諾威品牌 (NWL) 2009 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Newell Rubbermaid fourth quarter 2009 earnings conference call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we'll open up the call for questions. Just as a reminder, today's conference will be recorded. Today's call is also being webcast live at newellrubbermaid.com on the Investor Relations home page under events and presentations. A slide presentation is also available for download. A digital replay will be available two hours following the call at 888-203-1112, or 719-457-0820 for international callers. Please provide the conference code 6778854 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 very much. I would like to welcome everybody to the Newell Rubbermaid fourth quarter call. We appreciate your participation today. Joining me on the call will be Mark Ketchum, our President and Chief Executive Officer, and the Company's new Chief Financial Officer, Juan Figuereo. Our fourth quarter earnings release and a supplementary deck are available on our website.

Before turning the call over to Mark, I would like to remind the audience that some of today's comments will be forward-looking statements concerning the Company's plans, projections and objectives for the future. These statements are subject to a number of assumptions and uncertainties. Factors which could have a material adverse effect on our financial results and cause our actual results to differ from our forward-looking statements are laid out in our filings with the SEC. We further caution you that the Company assumes no obligation to update publicly any of these statements in light of future events. Also, our comments today include non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures are included in our earnings release and on our website. So thank you, and now I will turn the call over to Mark Ketchum.

Thank you, Nancy. Good morning, everyone, and thank you for joining us today. Before we begin our review of the financial results, let me welcome Juan Figuereo to his first quarterly earnings call as Newell Rubbermaid's Chief Financial Officer. As you have seen from our earlier public announcement, Juan has many years of prolific experience in the consumer products industry, having worked with PepsiCo, Frito-Lay, Wal-Mart, and most recently Cott Corporation. We're excited to have him on board and are looking forward to his contributions to the business.

Turning to the numbers, I'm pleased to report that Newell Rubbermaid closed out the year with another solid quarter of financial results. In a tough economy, while consumers and purchasing managers had been reluctant to spend, we feel very positive about the progress we are making implementing our strategy. Our Q4 results are evidence of that progress. We generated net sales of $1.4 billion and normalized EPS of $0.27. Our normalized EPS more than doubled prior year results. Gross margin was a strong 37% and we generated operating cash flow of $187 million, higher than forecasted. While Juan will get into more detail on the quarter, let me take a few minutes to recap the year for you.

As you recall, at the beginning of 2009, we were facing an extremely difficult and uncertain sales environment. At that time, we made a commitment to protect earnings and cash flow generation in the midst of declining revenues. We've done just that and more. We grew normalized earnings this year by 8% to $1.31 and expanded gross margins by almost 400 basis points to an all-time high for Newell Rubbermaid. We generated operating cash flow of $600 million, a 33% improvement over 2008. This strong cash flow performance reflects a real emphasis on inventory management in addition to our continued gross margin expansion and cost reduction efforts. We further optimized our portfolio by exiting low margin commoditized product lines in our Office Products and Rubbermaid Home businesses. We enter 2010 with a stronger portfolio that is responsive to consumer understanding, product innovation, and brand marketing.

On the SG&A front, we took out almost $130 million in expense in the year, mostly by reducing structural costs. In the first half of 2009, we held back strategic spending as well, but as we entered the back half, we began to loosen the reigns and collectively invest in key parts of our business. The investment we protected the most was the innovation pipeline. R&D spending was not cut since these investments are needed to generate sales growth in 2010 and beyond. But even in the challenging environment of 2009, we've benefited from our innovation investments. Our core sales declined approximately 7% in 2009, about two-thirds of our businesses achieved market share gains, evidence that our consumer-driven innovation and brand building efforts are working. During the fourth quarter, we saw sequential improvements across the board, as we started to lap the economic decline in Q4 of last year. And our largest segment, Home and Family, was able to grow core sales in the fourth quarter.

Certain parts of our business performed better than others, attributed largely to the diversity of our portfolio. In simple terms, commercial markets have declined more than retail markets, and our business reflects this. In our Home and Family segment, the primary purchaser and often the end user is the female head of household. With a product portfolio that includes many indispensable items, such as car seats, strollers, food preparation products, food storage containers and hair care accessories, this group is the least discretionary of our portfolio. It's no surprise that Home and Family was the most resilient of our three segments, with a low single-digit decline in core sales for the year and modest core sales growth in the fourth quarter. Our Home and Family segment has done a commendable job using consumer research and insights to deliver meaningful innovation to its target consumers. We've been telling you for several quarters about the strong performance in our culinary lifestyles business. Behind innovative new products such as Calphon Unison premium cookware, plus expanded distribution in near neighbor categories like small electrics and kitchen prep. This business actually grew sales low single digits for the year and grew share even more.

Another bright spot in this segment is our Rubbermaid consumer business, which includes both Rubbermaid food and Rubbermaid home products. This business has done an excellent job in understanding its target consumers and developing unique storage and organization solutions to solve their frustrations. And as a result, our Rubbermaid consumer business has gained market share in its key growth categories.

The Rubbermaid brand definitely matters to consumers, as evidenced by the fact that Rubbermaid was recently ranked number one in a leading industry publications consumer survey of favorite home goods brands. In our investments in advertising, marketing and demand creation are also resonating with consumers. In commercial for Rubbermaid easy find lids was rated the most effective TV spot of 2009. These results demonstrate the advances that we're making in Rubbermaid's consumer-driven marketing transformation.

Our Office products segment serves both retail and commercial consumers in the office and education space. We experienced a mid-single digit core sales decline in 2009, in line with the overall company performance. Merchant channels have been more negatively effected by the economy than consumer retail channels. As we exited 2009, our retail customers are saying that consumer sales have stabilized and even show early indications of growth. However, the commercial contract channels remain weak, which is largely a reflection of high white collar unemployment levels and reduced corporate spending. Despite these challenges, I'm proud of the job our Office products segment has done, staging the business for future growth. They are making very good progress on an ambitious program of consolidating global platforms, rationalizing the number of SKUs, reducing operating costs and investing in consumer driven innovation.

