諾威品牌 (NWL) 2005 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's third quarter earnings release conference call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. Just a reminder, today's conference will be recorded. Today's call is also available live via audio webcast at www.newellrubbermaid.com on the investor relations home page and digital replay two hours following the call at 888-203-1112 for domestic participants, and 719-457-0820 for international participants. Please provide the conference number of 925536 to access the replay. I will now turn the call over to Ms. Nancy de Jonge Davis, Vice President of Investor Relations and Corporate Communications. Ms.Davis, you may begin.

Thanks, Matt, before I begin today's conference call, I would like to take a moment to read our forward-looking statements. The statements made in this conference call that are not historical in nature are forward-looking statements. These statements are not guarantees, since there are inherent difficulties in predicting future results. 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 predicted, refer to our section quarter 2005 Form 10-Q, and our other SEC filings. Additional financial information about the company's 2005 3rd quarter results are available under our investor relations section on our website. Let me now turn the call over to Mark Ketchum.

Thank you, Nancy and good morning everyone. Thank you for joining us today. We completed the third quarter, with sales of $1.6 billion, a modest decline over last year's sales that was consistent with the company's guidance. To provide a little more color around the quarter, I'd like to let you know that our invest businesses generated a 4% increase in sales versus last year, driven by new products and marketing investments, While our fixed businesses posted a sales decline of 8% as we prioritized the bottom line over the top line. Gross margins showed solid improvement over a year ago. And earnings per diluted share on a continuing basis were $0.41, up 14% over comparable results of $0.36 a year ago.

I'd like to thank our nearly 30,000 employees for their hard work and dedication in delivering the solid earnings performance for this quarter. Pat Robinson will walk you through the financials in a few moments. My first eight days on the job have been consumed conducting operational reviews and meeting with as many members of our top management teams as possible. These meetings have first of all confirmed for me the strength of our leaders. These meetings have also reinforced the importance of the company's three key strategies: To drive our operations and performance, and improve our shareholder value. The first key strategy is to invest in our strategic brands to deliver top line growth. The key investments will be marketing and new product development. We will focus on developing best-in-class practices around consumer understanding, competitive benchmarking, and product innovation. I have found that a few of our businesses already have this figured out. So I will focus on implementing these innovation processes consistently across the company. I want to make it clear we will be selective in where we will invest. We will focus advertising, promotion, and R&D disproportionately on our strategic, high-potential, high-margin brands. This is not to say that our other brands are not important. But we believe that we can best leverage our returns through a concentrated focus on our strategic brands. Products where we have superior consumer insights and intellectual property will be at the top of this list. Our second key strategy is to be in a best-cost position. We can achieve this through the right sizing of our manufacturing footprint, delivering productivity enhancements through Newell operational excellence, and by placing a greater emphasis on our nonsupply-chain costs, specifically our SG&A line items. Our recently announced project acceleration is the cornerstone of optimizing our supply chain. As background, the company will have reduced its manufacturing base from 130 to approximately 80 facilities by the end of this year. Through the plan that we announced a few weeks ago, we intend to close another third of our manufacturing facilities, strategically source a much larger portion of our product, and operate from more best-in-class countries. These efforts will put us in a position to achieve best cost status. Newell Rubbermaid's operational excellence program focuses on driving productivity along with a focus on product quality, safety, and service levels. We have been able to achieve a significant amount of savings through productivity and you will hear detail from Pat later in the call. I can't overstate the importance of this work to both our past results and our future results.

The other element of a best-cost position is SG&A control. We believe we have important opportunities to drive up costs within SG&A, but we must emphasize, all SG&A is not created equal. We will increase our investments in advertising, promotion, and research and development on our strategic brands. But we will place great emphasis on identifying cost inefficiencies within general and administrative expense that I expect will more than offset these other investments. Our third key strategy is to lead and feed the portfolio. Over the past three years, the company has made significant progress in strengthening the portfolio through strategic acquisitions of businesses totaling $900 million in sales, and the divestiture of more than $1 billion in sales of nonstrategic businesses. Our criteria for acquisitions will continue to concentrate on businesses that enhance our portfolio, have intellectual property as a distinctive competency, and allow us to leverage similar customer bases, sales channels, and consumer knowledge.

