諾威品牌 (NWL) 2013 Q2 法說會逐字稿

Good morning and welcome to Newell Rubbermaid's Second Quarter 2013 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 home page under events and presentations. A slide presentation is also available for download.

I will now turn the call over to Doug Martin, Chief Financial Officer. Mr. Martin, you may begin.

Thank you, Regina, and good morning, everyone, and thanks for calling in. Nancy isn't joining us this morning, but she'll be available next week. Of course, you all know Alicia and she's available after the call.

On the call with me today is Mike Polk, Newell Rubbermaid's President and CEO. Before we get started, I'd like to take this opportunity to remind you that today's presentation includes forward-looking statements. These statements are based on current expectations and assumptions. Actual results or outcomes could differ materially from Management's expectations and plans.

We caution you to consider the important risk factors described in our press release and in our various SEC filings. Please note that any non-GAAP financial measures including, but not limited to, core sales, normalized operating margins, and normalized earnings per share are provided because Management believes that they provide insights which enable investors to better understand and analyze our ongoing results. A reconciliation of GAAP to non-GAAP measures is included in today's earnings release and as part of the slide deck that's available on our website.

With that, I'll turn the call over to Mike.

Thank you, Doug. Good morning, everyone, and thanks for joining our call.

We have two objectives today. First, Doug and I will review our second quarter results and update you on the progress we're making driving the Growth Game Plan into action. Second, I'll provide some perspective on the balance of 2013 and the factors that could influence delivery.

This morning, we reported a good set of Q2 results that represent our eighth consecutive quarter of consistent delivery. Core sales grew 4.5%, 2.5% when adjusted for the 2012 European SAP-related timing shift from Q2 to Q1. Normalized operating income margin increased 100 basis points; driven by increased productivity and a significant reduction in fixed SG&A, as a result of Project Renewal, partially offset by increased brand support.

We delivered solid operating cash flow of $63 million and normalized earnings per share of $0.50, up 11.1% versus prior year and $0.01 ahead of consensus. Through the first six months, core sales increased 2.5%, in line with expectations. Normalized operating income margin expanded 40 basis points. Normalized EPS increased to $0.85, up 10.4% versus prior year.

We've delivered solid operating cash flow, which has enabled us to invest back into the business while also returning value to shareholders, increasing dividends and share repurchases by 70% or nearly $66 million versus prior year. At the same time as driving delivery, we've been very busy continuing to drive the Growth Game Plan into action.

During the first half, we deployed our new operating model, reorganizing the Company around its two core activity systems -- development and delivery, supported by three business partnering functions, legal, HR and finance. And four winning capabilities, in design, marketing and insight, supply chain and customer development. All in service to driving accelerated performance in our five operating segments, Commercial Products, Tools, Writing, Home Solutions, and Baby & Parenting.

In the process of doing this, we restructured marketing and R&D, creating a larger, independent consumer marketing organization, investing significantly more money in insights that will drive bigger and better innovation and brand growth plans. While also committing to transform Newell into a design-driven Company, breaking ground on a new state-of-the-art design center where all of Newell's design activity will be located. While also recruiting a new global leader of e-commerce, who will collaborate with both development and delivery to accelerate progress and what we believe to be one of our biggest growth opportunities.

In the first half, we also rolled out our new global supply chain organization, establishing a One Newell procurement function and a common set of supply chain metrics and goals as we strengthen our productivity funnel and establish a focused agenda to reduce our working capital. In the midst of these changes, we simultaneously launched several new innovative products across our business segments and regions, including a new Graco travel system called Graco Modes -- three strollers in one with 10 riding options from infant to toddler.

A new line of Aprica ultra lightweight strollers, called AirRia, already the best selling stroller in Japan. And a new line of PaperMate botanical pencils and premium Sharpie markers called Sharpie Neon, with both launches off to a very fast start. And the new innovation on Irwin in Brazil called Dupla, the first ever double-sided hacksaw blade. We also set the stage for four big third quarter initiatives -- the launch of Rubbermaid Commercial Products Executive Series, a new line of carts and cleaning products for luxury hotels.

The launch of an entirely new line of Irwin Tools in Brazil, where we will enter 10 new hand tool and accessory segments with over 500 Irwin SKUs. The launch of a new line of Levolor wood and faux wood blinds, and the sell-in of what should be, in partnership with our retailers, one of our strongest Back-to-School merchandising drive periods ever, with significantly increased Back-to-School display and merchandising activities set for Q3 on Writing, Rubbermaid LunchBlox and Goody. All of this while implementing SAP and transitioning to a more tax-efficient, dual entity business model in Brazil, continuing to make progress on our European transformation, announcing our intention to sell our hardware business, and last week, closing on the sale of our Teach platform business.

That's a full agenda by any standard and I think we executed well. We exit the first half of the year with good momentum; particularly on Commercial Products, Baby, and Home Solutions. Our Tools segment is well-positioned for a strong Q3 and Q4 and solid full year of growth on the full year, following the second quarter transition in Brazil to SAP.

Writing has continued to build share in the first half, with great innovation complemented by strong retailer partnerships and merchandising. Writing has absorbed the impact of tough North American office superstore conditions in our transition to a more consumption-focused distribution approach in China on fine writing.

Our savings programs are right on track and we're set to deliver the full-year targets. And our productivity programs are accelerating, enabled by our new global supply chain organization.

Our first half results in the developed world were solid, with good core sales growth in the US of 3%, while EMEA core sales growth declined just 2.2%; slightly better than our recent trends. In our priority emerging markets in Latin America, first half core sales growth accelerated to nearly 19% as a result of our investment activity. Terrific outcome.

Clearly, there's much to be pleased with and we're proud of our first half. With that, let me hand the call over to Doug to go through a more detailed review of results and then I'll return to provide some perspective on the balance of the year.

