諾威品牌 (NWL) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's third quarter 2009 earnings conference call. At this time all participants are in a listen-only mode. After a brief discussion by management we will open the call for questions. Today's conference will be recorded. Today's call is being webcast live at www.newellrubbermaid. com 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 719-457-0820 for international callers. Please provide the conference code 1218477 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.

Thanks. Welcome to Newell Rubbermaid's third quarter earnings call. We appreciate your participation. Joining me are Mark Ketchum, President and Chief Executive Officer, and Pat Robinson, Chief Financial Officer.

Let me remind everyone today's announcement includes certain forward-looking statements which are subject to a number of assumptions and variables. We encourage you to review the detailed safe harbor and risk factor disclosures that are laid out in our filings with the SEC. We further caution that you the Company does not undertake and specifically disclaims any obligation to update any forward-looking statements that we make today. Please also note that during this call, we will refer to normalized earnings and other Company defined non-GAAP measures. Reconciliations of these non-GAAP financial measures to GAAP financial measures are included in the earnings release and also the investor section of our website. With that I would now like to turn the call over to Mark Ketchum.

Thank you, Nancy. Good mornings everyone, and thank you for joining us today. I'm pleased to report that Newell Rubbermaid delivered another solid quarter with results coming in better than we had forecast on several fronts. Normalized EPS of $0.38 was ahead of our guidance and an improvement over last year despite a very challenging top line. Gross margin of 37.4% represents a significant improvement over last year's results. Operating cash flow of $328 million was also strong.

Based on Q3 results, our expectations for full year performance on these metrics have increased as well. Overall, the theme for the third quarter was stabilization. Core sales, although still down significantly, compared with our year-ago results, seem to have found a relatively stable bottom with 8% to 10% declines for four quarters in a row now. We believe this is a new base we will grow from.

Gross margins with help from our planned product exits, have bounced back from last year and even outperformed the high watermark we established in 2007 before the economy tanked. We're quite proud of the fact that our 2009 gross margins will be an all-time record for Newell Rubbermaid. Year-to-date cash flow of $416 million has been very strong and significantly higher than fiscal '08 levels. Thanks to continued discipline and reduced inventories and using working capital more efficiently. Finally we're pleased that we've once again been able to deliver normalized EPS in line with or better than guidance. We now expect to outperform 2008 full-year normalized EPS results driven by gross margin improvement and the actions that he we took to control our SG&A cost structure. All in all, we're pleased with our performance this quarter and year to date, and we're cautiously optimistic about 2010.

I will talk more about next year in a minute, but first, let he me tell you more about how we've managed the current year. We've been extremely diligent in managing our SG&A spending to deliver targeted bottom line results enacting contingency plans as necessary early in the year. Higher gross margins and structural cuts have allowed us to begin reinvestment in certain areas of our portfolio. Recall we told you last quarter we would spend incrementally in the back half of the year on selective advertising promotion and sales support, as well as on longer term research and development. We did exactly that in Q3.

While SG&A expense spending was down 11% to last year, it was about $30 million above the run rate of the first two quarters. And in Q4, we'll be supporting our brands for the important holiday season, so that spending will likely trend a little higher to drive sales where we see some strength while building our new product pipeline and our growth platforms for 2010 and beyond. Let me give you some examples.

During Q3, we invested to support our critical back-to-school season which helped drive slightly better than expected results. In addition to the media and in-store marketing I described last quarter, our Sharpie brand team extended their Uncap What's Inside campaign with innovative marketing and PR tied into New York fashion week. We saw market share gains in several product categories, and thanks to a more evenly distributed order pattern on the part of retailers, replenishment orders were relatively strong, and returns low relative to previous years' results.

Our Office Products group is also investing by putting more feet on the street in support of our Mimio Interactive Whiteboard technology and student response systems. This business, although relatively small is one of the fastest growing product offerings in our portfolio. Some of the Federal Government's stimulus spending has been directed to capital investments in education, and these dollars are making their way down to the district level, presenting us with a prime opportunity to make inroads with Mimio.

In our Rubbermaid commercial product GBU we are focused on delivering innovative product in response to concerns of commercial property managers in this challenging economic environment. For instance, our technical concepts offering of hand sanitizers and hand cleaner dispensers has been performing exceptionally well. As a result, technical concept sales were up 10% in the third quarter. These products speak directly to property managers' heightened awareness of health and hygiene best practices in public settings, driven most recently by the H1N1 concerns. And, of course, this product line is particularly attractive since it includes a high percentage of consumable sales of our proprietary skin care products.

