諾威品牌 (NWL) 2012 Q2 法說會逐字稿

Good morning, and welcome to Newell Rubbermaid's second-quarter 2012 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. As a reminder, today's conference is being recorded.

A live webcast of this call is available at NewellRubbermaid.com on the Investor Relations homepage under Events and Presentations. A slide presentation is also available for download. I will now turn the call over to Nancy O'Donnell, Vice President of Investor Relations. Miss O'Donnell, you may begin.

Thank you and good morning. Welcome to the Newell Rubbermaid second quarter earnings call. With me today is Mike Polk, President and Chief Executive Officer, and Juan Figuereo, Chief Financial Officer.

Let me remind you that as we conduct this call we will be making forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are subject to various risks and uncertainties, many of which could cause actual results to differ materially from such forward-looking statements. A discussion of these factors may be found in the Company's annual report on Form 10-K and in today's earnings release.

Also, our press release and this call contain non-GAAP financial measures that include, but are not limited to, normalized operating income, operating margin and normalized earnings per share. We believe that these measures are important indicators of our operations and they are provided to facilitate meaningful year-over-year comparisons. A reconciliation of those measures to the most directly comparable GAAP measures is included in the Investor Relations area of our website as well as in our filings with the SEC. With that let me turn it over to Mike.

Thank you, Nancy; good morning, everyone, and thanks for joining our call. This morning we reported a solid set of Q2 results with good underlying growth trends across most of our portfolio, a 40 basis point increase in normalized operating margin driven by a 50 basis point gross margin increase, an 11% increase in operating cash flow and $0.47 of normalized EPS, $0.02 ahead of consensus and 4.4% ahead of year ago.

Through the first six months core sales increased 2.5%, right in the middle of our 2% to 3% full-year guidance range. Normalized operating margins expanded 20 basis points, which is at the high end of our full-year guidance range of up to 20 basis points. Normalized EPS was $0.80, up 8.1% versus prior year and above the high end of our full-year guidance range of 3% to 6%. And operating cash flow increased over $70 million versus prior year and is on track to deliver in our full-year guidance range of $550 million to $600 million. So a pretty good set of numbers at the halfway point in the year.

Importantly, at the same time that we are driving delivery we are driving change. During the first half of 2012 we deployed a new simplified group in GBU structure, launched our new customer development organization, executed the European SAP/EPC transition, closed a significant Rubbermaid consumer factory, initiated a new indirect procurement partnership with IBM, and gained traction on our working capital reduction program.

I am proud of the team's effort. We are driving the business towards more consistent performance and we delivered in a very tough environment. Perhaps as importantly, they believe in our new vision and strategy and our resolved to strengthen our Company and accelerate performance as we move into 2013 and beyond. There is still much to do, but we are on track to where I hoped we would be one year into my time at Newell Rubbermaid.

As you know from our press release, we have reaffirmed our full-year guidance. Before exploring the factors that could influence full-year delivery, let me walk through the highlight reel for Q2 in the first half.

As you know, Q2 was a complicated quarter as a result of SAP implementation in EMEA. There were no big surprises in the SAP transition and, in fact, I was very pleased with the execution of the program. To protect shipments through the Q2 start-up window we pulled about $28 million in net sales from Q2 into Q1. This pre-buy in Q1 and then the deliberate start-up of our order management systems in Q2 limited our merchandising activity in the quarter resulting in less sales than would otherwise have been delivered in a normal quarter.

Adjusting for the impact of the SAP pre-buy but reflecting the absence of the merchandising in EMEA, Q2 core sales were up 2.3%. In Q2 our professional segment had another very good quarter with core sales growth of 4.6% excluding the impact of the SAP shift. For the first half core sales in the Professional segment rose 5.3% with all four global business units contributing to the increase.

The 5.3% core growth in Professional was achieved against a full year of core growth rate in 2011 of nearly 6%. So strong momentum and good growth on growth as we invest Project Renewal savings into the Professional segment selling systems in the fast-growing emerging markets.

Our Consumer segment has had a tougher start to the year. In Q2 core sales excluding the SAP timing shift were nearly flat, declining 3/10 of a percent. This is an improvement versus Q1. Despite good results in our Writing & Creative Expression GBU, we continued to have challenges in our Decor business and an increasingly difficult macro environment impacted our European Fine Writing brands.

While our Decor operational issues are largely resolved as we exit Q2 the recovery has been tempered by a change in corporate strategy at our third largest customer in this category, J.C. Penney. JCP's new everyday low price approach has adversely impacted our highly merchandising sensitive Decor business and we now expect this impact to persist until our partner's new strategic vision is fully implemented in our categories.

These two factors, European macro impact on Fine Writing and the JCP challenge, drove the consumer segment decline in the first half and will put pressure on our consumer results through the second half of 2012. These impacts are reflected in our full-year guidance at current but not worsening levels.

Our Baby & Parenting segment delivered another strong quarter in Q2 with core sales growth of 7.3% excluding the SAP timing shift. First-half core sales grew 13%. We continue to make progress on Baby & Parenting with improved POS in Graco in North America and sustained strong momentum on Aprica in Japan. While we still have work to do we are encouraged by these first-half outcomes and are increasingly confident in our ability to deliver a good set of results in 2012.

In total our first-half core sales growth was 2.5% and is slightly ahead of where we expected to be at this point in the year. Core sales grew in six of our nine global business units, three of those six over 5% and two of those three over 10%. Our top 14 brands, which represent about 85% of our revenue, grew core sales nearly 5% with standout performance in Aprica, Paper Mate, Lenox, Graco, Irwin and Sharpie.

We continue to deliver strong emerging market core growth of about 14% with 13% core growth in Latin America and nearly 18% core growth in Asia Pacific in the first half. Core sales in the developed world grew about 1% with North American core growth of 2% partially offset by an EMEA core sales decline of a little less than 6% in the first half. We estimate EMEA's underlying decline to be about 4% when adjusting for the SAP transition related to the absence of merchandising in the February through May period.

Our Win Bigger categories grew core sales nearly 4%, our Incubate For Growth categories grew over 13% while our Win Where We Are categories declined about 4% driven entirely by Decor.

