諾威品牌 (NWL) 2006 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to the Newell Rubbermaid second quarter 2006 earnings 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 as 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 under "events and presentations." A digital replay will be available 2 hours following the call at 719-457-0820. Please provide the conference number 6057747 to access the replay. I will now turn the call over to Mr. Patrick Robinson, Vice President and Chief Financial Officer. Mr. Robinson, you may begin.

Thanks, and good morning. Before we begin I would like to take a moment to read our forward-looking statement. Statements made in this conference call that are not historical in nature are forward-looking statements. These forward-looking statements are not guarantees, since there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the statements. For a list of major factors that could cause actual results to differ materially from those projected, refer to our most recent quarterly report on Form 10-Q, including exhibit 99.1. Additional financial information about Newell Rubbermaid's second quarter and first half results are available under the investor relations section of our website at www.NewellRubbermaid.com. Let me now turn the call over to Mark Ketchum.

Thank you, Pat. And good morning, everyone. Thank you for joining us today for our second quarter earnings call. We are pleased to announce continuation of the positive trends delivered in the first quarter. We delivered strong sales growth and substantial gross margin expansion. Total net sales were $1.7 billion, up 9.6% from last year. Internal sales grew 4.2%, consistent with our increased emphasis on investing for growth. As you saw in our earnings release, we moved our European home decor business into discontinued operations. I will talk about this further in a few minutes. Excluding that business, our internal sales growth was even better at 5.7% on a continuing basis. The strong performance this quarter was broad based. Calphalon, Goody, Rubbermaid Commercial, and the Irwin and Lenox branded businesses were particularly strong. And Office Products posted important growth. Rubbermaid Home Products delivered strong indices versus a relatively soft year ago period. Net, our top line sales are responding well to the investments we are making in strategic SG&A.

Gross margins for the quarter expanded 250 basis points to 33.9% of sales, driven by improved pricing, productivity and mix. Second quarter earnings per diluted share on a continuing basis were $0.54, well above last year's results of $0.41, and above our guidance. Operating income rose 15% to $221 million, contributing $0.06 of EPS improvement year-over-year. While a $23 million net benefit from the resolution of tax matters contributed the remainder of the quarter's earnings performance.

I communicated to you in previous calls our commitment to creating and maintaining a portfolio comprised solely of invest businesses. In line with that objective, our Board of Directors authorized management to hold for sale 1 of our fixed businesses, Home Decor Europe. This business designs, manufactures and sells drapery hardware under Gardenia and other brand names. We have concluded that it's not a good fit with our new business model. Taking this action does not affect our U.S. home fashions business, which sells under the trademarks of Levolor and Kirsch. Unlike the European business, which is dominated by drapery hardware, the U.S. home fashions business is primarily a window coverings business, blinds and shades. We have been more successful providing innovative solutions to both consumers and customers with Levolor and Kirsch in the U.S. market. Going forward, we will continue to focus on improving Newell's business portfolio to deliver the returns and top-line sales growth that our shareholders expect.

Now I'd be the first to admit that Newell Rubbermaid's business isn't always easy to understand. We compete in over 40 distinct product segments, with close to 20 important brands. We are in the midst of a second major restructuring since 2001 which necessitates the reporting of restructuring impacts on our financial results. And we have been reporting out additional metrics for the fixed and invest portions of our portfolio. So allow me to provide some additional perspective to make the significant trends more obvious. First, 2006 represents a real inflection point in our top-line growth. For the past couple of years, sales have been declining as we exited unprofitable product lines and minimized strategic SG&A investment. Recall, sales declined over 2% in 2005. By comparison, year-to-date in 2006 sales are up 10%. Now about 4 points of this is the DYMO acquisition, and another 2 to 3 points are from 1-time events, including moving European home decor to discontinued ops and the timing of certain sales events. But this still leaves a year-over-year swing of 5 to 6 points of internal growth, which is real growth. While this rate will be a couple points lower in the second half because of comparisons with 1-time events in 2005, it won't change the characterization of the full year. We are now delivering meaningful sales growth and expect to continue doing so.

Second, we are expanding gross margins at a healthy clip, nearly 300 basis points in the first 6 months. This has been driven by a combination of pricing, operational productivity improvements, and mix improvements which more than offset raw material inflation. The fact that we are getting important contributions from all 3 of the gross margin drivers is significant. It bodes well for continued margin expansion. We will see some slowing of gross margin expansion in the second half due to greater raw material inflation and the timing effects of pricing actions this year versus last. However, we will still exceed our going in gross margin targets, which were pretty robust, by about 50 basis points in 2006.

Third, earnings per share will be up smartly for the year and they are driven by operating improvements. We have booked tax benefits in both Q1 and Q2, and taken EPS guidance up twice. But let's be clear. Tax and other 1-time helps in 2006 will be essentially the same as 2005 on a full year basis. Operational improvements are, and will be, the key driver of EPS growth this year. Fourth, we have a high sense of urgency to deal with our remaining fixed businesses. The action we are taking on our European home decor business illustrates our resolve to get our portfolio right for the future. We are in the middle of several major transformations at Newell Rubbermaid. The transformation of our finished product sourcing model, of our business model, of our strategies and of our culture. I would like to spend a few minutes on each.