As an example of this, I point to the acquisition DYMO, a global leader in designing, manufacturing and marketing on-demand labeling solutions. DYMO remains on track to close by the end of this year. Now, I know a couple of you have been asking questions about our investments in growing brands. So once again, I want to assure you that our investments are selective. Because our portfolio is complex, let me walk you through at a high level some examples of where we are in terms of our invest and fix choices.

An example of an invest business within Office Products is our marker business, highlighted by the success around Expo and Sharpie. Meanwhile, office accessories, which today have limited product differentiation from competitors, is an area of the business we still need to improve. Let me walk you through the Sharpie example. Before 2000, Sharpie was an average grower in the office supply space. Beginning in 2001, Sharpie's color line was expanded from black and red to 29 colors. We launched the Sharpie metallic in 2002. The Sharpie retractable line in 2003. Sharpie accent highlighters in 2004, and the Sharpie mini in 2005. This collection of initiatives has expanded category consumption. In addition to in addition to R&D, we increased advertising and promotion through television campaigns to launch the retractable and the mini, as well as an investment in the Sharpie Nascar sponsorship. Sales of the Sharpie brand have more than doubled within just a few years behind these investments.

Within our Tools & Hardware segment, our Lenox brand is a key investment business. Our Amerock business which sells window and door hardware is in the fixed category. We acquired Lenox in the first quarter of 2003, and at the time it was a very profitable business, yet sales had been historically flat for a number of years. Through increased investment in R&D, the business introduced several innovative products with proprietary technology, including Lenox Gold, reciprocating saw blades, and metal saw blades. At the same time, end-user marketing and other promotional efforts helped to drive demand for the product. Sales have grown more than 20% since the acquisition, and profitability has also increased. Within our Cleaning & Organization segment, Rubbermaid Commercial continues to experience growth through new categories, and is an investment business.

While Rubbermaid Home Products falls into our fixed category where we have been exiting low-large commodity-like product categories and adding value-added organization and storage solutions. Within our Home & Family segment, Graco is an example of invest business which is gaining traction, while Little Tikes falls within our fixed business as it continues to face a lot of resin cost pressure. Graco is a great example of a business that's turned itself around and moved to the invest category. The business holds tremendous brand equity with the consumer, and the team has done a nice job of developing innovative products, including the Mosaic line of compact stroller systems. Graco has made a solid start toward repositioning the brand into mid and higher-priced point products, while exiting lower-margin product lines. This year, sales within this business have been steadily improving each quarter. So there's just a few examples that I think give you an idea of our selective investments and how they are working. I would now like to turn the call over to Pat to cover details of the quarter. Pat?

Thanks, Mark. I'll start with our third quarter P&L. Net sales for the quarter were $1.6 billion down $23 million or 1.4% of last year, consistent with our guidance of flat to minus 2%. The decrease in sales consisted of the following: We have favorable currency translation of $14 million or .9%, favorable pricing of $31 million, or 1.9%, part line rationalization of minus $40 million or minus 2.5%, and a core sales decline of $28 million or 1.7%. Our invest businesses generated a 3.7% improvement in sales versus last year driven by a 6.1% increase in our tools and hardware business, combined with mid-single-digit growth in our Rubbermaid commercial and Rubbermaid food businesses. Also in these improvements was an 8.4% decline in the businesses we classify as fixed. Driving the lower sales performance was product line rationalization in our Rubbermaid home products business, core sales decline in our European Window Fashion business, and lower battery-operated product sales in our Little Tikes business. We expect this softness in our fixed businesses to continue in the fourth quarter.

