and 3% again. We continue to discontinue low margin products which is, of course, putting downward pressure on the revenue line. In free cash flow we are actually increasing the guidance for the year. Our previous guidance was to deliver between 250 and 275 million in free cash flow. We going to move that up to 275 million to 300 million in free cash flow given the strength of the cash flow performance for the business thus far.

A key for our fourth quarter performance will be new products. And I'm pleased to report that we are on track to deliver a series of important new product introductions in 2004 at Newell Rubbermaid. For example, our new generation of StraitLine laser products is now rolling out and will be in stores here November and December. And we're optimistic about this rollout. Our new line of high technology utility knives both in our Lenox and Irwin brands is in the process of being rolled out now and early sell through results are very encouraging. Our retractable Sharpie line continues to be a very exciting new product. In fact sell through results really were exciting here in Q3 and we think we are have a very important extension of the Sharpie franchise with the retractable Sharpies that we've now rolled out into the U.S. marketplace. Our Calphalon One non-stick product line was rolled out here recently and continues to be a key part of fueling the Calphalon brand growth in the U.S. market. And the Hummer series in the Little Tikes line is positioned for a strong holiday and Christmas sell through season. That product is now on the shelves and being promoted here in the fourth quarter. So, these new products and others are a key part of developing and maintaining, I should say, our guidance here for Q4 and for the full year. With that I'd now like to turn it over to Pat Robinson to share more details on our numbers. Patrick?

Thanks Joe and good morning everybody. Thanks again. And I will start with our third quarter P&L on a continuing earnings basis. Net sales for the quarter were 1.7 billion, down 57 million or 3.3% from last year which consisted of the following: A favorable currency translation of positive 30 million or 1.7 points. Favorable pricing of 3 million or 2/10 point. Product line rationalization of negative 75 million or 4.3%. And our core sales declined by 15 million or 9/10 point. Gross margin in the quarter was 473 million or 28.3% of net sales, down 20 basis points to last year. The decrease in gross margin is the result of the following: Favorable pricing of $3 million which added 10 basis points to gross margin. Raw material inflation was $31 million in the quarter, which consisted of resin of 16 million, steel of 10 million and other raw material inflation of 5 million. Which had a 1.8 negative -- 1 point -- 1.8. negative impact on gross margin. Gross productivity in the quarter was 29 million or 2.6%. This was partially offset by restructuring related costs of 15 million. The net impact was an increase of gross margin of 80 basis points. And favorable mix driven by the rationalization of unprofitable product lines, primarily in our Rubbermaid home products business. But also in our Eldon office products business, improved margins by 70 basis points.

SG&A was 307 million for the quarter, up 8 million to last year. The increase in SG&A reflects a currency impact of 7 million and a pension cost increase of 4 million. All other SG&A was essentially flat with investments in the business offset by our continued streamlining initiatives. Operating income was 166 million or 9.9% of sales, down 28 million from last year. And I'll take a few moments and talk about our segment information. In our cleaning and organization segment net sales were 456 million, down 58 million or 11.4% to last year. Driven primarily by the product line rationalization in the Rubbermaid home product business. Operating incoming was 29 million or 6% of sales, compared to 32 million or 6% of sales last year. The decrease in operating income is the result of higher raw material costs and loss absorption in our manufacturing facilities. Partially offset by favorable pricing, productivity and mix. In our office products segment net sales were 424 million down 4 million or 1% from last year. With the writing instruments business up about 4% which included a $10 million shift of back to school sales from quarter 2 to quarter 3. And the Eldon office business being down 24% driven primarily by the exit of low margin resin based products.

