諾威品牌 (NWL) 2005 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid second quarter earnings release conference call. (Operator Instructions). I will now turn the call over to Mr. Jesse Herron, Vice President of Investor Relations. Mr. Herron, you may begin.

Good morning and welcome to Newell Rubbermaid Second Quarter Conference Call. Before we begin, let me take a moment to read the obligatory forward-looking statement. The statements made in this conference call that are not historical in nature are forward looking statements. Forward-looking statements are not guarantees as to our inherent difficulties in predicting future results and actual results could differ materially from those expressed or implied in the forward-looking statement. For a list of major factors that could cause actual results to differ materially from those projected, please refer to our 2004 Form 10-K including exhibit 99.1. Additional financial information about the company's 2005 second quarter results are available under the Investor Relations section of our Web site at www.newellrubbermaid.com. Today, I am joined by our CEO, Joe Galli and our CFO, Patrick Robinson. Well, that being said, let me turn the call over to our CEO, Joe Galli. Joe?

Thank you very much, Jesse and good morning, everyone. Let me start off with an update on our EPS performance here for Q2. Our guidance for the second quarter was that we would deliver between $0.28 and $0.32 a share in EPS and we actually delivered $0.38 a share. That number actually includes the investment of $12 million or another $0.03 in self-funded restructuring. So we are focused very much on reducing our manufacturing overhead in the company in the second quarter. We did record $12 million as an expense that reduced our EPS by $0.03. We were planning to -- to invest $0.05 in the quarter, $0.02 of that restructuring activity has now been pushed out to the second half as we slowed down a couple of restructuring projects. They're still very much on track to be completed for the year, but they didn't occur in the second quarter as we originally thought.

Additionally, that second quarter EPS number was reduced by $0.01 because we took a product line and reclassified it to be held for sale or to be divested classification. So there's a $75 million product line in our Cleaning and Organization Rubbermaid business that, again, has been reclassified held for sale. That reclassification had the effect of reducing the EPS $0.01 in the second quarter. So, the $0.38 net of that accounting reclassification. And Pat Robinson will give you more details on that pending transactions - any questions later in the call.

Turning toward gross margin the second quarter was a strong quarter for us in terms of demonstrating gross margin improvement in the face of still challenging raw material inflation. Our second quarter gross margin came in at 31% -- 31% even, versus last year's 29.3%. So we did drive gross margin up 170 basis points again in the face of tough raw material inflation. For the year our gross margin for the first six months is actually up 80 basis points and this is encouraging progress. The raw materials inflation that we saw in the second quarter was more than offset by a strong performance on the part of our team in productivity and solid pricing success in the marketplace.

Turning toward raw material in the second quarter, we experienced $37 million in raw material inflation. Now that was lower than the $50 million we projected and lower than the $51 million we actually absorbed in the first quarter of this year. But it was much higher than last year's $18 million for the raw material inflation that we experienced in the second quarter. So, we -- again, we came in at $37 million. So we did get a little bit of relief in raw material, or raw material inflation was not quite as steep as we had originally planned. And that saved us $13 million in the quarter.

Now, the good news here is that our ongoing productivity thrust, which is driven by our new operational excellence efforts throughout the company really came through in the second quarter and we actually generated 2.6% in productivity or $27 million in savings in the cost of goods sold line. That was a $3 million improvement versus where we thought we'd be during that last call when we thought we'd take $24 million across that. So, $27 million productivity.

And in pricing, we actually were able to secure 2% pricing in the second quarter, or $35 million in pricing, that's $5 million better than where we anticipated last call. So the collective impact of productivity and pricing gave us $62 million in the improvements in gross margin more than offsetting the $37 million worth of raw material inflation which all told, allowed us to generate $25 million better than estimate in terms of gross margin. So a solid quarter in gross margin. We're now in the 30's. We still have a long way to go. But we are very, very encouraged, everyone, by the progress that our team is making in reducing our manufacturing overhead and improving costs of goods sold and also holding the line on pricing with our retail partners.

Turning towards sales in the second quarter -- you will recall we had guidance of -- a sales decline of between 1% and 3% and our actual sales came in down 1.6% or right in that guidance level.

Just to give you some color behind the top line, we actually had a benefit of 1.5% in currency in the quarter, we had a benefit of 2.1% in pricing. But we saw sales decline by 3.6% due to the planned exit of low gross margin product lines, primarily in Rubbermaid home products but also some selective product lines. Discontinuances included also occurred in the quarter in Graco, window fashions, and in our Eldin Office Products part of Sanford. So that all totaled up to 3.6 of planned exits. That was the impact of 3.6.

In addition, we had a core decline of unplanned sales declines occur in Rubbermaid Home Products in European Window. So in the case of Rubbermaid Home Products, our pricing has been aggressive and we've seen more sales decline than we originally planned that reduced our sales a bit in the quarter. And also in European window, we're seeing the continued growth in the impact on private label on our business and so our sales there declined at faster rate than our estimate.

At the same time, the quarter was a good one in terms of seeing progress in achieving organic growth in the "Invest/Grow" businesses that hold so much potential for this company in the future. So once again our sales were down in total, 1.6%. But if you looked at our "Invest/Grow" businesses collectively, those businesses are actually up 3% in the quarter and this is great news. Our tools and hardware business, led by Jim Roberts actually grew 5% in Q2 and has a terrific product pipeline and really, really good momentum worldwide.

