諾威品牌 (NWL) 2010 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to the Newell Rubbermaid second quarter 2010 earnings conference call. At this time, all participants are in a listen-only mode. After a brief discussion by management, we will open up the call for questions. Just a reminder, today's conference will be recorded. Today's call is being webcast live at Newell Rubbermaid.com on the Investor Relations home page under events and presentations. A slide presentation is available for download. A digital replay will be available two hours following the call at 888-203-1112, or 719-457-0820 for international callers. Please provide the confirmation code 7071403 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.

Good morning, welcome to Newell Rubbermaid's quarterly conference call. Today's discussion will include forward-looking statements about our Company's performance. I remind you that actual results may differ materially from expected results because of various factors. If you refer to our most recent 10-K, 10-Q, and 8-K reports, you will find cautionary statements and risk factors which provide a more detailed explanation of the inherent limitations in such forward-looking statements. The Company does not undertake and specifically disclaims any obligation to update any forward-looking statements that we make today.

We further caution you that the Company will make a number of references to non-GAAP and other financial measures in order to help you better understand the underlying performance of our business. You can find the GAAP to non-GAAP reconciliations in our earning release and on the Investor Relations section of our website. With me today are Mr. Mark Ketchum, President and Chief Executive Officer of the Company, and our Chief FInancial Officer, Juan Figuereo. I will now hand it over to Mark.

Thank you, Nancy. Good morning, everyone, and thank you for joining us today. I'm very pleased to share the results of another strong quarter with you. Newell Rubbermaid once again achieved core sales growth, strong gross margin expansion, and year-over-year normalized EPS growth. We are delivering consistently on the objectives we outlined at the beginning of the year and reinforced at our May Analyst Day. Our strategy is working, and we remain confident about our ability to meet our full-year financial targets.

Second quarter core sales increased about 4% after adjusting for the $35 million of SAP-related prebuy reported in our Q1 call. Without this adjustment, core sales were up 1.5% in Q2. Second quarter sales trends are consistent with the full first half with year-to-date core sales up 4.1%. We are pleased with this rate of growth especially given that we are not getting much help from the economy. Across our portfolio, we continue to gain market share and new distribution, on the strength of our new product introductions and robust advertising, marketing, and sales support. Our innovations are winning with consumers and customers alike.

We are also benefiting from the fact that many of our international markets, particularly those in emerging economies, are growing significantly faster than the North American markets. We are making good inroads in Asia Pacific and continue to build our business in Latin America where some of our business units are posting strong double digit growth. Our international sales this quarter grew 9% in local currency, similar to the first quarter. Net, our sales year-to-date are consistent with our full-year outlook for both core sales and total sales. Gross margin expansion also continued this quarter, improving 220 basis points to 39.3% of sales, on strong productivity and improved product mix. Operating margin was also healthy at 15% of sales, and normalized EPS was $0.51, a 9% increase over last year's second quarter. These positive data points give me confidence that our long-term strategy is working and our business model is delivering.

I would like to take some time now to review a few of the business highlights from the quarter. One of our key priorities is to improve our operations in Europe which comprise approximately half of our international sales. As many of you know, Europe has been a challenged area for us for many years. In January, we announced new leadership and revised commercial operations structure. Behind these changes and numerous detailed gross margin improvement plans, we are already showing steady improvement. However, we decided that we needed to move even more boldly to capitalize on the momentum and to reach the profitability levels required to really leverage our significant presence in this region.

Last month, we announced an accelerated approach to addressing this structural issues in the region. The European transformation plan will simplify our business and improve profitability on accelerated basis. By centralizing key decision making through an EPC structure and streamlining support functions, we will reduce the complexity of the business, speed up our time to market, and enable a more efficient and cost-effective FAP implementation. When completed in 2012, the plan will generate a $50 million to $60 million annual profitability improvement. In the meantime, we will see benefits in 2010 from the best practices and process improvement opportunities that accompanied the leadership changes implemented earlier this year. All these benefits will position our European business for profitable growth as we target a 10% or higher operating income margin sustainably in Europe. While the plan is still in the early stages, I'm pleased to report that initial reaction by our employees has been largely positive. We are making good progress on the detailed planning ahead. We look forward to keeping you updated as the program progresses.

Turning now to our operating segments. In our Home & Family group, I'm pleased to report that our major brands are gaining shares in all five global business units year-to-date. The new product innovation in this segment is robust, and our strategic investments in advertising and promotion, targeted marketing, and more effective merchandising are paying off. For example, our beauty and style GBU generated strong double digit sales growth this quarter and is on track to deliver its biggest year ever. This business has successfully expanded distribution and won significant additional listings with several major customers due to the strength of its innovation pipeline and its ability to create consumer demand. The latest success is the new Goody Simple Styles Collection which launched earlier this year. Simple Styles is a line of unique, easy to use hair accessories, such as the Spin Pin, that make it easy to achieve salon quality hairstyles at home with only a few simple steps. This launch was supported by full-scale integrated marketing including television advertising. As a result, the Spin Pin is currently the number one selling item in the category. Retailers are excited about the Goody brand because we are driving category growth across all channels.

Our baby and parenting GBU also saw share gains and a sequential improvement in core sales this quarter, driven by better performance in North America and strong growth in our emerging and Eastern European markets. We also saw significant mix benefit, as most of our innovation comes with higher margins. Looking to the remainder of the year, we expect baby and parenting to deliver positive core sales growth, with full-year results in line with the Company's overall sales target.

