Newell Brands Inc. (NWL) Q2 2008 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen and welcome to Newell Rubbermaid Second Quarter 2008 Earnings Call. At this time all participants are in a listen-only mode. After a brief discussion by management we will open up the call for questions. Just a reminder today’s Conference will be recorded. Today’s call is being webcast live at www.newellrubbermaid.com on the Investors Relations homepage under Events and Presentation. A slide presentation is also available for download. A digital replay will be available two hours following the call at 888-203-1112 or area code 719-457-0820 for international callers. Please provide the conference code 4524394 to access the replay. I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Ms. O'Donnell you may begin.

Thank you. Good morning everybody. Welcome to our second quarter 2008 earnings call. Joining me today are our President and Chief Executive Officer, Mark Ketchum and our Chief Financial Officer, Pat Robinson. As usual Mark will be discussing the highlights and progress for the quarter and pat will follow with details on our financial performance and outlook for both third quarter and full year 2008. Following prepared comments we will be happy to take your questions. A couple of items before we begin, first, let me remind you that the statements made on today's call that are not historical in nature are forward-looking statements. As such they include risk and uncertainty. Actual results may differ materially from those expressed or implied in the forward-looking-statements. For discussion of specific risk factors that could cause actual results to differ materially please refer to our most recent quarterly report on Form 10-Q and the related exhibit 99.1 as well as the forward-looking statement information on the earnings call presentation which was posted earlier this morning on our website in the Investor Relations section. We will also be referring to non-GAAP financial measures on the call. A reconciliation of these non GAAP measures to the most directly comparable financial measures calculated in accordance with GAAP is also available on our website. With that covered, thank you. I will now hand it over to Mark.

