諾威品牌 (NWL) 2009 Q2 法說會逐字稿

Good morning ladies and gentlemen and welcome to Newell Rubbermaid second quarter 2009 earnings conference call. (Operator Instructions)

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

Thanks. Welcome to Newell Rubbermaid second quarter call. We appreciate you once again taking the time to join us. The members of our management team with me today are Mark Ketchum, President and Chief Executive Officer and Chief Financial Officer, Pat Robinson.

I'll begin the call with our forward-looking statement reminder. Today's announcement includes certain forward-looking statements, which are based on current factual information and certain assumptions, which management believes to be reasonable. These statements are subject to known and unknown risks and uncertainties. Actual results could differ materially from those indicated by these statements due to various factors, which are discussed in detail in Newell Rubbermaid's 2008 annual report on form 10-K and other periodic filings with the SEC. We further caution you that the Company does not undertake and specifically disclaims any obligation to update any forward-looking statements that we make today. In addition, we refer to certain non-GAAP financial measures. Reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures are included in our earnings release and the Investor section of our website.

So with that, I'll now turn it over to Mark.

Thank you, Nancy. Good morning everyone and thank you for joining us today. I'm pleased to report that Newell Rubbermaid delivered strong earnings and cash flow results this quarter. Normalized EPS of $0.47 was well ahead of our guidance range, as a result of strong gross margin performance and rigorous expense management. Operating cash flow also increased noticeably to approximately $100 million during the quarter as compared to only $2 million in last year's Q2.

During the first six months of 2009, we generated operating cash flow of $88 million, an improvement of more than $200 million compared to the first half of 2008 when we used cash. This impressive performance for the quarter and year-to-date is the result of our operating unit's continued discipline in reducing inventories and using working capital more efficiently.

We're quite proud of the fact that even in a difficult economic environment, we've done what we said we would do. For the past six months, we told you that our plan was to manage the business, to protect earnings and maximize cash flow in spite of top line weakness and volatility and we have delivered on that promise.

As we anticipated, our top line has been under pressure. Net sales declined almost 18% during the quarter. Core sales were down about 8% in line with our guidance of a high single digit decline. Product line exits and foreign exchange accounted for the other 10 points of sales decline. Gross margin increased to 37.1% this quarter, a 300-basis point improvement over last year. This expansion reflects the positive impact of the planned exits from low margin and commoditized product categories.

Gross margin also benefited from the carryover effect of 2008 pricing initiatives and input costs moderation compared with the dramatic inflation we experienced in 2008. For the first half of 2009, gross margin was 36.2%, a 200-basis point improvement over the first half of 2008. As mentioned in my opening, we've also been extremely diligent in controlling SG&A expenses to protect the bottom line.

Year-to-date, SG&A expense is down $113 million or 15% to last year. This improvement reflects permanent reductions in structural SG&A, as well as strategic SG&A reductions. In case some cases, the strategic spending has been eliminated for the year, while in other cases, it was deferred for possible reinstatement in the back half. A combination of higher gross margins and significantly lower SG&A expense, helped drive normalized EPS of $0.47, well above our earlier guidance range of $0.30 to $0.37.

Operating margin in the second quarter, improved a healthy 260-basis points to 15.2% of sales. Our strong year-to-date performance gives us even greater confidence in our ability to meet our financial targets we originally set for the year that.

With confidence in hand, we will resume some of the investment spending we chose to defer during the first half. Over the next two quarters, we will invest $40 million to $50 million more than in the first half in two primary areas. First, on selective advertising, promotion and sales support, to drive sales in the back half. Focused on the important back-to-school and gift giving seasons. Second, on longer term R&D, discretionary training, market research and measurement and outside agency support to build our new product pipeline and help develop growth platforms for 2010 and beyond.

The areas targeted for investment will be those with the highest near-term sales growth potential based on our current economy. Our Home and Family businesses and Office Products categories, including technology, markers and highlighters and fine writing. About half of the the $40 million to $50 million dollars represents spending that was delayed from Q1 and Q2. While the other half is investment spending that was originally budgeted for the back half.

Of course, we'll continue to manage all of our SG&A spending closely and we will calibrate our investment to the sales environment in order to meet our financial commitments.

Turning to our outlook for the year, we expect sales will remain under pressure due to weak consumer demand and customer inventory reductions. While we believe inventory destocking has stabilized with most of our retail customers, we've seen additional corrections since our last earnings call in the commercial and industrial channels, as well as in parts of Europe. You'll recall that commercial activity did not start to decline until a quarter or so later than retail, thus it's taking long to stabilize.

Consequently, we are maintaining our full-year 2009 sales guidance of a 10% to 15% decline. We are currently trending to come in at the bottom end of that guidance range. This outlook reflects a high, single digit decline in year-over-year core sales, consistent with what we saw in the first and second quarters. The balance of the decline reflects planned product line exits and unfavorable FX.

The positive news is that our strong normalized EPS and cash flow results in the first half of the year give us the confidence to raise guidance on those two metrics. Our 2009 outlook now anticipates operating cash flow of approximately $500 million, as compared to our previous forecast of more than $400 million. This is nearly a $50 million improvement over 2008, despite a much lower sales base.

