諾威品牌 (NWL) 2005 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Newell Rubbermaid first quarter earns release conference call. 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, everyone. Today I'm joined by CEO Joe Galli and CFO Pat Robinson. Before we begin today's call, let me take a moment to read the obligatory forward-looking statements. The statements made in the conference call that are not historical in nature, are forward-looking statements. Forward-looking statements are not guaranteed since there are inherit difficulties of 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 2000 Form 10-K, including exhibit 99.1. Additional financial information about the Company's 2005 first quarter results available through the Investor Relations section of our Web site, at www.newellrubbermaid.com. With that being said, let me turn the call over to CEO Joe Galli. Joe?

Thank you, Jesse, and good morning everyone. Let's start off with a look at our EPS performance here for the first quarter. The corporation delivered $0.32 per share in EPS, compared to last year's $0.18 a share, in Q1. Let me give you some additional details behind those results. As you know, we were forced to receive a $59 million favorable tax impact in the first quarter. That allowed us to fund restructuring activities, featuring the announcement of the closure of 3 manufacturing facilities in the U.S. That restructuring activity had a first quarter cost or charge of $24 million, which was below what we originally thought. Some of those charges will now be reflected in our second quarter results. So the overage in our first quarter performance in terms of EPS, will come back in the second quarter. We as a Company will be on track as we emerge from the first half of 2005.

If you turn toward raw material, what you see is that in the first quarter, raw materials inflated $51 million over last year. This is about the level that we expected, though this is the highest one quarter raw material inflation level that we've seen here at Newell Rubbermaid. But that $51 million is compared to last year's inflation level of $21 million. And we did continue to see inflation in some raw material here in Q1, revenues was up for an example 5% over Q4's level. However we're seeing a stabilization pattern in raw materials, as we look at the balance of the year, and we do believe that are full year guidance in projection's are accurate, and reflect what's going to happen here in the raw material environment. We had projected raw material inflation for the year of $170 million, which again, we think is on track, and we think our plans are accurately reflective of what will happen with our raw material. Now, to offset raw material inflation in Q1, our plan was to generate $20 million worth of productivity throughout our supply chain network, and achieve $20 million in positive pricing. Our actual results in Q1 were as follows: We delivered $18 million worth of productivity But we did secure $30 million worth pricing, so We actually offset $48 million of the raw material raw inflation, in the gross margin line between productivity efforts and pricing. $3 million short of the raw material, but an excellent performance on the part of our team. This pricing, we think is important, because we've established new price point levels, particularly in Rubbermaid Home Products, but also in other raw material affected products or low gross margin areas. And we think these new price points will allow us to move forward and deliver acceptable levels of profitability in areas of the Company that have under performed in terms of gross margin in the past. However the pricing does create a reality of volume shortfall or volume reduction, which we've seen in some parts of our business. There is a price elasticity that kicks in at the new price point levels that we've established in the marketplace. We are determined to maintain these price point levels because they're important for our future. But they do have a short term effect of reducing volume, and in some cases, creating manufacturing absorption challenges, which is why our productivity fell a little bit short of our plan.

If you look at our internal sales performance for Q1, what you see is that sales down 6.5%, and this breaks down as follows:we benefited with 1.6% of currency. We also picked up two points of pricing, which was a good performance for the Company. We saw a reduction of 4% in sales volume, due to the planned exit of low gross margin products, and these planned exits are very much needed for our long-term goals, and our on track with our original plans. And then we did experience 6.1% core sales decline in the Company. Now there were two areas that contributed to this sales decline. While 2/3's of that decline was in Rubbermaid Home Products, where the pricing actions that we've taken have resulted in retailers backing off the category, and in some cases, we have walked away from additional volume that we planned to when we set out with this pricing. And about 1/3 of the core decline, falls in our European window's fashion business, where we are seeing retailers move toward private label over in Europe. And because we have a manufacturing network still in place in Europe, those private label sales don't make sense for us, so we've walked away from some that have revenue, and so we've seen our sales decline in European window here in the first quarter. And that trend will continue this year.