Thank you, Nancy. Good morning everyone and thanks for joining us on our call today. Our 2008 second quarter was certainly eventful, as all of you are aware we are living in some extraordinary economic times. We have soft consumer spending in several US markets exaggerated material cost inflation, insured events and uncertainty in the financial markets. Despite the challenges, I’m proud with the progress that we are making on a number of fronts. To be clear we are not happy with our 2008 outlook. For 2008, it’s not indicative of our underlying strength or our future potential. We are a much better today than we were three to four years ago and with the actions that we are taking I’m confident we will emerge from today’s difficulties, even better positioned to win in the future. To begin I am pleased to report Newell Rubbermaid previously announced guidance for the quarter. Total net sales rose 7.8% eclipsing high end of the guidance range we provided on the last call. Internal sales, which exclude the impact of major acquisitions rose 3.2%, slightly above expectations as a result of favorable currency exchange rates. Growth drivers during the quarter included double-digit internal sales increases in Rubbermaid Commercial products, Rubbermaid Food businesses and our international business as far as high single-digit internal sales growth in our baby and parenting in the EU. These strong results more than offset expected sales decline in our North American writing instruments and tools part of the businesses but weak US economy continues to be a challenge. Our overall solid top line performances validate our strategic focus on investing in innovation and building brands that matter. In fact, the strategy is even more important in a tough economy. Consumers are shopping for superior value and performance and many of our brands and our products are delivering. Tough quarter normalized earnings per share were $0.49 consistent with guidance. The decline of 12% versus last year was due primarily to lower gross margins partially offset by higher sales and lower structural SG&A. Operating income was $230 million as compared $248 million in the prior year. Gross margin for the quarter was 34.1%, a decline of 160 basis points. We generated strong productivity savings as planned plus favorable pricing and mix but these positive will more than offset by dramatic input cost inflation particularly in our resin intensive businesses. We now expect to incur input cost inflation between $275 million and $325 million this year compared to our estimate of $170 just three months ago. We announced two weeks ago that runaway inflation in oil and resin had permanently changed the viability of certain category and product lines. In response to this new reality we took decisive action on couple of fronts namely, strengthening our product portfolio through the exit of certain product categories plus aggressive pricing initiatives. Let me talk about our portfolio first. Operating in today’s extremely volatile commodity environment we have felt most pressure in a few low margins, low value added product lines particularly where resin is the high percentage of the cost of the goods sold and where the consumers’ interest and paying for innovation is relatively low. In most cases these products contribute only marginally up gross margin line. We talked to you on numerous occasions about creating a new business model in Newell Rubbermaid based on strong consumer meaningful brands. Over the past several years that strategy has led us to dramatically shrink the portion of our portfolio that falls into commodity like products from over 40% in 2003 to about 12% in 2007. The extraordinary market conditions that we now face compel us to be even less patient in turning around or down sizing the remaining commoditized categories. Therefore, we announced we are taking definitive step to strengthen our overall portfolio, reduce our resin exposure and protect margins on our profitability. We expect to divest downsize or exit approximately $500 million in sales of selected low margin mostly resin and consumer product categories. This is not a new strategy this is an acceleration of a strategy that has already been in place. Now the details and the exact timing of the plans have not yet been finalized, I can tell you that a significant percentage of the affected categories will be within the home products and office organization businesses. These are difficult choices because many of these products have long been associated with the iconic Rubbermaid brand. But at today’s prices, plastic is no longer the economical solutions that once was for many basic products. These steps are necessary to ensure long term growth and prosperity of Newell Rubbermaid. The goal of these portfolio investments is to eliminate the significant swings in our performance caused by classic resin. Once our plans are completed resin input cost will be manageable in ordinary course of business like any other raw material. We will still manufacture products containing classic resin but they will be in categories where resin represents a much smaller part of the cost structure and where our brands and our innovation can support price increases whenever necessary such as Rubbermaid food storage products, Rubbermaid Commercial products and Graco. In recent years we have worked hard to create a more focused and profitable portfolio that can serve as a growth platform. We downsized the business by about 20% and we improved gross margins over 500 basis points between 2003 and 2007 through the strategy. Once we complete the new portfolio rationalization we expect gross margins to improve incrementally by over 200 basis points and EPS to increase by 5% to 10%. So, you can see that these moves are both on strategy and significant. The other action that we are undertaking to help combat inflationary pressure is aggressive pricing, this initiative will affect a number of our product lines beginning October 1. These price increases will be substantial over 20% in some case. In addition we will initiate a new quarterly price adjustment mechanism within the resin intensive businesses. These price increases will go one way towards regaining a more reasonable margin structure in the affected categories in 2009. As we look through the remainder of the year we have adjusted our full year 2008 normalized EPS expectations to range $1.40 to $1.60. In today’s highly volatile commodity market, it’s very difficult to predict where oil, natural gas and resin cost will be over the next six months. However, we believe we have taken an appropriately conservative approach in forecasting the range for possible outcomes. With the low end of our guidance reflecting an even weaker consumer spending environment and a rise in the price of oil is high as $200 per barrel by the end of the year. Although we have taken our EPS target down for the year, we are holding our projected sales growth guidance to 6% to 8% and our internal sales growth forecast to 2% to 4%. Currency will account for a large part of the growth. The remaining poor sales growth is due largely to the strength of new products, market share gains and July 1st, pricing initiatives already incorporated in previous guidance. As I mentioned earlier our ongoing focus and consumer driven innovation and strategic brand building is an important factor helping to drive top line results. For example our home and family segment sales are up high single digits year-to-date excluding acquisitions. In addition to Sweetpeace, the baby and parenting business is being propelled by the launch of the Graco Nautilus three in one car seat, which went into full distribution this month. The Nautilus offers parents a complete car seat solution as the child grows. It converts from a five-point safety harness for small children, to a high back seat belt option for toddlers, to a backless booster seat for kids up to 100 pounds. This makes it the only forward base in car seat that child will ever need. The early sales results are very encouraging. We have started shipping a brand new premium line of Calphalon heating electrics including products like a countertop oven, a slow cooker (inaudible) and a contact grill. This new line expands the well known Calphalon brand into a natural near-neighbor category. Consistent with the brand's heritage, we combined sleep and stylish design with intuitive controls and best-in-class heating performance. Retailer selling has been very good and we have high hopes for this launch. You can look for the new Calphalon Electrics in stores this fall. The continued success of our food storage innovations, Produce Saver, Easy-Find Lids and Premier have helped drive double-digit year-to-date sales growth in our Rubbermaid Food Service business unit. By offering important features such as longer produced storage life, easier organization storage when not in use and stain and odor resistant, we have demonstrated our ability to bring consumers meaningful innovation to the durable food storage category and these are just a few examples. One other news, we are pleased to report that early integration of Aprica and technical concept acquisitions is going well. The two transactions closed on April 1, and together added 4.6 point of top line growth in the second quarter. Now, we still expect dilution in 2008, we are going even more optimistic about the long term potential of these acquisitions. Our international business continues to be a growth driver for us fueled largely by stronger results in our European office products business. Weak dollars working in our favor here but even excluding currency effect international sales rose 6% during the quarter. And lastly, we continue to make bit progress on our efforts to leverage the scale of the company and achieve best total cost. SAP implementation and home & family has progressed smoothly and we are in the planning stages for the next go live in our organization and decor and tools and hardware segments in the fall of 2009. Our project acceleration restructuring program is still delivering as expected. With recently announced portfolio rationalizations will expand the scope and deliver increased savings now estimated at $175 million to $200 million annually and conclude the program in 2010. So, even as I reflect in our 2008 results, I’m optimistic. The challenges we face in the volatile commodity markets and depressed macro economy are significant. But I’m encouraged by the many positives is working to drive our transformation into a best in class consumer brand in the marketing company. Our corporate strategy of creating consumer meaningful brands, leveraging the advantage as working as one company, achieving best total cost and fostering a culture of excellence is making us a better company. The success of this strategy even in today’s challenging environment gives us the confidence to continue making the necessary investments in our brand building and other corporate initiatives to drive sustainable profitable growth. At this point I’ll turn the call over to Pat, who will walk through the financials and details of our updated guidance before I return to provide summary comments and then take Q&A. Pat?