The back half of the year is going to be a busy one for the Home & Family segment. We have major new product launches at Calphalon, Rubbermaid Consumer, and Graco. These innovative product launches will be supported by integrated marketing plans and increased spending levels. As a category leader, or strong number two in most of their segments, Home & Family's brands are looked to for innovation by our retailers. We are delivering and have received enthusiastic support from our retail partners as a consequence. I think this business is positioned as well or better than at any point in recent history, and I'm very encouraged by the momentum we are seeing.

I will now turn to the Office Product segment. This group delivered solid core sales growth led by the technology GBU in markers and highlighters. Our selling for back to school has been encouraging, and we have several exciting new products on the shelf. Although it's too early at this point to predict exactly how the back to school season will play out. In our technology business, we recently held a big bang launch of our comprehensive interactive teaching technology system called MimioClassroom. This new and very well integrated suite of interactive teaching tools offers an affordable and easy to use solution for increasing student engagement, and enhancing classroom learning. The introduction at a recent industry show in Denver grew huge crowds. We believe this kind of enthusiastic reaction by potential users is a strong indicator of MimioClassroom's growth potential. We are continuing to invest strategically by building the Mimio sales force and the other infrastructure necessary to support a high rate of growth. Our markers and highlighters GBU also had a good quarter with mid-single digit core sales growth driven by new product innovations such as Expo Washable, the Sharpie Pen Grip, and Sharpie Pen Retractable. The newly launched Expo Washable dry erase markers are formulated with a special ink that is designed to easily wash off skin and most fabrics, solving one of the biggest frustrations of dry erase users.

As the number one, every day writing brand in the US, the Sharpie brand continues to build its brand equity and to grow its market share. The innovative Sharpie pen franchise continues to grow, and this fall, you should look for the launch of Sharpie Liquid Pencil. It features a unique liquid graphite formulation that lays down smooth like a pen, thus eliminating the problem of broken pencil leads, yet still erases like a pencil. We are continuing to support the Sharpie brand with impactful and creative advertising and promotion including television ads and social media.

Turning to Tools, Hardware, and Commercial Products, this group led total Company sales performance again this quarter with 6% core sales growth. They delivered growth in all four geographic regions, highlighted by strong double digit growth in Asia Pacific and Latin America. While we have yet to see a full blown recovery to pre-recession levels, we are seeing a significant rebound in many of our commercial and industrial markets around the world. We have also stepped up our brand-building investments in this segment. A significant portion of this is directed at further developing our market research and consumers insights capabilities,and this is paying off.

In our industrial products and services GBU, core sales grew double digits, with very healthy growth in both the band saw and hand tools platforms. The Q88 band saw blade, which was designed specifically for developing Asian markets, continues to drive industry-leading conversion rates. We have several new product launches scheduled for the back half of the year that will help to drive future top line growth. Our commercial products GBU was paced in the second quarter by strong growth in A-Pac and Latin America. Across the first half, core sales are up double digits. We expect that trend to continue into the back half. We are successfully expanding our key growth platforms including material handling, hygiene microfiber cleaning, and our suite of skin care products. By combining meaningful innovation with effective commercialization, we are winning additional distribution and increasing brand awareness and taking share.

I will conclude my opening remarks by reviewing our outlook for the rest of the year. Recall that when we last updated our outlook in April, we were hopeful that the back half would be helped by a stronger economy than the front half. It has now become more unlikely that we will see a meaningful improvement in the macroeconomic situation over the next six months. Point of sale velocity is mixed and uneven in a number of key markets particularly in North America and Western Europe. But the good news is we are still well positioned to achieve our annual targets even in the absence of an economic rebound. As I illustrated with some of the earlier examples, our innovation pipeline is robust. We are increasing our brand-building support in the second half to create our own momentum, not depending on the economy to provide the momentum for us. This is funded by strong first half gross margin expansion. Thanks to the strength of our strategic initiatives, we are gaining new distribution and taking share across our portfolio, allowing us to meet our sales growth objectives. We expect core sales growth in the second half to outperform the first half. Our solid performance year-to-date gives us confidence in our ability to achieve our full-year projections. We are on track to meet all of them.

So looking at our full-year 2010, we are taking up our guidance for core sales growth from mid -- excuse me -- to the mid-single digit range as compared to our earlier expectations of low to mid-single digit. This reflects our solid first half sales performance, as well as our confidence in the strength of our business for the remainder of the year. We are maintaining our forecast for 75 basis points to 100 basis points of gross margin expansion even in the face of inflationary pressure on source products. Finally, we are raising our EPS guidance for the year to the range of $1.40 to $1.50 to reflect our healthy, year-to-date performance. In summary, I'm very pleased with the our progress year-to-date, and I'm confident that we have the leverage within our control to deliver our financial commitments for the year. So with that, let me turn the call over to Juan to walk you through the financials in more detail. Juan?