On the flip side, our office product segment experienced excellent sales performance in the first quarter. When you back out the planned exit of our resin intensive[ph] Eldon products, which was $15 million that we talked away from. The balance of our office product business, which is our writing instruments or our pen business, actually was up 4.5%, which reflects a payback in the SG&A investments we've made in this phase. It reflects the fact that our PaperMate franchises is now stabilized and starting to show traction with our new products, and our marker business is very strong and continues to gain momentum. If you turn toward cash flow the first quarter, what you see that we improved over last year by $62 million, this is cash from operations. That improvement will reverse somewhat in the second quarter, and will end up in the first hall of the year on track with original plan in terms of cash from operations. We did experience some timing benefit and working capital in the first quarter, which contribute to that improvement in cash from operations. We also continue to carry inventory levels above last year by $95 million. That's a planned decision to strengthen our service level performance, moving into the key back to school selling season for office products space, and also we've invested an inventory in our high margin tool business, where we believe there's significant potential for the new products that we're about to launch. So those inventory levels which is a trend that we started back last year, continue here on in the first quarter of 2005.

If you turn toward fixed capital, what you see in Q1 is that we improved our fixed capital performance $14 million. We spent $23 million in 2005 versus last year's $37million, so that's a $14 million reduction in fixed capital, which reflects the ongoing effort in the Company to decapitalize or reduce our manufacturing overhead throughout the Company's remaining manufacturing network. We think this is an important discipline, our fixed capital spending discipline, as we continue to have more manufacturing overhead than is required to support our business model in our future sales levels. So this fixed capital reduction is very much on track with our strategic direction here in the Company. So if you look at free cash flow after the dividend pad of $58 million here for the quarter, which is - that dividend pad continues to be something we're very much committed to, we did improve over last year by $75 million in terms of free cash flow. Again, some of that improvement will reverse in Q2 and will end the first half on track with our original plan.

If you turn toward EPS guidance for 2005, what you see is that we are reconfirming our full year guidance of $1.38, to $1.48 a share. This reflects our confidence that raw material environment has stabilized in the Company, so we're confident in this original guidance that we've established for the year. For Q2, our guidance is $0.28 to $0.32, a share. That's down because of the over-performance in Q1, and again, we'll end up the first half on plan for the Company. Our full year internal sale growth guidance has been revised down to a negative 1% to negative 3%, down from the original up one to down one. This is reflective of the sales reduction in the Rubbermaid Home Products, which again is a result of the pricing levels that we feel are important to establish, based on the reality of raw material, specifically resin. This also reflects ongoing softness in the European Window business. So we think it's prudent to guide from a top line standpoint to down one to down three for the full year. And Q2 also will be down between 1% and 3% for the Company.

If you look at the full year cash flow guidance, our cash from operations continues to be between $625 million to $675 million. Fixed capital guidance continues to be $125 million to $150 million, and of course our dividend pad will stay at $230 million. So that all nets down to free cash-flow guidance level of $250 to $300 million, which is consistent with where we set out at beginning of the year. At this point, I'd like to turn it over to Pat Robinson to share with you more details on our financial performance. Pat.

Thanks Joe. I'll start with our first quarter P&L on continuing earnings. Net sales for the quarter were $1.4 million, down $97 million or 6.5% the last year consisting of the following; Unfavorable currency translation of $24 million, which improved sales 1.6%. Favorable pricing of $30 million, which improved sales by 2%. Product line rationalization of negative $60 million, or 4%, and our core sales declined by $91 million, or 6.1%, for a total change of $97 million, or negative 6.5%.