Operating income for the group was 62 million or 14.5% of sales compared with 70 million or 16.3% last year. The decrease from the prior year is primarily the result of the sales decrease at Eldon, raw material inflation and an increase in SG&A spending partially offset by the sales increase in writing instruments. In our tools and hardware segment, net sales were 31 million up 2 million or 1/2 point to last. With positive currency and an increase in the Lenox business offset by a shift of sales from quarter three to quarter four in our Irwin business. Operating income for the group was 45 million or 15% of sales down from 54 million or 18% last year. Operating income declined primarily as a result of the increase in raw material costs particularly steel and restructuring related costs in this segment. In our home fashions segment net sales were 228 million or up 4 million or up 2% to last year. Operating income for the group was16 million or 7% of sales down from last year's operating income of 18 million or 8% of sales. With an increase in raw material costs partially offset by productivity.

In our other segment net sales were 263 million, essentially flat to last year. As new product introductions at little Tikes were offset by declines in our Graco and European cookware businesses. Operating income for the group was 25 million or 9.4% of sales, compared to 31 million or 11.8% last year. Operating income decreased primarily as a result of raw material inflation and increased SG&A spending in the Little Tikes business. Turning now to free cash flow. We delivered 202 million in the quarter, up 40 million to last year. The primary drivers sources of cash were continuing earnings and depreciation of 156 million. Positive working capital of 105 million. Change in accruals or non-cash expenses of 64 million and deferred taxes and other of 38 million for total sources of cash of 363 million. Uses of cash were capital expenditures of 25 million. Cash restructuring payments of 28 million. A dividend payment of 58 million and a voluntary pension contribution of 50 million. The increase to last year is attributable to a $34 million reduction in capital spending primarily related to the Rubbermaid home products and divested businesses.

Other third quarter items. We did report on the last call the sale of the Little Tikes commercial play business on July 1, 2004. And this transaction resulted in an after-tax gain of approximately $9 million in the third quarter which is shown in discontinued operations. We did take an impairment charge in the quarter. And this is more fully disclosed in the Company's form 8-K which was filed with the SEC today. This is a noncash pretax impairment charge of $349 million. These charges were required to write down certain assets, primarily goodwill, trade names and trademarks and fixed assets down to fair value. As a result of the impairment analysis and writedown; depreciation and amortization expense is expected to decline by $3 million in 2005. Also in the third quarter the Company recognized a net 2.9 million tax benefit related related a refund for the closing of prior year audits. Turning now to our year-to-date results. Net sales were 4.9 billion, down 132 million or 2.6% to last year. Internal sales declined by 122 million or 2.4% which consisted of the following: Favorable currency translation was positive 115 million or 2.3%. We had unfavorable pricing year-to-date of 24 million or 1/2 point. Product line rationalization was negative 200 million or 3.9%. And our core sales have declined by 13 million or 3/10%.

Year-to-date gross margin was 1.4 billion or 28% of sales down 70 basis points to last year. The decrease in gross margin is the result of the following: The unfavorable pricing of 24 million had a negative 40 basis point impact on gross margins. Raw material inflation of 70 million consisting of resin of 39 million, steel of 22 million and other of 9 decreased gross margins by 140 basis points. Gross productivity of 86 million or 2.5% was largely offset by restructure related costs of 66 million. The net impact was a positive 40 basis points to gross margin. And favorable mix driven by the rationalization of product lines primarily in Rubbermaid home products increased margins by 70 basis points. Year-to-date SG&A is 944 million or 19.1% of sales up 40 million to last year. The increase in SG&A reflects a currency impact of 31 million and a pension cost increase of 12 million with all other SG&A essentially flat. Operating income year-to-date is 441 million or 8.9% of sales.

Turning now to the fourth quarter outlook. We expect sales to decline between 1% and 3% driven by the following: Product line rationalization is expected to reduce sales by $75 million versus last year. Pricing in the quarter is expected to be a positive 15 million. And foreign currency translation and sales growth in our core businesses are expected to increase sales by $20 million. For the fourth quarter we expect continuing earnings to be in the range of 43 to 47 cents compared to 38 cents a year ago. This range includes $35 million of raw material inflation or a negative 9 cents impact on earnings for the quarter. With resin of 19 million, steel of 11 and other inflation of 5 million. Offsetting the raw material inflation is gross productivity of 3.2% or about 36 million resulting in a net improvement of 9 cents to last year. The favorable pricing of 15 million will improve earnings by 4 cents. And the favorable comparison to the earnings impact from last year's tornado at the Wooster facility will yield an increase of 3 cents in the quarter. Net SG&A investment will be offset by streamlining activities, favorable mix for our new products and tax rate and other cost favorability in the quarter.