By focusing the portfolio on the four leading brands, Paper Mate, Sharpie, Parker and Dymo, the Office products group is now better able to leverage innovation, branding, marketing, and the supply chain on a global level. For example, we are successfully migrating our regional everyday writing brand into Paper Mate and will launch new global Paper Mate packaging beginning mid year. Markers and highlighters, our Sharpie brand, gained share behind innovative products like the Sharpie pen and integrated marketing campaigns have leveraged Sharpie's impressive brand equity. As a result of our team's efforts, Sharpie has gone from being the largest permanent marker brand to become the largest writing brand in North America. In the technology GBU, we are seeing good traction from our menu, interactive white board and student response systems platform, which grew almost 50% in 2009. We're investing significantly in this business to build out our sales and marketing capabilities to provide further growth in 2010.

Our Tools, Hardware and Commercial Products segment is focused on construction and maintenance of residential and commercial properties. Because of this, it's the most cyclical piece of our portfolio. Professional tradesmen and industrial end users were heavily impacted by persistent weakness in housing, commercial real estate, and industrial markets. As a result, this segment experienced a mid teens percentage core sales decline. Even in this tough year, however, our businesses out performed many of their peers and gain market share in key categories. In addition, a diligent focus on streamlining structural costs and improving productivity help drive 120-basis point improvement in operating margins. Looking forward, this business is well positioned to deliver significant sales and income growth as the business cycle improves. Industry leading innovation and a strong new product pipeline, combined with a leaner and more efficient operating structure, provide competitive advantages that we can leverage.

Within our commercial products GBU, the addition of technical concepts has given us an entry into the fast-growing and trend-forward global hygiene markets. PC experienced high demand for its hand sanitizer and hand cleaner dispensing products this year in the wake of heightened concerns about H1N1 and other communicable illnesses. This business grew 25% in 2009. The comprehensive suite of skin care solutions offers superior performance in the lowest cost per use. PC is poised to capture additional market share and sales growth going forward.

In our Tools segment, the Lenox team is focused on taking market share by investing in new product innovations and spending strategically to generate trial and awareness. In 2009, Lenox launched its T2 technology, a reciprocating saw and hacksaw blades, the longest lasting blades on the market. T2's revolutionary design delivers up to 100% longer blade life and 25% faster cutting performance, rating a new standard of excellence and great value, which is critical in this economy.

Looking forward to 2010 and beyond, we're excited about Newell Rubbermaid's growth prospects. 2009 was a challenging year, yet we continued to make meaningful progress in our transformation to best in class consumer branding and marketing company. In a declining economy, we demonstrated that we can grow share. By growing share in a mostly flat economy in 2010, we will deliver modest share growth and modest overall growth which will accelerate when the economy begins to improve. I'm proud of the work our teams have done this past year that are positioning our businesses for growth, the leaner cost structure, significantly improved margins and lower working capital needs. Our innovation pipeline gives me even more confidence that we will see sequential improvement as the year goes on. 2009 required us to play more defense. 2010, we get back on offense. We see evidence of market stabilization across most of our portfolio. We are renewing our focus on driving top line sales growth. We expect our consumer retail businesses to lead the recovery followed later by our commercial businesses, consistent with the lag trends that we saw heading into the downturn.

Let me turn now to our financial outlook for 2010. We are making a change in our guidance policy this year. We believe full year results provide the most useful gauge of how our transformation is progressing. I want my teams focused on the long-term growth of their businesses, not on managing the quarters. So with regard to external communications, we are adjusting our guidance practices to focus on our annual outlook rather than on individual quarterly earnings expectations. We think this approach offers a better reflection of how we are managing the business internally and will provide you with a better gauge of our progress.

For the full year 2010, we expect low single-digit core sales growth, where sales exclude the impact of foreign currency and an estimated 2% overhang from the 2009 product exits. Remember, we exited categories gradually through 2009, so there will be some year-over-year drag in 2010. We anticipate sales growth will be more heavily weighted to the back half of the year, as the impact of our increased investment behind our brands begins to build and we benefit from some second half product launches. Gross margin for the year should expand by 75 to 100 basis points. This improvement will be driven by the positive impact of product line exits, restructuring savings, product mix, and increased productivity partially offset by higher input costs. We expect rising input costs to have a bigger negative impact in the first half of 2010, since as you will remember, commodity costs were at their lowest levels in the first half of 2009. We will continue to reinvest a portion of our gross margin improvement and strategic brand building activities and other strategic corporate initiatives.

In addition to increased A&P and R&D, we will invest in our ongoing global SAP rollout and additional sales resources, for instance, in our office technology and industrial products GPUs. The year-over-year increase in SG&A will be more pronounced in the first half of 2010, primarily because we significantly curtailed SG&A expenses in the front half of 2009 and then subsequently ramped up spending in the back half. For the full year 2010, we expect normalized EPS in the range of $1.35 to $1.45. Included in this outlook is an estimated $0.04 to $0.05 negative impact, resulting from the devaluation of Venezuela's currency. Excluding this impact, the midpoint of our 2010 outlook reflects year-over-year normalized EPS growth of approximately 10%. So with that, let me turn the call over to Juan to walk you through the financials in more detail. Juan?

Thank you, Mark. Before getting into the numbers, first, let me say that I'm really excited to be here and that I am energized by what I've seen in the short time since joining Newell Rubbermaid. I also want to acknowledge my predecessor, Pat Robinson, who has been helping me get up to speed on the Company and has really helped make my transition easier. I hope Pat is sitting at home listening to this call, so Pat, thank you. And now the numbers.

Net sales for the quarter were $1.42 billion, down 2.1% compared to last year. Core sales, which exclude the impact of foreign currency and product line assets declined 1% in the quarter. Planned product line exits reduced sales by approximately 4%, while favorable foreign currency contributed a positive 3%. Gross margin was $526 million, or 37% of sales, an increase of 700 basis points over the fourth quarter of 2008. Among the biggest contributors to this significant improvement were productivity gains from several initiatives including all the ones that are in project acceleration. Also improved product mix, the positive impact of product line exit and pricing. Also included in the number is the impact of better overhead absorption compared with last year's challenging quarter.

