諾威品牌 (NWL) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid second quarter 2008 earnings call. At this time participants 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 being 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 888-203-1112 or area code 719-457-0820 for international callers. Provide the conference code 4524394 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, everybody. Welcome to our second quarter 2008 earnings call. Joining me today are our President and Chief Executive Officer, Mark Ketchum, and our Chief Financial Officer, Pat Robinson. As usual, Mark will be discussing the highlights and progress for the quarter and Pat will follow with details on our financial performance and the outlook for both third quarter and full-year 2008. Following prepared comments we'll be happy to take your questions.

A couple of items before we begin. First, let me remind your that the statements made on today's call that are not historical in nature are forward-looking statements. As such they include risks and uncertainties. Actual results may differ materially from those expressed or implied in these forward-looking statements. For a discussion of specific risk factors that could cause actual results to differ materially, please refer to our most-recent quarterly report on Form 10-Q and the related exhibit 99.1, as well as the forward-looking statement information on the earnings call presentation, which was posted earlier this morning on our website in the investor relations section. We'll also be referring to non-GAAP financial measures on the call. A reconciliation of these non-GAAP measures to the most-directly comparable financial measures calculated in accordance with GAAP is also available on our website.

With that covered, thank you, and I'll now hand it over to Mark.

Thank you, Nancy. Good morning, everyone, and thanks for joining us on our call today. Our 2008 second quarter was certainly eventful. As all of you are aware we're living in some extraordinary economic times. We have soft consumer spending in several of our US markets, exaggerated material cost inflation and turbulence and uncertainty in the financial markets. But despite the challenges I'm proud of the progress that we're making on a number of fronts. To be clear we're not happy with our 2008 outlook, but 2008 is not indicative of our underlying strength or our future potential. We're a much better Company today than we were three to four years ago, and with the actions that we're taking I'm confident we will emerge from today's difficulties in even better position to win in the future.

To begin I'm pleased to report Newell Rubbermaid met or exceeded previously-announced guidance for the quarter. Total net sales rose 7.8%, eclipsing the high end of the guidance range we provided on the last call. Internal sales, which exclude the impact of major acquisitions, rose 3.2%, slightly above expectations as the result of favorable currency exchange rates. Growth drivers during the quarter included double-digit internal sales increases in Rubbermaid Commercial products, Rubbermaid Food Service and our international Office Products business, as well as high single-digit sales growth in our Baby & Parenting GBU. These strong results more than offset expected sales declines in our North American writing instruments and Tools & Hardware businesses, where the weak US economy continues to be a challenge. Our overall solid top-line performance validates our strategic focus on investing in innovation and building brands that matter. In fact, the strategy is even more important in a tough economy. Consumers are shopping for superior value and performance and many of our brands and our products are delivering.

Second quarter normalized earnings per share were $0.49, consistent with guidance. The decline of 12% versus last year is due primarily to lower gross margins, partially to offset higher sales and lower structural SG&A. Operating income was $230 million as compared to $248 million in the prior year. Gross margin for the quarter was 34.1%, a year-over-year decline of 160 bases points. We generated strong productivity savings as planned plus favorable and mix, but these positives were more than offset by dramatic input cost inflation, particularly in our resin-intensive businesses. We now expect to incur input cost inflation between $275 million and $325 million this year compared to our estimate of $170 million just three months ago. We announced two weeks ago that run-away inflation in oil and resin had permanently changed the viability of certain categories and product lines. In response to this new reality we took decisive action on a couple of fronts; namely strengthening our product portfolio through the exit of certain product categories, plus aggressive pricing initiatives.

Let me talk about our portfolio first. Operating in today's extremely volatile commodity environment we have felt the most pressure in a few low-margin, low value-added product lines, particularly where resin is a high percentage of the cost of goods sold and where the consumers' interest for paying for innovation is relatively low. In most cases these products contributed only marginally at the gross product line. We've talked to you on numerous occasions about creating a new business model at Newell Rubbermaid based on strong consumer-meaningful brands. Over the past several years that strategy has led us to dramatically shrink the portion of our portfolio that follows into commodity-like products rom over 40% in 2003 to about 12% in 2007. The extraordinary market conditions that we now face compel us to be even less patient in turning around or downsizing the remaining commoditized categories.

Therefore, we announced on July 15th that we are taking definitive steps to strengthen our overall portfolio, reduce our resin exposure and protect our margins and our profitability. We expect to divest, downsize or exit approximately $500 million of sales of selected low-margin mostly resin-intensive categories. This is not a new strategy. This is an acceleration of a strategy that has already been in place. While the details and the exact timing of the plans have not yet been finalized I can tell you that a significant percentage of the affected categories will be within the home products and office organization businesses. These were difficult choices because many of these products have long been associated with the iconic Rubbermaid brand, but at today's prices, plastic is no longer the economic solution it once was for many basic products.

These steps are necessary to ensure the long-term growth and prosperity of Newell Rubbermaid. The goal of these portfolio investments is to eliminate the significant swings in our performance caused by plastic resin. Once our plans are completed resin input costs will be manageable in the ordinary course of business like any other raw material. We will still manufacture products containing plastic resin, but they will be in categories where resin represents a much smaller part of the cost structure and where our brands and our innovation can support price increases whenever necessary, such as in Rubbermaid Food Storage products, Rubbermaid Commercial products and Graco®.