Thank you, Mark. I will start with a review of the income statement on a normalized earning basis. Net sales for the quarter were $1.5 billion, as light decline versus the prior year. Core sales, which exclude the impact of foreign currency and product line exits, increased 1.5%. After adjusting for the previously reported first quarter prebuying by certain customers in anticipation of the April SAP go live at our Rubbermaid Commercial and Rubbermaid consumer business units, we estimate that core sales increased 3.8% this quarter. While the impact from foreign currency in the quarter was nominal, product line exits reduced sales by approximately 1.9%. In North America, we gained share and increased sales pace, and net sales were slightly positive after adjusting for the SAP prebuying. Our international business continued to gain momentum with reported net sales growth of 6%, or just over 9% excluding currency impact. On a year-to-date basis, we reported net sales of $2.8 billion, a 3.5% increase versus the year-ago period, while core sales increased 4.1%.

We generated gross margin of $587 million, or 39.3% of sales, an increase of over 200 basis points compared to the second quarter of 2009. Please note that although Q2 is typically our highest gross margin quarter for the year, the increase was a little higher than anticipated. The biggest contributors to the improvement were productivity gains resulting from a number of initiatives including project acceleration, higher overhead absorption, and favorable product mix across all three operating segments, mainly driven by product innovation. Consistent with our strategy, these positive factors offset significant input cost inflation in the quarter. Year-to-date, we generated gross margin of $1.1 billion, or 37.8% of sales, an increase of 160 basis points over the prior year. Productivity initiatives and favorable mix are driving our gross margin expansion.

On a normalized basis, SG&A expenses were $361 million or 24.1% of net sales compared with $329 million or 21.9% of net sales last year. Currency accounted for $1 million of the year-over-year increase, while brand-building and other strategic spending accounted for the majority of the remaining increase. Year-to-date, normalized SG&A expenses were $687 million or 24.5% of sales. We do anticipate increased strategic spending in the back half of the year aimed at supporting seasonal events and key product innovation. However, we still anticipate that our full-year SG&A will be at or below 25% of net sales. Operating income on a normalized basis was $226 million, or 15.1% of sales, a slight decrease versus last year, as margin expansion was fully offset by brand and volume building SG&A spend.

On a year-to-date basis, our normalized operating income was $372 million, or 13.3% of sales, versus 12.6% of sales last year. Interest expense for the quarter and year-to-date were $33 million and $65 million, respectively, representing a decrease versus the previous year of $7 million in the quarter and $6 million year-to-date. This improvement is reflective of higher interest rates offset by lower outstanding debt levels. Our continuing touch rate in the second quarter was 24.8% compared to 31.4% last year. The lower rate this quarter was primarily due to the favorable resolution of a foreign tax examination which resulted in a one-time tax benefit of $8.2 million or $0.03 per share. Excluding this nonrecurring benefit, the continuing tax rate for the quarter was 29.1%, which was slightly lower than normal due to a change in the geographic mix of earnings. Our full-year continuing tax rate is projected to be approximately 31%.

Our normalized EPS for the quarter came in at $0.51, an 8.5% increase over last year. This $0.51 excludes $0.05 of GAAP dilution from the convertible notes we issued in 2009. Please note that due to the call spread feature associated with these notes, the economic dilution would be only $0.02. We have included a schedule in our Q2, 2010 earnings call presentation located on our website that illustrates the methodology for calculating both the GAAP and the economic dilution from the convertible notes and associated hedge transactions. Normalized EPS also excludes a foreign exchange gain of $0.01 associated with the Company's Venezuelan operations. During the quarter, new regulations were introduced governing trade of foreign bonds in Venezuela, so the Company transitioned from using both the bond parallel rate which averaged about 7.2 bolivars per dollar in the quarter prior to the regulations to the sitme -- SITME rate of 5.3 bolivars per dollar. Because our Venezuelan operations are accounted for using hyperinflationary accounting, the increase in the US dollar value of the Venezuelan net assets resulting from the change to the more favorable exchange rate was recorded as a foreign exchange gain, which has been excluded from normalized earnings.

Normalized EPS also excludes $0.05 per share reflecting $21 million of project acceleration restructuring and related impairment charges and $1.6 million, or approximately $0.005 per share of restructuring-related costs associated with the European transformation plan. Restructuring charges included in the prior year quarter were $30 million, or $0.08 per share. On a cash flow front, we generated $154 million in operating cash flow during Q2. That's a 55% increase versus last year's $99 million, driven by increased earning and working capital improvement. CapEx for the quarter was approximately $38 million.

Now I will turn to our segment information. Home & Family net sales were $592 million, a 4.1% decrease versus last year. Core sales in this segment decreased 2.6%, ForEx contributed a positive 0.8%, and the impact of last year's product exits reduced sales by 2.3%. If Q2 results are adjusted for the impact of the SAP prebuy and Rubbermaid Consumer, core sales would have been approximately flat. Strong growth from beauty and style and culinary lifestyles was offset by tough comps in our baby and parenting business compared to last year's strong results. The baby business has generated sequential improvement for two quarters now, and we expect this GBU to generate year-over-year growth on a full-year basis. Home & Family operating income was $76 million, or 12.8% of sales, a decrease of 20 basis points in operating income margin as compared to last year. Total SG&A for this segment increased by about $1 million versus last year, due to higher brand-building and strategic SG&A spending.

In our Office Product segment, Q2 net sales were $484 million, a 2.7% decrease versus last year with product line exits reducing sales by a full 3% and a favorable ForEx of 2.8%. Core sales grew by 3.1%, primarily attributable to strong results from markers and highlighters, fine writing, and the technology business unit. Office Product operating income was $99 million, flat to last year, but operating margin of 20.6%, was better than the year-ago performance by 60 basis points. Increased brand-building and seasonal volume building strategic SG&A across the segment was more than offset by improved gross margins driven by better mix and productivity initiatives.