Thank you, Mark. I’ll start with our second quarter 2008 income statement on a normalized basis. The net sales for the quarter were $1.8 million up 7.8% over the last year and above the high end of our guidance of plus 6% to 7%. Internal sales which exclude the impact from the technical concepts Aprica acquisitions increased 3.2%. Foreign currency balance approximately 3 points continued strong growth in our international business and positive pricing more than offset softness in our domestic tools and hardware, office products, and the core businesses. Our international business increased approximately 17% in total and 6% in local currency. Our domestic business was down about 1% for the quarter. From our business year perspective, double-digit growth in our Rubbermaid commercial, Rubbermaid food and European and Asia Pacific office products businesses and high single digit growth in our baby and parenting essential business lead the sales improvement for the quarter. Gross margin for the quarter was $623 million or 34.1% net sales, about 60 basis points lower than prior year. Improvements from ongoing productivity initiatives, savings from project acceleration and favorable pricing are more than offset by significant inflation in our raw materials most notably oil and natural gas based resins as well sourced finished good. SG&A was $393 million for the quarter up $36 million in the last year. Incremental SG&A from acquisitions, currency transmission and continued brand building investments drew the increase. Operating income of $230 million or 12.6% of sales was down $18 million or 7% the last year. Interest expense was $11 million higher than the previous year as a result of the additional borrowings used to fund recent acquisitions. The company’s continuing tax rate was 28.5% compared to 29.5% last year. Normalized EPS of $0.49 for the second quarter is inline with our April guidance. The company reported approximately 69 million or $0.16 per share in restructuring charges including asset impairment related to project acceleration which are not included in the continuing earnings described previously. Consistent with our press release on July 15, the company recognized aspect impairments in connection with its intention to divest, downsize or exit certain consumer product category. I will now take a few moments to talk about our second quarter 2008 segment information. In our clean organization in the core segment, net sales increase 12% or $65 million in the last year, excluding acquisitions internal sales increased 4.7% in total and 3.4% local currency. A strong double digit growth in Rubbermaid Commercial and Rubbermaid Food was offset by softness in the core business. Operating income for the segment was $75 million or 12.2% of net sales, a decrease of $7 million or 8%versus a year ago. Higher raw material inflation particularly resins more than offset the contribution from higher sales and acquisitions. Office products and net sales improved by 4.3% for the quarter, driven by a 4 point currency benefit. From a GVU perspective growth in the segment was led by our office technology business, which was up double digits in the quarter. From the regional perspective Europe and Asia Pacific we up below double digits in local currency, while North America was of mid single digits for last year. European comps benefited from the soft second quarter in 2007 driven by service level interruption but did not repeat this year. Operating income was $103 million or 16.7% of sales down $6 million in the last year as the drop through from increased sales was more than offset by raw material inflation and increased investment in strategic SG&A. In our tools and hardware segment net sales were $322 million down $2 million or 1% the last year. Currency contributed 3 points to the top line. Our domestic business was down mid single-digits for the quarter as we continue to be affected by continued softness in the US residential construction market. Operating income for the segment was $47 million or 14.5% of sales down $1 million in last year as productivity gains and favorable pricing were offset by raw material inflation. In our Home & Family segment net sales were $280 million, an improvement of $43 million or 18.3%. Internal sales, which exclude the impact of the Aprica acquisition, grew $7 million or 2.7%. As you will recall we had approximately 400 basis points of ship from Q2 to Q1 due to our SAP implementation and the timing of certain promotional activities. The year-to-date internal growth rate up approximately 8% is on track to deliver our full year expectation of high single digit growth in the segment. Operating income of $28 million or 9.9% of sale was down to $3.5 million in the last year as the drop through of increased sales was more than offset by increased strategic SG&A spending for new product launches, brand building investments and the Aprica acquisition. Turning now to our year-to-date results, net sales were $3.3 billion up approximately 6% in the last year in total and up about 3.5% on an internal basis, which includes about 3% of currency benefit. Our international business increased approximately 18% in total and 7% local currency while our domestic business was down about 1.5% year-to-date. From our business year end perspective, double digit growth in our Rubbermaid Commercial and Rubbermaid Food businesses and high single digit growth in our home and family segment led the year-to-date sales improvement. Gross margin for the first six months was 34.2% down 90 basis points from the prior year as significant raw material and sourced finished goods inflation more than offset positive pricing, savings from project acceleration and gains from ongoing productivity initiatives. SG&A for the first six months was $753 million or $57 million higher than the last year driven by the technical concepts and Aprica acquisitions the impact upon foreign currency and continued investment in brand building and strategic corporate initiatives. Year-to-date operating income of $360 million or 11% of sales down to $25 million or 6% for last year. Turning now to cash flow, operating cash flow for the first six months was a use of $121 million compared to a slowest of $173 million last year. About 40% of the decline in the front half is timing, which is expected to reverse in the back half of the year. Specifically this relates to the timing of cash tax payments as well as the timing of cash payments for accrued abilities primarily customer program accruals. About a quarter is due to a decrease in DPO to approximately 50 days this year which relates to the mix in timing of production and sourcing in each year. We expect to end the year with DPO in the high 40’s, which is consistent to where we had finished the last several years. As we reduce production in quarter four to take inventory as the system. The remainder of the first half decline is due to lower net income and higher first half inventory growth than a year ago. As we look to the back half of the year, we are very confident that the cash flows will return to prior year levels, delivering approximately 500 million of operating cash flow. We plan to reduce the inventory to approximately the same level at December 2007, from the days on hand perspective, which will generate between 100 and 150 million in cash and approximately 50 million incremental last year. The reversal of the cash tax and accrued liability timings issues, which negatively affected the front half of the year, will generate an incremental $100 million to $125 million compared to a year ago. Combined these will more than offset, the expected year-over-year decline in operating profit and the increase in cash restructuring payments. In summary, we delivered approximately $500 million of operating cash flow and approximately $400 million of free cash flow after capital spending between $90 million and $100 million. From a full year perspective we now expect cash flow from operations to be between $350 and $400 million net of approximately $80 million of restructuring payments. We continue to expect full year capital expenditures between $160 million to $180 million. Turning to the third quarter, we expect net sales to be up 6% to 7% including the impact of acquisitions and internal sales to be up between 2% and 4% driven by continued strength in our Home and Family segment, the Rubbermaid Commercial and Rubbermaid Food businesses and our international businesses. Foreign currency benefit is expected to be about 2.5 points for the quarter. We anticipate normalized EPS for the quarter to range from $0.31 to $0.35 compared to $0.52 a year ago. We expect raw material and sourced product inflation to increase significantly in the quarter with most of our back half pricing action expected to begin reading through in the fourth quarter. We also expect increases in year-over-year strategic SG&A spending. As previously announced the company elected to retire and reset securities through July 2028 and cash settled to related marketing option. This election will result in a one time charge of $0.13 per share in the third quarter .It will produce a savings of approximately one and a quarter cents per share over the remaining 20 year life of the original options. Turning to the full year outlook we continue to expect net sales to increase 6% to 8% which includes the contribution of technical concepts and Aprica, excluding these acquisitions we continue to expect internal sales growth of between 2% and 4%. We now expect foreign currency to contribute approximately 2.5 points of growth for the year. Our sales outlook by segment has changed only slightly from our last call. We continue to expect approximately 20% total sales growth in high single digit internal growth in our home and family segment and approximately flat sales in our tools and hardware segment. We also continue to expect high single digit growth in our clean organization core segment driven by RTC acquisition as well as continued strength in a Rubbermaid Commercial and Rubbermaid Food businesses. However, we are low in our internal sales expectation for low single digits as aggressive fourth quarter pricing actions are expected to be more than offset by related volume declines in our Rubbermaid Home products business. We also expect continued softness in our home decor business for the reminder of the year. We are increasing our office product segments internal sales guidance to be up low single digits driven by strength in our international business and favorable foreign currency of approximately 4 points for the year. We continued to experience unprecedented pressure on our gross margin from raw material sourced product inflation. We now expect gross margins to decline 100-175 basis points for the year, while we continue to see benefits as planned from project acceleration combined with ongoing productivity initiatives the reduction to our April guidance is driven by dramatically higher inflation from raw materials, primarily resin and metals. We now estimate the impact from raw material and sourced product inflation to range from $275 million and $325 million, compared to our previous expectation of $160 million and $180 million on our April call. As you know, oil and natural gas prices increased dramatically during the second quarter with the average price of oil increase approximately 27% and the average price of natural gas increasing 31%. As a result we expect resin cost to continue to inflate to the remainder of the third quarter as we believe the recent oil and natural gas inflation has not yet fully reflected in today resin cost. As previously announce we are initiating aggressive price increases in certain of our categories in the back half of the year including those of resin, the primary cost of goods. These increases, some of which are as high as 22%, will help to offset a portion of the dramatic inflation we have experienced this year. However, the related volume impact on our fourth quarter business will more than offset the benefit from pricing in that period. The largest impact of these pricing initiatives will come next year. Despite the continued raw material and sourced finished goods inflation we are continuing to invest in strategic SG&A at approximately the same dollar levels as we shared on the April call, while we are also continuing to reduce structural SG&A. Consistent with our press release on July 15, we expect full year normalized EPS between $1.40 and $1.60 per share. The change in guidance is attributable to the dramatic inflationary pressures and raw material and sourced finished goods and the volume impact as we downsize and exit certain categories and right size our inventory levels accordingly. The lower end of our guidance reflects the assumption that the price of oil approaches $200 per barrel by the end of the year and an even weaker consumer spending environment by year-end. Based on the strategic initiatives outlined in the July 15 press release we anticipate pre-tax restructuring charges of between $175 million and $225 million of $0.46 to $0.59 per share. The outlook above does not include these charges. And before we open the call for questions, Mark has some final comments. Mark?