We are also increasing our 2009 normalized EPS projections to a range of $1.15 to $1.30 from our previous guidance of $1.00 to $1.25. This improvement reflects the flow through of our year-to-date earnings upside, partially offset by a higher investment and strategic brand building activities in the back half.

Before I turn the call over to Pat, I would like to briefly highlight of few of the individual business unit successes that we've had during the quarter. I think it's important to note that even this this recessionary environment, our brands are continuing to introduce innovative new products and continuing to develop creative and engaging marketing campaigns to drive market share and gain additional product listings.

For example, our Culinary Lifestyles business continues to turn in a strong performance led by exciting new product introductions. Sales for this GBU were once again up mid-single digits to last year, which is particularly impressive in this relatively high price-point category. Last quarter, we told you about the launch of Calphalon's Unison line of nonstick dishwasher safe, gourmet cookware. Unison combines two revolutionary nonstick surfaces in the same set. Slide for easy release and seer to seal in flavor. Since it's Q1 exclusive launch with William Sonoma, Unison has performed extremely well, exceeding our expectations in driving market share gains for Calphalon. We have now expanded Unison availability to other fine retailers and we expect continued success with this innovative new product.

In our Office Products segment, we are taking share and gaining distribution in our markers and highlighters business on the strength of a new integrated marketing campaign for their Sharpie brand. With a new tag line, "Uncap What's Inside", the campaign a uses combination of print, TV, in-store and digital advertising, as well as social media to better communicate the relevance and value of the Sharpie portfolio. Early results indicate strong consumer engagement and we anticipate additional sales and share growth going forward.

A third example is from the Graco brand in our Baby and Parenting GBU. Graco has generated market share gains in several categories, through the successful launch of innovative new products such as the 4-in-1Blossom Feeding Chair and the new Pack-n-Play Playard with a newborn napper feature. This is the first-ever playard with a separate station designed to cuddle your newborn. Graco's success with these new products proves our thesis on innovation and to introduce an exciting new product with features driven by consumer insights. Retailers support it and consumers buy it.

So, just a few examples to demonstrate, that even in these difficult times, we are continuing our progress in building brands that matter across the portfolio. Our success in driving gross margins allow us to invest, in fact, to reinvest in the consumer-driven innovation branding and marketing initiatives that will help position the Company for future sustainable growth.

At this point I'll turn the call over to Pat, who will walk through the financials in additional detail and I will return to provide some final comments. Pat?

Thanks, Mark. I'll start with a review of our second quarter of 2009 income statement on a normalized earnings basis. Net sales fortunate quarter were $1.5 billion, down 17.6% to last year and slightly favorable to our guidance of sales decline of approximately 20%. Our core sales decline, which excludes currency and product line exits, was approximately 8% in the quarter, in line with guidance. This reflects the weak consumer sales environment, as well as some inventory destocking, primarily in the industrial and commercial channels.

It's difficult to measure precisely, but we think about one-third of the core sales decline was attributable to inventory adjustments, with the remaining two-thirds reflecting lower consumer sell through. Our planned product line exits reduced sales by 6 points and unfavorable foreign currency contributed a negative 4 points. Both of these metrics came in on the favorable side our.

As of April 1st, we anniversaried the acquisitions of Technical Concepts and Aprica, since sales from both of these businesses are reflected in core sales.

Gross margin continued to be a very positive story for us this quarter. We generated $558 million or 37.1% of net sales, which was a 300-basis point improvement over the second quarter of 2008 and a 430-basis point improvement over the full-year, 2008 gross margin percentage. This improvement was largely driven by the favorable impact of our product line exits, more favorable input costs, as we start the comp against the dramatic raw material inflation from a year ago and the read-through from our 2008 pricing actions.

These positives more than offset an unfavorable customer and product mix and lower plant utilization rates, resulting from the sales decline and the significant takedown in inventory levels. We continued to aggressively manage down both our strategic and structural SG&A spending during the quarter, which we indicated we would do, particularly if core sales remained under pressure.

SG&A expenses were down $64 million year-over-year. About $45 million of this improvement was attributable to cost reduction activities initiated in 2008, as well as incremental contingency plans implemented this year in response to sales weakness. Foreign currency translation accounted for the remaining $19 million decrease.

Operating income was $229 million or 15.2% of sales, compared to $230 million or 12.6% of sales last year. Our year-to-date operating margin was 12.6%, an improvement of 106-basis points over last year.

Interest expense was $40 million, $1.6 million higher than the previous year, due to marginally higher average bargaining rates in 2009. Our tax rate was 31.4% compared to 28.5% last year. The increase was driven by changes in the geographic mix of earnings outside of the US.

Moving on to earnings per share, the combination of strong gross margin expansion and continued aggressive SG&A management, drove normalized EPS of $0.47, well above our guidance of $0.30 to $0.37. This $0.47 excludes approximately $0.01 of dilution from our convertible bonds issued back in the first quarter and $0.01 of costs incurred in connection with the early retirement of $325 million dollars of medium term notes. Normalized EPS also excludes approximately $30 million, or $0.08 per share in restructuring related impairment charges related to project exceleration.