Approximately 2/3's of the core sales decline occurred in the cleaning and organization segment, primarily in the Rubbermaid Home Products business, resulting from the agressive pricing required to offset resident inflation. We expect the sales decline in this segment to slow to the mid single digits in Q2, and sale to be flat the back half of the year by, the introduction of new alternative material products. The remaining 1/3 of the cores sales decline occurred in the European home fashions business, primarily due to the soft economic environment in Germany, and market share losses to private label suppliers in the OPP, drapery hardware product lines. We expect this softness to continue throughout the year in this segment. Gross margin in the quarter was $379 million, 27.2% of sales, down 20 basis points to last year. The change in gross margin is a result of the following; Raw material inflation in the quarter was $51 million, primarily in resin and steel, which negatively impacted margins by 3.4 points. We saw favorable pricing of $30 million, which increased margins by 1.4 points. Productivity of $18 million, or 1.8%, lifted margins 1.2 points. And favorable mix driven by new products, and continued rationalization of unprofitable products lines,combined with the positive impact of the U.S. pension curtailment, were partially offset by restructure related cost and net impact of these changes lifted margins by 60 basis points.

SG&A in the quarter was $304 million, up $4 million to last year. The positive impact of the U.S. pension plan curtailment, was more than offset by foreign currency and additional investment in our writing instrument and tool and hardware segments. The Company was successful in resolving tax matters in the first quarter, and the resulting favorability of $58.6 million has been and will be used to fund restructuring and related activities. We recorded approximately $24 million in restructuring related cost in the first quarter. The net impact of the quarter was an incremental $0.15 per share, versus the previously communicated $0.11 per share. The favorability in the first quarter will be offset in later quarters, due to the timing of these strategic projects. Operating income in the quarter was $68.7 million, or 4.9% of sales. We'll now take a look at the segment information. In our Cleaning and organization segment, net sales were $341 million, down $65 million, or 15.9% the last year, driven primarily by the planned product line exits in the Rubbermaid Home Products business. In the core sales decline discussed earlier, partially offset by favorable pricing and foreign currency. Operating income for the group $15.4 million, or 4.5% of sales, compared to $20.9 million last year. The decrease in operating income was a result of higher raw material costs, and lost absorption in the manufacturing facilities, partially offset by productivity and pricing.

In our office product segment, net sales were $333 million, or flat the last year. Excluding $15 million in product-line rationalization in the Eldon business, sales in the segment increased 4.5%. Driving the favorability for new product successes in writing instruments, retractables, flex-grip, elite and Sharpe emitting, and positive pricing. Operate income for the group, was $34 million, or 10.1% of sales, compared to $32 million, or 9.6% last year. The increase in operating income is the result of productivity and pricing, partially offset by raw material inflation, and increase investment in SG&A. In our tool and Hardware segment, net sales were $276 million, up $2 million, or about 1% the last year. Driven by increases at Lenox and Bernzomatic, partially offset our product lines exits at at our Amrock division and the losses of LEM sales, in the power tool accessory business. Operating income for the group, was $27 million, or 9.7% of sales, down from $43 million, 15.7% last year. Restructure related costs at Irwin and Amrock,combined with our continued investment in SG&A, drove the decline. We expect both sales operating profits to deliver year-over-year improvement in the segment throughout the rest of 2005.