In our Tool, Hardware & Commercial Product segment, net sales were $421 million, a 7.8% improvement over last year. Once again with growth across all GBUs. Core sales increased 6.1%, and favorable ForEx increased sales by 1.7%. If adjusted for the SAP prebuy, core sales growth in Tools, Hardware & Commercial products would have been low double digits. International growth again this quarter, has been the primary driver of growth in this business segment with significant gains realized in Asia Pacific, Latin America and EMEA, which grew over 20% in total excluding currency. Operating income was $70 million. Operating margin declined 60 basis points to 16.7%, as productivity initiatives were partially offset by increased SG&A in support of strategic initiatives.

Our full-year 2010 outlook. As Mark mentioned earlier, on the strength of our year-to-date performance and our increased level of confidence for the remaining two quarters, we are raising our outlook for full-year core sales to mid-single digit growth. We anticipate a 1% to 2% decline from the impact of last year's product line exits and a modest negative impact from ForEx. We continue to expect gross margin to expand by 75 basis points to 100 basis points, although we now feel comfortable closer to the top of this range. We plan to offset the impact of expected input cost inflation through a combination of productivity, mix, and pricing. It is also important to note that we had a very strong gross margin performance year-to-date, and our gross margin expansion in the back half will be much lower than we saw in the first six months. We will still see improvements, to be sure, but as we begin to lap higher margin in the second half, we will also be facing higher costs on China-sourced products, increases in oceanic freight, and we will have less help from seasonal production levels than we saw in the first half. So lower gross margin expansion in the second half, but still on track to deliver our target of 75 basis points to 100 basis points on a full-year basis.

We expect to maintain SG&A spend for the full year at or below 25% of net sales on a normalized basis. Year-to-date, our spend has been below 25%, but our spending in the second half will be higher due to seasonal programs, a heavier calendar of product launches, and other volume building activities. We are spending to increase momentum based on a strong conviction that our strategies are working. Interest expense for the year is expected to decline approximately 5% compared to 2009 as lower net debt levels more than offset higher interest rates in the balance of the year. Our effective tax rate for the year is expected to be around 31%. We are raising our outlook for normalized EPS to between $1.40 and $1.50 per share. We anticipate 2010 pretax restructuring charges of between $60 million to $80 million, or $0.15 to $0.25 per share, and restructuring-related costs of approximately $15 million, or $0.03 to $0.05 per share, associated with the European transformation plan previously announced. Our normalized EPS outlook of $1.40 to $1.50 excludes these charges. We are maintaining our expectation for 2010 operating cash flow, which is projected to exceed $500 million after $70 million to $100 million in restructuring cash payments for the year. Capital expenditures are expected to total between $160 million and $170 million, resulting in free cash flow in excess of $300 million, available to address dividends and reduce outstanding debt.

In conclusion, we are encouraged by the evidence we are seeing in the marketplace that our strategies are working with customers and consumers as we continue to gain share to increase shelf space and gain new customers. While we expect some headwinds from the slow pace of the recovery in North America and Europe, our Latin America and Asian businesses continue to gain momentum, and we are investing behind it. Our results thus far this year represent good progress toward our goal, and we are feeling more confident about our ability to meet our 2010 targets and create value for our shareholders. So thank you, and with that, I will hand it back over to Mark for his final comments. Mark?

Thanks, Juan. Before we open it up to your questions, I want to reiterate that I'm feeling encouraged and confident about Newell Rubbermaid's business. There are certainly some challenges ahead of us. First, we have a lot of work to do to get our European profitability where it needs to be. Second, the economy remains difficult, and retailer and consumer confidence is still somewhat uncertain. Yet, we have demonstrated the ability to grow core sales and expand gross margins in this environment. So despite these challenges, I believe our Company is positioned to succeed.

We have made dramatic progress throughout the organization in our ability to develop consumer insights, introduce innovative new products, and bring these innovative new products to market in a commerciality successful way. The business wins we have talked about, increased distribution, the market share gains -- they are all evidence that our business model is working. Our actions demonstrate our confidence they are leveraging our gross margin expansion to grow the top line. We will be spending more in the next six months than in the first half, and more than a year ago to support our innovation and brand-building. I think we are positioned as well as we have ever been to succeed, and I'm excited about the opportunities ahead of us. Operator, at this point, I'd ask you to queue up the questions.

Thank you. (Operator Instructions) We will take our first question from Lauren Lieberman at Barclays Capital.

Good morning. Could you talk a little bit -- I know it's still early on back to school in terms of what takeaway -- consumption will be. But some of the retailers have been talking about expectations for a more promotional environment. So how much of that is retailers competing with each other versus trying to stimulate demand? What role do you think yourselves and the manufacturers will play in funding that promotional activity? Thanks.

We are seeing exactly what you just described. We are seeing a stronger interest and plans that support a high level of promotional activity. I think they are doing it for both reasons that you suggested. They are doing it to compete with each other as well as to try and stimulate getting consumers back in the store. Getting foot traffic up. Some of our -- we have participated in some of those promotions, but we also have a very strong both off-the-shelf program and a program in support of our new items that we launched. As we said earlier, it really is too early to tell how that's going. We won't get any valid point of sale data that will give us a good reading for another month or so.

