Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Executives

Nancy O'Donnell - Vice President of Investor Relations

Mark Ketchum - President and Chief Executive Officer

Pat Robinson - Executive Vice President and Chief Financial Officer

Analysts

Budd Bugatch - Raymond James

Wendy Nicholson - Citi Investment Research

Chris Ferrara - Merrill Lynch

Joe Altobello - Oppenheimer

Connie Maneaty - BMO Capital

Newell Rubbermaid Inc. (NWL) Q1 2008 Earnings Call April 24, 2008 9:00 AM ET

Operator

Please stand by. Good morning ladies and gentlemen and welcome to Newell Rubbermaid First Quarter 2008 Earnings Conference Call. At this time all participants are in listen-only mode. After a brief discussion by management we will open up the call for questions. Just to reminder today’s Conference will be reported. Today’s call is being webcast live at www.newellrubbermaid.com on the Investors Relations homepage under a Events and Presentation. A slide presentation is also available for download. A digital replay will be available two hours following the call at area code 719-457-0820.Please provide the conference access code 9477556 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.

Nancy O'Donnell - Vice President of Investor Relations

Thank you. Good morning, welcome to the Newell Rubbermaid first quarter 2008 earnings call. Before we begin, let me take a moment to remind you that the statements made on today's call that are not historical in nature are forward-looking statements. As such, these statements are not guarantees, and actual results may differ materially from those expressed or implied in the forward-looking-statements. For discussion of factors that could cause actual results to differ materially from those suggested by the forward-looking-statements made today. Please refer to our most recent form 10-K and the forward-looking-statements on the Q1 2008 earnings call presentation which was posted earlier this morning in investor relation section of our website at www.newellrubbermaid.com.

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. So with that, I will turn the call over to our President and Chief Executive Officer Mark Ketchum.

Mark Ketchum - President and Chief Executive Officer

Thank you Nancy and good morning everyone. Thank you for joining us today on our first quarter 2008 earnings call. I am pleased to report that Newell Rubbermaid delivered solid first quarter financial results, inline with our previous guidance on both the top line and normalized EPS. Now the US economic environment continues to be very challenging, we generated strong growth in a number of our key businesses.

Although we must react to the short term turmoil and/or doing so. Our primary attention remains focused on the long term, building for sustainable excellence. We continue to launch innovative products that better meet user needs and build incremental sales. Including the recent introduction of the Graco(R) Sweetpeace(TM) Soothing Center(TM), Rubbermaid(R) Produce Saver(TM) and the Pulse(TM) Microfiber Cleaning system from our Rubbermaid commercial business unit. We closed on two terrific strategic acquisitions in April which expand our category and geographic footprint, enhance our margins and leverage innovation and branding.

We are seeing a truly meaningful expense in our European business, indicating our intervention mac region are taking hold, and we have enough confident in our strategy to continue increasing our brand building spending in this tough environment. We feel good about our direction and we’re sticking with it.

Overall, net sales rose 3.6% within high end of our guidance range for the first quarter. This growth was driven by the impact of favorable currency combined with double digit sales growth in our Home & Family, Rubbermaid Commercial and Rubbermaid food businesses. We also generated high single digit constant currency growth across our international businesses. Partially offsetting this positive sales trends or weaker results from our US tools and hardware and office product segments. These are the businesses most affected by the weak US economy.

Gross margin for the quarter was essentially flat. We generated the expected margin improvement from strong productivity favorable pricing and mix. But unfortunately these were offsets by a significantly higher and expected rate of inflation. We sourced and it’s good in raw material.

In our January forecast, we anticipated inflation at a little more than double the 2007 impact. Now just three months later we are estimating inflation impacts at about four times year ago levels. Normally a 170 million year-over-year. I am sure you are well aware of this speculative environment from any commodities right now. This is exacerbated by the impacts of inflation and the weak dollar in China, you’re routing the margin advantages of product source from that region.

As previously communicated we continue to take pricing action to offset inflation, but there is a timing lag that can't be avoided. At the consequence we are adjusting EPS guidance down and widening the range to reflect this volatility and uncertainty. More on this later in the call.

Normalized basis Q1 EPS was flat year-over-year. Excluding charges, first quarter earnings per diluted share were $0.27 consistent with our guidance. Operating income was a 130 million as compared to a 136million in the prior year.

During the quarter, we continue to invest to deliver our vision our transforming Newell Rubbermaid into a global company of branch matter and great people known for best-in-class results. Our investment in strategic brand building this quarter was up 9% to last year.

