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Newell Rubbermaid, (NYSE:NWL)

Q4 2008 Earnings Call

January 29, 2009

Executives

Mark Ketchum - President and Chief Executive Officer

J. Patrick Robinson - Executive Vice President and Chief Financial Officer

Nancy O’Donnell - Vice President of Investor Relations

Analysts

Bill Schmitz – Deutsche Bank

Wendy Nicholson – Citi Investment Research

Chris Ferrara – Bank of America

Budd Bugatch – Raymond James

Bill Chapelle – SunTrust Robinson Humphrey

Joseph Altobello – Oppenheimer & Co.

Connie Maneaty – BMO Capital Markets

Linda Weiser – Caris & Company

Operator

Please stand by. Good morning ladies and gentlemen and welcome Newell Rubbermaid’s Fourth Quarter 2008 Earnings Conference 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, under the Investor Relations home page under Events and Presentations. The slide presentation is also available for download. A digital replay will be available two hours following the call at 888-203-1112. I’ll repeat that. That’s 888-203-1112 or area code 719-457-0820, 719-457-0820 that is for international callers. Please provide the conference code 6062144 to access the replay.

I will now turn the call over to Nancy O’Donnell, Vice President of Investor Relations. You may begin.

Nancy O’Donald

Good morning. Welcome to Newell Rubbermaid’s fourth quarter and full year 2008 earnings call. Before we get started, it’s my job to remind you that are discussion today contains certain forward-looking statements within the meaning of the Securities and Exchange Act of 1934.

These forward-looking statements include risks and uncertainties and actual events and results may differ materially. For a detailed discussion of some of the most important risk factors that may impact our performance, please see our most recently form 10-K and 10-Q. We further caution you that we do not assume any obligation to update any forward-looking statements that we make today.

We’ll also provide certain non-GAAP financial measures on the call. Reconciliation of the non-GAAP financial measures to the most directly comparable GAAP measures is included in our press release and is also available on our website.

With me on today’s call, as usual, are Mark Ketchum, the company’s President and Chief Executive Officer, and Pat Robinson, our Executive Vice President and Chief Financial Officer. So I’ll turn the call over now to Mark.

Mark Ketchum

Thank you, Nancy. Good morning everyone and thank you for joining us today. I would like to start by offering some perspective on Newell Rubbermaid’s performance and our strategy and most importantly how we are managing our business in the face of the very significant challenges thrown at us by today’s economy.

I won’t belabor the point that we are in difficult times. We are all too familiar with the list of issues confronting businesses today. At the top of the list for a consumer products company is fewer people with jobs, contracting credit, declining consumer confidence, and the resulting top line pressure. The volatility we’ve experienced this past year, the depth and rate of the decline and the resulting lack of clarity and visibility to forecast the future are unprecedented in my business career.

However, it is what it is and we must and we will deal with it. We are dedicated to making the best of a difficult situation. In today’s environment, our first responsibility is to protect the long-term future of Newell Rubbermaid by maintaining our solid liquidity position and the financial flexibility necessary to weather this economic storm. The way we’ll do that is by prioritizing the generation and preservation of cash and earnings in that order.

We did a good job of managing our business to generate cash during 2008; although at some sacrifice to operating income particularly in the fourth quarter. Despite the unexpected sales short fall that materialized in November and December, we delivered operating cash of $212 million in the quarter and $455 million for the full year exceeding the high end of our guidance range. We were able to deliver on our cash targets through a laser like focus on working capital; dramatically curtailing production in order to reduce inventories and tight management of payables and receivables.

Looking ahead to 2009, we think it’s prudent to plan for another difficult year. With that in mind, we announced today that we are reducing our 2009 dividend by half. This is not an easy decision. We are certainly mindful of the importance of returning value to investors through dividend income. As we stand today, we believe it is likely we could operate our business, maintain an appropriate level of capital investment, and meet our 2009 debt maturity obligations without a change to our dividend but the leadership team and the board concluded it makes sense to reduce our risk profile and protect our solid investment credit rating and access to the credit markets.

Our number one commitment to shareholders is to protect and preserve the long-term future of the company. This more conservative dividend policy which frees up approximately $120 million in free cash flow creates an additional buffer to help deal with the unknowns that 2009 might throw at us and the new dividend level still offers an appropriate, attractive yield relative to our peers and the overall market given our lower stock price and earnings expectations.

In line with that conservative approach, our mantra for 2009 will be flexibility and adaptability. Obviously, we have no control over the economy and we can’t magically increase consumer confidence. So we will read and react. We anticipate that 2009 will be highly unpredictable especially as it impacts revenue. We anticipate in our modeling year over year declines in core sales volume, in addition to the 4 to 6% revenue decline from product categories we are exiting.

In light of that, we’re focused on protecting earnings by aggressively managing our cost structure. Keeping with our operating principles and flexibility and adaptability, we are preparing several layers of contingency plans in case economic conditions worsen. We’ll be ready to adjust on short notice as needed to deliver our cash and earnings targets.

As we announced back in December, we’ve initiated workforce reductions and a salary and wage freeze across the organization. This is part of targeted structural SG&A reduction of $100 million expands the end of 2008 and the first half of 2009. To further realize structural cost efficiencies we are consolidating and simplifying our segment structure and reducing the number of global business units from 16 to 13; more on this later.

On a positive note, we think we can improve our gross margin in 2009 aided importantly by category exits that will leave us with a more focused, more profitable portfolio. We still expect that once completed these exits will drive annualized gross margin improvement of more than 200 basis points. We’ll see much of that improvement in 2009.

In addition, we expect to benefit from the positive pricing actions taken last year. We are seeing relief in resin costs due to the decline in oil and natural gas prices but still expect year over year inflation in other input costs such as metals and sourced finished goods. Net, we believe pricing and inflation will be offset in 2009.