What are you seeing in terms of commercial demand in office products at this point? Is there restocking in offices yet on pens and that sort of stuff?

Actually, the commercial part of the business has been the stronger part compared to retail. We are seeing a little bit more of a rebound in commercial that's led the retail consumer.

Okay. Great, thank you.

We will take our next question from Bill Chappell with SunTrust.

Good morning. Just first trying to understand your commentary on the gross margin. Just looking at last year, there didn't seem to be quite as much seasonality between 2Q, 3Q, and 4Q on gross margin. I understand there is some new -- be it freight or shipping or other things that are impacting it. But just trying to reconcile how big of a sequential drop you expect?

Let me start, and then I will ask Juan to add some color to it as well. First of all, I think you should not look at 2009 as indicative of our annual pattern because everybody knows 2009 was a pretty weird year. If you look at our historical pattern from '08, '07 and so on, Q2 usually is -- always is our strongest gross margin quarter and that was the case and will be the case again this year. Juan, you want to add a little commentary about what we see in the second half?

Sure. First, let me say that the first quarter -- in the first quarter, our inventories are typically low. In the second quarter, we build inventories, and that leads to more overhead absorption. This quarter was particularly strong -- the second quarter. In the second half, we expect to continue to see the productivity gains but now lower. And we are facing, as we indicated, some headwinds. We are particularly concerned about China where there is labor inflation and also ocean freights in the second half of the year. Now having said that, we still expect to have positive expansion. So we are still on track, and we said we feel comfortable at the top of the range. Still a positive story, just not as positive as the first half.

Got it. On top line, did you say -- do you expect all three businesses to have top line growth this year? Just trying to understand the Home & Family, and I think there was a original thought that Home & Family could do mid-single digit growth in the second half? Didn't know if you were still comfortable with that?

Let me talk a little bit about Home & Family. First of all, to answer your first question -- yes, we expect positive growth from all three of our business segments. Let me add some color about Home & Family because I suspect there are other questions regarding that business. So core sales in the first half were negative approximately one point. And what I'd tell you about this business is a couple of things especially compared to our other businesses. It takes a while to build momentum, especially in a flat economy. We have got some good momentum, and I will describe what some of those initiatives that are going to affect the second half are in a second. The other thing I will tell you is compared to our other two businesses, Office Products and Tools, Hardware & Commercial Products benefit more from sales outside the US, which we have talked about before. The growth rates ex-US and the economies ex-US are stronger. Home & Family business has about 85% of its business in North America, the other businesses have one third to one half of their business outside the US. So they get more benefit from where the economies are more robust. And second, Office Products and Tools, Hardware & Commercial products experienced bigger downturns in 2009. So frankly, there was more pent-up demand in the first half of this year in those businesses. Both of those businesses were helped a little bit by that.

Now, let me tell you why I'm really confident about our second half in Home & Family where we expect strong core sales growth. Culinary, I will start there. Culinary had a great year last year. They are not stopping behind what they did with Unison last year, they have got a great year two planned because we know there is still a lot of opportunity to create awareness and demand for our top of the line Unison. In addition to that, we have done total refreshes of our good and better lines. We consider Unison our best line. Our good and better lines include our stainless steel and contemporary non-stick products, and we are refreshing both of those and relaunching those. And third, we are increasing marketing spending there. Beauty and style, I already referenced in my comments, and I talked about how they are benefiting from distribution and benefiting from the new Simple Styles collection. They are showing very strong point of sales trends that we expect to continue, and again, have some increased marketing support in the second half.

Our decor business is testing new size and store smart machines. This gives an option for consumers who have a custom measurement but don't want to go all the way to a total custom blind. A lot of choices to go in the store, bring in their measurements, and have the associate put our product in the machine, hit a few buttons to put in the right measurements, walk away. And within a few minutes, they have got the custom cut that they need for their measurements. So we are testing these and expect -- we have already done our own testing. Now we are going to test them in-store, and think that this will provide the opportunity for a lot of upside in the future because this is really a terrific innovation.

In our Rubbermaid business, we are launching Reveal, which is our microfiber cleaning system. It offers great cleaning performance and also does that though with where you can use your own fluid, and you don't have to throw away the pad. You are able to wash the pad. Also, they are coming back and doing their third year of marketing support behind Easy Find Lids program in Rubbermaid food. So again, we are not launching these product initiatives and walking away from them. We are launching them and continuing to support them because there is a lot of opportunity to continue to build awareness and drive attraction to these products.

Baby and parenting. We have got really strong product launches in all three of our key regions -- North America, EMEA, and Japan. A lot of new strollers, some new car seats, and also improved monitors -- baby monitors. We have got -- there is still kind of fledgling programs, but they are gaining good traction in terms of expanding into Brazil and China. We are launching Aprica in North America. In all of our businesses throughout the Home & Family business, we have got a lot that's coming in the second half, and we are very confident that we are going to have a really good second half.

Great, and I assume that's why you are expecting a slightly higher tax rate? And 3Q and 4Q was just the mix more toward North America?

Yes, that would be right.

Perfect, thank you.

We will take our next question from Budd Bugatch at Raymond James.

Good morning, Mark, Juan, Nancy. This is actually Chad filling in for Bud. Congratulations first on a very solid quarter. Couple of questions. I think initially you had told us that you expected SG&A investment in the first half to be in the $40 million to $50 million range. Could you share with us what that ended up being? And maybe quantify what you are expecting for the second half?