SG&A expense was $384 million, an increase of 8.2%, or $29 million as compared to last year. This was driven by stepped up support behind some of the key branding, innovation, and new product opportunities that Mark alluded to just a little earlier. You should view this as an early investment on our shift to growth, consistent with our model of reinvesting some of the gross margin improvement and structural SG&A reductions in support of sustainable top line growth.

Our operating income excluding charges for the quarter was $142 million, or 10% of sales. That's an increase of 77% as compared to $80 million, or 5.5% of sales last year. Interest expense during the quarter was $33 million, at 3.5%, or $1 million decrease compared to the previous year, as we continue to pay down debt and improve our credit metrics. Our continuing tax rate in the fourth quarter was 29.3% compared to 27.9% last year. The increase was driven by changes in the geographic mix of tax earnings.

Moving on to earnings per share, strong gross margin expense drove 145% increase in normalized EPS to $0.27. The $0.27 excludes approximately $0.02 of GAAP dilution from the convertible bonds that were issued in the first quarter of 2009. Please note that due to the call spread feature associated with these bonds, the economic dilution is smaller, a little less than $0.01. We have posted a schedule on our website that demonstrates the GAAP and economic dilution of convertible notes and the associated hedge transactions. On restructuring, normalized EPS also excludes approximately $13 million, or $0.04 per share in restructuring and related charges associated with project acceleration. The equivalent amount included in the prior year quarter was $19 million or $0.05 per share.

Shifting to cash flow, operating cash flow exceeded the estimate this quarter. We generated $187 million in cash flow, which compares to $212 million in the fourth quarter of last year. Our operating unit did a nice job of managing working capital and a particularly good job reducing inventories. We ended the year with 70 days, that is a full 12 days out of inventories, which contributed $243 million to our improved cash flow for the entire year. Our CapEx spend was $46 million for the quarter. We repaid $144 million of debt during the quarter, consistent with our strategy to use excess cash to pay down debt.

Now, turning to the segment information, Home and Family net sales were $606 million, a decrease of 1.7% versus last year. However, core sales increased 2.1%. Forex contributed a positive 1% and planned product exits reduced sales by 5.2%. This core sales increase was driven by Rubbermaid home and food, culinary life-style, and our North American baby business. As you have probably noted, this represents our first segment core sales growth in several quarters. Home and Family operating income was $50.1 million, or 8.3% of sales, an increase of 260 basis points in operating margin as compared to last year's $35.1 million, or 5.7% of sales. This improvement is attributable to core sales growth, relief from the input cost inflation that we experienced in 2008 and the benefit from product line exits. The improved results include the increased strategic SG&A spend during the quarter that Mark referred to in his earlier remarks.

Office products, Q4 net sales were $411 million, down 3.8%. Core sales declined 2%, which is a significant improvement from the negative 7% to 9% run rate over the last several quarters. Product line exits reduced sales by 5.7%. These were partially offset by favorable [courtesy] impact on sales of 3.9%. Office products operating income was $51 million, an increase of $34.5 million compared to last year. Operating margin was 12.4% and 850-basis point improvement compared to 3.9% last year. This was driven by productivity, improved product mix, and structural SG&A reductions.

Tools, Hardware, and Commercial Products net sales were $404 million, down 1.1%. Core sales declined 4.7%, another marked improvement over the high teens run rate in the previous quarters, favorable FX increased sales by 3.6%. Operating income was $64.7 million, an increase of $15.7 million compared to last year. Operating margin improved 400 basis points to 16% of sales, reflecting strong productivity and continued SG&A management.

Now for the full year 2009 results, our sales were $5.58 billion, a 13.8 reduction to a year ago. Core sales declined 7.3%. Product line exits contributed a negative 5.2% and foreign currency resulted in a 2.1% reduction. Acquisitions contributed about 1% improvement. Gross margin was 36.7% of sales, a significant improvement of 390 basis points to last year. This improvement more than offset the gross margin decline of a year ago and puts the Company back on track to delivering on our 40% gross margin target over the next few years. SG&A expense declined $128 million for the year as compared to 2008. Acquisitions added $21 million to the base and Forex reduced it by $38 million. As previously noted, the mix of SG&A spend improved, as our gross margin expansion allowed us to increase the rate of strategic SG&A spend in the back half of this year, of 2009. Full year operating income excluding charges was $675 million, or 12.1% of sales compared to $621 million, or 9.6% of sales last year, a solid improvement of 250 basis points.

For the full year in 2009, interest expense was $140 million. Our effective tax rate was approximately 31%. Normalized EPS for 2009 were $1.31 compared to EPS of $1.21 for 2008. This excludes restructuring charges, nonrecurring items, and dilution from the convertible notes. There is a reconciliation to GAAP EPS in the press release. For the full year 2009, we generated operating cash flow of $603 million, an improvement of $148 million versus the prior year. This reflects our improved P&L flow-through, continued working capital discipline across all of our segments, capital expenditures were $153 million in 2009.

And now turning to the 2010 outlook, we expect growth to grow core sales in the low single digits range. We expect a 2-point decline from product line access and we expect foreign currency impact to be slightly positive. We anticipate that the year-over-year core sales growth will be skewed to the back half of the year, while product exits will have a bigger impact in the front half. We expect to expand gross margins by 75 to 100 basis points as a result of productivity, product mix, and the impact of last year's product exits. Margin expansion should be spread fairly evenly throughout the year. Our SG&A spend will reflect historical patterns of seasonality with Q3 and Q4 the highest absolute dollar spend, but the year-over-year increase in the strategic SG&A will be largest in the first half of the year, as compared to lower spending levels in Q1 and Q2 of 2009. We expect interest expense to be relatively flat to 2009, with lower debt levels offset by slightly higher interest rates. Our effective tax rate for the year is expected to be around 30%. We expect normalized EPS to be between $1.35 and $1.45 per share.