In recent years we have worked hard to create a more focused and profitable portfolio that can serve as a growth platform. We downsized the business by about 20% and we improved gross margins over 500 basis points between 2003 through 2007 through this strategy. Once we complete the new portfolio rationalization we expect gross margins to improve incrementally by over 200 basis points and EPS to increase by $0.05 to $0.10, so you can see that these moves are both on strategy and significant.

The other action that we are undertaking to help combat inflationary pressure is aggressive pricing. This initiative will affect a number of our product lines beginning October 1st. These pricing increases will be substantial, over 20% in some cases. In addition, we will initiate a new quarterly price adjustment mechanism within the Company's resin-intensive businesses. These price increases will go a long way towards regaining a more reasonable margin structure in the affected categories in 2009.

As we look to the remainder of the year we have adjusted our full-year, 2008, normalized EPS expectations to a range of $1.40 to $1.60. With today's highly- volatile commodity markets it's very difficult to predict where oil, natural gas and resin costs will be over the next six months; however, we believe we have taken an appropriately conservative approach in forecasting the range of possible outcomes, with the low end of our guidance reflecting an even weaker consumer spending environment and a rise in the price of oil to as high as $200 per barrel by the end of the year. Although we have taken our EPS target down for the year we are holding our projected sales growth guidance to 6% to 8% and our internal sales growth forecast to 2% to 4%. Currency will account for a large part of the growth. The remaining core sales growth is due largely to the strength of new products, market share gains, and July 1st pricing initiatives already incorporated in the previous guidance.

As I mentioned earlier, our ongoing focus on consumer-driven innovation and strategic brand building is an important factor to help (inaudible) top-line results. For example, our Home & Family segment sales are up high single digits year to date, excluding acquisitions. In addition to Sweet Peas, the Baby & Parenting business is being propelled by the launch of the Graco®.. Nautilus® three-in-one car seat, which went into full distribution this month. The Nautilus® offers parents a complete car seat solution as their child grows. It converts from a five-point safety harness for small children to a high-back seat belt option for toddlers to a backless booster seat for kids up to 100 pounds. This makes it the only forward-facing car seat your child will ever need. Early sales results are very encouraging.

We have just started shipping line of Calphalon® heating electrics, including products like a countertop oven, a slow cooker, a waffle iron and contact grill. This new line expands the well-known Calphalon® brand into a natural near neighbor category. Consistent with the brand's heritage we combined sleek and stylish design with intuitive controls and best-in-class heating performance. Retailer sell-in has been very gunned we have high hopes for this launch. You can look for the new Calphalon‚® electrics in stores this fall. The continued success of our food storage innovations -- Produce Saver, Easy Find Lids and Premier -- have helped drive double-digit, year-to-date sales growth in our Rubbermaid Food Service business unit. By offering important features, such as longer produce storage life, easier organization storage when not in use, and stain and odor resistance we have demonstrated our ability to bring consumer-meaningful innovations to the durable food storage category, and these are just a few examples.

In other news we are pleased to report that early integration of Aprica and Technical Concept acquisitions is going well. The two transactions closed on April 1st and together added 4.6 points of top-line growth in the second quarter. While we still expect slight dilution in 2008 we are growing even more optimistic about the long-term potential of these acquisitions. Our international business continues to be a growth driver for us, fueled largely by stronger results in our European Office Products business. The weak dollar is working in our favor here, but even excluding currency effect international sales rose 6% during the quarter. Lastly, we continue to make good progress on our efforts to leverage the scale of the Company and achieve best total cost. Our SAP implementation at Home & Family has progressed smoothly and we are in the planning stages for our next go live in our Cleaning, Organization & Decor and Tools & Hardware segments in the fall of 2009. Our project acceleration restructuring program is still delivering as expected. With the recently-announced portfolio rationalization we will expand the scope to deliver increased savings now estimated at $175 million to $200 million annually and conclude the program in 2010.

So even as I reflect on our 2008 results I am optimistic. The challenges we face from the volatile commodity markets and the depressed macro economy are significant but I'm encouraged by the many positives working to drive our transformation into a best-in-class consumer branding and marketing Company. Our corporate strategy of creating consumer-meaningful brands, leveraging the advantages of working as one Company, achieving best total cost and fostering a culture of excellence is making us a better Company. The success of this strategy, even in today's challenging environment, gives us the confidence to continue making the necessary investments in our brand building and our other corporate initiatives to drive sustainable profitable growth.

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

Thank you, Mark. I'll start with our second quarter 2008 income statement on a normalized earnings basis. Net sales for the quarter were $1.8 billion, up 7.8% to last year and above the high end of our guidance of plus 6% to 7%. Internal sales, which exclude the impact from the Technical Concepts and Aprica acquisitions, increased 3.2%. Foreign currency benefit of approximately three points, continued strong growth in our international businesses and positive pricing more than offset softness in our domestic Tools & Hardware, Office Products and Decor businesses. Our international business increased approximately 17% in total and 6% in local currency, while our domestic business was down about 1% for the quarter.

From a business unit perspective double-digit growth in our Rubbermaid Commercial, Rubbermaid Food and European and Asia-Pacific Office Products businesses and high single-digit growth in our Baby & Parenting Essentials business led to improved sales for the quarter. Gross margin for the quarter was $623 million, or 34.1% of net sales, about 160 basis points lower than the prior year. Improvements from ongoing productivity initiatives, savings from product acceleration and favorable pricing were more than offset by significant inflation in our raw materials, most notedly oil and natural gas-based resins, as well as sourced finished goods.