Yes. We came in, I would say, more or less as we expected. There is some shifting -- always of programs. Some programs you end spending a little later. But we came just a little south of $50 million, $46 million.

$46 million, year-over-year increase.

Okay. And could you give us same number? The expected increase for the second half?

We don't want to quote a specific number, Chad. But we are, as I said, what you can expect is that we will spend both more than we did in the first half in total in the second half as well as more on a year-over-year basis. Obviously, some of that will depend on how the volumes progress. That's one of the reasons that we are confident that we can drive growth in the second half despite the fact that we are not getting help from the economy is that we put ourselves a little ahead of the game on gross margins in the first half. Gave ourselves a little more spending room, if you will, to make sure that we can invest and invest as we need to support these great innovations. We are really pleased with the innovations we have, and by gosh, we are going to make them succeed.

Let me summarize that for you with numbers just before we move on. You can expect, as we said, 25% of net sales, full-year. So we are going to spend to that level. You can expect it to come out about even in the second half.

Quarters, right?

Even across two quarters. Thanks, Mark.

As we think about it by segment, it sounds like there is a lot of new product activity in Home & Family. Will that have a little bit more of a waiting in that spend? Or how do we think about the segments?

No, I don't think so. While I didn't talk about the other businesses, they have got a lot of innovation going on as well. We have got several new platforms that we are continuing to support in our Rubbermaid Commercial business. We are supporting the MimioClassroom in a big way, and we are supporting that with a lot of additional salespeople and developing promotions and tests with school systems so we can get that product really going. We have got the innovations that I described in Sharpie. We have got a couple of innovations in Paper Mate. We are continuing to invest in the fixturing and furniture and fine writing. Our tools and hardware business has new reciprocating saws and a new hole saw later in the quarter. We really have initiatives that span all the businesses, and I think that the spending really will -- the increased spending in the second half will come from all three of the business segments.

If I could fit one other quick one in, you talked about some cost pressures in China and cost pressures in freight in the second half. How are you thinking about, specifically, commodity costs going into the second half? Will the headwind moderate? How do you expect that to play out?

On the second half, we are expecting that commodity costs will moderate somewhat, and in some cases, we have less exposure because of the way we buy. The important thing is that we still expect to offset any cost inflation with productivity and mix. We have a good track record of doing that. And we feel comfortable about the second half.

Sounds great. Congratulations again. Good luck to you in the second half of the year.

Thank you.

We will take our next question from Joe Altobello with Oppenheimer.

Hello. Good morning. First question, just wanted to go back to the more constructive sales outlook you have now for 2010.

I'm sorry, Joe, could you speak up a little bit? I'm having a hard time hearing you.

Sure. Can you hear me now?

Yes.

The more constructive sales outlook for 2010? How much of that was better than expected sales in the second quarter? How much of that is better visibility into your businesses in the back half of the year? Because you did say earlier in the call that you are not expecting any help from the economy, but now your top line outlook is better than it was three months ago.

Well, again. The top line outlook in total is about the same. We are expecting less help from the economy and more help from the momentum we are going to generate ourselves by driving core sales. I think that is the way to think about it. We have left our -- left the guidance probably still fairly broad in terms of top line. We are still calling it low to mid whereas we are confident that our core sales will be mid, and that's an increase versus our previous guidance for core sales. The other thing, from that core sales, you will have the negative impact of product line exits although that will moderate a little bit in the second half. And then of course, currency, we think switches from a help in the first half to a little bit of a hurt in the second half.

Let me add to that, that there is a fairly long list of initiatives. Mark ran through a lot of them. So far, our success rate has been fairly encouraging. The stuff that we have launched so far is doing well. With looking at that list and knowing that we are investing behind it, we feel comfortable. We feel good about it.

Okay. If I could go back to the earlier comment you made about a rebound in some of your commercial industrial markets around the world. It sounded like US was still trailing the rest of the world. Are you seeing any rebound in the US, or is that mostly international markets?

It's mostly international markets. Again, the US commercial industrial markets have also rebound a little bit, but not as much as international. International in total is leading the way. Everything is stronger internationally than it is in the US and in Western Europe. That's true pretty much for all segments.

Got it. Okay. Great, thanks.

And we will take our next question from Jason Gere at RBC Capital Markets.

Good morning. Just on the same line, thinking about international and Latin America. I know you did talk at your Analyst Day about the growth in emerging markets. I'm just wondering in particular, can you talk about future roles of joint ventures? I know you are doing one with Avon with the Rubbermaid business. I was wondering if you could put that into context? And then also, really as you look maybe three years out, the breakdown of your sales growth between international growth versus market share gains in North America in category growth there? Thanks.

Let me start with the second one first. What we are seeing this year and what we expect to see going forward for the foreseeable future is significantly stronger growth in our international markets. This year we are seeing close to 10% growth in those markets on a constant currency basis, and I think that is order magnitude what we hope to achieve in future years. That compares with the numbers that we have talked in total growth would imply that our US business would be growing low to mid-single digits. And in many cases, being category leaders, a lot of that will be share growth. It is not going to be category growth as much as it is going to be share growth. That's what we are counting on in the US markets.

To your question about -- .

Question about the JVs.