Now, to help you understand how we're thinking about this outlook, please consider that at the midpoint of this range, our 2010 outlook reflects EPS growth of 10% compared to 2009 normalized EPS, when you adjust to exclude the $0.04 to $0.05 full year unfavorable currency impact associated with translating Venezuela's results. Said another way, to compare apples to apples, EPS numbers reflecting the devaluation similar in both years, normalized EPS of $1.31 in 2009 would become $1.27, a 10% growth rate on top of that gets you to roughly $1.40 in 2010, which is the midpoint of our 2010 outlook range.

We anticipate 2010 pretax restructuring charges of between $60 million to $80 million, or $0.15 to $0.25 per share. Our EPS outlook excludes these charges. Please note that we expect the year-over-year improvement on EPS to be back half weighted, because of the return to historical seasonality of SG&A spend, the year-over-year change in input costs, and the fact that most of our new product launches and customer modular resets should have a full impact on the second half of the year. We expect to generate approximately $500 million or more in cash from operations in 2010. This outlook includes an estimated $70 million to $80 million in restructuring cash payments for the year. Capital expenditures should be approximately $160 million in 2010, resulting in free cash flow in excess of $300 million, which would be available to pay dividends and reduce outstanding debt. Any incremental cash flow above our estimates will be used to reduce debt.

Our working capital investments will be higher earlier in the year because in addition to traditional inventory builds for the back-to-school season, we will build inventories to support new product launches and will increase [a safe start] as we switch over to SAP in some of our business units. Also, incentive payments, which are typically paid early in the year, were earned and accrued at higher rates in 2009. It is also important to note that our outlook is based on certain micro economic assumptions, which include a slightly positive economy and a relatively stable commodity and interest rate environment. If there are significant deviations from these assumptions, we will update you as to the impact, if any, on our outlook. And finally, and this is important, as you extend your financial models beyond the completion of our SAP implementation, you should note that with the significant shift from self manufacture to source in most of our business units, that is project acceleration, our CapEx investment rate should be expected to decrease to somewhere around 2% of net sales. In fact, we believe CapEx slightly lower than 2% is possible.

So in conclusion, as the new CFO, I am very excited about Newell Rubbermaid's prospects for 2010 and beyond. With a leaner cost structure, a better balance sheet, and significantly improved cash generation capability, we are fundamentally a stronger company today than we were a year ago. Core sales strength are starting to improve and we are looking forward to reaping the benefits of our strategic benefits across the organization. 2010 should be a year of great opportunity and I look forward to sharing our continued progress with you. With that, I will hand it back over to Mark for his final comments. Mark?

Thanks, Juan. I would like to conclude by thanking everyone here at Newell Rubbermaid for the hard work and sacrifice that delivered very commendable 2009 results. Our team did an outstanding job of rising to the challenge during a tough year. Our strong operating cash flow, very healthy gross margin expansion, and earnings growth would not have been possible without it.

As we start 2010, we feel very good about our prospects. Our strategic transformation is progressing and our investments in consumer-driven innovation, brand building and marketing are paying off. We're taking share and we're building a strong new product pipeline which will help drive future sales growth. We're back on offense. Thanks to our strategic focus on optimizing the portfolio, and achieving best cost and efficiency across the organization, our business is more attractive and more profitable than ever. We're committed to delivering sustainable growth and will continue to invest in Newell Rubbermaid's long-term success. So at this point, I'll ask the operator to open the line for questions. Operator?

(Operator Instructions) Your first question comes from Wendy Nicholson with Citi Investment Research.

Hi, good morning. My first question, just to follow up on Juan's comment about when the CapEx percentage of sales is expected to meaningfully come down, is that in 2011 or is that out to 2012?

We are rolling SAP as you know and we are really excited about SAP because that is improving our capability really to run the business, particularly a lot of improvement in the supply chain. You saw some of that through the 12 days that we took out of inventory. That's a multi-year project, as you know, and we think that most of the spending should be done by 2013.

Okay, fine. So the revision down to 2% sales is several years away?

Yes.

Okay, but my bigger question, though, goes back to the gross margin. And I know, Mark, you had made a comment I think it was after the second quarter where you have seen a huge infection point in the gross margin that your expectation for the year was more like a 36% gross margin and you've come in steadily above that and the guidance for the gross margin for next year is terrific. But I was wondering what's kind of changed in your mind. Is it purely a function of the commodity environment? Is it that you've been able to hold on more pricing than you would have expected, or is it just the productivity initiative where you're feeling, whatever, more productive than you would have expected, because the gross margin is clearly doing better than I expected.

You're right. We're a little bit ahead of even where we expected six to eight months and I think you probably already mentioned two of the things. Commodity environments are a little bit more favorable. The pricing has -- we've held on to more of the pricing that we did before. The third thing I would say is our mix continues to drive improvement. We've talked about this before. When we introduce new products or product refreshes, we work hard to engineer and build in a supply chain and a pricing strategy that actually helps build incremental, build increments to our gross margin with each product refresh and new product introduction and that's paying off as well.

And recently, even though the consumer remains weak and unemployment's a big problem, you haven't seen any incremental pressure from a pricing perspective?

There's always pressure and I think as I talked before, selling value in this economy is paramount, but I think any of the products that we have off of that kind of value performance -- therefore, we're still able to sell a mix that is on average will be better.

Terrific. Thank you very much.

Next, Bill Schmitz with Deutsche Bank.

Good morning.

Hi, Bill.

Can you talk a little bit more about Venezuela and how you get to the $0.04 to $0.05 hit? I thought it was like 1.5% of sales and even if you give it a really high margin, if the entire business went away, it would be $0.04. How do you get to that number?

Yes, what is happening in Venezuela, Bill, is that with the devaluation, the government announced a two-tier exchange rate, but there's still a parallel rate. So we're taking the more conservative approach. We're assuming that we're going to translate our financial statement at the parallel rate, and that is going from 2 and change to just over 6. So that is a pretty big impact. Just to give you an idea, our prior year sales 2009 in Venezuela were around $65 million, $70 million range. So when you go from 2 and change to 6, that's a big impact.