The transformation of our finished product sourcing has required a huge investment of time, money and energy beginning in 2001, and continuing with the current 3 year plan called Project Acceleration. At the conclusion of this journey, we will have transformed our sourcing profile from Newell Rubbermaid-owned high cost country manufacturing, to a 50/50 blend of Newell Rubbermaid manufacturing and third party sourcing partners, with about 70% of all production located in low cost countries. This transformation will put us in position to have best-in-class total delivered cost in the vast majority of our product categories. Project Acceleration is on track, with over half of the anticipated consolidations and closures announced and in progress.

Our business model is undergoing a major transformation as well. We are transitioning from a product-focused manufacturing sales and distribution driven company to a consumer-focused, innovation, branding and marketing driven company. This transformation will manifest itself in many different ways. We will hire, train, develop and reward a different mix of skills and talents, with more consumer understanding, branding and classical consumer marketing capabilities. Armed with these new skills, we will link our marketing people more directly into the innovation process. We will add uniform measurements of consumer and competitor understanding and marketing effectiveness. Finally, our investment in strategic SG&A, which we define as consumer promotion, consumer advertising and R&D will increase to drive top-line growth. This already underway, and is a significant reason we are growing the top line. Strategic SG&A will rise from about 4% of sales last year, to about 5.5% of sales this year. Net, we are making considerable progress on all elements of this business model transformation.

Our third transformation is strategic. The diverse collection of businesses in our portfolio requires strategy on 2 levels. We need individual business unit strategies that focus on winning with the unique consumers and customers, and beating the unique competitors that each of our brands face. We must also have a transformational corporate strategy that unifies the whole portfolio. We've discussed this strategy with you previously. Building brands that matter to consumers around the world, operating as 1 company to capture the efficiency and effectiveness benefits of integration, innovating in everything we do to drive differentiation and superior results, and creating a best cost mentality across the Company.

Finally, we recognize a cultural transformation is required to successfully deliver on all of the other transformations. We are already hard at work driving cultural change across the Company through collaboration and teamwork, external focus, best-in-class benchmarking, identifying and reapplying current best practices across the Company, valuing diversity and development, and putting the consumer first.

Before turning the call over to Pat Robinson to get into the details, I would like to flag some highlights from the quarter. Our Tools and Hardware business performed well, delivering mid single-digit internal sales growth. The Lenox and Irwin branded product lines are leading the way. They are growing double-digits year-to-date by expanding into new categories and growing their market shares in existing categories, with product upgrades and effective marketing. Calphalon had a fantastic quarter, posting high double-digit sales and operating income growth during the quarter. This performance is a reflection of targeted advertising and promotion spending to drive consumer awareness of our great products, plus the expansion of product offerings in the near neighbor category such as kitchen utensils, textiles and bar ware. Calphalon is growing sales by leveraging its strong brand equity, its expertise in consumer understanding, and by investing in superior product design.

Our Office Products segment did well on the top line this quarter, posting mid single-digit internal sales growth on the strength of markers and highlighters and Everyday Writing. Now growing markers and highlighters is a continuing story. But growing Everyday Writing is a new story. We accomplished this by launching about a dozen items for the back to school season that were more competitive in both performance and price. Customer support has been strong. Year-to-date, Office Products has also increased its investment in advertising, promotion and product development by nearly 45%.

Rubbermaid Home Products delivered double-digit growth on the quarter, aided by strong sales of our coolers product line as the summer heated up. We have worked hard and with much success to get this fixed business on an even keel. Last year the business lost money, this year it will be profitable. Last year the business was unusually skewed to the second half. This year we are balancing the halves to level out production for better capacity utilization. Last year we had virtually stopped all investment in innovation. This year we have garnered national media attention for our innovative closet and garage organization products, which were ranked number 1 and number 2 respectively by a leading consumer products magazine. 2 quarters does not make a year. We are not resting on our laurels. But we are emboldened by what we have demonstrated at the halfway point. So with that, let me turn the call over to Pat to walk through the detailed financials, before I come back to provide some summary comments.

Thanks, Mark. I will start with our second quarter P&L on a continuing earnings basis. Net sales for the quarter were $1.7 billion, up $148 million or 9.6% over a year ago. Excluding DYMO sales, internal sales were up $88 million or 5.7%, driven by core sales increases and favorable pricing. Positive currency translation improved sales by six-tenths of a point in the quarter. The impact of moving Home Decor Europe into discontinued ops improved internal sales growth in the quarter by approximately 1.5 points. Internal sales grew by 4.9% in our invest businesses, led by double-digit growth in our Calphalon, Goody and Irwin and Lenox-branded tool businesses, as well as mid single-digit growth in Office Products and Rubbermaid Commercial. The businesses we classify as fixed realized an 8.7% increase, as double-digit growth in Rubbermaid Home Products and Little Tikes was partially offset by lower sales in North America window fashion business.

Gross margin in the quarter was $574 million or 33.9% of net sales, up 250 basis points to last year. The increase in gross margin was the result of strong productivity, pricing and favorable mix, more than offsetting the impact of raw material inflation. SG&A was $354 million, up $61 million to last year. About one-half of the increase is acquisition related and impact of expensing stock options. The primary drivers of the remaining increase were the additional strategic advertising and promotion investment in our Calphalon, Graco, Rubbermaid Food and Office Products businesses, and other variable expenses associated with the increased sales and operating performance of the Company.