Thank you, Pat. Before providing my summary comments, I’d like to thank all of our employees for their continued hard work and dedication particularly, during in difficult times. Its also been bumpy ride for our shareholders, 2008 has proved to be a challenging year as tough as any year I have seen in my 37-year career. We have had to take some tough actions to help preserve new Rubbermaid’s ability to grow and prosper in the future. We will continue making the changes necessary to position our company to long time sustainable shareholder value. We have demonstrated this in the past and we demonstrated again with the actions that we announced two weeks ago. Now we are dealing with some very severe near term economic pressures this year let’s not lose site of considerable progresses we have made over the past several years. Our investment is building strong consumer meaningful brands are paying off, driving top line sales growth in many of our categories to offset temporary market contraction in US tools and hardware and US office products. Our efforts to achieve best total cost are driving strong productivity and improved efficiency, which is helping to offset some of the unprecedented cost inflation. Our margin structure in 2008 is still much healthier than it was in 2005 even after the hit from resident inflation and we will deliver another step change improvement in gross margin after executing the recently announced actions. We are collaborating more across brands and business units and sharing best practices corporate wide, which is resulting in bid for a more successful product launches. Our culture is becoming more consumer and brand centric and embracing best in class as our key benchmark. Each year we take steps to make our portfolio less commoditized, more differentiated, and more international with higher gross margins. Our strategies are delivering results and are building competitive advantage. I am confident in our ability not only to weather the current economic storm but emerge from these turbulent fines a stronger and more profitable company. Thank you for joining today’s call and I’ll now ask the operator to open up the line for questions.