Yes, okay. That's great. Can you just talk about retail ordering patterns? What you're seeing, what the outlook is for next year? Then I have a follow-up, if I can.

Well, I think as we referenced, we've seen, we've seen things flatten out and even start to, to slightly improve in a few of our businesses, so I referenced in my remarks that we're starting to see the retail office products business, for instance start an upward inflection. So I think that's what we're seeing. We're seeing flat or in a few cases cautious, cautiously optimistic, slightly up.

Okay, great. And then just lastly, if I could, in terms of the product line exits, I imagine there's some stranded overhead associated with closing down all those businesses, because it is a big chunk of sales. How does that, those costs come out overtime? Is there a plan to reduce some of that load?

Well, Bill, the answer is yes, and, again, we took the biggest chunk of that out. It's -- some of that -- I'll just give you an example of our Lenox business. Lenox business, you'll recall, up until 2007 was going almost 10% a year. And part of the reason they were growing is that we were adding sales people. We've added a lot of sales capability. That business has been really hard hit, all right. But, we've made the investment in hiring people, training these people to become experts at selling band saws and while we reduced the numbers, we took reductions in that selling organization, we didn't go all the way down to what, what it would have taken to match the instantaneous reductions in that business. We just think that's a bad choice to take that investment that we've invested in people in terms of training and developing them. Some of that, we are betting a little bit on the economy in terms of a return in the economy. And then the other thing is that in some parts of our business, including, including Europe, for example, it just takes longer to make the final adjustments in our staffing.

Okay, great. Thank you very much.

Do you want do something?

I would like to answer that, as I came new to the Company, just trying to understand the strategy, what we were doing, and I looked at the product line exits, in conjunction with project acceleration, which is really focused on the planned closures and downsizing, that absolutely upsets the impact of the product line exits. In this quarter, product line exits added one point to our gross margin improvement. So that is working really well. You couple that with the rich pipeline of innovation and that seems to be a part of the strategy that is working really well.

Okay, great. Let me take it one step further. I know you said those businesses you're selling kind of average 3% on the gross margin line. Can you say what it is, sort of a contribution margin type level?

Yes, we'll have to get back to you on that. I would have to give you a number off the top of my head.

Would you guess maybe negative if it's a 3% gross?

I -- well, again, I think a 3% gross number, that might of been on selected product lines, but that wouldn't of been representative of the entire batch of products that we're exiting, so rather than respond to your number, let us get back to you with our numbers.

Okay. That's perfect. Thanks.

The next question comes from John Faucher with JPMorgan.

Good morning. Wanted to get one point of clarification on the guidance which is last time you spoke, you gave more specific 10% number, you alluded to that a couple of times. Today is the midpoint of the range. It doesn't sound as though anything has changed other than the Venezuela piece. Is that the right way to interpret the guidance, just sort of bracketing in on both sides?

Yes, I think that's the right way to interpret it.

Okay, and then following up on Bill's question before about Venezuela, I guess I'm still struggling as well to get to the bottom line impact. Looks like if it's $50 million, which is kind of what you were alluding to, that would have to run through at a pretty high incremental gross margin, pretty high incremental margin. So as your Venezuelan business is that much higher in margin that you gets you to that $0.04 to $0.05 number?

Yes. In a word.

That makes a lot more sense. I apologize. One last question, you've had some management changes in Europe. Obviously seems like there's some margin opportunities there. Can you talk a little bit about how we should view sequential improvement in Europe going forward? Thanks.

Well, sequential improvement in Europe going forward will be faster than the pace in the rest of the Company on average. It's because they have got a lower starting point. Those businesses continue to be a focus of our product, of our product improvement efforts. Several of the restructuring projects that we'll be doing this year are centered in Europe. Therefore, we'll see a significant improvement in gross margin driven by lower cost of goods. And so that business is a focus and you ought to expect to see that will be a disproportionate contributor to our OI and margin progress going forward.

Got it, thanks.

Next question comes from Chris Ferrara with Bank of America.

Good morning. Just following up, on Europe, can you talk a little bit about what some of the structural changes are that are going on in Europe that are going to drive better sequential improvement, mainly from a cost side, I guess, that would probably be the best way. Thanks.

I actually can't get into as much detail as I'm sure you're wishing by asking that question, Chris. The -- and the reason why is that you know when you do, when you're doing restructuring plans or restaffing plans in Europe, you have to involve the works counsels and we're in the middle of that process. So I can't tell you things that would be in advance of what I would share and work with them.

Okay, that's actually--

I want to -- what we will do, is we'll record it as we go throughout the year and what we're doing (Inaudible).

Great. And then just can you talk a little bit about the flow of growth? You are talking about low single-digits growth as you get into 2010. I guess it's an obvious question, but do you get to sort of mid-single digits growth? Could you be growing 5%, 6% on your budget by the back half of 2010, or by Q4?

Look, I think that's a possibility, but that's not -- I don't want to try and get that specific and have you start sticking numbers like that in there now. What we have said and what we do believe is that our -- the sales improvement will be more back half loaded. It will be more back half loaded for a couple of reasons. One is the investments we started making in the fourth quarter and we'll continue to make in the first two quarters of this year. Those are all investments that the benefits of those build overtime. Second is that we've got a number of new product launches or new distribution that occurs in March, April, May, June July. Therefore you get less effect in the first half and more of an effect in the second half. And so I think finally if we get help from the economy, it's going to continue to build overtime. I've responded before that right now what we see is still a pretty flat economy. We think that it there's an opportunity for that to grow. It would grow in the, more in the second half. Lastly, I think there's pent-up demand.

So my gut tells me, I'm just use the example of our Office Products business. I've used the example in our previous discussions. The consumer has to find a pen at home in their drawer that's going to write so they can put up the purchase of a pen, they can probably go do that. You can only do that for so long. Eventually, all your pens will run out of ink and you'll have to buy more pens. Using that example, you're just logic would tell you that as time moves on, consumers' ability to postpone or substitute goes down and that also, even without the economy growing, some of our product categories really are what I'd call replacement or replenishment kind of categories and we benefit from that. For all of those reasons I think they will be building throughout the year.