Underpinning our performance are some notable achievements. Our Industrial Products & Service business continued to drive strong core sales growth both domestically and abroad. After adjusting for SAP Industrial Products & Services delivered their 10th consecutive quarter of double-digit core growth. Year-to-date our Lenox brand core growth was well over 10%.

The Irwin brand delivered its seventh consecutive quarter of greater than 5% core sales growth. We're seeing strong results from our Irwinization marketing and merchandising initiatives. Year to date Irwin core growth was nearly 10%.

In the US new innovations on Graco are resonating with consumers. The Graco Fast Action and Ready To Grow travel systems are driving significant market share gains. Graco's first-half growth was over 10%.

In Japan Aprica's success story continues. We are investing to sustain the momentum in the business as we anniversary the strong year-ago growth and competitors respond to Aprica's significant share gains. Aprica has been our fastest-growing brand in the first half delivering strong double-digit core growth.

In Asia our Fine Writing business continues to perform strongly. In Q2 we launched Parker Ingenuity with Parker 5th Technology in China while sustaining terrific growth across the balance of Asia. Parker delivered strong double-digit core growth in the first half in Asia.

Our Writing & Creative Expression brands are driving category growth in the US, outpacing the total category growth rates by more than two to one. Paper Mate has now taken the number two share position in the total Writing category in the US as a result of the terrific success of Paper Mate InkJoy. Globally both Sharpie and Paper Mate delivered over 5% core growth in the first half.

As I mentioned earlier, we're also making good progress in our change agenda. In Q2 we successfully went live on SAP in Europe and are operating in an EPC model as of early April. Our teams have managed the transition extremely well and we expect to be back to normal merchandising levels in the back half of the year.

In the US we continue to build out our new customer development organization. We've seen some early wins, most notably an Office Depot Rubbermaid partnership under which Rubbermaid storage products will be sold nationwide at Office Depot retail stores and online.

On the cost side, our Project Renewal efforts are on track to deliver $90 million to $100 million on savings by the first half of 2013. In Q2 we rationalized capacity by closing a significant Rubbermaid consumer facility. We are also exiting distribution center consolidations in Rubbermaid Consumer and Rubbermaid Commercial. The benefits from these efforts will start flowing through the P&L in Q3.

Beyond Project Renewal we are starting to see the early read through of savings from our initiative to reduce indirect procurement spend. Our goal is to reduce indirect procurement costs by $50 million in the US by the end of 2013 and we have made significant progress against that goal in the first half.

We've also identified $100 million in working capital savings over the next three years. SAP is a key enabler to better working capital management and with over 80% of our business now on SAP, I feel confident that we have the tools to work more efficiently and free up trapped cash for more productive uses.

On balance we have good visibility and have made progress on costs and we begin -- we began to reinvest some of these benefits into our selling systems on our Win Bigger categories in Latin America in Q2. We expect the pace of reinvestment to pick up in the second half of the year as we develop new eBrand Building digital assets on a number of key businesses.

So, we've delivered good first-half results and I hope you feel as good as we do that we are getting the business into a more consistent and predictable cadence of delivery. Let me now have make a few comments on the balance of the year.

As a reminder, we've guided full-year core sales to increase between 2% to 3%; normalized operating margin to increase up to 20 basis points; normalized EPS to increase 3% to 6% or in the $1.63 to $1.69 range; and operating cash flow between $550 million and $600 million.

As I said, given our first-half results, we are reaffirming our full-year guidance. There are four key factors that could influence where we fall in our guidance range. The first factor is our performance on our Writing & Creative Expression brands through the back-to-school season. We are very well positioned for an excellent back-to-school season with a stronger Q2 sell-in than last year, better merchandising placements and good US marketshare momentum on Paper Mate, Sharpie and Expo.

The customer development teams and our retail partners have put together a good set of plans. Of course we need the consumer to convert our merchandising placements to purchase and then we need our customers to place replenishment orders for our business to see the revenue benefit in the P&L.

Remember, the back-to-school formula for success is strong sell-in plus great sell-through plus strong replenishment, that equals a great Q2 and great Q3 in Writing & Creative Expression. If any of those variables are off the season is off.

Sell-in Q2 was stronger than prior year and the merchandising placements are stronger as well. So far 1.5 boxes checked out of three. We need to see sell-through and replenishment. Our guidance assumes we check all three boxes. The merchandising season is just kicking in to high gear so we will find out soon enough.

The second factor influencing full-year delivery is the continued recovery of our Decor business and the speed with which JCP migrates their sets to their new merchandising vision. Our full-year guidance assumes positive resolution of our operational issues in Q3 and we are largely there with all of our service metrics back to standard as we speak. We have assumed in our guidance that the adverse impact of the changes at JCP persist until they activate their new strategy in our categories next year.

The third factor is the macroeconomic environment in Europe. Conditions have worsened through Q2 and were a little more difficult than we anticipated when we most recently spoke in May at the Analyst Day. The most significant impact is in our European Fine Writing business where traditional stationery stores, which make up nearly 40% of our Fine Writing business, are under real pressure. We expect the European pressure on Fine Writing to continue into the second half of the year, but to not worsen.

The fourth factor that could influence where we fall on the guidance range is foreign exchange. Through midyear we've experienced about a penny of adverse EPS impact from ForEx, about $0.02 batter than what we originally anticipated. Our guidance assumes the last few days' rates hold for the balance of the year.

If they do EPS will be adversely impacted by about $0.02 more in the second half of the year than what we were anticipating when we previously guided. So rather than flowing about $0.03 negative in the first half and about $0.02 negative in the second half, the ForEx impact was about $0.01 negative in the first half and will be about $0.04 negative in the second half with a skew to Q3.

Importantly, when the ForEx pressure just mentioned is coupled with the reversal of our Q3 2011 management incentive plan true-up of about $0.04, which I have mentioned in our previous earnings calls, our ability to deliver Q3 2012 EPS growth versus prior year becomes really difficult.