Thank you. We will now begin the question and answer session. [Operator Instructions]. Your first question comes from Wendy Nicholson with Citi Investment Research.

After due with some of the pricing that you’ve announced and given the volatility in oil prices. I know your expectation, you threw out that $200 oil number. But how fluid is the pricing that you are taking in other words, now that oil has come off are you contemplating taking less pricing or how to texture those conversations?

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

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

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

Okay. And then just one more question if I may, the cash flow outlook I think is probably causing some folks to have a little tiny bit of a heart attack because it can sort of barely that dividend, so I guess, is there any contemplation that you might cut that dividend or you just going to finance that or there is some…?

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

Excellent, thank you very much.

Your next question comes from Chris Ferrara with Merrill Lynch.

Hi, good morning guys.

Hi, Chris.

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

I will start with the tax. Last year and the first half of the year there were two events which didn’t repeat this year in the first time. We had some net operating loss carried forward that lowered our cash taxes in the first half of last year, we did not have those, at least not in the same magnitude this year. And we also received a tax refund last year in the front half which lowered our net cash outflow. So, year-over-year comparison was unfavorable from a cash tax standpoint because of these two items. Also in the first half of this year, we paid cash taxes on an anticipated higher income level, we just took our income level, our expectations down. So, our back half taxes are reduced accordingly. So now we lower income expectations for the year, our cash tax is going to help the back half compared to the front half of very low. So, more than pay half of the taxes year-to-date. So, those two things combined in the front, weaker last year and back half will be comparably stronger. From the accrue liability standpoint it primarily related to the customer programming and that’s just the timing of one customer to deduct those program payment some are on quarterly, some are semi-annual, some are annual. Now, we just had more customers take those in the front half before the end of the quarter then we had in the past. So that will reverse in the back half.