Turning now to cash flow. Fourth quarter cash flow is expected to be between 125 and 150 million. Sources of cash being continuing earnings and depreciation of 180 million. Working capital improvement of 65 to 90 million for total sources of 245 million to 270 million. Uses of cash will be capital expenditures of about 40 million, our dividend payment of 58 million and restructuring cash payments of 22 million for total uses of cash, 120 million. For the - - turning to the full year. Full years sales are projected to decline between 1% and 3%. We are maintaining our full year earnings guidance in the range of $1.36 to $1.41. And increasing our cash flow guidance to a range of 275 million to 300 million. Turn it now back over to Joe.

Thank you, Pat. In summary, 2004 really is a year where the Company is making broadbased progress on many fronts. We have completed a major restructuring program which includes the closure of 84 facilities in western Europe and the U.S. We have completed a significant divestiture program ahead of schedule and within the targeted proceed level that we established. We are in the process of exiting over $275 million worth of low margin product lines in Rubbermaid home products and in Eldon. And in the face of $105 million worth of raw material inflation plus having to absorb the impact of the loss of volume on the 275 million of the product exits. Our team has delivered on 3 consecutive quarters here in terms of EPS this year and we've exceeded free cash flow in all 3 quarters. And moving into the fourth quarter we are holding our EPS guidance for the year in spite of raw material inflation while increasing our free cash flow guidance. Additionally, our product pipeline is building for 2005 and beyond. In fact our future is looking extremely bright as we look into the product pipelines that are developing throughout the Company. It has taken awhile to get this product pipeline going but it is clearly something that we will see very positive results in year for 2005 and particularly beyond.

Our new operational excellence program is gaining traction throughout the Company. Most recently we deployed this in earnest in our office products group. Where there is a lot of low hanging fruit and great opportunity to harvest productivity gains in the office products area. And more broadly office products we believe is a business that turned the quarter. For the first time in 5 quarters as I mentioned before the office products team has achieved its earnings estimate for the quarter. The organizational changes that we've made in office products have worked out extremely well with the new leaders now in place doing a nice job of driving that business. And achieving that business' potential long term. So, we feel that we've continued to do the right things to position Newell Rubbermaid for long term financial success here in 2004 and beyond. With that I'd like to open it up for Q&A.

Thank you. We will now begin the question and answer session. [Caller Instructions.] If we are unable to get to your question during the conference call contact please contact Newell Rubbermaid Investor Relations at (770)407-3994 after the conclusion of the conference call. Our first question comes from Mr. Bud Bugatch with Raymond James and Associates.

Nice to see some of the metrics starting to turn positive. A couple of questions. I'll try to be very brief. On new products you talk about them with some generality. Is there anyway to put this - - I know this is an issue we've tried to get our hands on before. Issue of getting a percentage of new products either in the fourth quarter or where you think you're going to be somewhere in the first half of next year as a percentage of sales?

We have said directionally, Bud, that this year we're going to be - - our projection is to be roughly 15% sales would be derived from new products launched within the past 3 years. That number will go up next year but it won't achieve our target as of yet in '05. Our long-term goals would be well over 30. But it will go up next year but we have not quantified it and disclosed it for '05.

And for the - - are you seeing for them the 1,000 basis points of improved margin that you have kind of talked about?

We are. You know, raw material inflation has affected it some what, Bud. But, you know, when you look at what we set out to do we are seeing the 1,000 basis point margin accretion on the new products.