Thanks, Mike. Newell reported net sales for the quarter of $1.47 billion, a 3.5% increase over the prior year. Core sales, which exclude the impact of unfavorable foreign currency, increased 4.5%. When adjusted for the $28 million impact of the 2012 EMEA SAP pull-forward from Q2 to Q1 of last year, second quarter core sales grew 2.5%.

Gross margin was 39.5%, a 70 basis point year-over-year increase, as strong productivity was partially offset by inflation and pricing. Normalized SG&A expense was $363.2 million or 24.6% of sales, a decline in overall spend of 30 basis points. Renewal savings enabled us to fund an additional $8 million in strategic advertising and promotional investment behind Tools and Commercial Products, in addition to the annualization of sales force investments last year that are yielding growth dividends in Latin America and on Rubbermaid Commercial in North America.

Our plans call for further acceleration of strategic spend behind our brands in the back half of 2013. Reported second quarter operating margin was 12.6% compared with 12.4% in the prior year. On a normalized basis, Q2 operating margin was 14.9%, a 100 basis point improvement from the prior year.

Interest expense was $15 million, down about $6 million compared with 2012, due to the work we did last year to strengthen our balance sheet and improve our interest position. The normalized tax rate was 26.6%, up slightly from the prior year.

Other expense this quarter reflects transactional FX losses, primarily due to the strengthening dollar against the yen, Canadian dollar, and Australian dollar. Second quarter reported earnings per share were $0.37 compared with $0.38 in the prior period. Normalized earnings per share, which exclude restructuring and restructuring-related costs and discontinued operations, were $0.50; an 11.1% increase from a year ago. The increase is attributable to improved operating results and a somewhat easier comp against Q2 results last year, due to the SAP pull-forward.

We generated operating cash of $63.3 million during the quarter. This compare was $103.1 million in the prior year. The decrease is primarily related to changes in working capital.

Accounts receivable days increased due to timing associated with the Q2 ramp-up of shipments post the SAP implementation in Brazil, stronger year-over-year sales in the back half of the quarter, and a broader set of customers qualifying for Back-to-School extended dating. The year-over-year increase in inventory relates primarily to Q3 product launch builds for Tools in Brazil and promotions in Home Solutions.

Accounts payable days also increased meaningfully in the quarter versus the prior year so that overall cash conversion days improved. We expect that the accounts receivable and inventory shifts will reverse in the third quarter and have a clear line of sight to our working capital and operating cash goals for the year.

We also returned $82.2 million to shareholders during the quarter, including $43.6 million in dividends and $38.6 million for the repurchase of 1.5 million shares. Program to date, the Company has repurchased 11.2 million shares at an average price of $18.81, for a total of $210 million. This leaves us with $90 million on the current authorization.

Turning now to a little more detail on the segments, as I mentioned earlier, the SAP go live in EMEA in Q2 of last year impacts year-over-year comparisons for both Q1 and Q2 of this year. For all businesses with operations in EMEA, I will be discussing reported sales growth, core sales growth, and core sales growth adjusted for the SAP-related timing shifts in that order, to avoid confusion.

Reported net sales in our Commercial Products segment grew 7.1%. Core sales rose 7.6% and core sales adjusted for last year's SAP-related timing shifts grew 6.5%. Improvement was driven by strong Commercial Product sales in North America with healthy order rates across most products and customers. Operating margin for this segment was 10.8%, down 30 basis points due to mix, inflation, and sales force investments in North America and Latin America, partially offset by structural cost reductions.

The Tools segment delivered reported sales decline of 2.2%. Core sales declined 1.3% and core sales adjusted for last year's SAP-related timing shifts were negative 5%. Our core sales in Brazil this quarter were negatively impacted by the roll-out of SAP on April 1.

While not material to total Newell results, they are meaningful to our Tools segment, as approximately $5 million of Tools net sales in Brazil were pulled forward from the second quarter this year into the first. Given the impact of both EMEA and Brazil SAP on Tools, looking at Tools' first half core sales growth is the best indicator of underlying performance because the anomalies are eliminated. First half core sales growth in Tools was essentially flat against tough year-ago comparisons of nearly 10% growth and sluggishness related to industrial bandsaw portion of the segment.

Normalized operating margin in the Tools segment was 9.2%, down versus last year's 15.1%. Gross margin was impacted by lower sales volume, related in large part to the SAP timing in Brazil, unfavorable mix related to the slowdown in industrial products, and inflation. In addition, we've increased investment in the Irwin Dupla hacksaw blade innovation in Latin America and the Hilmor brand launch in the HVAC channel in North America.

In our Writing segment, second quarter reported sales grew 4.1%. Core sales increased 5% and core sales adjusted for last year's SAP-related timing shifts increased 1.5%. In quarter two, strong growth in Latin America and very good sell-in to support Back-to-School merchandising in both Europe and North America have more than compensated for weaknesses in the office superstore channel and the negative impact of the reset of our distributor model for Fine Writing in China. Second quarter normalized operating margin in the Writing segment was a very strong 25.9%, up 290 basis points due to improved mix, structural SG&A reductions. And the weighting of marketing investment toward the third and fourth quarter as compared to last year.

Our Baby segment delivered another very strong quarter, with reported sales growth of 7.6% and core sales growth of 11.3%. Core sales growth adjusted for last year's SAP-related timing shift was 9.8%. The formula for success in Baby continues to be winning innovation and strengthened partnerships with our retail customers. We generated good growth across our North American customer base as a result of an expanded retail presence, successful new innovation, and improved POS.

Aprica, in Japan, also grew mid single-digits, driven by increased promotional activity and our success with new products at retail. Baby's Q2 normalized operating margin was 12.1%, up 160 basis points to last year, largely the benefit of renewal cost savings and increased sales.