During Q3 we also increased support behind the launch of a new line of versatile, convertible Rubbermaid material handling carts. Initial results indicate very good consumer acceptance. With industry leading durability, superior ergonomics and enhanced maneuver ability, this line will help serve as a key platform for future growth.

We are continuing to invest behind innovative Home & Family product launches including Calphalon Unision, our newest line of premium nonstick dishwasher safe cookware. Since launching this past spring, Unison has performed extremely well exceeding our expectations and driving substantial point-of-sale and market share gains. Calphalon has also won expanded distribution in key near neighbor categories such as cutlery, heating, electrics and bakeware. Those are just a few examples, but across our portfolio we believe these types of investments are critically important drivers for top-line growth. I'm pleased that our year-to-date performance has allowed us to move beyond the hunker down mode and start back into the invest for the future mode.

As we turn to our outlook for the remainder of the year, it's worth noting that while we're seeing stabilization in most of our businesses, we have yet to see a real rebound. The retail consumer is still very cautious and commercial demand is constrained by the weak construction in employment markets. Consequently our full-year 2009 sales outlook remains unchanged with the sales decline at the unfavorable end of minus 10% to minus 15%. This outlook reflects a high single-digit decline in year-over-year core sales consistent with our year-to-date results. The balance of the decline reflects planned product line exits and unfavorable FX.

Despite the sales softness business we are once again raising our normalized EPS and cash flow guidance. A reflection of a good third quarter and year-long attention to gross margin expansion, expense control, and inventory reduction. Our 2009 outlook now anticipates operating cash flow of approximately $550 million as compared to our previous forecast of around $500 million. This is a $100 million improvement over 2008 despite a significantly lower sales base.

We are also increasing our 2009 normalized EPS guidance to a range of $1.27 to $1.32, up from previous guidance of $1.15 to $1.30. This improvement reflects the flow-through of our third quarter earnings up side. We are still in the early stages of our 2010 budget process, so we don't have definitive guidance yet regarding next year's performance. But I will share some of our preliminary thoughts with you to help with your own projections.

We think it's likely that consumer spending and commercial demand will begin to rebound next year but probably not until the second half. At this point, I think it's reasonable to expect low single-digit core sales growth in 2010, which should just about offset the overhang from this year's product line exits. Remember, we exited categories gradually throughout 2009, so we'll experience about a two to three-point year-over-year drag from this effect.

Gross margins should continue to be a positive story for us in 2010. Mix improvement from innovation and brand building, plus category exit benefits and another year of restructuring savings should drive continued gross margin expansion. We will also continue to reinvest a portion of our 2010 gross margin growth into strategic brand building activities. Net we think it's possible to use this combination of modest sales growth, further gross margin expansion, and brand building reinvestment to push earnings growth towards 10%. Let me turn the call over to Pat at this point. He will walk you through the financials and additional detail, and then I'll provide some summary comments.

Thank you, Mark. I will start with a review of the third quarter 2009 income statement on a normalized earnings basis. Net sales for the quarter were $1.4 billion, down 17.7% compared to last year, and consistent with our guidance of high teens percentage sales decline. Core sales, which exclude the impact of currency and product line exits, declined 9.6% in the quarter, at the unfavorable end of our guidance for a high single-digit decline. Planned product line exits reduced sales by six points, and unfavorable foreign currency contributed negative two points. Both of those metrics were in line with our guidance.

We saw significant improvement in gross margins this quarter. We generated $543 million or 37.4% of sales for a 480 basis points improvement over the third quarter of 2008. There were several contributors. Lower input costs as we continue to comp against the dramatic raw material inflation from a year ago. The read-through from our 2008 and 2009 pricing actions, as well the impact from product line exits and Project Acceleration. The negative in the quarter was lower plant utilization rates, resulting from the sales decline and the reduction in inventory levels.

As Mark pointed out, we reduced SG&A expense by $44 million compared to last year. This was driven by cost reduction programs initiated in 2008 and the incremental contingency plans we implemented this year in response to top-line pressure. However, we did invest about $30 million more in quarter three than the average quarterly spend in the first half of the year and now expect to increase that rate of spend again in quarter four in support of key branding, innovation and new product development opportunities. The increased investment compared to the first half trend is higher than we indicated on our last call as our continued strong gross margin performance has given us the ability to selectively invest to drive top-line growth in 2010 and beyond.

Quarter three operating income was $192 million or 13.3% of sales compared to $180 million or 10.2% of sales last year, a solid improvement of 310 basis points. Our year-to-date operating margin was 12.8%, a 200 basis point improvement. Interest expense during the quarter was $36 million, $3 million lower than the previous year, as we continue to pay down debt and improve our credit metrics. Our continuing tax rate in the third quarter was 31.9% compared to 28.4% last year. The increase was driven by changes in the geographic mix of earnings.