SG&A was $393 million for the quarter, up $36 million the last year. Incremental SG&A from acquisitions, currency translation and continuing brand building investments drove the increase. Operating income of $230 million, or 12.6% of sales, was down $18 million, or 7% for the last year. Interest expense was $11 million higher than the previous year as a result of the additional borrowings used to fund recent acquisitions. The Company's continuing tax rate was 28.5% compared to 29.5% last year. Normalized EPS of $0.49 for the second quarter is in line with our April guidance. The Company recorded approximately $69 million, or $0.16 per share in restructuring charges, including asset impairment related to product acceleration, which are not included in the containing earnings described previously.. Consistent with our release on July 15th the Company recognized asset impairments in connection with its intention to divest, downsize or exit certain consumer product categories.

Now take a few moments and talk about our second quarter 2008 segment information. In our Cleaning organization in the core segment net sales increased 12%, or $65 million the last year. Excluding acquisitions internal sales increased 4.7% in total and 3.4% local currency, as strong double-digit growth in Rubbermaid Commercial and Rubbermaid Food was offset by softness in the Decor business. Operating income for the segment was $75 million, or 12.2% of net sales, a decrease of $7 million, or 8% versus a year ago. Higher raw material inflation, particularly resin, more than offset the contribution from higher sales and acquisitions.

Office Products net sales improved by 4.3% for the quarter, driven by a four point currency benefit. From a GBU perspective growth in the segment was led by our Office Technology business, which was up double digits in the quarter. From a regional perspective, Europe and Asia-Pacific were up low double digits in local currency while North America was off mid single digits the last year. European comps benefited from a soft second quarter in 2007 driven by service level interruptions that did not repeat this year. Operating income was $103 million, or 16.7% of sales, down $6 million the last year as the drop-through from increased sales was more than offset by raw material inflation and increased investment and strategic SG&A.

In our Tools & Hardware segment net sales were $322 million, down $2 million or 1% the last year. Currency contributed three points to the top line. Our domestic business was down mid single digits for the quarter, as we continue to be affected by continued softness in the US residential construction market. Operating income for the segment was $47 million,. or 14.5% of sales down $1 million the last year, as productivity gains and favorable pricing were offset by raw material inflation. In our Home & Family segment net sales were $280 million, an improvement of $43 million, or 18.3%. Internal sales, which exclude the impact of the Aprica acquisition, grew $7 million, or 2.7%. As you recall we had approximately 400 basis points of shift from Q2 to Q1 due to our SAP implementation and the timing of certain promotional activities. The year-to-date internal growth rate of approximately 8% is on track to deliver our full-year expectation of high single-digit growth in this segment. Operating income of $28 million, or 9.9% of sales was down $3.5 million the last year, as the drop-through of increased sales was more than offset by increased strategic SG&A spending for new product launches, brand building investments and the Aprica acquisition.

Turning now to our year-to-date results, net sales were $3.3 billion, up approximately 6% the last year in total and up about 3.5% on an internal basis, which includes about three points of currency benefit. Our international business increased approximately 18% in total and 7% in local currency, while our domestic business was down about 1.5% year to date. From a business unit perspective, double-digit growth in our Rubbermaid Commercial and Rubbermaid Food businesses and high single-digit growth in our Home & Family segment led the year-to-date sales improvement. Gross margin for the first six months was 34.2%, down 90 basis points from the prior year, as significant raw material and sourced finished goods inflation more than offset positive pricing, savings from project acceleration, and gains from ongoing productivity initiatives. SG&A for the first six months was $753 million, or $57 million higher than last year, driven by the Technical Concepts and Aprica acquisitions, the impact of foreign currency and continued investment in brand building and strategic corporate initiatives. Year-to-date operating income was $360 million, or 11% of sales, down $25 million, or 6% over last year.

Turning now to cash flow, operating cash flow for the first six months was a use of $121 million compared to a source of $173 million last year. About 40% of the decline in the front half is timing, which is expected to reverse in the back half of the year. Specifically this relates to the timing of cash tax payments, as well as timing the of cash payments for accrued liabilities, primarily customer program accruals. About a quarter is due to a decrease in DPO to approximately 15 -- to approximately 50 days this year, which relates to the mix and timing of production and sourcing in each year. We expect to end the year with DPO in the high 40s, which is consistent to where we finished the last several years, as we reduce production in quarter four to take inventory out of the system. The remainder of the first-half decline is due to lower net income and higher first-half inventory growth than a year ago.

As we look to the back half of the year, we are very confident the cash flows will return to prior-year levels, delivering approximately $500 million of operating cash flow. We plan to reduce inventory to approximately the same level as December 2007 from a days-on-hand perspective, which will generate between $100 million and $150 million in cash and approximately $50 million incremental the last year. The reversal of the cash tax and accrued liability timing issues, which negatively affected the front half of the year, will generate an incremental $100 million to $125 million compared to a year ago. Combined these will more than offset the expected year-over-year decline in operating profit and the increase in cash restructuring payments. In summary we will deliver approximately $500 million of operating cash flow and approximately $400 million of free cash flow after capital spending of between $90 million and $100 million. From a full-year perspective we now expect cash flow from operations to be between $350 million and $400 million net of approximately $800 million in restructuring payments. We continue to expect full-year capital expenditures of between $160 million and $180 million.

