Newell Rubbermaid Q3 2007 Earnings Call Transcript

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Newell Rubbermaid(NYSE:NWL) Q3 2007 EarningsCall October 25, 2007 9:00 AM ET

Executives

Ron Hardnock -Vice President of Investor Relations

Mark D. Ketchum -President and Chief Executive Officer

Pat Robinson -Executive Vice President and Chief Financial Officer

Analysts

Budd Bugatch -Raymond James

Connie Maneaty - BMOCapital Markets

Bill Schmitz -Deutsche Bank

Linda BoltonWeiser - Oppenheimer

ChristopherFerrara - Merrill Lynch

JoeAltobello - CIBC World Markets

Operator

Good morning,ladies and gentlemen, and welcome to Newell Rubbermaid's third quarter 2007earnings conference call. (Operator Instructions) Today's call is being webcastlive atwww.NewellRubbermaid.com on theinvestor relation’s home page under events and presentations. Aslide presentation is also available for download. Adigital replay will beavailable two hours following thecall at 719-457-0820.Please provide theconference code of 1044327 to access thereplay.

I will now turn thecall over to Mr. Ron Hardnock, Vice President of Investor Relations. Mr.Hardnock, you may begin.

Ron Hardnock

Thank you and goodmorning. Before we begin, I would like to remind you that thestatements made inthis conference call that arenot historical innature areforward-looking statements. These statements arenot guarantees and actual results could differ materially from those expressedor implied.

For alisting of major factors that could cause actual results to differ materiallyfrom those projected, please refer to our most recent quarterly report on Form10-Q including Exhibit 991. We will also bereferring to non-GAAP financial measures on this call.

Areconciliation of these financial measures to themost directly comparable financial measures calculated inaccordance with GAAP is available under theinvestor relations section of our website atNewellRubbermaid.com.

Let menow turn the call overto our President and CEO, Mark Ketchum.

Mark Ketchum

Thank you Ron andgood morning everyone. Thank you for joining us on our third quarter 2007earnings call. I'm pleased to report itwas a strong quarter.More importantly, we've raised our 2007 EPS, gross margin expansion and cash flowforecast due to operating improvements and provided apositive outlook for 2008.

As I've assertedpreviously, full year results arethe truest indicatorof how we're performing. Our upbeat expectations for 2007 and 2008 demonstrateour ability to growprofitably despite atougher economic environment. I'll talk more about this later inmy remarks.

For thequarter total net sales were $1.7 billion, up 6.4% from last year and inline with the updatedguidance we provided on September 17th. Q3 2007 represents our eighthconsecutive quarter of organic growth, following three years of flat or negativegrowth.

Gross marginsexpanded 190 basis points to 35.6% of sales, ahead of our guidance. Excludingcharges, third quarter earnings pershare were $0.66, compared to $0.46 inlast year's quarter. If you exclude one-time tax benefits inboth periods, normalized EPS was $0.52, a27% improvement over last year.

Operating incomeof $237 million was up 18%. Pat will give you more detail on thequarter in hisremarks. Looking forward, our primary focus is on building atop-tier global innovation and branding company, capable of generating strongrevenue and profit growth year after year.

As we progressthrough this transformation, we will seequarter-to-quarter fluctuations due to timing and other business factors. I trynot to overreact to these quarterly fluctuations. I'm focused on delivering ourannual plans and building our long-term capability.

We areproud of the strongprogress we made in2006 and we're equally proud that we will meet or beat 2007 full year guidancethat we communicated atthe beginning of theyear. As you will hear ina few moments, weexpect to validate our turnaround with another annual installment of goodresults in 2008.

We aredelivering 2007 and 2008 results consistent with thecommitments we made atour February analyst day. We aredoing this despite atougher macroeconomic climate that includes increasing softness innew house construction and amore sluggish retail environment inNorth America.

From now through theend of 2008, we estimate these factors will pressure total company sales by 1.5to 2 percentage points, but this won't knock us off our stride. Thenew business model we adopted and strategic transformations that we aredriving are serving uswell.

We areencouraged by continued market share gains, notably inCalphalon, Goody, DYMO and Rubbermaid Commercial businesses and by globalgrowth in our IRWINand LENOX branded tool businesses.

Inaddition we arecontinuing to reap significant gross margin benefits from better mix driven byour improved business portfolio, stronger sales of higher margin products and adiverse channel mix of both retail and commercial distribution.

For 2007 fullyear, we expect approximately 4% sales growth, over 175 basis points of grossmargin expansion, 18% normalized EPS growth and healthy operating cash flow. Allof these results meet or beat theexpectations we shared with you atthe beginning of theyear.