Gross margin in the quarter was $500 million or 31.3% of sales, up 2.6 points to 2004. Improvement gross margin is a result of the following: Raw material inflation in the quarter of $17 million, primarily in resin, decreased margins by one point. Favorable pricing of $31 million improved margins by 1.3 points, productivity of $22 million or 2.1% improved margins by 1.4 points, and finally, favorable mix driven by new products and continued rationalization of unprofitable product lines was partially offset by restructure-related costs, the net impact of these changes lifted margins by 90 basis points.

SG&A for the quarter was $312 million, an increase over last year of $14 million. The primary driver of the increase was additional strategic advertising and promotional investment in our Office Products and Tools & Hardware segments, partially offset by streamlining activities. Restructuring charges were approximately $15 million in the quarter, reflecting the closure of a manufacturing facility in our Cleaning & Organization segment. Excluding impairment charges, operating income in the quarter was $174 million or 10.9% of sales, up from $167 million, or 10.3% of sales last year.

I'll now take a few moments and talk about our segment information. In our Cleaning & Organization segment, net sales were $393 million, down $13 million or 3% to last year, driven primarily by the planned product line exits in core sales decline in the Rubbermaid home products business. Partially offsetting this decline was mid single-digit growth in both Rubbermaid Commercial and Rubbermaid Food Products. Operating income for the group was $31.7 million or 13.7% of sales, compared to $30 million last year. The increase in operating income was a result of pricing actions, core sales growth, and Rubbermaid Commercial and Rubbermaid Food Products, reductions in SG& A, and favorable mix, more than offsetting raw material inflation and lost absorption in our manufacturing facilities.

In our Office Products segment, net sales were $428 million, up $4 million or 1% to last year. We continue to see growth in North and South America as our back-to-school season was on plan and slightly above last year. Offsetting this growth was a high single-digit decline in Europe. From a product perspective, Everyday Writing has stabilized and Markers continue to grow double digits, offset by declines in Fine Writing and Office Supplies. Operating income for the group was $60 million or 14% of sales compared to $62 million or 14.5% of sales last year. Increased investment in SG&A primarily related to the Sharpie advertising campaign offset improvements in gross margin driven by new product introductions and productivity.

In our Tool and Hardware segment, net sales were $319 million, up $18 million or 6.1% to last year, driven by strong sales at our Lenox, Irwin, and BernzOmatic businesses, partially offset by mid single-digit decline at our Amerock business. Operating income for the group was $46 million or 14.5% of sales, up from $45 million last year. The sales increase combined with productivity more than offset raw material inflation primarily in steel, and increased investments in SG&A. In our Window Fashions segment, net sales were $204 million, down $24 million or 10.6% to last year, driven by product line exits, and core sales declines in our European Home Fashion business. The group recognized operating income of $14 million in the quarter compared to $16 million last year. The decrease in operating income is primarily the result of the sales decrease, partially offset by productivity and reduced SG&A.

Now, Home & Family segment net sales were $255 million, down $8 million or 3% to last year, primarily as a result of a core sales decline in our Little Tikes battery-operated products, partially offset by mid single-digit growth in the rest of the segment. Despite the sales decline, operating income for the group was flat to last year at $25 million, driven by strong productivity and reduced SG&A in our Little Tikes business.

Operating cash flow for the quarter was very strong at $359 million compared to $285 million last year, and above our previous guidance of $225 to $275 million. The [favorability] versus last year was driven primarily by improvement in inventory performance, inventories declined by $13 million in the quarter this year versus an increase of $45 million last year. And the fact that the 2004 cash flow included a $50 million funding of the U.S. pension plan. Capital spending in the third quarter was $24 million versus $25 million a year ago. We continue to make progress and improving our portfolio and recently announced that we reached an agreement to sell the European Cookware business. The company expects the deal to close by January 2006 and expects to record a charge of $25 to $35 million on the sale, of which $23 million was recorded as an impairment charge in the third quarter. The impact to continuing EPS of this disposition will be a $0.01 improvement to the September year-to-date results, offset by a $0.01 decline in the fourth quarter, making it EPS neutral for the year versus our previous guidance. The company also continues to classify certain product lines in the Cleaning & Organization segment and discontinued operations as part of the company's effort to improve its portfolio.