Turning to the third quarter, we expect net sales to be up 6% to 7%, including the impact of acquisitions, and internal sales to be up between 2% and 4%, driven by continued strength in our Home & Family segment, the Rubbermaid Commercial and Rubbermaid Food businesses and our international businesses. Foreign currency benefit is expected to be about 2.5 points for the quarter. We anticipate normalized EPS for the quarter to range from $0.31 to $0.35 compared to $0.52 a year ago. We expect raw material and source product inflation to increase significantly in the quarter, with most of our back-half pricing actions expected to begin reading through in the fourth quarter. We also expect increases in year-over-year strategic SG&A spending. As previously announced the Company elected to retire its reset put securities due July 2028 and cash settle the related remarketing option. This election will result in a one-time charge of $0.13 per share in the third quarter, but it will produce a savings of approximately $0.0125 per share over the remaining 20 life of the original options.

Turning to the full-year outlook we continue to expect net sales will increase 6% to 8%, which includes the contribution of Technical Concepts and Aprica. Excluding these acquisitions we continue to expect internal sales growth of between 2% and 4%. We now expect foreign currency to contribute 2.5 points of growth for the year. Our sales outlook by segment has change the only slightly from our last call. We continue to expect approximately 20% total sales growth and high single-digit internal growth in our Home & Family segment and approximately flat sales in our Tools & Hardware segment. We also continue to expect high single-digit growth in our Cleaning, Org & Decor segment driven by our TC acquisition, as well as continued strength in our Rubbermaid Commercial and Rubbermaid Food businesses. However, we are lowering our internal sales expectation for low single digits, as aggressive fourth quarter pricing actions are expected to be more than offset by related declines in our Rubbermaid Home Products business. We also expect continued softness in our Home Decor business for the remainder of the year. We are increasing our Office Product segment internal sales growth guidance to be up low single digits, driven by strength in our international business and favorable foreign currency of approximately four points for the year.

We continue to experience unprecedented pressure on our gross margin from raw material and source product inflation. We now expect gross margins to decline 100 to 170 basis points for the year. While we continue to see benefits as planned from product acceleration, combined with ongoing product initiatives, the reduction to our April guidance is driven by dramatically higher inflation from raw materials, primarily resin and metals. We now estimate the impact from raw material and source product inflation to range from $275 million to $325 million compared to our previous expectation of $160 million to $180 million on our April call. As you know, oil and natural gas prices increased dramatically during the second quarter, with the average price of oil increasing approximately 27% and the average price of natural gas increasing 31%. As a result, we expect resin costs to continue to inflate for the remainder of the third quarter, as we believe the recent oil and natural gas inflation has not yet been fully reflected in today's resin costs.

As previously announced we are initiating aggressive price increases in certain of our categories in the back half of the year, including those where resin is the primary cost of goods. These increases, some of which are as high as 22%, will help to offset a portion of the dramatic inflation we have experienced this year. However the related volume impact on our fourth quarter business will more than offset the benefit from pricing in that period. The largest impact of these pricing initiatives will come next year. Despite the continued raw material and source finished goods inflation we are continuing to invest in strategic SG&A at approximately the same dollar levels as we shared on the April call, while we were also continuing to reduce structure SG&A.

Consistent with our press release on July 15th we expect full-year normalized EPS of between $1.40 and $1.60 per share. The change in guidance is attributable to the dramatic inflationary pressures in raw material and source finished goods and the volume impact, as we downsize and exit certain categories and right size our inventory levels accordingly. The lower end of our guidance reflects the assumption that the price of oil approaches $200 a barrel by the end of the year and an even-weaker consumer spending environment by year end. Based on the strategic initiative outlined in the July 15th press release we anticipate pre-tax restructuring charges of between $175 million and $225 million, or $0.46 to $0.59 per share. The outlook above does not include these charges.

And before we open the call for questions Mark has some final comments. Mark?

Thank you, Pat. Before providing my summary comments I would like to thank all our employees for their continued hard work and dedication, particularly during these difficult times. It has also been a bumpy ride for our shareholders. 2008 has proved to be a challenging year, as tough as any I've seen in my 37-year career. We've had to take some tough actions to help preserve Newell Rubbermaid's ability to grow and prosper in the future. We will continue making the changes necessary to position our Company to build long-term sustainable shareholder value. We have demonstrated this in the past and we demonstrated it again with the actions that we announced two weeks ago.

While we are dealing with some very severe near-term economic pressures this year let's not lose sight of the considerable progress we have made over the past several years. Our investment in building strong consumer-meaningful brands are paying off, driving top-line sales growth in many of our categories to offset temporary market contraction in the US Tools & Hardware and US Office Products. Our efforts to achieve best total costs are driving stronger productivity and improved efficiency, which is helping to offset some of the unprecedented cost inflation. Our margin structure in 2008 is still much healthier than it was in 2005, even after the hit from resin inflation, and we will deliver another step change improvement in gross margin after executing the recently-announced actions.

We are collaborating more across brands and business units and sharing best practices corporate-wide, which is resulting in bigger, more-successful product launches. Our culture is becoming more consumer and brand centric and embracing best-in-class is our key benchmark. Each year we take steps to make our portfolio less commoditized, more differentiated and more international with higher gross margins. Our strategies are delivering results and are building competitive advantage. I'm confident in our ability not only to weather the current economic storms but to emerge from these turbulent times a stronger, more-profitable Company.