I think that's really helpful. Following up on the SG&A commentary, one last quick one. Can you break out a little bit this quarter, I understand strategic SG&A was up, but SG&A was up by a pretty large amount this quarter as a percentage of sales. How much of that can you sort of whittle out into very simple buckets for us to understand just to get a sense for how much of it carries forward?

I'll put it this way. The lion's share was strategic marketing investments that we made on our top five or six businesses. So businesses -- several of which I mentioned in my own comments. I mentioned, for instance, our mimio business and how that was up 50% last year and we're continuing to invest in that. It was one of the places we continued to invest. I mentioned technical concepts. Hand sanitizer and hand wash systems, we invested in that. Invested in the markers and highlighters, Sharpie brand, invested in Rubbermaid food products. Those are just a few of the businesses that we invested in, and the lion's share of that increase in fourth quarter was behind those kinds of businesses.

So in a word, I feel really good about, about the innovation. I think the consumer is starting to at least be more amenable to kind of coming back into the market. Some of that, I always talk about waiting for the economy, but some of that, we can help spur that on. In other words, part of what gives consumers confidence is continuing to get prompts. And the prompts that we have, as I said, in many cases are very value imprinted, so we're going to make those prompts. Did that give you what you're looking for?

Yes, that's perfect. Thanks.

I would like to add to that, there's a couple things Mark has done, where there's growth already accelerating, he added more fuel to it, and that's the case with technical concept or where there's exciting innovation coming out, he added more support to make sure that the innovation has a better chance. That's basically the kind of the simple criteria.

Thanks. Also, was overhead down in the quarter year on year?

I don't think it was down, no.

We'll take our next question from Lauren Lieberman with Barclays Capital.

Thanks, good morning.

Good morning.

Tell me if you could talk a little bit about whether or not there's any sort of replacement cycle to the industrial piece of your business. I would just think if we get to a point where we're looking at two years of declining sales, there's got to be some degree of replacement spending that has to happen at the industrial markets. And can you talk a little bit about that, whether you expect to see that, if any of that builds into your expectations.

Your answer is you're absolutely right. There is a significant replenishment portion in -- across all of those industrial businesses. I've already referenced Office Products and that's not industrial business, but that's the commercial side of that will also require replenishment.

Let me give you a couple of examples from the Tools, Hardware and Commercial products business. Person who is doing construction for a living is using circular saw blades, reciprocating saw blades and so on and those eventually wear out and have to be replaced. In the Rubbermaid commercial products business, eventually trash cans and mop buckets and serving carts and so on just get old and break down, especially if they were competitors' products. And they have to be replenished. While you can put those off for a while and operate with a banged up cart or a wobbly cart or a trash can that's falling apart, eventually the purchasing managers know that they have to do that replacement. So there is a significant replacement component throughout all of those industrial businesses. And even if you didn't he see us, a pickup in the industrial economy, more construction, more commercial construction or pickup in the industrial output, you would still expect to see some improvement in that. Juan, do you have anything?

Yes, I just wanted to share some of my initial impressions. Coming in and visiting with the business units, there's another aspect of it that is often overlooked, which is to the extent that we're applying consumer-driven innovation to that segment of our business and we are, there is innovation that is to drive productivity. So you don't really have to wait until this stuff breaks or wears out because there could be a compelling case to replace because of productivity. And there's some exciting stuff that we have in the pipeline.

That's a great point.

So how much do you now, if at all, have some of that replacement cycle, replenishment cycle built into your expectations of market growth, or do you think we still have time?

No, I think there's certainly some of that built into the expectations of growing core sales this year.

Okay.

But again, we believe that there's the likelihood is that opportunity and that realization of that opportunity builds throughout the year.

Okay, all right. Thanks a lot.

Your next question comes from Michael Kelter with Goldman Sachs.

Hi. Seems like a few of us are trying to get at what's underlying the SG&A and expansion in the quarter as a percentage of sales. I know you're investing behind the brands. Maybe a different way to look at it instead of focusing on the quarter, seems like A&P as a percentage has been roughly flat, maybe up 150 basis points over the last three or four years. But SG&A as a percentage of sales is up about 3 to 500 basis points, depending on how you look at it. So quite a bit of it is not a strategic investment. What is it, and how do we think about it going forward?

Yes, let me take a crack at that answer without making this too long winded. When we've talked before about brand building SG&A, and sometimes we refer to that as strategic SG&A, we said that includes advertising and promotion, R&D, advertising consumer promotion, and R&D. And we talked about that going from less than 4% to 6%. I can also tell you that during this year in the earlier quarters of the year, it was 4.5 to 5.5 and by the fourth quarter, it was back up to 6.5. So a significant portion of the build this year also was restoring it to that range.

But I would also tell you that there's another big bucket of SG&A that is business building or capability building SG&A that I would call strategic, even though it doesn't fall into those buckets of advertising consumer promotion or R&D. So for instance, in many of our businesses, selling is the most strategic thing we can do, all right. In our industrial products businesses, in our commercial products businesses, and some of our technology businesses like mimio, calling on the customers and the more customers you can call on, the more trials you can get of your product, that's how you make the conversion, make the conversion by calling a lot of customers, getting a lot of trials set up, converting those trials into sales. And so often times, the additions there are sales people refer to in the past as feet on the street.

I consider SAP a strategic investment. And guess what, that investment has to continue to go up until we're finally fully live on SAP. Why is that? Well, we still have a number of people that are on our businesses, that are on our legacy systems. We still have to maintain the servers in the legacy systems until everybody is off of those. And frankly, even when half of the businesses goes off of those, you're not able to reduce your costs very much on the maintenance of our old servers and your old legacy systems. Yet each new business that goes on SAP picks up an incremental SG&A cost because we're outsourcing the support, the data storage and the server capacity for adding those new businesses. So someday when we're all on SAP, we will shut down our legacy systems, shut down our servers and we get a balloon payment. But until then, it's a net incremental add every year frankly.

So those are just the examples of whether I'll call a strategic spending that we're doing in SG&A that's continuing to drive an increase for at least in the short-term. And then lastly in this past year, obviously our ability to fully absorb the reduction, it was a heck of a challenge in some cases and I referenced this before with our Lenox sales and selling organization as an example. That business was down over 20%, but I didn't take 20% of the sales force because we've invested too much money in developing and training those people. If that business stayed down 20% for five years, we would take them out, but I don't think it's going to.

That's very helpful. On the same topic, maybe looking forward, sounds like for 2010 you're calling for roughly flat sales with organic up low singles and the product line negative, maybe offsetting that. Is there a possibility you could see some SG&A leverage by taking out costs going forward, or, or is it still going to continue to get a little bit worse at least in the near term because you have normal, let's say salary inflation, SAP investments, brand investments? How do we think about that line item next year?

Yes, let me try to take that, Mark. We have, we have a strategy that basically says, reduce your core right, whatever is not customer facing and invest some of that and invest some of the gross margin expansion into the -- what builds the business. And we are living by that creed. So what you see in the numbers reflects that. So at a higher level, we are moving I think at a decent pace towards the strategy, the P&L that was previously discussed with 40% gross margin, kind of 25% SG&A. So at a high level, we're progressing towards that. On a short-term basis, the business seems to have the flexibility. If the top line is growing, just add a little bit more take back here. So you'll see -- that's what you will see as the year progresses. But you should see some leverage as the top line returns.

Thanks. And then one last question on a different topic on cash, seems like you have done a great job generating cash even through the downturn. You mentioned in your prepared remarks that other than servicing the dividend, that really you would be using excess cash to delever the balance sheet. Is that, is that really the only use of cash for the foreseeable future, or would you entertain let's say an acquisition if one came along or any other use of cash?

I'll take a stab at that one, too. It was one of my top priorities made very clear that we need -- we have a good balance sheet. We need to make it stronger. So our top priority to use excess cash is pay down debt.

You won't -- shouldn't expect to see us doing anything significant in the M&A area until we've got those credit metrics restored to where we want them. So while we could do a few small bolt-ons wouldn't be any more than that.

Thank you very much.

Thank you. Your next question comes from Budd Bugatch with Raymond James.

Good morning. Juan, congratulations, and best of luck to you.

Thank you, Budd.

I also wanted to get at the SG&A and Mark, thank you very much for that color on what now makes up strategic SG&A. Can you quantify for us at least going forward what that amount is or how do we think about it in terms of that versus overhead, is there a percentage that we can look at for strategic versus ongoing SG&A?

I tell you what, Budd. I'm not going to give you a number today, but I'll make this commitment. When we do our analyst day in May, we'll give that more color, because I think it's a subject that deserves a little more, a little more time spent on it than what I might be able to provide right now.

That would be terrific. And then second question I had kind of relates to overall in the Company when you think you will get to that 40%, 25% timeframe. I know that that's kind of nebulas, but what is the track to that now? When do you think you will be --

I think last year when I talked about that and I talked about some of that in the presentations that I did, we said three to five years and I think that's still the right timeframe. So our stretch objective is to do that in three and I think minimally, we would -- or maximally we would do that in five.

So is it still three to five, or does it become two to four?

I think it's still three to five. I think what we did last year about it, we were able to go a little bit faster, but I think the glide path, if you look at where I thought I would be, now we're talking about in 37.5 range for next year and that's about where I thought I would be if I forecasted it last year. So if we hadn't done -- in other words, we would do a little bit better a little quicker in 2009. We haven't added incrementally, I don't think, to our ability to get there yet.

So 2013, 2015 timeframe is kind of one way to think about that, I guess?

Yes, yes, yes.

And just lastly, on the Bolivar issue, I guess the way to think about that versus last year, because that's the year that hasn't been [restated] when you call it out, as you report, is it about a $0.01 a quarter, or a penny and a quarter a quarter, or was there much seasonality to it, or is that how it will show up when you, when you report the quarters?

At this time, our best assumption would be spread throughout the year, the quarter $0.05. And we'll see what happens in the country.

Okay. Thanks, thanks, Juan. Thank you, Mark.

You bet.

Your next question comes from Bill Chappell with SunTrust.

Hi, good morning. This is Mike Schwartz filling in for Bill. Not to beat a dead horse here, but I have another question regarding the strategic brand investment. With how you've ramped that up in the second half of 2009, could you quantify or maybe give us a little more color about what kind of impact it had on revenues, if any, in the fourth quarter, and how you see that playing out in 2010?

Probably didn't have a huge impact on the fourth quarter. I think it had a little bit. But more than that, it was a build for 2010. The other thing I will add a new piece of color so we're not repeating things we've already said.

Some of this investment is in things like building out our core understanding of our businesses. Part of R&D is consumer research. So part of the R in R&D is research. I think we talked before, we are coming from a point where we did very little, almost none in some of our businesses and as you know, we're dedicated to really understanding our brand equities, competitors' brand equities, our product performance, how it performs versus that, when we are ready to launch new products, we're doing concept tests, we're doing volume metic pricing tests. Those tests add up to several million for every single brand, all right. And some of those investments therefore are almost invisible in the short-term, I shouldn't say invisible, they will not drive top and bottom line growth in the short-term, but they are fundamental to getting the basics right. Understand you're consumer, understanding if your new innovations are really going to be meaningful, where you can price them, what's the likely competitive response is and really understand your markets. As we enter new geographies, we're doing more testing than we've ever done before, as we're entering new neighbor categories.

There's tens of millions of investment that we have to ramp up frankly versus where we were a couple years ago and we're not done ramping that up. So that's another piece that probably wouldn't show up within the immediate returns, but I assure you, it's the right long-term investment.