Our strong grossmargin improvement continues to fuel our investment instrategic SG&A. This year we expect to spend anincremental $95  to $100 million tosupport brand building and other keycorporate initiatives. This is $5  to $10million higher than we told you back inFebruary.

Looking now to2008, we expect to again deliver thegrowth trifecta, with 3% to 5% sales growth,robust gross margin expansion inexcess of 100 basis points and normalized EPS of $1.95 to $2.00 ashare. Our top-line expectations reflect thestronger new product pipeline and additional strategic spending to increasedemand for our brands, getting us off to agood start in 2008 andkeeping us there.

Before I turn thecall over to Pat, let metalk briefly about theprogress we've made on some of our keystrategic initiatives. On October 1st we successfully went live with theSAP implementation atour North American Office Products business unit.

We have investedconsiderable resources to ensure success and we arepleased to report that thelaunch has goneextremely well. This go live marks thefirst major milestone inour planned multi-year rollout of SAP. Thefirst launch hasprovided a good roadmap and a solid baseof experience to reapply as we implement this best-in-class business processenabler across theorganization.

We arealso continuing to invest invarious brand building and marketing efforts to help drive top-line salesgrowth. Let me mentionjust a few highlights.In our tools & hardwaresegment, we achieved solid sales growth due largely to continued strength inour international tools businesses. One area inwhich we have seen especially good results is our LENOX Industrial Bandsawbusiness.

Thesuccess has beendriven largely by our grassroots deal marketing efforts. We aregenerating a quickpayout as we expand our team of trained professionals who work with our endusers to educate them on thebenefits, use, and installation and servicing of our band saws. We aredeploying this marketing model globally and have seen adouble-digit increase inour industrial band saw business outside theU.S.

Inour baby and parentingessentials business, we will soon launch theGraco SweetPeace Newborn Student Center.SweetPeace represents agame changinginnovation that will reinvent thebaby swing market. SweetPeacewas developed based on comprehensive research with moms and pediatricprofessionals to understand what works to calm babies thebest.

This uniqueproduct features apatented motion and customizable seating positions to better mimic theactual movements that mothers use to soothe their infants. SweetPeace alsocomes programmed with soothing prenatal sounds, such as aheartbeat, that researchers have proven to beespecially comforting to babies.

We areinvesting in atargeted multimedia, print and web marketing campaign to support thelaunch of this innovative new product. Our DYMO labeling technology business isup strong double-digits year-to-date on thesuccess of its breakthrough TVmarketing campaigns throughout Europe.

Our fine writingbusiness is significantly enhancing its merchandise and in-store experiencewith the creation ofsleek and attractively designed store within astore display concepts atfine retailers across theglobe.

Inour beauty and style business, Goody hasinitiated a majormarketing campaign to support theintroduction of its innovative Styling Therapy line of brushes. These uniquestyling instruments areinfused with special ingredients to help control dandruff, add shine or protecthair color.

Sales of StylingTherapy have doubled since thelaunch of this A&P campaign. Again, these arejust a few examples ofthe types ofinvestments we aremaking across all ofour business units to help those brands that matter atNewell Rubbermaid.

With that, let meturn the call over toPat Robinson, who will walk through thedetailed financials and guidance before I return to provide some summarycomments. Pat?

Pat Robinson

Thank you, Mark.I'll start with our third quarter income statement on anormalized earnings basis. Net sales for thequarter were $1.7 billion, up $101 million or 6.4% over ayear ago andconsistent with our revised guidance provided inthis September. Sales growth excluding foreign currency was 4.5%, marking the8th consecutive quarter of sales growth for thecompany.

This quarter salesimprovement was driven by double-digit increase inthe home & familysegment, mid to single-digit increases inthe cleaning, organization& decor and office products segments, and alow single-digitincrease in tools& hardware.

As Mark mentioned,third quarter sales benefited by about 1.5 from thetiming of sales in ouroffice products segment, and about 0.5 point shifted from quarter two relatingto the service levelissues in Europediscussed in our lastcall and about 1 point shifted from quarter four relating to thepre-buy in advance of thecompany's SAP go-live inNorth America.

Year-to-date saleswere $4.8 million up 4.4% for last year, including about 1.5 point inforeign currency. Gross margin inthe quarter was $601million or 35.6% of net sales representing a190 basis point expansion versus 2006 and above thehigh end of our revised guidance of 125 to 175 basis points.