Thank you for joining today's call and I'll now ask the operator to open up the line for questions.

Thank you. (OPERATOR INSTRUCTIONS) Your first question comes from Wendy Nicholson with Citi Investment Research.

-- has to do with some of the pricing that you've announced and given the volatility in oil prices, I know your expectation you threw out that $200 oil number, but how fluid is the pricing that you're taking? In other words, now that oil;s come off are you contemplating taking less pricing or how fixed are those conversations?

Let me answer that with two or three parts. First of all, we think it's best to take a conservative approach in terms of our outlook for the rest of the year because of the volatility that we've experienced. Number two, the pricing that we're taking in October just begins to get us caught up, so we've got a long ways to go to get caught up and that's what we're doing with the first increment that we're taking in October. Going forward, January and beyond, we will have a mechanism is very transparent with our customers that relates what's going on in the actual changes in resin pricings, our input costs, what the projection are based on where oil and natural gas are going, and we'll put that together to do what we need to do in order to continue getting caught up to where we are. So the answer is no. Even if the oil were to stay at where it is today we wouldn't come off the pricing that we've already started communicating with our customers because we need that to get caught up and because we believe, as Pat said earlier in his remarks,$ that even at $125 to $135 oil resin has not fully caught up with that price point.

And the volume drawdown that you're expecting in the fourth quarter, that's more a function of your SKU reductions and those sorts of thing.s or have you begun to hear any push back from your retailer saying, hey, that pricing's too aggressive so we're not taking as many new products, or something like that?

It's kind of that combination of both. We expect that where it is implemented, where the customer continues to carry the product and implements the full pricing right away it may slow down demand and that's part of it. And the other is that we assumed that that will be the beginning of some customers saying, I don't want to carry it at that price point.

Okay, and then just one more question, if I may. The cash flow outlook I think is probably causing some folks to have a little teeny tiny bit of a heart attack because it looks like you can barely pay that dividend, so is there a contemplation that you might cut that dividend or are you going to finance it, or is there some --?

Absolutely not, there's no contemplation of that, and let me just put it in perspective. As Pat said, we expect to generate $500 million order of magnitude in the second half and if you look at our big commitments for the second half it would be dividend and CapEx, and put together that's around $200 million, so there's plenty of room to still do that and still pay down debt. So, no, there's no worry and no concern and absolutely no contemplation of adjusting that dividend.

Excellent. Thank you very much.

Your next question comes from Chris Ferrara with Merrill Lynch.

Hey, good morning, guys.

Hi, Chris.

Pat, I was wondering can you just talk a little more in detail about the timing change on the cash tax payments you were talking about and the customer accruals, just a little more detail as to what those relate to and how they're going to reverse?

I'll start with the tax. Last year in the first half of the year there were two events, which didn't repeat this year in the first half. We had some net operating loss carry forwards that lowered our cash taxes in the first half of last year. We did not have those, at least not in the same magnitude this year. And we also received a tax refund last year in the front half, which lowered our net cash outflow. So year-over-year comparison was very unfavorable from a cash tax standpoint because of those two items. Also in the first half of this year we paid cash taxes on an anticipated higher level income. As you know we just took our income level -- or our expectations down, so our back-half taxes are reduced accordingly. So now that we have lower income expectations for the year our cash taxes going out the back half compared to the front half are very low, so more than paid half of the taxes year to date. So those two things combined, the front half weaker than last year and the back half will be comparatively stronger.

From the accrued liability standpoint it really primarily relates to customer program and that's just the timing of when customers deduct those program payments. Some are on quarterly, some are semiannual, some are annual. We just had more customers take those in the front half or before the end of quarter than we had in the past, so that will reverse automatically in the back half.

Can you give more detail on that? How big is that to cash flow, the customer accruals? Why were they taking more in the first half? Does that just mean customers are running more promotions in the first half of the year than they did in the year ago? And why would you expe --?

I can't tell you why. The customer programs has really not changed in magnitude, so they're approximately the same year over year. It's a substantial number for the Company. Our invoice to net across our business, it varies widely across the business, but on average for the company is low double digits, so it's a big number. So a couple customers taking them a little bit earlier or a little bit different timing, or a change in programming, if one was on an annual basis last year and now they're on quarterly can affect our cash flow.

But whatever it was. In other words, is the way to think about is that you guys are -- you guys essentially prepaid this stuff? You paid for more than the first half's worth of customer accrual?

No, it's just different than what it was done last year. I'm just comparing year over year. So the total amount of payments for the year will be the same. More were taken in the front half this year than a year ago.

Okay, okay. And then I guess on the top line in general, you guys -- your guidance organically is not for any sort of deceleration even though your customers are seeing increasingly weakening trends, so I'm assuming the more cyclical parts of your business are worsening a little bit. Where is your business accelerating? Why are you able to continue to organic growth at the same level next quarter as you do this quarter?

I think there's a number of reasons. One, we're continuing to invest and we've got a lot of investment in the third quarter. I think our year-over- year increase in brand building SG&A is up around $50 million and over two-thirds of that is a real increase, the other third would be currency related. We're investing behind things like we're introducing Sharpie® Pens in North America. We're doing a global Sharpie® campaign with the endorsement of Beckham on Sharpie®. We're driving Papermate in Europe. And year-over-year relatively we had a low spend in 2007 in Office Products because of the supply issues. You don't spend a lot of money promoting what you can't get on the shelves, so last year that affected -- it actually took down our spending. This year it'll be back up.