Moving on to earnings per share, the combination of strong gross margin expansion and continued aggressive SG&A management, drove normalized EPS of $0.38 ahead of our guidance of $0.25 to $0.35. The $0.38 excludes approximately $0.02 of dilution from the convertible bonds we issued in the first quarter. Normalized EPS also excludes approximately $27 million or $0.07 per share in restructuring related impairment charges associated with Project Acceleration.

Operating cash flow was another very positive story for us this quarter. We generated approximately $328 million in cash flow which includes a voluntary $75 million pension contribution. That $328 million compares to $364 million in the third quarter of last year. Our operating units did a nice job of managing working capital, particularly inventory. By reducing inventories we generated cash of $75 million during the quarter and $270 million during the last 12 months. This reduction yielded three fewer days of inventory on hand compared to a year ago. Year-to-date we've generated operating cash flow of $416 million, an improvement of $173 million versus the same period last year.

Based on our year-to-date performance we're raising full-year guidance for cash flow to approximately $550 million. That's a $50 million increase to our July guidance and reflects continued working capital discipline in the fourth quarter. We continue to anticipate approximately $100 million in restructuring payments for the year and capital expenditures of about $150 million.

Now I will turn to our segment information. Home & Family net sales were $597 million, a decrease of 16% versus last year. Planned product exits represented approximately 10 points of the segment's overall sales decline while unfavorable foreign currency reduced sales by one point. Our core sales declined about 5%. The best performance in the group, and for that matter in the Company, came from Rubbermaid Home and Food and Culinary Lifestyles. But Baby and Parenting sales were negatively impact by softness in the baby category worldwide.

Home & Family operating income was $84 million or 14.1% of sales, an increase in absolute dollars and percentage basis compared to last year's $60 million or 8.4% of sales. This 570 basis point improvement is attributable to relief in the input cost inflation in 2008, the benefit from product line exits and disciplined SG&A management. These positives more than offset the negative impact from lower sales volumes and unfavorable product and customer mix.

In our Office Product segment, quarter three net sales were $448 million, down 16%. Core sales declined about 7% as the Office Products category continues to be challenged both here in the US and internationally. About six points of the overall segment sales decline resulted from planned product line exits and another three points was attributable to currency. Office product operating income was $54 million down $6 million compared to last year. Operating margin was 12%, a slight improvement compared to the 11.3% last year as the benefits from SG&A reductions and product line exits were offset by lower core sales and the negative impact of lower production volumes in our plants.

In our Tools, Hardware and Commercial Product segment, net sales were $404 million down 21%. Core sales declined about 19%. This business continues to be impacted by softness in commercial and industrial channels and sustained weakness in residential construction spending. Unfavorable foreign currency reduced sales by two points. Operating income was $75 million, down $6 million compared with last year. Operating margin improved 270 basis points to 18.6% of sales, reflecting lower input costs and structural SG&A reductions.

Let me now turn to our 2009 outlook. Our sales guidance for full year 2009 is unchanged. We expect sales to be at the unfavorable end of a 10% to 15% decline. Core sales are expected to decline in the high single digits while product line exits will contribute a negative four to six points. Foreign currency will result in about a two-point reduction, and acquisitions contribute about one point of improvement. As a result of our third quarter performance, we are increasing our full-year guidance for normalized EPS to a range of $1.27 to $1.32. This guidance excludes any assumed dilution from the converts. We expect interest expense of $145 million, and our effective tax rate should be about 31%. We anticipate pretax restructuring charges of between $110 million and $120 million, or $0.28 to $0.31 a share. These restructuring charges are also excluded from our normalized EPS guidance.

For the fourth quarter we are anticipating a net sales decline of between 2% and 4%. Core sales should be flat to down low single digits as we begin to comp against significantly lower sales volumes from quarter four 2008 with a three to five-point decline from product line exits. Foreign currency exchange flips over to a positive impact of about two points this quarter. Quarter four normalized EPS is expected to be in the range of $0.23 to $0.28 compared to $0.11 a year ago.

In conclusion, we're feeling pretty good about our business. We haven't yet seen improvement on the top line but the trends seem to have at least stabilized. I feel very good about cash flow and about the Company's capital structure after the last step in the refinancing was finalized this quarter. And our strong year-to-date performance on gross margin and SG&A reduction gives us the confidence to loosen up the purse strings a little and start to invest selectively to drive top-line growth in 2010 and beyond. In short, I think we've made good progress this year despite a number of challenges, and I'm excited about our long-term prospects. With that, I will hand the call back to Mark for his final comments.