All that said we have a number of positive things happening in the business. And despite the challenges and uncertainties articulated, we continue to have good visibility to cost and earnings and continue to suggest that the middle of all four of our full-year guidance ranges reflect our balanced view of what we can achieve in 2011. With that let me hand over to Juan for a more detailed look at the numbers.

Thanks, Mike, and good morning, everyone. Net sales for the quarter were $1.5 billion, a 1.9% decrease versus the prior year. Core sales, which exclude the impact of foreign currency translation, increased 0.4% or a 2.3% increase after adjusting for the EMEA SAP pre-buy. In North America net sales grew 2.2% and core sales grew 2.5% led by very strong growth in our Professional and Baby & Parenting segments.

The Consumer segment's North American core sales were essentially flat in the quarter as challenges in the Decor business were offset by stronger back-to-school sell-in. Outside North America net sales decreased 13.1% or 5.4% excluding ForEx.

Both Latin America and APAC, which, as you know, are priority growth markets for us, delivered another quarter of double-digit core sales growth with Latin America increasing 14.9% and APAC increasing 12%. In EMEA core sales declined 20.9%, mainly due to the SAP implementation including the previously mentioned pre-buy, plus the temporary halt in merchandising efforts related to the (inaudible) period all exacerbated by the impact of a worsening tough macro environment in Western Europe.

Gross margin was 38.3%, representing a 50 basis point improvement over the prior year ago quarter. Pricing and productivity more than offset a 90 basis point negative impact from input cost inflation. Normalized SG&A expense decreased $4 million compared with the prior year and, on a percentage of sales basis, increased 20 basis points to 24.7%. A stronger dollar drove $10 million of the expense decrease.

On a constant currency basis SG&A spending was up $6 million, all driven by strategic spend which rose 40 basis points as a percentage of sales. The increased spending focused on demand creation activities in focused growth areas. Sales force expansion in the Newell Professional segment where we are showing continued strong growth trends was one of those focus areas. And in our Consumer segment support for the launch of InkJoy and geographic expansion in the Writing business was another.

Reported operating margin of 12.2% compares to 12.7% in the prior year. The decline is due to increased restructuring and related costs arising from Project Renewal which started flowing through the P&L in Q4 of 2011. Operating margin for the quarter on a normalized basis increased 40 basis points to 13.7% driven by gross margin expansion.

Interest expense for the quarter was $20.5 million compared with $21.3 million in the previous year, which was slightly higher than anticipated due to the timing of debt issuance related to the redemption of $437 million in outstanding junior convertible subordinated debentures related to our 5.25% quarterly income preferred securities, most often referred to as QUIPS.

During the quarter we issued $500 million of medium-term notes in two tranches, $250 million of 2% three-year notes and another $250 million of 4% 10-year notes. We also initiated the redemption of the QUIPS in Q2 and completed this transaction in early Q3. This refinancing will improve our cost of borrowing over the term of the notes and eliminate any potential earnings dilution associated with the convertible feature of these securities.

We anticipate annualized interest savings of approximately $0.02 per diluted share as a result of this transaction. Due to the negative carry costs during the notice period, the benefit in 2012 is expected to be less than $0.01 per share.

The reported tax rate for the quarter of 32% represents a 17 percentage point increase over the prior year, the increase primarily relates to discrete items recorded in each period. In the current quarter we recorded $11 million in tax charges for the impact the European transformation plan had on our tax reserves and valuation allowances. We expect to recognize approximately $7 million in additional related tax charges during the back half of the year.

As you may recall, the last year rate includes a $0.07 per diluted share tax benefit related to the reversal of tax contingencies due to the expiration of various worldwide statutes of limitation. Our normalized tax rate in the second quarter was 25.8% compared with 26% in the prior year quarter. Operating cash flow in the quarter was $103.1 million or a $10.3 million improvement over the prior year quarter mainly due to lower non-operating working capital.

We are making good progress on our working capital initiatives with a notable three days reduction in inventories versus the prior year. Our progress against payables will begin to show in our DPO in the second half as there are some temporary items that are impacting progress in Q2.

We returned $54 million to shareholders in the form of $29.1 million in dividends and $24.9 million paid for the repurchase of 1.4 million shares. We have repurchased 5.7 million shares at an aggregate cost of $87.4 million since inception of the program in the third quarter of 2011.

Turning now to our 2012 outlook, as Mike covered earlier, we are reaffirming our full-year guidance. We expect full-year core sales growth of 2% to 3%. With the dollars strengthening against currencies we are now increasing the expected foreign currency translation impact on sales for the year to an estimated negative 2%. This assumes average exchange rates for the balance of the year remained around recent spot rates.

We anticipate normalized operating margin to expand by up to 20 basis points. This guidance reflects our expectation that we will generate gross margin improvements as productivity, improved product mix and pricing more than offset inflation and that we increase strategic SG&A spend to support our growth game plan.

We expect interest expense to come in slightly below $80 million with debt reduction to occur in the second half of the year. Our normalized full-year effective tax rate for 2012 is projected to be around 26%. We expect 2012 normalized earnings per diluted share between $1.63 and $1.69 or about 3% to 6% growth.

This EPS guidance excludes between $110 million and $130 million or $0.27 to $0.32 per diluted share of planned restructuring and restructuring related costs associated with the European transformation plan and Project Renewal, as well as $18 million or $0.06 per diluted share related to the 2012 tax charges expected to be recorded for the European transformation plan.

Although we still expect about $0.05 per share of unfavorable foreign exchange, we now believe the timing of that impact will be largely realized in the back half of the year.

Operating cash flow is expected to be between $550 million and $600 million for the full year including $110 million to $120 million in restructuring and restructuring related cash payments. Capital expenditures are projected at $200 million to $225 million.

In summary, with Q2 behind us, in spite of tougher macros in Western Europe, our financial outlook on the year remained essentially unchanged. As is always the case in business, we've had some puts and takes, we are more challenged in certain areas than we initially expected, namely in foreign exchange in Europe due to the macro issues and in our Decor business. But we also have good momentum in other parts of the portfolio including Baby and in the majority of our Professional business.

