Question-and-Answer Session
Operator
(Operator Instructions) Your first question comes from the line of Michael Rehaut of J.P. Morgan.
Michael Rehaut - J.P. Morgan
Hi, thanks. Good morning.
Nolan D. Archibald - Chairman, President and CEO
Good morning.
Michael Rehaut - J.P. Morgan
The first question is just on the '08 guidance, and I appreciate some of the detail there. It appears that excluding some of the cost inflation that you're expecting in '08 which is about a 180 basis point hit to margins roughly, that your margins could actually have been roughly flat even with a modest sales decline.
So I was wondering if you could help with how you're approaching this as this has been an ongoing issue for a number of years, and if you could kind of review maybe your hedging strategies or your sourcing strategies or if there are any other types of things that you might be thinking of doing that you're not already doing.
Then I have a follow up.
Mike Mangan - CFO
Mike, this is Mike Mangan.
To your point, we are looking at our margins to decline modestly here in 2008 inherent in the guidance from the 9.6% range to down to in and around 9% for the year for 2008.
Significant commodity inflation at $120 million, that'll put 180, 190 basis points of pressure on our margins, yet we'll be able to offset some of that with productivity improvements, we'll get some favorable FX. We won't have the recall charge that we saw in 2007. Probably some modest, flat but maybe a bit favorable on the pricing side. And as well, we'll get some restructuring benefits as well.
So, you know, net-net, our gross margins will be flat to up slightly, and we'll see some challenges with SG&A percentage given leverage.
In terms of fighting these costs, we are doing a number of things. A significant portion of that productivity is driven by value engineering activities. We drive productivity and look at not only alternate suppliers but alternate material usage in our products, so we're trying to substitute obviously away from higher-cost commodities down to lower-cost commodities, and that's one of the big items that drives our productivity benefits for 2008.
As well, we'll continue to work on dual sourcing to leverage that supply base in China and in other places around the world begin to drive productivity in our business.
Nolan D. Archibald - Chairman, President and CEO
- To read the full transcript on Seeking Alpha, click here »