Thanks, Pat. I want to conclude by thanking all of my new Rubbermaid colleagues for a terrific job of delivering on our financial commitments in the face of a very challenging economic environment. I'm pleased by our strong third quarter and year-to-date earnings, cash flow, and gross margin performance. Our solid results during these difficult times give us even more confidence in our strategy.

As we look forward to 2010 we will continue to manage the business to protect cash and earnings, and to invest strategically to support future sustainable growth. By investing in consumer driven innovation and brand building optimizing our portfolio towards higher growth and higher margin businesses, and achieving best costs and efficiency across the organization, we will ensure Newell Rubbermaid is well positioned for long term success. As always, we thank you, our shareholders, for your continued support. With that I'll now ask the operator to open the lines for questions.

Thank you. We will now begin the question-and-answer session to. (Operator Instructions) Our first question comes from Bill Schmitz with Deutsche Bank.

Can you just talk about how the production down time has impacted gross margins and whether or not you expect that trend to continue in the fourth quarter into next year?

Well, it's been obviously it's been a pretty heavy negative impact for us. As we start the comp against last year's quarter four however it will be less so. And as we get into next year it should be a slight positive for us.

Can you put any numbers behind it?

I don't want to give the specifics around it, but that's the trend. The trend we see has been very negative for volume in the plants. It's stabilized this quarter. Again, be a positive going into next year.

Can you just talk about the level of de-stocking? Are we done with the de stocking? How much is left and where do retailer inventory levels stand?

We think the answer is, yes, de-stocking is essentially behind us. The tail end of it--recall that it started first in retail, then followed in commercial, and we think the commercial now is about at the end of its de-stock as well.

Lastly, if I could, how much is left on the sort of Project Acceleration savings and what are you expecting for next year?

We expect about another $50 million incremental next year, then the tail end will read through in 2011 just from our actions next year. Probably about half of that number.

Thanks very much.

Your next question comes from Bud Bugatch, Raymond James & Associates.

Good morning. I've got a couple of questions. First, Pat, can you talk a little bit about the Office Products segment in terms of the margin? I know the operating margin was 70 basis points better than last year but last year was an unusual year. Usually between second quarter and third quarter, the rate of decline in op margin is not as high as it was this year. This year is the highest--I've got in memory I think around 800 basis points from second quarter to third quarter. Was there something going on that caused that? How do we look at that going forward?

The gross margins were relatively flat between quarters. It was all SG&A expense was significantly higher in quarter three as the lion's share of our investment was in that segment, particularly in the technology and markers and highlighters part of business.

So that's going to continue in Q4 as well?

I think the spend will be more distributed in quarter four across the segments, but they will get their share of the increased investment. Not as much as--they won't have the lion's share like they had in quarter three but they'll have their fair share.

Bud, two things affected that SG&A spending trend. One is that back to school was later this year than it's been in previous years. That's what our customers were telling us, so we -- spending in that direction. Secondly, we made some incremental investments, which I alluded to including Mimio and Sharpie in my remarks. Those are some of the incremental investments because those are things we saw that were working.

Do I appropriately infer from that, Mark that the op margin for Office Products in the fourth quarter should be higher than it was in the third quarter as it typically has been in a number of past years except for last year?

I don't think we want to give that quite that level of specificity. It certainly won't be anything chose to what it was in the second quarter. It will be more like the third quarter than the second quarter.

Okay. And for my second question, can you talk about where you are in the product line exits from a standpoint of what revenue -- what poundage of resins you're using today on an annualized rate, where you think you will be next year? I think resin costs, at least by our numbers, are starting to go up, so that should start to be unfavorable year-over-year in the fourth quarter, is that not correct?

I think they will be slightly unfavorable in the fourth quarter. Our usage of resin is in the 350 to 375 range.

On an annualized basis. So you are at your target. You were going to try to get to the 400 million pounds, if I remember.

Actually, below that.

Thank you very much. Pat, best of luck and congratulations on all the good work you've done.

Thank you.

Your next question comes from Bill Chappell with SunTrust.

Good morning. Mark, you talked a little bit about next year seeing some end commercial markets improving by the second half. Is there anything that we can base that on or get excited about? And when you look at your top-line growth expectations for the core business, is that just market share gains, or is that some assumption that the end markets do improve?

It's some of both. It's certainly driven most importantly by market share, especially in the first half of the year. Our expectation is that the second half of the year will see that growth coming in terms of total consumption in both the consumer and commercial channels. I mean, a lot of these products are product categories that eventually have to be replaced. So while in the short term, businesses or individual consumers can postpone a purchase and make do with what they have eventually they have to go buy more.

Got it. And on -- specifically on the baby and parenting comment, any reason behind the weakness that you know of during the quarter, is that expected to extend through fourth quarter and into early next year?