Operating income for the quarter was $221 million or 13% of sales, up $29 million or 15% to last year. EPS for the quarter was $0.54, up $0.13 to the midpoint of our guidance. $0.03 of the improvement was operations driven, caused by the increased sales and gross margin expansion, partially offset by increased SG&A investment. $0.08 was attributable to the 1-time tax benefit, and $0.02 was due to moving home decor to discontinued ops. The remaining charges to discontinued ops in the quarter are as follows: Approximately $0.01 is due to the loss on the sale of the business. And approximately $0.03 is restructuring and impairment costs to prepare the business for sale and to liquidate parts of our UK home decor business.

Interest and other income was a net expense of $37 million in the quarter -- in the second quarter of 2006 compared to a net expense of $33 million last year. The net increase was primarily due to increased interest expense as a result of the DYMO acquisition and rising interest rates. In the quarter, the Company determined that it would be able to utilize certain capital loss carryforwards that it previously believed would expire unused. Accordingly, the Company recorded a $23 million tax benefit in the quarter. The net impact of interest, taxes and other income is a $0.07 improvement year-over-year.

The Company recorded approximately $20 million in restructuring charges related to Project Acceleration in the quarter. These charges are not included in the continuing earnings described previously. We are pleased to report that Project Acceleration is on track, and that we have announced the closure of 15 facilities since the plan's inception, in line with our expectations. We continue to expect cumulative charges of $350 million to $400 million over the life of the initiative. Annualized savings are projected to exceed $120 million upon completion of the project, with approximately $50 million benefit expected in '07 and the remainder in 2008.

In the second quarter, the Company's Board of Directors authorized management to sell its Home Decor Europe business. As a result, the business is reported in discontinued operations for all periods presented. The business contributed approximately $375 million of revenue in 2005. The impact to continuing EPS of this disposition will be a $0.04 improvement to the June year-to-date results, and is roughly EPS neutral for the year versus our previous guidance.

I will now take a few moments and talk about our second quarter segment information. In our Cleaning and Organization segment net sales were $403 million, up $38 million or 10.5% to last year, driven by double-digit growth in Rubbermaid Home and mid single-digit growth in Rubbermaid Commercial. We expect Rubbermaid Commercial to continue with mid single-digit growth for the remainder of the year. The quarter 2 growth rate in Rubbermaid Home benefited from relatively easy comps, as 2005 quarter 2 sales were suppressed by product line exits and pricing actions required to offset raw material inflation. For the back half, we expect Rubbermaid Home product sales to decline high single-digits, primarily in the fourth quarter, as a result of a change in the seasonality of promotional volume which is spread more evenly throughout the year in 2006 versus more fourth quarter weighted in 2005. Operating income for the segment was $43 million or 10.6% of sales, compared to $23 million last year, an increase of 86%. The increase in operating income is the result of the sales increase and productivity, partially offset by raw material inflation and higher SG&A.

In our Office Products segment, net sales were $579 million, up $84 million or 16.9% to last year, benefiting from acquisitions. Internal sales were up about 5%. From a product perspective, double-digit growth in markers and growth in Everyday Writing was partially offset by declines in coloring and office organization. We expect mid single-digit internal sales growth for the rest of the year in the segment. Operating income was $100 million or 17.3% of sales, up $1 million to last year. The additional income from the DYMO acquisition was offset by increased SG&A investment, restructuring-related inefficiencies, and acquisition integration costs. For the back half of the year we anticipate double-digit growth in operating income for the segment.

In our Tools and Hardware segment, net sales were $329 million, an increase of $13 million or 4.2%, driven by double-digit growth in our Irwin and Lenox branded tools. We expect low to mid single-digit growth in the segment for the back half of the year, with continued strong growth in our Irwin and Lenox branded tools, partially offset by the decline in our consumer electronic tool business, particularly in the fourth quarter. Operating income for the segment was $54 million or 16.4% of sales, an improvement of $5 million, or 9% to last year. Operating income increased as a result of the increased sales volume and productivity initiatives, partially offset by additional SG&A investment and raw material inflation.

In the Home Fashion segment, net sales were $107 million, down $8 million or 7.3% to last year, due to the timing of first half shipments in the North America window fashion business. As you recall, this segment posted double-digit growth in the first quarter. Year-to-date, our sales for the segment grew $11 million or 5% versus last year. We expect sales to be down low to mid single-digits in the back half, primarily as the result of product line rationalization. Operating income for the segment was $14 million or 13.5% of sales compared to $8 million in the prior year. The increase in operating income was a result of strong productivity, partially offset by the sales decline. We expect pressure [will back half] operating income as a result of unabsorbed overhead associated with the European window divestiture.

In our Home and Family segment, net sales were $279 million, up $22 million or 8.4% to last year. The [inaudible] improvement was double-digit growth at our Calphalon and Goody businesses. We expect mid single-digit sales growth for the rest of the year in this segment. Operating income for the group was $30 million or 10.7% of sales, representing a $7 million or 30% improvement over the prior year. Driving the favorability was the increase in sales and productivity, partially offset by increased SG&A investment.