Operating cash flow was another very positive story for us this quarter. We generated approximately $100 million in cash flow, $98 million better than the second quarter a year ago. This reflects a great deal of focus and discipline on the part of our operating units to manage working capital, particularly inventory.

We reduced inventory by $108 million during the quarter, compared to a $1 million build in Q2 of last year. This,despite the meaningful sales decline, resulted in a five-day improvement in days-on-hand year-over-year.

Year-to-date, we generated an operating cash flow of $88 million, as compared to a use of $121 million last year. That's an improvement of $209 million. With a strong first-half performance in hand, we're now comfortable taking up our full-year guidance for cash flow to approximately $500 million compared with the previous guidance of more than $400 million back on the April call. We continue to anticipate approximately $100 million in restructuring payments this year and full-year capital expenditures of about $150 million.

Now I'll turn to our segment information. I will start with the Home & Family segment. Net sales were $617 million, a decrease of 14% versus last year. Core sales volume declined about 2%. Core sales in our Baby & Parenting and Culinary Lifestyle businesses grew in the mid-single digit range, but those improvements were offset by the declines from the other businesses in the segment.

Planned product exits accounted for approximately 10 points of the overall sales decline, while unfavorable FX contributed a negative 2 points. Operating income for Home & Family was $80 million, or 13% of net sales, compared to $70 million, or 9.7% of sales, a year ago. This 330-basis point improvement reflects disciplined SG&A management, in addition to lower input costs and the benefit from product line exits. These positives more than offset the impact from lower sales volumes and unfavorable mix.

Office Products second quarter net sales were $497 million, a decrease of 18%. Core sales declined about 7%. As the Office Products category continues to be challenged, both here in the U.S. and internationally. Approximately 6 points of the overall sales decline resulted from planned product line exits and another 6 points was attributable to foreign currency translation.

Operating income in the segment was $99 million, down $3 million to last year. Operating margin was 20%, up 330-basis points, again reflecting aggressive SG&A management and the benefit from product line exits. In our Tools, Hardware and Commercial Product segment, net sales were $390 million, down 22% to last year. Core sales declined about 18%. As this business continued to be impacted by softness in commercial and industrial channels, along with the sustained weakness in residential housing. Unfavorable FX reduced sales by 4 points. Operating income for the Tools segment was $68 million or 17.3% of sales down from $80 million or 16.1% of sales last year.

Let me now turn to our 2009 outlook. As Mark noted, we are reiterating our full-year sales guidance for a decline of 10% to 15%. Based on sales trends year-to-date, we believe we're more likely to end the year at the unfavorable end of the range. We expect a core sales decline in the high single digits, a 4 to 6 point decline from planned product line exits, and 2 to 3 point drag from foreign currency.

Acquisitions will contribute about 1 point of growth. We'll continue to closely manage our SG&A spending in the back half of the year. However, as Mark noted, given our year-to-date results, we plan to increase strategic spending in areas where we believe we can have a meaningful impact on back half sales performance or where we can accelerate innovation and new product development for future growth.

So, while you'll continue to see year-over- year reductions in SG&A, those reductions will not continue at the same rate you saw in the first half of the year. We're raising full-year guidance for normalized EPS to $1.15 to $1.30, based on our solid results in the first two quarters. This compares to our previous guidance of $1.00 to $1.25 and excludes dilution from the convertible bonds issued during the first quarter of the year.

In other full-year data points, interest expense is now estimated to be approximately $150 million to $155 million. Our effective tax rate is expected to be 30% to 31%. We anticipate pretax restructuring charges of between $100 million and $150 million or $0.28 to $0.43 per share. These restructuring charges are excluded from our normalized EPS guidance.

For the third quarter, we are guiding to a net sales decline in the high teens percent range. This reflects a high, single digit core sales decline, a 6 to 8 point decline from product line exits and unfavorable foreign currency translations of 2 to 4 points. Normalized EPS for the quarter is expected to be in the range of $0.25 to $0.35 cents compared to $0.36 a year ago.

We expect quarter three operating cash flow to range from $200 million to $250 million.

In closing, we're proud of our first half performance. It reflects a lot of hard work on the part of a lot of people. We demonstrated an ability to generate strong cash flow, strengthen our balance sheet and deliver on EPS guidance in the face of some difficult economic times. We'll certainly continue our efforts in the back half of the year and we're confident we'll exit the year with an improved gross margin, a new leaner more efficient cost structure and poised to resume top line growth once economic conditions start to improve.

With that, I'll hand it back to Mark for his final comments.

Thank you, Pat. 2009 has been without a doubt our most challenging year ever, but I'm upbeat. I'm encouraged by our first half results. Earlier this year, I asked everyone at Newell Rubbermaid to rise to the challenge and deliver a year they could be proud of despite the historic economic downturn. Since then, the Newell Rubbermaid team has done on outstanding job, reducing costs, conserving cash, gaining market share and operating more efficiently and effectively. I want to commend all of our employees for their hard work. By focusing on the things that are within our control, we've proven our ability to weather this economic storm and position ourselves to emerge even stronger once it has passed.

We are entering the year with some positive momentum. We'll continue to prioritize managing expenses and generating cash flow, but we now see our way to release selective investments and strategic SG&A to help build our brands and enhance our new product pipeline. While we continue to face an uncertain and volatile economic environment, I'm convinced we are doing the right things to both ensure near term profitability and enable long-term prosperity. We are operating consistent with our strategies, investing in consumer-driven innovation and branding, optimizing our portfolio with higher growth and higher margin businesses and achieving best costs and efficiency across the organization.

As always, we thank our shareholders for their continued support and with that, I will now ask the operator to open the line for questions.

Thank you. (Operator Instructions) Your first question today comes from Michael Kelter with Goldman Sachs.

Hi guys. I just wanted to ask first about the gross margin, who is much better than than, I think anyone expected, even though everyone did see resin coming down and you talked about the divestiture impact. Maybe you can give a little more color about what the drivers were, more specifically quantitatively around the resin versus divestitures versus the productivity gains you guys have experienced?

We're not going to get into the specifics on what each contributed, but the big three contributors, we already spoke about, the product line exits, the carryover pricing from 2008, which we've been able to keep in place pretty much across the board, with a few exceptions and then finally the year-over-year input costs improvement, particularly in resin, but in some other commodities as well. They are the three big contributors. The offsets to that are volume, the volume in our plants is way down to a year ago, and the mix, I'm sorry, the unfavorable mix, consumers are still mixing down, pretty much across the board. Those are the two offsets.

I guess, should we then think about this new level, the 37% level as your new normal to look forward and with the productivity already in place, divestitures now done and resin somewhat stable, we should be looking forward from 37% here.

I'd like it at the first half. The first half was 36.2%, I think that would be more line line with a sustainable rate. In fact, there may be some pressure in the back half from pricing and also from commodity comparisons to a year ago. Now for the front half, back half, we also think commodities will be slightly higher in the back half than the front. So, I think the 36.2% would be more in line than the 37.1%, and maybe even slightly below that, but that would be our internal target.

Michael, I would add to that in saying I think we do have upward run rate going forward after this year. We'll get full-year benefit of exiting these categories, whereas this year we get partial-year benefit. We continue to do restructuring, manufacturing restructuring projects under our project acceleration acceleration mantel that will benefit this year and next year. As volumes come back, we'll get better factory capacity utilization, which will absorb overhead costs in a more effective way, so I think we have a number of upside vectors that will continue to drive that margin in future years.

Finally, on SG&A that's always been kind of an offset for gross margin improvement for you guys. Is there anything that's going to change -- over the last maybe ten years -- it just keeps creeping up as a percentage of sales and that's despite taking headcount down and number of plants down significantly. What maybe would give us confidence that SG&A as a percentage of sales will really turn around after this year?

Well, first of all, I'd parse out the SG&A into two buckets, right? Our strategic and our structural. We have been successful in reducing our structural SG&A over the last several years, and that continues to be one of our focuses. We're doing that because we want to invest more in strategic. So, I'll remind you in 2005, we were spending less than 4% of our sales on strategic SG&A, on brand-building SG&A. We had that up over 6%, we'll probably be a little less than that, but on an ongoing basis, I think that number ought to be, especially as we continue to change the mix of our portfolio into businesses that respond to innovation and brand-building -- the number is probably closer to 8%. So, the total may not change much, but you'll continue to see a shift within that total bucket as we save in structural and reinvest in strategic.

Thank you very much, guys.

And your next question comes from John Faucher with JP Morgan.

Yes. Good morning. So, if I take a look at your top line guidance, in terms of getting to the down 15%, it looks as though that implies that if you strip out the comps from last year, say you do sort of a 2-year run rate, the top line will actually decelerate into the back half of the year, down 16% over the last two years, again adjusting for the comparisons. Can you talk a little bit about maybe what's getting worse to get us to that and also given the additional spending, do you think that could provide a little bit of a boost to the top line or is this spending that's maybe going to be more of a 2010 impact? Thanks.

First, I'm not sure I'm looking at the same numbers as you. We're not showing anything is getting worse. We're showing the third quarter would be comparable to the first half in core sales decline, in other words down high. single digits and that's what we have seen so far. We do expect the fourth quarter to improve at that rate driven by two things. First, we believe the inventory destocking should be largely behind us, even the commercial and industrial channels, at that point and secondly the comps get much easier for us in the fourth quarter. So, we saw our sales really drop off in the fourth quarter of 2008 compared to the first three quarters. That was the big drop. So, we think the fourth quarter this year will be a lower percentage decline and hopefully we will start to see things start to get better in 2010.

I think what I was referring to was if you adjust for the comparisons because the top line growth in the back half of 2008 decelerated into Q3 from Q2 and then obviously fell off a lot in Q4. So, if you adjust for those comps, it looks like you're still expecting top line to be, even fundamentally, even a little bit lower. But it doesn't sound like -- did you understand what I'm asking?

I do understand what you're asking, but again I don't have those last year numbers. My recollection is that the third quarter wasn't that different from the first two last year. In other words, they were all close to about breakeven, around 1% up or 1% down. It was the fourth quarter that we saw the dramatic decline.

In fact, John, the fourth quarter, the core sales were off about 8%. So, in fact, you could say the last three quarters, we've seen an 8% to 10% core sales decline. That's in the same range that we're estimating for the third quarter of this year, so that will be four consecutive quarters with high, single digit core sales decline, so when we get to the fourth quarter, we don't have that in there anymore, we don't have that kind of year-over-year core sales decline, the things that continued to drag on the top line are currencies (inaudible).

Okay. And then going back to the spending piece? Sorry?

Hang on .

Going back to the spending piece, how long do you think it will take for this extra spending to come through and give a further boost to the top line.

Look, I think some of it can and will have an effect in the -- in the second half of this year and some of it will affect and get us off to a better start in the second half. So, let me just give you a few examples to kind of bring this area to light. I talked before about the Sharpie media campaign. We like what we're seeing and we're going to invest in it. One one of the things I didn't say in my script was that the media has a strong value refraining element to it, so the Sharpie campaign message talks about things like longer write life. Sharpies last about one-third longer than most comparable markers and highlighters. We're pointing that out. We are -- we offer a twin tip Sharpie, got a fine point on one end and blunt point on the other end, so it's getting 2-in-1. We talk about the ways you can use Sharpie, using Sharpie for instance, to take a -- to buy a less expensive plain notebook for back-to-school and decorate it yourself instead of buying an expensive decorated notebook cover. So, there's a strong value element in that messaging that's very relevant to today. We think people respond to that.

We talked about the Calphalon Unison, which is very well. We're going to continue to spend and expand our spending behind that, so we're kind of feeding something that's working.

We're also feeding the Rubbermaid food storage campaign. We've had two strong years introducing Premier, then Easy Find Lids, then Produce Saver and this year, Lock-Its and we're continuing to invest because again that's something that's worked.

There are two areas of the economy that are not down and that's Education and the Health industry and we're spending into that. We've got a terrific product, our Mimeo Whiteboard capture and projection product, that is a superior product for two reasons. One, it's rated much easier to use by teachers and second, it's cost per classroom is about half of what the competitor is. So again, that's right on target in this economy -- it is something that's easier to use and a great value in an area where there is still spending and stimulus spending, in fact.

In the Healthcare area, we've got a terrific line of Rubbermaid medical carts that are new to the market within the last couple of years, but again healthcare is an area that hasn't cut back, spending continues to be -- to be available and we're expanding our sales coverage for that.

So, these are just a few examples of the kinds of things that we're spending our money on. That we know -- that we're spending because we've got a good indication that these things are working and/or the consumer is responsive and the market is responsive this time. That help?

Okay. Great. Thanks.

Your next question comes from Lauren Lieberman with Barclays Capital.

Thanks a lot. Good morning. Just a quick question on working capital and inventories. Since you did such a good job on inventory levels this quarter, I was wondering if the in back half if there will be mess manufacturing curtailments, so a little bit less negative operating leverage from trying to manage working capital?

If you look at our sales in the back half, it will be a little higher than the front half, so we'll get some help there, but the inventory change back half and front half should be almost the same. So, I think the volumes will be slightly higher in the back half so we'll get a little bit of help there.

Okay. So, it's primarily from volumes being higher rather than less manufacturing curtailment to control inventory, that's not -- at least not yet a dynamic?

That's right. In other words, the front half -- I have to look up the number. I believe we've taken out about $75 million of inventory and I think you should look for us to take out a similar number in the back half, so that will have -- it will be neutral.

Okay. And then the second question was just with all the chatter around changing shelf sets at retail. A lot of the dialogue has been around some of the more consumable categories, but I was wondering what you've seen in your categories in any kind of notable wins or losses or changes that are going on?

I tell you Lauren, that there's not a C change effect there. I think we believe that the battles are as intense as they always are for shelf space and we have to provide a compelling product proposition, so we've had -- we've had some wins, we've had some wins in our writing instruments categories. We have had some wins in our personal care area in Goody and we do some trading back and forth, so sometimes gaining in one account and losing something in another account. The only thing I can tell you, it's not what the customers are doing and what we're doing it's not a C change effect either for them or for us in our categories.

Okay. And the other thing was just on pricing. I Pat, I think you mentioned there could be a little bit of pressure on pricing in the second half. Was that more about Q4 lapping increases you've taken or is it pricing adjustments that you may be making?

I think it's a little of both. We will lap the fourth quarter that we took last year, that's a definite. We are seeing in pressure on across all of our businesses, frankly, to give back some price. We're resisting that the best we can.

Okay. And year-to-date, it's sort of -- it's largely held?

Yes, it's largely held. Yes. Yes.

Okay. Great. Thank you.

And Lauren, again, to put that in perspective, most of that pricing just caught up from what we're behind in 2008. I look over now, 2008 and 2009, whereas in 2008 we were behind, we're kind of caught up, so I see that pricing is now getting us right with the world.

And your next question comes from Bill Schmitz from Deutsche Bank.

Hi, good morning guys. Do still know what the capacity utilization was in the quarter? Do you have the that number?

No. I would have to get back to you on that one, Bill.

No, definitely don't obviously. How about back-to-school again, I think I asked you a month and a half ago, has anything changed in your thoughts for back-to-school season and Pat, just another question along those lines, are you fully-reserved for Office Depot and Office Max and some of the issue with those two retailers?

We're adequately reserved. Fully from an accounting standpoint, no -- there's going to be no change in their financial situation, so I think we're adequately reserved and we realize there could be some issues, probably not in the near future, but down the road.

To your other question, how is back-to-school looking? Again, we were satisfied with our sell-in and I think the other dynamics that I discussed with you before, Bill, was the fact that retailers in general are taking less stock in their back-to-school season. So in the past, kind of the practice was load up the stores to the gills and then try and blow it through. Now, they're being more cautious in terms of inventory they take in. So, their managing their cash in the same way we're managing ours, so the sell-in that that context we think was pretty good. Now we need to see the sell-through and the new model would be -- we would get if this works, and sales year-over-year were similar in terms of their -- what they're selling out the door and at retail, we would get more replenishment orders in the third quarter than we have in past years. That is a dynamic that has yet to play out and we're all waiting to see.

Okay. Just in terms of the product line exit, are you mostly done after the third quarter?

No, we'll still have product line exits through this year and you'll have the carryover impact in the next year because we didn't get out on day one this year. So, the products that were exiting, for instance in Q2, Q3 and Q4 will all impact Q1. It will be a little less in Q4 than we will see in the third quarter.

Okay. Lastly, I promise. The cash flow. Are there any other calls on cash besides the dividend and the capital expenditures, is there any sort of one-off funding requirements or anything or will most that have be used to repay debt?

It will mostly be used to repay debt. The one change year-over year. We're likely to make a pension contribution here in the third quarter.

How big is that?

I'm sorry?

How big is that going to be, do you know?

I can't give you an exact number, but it will probably be in the $50 million range.

Okay, thanks. Perfect. Thanks. Very helpful.

And your next question comes from Wendy Nicholson with Citi Investment and Research.

Hi. Could you talk a little bit more about the commercial business, in order of magnitude? Exactly how much was it down and I know you said that lagged the rest of the business in terms of timing of the slowdown, but I think historically that's actually been a very high margin business for you, so I was surprised to see the Tools, Hardware and Commercial segment not get hit more on the operating margins and is that likely something to come in the third and fourth quarter, I guess? Thanks.

You saw the Tools & Hardware segments down about 18% in total and the Commercial Industrial piece was higher than that, so in other words, the Tools that we sell through retail were sort of down I guess high, single digits and it was north of 20% in the Commercial and Industrial channels.

That was mostly a volume dropoff or have you had to get a lot more aggressive on price there?

It's a volume droppoff.

Okay.

In our Lenox business, our industrial band saws and so on, that tracks very closely with industrial production, so as industrial production in the auto industry or other industries that cut a lot of metal goes down, that's what drives that. And then in the -- our Rubbermaid commercial business is affected by the rate of new properties that are opening up and obviously they've been, a lot of those projects have been slowed way down, and building maintenance service providers are also cutting back their normal replenishment of old items that normally they would have some schedule to replace their carts or whatever old equipment they would typically source from us and they just slow down that replacement. Use beat-up carts for longer. Both of those factors are what's affecting those channels.

As far as the operating margins, that segment's under the most pressure on the top line and they've been very aggressive about taking their SG&A down to match that sales decline and so I don't expect the back half margins to be much different than the front in that segment.

Okay. And then just a follow-up question on Bill's question on the product line exits. I think when you initially identified the $500 million, my understanding was that you might just discontinue those SKU's or you were looking to sell some of the businesses, but is it my sense now that you're just basically going to it is continue them all and trying to actually get any value from them in selling those smaller brands or whatnot is off the table?

No, it's not off the table, but obviously we haven't sold any so far and the environment hasn't been really good for doing that, so we continue to keep those options open and over the next six months or so, we'll have to do one or the other, but we've actually kind of held off on a couple of them because we still think there's an opportunity to sell them.

But to follow your math this year, if you kind of pick the mid point of the range it looks like you're going to have $300 million of that $500 million gone from the portfolio?

We also had some in the fourth quarter of 2008.

So fair to say by the middle of 2010, certainly by the end of 2010, this whole initiative is behind us and we won't hear about product line exits anymore. Is that fair?

That's correct.

Great, thanks.

And your next questions comes from Chris Ferrara with Merrill Lynch.

Hi guys. Pat can you talk about the tax rate a little bit? Is this new rate normalized and what changed so quickly with international geographies that would have driven up as far as it came from the run rate we have been looking at?

It's just the mix of where we're making our money, so we're making less in areas that either have -- have tax advantage or have tax laws carried forward right now. So that's driven the rate up. We said 30% going if the year. We're saying 30% to 31% now. So, it's not dramatically higher.

And then I guess can you talk a little bit about the impact of loss of fixed cost leverages? Is there any way to roughly quantify that? It kind of strikes me, 37% gross margin, I don't think I've ever seen a 37% gross margin out of you guys despite all of the headwind?

Thank you. Thank you for the compliment.

How do you -- but how do I think about where you -- forget next quarter or the following quarter, I mean, how do I think about where that's going long-term? Because, it occurred to me if you do a basic breakout of what we think fixed versus variable costs are, it's seems if you get a little volume going through these plants, like low single, mid single digits, it's an easy step, right to 40% is that way off?

Chris, I wouldn't call it an easy step, but as I did reference earlier, it is one of the vectors that gives us confidence that there is upward momentum going forward over the next few year. So, (inaudible) the plants continuing to get the full-year benefits of these product line exits and the --

Full impact of project acceleration.

Yes, getting the full impact of project acceleration, as well as the continued work we're doing on mix gives us the pathway to 40%.

So, is there anything in -- is there anything -- I get SG&A, I guess SG&A is somewhat flexible, you don't want to throw good money after bad. When things get better you spend more. Is there any temporary aspect of all the cost cuts you're running through COGs?

I would say no.

Great, that's helpful. Thanks, guys.

Just one last comment on that, Chris, the other thing too is there's not an easy formula to apply, because about half of our goods are sourced and half are manufactured. We obviously have the leverage on those that we continue to manufacture. We kind of build into our pricing contracts with our suppliers something that would dampen the effect of volume on our source products.

In our facility, the overhead rate is about -- varies by plant, but it is 25% to 30%.

There is some leverage to -- (inaudible).

That's right. Exactly.

Thanks guys.

Your next question comes from Budd Bugatch with Raymond James.

Good morning, Mark. Good morning, Pat. Congratulations on the quarter. I'm having a little difficulty walking through to the third quarter guidance range. If you could help us, assuming that the high teens reduction year-over-year of, let's say 18% gets you to about a $1.44 billion for the third quarter, which is $60 million dollars below the second quarter, and if you do project a 30% contribution margin, that's $18 million of an operating profit of about $0.04. If you spend all of the extra strategic SG&A, that's about $0.12, so that gets you to about $0.31, for the mid-point of your guidance range. If you use just half of it, it's like $0.08 or at the top end of the guidance range. What am I missing here? What piece are we missing? Is there just a buffer for being conservative? How should we think about that?

There is a buffer. I couldn't follow all of those numbers. I have to jot them all down, but the biggest change is the SG&A spend quarter-over-quarter. That is the biggest difference. The margins should be relatively -- the gross margin will not -- we don't believe will hold at 37%. Quarter 2 is driven by some mix. We have favorable mix within our businesses. As I mentioned before I used the first half quarter gross margins, not the second quarter gross margins. Okay. You can use the sales numbers that we guided and then the SG&A would be the difference between the two quarters. That and the margin gap between the two.

I'll go back over those with you offline, but the second question I had and let me ball two questions up in one, you gave us a 200basis point bogey for gross margin year-over-year as an improvement. You did 300-basis points this quarter.

Right.

I wondered whether that still holds and secondly, can you kind of quantify for us what -- what the SG&A, strategic SG&A in the second half will be on a percentage to sales? Is it going to be about 7%, if 5% was first quarter, first half is 7% the second half?

We have to do the math and get back to you.

I don't have that percentage on the second question. What was the first part again, Budd, I'm sorry?

The bogey for gross profit.

We will be north of the 200. I think more in the 275 to 300 range it looks like, now for the year.

Congratulations again. Thank you.

Thank you.

And your next question comes from Connie Maneaty with BMO Capital Markets.

Good morning. I hate to ask about product line exits, but I will and it's a slightly different question. We're all hearing that consumer behavior is changing and maybe in a permanent way, and once you get through discontinuing all the low margin products, are you really left with the kind of portfolio that will grow in a slower growth environment or do you think that there are more decisions about -- to be made about the portfolio that remains?

Connie, I don't think it will be a portfolio question going forward, I think it will be a question of, can we deliver innovation that is important to consumers and consumers respond to and second to make sure we have in some categories, where it's necessary to have a range of product price points so we can appeal to different elements of the consumer population. So, it's important to have strollers or car seats that hit three or four different price points and we need to make sure every one of them can deliver average margins for us. It's a challenge for us, but it's not a portfolio question going forward. I think we will solve for the obvious portfolio issues. That said, we are always, and constantly every year, we will look at is there other trimming of sales we need to do, but I don't think it will be big.

Okay. Thank you.

And your next question comes from Mark Rupe with Longbow Research.

Hi guys. Congratulations on the quarter. Can you give us an update on some of the brands you're taking into some new geographic areas and how that is proceeding and if the economy is impacting that process at all?

Well, if the economy does, it's impacting everywhere in the world. So, first a broad answer to that question is it impacts everywhere and has slowed down some of the investments we might have otherwise made. We are continuing to expand our fine writing instruments. We continue to expand our markers and highlighters. We continue to expand our Rubbermaid Commercial and our Industrial band saw products in many -- in new geographies. Those would be probably top of the list.

Okay. How about some of the recent acquisitions?