Also, a solid performance in the second quarter was demonstrated by a number of other "Invest/Grow" business units. I was particularly impressed with Rubbermaid Commercial Products where we're seeing outstanding new product glow and solid market share gains and we're starting to get that business into growth mode.

We also experienced nice growth in our Rubbermaid Food Products business, particularly in the US where our take alongs business and other storage products are performing nicely in the marketplace. And our Graco and goodie businesses showed nice growth in the second quarter. So we still have plenty of work to do in these busineses, but they did show nice progress.

Now turning to Sanford worldwide - our Sanford office products group actually turned in 1.3% growth globally for the second quarter. But that was actually an encouraging performance. Our writing instrument business was actually up 2.1% or $9 million in the quarter while the Eldin resin-based office products business was down 4.5%, some of which was by design.

So, Sanford is not where we need it to be in terms of organic growth. We have work to do, particularly in the U.S. But we're making progress on Sharpie, Paper Mate, Expo and we feel strong that this business has great potential for our future.

In terms of cash flow for the quarter, our cash came in as expected in Q2. We are on plan for the year and we're very much on track in terms of free cash flow and working cap and fixed cap all continues to be well disciplined in the company.

We are now turning towards the back half, where we're now introducing guidance for Q3 in EPS of between $0.33 and $0.37 a share. So this guidance reflects the shift of projects that I mentioned earlier from Q2 to Q3. So, guidance for Q3 will turn in between $0.33 and $0.37 a share EPS and for the full year, we're actually guiding to the high-end of our range. We now believe our EPS will come in at $1.43 to $1.48 a share.

In terms of organic sales growth, our performance for this year, in Q3, we believe our sales will actually decline between 2% and hold flat. So we'll be between flat and down 2 in the third quarter. And for the full year, we're reconfirming our prior guidance of down 1 and down 3. And this continues to reflect the -- our planned exit of low margin product lines, particularly Rubbermaid Home Products and the decline in our sales due to price in Rubbermaid Home Products along with the softness in the European window. That's reflected in that guidance.

We're also - on this call reconfirming the cash flow guidance for the year. We're very much on track to deliver cash from operations of $625 to $6.75 million. Our CapEx is still pegged at up between 125 to $150 million for the year. And of course our dividend is sacred and that's baked in the $239 million. So at this point, I'd like to turn it over to Pat Robinson to give you additional details about the second quarter.

Patrick?

Thanks Joe.I'll start with the second quarter P&L. Net sales for the quarter were $1.6 billion, down $26 million or down 1.6% from last year, consistent with the guidance of minus 1 to minus 3%. The decrease in sales consisted of the following. We have favorable currency translation of $25 million or 1.5 points, favorable pricing of $35 million or 2.1 points, product line rationalization of negative $60 million or minus 3.6 points. And a core sales decline of $26 million or 1.6 points.

The core sales decline was primarily the Rubbermaid Home Products business resulting from the aggressive pricing required to offset resin inflation. We continue expect sales to be flat in in the Cleaning and Organization segment in the back half of the year driven by the introduction of new alternative material products.

Additionally, we continue to see core sales declines in our European Home Fashion business primarily due to the soft economic environment in Germany and market share loss to private label suppliers in the OPP Drapery Hardware product lines. We expect this softness to continue in the back half of the year.

Offsetting the sales declines was growth in the tools and hardware and office products segments driven by the new product successes, favorable foreign currency and positive pricing. The Tools and Hardware business was up 5.1% and our Office Products business up 1.3% for the quarter.

Gross margin in the quarter was $508.8 million or 31% and net sales up 1.7 points from last year. The change in the gross margin was the result of the following -- we saw raw material inflation in the quarter of $37 million, primarily in resin and steel, which negatively impacted margins by 2.2 points. We had favorable pricing of $35 million, lifting margins by 1.4 points. Productivity of $27 million or 2.6% lifted margins by 1.6 points. And favorable mix driven by new products and the continued rationalization of unprofitable product lines was partially offset by restructuring related charges. The net impact of these changes lifted margins by 90 basis points.

SG&A for the quarter was $324 million or 19.8% of sales, an increase over last year of $7 million. Primary drivers of the increase were foreign currency of $6 million and additional investment in our office product and tool and hardware segment partially offset by streamlining activities.

When we provided guidance in the last call, we had projected to incur about $20 million in restructuring and related charges in the second quarter. Actual charges were approximately $12 million with about $8 million or $0.02 per share shifting into the third quarter.

Operating income in the quarter was $184 million or 11.2% of sales, up from $172 million or 10.3% a year ago.

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

In the Cleaning and Organization segment, net sales were $377 million, down $23 million or 5.9% from last year driven primarily by the planned product line exits and core sales decline in the Rubbermaid Home products business partially offset by mid-single digit growth in both the Rubbermaid commercial and Rubbermaid food businesses.

Operating income for the group was $23 million or 6.1% of sales compared to $15 million last year. The increase in operating income was the result of the successful pricing actions, productivity and favorable mix, more than offsetting raw material inflation and lost absorption in our manufacturing facilities.

In the office products segment, net sales were $496 million, up $6 million or 1.3% from last year. The sales increase was driven primarily by new products successes in writing instruments and foreign currency partially offset by the declines in our Eldin office products business.