Operating cash flow for the quarter was $104 million compared to $36 million in cash generated in the prior year, and approximately $40 million greater than the high end of the range provided on the last call. The improvement over the prior year is primarily the result of increased net income and improved working capital, primarily due to the timing of accounts payable. Capital spending for the quarter was $32 million versus $23 million last year. On a year-to-date basis, total sales have increased 10.4%. Internal sales grew by 6.2% or approximately $175 million, with our invest businesses up 4.9% and our fixed businesses up 10.8% to last year. The impact of moving Home Decor Europe into discontinued operations improved internal sales growth by about 1.7 points. Gross margin was 32.7%, up 290 basis points to the prior year as a result of productivity, pricing and favorable mix, partially offset by raw material inflation.

Operating income rose $67 million or 25%, while EPS was $1.03 per share compared to $0.76 in the prior year. $0.16 of the increase was driven by operational improvements, with the remaining $0.11 caused by the increase in 1-time tax benefits, partially offset by other 1-time items and the accounting change for stock options. Operating cash flow was $92 million, consistent with the prior year, while capital spending increased $11 million to $57 million.

Turning now to our back half guidance, we expect internal sales growth in the low single-digits, including approximately $20 million in positive currency impact. We estimate mid single-digit growth in our invest businesses, consistent with the performance in the first half, driven by high single-digit growth in Calphalon and Graco, and mid single-digit growth in Office Products and Rubbermaid Commercial. The back half sales improvement in our invest businesses is expected to be partially offset by high single-digit -- by a high single-digit decline in our fixed businesses driven by product line rationalization and the change in seasonality of our promotional business at Rubbermaid Home Products. We expect gross margins to expand 175 to 225 basis points, driven by productivity, pricing and favorable mix, partially offset by raw material inflation, particularly in resin and metals. We expect SG&A to increase $110 million to $130 million to the prior year, driven by continued investment in strategic advertising, promotion and R&D initiatives, acquisitions, foreign currency, and the impact of stock option accounting.

We anticipate EPS will be in the range of $0.72 to $0.82 per share compared to $0.84 a year ago. Remember last year's back half included approximately $0.11 of 1-time tax and other income, which are not repeated in our back half guidance for 2006. Operating cash flow is expected to be in the range of $485 million to $535 million, with capital expenditures of $70 million to $95 million. In quarter 3, we expect internal sales to be up low to mid single-digits, including about $10 million of positive foreign currency impact. Our invest businesses are expected to contribute mid single-digit growth, while our fixed businesses are expected to be flat. Gross margins are estimated to expand by 125 to 175 basis points, driven by productivity, pricing and favorable mix, partially offset by increasing raw material inflation. As you recall, quarter 3 is our most difficult quarter with regard to raw material inflation year-over-year, given the relatively low resin prices experienced in quarter 3 of 2005.

SG&A expenses will increase by approximately $75 million, driven by continued investment in strategic initiatives, acquisitions, foreign currency, and the impact of stock option accounting. We have also shifted some Office Products promotional spending from the fourth quarter to the third to help drive consumer demand in the back to school season. For quarter 3, we expect earnings to be in the range of $0.35 to $0.39 per share compared to $0.43 a year ago. Last year's EPS included $0.06 of 1-time tax benefit which is not repeated in our 2006 guidance. This outlook does not include pretax restructuring charges of approximately $55 million to $75 million, or $0.16 to $0.23 a share. Operating cash flow is expected to be in the range of $250 million to $300 million in the third quarter, with capital spending of $35 million to $45 million.

Finishing up with the full year outlook, we expect total sales to improve high single-digits, with internal sales now estimated to be up low to mid single-digits, including approximately $20 million of favorable foreign currency impact. We expect our invest businesses to grow sales mid single-digits, while the businesses we classify as fixed are expected to be flat to 2005. Gross margins are now estimated to expand from 225 to 275 basis points, driven by productivity of 2.5% to 3%, pricing of approximately 1.5%, and favorable mix driven primarily by the DYMO acquisition, partially offset by raw material inflation of 1.5% to 2%. SG&A expenses are projected to increase by $230 million to $250 million from the prior year. About 40% of the increase is due to acquisitions, 40% represents increased investment and A&P and new product development, and the remainder is due to the impact of foreign currency, stock option accounting and the pension curtailment benefit recognized in 2005.

We are increasing our 2006 earnings estimate by $0.10 a share, to a range of $1.75 to $1.85, reflecting the higher sales outlook, improved gross margins, and additional tax benefit, partially offset by the increased SG&A investment discussed previously. The $0.20 improvement year-over-year at the midpoint of our guidance is driven entirely by our improved operating performance with 1-time tax, other income and the accounting change for stock options essentially flat year-to-year. The outlook does not include pretax restructuring charges of approximately $150 million to $180 million, or $0.45 to $0.56 per share. We have increased our cash flow from operations to be between $575 million and $625 million, including approximately $75 million of cash restructuring charges. Capital expenditures are estimated to be in the $125 million to $150 million range. I will now turn the discussion back over to Mark for some additional comments.

Thanks, Pat. In closing, I first want to thank our over 28,000 employees for delivering another good quarter, marked by strong internal sales growth and gross margin expansion. I am especially pleased to see the positive top line impact across the Company from our more vigorous investment in strategic SG&A, and our increased focus on the consumer. As I said earlier, our sales indices are a real step change versus previous years. Through project acceleration, we are continuing to improve our manufacturing cost structure, our capacity utilization and our manufacturing flexibility. We will maintain our emphasis on excellent execution of this project. Rapidly expanding gross margins have given us permission to accelerate our investment in growing the top line. This investment is so fundamental to our success that we will continue a similar increase in strategic SG&A investment in the second half, even though our rate of gross margin expansion will moderate somewhat.