In the third quarter, the company recorded a $20 million gain related to this business, after winning several line reviews with key retailers. As were fully disclosed in the company's form 8- Ks filed with the SEC earlier this month, the company recorded a noncash impairment charge of $58.6 million in the quarter. This charge was required to writedown certain assets to fair value, including goodwill, trademarks, and trade names related to the company's U.K. Home Fashion business and European Cookware fixed assets.

I will now cover the year-to-date results. Year-to-date net sales were $4.6 billion down $143 million or 3% to last year, consisting of the following: With favorable currency translation of $63 million or 1.3%, favorable pricing of $96 million or 2%, product line rationalization of negative $161 million or 3.4%, and core sales decline of $140 million or 2.9%. Year-to-date net sales in our invest businesses improved 2.2% versus last year, led by mid-single-digit growth in Tools & Hardware, and Rubbermaid Commercial products. Year-to-date net sales in our fixed and evaluate businesses declined 9.8%, primarily as a result of low margin product line exits in Rubbermaid Home Products, and core sales declines in our European Window Fashions and Little Tikes businesses. Gross margin was $1.4 billion, or 30% of net sales, an increase of 140 basis points to last year. Year-to-date gross margins -- gross margin was impacted by the following: Raw material inflation of $105 million, which negatively impacted margins by 2.2 points. Favorable pricing of $96 million, or 2%, lifted margins by 1.4 points. Gross productivity of $67 million or 2.2% also improved margins by 1.4 points. Finally, favorable mix driven by new products and continued rationalization of unprofitable product lines was partially offset by restructure-related costs. The net impact of these changes lifted margins by 80 basis points.

Year-to-date SG&A was $939 million, up $25 million to last year. The increase in SG&A reflects a currency impact of $16 million. All other SG&A was up $9 million with strategic investments of $32 million in our invest businesses, partially offset by streamlining in our fixed businesses. Year-to-date operating income was $424 million, or 9.2% of sales. Operating and cash flow was $451 million year-to-date compared to $422 million in the prior year. Capital spending is $70 million year-to-date, compared to $96 million last year.

Turning now to the fourth quarter outlook, we expect sales to be between minus 2% and minus 4% driven by the following: Product line rationalization is expected to reduce sales by $40 million versus last year, more than half in Rubbermaid Home Products, and the remainder in our Graco and Window Fashion businesses. Foreign currency is expected to have a negative $20 million or 1.1% impact to last year in the fourth quarter, compared to a positive 1.3% impact year-to-date, roughly at 2.5 point swing. Pricing for the quarter is expected to be $35 million favorable or 2% of net sales. Core sales declines in our Window Fashion and Little Tikes businesses are expected to be partially offset by sales growth in our invest businesses. For the fourth quarter, we expect earnings to be in the range of $0.33 to $0.38. This range includes a $0.02 decline in earnings as a result of the sales decrease, $55 million in raw material inflation, which will be offset by productivity of $22 million or 1.9%, and positive pricing of $35 million, resulting in no net impact to EPS for the quarter. Our resin costs are expected to approach $0.70 a pound in the quarter, compared to $0.55 a pound in the fourth quarter of last year. We believe the spiking cost is temporary, due to supply shortages caused primarily by the hurricanes in the Gulf, but compounded by an explosion at a plant of one of our key suppliers. We anticipate costs will remain at these higher levels into next year but expect some relief as more capacity continues to come back online.

We have planned investment in SG&A of about $10 million or $0.03 a share in the quarter. We expect fourth quarter restructuring-related costs to approximate $17 million or $0.04 a share. We also had a $0.02 tax benefit last year, which will not be repeated in 2005. The net impact of restructuring and taxes is a $0.06 reduction in EPS for the quarter. The impact of all of the above changes is an approximate $0.11 decline in EPS in Q4 at the midpoint of our guidance. Fourth quarter operating cash flow is expected to be between $160 and $210 million, compared to $238 million last year. Capital expenditures are estimated to be in the $30 to $40 million range compared to $27 million last year.