Well, we think we're going to see better results in the fourth quarter. It was a little bit of surprise. Some of it was timing of promotional events, some big customers, some have actually been restructuring and reset timing at some big customers. Some has been a trend in consumers to continue.

Again, the new mom, the expectant mom, right, those are people that are usually not flowing in money, so they're trying to conserve their money, so we're just seeing a trend for people -- for women to in some cases trade down, in some cases borrow a stroller or car seat and some of those kinds of effects, so it's put a damper on that category. So we held share during the period and yet saw a bigger decline than we had anticipated going in.

So have you seen some improvement in October or more of the same?

We don't have that visibility yet.

Got you.

We'll expect to see that segment grow from a core standpoint in the fourth quarter.

Great. Thanks so much.

And your next question comes from Jason Gere with RBC Capital Markets.

I guess just talking about the core sales for next year, can you give us -- right now I assume that you're having dialogues on planogram resets with both mass and specialty channels. Can you talk about where you stand on that, when you think will you have more visibility in terms of expansion on the shelf?

Are you referring to any particular category, Jason? Because obviously that varies across our broad range of businesses.

Talking more generally speaking, but I guess I would focus more on Office Products and Home & Family.

Well again, without going into category by category or customer by customer specifics, our trends are good we are seeing expanded distribution on several of our key new product initiatives, on a number of our most important categories in both Office Products and Home & Family. So we anticipate that will be a positive for us next year.

Okay, and then just on the same topic of core sales, when you're talking about flat to slightly negative fourth quarter, and as we look to next year I think you said low single-digit organic sales. Should we anticipate that the trend should continue at that -- at the fourth quarter levels in the first half, then a broader expansion in the back half, or how are you looking at that, taking into consideration the easy comps?

The answer is yes, about the way you just described it. We think that sequentially it ought to get stronger throughout the year. I don't know if it will be exactly every quarter being stronger than the one before, but certainly the back half will be stronger than front half, and that's both because we think the commercial market will kick in later than the retail. One thing I would offer up is that we're already seeing, and will see first in our consumer -- our consumer heavy product categories and business units, we'll see that growth occur first. We'll see it lag in Tools, Hardware and Commercial.

So even in the fourth quarter of this year, we'll begin to see more of the Home & Family categories as an example grow. Office Products will probably be next because it's a lot of consumer but has a strong commercial component to it, and we'll see the Tools, Hardware and Commercial products broke be the last to start coming outs of it because it is even more heavily weighted towards commercial product.

Okay. And just the last question, just adding on to Bill's question before, on the baby and parenting, the Home & Family, while the sales came in lighter than anticipated the margins are very strong. So how do we think about this going forward? Is this one where we're going to see a lot more investment to support the category growth going forward? So the 14%, which I think is the best I've seen in terms of what you've delivered, are we looking more back into that 12% range as more of a normalized way of looking at that time margins of the segment? Thank you.

Well, I don't think we're ready to talk about margins for 2010. But again, Home & Family business is one of businesses, as I've said,we'll see some of the best opportunities in fourth quarter and right' way in 2010 to drive the top line. So we will -- that's one of the places that will be increasing investments. They've made improvement in structural costs in gross margin and we think that's sustainable.

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

Hi, Connie.

With the down time you've taken, and as you look at what demand might be when it rebounds, do you think that your plant layout is appropriate for the size of the sales growth you think over the long term will happen, or as you look at it do you think you have too much capacity?

No, we actually think it's pretty good. We think we're about right. The steps we've taken this year in terms of structural reductions, have tried to address where we had too much capacity -- and going forward wouldn't anticipate needing to substantially change our manufacturing footprint to be right going forward.

Recall we've been in continuous process of restructuring manufacturing, and the other thing you need to keep in mind is roughly half of our manufacturing now is third-party sourcing, and therefore we can flex that up and down easier during these kinds of times. So it's only about half of our total output that we have to pay attention to what you just described.

Okay. Just to -- back to the outlook for sales growth for next year I think you said that the increase in core sales growth would be offset by pretty much of what's left in the exit, product line exit. So does that mean that any sales growth, total sales growth, reported sales growth, would be based more on the contribution from currency? Is that the right way to think about?

Again, I think our total sales growth will probably be flattish, and with the low single digits in core pretty much off set by the carry-over effects of product line exits. We are essentially done with the vast majority of those product line exits. But because they didn't occur all at once on January 1st, there's that lag effect that will be a drag all yearlong.

Right. The sales will be essential flat with core sales up low single digit range offset by that 2% to 3%. Carry-over effect from product line exits. And there should be a positive impact from foreign currency. We haven't tried to quantity that get. It keeps changing. We should have a little bit of tail wind.