Can you give a little more on that and I guess how big is that to cash for the customer accruals and I guess why were they taking more in the first half, does that just mean customer are running more of promotions in the first half of the year than a year ago?

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

Whatever it was, in other words is there a way to think about it, you guys have prepaid this stuff, you pay from more than the first half half’s worth of customer accrual?

It’s just different in way we have done last year. I’m just comparing year-over-year. So the total amount of payments for the year will be the same just taking more in the front half than a year ago.

Okay, okay. And then, I guess on the top line in general, I mean, your guidance organically is not for any sort of deceleration even though your customers are seeing increasingly weakening trends. So, I am assuming the more cyclical parts of your business is you are worsening a little bit, where is your business accelerant, why you are able to continue to organic growth in the same level next quarter as you do this quarter?

I think there are a number of reasons. One we are continuing to invest and we’ve got a lot of investment in the third quarter. I think our year-over-year increase in brand building SG&A is up around $50 million and over two thirds of that is a real increase, the third would be currency related. We are investing behind things like we are introducing Sharpie Pens in North America. We are doing a global Sharpie campaign with the endorsement of Beckham on Sharpie. We are driving Paper Mate in Europe and year-over-year relatively we had a low spend in 2007 in office products because of the supply issues. You don’t spend a lot of money promoting what you can’t get on the shelves. So, last year that affected, actually our spending. This year it will be back up. Home and family I already talked been electronics introduction and talked to you about the baby and parenting introduction of Nautilus which has just begun and we are also expanding geographically the brand. Tools and hardware, we are investing especially in developing markets with more feet on the street and cleaning core continues to invest in Rubbermaid Food and Rubbermaid Commercial so, we have a lot of strong initiatives and we’re actually not taking our foot off the pedal at all in terms of investing behind us. We get contributions from the two acquisitions. We get the pricing initiatives that were taken so the combination of all those, you know the acquisitions and the investment in innovations the ongoing strength we’ve had in business like Rubbermaid Commercial, Rubbermaid Food, Rubbermaid Home and Family and the pricing that help all of those things give us confidence in those numbers in the back half.

Great, and then just finally, why are your like all of your customers adjust the mechanisms on pricing or is just a situations where we say okay, agree a little over just offsetting in with that the part of $500 million that we exit?

Is basically, we pull them we have to get this and so far again no customer like their pricing but they understand it and they understand from our willingness to exit other categories that this is that serious so, it’s not a negotiable point and it will just happen to get this kind of pricing in order for us to stay in business and they want us to stay in business they want Rubbermaid brand.

Okay, thanks a lot guys.

And your next question will come from Bill Smith with Deutsche Bank.

Hi, good morning.

Good morning.

Morning Bill.

Hi, guys can you just give some more detail on the assumptions on $200 oil and demand softness I mean how does that flow through the model and just a little bit more details so that we can try to build around to kind of test some of those assumptions?

Yeah, this is Pat, the $200 oil obviously for oils moves in our favor very recently although yesterday it go up that $5 but frankly it effects we believe it effects ‘09 way more ‘08 okay. In other words we don’t believe that the resin cost have even caught up for oil in the $125 to $135 range yet. So we are going to see -- we believe we’ll see inflation in August, in September beyond what we paid in July. We don’t have complete confirmation of that yet but that’s our belief. And let's assume oil then moves to the direction of $200 over the remain four or five months for the year because usually we have added two months lag, one to two months lag for that to get into the cost. So, it will affect credit factors in the fourth quarter but frankly it would affect 2009 for much greater degree. So, for this year, it effects the fourth quarter probably in the $0.04 or $0.05 type of range.

Okay.

Now if it goes to $200 tomorrow one big jump and that would be definitely okay but it especially as they gradually go to $200 over the rest of the year.

Got it, okay. And that make sense on the oil side, does that mean growth margins can decline again in 2009?

No, they will not and what we’ve announce recently with these product line exit and sales will actually improve gross margins by a minimum or 200 basis points year-over-year. So, that alone will increase margins but we believe also from a pricing standpoint we are now not in the front of the curve by means but we are working our way we’ve been going into ‘09 although we anticipate pretty significant inflation again in ‘09 versus ‘08 into the level we are seeing this year. We also anticipate that our pricing will be much more in line with that.

Okay. How many pounds of resin?

I think, that I was repeating too. As I said in my remarks our objective is to make resin another raw material in the normal course of running the business. So the businesses that resin will still have high resin containing quantities, which will be Rubbermaid Commercial and Rubbermaid Food and Graco for instance with our car seats. All those businesses number one resin has a percentage of the cost to good filled much more in a voice in the categories that we’re exiting. And therefore, even the large increase and you know there are large users of resin in terms total tonnage its much smaller relative to the price per unit. And second all those businesses are growing substantially through innovation and the consumer is willing to pay for that performance and value and so we expect that this is going to be, I don’t call it a non issue but it won’t be the kind of thing that will report about and fixed and I expect same one-tenth -- much time taking about resin next year even if it continues to delay.

Hope so.

I’m not just hoping, we are planning and expecting that because again the resin that will take out of the system is affected in the products were those conditions just don’t exist. Its relatively low value added, the consumer just wants a basic product, we have tried to test out and offered them innovated ideas and they said just want a basic product and so that’s not going to be our game and that’s why we are exiting or downsizing these categories.

Okay. So, can you give us a number of just like €750 million all in now, I mean do you know what the number been next year in terms of resin buy?

We expect it will be down around 40%.

40%, the resin exposure.

Yeah.

Wow, that’s a big number. Thank God you don’t still own little takes.

We have been on this course for a number of years. We still about 12% of our business that we would have product wise commoditized and much of it was unique kinds of categories and we are making nice progress in continued cost reduction and what I call fixed in the margins but that was a more normal set of circumstances and obviously that world changed its not normal anymore.

Okay, great. And then just one final if I could, how is the back to school season looking for the office products business? Because you’ve had some pretty miserable results by a lot of the office supply retailers?

Our selling with consistent and consistent with what they are reporting and consistent with the North American business is. Seeing what is down in North America in the neighborhood of 5% to 10% in terms in overall. So, its going to be softer than it was year ago but we certainly hope they are owning that environment and with investments that we are making in bringing new products like sharpie pen to market and we are going to do outside the US, that’s what will be the positive side of the office products equation.

Our office technology business continues to grow significantly in the double digit. So, it helps offset some of that decline that we are seeing in the writing categories.

Okay, how are inventory levels in the trade?

Well again, we think on our product we think we are okay, we don’t see a significant take down risk where we are today.

Okay, great, thank you. Sorry for taking so much time.

No, okay.

Your next question comes from Budd Bugatch with Raymond James.

Good morning Mark, good morning Pat.

Good morning.

Just couple of things, you talked a little bit about some other planning assumptions in for 2009, in revenues we’re going to be down $500 million I guess annualized on revenues what should we think about that you already did say I think your gross margins will be up in 2009, can you give us kind of maybe the initial thoughts as there is wide disparity of estimates out there now?

Related what we’ve announced couple of weeks ago about the top line down around $500 million but the gross margins improved in just from our announcement in excess of 200 basis points, which is private lines had low single digit gross margins and our operating profits when we put this behind as we haven’t at the start in next year over this call and our run rate I mean next year will be up to $0.05 or $0.10 and that’s to us taking out the associated SG&A related to those product lines.

An internal growth what do you think I know it’s obviously nobody has got a good crystal ball right now?

We are not going to predict that at this point in time but --

Okay. Let me talk a little bit about the drill down a little bit home and family obviously Aprica I think you’ve – I got you right at about $36 million of volume in the quarter and you can confirm if I’m right on that or not but, I was disappointed in looking at the margins and the change in operating profit in there right? Now, a creek of what somewhat dilutive can you kind of quantify what that was between brand building strategic SG&A and the Aprica dilution?

Aprica in the quarter was a little -- not sure they were down of $3.5 million in profit and total probably half of that was Aprica and the rest was the strategic spending and pressure a presumable margin from implied costs.

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

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

Okay. And if you could talk a little bit about Europe in terms of profitability I know in the Q’s we see European profitability and I know that the numbers we see include I guess project acceleration cost but what I was surprised in the first quarter to see Europe move into a loss category and can you kind of give us maybe some geographical help when operating help now and what that was -- how much of that maybe acceleration or restructuring charges?

I know how they are specifics but that’s what it is, (inaudible) restructuring in Europe and so that’s what taken it to a loss on a GAAP basis. On a management basis or a continuing basis I will have that back to you, have Nancy get back to you and tell you what that difference is.

It’s improving year-over-year and its not declining.

So and same in the second quarter as well?

Yes, and expected for the year also, yeah.

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

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

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

I don’t have those numbers right in front of me Connie. But you’re right, the largest share of it is resin say more than half. The next biggest piece is sourced finished product and that’s been driven by same as is driving our own production and the next biggest and it’s called out of quarter and the rest is metal and packaging (inaudible). But I don’t have the exact numbers.

Okay, I guess on the sourced goods, that was you kind of led into my next question. A total land at cost basis, does it still make sense to show a lot of products outside the US when we take into account labor rates along with cost inflation?