The efforts we have initiated to leverage 1 Company, 1 Newell Rubbermaid, are encouraging for the future. Consolidating distribution and transportation, centralizing procurement of common materials and services, and expanding the scope of our shared services, will all pay future dividends. I am also extremely pleased with how quickly Newell Rubbermaid people are embracing culture change. Increasing the level of collaboration. Various functions coming together to form virtual communities for sharing best practices and for learning new capabilities. Raising the bar to define best-in-class results and aspiring to achieve them. All of these things are happening. As I told you before, the raw materials of future success are here. Good brands and good people. The fact that we are raising annual guidance for sales, gross margin and EPS is not a surprise to me. Thank you for joining today's call, and I would now ask the operator to open up the lines for questions.

[OPERATOR INSTRUCTIONS] 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. [ OPERATOR INSTRUCTIONS] Budd Bugatch, Raymond James.

Congratulations on the quarter, Mark and Pat. The one area I was kind of off in my numbers are -- 2 areas were Cleaning and Org and Office Products. Cleaning and Org is significantly better, and congratulations on that. And Office Products not quite as good as I was looking for. Can you kind of give us maybe some flavor? I know Cleaning and Org -- did that benefit much from resin curtailment? It wasn't as high as I thought it was going to be. And Office Products, I have heard some issues from some the retailers I cover about some of the service levels.

Let me take those one at a time. Let me start with Cleaning and Org. The perspective I want to repeat for Cleaning and Org is that a year ago the Rubbermaid Home Products, which is a large majority of the sales in that segment, was skewed very much to the back half of the year. That is unlike, frankly, what our previous history had been, and unlike what we want it to be. That doesn't do good thing for your capacity, utilization and your cost structure. We are returning this year to a more even profile. And so for the total year, that total business will be actually be pretty close to flat. I'm talking about Rubbermaid Home Products, just that portion. And yet what it -- what we will see is what looks like -- not looks like, what is positive indices in the first half, and negative indices in the second half that kind of offset that. So I look at that as a little bit of an artificial boost to our sales growth rate in the first half, and it will be a little bit of an artificial drag on the second half. But the way I look at the business, maybe in total, is that we are growing the invest businesses for the back half of the year the same -- at about the same rate as we we're growing them in the front half of the year. And that our fixed businesses will be about flat for the year, although that will be skewed because of last year's comparison.

So for the full year of Cleaning and Org you will be up, what, about mid single-digit then, instead of the double-digit where it is?

That sounds right. Yes.

Okay.

And Mark's kind of addressed Rubbermaid Home. Now Rubbermaid Commercial, they are up mid single-digits year-to-date. We expect that to continue. That business has been growing at that rate actually the last, at least 18 months. And we expect that to be a strong back half.

On the Office Products, I guess I'm a little surprised at your characterization. Because actually if you look at that business, it hasn't grown in total for several years. They grew roughly 1% in the first quarter, and they grew close to 5% in this quarter. So that total segment is doing better, certainly on the top line. Now, on the bottom line, and that might be what you are referring to, the bottom line frankly, I think the best way to describe it is we are going through some growing pains, and that is related to the -- what you said about service levels. Our business is up, and it's up behind this investment in several new products. And at the same time, we're -- that business is being effective by project acceleration. We are moving the location of the production for some of these products, and the combination of a rising business and moving our points of production has given us some growing pains. We've had to scramble to try and cover for that, work extra overtime, to spend extra distribution costs to get the product to the consumers on time and those kinds of things. So it's been one -- it's a good story that we are now learning how to grow the top line. We now need to get our supply base straightened out to support that kind of ongoing growth.

Just a quick follow-up, if I may, on that. Do you think the service level will improve in third quarter? Or is it more of a fourth quarter item?

No. Number 1, let me say a couple things. It's already improving. Our toughest point was probably a couple months ago, when we were shipping the very high volumes to stock in back to school promotional events. So it's getting better as we speak. The second thing is that the service levels for the vast majority of our products, and the vast majority of our SKUs have been very good and very reliable, like they usually are. As a Company we are pretty good at that. The service level problems have really been confined to a handful of items, and it's these handful of items where we're moving the locates of the production and we've rolled out new products.

Thank you very much. Good luck on the rest of the year.

Wendy Nicholson, Citigroup Investment Research.

Wendy, are you there?

There seems to be a problem. Linda Bolton Weiser, Oppenheimer & Co.

Can you just talk a little bit about how you arrived at your decision to sell the European window fashions business, and yet to keep other of the fixed businesses? Can you just talk about your thought process there?

Well, for all of our fixed businesses, we are constantly evaluating what our options are. And our options are to fix them. And to fix them means fixing the financial profile and the strength of the business, the return on investment, the margins, and also it means strengthening the brands. At some point in time you finally conclude you've exhausted your best ideas and/or you think that a better way to approach it is to divest and invest those proceeds someplace else. And so it's not ever a kind of watershed event. It's a gradual process where you finally come to the conclusion that this would be a better option. So that's what's happened here. So for all of our fixed businesses we are continuing to make those same kinds of evaluations. Our first attempt is to fix them. But if we finally conclude that the structure of the industry or our ability to affect it, our ability to brand, our ability to differentiate is not as strong as we expect it to be and need it to be to fit our business model, then we look for other options. And we reached that point with the Home Decor Europe business.

