諾威品牌 (NWL) 2007 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's third quarter 2007 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 a reminder, today's conference will be recorded. Today's call is being webcast live at www.newellrubbermaid.com on the investor relations home page under events and presentations. A slide presentation is also available for download. A digital replay will be available two hours following the call at 719-457-0820. Please provide the conference code of 1044327 to access the replay. I will now turn the call over to Mr. Ron Hardnock, Vice President of Investor Relations. Mr Hardnock, you may begin.

Thank you and good morning. Before we begin, I would like to remind you that the statements made in this conference call that are not historical in nature are forward-looking statements. These statements are not guarantees and actual results could differ materially from those expressed or implied. For a listing of major factors that could cause actual results to differ materially from those projected, please refer to our most recent quarterly report on form 10-Q, including exhibit 991. We will also be referring to non-GAAP financial measures on this call. A reconciliation of these financial measures to the most directly comparable financial measures calculated in accordance with GAAP is available under the investor relations section of our website at newellrubbermaid.com. Let me now turn the call over to our President and CEO, Mark Ketchum.

Thank you, Ron, and good morning everyone. Thank you for joining us on our third quarter 2007 earnings call. I'm pleased to report it was a strong quarter. More importantly, we've raised our 2007 EPS, gross margin expansion and cash flow forecast due to operating improvements and provided a positive outlook for 2008. As I've asserted previously, full year results are the truest indicator of how we're performing. Our upbeat expectations for 2007 and 2008 demonstrate our ability to grow profitably despite a tougher economic environment. I'll talk more about this later in my remark. For the quarter total net sales were $1.7 billion, up 6.4% from last year and in line with the updated guidance we provided on September 17th. Q3 2007 represents our eighth consecutive quarter of organic growth following three years of flat or negative growth.

Gross margins expanded 190 basis points to 35.6% of sales, ahead of our guidance. Excluding charges, third quarter earnings per share were $0.66 compared to $0.46 in last year's quarter. If you exclude one-time tax benefits in both periods, normalized EPS was $0.52, a 27% improvement over last year. Operating income of $237 million was up 18%. Pat will give you more detail on the quarter in his remarks. Looking forward, our primary focus is on building a top-tier global innovation and branding Company, capable of generating strong revenue and profit growth year after year. As we progress through this transformation, we will see quarter to quarter fluctuations due to timing and other business factors. I try not to overreact to these quarterly fluctuations. I'm focused on delivering our annual plans and building our long-term capability.

We are proud of the strong progress we made in 2006. And we're equally proud that we will meet or beat 2007 full year guidance that we communicated at the beginning of the year. As you will hear in a few moments, we expect to validate our turnaround with another annual installment of good results in 2008. We are delivering 2007 and 2008 results consistent with the commitments we made at our February analyst day. We are doing this despite a tougher macroeconomic climate that includes increasing softness in new house construction and a more sluggish retail environment in North America. From now through the end of 2008, we estimate these factors will pressure total Company sales by 1.5 to 2 percentage points, but this won't knock us off our stride. The new business model we adopted and strategic transformations that we are driving are serving us well.

We are encouraged by continued market share gains, notably in Calphalon, Goody, DYMO and Rubbermaid Commercial businesses and by global growth in our IRWIN and LENOX branded tool businesses. In addition we are continuing to reap significant gross margin benefits from better mix driven by our improved business portfolio, stronger sales of higher margin products and a diverse channel mix of both retail and commercial distribution. For 2007 full year, we expect approximately 4% sales growth, over 175 basis points of gross margin expansion, 18% normalized EPS growth and healthy operating cash flow. All of these results meet or beat the expectations we shared with you at the beginning of the year. Our strong gross margin improvement continues to fuel our investment in strategic SG&A.

This year we expect to spend an incremental $95 million to $100 million to support brand building and other key corporate initiatives. This is $5 million to $10 million higher than we told you back in February. Looking now to 2008, we expect to again deliver the growth trifecta, with 3% to 5% sales growth, robust gross margin expansion in excess of 100 basis points and normalized EPS of $1.95 to $2.00 a share. Our top-line expectations reflect the stronger new product pipeline and additional strategic spending to increase demand for our brands, getting us off to a good start in 2008 and keeping us there. Before I turn the call over to Pat, let me talk briefly about the progress we've made on some of our key strategic initiatives. On October 1st we successfully went live with the SAP implementation at our North American Office Products business unit.

We have invested considerable resources to ensure success and we are pleased to report that the launch has gone extremely well. This go-live marks the first major milestone in our planned multi-year rollout of SAP. The first launch has provided a good road map and a solid base of experience to reapply as we implement this best-in-class business process enabler across the organization. We are also continuing to invest in various brand building and marketing efforts to help drive top-line sales growth. Let me mention just a few highlights. In our Tools & Hardware segment, we achieved solid sales growth due largely to continued strength in our international tools businesses. One area in which we have seen especially good results is our LENOX industrial bandsaw business. The success has been driven largely by our grassroots deal marketing efforts.

We are generating a quick payout as we expand our team of trained professionals who work with our end users to educate them on the benefits, use, installation and servicing of our bandsaws. We are deploying this marketing model globally and have seen a double-digit increase in our industrial bandsaw business outside the U.S. In our baby and parenting essentials business, we will soon launch the Graco sweetpeace Newborn Student Center. sweetpeace represents a game changing innovation that will reinvent the baby swing market. sweetpeace was developed based on comprehensive research with moms and pediatric professionals to understand what works to calm babies the best. This unique product features a patented motion and customizable seating positions to better mimic the actual movements that mothers use to soothe their infants. sweetpeace also comes programmed with soothing prenatal sounds, such as a heartbeat, that researchers have proven to be especially comforting to babies.

We are investing in a targeted multimedia, print and web marketing campaign to support the launch of this innovative new product. Our DYMO labeling technology business is up strong double-digits year-to-date on the success of its breakthrough TV marketing campaigns throughout Europe. Our fine writing business is significantly enhancing its merchandise and in-store experience with the creation of sleek and attractively designed store within a store display concepts at fine retailers across the globe. In our beauty and style business, Goody has initiated a major marketing campaign to support the introduction of its innovative Styling Therapy line of brushes. These unique styling instruments are infused with special ingredients to help control dandruff, add shine or protect hair color. Sales of Styling Therapy have doubled since the launch of this A&P campaign. Again, these are just a few examples of the types of investments we are making across all of our business units to help those brands that matter at Newell Rubbermaid.

With that, let me turn the call over to Pat Robinson, who will walk through the detailed financials and guidance before I return to provide some summary comments. Pat.

Thank you, Mark. I'll start with our third quarter income statement on a normalized earnings basis. Net sales for the quarter were $1.7 billion, up $101 million or 6.4% over a year ago and consistent with our revised guidance provided in this September. Sales growth excluding foreign currency was 4.5%, marking the 8th consecutive quarter of sales growth for the Company. This quarter sales improvement was driven by double-digit increase in the Home & Family segment, mid to single-digit increases in the Cleaning, Organization & Decor and Office Products segments, and a low single-digit increase in Tools & Hardware. As Mark mentioned, third quarter sales benefited by about 1.5 points from the timing of sales in our Office Products segment. About 0.5 point shifted from quarter two relating to the service level issues in Europe discussed in our last call and about 1 point shifted from quarter four relating to the pre-buy in advance of the Company's SAP go-live in North America.

Year-to-date sales were $4.8 billion up 4.4% for last year, including about 1.5 point in foreign currency. Gross margin in the quarter was $601 million or 35.6% of net sales representing a 190 basis point expansion versus 2006 and above the high end of our revised guidance of 125 to 175 basis points. Favorable mix, ongoing productivity initiatives and savings from Project Acceleration drove the majority of the year-over-year improvement, while favorable mix drove the improvement to our revised range provided in mid September. SG&A was $364 million in the quarter, up $30 million to last year. Driving the increase was strategic brand building investments in all of our segments and other strategic initiatives including SAP and shared services partially offset by savings in corporate overhead expenses.

Reinvestment in strategic SG&A at our operating units is on track for both the quarter and for the year. Operating income for the quarter was $237 million or 14% of sales, an improvement of $36 million or 18% for last year, driven by sales growth, gross margin improvement partially offset by the increase investment in SG&A. Year-to-date operating income was $621 million or 13% of sales, up 15% for last year. Interest expense was approximately $5 million lower than the prior year reflecting the reduction in debt year-over-year and slightly lower average borrowing rates. The Company's continuing tax rate was 29.5% for the quarter compared to 31% last year. As disclosed in the mid September press release, the third quarter of 2007 benefited from the resolution of certain tax matters of approximately $39 million or $0.14 a share versus a tax benefit of about $15 million or $0.05 a share in the third quarter of '06.

Normalized EPS for the quarter was $0.52, about 27% higher than last year's normalized EPS of $0.41 and $0.03 above the midpoint of the prereleased range driven by higher gross margins. Year-to-date normalized EPS of $1.35 up $0.26 or 24% for last year. The Company reported approximately $23 million in restructuring charges related to Project Acceleration in the quarter which are not included in the continuing earnings described previously. Operating cash flow for the quarter was $283 million compared to $312 million in the prior year and slightly above the high end of our previous guidance of $225 million to $275 million. Capital spending was $41 million in the quarter compared to $37 million last year. I'll now take a few moments and talk about our third quarter segment information.

In our Cleaning, Organization & Decor segment, net sales were $547 million up $28 million or 5.4% to the third quarter of '06. This increase was driven by double-digit growth in our Rubbermaid Commercial business and low single-digit growth in Rubbermaid Consumer. Operating income for the segment was $84 million or 15.3% of sales, an improvement of $16 million or 24% versus a year ago. Sales growth, productivity gains and favorable mix drove the improvement. Office Products net sales increased $27 million to $545 million, an improvement of 5.3% versus last year. Year-to-date sales are up about 3.5%, which includes about 1 point of improvement from the pre-buy in advance of the SAP go-live. Back to school met our expectations, while technology continues to grow double-digits. In addition we rectified the service issues in Europe that impacted our quarter two performance.

For the full year we expect low single-digit growth in the segment. Operating income was $84 million or 15.4% of sales, up $9 million or 12% to last year. The sales increase and favorable mix partially offset by increased SG&A investment drove the year-over-year improvement. In our Tools & Hardware segment net sales were $336 million, up $12 million or 3.5% versus last year. Continued strength in our international tool businesses more than offset softness in our domestic Tools & Hardware business affected by the U.S. residential construction market. The international business benefited from the successful commercialization of certain products, particularly bandsaws. Operating income for the segment was $51 million or 15.3% of sales, up $5 million or 11% over last year when higher sales volumes and strong productivity partially offset by raw material inflation particularly in metals.

In our Home & Family segment net sales were $259 million, an improvement of $34 million or 15.3% in the quarter. New product launches and an increased investment in demand creation activities drove strong sales growth across all three business units. Double-digit sales growth supported by increased strategic SG&A investments drove operating income of $37 million, up $9 million or 32% to last year. Turning now to the quarter four 2007 outlook. We expect sales to increase about 2%. As we discussed earlier, the quarter four growth rate is negatively impacted by about 1 point as certain retailers bought in advance of our October SAP go-live. For the quarter we expect growth in all business segments except for Office Products, which is expected to be down low single-digits.

Adjusting for the SAP pre-buy, Office Products would be essentially flat in the quarter as our sell-in rate is expected to be negatively impacted by inventory actions taken at certain key retailers. Our point of sale in this segment has actually eclipsed last year, particularly in the mass merchant and commercial channels, a trend we expect will continue given this confidence that the fourth quarter selling decline is temporary. Based on this we expect quarter one 2008 Office Product sales growth to be in the 3% to 5% range as sell-in better matches our POS. Savings from Product Acceleration, other ongoing productivity and favorable mix will drive expected gross margin expansion between 175 and 225 basis points. For quarter four we expect normalized earnings to be in the range of $0.44 to $0.46 per share compared to $0.42 a share a year ago.

Operating cash flow is expected to be in the range of $200 million to $250 million in the fourth quarter versus $239 million last year. Capital spending is expected to be $35 million to $45 million in the quarter. For the year we now project sales growth of about 4% with growth in all four business segments. Favorable foreign currency will contribute about 150 basis points. Restating for the timing items in Office Products, our growth rates by quarter are approximately as follows -- In quarter one we were plus 3%; quarter two plus 4%; quarter three plus 5%; and fourth quarter plus 3% for a full year growth rate of positive 4%. We are guiding our gross margin expansion to the high end of the range previously communicated. We now expect expansion of a 175 to 200 basis points.

Productivity resulting from Project Acceleration savings and ongoing initiatives combined with favorable mix will drive the gross margin expansion. From a timing perspective, we now anticipate savings from Project Acceleration of $60 million for both 2007 and 2008 as about $10 million savings originally expected in '08 will now be realized this year. The total cost in savings of Project Acceleration remain on track. Pricing and raw material inflation are still expected to generally offset for the year. We plan to invest approximately $95 million to $100 million of our gross margin expansion in strategic brand building initiatives, including consumer understanding, innovation and demand creation, as well as other strategic initiatives including SAP and shared services. This represents an increase of $5 million to $10 million to our analysts day guidance, as our strong gross margin performance has allowed us to increase our investment while also delivering an additional $0.08 of normalized EPS improvement for the year.

Consistent with previous guidance, the effective tax rate for 2007 is expected to be between 29% and 30%. We are increasing our normalized EPS guidance $0.04 to be in the range of $1.79 to $1.81. This outlook does not include pretax restructuring charges of approximately $75 million to $95 million or $0.22 to $0.28 a share. We are increasing our estimate of cash flow from operations to be between $650 million and $700 million. We expect restructuring cash payments to be approximately $50 million to $60 million, as the timing of certain payments primarily severance has shifted from 2007 to 2008. Capital expenditures are expected to be in the $145 million to $155 million range including SAP.

Looking ahead to 2008, we expect sales growth to be between 3% and 5% for the full year, with growth expected across all business segments. New products and increased strategic SG&A spending are expected to more than offset the impact of a continued sluggish economic environment, particularly in North America. We expect project acceleration and our ongoing productivity initiatives to fuel gross margin expansion in excess of 100 basis points. We anticipate investing approximately half of this margin expansion back into strategic brand building initiatives and other corporate initiatives. This sales growth and market expansion will drive normalized EPS to a range of $1.95 to $2.00 a share.

We also expect to continue to convert in excess of 90% of full year 2008 earnings into free cash flow. We will provide more detail around our 2008 full year guidance on our fourth quarter call after we have completed our budgeting process. Similar to last quarter we have posted a brief supporting slide presentation on our website, www.newellrubbermaid.com, under quarterly earnings in the investor relations section. Before we open the call for questions, Mark has some final comments.

Thanks, Pat. Before closing the call, I would like to thank all of our employees for once again delivering a strong quarter. And we also add a special thanks to all the people who worked so hard to deliver a very successful SAP conversion in North American Office Products. This was a truly outstanding job. Year-to-date we've achieved 4.4% sales growth, 170 basis points of gross margin expansion and a 15% increase in operating income. Our solid outlook for 2007 and 2008 is evidence that our new business model is working. We can grow sustainably even in weaker macroeconomic environments. We also continue to be a strong gross margin story, reaping the benefits of favorable product mix, ongoing productivity, and savings from restructuring. This robust gross margin expansion will fund additional investments in strategic brand building and other capability building initiatives that are so critical to driving top-line sales growth and to supporting our long-term success. Our vision is to be a best-in-class Company. We are clearly making good progress. However, this is a marathon, not a sprint and it will take several years to get there. As we go forward, we will build upon the momentum we have gained thus far and maintain our focus on building brands that matter, achieving best total cost, leveraging the power of One Newell Rubbermaid and fostering a global culture of innovation and excellence. As always, we thank all of our shareholders for their continued support. And thanks, once again, for joining today's call. I will now ask the operator to open the line for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Budd Bugatch with Raymond James.

Good morning, Mark, good morning, Pat, congratulations.

Thank you.

Congratulations on last night, too, Mark.

First in four in a row.

Oh, my. We may hold you to that one. Just talk a little bit about -- you talked about 1.5% to 2% impact of the macroeconomic climate. I guess that's about $100 million off of sales for next year, if I do that properly. Can you kind of drill down and tell us where you think that's impacting and how you get there.

It's primarily in our Tools & Hardware segment, because of the slowdown in housing. That, as you know, continues to get worse. So that's where we see most of that impact.

And Tools & Hardware, you're looking at -- if we look at international, that's still growing well. Domestically I would imagine commercial is growing well, industrial is growing okay. So the impact is in the home side of that?

Yes it is. In fact we said in the past, this is still correct, about 5% of our total business, total Newell Rubbermaid business is effected by the housing market. Again, the largest part of that in Tools & Hardware.

My follow-up has to do with raw materials for next year. I'm concerned I'm seeing some inflation and obviously with oil where it is, tremendously worried about that. Can you kind of go over your outlook for that maybe for the fourth quarter and for next year and how do we monitor that?

Well, let's talk about next year. We definitely are going -- we believe we're going to see more pressure from raw materials in '08 than '07, and everybody is driven by resin costs. They are a bit of a moving target at this point. But beyond that, we have shown the ability the last three years to price and take price to offset raw material inflation in '05, '06, '07, it's our intention to do that again in 2008. We are currently working through those pricing decisions as we speak as we go through our budgeting process. We can fill you in in more detail on our next call. But over any annual period or a longer period, we expect to be able to offset raw materials with price. Now, in the short-term we have to get our pricing actions in place and inflation happens when it happens.

And resin is still around 700 million pounds now, is that about right?

That's about right.

And you used to have or a couple of years ago you had installed an indexing mechanism for pricing on resin when it really got to be challenging. Is that still in place or do you have to go back to the customers?

Well, it's not what I'd call in place in that it's automatic. But we always have to go back to customers and that was the case even before. That's the basic principle we'll continue to use. As Pat mentioned, the timing of our pricing with many of our customers is either twice a year or once a year. So our ability to respond is not immediate in many cases. But as Pat said, over any long period of time we still expect to be able to have raw material inflation and pricing offset.

Pat, just lastly, anything on metals in raw materials, too?

We expect some pressure on metals but about the same as we saw this year.

Okay. Thank you very much. Congratulations.

Thank you.

Your next question comes from Connie Maneaty with BMO Capital Markets.

Good morning.

Hi, Connie.

With your comments about the weakness in North American retail and housing and the strength in the international business, is there any chance that North American, or U.S. sales in particular, decline in the fourth quarter and the sales growth that you do show is all international?

No, I don't think it will come out that way. But again, the international businesses will be leading the way in terms of their rate of growth. No, we'll still see some growth in North American total.

Okay. Also when you talk about this terminology, when you talk, say sales are sluggish or sales are weak, does that mean they declined?

All it means is there's more macroeconomic pressure. You're seeing some of that show up in the fourth quarter.

No, but I mean when you say that North American tool sales were weak or sluggish.

No, they were not down in the quarter.

They were not down. Okay. So you don't have standard language where weak and sluggish means decline, right?

No.

Okay, great. Thank you.

Your next question comes from Bill Schmitz with Deutsche Bank.

Hi, good morning.

Hi, Bill.

I know you're not going to talk about specific customers, but what gives you confidence that some of this destocking in the Office Supply channel abates the first quarter of next year? I know they have taken their inventory down from six months ten years ago down to three and now it's down to like a month and a half or two. What are you seeing in the marketplace and what are they telling you that you think that this is going to pick up in the first quarter?

Well, look -- first of all, what -- we track two things. One, we have some visibility into inventory levels at our customer's. Second, we also have on a customer by customer basis visibility on point of sale. Our point of sale has actually been up and as we have seen the trends in inventory takedown, we know that there's an endpoint to that. So we expect that good point of sale strength will start flowing through into shipments. The other thing I can tell you is that we've got a stronger pipeline of new initiatives coming forward next year than we did this year. We purposely kind of held back on new initiatives this year so that we could get through the SAP conversion in North America without interruptions. Obviously if you're trying to innovate and provide new products at the same time you're trying to go through a change like that, it just adds a level of complication that you want to avoid. We were a little more cautious in terms of our rate of new product initiatives this year. Next year we'll open the flood gates again.

Right. Thanks. Then just a follow-up on SAP. I know Stanford North America was the first one, what is planned for next year in terms of conversion.

We have one segment go-live in North America again, our Home & Family segment. Right now it's anticipated to be in the second quarter.

Okay. That's it for 2008?

Yes.

Okay, great. Thanks so much. Pat, I hope you're feeling better?

Thanks a lot. I am.

We'll talk to you soon.

Your next question comes from Linda Bolton Weiser with Oppenheimer.

Thank you. I guess I have a question about the Cleaning and Organization profitable. It's very impressive given the raw material cost pressures. You have a 15% operating margin now there. Can you discuss -- I'm picturing that the Cleaning and Organization versus home fashions are roughly equal. If you could shed some light on that in terms of profit margins. Also in Rubbermaid, can you comment is the margin improvement due to home products still improving or is it all of the pieces that are improving profitability? And is home products now where it needs to be?

Okay. There's a lot of questions. Let me try and give you an overview of that. We don't report on specific portions of the business within there, but I can tell you that, for instance, Rubbermaid Commercial has always been at the strong end of that, of the range within that business segment, and that Rubbermaid home products, I've shared that with you before, is the one area that's been below investment grade. We talked about that when we talked about what businesses still needed to be fixed, if you will, using the definitions the Company was using a couple of years ago. But I also told you that Rubbermaid home had made a great first installment, had gone from negative to positive profitability last year.

That they were making another big installment this year and that it would be fully fixed by the end of '08. They are on that track. They are making terrific progress by redesigning their products and redesigning their overhead and better utilizing our factories and a number of other things that they are doing to really continue to get themselves into a best cost position. They are well on their way to having investment grade economics themselves and then all the portions of that business would.

Just one other comment, all of our business segments now have operating margins in the low to mid-teens ranging from roughly 13% to 15%. Their Company's operating margins will approach 13% this year, probably in the 12.8% kind of range. The gap is that we have some corporate expenses don't get allocated back. They are all operating now in that 13% to slightly above 15% range for the year.

Just as a follow-up, I think people are always thinking about your category versus the categories like Procter & Gamble. What's the very long-term margin potential of durable goods categories versus consumables. Do you have any view on that, Mark?

I guess I don't want to pick a single number, because as you know, we've got such a mix of products that what our actual mix is would affect that. We have talked about driving our gross margin towards 40 and driving our net margin towards 15, and I think that's a good near-term target. I would hope that three years from now that will be close to reality and you'll be asking what's next. Obviously there will have to be something next.

Okay. Thanks a lot.

Okay.

(OPERATOR INSTRUCTIONS) We'll go next to Chris Ferrara with Merrill Lynch.

Hi, guys. I was wondering if you can talk about, I guess, what probably the bigger concern is for your stock in the marketplace, which is what happens if we do see a recession. Is there any way you can try to quantify in some way what you'd see, say, for a commercial or industrial construction if we saw a U.S. recession and what kind of share gains from a quantitative perspective you'd need in, say, your tool business to offset that and to still be able to put up flat to low single-digits growth?

We haven't modeled that, so we're not planning for the worst. We're planning for what we think is reasonable and that would be kind of planning for the worst. I guess the other thing I'd tell you it that that's why it's so important that we use the total portfolio we have at our disposal and that portfolio is both within that business. So within that business, as you know, within our Tools business there's residential, there's commercial, there's industrial. Within that business there is U.S. and there is international. And so trying to really use the strongest parts of the mix at any one point in time to drive business is what we're focused on doing. And then obviously as a Company we're trying to use the total mix of Newell Rubbermaid, so that if there are weaknesses there that we can offset someplace else.

So is it fair to say -- so you guys expect continued residential construction weakness but you don't expect a recession in the U.S.?

I would say the 1.5% to 2% kind of drag that we talked about before would not anticipate a full blown recession, no.

Got it. Got it. And then I just want to ask about on the Q4 guidance, it looks like your implied SG&A reinvestment would be roughly $40 million bucks, which is big, right? It would be up 300 basis points over two years ago. Is that right? Is that the right way to calculate it? I guess where would a lot of that incremental be coming from given how high the run rate has been.

I think it's actually a little lower than that in the fourth quarter. I think our SG&A is up about $70 million through September and we're saying $95 million to $100 million for the year. So we're looking, unless my math is wrong, more like $25 million to $30 million of reinvestment in the quarter.

Got it. Then it's my math that's wrong. Just gross margin, mix as a driver of gross margin, it's not something I guess we've spent a ton of time, that you guys spend a ton of time talking about. I know it's probably hard to forecast in the near-term. It seems to be something you've called out more and more often. Can you just give a little color on where that's coming from? I understand new products are generally higher margin. Is it that simple that your pipeline has been more robust or are there other things in play?

Really is a couple things. It's one, the first one you just said. We've talked about this before. Any time we launch new products or get in the near neighbor categories, our expectation from a planning standpoint, we're not 100% but we have a very, very good batting average here. But the expectation is that the new products improve the fleet average gross margin. So that's one thing, as we drive innovation and get in near neighbor occasion we're constantly seeing that as a opportunity to build our margin. The other thing is as we spend more money on consumer demand creation, we can spend it disproportionately again on the parts of our line-up. So within any given product segment or business unit, they have parts of their line-up that are better gross margin than others and we're, again, focusing more of our brand building marketing spending on the parts of the line-up that are better margins. So both building that mix by what we advertised market as well as by launching products and launching in the categories that have a better margins is probably the two key things.

Thank you very much.

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

Thanks, hi, guys.

Good morning.

First question is on Office Products. I think you said on your 2Q call market, Pat, I forget which one, that the delayed shipments plus the pull forward from 4Q to 3Q would add about $30 million to $40 million of sales in the quarter. It looked like is was about $20 million, $25 million of an impact in the quarter. How much of that was less of a pull forward than you thought and how much was less of a recapture of the $15 million in sales that didn't go out in 2Q?

Virtually all of the difference was less of a pull forward.

Okay. Fair enough. Then secondly, and this is maybe a little bit picky, but I think in your analyst day in February, you had talked about gross margins being up 125 to 175 basis points both this year and next year. This year obviously you do slightly better than that. Next year you're saying at least 100 bps. Is that a change or is that just me being a little bit picky there?

We do say in excess. Part of the reason there is we have to go through our budget process. We talked about it a little bit early on answer to Budd's question. Got a bit of a moving target on oil and resin cost right now, we're trying to zero that in. Also our pricing action is required also. We're very comfortable be in excess of 100. We'll give you more detail on the next call.

And the project acceleration savings obviously being pulled forward a little bit.

(inaudible) but $10 million got pulled from '08 into '07, which is a good thing. We've accelerated those savings, but that's small, about $10 million. We had said 50 million in '07, 70 in '08, we're now saying 60.

Okay, great. Thanks.

Your next question comes from Connie Maneaty with BMO Capital Markets.

Hi. I just have a follow-up. Could you talk about what's been going on in the international tools with the commercialization of these industrial bandsaws? Can you give us a little bit of detail and also what you call that group of employees that goes to the work site, how they all operate?

Yes. Well, they are field activation specialists is the way to think about them. What they are is they are people that really understand and can work with the end user to demonstrate. What we're doing, I would describe most simply, as adding feet on the street. What that means, you've got to bring these people in, you got to train them on our products, how they work, why they are better, make them experts on going into a manufacturing site and showing them how if they replace their existing bandsaws with our bandsaws, they will get productivity advantages and eventually cost per cut advantages. So that's what we're doing. As we add those people, train them up, send them out in the field, they can now cover several more accounts than we could cover before. We're getting deep penetration into geographies where we already existed and we're getting further into new geography, for instance, eastern Europe.

Wait, which part of the international business segment is growing the fastest?

Actually both Europe and Latin America grew double-digits for us. They grew about the same.

Great. Thank you.

Your next question comes from Linda Bolton Weiser with Oppenheimer.

Yes. Can you just clarify if the special tax item in the quarter was cash or noncash?

It's noncash for the year. Eventually it will be cash.

Right, yes. Okay. Thank you.

Your last question comes from Chris Ferrara with Merrill Lynch.

Hi, again. Just wanted to talk about the productivity. I know you guys have -- you targeted 2.5% of improvement. Can you just clarify what kind of productivity you see just as far as base productivity goes and what's related to Newell OpEx and project acceleration. What is sort of your target? Should we just look at restructuring savings going forward as the primary productivity savings number? Or like what would be in addition to that?

This year it's a big contributor, Project Acceleration is about 60 million, as we said, maybe a 50 million of that was from the gross margin line, Ron, is that right? 10 million in SG&A. Roughly a little more than half of our productivity this year is coming from Project Acceleration. As we move to a more sourcing type of model, I think we talked about this before, only about half of our production will come through our own facilities. So we'll get less from our own OpEx and our own facilities going forward. On the horizon, though, is working with our supply base and training them in the same techniques we use in our own facilities and get the agreements in place that we share in the productivity that they generate. The second, I'd say, untapped area is distribution and transportation. As you know, we're going through a reorganization of that whole network and taking about half of the DCs out of the network. That's a big driver going forward also.

Got it. Then do you guys, back onto gross margin, the mix impact. Do you guys forecast in a specific mix improvement number in your gross margin targets or is it something that you sort of leave as potential upside?

It's business by business. But there is some baked into our model going forward, yes. And in our estimates.

Got it. Thanks a lot.

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