Turning now to the full-year 2005 outlook, we expect sales to be approximately down 3%, driven by product line rationalization, and core sales declines in our fixed businesses. The fixed categories expected to decline between 8% and 10% for the year. Partially offsetting this decline will be sales growth in our invest businesses of approximately 2%. We continue to expect earnings to be in the range of $1.43 to $1.48. This range includes the impact of the net sales decline, which will reduce earnings by approximately $0.03 per share, $160 million in raw material inflation, which will be more than offset by positive pricing of $130 million or 2% of sales, and productivity of approximately $90 million, or 2.2%, the net impact of which is an incremental $0.15 per share.

Increased investment in SG&A of approximately $50 million in our invest businesses will be partially offset by the positive impact of the pension curtailment, and streamlining initiatives in our fixed businesses. The net impact as an increase in SG&A of about $35 million or negative $0.09 per share to last year. The favorable resolution of tax matters is being used to reduce manufacturing infrastructure and to right-size our European overhead structure resulting in a $0.02 per share improvement versus last year, and interest and other costs are expected to be flat to last year. The net impact of all the above changes is approximately $0.05 improvement in EPS versus a year ago. We are increasing our guidance for 2005 free cash flow to the high end of the range. Operating cash flow is now expected to be in the range of $610 to $660 million, capital expenditures of $100 to $110 million, bringing our free cash flow guidance to $270 to $330 million for the year. I will now turn the discussion back over to Mark for some additional comments. Mark?

Thanks, Pat. In my short tenure here at Newell Rubbermaid, I am very pleased to tell you I can see several operations where be demonstrate strong discipline. The company has done a good job in delivering operating cash flow as Pat just mentioned, supported by good capital management in both working and fixed capital costs. We will continue to take a balanced approach to capital allocation, investing selectively in our businesses and returning cash to our shareholders through our dividend. The company has also done a very good job in estimating raw material costs, and then also offsetting these costs.

At the beginning of 2005, the company anticipated $170 million of raw material inflation. Our current estimate is $160 million. Essentially spot on. So while we see quarter-to-quarter volatility, our ability to predict across the year is very good. I'm happy to report Newell Rubbermaid has been able to more than offset these $160 million of cost through a combination of pricing and productivity. Managing costs in today of environment will continue to be a challenge. Predictability will not clear up for a few more months. During Analyst Day, we provided an estimate of $0.60 a pound for resin in our model for 2006. Today, the price per pound is running well above this estimate. And unlike the past year, near-term lesson costs are not only being driven by oil and natural gas prices, but by hurricanes and an explosion at one of our suppliers which have disrupted supply. In the face of these significant raw material cost increases, we remain committed to driving productivity and taking pricing where appropriate to offset the cost increases.

So in closing, our three key strategies are investing in our strategic brands to drive top line growth, optimizing our supply chain through project acceleration and Newell OPEX, and strengthening our portfolio of businesses. We are building the business that is committed to growing sales, delivering on the bottom line, and optimizing our cash management. Operator, I would now ask you to open the line for questions.

Thank you. We will now begin the question-and-answer session. If you have a question, you will need to press star one on your touch-tone phone. Please limit your request to two questions. If your question has been answered and you wish to be removed from the queue, please press the pound sign. Your questions will be queued in the order they are received. If you are using a speakerphone, please pick up the hand set before pressing the numbers. If we are unable to get to your question during the conference call, please contact Newell Rubbermaid investor relations at (770)407-3994 after the conclusion of the conference call. Once again, if there are any questions, please press star and then the number one on your touch-tone phone. And our first question will come from Wendy Nicholson of Citigroup.