Okay. And I know you haven't - - I suspect you don't want to talk about 2005 outlook with any specificity yet. What can you us about though potentially things likes pricing? It looks like something under 100 basis points of sales for the fourth quarter if I did my math right on sales. What do you think you're going to get - - how long does that persist? How much more pricing is there to get from the retail partners?

Bud, it is still early days to come and in '05 we have a lot of work to do given the raw material inflationary environment that we face we have a lot of work to do in converting that into the pricing as we move forward. It is still early days to comment on '05. We have a lot of work to do. Given the raw material inflationary environment that we face. We have a lot of work to do in converting that into the regular pricing as we move forward. So - - it's too early to comment though on the impact that it will have on 2005.

Okay. My last 2 questions for Pat. Did I miss something on restructuring related costs, thought you would have some persist in the fourth quarter and first quarter of next year? And did you give a percentage of productivity as measured by the applicable gross cost of goods sold?

For the fourth quarter?

For the third quarter yes, sir and for restructuring related costs going forward.

The fourth quarter productivity was 2.6% and the fourth quarter is 3.2. I'm sorry. Let me just look at it. 3.2%. The restructuring related charges are virtually behind us but --.

Thank you very much.

They are not significant going forward.

Good, that's great, thank you.

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

Hi, a couple of questions. My first has to do with the product line exits. Now, that you are a couple quarters into that have you I don't know expanded your thought process of maybe needing to to do more than you originally articulated or do you think that original target that you set out last December sticks?

Wendy we are still evaluating. Given the reality of resin we are taking a hard look at capital intensive, resin intensive products and there may well be more for us to do here. We haven't finalized our plans for '05 but we are certainly open minded about continuing to improve the product line so that we can end up with the right kind of yield.

Okay. And sort of along those same lines just in terms of the pricing that you are trying to take and given the higher raw material prices did you comment if you did I'm sorry, I missed it, on how many of your competitors or private label particularly on the Rubbermaid side of the business how many of them followed the price increase? In other words are you losing any market share or any distribution because you have been aggressive on pricing?

Wendy, we have certainly in some cases we raised prices knowing that we may well give up some shelf space. And that has been part of our plan for this year. With that said, we are seeing the competitive environment move in some cases in pricing. But it is still early and some competitors have increased prices and others haven't. But we are really try to control our own destiny and do what is right for our business and our brands. And I believe that we are taking the right steps here. I think it is important to note that other than planned product exits, Wendy, this have been no significant market share losses this year. And that is encouraging news. I also will clarify with you that even if we continue to discontinue low margin products going into '05 the level won't be anywhere near the level that we have seen this year.

Terrific. And then just finally, I had 2 questions about '05. And I know it is early. But I still - - I guess there are 2 things that seem to be helping you a little bit in the short-term that I'm questioning whether they are sustainable and one is the tax rate and the other is the CapEx spending. The tax rate being so low in '04 does it necessarily foot back up in '05? So is that going be a pressure on your reported earnings? And the same thing on the CapEx. It is running so low this year. Is that a permanent change or do we see that going back up, doubling next year so that is going to eat into free cash flow?

The ongoing tax rate will be around 31% next year. We have had some one-time benefits this year. But it's consistent with what we have run this year as our ongoing rate. Okay? And Q4 also will be 31%. As far as capital spending we have taken a lot of actions getting out some of our highly capital intensive product lines through disposal of the businesses. Or getting our of the product lines themselves in Rubbermaid home products. But our ongoing rate of capital spending should be in the 150 to 200 range. So it will be higher than this year but not as high as it has been in the past.

Terrific. Sounds great, thank you.

Thanks, Wendy.

Your next question is from Connie Maneaty with Prudential Securities.

Again that is a 2005 question. What do you think the worst case for raw material inflation would be next year?

Connie, it is too early to comment. We know it is inflating and you know we are working hard to try to quantify the number but it is just too early to comment right now.

