Q4 2004 Newell Rubbermaid Earnings Conference Call - Final.

Original Source: FD (FAIR DISCLOSURE) WIRE

OPERATOR: Good morning, ladies and gentlemen, and welcome to Newell Rubbermaid's fourth quarter earnings release conference call. (OPERATOR INSTRUCTIONS). Just a reminder, today's conference will be recorded and will also be available live via audio webcast at www.NewellRubbermaid.com. And digital replay 2 hours following the call at 1-888-203-1112 for domestic participants, and 1-719-457-0820 for international participants. Please provide the conference code of 929053 to access the replay. I will now turn the call over to Mr. Jesse Herron, Vice President of Investor Relations.

JESSE HERRON, VP OF IR, NEWELL RUBBERMAID INC.: Today I'm joined by CEO, Joe Galli, and CFO, Pat Robinson. Before we begin our conference call let me take a moment to read the obligatory forward-looking statement.

The statements made in this conference call that are not historical in nature are forward-looking statements. Forward-looking statements are not guarantees as there are inherent difficulties in predicting future results, and actual results could differ materially from those expressed or implied in the forward-looking statements. For a list of major factors that could cause actual results to differ materially from those projected, please refer to our 2003 Form 10-K, including Exhibit 99.1.

With that being said, let me now turn the call over to our CEO, Joe Galli.

JOE GALLI, PRESIDENT, CEO, NEWELL RUBBERMAID INC.: Good morning everyone. I'm pleased to tell you that in the face of a very challenging raw material environment Newell Rubbermaid delivered a very strong fourth quarter in 2004. And we enter 2005 with tremendous momentum here in this Company.

First of all in Q4 we finished up at 45 cents a share in EPS, which brought our full year performance in at $1.38. I think it is important to note that our EPS was up 18 percent in the fourth quarter versus 2003. A nice trend in the fourth quarter that reflected a great job on the part of our team.

Raw material, as you know, continues to inflate, and in fact in the fourth quarter raw material inflated a full $46 million over the prior year. That was $11 million more than we anticipated 3 months ago. Revenue inflated during the quarter 27 million. Ferris and nonferrous metals were up 14 million, and corrugate and wood products up an additional 5 million. So that came in at a $46 million level of inflation for the fourth quarter alone.

And that inflation in the fourth quarter continued to reflect the trend that we saw throughout '04 and that we will continue to see in '05 when it comes to raw materials. If you remember back to the beginning of 2004, we actually budgeted for 20 million of raw material inflation for 2004. And what happened is raw material went up in the first quarter alone 21 million, in the second quarter another 18 million, and in the third quarter another 31 million. And Q4, as I mentioned, it was up another 46. So for the year we had to offset $116 million of raw material inflation, again, for the full year of 2004.

Now our team did a very impressive job in the fourth quarter of offsetting the raw material head wind that we faced. First of all, our new Operational Excellence thrust continues to gain traction throughout the Corporation, particularly in writing instruments where we hadn't seen progress prior to the second half of last year. We really are starting to see some very encouraging momentum in that part of our Company, along with the rest of the Company where we have had good traction.

In the fourth quarter our productivity thrust delivered $37 million. So we had $37 million worth of positive productivity in Q4 to help offset that raw material inflation. And we also were able to generate $21 million worth of pricing in Q4, which reflected a lot of effort on the part of our sales and marketing team to work with our key retail partners and implement price increases that really reflected an unprecedented level over the last 5 years. So we got a total of $58 million worth of gross margin offsets between productivity and pricing, which more than offset, again, the 46 million raw material in the fourth quarter.

Turning towards the top line, our sales came in down 1 percent, which was at the high end of the guidance that we had issued, which was down 1 to 3. It is important to note that that sales decline does reflect the fact that we exited $75 million worth of non-strategic low margin products in the fourth quarter alone. And in fact, if you look at the full year, what you see is that we executed the plan that we had articulated last year, which was to continue to discontinue low margin, non-strategic products that were resin intensive and basically commodity oriented.