Operating income for the group was $99 million or 20% of sales compared to $96 million or 19.6% of sales last year. The increase in operating income was the result of the increased sales, improved gross margins driven by new product introductions and productivity, partially offset by increased investments in SG&A primarily related to the Sharpie advertising campaign

In our tools and hardware segment, net sales were $316 million, up $15 million, or about 5% from last year driven by strong sales in our Lenox, IRWIN, and BernzOmatic businesses, partially offset by a decline in our Amroc business.

Operating income for the group was $49 million or 15.6% of sales, up from $46 million last year. The sales increase in strong productivity more than offset raw material inflation and increased investments in SG&A.

In our Home Fashions segment, net sales were $212 million, down $12 million or 5.4% last year from last year with mid- single-digit growth in our North America business offset by product line exits and core sales declines in our European home fashion business.

The group recognized operating income of $4 million in the quarter compared to last year's operating income of $9 million. The decrease in operating income is primarily the result of the sales decrease, unfavorable manufacturing volume and raw material inflation, partially offset by productivity.

In our Home and Family segment, net sales were $242 million, down $12 million or 4.7% from last year primarily as a result of product line exits in our Graco business and core sale declines in the Little Tykes battery operated products partially offset by core sales growth in the rest of the segment and favorable foreign currency.

Despite the sales decline, operating income for the group increased $4 million versus last year. Operating income was $19 million or 7.8% of sales compared to $15 million or 6% of sale last year driven by productivity and reduced SG&A in our juvenile products businesses.

Operating cash flow for the quarter was $36 million consistent with our guidance of zero to $50 million.

Capital spending in the quarter was $23 million versus $34 million in the last year.

On June 1, 2005, the company completed its previously announced sale of its Curver business, the company's European home products division. This transaction is consistent with the company's intention to divest non-strategic businesses and concentrate on leveraging brand strength and product innovation in its core portfolio of businesses.

In connection with this transaction, the company recorded a turnover non-cash charge of $62 million, of which $49 million was previously recognize in quarter 1 as a component of these completed operations. The remaining $24 million loss recognized in quarter 2 was an impairment loss on discontinuation of operations associated with the anticipated disposal of certain product lines in the Cleaning and Organization segment. It was part of the company's continued effort to divest non-strategic businesses. These product lines contributed approximately $75 million in sales in 2004. Additionally, the reclassification in quarter 2 to discontinued operations reduced continuing EPS by $0.01 in the quarter.

Turning now to the year-to-date results. Net sales are $3 billion, down $120 million or 3.8% from last year, consisting of the following -- favorable currency translation of $49 million or 1.6 points, favorable pricing of $65 million or 2 points, Product line rationalization of negative $120 million or 3.8 points. And core sales decline of $113 million or 3.6 points. Gross margin year-to-date was $883 million or 29.3% of net sales, an increase of 80 basis points from last year.

Year-to-date gross margin was impacted by the following -- we had raw material inflation up $88 million, primarily in resin and steel. Favorable pricing of $65 million or 2.1%, lifted margins by 1.5 points. The raw material inflation affected margins negatively by 2.8 points So favorable pricing lifted margins by 1.5 points. Gross productivity of $45 million or 2.3%, lifted margins by 1.4 points. And then favorable mix driven by new products and continued rationalization of unprofitable product lines combined with the positive impact of the US pension curtailment were partially offset by restructuring related costs. The net impact of these changes lifted the markets by 70 basis points.

Year-to-date SG&A was $627 million or 20.8% of sales, up $12 million from the last year The increase in SG&A reflects a currency impact of $13.5 million. All other SG&A was down $1.5 million with strategic investments more than offset by streamlining initiatives. Year-to-date operating income was $249 million or 8.3% of sales.

Operating cash flow was $92 million year-to-date compared to $137 million in the prior year, and capital spending is $46 million year to date compared to $70 million last year.

Turning now to the third quarter outlook. We expect sales to be flat to down 2% driven by the flowing --

Product line rationalization is expected to reduce sales by $40 million versus last year with about one half of that in Rubbermaid home products and the remainder in our Graco and window fashion businesses.

Foreign currency is expected to be flat for the last year end of the quarter.

Pricing for the quarter is expected to be positive $32 million or 2.3% of net sales. And Core sales decline in our Home Fashion and Little Tykes businesses are expected to be largely offset by sales growth in our Tools and Hardware, Rubbermaid Commercial, Rubbermaid Food, and Writing Instruments businesses.

For the third quarter, we expect earnings to be in the range of $0.33 to $0.37. And this range includes $32 million in raw material inflation which will be more than offset by productivity of $31 million or 3% and positive pricing of $32 million. The combined impact of these items was about positive $31 million or positive $0.08 a share. We have planned investments in SG&A of $15 million or $0.04 per share primarily in the writing instrument and Tool and Hardware segments.

We expect third quarter restructuring in related costs to be approximately $36 million or $0.09 a share. Included in this number is the $8 million carryover from Q2, plus closure of additional manufacturing facility this year in our Cleaning and Organization segment.

We also expect $0.04 in benefit from the resolution of tax contingencies compared to a $0.01 benefit last year. The net impact of restructuring and taxes is a $0.06 reduction in EPS for the quarter.

Finally, we expect increases in interest and other costs to be more than offset by favorable mix resulting in a $0.01 increase in earnings last year. The impact of all of the above changes is approximately a $0.01 decline EPS in Q3 at the midpoint of our guidance.

Third quarter operating cash flow is expected to be between $225 million to $275 million compared to $285 million last year and capital expenditures are estimated to be between $25 and $35 million compared to $25 million a year ago.