I am pleased to say we continue to seek the benefits from strategic spending in our sales results. For example, our baby and parenting essential business delivered double digit sales growth this quarter, reflecting strong sale of the new and innovative products and a benefit of greater investment in advertising and promotion. Last call we foreshadowed our introduction of Graco(R) Sweetpeace(TM), new Soothing Center(TM), which completely reinvents the baby swing category. This product creating multi centering and a unique motion, they more closely duplicate the way parent intuitively suit their invent. Since launching at the end of last year sales of Sweetpeace have exceeded our possessions.

We have seen in the results from an end use of driven marketing focus in our Rubbermaid commercial products businesses as well. This business delivered another strong quarterly performance with double digit sales growth. Rubbermaid commercial continues to build on its marketing leading positions by driving innovation and user conversion activities and conceptual selling to facilities managers. We further build on a base business growth by expanding the product offerings for example, into daffodils rough use, smoking management, Microfiber Cleaning system and professional backings within past 12 months.

We saw strong local currency sales growth outside in North America, led by baby and parenting in the EU, tools and hardware in Central and Eastern Europe and Latin America, and office technology in Asia Pacific. We continue to see favorable results from the Television plant and Internet campaigns reporting our technology brands then by Dino and Indicia internet postage business.

During our first quarter we announced two significant acquisitions, Aprica and Technical Concepts. Aprica is a leading Japanese brand of premium stores car seat and other related juvenile products. Aprica has an outstanding reputation for innovation, supported advanced pediatric research and has been recognized internationally for its dedication to trial safety. This acquisition provides spring board to broaden our baby and parenting presence across Asia, as well as to expand the scope of Aprica sales outside of Asia.

Furthermore, Aprica enhance our design capability in light weight scores in car seat and our skill in marketing to the premium segment. The Aprica acquisition also provides the critical math needed for more sheds recourses in Japan, which will help accelerate investment in the Asia Pacific region by other Newell Rubbermaid business units.

The Technical Concepts acquisition gives our commercial products GBU, an entry into the rapidly growing $2.5 billion away from home wash room market. Technical Concepts is a leading global provider innovative touch free and automated rest room hygiene systems including hands free water dispensing, soap dispensing and air fresheners. The solution offered by Technical Concepts match the strong global trends in hygiene conservation and lower cost facilities maintenance. This acquisition fits clearly within our strategy of leveraging our existing sale and marketing infrastructure across the additional product categories, categories by performance matters customer who will pay a premium for innovation.

In addition, with approximately 40% of its sales outside the US Technical Concepts significantly increases the global footprints of our commercial product business. The Aprica and Technical Concepts acquisition both close on April 1st.

For the full year in 2008, we expect these two deals at 3 to 4 points of top line sales growth and to be slightly dilutive in EPS. We continue to invest in our initiatives to achieve best cost. Restructuring our supply chain and leveraging the power of one Newell Rubbermaid. The project acceleration and restructuring program is still on track to achieve over a $150 million in cost savings by the end of 2009. Our latest example was announced last month. Our new Southeast Distribution Center consolidates four smaller warehouses and will open in the third quarter of this year in Atlanta. We are also pleased to announce that we successfully completed the second phase of our SAP implementation. We went live in our Home and Family segment on April 1st. As with the first launch in North American office products last year, the Home and Family conversion went off without a hitch. The overwhelming success of our first two implementation is as confident as we continue our multiyear rollout of this best-in-class business process enabler. We expect to launch the third wave in SAP in our tools and hardware and clinging organization into core segment in the fall of 2009.

Looking to the remainder of 2008, we are adjusting our guidance to reflect the changes we’ve seen in our universe since the last time we updated you in January. We are raising our top line sales growth guidance for the year to 6% to 8%, reflecting the benefits from Aprica and Technical Concept acquisitions and the impact of favorable currency. We are also adjusting our gross margin expectations and EPS target downward to reflect the greater than previously anticipated impact of raw material and source goods inflation driven by record high energy prices and the weaker dollar. Average six months ago was adjusting $120 of barrel oil or $1.60 in exchange for the Euro. We like many others have been stunned by the unabated commodity price movement in the recent months.

In response to the unwelcome short-term developments, we will continue to take the actions previously committed. First, we will continue to take pricing to recover inflation, however, we cannot implement pricing taxing up to get ahead or even keep up in the current environment. And the short-term price recovery will lag inflation which will result in fixed gross margins and EPS this year. Second, we are tightening our belt significantly on discretionary SG&A to offset some of the gap between inflation and pricing. Third, we are funneling our resources, people and money into our quickest payout productivity and business projects. Our mantra is fewer, bigger, and better.