Okay. Can you - - do you have a since of how consumers are doing with regards to your products? I mean it is pretty clear that you have been managing well through this - - through all of this cost pressure. But are consumers actually shopping for your categories? It is just kind of hard to see in the numbers.

You know, I would say, Connie, one indication is back to school. Back to school went per plan. Started slow but it finished well. And we were comfortable that we achieved our plan there. And I think more broadly sell through is okay. It is not certainly gang busters but I would say it is okay.

And just finally on the cash flow from operations. I mean it is great that the overall cash flow is going up. But could you just give us, you know, is the reason that cash flow from operations coming down is that strictly raw material cost related?

Our earnings are up in the range that we gave you before. So it has been a working capital related and primarily inventory related. And that's primarily in our writing instrument business where we've had service level issues in the early part of the year. And we've needed to carry some extra inventory there. And we are also in the process of one of our final restructuring actions is in Amerock. As we move that plant we've had to build some additional inventory there. So it's primarily inventory.

Okay. If I could ask one more. Are you close to announcing a new head of writing instruments?

We are, Connie. We are hopeful that we can get it done in the near future. But I will say the search has been very positive. We have seen of number of outstanding candidates and we are being careful about it but, yes, we are close.

Thank you very much.

Your next question comes from Chris Ferrara with Merrill Lynch.

Can you guys talk about when you would feel oil over $50 a barrel? Given the lag that you see with your purchasing methods for raw materials. When would pressure get even higher even if resin prices and crude prices stayed flat from here would you see future incremental difficulty in the next few quarters?

Chris there is a 2 month lag, you know, directionally. We are seeing it now. We are seeing resin inflate now based on with the way oil behaved over the last couple of months. And we are projecting it to behave, continue to inflate as we go forward and on into next year. We are going to adopt a conservative approach in terms of planning. Okay?

I was more referring to I guess the lag in increased resin prices that you see based on forward buying and whatever methods you use to sort of control costs.

Yes this is a - - it is a 2 - - basically we have about a 2 month price protection. Not total because we can't protect all of the buy. But there's 2 months price protection directionally.

And could you also talk about the higher SG&A in the Little Tikes business? And what is going in there and how the business is doing?

Little Tikes is based on advertising investment surrounding new products like the Hummer, the motorized product lines. So, you know, Little Tikes historically hasn't spent any money on advertising. And we've begun to invest in the marketing of Tikes as we have the high margin new products. So it is really related to the advertising on Hummer and the other new products.

What are the sort of headline new products that we would see from here maybe for the Q4 launches and for early '05?

Well, I can itemize them for Q4. We are not discussing Q1 yet although there is a lot on the way. But for Q4 it's the Little Tikes Hummer. The Calphalon One rollout, the Sharpie retractable series which is going extremely well. The laser line of products out of the Irwin StraitLine unit. The utility knives which are both Irwin and Lenox. Those are the largest new products. There are certainly others but those are the keys for the fourth quarter.

Your next question comes from Eric Bosshard with Midwest Research.

A couple of things. First of all, can you give us a little sense of by segment where you are having success raising price?

We are not commenting, Eric. All of our segments are making an effort to implement pricing. But we just think it is wise not to comment with a high level of specificity.

Secondly, office margin, I know that you've got this discontinued Eldon - - some discontinued Eldon lines that should be benefiting the margins. And the margin contraction is a bit less than we've seen in prior quarters but it's still going the wrong way. Can you give us a little bit of sense of what is driving that margin contraction and when we should expect that to conclude?

First of all absorption - - as we move out of these products we are dealing with the reality of you know underutilized plant absorption. Secondly, there is a raw material burden particularly in the Eldon side of OP which is the a intensive business. There is some raw material inflation in writing instruments. But nothing like Eldon.

And they are not generating the type of productivity yet to match the Company average. Okay? Remember last call we talked about putting the new head of operations there. And we are getter better in productivity there but the Company's average is going 3%. And they're going to run something under that. So they are not offsetting the inflation with the same rate of productivity.