Turning now to the full-year 2005 outlook, we continue to expect sales to be in the range of minus 1% to minus 3% driven by product line rationalization and core sales declines in our Rubbermaid Home Fashions and the European Home Fashions businesses. Partially offsetting these declines will be favorable pricing, favorable foreign currency, and core sales growth in our Office Products, Tools and Hardware, and Rubbermaid commercial businesses.

We now expect earnings to be in the range of $1.43 to $1.48, the high end of our previous guidance. This range includes the impact of the net sales decline that will reduce earnings by $0.04 a share, $150 million in raw material inflation, which will be more than offset by positive pricing of $125 million or 2% of sales, and productivity of approximately $105 million or 2.6%, the net impact of which will be an increase of $0.20 per share.

Increased investments in SG&A primarily in the office product and the tools and hardware segments will be partially offset by the positive impact of the pension curtailment. The net impact is an increase of SG&A of about $30 million or negative $0.07 per share. The favorable resolution of tax matters is being used to further reduce manufacturing infrastructure and to right size our European overheads structure resulting in a negative $0.02 per share.

And interest and other costs are expected to reduce earnings by $0.02 for the year. The net effect of all of the changes is approximately $0.05 improvement in EPS year-over-year.

We're maintaining our guidance on the 2005 cash flow. Operating cash flow is expected to be in the range of $625 to $675 million with capital expenditures between $125 and $150 million. I'll now turn the discussion back over Joe for some additional comments.

Thanks, Pat. 2005 the year where we are very much focused on four key priority - one is reducing the manufacturing overhead. Two is deploying throughout the Company our new operational excellence thrust. Number threeis to continue to strengthen the corporation's portfolio. And four is t investment of what we call a virtuous cycle to drive future organic growth.

Let me just touch on these priorities and give you a sense of how we're doing, very quickly.

First in terms of reducing manufacturing overhead, we previously, we've announced this year the closure of three manufacturing facilities - we announced those in Q1. And you are seeing the benefits of those closures and the other restructuring we've done in the company with the 170 basis point improvement in Q2 alone.

Given the results of our company in Q2, we were able in the quarter to announce the closure of an additional Rubbermaid facility. This facility will be closed -- we'll get to work on that in Q3, but we will fund that in our EPS this year. And that's good news. Because that just accelerates the pace in which we reduce manufacturing overhead and streamlines our company even more.

Additionally, we continue to make nice progress on what we call the decapitalization of our company, which is reducing our fixed assets and pushing more of the capital burden off on our supply partners. And this is working well. CapEx is down $24 million year to date and we feel good about our direction and our discipline when it comes to fixed capital.

So this company is very much committed to achieving our best costs of -- a best cost position in the businesses we compete in. But we still have a lot of work to do, as there are still too many facilities that we've got in -- in western Europe and North America and we still have work to do.

Turning toward operational excellence, we made nice progress in Q2. We still have a long way to go. But we did generate $27 million worth of productivity in the second quarter. This was encouraging and there's momentum building here in terms of our company's productivity. The business unit we've got with the most potential -- and you can say the most -- food is our Sanford business worldwide. Here we just appointed one of the corporation's most skilled operations leaders, a gentleman named Ahfed Belhaje. Ahfed previously was the Vice President of Ops for our European Tools group. Ahfed was originally recruited by Jim Roberts, trained in Jim's new operational excellence program. Ahfed grew up in the General Electric system and has an outstanding background. And I think his addition to Office Products bodes well for that business's productivity in the future. Now our operational excellence program this year is tempered a bit by the volume challenges we face because we do have too much manufacturing overhead. So we are, again, tempered a bit by this unabsorbed overhead that we've got throughout the company. And that's an issue we continue to work on.

Fortunately, raw materials appeared to have stabilized at a very high level. But we didn't see additional inflation in Q2. And that's a good sign and we're not naive about this. We are, in our modeling, projecting high raw material environment over our three-year period. But we did see things stabilize in Q2 and that was good news.

Turning towards our portfolio. The company continues to strive to build a better portfolio of businesses. We did close on the sale of Rubbermaid Europe or the Curver business in Q2. That now is behind us. It's good news. It allows us to streamline Europe and it sheds us of resin intensive product lines that had extremely low gross margins. On this call today, we also disclosed that we've classified another $75 million product line as part of the Rubbermaid of Cleaning and Organization. That business - the divestiture of that business is pending and we're optimistic that over the next six months we'll be work that out.

You should know that we remain active on the acquisition front. We are looking at some exciting prospective acquisitions that would fit this company strategically and of course be acretive and synergistic additions. These are things that we are looking at are bolt-ons, but would clearly moving our leadership platforms in the right direction. We look forward in the future to continue to update you on this strengthening of portfolio thrust that we have going on in the Company.

Turning towards our virtuous cycle. We are making nice progress when it comes to new product development, building a new product flow. In fact, we're going to focus on our Analyst Day coming up in September, Jesse, on the new product flow that we've seen this year and that you will continue to see over -- over the next several quarters. I think it's safe to say that new product development in this company has taken longer to get underway than we had hoped. On the other hand, now that we have momentum building, there's nice traction here. And I think you'll be encouraged when you see the amount of significant high margin new products on the way, not only for this year but over the next three years. It's an exciting development in our company. Again, this will be a focus on Analyst Day.

Just to summarize today's call, we are pleased with the progress we've been able to make in gross margins, though there's still a lot of work to do. I'm particularly impressed that our sales and marketing teams have been able to implement a pricing discipline, because we really weren't effective at taking pricing several years ago. But we have been able to take the kind of pricing we need to offset raw materials to some extent. And, of course, our productivity thrust led by the OpEx team has been outstanding.

And with the raw material environments stabilizing, and with the visibility we have in the back half, we feel confident that we will deliver again in the high end of the range as we've guided today. So with all of that, I'd also just like to reiterate that our Analyst Day is scheduled for September 22. It will be in Manhattan. I assure you this date won't change. And we're looking forward to it. I think you'll find it will be an insightful day in terms of seeing not only the new product flow in the company, which I said is very encouraging, but also the talent we've been fortunate enough to attract and retain in this company. We do believe we've got an excellent team and they're working hard on the right thing. So with all that, Jess, let's open it for questioning.

(Oprator Instructions). And our first question today will come from Budd Bugatch with Raymond James & Associates.

Good morning, Joe, good morning, Pat. Let's take your word. Just talk a little bit about the transformation, understanding that it never is finished, but can you kind of give us -- you said you've accelerated it by one facility this year. Can you quantify for us how many facilities you're down to now? And how fast you think you can move this forward over the next couple of years and where you ultimately want to get to?

Well, Budd, we're going to spend a lot of time on this in analyst day. But I can say our three-year plan gets us to the end point that we think makes sense. And, you know, so we're -- it's a work-in-process now. And we really have to identify '06, '07, '08 a three-year period where we get the manufacturing overhead down to an end point that allows us to do what we need to do.

Budd, we started with 130 manufacturing facilities in '01 -- we started this - we've moved that down to 89 through the restructuring program from '01 to '04. And we expect to end this year with 80 facilities. Some of those were divested in the Curverdivestiture and the rest are the four that we're closing on this year.

And do you care to give us the end point now or do we need to wait for Analyst Day on that ?

I think we'll have to wait until Analyst Day.

I just had a couple of other quickies - The $150 million of Infomel inflation, I think last call you gave us $120 million of resin, $40 million of steel, and $10 of corrogateand other -- how would you parse that today?

The improvement is in resin.

So it's all in Resin?

Yes.

Actually, Budd, steel actually got a little worse, and - I think with specialty steels. But resin not more than offset that and for the short term got better.

Can you give us kind of the difference? Is it $5 million or $10 million?

No.

I don't understand.

Instead of -- thehe resin would have gone from $120 million to $100 million. Did it go down to $90 million or $95 million? What is that - that number?

We're not disclosing, Budd, that level of granularity here.

Okay. All right. And, finally, can you give us a little bit of the idea of the productivity by segment? Which ones did better? Which did not as well?

I don't have that in front of me, Budd. Joe will actually get back to you.

Offline. Okay. Thank you.

Yes.

Our next question will come from Ann Gillin-Lefever of Lehman Brothers.

Good morning everyone, just a couple of follow-ups. Are we still looking at the Q1 tax benefit of $58 million being entirely offset by restructuring in the full fiscal year?

We are, we're actually looking at it now to be slightly more than offset. We're looking at restructuring charges to be about $0.02 per share greater than the tax benefit because of the addition of the Cleaning and Organization plant that we added to the program.

OK.Great. Pat, is that also -- is that $0.02 larger if I now add in next quarter's $0.04 tax benefit?

The net benefit for tax year-over-year in one-time tax benefits is about $0.20.

Right

Okay. And the net charge from restructuring related charges is about is $0.22 per share.

That's great. Okay, And then Joe. Can you give us an outlook around SG&A. It feels like with your gross margin coming in strongly, that you should be able to start to invest more on this line beyond the -- beyond the Tool and Office business.

We are taking it up. In fact we did take it up. In this estimate, we were looking at about a $20 million year-over-year increase in SG&A on last call. And we took it up to $30 million. So we have about $10 million additional SG&A that we're going spend in all of our "Invest/Grow" categories.

So none of that in that pension, Pat, it's all going to be brand support?

That's right. It's net of pension. The $30 million increase is net of pension. Okay. So it's actually more than 30 and the last time the net investment was $20 million. Net increase was $20 million. So take it up by $10 million based on the strength of the segment in that quarter.

Okay --

And sometimes that brand support shows up as classic A&P on the P&L. Sometimes it's sales comp. But -- we will be extending our Phoenix program which is working very well and it's going to be focused on some of these "Invest/Grow" areas. That shows up as sales comp, but really it's marketing to get to the end user, the consumer.

Okay. You're leading right into my next question.

Oh good. Well, you're welcome.

Here's the questionYou've been forecasting minus 3s to minus 1s for the year on the topline. You just put roughly 1% -- $75 million you moved into discontinued. You didn't change that forecast. Am I supposed to be thinking that's because you are putting more against gross to net or offsetting sales.

That number comes out of both years on discontinued, Ann . So it was last year's sales come down by a like of --

Your minus 3 to minus 1 is net-net.

That's right.

Okay. Is there any way of understanding what increased investment is going against the sales line? Does it -- that's increased against the brands?

I'm not sure I understand the exact question but --

Ann, if you wouldn't mind following up with Jesse, we can help you with this as best as we can. We are clearly increasing our tremendous investment brands that will continue over the next three years, but I think we can help you if you just follow up with Jess.

The biggest change, though, in our sales forecast has really been -- foreign currency has been - has gone a little negative on us in the back half of the year. And we've replaced that with core sales growth in some of our "Invest/Grow" categories. But I don't have the breakdown by category. You can get that from Jesse.

All right That's fair. . It's just o many moving parts that I missed. And just one last thing, Joe. I mean, you are saying you're committed to the best cost position. You have a lot to do. You also said you have too much manufacturing overhead?

Yes.

Why do this over three years? It seems like the organization's been doing this for so long and you're alluding to another three-year plan to come.

Yes, Ann, I mean , I think it's safe to say we're going reduce our manufacturing overhead as fast as we possibly can. And the three-year period -- by the end of that period, we'll be at the end point. Some things you do quicker than others. But I would say the sense of urgency here is quite high. And we will go as fast as we can.

Great. Thanks so much.

Our next question will come from Wendy Nicholson with Smith Barney.

Hi, Good morning.

Hi, Wendy.

In terms of the pricing environment, the pricing you've taken has clearly helped you both on the top line and the gross margin front. Do you see real stability in the pricing among your competitors in private label? In other words is there a risk as resin pricing comes down that we see actual pricing pullbacks if you will in the market?

Wendy, there's always a risk. But the fact is that the pricing we've been fortunate enough to secure doesn't nearly offset the raw material inflation that we've experienced around here over the last two years. So I do believe that the pricing that we've taken is -- is stable. We're not looking at any price erosion. Our competitive set has followed -- our competitive set has not - in some of our businesses has gone as far as we have gone. And that's by design, Wendy, because we're repositioning, particularly the Rubbermaid brand as a trade-up brand. We're not really interested in that OPP zone of the market the way we were in the past.

So the bottom line is that I feel confident we can maintain our price levels. I don't believe -- if resin comes down a little bit, there's still so much that we -- that we had to absorb over the last three yeas that there won't be any pricing coming down here.

Okay. And then -- that sounds great. And the specifics on $75 million business that you have holding for sale. Can you talk - would you tell us, a, what it is, and, b, the effect on your business? I mean I assume that's also lower margin?

I can't -- we can't give you any specifics or we already would have. As soon as we get the deal closed, we'll, of course, announce it. Wendy. But the good news is it's a yet another low-margin product line that doesn't fit our model and it will just help us in that Rubbermaid zone of the company improve our margins and focus on the areas that have the highest potential for our model.

And then last question. Just as it relates to Europe. I know you talked a lot about how the European windows business is under pressure. You've also talked in the past about the stationery business in Europe. Does Europe generally continue to be a weak spot for the company? And are there plans to develop Europe more fully, do you think?

Wendy, so Europe -- here's the thing about Europe. We have an outstanding team in Europe. This is the best European management team I've ever worked with. But the European P&L for the Company has significantly lower operating margin performance than the U.S. for a variety of reasons. Mainly the cost of doing business there, manufacturing and the infrastructure costs. So we look at Europe as -- as filled with sort of a portfolio opportunities in brands that have high gross margins, a lot of intellectual property. There's tons of opportunities for us to continue to grow in Europe. For example our Lenox business is growing beautifully in Europe.

Our BernzOmatic has gone from nothing to a nice business in Europe. So we have a lot of those kind of opportunities. At the same time, we're not -- we don't believe in fullest consistency. We're not wedded to doing business in Europe just because we make money on the product line in the U.S. If we can't -- if the model won't yield a profit, Wendy, in Europe, we're going to move out. And you're seeing us - we're contracting our window business. We sold Rubbermaid. So Europe going to end up looking a lot different in three years than it is today.

It'll be much more profitable. We're less focused on top line growth and much more focused on the quality of our -- of our earnings. The two businesses with the obvious potential in Europe are tools and our office products or Sanford brands businesses. The third is the Rubbermaid commercial area where we're in a very small position but has a lot of upside potential. So anyhow. And we'll give you more feedback on that on Analyst Day.

Okay. And then my just very last question following up on Europe. I think you've talked in the past about NOL's that you have relating to the losses in Europe?

Yes, we do.

And when I mean, are we seeing those? Are those part of youe effective tax rate? Or are those to come?

They are not part of our effective tax rate yet, Wendy. But we'll hope use those certainly over the next strategic planning period -- over the next three--year period.

Let's just say, Wendy, we're very hopeful we'll be able to utilize those NOL's in this three-year period. Lots of opportunity there in the tax bracket.

How does that work? They just sit there and you can use them when you want?

No, we use them when we have profit in the countries where we have those NOL's.

Okay. So you have to wait until you generate profit and then you can just shield the taxes you would normally pay on that profit.

That's correct.

Okay. Got it. Thank you so much.

We'll go next to Bill Schmitz of Deutsche Bank.

Hi, good morning

Hi, Bill.

Hey, I'm just going through the whole raw material algorithm again, and so it looks like it was $51 million in inflation in the first quarter, $37 million in the second quarter, now that the European Rubbermaid business is gone --

Yes ---

Why are you still estimating another, say, $62 million of cost inflation. And then, I know steel is going up. But the question is if there's upside there, will that flow down to the bottom line -- the incremental savings from the raw materials portion or will you kind of plow that back in to accelerated SG&A costs?

First of all, the Curver business was a relatively small business for us -- about $120 million in sales. It does have a slightly positive impact on that raw material inflation number. But it's not huge. Raw material -- resin in particular, our outlook on resin is we expect to see resin increase in the back half of the year at its -- from its current points, Okay? So, we are looking at reduced inflation in the back half. We had$51 million in the first quarter, $37 million in the second quarter, and a little over $60 million. So roughly $30 million a quarter in the back half, lower than we saw in the front half, but not dramatically lower.

Okay. Great. I just thought the comparisons were a lot harder on the first half than in the back half on the resin side.

Yes, well, I don't have a crystal ball but --

You don't?

-- we're anticipating resin to come back up in the back half based on where oil is right now.

Okay. And then just a follow up on the pens business. How is the back-to-school season looking so far? I know it's still a little bit early. But is there any incremental change in terms of -- you're facing ? I know Paper Mate is making some early progress off of a pretty low base after three years of declines.

It's certainly early days to call, Bill, although the early signs are encouraging. We've made outstanding gains in markers and that's Sharpie, Sharpie Accent and Expo. We have, I'd say held our position in the Paper Mate world -- and that's Paper Mate liquid paper, Flair and those businesses. So in net, we're doing a little better than last year. But there's still a lot of work to do particularly in that Paper Mate side or everyday writing where we've had a lot of volume and we've had years without a lot of new product.

Okay. And then one last one - and I'm sorry for take so much time here -- you committed to not taking below the line restructuring charges. Is that going to change? And then the other question is this -- as you talked about the virtuous cycle. Why won't you wait for the virtuous cycle to get going again before you start embarking on this -- I don't want to call it aggressive but this bolt-on M&A strategy?

Alright, let's go first on restructuring, we did say we had completed the program we announced in 2001. And I wish I would've been clairvoyant back then. But I think we did a good job of closing over 40 facilities and we saved more money than we committed and we got it done on time under budget. And at that point we said we were no longer going take charges related to that program. Looking into the future I think the company has to do the right things that will set this -- this -- the Newell up to achieve our best long-term results. So, we're committed to doing whatever is going to drive the shareholder price long term, Bill, and we're looking hard at how we do that with the manufacturing overhead this year as you have mentioned.

In terms of the virtuous cycle, we do need to continue to see momentum when it comes to new product development, marketing, etc. But I don't think we can be inactive on the acquisitions front completely. We haven't really done anything significant in terms of acquisitions since 2002 when we bought Lenox. And since we've acquired the Lenox business, we've grown that business, double digit every quarter since we bought it and we've raised the operating margin almost 1,000 basis points. So I think the team has demonstrated the ability to assimilate an acquisition and create value. And we haven't done anything since. We've been focused on divestiture and reducing our manufacturing overhead. But at some point, it will make sense particularly with the strong cash flow over the last three years for us to put that capital to work in the way we think will benefit shareholders long term. That's what we intend to do.

Okay. Thanks very much.

Your next question will from Mr. Eric Bosshard with Midwest Research.

Good Morning. Two questions, a cash flow and a restructuring question. On cash flow, Pat, you gave guidance from for 3 2Q) cash from ops. In the first half cash from ops is down. Can you help us understand what's going on within that and why you're going to get what looks like a big benefit in the fourth quarter to get to the full-year guidance?

First half cash flow is down about $40 million, Eric, and that's mainly on the accounts receivable line. It really has to do with the timing of sales primarily in Q2, they were more in the back half of Q2 this year than they were last year. So they were hung up on the balance sheet and they'll be collected in Q3. The Q3 cash flow is relatively flat, right at 250-ish versus 280 last year. And that's really related to inventory reduction in the quarter and the collections of those receivables. I don't really have the comp by line in front of me year-on-year right now. Why it's down little bit from last year. But some of that is restructuring cash, I'm sure, in the quarter, though. So or the year, we're very confident that we're going turn in the -- the $625 million to $675 million as well as our capital expenditure commitment.

Is there anything in 4Q that will help you make up for the first half in the modest 3Q deficit? I guess what I'm asking is there an effort within inventories or within payables that is strategic, that is important to that?

Well, you remember, our last year cash flow was actually a higher than commitment this year. So we don't have to make up the full delta. We actually turned in 307 last year of free cash flow. And our mid point of our commitment was $275. So our back half cash flow was actually relatively flat year-over-year.

Okay. But the cash from the ops last year was $660?

Okay. I'll have to get back to you.

Okay. That's fine. And then, econdly, on restructuring - am I right? this year you'll end up with about $0.25 of tax benefit -- tax and pension that you're basically using to offset restructuring expenses this year?

That's right.

Okay. And I guess the question, Joe, you went through the last restructuring indicated you wouldn't have anymore one-time charges - that restructuring was complete. And this morning, it sounds you're talking about the next three years, there's more work to do. And my question is strategic in nature in that is, what change that says there's another three-year restructuring program that sounds like will include some perhaps meaningful charges. What's changed in order for you to go have to go back at this?

In 2001, we had a company that made 90% of its products in Western Europe and North America. We did an analysis very quickly and went out and closed 40 facilities down in about 24 months. Hardcore manufacturing facilities and another 40 DCs. That was a lot of activity. There were not a lot of companies that were able to get that done in the period of time. We have said all along, we've got to go through that process while we assess our portfolio and see where we stand at the end of that.