Fourth and finally, we are staying committed to building long-term shareholder value. Our investments and innovation in consumer-centric branding. Investments in meaningful strategic acquisitions, investment in restructuring the supply chain for best cost, investment to leverage one Newell Rubbermaid for efficiency and effectiveness benefits, and investments in changing the culture to fit the new business model, all of these will continue without interruption.

At this point, I will turn the call over to Pat who will walk through the financials and the details of our updated guidance before I return to provide summary comments. Pat?

Pat Robinson – Executive Vice President and Chief Financial Officer

Thanks Mark. I will start with the first quarter 2008 income statement on a normalized earnings basis. Net sales for the quarter were $1.4 billion up 3.6% the last year, in consistent with our guidance of +2% to +4%. Foreign currency benefit of approximately three points, strong growth in our international business and positive pricing more than offset core sale softness in our domestic tools and hardware, office products, and consumer home products businesses. Our international business increased approximately 19% in total and 7% in local currency. Our domestic business was down about 2% for the quarter.

From our business year perspective, double digit growth in our home and family segment and in the Rubbermaid commercial and Rubbermaid food businesses lead the sales improvement for the quarter.

Gross margin for the quarter was 491 million or 34.2% net sales, about 10 basis points lower than last year. This was less than our plan due to approximately 70 basis points of additional raw material cost inflation primarily resin driven by the dramatic increase of oil and natural gas prices in the quarter. In place it was offset by ongoing productivity initiatives, savings from project acceleration and favorable pricing.

SG&A was 361 million for the quarter up 23 million the last year, brand building investments across all segments and spending on corporative initiatives primarily SAP drove the increase. This increase was less than originally planned and were the offset of the additional raw material inflation we experienced during the quarter.

Operating income of 130 million or 9% of sale was on plan. It represents a decrease of about 7 million or 5% the last year .Interest expense was slightly favorable the last year driven by favorable interest rates, and lower debts level year-over-year as the additional borrowings used to fund recent acquisitions were gone in the later part of the quarter.

The company’s continuing tax rate was 28.5% compared to 29.6% last year. In the first quarter of 2007 the company recorded approximately 2 million or $0.01 of period tax benefits. Normalized EPS for the quarter was $0.27, its flat to last year on a normalized basis and inline with our January guidance. The company recorded approximately 18 million or $0.06 per share in restructuring charges related to profit acceleration in the first quarter which are not included in the continuing earnings prescribe previously.

Operating cash flow used during the quarter was a 123 million compared to a source of 15 million in the prior year. The decrease is attributable primarily to an increase in inventory. One quarter of the growth in inventory year-over-year is driven by foreign currency. Remaining of the build was driven by our office products in Home & Family segments. Office products inventory level reflects our efforts to avoid service level and interruption expense. In the prior year, during the critical back-to-school season as we continue to execute one project acceleration. The increase in the Home & Family inventory is due to a temporary buildup of safety stock in anticipation of our April 1st SAP conversion.

While most of the inventory build was planed, our current inventory levels are higher than we would like them to be. We expect to reduce inventory during the remainder of the year to approximately the same level as December 2007 for the days on hand standpoint. Capital spending in was 40 million compared to 33 million last year.

I will now take a few moments to talk about our first quarter 2008 segment information. There are clean organization in the course segment, net sales increase 1.6% or 7 million the last year in total, and we’re approximately flat in local currency. Strong double digit growth in Rubbermaid commercial and Rubbermaid food was offset by softness in the Rubbermaid home and the core businesses. Operating income for the segment was 48 million or 10.4% of sales, a decline of 9 million versus a year ago. Higher raw material inflation particularly resins and strategic brand building investments more than offset the contribution from higher sales.

Office products net sales improved by 3.8% from the quarter, driven by a 5 point currency benefit. We did experience double digit growth in the office technology business, and high single digit growth in our international businesses and local currency. However this growth was more than offset by softness in the domestic instrument market, which was down high single digits, driven by weaker food traffic and our office product retailers.

Operate income was 35 million or 8.2% of sales essentially flat to last year as improvements in sales and gross margins were offset by higher brand building SG&A.

In our tools and hardware segment net sales were 290 million down 4 million or 1.2% the last year. Currency contributed 4 points to the top line. The company experiences a low single digit growth in our European and Latin America businesses in local currency. Although, we continue to see softness in our domestic businesses affected by the US housing market which where down high single digits for the quarter.