Are you anticipating at this point more divestitures? Or do you think you're coming to an end?

Well we don't comment on our divestitures on a going forward basis. But as I said before, that's always an option with our fixed businesses. We've had a good track record of fixing some businesses. We fixed Goody and Graco last year. And moved them from the [inaudible] to the invest category . I described earlier in my remarks we're making some really good progress in Rubbermaid Home. But last year we divested a couple businesses, the Curver business and the Pyrex business in Europe. And now we are divesting the Home Decor business. And we have still got a few fixed businesses left to go.

Okay. Can I just ask 1 question about the raw material cost situation? My understanding is that you've had a resin surcharge in place since early '05. So I guess I'm a little confused about why you are commenting on gross margin performance relative to resin costs.

Resin costs are actually -- when you look year-over-year, our highest quarter last year was the third quarter by far. And so they really spiked -- . I'm sorry, the other way around. Our lowest quarter was the third quarter last year. And so while they are relatively the same this quarter as last quarter this year, the comparisons make the difference dramatic for next period.

Our pricing surcharge runs on a 6 month basis. It's addressed every 6 months. Whereas the raw materials can fluctuate month to month behind that, right?. So what happens is, we actually took our raw material inflation number down, our projection for the year, about a half a point. So the midpoint now would be about $75 million versus the midpoint of about $100 million last call. But that fluctuates largely quarter-to-quarter. In fact, the largest quarter, which is the third quarter, is 3 times the amount of inflation that we'll see in the smallest quarter this year.

Okay. And just 1 final thing. On the comment that you made that the removal of the European window fashions into discontinued. I think you said it helped EPS in the first half, but yet the full year it's neutral. Can you just explain how you get to that?

Sure. In the front half, the absorbed overhead costs go down to discontinued ops with the business. But once it's divested, there is an overhang cost, which will take us some time to take out, remain in continuing operations. And we have to get those overhead costs out. They hurt us in the back half.

Okay, I've got you. Thank you very much.

Wendy Nicholson, Citigroup Investment Research.

Can you guys hear me?

Yes, we got you, Wendy.

I apologize. My first question has to do with the tax rate. I know that you are guiding us to a normalized tax rate in the back half of this year, and it sounds like for '07 as well. But it's now been kind of 3 years since you've seen something below a 31% tax rate. And I'm just wondering if consensus expectations out there just aren't artificially low, because it doesn't strike me as reasonable that your tax rate really goes in fact go back up to 31%, here on out. So can you give us some sense of the probability of that really happening? I mean, between your NOLs and all that kind of stuff, it sounds like that's just an artificially high target.

We will guide you to use $0.31 -- 31%. Okay. In any period it is possible that we could realize additional, call them 1-time or nonrecurring tax benefits, Wendy. When they happen, we are obligated through GAAP to take them in a lump, not smooth them into the rate. So, and I can't project for you what our future 1-time events are going to be. It's not something we can do. So we have had several now over the last couple of years. We are always working on tax strategies to lower our tax rate, and take advantage of that. But I think you should use 31% in the model, and we will continue to work on ways to take advantage of any of our tax loss carryforwards like we did this quarter.

Is it fair to assume that with the sale of the European home -- the European windows business, that you are going to be able to access those NOLs in Europe faster than you would have otherwise?

That would be fair, yes.

Okay. And then just my last question. Have you done preliminary planning? The 5.5% strategic spending in '06, do you think that number remains kind of flat as we look towards '07? Or do you think that is going to take another tick up?

I think at this point of time in the total SG&A will remain about flat versus where we are coming out this year in 2007. In an ideal world we will be able to continue to find some structural SG&A that we may be able to reinvest into strategic SG&A.

Terrific. Thanks very much. I appreciate it.

Bill Schmitz, Deutsche Bank.

Can we just start with writing instruments, especially the Everyday Writing pieces of business? Even when Gillette owned Papermate, I think it's been 10 years since that business has grown. So what's changed there? And have you made any improvements on the low end stick part of the business? I think that's been the big problem the last few years.

Several items that I referenced earlier, that we rolled out as part of our back to school program this year, were in Everyday Writing. And they were on key SKUs, key items that we have concluded we needed to be more competitive. And so we made, frankly, a lot of little changes, but little changes the consumer can notice. We would make the writing experience smoother by adjusting the tip size. Or we would change the grip slightly to make it more comfortable on the hand. So things are still fairly small but are noticeable. And at the same time we really worked hard on improving our cost structure, so that we could deliver a better value to our customers, and they could in turn, pass it on to the consumers. We have been able to offer both better value and better performance on a handful of key high volume items within the Everyday Writing line. And that's behind growing that segment, which you are absolutely right, hasn't happened for quite awhile.

Great, thanks. And then just talking about the restructuring broadly, a couple things. How far away are we from getting some kind of ERP/SAP solution put in, because I know that's been somewhat of a problem for the last several years. There's not a whole lot of transparency into the different businesses, given the lack of ERP. And then also, how long does it take for you guys to absorb some of this overhead that you are losing when you decide to shutter these businesses?

I will take the first one. On the SAP, Bill, we were [inaudible] and by the end of the year we will probably be able to make an announcement about the timeframe on implementation. As far as the overhead, overhang, if you will, our goal would be to get that out by the end of the year on this particular divestiture. That's going to take some work. We only have 5 months to do that, and this is a European business, but that's our goal.

Okay, great. And then on the SAP. Is there any preliminary thoughts on what kind of cost savings that will drive? Because for some other the companies in the peer obviously, it's been fairly significant, or is it just too darn early?

We're not far enough along to tell you that, Bill. I can't give you a good number right now.

Okay. Thanks very much.

Chris Ferrara, Merrill Lynch.

Can you just talk about the operating loss from the European reclass again? I just want to make sure I'm clear on it. Did you say that only $0.02 of the $0.06 loss was operational? Like, what I'm trying get to is, had you guys not made the reclassification, what would EPS have been in the quarter X-charges, and what would gross margin have been? What would the change have been?

It was $0.02 of the Home Decor charge to discontinued ops is operationally driven. The remaining, I will call it approximately $0.04, 1 was loss on sale, and $0.03 was call it restructuring and liquidation costs -- well, the liquidation cost was to shut down part of our UK business, and then some severance and asset write-off related to that. Okay? So $0.02 was operational. So to walk you down from our guidance, we guided the midpoint was $0.41 for the quarter, $0.02 improvement from the Home Decor divestiture, about $0.03 from I'll just call it, operating improvements being higher internal sales growth, and gross margin expansion higher than our expectation, and offset by some SG&A investment. And then $0.08 of 1 time tax.

Now, to answer your gross margin question, it was 20 basis points impact from the Home Decor moving out to the discontinued ops. So the improvement would have been 230 instead of 250. To walk the quarter for you one other way, from last year to this year, with Home Decor out of operations in both periods, we did $0.41 a share last year, we had about $0.06 of I will call it operational improvements through increased sales and gross margin expansion, offset by some SG&A investment. And by the way, in that $0.06 also is about $0.02 from the DYMO acquisition. And then we had about $0.07 of I will call 1-time and accounting changes. $0.08 from the tax benefit, and negative $0.01 from the expensing of stock options this year, which is not last year. So the $0.13 improvement to last year, 6 is operationally driven and 7 I will call it 1-time or accounting changes.

Great, that's really helpful. I just wanted to ask you about the tool business. I mean, given what we are hearing from Black and Decker and Stanley, how does a reduction -- home starts or just a decline in housing, impact your tool business? Are you getting enough shelf space gains and moves into now these categories that's just offsetting a macro environment, or are you not even seeing the macro change at this point?

Again, we are seeing double-digit growth in our Lenox and Irwin branded tools. And here is the way I characterize that. We still have relatively low shares in those businesses, so we are gaining a lot of share by bringing product improvement to the market on our existing product lines. Second, we are entering new product lines. And the combination of those 2 just so far outweigh any what might be a minor impact from that, that we just don't see it. so we are feeling very bullish about our tools business. Not worried frankly, about any impacts of housing starts or so on, because, 1, it's got a relatively small effect in total on the Company, of course. And, 2, on that business our opportunities for growing that business through growing our share and category expansion are so great that they -- any other effects would pale in comparison.

Great. And then just finally, what was the impact, not divestitures, but what was the impact of product line exits in the quarter, if any? And can you refresh what the guidance is for that on a full year?

The guidance going into the year was $75 million, and we are saying about half of that now for the year, with roughly a third of that happening in the front half, and two-thirds in the back half.

[OPERATOR INSTRUCTIONS] Connie Maneaty, Prudential.

I have a couple of questions. I suppose having followed Newell for so many years, my first question is when are the results ever going to get easier? But other than that, on the first quarter call, you signalled that you saw internal sales growth for the second quarter would be in the low single-digits area. But you also back then knew what the 1-time impacts were in the comparisons. So where were you surprised on the strength of sales?

Well, you know, surprise might be too strong of a word, but I think there is no question we had exceptionally strong business in Calphalon, that was probably a little bit above what we thought it was going to be. We had again very good quarter on Lenox and Irwin brand products. Office was probably a point or 2 better than we had estimated going into the quarter. Rubbermaid Commercial continued to be strong.

Did you advertise again for Calphalon in the first quarter? Or is this just follow-through from the fourth quarter advertising?

We advertised, but also we've started to do some other things. We've opened up a couple of our own retail outlets and that's added a little lift. And we started introducing some new product lines. We are getting into soft goods and utensils and bar ware.

How many stores have you opened?

We were up to 3 now.

Where are they?

1 is in Massachusetts outside Foxboro, and 2 are in Texas.

Okay. Window fashions in North America. What percentage of that business is still customized and what is sort of common or just shipped to mass retailers?

I can't give you a good number. We will follow-up and give you that number.

Is the North American window fashions business operating at a profit?

Oh, yes. Very much so. In fact, you can tell that now the business left in continuing operations. You can see that it is profitable.

Okay. And how are you characterizing that? Is that a fixed or invest business?

That's still in our fixed category .

Let's see. I expect that -- will there be additional charges announced at the end of the year for some of the new initiatives you are planning, like the horizontal integration and distribution and transportation and SAP?