If I could just ask one last question on your gross margin, given the business as you know, is there variability in the quarter on how we should think about modeling for next year? Because the middle quarters aren't the full year rate, or are they?

The first and fourth quarters historically have been the lower two, and the second and third the higher. The biggest driver is that Office Products have the highest gross margins of the segments and their sales are highest in those two quarters as a percentage of total. The other driver is our total volume is low in Q1, so that suppresses that margin. In Q4, we tend to have a higher percentage of promotional business, particularly in consumer businesses, so that also suppresses the margins a little bit in quarter four.

That's helpful. Thank you.

Your next question comes from Lauren Lieberman with Barclays Capital.

Thanks. First question was just going to be on that Home & Family business. So margins were good enough that it would almost suggest you weren't totally surprised by the rate of core sales decline. So I'm wondering if that's the case and how much of this really was related to timing, maybe of of the planogram stuff you talked about not happening until Q4, thus you maybe spent less money on those businesses in Q3 than you would have anticipated if the planogram stuff had gone into the mark.

A little bit of it is timing. We expect to see growth in that segment in quarter four. As far as the timing of the SG&A spending, we're spending pretty much on plan, and we do expect an up tick in quarter four in that segment.

But then why were margins up so much in the quarter if sales was a significant negative surprise?

Gross margins came in as a positive force for us in that segment, so that covers the gap in the miss in sales.

Okay. And then what is it, though, about Q4 -- because again, it sounds like the sequential deceleration in that business really was a surprise, so is it the easy comps for Q4 that are giving you comfort? Is it your knowledge of what's getting on the shelf and when, new product activity? I feel like I want something else to hold on to for why I should be comfortable with growth after a 5% decline sequentially.

Lauren, it really is all those things. It's the new product initiatives, it's the timing of promotional or reset activities across our customers. It's all the things you just mentioned.

Some of the reset stuff, it's an end of '09 event, it's not just a 2010 event.

That's true. Depending on the business and the segment, that's right.

Okay.

And the promotional activity can happen you know that the baby and parenting business, for lack of a better word, is choppy quarter to quarter, depending on when the retailers run their promotion, so we're getting a little bit of rebound just from the timing of that activity.

Okay. And my other question was just going to be on pricing. You ended last year, I think it was at a $200 million run rate for incremental pricing, but you realized $100 million through the year. In 2009 thus far, has that -- are you on track for that other $100 million to show up, or have you adjusted price points along the way?

We're on track and for that to read through as well as some additional pricing we've taken, mainly in our international businesses related to currency. So pricing pretty much read through on our expectation.

If you look into next year at this point, is there much in the way of inflation in your very preliminary budget or is it thinking the it will be fairly benign?

There's going to be modest inflation. We have seen recently a tick-up in oil, and its related impact on resin. We don't think it will be at the 2008 levels, but we think it will be higher than '09.

And does it feel like the market could bear additional pricing should inflation be at the degree you need it?.

In certain categories we can take pricing. We also think we will get strong benefit from Project Acceleration, from ongoing productivity initiatives, from the overhang of the product line exits. Frankly we in fact we'll have favorable mix driven by new products, so we think the combination of that will more than offset the modest inflation, call it, to allow us to improve gross margins again next year. Not to the extent we're improving them this year. We're looking at a 350-basis-point improvement not this year but we think 100 basis points is not unreasonable.

Okay, great, thank you so much.

Your next question comes from Joe Altobello with Oppenheimer funds.

Thanks, good morning. First question is on the sales outlook for next year. Just to be clear, you guys are not assuming any restocking of inventory at the retail level in that number.

No, we're not.

Any market share gains in that number?

Yes.

Okay.

Both market share gains and a gradual return of consumer spending.

Okay. So it's category growth plus some modest market share gains in terms of the 2% to 3% organic growth.

Right. And accelerating gradually throughout the year.

Got it. Secondly, in terms of the SG&A, you guys obviously have done a good job of managing that this year, and, Mark, you mentioned earlier about some reinvestment next year. In terms of the amount of reinvestment, you are, I guess target has been about half of gross margin expansion getting reinvested. Is that still a good assumption for 2010 as well?

I think that's a good starting place. Again, we haven't put together our final budgets, so it's a little early to try and zero it in that closely, but order of magnitude, that's the way we've always thought.

Okay. Then lastly, on the gross margin expansion, the 480 bps in the quarter, you guys talked about a number of factors. Was one a standout, or were all three or all four of them equal?

They were sort of equal. The three major ones are the product line exits, the input costs, and the pricing combination and of the three, all pretty equal.