Yes, it does because the raw material inputs are virtually the same so that’s large percentage of our cost so that drive in new higher cost in many case. We are seeing that here as well as there. The labor differential although it has shrunk a little bit so significant and higher source of significantly low in labor and also overhead in the plans that are overseas. So, the same trade off that we would always do is really the labor and overhead savings offset the transportation and just say half of that. In that way various in the type of product and much labor. Labor with the Rubbermaid products usually make them closer to market because they are expensive to ship and have very low labor component whereas smaller product with a higher labor content still makes sense to go overseas.

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

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

The other I would say Connie is that the supply and demand of the resin capacity has much more significant impact, effect rather at more constant input cost and when the input cost are rising and are as high as they are today that totally overwhelms it. Input costs or oil and natural gas energy costs are 65% to 75% of their total cost structure. The total cost structure making resin because it is a) the input material, b) it takes energy to run the cracking process and c) it takes energy to transport its market and so its such a predominate cost so when it doubles it just totally worsening the impact and supplying demand.

That’s very helpful.

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

Thank you very much.

Your next question will come from Joe Altobello with Oppenheimer.

Thanks, good morning, guys.

Good morning.

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

That’s fair. I think you will see those exit starting in the fourth quarter and then picking up sequentially but in total it will take about 12 months before we are at the end point.

And if that’s case that will get you to $0.05 or $0.10 of accretion?

That’s right.

Okay. In terms of the commodity cost situation if we assume that commodity stay where they are at today, it sounds like Pat, you’re still looking for additional inflation next year?

Well, just the carry over effect of this year’s inflation is significant in other words it hasn’t move -- did move on January 1, we get it all from day one, its moving up during the year so even if they stabilize we would have a year-over-year impact.

Even with the business exits?

Yes, we still use there are raw materials in the businesses that we will remain in. So the rate of inflation when that remaining business would be about the same just be a lower base. So the dollars may come down. But the rate of inflation would be roughly the same.

But you’ll still be up.

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

And the $0.05 to $0.10 accretion incorporate any fixed cost absorption from the exits of those differences as well?

Is does. Those businesses are fully burdened with their fixed costs. Low single digit gross margins and we will be making the appropriate actions to take that fixed overhead out. And then from SG&A standpoint we will remove the SG&A that is directly related to those businesses which generate the $0.05 to $0.10 improvement.

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

Not yet. We had a good second quarter. We had some pretty favorable comps because of pretty weak second quarter last year. But we had a good second quarter in office products in Europe as well as Asia and we continue to get the foreign currency benefit and also point out the office technology business is doing very well. So, all those combined are causing the growth in that segment.

Okay. And then lastly, the volume decline you are anticipating in 4Q and the price increases, how much of that is from consumers moving to lower priced items and how much of that is retailers in the allocating less shelf space?

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

Got it, understood. Okay, thanks.

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

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

What was the surcharge (multiple speakers).

How did that all work and how did the surcharge go away because there was one I recall?

Yeah, we did have one. I forget which year it was, I think it was in probably it was late ‘04 (multiple speakers) resins at the time, it was semi-annual basis as I recall and we did exit some product lines. I wouldn’t say it was a direct result of that but it was connected with it at that time. But moved away from it because there was a low in our resin costs, frankly. And went back to our -- our normal pricing mechanism which would be more on an annual basis on those products and that we see again the mediocre rise in resin cost. We feel we have to have some mechanism in place that ties our price to go that again.

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

It wasn’t going down. It just leveled off.

The theme dynamic worked then, Linda, which was initially the inflation resin preceded our ability to price to cover it so we were behind from the beginning and had to get caught up, right, we got to caught up little bit faster because it wasn’t nearly as dramatic in terms of its total impact as it is today. But, there is always lag effect when its starts moving that quickly. And so the surcharge then and are pricing now isn’t just starting with today as the point in time going forward it starts, the clock starts some point back in history and so here is what we got to do to get caught up, here some much we are behind April. And that’s what mechanism going forward, we will accommodate both or a comfort of getting caught up, as well as, you know, actual current environment and the predicted environment.

And were caught up going -- you know out of those 7, we had about $350 million inflation over the previous 4 year period and about 350 million of pricing. So, we had caught up at that point and we are now behind again.

When we stopped the surcharge and we were caught up and resin had stabilized.

Okay, thank you very much.

If we were unable to get to your question during this call, please call Newell Rubbermaid Investor Relations at 770-407-3994. Today’s call will be available on the web at www.newellrubbermaid.com, and on digital replay at 888-203-1112 or area code 719-457-0820 for international callers with the conference code of 452-4394 starting two hours following the conclusion of today’s call and ending August 14. This concludes today’s conference, you may now disconnect.