Hi, good morning. My first question has to do with the Cleaning & Organization operating margin. That was a lot higher, frankly, than I had been looking for. I'm trying to understand whether there was sort of a specific anomaly in the quarter that led to that improvement, or whether there's been some permanent change, and pricing has now made this a double-digit margin business as opposed to a single margin business. And then my second question is, with regard to the outlook of '06, you talked, Mark, about maybe taking more pricing. How much more pricing are you assuming you will take in '06, and what's your sort of preliminary assessment of what that might cost you on the volume front?

Let me handle the first part. Wendy, this is Pat. As far as quarter 3, the raw material inflation in the quarter was $17 million, and that is volatile, that changes by quarter and in the fourth quarter that's going to become $55 million, a lot of that is resin, whereas our pricing is fairly constant across the year. The volatility quarter-to-quarter is really being caused by the raw material volatility. Does that answer your question?

It does, that's it.

Wendy, I'll handle the second question. On the 2006 environment, this is still a very volatile and difficult raw material environment, and so as I said, we really don't have very good visibility yet, but I think we will have much clearer visibility in the next few months. It's because variability is being driven by these catastrophic events but we do see the production coming back onstream. So we're paying considerably more for resin now than we had in our outlook that we shared with you on the analyst day. But we do expect that to gradually mitigate as we go through the year. So we don't yet quite have an estimate. So that then brings back to the question about pricing, the an answer is I can't give you a specific yet about how much pricing that we'll be looking at, but our expectation is that we will use the combination of pricing and productivity together to be able to cover that cost.

Have you had any preliminary feedback from your retailers? I know Joe talked at Analyst Day a little bit at how there's been some volume slippage and shelf space taken away from some of the Cleaning & Organization products because prices have been raised. Do you think from talking to the retailers, you've kind of pushed it as far as you can regardless of what resin does, or do you think there's openness on the part of the retailers to push through a price increase?

I think there has to be openness. This is one that everybody is facing the same thing. So I think there has to be openness going forward, and I'm not trying to tell you that's not difficult and we won't try and minimize how much pricing that we have to take, but it's a reality.

Okay. And then, I'm sorry, just a follow-up, Pat, to what you said about the variability in the resin impact third versus fourth quarter, is that a function not only of the kind of the spot price of resin but also objection product mix within the quarter? That seems like a huge swing.

Fourth quarter is a big quarter for Rubbermaid Home Products. It's the biggest quarter of the year for Rubbermaid Home, so, it does disproportionately affect that quarter. It's more a factor of the supply issues I spoke about and the shortness of supply right now.

All right. But outside of that, you think that the improvements you made in third quarter, I mean, that resin -- that lack of resin impact and that better gross -- better operating margin, excuse me, is a hopefully semipermanent improvement and that reflects your cost savings?

We've had some good progress in productivity and pricing, they're the constants. And again, the raw material inflation is what makes it volatile quarter-to-quarter, Now, I think we've done a pretty nice job of estimating that for the year, but this quarter to quarter fluctuation is a lot more difficult to predict.

Fair enough. Thanks very much.

Your next question comes from Bill Schmitz from Deutsch Bank

Hi, good morning. Can we talk a little bit more about the resin cost environment and your pricing assumptions? Because if my model is right, I think you're down about 300 million pounds year-over-year in resins, so shouldn't the reduced resin exposure you have more than mitigate the $0.15 increase year-over-year in resin prices?

No, I don't think so, the way we calculate this is the amount of resin we buy this year at this year's cost, less last year's cost, that delta in cost time to this year's buy is the inflation that we're seeing year on year and the impact on our P&L.

Okay, so why isn't the math working then? If it is a 300 million pound delta like you outlined at Analyst Day, so why isn't that simple as saying 300 million pounds less, I'll take the delta on the resin prices and that should be the impact.

The 300 million pounds less, you're seeing in that our lower volumes in Rubbermaid Home Products and the businesses we have exited that are resin-based. Those are just sales that we're not seeing any more. The impact is relatively small because the margins on that business were very low. Then the impact on the business that remains is the 800 million pounds that we're buying times the delta in cost.