Question about the partnerships. What we are looking for is we are looking for these kinds of partnerships that enhance our ability. You mentioned Avon which is one of the ones. By the way, that's a test. I say that only to make sure everybody understands that that's not a long-term commitment yet. It would have to be one that was successful for both Avon and us for it to continue, and I'm not yet sure if it's strategic or tactical for Avon. Time will tell on that one. I would also tell you that's just one of several options we are looking at to try and expand our business on Rubbermaid food storage products in Brazil.

I'll reference another one that I have mentioned previously, and that is our 3M relationship with our Dymo business. 3M has a extensive sales force. I think close to -- well, I think it is close to 1,000 sales representatives that call on the electrical construction channel. They had much better coverage in that channel than we did, and we formed a partnership with them to sell our Dymo industrial labeling equipment through their sales force. It's off to a great start. So those are the kinds of examples that we are looking for is how can we leverage the strength of other noncompetitors in some of these other markets around the world to accelerate some of the great products that we have. Because frankly, our infrastructure outside the US is the thing that will take the longest to build up. When you can build it up through partnerships, you can usually go faster.

Just a follow on I guess within international, and I apologize if you did mention this earlier in the call. With Venezuela, can you talk about how the volume trends were during the quarter versus your expectations? And then in the back half of the year with the EPS impact, is it worse than you anticipated in line? If you can give color around that. Thanks.

Let me take a stab at that, Mark. First, on the second part of the question, the EPS impact is just as we expected as we disclosed earlier this year. So that's playing out as we expected. The change in the accounting and the currency, that was better than we anticipated. And we don't know if that's going to hold or not. We don't know what is going to happen in the market. In terms of trends, on a local currency basis, the business is growing and has been growing. But it has been difficult to access foreign exchange to buy raw materials. So we are beginning to be more concerned the second half the second half of the year. But again, this would be within the range that we disclosed in terms of EPS impact expectations.

Okay. Great. Thanks.

We will take our next question from Chris Ferrara at Bank of America.

Hello. Not to jump the gun on something that you are saying is coming in 2012, but the European restructuring savings. How much, if any of the savings, do you think could possibly hit 2011 since it seems like a lot of the work is being done there. And how do you think about what the reinvestment rate would be of something like that? Because obviously, $0.17 to $0.21 is a big proportion of your total EPS. Is that -- do you view that as way to pile a lot more strategic SG&A back behind the business?

Mark, let me take a stab at that. First, we are really happy with the progress that we are making in Europe, and we think that what we are doing is absolutely the right thing. We are in fact doing what other companies have done ahead of us. It's a proven model and gives us confidence. It's going to allow us to invest so that's a good point. Chris, it is going to allow us to invest to grow the business, and that's the part of what makes it more exciting really for us. That we are going to have a better, leaner structure with the ability to invest higher. In terms of the savings. Some of them, and mark mentioned that in his remarks, they start to come in slowly. Particularly the process improvement savings after the leadership changes that were made earlier in the year. Then by 2011, some of the benefits will begin to accrue some of the financial benefits. However, we think the full impact of the amount that we disclosed in the release will be after 2011. So think about 2012.

And just following up, do you think that a certain portion of that will be reinvested? Could you give us a rough idea of how you are thinking about that? What proportion of that savings would be reinvested?

I don't think we can give you a number on that today. What I would tell you today is that our investment rates today are not woefully short in terms of Europe, but we just haven't put the focus there. We haven't put the focus on investing in the right kinds of products and making investments there as aggressively as we do elsewhere because it's just not as profitable to do so. This is really a key to making sure that this is -- gets the focus that it deserves. But I don't have a specific number to give you in terms of reinvestment rate.

Okay. Then I guess we have talked a lot -- and you have talked a lot over the last year and more than that on increasing in strategic SG&A. This may be hard to pull together for the whole Company. But competitively, how do you think about your spending rate relative to that of your peers? Do you think that your, say for instance, your back half increase in strategic SG&A -- will that further widen the gap between what you are doing and what your competitors in all your individual categories are doing? Or do you actually see stepped-up innovation and stepped-up spending in some of the specific categories in which you compete from your competitors?

We're not really seeing that kind of stepped-up spending from our competitors. So I think this will continue to widen the gap. As we talked at Analyst Day, eventually we think that this 6% plus average that we spend on brand-building support today -- that we will go to 8%. We think that the additional strategic spending that we spend that's particularly critical to some of our commercial and industrial businesses that that will go from 6% to 7% or so. And therefore -- and in both cases, we think that what we are doing is widening the gap versus our competitors.

Great, thanks. One other small one. Is there a -- did you see a material geographic margin mix drag because the growth was so heavily weighted toward international?

What do you mean?

In other words, did you see margins get dragged down a little bit this quarter specifically because you grew faster in lower margin markets?

Okay. I got it. Margins actually were helped a little bit by the mix this quarter.

Most of our gross margins outside the US are pretty healthy. I think with the exception and sometimes what it takes to invest in a truly emerging market, most of our gross margins in our other regions around the world are healthy.

Thanks.

We will take our next question from Bill Schmitz with Deutsche Bank.

Two things. On the 15% operating margin target, is that changed with the European restructuring savings?

That's part of getting there.

That's part of -- because it wasn't there before though. Does that mean that things have changed? Or do you always have it -- ?

It wasn't disclosed to you before.

That's so wrong.

It was always in our plans.

Okay.