What's changed is now that we sit after completing that program successfully, and we are saving $145 million a year as a result of that first program. But we're saying, look, we have about 80 facilities at the end of the year after divestitures. And we can't sit here -- if we're not in a best cost position, it doesn't make sense for us to sit here and not continue on pursuing projects that would yield a great return. So we're going do what's right for our shareholders. Again, I wish I would've been clairvoyant in 2001 and had an exact command of -- after my first six weeks with the company -- of what to do. But this was a complicated company.

We had to assess what businesses we wanted to keep, what businesses we were going to sell, and what made Sanford's manufacturing overhead standpoint. And we -- let's just say, we put a ton of time into this . I feel good about the plan going forward. Just stay tuned and we'll continue to disclose our plans. But I can -- I can assure you that all those plans are focused on driving long term shareholder value.

Thank you.

Eric, I want to get back to you. The inventory is the biggest change year-on-year in the back half. Last year we took about $80 million of inventory out in the back half. And we're anticipating between $100 million and $130 million come out in the back half of this year.

Great, thank you, Pat.

Your next question comes from Connie Maneaty of Prudential Securities.

Hi, Good morning.

Hi, Connie.

Could we just go back to this question about restructuring, maybe? What percentage of your sales do you now make in North America and Western Europe?

It's 60 plus, Connie. It's closer to 60 as of right now, closer to 65.

60 to 65?

Yes.

Okay, And so of the 30 to 35% that have gone to low-cost countries, how do you split that between what you outsource and what you manufacture yourself?

About two-thirds of it is outsourced, and about one-third made in our own facilities. And I expect that, as time goes on, Connie, the outsource number will go up vis-a-vis the announcedmanufacturing number.

As you look at the businesses you still have, which of that -- where you still manufacture the products? which ones do you think are most critical for you to manufacture yourself?

The businesses that -- where it's the most critical to manufacture, Connie, is where we actually add value in the manufacturing process. And I'll give you an example, Lenox, we have outstanding patented technology when it comes to linear edge cutting tools. And that's why our margins are stronger and why our market share is growing. In that case, the manufacturing technology is a part of the product proposition that makes us better. So the manufacturing we do there is critical.

We have some other businesses like that where there's a manufacturing technology though not a lot. That's why we are increasingly bold about looking at this ratio and the three-year plan calls for doing much more outsourcing as opposed to in-house manufacture

So if we were to look out three years -- I mean, is that a fair assessment that maybe only - maybe you manufacture something on the order of 20% of what you sell?

That's low. But it will be certainly less than half. And we'll -- again, we'll talk more about this at analyst Day.

Okay. Are you done with product line exits in 2005 or is there more to do in '06?

It will be minimal --I don't think you're ever done. There's so many SKU's in this company. There are so many product lines that is need to be streamlined. I'm sure we'll find more to do, Connie. But the lion's share is certainly done.

And one thing --

And also I think we're done with calling it out as an excuse on why our organic growth is not up. In other words, I think you won't hear us talking about it once we get into next year. It will just be part of our ongoing business. As time goes on, we're always going discontinue low margin or outdated product line and offset that with high gross margin new products. So that will be more of a business as usual part of the company's management starting in 2006.

And just two real quick questions -- what is resin now as a percentage of cost of goods? I mean after you've been divesting and everything, it's kind of hard to keep track. I think you said it's around 10%?

I think that's roughly correct. Jesse can get the exact number.

It's actually a little bit higher. We can walk through the costs offline. But it's actually -- right now it's at inflated level , it's actually just north of 10%.

Okay and one final question. Are there still -- are you still needing to hire some upper management? Are there any holes left in your structure? And where would those be?

We -- at the senior levels we're in good shape, Connie. We have plenty of openings at the sort of manager level, particularly in R&D. But at the senior level, we're right now fully staffed. And that's good news.

Okay, many thanks.

Our last question will come from Linda Bolton Weiser of Oppenheimer & Co.

Thank you. I was wondering if you could comment a little bit on market share performance and did you take price increases anywhere other than in Rubbermaid.

Yes, On the price increase front, we took price increases just about throughout the company. There's very few product lines that didn't go through our pricing increased process. Now Rubbermaid products took the largest as a percentage, but the raw materials inflation affected all of our businesses. Therefore we had to take pricing. And in terms of market share, we don't disclose, , Linda, for obvious reasons, market share by brand, et cetera. I can tell that our "Invest/Grow" businesses are -- we see encouraging signs in terms of capturing market share where we want to.

How's Paper Mate doing in terms of market share?

Paper Mate's holding its -- as I mentioned earlier. Our market business, Sharpie Expo and Sharpie Accent are taking share growth nicely. Paper Mate is holding its position. We haven't -- we've seen erosion over the last three years. We've stopped that erosion. But we're not gaining yet. And that's -- that's what we believe we can do in the next three-year plan. So right now, Paper Mate is, I'd say, bottomed out in terms of its share loss. We have seen some encouraging signs right ass we've brought new products to market in Paper Mate and Liquid Paper et cetera. In fact, the Liquid Paper 2-in-1 is selling like crazy and there's some other very positive signs there. But then, collectively, Paper Mate is holding its share.

Okay. Thanks, Joe.

Thank you, Linda. Okay, well, just once again, I'll reiterate, we have Analyst Day September 22. Hope to see you all there. And thank you so much. And we'll look forward to our next call on analyst day.

If we were 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 a confirmation code of 922235 two hours following the conclusion of today's conference for 30 days ending on August 28, 2005. This concludes today's conference. You may disconnect at this time.