This gross margin expansion will help fund continued selected investment and strategic brand building. Even in this weaker environment we still see solid growth potential in a number of our GBUs and in developing markets. We will continue to invest strategically in innovation and new product launches in categories where consumer and retail dynamics are the most responsive.

Our long-term strategy has not changed. We remain committed to delivering sustainable growth by investing in consumer driven innovation and brand building, optimizing our portfolio, and achieving best cost and efficiency across the organization. I’m pleased to say we continue to make good progress in advancing these objectives even in the face of the 2008 and the 2009 economic headwinds.

Our careful fiscal management during the difficult period will help ensure that we are well positioned to resume our growth trajectory once the economy rebounds. Let me get more specific on our outlook going forward.

As I said earlier, we expect the difficult retail environment experienced in the fourth quarter to continue into 2009 particularly in the first half of the year. For the full year, we are anticipating a net sales decline of 10 to 15%. This reflects a year over year decrease in core sales primarily driven by continued weakness in the US market plus a negative currency exchange impact of 2 to 4% and an additional 4 to 6% negative impact from categories we are exiting.

I am very weary of being able to accurately forecast organic sales in this current environment. The consumer economy is resetting to a new base. Unemployment, reduced credit spending, and shaky consumer confidence will all reduce consumer spending. Who knows, Americans might even start to save some money again. So nobody knows exactly how big or how lasting this new consumption pattern will be.

However, I have a much better level of confidence in our EPS and cash guidance. As I stressed earlier, cash is our key priority this year. We expect to 2009 operating cash flow in excess of $400 million. Once again, disciplined management of inventory, accounts receivable, and accounts payable are the key levers. With our strong cash flow generation and our solid capital structure, we are confident we can comfortably satisfy our financing and liquidity needs in 2009.

We expect to deliver normalized EPS in the range of $1.00 to $1.25. This range is wider than usual, a reflection of the highly variable environment but we believe, that with the contingency plans we have in place and with our commitment to adapting to circumstances, we’ll be able to adjust our plans as needed to meet these EPS and cash targets.

One more detail before I turn the call over to Pat. As part of our overall focus on reducing and streamlining structural costs, we have recently introduced some changes in the organization structure of the business. Effectively the first quarter of 2009, GBUs within our cleaning organization in the course segment will be organized as follows. The Rubbermaid commercial products GBU will be managed as part of a renamed tools, hardware, and commercial product segment. Rubbermaid food and home products and the décor GBU including the Amerock brand will become part of our home and family business segment.

We believe this reorganization will be a very positive change with two step distribution route to market makes Rubbermaid commercial products a good fit with significant portions of the tools and hardware business. The target consumer for the majority of décor and Rubbermaid food and home, namely the female head of household, makes these businesses a good fit with home and family.

So besides making good business sense, this change recognizes and leverages the talents of our two business segment presidents, Bill Burke and Jay Gould, and will allow us to realize structural SG&A efficiencies consistent with our focus on cost management. The office products group as announced previously is reporting directly to me until a permanent head is appointed. We expect to announce the new president of office products in a few months.

So at this point, I’ll turn the call over to Pat. We’ll walk through the financials in additional detail and then I will return to provide final comment, Pat.

J. Patrick Robinson

Thanks, Mark. I’ll start with our fourth quarter 2008 income statement on a normalized earnings basis. Net sales for the quarter were $1.5 billion down 11.6% to last year consistent with our revised guidance of a sales decline in the low teens.

The sales decline was driven by a significant deterioration of our retail sales in the fourth quarter across substantially all of our businesses and geographies with the office products and tools and hardware segments seeing the largest impact. A rapid decline in consumer foot traffic late in the quarter coupled with tight management of inventory levels by retailers led to the sales drop off.

Foreign currency contributed 4 points to the sales decline in line with our expectations. Previously announced product lines exited contributed approximately 3 points to the decline. Acquisitions contributed approximately 4 points of growth in the quarter. Our international business decreased approximately 12% in total and 1% in local currency while our domestic business was down about 15% for the quarter.

Gross margin for the quarter was $435 million or 30% of net sales. About 510 basis points lower than the prior year. The following factors contributed to the margin decline. First, about one half of the decline was driven by the impact of lower production volume in our operating facilities driven by both lower sales volume and aggressive inventory management which allowed us to maintain our days on hand at approximately 82 days despite the steep decline in sales.

Secondly, in response to the sales decline we accelerated our sku rationalization efforts on slow moving products in categories planned for exit adjusting the carrying values of existing inventories to reflect revised sales strategies or lower sales outlook driving about one quarter of the decline. Unfavorable customer and product mix as customers favored value retailers and value products during the quarter drove the remaining 25%. The impact of raw materials and source product inflation though less than anticipated was still a significant negative impact in the quarter. However this was offset by positive pricing in the quarter.

SG&A was $355 million for the quarter down $16 million to last year. Incremental SG&A from acquisitions was more than offset by our aggressive management of structural and strategic SG&A spending. Operating income of $80 million or 5.5% of sales was down $125 million or 61% to last year.

Interest expense was $13 million higher than the previous year primarily as a result of the additional borrowings used to fund acquisitions. The company’s continuing tax rate was 28.5% compared to 27.5% last year. The company did have a period tax benefit of approximately $26 million or $0.09 per share related to the resolution of certain tax contingencies.

Normalized EPS of $0.11 for the fourth quarter is slightly above our revised guidance of $0.06 to $0.10 provided in our December press release. Management of SG&A spending and favorable interest rates accounted for the increase.

The company recorded approximately $19 million or $0.06 per share in restructuring charges related to project acceleration which are not included in any of our earnings described previously. The significant decline in the financial performance of certain business units in our tools and hardware and office products segments in the fourth quarter of 2008 combined with the adverse impact of the current macroeconomic environment when our outlook for these businesses led us to evaluate the carrying value of our intangible assets.

As a result of this evaluation, the company recorded noncash impairment charge of $299 million or $1.07 per share in its fourth quarter results related to goodwill. These charges are not included in the continuing earnings described previously. Operating cash flow for the fourth quarter was $212 million, up $13 million to last year despite a $100 million reduction in normalized earnings between years demonstrating our ability to generate cash in these difficult economic times.

Working capital improvements drove the increase between years including improved DSL of approximately four days and tight management of our inventory levels. For the year, we’ve generated approximately $455 million cash flow from operations above our July guidance.

I’ll now take a few minutes and talk about our fourth quarter 2008 segment information. In our cleaning organization in the core segment, net sales decreased 8.2% or $45 million to last year with unfavorable currency contributing 3 points to the decline. The acquisition of technical concepts contributed 6 points of growth to the quarter. Approximately 6 points of the decline is attributable to a decrease in sales on low margin products that we are exiting. High single digit growth in the Rubbermaid food business was more than offset by a high single digit decline in Rubbermaid home excluding the exits and a mid-teen decline in our décor business.

Operating income for the segment was $60 million or 11.8% of net sales, an increase of $8 million or 16% versus a year ago. The benefit from acquisitions, favorable pricing, and aggressive management of SG&A spending more than offset the impact of the sales volume decline and raw material inflation.

Office products net sales decreased by 14.4% for the quarter including approximately 5 points of decline from foreign currency. Our North America business was down mid-teens to last year while our international business was down 1 point in local currency. From a GBU perspective all businesses faced extreme pressure from the economy including lower consumer demand and inventory management at retail.

Markers and highlighters and technology experienced declines in the mid to high single digit range while everyday writing, fine writing, and office organization experienced declines in the mid to high teens. Operating income was $17 million or 4% of sales, down $72 million to last year.

In response to the rapid sales decline in the quarter, we took aggressive steps to slow down our manufacturing facilities and accelerate our sku rationalization efforts. Combined these efforts resulted in approximately $30 million of operating income reduction in the quarter.

In our tools and hardware segment, net sales were $257 million down 23% to last year with currency accounting for approximately 5 points of the decline. Our domestic business was down approximately 24% in the quarter and international business was down 2 points in local currency.

Retail inventory management, a significant increase in softness and industrial construction channels continued declines in the housing market and drop off in consumer foot traffic in the fourth quarter drove the decline. Operating income for the segment was $17 million or 6.4% of sales, down $32 million to last year as the volume impact on our plans and tight inventory management more than offset SG&A reductions and favorable pricing.

In our home and family segment, net sales were $261 million, an improvement of $4 million or 1.5%. The acquisition of Aprica contributed approximately 12 points of sales growth to the quarter. Culinary lifestyles had a high single digit sales decline. Baby and parenting essentials experienced a low single digit decline.

Operating income of $7 million or 2.8% of sales was down $29 million to last year. The drop through of lower sales, an unfavorable mix in our baby and parenting business, and source product inflation all contributed to the decline. In addition, our baby and parenting business experienced approximately $10 million of increased costs associated with compliance with newly enacted child safety protection laws in the quarter.

Turning now to our full year results. Net sales were $6.5 billion up 1% to last year including 3 points of benefit from the acquisitions of technical concepts in Aprica. Foreign currency contributed about 1 point of sales growth. Our international businesses increased approximately 8% in total and approximately 5% in local currency while our domestic businesses were down about 5%.

From a business unit perspective, mid to high single digit growth in our Rubbermaid commercial, Rubbermaid food, and baby and parenting businesses was more than offset by continued softness in our office products and tools and hardware business units particularly in North America.

Gross margin was 32.8% down 240 basis points from the prior year. The main drivers were the significant raw material and source product inflation, the fourth quarter volume decline and its impact on our plant productivity and unfavorable mix which more than offset positive pricing for the year. SG&A was $1.5 billion or $72 million higher than last year attributed entirely by acquisitions and the impact of foreign currency. Fiscal year 2008 operating income was $621 million or 9.6% of sales, down $206 million or 25% to last year.

Turning now to our 2009 outlook; for cash flow we expect to generate an excess of $400 million in cash from operations in fiscal 2009 delivering $100 million from continued strong working capital management. This guidance includes $100 million in restructuring cash payments for the year.

We’d expect capital expenditures to be approximately $150 million in 2009 resulting a free cash flow in excess of $250 million available to cover dividend payments and reduce outstanding debt. The company currently has approximately $275 million of available cash in cash equivalents as well as approximately $690 million of unused capacity on its revolving credit agreement which expires in 2012.

The company has two important loan covenants under its revolver and term loan bank facility. The first is interest coverage and the second is debt to total capitalization ratio. As of 12/31/08, the company has significant cushion under both covenants and expects to maintain significant cushion through 2009 even at the low end of its current earnings and cash flow guidance. The company has $750 million of debt maturities in 2009, approximately $500 million in September and $250 million in December, which it expects to refinance most likely through the capital markets in the first half of the year.

As Mark noted, we expect 2009 will be another difficult year with extreme volatility in the marketplace. As a result, we will remain conservative in our guidance for the year particularly as it pertains to sales volume. For the full year, we currently expect net sales will decrease 10 to 15 percentage points include the 1 point benefit from acquisitions.

Our guidance includes a 4 to 6 point decline from planned product line exits and 2 to 4 point decline from currency. We expect all of our operating segments to experience sales declines within this range with the exception of home and family which we expect to be flat to minus low single digits.

Our effective tax rate for the year is expected to be 30%. Our full year guidance for normalized EPS is between $1.00 and $1.25 per share. We anticipate pre-tax restructuring charges of between $100 and $150 million or $0.28 to $0.43 per share. The outlook above does not include these charges.

Turning to the first quarter, we expect net sales to be down low to mid teens including 4 points of growth from acquisitions. Our guidance assumes a 3 to 5 point decline from unfavorable foreign currency and a 4 to 6% decline from product line exits. We do not anticipate any relief from the weak consumer demand experienced late in the fourth quarter of 2008.

We expect retailers to continue to tightly manage channel inventories as well. Accordingly, we expect the first quarter sales declines to be in line with those experienced in the fourth quarter of last year. We anticipate normalized EPS for the quarter to range from $0.07 to $0.12 compared to $0.27 a year ago. The primary drivers of the decrease are the core sales decline and its related volume impact on our production facilities; continued tight inventory management which we expect Q1 inventory growth about half of what we saw a year ago; an unfavorable mix as we expect consumers to trading down to value retailers and products.

As Mark mentioned during the first quarter of 2009, the company made the decision to align the GBUs in the cleaning and organization in the core segment to our tools and hardware and home and family segments. Beginning with the first quarter of 2009 earnings call, we will begin reporting our financial results under the new three segment structure.

We will release updated historical segment financial information prior to the first quarter earnings call. Before we open the call for questions, Mark has some final comments.

Mark Ketchum

Thank you, Pat. Before I close, I would like to thank our employees for their hard work and dedication particularly in light of the difficult but necessary decisions that we’ve made to position Newell Rubbermaid to deal with these recessionary times. We are committed to the long-term health and success of this company and we’ll continue to do what is right to ensure its long-term prosperity.

Whatever 2009 may bring, I can assure you that our top priorities are to protect cash and earnings and to remain flexible and adaptable in an ever-changing landscape. We’ve taken steps to further strengthen our already strong balance sheet. We have developed contingency plans for a variety of economic scenarios and will aggressively manage our business as appropriate to deliver on our financial targets.

In the midst of the economic turmoil, we have not lost sight of our long-term strategic objectives. The strategies that served us well during more robust times are still critical during a downturn. Our moves to reshape the portfolio will make us a more innovation and marketing responsive, a more profitable, and more global company.

Our focus on changing the business model to become more consumer and brand-centered will help us win with consumers and customers, gain market share, and ultimately grow the top line.

And our continued drive to achieve best cost and efficiency and better supply chain management, and greater leverage at the company scale will reduce the cost of non-market facing activities and accelerate the adoption of best in class processes.

Despite all the short-term uncertainty, I feel good about the future of Newell Rubbermaid. The tough measures we have taken to deal with the current economic environment set us up to rebound more quickly as the economy recovers. Coming out of the recession, we will have a faster growing, more strategic, and more profitable portfolio, a leaner organization structure, and a strong inventory and cash management ethos.

I look forward to updating you on our progress on our next call. I will now as the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now begin the question and answer session. (Operator Instructions) Your first question comes from Bill Schmitz, Deutsche Bank.

Bill Schmitz – Deutsche Bank

Good morning guys. Could we just start on the product line exits because I think when we talked before we thought that it probably wasn’t a bid to sell some of this stuff off, so are you just going to shutter them? Or are there still plans in place to try sell off some of those?

Mark Ketchum

There are still a couple of businesses that we would like to be able to market, so we're going to continue to hold and run those in the immediate term. And that looks like the best decision. But as we also indicated, we will continue to exit other categories by withdrawing from them and that’s the 4 to 6% of additional revenue decline that we referenced earlier.

Bill Schmitz – Deutsche Bank

Okay, and then will it be done by the fourth quarter or will there still be product line divestitures in the fourth quarter of next year?

Mark Ketchum

Well, I think the divestitures could still be with us at the end of the year. I just don’t know that. Circumstances may change. We may find that there’s a better economic scenario in terms of monetizing or exiting those businesses. But at the current time, we’re going to exit about two-thirds without divestiture and roughly a third of it that we would still hope to divest.

Bill Schmitz – Deutsche Bank

Okay, great. And then on the debt side, I think of the 750 million due, roughly 450 or 500 to accounts receivable securitization facility. Is there any more color on whether or not that market’s opening up again and whether or not you’re going to be able to renew that facility.

Pat Robinson

We haven’t been renewing that. Citigroup Bank is holding it now. As far as I know, that market’s still available. But our plans are that more than likely we’re going to term that out in the first half of the year.

Bill Schmitz – Deutsche Bank

And what’s the rationale for that?

Pat Robinson

Just to make the balance sheet more secure and put more maturity into our debt.

Bill Schmitz – Deutsche Bank

Okay, I’ve got it. That makes sense. And the just lastly, I have one third quick one. Resin prices are down $0.35 or 0.40 if you look at some of the published numbers. Why aren’t your sourced goods numbers coming down instead of going up because a lot of the content of those products is on heat resin.

Pat Robinson

Actually, it’s not. There’s a lot of resin product, Bill. We make most of the resin stuff ourselves.

Bill Schmitz – Deutsche Bank

Okay, so then what is driving that inflation on the source products?

Pat Robison

Well, it was the other materials. The metals and packaging have not come down, at least not significantly with resin, and some of them have actually gone up. The other thing is we had labor inflation that’s still happening, primarily in China. And the currency, although the pre-strips of our hasn’t happened as rapidly. It’s still happening. So those combined are still causing some pressure on source power.

Bill Schmitz – Deutsche Bank

Okay, great, thanks very much.

Operator

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

Wendy Nicholson – Citi Investment Research

Can you start by talking about the European business versus the US business? I’m surprised the European business, or the international business as a whole, has been as strong as it has. And in terms of your forecasting for next year, are you assuming more of a slowdown in the growth rate there just like you’ve seen in the US.

Mark Ketchum

Well, specific to Europe, Wendy, it has lagged the US, but generally it’s following the same trend. So the downturn their started later, but we are seeing it more now, and that’s frankly reflected in our first quarter to first-half estimates. So we’ll see more of a drag from Europe than we had seen previously. But we did start to see that at the end of the fourth quarter. You read the news as well. You’ve got some fairly serious declines in places like the UK and Spain and more moderate, but still significant declines throughout Central Europe.

Wendy Nicholson – Citi Investment Research

You said the European business was only down 1% versus the US business down mid-teens. Is that right?

Mark Ketchum

That’s right. It wasn’t just Europe. It was all international—Latin America and Asia as well.

Wendy Nicholson – Citi Investment Research

Right, but it’s fair to assume that that’s going to deteriorate from here, I would assume.

Pat Robinson

I think our European business, as Mark mentioned, certainly in Western and Central Europe will follow the US pattern is our assumption. Now, Eastern Europe and some of the developing areas that we include in Europe, like the Middle East and what have you, they may decline, but their growth rates will still grow. Their growth rates will decline but they’ll still be in a growth mode.

Mark Ketchum

And Latin America and Asia will continue to grow.

Wendy Nicholson – Citi Investment Research

And the product line exits, are those almost all based in the US?

Pat Robinson

Yes.

Wendy Nicholson – Citi Investment Research

Okay and then can you comment just on the US business? Bill mentioned the drop in resin pricing and obviously that should turn into a big tailwind for you and some of the other guys out there, but have you seen private label start to pull back pricing? Or have the conversations with retailers gotten more difficult? And can you also comment on inventory levels on some of your bigger categories at retailers?

Mark Ketchum

There’s a couple questions in there and I will try to take them all and if I’ve missed anything, tell me. First, the comment on resin, certainly we’ve seen a significant decline in resin versus last year and total versus its peak. But also, I’d offer as perspective that the lowest quarter for resin last year was Q1. So the benefit isn’t the benefit we’d see versus its peak in August or September. We have to look at what it was versus the same point in time a year ago. So that’s relative to the question of the resin benefit that we’ll see.

The other thing that we’re seeing obviously is a lot of price pressure. And the price pressure comes not from customers as much as it does from competitors. Competitors are willing in some cases to drop their prices and we have to adjust our prices to stay competitive.

The third thing I’d say is that where we’re seeing the most pressure, both of the places that we would get the most benefit from resin price declines as well as where we’re seeing the most price pressure, are precisely the categories we’re exiting. And that’s the reason we are exiting them. We don’t like that business dynamic. We don’t want to be in those kinds of commoditized categories. So the other thing is over time, we have less and less of an impact of either the benefit from resin or the negative price pressure effects.

So that was that question on the price of resin. Secondly, you asked about pressure from private label. Again, I would characterize the issue a little bit differently. I think we’re seeing more and more pressure from consumers and customers trading down. And it’s not just trading down to private label; it’s trading down within our own mix. We’ve got a fairly significant negative mix impact that we started seeing in the fourth quarter and we’re seeing again in the first quarter as both consumers, but also customers want to make a value statement to their perspective shoppers. And the way, oftentimes, they think they can do that best is by offering something that looks like a fabulous deal, meaning low price. And so they’ll pick the items that they can offer that fabulous deal price on. And often times that’s entry price point kinds of products. So that affects our mix and we’re seeing that. So we’re getting the benefit of that from a volume standpoint, but it’s a mixed hurt. So it’s not really just private label pressure that we’re seeing as much as there is just a general pressure for customers and consumers to mix down in this environment.

Third question was inventory related, I think.

Wendy Nicholson – Citi Investment Research

That’s right. Inventory levels to out-retailers.

Mark Ketchum

Yes, again, it varies by customer and by product category and channel. Frankly a lot of our customers and our channels have leaned themselves up pretty well in the last few months, but I’d be naïve to sit here and think that the pressure on cash being what it is that some customers and channels won’t see driving their inventories down further to be a continued opportunity that they might go after.

Wendy Nicholson – Citi Investment Research

And just in terms of the middle comment you made about how people are trading down and how retailers are trying to offer more value, does that affect the way you think about innovation this year? I know the last couple of years you’ve focused more on innovating at the higher end and the more value-added side, whether it’s in the family care or even on the office product side. Does that affect not only the number of new products but the type of new products you’re launching this year?

Mark Ketchum

Not really a lot, what it does is affects our rate of spending and our pace of spending in terms of launching those initiatives. So in some cases we’ve either scaled back on the launch plans or we’re testing them more before we go ahead with the performance. So obviously we can’t just ignore that factor.

And in some cases it’s frankly delaying the timing of them until we think there’s a receptive audience, both consumer and customer. But the answer is our innovation is still focused on where we can really bring performance that differentiates us. And the other half our innovation has always been focused on how we do that at a best cost—how we design and engineer the products and also how and where we manufacture them.

Wendy Nicholson – Citi Investment Research

I’ve got it. Thank you very much.

Operator

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

Chris Ferrara – Bank of America/Merrill Lynch

Hi guys. I just wanted to know if you could comment on the Q1 sales outlook in ’09. How much of that weakness is assumed further destocking at retail?

Pat Robinson

Well, it’s hard for us to split that to be honest with you, Chris. We think in the fourth quarter, if you remove currency and remove 59 exits and you get right down to our core sales and lines and it was around 8.5% and roughly a third of that might have been retail inventory adjustment and the other two-thirds consumer demand.

When we look at the inventories at retail, Mark mentioned, we think they’re down from where they were a year ago, not in every channel, but in most of the channels. But we think the retailers may continue to do that and we’re actually baking that into our first quarter guidance. So maybe roughly a third, but it’s hard to get an exact read.

Chris Ferrara – Bank of America

That’s understandable. But I guess the right way to characterize your think is that Q1 suffers from that as much as Q4 did and then it sort of eases from there. Is that right?

Mark Ketchum

That’s a general rule, yes.

Chris Ferrara – Bank of America

And then Pat, I guess I might not have heard this right. I thought you said one-quarter of the gross margin decline you saw in the corner, it sounded like something related to an inventory write-off. Is that right or wrong? Could you just give a little more clarity on the first quarter you cited.

Pat Robinson

Yes, it wasn’t write-offs but it was write-downs related to some of the product line exits that we’re doing as well as some skew actualization efforts that we had planned, but we decided to accelerate. So with downturned sales and the downturn of our outlook, we reevaluated those reserves and took some charges in the quarter.

Mark Ketchum

Of course, it also has to do with there have been promotional items that retailers are canceling their orders for their promotions, even display pieces and display packs that we’ve made with agreement, then they came back and said I’m not going to do this. So that’s a very unusual circumstance, but it’s real. So if I’ve got a promotional pack or displays that I’ve pre-built and put into inventory and now it looks like I can’t move them or the contract for them has gone away, I’ve got to do something.

Chris Ferrara – Bank of America

So to the extent that you’ve sort of ratcheted into your top line expectations and presumably won’t be surprised by value packs being sent back, can we look at that as a onetime type event right now?

Pat Robinson

I think so. I think it’s something we do as a regular course of business—evaluate the value of our inventory and write off the lower cost of the market. We maybe do that every quarter. It happened this quarter because of the economic decline in sales, and in some cases, how we were going to take this product to market and accelerate the skew rationalization effort, meaning that there were some skews we knew we wanted to get out of and we decided to go faster and even just write them off rather than try to bleed them out through the market over the next 12 months, I’d say.

Chris Ferrara – Bank of America

Great, and finally, Mark would you be able to comment a little bit on the departure of Jim Roberts? He was a guy who was viewed as important driver of productivity and then to see him leave suddenly like that, I was wondering if I could get your perspective on that.

Mark Ketchum

I’m not going to. I will decline to do that. I will only say that it was a mutually agreeable separation and I think it also has given us an opportunity that we’re taking advantage of to restructure in a more cost-efficient and effective way that really utilizes our other executives.

Chris Ferrara – Bank of America

Thanks a lot guys.

Operator

Your next question comes from Budd Bugatch with Raymond James.

Budd Bugatch – Raymond James

Good morning Mark and Pat. I wondered, hopefully you could help us walk from the first quarter guidance which you’re expecting to the full-year guidance. I realize the first quarter is always the lowest quarter but this seems particularly low and I wondered if you could maybe just give us some flavor of what SG&A and cost of sales and gross profits expected in the first quarter versus the rest of the year and how you look at that.

Pat Robinson

I’m not going to give you the different line items. We’re not going to do that by quarter. But I will tell you what’s happening in Q1 versus both a year ago and maybe how we expect these trends to continue. I’ll start with the core volume decline, which if you back out currency and product line exits and you take the mid-point of that guidance there, you would say that the core volume decline in the year is somewhere in the 3 to 8% range.

For the quarter though, we’re looking at more like 7 to 10%. So this is the largest quarter of core sales decline we expect for the year. And we expect that to get a little better in Q2, not significantly, but then as the back-half as our comps get easier, we think that number will get better. There will still be a decline but it will improve.

Okay, the second major item is inventory build. Last year in the first quarter—and actually in the last few years—we’ve had significant inventory build in Q1. I believe last year was over 130 million. We do not expect to have anywhere near that type of inventory build and I think I mentioned about half of that in the first quarter. We will build inventory because the second quarter is our largest sales quarter, but nowhere near to the degree we did a year ago, so we’re going to have volume pressure from not only the sales decline but from the inventory build, particularly in the first quarter. And that will come back to help us later in the year because we won’t have that inventory to take out of the system later. So our production volumes will be somewhat higher as we get to the latter part of the year. So our build will be more evenly balanced as we go across the year.

Budd Bugatch – Raymond James

So a disproportionate impact basically on cost of sales earlier in the year?

Pat Robinson

That’s right.

Budd Bugatch – Raymond James

Will there be SG&A savings as we go through the balance of the year—it looks like corporate overhead for the year of 2008 versus 2007 was about flat at 82 million. How do you look at that?

Pat Robinson

That was the fourth item I was going to now. SG&A savings will ramp up as we go through the year. So our lowest comp savings, if you will, the last year will be in Q1. So that’s a fourth factor, probably the least factor, but probably the third one I was going to mention was mix. We talk about retailers trade the value product. That really began in Q3. If you recall, we had a pretty big negative mixed impact in Q3. And that was the first quarter we saw that. So the first half of the year, we’ve baked that negative mix impact in, but that will annualize itself by the time we get to the back-half.

So as we compare our ’09 to ’08, those are the four factors that will hurt us in Q1. The ones that will start to improve in the latter half of the year are the volume declines will not be as steep. The inventory bill will actually be more balanced and the SG&A will happen more as we go through the year and ramp up.

Budd Bugatch – Raymond James

As I recall there was also I think $50 million in restructuring savings that should have impacted from acceleration in ’09. Is that still planned?

Pat Robinson

That is still planned. It’s part of our productivity efforts for the year. Some of the headwind on that will be the FX impact, the currency impact, on our product costs in outside the US of our sourcing product in Canada, it’s denominating the dollars. They’re paying more for that product. So that’s taking part of that productivity away, but we do expect to get 50 million in savings from acceleration this year.

Budd Bugatch – Raymond James

Okay, and did you answer the corporate overhead question, the 82 million? Is that going to be lower year-over-year for ’09 versus ’08?

Pat Robinson

Well, 82 million is the amount that remains in corporate after allocation to the groups, but our corporate costs will be down year-over-year substantially.

Budd Bugatch – Raymond James

So that number as we see it should be down year-over-year?

Pat Robinson

Well, again, and that’s the amount that’s left over after allocations, so I’m not sure whether the leftover amount that you see as corporate will be the same or not. Do you follow me?

Budd Bugatch – Raymond James

I follow you. I know how the accounting is done. We only get to see certain numbers, so I was looking at what we get to see.

Pat Robinson

The total bucket of corporate costs are coming down.

Budd Bugatch – Raymond James

Okay, I was curious on your comment on raw materials. I’ve seen most materials and many of the specialty materials down 50 to 60% and the steel is down, surprisingly, from the peak. So you comment on that and in particularly in China and see what’s happening with container costs. The sourcing issue was a surprise issue. Could you review that for me? I’m kind of confused.

Pat Robinson

As far as materials themselves, in particular steels, I don’t have enough information in front of me to comment on that. The information I have from our sourcing people is that steel is actually relatively flat. Some is up and some is down and overall, I think metals in total, not just steel, are relatively flat year-over-year on an average cost basis to our forecast for average cost this year.

Budd Bugatch – Raymond James

That’s really a variance with the numbers that I track every week.

Pat Robinson

You’re right.

Budd Bugatch – Raymond James

And the cost of fuel should have really impacted containers coming from Asia.

Pat Robinson

Container costs are coming down.

Budd Bugatch – Raymond James

But you’re overall expecting pricing to offset deflation expected for this year?

Pat Robinson

That’s right.

Budd Bugatch – Raymond James

We were looking for a quarter-of-a-billion dollars of resin deflation this year and you’re going to give that back pretty much.

Pat Robinson

A quarter-of-a-billion? We’ll buy 450 million pounds of resin, so the average cost of resin in ’08, I’m not sure you get to your number there.

Budd Bugatch – Raymond James

We do it quarter-by-quarter. I’ll send it to you and see if there’s something we’re doing wrong. Okay and we’re in that same 400 to 450 million pounds so that’s not a variance with what we see. Thank you very much.

Pat Robinson

Okay.

Budd Bugatch – Raymond James

Thank you very much. Good luck for the first quarter and the year.

Operator

Your next question will come from Bill Chapelle with SunTrust Robinson Humphrey.

Bill Chapelle – SunTrust Robinson Humphrey

Good morning. Can you just talk a little bit in terms of the product exits that you had already announced? How or is that having any impact on your other categories in terms of other retailers? Are you getting penalized on other categories for pulling the rug out on the ones you did? Or how are retailers looking at that?

Mark Ketchum

For the most part, we’re not getting penalized because we did it in a way that has allowed them time to find alternative sources of supply. So we’re exiting gradually. We’ve given them time to find alternate supplies in the cases where these products were in their catalogs. So we’ve maintained them in their catalogs. So the answer is no, we’re not getting punished.

Bill Chapelle – SunTrust Robinson Humphrey

And for the remaining third of the business, which I guess will be throughout 2009, is that under similar management? How does that continue to operate in limbo?

Pat Robinson

Well, again, one of the reasons we don’t talk specifically about those is because the people involved in those business don’t think of themselves as limbo. Their working hard to make those businesses everything they could be. And obviously that’s what we would want to do to maximize value if and when we’re ready to go back and try and divest them. So, that’s one of the reasons we don’t talk specifically about those businesses.

Bill Chapelle – SunTrust Robinson Humphrey

And then just on the currency side, I assume your guidance is based on current spot rates today. Is there any color you can give us if something moves what the translation effect is on the overall business?

Pat Robinson

Well, that would be difficult. We do about 30% of our business outside of the US. Maybe two-thirds of that’s in Europe. So that’s mainly the pound and the euro. And then the other two big currencies for us are the Canadian dollar and the Mexican peso. The others are relatively moderate. I don’t know if that helps or not.

Bill Chapelle – SunTrust Robinson Humphrey

But basically you’re assuming that the current spot rates—

Mark Ketchum

For now we just take the current rates and run out for the year. We don’t try to predict whether they’re moving one way or another.

Bill Chapelle – SunTrust Robinson Humphrey

Okay, great, thank you.

Operator

Your next question will come from Joe Altobello with Oppenheimer.

Joseph Altobello – Oppenheimer & Co.

Thanks, good morning guys. Most of my questions have been answered. I just have two quick ones going back to the gross margin for a second in terms of your guidance. When are you guys assuming we start to see gross margin expansion if at all this year, the back-half?

Pat Robinson

I think it’s more back-half than front. For the reasons I talked about, Q1 is going to be our lowest comp the last year, I don’t expect much expansion this quarter is at all. But we could start seeing it in Q2 and in the back-half, I would expect to see it.

Joseph Altobello – Oppenheimer & Co.

There are a lot of moving parts on that I suppose.

Pat Robinson

There certainly are.

Joseph Altobello – Oppenheimer & Co.

Okay, and secondly the tax rate you mentioned earlier is going to be about 30% in ’09, up significantly versus ’08, what’s driving that?

Pat Robinson

Well, it’s really the mix of where our earnings are coming from. One of the issues we have with this change in the dollar versus the euro and the pound is we’re not earning as much money in Europe as we were and that’s where we have our taxed carry-forwards if we’re lowering the rate. So that’s the main impact is where we’re earning the money.