And the product line exits, 200 basis point increase from that. Sounds like you're pretty much on course for that. Is there up side to that number?

Three-quarters of that is reading through this year, the remainder will come through next year because we're not out of all of that product as of first day. So we are on track for the total of 200 with the split that I just mentioned.

Thanks.

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

Hi. My first question just to clarify on the top line did you offer us any preliminary guidance for currency impact on 2010 top line?

Actually we did not but I mentioned on a previous question that with the currencies as they are today we expect a little tail wind.

Sorry, I didn't miss that. The second thing is just a bigger picture question on the loosen up the purse strings, we're going to spend a little bit more money to drive top-line growth. That sounds like absolutely the right strategy, but I guess in terms of your confidence level in where you're spending money, I know there's been a shift over the years in terms of more consumer marketing as opposed to retailing, more marketing directly to the retailers and different types of promotions.

Mark, if you can speak to where you are from a marketing/investment perspective and your confidence that the money you spend will actually bear fruit in terms of driving those market shares that you're expecting.

Well, we're highly confident, Wendy. I think the thing that he we've been most encouraged by is we're seeing more and more of those kinds of success stories. I try and mention a few of them on each of my calls. But across the board, including some of businesses that I think in the early days were the most skeptical as to whether or not this would work, we're finding that it does.

So starting with great consumer understanding, making sure that our concepts and our product innovations really are addressing truly important and unmet consumer needs. And then doing a great job actually building that into the product, getting those manufactured for the right cost so that we could offer them for the right retail price, then making sure that our marketing is effective. Our marketing mix continues to shift and certainly will continue to vary by business unit.

What hasn't changed is that, for instance, our commercial businesses still you need to go more direct to the end users and demonstrations count a lot. We continue to invest in that. I talked about more feet on the street in our Mimio, and that's an example of an investment that frankly is more sales people and product demonstrators, because ultimately that's how you make that conversion to a school board or a teacher who is running a test on behalf of the district or the school board, and so those are examples of how we're really targeting that spending. Many of our more consumption driven categories, like our office products, like our Rubbermaid food, more broad-based media support, including TV works, and we're continuing to drive that.

And so I think that businesses now are really in tune with the concept of starting with consumer understanding, building good concepts, putting products that match the concepts, getting the price points right, so that it gets retail support and shows up as a value on shelf, and then making sure the marketing message is put through in the most effective way.

So if you could clarify in terms of, the again, the loosening the purse strings concept, would you say two-thirds of that is oriented towards stuff that either the retailer or the consumer is going to see, and one-third of it is R&D? How much of it is internal spending versus, I guess, external spending?

That's probably a good guess. I think about typically about a third of our spending is R&D and the other two-thirds is activation.

Got it. Terrific. Thank you very much.

Thank you.

Your next question comes from Chris Ferrara with Bank of America.

Hey guys wondering if you could talk about the new product initiative pipeline as you go into next year. I understand this hasn't been the most aggressive of new product years given the macro setting but is the pipeline pretty full for 2010? And is that part of your confidence in that low single-digit growth rate or would you say the pipeline is closer to a normalized level recommend active to history?

I think it's fuller than history, Bill. I'm sorry. Chris. I think it's fuller than history, and I think that the only question we still have in terms of our planning for our budget is really making sure that the consumer market really is ready for each of those initiatives. So we will time them, we will sequence them, and we will spend according to where we see the strongest demand. But the pipeline clearly is more robust now than it's been in past years.

Great. And I guess that gets back to another question that was asked earlier around shelf space. I think you were answering on planograms in view specifically on the businesses that were asked. You mentioned that you have some visibility on new product but if you take a step back and look at how you feel about shelf space across the country, A, is there any visibility into those planograms more broadly across the whole portfolio, and if there is is it good or is it good or is it just too early to tell at this point?

That's always a really hard question to try and answer for the Company because it's really important to go business by business and customer by customer, and I don't think that's appropriate to try and do on this call. But again, I would say broadly speaking, we're pleased with the reception that we're getting to our new products. That's where we clearly look for new product placement and strong support on shelf. The places where we've seen reductions in the past year are places where we purposely wanted to see reductions. So we have de-emphasized or exited categories, and that's where we expected to actually see shelf declines and have done so.

So part of getting this mix right and getting the base right to grow from going forward was giving up. So we've lost some shelf space on wood case pencils, for example, but we're gaining or holding shelf space on our value added office products, and so that's the trend that we wanted to see and we are seeing.

Great, thanks a lot, guys.

Your next question comes from John Faucher with JP Morgan.

All my questions have been asked.

(Operator Instructions) Our next question comes from Michael Kelter with Goldman Sachs.