Okay, that's fair. Can you just talk about Everyday Writing. You said that business seems to have stabilized. What's it going to take to get that growing again? PaperMate really hasn't grown since before Gillette sold it. What are you going to do to accelerate growth there?

I think innovation is going to be the key. I described before the Sharpie and Expo examples where bringing new products to market, expanding category consumption has grown the business dramatically, and we just need to do that across the writing instruments business. That's what we're hard after. We're hard after those kind of innovations, and I expect you'll be seeing more of those more broadly this coming year.

Okay so in your eight days or whatever, Mark, do you think these are brandable businesses that can become, and I hate to say it so pejoratively, decommoditized?

I certainly think PaperMate is one of those, absolutely.

Okay, thanks very much.

I mean, you know --

Your next question comes from Connie Maneaty from Prudential.

Good morning. Mark, you talked about going after SG&A inefficiencies. Newell's never really seemed to be loaded with SG&A. So where do you see the biggest opportunity?

I tell you right now, I don't know where the biggest opportunity is going to be,because we've really just started to dig into it, but I'm convinced just based on the variation I see from business-to-business that there will be significant places we can go after, you know, the general administrative areas. And so while, as I said before, we will continue on our invest businesses, on our strategic brands to invest in more marketing and more product development, I think we'll be able to find offset for that and more. So I just really think there is money to be had there.

So does this sort of suggest maybe that Newell operational excellence isn't as widely adopted from business to business?

No, not at all. Newell op ex was never intended to after this cost bucket. So Newell op ex is really focused on our product supply chain costs and our product supply systems, and not the SG&A line items.

And one final question: As you look into 2006, given the raw material environment, is it safe to assume that the earnings growth would be more second-half-weighted than first half?

It's too early to comment on that. We need to go through our detailed budget reviews which really are later this month.

Okay.

Okay.

Thank you.

Thank you, Connie.

Your next question comes from Budd Bugatch from Raymond James.

Good morning. This is Chris Thornsberry on behalf of Budd. Again, just touching on the Cleaning and Organization segment. You did see a pretty substantial improvement. How much of that, if you could parse that out, came from the exit of low margin product lines because those obviously have lower profitability than what you have remaining?

I don't have that breakout. Can we handle that off-line?

Sure, sure, but that did factor into some of the improvement there, right?

It did. But again, I think the biggest factor, again, is the pricing is relatively constant across the year, the productivity has been relatively constant. the biggest fluctuation has been this is a relatively light raw material inflation quarter for us at $17 million. And versus this quarter, the fourth quarter, which is up $55 million. So that volatility quarter-to-quarter is really driving the increased profitability there.

Okay. And if you could give a little bit more color on the Office Products segment, we saw margins decline about 50 basis points or so year-over-year, I think that's the first decline we've seen this fiscal year so far. I know you mentioned that you had a couple issues there in terms of inflation, but what was driving that?

On the profitability in Office Products?

Yes.

Really the increased investment in SG&A. We had a substantial investment this quarter, and gross margins improved in that business, the top line was relatively the same, just an increase in investment in SG&A to drive the brands there.

That's the same story in Tools & Hardware?

Tools and Hardware was up slightly, but yes, we have some increased investment there also.

Okay and my final question is you did say that you anticipate some resin capacity to come back online in next year. First off, when is the key supplier that had the explosion, are they producing yet and two, when do you expect the other capacity to come online in the industry, is that more of a middle of the year type of event?

When the capacity will come online in the industry, it's tough to say. It's coming back as we speak and it's coming back slowly -- slower than we had like, frankly. But it is coming back. This is related to the hurricanes, it takes a while to start this back up again. As far as the specific supplier that went down from the explosion, they are back up, but they're not fully back up yet, they're not to 100% capacity.

How much are they producing now?

I don't know that number.

Okay, thank you.

Your next question comes from Eric Bosshard with Midwest Research.

Good morning. A couple of questions. First of all, Pat, can you help us, in the release you talk about a $20 million gain in the Cleaning & Organization segment. Is that in the operating number or not in the operating number?