So at this point we believe the risks and opportunities are relatively even balanced. And if things play out the way we see them today, that should put us somewhere in the middle of our guidance metrics for the full year. So in conclusion, with our strategy in the early days but gaining momentum, our first-half results give us confidence in our ability to deliver on our full-year guidance. With that I will turn it back over to Mike.

Thanks, Juan. It's hard for me to really believe that a year has passed since I started in this role. Time has just really flown by. We packed a lot in and I think there's a lot to be proud of.

Despite a very tough environment, operational issues on Baby and Decor, SAP implementation in Europe and a change associated with Project renewal, for the past 12 months we have delivered 3% core sales growth, expanded normalized operating margin by 50 basis points and increased normalized EPS by 10.7%.

In the same time frame we've strengthened the balance sheet by paying down $500 million of bond maturities, increased our access to credit at attractive terms through a new $800 million revolving credit facility, improved the capital structure of the Company by refinancing our QUIPS at more favorable rates and deployed a more tax efficient business model into Europe.

We also increased the dividend payout by nearly 53% versus the prior 12 months and returned an additional $87 million to shareholders through our new $300 million three-year share repurchase authorization. These outcomes are a credit to the team and demonstrate that we are capable of delivering results, driving change and creating value for our shareholders.

All that said, my focus is on the future. I am clear today that the possibilities for Newell Rubbermaid are greater than I imagined when I first took the role last July. My confidence in our ability to play for the upside strengthens with every hurdle we clear. I don't expect an easy ride given the state of the global economy and, as a result, will continue to assume and build plans that contemplate tough macroeconomic times ahead.

Of course the big picture for Newell stretches well beyond macro pressures or the quarter to quarter issues in the business. The strategic opportunity which is captured in the growth game plan is significant and the ambition to build a larger, faster growing, more global, more profitable Newell Rubbermaid is there for the taking.

There is no doubt we are on our way, but there is much more to do. We've only just begun to build out our geographic footprint to the faster growing emerging markets. We are only getting started on the exciting possibilities of eCommerce and eBrand Building. We have only had our new customer development teams in place for a few months and they are just beginning to make an impact.

And our brands and innovations are hungry for support. When we get the support on our businesses at the right level and in the right way we see great results. So a good start for sure, but much more opportunity ahead of us than behind us.

The growth game plan has been cascaded deep into our organization and will shape our agenda over the next number of years. It's about activating a clear set of portfolio choices, reigniting the entrepreneurialism that is in the heart of every one of our brands, and building two towering capabilities of equal stature -- one focused on the development of our growth ideas and the other focused on execution in creating commercial value from those ideas in the marketplace.

To activate this growth agenda we need to continue to release the trapped capacity for growth. We've taken the first step to simplifying our organization with Project Renewal, but we need to continue to drive out costs that do not create demand. There is a significant opportunity here and where we have attractive cost reduction ideas that yield a good return and enable more of our resources to be invested in growth and strengthened capabilities we are going to take them.

You've seen in our (inaudible) plans many of those ideas over the last 12 months and there will be more to share. Releasing the trapped capacity for growth is inextricably linked to our opportunity to accelerate results and drive shareholder returns to higher levels.

As I hope you can tell, I'm excited about playing for the upside at Newell. We've laid out a clear and aggressive strategy, now it's all about decisive leadership, strengthened execution and the deployment of the right resources to drive the growth game plan into action. With that let me open it up to questions.

Before we get started on the questions I'm going to ask for your assistance. We are asking you to limit yourself to one question and one follow-up so that way we can get to everyone and hopefully still finish up in a reasonable time period. So, operator, we will take the first question.

(Operator Instructions). Bill Schmitz, Deutsche Bank.

My first question, can you just give us some color on what you think the SG&A ratio for the year is as a percentage of sales?

We said we may end up anywhere between 25.5% and 26%. I think 26% is what we said the last time we talked and we are sort of right in line with that through the first half. I think our SG&A ratio in the first half is at about 25.9%.

Okay, great. And then just a follow-up, kind of unrelated. But is there any change -- have you seen any change in either sell-in or sell-through patterns towards the end of the quarter or early into July?

We had a little bit stronger sell-in to back-to-school on Writing & Creative Expression than we did last year. One of our customers made the choice to take their back-to-school -- a portion of their back-to-school inventories earlier than we did last year.

Okay, and then no change in sell-through?

It's too early to know on back-to-school. I mean, we're just really kicking in now. Look, I think the headlines here are we've got better sell-in than we had last year, we've got better share momentum on the three big brands that will get merchandised heavily in back-to-school season, which is Sharpie, Paper Mate and Expo.

In fact, our Writing shares as a percent of the total Writing market are up nearly 150 basis points in the first half of the year. And Paper Mate went from being the number three brand in the total Writing category to the number two brand in the total Writing category in the first half. And we have that momentum sustained right through, right through the month of June the last share numbers I saw.

So we are coming into back-to-school and we have better merchandising placements, higher displays, et cetera. So we are better positioned. But, Bill, as you know, it is about converting all that stuff that you do up-front to purchase from the consumer and then it is about our retailers' point of view on their inventory positions as to whether we get replenishment orders after the back-to-school season. So there is a lot to unfold over the next three or four weeks -- 5 weeks.

Great, thank you very much.

John Faucher, JPMorgan.

Mike, I think you said that the impact of the lower merchandising on the European business was 2%, right? So it was down 4%, would have been sort of down 2% without the extra merchandising. Can you talk a little bit about how you are layering the normal level of merchandising back in?

And sort of following up on Bill's question, are you seeing any difference in the cadence over time in terms of European demand either on an underlying basis sort of either decelerating or accelerating from that standpoint? Thanks.

Yes, thanks, John. It's a good question. Remember what I -- I think I've said this a couple times along the way. We are not going to try to make up the lost merchandising from the first half of the year in the second half of the year. I don't want to do that because I worry about the competitive response to increased frequency of merchandising or greater depth of price points in the second half of the year.