The Home Solutions segment turned in its second quarter of positive sales results behind good execution in the US on Rubbermaid consumer's Furious Five merchandising for Memorial Day and robust growth from Calphalon, driven by distribution gains. Home Solutions reported sales growth was 2% and core sales growth was 2.3%. Home Solutions' normalized operating margin was 13.5%, a 260 basis point improvement versus the prior year, reflecting improved operating performance, increased sales, the benefit of Project Renewal savings, and productivity.

Looking at Q2 sales by geography, North America core sales grew 2.7%, driven by strong performances in Commercial Products, Baby & Parenting, and Home Solutions. US business grew 3.1%, ahead of overall market growth, implying continued share gains.

In EMEA, core sales adjusted for last year's SAP-related timing shifts declined 1%, which is slightly ahead of our more recent 3% rate of decline. While we're pleased with the stabilization in the quarter, we believe the ongoing macroeconomic challenges in Western Europe will continue to drive declines greater than those reflected in the second quarter results.

In Latin America, core sales grew 9.8%, despite the negative impact of this quarter's SAP-related timing shift in Brazil. First half core sales growth of nearly 19% was more predictive of our expectations going forward, given strong Tools and Writing plans in the second half of the year.

In Asia-Pacific, core sales grew 0.7%. Continued good growth from Aprica and Fine Writing in Japan was offset by the previously discussed step back in Fine Writing in China. Reported sales contracted in the period due to the weakening of the yen and the Australian dollar.

Our developed world core sales growth, adjusted for SAP, was a little more than 2%, driven by a solid US growth rate of 3.1%. Our emerging markets business grew mid single-digits or high single-digits if adjusted for the impact of SAP in Brazil. The accelerating underlying trends in Latin America were partially offset by declines in China, as a result of the planned reset of our route to market model in China on Fine Writing.

Switching now to our cost programs, we continue to make good progress on Project Renewal, indirect spend, and overall spend control. Through the end of Q2, we are on plan, having realized over $100 million in cumulative savings for Renewal, and we remain committed to investing the majority of the Renewal savings back into strategic SG&A, such as selling resources, advertising and promotion, product development, consumer research, and capability building to help drive core sales in our priority businesses and markets. We intend to reinvest more heavily in the back half of the year to drive accelerated performance and position ourselves for sustainable growth in 2014.

In summary, we're pleased with our Q2 results and our continued progress in driving the Growth Game Plan into action. I'll now turn it back over to Mike for some additional comments.

Thanks, Doug. Let's now turn to our 2013 outlook.

As communicated in the press release, we've reaffirmed our full year guidance on core sales growth, normalized operating income margin, and operating cash flow, while raising the lower end of our normalized EPS guidance range by $0.02. Our revised full year guidance is core sales growth of 2% to 4%, normalized operating income margin expansion of up to 20 basis points, normalized EPS of $1.80 to $1.84, which represents growth of 8% to 10% above our 2012 normalized EPS of $1.67. And operating cash flow in the range of $575 million to $625 million.

Our full year guidance assumes sustained second half momentum in Commercial Products, Baby, and Home Solutions. Very good second half growth on Tools with solid full year growth, as a result of our strong second half growth initiatives in Latin America and North America. And excellent sell-out and share growth in Writing, but with core sales growth roughly in line with the first half performance as retailer inventories in the office superstore channel rebalance to sell through.

There were three key factors that could influence where in the 2013 full year guidance range we fall. The first factor is the timing of the Office Depot/OfficeMax merger. Our 2013 full year guidance assumes we do not replicate last year's September Back-to-School replenishment program in advance of the Office Depot and OfficeMax merger. And that the current softness in the broader office superstore channel continues through the balance of the year.

The Depot/Max merger will result in a significant distribution network and retail footprint consolidation at that customer. That consolidation will result in a one-time trade inventory reduction, yielding a significant negative revenue impact to Newell. Our 2013 full year guidance assumes that event occurs over some period of time in 2014 and there is no impact in 2013. While unlikely, if the timing of that consolidation were to accelerate into Q4, it could disrupt our 2013 delivery.

The second factor that could influence where in the guidance range we fall is the planned growth acceleration of our Tools business in the second half. Our 2013 guidance assumes a strong second half growth profile on Tools, following an essentially flat first half performance, as a result of the Brazil business system transition to SAP and some sluggishness in the industrial portion of our Tools portfolio.

We are well-positioned to deliver the assumed growth acceleration. We will benefit from both the second half growth associated with the first half launches on Hilmor in North America and Irwin Dupla in Brazil. And the significant expansion of the Irwin tool belt in Brazil with our launch of over 500 new Irwin SKUs into 10 new tool and accessory segments at over 100 distributors and customers.

Additionally, all of this new innovation is being supported by strong brand investment in Q3 and Q4, with new advertising on Irwin slated to go on air in September. We're quite comfortable we will deliver a very good growth in the second half on Tools and solid growth on the full year.

The third factor that could influence where in the range we fall is the delivery of Renewal savings and other margin-enhancing actions that enable increased brand investment in the second half of 2013. Our 2013 guidance assumes increased brand support in the second half, driven by Project Renewal savings, strengthened productivity versus the first half, and positive price realization to gross margin. While our progress on positive price realization has been mixed given market competitiveness in certain categories, we're right on track to deliver the Project Renewal savings objectives. And we will build on very good second quarter productivity results, with strengthened second half performance.

We expect to be able to comfortably step up brand investment in the second half of 2013 as part of our drive to (technical difficulty - audio drops off). I'd like to point out a few things. Given the timing of innovation and our plan to support Back-to-School and National Tradesman Day on Irwin with breakthrough levels of brand support, we will likely experience some operating income margin contraction in the third quarter.

That said, we continue to expect to deliver full year normalized EPS and normalized operating income margin expansion in the middle of the revised guidance range. We also continue to expect, as communicated on our first quarter earnings call, that Q3 and Q4 normalized EPS will be roughly in line with each other.

Let me close by saying we are eight quarters into a more consistent cadence of delivery. We've achieved this with a higher level of change than most companies experience and I think my team's done an outstanding job of simultaneously driving delivery while driving change. We're strengthening the basic activity systems critical to our business success, establishing a true operating Company that unlocks the potential of our $6 billion business, rather than simply our individual brands or operating units. This has required increased focus in funding, new ideas in leadership and a Best-in-Class ambition for a core set of capabilities in design, marketing and insight, supply chain, and customer development.

While consistently making our numbers as job number one and is critical to building your confident in United States, it's the potential of all this change, of our new operating model and release of trapped resources in their pivot to growth that gets me far more excited. In fact, there's a much bigger value creation story to be delivered than what we've delivered so far. It'll play out over multiple quarters and I believe we're firmly on track to both strengthen the business and create that upside.

The Commercial proof of this potential is best represented by the last 1.5 years on Baby & Parenting, our incubate for growth business that was, admittedly, quite broken when we started to work on it. Kristie Juster and her team piloted the new model we're now more broadly deploying, moving quickly to increased resources in customer development and category management in our priority markets, the US and Japan, significantly strengthening innovation and commercialization, investing early in growing channels like e-commerce, and enabling investment through a much greater discipline on cost.

The Baby story has played out over the last six quarters with strong, hard number results, compound growth rates on core sales in the high single-digits with more to come. And over 500 basis points of operating income margin expansion. But perhaps most importantly, these numbers were delivered with all stakeholders, whether supply partners or customers, investing deeper in our business relationships and embracing what the new Newell can bring. In fact, our largest Baby customer named Newell Global Vendor of the Year in 2012 across their entire Company, for our commitment to collaborative growth in the Baby category. And has in 2013 taken Sharpie, PaperMate and Expo into their Back-to-School merchandising program, something they've never done before.

Market share wins, transformed P&L metrics, tremendous value creation, and increased reputational capital for our Company that's converted to more business on an adjacent category. This is a healthier, more sustainable growth strategy for Newell. This is the new operating model in action and these are the results that are possible.

We're at that pivot where much of the disruptive change is just behind us. While there's some more to come, the fog change is clearing and we can now get focused on unlocking our upside, using all of our new resources to stretch for strengthened performance. The organization is beginning to see and feel the potential of our new operating model and there's a positive energy building about the new Company we are creating. That's the power of the Growth Game Plan. I'm proud of the progress, but more importantly, I'm excited by our possibilities.

With that, let's open the line for questions.

(Operator Instructions)

John Faucher, JPMorgan.

In looking at Brazil, you've obviously got a pretty aggressive plan there, lots of new product launches, what have you. Most companies are talking about economic weakness there, so can you talk about building the business, not exactly up from scratch, but given the smaller scale, is that what protects your growth plans there, despite the fact that the economy is obviously softening there?

Yes, if you follow the GDP growth across Latin America, you probably would not expect to deliver the kind of growth rates we've delivered in the first half. Our core growth is up about 19%. It's all about where we start from and we've got a pretty focused portfolio in Brazil that can participate in what will be, over time, a significant investment in infrastructure build out and so, we're playing a long game in Brazil. It's not about this quarter or last quarter's GDP growth. We've got to take that perspective. The businesses we'll play into Brazil with are all on trend.

Having come from companies that have big emerging market footprints, you have to be prepared to accept the increased volatility in the macros if you're committed to building your business and committed to participating in what is obviously a very strong long-term macro story. You have to accept the short-term volatility for the long-term gain and that's what we're doing. Again, our upside is clear. We have a line of sight to it. We don't suffer the downturns that others do, given the fact that our footprint is not yet as big as what others have.

Got it. One quick follow-up on that, in terms of looking at the Industrials business, bandsaw blades, what have you, what exactly is the change that's driving some of the weakness in demand there? Is that, again, just sort of a global macro issue?

Our business is North American and Asian-based. Look at China's PMIs, 47.7, 11 month low and look at the commentary around it, steel, shipbuilding, auto; these are industries that our business pivots on. The thing to recognize is that our bandsaw business is less than 20% of our total Tools portfolio. The Industrial portion of our portfolio is suffering with what is pretty sluggish macros on industrial production across the world, but this too will pass. We have good innovation plans in that portion of our Tools business and we have a very, very strong differentiated selling system, particularly in North America, that we will continue to leverage.

Okay. Great. Thanks, guys.

Lauren Lieberman, Barclays.

First, my question was on pricing. I was surprised to hear it called out as negative in the commentary because I thought last quarter, your comments were that by the end of Q1 and into Q2, you kind of had the pricing you needed, so I would have thought it would have been positive this quarter. Can you talk a little about that?

Sure. In some of our businesses, we don't talk about the underlying volume, underlying price growth by segment and quite frankly, we're not as crystal clear as some others are on that for the total Company, but net pricing was down a little bit in Q2, invoice pricing. Our list price were up, but customer programming was higher in a couple of specific categories -- in our resin-based businesses and our Tools business, quite frankly, as some of our competitors went more aggressive on pricing and merchandising than we were planning. We have to be principled on pricing. We've taken invoice prices up on a number of categories in Q2 and we will do more invoice pricing, list price increases in Q3. But the principle that drives our pricing choices is relative competitiveness in our markets. We're not going to compromise on price points, our strategic price points, if in fact, our competition doesn't follow and so, we've got to manage that. We're optimistic, in the back half of the year, that we will see price realization. The question is, can we count on as much as we'd like? It's something we'll have to watch.

We'll let our pricing principles drive the choices. The variable that we'll flex will be customer programming, not list price, and we'll maintain competitiveness. We have enough flexibility in the way we can phase Project Renewal savings and we have strengthening momentum in productivity as a result of the roll-out of our global supply chain organization, such that we can overcome any potential issues we might face there. But I wanted to be transparent with that because we had hoped we might be able to capture more price in Q2 than we were able to and it's something we've got to be very attentive to going forward.

Okay. From what you can tell, particularly in Tools, is it competitors being more aggressive in response to how different things are for Irwin and Lenox today than they were two, three years ago? They're finally maybe catching on to some of the changes at Newell?

I hesitate to comment on why some of our competitors are doing what they're doing. I will say that we're going to try to drive our growth strategically through innovation, through brand investment, and through the right level of customer programming to drive trial and repeat on our businesses. We'll have to watch that. In any given quarter, though, we may have to flex in or out on pricing to maintain competitiveness and of course, in key drive periods, we'll do that.

We've seen very, very good growth on this business over the last four years. Last year, as Doug mentioned, double-digit core sales growth in the first half of this year and some of our competitors haven't performed as well; a number of them in the first quarter, quite frankly. The fact that some of them in Q2 have gotten more aggressive doesn't shock me. The challenge to us is to make sure we build a funnel of great ideas that enable us to not have to play that game to drive our growth. I think we've got that funnel playing out in the marketplace, the innovation playing out in the marketplace in the second half of this year. I'm quite optimistic about our ability to deliver a strong growth profile in Tools in the second half of the year and solid full year growth as a result.

Bill Schmitz, Deutsche Bank.

What were the proceeds for the sale of the Teaching business and the Hardware business?

The Hardware business hasn't been closed yet. That's still underway, so no update on that one. The Teach business was sold for a relatively nominal amount and we recorded a small additional charge in the quarter related to that.

When will the cash proceeds for both start to -- there's no proceeds you said from the Teach side or very minimal, but how about the proceeds from the hardware piece?

The hardware piece, again, we're still in the middle of managing that transaction. Like to see it in Q3, but we don't have any specific timing.

I hope we can get the deal done pretty quickly here. I think if we can, then we will likely see the cash proceeds flow in September. We're in the midst of it and that timing could shift.

Okay. Got you. Can we just spend a little bit of time on SAP? What percentage of the business is up and running? Can you just talk about what the discrete costs that are nonrecurring that are flowing through the P&L and maybe what kind of goes away when? That's kind of a long, broad question. Also, the CapEx associated with it and when the CapEx from the SAP starts to roll off?

Sure, Bill. This is Doug. The roll-out in SAP in Brazil takes -- we were just above 80% or right about 80% when we finished EMEA a little over a year ago and Brazil takes us up a little more. We're low 80%s in terms of global coverage on SAP; all of North America, all of EMEA with the exception of a couple really small markets, and Brazil. We've got a foothold in Latin America now.

As the projects downsize, so North America and EMEA were obviously the biggest pieces of the project and Brazil is a little smaller and more contained, so we're capitalizing less cost internally and incurring less cost externally as we move forward. The flip side of that is, the big cost that we capitalized in the prior five-year period are being amortized into the income statement. Over time, there's a slight increase year-over-year in the cost for next year or two and then there'll be a tail.

Okay. How about the expense piece, though, because a lot of the startup costs with the SAP consultants that were sitting with you guys in Atlanta, when does that start to go away?

That's being wound down, actually. We've seen some significant reduction in that this year as we rolled off of EMEA and into Brazil, so less support required for that launch. We'll continue to wind it down, but then that becomes a certain maintenance requirement across the enterprise.

Bill, just to be clear about where we go from here with SAP, we want to finish the job in Latin America. We're setting the stage now to kind of finish up with Mexico and with Endicia. We've got more work to do on SAP in Latin America. The complexity of Brazil drove our choice to go there first. It was not simply an SAP implementation. We went to a dual entity structure that's more tax efficient at the same time. That's why it took us a little bit longer to start up on SAP in Brazil than it did in other start-ups, because we needed to manage that complexity. That clearly had an impact on the Tools core sales growth in the quarter.

Got you. To follow up on that, the $50 million of indirect procurement savings, typically, you need the SAP up and running to really leverage those savings and also there's clearly a working capital element to SAP which obviously helps. When do we start to see some of that stuff come through?

We're seeing that on the indirect side. We've had access, again, to 80% of the data for now over a year across the entire organization and Mary and her team have a real focus on that area. We delivered, as you recall, $20 million last year and are on plan to deliver the incremental $20 million to $30 million this year. That's all being done. We've made some progress on some of the businesses that have been on SAP for a while from an inventory management perspective, but we see that opportunity continuing to improve as we go forward; particularly as the new supply chain organization gets involved and does things in a more standardized and consolidated and leveraged fashion across the Company. We still see opportunity there. You saw a little blip in inventory at the end of this quarter as we were ramping up to build for some significant activity in Q3; particularly the Tools launch that Mike talked about and some promotions in Home Solutions.

Also the launch of the Levolor business, which went in the first week of July. Again, if we hold the mirror up to ourselves, I think we have a lot of work to do on working capital. I think one of the exciting things about the global supply chain organization and Doug's new organization and the segment's work and their ability to focus on delivery is we have a real opportunity there over time, despite being a very cash generative business, we haven't made as much progress on working capital as I think we would like. The combination of SAP, the global supply chain organization, segments now focused on delivery, entrusting their development counterparts to do the marketing and innovation work and the brand work on their behalf, it creates the space to be focused on driving better practices into our business model. We should be able to make good progress here over time. We made a commitment maybe a year ago about making progress over three years of $100 million in working capital. That's sort of tip of the iceberg for me. I think it's really important and it will be part of the discipline that we need to drive into action as part of the Growth Game Plan.

Great. Thanks, guys, very much.

Joe Altobello, Oppenheimer.

Just a couple questions, to begin, on Writing. First of all, can you give us an update on China, post the reset that you guys had in the first quarter? Secondly, you mentioned the weakness or continued weakness in the office superstore channel. Is that business moving to other channels or is that more of a category softness issue?

Yes, we saw decent growth in Writing in Q2. I think you can make some assumptions about channel shifting going on there. On the office superstore channel, that's true. I think there's plenty of growth to be had here. We're committed to working with our office superstore retail partners to build the categories in that channel, as well as our commitment to do that with our other retail partners. We do see channel softness within Writing, but we do see a fair amount of channel shifting happening between the office superstores and mass and food and drug and eCommerce. There's some real interesting channel dynamics happening at the moment and we've been able to absorb that.

The real driver of our Writing core growth decline in the first half is actually Fine Writing China, which is the other part of your question, Joe. We took a big step back in Q1. We took less of a step back in Q2. We do expect that second half, we'll begin to stabilize the business. I think Q3 will still be a down quarter on Fine Writing and Q4 we'll see some recovery in China. But we're going to take our time and do that the right way and set up our Writing future in China with a more constructive set of practices en route to market.

Okay. That's helpful. Just shifting gears a little bit to the broader portfolio, obviously you did sell Teach, you're on the verge of selling Hardware. Could we see more divestitures and when could we see some bolt-ons, potentially?

We're focused on driving the Growth Game Plan into action. As I said, we really, at the moment, don't have -- we certainly have the financial capacity to go buy something if we wanted to. But I really am more concerned about bedding down the new operating model and putting it to work. Our focus is more on the organic side of our business agenda. We'll have cash capacity to consider bolt-ons in the future. Obviously, we've started to think about those, but I wouldn't think that's how we would deploy capital in the very near term.

With respect to other disposals, we want to finish the ones we've committed to execute at this point before we think about anything else in that space, quite frankly. I think we have a portfolio that we can leverage and we can play the existing portfolio to win. We did say in our Q1 call that we have some product line exits that we might consider as part of the EMEA transformation. We're not at the point to talk about those and there are portions of our business outside of EMEA that have margin structures that are not that attractive and competitive dynamics that make them challenging. We'll have to figure out how to address some of those, either through the operations or we might consider, on an ongoing basis, weeding those portions of the portfolio out.

We're not going to be in a position to talk about any of that probably until the end of October when we do Q3 earnings. We've got more work to do in Europe with the Works Councils before we can say exactly what we are going to be able to do. I'd just manage your expectations towards that window. Whatever we choose to do, it'll be smaller than what we've just recently announced on the disposals. As you recall, Teach and Hardware, about $300 million business. What we're talking about, what I'm referring to in these comments, is significantly less than that.

Okay. That's helpful. Thanks, Mike.

Taposh Bari, Goldman Sachs.

You laid out the scenarios around the office supply space merger later this year. Can you help quantify each of those scenarios and what that could mean for the Writing category?

I purposefully left that out. We've got to actually think about all the contingencies. Simply exposing a number related to what Depot and Max are going to do on their distribution network and on retail footprint consolidation without reflecting in our 2000 growth plans and things we might do to compensate for that down elevator that we'll inevitably have to face into, I think, would only play the downside out there. I purposefully didn't put a number in front of you. Quite frankly, we have more work to do, understanding exactly what their flow of change is going to look like post-merger and we're in the midst of doing, building -- in fact, our whole team is in this week building 2014 plans out. Until we've gotten both sides of the ledger clearer, I'd hesitate to give you a number.

Okay. That's fair. Just looking at your guidance and the trajectory of margins, if we get to the midpoint of your guidance, it looks like you're modeling in less robust margin expansion for the second half of the year than what we saw in the second quarter, yet you're saying that core sales growth are set to accelerate. Can you help us walk through that dynamic? On SG&A, how do we think about that as your core sales growth does accelerate?

Yes. The reason we see more modest margin expansion in the second half of the year and the potential for margin contraction in Q3 is because we step up our brand investment. When I say brand investment, I'm largely referring to advertising and promotion investment in the second half of the year. That's partially funded by the flow of Renewal savings and strengthened productivity and potentially, some positive price realization, which we didn't get in the first half of the year. The strategic ambition of the Growth Game Plan, quite frankly, is to, in fact, strengthen the investment behind our brands as a way of accelerating the growth. The combination of brand investment plus new capabilities is what drives growth acceleration in the second half of this year and then into '14 and beyond.

That's the model that sits behind the Growth Game Plan and that's why we haven't promised big step changes in operating income margin, despite the fact we could deliver that if we let the savings flow to the bottom line and didn't increase the growth commitment. That's the logic behind the Growth Game Plan. It's releasing the trapped capacity for growth, putting that investment back into the business, while delivering what we think will be competitive levels of earnings growth and EPS growth and that's what we begin to do. We started to do it in Q2 and we'll continue to do it in Q3 and into Q4.

Okay. Appreciate it. Just last one on housekeeping. You mentioned the Brazil SAP this past quarter. Was there a timing shift there on core sales? Is that reflected in your 2.5% adjusted number, if material?

We actually didn't -- because for the Company it's not material. Unlike the EMEA change, which is a pretty dramatic shift, the $28 million, while it is material for the Tools segment in the quarter, it's really not material for the whole Company. We didn't call it out either in Q1 or in Q2. That said, as you look at the Tools numbers, you do need to think about it. I do think in the Q, we called out the Tools-specific impact which was about a $5 million shift from Q2 into Q1 that you need to put back into the Tools number to understand what the true underlying performance is. That's why the best way to look at all these shifts is to look at them on a first half basis. Doug, in his comments, said first half growth on Tools was essentially flat. That's the real underlying performance in the first half of the year.

Thanks a lot.

The reason we're optimistic about the Tools business is because our activity is skewed to the back half of the year. You can see that in all the launches we're doing and the step-up in investment we're making. That's why, on the full year, we think we can get to solid growth, despite having to lap a very strong Tools performance in 2012.

Looking forward to it. Good luck.

Bill Chappell, SunTrust.

First, on the macros, broader question, are you seeing anything in terms of, especially in the more cyclical businesses, category improvement in the US and maybe to some extent in Europe that give you some confidence going to the back half or is most of the growth going to come Company specific? Do you need category growth? Do you need improvement to have accelerated growth as we move into 2014?

No, we're not counting on it. We're not counting on the macros improving. We said all along that our ideas trump the macros. That's particularly true for us, given our footprint. My comments early in the Q&A around Tools in Brazil, I think John asked the question, that's an example of that.

I think we might see some macro benefit in Decor and in Cookware as the housing market seems to be moving in the right direction, but quite frankly, the thing that will drive Decor recovery will be stronger ideas. I think the launch of our wood and faux wood launch in Q3 is going to be the bigger driver of our Decor business than the housing market, same on Cookware. With the exception of our Industrial Products business, which is probably the most macro-sensitive business, if we're talking normal wobbles in GDP growth, I don't think our portfolio is as sensitive as maybe some might think to this. It's far more sensitive to what we do.

Okay. More specifically, just so I understand, when you talk about the Office Depot/OfficeMax merger when it does actually happen, is it as big as a 1% impact to your total sales or is it just fairly minimal and it's going to have more of a one quarter type of impact.

I think we haven't gotten to a specific number, Bill, but in any given -- it also depends on how they execute their synergy plan. If they were going to take 100 stores out, if they did it all in one quarter, that would hurt. We'd get an inventory impact. If they did 100 stores over four quarters or six quarters, we'd be able to manage through that. We don't have that kind of clarity yet as to how they're going to handle that. But it is certain that when they take their inventory -- when they take their distribution network and consolidate warehouses and when they reduce their store footprint, we're going to see some backing up of inventories in the system. That will disable our ability to sell in to their footprint for a period of time.

I'm hopeful it plays out over multiple quarters, in which case, we won't have to talk about it because we'll figure out a way to manage through that and manage around it. If it happens in a three month window, then it could have a material impact. But we'll get more specific with that as we get through the third quarter and into our full year guidance next year. But it is a real thing that we can't sort of stick our head in the sand on. We've got to plan for it.

You're talking about like 3% to 5% growth next year, but it's actually going to be 2% to 4% because of this issue.

I don't think so, but I don't know until I get more insight from them.

Great. Thank you.

Olivia Tong, Bank of America.

Question on Baby, you guys touched on it a little bit before. Revenue growth, obviously, continues to do better than expected and you mentioned a couple of new products for both Graco and Aprica and margins improved as well. Can you update us on how you think about this business and its standing relative to your other businesses within your portfolio? Is it still categorized as incubate at this point?

Nothing will change the relative portfolio priorities through the Growth Game Plan window that we're in. Our Growth Game Plan timeframe is through 2017 and the portfolio choices that we've made are fixed in that window. Baby's performance, however, is outstanding and I think the team deserves -- Kristie Juster, Laurel Hurd, the team deserves tremendous credit for this. We see similar things starting to happen in Home Solutions. These two businesses, these two segments are not going to get big advertising and promotion investment. That's the design of the Growth Game Plan. They need to grow with less.

We're attacking the cost structure. The people are coming out of those businesses and have been for the last eight quarters, quite frankly. Both businesses are figuring out how to grow, pulling different types of levers. In the case of Baby, you see what I described. You see the team pulling two levers -- one much closer in strategic partnering with customers and good in-store insight work, driving better placement and better sell-out of the ideas they're bringing to market and strengthened partnership with our supply partner, bringing bigger, better innovation to the market, but not big A&P investment. In fact, A&P investment in the Baby business is down over that timeframe and growth is accelerating because they are pulling the levers that are relevant to that category and that drive growth. This is the Growth Game Plan in action.

The Growth Game Plan has two pieces to it. One, a set of businesses that need to grow ahead of their markets with less resource and need to figure out how to do that; that's Home Solutions, that's Baby and a set of businesses where we're going to leverage the scale of our $6 billion Company and put that scale to work to drive increased competitiveness; those are our win bigger businesses. You see us doing that most profoundly this year on Tools where we're making big investments. You see the operating income margin stepping back pretty dramatically because we're disproportionately resourcing the step change we're trying to shape and next year, that may not go on Tools. That may go somewhere else. It may go to Commercial Products or it may go to Writing, depending on where we believe we need to place those investments at.

That's the power of an operating Company. You can more dynamically manage resources and that's what we're doing. Is incubate for growth, there are two incubate businesses now post disposal -- there's Endecia and there's Baby. Should we declare that Baby is a win where we are business? We could. Effectively, they're behaving that way today. Endecia continues to be an incubate business. In terms of the macro choices, our portfolio roles are clear in the context of the five year -- the first chapter of the Growth Game Plan, which is a five-year timeframe through 2017. We're going to use that framework as what it's intended to be, the guardrails on choices.

Got it. Thanks. That's very helpful. Further expanding on the marketing, now that you obviously have this marketing organization in place, can you talk about changes that have happened since putting that organization in place? Also, within the win bigger businesses, can you talk about how you decide how to invest,? Like in Brazilian sales force for Tools as opposed to more promotion and activity in Writing and all the different things that go into the decision making process on the investment spend. Thanks.

Yes. I'm really transparent about it. It is, in part, a function of readiness and the ideas and the sequence of ideas into market. Money flows to ideas and that certainly is one variable that influences choices in any discrete window. We have a very, very full Tools agenda in the back half of '13 into 2014 and that is shaping our choices. The other thing that has to be considered is which businesses will create the scale around which you build your emerging market enterprise? In the case of the Tools choice, for example, in Brazil, Tools today represents over 80% of our business in Brazil. Of course, we're going to invest in that business as we look to scale our overall footprint. We'll build the infrastructure around the power categories in those respective countries -- in Colombia and Venezuela it will be Writing, in Mexico, it will be Writing and Commercial Products. These are things that influence choices as well.

Our priorities are Commercial Products, Tools, and Writing, in that order. Our growth agenda is based on building share in our home markets, which is largely North America, the exception to that is Baby Japan is also what we would consider a home market. Also, extending our footprint into the faster growing emerging markets in a disciplined and focused way in a select group of categories which are Commercial Products, Tools, and Writing. The sequencing is really a function of readiness and money flows to ideas and we look at Mexico, Colombia, Venezuela, and Brazil as our footholds in Latin America as we build out a more broad business system.

Thank you.

Connie Maneaty, BMO Capital.

I was hoping to get a little detail on the third quarter operating margin contraction. Are you thinking it'll be flat to slightly down or something bigger like on the order of 100 basis points? My bigger question, though, is will you be spending in the third quarter what you thought you would have spent at the start of the year or are Project Renewal savings coming through faster than expected? If this is a pay as you go system, you have more money to spend?

Yes, we won't spend beyond what we think is necessary to drive strategic growth. I reserve the right to sort of gear shift as we get into this. But the focus of our spending, just to be clear, in Q3 will be on Writing around Back-to-School and on our Tools business as we launch into Brazil this big initiative and as we execute a much bigger, more exciting National Tradesman Day event in North America in September, and as we start to market more aggressively as our distribution builds Hilmor in North America. Again, the money's flowing to the ideas. I was very pleased in Q2 on Renewal savings flow to the P&L and probably even more pleased with how quickly we saw a step-up in productivity delivery out of the supply chain.

Both of those variables will influence how much we spend and obviously, the growth will influence how much we spend in Q3. In terms of giving specific guidance on operating income margin in the quarter, we certainly could absorb 100 basis point decline in operating income margin in the quarter and still deliver within our guidance range and strategically support the businesses with that level of spend. Do I think that's where the story will end? Probably not. I wouldn't model that aggressive an investment. Is it flowing exactly as we thought it would? It's actually not, because we invested more strategic investment in Q2 than we anticipated, putting some serious money behind consumer research in that window. That money was originally set to flow into Q3.

So we've got a lot of moving parts here. As we see room to be able to pull spending forward, we're obviously going to do that because it sets up our ability to accelerate growth faster than we otherwise would be able to. There's lots of moving parts. You've got to consider readiness, et cetera, so we saw one advertising campaign the other day that we loved, ready to go. We saw another one that needs more work and I'm not going to spend behind it until it's ready. Those types of choices could influence sequencing of spending. Does that make sense, Connie?

Yes, it does. Thanks. I was hoping to get some order of magnitude on the one-time pipeline fill in Brazil in Tools in the third quarter?

Despite the temptation, I wouldn't give you a specific number, but you should expect us to have a very solid growth performance in Tools in Q3. The challenge in the emerging markets is, actually, to put your finger on it. In North America, I could give you a real number. But you've got 100 different distributors and customers in Brazil that we're selling this 500 SKUs into and when they choose to take that and accept first shipment, it's something that can stretch out over a period of time. It's not like in North America where you're selling it to home centers and the hardware channel or distributors where you get a big pipeline bump. It's spread a little bit more than you might think in a country like Brazil.

Thank you.

Linda Bolton-Weiser with B. Riley.

Mike, when you first came to the Company and laid out your strategy, your big picture strategy and how things would progress in phases over a number of years, I think I remember you saying that even in the out years, that EPS growth wouldn't be likely to be over 9%, if I'm remembering correctly. Yet here, we've got a year still fairly early on where you're projecting 8% to 10% EPS growth. How should we think about that? Is it that now we could think about you being a double-digit EPS grower in the out years or how should we think about your original vision on how things would go?

Sure. Look, I think the guidance we issued at CAGNY in 2012 is the guidance we would hold to. Remember, we had a $0.03 one-time tax benefit in Q1 that we said we were going to bank. That's what drives the higher performance. You have to be careful in terms of what you assume going forward. The one thing that we have to be sensitive to, though, as we think about our EPS growth year-over-year is that as we move through the strategic phase to the acceleration phase, we have to make sure that we're delivering EPS growth at competitive levels while trying to drive our strategic vision into action. That's always going to be a tension in the system.

What we said for the acceleration phase was around 6% to 9%, 5% to 8% in the strategic phase, 6% to 9% in the acceleration phase. In any given year or moment that might be on the lower end or on the higher end. I would hope we could push towards the higher end. Part of what will influence that is what we choose to do with what is a very, very cash accretive business. Our capital allocation strategy might influence that at some point in time. Again, either through bolt-on M&A, which obviously we didn't not contemplate at all, M&A in or out. In the guidance we provided at CAGNY in 2012, we said it was ex M&A, either disposals or acquisitions. It didn't contemplate a more aggressive repurchase authorization than the one we currently have in the marketplace, which, as you recall, is a $300 million authorization that expires next year.

Thanks very much.

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.

I would just like to say thank you for all your support over the last couple of years and we are very pleased with the progress we're making. We're entering into a new phase, as most of the disruptive change settles down in the rearview mirror and we get on to operating in the context of the new operating model. We're very excited about the prospects and the possibilities for our business. We hope to continue to put consistent performance on the board as evidence of that. Thank you again. We'll talk to you soon.

Today's call will be available on the web at newellrubbermaid.com and on digital replay at 855-859-2056 or for international callers, 404-537-3406, with an access code of 17373814, starting two hours following the end of today's call. This concludes our conference. You may now disconnect.