It's, again, too early to do that. I think we committed to you that we are working our darnedest to be able to include that in next year's budget and give you visibility on that by the end of the year. So all I would say is, it's possible, but it's too early to tell for sure.

And then finally, as we look at the second half, if we take out the $0.11 from the 1-time items last year, last year's second half base is $0.73. You are essentially saying going forward, earnings in the second half will be flat, to up what, 10 or 11%. What are the major events that are happening in the second half that seems limiting the impact you are getting from sales growth and gross margin expansion?

Well, it's a couple things going on there. First of all, our internal sales growth was about 6% in the front half. We are saying low single-digits in the back half. There's really 3 items that are causing that adjustment. 1 is the timing of promotions in Rubbermaid Home Products, again, were more evenly spread across the year, which is consistent with our traditional business. 2005 was very fourth quarter loaded, that was the anomaly. The [e tools] have an impact for us greater in quarter 4 than any other quarter for the year. That business is nearing the end of its life cycle, so that has a bigger impact in the back half than the front. And then we have some product line rationalization which I mentioned before, we will be about twice as big in the back half as the front half. So combined, they are lowering our internal growth rates, so that is having an impact on us.

From a gross margin expansion standpoint, we are up roughly 290 basis points in the front half, and we are saying 175 to 225 in the back half. We do have higher raw material inflation in the back half, particularly in quarter 3. If you recall last year, resin hit its low point in quarter 3. It's relatively flat quarter-to-quarter this year in our projections, so we are going to be hit the hardest in the back half. We also have a little skewing in the timing of price increase. About 60% of our price increases have come through in the first half, and about 40% will be in the back half. Really relates to some pricing we took in July of '05 that will not repeat in July of '06. So that's combining to take us back to about a 200 basis point improvement in the back half. And then SG&A is relatively flat year-over-year, as far as the increase in each half of the year. So we just have a lower drop through in operating income. But both halves are improving. The front half is up $67 million, I think, in operating income year-to-date. And we are saying maybe about $25 million in the back half, for the reasons I just said.

Great. That's very helpful. Thank you.

Joe Altobello, CIBC World Markets.

Pat, you just mentioned the price increases you guys are taking this year, and obviously you have done a lot of it in the last few quarters. What's been the response from retailers? Have they started to push back at all?

You know, the pricing that we take, we took some at the beginning of the year, and we have not really taken any since then. And we talked about that at the beginning of the year. The pricing that we took, we always get -- no customer says thank you, can I have more? But we've had good justification for doing it. And we have tied it very clearly to our cost structure. They know that we are passing on a lot of our own productivity gains. So w're not doing a penny for penny pricing as our cost structure goes up. And so while we've had -- you always have push-back, we've had acceptance of the pricing we got to have. And the other thing they have seen, is they have seen us have the willingness to get out of product segments. Get out of product categories where we can't get the kind of pricing to have profitable businesses. And so they know that trend will continue, so they have to accept it if they want to have our brands on the shelf, in some cases they are going to have to take those, because otherwise we will exit those businesses. So there is kind of no new news on pricing. As I said, most of the pricing that we have in place for this year that's affecting this year, was taken early in the year.

Okay. And then to follow-up on that, it sounds like you guys are still not seeing any inventory reductions on the part of retailers.

No, no, nothing that's causing any [significance].

And then finally, just a housekeeping item, once the Home Decor Europe business is gone, what percent of your business will be fixed?

Roughly 20%. Little over 20%.

Perfect. Thanks a lot.

Eric Bosshard, Cleveland Research Company.

A couple things you've mentioned, I just want to be clear on. First of all, within your guidance, is the tax rate to be 31% in the back half of the year?

Yes, 31% in the back half.

Secondly, the Rubbermaid Home Product change in the schedule that gave you this big up first half and apparently down the second half, could you just explain what drove that again? I'm unclear on that.

Well, what really drove it is that early in the year last year, so again last year was the anomaly. And early in the year last year, the business was really battening down the hatches as they were really trying to work on getting their bottom line fixed. And they got towards the end of the year, in some of the product segments, they had done better and therefore competed for promotional volume in the last quarter. They competed apparently where some other competitors chose not to, and because of that, had a huge spike in their volume. This year, we see a more normalized pattern. Our history, 2003, 2004 and what we anticipate 2006 for that business is about a 50/50 split, front half, back half, and it was way skewed away from that last year. So that's just given us the kind of the weird comparisons, front half and back half.

And then next, on the last call I think you answered someone's question stating that the operating profit guidance was still around $710 million, I think, as we were going through the impact of tax and raising the guidance. With the guidance increase today, can you just give us a sense of -- I haven't been able to do the math this quickly. How much has the operating profit number actually increased within this $0.10 guidance?

$0.08 of the improvement the last call is the tax benefit we saw in Q2. And $0.02 of it is from operations.

And how much of the $0.02 from operations relates to the Home Decor divestiture?

That's relatively flat, again, for the year. It helped in the front half, it's hurting us in the back half. It's essentially EPS neutral for the year. So it's really the rest of the operations driving it.

Great. Thank you.

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 719-457-0820 with the confirmation code of 6057747, starting 2 hours following the conclusion of today's conference, and ending on August 10th. This concludes today's conference. You may disconnect.