So rather than have that money flip into the -- the merchandising money flip into the back half of the year to increase frequency, we are just going to get back into our normal rhythm. And we are -- I think we will be fine in terms of being back in that rhythm -- we are right now and we will through the third quarter and into the fourth.

Got it. And then any change in cadence over the course of the quarter or into the third quarter in Europe or is it just all pretty much steady state?

The only underlying -- look, there is a lot of pressure in Europe. And as you recall, our underlying declines are around 3% to 3.5% as we exited last year and into the first quarter. Part of the issue in the optics of our numbers in Q2 has to do with the SAP pull forward. So I wouldn't overreact to the double-digit decline in EMEA that you see. So if you adjust out for that it is about an 8% decline in the quarter.

A portion of that has to do with the lack of merchandising -- it's not a small amount, so roughly in line with what you said, about 2 percentage points. We have some timing things that happened at the end of the quarter. We didn't ship the last three days of Q2 in Europe as part of our SAP transition in the first hard close in an EPC environment. So part of that is artificially -- has artificially pressured our results in Q2 as well in EMEA.

But the fact is that we have some underlying issues in Europe related to the macros and they are most acute in our Fine Writing business. And what's interesting about it is it's the smaller stores, so that represents probably about 40% of our revenue in Europe, and it's actually the price points that are less than $100 where we are having the issues.

And it makes intuitive sense if you think about it. If you are a wealthy person in Europe you have money to spend. So if you want to buy a $250 or $300 pen you can and our business looks fine in that segment. Our under $100 offerings are sort of tweeners is the best way to describe it between everyday Writing instruments and prestige Writing instruments. And that is where the pressure is. And those tend to get sold at some of the smaller stationery stores which represent about 40% of our business.

That piece of our business is really feeling the heat. And that accelerated in the first half of the year. And we've in our guidance range contemplated that for the back half, but that is something we need to figure out because at the moment, despite really strong double-digit growth in Asia on our prestige Fine Writing business, we are losing it all, giving it all back in Europe on this sort of mid-tier segment that is under pressure.

And that is a real issue. That is going to cause our roughly 3.5% underlying performance to be worse as it was towards the second half of Q2. And we made the assumption that that carries forward with us into the second half of the year.

Okay, thank you.

Chris Ferrara, Bank of America.

So I wanted to move to the US and very recently we have heard a lot of discretionary, semi-discretionary companies talk about this cadence that Bill and John were referencing except more in the US, right, falling off and you have seen demand destruction.

I noticed in the four things you named for what would affect where you landed in your guidance, US wasn't one of them or US macro wasn't one of them. And frankly your US macro -- your US growth accelerated this quarter, right. So exclusive a back-to-school -- like I get back-to-school sell-in was good, but generally your categories, your businesses outside of back-to-school, what are you seeing in the US?

Look, part of our professional momentum is driven out of excellent execution on industrial Products & Services and the Irwin brand, so Lenox and Irwin in the US. And so we have seen strengthened momentum there. And we have continued momentum on Rubbermaid Medical, good double-digit growth, I really didn't call that out.

And then of course I think the positive data in the second quarter -- the most positive data in the US in the second quarter has got to be our Baby performance where we are seeing very good consumption gains and share gains. Despite all the headlines you read -- I don't know if you saw the report this morning on birthrates, but some negative report -- negative report on birthrates in the US suggesting they're at the lowest levels in 25 years.

So despite that -- and you know, honestly, some of these macro issues I tend to -- the European thing is really acute, but things like the birthrate data, that is just sort of the cost of doing business. So your brands has got to carry the day, you have to have better innovations and we're starting to see that.

So I think the US -- I'm pleased with US results. We need the US to perform well and we are getting that from Baby and from Professional. We have got some challenges in the consumer segment aside from our Writing & Creative businesses -- Creative Expression businesses. But, and that's largely in Decor. But I can't say that I'm disappointed, I'm actually pleased and I think part of this is a reflection of the strength of our brands and part of it is the impact -- the early impact of the CDO.

Great. And I guess as an unrelated follow-up, I get like -- so obviously currency, you are offsetting that drag. Can you talk about commodities? How has your outlook on commodities changed from last quarter to this quarter? And sorry if you've said it already.

No, I mean we've got a slight improvement in our resin outlook for the back half of the year, but we still believe we are going to experience about 100 basis points of inflation in the back half, an adverse impact in gross margin. And while resin's more favorable, we continue to have pressure in metals and source goods and the other commodities that we are dealing with like paper and packaging.

So, yes, moderated because remember we talked about at the beginning of the year about 150 basis points of negative impact in gross margin related to inflation. The back half of the year will be closer to 100 as resin inflation has moderated. The thing about our resin -- the resin impact for us is we think we see some benefit in Q3, but we don't see much benefit in Q4, at least in our outlook.

And the other thing to note is we lose the pricing leverage in gross margin as we move through Q3 into Q4. Because remember, most of our pricing benefit in gross margin relates to 2011 pricing actions and the carry forward of that. So I think our comparisons get a little easier on gross margin in the back half of the year.

I think our gross margin is about where we would hope it would be. I'm pleased with the progress, and we're going to need to count on productivity mix and strategic pricing where we can get it to compensate for what will still be about 100 basis points of inflation in the second half in gross margin, albeit less than what we had originally anticipated.

On your ForEx point, Chris, the thing to note on ForEx is that we are in the range that we suggested we would be in on the full year. We said there would be about $0.04 to $0.05 of impact when we guided back -- when we first guided back in January. We actually did better on the ForEx line in the first half of the year. So some of our EPS over delivery in the first half is related to, relative to our forecast is related to a more favorable or a less -- the best way to say it is a less negative impact in the first half than we originally anticipated. So there is about a penny of adverse ForEx impact in the first half.

The dollar has strengthened since late April pretty substantially, and I know it is bouncing around quite a bit and it bounces around every day. But part of that favorability reverses -- part of that first-half favorability versus the guidance reverses out in the second half. And that's why I said the flow sort of shifts. We anticipated $0.03 adverse in the first half, $0.02 adverse in the second half in EPS, and it is likely to end up if things hold as they are today $0.01, $0.04.