Let me add to that, just to remind you that that was funded with gross margin expansion and I think part of the good side of the story is that the gross margin was slightly ahead and we had good places to invest the money in behind growth. It would have been a sad story the other way around if we didn't know where to invest behind growth.

Okay, great. Thanks for the additional color. And then my final question, with regards to working capital, you cut inventory levels by over 200% in 2009. I'm sorry, $200 million. That would be a heck of an improvement. But over $200 million in 2009. I think on a prior call, you said you see more improvements in 2010. Could you give us some color on how you quantify that or how that compares to 2009?

Yes, well, the improvement in 2009 was really great. 12 days out of inventory and that reflects what Mark has been talking about when he says we're adding capability. You can't take 12 days out of inventories with a knife. That requires just fine cutting instrument and I think that makes you feel comfortable. As we look forward in 2010 and beyond, we will continue to fine tune, but the numbers will be smaller. You can't keep -- you can't take that kind of inventory out every year. So probably in the $30 million to $50 million range, if you do a good job. The fact is that the capability rollout continues in this business. The flow-through was in a cash flow basis and a P&L basis is improving day by day and that's very encouraging.

I would say I expect an annual improvement in inventory reductions should be an annual story for many years to come frankly. That's why we're making the investments that we're making in SAP. I think I remarked before that the businesses that made the most progress in inventory reduction this year are the businesses that are own SAP. That's proven to to be exactly what you want it to be, which is a tool that will allow us to do better, demand planning, inventory planning, and control. Taking out SKUs, all right, is an opportunity to get rid of the tail of the slow-moving items. So when you look at the investments we're making in better SLP processes, putting in system SAP and reducing SKUs, simplifying and harmonizing our lineups, all of those things are things that give you the capability to take inventory out.

Okay, great. Thanks a lot.

Your next question comes from Connie Maneaty from BMO Capital.

Morning. I have a question or two on Venezuela and then a follow-up. I think in the press release you said you adopted the parallel rate for translation in the fourth quarter of 2009. So do you have three quarters at the official rate and one quarter at the parallel rate, so that going forward, by the time we get to the fourth quarter of 2010, there should be no year-over-year impact, right? But why did you adopt a parallel rate before it devalued?

Yes, we actually adopted the parallel rate after it devalued. Here's what was happening. We had been accessing the official rate from time to time for the payment of intercompany royalty. So we were translating that using the official rate because we had the ability to access it. Once the government devalued and instituted the two-tier exchange rate, then we said we are probably not going to be able to access the official rate for the payments of royalties. So we kind of took the conservative approach and what we had on the balance sheet in terms of intercompany royalty receivable, we wrote down to the parallel rate. That is the impact that you saw in the fourth quarter.

Okay, because that was the other question. I thought there was also a balance sheet impact. So you took the balance sheet impact in Q4 and then the translation and transaction runs all through 2010, right?

Yes, that is correct.

Okay. My second question is just on the timing of earnings growth. I think I appreciate all the factors that are, or some of them anyway, that are going into this year. But it also sounds like with commodity costs being higher at the start of the year with SG&A as a percentage increase being higher at the start of the year with most of the new products sales showing up in the back half of the year, it sounds as though first half EPS will be down year-over-year. Is that the right way to look at it, with the ramp up in the second half?

I think directionally, that's the right way to look at it, Connie.

Okay.

And again, just to be clear, our input costs are not higher in the first half versus second half. They are only higher in relationship to 2009 because 2009 was unusually low in the first half on input costs and also was unusually low in the first half on SG&A spending because we had really pulled back on our spending to make sure we could deliver our numbers, even if the world continued to collapse.

Okay, that's helpful. Thanks.

Your next question comes from Jason Gere with RBC Capital Markets.

Hi, good morning. This is [Joe Shpak] in for Jason. Just a quick one to help you try to wrap up here. Appreciate all the talk on spending behind for the strategic spending behind the growth. I was just wondering if there are any areas where you've been seeing -- where you increased any spending defensively. I believe I heard Juan say spending is up in Home and Family as well and I was wondering if there were any issues in that segment or across the entire portfolio?

Well when spending is up in Home and Family, of course Home and Family has five business units and I referenced a couple where we had increased spending like our Rubbermaid food business and baby and parenting. So I'm not quite sure what you're -- what --

Just if there's -- in terms of competition, if any of the increase in spending has been more of a defensive nature as opposed to offensive in trying to fund future growth.

For the most part, no. Everything I referenced there would be more offense than defense. Often times, the defense investments we need to make would probably show up in lower net sales because they would be in the form of price give backs or price promotion, which we wouldn't include in SG&A.

Jeff, the best measure of that is the fact that we gain share across most of the businesses and pricing was a net positive.

Okay, great. Thanks.

Thank you. And your last question comes from Joe Altobello with Oppenheimer.

Good morning. Two quick ones and I'll let you go. First on the gross margin, obviously a very good improvement last year. Even though it was skewed that little bit in the first quarter, if I look at your guidance this year, it's only flat to slightly up off of your high water mark of about 37.4 last year. How much is commodities weighing down on us?

Commodities is going to be just a slight negative on a full year basis to 2009.

Okay. So if that's the case, I would imagine there is some upside to that number.

Well, I hope you're, I hope you're right.

Probably should have been more subtle there.

No, we believe the, what Mark committed to, the 75 to 100 basis points is absolutely doable. Frankly, if there's more than that, that's a decision Mark needs to make if he wants to expand the margin or if he wants to put a little bit more on growth. So we don't know how it's going to play out, but we do feel good about the 70 to 100 basis points.

Got it. And lastly, the dilution from the converts at today's stock price is about 9%, is that right?

I think that's about right, but we did post -- there's a, there's a schedule on the website and the, on the presentation that should allow you to calculate different prices.

Okay, perfect. Thank you.

Sure.

Thank you. If you were unable to ask 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 newellrubbermaid.com and on digital replay at 888-203-1112, or 719-457-0820 for international callers with a conference code of 6778854, starting two hours following the conclusion of today's call and ending February 13. This concludes today's conference. You may disconnect.