諾威品牌 (NWL) 2008 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's first quarter 2008 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 homepage under Events and Presentations. A slide presentation is also available for download. A digital replay will be available two hours following the call at area code 719-457-0820. Please provide conference code 9477556 to access the replay.

I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Ms. O'Donnell, you may begin.

Thank you. Good morning, welcome to Newell Rubbermaid's first quarter 2008 earnings call.

Before we begin, let me take a moment to remind you that the statements made on today's call that are not historical in nature are forward-looking statements. As such, these statements are not guarantees and actual results may differ materially from those expressed or implied in the forward-looking statements. For a discussion of factors that could cause actual results to differ materially from those suggested by the forward-looking statements made today, please refer to our most recent Form 10-K and the forward-looking statement on the Q1 2008 earnings call presentation, which was posted earlier this morning in the Investor Relations section of our website at newellrubbermaid.com.

We will also be referring to non-GAAP financial measures on the call. A reconciliation of these non-GAAP measures, and the most directly comparable financial measures calculated in accordance with GAAP, is also available on our website.

So with that, I will turn the call over to our President and Chief Executive Officer, Mark Ketchum.

Thank you, Nancy, and good morning everyone. Thank you for joining us today on our first quarter 2008 earnings call.

I'm pleased to report that Newell Rubbermaid delivered solid first quarter financial results, in line with our previous guidance on both the top line and normalized EPS. While the U.S. economic environment continues to be very challenging, we generated strong growth in a number of our key businesses. Although we must react to the short-term turmoil, and are doing so, our primary attention remains focused on the long-term, building for sustainable excellence. We continue to launch innovative products that better meet users needs and build incremental sales, including the recent introductions of the Graco Sweetpeace Soothing Center, Rubbermaid Produce Saver, and the Pulse Microfiber Cleaning System from our Rubbermaid Commercial business unit.

We closed on two terrific strategic acquisitions in April, which expand our category and geographic footprint, enhance our margins and leverage innovation and branding. We are seeing a truly meaningful expansion of our European business, indicating our interventions in that region are taking hold, and we have enough confidence in our strategy to continue increasing our brand-building spending in this tough environment. We feel good about our direction and we are sticking with it.

Overall, net sales rose 3.6%, at the high end of our guidance range for the first quarter. This growth was driven by the impact of favorable currency, combined with double digit sales growth in our Home and Family, Rubbermaid Commercial and Rubbermaid Food businesses. We also generated high single-digit constant currency growth across our international businesses. Partially offsetting these positive sales trends were weaker results from our U.S. tools and hardware and office products segments. These are the businesses most affected by the weak U.S. economy.

Gross margin for the quarter was essentially flat. We generated the expected margin improvements from strong productivity, favorable pricing and mix, but unfortunately these were offset by a significantly higher than expected rate of inflation for source-finished goods and raw material. In our January forecast, we anticipated inflation at a little more than double the 2007 impact. Now, just three months later, we are estimating inflation impacts at about four times a year ago levels, nominally $170 million year-over-year.

I'm sure you are well aware of the speculative environment for many commodities right now. This is exacerbated by the impacts of inflation and the weak dollar in China, eroding the margin advantages of product source from that region. As previously communicated, we continue to take pricing actions to offset inflation, but there's a timing lag that can't be avoided. As a consequence, we are adjusting EPS guidance down and widening the range to reflect volatility and uncertainty. More on this later in the call.

On a normalized basis, Q1 EPS was flat year-over-year. Excluding charges, first quarter earnings per diluted share were $0.27, consistent with our guidance. Operating income was $130 million as compared to $136 million in the prior year. During the quarter we continued to invest to deliver our vision of transforming Newell Rubbermaid into a global company of brands that matter, and great people known for best-in-class results.

Our investment in strategic brand-building this quarter was up 9% to last year. I'm pleased to say we continue to see the benefits from strategic spending in our sales results. For example, our Baby and Parenting Essentials business delivered double-digit sales growth this quarter, reflecting strong sales of new and innovative products and the benefits of greater investment in advertising and promotion. Last fall, we foreshadowed our introduction of the Graco Sweetpeace Newborn Soothing Center, which completely reinvents the baby swing category. This product creates a multisensory environment and a unique motion that more closely duplicate the way parents intuitively soothe their infants. Since launching at the end of last year, sales of Sweetpeace have exceeded our projections.