Great, thanks a lot for all the color.

Bill Chappell, SunTrust.

I will actually just follow up on Chris' question. As you look at commodities for next year, is there a tailwind? Are you looking into kind of locking in some of the cost now or just kind of wait as the year progresses?

I mentioned this, Bill, you and I have talked about this a little bit and I've mentioned it on prior calls, we've been a pretty sophisticated resin buying office here given the amount of resin that we buy. And so we will leverage all the options at our disposal that are financially prudent for us to leverage; we're not going to -- I don't want to be in the trading business or take the risk associated with being in the trading business. But I'm quite happy with the way our resin commodities are bought.

The thing that's more of a drag on us at the moment is our source goods inflation. And if you recall from earlier conversations we've had, we had a bunch of contracts that expired that were long-term contracts at the beginning of the year and we've had to lock in that higher labor rate. And so as a result you end up with an inflation impact on our source goods that flows through the full year.

And I think at some point we may want to lay out in a little bit more detail how significant our source goods are in cost of goods, because it is a pretty important variable for us and when we have inflation there we end up with a pretty significant impact on the total Company.

So the source goods will be about half of the inflationary pressure on the second half is quite significant. So on the buy forward, Bill, just to be clear, we do go out -- typically we don't go out more than once a year, we usually go longest on the metals because that is where you have the exchange traded metals, you can go longer. The resin tends to be shorter, but this year we have done some into next year.

Great, thank you. And then just following up, we are still kind of new to the three categories of Incubate and Win Where We Are and I guess Win Everywhere, I'm just trying to understand (multiple speakers).

(Inaudible) all in time, it is whatever you want it to be, Bill. It's Win Where We Are, it's Incubate and it is Win Bigger.

Thank you. I mean how should we look at the fact that Incubate was the fastest growing this quarter? And particularly at some point does Infant -- Baby and Infant kind of get out of the Incubate category or are they out of the woods? And should I worry that one is growing faster than the other in a given quarter?

No, there are a couple of -- there's a bunch of businesses in there. I mean Baby is by far the biggest piece of our Incubate categorization. And as you recall, we put baby in there for a different reason than we put the other ones in there.

We put Endicia and Mimio and Rubbermaid Medical in there because they really are ventures and we don't want them subsumed into the operations of the bigger parent. So we want them insulated so that they can build their repeatable growth models and they are doing well.

Double-digit growth on Rubbermaid Medical, very, very strong on Endicia, which is a competitor to stamps.com, great business. We just were out there, they are in Palo Alto. And then Mimio is dealing with all the headwinds associated with the pullback in municipal investment -- associated with budget management, et cetera, in the education space.

So we have got three different businesses that are insulated as Incubators and then we've got Baby there. And we put Baby there because it needed an intervention. And we made that intervention both at the management team level and then in the reporting structure, so we brought it directly into me. And I've got closer to that business than I am in other businesses as a result of the problems we had in the first half of last year.

Strategically I expect us to leave it there for the foreseeable future because, despite our efforts to get it back into recovery, which we are going to be able to do. We have a challenge in our portfolio which is because of the margin structure in this business you would not make a big investment behind it if it caused you to mortgage other Win Bigger categories, like our Professional portfolio and our Writing portfolio for the sake of developing the business outside of the markets that it is in.

So obviously I would love to play for China on Baby, 18 million births versus 3 million here. But until we get that structurally shifted it needs to -- it needs to stay where it is and we need to figure out how to unlock that opportunity because otherwise we won't play for that Chinese opportunity in as big a way as we could.

So that is why it sits in Incubate because it requires a strategic intervention, it requires both an operational intervention which [Christy] and her team are well on their way on. But for the long haul it requires a strategic intervention because even with double-digit OI margins, which we are beginning to get towards -- big step changes in operating income margins which I am pleased with and Christy and the team deserve terrific credit and so does our partner for enabling and helping us to get there.

But for us to get and play for China, we need probably another 300, 400 500 basis points of margin in this business. And so that is going to require a big shift and a real rethink and that's what we -- that's why we need to leave it in Incubate for the foreseeable future because we have got to get the recovery bedded down and we can grow this business without doing what I just described.

But if we really want to play it as the third leg of our Win Bigger strategic agenda we have to find a different mechanism to change the dynamics there. And so that is why it is where it is and that is why I envision it staying in that categorization for the foreseeable future, because it's going to take a lot more work to get that piece of the puzzle figured out.

Perfect, thanks for the color.

Lauren Lieberman, Barclays.

Just a follow-up on the Baby conversation. So one was just a surprise at it still being so strong, not just because you've sort of been fairly cautious after last quarter. But we thought there probably had been some effective pull forward just by virtue of how big the Walmart promotion was in Q1.

So can you just talk a little bit about where the surprises were in North America this quarter? I know you're saying the birthrate -- you've got to grow regardless of what the birthrate is, but this is a dramatic change and not just -- you've got easy comps, but you also had this really difficult sequential situation.

Yes, we've got -- there's two things that happened that were pleasing in the second quarter. Number one, and I will talk outside the US for a second, in Q2 of 2011 we saw our first step-up in Aprica performance in Japan. And probably the most pleasing thing that occurred in Q2 to me is as we lapped what was double-digit growth in the prior Q2 period we delivered double-digit growth in the current period.

So Aprica is on a roll, I mean I think that is one headline I would give to you. I think it gets tougher as we move through Q3 into Q4 because we are beginning -- I was surprised that our competition hasn't responded in -- very aggressively in Japan yet.

And we know through the normal ways you do competitive intelligence that they are coming with some stuff in Q4, so we are going to have a tougher comp, not just driven by the year ago comparisons but as a result of, in the back half of the year, stronger competition.

All that said, I love what's going on in our Japanese Baby business, it's got a great leader there in [Miyatasan], working for a great leader in Christy and these guys are all over it. So I do think it gets a little bit tougher in the back half of the year, but I am pleasantly surprised by the Q2 results on Aprica.

I mean there is other good news in Baby, which is the fast action innovation and some of the other innovations we have got executing in -- flowing into the marketplace in Q2 are having a good impact. Our POS is up in the US pretty nicely in the second quarter.

So, yes, you are right, the Baby Days event was a Q1 event which was earlier, but we've got -- and so Walmart had a very strong Q1 and at the comp a less strong Q2. But we've got momentum in other places in the US and as a result of a really good effort on the part of the customer development organization and strong engagement from the leadership with their retail partners and we have better innovation [from them].

So it is the fundamentals that are starting to kick in. Does competition respond more quickly in the US than it did in Asia? Probably, it's a more dynamic market. But on balance we are feeling a little bit better about the first half.

Now the only thing I would say about our first-half performance is you should recall that the first half of 2011 is by far the easiest comp we are going to have. So we delivered 13% core sales growth in the first half of 2012 up against 12% declines in the first half of 2011.

So it obviously gets harder from here. Q3 2011 was a down quarter, but not nearly as down as the first half of 2011. And Q4 was an up quarter in 2011. And so it gets tougher. But that's why we pay Christy the big bucks.

And then just following up, the profitability there that you were speaking about in the last question. So how much of that do you think is really like operational improvements versus better volume leverage?

It's a combination of both. I mean we've done a lot of things on the cost side in structural SG&A really quickly. We are not -- we haven't made a big bet on Baby. Whether we can hold double-digit operating income margin or not in the second half of the year on that business -- I actually don't worry about it because I want to make sure we invest to sustain the growth momentum there and get the fixed cost leverage.

So we will see what happens in the second half of the year, but we are going to start to spend a little bit more behind this business because we have better innovation coming. We actually have better innovation coming at the end of this year to Europe as well.

So if you look at our business, three geographies really matter -- it's North America; it's Asia, but that is really Japan; and it's Europe. Two of the three are beginning to do really well. One is doing extremely well, one is beginning to get its sea legs, that's North America. Europe is still a drag on the business and that is going to continue until we get to the end of the year and we get the innovation out.

But I want to make sure we are spending enough to make that innovation land with impact. And so we may get a little bit back on operating income margin on that business in the second half of the year.

Okay, thanks a lot.

Joe Altobello, Oppenheimer.

A couple of questions actually. First, just want to go back to the US for a second. And I know you guys had touched on this a little bit earlier in the call, but in terms of what you saw on the part of your retailers and their willingness to carry inventory either late in 2Q early 3Q, have you noticed any increased cautiousness there at all?

Look, I mean we -- as you know, Joe, the thing that impacts revenue is the change in the change in inventory behavior, not just the inventory pressure. There is always inventory pressure on businesses because retailers are -- their key metric is return on invested capital. So it is obviously an important thing for them to leverage.

The drum beats out there, I think the negative headlines on the macros tend to cause retailers to be more cautious. And we have seen at points in time where our -- because we have visibility to this, we have POS data, we know what our retail sales are by customer, we know what our inventory positions are by customer.

When we get out of balance we see retailers adjusting to get us back in balance so that the rate of inventory growth relative to the rate of sales growth is in sync. So in any given moment you've got those normal fluctuations going on.

There are some retailers that are pressing harder in Q2 on inventories, but I don't like to talk about it unless it's a huge deal. We felt that a bit in our Decor business and we felt that a bit in our cookware business and I suspect in both of those categories in the second half of the year we will see and feel that kind of pressure continue.

It will be a question mark on Writing & Creative Expression and it will be reflected in the replenishment orders we get to post back-to-school as to whether the office superstores and the mass guys who have taken strong positions up front, whether they are as confident in the category sustaining its growth rate going beyond back-to-school and that will influence the choices they make.

So we have to be prepared for that risk at the end of Q3 and into Q4 in Writing & Creative Expression. And we can't control it so we just try to manage the sell-in against what we think the sell-through is going to be so that we get the consumption to play out and we get that balance such that we get the replenishment orders.

But it's not science, it is art. And we can get that wrong and we won't know how that story is going to play out until the consumption, the sell-through occurs in the month of August into the middle of September.

Okay, that is very helpful. And then on the SG&A line, the strategic investment this quarter I think was up 40 basis points, it was up 90 basis points in the first quarter. What are you expecting for the second half and what is baked into your guidance?

We don't guide on -- and I haven't really commented, Joe, on the forward-looking numbers. That said, we have begun to invest renewal savings in the second quarter behind selling systems in Latin America largely on the Professional business but also on Writing in Brazil. And we will begin to broaden that investment to include the investment behind the creation of new digital assets for our eBrand Building and eCommerce initiatives in the consumer segment.

So -- but I'm cautious about going hog wild on that investment until I see how the macros play out and -- I'm more conservative here than maybe you guys think I am. I am not going to throw the money out there until I am really sure. Now that said, I would expect strategic SG&A to be up in the second half of the year versus prior year.

The one thing I would say in some of those numbers is you have to remember that part of that will reflect the true-up dynamics on our management incentive programs versus prior year. So it's not all working money because, remember, our product marketing folks and our selling resources are in strategic SG&A.

So last year we paid out our bonuses very low, we've got the true-up that's in our back half numbers in the third quarter. And a part of that -- not all of it, but a part of that is sitting in strategic SG&A. So some of the increases that you might see will be sort of artifacts of that dynamic.

Okay, great. Thank you.

Budd Bugatch, Raymond James.

I just would like to go through looking at the Professional and Baby & Parenting. You had revenue increases in Professional and from quarter to quarter, from first quarter to second quarter and flat in Baby & Parenting, and yet the operating income in each declined, so the contribution pull-through didn't look like it was there. Can you kind of maybe give us a little bit of drill down as to where that was and what caused the operating income to decline in each of those?

Yes, I think the thing to remember, Budd, is that on the reported numbers you have the SAP effect, so you have the revenue that has been shifted and the gross profit obviously that was connected to that revenue shifted from Q2 to Q1. But to be -- so that is a big chunk of it and probably the most significant chunk of it on Baby.

On Tools though, we are investing in selling systems -- in Professional, sorry, we are investing in selling systems, largely in Latin America, Brazil on our Tools business, across Latin America on IP&S, in China on IP&S, in Latin America on Commercial, and we are also putting some money behind Rubbermaid Medical in terms of selling resources in the US.

So the drag on operating income margin, once you net out the -- once you net out the SAP effect -- on the Professional portfolio is related to those investments and that is (multiple speakers) part of the renewal money that is going into that.

So just to be clear, if I parse those -- the expenses into gross profit or cost of goods sold and SG&A, you are saying in Professional it is basically the strategic SG&A investment that is doing it, and in Baby & Parenting it was a reduction in gross margin due to the SAP shift? Is that the way to look at it?

Yes, it's a -- no, gross margin didn't go down, it is about the absolute -- it's about the fixed cost leverage of not having the revenue and gross profit dollars in Q2 on Baby. On Professional it's a combination of that and what I described as the incremental SG&A that we put -- strategic SG&A that we put behind the business. So it is two things on the Professional portfolio.

Okay, thank you very much.

Jason Gere, RBC Capital Markets.

Mike, I guess I just wanted to first talk about I know the layout of the year was the first and fourth quarters were going to be the strongest. So from a sales perspective and kind of the buckets that you have laid out for some of the incremental pressures, it feels like the third-quarter sales will probably come in a little bit lighter than expectations just because of the Decor business and the turnaround there.

So as you think to the fourth quarter on the consumer side, are there any incremental merchandising plans that you have in place? And I guess what gives you that confidence that the sales can really accelerate especially when you have the toughest comp? And then I just have a couple of follow-ups.

Yes, I mean, we've got good underlying share momentum in our businesses for the most part, so I think that is one of the big contributors on the consumer side as to why you would expect the momentum to continue.

Remember, InkJoy just began to sell in the second half of the year. So we've got some dynamics like that that are positive. We've got a dynamic on Calphalon where we have to lap the inventory pipeline on J.C. Penney and we've got the J.C. Penney issues on Decor that will be offsets to that.

We've got good merchandising plans set on Rubbermaid Consumer -- remember, we were shutting down one of the big Rubbermaid Consumer factories and moving machinery from Texas to Kansas and Ohio in the second quarter, so we weren't really pressing that business very hard because you'd disrupt availability and we'd create a capacity dynamic that in a service issue we wouldn't want to do.

So we've got that transition, which -- in the factory landscape that we executed in Q2 that is behind us so we have a little bit more flexibility on Rubbermaid Consumer in the second half of the year and I would expect us to be able to deliver some more progress. So there is a lot of different moving parts and our numbers and then we've got Baby momentum.

So baby is certainly stronger than year ago in Q3 and we will have to see about Q4 how that plays out. We don't (multiple speakers) by quarter, Jason, as you know. But I think we should -- you should think about what we said with respect to our full-year guidance along those four -- along the four different metrics that we guide on and hopefully we can do a little bit better on some of them. But at this point I think that is a good reference point.

Okay, good, thanks for the clarity. And then I was just wondering if you could provide some update on One Newell. And I know it's probably a couple of months under your belt, but just maybe some of the wins, some of the learnings along the way that have come in maybe better than expected?

Yes, so Project Renewal is the first step in simplifying our structures and we are seeing the benefits of that beginning to flow through. We did some important things that were tough for the organization in Q4 and into Q1 of 2013 on the GBU architecture and group design and those are largely done and behind us.

We then shifted our focus in Q2 to the manufacturing and distribution center component of Project Renewal. And we have done the factory closure, which obviously was quite dramatic in Texas for people and we have moved the equipment now and are starting up that equipment in Kansas and in Ohio in those factories and that has been exciting and disruptive, but positive.

And so we are focused on the manufacturing and distribution center side of things. And then we've got some more to do to close off renewal in the back half of the year and into next year to put a punctuation point on that. That is Project Renewal.

When we talk about One Newell initiatives, that is above and beyond Project Renewal. And what that is about is about improving the indirect procurement costs in our business and getting on with the working capital opportunities. And that has nothing to do with restructuring, that has to do with really tightening down on how we spend our money.

One piece of that is the indirect procurement partnership that we formed with IBM to access their $50 billion buying pool and that is focused on US indirect procurement which, if you recall, is $1.2 billion of spend. And that is where we said we would expect to get $50 million of savings by 2013. We are making great progress there; I'm really happy with the work and the team that is leading it and the energy that it has created within the total organization.

And the working capital opportunity that Juan talked about at Analyst Day we're just beginning to get into. I'm pleased with our inventory management the first half of the year, it's down $70 million versus prior year. And that is because we are focused on it and we -- part of our incentive schemes are focused on quarterly delivery of improvements.

And so, we are really kind of wiring that one down and we are making some good progress on payables. As we exit Q2 into Q3, Q4 we will make some good progress on payables as we put some new programs in place there.

And so all those things are playing out and we have a lot more work to do in both areas. So I don't want to -- I think it's premature to suggest that we are anywhere near just kind of making it down in a 100 yard sprint, we are sort of on the 20 yard line on indirect procurement probably on the 10 yard line on the working capital.

But that has fallen out and I think the organization sees the opportunity and smells it; we are all in the same incentive scheme so that we all have skin in the game on the outcome, every one of us, and so we are all pulling the oars in the same direction to make it happen.

Okay great. Thanks for the clarity.

Bill Schmitz, Deutsche Bank.

My follow-up was already answered, thank you.

This concludes our question and answer period. If we were unable to get to your question, please call the Investor Relations team at 770-418-7075. I will now turn the call back to Mr. Polk for any concluding remarks.

My last comment I guess would be simply that I characterize the first half of 2012 as a step in the right direction. I am really pleased that we are starting to get this business back into a consistent cadence of delivery. And the real opportunity going forward is to pivot the organization and its resources against the growth game plan and start to activate that game plan and drive it into action. So with that I think we will just call it a close and we will talk to you soon. Thanks.

Today's call will be available on the Web at NewellRubbermaid.com and on digital replay at 855-859-2056 or 404-537-3406, with an access code of 10707444 starting two hours following the end of today's call. This concludes our conference. You may now disconnect.