In the Rubbermaid Home Products business throughout the year we exited $245 million worth of these products. And in our Office Products Group in the Eldon resin intensive component we discontinued $30 million worth of products. So for the full year we actually exited $275 million worth of these resin intensive low margin commodity products, which is exactly the plan that we had laid out 12 months ago.

Turning towards cash flow. We had another strong cash flow performance at Newell Rubbermaid in 2004. Starting with our working capital performance we were very pleased that for the fourth year in a row we showed excellent progress in working cap as a percent of sales. Even though we made a decision in the second half of 2004 to increase our inventory levels, so that we could buttress our service level performance for the our key retailers in a time when we were going through broad based restructuring throughout the Company.

Although we did increase inventory, we still reduced working cap by significantly improving our DSO performance, and making incremental improvements in DPO. And our working cap actually came in at 23.7 percent of sales, down from last year's 242, down from 2002's 258. And again this was the fourth year in a row we improved working cap as a percent of sales.

Turning towards fixed capital. We have -- a year ago we implemented an important strategy in the Company that we called decapitalization. What this reflects is our thrust to reduce our fixed capital expenditure at Newell Rubbermaid by working closely with our supplier partners, and negotiating with our suppliers to absorb some of the fixed capital burden that we have in running our business. We also have exited capital intensive productlines via divestitures or discontinuance. And we have become even more disciplined at deploying fixed capital, focusing on investing our fixed capital in those high margin, high return businesses that have the most potential. With all that said, our performance in 2004 came through very strong.

We invested 122 million of fixed capital throughout the year of 2004. That was down 178 million from 2003's 300 million level. And really this 122 million of fixed capital reflects a whole new level of capital discipline for Newell Rubbermaid. If you look back over the last 5 years, this is an unprecedented low level of capital investment. And it is a zone that we intend to perpetuate here because of this new decapitalization discipline that we have infused throughout the Company.

So if you look at our working and fixed capital performance combined with earnings, what you see is that our free cash flow in Q4 came in strong. We delivered 154 million of free cash flow in Q4 alone. That allowed us to generate a total of 307 million free cash flow for the year of 2004, up from '03's 242 million, or a $65 million improvement. And again for the fourth year in a row we have shown very strong cash flow performance at Newell Rubbermaid while we experienced many challenges like raw material inflation and broad based restructuring. So we were pleased with our team's performance here in cash flow.

Turning toward 2005, we are introducing guidance today as follows. For the full year our EPS guidance is that we will deliver between $1.38 and $1.48 a share of EPS. Again, for the full year of 2005. And in the first quarter our EPS guidance is as follows. We will deliver between 24 and 28 cents a share in EPS. Here again in Q1 of 2005.

Now let me emphasize that this EPS guidance for 2005 reflects the following. First of all, we are projecting raw material to inflate in 2005 $170 million. As I have shared with you earlier, raw material inflated in 2004 116 million, so we are seeing a significant increase in the price of raw materials in 2005.

And that breaks down as follows. We anticipate resin will be up 120 million this year. Ferrous and nonferrous metals will be up 40 million, and all other commodities that we buy will be up $10 million. That is how we end up with this $170 million worth of inflation.

Now our plan this year is that we will offset that raw material inflation as follows. We're projecting that our new Operational Excellence thrust will generate productivity in excess of $100 million. In addition, we're planning to secure pricing of 100 million throughout the course of 2005. So our plan is to more than offset this dramatic raw material increase with our productivity thrust and with our pricing plan that we're well on the way to implement in the marketplace.

Also reflected in our 2005 guidance is the fact that we were fortunate to receive a favorable tax impact for 2005. And this favorability will enable us to fund over $40 million of additional strategic restructuring projects. These restructuring projects include the closure of additional plants in high cost countries, and the reduction of overhead that will allow us in future years to improve our financial performance both in …