As they gain traction on OpEx and they are really doing a nice job of rolling that program out that will help the margin there as we go forward.

Is the margin - - year over year margin stability likely to appear in 4Q or the first half of '05? Do you have a sense of when we see the margin stabilize in that business on the year-over-year basis?

We haven't done the work yet on that to have enough detail to tell you that specifically, Eric.

And then my last question for you, Pat, is you indicated that in 3Q the core revenues sounded it like improved 45 million I believe between currency and core and then in the fourth quarter the number you indicated 20. First of all is that math right? And then secondly why would the 4Q core revenue growth be less than the third quarter?

I haven't looked at that in that detail, Eric. Can we back to you?

That's fine, we can do that offline. Thanks.

Your next question comes from Ann Gillin with Lehman Brothers.

Joe, I was wondering if you could give us color on the ad marketing spend? Doesn't sound like it was a big delta in the SG&A line but you did have some savings that you might have used to increase ad and marketing spend.

Well, okay, we are investing in terms of TV advertising in the Sharpie, in our StraitLine area and in Little Tikes. Those are the areas of investment in this year for Q3 and Q4.

And is there an order of magnitude we can think about just to understand the investment at the whole Company level?

We haven't disclosed it. Jesse will follow up with you offline if that would be helpful to you.

It would be, thanks. And then the same thought process for '05 given it feels like you invest on that line as you have got the new product line flow going?

Yes. I think - - again I'm not giving you specific numbers for '05. But I will tell you that we are not going to back off investing in high margin, high impact new products in '05. Fortunately we have some exciting products on the way. And we will launch those products with an appropriate marketing plan. Whether it is TV or other forms of marketing to fuel demand for those products. So that will become more visible as time unfolds. But we're going to continue to stay focused on that strategy there.

Terrific. And then on the kind of promotional side of the business; I just don't know how to think about your current levels of promotion kind of net to sales and what we would be seeing going forward as you ramped up new products?

You mean by promotion do you mean like impulse oriented products.

Yes. Anything that essentially you have to net off from sales. Because it is considered a price reduction.

Well, are you asking do we have more of that kind of activity or less or --?

First, I don't know what the base level would be like to think about for your Company as a whole. And then how that might change as you get into more of a new product launch?

Yes, actually, you know, it's' an area for competitive reasons we just don't disclose. I think maybe if you talked with Jesse we can help you model it out and get what you are looking for. We don't specifically comment on invoice to net Ann.

Okay. And just last question because it sounds like I have a lot to do with Jesse after this.

He will love hearing from you.

If you could just talk about kind of the follow-up to Connie question. Any tradeoff you're seeing on the volume line from those areas where you've been able to put pricing in at the shelf?

We have seen - - you know, so far we have been able to implement some pricing. Certainly not enough to offset all the raw material. But we've been able to implement modest pricing action. And we're continuing to implement pricing in the marketplace. I think the reality is a the consumer level, most of our products have relatively inelastic pricing characteristics. Meaning that as the price goes up there is really no downside impact on consumer sell-through. The trick is working with our retail partners to keep the products on the shelf. But once the pricing is implemented, in fact we don't see a decline in sell through. So that has been our early read.

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

Thanks. Good morning. Joe, just could you give us a quick update on the progress you making in terms of moving your manufacturing offshore to more lower cost countries at this point?

Sure. I mean as you know this has been a major thrust of the corporation in the last 2 years. And as I mentioned we've closed 84 facilities in Western Europe and the U.S. and with the vast majority of that output shipping mostly to China. A little bit to Mexico, India and Central Europe. We would expect by year end that about 45% of our cost of goods sold would come out of low cost countries. It is 40% now and then it will inch up to 45% by year end. That's still not enough. But it is way over where we were 2 years ago and it reflects, you know, pretty solid progress in this Company. With that said, though, we still have over the next 3 years a lot of work to do to continue to lower our manufacturing cost base to go more to an outsourcing model to ship more production into places like China and India. And we're hard at work on that. We are trying to do this with the right sequence and ensure that we maintain customer service levels the best we can while we lower our costs.