Operating income for the segment was 35 million or 12.1% of sales up 1 million from last year driven by strong productivity and favorable pricing which more than offset raw material inflation and the softness in our domestic tool businesses.

In our Home & Family segment net sales were 257 million, an improvement of 30 million or 13.3%. Approximately 400 basis points of this improvement represented a shift from Q2 to Q1 due to our SAP implementation and the timing of certain commercial activities. The remaining high single-digit growth is driven by our baby and parenting essentials and beauty and style businesses led by new product launches and demand creation activities.

Operating income of 31 million or 11.9% of sales was flat to last year as volume gains were offset by increased strategic SG&A spending for new product launches and brand building investments.

Turning to the full year outlook. We project net sales to grow between 6% and 8% reflecting our recent acquisitions of Technical Concepts and Aprica. We now expect foreign currency to contribute approximately 2 points of growth for the year. Internal sales growth excluding the impact of acquisitions is now projected to be between 2 and 4%.

From a segment standpoint, we expect our Home & Family business to grow approximately 20% for the year driven by the Aprica acquisition, new product introductions and demand creation activities. Internal sales are now expected to grow high single digits supported by new product introductions and demand creation spending.

Cleaning, Organization & Décor will grow high single digits attributable to our Technical Concepts acquisition as well as continued strong growth in our Rubbermaid Commercial and Rubbermaid Food businesses. Internal sales are still expected to grow low to mid single digits.

We now project the Tools & Hardware segment to be approximately flat to last year. As we saw in the first quarter, we expect our international business to be up low-to-mid single digits excluding currency. We expect approximately 2 to 2.5 points of foreign currency benefit for this segment. With North American housing starts estimated to be between 800,000 to 900,000, we expect our domestic business to be down mid single digits.

We still expect our office product segment to experience flat to low single digit growth. The segment will benefit from approximately 3 points of growth from foreign currency. We expect double digit growth in our office technology business and our international business to be up low-to-mid single digits in local currency.

The North American instrument business will be down mid-to-high single digits as the office products retail environment continues to be very challenging. We now expect gross margin to expand between 25 and 75 basis points. We continue to see benefits as planned from project acceleration combined with ongoing productivity initiatives and favorable product mix. The reductions of our previous guidance is driven by dramatically higher inflation from both raw materials, primarily resin and metals and source-finished goods primarily driven by raw material inflation, the weak US dollar and local labor rate inflation.

We now estimate the impact from raw material on source product inflation to be between 160 and 180 million compared to our previous projection of 100 million on our last call. As an example of the rapidly increasing raw material environment, oil prices have soared 31% and natural gas 30% since our January call; both of which are key inputs to the cost of resin.

Our current range of inflation assumes the following. For resin, the midpoint of our guidance assumes a CDI average cost per pound of $0.87 for the year which corresponds to the latest, meaning April 23rd guidance. This represents a 9% increase to our January 2008 guidance and a 22% increase to last year's average CDI cost. The high-end of our inflation range reflects an additional $0.02 per pound increase in the average cost for the year.

For finished goods sourcing, one of the key drivers for finished goods sourcing inflation outside of raw materials has been the weakening of the US dollar versus the Chinese RMB. From the January '07 to January 2008, in that period, the dollar weakened approximately 6.5% and from January 2008 to now an additional 4.5%.

The midpoint of our range assumes continued weakening of the dollar of approximately 3 to 4% for the remainder of the year. We have pricing initiatives planned for the back half of the year which will help to offset some of this unprecedented inflation. Although the rate of increase in costs since our last call means that we will not be able to offset this inflation within the current fiscal year. We remain committed to our strategy to reinvest the portion of our gross margin expansion and brand building initiative and other strategic corporate initiatives.

However, in light of the increase gross margin pressure that we’re experiencing, we’ve reduced our plan to SG&A spending for the year. This level of spending now represents approximately two-thirds of a revised gross margin expansion. We are lowering our full year guidance for normalized EPS to between $1.80 to $1.90 per share.

I'd like to now take a moment to walk you from our last estimate of this estimate. The mid point of our last estimate was a $1.97 a share. We have a $0.15 to $0.20 reduction from raw material and sourced product inflation in addition to approximately $0.02 dilution from acquisitions. This was partially offset by approximately $0.07 on pricing and SG&A actions. This gets us to the mid-point of our revised guidance.