In our home fashion segment, net sales were $198 million, down $29 million, or 12.6% from last year. With currency benefits offset by planned product line exits, and core sales declines in the Europe home fashion business. The group realized an operating loss of $4.5 million in the quarter, compared to last year's operating income $4.5 million. Decrease in income was primarily the result of unfavorable volume, raw material inflation, and the liquidation of our Douglas Cain business, in the UK, partially offset by productivity. In our home and family segment, net sales were $245 million, down $6 million, or 2.4% from last year, primarily the result of product line exits in our Graco business, partially offset by favorable pricing and foreign currency. Operating income for the group, was $13 million, or 5.4% of sales, compared to $16 million, or 6.3% last year. Operating income decreased primarily as a result of raw material inflation, and restructuring relating activities, partially offset by pricing and productivity. Operating cash flow for the quarter was $56 million, compared to a use of $6 million last year, or $62 million improvement. Capital spending was $23 million versus $37 million last year. We'll get the sources of operating cash-flow from the quarter, earnings plus depreciation contributed $90 million of cash. Working capital was a positive $37 million. Deferred taxes is another positive $5 million for total sources of $132 million. Restructuring cash payments were $11 million, and our change in accrual, $65 million for total uses of cash of $76 million, and with a positive cash operating cash flow of $56 million for the quarter. On January 12, 2005, the Company entered into an agreement for the sale of the Curver business, it's our Rubbermaid Home Products business in Europe, which is expected to close in the second quarter. In connection with this transaction, the Company expects to record a total non-cash charge of $60 to $80 million, of which $49 million was reported in the first quarter, as a discontinued operations.

Turning now to the second quarter outlook. We expect sales to be in the range of minus 1% to minus 3%, driven by the following; [inaudible] rationalization is expected to reduce sales by $60 million versus last year, and about half of this in the Rubbermaid Home Products, and the remainer in our Graco window fashions and office product businesses. Pricing for the quarter is expected to be $30 million favorable, or 1.8% of net sales, and the sales decline in the core business of approximately $25 million will be offset by favorable currency translation. For the second quarter, we expect earning to be in the range of $0.28 to $0.32. This range includes $50 million of raw material inflation, which will be more than offset by productivity of $24 million, 2.2%, and positive pricing of $30 million. The combined impact of the items is positive $4 million or 0.01 of share. Expect second quarter restructuring related cost to be approximately $20 million, or $0.05 a share. And we have planned investment in SG&A of about $10 million, or $0.02 per share, primarily in the writing instrument and tool and hardware and segments. Also in the second quarter of last year, the Company recognized a net $6.4 tax benefit related to the resolution of some tax matters, and this was all in a $0.02 benefit to earnings, which will not [Inaudible] in 2005. Finally we expect the impact of the core sales decline and increases in interest and other costs to result in a $0.02 decline in earnings for last year. The impact of all above the changes the approximate $0.10 decline in EPS in Q2 at the mid-point of our guidance.

Second quarter operating cash flow is expected to be between $0 and $50 million, compared to $144 million last year. Capital Expenditures are estimated to be in the $25 to $40 million range, compared to $34 million last year. Reduction in accounts receivables collections results from the Q1 sales decline was the primarily driver in the decrease in operating cash-flow, quarter-over-quarter. The improvement in operating cash-flow of 62 million realized in the first quarter, will larger offset decline expected in the second quarter, resulting in a year-to-date operating cash flow expectation of between $75 and $100 million, versus $137 million last year. Year-to-date capital spending will be between $50 and $65 million, versus $70 million last year.

Turning now to the full year outlook. We expect sales to be in the range of minus 1% to minus 3%, driven by product-line rationalization, and core sales decline in our Rubbermaid Home Products and European window fashion businesses. Partially offsetting these declines will be favorable pricing in currency, and core sales growth in our office products and tool and hardware segments. We continue to expect earnings to be in the range $1.38, to $1.48. This range includes the impact of the core sales decline, which will reduce earnings by $0.04 a share. $170 in raw material inflation, which will be more than offset by positive pricing of $125 million, or 1.9%, and productivity of approximately $100 million, or 2.4%, the net impact of which is an incremental $0.14 per share. Increased investment in SG&A primarily in the writing instrument and tool and hardware segments, will be partially offset by the positive impact of the pension curtailment. The net impact in SG&A, positive $21 million or negative $0.05 a share, year-over-year. favorable resolution of tax matters will be used to further reduce manufacturing infrastructure, and to right size our European overhead structure, resulting in no-net impact in earnings for the year. And finally, interest and other costs are expected to reduce earnings by $0.02 for the year. The net impact of all the above changes is an approximate 3% improvement EPS versus last year. We are maintaining our guidance in 2005 cash flow. Operating cash flow is expected to be in the range of $625 to $675 million, with capital expenditures of $125 to $150 million. to 150 million. I'll now turn it back over to Joe for some additional comments.

Thank you, Pat. We continue to be focused on the strategic thrust here at Newell Rubbermaid that will allows us to achieve our long-term financial goals. I just want to give you a quick summary here on the forward thrusts. We are committed to reducing our manufacturing overhead, which is too high. We're committed to deploying our Newell operational excellence program throughout the Company. We are committed to strengthening the portfolio of businesses that we manage here at Newell Rubbermaid. And finally, we are building our - what we call our virtuous cycle, which is all about developing new products and intellectual property and strengthening our brands and creating demand. In the first quarter as I mentioned, we closed three facility, the Wilmington, Ohio manufacturing facility, Santa Monica manufacturing facility, and our Albertson, Pennsylvania manufacturing facility. Those facilities - the closures were announced in Q1, and this continues to allow us to reduce our manufacturing overhead here in high cost countries, and ship production to low cost countries and to shift to more of an outsource model. We also again, continue to decapitalize successfully. We are reducing the amount of fixed capital we deploy in manufacturing facilities. CapEx was down $14 million for the quarter.

I think it's important to note that we're committed to the pricing levels tha we've been able to achieve in the marketplace, particularly in our low margin products. This is resulting in the short term issue of manufacturing absorption that is eating up some of our productivity gains that we've experienced in company. But we believe as we continue to reduce manufacturing overhead, this is absolutely the right step for us as we must establish the right kind of price levels in the marketplace to launch or generate the kind of gross margins that we're looking for here at Newell Rubbermaid. Turning toward new operational excellence, we took a big step last quarter by announcing Ray Johnson as President of Global manufacturing and supply chain for the Corporation. Ray worked very closely with Jim Robertson, in deploying Newell op-x in the Irwin Rubbermaid groups over the past several years. Ray now has full corporate responsibility to deploy op-x in a consistent and disciplined manner throughout the Company. He's made great strides in our writing instrument business, working with Steve Martin in deploying op-x, and we now will roll this program in earnest in the home and family area ,and the collectivism pact of this will be, - we believe, year after year of important productivity gains throughout our supply chain network worldwide. I also want to mention that again, raw materials we believe have stabilized at the current high level. We think our planning of raw materials this year was on track. We don't like the fact that raw material have inflated as much as they have, but we have not been caught off guard with any additional inflation, and we do believe we have an accurate read looking at the balance of 2005 where raw materials was shake out.

So if your turn toward portfolio management in the first quarter, we added a small acquisition for the Company. We acquired a company called Teracorp, which is a leader in lead-free soldering, which is a growth area in the tool hardware sector. We bolted this on to our Bernzomatic business, which is a high-margin high-return business. And the addition of Teracorp makes that Bernzomatic franchise even stronger and gives it even more growth potential in the future. Also in the M&A front, we continue to successfully wrap-up our Curver divestiture on European Rubbermaid Home Products business, and we hope to finalize this divestiture by the end of the second quarter. That continues to go on track for the company. And of course, we are looking at other opportunities under the leadership of Buddy Blaha to strengthen the Company's portfolio by looking at selective strategic excretive acquisitions, and also by evaluating the possibility of divestiture where it makes sense and supports the Company's long term goals. Finally, the key to this Company achieving its goals over the long term, is by building up what we call or virtuous cycle, which is all about developing innovative patented new products, branding those products with the right kind of brand and creating demand around those products, at price levels that support the right kind of gross margins. We are making strides in the Company and investing in this virtuous cycle.

We have invested money in our high margin businesses. When it comes to SG&A product development and marketing, you'll see some interesting new product roll outs this year in the second quarter. In fact, our Mini Sharpies will begin to populate retail shelves, and in fact our national TV campaign will roll out in May, and this Mini Sharpies proves - we believe has the potential to be a blockbuster for us in terms of new product. We're rolling out our innovative paint buddy paint application tool which is really rolling out in the second quarter and also on national TV as part of our shore line paint and hardware business. Our Graco business has turned the corner nicely here at Newell Rubbermaid, and new products are leading the charge at Graco. We're launching here in the Q2 our new silhouette pack-n-play system which is a greatly improved pack-n-play design with better aesthetics and fashion. We're also launching our mosaic line of compact strollers.These are innovative products that are more compact than traditional strollers, and have met with excellent reception so far in the marketplace. In our Rubbermaid business as Pat mentioned, we are rolling out alternative materials non-resin based materials, which promise to have higher gross margins, and also appeal to consumer tastes here in 2005. These products feature wicker-based products, high-fashion fabric, stainless steel high polished metals, and other forms of materials, that when combined with some elements of our resin product line, will give us a high margin value added fashion oriented new product range, all with the Rubbermaid stamp of approval. We think that these new products are interval in improving the financial returns in Rubbermaid Home Products, and the user reaction so far has been very encouraging.

To support the process we're pleased to announce in the quarter the recruitment of Shawn Holiday, now President of our new business ventures and innovation here at Newell Rubbermaid. Shawn has an outstanding track record in the consumer product sector and brings to us tremendous global experience, and will help us in generating new high margin revenue streams and in inculcating a innovation and new product development system throughout the Company that will consistently deliver high impact new products, we believe for years to come. We also added Matt Milgrin[ph] this past quarter who's Vice President of Global Licensing. We belive licensing our brands represent an opportunity to generate in an incremental high margin revenue stream, which will help fund investments in other new products and increase the profit levels of this Company as we move forward. In summary, we are very committed in the Company to our new product development process to creating demand around the new products, so that we can begin the process of growing our sales organically and generating the kind of financial returns we believe we're capable of long term. So in summary, we feel like the first quarter was good progress for the company. I'm pleased that the team was able to offset raw material with the excellent job in pricing and productivity. I think this team is delivering nicely in a tough environment, and 2005 will prove to be a year of encouraging progress for Newell Rubbermaid. At this point I'd like to open up it for question.

Our first question today will come from Bill Schmidt Deutsche Bank.

Good morning.

Hi, Bill.

Can we talk about tool and hardware margins? I know you said restructuring charges and raw material, but that was way worse than we're looking for. What's going on there?

Well, 3/4 of the decline was in restructuring related charges related to Amrock and Irwin. And the other quarter was related to related to increased SG&A spending. As I mentioned we do expect in that segment to see improving sales and the two to four percent range for the year, and also improving operating income each quarter now for the rest of the year. So it's a one quarter event, primarily related to the two items I just mentioned.

Have you changed your view on [inaudible] purchase recently? I think it would be hard pressed at these levels to find an acquisition that is adequate that your stock would be at these levels?

Bill, we continue to evaluate the best use of cash for the Company, and at this point we have not announced this year a repurchase program or we haven't decided to repurchase any shares. We recognize the stock is very depressed at these levels, however we still believe as we look long term, that we can increase our earnings with the right kind of strategic acquisitions. So we haven't come, off that even though the stock I agree, is very much depressed at this point.

Okay because I sort of done a back example of analysis, and doesn't seem like I can find returns in the deals you've done historically that would be as compelling as repurchasing shares right now.

I think at the stock price, I agree with that. Our view long term in the Company is there's tremendous potential here to build leadership platforms which will create an awful lot of value long term. It' s a question of the time frame, Bill, but I recognize your point of view. We still though, are very committed to building long term leadership platforms in our high growth potential businesses.

Thanks very much.

Thank you.

Our next question will come from Budd Bugatch with Raymond James.

Good morning, Joe, good morning, Pat.

Good morning, Budd.

Two questions, Can you walks us through a sales progresses for the balance of the year? I know we got the year and quarter and the second quarter, but how does it look out for the year, and can you walk us through the elements of that Pat, maybe in terms of overall for the year, an what may be seen, third and fourth quarters?

Third and fourth quarters should be relatively flat in sales Bud to last year, with growth in our office products and tool and hardware segments, again in the two to four percent kind of range, offset by declines in the other three segments, driven by product line exits and continued softness in home fashion business in Europe.

And the product line exit ramp, is there any ramp in that, or is it just simply as going the same way for the year now?

Well, it will be a little bit front end and we expect about 60% of it in the front end of the $200 million, and about 40% in the backout.

Okay. And can you also give us a gross margin walk through for the rest of the year in terms of what we might see. We've got two quarters worth of inflation and we now have inflation number for the year. Does it really fall off fourth quarter? And what happens to productivity in each of the remaining quarters? And I don't think you gave us a mix in restructuring-related number. You may have given it separately. Just if you could do that for the first quarter?

Okay let me talk about the margins by quarter first. There's a lot of of questions.

I understand.

The first quarter margins were slightly down to 20 basis points. We expect a similar performance in Q2, flat to slightly down in quarter two. In the third quarter, expect margins to be flat to up about a half a point. And in the fourth quarter we expect margins to up about a point. The main driver of that is, the raw material comps get better as we go throughout year, so that's the driver of the improvement. We expect productivity to get a little better in the back half than the front half, that's also a contributor to the improving margins. Pricing to be relatively flat. As you know, we spent $125 million for the year. We saw $30 million in the first quarter and we're seeing $30 million in the second, so a slight pickup in the back half. So there's the driver's of the improvement.

And in the first quarter. Could you give us the actual numbers from mix and restructuring the related costs?

Well restructuring and related charges in the first quarter were $24 million.

Costs of sales?

Sorry?

That's all in cost of sales?

Yes.

Okay. And so the mix is the balance of the change, then?

That's right.

Bud let me jump in there for one second. This is Jesse. We had 6.2 that went through as a straight restructuring line item. That's not in the cost of sales numbers. And the other $17.3 million went through cost of sales.

Okay, thank you very much. That's very helpful.

Thanks, Bud.

Next We'll hear from Joe Altobello CIBC World Markets.

Hi, guys, This is actually Henry Capion[ph] for Joe Altobello. Just a couple of questions in terms of the strategic alternatives for the Rubbermaid Home Products group. Where do you stand on that? And then in terms of acquisitions, are you interested in categories that are new or existing?

Well, first on the alternative materials for Rubbermaid. Where we stand is that we're rolling out a series of products this year that feature those alternative or non-resin materials. There all source products, so they don't require fixed capital And they really do add a fashion-forward element to our Rubbermaid Home Products range. We're optimistic about the products. Both from a gross margin standpoint, but more importantly from a consumer acceptance stand point. We think this is really going to help our Rubbermaid Home Products business, and reflected in the guidance here this year. In terms of the acquisition question, we are interested primarily in looking at businesses that are bolt-on, that strengthen existing platforms in the Company. We have nine different businesses zones that we compete in today, which all could develop into leadership platforms. I don't know that we'll develop all 9, but right now, there are nine different arenas we compete in. And the acquisitions activity that we're looking at would support those positions that we're in today. Positions of existing global leadership or positions that could become very strong globally with the right kind of M&A activity.

Okay. And then again in terms of push back on price increases on the home products in the home products group, are you seeing that come from retailers or customers?

Well, it is actually both. In some cases retailers have reduced their emphasis on the category because of the price point realities here that we've got. In other cases the new price points are a place in retail, and price elasticity is a reality in the sales through-through levels have come down versus the historic levels at much lower price points. In both cases though, we think this is a healthy trend, both for new Newell Rubbermaid and for our retail partners. As painful as it it to adjust price points upwards, we think that price points in this residence has the space have to reflex the reality of our future projected resin costs. And our gross margins here in this space even with resin at a much lower level, we're always pretty thin. So we're going through a basic wholesale reconfiguration of this category called Rubbermaid Home Products, and what we're going to end up with is a good business with a strong brand that will be sustainable, and that will allow both retail partners and Newell Rubbermaid to make an acceptable financial return.