Favorable mix,ongoing productivity initiatives and savings from project acceleration drove themajority of theyear-over-year improvement, while favorable mix drove theimprovement to our revised range provided inmid September.

SG&A was $364million in thequarter, up $30 million to last year. Driving theincrease was strategic brand building investments inall of our segmentsand other strategic initiatives including SAPand shared services partially offset by savings incorporate overhead expenses.

Reinvestment instrategic SG&A atour operating units is on track for both thequarter and for theyear. Operating income for thequarter was $237 million or 14% of sales, animprovement of $36 million or 18% for last year, driven by sales growth, grossmargin improvement partially offset by theincrease investment inSG&A.

Year-to-dateoperating income was $621 million or 13% of sales, up 15% for last year.Interest expense was approximately $5 million lower than theprior year reflecting thereduction in debtyear-over-year and slightly lower average borrowing rates.

Thecompany's continuing tax ratewas 29.5% for thequarter compared to 31% last year. As disclosed inthe mid-Septemberpress release, thethird quarter of 2007 benefited from theresolution of certain tax matters of approximately $39 million or $0.14 ashare versus a taxbenefit of about $15 million or $0.05 ashare in thethird quarter of ’06.

Normalized EPS forthe quarter was $0.52,about 27% higher than last year's normalized EPS of $0.41 and $0.03 above themidpoint of thepre-released range driven by higher gross margins. Year-to-date normalized EPSof $1.35 up $0.26 or 24% for last year.

Thecompany reported approximately $23 million inrestructuring charges related to project acceleration inthe quarter, which arenot included in thecontinuing earnings described previously.

Operating cash flowfor the quarter was$283 million compared to $312 million inthe prior year andslightly above thehigh end of our previous guidance of $225 to $275 million. Capital spending was$41 million in thequarter compared to $37 million last year. I'll now take afew moments and talk about our third quarter segment information.

Inour cleaning, organization & decor segment, net sales were $547 million up$28 million or 5.4% to thethird quarter of ‘06. This increase was driven by double-digit growth inour Rubbermaid commercial business and lowsingle-digit growth inRubbermaid consumer.

Operating incomefor the segment was$84 million or 15.3% of sales, animprovement of $16 million or 24% versus ayear ago. Sales growth, productivity gains and favorable mix drove theimprovement. Office products net sales increased $27 million to $545 million, animprovement of 5.3% versus last year.

Year-to-date salesare up about 3.5%,which includes about 1 point of improvement from thepre-buy in advance of theSAP go-live. Back toschool met ourexpectations, while technology continues to growdouble-digits. Inaddition we rectified theservice issues in Europethat impacted our quarter two performance.

For thefull year we expect lowsingle-digit growth inthe segment. Operatingincome was $84 million or 15.4% of sales, up $9 million or 12% to last year. Thesales increase and favorable mix partially offset by increased SG&Ainvestment drove theyear-over-year improvement.

Inour tools & hardware segment net sales were $336 million, up $12 million or3.5% versus last year. Continued strength inour international tool businesses more than offset softness inour domestic tools & hardware business affected by theU.S.residential construction market.

Theinternational business benefited from thesuccessful commercialization of certain products, particularly band saws.Operating income for thesegment was $51 million or 15.3% of sales, up $5 million or 11% over last year,when higher sales volumes and strong productivity partially offset by rawmaterial inflation particularly inmetals.

Inour home & family segment net sales were $259 million, animprovement of $34 million or 15.3% inthe quarter. Newproduct launches and anincreased investment indemand creation activities drove strong sales growth across allthree-business units.

Double-digit salesgrowth supported by increased strategic SG&A investments drove operatingincome of $37 million, up $9 million or 32% to last year.

Turning now to thequarter four 2007 outlook. We expect sales to increase about 2%. As wediscussed earlier, thequarter four growth rateis negatively impacted by about 1 point, as certain retailers bought inadvance of our October SAPgo-live.

For thequarter we expect growth inall business segmentsexcept for office products, which is expected to bedown low single-digits.Adjusting for the SAPpre-buy, office products would beessentially flat in thequarter as our sell-in rateis expected to benegatively impacted by inventory actions taken atcertain key retailers.

Our point of sale inthis segment hasactually eclipsed last year, particularly inthe mass merchant andcommercial channels, atrend we expect will continue given this confidence that thefourth quarter selling decline is temporary.

Based on this weexpect quarter one 2008 office product sales growth to bein the3% to 5% range as sell-in better matches our POS. Savings from productacceleration, other ongoing productivity and favorable mix will drive expectedgross margin expansion between 175 and 225 basis points.