Home & Family, I already talked about Calphalon® electronics introduction and talked to you about the Baby & Parenting introduction of Nautilus®, which has just begun, and we're also expanding geographically the Teutonia brand. Tools & Hardware, we're investing, especially in developing markets, with more feet on the street, and Cleaning, Org & Decor continues to invest in Rubbermaid Food and Rubbermaid Commercial. So, we've a lot of strong initiatives and we're actually not taking our foot off the pedal at all in terms f investing behind this. We get contributions from the two acquisitions, we get the pricing initiatives that we're taking, so the combination of all those -- the acquisitions, the investment in innovations, the ongoing strength that we've had in businesses like Rubbermaid Commercial, Rubbermaid Food and Home & Family, and the pricing help, all of those things give us confidence in those numbers in the back half.

Great. Then just finally, why are your -- why will your customers agree to adjustment mechanisms on pricing or is it just a situation where you say, okay, agree to it or we'll just stop shipping and that'll be part of our $500 million that we exit?

That's basically it. We've told them that we have to get this and so far -- again, no customer likes to take pricing, but they understand it and they understand from our willingness to exit other categories that this is that serious, so it's not a negotiable point any more. We just have to get this kind of pricing in order for us to stay in business and they want us to stay in business. They want the Rubbermaid brand.

Thanks a lot, guys.

Your next question will come from Bill Schmitz with Deutsche Bank.

Hi, good morning.

Good morning, Bill.

Can we get some more detail on the assumptions on $200 oil and demand softness? How does that flow through the model, just a little bit more detail so we can try to build our own to test some of those assumptions?

This is Pat. The $200 oil, obviously oil has actually moved in our favor very recently, although yesterday it did go up about $5, but frankly it affects -- we believe it will affect '09 way more than'08, okay? In other words, we don't believe that the resin costs have even caught up to oil in the $125 to $135 range yet, so we're going to see -- we believe we'll see inflation in August and September beyond what we paid in July. We don't have complete confirmation of that yet but that's our belief. And then just assume oil then moves to the direction of $200 over the remaining four or five months of the year there's usually about a two-month lag -- one to two-month lag for that to get into the cost, so it will affect -- could affect us in the fourth quarter, but frankly it would affect 2009 to a much greater degree. So for this year, if it affects the fourth quarter it's probably in that $0.04 or $0.05 type of range. Now if it goes up to $200 tomorrow in one big jump then that would be different, okay, but our anticipation is it gradually goes to $200 over the rest of the year.

Got you. That makes sense on the oil side, so does that mean gross margin's going to decline again in 2009?

No, they will not, and what we've announced recently with these product line exits and sales we'll actually improve gross margins by a minimum of 200 basis points year over year, so that alone will increase margins and we believe also from a pricing standpoint we are now -- we're not in front of the curve by any means, but we're working our way back. We think going into '09, although we anticipate pretty significant inflation, again, in '09 versus '08, even to the levels we're seeing this year, we also anticipate that our pricing will be much more in line with that.

Okay. How many pounds of resin --?

Bill, I think that's the another thing that's worth repeating, too. As I said in my remarks, our objective is to make resin really just another raw material in the normal course of running the business. So the businesses that will still have high resin-containing quantities, which would be Rubbermaid Commercial and Rubbermaid Food and Graco®. for instance, with our car seats, all those businesses, number one, the resin as a percentage of the cost of goods sold is much smaller than it was in the categories that we're exiting and therefore, even a large increase and even though they're large users of resin in terms of total tonnage, it's small -- much smaller relative to the price per unit. Second, all of those businesses are growing substantially through innovation and the consumer is willing to pay for that performance and value. So we expect that this is going to be -- I won't call it a non-issue but it won't be the kind of thing that we'll report about and fixate on. I expect to spend one-tenth as much time talking about resin next year, even if it continues to rise.

I hope so.

I hope so, too. (LAUGHTER) And I'm not just hoping. We're planning and expecting that, because again, the resin that we'll take out of the system -- the resin volume that we'll take out of the system is in the products where those conditions just don't exist. It's relatively low value added. The consumer just wants a basic product. We try to test out and offer them innovative ideas and they said, I just want a basic product, and so that's not going to be our game and that's why we're exiting or downsizing these categories.

Okay, so can you give us a number, if it's like 750 million pounds all in now do you know what the number will be next year in terms of resin buy?

We expect it'll be down around 40%?

40% the resin exposure?

Yes.

Wow, that's a big number, thank goodness you don't still own Little Tikes. (LAUGHTER)

Or Curver or -- Now remember, we've been on this course -- and that's the other point I made -- we've been on this course for a number of years. We still had about 12% of our business that we would have classified as commoditized and much of it was in these kinds of categories. We were making nice progress in continued cost reduction in what I'd call fixing the margins, but that was at a more normal set of circumstances and obviously that world has changed. It's not normal any more.

Okay, great, and then just one final one, if I could. How's the back-to-school season looking for the Office Products business because you've had some pretty miserable results by a lot of the office supply retailers?

Well, again, our sell-in was as expected, but it's consistent with what they're reporting and consistent with what that North American business is, so we're seeing that same effect they're seeing, which is down in North America in the neighborhood of 5% to 10% in terms of overall. So it's going to be softer than it was a year ago, but we're certainly holding our own in that environment and with the investments that we're making in bringing new products, like the'® Pen to market and what we are going to do outside the US, that's what will be the positive side of the Office Products situation.

Our Office Technology business continues to grow significantly in the double digits, so that helps offset some of that decline we're seeing in the writing categories.

Okay. And how are inventory levels in the trade?

Well, again, we think we're -- on our products we think we're okay. We don't see a significant takedown versus where we are today.

Okay, great. Thank you, sorry for taking so much time.

Your next question comes from Budd Bugatch with Raymond James.

Good morning, Mark. Good morning, Pat.

Good morning.

Just a couple things. You talked a little bit about some of the planning assumptions then for 2009. In revenues we're going to be down $500 million annualized on revenues. What should we think about that? You already did say that gross margins will be up in 2009. Can you give us maybe the initial thoughts because there's a wide disparity of estimates out there now.

Related to what we announced a couple weeks ago, Budd, the top line down around $500 million, but the gross margins improving -- just from that announcement -- in excess of 200 basis points. The product lines had below single-digit gross margins and our operating profits, when we put this behind us -- it won't happen at the start of next year, but let's call it a run rate by mid next year we'll be up $0.05 to $0.10 and that's from us taking out the associated SG&A related to those product lines.

And internal growth what do you think -- I know it's obviously -- nobody has got a good crystal ball right now.

We're not going to predict that at this point in time, Budd.

Okay. Let me talk a little bit -- drill down a little bit to Home & Family. Obviously Aprica -- I think, Pat, if I got you right -- added about $36 million of volume in the quarter -- and you can confirm if I'm right on that or not -- but I was disappointed in looking at the margins and the change in operating profit in there. I know Aprica was somewhat dilutive, can you quantify what that was between brand building, strategic SG&A and the Aprica dilution?

Aprica in the quarter was, I believe -- I'm not sure -- they were down about $3.5 million in profit in total. Probably half of that was Aprica and the rest was the strategic spending and the pressure -- a little bit of pressure on margins from input costs.

And then in the third and fourth quarter, what do you think, is Aprica going to be that kind of dilution again or --?

It should be more neutral to the profit in the back half.

Okay. And if you could talk a little bit about Europe in terms of profitability. I know in the Qs we see European profitability and I know that the numbers we see include project acceleration costs, but I was surprised in the first quarter to see Europe move into a loss category and can you give us maybe some geographical help on operating profit now and whether that was -- how much of that may be acceleration or restructuring charges?

I don't have the specifics but that's what it is. We're doing a lot of our restructuring in Europe and so that's what's take that to a loss on a GAAP basis. On a management basis, or a continuing basis I would have to get back to you -- I'll have Nancy get back to you and tell you what that difference is.

But it's increase -- it's improving year-over-year, it's not declining.

And same in the quarter, as well?

Yes, and expected for the year, also. Yes.

Okay. All right, good luck. Thanks very much much.

Your next question comes from Connie Maneaty with BMO Capital.

Let's see, could you give us a breakdown of your inflation outlook, the $275 million to $325 million. How much is -- sounds like resin is the biggest piece, but how much is resin, oil, natural gas, metals and the finished source goods? Could you give us a percentage of each in that inflation outlook?

I don't have those numbers with me right in front of me, Connie, I'll be honest with you. But you're right, the largest share of it is resin, I'd say more than half. The next biggest piece is sourced finished product and that's being driven by the same thing that's driving our own production, and the next biggest -- and let's call that a quarter. And the rest is metals and packaging, transportation, whatever, but I don't have those exact numbers here.

Okay. I guess on those sourced goods that was -- you kind of led into my next question. On a total landed cost basis does it still make sense to manufacture a lot of products outside the US when you take into account (inaudible) labor rates along with cost inflation?

Yes, it does, because the raw material inputs are virtually the same so that's a large percentage of our costs.

And that's what's driving their higher costs in many cases.

We would have seen that here as well as there. The labor differential, although it has shrunk a bit, it's still significant -- they're still significantly lower in labor and also overhead in the plants that overseas. But the same tradeoff that we would always do is really does the labor and overhead savings offset the transportation (inaudible) and that really varies on the type of product and how much labor it has in it. So a product like the Rubbermaid products, we usually make them closer to market because they're expensive to ship and they have a very low labor component, whereas smaller products that are more easily shippable and have a little higher labor content it still makes sense to go overseas.

Okay. We keep hearing about the new resin capacity that's supposed to be coming on in the Middle East and primarily made from natural gas? Are you expecting that? I guess the question is, Dow is taking out capacity just at the time when new capacity is still supposed to be coming on. How should we think about the suppliers' behavior? Why shouldn't the price of resin come down with new capacity coming on?

You're talking about supply and demand impacts on the price and frankly, with their input costs going up so fast, meaning oil and natural gas going up so fast, the supply and demand part of the equation has really become less important this year. Going forward we really haven't taken a view whether that capacity's going to lower costs or not. When we look out to '09 we anticipate, again, that oil and natural gas will continue on the path at this point because we don't want to take that conservative view, but we haven't taken any offset to that based on more capacity coming online because we've heard that too for years and years and we haven't quite seen the effect of that yet, so we're going to take the conservative view and just expect the inflation on the input costs.