For perspective, the mid-point of our current guidance represents a $0.03 improvement the last year while offsetting between $0.40 to $0.45 of inflationary pressure. The outlook does not include pre-tax restructuring charges of 125 to 150 million.

We continue to expect cash flow from operations of between 600 and 650 million, net of approximately 100 million restricturing cash payments. This expectation includes our plan to reduce inventories to more normalized levels during the rest of the year. Capital expenditures are estimated in the 160 to 180 million range including the expenditures for SAP.

Turning to the second quarter. We expect our net sales to be up 6% to 7% including the impact of acquisitions, and internal sales to be up between 2 and 3% 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 approximately 3 points for the quarter. We anticipate EPS for the quarter in a range of $0.47 to $0.50 which includes approximately $0.02 to $0.03 of dilution from the recent acquisitions which includes the amortization of acquired intangibles and the other onetime acquisition costs.

And before we open the call for questions Mark has some final comments. Mark?

Mark Ketchum - President and Chief Executive Officer

Thank you Pat. First I would like to thank all of our employees for their continued hard work and enthusiasm in these particularly tough times. Let me add a special thanks to all the people who worked diligently to complete the very successful SAP conversion in our Home and Family segment. This represents a ton of work. The fact of this was largely invisible to the outside world is a testimony to their success.

As we manage through a difficult economic environment this year. We remained focused on executing the long term transformation of New Rubbermaid into a best-in-class and class consumer branding and marketing company. I'm disappointed that we are not able to fully offset the extraordinary inflationary impacts of recent months. But I'm no less confident our strategies and actions are in the best interest of building sustaining shareholder value.

We are committed to investing in strategic brand building to strengthen our brands and drive sales growth. To delivering gross margin expansion fueled by better productivity and mix, and to achieving solid operating income and EPS growth over the long-term. I'm proud of the progress that we’re making and I'm confident that we are doing the right things to improve our business. We firmly believe the investments we are making in our brands will help drive profitable top line sales growth. We are coming together as one company to improve efficiency and boost productivity, and we’re collaborating more, benchmarking more and sharing best practices to help create a culture of excellence.

I look forward to sharing the results of our efforts with you on our next quarters call. As always and especially at this time, we thank all of our shareholders for their continued support. Thanks for joining today's call and I'll now ask the operator to open up the line for questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instruction). Your first question today comes from Budd Bugatch, for Raymond James.

Budd Bugatch

Good morning Mark. Good morning Pat. Mark, just a couple of quick questions. One, I saw Home and Family significant revenue growth but yet no profit growth in fact I know you said strategic spending on SG&A, can you give us a little bit of better granularity and how that might unfold for the rest of the year?

Mark Ketchum

Sure. You’re right, there was additional spending the quarter to drive that sales growth. And the full I now have to split it between Home and Family as it existed before the Aprica acquisition and then – and I will talk about with Aprica. The margins for the year of home and family from operating expense will be down slightly maybe 20 or 30 basis points without Aprica. So we expect high single digit growth and sales and mid to single digit growth and income.

With Aprica however, because of the startup cost there, a very little income from the acquisition this yea. So the quarter numbers will be down around 12%, I think last year it was 13.8. So sales we were very low income for this year.

Budd Bugatch

Okay. And just on the EPS guidance for the year and year end, and thanks for that walk on tool with raw material. I wonder if you could give us well maybe reflection as to how that raw material and pricing will work up through the year from firm your $0.7 recovery, from pricing and I think productivity, I can't remember what the?

Mark Ketchum

On SG&A $0.7.

Budd Bugatch

Yes the SG&A curtailment, and how much is between pricing and how much is SG&A, and is the pricing pretty much of fourth quarter or..?

Mark Ketchum

Well the pricing is more back offloaded and the SG&A cost are also. The split between the two is roughly 50-50.

Budd Bugatch

Will that then, when the pricing be enough to recover all the raw material growth which you are saying then?

Mark Ketchum

Not this year, we will cover rough little under half this year. But I don’t know run rate as we leave the year will be closer to 60%, and then we will need to take up this food pricing in January to recover the rest.

Budd Bugatch

Okay. And just finally, can you talk a little bit about the balance sheet, you had $900 million of short term debt at the end of the quarter, I know you had a $500 million of note offering. How would the balance sheet look or how does it look now?

Mark Ketchum

Well the short term debt, it represents two things, one, we have a $450 million accounts receivable financing structure that comes do in September which we’ll pay down, and then there is a $250 million note that resets in July and we will remarket that in July, so that’s most of the short term debt out there. So that will become long term debt, I guess as we leave the year. The rest is commercial paper.