For quarter four,we expect normalized earnings to bein therange of $0.44 to $0.46 pershare compared to $0.42 ashare a year ago.

Operating cash flowis expected to be inthe range of $200 to$250 million in thefourth quarter versus $239 million last year. Capital spending is expected to be$35 to $45 million in thequarter.

For theyear, we now project sales growth of about 4% with growth inall four businesssegments. Favorable foreign currency will contribute about 150 basis points.Restating for thetiming items in officeproducts, our growth rates by quarter areapproximately as follows.

Inquarter one, we were plus 3%; quarter two plus 4%; quarter three plus 5%; andfourth quarter plus 3% for afull year growth rateof positive 4%. We areguiding our gross margin expansion to thehigh-end of the rangepreviously communicated. We now expect expansion of a175 to 200 basis points.

Productivityresulting from project acceleration savings and ongoing initiatives combinedwith favorable mix will drive thegross margin expansion. From atiming perspective, we now anticipate savings from project acceleration of $60million for both 2007 and 2008, as about $10 million savings originallyexpected in '08 willnow be realized thisyear.

Thetotal cost insavings of project acceleration remains on track. Pricing and raw materialinflation are stillexpected to generally offset for theyear. We plan to invest approximately $95 to $100 million of our gross marginexpansion in strategicbrand building initiatives, including consumer understanding, innovation anddemand creation, as well as other strategic initiatives including SAPand shared services.

This represents anincrease of $5 to $10 million to our analyst day guidance. As our strong grossmargin performance hasallowed to increase our investment, while also delivering anadditional $0.08 of normalized EPS improvement for theyear.

Consistent withprevious guidance, theeffective tax rate for2007 is expected to bebetween 29% and 30%. We areincreasing our normalized EPS guidance $0.04 to bein therange with $1.79 to $1.81. This outlook does not include pre-tax restructuringcharges of approximately $75 to $95 million or $0.22 to $0.28 ashare.

We areincreasing our estimate of cash flowfrom operations to bebetween $650 and $700 million. We expect restructuring cash payments to beapproximately $50 to $60 million, as thetiming of certain payments primarily severance hasshifted from 2007 to 2008. Capital expenditures areexpected to be inthe $145 to $155million range including SAP.

Looking ahead to2008, we expect sales growth to bebetween 3% and 5% for thefull year, with growth expected across allbusiness segments. New products and increased strategic SG&A spending areexpected to more than offset theimpact of a continuedsluggish economic environment, particularly inNorth America.

We expect projectacceleration and our ongoing productivity initiatives to fuel gross marginexpansion in excess of100 basis points. We anticipate investing approximately half of this marginexpansion back into strategic brand building initiatives and other corporateinitiatives.

This sales growthand margin expansion will drive normalized EPS to arange of $1.95 to $2 ashare. We also expect to continue to convert inexcess of 90% of full year 2008 earnings into free cash flow. We will providemore detail around our 2008 full year guidance on our fourth quarter call afterwe have completed our budgeting process.

Similar to lastquarter, we have posted abrief supporting slide presentation on our website, www.newellrubbermaid.com,under quarterly earnings inthe investor relationssection.

Before we open thecall for questions, Mark hassome final comments.

Mark Ketchum

Thanks, Pat.Before closing thecall, I would like to thank allof our employees for once again delivering astrong quarter. And we also add aspecial thanks to all thepeople who worked sohard to deliver a verysuccessful SAPconversion in NorthAmerican Office Products.

This was atruly outstanding job. Year-to-date, we've achieved 4.4% sales growth, 170basis points of gross margin expansion and a15% increase inoperating income. Our solid outlook for 2007 and 2008 is evidence that our newbusiness model is working.

We can growsustainably even inweaker macroeconomic environments. We also continue to bea strong gross marginstory, reaping thebenefits of favorable product mix, ongoing productivity, and savings fromrestructuring.

This robust grossmargin expansion will fund additional investments instrategic brand building and other capability building initiatives that areso critical to drivingtop-line sales growth and to supporting our long-term success.

Our vision is to bea best inclass company. We areclearly making good progress. However, this is amarathon, not a sprintand it will takeseveral years to getthere. As we go forward, we will build upon themomentum we have gained thus far and maintain our focus on building brands thatmatter, achieving best total cost, leveraging thepower of one Newell Rubbermaid and fostering aglobal culture of innovation and excellence.

As always, wethank all of ourshareholders for their continued support. And thanks, once again, for joiningtoday's call. I will now ask theoperator to open theline for questions.

Question-and-AnswerSession

Operator

(OperatorInstructions) Your first question comes from Budd Bugatch with Raymond James.