And could you remind us what your long-term goal is?

Well, the goal that we've communicated historically is 50%. Although I have always said that that - - once we get to 50 then we will step back and assess whether, you know, there should be another step, another order of magnitude taken in terms of low cost countries. We can have transportation intensive products that right now make more sense to produce in Western Europe and the U.S. However, the more we ship to low cost countries the more we learn about it. And the more opportunity we find that exists in places like China and India. So this is a number that will continue I believe to move up over the current 50% goal.

Okay. And just going back to your May analyst day. I realize that is a long time ago and a lot of things have changed since then. But I think you had indicated that for '05 your EPS sort of thoughts were $1.47 to $1.57. I wanted to see if that is still in the ballpark or you had made major changes to that?

We are not making any comment on 2005 at this point.

Just to a lack of visibility?

We go through a rigorous budget process in the month of November. You know, the raw material environment has changed. Certainly in the last 6 months. And, you know, we need to project the right kind of realistic guidance for next year once we get -- go through the highly disciplined budget process that we go .

And I assume we will get guidance in January?

Yes. We - - in our fourth quarter conference call we will communicate guidance for 2005. That's correct.

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

Good morning. On the last call you talked about incremental SG&A investment of $25 million in the third quarter, some investment in marketing and product development mostly in writing instruments. How did the actual spending compare to that plan?

We spent about half of the incremental in the third quarter, some of that flipped into the fourth quarter. We expect that to occur now in Q4. We also had additional streamline savings that went beyond what we had anticipated coming into the quarter.

Our last question comes from Linda Bolton Weiser with Oppenheimer and Company.

I was wondering if you could elaborate a little bit more on the margin performance in the tools business? Why the large decline year over year? I think you had mentioned raw material and some restructuring charges. What are those restructuring charges related to and then when might we see the operating margin increase year-over-year?

We should see an operating margin increase in the fourth quarter in tools and hardware. And the - - they were hit particularly hard by inflation in steel. And the lion's share of the restructuring related charges occurred in that segment in the third quarter. That is related to the closing of the manufacturing facilities and the streamlining of some SG&A.

And just one quick follow-up. Can you just comment on the status of the Phoenix program? I think we had read somewhere that it had actually been pulled out of Wal-Mart.

Linda, we disclosed - - we moved out of Wal-Mart awhile ago. Actually last year. A year ago. Phoenix is an integral part of our marketing mix and it's being deployed in a series of retail partners here in the U.S. and Canada with some deployment in Europe. It continues to be an essential feeder system for the Company. In fact 575 Phoenicians have been promoted to their second or third job in the Company. And so the entire marketing sales management system of the Company has been supported here by this infusion of Phoenix talent. And we are very excited about that. As we go forward Phoenix continues to be part of the organizational development process. But we will redeploy Phoenicians in the specific retailers where the payback and the strategy make the most sense. So, for example, as we move into '05 what you will see is that more Phoenix will be deployed calling on end users directly. As opposed to in retail stores. We will be in a number of retail outlets. But we'll going directly to the consumer demonstrating many of our new products as a growing part of the Phoenix effort in grass roots marketing. Anyhow, it's alive and well and that's kind of a general overview of where we are.

Is the cost run rate for the program then relatively unchanged?

The cost run rate of Phoenix is lower this year than last because we moved out of Wal-Mart. As we move into next year it will be roughly the same as this year. Well, thank you very much and we look forward to our next conference call in January.

If we are unable to get to your question during this call please 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 (888) 203-1112 domestically and (719) 457-0820 internationally with the confirmation code of 363357. 2 hours follow the conclusion of today's conference for 30 days ending on November 26 of 2004. This concludes today's conference. You may disconnect.