Okay, last question. In terms of advertising spend this year versus last year, can you break out both the co-op ad spend and ad spend in the SG&A?

We haven't broken it out. What I can tell you is that we are investing more heavily in national advertising. Cooperative advertising is really a component of a broader trade marketing effort, and though sometimes you may increase co-op advertising and reduce another trade marketing element. So we don't really break cooperative advertising out in terms of a national advertising, though we haven't broken it out for this call. It is up, and it is up in our strategic invested areas, writing instruments and tool and hardware. Both of those areas will see significant increases in advertising this year over last.

Okay great. Thank you very much.

Thank you.

Our final question will come from Scott Carroll Goldman Sachs.

Hi, thank you.

Hi, Scott.

Joe, you mentioned earlier I think, that manufacturing overhead was way too high. You seemed to be very committed to reducing it, and I'm just wondering if you can share with us any benchmarks you're using or where you are in the process of getting costs out of the system, and then I have a follow-up.

Well look, we look at a lot of different metrics when is it comes to evaluating manufacturing overhead. a big is, one what percentage of our manufacturing capacities is utilize, and we're well under the optimal level of manufacturing absorption today.

Primarily RHP business Scott where we have the biggest impact from volume. Also seeing it in window fashion and in our Little Tykes business, also.

Even in the high margin writing instrument business our absorption level in the manufacturing network is currently below the level we'd that we'dconsider optimal. The second thing we look at Scott is, with the percentage of our supply chain that resides in high cost countries like Western Europe and North America, as opposed to lowe cost countries like China or the broader Asian Theatre. While we've made great progress here over the last three years, we still recognize there's work to do ,and we don't have an optimal cost structure in this Company. So we're continuing to march toward a long term vision, where we'll have the best cost portion world-wide and we'll be doing more outsourcing versus manufacturing in our own facilities and we'll have far more of our cost of goods sold that will come from low cost countries.

And have you shared with us what the capacity utilization is broadly? Either in various divisions or across the Company?

We have not. It varies quite a bit business to business. So I don't have those updated in front of me.

Could you-.

Look, I mean for a lot of reasons we don't disclose it, but I can tell you that it is significant burden on our gross margins today. I can also tell you that we are pricing not based on manufacturing absorption, but based on establishing the right price levels in our marketplace.So in other words, we need to establish the right kind of price, points based on realities of raw material and our margin requirements long term, and then deal with our overhead absorption challenge as time goes on.

Great, thanks. And then secondly just in terms of M&A given these challenges as you have been sort of riding the supply chain worldwide, are you placing any limiting factors in terms of the number of acquisitions you might do, or the potential dollar amounts that you would allocate to acquisitions say, in the next 12 months?

It' s a good question. What I can tell you is that we make two highly successful acquisitions back in '02, our Lenox, our Irwin business, both have been home runs for the Company. As we moved into '03 and '04, we really backed off acquisitions in the Company in total, as we focused on restructuring efforts and on the heavy lifting required to get us where we need to go. We are prudent I believe very prudent in looking at acquisitions We're not going to tackle anything that we can't integrate successfully. Our track record here over the last four years is really quite good, and let's just say that the managerial bandwidth capacity of the Company is an important consideration along with our capital structure when we look at M&A. With that said, as we look forward we believe we're in a zone where we can integrate selective acquisition or two over the next 24 month, if they make sense for the Company long term.

Good, I appreciate it. Good luck.

Thank you. At this point, we'd like to again thank everyone for joining us, and look forward to our next conference call in three months.

This concludes today's conference. You may disconnect at this time. Have a great day.