Joseph Altobello – Oppenheimer & Co.

And then lastly if I could, the accounts receivable was down significantly year-over-year as well as sequentially and obviously you guys are managing that, but what are you doing specifically to improve collections?

Pat Robinson

Well, it’s really a combination of two things. One is the timing and the sales in the quarter. So we are managing the timing of the collections very tightly because of the economy and other factors, but our sales drop-off was late in the year. It was in late November, December, so that alone had a significant impact on the DSO. I think our only DSO will remain in the low 60 days, I think at 61. If I’m not mistaken, last year was 65. But I think in that range is where we’ll be going forward, but a lot of that was the timing of the sales of the quarter and maybe a day or so was tighter collections.

Joseph Altobello – Oppenheimer & Co.

I’ve got it. Thank you.

Operator

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

Connie Maneaty – BMO Capital Markets

Hi, good morning.

Pat Robinson

Good morning, Connie.

Connie Maneaty – BMO Capital Markets

You mentioned that there was a $10 million addition cost in the Home and Family business, some sort of regulation.

Pat Robinson

That’s right.

Connie Maneaty – BMO Capital Markets

What was that and was it a one quarter event or does it continue going forward?

Pat Robinson

It was a quarter event. There was a new regulation around child safety for our Baby and Parenting business. I’m not intimately familiar with the legislation, but the cost were to rework our products to make it compliant with that legislation but products in our own warehouses and products at retail.

Mark Ketchum

Connie, basically what this legislation does is it requires certification and what I call tracking from secondary and tertiary suppliers all the way to the retailer’s shelves that can certify that every element is safe. The key things that they were looking for is lead—lead paint and lead-based dyes. And so what it requires is that any product that you didn’t have records of that in the past, you now have to develop those. And obviously we’ve been at that. That legislation didn’t just happen, but we’ve been on it. The other thing is that customers took advantage of this. If they had some slow-moving stock or some old stock, they might have returned it to us and said can you vouch for this that it passes the current law and of course we couldn’t. So frankly we’ve had to take back some product that we hadn’t expected to take back and rework it or re-certify it or do something else with it.

So that’s a part of what we’re doing there. This is something that’s affecting everybody in the category and it actually has created a disturbance in the force, if you will, because there’s been a lot of inventory swings across certain product lines in within Baby and Parenting. But bottom line, it is a period event, it should essentially be behind us after the first quarter.

Connie Maneaty – BMO Capital Markets

Okay, so after Q1, so a little bit more still in Q1 but then it’s done.

Pat Robinson

Right.

Connie Maneaty – BMO Capital Markets

As consumers and retailers change their mix to lower price products, could you give us what the order of magnitude difference is on the profit of opening price point versus what you sell the most of?

Pat Robinson

No, it varies so much my product line wouldn’t be meaningful, but the impact in the quarter was about a point, a little over a point to our gross margin.

Mark Ketchum

But it’s hard to answer that with a number or even a range of numbers that would be very helpful. It really does dramatically vary by product category depending on the situation. The retailers profile our own cost structure and everything else.

Connie Maneaty – BMO Capital Markets

Okay, how does moving from four segments to three really save a meaningful amount of money?

Pat Robinson

It eliminates the group overhead. It’s a key place that it does that. There’s a duplication in several functions in terms of group support and that’s the biggest way it does it.

Connie Maneaty – BMO Capital Markets

Okay, and then one final question, where are you with your SAP implementation?

Pat Robinson

We are continuing on it so we have two other business that are on track to do their conversion this year.

Connie Maneaty – BMO Capital Markets

And which are those?

Pat Robinson

That’s our Tools and Hardware business and our Cleaning and Organization business units.

Connie Maneaty – BMO Capital Markets

Okay, thank you.

Operator

And your final question today comes from Linda Weiser with Caris.

Linda Weiser – Caris & Company

Hi, thanks. I know it’s hard in many of your categories to measure your market share, but can you give us some broad, broad stroke comments on maybe some areas where you’re gaining shares most strongly and then areas where your market share gains are not as strong or even declining share?

Mark Ketchum

I can’t give you as much as I’m sure you’d like and as much I wish I could give you, Linda, partly because there is this lag effect. What I could do is I could tell through probably around October and then what we don’t have yet is we don’t have very good numbers from the November and December period and of course, that’s when we started to see some of this really dramatic shift in consumer habits here. We were gaining share in Culinary and gaining share in many of our international businesses across tools and office products. We were gaining share in Rubbermaid Food and some of our Baby and Parenting product lines, and so it really varies by category and product line, but those are some of the stronger ones. And what the total outcome based on what happened in November and December, we just don’t have visibility on yet.

Linda Weiser – Caris & Company

Okay, and do you have numbers on what pension expense is going to be in ’09 versus ’08 and what the cash contribution will be ’09 versus ’08?

Pat Robinson

I’ll start with cash first. We don’t know the exact number yet, but we do expect that contribution will be in the $50 to 75 million range and that is baked into the cash guidance that we gave. From an expense standpoint, I can’t tell you what the total expense is. I know it’s up year-over-year and I want to say it’s up $0.02 to 0.03 per share, something like that, so 8 to 12 million. And Nancy will verify that later, but I think that’s right.

Linda Weiser – Caris & Company

Okay, thank you very much.

Operator

If we were unable to get to your question during this call, please call this call Newell Rubbermaid Investor Relations at 770-418-7662.

Today’s call will be available on the web at www.newellrubbermaid.com and on digital replay at 888-203-1112 or 719-457-0820 for international callers with the confirmation code of 606-2144, starting two hours following the conclusion of today’s call and ending February 12. This concludes today’s conference.

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Source: Newell Rubbermaid Q4 2008 Earnings Call Transcript
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