Budd Bugatch -Raymond James

Good morning,Mark. Good morning, Pat, congratulations.

Mark Ketchum

Thank you.  Good morning Budd.

Budd Bugatch -Raymond James

Congratulations onlast night, too, Mark.  First in, four ina row.Mark Ketchum

 Wemay hold you to that one.Budd Bugatch - Raymond James

You talked about1.5% to 2% impact of themacroeconomic climate. I guess, that's about $100 million off of sales for nextyear, if I dothat properly. Can you drill down and tell us where you think that's impactingand how you get there?

Pat Robinson

It's primarily inour tools & hardware segment, because of theslowdown in housing.That, as you know, continues to getworse. That's where we seemost of that impact.

Budd Bugatch -Raymond James

And tools & hardware,you're looking at --if we look atinternational, that's still growing well. Domestically, I would imaginecommercial is growing well, industrial is growing, okay. So, theimpact is in thehome side of that?

Pat Robinson

Yes itis. In fact, we said inthe past, this isstill correct, about 5% of our total Newell Rubbermaid business is affected by thehousing market, and again, thelargest part of that inTools & Hardware.

Budd Bugatch -Raymond James

Okay. My follow-uphas to dowith raw materials for next year. I'm concerned, I'm seeing some inflation andobviously with oil where itis, tremendously worried about that. Can you go over your outlook for thatmaybe for the fourthquarter and for next year and how dowe monitor that?

Pat Robinson

Well, let's talkabout next year. We believe we're going to seemore pressure from raw materials in'08 than '07, and everybody is driven by resin costs. They area bit of amoving target at thispoint.

But beyond that,we have shown theability the last threeyears to price and take price to offset raw material inflation in'05, '06, and '07, it's our intention to dothat again in 2008. Weare currently workingthrough those pricing decisions as we speak, as we go through our budgetingprocess.

We can fill you inmore detail on our next call. But over any annual period or alonger period, we expect to beable to offset raw materials with price. Now, inthe short-term we haveto get our pricingactions in place andinflation happens when ithappens.

Budd Bugatch -Raymond James

And resin is stillaround £700 million now, is that about right?

Pat Robinson

That's aboutright.

Budd Bugatch - RaymondJames

And you used tohave or a couple ofyears ago you hadinstalled an indexingmechanism for pricing on resin when itreally got to bechallenging. Is that still inplace or do you haveto go back to thecustomers?

Mark Ketchum

Well, it's notwhat I'd call in placein that it'sautomatic, but we always have to go back to customers and that was thecase even before. But that's thebasic principle we'll continue to use. As Pat mentioned, thetiming of our pricing with many of our customers is either twice ayear or once a year. Soour ability to respond is not immediate inmany cases. But as Pat said, over any longperiod of time we still expect to beable to have raw material inflation and pricing offset.

Budd Bugatch -Raymond James

And Pat, justlastly, is there anything on metals inraw materials, too?

Pat Robinson

Well we expectsome pressure on metals but about thesame as we saw this year.

Budd Bugatch -Raymond James

Okay. Thank youvery much. Congratulations.

Mark Ketchum

Thank you.

Operator

Your next questioncomes from Connie Maneaty with BMOCapital Markets.

Connie Maneaty- BMOCapital Markets

Good morning.

Mark Ketchum

Hi, Connie.

Connie Maneaty- BMOCapital Markets

With your commentsabout the weakness inNorth American retail and housing and thestrength in theinternational business, is there any chance that North American, or U.S.sales in particular,decline in thefourth quarter and thesales growth that you doshow is allinternational?

Mark Ketchum

No, I don't think itwill come out that way. But again, theinternational businesses will beleading the way interms of their rate ofgrowth. But no, we'll still seesome growth in NorthAmerican total.

Connie Maneaty- BMOCapital Markets

Okay. Also whenyou talk about this terminology, when you talk, saysales are sluggish orsales are weak, doesthat mean they declined?

Mark Ketchum

Allit means is there'smore macroeconomic pressure. You're seeing some of that show up inthe fourth quarter.

Connie Maneaty- BMOCapital Markets

No, but I meanwhen you say thatNorth American tool sales were weak or sluggish.

Pat Robinson

No, they were notdown in thequarter.

Connie Maneaty- BMOCapital Markets

They were notdown. Okay. So youdon't have standard language where weak and sluggish means decline, right?

Mark Ketchum

No.

Connie Maneaty- BMOCapital Markets

Okay, great. Thankyou.