Quick question on tools and hardware. It's been down running roughly 20% on a core basis for four quarters. You have run through that and have got a new base to work off of. I heard you on the beginning part of 2010. Is there a point, either the back half of '10 or even into '11 where it shows true cyclicality and really grows, make up some of that lost ground, or is this really a new base and a lot of that demand is gone forever? How should we think about it?

At some point it really does return. I don't know if home construction will ever be at the peaks that it was in '06 and '07 but it certainly will come up off of where it is today. Commercial construction will also rebound from where it is today. And the replenishment and outfitting of both existing and new buildings from our commercial products will, it's not even entirely dependent on construction bouncing back so that will come back more quickly. I think there is a lot of cyclical up side in all the tools and hardware, and in particular, the Rubbermaid commercial business.

Thanks. The other question I was going ask around SG&A, if I look forward to 2010 and you have let's say low single-digit core sales offset by the low single-digit product line exits, maybe one or two points on forex, that leads to a top line up one or two percent.

Is it feasible that SG&A could be up less than that or even down on an absolute basis to generate some fixed cost leverage if you are going to spend back against the business? Does acceleration give you some of that leeway, or is SG&A going to come up in a low single-digit fashion as well and that should -- and the real margin gains are from gross margin only?

Most of -- the gain will be from gross margin expansion as far as the drop-through to operating margins. We will have some structural cost take-out next year from Project Acceleration. A lot of that would be in Europe, some of it frankly in the finance organization as we get further down the road and shared services. However, we will invest more in our strategic SG&A next year, and that will more than offset the structural change.

Thank you very much.

Your next question comes from Mark Rupe with Longbow Research.

As it relates to gross margin expansion for next year do you expect to evenly flow through the quarters relative to 2009?

Ask that again.

The improvement in gross margin. Do you think the flow through next year will be kind of even on a quarter -- relative to this year's quarter basis or will be more back half weighted with volume?

I honestly can't answer that we haven't done the quarterly breakout yet. I just don't know yet.

Secondly, on the inventory position, obviously it came down three days. How do you feel about your situation there?

We feel good about the -- what the operations have done on inventory. They were down $270 million to the same point last year. Take out is more than the sales decline or the cost of sales decline -- we think we have that read through for the year. We don't think we're done there. We're still in the 75 to 77 day range, and that's not the ultimate destination. We think over next several years, three to five, call it, we should be able to get down to 60 days of inventory with the initiative around SAP, rolling it out throughout the Company as well as our process around inventory management is improving every quarter. So we're happy with the progress, but we think there's still room to go.

Lastly, on the product line exits for next year, is it still in the Home & Family and Office, primarily?

That's correct.

Okay, thank you.

Your next question comes from Linda Bolton-Weiser with Caris.

Hi, I was just curious if when you give EPS guidance for 2010 are you still going to be using that lower share count -- it's a little bit deviating from GAAP rules to not use the higher share count.

We're going to hold the share count, not constant. We will play through any changes due to equity compensation but as far as the convertible is concerned we are going to exclude that from normalized guidance on EPS.

Okay, and then can you just review the balance sheet for us and refresh when you say the next piece of debt is coming due and what you're thoughts are on the balance sheet at this point?

We're happy with the progress. We're down to$2.6 billion in debt at the end of the third quarter. We'll continue to pay that down through next year. That's our main objective for cash over the next twelve months is to get our credit metrics back to the solid BBB. I think we have about $75 million left of the notes due in May still to pay down, then about $50 million of the term loan with our bank group due in September of next year. We have about $50 million due in December of this year of the bonds that we partially paid down in March. Call it $175 million over next 12 months. As we improve EBITDA we think that our metrics will get back to support that solid BBB rating.

Okay, great, thanks a lot.

And your last question is a follow-up from Connie Maneaty with BMO Capital Markets.

Thanks for taking the follow-up. In the second quarter, --

Hello, we can't hear you, Connie. Connie? We can't hear you.

Are you there?

Go ahead, Connie. Your line is open.

Hi. Does that work?

Yes.

Okay, good. In the second -- on the second quarter call you said you thought you might have to roll back prices in the second half because of what was going on competitively. Did that materialize or not?

Not to any great degree, no. There might be certain specific instances where we've given up price, but again, pricing is reading through to our expectation right now.

Okay, thanks very much. If we were unable to get to your question during this call, please call Newell Rubbermaid Investor Relations at 770-418-7662. Today's call will be available on the web at www.newellrubbermaid.com and on digital replay at 888-203-1112, or 719-457-0820 for international callers, with the conference code of 1218477 starting two hours following the conclusion of today's call and ending November 12th. This concludes today's conference. You may disconnect.