We are seeing results from our end-user drive marketing focus in our Rubbermaid Commercial products business as well. This business delivered another strong quarterly performance, with double-digit sales growth. Rubbermaid Commercial continues to build on its market-leading positions by driving innovation, end-user conversion activities, and conceptual selling to facilities managers. And further, built on base business growth by expanding our product offerings. For example, into decorative refuse, smoking management, micro fiber cleaning and professional vacuums within the past 12 months.

We saw strong local currency sales growth outside of North America, led by Baby and Parenting in the EU, Tools & Hardware in Central and Eastern Europe and Latin America, and Office Technology in Asia-Pacific. We continued to see favorable results from the Television, Print and Internet Campaigns supporting our technology brands, led by DYMO and Endicia, our Internet postage business.

During our first quarter we announced two significant acquisitions, Aprica and Technical Concepts. Aprica is a leading Japanese brand of premium strollers, car seats and other related juvenile products. Aprica has an outstanding reputation for innovation, for supported by advance pediatric research, and has been recognized internationally for its dedication to child safety. This acquisition provides a springboard to broaden our baby and parenting presence across Asia, as well as to expand the scope of Aprica's sales outside of Asia. Furthermore, Aprica will enhance our design capabilities in lightweight strollers and car seats, and our skill in marketing to the premium segment. The Aprica acquisition also provides the critical mass needed for more shared resources in Japan, which will help accelerate investment in the Asia-Pacific region by another Newell Rubbermaid business units.

The Technical Concepts acquisition gives our Commercial Products' GBU an entry into the rapidly-growing $2.5 billion away from home washroom market. Technical Concepts is a leading global provider of innovative, touch-free and automated restroom hygiene systems, including hands-free water dispensing, soap dispensing and air fresheners. The solutions offered by Technical Concepts match the strong global strength in hygiene, conservation and lower-cost facilities maintenance. This acquisition fits squarely within our strategy of leveraging our existing sales and marketing infrastructure across additional product categories, categories where performance matters and customers will pay a premium for innovation. In addition, with approximately 40% of its sales outside the U.S., Technical Concepts significantly increases the global footprint of our Commercial Products business. The Aprica and Technical Concepts acquisitions both closed on April 1st. For the full year 2008, we expect these two deals to add 3 to 4 points of top line sales growth, and to be slightly dilutive to EPS.

We continue to invest in our initiatives to achieve best cost, restructuring our supply chain and leveraging the power of [one] Newell Rubbermaid. The Project Acceleration restructuring program is still on track to achieve over $150 million in cost savings by the end of 2009. Our latest example was announced last month. Our new Southeast distribution center consolidates four smaller warehouses, and will open in the third quarter of this year in Atlanta. We are also pleased to announce that we successfully completed the second phase of our SAP implementation. We went live on our Home and Family segment on April 1st. As with the first launch in North American office products last year, the Home and Family conversion went off without a hitch. The overwhelming success of our first two implementations gives us confidence as we continue our multi-year roll out of this best in class business process enabler. We expect to launch the third wave of SAP in our Tools & Hardware, and Cleaning, Organization & Decor segments in the fall of 2009.

Looking to the remainder of 2008, we are adjusting our guidance to reflect the changes we've seen in our universe since the last time we updated you in January. We are raising our top line sales growth guidance for the year to 6 to 8%, reflecting the benefits from the Aprica and Technical Concepts acquisitions, and the impact of favorable currency. We are also adjusting our gross margin expectations and EPS targets downward, to reflect the greater than previously anticipated impact of raw material and source goods inflation, driven by record-high energy prices and a weaker dollar. Nothing I read six months ago was suggesting $120 a barrel oil or $1.60 in exchange for the Euro. We like many others have been stunned by the unabating commodity price movement in recent months.

In response to these unwelcome short-term developments, we will continue to take the actions previously committed. First, we will continue to take pricing to recover inflation. However, we cannot implement pricing fast enough to get ahead or even keep up in the current environment. In the short-term, price recovery will lag inflation, which will result in hits to gross margin and EPS this year. Second, we are tightening our belt significantly on discretionary SG&A, to offset some of the gap between inflation and pricing. Third, we are funneling our resources, people and money into our quickest payout productivity and building projects. Our mantra is fewer, bigger, better. Fourth and finally, we are staying committed to building long-term shareholder value. Our investments and innovation and consumer-centric branding, investments in meaningful strategic acquisitions, investments in restructuring the supply chain for best cost, investments to leverage one Newell Rubbermaid for efficiency and effectiveness benefits, and investments in changing the culture to fit the new business model, all of these will continue without interruption.