Operator

Your next questioncomes from Bill Schmitz with Deutsche Bank.

Bill Schmitz -Deutsche Bank

Hi, good morning.

Mark Ketchum

Hi, Bill.

Bill Schmitz -Deutsche Bank

I know you're notgoing to talk about specific customers, but what gives you confidence that someof this destocking in theoffice supply channel abates thefirst quarter of next year? I know they have taken their inventory down from sixmonths ten years agodown to three and now it's down to amonth and a half ortwo. But than why doyou stay in themarketplace and what arethey telling you that you think that this is going to pick up inthe first quarter?

Mark Ketchum

Well, first ofall, we track two things. One, we have some visibility into inventory levels atour customer's. And second, we also have on acustomer-by-customer basis visibility on point of sale. Our point of sale hasactually been up and as we have seen thetrends in inventorytakedown, we know that there's anendpoint to that.

And sowe expect that good point of sale strength will start flowing through intoshipments. The otherthing I can tell you is that we've got astronger pipeline of new initiatives coming forward next year than we did thisyear. We purposely  held back on newinitiatives this year sothat we could getthrough the SAPconversion in North America without interruptions.

Obviously ifyou're trying to innovate and provide new products atthe same time you'retrying to go through achange like that, itjust adds a level ofcomplication that you want toavoid. We were morecautious in terms ofour rate of newproduct initiatives this year. Next year we'll open thefloodgates again.

Bill Schmitz -Deutsche Bank

Right. Thanks.Then just a follow-upon SAP.  I know Stanford North Americawas the first one,what’s planned for next year interms of conversion?

Pat Robinson

We have onesegment go-live in North America again, our home & family segment. And right now it'santicipated to be inthe second quarter.

Bill Schmitz -Deutsche Bank

Okay. That's itfor 2008?

Pat Robinson

Yes.

Bill Schmitz -Deutsche Bank

Okay, great.Thanks so much. Pat, Ihope you're feeling better?

Pat Robinson

Thanks alot. I am.

Bill Schmitz -Deutsche Bank

We'll talk to yousoon.

Operator

Your next questioncomes from Linda Bolton Weiser with Oppenheimer.

Linda BoltonWeiser - Oppenheimer

Thank you. I guessI have a questionabout the cleaning andorganization profitability. It's very impressive given theraw material costpressures. I mean you have a15% operating margin now there. Can you discuss -- I'm picturing that thecleaning and organization versus home fashions areroughly equal.

If you could shedsome light on that interms of profit margins and also inRubbermaid, can you comment is themargin improvement due to home products still improving or is itall of thepieces that areimproving profitability? And arehome products now where itneeds to be?

Mark Ketchum

Okay. There area lot of questions.Let me try and giveyou an overview ofthat. We don't report on specific portions of thebusiness within there, but I can tell you that, for instance, Rubbermaid commercialhas always been atthe strong end ofthat, of the rangewithin that business segment, and theRubbermaid home products, I've shared that with you before, is theone area that's been below investment grade.

We talked aboutthat when we talked about what businesses still needed to befixed, if you will, using thedefinitions the companywas using a couple ofyears ago. But I also told you that Rubbermaid home had made agreat first installment, had gone from negative to positive profitability lastyear.

That they weremaking another biginstallment this year and that itwould be fully fixedby the endof '08and they areon that track. They aremaking terrific progress byredesigning their products and redesigning their overhead and better utilizingour factories and anumber of other thingsthat they are doing toreally continue to getthemselves into abest-cost position. They arewell on their way tohaving investment grade economics themselves and then allthe portions of thatbusiness would.

Pat Robinson

Just one othercomment, all of ourbusiness segments now have operating margins inthe lowto mid-teens ranging from roughly 13% to 15%. Thecompany's operating margins will approach 13% this year, probably inthe 12.8% kind ofrange. The gapis that we have some corporate expenses don't getallocated back. They areall operating now inthat 13% to slightly above 15% range for theyear.

Linda BoltonWeiser - Oppenheimer

Just as afollow-up, I think people arealways thinking about your category versus thecategories like Procter & Gamble. I mean what's thevery long-term margin potential of durable goods categories versus consumables?Do you have any viewon that, Mark?

Mark Ketchum

Well, I guess Idon't want to pick asingle number, because as you know, we've got such amix of products that what our actual mix is would affect that. We have talkedabout driving our gross margin towards 40 and driving our net margin towards15, and I think that's agood near-term target. I would hope that three years from now that will beclose to reality and you'll beasking what's next. Obviously there will have to besomething next.

Linda BoltonWeiser - Oppenheimer

Okay. Thanks alot.