Well, the recent acquisitions as you're aware were ones that came with a strong international geographic profile. So, obviously the Rubbermaid Commercial business includes the Technical Concept acquisition, which was already at a large international footprint and continued to -- that's part of what I referenced when I said we're expanding Rubbermaid Commercial. Aprica is in Japan and I referenced Babycare, so those are both the examples that would support that.

So, you're still thinking, the thought process is expanding Africa into other geographic areas as well.

Exactly, exactly. In the case of Africa, into the US and eventually Western Europe, as an example, so it's kind of coming in the reverse.

Perfect. Thank you.

And your next question comes from Joe Altobello with Oppenheimer.

Thanks. Good morning guys. I just wanted to go back to the volume leverage question for a second. This is the probably the second or third quarter that we've heard about inventory destocking from a number of companies, including you guys. It sounds like you're doing the chorus this morning and saying that it's starting to wane a little bit. Some have gone so far as to say that inventories at retail, particularly in North America, are at relatively low levels and you could see a restock whether or not that could happen later this year or early next, and I imagine that's not baked into your guidance, but where do you guys stand in terms of right now, inventory levels at retail and is there a possibility we could see a restock, let's say early 2010?

Yes. Joe, as I said earlier we do think the most restocking at retail is behind us. You're right, we haven't built in any upside from potential restocking, but I think that's a possibility, but I'll wait to see it as opposed to predicting it because I think in some categories and some customers, there was frankly room to take out inventory in the same way we've -- the silver lining in the cloud was -- as we knew we had to really go attack inventory generate cash. I think we've learned that we can operate at lower inventory levels and still do so with very good customer service and I think they may find some of the same so I'm not going to predict that one yet, but yes, I will reaffirm what you started with which is most of the retail stocking, I think, is behind us. We are still seeing some destocking though in our industrial and commercial channels because, as I said, the economy affected them in terms of consumption at a later point and so that restocking is still going on in those commercial and industrial channels.

As well as internationally. We're still destocking outside the US.

Okay. And then secondly, you just hired a person to head a new spot, President of Asia-Pacific. This is a region you have been relatively underdeveloped in. I guess this just falls onto the last question. What's the opportunity there, what's sort of the time frame when you guys feel like you can build up that business to be a real contributor to the bottom line?

Right. Well, first to clarify, I didn't hire a new person, Magnus Nicolin was already the President of our EMEA, so I just added the APAC responsibilities. Even though Asia-Pacific is also undergoing a lot of economic challenge, probably with the exception of China, in the long run, it's clearly a high-growth opportunity. In the short-run, even China would be a growth opportunity, so the appointment of Magnus, I think is a signal that we're devoting a high level of strategic resource to put better definition around about how to better exploit this opportunity. It's a relatively small percentage of our business today, 5% or 6%, but obviously has potential to be a lot larger and so we're going to take advantage of this current opportunity meaning the -- especially in China where the economy is not as impaired and really trying better to define the opportunity and how we can exploit it. It should an bigger piece of our business, that's all there is to it, but I don't have any number and I don't want to throw made-up numbers at you today.

Perfect. Thank you.

And your next question comes from Bill Chappell with SunTrust.

Good morning.

Good morning, Bill.

Digging a little further into the strategic spend for the second half. Is that equal weighted across all three divisions or is it focused on more of the Home products? How should we look at that?

It's not equal weighted. It's focused more on Home & Family and Office products. So, while there will be some within the Tools, Hardware & Commercial products, specific to a couple of new innovations we're launching in the Rubbermaid Commercial business. The majority of that is Home & Family and Office products. There's also some corporate investments we're going to make, so corporate investments in delayed training, investments in our IT and structure and things like that.

And just trying to understand, how much of this is -- of catch-up to get you back to a normalized level of spend and how much it is really focusing on growth with hope of a rebound next year?

Half of it was delayed from the front half, okay, and the other half, frankly was budgeted or planned in the back half, but was available to cut if we didn't have a stronger first half as we had, so I think the spend rate in the back half will be comparable to what we did in 2007 when we were spending a little over 6%. I think we'll be back to those type of rates in the back half.

Okay. One last, I understand Home & Family is holding up relatively well. As you look at Office products, which you're spending back into, do we see light at the end of the tunnel there, by the time we get to the fourth quarter or first quarter of next year of it bottoming out or maybe starting to rebound?

Well, again if you look at it's core reductions -- it's core reductions are very consistent with total Company, the 7% to 10% range and so it's kind of looking what I'd call average and the answer is we do think that that's one of the segments that will come back faster than some of the others.

Great. Thank you.

And your last question comes from Linda Bolton Weiser with Caris.

Hi. Maybe you were talking about this already, but can we think about possible acquisitions again in 2010 or is that more a possibility for 2011?

Probably 2011 or beyond.

Our first goal is to get our credit metrics back in line with a solid triple B rating. So, that's our focus now with cash.

Okay. Great, thanks a lot.

And that does conclude our Question and Answer session. We'll turn the conference over to our hosts for any closing or additional remarks.

I don't think I have any concluding remarks other than once again, thank you for your interest and support and talk to you again next quarter.

Thank you very much. (Operator Instructions) You may now disconnect.