At this point, I'll turn the call over to Pat, who will walk through the financials and the details of our updated guidance, before I return to provide summary comments. Pat?

Thanks, Mark.

I'll start with the first quarter 2008 income statement on a normalized earnings basis. Net sales for the quarter were $1.4 billion, up 3.6% to last year and consistent with our guidance of plus 2 to plus 4%. Foreign currency benefit of approximately 3 points, strong growth in our international business, and positive pricing more than offset core sale softness in our domestic Tools and Hardware, Office Products and Consumer Home products businesses. Our international business increased approximately 19% in total and 7% in local currency. Our domestic business was down about 2% for the quarter. From a business unit perspective, double-digit growth in our Home and Family segment and in the Rubbermaid Commercial and Rubbermaid Food businesses led the sales improvements for the quarter.

Gross margin for the quarter was $491 million or 34.2% of net sales, about 10 basis points lower than last year. This was less than our plan, due to approximately 70 basis points of additional raw material cost inflation, primarily resin, driven by the dramatic increase of oil and natural gas prices in the quarter. Inflation was offset by ongoing productivity initiatives, savings from Project Acceleration and favorable pricing. SG&A was $361 million for the quarter, up $23 million to last year. Brand-building investments across all segments and spending on corporate initiatives, primarily SAP, drove the increase. This increase was less than originally planned, in order to offset the additional raw material inflation we experienced during the quarter. Operating income of $130 million or 9% of sales was on plan, and represents a decrease of about $7 million or 5% to last year. Interest expense was slightly favorable to last year, driven by favorable interest rates and lower debt levels year-over-year, as the borrowings used to fund recent acquisitions were drawn in the latter part of the quarter.

The company's continuing tax rate was 28.5% compared to 29.6% last year. In the first quarter of 2007, the company reported approximately $2 million or $0.01 of period tax benefits. Normalized EPS for the quarter was $0.27, flat to last year on a normalized basis and in line with our January guidance. The company reported approximately $18 million or $0.06 in restructuring charges related to Project Acceleration in the first quarter, which are not included in the continuing earnings described previously. Operating cash flow used during the quarter was $123 million compared to a [source] of $50 million in the prior year. The decrease was attributable primarily to an increase in inventory. One quarter of the growth in inventory year-over-year is driven by foreign currency.

The remainder of the build was driven by our Office Products and Home and Family segments. Office Products' inventory levels reflect our efforts to avoid service-level interruptions experienced in the prior year during the critical back-to-school season, as we continue to execute on Project Acceleration. The increase in Home and Family inventory is due to a temporary build-up of safety stock in anticipation of our April 1st SAP conversion. While most of the inventory build was planned, our current inventory levels are higher than we would like them to be. We expect to reduce inventory during the remainder of the year to approximately the same level as December 2007, from days on hand standpoint. Capital spending was $40 million compared to $33 million last year.

I'll now take a few moments to talk about our first quarter 2008 segment information. In our Cleaning, Organization & Decor segment, net sales increased 1.6% or $7 million to last year in total, and were approximately flat in local currency. Strong double-digit growth in Rubbermaid Commercial and Rubbermaid Food was offset by softness in the Rubbermaid Home and Decor businesses. Operating income for the segment was $48 million or 10.4% of sales, a decline of $9 million versus a year ago. Higher raw material inflation, particularly resin, and strategic brand-building investments more than offset the contribution from higher sales. Office Products' net sales improved by 3.8% for the quarter, driven by a 5-point currency benefit. We did experience double-digit growth in the Office Technology business, and high single-digit growth in our international businesses in local currency. However, this growth was more than offset by softness in the domestic writing instrument market, which was down high single digits, driven by weaker foot traffic at our office product retailers. Operating income was $35 million or 8.2% of sales, essentially flat to last year, as improvements in sales and gross margin were offset by higher brand-building SG&A.