Operator

Okay. We'll gonext to Chris Ferrara with Merrill Lynch.

Chris Ferrara -Merrill Lynch

Hi, guys. I waswondering if you can talk about what probably thebigger concern is for your stock inthe marketplace, whathappens if we do seea recession. Is thereany way you can try to quantify insome way what you'd seefor a commercial orindustrial construction if we saw aU.S. recession and what kind of share gains from aquantitative perspective you'd need inyour tool business to offset that and to still beable to put up flat to lowsingle-digits growth?

Mark Ketchum

We haven't modeledthat, so we're notplanning for theworst. We're planning for what we think is reasonable and that would bekind of planning for theworst. I guess theother thing I'd tell you itthat that's why it's soimportant that we use thetotal portfolio we have atour disposal and that portfolio is both within that business.

Sowithin that business, as you know, within our tools business there'sresidential, there's commercial, there's industrial. Within that business thereis U.S. andthere is international. And sotrying to really use thestrongest parts of themix at any one point intime to drive the businessis what we're focused on doing.

And then obviouslyas a company we'retrying to use thetotal mix of Newell Rubbermaid, sothat if there are weaknessesthere that we can offset someplace else.

Chris Ferrara -Merrill Lynch

Sois it fair to sayyou guys expect continued residential construction weakness but you don'texpect a recession inthe U.S.?

Mark Ketchum

I would saythe 1.5% to 2% fdrag that we talked about before would not anticipate afull-blown recession, no.

Chris Ferrara -Merrill Lynch

Got it. And then Ijust want to ask about on theQ4 guidance, it lookslike your implied SG&A reinvestment would beroughly $40 million bucks, which is big, right? Itwould be up 300 basispoints over two years ago. Is that right? Is that theright way to calculate it? I guess where would alot of that incremental becoming from given how high therun rate hasbeen?

Mark Ketchum

I think it'sactually a littlelower than that in thefourth quarter. I think our SG&A is up about $70 million through Septemberand we're saying $95 to $100 million for theyear. So we'relooking, unless my math is wrong, more like $25 to $30 million of reinvestment inthe quarter.

Chris Ferrara -Merrill Lynch

Got it. Then it'sbeen my math that is wrong. Just gross margin, try to mix as adriver of gross margin, it's not something I guess we've spent aton of time, that you guys spend aton of time talking about. I know it's probably hard to forecast inthe near-term. But itseems to be somethingyou've called out more and more often.

Can you just give alittle color on where that's coming from? I understand new products aregenerally higher margin. But is itthat simple that your pipeline hasbeen more robust or arethere other things inplay?

Mark Ketchum

Really itis a couple of things.It's one, the firstone you just said. We've talked about this before. But any time we launch newproducts or get inthe near neighborcategories, our expectation from aplanning standpoint, we're not 100% but we have avery, very good batting average here.

But theexpectation is that thenew products improve thefleet average gross margin. Sothat's one thing, as we drive innovation and getin near neighborcategories we're constantly seeing that as anopportunity to build our margin.

Theother thing is that as we spend more money on consumer demand creation, we canspend itdisproportionately again on theparts of our line-up. Sowithin any given product segment or business unit, they have parts of theirline-up that arebetter gross margin than others and we're, again, focusing more of our brandbuilding marketing spending on theparts of the line-upthat are bettermargins.

Soboth building that mix by what we advertised market as well as by launchingproducts and launching inthe categories thathave better margins is probably thetwo key things.

Chris Ferrara -Merrill Lynch

Thank you verymuch.

Operator

Your next questioncomes from JoeAltobello with CIBC World Markets.

JoeAltobello - CIBC World Markets

Thanks, hi, guys.  Good morning.

Mark Ketchum

Thank you.

JoeAltobello - CIBC World Markets

Our first questionis on office products. I think you said on your 2Q call market, Pat, I forgetwhich one is that thedelayed shipments plus thepull forward from 4Q to 3Q would add about $30 to $40 million of sales inthe quarter.

Itlooked like it wasabout $20 to $25 million of animpact in thequarter. How much of that was less of apull forward than you thought and how much was less of arecapture of the $15million in sales isthat didn't go out in2Q?

Mark Ketchum

Virtually allof the difference wasless of a pullforward.

JoeAltobello - CIBC World Markets

Okay. Fair enough.Then secondly, and this is maybe alittle bit picky, but I think inyour analyst day inFebruary, you had talked about gross margins being up 125 to 175 basis pointsboth this year and next year. This year obviously you doslightly better than that. Next year you're saying atleast 100 bps. Is that achange or is thatjust me that being alittle bit picky there?