It's not in the operating number, that's down in discontinued ops, we'd written that business down in Q3 based on our expected selling price at that time. We had some significant line review ins that caused us to take the value of that business off. So it's running through discontinued operations.

To be clear, on the margin that segment, should we assume now that the Rubbermaid segment is a 14% margin segment or are you basically saying this is a quarter where the pricing continued but the material costs pressure did not?

Yeah, it's not a 14% operating margin business, this quarter it is, but not a continuing basis. The delta between pricing productivity, raw material inflation was favorable for us in the third quarter, but again it turns unfavorable in the fourth as raw materials spike up. So the ongoing rate in that business, I'd have to get back to you on, Eric. But it won't be that high.

Okay. And then lastly, coming out of 2Q you gave us productivity guidance which I think the number you're guiding to now is about $15 million lower than what you guided to coming out of 2Q. What changed within that number?

We had a volume impact, decrease in volume, which is reading through in the productivity number. In fact, it brings up a good point, the total productivity number this year is $90 million, I think last time we got it $105. It is down $15, it's volume related, Cleaning & Organization, segment and one business in Tools & Hardware where it's affected us. But for the year, volume impact is over $100 million for us. This is by project acceleration is very key to us right now, we need to get some of this excess capacity out of the system. The entire delta is related to volume in both the third and fourth quarter.

Thank you.

Okay.

Your last question today comes from Chris Ferrara with Merrill Lynch.

Hi, I wanted to know, Mark, now that you've been here for at least a short period of time, can you give some color on the prospects for management retention? I guess how in your opinion has the organization received Joe's departure in this, even though it's over this short time frame, I'm wondering if you have any color there?

One, I tell you, I think morale is very good. I have gone around and talked to people, I think they're positive and upbeat about prospects for the company and I think they're very committed to this company, so that really addresses the other half of your question, which is anticipation of management turnover. I don't anticipate a lot of management turnover. This is a group of strong leaders and employees and I think they're delivered to delivering on the mission of Newell Rubbermaid. The one comment I've heard over and over again as I've done my one-to-one conversations is, I want to finish what I started.

Got it. I just want to on a different topic, I guess Mark, you haven't had much experience in I guess use the term again, commoditized products at Proctor and Gamble. I guess what's your view there, will Newell Rubbermaid be a low-cost producer and is there value-add in "commoditized" products if you can be low-cost producer, and is there a future for that at is this company?

Well, let me first tell you that I certainly had categories that were trying to be commoditized, probably bathroom tissue was the best example of that. There is a strong private-label business there. And in our European business for tissue and towel, there's a huge private label presence, and therefore, a tendency towards commoditization. So actually I do think I have quite a bit of -- of experience in that. And again, what I can tell you, that's not -- that's not where we're going, it's not going to be the strength of this company going forward. But before you cry "uncle" on a business, the first thing you do is you look for, where can I add value? And value usually comes from innovation. Innovation's going to be the key. Where can we add innovations that consumers appreciate and therefore are willing to pay for. That's how you decommoditize; that's why investments and branding are important, and then finally, having that low-cost position is the other, you know, very key element, though, because you have to be able to fight off the nonbranded competitors, or those who are trying to decommoditize -- or commoditize the market, rather. And so I think that, you know, both of those are going to be important fuel mixture elements getting into a very good cost position so you can fight the bottom feeders while we continue to innovate and bring meaningful product differentiation and invest behind telling consumers about that differentiation in order to separate ourselves from the commodities. And those -- and when you finally give up, and like I said, cry "uncle" because you tried all those things and can't do it, that's when we need to get out of those businesses.

Okay, thank you.

Thanks very much, I appreciate your joining us today, and we look forward to talking with you again in January to report our Q4 and our full-year 2005.

If we were unable to get to your question during this call, please gall 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 925536 for two hours following the conclusion of today's conference for 30 days ending on November 30th, 2005. This concludes today's conference, you may disconnect. Have a great day.