Budd Bugatch

$500 million of notes they have been marketed, did you went up the market?

Mark Ketchum

I am sorry, say again.

Budd Bugatch

$500 million of notes which you are marketing now after the quarter?

Mark Ketchum

No. That will be issued on $750 million of new notes rate before the end of the quarter on March 20 or March 29, March 30.

Budd Bugatch

Okay. Thank you very much.

Operator

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

Wendy Nicholson

Hi. My first question has to do with the pricing outlook, and, I guess the question given what we’re seeing from the consumer and maybe further weakening of consumer willingness to spend more for household products. Are you worried that there is going to be more of a draw down on your volume side if you try and post the envelop too hard on pricing, and what's your confidence level on that? And then my second question is on the cash flow side, it sounds like your outlook for cash flow is still very good, but can you just reiterate that there is no rest to the dividend number one, and number two, it strikes me that this would be a wonderful time to have a share buyback program. So I am wondering it that's creeping up in terms of priority for cash flow you know as we go forward here?

Mark Ketchum

Let met start with your first question, I think your assessment of pricing is exactly right in this current environment, it is very difficult to take pricing in certain of our categories because our retailers obviously are suffering problems with food traffic and the last thing they want to do is show more pricing to their end user. In fact they are obviously trying to do the opposite. So that's what built into our assumptions that our pricing will necessarily lag the inflationary rate. We just know we can't get it all in the short term. So, #1, we, as you know, take pricing generally in six month increments, so our next round of what we didn't already take in January is July, and we know we won't be able to get it all there because the retail market just won't be ready to accept it all. So that's what's built into our assumptions on price recovery. I'll let Patty answer the second half of your question.

Patrick Robinson

From a cash flow perspective, we still feel good about our range. We were actually near the high end of the range on our last guidance of 600 to 650. The takedown in earnings cost us about $30 million in cash for the year. So, now we are more in the middle of that range. That cash flow includes the reduction of our inventory back to the low 80 mid day Mark which is where we ended last year. So, we do have some inventory to takeout of the system and some work to do there. As far as the dividend, the dividend is very secure, and they have no intention of chasing.

Wendy Nicholson

And any timing on the buyback, a potential buyback?

Mark Ketchum

Well I think in the short term, given the acquisitions we just made, that’s not going to happen in the near term, and again as we said before, we will continue looking at that in the longer term.

Wendy Nicholson

Okay, and then I just have a followup on that question on the inventory drawdown Pat. You know obviously to the extent whatever turning your plans off or operating at whatever, not perfect capacity utilization that you try and work through that inventory, there is obviously going to be a gross margin hit. I assume you feel like this new target for the gross margin 25 to 75 includes the ramification of all that inventory drawdown?

Patrick Robinson

Yeah, it does.

Wendy Nicholson

Okay, thank you very much.

Operator

Your next question comes from Chris Ferrara with Merrill Lynch.

Chris Ferrara

Hey guys. I wanted to just ask about, I guess the approach going in to guidance. I guess one of the things we have seen with some of the more discretionary stocks out there are management teams cutting guidance and then cutting again and then cutting again. And, for you guys it seems to be different, it seems like it is not as top-line related as it is materials cost. Can you give a little color into what your approach was? I mean, how concerned are you with the idea that you could potentially have to come back to the street again with even lower guidance after this I mean. So, I guess what's your condition level in this guidance and with respect to the top-line as well?

Mark Ketchum

Well let me comment both on top-line and bottom-line Chris. On top-line, I think, we've got a great deal of confidence and that's part of the reason why we took our guidance up both in terms of the impact of the acquisitions, but also reflecting currency. But, if you really think of what we're doing, we're continuing to drive new part innovations. We're continuing to invest incrementally in marketing those innovations. We've got the positive contributions from currency. And we've got proof in a number of our businesses where the business climate is better that these investments are working. So, we feel pretty good about the top-line number.