Pat Robinson

We dosay inexcess. Part of thereason there is we have to go through our budget process. And we talked about ita little bit early onanswer to Budd's question. Got abit of a moving targeton oil and resin costright now, which we're trying to zero that in. Also our pricing action isrequired also. We're very comfortable to bein excess of 100 and we'llgive you more detail on thenext call.

JoeAltobello - CIBC World Markets

And theproject acceleration savings obviously being pulled forward alittle bit.

Pat Robinson

But $10 milliongot pulled from '08 in'07, which is a goodthing. We've accelerated those savings, sobut that's small, about $10 million. We had said $50 million in'07, $70 in‘08; we're now saying $60.

JoeAltobello - CIBC World Markets

Okay, great.Thanks.

Operator

Your next questioncomes from Connie Maneaty with BMOCapital Markets.

Connie Maneaty- BMOCapital Markets

Hi. I just have afollow-up. Could you talk about what's been going on inthe internationaltools with thecommercialization of these industrial band saws? Can you give us alittle bit of detail and also what you call that group of employees that goesto the work site, and howthey all operate?

Mark Ketchum

Yes. Well, they arefield activation specialists. That is theway to think about them. And what they areis the people thatreally understand and can work with theend user to demonstrate. What we're doing, I would describe most simply, asadding feet on thestreet.

What that means,you've got to bring these people in, you got to train them on our products, howthey work, why they arebetter, make them experts on going into amanufacturing site and showing them how if they replace their existing bandsaws, with our band saws, they will getproductivity advantages and eventually costper cut advantages. Sothat's what we're doing.

But as we addthose people, train them up, send them out inthe field; they cannow cover several more accounts than we could cover before. We're getting deeppenetration into geographies where we already existed and we're getting furtherinto new geography, for instance, Eastern Europe.

Connie Maneaty- BMOCapital Markets

Wait, which partof the internationalbusiness segment is growing thefastest?

Pat Robinson

Actually both Europeand Latin America grew double-digits for us. They grewabout the same.

Connie Maneaty- BMOCapital Markets

Great. Thank you.

Operator

Your next questioncomes from Linda Bolton Weiser with Oppenheimer.

Linda BoltonWeiser - Oppenheimer

Yes. Can you justclarify if the specialtax item in thequarter was cash or non-cash?

Pat Robinson

It's non-cash for theyear. Eventually itwill be cash.

Linda BoltonWeiser - Oppenheimer

Right, yes. Okay.Thank you.

Operator

Your last questioncomes from Chris Ferrara with Merrill Lynch.

Chris Ferrara -Merrill Lynch

Hi, again. Justwanted to talk about theproductivity. I know you guys have, you targeted 2.5% of improvement. Can youjust clarify what kind of productivity you seejust as far as base productivity goes and what's related to Newell OpEx andproject acceleration?

What is sort ofyour target? Should we just look atrestructuring savings going forward as theprimary productivity savings number? Or what would bein addition to that?

Pat Robinson

This year it's abig contributor,Project Acceleration is about $60 million, as we said, maybe a$50 million of that was from thegross margin line, Ron, is that right? $10 million inSG&A. So roughly alittle more than half of our productivity this year is coming from project acceleration.

As we moveto a more sourcingtype of model, I think we talked about this before.  Only about half of our production will comethrough our own facilities. Sowe'll get less fromour own OpEx and our own facilities going forward.

On thehorizon, though, is working with our supply base and training them inthe same techniques weuse in our ownfacilities and get theagreements in placethat we share in theproductivity that they generate.

Thesecond, I'd say, untapped area is distribution and transportation. As you know,we're going through areorganization of that whole network and taking about half of theDCs out of thenetwork. That's a bigdriver going forward also.

Chris Ferrara -Merrill Lynch

Got it. Then doyou guys, back onto gross margin, themix impact. Do youguys forecast in aspecific mix improvement number inyour gross margin targets or is itsomething that you sort of leave as potential upside?

Pat Robinson

It's business bybusiness. But there is some baked into our model going forward, yes, and inour estimates.

Chris Ferrara -Merrill Lynch

Got it. Thanks alot.

Operator

If we were unableto get to yourquestion during this call, please call Newell Rubbermaid investor relations at770-407-3994. Today's call will beavailable on the web atwww.newellrubbermaid.com and on digital replay at719-457-0820 with aconference code of 1044327 starting two hours following theconclusion of today's call and ending November 8th. This concludes today'sconference. You may disconnect.

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