The other thing I'd say, Connie, is that the supply and demand side of the resin capacity has a much more significant effect at more constant input costs and when the input costs are rising and as high as they are today that totally overwhelms it. Input costs, oil and natural gas, energy costs, are 65% to 70% of their total cost structure , the total cost of making resin because it is, A, the input material. B, it takes energy to run the cracking process. And C, it takes energy to transport it to market. And so it's such a predominant cost, so when it doubles it just totally dwarfs any impact from supply and

That's very helpful.

See, the other thing that's happening, though, you have realize is that in resin, even resin that comes on in the Middle East, that it will be most attractive to European suppliers. Today a lot of the European suppliers have come to the US to buy resin from US companies, paying the additional incremental cost to ship it across the ocean because of the currency. The Euro's so cheap versus the dollar so they can get a lot more money by coming across and buying dollarized resin. So that's also affecting the dynamics of the marketplace today.

Thank you very much.

Your next question will come from Joe Altobello with Oppenheimer

Thanks. Good morning, guys.

Morning.

First question in terms of the timing of the portfolio process, you guys are not assuming a step function on January 1, '09, it sounds like you're sort of assuming a ratable process throughout 2009. Is that the case?

That's fair. I think you'll see those exits starting in the fourth quarter then picking up sequentially but in total it 'l take about 12 months before we're at the end point.

If that's the case that will get you to $0.05 to $0.10 of accretion?

That's correct.

In terms of the commodity cost situation, if we assume commodity costs stay where they're at today, it sounds like, Pat, you're still looking additional inflation next year?

Well, just the carry over effect of this year's inflation is significant. In other words, it hasn't just -- it didn't move on January 1st and we got it all from day one, it's been moving up during the year so even if they stabilize we would have a year-over-year impact.

Even with the business exits?

Yes. We still use -- there's raw materials in the businesses that we'll remain in. So the rate of inflation when that remaining business would be about the same, just be a lower base. So the dollars may come down, but the rate of inflation would be roughly the same.

But you'll still be up? Okay.

I think the way I'd think about next year is we'll continue to see a pretty hefty price tag for inflation but you'll also see much more benefit from pricing because it will be in categories where we can price and knowing and anticipating that we're going earlier next year.

And the $0.05 to $0.10 of accretion incorporates any fixed costs of absorption from the exits of those businesses, as well?

Is does, yes. Again, those businesses fully burdened with their fixed costs are low single-digit gross margins and we'll be making the appropriate actions to take that fixed overhead out. And then from a SG&A standpoint we'll remove the SG&A that will -- are directly related to those businesses, which generates the $0.05 to $0.10 improvement.

Okay. And then in terms of the Office Products business it sounds like you are a little more constructive on the international part on that given your comments this morning, so it sounds like you're not seeing any weakness overseas in western Europe, for example, that we're seeing here in the US, as of yet?

Not yet. We had a good second quarter. And again, we had some pretty good comps because of a pretty weak second quarter last year, but we had a good second quarter in Office Products in Europe, as well as Asia, and of course we continue to get the foreign currency benefit. And I'll also point out the Office Technology business is doing very well. So all those combined are causing the growth in that segment.

Okay. Then lastly, the volume declines you're anticipating in 4Q from the pricing increases, how much of that is from consumers moving to lower-priced items and how much of that is retailers maybe allocating less shelf space?

As I said earlier, we really can't break that out that specifically and frankly, until customers make their actual choices and put it out there we won't know for sure. So we've assumed that there's some of each and that's what's included in our estimates.

Got it, I missed that. Okay, thanks.

We will take our final question from Linda Bolton-Weiser with Caris.

Hi. I seem to recall that there was this concept of the surcharge under the previous CEO, under Joe Galli, and maybe -- I know it was before your time, Mark, but maybe Pat could comment on how did that work and did that effectively eliminate some low margin SKUs through the natural process of the surcharge, and how did --?

What was the third charge, Linda?

Surcharge.

Oh, I'm sorry, I thought you said the third charge.

How did that all work and how did the surcharge go away, because they def -- there was one, I recall.

Yes, we did have one, I forget which years. I think it was in -- probably in late 2004.

it was '05 and '06. It was here when I was here.

And there was no significant inflation in resins at the time. It was on a semi-annual basis, as I recall, and we did exit some product lines -- I wouldn't say as a direct result of that but it was connected with that at that time. But we moved away from it because there was a leveling out of resin costs, frankly, and went back to our normal pricing mechanism, which would be more on an annual basis on those products. And now that we're seeing again the medioric rise in resin costs we feel we have to have some mechanism in place that ties our pricing to that again.

So you say the retailer forget to take you to the table when resin was going down?

Well, it wasn't really going down, it just leveled off.

And again, the same dynamic was that worked then, Linda, which was initially the inflation resin preceded our ability to to price to cover it so we were behind from the beginning and had to get caught up. We got caught up a little faster because it wasn't as dramatic in terms of its total impact as it is today, but there is always a lag effect when it starts move moving that quickly. So the surcharge then and our pricing now isn't just starting with today at a point in time going forward it starts -- the clock starts some point back in history and says here's what we've got to do to get caught up, here's how much we're behind the eight ball. And that's what our mechanism going forward will accommodate both -- will account for both getting caught up, as well as actual current environment and the predicted environment.

We were caught up. Out of '07 we'd about $350 million of inflation over the previous four-year period and about $350 million of pricing so we had caught up at that point and we are now behind again.

So when we stopped the surcharge it was when we were caught up and resin had stabilized.

Okay. Thank you very much.

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