The bottom-line obviously is going to be toughest one because it was, you know, the bottom-line was affected not by our sales but in fact by this inflationary environment. It’s one of the reasons that we gave more visibility than we normally would about what our assumptions in terms of resin pricing and affects going forward. Because frankly, if we sat here three months ago and you would have asked me the same question, I would have answered it the same way. All of the information we use on projections are the same best sources that are available to you as well. So who knows, but all I can tell you is that none of those sources were projecting what we actually saw in the last three months. So, for instance if we look at the current CDI, which is the major index we use to predict resin, it is an index that tries to predict throughout the balance of the year. So, it is not just a point in time, it is a projection going forward and that's a projection that was updated yesterday and updated based on their knowledge that oil is $115 to $120 a barrel. So, it is based on that. But if oil went to 140 or 150? Would we back you know? Yeah probably we would. And so, that’s the only thing I can to tell you is that its kind of crazy times, I am trying to project those. We use the best information available. As Pat said, we had a little bit of pat to protect us a little from it going a little further. And that’s what's built into our numbers today. But if the numbers continue to go crazy, and that’s what I would describe last three months of going crazy. Yeah we would be back. But I feel that we got it covered within the range of our ability to predict, and that’s why as I said we try to be more transparent so that you can see anything that’s coming down the pipe either good news or bad news by also watching those same kind of indices and exchange rates.

Chris Ferrara

That’s really helpful, and just as a sort of follow up to that. With respect to top line, I know with cash flow I think Pat just said we were pacing, at the top of the range and now we are more at the middle end of the range. And the fact that you’re basically maintaining your organic like ex-currency, ex-acquisitions sales outlook of one to two and maybe at zero to two or one to two. Are you at the lower end of that range now as opposed to where you where you before? I guess it sort of the longwinded, but I mean to whittle it down. Is the macro economic environment worse today relative to your guidance than it was three months ago? I mean, how is that? And why you’ve been able to maintain sales despite that even excluding currency?

Mark Ketchum

Here's maybe another way to look at the whole sales picture. We're facing declining markets in a number of our key US markets, alright. Tools and hardware were more broadly in the US now, office products, probably excluding our technology business in the US. Home decor which include our Levolor, our Amerock and Ashland businesses. Together those businesses in the US are 35 to 40% of our sales. And we are seeing those market decline averagely 5 to 10%. So our expectations that we are going to be able hold our own with the kind of innovations we are doing despite the soft retail and the emphasis that all the retailers have on driving price we are driving our innovation and expect to hold our own in those.

We'll offset that decline in that 40% with growth in the other 60% of our businesses which is the balance of our domestic businesses and all of our international businesses. Those markets are not being affected with declining markets the way I just described the other ones are in the US. And in those, we expect on average to be growing 5 point kind of core what I'd call, core volume growth, unit volume growth, and then we add on top of all of that across the world these positive impacts of currency and pricing, and that’s what gets us to the 2 to 4% top line growth that we feel pretty confident of. So what I'd say holding our own and allows the US economy that’s affecting a number of our US businesses and growing our unit volume on averagely 5% around the balance of the world driven by our continued investment innovation and marketing support.

So that’s not a great story, but its still a story we’re pretty proud of, and it’s one of the reasons we’re sticking to what we’re doing in terms of continuing the investments in innovation and SG&A.

Chris Ferrara

Thanks a lot. I appreciate it.

Operator

Your next question comes from Joe Altobello with Oppenheimer.

Joe Altobello

Hey guys good morning, just wanted to follow up on Chris comment, a question on the top line. If you go back to the October call, you guys talked about the '08 top line being up about 2 to 3% on the base business with about a 300 to 400 basis point drag from the economy and housing. What is that second component today, that 300 to 400 basis point?

Pat Robinson

I have to get back to that. I don't have that number. I mean another way of looking our sales, that Mark just described as, you know, right now, our production on currency is about 2 points, we’re getting a little more than a point in pricing than our rethought for the year. So our core sales growth will be flat for the year. But our international businesses we expect to be up similar what we saw in the first quarter in local currency basis up in mid to high single digits. But our domestic business will be down as also as we saw in the first quarter low single digits we are down 2% in the first quarter or you expect that to continue. So what does that drag in the US is probably it could be as less as 5 points now 5 or 6 points, I guess, I haven’t really thought through that one.

Joe Altobello

Okay because it seems to imply actually that your base has improved a little bit, ex the macro issues, that’s why?

Pat Robinson

No. Again our core as we expect to be flat with the spit that I just gave you, and the market is little bit differently about business. But…

Joe Altobello

Okay

Pat Robinson

But I fondly has change much, our core sales on January, I am not sure about October, but the January is about the same.

Joe Altobello

Okay. And then going back to Mark’s comments about, having a lot of confidence in the top line outlook, it seems like the issues that you guys are facing a lot of it is unfortunately outside of your hand I mean, given retailers what if they are aggressively reducing inventories and your comments on that, would the economy worsen. So it seems like, I am just trying to figure how you guys can have a lot of visibilities in top line when the issues are primarily Marco in nature at this point?