In our Tools & Hardware segment, net sales were $290 million, down $4 million or 1.2% to last year. Currency contributed 4 points to the top line. The company experienced low single-digit growth in our European and Latin American businesses in local currency. However, we continue to see softness in our domestic businesses, affected by the U.S. Housing market, which were down high single digits for the quarter. Operating income for this segment was $35 million or 12.1% of sales, up $1 million to last year, driven by strong productivity and favorable pricing, which more than offset raw material inflation and the softness in our domestic tool businesses.

In our Home and Family segment, net sales were $257 million, an improvement of $30 million or 13.3%. Approximately 400 basis points of this improvement represented a shift from Q2 to Q1, due to our SAP implementation and the timing of certain commercial activities. The remaining high single-digit growth is driven by Baby and Parenting Essentials and Beauty and Style businesses, led by new product launches and demand-creation activities. Operating income of $31 million or 11.9% of sales was flat to last year, as volume gains were offset by increased strategic SG&A spending for new product launches and brand-building investments.

Turning to the full year outlook. We project net sales to grow between 6 and 8% reflecting our recent acquisitions of Technical Concepts and Aprica. We now expect foreign currency to contribute approximately 2 points of growth for the year. Internal sales growth, excluding the impact of acquisitions, is now projected to be between 2 and 4%. From a segment standpoint, we expect our Home and Family business to grow approximately 20% for the year, driven by the Aprica acquisition, new product introductions, and demand-creation activities. Internal sales are now expected to grow high single digits, supported by new product introductions, and demand creation spending. Cleaning, Organization & Decor will grow high single digits, attributable to our Technical Concepts acquisition, as well as continued strong growth in our Rubbermaid Commercial and Rubbermaid Food businesses. Internal sales are still expected to grow low to mid-single digits.

We now project the Tools & Hardware segment to be approximately flat to last year. As we saw in the first quarter, we expect our international business to be up low to mid single digits, excluding currency. We expect approximately 2 to 2.5 points of foreign currency benefit for this segment. With North American housing starts still estimated to be between 800 and 900,000, we expect our domestic business to be down mid-single digits. We still expect our Office Products segment to experience flat to low single digit growth. The segment will benefit from approximately 3 points of growth from foreign currency. We expect double digit growth in our Office Technology business, and our International business to be up low to mid single digits in local currency. In North America writing instrument business will be down mid to high single digits, as the office products retail environment continues to be very challenging.

We now expect gross margin to expand between 25 and 75 basis points. We continue to see benefits as planned from Project Acceleration, combined with ongoing productivity initiatives and favorable product mix. The reduction to our previous guidance is driven by dramatically higher inflation from both raw materials, primarily metals and metals, and sourced finished goods, primarily driven by raw material inflation, the weak U.S. Dollar and local labor rate inflation. We now estimate the impact from raw material and source product inflation to be between 160 and $180 million, compared to our previously projection of $100 million on our last call.

As an example of the rapidly increasing raw material environment, oil prices have soared 31%, and natural gas 30%, since our January call; both of which are key inputs to the cost of resin. Our current range of inflation assumes the following. For resin, the midpoint of our guidance assumes a CDI average cost per pound of $0.87 for the year, which corresponds to their latest, meaning April 23rd, guidance. This represents a 9% increase to their January 2008 guidance, and a 22% increase to last year's average CDI cost. The high end of our inflation range reflects an additional $0.02 per pound increase in average cost for the year.

For finished goods sourcing, one of the key drivers for finished good sourcing inflation, outside of raw materials, has been the weakening of the U.S. Dollar versus the Chinese RMB. From January '07 to January 2008, in that period the dollar weakened approximately 6.5%, and from January 2008 to now, an additional 4.5%. The midpoint of our range assumes continued weakening of the dollar of approximately 3 to 4% over the remainder of the year. We have pricing initiatives planned for the back half of the year which will help to offset some of this unprecedented inflation. However, the rate of increase in costs since our last call means that we will not be able to offset this inflation within the current fiscal year.

We remain committed to our strategy to reinvest a portion of our gross margin expansion and brand-building initiative, and other corporate initiatives. However, in light of the increased gross margin pressure that we are experiencing, we have reduced our planned SG&A spending for the year. This level of spending now represents approximately two-thirds of our revised gross margin expansion. We are lowering our full-year guidance for normalized EPS to between $1.80 to $1.90 per share. I'd like to now take a moment and walk you from our last estimate to this estimate. The midpoint of our last estimate was $1.97 a share. We have a $0.15 to $0.20 reduction from raw material and sourced product inflation, in addition to approximately $0.02 dilution from acquisitions. This was partially offset by approximately $0.07 of pricing and SG&A actions. This gets us to our midpoint of our revised guidance. For perspective, the midpoint of our current guidance represents a $0.03 improvement to last year, while offsetting between $0.40 to $0.45 of inflationary pressure. The outlook does not include pretax restructuring charges of 125 to $150 million.

We continue to expect cash flow from operations of between 600 and $650 million net of approximately $100 million of restructuring cash payments. This expectation includes our plan to reduce inventories to more normalized levels during the rest of the year. Capital expenditures are estimated in the 160 to $180 million range, including expenditures for SAP.

Turning to the second quarter, we expect our net sales to be up 6 to 7%, including the impact of acquisitions, and internal sales to be up between 2 to 3%, driven by continued strength in our Home and Family segment, the Rubbermaid Commercial and Rubbermaid Food businesses, and our International businesses. Foreign currency benefit is expected to be approximately 3 points for the quarter. We anticipate EPS for the quarter in a range of $0.47 to $0.50, which includes approximately $0.02 to $0.03 of dilution from the recent acquisitions, which includes the amortization of acquired intangibles and other one-time acquisition costs.

Before we open the call for questions, Mark has some final comments. Mark?

Thank you, Pat.

First, I would like to thank all of our employees for their continued hard work and enthusiasm in these particularly tough times. Let me add a special thanks to all the people who worked diligently to complete the very successful SAP conversion in our Home and Family segment. This represents a ton of work. The fact that this was largely invisible to the outside world is a testimony to their success.

As we manage through a difficult economic environment this year, we remain focused on executing the long-term transformation of Newell Rubbermaid into a best-in-class consumer branding and marketing company. I am disappointed that we are not able to fully offset the extraordinary inflationary impact of recent months. But I am no less confident our strategies and actions are in the best interest of building sustaining shareholder value. We are committed to investing in strategic brand-building to strengthen our brands and drive sales growth; to delivering gross margin expansion, fueled by better productivity and mix; and to achieving solid operating income and EPS growth over the long term.

I am proud of the progress that we are making, and I'm confident that we are doing the right things to improve our business. We firmly believe the investments we are making in our brands will help drive profitable top line sales growth. We are coming together as one company to improve efficiency and boost productivity, and we are collaborating more, benchmarking more, and sharing best practices to help create a culture of excellence. I look forward to sharing the results of our efforts with you on next quarter's call. As always, and especially at this time, we thank all of our shareholders for their continued support.

Thanks for joining today's call, and I will now ask the Operator to open up the line for questions.

Thank you.

(OPERATOR INSTRUCTIONS)

Your first question today comes from Budd Bugatch with Raymond James.

Good morning Mark. Good morning Pat. Just a couple of quick questions. One, I saw Home and Family, significant revenue growth but yet no profit growth, and Pat I know you said strategic spending on SG&A. Can you give us a little bit of better granularity and how that might unfold for the rest of the year?

You are right. There was additional spending in the quarter to help drive sales growth, and for the full year I am going to have to split it between Home and Family as it existed before the Aprica acquisition, and then I'll talk about with Aprica. The margins for the year for Home and Family from an operating standpoint will be down slightly, maybe 20 or 30 basis points without Aprica. So we expect high single-digit growth in sales and mid single-digit growth in income. With Aprica, however, because of the start up costs there, there was very little income from that acquisition this year, so the reported numbers will be down around 12%. I think last year was 13.8. So it will add to sales but very little income for this year.

Okay. And just on the EPS guidance for the year and year - and thanks for that walk through with raw material, I wonder if you can give us - or maybe refresh me as to how that raw material and pricing will work up through the year from your $0.07 recovery from pricing, and I think productivity or I can't remember --

From SG&A, yes. $0.07.

Yes, the SG&A curtailment. How much is between pricing and how much is SG&A, and is the pricing pretty much a fourth quarter --

The pricing is more back-half loaded and the SG&A cuts are also - the split between the two is roughly 50/50.

Will that then - will the pricing be enough to recover all the raw materials growth that you are seeing then?

Not this year. We'll cover a rough - a little under half this year, but on a run rate as we leave the year, it will be closer to 60%, and then we'll need to take additional pricing in January to recover the rest.

Okay. And just finally, can you talk a little bit about the balance sheet? You had $900 million of short-term debt at the end of the quarter. I know you had a $500 million note offering. How will the balance sheet or how does it look now?

Well, the short term, that - it represents two things. One we have a $450 million accounts receivable financing structure that comes due in September which we'll pay down, and then there's a $250 million note that resets in July, and we'll remarket that note in July. So that is most of the short-term debt that is out there. So that will become long-term debt, I guess, as we leave the year. The rest is commercial paper.

$500 million in notes. They have been marketed, you went - that to market?

I'm sorry, say that again?

Aren't there $500 million of notes that you were marketing now after the quarter?

No. We issued $750 million of new notes right before the end of the quarter, like March 29th, March 30th.

Okay. Thank you very much.

Your next question comes from Wendy Nicholson with City Investment Research.

Hi. My first question has to do with the pricing outlook, and I guess the question, given what we are seeing from the consumer and maybe further weakening of consumer's willingness to spend more for household products, are you worried that there will be more of a drawdown on your volume side if you try and push the envelope too hard on pricing? And what is your confidence level on that? And my second question is on the cash flow side. It sounds like your outlook for cash flow is very good, but can you reiterate that there is no risk to the dividend, number one, and number two, it strikes me that this would be a wonderful time to have a share buyback program. I'm wondering if that is creeping up in terms of priority for cash flow as we go forward here.

Wendy, let me start with your first question. I think your assessment of pricing is exactly right. In this current environment, it is very difficult to take pricing in certain of our categories because our retailers obviously are suffering problems with foot traffic, and the last thing they want to do is show more pricing to their end user, in fact they are obviously trying to do the opposite. So that's what is built into our assumptions, that our pricing will necessarily lag the inflationary rate. We just know we can't get it all in the short term. So number one, we, as you know take pricing generally in six month increments, so our next round, what we didn't take in January, is July, and we won't be able to get it all there because the retail market just won't be ready to accept it all. So that is what is built into our assumptions on price recovery. I'll let Pat answer the second half.

From a cash flow perspective, we still feel good about our range; we were actually near the high end of the range on our last guidance of 600 to 650. The take down in earnings cost us about $30 million in cash for the year. So now we are more in the middle of that range. That cash flow, though, includes the reduction of our inventory back to the low 80 day mark, which is where we ended last year. So we do have some inventory to take out of the system and some work to do there. As far as the dividend, the dividend is very secure, and we have no intention of changing the dividend.

Any comment on the buyback? A potential buyback?

I think in the short-term, given the acquisitions we've just made, that is not going to happen in the near-term. Again, as we said before, we will continue to look at that in the longer-term.

Okay, and then I just have a follow-up on that question on the inventory drawdown, Pat. Obviously to the extent, whatever you're plans - you know, turning your plants off or operating at whatever, not perfect capacity utilization as you try and work through that inventory, there's obviously going to be a gross margin hit, but I assume you feel like this new target for the gross margin, 25 to 75, includes the ramification of all that inventory drawdown?

It does.

Okay. Thank you very much.

Your next question comes from Chris Ferrara with Merrill Lynch.

I want to just ask about I guess the approach going into guidance. One of the things we've seen with some of the more discretionary stocks out there are management team's cutting guidance and then cutting again, and then cutting again, and for you guys it seem to be different, it seems like it's not as top line related as it is materials cost. Can you give a little color into what your approach was? How concerned are you with the idea that you could potentially have to come back to the street again with even lower guidance after? So I guess what is your conviction level in this guidance and with respect to the top line as well?

Let me comment both on top line and bottom line, Chris. On top line, I think we have a great deal of confidence, and that's part of the reason why we took our guidance up both in terms of the impact of the acquisitions but also reflecting currency, but if you really think of what we are doing, we are continuing to drive new product innovations. We are continuing to invest incrementally in marketing those innovations. We have positive contributions from currency, and we have proof in a number of businesses, where the business climate is better, that these investments are working. So we feel pretty good about the top line number.

The bottom line obviously is going to be the toughest one, because the bottom line was affected not by our sales but in fact by this inflationary environment. It's one of the reasons that we gave more visibility than we normally would about what are our assumptions in terms of resin pricing and FX going forward, because frankly if we sat here three months ago and you asked me the same question I would have answered it the same way. All of our - all the information we use on projections are the same best sources that are available to you as well, so who knows? All I can tell you is that none of those sources were projecting what we saw in the last three months.

For instance, if we look at the current CDI, which is the major index we used to predict resin, it is an index that tries to predict throughout the balance of the year. So it's not just a point in time, it's a projection going forward and it's a projection that was updated yesterday and updated based on their knowledge that oil is $115 to $120 a barrel. So it's based on that, but if oil went through $140 or $150, we would be back? Yes, probably we would. So that's the only thing I can tell you, is that it's kind of a crazy time trying to project those. We use the best information available.

As Pat said, we had a little bit of pad to protect us from it going a little further, and that is what is built into our numbers today, but if the numbers continue to go crazy, and what's what I would describe the last three months, as going crazy, yes, we would be back. But I feel we have it covered within the range of our ability to predict, and that's why as I said we try to be more transparent, so you can see anything that is coming down the pike, either good news or bad news, by also watching those same kinds of Indices and exchange rates.

That is really helpful. Just as sort of a follow-up to that, with respect to the top line, I know with cash flow, I think Pat just said, you know, we were pacing the top end of the range and now we are more at the middle end of the range, and the fact that you are basically maintaining your organic, like ex-currency, ex-acquisitions sales outlook of 1 to 2, and maybe it's zero to 2, or 1 to 2, are you at the lower end of that range now as opposed to where you were before? I guess it's - sorry to be long-winded, but I mean to widdle it down, is the macroeconomic environment worse today relative to your guidance than it was three months ago? And why have you been able to maintain sales despite that, even excluding currency?

Well, here is maybe another way to look at the whole sales picture. We are facing declining markets in a number of our key U.S. markets. Tools & Hardware more broadly in the U.S. now; Office products, probably excluding our Technology business in the U.S.; Home Decor, which would include our Levolor, our Amerock and our Ashton business. Together, those businesses in the U.S. are 35 to 40% of our sales, and we are seeing those market decline an average of 5 to 10%. So our expectations that we'll be able to hold our own with the kind of innovations we are doing, despite the soft retail and the emphasis that a lot of the retailers have on driving price, we're driving our innovation and expect to hold our own in those. We'll offset that decline in that 40% with growth in the other 50 - the other 60% of our businesses, which is the balance of our domestic business and of our international businesses; those markets are not being affected with declining markets the way I just described the other ones are in the U.S. In those, we expect on average to be growing 5 points of kind of core - what I would call core volume growth, unit volume growth, and then we add on top of all of that across the world these positive impacts of currency and pricing, and that's what gets us to the 2 to 4% top-line growth that we feel confident of.

So what I would say is holding our own in a lousy U.S. economy that is affecting a number of U.S. businesses, and growing our unit volume average of 5% around the balance of the world, driven by our continued investment in innovation and marketing support. So that's not a great story, but it's still a story we are pretty proud of, and it's one of the reasons we are sticking to what we are doing in terms of continuing investments in innovation and SG&A.

Thanks a lot. I appreciate it.

Your next question comes from Joe Altobello with Oppenheimer.

Good morning. Just wanted to follow up on Chris's comment or question on the top line. If you go back to the October call, you guys talked about the '08 top line being up about 2 to 3% on the base business, with about a 3 to 400 percentage point - I'm sorry, 3 to 400 basis point drag from the economy in housing; what is that second component today, that 3 to 400 basis points?

I'll have to get back to that. I don't have that number. Another way to look at our sales, a little bit there as Mark just described, is right now our prediction on currency is about 2 points. We're going to get a little more than a point in pricing that will [read] through the year. So our core sales growth will be flat for the year, but if you split that - our international businesses we expect to be up similar to what we saw in the first quarter on a local currency basis, up to mid to high single digits, but our domestic business will be down, also as we saw in the first quarter, low single digits. We were down 2% in the first quarter, and we expect that to continue. What is that drag in the U.S.? It's probably - it could be as much as 5 points now, 5 or 6 points I guess. But I haven't really thought it through that way.

It seems to imply, actually, that your base business has improved a little bit, ex the macro issues. That's why -

Again our core sales we expect to be flat, with the split that I just gave you, and then Mark just gave it to you a little bit differently, by business. I don't think it's changed much, our core sales growth assumption, at least in January, I'm not sure about October, but January is about the same.

Going back to Mark's comments about having a lot of confidence in the top line outlook, it seems like the issue that you guys are facing, a lot of it is unfortunately outside of your hands. I mean, given retailers, whether they are aggressively reducing inventory, and I would like to hear your comments on that, or the economy worsens, so it seems like - I am just trying to figure how you guys can have a lot of visibility to the top line when the issues are primarily macro in nature at this point?

Again, what we have to do is take our best projection on the balance of the yea,r and our best projection is that the U.S. economy is not going to get better, and that the current drags or headwinds that we are seeing in those businesses that I already described - in the U.S., Tools & Hardware, Office Products, ex-Technology, in our home decor businesses - those businesses we think are going to face the same kind of headwinds throughout the balance of the year, so we are not counting on those getting better. So again, our business model counts on growing and growing strongly in the U.S. businesses that are not as affected by the economy right now, and all of our international businesses, which are pretty robust.

Are U.S. retailers aggressively, or more aggressively, managing inventories at this point? And I'm talking about the Home Depots and the Staples, in particular.

They obviously - they are aggressive, and they are aggressively trying to get foot traffic back into their doors, right, and they are trying to do it with promotional items and things like that. Sometimes those promotional items are not in our categories, and so it's one that is kind of hard to answer in the macro, but there's no question that they are out there beating on their suppliers for, "Give us something that is going to help get the customer back in the store." What we are trying to give them is innovation, and innovation does get customers back in the store. There's a long history that says you can excite consumers with innovation, and that's what we are continuing to focus on, not trying to just drive them with price-off deals or two-for-ones.

And then lastly, the 2Q EPS guidance, it says it includes some one-time acquisition costs. Can you quantify that?

Again, the acquisition hits about $0.02 to $0.03.

$0.02 to $0.03, okay, sorry. Thanks.

Your next question comes from Connie Maneaty with BMO Capital.

Good morning. Pat, can you give us a breakdown of how products are sourced in low-cost countries? Which regions represent what percentage of source product? And outside of the dollar and raw material inflation, what's going on with just the general cost of doing business and wages?

I can't give you exact percentages, but I will say that the large majority of our source product comes from China. I don't have that exact percentage in front of me, but it's more than 75%. That's the major currency that we are dealing with from a currency standpoint versus the dollar. That's a major impact on the cost. The other is raw materials; the same raw material inflation we are seeing, they are also seeing there. The third, it's minor though in comparison. There is labor rate inflation there. We are looking at low double digits right now, in the 10 to 15% range, but labor is only about 5% of the components of the cost. So in dollar terms, it's not as big an impact as raw material and currency.

Okay. And my follow-up question is, from all of the raw material gurus you talk to, which basic materials do they think are in a speculative bubble, and which may be moving permanently higher because of a shift in supply and demand?

I don't think we get that kind of guesstimate. Personally, I think oil is a speculative bubble. One thing - you know, all of us watch that. It's very visible, and you know for every barrel that is consumed there are six or seven barrels traded. So that is pretty speculative, I would say. I don't know that our other commodities see nearly that kind of speculation, but since obviously some of our commodities are tied to the price of oil and natural gas, we get swept under that same speculation.

If I could just ask a last question on the portfolio. A couple of years ago I think you said you had your portfolio pretty much where you wanted it to be. Given the change in the environment, do you still have what you think is an optimal portfolio, or are you considering either some divestitures or more reductions in the product line?

Nothing major from a divestiture standpoint. We continue to evaluate product lines and every year we downsize certain parts of the product lines that continue to either not respond to innovation or to operate in a more commodity-like way, and so we are every year continuing to reduce that percentage of our business that I would call commodity-like, but no major reductions right now. The housing market will come back, and when it does we'll be happy again that we are in Tools, and Office Products will come back. Those are businesses that, for the long haul, we still like. They are good businesses.

Okay. Thanks.

Your last question is a follow-up and it will come from Chris Ferrara with Merrill Lynch.

I wanted to ask about SAP. Why are you waiting until the back half of '09 for the go live on Cleaning, Org & Decor and Tools & Hardware, when you are just getting through your second phase right now?

It's a big part of our business, and we just have a lot of prework to do to get that in shape to take it live. So that's the timeline we set up originally. It's the same timeline that we communicated previously, so nothing's changed from that perspective.

Thanks.

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