The 10% minimal operating margin was always there. While the European transformation plan that we announced wasn't always there, expectation we were going to have to find a way to get to 10% or better operating margins in Europe was always part of our ongoing plan. And that was part of getting to 15% as a Company.

Okay. No, that's fair. As you look at the strategic pending, is there a point in time where you are spending a at the right levels? I imagine you are still in catch-up mode. So will there be a point in time where that stabilizes, and maybe you can start to leverage some of the overhead costs a little better?

I think that will be the case. And by the way, I don't think we are in catch-up mode because we are, frankly, accelerating to go to widen the gap as was discussed a few moments ago. So we are getting maybe caught up with our potential for what we could and should be investing behind an innovation and consumer-focused brand-building model. But we are not behind any of our competitors. What we are doing is we are trying to widen the gap and make that a true competitive advantage. But yes, at some point in time, it levels off. It maintains as a percent of sales, and you use your sales lift to generate the marketing dollars you need to continue growing your top line. And you're able to do that with the same structural cost, and therefore, it becomes leveraged with the higher volume.

I would add to that Bill that it is hard to compare apples-to-apples in terms of spending levels. I think the way you look at it is one is increasing, so we are investing more in those -- in brand-building than we were in the past. You look at the effectiveness. I know that's hard also to quantify, but the fact that we are gaining share, more space with the customers. Insofar that we feel that we are winning that tells you that the effectiveness level of the spend is high.

Got you. When you talk about strategic spending, I assume you exclude the gross to net stuff? Is there any number you can give us on what the total brand-building spending was year-over-year? That $46 million -- I imagine the trade promotion stuff is not included in there?

No, trade promotion would not be included in there. I think we did remark earlier that of that increase in the first half, roughly -- about two thirds of that was spent on brand-building and other strategic. So those two buckets that I have talked about before. As you recall from Analyst Day, those two buckets together are a little over half of our total SG&A spend.

How about in terms of the [promote]? Was there a big uptick in gross to net? In the first half of the year or even in the quarter? Because I know, Lauren asked that question, which is happening everywhere where the trade is asking for more promo and less ad dollars?

Our net pricing is up slightly, Bill, so the answer to that would be no.

And then, one last one. [Nance Ackra] talked about some changes in car seat laws in Brazil and China. Where do you stand in those markets? Are you positioned to take advantage of some of those changes?

I think we are getting ourselves positioned. I wish we were a little bit further ahead of that game, but I think we're positioned. We have entered into a distribution arrangement in Brazil, and we like the partner that we chosen. And we like the initial results. That, of course, is the first one so they have a law. They haven't started enforcing the law yet. Until they start enforcing it, our experience looking back many, many years to when car seat laws went in to effect in other parts of the world, there is usually lag between when they go into effect, when they are enforced, and when consumers really say, okay, I have got to go do this. There is a little lag there, but the law exists. And some day, they will enforce it. We now are partnered up with the distributor partner, and I think we will be able to catch one of the early trains there.

China still doesn't have such a law. There is nothing pending. There has been talk about one coming. But still we haven't it. So they are still further behind in terms of that. Yet we are about at the same place there as we are in Brazil. In other words, we are developing distributor partners and starting to get products that are compliant with their applicable safety laws on the store shelf there.

Got you. Does the Graco brand mean anything in Brazil or China?

Not yet because it hasn't really existed before.

Thanks so much.

We will take our last question today from Linda Bolton-Weiser with Caris & Company.

Hello. Can you talk a little bit more about the retail environment? Specifically about how retailers are thinking about inventory levels? Are they in anticipation of slowdown? Are they actually trying to order less than consumption? Or are they ordering in line with consumption? Can you just comment on that? And any differences among any channels or categories of products?

I think they see inventory levels that they have today as roughly where they want them to be. They took the same actions, I think, that we took and many others took over the 2008 and 2009 crisis to get inventories to a lower level -- lower sustainable level. Where they are now they probably like them. I would expect them to try and order consistent with consumption. As they see the [PUS] coming in, they will reorder. But I don't think they will either get ahead of themselves nor do I anticipate that they will try to pull back.

I think in this environment everybody is watching their inventory more carefully. Retailers are. We are. Everybody is being careful.

Okay. And just as you think about your businesses. You're giving less examples of growth areas where you have got innovation and new products. Is there -- not to rain on that parade, but is there any product category or areas where there is declines? And you're having trouble seeing the way to innovation? And could there be any possible still things that will become problems later on that you still might have to pare out later? Or are you really sure of what you have at this point?

We feel very good about our portfolio in total. As we described at Analyst Day, there is always fine-tuning that we should and will do. But by in large, we like the portfolio where it is. We are experience -- we see opportunities to grow in all of our businesses, and the reason that we took our guidance up for core growth in the second half is because of the strength of that innovation. And recall, that's up from 4% in the first half. Sometimes, it's hard to see through the numbers with some of the other moving parts. But we had roughly 4% core growth in the first half, and we have now told you that we expect it to be stronger in the second half and stronger on the heels of the innovation. And it's broad-based.

Okay. Can you remind us which quarter the most unfavorable comparison is for the raw materials?

The raw materials -- the biggest impact was from resin in the quarter.

Right. But is the comparison the worst? Was it in second quarter or will it be in third quarter?

The worst will be in -- what we expect is the worst will be in the second quarter. So far, it has been the highest raw material inflation that we have experienced. We hope and expect it will be the worst for the year.

Okay. Great. Thank you very much.

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

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