Mark Ketchum

Again what we have to do is take our best projection on the balance of year and our best projection is that the US economy is not going to get better and the current drags or headwins that we’re seeing in those business are already describe. In the US, tools and hardware products ex-technology in our home décor business, those businesses we think are going to face the same kind of headwins throughout the balance of the year, so we’re not counting on those getting better. So again our business model counts on growing and growing strongly and the US business is that are not as affected by the economy right now, and of our international businesses which are pretty robust.

Joe Altobello

Our US retailers aggressively, are more aggressively towards this point and I am talking about the home depots and the stables are particular?

Pat Robinson

Well they obviously are – they’re aggressive, and they are aggressively trying to get the traffic back into their doors and I think they’re trying to do it with promotional items and things like that, sometimes this promotional items are not in our categories and so, it’s one that’s kind of hard to answer in the macro, but there is no question that you know they’re out there beaten on their suppliers or give us something that’s going to help keep the door. What we are trying to give them is innovation, and innovation does get customers back in the stores, there is a long history that says that we can excite consumers with innovation and that’s what we are continuing to focus on not trying to describing with a price off deals or ones.

Joe Altobello

Okay. And the lastly the 2Q EPS includes some onetime acquisition costs, can you quantify that?

Mark Ketchum

Again the acquisition hits about 0.2 to $0.3

Joe Altobello

$0.2 to $0.3 okay sorry. Great thanks.

Operator

Your next question comes from Connie Maneaty with BMO Capital.

Connie Maneaty

Good Morning. Pat, can you give us a break down of how products are source in low cost countries, which regions represents what percentage of source product and outside of the dollar and raw material inflation what’s going on with just the general costs of doing business and wages?

Pat Robinson

Okay. I can’t give you exact percentages, but I will say that the large majority of our source product comes from China. I don’t have that exact percentage of economy, but its more than 75%, that’s the major currency that we’re dealing with currency standpoint versus the dollar. So that’s the major impact on the costs, the other is raw materials, the same material inflation worsening their office. And the third its my comparison, there is labor rate inflation whether there is low double digits right now, I mean the 10 to 15% rate. But May was only about 5% the comparative of the cost. So in dollar terms its not a big, its not as a big impact as raw material and currency.

Connie Maneaty

Okay. And my second question is from all the raw material growth you talk to, which basic material do they think are in a speculative bubble and which may be moving permanently higher because of shift in supply and demand?

Mark Ketchum

No I think we give that kind of estimate, first thing, I think we hold some speculative bubble. I mean you the one think all this Watch that, it’s very visible and you know that for every barrel that’s consumed there is 6 or 7 barrels traded. So that is pretty speculative, I would say. I don’t know that our other commodities seen that kind of speculation, but since obviously, some of our commodities are tied to the price of oil and natural gas, we get swept under that same speculation.

Connie Maneaty

I am about to just a last question on the portfolio. Couple of years ago I think you said you had your portfolio pretty much where you wanted it to be. Given the change in the environment do you still have what you think is an optimal portfolio or are you considering either some divestitures or more reductions in the product lines?

Pat Robinson

Well nothing major from a divestiture standpoint. We continue to evaluate product lines, and every year we downsize certain parts of the product line that continued to not respond innovation or to operate in the more commodities like way. And so, we are every year continuing to reduce that percentage of our business that I would call commodity like. But no major reductions right now. The housing market will come back and when it does, we will be happy again that we’re in two holes and also products will come back -- those are businesses that for long hour we still like there will be businesses.

Connie Maneaty

Okay.

Operator

Your last question is follow up and it will come from Chris Ferrara with Merrill Lynch.

Chris Ferrara

I wanted to ask about SAP, why are you waiting until the back half of '09 for the go-live on you know, cleaning Organ & Décor and tools and hardware when you are just getting through your second phase I guess right now?

Mark Ketchum

Well it’s a big part of business and we just have a lot of pre work to do, because that’s in shape to take it live. So that’s the time I will set up originally at the same timeline and that we communicated previously. So nothing changed for now.

Chris Ferrara

Go it, thanks.

Operator

If we were unable to get to your question during this call, please call Newell Rubbermaid Investor Relations at area code 770-407-3994. Today's call will be available on the web at www.newellrubbermaid.com and on digital replay at area code 719-457-0820 with a conference code of 9477556 starting two hours following the conclusion of today's call and ending May 8.

This concludes today's conference. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Newell Rubbermaid Inc. Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts